Q2 2012 Gas Natural SDG SA Earnings Conference Call

GAS.MC - Gas Natural SDG SA
Q2 2012 Gas Natural SDG SA Earnings Conference Call
Jul 24, 2012 / 08:30AM GMT 

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Corporate Participants
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   *  Luis Calvo
      Gas Natural SDG SA - Head of IR
   *  Rafael Villaseca
      Gas Natural SDG SA - CEO
   *  Carlos Alvarez
      Gas Natural SDG SA - CFO

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Conference Call Participants
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   *  Fernando Garcia
      Espirito Santo Research - Analyst
   *  Alejandro Vigil
      Cygnus Asset Management - Analyst
   *  Miguel Medina
      JB Capital - Analyst
   *  Alberto Gandolfi
      UBS - Analyst
   *  Pablo Cuadrado
      Bank of America-Merrill Lynch - Analyst
   *  Gonzalo Sanchez
      BPI - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Javier Suarez
      Nomura - Analyst
   *  Javier Ruiz
      Exane BNP Paribas - Analyst
   *  Jorge Alonso
      Societe Generale - Analyst
   *  Jose Antonio Lopez
      HSBC - Analyst

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Presentation
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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [1]
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 Good morning. Welcome to the presentation of results for the first six-month period of 2012 of Gas Natural Fenosa. The presentation will be done by the CEO, Mr. Rafael Villaseca, together with the CFO, Mr. Carlos Alvarez, and the Development and Strategy Director, Mr. Antonio Basolas. After the presentation we will have time for questions and answers for people here in the room and those of you who are following us on the Internet or by teleconference. So I will pass the floor to Mr. Villaseca.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [2]
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 Good morning, everyone. I want to first of all thank you for being here physically and remotely. We are going to start with the day's program. First of all I'm going to talk about the highlights of the period, the first six months, last quarter. Then we'll talk about growth of international operations and then we'll talk about financial, most relevant financial events, analysis of operations and conclusions. After that we'll have time for questions and answers.

 So if we go into the main [menu] which is the main figures of this six-month period, we have to underline that the net income of the Group has gone down by 6.7%. That has to do mainly with the lower levels of production income as a result divestments. And if we adjust for that our profit after tax grew by 24% this year as regards last year.

 The EBITDA, consolidated EBITDA for this six-month period is EUR2.55m -- EUR2,559m, which is a growth of 7.3%. If we adjust that EBITDA and we bear in mind that last year there were divestments and this year there have been none, we have less assets in operation in this EBITDA, the EBITDA would have grown by 10%. So we have had this growth of 7.3% in spite of those disinvestments, in spite of the market conditions in Spain and the impact of the Royal Decree Number 13 in Spain that I'll talk about later.

 In terms of investments, they've gone up by 3.3%, up to EUR535m, and in line with our strategic plan and objectives. And this we'll deal with later too.

 Our net debt is EUR16.9b. That's minus 2.3% as regards last year. And we continue to comply with the aim that we set ourselves of finishing the year between EUR15b and EUR16b.

 It's important to point out, given the relevance of all financial matters for our Company at this time, as you know, one of our aims in our plan is to organize our finances, and we no longer need to go to the financial markets. We will not need to do so over the next 24 months because we have enough cash, more than enough cash.

 We have to also insist that our cash -- structural cash flow is positive. So we generate money after CapEx and dividend payments to cover our investment needs. And these investments, only one-third of them are maintenance operations, so our margin as regards capacity for investment is really very high. We will talk about that more later.

 I want to now have a look at the shareholder remuneration policy based on the strategic plan. Our payout is 62% which gives us a profitability per dividend of more than 6%. So last year our total dividends paid out at the beginning of this six-month period were EUR821m, which means an increase of almost 11%. The scrip dividend had a success rate of 18% which meant that payment in cash was EUR379m.

 It's important to point out the regulatory measures introduced by the government, and we're going to talk about the new measures that might be coming into force. You're very familiar with all these things. We've spoken about the problems with the electric sector in Spain. Three measures have been approved by the current government since it changed.

 One was the Royal Decree 1/2012, which meant a temporary suspension of financial incentives for new facilities under the Special Regime. This has been a measure whose effects won't be felt until practically 2014 because there is still commitment to cover the subsidies in plants that were inscribed under the pre-registry or pre-registered. So this Royal Decree unfortunately this year and next year will not practically have any impact.

 Then we've got Royal Decree 13 which we've spoken about, we've mentioned, which was accompanied -- was associated with a tariff increase of EUR1.39b and which lead to a reduction in costs, especially in the traditional sector, of EUR1.7b. The impact for our Company, we'll see the details later, was as regards distribution, with a reduction of EUR111m as regards what we had foreseen for this year.

 And finally we've got the Royal Decree 20, which also introduced a series of measures in costs, extrapeninsulars, transmission, higher access charges for low voltage and territorial supplements to cover regional taxes. As from now these taxes will be associated to the tariffs of the different regions of Spain.

 These are the three measures that the government's introduced. And we are waiting for the more definite adjustments that are pending. Why are they pending? Well you know that we still have an unbalanced system and that it will be difficult to comply with the EUR1.5b deficit that's been foreseen for this year. The government's made some statements that have appeared in the media about what sort of measures that are pending might be introduced. We've known through the press, but this hasn't been officially confirmed, there are some supposed measures of the government that haven't been confirmed officially.

 In accordance with this and the statements -- general statements of some members of the government, we would be facing a spread of deficits using a new tax regime and there would be different taxes that would try to solve the problem that we are in. And there's talk -- this is not official, but there is talk about putting a tax on generation, on the basis of an amount that would be set based on how much you sell, with a progressive increase. And there's also talk about tax on hydraulic and nuclear production, which would also be unofficially associated, no confirmation has been given, associated with the periods of the concessions.

 We're waiting for all this to be confirmed, if it is confirmed. But Gas Natural Fenosa, we still see things in the same way. The regulated tariff deficit system in Spain has EUR10b a year in subsidies. Until that problem is solved we believe it is simply impossible to solve the tariff deficit problem. We're talking about huge amounts that affect the whole electric system and there is no comparison with any other country in the European Union.

 So something will have to happen. Obviously one of the alternatives is to apply taxes on the cost of the product, and another one is to address it in a different way, to say that the solution is -- has got nothing to do with the problem that you can see clearly in this chart, would be to turn a blind eye and it would be useless because these EUR10b, which are still growing, is going to have an impact.

 We believe the government is working on this. This is a clear situation and I think that they'll have to deal with it. And whatever they do, they'll have to solve the main problem which is, as you see, almost 60% of the costs that are administered by the government under the Spanish system are subsidies of different kinds.

 Now if we go to a very important chapter, I'm going to allow the second section of this presentation to talking about our international operations. Now the EBITDA generated from international operations is --accounts for 42% of the Company's total EBITDA. We're very satisfied. It was one of our aims which has really sped up in the last few years. And we've got 42% of EBITDA is international, of which 57% corresponds to our Latin/South American activities; 33% to our international gas activities, where we include infrastructures and sales; finally 6% of that is the rest of Europe and 4% the rest of the world. So in accordance with our strategic plan and the circumstances that we're in, we are highly satisfied with how well our international business is going.

