Q2 2014 Gas Natural SDG SA Earnings Call

GAS.MC - Gas Natural SDG SA
Q2 2014 Gas Natural SDG SA Earnings Call
Jul 24, 2014 / 08:00AM GMT 

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Corporate Participants
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   *  Rafael Villaseca
      Gas Natural SDG SA - CEO
   *  Carlos Fernandez
      Gas Natural SDG SA - MD of Economics and Finance

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Conference Call Participants
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   *  Pablo Cuadrado
      HSBC - Analyst
   *  Javier Suarez
      Mediobanca - Analyst
   *  Alberto Gandolfi
      UBS - Analyst
   *  Jose Javier Ruiz
      Macquarie - Analyst
   *  Jorge Alonso
      Societe Generale - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Manuel Palomo
      Exane BNP Paribas - Analyst
   *  Martin Young
      RBC - Analyst

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Presentation
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Unidentified Company Representative   [1]
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 (Interpreted). Good morning everyone. Welcome to this presentation of results of Gas Natural Fenosa for the first half year. The presentation will be given by our CEO, Mr. Villaseca, together with the CFO, Mr. Carlos Alvarez, and the General Director for Strategy and Development, Mr. Antonio Basolas. After the presentation we'll have a Q&A session, beginning with the people in the room and then we'll take questions through the Internet and on the telephone. So without further ado I pass the floor to our CEO, Mr. Villaseca.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [2]
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 (Interpreted). Good morning everyone. Thank you for being here physically and remotely. In accordance with our agenda, which you see on the screen, I'm going to focus on these four points and then we'll have the questions and answers. First of all, highlights, this first part of the year, then financial figures, financials, then analysis of operations and finally we will have some conclusions.

 So if we go to highlights, we have to underline financial indicators that you see in this chart. The net income, after accounting what we got for our, for the sale of our telecommunications business, grew by 19.5% and reached EUR932m. The EBITDA has gone down by 3%, down to EUR2.4b that we'll break down into businesses later. Investments, material and immaterial, have grown by 15% basically as a result of accounting for the purchase, time charter purchase of a new methane ship. But this is an investment that we haven't paid in cash so it's accounted for but it's not been paid for.

 The net debt continues to go down. It's gone down by 5.5% versus the same period for last year, down to EUR13.4b. Now this includes the amount that for the tariff deficit in the electric system for 2013 and the tariff deficit up to now in 2014. If there were -- these debts were not present that we've got to collect, our debt would be EUR12.8b.

 It's important to talk about the recent auditing and legislative measures in Spain that have affected the gas sector. Measures in Royal Decree 8/2014 affect all the gas industry and we should underline that undoubtedly they are going to give the sector greater stability, predictability. They will also ensure the mechanism for that stability, financial stability to be firm and they are going to incentivate the industry so that our distribution activity can continue to grow.

 The measures have been set down for the accumulated deficit that might exist at the end of the year is refinanced over a certain period. Regulatory six-year periods have been set up and also the rules to administer this sector which, as you know, did not have important problems but did have some specific moderate imbalances that will now be corrected.

 As regards distribution, which is the aspect of regulation that affects us more directly, and in spite of the concerns of the market it's necessary to say that, as we foresaw, the parametric formula continues for remuneration of distribution. And that makes sense because this sector is still growing. Where Spain is not highly-gasified country, it has a higher development potential. Therefore remuneration should look towards increasing efficiency and growth. So the parametric formula will continue to be used, but it will be corrected in order to incentivate growth, focusing on higher volume customers and modern network expansion into new municipalities.

 That's something that satisfies us because it will allow us to continue to operate on a market which, in spite the important crisis in Spain, has allowed us to continue to grow and we will continue to grow after these measures.

 Remunerations have gone down for all businesses that are regulated. And specifically in distribution, our distribution businesses, we thought that the impact of these measures this year, since the measures will come into force on July 5, will be about EUR45m.

 Within regulation we have to say that the details of the adjustments of remuneration for premiums, for renewables' cogeneration, have come out. There's going to be standard values to be paid out throughout the life of the asset, and that will fix and set all the remuneration parameters for the different technologies. This is in line with the royal decrees that have been published, and the ministerial orders that have been published this year. This is nothing new for us; it was more or less what we calculated and therefore our investment in renewables, we really haven't got much more to say, just to indicate that this important chapter of adjustment of the tariff deficit has been closed.

 The other important question is the sale of our telecommunications branch. As you know, because we announced this in our strategic plan, all the assets, strategic assets that are not core business of our Company -- telecommunications is one of them -- are subject to review. And there was the possibility that's being confirmed, of selling this, and therefore the Company sold it for EUR510m. And that money will be used to finance growth activities. It's been a good opportunity that has allowed us to achieve gross capital gains of EUR252m. It was an interesting business, but which was not one of our core businesses.

 We also have to say that we've continued to work along the lines of growth that we'd set down for our Company, basically three, liquid natural gas, distribution and the international generation market. We've got things to tell you here.

 In mid-stream gas business we've sold -- just signed an agreement with Cheniere for a plant on Corpus Christi in Texas, to get supply of 2 bcm for over 20 years. It's a long-term operation similar to the one we've signed with the Cheniere plant in Louisiana. We've also opened up a new market, commercial market in Chile with a long-term contract to start in 2016, which fits in very well with our portfolio for sales and purchases. It's an international long-term market that fits in very well with our strategies.

 And we've got to also say, as regards gas distribution networks, that we've signed an agreement to develop our gas distribution network in Brazil. We've signed with CEMIG, the Brazilian company. And over the next few companies -- months we are going to look at how we can set up a gas distribution holding in Brazil that can address new investments in this big, large country, Brazil, which has several important natural gas development projects in different states. This would be done with our contribution.

