Half Year 2017 Gas Natural SDG SA Earnings Call

GAS.MC - Gas Natural SDG SA
Half Year 2017 Gas Natural SDG SA Earnings Call
Jul 26, 2017 / 10:00AM GMT 

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Corporate Participants
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   *  Abel Arbat
   *  Carlos Javier Álvarez Fernández
      Gas Natural SDG, S.A. - CFO
   *  Rafael Villaseca Marco
      Gas Natural SDG, S.A. - CEO, MD and Executive Director 

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Presentation
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 Abel Arbat,    [1]
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 (foreign language) Hello. Good morning, everyone, and a very -- welcome to the conference of the results of the first half of 2017 Gas Natural Fenosa.

 Our CEO will be delivering the presentation, Mr. Rafael Villaseca; and we have the [Ec-Fin] General Manager, Carlos Álvarez; and the General Manager for Strategy and Corporate Development, Antonio Basolas.

 Once we finish the presentation, we will open the Q&A session. And as always, we -- you can visit our website to ask your questions. You can send them during the presentation. And after the presentation, we won't be receiving any more questions.

 So without any further ado, Mr. Rafael Villaseca. You have the floor.

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 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [2]
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 Good morning, everyone. And in the first place, thank you very much for attending this presentation of results. You now see on screen the agenda of the topics we will be developing. And in the first slide, I will be giving you the highlights of this first half of the year.

 I want to mention and stress that the trend of the second quarter of the half is similar to the first. And as a result, finally we see a drop in EBITDA, 6.6% less than the previous year in homogeneous terms. We [attend] to the deconsolidation of Electricaribe.

 The net profit has been at EUR 515 million (sic) EUR 550 million, 15% less than the same period in last year. Essentially, our platform, the EBITDA factor, given the greater minority interest that are consolidated after EBITDA in the P&L account, and that affect growth activities.

 Investment has reached a levels of EUR 740 million, almost 22% above last year.

 Cash generation has been almost EUR 16 billion, almost 3% above the previous year, based essentially on a very solid behavior of the network businesses, both in Spain and essentially in international; and a very good performance in the international generation business in our group through GPG, which, as you know, is essentially on contract.

 I also want to stress that we continue seeing stabilization of the results of the gas commercialization or trading division, I will later on speak about. And without that, the problem continues to be the first one that we detected in the first quarter.

 The business of the electricity generation in Spain, including -- not only generation, but also trading in electricity in Spain, which presents results much below the previous year. And I will also talk in more detail about this.

 I will also like to indicate that we've continued with the effort to optimize debt, which has seen very good results already.

 And finally, generally speaking, the investment plans continues along the plan and is on track. And the board approved yesterday the payout of the complementary dividend for 2016. And also, the interim dividend was approved for 2017, which I will talk about in greater detail later on.

 The most relevant facts and highlights this half of year are these 4, which we could already anticipate in the previous presentation of results. Remarkable growth in regulated activities in our networks, very notable. Also, strong growth and very good performance in international contracted generation, GPG. In the third place, the growing renewable energy exposure in the [mix] in Spain, given that, as you know, we won an important part of the first auction. And according to (inaudible) delivered news, we could have got 250 megawatts of photovoltaic. And this has not yet been confirmed, but these are news of today.

 And fourth place, the successful renegotiation of the contract for the sale of liquefied natural gas to Puerto Rico, which allows us to double the amount of gas that we sell in LNG and also with a very important indexation to Henry Hub.

 If we now go in detail. And according to the chart that you have, you can see the strong networks recorded everywhere. But specifically, in Latin America, the EBITDA, discounting Electricaribe -- or deducting Electricaribe reached EUR 1.442 billion in several activities. And this means a growth of 4.7%, almost 5%.

 In gas networks, growth has been around 6%; and in electricity networks, 3%.

 By geographical areas, the Latin America network EBITDA grew by almost 9%; and in Europe by almost 2%.

 With greater detail, it's important to stress out that the EBITDA in Latin America in gas networks was mainly based in Chile, Mexico and Brazil, with a very strong growth. And Spain, 3%, without taking into account the restructuring costs mainly in electricity networks incurred in this quarter.

 In electricity networks, we also want to stress that Latin America grows by 7%, deducting Electricaribe, versus the 3% in Spain. So a remarkable growth in regulated activities.

 And here, you see our focus of what has happened locally in the both more promising countries in this aspect currently, which are Chile and Mexico. In both countries, there has been -- both countries have enormous potential for growth. There's been strong and remarkable growth.

 In Chile, the growth has been by 10%, 4.5% for electricity networks and over 10% in gas networks. And bear in mind, that, practically, it's not in full performance, the regasification plan, because it was approved on the 30th of March last year by the Chilean parliament. So we are launching a plan that will become fully into force next year.

 Apart from this growth, we need to highlight their noticeable efforts to optimize costs and corporate structure that will allow to have important synergies and future tax advantages for structures and optimization.

 In Mexico, the EBITDA for gas distribution grows by over 16% because of increase in sales, and also tolls and their indexation. Also, the base of customers increased notably. And in this country, we're also favored by the exchange rate.

 If we now look at international contracted generation, a business which you know we developed through global power generation, we want to stress that, as forecasted, we've seen a sustained growth and starting an extension that we believe is almost to ensure the EBITDA in the period grows by 19.4%, almost at EUR 148 million.

 In Mexico, the EBITDA has grown by almost 28%, given the greater availability of our plants, basically combined cycles and the use and marketing of the surplus energy through the synergies with the rest of the group, and given greater volumes and improvements in margins.

 We also want to indicate that we continue to have a very good development in our solar panel project in Brazil, which will come into force now in the second half, specifically next month, and which will mean to start with 2 -- 95 equivalent price -- equivalent price of EUR 95 megawatt hours, and we expect to receive this EBITDA in the next half. In fact, in the next quarter.

