Gas Natural SDG SA to Acquire Compania General de Electricidad SA Call
Oct 13, 2014 AM CEST
GAS.MC - Gas Natural SDG SA
Gas Natural SDG SA to Acquire Compania General de Electricidad SA Call
Oct 13, 2014 / 09:30AM GMT
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Corporate Participants
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* Rafael Villaseca
Gas Natural SDG SA - CEO
* Carlos Alvarez
Gas Natural SDG SA - CFO
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Conference Call Participants
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* Jose Ruiz
Macquarie Group - Analyst
* Javier Suarez
Mediobanca - Analyst
* Alberto Gandolfi
UBS - Analyst
* Martin Young
RBC - Analyst
* Cosma Panzaachi
Sandford C. Bernstein - Analyst
* Carolina Dores
Morgan Stanley - Analyst
* Javier Garrido
JP Morgan - Analyst
* James Sparrow
Exane BNP Paribas - Analyst
* Manuel Boosadaqua
BofA Merrill Lynch - Analyst
* Manuel Palomo
Exane BNP Paribas - Analyst
* Jorge Alonso
Societe Generale - Analyst
* Andrew Moulder
CreditSights - Analyst
* Michael Gladstone
Pepworth Capital - Analyst
* John Gauntha
* Cosma Panzacchi
* Antonio Basolas
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Presentation
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Unidentified Company Representative [1]
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Good morning and welcome to Gas Natural's conference call on the acquisition of the Chilean company, CGE. This conference call will be hosted by our CEO, Mr. Rafael Villaseca, who will be joined by our CFO, Mr. Carlos Alvarez as well as by our Head of Strategy, Mr. [John Ganutha]. Mr. Villaseca, you may start the presentation.
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Rafael Villaseca, Gas Natural SDG SA - CEO [2]
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Okay. Good morning everybody. The purpose of this conference call is to explain to you the details of the deal we signed past Saturday in Santiago, Chile.
It could be interesting if you follow my words seen in the chart we have prepared and we have sent to all to you. According to this I began for the first chart and I repeat the purposes to explain the deal definitively the buy of CGE company that we have bought.
CGE is a material transaction for GNF. While the cash outflows amounts to $3.3b total fair value including net debt and minorities is $7.4b. It is also very material because it represents a significant entry into Chile, one of Latin America's largest and most stable markets.
CGE is a leading company in electricity distribution and transmission, natural gas distribution and LPG, that operates under a stable regulatory framework. Chile's an investor-friendly country with a solid regulatory environment and with a lot of [sound an] potential LNG penetration where CGE is already present.
GNF has already signed and irrevocable purchase agreement with CGE controlling families for the acquisition of a 54% stake with the intention of acquiring the 100% through the immediate launch of a public tender offer. The transaction can be financed with GNF's available liquidity and is expected to be accretive from the day one for GNF.
Following the second chart, the position of GNF allows -- of CGE allows GNF to gain immediate scale in Chile, a market with attractive gas and power demanding [dynamic and excellent] growth prospects. Chile's macroeconomics metrics positions the country above its comparable peers in terms of growth, leverage and credit rating profile.
Chile is expected to grow at 3% this year while maintaining 15% of public debt as a growth of GDP. Moreover, Chile is an excellent credit rating profile, above that of many OECD countries. Furthermore, it is ranked among the best countries in the world in terms of economic freedom and opportunities for doing business.
CGE is characterized by a [buoyant] and diversified business profile in the Chilean energy sector, with a strong focus on regulated activities. Electricity distribution contributes 100% and with a contribution to the Group's EBITDA of 28%, EBITDA last 12 months of $213m.
Electricity transmission contributed 100% and with a contribution to the Group's EBITDA of circa 15%. EBITDA last 12 months was $111m. At gas, CGE's gas division, Gasco, 57% owned by CGE is listed in the Santiago stock exchange and operates in two different segments.
One natural gas distribution, operated through Metrogas, which is 52% owned by CGE, and contributes to the Group's EBITDA in 39%, EBITDA last 12 months $291m. And LPG division contributing already 18% to the Group's EBITDA, EBITDA last 12 months [157%].
CGE's revenues for the first half of this year, in the last 12 months, amounted EUR4,121m -- $4,121m, sorry, with an EBITDA of $727m for the same period, 18% EBITDA margin.
If we consider LPG gas distribution by geography, 96% is originated in Chile, 2% in Colombia, where CGE is active with LPG, and 2% in Argentina, where CGE is active in electricity and gas distribution. Obviously, Colombia and Argentina are countries that GNF knows well.
[And as for] EBITDA by business [39%] comes from natural gas, 28% from electricity distribution, 18% from LPG activities and 15% from electricity transmission.
In the next slide the slide shows the former CGE shareholding structure. CGE's shareholding structure has three controlling families, the Marin, Perez Cruz and Grupo Almeria families, who (inaudible) control [62.9%] of the Group.
CGE is the owner and controlling shareholder of 56.6% of Gasco. The three families also have just above 20% combined in Gasco. GNF has signed an irrevocable agreement with the families for 54.2% participation in CGE, ensuring control of the company.
The transaction is expected to close in the next month and a half, as per this calendar. On Saturday, October 11, GNF signed an irrevocable agreement with CGE's three controlling families in Santiago, Chile.
At the end of the day CGE, following a Board of Directors' meeting, published a significant event confirming the validity of the transaction. Yesterday, [Saturday], October 12, the takeover bid was announced to the regulators, market and the media.
Today, October 13, CGE will deliver the prospectus to the Chilean regulatory and the acceptance period of the takeover bid [to] start. On November 11 the 15-day acceptance period of the takeover bid ends. [A section] will be paid and closely -- and closed by end of [November].
The second part of my presentation, the strategic fit, you can see we strongly believe that CGE fits very well within Gas Natural Fenosa's corporate strategy for the following reasons.
One, CGE's takeover allows GNF to enter Chile, a new key market in LatAm that by the virtue of it size and characteristics gives GNF an immediate leading position in both gas and power. The transaction extends GNF's geographic diversification and improves the Group's business risk profile.
