Q2 2013 Gas Natural SDG SA Earnings Conference Call

GAS.MC - Gas Natural SDG SA
Q2 2013 Gas Natural SDG SA Earnings Conference Call
Jul 23, 2013 / 08:30AM GMT 

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Corporate Participants
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   *  Luis Calvo
      Gas Natural SDG SA - Head of IR
   *  Rafael Villaseca
      Gas Natural SDG SA - CEO
   *  Carlos Alvarez
      Gas Natural SDG SA - CFO
   *  Antonio Basolas
      Gas Natural SDG SA - Director of Strategy & Development

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Conference Call Participants
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   *  Manuel Palomo
      Exane BNP Paribas - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Jorge Gonzalez
      Analisis Banco Sabadell - Analyst
   *  Miguel Medina
      JB Capital Markets - Analyst
   *  Fernando Garcia
      Espirito Santo - Analyst
   *  Alex Rygiel
      FBR Capital Markets - Analyst
   *  Alberto Gandolfi
      UBS - Analyst
   *  Javier Suarez
      Mediobanca - Analyst
   *  Jorge Alonso
      Societe Generale - Analyst
   *  Pablo Cuadrado
      BofA - Merrill Lynch - Analyst
   *  Fernando Murillo
      La Caixa - Analyst
   *  Virginia Sanz
      Deutsche Bank - Analyst
   *  Jose Javier Ruiz
      Macquarie - Analyst
   *  Michael Ripley
      Mizuho Bank - Analyst

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Presentation
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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [1]
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 (Interpreted) Good morning and welcome to the presentation of results of Gas Natural Fenosa for the first six month period of 2013. The presentation will be given by the CEO, Mr. Rafael Villaseca, together with the CFO, Mr. Carlos Alvarez, and the Director for Strategy and Development, Mr. Antonio Basolas.

 After the presentation we will have a Q&A session, we will begin with the people in the room and then we will take questions from people remotely on the phone and the internet. So I will pass the floor to CEO of the company, Mr. Rafael Villaseca.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [2]
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 (Interpreted) Thank you, Luis. Good morning, everyone, and greetings to you all. I'm going to present the results for the first half of the year. As usual, the meeting will be based on these four points, highlights, financials, analysis of operations and conclusions and then your questions and answers.

 If we start with the highlights, we're going to talk about these four key financial indicators. First of all, globally we have to say that the results are very stable and continue to be stable as a result of the soundness and the good risk profile of our company. So as a result of that, in the first six months we've generated a net income that's gone up by 1.7% as regards last year, mainly because of the growth in the international business.

 The EBITDA has gone up just under 3% to EUR2.6b in spite of two important things that have influenced us, divestments, as regards last year and the new fiscal measures of the law that came into force on January 1 this year which meant a significant impact on our P&L account.

 Thirdly, investments in materials have grown by 11.4% as a result mainly of the investment in South America, and the net debt of our company has gone down by 5.4% and it's now just above EUR14b. Were it not for the pending debt as a result of the tariff deficit which caused it to be EUR15.1b, that's 5.4% less than the debt we had at the beginning of the year. So our financial structure is quite sound.

 Now if we look at the international profile of the business, we have to say that 43% of our EBITDA is international operations and out of that 43% international, 43%, 57% is South America and 33% is business that has to do with natural gas outside of Spain both in infrastructure and supply. The international operations account for 43% and they are more and more important, not only in development but also in investment as we've seen and we will see.

 This international share of our operations, this EBITDA of 43% has grown by 6.2% as regards last year. In fact, in South America, the EBITDA has grown by 6.2% and the rest of the business by 5.9%. It's important to underline the continuous and healthy growth of our sales on the wholesale market internationally. Gas market, 6% growth in EBITDA, in spite of the absence of supply of gas from Egypt which has undoubtedly done a lot of harm for our growth.

 So there's a good profile internationally; a sound, flexible profile that adapts and adjusts to difficult situations and quick changes.

 We also have to point out the weight of our gas activities. Out of the total EUR2.6b of our EBITDA, global EBITDA for the six-month period, 58% is activities that have to do with gas, regulated and liberalized. And international operations, 40% both in Span and abroad.

 To give you further detail and a greater breakdown, in the growth of the EBITDA of our company, this six-month period as regards last year. Gas has grown by 4% whereas electricity has gone down by 2%. Gas has gone up by 4.4% and electricity has gone down by 2%, mainly due as a result of the bad situation in Spain both in generation and distribution of electricity. So gas has grown a lot, especially internationally and this situation is a result of the convergence of our gas and electricity business which we began a few years ago.

 It's important now to point out several relevant events that should be pointed out. First of all, successful public bond issuances this year for EUR1.5b which have increased the average life of our debt. We've also begun the construction of the 234 megawatt Hioxo wind farm in Mexico which we hope will start up in the second half of this year.

 Thirdly, cash payment of final dividend which we did on July 1 for more than -- for a total of EUR504m. So that's a payout of 62.1%. On July 9 in the second half, we signed a loan for EUR250m, an eight-year loan with the European Investment Bank for a total of EUR475m which we've agreed with them to finance regulated activities in Spain.

 Finally, and this is equally important, Royal Decree Law 9/2013 of July 12, with new measures to reduce the electricity tariff deficit in Spain has come into force, and I will tell you more about that in a second.

 Now to begin with this, we have to say that the agreement with -- in accordance with what the Minister himself said when he presented the law on the Royal Decree, and the information that has been published in the media, we can say that the Ministry estimates that there is a deficit of EUR10.5b, which is more or less similar to the figure of subsidies that are present in the Spanish electric system.

 Of this, according to the Minister, EUR6b are covered by the measures that have been introduced, especially the law which began -- which came into force at the beginning of the year in the form of special taxes. And based on what the Minister said, now we have to -- we have EUR4.5b still pending coverage.

 In accordance with the Minister, they are going to cover EUR900m through the State budget, EUR900m as a result of increase in the electricity rates and then EUR2.7b by the companies. So the first comment is to say that the State contribution has gone down by EUR900m not up because before this law the State was obliged to cover the whole -- subsidize EUR1,800m.

 Secondly, the electricity rates have gone up, the Minister, there was a law that came out -- well a law is going through Parliament right now and they will probably go up by next month to total an amount of EUR900m. Then the EUR2.7b, I will give you the breakdown on that.

 In accordance with the tariff with the toll law that's in preparation and going through Parliament, well, it's going to be put into force soon, was in accordance with that EUR1.6b will be carried by the special regime companies and EUR1.1b by the ordinary regime companies. That is the breakdown of what the Minister said and what the law introduced as regards these events.

 Now if we continue with this Royal Decree, I have to say that the main measures have been in the press you know about them. It's important for me to tell you that the legal documentation that is now -- or that has been approved, there's a lot of documentation, talk about hundreds of pages of legal information that we're studying with great detail and interest, so this is just a preliminary series of remarks. So all this will have to be confirmed after we've been through the hundreds of pages that are associated with this. And what is yet to come and sent to the CNE and the different institutions that will have to give their opinion before it's finally approved. So this is a preliminary impression.

 Now you know that transmission and distribution are going to be regulated based on remuneration that must be subject to the Treasury Bond at 10 years plus 200 base points. Now at the same time the special regime based on a special mechanism of standard costs, etc., will have a profitability that will be calculated based on a Treasury Bond at 10 years plus 300 base points.

 At the same time, there's been a total increase of the State guarantee by EUR4b to cover extra the excess deficit last year for EUR1b more and that's going to be securitized.

 Now there's going to be a reduction of the capacity payments from EUR26,000 to EUR10,000 per megawatt over twice the number of years remaining to cover the current 10-year period. There is a limit to extrapeninsular costs; it's not yet been ascertained clearly. And finally, there's going to be what they call the social voucher. Distributor companies will have to finance this social voucher.

 So all this, as I say, we'll have to look into in detail. We've got to study very closely but there's no doubt that the new profitability of Treasury Bonds at 10 years plus 200 base points, this introduces important issues, methodology. If you do things this way we think methodologically this is not right because this doesn't reflect the cost of the resources in each company.

