Q3 2012 Enagas Earnings Conference Call
Oct 23, 2012 AM CEST
ENG.MC - Enagas SA
Q3 2012 Enagas Earnings Conference Call
Oct 23, 2012 / 07:00AM GMT
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Corporate Participants
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* Antonio Llarden
Enagas SA - Chairman
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Conference Call Participants
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* Pablo Cuadrado
Bank of America - Merrill Lynch - Analyst
* Alberto Gandolfi
UBS - Analyst
* Javier Suarez
Nomura - Analyst
* Carolina Dores
Morgan Stanley - Analyst
* Gonzalo Sanchez-Bordona
BPI - Analyst
* Olivier Van Doosselaere
Exane BNP Paribas - Analyst
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Presentation
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Unidentified Company Representative [1]
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(Interpreted). Good morning ladies and gentlemen and welcome to the presentation of Enagas earnings for the first nine months of 2012. Figures were released this morning before the opening bell and they are available on our website, www.enagas.es. Mr. Antonio Llarden, the Chairman of Enagas will host the presentation. We expect it to last about half an hour and afterwards we will have a Q&A session that we will try to answer as swiftly as possible. Thank you very much for your attention and I will now hand the floor to Mr. Llarden.
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Antonio Llarden, Enagas SA - Chairman [2]
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(Interpreted). Good morning ladies and gentlemen and thank you very much for joining us today. Today we are presenting our earnings for the first nine months of 2012. Despite the complex economic and financial environment, results remain positive and also in line with our targets set at the very beginning of the year. The results shown in detail in the presentation accompanying this conference call will allow us to meet our guidance for the year. I will briefly describe the most headline figures.
EBITDA grew 4.4% compared to the first nine months of 2011, reaching EUR683.5m. This increase was due mainly to growth in the Company's asset base over the past year. Here I would like to point out that operating expenses rose just 0.9% in like-for-like terms in the period. Net profit amounted to EUR281.4m, a year-on-year increase of 3.9%. The increase is still above our target for the full year although it is less than in the first half. As we approach the end of the year results will become more comparable with those in 2011. By the second half of last year, we started to take into account Gaviota and Altamira facilities in our results. All this leads us to maintain our prudent target of slight net profit growth in the full year 2012.
We have invested EUR647.9m and brought into operation assets of EUR895.3m. Both figures are well above the guidance we released at the beginning of the year, largely due to the investment in the natural gas plants in Quintero and also the set up of the Yela underground storage facility in Guadalajara. This facility which began operations in August is key to ensuring the security of the Spanish gas supply system.
We are now into the fourth quarter and I would like to review the main guidance for this year. First, EBITDA growth of around 8%. Perhaps at the end of the year this will be below 8% due to the consolidation of Naturgas Transporte, which will not take place until January 2013 due to the time we needed to acquire all the necessary authorizations and permits.
Second, we are set to achieve a similar net profit to the 2011 figure. At the end of September we are still below this target, but we can still have -- average cost of debt could rise slightly during the last quarter. And we therefore prefer to remain cautious and leave our target unchanged from the 2011 figure. In any case, this is in line with our 2010/2014 business plan. Third, dividend growth of around 8%, this is our goal and we are on target to meet this goal. And finally, in terms of investment, we committed to investing EUR550m bringing assets towards EUR750m onstream. As you can see, we've reached these figures in this quarter.
Now regarding Enagas' financial position, this remains one of the Company's strengths and here I would like to highlight a few figures. Net financial debt at September 30 was EUR3.418b. To date we've increased the percentage of fixed rate debt to 86%.
In terms of untapped available financing, Enagas has liquidity of EUR2.6b, including the EUR750m bond issue we made just after the end of the third quarter, at the beginning of October. This will allow us to maintain high solvency ratios and continue to pursue our investment plan without jeopardizing our financial flexibility. This latest bond issue which I just referred to was carried out under excellent payment and cost conditions and we can now face the future secure in the knowledge that we have the necessary funds and are less subject to future risk in the credit market.
Furthermore, in the first nine months of 2012 we pursued an active policy of renewing loans and raising new financing. We have already completed a 100% of the planned renewals for the entire year and we have amply exceeded these targets with the closing of the bond issues at the end of October. All these provides further proof of Enagas' sound financial position allowing us to continue moving forward and towards our key strategic goals.
