Half Year 2015 Gas Natural SDG SA Earnings Call

Jul 29, 2015 AM CEST
GAS.MC - Gas Natural SDG SA
Half Year 2015 Gas Natural SDG SA Earnings Call
Jul 29, 2015 / 08:00AM GMT 

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Corporate Participants
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   *  Luis Calvo
      Gas Natural SDG SA - Head of IR
   *  Rafael Villaseca
      Gas Natural SDG SA - CEO
   *  Carlos Alvarez
      Gas Natural SDG SA - CFO
   *  Antonio Basolas
      Gas Natural SDG SA - General Manager, Strategy and Development

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Conference Call Participants
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   *  Fernando Garcia
      MainFirst - Analyst
   *  Alberto Gandolfi
      UBS - Analyst
   *  Javier Suarez
      Mediobanca - Analyst
   *  Jose Ruiz
      Macquarie - Analyst
   *  Manuel Palomo
      Exane BNP Paribas - Analyst
   *  Javier Garrido
      JPMorgan - Analyst
   *  Lawson Steele
      Berenberg - Analyst
   *  Carolina Dores
      Morgan Stanley - Analyst
   *  Jose Lopez
      CLG - Analyst
   *  Cosma Panzacchi
      Bernstein - Analyst
   *  Antonella Bianchessi
      Citigroup - Analyst

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Presentation
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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [1]
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 (Interpreted). Good morning, everyone. Welcome to this event. We're going to present the Gas Natural Fenosa results for the first half of 2015. This presentation will be done by our General Director, Rafael Villaseca, and the CFO, Mr. Carlos Alvarez and the General Director for Strategy and Development, Mr. Basolas. After the presentation we'll have a Q&A session beginning with the people in the room and then those who call in or send in their questions on the Internet. So I'll pass the floor to our CEO, Mr. Rafael Villaseca.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [2]
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 (Interpreted). Good morning, everyone. Thank you once again for being here at our quarterly presentation of results, both those of you who are here and those who are following us remotely. I'm going to look at the highlights first, then the financials and analysis of operations and then the conclusions and then we'll go to questions and answers.

 As regards the financial indicators, the clearest ones show our profit after tax has reached EUR751m which means in adjusted terms if we discount the extraordinary amounts because of the telecommunications operations last year means an increase of 1.2%, a drop of 19.4% would have been the opposite.

 The EBITDA has gone up by 10.5% and investments have grown by 7.4% up to EUR744m. The net debt has dropped by 1.2% and is at EUR16.7b.

 I want to clarify a reference to our optimization of asset portfolio operations in line with our strategies at this time. As you can see, recently we've reallocated EUR100m through the sale of 45% of Begasa for EUR97m, the purchase of 100% of Gecalsa for EUR103m, it's a renewable wind energy basically company. So we've got a majority investment there and we have projects in the pipeline as regards that. And we are convinced about the increased value that this will give our portfolio.

 As regards other events, I would like to say that the Torito in Costa Rica hydro plant has started out 50 megawatts of installed power and in Italy there's been a lifting in May of the temporary court intervention decreed in 2014 on gas distribution and supply activities in the country. This had to do with supposed or alleged operations of the Mafia and now finally this has been lifted and cleared.

 And now in Argentina also in June the Secretary for Energy, the authorities for energy, brought out a new rule for gas distribution for transit -- for temporary financial assistance and they set up a series of -- aimed at maintaining the chain of payments in O&M in attendance for the implementation of the tariff review. This means GNF will receive the equivalent -- well, EUR515m in local currency in 10 monthly payments. And we're waiting for the tariffs to be comprehensively reassessed.

 In June, the GCE branch of our Company in Chile, Gasco, acquired 12.8% of Gasmar, the import gas, and the share in that company, Gasmar, went up to 64%. And we also in July -- UF Gas's and Cepsa's stakes of 60% and 40% respectively were bought in Gas Directo for EUR18m.

 In April, we issued a hybrid, a nine-year EUR500m hybrid, with 3.375% coupon on April 21. In May, the Company also repurchased -- there was a repurchase of the Union Fenosa Preferentes EUR750m hybrid issue of 2005. This repurchasing offer was accepted by 85.3% of the people with preferential options so the Company has practically got no -- except for these percentages, marginal percentages -- no preferential share.

 Thirdly on July 1, in accordance with what was approved by the shareholders, the dividend was paid out in cash corresponding to the results of 2014 and we have to say that on July 14 our branch in Mexico issued -- there were two bond issuances in Mexico for a total of MXN2,800m. One is a MXN1.5b 3-year issue, another one is a MXN1.3b 10-year issue and this will consolidate and strengthen our position in Spanish America.

 I have to say that we changed our commitment and we continue committed to our strategic plan that we announced 2013-2015 whose targets were an EBITDA of more than EUR5b, a net income of EUR1.5b approximately, net debt to EBITDA ratio of 3 times and a dividend payout of 62%. We continue in line with that and are still committed to presenting to you at the end of the year the new strategic plan of the Company.

 And it's important to say that in addition to complying with the figures that we had planned the Company has made progress in the three lines that were envisaged within the strategic plan. And you have them here. We wanted to develop and concentrate our midstream gas operations, electric generation and network operations.

 What have we done? Well, it's good to remember that the midstream gas business we've increased --in this period of the strategic plan we've increased our portfolio by 11 BCMs as a result of the Sabine Pass and Corpus Christi operations and the Yamal and the Shah Deniz II projects. We're going to add 1m cubic meters to our fleet approximately so we're going to be able to face our challenges in this area.

 In terms of electric generation, we have added 520 megawatts to our portfolio, basically as a result of the Bii-Hioxo plant in Mexico, the wind plant, the plant in Torito, Costa Rica and the purchase of Gecalsa. And we also have to say that as regards our international activities in this area we set up Global Power Generation, GPG, and we will also incorporate KIA.

 In networks of distribution for gas and electricity, the number of service points has increased by 3.7m and with a potential of about 1m service points more by 2020. That is due to the new concession that we've had in Arequipa in Peru, the two new concessions in Mexico and in Spain, the purchase of Gas Directo, classification of many new towns in Spain as a result of the new regulations, and the gasification of the island of Menorca which we're also going to take care of, and also the incorporation of the CGE Group in Chile.

 So in addition to complying with the figures, as we said before, we've complied with all these other areas.

 If we go to the financial figures for this half-year, we have to say, as you can see here on this chart, that in the first half-year of -- the first half of 2015 there was a growth in net sales of 12.6%, purchases 11.8%, the EBITDA grew by 10.5%, amortizations EUR193m, debt EUR127m so operating income dropped as a result of the loss of the profits that we expected to derive from the telecommunications operations that I explained before. For that reason there's been a drop in the operating income.

 If we take away financial costs and expenses and taxes, we finally arrive at a net profit of EUR161m which means a drop of 19% as regards last year if we include extraordinary areas or a growth of [2.2% - sic see slide 12 "1.2%") if they're not taken into consideration.