 Secondly, remuneration, if you calculate that, 6.5% there's no need for me to tell you that that's below the cost of the resources of the companies in the industry in Spain, so obviously there's going to be a clear effect on the investments that we have because it's not going to be enough to cover the costs, which you know better than I do.

 As regards the social voucher, in spite of the Supreme Court judgment, they are going to insist that we pay this, but anyway we will have to read it and see exactly how this is going to take place.

 Now as regards the framework law which will now go through Parliament, well it's still in preliminary phases, but there's something very positive, which is the principle of financial sustainability of the system. It tries to establish solid grounds to prevent excess tariff problems, and we are very happy about that. We have full confidence that this time the measures will be approved to prevent situations of tremendous deviation that we've seen in the past, especially those of us who work under the ordinary regime. So this is good news.

 In addition to that, there's a series of expectations which are difficult to describe right now, temporary closure of installations and the setting up of market mechanisms for what we call interruptability and other pending measures that are not yet clear. So I'm talking, as I say, about hundreds of pages that we have to study closely before we can give you a definite opinion.

 However, if we look at what's been published by the government, especially in the toll law documents, in 2013 there's not going to be a tariff deficit. And with the entry into force of the new project -- law project, when it becomes a law we believe that this will solve the problem in the future and we're very happy about that.

 As regards 2013, on the left you can see the amounts of deficit. It's quite well balanced. There's a small excess of EUR16b. You see the differences basically once again the premiums for the special regime are the payments for special regime are going to go up. It won't be EUR9b it will be EUR10b actually this year, but there's going to be a discount of EUR750m as a result of applying the Royal Decree.

 So special regime will only go up by EUR250m over what was expected at the beginning of the year. So at the same time, also it's going to go up by -- the payment to extrapeninsulars is going to go up by EUR900m. Initially it was going to be 100% carried by the State, but in accordance with the new regulations it will only be half of that, so the other half, EUR900m will be carried by the extrapeninsular -- sorry, the General Electric System.

 To cover all this the most important saving is in transmission and distribution as you can see. It goes down by more -- just over EUR500m as a result of the application of the measures that I've told you about. In any event, what's important is to point out that the aim of not having a deficit in this year is going to be met. And we are going to guarantee self-sufficiency in electric industry in Spain.

 Now if we continue with the impact of all these measures, the impact on society will be on combined cycle capacity payments which have gone down, but the payments used to be for 10-year periods and some cycles were covered by some -- by our companies (inaudible) so the impact just has to do with whatever years were pending.

 Electric distribution with the reduction to the figure that I quoted, the social voucher and the part that corresponds to us of the special regime. Although this is especially difficult to put into figures at this time because as you know, or you probably -- you might know, this is profitability of 200 -- 300 base points over the 10-year bond, we're talking about 7.5 right now, based on OpEx and CapEx standards that have not been yet defined.

 So these are preliminary estimates that are very difficult to really detail until we know the small print. But what we can say right now, the estimate is that the impact on our accounts this year for this company will be EUR90m before tax and EUR180m for 2014. At the same time the impact on combined cycle plants, if you bear in mind that years that might be pending in terms of collecting capacity payments is about EUR100m.

 So this is the forecast we have at the moment and it's important to point out that it's not the first one. It will be at least a third if we just look at the past two years, the Royal Decree 13 of 2012 already meant an impact on the P&L account of EUR100m and so far this year the impact on our P&L account of the fiscal measures of the law number 15 account for EUR150m, so we're talking about EUR150m until now plus EUR90m, so next year EUR180m. So this is the impact on the traditional sector industry which believes, we do believe in fact, that we're being treated very harshly after this adjustment.

 More impressions on this regulatory reform. Well, first of all, and this is very important, we have the expectation that this solves once and for all the serious problem that we have. You know that in this company we've been saying this for many years the problem of the tariff deficit. That's great news, and that we have a guarantee to face that we really feel very happy about that.

 The second thing is that the electric industry in Spain traditional activities of electricity in Spain and this was presented yesterday by the industry has made an effort which equals EUR4.5b in the P&L accounts in association with these new measures that have been approved. That were approved last year and the new fiscal measures and the new law of 2013.

 All this has a very serious impact and we know what the outcome -- the aim is to solve the tariff deficit problem, but we should remember that the origin of this problem has to do with political decisions that have nothing to do with the electric business. EUR11b in the Spanish electric system you know, that's not as a result of the company decisions that's political decisions. So a contribution of the State budget should not only not have gone down to half its value but it should have continued to help to solve a problem that was created by political decisions that had nothing to do with the electric business.

 So in that electricity distribution is heavily penalized with a profitability of 6.5% and you need no explanation that it's well below our resources and the combined cycle plants which on the one hand they are fundamental to maintain security and safety of supply, renewable back up and peak electricity demand, but they are suffering a heavy impact because the capacity payments are going to go down.

 So all this will have repercussions and we've got to look at this, as I say and see how they actually affect our business and how we should react in the face of this situation.

 Now if we go to the financials for the six-month period, I have to say that our net profit has gone up by 1.7%. If we start at the top, net sales have gone up by almost 12%; EBITDA has gone up by 3%. It's important to point out a few things that are important to know. The increase in tax is almost EUR150m. The impact of the fiscal measures law that came into force on January 1 which affects the electric and gas markets almost EUR150m.

 Secondly, I have to say that we've applied a deterioration of EUR70m which corresponds to the loss in value for the processing gas rights in the Damietta plant which has had to stop, which I will refer to later again. We've increased the provisions for this six-month period slightly over last year.

 And finally, indicate another important thing, in accordance with what the shareholders approved, and based on Law 16 of 2012 we've updated our balances and that means that we've registered a fiscal credit loan of EUR109m which allows the effective rate to go down in the year to 22%. All that together gives us a profit of -- a net income of EUR780m which is 1.7% more than last year.

 Now if we analyze the breakdown of the EBITDA we have to say that first of all distribution in Europe, we'll look at this in further detail, a very quick overview, is negative by 1% and the distribution in Europe, electricity mainly, despite the good behavior as we will see with Moldavia, of the bad behavior of the distribution sector in Spain which dropped by 10% in their income last year in Spain.

 As regards electricity there is a decrease of almost 5% in EBITDA, mainly as a result of the Spanish market once again. Special regime on the other hand has significantly improved and as regards the gas, good behavior except for UF gas which still although whose income has gone down by 50% as a result of the Egyptian crisis. Good distribution and supply behavior based on international activities mainly.

 South America still growing except for electric distribution but don't forget about the impact of the divestment operations that have been carried out in that market. But in any event, both gas and generation and the total generate a positive EBITDA of more than 6% which leads to a growth in the general EBITDA of the company of almost 3%.

 As regards investments, they've grown by 11% as a result of Spanish America. We have there invested very strongly, our businesses are very good over there and this time 47% of our investments and they're growing, are now coming from our international activity, that will increase further and that amount has gone up by 57% in this first half of the year as regards last year.

 I also have to say about the securitization of the tariff deficit. At the end of the year we still had pending EUR1.06b pending, and throughout the year we've collected EUR540m as a result of securitization of that amount and EUR79m direct income from what people have paid for their electric bill. And there's been EUR469m deficit of which a part of that is due to the excess last year which has been calculated after closure and then EUR915m which had to do with the deficit this year which will have to go down to zero in accordance with the measures that the government has introduced.

 As you know, all the debt for 2014, even the excess is going to be securitized, that's what the government said, and the excess this year is EUR353m in accordance with government provisions. That should be zero by the end of the year.

 Now I've got to say that within financials that we've still got, well, our debt profile is very good, comfortable, so the debt as from 2017 is 68% of our net debt. The average life of our debt is five years. That means that we've got our need covered until 2015. Debt has gone down to some EUR15b, and now it's going to go up because of the payment that the dividend, but it will go back to levels of around, well 50% leverage.