Third, GNF's takeover considers -- CGE's, sorry, takeover considers GNF as the leading gas distribution company in the largest population hubs in LatAm. We believe that with the takeover of CGE, GNF strengthens its position as a key player in electricity distribution in LatAm.
Also the transaction allows GNF to integrate its global LNG business with the Chilean market, which is based on international pricing mechanisms. In addition, the transaction facilities the participation of GNF in electricity generation projects in the near future.
There are substantial opportunities we see within that GNF -- sorry, the CGE platform in Chile and for our newly-strengthened LatAm platform as a whole.
Desspite the large size of the CGE transaction, given that its profile is not dissimilar to GNF, it has a very minor impact on GNF in terms of both our regulated versus liberalized business mix and in terms of the gas versus electricity mix.
Where CGE makes a very significant company in [GNF] is in increasing the weight of international activities to 51% of EBITDA from 44% currently. LatAm's share increases significantly to 35% of total EBITDA and Chile immediately becomes the largest individual international market for GNF.
Seen in the next chart, with this transaction GNF reinforces its position in LatAm as a leading distributor both in natural gas and electricity. In Chile the transaction adds 0.7m connections in gas distributions and 2.5m in electricity, strengthening Gas Natural's global presence through leading our well-regarded brands and diversified asset base.
Let us look at GNF's pro-forma positioning in gas distribution and electricity distribution. GNF has made efforts during the last years to enhance its position as a leading gas distribution company in the largest urban are in LatAm and CGE is another significant step forward.
With this transaction GNF will be present in seven of the largest urban population hubs in LatAm, only excluding Lima and Caracas. Moreover, the transaction allows Gas Natural to increase by 17% the number of gas distribution customers in LatAm, reaching 7.4m, 3.8m more than its next competitor.
In the next chart we would like to reinforce that the transaction with CGE helps GNF consolidate its electricity distribution platform in LatAm, becoming one of the largest players in the industry with more than 6.3m connections, more than twice its existing position.
Also with this transaction GNF shift its electricity distribution strategy in LatAm to a business in Chile where we will find a more [real] and stable regulatory regime and more growth opportunities.
In the chart the position of CGE grants GNF an overwhelming position in gas distribution, a market that continues to have strong growth momentums. Also, and despite the changes currently under way, Chile enjoys a high quality of predictable regulatory environment. CGE's presence in LPG allows it to anticipate the dynamics to connect these two markets.
As previously mentioned, in LNG [the] transmission allows GNF to gain an immediate position in a country that presents significant growth opportunities. Chile's demand for LNG will continue to grow in the short term, reaching in 2020 a total expected demand of 4.9m tonnes per annum. And we expect to successfully integrate CGE's LNG activities into Gas Natural's platform.
In order to ensure CGE's participation in Chile's demand growth CGE has secured via Metrogas a gas sale agreement with GNLChile, which has one of the funding partners as a terminal use agreement with the regasification plant of Quintero. Moreover, Metrogas owns a 20% stake in the Quintero plant. The LNG is currently provided under a contract with BG Group.
Chile has unprecedented capacity expansion of over 11 gigawatts by 2030. Chile will -- CGE doesn't currently have a presence in generation demand in the case of in Chile so that in the near future there will be an increasing demand and with GNF we will be able to participate based on [governmental] emphasis [and on] energy cost reduction.
More opportunities for gas-fired generation given the focus on LNG and the promotion of LNG activities through the ENAP's LNG regasification capacity available to be contracted. The promotion of Quintero's terminal expansion. And the boost in the construction [of] a third regasification terminal.
Third point, valuation financing and impact of GNF. The agreed share price of CLP4,700 implies fair value of $7.4b, [taking into account] has an assumed net debt of $2.3b, minorities of $1.9b, mainly Metrogas and Gasco, and other fair value adjustments.
The implied enterprise value under last 12 months' EBITDA of 10.2 multiple is significantly below past observed market references in Chile in the electricity distribution, transmission and gas distribution segments. GNF expects the transaction multiple to be 10.6 based on 2015 expected EBITDA.
The total reservation for CGE includes the assumption of debt, $2.3b, and a considerable amount of minority, $1.9b, given the good [infrastructure] of the Group, which let me remind you that has 56% ownership of Gasco and 51% of Metrogas.
Given this corporate structure and the relevant [precedent] transactions we believe that the appropriate parameter for co-operation to both is enterprise value under EBITDA.
CGE is (inaudible) distribution business and depending of the EBITDA of reference last 12 months or next year the [right multiplier] paid would be between 10.2 to 10.6.
However, Chile (inaudible) current generation as part of their business and [paid] at lower multiples. CGE is the only listed utility where a larger majority of the value comes from distribution and [transmission] in that respect (inaudible) precedent transactions for regulated business in Chile have been above 12 of enterprise -- multiple for enterprise value under EBITDA.
With a cash balance of EUR5.5b GNF's healthy financial situation enables the Company to fund this transaction with its current liquidity. Looking into CGE's debt structure, the company's debt is composed of 62% bonds, 35% bank loans and 3% other, with a weighted average interest cost approximately 7.5%. There are no change of [control close] within CGE's debt facilities.
Next chart, the CGE acquisition is in line with the guidelines presented in the [2015/2016] strategic plan, growth within our international priority businesses and geographies and we think conservative leverage policies.
While GNF maintains its commitment to meet in [2013/2015] inorganic ambitions without [diluting its shareholders], this transaction is accretive for GNF from day one. That is really relevant; accretive for GNF from day one. This will increase our net income in 2015 and beyond and through our dividend payout policy increase the level of dividends paid out to shareholders.
And as a conclusion in the last chart, in conclusion we will highlight the following [take outs] as the main points behind a defining transaction for Gas Natural.
Contribution to GNF's commitment to build on its announced strategic and financial targets, as the transaction will be accretive from day one, increasing our net income in 2015 and beyond and therefore the dividends paid out to the shareholders.
[Enables] the entrance in a leading LatAm economy with very solid fundamentals gaining relevant presence from the beginning; allows the integration of a truly leading energy distribution platform through the whole LatAm region; underpins the future participation in profitable generation projects and LNG activities.