I would also like to point out that on July 5 a final dividend was paid out of 2011 profit. The total 2011 profit -- the total dividend was 18.5% higher than the 2010 dividend and it was in line with the 65% payout policy for the fiscal year 2011 that I announced at the conference call this time last year.
I would like to remind you that for 2012 the Board of Directors agreed to raise the payout to 70% and, as I already mentioned, we expect to increase the dividend for 2012 by around 8%. One of the Company's main cornerstone is to maintain shareholder trust and loyalty. This means continuing to create shareholder value. This is the reason why we are working hard to continue increasing the dividend, especially in this complicated financial and economic environment, tremendously complicated environment.
I would like to briefly comment on the latest regulatory measures set down in the Royal Decree 13/2012 of March 30 and the Ministerial Order of April 26. As we move forward to the end of the next year I can confirm that these measures will help reduce the gas tariff deficit significantly, thanks to all these adjustments. And thanks to this, this small deficit which arose at the end of 2011 is being resolved in the swiftest and most efficient manner.
Now with regards to demand evolution and also despite the adverse economic backdrop, conventional domestic demand is, that is domestic conventional demand along with co-gen and industrial demand rose by 6.3% in the first nine months of the year. The latest forecasts point to an increase in total demand for transported gas of around 1% in 2012 and with a total increase in conventional demand of between 5% to 6%.
Now finally I would like to mention to the recent organizational and shareholder changes at Enagas. You all know in recent months, the Company has successfully culminated its process of hive down at subsidiaries and accreditation by the regulator and the EU as an independent gas transmission system operator, herein after referred to as TSO. Also as a consequence of the approval by the EU of the third gas directive, the free float of the Company now at the end of October represents 85% of its capital which is one of the highest levels on the IBEX 35 Index. We are currently one of the companies on the Spanish (inaudible) market with the highest percentage of foreign investors, which represent around 75% of our share capital and for us this is a source of pride.
It is because of all these factors that Enagas Board of Directors at my proposal resolved to appoint a new CEO, Mr. Marcelino Oreja Arburua. This appointment will help strengthen the Company's management structure in its new capacity as a holding company and is also in keeping with the most stringent international corporate governance recommendations. Mr. Marcelino Arburua is present at today's conference call and he has my full backing and a proven professional track record, which is essential given the Company's current situation.
In short and in order to conclude, the nine months earnings we have just presented gives Enagas very good visibility for 2012. With this data we realize that we are on track to meeting each and every one of our commitments, and not only for this year but also for 2013 and 2014. We've achieved this for the sixth year in a row. All this is due to the enormous effort we've made -- we've done adapting ourselves to the terrible difficult economic circumstances and also the recent regulatory measures. I would also like to state that, as I mentioned in our previous conference call, we will update our business plan accordingly in February 2013 at the time of the publication of the full year 2012 earnings.
Thank you very much for your attention. If you now have any questions, please do ask now and we will endeavor to answer them as best we can, either myself or the rest of the Board of Directors. Thank you very much indeed.
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Questions and Answers
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Operator [1]
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(Interpreted). Good morning ladies and gentlemen. The Q&A session starts now. (Operator Instructions).
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Pablo Cuadrado, Bank of America - Merrill Lynch - Analyst [2]
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(Interpreted). (Technical difficulty). Is that due to consolidation, asset consolidation?
And last but not least, regarding the underground storage facility put into operation, Yela specifically, one government proposal suggested increasing remuneration of these underground storage facilities or these type of assets. What do you think about this timing? When will this come into place?
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Antonio Llarden, Enagas SA - Chairman [3]
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(Interpreted). Yes, thank you very much indeed, Mr. Pablo Cuadrado. First and foremost, regarding these figures you asked about, the gas deficit we think it is, by the end of the year it will be around EUR170m or EUR180m or even EUR200m. So it is well below last year's target. And our intention is, if these increases, the total increases are maintained in coming years, gas deficit could be easily covered by result.
Now regarding the personnel OpEx, this year we've covered all these expenses in La Gaviota storage facility. We're talking about 50 to 60 employees. And on top of that, when it's put into operation we will include the employees in Yela. And that's why our labor costs are increasing our OpEx cost. They are around 1% increase.
And last but not least, regarding this issue with the underground storage facilities, at the current moment we are studying the -- well, the Ministry is trying to conceive a new ministerial order foreseeing the adjustment of the [redistribution] to these underground storage facilities linked to the expansion of their useful life that we foresaw at the beginning of the year. Hopefully this will be approved by the end of the year, around December 2012. The draft, the ministerial draft is, as far as we are concerned, quite positive as far as it is adjusting all the financial and economic costs due to the current Spanish legislation and it is adapted to the useful life of these underground storage facilities.
