Full Year 2013 Gas Natural SDG SA Earnings Conference Call

GAS.MC - Gas Natural SDG SA
Full Year 2013 Gas Natural SDG SA Earnings Conference Call
Feb 18, 2014 / 09:30AM 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 - Managing Director of Economics & Finance
   *  Antoni Basolas
      Gas Natural SDG SA - Managing Director of Strategy & Development

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Conference Call Participants
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   *  Alejandro Vigil
      Cygnus Asset Management - Analyst
   *  Miguel Medina
      JB Capital Markets - Analyst
   *  Javier Suarez
      Mediobanca - Analyst
   *  Jose Ruiz
      Macquarie Group - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Manuel Palomo
      Exane BNP - Analyst
   *  Martin Young
      RBC - 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). Thank you very much. We begin the present event. We're going to present the results of Gas Natural Fenosa for 2013.

 As usual, the presentation will be done by our CEO, Mr. Rafael Villaseca, and our CFO, Mr. Carlos Alvarez, and our Director for Strategy and Development, Mr. Antoni Basolas. After the presentation, we'll have Q&A session with the people in the room first, and then we'll have questions from people following us on the Internet or on the phone. And we cannot be -- we have to finish, because of our program limitations, by 12 o'clock.

 Good morning. I pass the floor to CEO Mr. Rafael Villaseca.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [2]
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 (Interpreted). Good morning to everyone, those of you here and those of you following us on the Internet and by phone. I'm going to give you the details of 2013, first of all the most relevant issues then regulatory affairs, then financial highlights, a breakdown of operations -- analysis of our operations and then conclusions, before we have a Q&A session.

 If we go to the more relevant, to the highlights, I will say that we think our results have been good in spite of the bad situation of the electric business in Spain. We've had results after taxes of EUR1.44b, slightly above last year, same as the EBITDA, which has grown by 0.1%. We've made material -- and immaterial investments that have grown by 10% to reach EUR1.4b.

 And finally, the debt. The net debt has gone down by 8.5% as regards the end of 2012, and it is now at EUR14.6b. This would have dropped down to EUR14.1b had it not been -- or if we'd discounted the deficit, the tariff deficit at the end of this year. We think these points are very important.

 Now, what's the impact of the regulation in Spanish operations? Well, there's been various tight and strict regulations in the electric sector, and our EBITDA comes from electricity Spanish -- operations in Spain has gone down by more than 1% (sic - see slide 6 "9.2%").

 Electricity distribution we've dropped by 4%, electricity 12.7% and special regime 1.9%, so we're talking about EUR455m before taxes that we've lost there, in line with what we had said. No surprises, but there's been a very, very strict and heavy impact on our operations as a result of the regulations, especially in electric generation.

 All this fortunately has been made up and that's why our results are slightly above last year, with a very good behavior of our business, especially in the international area. Of the EUR5b of our EBITDA that we have totally, 44% comes under international entities, so we're talking about EUR2.2b. And 58% of that goes to Latin America and 33% has to do with international gas operations. The rest, 6%, is other operations of distribution in Europe, basically Italy.

 And there's a remnant of 3%. It's important to point this out, because it's the key which has helped us face and overcome the severe impact of the regulation in Spain, and it has allowed us to reduce costs and make up for the huge problem we've had.

 Operations have grown by 2.2%. We've grown in Latin America 2.5%. But if we looked at this in local currency, we're talking about 10.6%. We'll talk about this business by business.

 Our strategic plan envisaged a deterioration because of the rate of exchange changes, which have impacted us sooner than we'd thought. And the same in the rest of the businesses, which have grown by 1.8%. So, this has been the impact on international activities of exchange rates and conversion into national rates -- national currencies.

 Gas has sold well, in spite the fact that in the last quarter there's been some delays from one quarter to another, not significant. And we are satisfied with the good behavior and performance, rather, of all the units of our business, which is the base of our sound activities.

 The other instrument that has made up for this big problem that we've had with electricity in Spain is the efficiency plan. 2013, we have achieved EUR112m in savings without bearing in mind the new NIF changes. And we foresee, in the strategic plan 2013/2015, to achieve EUR300m in savings. This year, we hope to reach EUR202m.

 We're acting on 90 projects that are now going on and that affect operations, maintenance, trading and corporate structure. In 2013, the main activities have focused on special and specific services, saving on commercial operations and reduction of operational costs of the Company. This plan has been a strategic move we have experience from the past, and we hope to make up for all the other problems we've had.

 2013 is a good example. We've had tremendous adjustments in terms of our electric business in Spain, but this is made up for by our good operations internationally and in other areas. And this has made it possible to achieve the bottom line and the EBITDA slightly above what we got last year.

 Now, I have to say that this will be accompanied, if it's approved by the GSM, will produce a good dividend for the shareholder, and the Board will deal with this. So we will look at the possibility of a total dividend of EUR898m. That's a 0.3% increase, which increases in line with profit, which will mean a payout of 62.1%.

 And all that is in line with what we foresaw in the 2013/2015 strategic plan which was presented to you. That means it will be paid in cash. So that will mean a profitability or a yield of 4.8%, as compared to the end of last year.

 We also have to say that together with this dividend, our performance on the stock exchange has been good. We had a -- our value went up by 37.7% on the stock exchange in Spain, which is in contrast with the 24.1% that the IBEX went up, on average, and 9.2% for the European utilities. So our stock really went up and our prestige went up on the stock exchange very well in comparison with other companies.

 In the last three years, 2011, 2012 and 2013, our Company, in spite of the big difficulties we've had with the regulator and the Spanish market, have increased our value by almost 63% as regards what we were valued at at the end of 2010.

