Full Year 2016 Enagas SA Earnings and 2017-2020 Outlook Call

Feb 14, 2017 AM CET
ENG.MC - Enagas SA
Full Year 2016 Enagas SA Earnings and 2017-2020 Outlook Call
Feb 14, 2017 / 08:00AM GMT 

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Corporate Participants
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   *  Antonio Llarden
      Enagas SA - Executive Chairman
   *  Borja Garcia-Alarcon
      Enagas SA - CFO

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Conference Call Participants
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   *  Fernando Lafuente
      Alantra Equities - Analyst
   *  Javier Suarez
      Mediobanca - Analyst
   *  Virginia Sanz
      Deutsche Bank - Analyst
   *  Jose Ruiz
      Macquarie - Analyst
   *  Harry Wyburd
      BofA Merrill Lynch - Analyst
   *  Olivier Van Doosselaere
      Exane BNP - Analyst
   *  Oliver Salvesen
      Jefferies - Analyst
   *  Nelson Bernardino
      Haitong Securities - Analyst
   *  Antonella Bianchessi
      Citigroup - Analyst

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Presentation
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Unidentified Company Representative   [1]
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 (Interpreted) Good morning, ladies and gentlemen. Welcome to Enagas' 2016 results. This the conference call and the presentation of our updated five year forecast to 2020. The results were released this morning before the opening bell, and are available on our website at www.enagas.es.

 Mr. Antonio Llarden, Chairman of Enagas will host the presentation. We'd expect the conference call to last around 15 minutes. And afterwards we will have a Q&A session during which we will try to answer any questions as fully as possible.

 Thank you for your attention, and I will now hand the floor to the President, Mr. Llarden.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [2]
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 (Interpreted) Good morning ladies and gentlemen. And thank you for your attention. As you see in Enagas' website and at CNMV's website, you will find a comprehensive presentation with detailed information. To not take too long I will try to restrict my talk to 15 minutes. And I'm simply going to highlight the key messages.

 And as usual, during the Q&A session we will be able to take a more in-depth look at all the matters that are of interest to you. As usual, after today's results presentation I will be starting a road show, during which I will be holding meetings with our main investors.

 I will structure my introduction into three parts. First, I will look at Enagas' results for 2016, then I will review our strategic priorities for the period 2017, 2020, and our goals for that period and, in particular, those ones for 2017. And the third part, we'll wrap up this conference call by summarizing our main challenges in the sphere of sustainability, which in the current context is one of the main challenges to which we, energy companies, must rise.

 In 2016 for the 10th consecutive year, we have met and in some cases even surpassed our targets. I shall go over the main figures. Our funds from operations at yearend totaled EUR756.8 million, which is a year-on-year increase of 8.6%, these versus 2015. And it has allowed us to achieve a funds from operations ratio over net debt of 15%.

 The net profit after tax represents EUR417.2 million. And it has increased by 1.1%, which is surpassing the target of 0.5% that we had set at the start of the year. This increase was mainly due, especially, to the higher contributions from our investees, especially the brownfields acquired in 2015 and during the year 2016.

 Our international activity in 2016 accounted for 10% of the Group's net profit. And invested dividends totaled EUR90.5 million, which further strengthens our funds from operations and also exceeding the estimated annual target, which was EUR65 million.

 In the figures that we are presenting today, we include the finishing of the concession of Gasoducto del Sur de Peru, GSP. Last January 23, this concession ended after the financial close. This was the sole and direct consequence of the inability to secure international financing for the project because of the situation of the majority shareholder of this concession.

 According to research conducted by the Company -- for the Company by external consultants, sorry, based on the concession contract and other agreements signed by the partners in this GSP project, Enagas will recover, we think, the investment made in the project in a maximum of three years. As you are aware, the Standard and Poor's agency has confirmed that its ratings and outlooks for Enagas are not affected by the termination of the concession contract.

 With regards to the investment figures, in 2016 Enagas has invested a total of EUR912.2 million. Out of this amount, EUR199.3 million correspond to investments done in Spain and the remaining EUR712.9 million to the international investments done to strengthen our position in strategic assets in which we are already present.

 The main transactions this year were -- I shall recall quickly, have been for TGP Peru we have acquired 4.6% additional stake, increasing our total interest to 28.9%. Therefore, we control this company in tandem with our partners, both partners which is Canada Pension Plan Investment Board and Sonatrach. Both, of course, two companies with whom we've got an excellent partnership.

 In the regas Sagunto plant, Saggas, as you know we have increased our shareholding by 42.5%, so we now own 72.5% of the stake. And finally, as it's very well known by all of you, in the GNL plant Quintero, GNL Quintero in Chile, we have acquired 40% additional stake. Therefore, we take our shareholding to 60.4%.

 With regards to our financial structure, Enagas in 2016 has made two bond issues operations. One of them, the first one, EUR750 million, with an annual coupon of 1.375% and a maturity of 12 years, so I shall recall 1.375%. And another operation of EUR500 million at a maturity of 10 years and an annual coupon of 0.75%. This is, of course, a clear indication that the Company is held in high regard in capital markets.

 Therefore, we have a robust financial situation, very solid situation, with diverse sources for funding and financing with an average cost of debt of 2.4%, lower than that 2.7% we had in 2015. And over 80% of that debt is at a fixed rate.

 I'd like to insist on this issue because I know you're aware of it. But with the trends of the last years -- last month's trend of markets, there is a certain feeling, which is quite correct, that the utilities can be slightly more affected by these interest rate increases. But in the Enagas specific case, which is the one I can talk for, it is clear that our debt structure makes it almost impossible for us to be affected by these almost -- interest rate increases in the market.

 The available -- the stability (inaudible) for December 31 is EUR2.409 million (sic - see press release, "2.409 billion") and we have no significant debt maturities until 2022. So we therefore have diversified financing sources, 61% of the debt is arranged on the capital markets and 26% of that debt is financed with institutional debt through loans from the Spanish State Finance Agency, Instituto de Credito Oficial and the European Investment Bank.

