Q3 2012 Gas Natural Sdg SA Earnings Conference Call

GAS.MC - Gas Natural SDG SA
Q3 2012 Gas Natural Sdg SA Earnings Conference Call
Nov 06, 2012 / 09:00AM GMT 

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Corporate Participants
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   *  Rafael Villaseca
      Gas Natural Fenosa - CEO
   *  Carlos Alvarez
      Gas Natural Fenosa - CFO

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Conference Call Participants
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   *  Pablo Cuadrado
      Bank of America-Merrill Lynch - Analyst
   *  Fernando Garcia
      Espirito Santo - Analyst
   *  Alvaro Navarro
      Intermoney Valores - Analyst
   *  Javier Suarez
      Nomura - Analyst
   *  Javier Garrido
      JP Morgan - Analyst
   *  Jorge Alonso
      Societe Generale - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst

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Presentation
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Unidentified Company Representative   [1]
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 Good morning. Welcome to the presentation of results of the nine first months of 2012 for Gas Natural Fenosa. The presentation will be given by the CEO, Mr. Rafael Villaseca, together with the CFO, Mr. Carlos Alvarez, and the General Director for Development, Mr. Antonio Basolas.

 As usual, after the presentation, we'll have a series -- we'll have a time for questions and answers for people in the room and people who've followed this remotely.

 And without further ado, I'll pass the floor to the CEO, Mr. Rafael Villaseca.

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [2]
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 Good morning. I want to thank you for being here, either physically or remotely. And I want to tell you that what I'm going to talk about is what you have on the slide. We've got highlights. Then we've got growth of international operations, then the consolidated results. We'll analyze the lines of business, most relevant lines of business. And then we'll have the conclusions and the questions and answers.

 If we start, first of all I want to point out that in the first nine months the net income has been EUR1,115m, which is practically the same as last year, although it's absolutely necessary to remember that the -- we've had a drop because of the -- in the added value. And then there's been the impact of the Royal Decree number 13 of this year on regulated business, electricity business. In spite of all that, our results, net results are more or less the same.

 Secondly, EBITDA has reached EUR3.8m (sic - see presentation "EUR3.8b"), which is 8.1% more than last year, in spite of this investment and this Royal Decree that I mentioned before. And that's clearly due to better results of our businesses outside of Spain, because in Spain things have not gone so well in general.

 Thirdly, investments have gone down 1.2%, EUR822m. And that trend we'll analyze later, will continue over the next few quarters for sure.

 And fourthly, the net debt is EUR16.9b, which is lower than December, which would be EUR15.6b. And the financial control of the Company debt, proactive management of expiries and a capital fundamental, all this is very important for our Company. And it -- we've got a structural cash flow which is still positive. And this allows us to face the commitments that we had acquired or taken on, priority of liquid of cash flow in the Company and rationalization of investments. And we've got to insist also that investments from -- in maintenance reach only one-third of what we -- of our full investment.

 We have to look at the regulatory issues. They're very important in the electric sector in Spain. And the history of this is these three Royal Decrees that will be supplemented by the very important law that's been going through -- that's going through parliament at the moment right now.

 First of all got Royal Decree 1/2012, which basically suspended temporarily the investments in the Special Regime, renewables especially, but however its effects, as we'll see later, are not going to be immediate. They'll start as from 2014. And unfortunately subsidies continue to -- renewables continue to increase. In this case they're more solar energy. That's the first measure that was taken by the government. And in 2014 we'll probably see its effects, but not before that.

 Secondly, we've got Royal Decree 13 of this year, which established a series of measures which came from the judgment of the High Court, the Supreme Court that you all remember. And one of the measures was an increased -- increase of the rate of almost EUR1.7m (sic - see presentation "EUR1.7b") as a result of that ruling from the Supreme Court and then reduction of costs in several regulated activities, transmission, distribution, capacity charges and other, that accounted for about EUR1.8m (sic - see presentation "EUR1.8b").

 And finally, we've got another Royal Decree, number 20 this year, which imposed a lower remuneration for extrapeninsulars and transmission, higher access charges for low voltage and territorial supplements to cover regional taxes in the sector.

 As I've said, these have been -- this is the history. And now we're going -- there's a law going through parliament that we'll have to face the problem that you see here, which is we still think, without a doubt, that the most important problem of the electric sector in Spain industry is that the access costs are slightly more than EUR19b. Almost 60% of that is subsidies. And this year there are probably going to be more than EUR11b. And that's an absolute -- it's a big problem for the electric sector. It won't allow things to move forward. That's the big problem that we've got.

 It's a political decision. The government has made a clear decision with the law that is now being -- they've said they're going to supplement with other measures. And you know, we've already said this, that those subsidies, not just -- not that alone, but the Special Regime subsidies are -- account for 73% of all subsidies. We're talking about more than EUR8b that will go to Special Regime subsidies.

 And there's been enormous growth in solar power, which is going to get twice as many -- twice as much in subsidies than last year. And the same might happen next year because, up until 2014, this -- the conditions of this Royal Decree this year won't come into full force. That's the reality of the problem. Other costs are not just only -- are not just controlled, some of them have come down or in line with the rest of Europe. But this requires some kind of approach. And this Royal Decree, this -- there's a project for a new law that's going through parliament right now and measures have been introduced. And it's been said that there'll be other regulation measures that the Ministry for Industry will consider.

 So what are these measures that are now being debated in Parliament? Well, you know them. Here we've got a list. In general we're talking about a series of taxes really, taxes and duties that are going to be applied not just to electricity but also to gas. And the aim is to get money, which next year would be about EUR7b to allow to face -- EUR7b a year to face the deficit, the tariff deficit very solidly.

