Q1 2014 Gas Natural SDG SA Earnings Conference Call
May 06, 2014 AM CEST
GAS.MC - Gas Natural SDG SA
Q1 2014 Gas Natural SDG SA Earnings Conference Call
May 06, 2014 / 08:00AM GMT
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Corporate Participants
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* Luis Calvo
Gas Natural Fenosa SA - Head of IR
* Rafael Villaseca
Gas Natural Fenosa SA - CEO
* Carlos Alvarez
Gas Natural Fenosa SA - CFO
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Conference Call Participants
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* Fernando Garcia
Espirito Santo - Analyst
* Alejandro Vigil
Cygnus Asset Management - Analyst
* Gonzalo Sanchez
BPI - Analyst
* Javier Suarez
Mediobanca - Analyst
* Javier Garrido
JPMorgan - Analyst
* Jose Ruiz
Macquarie - Analyst
* Virginia Sanz
Deutsche Bank - Analyst
* Carolina Dores
Morgan Stanley - Analyst
* Martin Young
RBC - Analyst
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Presentation
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [1]
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(Interpreted). Good, thank you. Good morning, everyone. Welcome to this event.
We're going to present the results of Gas Natural Fenosa for the first six-month period of 2014. As usual they will be presented by our CEO, Mr. Rafael Villaseca, together with the CFO, Mr. Carlos Alvarez, and the Director of Strategy and Development, Mr. Antonio Basolas. And then we'll have, after the presentation, the Q&A session. It will begin with people in the room and then we'll we've questions from callers or Internet followers.
So thank you very much and I'll pass the floor to the CEO, Mr. Villaseca.
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [2]
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(Interpreted). Good morning to everyone. Thank you for being here at this presentation of results here in the room and remotely. This is the agenda. We've got, first of all, the highlights, then, we've got the financials. Then we'll talk about the different businesses and then we'll have the conclusions and have the questions and answers.
So, to begin with the highlights for the first quarter of 2014, on the slide you can see the negative aspects and the positive aspects.
Among the negative aspects we have three; the impact of the new regulation on electricity in Spain. These regulations have affected this quarter very adversely. They went in force, these regulations, at the end of 2013.
Secondly, the evolution of Latin American currencies as regards the euro, especially in translation, the transfer or the impact of the exchange rate differences in our results.
And then the mild weather in Southern Europe, Spain and Italy especially, during the first months of 2014, this has affected the energy consumption especially gas.
And it's important to say that these three negative aspects they will mostly be diluted throughout the year because as regards the regulations, a lot of the regulations that are affecting us negatively as regards 2013 started to affect our results as from July 1 last year. So throughout the year the comparison will get better.
Secondly, because the problem of the differences in exchange rates has to do with the relative strength of some currencies in Latin America, during the first and second quarter of last year, as the -- as we move forward comparison with last year will get better. And also because we expect and hope that the weather will be more balanced throughout the year.
As regards the positive aspects we have four. First of all, growth in gas distribution networks in Europe and Latin America. That's not surprising; Latin America our supply points are growing all the time especially gas but also electricity. And also it's important to point out that this growth is taking place in Europe. In Spain, in spite of the recession, the crisis, the importance of the natural gas market for homes and industry is growing and continues to grow.
We've also got another positive aspect and that's the good performance of gas markets and electricity markets in Latin America. Irrespective of the supply points, the gas and electricity consumption in Colombia and Panama have been very good.
Thirdly, the efficiency plan, which is working very well, and we expect to reach our aims. And finally, the good -- based on what we saw in the strategic plan, a good development of international gas markets in terms of volumes and margins. So, we have to say that we're confident to comply with the aims of our 2013-2015 strategic plan.
As regards the key financial indicators we have to point out that the net income has exceeded EUR400m, exactly EUR402 which -- and that is a decrease of 2.3% as regards last year. The EBITDA which has been corrected in accordance with the new accounting standards, is EUR1.2m (sic - see presentation slide 6 "EUR1.2b") and has gone down by 4.7%.
Investments have increased [by] EUR357m, 84%, but it's important to say that there's an atypical investment that has to do with renting systems and hasn't had an impact on the results.
And the net debt continues to decrease; in spite of some issues like the tariff deficit in 2013, has gone down as regards last year. But we'll look into this in further detail.
First of all, we have to say that we've adapted our accounting standards to the new IFRS 11 standards and these are the data. And when we compare with the previous year, tax year, we adjust the figures of last year in accordance with the table you can see.
The first quarter of last year has been adjusted to the new accounting standards, that means a decrease of EUR44m in the EBITDA, EUR12m in investments and EUR500m (sic - see presentation slide 7 "EUR504m) in net debt. That means that the comparisons are homogenous and figures will be in line with the new accounting standards.
If we look at the EBITDA, maybe this graph, I think, summarizes it quite well. The last year the EBITDA based on the new accounting standards was EUR1.285m (sic - see presentation slide 7 "EUR1.285b"). So in that quarter we've increased our EBITDA by 4.6%. That's good behavior of the activity variables, the operative variables.
But the Royal Decree number 9 of last year, which didn't apply last year and does apply this year has meant EUR76m less in EBITDA. And the problem of transferring the currency exchange differences has reduced the EBITDA by EUR44m. So that means that we've gone from growing 4.6% to decreasing our activity by 4.7%. And the adjustment based on the regulations and the exchange rate differences, both these phenomena, as I said before, will get better and flatten out as the year moves on and our business will balance itself out. And we are going to keep having good results.
As regards the efficiency plan, you know that the strategic plan for 2015 we should have had a savings of EUR300m annually. This first quarter of 2014 we've reached EUR143m. And our aim is to end this year with EUR200m. We think we're going to achieve that aim and to continue with our policy of adjusting and saving. And by rationalization of costs and optimization of all costs of the corporation we believe that we are going to reach that aim of EUR200m, well, those EUR200m in savings by the end of the year.