 Now our financial structure is very efficient, 80% is fixed rate at every good interest rates, as I can tell you. This is 4.2% for the whole period and equally most, 88% of that is in euros, which is our operational currency. Then there's 10% on capital markets and only 25% is bank loans.

 Now our liquidities, cash flow is good, EUR11b which covers all our needs for the next 24 months as we said before. We've got to point out EUR5b -- EUR5.8b in cash flow and banks and EUR3.5b in loans and credits -- credit line loans.

 In accordance to that, we have EUR3.5b available for capital markets in Europe and EUR500m Colombian pesos in the market in that country. And also EUR475m in a loan that's been approved, European Investment Bank loan. The average life of our loans is about three-years payback.

 Now that means that we have a sound capital structure and the funds are 23.7% pre-tariff deficit before securitization. After securitization there will be 25% and the net debt over the EBITDA is just under 3. So the net debt to EBITDA ratio is 3 -- or three times. So this is a diversified debt maturity profile, 80% fixed interest rate and next year's rates will be fixed in a loan scenario and there is no great risk.

 If we look at the operations analysis, the first one is distribution of electricity in Europe. This business, investments have gone down by 31%, mainly as a result of the lack of investments in electric distribution in Spain for obvious reasons that have to do with the profitability of the business. Unfortunately this is going to get even worse in the near future. Also sales have gone down by 4% more or less in parallel to, we'll see later, to the development of demand of electricity in Spain and all this within a drop of 1% in the EBITDA.

 Now if you bear in mind that Moldavia, which is the other electric distribution that's shown here, their EBITDA has gone up by 18%, that will give you an idea of the drop of the EBITDA in association with distribution in Spain as a result of the measures approved in March last year.

 The supply points have gone up slightly by 4. -- 0.4% and the TIEPI has got a little bit worse, but climate has also influenced that situation.

 In terms of gas distribution in Europe, it's mainly we're talking about Spain and Italy. Investments have gone down by almost 5%, connection points have gone up by 1.3% and sales have gone down by 4%. I have to say that the EBITDA is more or less flat in spite of the fact that Italy has grown more than 8%.

 Once again Spain is the problem, and distribution of gas in Spain is more or less, it's not too negative because we are still investing in areas where we already are present. So we're investing in the residential sector and increase that. So we've increased the distribution network by 1,400 kilometers in Spain. So the EBITDA is EUR500m of which EUR400m odd are in Spain and I insist remunerations have been frozen because of a zero efficiency factor that's been applied.

 I have to say that gas distribution, that business has not been affected by any change. The government can update rules and regulations and do what they feel fit. But gas distribution in Spain is different from the electric distribution market for two reasons.

 First of all because the gas market in Spain is not mature by a long stretch. It's not mature at all; there are still many areas that haven't got gas and people who haven't got gas at home. So it's not yet mature so there are still opportunities for growth. Secondly, because the gas distribution system is not associated with asset remuneration, variables have a significant impact. The new customers and the consumption that goes through the network, the gas business is subject to market risks in such a way that there is a repercussion on the income as a result of the fact that the consumption of gas in Spain has gone down and customers have still yet to grow.

 So if the distributor wins the system wins more so because we only invest if we get customers that consume. If we develop a network and we don't get any new customers our results are obviously negative. I mean that's obvious. So we've got an efficient system in terms of -- because it is aimed in the same direction of the whole gas system in Spain and therefore there should be no serious problems in terms of bringing together the interests of the general system and the distributors.

 With regard to the gas and electricity market activities, with regard to the basic supply and demand for the traditional and conventional sector and the residential and industrial have both grown less than 1% in this first semester while the electricity demand has gone down just under 4%.

 These figures are not that different from the ones that we experienced in the first quarter and the trend seems to be that gas has reached, well, not now but reached, it's struck balance in the past because the drops have been compensated by the new customers that we're getting on board. And so electricity which is a more mature market, as you all know, the decrease is around 4% accumulated figures.

 If we actually want now to see why this is, here you can see that the production of our group has gone down 21%, 24% in the ordinary regime and there has been a 15% growth in the special regime. In general our production process has gone down by 21% and the technologies that have been most effective have been national coal at the beginning of the year for, well, just because the system was getting low, and also the CCGTs has gone down considerably as you can see here.

 Now what I should mention is that there is no doubt whatsoever, as a consequence of the measures that have already been published and the ones that have been announced are going to change in a considerable way, the structure and the way the entire electricity generation market is going to work because a lot of the things that are now being processed will have important impacts, not just the way we operate, but also in the structure of the electricity business in Spain.

 Now if we analyze the ordinary regime in Spain we have gone down, as we've said by 24% as far as production is concerned. And as you can see here in hydro we've gone up 300%, it's been a very good year for hydro both for the normal hydro and the mini hydro. And the other non-hydro generation has gone down 39%. Nuclear has gone down by 4% and national coal, as I said, nuclear has gone down just for operational reasons and national coal was due to the fact that it was very slow to set up the subsidy for coal that is still valid.

 With regard to the sales of electricity, we maintain our policy and our market shares at almost very similar. Our policy is to maximize the margins, optimizing the share and in this respect our cover for different mechanisms means that we can fight against the volatility in the prices.

 In a whole, all this business, the EBITDA has gone down by 5% to reaching EUR352m and the tax measures that affect the electricity business have represented this quarter EUR143m.

 In as far as the special regime, this has gone up considerably by 15% and EBITDA has gone up by 7%. So this has been a very good year for wind energy and this has clearly seen that this is now a positive impact as far as EBITDA is for this business. And I would like to say that the two small hydro projects taking place in Galicia and they are going to be commissioned towards the end of this year.

 Now if we look at the gas supply in Spain, I would like to say that in as far as Spain is concerned, the market went down 9%, the entire Spanish market went down 9%. However, if you need to say that this is broken down into (inaudible) word. The conventional market which went up almost 1% but the electric or the power market went down almost 43%. I'm talking about Spain here. The electricity industry -- sorry the gas industry has corrected itself. It continues along a moderate growth path around 1% and they are still registering falls due to the lack of use of the CCGTs.

 So if we apply this to Gas Natural, you can see here in the traditional or the conventional market we grew above the average market growth, 3.4% and in the electricity we went 38% fall which was less than the actually country figures. So in Spain we went down 5.4% in as far as the gas consumption is concerned which has been compensated by the increase by our international business.

 What's worth highlighting is that the residential consumption has gone down slightly, around 8% due on the one hand to the divestments and also it's worth highlighting that in the -- well, the sales of third parties into industry which is a bigger market, there's been a change, [20%] whereas electricity has been going down somewhat.

 It's also worth saying that we're continuing to get more contracts and we're growing there. As we say, Spain isn't a country that's got lots of gas, we're a long way from the gas levels that we should have. This means that it's gone up 3% of contracts this year we've grown on that by 3%, and gas sales and maintenance contracts have gone up 11%. So therefore the gas market is still profiting in Spain for a very modest growth share, it's modest but it's still growing and also the situation that there's a lack of maturity for this fuel here in our country.

 With regard to international gas sales, we can see a cumulative sales of 0.7%. What's worth highlighting is a strong growth in Europe which is 52% and a drop in the rest of the world, I'll be looking -- we'll see whether it's going to maintain over the rest of the year. But our sales of gas outside Spain now represent 30%, and of course that is growing.

 The maturity of our international contracts are around two years. And all this without including Union Fenosa Gas. If we include that, in spite of the fact that they've gone down, this would be higher anyway. By doing that we have reduced our dependency on the Spanish gas market, in spite of the fact that I still think there has been a 1% positive increase and what we've done is to leverage in Europe where we've set up our own network in France, Belgium, the Netherlands, Luxembourg and Germany and so our portfolio in those areas is over 27 terawatt hour and the average duration of the contracts signed is two years.

