Half Year 2016 Gas Natural SDG SA Earnings Call
Jul 27, 2016 AM CEST
GAS.MC - Gas Natural SDG SA
Half Year 2016 Gas Natural SDG SA Earnings Call
Jul 27, 2016 / 08:00AM GMT
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Corporate Participants
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* Rafael Villaseca
Gas Natural SDG SA - CEO
* Carlos Alvarez
Gas Natural SDG SA - CFO
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Presentation
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Unidentified Company Representative [1]
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Good morning everyone. And welcome to the presentation of results of the first half of 2016 for Gas Natural Fenosa. The presentation will be done by our CEO, Mr. Rafael Villaseca together with the CFO, Mr. Carlos Alvarez and the Director of Strategy and Development, Mr. Antonio Basolas.
After this, we will have a Q&A session. And it won't be possible to -- we won't include phone questions, questions on the telephone we'll start with the questions in the room and then questions sent in after filling in the form on the webcast. We ask those who use this later format to send in the questions before the end of the presentation because that won't be -- it won't be possible to send in any more questions once the Q&A session begins.
I'll pass the floor to Mr. Rafael Villaseca.
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Rafael Villaseca, Gas Natural SDG SA - CEO [2]
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Welcome, good morning. Thank you for being here. This is the program for today. These are the three points. First, we are going to look at the highlights, then we'll look at the results and then I'll give you some conclusions before we have the Q&A session.
As regards the most relevant events, the highlights, net income has gone up to EUR645 million in this first half which is -- compares negatively by 14.1% less to last year. But to get a clear picture of what has happened, to compare it with the -- you've got to discount the effects of the translation of currency, foreign currency, to the balance and the impact, non-recurrent impact that materialized last year. If we do that, the drop in EBITDA has been -- of the net income sorry has been 6.5%.
Now as regards to EBITDA it's EUR2.457 billion, which means a drop of 6.2% as compared to last year. But, once again, if it's -- we adjust the results, we discount atypical situations and the foreign currency impact the EBITDA is more or less flat.
Net investments EUR622 million similar to last year -- well lower sorry than last year. And net debt is 5.4% below the net debt at the end of the first half of last year, and it's EUR15.832 billion.
Now after the closing of the half year there has been some events that have to be commented upon. First of all, the sale of 20% of GNL Quintero to Enagas Chile, 20% of the regasification plant at Quintero through our -- through Metrogas, our (spoken in Spanish). The -- we'll be talking about EUR32 million net capital gain to be booked during the second part of this year.
Also our (spoken in Spanish), UF Gas, has sold 42.5% of the regasification plant at Sagunto to Enagas for EUR106 million which will lead to net capital gain of EUR21 million to be booked during the second half of this year.
And, thirdly, we are satisfied to say that the restructuring of natural gas business in Chile is going ahead as scheduled. The split between natural gas and LPG companies has been implemented. Those businesses were -- are now separate. And we are now going through the cross takeover bids launched with -- which we hope will be settled by early August. So the consolidation of natural gas and the disinvestment in LPG in Chile we hope will materialize in the third quarter. So our business portfolio is continuing to be optimized as we had scheduled.
Allow me to give you an outlook for 2016 the rest of the year. Now what we think will happen within the framework of our strategic plan, which was presented in May. First of all, I have to say that we knew this, we saw it might be possible, that there has been no optimization of gas procurement portfolio due to a lower gas demand in Spain and the convergence of commodity prices internationally. This is important.
Also, it's necessary to bear in mind that in the first half of last year there were -- it was positively impacted by non-recurring items, which we don't think will mean any -- will be significant in the rest of this year.
We also have to say that we expect the negative currency translation impact we expect it to be lower in the second half of the year. And the gas prices which are -- have been under pressure in the first half will still be impacted negatively by crude and LNG, by crude oil and LNG pricing dynamics. And then the capital gains from asset sales will be reflected in the second half of the year.
So we still think that the results will be within the range that we foresaw and said when we presented the strategic plan a few months ago in May.
We have to say that in line with what we had foreseen and announced we've approved the interim dividend for 2016. We've applied the new policy contemplated and considered in the strategic plan in such a way that we guarantee minimum EUR1 per share. So we've approved a payment of interim dividend of EUR0.33 per share payable on September 27. So we think there will be a dividend this year of at least EUR1 billion against the 2016 results, fulfilling the commitment of an attractive and sustainable shareholder remuneration.
Now if we look at the results and the EBITDA of the first half, some comments. First of all, as regards the breakdown of gas and electricity, I'll start on the left of the chart, 52% was -- of the EBITDA was gas and 48% was electricity. Gas activities have behaved worse than electric activities because of the gas market situation as we have repeatedly said.
74% of the EBITDA is regulated because it has to do with regulated or quasi-regulated activities, for instance, the pipeline in the Maghreb global power generation, which is a company that operates with PPA and its quasi-regulated PPAs and 26%, is non-regulated.
We have to point out the good behavior -- good performance of all regulated activities even of course Latin American activities, although they've been affected by the behavior of the exchange rates national currencies when put into the consolidated balance. But apart from that, all regulated activity has been clearly positive.
And finally, 56% of the EBITDA was generated in Spain, the rest outside of Spain. And it's grown in Spain by 2.2% and decreased internationally by 15.1% due to the gas issue and the exchange rate issues.
