Full Year 2016 Gas Natural SDG SA Earnings Call

GAS.MC - Gas Natural SDG SA
Full Year 2016 Gas Natural SDG SA Earnings Call
Feb 08, 2017 / 11:00AM GMT 

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Corporate Participants
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   *  Rafael Villaseca
      Gas Natural Fenosa - CEO

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Presentation
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Unidentified Company Representative   [1]
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 Good morning, everyone, and welcome to this event, in which we will present the results of Gas Natural Fenosa corresponding to the 2016 year. This presentation will be carried out by our CEO, Mr. Rafael Villaseca, together with the CFO, Carlos Alvarez; the General Manager for Strategy and Development, Mr. Basolas.

 Once we have finished, we will open the Q&A session in which just like in previous occasions we will be here for you. You will not be able to ask questions over the phone, you will need to use the form provided on the website of the webcast. For this we would request that those using this modality please send your questions during the presentation, because after the presentation we will not be receiving any more questions.

 So without further ado, I will pass the floor over to the CEO, Mr. Rafael Villaseca.

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [2]
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 Good morning, everyone, and thank you for attending this online meeting, throughout which we will develop the agenda that you have on screen and this is the way in which we usually present it lately.

 First of all, we will give you a brief overview of milestones and situations of interest. Then we will analyze the results of the 2016 year and we will also talk about the outlook for 2017. And to finish, we will have a conclusion which will then link to the Q&A. And as an annex to the presentation, you also have all of the information about the P&L account, EBITDA, investment structure and operational magnitudes which we normally provide to you.

 We'll start with the most relevant events. I would like to tell you that we have a situation of again seamless, solid behavior of our financial magnitudes throughout this year, which have met the expectations of what was forecasted in the strategic plan presented last May. The solid model has confirmed the perspectives that we gave to you and as you can see, net income is between EUR1.3 billion and EUR1.4 billion, which we had advised and EBITDA is around EUR5 billion. All of this maintaining the indebtedness policy and the dividend policy that we had informed you about.

 We confirm then the perspective and if we go into detail we would like to say that the network business has shown strong underlying growth in the indexes and exchange rates have stabilized, mainly in the third and fourth quarter. And they affected us negatively in the first part of the year. The wholesale gas business is the one that also had a negative behavior versus last year, but also with the stabilization of margins throughout the year.

 In electricity, prices will be lower in the market and this has led to mainly in the first half of the year profit in marketing, which has stabilized the market but in the second half of the year, especially from September onwards, the increase of the pool changed matters, but the integrated model has allowed us to reasonably maintain the profit of this business.

 In investments, we continue to add business, add value. We've been -- our discipline in making investment decisions and ensuring growth. So as a summary, within the strategic vision, the strategic plan 2016, 2018, 2020 that we had presented.

 The net financial debt reached EUR15.423 billion, so it has dropped, despite the fact that this year there's been a record dividend payout, due to the advance of one of the interim payments which has generated three payouts this year increasing the cash. And from September 31 of last year we have deconsolidated our company in Colombia, Electricaribe, for reasons that I will explain later in detail. So strength in our results in agreement with this model that we have exposed.

 I would like to point out the attractive remuneration policy. We have maintained a dividend per share of EUR1 that we had anticipated as minimum dividend. So on September 27, we already paid the EUR0.33 per share as interim dividend and then a complementary dividend remains at EUR0.67 per share, which would then complete the dividend of EUR1 per share that we committed to. This will mean a profitability of 5.6% versus the year-end price and it means a payout of 74.2%. So we meet the dividend policy that we informed.

 It is also important to point out, as was foreseen in the strategic plan, that we continue to optimize our asset portfolio, which is one of the pillars of the strategic plan that we announced in May, in such a way that in 2016 we have sold assets by EUR756 million, leading to capital gains of EUR111 million.

 Amongst those assets, we would point out selling 20% of our Chilean regasification plant in Quintero, EUR182 million. In Chile, also the sale of the LPG business, EUR220 million. And finally, the second quarter of the year Union Fenosa Gas also sold the stake in two regasification plants in Spain, Mugardos and Sagunto, with positive results. We also add to these the sale of real estate assets in Madrid and other locations for EUR220 million. As a whole, this generated capital gains of EUR111 million.

 And in terms of the acquisitions, I would like to point out the buy of minority shareholding in Gasco in Chile, EUR306 million and the acquisition of the Irish marketed value and other power generation projects which have allowed over EUR400 million of acquisitions in the asset rotation versus last year.

 In the chart that you are seeing on the screen, you can see what we've done in 2016. The Company will continue to identify and monetize assets that do not have a strategic fit, be it due to business or geographical reasons.

 I already mentioned it, but I would like insist on the fact that we move forward in complying with the strategic planning networks. We have increased the connection points for gas and electricity in all countries and also in Spain. In the gas business, we have acquired -- we are in the process of acquiring four tankers. Two of them have been delivered already and two more will be throughout this year, to tend to the new volumes from the contracts from the US, Cheniere.

