Full Year 2014 Gas Natural SDG SA Earnings Call
Feb 17, 2015 AM CET
GAS.MC - Gas Natural SDG SA
Full Year 2014 Gas Natural SDG SA Earnings Call
Feb 17, 2015 / 09:00AM GMT
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Corporate Participants
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* Luis Calvo
Gas Natural Fenosa - Head of IR
* Rafael Villaseca
Gas Natural Fenosa - CEO
* Carlos Alvarez
Gas Natural Fenosa - CFO
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Conference Call Participants
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* Fernando Garcia
MainFirst - Analyst
* Alejandro Vigil
Cygnus Asset Management - Analyst
* Isidoro del Alamo
BBVA - Analyst
* Javier Suarez
Mediobanca - Analyst
* Javier Garrido
JPMorgan - Analyst
* Carolina Dores
Morgan Stanley - Analyst
* Jose Ruiz
Macquarie - Analyst
* Martin Young
RBC - Analyst
* Cosma Panzacchi
Bernstein & Company - Analyst
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Presentation
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Luis Calvo, Gas Natural Fenosa - Head of IR [1]
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(Interpreted). Good morning to everyone. Welcome to the presentation of results of Gas Natural Fenosa for the fourth quarter of 2014, by Mr. Rafael Villaseca, CEO, together with the CFO, Carlos Alvarez, and the Director of Strategy and Development, Mr. Antonio Basolas.
After the presentation, we'll have a Q&A session. We'll begin with the questions in the room and continue with the questions from people who followed us on the phone or on the Internet.
So I'll pass the floor to our CEO, Mr. Rafael Villaseca.
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Rafael Villaseca, Gas Natural Fenosa - CEO [2]
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(Interpreted). Good morning, everyone. Thank you for coming to this presentation, those of you who are here physically and those who are listening to us, following us remotely.
The program you have here on the screen. We're going to look at highlights. Then we're going to look at the financial dimensions. Then we will do an analysis of the different business lines, and then we'll have the conclusions and then we'll have the Q&A.
So if we begin with the first point, the highlights, on this chart you see the key financial indicators. We have a net income after taxes of EUR1.4m (sic - see slide 5 "EUR1,462m"), which is an increase of 1.2% as regards previous year. We must remember several extraordinary effects, some sales that we will talk about, and the adjustment as a result of the fiscal reform and the deterioration of our assets in Egypt. We'll give you more details about this, because they explain this 1.2%.
EBITDA is similar to last year, 0.1%. It's EUR4.8b. Investments, EUR1.7b without counting the investment in the Chilean group holding, CGE. And then the net debt is EUR16.9b.
It's important to say that we continue with our policy of paying out dividends, as contemplated in our strategic plan, in such a way that the dividend that we propose and that will be approved at the General Shareholders' Meeting is EUR900m, and that's an increase of 1.2% as regards the previous year, based on the payout of 62.1% that we established in the strategic plan. That means a profitability per dividend of 4.4% as regards -- or based on the closure at December 31, 2014, and the total profitability in 2014 for the shareholders is 16.1%.
We have to say that this we think is important and significant, this amount, bearing in mind the environment. And also, we want to say that -- to analyze this level of profitability, we can say that Gas Natural Fenosa in the last three years has had a profitability of nearly 21% yearly, cumulative 21% yearly for our shareholders.
At the end of this year, we are going to present a new strategic plan to update the basic hypotheses of our business and contemplate the integration of the Chilean group CGE. And that will lead to an analysis of all the different things that we have to do, including remuneration of shareholders, in the immediate future.
We must also remind you, although this is something that you know about, that we are now working in accordance with the NIIF 11 standards that regulate our accounts, and that -- the international standards, new international IAS standards. And we must say that the results for 2013, if they're adjusted in accordance with the International Accounting Standards, we see a decrease of EUR39m in investment, a decrease of the net debt of EUR389m, but the net profits have not been affected.
It's important to point out that we have -- at the close of the year, we have had a look at our assets in Egypt, especially what has to do with the Damietta plant, which is part of our Union Fenosa Gas that we have with Eni on a 50/50 basis. We have losses as a result of deterioration of the assets in Egypt, but that has no effect on the cash flow levels. And it's EUR485m, plus the EUR75m that we provisioned last year.
Last year, we foresaw a situation that would be short term and that things would not become normal. But the Egyptian side did not comply with the agreement, and that led to a situation where this year we had to recalculate all our commitments on a longer term, especially the supply of gas to our Damietta plant in accordance with the signed agreements.
We have to say that these assets belong to Union Fenosa Gas and they're consolidated based on the participation method, and the company Union Fenosa Gas is still making a profit in spite of this deterioration.
There's another small adjustment of EUR47m that we've lost as regards that Nueva Generadora del Sur company which we have with CEPSA. It's a combined cycle plant with cogeneration systems.
We must remind you that, as regards Egypt, the situation is stable at the moment, but we have three lines of activity, three approaches to solving the problem. The first is negotiations with the Egyptian government, to try and find a solution and get them to comply with their obligations. These negotiations are ongoing and we expect to arrive at a reasonable solution.
Secondly, legal action, which we've carried out through arbitrations and litigation, applying all the legislation that we have available to us. That is also -- we are also doing that.
And then we have to remember that in the Eastern Mediterranean there is a very important area with large reserves of gas. There's an area in Tamar, for instance, and we are looking at the possibilities. It's difficult, but we're looking at the possibilities for the plant to be supplied by those reserves that are very near Damietta.
So those are the three lines, negotiation, litigation and the possibility of making use of the gas that's off the coast of the Western Mediterranean, in the north of Africa.
And another important thing to understand this is the regulations in Spain. The regulations in Spain, we've already said about this, the Decree Law 8/2014 launched the reform of gas. And this was enforced in the second half of 2014, and basically establishes new rules and regulations for the distribution of gas, which in addition to solving the problem of the deficit that had built up by the end of 2014 through amortizations for a 15-year period, replicates the remuneration system based on parametric systems that are associated with incentives for growth, and therefore continues to promote the gasification and the expansion of our networks to new areas, and also try and introduce financial stability, because these are periods of six years where the stability is not only guaranteed financially, which is not so complex in gas as it was in electricity, but also establishes very clear rules for the incentivation of growth. The downside is that throughout 2014 there's been a negative impact on our P&L account of up to EUR48m.