 And this can be seen clearly. It's not just that the EBITDA of the international activities is 42%. No. But on top of that our EBITDA has grown in this six-month period by almost 32% as regards the same period of the previous year. It's based, this growth, on the activity of the gas activities in the world, infrastructures and sales which have done very well, and Latin American activities. You know that we've clearly committed ourselves strategically in the Company with these operations and we're trying to capture opportunities in the whole world in energy, and especially in natural gas.

 Now if we look at the sales, international gas sales, the international -- sales to international customers have grown by 45%, that's more than 47,000 gigawatts per hour per year.

 On the international markets, 30% of the volumes of gas that we sell go -- are -- for these are sold on the international market. And we have a very important network of activity. You know that we don't -- we're not pure traders. We have final customers that we try to make loyal in the long term. This has been a success. We've got commercial activity in France, Belgium, Germany with customers. A final portfolio at the end of the last six-month period was about 16 terawatt hours per annum.

 Sales in this region have grown by 18%. This is all based not only on our organization but our own fleet of methane distributors and generators, our liquid gas facilities and the expansion of our activities the world over.

 And a good example of this is that the sales of gas in countries beyond the EU has grown in the last year by 60% compared to the previous year. That's all due to the fact that we have a situation where the segments of the gas market present with opportunities that we think will be preserved and will be maintained over time. It's absolutely clear that our strategy will focus on maximizing the value of supply contracts in the Atlantic and Pacific -- in the Atlantic and Pacific basins. And we will make use of the fluctuations of these markets. And we are going to try to maintain and consolidate that strategy by our through two- to three-year commercial agreements.

 In the Atlantic basin, for instance, the Puerto Rico contract and several contracts in South America that we're working on right now. And in the Pacific basin you know that we have mid-term contracts with customers in India and the Far East.

 And within that strategy we would include the contract with Cheniere for 5 bcms of LNG without limits on destination.

 Continuing with our international activities. In Latin America in terms of gas distribution there's a higher potential for growth in terms of growth of networks. We're almost near 6m points of supply. Connection points, that's an increase of about 4%. And the sales of gas through these networks have grown by 7%. EBITDA has grown by 3%.

 As regards the same but for electricity, the importance of our growth can be seen in the fact that we disinvested in Guatemala but our electricity sales have gone up by more than 6% and the connection and supply points have grown by almost 4%. EBITDA increased by 32%, although, as we warned last year, this figure should be taken -- should be adjusted because there was an exceptional tax applied in Colombia last year which is not applied this year. So the comparison is affected by that factor. But apart from that, in any event growth is significant and clearly positive.

 Now if we go to our P&L account, these are the results. Our net sales and EBITDA have grown by almost 8% -- more than 7%. EBITDA is EUR2.5b. And apart from disinvestments, this 7% of growth via EBITDA, if it hadn't been for those disinvestments, would be about 10%.

 Amortizations have increased by 2%. Our provisions 24%, basically due to the situation in the Spanish market. And the operating income is EUR1.58b. Results, financial results are negative logically, but lower than those last year because of the lower cost of our debt and also the reduction in our debt which is sustained.

 That leads us to an income before tax of EUR1.15b, which ends up in EUR1.6b after tax. The reason for that is the adjustments that we have not had to introduce this year. Had it not been for that, our income before tax would have grown by 24%.

 Now if we analyze the EBITDA and the makeup or breakdown of the EBITDA, you see that distribution in Europe has been 5% less in the EBITDA breakdown than last year. Why has that dropped almost 11%, that EBITDA and distribution? Well because of the Royal Decree number 13 this year, which introduced or led to a reduction of 10% in this regulated activity.

 In terms of gas, it's practically flat as regards last year. This has to do with divestments that we've made. A comparison of connection points in the region of Madrid when you compare to last year's situation, that can be seen.

 In terms of the electric business there's a negative result 2%. And it focusses on the Spanish business. Why is that figure negative? Well because of the divestments in [Aruba] and (inaudible) over the last year, and also the energy mix problem from two points of view. One of them is that we're selling less because of divestments and because of the costs. Hydraulically this year has been very bad and that mix increase leads to margins that are slightly worse. So all told, the ordinary regime has gone down by 5% in electric results in Spain.

 Not the same applies to the special regime whose EBITDA has gone up by 15%, that has mainly to do -- not only but mainly to do with the wind energy activities of the Group who have been very positive.

 In terms of gas, there's been a 15 -- a 52% increase mainly due the international activity of the Company, which has led to an increase of volumes and margins.

 And in Latin America, there's a growth of 9% of our results, very much based on electric distribution but also the gas distribution is very positive. So at the end of the day we've got a total growth of 7.3% in our EBITDA, 10% if we don't take into account divestments of last year.

 In terms of our investments, EUR535m, EUR17m more than last year. So there's practically -- well it's the same, slightly higher. And this has to do with regulated business, as you see. And we'll talk about this in a minute. And also the investment in Torito, the hydraulic plant, 50-megawatt hydro plant in Costa Rica.

 We are very, very well disciplined financially, continuing to be so. And this will reflect the adjustments and cutbacks -- regulatory cutbacks, the Royal Decree 13 this year. We knew about it in April. And obviously the Company introduced the measures that were necessary to adjust its investments to the regulatory situation of the country. So naturally in the second six-month period in electric distribution especially we will [curb] the effects of the adjustment as a result or a consequence of the reduction of the remuneration of that activity in Spain.

 But anyhow, one-third of our investments, only one-third of our investments have to do with maintenance. So two-thirds are decisions of the Company that will be reviewed at the time. And our absolute priority is to maintain our financial targets based on whatever regulatory adjustments are introduced.

 As regards the securitization of tariff deficit, there is nothing new here. But we must say that in the six-month period the Company had an income of EUR367m from the FADE fund which reduced the debt that we had with the electric system. The total deficit at the end of June, including not just the deficit before but also in that period is EUR1.067b. So we are waiting for the financial situation improves and we can solve this big issue that the system has. But it would be good before we move forward to analyze our debt.

 The first thing we should remember is that we have a very strong financial control policy. And that's our main priority and will continue to be so. If we look at our commitments since we took on debt to acquire Union Fenosa, we are talking about [EUR1.16b], which is near the EUR16b -- EUR15b to EUR16b that we had agreed on, and that's 53.3% as a whole.

 In this first six-month period, we've had a negative impact that has to do with the fact of the new regulation to pay taxes beforehand and also the Supreme Court decision as regards exports which we lost, a case that we took to the Supreme Court, which -- that led to a loss of cash availability. That won't happen again. If that hadn't been the case we would have even reduced our debt further. But in any event it's important to remember that since the beginning of our debt we've reduced it by EUR1.9b since we started taking on debt. And this has to do with a structural cash flow system and the stability of our Company and the disinvestments, the divestments that we've made.

 As regards the debt structure, 75% of it is fixed, 25% is floating debt and the prices are very competitive of our debt. As you can see if you look at the costs that come up in the P&L account, 82% is in euros and 59%, which would be 62% if we discounted the deficit, is in the capital markets.

 As regards our profile, mature -- debt maturity profile as regards the EUR16.9b we've tried to extend the profile, the maturity profile significantly so that 77% of our debt will mature after 2015. And the average life of our debt is five years and we now have our needs covered for this year and for next year and we're working on 2014 right now.