 Now, as you know fully well, after January this year the new IFRS standards were applicable and joint ventures will be accounted for using the equity method instead of the proportional integration method or proportionate consolidation method. What would have happened had we applied this to the figures of last year, which were still done with the old system?

 Well, the net debt would have gone down by EUR389m, the EBITDA would have gone down EUR236m, investments would have gone down by EUR68m and net profit would have not been affected. There are three affiliates, Union Fenosa Gas, Ecoelectrica and Nueva Generadora del Sur, who have been affected by the change in the method. This impact will be absorbed in the accounts and the results of 2014.

 Now, if we look at regulation in Spain, we've got to begin by looking at the electric sector. Now, the big problems we've got and we're trying to address, or the administration is trying to address, as you can see, Spain has since the beginning of the crisis, 2008, a strong increase in final consumer prices, in accordance with Eurostat. Prices have gone up by 44% for private homes and they've also gone up significantly for companies.

 Now, in accordance with Eurostat and the national authorities, in these past six years there's been an accumulated tariff deficit of more than EUR28b. So we've got final prices that are above the average in Europe and then the tariff deficit which has continued to grow, and that means that that has led to a snowball effect since the beginning of the crisis.

 If we look at what's happened since the beginning of 2013, you see the old system costs that reach EUR45b. The cost of energy meant 26% was the cost of energy. That was what the part that was attributable to the cost of energy, 26.3%.

 But we've also got taxes that were applied since January 1, 2013 in accordance with Law 15/2012, and this you see in the section of taxes. We've broken that away so that you can identify them clearly, because we're talking about taxes, not the cost of energy.

 If we don't bear in mind the taxes, the cost of producing electricity went down by 22 -- the cost of energy for 2013 in Spain was 22.2% lower. If we take into consideration taxes, it would be only 6.5%. But what is clear is that the cost of the raw material in 2013 went down very notably, had there not been changes in taxes.

 As regards with regulated costs, costs of the system, that is, transmission and distribution, were 2.5%, and associated costs, premiums and debt servicing 32.3%. And after the most recent changes in the tax laws, taxes went up by 31.1% to a total of EUR11.9b.

 Now, the cost of producing electricity in Spain is similar to other countries in the European Union, but we've got regulated costs that are 41% more expensive than the other countries, member states, in accordance with the calculations and estimates of the Ministry.

 Now, if we analyze what's happened with the wholesale price, the pool wholesale market, the famous pool, since the beginning of the crisis in 2011 the electric pool has gone down by 31%, and it's gone down practically year on year. In 2013, it went down 22% or 6%, depending whether you take into account taxes or not. But it went down and has gone down since the crisis began.

 If you look at it at the right and you compare this with the average pool price in other countries, you'll see what I said before. And the Ministry itself said that the prices in Spain are in line with the European market, but the Spanish price, EUR44.26 per megawatt hour in Spain, includes taxes that were not applied in 2012. But even including taxes, we've got electricity in line with the prices in Europe.

 So we may conclude that the problems that we were referring to at the beginning, as the Ministry itself says, definitely have -- not really have much to do with the performance of the wholesale electric market.

 So we can continue to look at the costs of the electric system. Here you see access costs. Access charges were EUR17.6b last year, which together with the other costs are the regulated costs, EUR21.2b. If we associate that with income, we've got a deficit of EUR3.6b for this year.

 Recently, a couple of days ago, it seems that in the provisional liquidations and calculations the figures are slightly higher, but all the information we've got, based on that information, it will be more like EUR3.6b because there's income also coming. There will be income coming from taxes that have to be returned.

 But anyway, irrespective of whether the final provisional liquidation figures published by the CNMV talk about EUR4b, it will probably be more like EUR3.6b, which will give us an accumulated figure of EUR29b.

 Now, the most important chapter in this department of costs are the subsidies, and in spite of the effort that the administration has made they went up by 6% last year. And we must also remember it is subsidies to renewables, which according to the administration are about EUR9b, are the highest in the EU in terms of euro per megawatt hour.

 We believe that if you look at all this the analysis is quite clear, so we've got a very clear problem. The government has developed a series of measures in recent years that you see here, a huge amount of them. A lot of complex measures were taken, extensive measures, and some of them are still pending approval. And they're all aimed at solving those problems, and that's what the sector and the public opinion has been told.

 Started with a decree in 2012, which froze new investments. There's a moratorium on investments into renewable energy. Two more decrees in 2012, number 13, number 20, which reduced remuneration of distribution, transmission, capacity payments, extrapeninsular compensation and others.

 Then, after that, there's a series of what we call ministerial acts or orders, one in 2012 which increased access tariffs. And then the act or law of 15/2012, which introduced fiscal measures for energy as from January 2013 for energy sustainability supported by generators and auctions of CO2 allocated to regulated costs coverage.

 Then there's another decree in 2013, introducing urgent measures to reduce costs of the system. There's another law or act number 24, which establishes general principles of the sector. And then there was the new -- this is still pending approval -- the new framework for transmission and distribution, and this has to be developed yet and approved.

 And we've got law 15/2013, which the Ministry no longer has to contribute to the deficit of the previous year, and the decree 2/2013 whereby there is a change in CPI index for the update of the remuneration of regulated activities.

 So all these measures are aimed at solving the problem that I've described before, and some of them still require full approval. And all this, together with the opinions that the Ministry has and comments that the Ministry has declared and published, lead to a series of adjustments in the last two years equaling about EUR10.5b a year.

 So, in reduction in subsidies, in that chapter we're talking about EUR2.2b; EUR2b for special regime, EUR210m for extrapeninsulars, and the state budget, EUR900m approximately. You know half of the subsidy to extrapeninsulars and what we might call traditional utilities, about EUR2.24b; that's transmission, distribution, capacity payments and the social voucher. Also, new taxes have been -- and levies have been approved up to a value of EUR3.1b, and tariff increases up to EUR2b.