 So within this area, the wind projects advance in Australia and the wind and solar projects in Chile which were allocated to us and are perfectly on track, we expect to include them next year into our normal chain of value acquisition.

 As far as this topic is concerned, I like to talk about our generation mix and renewable energies. As you know, the recent capacity auction in the 17th of May, we received 667 megawatts, that will allow us to exploit 22 projects in several sites and locations. And I would like to insist on the excellent location and analysis of these sites. They've been developed by our companies, and throughout several years, making the most of our knowledge of those areas. And I can ensure you that they exceed the average on wind hours per year of the wind farm [extol] in the whole of Spain. So the investment is below EUR 700 million, 678 megawatt in capacity, and they will come into force in 2018 and 2019.

 This is also complemented by the 65 megawatts already won some time ago of the Canary coupon, which is an addition to the almost EUR 100 million. So we increased notably our installed power and renewables in Spain, and we have almost reached the target that we had set of 1.8 GW, which would be increased if confirmed that the auction in the photovoltaic power tender, although this was not compulsory, is celebrated today with a very high likelihood, with [1,250 megawatts], which will also be included in our plan. And we have perfectly met our interest in reaching higher levels of renewables in Spain for the year 2020.

 I want to insist on the appealing profitability of all these projects, very much above our capital cost. And I'd like to insist that both wind and photovoltaic projects are very studied projects, with wind and solar resources that are very high, above national averages, and have also connection facilities which allows us to be very optimistic as regards they capturing very interesting returns for our company.

 I would also like to indicate to you that, recently, we have renegotiated very successfully the extension of the current liquefied natural gas sales contract to Puerto Rico. This is double from 1 to 2 bcms. The contract of the public state company associated to Puerto Rico, which also supplies gas for the electrifying of the company.

 This is a favorable contract, indexed to 50% Henry Hub and 50% to oil for 3 years, and it will start in the next month of October. The contract has a perfect strategic adaptation and also a logistical one because it adapts and fits into energy, environmental and financial needs of the islands.

 So we are on track to ensure between 70% and 80% of our sales volumes committed for the year 2018 as our normal policy indicates at the end of this year. And the partial indication to Henry Hub will allow us to cover our exposure to this index after the entry of the new volumes coming from Cheniere.

 It is important to stress the importance of the contract for the island because it is an essential supply for the normal activity of lighting and electricity needs of this Caribbean-associated state.

 And now going into the evolution of our company. As regards to the strategic plan for 2016-2020, we continue on the 4 repeated panels. And we want to have cash generation that supports future dividend, also a strict financial discipline. There is successful efficiency plan and also a very ambitious, and an active portfolio management.

 And talking about all of these, I would like to start saying that the board yesterday approved the interim dividend for 2017, with the cash payment of EUR 0.33 per share on the 27th of September. This is aligned with the dividend policy that we established for 2016-2018, which contemplates a payout of 70%, with the minimum of EUR 1 per share as the payout of the interim dividend in the month of September as we've already stated.

 With this, we expect to have a total payment of EUR 1 billion against the results of 2017, which represents a dividend yield of approximately 5%, assuming share prices -- current share prices of around EUR 20 per share.

 As regards the strict financial discipline, I would like to indicate that we continue along the track. In April this year, we finalized successfully our liability management operation, issuing bonds to 7 years via EUR 1 billion, with a coupon of 1.125% and with a buyback of bonds by EUR 1 billion.

 Also, new institutional loans have been signed for BEI (sic) [EIB] and ICO for an amount of EUR 650 million to 20 and 11 years, respectively, and some other new loans and use of credit instruments for a total of EUR 3.5 billion additionally.

 And this week, precisely, we have signed the first sustainable loan for an amount of EUR 330 million for 4 years. In Latin America, we continue with the optimization of the debt in the region with the refinancing of circa EUR 650 million in Mexico and Panama.

 Finally, we continue to have a proactive management of our exposure to interest rates. And currently, we have 80% of the debt at fixed rates, having covered these rates, so that we ensure 70% of the debt has no exposure to increases in interest rates up until the end of 2020. And we continue exploring different possibilities in liability management.

 So this way, and according to what I said, the financial result in the year on course has improved by EUR 32 million, so that we have reduced our debt cost from 3.9% in the previous year to 3.7% that we currently have. And we trust we can bring it down to 3.6% this year. So we continue with the progressive and constant improvement of our financial results.

 It is important to highlight our efficiency plan. As you know, we had a plan 2016-2018 contemplated in the strategic plan, and we'd like to say that we anticipated this -- the plan was working frankly well. So in June 2017, we had already identified all the initiatives to meet the EUR 150 million forecasted for the current year.

 And also, we estimated and we actually have managed in the first half of this year, out of the EUR 150 million, we've already achieved EUR 130 million, so we still have EUR 20 million pending for the second half of the year.

 So we have benefited the EBITDA by EUR 32 million this first half, with EUR 21 million for capturing costs. So the efficiency plan is for the ongoing and the goals for 2017 have been met. This has taken us and knowing that we're seeing this having identified the individual actions that lead to the achievement of these savings, it has encouraged us to launch a new and more ambitious plan for 2018, 2019 and 2020, which I will now be talking about.

 Remember that we have already developed 3 plans, we're now going to talk about the fourth, which we have successfully implemented. And according to the estimated calendar, for that reason, we trust that the one that we're now going to launch will also be very successful, although it has higher requirements and is supported in new technologies and new approaches to the cash-cutting plans.

 We expand the horizon to 2020 in order to have a greater term to execute the fantastic plan. And we increased on what was estimated for 2018 by EUR 205 million, the target of our cost reduction goals.

 So for 2018, 2019 and 2020, we expect to have a current annual savings of EUR 275 million at the end of the year; EUR 45 million more in 2018; EUR 85 million more in 2019; and EUR 75 million more in 2020. So these will be added to the already forecasted in the old and former efficiency plan.