As regards the debt, the debt's been very positive, its evolution. It's leveraged on the free cash flow. Last year we had the debt that you can see here on the slide, EUR14b. So it's gone down by 0.6%. It's gone from EUR14.2b to EUR14.1b. It would have gone down more had it not been for something that we don't think will repeat itself which is the tariff deficit of EUR576m (sic - see presentation slide 10 "EUR566m") which is included in this EUR14.1b debt and which includes two deficits that shouldn't happen again.
First of all, EUR496m of the previous year which, as you know, should have been zero but because of changes in Spanish legislation we had EUR496m which has to -- had to be securitized. And that initially we were told was going to happen. We've got to securitize that; we hope to do it this year. And it's not going to repeat itself, because this year, as I'll say later, there's no deficit based on all the forecasts and the current legislation.
It is true that internally in the first quarter there's been a deficit of EUR70m which we financed with the rest of the sector. So this EUR566m in debt, that will not recur because of, as I say, the tariff deficit.
Another relevant chapter is shareholder remuneration. On April 11 a dividend of EUR898m was approved; dividend will be paid in July, based on the idea of paying out -- having a payout of 62.1% and a yield of 4.8%. And this is in line with our strategic plan. This has allowed us profitability of nearly 5% at the end of last year.
I also have to say, you know this but we'll remind you, the good performance of our shares. So at the end of the first quarter, at the top on the right, we've had -- we're way above the IBEX-35 and our European peers. And that situation is the same up until yesterday. So we're satisfied at the performance of our shares and we're committed to continue to do good work in that area and improve it if possible.
As regards the electricity sector reform, you know that in the past two years there have been a series of measures that have had a strong impact. Other measures are pending approval which you see on the right of the slide. And we have pending approval quite a few relevant aspects. We are conservative about them.
We're talking about electricity, for instance the Royal Decree on renewables, co-generation and waste, which will have an impact on our wind energy production and also on co-generation production, the Royal Decree on capacity payments, mothballing and wholesale market and other Royal Decrees on supply, self-generation, extra-peninsular generation which doesn't affect us so much.
So the impact of all the legislation of 2012 and 2013 will mean about EUR600m a year based on what we're already told you and reported regularly. And the measures that last year weren't -- had not been applied in the first quarter and have been this quarter have meant EUR73m; a decrease in the EBITDA of EUR73m as I said before.
Now, based on these approved and pending changes, if these changes are approved, what are our forecasts? Well, you've got it on this slide. As you see there's going to be an adjustment and we believe, firmly believe that this year there won't be tariff deficit and it won't be appreciable anyway.
The measures that have been taken you can see here. There's an increase of income, revenues, because of the toll increase, about 12%, up to EUR19.2b. And in terms of system costs, you see the impact on transmission, distribution, so second year of adjustment. And the costs of the system, transmission, distribution will go down. The worst happened last year.
And then in associated costs there's going to be a reduction of 22% in subsidies focusing basically on the reduction of almost EUR2b, EUR1.7b in terms of subsidies for the old special regime energies; renewables, co-generation and waste. Based on estimates of the regulator, these reductions will mean about EUR1.7b and focus on wind energy and will justify or will make the subsidies go down to EUR9.3b. So the key is this adjustment of the subsidies which is imminent. It will be published after it goes through Parliament and what have you.
And the debt servicing will go up by 11%, almost EUR3b. This is payment of principal and interest; principal debt or main debt and interests. And this is the plan and we believe that this year it's more than probable that we will finally balance out the accounts in the regulated electricity system.
As regards the gas sector reform, we've got to repeat something that we've said often, the tremendous difference as regards the electricity system or electric system. You know that we've [liquidated 2013] and those points had a deficit of EUR26m. So we've got to underline that in 2013 we had a deficit of EUR26m. In 2012 there was a surplus of EUR23m. And at the end of the year we think that it will be about EUR324m; EUR300m-odd will be the deficit of the gas system.
Now, if we bear in mind the volume of this deficit, which is really very low, and bearing in mind the measures that were taken, a moderate increase in tolls and charges, we are convinced that we are going to be able to handle this. And this deficit will not only not grow -- it's not growing -- but will go down.
As you know, it's been published by the media, the Ministry has asked for opinions, asked the companies for their opinions. And they're looking at the possible measures that might be necessary to prevent a worsening of the situation to solve the accumulated deficit. We don't think this is difficult; it doesn't really require wide-ranging measures because problems are minor.
And secondly, we believe that the differences as regards the electricity sector which might be present, which people might be thinking about, don't really make sense because the gas and electricity sectors or industries are completely different. The electric industry is a mature market with no potential. It's not the case in the gas market which continues to grow notably in spite of the crisis. There's a lot of gas to be installed yet in the country. And the increase of gasification in terms of increasing supply and supply points will reduce the deficit.
What the distributor collects or charges is much lower than what the system -- the income is into the system. So the more we invest in distribution, the less deficit there is automatically. And this is because of another singular thing. The gas market is subject to risk. Our income as a result of distribution is conditioned by the volume of gas in the system and the points of supply that we capture.
That has two very relevant effects. The first one is that investment is automatically limited by operators, by ourselves because we're not interested in investing if we're not convinced that there's going to be enough gas consumption for the figures to work out. And when that is guaranteed, well, then there is guaranteed income for the system. That doesn't happen in the electric market because remuneration is based on the volume of investment. It's not the case in the gas markets and it's important to bear that in mind.
And the other big consequence in terms of the system is that when volume of consumption goes down, things adjust themselves automatically because since there's less volume of gas in the system, if there's less consumption we charge less.