 As is natural, we're applying the new accounting rules that were introduced in 2011, IFRS 11, and I would like to remind you that this means that our EBITDA has gone down by EUR137m versus what it would have been applying the old rules, and our debt goes to EUR393m. All these figures for 2014 and 2013 are now in line with the new accounting standards.

 As regards the evolution of our EBITDA this six-month period, it's important to underline that in line, in accordance -- based on the normal operations of the Company, there's been a growth of 5.2% in the EBITDA, EUR2.6b. But we've got two negative effects, which have led us, have caused us to only have EUR2.4b EBITDA. That's a 3% drop.

 Those effects are the Royal Decree number 9 last year, which wasn't enforced fully in the first six months and this year has forced us to make regulatory adjustments to the value of EUR132m. Those adjustments weren't present last year and are present this year. And secondly, the different exchange rate and rate differences -- exchange rate differences, referring to Brazilian and Colombian currency and other South American currencies, have also led to a drop; currency translation adjustments.

 And we're going to talk about this later, but I wanted to tell you that these phenomenon, these two phenomenons, which mean that we are talking about more than EUR200m in the negative, have been made up for by the international gas activity, which is working well, in accordance with the plans that we presented in different occasions and that are included in our strategic plan.

 As regards the regulatory adjustments, we have to say that the impact, total impact on the electric sector for our Company -- we've announced this -- have been EUR600m and in this first six-month period EUR132m more than last year. So it's going to be EUR600m all in all. In gas there has been no regulatory adjustment in the first six months. In the second six months it will be about EUR45m.

 As we've underlined in several occasions, the efficiency plan is a key instrument in our budgetary and strategic development. We have followed the aims that we had set ourselves, which are to get EUR300m recurrent annual savings. This continues. We estimate EUR200m this year. In the first six-month period we've saved EUR165m so we are confident that we will comply with what we set down in our efficiency plan. These cost reductions are services reductions, commercial operational costs and optimization of corporate areas. The Company is reacting very well to these adjustments and introducing all the efficiency measures that we can based on best practices in the world.

 As a result of our strategy, we have to say that there's been a strong drop in our net debt. Last year we had a debt of EUR14.25b. Adjusting options, investments, dividend paid out and cash flow ups and downs, the net debt at the end of June this year was EUR13.47b. That's a drop of 5.5%. However, this amount includes as debt that's still pending nearly EUR600m in tariff deficit, of which EUR436m corresponds last year and EUR155m to this year, up to this date.

 As you know, it's been published, the Ministry is in conversations with the industry, with the sector, to try and see how these amounts can be securitized so that they are no longer a burden for the P&L accounts of electric companies, but -- or balances of electric companies. But we have to highlight the cash-flow generation of the Company that has allowed us to keep on this road and continue to reduce our debt financial -- net financial debt.

 Now if we continue and talk about the most important financial aspects, I'm going to very quickly give you some data. You can analyze it and ask questions, whatever questions you wish.

 The EBITDA and gross margin have not dropped so much as they did in the first quarter, 4.1% and 3% respectively. And that is really based on the fact that the environment is very demanding and very hard. The new measures in the electric sector to translate exchange rate, currency differences have had an impact on the bottom line. Amortization has dropped by 1.4%, and is at EUR796m, and we got EUR253m as a result of the different sales operations.

 Financial results were EUR398m, which is 3.1% more than last year, but the cost of our financial debt has gone down, which -- what happens is that it -- also the remuneration that our treasury department pays out has also gone down. So that this, together with the different general and specific financial risks that we have, has led us to rethink our policy in terms of cash flow so that we're in line with the new situation of remunerations on the market. So the benefit before taxes has gone up by 16% -- profit before taxes has gone up 16.3%. And the final net profit is EUR932m, which means an increase of 19.5%.

 If we look at the breakdown of the EBITDA by business or by business, distribution in Europe has gone down by 2%, 1% gas and then electricity 3.5% basically as a result of regulatory measures this year versus last year, during which they were not applied.

 Electricity, there's been a 12.1% drop basically as a result of the generation activity and also renewables that have been very strongly adjusted as regards last or in comparison with last year.

 And then gas activity jointly gives us a growth of 7.2% in terms if EBITDA and there's been growth in infrastructure and also wholesale operations, which are continuing to develop along the lines, strategic lines that we'd defined.

 Latin America has a drop of 11.9% basically because of the impact of the devaluation of their currencies versus the euro as translated into our consolidated results or accumulated results. If we broke this down and broke down the results for Nicaragua, we would see that the results are different and we are going to look at business by business.

 The EBITDA is therefore EUR2.4b, with a drop of 3% versus the previous year. We'll look at this in further detail in a minute.

 In terms of investments over the period, if we don't bear in mind the EUR177m that correspond to the methane ship that we've bought, have gone down by 15.4% and continue -- the networks continue to grow more than anything else. Gas distribution networks both in Spain and Latin America justify practically the whole of our investment in gas and electricity networks. Latin American investment include EUR66m in the wind park of Bii Hioxo, which is about to start to go into operation. But obviously in comparison with last year the production is going down quite a bit and also there's a significant drop in investments in Spain, especially in generation.

 As regards our debt profile, debt maturity profile, we are quite comfortable. And 2014, you should remember that on July 9 we had EUR2b, which have been covered and as from now our needs are covered until 2016. We've got to highlight/underline that in part at least our situation had to do with the fact that we had to pay this EUR2b on July 9 and the commitments that we had to cover for last year.

 Our financial structure is really quite efficient, with a well-balanced, low-risk profile. 80% is fixed at a very competitive interest rate, 4.3%, and tending to go down. And then 86% is in euros. 73% is funds that come from capital markets, with a very significant drop in bank financing.

