Nine Months 2017 Gas Natural SDG SA Earnings Call

GAS.MC - Gas Natural SDG SA
Nine Months 2017 Gas Natural SDG SA Earnings Call
Nov 07, 2017 / 11:00AM GMT 

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Corporate Participants
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   *  Antonio Basolas Tena
      Gas Natural SDG, S.A. - MD of Strategy & Development
   *  Carlos Javier Álvarez Fernández
      Gas Natural SDG, S.A. - CFO
   *  Rafael Villaseca Marco
      Gas Natural SDG, S.A. - CEO, MD & Executive Director 

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Presentation
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 Unidentified Company Representative,    [1]
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 Hello. Good morning everyone and welcome to the presentation of results of Gas Natural Fenosa corresponding to the third quarter of the year 2017. As always, the presentation will be led our CEO Mr. Rafael Villaseca accompanied by the ECOFIN's General Manager, Carlos Alvarez and the Strategy General Manager & Development General Manager, Antonio Basolas. Once the presentation is over, we will open the Q&A session. And as always, you can visit our website to ask any questions you may have.

 Remember that they must send during the course of the presentation, after which it will be unabled. And without any further ado, our CEO, Mr. Rafael Villaseca. You can have the floor.

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 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [2]
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 Good morning, everyone, and thank you very much for assisting and attending the presentation of results corresponding to the 9 first months of 2017. The agenda is the one that you can see in the first slide. We will go through the main landmarks and milestones of this period, and we will review the trends that will guide the results for this year and we will have an introduction to the new strategic plan 2018-2020 that we will be introducing next year. After this, we will mainly focus on each one of the businesses with great detail. And finally, we will look and talk about the 2018 outlook and we will establish the main conclusions to then move on to the Q&A session.

 So, now going to the main highlights. I would like to indicate that now reclassifying the activities in Italy as discontinued, you already know that we have carried on agreement to sell them. The figures appear here on screen and they indicate that the EBITDA for the period has reached EUR 3.140 billion, a 7.4% lower than the previous year.

 Net income has been EUR 793 million, 15.2% lower, with a drop versus EBITDA because of the minority interest figure. As regard to investment, they've reached EUR 1.134 billion, 17% lower than last year. Finally, cash generation has been really strong so the net debt is maintained at a similar level, 2% higher than the previous year. And despite this, we've already included of course, the cash payout of interim dividend for 2017, which was carried out at the end of September this year.

 We have strong behavior of international generation and network business and the gas supplies division has continued to have a complicated (inaudible) worsened in the third quarter, although the perspectives are now varying. The Electricity business in Spain continues to affect negatively the results of the company, and without a doubt, it is the most stressed and highlighted factor of this year. We will also talk about the natural disasters repeated and natural disasters are very exceptional ones that our company have experienced, especially in the last quarter and throughout the year.

 We maintain our payouts commitment to shareholders, our compensation commitments; and we must indicated that the cash management continues with 2 materialized operations but still not accounted for such as the sale of the total of our business in Italy and the sale of a minority stake of 20% in the gas distribution business in Spain.

 So we now move on to the next part and this would be the key highlights of this quarter. Although it would be necessary to indicate that as a consequence of the lack of legal certainty created by the social and political events that have taken place in Catalonia and as long as this situation is maintained, as we communicated in a relevant fact on October 6, their company has changed its registered office, which is currently in its corporate offices in the Madrid.

 So, now focusing on the main highlights indicated in the slide; the first one would be to stress the strong performance of the network and international generation activities. In the second place, the persistence of certainly very abnormal weather conditions in Spain, which has been one of the substantial factors that have affected the electricity business.

 In the third place, we would like to indicate, as already anticipated, the natural disasters that we have suffered in Chile, Mexico and Puerto Rico mainly. In the fourth place, the advances of our restructuring in the Chilean CGE subsidiary; also important to point out that we continue to optimize the debt and financial costs to finally indicate that there has been a successful sale of the minority stake of the gas distribution businesses in Spain, and #8, the sale of distribution and supply activities for gas in Italy.