So what I'm trying to say is that the gas and electricity markets have got nothing to do with each other. And the problem of the gas market is not really relevant and it should not be serious. And we're convinced that it will resolve reasonably.
If we go into the financials, you've got the P&L account. Our EBITDA has dropped by 4.7%. Amortization has gone down a little bit at EUR387m. And if we bear in mind, our financial results are about EUR200m, almost 3% less than last year, the profit before tax goes down to EUR589m, that's 5.8% less; in accordance with our estimates slightly less than 20%. And the net income is EUR402m after taxes so it's a decrease of 2.3% as regards last year.
If we look at the breakdown of EBITDA by businesses, it's interesting because a lot of these phenomena I think will be limited to this first quarter. First of all, electricity distribution I'll just give you a flash. In electricity distribution, electricity, basically Spain, this is a problem of regulation. And in terms of gas basically it's Italy. Very, very mild winter also in Spain, but more in Italy, have led to a situation where there's a drop of 1% in the remuneration in distribution; that's because of the weather.
As regards the electric market or business, the liberalized business of generation and marketing, trading have led to a reduction of 3%. There's been a 3% reduction in the liberalized sector. In spite of the fact that it's liberalized, it's very strongly regulated and that affects the pool, the electric pool market. And the trading we've had a negative result which has been made up for by the policies, marketing policies that we introduced and that has lessened the impact of this.
As regards the regulated business in Spain, we're talking about the old regulated regime, our investments here are basically in wind energy which have been, as you know, most affected by the adjustment that we foresee will happen in renewables and specifically in wind energy.
[Distributors], EUR4m in absolute terms. And the business of supply has dropped by EUR9m and that's basically due to the same reason; the drop, especially in Spain, a little bit in Italy too, of consumption in homes because of the mild weather, that's affected our results.
As regards Latin America, there's a drop of 10%, EUR31m and the reason is always the same. Good operational behavior but the problem of the exchange rate differences in terms of our accounts. That's the [advance] that we look at in detail now.
Let's go to investments. As you can see, if we take away investments in the framework I was referring to, our investment in -- has dropped by -- our investments have dropped by 6.2%. EUR175m -- well, you've got it broken down on these graphs. In addition we've had EUR175m corresponding to a new LNG tanker and then the investment in Latin America has been about EUR22m basically into the construction of a wind park, Bii Hioxo wind park in Mexico. And there's been a drop in Spain because of what we've already explained.
As regards the debt, here you have the maturity profile. The net debt is EUR14.2b. We've extended our maturity profile and we're satisfied with the situation.
We have issued a bond recently and we've had a record both in terms of the interest obtained and also because of the amount of people that bought this bond. And the maturity from 2017 will entail 82% of our debt and the average maturity will be of over five years.
Now, if we turn to our financial structure, let me insist on something that I've said in the past, namely the fact that our risk is very well balanced. 82% is at a fixed rate and 87% is denominated in euros. Also 72% we obtain from capital markets which are very interested in all our issuing processes. And the average debt cost has been at 4.3%.
In addition, we have had a very good liquidity level which you can see from this chart. The liquidity is of almost EUR12b which is enough to cover all our financial needs for 24 months. And this is made up of EUR4.5b in cash and EUR7b odd in credit, amongst them the credit of the European Investment Bank. And in addition we would have the capacity to resort to the capital markets with obtaining EUR3.2b (sic - see presentation slide 22 "EUR2.3b") additional.
So we have a proactive policy to keep up this solid financial profile which you can see from this graph. This shows you our cash flow, our leverage. You can see the pre-tariff deficit which is 25% and the post-tariff deficit which is 25.9%. And you also have the net debt over EBITDA figures on the graph.
And if we also add to this our diversification in terms of our maturities and the lack of risk related to exchange rate, so this makes us highly satisfied. And we are convinced that our risk profile allows us to expect to receive higher ratings from agencies because our fundamentals are in line with companies that have ratings higher than ours.
Now if I focus on the analysis of operations, we shall begin electricity in Europe. This means Spain and Moldova. You will see that sales have dropped by 4% (sic - see presentation slide 25 "4.8%") and this is because of the temperature this quarter. And TIEPI is higher than the previous year and this is because of the weather. We've had storms in Galicia which always seriously affect our facilities. And on many occasions they normally occur during the first quarter of the year.
In line with this, investments have fallen by 10% -- have risen by 10% with respect to the previous year. But this EUR2m is not really relevant because there will be a general reduction of our investments in distribution because these are investments in Spain and, as you know, the regulations have restricted these investments. And so this EUR2m increase is not really relevant.
And the EBITDA fell by almost 4% because of the regulation affecting this business in a very particular way because the remuneration has been capped at 6.5% which is not really in line with the costs that this business should have. We still have a very ambitious retrenchment plan which has helped us very much balance this math. The number of supply points is already 4.5m in Europe.
Now in terms of gas, sales, gas sales fell by 10.3%. And this is because of temperature both in Italy and in Spain. In relative terms this temperature increase was higher in Italy than in Spain, but in absolute terms the impact was higher in Spain. So this weather has played against us this quarter but the connection points have increased by 1%. We've got nearly 5.2m supply points, 36,000 new supply points this quarter. And of course in Spain as you know the real estate market is in a slump, but we have gone to nine new municipalities. And therefore we have increased the network by 300 kilometers and this has increased, as I was saying, our supply points.
If we go on with gas distribution, there was an increase of [EUR3m]. This is not very much but we're still investing quite a bit of money in the gas distribution because it is -- these investments are justified. Investments in gas distribution are linked to obtaining supply points that consume enough gas to be profitable. This is related to the advisability that we should grow. The more we grow, the more money we make.