 So the total adjustments in the whole sector are EUR10.5b and we hope that this year the balance in the budget will be achieved for the electric sector, although it's true that there are important pending issues in terms of how these measures will be applied.

 It's important to talk about the gas situation; completely different, this situation, and it's recognized in that way. In the year, in this 2013, profits have been practically non-existent. It's the second year that there's no tariff deficit in the gas sector. We've got an accumulated deficit anyway in 2013 of EUR314m. It's not a significant deficit, both in the ordinary sense of the word because there is no profit in last two years and because the figures are different.

 We hope -- the government is launching a plan which includes four basic aims for the gas sector. To review the remuneration frameworks -- it seems reasonable to do that -- and update all the framework of remuneration.

 Secondly, they want to get rid of the deficit. It's not too great but it would seem important to work on it. The third one is to create a secondary gas market, which would be an excellent measure to make things more flexible and transparent in the gas industry in Spain.

 And the fourth aim that's been announced and we think is very good is to increase competition, but it's necessary to know that the Spanish market is one of the most competitive in Europe, without a doubt. However, any effort that is made for that to continue along those lines we think will be okay.

 For 2014, we're waiting for some issues to be solved, but we're waiting for adjustments in the tariffs for there to be reasonable balance in these accounts.

 To conclude, in terms of the gas deficit, there's a very significant specificity which differentiates the gas sector from the distribution -- the electricity distribution sector, and this happens all over the world. And like the electrical sector, gas is not a universal service and therefore it has a commercial activity that the electrical sector doesn't have, because any household in Spain needs to have electricity but not gas.

 So there is not only a cost but a risk, basically, which is the commercialization of the supply points by the distributor, because there's no obligation to supply households with gas. And this is linked with the fact that Spain is a non-gasified country. The gasification rate is 27%. So there's still room for development and room for investment that we will discuss later.

 And secondly, this is not just a risk based factor; there's other risk based factors because the income of the gas sector is conditioned by the volumes of gas that go through the networks at the supply points that are installed by the distributor every year. So this is a very significant difference vis-a-vis the electrical sector.

 Also, remember that through the distribution network only conventional gas passes and not combined cycles. And in that respect, there's not been a significant or a spectacular fall in conventional gas consumption. What I mean is the consumption served by the distribution network. There's still a demand for distribution networks to service the new 150,000 supply points that are established every year.

 I also want to say that if you look at the figures of the sector, every time that a new customer is obtained the system improves, because what the distributor receives is less than what the customer pays. So this resolves the problem of any system, because the growth helps to reduce the problem.

 Sometimes, of course, dysfunctions arise, but this means that this problem has been resolved but we're in a sector that's completely different from the electrical sector.

 Now, having said this, we will go on to the financial data which were explained about two hours ago, but the gross margin and the EBITDA of our Company have grown by 1.9%, so there's a stability at the level of EBITDA. This happened in a very demanding environment, both from the macroeconomic and the (inaudible) regulatory points of view. This has been a terribly hard year because of these reasons.

 Our amortizations have increased by 6.1%, basically due to the impairment test that we applied to the Damietta Plant. We made provisions at a similar level as the previous year and the operational profit is EUR2.9b. The financial results have been 4.1% lower than those of last year, and this means that the profit before tax reached EUR2.1b.

 Finally, after applying the taxes that benefited from a more positive rate because of the updating of balance sheets that has been applied, this takes us to a net profit of EUR1.4b. That is an increase of 0.3% with respect to the previous year.

 Now, if we look at the different business lines, if we look at our EBITDA, you can see that we have a series of business lines which are negative performers. The most negative of these is the electrical business in Spain, which fell by 15% because there was a very significant impact of the ordinary regime of electrical generation in Spain, also Union Fenosa Gas and the electrical distribution business in Spain that I also mentioned.

 Now, on the positive side, the gas sector has performed reasonably well and the international gas supply businesses have managed to offset the negative results I mentioned before. Of course, in Latin America we had a problem with the conversion rate of the Latin American currencies, but we already contemplated this in the strategic plan but this has been faster than we had expected. So this would be an overview of our EBITDA situation.

 Now, in terms of investments, we have invested 10% more. In electrical distribution Europe, the investments have fallen in a significant way, over 16%. Investments in gas have stayed stable, because the investments in the development of the gas network are still being made and this is a good thing, not just because this is business for the Company but also because it helps -- it contributes more resources to the gas system.

 And in Latin America, well, the growth has come from two investments that we have underway. One of them is the wind farm of Bii Hioxo and the other one is the hydro power plant in Costa Rica.

 Now, as regards the debt profile, you have the gross and the net debt. We have a net debt of EUR14b and the maturity calendar is quite comfortable. We have always been very cautious and very conservative in terms of our financial provisions, and that's why 78% of our debt has a maturity for after 2017. In other words, all our financial needs until 2016 have been covered.

 And all of this has been possible with a debt structure which is extremely efficient. 82% of our debt is fixed and last year the rate was 4.2%. And 86% is denominated in euros, which is logical because we basically operate in the euro zone. And also, 72% of our debt is in the capital markets, so we applied a policy of removing bank intermediaries.

 And we have a high level of liquidity of over EUR11b, and so this covers all our obligations for 24 months. And in addition, we also have EUR3b more corresponding to programs approved in the capital market. EUR4.2b are in cash, EUR7b are in committed lines of credit, and we still have some amounts from loans that we haven't yet availed ourselves of.

 Now, in terms of the deficit, well, because of the changes in the regulations, we had to face some changes that the government imposed. So throughout the year a new deficit occurred for about EUR600m. But of course the Company, as a result and thanks to the securitization plans, we made over EUR1b and the electrical system obtained EUR104m. So at the end of the year, the amounting pending from the system was EUR485m, which includes the debt corresponding to 2013.