 As I was saying, 2 very important and positive topics had been the performance of the international network business, networks everywhere, and also international generation business; both have had very strong and firm growth. The distribution has been importantly levered in the gas networks in Latin America and international generation, generally speaking of course, but specifically activities in Mexico.

 The growth of EBITDA in the network activity has been 5.5%, flat in electricity but higher than 9.3% in gas networks, promoted mainly by Latin America especially by Chile and Mexico. In international generation business, the increase of 14.2% is strongly levered by the growth in Mexico, which has been higher than [21%]. And we indicate that activities have already started in the production of our solar plants in Brazil, which started at the end of September.

 We also want to indicate the growing strength of renewable energies in the generation mix. In this case, in Spain, as we already advanced, on 26th of July, we were allocated or awarded 250 megawatts of photovoltaic energy, according to the latest auction promoted by the government and we are going to invest EUR 165 million in the period 2017 to 2019; out of which, next year, we will pro forma around EUR 120 million.

 This means that we really had and have a photovoltaic operation portfolio in Spain, which is truly impressive with an advanced administrative status, which has profitabilities that will be along the expected lines or even better when we start the project in December 2019. The competitiveness of this project, we are very happy with them, because it's mainly due to the fact that, for some time now, we've been working with the identification of sites in Spain with high solar resources, above 1,900 hours of annual production with a very optimized CapEx both in the plants or sites and their connections.

 This allocation contributes with the 676 megawatts, wind megawatts awarded in the auction in May. And also the Canarian [Cuprin], which are already in construction. And together, it's practically doubling the current renewable powering capacity that we have in operation in Spain. These 3 projects that we have at Spain have an aggregate investment higher than EUR 900 million, out of which EUR 500 million will be invested next year. And it will be actually next year, when they all become operational.

 As we were already saying, there has been some abnormal weather conditions in Spain, which can be summarized in a single figure according to statistics of the Spanish hydro system. The likelihood of overcoming or exceeding the low hydro (inaudible) effect are 99%, so the situation is truly extreme and it's very difficult for it to -- or for the conditions to persist in such -- especially in Spain this has been one of these factors, which has truly affected EBITDA, which has dropped from EUR 715 million. It will probably drop at the end of this year between EUR 380 and EUR 400 million, according to mainly 2 reasons, one of them has already been explained, the hydro situation, hydro production; and also the low reference prices in supply last year, which we are suffering this year and this phenomenon has continued throughout the year, starting now to change.

 The negative impact of these 2 factors, the hydro production and the non-transfer of the increase of production cost towards the final market is around EUR 110 million. So these are typical cases. So we could say that our normalized EBITDA for this business would be around EUR 500 million annually. So between EUR 100 million and EUR 150 million above what we are having discounting other factors in the charts, such as the impact of social discounts, which is new and also the evolution of commodity prices.

 I would like to insist that the phenomena of hydro production would be around EUR 60 million in our accounts and the phenomena which is exclusive to the non-translation of final market is EUR 50 million. Surprisingly enough, in order to talk about the second factor, we would like to indicate and we will later on talk about this that forward markets, as a consequence of the action of companies supplying, have not (inaudible) situation caused where many of our competitors have been fighting to increase their market share under the expectation that very likely this situation in the pool, the hydro production would change and with this prices too.

 Going back to situations, such as last year's, our company did not play around this policy, but in any case, I would like to tell you that we have had to suffer, as you can see in the square or in the box to the right and bottom of the slide that despite an increase in the pool about 47%, this has not been in anyway transferred to final prices. It is true that this is now starting to being transferred, as was logical, given the commercial policy and the fact that it didn't make a lot of sense and we trust this to become more normal at the end of the year, mainly due to the high generation prices that we are suffering.