In terms of the EBITDA, it fell by 1.2%; not in Spain. In Spain it grew somewhat, grew by 1%, but it did fall in Italy. And in Italy it fell because consumption plummeted in the areas we operate because of the weather factor. But we think that this phenomenon will not be repeated in other quarters.
If we look at the gas and electricity demand in Spain, there's been a fall of 9%. And the reason for this once again is the weather. Temperatures have played against us this quarter. The demand of electricity fell by 1.8% in the quarter. This is 0.6% if we correct it for holidays and temperature. With these two phenomena, the fall will be reduced to 0.6%.
And now if we go into further detail, generation fell by 12.5% because, as you know, this first quarter was a period of very high and atypical rainfall. Normally the first quarter is not a very rainy quarter in Spain, but this year it was and there was a lot of wind power. And this resulted in lower [wind gap] and therefore a lower functioning of our natural gas and coal stations. But in addition there was a very sharp decrease in wholesale prices. And so our share went down from 20% to 18% in the ordinary regime market. These are still considerable figures, taking into account that our installed power is of around 15%.
Now, if we now turn to the electricity market in Spain, you can see that our production in the ordinary regime fell by 14%. Electricity sales fell by only 1.5%. So we partly managed to cover the problem with a good marketing policy. But the weighted wholesale price in Spain fell by 39% this quarter with respect to the price of the previous year. This was a very sharp decrease owing to regulatory reasons. When regulated producers use subsidized technologies, they create a very atypical situation. But in spite of all this we managed to retain our EBITDA level because the liberalized marketing, especially in industrial markets, greatly compensated for the fall in these markets which have an atypical component because of the higher rainfall and the higher wind power in this quarter.
Now, if we talk about the former special regime, as you can see, there was a much higher wind production and we took advantage of this; also a lot more water production. And there was a fall in co-generation because of some regulatory situations that we will look at later.
EBITDA fell sharply because most of our regulated generation regime is based on wind. And according to what we know, this will probably -- the system will probably be punished in the adjustments to be adopted by the government. And we have been conservative and this conservative policy has been such that there was a sharp fall in the EBITDA of the generation regulated business because of the wind generation.
Now if we look at gas, the gas business, we should mention that our sales in Spain have fallen by 11% and our international sales grew by almost 14%. Overall there's been a reduction of about 1%. So we are in a stable situation both in Spain and abroad.
In Spain there's been a reduction in most areas, especially combined cycles for the reasons explained. And there was also a decrease in consumption both in industry and households because of the mild temperatures that I mentioned before.
In terms of the international business the opposite has been the case. There's been a significant growth in Europe. Our marketing policies have been very successful in Europe for the marketing of liberalized gas.
Let me insist that other markets are behaving as we contemplated in our strategic plan for 2013 and 2015. So we managed to sell greater volumes and the margin policy is the one we contemplated initially.
So international sales accounted for over one-third of our total sales, especially in Asia and the Americas. We also incorporated a new methane carrying vessel to our fleet. And for 2016, the second half, we're going to be able to start operating with supplies from [China].
We've grown our contract portfolio, especially internationally and we should mention that we already have 11.3m residential contracts for gas, electricity and services that will provide us a platform that is very good for us. And service contracts have increased by 6% in the retail market.
Now in terms of Union Fenosa Gas, sales, overall sales have been 8.3% (sic - see presentation slide 35 "8.2%") lower. But we need to mention that even if they have fallen in Spain by about 20%, they grew outside Spain by almost 19%. And this has been such that results, the overall results have not really gone down. So the company really performed better than the previous year because the previous year we had negative results incorporated to our figures which were of EUR25m and this year the figure was EUR6m. And so the improvement of Union Fenosa Gas is evident.
We still do not get -- we're still not getting supply from Egypt. And so we're having talks with the Egyptian authorities, waiting for the political situation to improve. And of course we are defending our interests as much as we can.
Now in terms of Latin America, this is a graph that shows us our EBITDA divided by types of businesses on the left and geographical areas on the right. We are highly satisfied because both provide for stability and growth. Of the total of EUR274m EBITDA, half of this figure corresponds to gas distribution, 29% corresponds to electrical distribution and 18% corresponds to electricity generation.
As you know we use the PPA system. If you look country by country, 88% corresponds to three important and powerful economies, Colombia, Brazil and Mexico. Specifically Colombia contributes EUR95m EBITDA, Mexico EUR76m and Brazil EUR69m. On the whole, countries like Panama, Argentina and the Dominican Republic, between them contribute EUR34m so the profile is quite solid. And even if there are some problems with different exchange rates, when you transfer the results to the consolidated balance sheet, you can still see that our position is quite powerful.
And in this graph you can see that the EBITDA of the first quarter last year was of EUR305m. If we discount Nicaragua where we have divested, the figure will be EUR302m. The activity grew by EUR9m, 3%. So we would be at a level of EUR311m. But the problem of transferring the currency rate so is such that instead of growing by 3%, we have gone down by 10%. But this will be diluted in the rest of the year because in the third and fourth quarters we will already have exchange rates similar to those at present. So we don't think this is going to be a major problem.
Now what about gas distribution in Latin America? Well, it has a very high development potential. As you know, supply networks have exceeded 6.3m supply points with increases of 4%, especially in Mexico and Colombia. Sales have grown by over 2% with a spectacular increase in Colombia of 26% because of the increase in our industrial customers. These are sales that started occurring and which will still occur in the next two years because these are the contracts that have already been signed. These are industrial contracts in the area of Bogota in Colombia.
Now in terms of our investments and EBITDA in the business, the investment has gone down by 3%; this is EUR1m. We will still invest in this area because of the good prospects that it has. We already achieved 214,000 (sic - see slide 39 "241,000") new supply points with respect to the previous year, and we are starting to operate in Peru, where we expect to comply with all of the expectations.