So, as I said, at the end of this December this new regulation will be approved by the government.
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Pablo Cuadrado, Bank of America - Merrill Lynch - Analyst [4]
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(Interpreted). Thank you very much indeed.
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Operator [5]
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(Interpreted). Now the next question will be done by Alberto Gandolfi from UBS. Thank you very much.
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Alberto Gandolfi, UBS - Analyst [6]
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(Interpreted). Good morning ladies and gentlemen. I have three questions. I'll start with the last question. It's a follow-up question on Pablo's comment. Now regarding the gas deficit, you were talking about EUR200m for 2012, aren't you? Can you briefly specify -- that's an annual figure, but what is going to be the balance by the end of the year and how much corresponds to Enagas? Is it EUR200m? I just didn't understand this very well.
Secondly, could you briefly talk about your CapEx outside of Spain because you're constantly talking about EUR100m and EUR150m in opportunities, but it turns out that you're investing a little bit more of this figure? So can you talk about this figure, EUR100m and EUR150m every year? Shall we wait until the end of the year or February for example?
And in this concern, Italy is thinking about an outstanding investment upgrade to become a hub. Do you think that this will be done only by the local domestic operator or do you foresee opportunities in other lands?
And last but not least, regarding regulation. The Minister has recently claimed that new regulation will follow soon, but you didn't explain this very well. By the end of March you talked about the net remuneration. In the short to medium term, given this new regulation, will this net wrap figure remain the same, taking into account existing and new businesses? Thank you very much indeed.
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Antonio Llarden, Enagas SA - Chairman [7]
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(Interpreted). Thank you very much Alberto. The gas deficit was around EUR300m last year. It will go down to EUR170m, EUR180m, or even EUR200m this year. This is for the whole system, so taking into account all the system costs and also the collection we expect to have based on demand. Now Enagas proportion will be around 40% so perhaps we're talking about EUR70m to EUR80m. So, as I said, the good news is that the recent approved measures by the Ministry are having its fruits, very positive indeed, and hopefully in the next two to three years if we maintain the current policy, which is a total-increase policy, then this problem will be solved in the future.
Now regarding CapEx outside of Spain, in reality we shall refer to core business acquisition, assets that belong to third party operators. And, as I said, we do not have much time to explain this policy at the moment. Hopefully, why don't we wait until the results presentation in February and then I'll give you an update on our business plan.
So in general terms we haven't modified anything really. We are paying attention to the current existing core business assets that sit in our business that do not stress out our debt policy, that do not increase our debt levels beyond our strategic plan, that can provide some recurring income, whose performance ratios that are equal or even beyond the current asset ratios that we have at the moment. So no general changes in this respect. Perhaps in February we can give you an update in this respect.
Now regarding Italy, we've identified several measures by the Italian government. Apparently the government is going to invest in the Italian territory in order to boost competitiveness and to create a hub in Europe, that being Italy. So for the time being we have no opinion in this respect. We do not know how these investments will be performed. We understand that our key -- the key operator will be our partner in Italy, but we will have to wait and see until we receive further information about the Italian energy plan in order to know whether this is going to benefit our Company and whether third-party investors will take place. So far we have no opinion in this respect, as I said.
Now regarding regulation, as I said, what the minister has mentioned was always applied to the electric system. We have no news regarding the public administration thinking about new changes so all remarks by the minister focused on the electric system. A fortnight ago the minister in parliament repeated that after the current gas reform regarding rates and tolls and so forth, well, for the next year perhaps we will introduce some changes in the electric system, trying to boost competitiveness, but always linked to the electric system. So therefore we have -- there are no changes in our expectations regarding the gas system.
This is fairly reasonable as far as we are concerned because you've seen during 2012 the main problems facing the energy system are heavily related to the electric deficit, the mix between renewable energies and other sources of energy.
And last but not least, we are talking about different technologies compared to the gas technology. We are thinking about boosting more competitiveness in the electric system. However, the gas system is a very open system. More than 90% of consumed gas lays in the free open market, tariff-free market. Due to the technology and infrastructures of Enagas, our infrastructures facilitates the existence of competitiveness and therefore it doesn't look like or at least we have no indication saying that this is a source of concern. Thank you very much indeed.
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Operator [8]
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(Interpreted). Next question will be by Javier Suarez from Nomura. Please go ahead.