 I would also like to talk about the impact of natural disasters on G&F operations. They've been very well known and spoken about on the price on the 9 first years of the month is around EUR 20 million are reflected in our accounts. However, we estimate that together, throughout the year, they would reach EUR 85 million in negative terms.

 These extraordinary weather conditions have been -- the very strong snowfalls in Chile and Moldova with rates -- impact to networks very -- wood fires, very serious wood fires that we have last summer, last also summer in Chile, which has cost -- derived cost, there was some civil liability and damages suffered in the different facilities, as well as penalties and some of them appealed, but which regulators have applied.

 We need to add the hurricanes in the Caribbean affecting importantly in Puerto Rico, also in Dominican Republic and the important earthquakes in Mexico, which have taken us to material damage and also problems of loss of profit because of halt of operation in both countries; Puerto Rico and Mexico.

 In 2018, we expect -- given the insurance contracts, we expect to partially compensate this in EUR 30 million, but this has not been considered in today's accounts; the ones that we're presenting today. Also we would like to indicate that the restructuring of Chile operations, given the restructuring because of the merger of some companies has produced important impacts in simplification, improvement of corporate governance, efficiencies and consolidation, as well as optimization of processes which will be transferred to our (inaudible), but there is a positive phenomenon of EUR 115 million, which will be the favorable impact on net profit, because of deferred tax assets that we expect to materialize in this fourth quarter of the year.

 We will continue to have an optimization activity from all different perspectives and then next year, we expect to continue having good news in this respect. Also, we continue with our efforts to improve the management of our financial liabilities. This year we have improved in EUR 72 million after-tax the financial result, reducing our average cost from 4.3% to 3.6% and we still expect to reduce it to 3.5% at the end of this year. As we have also announced, we have performed refinancing operations and debt extension operations with clear improvements for a volume of approximately EUR 3 billion in the third quarter. And I would also like to indicate that we will continue performing these type of operations, both for the rest of the year and next year too.

 The optimization of the asset portfolio of our companies has led to 2 operations. The first one, also announced, was the sale of 20% of the gas distribution business in Spain. We have done it at a value that involves 15.7x the EBITDA 2016, EUR 13.9 billion, which results in EUR 4 billion above the average estimated by financial analysts with -- had a multiple of only 11.2x. The company will receive in the first quarter of 2018, EUR 1.5 billion of cash for this operation and this will generate capital gains in our reserves with an important impact in our equity around EUR 1 billion.

 You also know about the sale of our assets of gas distribution and supply in Italy to 2i Rete Gas in Edison, which have led to an enterprise value of EUR 1.020 billion, with an equity value of EUR 759 million. The operation is estimated to be closed this quarter, could be a bit of a delay at the beginning of 2018 and it will generate capital gains of EUR 190 million after-tax. There activities generated in last year, an EBITDA of EUR 83 million.

 All this crystallizes -- these 2 operation crystallize a good value for shareholders. There is EUR 727 million to be paid out for the distribution business in Italy, represent a multiple of 11.7x EBITDA; EUR 111 million above the average assessment of analysts and the premium is 30% above RAB of the business, the EUR 193 million in the supply business. So (inaudible) distribution represent a multiple of 12.5x EBITDA; around EUR 140 million above the average evaluation by analysts.

 And recent transactions and operations in the industry, as you know, the reason have been the limited likelihood -- the reason for this investment, the limited likelihood of maintaining our competitive position in Italy before the reorganization of concessions in that country. Because we lack critical mass, which is enough to act as a consolidator before other Italian operators. So, in any case, these are operations that generates a very significant value for our shareholders.

 We are now going to move on to the outlook of 2017. We would like to indicate that these are our closing perspectives. We estimate net profit between EUR 1.3 billion and EUR 1.4 billion, which would be repeating the results of 2016 in our 2017, which has been truly difficult because of the reasons and given every discount in this closing projection; the positive effects of expected capital gains in Italy; and the positive tax impact of the restructuring operations in Chile; and also the extraordinary negative effect of the electricity business in Spain, which we mentioned before, and the impact of natural disasters, which has already been mentioned too and the cost of restructuring, the one shot cost for our efficiency activities, we would reach net income derived from our current operations, which would be EUR 1.2 billion.