If we look at a breakdown of the EBITDA compared to last year's EBITDA, last year in the first half we got EUR2.620 billion. If we discount the EUR39 billion (sic - see slide 11, "EUR39 million") of non-recurrent EBITDA we've got EUR2.581 billion which is the figure we should use to compare.
But we've got immediately two effects that are opposite. Businesses that have to do with procurement and marketing of natural gas, which have produced a negative result of EUR163 million negative. But the rest of the businesses of the holding have produced EUR153 million in the positive which almost make up for -- offset that other figure, the previous figure. The rest of activities we are going to look at with greater detail in a minute.
So that leads to a situation where the EBITDA practically would be flat if we adjusted that way. But we've got to bear in mind the translation effect of the currency. That has had a negative impact of EUR114 million which leads to that deterioration of EBITDA of 6.2%, that drop, which is in line with what we foresaw when we told you, when we presented the strategic plan.
Now if we look at the effect of currencies, translation effect impact on EBITDA, it's interesting to look at this graph on the left and the right. The total, the full effect has been EUR114 million. Now we have to say that in accordance with the graph on the left and the forward quotations or levels our sense is that there will be no further negative impact in the second half of the year. So we hope to close the year with a figure that is equal or lower than the negative EUR114 million registered to date.
That is due to the fact that we seem to have bottomed out and that there is even some positive rebound, which will mitigate the bad or negative effect in this first half. The collapse of Latin American currencies seems to have been -- bottomed out this first half, especially in the first quarter when there has been a certain degree of recovery even and this can be seen clearly in the forwards.
So we hope that we go back to levels of -- normal levels in terms of exchange rate in the second half of the year. But beyond that, it's been necessary to consider that practically in all countries, the tariffs of regulated businesses are inflation index-linked and that has to do with the devaluation of currency versus the dollar. So there's going to be a positive adjustment over the next few months and quarters that must mitigate the effect that we've already suffered of exchange rates as a result of increased tariffs.
For example, as you know, inflation in the two countries where it's been worse, Brazil and Colombia, inter-annual inflation is up about 10% a year at this time. So that will -- must be translated to tariffs. Tariffs for Brazil and Sao Paulo and Rio for instance the update is done in January and June every year based on the -- what the situation is and the same in Colombia where they're updated monthly based on the inflation.
So the inflation phenomena, which will continue in those countries that have devalued their currency, will have to be translated to our tariffs. And will mitigate the negative impact, especially last year and the first half of this year, the impact on our P&L account.
If we analyze the gas EBITDA which is impacted more in the first half of this year as we foresaw. We see clearly on the chart EUR423 million. So that's 26.8% less than the previous year. So in infrastructures we are talking about 35% and that's more or less in line with what we had, a growth of 2%. And 65% of this EBITDA is the procurement supply business which accounts for EUR277 million.
Let me give you a thought though which is important. This year gas supply -- natural gas supply and liquid natural gas is really at a minimum, markets are depressed, margins are low and you know what the issues are. But our Company in this year and at this negative time has had an EBITDA, and you know that amortizations in this business are minimal and would not have any effect on the bottom line, of EUR277 million, which is the sale, corresponds to the sale of more than -- the megawatts we've sold in this first half.
So in the face of the pessimism that most people look at the business -- have when they look at the business we, at the worst of times, in six months have produced EUR277 million in EBITDA. So it's not just that we won't have take or pay it's in addition to that. No contract, no agreement is in the red in negative figures and we make money in all our contracts. Of course, much less than other years due to conditions that we've explained and we'll explain again. But this is giving the Company in one of the worse times EUR277 million. I'd like to emphasis that again because it's really important when we consider what this means and the value of this business for the Company.
Now the reasons for this drop you know it's the effect of the commodities. The Brent has dropped -- continued to drop the price of Brent. And in spite of the Henry Hub, most supply contracts are Brent-linked in sales and purchases.
The second factor is that margins have done badly for commercial reasons on the markets as a result of the offer and supply in the world. So this you know full well and it affects 11% of our EBITDA which -- and that's the way of the supply business. It accounts for [8]% of the EBITDA and we have to say that it's EUR277 million.
Continuing with our EBITDA, we've got two graphs here, the first one on the right you can see the reduction of the margin that I've already mentioned. This is due to the reasons that I've already said. The terms related to the commodities that we will look at in detail now and also the strictly retail issues.
So last year we've gone from a margin of EUR2.67 megawatts to EUR1.72 so the drop has been almost 36%. That's a very important drop. We can think that though it is the reason that justifies EUR163 million less that we have lost compared to last year, so there is EUR163 million less in earnings but we really think that has now reached the drop -- real bottom.
So now we want a clear reason, so now we are going to be very cautious and we continue to think that this is the strategic plan that defines the best issues here. But we'd like to mention the fact that the figure that we have gained in the second quarter this year has been higher in unit margin than the one we had in the first quarter, slightly above but it's not lower.
And so the reduction of the Brent prices -- and you can see on the left-hand side what has happened. Well, we've got one of the worst possible scenarios, which has been a fall, an important fall in the Brent price, 43% in this period, with a flat dollar rate with the negative correlation has -- which means that the dollar hasn't been revalued.
But we can see here that other indexes that reflect the costs of the commodities in the LNG market they have also gone down, especially that -- in the Japanese markets. We do not expect that this will go down even any further. In fact, we believe that this will be stabilized and maybe then even a slight improvement.