As regards the EBITDA, taking into account the different currency differences, the EBITDA would be flat. If we discount the exchange rate, then we would be a bit lower, but if we don't, the EBITDA would be flat, so the business is still very strong, although, of course, we have this problem of the currencies.
Now, in terms of electrical distribution, there's been a very good operational performance. We have grown our sales, both in Colombia and in Panama, and there's also been an increase of 4% of our supply points, both in Panama and in Colombia. We are satisfied because of the growth in both countries of these businesses, and this means that our investments have grown in the areas that require such investments, and if we discount the effect of the exchange rate and of the divestiture in Nicaragua, so we can speak about strong growth, 12% growth of our EBITDA. And in accounting terms, unfortunately, well, it's overshadowed by the problem of the currencies.
Now, in terms of generation, Latin America, well, there's been a stoppage in Hermosillo, but this, of course, will be balanced out in the rest of the year, and we don't think that this will have a significant impact upon our EBITDA. As you can see, investments have increased, and the reason for this you know. It's the Bii-Hioxo plant. It's a wind plant in Mexico. We are building this plant, and EBITDA fell by EUR1m, which is not really important, and our results are still very good.
So let's go on to the conclusions. So we are very satisfied. We already mentioned what problems we have had to face, but in spite of all, we believe that we have achieved considerable results, taking into account the regulatory changes and the differences in the currency rates that I mentioned.
The management model is still focused on value creation, and this is something the markets have responded to very well, because we have grown by 11.5%, and this is going to allow us to keep complying with our dividend policy according to the strategic plan. All of these results underscore the importance of complying with the 2013 and 2015 strategic plan. Thank you.
Okay, so we will now start our Q&A session, and we will start by questions from people in the audience, in this room. First question, over here, please?
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Questions and Answers
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Fernando Garcia, Espirito Santo - Analyst [1]
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(Interpreted). Good morning, Fernando Garcia. I have two questions. What is your estimation for the gas tariff deficit this year?
The second question, you mentioned the situation in Egypt. I would like to know, I think you're working on a new supply contract from Israel, so could you explain this to us? And does this mean that you don't expect the Egyptian situation to be resolved in the short term?
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [2]
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(Interpreted). Now, with respect to your first question, the deficit for 2012 was not really a deficit. It was a profit, and in 2013, too, and so the situation is very good. Of course, there's this EUR100m gap that needs to be resolved.
In terms of the other topic you mentioned, I don't know much. It's a significant investment, but the amortization period is long, but it's going to be income. I don't know much more about this. I can't say much more, apart from the fact that this investment, of course, will have a counterpart, because in order to incorporate it into the system, we will have to be operational, so I don't know really how the ministry will calculate its impact.
But I would like to respond to some of the information published, which mentions some really absurd figures in terms of the impact of this investment. Some of the figures published make no sense at all. We believe that there will be a regulatory framework, there will be income, and expenditure will be one more heading, but not to the extent mentioned by the press.
Now, in terms of Egypt, it is true that the area, there's a kind of square kind of formed by Cyprus, Israel and the coast of Egypt, which has a lot of natural gas reserves in this area, generates production which is much higher than the consumption of the countries involved. And so this makes the plants in those areas especially valuable.
In this case, Union Fenosa Gas is exploring all possible avenues in order to make the most of any possibility. There's a strong will to study and explore possibilities to monetize the gas in that area of the Mediterranean, which is very important, and our plant there has a very strategic position.
In Egypt, they have a lot of problems. In the short term, we don't expect any solution to resolve the problem immediately, but we are convinced that Egypt has significant gas reserves, which of course they will want to exploit and use to guarantee its income of foreign currency. And when the political situation is resolved, they will tackle this question, and the two plants, they will have to play a strategic role, because they are a very important source of income for the country.
We are now negotiating. You know Fenosa Gas is negotiating and exploring alternatives and taking steps to safeguard its interests.
Any further questions from the floor here?
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Alejandro Vigil, Cygnus Asset Management - Analyst [3]
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(Interpreted). Hello. Good morning, Alejandro Vigil from Cygnus Asset Management. I want to insist on the gas tariff deficit and provide some figures. It is not concerning but demand this year is falling, and could you quantify what the entrance of Castor will entail? Are we talking about EUR100m or EUR200m, perhaps?
And the second question is, well, I know you don't guide specific guidances, but if you look at the beginning of the year, it seems that this is going to be a very stable year for profit and for dividends. Could you mention something about this?
And the last question has to do with opportunities to purchase assets. The media have published news about the possibility you may buy something in Latin America or other regions in the world.
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [4]
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(Interpreted). Well, first of all, the question of the debt of Castor, I don't know what the structure of the Castor transaction is, and it's not really related to our business. There's many things to be said here.
Our business in the regulated system is gas distribution, and gas distribution is not linked with underground storage, so the possible deficits or profit generated by [Castor] is not really related to us. And, secondly, I don't know where you get this figure of EUR100m, and thirdly, I don't think this is a relevant figure as far as the gas sector is concerned, because if you take into account the income of the gas sector, that figure of EUR100m is not really relevant.
And let me say this, that this is an investment that produces income, and therefore, let me insist that this has no direct relation with distribution. Secondly, it is an investment that has income, and thirdly, if you compare it with the overall income of the sector, it is not a very important or a very significant figure. I don't think that this will be a problem, and if it was, it could easily be solved.
In terms of gas consumption, it is true that the first quarter was bad, and you know the reasons for this. I mentioned the higher temperatures in the previous year, but the situation of the gas sector is different.
