Q1 2013 Gas Natural SDG SA Earnings Conference Call
May 07, 2013 AM CEST
GAS.MC - Gas Natural SDG SA
Q1 2013 Gas Natural SDG SA Earnings Conference Call
May 07, 2013 / 08:30AM GMT
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Corporate Participants
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* Rafael Villaseca
Gas Natural SDG SA - Managing Director
* Carlos Alvarez
Gas Natural SDG SA - CFO
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Conference Call Participants
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* Sonia Ruiz De Garibay
Bankia Bolsa - Analyst
* Alberto Gandolfi
UBS - Analyst
* Javier Garrido
JP Morgan - Analyst
* Carolina Dores
Morgan Stanley - Analyst
* Gonzalo Sanchez
BPI - 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 Gas Natural Fenosa for the first quarter 2013. The presentation will be chaired and led by our Managing Director, Mr. Villaseca together with the CFO, Mr. Alvarez and the Director of Strategy and Development, Mr. Basolas. After the presentation we will have a time for questions and answers. We will start in the room and then take questions remotely on the internet or by telephone. I pass the floor now to the Managing Director, Mr. Villaseca.
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [2]
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Hello, good morning. Thank you for being here once again in this meeting. We're going to analyze the results of the quarter based on the usual program. First of all highlights, then we will look at the Spanish electricity regulation issues and then financial questions and then analyze our operations and then conclusions, then we'll have questions and answers.
Now with the more relevant facts of the quarter, I have to underline that we are satisfied because the soundness and well-balanced situation has led to a stability in our results that we think is very significant. Net debt -- profit EUR411m, with a growth of 1%. EBITDA EUR1.3b, that's plus 2%, in spite of the bad situation of the market and the changes last year and the changes in the regulation. But in spite of that, the EBITDA rose 2.2% and it's EUR1.3b.
Investments have gone down by EUR206m and net debt is below EUR16b. It would be about EUR15b if we had securitized all the pending debt.
The key of our stability has to do with our international business. In this quarter, 44% of our EBITDA comes from the international market and of that 44%, just over half is Latin America which accounts for 55% of this EBITDA. 44% is the International business, infrastructures, provisioning, and distribution in Europe of the -- and the distribution business in Europe. So we are quite satisfied with the International Business which makes up for the bad situation in Spain, especially the electric business in Spain. Because the gas market in Spain has had a behavior - more positive behavior than electrical business.
To give you more details, international activities on this chart, you can see that there's been a growth of 8% of the EBITDA, 12.5% of that is growth from Latin America, and just over 3% the rest of businesses.
It's important to point out the good situation in Latin America and the weight of the sales -- wholesale gas operations which have grown, although there has been a negative -- there have been negative factors, unfavorable factors that have slowed down that growth. One of them is Union Fenosa Gas, we will look at it in detail in a minute, the lack of supplies from Egypt.
Secondly, always remember that when you compare with the first quarter of the previous year, the first quarter of the previous year, as we said at the time was exceptionally good in this business. So if you compare with the first quarter of last year as regards gas, international gas activity, that's a factor that has to be taken into consideration. In any event, the growth model internationally is sound and supports the results of our company.
If we talk about the latest events, we have to tell you a series of things that have happened in the first few months. The purchase, 10% of Medgaz in January with an additional 18-year contract of 0.8 bcm from Algeria. The sale of Nicaraguan assets in February for $58m, which means a deconsolidation of almost EUR4m. Also there's a positive item of news, successful bond issuances for EUR1,550m. Securitization of EUR371m of tariff deficit in the first quarter of this year and an additional EUR266m to date during the second quarter.
There has also been a proposal to repurchase EUR609m preference shares, currently in acceptance period. And also we have to say that the AGM on April 16 approved the complementary dividend against 2012 for a total of EUR895m which will mean a 62.1% payout ratio.
Also, and this is very recent, we have to say that our contract with Cheniere is going very well, the operation for purchasing the five bcm of Sabine Pass. And as you know in the beginning we were going to start on the third quarter 2017. Due to the good progress of the project, which now has the environmental impact authorizations and the export authorizations and a good progress of the work of the whole project, and secondly due to the fact that we've reached an agreement Cheniere, we're going to have early quantities of up to three bcm as from the third quarter -- second sorry, quarter of 2016.
So we're going to start that operation. We're going to have three bcm in the same condition a year ahead of schedule. So the project is going very well. As I say we'll be ahead of schedule by one year as a result of how things -- these agreements with Cheniere and how well things are going.
Now if we go into the second item, regulations. In Spain, especially, electricity we've got to summarize the measures that last year the government introduced to reduce and solve basically the serious tariff debt -- deficit problem which persists. The government has made and is still making important significant efforts to solve this capital program. It began with a Royal Decree, the first one of the present government where there was a temporary suspension of financial incentives for new facilities under special regime, renewables.
A series of ministerial orders reviewing access charges in January and April 2012, a tariff review from April includes an extraordinary increase to comply with the sentences from the Supreme Court, a Royal Decree law, number 13, reduction of costs for a lower remuneration for transmission distribution capacity payments and other regulated activities.
