Nine Months 2014 Gas Natural SDG SA Earnings Call

GAS.MC - Gas Natural SDG SA
Nine Months 2014 Gas Natural SDG SA Earnings Call
Nov 04, 2014 / 09:00AM GMT 

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Corporate Participants
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   *  Rafael Villaseca
      Gas Natural SDG SA - CEO
   *  Luis Calvo
      Gas Natural SDG SA - Head, IR
   *  Carlos Alvarez Fernandez
      Gas Natural SDG SA - CFO

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Conference Call Participants
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   *  Alejandro Vigil
      Cygnus Asset Management - Analyst
   *  Manuel Palomo
      Exane BNP Paribas - Analyst
   *  Javier Suarez
      Mediobanca - Analyst
   *  Alberto Gandolfi
      UBS - Analyst
   *  Virginia Sanz De Madrid
      Deutsche Bank - Analyst
   *  Jose Javier Ruiz
      Macquarie - Analyst
   *  Martin Young
      RBC - Analyst
   *  Hugh Wynne
      Sanford Bernstein - Analyst

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Presentation
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 Luis Calvo,  Gas Natural SDG SA - Head, IR   [1]
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 (Interpreted). Good morning and welcome to the presentation of results of the Company for the first nine months of 2014. As usual, the presentation will be done by our CEO, Mr. Rafael Villaseca, together with the CFO, Mr. Carlos Alvarez, and Strategy and Development Manager, Mr. Basolas. Then after the presentation we'll have a Q and A session. We'll begin with the people in the room and then with people who have questions that they wish to ask through the internet or by -- on the phone. So, I'll 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, and thank you for being here, both physically and remotely. These are the four areas that I'm going to deal with. First of all, highlights of the period. Then we'll look at the financials, then we'll do the analysis of operations of the different business lines and then we'll have conclusions.

 As regards the key financial indicators we can see them here on the chart the net income has gone up by 10.6%, EUR1,239m and there's an impact resulting from the divestment in telecommunications. The EBITDA, the drop is not so sharp as last year, it's EUR3.6b that's 2.3% less than the equivalent period of the last year. Investments have gone up by 15.2%, just over EUR1b but they include a new methane supplier which ship -- which is a renting operation although it's been accounted for as an investment. Net debt is at EUR13b, EUR13.8b. That means that there's a drop of 2.9% versus December 31 of last year.

 We should remember, you know this but we'll remind you, that as from January 1, 2014 the new IFRS standards have been applied. So we're not using the old method but the new method and we applied these new accounting standards. The main consequences are a reduction of EUR175m in the EBITDA that comes from Union Fenosa Gas, Ecoelectrica and Renewables; a decrease of EUR27m in investments, EUR396m in the net debt and all these figures have been calculated, as I say, in accordance with the new standards.

 We have to say that in this period there's been a change in the regulations in the gas market in Spain that are included in Royal Decree Law 8/2014 in effect as of July 5. This new regulation brings both higher stability and higher predictability in distribution of gas in Spain and it avoids or prevents the tariff deficits. For 15 years it establishes that the -- we're going to recover from the accumulated deficit in the sector. And it also establishes regulation periods of six years; the first one comes to an end in 2020 which will give us more predictability.

 The remuneration of distribution in gas is still based on a parametric formula which incentivates growth focusing on consumers with higher volumes of consumption and areas with low gasification levels in Spain. The novelty is the impact it will have on the level of money that we make. For this first half-year that impact was about EUR45m.

 As regards regulation of electricity, everything is taking place within the framework of Law 24 and the aim is to achieve financial stability of the new system to prevent new future deficit -- tariff deficits that are disastrous for the sector. As a result of this, law royal decrees were approved to regulate the activities of transmission and distribution, a law on interruptability, a royal decree that establishes the new methodology for calculation of voluntary price for small consumers and a royal decree on renewables, co-generation and waste which is going through now, and also pending approval there are a series of measures on payments for -- capacity payments, wholesale market, installation, hibernation, trading, supply, self-consumption and the new invoice model.

 We've acquired -- Gas Natural Fenosa has acquired the Chilean General -- Compania General de Electricidad, CGE and we're negotiating that purchase and it fits in with our strategies very well. That investment which we're going to materialize we hope, we'll tell you dates later, will allows us to penetrate Chile, one of the key Latin American markets, and reinforce our position of leadership in the gas and electricity markets and will allow us to become leaders in those markets in Chile.

 Our geographical diversification has increased and our risk profile therefore gets better in a country with a higher rating. Our Company becomes one of the leaders in gas distribution. We'll reinforce our position in electricity in Spanish America. And it will also speed up the integration of our global gas -- natural liquid gas in Spanish America and Chile. On the other hand, it facilitates our future participation in generation projects which are greatly in demand in Chile and will be more in the future.

 In recent years, as you know, we have been trying to reinforce our position in gas distribution and at this time we are present in Spanish America in the greatest areas, largest areas. We are not in Lima yet, we're in Arequipa, the second area in the country in Peru, and we're not in Caracas either in Venezuela. Apart from those two capitals, we're present in all the large cities in Spanish America. And in addition to that, the acquisition of CGE in Chile will allow us to increase by 17% the amount of customers in the region. So we'll be one of the leading distribution companies on that continent.

 This acquisition of CGE has a limited impact on the business profile but a positive impact. It does not change really greatly the weight of regulated versus liberalized areas or sections of our business. But it does change and improve, we believe, the weight of international activity which will increase above 50%. It was 40%-odd until this acquisition. So Spanish America will contribute significantly more, up to 35% of the total EBITDA and Chile will be the greatest international market that we have. We believe therefore that this -- our strategy -- this fits in perfectly well with our strategy and it fits in with our risk profile and it actually improves it.