 So we're talking about tax measures. And these tax measures, as you can see here, are also completed or supplemented with a series of resources that will be taken out of the budget for the state and passed on to the electric industry so that -- to spread things out more. And probably the law will include, we'll see what happens, that partially the cost of these subsidies for Special Regime renewables will be included directly in the general budget, 38%, according to what is being discussed in parliament.

 So we think that these measures really respond to this need to face this problem. But we want to insist that costs have to be limited. They're causing the imbalance in the electric system in Spain. And they have to do with a very, very high level of subsidies that the system is carrying as regards any other country in Europe.

 And these are the measures. And we'll soon know what the final result, this law, this act will be, and when it will come into full force, although probably it will happen in next year. With these measures, in our opinion, in 2013, there's a high probability that we will no -- would no longer have a tariff deficit. Later, if you want, in questions and answers, in the question-and-answer time, we can talk about the impact of all these measures, not just on companies, but on the electric industry and the gas industry, which is also affected.

 Now if we go to the most relevant things, which are the evolution or growth of our international operations, we have to say that we have two things. First of all you see on this slide that more than 40% of our EBITDA is in the international area. And of that 43%, almost 60% is Spanish America and more than 30% is the gas activity all over the world.

 Now we've always been committed to this, Spanish America and gas, as you know. And things are being -- working very successfully. In Spanish America we got -- we will talk about this and also gas. But we can say that we foresee that, at different rates of growth, growth will actually continue. And that'll be part of our strategy. But it's not just the importance of our international activity; it's how it grows.

 In fact, EBITDA from international operations has grown more than 27% as regards the same period for last year. And that's very important because the growth of our activities in Spanish America is almost 10%. And it's growing more than 60% activity -- gas activities have grown more than 60% for final users outside the European area. So we're really very, very satisfied with the sound growth of our business internationally and the weight that these operations have within our activities.

 Now if we look at gas, you can see that the growth of -- the amount of gas we sell internationally has been almost 25%, foreign sales, 25% growth in our gas sales in the world, which means that we are a strong player globally in natural liquid gas or liquid natural gas. That means that 30% of the gas that we sell, we sell outside Spain. And that's our strategy. And to date it's been notably successful since we don't -- the business -- we don't depend on the gas -- on the Spanish gas market for our sale of gas. And we can make up for worse markets with better markets, and we've got different alternatives to keep our P&L account going well.

 We've been successful in Europe, more than 13% growth, in spite of the situation in the continent -- on the continent, based on stable customers. Our commercial gas activity is not focused at all on the spot markets but on the establishment of commercial relationships, long-lasting relationships in mid-term and long-term markets. And it's leveraged with our fleet of ships and with the flexibility of our supply so that we can continue to be leaders in the Atlantic Basin and continue to grow in the Pacific Basin.

 You know the model. I just want to digress slightly. We continue to be convinced that the LNG is a business of the future because the percentage of gas that is consumed, LNG consumed in the world is still very low. And the need to globalize, the convenience globalizing and interconnecting all these different demands is going to increase. And that's why we think that this business model is very interesting, is quite unique.

 There are few companies in the world that have the same approach. And I think this will allow us to continue to have a very good strategic and financial position. It's an integrated model that aims at reducing the commodity risk by diversifying the sources, having a dual LNG gas pipeline structure, making use of the flexibility of the FOB contracts, and index rating our contracts in such a way that we can have a basket of diversified final markets, which together with transmission assets that we can manage, basically based on the fleet, allow us to access the most convenient markets at each time, always within a dynamic of stable relations, not pure trading on the spot markets.

 And this -- to this we have to add the joint vision of gas and electricity industries. And that gives us the flexibility that we are making use of so successfully as regards our P&L account.

 This high degree of flexibility of the transmission assets we have has allowed us to make use of the opportunities that come up, have been coming up for some time. And this leads us to a situation where we are looking -- we are always alert as to prices in order to very rapidly respond to markets that should be optimized and keep a balanced position because we've got not only to optimize our margins but reduce our risks, the risks that come out because we have a global approach.

 So we are now balancing our Atlantic position with a Pacific position. We've taken position, up positions in India. For some time we've been present in Japan and Korea. And in India we're working to balance out the risks in our commercial positions. So we think that this will lead us to increase our market -- international exposure, maximize income and reduce risks.

 We continue with the policy of maintaining mid-term contracts in the Atlantic basin. We are focusing, as you know, on Puerto Rico and South America, and in the Pacific basin, as I said, the Far East and India. Our contract, 5 bcm LNG contract with Cheniere will give us a huge opportunity too.

 If we continue with our international activities, one of the businesses, important businesses is gas distribution in Spanish America. The EBITDA there is growing 12%, almost EUR500m. And there's still a very high potential for growth. We've exceeded 6m supply points. And markets like Mexico and Colombia still have very high rates of growth. Sales of gas have exceeded 6%, and the connection points, as I said, almost 4% of growth of those connection points.

 If we look at the business of distribution, electricity distribution in Spanish America, the EBITDA's grown by 26%, although it's necessary to underline that the comparison is not totally fair because last year Colombia had the effects of a tax that was introduced, a special tax. But anyway, the growth has been very significant. And growth in terms of sales has been more than 6%, almost 7%. And as regards connection points, it's also been 4%. So all the markets continued to grow appreciably.

 As regards generation in Spanish America, the first thing we've got to say is that the -- this is a business where availability is the most important thing. In spite of the accident we had last year at Tuxpan, which forced us to reduce our activity, in spite of that the EBITDA's grown almost by 5% and it has exceeded EUR190m.