 And all of this has made it possible for us to have a very robust capital structure, which you can see in the ratios on the left and the right of the screen. So our cash flow -- free cash flow shows that our situation is improving, and the coverage of net debt with respect to EBITDA is also improving.

 We are improving our position. And the figure is 4.2% with a lack of currency exchange risk, because our subsidiaries in Latin America are denominated in local currencies and so we believe that we have quite a healthy situation on that score.

 Now, if we analyze our operations, let's start by distribution in Europe. Now, distribution in Europe, our investments, as I was saying, fell by 16.5%. As a result of our reduction in investments in Spain, the new regulations which still have to be defined, there's not much margin for us to make an investment plan.

 And also you've got to take into account that supply points are stable and are a given, and therefore this is what it is. And sales fell by 3% because of the economic crisis.

 EBITDA fell by almost 4%, reaching EUR600m, and this was basically in Europe a result of the situation in Spain. The situation in Moldova was stable and the supply points were stable at 3.8m supply points. And we should stress the bad weather last year, which affected the Company's TIEPI.

 Now, in terms of gas, investments fell by almost -- rose, sorry, by almost 4% because the market is still not mature. But it still grows and it is growing because of -- well, the Company is not investing in building new things but it is investing in existing construction. So those existing constructions are adopting natural gas as the most efficient type of energy, and this has involved an increase in 150,000 new points in sale.

 But of course the net figure was lower because some people in second residences have disconnected themselves from the network. So the new contracts amounted to 150,000 but 100,000 disconnected themselves, so these were second residences. But this is something that is not likely to carry on for the next year, because the impact of the crisis is going to abate next year.

 So, this EUR1b in EBITDA corresponds -- well, approximately EUR100m corresponds to Italy and the rest corresponds to Spain. And we should emphasize that both in terms of gas and electrical distribution the EBITDA achieved was made possible by the efficiency plans I mentioned before. I also want to say that this year Gas Natural reached 36 new municipalities in Spain and our network was increased by 1,000 kilometers.

 Now, in terms of the energy market, I would like to mention that the electrical demand fell by 2.2% in Spain. However, the demand of conventional gas fell by 2.2%. This includes residences and industries but not combined cycles. This is a similar factor to other years. And this has been affected negatively because the weather was milder than the previous year in the last quarter of the year in general.

 Now, in terms of the reduction in electrical demand, we believe that the main reason has to do with the economic crisis, which is fortunately improving in Spain.

 Now, if we now jump into the electrical business, you can see here the production of Gas Natural Fenosa, which had a reduction with respect to the previous year of 9% production basically because of a lower production in coal and combined cycles. It is true that there's been a larger margin because this lower production of coal and combined cycles was largely compensated for by higher hydro and mini hydro production.

 Here, as you can see, the increase in hydro production of the Company last year was 166% and in mini hydro was 41%. And wind power also increased by 10%. So this generation, which has a lower marginal operation cost than coal and combined cycles, which lost production share, managed to offset the effects of the lower production in total terms.

 Now, the market share is similar in the ordinary regime with standard 10.6%; last year we stood at 20.7%. So the only new thing -- the only new elements are the fall in the consumption in Spain and the change in the mix because of weather conditions, basically water and wind.

 Now, in terms of the energy market, well, the electrical energy has had a 15% impact in our business because there's been a 15% reduction because of the severe impact of all the regulations that have been enforced this year. They have been partly compensated for by the change in the generation mix, there's been more hydro and wind energy, and also by the efficiencies that we have introduced.

 Production fell; the sales of electricity also fell. But I want to emphasize something very important, because the pool or the weighted pool, if you take a look on hourly production, fell by 9%. So all of these factors made the problem more severe. So there's been a severe impact of regulatory problems and there's been a fall of EBITDA of over 15%.

 In terms of the special regime, it fell by 2% as a result of the regulatory changes that have been quite significant, and this has been offset by a significant impact of the hydro and mini hydro production. New small hydro projects in Galicia have been commissioned. And in terms of the makeup of our wind production, you can see that in wind power we increased it over 10% and in small hydro over 40%, for reasons I mentioned before.

 Now, in terms of gas, the Spanish market fell last year by almost 8%, but not the conventional market. The conventional market was slightly lower than last year, 0.6% lower. The problem is still the fall of consumption to produce electricity.

 I want to remind you that distribution doesn't really pay attention to cycles; it only pays attention to conventional cycles. And so the distribution network is not really idle, because it serves a market that is stabilized and which can still grow.

 Our sales, in spite of how the market fell by 8% our sales only feel by 3.8%, slightly less than 4%, because in the conventional sector we're still having small growth. And in the electrical sector, we didn't fall as much as our competitors. You can see here the figures on this graph. We fell by 26% in gas supply cycles and the whole country fell by 33%.

 I want to mention that we have over 11m active contracts. Our number of customers increased by 1.7m residential contracts and 114,000 commercial contracts, and we are happy that we still have an active participation in this market, which is one of the most competitive markets in Europe and which is fully open and transparent. The infra-utilization or the underutilization of our plants makes it very easy to enter the Spanish market and sell here. That forces us to be very efficient both in logistics and commercial terms.

 Now, this fall in the Spanish market of sales -- this fall in sales in the Spanish market, our sales fell by 4%, as I said, has been compensated for by the increase in international activities, which of course give us a greater profit. We grew by almost 9% in our international sales, in Europe 42% and the rest minus 3%.

 This minus 3%, don't pay too much attention to it. This have very specific situation. The different circumstances give rise to these misadjustments. But the different sales made in Asia and Latin America fundamentally will still be thriving in the future.