 In general, international generation, global power generation has ensured 471 megawatts of renewable or new capacity generation, with strict criteria of profitability and in projects that we expect will start to operate within the horizon of this strategic plan. That transition has allowed us to reduce financial costs and we have continued with OpEx efficiency which comes into being in a tangible way.

 And as the plan moves forward, we expect captured costs to become lower and all of this has all generated strong cash generation, covering CapEx needs. And also the dividend policy which this year had an extraordinary nature, higher than normal. And as I said, at the beginning, a success in the initiatives of portfolio optimization, so in line with what was set in the strategic plan.

 As to the analysis and evolution of our EBITDA in the year that has elapsed, as a whole, a drop of 5.6% versus 2015 because of situational reasons. Two situations have affected importantly, one is the world situation of energy prices and also the situation of currency exchange.

 As we can see on this chart, the difference is in more than EUR200 million in the GasNatural business and over EUR100 million with the translation effect, currency effect. These are basically the reasons leading to this reduction of EBITDA.

 If we were to discount the last effect, the translation effect, EBITDA would drop only 3.6%. Bearing in mind the situation of the international energy markets, we believe that this is a key indicator of the robustness of our business and the possibilities we have to continue to meet our commitments in the strategic plan.

 And if we now go into detail as to what happened with currency translation effect, the total impact of EUR112 million is broken down here by quarter and by activity and currency. I would like to indicate that as you can clearly see these effects, these negative effects had most of their impact on the first half of the year and almost flat and even positive at the end of last year.

 The path to recovery is visible in many of the currency we work with, especially the Brazilian real, Colombian peso, a bit less in the Chilean peso, which have had almost zero effect, despite the devaluation of the Mexican peso, which is of course, a consequence of the latest US election. So in this regard, we are a lot more optimistic than last year and we believe that the trend will consolidate in this current year.

 So distribution networks of gas and electricity in Europe, which is the greatest component of our EBITDA with 62%. EBITDA has increased by 0.8%, reaching a total amount of EUR1.596 billion. And gas distribution in Spain, a growth of almost 2%, despite a reduction and negative one shot due to the change in criteria with remuneration, due to compulsory inspections which are now compulsory every five years instead of four years. Despite this negative impact, EBITDA has grown by 2%.

 As to the electrical distribution EBITDA has been affected by the cost of capturing efficiencies, which we expect to drop in amount in the following efficiency plans in this network business. Outside of Spain, concentration as a whole is in Moldova. In Italy, there has been a reduction due to lower regulatory remuneration and in Moldova and in Greece for the same reason.

 About investments in networks, we have intensified investments which will, of course, mean more EBITDA growth from 2017. In gas distribution, an increase by almost 60%, almost EUR700 million. The main reason is the acquisition of 230,000 connection points from oil companies which supply LPG, liquefied petroleum gas, and we have obtained them to progressively transform them to natural gas. These new connection points are beginning to -- we're beginning to transform them in 2017 and most of them until 2019.

 Electricity distribution in Spain incorporation of an additional 19,000 connection points, reaching 2.8 intelligent meters. And in Italy and Moldova, the increase in investment is mainly due to the expansion of the network.

 And now talking about gas distribution networks in Latin America, in all of them we need to account for the negative impact of the ambition of local currencies, which has had an impact on EBITDA in EUR74 million, as we can see on the chart. Discounting these, the net factor has meant an increase of EUR40 million, which means 4.9% increase in EBITDA in this business.

 In local currencies, the activity in Chile has increased almost 2%, in Colombia 7.2% and in Brazil, a reduction because of lower sales to industrial and power generation, very much due to the different weather situation this year versus the year before. In Mexico, higher sales and margins continue. And in Argentina we are glad about the new regulatory environment, which started yielding positive results last year and should consolidate in the current year.

 As a summary, important growth platform, immediate growth platform in the region due to two growth factors. One is the gasification of Chile that was approved in December and it will be put into practice this quarter. And secondly, the new gasification areas in Mexico, due to the energy reform that has taken place in said country.

 And about electricity distribution networks, we also see an impact in Latin America by the currency translation, EUR23 million (sic - see slide 15 "EUR33 million"). The increase is in EBITDA 3%, EUR20 million, already discounting the currency effect in Chile above 1%. And in Colombia indexing of tariffs and activity has meant an increase that you see is highly compensated, even generating losses due to provisions for insolvency. We will later talk in more detail about Electricaribe Colombia and our perspectives.

 Gas Natural Fenosa, as I said, has stopped consolidating the accounts of this company as of December 31, so from now on they will not be considered a current asset of the Company, a current business of the Company.

 Investments in Latin America growth in works by 7.5%, reaching a bit under EUR700 million, increasing in electricity networks and a bit of a reduction in gas networks. Electricity networks, one of the reasons for the increase is the new regulation of sub-transmission in Chile due to the new legislation. This has meant greater investment opportunities, of course, in profitable financial terms.

 The rest of the divestment in the country has to do with -- investment in the country has to do with maintenance and expansion of networks, mainly in Chile.