And then we had Royal Decree number 20, reduction of remuneration for transmission and extrapeninsular systems and the possibility to include supplements in the access charges, territorial and progressiveness. And then Law 15 last year, which introduced fiscal measures, I think it was in seven, for the system's sustainability approved in 2012 and in force since January 13. These measures will, well as I say, were enforced in January this year.
And then there is Royal Decree Law 29, which raises the upper limit of the deficit for 2012 allowing its securitization and eliminated the tariff sufficiency from 2013.
In 2013, it's also begun with a series of regulation measures. First is the Royal Decree Law 2 of this year, which changes the indexation for the annual updating of the regulated activities and does away with the index linked -- automatic index-linked procedure. And also a change in the remuneration of the Special Regime. There will be an option to choose between regulated tariff and market price without premium.
Then there was a Ministerial Order that froze the prices -- current prices, and established that remuneration for extrapeninsular systems would come under the General State Budget for 2014.
And finally, you know, probably, that the Government is proposing a EUR2.2b line of credit to finance the mainland tariff deficit. We think that therefore it is possible to reach deficit zero this year.
The Government has also announced that at the end of this semester, this six-month period, there's going to be an in-depth reform of the electric system. We'll talk about that later.
If this is taken and put into figures, here you see them. Last year the deficit exceeded very much exceeded what was foreseen, EUR5.6b that's what happened. And this year, due to two measures that I told you about, the extrapeninsular systems will be brought under the National State Budget and extraordinary line of credit will lead to zero tariff deficit. That's what we foresee.
If we look at things more in depth, we see that the basic problem that leads to this situation, tariff deficit situation persists and it is the subsidies that are in the system, Spanish electric system. Last year there was EUR11.3b in subsidies and of course Special Regime renewables, solar energy -- solar energy consumes more taxes than any other. There was a growth of 14% in the amount that that consumes, in spite of the fact that it produces very little electricity.
And also for 2013, we don't expect the extrapeninsular systems will contribute to the electric system. But we are talking about EUR10.5b approximately as a surcharge on the electric system. That is the big problem of the Spanish electric system, regulated system, and I am sure that the Government will continue to make efforts to solve it in a reasonable way. But the big problem is that as you know -- as you can see, these amounts continue to increase, although it seems that the government is going to introduce measures to solve the problem and it must be solved urgently.
In terms of our financial data, here you have our P&L account. The gross margin and the EBITDA grew by 5.6% and 2.2%. Turnover grows by 4% and taxes have increased as a result of the law that started, and I mentioned earlier, that went into force on January 1. Provisions are at EUR55m. So our income, our benefit -- profit operating income is at EUR833m, EUR620m before tax, EUR411m net income, which is an increase of 1% on the previous year.
If we look at the breakdown of the EBITDA which grows by 2.2%, we will see that in Europe in distribution practically flat. All this we are going to go into in detail, but distribution in Europe -- that's gas and electricity -- electricity is basically Spain, Moldavia. Gas is basically Spain and also Italy. Electricity there's a drop of 1.8% in spite of the excellent behavior of Moldavia, which has increased more than 30% and that's due to the adjustment of income that took place last year.
And in gas there's a growth of 1.6% as a result of the better management and growth, because the point of supply now exceeds 70,000 and there's margin for growth.
In terms of electricity there's a 5% fall, basically because of the generation in Spain which has resulted in a total 10% decrease in terms of gas. It's a significant increase in provisioning, basically because of margins and volumes in the international market. We should also mention the good performance of Gas Natural sales for Fenosa in the Spanish wholesale gas market and the poor performance of Gas Fenosa gas because of the problems in Egypt.
In terms of Latin America, there's a growth in all businesses except for electricity, but there's a divestiture in Nicaragua and there is also a negative impact exchange rate. So the total increase is 2.2% increase.
Investments have gone down by 8% compared with the previous period, and international investments already account for 42% of total investment. Now, we should mention that there has been a very significant reduction in investments in electrical distribution in Europe because of the regulatory adjustments that I mentioned before, 70% of investments are in regulated or quasi-regulated businesses.
In terms of securitization of the tariff deficit, last year we still had EUR1.1b outstanding. In this first quarter we have collected EUR371m and there was a deficit in the quarter of EUR251m. We believe that this deficit will be corrected along the year, because of the measures that will be introduced in terms of taxes and the extraordinary activities.
Now at December 31, the deficit was then of EUR889m, this was the amount outstanding. This corresponded to the previous years, and also to the current year. But in the second quarter, we have already collected EUR169m, so to date the debt that the electrical system has with us, is EUR720m and we hope that throughout this year this figure will dwindle.
Let me tell you about our maturities. We are very prudent when managing our finances and we have a net debt which is below EUR17b and according to the different maturity days, 46% of the gross debt and 60% of the net debt expires as from 2017. Our financial needs are covered until 2014 and therefore our efforts are now focused on 2015 onwards.