 And we also have very ample liquidity, EUR12.7b (sic - see slide 19 "EUR12.807b"), which would allow us to cover more than 24 months of debt payback. That is broken down into what we have in cash and what we have available in terms of loans. At the beginning of July, as I say, we had to [buy] EUR2.5b. We had a commitment that had to be paid by that date and then the dividend that we paid out at the beginning of July. So that was EUR2.5b, but we've got more than EUR2b -- EUR2.2b -- to cover all our operations in the near future.

 Our high liquidity levels are being reviewed, because of two factors. The drop in financial risks -- the markets are more comfortable than they were 24 months ago -- and also the drop in the remuneration of our liquidity.

 So if we look at financial ratios that can define our financial situation, we can say that it's really sound. Our funds -- our pre-tariff deficit ratio is 22.8%. Our post-tariff deficit 23.8%. And it's 2.8 times in terms of pre-tariff deficit -- our EBIT -- the ratio net debt/EBITDA is 2.8 times pre tariff, and 2.7% post tariff. So we can conclude that our financial structure is sound. And there are no exchange-rate risks because our branches in general, almost all of them, are financed in local currencies or in the currencies in which they do their business and they haven't ?- so they don't come under that risk.

 If we look at our operations, we are going to look at distribution in Europe, mainly Spain. Sales altogether dropped by 1.7%, but there's been a slower drop in comparison with the first quarter. All this has to do with temperatures that have been very mild throughout the six-month period, especially the first quarter, and this has caused -- this has meant less consumption of electricity. And then in the north east of the peninsular we had some problems that affected our installations at the beginning of the year.

 Investments have gone down mainly because of the new regulatory framework, which still has to be refined, but we've reduced our investments. And also this has led to a very significant efficiency plan that has achieved a situation where the EBITDA in spite of regulations has only dropped by 3.5% as regards last year. And that has to do with the application of Royal Decree 9/2013, which was enforced in July last year. Therefore comparison of the second six-month period in last year and this year means that we've felt that impact.

 In terms of the supply points we've achieved, we've got 4.5m supply points in Europe, of which 3.7m are in Spain.

 In terms of distribution, gas distribution in Europe, Spain mainly, also Italy, we have to underline how sales have dropped by 14.2%. That's justified by the drop of consumption as a result of the high temperatures, especially in the first quarter, but also comparatively in the second quarter. Especially in Italy and also in Spain, the weather has been against us in terms of consumption.

 In any event, the growth process continues in such a way that the supply points have grown by 1.1% due to the greater activity in the residential sector. So that the Company has achieved 20 new municipalities and 422 kilometers of distribution more. Which means, even before the new regulations, the lack of maturity of the gas distribution market in Spain will help us to increase our business, as a result of the new regulations recently approved by the government.

 In terms of our investments, they've grown by 5%. The reason is to make use of this increased number of supply points. This will continue.

 And the EBITDA has gone down by 1% fundamentally, as a result of the strong drop in consumption, especially in Italy. But the situation is a bit flat, as you can see, in spite of the mild situations that I mentioned before, mild temperatures. There'll be a drop of EUR45m in the EBITDA probably in the second half of the year.

 As regards this supply, gas and electricity supply markets, conventional gas demand has gone down by 11.6%, also due to the weather in Spain, the mild weather. It's gone down significantly. And the demand for electricity has gone down by 1.2%. Now, if we adjust that for temperatures, that would mean a growth of 0.1%. That would be a good -- that would be good news. The Spanish market very slowly is growing again and it hasn't done so more due to the mild weather we've had until now. But at any rate we have improved our situation and we are starting to grow, moderately, but it is growth nevertheless.

 In terms of GNF, our production has fallen and this production is concentrated in the old renewable energies, which fell by 2.9%, mainly because of the fall of cogeneration and also a reduction in hydro power. The year has been quite good for hydro power, but not in the north-western basins and therefore we didn't reach the average values for the country. In coal we are doing quite better because of the quotas established by the government.

 Combined cycles fell by 9.6%, which is less than the general figure for the reduction of combined cycles in the country. Now, at any rate, in terms of combined cycles in the second half year, their performance was better than the previous year and they have been impacted by the high rainfall in the first part of the year. So our (inaudible) generation fell from 18% to 17%.

 I think that we should now highlight the reduction in the prices of electricity in Spain in the wholesale market and also pool prices have fallen. You can see this on the right. The average pool price fell quite significantly. It fell by 12.3% and this is bad news for us, but we should also mention that these prices are recovering.

 In the first quarter the pool price was EUR24.88, one of the lowest prices in the history of our electrical system, as a result of the high rainfall in the period. But in the second quarter the price was EUR41, which is what gives the average of EUR32, and this is almost 30% higher than the value of the second quarter of the previous year. So there's been a certain recovery and we hope that this recovery will gain force in the next few quarters thanks to better weather.

 In terms of the EBITDA of the business, it fell only by EUR10m and this was fueled by the good performance of the hedging of our generation position, carried out strategically by this company.

 Now in terms of the cogeneration business and the renewable business, the old special regime, let me tell you that production fell by 3%. And this is basically a fall related to cogeneration and an increase in hydro power and the wind business.

 In terms of hydro power, two new stations started operating because, you see, this was not a very good year for our river basins, but at least the start of operations of these two stations led to an increase in our production of 23%. But the enforcement of the law that deals with remuneration of this business has led to a fall of 60% in the renewable businesses. This already includes the different regulatory measures I mentioned earlier.

 Now if we now plunge into the gas business, if you look at the graph you will see that our provisioning and our sales in Spain have fallen by 10%. Of this, 22% occurred in the electrical market where our sales to the Spanish market fell, 70% was due to the residential market because of the weather situation, and 7.6% was due to the industrial sector and the supply to third parties. If we isolate the industrial sector, the industrial sector fell by only 3.6%, which is not a very high figure.