 As regards the EBITDA, the general view you see here that there is an increase of 10.5%. In the businesses of gas distribution the increase has been positive in spite of the drop in Spain as a result of the new regulations that have penalized by about EUR50m the results of this half-year.

 As regards electricity distribution, it's continuing to grow and will continue to grow in Europe. I'll say more later. The gas distribution business has gone down by 5.7%, almost 8% in supply. I will tell you why. Infrastructures and improvement and in electricity the drop in business in Spain is reflected here but GPG has contributed to our business and also CGE in Chile.

 If we look at investments, the investments, total investments, have grown by 7.4% although we have to bear in mind that if we discount -- if we remember the fact that the purchasing of a methane ship last year was -- we have to -- if that is excluded the increase would be 33.6%. That breaks down into an increase of 23% investments in Spain and 48% investments internationally. The international investments have gone up very significantly as a result of the CGE operation and in Spain there's been an increase of investment in gas and also electricity, as I will show later.

 Financial investments throughout the year are almost 13% of Gasmar by GCE in Chile and the purchase of 0.65% in CGE. We have to say in any event that we are being more and more -- becoming more and more international in our investments since the increase of investments in Spain have to do with the new gas networks and the new regulatory framework which is incentivizing growth and also there was a stop -- distribution -- investments in electric distribution were held up but are now coming up to the line of the general business and the situation is improving.

 So the net debt you see here, this was the closing of last year. If we look at investments, dividend flows, etc. and the problem of the currency translation, the debt -- well, it goes down by 1.2% to EUR16.7b at the close of the half-year period.

 And we continue to have a very comfortable debt maturity profile and after 2018 73% of the debt matures. So in other words our financial needs are covered until 2016.

 And all this, bearing in mind a constant situation in our case which is an efficient net debt structure, 78% of the debt is fixed rate -- is at fixed rate and that will be about 4.5% yearly approximately; 76% of the debt is in euros and finally, 67% of the debt is diversified or came from diversified financing sources, capital markets not banks. So that is twice as much as the amount we have from banks.

 I also have to say that we have ample liquidity, up to EUR9.7b by the end of the half-year period, and this would allow us practically -- that is 24 -- would give us 24 months for paying all our expenses. And in addition to that we have an additional ability of EUR5.7m invested in Euro and Latin America programs, Mexico, Chile, Panama, Colombia, etc. So we continue with this policy of administering and managing our debt well in this way.

 If we look at the analysis of operations, we start with gas distribution. We have to say that in Europe, this is mainly Spain but also Italy, we've had a growth of sales of about 4.6%, which is quite a significant growth in contrast with other years because there's been a higher demand which in turn has resulted from the lower temperatures as compared to the previous year. So it's not so much that it's been much colder in Europe but the previous year it was much warmer.

 As regards expansion and growth, we continue to grow by about 1% and in Spain that's more than EUR5.2b. And as regards the regulations, well we've suffered by about EUR50m throughout the half-year period but in the present framework the network is being incentivized and the growth of our customer portfolio. Investments in gas distribution have therefore gone up by 16% and we expect -- we have connected six new towns, municipalities, in the first half of 2015 and we've increased by more than 1,500 kilometers the network.

 In terms of EBITDA, there's been a negative growth of 3.5% as a result of the regulations. If these regulations weren't -- or if this framework was different as from the next half-year, the regulation effect will have been absorbed because it's applied in the second half. But if we don't take that into consideration, the EBITDA for the gas distribution business would have grown by 7.4%.

 In terms of gas distribution in Latin America, sales grew by 0.4% but this is due to a strong decrease in Argentina which in turn was caused basically by the temperatures in the area which have been quite mild in the last few months, and so they gave rise to this drop in consumption. But if you compare the figures of other countries, Brazil, Colombia and Mexico, you will see that the increase is very significant.

 Also there's an increase in connection points, not in Argentina. But, as you can see, in Brazil almost 5%, Colombia almost 4% and Mexico over 7%. We are very satisfied because there's huge growth possibilities and on the whole, as you can see, connection points have increased by 4.4% overall with a significant contribution by Mexico.

 If you look at the investment, this 285,000 new connection points have led to a big increase. In Brazil the number of new customers has been incredible. Of course weather has helped to achieve this situation. In Colombia sales increased by 7%; in Mexico there's still very sustained growth, so the net increase in the number of customers reached 42% in the first half and sales increased by 9% in the industrial sector and 6% in the domestic and commercial sector. And in Argentina the good news, as I was saying, is this approval of the transient economic assistance which will put EUR49m into our pockets this year.

 Now the electricity distribution in Europe, as you can see, had a growth of 1.2%. It's quite moderate growth because the markets are very mature. But this growth is accompanied also by a reduction in losses and a significant improvement in quality, of course depending on the climate conditions which were very favorable.

 Now in terms of (technical difficulty), let's start by our earnings. We didn't have many earnings but one of the reasons for this is the remuneration system links this figure to the figures of the two years before and two years ago the Company had a policy of retrenchment in terms of investments in electrical distribution because we were still unsure about the new regulatory framework. So we didn't going to go back to investment normalcy until the end of last year we became familiar with the new framework. But in 2015 results are related with investments of 2013 and those investments were much lower than the investments that we are making today. Investments grew by 25% according to the new plan and the number of connection points exceeds 4m of which 3 (technical difficulty).

 Now in terms of electrical distribution Latin America, a significant increase in sales, significant increase in connection points in both countries where we operate, but we'll look at this later. The sales growth has been very significant in the two countries in the areas where we operate and there's very powerful growth (technical difficulty) points. In addition, results have been very good because EBITDA increased by over [20%] and this is related with the increase in demand and also with the efficiency plans revolving basically around an attack to (technical difficulty) business and growth of 20%. Investments also grew by 14% as a result of all of this strong demand and strong pressure to improve our grid. And those results include the application of the tax on wealth in Colombia which has placed a burden and this generation of EBITDA (inaudible) would have increased by 30%.

 Now in terms of the liberalized businesses for gas and electricity in Spain, let me tell you that with restricted conventional gas demand in Spain this figure includes 2.1% that we should mention but the situation is becoming more and more normal in terms of the electrical -- in terms of the gas demand for electrical consumption.

 So, on the whole, the whole of the demand for natural gas in Spain last year increased by 5.3%. (Inaudible) the demand in the first half increased by 1.9% and according to the calculations of (inaudible) Electrica, taking -- because of the effect of temperature the increase was 0.5%. I also want to announce that in July we expect to close the month of July with a gross increase around 12% because of the high temperatures that Spain is suffering.

 So these are the macro figures. Now in terms of gas, I will tell you that our Company had a total volume of 2.4% negative vis-a-vis 5.3% of the whole sector. The reason for this is not of course gas devoted to electrical generation, which went up by 28%, or residential gas. No, the problem was industrial gas, due not to the sales for industrials but also the sales -- but especially to the sales for the provisioning of third parties and also sales for cogeneration, especially sales related with Purina's businesses which, as you know, froze in the first half of 2014. So the combined different completion of provision in contracts for third parties and secondly, the cogeneration are significant factors when we compare ourselves with the previous year.