 Before finishing this overview for 2016, I would like to talk about the gas demand. Since the beginning of the economic crisis in Europe, this is the second consecutive year in which the gas demand, total gas, grows. And we have ended 2016 with an increase of 2.1% in that gas demand. This increase was mainly due to the evolution of the industry demand, which is the main consumer of natural gas in Spain. And it has risen by 3.3%, which is in line with the performance of the Spanish economy.

 As an anecdote, on January 19, 2017, the gas demand reached with -- through all concepts, 1,589 gigawatts hours which is a record figure that had not been attained since February 2012, five years ago. This volume, which was extraordinary of gas demand, has been covered normally thanks to the flexibility of the gas infrastructure. And in particular thanks to the regasification plants and the underground storage facilities that have enabled to satisfy this direct demand for natural gas and gas for power generation to be met.

 In the midst of a cold front and with several nuclear power facilities unavailable in France because of technical problems, the gas infrastructure network enabled total energy needs to be satisfied. Not just in Spain nationally speaking but also in our neighboring countries, contributing to the security of supply in Spain but also in Europe.

 So regarding 2017, so far until yesterday the total demand is growing at almost 20%. Of course, this figure cannot be extrapolated to the rest of the year, but it is proof of a robust growth which is consistent with last year's demand.

 With regard the strategic priorities set for 2017 and 2020 it is based on a stable net profit and dividend growth. We, Enagas, have maintained our strategic priorities, which are aimed at the following four points.

 First, we want to consolidate our position in the regions where we are already present. We want to improve operating efficiency. Thirdly, we want to maintain a robust financial position and an attractive and sustainable shareholder remuneration. And lastly, we are fully committed to promoting new uses for natural gas, which in the end these will help for our sectors to have a brilliant future.

 The operating environment over the coming years is likely to be shaped by the transition towards a low carbon energy model. This is going to be led probably by Europe, by European countries. We as agents in the energy sector have the duty of focusing on achieving a cleaner economy, a less polluting economy. And in that context, Enagas will play a crucial role and is already playing a crucial role regarding security of supply and market integration in Europe, since we are present in the main gas infrastructure developments.

 Another characteristic, another feature of the operating environment in the next few years is going to be the development of the LNG market, which is going to experience cumulative growth until 2020 of over 6%. This will be fueled by on the one hand the additional liquefaction capacity that already exists or will appear in the short-term in the US and Australia due to the growth in regasification in new markets, non-OECD markets, and that [mostly] due to the increase in floating solutions and their importance for liquefaction as well as regasification and storage.

 Enagas is one of the leading global players in LNG infrastructures. With the recent investment and those that are planned for the 2017, 2020 period, we believe we are well placed to make the most of this market's opportunities for growth in these markets and more specifically those that are growing where Enagas is already present. We will continue to promote the development of gas infrastructures through our subsidiaries as well.

 Having taken a look at this global environment, I am now going to talk about our outlook and targets, more specific targets for the 2017, 2020 period. First of all, based on the current forecast for demand the gas system is set to become balanced over this period, since the imbalance between revenues and costs is going to be eliminated.

 As a matter of fact, the balance of the system might be reached during 2017. And during the period until 2020, we will absorb all of the deficit that has been accumulated until then. This balance will also mean for us a positive effect improving our working capital thanks to -- improving our cash thanks to the improvement in working capital.

 And I also wanted to highlight the visibility in our regulated revenue thanks to the stable regulatory framework that we have until 2020. During this period, obviously, we will continue to keep on going the extra mile to improve operating efficiency, which as you know is one of the means where we have the best classifications. I think I said this six months ago, that the Council of European Energy Regulators have included Enagas amongst the transmission system operators in Europe that are most efficient in the management and maintenance of gas infrastructures.

 Thirdly, GNL Quintero will start to consolidate itself globally from January 1, 2017. So we have already started consolidating it, and in the next quarterly accounts, you will see it as consolidated. And lastly, we think, because it is our objective, that our invested companies start contributing 13% of our net profit in 2017 compared to the 10% that they brought in 2016, and they will rise up to 25% in 2020 which affirms our established targets.

 With regards to investments during this period, we have thought of investing around EUR1,450 million. In Spain, the main projects are the regasification plant for Tenerife and the first phase of what we used to call MidCat, that is now called STEP, South Transit East Pyrenees Interconnection. Between these two projects, obviously, there is regional investment in Spain. And outside of our country, we consider the investment that has already been engaged, the Trans Adriatic Pipeline and GNL Quintero.

 Our strong fund generation will enable us to achieve an available cash flow. That is to say after carrying out pledged investments and payment of the estimated dividend of approximately EUR1,300 million. This estimated discretional cash flow generation that has been foreseen for this period will enable us to strengthen our balance sheet structure by also reducing our debt levels.

 We estimate an average financial cost for the period, excluding GNL Quintero, of around 2.5%. And we are aiming to maintain our funds from operations standalone ratio with respect to debt, net debt, of above 15%. As I said at the beginning, as of today over 80% of our debt is at a fixed rate. And there are no significant maturities that will take place until 2022. We believe that this shields us reasonably well from the high volatility of the market.

 We also foresee a cumulative growth in net profit until 2020 of 3%. That might potentially rise up to 4% if at the end of the period we carry out further investment in brownfield assets. The growth of dividend in a sustainable and steady way is still one of our main priorities, not to say our main priority. Therefore, we reiterate our target of increasing our dividend by 5% annually, reaching up to EUR1.68 per share at the end of 2020. As we can see in the presentation we will go from a dividend per share of EUR1.46 per share in 2017 to EUR1.68 per share in 2020.