The financial structure still has the same characteristics as always. Basically our debt is denominated in euros and 70% our borrowing is in financial markets. And if we discounted the tariff deficit then the amount we have received already exceeds 70%.
Now, we are still maintaining very high liquidity levels. This is still one of the company policies. Almost EUR10b and of this, EUR4.5b are in cash and EUR5.3b in different mechanisms of loans and credit facilities that are available to us. The average weighted life of the available credit lines is of about three years.
In addition to this the company has an additional access to EUR2.6b in capital markets and this -- and of course we should add to this certain Colombian peso facilities. This doesn't include the money we've collected from [FAI]. This was EUR169m and so we are still moving forward in a very prudent way in terms of our debt and in terms of our financial needs.
Now if we now go into the analysis of our operations, let's focus on distribution in Europe and first of all let's focus on electricity. As you can see you know this, well we have Spain and Moldavia. As you know, EBITDA fell by 2% in spite of the fact that Moldova grew by more than 30% and this is because of poor performance of electrical distribution in Spain. And this was mainly due to the reduction in remunerations caused by the law passed in May of the previous year. What did the company do in the face of this?
First of all, we reduced our OpEx and our CapEx. CapEx, the company reduced by 50%. In terms of OpEx, we also reduced all sorts of expenses in order to react to the significant reduction in income. In spite of this, the point of supply have increased by 0.5% and it is also important to mention that the quality of supply has maintained, it has been a good year and we promised that this will still be possible in the future, but of course there is the risk that the low retribution will of course make investments less attractive.
Now in terms of the situation of gas distribution in Europe, there's two markets as you know. There's Spanish market and the Italian market. There has been an increase in EBITDA of 1.6% basically due to Italy. The EBITDA in Spain was almost flat.
Sales in Spain fell a little, but commercialization has increased a little. But of course there's been an increase in points of supply, 75,000 new points of supply. And this is significant. This is a very highly mature electricity market and there is no new construction, but the gas market as you know, there's a low penetration of natural gas in Spain, and so this allows us to have opportunities to install new points of supply. For example, in new municipalities this quarter we entered six new municipalities. We increased our network by several kilometers and then there's new gas consumers in buildings where they already had gas but the installation was not connected to the network.
On the other hand, I'd like to say that unlike the electrical section, the basic remuneration that gas distributors receive is related with new points of supply and consumption levels, and so what I mean is that the more you pay -- so if you pay a lot in distribution this is because the distributor has invested in your customers, and we normally do this when there is new consumption.
So when the distribution expense increases, there's a reduction in any potential deficit of the system. So in time it increases because we are not linked to investment, but we are linked to consumption. Neither us nor our colleagues in the sector will invest in the gas sector if this is not to capture new customers who may consume and contribute income to the system which may increase the positive balance and reduce any deficit that may occur. This is a really important thing to mention.
EBITDA hasn't grown, basically because the update factor has changed because now what is used is the underlying retail price index.
Now in terms of energy, well, conventional consumption of gas and electricity, namely industries and residencies has been at minus 1%. But Natural Gas Fenosa has had 5%. So for Gas Natural Fenosa this quarter, the performance of the market has been positive, clearly so unlike the other competitors.
In terms of electrical demand, minus 5%, however, the good news is because of course this figure is very bad, but the good news is that in April it was positive by 0.5%. Two comments here. First of all, there is minus 4.6% should be adjusted by at least one digit because the previous year was a leap year. And secondly, the accumulated figure for April should be minus 3.2%, minus 2.2% if we adjusted for the leap year. So it seems that the second quarter will be better in terms of consumption than the previous year.
Now if we now focus on electricity in Spain and the electricity produced by Union Fenosa, we have produced 17% less energy than the previous year. In the ordinary regime, this has been minus 21% and the Special Regime 31% positive. So we have fallen as a whole because the year, well, has been very rainy and this should be considered. The winds also blew a lot and even if we are present in the wind sales, this is not our bread and butter. But our production share has not fallen too much.
Now if we go into the nitty gritty, this is the slide that corresponds to the ordinary regime. The ordinary regime will reduce our production by 21%. Clearly as you can see, hydraulic energy went up by 600% and the reason is that the bases where we operate, especially in Galicia in the North West of Spain, there has been a lot of rainfall. However, the remaining technologies in the ordinary regime have recorded a fall of almost 40%.
All in all, our share in the ordinary generation market is of 20.5% only, 0.3% less than the previous year.
EBITDA went down because the average price of the Spanish pool fell by more than 20% and this is a very important point. The Ministry of Industry and the Secretary of State for Energy has said that the Spanish wholesale market is not working properly. We have a very serious problem because entrants into the system of energy at EUR0 is such that the wholesale market is not working properly. Almost half of the energy is subsidized. It has cost EUR0 then we cannot talk about a real market. So this gives rise to a very atypical and counterproductive situations which outside to the market doesn't work, and resulted in the figures you can see in the slide.