 However, this decline of 2.5% in the national market is offset by an increase of over 13% in international markets. I want to mention an increase of 24% in the gas sold in Europe and almost 6% in gas sold to other countries. So on the whole, taking into account the national and the international market, our Company increased its gas sales by 3.3% this half-year.

 I also want to mention that international sales already account for 45% of our total turnover and this figure is becoming consolidated more and more and also at the end of the quarter the fall was in excess of 46%. And this has influenced all energy product markets including natural gas. However, a mitigating factor is the euro-dollar parity and this of course compensates for the other factor.

 I also want to indicate that Henry Hub over the same period as compared with the previous year had also -- had a fall of over 40%. So the evolution was parallel to the evolution of Brent but at National Balancing Point only shrank by 12% and last year the price was similar to that of the previous year.

 So in general I'd like to tell you that these indices had performances that need to be analyzed carefully and this is something we're going to be doing now. Our EBITDA this year, as you know, fell from -- on this basis I mean gas supply -- fell from EUR484m to EUR455m. This means a fall of 7.9%. If we want to break down this figure and understand why this happened, we will see that this is related to reduction of margins in about 10% and an increase in volume of about 3.3%. On the whole this entails a net fall in EBITDA of about 7.9%.

 Let's analyze those things separately and let's begin by the first factor, quantity. There's been an increase in quantity by 3.3%. What do we expect in the next few years, that's 2016, 2017 and 2018, which is the horizon of our strategic plan? Well, if we begin by Spain, in the first half there was an increase in consumption of 5.3%. Our impression and our opinion is that in the next few years from 2015 there's going to be two circumstances that are going to lead to a moderate increase in consumption in Spain.

 First of all, the decline in coal consumption because of the completion of public support programs in this technology due to the EU regulations, and also an increase in industrial demand which will accompany the increase in industrial activity and the country's GDP. So we believe the development of the country's economical activity and the problem of coal should induce moderate increases in the amount of gas consumed in Spain.

 In the international market we need to refer to the supply factor, and I'm just thinking about LNG, especially focusing on Australia. But of course this gas from Australia has already been sold in bilateral contracts and so we do not believe that this will strongly distort the market.

 The North American market will start introducing the first liquefaction plants but this will start in 2016 and approximately half of the supply of liquefied natural gas from the US will be for us because this will entail the placement into service of the Sabine 3 plant and then there's going to be other contracts later on. So in the period we're considering we don't think that there's going to be further increases in gas in the market, apart from the ones I mentioned.

 In terms of the increase in demand, we do believe that there's going to be an increase in demand because of the different circumstances. Now for environmental reasons and regulatory reasons there's going to be a replacement of natural gas -- coal is going to be replaced by natural gas. We shouldn't forget the problem of nuclear plants in Japan and the possible entry into service of plants that are now not operational. But we need to also consider what is going to happen with the German stations.

 Also for environmental reasons, not just coal will need to undergo changes but also many countries like Chile with its biomass will lead to a conversion of biomass into other types of energy and the decline in production in certain countries such as Egypt affects the demand of liquefied natural gas in Philippines and Jordan, etc. which are already active in the world energy markets to guarantee supply. And also there's many countries where economic growth, such as China or India, will need -- will require greatly in energy resources and gas will play an important role there.

 All of this, together with the need to diversify sourcing technologies, will be such that LNG in our country will grow in the next few years. Now our conclusion is that in Europe there will be a moderate increase in gas demand but LNG at a world level will experience a very strong increase in that period of time.

 As regards GNF, we are going to continue keeping our market share in Spain and we'll evolve depending on what happens in the market in Spain. And on the international market basically we can't forget that in 2016 the volumes deriving from our contract with Cheniere will begin to come into force, Sabine Pass especially.

 The margins of this contract will not be what we foresaw three or four years ago because there's been changes in the basic scenario of these commodities but they will give us positive margins which, when we take into consideration the volumes, will increase. And that is due to the fact that that contract has been sold and matched and therefore its contribution is going to be positive right from the time it's in our portfolio.

 That, together with the fact that we are firmly working on new markets with final customers, competitive markets because gas is competitive, and the flexibility that our fleet allows, permits us to say that our volumes in growth in Europe will be -- there'll be a moderate growth in Europe and internationally there will be a clear growth as a result of the reasons I've explained.

 Now what about prices? There's no doubt, as I said, that the decrease in the price of Brent has affected all energy products but it has done so in a way which as regards natural gas is not linear or direct. You can see this when we showed that there was a drop in the price of Brent of nearly 40%, the National Balance Point only went down by 12% and that's affected very significantly by the volumes of gas in the European pipelines which is an atypical circumstance that will also be reflected in the market.

 If that point were only an LNG reference, the behavior of that would have been different. But the price of Brent has dropped almost 46% as regards the previous year but it's also true that there are several mitigating factors. The first one is the euro-dollar exchange which we referred to, and the second is that the price of the gas contracts is associated with the price of Brent. As there's usually a gap there of about six months, a delay of six months, so our contracts automatically go down in price, in addition to the fact that, as you know, every three years normally there are reviews, ordinary reviews of prices of contracts. Therefore the reviews that are negotiated every year in the contracts are going to be negotiated and bring the price down.

 And if you also consider that we don't act on spot markets, we're not present in spot markets, and we do act -- we're active with final customers and we have a diversified portfolio, in our opinion the future tells us that in the worst case scenario -- I'm talking about traditional market -- the increase in amount will make up for the decrease in prices, and we don't expect that worst case scenario. That would be a summary of our view, vision which we will specify further in our strategic plan.

 If we carry on with the data of our EBITDA and we go to electric power, in Spain we have to say that in all we've been -- we've produced almost 7% more electricity than in the previous year because in general there's been less wind production, wind electricity and hydraulic production and there was much more production of combined cycle plants and coal. And in general the drop was very significant in hydraulic production, almost -- and a very great increase in thermal and combined cycle plant production.

 We have to also underline that with the support of National Coal that situation has regularized and our production has gone above 18%. Sales of electricity in Spain increased by 3%, pool price by 51% but our EBITDA went down by 8% because there's been a clear increase in the cost of generation as a result of the change in the mix due to the reduction in our -- of more than 40% in our hydraulic mix.

 As regards cogeneration and renewables, there's been a drop of 10% as a result of the lower rate of wind energy production and hydraulic production. And we also have to point out the completion of the Gecalsa acquisition which should add 222 megawatts of net capacity in renewables and this will increase -- this carries with it a portfolio of about 400 megawatts which we are going to develop in due course.

 If we look at the international power generation, the production dropped by 5% as the result of a lower production in Mexico because of maintenance operations in the plants. There's been a higher production because of Bii-Hioxo but the balance is negative. The hydraulic plant at Costa Rica has started up and investments have grown as a result of the completion of the Costa Rica and Hioxo projects.

 The EBITDA of the business has increased significantly, basically because of the higher activity resulting from these new investments.