As regards the electric system, the measures -- significant, important measures that were introduced in the last two years by the government have been applied, and we are convinced that that will avoid the appearance and development of new deficits, and once the amounts have been adjusted, will ensure that 2014 will be closed in a balanced way. But in spite of all that, that has had an impact of EUR98m on our accounts for electric distribution.
And also in the electric sector, we have to say that we've securitized -- completely securitized all the debt that due to the tariff deficit the electric system had with the companies and with us, and it's only the temporary deficit for 2014 which we are sure will be solved in not very many months. But the accounts for 2015 have had an impact, a negative impact, of EUR141m as a result of regulations, as compared to the previous year.
If we look three years -- in the last three years, the impact of rules and adjustments has had an impact of EUR683m on the EBITDA. But after the significant effort that we've made, we have no doubt that uncertainty, in terms of regulations, has finished by 2014.
Another effect which has had a very significant impact in the first half of the year but not the second half of the year is the problem of exchange rate differences in terms of our consolidated accounts, especially as regards Latin American, Brazilian and Colombian currencies. The impact has been EUR70m, especially as a result of Brazilian and Colombian currency, but as you see on the right, this is a phenomenon that has had even a positive effect in the second half of the year. We trust that this problem, although severe, is being dealt with, and we don't expect similar situations in 2015.
It's also important to point out the reform -- the tax reform in Spain, the corporate tax law reform, Law 27/2014, which means a decrease from 30% to 28% in 2015 of tax, and 28% to 25% during 2016. This has resulted -- the subsequent restatement of deferred tax assets and liabilities resulted in a EUR325m lower corporate tax expense for 2014, EUR325m less. It's important to point out that this has had no impact on the cash flow this year.
It's interesting to look at the evolution of our net benefit profit after taxes between 2013 and 2014. First of all, profits last year, EUR1.44b, have had to carry the losses that had to do with the Egyptian operation, and then the impact of the regulations in gas and electricity, the regulations that I've just explained, meant EUR141m negative in our P&L account. The impact of the translation or the application of the exchange rates, Colombian and Brazilian, basically, to our consolidated accounts meant EUR44m in the red or negative.
So we started the year with high figures -- with a high impact. But that's been made up for, EUR325m, as a result of the new tax law and the savings that we've achieved in deferred taxes, EUR252m, as a result of the activities having to do with telecommunication sales, and EUR218m, and finally EUR61m as a result of the fiscal effect.
So it's important to say that if we discounted the effects of the loss of value of the assets and the new value of assets and liabilities as a result of deferred taxes, the net profit would have grown approximately by 15%. So we're talking about 1.2% as a whole.
We also have to say that we'll continue with the efficiency plan. One of the keys for the development of this plan is that we have foreseen EUR300m cumulative every year, and we want to reach that level this year. We are advancing well. Last year we achieved about -- we arrived at EUR228m and we've got another EUR78m before we arrive at the EUR300m for 2015.
Basically, we have achieved by reducing costs and services costs. And in terms of the rationalization of commercial and operational costs, we've optimized costs in the corporate areas. The new strategic plan, this one will finish this year. Probably by the end of the year we will be able to present -- we will launch a new efficiency plan and it will contemplate the merging with the CGE, the Chilean group.
The acquisition of CGE has been one of the highlights, and this means that we've got ahead in terms of some of the investments that we thought we were going to be able to do for 2017 with this significant operation, significant because of its strategic impact and also its economic aspects. It's going to be very important for us.
So this means that we're going to consolidate our presence in Spanish American, a country that we wanted to do business with. And we have three lines of growth. One is networks of gas and electricity, LNG, and electric generation. Although the company is not in generation, our business in Chile will be an excellent springboard to make use of the new measures introduced by the Chilean energy project and plan. We will incorporate the variables that have to do with CGE as from this year.
In the figures that we submit, we just contemplate one month of consolidation of the general electricity, the CGE. And the reasons are -- there are obvious reasons, but there are three more. Naturally, there are the costs of transaction that the company has had to face for the operation.
And then the accounting criteria have had to change, because the plans that were used in Chile are not exactly the same as the ones we use, and also because increases in financial expenses as a result of US financial units have used, which are applied in Chile and which have had a negative effect on the operation in 2014.
But the EBITDA for this company is about EUR224m and their profits after taxes is about EUR80m, after -- or including these three negative effects that I have described and following the adjustment of the gas market, because the prices in Chile in fact have gone down.
So we are satisfied with that purchase. We're integrating and rationalizing CGE, to put it in line with the way we do things. And we can tell you that we think this project is very attractive and has a huge potential for development.
Other highlights for 2014 are, first of all, the launching of the global power -- the GPG company, which is going to act all over the world outside Europe. This year, in addition to analyzing the possibilities that we have in all of the world, what it has done has been to start up the wind plant in Mexico, the 234 megawatt Bii Hioxo wind farm in Mexico, and completed the Torito 50 megawatt mini hydro plant in Costa Rica, which we expect to start up in this first half of the year.
The company also got two new concessions awarded in Mexico for gasification in the northwest of the country. And as you know, we signed a contract for purchase with Cheniere for 2 bcms for the Corpus Christi plant which will begin to supply gas in 2019.
So these aspects, together with the purchase of CGE, are our main activities this year.
If we go on to the details, the financial details, the income statement tells us that net sales increased by less than 2%, slightly less, and EBITDA grew by 0.1%, which indicates a stable situation within a macroeconomic environment from the energy and regulatory point of view which was quite harsh for the Company, very, very demanding.
Amortization increased by 0.4%. Provisions increased to EUR302m. And all of this means that the earnings from the transfer of assets gave rise to an operational profit that grow by 5.6% with respect to the previous year.