 And if we look at financials, well, the gross margin and the EBITDA have grown by 9% and 8%, respectively. They're at EUR5.6b and EUR3.8b, and that, I don't have to remind you, within an environment, macro, energetic and financial environment which is very demanding and very hard at this time for our Company. And all this is a result of a balance between liberalized markets and regulated markets, gas business and electric business, and of course our presence, international presence.

 Also we have to say that these P&L accounts that we're -- these results that we're presenting include the effect of disinvestments in 2011, which were very significant, and the effect of the Royal Decree this year which had a tremendous impact on our P&L account, more than EUR80m.

 Amortization have increased by [1.6], and the operating income is EUR2.3b. Financial results are lower than last year as a result of the reduction of the debt, absolute figures of debt and the improvement in the cost of our debt. In spite of our risk situation, the management of our financial (technical difficulty) has been clearly positive. So the income before tax is almost EUR1.7b.

 And net income is EUR1.1b. It's almost flat. But adjusted to -- if we adjusted it, it would have been a growth of almost 30%. And you must remember that that includes the effect, reiterated effect of this Royal Decree.

 If we look at the breakdown of our EBITDA, we see that the distribution business in Europe gives us a reduction of 5% basically because of the drop of -- in 12% of our distribution business and electric. And gas distribution has remained the same. So there's been a drop in electricity and gas has remained the same.

 The measures contemplated by the Royal Decree of number 13 this year penalize with a rate of 12% the electric distribution business. And that means that's a hard blow for the electric distribution business. We'll have to adjust to that. And we'll do it by correcting by our OpEx and CapEx to the new situation that we have.

 We have to say also that the gas business is affected by disinvestments in Madrid, the region of Madrid. So our EBITDA we have managed to preserve in spite of the reduction of the scope of our business in gas.

 In terms of electricity, we've got an increase of 5.6%, strong growth of the Special Regime, renewables and cogeneration, basically renewables, wind energy, and the improvement of our marketing or trading, electric trading business in Spain, which we'll talk about later.

 As regards gas activities all told, there's an increase of 44%, basically because of the notable increase of our activity in the international gas business. We've already spoken about how that's going. We'll talk later about gas business in Spain, which is not so good at all.

 And then in Spanish America, EBITDA grows almost 10%, a lot of leverage based on the increase of electric distribution, although the comparison with last year, as they say, cannot -- is not homogeneous because of the special tax that was introduced in Colombia last year. So there's an 8.1% growth in our total EBITDA.

 Now we should underline that of that growth in the EBITDA, the international grows by 27% and the Spanish dropped -- EBITDA growth grows -- drops by 3%.

 As regards our investments, this is the breakdown. The figure is slightly below last year. 80% is regulated activities. And distribution in Europe and Spain, Italy too, accounts for 46%. That's in Spanish America 28%. So it's necessary to underline that 63% of our investment has been done in Spain and 37% in the -- on the international markets.

 But investment in Spain is being reduced as regards last year, but investment internationally has grown by 15%. We'll talk about this with more detail later when we talk about the distribution situation, where we should insist that the measures of March forced us and will force the Company to reposition itself clearly in terms of its activities within the new framework of regulation. This year it won't be so noticeable because these measures were introduced at the end of March. And the adjustment measures practically this year will have an effect, but we won't notice until next year probably. And adjustments in investment and current expenses will be noticeable at the end of the year, but especially next year.

 So as regards the tariff deficit, securitization of tariff deficit, throughout the year we've collected EUR367m to which we should add EUR11m that have been collected in the present quarter. The deficit -- sorry, at the end of September, we had EUR1,357m pending, which includes the result of the deficit this year.

 Securitization by FADE continue. On October 5 there was an approval of an obligation to issue in a period of 12 months. And we are convinced that, in accordance with the founding mission and the necessity to do something about this situation, we will securitize this significant account that we are owed.

 We've got to talk about our structure too, our financial, net financial debt, and say that we've got a risk profile that is really well balanced. And it's based on several pillars. One of them is that there's 78% of our debt is a fixed debt and very competitive. Our average debt throughout the year is 4.1%, which is a figure that compares well with the same period for last year. And 85% of our debt is in euros. And we have up to 60% of our debt in the capital markets, not in the bank -- financial bank markets.

 And as regards maturity, our maturities, we've significantly increased the maturity profile. We got wider margins to give us a breather. And maturities as from 2015 account for 70% of our gross debt and EUR16.9b in terms of net debt.

 The average life of our net debt is five years. We -- all our financial needs are covered up until 2014 and we're working on 2015. Together with this you should bear in mind the ample liquidity we have available, more than EUR9.3b, of which [EUR4.4b] are held in cash and almost EUR5b are based on different credit lines that we have open with banks, different banks. But in addition to that, the Company has credit -- has loans up to EUR3.5b to which we should add the peso, Colombian peso program implemented in October.

 Not included in -- this is not include -- it is -- at the end of September there were two bond issues that are not included in our debt, which are one for EUR500m in the mid-term debt programs on the European markets and another one, EUR130m on the Colombian market. The average life of these loans is about three years. And all that will allow me to say -- allows me to say that we continue with one of our priorities, is the active management of all our debt.

 Now if we analyze the operations now, first of all, let me tell you about distribution of electricity in Europe. The electrical business in Europe, basically Spanish, also in [Moldova], but basically in Spain, has fallen by more than 12% in EBITDA terms. The reason is that there's been a general cut in the distribution business in the sector. So this will force us to reconsider our investments and running costs because this drop in income and revenues will not allow us to continue investing as we wanted to. Next year we will see the impact of these new policies.