 With regards to 2017, and I will now finish, the main objectives that we have set are to fully consolidate LNG (sic - "GNL") Quintero, full integration, starting on January 1. To pay a dividend of EUR1.46 per share, to achieve growth in standalone net profit of 5%, to carry out the committed investments of around EUR650 million. To achieve a dividend volume for our investees of around EUR120 million. To maintain a standalone funds from operation over net debt ratio of more than 15%, as I said previously. And all of this with an average financial cost of around 2.4%.

 Before I finish my presentation, I wanted to repeat that we are committed to sustainability. In any of the scenarios that we have -- envisage for the coming years, natural gas has and will still have a pivotal role to play in achieving climate change targets, which is a strategic priority for Enagas.

 We have integrated sustainability into our strategy and into how we do business on a daily basis. As a proof of this, I would like to mention two awards we have been given during 2016. The first award, which I'm referring to, is the fact that Enagas is the number one Spanish company by sustainability and we are amongst the 10 most sustainable in the world according to the Global 100 Index that was recently presented in Davos.

 And the second award is the fact that in 2016 Enagas was also included for the ninth year in a row in the Dow Jones Sustainability Index, a global benchmark for sustainability that qualifies us as leaders in the gas utility sector. So we are very satisfied with these recognitions that have been given to us by serious and committed to sustainability institutions.

 And in order to finish and as a conclusion for this presentation, I would like to highlight that shareholders' remuneration remains Enagas' overriding strategic priority. We are committed to paying a robust and steady dividend with a minimum annual growth of 5%. The estimated cash generation for this period will enable us to honor our dividend commitment and to strengthen our balance sheet, reducing debt level.

 On the other hand, although most experts have stated, and rightly so, that we are entering a period of higher interest rate, our earnings, we believe, will not be affected by this. Because over 80% of our debt is, as you very well know, long-term and fixed rate. We have raised our estimated cumulative net profit growth for the period from 2% to 3%. And potentially we believe we could even reach 4% as an average for the period.

 Our international strategy for the coming years is based on the consolidation and development of the investments that have already been undertaken, and on the recovery of our investment in GSP, which will generate in the future opportunities so that we may invest in new projects, always following the criteria that we have always respected, fulfillment criteria.

 And we think that we may maintain and strengthen our leadership and sustainability which is still one of the -- which is still a cornerstone in Enagas' strategy in the current economic strategic sustainability context.

 So in short, a company like Enagas has a long-term perspective. We have a stable track record which regardless of economic cycles means that our long-term performance will be positive and foreseeable, reasonably foreseeable.

 So thank you for your attention. And if you have any questions please feel free to ask them. We will try, my team and I, to answer to your questions with as much detail as possible. Thank you.

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Questions and Answers
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Operator   [1]
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 (Interpreted) Good morning ladies and gentlemen. The Q&A session starts now. (Operator Instructions). First question from Fernando Lafuente, Alantra Equities. You have the floor.

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 Fernando Lafuente,  Alantra Equities - Analyst   [2]
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 (Interpreted) Hello, good morning. I'd like to raise three questions, two more specific on the international investments and another one for the strategy on the Company for their precedent GSPA. I'd like to know if you have an estimate of how much would have the net profit for 2016 and its growth been without the impact of GSP. The second question on TAP, I'd like to know more about how the true up works. And when do you expect to receive or to fund and receive the part that you have advanced?

 And the third question on the strategy. Taking the points mentioned by the President in the presentation, I'd like to know how stable that balance is between new investments and the balance sheet and the debt. Because in the end I'd like to know if there is room for further investments. How much that room is. And if you have room when and where would you carry out those investments or your intentions for new investments. Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [3]
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 (Interpreted) Well, thank you very much Mr. Fernando Lafuente. Maybe the two first questions we're going to give you all the details, but I'd rather to give the floor to CFO, Borja, and then I will answer the questions on strategy. So, Borja.

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 Borja Garcia-Alarcon,  Enagas SA - CFO   [4]
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 (Interpreted) Thank you President. Good morning Fernando. Well, to estimate the growth the Company would have had without the GSP impact, the best way to do it starting from the guidance we provided in September, the growth would be 1.5%. I shall recall that in that guidance we were including a GSP contribution until September of EUR10 million. Since then on we have to take into account the contribution in Q4 by Quintero and TGP EUR6 million. That will have taken the Company to a -- profit after tax of EUR423.7 million and a contribution of 2.7%, starting -- that growth of 2.7%.

 We shall have to include a series of effects in Q3 over what we had in our guidance. Those effects jointly add up to EUR37 million. And they can be broken down into the following. First, pending recognitions, growth EUR18 million, net EUR13 million, the calculation of EUR6.5 million by Morelos as a consequence of a recognition of additional fees, and the contribution of Saggas, mainly due to pending recognition of EUR6 million. And we had in our forecast that GSP was going to contribute with minus EUR10 million, as this has not been a real contribution because we didn't have the financial closure.

 In order to get to that EUR37 million we included EUR10 million GSP that were not included in the previous forecast. The next step is to bear in mind all the impact of the ending of GSP. The termination of GSP, it's EUR41.5 million, added to those EUR223.7 million, reach EUR438.7 million, that's 11.2%.

 I'd like to make a comment here. Something is the impact of the ending of GSP EUR41.7 million and something different is the impact of GSP in the year 2016. The impact of the termination of EUR41.7 million is due to first the discount of three years, for the three years that we are going to need to recover the corresponding funds, which is the collateral of the -- and the bridge loan which is EUR233 million, which as you know have a gross impact in the financial results of EUR13.36 million. This impact in net terms we have to take out EUR3.2 million. This EUR3.2 million are registered in the tax line.