 Okay. Now, please allow me to insist that our commercial strategy in Europe is a success with an increase of 42%. The rest of the world outside Europe, well, we're also going to thrive and the business is still our priority. It's still our capacity in terms of our -- well, our priority is flexible contracts, especially for GNL (sic - "LNG"), which allows us to combine gas and electricity strategies.

 And this, combined with the acquisition of new vessels, will make it possible for us to serve this market, which is a growing market which has margins that are still very, very significant, as we contemplated in our strategic plan.

 And please let me tell you that international natural liquefied gas are still growing. In 2009, our GNL exports -- or LNG exports only accounted for a minor percentage of what we sold, but last year they accounted for over 40%, which is a spectacular increase which allows us to become an international scale or a world level operator. And this will increase in 2006 (sic), when our contract with Cheniere in the United States takes off.

 Now, in terms of Union Fenosa Gas, the news here is the Damietta plant is still at a standstill because Egypt is not supplying, and this led us to a fall of almost 18% in terms of the gas supply received. Well, the Company will still have other sources from Oman but not from Egypt.

 So this meant that we had to moderate our sales both in combined cycles and industrial sales, and the Company still developed international activities for the sale of liquefied gas and also the Company's infrastructural results have also been positive.

 The Company provisioned EUR70m because of the problem of Damietta, and we still have the problem of the temporary stoppage. We haven't managed to reach a satisfactory agreement with the Egyptian authorities in terms of the resolution of this problem, but we believe that when the current political situation in Egypt stabilizes, and we hope it will happen soon, we can start discussing the details of the new agreement that should bring things back to normal.

 In terms of Latin America, you know that our -- you can see that our EBITDA was of EUR1.3b, and this in spite of the negative translation of exchange rates which was quite significant last year. In any case, we are diversified. Half is gas distribution, 26% electrical distribution and the rest electrical generation. Businesses are distributed and we are satisfied with all of them.

 In terms of the countries, the first country that contributes the most is Colombia, with 33%, and then Brazil and then Mexico 22%. Now, the problems have had to do with the exchange rate, basically, in Brazil, but our borrowing level in local currency will make it possible for us to control this problem and will make it possible for us to benefit from the high growth in these businesses in these countries.

 And we are positioned in a very good way, especially in gas distribution precisely in the areas where the growth potential is the greatest. Both in Mexico and Brazil the potential growth is enormous and we are bound to benefit. In Colombia, it is true that the potential market is lower, but it is no less true that in the area we're operating for gas distribution

 in the Bogota area, the market is still increasing and therefore every year there is more and more contracts and I'm sure that next year we will have further development.

 In Brazil and Mexico, in the areas we are acting, the potential is, without any shade of a doubt, very, very large.

 Now, if we now delve into gas distribution, EBITDA was EUR686m and it grew by 7.2%. In local currency it would have grown by 18%, so it's been a very sharp growth. Sales grew by 9% -- over 9% and the connection points grew by almost 4%, so this has been a very good performance.

 We are applying best practices, also developing efficiency programs and considering the possibility of finding interesting growth areas such as that in Peru where, as you know, in the south of the country we achieved a concession to develop gasification.

 In terms of the electrical distribution business, it decreased by 7.1% because of two factors, local currency and divestitures in Nicaragua. If we hadn't considered these two problems, divestiture in Nicaragua in local currency, it would have grown by 6%, so this has also been satisfactory.

 The most important investment was in the Caribbean and it enjoys a very significant market, with a growth in demand of 7%. We are confident that these two markets, the Panamanian and the Colombian market, will still be very active and will allow us to even improve these figures.

 In terms of generation, last year production increased by 5% and EBITDA also increased by 5%, in spite of the fact that those things are not connected, but EUR235m. And there's two projects underway; one of them is the 50 megawatt hydro power of Torito in Costa Rica and the 234 megawatt plant in Mexico, which is a wind farm.

 Finally, as a conclusion, I'd like to say that we are satisfied with the results. We've had poor electrical results in Spain, compensated for by the international business, which has had a very good evolution, and with a wonderful efficiency plan which has been very, very effective.

 We are still deleveraging, apart from the fact that we had to finance part of the tariff deficit that had not been contemplated before and lengthening the average debt of our Company. We have updated our strategic plan and nothing today indicates that we should change one single comma of it. And we will still have a 62% payout in our dividends.

 And that's all I had to say. Thank you.



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Questions and Answers
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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [1]
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 (Interpreted). So, we will now have the question and answer session, first of all the questions from the room here. If you have any questions, please identify yourselves and say where you come from. Please, first question. Yes, go ahead, please. This person here, go ahead.

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 Alejandro Vigil,  Cygnus Asset Management - Analyst   [2]
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 (Interpreted). Hello, good morning. Alejandro Vigil from Cygnus Asset Management. I have a couple of questions. One of them has to do with the prospects for 2014. I know you're not giving specific guidance but perhaps in a qualitative way, which are going to be the key aspects for 2014 and whether you will be able to compensate for the negative impacts of the regulatory measures introduced by the government in Spain.

 And the second question has to do with investment plan -- organic investment plans for 2014.

 And the third question is whether you can tell us anything about non-organic plans, because your balance sheet seems more robust now so what other possibilities are you considering outside your organic growth?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [3]
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 (Interpreted). Well, for the first question, 2014, well, 2014 we will have to follow similar lines. In terms of the annualization of measures in generation, etc., measures will affect the second half, so the impact will have to be higher because now they will be annualized.

 So this situation -- this negative situation will persist and we have to compensate for it with the good performance of the rest, so the good performance of the international market, and this is going to occur. And also the efficiency plan, which has gone off to a good start and which has been taken very seriously. So things will evolve along the lines contemplated in the strategic plan of the Company.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - Managing Director of Economics & Finance   [4]
------------------------------
 (Interpreted). Now, in terms of the organic investments, if we take 2013 I think it's a good indication of what will happen in 2014. But more and more, the international business, because of the projects that we are completing, especially the Bii Hioxo project in Mexico, well, the international share will increase more and more.