 We also believe that the situation of the sector should have been taken into account in comparison with other European operators rather than generalizing these cuts. But, well, this is what we have and we will react the best we can.

 The amount of these cuts this year, about EUR80m accumulated until September, although for the whole year it will be EUR110m. So during the first quarter for this reason our EBITDA has fallen by almost 13%.

 I also want to tell you that we will continue with our policy to improve our efficiency in the electrical business. We have improved our quality and all the management parameters. Our goal will be to do more effective management in order to lower the impact or to alleviate the impact of these regulatory measures.

 When it comes to gas distribution, EBITDA was more or less stable due to the fact that we have divested. Had we not divested in Gas Madrid, we would have grown 20% approximately. And this has to do with a 7% more investment and increase in connection points, an additional 90,000 points of connection, and sales which have dropped by 2%.

 Gas distribution is a business which is very much connected, not so much to investment but to better business and increase in connection points. As you can see, this market is not mature. We've accumulated 90,000 more connection points this year. It is true that there have been no new constructions, as was the case in the past. But a lot of private homes that did not have gas are now connecting themselves to the grid due to the good terms and conditions of this fuel, both in terms of price and in terms of efficiency.

 So we've grown in terms of connection points. We will continue to add new connections. And we hope that we will be able to attract new homes in the future because the level of gasification in Spain is way below the European average.

 The distribution network increased by almost 2,500 kilometers. And as I said, EBITDA stays more or less flat due to divestments in supply points.

 Now talking about gas and electricity demand in Spain, and this includes the deregulated part, the conventional natural gas business has grown by 6.3% in accumulated terms here in Spain, whereas electricity demand, and these are gross numbers, has fallen by 0.7%.

 I should tell you that the first number is due to the situation of the residential market. Temperatures have been lower this year, not lower than the average temperature, but lower than the previous year, which was warmer. And when it comes to the drop in demand, well, it's true that demand has fallen by a little less than 1%, electricity demand. But there are other things we need to take into account.

 The problem of the electricity sector is not benefiting from improvement in the market. But we should not blame the current imbalance to demand problems because when it comes to generators, demand has grown substantially during the first half of the year, mainly because of pumping and the export of energy. So all in all the generation business in Spain grew by 2% in production terms, even though demand in the country went down by 0.7%.

 If we analyze this in greater detail, we can see that production has fallen by 3.3% in the ordinary regime and the Special Regime 11.8%. In the case of Gas Natural, our production fell by [1.1%] as a whole. And when it comes to the ordinary regime, 2.2% drop, but a 13.8% increase in the Special Regime. In general we can say that there have been higher volumes of coal for two reasons, first of all because it was compulsory to burn national coal, but also because there was an interest in consuming international coal because of the good prices.

 I should also mention that there's been less rainfall this year, so our water -- hydropower plants have been less used, and the same with combined-cycle plants in (inaudible).

 This has been a key thing. And even though compared to the last quarter of last year it may not look as good, thanks to our marketing and commercialization policy, we've achieved good results. We've given full priority to margins, even when it means losing market share. The reason is clear. In our opinion, it was to be expected that electrical costs were going to go up. And that is why our Company decided not to increase its commercial policy on after share or market share. And that's why we've been able to benefit from better results in electricity commercialization. So that is why our EBITDA has grown by almost 6% in the nine first months of the year.

 When it comes to Special Regime, more than [EUR110m] EBITDA, it's grown 5.5%. Production has been substantially higher, almost 14%. And this has a lot to do with a more than 20% increase in hydropower production because of the greater capacity and the fact that there's been more wind. We also see a drop in mini-hydro, which has suffered from the fact that there's been less rainfall. Cogeneration also increased by this amount.

 Mini-hydro in Galicia and in other places, well, we're also working on a wind project in Mexico, more than 200 megawatts, which we hope that will start construction soon so that it will be fully operational at the end of 2014.

 Now, talking about gas supply in Spain, our gas business has grown. Our business has grown by 3%. And here you have the basic variables. When it comes to the wholesale business, it's grown by 4.5%, the residential business almost 18%, and the electrical business has fallen by almost 7%, due to the fact that combined-cycle plants have decreased their production. All in all, our gas sales have increased by 3%.

 Now, talking about Union Fenosa Gas, a company owned 50% with Eni, its performance -- its EBITDA rather has grown almost 7%, close to EUR20m (sic - see presentation "EUR218m"). This result has a lot to do with a situation of international liquefied natural gas sales. These sales have grown by almost 20%, as you can see in the international market, whereas they have remained stable here in Spain. In Spain, volumes have fallen. They are more or less stable. And when it comes to infrastructure, the stable contribution to generation is maintained.

 And now all I have to do is mention some conclusions. We're happy because even though the situation is quite complex and very hard from all points of view, in spite of this our EBITDA has grown 8%, bearing in mind that we have sold some assets and the regulatory situation is not very good. Net profit, adjusted net profit grows almost 23%. And all of this has happened by improving our financial structure, strengthening our financial position, as shown with these three benchmark issues of over EUR2b.

 So we're very happy. We're reasonably happy with these results, which encourages us to think, as we've told you in previous quarters, that we're going in the right direction, that we're doing the best in order to achieve the goals of the strategic plan that you received for the year 2012.

 We think we're going in the right direction and we think we will achieve all of our goals. The Company's aware of the changes that have happened in the regulatory markets. And we will update at the beginning of 2013 our strategic plan. We're currently working to achieve our goals and fulfill our commitments in 2012. And we will do the same for the following year.