 And additionally speaking, put into equivalent it has two impacts. First, the consequence of the discount for three years of the invested equity, EUR275 million, and the reversal of the put into equivalents that we have for GSP in 2014, 2015 and 2016, 2014 was EUR1 million, 2015 was EUR5 million and 2016 as I said before we provided EUR10 million. If we add up all this impact, we have, due to the termination, EUR41.6 million. But you have to bear in mind the EUR10 million we have provided to September. So the global impact of GSP in the P&L account in Enagas 2016 is EUR31 million.

 And the second question related to the true-up -- the true-up for the TAP. The equity invested in TAP up to today by Enagas is EUR263 million. The equity that we will invest as the financial closure expected for the yearend is EUR476 million. And we estimate to have to true-up of EUR205 million. And that true-up has to do with the capital structure we have for TAP once the financial closure is, which is 70% 30%. The financial closure was foreseen for 2016, the end of 2016 we are going to wait -- we have decided to wait slightly longer to improve our terms and conditions for that financing.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [5]
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 (Interpreted) Well, thank you to the CFO. I think that you have provided very clear and detailed responses to the details of the true-up for TAP, and the impact of GSP. And with regards to the strategy, that was the third question by Mr. Lafuente. Yes, if you see in the presentation the breakdown of the cash flow, you may think that beyond the dividend and investment commitments we have, yes, available cash in the total of the period that will be more than EUR1.3 billion that we will see at each step, which is the objectives that we have that are more addressing.

 On the one side, we want to reduce our debt when necessary. And, of course, why not further investing. You must think that our teams are constantly starting the possible projects that might be suitable for our theoretical objectives. And depending on whatever we may see at each moment we will take the most -- the best decisions. So there is room for then investment. That room is not to be implemented immediately in this year but maybe during this period we, if you will allow me to say, we will be able to sail and change our [CAP] around our vessel when necessary, when needed and depending on the wind. Thank you very much.

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Operator   [6]
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 (Interpreted) The next question will be asked by Mr. Javier Suarez from Mediobanca.

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 Javier Suarez,  Mediobanca - Analyst   [7]
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 (Interpreted) Yes, good morning. And thank you so much for answering to my questions. The first question is a general question regarding the Company strategy after what happened with GSP in Peru. I wanted to know what the President thinks about this. Does this make the Company change its international expansion? Or does the Company think that they have to somehow redefine the risks when investing in these Latin American projects?

 So what does the Company draw as a lesson from this GSP situation? And how does the Company think that this could have an impact on its international expansion or the capital cost when capital is being invested in emerging countries?

 And with regards to TAP, could you tell us for 2020 what the contribution will be in the equity line that TAP should represent?

 And the last question has to do with 2017. The Company talks about the standalone growth of around 5%. You have given us the EBITDA number, and I wanted to know what would be the figures that you could expect for 2017 for M&A, the cost of debt, equity consolidation line and taxation just to try and understand how you go from EBITDA to standalone growth of 5%. Thank you so much.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [8]
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 (Interpreted) Mr. Javier Suarez, thank you so much. First of all, our strategy, our international strategy, with regards to the main aspects of it we believe does not have to vary. We have defined some world regions for us to act which are the ones where we are already set, Europe more largely, and Asia Pacific and America and that is where we are still focusing.

 What lessons have we drawn from this? Well, first of all a positive one. The criteria that we require from our projects are working, as they should the world over. With regards to GSP they -- and rightly so, as you very well know the problem was not the project itself or the engineering capacity but rather a very specific circumstance that affected the majority shareholder. For problems that this company had that were not problems in this project but rather in many other projects in many other countries.

 It's true that as a consequence we have reinforced our criteria, our internal criteria. That we are saying for partner selection and follow up of projects. And I even asked for an internal audit of the Company to be -- to take place. That has already taken place. And that has already been seen by the Board of Directors. And we saw that for this specific project all caution measures were taken.

 We signed the concession agreement in 2014. There wasn't at that time, and we haven't found any public or private element, information element, that might allow us to foresee the situation in which the Company found itself later on, this majority partner found himself in. And after the signing of the concession, big international banks gave loans to GSP as well as to the majority partner following compliance criteria that are very strict.

 So we have drawn a lesson from this. We have increased if possible our internal criteria for project selection and partner selection. And I think that this could give you some ease of mind.

 And secondly, we still reaffirm ourselves in the general criteria that we have set for the regions where we are working. And we have added two additional elements that I had already mentioned in some previous conference calls. On the one hand our intention whenever we can when there are some specific projects to concentrate and focus on the places where we are already present. And we have known partners and projects that are working very well, reality is that are very positive.

 And on the other hand, the possibility in the future of in those cases where we have consolidated a strong presence in certain subsidiaries to have these subsidiaries, and I'm thinking of GNL Quintero in Chile or TGP in Peru, as investment tools by themselves. Obviously, I'm saying this after we have been able to establish agreements with our partners in these projects.

 So the conclusion that we draw would be Javier that we don't think that we have to modify fundamentally our internationalization criteria. In general lines, we think that we have been successful in most cases except for one. And in this case, I also have to say, although with caution, that we think that the measures that we put in place when we signed the concession and after it have allowed for the non-financing of the project to recover according to legal dispositions in the country, which is Peru. And thanks to the reports of our advisors, we think that we will be able to recover the capital that was invested. So we think that in that line we are working as we should.

 As for the impact that this might have with regards to risk valuation, I think that the best opinion that I can give you is the one that our rating agency have given, Standard & Poor's. And you -- I'm sure you'll see that we thank them for how fast they have worked. As a listed company, speed is something that we thank. And we did some relevant facts even before the elements took place for the concession to take place. And you know that Standard & Poor's has issued a very clear opinion saying that this does not have an impact on our rating.

 So, well yes, I will tell you obviously that when one has a problem such as this one the whole team learns from it. And, as I said, we have put in place internal reinforcements, measures when analyzing projects and selecting partners. But at the same time, I have to say that the circumstances that took place here were exceptional ones. We can consider that they were exceptional. This was something that had never happened. I would dare say that this did not -- has not happened before in the world. I'm talking about magnitude and the sort of secrecy that actually happened. None of the economic agents that usually work in this world had information of what later on came to happen.