 As I said, it fits in perfectly in our strategy. If you look at the 2013-2015 strategic plan which explain that these were growth factors, distribution of gas in the Latin and Spanish American market, and this we still are committed to achieving the in or non-organic growth objectives for 2013-2015 without diluting the income of our asset holders or shareholders. This is not going to dilute our operations; t will be -- it will increase our profits right from day one. And it will increase in accordance with our payout policy the dividend that we pay our shareholders.

 As regards the dates, here you have it, the negotiations will be -- come to an end of this month. It was launched on October 12. The paperwork in Chile has gone through very quickly. The acceptance period will come to an end on November 11. The result will be published on the 14th and the liquidation of the operation will be completed after November 15 and after that date we will take over control of CGE depending on the result of the operation, which we can call positive because for a start we have agreed 54% of the shares and also the period for competing offers to be submitted is over. So, we think that this is going to be plain sailing now.

 We continue with the efficiency plan, several plans have been submitted to the market and developed successfully to date. And this current efficiency plan is advancing well. Last year we had savings of EUR108m redundant savings. In the nine first months of this year we've achieved the -- we've reached EUR188m and we hope to reach EUR200m by the end of the year and EUR300m within the full period up to 2015. These initiatives are to reduce services and discretionary costs, streamline commercial and operational costs, and optimize costs in corporate areas.

 Based on all this, the EBITDA of the Company has had an impact which you can see on this chart. We've got to distinguish, we've got to start with the EBITDA, we've got to start from the EBITDA in the same period last year to see what happened with the EBITDA and look at the extraordinary impacts it's had. The impact of the ordinary activity of the Company would improve our EBITDA by 4% in this period, up to EUR3.83b. But as you know, this year we are suffering regulatory measures both in electricity which were not in force in 2013 and also in gas since July 5 this year, which account for EUR151m.

 And then we have a negative impact of EUR80m as a result of the exchange differences with the non euro currencies. So we've had EUR151m plus EUR80m, EUR231m negative that we've suffered as regards our ordinary activity. So at the end of the day, the EBITDA is EUR3.6b, 2.3% less. But if we disregard those two phenomena that we've mentioned, and we hope that that won't happen again, the EBITDA would have actually gone up by 4%.

 If we analyze the negative impact of these exchange differences, this is due to the depreciation of the Spanish American currencies, Brazilian and Colombian mostly. But as you can see in the last few quarters, especially the last quarter, the impact is minimal, only EUR3m. So it's an historical adjustment and we are absorbing this and we hope that this will be practically irrelevant in the near future. The currencies are behaving better. And in the quarter, the third quarter the effect of these exchange differences is really minimal.

 In terms of net debt evolution we are un-leveraging our situation. We're reducing the debt. We've had EUR1b in investments and in spite of the dividends the cash flow has allowed us to reduce debt by almost 3% which would have been more had we been able to collect the tariff deficit. Our debt carries at EUR622m that come from the electric tariff deficit which is divided into two areas; EUR428m that corresponds to 2013 and EUR194m that corresponds to the money that's been held back by the CNMC.

 And we want to securitize this, this year, and this year we also expect to find balances -- there's a balance found in the electric regulated sector so that finally we're in the black. So there's a -- our structural cash flow generation continues. But there's also divestment in the assets of telecommunications, which I've mentioned earlier.

 Now, let's go to the financial details, here's the P&L account. I have to say that the gross margin and EBITDA in the quarter have slowed down at a lower pace, EUR5.6b, EUR3.5b. All of this in an environment which continues to be very -- not positive, very demanding, and also we've got the exchange differences in Latin America to count for. Securitization is EUR1.14b including EUR25m for losses, deterioration of assets and that has led to a growth in operating income of 6.8%.

 Financial results are EUR587m, the net debt EUR550m and then after a negative amount of EUR75m in the participation in our associated companies and taxes we arrive at a total profit of EUR1,329m (sic - see slide 10 "EUR1,239m") which means an increase -- a net increase of 10.6%.

 If we break down the EBITDA, you can see it on the screen, minus 2.3%. 13.1% for Spanish America which mainly has to do with the exchange rate differences in Brazil and Colombia especially and the adjustment of the new RTI, the price review in Rio de Janeiro. So gas distribution has gone up 1.6%, electricity 1% and the rest are figures that are very well in line -- very much in line, but the EBITDA drops by 2.3%, we'll see that in further detail in a minute.

 Now, as regards the investments there's a drop of 4.9% in investments without taking into account the new ship -- methane ship. The new ship would mean EUR177m of all investments in tangibles and intangibles and this is an atypical investment, it's a renting thing would correspond to the distribution of gas and electricity both in Europe and in Spanish America. Electric generation includes EUR177m which is the Bii Hioxo facility and there's also been a drop in investment in Spain as a result of the economic slowdown in Spain, and our activity in Spain.

 If we go to the debt maturity profile, you have it on the screen, we continue to increase this. The dates of payment are very convenient; we're not really under pressure. But I have to say that after 2017 we have to pay for 90% of our debt. So the average age of this debt is about five years. So we've covered all our needs -- all our needs up to 2016 including that year are covered.

 Now, we think that the debt risk profile is well balanced as you can see on this -- in these figures. The first one, 82% of the debt is fixed, very competitive, 4.28% fixed interest. Secondly, 87% of the debt is in euros, which is the currency of most of our income. And then the capital markets account for 68% of all the financed debt.