The Government is aware of this problem and needs to solve it, because there is no normal electricity market in Spain. It is a sunken market because of -- basically because of regulatory reasons. And this issue has to be resolved. We know that the Ministry is worried about this. So the result of this, our EBITDA in this business fell by practically 10%.
But in the Special Regime sector, EBITDA rose by 18%, fundamentally because of the increase in wind, power and also because of mainly hydraulic energy which grew by 67%. All of this was in spite of the negative impact of the fiscal measures approved at the end of the year, which had an impact of almost EUR8m in terms of EBITDA.
We are still working on two hydro stations in Galicia. And the wind plants in Australia and Mexico are also underway.
Now in terms of gas provisioning in Spain, we are talking about Gas Natural Fenosa on the whole, the whole of the provision into Spain has fallen by 3%. The reason for this is a reduction in 33% of provisioning to electrical stations.
All in all, if we add residencies and industries, that is conventional gas consumption, Gas Natural Fenosa increased its sales in Spain by 5%. The residential adjustment is because of problems with temperature. Then (inaudible) adjustment is related with an increase in consumption in export industries.
This is not the first quarter that I mentioned such a thing. There seems to be a consolidated trend and we are very happy about it. So if we leave aside the electrical problems, this has had a positive impact because sales to the conventional market in Spain have risen.
I also want to say that commercial activities have grown. The gas sector is a strongly competitive and open sector, more than ever because the underuse of the gasification plants and we've also had a 3% growth in the number of contracts. Residential contracts, well, amount to 1.4 per customer and in terms of maintenance contracts we also increased them by 14% at the end of this quarter.
If we now talk about the international energy sector, this as you know, Fenosa Gas, well, the growth has been significant. EBITDA grew by other 30% including the gas sales in Spain. And the reason, there are three reasons for this. One of the reasons we mentioned already, the good performance of the commercial market in Spain. Then there are two other reasons that you need to understand.
First of all, Europe has worked quite well as you can see in this graph, we increased our sales to Europe by 36% through organizations with our own network like Benelux or other countries where we market to end users. And as we said in the last few quarters, margins have not only stayed at the same level, but in some markets they have also risen. All three factors have contributed to this increase in EBITDA in the international sales business. So there's an increase of 5% for the reasons I just mentioned.
The key behind this is the policy of our strategy, which you know, our policy of managing contracts, different types of contracts, flexibly and without flexibility through ships, great flexibility in the fleets leaving the Atlantic Basin and more and more presence in Asian countries that want LNG.
37% growth there's been in Europe and also we've joined the Med Gas Project so all this comes under a policy of diversification, provisioning and final markets in such a way that we can capture any opportunities that come up throughout the world.
So we think the situation is not going to come to an end. We believe that LNG will continue to have a heavy weight or even heavier weight in the world in the future. Our LNG sales are 60% already of all our sales, including of course sales in Spain. Our sales, international sales, of liquid natural gas are 42%. In 2009 it was half of that. So we've internationalized our business.
And if we look at the world, flexible natural gas that can go anywhere is increasing too. A few years ago it was 22% and now it's 35%. So this is the true measure of globalization of the market, natural gas market, which will be reinforced further in the future. There's a lot to do, but a lot will be done by our company in this area.
Finally, I want to also say that Union Fenosa Gas, I want to say a few things about. Union Fenosa Gas has had an EBITDA negative, negative EBITDA of minus 86%. It's positive, it's EUR13m, but the problem is well known, it's the lack of supplies from the Egyptian supplier, the Government of Egypt, to our plant in Damietta. But I want to say that in 2012 we only had a 20% of this supply, however the company had an EBITDA of over EUR500m and a net income of EUR300m after tax. So the company in spite of the problem of supplies has significant result.
It's also important that you bear in mind that in the first quarter 2012, Union Fenosa Gas had atypical positive values in volume and price, trading price. In contrast with Gas Natural Fenosa, Union Fenosa Gas is present in the trading market and last year, 2012, was enormously superior to the previous year and to the following year. So that has to be borne in mind.
And also you must consider that the demand for Union Fenosa Gas is very much seasonal in nature and that this quarter is not representative of the whole year. It's a special quarter.
Sales went down by 18% due to this situation and the restriction of supplies were the key behind that.
Our company, naturally, is talking to the Egyptian authorities. Egypt is in a problematic political situation, we're negotiating with the government. There's elections coming up and that doesn't really make it possible to speed things up more. But we believe that finally this problem -- we've got contracts and documents backing us up, and we believe that there will be a positive outcome as soon as we can make things move forward with a new government or with people who are willing to focus on the problem.
The gas supply to Spain decreased, but finally and in spite of that, the company had a positive EBITDA.
Now if we go to the Latin American business, there's good news on all fronts because even in electric distribution, which is minus EUR3.1m, the EBITDA that's due mainly to the disinvestment in Nicaragua and some problems with the conversion rates of foreign currency. But in general all businesses have grown significantly and we're going to look at their EBITDA as being -- well, it's more than EUR200m, of which EUR172m correspond to gas distribution, that's 25% (sic - see presentation - 53.1%) and EUR82m electric distribution and EUR70m electric generation, all those areas have been positive.