From the beginning of the crisis, in 2008, gas consumption in Spain has risen by 5%. It went down in combined cycles, but let me say, the distribution system doesn't work for combined cycles, so gas distribution in Spain in the height of the crisis had to meet a demand which was 5% higher. And it is still growing.
So if we speak about the gas sector in relation with our distribution business, we should do it in terms of growth and the need of more infrastructures. Let me insist that any solution to this problem obviously -- well, it doesn't make any sense, and I don't think anybody is considering this -- well, what is the big problem?
There's gas infrastructures that are underused, fundamentally because of the stoppage of combined cycles. So the country was equipped with a high gas component, but then you know what happened with the electrical sector. But this is not the case of distribution.
Our business hasn't been affected at all. It has been affected by the question of combined cycles, but not because of this, and so what will be the solution to this? Well, to increase gas consumption so that all infrastructures, not just distribution infrastructures, are more operational. This means that we should increase industrial and residential consumption, and this also means increasing gas distribution. There's no other solution, I'm afraid.
So it's not just the quantitative scope of the problem that we need to tackle, which is minimal, but the future of the sector points to the need of increasing our distribution capacity in a country that is not very much gasified. We are at 50% of the European average, and also, every new customer that joins the gas distribution system gives us higher profit.
So this leads us to a situation which really is -- which really makes us very calm. We need to update our gas system, because the parameters haven't been changed in many years, and so it's only natural that the government would like to revise it, but this cannot be compared with other sectors, such as the electrical sector, where the problems are very different, and the situations are also very, very different.
In the gas system, there's no subsidies, and in the electrical system, there were almost 14,000 different subsidies. And so the gas system didn't have any structural problem, and so the adjustments, if they are made at all, will just be minor.
Now, in terms of other investments, our Company is studying its portfolio to see whether some things are -- well, perhaps are not necessary and we might want to get rid of them. And you also [know] that our strategic plan contemplates the businesses in the markets where we want to grow, and we haven't made any decision yet, but we will look at any possibility that emerges in the markets we want to be in, which are basically three.
And we will study them very carefully, but we will be extremely cautious if we do make a decision to invest any money. Our ability is to develop our greenfield business, because this is the type of business that generates most value. And if some opportunity comes about, we will study it.
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Gonzalo Sanchez, BPI - Analyst [5]
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(Interpreted). Hello and good morning, Gonzalo Sanchez. (technical difficulty).
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [6]
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(Interpreted). Yes, we don't give guidance, and we're not going to make any exceptions, except for one. We are going to comply with our strategic plan for 2015, which is not so far away. Our current situation and our provisions, forecasts, make us believe and ratify that Gas Natural Fenosa is going to comply with the strategic plan that we told you about.
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Gonzalo Sanchez, BPI - Analyst [7]
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(Interpreted). Hello, good morning. Gonzalo Sanchez from BPI. I had two questions, one about the regulation reform of the gas sector. Have you got any indications in terms of timing or when might we expect some solution on the side of the gas market and on the side of distribution and regulated activities?
And the second question is about potential hibernation of combined-cycle plants for electricity production. Is there any news about that? Is there any? Have you got any dates, or how will that be done, or is that just stagnant?
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [8]
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(Interpreted). Well, first thing, based on the news we have, and this is just an opinion, it seems that the new legislation of the gas sector will be approved by the last quarter of this year, but this is a personal opinion. It's not been confirmed.
I think that things are working in that direction. We might foresee that it will be done -- it will be done through the legislation. The ministry has been working on it for some time. It would make sense that before the end of this year, we can say that the framework will be ready and set up. That would be a reasonable estimate. Nobody's told us, but that's what we consider on the basis of our opinion.
In terms of hibernation, this is one of the pending issues. We think that work is being done in this regard, and something will have to be done. We've got an issue that has to be solved.
On the one hand, we've got the current regulation, which affects the liberalized market, and that's an irony, but that's the case. The actions of the government on the electric generation market are leading to a situation where combined-cycle plants are being left out in the dark, but they are absolutely indispensible to back up the supply, and that's got to be solved, because it's not possible to have a situation where, because of the regulations, the combined-cycle plants are going to be left out of the picture.
And at the same time, they're going to be used, so this is going to have to be solved in one way or another, technically and financially. The ministry has told us about this several times. They're interested in approaching this.
Other European countries, for instance Germany, are doing something about this, and we might be able to do something similar in Spain, but the circuitry of state for energy is working on it. We know that.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [9]
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Any more questions in the room? No more questions in the room, so we'll go to the callers.
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Operator [10]
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(Interpreted). Javier Suarez, Mediobanca.
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Javier Suarez, Mediobanca - Analyst [11]
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(Interpreted). Hello. Good morning to everyone. My name is Javier Suarez. I had three questions. The first one is about the situation, geopolitical situation, in Russia, the Ukraine. I'd like to know your opinion about how this might affect the business plan of your Company. Europe needs to find alternative sources of gas, and this might open up potentially good ideas for your Company.
Second question is about the accounts. Don't you think it's excessive for the Company to have a cash of about EUR4.5b -- cash flow of EUR4.5b with the debt that you have? Could you indicate the way how this could be corrected because, from my point of view, if you compare the amount of cash flow with the debt, it's excessive, in my opinion?
And then the third question, about possibilities of buying anything in South America. In the media, there's been reports about your interest in Colombia. Could you give us some information about that? Thank you very much.
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [12]
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(Interpreted). Well, I'll answer the first and third question. The Ukraine, the crisis in the Ukraine, as you know, is not affecting the Spanish market directly because we don't get Russian gas at all in Spain, and we don't carry the risks of other Central European countries.