 In gas, a strong impact of the Colombian peso reduction of investments in network expansion, also in Chile, due to mainly the delay in our forecasts of the gas law which was approved in December and will come into force this quarter and which will, of course, generate more activity, which we were expecting six months before.

 And talking about gas, and as mentioned in previous quarters and we advance in some detail in our 2016, 2018, 2020 strategic plan. The gas business has behaved worse than in 2015, motivated mainly due to the marketing activity, which represents 65% of this EBITDA, which is also a consequence of changes in the price environment of raw materials, especially prices for raw materials and final prices in liquefied natural gas markets in the world.

 Margins and rates and as you can see on the right, have stayed stable throughout the year, but with a strong impact versus the previous year. We've already absorbed this reduction in raw materials and the situation in the markets and our forecast is a maintenance and slight and progressive recovery of margins this year.

 About the electricity business in Spain, there has been a slight drop of EBITDA, 3.5%, but with high levels of EBITDA in this business. The wholesale market characterized by high volatility, very high volatility, as you know, in the first half of the year. And you can see it on the chart on the right, the prices of the wholesale business, the pool was really low, due then progressively increase slightly in the third quarter and then faster from September onwards and in recent days from December until now, with very high peaks due to the current situation of supply and demand in our national market.

 In any case, the average pool of 2016 was 21% lower than the pool of the fiscal year 2015. This meant lower revenue or lower profit in generation, but also capturing value in marketing mainly in the first and second quarter of the year, mainly the first, due to the possibility of capturing in those markets. In those markets the facility was very high and then lower in the rest of the year.

 In the fourth quarter, actually a negative trend started, which will of course, have continued in the first month of the 2017 fiscal year. High volatility integrated position which allows us to capture value when these imbalances make it possible. And at any rate, a conservative position to prevent market imbalance from creating a high risk reverse performance.

 And in terms of global power generation, generation outside of Spain, stability with an important growth potential through PPA projects that we are developing. EBITDA reduction by 1.5%, mainly downtime in Mexico for maintenance. And the CapEx has a slight increase, due to down payments of photovoltaic projects in Brazil, which are supposed to be operational in the second half of the current year.

 If we now analyze the variation of net profit, we see -- or net income, we see a reduction of 10.3% versus last year, with a very important effect in activity linked to two factors that we mentioned before, the negative affect of the gas business and the evolution of currencies versus EBITDA due to the exchange rates that we mentioned before. This all has meant this EUR230 million in the first column of the chart.

 Secondly, the deconsolidation of Electricaribe, ECA -- sorry, the result of ECA has meant negative EUR49 million versus last year, due to the negative evolution mainly because of defaults and fraud of the Colombian company. This has all been offset with different business network and also and importantly, EUR76 million in capital gains and EUR58 million better financial results.

 In the last quarter, we should point out on the non-recurring items column, effects that offset that have been important. First one is positive effects of the Transnet merger in Chile, reversion of deferred tax leading to a capital gain of EUR124 million. The second one negative effect, EUR18 million, as a consequence of the tax reform in Chile. And third, EUR94 million additional impairment of Union Fenosa Gas due to the reasons you know, of our problems in Egypt.

 As to the cash flow from ordinary activities, I would like to talk about these charts, where we can see that we have continued with a very high generation of flows, EUR3.375 billion of cash flow generation. And if we reduce the component of investment due to maintenance, we would have a free cash flow of EUR2.417 billion, or maintenance-free cash flow. And we have a total free cash flow, net cash flow, of EUR1.757 billion.

 To the right, you see the breakdown of this cash flow by networks, gas and electricity. And I would like to point out that, of course, most of the investments is in networks, both in maintenance and growth. And in any of the business, the free cash flow is high, bearing in mind that this year we include the purchase of connection points from Repsol and other oil companies, which has meant an important deployment of cash for the parties of these connection points that we will transform to natural gas.

 So we again strengthen the compliance of our dividend policy, or we would like to point out this combined with the strategic plan and the dividend policy.

 As to net debt evolution, the ordinary cash flow that we previously mentioned, of course, has allowed us to maintain not only all investments, but also dividend payout and the special dividend that took place this year. We have advanced EUR330 million of dividend payment and we have been able to offset the currency effect mainly in the last quarter.

 And this has also helped us in the deconsolidation of the Electricaribe debts by EUR534 million. This means in the end that the net debt is EUR15.423 billion, 1.4% below the previous year, with a tariff of EUR607 million atypical, corresponding to the temporary tariff deficit both in gas and electricity, which we expect to monetize. But which leads to this figure of negative EUR607 million at the end of last year. If this temporary deficit had not existed, our debt would have been reduced by 5.3%.

 And about optimizing cost of debt, the net financial expenses decreased almost by 8%. Our policy is to continue along this path of reducing financial expenses, because in the situation of the market with the issues also allowed by the bond issues, 10-year bonds with a coupon of 1.375%, the total debt of the Group is at 4.375% including costs of LatAm subsidiaries. The cost of debt is 4.3%, including LatAm subsidiaries and we expect to be around 3.9% next year.