 Thank you. And if you have any questions or comments, now the floor is open for questions and comments. We'll start with those that come from the floor. Those of you who have any questions, please identify yourself. Tell us your name and what institution you represent.



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Questions and Answers
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 Pablo Cuadrado,  Bank of America-Merrill Lynch - Analyst   [1]
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 Good morning. I'm Pablo Cuadrado from Bank of America-Merrill Lynch. The first question has to do with net debt, where quarter after quarter it's gone down by EUR50m, EUR100m. I think you were talking about [EUR16,000] or [EUR17,000] for the end of the year. Is it that CapEx is going down? What's the reason for this performance?

 And the second question has to do with the provision line, which has increased by 25%. Do you have any guidance for the end of the year? Any problems when it comes to collecting bills?

 And the other one has to do with this number of 25%. Could you give us some idea of where you see there's going to be growth in the years 2013 or '14? Do you think this double-digit growth will be sustainable?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [2]
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 When it comes to international gas sales, well, 20%-some growth is something we don't expect for this year, but we do hope this will consolidate and we will continue to grow. There are several reasons. The percentage of liquefied natural gas in the world is still very low. And the possibilities of interconnection as well as the needs are increasing substantially. So we don't think that we will reach that 25% again. But I think we will achieve something similar.

 In Latin American markets, we see that demand is growing. The Asian market, in spite of the volatility of Japan, they're demanding this type of fuel. And I believe that liquefied natural gas will continue to grow for that reason. We've been betting on it as one of our core businesses. And even though things will not be exactly the same because these are not recurrent numbers, I think this business will still deserve our attention.

 That objective of [EUR15,000] or [EUR16,000] dependent on tariff deficit, so depending on what happens, we'll be closer to [EUR15,000] or [EUR16,000]. The way things are, I think we're going to be around [EUR16,000].

 What's happened in the first few quarters? Well, as we said before, well, as you saw in our presentation, tariff deficit, the net number is bad for us. There's been more generation due to tariff deficit, so that has really compromised our debt situation. To this we have to add the payments we had to make, corporate tax advances, which were more reduced in previous years. And for all these reasons, the debt we've accumulated so far has moved less than what we expected.

 What's going to happen in the last quarter? I think we're going to come closer to [EUR16,000]. And as a Managing Director, and as you very well said, this contention of investments will help us reduce our debt more this quarter than in previous quarters. And global investments will be closer to those of last year. So I don't think the number is going to be more than EUR1.5b.

 Now talking about your second question about provisions, well there are two fundamental factors here. First, exchange rate, especially in Latin America. There have been two operations in some countries, Colombia and Nicaragua, where provisions have increased due to the fact that sales and volume are greater, both because of exchange rate and other reasons. And that is why provisions have increased, both in Latin America and in Spain. There's been a deterioration of collection ratios. And there are things that will help us contain this. But yes, there's a certain level of deterioration.

 Any further questions from the floor?

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 Fernando Garcia,  Espirito Santo - Analyst   [3]
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 I'm Fernando Garcia from Espirito Santo. You spoke before about gas. Could you tell us what do you think are going to be the margins of gas in the next few quarters? Especially I would like for you to talk about spot sales of gas. I believe that at the end of the second quarter there were three spot sales of gas. What about this year?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [4]
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 Our spot sales are not significant. They are non-significant. Our gas business is a business with end clients with mid- or long-term contracts and we don't work much on the spot market, only residually. We haven't done it in the past and we won't do it in the future.

 As far as margins, well the truth is that the situation is quite volatile. There are lots of phenomena in the world market. That is why the way we manage our business is so important. We have to pay attention to the changes. And this also has a lot to do with the situation in some countries, China, India, whether the plants go into operation. All of this will change the flows. But it's also clear that, in spite of this deterioration in some markets, there's a pressure to reduce supply prices. And this is what our Company is doing.

 And we're making some adjustments. We've had some suppliers already. Well markets are in a situation to justify this and we're already benefiting from it. Movements in international markets, where we could question volatility, well we believe that we'll be able to maintain if not volumes, at least margins.

 Any further questions from the floor?

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Unidentified Audience Member   [5]
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 Good morning. I'm [Alejandro] from [Asset Management]. I have three questions. The first one is, well, maybe it's too early to talk about the strategic plan that you anticipated, but could you tell us what you think is going to happen in the year 2013? I know there are still some areas of uncertainty. But in qualitative terms, could you tell us how you see the year 2013, gas business, international part of the business, etc.?

 The second one has to do with securitization of deficit, your timing for the next securitizations and your conversations with the administration.

 And the other one has to do with acquisitions. You spoke about your interest in Medgaz. Now that you have levels of debt that are more comfortable, maybe you could say something else.

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [6]
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 It's obvious that we're going to have to develop this. We will present it in as much detail as we can. It's true that we expect to have a lower growth than we contemplated due to the situation of markets. We still believe that our international activity will be relevant. Internationalization will continue to be key, both in businesses of commercialization and other businesses.

 Our priority will continue to be the strengthening of our financial situation. We believe that, even though this is still pending a decision by our Board, our net-debt-to-EBITDA ratio will continue to be 3 and our financial structure will be around 50/50 as a main axis of our policy. And there's no doubt, and this will give continuity to what we've been doing so far, the efficiency plan both in OpEx and CapEx will continue.