 We will continuously work to improve practices. This is already something that we do in our group, continuously improving efficiency. And as you can see on the graph, we focus the savings on these efficiencies, essentially in group distribution activities. So in gas and electricity networks, the capturing costs will reach EUR 170 million, which will essentially take place next year. And investments to achieve all these savings, essentially in systems and IT systems, will be around EUR 60 million in order to improve processes in different parts of our company, processes and cost.

 On the following slide and chart, you have a detail of the great lines by which we want to obtain the savings of EUR 275 million. And there are 5 action blocks. One is digitalization and technology, which will allow us to transform and simplify our processes with automation, both for management and maintenance of assets, new policies, investment models that adapt to more customers and geographies. Also, a review and optimization of internal and external relationship with our suppliers, restructuring and optimization of all resources, leveraging their digitalization and to continue optimizing the processes, mainly logistics processes.

 This is an ambitious plan. But allow me to say that it has been specific, up to EUR 275 million, along specific lines of action that we hope we can start implementing and putting into service right away, so that some specific targets forecasted for 2018 start to be a reality in the second half of 2017.

 As regards the second topic, the portfolio management, you already know that it's constant for us to assess and evaluate our portfolio, trying to optimize its value. So last year, you will remember that we did the divestments by EUR 750 million and acquisitions by a value of EUR 350 million. We continue to do this.

 So which are our basis? Our approach is characterized by mainly 2 essential reasons: assess those regions and businesses that do not comply with or don't have a critical mass to comply with the minimum profitability requirements and/or growth requirements; and in the second place, we want to highlight those regions or businesses that have low integration or synergies with the rest of our activities, or where we don't have a clear competitive edge. These are the 2 issues with which we try to analyze this management.

 In this sense, allow me to say that, currently, we are assessing strategic options for a series of assets which -- their book value would be around EUR 1 billion, including those in Italy; and assets, real estate assets, as you know, which will also be in this situation.

 We also assess all strategic opportunities that we can consider and that can crystallize value for our shareholders. And we believe that this has been a very successful approach. If you measure it by the ROACE, you will see that the average capital employed has been a profitability average, profitability of 9% last year on employed assets, which compares very favorably to the totality of our European counterparts and peers.

 Now going into the consolidated results of the first half. I will talk about the operational results, EBITDA in this semester. We've had a good behavior of the first of the network and international generation businesses, maintenance of the same track record of the gas business and bad performance of electricity business. I'll try to go into detail in this.

 It is clear that the climate and weather conditions, abnormal in Spain, and the problem of fuels, seriously affected the electricity business. But it is also obvious that, as you can see on the graph that you have in front of you, this has had a weight of EUR 186 million less in the EBITDA of our company, which have unfortunately compensated and offset the wins in networks and international earnings.

 It is also true that, in the first half, we haven't had some extraordinary earnings that we had in the first half of the previous year.

 And in the first half of this year, we have incurred in some capturing costs that we didn't have last year. And as extraordinary costs, as you know, the natural catastrophe of the fires that took place in the austral summer which entailed significant costs.

 As a summary, we could say that all the activities have had a reasonable and favorable performance, except for the electricity activity in Spain. Although we do trust we'll see changes in the second half of the year.

 If we now talk about net income. You can see that the reasons for activity and operation, I was talking about before, justify this drop at EUR 112 million, basically because of the electricity activity in Spain compensated and offset by the better financial results, which I explained before.

 In the chapter of others, we talk about the minority interests and their greater weight they've had in the P&L account as compared to the previous year.

 And as regards as the -- as net debt evolution has been relatively stable this year, we continue with a very good cash-generation capacity, which has been offset by the payout of dividends for investments. And in particular, on the 27th of June when we do the complementary payout of dividend of EUR 670 million, the net debt ratio of EBITDA and EBITDA costs of net financial debt was between 3.4 and 6.8, respectively. And we expect to see, at the end of the year, results that are basically in line with what we have proposed in the strategic plan.

 If we talk about investments, allow me to say that these -- the material and immaterial investments, gross investments, have been increased by 20% versus the previous year, basically focused in networks. And within them, in Latin America and also in our international generation investment, in Latin America, gas distribution reached EUR 155 million, with an increase of 38% versus the previous year. And EUR 144 million in electricity distribution, 23% versus the previous year.

 In international generation, global power generation, investments have also grown essentially because of the photovoltaic project in Brazil, which starts -- comes into force next month; and the wind park or wind farm in Australia, with an investment of EUR 15 million. The reduction of networks -- investment in networks in Spain is related to a change of policies, trying to be more efficient and making the most of time and volume, and also the investment and development with the customers that contributed greater sales and volume of sales.

 This has allowed us to achieve volumes similar to the ones expected, with less -- least investment effort at least in this half of the year.

 The investment in growth represents 53% of the total investment performed. And for the second half, we expect to see investment in the 2 methane tankers, although I must remind you that this is done through the main [charter] procedure, which is leasing. And it won't affect -- directly affect our liquidity as it works as of renting.

 If we now go into each of the activities, and we start with the networks in Europe. I want to say that in Europe, there's been an EBITDA of EUR 786 million, along the lines of what was generated in the first quarter of the year. The dismissals for the first of the -- for the strategic plan has been important. And if we exclude these expenses, growth would have been close to 2%, 1.7%.

 As regards cash distribution in Spain, the EBITDA experiences a growth of 3.5%, mainly due to recent investments and to the initiation of the transformations of LPG and natural gas networks.

 In electricity distribution, the capturing costs of efficiencies, that we indicated before, have led the growth to be less than expected. But if we deduct them, the growth has been of 3%.

 In European networks, Italy has been stable and a slow decrease in Moldova. Investments will continue to support growth essentially in Spain. And we trust that we can follow along these lines of growth for the rest of the year and for next year too.