 And I would like to end by saying that from the moment we detected these problems I can assure you that we did everything that was in our hands to manage from a strategic and legal point of view to defend our shareholder's interests, which is what I believe we are doing. Thank you very much Mr. Javier.

 Yes, sorry Javier, I think I forgot your -- the two questions that I had asked the CFO to answer.

 I wanted to close the microphone so quickly that I forgot to give the floor to Mr. Borja Garcia-Alarcon who will provide you with some specific information with regards to TAP's contribution in 2017's information. Borja please.

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 Borja Garcia-Alarcon,  Enagas SA - CFO   [9]
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 (Interpreted) Thank you Mr. President, Javier, good morning. TAP's contribute to our P&L for 2020 with EUR36 million, and as for dividend there will be no contribution by TAP's [at the yearend], it will be later on. With regards to guidance for 2017, we have an EBITDA of EUR842 million.

 The amortization will be around EUR165 million, the financial results will be in line with our guidance of EUR100 million. The equivalent will be of around EUR80 million, the taxes will be EUR120 million and that is how we go to [EUR437.5 million], that represents 5% growth of our standalone. So, thank you very much.

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Operator   [10]
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 (Interpreted) The next question will be asked by Ms. Virginia Sanz from Madrid Deutsche Bank.

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 Virginia Sanz,  Deutsche Bank - Analyst   [11]
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 (Interpreted) Good morning, I had a couple of questions. The first one has to do with the objective with CFO for 15% of our debt. My question is, does that already take into account those EUR1 billion that you could receive for GSP for the true-up recovery of deficit and so on, or has it only been done with the operational CFO for those EUR1,800 million, I believe that you mentioned.

 I also wanted to know in this plan that you are presenting for 2020, the growth of net profit is accelerated when compared to the previous plans. I want to understand if it is due to the fact that you consider that there will be a lesser growth of OpEx, or if -- or there is a difference from the financial side, or more greater contribution by your subsidiaries, or because you think that there will be a 12% growth of net profit.

 I also wanted to know what's the policy that you follow to check and verify currency, since 25% of your debt is in dollar. Lastly, if you consider that GSP might follow -- might continue some other way, because I understand that the Peruvian government does have much interest in this project. So, I wanted to know if there is that possibility? Thank you very much.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [12]
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 (Interpreted) Thank you Virginia, I will give the floor to answer the first two questions and then I will answer the last two ones.

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 Borja Garcia-Alarcon,  Enagas SA - CFO   [13]
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 (Interpreted) Good morning Virginia. Funds from operational guidelines, first part, is estimated, bearing in mind the standalone scenario, without including those additional aspects we were talking about.

 With regards to the second question, the growth of [2015-2020] originally was 2%, you have to add there three effects to reach 3%. We have to bear in mind there first hand the contribution of the new acquisitions that were not included, and two, Quintero, Saggas and the additional participation of TGP, EUR22 million additionally.

 The improvement in the financial result EUR28 million additional euros, and you have to take out here EUR36 million from the GSP contribution. So that's the bridge between 2% and 3%. In order to go from 3% to 4%, as we said in the presentation, we have to bear in mind the funds for investment of the GSP reinvestment funds, as these funds are to be received.

 With regards to the hedge policy for currency, well we don't have a clear policy, so all the investment is done in dollars, the debt is in dollars, and the revenues are in dollars. There are no revenues in local currencies. So what's not included in this sense, it is included in euros, revenues in euros, which is Europe. And that in Europe, with the exception to Sweden in which our investment and our revenues are in Swedish krona.

 So the general norm we have is not to blend finances in different currencies, investment in other currencies, and preventing local currencies in the case of America, so dollars for revenues in that.

 For GSP, this is a very good piece of news for us. The GSP project has to continue because it is an objective, a political infrastructure objective, for the actual -- for the current Peruvian government and for the country, as the different Peruvian parliamentary groups have expressed.

 Because it is understood as one of the star projects to economically restructure the country. So this is positive and we have committed -- I myself have personally committed towards the Peruvian President that we are going to facilitate the continuity of this project, which in turn as you know, it is fundamental for us.

 Because the recovery of the equity and the warrants we have is based on a mechanism that was perfectly provided in the concession and for a possible situation of this nature the continuity of the project was foreseen. We have a different consortium which is the one that recently allows for the partners to -- to the bonafide partners that have participated and that have been affected by the situation that I was referring to, that you are aware, it allows us to recover all this.

 We will see if afterwards we are going to be present or not in the new consortium. But right now this is not the priority. The priority is to facilitate to the maximum, the administration of the country of Peru, all the technical measures and all the administrative measures, allowing to have these new concessions, tender, and [to us] in parallel the recovery.

 Once having said that, well, we see in the future what happens but we must not forget that we are already present in Peru as the gas -- the operating company of Amazonas and TGP. We've got a solid activity there and there is a possibility of growth there independent to this issue. Thank you, Virginia, for your questions.

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Operator   [14]
------------------------------
 (Interpreted) The next question will be done by Jose Ruiz from Macquarie, you have the floor.

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 Jose Ruiz,  Macquarie - Analyst   [15]
------------------------------
 (Interpreted) Good morning. I just wanted to ask with regard to the answer provided to some topics. Could there be a possible change if you decide to be in the tender -- go to the concession, or do you have to wait for those three years to recover the assets and then go into a possible concession, if you of course were interested in getting into that. I wanted to understand the legal aspects here, thank you?

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 Antonio Llarden,  Enagas SA - Executive Chairman   [16]
------------------------------
 (Interpreted) Ms. Jose Ruiz, thank you very much. We, I think in the document, have provided quite detailed information, let's say the legal and procedural information. I did recall that there is some notes from analysts that have been issued in the last weeks providing these details but I'll try and summarize here.