And finally it represents the acquisition of a top-class asset with proven track record and detected upsides.
Well, ladies and gentlemen, that's all. And we are ready for you questions.
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Questions and Answers
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Unidentified Company Representative [1]
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Right now we'll start our question and answer section, so please state your name as well as your situation when making the question. [Operator]?
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Operator [2]
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(Operator Instructions). Jose Ruiz, Macquarie.
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Jose Ruiz, Macquarie Group - Analyst [3]
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Yes, good morning. Thanks for taking my questions. Just a couple of ones. The first one is what is the future of Grupo Gasco, as LPG could be cannibalized by gas distribution?
Secondly, if you're considering any sale of assets I'm thinking about the transmission business, Transnet and [SML].
And last, but not least, you would assume in the calculation of EPS accretive that the cost of refinancing this 7.5% would be refinanced at a lower cost. Is that correct? Thank you.
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Rafael Villaseca, Gas Natural SDG SA - CEO [4]
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So we'll start with the last.
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Carlos Alvarez, Gas Natural SDG SA - CFO [5]
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Yes, Carlos Alvarez speaking. We are assuming when we mention that the (inaudible) position regarding the current refinancing of this acquisition. And we are assuming more or less circa 3% [of cost] of [this] acquisition financing.
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Rafael Villaseca, Gas Natural SDG SA - CEO [6]
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Related to your other questions, we are not thinking in sell assets in our new activities in Chile. In principle we are happy we've sold the business [and are willing] to develop, especially in Gasco.
Gasco we'll control through our majority participation in the company and we are going to develop their distribution and commercial activities through this company.
The businesses of this company are similar of the business we know very well and we are now developing also in LatAm, in other countries and in Spain. So we expect to increase our activities in commercialization and distribution because we are convinced that Chile presents us a lot of opportunities.
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Jose Ruiz, Macquarie Group - Analyst [7]
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Thank you.
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Unidentified Company Representative [8]
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All right. Could we have the next question?
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Operator [9]
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Javier Suarez, Mediobanca.
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Javier Suarez, Mediobanca - Analyst [10]
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Hi, good morning all. This is Javier at Mediobanca. I just wanted -- I just have three follow-up questions. The first one is on the regulation in Chile for the different activities, this being a highly-regulated entity with almost no exposure into generation market.
I just want to (inaudible) you can go direct as through the fundamentals of this regulation on the things that are more important for you in terms of regulation for the different activities and whether or not that regulation is stable for the next years to come. Which are the points of concern, if any?
The second question, apart from regulation I just wanted to have your perception about this company as a growth platform in Chile and in general the synergies that this could have with your other activities in Latin America.
Obviously, the multiple that has been paid looks full, let's put it this way. And I guess question myself is how the company (inaudible) company grow in the future, and what lever the company may use to increase the profitability of the company or to get synergies with the other activities that the company has in Latin America?
And then the final question is on the debt structure of the company. Can you [brief] us on your expectation on the net debt to EBITDA of the company after the completion of the deal? I guess that's from January 1, 2015. And your expectation or which level of net debt to EBITDA the company feels comfortable down the road?
And I have noticed that in the slide number 21 there is a (inaudible) range of net debt to EBITDA for the year 2015 that goes between 2.5 to 3 times. Can you be a little bit more specific on where the company's expecting to have the net debt to EBITDA by the end of 2015? Many thanks.
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Rafael Villaseca, Gas Natural SDG SA - CEO [11]
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Okay, thanks. The two first questions. Regulation in Chile is (inaudible) very stable and we know very well, because we have analyzed this deal for a lot of time.
And we are convinced that regulation is one asset for our investment in Chile. It's completely true that in the present situation we know that the Chilean government is analyzing possible changes in gas distribution regulations.
[But] we know the new issues, the new interests of the government, and we have taken into consideration this when we launch the takeover, when we fixed the prices. So we are happy with the regulator and with the basis that they doing things.
Synergy; we have practically not consider any kind of synergy in the present situation. It's true that without any doubt we are going to achieve several. There are probably a lot.
But we have not taken into consideration synergies for established practice and for developing (inaudible) of the company. We are convinced that in the immediate future we can analyze that indeed and launch plans to achieve a good amount.
And the third question, my colleagues are --
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Carlos Alvarez, Gas Natural SDG SA - CFO [12]
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Carlos Alvarez speaking [on LatAm]. Referring to the slide twenty-first, we include in this that current figures of Gas Natural Fenosa at the beginning of the strategic plan and the targets established with our strategic plan.
That means that these figures are Gas Natural Fenosa a standalone basis and according to the strategic plan. That means that the -- referring the net metric of the [EBITDA] ratio remember that will represent the strategic plan. We announced that this ratio will be 20 -- 2.5 times.
But at the same time we mention that we have some part to invest considering that our target is remaining in the 3 times' range. And this is the idea that [we have one thing]. We believe as a company this 3 times is good. And with this transaction we believe we will be in this range by 2015 [without doubts].
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Javier Suarez, Mediobanca - Analyst [13]
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So by the end of 2015 we should expect a net debt to EBITDA at 3 times, correct?
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Carlos Alvarez, Gas Natural SDG SA - CFO [14]
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Yes. Around 3 times, yes.
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Javier Suarez, Mediobanca - Analyst [15]
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Thank you.
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Unidentified Company Representative [16]
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Could we have the next question?
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Operator [17]
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Alberto Gandolfi, UBS.
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Alberto Gandolfi, UBS - Analyst [18]
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Yes, thank you. Good morning everyone. I have a few quick ones as well. Just to be sure I understand, Carlos Alvarez was touching about 3% cost of debt for the funding. Can you specify in which currency you are going to borrow to fund the acquisition, please?
Secondly -- apologies to go again back to regulation and the question of Javier, but here again it's quite crucial to assess the deal. Could you please tell us for at least the three key activities, like power distribution, gas distribution and power transmission, when is the next regulatory review and what is the current return you make on these three activities?