 If we talk about networks in Latin America, we would like to stress the strong growth in the whole of the area. The growth of EBITDA is 9.8%, supported on the growth of supply points and also the positive impact of the evolution of local currencies.

 In Chile, EBITDA grows by 17%. In Colombia, it's been negative, affected by the abnormal behavior of El Niño phenomenon, which was hugely positive in 2016 for the evolution of our company. And this year, it has become more normalized, so it has been affected by these adjustments.

 In Brazil, a strong growth of 7.8%, mainly due to the activity of exchange rate. And excluding this exchange rate, it's very remarkable. Mexico grows over 16%, basically because of greater margin and update of tariffs according to contractual formulas.

 The EBITDA in Argentina was EUR 19 million, 10% above, because of the comprehensive tariff review with 3 steps, or terms, we've only recorded one step and the next one will be recorded in November at the end of the year and fully next year.

 So the gas distribution network business in Latin America continues a clear focus of growth and investments.

 If we now talk about our investments also in Latin America, in this case in electricity, we see that after the deconsolidation of the Electricaribe results, the EBITDA increases by 7%, essentially because of the contribution of Chile and Argentina. You know that the electricity distribution investments in Argentina were dependent on the Chilean companies that we acquired.

 In Chile, grid sales have led to the increase of 6.5% in local currency, this increase in sales and also including our recurrent costs.

 In Panama, the EBITDA has been negatively affected because -- that we had to regulatory offset previous years that the regulator has now adjusted with a bit of a delay and which have atypically affected the results of this half.

 The EBITDA in Argentina grows by more than double, thanks to the regularization of tariffs that have taken place in the country. Investments have been EUR 177 million, and EUR 82 million of these are in growth.

 As far as the gas business is concerned, you can see here in the chart the evolution of EBITDA and of our volumes. And I would like to indicate that the trading EBITDA reached EUR 272 million, in line, more or less, with the same period of the previous year.

 But we need to stress that this situation clearly takes place given an increase in volume, providing greater EBITDA and a slight decrease in margins that gave us less margin. So the [risk] has been offset.

 As regards volumes and sales, a growth of over 11% versus the same period of the previous year, essentially in 2 sectors: international and LNG. And the sales for gas combined cycles, essentially in Spain given the atypical weather conditions that have been suffered.

 As regards the margin, there's been a drop versus the previous year of EUR 1.7 megawatts to EUR 1.5 megawatt in this half.

 The EBITDA for infrastructures rose because of the dollar situation. And the results of trading, generally speaking, as you can see, despite the pressure around margins, have remained stable and have kept the track and followed the track of the first half -- of the first quarter.

 As regards electricity in Spain, the great big protagonist has continued the bad trend already indicated in the first quarter, which we expect it to change in the second, specifically in the fourth quarter on the ongoing year. It is essentially due to a contraction in hydraulic production and weather conditions. And apart from these important and significant factors, our opinion is that there are some structural factors in the wholesale electricity market in Spain that lead to prices indicated by the market, and their behavior to be far away from an adequate market and a market that is adapted to the reality of the different operators and the situations of the different companies.

 What has happened also, atypical and important, as you know, a very dry climate in the first half of the year, which has also punished our company very much.

 About the results of the previous year, I don't know the figures by hand, but the reduction of our hydraulic production is 70% versus an average of 50%, although some of our peers have only suffered a reduction of 30%. Unfortunately, our hydraulic accounts and basins, specifically in the -- in [High Tajo] and Galicia had been more negative than the ones of our peers.

 In the second half, we had -- second quarter, we had a very similar situation. So 2 factors are being combined here. The costs -- production costs are more expensive. And also, there has been a decrease of the trading margins.

 It is interesting to also stress that despite the noticeable increase of the electricity pull by 70%, the forwards for 12 months, which somehow reflects the commercial policies of the different traders, have only increased by 12. So the forward price in these 12 months was not at -- didn't reach EUR 42, whereas in the first half of the previous year was EUR 47.

 This is a really strange and weird situation that justifies the trading disaster that is being suffered. We cannot convey to the final market the noticeable increases in the generation costs detected by the wholesale market, and this has been worsened by an increase in imports that has also made difficult to capture improvements in generation. Increase in imports, essentially due to the high costs and high taxes of generation -- applied to generation in Spain.

 So this effect justifies this situation but we believe that the weather or the time will be able to translate this [décalage] on to final customers. But also, the change of weather conditions will allow to avert the situation and to reduce generation costs with greater increases on behalf of hydraulic generation, which, as you know is inframarginal and allows companies to have some of these extra costs.

 It will also depend on weather conditions, but we fully trust that the second half and also -- and essentially, the fourth quarter, will be better, so in principle, we will maintain that the drop will continue to be around [EUR 10 million], because these situations or situations -- similar situations will not only continue, but will revert.

 As regards international generation, we would like to stress the huge increase in -- 20%, almost 20% of the EBITDA of global power generation, which is mainly due to Mexico. In Mexico, EBITDA increases by 28%, given better margins, greater availability and also profitabilities, especially production surplus. The increase in investment is mainly due to investment in Brazil and also the project in Australia. These projects contribute visibility to our global power generation project, which is basically on track on our estimated track.

 And just to finish, I would like to indicate as a summary, that all our activities experienced a positive evolution, except for electricity in Spain.

 In the second place, we would like to say that the difficulties -- it's likely that the difficulties of electricity in Spain in the second half of the year are reduced, both in trading and distribution, improving the general perspectives of our company for the second half of the year.

 In the third place, we have performed important advances in all aspects that we can control. Our investments continue to being -- to lever profitable growth, especially in regulated activities and contracted activities, which are the activities which represent almost 80% of our EBITDA.

 We have launched -- this is also in our hands, a new and more ambitious efficiency plan. We expect to provide results in 2017, although it's for 2018, 2019 and 2020.

 We continue to be very focused in the strategic review of our portfolio, so that we can continue guaranteeing maximization and value. We will continue to improve the cost of debt, as we have detailed recently. And we have already approved the interim dividend for 2017 according to our commitments.