If you look at countries we've got to emphasize the results in Colombia, Brazil and Mexico. We continue to think that we are sound in Latin America and there's a good potential for growth which can be seen on this graph, because the business of, for instance, distribution, especially gas, you can see what potential for growth we have in the areas we are. In Mexico there's a growth potential of almost 5m points of connection, customers in Brazil, 4m, less in Colombia because the market is more mature, and Argentina 800,000, so it's a high potential of growth in Latin America.
On the right, you see that if we look at the most important cities in South America we're practically present everywhere except these three; Lima, Caracas and Santiago de Chile. These are the cities that have a greater growth potential and we're working on all these cities. So it's not exaggerated to say that our potential market is almost 10m consumers.
If we go into detail, if we look at the situation in Latin America for gas distribution, sales have grown by 20% and connection points have grown by 3.5%. We should highlight Brazil due to the hydraulic situation this year, last quarter the consumption of gas is going up very much and we've exceeded 6m points of supply and the EBITDA has grown by 18% as regards the previous year. So that is positive too.
If we look at distribution in Latin America on the right, you can't see it but you can perhaps imagine it.
On the left you see the electric sales, there's a growth of 4.5% and the connection points 3.4% is the increase in Colombia, 3.5% is the increase in Panama. The EBITDA has dropped by 3.5% but that's due to the Nicaraguan situation and some effects of the rate of exchange.
In generation -- this is basically a regulated business -- the EBITDA has grown by 22.8%, EUR70m. One of the reasons is that the Tuxpan plant had a breakdown last year which has been repaired so things have got much better. There are two new projects started, one of them is a hydraulic plant of Torito in Costa Rica and the other is a wind project Bii Hioxo in Mexico.
And if we go to the conclusions we have to say that we are satisfied with our business model which is allowing us to face the storm and the difficulties in Spain and the level of uncertainty internationally with a model that is diversified; the EBITDA grows, sales grow and profits grow.
Our financial strength is our priority and this is confirmed by the success of the issuance of EUR1.5m (sic - see presentation - EUR1.5b) bonds.
And finally, the AGM ratified and approved the dividend, as I said before, that will make it 6.6% profitable as regards the previous year.
That's what I have to say, I'm at your disposal for questions. Thank you.
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Questions and Answers
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Unidentified Company Representative [1]
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We'll start with the questions and answers, I don't know whether there are any questions in the room? No? Yes? There's a question at the back.
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Sonia Ruiz De Garibay, Bankia Bolsa - Analyst [2]
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Yes, my name is Sonia from Bankia. I've got a couple of questions. The first one, the CapEx for this year, we're talking about minus 8%. I don't know whether at the end of last year you spoke about EUR1.3b for the year. Is that a bit high or what can we be talking about?
And secondly, wholesale gas sales, the guidance that was given you would try to, it was a challenge to repeat last year's results. What could we think would be a good figure for the next three months?
And then impact of the pool price which is now very low on future renegotiations of electro contracts for liberalized customers, in terms of Union Fenosa Gas are there any write-down foreseen for the assets you've got there because we've had supply problems for a few months now?
Finally, the strategic plan, what after the government announces that initially they foresee for the end of the quarter to reform the system, when do you think that you'll announce your strategic plan? Thank you very much.
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [3]
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Well, I'll start with the last one and, I should have said this before, we're working on our strategic plan, it's very advanced and our idea was to present it next month. We're going to delay it in order to know what the government says, what the measure are. It makes sense to wait for a little bit for the government to publish their measures but the strategic plan is very advanced.
I'll let the CapEx question be answered by Carlos Alvarez but I'll go to the other questions. We've already said in terms of wholesale gas sales, we've already said that the volume of the international market was not going to grow like last year, it wasn't possible, and that's what happened, we've grown by much less. And we also said that we didn't see drops in margins and both things have happened. We still continue to see things in the same way, there's not going to be a tremendous growth like last year but that doesn't mean that there's going to be a decrease and we don't see that there's going to be a drop in margins on the international market. This is what we saw and this is what we would see.
In terms of the pool, well, you've got to look at the problem from two points of view. Naturally, one of them, the pool finally is carried by the customers but that's not possible to carry on with that situation, there's a long list of considerations why the situation is going to have to change dramatically. First of all, the climate situation, we've reached a situation where this quarter things, hydraulic and wind levels are not going to be the same. And it's, secondly, not possible for the wholesale market to continue to function because it's no longer a market. We're convinced that the government will act upon this so that we'll have to say that there is no electric market. I don't know what we could talk about but not about an electric market, it's not possible for this situation to continue.
And, naturally, at the normal market price of electricity the wholesale gas market, or electric market, we will have to be carried into the general market. But I think that indicates another horrible consequence of the policy as regards renewables, it's not just the extra cost of the deficit but also the fact that it's a priority sinks the normal market. The government has looked at this, tried to solve the first problem, it's indispensable for them to solve the second problem because, if not, no market can survive on the basis that half of the offer if zero cost and subsidized, it just cannot work.