But we have to be cautious in this area. And we think that there is going to be certain stabilization for the rest of the year and therefore we are going to continue to work in a business that's not in its best possible moment, but it is providing the Company with obviously quite a few million euros.
This is the same, you can see here. If you know that, when you see the forward curves for each one of the moments in time on the graph for the 2016, 2017, 2019 and 2020 years, you can see that on the medium-term there is an increase in prices which is very clear in the oil prices and less clear, more stabilized some years compared to other years in the NBP forward prices.
But anyway, regardless from the beginning of the year you can see that the trend is very clearly upward. So therefore, we truly believe, because I've seen the Brent price changes obviously affect us more because of the indexing that we have to do with purchases and sales.
So on the medium-term we are convinced that there will be improvement, not immediately but in the medium-term. But as we said, we are very cautious when we observed what is going to happen in the market. But we are convinced that the flexibility of our portfolio and our logistic network will allow us to be able to continue along this positive path despite the crisis in this business.
Now changing business, now let's leave behind the natural gas, and obviously if you have any doubts on that, we will answer any questions later on, but we are talking about the electricity market now. We would like to say that the global growth has been up 7% and in Spain, it has been 12%. Global Power Generation, which is our subsidiary, which we used for our international business, has gone down 5%. But when you compare that with certain availability in Mexico, which we hope will be solved, but they're not strategic problems.
So anyway, now in Spain the business has gone up 12%. It's very important to observe this because it means there is a clear stability and there is growth potential in the business. And mainly this is due to the fact -- obviously not to the electricity market, nor volume related to generation, nor on the price which have gone down considerably, but this is our retail and trading ability which we have seen over the last one or two years.
If we now look at the electricity market in Spain, I'd like to give you further detail of what's happening. I'm sure some of you probably know the pool price has gone down 36%. Yet again, this is due to the volatility, which any analysis that is carried out, just can't take this into account. And it's related to two or three major factors that affect the pool price making it go down.
The first factor without a doubt is the increase in the hydropower. This has gone up atypically this year. I think -- it's been -- gone up 40%, so there's been 40% more hydropower this year than the energy mix in previous years, so water or hydro has gone from 13% to 19%.
The demand in Spain is flat and it registered in the first semester negative 0.3%. And the electricity production has gone down, so it's minus 3%. So therefore there has been some negative exchanges.
But if we look at this, there has been also imports of electricity production from Portugal. And this has been leveraged by the good prices and a difficult -- different tax situation in the market and the French -- within the Portuguese and the French market, which has affected Spain. And also what you know is the weight of renewables which is continually more -- has more affect on the pool prices, and so the renewables in the electricity market is going down because therefore it affects the prices.
So as you know the market used to be called the electricity -- regulated electricity market, this special regime. And the -- it has a guaranteed 7.4% profit levels independent to the fact that the pool price is one other price so therefore the pool prices are going down. But all these phenomenons that are happening at the same time means that the pool price has gone down by 36%.
So our strategy in these very complex times has been to manage in a flexible manner the entire integrated supply chain from the one end to the other, so that we have been able to add all the value to this business and we have been leveraging the sales of this. But we want to be very careful so that in the immediate future the commercial aspects will be -- we think they will actually affect the supply prices. But we do hope that the pool prices go back to normal prices.
You have to take into account, which I'm sure you all know, that in this first six months we have had the lowest pool prices in Europe with a big difference compared to any other place, especially in France there is a big difference because they have a lot of nuclear energy.
Now if we go to the other business, which are the network business, I would like to say that we are very satisfied with this business, which is working relatively well. And as you can see here, the entire business has gained almost 5% more on EBITDA. But we have to highlight two things.
One, Spain is flat, but it's also very important that you take into account that there is a unique factor in Spain, which affects us in a specific way this year. Let me explain this. The regulation has changed in gas and so the special periodical inspections instead of being done every four years they're done every five years. So naturally this year is the year where we have to be delayed and this is going to affect our regulated income taking into account that the cost we have to pay for the inspection costs. So this is just a timely event.
And in -- Spain is doing relatively well, waiting to be able to accelerate the gasification as soon as we get the authorizations to be able to carry out the transformation of the connection points for LNG to natural gas.
So anyway, on an international level EBITDA has gone up 9%, which is really a considerable increase. And as you can see it's 8.6% due to gas and 11.5% due to electricity. So these are our growth figures, of course, without taking into account the problem of the different currency rate transfers -- translations. And then we hope this will become neutral in our second six months. So this has been seen in all countries.
And there has been an important growth in all countries [except for] Brazil, which is not a surprise because we'd already envisaged that this year the Nino phenomenon would mean that consumption would go down. As you know in Brazil, the combined cycles do combine income from distribution. That's gone right down due to the hydro, which was expected this year. And that is something that's very logical. And all the other activities in all the other countries have been very positive and we are very satisfied with our performance in all the countries.
So along these lines, I'm now on this chart, you can see that the activity -- the growth activity is continuing. There are several countries that are growing more than 5% to highlight Mexico, Panama and Brazil where the growth, for example in Mexico, is 7.5%. And we have new growth possibilities too taking into account the new regulations, which is much more liberal, which is now being applied in that country.
And I would like to repeat again that in Chile, despite the fact that we haven't -- they still haven't approved the new regulation, it's still in the paperwork stage, but our expectation is that for the country in Chile it is still -- it is growing 3% without even having launched our growth plan.