 I would like to continue to say that we have leverage, and you can see this on the graph that we are showing you and we have our own methane tanker fleet and we've got great flexibility for our procurement contracts which allows us to remain leaders in the Atlantic basins and now we are going to -- we are really getting into the Asian markets now. This diversification exercise we will continue to do with the provisions, for example towards the end of 2016 we will get a new contract and we think we'll also have a diversification of our end customers through the use of making the most of our entire nuclear fleet.

 This is one of our businesses where we haven't just covered the commodity risk but we're also managing to make the most of the opportunities in the, and I'm talking the end markets, as we said these are new markets that are coming up.

 We also need to see this in these graphs, where here you can see that last year if we have an annualized figure which is more representative because obviously it depends on the seasonality, which seasonality takes place all over the world because it's in different hemispheres you have winter at different times, but this has got more complete information, but here it's important to say that LNG represents 60% of our sales and likewise we can see that LNG is part of our sales.

 At the moment, the international we're talking about represents 42% where not all that many years ago in 2009 it was 21%, so we've doubled the sales worldwide. And finally to say that the LNG flexible, i.e. that has access all over the world and we can optimize this without any problems, it now represents over a third of all our contributions.

 I would like to say that this gives us great opportunities for growth, and it means that we can think that we will be able to grow in a business that will be highly affected as from 2016 when the contract of the La Cheniere comes in to effect.

 With regard to Union Fenosa Gas, the gas supply that the company has been working with has gone down 25% both in Spain and on the international market. The key here is a lack of supply in our Damietta Plant and also the fact that there is -- the spot price has gone up in the first quarter but it wasn't maintained the second quarter, so in spite of all this and as you all have appreciated that it has reached a positive EBITDA of EUR78m higher because at the end of the day what we have in the first quarter has been stabilized in the spot markets worldwide.

 The sales in Spain have been affected and also obviously the markets and also the sales of the combined cycles in line with our forecast, there has been a deterioration of EUR17m s a result of the temporary stop of work like the fact not just that the declarations for the new Minister there and also conversations we've been holding with people in the country, the new government seems to be focusing on how suitable it is. Well, they think that they need to develop all their energy resources and put an end to this period of uncertainty.

 As you know this has been occurring for many months now and we've been negotiating with the Egyptian authorities to find a solution to the problem that we are facing. Until now we hadn't been able even to have a fluid conversation with them but we really hope this is going to change with the new government and taking into account the new declaration, it seems that we would now offer solutions to the problems, but also there will be a temporary period during where we will still have problems and therefore we have applied this deterioration as you can this here. We just hope things will be solved and meanwhile there's no point in just commenting the fact that of course we have carried out the necessary legal actions to cover our interest. However, we still believe that by negotiations and maybe with a new government and a new Minister in Egypt this will lead to more efficient and quicker solutions than going through the courts.

 As far as Latin America is concerned, the EBITDA has gone down by 6.3%. As you can see here, the total EBITDA of EUR655m corresponds by 54% to the gas distribution activity, 25% to the electricity distribution and the remainder around 20% to the generation activities.

 If we break this down by country, you can see that the country that contributes the most is Colombia with almost 33% followed by Brazil with 28% and then Mexico by 22% and the remains, Panama, Nicaragua, Argentina, Puerto Rica and the Dominican Republic represent as a whole this almost 18%. This expectation is working, some countries work better than others, but in general we can say that the profile is very solid and we still think there's growth potential here.

 And to a certain extent, as you well know, that we are working in areas which have great growth potential. Without any doubt, the most growth potential is Mexico, as a country, and Mexico City, we think there's great growth potential in Mexico, Sao Paulo, Rio, Monterrey, well, these cities where we have already set up shop. And so the majority of the Latin American countries that have got an important urban potential, you can see this on the right hand side. We are present in all of them, except for three, so we truly believe that this growth path will be maintained in the immediate future.

 Now, when we are talking about the gas distribution in Latin America, the EBITDA has gone up by 15%. We are talking about regulated activities for gas distribution. Now we have reached a point where we have got 6m connection points, which is a 4% increase, which you can see there's growth in Brazil, Colombia and Mexico. The sales of gas have gone up too and the EBITDA, as I've said, now reaches EUR356m, which represents a 15% growth year on year.

 With regard to electricity distribution, we can say that EBITDA has gone down by 8% due to the divestment in Nicaragua due to the currency problem, and also in general this means that the sale of electricity in the countries where we remain, this has gone up by 7% and the connection points have gone up by 4%. So, therefore, the growth in the markets where we are, especially in the Colombian market, are very important, because in the area where we operate on the Caribbean side at the moment they are having important economic development that is very important, as I've said.

 With regard to generation, business has -- EBITDA has gone up by almost 8% and now reaches EUR134m. This is due to the fact we've got higher levels in the main areas and we've -- now we've started to go back to have activity in our Tuxpan power plant, because it had an accident last year and it wasn't working for a few months. Now we've started to build the Bii Hioxo wind park, which is going to be 234 megawatts, and now it's in the construction phase and the Torito Costa Rico hydro has 50 megawatts.

 Now the conclusions. What I would like to say -- we would like to say that our conclusions -- our EIBTDA's gone up almost 3% and our net profit has gone up just under 2%. But in parallel we can say that the deleveraging has been maintained perfectly and this has managed to lengthen the average life of our debt.

 Without any doubt whatsoever, the regulated changes that know will change in a conceptual and a constructional way And many of the things today that we've been talking about, which will oblige us to redefine in a very serious manner a lot of our businesses here in Spain. This is something we will be bearing in mind and we were going to include into our strategic plan that we are working on at the moment. So that after our summer holidays we will now go over it quickly, and we will offer it to you and WE'RE including everything that we are able to evaluate and we can put into this strategic plan.



==============================
Questions and Answers
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Unidentified Company Representative   [1]
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 (Interpreted) Well, now we would like to open the Q&A session. We would like to ask anyone who has any questions from the floor, if anybody would like to participate, please could you say your name and the company or entity that you represent. Yes, I think there's a question there, at the front.

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 Manuel Palomo,  Exane BNP Paribas - Analyst   [2]
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 (Interpreted). Good morning. I'm Manuel Palomo, from Exane BNP. Well, questions -- well, lots and lots of questions, actually. One of them is regarding to the gas regulations. What we've seen after the approval of the electricity regulations here in the markets, well, the markets have considered that there could be -- do you think there's going to be similar regulations for the gas market because we've read in the press that it seems that this may be accelerated so that the new regulations for gas will be implemented and it will come into effect on January 1 next year.

 This question, well that's my first question. So what do you think, what are your expectations for the deficit for this year, what are your expectations for the accumulated deficit for the cumulated yearly figures, and if you think this is going to have additional impact?

 When you say -- I think you said you have got 6.5% on the return of the gas activities in Spain. My second question, have -- well, you've had a preliminary impact with regard to the electricity regulations, which I think you said EUR280m as from 2014. Well, my question related to that it seems that in the capacity payments it's clear, and it seems that this is being accepted by the distribution. Also, the OpEx is [seven] parameters that could lead us to get these final figures.

 And then -- well, I'm sure there are going to be lots of other questions, but anyway you've mentioned the fact the strategic presentation we have seen, again, that the CapEx is below the depreciations, or amortizations. But I'm not quite sure what the dividend policy for the Company is going to be. And that's obviously very important when people are deciding when they are going to invest in the Company. So could you shed a bit of light on that issue, please?

 And finally, what I would like to ask is that you've talked a lot about the tax impacts in the electricity market. There are other competitors that openly say that these tax impacts are now being passed on by the wholesale market to the final clients. Can't you do that? Is there something that prevents you from doing that, or are you doing it? And so, therefore, this impact is not as important when we are looking at -- as far as the P&L perspective.

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Unidentified Company Representative   [3]
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 (Interpreted). Well, the first question -- well, we'll talk about the gas issue. We have got -- we are not aware of any other news. I can assure we only read what comes up in the press related to this so, therefore, we have got no further expectations than the one -- well, obviously there are ones that the government said are going to update the gas systems when they think this is necessary.