 So just to conclude, we continue to work to achieve the goals set in terms of net income between EUR 1.3 billion and EUR 1.4 billion for 2017.

 Thank you very much, and we are ready for your questions.

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Questions and Answers
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 Abel Arbat,    [1]
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 Thank you very much, Rafael.

 So we now move to the Q&A session, those questions received through the website. I would like to tell you that the possibility of asking questions through the website now is finalized. So if there is any pending questions, you can contact the Investors -- the investment team so that we can answer you as soon as possible.

 So we start now with the questions, and we start with Carolina Dores with several questions by Morgan Stanley, specifically 4 questions. The first one is related to the net income or net impact of the efficiency plan. The second question is related to the guidance for 2017 and our targets of EUR 1.3 billion and EUR 1.4 billion. The third question, also related with the targets. She asks about net income of EUR 1.6 billion to 2018. And the fourth question is related to our management's portfolio. Carolina asks whether we're still analyzing alternatives in our gas distribution business. And if the answer is yes, what would be the most likely use of the funds and revenue that we get from this?

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 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [2]
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 Okay. So they are very open questions. We will try to answer. I may have answered some of them partly already during the presentation. Carlos, maybe you can help me out with the first one.

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 Carlos Javier Álvarez Fernández,  Gas Natural SDG, S.A. - CFO   [3]
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 As regards to the efficiency plan, which is established in the slide, we show a graph that shows the increase versus the previous plan which would only affect 2017, because the current plan only reached 2018. So there is an incremental, which would be some accrued savings, taking this EUR 70 million in the previous plan, plus the ones accrued for this year, and we've also adding the amounts estimated in savings and costs for 2019 and 2020. Also in the presentation, we are saying that we have a cost -- capture cost -- capturing cost estimate of around EUR 270 million, and most of them will be paid out or developed throughout the following year. So we could say that the net savings of this first year would be close to 0. Allow me to say that, because the savings to achieve in 2018 will be almost neutralized by the capturing costs. So this would be the net impacts or net profits taken to net result, which would be practically the same. If your specific question is for 2018, in successive years there will be less capturing costs. So obviously, the net impact and results will be higher because you accumulate the differential of capturing costs that has a direct impacts on the P&L account.

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 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [4]
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 As far as the current year is concerned, there is no doubt that this is a complex year, but we believe we can achieve the targets that we have set. We want to insist that this is a challenging, complicated and not easy target, but we want to get there because of several reasons. In the first place, there's a good evolution of our investment in networks. The growth of Chile, Mexico and Argentina in terms of EBITDA is solid, robust, will continue. There is now a new increase in tariffs that will affect gas and electricity distribution in Argentina, Chilean programs we already launch growth, and also in Mexico. So we believe that this will continue to happen in this half -- next half of the year and with some positive news. Global power generation [in the second place] will continue its positive path with growth in EBITDA, but also with the commissioning of the photovoltaic plant in Brazil. And from next months onwards, it will provide improvement. Also, in the natural gas business, we include 2 new tankers, which naturally mean more volumes, with which we will try to [contain] management to the complex situation of the natural gas business. These are the positive factors, it is true that we cannot stop considering the factors which have been negative. Up until now, as regards electricity in Spain, this has been the true and more significant problem.

 I insist there are some structural factors in the operation and functioning of this market, but I would also like to insist that we believe that what has happened will revert, will change. The hydrological normal perspective and the commercial behavior of [décalage] takes us or makes us think that what has happened in this half of the year will not be repeated in the second half of the year, and there will be different situations, specifically in the last quarter of the year, we've lived and experienced similar phenomenons. There is a risk factor, of course, but we believe that what has happened should not continue and it should actually change. Also, the efficiency plan will provide positive signs in the EBITDA in this next half year, because although it's 2018, 2019 and 2020, we're already starting with the different actions and measures, which will lead to savings in the current year. We would like to insist on the fact that the improvements on the debt cost -- we've already announced them, we plan to optimize them, and we hope that this can take place. We also disconsolidate -- deconsolidate Electricaribe, EUR 44 million for last year, that will disappear. We believe that we can achieve it. We're seriously working towards this achievement, but we cannot ignore that this is a complicated challenge and we need to face this challenge. But we presently believe that there are some instruments that allow us to think favorably. Of the situation in 2018, the situation is somewhat similar. It's not a year that could be appointed as easy, but there might be some new situations arising indicating -- I'm talking about 2017 -- something that I [did not] mention every year, at the end of the year, there are extraordinary profits, situations which are not related to divestments every year. And they're normally concentrated at the end of the year. We have not taken this into account, and this could also improve. Talking about 2017, once again, I'm talking about regulatory matters, arbitrations, legal situations. In the second half of the year and also in the last quarter of the year, they're normally atypical results concentrated that are not arising from divestments, but also affect the results. Going back to 2018, we would have the efficiency plan in -- fully in force. We will have the investments in Brazil working fully and also the Australia ones, which will also come into force. Don't forget that one of our important businesses is the gas business. And as we said in the previous results presentations, from the 1st of January on, we open the supply -- gas supply contracts so that their prices will be reviewed. It is very clear that in the current situation, the price review is downward. So from the 1st of January next year, we'll have an important instrument to once again adjust our margins, taking into account the possibilities clearly offered by the contract and the real situation of markets. So all this together, taking into account that we also expect a normalization of electricity, will allow us to contemplate, at present, our goals as something possible, and we're not going to change them currently. We continue to work so that all these things can follow the contemplated track. As regards to the last topic, gas distribution, I would like to tell you that, without a doubt, we continue working in all these matters by, well, you know the reason very well, a few months ago, there was a series of operations that have placed our focus on the convenience of analyzing, in detail and in depth, what we can do best with our networks. So we're analyzing several opportunities. Clearly, these opportunities can be of different natures. We are working on them. The alternatives are being contemplated and observed. And we expect to make a decision in the short term that has not yet been made. And as the decision has not yet been made, there's been no decision as to the growth with this hypothetical liquidity of this hypothetical operation. So this is analyzed in depth. We expect to have some decisions briefly, and no decision has been yet made.