The gasification plan that we have envisaged for our subsidiaries in Chile it's still in the project phase, and we expect that it will be finalized the same time as when the regulations are finalized so that this should be done within this year. And so we hope that there is going to be more growth next year. But, however, despite all this there is growth in Chile of 2.7%. So we're highly satisfied by our investments in Chile.
With regard to Spain, we would like to say that the growth is 1% in gas. However, we haven't actually started to do the LNG because we are still pending different types of permits. So the growth in networks is clear and it is very specific in Latin America.
So now, let's have a look at the company's cash flow. I would like to mention the fact that the debt has gone up from EUR15,648 million -- sorry it's gone up by 1.8%. But, however, if you compare this with the debt that we had at the end of the first six months of last year it's gone down 5.4%.
And it's very important to mention that the cash flow has been -- well, the free cash flow has been very important almost EUR1.8 million (sic - see slide 20, "EUR1.8 billion"). And this semester it's been especially higher. And I'd like to explain that it's a EUR1000 million, because this six months because we have already paid the interim dividend from between one quarter and another, so what happens is that we have EUR592 million that in normal circumstances would have been paid out in different quarters. So therefore, in a non-typical manner which has affected negatively the cash flow of this semester, but this will not happen in the remaining ones.
So there has been a 5.4% decrease compared to last year. And I would like to say that had the dividend payout been done in a different [point in time] the decrease compared to last year would be 2.6% and almost 9% compared to the previous year. So as I'm saying we are continuing with our deleveraging policy and we are continuing with a very strong pre-cash flow policy.
With regard to investments, I would just like to say that 89% have been in regulated business or quasi-regulated business and 11% have not been regulated business. So in -- so half of this has been in Spain and the other half has been abroad.
It's worth mentioning that the increase of the networks in Mexico and Colombia and in Brazil -- in Spain, new municipalities have been connected to gas, which represents a [1.5] connection point increase. And also, we are now in the process of acquiring 250,000 points -- connection points of piped propane with Repsol.
And so therefore we are going to see immediately there's going to be growth and we are doing well with the growth in the federal in the district and in [Los Bajios] as well, we have a concession in Mexico. And also, we are maintaining our strict control of the management and the commercial activities in these countries.
So therefore just to conclude compared to our financial discipline I said we've got a very solid profile and we have got leverage of a very strong cash flow, which has gone up almost 12%, a reduction of our net debt levels compared to the same period last year despite the fact that we have paid the interim dividend out before. And also we've got EUR11 billion in liquidity.
And we've got a 10 year bond at 1.25%. And I would like to say that we have already mentioned the fact that on the short-term, we are getting finance at very -- or even at negative interest rates. So we have got all our financial needs covered for the next 24 months. And the European Central Bank has also included in different issuance of Gas Natural Fenosa bonds within their program of debt purchase -- of the debt purchase program.
And so as I finish we would like to say as conclusion in a very complicated price market for the commodities and exchange rates without a doubt these are our two major issues, so the EBITDA falls and the profit falls have been those that were expected. And if we take out the -- a typical exchange rate they are compared in a very reasonable manner. So this means that the regulated businesses are still showing a strong performance, which is satisfactory in a context that is basically stability.
Latin America, in spite of the currency depreciations, but we think they have reached rock bottom and they are registering activity growth which is very considerable, as we said, almost double-digits. And we now believe that we have just approved the interim dividend in line with our new policy. And we'd like to ratify our expectations within the framework that we have already explained when we in March -- in May sorry we explained our strategic plan.
So anyway, that is the end of the presentation. So I am now waiting for your questions and we will provide the answers.
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Questions and Answers
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Unidentified Company Representative [1]
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We'll begin with the questions and answers. We'll begin with the questions in the room. Are there any questions in the room? Yes, please.
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Unidentified Audience Member [2]
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Good morning. My name is -- I'm from [Edi Companios]. Three things, the average cost of debt could you give us an idea because there has been a couple of issuances. In the second quarter, the costs were very competitive. Has there been an improvement?
CapEx, when you presented the strategic plan one of the novelties was the strong increase in CapEx as compared to the previous strategy plan. The CapEx is not exhibiting that strong growth. Will we see that in the second half of the year or will it be left for next year?
And then a third thing I want to speak about the liquid natural gas volumes, the early quantities of [Cheniere]. The outlook from the presentation in Latin America is going to do better in the second half of the year it's not going to do worse in LNG maybe electric marketing might do a little worse. Will there be a recovery in volumes of LNG? Spain is poor, the margin is poor in the second half do you think there'll be more from Cheniere to prop up these results and make them better? Thank you.
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Rafael Villaseca, Gas Natural SDG SA - CEO [3]
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Well, I'll just say a couple of things and then pass the floor to the CFO as regards CapEx. Now it's a good summary of businesses what you've just given us. But the electric business commercial pressure is going to be felt, but also the situation on the market the pool is going to change. So there is always a balance effect. We'll have to see how it all ends up and how we optimize it.
It's a classic thing, volatility of the market; generation market is so high that really the commercial effect absorbs the impact to a greater or lesser degree. Anyway, there are traders that disappear and generate very strong losses for the market, they now come back because -- well this is how it goes. But volatility can change and things balance out, they go up, they go down. That's a comment on the side.
As regards liquid natural gas, we still don't have early quantities, they are slightly delayed. Before the end of the year, we'll probably get some quantities, modest quantities. There's not going to be a huge volume of LNG. There'll be a little more from ships, tankers we are going to get but not huge volumes.