 So the efficiency plan, it was one of our goals and it continues to be one of the main goals of the strategic plan, that next year we expect to consolidate EUR27 million, with net savings of EUR62 million in 2016 after the cost of capture. We have not only exceeded the expectations, but we strengthen ourselves in this objective which is, of course, part of our priorities.

 Where did this take place? Mainly in gas distribution in Spain and in networks in Latin America, also in corporate costs. For 2018, bearing in mind that we expect to reduce capture costs, we are convinced that we will be able to meet the strategic plan also in this item.

 And now talking about Electricaribe, in November 2016 the company was taken over by the Colombian government for a two-month period. In January, this was extended for an additional two months and due to the fact that the situation is at this point a distancing of our activities due to the unilateral actions of the intervener managing the company on behalf of the Colombian government, we have lost control of this company. And due to the good governance and accounting standards, we need to deconsolidate as of December 31, 2016.

 From that date on we will not consolidate the company. We will deconsolidate and we will maintain it as a financial investment with a value of EUR475 million value, the fair value of EUR475 million. In 2016 it was consolidated, so the accounts that we present today include all of the consolidated year of Electricaribe. This deconsolidation means also a deconsolidation of debt of EUR536 million because of the change in scope.

 The potential impacts on results in terms of EBITDA and net income will not be shown in our accounts from January 1 of this year. And I would like to remind you that in 2016, EBITDA was EUR253 million and the Company posted losses by EUR44 million. The situation of the Company is one we have already explained, unfortunately the fraud and default situation and the impossibility to tackle these with the ordinary mechanisms or receiving compensation by the regulators, led us to a situation which generated this takeover.

 And our Company wants to react with clarity, as we did today, on the face of the problems. But we want to continue to negotiate with the Colombian government and to try and reach a satisfactory agreement for our interests, which prevents continuing with international arbitration which we started in July last year and which will take us, after the negotiation period, to continue to not with international arbitration for investment production. So we trust we will continue with negotiations and will reach an agreement.

 I'd also like to say that other aspects that affect our company are investments. We contemplated an investment of EUR80 million per year in 2017 and 2018, which will not take place. Having said this and despite the deconsolidation that will take place, we confirm that the net income objectives that we had in strategic plan are maintained. That is for the current year we will be between EUR1.3 billion and EUR1.4 billion and they will be around EUR1.6 billion for 2018.

 In the following chart, you will see an advance of, or preview of, the current year, especially generating and electricity and a bit in gas. We see an impact by atypical market situation, but will be our vision for 2017 overall.

 We expect to maintain the net income foreseen in the plan, and positive cash generation after investments and dividends. Obviously in term of EBITDA, there will be an impact versus our objectives due to the deconsolidation of Electricaribe of around EUR250 million in terms of EBITDA.

 As a whole in Europe, and talking about networks, we expect a flat behavior. We foresee an increase of EBITDA in gas distribution, and a behavior of distribution which will not be so positive due to the capture costs of the efficiency that we are developing, and that of course in future years will yield results more clearly.

 In Latin America, the EBITDA of the network should increase due to more favorable regulatory situation, and also due to the positive evolution of currency in those countries. We -- in Spain, we expect a drop in EBITDA as we anticipated in the strategic plan due to the maintenance of pool prices, which will be higher than in the year before, and the changes pertaining to the social bond and protective customers.

 In international generation, we observe a potential of EBITDA increase due to the new megawatts that will operate in the second half of the year, and also due to the positive evolution of exchange rates.

 In terms of gas, we expect an improvement in its contribution to EBITDA because of a better scenario of commodities and margins, and also a volume increase because this year, towards mid-year, we expect in August there will be normalization of supply with the Cheniere contracts. As a whole, maintenance of margins in the gas business and greater volumes, which would he our progress for this year.

 And about the investments for 2017, you can see in the chart they are mainly for the growth in networks and in Spain and Latin America, and a bit less than that for international generation projects. You will also see that we continue with the investment which we have already announced for the new tankers to complete the four tankers that we need for the Cheniere operation.

 60% of the investment will be devoted to growth, and 40% to maintenance. Within growth, around EUR1 billion will lead to higher EBITDA in 2017 and 2018, additional to the positive impact of the two new tankers. We then expect to invest around EUR2.4 billion throughout these years, to add the different business lines you can see, which is EUR300 million below what we had indicated at the beginning of the strategic plan, offset by the amortization of assets of around EUR800 million that we expect for this year.

 This will lead to an expansion of our networks in all regions in this year, which will also be benefit by improvements in exchange rates. In Spain, we expect in gas distribution, discounting the supply, which we will increase by around 1,000 production points, and in electricity a lot more flat.

 For Latin America, we expect to grow by 5%, a very high figure, based on the growth in Chile due to the expansion plans because of the new gas law, and in Mexico because of the regulatory changes throughout the country, which will improve gas expansion without a doubt.

 In Spain, I would like to point out that in the natural gas business we will also be benefitted by the LPG business in the collection points that have not yet been transformed to natural gas over to -- we'll ratify the revenue base stable for these and future years.