 And then there's one additional investment in 2014, has to do with the new vessel that we're going to be buying, which is not really an investment from the point of view of cash outlays but we will still increase in gas basis, reducing electricity. And in the rest of the areas we will more or less stay at the same level in terms of investments.

------------------------------
 Antoni Basolas,  Gas Natural SDG SA - Managing Director of Strategy & Development   [5]
------------------------------
 (Interpreted). Additionally to the investments contemplated in the strategic plan, we are trying to create our portfolio of projects, basically, internationally in the areas we are focusing on strategically, namely international electrical distribution and the development of LNG. Internationally, we're looking at brownfield projects, both in Asia and in Latin America, but there's nothing specific on that front.

 So, to summarize, this is all that we -- this is basically what we said in the strategic plan.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [6]
------------------------------
 (Interpreted). Any other questions?

------------------------------
 Miguel Medina,  JB Capital Markets - Analyst   [7]
------------------------------
 (Interpreted). Good morning. Miguel Medina from J (sic) Capital. Two questions. The first one. Something that attracted my attention was the strong increase in the TIETI (sic). Is that because of the climate or does that explain 100% that increase, or are these the consequences of cutbacks in investment and might this be happening in the future?

 And the second questions about one of the fact -- one of the players that is complaining bitterly. Everybody's complaining, but the co-generator section is complaining very bitterly. They're talking about closing down plants, not paying contracts, etc. Can this or could this have some effect on the gas activities in Spain?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [8]
------------------------------
 (Interpreted). Well, as regards the first, basically, the problem with the TIEPI has to do with Galicia. Last year, there were strong -- very strong storms in Galicia, which very severely affected the situation. In contrast with 2012, which was very good, 2013 was terrible. No, the cutback in investments has not had that effect. It couldn't have had any effect.

 As regards co-generation, we would have to look at what the true actual impact is, and secondly what will replace all that, what alternative there'll be. If we'll go from co-generation to simple generation, what will happen? There's no doubt that the measures are affecting the co-generators, yes, that the industries have installed.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [9]
------------------------------
 (Interpreted). Anymore questions in the room?

------------------------------
Unidentified Audience Member   [10]
------------------------------
 (Interpreted). Hello, good morning. (Inaudible) from [Bordona]. Two questions. One is about the possible changes in regulations in the gas market. I'd like to know whether, after the arguments on the differences between gas and electricity, whether you expect any change in regulation that makes gas more similar to the electric situation, or will it continue to be more associated with consumption.

 And then, as regards the gas supply business, I'd like to know whether you can give us any guidance as regards the margins you expect for the next year or two years in contrast or otherwise, compared to previous years.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [11]
------------------------------
 (Interpreted). Well, as regards the second question, we still think the same that we thought. There's going to be a good -- those margins will be more or less the same. They've gone up because of the climate, what happened, but we wouldn't move from the estimates for margins and volumes that we had a few months ago when we presented the strategic plan.

 As regards to the gas regulation system and distribution, which is our business, we don't think it would make much sense. We've heard that the Ministry says that it would be reasonable to associate remuneration with demand, with the market.

 So if that relationship between remuneration and consumption and supply points changed and became fixed, that would go against the logical ups and downs of income, depending on what the sector situation is. So that wouldn't be positive. I think that would be negative for the sector.

 I think that the gas system has shown over time that it's been going through hard times, and even then it works well and doesn't cause any problems. EUR300m-odd we've got now, deficit. That's our opinion. Problems have to be solved, of course, and update everything, but there are no reasons to change things radically in terms of what's happening because things work reasonably well.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [12]
------------------------------
 (Interpreted). Anymore questions?

------------------------------
Unidentified Audience Member   [13]
------------------------------
 (Interpreted). Hello. Good morning. My name is (inaudible) from [Banca Dos]. Two questions. One is you said that there's no agreement in terms of gas; will there be additional impairments throughout 2014?

 And the second one's financial structural issues. I think there's a lot of liquidity, a lot of cash in the Company this year. What are you going to do with that cash? Reinvest?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [14]
------------------------------
 (Interpreted). Well, the CFO will tell you more about this. Union Fenosa Gas has adjusted in line with the accounting standards, adjusted everything, all the numbers, figures. The plant that you have mentioned is very strategic for Egyptian interests because it's the way out. It's fundamental for the Egyptian economy.

 I think there will have to be a reasonable solution to this. Obviously, it depends -- it's a matter of time, but we're convinced that as soon as we can have a clear dialogue with a new government there and we can talk to people reasonably and in calmed, relaxed conditions, the solution will be found that benefits all parties involved. If it's necessary, we might have to introduce some adjustments and we'll do so if needs be.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - Managing Director of Economics & Finance   [15]
------------------------------
 (Interpreted). Good. We are calm. We've got the two possibilities. We can cover things one way or the other. We haven't made the decision yet.

 In the long run, our liquidity and cash situation will change what we do throughout this year. Maybe we'll reduce the cash flow available amounts. But that doesn't mean to say that we're going to do anything special, but of course there'll be a change in the balance of cash flow.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [16]
------------------------------
 (Interpreted). Any other questions in the room? No more questions? We go to the questions from -- on the telephone.

------------------------------
Operator   [17]
------------------------------
 (Interpreted). Javier Suarez, Mediobanca.

------------------------------
 Javier Suarez,  Mediobanca - Analyst   [18]
------------------------------
 (Interpreted). Good morning, everyone. My name is Javier Suarez from Mediobanca. I've got three questions. The first is as regards the review of the gas system. I would like to know whether you've started to set up meetings with the government and whether you think that the gas -- renewal of the gas sector is speeding up and will it take place in 2014.