And as regards the CapEx, I'll pass the floor to Carlos Alvarez.
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Carlos Alvarez, Gas Natural SDG SA - CFO [4]
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Well the debt -- the cost of debt this first half has been about 4.3%. Maybe for the rest of the year or the whole of the year will be more or less the same or slightly below that, but always above 4.0% something or 4% something.
And why does this not reflect on what we've said? Well remember as a Latin American debt component at rates which you are familiar with, and that affects the issuances and that's why they're not having the effect that they would have if we were talking about European debt as an average. But we are at about 4.3% anyway. Now, I think this is slightly below what we'd said at the -- in the strategic plan I think we said 4.5%, so it'll be 4.3% or slightly lower.
As regards the CapEx, well, if you look at the figures of the report, the CapEx for the first half is lower than the first half of 2015, but there's an element that comes from financial investments which accounts for that. If you go to material and immaterial investments, they're slightly above the quarter -- the first half of last year I think, 1.5% above.
Now, as regards these financial elements, last year we were building, still building the hydraulic plant at Torito on Costa Rica, and because of accounting issues that is considered to be rent. And that component's no longer there because the plant's been finished. In the previous year we had bought shares or -- in the Chilean CGE Group, and that's not there this year either. If you adjust for those two things, the material and immaterial investment, which is the current investment, slightly higher than last year.
Another thing, normally you know that second-half investments are usually higher than first-half investments because that's how it -- because of accounting or process matters. That's what usually happens. Once the year matures, investments go up. Now, I think we will be higher in the second half.
Now, the third thing you were saying has to do with the fact that the strategic plan, it was a novelty. But growth of investment was especially in the second half or in the second period after 2018 when all the projects, aspirational projects we had in generation, so to speak, internationally and nationally, but especially internationally, that's when those projects will mature. They have not yet started to mature.
Projects that are going to start to mature would be the Canary Island quota, the wind farms. And the rest of it is the organic growth, which is improving at a better rate than the previous year.
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Unidentified Company Representative [5]
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Carlos, I just want to say that organic growth has gone down as the investment cost has gone down because of the delay in the Repsol transformation network process and also because the Latin American exchange rates have been devalued and there's a structural impact there.
And finally, the tankers, the two ships will come in, in the second half. But these are the investments that we had foreseen. There's been a slight delay and a slight saving.
Right, well, are there any more questions in the room? No? Well, we'll go to the questions that have come in through the website.
We'll start with Jose Javier Ruiz from Macquarie, and he's got a question. The margin of wholesale trading of gas has been similar in the second half and the first -- the second quarter and the first. Do you expect to have a recovery of margins in the second half?
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Unidentified Company Representative [6]
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Gas trading margin, well, similar, if I'm not mistaken, slightly better in the second half -- second quarter, sorry. I've got the figure here. I've got to be cautious, but it's been better.
First quarter was EUR1.68 megawatt hour, and in the second, EUR1.77. We've got to be cautious we don't see a worsening. We see a situation that must be stable and slightly -- and a slight improvement. But the markets are shaken up, so we've got to be prudent and cautious.
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Unidentified Company Representative [7]
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Good. The next analyst is Javier Suarez from Mediobanca, and the first question has been answered. It was about the margins of gas.
Second question is about debt. Could you tell us what part of the debt in Latin America is local currency and what part or how much is in dollars? If possible, you can break this down by countries?
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Unidentified Company Representative [8]
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All the debt in Latin American is in local currency, only in those cases where the currency is dollar or the business is dollar. It's GPG debt, basically, the combined cycles in Mexico, that's in dollars. The rest of the debt, regulated activities of gas and electric distribution -- we've said it repeatedly -- is in the local currency of each country. I think that in the attachment at the end of the presentation there's a breakdown of the debt via countries.
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Unidentified Company Representative [9]
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The next question is from the same person. It's about Chile. Could you give us more details about the restructuring of your activities in Chile and the synergies that might be harnessed?
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Unidentified Company Representative [10]
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Well, the synergies, there's a plan that we're going to specify over the next few months. There will be synergies. You know the plan. It's our first operation, which is in -- being developed to separate the LNG activity, segregate them out.
The second thing is to sell our shares in LN -- in -- buy natural gas. We're going to concentrate on natural gas. We've split out these things. We're in the process of crossover bids to get into natural gas and out of GLP. And we will restructure the Company to try to simplify the complex administrative tangle which is sometimes not as efficient as possible. And there will be synergies coming out of that which are considered in the strategic plan.
Last week, we announced that simplification, the merger of the main company that did the purchase in Chile, which was Gas Natural Fenosa Chile and the General Electric company of Chile. That's the first merger. That's the first thing we're going to do to simplify the administrative issues over there.
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Unidentified Company Representative [11]
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Good. The final, last question from Javier Suarez. Do you think it's necessary to speed up investment in renewables?
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Unidentified Company Representative [12]
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No, we don't. Yes, we continue. We think it's necessary to continue with what's in the strategic plan. You know the plans in Spain, Canary Islands. Basically, we've consolidated on whatever the government produces.
And GPG has a plan where we detail exactly what we wanted to do for each technology. That's the plan. And the calendar -- the dates are in the strategic plan. We're not going to go faster or slower.