 I would also like to talk about the regulatory scenario in those countries. Basically, until 2020 there shouldn't be important changes in Spain, but I would like to say that the new regulation of gas distribution in Chile approved in December should come into force in the first quarter of this year. This regulation maintains the free tariff regime, and a return of around 11% for the investments in collection in the next few years.

 In electricity distribution next year, we expect regulatory novelties which are now in an analysis phase in Argentina. The Comprehensive Tariff Review is in an advanced phase, and we expect positive news in April in Colombia. Throughout 2017 we expect an ordinary review of gas distribution, the remuneration of gas distribution with a certain decrease in profitability which we already forecasted in the strategic plan, within regulatory impact.

 As a summary, stability and attractiveness of the regulated business, despite the calendar that we are showing on the slide.

 And now, moving into gas supply we will increase volumes by around 6%, and this increase will be a consequence of the new supply from the US, which will be adjusted with an introduction in the spot gas that we have used this year because of very favorable situations, mainly in the North of Europe.

 For 2017, we expect to normalize sales in the retail market. We have been clearly low in the past year, and the cold weather expectations, which lead to a normal year in this regard. We also expect to increase sales of liquefied natural gas in the international market, and a bit of a contraction in European markets, without this meaning a significant impact in margins.

 I insist the increase of volume due to the Cheniere operation, and 90% of the gas in this chart has already been contracted at attractive margins, and all of this added to the flexibility and logistics and the action capacity in the spot markets should allow us to have a better year in the gas business as compared to the previous year.

 Now, on electricity business, we maintain our perspectives and our opinions that we presented in the presentation of the strategic plan, and for 2018 we expect a drop of EBITDA margins due to the very high volatility of prices in wholesale markets, and the consequences this will have in income due to generation and marketing as well.

 The consequences of this will continue. We also expect the negative impact due to the social legislation on vulnerable clients in the social bond, which is currently in the regulatory phase.

 It is true, also, that we benefit from the integrated nature of our activities, which last year allowed us in the first quarter, and also within the second quarter, to capture special values which took place in those quarters due to the situation of the supply market versus the generation market.

 If similar situations happen, of course, we will have positive impacts in our accounts, but if the year is more normal and less volatile we foresee that we will continue with what was indicated in the strategic plan.

 As to global power generation, I would like to say it is one of the pillars of our growth. Aside from the 2.7 gigawatts installed at the end of 2016, we have ensured 471 additional megawatts, which will start operating between 2017 and 2020, all of them in attractive PPA condition.

 In Brazil, we have acquired two photovoltaic plants of 6 megawatts, which will start operating in the second half of this year, in Australia a wind farm of 91 megawatts which will start operating next year, and in Chile an integrated wind and photovoltaic project which will start operating 2020. With all of this in the next two years we will -- the Company's global power will meet the goals we have set for 2018.

 As to currencies, here you have our forecasts, the way we see the situation. I would like to indicate that here in our businesses we see 2016 the most important currencies are the dollar and Chilean peso, and that movement will have a clear impact, mainly on the network business. During the first half of the year we expect a positive evolution of exchange rates versus the year before, maybe with the exception of the Mexican peso.

 And just to finish, I would like to indicate that the 2016 year has been complicated, as in complex, with important difficulties due to the situation of gas markets in the world, commodities and final prices, and also the currencies of Latin American countries.

 Despite this, we have met our financial commitments, both in terms of EBITDA, net income and dividend. It's been a year impacted by all of this, which we've been able to offset with the network business and the efficiency plan, and also with non-recurrent results.

 For 2017, we will continue with organic growth in networks, which should allow us to move forward (inaudible). We believe that the exchange rates will be positive as compared to the previous year, and that the gas business will behave better than in the previous year, in such a way that we will be able to compensate the deconsolidation of Electricaribe.

 And we will, of course, continue with the efficiency policy and with the optimization of the portfolio, divesting in assets which are non-strategic.

 So as a summary, and as I already mentioned before, we maintain our target of net income for 2017/2018 around EUR1.3 billion, EUR1.4 billion for 2017, and EUR2.6 billion for 2018. This is all, thank you very much.

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Questions and Answers
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Unidentified Company Representative   [1]
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 Well, we now move over to the Q&A session. As you know, questions are received through the website, and from now on we are not receiving any more questions. So if anyone wants to ask a question, we would appreciate if they could contact the investor relations department after the presentation.

 The first series of questions come from Harry Wyburd from Merrill Lynch. Several questions. First one is about gas prices. The spot prices of LNG have increased a lot in January to December. There's also been prices in Spain that the day-after prices in January, important increases, have we benefitted from this event, and what was the financial impact in the fourth quarter of 2016 and the first quarter of this year?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [2]
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 With regards prices, it is true there's been upwards tension, very importantly in Asia, Europe and in Spain as well. In Spain, we need to point out that the tension in the market is due to a secondary market of these adjustments. So it does not show the situation of the final market, because it is not a primary market.