------------------------------
 Abel Arbat,    [5]
------------------------------
 Thank you very much, Rafael. We continue with 3 additional questions by Monica Girardi from Barclays, which I'm now going to summarize. The first one is as to whether we can give an update on Electricaribe. The second one is, once again, on guidance, but it includes a guidance on net debt for the closure of the year and also EBITDA guidance. And the third one is related to the dynamics that we're observing in margins in the gas trading business and in the electricity business in Spain.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [6]
------------------------------
 As far as the first question is concerned, Electricaribe, our position continues to be the same. We would like to have an agreement with the Colombian government to solve a problem, which is very elementary. It's called fraud and default. And we need to solve this. There is a problem in Electricaribe, and it has to be solved. There is no novelties unfortunately. We haven't been able to advance as we would have liked in the negotiation stage. The pre-election situation in Colombia may have delayed this. We don't know this for sure, but certainly this is not advancing at the expected rate. We continue to be open. Our doors are totally open. And it is advancing at its own pace -- well, the arbitration that we imposed in the United Nations (inaudible)because we believe we -- it's justified. As we said in the first quarter, the goals of the strategic plan presented in May 2016 -- when we closed the previous year, they were corrected in terms of EBITDA given the EBITDA deconsolidation, so there has been no variation. As the CEO said, we continue to work to meet our goals, and we continue to work to meet the goals established in the plan in terms of net income, net debt and EBITDA.

 In terms of gas and electricity margins, interesting question and complex question. Let's start with the gas margins. We continue to have a market in which volatility can impose itself at any moment. We saw that at the end of last year and the beginning of this year. So markets experience currently a surplus of gas, but this could turn around at any moment based on the things that happened with demands, which naturally this year is being fairly complicated, because in some movements and in some sectors, such as the electricity sector, it's been quite high. And in residential, for instance, it started to be very high, but it's dropped, mainly due to temperatures. Volatility will continue to (inaudible). But we shouldn't be too far away from the ground, because in some zonal markets it's not possible to maintain always the same results. We're looking at earth. We're touching upon earth, and there's some deposition of great importing countries and their reserves, I'm talking about [Al Faris] and the position some countries have as regards what to do or not, and the following winter will determine the movement. There is a turning point, and we need to see where it turns to. We believe there will be a certain stabilization, and it will probably be delayed more than expected, and supposed and assumed. But with all likelihood, what will happen, it will be a moderate growth in stabilization of those margins. That's what we expect and what we trust. As far as electricity margins is concerned, I guess you're talking about trading and generation. Our focus in Spain and the rest of our generation is PPA mainly, so the situation is complex, without a doubt. This is our operation -- this is our opinion. There is 2 different things we need to tackle. [One] are the things that have taken in Spain, very singularly, extreme droughts and dryness and low rate of winds. There has been an increase of the pool, which has not been transferred to the customers, and also production costs, which have increased in price. Sometimes the media don't fully understand. And despite, there is an increase in the wholesale markets, increase in price in the wholesale market. The results have not improved. And also trading, that does not adjust its prices, because trusting the forward markets, which has been extraordinarily low, continues to sell at costs that are generating losses nowadays. This is a combination that must change, without a doubt, and it shouldn't take too long to change. It is also true. And here I would like to say that there is another problem, the structural problem. The wholesale market in electricity in Spain, is not a market that is working and operating properly, extreme volatility, and also a composition and not very fair structure in the Spanish market. Practically 40% of the supply is subsidized out of market or off market, and this is equivalent to say that the market cannot work properly, and this is what happens. Sooner or later, we will need to regulate this market differently, making it much more fair and reasonable, avoiding high volatility and the high problems that it's presenting for generators and also for traders. So as a conclusion, the problems that we're seeing this year must be modulated in the next few quarters.

------------------------------
 Abel Arbat,    [7]
------------------------------
 Thank you very much, Rafael. Now continuing with Monica from Barclays. She has 2 additional questions. One is related to the management of our asset portfolio. The question is added to what has already been said. So what are those businesses we believe are core or key in our strategy for the future? And the next one, which I can answer, is related to the cost of debt. So as you can see on the presentation, our target for the closer of the year is 3.6% of gross costs. And for 2018, we will continue to work in the optimization of this cost. So it will be 3.6% or even lower.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [8]
------------------------------
 Our business model is the one that we explained in the strategic plan and we believe has been successful. I would like to tell you what this model is. It's 4 interrelated business: gas distribution, gas -- electricity distribution, electricity generation and gas supply. They're interrelated, given our generation mix. It is true that these businesses are not synchronized, and sometimes, not only by geographies, but also because of the functioning and operation of the markets, some are at good moments, when others are in bad moments. We believe that the balance between these 4 businesses and their corresponding geographies, without a doubt, creates complexity, makes the management more sophisticated and complicates the analysis. But it provides us stability and instruments in order to deal with the different challenges that we find in the sector. You know that if you analyze all the utilities in Europe, the only European utility that in the year 2016 have better results than in 2010 was our company. And this is not by chance. This is because of our diversification in these 4 businesses, which not always are in good moments, but ones offset others and allow the company to react and not take it to a crisis, a problem which has been suffered by some of our peers. So we continue to believe that these are the business where we need to develop and evolve, placing our emphasis in what corresponds for each moment. Naturally, we need to be very watchful of the different markets and their situations in order to -- above our costs of capital, to go for those that do not present problems and which have good perspectives. Now you can see it clearly, the networks businesses and the international generation, also regulated business. This is our idea. And where we're still focusing, we're focusing our growth on these businesses, and we apply powerful efficiencies in the rest, while we try to face the different regulatory and market problems that affect those which don't have that growth capacity. We permanently review them, so that the weights are not naturally the same. At different moments, we provide greater weight to one or other. This is the philosophy contemplated in the plan, and we believe has been successful. And if it's appropriately adapted to each moment, it should deliver as the key to continue.