 And the second one for the news that we are reading in the press we are really not quite sure what the actual reliability of this information is. It's very difficult to value, even taking the current situation, it's difficult to have a -- to assess the impact on the electricity on the gas markets. Maybe they are going to establish some sort of tax. It doesn't have to be the same as in the electricity [market], it would depend on the base for this. As we say, even in the electricity we have still got a lot of details missing, so we don't dare to say what the impact would be for the gas market.

 But basically we think it would be a more complex and more general issue because, as I tried to explain earlier, the gas system is completely different to the power system; different formulas. And it's made of -- the market of the gas is very difficult. A lot of the remuneration is related to the growth.

 There's two conclusions. The first one is that actually they will be transferring the growth risk to the companies, and then we've got the profitability level that comes into place, and I mentioned the deficit system which cannot be moved on to them. So the more distribution we have, it's because you have a customer, because otherwise we don't collect payments. And if any of the operators -- well, we are actually one of the most important operators and so we are not going to invest if there's going to be no profit levels.

 So we need more customers that can [assume] to our pipeline, because otherwise we don't make money. And if we don't, we don't invest. And if we do make money, then the system makes money because this helps to cover the deficit.

 So the possible deficit, I don't think it even reaches the EUR100m. I think the accumulated figure is about EUR100m. It's not really that important a structural problem; we think this could be solved. But it doesn't -- it's not based on the gas distribution. I'll explain this.

 You have seen that on many occasions, quarter after quarter, I explain that conventional gas is stable or growing between zero and 2%. This is the gas that goes along the pipelines, the distribution pipelines, so there's no other activities so the system performs very similar. As we say the growth has been between 1% and 2%, because the sub-activity of the growth comes from the combined cycles, and they don't go through the distribution structure; they go through the transport system. But we do not get any compensation back, because that doesn't go through the gas system pipelines.

 So the industry's activity, well, it's true to say that we've the re-gasification plants and the transport are related to the problems within the electricity market. The problem lies there where, on the other hand, the gas market continue needs distribution to the O2 supply what is needed and, [as I said], there's still some growth in a country that's still not got high levels of gas supply.

 So it's difficult to answer the question. You were talking about how the model would be for the gas market and what will happen there. Obviously it's very difficult because we do not have any information. But preliminary impact, as our first estimations, obviously there are a lot of things that have been safe -- with all the safeguards that we've mentioned there's still a lot of details missing. We don't know exactly everything, how everything is going to go in the future.

 But we think it's a good idea to say how we see this today, and I think it was EUR90m this year, and then we said there could be EUR180m, as we said. Well we mentioned these figures earlier and I detailed them, but it's very important to look at the small print to see exactly what's going to happen after the recent government changes. Now we've said in our strategic plan we will talk about this issue in the future, and it's normal to, as part of our strategic plan, we will mention this issue as part of lots of other issues that we will mention.

 Tax impact, this is something that's very complex, very, very complex. It's very difficult to have a real criteria because you can look at the figures in very different ways. If we transfer the impact to the customers, well this is one of two things. Oh, it would have coincided with an increase in the pool prices, but that wasn't so. Or recognize the fact that the income has -- means that the reduction in the raw materials in the pools has been to such an extent that it should have been compensating the taxes, which didn't happen either.

 So we should have some sort of intermediate estimate. I've got serious doubts that we can transfer everything to the end consumers because, imagine otherwise, you get the remuneration you would get from the pool price, and then you get 7% of the tax plus whatever comes from anything else and then calculate how the procurement should be to maintain our profits. So I have the feeling that it's not possible taking into -- so it's very difficult and strange behavior of the wholesale market in Spain. And it's very difficult to confirm this.

 Something else is it should be, in theory, but the Spanish electricity market works in a very different manner. We -- I'm not sure how many hours -- 900 hours were registered. Oh, it was zero in the pool over the first quarter. Nothing is transferred, because if you've got zero in the pool nothing is transferred.

 So obviously nothing was transferred so, therefore, it's obvious that if the market should work as it should -- as if things were -- as it should in theory, which would be very clear that the enormous amount of regulation, some of the very unusual ones as well, which are linked to the behavior of wind energy and also the coal, means that the final result is very uncertain. And so I think it's very difficult to apply the theory to this.

 I think you talked about the 253 -- I think we talked about the -- there was a certain amount for the ordinary regime. So it means this is due to the fact that it's cost us more to produce this. But we don't know how this has affected us. As I say, the gentleman has just said.

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Unidentified Company Representative   [4]
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 (Interpreted). Thank you very much. The next question, please.

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 Carolina Dores,  Morgan Stanley - Analyst   [5]
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 (Interpreted). Good morning, Carolina Dores from Morgan Stanley. I've got three questions. The first one -- how many -- much loss do you have from the wind energy? I think you said of this EUR180m for 2014. And the government carrying out changes in the market, do you have any expectations of a negative income for your -- well, of a negative impact of the income due to these changes that the government are implementing?

 And the last question I want to ask -- well, actually the last one is two questions. The first one is what is the minimum CapEx that you could have for the electricity market in Spain?

 And the second one, do you expect to reduce the investments in the gas market until there is going to be a clear clarification of whether they are going to reform the gas market or not? Thank you very much.

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Unidentified Company Representative   [6]
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 (Interpreted). With regard to the wind energy, in wind energy we don't dare to give exact figures, because it's very complicated. As you know, the system that they want to have means that you have to have a 7.5% profit level, but it's based on standard costs that we don't know at the moment, and the specific formulas that will be applied, which are very complicated. So we don't dare give any really fixed one, but we've made global estimations, because we really don't dare to give any specific figures related to the wind energy because we really don't know what the behavior is going to be.

 With regard to restrictions and limitations, the Royal Decree was issued very recently. And some things like the intervention in the market, we think their intervention is important, but that's if we understood correctly the new Royal Decree but we obviously could just study it. At the moment we really don't think we are able to see where this is all going to lead us to. We are going to study it, we are going to see how it works and then we have to see what the free market conditions are. And this is obviously a liberalized market.

 And with regard to the distribution or investments in the gas distribution, as we said we have a remuneration this year. We are going to finish this year's plan, obviously, like all cases, depending on what happens to the situation related to the legislation. Then we will have to reconsider importantly what our strategies are going to be for investment. We've done that for the electricity bucket because you can see last year we defined a first plan. And then we will have to see within the gas industry we will decide -- it was decided that the country will not be gasified. But, as we said, today we don't have a clear criteria of seeing what's going to happen there. And as soon as we get more facts and figures, then we will study these cases.

 Do you want to talk about the CapEx?

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Unidentified Company Representative   [7]
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 (Interpreted). Well, we have to analyze what is this year, 2013. We are going to continue along the pace that we set for the year and then our strategic plan, what's going to be the minimal CapEx? If we think what it should be we think that was the one had to be linked to supply. But, as I say, I do not have the figure here with me, but I think it will be aligned to what we have already contemplated.

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Unidentified Company Representative   [8]
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 (Interpreted). Any other questions from the floor here?

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 Jorge Gonzalez,  Analisis Banco Sabadell - Analyst   [9]
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 (Interpreted). Good morning. Jorge from Banco Sabadell. I have several questions. Could you give us the impact of the social voucher for 2014?

 And another doubt I have with regarding to the cutbacks in the distribution, the Minister said that their reforms would be divided between 50/50 with the ordinary regime and wind. And you are talking about [101,600]. So do you think that the Ministry has estimated or underestimated the cutbacks on the ordinary regime? Or do you think there is any reason for actually reaching the figure that we actually don't know yet, and that the market could have naturally not taken into account all the reforms for you.

 With regard to the gas, I'm relating to what certain colleagues have already mentioned. Do you not think that if the gas reform doesn't make a lot of sense to have this social voucher, don't you think there's going to be more risk there? And do you not think the Minister of Industry will have some cutbacks related to the gas, or is this something that's going to be looked at further in the future.