So we are convinced that on the one hand, objective conditions are not going to allow that to happen, that's already happening now, but secondly, the Secretary of State has said that they're looking at this, I don't know what they're going to do exactly but I'm convinced that this will effect European regulations on this problem. When the volume of renewables was in the past 10%, 15%, 20%, well you can more or less manage the problem without great consequences but in Spain we have very high figures, it's impossible, literally impossible. From the economic and from the market point of view things will have to be done, I'm sure that the government thinks about them and they'll be done.
As regards Union Fenosa Gas, we are convinced that the soundness of our assets in Egypt, these are circumstantial factors that will pass, but our investment there is sound and our future is clear. We have a clear idea of it. We have two plants, one marks -- well, the reserves, the plant has an excellent future ahead of it and it's obviously that our contractual rights are recognized and respected. Obviously, we have to bear in mind the present troublesome circumstances but I think we'll reach a reasonable agreement. There'll be delays but this is going to -- the assets have a value which is not going to diminish.
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Carlos Alvarez, Gas Natural SDG SA - CFO [4]
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And the other question, well in 2012 it was EUR2,500, the figure I think will be similar, the CapEx for this year. Reduction will be probably in the electricity business and then we're increasing gas distribution and in generation due to the two projects that we've mentioned that we have in Costa Rica and also Mexico more or less the same so, the CapEx.
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Unidentified Company Representative [5]
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Any further questions from the floor? It seems that there are no further questions from the floor so in that case we will pass on to the telephone questions.
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Operator [6]
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Hello, good morning. The first question is by Alberto Gandolfi from UBS.
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Alberto Gandolfi, UBS - Analyst [7]
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Hello, good morning, I'm Alberto Gandolfi from UBS, thank you very much for answering my questions. First of all, in terms of cash generation, the cash flow from ordinary activities has fallen by 25% and I was struck by this because I hadn't realized this figures was so high. How much cash do you expect to generate this year organically, that is trying to, so without taking into account securitizations. So just to understand your free cash flow power.
In the second place, I think you mentioned this already, but could you elaborate on the ratio between the wholesale and the retail business and the hedging for 2014 and how much have you benefited in this quarter because of the low use of cycles?
The third question has to do with regulation and I think you have explained this very well. But what is the potential risk that you can anticipate the electric review, because apparently there's some talk about cutting down on certain aspects here and some talk that the Ministry is now starting to talk about the gas tariff deficit.
And that's about all I want to ask for now. Thank you, gentlemen.
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [8]
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Well, in terms of your first question, as you can see from the last part of the [CNMV] presentation this has to do with changes in current capital, because there was a positive movement of EUR80m last quarter but this year there has been a negative movement of EUR190m. This has to do with the short-term effects, but I don't think this will happen in the following quarters because if you compare all of these things you've got to take into account the effects that have occurred and have been felt over the current quarter. This has to do with taxes and, of course, companies have had to contribute to this, so the effect is temporary. It will, of course, revert in the next few quarters and there's not really any changes to the cash flow trends that have been described in the past.
In terms of your question in terms of our expectations in terms of wholesale and retail businesses, well internationally we mentioned what we thought about gas. But for Spain in the electrical business this year we expect a better situation than the current situation, the accumulated figure at the end of last quarter, the figure is minus 2-point-something in comparative terms if we discount the leap year. And in electricity, well, minus 1.5 or thereabouts.
And in terms of our marketing policy I don't think there will be many differences because, as I said, the problem of the pool needs to be analyzed in a different way. It will have to do with the reorganization of this index because otherwise it will just be impossible to take care of all that.
Now in terms of natural gas we believe that the situation of the conventional market in Spain is going to stay put. Perhaps, the figure will not be as high as 5 but it will be positive, we will be selling more in the wholesale market than last year and the figures will be quite significant. And this is a trend that we need to have because I'm sure that Spain is going to see an economic recovery and this will lead to a greater consumption of natural gas.
And in terms of the cycles, well, if we use gas better, well, we only use combined cycles when there is no better alternative. If there is a better alternative in the wholesale, retail or even international market that is what we're going to go for. So in the future we expect that combined cycles will be used more but this shouldn't affect our margins because we will not be availing ourselves of the combined cycles if we don't really need to.
So to summarize what I would say is that the electrical market is going to have to focus more on its fundamentals because there are some things in the Spanish market that are not really related to our fundamentals and what we should focus on is our fundamentals.
In terms of regulations it is true that the government has announced that before the end of this half year it will announce new measures to adjust the deficit, we don't really know what these measures are going to be. What are the risks? Well, for distribution, to be honest, we're not really sure how this will be instrumental, distribution was already lower last year in the month of March and this resulted in a significant fall in investments and in the number of jobs. The reports that we have been made privy to do not really show that there's a significant capacity to reduce many things and so, to be honest, we are waiting for this to be published with bated breath but we don't think that those announcements will really change too much.