------------------------------
 Abel Arbat,    [9]
------------------------------
 Thank you, Rafael. The next question comes from Jorge Guimarães from Haitong. It's related to the efficiency plan. The question is specifically about the [EUR 205-incremental-million] to the existing plan are only related to operational efficiencies. Or do they include another customer efficiencies?

------------------------------
 Carlos Javier Álvarez Fernández,  Gas Natural SDG, S.A. - CFO   [10]
------------------------------
 Well, as shown in the presentation, they're cost efficiencies. So some of them are related to customers, but not with revenue, which is -- if that is your question, we're talking about efficiencies, in any case, on costs.

------------------------------
 Abel Arbat,    [11]
------------------------------
 Thank you very much, Carlos. So we continue now with Manuel Palomo from Exane. Manuel has 3 questions. The first one is related to the targets of 2018, which we've already touched upon. He is specifically asking as to whether the increase of efficiencies that is expected, whether we review our guidance for 2018. The second question concerns the renewable energies. And specifically, he's asking what is the profitability expected of the different wind generation projects that we had in June.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [12]
------------------------------
 As I've said, we're currently not reviewing any goal for 2017. We're working for their achievement, so we're working on 2017 -- excuse me, so we're not now reviewing any for 2018. In order to be more specific about your question, and I think I mentioned this before, for 2018, it is true that there is an increase in costs. But we've also mentioned that there will be some capturing costs of this efficiency plan that will affect 2018. So the [effect] in results in 2018 will not be the incremental you're mentioning in order to hypothetically modify the objectives.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [13]
------------------------------
 As regards our wind projects, and also maybe, this could be translated to the photovoltaic ones that we may have won today, they are special -- truly special projects. We've been working greenfield on them for many years to have winning projects because of resource and very efficient CapEx. But I would like to indicate that the tier equity of these projects is in double digits, and the tier -- capital tier equity and the project tier would be between 8% and 9%. So considering all this at a -- pool levels of around EUR 45. So in these environments, we would find the profitabilities mentioned. And the key is in natural resource, which are projects that have been very much selected and also the capacity of investment we will believe we will truly manage.

------------------------------
 Abel Arbat,    [14]
------------------------------
 Thank you, Rafael. We have 2 questions here. Some have been partially answered. The first one concerns the targets for 2019-2020 that we had of 1.8. I would say that the targets were not targets as such. They were just ambitions, which still need to be -- become materialized in targets. So the second question by Manuel is also related with the gas margins. And he asks whether we believe they've touched rock bottom.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [15]
------------------------------
 Well, it's true that, that sign does not seem clear. But we're -- if we're not there, we should be very close. It's difficult, you know, that the gas market doesn't have the transparency or [validity] of other markets. But if this is not so, we're not too far away from this happening.

------------------------------
 Abel Arbat,    [16]
------------------------------
 Thank you, Rafael. And another question, related to targets. He is specifically asking whether these EUR 1.3 billion and EUR 1.4 billion targets for 2017, are we considering any capital gain to reach these levels?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [17]
------------------------------
 I was saying before, this is a challenge. But the measures I was mentioning before about meeting this target do not contemplate an extraordinary profit given or by divestments.

------------------------------
 Abel Arbat,    [18]
------------------------------
 Thank you very much, Rafael. We now move onto the next set of questions, Javier Suarez from Mediobanca. The first one is related to the efficiency plan of EUR 275 million. And he is asking: What are the main business areas where we expect to recover this efficiency? The second question has already been answered. It is related to the profitability of renewable energies in terms of [Iraq]. And the third question has also been answered and is related to the targets for 2017 and 2018. And the fourth question, Javier is asking whether we can provide greater detail on the sale contract for LNG in Puerto Rico.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [19]
------------------------------
 So starting with the last one, we have given quite a lot of details. We cannot give further details. But I would like to remind you that it's 2 BCMs, October onward for 3 years and a contract that is associate 55 -- 50% to Henry Hub and Brent 50%, good conditions, continuity and is a necessary supply and basic supply for the island, which we have been working with for many years, and we are now doubling it. As far as the efficiency plan is concerned, we are now showing the chart once again, and we can see our detail networks is 46%; we see it here. In the gas business, 5% only. In the electricity business generation, 12%. In the corporate activities, we expect 19% of cost improvements. And finally, cross-sectional activities affecting all departments, such as common acquisitions, 18%.

------------------------------
 Abel Arbat,    [20]
------------------------------
 Thank you very much, Rafael. We continue now with Philippe Ourpatian from Natixis. He has 4 questions, 2 of which has already been answered. So I will start with the first one, which relates to the cost for the implementation of the new efficiency plan. As Carlos explained before, there are EUR 170 million in restructuring costs, which will be incurred in 2018 and [EUR 60-additional-million]that will be more related to investment in technology and digitalization. The following question by Philippe are related to the rumors in the market on a potential operation with EDP. In this sense, he is asking whether we see industrial logic to this and whether we believe it makes sense for Gas Natural to perform an operation such as this, whether it's EDP or with a different company. And then another question, which has already been answered. Because of the episode with Natixis, it has -- it's related with the targets for 2017 and how this has an impact or how this is impacted by the efficiency plan.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [21]
------------------------------
 Well, as to the second question, we're not indicating -- we're not negotiating with EDP or any other operation. Naturally, all companies, we analyze all the possible alternatives and all the possible operations that could contribute added value to our shareholders. They're always very complex operations that need to take many different perspectives into account, from the strictly market perspectives to the regulatory and technological perspectives and insights. And this is an analysis that we have not yet concluded in this or any other case, so I cannot dare to make any other conclusion. On the other hand, it wouldn't make any sense because we are not negotiating anything with this or with any other company.