 Mainly, the rights the concession provides us, for example, is that the administration of the country commits for a maximum delay of 12 months, an advisable period of 12 months to do some auction procedures. So tenders that have to reach a minimum in the worst-case scenario 72.5% (sic - "72.25%") of the net accounting value and under normal conditions 100%. From then on there are some payments allowing to recover that capital.

 It is true, we have estimated a period of three years, which is by far much more than this (inaudible) conditions because we wanted to be very transparent here and very cautious and conservative.

 The normal thing if everything runs smoothly is that, yes, we shall be able to recover this much before the period we have set of three years. But we deemed better to be cautious and not to provide every six months a guidance on if there is a delay in the process or not. Thank you for that question.

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 Jose Ruiz,  Macquarie - Analyst   [17]
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 (Interpreted) Yes, maybe I wasn't clear. I just wanted to know if in that -- if you were to decide to continue with the concessions, will you buy your own assets or how would that work. Because if I take it from the stance of a new concession and you were to be interested into continuing at GSP, building that gas (inaudible), would you be interested to enter into a new concession?

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 Antonio Llarden,  Enagas SA - Executive Chairman   [18]
------------------------------
 (Interpreted) Yes, right now we don't want to mix things because we even think that from a procedural stand we don't want to have an influence whatsoever in an administrative process which is under -- it's being done by the Peruvian administration, as we were committed to facilitate. Whether we will be or not to the new consortium. For the time being it is not one of our concerns.

 Right now, what we are occupied with is to help the Peruvian administration and interest of the country where we are present in other brownfields. And, of course, for our sake, for this process to be as smooth, quick as possible. If afterwards in a different space, in a different time, it will be useful for us to be or not, that is something that we will see then.

 But for the time being our commitment -- and our CEO has been in Peru with the minister and we are at maximum degree of collaboration to precisely make from the stance of the country to the project not to be stopped. We are taking all the necessary measures, technically wise and administratively wise, facilitating this process. In the future, we will see what are the options if they're interesting or not for us.

 But for the time being we are in a phase of facilitating the government of the Peruvian country, for them to continue with this project, so it is not paralyzed. On our side, we want to defend our employees and our shareholders and what we want is to recover the capital that we put in the project, that is our main concern. Thank you, Jose.

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Operator   [19]
------------------------------
 (Interpreted) Ladies and gentlemen, there are no more questions in the Spanish channel. We will go to the English channel, thank you. The first question comes from, Harry Wyburd from Merrill Lynch, please go ahead.

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 Harry Wyburd,  BofA Merrill Lynch - Analyst   [20]
------------------------------
 Hi, good morning everybody, three questions from me please. So firstly, you obviously had a very good demand backdrop in January, February, as you pointed out in the presentation.

 Also gas generation is becoming increasingly competitive versus coal in Europe, so I wondered domestically, are there going to be any potential new CapEx opportunities now that there's potentially a better justification for strengthening the grid in Spain?

 Then the second question is on your debt. Just on the floating portion of the debt, which is around 20%, could you tell us what it's indexed to, because obviously it's probably Euribor but I just want to check. Obviously, Euribor has not gone up along with bond yields, so I'm interested to know what the indexing is there.

 Then finally, inflation has started to come back a bit in the Eurozone. Obviously (technical difficulty) regulation does not have any inflation linked allowances. So I just wondered what your -- whether you see inflation as a threat, whether you've seen any increases in costs over the last few months because of that, and whether you think that's something that could be a threat to your guidance over the next few years if inflation stays high? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [21]
------------------------------
 (Interpreted) Let me just try and answer your questions quickly, thank you Harry. There has been an increase in demand in these months of January and February thanks to the cold season and some technical circumstances that we have known how to handle.

 So direct CapEx with regards to the network in Spain, we don't really believe that it will be necessary. Because we have already shown that we were quite flexible to move big volumes of gas from one part to the other of the country, or within Spain or towards other countries.

 But it is true that there are a couple of projects, one of which has already been considered for the 2017-2020 period, and another one hasn't, which our international interconnections that are thought of in order to provide a greater supply of safety and a greater price competition in what we try to define as the internal gas market.

 What we have foreseen is the preliminary phase of the MidCat, which I have just -- called the STEP, the STEP, South Transit East Pyrenees, that would provide us with a higher volume connection with France. We have also foreseen for the European planning, although out of caution we have not included it in our 2017-2020 period, is a third interconnection in the Iberian Peninsula between Spain and Portugal, between (inaudible) and Zamora, but we haven't included this.

 Then there is -- it's true linking it to your second question, this higher demand of gas has created for a greater volume of gas transportation. You know that a small part of our revenue comes from what we call RCS, which is linked to gas volume.

 On the other hand, with regards to strategy, as you can see in our presentation, we have also made reference to the fact that we think that the natural gas market in the world, especially liquid natural gas, is going to evolve to a greater movement.

 A movement that will be similar to that of oil, masses of LNG that will be moving from one place to another and that will require storage facilities and places for us to be able to ship them and unship them, which are the re-gas plants. So we do think that our infrastructure, which does not require further investment, could in the medium-term be greatly used. That would thus provide us with greater income.

 With regards to debt, that which is not fixed, the floating part is 20%, and our CFO confirms that it is referenced in euros to Euribor.

 Finally, we have made forecast for the future with an increase of OpEx below the inflation line due to an efficiency policy, which is not new. We have maintained [responsive] for some time now. We have income that could be increased depending on volume. This is something that is quite helpful in that sense.

 The financial expenses is controlled and we can say that our forecast in that sense allows us to consider that we could face inflation. Let's not forget that international activity is linked to American inflation indexes. So we think that with the different formulas, the different ways in which we have considered it, we can face with not many problems this inflation problem.