I think the key has to do with subsidies, if you compare the remuneration of distribution in Spain with the situation in Europe by customers or by kilowatt hour, you will see that the Spanish rate of remuneration is one of the lowest in Europe and so I don't think that that will provide any solutions.
Now in terms of payment for capacity it is the other way around, we expect a positive announcement, because if there's no guarantee for capacity payments then the Spanish system will be lagging behind the backup of the system because it's 80% renewables. So you either guarantee that the stations that give the backup service are profitable or otherwise the service will just not be rendered. Other countries have similar problems, Spain has had this problem for many years, for too many years, and the government will have to face up to this problem because renewable energies are not firm energies so they have positive externalities but they also have negative externalities and this is one very important negative externality which will have to be taken care of otherwise the risks in the system will be very high.
Now the gas tariff deficit, well, there will be a slight surplus in the system this year but the problem is that about EUR300m there, and the problem with the deficit, even if there have been a few investments in the system basically in warehouses, etc. but the problem has to do with the electrical service, with the electrical system, not in the gas system. In spite of that, in the current year there will be a certain surplus, as I said, we don't believe that the problems of the gas sector are very complex and we are convinced that relatively simple solutions will be introduced to redress the balance.
I want to clarify something. In terms of tariff deficit, in terms of cash flows, in the current capital changes we included the deficit generated in that period but the amounts collected are in the other line. That is collections from divestitures and this is something I wanted to specify.
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Unidentified Company Representative [9]
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Okay, we will now have the next telephone question.
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Operator [10]
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The next question will be asked by Javier Garrido from JPMorgan.
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Javier Garrido, JP Morgan - Analyst [11]
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Hello, good morning. I have several questions. The first question has to do with the [senior] contract, I don't know whether I got you clearly. Could you clarify the date at which the contract will come into force? When are you going to start receiving those three bcm? I don't know whether you said 2015 or 2016.
The second question has to do with whether you expect an improvement with respect to the first quarter in relative terms, because in the first quarter the income was flat and I wanted to ask you whether you anticipate that there may be an improvement in the next few quarters.
The third question has to do with gas distribution in Brazil, if you could perhaps give us some information about the regulatory reviews in Rio de Janeiro and what result you expect of that regulatory review?
And lastly, I wanted to know whether you could make a comment about your supply contract with, gas supply contract with Qatar? I think you are in the midst of an arbitration process and I wanted to know whether you can mention what could be the implications and what amount of your profits could be affected if the contract with Qatar was terminated.
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [12]
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Well, regarding the first question, it would be the second quarter of 2016 and the maximum amount is 3 bcm subject to the conditions because these are not firm quantities, but those would be the amounts related with the possibility that this part of the program can be complied with.
In terms of electrical distribution, we don't anticipate any improvements but it's true that we are improving efficiency by reducing CapEx and OpEx but we have some extraordinary expenditure because of some adjustments, so we don't expect improvements in those businesses.
In terms of gas distribution Brazil, it is underway. It is too premature to speak about them, about these things. We are now following the process established by the Rio de Janeiro authorities to resolve these issues and until the end of the third quarter, beginning of the fourth quarter, we won't be able to say much about this.
In terms of Qatar, we don't anticipate a negative solution to our interest because we are proposing a reduction. We need to understand this as a normal flow of events. Contracts include a series of landmarks where you've got to do a certain number of things, and one of the things you need to do is resort to a third party that may act as an arbiter. They're still negotiating and now we need to do things that we have done but I don't think the contract will be terminated and I'm sure that we will manage to strike a deal with Qatar.
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Unidentified Company Representative [13]
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Next question.
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Operator [14]
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The next question will be asked by Carolina Dores from Morgan Stanley.
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Carolina Dores, Morgan Stanley - Analyst [15]
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Hello, good morning, I have two questions. The first one is about LatAm. You talk about growth opportunities for this year in LatAm; I wanted to know whether this is organic growth or whether you are expecting some non-organic source of growth in LatAm?
And the second question has to do with the 2013 results. The consensus indicates about 5% to 7% net profit, is this in line with your expectations or do you expect to maintain your 2012 result for 2013?
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [16]
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Well, we don't really anticipate our forecast so we can't give you details in that respect.
In terms of growth in LatAm for this year it will be organic. Of course, we are open to transaction but at present we are not analyzing any operation to acquire any new business in Latin America.
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Carolina Dores, Morgan Stanley - Analyst [17]
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Thank you.
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Unidentified Company Representative [18]
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Next question please.
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Operator [19]
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The next question will be asked by Gonzalo Sanchez from BPI. Go ahead.
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Gonzalo Sanchez, BPI - Analyst [20]
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Hello, thank you. I have three questions. The first one has to do with distribution of electricity in Spain. There has been a lot of talk about efficiency measures to counteract regulatory cutbacks and I have seen that the figure this quarter has risen by 13%, so I want to know whether there has been any extraordinary expense this quarter.
The second question has to do with LatAm, about slide 35 of the presentation which shows that the less mature markets for gas distribution will be Mexico and Brazil; however, growth in supply points is faster in Colombia which would seem to be the most mature market. So what are you doing to try and capture that huge market in these geographies and I want to know whether those things can be achieved organically or whether something specific needs to be done.