In the face of supply security policy to cover the 60 BCMs that comes through the Ukraine, there are not so many alternatives, and it's obvious that one of them is to do it through the Iberian Peninsula, because the peninsula is an air carrier, so to speak, for gas coming into Europe. We've got eight plants, including the one in Portugal, gasification plants, and we've got pipelines. So we could bring -- gas for the whole world could come through Spain, be regasified here and supply Central Europe. But it's absolutely key, in order to do that, to have something that we don't have, and that is interconnection with France over the Pyrenees.
If that problem were solved, there's no doubt that Spain could -- and Portugal -- Portugal but especially Spain, could collaborate very strongly in solving supply problems in Central Europe. Beyond that, it's obvious that our position as a company is what it is. We don't foresee any risks in supply of our customers in the next few months.
There might be volatility, depending on the political situation. You know that in general terms we don't take up positions as regards these issues. We're conservative. We'll continue to be so.
One of the alternatives that the European Union might consider to cover those supply risks, one of them would be maybe to consider the possibility of Spain letting in gas from all over the world.
As regards purchases, I've referred to that before. I would say the same again. We'll study anything.
Isagen. Isagen, we qualified to participate in a project, and we're going to study it. Isagen is an excellent company that the Colombian government wants to privatize, although now the process has been legally suspended because of differences that have to do more with politics than economics.
We don't know how that will be solved or when it will be solved and whether, finally, the financial conditions will be of interest or not, but we are initially very interested in this large project, an we're doing a follow up. We'll see how it comes to an end.
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Carlos Alvarez, Gas Natural Fenosa SA - CFO [13]
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(Interpreted). The second question that you asked, about the balance between the cash flow and the debt, when you look at the debt, EUR14.2b, that's the net debt. If you go to the page 20 of our presentation, you've got the breakdown of net and gross debt. Gross debt is EUR18.7b, and that compares with the EUR4.5b, and that graph, you'll see that there is the maturity of 2014. The maturities are EUR3b, and of those EUR3b, there's an important part, which is a bond that will mature in June, which is EUR2b.
So that, the fact that we've got that amount of cash flow is just temporary, because that will balance itself out by June.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [14]
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(Interpreted). Good. The next question, please.
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Operator [15]
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(Interpreted). Javier Garrido, JPMorgan.
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Javier Garrido, JPMorgan - Analyst [16]
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(Interpreted). Hello. Good morning. I've only got two questions. The first one as regards or about the impacts of the weather on gas trading in Spain, could you quantify the exact impact of the mild weather on the marketing, gas marketing results?
And the second question is about the impact that the Royal Decree number 9 has had on the electricity business in Spain, liberalized business. Could you tell us how much and how much as regards in comparison with last year? Thank you.
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Carlos Alvarez, Gas Natural Fenosa SA - CFO [17]
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(Interpreted). Well, I think we're talking -- I'll start with the second question. The first question, the impact in Italy on sales is 16% decrease, which is basically what produces the reduction of the EBITDA for Italy.
In Spain, I'd say that the decrees that you've seen basically corresponds to residential -- the drop in residential consumption because of the mild weather. As the other question, you've asked about the breakdown of the impact of the Royal Decree number 9.
As we've said, a relevant part of those millions is absorbed by the special regime. There's a slide, a page of the presentation, that also indicates that. To do an estimate of the draft for adjusting remuneration of wind parks, etc., what affects us most is the wind part, and I would say because there are a series of wind parts that are not being remunerated because they've had 7.5%.
So they'll go to the market. The market is depressed, so part of this is due to the special regime. To give you a datum that will help you, in the third quarter, the impact of the Royal Decree number 9 was EUR50m on our accounts. In the fourth quarter, it was EUR51m. In this quarter, it will be EUR76m, I've said.
So that increase is basically due to the estimate because of special regime. The rest is more or less the same, so the ordinary regime, it's the impact that we saw in previous quarters. The difference between EUR50m and EUR76m has to do with those estimates that we hope are conservative.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [18]
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(Interpreted). Next question, please.
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Operator [19]
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(Interpreted). [Jose Ruiz, Macquarie].
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Jose Ruiz, Macquarie - Analyst [20]
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(Interpreted). Yes, just two questions. The first has to do with I think that you've told us the impact on profits. Could you give us the EBITDA figure in the first quarter on Union Fenosa Gas?
And the second question has to do with the combined-cycle plants that are operating on the basis of spot prices. I would like to know whether in this first quarter they've been affected by the strong drop in combined-cycle plant production.
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [21]
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(Interpreted). Well, to answer your second question, we don't operate with spot gas, spot market gas, so the combined-cycle plants are covered by our own system of supply. We don't operate on the spot markets to buy electricity, so I can't tell you. I can't tell you about that, because it's got nothing to do with us, if I've understood the question correctly. I haven't got the figure here, but I'll let you have it.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [22]
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(Interpreted). Next question, please?
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Operator [23]
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(Interpreted). Virginia Sanz, Deutsche Bank.
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Virginia Sanz, Deutsche Bank - Analyst [24]
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(Interpreted). Yes, good morning. I want to ask you to clarify the answer you've given Javier Suarez from the Russia and the Ukraine problem. If the situation gets worse and they're in urgent need of gas in some countries this year or next year in the liberalized market, are things so limited that you couldn't make use of this opportunity and sell some more gas to Europe to countries in need of gas, because of the conflict?
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [25]
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(Interpreted). Well, in general, our policy is to limit things and adjust them, and we don't start -- we don't speculate, and we don't play in that arena. Our portfolio for supply -- if we talk about -- we can talk about the end of 2015, the end of the strategic plan. Most of our operations of supply and sale are closed. Not all of them, but we don't run risks, as you know. That's not our game, although possibilities do exist, and there's always potential for running off excess gas or whatever.