A third question. You're talking about EUR100m accretion. But looking at the accounts of CGE the company currently delivers about EUR100m of net income. However, if I think about you have to borrow to pay the cash payment of EUR2.6b I would expect the accretion to be less than EUR100m.
And also then can you talk about the asset write-up that you're going to implement if you're going to implement an asset write-up, or perhaps there is goodwill in the transaction?
And last question, what do you think average is going to be CapEx for the next couple of years? Thank you.
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Rafael Villaseca, Gas Natural SDG SA - CEO [19]
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Okay. Carlos, did you want to (multiple speakers)?
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Carlos Alvarez, Gas Natural SDG SA - CFO [20]
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Yes, I'll try to answer the first and the last question and my colleague John Gauntha will answer in terms of your question referring towards regulation.
As I said, now we will finance our -- the transaction with the liquidity that we have, but [we] consider when I mention the 3% cost (inaudible) is considering the idea that we have to refinance this -- the power of the acquisition.
Today [isn't ideal. We have -- today we'll pay -- we will pay in Chilean pesos and we will finance depending on the condition on the market and the conditions that will be around. This is the situation that we have. We have the affirmation today that the average cost of the debt post tax will be around 3%. But this is our intention today.
And the last question that you mentioned (inaudible) into the -- no, to the -- the transaction goodwill etc., because you want to make some composition of the net income [of] the company and the cost of the transaction etc.
We are assuming that the difference and the depreciation on price between the net book value the most part of them will be not depreciated because [of what is] goodwill or this part of the asset that will be not depreciated because [you have] long terms, like the concessions etc.
We are assuming that depreciation of this part of the extra [faith] in the acquisition will be not significant in the transaction. That means that, as I mentioned before, the sole cause that you need to consider in order to depreciation calculation is the cost of the -- a decision (inaudible). Okay?
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Rafael Villaseca, Gas Natural SDG SA - CEO [21]
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Related to the regulatory framework, as I have explained, the government is now writing a new framework as regards the natural gas entering Chile. We have recently developed a good relationship with the ministry and the regulatory bodies.
We fully understand the ramifications the government is willing to apply many of the regulatory cap rates and asset recognitions. And we have incorporated this into our valuation analysis. My colleague, John Ganutha, can [answer].
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John Gauntha, [22]
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(Inaudible) starting with power distribution. Your question was what the rate of return. The rate of return that the current regulation holds is 10% [pre-tax] plus/minus 4%. And that's not supposed to change.
The regulatory period is (inaudible) it's every four years. So the next regulatory period should start in 2015 (inaudible) get from the jobs that we have with several people and the government in Chile.
We don't think that there should be any downside regarding to the energy reform, because the energy reform is much more focused in power generation than in power distribution.
And if you look at the contribution that power distribution has, in the end the electricity prices of the customer is negligible, so we don't think that we should be seeing the -- anything there.
As far as transmission is concerned, let's focus we are not talking about transmission. We are talking about [shift] transmission. The regulation there that we have is with a return of 10% [pre] of the tax. And the regulatory period right now we are in the midst of the regulatory revision process.
And as I said before we don't think that there's something there that we should be worried about. And we don't think that there should be some material. There are some talks about what's going to happen with the rights of way and all those kind of things, but we don't think that it should be material as far as (inaudible) is concerned.
Gas distribution there is no regulatory period per se, but there is a -- it's a maximum profitability that is allowed that is [quark] plus 5%. And from what we see or what we hear is that there are two talks right now as far as how big the regulatory asset base is going to be and how -- where that quark plus 5% should be changed.
And in that sense we have taken in our valuation a conservative scenario regarding both the asset data and also profitability, so we don't think that there we should see any surprises.
And I think that last but not least is the power generation, because in the end one of the key drivers of the -- all of this regulatory process has been the higher liquidity (inaudible).
And that will basically lead to generation problem. The thing is that it goes down then to the gas situation. And I think that for us that electricity distribution should be on the upside if the power distributions go down.
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Alberto Gandolfi, UBS - Analyst [23]
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-- for this clarification, but before allowing you to answer the question on CapEx can I be 100% clear on the first answer by Carlos? You are going to draw from your liquidity effectively -- at least initially you're going to borrow in euros? Is that correct?
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Carlos Alvarez, Gas Natural SDG SA - CFO [24]
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Of course we will borrow at that -- the European level, of course, but at the end we will send this cash flow to the Chilean (inaudible). There is not surprises on that.
But if you are asking me if the 3% is a matter of the currency, it's not a matter of the currency. This is a matter of the product that we will [on] the maturity of the refinancing of this is a euro level [the] cost of the debt, okay?
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Alberto Gandolfi, UBS - Analyst [25]
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Thank you.
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Unidentified Corporate Representative [26]
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Right, could we have the next question?
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Operator [27]
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Martin Young, RBC.
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Martin Young, RBC - Analyst [28]
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Yes, good morning to everybody, just a couple of questions. The first one relates to the gas activities and the fact that there are minorities in there. Is the possibility of buying out those minorities at some stage in the future something you are considering?
And then, secondly, getting back to the accounting for this, would it be fair to suggest that the accretion could be in the range of 2% to 3%?
And, secondly, will the various activities within CGE be spread across the current way that you report your businesses in Latin America, so gas distribution into gas distribution, electricity distribution into electricity distribution and so on? Thank you.
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Unidentified Corporate Representative [29]
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Could you repeat the second question, Martin, please?
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Martin Young, RBC - Analyst [30]
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Yes. The second question was, firstly, is it fair to say that the accretion could be in the range of 2% to 3% from day one?
And then the second part on the accounting was will the activities of CGE be spread across the Latin American business as you currently report, so CGE's electricity distribution activity being reported in Latin American distribution of electricity and so on? Thank you.
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Rafael Villaseca, Gas Natural SDG SA - CEO [31]
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I answer the first. The minorities in Gasco is a stable situation. We are nothing (inaudible). For us it's a comfortable situation with the future, but in any case for us is that is the end of the deal.
The other thing, Carlos, (technical difficulty).