 We learned a lot and we've managed to obtain very good annual savings and we will continue along these lines. So that is what we are going to do with our strategic plan. But I cannot tell you anything else about next year. What we do expect is that deterioration of macro variables, gas consumption and electricity consumption will bring us to a similar year next year, maybe slightly worse in electricity. But we're now at 0.7%, minus 0.7%. Falling 1% is something that we should be prepared for. The final adjustment of regulations will see what the impact is.

 And in the gas segment the result has been positive. We don't think it's going to be exceeded next year, but we don't believe that next year is going to be worse. It's not going to be better either. I don't want to be overly optimistic. But it is quite probable that next year will be in a macro-demand situation that will be similar to today's. Maybe slightly worse but not much worse.

 When it comes to securitizations, we're convinced that after all the bureaucratic obstacles we will start with securitization, and these amounts will be collected.

 I also want to say that what seems to be sure from the steps taken by the government, it looks like next year is going to be finalized. And that would be a good piece of news, that we'll no longer -- we will no longer have this problem as a structural problem. And we will end liquidating those amounts that are due to us. We're doing what it takes to make sure that this happens, and as -- its resolution will depend on different things.

 But I believe that -- well, when it comes to Medgaz, we continue to negotiate with Sonatrach the potential acquisition of 10%. And we'll see whether this can be done.

 We've had a positive -- some positive news when it comes to tariff deficit. In the different measures contained in Royal Decree 13 there were certain things that were going to happen that have already happened. So that's going to have a good impact on our Company. So that is something that is positive because it will counteract the other problems. Royal Decree 13, well it's going to help in that regard.

 Any further questions from the floor?

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Unidentified Audience Member   [7]
------------------------------
 I am from [Bankia] and I have three quick questions, first one about dividend. Everything seems to indicate that the goal for this year will be achieved. Can we expect a change in the dividend policy? What about -- is it going to be in cash or what?

 And the other one has to do with preferred shares. We see that there are no major maturities for debt this year. But I think Union Fenosa made an issue of preferred shares that can be cancelled next year by holders. What can you tell us about it?

 And when it comes to the strategic plan, you've talked to us several times about CapEx and OpEx discipline as a way to protect cash generation in view of the fiscal measures that will be adopted next year in Spain. Could we think about a program of divestments as for standby Iberdrola, for example?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [8]
------------------------------
 Now when it comes to the dividend, traditionally the Board of Directors of Gas Natural Fenosa in its November Board meeting decides what to do with it. And this should also be the case this year. No decision has been made to change the dividend policy so far. And no decision has been made when it comes to whether we're going to have scrip dividend or not, although in the past when it was done, it was done on the basis of complementary dividends.

 But as I told you, no decision has been made as yet on that regard. And I'm sure that the Board will make the best decision in the November Board meeting. This was May. We're looking at this issue even though it's already been regulated how it should work. We are trying to see -- we will see whether we can -- we have to take some additional measures.

 When it comes to divestments, well first of all our business portfolio is subject to the situation, and we will take advantage of any situation. We're very happy with our position, with the position of some of our businesses. And we will always be open to any further consideration. But we believe that our generation cash flow, free cash flow generation program will be more than enough to guarantee this without having to use anything exceptional.

------------------------------
 Alvaro Navarro,  Intermoney Valores - Analyst   [9]
------------------------------
 Good morning. Alvaro Navarro of Intermoney Valores. I've got two questions, one about the LNG Repsol business. Could you give us some details about how much the stream business contributes that you have together with Repsol, contributes to that and whether there's going to be any change once Repsol's got rid of that business?

 And then secondly I'd like to know what forecasts you have for average cost of debt, bearing in mind the coverages you have right now for over the next two years. Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [10]
------------------------------
 Well, as regards to the first question, stream is not within the assets -- the scope of the assets we're disinvesting in; it's an instrument company. So if Repsol doesn't continue with that LNG activity we don't know what would happen. But that doesn't come within the period of disinvestment that we're considering.

 As regards the debt, well I think slightly above 4.1% that we have right now. We are talking about -- our aims are to try to increase the average life of our debt and our liquidity. If we could come below 4.9% it would be magnificent. We've managed it this year, and we've managed to be below the cost of the debt of last year. But when it comes for budget -- when it comes to budgeting I'd go slightly higher.

 As regards stream, it's an instrument. It doesn't contribute nothing -- anything to the Company.

 Any more questions in the room? Well there are no more questions in the room so we'll go to the questions over the telephone. Go ahead, please.

------------------------------
Operator   [11]
------------------------------
 Good morning. We've got a question from Javier Suarez of Nomura, when you are ready.

------------------------------
 Javier Suarez,  Nomura - Analyst   [12]
------------------------------
 Hello. Good morning. Nomura, Javier Suarez. I've got three or four questions actually. The first one is going back to the reform of the electric industry, the law going through parliament. I'd like to know, what do you think about the possibility of introducing modifications that could make it difficult for applying these taxes to the final users? We're hearing a lot of noise in the industry because obviously there's strong opposition to increasing the prices of electricity. So how could you square the circle? How could you try to reduce the impact on the industry?

 And as regards that, I'd also like to know your opinion after the new measures applied to gas. What about the green cent, as it's been called, that's going to be applied to the gas industry?

 And then as regards gas, we've seen strong growth on the international markets. The CEO has commented that the national business accounts for 30% of the total. How much do you think that growth is going to be internationally structurally, logistically? It seems to be a very, very strong growth in the Atlantic and Pacific Basins. Where do you think that international growth is going to be located?