The cost of the net debt was of EUR633m (sic - see report page 7 "EUR733m"), less than the previous period, but the Company had less remunerated cash and the cash that was remunerated was remunerated at a lower interest rate. And then the impairment from Union Fenosa Gas also had an impact on our accounts, which means that whilst we have discounted taxes at a typically low tax rate because of the fiscal reform in Spain, the result then is of EUR1.4b. That's the earnings, EUR1.4b, which indicates an increase of 1.2%.
In terms of EBITDA, these are the figures by business line. And in Europe, there was a fall in gas distribution and the explanation is very simple. It's basically a result of the EUR49m difference with respect to the previous year, and EUR45m justified by themselves, because of the new measures to do with the regulation that I was mentioning before. But we should also mention that, as you know, in 2014, gas consumption throughout Europe, Spain and Italy especially were much lower than 2013 because of the weather.
Now, in Latin America, there was also a reduction in gas distribution of 11.7% because of two very clear reasons. The first one is the devaluation of the Colombian and the Chilean peso, and then the review of tariffs that came into force on January 1, 2014 in Brazil, which cut our distribution. This was all contemplated in our strategic plan, but of course this is when we observe these figures in black and white.
In terms of gas distribution, there was a growth of 2%, and in electricity 2% also. Especially in the case of Spain, you have CGE which is a minimum amount and doesn't -- that is not very representative for the reasons I mentioned before. And all of this leads us to a total EBITDA of EUR4.853b.
Now, in terms of investments, this chart shows you all the tangible and intangible investments, not the financial ones, so CGE is not in the chart. And international investments grew by 21%; investments in Spain only grew by 4%. In terms of the magnitude of those investments, you've got to see that in terms of gas we need to highlight the question of the vessel, even if this is not an investment of this fiscal year, but it should be considered.
And then, in terms of gas distribution, there was an increase in investments in Latin America corresponding to Brazil. This is an advance payment we made to the government because we wanted them to allow us to access new cities and also through satellite plants, which is going to allow us a more economical growth than we had so far. And in terms of the agreement, this agreement will allow us to have a significant development in the Rio de Janeiro area at more economical figures.
So, I want to underscore in terms of investment that our investments internationally are gaining more and more weight, and all of this happened with a very strict control of our debt. The figure is higher because of the leverage, because of the Chilean transaction. But in spite of all, the final leverage stands at 48.5% vis-a-vis 48.8% of the previous year.
So if we take a look at the investments, the dividends and our acquisitions, apart from the generation of funds that we managed to achieve this year, our debt -- final debt is of EUR16b. There's still some money that we need to collect from the tariff deficit, but this corresponds to 2014. These are interim amounts that we are convinced that are going to be paid in the next few months, because -- and this is why the deficit -- we expect a deficit of zero for 2014.
And the schedule -- the maturity schedule for our debt is quite comfortable for us. And what I have to say about this is that the debt that matures from 2018 is already 74% of our net debt and the average life is around five years.
All the debt we have is in very advantageous conditions for us. 78% of the debt is at a fixed rate, which last year was 4.28%. 64% is directly linked to capital markets, and 75% corresponds to euros and 20% in US dollars. So we're still having very competitive rates and we are benefiting by the low interest rates that are currently prevailing.
Now, you can see this in this chart as well, because at the end of the year we had a liquidity of EUR10b, which was enough to cover our needs in 24 months. And this can be broken down into EUR3.5b in banks and EUR7.5b in credit facilities that are available. And to this, we should add the available -- the additional available capacity, which is in excess of EUR5b, that we can access in capital markets in Europe and Latin America. So we are still following a proactive policy in terms of our cash flow.
So, in short, I would like to highlight our solid financial structure that rests on a structurally positive cash flow generation, and we have seen that this is so even in very difficult years as the ones we've had so far. This has been shown by the successful issuing of a hybrid bond we issued recently and then a 10-year bond that we issued in January, both of them in very good economic conditions. Through all of these transactions, we were capable of buying the Chilean company without any additional financing needs.
Our pro forma net debt is of 3.2 times at December 31, and we are very satisfied at our financial structure.
Now, if we now plunge into an analysis of transactions, in the first place we should talk about gas distribution, gas distribution in Europe, especially Spain and Italy. I want to mention that sales have gone down, and the reason for this is the weather in the whole of Europe, especially in Spain and Italy, which has been such that sales had fallen by 10%.
However, connection points have increased by 1%, and this is really very important. In spite of the economic crisis and in spite of the fact that even in Spain -- that in Spain the reform stimulating the enlargement of the network had not really been introduced, our connection points did increase. And I want to mention that new connections in Spain exceeded 160,000 in the midst of the crisis and when the new advantages for gas distribution had not been disclosed.
Now, the new regulatory framework will allow us to not only recover gas distribution, but in addition it should allow us to grow in this field. Now, gas distribution had an increase in investments of 17% at the end of the year, getting ready to take advantage of the regulatory framework, and a reduction in EBITDA of 5% because, first of all, of the weather conditions which affected distribution income, and at the same time because of the entrance into force of the new system that led to a reduction in our distribution of EUR45m.
Now, through those investments we increased by 1.2 kilometers. We increased the network by 1.2 kilometers and we accessed 48 new citizen towns.
If we speak about the gas distribution in Latin America, I'd just like to say that the situation in Latin America indicates a significant growth of almost 10%, especially in Brazil and Colombia, which have had increases. And there's also been an increase of more than 4% in the new connections, especially in Mexico and Colombia.
Gas sales have grown. We should mention the growth in Colombia because of the industrial sector in that country, and the growth in Brazil because of the electrical sector. The distribution network is in excess of 6.6m supply points.
Now, investments grew significantly. It is true that there is an atypical amount linked to the activity, which is the payment made in Brazil in order to be able to access new citizen towns through satellite GNL or LNG plants. And this is what distorts the comparison with the previous year, but this is going to be very profitable for the next financial years.
And EBITDA fell by 4.5% because of two very clear reasons. The first one is that there's the exchange rate differences between the Colombian and the Brazilian currency. And the second factor is the new regulatory framework in Brazil, which even if it affects us negatively, this came as no surprise because we had already discounted it in our strategic plan. If we took those losses away, we would be in a very positive situation, as we should.