 And that is the case because we have a very ample liquidity, EUR2.5b, to cover those 24 months, of which about EUR4.3b are in cash and EUR4.5b in loans and available credit. So all that should even be improved by more than EUR5b that we have both in European and Latin American programs.

 It's important to underline that after the closure of this -- for this closure in the month of July, the Company has signed for loans for up to EUR1.2b at five years and EUR300m at three years, which increase the capital that we have available. The average weighted life of our debt is slightly less than three years, and that is the result of our very proactive policy of maintaining healthy levels of liquidity.

 Now let's talk about the analysis of our operations. And I've already talked about the non-European operations and now I'm just going to have a quick review of those that we have in Europe and more specifically Spain.

 With regard to the power distribution, sales have maintained a slight drop in activity of about 0.5%. The Spanish power market is almost flat. We've put in a lot of effort there. We've improved our quality of service and we've improved efficiency, which means that we can recover the EUR111m that it costs us per year according to the Royal Decree, which is 13/12. And we have reacted to this.

 And with regard to our policies, we have improved our operating efficiencies and we've been able to minimize the impact of this loss of sales. And therefore our EBITDA has reduced by 11.7%. And I would like to say we will try to reduce it with regards to these efficiency measures which I've already mentioned, and these are now up and running; they've been implemented.

 We're talking about the gas distribution in Europe. The fall here, well it's basically related to Spain, as I said. The majority of this drop is Spain. And the drop in sales is around this 2%, and mainly just related to the divestments that were carried out last year. If you remember we sold connection points in Madrid.

 Had that not been the same, the situation would be almost flat with regard to the volumes of our sales network. But what we are growing in with the connection point, as you can see here, is more than 90,000 connection points in six months which we've been able to capture. And what this is is the result of the fact that the Spanish gas market isn't mature yet. And in spite of the situation in the country at the moment, with especially the real estate markets, it still means that there are important opportunities available to offer gas to homes, which to date they were not enjoying the benefits of natural gas.

 But despite the fact it's very low activity in a new construction market for homes, but the inhabited properties that exist in the market, but they didn't have gas, which means that they are still possibly there to grow because there's a very low level of gas in these properties compared to other European levels. And as I said, basically due to the divestments, EBITDA we've got -- will achieve EUR451m, which is a decrease of 2.4% when compared to last year. Had the divestments not occurred, the EBITDA would have grown by 5%.

 With regard to the gas and electricity supply, which are almost practically totally liberalized, it's important to highlight that the traditional demand for gas in Spain has grown 7%. This demand is reasonably consolidated. And this is -- well even our sector has gone up 8%. And this is due to the residential market to a certain extent. And this is due to the weather that has improved. Also there has been an increase of around 6% in the large consumption market which is due to the industries. With regard to demand for electricity, this is almost flat demand, hardly any changes with regard to the previous year.

 Now let's go into further detail about this. As you can see on the screen, the production, we're now talking about the production of our Group for electricity, it went down 2.7%. And mainly this is due to the ordinary regime. The ordinary regime, there was a reduction of 3.7% mainly due to the fact that we had 70% less of hydro production because it's been a very dry year, and especially in the basins where our Company works, which is in the Galicia area and in the (inaudible) river. So this has caused an important impact, as I said due to hydro, and it's had an impact on the cost since there has been less generation of hydro power.

 Now with regard to currency there, the other side of the question is that we have had more or higher volumes within the special regime and in cogeneration. It's important to highlight the fact that there's lower volumes in ordinary regimes that are related to the divestment in (inaudible).

 And when we're talking about the supply, it's very important to say that our policy to maintain our portfolio on profitable levels, because we're convinced that the market has still not been affected by the slight increases that will take place in the electricity pool. So our policy is to give something in the short term within the supply portfolio. And this is because the funding market will have to include the higher costs of electricity production.

 With regard to generation costs, they have gone up and I would like to say yet again that this is due to the higher weight of the mix and the drop of the hydro production.

 Now we can see the wind energy has grown 18% here and cogeneration went up almost 10%. The EBITDA of the business there went up 16%, reaching EUR181m.

 We've got a series of projects in the pipeline which at the moment are just in the permitting phase, both in Spain as well as abroad. And according to the regulation and of course the financial objectives which are our priority, we are developing all these.

 With regard to the gas market, well, as I've already said, the gas market within the residential traditional sector, it's a positive situation because almost 7% in Spain and 80% with regard to natural gas, the residential market have got double-digit increases. And obviously this is related to the thermal issues, but also the consumers. In the graph you can see there's a 6% growth and that's leveraged with the industrial consumption.

 With regards -- well at the end, natural gas in the face of a negative market tends to face a drop in the consumption of gas or electricity which as a whole gives a negative 2%, but natural gas has had an increase of 4.7%. And if that is added to the increase in our sales outside Spain, which is around [50], it means that our gas activity in volume has gone up almost 14%.

 With regard to Union Fenosa gas with regard to the EBITDA, it's gone up by 27%, and mainly due to the good situation of the international gas market where this company operates where we have, as I say, we were 50% [with an Italian company]. The gas supplies in Spain has had a 7.3% increase mainly because of the electricity generation, and that has been developing favorably. And the business that you can see on the left-hand side and the national and domestic, you can see there's been around 20%.

 And on the right you can see the evolution of the infrastructures which are negative due to the less use of the Sagunto regasification plant and also because there's less activity in the Damietta plant, mainly due to the political situation in Egypt.

 And as a conclusion, well I would like to say that we are reasonably satisfied taking into account obviously the very challenging situation. And we think we've had reasonably good results in this period. Obviously it's a very difficult market at the moment but we have still managed to get a growth of 7.3% and a net income of 24% growth, which is reported net income of minus 6.7%.

 As we say, we strengthened our financial structure and we have, as we say, strengthening our financial policies. And we're still offering good remuneration to our shareholders. And we're still convinced that we can continue to fulfill the objectives or the targets that we established for our strategic plan for this year. And we are now going to concentrate our efforts of the next few months to achieve the strategic plans.

 So now we would like to start our question-and-answer session. And we will start with questions that are being asked here in the -- the people who are present. So if you could start please by introducing yourself.



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Questions and Answers
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 Fernando Garcia,  Espirito Santo Research - Analyst   [1]
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 I'm Fernando Garcia from Espirito Santo Investments. I have three questions. The first one is related to --.

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Operator   [2]
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 (Operator Instructions).

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 Fernando Garcia,  Espirito Santo Research - Analyst   [3]
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 -- recurrent. What is coming from a higher demand of gas, for example from Asia, maybe from Japan?

 And the second question I would like to ask, you mentioned the possible solution that would come from the generation or the generation. And I would like the Company to evaluate this possible resolution. Also from the legal point of view, what is your opinion there?

 The Company has also been mentioning in this presentation possible corrective measures taking into account the -- well, taking into account that the monetary situation, the regulation may get more complicated. And also I think you mentioned that there may be a reduction in investments would take place, taking into case the maintenance issue and maybe a third of the investments would be reduced. So could you mention other possible measures, corrective measures in the case that this very difficult situation should continue?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [4]
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 Well the first question, the international market situation, the gas market, which obviously it depends on supply-and-demand issues. The gas market has various situations. There has been a reduction in price, not volumes in the US. And also the negative gas prices in Europe and there's been an increase, an important increase in Asia and the Far East.