 And the third question is about the gas, Spanish/American gas business. In 2013 there's going to be new regulations in Brazil, Colombia and Mexico. Could you tell us your vision -- your -- what do you think -- what your expectations are for those countries? They're obviously very important for the growth of the Company. Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [13]
------------------------------
 Well there are several things. First of all, as regards the -- I don't -- the first question, I don't know about any initiatives to try to prevent the pass-through. There are initiatives to try and prevent gas and electricity from going up as a result of those measures. But my opinion is that these are measures that mean -- will have an impact directly on the impact -- on the industry, both of gas and electricity. And since it's a marginal system, if you add further direct costs to that system there is going be pass-through, there's no doubt about it, because there's no doubt about it, there is no other way.

 But in the electric market the situation of a market where 50% of the offers are being subsidized and given priority access, together with a series of interventionist measures on the pool market, it's really difficult to know what the speed of pass-through will be for these activities and what their impact will be on the market.

 The electric pool is strongly influenced by regulatory measures that distort -- clearly distort the operation of the market. So there's a question mark there as to how -- what's going to happen with those costs. But there's no doubt at all that variable and direct costs will always, always be added to the bill.

 And also another possibility is it's just not possible because it would mean that margins wouldn't be adequate. A 6% tax on generation, with a tax like that, operators can't absorb that, can't carry that. So in our opinion the nature itself of taxes will make power more expensive. And in the electric sector the market is very unique, its situation. Regulation makes strange things happen.

 And in the gas market it's even more of a case. Although there's not the degree of intervention, it's much more transparent, much more global. But it's impossible for this higher cost of gas. It's as if providers put their prices up, it's going to go on the bill. It's impossible for this not to happen. Who's going to pay for it? Well it will have to be paid by the final user; it's going to go on the bill. And we'll see how that happens, but that's what's going to happen. There's no doubt about that.

 How -- what would that be in the gas market? Well it depends on the final amounts that are approved, about 3%, 4% might be the impact in the gas market. We have to see what's going to happen. And as we've seen in the past 3%, 4% have been frequent in the gas sector, 3%, 4% increases as a result of the increase prices by providers or the Brent index linking because, as you know, gas prices are linked to oil prices. But pass-through will take place. We don't know at what speed, at what rate, but it will happen.

 And another question, what's the increase of our ability to sell on the international market? Well we've got a growth potential which is quite big, because our percentage that we get, pipeline gas that we get is low. So we have in theory the ability to approach a -- to grow a lot.

 A different matter is we would sometimes have to talk to our providers, etc. But we have the ability -- we have ability to grow, especially in the face of the weakness of the national market. Except for finalist contracts, which are not just pipeline contracts. There are some others, some electrical contracts. The rest is either free because of its nature or its -- or it can be associated to internationalization contracts.

 We still have a margin. We don't continue -- we don't think we're going to continue at a rate growth of 22%. It will continue to grow, but not at that rate, which is truly very high.

 As regards Latin America, Spanish America, there is a review in Brazil and Colombia, not Mexico, not Mexico. And Brazil and Colombia, we beginning the process. It usually goes on for a long time, a year. And we negotiate the new conditions to access new areas, new investments. And the dialogue is always new investments that are going to be captured. But we have confidence in both markets. And we hope the regulator will favor the regasification of the countries and we're working along those lines.

 Good. Next question.

------------------------------
Operator   [14]
------------------------------
 The next question is from Javier Garrido of JPMorgan.

------------------------------
 Javier Garrido,  JP Morgan - Analyst   [15]
------------------------------
 Hello. Good morning. I have three questions as regards the results of the third quarter. First of all you've just spoken about regulations in Brazil. Could you explain what has -- what is behind the distribution business in Brazil in addition to the rate of exchange? There's been an increase in volumes and the margin of energy has increased. What has lead to the Brazil -- Brazilian EBITDA dropping at nine months?

 The second question is as regards the volumes of international gas sales. You've spoken about the accumulated or consolidated increase throughout the year. But in the third quarter there's a drop of 10% in sales of gas on the international markets. Could you give us more details about why that has happened? I presume you mean specific factors. Could you give us more details?

 And then the third question is Union Fenosa Gas. Could you give us a bit more -- more details on results of this division? In the third quarter there had been a significant drop in EBITDA. Could you tell us more about the motives for this drop and what we can expect for the next few quarters?

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [16]
------------------------------
 Well I'll start at the end. Carlos Alvarez will answer the other question about Brazil.

 Union Fenosa Gas has benefited from the exceptional situation of international markets. Union Fenosa Gas has had spot market positions, more notable positions. Union Fenosa Gas has had operations on the spot market which were not at the same level as the beginning of the year. So this has been reflected on the EBITDA. There's been a lower profitability as a result of those operations.

 It's also true that the ups and downs of the gas supply at the Damietta plant in the months of the summer, the lack of supply is greater because of the energy demands of the Egyptian electric systems. And we're getting less gas in the summer and more gas in the winter. So in the third quarter the company has had less provisioning. That -- all those things put together explain what's happened in this quarter.

 As regards -- well the truth is that the situation on markets we think will be more similar to what we have now than what we had at the beginning of the year. So growth will probably slow down in terms of the trading operations of Union Fenosa Gas.

 As regards the international LNG sales, the other third quarter has to do with the fact that last year we began adjustment of the third quarter, so the comparison is based on what happened last year. There's no exceptional measures. This year we continue, but the third/fourth year the situation in the market will be more stable. Growth will happen in 2012 as regards the first six-month period of 2012. In the third quarter of 2011 we began to produce or the market began to return to normal.