 If we go into the Chilean situation, we have to say that the electricity distribution and transmission business in Chile, the figures of business have gone up clearly, 3.3%, electricity 2.5% in connection points and transmission 3.6%. So there's a clear increase there. Up to 2020 we foresee an increase of about 5% in electric demand every year.

 And as regards the gas -- natural gas and LPG business of CGE, natural gas sales went up by more than 4% and also the connection points. Clearly we're confident that the approval that's going through parliament at the moment -- quite slowly but anyway I'm talking about the new regulations for gas -- will allow us to speed up the gasification plan for Chile.

 As regards LPG, the business, wholesale business has dropped by -- but that is because of in many cases the customers have become autonomous in terms of their supply. But not the final sales have only dropped by 2% or the financial results. So overall the Company has a clear increase of its contribution to the Group without or discounting the important significant synergies which we will obtain and are beginning to bear fruit but are only just beginning to do so.

 So we're satisfied with our investment in Chile and we hope and we expect that the growth will speed up even more in the immediate future.

 In conclusion, we have to say that we're satisfied with our business model. We are suffering all the different turbulences associated with the problems that have been affecting commodities, basic commodity market, but there's been a growth in EBITDA of 10% and a net income growth of 1.2% and we think that those figures reflect good management. Business -- LNG wholesale businesses don't have the potential for growth because of the drop that -- the slowdown in the commodities market but will allow us to face up to the future well.

 And the international situation is getting stronger and we think that we're going to be able to continue to grow internationally in the immediate future. That's the end of my presentation so I'm at your disposal for the questions that you might want to ask.

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Questions and Answers
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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [1]
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 (Interpreted). Good, let's go to the Q&A session. We'll start with questions in the room. I think we have one here. I'd please ask you to say who you are before you ask the question and what company you represent.

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 Fernando Garcia,  MainFirst - Analyst   [2]
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 (Interpreted). My name is Fernando Garcia from MainFirst. I've two questions, one is about the LNG business. I would like to know your opinion on the meaning of the results that indicate an improvement of margins in the second half of the year in this business. How should we interpret those indications, the fact that the EBITDA will probably drop less than in the first half?

 And then for 2016 you said that you're going to have bigger volumes because of the gas from Cheniere. I would like to know what you think -- how the margins are going to go if you -- bearing in mind the drop in the price of oil and maybe an excess capacity of LNG for 2016?

 And then I have a question about CGE. I'd like you to tell us exactly what's the situation with the negotiations in terms of the regulation changes in gas distribution in Chile?

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Unidentified Company Representative   [3]
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 (Interpreted). Well, as regards LNG, the rest of the year we expect a similar situation more or less, similar to what we have now. We think our evolution will continue along the same lines. This situation that we're experiencing of lower margins will be made up for by the increased volume, 3.3%, maybe a little bit more in the second half of the year. That's what we think will happen.

 As regards 2016, the Cheniere contract will add volume, more volume, and that will undoubtedly be positive and will -- and we'll have new contracts too. I don't think that that excess capacity that you mentioned will affect those results because basically that's a contract that has been dealt with and sold. We'll have to see what happens with that excess capacity in different areas and markets but we don't think that will affect the increases in our results as a result of Cheniere.

 In gas, CGE is increasing its production and we think that the new gas law in Chile will ratify that, basically because the number -- because the main policies of the country -- energy policies are promoting gasification to solve a lot of the pollution biomass resulting or derived pollution problems in a lot of the big cities. So the Chilean government wants to gasify, wants to increase the use of gas, and we are -- we'll have to wait to see what the finer details are before we go forward with our plans.

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [4]
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 (Interpreted). Good, there are no more questions in the room so we will now go to the questions on the telephone.

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Operator   [5]
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 (Interpreted). (Operator Instructions). Alberto Gandolfi, UBS.

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 Alberto Gandolfi,  UBS - Analyst   [6]
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 (Interpreted). Hello, good morning. Thank you very much. I have three questions please. The first one is about the LNG business globally. Your portfolio is growing up to 11 BCMs. How many BCM of your existing current contracts are coming to an end or is that a pure addition? Because you're talking about a growing demand globally but the LNG demand has not grown since 2012 so this market has not really grown a lot. There's been a crisis but this year the demand of LNG or for LNG in Asia has dropped by 6% since the beginning of the year. So don't you think there's a risk if you bear in mind the huge -- the volume you've spoken about in terms of supply and the fact that the demand is not growing very much, don't you think there's a risk that you might have too much gas? Is that a possible financial scenario for you?

 Second question. You're saying that you're not operating on the spot markets. That's clear. But what I don't understand is the spot markets in Lat Am and Asia have gone from 12 to 15 BTU, dollars per BTU, but your EBITDA went from less than EUR400m to about EUR900m. So can you help me please to understand why with LNG volumes that have just -- that have doubled, yes, but are not -- do not account for all of this increase, how is it possible for the EBITDA to have gone up so much if you practically -- if you've not used indexed sales in one way or the other on the spot markets?

 And the final question is also about LNG margins globally. The price in Asia, in Japan it's for instance gone down by 50% since November, it's gone down from $15 to $7 per BTU. And in Europe we're at about $6.5. So I'm trying to understand the dynamics of all this because it could happen with the offer that we're getting two or three years, four years might go by without international margins, especially if the situation changes in Spanish America. So it's a bit strange to me that you seem to be so calm and relaxed about this or maybe I'm not -- I'm missing things.

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Unidentified Company Representative   [7]
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 (Interpreted). Well, several clarifications. The first one is that the 11 BCMs are for new contracts. They don't bear in mind what is -- the contracts that are going to come to an end within that period. From here until 2020, 2021 a lot of contracts come to an end, for instance the one in Algeria with LO 8 BCMs. So the figure that I've given is not -- is the figure for new contracts but not the net figure so to speak. After 2018 a lot of contracts are going to come to an end in our portfolio that we will have to renegotiate in some way, one way or another. So we don't think that we're -- we've got too much gas, especially thinking of 2016. The Cheniere contract has been sold all that and it's been sold with a margin. We're not selling on spot markets. What spot markets do has little to do with our results because we don't operate on -- we don't sell to spot markets, sometimes, very occasionally.

 Your comment about the improvement of the wholesale gas market is not -- cannot be extrapolated to this situation. That difference from negative to positive had to do with the internationalization a long time ago of our natural gas business through the LNG business. When the Spanish market sunk in 2008/2009 our Company reacted and looked for final users, final customers, outside of Spain.

 That is the key, not the sale on spot markets. That is the reason why spot markets, then and now, are telling us what is happening, but not our behavior. For instance, if things go up or down next year is not going to influence how we sell our LNG through our Cheniere contract because that has been dealt with and is sold. There is therefore no -- it's not index-linked.

 There are greater offers of gas, larger -- more gas, but we don't think there's going to be such a huge increase of LNG in Europe. Where's it going to come from? Australia? Australia has practically sold all of its gas and the Latin American gas will have two contracts, one is -- will be owned by Shell and another one will be our contract. There will be no more gas from the US until well into 2019 with the two plants -- with the two Sabine Pass plants. And other sales such as the Camila operation will not start up until after 2019. So you've got to be very cautious. Most of these markets that you've referred to in your question are exactly that. They are not markets that are index-linked where significant amounts of gas are index-linked in the long term.