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Unidentified Company Representative   [10]
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 (Interpreted). Well, we always hope that the Minister do some things that makes sense. We obviously hope it works, and so we obviously believe that we do think that any reform or update for the gas reform will be done, making sense, obviously.

 The gas is an industry that doesn't have serious difficulties. There's no structural problems; not important structural problems. Where they are, let's say the structural problems are related to the electricity sector. The gas industry is sufficient, it's the right size. Obviously you always have to adjust things and improve them and make things more efficient. That's normal, but we -- they do not have the same problems as the electricity market.

 So we are [convinced] that the magnitude of the problem, which will be, as we said, we think all changes will make sense. Well, that's at least what we hope.

 With regard to the social voucher, well, we haven't given details. We've done our general assessment of this, because it would be difficult to make things very precise globally, because we need more details. But we think that the impact for next year will be EUR180m including the social voucher, but we do not dare to detail things yet.

 With regard to the distribution, well, the possibility that we can make mistakes. Obviously, when we are talking about the tariffs, if you go to page 11, page 11 you can see that that's what the Ministry has given us. You look at the figure that for this year there will be savings of EUR749m, so it's -- well, what exactly the figure is -- well, we think that that might be [1,600 on year] figures; maybe we made a mistake there.

 Well, this year, when we are talking about the Minister -- Industry Ministry's figures, we think there's going to be saving on premiums for renewables of EUR749.5m. So that's the only explanation we have in the figures that we presented. We really don't know if there's anything else, and that's the only way I could read that information. But please understand these are very preliminary ideas and we are trying to get as much information from there as possible.

 There is data in the presentation that might give you an idea. It is almost mathematical. The effect on capacity payments, half of EUR180m comes from the impact on the capacity payments. The rest, which is EUR45m and EUR90m, is -- corresponds to distribution, social voucher and special regime. So it's an estimate of an estimate of things that are not written down, some of them. So we can't give you the exact breakdown because it's an estimate, a preliminary.

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Unidentified Company Representative   [11]
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 (Interpreted). Good. Any more questions from the room, from the floor?

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 Miguel Medina,  JB Capital Markets - Analyst   [12]
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 (Interpreted). Miguel Medina, from JB Capital. Just a question on this regulation business. It looks as if there's a competition to see who's more unsatisfied with the regulations. You've mentioned the social voucher, which goes against the sentence by the Supreme Court. Now, what about legal action? The possibility of legal action is something that's worrying you and that can delay the new measures. Do you think there's going to be an avalanche of litigation, and are you going to take part in it?

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Unidentified Company Representative   [13]
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 (Interpreted). Well, first of all, our company considers all possibilities to defend -- available to defend its interests. But we are analyzing things. We are studying things. Everything's possible. But we are still -- these are early days.

 The second thing, there are measures that are immediate in their effects, like the Royal Decree, which is in force. Others have to go through a series of slow transactions, so it all takes its time and I think obviously everybody is going to analyze all this, all the different companies. And then there'll be whatever there is. There'll be the reaction that everybody considers appropriate.

 As regards being unsatisfied -- yes, we are. We historically have had nothing to do with these problems, and we believe -- we not only -- we've had nothing to do with the decisions that have created this problem. We have not benefited either. So we think that this should -- the adjustments shouldn't be carried by somebody who's not guilty or didn't benefit from it. But of course these considerations can work us up, but they are not going to solve anything.

 So we are going to try and solve things and see what we can do to defend our best interests. And obviously we'll adjust all our strategy to the new framework, once we know all the details.

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Unidentified Company Representative   [14]
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 (Interpreted). Good. Any more questions?

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 Fernando Garcia,  Espirito Santo - Analyst   [15]
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 (Interpreted). Fernando Garcia, from Espirito Santo. I had a couple of questions. They have to do with gas. I wanted to know whether the EBITDA of the second half can be considered recurrent EBITDA, since the Company has, for the time being, doesn't -- won't enjoy the gas from Egypt.

 The second question is whether you can give us more details as to the historicals, combined historicals. I'd like to know what the -- Gas Natural thinks about the regulation measure and the impact that that could have on Gas Natural. Thank you.

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Unidentified Company Representative   [16]
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 (Interpreted). I think that the previous conference call, or somewhere else, I referred to Union Fenosa Gas, and I said we are comparing the first quarter, which was very bad, with a very -- a first quarter of the previous year that was very good. So if -- it would be more logical to look at the last two quarters of 2012, which were already affected by the lack of gas from Egypt.

 If we look at the EBITDA of the third quarter of last year, that was [45] and fourth quarter was [38]. And now we've had [65], so it would be more normal -- well, [40, 38, 45, 50] is more or less the figure that you can think or consider about.

 In terms of the deterioration, well, how do we calculate that? Well, you determine a series of hypotheses that there's stop in the plant supply, and then you recalculate based on the new activity of the pump when it starts up again. That's how it's done, so it's a forecast that's based on what the plant does, and remuneration of the assets based on the plant activity. That's how it's done. You consider the plant stops for x number -- whatever time, and then that's where it comes from.

 As regards this hibernation affair, it's an interesting thing. The idea would be to incentivate. We still don't know how the temporary stopping of certain plants. But that would be subject to a condition by -- it would not have to -- obviously the security of supply could not be affected. So some plants can be stopped and some can go into hibernation; some can't, but we will have to look at it and see.

 We'd have to look at that. We've still got to insist that, in spite of everything, the combined cycle plants, there is no doubt that they are ill-treated by the present situation. They are absolutely vital and critical for covering the consumption of electricity in the country.

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Unidentified Company Representative   [17]
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 (Interpreted). Good. Are there no more questions in the room?

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 Alex Rygiel,  FBR Capital Markets - Analyst   [18]
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 (Interpreted). Hello, good morning. Alejandro Rygiel, from [Fruso Management]. I know it's difficult and the formulas are different, but it might be useful to look at possible scenarios, to have an idea of what your profitability based on assets is within the context of the regulatory changes. Thank you.

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Unidentified Company Representative   [19]
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 (Interpreted). No, it's not based on accounting assets. That was calculated in 2002, and we built on that. So to go to a net-RAP system, what would be -- what would we be talking about? Well, we don't know. Hypotheses, you can have as many as you like, and scenarios. I don't really know what is the in the mind of the Regulator right now.

 Now, as it was done with the electric system, studies were made, in-depth studies by the CNE to focus the subject. We still lack foundations to talk about this, profitability and many other things.

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Unidentified Company Representative   [20]
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 (Interpreted). Good. Any more questions in the room? No more questions from the floor, so we'll go to the questions on the telephone.

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Operator   [21]
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 (Interpreted). Good morning. We are going to start with the questions on the phone, so please start now, if you wish to ask questions. Thank you very much.

 First question, Mr. Alberto Gandolfi, from UBS.

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 Alberto Gandolfi,  UBS - Analyst   [22]
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 (Interpreted). Yes, hello, good morning. Sorry to go back to gas distribution again, but this is in line with the question by Mr. Rygiel. Now, if we look at things from a slightly different angle, can you give us -- could you tell us what the EBITDA over gross capital investment rate is, or EBITDA over net capital invested? Because the tariff deficit in gas is much lower than in the electric business, but the Ministry talks about consistency. And 6.5%, 8%, 6.8% before taxes for the electric industry and calculations for gas of 12%. Now, that might be a strong risk factor for the Company. Now, our calculation -- are we doing our numbers right or not?

 A second question on the reduction of the debt in the second half of the year, could you tell us how much of that comes from cash flow generation; how much is (inaudible)?

 And another couple of questions. The amortization -- I have understood what you have said about procurement, but what about amortization?

 Non-recurrent factors, are they included or not?

 And the last question, the EBITDA in the chapter of others -- could you give us guidance about that? Thank you very much.

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Unidentified Company Representative   [23]
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 (Interpreted). Well, just to talk about the gas -- well, the gas deficit issue I will refer you to Carlos to deal with that. But I haven't heard the word consistency.