We can send gas to markets that have a greater need and pay a higher price. That's always a possibility. If we're talking about companies that have the expertise, the customer portfolio and the logistic ability to do these physical operations that we might do, but if that arose, we would collaborate. But our position is usually we work on the basis of closed contracts.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [26]
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(Interpreted). Good. Next question.
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Operator [27]
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(Interpreted). Carolina Dores, Morgan Stanley.
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Carolina Dores, Morgan Stanley - Analyst [28]
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(Interpreted). Hello, good morning. I've got two questions. The first one, on the liberalized gas market, do you think that during this year volumes will be stable as compared to 2013? Or do you expect to close the year with any changes?
And the second question is about the performance in Brazil. Without the exchange rate effect, I think the EBITDA of Brazil this six-month period -- what could we say about Brazil? Thank you.
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [29]
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(Interpreted). Well, as regards the first question, if I've understood you correctly -- I couldn't hear you very well, sorry -- we expect the volume to be similar to the previous year, based on the operations. We are having less sales in Spain, more sales outside of Spain. That's the general progress of things.
Not so much what we've seen in the past quarter, because the first quarter situation has been extreme because of the high temperatures in Spain. It's not reasonable to expect that this will continue to happen throughout the rest of the year, so there's not going to be such a huge difference. But in general, the Spanish market, international market, things will continue to be more or less the same in terms of volume and the margins that we've had.
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Carlos Alvarez, Gas Natural Fenosa SA - CFO [30]
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(Interpreted). As regards Brazil, there is a EUR2m -- there's been a EUR2m difference there in terms of the decrease, but there's been no significant adjustment in terms of the tariff adjustment that we've had.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [31]
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(Interpreted). Good. I think that's the end of the questions. We'll go to the questions in --
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Operator [32]
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The first question comes from Martin Young from RBC. Please go ahead, sir.
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Martin Young, RBC - Analyst [33]
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Good morning to everybody. Just a couple of questions, getting back onto the issue of regulatory reform in the gas industry in Spain. And the first one is, I'd be very interested to know, given your suggestions that we could have a solution by the end of this year, the amount of dialog and involvement that you've had with the ministry.
And then the second question is to help me understand your position about increasing the reach of gas distribution being a potential solution to all of this, but how can you really be so confident that there won't be some adverse impact on the revenue that you receive for the utilities distribution in Spain? Thank you.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [34]
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Sorry, Martin, the audio -- could you please repeat your questions slowly, because the sound quality of your phone connection is not very good.
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Martin Young, RBC - Analyst [35]
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Okay, apologies for that. It was two questions around the issue of tariff reform in Spain. The first question, in relation to gas distribution, was to what extent you have had conversations and involvement with the ministry given that you believe a solution could be in place in the fourth quarter of this year.
And then the second question was around I totally understand your position in terms of promoting distribution and increasing distribution volumes and connections, and part of the solution, how can you really be so confident that there won't be some adverse impact on the remuneration that you receive for the activity of gas distribution in Spain?
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [36]
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(Interpreted). I think I've understood -- I haven't really understood the details of the question because of the sound. I think I've got the gist of it. I'll try to tell you about the adjustment in the gas sector.
Yes, there are conversations with the ministry, based on the fact that the ministry is asking all the companies -- asking for data and opinions, and obviously we have been involved in that process. We've answered, given our opinion, and based on that, our conclusion is that -- we can't really call them conclusions.
It's a hypothesis about what we expect from the adjustment in the gas sector, which I understand the word itself, adjustment, is an exaggeration, I think, because the system the previous year had a deficit of EUR26m. I think you can't really talk of an adjustment, but if you want to call it an adjustment, call it an adjustment, but it will be reasonable.
We, because of what I've said, believe that the adjustment won't be significant in terms of an impact on our accounts. It's true that we might have to reduce the accumulated amount, but measures will have to be taken to increase the distribution of gas in Spain as an indispensible measure to start up infrastructure for regasification and transmission, which are underused. And we are convinced that those measures to promote distribution and the efficiencies we can gain the field will palliate -- very greatly palliate -- any adverse effects of the adjustment. That's what we're convinced about, and today we still think the same.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [37]
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Good. Any more questions?
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Operator [38]
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There are no further questions. Thank you.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [39]
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(Interpreted). Good, well, after the questions from callers, telephone callers, we're going to finish with a question sent through the website. Practically all of these questions have been replied to. There are a couple of questions that have to do with figures. We'll reply in writing.
But just a couple of questions that I would mention that refer to the financial structure, which are the first, could you tell us in the light of the drop in debt whether there might be a change in the divided policy?
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [40]
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(Interpreted). Well, no. No, we're not. We're going to continue with our policy for debt and for dividend distribution, which is included in the strategy -- strategic plan.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [41]
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(Interpreted) And the last question has to do with our comments about the rating agencies. Do you think your rating is going to be increased over the next 12, 14, 24 months, and what ratting do you think you'll get? What's your aim?
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [42]
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(Interpreted). Well, we expect our ratings to be increased, and they should be increased immediately, in our opinion, if we're compared with our peers in Europe. Figures, strategies, we're in a perfectly good position as regards those, and they have higher ratings. So after resolving the issue of sovereign risk, we couldn't -- we wouldn't really understand it if our ratings don't go up in the near future.
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Luis Calvo, Gas Natural Fenosa SA - Head of IR [43]
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(Interpreted). Good, no more questions, so we'll finish the Q&A session. And without further ado, I'm going to pass the floor to our CEO to close the meeting and the presentation. Thank you very much.
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Rafael Villaseca, Gas Natural Fenosa SA - CEO [44]
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(Interpreted). Well, thank you. Thank you for being here, physically or remotely. Thank you very much and see you in the next quarter.
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Editor [45]
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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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