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Javier Suarez, Nomura - Analyst [9]
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(Interpreted). Hello. My name is Javier Suarez from Nomura. I have three, four questions as well. Some of them are a follow up on my colleague's questions. So first question is a follow up on how much the tariffs/tolls need to go up. Reasonable increase could be affordable. Could you please specify what's a reasonable increase in the gas price to assume this increase, taking into account that in the last draft, the last bill there is a green cent applied to gas that could have an impact on the tariffs? So could you please say what's reasonable?
The second question is regarding the CapEx. Could you give us the figure for organic CapEx aside the purchase of Quintero? And also do you see any type of risks in the organic CapEx of the Company?
Also could you update us on the CapEx, whether this EUR700m investment in average per year, is that sustainable or do we need to update that figure somehow?
Now one more question regarding CapEx. What's your capability of investment? Could you give us a definition in absolute terms? What's the investment capacity that the Company's management sees for the Company?
And the last question regarding the timing on when the national infrastructure plan is going to be approved, when do you think the government will publish that report? I think that could be relevant to what they needed to invest in infrastructure in Spain. Thank you very much. That is all.
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Antonio Llarden, Enagas SA - Chairman [10]
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(Interpreted). Thank you very much, Mr. Javier. So first, the calculations we've made for a four-year period would be the following. With average yearly increases of tolls at 3%, at a sustainable 3%, it's perfectly doable. That said, you need to bear in mind that transportation infrastructures represent less than 10% of the total gas cost, of the total gas bill. So that 10%, that plus/minus more or less 3% does not have such a great impact. So fluctuations in the price of, raw price of raw materials that we've seen in the last two years, for example, have a much higher impact on the final price of gas than the cost of infrastructures.
Regarding the green cent, we do not have more information than what is available on the bill draft that the parliament is going to be discussing shortly. But there has been some news in financial media saying that the government, the ministry is considering a reduction to -- of the green cent in gas consumption. If there is a reduction of course it can always help. Now bearing in mind that an important portion of gas consumption in Spain unlike other European countries takes place in the industrial sector, and the price of gas in the industrial sector is market price and the fluctuations to the price of the raw material are very important, much more than the overall infrastructure costs, which do not represent an important share of the price.
Now regarding the CapEx, the organic CapEx for the year is at around EUR300m, EUR350m. Regarding the prospects or outlook, I have two things to say. First, at the end of 2014, with the forecasts we've done right now we believe we will be able to meet our investment commitment from 2010/2014 which was at around EUR2.5b and that's where these EUR700m per year come. The only difference is that with the EUR3.5b we will have to abide by it due to certain positions of third-party assets that are not part of the organic CapEx. Now the investment capacity of the Company is going to be met easily and we will comply with our strategic plan as well.
Now second idea, starting 2014 I believe organic CapEx needed by the gas system in Spain is well below the EUR600m/EUR700m average that the country has maintained the last six, seven years. To know it exactly we will have to wait for the energy plan to be approved. Right now we do not know what's the specific calendar the ministry is setting. We believe it will be to the first semester, first half of the year of 2013. But we do have very detailed information regarding the needs of the system beyond 2014. As I see it, at least for a period of four, five years, through 2017/2018 the domestic needs of the gas system in terms of investments are well below the average we have kept up so far.
So this leads me to my final point, and this will be further detailed when we introduce the update on the business plan. The number one policy priority for Enagas starting then, what we are doing already in fact is a very appealing [redistribution] policy for shareholders. The gas system in Spain is much more mature than what we had in 2006/2007 when we carried out our strategic plan. It was based on the energy plan in force back then, the 2008, 2016, which was an update on the 2002, 2012 plan. But now the situation is different. We have carried out heavy investments in the last few years and that's why I believe that starting 2014 the investment needs are going to be much lower.
In any case, well, these are the facts. The situation that we will be able to give you more information about in two months time when we close the year and we can review the business plan and give you more visibility beyond 2014. Thank you very much.
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Operator [11]
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(Interpreted). The next question will be asked by Carolina Dores from Morgan Stanley. Please go ahead.
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Carolina Dores, Morgan Stanley - Analyst [12]
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(Interpreted). Hello. Good morning. I have two questions. The first question is could you please update us on the acquisition of the Castor share? When are you going to execute it?
And second question, between the end of 2012, beginning of 2013, what refinancing do you need to do?