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Unidentified Company Representative [13]
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The next question is from Daniel Rodriguez from Fidentis. It's a question on gas trading margins, which has been replied to.
The second question is about the dividend. When are you going to pay out the complementary 2016 dividend? Because the first dividend will be paid in September, as you said.
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Unidentified Company Representative [14]
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Well, in the strategic plan we said it. The only change as regards paying out the dividend was the advance payment in September. And the rest will be paid -- well, this year it's June 30, so it'll be June 30 or June 29 of next year.
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Unidentified Company Representative [15]
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Good. The next questions come from Fernando Lafuente, analyst at [N+1]. The first one refers to the dividend. You've announced that the advanced dividend will be in cash. Are you going to offer a scrip option?
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Unidentified Company Representative [16]
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No, we haven't considered anything about that. No.
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Unidentified Company Representative [17]
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The second question has to do with NPL provisions have been increased by 15% in the first half of this year. Why have they increased and what do you expect for the full year?
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Unidentified Company Representative [18]
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Basically, this has to do -- you know the problem, Electricaribe, the problem we've got there. We're trying to solve the bad debt and fraud problem we've got on the Colombian coast. Due to the high prices of power because of the El Nino phenomenon, this has led to an increase in the figure that we've had to provision. We expect the important, significant regulatory changes which help us to resolve this issue.
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Unidentified Company Representative [19]
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The next question is Union Fenosa Gas has lost EUR43 million in the first half. Why, and what do you expect for the full year?
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Unidentified Company Representative [20]
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Well, why, because bottom-line business has produced that loss. Operationally, in general, the results are positive, but when you bear in mind the amortizations and what have you that's the result that you arrive at.
But there's no forecast. We don't think the operations will change operationally and therefore the bottom line probably won't change for the rest of the year.
The only positive news item is an extraordinary issue, which is the sale of the plant of Sagunto, which will produce capital gains in Union Fenosa Gas and that will change the bottom line. In operations there won't be changes, but in the second half of the year that capital gain, is EUR20 million odd, will change the second half.
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Unidentified Company Representative [21]
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And the last question has to do with Peru. What's the contribution of Peru been? What do you expect for the full year and in the future?
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Unidentified Company Representative [22]
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Well, we've got it on the written report at least. Activities in Peru will begin in 2017. As you know, this requires permits and what have you and investments to connect up the first customers. The best date we have, this will probably happen in 2017.
So there's been no contribution from Peru in this year because there have been no sales in this -- in the first half, and there won't be any in the second half, so negative contribution, EUR0.1 million because of the maintenance expenses of our activity there. But until 2017 there won't be sales and there won't be a contribution.
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Unidentified Company Representative [23]
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The next few questions are from Carolina Dores from Morgan Stanley. One of them has been answered, has to do with the presentation and the guidance on net profit for 2016.
The next question is following the results from the gas distribution business. Spain, we've got -- the first semester results are negative, so will there be a recovery in the second half of the year or do you expect it to continue like the first half?
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Unidentified Company Representative [24]
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Well, the problem, I've already mentioned, is related to changes in regulation, meaning that the inspection cost, which was an income for the distributing companies, now the inspections, instead of being carried out every four years, they're carried out every five years. This is the change year, so therefore we stop getting certain income which we received previously. This is mainly (inaudible). There was something related to the volumes. It's been quite a warm winter, but mainly this is the first issue that I've already mentioned.
We didn't -- we don't expect any important problems related to gas distribution business and therefore accept this timely problem of the good change from four to five years. We think that the business will be as it had been previously. Well, thank you very much.
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Unidentified Company Representative [25]
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The next question comes from Martin Young from RBC and is as follows. The net entry and outgoing of the cash flow, you've said you've got this crossover business in Chile, so can you explain this further, please?
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Unidentified Company Representative [26]
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Well, it will depend on the degree of acceptance, i.e. I think at the end there will be a net outgoing with the settlement of what we sell and what we buy. But if we add the deconsolidation of the debt from December to discontinued activities of LNG, the impact means a reduction in the net debt.
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Unidentified Company Representative [27]
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Okay, thank you. The next questions come from Rui Dias of UBS.
There's two questions that have already been answered related to the gas trading margins, but the question that still remains will be referring to the refinancing of the debt. So what is the break down in the different currencies of the debt that matures over the next two years and what is the average interest rate of this debt?
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Unidentified Company Representative [28]
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I'm afraid I don't have the details here with me, but I think the most important maturities correspond to the bonds that are public that mature at the end of this year, if I remember correctly. And I think it's around EUR1000 million. I think that they mature -- it's a bond that matures this year, and I think the cost is around 4% or 5%. And that's the most important maturity that we have in euros.
The rest of the Latin American debts, as you know, they are much shorter maturities and normally they're being renewed in all the different countries. I think on the short term, I think the one I've mentioned is the most important maturity, as I said, for EUR1000 million for this year.
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Unidentified Company Representative [29]
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Thank you. Well, now Philippe Ourpatian from Natixis. It's a question related to the drop in the net profit. We've already mentioned that.
And also, now we'll go onto the next analyst who's asked a question, so Manuel Palomo from Exane. And he's got four questions. One has already been answered, referring to the CapEx, and another question which has been partially answered relating to Union Fenosa Gas.
And the question that remains is one that -- can we rule out those additional -- initial reductions in this business?
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Unidentified Company Representative [30]
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Well, as we said, we've already been checking this and the auditors have given their opinion. So we said they know the situation. We are where we are.