In terms of electrical distribution in Europe, basically Spain and Moldova, sales fell by 1.5% because of milder weather. There's also a market sluggishness. But 2015 started with very good expectations in Spain, both for gas and electricity, a far cry from the previous year. And the TIEPI was in line with the previous year and it was affected by the weather of northwest Spain.
Investments grew by 1.5%. We're trying to try and invest efficiently in the short term at a reasonable cost to achieve systematic efficiencies, and this has made it possible for the EBITDA to grow by 2%. In any event, the supply connection points are in excess of 4.5m, of which over 3m are in Spain.
In terms of Latin America, the figures also are quite different. Sales of electricity grew by almost 6% and the supply points grew by 4%. We should mention here Colombia and Panama. Things went quite well in general, but Colombia has a very significant weight for us.
I should also mention that we are advancing a final agreement with the Colombian regulator to relaunch our investments in Electricaribe area, which would rest upon a better regulation in terms of important issues in these markets, such as fight against fraud and NPLs. We are quite happy with the developments and we hope that they are going to impact our results in the present year.
The growth that you can see of 5.8% doesn't take into account Nicaragua, where we divested in February last year.
In terms of distribution of electricity, and investments fell by 2.4%, which is not really significant. It will probably stabilize in the future. And EBITDA grew by 7%, without considering Nicaragua and without considering exchange rate differences. In both cases, the figures would be different if we considered those, but we believe that it's clearer to indicate to you that in operational terms the markets are growing, we are achieving higher efficiencies and reducing significantly our losses in the network.
Now, in terms of energy, and talking about Spain, markets in general performed negatively. The conventional market for gas in Spain shrank last year by 9.8%, almost a 10% reduction, and the electrical market by 1.2% for the whole of Spain. That figure corrected for temperature and for holiday periods entails a growth of minus 0.2%.
This means that electricity in Spain in 2004 (sic) was flat and gas, conventional gas, fell by 10%, almost. The forecasts for this year are different and they are characterized by an optimistic tone, which is warranted if you look at the results we've had in the first 45 days of the year. The first 45 days of the year, the gas demand increased by 4.2% and electrical demand increased by 3.5%.
In any case, our estimations indicate that this year there's going to be a significant improvement because, well, electricity was really giving signs that they had hit a maximum level and the weather has changed this year.
Now, if we now talk about gas, our sales fell in Spain by 5.9%. In the whole of the sector, they fell by 9.8%. We only had 5% less. But in the international market, our sales grew by almost 24%.
So, as a whole, international plus national, our activities in the liberalized natural gas market increased by 3.5%. In Spain, there was the reduction that I mentioned, 12.5% less in the electrical market, 16% less in the residential market, which is significant because of the weather, and 3% in the industrial segment.
It is important to mention that international sales already account for 38% of total natural gas sales in our Group, and we are still consolidating our sales both in Asia and the Americas. Last year, we concluded new contracts with Chile, apart from our transaction with CGE, and we also increased our sales in Europe, and we worked in the Asian markets where we expect contributions -- significant contributions to our international growth. There was also the incorporation of a new methane vessel to our fleet and the retail segment kept increasing.
You know that our model requires final customers and not trading transactions, and this has meant that our contract portfolio in Europe reached a figure of 12m active contracts in residential services for gas, electricity and services. If we add to this our growth in SMEs, which was close to 3%, this allows us a very significant volume of retail activities, which is one of the keys to our natural gas marketing business in the world.
Now let me say a few words about our liquefied natural gas business, which has been very successful in the last few years and it is still going to be successful in the future; we're sure about this.
Now, first of all, I want to review something that I'm sure you already heard me talk about, which is our business model. Our business model is based upon a gas sourcing structure that is diversified at origin, which is not really present in the upstream segment, and so it is devoid of the risks inherent in this type of business, but which in spite of that allows us to have flexibility.
On the other side, we have marketing. We market through end-customers throughout the world, and that activity is not focused on trading markets. And let me tell you that of our activities for international gas sales in 2015, which all of it is practically sold, we don't expect to sell one single vessel in spot markets because our policy is to address final consumers.
So, this policy, plus the sourcing policy, is based upon the gas starts at plants, and especially the vessels that allow us to provide flexibility and capture marketing opportunities on the basis of a medium- and long-term policy. So, practically, we are selling 1 or 1.5 years ahead.
Now, if we now turn to another thing, I want to mention the short-term impact upon our situation. I want to distinguish between the short term and the long term, because obviously the energy crisis of Brent has impacted the whole of the energy sector and it has also impacted us. There's no doubt about it. But I want to mention clearly that the impact on our results is mitigated by many things that we need to mention, which is something very real, as has been seen in the last few years.
First of all, I want to say that the situation of the natural gas market in the world is not the same as that of oil. The evolution of supply is not the same either, and the performances of demand are not the same in oil markets and in natural gas markets.
And then the liquidity of the market and globalization are not the same either. Markets do not behave in the same way. And even if it is true that in some way they are connected, it is not true that this connection is 100%.
There's no doubt that the fall in the oil price is going to affect our business and we will have to face some negative effects this year, but of course we expect to compensate for these negative effects with additional activities, so that we think that we will be able to comply with our strategic plan for 2015. However, the negative effect of the general situation arisen because of the fall in the oil price has some mitigating effects that you need to understand.
First of all, our sourcing; we don't have positions in the upstream, so our sourcing activities are to a large extent linked to Brent and so prices are adjusted downward automatically. It is true, however, that these phenomena sometimes do not reach 100%, but they do reach very significant percentages. So, we are naturally well hedged against these reductions in price.
Secondly, international sales of liquefied natural gas are expressed in US dollar and you know, and this is something historic, that there's a negative correlation between the evolution of the Brent price and the evolution of the US dollar with respect to the euro. You just have to look at this graph. This is the situation in the second half of 2014, where Brent fell by 44% and then there was a correction of 10% in the US dollar. And if you look back, you can see what happened in the last -- when the last fall occurred in 2008.