 We have contracts, significant contracts with countries like Argentina, Chile and that, but those contracts are not bound to those markets, are not indexed to those markets. So we do not believe that for 2016 that increased volume will produce that phenomenon that you have mentioned of excess capacity in our portfolio and drop in margins. No, we don't think that will be the case. I think I've answered all your questions. If I haven't I can always further expand.

------------------------------
Operator   [8]
------------------------------
 (Interpreted). Javier Suarez, Mediobanca.

------------------------------
 Javier Suarez,  Mediobanca - Analyst   [9]
------------------------------
 (Interpreted). Hello, the top of a good morning. I'm Javier Suarez and I have three questions. First of all, insisting on the performance of the wholesale gas division, I wanted to know whether in the fourth quarter we can expect a certain recovery in margins, because on the one hand we should have continuously strong demand and on the other we should already have some effects of the renegotiation of the supply contracts because these contracts are renegotiated every six months. So is it correct to say that in the last quarter we should see a certain recovery in margins?

 Second question has to do with the general situation in Latin America. And I wanted to know your opinion of the possibility that there may be a slowdown. And I want to know what effects this might have on the Gas Natural business and also what affects an increase in interest rates in the United States would have on this.

 And thirdly, I would like to know on slide 17 you say that you have financed about 80% of your debt in euros and US dollars. And the part of your business that is growing most is Latin America. Should the company consider increasing the part of the debt considered in local Latin American currencies so as to improve its possibilities in the future?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [10]
------------------------------
 (Interpreted). Well, in terms of the first question it is true, and this would link with the previous question. So in addition to all that I've said most of our sourcing portfolio is linked to Brent. This means that when the Brent price goes down by 50% our formula also falls proportionally. And this means that we need to act -- we need to add the euro/dollar parity to all our other mitigating circumstances so we can adapt to those situations precisely because of the type of sourcing contracts we have, which also follow the evolution of the Brent price.

 But in the second part of the -- we don't expect significant changes in the global situation. We are going to try, and we believe we can achieve this we are going to try and maintain the same situation that is the fall in margins of 10% will continue.

 And I also want to mention that when in the past when there have been falls in the Brent price our margins have not fallen in the same proportion. But of course we do not anticipate that the Brent price will keep falling so significantly. But what I want to say is that we have clearly mitigated this effect of the commodities and we have weapons to mitigate it even in the future, because obviously there's some renegotiations in the pipeline. But for the second half we expect that the situation is going to be such that we will be able to comply with our commitments in the strategic plan.

 In terms of Latin America there is a certain slowdown in many countries. But we don't think it's going to affect our distribution business Gas Natural and electricity, because the increase in demand is very significant. In electricity it is over 5% and 4.5% for gas. So the investment plans and gasification and electricity distribution are not going to undergo too many changes. Because even if it is true that there is a certain slowdown in the economies of those countries as far as our businesses are concerned both demand and the needs of those countries are such that we are encouraged to keep enlarging our network.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [11]
------------------------------
 (Interpreted). Well, in terms of the debt structure in the different countries we operate we try and finance ourselves with local currency. So what you have said is already in line with our current policy. And if we do indebt ourselves in US dollars we take out the corresponding swaps in order to hedge the situation.

 But of course we need to mention that when you look at our multiplier for EBITDA, Latin America ex-Chile is under-indebted. So our ratio in Colombia, Brazil, Mexico, etc. is of around 1.5%. So it is true that we are less in debt and so we will analyze the situation. And in Mexico and other countries as well these are countries that are going to be investing in the next few years, and so inevitably the debt will increase.

 And if you look at this graph in comparison with the previous year you will see that the yellow part increased a lot. And the yellow part is basically Chile, because last year we didn't have Chile. And the Chilean local debt is at now a ratio that is 3 times EBITDA which is our normal ratio.

 But now in terms of debt we are working on the Chilean case. We want to reconvert the debt in US dollars to pesos in order to have a better balance in terms of assigning our cash flows in that country in relation with the debt. And we also want to get the price down, because this debt tends to be quite expensive. When you finance long term in Mexico at 10 years the cost is around 7% for example. So we are trying to maintain cash flows in local currencies without damaging our cost structure.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [12]
------------------------------
 (Interpreted). Okay, next question please.

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

------------------------------
 Jose Ruiz,  Macquarie - Analyst   [14]
------------------------------
 (Interpreted). Hello, good morning. Thank you for taking my questions. The first question has to do with the reasons why you cancelled contracts to third parties in Spain. I wanted to know whether this was your decision or whether it was the client's decision.

 Secondly, I wanted to ask you about the regasification plant project in Colombia. And I wanted to know how -- whether -- how your situation in Colombia would change if you had a possibility to market your own products in Colombia. Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [15]
------------------------------
 (Interpreted). Right, okay. In terms of your first question contracts to third parties well that basically expired, these are older contracts, they were quite long-term contracts and our policy is now selling to end users. We have announced this many times. So it's not just that the contracts expires but also that we didn't want to keep acting through third parties but do it with end users even if this is more difficult to do now than it was four years ago.

 Number two regasification of Colombia, well, I wanted to insist on what my colleague was saying. It is very difficult to anticipate things. It's difficult to anticipate the evolution of the large energy variables. But it is not true that in the world of natural gas news is always bad. We don't believe this is true. There are many countries that are experiencing a huge surge in the consumption of LNG, especially Colombia and Mexico. Colombia indeed is going to set up a regasification plant in order to supply electricity in that accompanies a very well-known phenomenon which is the regulation of renewable energies in this case hydro power, so they need gas.

 And so they are going to be launching a plant basically devoted to the current combined cycles that require it. But naturally the growth of electrical energy in the country is going to be huge. And so this is going to require greater electrical investments in order to cater for demand. This is a wonderful opportunity for us, because we are very active in this area. We are following up on this project, and we hope it is going to provide [elite] opportunities to domestic and industrial gas distribution in the areas where it may be established.

 In Mexico, our policy is very clear -- now that we and our other competitors have a lot of LNG plants in Mexico. We are going to be establishing more combined cycle plants in Mexico. Now there are many tenders underway which we are analyzing very carefully. We have four combined cycle plants in Spain/Mexico which form the hard core of the generating activity of global power, which this half grew its EBITDA by 30%.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [16]
------------------------------
 (Interpreted). Okay, next question please.

------------------------------
Operator   [17]
------------------------------
 (Interpreted). Manuel Palomo, Exane BNP.

------------------------------
 Manuel Palomo,  Exane BNP Paribas - Analyst   [18]
------------------------------
 (Interpreted). Hello, thank you for answering my questions. I have two questions and two things I would like for you to clarify. The first question has to do with gas distribution. In spite of the change in the regulation increase in supply is lower than last year. So is this a question of time for us to see increases in this figure? And if so, when can we expect it to increase and what could be the expected average figure?