I think the future really lies in the -- based on two important issues, one, the negotiations that we are continuing with the Egyptian state. They're very complex negotiations, but without a doubt they're still continuing.
And the second issue is a legal situation that currently exists. We have obviously different court cases, which they have been set against the Egyptian state from Washington, so it's arbitration in the Chamber of Commerce to defend interest. We truly hope that this doesn't mean we will need to make further adjustments, but regardless as of the date, the auditors have considered what you have seen in the figures that we have already presented.
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Unidentified Company Representative [31]
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Thank you. The next question refers to the gas supply contracts. Do you expect any renegotiation in the years 2016 and 2017? And we -- or do you think that we have already seen the worst of this business?
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Unidentified Company Representative [32]
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Well, the price reviews are the ordinary ones. We continue to negotiate. There are two or three contracts, which is normal, and they will follow the normal dynamics of renegotiation.
But what we referred to earlier is not related to the price reviews. It's more to the market dynamics in volumes and margins. We think that this leads us to believe -- and I said probably. This is from a very conservative and prudent standpoint. We think that we have reached the actual bottom of this.
When we gave you our strategic plan there was a slide that offered a schedule for these different issues. And you can see the part of the volumes' importance were actually in the year 2017, if you go back to our strategic one.
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Unidentified Company Representative [33]
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So the last question by Manuel Palomo, could you give us an update on the volumes of this 10-year contract for the years 2017 and 2018?
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Unidentified Company Representative [34]
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I think the volumes sold of that contract are two-thirds of the total volume to date have been sold. Saying this in other words, because at the end of the day we don't sell bits of contracts, we have a complete portfolio. So if we leave the retail business on one side, which to a certain extent has different dynamics to the renewal of the contracts and the different ratios they have, so if we just deal with all the other business, whether it be industrial, commercial issue or whatever, I think the portfolio at the moment that is committed for next year is above 60%.
So the dynamics, this is what normally happens. Halfway through the year you normally have a commitment for half or 60% of next year's portfolio.
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Unidentified Company Representative [35]
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The next questions are from Javier Garrido. He's got four questions. I think some have been answered. One was related to Fenosa Gas and the other one to our forecast. Another one was related to the fall in net profit and the other one was related to the gas supply issues.
Virginia Sanz from Madrid is another analyst who's asking questions. She has four questions. One's already been answered with regard to the profit margins for the gas commercial -- the gas sales or gas supply.
And the other one was for the Chile cross selling. And so what impact could this have on our financial statements, our P&L?
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Unidentified Company Representative [36]
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It's not going to be important. It's a very small capital gain, but it's not important. It will not really -- the fact that we're selling it, we'll actually get some sort of capital gains, but it's not going to affect our main figures.
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Unidentified Company Representative [37]
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Okay. The next question is related to the fact if we're bearing in mind more investments in non-core assets.
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Unidentified Company Representative [38]
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At the moment there are no divestments. We are checking our portfolio constantly and -- to see which assets fit in better or those that don't fit in so well and see which assets, at a good price, we could consider selling off. But at the moment there is nothing that is being undergone.
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Unidentified Company Representative [39]
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And the last question is if we see any opportunities to purchase in the renewable asset sales that are taking place in Spain.
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Unidentified Company Representative [40]
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Well, we are studying all of them of course in Spain and outside Spain too, but as I say, there is nothing at the moment that we can be specific about. We follow them with great interest and rigor, but we said there's nothing to -- as I say, we follow all these possible sales, but there is nothing to report on them at the moment.
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Unidentified Company Representative [41]
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So let's go onto the next analyst, Jorge Alonso from Societe Generale. His first question is what has been the contribution EBITDA for the services for the supply?
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Unidentified Company Representative [42]
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The services? Well, we don't provide this information, but I think it's between EUR50 million or EUR60 million, EUR50 something million.
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Unidentified Company Representative [43]
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And the second question is that electricity sales in Spain are 10% up. Can you give more reasons or more forecasts for the future on these sales?
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Unidentified Company Representative [44]
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No. The commercial dynamics that I've already mentioned for the semester have got positive results in electricity because of our commercial activity, our marketing activity. So the Company is very clear that we -- this is part of our value chain, so it goes to one or other side of the value chain, depending on the current situation. That's what's happened.
For the rest of the year, we can explain as -- well, we think there's going to be going to be growth in the commercial margins due to competition. But possibly there will be an improvement in the wholesale market generation because we think that the pool prices should be corrected. It's very difficult to get definite figures on that, but we do expect the pool price to go up.
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Unidentified Company Representative [45]
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And the last question refers to Argentina. What can be expected for Argentina in the year 2017 due to the government measures?
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Unidentified Company Representative [46]
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Well, the measures that have been implemented by the government, they're positive, clearly, for our Company, very clearly positive for our Company. The government has increased the rates or the tariffs, which is important.
I'm talking from memory, but I think they've gone up something like 300%, (inaudible) on the integrated tariff reviews. And they've committed to carry them out within one year, so therefore the government has taken on the commitments to actually implement a measure and take into account that all the distributing companies, both the gas and electricity companies, will now have normal business. So now certain measures by the judges have paralyzed some activities, but the government has placed an appeal to the High Court.
But we do think in a few weeks' time the situation will become normal again. We have a favorable position. The government is very clear about how they're going to solve the situation. And we truly believe that throughout the year this will have a positive impact on our P&L.