 Well we had envisaged this a few years ago, but there has been exceptional changes in the market, especially in Asia on the supply. We have more demand from the [positive] exporting gas to countries that don't have them, for example the US. Also in three or four years we know that we are involved in such projects. And in a two-, three-, four-year period it would be very difficult to talk or even consider increase of the supply.

 With regards to the demand, it continues even though there is a lower growth level. The Asian countries, China, India, etc., are growing at a lower rate, but it's still important growth. And of course there is an increase from -- of gas from, shall we say, the Japanese power plants are not working at the moment so therefore they have higher demands of gas.

 We do not envisage important changes, and regardless that would be the global analysis. And in ours more specifically we are -- well we have launched a general policy for mid-term contracts, two or three years, which is what we're signing at the moment. So therefore it's very difficult to be certain what's going to happen in such a very difficult energy market. We're not sure -- well we don't think there's going to be important changes in two or three years in the world situation for the gas, natural gas market with regard to this business a couple of years, even three years ago, we started to develop outside Spain.

 With regards to the generation tax that you mentioned, I would say, well, we really do not know. We don't know. There's not even any draft, legal draft or text that will allow us to study the actually legal scope or the financial scope of the measures. We know the measures that have been published in the press and also the declarations that have been quite general ones that our politicians have mentioned. But we are not aware of any draft text or any legal text which allow us to actually analyze such methods.

 But obviously the Spanish legislation allows them to apply certain taxes and charges and this could be developed. But with regard to the scope and obviously with regards to how much this will be, I think it's too soon to talk about that because we really don't know what the volume will be or the tax base or what such tax activities would be based on. We will have to look at that. I'm afraid we don't dare to have an opinion on that.

 Obviously we are convinced, we are totally convinced that the problem is not related to generation; it's related to the subsidies that are being considered for such generation. So one way to do this is to cover this with taxes or charges which could be transferred to the products. But another way of doing so would be just to attack the subsidiaries directly. But I have to say yet again it's too soon to have an opinion on this because we're not aware of any text that allows us to analyze the legal relations of this.

 Obviously today when we say that we have certain measures which means that we can face the restrictions in the market, we are [reducing] two things at moment. One is the situation of having extreme liquidity. We've got more than [8b] in liquidity, and that's one of the ways of doing that.

 And the other one is that our capacity to reduce investment is quite remarkable. But we hope that we will not have to apply such measures that we have envisaged to change the current business of the Company. But should it be necessary, obviously not only the excess liquidity that we currently have, plus a reconsideration of our investment policy we think would be more than sufficient to be able to face up to the hypothetical contingencies. But we're not envisaging them, but it seems that today we -- everyone should have some sort of hypothesis to be able to cover such events.

 Within that frame, in July we have anticipated certain launches related to the credit facilities of the Company, and these had maturities between 2012 and '13. We've carried out [transactions] over EUR1,200m. And they mature beyond three years. So the current situation means that we're working to be able to ensure the liquidity of the Company and so we have some sort of leeway there. And so today we have not had to touch the liquidity situation and therefore we hope that we won't have to do anything related to the [investments envisaged].

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [5]
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 Any other questions from the people here in the room?

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 Alejandro Vigil,  Cygnus Asset Management - Analyst   [6]
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 Good morning. Alejandro Vigil from Cygnus Asset Management. I've got three questions too. The first one is that these are exceptional times, so this question is that Spain could lose the investment grade over the next few months and this could also have an effect on the companies, like your Company, because to lose the investment grade, what consequences would this have on our current situation of debt or this access to liquidity that you've said of EUR8b?

 The second question is related to the tax that you've mentioned on the CO2, or shall we say the [green cent] on gas, obviously in line with the sort of thing mentioned. I understand that there would be a possibility to apply a pass-through related to tax. And also the regulation of the gas for the tariff deficit for this gas, it seems that the situation's improved considerably, but has there been any comments with the ministers to be able to review of the regulatory framework related to the gas here in Spain?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [7]
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 I'll start with the last question. We don't think that the problem -- the gas deficit is a structural problem. It was a situation last year based on the fact that the volumes went down and so therefore the figures didn't tally. And it was logical that they didn't tally and so therefore that's why you have to have a deficit, because you have a deficit when we don't have good provisions or good budgets. And so we need to have certain tariffs ready to be able to cover this.

 And so when we talk about the first figures that we got from [CNM], so we don't think it's that important problem. And measures were taken and therefore we don't expect that there will be more measures necessary to cover this issue, and the government didn't launch them even then.

 And now the second question, the tax on CO2 and gas. As I said, I said we had no formal evidence or any formal documents that we can study. But I have read in the press about these EUR0.04 that may be applied through some gas fuel. This is what we've read. But this measure is something that obviously will be applied to the product and it will obviously be applied to the product itself and that's what we think maybe -- may happen. But I must say, again, we do not have any evidence that will allow us to carry out a detailed analysis.

 Well the other, the first question, we're talking about the Spanish economy. Whilst we say we will have to react when necessary to apply the measures when they come up, we will react with our liquidity, with our investment policies in order to fit the Company into a new scenario.

 Today it's not worth thinking there's going to be catastrophes unless, of course, the Company will -- we're obviously working to have a very strong financial position but we're talking about the free cash flow that's positive and we need generate cash. And this is what is happening and this will continue to happen. The second is the policy for liquidity, which is quite considerable and we have that. And the third point is the capacity to adjust should it be necessary to our investments. So we've got three strong instruments that naturally they could be complemented, along with some others, should any catastrophes come up. But obviously we really don't think that will be the situation.

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [8]
------------------------------
 Thank you. Any more questions from the floor?

------------------------------
 Miguel Medina,  JB Capital - Analyst   [9]
------------------------------
 Good morning. Miguel Medina from JB Capital. I've got three questions but they're very quick ones. The first one, you mentioned the effect of the change in the corporation tax due to the first semester. The administration has made [third rule] -- another change for the corporate income tax, especially on international business. Could this have any consequences on the second semester and on the midterm?

 And then second question, with that you've already mentioned related to the lines that you refinanced to prolong the maturity, are the conditions very different to the ones you previously had for your other investments or your other finance?

 And the last question that you said about the Egypt situation and [Damietta], if the government changes in Egypt could this have any consequences related to the legal situation or the joint venture you have there, or the way that the gas investments in Egypt will be carried out?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [10]
------------------------------
 I will start with the last question and then I will give the floor to my colleague, the other ones. The Egypt situation, well I think we see the change as positive. I think it's necessary. The most determining factor in this semester has been the uncertainty in Egypt because there were pending elections, etc., etc. And we positively think that now the new government will affect us positively and so we then think things will start to be regulated.

 We obviously think this change of government is positive, but we obviously have to wait to see that they come into power and then we get a name, the new ministers and the people who are responsible for running the country. And then we would be able to carry out analysis of the issues. So I think we were concerned in the past because there was a lot of uncertainty in the country because we didn't know exactly who was responsible for things in their country, but that is the situation and I think that's all we can say related to Egypt.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [11]
------------------------------
 With regard to the -- when we're talking about the impacts related to the P&L of the Royal Decree, but what they are related to, especially in our case, to the interim payments. And so when we carry out the calculations to make the interim payments that were done in April, well, the amount was higher than the amount that we had envisaged in our internal calendar. And possibly in the second semester we will have to carry out other interim payment that wasn't concentrated within our accounts, but maybe it's another EUR70m, EUR80m. The other measures have not affected us in an important manner.