 And what's your proposal to cancel out the tariff deficit, which is not large but which exists and which will depend, obviously, on entry into production of Castor or not?

 The second question has to do with the wholesale gas market, which has enormous growth, especially abroad. We've seen greater growth in Europe than in other parts of the world. Could you tell us what are the implications of this for your European margins? Are they significantly different in Europe from other parts of the world? I think they're dropping by about 3%.

 Then the last thing I wanted to ask you is the tariff deficit in the electric sector. We've seen the liquidation number 12. You've mentioned this slightly, but could you give us more details about this? Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [19]
------------------------------
 (Interpreted). As regards the first question, yes, there have been contacts. The gas sector has had contacts with the Ministry. We've had meetings with the Ministry to perform the preliminary studies that have -- that led up to the four points that the government has presented.

 I don't know when all this will come together. It might be the second quarter, but quite frankly I haven't got the information or the ability to give you a more specific answer.

 The tariff deficit EUR300m issue, that can be solved easily. Amortization with an interest -- a reasonable interest; that's a figure that can, quote/unquote, be absorbed by the gas market with relative ease. It's nothing to worry about, although it is true that at this time that deficit is being financed by everybody in the regulated gas market who's receiving income.

 So it would be a question of introducing a plan so that we can get back that money -- that deficit in a reasonable term of time. I don't think it's that difficult.

 Castor; I can't answer whether Castor starts up or not. Introduction of costs in the system and what those costs will be, I'm sorry, I don't know. The Ministry's looking at that. I don't know exactly what the conditions are. What income and what -- Castor will have income also, produce income, but this is something that I can't tell you about.

 As regards the wholesale gas market, remember that we're talking about sales to the final market. Most of these sales are not wholesale market but industrial and sometimes residential market. I would like to remind you that we've got a contract we've got to supply public centers of the Ile de France.

 Now, apart from specific one-off operations, we want to go to final customers, and that's what we're doing in Europe with our own commercial network and we'll continue to do that with the margins that we have. If we don't make money, we're not going to do it, obviously. If this doesn't work, and it doesn't necessarily have to work, we'll take gas to other places using our logistic and commercial capabilities.

 We're very pleased with our position commercially in Europe, and we will continue along those lines in France, Belgium and for some time we've started in Germany now.

 Liquidation 12; the information I have is what has been published, although it's true that there are some new costs that hadn't been contemplated, in our opinion. It's an opinion, but we think it's reasonable. There are income -- some income is lacking, the return of certain taxes that we haven't been paid back because the procedures are very slow.

 Also, special regime contributes with the adjustments that are being approved since July 1, 2013, so once that work associated with the renewable energy is finished, there'll be costs from the second half of 2013 that will be taken off what is the amount that is now being calculated. We think that probably the final deficit will be at about the figure I told you before.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [20]
------------------------------
 (Interpreted). Next question, please.

------------------------------
Operator   [21]
------------------------------
 (Interpreted). Jose Ruiz, Macquarie Group.

------------------------------
 Jose Ruiz,  Macquarie Group - Analyst   [22]
------------------------------
 (Interpreted). Good morning to everyone. I would like to ask two questions. One of them is about Brazil, distribution of gas, whether -- if the drought goes on in the first three months of the year, what are your expectations in terms of volumes of gas as compared to last year, which was truly tremendous growth? But the problem of the drought in Brazil is going to affect this.

 The second question is how the discussions are developing as regards distribution tariffs in Colombia, and when will we be seeing the excess charges of last year recovered in that country?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [23]
------------------------------
 (Interpreted). As regards Brazil, yes, they've still got the drought on. Well, there's been two months. They're using gas plants to produce electricity. It's too soon to say what's going to happen, but it continues.

 As regards distribution rates or tariffs, that's started -- negotiations have started, but they're only preliminary yet for the review of ordinary gas rates in Colombia. But the renegotiation of the gas distribution tariffs in Brazil has concluded in Rio. They were approved at the end of last year in line with what the strategic plan had foreseen, so it's solved in Brazil.

 In terms of gas distribution in Colombia, we're beginning conversations and negotiations for this to be done. It would be throughout this year.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [24]
------------------------------
 (Interpreted). Good. Next question, please.

------------------------------
Operator   [25]
------------------------------
 (Interpreted). Carolina Dores, Morgan Stanley.

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [26]
------------------------------
 (Interpreted). Hello. Good morning. Thank you for taking my questions. I've got two. The first one is in the fourth quarter, the activity of procurement and trading of gas, the margins went up but the gross margin and the EBITDA remained stable. For 2014, are the margins going to be near the average of 2013 or nearer the average for the last quarter?

 And the second question is about -- well, in 2014 you're going to reduce your debt by EUR1b or EUR1.5b. Will there be an increase in the dividend payout or not?

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - Managing Director of Economics & Finance   [27]
------------------------------
 (Interpreted). What happened in the fourth quarter in terms of procurement and amortization I think has to do -- in the wholesale gas or international or what we call industrial there are no changes. The margins are more or less the same. And then there's a certain increase but the change takes place in the retail market, which includes the Spanish retail market.

 On that chapter, in November/December there was a decrease in activity because of the climate. It's been warmer and sales have been -- we've had less sales and less income. And then, because there's a component, there's an association between the tariff and the [tour]. So it hasn't really got much to do with the wholesale market but with the retail market, and that's a specific situation that has to do with the winter of 2013.

 So, in terms of the forecast, we think that in 2014 and probably into 2015, the margins will continue to be in line with what we had in 2013 as an average, as you said.