So, on the one hand we have that our purchases for Brent are negatively indexed, so this is positive to our margins, and then we also have the euro/US dollar parity which acts as a compensating effect, and so both are mitigating factors.
Now, our marketing policy focuses on end-customers, not on trading activities. This year, as I was saying, we're not going to sell one single vessel in the spot market. So, those sales are based on multi-annual contracts that defend us against margin fluctuations, so we're not going to have the fluctuations that are typical of spot market.
And so it is to be expected that our behavior is not perhaps going to be wonderful, the wonderful performance we had in the last few years since LNG, but it is still going to be positive behavior, and the potential negative effects will be compensated for by other headings in our P&L account.
But that's the short-term vision. Long term, we continue to trust in the good future of LNG, first because the growth of economies in emerging countries who import energy is on these graphs by Wood and Mackenzie, and they indicate clearly that the demand will grow. Even if it's moderate in some countries, it's still going to grow. And this is going to produce a gap in -- since prices -- while prices prevent investments in the market for LNG, which might be the case right now, but things will get more and more balanced and supply and demand will be balanced over the next few years.
We think that in the LNG, in accordance with the Wood and Mackenzie statistics for 2013, 300 additional bcms will be required. And whatever it is, it will be a huge amount that will be needed, and that will require investment that will have to be in line with the prices from the markets, but this tension that will be created we think in the long term will be good.
So, we approach the future with several advantages, in the first place in the short term; you've already seen them. And in the long term the diversification of our offer plus our sound position in terms of the final market and our own fleet will help us to have a position of advantage in this market.
Finally, as regards -- and this will begin in the second half of next year, with the beginning of export of gas from Cheniere to Sabine Pass. All that contract and all the volumes that we -- the amounts that we foresee under that contract are covered.
In electricity, last year, Gas Natural Fenosa generated 7.2% less electricity in terms of kilowatts hour than the previous year. As you can see, mainly we had growth, moderate growth, in nuclear power, also imported coal due to good prices and a drop in combined plant production. And in the special regime there was a significant drop in cogeneration and a significant increase in mini-hydraulic plants.
This year, and these are the estimates for transmission, basic transmission, and also based on the performance of the first 45 days, we think there's going to be an increase of demand and generation in Spain.
The previous year, despite all this, the EBITDA went up by 2.6% in spite of the drop in generation and the drop in the pool prices that dropped by 5% as regards the previous year. We achieved a positive EBITDA of 2%. Based on our commercial policy, our sales grew by almost 5.5%.
This EBITDA is based mainly on liberalized trading, which has allowed us to make up for, to a large extent, the drop in the pool prices, the drop in production and the negative effects. We're satisfied with our defensive policy, which is very much leveraged on improving our costs throughout our generation infrastructure.
In cogeneration and renewables, what used to be called the special regime, special is a result of cogeneration, there was a drop of -- in generation by our Company of 12% and a significant increase in mini-hydraulic generation as a result, in part, of the new plants at Belesar II and Peares II in Galicia. And we are also repairing some wind parks in Galicia, in the region of Galicia, in the northwest of Spain.
Global Power Generation, GPG, the company that has to develop the generation business the world over, had a drop of 2.4% in generation as a result of less hydraulic production in Costa Rica and less production in the Dominican Republic. This is a PPA business, and therefore it hasn't really had an impact.
Investment dropped dramatically, because the previous year our investments in the wind park of Mexico, the Bii Hioxo park, were going full blast, and that started at the end of last year. This is a 100% regulated activity. And EBITDA was EUR221m.
Finally, CGE, the Chilean concern. We had a series of expenses, adjustments, change of accounting criteria, some adjustments as a result of the financial units that the Chilean currency is based on, but we have to underline the strong, sound foundations for the business.
Gas sales went up by 11%. The connection points for gas distribution, almost 600,000 points more, supply points more. Electricity sales were in excess of 3.3% and the connection points we are almost -- we've reached almost 2.9m connection points. Transmitted electricity grew by almost 5%. And in the GLP business -- GPL (sic - see slide 44 "LPG") business, the growth of the business was in excess of 3%.
These are very positive figures, in spite of the fact that this was not the best year for the Chilean economy. But we think this has been a very good purchase and will be a pillar for our growth in the immediate future.
Now, and in conclusion, I have to say that this year has been difficult because of exchange rate reasons, regulatory reasons, adjustments in the value of assets in Egypt, but we're satisfied because we have balanced out the situation and we continue to comply with our strategic plan. This is our key strategic plan, is our main goal, and we are complying with it.
The EBITDA's grown not very much, final profit 1.2%, in spite of all those different problems and levels of uncertainty. The purchase of CGE and other operations should show you clearly -- or should show clearly that we're going to grow. And the LNG business, it will be subject to Brent volatility and the difficulties in the market, but will continue to be a good business and we're going to continue to develop that.
And with a payout to shareholders not only in dividends but as a whole, and this allows us to say that this is going to be a good year, this year. We're going to finish our strategic plan and we think we're going to comply with its aims.
That's all from me. Thank you very much.
==============================
Questions and Answers
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [1]
------------------------------
(Interpreted). Well, we are going to take questions now. We're going to start with the questions in the room. I would ask -- I would please ask you, if you've got questions, identify yourself. Tell us who you are and who you represent.
------------------------------
Fernando Garcia, MainFirst - Analyst [2]
------------------------------
(Interpreted). Good morning. Fernando Garcia from MainFirst. I have three questions. The first one is on LNG. You're looking at short term, medium term, long term. In the short term, the petroleum or oil price curve in Asia is not as -- is different from Europe, and I would like to know how we can make money in this business, international business, when the LNG prices in Japan are below those in Spain.
And the second question is that I'd like to know, after the provisions that you foresaw for Union Fenosa Gas, what would the situation of that business be?
And then the third question; are you talking about EUR1.5b net profit for 2015? Could you confirm that?
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [3]
------------------------------
(Interpreted). Yes. I'll begin with the last question. We confirm that amount. All the aims and goals of our strategic plan are current and we are firmly committed to comply with them. That is our aim. That can be -- that is quite clear.