 In addition to all this, we've got a wide -- we've got a lot of money available. Here you see EUR10b that would cover all our financial needs for more than 24 months. And the breakdown is EUR6.9b in loans and EUR3.9b in cash. In addition to that, we have EUR4b additional in Latin American and European programs so we are proactive in this area too. And this is one of the strategies that we're going to use to finance our operations in Chile.

 All this leads to solid cash flow and financial ratio setup and this can be seen in the two ratios you see here, the pre-tariff deficit and post-tariff deficit. The FFO net debt ratio and the net debt EBITDA ratio, you see that these have improved, and will improve, or would have improved after collecting the tariff deficit which we hope to collect over the next few months. So we've got a strong financial structure, diversified in terms of payback dates and very low risk in exchange rate risk. Because most of -- practically all our operations are financed in local currency.

 If we look at our operations, distribution of gas, sales have dropped by 13.5%. This is due to a key factor, less demand, because of the weather. The weather has been very warm in the last few -- in the last months in Europe and especially in southern Europe, especially Italy and Spain. We've continued to increase our number of supply points and this is going to be incentivated by the new regulation of the sector in Spain as I explained a few minutes ago. And naturally, this will incentivate getting more large customers and reaching areas where gas is not available yet.

 The EBITDA in this business is EUR726m and it goes down slightly due to, first, the adjustments that I've mentioned before which affect -- since July 5 affect Spain, and also a drop in demand. You know that gas distribution income especially in Spain is associated with commercial activity. The drop in the Spanish demand due to the weather and this has led to a reduction in this EBITDA. Investment continues to increase, has increased by 13.2%, so the first nine months of this year we've increased the network by 800 kilometers and we've gasified 32 new towns.

 Well, if we continue talking about gas distribution in Latin America, we'd like to highlight the very high growth potential that you can see here on this slide, where the sales have gone up by 8.5% and the connection points have increased by 4.3%, which is now -- we have over 6.5m connection points. So I'd like to highlight important growths in Mexico and Colombia and just to highlight the fact that the whole area in general terms has got a favorable development and increase.

 In effect, investments in this area have increased in 15.3% however the EBITDA has gone down by 4.2%. 4.2% if you think -- take this away from the total reduction the amount that is related to the different foreign exchange rates in the consolidated accounts. So EBITDA's has gone down 13% but if we discount this foreign exchange effect, the EBITDA's gone done 4.2%, fundamentally, mainly all of it due to the adjustment of the remunerations because of the regulatory ones, because this is related to the Brazil era. This is -- as from now we will continue to operate as normal with that adjustment.

 I'd like to highlight therefore the connection points have gone up by 270,000. And we should also highlight the fact that we have to add Peru, the Arequipa area both residential and industrial where we're working considerably and more recently of the two areas in Mexico. In the northwest area, northeast, we have now got an extra 250,000 new connections. And the second area that is undergoing attention at the moment which would add another 500,000 new connection points, so we've not just got potential growth but we've also got new areas, Peru and Mexico that are joining our scope and this is obviously due to the acquisition we've made in that area.

 With regards to the electricity distribution I'd like to say that there's been a sales drop of 2.2% because of reduction in demand and within this particular chapter mainly due to the weather. The markets have had a mild winter and that -- as we say the mild winter means there's been less consumption. And as we say, these slight falls in the figures are due to the weather.

 With regards to investment, you can see there's an important reduction due to the adjustments that we've made in investments due to the regulatory mechanics. And also the connection points are over 4.52m of which 3.7m correspond to Spain. The EBITDA's gone down 0.9% so that now the strong regulatory adjustment that we made in this activity has now got better operational activities and our OpEx we said we've got a very important cost containment policy. And without a doubt some of these have affected the management of the Company. We're trying to therefore control this fall in the EBITDA and we really think we have achieved our target.

 With regard to the electricity distribution in Latin America, sales have gone up by 6.3% and the connection points 3.5%, very strong growth in the entire area even if we take -- if we deduct Nicaragua because we just -- we divested there. And so there the sales in electricity have gone up by 6.3%. So we've got strong growth and we will now add to this the Chile market.

 Now, if we're talking about electricity distribution again, the investments have gone down by 8%. And the EBITDA has had an improvement of 6.5% mainly due to the improvement of demand and also the efficiencies that we have been applying in the entire area. However, I'd like to point out that this 6.5% growth of course has not taken into account the negative impact of the exchange rate difference which was negative. So the accounting EBITDA would be minus 0.8% if we take away the foreign exchange negative factors.

 With regard to the gas and electricity demand in Spain, as you can see on this slide, the gas for -- the gas demand, the conventional gas has gone down 9.2% once again due to the weather is what backs up this reduction. The electricity demand has gone down 0.9%. But if we correct this in line with the Red Electrica data and the temperatures and labor market this 0.9% figure would go really to plus 0.3%, so they would have -- if we have an adjustment of the electric market and we have a fall in the conventional gas demand which is due to the weather as I've already said.

 Now, if we actually talk about Gas Natural Fenosa, the gas supply in Spain has fallen 4.7%. We have to highlight the fact that the residential, which I keep repeating this is due to the weather, also it's worth mentioning the CCGT's which have also fallen as well. And it's also worthwhile highlighting main -- 1.84% which is a moderate amount which is a fall in the industrial market, which is a supply to the large companies, which is zero point -- minus 2%. So despite the weather this is also another affect.

 So, anyway the demand in Spain for gas has gone down 4.7%. However, as we see the international market, it has grown by 23.2%. So therefore we've got sustainable growth in the entire international market especially our sales in Europe, they had a very considerable increase of 43.7% and the rest 13.5%. So therefore, we have firmly committed to international -- we're not being opportunist traders, but we are going to have medium and long-term agreements with customers which are now providing this growth that we can see in our Company figures.