------------------------------
 Abel Arbat,    [22]
------------------------------
 Thank you very much, Rafael. There is a company -- José Ruiz from Macquarie, already answered, an update of the situation in Electricaribe. So we now move to a question by Lazarus Research, of Fernando Garcia. He is asking about renewables. And specifically, he is asking about the load factor of the 667 wind megawatts and the 250 megawatts that's -- we will be allocated in the solar project. Could we provide details on load factor and investment in this sense.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [23]
------------------------------
 As regards to the load factor? Clearly, above the average. Clearly, we are now finishing -- and I'm talking about the wind one -- of selecting in our current portfolio those -- we need to be specific, those wind farms that are going to be included in the final lists are the ones that we are going to develop. We are going to choose the most efficient one as to investment costs and use in this and in the photovoltaic project, which are clearly above average. And I can't remember the figures, the final figures.

------------------------------
 Abel Arbat,    [24]
------------------------------
 And the 250 megawatts, if this were so, the investment costs -- can you remember it?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [25]
------------------------------
 I think it didn't reach 100. I'm very sorry. I currently cannot remember the investments estimation. We will provide it briefly.

------------------------------
 Abel Arbat,    [26]
------------------------------
 Yes. We will answer the question from relationship with investors. Following with a different question. There is a couple of questions by Alejandro Virgil from Cygnus, which have already been answered. So we'll continue with the next questions. We'll now move on to the questions by JPMorgan, Javier Garrido. Both questions have been, I believe, answered. One is related to the targets, and the other one is related to the revenue from the potential sale of assets. Another question by Daniel Rodriguez from Fidentiis, targets 2018 and 2020. This has also been answered, too. And we now move on to the questions by Rui Dias from UBS. Rui's questions have been practically answered, too. They're related with the efficiency plan, the outlook for 2017, the gas supply margins and the rumors of EDP in gas. Rafael already mentioned.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [27]
------------------------------
 I'm very sorry. As regards the question on the investment, it would be around EUR 150 million. And the load factor, to give you more information, we see that the average would be around 3,000, clearly above 3,000. And the wind and in photovoltaic, we're talking about an average of [1,005] -- 900 in Spain and would also be above the 1,900.

------------------------------
 Abel Arbat,    [28]
------------------------------
 Three additional questions by Fernando Lafuente, 2 of which have already been answered, as regards to what is core and what is not core and the gas distribution business in Spain. And the third question where he's asking us to be more specific per business line as regards to the efficiency plan.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [29]
------------------------------
 Well, I just answered this, and this is on the slide, the detail per each action line and when moving onto the next slide, which is basically leveraging and the new models -- management models.

------------------------------
 Abel Arbat,    [30]
------------------------------
 There is an additional question by [Ahil Perez] from [Venta Cuadros], which has already been answered. And also 2 questions, 2 additional questions by Javier Suarez from Mediobanca, which have already been answered, too. Additionally, a question by Philippe Ourpatian from Natixis, which is related with the gas supplies margins, which has already been answered. And now we move on to a question by José Lopez from Millennium, a question which is very specific on the cash conversion in the electricity business and the distribution business in Argentina. We are suggesting or proposing that we will review this in relationship with investors, and we will try to answer you after the presentation. Another additional question by Stefano Bezzato from Credit Suisse, which has already been answered, as regards the guidance for 2018. And also, 2 questions by [Juan Carlos Sanchez] from BPI, which have been answered, as regards the level of return in the renewables projects and also the different calendars and potential timings for corporate operations. So both have been answered. Questions by Jorge Alonso from Société Générale. A new question as regards the infrastructure business. He's asking whether we believe that the growth in EBITDA and the infrastructure business will be impacted by the delay of the storage in Doñana and how much EBITDA can this project represent.

------------------------------
 Carlos Javier Álvarez Fernández,  Gas Natural SDG, S.A. - CFO   [31]
------------------------------
 In principle, the infrastructure EBITDA is the Maghreb gas pipeline EBITDA. It does not affect the storage or upstream business that can be there. It's minimum. So in the evolution of this chapter, clearly the increase that we currently see is due to the increase in the tariffs that each year infrastructures in Maghreb see and that will continue to exist in the following years. So there is nothing that can cut short this growth that's -- is contributed by tariffs, that increase every year.

------------------------------
 Abel Arbat,    [32]
------------------------------
 Thank you very much, Carlos. 3 additional topics also by Jorge Alonso from Societe. The first one is related with the business of electricity, [through the] business in Spain. If the year continues to be so dry, do we believe that the EBITDA estimate of EUR 550 million continues to be something possible?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [33]
------------------------------
 I would now say that we expect to not overcome the EUR 200 million or surpass them versus the previous year.

------------------------------
 Abel Arbat,    [34]
------------------------------
 He is also asking how the auxiliary services have evolved in Spain in the first half? And what forecasts do you -- do we have for the next few months?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [35]
------------------------------
 The price increased less than the pool, close to 20, although the pool increased by 70. And we continue working in this market as our peers and competitors.

------------------------------
 Abel Arbat,    [36]
------------------------------
 Thank you, Rafael. Last question by José Ruiz from Macquarie. It's already been answered. He asked whether the gas distribution project in Spain continues to be on the table or not, and the answer has already been provided.

 And with this, we conclude the Q&A session. I would like to remind you once again that, in case you have any additional question, the relationship with investment team -- or investors team, is at your entire availability and disposal to answer any questions you may have. And now Rafael Villaseca has the floor.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD and Executive Director    [37]
------------------------------
 Thank you very much. As Mr. Abel Arbat was saying, we're at your disposal to clarify anything you want to be clarified. And we expect we can chat with you and speak with you when we close the next quarter. Thank you very much.




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