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Carlos Alvarez, Gas Natural SDG SA - CFO [32]
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According to our figures [the] first-day accretion is in line with your calculation, around 3%, yes. Okay?
And the last question that referred to the reporting etc. (inaudible) we are not taking the control of the company with that idea, but we need to show more the report and the details of the subsidiaries etc.
But in principle we are thinking that CGE will be a unit and under this unit we will have several sub-units according to the segments like Gas Natural segment more or less, okay? But this is a whole unit and under this the different lines of businesses like we have today in Gas Natural Fenosa.
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Unidentified Corporate Representative [33]
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All right, could we move to the next question?
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Operator [34]
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Cosma Panzacchi, Sanford Bernstein.
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Cosma Panzacchi, [35]
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Hi, good morning and thanks for taking my questions. I have three questions on the acquisition and one overall on Gas Natural Fenosa.
The first question on the acquisition regards to what you present on page 4. If we are not wrong, you say that the deal happens at 10.6 times' EBITDA for 2015. And given the $7.4b [CV] that means that you are actually implying a current FX a CLP415b EBITDA for 2015, which would be approximately 5% lower than 2013.
So I was wondering what is driving down the EBITDA of CGE between 2013 and 2015 and if that's just a blip or structural?
The second question on the acquisition relates instead to page 5, where you mention that with this transaction Gas Natural Fenosa becomes one of the few European utilities to be able to exploit Chile.
I wonder how you would position the new position of Gas Natural Fenosa versus, for example, GDF Suez and Enel who already have significant positions and stakes in the Chilean market.
And the third question on the acquisition itself would be about the timing. So most of the structural elements that you are talking about on Chile in terms of regulation, outlook and so on were already in place one year ago or even before.
And if I look at again page 5, for example, the real GDP growth for 2014 that you represent at 3.3% for this year has been decreased by the Minister of Economy [Arenas] to 2% this year already in September.
So I was wondering why buy CGE now and at these multiples that are higher than in the recent past when the structural elements don't seem to have changed?
The final question is on overall Gas Natural Fenosa. If I look at page 21 once again, and I compare it with your original strategic guidance, and I look at the net debt on EBITDA that appears there I wonder does this acquisition now rule out any other inorganic moves in the Spanish market? Or if it doesn't would you envision to sustain [those an] asset rotation program? Thank you very much.
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Rafael Villaseca, Gas Natural SDG SA - CEO [36]
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I answer some questions. Well, we signed now the deal because now there are the possibility to sign it. Now in the present circumstances the families that have the control of the company put on the market the possibility we will acquire it and we have [profited] that possibility and we have signed it.
But in any case it's important to consider that our multiplier under EBITDA is on track on the older transactions if you especially consider that the business of CGE is not involved in power generation.
CGE is a controlled transaction versus an intra-group (inaudible) work. This is the case of Enersis. There are no control premium and that is really relevant.
If you put it into the [figure] the amount could be more or less similar. And I may insist we have bought now because now we have had the possibility and we have taken that into account.
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Unidentified Speaker [37]
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(Inaudible).
About inorganic movement what -- is complicated to answer. This is not in our hands. Certainly, we are not thinking about what -- in fact, this taking into account E.ON we won't see [other] important movements in the Spanish market, but certainly it's difficult to see what it's now thinking, for example, Endesa or other companies, but we don't think of it.
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Carlos Alvarez, Gas Natural SDG SA - CFO [38]
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Regarding what happens 2015 EBITDA, what we think is that there we have factored in some of the regulatory factors that there might be, but we think that they are one-off and they should not be something structural.
And regarding the strategy what makes us different from other European companies that might be there, we have some common things regarding with them so we think that the ability of operating the power distribution on the part of developing the power generation opportunities.
But we think that we are the only player who can actually develop the full potential of the power [and] the gas distribution business. And I think that's something that's really important, because on top of the economic growth you have the gasification growth so that's on top of growth.
And I also think that the LNG is consistent with the movements that we've shown in the past. So, for example, already in May we made public that we have signed an LNG contract [with] BHP Billiton in the north of Chile. And I think that that's the kind of place that we're talking about and trying to find a synergy for all of our LNG portfolio.
------------------------------
Unidentified Corporate Representative [39]
------------------------------
Operator, could we move on to the next question, please?
------------------------------
Operator [40]
------------------------------
Carolina Dores, Morgan Stanley.
------------------------------
Carolina Dores, Morgan Stanley - Analyst [41]
------------------------------
Hello, good morning and thanks for taking my questions. I have three if I may. The first one is that you -- even though this transaction is earnings accretive you haven't really raised the guidance for 2015. I was wondering if you were being conservative, or if there's any business that has been underperforming versus your expectations?
The second thing, you talked about opportunities to grow in the Chilean generation market. I wanted to know if CGE has any projects that it could quickly start building.
And my third question is in your strategic presentation you didn't mention growing electricity distribution as one of your key targets. I was wondering is that CGE participations in the electricity distribution was in a way price or an asset that you have to take for the generation and LNG opportunities, or if you think that this market is becoming more attractive in Latin America. Thank you very much.
------------------------------
Antonio Basolas, [42]
------------------------------
Yes, [Antonio Basolas] speaking. (Inaudible) the targets of 2015 we are -- today we are not presenting a new strategic plan. We are revealing our targets for 2015. This is the targets we believe that are more close to -- that we have more close in 2015.
But at the same time we have [done] this transaction that will put us for sure in an accretive position for the start. That means if we consider that we have accretive net income for next year, for sure the net income will reach this accretive position of the current target that we have at this time. There is no more than this, no more secrets, okay?
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [43]
------------------------------
To the other questions, power generation, certainly CGE is not in that business, but it is GNF as you know is one of our targets to grow worldwide our portfolio of generation plants.
And as you know we have developed in our company a new one, GPG, Global Power Generation, and its objective is to be grow worldwide the new plants, hydro, coal, natural gas, wind farms basically.
And so it's clear that the Chilean markets provide us the possibility to profit a lot of opportunities. Certainly, with our position in Chile that is much better than without, but that's clear. So in one way or the other basically through our new company, Global Power Generation, we -- again we would like to take advantage of this issue again.