 Continuing now with the gas supply business, the EBITDA has gone up just under 2%, international sales which really -- which now represent 37% of the total sales, gas sales for the Company. We should highlight the fact a new contract that we signed with Chile with [Willington] and the increase in Europe in our intention to continue with our policy for the central European market. This is due to a lot of commercial activity and so now we've got 12m contracts that are active in residential gas electricity. And as I said we have also been working a lot with the SMEs. We have got a new tanker which for the year 2016 we hope it will start now providing the gas for the Cheniere contract.

 With regard to electricity business in Spain, our production's gone down 4.2%. The reasons have been clearly observed. And you can see there with the coal for example, which is a regulated business in Spain, which you know, we've had a fall in all these segments especially in CCGTs. The wind generation and the rest of the hydro and co-generation have all undergone a 5.6% fall. But our market share compared to the traditional market has gone down 1.2% and so now we're at 18.6% of the entire production in Spain.

 With regarding to the electricity business in Spain, the sales however, the final sales have gone up by 3.6%. And also take into account that the pool price has gone down 5% to our EBITDA's only gone down by 3%. Let me try and explain this. So we've had less production. There have been a fall, prices gone down, but the commercial activity has grown, has intensely grown, trying to position itself in maximizing the margins and not the quota in line with the cover needs. So therefore we have managed at the end of the days all these effects, especially when the pool price drop, have only affected us by just less than 3% for our EBITDA.

 So we need to highlight that the daily market is around 5% below the previous year and that the prices over the quarter, the pool prices are between [EUR56.3 and EUR67.25] so there's a high level of volatility due to this specific structure of the Spanish wholesale market. I would like to say that the EBITDA's only gone down EUR17m basically due to this compensation between the liberalized trading.

 With regarding to the business related to co-generation and renewables of former regime, this has gone down 5.6% in the production mainly due to the fall of the co-generation technology, due to new regulatory regulation. However, we have grown in wind energy and in hydro and mini hydro and there's considerable increases with some of the mini hydro by 23.6%. And we've also continued production in some of these wind parks which are in Galicia, and they're going to be coming into operation at the end of the year.

 We'd now like to indicate that we're now launching and we're now going to explain it here that global power generation has the objective to develop and operate, and invest in international generation. And when we're talking about international generation it means outside Europe. The idea is for this Company, which is a 100% subsidiary operates the wind parks that we have worldwide and they can sit to position the Company as in lots of generation projects that are being launched in the world, especially in the Latin American areas and in the Asian areas.

 We'd like to highlight the fact that the reduction in the production, as you know, you know these have PPAs and the investments have gone down by 27.4% due to the fact that the Bii Hioxo park in Mexico's almost finished and it will come into operation at the end of this year. So this activity, this is 100% regulated, at the end of the day is growing 1.2%.

 Well, as a few conclusions, we would like to say that we're very satisfied with our business model and it's still working along the lines that we explained, well, many months ago, and it shows that we've got high stability levels. The EBITDA's gone down by 2.3%. But we need to highlight that the severe regulatory impacts and the translation of the foreign exchange rate (inaudible) means that the -- have still grown at 4% taking into account the fact that the market is not that favorable.

 The net profit has grown almost 11% due to our divestment in the telecommunications area. I'd like to highlight that the regulatory measures in Spain for gas and electricity have now been taken and they will allow this business to grow. And of course the acquisition of the Chilean company, CGE, will now intensify the progress in our strategic plan as well as our consolidation in the international market.

 And all this just to say that we'd like to say that we fully confide in our ability to fulfill the strategic plan targets set for 2013-2015 which we communicated to the market in its day. That is all I wanted to say, so thank you very much. And we would now like to open up the sessions for question and answers. Let's start with those who are here. Please could you identify yourselves saying your name and the company that you represent?

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Questions and Answers
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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [1]
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 (Interpreted). Any questions from people here on the floor?

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Unidentified Participant   [2]
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 (Interpreted). Good morning, I have three questions. The first one with the differences -- LNG there seems to have been a fall in liquid natural gas is the first one. And the second one is related to that. Could the fall in the petrol or the fuel prices have an effect on the price of the LNG? And also you said that in Argentina they have tankers that are empty or they're there waiting to unload. Is this true? What is the situation of the tankers and Argentina?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [3]
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 (Interpreted) Well, I'll start with the last one. Our Argentina contract is operating totally normal, there's no incidents currently. The high volumes period is their winter, so there's very few amounts to yet be served. But until now everything is working back to normal.

 With regard to the liquid natural gas, well, volumes and prices, well, volumes we all know. At the end of the summer -- well, this year there has been very warm climate in the Northern Hemisphere, especially Europe and this has been noticed in the gas consumption. And, of course, this means that we've got higher volumes of gas which are in the market and so it affects the price. And so this is always in the summer when this happens, because a lot of the supplies are regularly during certain months but of course in other months they are not as regular.

 We always get certain phenomenas to the supply and demand relation in summer and winter. So unless we think the weather is going to affect it even more we don't think there's going to be any other impact. The price has gone down and therefore there's an adjustment, a downward adjustment on the final prices of all the energy products.

 Also in our contracts, which is well known, in the Gas Natural Fenosa and the majority of utilities most of the contracts are pegged to the Brent price. So if that goes down so the contract price goes. So we're not expecting there to be a relevant affect on our business margins or on the volumes that we supply.

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 Luis Calvo,  Gas Natural SDG SA - Head, IR   [4]
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 (Interpreted). Next question please. Any questions from people here at the floor?