 The second question has to do with provisions. You mentioned something to do with attacking bad payers. But provisions have increased significantly this period. So could you please explain what lies behind this? And also wanted you to clarify the following, for your net debt EBITDA ratio for the end of the year I understand that you're not including the EUR1.5b hybrid as a debt.

 And the second clarification is a follow up on a question by Alberto regarding increase in volumes. I think the CEO mentioned that there were some contracts, for example, an 8 BCM contract in Algeria which was going to be completed soon. And my question is whether you were considering not renewing it.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [19]
------------------------------
 (Interpreted). Well, first of all in terms of gas distribution I don't have the figures here for the half. But our target is to increase the number of supply points by 150,000 in Spain this year. Of course there's no new buildings so what we are going to do is transform our current drillings to natural gas especially in smaller towns.

 In terms of bad debts even if we are certainly improving in some areas, but some areas play against us especially in Colombia. First of all, we have changed accounting policy to make it more aggressive when we discovered some irregularities, namely some fraud. The turnover in the last well four years revealed some bad debts and so the comparison with the previous year does not really reflect an increase, because now some things that used to be hidden have come to the surface.

 Another reason is the consumable increase in electrical energy both in Colombia and Panama which is such that for the same physical level of bad debts there is an increase in debt. There is technical reasons would explain all of the change.

 In terms of Algeria the contracts would expire in 2021, and we haven't made any decisions as yet. We have plenty of time to make the most appropriate decision.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [20]
------------------------------
 (Interpreted). And in terms of net debt to EBITDA ratio this is the -- this would not include the hybrids that we have issued which are not recorded as debt. They are considered to be non-controlling interest.

------------------------------
Operator   [21]
------------------------------
 (Interpreted). Javier Garrido, JPMorgan.

------------------------------
 Javier Garrido,  JPMorgan - Analyst   [22]
------------------------------
 (Interpreted). Thank you. I have several questions. First of all, I want some clarifications. I think I understood that you expect for the second half of 2015 for the sourcing and marketing business for gas you expect figures similar to those you had in the first half. However, if we look at the different quarters in succession, in the second quarter of the year EBITDA fell by 16%. You mentioned that in the first quarter the situation had been exceptional because there had been some spot contracts. But in the -- in April to June has anything exceptional happened? Or was there an exceptional profit in the second quarter of 2014 that explains this significant fall? This is just to understand the trend for the second half of the year.

 And a second clarification about this business as with the comment you made, in the worst case scenario you expect that the increase in volumes will offset the fall in margins. Should I understand that this means that your expectation is for the result of this business in the 2016 to 2018 period will be at least the same as in 2015? Is that what you meant with your comment?

 And one third question, specifically about volumes in Chenier. You mentioned that those volumes in Chenier have been hedged and matched. Does that mean that you have hired for 2017 EUR4.5m additional in sales or have you replaced these figures that is supplying the same contracts but with Chenier contracts rather than with current?

 And the fourth and last question would be that you mentioned that your sourcing contracts are linked to Brent prices, and so they are reviewed downward given the fall in the Brent price. And I understand that those Brent contracts are linked to the same indices and therefore those downward reviews shouldn't have a significant impact on your margins. Is there any factor apart from residential customers in Spain that change this much in the contracts? Or is there any other factor that may help you benefit from the downward review of those provisioning contracts?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [23]
------------------------------
 (Interpreted). Different questions, I'm going to try and remember everything. As regards the last question I just want to add something. Our policy for new supplier contracts in the next few years includes the fact that after 2018 the basis portfolio contracts come to an end, most of those contracts. We were hoping to arrive at that date with a situation that allowed us negotiation possibilities in terms of the contracts that expire after 2018. And with those new 11 BCMs that will precisely be the situation.

 As regards the second half of this year we expect our margins to be similar. There are many different factors that will influence the situation, foreign exchange, price of Brent. But we expect a similar situation, a drop in margins more or less maybe not so strong as we've had. T hat's what we hope will -- or expect will happen.

 As regards next year the Chenier contract is -- has been sold for more than 4 BCMs. Half of those will be new customers; half will be older customers. The new volume will mean that there will be a greater margin in general terms, of course there will be some exceptions.

 The renegotiation of those contracts will allow us, with a certain delay always, I'm talking about supply contracts, allows us to collect what we pass onto the customer. So in general terms there's not going to be a decrease or an increase in margins.

 What we try to do with our operations is to guarantee some kind of margin, even if it's not the best depending on the market, and do -- and ensure things for as long as possible. We appreciate that policy and our customers do so too.

------------------------------
Operator   [24]
------------------------------
 (Interpreted). Carolina Dores, Morgan Stanley.

------------------------------
 Carolina Dores,  Morgan Stanley - Analyst   [25]
------------------------------
 (Interpreted). Hello, good morning. Thank you for accepting my questions. I have three questions. The first one has to do with the purchase of [Gecalsa] in Spain. What's the size of the pipeline? What's the -- what are the specifications? Will you get that contract in Spain in the short-term?

 And the second question has to do with the improved margins in China in the second half of the year. Is that going to continue in 2016? Do you think you'll need action from the government?

 A final question is whether you can give us an update on potential new projects CGE projects, potentially new CGE projects and whether growth is going to take place there.

------------------------------
 Antonio Basolas,  Gas Natural SDG SA - General Manager, Strategy and Development   [26]
------------------------------
 (Interpreted). As regards the Gecalsa purchase they have 400 megawatts of wind production pipeline mainly in Spain and Chile. In Chile I'm going to submit to the competition in bids in March 2016 for electric power distributors in long-term contracts.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [27]
------------------------------
 (Interpreted). As regards to Chile the improved costs we begin to feel that already but it's not yet relevant or significant. Our efficiency and synergy plans are just beginning. It's early days. Probably in six months time we'll see things more clearly. And in one year performance -- then we'll be in a situation of full performance.

 There has been growth of markets in Chile, sales of gas, natural gas and electricity have increased by about 12% in Chile in spite of the fact that the Chilean economy is not going through its best time.

 As regards general global generation we are looking at international opportunities associated with technology, combined cycle plant technologies, hydraulic technology and also wind parks. And those are the three areas where we are active. And we are looking at possibilities for developing greenfield projects in a whole series of countries where we are doing a lot of work. And we hope to have good news for you in that area soon.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [28]
------------------------------
 (Interpreted). Good, next question.

------------------------------
Operator   [29]
------------------------------
 (Interpreted). [Jose Lopez], CLG.

------------------------------
 Jose Lopez,  CLG - Analyst   [30]
------------------------------
 (Interpreted). Good morning. Other people have asked about this, but I wanted you to further clarify your optimism as regards the growth in demand of electricity in Chile. Copper, the price of copper is falling. The price of commodities is falling in general. So why is it that you're so optimistic? Spanish/ America in general prices are dropping, Brazil. And the interest rates are possibly going to go up. Why is it then that you're so optimistic as regards the growth in demand of electricity and gas because I think that there is a classic slowdown in Spanish America? We can see this in the basic commodity market.