 With regard to our credit facilities, what we have done is to anticipate the maturities. So what we've done is renegotiated with the current financial entities, which are possibly the same credit facilities that we had but they've refunded, so it's EUR1,200m has been refinanced at five years and EUR300m have been funded for three years, and this was done in June. This means that we've increased the liquidity, which is this EUR1,500m. It's higher than what we had envisaged.

 And with regard to the conditions, I'm not going to say but if we're talking about the conditions or the spreads that have been applied to these, obviously they're higher than the ones we had. Obviously because the term is longer, but also in general the situation we have related to these credit facilities, we made these as back-up lines. We haven't drawn any money on them yet.

 We operate on the short-term rather than in a capital -- rather having -- so as said, these credit facilities are as a backup. The current cost of our debt which we've already said is a competitive one; it's less than 4.1%. This is the global figure for the Company. But these credit facilities, well, if we were to draw them in total the costs would not be a lot higher than what I've mentioned. If we -- obviously it's not just one credit facility, but if we used them all, it wouldn't be much higher than 5%.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [12]
------------------------------
 Thank you very much. Any more questions from the people here in the room? So now we would like to move on to the questions that are coming in on the phone. We will start with the questions that have been asked in Spanish. The first question, please.

------------------------------
Operator   [13]
------------------------------
 Good morning. The first question will come from Mr. Alberto Gandolfi from UBS. Please, your questions, please, Mr. Gandolfi.

------------------------------
 Alberto Gandolfi,  UBS - Analyst   [14]
------------------------------
 Good morning, everyone. This is Gandolfi, I've got four questions, but they're going to be very quick. The first question is could you please talk about how much you've sold for the Spanish generation for 2013 and how do you see the spreads and the prices for 2012?

 And secondly, could you mention a little bit about the contribution to the EBITDA related to the domestic coal?

 And thirdly, the regulation. This is a bit about the follow-up about the previous question by Alejandro. I didn't quite understand. Do you think that there could be some [news yet] about the remuneration related to gas distribution in Spain because the [CNM] have made some sort of proposal.

 And finally, this is more a question that is just basically related to strategy. You talked about the scrip, and that's very good to be able to help to reduce the debt. But when we've got more structural measures when this has -- so the profit per share has gone down, so do you think the balance sheet will be sufficiently strong to stock-taking or applying these scrip dividends or we'll have to adjust the amount of the dividends per share?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [15]
------------------------------
 I'm going to answer some of these and then Carlos Alvarez will help me answer some. First of all the gas market. I have not got any evidence that the gas distribution is going to change here in Spain from the [CNM], the government plan. (Inaudible) can study this and the government can apply any changes that they consider necessary.

 However, it doesn't really seem to make a lot of sense to do this. Why? Well, for one reason, with the current gas distribution system the remuneration, which is completely different to the power sector, is basically related to the volumes that go through the network and the new customers that are captured. So therefore the result is that the increase in the cost, which means to capture customers and to have higher volumes to the system is less than the income that the represents.

 Or in other words, the more we charge the distributors, there's more deficit in the system or more surpluses because they pay us to capture customers and to distribute gas, which is less than the customer pays the system for the gas that they consume for the regulatory payments for the [tolls]. So the gas system has no problems whatsoever. It has been devised in such a way that the operators, we only win money if we manage to capture new customers and they obviously have volumes of use, and if we grow, or if our income grows, if they want to go right up, well it would be because the customers are paying this and also they are offering another positive amount to the system.

 And that from a -- if we look at that from a different aspect we're a country that there's not a lot of gas and there are certain urban areas that do not have gas at present. It would mean that this isn't an important problem or is it a problem that needs to have changes at the moment? Why? Because any changes would be against the actual balance of the system in itself.

 So I just want to insist on this, either more money that the operators earn, the better the system works. Why? Because we collect payment for the customers that we acquire and the volumes that go to the system. And that's very important. And it justifies very clearly the fact that it obviously is not a priority to change the gas distribution system. Independently anything can be changed, anything can be improved, because it is not a problem at the moment and it hasn't been really considered because it's not considered to be against general interests.

 With regards to forward sales, I can't -- I don't know if Carlos can answer this. In our opinion in general the Spanish market has pending some sort of transfer of the prices from the wholesaler to the end customer, so therefore over the next few months or next year inevitably this transfer across will have to be moved on. And so therefore our policy is to be very cautious when we are finalizing our customer portfolio because the increase in the [pool] price which has taken place this year will end up being transferred without a doubt to the end customer. I don't if, Carlos, you wanted to add anything there?

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [16]
------------------------------
 Well our portfolio that's being contracted for wholesale is about -- over EUR55 per megawatt. And of that portfolio, it's halfway through the year, for next year we've got about 30%. That's what we've got committed.

 The other question about the scrip dividend, as regards what you said about the scrip dividend, our Board in the last two years has made the decision that the dividend would be paid traditionally and that just the complimentary dividend would be based on the scrip dividend formula. That's a decision; that's not our established policy. That's has been made -- a decision that's been made from one year to the next. So we haven't decided what we're going to do next year, whether we're going to continue to do that or not. And the Board, based on the current circumstances, will decide whatever it has to decide as regards both the main dividend and the complementary dividend.

 I'll just point out that when the first -- whenever it was first decided to do this, it wasn't -- didn't have anything to do with our debt. It was because we wanted to offer the option to our shareholders. And it was well accepted the first time and that's why we repeated the formula. That's the main factor.

 For the Company it was also good, but it was also a question of offering shareholders an option and other circumstances, like you, Alberto, have mentioned, I'm sure the Board will bear in mind when they make their decision in future.

 There was a question about the issue of local coal, Spanish coal. The increases in Spain and our Company's production of energy, coal energy, are spectacular. In fact the increase of coal has been 66% in Spain, but national coal has had a 45% increase and imported coal 100%. The figures show that production with imported coal is doubling due to the prices of coal that have to do with the North American situation, as we know, and Gas Natural Fenosa at its plants, at the Meirama plant especially, is making use of this situation.

 As regards national coal, increases are very important and significant. Obviously this is associated with the subsidies that are being given to coal, which remain the same. What has got down and led to the conflict -- social conflict that we know there are subsidies -- direct subsidies to mines. But the obligation to burn coal remains and it's subsidized based on the figures I've given you. Gas Natural Fenosa is against this policy obviously. We accept it because we have to, but we would prefer absolute freedom since it's a liberalized sector to work in accordance with the market. But we're prepared to compete through coal as we are showing -- as is being shown now, because coal plays a part in the mix.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [17]
------------------------------
 Next question.

------------------------------
Operator   [18]
------------------------------
 The next question is by Mr. Pablo Cuadrado from Bank of America Merrill Lynch.

------------------------------
 Pablo Cuadrado,  Bank of America-Merrill Lynch - Analyst   [19]
------------------------------
 Yes. Good morning to you all. My name is Pablo Cuadrado from Bank of America-Merrill Lynch. I've got four very brief questions. The first one is could you give us an idea of the provisioning, the procurement? I see that it's increased as regards last year. Could you give us an idea of what's going to happen by the end of the year with that?