 Homogenization, that is not what we are going to do; it's a different thing. We are not talking about homogeneity there. The gas market is not mature, unlike the electric market. So the electric market might not grow in quality because there is no demand. And that's not the same in the gas system.

 Secondly, remuneration is association with risk factors, and that is not the case in the electric business. So this homogenization, or consistency issue, would lead us to other issues -- other things, and we can't deal with things that are different in the same way. If the things are different, you can't treat them in the same way.

 Now, what you are asking me the figures, well, the figures I've got are the EBITDA for the gas in Spain. It's in the first-half report, EUR452m, EUR451m last year. If you multiply by two, you are not going to really make a big mistake as regards the joint EBITDA for 2013.

 As regards the assets of investments in recent years, I think that the annual accounts there's a breakdown per activity, because we are obliged to do that. So that's available. I haven't got the figures in front of me, but that information you've got there. Now, calculations -- how you should figure these things out. Well, you've got the figures; you can do as many calculations as you like.

 As regards the second question, the debt. In the report there's also the funds. In principle there is nothing that we could consider extraordinary. Cash flow generation of the Company is what it is. The operation, EUR2.5b, operation cash flow, so there's nothing extraordinary there. It's something to do -- a little bit of that has to do with the exchange rate, but it's not really relevant.

 And if you've looked at the securitization of the tariff deficit, it's true that there is -- and that's not included under the operation figures, but something has benefited us, which is the higher level of securitization and collection as regards of the deficit generation. That's reduced the debt, obviously.

 They are the two main reasons in reducing the debt that -- and the debt reduction that we've had in this first half. I told you in the first quarter we've got the dividend payment, and that affected the situation the second and third quarters. That would be -- they've benefited from -- that figure has improved.

 Third question, I think we've answered already. Losses because of deterioration, that includes the deterioration of the Damietta plant a value of EUR60m, or by a value of EUR60m. That's the only thing, and we have already told you about that and answered that in detail.

 And as regards guidance, I don't know what you mean by guidance. We don't give any guidance on that, so I don't know really what guidance you want, but we don't give guidance in terms of EBITDA results.

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Unidentified Company Representative   [24]
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 (Interpreted). Next question, please.

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Operator   [25]
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 (Interpreted). The next question, Mr. Javier Suarez from Mediobanca.

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 Javier Suarez,  Mediobanca - Analyst   [26]
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 (Interpreted). Hello, good morning. My name is Javier Suarez, from Mediobanca. I wanted to ask you about the debt of the Company. We've seen the debt of the Company in terms of debt over EBITDA less than 3 times, and I think the Company's going to still have free -- very strong free cash flow generation in the next few years. Now, I was wondering about the debt reduction process of the Company; what level of debt you feel comfortable with? I know you don't give guidance, but I'd like to have your feel for this. How sustainable is the debt; how comfortable you feel with the amount of money you owe? That's the first question.

 The second question is on the progress of the international gas business. It's interesting to look at the trends, underlying trends. The strong growth in the gas business internationally, but could you give us an idea of the sustainability of this wholesale international gas business in the future, in terms of volume, price, internationalization of the Company? How far do you think this can go?

 I think it's -- what's going to happen with the different regions of the world, whether -- what way each different region is going to have in terms of that, and how that's going to develop?

 And then in South America there's a strong drop in the price of local currencies, as a result of a possible interest rate increase in the US. Could you tell us how the gas business is going to develop in South America, how do you think? Is that going to slow down, or what, apart from the issue of the currencies?

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Unidentified Company Representative   [27]
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 (Interpreted). Well, as regards the first question, we'll talk about this in detail in our strategic plan. But I've got to say that we -- yes, we are comfortable with the debt 3 times the EBITDA. We think that's reasonable, but we are obviously going to review that when we do the strategic plan.

 As regards the international gas business, obviously that is a question that comes up time and time again. And that reminds me, I'd like to tell you we've been talking about this for five or six years. This is a business that is here to stay. It's subject to all volatility and uncertainty of the international markets, but we believe that we are able to stabilize the risk, within margins that are reasonable.

 We are convinced that globalization of energy will lead to an internationalization of liquid natural gas. And in that area Gas Natural Fenosa has very important and significant knowhow, to secure a good position.

 And also the American market is going to become consolidated, because they've got local gas, but they need more and more LNG to complement their energy needs. But not just in (inaudible), but also -- in Asia and other regions of the world.

 We have the potential and the knowhow. This is our business. We are going to do whatever we have to do and we are going to get a lot of contracts, the 5 bcms of Cheniere, and many other businesses that will open up in the future. So we are happy about that.

 In South America and the effect of devaluations there, I just want to say that most systems, we negotiate real-term tariffs. So the tariff every year is adjusted and is index-linked. If there's a devaluation process, what happens is that inflation occurs and that goes into the tariff.

 Secondly, any slowdown in South America can have an impact on us, but natural gas in most of these countries is a fuel that replaces other fuels that are more expensive. That's another factor that can accelerate the process of gas consumption in certain countries. If it's cheaper, they are going to use more.

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Unidentified Company Representative   [28]
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 (Interpreted). Good. Next question?

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Operator   [29]
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 (Interpreted). Next question from Mr. Jorge Alonso, from Societe Generale.

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 Jorge Alonso,  Societe Generale - Analyst   [30]
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 (Interpreted). Hello, good morning, and thank you for replying to my questions. The first of them is whether you could tell us -- give us an idea of the measures that the Company can introduce to face up to the regulation -- impact of regulations. Are you going to reduce costs? Are you going to cut back? In what areas would you do that? How are you going to save money in the short term?

 The second question has to do with the dividend. Based on the estimates, or based on the impact that you think the regulations will have, since the Company is continuing to generate cash flow and reducing the debt, could you -- do you think you could maintain the dividend, or are you going to have to reduce too, the payout, as a result of the impact of the regulations?

 And the final question has to do with the revision of the rules and regulations in Brazil. Could you tell us about that? Thank you.

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Unidentified Company Representative   [31]
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 (Interpreted). Well, I'll start with the last question. Brazil, things are moving ahead normally and reasonably. The Regulator in the Rio -- State of Rio -- it will be a question of months, but not very long before we arrive at a definite situation and we update the tariffs in Rio.

 As regards the dividend, there is no change. We will talk about this in the strategic plan, but there's no change that I can tell you about as regards our policy. There's no change. The Company hasn't dealt with it and the Board hasn't deal with it.

 As regards the impact measures, well, obviously we spoke about this when we spoke about the first adjustment in distribution last year. We were going to act in OpEx and CapEx. We have taken action strongly in both areas. You can see it more clearly in the CapEx, which has been reduced and will continue to be reduced, because remuneration doesn't cover cost of resources. So we can't invest. It's as simple as that.

 And as regards OpEx, of course we are going to continue to launch plans in all the business areas and, of course, in those that have been affected by cutbacks, important, significant plans to cut back our costs.

 In distribution of electricity, first quarter, second, OpEx there is no reduction; there was an increase. That has to do -- in order to reduce OpEx you've got to reduce expenses that have to do with people and systems. And we are dealing with that. In the first half of the year we've had more OpEx, but that will reduce OpEx in the future too.

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Operator   [32]
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 (Interpreted). Next question by Mr. Cuadrado, from Bank of America, Merrill Lynch.

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 Pablo Cuadrado,  BofA - Merrill Lynch - Analyst   [33]
------------------------------
 (Interpreted). Hello, good morning. A lot of the questions have been answered already. I just wanted to ask two very quick questions. The cost of the debt, 4.2%, is that the level that you expect for the second half of the year, if we look at the annual accounts?

 And then this question, if you look at the wholesale business, gas business, the beginning of the year the message was -- international volumes were more or less flat. I think we were talking about a performance, quite a flat performance as regards the previous year, but if you look at the first-half figures there's been a very strong growth. I think that shows that the margins are probably better. This is not -- I know you don't give guidance, but what do you think the performance in the second half? Is it going to be similar? Is it going to slow down? What do you think?