The second question, the price of oil goes up and down. Gas is completely different from oil. I would like to insist on that. There is no direct correlation between oil and gas. There are impacts of one market on the other. Obviously, the Brent market affects all prices, all power sources, and LNG too, but the situation is quite different. In fact, the Company is making use of significant opportunities in the Asian market over the next 24 months. We're working on that and we don't see that there's any special correlation.
In the long term, well, we can't tell you about Japan. Maybe some companies on the spot market are in that situation, but we don't sell in those markets and we're not going to do so. We have medium- and long-term contracts for Japan and they're not below the prices that we handle in other markets.
If we look at the short term, most of the gas market is not on the spot market. It's based on long-term bilateral agreements. This is what we've always done at Gas Natural, and the sales for the past year and for next year have already been negotiated. We're talking about long-term bilateral agreements that are not in any way associated with spot markets. Last year, the spot markets became inflated and reached stratospheric proportions, but we've got nothing to do with that.
In the short term, I ratify what I've said. We have mechanisms to very significantly mitigate any drop in the margins of LNG, and our sales are in a different market from the Brent market. And we are completely confident that especially emerging countries, Japan too, are going to require huge amounts of gas. That is a very suitable fuel. And, well, you might have -- we might have volatility in the short term as a result of this shock that has been produced by the drop in the Brent market, but we believe that in the long term things are going to be good and positive.
Good. As regards the other question, I'll pass the floor to our CFO.
------------------------------
Carlos Alvarez, Gas Natural Fenosa - CFO [4]
------------------------------
(Interpreted). Well, the value of the share in Egypt is EUR1b, approximately, as a whole. It's not just Union Fenosa Gas. We have other agreements and other assets and sales.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [5]
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(Interpreted). Very well. Next question in the room?
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Alejandro Vigil, Cygnus Asset Management - Analyst [6]
------------------------------
(Interpreted). Hello. Good morning. Alejandro Vigil from Cygnus Asset Management. I've got several questions on the comment you've made about 2015. You've spoken about LNG. You've spoken about certain qualitative elements. But what about quantitatively? Could you give us some guidance? You're talking about EUR900m in 2014. What do you think the situation will be this year?
And as regards this, when you confirm your guidance for 2015, I think it was EUR5b, the EBITDA, and that excluded the Chilean operation. Can you confirm those EUR5b?
And then the final question is about the dividend. The dividend this year has gone up by 1%. I know that you have a payout policy of 62%, but how do you think this will evolve -- that dividend will evolve in the future? Maybe that 1% is a message of precaution, or are you aiming at complying with your payout objective?
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Rafael Villaseca, Gas Natural Fenosa - CEO [7]
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(Interpreted). Well, the second question, LNG, we don't go by business lines so I'm not going to give you specifics, but I would like to insist that it's a fundamental business. It might have a -- there might be a series of negative effects as a result of what's happening on the markets, but they will be cushioned by other phenomena in such a way that we are going to comply with the EBITDA that we've included in the strategic plan.
As regards the dividend, our commitment is the strategic plan. Therefore, the strategic plan spoke about 62% payout, and that's what we've applied to the profits this year. And I insist we want to be rigorous and apply this. This is what we said, that's what we want to do and that's what we're going to do. And we foresee -- we think that we're going to comply with it, and we'll end the year and comply with it.
But when we introduce the new strategic policy, we might look at -- change it and look at other things, but that's a different thing. At the end of the year, there will be a new strategic plan that will contemplate whatever has to be contemplated. But until now, we've just followed our strategic plan, yes, and we haven't changed that. So, what we're doing is following and honoring our commitments in our -- the commitments in our strategic plan.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [8]
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(Interpreted). Any more questions?
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Unidentified Audience Member [9]
------------------------------
(Interpreted). Hello. Good morning. I'm from [Verraca] Finance. Three questions. First of all, the cost of debt for 2015, because on the one hand we have the impact of the Chilean debt, which is more expensive but you've dealt with that very competitively. So, what levels might that arrive at as regards the 4.28% this year?
And then CapEx; is it going to be EUR2b? You've closed at EUR1.8b. I presume Chile will demand more CapEx, more investment. What are the possibilities for investment if the Tamar negotiations are successful?
And thirdly, as regards South America, we've seen a change in regulations in Brazil this year. Do you expect any more important significant regulation changes in any country in Spanish America?
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [10]
------------------------------
(Interpreted). Well, I'll start with the last question. Carlos will deal with the other two. We have taken into consideration the regulation changes in Colombia which are going to happen soon. We cannot -- we do not know yet what will happen, but we know that this is going to happen. Regulations are going to change and we foresee that.
------------------------------
Carlos Alvarez, Gas Natural Fenosa - CFO [11]
------------------------------
(Interpreted). As regards investment, EUR8b, EUR9b, I presume. This year, we've got an investment which -- this year which will not affect next year, the ship, the tanker.
And then Tamar, I don't think that will have any impact, that operation; maybe at the end of the year. It's not really going to change the figure of investment.
As regards the cost of the debt, we're working slightly -- it's slightly higher because of the CGE -- purchase of CGE. It's a competitive price that we've got, but after the CGE operation we've got to look at it and restructure. That will take a few months. It might be slightly higher than 4.3% -- than the 4.3% value this year, might be 4.4%. We expect -- we hope it doesn't reach 4.5%.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [12]
------------------------------
(Interpreted). Yes, another question, Isidoro?
------------------------------
Isidoro del Alamo, BBVA - Analyst [13]
------------------------------
(Interpreted). Good morning. Isidoro from BBVA. I have two questions. The first one, as regards regulation changes in Spanish America, I think that Chile, the gas distribution business, there's going to be some changes there.
And the second one is that after buying the Chilean concern, do you consider investments in that area to be closed?
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [14]
------------------------------
(Interpreted). Well, as regards the first question, yes, it's true. There's a project, we don't exactly know what it will be, to regulate the distribution of gas in Chile. That is true. It's difficult to talk about impacts, because it's a reorganization of the gas -- natural gas sector industry in Chile. The basic legislation dates from the 1930s, so they're readjusting all that.