 At any rate, the prices have of course increased, and this is of course good for the Company, but it is necessary to mention that an amount is also linked. As you know, we have our provision -- supply linked to Brent, and part of our sales linked to Brent. Brent has moved along a similar path, and this is what will lead to the final results. So they will be dampened, because our sales do not go to the spot markets, but to final markets which yes, have had increases, but not those -- not equal to the spot markets.

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Unidentified Company Representative   [3]
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 The second question is about the Cheniere contract and the degree of cover that we have, and the question is, how many BCMs of the contract are open?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [4]
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 As we've said, maintained regional match contract by contract, we act as a portfolio, so we have a portfolio, a gas portfolio with these characteristics. Currency, also in terms of the indexes they refer to, and sales. So in these regards, 90% of our portfolio is already covered, sold, and the 10% remains to be sold. We trust that throughout the year we will of course be perfectly able to match the entire portfolio and sell it. As a whole we would have 10% of our gas as of today without naming final customer.

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Unidentified Company Representative   [5]
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 Third question. If I'm not mistaken, you start receiving volumes from Cheniere, because of what's stated in the contract, in August, but you're already receiving service deliveries this week. So how do you calculate the tolling fee for these early deliveries?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [6]
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 The tolling fee is the same as in a normal contract. Same payment.

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Unidentified Company Representative   [7]
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 Next question is about assets in Italy, and it says aside from the strategic review in Italy, what other assets or regions could be considered, or could you consider restructuring for the portfolio?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [8]
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 Well, we have already conducted several transactions, not only this year but in previous years, and of course in a permanent manner we consider the position of our assets to see which ones continue to be strategic, and which ones show opportunities.

 Italy is a case that we are studying in depth. You know that in the horizon we have a rearrangement from the point of view of consolidation of the sector by the Italian government, and the Company is studying what is the right decision to make, the optimum decision when faced with the opportunity/risk that we have with this reorganization.

 Our position will be clear in the following months, and we'll act accordingly, but in a similar way as with our entire portfolio.

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Unidentified Company Representative   [9]
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 Continuing with Italy, what would be the use of the -- how would you use what you get from the asset sale if it happens?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [10]
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 We haven't made any decision, as we haven't made any decision about what we will do with the assets in Italy.

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Unidentified Company Representative   [11]
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 And the last question of the analyst, GIP has been a shareholder for seven months, so what is the role of GIP in the business strategy? Have they proven to be mainly passive investors until now, or on the contrary they're taking an active role in strategic decision-making?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [12]
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 GIP -- we are delighted with the presence of GIP in our shareholding, and more specifically in the board of directors in the Company. Of course, the support that GIP is lending in the -- and their advice and the work in the board of directors is excellent, and of course -- and this is my personal opinion, and I'm sure that this is the opinion of the entire board -- this is an important aspect to face the future challenges of the industry and the Company. Very important contribution that we are very satisfied with.

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Unidentified Company Representative   [13]
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 The following analyst asking questions is Jose Javier Ruiz from Macquarie. One of the questions was already answered. The next question would be, bearing in mind the stabilization of margins in gas market, and the increase of electricity prices, could you consider in the future to increase the guidance of net income for 2017?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [14]
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 I don't know what we are going to do in the future, but at this point, seeing the situation, we do not -- we confirm what we said in the strategic plan in 2016. At that time we continue to see things on the same terms.

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Unidentified Company Representative   [15]
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 The following analyst to ask questions is Daniel Rodriguez from Fidentiis. One question was already answered, about the assets in Italy. An additional three questions. One is about Electricaribe. Part of the question was already answered in the presentation. And now, provisions, and whether any provisions have been booked for the value of the asset, and how do you expect to recover the EUR475 million, which is the value of the investment?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [16]
------------------------------
 I'll answer the last question. The asset is worth a lot more than EUR475 million from any point of view, therefore we are convinced that with the path of negotiation, which is what we are going for, we do not give up recovering this investment with the necessary measures, and valuating it again, but we are convinced that this is the way to move forward, and this is the way to recover it.

 We're also convinced that any other alternative, which we do not desire at all, which had to do with claims would lead to figures above the one we are proposing given the quality and the asset volume in the area, and how necessary in use they are in electricity supply in the area.

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Unidentified Company Representative   [17]
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 And the provisions?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [18]
------------------------------
 Provisions. Once the deconsolidation of ECA takes place, we have maintained a book value of the stake, EUR475 million, which is the lower -- between book value and market value of the Company. We've kept the lower value, which is what was shown in the books at the end of fiscal year 2016.

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Unidentified Company Representative   [19]
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 Okay, two more questions about the EBITDA, which were already answered in the presentation. And continuing with analysts, we now move on to Fernando Lafuente from N+1 Equities. One question was already answered about the contribution of Electricaribe in 2017, and the next question would be the provisions linked to default in Electricaribe.

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [20]
------------------------------
 Within provisions, which are included in the provisions chapter, all of them are for default, and those responding to Electricaribe are the most relevant within that chapter as we have already reported. In that line, we only have default provisions.