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Unidentified Company Representative [47]
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Thank you very much. The next analyst to ask a question is Stefano Bezzato from Credit Suisse. He has two question. One's already been answered, with regards to this dividend.
And the next one is if we could offer a breakdown of the EBITDA for the gas trading between Spain and international business.
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Unidentified Company Representative [48]
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As you know, we don't provide this information for obvious reasons, but on the -- in the attachments there is a breakdown of the sales in Spain and international there. I think it was 260 terras this first 6 months. 50% is done in -- domestically in Spain and -- or 55% and 45% internationally.
So they're obviously different margins, but I think that is a figure that we can provide. And you see the different percentage related to the sales.
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Unidentified Company Representative [49]
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Now Andrew Moulder from CreditSights has got another question that's already been explained about the gas trading margins. We've already explained that.
And the next analyst to ask the questions, Pablo Cuadrado. He has two questions that have already been answered with regard to the net profit this year and the gas trading margins too.
And finally, we have several questions from Cosma Panzacchi from Bernstein. The first one refers to the gas trading margin or business in Spain and internationally, and it's gone down 7% here in a market that is growing with regarding to gas sales.
So what actions are being implemented to stop losing market share and how do we see the Spanish market share will perform for the years 2016/2017? Two comments to that, one regarding to the guidance for 2016. I would like to repeat again that what we've already said, our guidance has already been communicated between EUR4 million for 2016, but (inaudible).
The second issue is related to our market shares. No, the Spanish market is negative. It is negative figures in all segments, in residence, wholesale electricity. So the whole gas market in Spain has gone down 1.3%.
And with regard to the market share, I'd like to remind you, and I will try to give you some figures, that our position is -- had very high market share there, well above 50% in the residential market especially. So therefore 1 percentage point up or down we do not feel is particularly relevant.
We do not have a policy related to maintaining market share. We're more concerned with maintaining EBITDA and the margins and we see a global market in general is negative. We have a very high market share. We're not going to have a specific campaign focused on market [share], but we will have campaigns that are focused on the fact of having a portfolio of clients which are more profitable and that they will contribute more to our balance sheets, to our P&L.
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Unidentified Company Representative [50]
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The next question refers to sales of gas in Europe, and it's as follows. Your sales in the European Union are still growing and are still registering a double-digit growth, but the drop -- I think the question refers to the gas margin, and EBITDA is more than 35%. Could you tell us if you're selling a TTF plus margin of EUR1 per megawatt on average? If the margin per megawatt of gas is 100% in Spain, what would the average margin be, 90%, 95%?
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Unidentified Company Representative [51]
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We don't give this information broken down by markets and customer segments. We don't break it down. But it's quite true that our commercial organization in Europe insist to have a customer base that is significant, stable and that is stable long term and continue -- that's our idea, obviously, and we want it to continue to grow, and it is growing. And the margins in Europe are below the margins of the international markets. Let's see how things are, but I have to repeat that we don't have any agreements or contracts with negative margins, not a single one.
I would like to remind you that in this chapter, when you look at European sales, that include -- the sales are on the European continental market, plus the sales in Italy also, and retail. So that double-digit growth includes from retail sales in Italy.
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Unidentified Company Representative [52]
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The next question is about generation, electricity generation business in Spain. What would the EBITDA be if we excluded Gecalsa?
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Unidentified Company Representative [53]
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Well, Gecalsa is about EUR10 million right now, if I remember correctly, in the first half of the year. That would be the EBITDA -- impact on the EBITDA.
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Unidentified Company Representative [54]
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Next question is about the gas business in Spain. What are the perspectives for gas prices in Spain as compared to the rest of Europe if, first of all, the role of [EMIT] gas was widened and increased as has been requested?
And secondly, if the connection, [Midcad] connection were built, the greater availability of gas for utilities, could that erode the current balance of the market?
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Unidentified Company Representative [55]
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As regards the Midcad connection, well, it's not yet begun in political and administrative terms, so we don't -- we can't tell you about that. In the future, well, it's obvious that there'll be a greater interconnection at accessible costs. That would unify market prices.
But I have to say two things, there's a very low level of connection and this is going to take a long time. And costs of these connections are complex and they're difficult. And it's -- this is a projection into the future which we're not really concerned about as regards the current strategic plan.
As regards the wholesale market in Spain, I don't understand why it is presumed that the volume will go up. It will if there are people prepared to bring gas into Spain. We'll see at what prices.
Spain today has no -- none of its own production of gas, so it would have to be the big international players that decide that they're not going to sell through bilateral contracts but through the hub. That is not happening in Spain today, so we don't -- we expect changes. The market changes.
Well, that market you've mentioned is a dis-adjusted or imbalanced market, but while the producers do not sell to that market massively, it will be difficult for things to be different. Today, the policy of supply countries, countries that supply Spain, is quite clear and coherent.
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Unidentified Company Representative [56]
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The same analyst has a couple of questions that have been answered. One has to do with the Cheniere contracts and the other one has to do with the dividend. So we can finish this session, this Q&A session, and I'll pass the floor to the CEO, Mr. Villaseca.
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Rafael Villaseca, Gas Natural SDG SA - CEO [57]
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That's all. Thank you very much. Have a good summer. If you have -- go on holiday, enjoy your holidays. And see you to talk about the third quarter. Thank you very much.
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Editor [58]
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Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.
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