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Antonio Llarden, Enagas SA - Chairman [13]
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(Interpreted). Thank you very much, Ms. Carolina. Regarding Castor, our forecast in this strategic plan as we set out in 2010 that was set for 2013, that is next year, the agreement that we have is that we have committed to buying 30% or up to a total of 50% of Castor when the public administration has finally set the regulatory values for CapEx and OpEx. If this happens to next year, that's when we will do it. If it happens later in 2014 we will purchase it in 2014. This is the exact answer for your question.
Now regarding the refinancing process, for 2012 we do not have further refinancing needs. Through the first third -- three quarters plus the bonds issued in the first half of October we have achieved all our refinancing needs for the year. For 2013 the total refinancing needs amount to EUR630m, EUR650m. And so that's why we are in a very good position because for 2013 and 2014 we have more than enough financing sources and we are well protected because of this from instability in financial markets, at least from the instability we've seen so far. Thank you.
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Operator [14]
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(Interpreted). The next question will be asked by Gonzalo Sanchez-Bordona from BPI.
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Gonzalo Sanchez-Bordona, BPI - Analyst [15]
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(Interpreted). Hello. Good morning. I had a question regarding the hive-down of regulated assets -- non-regulated assets due to the European directive. My question is could this have an impact in the future when the CapEx is much lower, you can increase payouts to shareholders or non-organic investments? At that point could this be a limit of some kind or in the distribution of dividends to the holding company or is this a sort of regulatory limitation? Thank you very much.
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Antonio Llarden, Enagas SA - Chairman [16]
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(Interpreted). Thank you very much, Mr. Gonzalo. So in principle there are no regulatory limitations in this regard. Since the liberalization process of energy, of the energy industry took place in Spain, which is much more open in gas than in electricity in Spain, the rest of vertically integrated operators in the gas system have already done their hive-down process for regulated and non-regulated businesses. In fact Enagas has been one of the last to do so following the regulation.
And the goal of the regulator is to know in detail that regulated businesses work well and that other non-regulated activities or businesses or activities that take place in other countries are not having an impact on the good business of the regulated side of the business, which is what the regulators care about. So there are no limits on this -- in this regard. In fact the accountancy is very clear thanks to this process and it's more peace of mind for the policy -- the management policy and dividend payout policy of the Company. But I insist there are no regulatory limitations, neither in our case or in the case of other companies that have already done the hive-down process of various holding companies and subsidiaries. Thank you very much.
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Operator [17]
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There are no more questions in Spanish. Let's move on to the questions in English. The first question comes from Olivier Van Doosselaere from Exane BNP Paribas. Please go ahead with your question.
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Olivier Van Doosselaere, Exane BNP Paribas - Analyst [18]
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Yes. Thank you very much. This is Olivier Van Doosselaere from Exane. Just two questions remaining on my side. First question, it may be a little bit difficult to estimate but I wondered if you believe that the impact of the green cent on gas consumption could have an impact on gas demands and what that impact potentially could be and if that could then again start to lead to a rise in the gas tariff deficit.
And the second question, I was wondering if you could maybe give an expectation on what your expectations are on the full-year impact on your earnings from the stake in Quintero. That's it. Thank you.
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Antonio Llarden, Enagas SA - Chairman [19]
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Thank you very much, Olivier. About the first question, my personal feeling is the possible increase of the final bill of the natural gas as a consequence of the green tax, my personal feeling is not important for the consumption, first of all because in Spain the domestic consumption is very stable. The total price of this tax in relationship with the total bill, it could be, for the average of consumers, not very important. And in the case of the industrial consumption or the natural gas for electric generation, probably also the impact of this tax is not very, very important in relationship with the total bill.
Also it is possible next year that the impact of the CO2 tax could be more important in the system, in the average system in general and then perhaps the electric generation by coal could be less important than in the year 2012. It could be good news for a combined cycle.
In conclusion I feel this tax is not a very important item in the case of the consumption of natural gas in Spain.
In the case of the, well, in the second question, the impact of Quintero, this year rivals, as you know very well, have not consolidated. Only we are -- with the consolidation we are talking about the net profit. In the case of the net profit this year it could be very little because we are talking about only to incorporate the net profit for the last quarter and we are talking about EUR1m or EUR2m. The next year logically it could be full year and in this case the consolidation of net profit could increase EUR4m, EUR5m, a quantity of this size. Thank you very much, Olivier.
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Operator [20]
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There are no more questions. Thank you.
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Editor [21]
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Portions of this transcript that are noted "interpreted" 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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