Possible impacts, well, we bore them in mind when we bought the company and we are waiting. We hope that the Chilean regulator will act in a normal fashion and this will not affect us.
As regards the other question, I've forgotten it. Yes, purchases. Well, acquisitions, operations like the CGE operation are exceptional. That is the truth of the matter. We are not considering anything else right now. Of course, we don't know what might happen, but at this time there are no operations being considered.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [15]
------------------------------
(Interpreted). Any more questions in the room? No more questions in the room? We go to the telephone questions. We begin with questions in Spanish.
------------------------------
Operator [16]
------------------------------
(Operator Instructions). Javier Suarez, Mediobanca.
------------------------------
Javier Suarez, Mediobanca - Analyst [17]
------------------------------
(Interpreted). Hello. Good morning. Thank you for answering me. I want to refer to the wholesale gas market. You mentioned we saw in 2008/2009 a similar situation in the Brent, in the oil market, and we saw that in two years the EBITDA of the wholesale business of the Company dropped by 15% the first year and another 15% the second year. Should we expect something similar over the next two years in terms of the wholesale gas market for Gas Natural? I'm thinking about the international projection of your businesses. Something similar might happen, do you think? That's the first question.
The second question is the possibility of presenting a cost cutting strategy. Where do you see you can cut costs, especially after the Chilean operation because -- do you think you can achieve significant strategies and synergies in there as regards the Chilean operation?
And the last question is about the financial structure of the Company. What level of debt over the EBITDA do you feel comfortable with at this time? I seem to remember that in the last strategic presentation there was mention of 3 times over the EBITDA or 3 times the EBITDA. So, what level of debt would you feel comfortable with?
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [18]
------------------------------
(Interpreted). Well, I'll answer one of them; costs. In compliance with the plan, we don't see any cost cutting in Chile; just the plan that's been launched for the rest of the companies. There's no doubt that in the new strategic plan one new element which is going to be important is the possibility of optimizing expenses in Chile. That is the case and that is what we will include in the strategic plan, without a doubt.
------------------------------
Carlos Alvarez, Gas Natural Fenosa - CFO [19]
------------------------------
(Interpreted). As regards the first question, wholesale gas market, the crisis in 2008, well, the situation in 2008 is not entirely the same as it is today, but the Company is certainly not the same. We, in 2008, were not the same as -- in terms of wholesale gas, we were not the same as we are today. Our international sales are increasing all the time, and there's a very relevant, important, specific way for -- international sales are becoming more and more important. In the long term, they will be even more important. And at that time, 2008, the retail market was much more important and was affected in a different way.
So, to give you a point of reference, if you go to page 38 there's a graph there that compares the EBITDA by half-year periods of 2014 and other years, and you see that there's a drop there of 4.2%. I think there will be a drop that might be similar to that. I don't know whether 4% or 2%. Nothing like the 15% that I think you mentioned.
That as regards the first question. And the second question, we in the strategic plan were saying that our aim was to be 3 times the EBITDA. We're going to continue to be at that level. We are now at 3.2 and by the end of the year we want to be at 3 times the EBITDA, which -- so that aim has not changed.
------------------------------
Javier Suarez, Mediobanca - Analyst [20]
------------------------------
(Interpreted). Good. Thank you.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [21]
------------------------------
(Interpreted). Next telephone question?
------------------------------
Operator [22]
------------------------------
Javier Garrido, JPMorgan.
------------------------------
Javier Garrido, JPMorgan - Analyst [23]
------------------------------
(Interpreted). Hello. Good morning. I have two questions. One is about the agreement with -- the Sabine Pass agreement. I wanted to confirm, or you to confirm me that the 3 bcms that you'll begin to receive in 2016, later 5 bcms, these 3 bcms in 2016, are they going to replace amounts that already exist under other agreements, or should we suppose that your expectation is to sell 3 bcms of gas more on the wholesale market?
And then, as regards this agreement, I would like you to confirm that those sales that you say you have covered for 2016 are covered with contracts that are associated with the Henry Hub.
And the third question is about CGE. When you bought it, you established a value of $7.4b and that was 10.6 times the EBITDA for 2015, which suggests an EBITDA of $700m in 2015. Is that your expectation, or has anything changed since you took over the company?
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [24]
------------------------------
(Interpreted). Well, as regards the first question, it's not right, not accurate. It's 4.6 bcms. But as from 2017 -- in 2016, there'll be -- the amount will be lower. Now, of course, we're talking about amounts in addition to what we have now, so it'll be an increased trading capacity, because no supply contracts or agreements come to an end next year. We'll continue with the same portfolio and we'll add that.
As regards coverage, some of the sales that have been covered are covered in the Henry Hub. Others, other areas have been covered through the market. But all operations -- the midterm operations we've covered are Henry Hub risk.
------------------------------
Carlos Alvarez, Gas Natural Fenosa - CFO [25]
------------------------------
(Interpreted). As regards CGE, we don't know what the profit will be because CGE itself hasn't done so, but there has been no change in our expectations when we bought the concern, the company. So, we believe that the figures that we dealt with are reasonable and sustainable over the next few years.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [26]
------------------------------
(Interpreted). Good. Question, next question?
------------------------------
Operator [27]
------------------------------
Carolina Dores, Morgan Stanley.
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Carolina Dores, Morgan Stanley - Analyst [28]
------------------------------
(Interpreted). Good morning. Thank you for accepting my questions. I've got three. The first one is what's the tax that you expect for 2015?
The second is whether you're going to announce new projects for international generation in 2015, any new country or region that's going to be included.
And the third one, as regards guidance, the EUR5b EBITDA, does that include the EBITDA -- what does that include? And as regards guidance, the EUR1.5b of profit, net profit, does that include non-recurrent amounts, as we saw in 2014? Thank you very much.
------------------------------
Carlos Alvarez, Gas Natural Fenosa - CFO [29]
------------------------------
(Interpreted). I'll answer the first and third questions. And then as regards the tax, I think that we've had a tax of 28%. It might go down to about 25%, just below 25%. That will be the rate for 2015, 24.5%, 25%.