Distribution of electricity, certainly, we would [sought] basically in natural gas distribution, but -- well, in this deal the natural gas distribution is one of the important [legs] of the deal.
But certainly power distribution is an excellent business in Chile due to this excellent position of the company in the market and the forecast of the development of the power in Chile. So we are happy with the -- both opportunities, natural gas and power.
------------------------------
Unidentified Corporate Representative [44]
------------------------------
Right, could we move to the next question, please?
------------------------------
Operator [45]
------------------------------
Javier Garrido, JP Morgan.
------------------------------
Javier Garrido, JP Morgan - Analyst [46]
------------------------------
Yes, good morning. I have a few questions if I may. The first one I was interested in if you could elaborate on the comment about the 2015 guidance, or indication of an increase in the EBITDA multiple because of regulatory reasons.
The explanation was that you see the drop in EBITDA because of one-off reasons. But did you mean the drop is a one-off and then this should recover, or that there should be a drop because there's a regulatory review and then this move from that lower basis?
I basically want to understand whether it's a one-off depress in your earnings in 2015 or it's simply a lower basis of the regulatory [earnings].
The second question is on the question made at the beginning of the call on cannibalization -- potential cannibalization between natural gas and LPG. And I honestly did not get what was your views on this.
If you could elaborate on whether you think there is a potential for cannibalization also banking on your huge experience in this competition between LPG and natural gas all across the world and, interestingly, your experience on -- in Mexico where it was a big issue.
The third question is on the tax rate. I would be interested in knowing what is your assumption for the tax rate in Chile going forward.
And the last question, if I may, is on the natural gas, your exposure to natural gas. You mentioned that you are not considering buying out minorities, or you are not considering changes in minorities, but are you happy just with the 30% attributable stake in the gas flows of one key element of CGE like Metrogas? Thank you.
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [47]
------------------------------
In the last question, yes, we are happy with that situation. In the future we [think] we will improve the situation, but certainly the present situation is quite comfortable for us.
Related to LPG and GNL it's important to remark that we know these problematics very well (inaudible) as in a lot of countries. But especially important to remark that [gas to have the two legs] of the problem of (inaudible). They are in between LPG and GNL according the profitability of both technologies.
So there are no cannibalization. There are businesses controlled by the same company [normally] the future we see worldwide that this changes from LPG to GNL, so the company controls that. Also the regulation so far is seeing both businesses all together. That's important to remark.
It is the reason because normally the gas distribution companies in Chile have both businesses because they are maybe making trading between both. So it's not a problem. It's an opportunity to control and develop the changes between one technology and another.
------------------------------
Carlos Alvarez, Gas Natural SDG SA - CFO [48]
------------------------------
Regarding the first and the last question, the 2015 (inaudible), there is no certainty about how the regulatory gas distribution is going to develop, but it's out of caution what we said is let's suppose that there's going to be one one-off.
We don't know whether that one-off is going to be 2015, 2016 or 2017. The only thing that we know, and that's something that the Minister (inaudible) has made public, is that they intend having some kind of [impact] on the gas distribution revenues. And that's what we have planned in 2015. But we think that 2015 and then -- the one-off effect and then we should keep on growing without a problem.
And regarding the tax, currently what we have is a 20% tax effect plus the 10% that you have on dividend, and the proposal whether this should be [a vote] at 20% [gap] to 25%, 27% and that would mean that the total effective tax would be about 35%. And that's what we've basically taken account into our valuation.
------------------------------
Unidentified Corporate Representative [49]
------------------------------
All right, we can move on to the next question.
------------------------------
Operator [50]
------------------------------
James Sparrow, BNP Paribas.
------------------------------
James Sparrow, Exane BNP Paribas - Analyst [51]
------------------------------
Yes, good morning everyone, just a couple of questions on the credit side. Firstly, do you think there's going to be any rating impact from this transaction?
Secondly, are you considering using hybrid capital to part fund this? I know it's something you've mentioned in the past.
And thirdly, just to clarify the amount of debt you're going to need to raise for this transaction, there's obviously the acquisition price, but are you going to refinance any of the CGE debt? I know you've said you didn't need to, but is that something you would like to do longer term? Thanks.
------------------------------
Carlos Alvarez, Gas Natural SDG SA - CFO [52]
------------------------------
Okay, we are highly comfortable that this transaction will not have a material impact on Gas Natural Fenosa's current rating and we are confident that we will maintain our triple B position.
Our pro-forma analysis of the current metrics with the capital structure used for the transaction had the conclusion that the main metrics regarded by rating agencies remain within the limits of our current ratings. For that we foresee changes in the current position [are] in front of the credit agencies.
In terms of the financing and the products that we are considering is -- there are a lot of opportunities that we need to consider and we are not close to do anything.
That isn't saying that we mention before the transaction in that the job that the company is doing under the financial plan is in order to refinance our [current debt], attend the maturities and now we have also to attend these new flows.
That means that we are open to currencies -- to new currency and to new products and (inaudible) new products that I mentioned. We are open to do these kinds of things.
And finally you are referring to if we are hoping to refinance the CGE. It's early to consider this. We believe that there is some opportunities, but the important part of the debt is in the bond market, a thing that is -- and part of the debt of the company is through the (inaudible), because I think that [this part of the] debt is linked with inflation and it's a part of the debt we need to consider more.
Initially we will not make anything, but as I mentioned to you at the beginning of this presentation, we (inaudible) something (inaudible) also we believe that in financing there will be some synergies also. But in our [valuation] we have not considered changes in the structure on the debt of CGE.
------------------------------
Unidentified Corporate Representative [53]
------------------------------
Okay, could we move to the next question?
------------------------------
Operator [54]
------------------------------
[Manuel Boosadaqua], Bank of America Merrill Lynch.
------------------------------
Manuel Boosadaqua, BofA Merrill Lynch - Analyst [55]
------------------------------
Hi, my question has actually been answered on (inaudible). Cheers.
------------------------------
Operator [56]
------------------------------
Manuel Palomo, Exane.