 The second question referred to leveraging. As we said, what we think for 2015 is to have a level of 2 times the value of the figure for the EBITDA. We don't foresee any extraordinary action there. In 2014, there's not going to be any big, significant differences in terms of the ratio at the end of the year. Below 3 times EBITDA value, but there's not going to be a tremendous variation there.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [28]
------------------------------
 (Interpreted). Good. Let's pass. Let's go to the next question.

------------------------------
Operator   [29]
------------------------------
 (Interpreted). Manuel Palomo, Exane DNP (sic).

------------------------------
 Manuel Palomo,  Exane BNP - Analyst   [30]
------------------------------
 (Interpreted). Hello. Good morning to everyone. I would like to ask you a couple of questions. The first is about combined cycle plants and renewables. We've seen that the load factors of the combined cycle plants have gone down. Do you think there will be any change there?

 And also, as regards renewables, after what the recent -- after what the government has published recently, do you think there'll be any changes?

 You said you've been in touch with the government to review and revise gas regulations. My question is whether you've also spoken about revising electricity and what the reform of the housing and residential market might imply. Thank you very much.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [31]
------------------------------
 (Interpreted). As regards the first question, of course we will do whatever tests the legislation demands, but it's true that combined cycle plants are still providing a key backup service for the system. We're waiting for the hibernation standards from the government and what standards will regulate the capacity payments which are contemplated by the European legislation.

 There's a strange situation here that we have to clarify. These payments are vital for the functioning of the electric system because they're acting in the adjustment markets but also as a backup for renewables. That has to be sold efficiently, for the sake of the security of the system. We're waiting for that to be dealt with. And that would give us -- we're the main combined cycle plant operators. That would give us the possibility of guaranteeing electric supply in the system.

 I think that in spite of everything, when we talk about the crisis, quote/unquote, of consumption in December due to the lack of water and wind, combined cycle plants were absolutely key and vital and crucial to keep the electric system in Spain going. That is something that has to be solved and we are convinced that it will be.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - Managing Director of Economics & Finance   [32]
------------------------------
 (Interpreted). Yes, the new factor for the combined cycle plants in 2012 was 28%, and the sector's been about 11%.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [33]
------------------------------
 (Interpreted). Our average was 28%, our logistic capacity, our contracts and the availability of all our plants throughout the country.

 In terms of regulation of the gas sector, of course we've had conversations, and every time that the government asks for our opinion we will gladly give it, and whatever information they request. We've had no news of the reform of the wholesale market. Some requests for information have been made, but we don't know.

 Undoubtedly, this is a reform, a very deep and complex reform because it involves not just Spanish issues but really conceptual problems such as how do you organize a market where practically half of the offer is subsidized.

 That's a tremendous problem, and we're convinced that it will require deep and meticulous, careful care. I couldn't tell you what the solution will be, although we have given our opinion and we'll continue to do so every time we're asked for it.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [34]
------------------------------
 (Interpreted). Good. Let's go to the next question, please. No more questions in Spanish. Let's go to the --.

------------------------------
Operator   [35]
------------------------------
 Martin Young, RBC.

------------------------------
 Martin Young,  RBC - Analyst   [36]
------------------------------
 Yes. Good morning to everybody. I just have a couple of questions. The first relates to the rollout of your strategy in Latin America. I know you say that the strategic plan has not changed by one comma, but any tweaking of your thoughts on a country-by-country basis given the depreciation recently of the Latin American currencies? I just wanted your thoughts there.

 And then, secondly, we've seen the gas prices in the US move in an upward direction over the past month or so. To what extent does that impact the profitability of your LNG business, and does it have any impact on your thoughts around the profitability of the Cheniere contract that you signed? Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [37]
------------------------------
 (Interpreted). In terms of our situation in Spanish America, we're not going to change. We're surprised the speed at which the exchange rates have been adjusted. We foresaw that in the strategic plan, but it's taken place even before we thought.

 But it's also true that it hasn't happened in every country. In Mexico, for instance, it's not been very serious, the impact, and that's where we have a lot of money invested. It's happened more in Brazil, but not in Mexico. We are sure that -- well, a lot of the business, our business, especially in Mexico, is in dollars so it's not affected by this problem.

 And the third thing is that, normally, a phenomenon like this, a depreciation or devaluation, generates in those countries inflation which is carried onto the tariffs of regulated service that we give. So we're convinced that there'll be an effect that will be made up for in our income.

 And finally, and I was saying this before in the case of Colombia, we must remember the very, very high rates of growth, almost 7% in electric demand in that area.

 We think that if we put all this together, there's not going to be a change in strategy. There'll be minor adjustments in some areas, but nothing more.

 As regards to the Cheniere contract, we don't think that that is so important. It's true that Henry Hub has gone up in winter and in all markets there. Is because of the climate crisis in the US, especially on the east coast, which has increased, as is natural and it happens every year of the Henry Hub.

 These are very volatile markets and it's reached 7, 8 in the American market. In the Japanese market, it's gone above 20. It's a transient situation. As soon as the climate gets back to normal, it will drop again. It was somehow foreseen in our strategic plan that it would go up as regards the old values, but nothing that really dramatically changes our forecasts in the strategic plan has happened.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [38]
------------------------------
 (Interpreted). Good. Well, as we said at the beginning of the presentation, we've got to finish by 12. We've got a few questions that have been sent in via the Internet. Most of them have been replied to. Those that are pending, we'll get in touch with the people personally, by mail, email or phone and reply.

 So, without further ado, I'm going to pass the floor to the CEO to close the event.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [39]
------------------------------
 (Interpreted). Thank you. Nothing more. Thank you for being here and we're here at your disposal. We can continue to clarify things that maybe haven't been clarified for lack of time. And thank you very much for your interest. Thank you very much. Good day.

------------------------------
Editor   [40]
------------------------------
 Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.






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