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 Alejandro Vigil,  Cygnus Asset Management - Analyst   [5]
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 (Interpreted). Good morning. Alejandro Vigil from Cygnus Asset Management. A couple of questions on your growth strategy, first of all on Chile, your acquisition there, if you could give us an idea of the opportunities for investment or growth that you can get via this acquisition of the CGE.

 Also this has got very -- this company has got a minority interest. What are you going to do with that? Or would you like to consolidate these minority interests in that company?

 Also in line with that, you are still playing part of the -- well, the E.on deal that went in, in Spain could you say anything about the possible E.on deal in Spain?

 And also the dividend's policy, 62% of payout. It seems that all the European utilities are really improving there. I am not sure if you are comfortable with this 60% or is this going to go up gradually?

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [6]
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 (Interpreted). Chile, well, Chile is offering a lot of investment opportunity. Well, not in the development of the company itself. It is a market both for gas and electricity. There is strong growth there and therefore the company has its business. It's very -- it's a bit too soon for us to consider a specific plan. We will obviously have one. We think that the acquirement of CGE means that we will have to study our strategic plan again and maybe adjust it.

 But, of course, there is no doubt about the fact we are not at the right moment to specify the figures to know exactly what the growth of the company will be. Obviously there will be growth because it's in a good position and in a market which will obviously offer good opportunities.

 In Chile, this company is well known as well as other Latin American companies. And then the generation projects are going to very important in that market. We have global power generation. We are seeing where the opportunities are, what they are and which ones we can make the most of. But it's a bit too soon to see how CGE is going to affect our accounts. Obviously it will be positive, but it will not be dilutive. But as I said we are going to work on that to be able to specify this within our strategy plan.

 With a minority interest we feel comfortable with them, but the truth is that we believe that the public offering that we've offered will be accepted. But anyway, regardless, we think we are going to achieve our objectives, so we are not considering any uncomfortable situations or any specific movements of any type whatsoever.

 With regard to E.on, I would just like to say, well, firstly we are interested in some of their specific assets. And secondly all these transactions are subject to confidentiality issues, so I'm afraid I can't go into details. But we could be interested in certain specific assets.

 So third point we still have commitments with the strategic plan, and so 2015 our politics have been -- are going to be fulfilled. And our policy towards the shareholders we can say that we believe that we will fulfill the dividends that we said we'll be paying out.

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 Luis Calvo,  Gas Natural SDG SA - Head, IR   [7]
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 (Interpreted). Any other questions from the people here present? No further questions here, okay, let's see if there are any telephone enquiries, any questions from our remote people.

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Operator   [8]
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 (Interpreted). (Operator Instructions). Manuel Palomo

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 Manuel Palomo,  Exane BNP Paribas - Analyst   [9]
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 (Interpreted). Good morning, everyone, three questions. The first one I wanted to talk a little bit about what Fernandez had said about the volumes, not necessarily as much as the margin. Throughout this year it seems that there is going to be a fall in LNG volumes. And we've seen this over the past two or three years. My question is, is this going to continue or do you expect some sort of recovery in the volumes? I'm talking about the Cheniere contract volumes because it seems that Cheniere ones there will be a ramp-up towards the end of 2016. So could you give me a little bit more information on that?

 My second question is in relation to Chile, not necessarily related to CGE and its growth potential but the LNG business in Chile. Have you got any forecast related to the LNG volumes that could be sold in the future in Chile?

 I would say not just on global market to where natural gas would be going but also -- the third question is related to policy. What about the proposals about the sector which sees it's going to be -- what are -- we are talking about the political situations in Spain i.e. when people now think that Podemos group is really going to be highly voted.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [10]
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 (Interpreted). I'll start with the last question, I'm afraid we don't talk about the politics here. I just wanted to say that in our company we believe in free market economy and in competition in our daily work. And we want to develop by hard work and investment in the right assets. And in the competitive market we think the better, the cheapest energy will be better to get the highest number of consumers possible. And apart from that I think there is very little I can say about the politics of the country.

 In terms of the volume of LNG I wouldn't say that the reduction in the volume of LNG is significant. It's due to the increased temperatures and the lack of consumption in the first half of the year in the North of the world. And that leads to surpluses but they are not really long term.

 And I don't really think that you can extrapolate the situation of certain spot markets to the general situation, because most of the movements on the market are not spot, don't come from the spot market. So I don't think that's significant. And I think that in normal weather which we are going to have over the next few years probably and hopefully we'll have normal levels.

 But it's also very important to say that the company doesn't -- is not a trader. We are not a trader. We sell in the medium and long term to final users. In 2013 and 2014 we had practically everything -- we had everything sold in long-term agreements and the same this year and next and the year after.

 We -- our idea is to set our relations in the mid and long term with solid and sound customers. We lose out on certain occasional peaks on the spot market, but that also prevents us from suffering from the lows of that spot market. But that is not our business. We are not worried about that. We are worried about continuing with our usual operations and also we hope to get the gas from Chile. We are looking forward to that.

 As regards Chile, it's difficult to tell you the needs, Chile doesn't have hydrocarbons, hasn't got natural gas reserves. They used to import the gas from Argentina. That came to an end some time ago. It's got to import from TGNL where it has its regasifying plant. And we've started to operate with them, and we think the potential is tremendous.

 Chile is very transparent in terms of price and volumes on the international market, and therefore it needs energy, power and in the case of gas it will have to import LNG.

 Our presence there is not significant. We hope to grow. There is no doubt that when the Panama Canal is increased and widened methane ships, larger methane ships will be able to take gas to Chile, and we hope to make use of that situation.