 And when I look at your debt I see 81% of the debt is in euros or dollars, and a significant portion of your EBITDA is being generated in currencies that are falling at this time. What are you going to do to sort out this mismatch between debt and cash flow?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [31]
------------------------------
 (Interpreted). Well, as regards the situation in Chile it is true that they -- well, the country is growing 2% to 3% GDP. It's not the same as other years but it's growing. It's not the best of times but it's not a bad time. The economy is going to continue to grow. The reality is -- the truth is that the economy -- demand is growing, electricity is growing at more than 3%, and gas is growing at more than 4% because the drop in the price of Brent oil is favoring imports. And there will have to be exports at the end of the day too.

 We don't see any problems in Chile. We see an opportunity when the economy -- when the growth picks up again, we are sure that there will be a growth in demand. This slowdown in Chile is nothing new. But I insist we are going to have 3% and 4% levels of growth.

 And the same happens in other countries where we operate. Gasification in many countries in Spanish America has a lot to do with the product that is, or the fuel that is being replaced. So things go better when the economy grows sharply but it's still positive even if the economies are not doing so very, very well.

 And as regards the electric market Panama and the Caribbean region of Colombia, because of different international agreements in the Caribbean, etc., are going to lead, are leading to very significant growth in demand. And there has been a growth for a long time.

 Even if it dropped by 6%, 7% we don't think that that would seriously affect our operations it would simply well reduce our growth slightly. We obviously would like a much better situation, but we don't think there is reason for concern at this time.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [32]
------------------------------
 (Interpreted). I don't know whether I explained myself correctly before, but the debt 81%, 80% is in euros not dollars. 80% in euros. So 80% of the cash flows are in euros too obviously. It's all matched out. We don't have to do anything else about that. And our policy also, as I've always said, is that our debt in the countries we operate in and the businesses we are in are usually in the local currency of the cash flow of those businesses.

 Local currency are in some countries like for the Mexico combined cycle plant through CPG those operations are in dollars and therefore the debt in those cases, or in that case is in dollars. That's why on page 17 you saw the dollar debt that corresponds to the businesses we do in dollars in Latin America. But we've got no risk associated with our debt in terms of the currencies because that's the policy we have and that's what we are going to do, we are going to continue with that policy.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [33]
------------------------------
 (Interpreted). I would like to just repeat something which is as regards Spanish/America. Almost all our businesses are regulated over there, so the economy has an impact but not such a great impact on our income, it's all regulated.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [34]
------------------------------
 (Interpreted). Next question. There are no more questions in Spanish. We are going to the questions in English.

------------------------------
Operator   [35]
------------------------------
 Lawson Steele, Berenberg.

------------------------------
 Lawson Steele,  Berenberg - Analyst   [36]
------------------------------
 (Technical difficulty).

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [37]
------------------------------
 Please because the sound wasn't very good.

------------------------------
Operator   [38]
------------------------------
 RBC.

------------------------------
Unidentified Participant   [39]
------------------------------
 Good morning to everybody. Three questions if I may. The first, and apologies for reverting to the issue of the procurement and supply business but your comments about stabilization in EBITDA in that business over 2015 suggest that you will basically have to post an increased contribution for EBITDA in the second half of the year. Given all the discussions about margins, I just wondered how you are going to achieve that increase in EBITDA in the second half of the year.

 Second question relates to Argentina and the compensations that you referred to in the press release. Will they be recorded in equal installments over that 10-month period?

 And then finally, and then I guess this is a very simple question, in respect of the Gecalsa acquisition in Spain from when will that acquisition be accounted? Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [40]
------------------------------
 (Interpreted). I'm going to try to answer although the sound was pretty appalling. We don't expect a very significant increase in wholesale business EBITDA in the second half. There might be. There's a lot of different factors at play. We are conservative. We'll continue along the line of making up for the drop in margins by an increase in volume. That's what we expect to do.

 In the second half there might be additional positive factors. But we'll have to wait and see how the slightly volatile situation evolves. We'll see what happens. And then after that, successive years we'll clarify our vision further at the end of the year about that.

 As regards Argentina, well, this will be carried under the heading of results proportionally. This is a temporary measure by the government in Argentina since it hasn't complied with the commitments of the ITR, as they call it, the Integral Tariff Revision. They've made progress. The global revision or review of tariffs they've made progress with it. But I presume that the political situation and difficulties has made it impossible for them to finalize that. And they've taken that temporary decision which means that we will have a EUR40m odd increase in our EBITDA this year for Argentina. But next year probably this will change once the review becomes final.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [41]
------------------------------
 (Interpreted). In terms of the incorporation of Gecalsa we are still waiting for the corresponding authorization. And we hope that the acquisition can be final along the third quarter. And this is when we will incorporate it into our consolidation perimeter.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [42]
------------------------------
 (Interpreted). Next question please.

------------------------------
Operator   [43]
------------------------------
 Cosma Panzacchi, Bernstein.

------------------------------
 Cosma Panzacchi,  Bernstein - Analyst   [44]
------------------------------
 Hi, good morning and thank you for taking my questions. I have three questions and one clarification. First of all on gas supply we have seen that the EBITDA in this segment is down by almost 8%. In your report you say that this is mostly but not entirely due to Spain. If we look at your European sales they have increased by 24% versus 2014, while the TTF price in the period is basically on a par with 2014.

 So does this mean that you are pursuing an aggressive volume over market strategy in Europe in order to gain market share? If it is yes, what is your final goal and ambition in terms of volumes for Europe?

 Moving to the second question, LNG sales are focusing on Spain. Since April of this year every single month Spanish LNG loads have been lower than in 2014. Given that you have some sort of inflexibility in your pipeline contracts how is that affecting the equilibrium gas price on the market in Spain so far? And if hydraulic conditions converts to normality by yearend and gas power demand grows moderate, could there be a risk of a gas glut in Spain and how would that affect your margins going forward?

 The third question is on generation. Power demand in Spain is 8% up and the wholesale prices are up by 51% versus 2014. But still your results for the segment in terms of EBITDA are down. So what went wrong? And if we look at 2016, if we include the effect of the French/Spanish interconnection there might be even the pressure downwards on the wholesale power price so in that situation how could that affect your results?

 The final clarification is on gas distribution in Chile. You have said that you are confident that the Chilean government will support the expansion of the network. But at the beginning of July the Mining and Energy Committee of the Chilean Parliament has approved the new Bill with no changes in terms of the maxing of profit margins, so it's still 9% not 1%. So I assume that this wasn't included in your case for the CGE acquisition. And because this was due to the Metrogas extra allowed margins in 2012 and 2013 if this is confirmed will you be able to act against the previous owners of CGE or not? Thank you.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [45]
------------------------------
 (Interpreted). Yes, it is true we are growing a lot in Europe with a very powerful commercial network based in Paris which attacks all the markets in Central and Northern Europe. We are very satisfied with it. Some years ago we also won gas provisioning through our residential -- for public organizations in Ile-de-France. And so our organization is achieving very many end customers SMEs, large companies, smaller companies. We are very satisfied with it.