 And this is of course impacted by the weather situation. So the first half year we see a maintenance of industrial consumption and a significant fall in residential consumption because of weather conditions.

 This fall of 10% is offset by the increase in our sales in the international market, both in Europe, which they grew by 37%, and in the rest of the world, where figures grew by 17%. So the overall figure is quite stable because the falls in the Spanish market is offset by our sales in international markets which is, of course, in accordance with our strategy. And this is so because our sales already account for almost 40% of all our sales, with the opening of new markets, such as the Chile market, and with a very high commercial activity in gas provisioning.

 We want to be leaders across all the segments in this business. We already have 11.3m active contracts and a huge amount of households that have both gas and electricity. Of course this is a basis that requires this use of assets, and we have added a new methane ship, which should anticipate the entrance into force of the new Cheniere contract and should collaborate to this internationalization effort that we are making to sell more gas internationally.

 In terms of UF Gas, the sales were 7.8% lower, however the component of the international sales increased. This was extremely positive. And there was a fall in the supply to Spain. So on the whole, Union Fenosa gas made a better contribution to our accounts than the previous year. They were negative by EUR35m, but the past year they were negative by EUR61m. So considering that they have a shortage of supplies from Egypt, the situation is not too bad.

 We are following the Egypt problem quite attentively. First of all we are negotiating with the new Egyptian government, which has just been appointed by the new President after the elections. And we hope that in the next few months we can move forward and reach a reasonable agreement with Egypt.

 The other fronts that we are trying to follow to mitigate this problem is to make the most of the opportunities we have in the area given the existence of significant reservoirs in the Mediterranean, which would make it possible for us to make our plant work with gas from Israel, which would be liquefied. This is a complex issue, but we have been analyzing it and the authorities of different countries have shown interest in it. So we will have to see whether we can actually pull it off. These are the different lines of work that we are following in order to try to mitigate the Egyptian problem.

 Now in terms of Latin America, EBITDA for the period is EUR546m. This entails a fall of 12% with respect to the previous year. However, I think we should mention that there's been a very significant impact of the depreciation of Latin American companies -- Latin American currencies with respect to the euro. Half of this EBITDA corresponds to gas distribution, 28% corresponds to electrical distribution and the rest corresponds to electrical generation. We should also mention that 88% of the EBITDA corresponds to three countries, Colombia, Brazil and Mexico, which are developing very smoothly.

 We are convinced that in spite of this currency problem these are very solid and robust markets with very good prospects.

 The impact of currency exchange differences is now abating. It was very bad last year but, as you can see on the right, in the first quarter the effect was EUR37m, in the second quarter it's been EUR29m and we are convinced that the effect will be lower and lower. There's two countries that bear the brunt of this problem, Colombia and Brazil. And this is what has very seriously affected our accounts, apart from of course the deconsolidation of Nicaragua and the adjustments in Brazil. If the exchange rate differences had not existed, results would have been just 1.3% negative. The difference should be attributed to the depreciation of currencies with respect to the euro.

 Now business by business in Latin America, if you look at gas distribution, we grew our sales by 4.8% in all countries except for Mexico. But this is because of a short-term problem because we had to carry out a stoppage in one of the facilities. But, as I say, this is not a major problem. What is more important than this is that connection points are still growing at a very healthy pace across all markets, so we are now exceeding 6m supply points. And sales are growing everywhere and especially in Colombia because of the presence of new industrial customers.

 In terms of gas distribution, sales have grown significantly. And EBITDA fell by 15.8% but if we take away growth rates the fall is only 2.8% and this is justified by the entrance of the new regulatory period in Rio de Janeiro and the adjustment that we had to make for the new period. In Argentina we have -- our operations are very small. We had an adjustment but it's really negligible. So if we discount all these situations, the impact of the exchange-rate factor leads us to the figures I mentioned before.

 Now as regards electrical distribution, the graph doesn't include Nicaragua, because we've got rid of this asset. And this comparison shows a growth of almost 6% in sales. We should mention the significant growth in Colombia where the whole of the Caribbean coast is developing very nicely. Let me insist on the huge growth potential of our electrical distribution in Latin America.

 Then investments have fallen by 7.5%, but I'm sure that this figure will recover in the next few quarters. And EBITDA went up by 2.6% if we exclude the exchange-rate differences that I mentioned before. This is due to the -- this growth in EBITDA is due to market situations and also to greater efficiencies. Especially in delinquencies, we have a plan to that effect which is working very well. In terms of generation in Latin America, if we discount exchange-rate differences, this business grew by, grew its EBITDA by 2%.

 And production fell by 3% because of the APPA regime. And investments fell by 18% (sic ? see slide 30 "28%") because the Bii Hioxo plant last year was in the midst of an investment period. And this is coming to an end. But the plant will be operational in the next quarter and it will contribute to our P&L.

 So we can conclude that we are satisfied by the stability of our results. Everything has gone according to plan. And so our EBITDA fell by 3%, having been to absorb all regulatory impacts and exchange-rate differences. Otherwise the result would have been positive if all these things hadn't happened. Our net income is of 19.5% more after the disposal of telecom assets. And we have enhanced our developments and activities that constitute future growth vectors. We are satisfied that the gas reform has been made because it allows us to still be very positive about this market.

 And, as a general conclusion, I should tell you that we are still very positive about our objective, strategic objectives for 2014, 2016. Thank you.

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Questions and Answers
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Unidentified Corporate Representative   [1]
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 (Interpreted). Okay. So we can start with the Q&A session now and we will start by the questions by people sitting in this room. You should please introduce yourselves before asking your questions.