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 Carlos Alvarez Fernandez,  Gas Natural SDG SA - CFO   [11]
------------------------------
 (Interpreted). We are going to start selling in Chile in 2016.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [12]
------------------------------
 (Interpreted). Good, let's go to the next question please.

------------------------------
Operator   [13]
------------------------------
 (Interpreted). Javier Suarez, Mediobanca.

------------------------------
 Javier Suarez,  Mediobanca - Analyst   [14]
------------------------------
 (Interpreted). Yes, good morning. I have three questions. The first is, and I apologize to insist on the issue of or the matter of dividends. Of the dividend after the purchase in Chile the net debt ratio to EBITDA by the end of 2015 will be 3 times, or times three which is a low, relatively low level compared to other utility companies. I'd like to know when your dividend payout is 62%, what's the rationale behind that. Is it that the company thinks that it's better to use the (technical difficulty) by sharing out dividend. Or you want to make use of this strong point in your balance.

 The second question is regards gas distribution in Spain. Spain is still -- penetration of gas is low in the country. The new government wants to promote gas in Spain. What is your vision? To what extent could gas be relevant by the end of 2020 and the possibility that you have of growing in Spain?

 And the third question is growth, about growth in Chile and Brazil. Chile, you seem to have more opportunities for investing in generation. You said that you might have opportunities for growth in generation in Chile and other parts of the world. I'd like to know what the situation is in Brazil. You signed up with CEMIG.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [15]
------------------------------
 (Interpreted). The first question about -- as regards to the first question the figures of the company, debt and a third of debt and dividend policy fit in with the strategic plan. The strategic plan is our commitment to our shareholders and with the financial markets in general, so the markets rating agencies etc. And that's what was foreseen.

 Times 3 EBITDA and dividend of -- a payout of 62% and the company's idea was to have it in a situation to grow significantly in terms of the dividend the EBITDA and therefore the dividend payout. That's what we are doing. We can explain. We are happy to explain. We don't think there will be surprises.

 We are convinced that we will comply with what we said. And we will be in a situation that will allow growth, greater dividend payment and the control of our debt three times the EBITDA. That's what we are going to do. 2015 is around the corner. We'll have to set up a new plan that includes Chile and once again look at the basic hypothesis that we will present to the markets in due course.

 In terms of the gas distribution in Spain we are convinced that the situation -- it's not just a question of low level of gasification in Spain but the new incentives in the new system approved by the government are going to accelerate and speed up the gasification of Spain, including large consumption customers and new populations, new towns and cities.

 We are convinced that if -- in a crisis like the crisis we have with no incentives and no real estate growth, we were talking about 100,000 new supply points. Well, if that was the case up till now it's going to be even better in the future.

 In terms of generation, Chile is one of the countries that has publicly, there has been a road show of the authorities in Chile in Europe, to present their projects. They've got big requirements they need -- they're investing in wind parks, hydraulic parks, combined cycle plants. It's an opportunity.

 And we know that there are other Spanish American countries that are making plans. In Mexico, combined cycle plants they are going to develop a lot of those facilities. Also Brazil, Columbia so there's big projects in the pipeline. But also Asia, India, Indonesia, Singapore they are all considering a series of projects. We'll look at the see which we are interested in and which we can deal with.

 But we are convinced -- remember that the three growth factors of this company, the three have a good outlook right now. On the one hand the LNG international business, which in spite of the situation we think is good perspectives.

 Secondly, the growth in gas distribution in Spanish America we've got a very good position there with our Brazil projects for instance. We are continuing to talk to CEMIG, the new areas that we've penetrated in Mexico, the one in Peru and our entry into Chile.

 And then the electric generation business will start up the big wind Bii Hioxo wind park, the Costa Rico hydraulic plant and other projects that we've got to develop through the business, through the global powers generation company. So this is all in the strategic plan. We are working on all this. But we are not only working on it -- but these are going to be levers for creating value.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [16]
------------------------------
 (Interpreted). Good, we'll go to the next question please.

------------------------------
Operator   [17]
------------------------------
 (Interpreted). Alberto Gandolfi, UBS.

------------------------------
 Alberto Gandolfi,  UBS - Analyst   [18]
------------------------------
 (Interpreted). Hello, good morning. I've got three questions. First of all, if we go back to LNG if we look at the effort -- the global liquid gas offers in -- there is going to be a growth of 40% up until 2018 and it's probable that the demand will normalize in Spanish America and in Japan. So if we don't look at the impact of the Cheniere contracts what do you think the outlook will be for LNG sales globally? Would it be correct to think that there is going to be a drop in sales, because there is going to be a change in the supply and demand?

 Secondly, looking at what happens in generation in Spain could you tell us about the prospectus for 2015? On the supply side there has been a very strong supply this year. But to 2015 do you think that supply is going to go down?

 And the last question is looking at the bigger picture. If we talk about growth, your investments are still 10%, 15% lower in terms of -- than the amortization. It's difficult to have organic growth for that kind of investment. So should we maybe think that growth is going to come through Cheniere and possibly other small purchases? Is that the going-forward strategy? Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [19]
------------------------------
 (Interpreted). Well, to begin with the LNG question, no, we don't believe that there is going to be a drop in margins or that the margins are going to shrink. We don't expect that at all. It is true that maybe, well, we'll see what Japan does with its nuclear plants, but other countries like China and India are growing all the time in their demand. And there's other countries that can also -- might speed up the closure of their nuclear plants in which case the solution will be natural gas. So we don't really think that the margins are going to shrink or volumes, no.