 Another question, going back to the international gas sales, you've explained quite clearly what you're doing internationally. But could you help us to understand more what the level of growth is based on those volumes that you expect for the end of the year and even 2013, because I think in the past we've spoken about double-digit volumes, but that might go from 10% to 40-odd%, so to get a better idea of that?

 The third question has to do with the regulation, but not as regards measures but the issue of the deficit, use of deficit. Could you confirm whether you've spoken to the Ministry in recent weeks about commitment, some kind of commitment because -- and what the situation is in these months?

 And the other question is about the net debt guidance. You're talking about EUR15b, EUR16b for this year. I would like to know whether that is based on net debt adjusted to deficit or is it EUR15b, EUR16b by end of year supposing that no further securitization is done.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [20]
------------------------------
 Well, as regards the last question, it's without discounting the securitization. Yes, EUR16b would be without additional securitization and EUR15b with it. That would be the difference.

 As regards securitization, the process is ongoing. It began positively at the beginning of the year. The situation of the markets leads to a situation where that is not one of the priorities of the government at the moment. We are convinced that as regards the -- as soon as the situation allows it, that will be taken up again.

 As regards the international market, well, rather than giving you figures, I can tell you this is a structural policy. It's not temporary. We're going to continue with our strategy of leverage in the areas that we know about, supply activities through our trading sector. But we believe that in the next 12 months at least the current policy and the current results will continue.

 The contracts that we're signing and we've informed the media about regularly will allow to continue with these policies, these margins, these increases, these results in the next 12 months. That's what we believe based on what we're achieving and what we've signed. Carlos, I don't know whether you want to add anything about this?

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [21]
------------------------------
 Well we believe that it's something that is temporary and that the second part of the year figures will be better than the first half of the year. Basically this is because of debt, bad debt provisions. You know that the policy of the company is to -- whatever has expired for more than six months to cover that and include it in the provisioning based on our registries.

 The difference as regards the previous year has to do with Latin America and the electric distribution, as you've seen in the details of the report. And when I spoke about a provisional situation or temporary situation, when there's an increase of sales and an increase in prices of electricity in those markets, it leads to a situation where the final amount of provisions also goes up, which is logical. And I think this is something temporary and in the second half of the year it will be less.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [22]
------------------------------
 Good. Next question, please.

------------------------------
Operator   [23]
------------------------------
 The next question is from Mr. Gonzalo Sanchez from BPI.

------------------------------
 Gonzalo Sanchez,  BPI - Analyst   [24]
------------------------------
 Hello. Good morning. I had two questions, the first one as regards the cost of debt. After the operations in the first half of the year I wanted to know whether you could give us a guidance, an idea of what the debt will be for the end of the year and next year, if possible.

 Then as regards regulatory issues, this has to do, although not directly, with the measures that have been mentioned in the press. I'd like to know whether you expect the rate as regards generation where they're passed through the customers will be introduced. And as regards the CO2 emission free rights, whether a mechanism in that area would be introduced to recover some values from the system.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [25]
------------------------------
 Well, I insist we'll have to see what this rate is, what this amount is applied and how it is applied. Generation, as we know it, doesn't really have margin, hasn't got required margins to carry more taxes. It's important to see what electric generation is. If you compare the situation of Spain as regards the costs of the pool and the rest of Europe, in recent years you'll see that it's probably been the cheapest pool in Europe. In fact of all the components of the cost of energy, the cost of the pool wholesale, the generation cost in Spain is the only cost that's gone down since the beginning of the crisis; it's gone down by 30% since the beginning of 2008.

 So it's obvious that any solution to the problem of the deficit cannot be based on the existence of further profits in generation because there are no additional profits. And it's obvious if you look at the prices at which energy is being sold in the wholesale pool in Spain, the costs of distribution as compared to Europe, you can conclude that there is simply no extra profit. There is just no extra profit.

 Solutions, taxes, well, that will have to be done in line with what can be accepted. I think that that's quite clear. And it's also clear that the EUR10b that have to be carried by the electric system in Spain as result of national policies are the problem and that has to be solved because that is what we believe.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [26]
------------------------------
 As regards the cost of debt, I've referred to this previously, our guidance for the year 2012, about 4.2% in this first half. We're at 4.1%. That's more or less the value. I don't know whether the second half will be more or a bit less, but it's more or less the same. That's about the figure. And that is based on, as Mr. Villaseca said, more than 60% of our debt is fixed, so variations will be small, or not really affect the process.

 As regards 2013, we won't give you any guidance but we have to say that everything we're doing, the operations that we're doing, it's true that one of our aims is to continue with our average debt life of about five years. If we continue with some activities the debt will get a bit more expensive, the cost of debt will be slightly higher maybe next year.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [27]
------------------------------
 Next question.

------------------------------
Operator   [28]
------------------------------
 The next question is from Mrs. Carolina Dores from Morgan Stanley.

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [29]
------------------------------
 Good morning. I've got two questions. The first one is whether you've done anything about the social bond payments.

 And the second one, what's the situation as regards the regions of Spain?

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [30]
------------------------------
 Could you repeat the second question, please?

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [31]
------------------------------
 What agreements do you have with the regions of Spain for supply to hospitals and things like that? Have you had to provision for the regions in this half of the year?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [32]
------------------------------
 No, we haven't taken anything back. Last year we had a cost. This year we haven't. We're talking about [EUR5m, EUR6m], that's the impact in the first half as regards the social bond.

 The second question, if I've understood it correctly, the global -- the situation with the regions, this is not provisioned. We don't consider that they are in a situation of non-payment but in a situation of delay. So there's been no change as regards -- there was no provisioning for the regions so there's been no change obviously.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [33]
------------------------------
 Next question?

------------------------------
Operator   [34]
------------------------------
 The next question is by Mr. Javier Suarez from Nomura.

------------------------------
 Javier Suarez,  Nomura - Analyst   [35]
------------------------------
 Hello. Good morning. My name is Javier Suarez from Nomura. I've got three questions. The first if we go back to the situation of the Company at this time, I appreciate the effort of the company to reduce its debt and show the markets that it's making an effort. The question is if we consider a worse scenario in the future, what reduction of debt -- annual reduction of debt over the next three years do you envisage and would you feel comfortable with?

 This question can be asked in many different ways, but it's really basically the question is how urgent and worrying does the Company consider the problem of the debt is and what's going to be done with it over the next three years. As you see the free cash flow generation, what do you think of that? And reduction of debt annually over the next three years and what level of debt the Company should have over the next three years in order to feel comfortable with it.

 The second question, if we go back to what's been said, one of my colleagues has mentioned the generation -- electric generation in Spain. I'm surprised by the figures in the second half. Are there any extraordinary items that we should know about and how the accounting has been done for the recovery of the social bond for 2009 to 2011?

 And the third question is going back to what one of my colleagues has also asked about the scrip dividend. I would like to know about the low level of acceptance of the most recently issued dividend and whether that would lead the policy -- the Company to change their policy and pay part of the dividend as a scrip dividend.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [36]
------------------------------
 Good. I'll answer these questions and then pass the floor to Carlos. First thing, the question, yes, can be asked in many, many different ways. But maybe it's already been answered. We, if the scenario gets worse, we feel reasonably comfortable. Obviously the word reasonably is ambiguous, but it's difficult to be more -- to be clearer than that.