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 Pablo Cuadrado,  HSBC - Analyst   [2]
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 (Interpreted). Hello. Good morning. I am Pablo Cuadrado from HSBC. I have three or four questions. The first one has to do with the regulatory impact for the gas business in Spain. Because since this year we will have new things in July, can all of this be extrapolated to next year? I just want to know this.

 The second question has to do with the gas volumes internationally. In the first quarter I think you grew by 15%. Now you're growing by 30% or more. I just want to know how you can explain that difference and whether you consider that there may be some kind of slowdown to be expected.

 Does that position have to do with your liquidity? You said you were studying alternatives now what to do. So I would just like to have further details. Are you considering buying bond or any other fixed income?

 And then another question is strategic, of a strategic nature in terms of the leverage. You net debt over EBITDA has shrunk. Your business is still generating positive cash flows. So in this business environment with low interest rates investors tend to look for greater yields. With the payout at 62%, do you consider that it may make sense to do something, given that your leverage is so positive and that you're still generating cash?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [3]
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 (Interpreted). In terms of your first question, I want to tell you that extrapolation is growth. But of course you need to take into account the efficiency plan underway and another one that we will launch in order to adjust the sector to the new regulatory situation and the growth that will occur because of the measures incorporated by the plan. So the figure will be below those levels and we will work to make it possible for the growth levels to be higher than it is at present in order to mitigate this impact you were mentioning.

 Now in terms of the international sales our policy is to keep maintaining the situation and that's why we are trying to gain new long-term customers, opening up new markets, such as the Chilean market, and keeping up a strong commercial activity in the north of Europe. Our policy is to internationalize our activities with end customers so that we are capable of balancing out our portfolio, so that weather problems such as the problems we had in Spain this quarter can be solved.

 An improvement of the weather conditions may reduce the imbalances and so this would of course be good for us. In the first half year we've been impacted by the weather conditions. But at any rate the general trend will be to increase our international activities in the gas sector and across the board, but specifically in terms of international supply.

 Now in terms of liquidity, we are going to reconsider. But we are going to reconsider -- well, part of it has already been reconsidered. Just think that our liquidity at the end of the half year was already compensated for by the payment of EUR2.5b because it was the bond maturity and the dividend payment. So there was an automatic adjustment. The liquidity at the end of the semester was atypical because of these maturities. But at any rate given that the general financial situation has changed and given that the remuneration has changed, we are going to be adjusting the liquidity.

 But, as I was saying, it has already been adjusted because of the payments that I mentioned.

 Now with respect to our leverage, we are going to do what we said in the strategic plan. Of course what I want to say is that until 2015 our goals are very well established, 62% of the payout, and our growth vectors and our leverage vectors are those defined in the strategic plan.

 Of course we are looking at different growth possibilities in our businesses and we are going to be happy to analyze any opportunity. But what we want to do is to grow in our organic areas, basically in international businesses, gas distribution in the world. And those are the vectors we are going to be looking at in order to guarantee our stability for the next strategic plan until 2017 and 2018. o no news on that front.

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Unidentified Corporate Representative   [4]
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 (Interpreted). Okay. As it seems that there's no further questions from the room we're going to give the floor to the phones.

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Operator   [5]
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 (Interpreted). Javier Suarez, Mediobanca.

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 Javier Suarez,  Mediobanca - Analyst   [6]
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 (Interpreted). Hello. A very good morning to one and all. Thank you very much for taking my questions. The first question has to do with the cash situation of the Company. At the end of the first quarter it was very high. You already explained that this would be automatically corrected with the payment of the dividend and the bond, but could you tell me what cash position you would feel comfortable with? This will be very important because we've seen a reduction in the debt that was not reflected on a reduction in financial costs and with such low interest rates this is something that could easily be corrected and help your bottom line.

 The second question had to do with the fact that a good solution for the sector could accelerate investments of the Company in the gas distribution system. And how much additional CapEx could be devoted to this activity and how -- to what extent do you think the market could accelerate their investments as a result of this clearer, regulatory environment?

 And the last question is regarding the situation of cash generation. And my question is whether you agree with analysis as follows, that this Company is a company that structurally is generating an operating cash flow of about EUR4b, it is investing less than EUR2b, it pays dividends for EUR1b and then it has a free cash-flow generation for about EUR1b a year. This would mean that the process of deleveraging of the Company could be very fast. So the question is, if this analysis is correct, then what is the Company considering doing in order to correct this in the next few years? So is the Company going to increase their dividend policy or buy assets? Thank you.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [7]
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 (Interpreted). The Company is complying with what it said in its strategic plan. Nothing is happening that we didn't contemplate in our strategic plan. We are reacting according to our strategic plan. We already contemplated deleveraging. We already contemplated increasing our international activities. So there's nothing new under the sun and nothing new should be expected about our strategic lines. In 2015 we will revisit this, but until 2015 there's going to be no changes. In terms of our results there have been no surprises. Everything has gone according to plan and we're very happy about this, both in terms of deleveraging and investment.

 Now in terms of accelerations in the gas distribution reforms, well, it is too soon to quantify them because these reforms have been published very recently. We're still working on the technicalities so at this point in time it is difficult to say much about this. But of course this is going to make it possible to accelerate the gasification of Spain, especially in customers that consume most and in places where we are not present today.

 Carlos, would you like to take the other question that this gentleman asked?

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 Carlos Fernandez,  Gas Natural SDG SA - MD of Economics and Finance   [8]
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 (Interpreted). In terms of the cash position we had in June, this cash position was atypical because we were going to have to make two payments that have immediately reduced our cash flow, [EUR5.5m] and then [EUR2.5m]. So we had [EUR5.5m] and then we had to pay [EUR2.5m] -- or EUR5.5b and we had to pay EUR2.5b. So the cash position that we would like to maintain would be around EUR2b. This would be a reasonable figure at present. So the big adjustment of our cash-flow position has already happened. We may have further reductions, but these will not be significant.