------------------------------
Manuel Palomo, Exane BNP Paribas - Analyst [57]
------------------------------
Hello, good morning, a couple of questions remaining. Well, one of them has been already answered, but I'm not sure whether I understood it or whether you finally answered it. It's what is the expected average CapEx level that you are assuming for CGE in the coming years? That's number one.
Number two, given that you are assuming a number of one-offs in the EBITDA for 2015, or 2016, or 2017, whenever it happens, what I would like to know it's in our expectations, in your projections what's the growth rate in a normalized year?
And the third one is on page 16. I see that there is BG supplying LNG to Chile. And I would like to know what is the size of -- if I may, the size of this contract and also the expiring date of the contract in case it could be replaced from -- for some other suppliers, such as Gas Natural. Thank you.
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [58]
------------------------------
Antonio.
------------------------------
Unidentified Speaker [59]
------------------------------
Okay, thanks. You like to answer?
------------------------------
Antonio Basolas, [60]
------------------------------
The closing of the contract it's (inaudible) and it's divided in two quantities, but that's the level of gas that BG should be supplying CGE currently under the current contract that is [to be signed].
Regarding CapEx, actually what we project is that the CapEx should be a bit -- it should increase in some of the businesses compared with the current levels that we have (inaudible) you have to go on a business-by-business basis. So we suppose the electricity distribution there is not a high increase.
On sub-transmission what we have done is we have taken a conservative stance because the increase in the sub-transmission CapEx cannot be guaranteed since it's compared on a competitive basis. So what we've done is taken the projects on which we could have visibility we have assumed that the CapEx -- have supposed that that CapEx should go down.
But in gas distribution we do think that there is -- there can be an important increase in the growth both what would be part gas distribution and also what would be LNG distribution -- LNG with the business core industries. So I think that [there] should be an update.
------------------------------
Unidentified Corporate Representative [61]
------------------------------
All right, could we move to the next question?
------------------------------
Operator [62]
------------------------------
Jorge Alonso, Societe Generale.
------------------------------
Jorge Alonso, Societe Generale - Analyst [63]
------------------------------
Hi, good morning to everybody. Just linked to the question made by Manuel, could you please guide us about what is the main drivers for the regulated businesses?
So in -- it's in power distribution is getting more efficiencies rather than expanding more the network and if in gas distribution still the penetration is quite large, so we will see the growth driven by big CapEx plans?
And if you can provide us with the current RAB of those activities so just to have something to compare with the new review that the government or the regulator will do or is undergoing. Thank you very much.
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [64]
------------------------------
I will start at the end. As far as current RAB is concerned I think that there are some public figures regarding public (inaudible) distribution and some transmission and those shouldn't change.
Regarding gas distribution the figures right now are under discussion. We have our own estimate, but they have nothing to do necessarily at the end (inaudible) might be, but we think that they should be pretty close.
And regarding what the main drivers for growth in the regulated business, it depends. So if you talk about electricity distribution we think that there are three main lines of growth.
One is due to the fact that the electricity distribution is where the electricity demand is going to keep on growing in Chile. So depending on the estimates we should be looking at an increase of electricity demand between 3% and over 4% (inaudible) per annum. So that's one of the -- that's one important driver of growth.
We do think that also, for example, as far as losses is concerned, although the level of losses that we have is a level that is almost on western standards, [with] 7% losses, the fact that the recognized losses are around the level of 4% that means that every (inaudible) you have a decrease on the losses, so there is a decrease on the price of your -- the distribution price that also has an important impact on us as far as profitability is concerned.
Of course, all of these regulated businesses are businesses on which you have -- you must continue to strive for efficiency. And I think that's something that CGE has been working on these last few years. And we as a Group, NGF -- GNF, we have shown in the past that we are able to achieve and to improve always the efficiencies, so I think that's also one.
And of course, CapEx, the growth that you are going to do it you must do it in a more efficient way and you have to try to adapt to the kind of growth that the regulator is going to look for in the efficiency models. That would be power distribution.
And in gas distribution I think that the main driver is the one that we -- on which we have a proven track record in each of the -- in all of the countries that we [are in] and it's basically growth.
So we have an important opportunity for growth in the residential market and also in the industrial market, but mainly in the residential market. And I think that you have to be able to grow in a profitable way. And that's what we have done in all the countries in Latin-America and that's something that we think we can keep on doing in Chile.
------------------------------
Unidentified Corporate Representative [65]
------------------------------
[All right], we can move to the next question.
------------------------------
Operator [66]
------------------------------
Andrew Moulder, CreditSights.
------------------------------
Andrew Moulder, CreditSights - Analyst [67]
------------------------------
Yes, hello, most of our questions were answered actually, but I just had a few more. I just want to be clear on your net debt to EBITDA target for 2015.
It just seems to me that with EUR2.6b of funding for the equity in this deal it's going to be higher than the 3 times you're talking about. Could you just be exactly clear on that? Where exactly do you expect your net debt to EBITDA target to be at 2015? Is it going to be 3 times, or is it going to be higher than 3 times?
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [68]
------------------------------
Sorry, Andrew?
------------------------------
Andrew Moulder, CreditSights - Analyst [69]
------------------------------
Yes.
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [70]
------------------------------
Excuse me, the line is not very good. So could you repeat your questions a bit more slowly, please?
------------------------------
Andrew Moulder, CreditSights - Analyst [71]
------------------------------
Yes, hi. I just want to be clear on the net debt to EBITDA target for 2015. You seem to be saying that it's going to be 3 times, but I'm just having difficulty getting there when I'm thinking about funding EUR2.6b for the equity in this deal.
It seems to me it's going to be higher than 3 times and I just want you to confirm whether -- what is the case? Will it be 3 times, or will it be more than 3 times for 2015? And when do you expect to get it back down below 3 times?
My second question, I just wanted to ask about the price you've actually paid. CLP4,700 per share seems to me to be a huge premium to the trading price in the market.
If I look at the price before there was speculation of this deal happening that was around about CLP3,000 or so, so you're paying 60% premium to that. I appreciate what you're saying about the multiples, but again when I look at the multiple chart you've presented you're talking about transactions in 2006 to 2012, which is quite a big range.