------------------------------
 Carlos Alvarez,  Gas Natural Fenosa - CFO   [17]
------------------------------
 Yes, Brazil has to do with a different mix as regards the previous year, and especially the rate of exchange that you've mentioned. There's nothing that has affected the margins that has not -- is not due to those reasons and the rate of exchange, as you've said.

 I just want to say that in the international business sometimes, well, it depends on the quarter, there's one [ship] more or less and that does affect the EBITDA. So the previous period, the international business was a higher percentage than what was usual in a normal quarter and that has affected the comparison.

------------------------------
 Jorge Alonso,  Societe Generale - Analyst   [18]
------------------------------
 Yes. The next question, most of the things that I wanted to know have been answered, but could we have more details about the situation of the gas margins in Spain, whether they're becoming stable or whether the weakness we've seen in demand is putting more pressure on the situation or, as happened in other quarters, the situation is more stable?

 As regards the portfolio of gas provisioning or procurement, could you give us some details as to whether there are going to -- you have any contracts that are nearing expiry. Thank you very much.

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [19]
------------------------------
 Well as regards the gas contracts, no. The Libyan contract ended this year -- ends this year. But it's true that before the crisis or as a result of the crisis the supplies to the Spanish market ceased last year, so that's over. And we continue to negotiate and we're trying not just to renew, but -- contracts, but to get new contracts, like the Cheniere one. There are other possibilities we are analyzing to consolidate the gas market.

 As regards the gas margins in Spain, it's true that our colleagues learnt the need to not pressure the market. There's no great demand of gas. To get the gas out the Spanish market has been a practice of our colleagues in such a way that we've avoided pressure on the margins.

 And it's also necessary to indicate that in residential markets, home markets and wholesale markets in Spain, growth rates have been very significant. If we talk about Spain, the growth of the residential market has been 10%. So those companies that were marketing in Spain and that have had a policy to deal with the potential excess of gas have seen that the Spanish market is increasing the consumption levels. The electric market's going down. So the two phenomena lead us to believe that this is something that will maintain margins reasonably higher over the next few months.

 Good. Any more questions?

------------------------------
Operator   [20]
------------------------------
 One final question from Carolina Dores from Morgan Stanley.

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [21]
------------------------------
 Good morning. I've got a couple of questions. Bond issuances, you've got EUR5b in the cash flow. Are you going to maintain that level of cash flow or are you going to -- what's going to be the strategy for the debt?

 And the other question is for the taxes for the year. Is that sustainable? Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [22]
------------------------------
 Well I'll answer the second question first. We're talking about 24.9%, which is the estimated rate which we hope to continue to have by the end of the year, so we'll be below, slightly below 25%.

 And as regards the bonds, we've begun to think about next year. I don't know whether -- from here to the end of the year. It all depends on circumstances. But we're talking about things to do for next year.

 And then next year we'll analyze everything. We'll analyze the basic objectives, liquidity, our aim to increase the life of our debt. And we will continue to look at all the possibilities we have for our expiry dates in 2015.

------------------------------
Unidentified Company Representative   [23]
------------------------------
 Good. That's the end of the questions. We're going to read the questions that have been sent by email. The first one from Barclays refers to the impact of tax on the prices of energy and whether we believe that the forward price curve is currently absorbing the possible impact of that increase -- of those taxes, whether we could remind -- we could say how much we've sold for 2013.

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [24]
------------------------------
 Well as regards the first part, we could say that the impact of the measures that have been taken would be about [EUR8] more, EUR8, more or less. The forward market is about half. The reasons in my opinion are -- have to do with what I was saying before. The electric market is a very singular specific market, first of all the singularity of the market and then the gap, marketing gap that exists. Companies are in excess and some are not long enough. If you're over -- if you're not -- if you're in either of these situations you'll have to adjust to the commercial situation.

 But the first thing is that the pool market is a market that is tremendously under the effect or under the pressure of regulation. So a lot of strange things happen, because if not it would be difficult to understand what happens. I've explained it before. Half of the offering parties on the market are subsidized. So what happens or does not happen oscillates all the time, which is not explained by theory and not explained by theory, and they're very volatile. We believe that in a more reasonable period or term, things will have to adjust to the realities of the industry. The amount is higher for next year 15 terawatts. I think it was about over EUR60.

------------------------------
Unidentified Company Representative   [25]
------------------------------
 Good. The final question is from (inaudible) from Credit Suisse. And the question is what would the consequences for Gas Natural be if the sovereign debt of Spain was reduced? What would be the consequence for Gas Natural?

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [26]
------------------------------
 Well really it would be -- the consequences would not be good in the sense that we got an activity that's about 50%. We've got another in Spain. We've got -- we've worried about this and tried to get ready for this.

 First of all we want to generate free cash flow to face our commitments. Secondly, a calendar of debt expiry dates that is -- that can face the more delicate moments that we can have on the financial markets. A very high percentage of our debt expires after 2015, or as from 2015. And the third thing is we've got to open up to all markets in such a way that we can go to other markets where we're not so exposed to the risks of the Spanish market.

 So all that's been achieved. It's been achieved with a policy that makes the rating agency put us above the sovereign risk, as you know. So these are the instruments that we have to face this. And the rigor of our administration and prevention measures in the short term will allow us to be not exactly prepared, because you can't always be fully prepared, but we're alert. And we think we could approach -- we could face -- confront any situation that arises.

------------------------------
Unidentified Company Representative   [27]
------------------------------
 Good. Well if that's the last question, I'll pass the floor to the CEO for him to close the meeting.

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [28]
------------------------------
 Well that's all. Thank you very much for being here, physically or virtually. And hope to see you next time. Thank you very much.

------------------------------
Editor   [29]
------------------------------
 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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