 Now we are not going to forego liquidity. Our liquidity goal is always the same. It is still the same. There's two ways of having liquidity, either in your till or in credit facilities. So what we're doing is preserving our liquidity at a good and healthy level. And so we're going to try and optimize this. In the past it was a good thing to have a lot of money in the till and now this is perhaps not such a good idea.

 And this will have an impact on the cost of the debt because this EUR2b bond paid 5.5% and so our average cost was high. But we're replacing this for a cheaper debt and so the cost of the debt in the second half year -- and this is something that the CEO mentioned -- is going to be lower. And this is going to allow us to go down from this 4.3% we are at, at present.

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Unidentified Corporate Representative   [9]
------------------------------
 (Interpreted). So the next question please.

------------------------------
Operator   [10]
------------------------------
 (Interpreted). Alberto Gandolfi, UBS.

------------------------------
 Alberto Gandolfi,  UBS - Analyst   [11]
------------------------------
 (Interpreted). Thank you. I have three questions for you. First of all, could you say something about an outlook for the next two years in terms of the [GNL] business or liquefied natural gas, LNG? Could you tell me what the effect of the drought has been on this and what have the profits from Latin America been in terms of those figures? Because there's lower demand levels and probably prices in Latin America, which have been very similar to prices in Asia, might go down. So I wanted to know your take on this at least from a qualitative standpoint.

 Secondly, I apologize for going back to the debt, because the retention ratio was strong, CapEx went up a little and the dividend policy didn't change. So could you please exclude, would you exclude the possibility of making large acquisitions in this context until 2015?

 And then my last question. Could you please, because I have made some calculations, but could you please tell us what is the contribution to EBITDA of domestic coal in Spain for the electricity business for the first half year?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [12]
------------------------------
 (Interpreted). With respect to LNG, let me tell you that we don't expect within our strategic plan any significant changes in volumes or in margins. We are talking about of course averages. But in the first place because sales are closed in the majority and so nothing can happen on that front.

 And then also we can't see any factors that should radically alter macro, the macro situation. Of course the rainfall in some countries may be different and many problems could arise related with the weather that alter the situation. But market diversification on the one hand and our commercial policy with end customers in the medium term and our medium-term investments allow us to state in terms of our strategic plan that we can see no changes in terms of volumes or margins in our international LNG business.

 Now in terms of the debt, let me insist nothing new is expected. All of it was included in our strategic plan word for word. And we already said that our Company was going to make the most of any growth opportunities and basically along three lines, and it is those three lines we will keep focusing on.

 Of course we don't exclude any acquisitions. We are not studying anything, but we're not excluding anything. We don't include or exclude anything. I just want to say that we are abiding by our strategic plan. Of course we will be more than happy to analyze any opportunities that come our way. But what we want to do is to develop those three business areas in an intensive fashion basically with an international vocation. This is our policy and it is not a new thing. And we are convinced that this policy will allow us to comply with our commitments and when this period finishes we might think of further horizons.

 And I can't give you any information about your third question, unfortunately.

------------------------------
Operator   [13]
------------------------------
 (Interpreted). Jose Javier Ruiz, Macquarie.

------------------------------
 Jose Javier Ruiz,  Macquarie - Analyst   [14]
------------------------------
 (Interpreted). Yes, good morning. Thank you for accepting my questions. I've got two. One, I'd like to know more about your strategy, the possible alliance with with CEMIG in Brazil. Have they not really developed their distribution business a lot and you would like perhaps to be leaders in that development process through the holding? Is that the idea?

 Secondly, could you tell me about connections in Mexico City, gas connections in Mexico City?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [15]
------------------------------
 (Interpreted). As regards the first question, the alliance we're looking at with CEMIG, we hope to bring to fruition over the next few months. There are different regulations and administrative things that we have to look at. Has to do with their and our interest in setting up a strong Brazilian holding that can make use of the ample gasification potential in the country. We are well positioned in Rio and Sao Paulo. Naturally Brazil is a large country and it has a series of states that are looking at this gasification, which is incipient yet in some of these states.

 And we believe there is a lot of potential and the best way would be to do it in association, in partnership. Traditionally the Company has done these things with local partners that supported us and they've understood our way of doing things and they have promoted these businesses. And this would be the case again. It's a jump ahead to be more ambitious and develop projects in Brazil.

 As regards the second question about connections in Mexico City, the rate of growth of Mexico is higher than 13.8%, the whole of Mexico. I haven't got the details for Mexico City, but most growth focuses on Mexico City so the highest rate of connections is in Mexico City. That's the net increase. If we go to the increase in terms of points of supply, our rate is about 10,000 points of supply that have started up, about 5,000 per quarter approximately.

------------------------------
Unidentified Corporate Representative   [16]
------------------------------
 (Interpreted). Thank you. We're now going to the next question please.

------------------------------
Operator   [17]
------------------------------
 (Interpreted). Jorge Alonso, Societe Generale.

------------------------------
 Jorge Alonso,  Societe Generale - Analyst   [18]
------------------------------
 (Interpreted). Hello. Good morning. I have quite a few questions. The first one is if you could tell us about gas competition in Spain.

 What about your margins? The volume is dropping. There's more gas available. What could you tell us about that?

 And in the medium term do you think that gas situation in Spain could affect the competition? Medium-sized customers might access gas in other places in better conditions or cheaper.

 I would also like to know whether -- I know you are trying to or I'd like to know whether you're trying to get some kind of compensation for the problems you've had in Egypt.