 So as a summary, I would say that when the market believes that inflation might go up in general, as well as financial costs, we humbly believe that both risks are quite under control. We are shielded against those risks in our income and (technical difficulty).

------------------------------
Operator   [22]
------------------------------
 (Interpreted) The next question comes from Olivier Van Doosselaere from Exane, please go ahead.

------------------------------
 Olivier Van Doosselaere,  Exane BNP - Analyst   [23]
------------------------------
 Yes, good morning everyone and thank you very much for taking my questions, I only have two remaining. The first one is quite specific, if you could just confirm if the EUR140 million dividends you expect from associates in 2020 includes anything from TAP?

 The second one, more general. I know you've said a lot already about the consequences of GSP. My question would be to what extent you have a feel if this episode would have in any way affected the relations that you have with the local authorities over there, and as a result of -- so your possibilities to win new projects in the area going forward? Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - Executive Chairman   [24]
------------------------------
 Thank you so much Olivier for your questions. With regard to the first one, I believe that we already answered that question. In our 2020 forecast we have not included a TAP dividend, so no, it is not included.

 For GSP, fortunately this is not having an impact on our relationship with the Peruvian Government, quite on the contrary. First of all, because I think that I can humbly say the Peruvian Government, which has been exquisite in its management of the problem, both with us and the country in general.

 They appreciated from the very beginning our goodwill and our willingness to help them and collaborate at all times in the resolution of the problems we had before us. I can tell you that our relationship with the government is actually very, very positive. We still have an ongoing, constant relationship with them.

 As I told you previously, we were already present in Peru before that. We were one of the main shareholders in the big acts that allows to conduct gas from the Amazonian forest to the coast and the Peruvian Government knows this position that we hold.

 Lastly, the fact that we are a company licensed by the EU, that is bound by our European laws, that cannot buy or sell gas anywhere. We can only be mid-stream operators and this obviously allows us to be for the Peruvian Government, as well as for other countries, a very reliable partner due to our professional experience, our track record.

 Because we have no problem whatsoever, no limitation from an entrepreneurial point of view, that could be against the interests of the country. So I think that this is a positive lever that we hold and I can assure you that we are making constant efforts to maintain our relationship with the Peruvian Government.

 I said previously, that Mr. Marcelino Oreja Arburua, our CEO, came back from Peru on Saturday after holding a few professional meetings with the administration. I can fortunately say, that due to our track record, maybe we are maintaining in this specific case of the Peruvian Government an excellent communication, with a common objective, a common objective of the both of us.

 So we are simply trying to facilitate for this project not to be paralyzed because sometimes unfortunately this happens with projects such as this one when there is some sort of interruption due to force majeure. The project that cannot be developed if the country needed it, then (technical difficulty).

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Operator   [25]
------------------------------
 (Interpreted) The next question comes from Oliver Salvesen from Jefferies, please go ahead.

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 Oliver Salvesen,  Jefferies - Analyst   [26]
------------------------------
 Hi, thank you very much for taking my questions and two questions please. Firstly, do you have any information on the timeline for the auctions for GSP, so that we can follow that this year?

 Secondly, on your FFO to net debt target of above 15%, how critical is staying above this level for maintaining the current credit rating? Should there be any investments which are significant say internationally this year, could you breach that 15% and still be okay with the rating agencies? Thank you very much.

------------------------------
 Antonio Llarden,  Enagas SA - Executive Chairman   [27]
------------------------------
 (Interpreted) Thank you very much, Oliver. The timeline for the auctions, as I said before for the tender, with the [written] norm of the administration is that in a period of 12 months they have to start and finish this auction or this tender period.

 For the time being, the calendar is being followed and we will inform you if there is anything to be informed. But as I said before, for cautious matters, to be cautious, we have a total recovery period set which is greater. But all the information makes us think that the Peruvian administration, which is very efficient in these terms, is working with the normal terms, so business as usual.

 As for the rating, we think that in this period as we understand, we may commit with the objective that depends on us, which is the ratio as such between funds from operations and net debt. There we can estimate that we may keep that ratio but less -- 15% for this period.

 Something different is for the rating that different agencies may provide, as you know, are to be affected by many, many other factors that are not of course in our hands to control. For example, the relationship we have got in each country with our sovereign debt, with a rating of that country concerned. So we never dare to make a forecast for rating because that's not in our hands.

 But what we can do is to have forecasts of that ratio which is one of the major parts and from what we understand of the formula rating agencies use. So it's clear that there are other factors that are not under control, for example, the evolution of the economy in Europe or in a specific country, or the interest rates that may make these rating agencies to change their formulae.

 So what I can tell you, nevertheless, is that with our rating agencies we've got full transparency. We always anticipate when possible all the information we have. I mean this is no confidentiality breach if I tell you that these facts are presented to the markets in due form are known by the agencies. They've got information at a time when we can provide it and, therefore, they are updated constantly.

 So the conclusion, we can commit to maintain a ratio which is -- because this is in our hands, not increasing the debt or not increasing investments et cetera or reducing costs. Something different is the rating of such that is given by the rating agencies.

 That is affected by other factors that we cannot control, that go beyond the walls of our city, that is, those are external to us and that depends on our country, our continent, devolution of the world economy et cetera, et cetera. Thank you, Oliver.

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Operator   [28]
------------------------------
 (Interpreted) The next question comes from Nelson Bernardino from Haitong, please go ahead.

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 Nelson Bernardino,  Haitong Securities - Analyst   [29]
------------------------------
 Hi, good morning everyone and thanks for picking my questions. Just two small questions from my side. So the first still rating relating to GSP, you said you will recover at least 72% of the NAV accounting value of the concession. I was just wondering if there is any risk that the Peruvian Government will calculate a different net asset value.