 Why do we feel reasonably comfortable? Well because the situation is bad enough as it is so we feel that we're covered for the next 24 months and even for the third year. We're working on solving the year 2014. So at this time we believe that we have a clear capacity to face a scenario that gets even worse.

 We don't want to think about catastrophes, but things might get even worse. But they already are bad enough and we think we're not going to have to go to capital markets over the next two years, which is quite good really. And we are -- our cash flow generation is positive and we can also allow ourselves to reduce our investments even further. So that makes us feel quite comfortable.

 We could, for the next two years, do absolutely nothing, and we are obviously going to do things over the next two years. But that allows us to feel comfortable and to answer your question and say that we believe that we have already done what we had to do to get through the worst of this. We'll do more things. We feel reasonably comfortable that we can face extreme situations which we hope do not arise, and if they do we'll face them as best as we can.

 The second thing, about the second question, one thing I've already said, in our opinion, and this -- we stated this, I think I stated it last time, the final market is not really reflecting the true increase of prices on the wholesale market. What's our reaction? Well, we've fallen short in terms of trading and we've increased the pool. This has increased our profits. But this is provisional or temporary because we believe that this will be translated into a final market and the situation will consolidate. That would explain why the second -- profits in the second half are higher than in the first half. We're talking about a slight EUR1, EUR2, EUR3, no more. But it's true and that's happened.

 As regards the last question, I don't remember, the scrip dividend. Well we repeat, this is something that the Company has always suggested and has been approved by the Board based on options for the shareholder. The investor has decided that they prefer cash; 18% prefer shares. Well that's all very well. If they prefer -- if they want something else, we wanted to offer investors and shareholders. We didn't want to impose anything. We wanted to offer the possibility. In the first year it was tremendously successfully. In the second year it was only 18% were happy with it. Next year we'll see. We offer the best alternatives to shareholders. There is no other idea behind that; that was the only idea behind it.

 If we look at electricity in Spain and profits of generation and trading, there's nothing extraordinary apart from what I mentioned before, the social bond. It's not an extraordinary bond, it's simply that there was one last year and there has been none this year. That's why the EBITDA in that chapter has grown by 18%.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [37]
------------------------------
 And in addition to what Rafael was saying, in trading we've operated better, thanks to the circumstances of the market. We've bought from the pool. And the mix, the production mix has been more economical for the Company so the margin's been higher than the previous quarter. And our mix -- generation mix has been more favorable from the point of view of cost. So social bond plus trading plus all those circumstances, that has led to the results that we've had.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [38]
------------------------------
 Good. Next question.

------------------------------
Operator   [39]
------------------------------
 The next question will be asked by Mr. Javier Ruiz from Paribas.

------------------------------
 Javier Ruiz,  Exane BNP Paribas - Analyst   [40]
------------------------------
 A couple of questions -- quick questions. The first one, I wanted to know whether the comments of Repsol would affect you. They are going to sell their liquid natural gas assets. Would that affect your contracts, specific contract with the company for gas supply?

 Secondly, if there's been the coverage levels in terms of production for 2012 at the end of the second quarter or second half. You want to reduce your debt in the second half of the year through free cash flow. That's the part of the year where a lot of CapEx comes together and I don't know whether I'm missing any information here, could you tell me? Or is it just free cash flow?

 And the final question is, well, it's a bit of a trick question. If Sonatrach -- Sonatrach after having -- after all the problems that you had with Sonatrach in the past and if we look at the margins of the mix, don't you think they are getting slightly perturbed? Is there a risk that we go back to the problems that you had with Sonatrach in the past?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [41]
------------------------------
 I'll start with the last question and I'll leave the middle two for my colleague, but anyway I'll start with the last one. I'm sure the reason it can't be done is very clear. Sonatrach, who was part of the controversy, it's a sales contract through the gas pipeline. So the margins are known, they can be measured, etc. The international activity is related to contracts obviously which are related to liquid natural gas, which is not the Algeria case, or they are FOB contracts or they've got profit-sharing clauses so therefore we share that with our suppliers and thus it's already discounted.

 So everything is totally normal. And when you buy gas through the gas pipeline, well, there's no alternative to this so you -- this is the philosophy for both companies, whilst when you're selling liquid natural gas you can do it CIF, FOB or whatever, that's the gas world. And we've been working that for many years. And the problems with Repsol -- sorry with Sonatrach came up when there were international margins, but they're not applicable to the gas we supply, rather to their own appreciation of what the gas price levels were in the Spanish market.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [42]
------------------------------
 The other -- the first question related to Repsol, yes. We have been asked by Repsol to be part of the tender, this opportunity while they want to sell their assets in liquid natural gas. Obviously taking into account our strategies and our situation, we're going to analyze this and we're going to see what our opinion is on that and the decision that we should make.

 And we do not have any gas supply contracts with Repsol at the moment, so that's not a problem. But we do have certain assets with them outside Spain which, well, they've decided to sell and they have asked us if we would like to study whether or not we're -- the fact that we're interested in that. And of course we will be studying that. And, as we say, it's one of our shareholders that's asked us to consider this issue.

 Related to the contracts or whether we've got coverage for this year, well I think we're talking about an 80% cover. So I really think we're covered for the rest of the year.

 And the other question made reference to something about reducing the debt level during the second semester. Well I think the CEO has already made reference to this. In the first part of the semester we have had certain situations which could be the payment of certain amounts which are related to the situation in the first semester, and so this will affect the free cash flow in the second semester.

 But obviously the current situation, if you look at our [funds], you see the dividends that were paid by the Company are higher than those from last year. And those dividends were related to those that were paid by some of our subsidiaries, which the previous year they were paid in the second semester. But this year they've been paid in the first semester. So when you're making the year-on-year comparisons, that was the advantage that we had compared to last year. But these were the main issues. It's around, as I said, EUR18m.

 But these extraordinary issues to a certain extent are going to contribute to the fact that the cash flow in the second semester will vary somewhat. But when we're talking about electricity distribution it doesn't mean necessarily that our investments are going to really go up.

 But when we're saying that we're containing the investments and this probably started during the second part of the year -- I have to contract myself, sorry, I'd forgotten a contract we have with Repsol, which is one for our generation market. So I think it's 1-point-something bcm. I think that's the only contract that we have in our portfolio, which is 1 or something like 6bcms. It's a long-term contract. Well, as I say, I think the issue still remains the same, but sd I'd like to correct myself, we do have one contract with Repsol.

 I'd like to now take the next question.

------------------------------
Operator   [43]
------------------------------
 This will be done by Mr. Alonso from Societe Generale.

------------------------------
 Jorge Alonso,  Societe Generale - Analyst   [44]
------------------------------
 Good morning everyone. I had a couple of questions. The first one is related to the Mexican market, the distribution market there which has recently been commented on in other quarterly results. They were talking about the conditions which would be offering a lot of growth in this area. So I would like to know the situation there in relation to Mexico.

 And also the other one is the CapEx flexibility that you're saying that you're giving as the minimum committed CapEx for the next couple of years. So we would like to have an idea of the capacity of the Company in very adverse situations to be able to make cutbacks or to adapt the investments on the short term.