And the third question has to do with the cost of debt. I would like to know what your expectations are for 2103 in terms of your debt. Thank you.
Well, as regards the first question, yes, they've gone up, they've gone up because of the staff adjustment, personnel adjustments. There have been payments because of reduction of the staff, but the OpEx are going down, yes and that will continue to be the case because the policy is to absorb the regulatory impact as much as we can by managing things better.
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [21]
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In terms of Latin America, what we're talking about are organic growth, it doesn't include acquisitions, purchases. When we refer to these figures that's what we're talking about. The company is studying and will study all opportunities in Latin America in all countries we can and we'll see whether we're interested or not and how to go about it. But in principal the comments that you're hearing here have to do with the regions where we are present, that doesn't mean to say that we don't want to go to others it means that since none of this is mature yet we're not going to specify.
It's correct what you said about Brazil and Colombia but there is a factor and the factor is that Bogota is still growing. And since Bogota is still growing the needs for new supplies, for new houses in Bogota are increasing all the time. Obviously the potential market is not so great but every year in Colombia the Bogota larger -- or Greater Bogota is growing all the time.
So if we look at the situation at a longer distance into the future Mexico and Brazil have the greatest potential for growth. In these cities we are talking about concessions, in Mexico DF we've got a concession to capture the potential growth in that area, we don't have to do much because we can channel it through our knowhow and experience in gas distribution.
As regards the cost of the debt, in the first quarter it's similar to what we had on average in the past year, I think it was 4.1%, this first quarter it's [4.12%]. The last conference call I announced that in 2013 we foresaw a slight increase because of all the operations we're involved in, debt is cheap in the short run and certain operations are more expensive than those that we had developed and we expected an increase, 4.2%, 4.3% of the debt and that's about the same situation now, 4.1% in this first quarter anyway.
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Unidentified Company Representative [22]
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Good, any more questions, telephone questions?
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Operator [23]
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There are no more questions in Spanish or in English. Thank you very much.
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Unidentified Company Representative [24]
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Very well. Well, we will now read, to finish, the questions that we've received over the internet. I'm going to read questions that have not been answered in thematic sections.
As regards the debt the question is, one of them, there's a question about expiry dates in 2015 including a loan of EUR3b, how do we hope to refinance that? Would it be through the financial markets?
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [25]
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2015? Well, when we're thinking about 2015 we haven't decided anything although it's true that, as you know, this time liquidity of the capital that we have would be enough to face that deadline, but we'll see what we do, whether we'll go through the financial markets, through banks partly. We haven't decided anything yet.
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Unidentified Company Representative [26]
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Good. The second question refers to the evolution of international gas sales, specifically on slide number 30 we see that sales of international LNG have dropped by 8%. What was that due to?
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [27]
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Well, several things. First of all, there was a ship -- one ship more or less in a quarter would change the figures of the quarter. The second is that, as we've said already in previous years, as regards volumes it was tremendously good and we've said that what we did not expect was to grow so much, we were going to keep good figures of growth but not so much. In any event, I insist, when we look at it from an annual or even six-monthly point of view the figures will change, I'm sure.
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Unidentified Company Representative [28]
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And then two questions that have to do with the structure and profitability of capital. The first one is about the possibility of the company repurchasing shares.
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [29]
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No, no, the administration, the Board hasn't looked at that at all.
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Unidentified Company Representative [30]
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And finally a few questions about regulation of gas distribution, is there going to be any change, any reform? And regulation distribution, something, would it be a return on investment or what?
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [31]
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Well, we haven't initiated the review process, it will begin when the government considers it fit. But we don't think that it's going to be done only in the electric sector because there are different matters here. First of all the risk, commercial risk, exists in gas distribution not in electric distribution and we think that is good. There are two reasons, one is an imperative. All buildings have to have electricity but not gas necessarily, so in the case of gas it's indispensable to invest in such a way that there are customers that consume gas, because if you haven't got a gas installation in a building you obviously can't consume gas, which is not the case in electricity.
And this leads us to repeating what we said before, the current situation is that gas distributors grow by investing, by capturing customers that are going to consume gas, if we don't do it that way, if we invest and there are no new gas customers we don't collect. So that's an advantage for the system because distribution can never cause a tariff deficit, it's more the opposite, when our colleagues in gas distribution invest in distribution it's because they've got customers that are going to consumer gas. But if they haven't it will be bad for us. The conclusion is if it goes well for us it will go well for the system because the system will collect more. So our philosophy is we think it would be a mistake to change this, we don't think the administration wishes to do so but we have no news about it at all.
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Unidentified Company Representative [32]
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Good, well if there are no further questions we can finish this presentation. I'll pass the floor to our Managing Director, Mr. Villaseca.
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Rafael Villaseca, Gas Natural SDG SA - Managing Director [33]
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Thank you very much. Hope to see you the next quarter. Thank you.
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Editor [34]
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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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