 And then renegotiation of supply agreements, gas supply agreements that you could tell us about. Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [19]
------------------------------
 (Interpreted). As regards the first question, marketing of gas in Spain, there are no significant changes because the market is in line for a very clear and atypical reason, if you compare our situation with other countries in Europe. A large part of supply in Spain comes by ship. Gas comes by ship so when there's some excess supply things are readjusted by taking the gas to other markets. That's been a norm in recent years. Due basically to the electric market, gas has gone down quite a bit there, the consumption of gas. And the ships have just been sent to other markets to set a balancing off of or supply and demand.

 It's an atypical situation I think because practically no other country in Europe can do the same because the gas comes by pipeline. But we have a very high level of flexibility. If we don't want the gas, ship goes somewhere else. It's as easy as that. Other countries, Switzerland, for instance, cannot do such a thing.

 And in terms of the hub, it's going to be a secondary thing. It's not going to be a primary hub like the American hub. In order for that, for it to be a primary hub in Spain, it would be necessary for the sellers of gas to sell gas to operators and customers within that market and it doesn't seem to be the trend among suppliers in Spain or Europe, with some exceptions. That means that basically due to the fact that primary supply or procurement is based on long and very long-term agreements, markets will be secondary, markets mainly for provision or temporary dis-adjustments between large providers and large customers.

 And that is welcomed by us. We think it's a good idea to create such a market so that agreements between companies are more flexible and the situations are clarified. But we have to be careful. This is not going to be a primary hub, because large suppliers on the European market and Spanish market desire and want to change the system. So instead of selling long term based on bilateral agreements, normally Brent-linked agreements, they prefer to do it or would prefer to do it on a primary market. That alternative is not feasible today.

 As regards Egypt, our negotiation covers all aspects and obviously what you have said, loss of profit. After this new government settles in we're quite optimistic. When we look at the new energy adjustment measures that have been introduced in Egypt and which we think were necessary, we're waiting to see what the new government does and we're convinced that at the end of the day we will be taken care of and we'll reach a reasonable agreement.

 Gas price review is constant. Long-term agreements, practically all suppliers that we have and all our companies in Europe have, especially in Spain, clauses that review rates and prices. So every three years the prices are reviewed. And there's always some agreement that's under review, always. I'm sure right now there's some contract or agreement that is being -- whose price adjustment is being reviewed. That's routine, standard practice in our industry.

------------------------------
 Jorge Alonso,  Societe Generale - Analyst   [20]
------------------------------
 (Interpreted). Thank you.

------------------------------
Unidentified Corporate Representative   [21]
------------------------------
 (Interpreted). Very well. Next question?

------------------------------
Operator   [22]
------------------------------
 (Interpreted). Carolina Dores, Morgan Stanley.

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [23]
------------------------------
 (Interpreted). Hello. Good morning. I've got two questions. First of all, please could you clarify the dividend policy for 2014? A payout 62%, will it be calculated on the basis of the current net-profit reported or current? Basically I'd like to know whether shareholders are going to benefit from the [Lecon Gas] sale operation.

 And the second question has to do with the Chile gas-supply agreement. What volume and how long? Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [24]
------------------------------
 (Interpreted). As regards the first question, 62% over the profits before -- after taxes.

 As regards the Chile agreement, it's a 0.6 bcm agreement. The supply will begin, Carlos, can you tell us?

------------------------------
 Carlos Fernandez,  Gas Natural SDG SA - MD of Economics and Finance   [25]
------------------------------
 (Interpreted). 2017.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [26]
------------------------------
 (Interpreted). At the beginning of 2017. Thank you Carlos. No, wait a minute, 2016, beginning of 2016, 0.6 bcm per year, Chile.

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [27]
------------------------------
 (Interpreted). Thank you.

------------------------------
Unidentified Corporate Representative   [28]
------------------------------
 (Interpreted). Any more questions in Spanish?

------------------------------
Operator   [29]
------------------------------
 (Interpreted). Manuel Palomo, Paribas.

------------------------------
 Manuel Palomo,  Exane BNP Paribas - Analyst   [30]
------------------------------
 (Interpreted). Hello. Good morning. I've got two questions. The first one has to do with Jorge's question about the gas hub in Spain. The regulator or generating authorities had said that gas was not going to be sold on that market. I wonder about people that or companies that want to sell gas in Spain and that come from other countries.

 And another question has to do with LNG. A few years ago this was a business which was very -- fluctuated a lot, went up and down very -- peaked and then dropped. It was very seasonal. Do you think in these first few months of 2014 these fluctuations in this first period of the year is something that is associated with the seasonal nature of the business? Why has it gone up and down so much?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [31]
------------------------------
 (Interpreted). As regards the questions, the first one, I'm not aware that there's any clause or term that prevents companies from selling gas in Spain if they want to. It depends whether it makes sense to them or not. The situation is that apart from adjustments, such as the one by Gazprom because of gas bubbles in Central America -- European markets, big suppliers in the world don't really want to go to the spot markets because, first of all, they're not working properly. They haven't got volume or depth, but especially because their wish is to set up long-term relations that guarantee selling gas for a long time and associate that with the Brent levels.

 And that applies to practically 80% or more of the gas that is sold in Europe and I don't think the situation is going to change. If you've got gas and it's being sold on the market, wouldn't make sense for that gas to be sold once again on the spot market. So we don't think that's going to have any kind of relevant impact on these hubs. But we think it's an excellent idea for a hub to be created by secondary companies and then we'll see in the future whether things change. Today we don't expect that to happen, but we will be watchful and alert to what happens.