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Unidentified Company Representative   [21]
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 There's a another question which was already answered about the debt that is deconsolidated. Now we move on to collection points in LPG in Spain. When will you start reconverting them, and what investment point do you estimate?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [22]
------------------------------
 We start reconverting them this year. We start with a progressive and successive plan, and the cost -- well, of course, it's variable because there are areas with a high potential of cold and far from the network, and in others it's a natural expansion of the network. I wouldn't dare give you an average figure at this moment. I would like to study it.

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Unidentified Company Representative   [23]
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 Next question. The deregulated gas business drops 25% versus the last quarter of last year despite price increase and volume increases in the fourth quarter. Why this drop?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [24]
------------------------------
 Well, the truth is that the movements in 2016 have to do with closed contracts. We cannot see our business. I insist when asked in terms of when the market increases or drops related to spot prices, because we don't sell at spot prices. If this were so, our results in the first and second quarters would have been much worse. Our sales are in mid- to long-term contracts, normally indexed to Brent, not only that. This causes the fact that we do not have these ups and downs due to price drops or increases, so when markets sink prices or when markets skyrocket, we don't have the ups and downs that pure spot market would have. This is the reason, okay?

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Unidentified Company Representative   [25]
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 The next question by the same investor is -- same analyst is, in the gas market, what was the average price per megawatt hour obtained in the generation and supply market in Spain, and what have you closed for 2017 and at what price?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [26]
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 The prices are above EUR55 per megawatt, which was the last price we had in the last quarter, which is what we have more or less closed for this year, for the next few quarters. EUR55, EUR58, around that, okay?

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Unidentified Company Representative   [27]
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 There's a question already answered about the regulation of gas in Chile, and his last question would be, when you talk about additional disposals of non-core assets, what do you mean by that, and what is non-core in the Group?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [28]
------------------------------
 Non-core would be whatever doesn't fit with our strategic plan, because -- or for geographical reasons, or for reasons of clarification for the future. Strategic reasons make us have an interest which is interim and not for the future. What would be the strategy? Well, the one that you know, the one of the strategic plan of May last year. So we continuously analyze businesses and geographical situations to see if they fit or not, and whether we have better ways of valuing this.

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Unidentified Company Representative   [29]
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 The following analyst is Carolina Dores from Morgan Stanley. One of the questions was already answered about the assets in Italy. The first question would then be as follows. Can you give us an indication about the EBITDA that will come from Argentina in 2017? Implicit in the global EBITDA goal, or target for the year. Do you expect an improvement in the gas distribution EBITDA, in line with the scale approved for electricity distribution?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [30]
------------------------------
 In Argentina, what we are foreseeing is on the one hand what we've had in 2016, which is already consolidating -- consolidated tariff increase formally from October 1 but actually from April 1, and what we expect is that from April or around spring on, the new, comprehensive tariff review will already be in force.

 And what we would or what the outlook for 2017 would be is the consolidation in the full year of what was obtained in the tariff adjustment of 2016, and then we need to wait and see what happens with the tariff adjustment for 2017. Bearing in mind the inflation levels existing with percentages which are above 20%, we can have an idea of the increases that may come in tariffs for 2017.

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Unidentified Company Representative   [31]
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 The second question would be, how do you -- what do you think about the government's proposals of setting a gas volume to set in the middle?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [32]
------------------------------
 We don't know whether that's a proposal or not. The proposal is to request the CNMC to develop a regulation to provide liquidity to the market in such a way that incumbents -- we are there of course -- act as market makers.

 Honestly, we don't see it for one specific reason. We don't see this is feasible, or relatively feasible. The reason is that Gas Natural Fenosa, as you know, does not have or hold gas. We buy gas. We don't have wells or reservoirs. We, therefore, do not have the capacity. When there is a tension in the market we do not have the capacity to contribute important amounts.

 And then a different matter would be the price. We don't have that capacity. In the current year, we've already sold 90%, and 10% of the gas is not sold yet, but it is essential to reserve a percentage for possible situations like the one which we just had in Europe. So the suppliers, utilities, our gas is sold, so we cannot be the backup of any market, because we do not have the necessary raw materials to act. So any volume will have a delayed term, because we will need to buy it, and the price will be the price of the market when we need to buy. So we honestly don't see the feasibility of it, but we must also say that we are waiting for -- we are waiting this regulation to see exactly what it is about.

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Unidentified Company Representative   [33]
------------------------------
 And the last question from Carolina, that is about margins of gas marketing activities has already been raised, with the questions on the previous analyst.

 Following analyst, Rui Dias from UBS. The first question is, what visibility do we have in the investments in generation capacity -- international generation capacity from now to 2020?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [34]
------------------------------
 We explained these a bit. There is even a chart where we show, in detail, the year will not be different from the following ones. It has to do with the power generation plan, and it will focus on renewable investments, namely in PPA markets and of course with profitabilities which preferably cover the capital costs and inherent risks.