 And my last question is related to the fact that on a European level we're seeing renegotiations of the gas contracts with the large suppliers or the large operators. And I would like to ask if you have the opportunity to renegotiate the contract? I'm not just thinking about Sonatrach because that's been mentioned, but when thinking about other suppliers, are you able to negotiate better conditions for your contracts? In what timeframes are we talking about? Or what do you think about this situation because it seems that the market is moving towards gas contracts which have got more spot aspects and less fuel-related aspects.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [45]
------------------------------
 Several comments, yes. Effectively in Mexico the historical comments, but I haven't said them, but as said they're related to the Federal -- Mexico DF. They are complex issues to supply gas to a very complex city such as Mexico DF. When we're talking about the connection points, I think, I'm talking from memory, it was about 30% growth this year. The project is going to last for a long time. We're continuing and we're very happy about that and without any doubt to offer gas to a city which is one of the most important ones in the world at the moment.

 If we're talking about capital expenditure, and Mr. Alvarez is going to talk about this in more detail, but I've already mentioned this. A third of our current investments are related to maintenance. The rest isn't. From there you can deduce what our base levels are.

 Well as far as gas contracts in Europe are concerned, two comments. The first one is related to the fact that in effect we have renegotiated some. The situation isn't the same because our European colleagues have enormous contracts, well [without the almost], within the bilateral relationship which is [closed] with large suppliers through gas pipelines. Our large supplier is Sonatrach, but the Spanish market is much more competitive than the European one, much, much more competitive, which is clearly seen in the gas prices in Spain as Eurostat publishes.

 But, however, taking into account the world markets, we've already renegotiated some, such as Nigeria and more recently with Norway, better conditions taking into account the markets, the Spanish markets and the reference prices that the contracts are indexed with. So we're talking about Sonatrach. And the other ones have been the other way round, for example, the renegotiation of the Sonatrach contract took place for the years '07, '08, '09 which were completely different to the current situation. So obviously the price renegotiations Europe-wide are being negotiated down, shall we say, thinking about the current position.

 We are in agreement that really we should now be more related to the spot markets. The spot markets doesn't necessarily mean that's the way we're going to go. We could have a favorable opinion on that and we would have to think about the spot markets. But this, well basically our opinion is, and I'm going to explain now, in Continental Europe the spot markets are fuelled by the excess or surplus from the operators, the exchange, because they have surplus from their national markets. So, for example, certain suppliers, well they're actually the same suppliers in the bilateral contracts with the operators like us and our European colleagues as those that supply the spot markets. They're the same suppliers, except, of course, when operators like us in Europe are going to sell our surplus on a timely basis to the spot markets.

 To date, and very explicitly, the countries that supply Europe, mainly Russia, Qatar and Algeria, have declared their non-interest in selling gas related to the spot markets. They are not going to -- well only on certain specific times they are going to use the spot markets. But the spot markets normally are fuelled by the surpluses and suppliers like us. This will never [be able to consolidated] referential spot market because that would be impossible because the reference market is the one that comes from the supply markets, i.e. from the three countries I've already mentioned. And as they [decline], this is normally applied to the Brent that's taken as a referential price.

 Now obviously in timely circumstances have taken to effect, for example, if there's surplus in Europe, there will not be a sufficiently liquid market rather than to take into the account the net adjustments on a timely basis. So the contracts are still going to be indexed to the Brent price based on the supplying country's [position] in the Continental Europe.

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [46]
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 Well, thank you very much. Any more telephone questions?

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Operator   [47]
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 Yes, we have one more question from Mr. Antonio Lopez from HSBC. Yes, Mr. Lopez, you have the floor.

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 Jose Antonio Lopez,  HSBC - Analyst   [48]
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 Yes. Good morning. Jose Antonio Lopez. Thank you very much. I have a couple of questions but some have been answered, but I've one still pending. It's about -- related to logistics. I would like to know in relation to what you have mentioned about taxes on generation, what guarantees do you have that what is going to be collected for these taxes is going to be used? Do you actually know if these taxes will be used to cover the tariff deficit or will it be used by the government for other things? Do you have any guarantee that it will be used to cover the tariff deficit?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [49]
------------------------------
 Well we don't have any guarantee, but we don't, as I've already said, we don't have any official confirmation that that is going to be a measure that the government is contemplating at the moment. We know what's published in the press but we don't know -- we've had no detailed information about this measure whatsoever.

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [50]
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 Thank you very much. Any other questions? No questions in Spanish and we don't have any question in English either. So thank you very much. So therefore let's go to the questions that we've got through the web page.

 It seems that the majority have already been asked and answered. I think we have three questions which -- well actually there's questions that I'm going to group together. The first one makes a reference to credit issues, i.e. if gas -- natural gas price should fall below the investment grade, and this refers to all the bank loans, the committed ones, and also if we need new collateral for our gas contracts and if the counterparts are prepared to still deal with us with natural gas.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [51]
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 Well in both cases the question is -- the answer is no. There's no effects, not on any of our credit facilities, not even the ones that have been signed recently. This will not have any effect on the fact that the credit facilities would disappear. And also I think certain loans, the traditional grid for the spreads, which could affect the costs according to the rating, but anyway -- but only in a very few cases, but it's not important in the whole -- when taking into account the whole credit facilities that we have. When we're talking about gas, the gas contracts wouldn't affect us if we're -- the investment grade would change, as has already been mentioned.

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [52]
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 The second group of questions make a reference to possible impacts from the new regulatory measures. More specifically, which measures could be implemented if we, or our contingencies measures, or if we get more efficiencies in distribution or could you be a bit more specific about what contingency plans could be set up?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [53]
------------------------------
 Well we've already -- as related to our distribution, we've already set up plans to be more efficient. Two plans have already been implemented. One is to reduce the operating costs and the other one, of course, is in as far as if we have less retribution, certainly in certain projects that are not so profitable and these are issues that [have already been] set up. And the Company has been working for a long time now on getting or being more efficient. And we initially were working on the synergies from the integration. But now what we want to do is more efficient to get higher levels of profitability for our distribution business.

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [54]
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 The next question is can we add some sort of comments on possible areas of common interest with Sonatrach?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [55]
------------------------------
 Well we are studying, and it's known that the first one will be our participation in the Medgaz gas pipeline. They're quite -- they've progressed quite a lot there and also there are things to explore together in Spain and abroad. The process is very slow and we think that we will come to some sort of agreement with them.

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [56]
------------------------------
 And finally certain questions related to -- well, in the previous presentation for the first half you talked about your strategic plan objectives. Can you offer any information on the calendar for the review of that, of the strategic plan?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [57]
------------------------------
 No, not yet. We will do that at the end of the year. That's our plan. But also we are waiting to see what happens to the regulatory issues because they need to be clarified. And our objective would be that at the end of the year or the beginning of next year we would be able to update this plan and we would update it obviously and be able to show all -- this would reflect the regulatory changes and then market conditions at that point.

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [58]
------------------------------
 Well they are all the questions then. Well thank you very much. We could consider that now the question-and-answer session has finished. And I would now like to give the floor to the CEO.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [59]
------------------------------
 Well, once again I would like to thank you for coming here today. And we will see you in three months' time. So thank you all very much.

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Editor   [60]
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 Speaker statements on this transcript were interpreted on the conference call by an Interpreter present on the live call. The Interpreter was provided by the Company sponsoring this Event.




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