 As regards seasonality of LNG, we should qualify this. It's true that consumption is greater in the northern hemisphere, therefore seasonality. Temperature is involved and consumption is affected by this. It's always been the case. There's always been a seasonality, which is now mitigated by the development of southern hemisphere markets, Argentina for instance. Chile, who are compensating and making up for that imbalance, so there's a change in that regard. But seasonality, what you're referring to, probably has to do with spot markets, which is an entirely different thing. Spot markets are hugely volatile.

 I would like to insist that most operations are not on spot markets. The vast majority of LNG operations are based on bilateral mid-term agreements and not on the spot market. Therefore prices of gas on the spot markets usually are subject to fluctuations between customers and suppliers. In our case practically all the gas we sell is not on spot markets. It's agreements, medium-term agreements with customers. Therefore seasonality either doesn't exist or it's included or written into the contracts, to the agreements.

 That's why sometimes markets don't reflect the accurate situation. International spot-market prices are depressed right now. But nobody is going to get an agreement, not even a 12-, 18-month agreement, based on those prices. And, the other way round this, winter prices were very high, but the reality of national and international transactions has to do with another bilateral market, not the spot market, which is not the most important reference many times.

------------------------------
Unidentified Corporate Representative   [32]
------------------------------
 (Interpreted). Good. Any more questions in Spanish? No more questions in Spanish. Questions in English.

------------------------------
Operator   [33]
------------------------------
 Martin Young, RBC.

------------------------------
 Martin Young,  RBC - Analyst   [34]
------------------------------
 Good morning to you everybody. Just two questions. One is following up on the changed regulatory framework for the distribution of gas in Spain. You've commented that you now foresee that this should be able to incentivize a greater growth pathway going forwards in gas distribution in Spain. Just wonder if you could shed some lights on what the impediments were previously. Was it purely and simply the regulatory framework that was stopping you from investing at a certain speed, was it the demand for increased gasification from municipalities or was there a financial aspect in respect to your own ability to invest?

 Second question relates to Moldova and Kenya. We've heard a lot about people asking questions around whether you will seek acquisitions, but you had two businesses there that are pretty small in the overall scope of your business. I just wondered if you could shed some light on your long-term thinking for those particular areas. Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [35]
------------------------------
 (Interpreted). The question didn't come through very well. There was a lot of background noise. I'm going to try and answer in accordance with my best abilities.

 For gas the obstacles are the commercial obstacles, the regulator, well, it's the framework. The regulatory framework is the framework. We've got to serve customers that are incentivated by the regulator, which are the large customers in new areas. That's what the regulator wants. They want large customers or reasonable customers and new populations, new municipalities.

 In terms of the commercial parameters, it will have to do with the competitive nature of natural gas. And we think that natural gas is still very competitive as a fuel in Spain and in most of the -- on most of the markets.

 So those are the variables. And the third one is the technology obviously. We need consumption levels that allow us a progressive growth, but we've got ample technological and technical experience so we're going to hopefully continue to gasify Spain. Spain's gasification rate is half of that of the rest of Europe, as you know.

 In terms of possible purchases, we didn't really hear most of the second question, but we have got no specific policy. We prefer greenfield operations. We included that in the strategic plan. But, as we said, if new opportunities come up we will analyze them and study them, and make the best decision. It's important that we want to grow in those three areas which have been described in the strategic plan, business line, geographical markets and types of business. Those three things are detailed in the strategic plan and the volumes that we'd like to reach. And that's going to be our policy. There's going to be no great changes there and we're going to continue along those lines.

------------------------------
Unidentified Corporate Representative   [36]
------------------------------
 (Interpreted). Good. Any more questions?

------------------------------
Operator   [37]
------------------------------
 There are no further questions in English.

------------------------------
Unidentified Corporate Representative   [38]
------------------------------
 (Interpreted). Let's go to the questions that have come through the Internet. Most of them have been answered already. We would have to -- I would highlight three. One has to do with our financial structure. The question is whether we continue to have -- whether our goal is reaching an A rating and how long would it take us?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [39]
------------------------------
 (Interpreted). It's not a goal that's been set as an objective. The strategic plan for 2013/2015 contemplated a series of goals. We didn't include a specific category or specific rating that we wanted. Obviously it depends on the rating agencies more than us. We are near getting a better rating we believe, but the letter that is given us will be given by the rating agencies. We have a positive outlook. We think that we'll move towards a better rating -- that is obvious -- and we'll see what happens.

------------------------------
Unidentified Corporate Representative   [40]
------------------------------
 (Interpreted). Second question is from Credit Suisse and the question is whether we expect CapEx for the second half of the year to continue along the lines of the first half of the year. There's been a drop.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [41]
------------------------------
 (Interpreted). The second part, second half of the year is usually more intensive because operations have moved forward more by the second half of the year and things have got more -- advanced more. But I think the figure will be more or less what we envisaged, EUR1.7b around. There's not going to be very significant variations although I think it'll be greater. CapEx investments will be greater, higher than in the first half.

------------------------------
Unidentified Corporate Representative   [42]
------------------------------
 (Interpreted). [Ecidro del Alamor] from the BBVA asks about the [Exigen] process. Can we clarify our position as regards that process? Are you interested? How would you finance that purchase? With, only with debt, borrowed money?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [43]
------------------------------
 (Interpreted). We haven't made a decision. We're interested in this operation. We've not made any decisions about it. It's true that the timeframe is very tight. Investment here would be interesting. We're looking at it. But we have not yet made up our mind.

------------------------------
Unidentified Corporate Representative   [44]
------------------------------
 (Interpreted). Thank you. This is the end of the Q&A session. I'm going to pass the floor to Mr. Villaseca for him to close.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [45]
------------------------------
 (Interpreted). That's all. Thank you for your attention. Thank you for being here. Thank you for connecting with us and see you next quarter. Thank you very much.

------------------------------
Editor   [46]
------------------------------
 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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