As regards our aims, well, we confirm the strategic plan. We have to keep going back to the strategic plan. And we're going to talk about the same EUR5.5b EBITDA and the same taxes that we have described. What we've said and what we continue to say, over EUR5b EBITDA and EUR2.5m.
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [30]
------------------------------
(Interpreted). As regards the investment opportunities internationally, Global Power Generation, GPG, is working on that, looking at wind technologies, hydraulic, mini and medium-size hydraulic technologies and gas opportunities the world over. And it's trying to identify attractive opportunities to further develop the business, and we hope that those expectations are realized.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [31]
------------------------------
(Interpreted). Next question?
------------------------------
Operator [32]
------------------------------
Jose Ruiz, Macquarie.
------------------------------
Jose Ruiz, Macquarie - Analyst [33]
------------------------------
(Interpreted). Hello. Good morning. I've just got one question. I would like you to clarify as regards those investments that you've talked about, this agreement with the Brazilian government for Rio de Janeiro. How much EBITDA is that going to generate or -- well, when?
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [34]
------------------------------
(Interpreted). Well, after this year, I don't have the exact details of the growth, what the growth will be. The investment advantages there will be that we will access new areas of population and we will be able to introduce LNG plants that are based on much better technologies. That will start this year. I can't tell you exactly when, but in the short term, relatively speaking.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [35]
------------------------------
(Interpreted). Well, thank you. We now go to the next question. There are no more questions in Spanish. We will go to the questions in English.
------------------------------
Operator [36]
------------------------------
Martin Young, RBC.
------------------------------
Martin Young, RBC - Analyst [37]
------------------------------
Good morning to everybody. Just two questions. The first relates to the LNG business. Sorry to keep going back to this. The suggestion you made in respect of Javier's question was that maybe we could see 4%, maybe 5% squeeze on EBITDA in 2015, given what happened in the second part of 2014. Given that you have said that most of the sales for 2015 are closed at fixed margins, is that 4% decline coming in relation to the open positions?
And if so, when we look forward to 2016, when you will have less sales closed at a margin already, what do you think the impact in 2016 might be? Should we be looking at a double-digit squeeze there?
And then the second question relates to tax. You've given an indication of 2015 effective rate. Given those changes in Spain, what do you think the rate for 2016 will be? Thank you.
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [38]
------------------------------
(Interpreted). In terms of the first question, this 4.5%, it's just an exercise. It's just speculation. We are not saying anything specific. Of course, there may be negative impacts because of the international situation that we cannot compensate for.
But secondly, partly this problem is related with the translation of the phenomenon, because the phenomenon has different translation rates for selling and for buying. And so this lag in translation could have an impact and has had an impact in the last few months of last year, but then it will be balanced out.
For example, the provisioning data, there's a six-month lag between the effect of the reduction in the Brent price and the application to the prices -- of the prices to the contracts. So, if the rate is faster then this phenomenon could occur, but we don't anticipate problems of two digits, as you were suggesting in your questions, for 2016. Thank you.
------------------------------
Carlos Alvarez, Gas Natural Fenosa - CFO [39]
------------------------------
(Interpreted). Now, the effective rate for 2015, I said it was of around 24% to 25%. For 2016, which is the second reduction, well, perhaps we're going to be closer to 24.5% and to 25%. But there's not going to be an improvement, because there's going to be a combination of the non-deductions, so there's not going to be very significant differences. I would work with the same hypothesis for 2015 and for 2016. Thank you.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [40]
------------------------------
(Interpreted). So, next question?
------------------------------
Operator [41]
------------------------------
Cosma Panzacchi, Bernstein.
------------------------------
Cosma Panzacchi, Bernstein & Company - Analyst [42]
------------------------------
Good morning, and thank you for taking my questions. I have two questions regarding the European and Spanish gas outlook. First, regarding Europe, we have seen that you have been growing by more than 40% your sales in Spain 2015. And given the partial abolition of gas tariffs in France this year and the increased competitiveness of your portfolio versus hub index prices, what do you expect could be a sustainable rate of growth in your European gas sales in 2015 and forward?
And regarding Spain, what impact do you expect from the start of the hub towards the end of 2015? Would it be fair to assume only a somewhat increased (inaudible), in line with what happened in the Italian gas hub, PSV? Thank you.
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [43]
------------------------------
(Interpreted). In terms of your first question, the growth in Europe, fundamentally in the north of Europe, in France, Belgium, the Netherlands and Germany, has been spectacular. It is not going to be the same, of course, this fiscal year, because the level is much lower and so the percentage is going to be higher now than in the future.
But we will still grow because the competitiveness in that market has been shown and we have an organization that is really very powerful and that is really deeply rooted in the market. But of course, we're not going to grow at those rates, especially not in relative terms. In absolute terms we might, but not in relative terms.
In terms of the gas hub, it is important to mention that there's going to be a secondary hub. It's not going to be a primary hub. That is impossible. It's going to be -- it will be primary gas producers sold the gas in the hub, but this is not going to happen. Large international suppliers of the hub, such as the Norwegian producers or Qatari producers, Algerian or Russian producers have repeated that they're not interested in participating in the hub.
So the primary market is going to be bilateral market and the hub will remain a secondary market, and this is all very well for us. It will clarify things and it will make it possible to monetize short- and medium-term transactions between operators. But it can never be a classical primary market with its volumes and its depth, because it will not be able to access the primary market.
------------------------------
Luis Calvo, Gas Natural Fenosa - Head of IR [44]
------------------------------
(Interpreted). Any further questions on the telephone?
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Operator [45]
------------------------------
There are no more questions.
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Luis Calvo, Gas Natural Fenosa - Head of IR [46]
------------------------------
(Interpreted). Okay. The questions I have that have been asked over the Internet have already been answered, so we can call it a day for now. But I will give the floor to the CEO, in case he wants to make any final comments.
------------------------------
Rafael Villaseca, Gas Natural Fenosa - CEO [47]
------------------------------
(Interpreted). That's all. Thank you very much for your attention and we hope to see you next report.
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Editor [48]
------------------------------
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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