 That's a very competitive market but which offers huge stability for us. And it is placed in a high consumption area. So we are going to keep growing provided that activities are profitable in that area. So in that respect this is no news and we hope that that area is going to keep growing.

 Now in terms of contracts in Spain I want to tell you that that adjustments occurred because contracts expire from time to time. We have a hugely diversified portfolio. We have thousands and thousands and thousands of customers. And so our renewal policies adapted to our -- to whether we want to devote more or less gas to the Spanish market or more or less gas to some customers or not.

 And for example, third party provisioning contracts, well, we don't really want to advance on those contracts; we'd rather work with direct customers or internationally which is what we have done for many years. When we decided at the beginning of 2008 when the prices started in Spain we decided to diversify our gas sales market.

 In terms of the generation business, the main reason for the fall is the significant increase in generation costs because what really increased a lot is the thermal generation coal and natural gas whose costs are much higher than the costs of generation last year, basically nuclear and hydro. For example, hydro fell by almost 40% and replacing 40% of hydro by gas or coal is much more expensive. So that explains this situation.

 We do not -- we are not receiving pressures from the electrical pool. the pool is a wholesale regulated market that's very transparent, and has been shown it works very normally within the complexity that these electrical markets had throughout Europe. And therefore, frankly I don't see that this is a possibility. Amongst other things, because the reason for the rise in prices in the electrical pool has to do with the need to have thermal generation capacity otherwise there would be just power cuts. So I don't see any real problem many problems in that respect.

 In terms of Chile this is -- it's a policy of the current government analysis program to gasify the country. Therefore the development of the law will have to contemplate it. And we are sure that it will contemplate it. But of course we need to take into account that the Chilean regulation, the current regulation goes back to 1930. So this is just a very considerable update of many -- of the elements of the law.

 But our opinion is that the law is going to try and make sure that gas in Chile keeps growing and keeps expanding. And we want to take advantage of this opportunity so that Metrogas keeps expanding, not at the same rate, but at a higher rate than it has been growing so far.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [46]
------------------------------
 (Interpreted). Next question.

------------------------------
Operator   [47]
------------------------------
 Antonella Bianchessi, Citi.

------------------------------
 Antonella Bianchessi,  Citigroup - Analyst   [48]
------------------------------
 Yes, very two simple questions, the first one is you mentioned that you're interested in expanding your network in Spain in the gas distribution, gasifying the new municipalities. Can you elaborate on the return that you're expecting to achieve on this new investment?

 The second question is can you quantify how much of your gas sales are hedged for 2016/2017 and which are the volume that you already sold and before which is the visibility you have on the profitability in 2016 and 2017?

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [49]
------------------------------
 (Interpreted). Well, regarding the profitability we are bound by the regulatory framework. It has to be above the cost of capital. So it should be around 9% for the new municipalities.

 And the second question the amount sold for next year for gas basically internationally everything has been sold. We still have some contracts in Spain which expire every quarter and they are renewed. And this is normal. And we expect them to be renewed as they expire. And this is what happened in the previous year. So everything is covered really.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [50]
------------------------------
 (Interpreted). Any further questions on the --?

------------------------------
Operator   [51]
------------------------------
 There are no more questions. Thank you.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [52]
------------------------------
 (Interpreted). Okay. Now we will turn to the questions that we have received over the internet. We will start by Monica Girardi from Barclays who is asking us -- well, she's asking two questions. First one is whether we can give any indication about the possible impact of the evolution of the currencies of Colombia and Brazil and whether this can change our strategic priorities?

 And secondly, whether we can give an update on the current situation of Union Fenosa Gas.

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [53]
------------------------------
 (Interpreted). In terms of Union Fenosa Gas we still have the Egyptian problem. That problem has different fronts. It has a legal front. We already filled different lawsuits against the Egyptian public company because they defaulted on their commitments. And next year we trust there may be some decision in our favor. And that's a line that we have started working down.

 And then the second one has to do with our negotiations with the Egyptian government who keeps saying that they are willing to resolve this problem in the medium term. We are still talking about that, but we haven't attained anything. We hope that that wishes of the Egyptian government will materialize in a reasonable way.

------------------------------
 Carlos Alvarez,  Gas Natural SDG SA - CFO   [54]
------------------------------
 (Interpreted). Regarding exchange rate differences, well, in countries where we operate we do not generate exchange rate differences. The only exchange rate differences that generate are the conversion differences when we translate the transactions of those countries to euro when we carry out consolidation.

 In some countries this is impossible to hedge. That's why you see in our income statement that there is some impact. In this first half including the devaluation of the -- of Brazil and Colombia the effect has been positive, so we've had a positive -- a joint positive effect of the translation of all non-euro currencies in the process of consolidation of our financial statements including the negative effect in real and in Colombia peso.

 And this is our strategy and principal every year whether the net may be positive or negative. But our historic diversification allows us to compensate for things, but this doesn't change our local strategies that we follow on the basis of whether it's expansion or whether there is any need of investment etc.

------------------------------
 Luis Calvo,  Gas Natural SDG SA - Head of IR   [55]
------------------------------
 (Interpreted). The last question comes from Fernando Lafuente from N+1. There's three questions, the first one is whether you could give us an update on the expected regulatory reviews in Colombia for this year.

 Number two what evolution can we expect for the financial costs this year?

 And number three the [heading] for associated company has been positive in this quarter. So could you give further details of the expected evolution of Union Fenosa Gas?

------------------------------
 Rafael Villaseca,  Gas Natural SDG SA - CEO   [56]
------------------------------
 (Interpreted). Well, with respect to the regulatory situation in Colombia, well, there is a certain delay, so it may be delayed to next year but things are on track. There are no relevant issues that I should mention here.

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 Carlos Alvarez,  Gas Natural SDG SA - CFO   [57]
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 (Interpreted). There has been no variation as has been said. We're talking about 4.5. I hope it's below 4.5. We are talking about 4.5. As regards associated companies there is not just Union Fenosa Gas involved there, there's [a contribution]. It's not too significant from Union Fenosa Gas but then there's a Puerto Rican companies, some wind production companies we have in Spain. There's little -- there are a few little companies in CGE in Chile that have a share.

 So the contributions from all those businesses have led to that positive figure this first half though Union Fenosa Gas there unfortunately hasn't got a very significant contribution and sometimes it's even been negative. It's not the most relevant area in terms of positive contributions. The positive contributions are coming from other businesses as in Puerto Rico, CGE etc.

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 Luis Calvo,  Gas Natural SDG SA - Head of IR   [58]
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 (Interpreted). Good, well, thank you very much. Since there are no more questions we can close the Q&A session and I'll pass the floor to our CEO Mr. Villaseca.

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 Rafael Villaseca,  Gas Natural SDG SA - CEO   [59]
------------------------------
 Well, thank you very much. Nothing more from me and I hope to see you the next time. Thank you. Goodbye.

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Editor   [60]
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 Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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