 The second question is relating to the quarterly results. You had a very good performance on the regulated revenues line. As far as I can understand, you mentioned this briefly, it seems to be due to some pending recognitions. Can you confirm that and that regulated revenues should be on a more normalized level of around EUR280 million or EUR285 million per quarter? Thank you.

------------------------------
 Antonio Llarden,  Enagas SA - Executive Chairman   [30]
------------------------------
 (Interpreted) Thank you very much Nelson for your questions. With regard to the GSP concession, I have to say that the accounting net value, the net book value of the concession, is fully in line with international standards for net values of assets. So, in principle, there is no possible confusion there.

 Secondly, the recovery norm also foresees explicitly to have an audit following the international practice that may determine exactly that net value. I have to add, that in our Company to have greater safety, we have asked one of the major world auditors to have a specific paper done on this issue, which has confirmed that what the norm of the concession says is fully aligned to the international norms, and the net values are in the rank that allows us to reasonably think that we may have this recovery.

 With Q4 2016, yes, as the details provided by the CFO say, we have already acknowledged a certain amount, EUR18 million, and you know that we've got always some pending revenues in the system that for different reasons have delayed. We also have for 2017 pending recognitions, which for cautious measures we always included them in the last quarter, in order not to think that we will recover them before.

 I have to say, nevertheless, that to your question we have to say, yes, we see that the gas Spanish system functioning and its [spending] cost system is working well. It is true that the evolution of demand has been very positive and that has affected recoveries and of course the interest.

 So from this stance, we are very at ease. I said that I think that we've made explicit reference myself, to the fact that all through this period we expect from the cash stance to recover the deficit part of the gas system, which is money that the system directly owes to Enagas.

 I think it's a -- by heart I think it's EUR400 million which we estimate that during this period we will be recovering them. This of course is not affecting the P&L account but it affects the cash availability. Thank you for your question Nelson.

------------------------------
Operator   [31]
------------------------------
 (Interpreted) The next question comes from Antonella Bianchessi from Citi, please go ahead.

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 Antonella Bianchessi,  Citigroup - Analyst   [32]
------------------------------
 Yes, hello, good morning, I'll be quick. So basically, can you kindly repeat how the true-up works?

 The second question is, in your new business plan you're assuming EUR28 billion lower financial charges compared to the previous one, can you split the cost of that that you're assuming in 2020?

 The other question is on CapEx, EUR650 million in 2017, can you give us some details of what is that?

 Finally, on your net debt, you have repeated more than once that you are very comfortable with your financial situation. But the reality of that, the assets in Spain, are rapidly declining and you will get, according to this business plan, to 2020 just in front of a regulatory review, with a ratio which might be pretty tight if nothing else happens on the special things that -- GSP reimbursement and so on. So do you think that this is a kind of healthy financial position in front of a regulatory review for 2020? Thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [33]
------------------------------
 (Interpreted) Thank you so much Antonella. With regard to the true-up and the decrease of financial costs I will give the floor to our CFO.

------------------------------
 Borja Garcia-Alarcon,  Enagas SA - CFO   [34]
------------------------------
 (Interpreted) Antonella, good morning. TAP is being financed 100% with equities right now. When the financial closing takes place we will have debt entering in and the capitalization of the company will be 70% debt and 30% equity, so we will have to rebalance the equity positon and all the shareholders will receive part of the equity invested up until then.

 As for the second question regarding the evolution of a financial cost, we had foreseen last year for 2020 a financial cost of 23% (sic - "3%") and it has -- of 3% sorry, and it has gone down to 2.5% with the evolutions this year. So that is the part that I explained, EUR28 million improvement.

 As for the CapEx, Antonella, for 2017, it's true that EUR650 million could be split into EUR175 million for projects in Spain and the rest would be international investments, that is mainly a part of the third tank of Quintero's EUR500 million, and the rest is TAP.

 I also wanted to highlight that since the beginning of the year, the consequence of GSP, we have had to have a guarantee for EUR200 million. This is also considered, from that point of view, as an investment.

 With regards to our financial comfort and our debt level, I already mentioned it previously. We do feel reasonably comfortable in a world that is obviously an uncertain one, but with a financial cost -- a total financial cost that is quite positive if you compare it with other companies from the sector, other similar companies with an important part that is a fixed one. So we really have under control its future evolution.

 And with income, that it's true in the regulated markets here in Spain. From the first moment that the regulation took place we know that there is a bit of a decrease on the yearly basis, 1% to 1.5% per year, but that is really compensated with the income that we are maintaining.

 As you know, they are not consolidated in our income sheets due to accounting reasons, but this is income that allows us to compensate this decrease in the regulated income and allows us to keep it positive. If we also consider the expiry dates, we know we are -- that we can be comfortable with the maturities.

 There are no maturities, there are no costs, et cetera, that would make us think or would lead us to think that there is a part of uncertainty in this period. We have actually been following a very cautious policy, we are very conservative.

 I think that in 2016, as we had already done previously -- and I'll end with this -- we have really benefited from the windows of opportunity for us to be issuing bonds in conditions that at least in Spain have been in both cases the best conditions. They were the best preparations that had taken place until that date and if we consolidate them with the general financial costs of the Company, it will allow us to feel quite at ease.

 I'm not going to say that we are certain of the situation because there are always uncertainties but we do think that the financial cornerstone is still one of the most solid pieces of Enagas' structure. Thank you very much.

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Operator   [35]
------------------------------
 (Interpreted) Ladies and gentlemen, there are no further questions in the conference call. I now give back the word to the Company for final remarks, thank you.

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 Antonio Llarden,  Enagas SA - Executive Chairman   [36]
------------------------------
 (Interpreted) If there are no more questions we shall finish this conference call. Thank you everybody, thank you. If you have further questions do not hesitate to contact our department of investor relations. Thank you.

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Editor   [37]
------------------------------
 Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.




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