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Unidentified Company Representative   [34]
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 (Interpreted). Well, I'll answer the second question. There's also a market -- we don't see big changes. I'm talking about international markets. But we think there will be an improvement in margins. We do expect and there has been an improvement in margins. The situation on international markets has been good and we think that that will carry on in the future, in the short term.

 It's difficult to talk about the medium long term, but we think it will continue. The margins in international markets are growing. Not in Spain, but international markets, yes. And we are -- we still feel positive about that.

 The cost of the debt, if we did nothing more, would be around 4.2%. But the Company wishes -- in the second half of the year we would like to pay some of the debt for 2015 and reduce it. I think that the estimate at the beginning of the year was around 4.4%, 4.3%. Bearing in mind, if we refer to that 4.2%, maximum 4.4%.

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Unidentified Company Representative   [35]
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 (Interpreted). Okay, we'll now go to the next question, please.

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Operator   [36]
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 (Interpreted). The next question is form Mr. Fernando Murillo, from La Caixa. Mr. Murillo, you have the floor.

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 Fernando Murillo,  La Caixa - Analyst   [37]
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 (Interpreted). Yes, good morning. Well, I think actually my questions have already been answered throughout the session. All I just want to know if you could give details about Union Fenosa Gas. So the difference of the infrastructures, well, I would be grateful if you could explain that. Thank you.

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Unidentified Company Representative   [38]
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 (Interpreted). I'm afraid I don't have the figures here. They haven't been broken down in the report that we have given, so I'm afraid I can't provide this information now.

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Unidentified Company Representative   [39]
------------------------------
 (Interpreted). Okay, next question, please.

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Operator   [40]
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 (Interpreted). The next question is from Virginia Sanz, from Deutsche Bank. Yes, madam, you have the floor.

------------------------------
 Virginia Sanz,  Deutsche Bank - Analyst   [41]
------------------------------
 (Interpreted). Good morning. I still have a few questions left. The first one is relating to the strategic plan. I wanted to know if it was sensible to think that the timing of the plan could be towards the end of the year, when you are clearer about if there is going to be any further regulatory measures for the gas. You could analyze the rest of the measures in further detail.

 Also, maybe I've understood, but it seems that investments in Spain in the future -- well, for electricity, will be very few. And then gas will depend about whether there is going to be any regulatory changes or not. Do you think that the fall or reduction in investment in Spain could be compensated with growing investments in Latin America? Because I assume that's what you did this year. Or do you think that would be a way to go in the future; do you think that's how the Company is going to go?

 And just with regard to Union Fenosa Gas, I wanted to know that with the negotiation that you said that you are carrying out at the moment with the Egyptian authorities, maybe we could accept that the EBITDA that we could see for 2014 would have a more normal path. Or do you think that this will be reflected in 2014?

 And finally I wanted to ask -- I think a few weeks ago Repsol are now starting to considering a reduction in their participation in the Country. Have you heard any information about this, whether Repsol is going to sell off some of their stock?

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Unidentified Company Representative   [42]
------------------------------
 (Interpreted). Well, with regard to the first question, we will try to finish our strategic plan as soon as possible. If we have been delayed, this has been due to important reasons. It didn't seem very practical to present it to you at the moment, with all these changes and lots of uncertainties. As soon as we can clarify these doubts, we will try to do it before the end of the year, and we will try and present it as soon as possible. We will do it as soon as possible, obviously, unless we get special circumstances come up. So, as we said, we will be doing it as soon as possible and so you can get this information.

 The second point on information on say a growth plan for the Company will be extended. We will see that in the strategic plan, obviously. We have been working on this for months and, without any doubt, they will go along the lines that you have already indicated, maybe not. Latin America, it could be in any other markets, but anyway what is something that is consistent that obviously there will be less investment in -- considerably less investment in Spain.

 With Union Fenosa Gas, well, we believe that the Company will stabilize, but it's true to say that in the short term there will be technical difficulties because of our supply, as we've already talked about the impairment here. But we do believe that we will get to some sort of framework that will regulate the situation. We hope that the Egyptian government will solve the current problems, which are affecting us.

 With regard to Repsol, we don't have any information or indication. I think maybe a month or two months ago we got information from them, from Repsol. And they said their idea isn't to diverse, but I'm afraid that's the only news we have. We don't have any further issue on the Repsol matter.

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Unidentified Company Representative   [43]
------------------------------
 (Interpreted). Okay, next question, please.

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Operator   [44]
------------------------------
 (Interpreted). The next question is from Mr. Jose Javier Ruiz, from Macquarie. Yes, Mr. Ruiz, you have the floor.

------------------------------
 Jose Javier Ruiz,  Macquarie - Analyst   [45]
------------------------------
 (Interpreted). Good morning. I just have one question, if you can give us an update on the electricity distribution business in Colombia. I would be interested if you are aiming to pass on the costs to the end consumers. And do you know how much money you've got to recover due to the wholesale price increase?

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Unidentified Company Representative   [46]
------------------------------
 (Interpreted). In Colombia we are passing the price increases onto the final markets. In fact in Colombia the most important issue we have is the presence of groups that we can't pass on this, because this is like social groups. But the government has established three aid programs for these special groups, which mean that the fact that these customers have a lack of resources, and the government will help them out.

 So I think in general terms the costs in Colombia have been included, excepting of course the subsidies that the government passes on to certain underprivileged consumers, because they can't pay for these increases. But I think the Colombian government have certain important programs to help these underprivileged areas.

------------------------------
Unidentified Company Representative   [47]
------------------------------
 (Interpreted). Okay, next question?

------------------------------
Operator   [48]
------------------------------
 (Interpreted). There are no further questions from the --

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Operator   [49]
------------------------------
 Our next question comes from the line of [Michael Ripley], of Mizuho. Please go ahead with your question, sir.

------------------------------
 Michael Ripley,  Mizuho Bank - Analyst   [50]
------------------------------
 Yes, good day. So you've seen your leverage fall quite sharply to 2.9 times, and you don't seem to be giving guidance currently on your leverage. But I'm wondering if the Spanish sovereign rating were to be cut over the next 12 months to below investment grade, do you think with your leverage at 3 times, or 2.9 times you could remain two notches above the sovereign, at Baa2? And, if not, would you be looking to achieve more deleveraging so that you can retain your current rating, under those circumstances? Thank you.

------------------------------
Unidentified Company Representative   [51]
------------------------------
 (Interpreted). We said in the last conference call that the rating for the Company, or the change of the Company's rating does not [infect] the cost structure of our company. Because our finance isn't linked to the Company's rating.

 And so then we were not -- the rating was not going to affect us, and so we are more important on the ratios of the debt levels and our EBITDA. I think that the transactions and the development of the Company, as the CEO has said, I think they can support the fact our 3-times-EBITDA debt levels mean that we will not be contemplating a change, [in] a hypothetical situation, if there was a change on the sovereign [its notch].

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Unidentified Company Representative   [52]
------------------------------
 (Interpreted). Any other questions?

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Operator   [53]
------------------------------
 There are no more questions.

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Unidentified Company Representative   [54]
------------------------------
 (Interpreted). Well, thank you very much. Now let's just go through the Internet questions. I think all of them have already been replied, except for one. And I think that's if we are very clear that the government will contribute the [EUR2,200] to pay for the tariff deficit.

------------------------------
Unidentified Company Representative   [55]
------------------------------
 (Interpreted). I have no doubt the fact that they will fulfill on their legal promises, on this, which was defined by the law. The law is going through Parliament at the moment. [So it's] contemplated in these charges that have already been explained, so we have no doubts about that. We really do think the government will fulfill on its promises.

------------------------------
Unidentified Company Representative   [56]
------------------------------
 (Interpreted). Well, as there are no further questions, we can now consider that this meeting has come to an end. So now we would like to give the floor to Mr. Villaseca.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [57]
------------------------------
 (Interpreted). No -- all I'd like to say, thank you very much to be here and, as said, we'll see you in three months time. Thank you very much.

------------------------------
Editor   [58]
------------------------------
 Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.






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