 The markets, especially marginal markets, spot markets will adjust any difference and spot markets will continue to be volatile. But you must not forget that the vast majority of our operations are not spot market operations they are medium- and long-term operations. And those volumes are much more well balanced than in the spot markets. It's got nothing to do with that.

 We don't foresee in the immediate future we don't think that there is going to a shrinkage of demand, because it's not happening. So we don't see why this will change in the future. We see structural reasons that indicate that if there is a certain economic recovery as in Spain and other countries in Europe a greater demand to cover the generation needs.

 In terms of the margins, we don't see that there is going to be a shrinkage either. There is a clear reason. It's possible that the development of competing gas at cheaper prices on the offer side -- on the supply side reduce prices.

 But, we sell to final users in the medium and long term at closed prices. Secondly, our -- we get our gas basically there -- our gas is associated with the Brent prices. So apart from exceptional issues that have to do with the spot market more than anything else we don't think that the margins are going to shrink at all.

 In terms of generation, we don't see why it should go down in Spain next year. This year has been especially a very bad year because of two things. First of all, the higher temperatures, the weather, warm weather, people have been using less gas in their homes. And that can be seen -- that's been -- you can see clearly in our figures.

 And if we -- but if we don't take that into consideration growth has been positive. So we think that at least it's not going to get worse in terms of demand and it might even get better if the weather if it gets a bit colder and the economic situation gets better.

 But it's been -- there has been a lot of rain, there has been a huge amount of rain this year in January and February and that has affected prices. The pool prices went down tremendously in the first quarter and half of the year. We don't think that it's reasonable to expect that next year this will repeat itself. The normal thing would be to expect a reasonable, moderate increase of electric prices.

 If you put those two things together plus stabilization because of the installed capacity should lead to a more positive situation for the next year.

 And as regards the third question, we have to say that there is no doubt that in 2014 and also 2013 the company has contained its investments, especially in gas and electricity distribution because of the regulations. There has been several factors, first of all, the impact that we've had to carry of the electric distribution adjustments. There's been new foundations laid for compensation in electric distribution which we hope will allow the sector to continue to develop. Up until now the policy has been to contain and restrict investments.

 In gas, the same has happened but it's been even faster. In gas, there is a very strong incentive, so the incentive to improve distribution of gas in Spain is going to be very great, and therefore there is going to be an increase of investments.

 And thirdly, we shouldn't forget that in generation both in Spain and in Spanish America there is a series of projects that have come to an end which have been affected by the lower investments.

 But that doesn't -- will not continue to be at the case. THERE is new projects that will be developed. And irrespective of new purchases we can continue to make our -- to grow organically. We think that the aims of the strategic plan are really being complied with and achieved. Thank you.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [20]
------------------------------
 (Interpreted). Well, thank you. Let's go to the next question.

------------------------------
Operator   [21]
------------------------------
 (Interpreted). Virginia Sanz De Madrid, Deutsche Bank.

------------------------------
 Virginia Sanz De Madrid,  Deutsche Bank - Analyst   [22]
------------------------------
 (Interpreted). Yes, hello. I've got several questions. First of all, could you tell us, update, the situation with Union Fenosa Gas there has been losses this quarter.

 And I'd like to hear once again your hedging -- foreign currency hedging policy because you say that you finance using the euro to protect the ForEx. But 80% of your debt is in euros, so could you explain that? And I'd like to know also whether you see potential for the cost of the debt to go down?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [23]
------------------------------
 (Interpreted). Well, the CFO will answer the other two questions. As to the first question on Union Fenosa gas, as you know, we are still negotiating with -- is negotiating with the Egyptian government. It's going slow but there are two possibilities, alternative supplies in the area, in the region which are being analyzed.

 And the second thing is how to solve the conflict resulting from non-compliance by the Egyptian government. We continue with this process. But in the very short term we don't really expect significant change as regards the current situation.

------------------------------
 Carlos Alvarez Fernandez,  Gas Natural SDG SA - CFO   [24]
------------------------------
 (Interpreted). What we've said about financing Spanish American activities, our debt, is in the local currencies. But two things, one, part of the Spanish American debt is in dollars, combined cycle plants mainly. In Mexico they are in dollars, so no, it's not just local currency but dollars too.

 And secondly, as a whole Spanish America its debt is much lower than Europe. If we look at the ratio between the debt and the EBITDA it's about 3 times in general. It's about 1.2, 1.1 times the EBITDA. So the volume of debt is smaller.

 But in all countries our debt is in local currency or the equivalent currency to cash flows and with our guarantees or securities by the parent company.

 The other thing was the cost of debt, we've spoken about 4.3. There are two factors it would depend. The euro part or side it would depend on the refinancing operations we are doing. We haven't got need for money right now, but we will continue to do things in order to refinance the debt that we have to pay in 2017.

 Now our idea is not to be in a worse situation than we are but to get better in terms of paying the debt. But what is going to have an impact is the CGE operation in Chile. That's debt in local currency and apart from the purchase resulting from the purchase which is also local currency. We are going to buy in Chilean pesos so the cost will be slightly higher because the local cost is above our average. But that cost won't improve over the next few years.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [25]
------------------------------
 (Interpreted). Let's go to the next question.

------------------------------
Operator   [26]
------------------------------
 (Interpreted). Jose Javier Ruiz, Macquarie.

------------------------------
 Jose Javier Ruiz,  Macquarie - Analyst   [27]
------------------------------
 (Interpreted). Two questions, one about the write-off you've done as regards the new generator. I'd like to know whether that write-off has to do with the line or the plant.

 And secondly to carry on with Virginia's question, I'd like to know how you justify the losses of EUR42m that you've had in Union Fenosa in the first quarter. Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [28]
------------------------------
 (Spoken in Spanish).