And it just seems to me to be a lot to be paying and I just wonder how you really justify that, or are you just saying it's the multiples?
And finally I just wanted to be clear on the debt at CGE. Will the debt at CGE actually be recourse to Gas Natural in Spain? I only ask because I know that with Enersis and Endesa that the debt in Chile was not actually recourse to Endesa in Spain. What's the situation going to be with you and CGE? Thank you.
------------------------------
Carlos Alvarez, Gas Natural SDG SA - CFO [72]
------------------------------
Yes, Carlos Alvarez speaking. I'll try to answer the first and the third question and my CEO will refer to the valuation etc. and the price.
I repeat the target that we -- initially we had in our strategic plan was for -- for 2015 was 2.5 times. But at this time we consider that we have some caution in order to invest inorganically, because the target of this company will be at least in the range of 3 times.
Considering this transaction we believe that at the end of 2015 we will be in this range. That means we will be around these 3 times and we need no time to be in this range. And we will be in this 3 times by the end of 2015, okay?
------------------------------
Andrew Moulder, CreditSights - Analyst [73]
------------------------------
Okay.
------------------------------
Carlos Alvarez, Gas Natural SDG SA - CFO [74]
------------------------------
And referring to the debt of the CGE, there is no change of [counter clauses] in this debt and the most part of the debt is bonds. (Inaudible) that means that we are not planning to change the debt structure of the company. For that we will release changes under current conditions of this debt the next coming months, okay?
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [75]
------------------------------
Related to price, to come up with the price we have used a combination of fundamental valuations and (inaudible) multiples of the Chilean market. We have used discounted cash flow for the different CGE businesses using different cost of capital for the different operations.
Certainly, as a cross check we have used the present transaction multiple [state] in the electricity and the gas distribution (inaudible) in Chile for the last decade. And if you see this you see that the multiples are not outside the market at all. You must consider that the quotation [don't mean] all the full value due to the special situation of the market in Chile.
According to this and according the peers -- the (inaudible) of the peers, if you take into the consideration that CGE has not business in power generation you see clearly, we have explained it in 19 page, that the multiples are [in line] with the other deals we have considered.
So also (inaudible) if you (inaudible) all the power portfolio and you include the control that is on both sides in this deal you can finally conclude that the price is our firm opinion is absolutely [into the good track], especially if we analyze discounted cash flow that is the fundamentals of any kind of calculations.
------------------------------
Andrew Moulder, CreditSights - Analyst [76]
------------------------------
Okay. Can I just follow-up on one thing you said there? You said that CGE is not in the business of power generation, but earlier on you did say that that was one area you were looking to expand. Could you just perhaps give me some idea of how important you think power generation will be in this business going forward?
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [77]
------------------------------
In this generation, in principle, nothing. It could be an opportunity to develop for GNF Group as a whole, but not for CGE. CGE is on the businesses, as you know, of distribution and commercialization natural gas and power distribution and LPG, not in power. So we -- in any case, we [haven't] considered any amount in the valuation of CGE from power.
All the things is at the Group as a whole GNF considered that there are good opportunities in Chile to develop businesses in this track, so that is our question, but not for put any value of CGE.
------------------------------
Andrew Moulder, CreditSights - Analyst [78]
------------------------------
Okay, thank you.
------------------------------
Unidentified Corporate Representative [79]
------------------------------
All right, we can move to the next question.
------------------------------
Operator [80]
------------------------------
Martin Young, RBC.
------------------------------
Martin Young, RBC - Analyst [81]
------------------------------
Yes, hi once again. It was only a very quick follow-up. I'm not sure if in all the responses to the CapEx question you actually put a number on your expectations for CGE CapEx from 2015 onwards?
So I would just be very grateful if you could give us a ballpark indication of what that consolidated number would be, please.
------------------------------
Carlos Alvarez, Gas Natural SDG SA - CFO [82]
------------------------------
I'm sorry, but we are not going to give any specific guidance regarding the number of CapEx. We have give the general guidelines of how we think are going to grow in each of the business lines, but [for the] time being we are not going to be more specific than that.
------------------------------
Martin Young, RBC - Analyst [83]
------------------------------
Okay, thank you.
------------------------------
Unidentified Corporate Representative [84]
------------------------------
Right, could we move to the next question?
------------------------------
Operator [85]
------------------------------
Michael Gladstone, [Pepworth] Capital.
------------------------------
Michael Gladstone, Pepworth Capital - Analyst [86]
------------------------------
Hi, good afternoon. Apologies for having joined the call late. I just had a couple of quick process-related questions.
I assume, given the timeframe in which you're working, that there are no regulatory approvals required either for the purchase of the 54%, which I understand is already complete, or for the balance of the offer which you're launching for the minority shares.
And the second question. Is there any minimum shareholder acceptance level required in the offer?
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [87]
------------------------------
Yes, first, there are no approvals pending in Chile or in Spain. There are no -- any kind of rules applied for this deal.
And secondly the condition is to achieve a minimum of 41%. It's true that we have signed at 55%, so 51% it seems that is (inaudible), but in any case 51% is the minimum level.
------------------------------
Michael Gladstone, Pepworth Capital - Analyst [88]
------------------------------
I see. So in addition to the 50 -- you've already exceeded the minimum level, as it were?
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [89]
------------------------------
Yes, we have [received].
------------------------------
Michael Gladstone, Pepworth Capital - Analyst [90]
------------------------------
Perfect, thank you.
------------------------------
Unidentified Corporate Representative [91]
------------------------------
(Inaudible). All right, are there any more questions?
------------------------------
Operator [92]
------------------------------
There are no more questions. Thank you.
------------------------------
Unidentified Company Representative [93]
------------------------------
Okay, so with this we conclude the Q&A session of this presentation, so I'll give the floor to our CEO, Mr. Rafael Villaseca, for his closing remarks.
------------------------------
Rafael Villaseca, Gas Natural SDG SA - CEO [94]
------------------------------
Many thanks for your time and many thanks for continue the interest to hear us in this new deal. Many thanks. Bye.
------------------------------
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