 Without these conditions, we will not do it, and we will do it in a conservative manner, so we've done it in the past. We've already covered the 2018 plan, and we have opportunities in many areas to cover the 2020 target, which is that mentioned in the strategic plan.

 We continue working on it, but I would like to insist that it would be in these type of investments, and secondly with the financial conditions and profitability conditions that we always impose on ourselves in all investments. We trust that due to the high need of investment in generation capacity in many countries, this will happen. But if it does not happen then we will not invest.

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Unidentified Company Representative   [35]
------------------------------
 The analyst makes a series of questions which have already been responded about orientation in financial magnitudes for 2017, and another question which was already answered about divestments in non-core assets.

 With regards the electricity generation and marketing in Spain, he asks whether we expect a recovery in the hydraulic volumes in the Iberian Peninsula in the short term.

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [36]
------------------------------
 Who knows? Well, of course, the year doesn't look like it's going to be very water-oriented, but the scenario changes, and it's very difficult at this point in the year to make a forecast.

 At any rate, as my colleague said before, we expect an increase in the average price of the pool in such a way that we will be at the levels of 2015 or maybe a bit more. There are many factors, not only water but also wind and what will happen with international prices of coal and gas. So it is difficult, but our estimation as average of the year subject to high volatility is what we expressed.

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Unidentified Company Representative   [37]
------------------------------
 Okay, and the last question by Rui Dias is about gas supply, and it is as follows. Can you give us an update on your renegotiations of gas supply with Qatar, Nigeria and UFG? Any material changes, especially in the indexing?

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 Rafael Villaseca,  Gas Natural Fenosa - CEO   [38]
------------------------------
 No, the indexing continues to be the same with Qatar. We continue to debate about price updates, and we are, as you know, in an arbitration process. We trust that despite the ongoing arbitration we'll reach an agreement at some point.

 If I remember correctly, in Nigeria this already ended, and there is no review on that front. And in the UFG, the contract that we have with supply and energy generation, there was already an agreement, so there are no structural changes and the ordinary review of negotiations are closed, except for the case of Qatar that I mentioned.

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Unidentified Company Representative   [39]
------------------------------
 Okay, we now move on to the following analyst, Pablo Cuadrado from HSBC, with a series of questions which were already answered about the regulation in Chile, Electricaribe and the cost of debt.

 His last question is whether you could give us a more specific view on the gas market in business for this year as compared to 2016, whether we foresee stable margins and a growth in volumes which will mean an increase in EBITDA, or on the other hand a contraction in margins?

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [40]
------------------------------
 I said before, and I happily insist on the fact that we foresee a contraction in margins in Spain and the North of Europe. We foresee somewhat of an improvement in margins in the international generation of LNG, but both of these can be -- both of these can be offset, but we mainly foresee an increase in volume.

 If we simplify, it would be maintenance of average margin, increase of volume, and within maintenance of margin an improvement in the international LNG market -- slight improvement, and slight worsening of margins in European markets.

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Unidentified Company Representative   [41]
------------------------------
 Okay, the following analyst to ask questions is Manuel Palomo. A question which was already answered, about non-core assets.

 Now the following analyst, Alejandro Vigil from Cygnus. His question is, I see your guidance that you maintain EUR1.6 billion net income in 2018 versus the EUR1.3 billion, EUR1.4 billion in 2017. This means almost 20% increase in income. What factors would you explain EUR300 million increase per year? Is it all organic growth, or does it include M&A?

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [42]
------------------------------
 It is mainly organic growth, additional to the efficiency plan. As I already said, we reached EUR220 million accumulated, and for 2018 there will be less capture costs. We need to add, also, the profitability of the investments in networks in many countries, and destabilization and improvement are two factors which have had a very negative impact.

 Number one, exchange rates. We expect a stabilization this year and recovery next year, and an improvement of the general energy framework in the world, both in gas markets and the raw materials for electricity.

 So what was foreseen in the strategic plan? We expected a recovery of past situations, not before 2018. We continue to expect them in 2018, but maybe towards the end of this year we will start seeing the impact, and there will also be, of course, the collaboration of the improvement of the financial result because we are doing permanent restructuring transactions, and we will continue to conduct them. All of this, in line with the strategic plan, is what makes us confident that we are in line to comply with the target for 2018.

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Unidentified Company Representative   [43]
------------------------------
 The following analyst to ask questions is Stefano Bezzato from Credit Suisse. A couple of questions which were already answered. One is about gas marketing margins, and another one about Italian assets, and just to finish, we have Javier Rincon from BNP Paribas, with a question about UFG which was already answered in the report, in the results report.

 So with this, we can conclude the Q&A session. Again, if someone wasn't able to send his or her questions, please contact the investor relations department of Gas Natural Fenosa.

 And without further ado, I will pass the floor over to the CEO, Mr. Rafael Villaseca.

------------------------------
 Rafael Villaseca,  Gas Natural Fenosa - CEO   [44]
------------------------------
 Well, I would just like to say goodbye to all of you. Again, we are available to you through our specialized department to answer any questions, or to give you any details you need. Thank you for your attention, and see you next time.

 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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