------------------------------
 Carlos Alvarez Fernandez,  Gas Natural SDG SA - CFO   [29]
------------------------------
 (Spoken in Spanish).

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [30]
------------------------------
 (Spoken in Spanish).

------------------------------
Operator   [31]
------------------------------
 Martin Young, RBC.

------------------------------
 Martin Young,  RBC - Analyst   [32]
------------------------------
 Yes, good morning to everybody. I just have three questions. The first one relates to the formation of the global power business. Given that you've now put all your generation assets inside of the Iberian peninsula under one roof I just wondered what your attitude is towards the rotation of those assets and particular in respect of Kenya what is the future of that company within the group.

 Secondly, you've touched upon opportunities in Latin America. Mexico is a country that has quite significant ambition in terms of securing significant additional investments in its energy activities. I just wondered what your thoughts are on the opportunities in Mexico and whether they would extend beyond distribution and electricity generation.

 And then the final question is about the 2015 target, EBITDA EUR5b. Last November at this stage you presented a split between the various activities of the group. Are you happy that we are on target to have a similar split in delivering EUR5b next year? Or are there some areas which are performing better than you had expected a year ago or are there some performing worse and if so which ones? Thank you.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [33]
------------------------------
 Yes, sorry, Martin, the quality of the line is not very good so we -- obviously we could barely understand the question. Could you please repeat it? I'm sorry but it's a problem with the quality of the telephone connection.

------------------------------
 Martin Young,  RBC - Analyst   [34]
------------------------------
 Okay, it was three questions. The first related to the power generation. If you've grouped all your assets outside of Spain under the global power banner just wondered if you were open to asset rotation within those various power stations that form part of that division. And in particular --

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [35]
------------------------------
 Martin, excuse me. Could I suggest you send your question in by writing, because the quality of the phone line is very, very bad?

------------------------------
 Martin Young,  RBC - Analyst   [36]
------------------------------
 It's not on a headset, maybe it's --.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [37]
------------------------------
 Okay, thank you. Could we have the next question?

------------------------------
Operator   [38]
------------------------------
 Hugh Wynne, Sanford Bernstein.

------------------------------
 Hugh Wynne,  Sanford Bernstein - Analyst   [39]
------------------------------
 Good morning, everyone. Thank you for taking my questions. I have a few please. The first one is on the Spanish tariff deficit. We have seen the latest publication of the CNMC that the tariff deficit is still EUR3.5b. And there is a structural difference between the actual and the forecast of about EUR1.3b. So, I just wondered if you could give (technical difficulty) of our expectation on the status of the tariff deficit by the yearend. If you expect that to be zero what would be the key drivers for that?

 The second question is on growth in Latin America. After the recent acquisition of CGE, would you expect the next move in the region to be driven by organic or inorganic growth? And what would be your strategy there?

 The last question is on gas in Europe. Could you briefly comment on the competitive landscape of gas in Europe excluding Spain? What is your strategy there and what do you think could be the market share, stable market share that you can achieve in Europe. Thank you very much.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [40]
------------------------------
 (Interpreted). With regard to your first question we don't believe there will be any tariff deficit this year. Why? Because it is certain facts that EUR115m have been withheld on our account, but throughout the year and the income that are still pending reception from the regulatory sector make us think that they will be balanced out during the year without any extraordinary differences.

 What will be the key drivers? Well, I think we could say the non-fulfillment of what the government has said when they presented the new electricity regulations specifically in the budget for the year 2014. If they fulfill on that we think there is a high possibility that there will not be a tariff deficit this year.

------------------------------
 Carlos Alvarez Fernandez,  Gas Natural SDG SA - CFO   [41]
------------------------------
 Well, we've already said this during our presentation, and we've highlighted the fact that our activity in Latin America, mainly in gas distribution, has got great potential for organic growth. We are in areas where the potential especially in Mexico DF and also other cities where we have other activities in Latin America. And so if we add to that these new tenders in areas in Peru and the recent ones we have won in North East Mexico.

 So this is the activity that we have been performing over the last few years by means of the gas -- providing gas to different areas and new concessions. So this is the growth that is offering these connection points growth which is double-digit i.e. 12%, 13% increase if I remember correctly.

 And so when we are talking about what's been done in Latin America, we can say can we consolidate our position in countries with CEMIG [Gamex]. We are saying how we can cooperate together in these markets and this is a type of activity that we are developing and that we would like to see over the next few years in Latin America, especially with the possible incorporations after the -- after the acquisition of CGE.

 With regard to the European market we have gas sales, and we've shown that in our presentation it's like 40%. These are final customer sales. We also sell to Europe through certain contracts but they were not included in that particular item, so we were just talking about supplies to fine -- end customers which are like medium-sized.

 They could even be retail customers, which -- especially in Italy, where we have got a liberalized market there. And we can have activities very similar to that we have in Spain where we are growing. And we are trying to get new customers and we can offer new services which we do like in the retail market in Italy like Spain. Well, the activities that we are carrying out we think that maybe we could have 4%,5% market share target.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [42]
------------------------------
 (Interpreted). Any further questions.

------------------------------
Operator   [43]
------------------------------
 There are no further questions. Thank you.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head, IR   [44]
------------------------------
 (Interpreted). I am trying to see what the questions that we have received from internet. I think they've all actually been answered during our Q&A session. So therefore we could now consider that this meeting has finished. Thank you very much.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [45]
------------------------------
 (Interpreted). Well, I have nothing further to say. Thank you all very much for coming. And I would like to welcome you back to the next quarter when we'll talk about the final year results. 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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