 Of course, when you just stress that for the next year, the net income would be reduced after the sales of the business in Italy, as we said, and the 20% of Gas distribution in Spain, these figures in terms of net income could represent around EUR 110 million. In any case and then as a summary, we expect to repeat the result we had last year. So, we expect to have a net income according to strategic plan between EUR 1.3 billion and EUR 1.4 billion subject to this closure of the sales in Italy that we mentioned before.

 In any case, the company continues to maintain the dividend policy expressed in the current strategic plan of a minimum of EUR 1 per share. And we've already mentioned at the beginning of this presentation, the company at the end of next -- month of February will perform an Investor Day and we will also publish the new strategic plan that will cover the period 2018-2020.

 The reason for this new strategic plan has a several argumentations and justifications such as the recent evolution of macro perspective and the energy markets, which without a doubt this year have had a significantly different trends this year, different to what had been expected in the second place, the change of scope experienced by GNF, by the Group as a consequence of the deconsolidation of Electricaribe and the sale of 20% of the gas distribution business in Spain, and the sale of activities in Italy that we've already mentioned.

 And also, given the inclusion of the new efficiency plan 2018-2020, which I had already talked about in the last quarter, we are now working for some time in this new strategic plan 2018-2020 which naturally will contemplate the optimum use of these divestments I have been mentioning, and also our investment plans, the indebtedness goals and the appealing remuneration or compensation for shareholders.

 If we now talk about the results of these new 9-months of the year, it is interesting to compare, in the page, the operational results and how they have evolved the level of EBITDA. Well, the graph does not include the activities of Italy, the have been excluded because they're already discontinued. We would like to stress, there has been good behavior in performance on network activities and also international generation both with very strong regulated activity component.

 The gas activity have had a negative behavior versus the previous year, EUR 58 million, we expect to be limited at the end of the year. And the great problem, as we already announced was the performance of the electricity generation and supply in Spain, which as I already mentioned beforehand, it has also reflected the high price of fuels and the cost of generation, given weather conditions and the weak final market which has not reflected in its prices the situation I was mentioning in terms of generation. This EBITDA [homogeneously] represents a drop of 7.4% versus the previous years.

 As regard to net income and in an identical fashion as you can see, the results after tax or net income after tax have a negative impact of EUR 187 million, mainly due to the activity, electricity activity in Spain and natural disasters, which have been mitigated by an improvement in financial result, EUR 70 million, and also an improvement in the recurrent effective tax rates that we have dropped from 23.5% to 21.5%.

 Now, talking about net debt evolution, it is more or less remaining stable, showing the good capacity for cash generation in the company and despite greater payouts of dividends and investments that we've have performed. You know that on June 27, we paid around EUR 670 million of complementary dividends and the September 27, we paid EUR 330 million as interim dividend for 2017.

 The debt of EUR 15.7 billion at the end of September represents a multiple on EBITDA of 3.5x and if we included the income we will receive as a consequence of the sales of Italy and the 20% of the gas distribution in Spain, the multiplier would drop to 3x and the debt would be EUR 13.5 billion.

 As regards investments, gross material investments represent a drop of 11.5%, which would be reduced or would change and would represent a growth of 3.6%, if we bear in mind that in the figures for 2016, we were including a methane tanker for EUR 206 million and this investment, you know is accounted for, but does not mean cash payout.

 In Latin America, investment in gas distribution reached EUR 253 million last year, 34% higher and gas -- electricity distribution, 13% above the previous year. Our investments in international generation was mainly due to 2 projects, the photovoltaic project in Brazil already ongoing, and the wind park in Australia.

 The reduction of investment in networks in Europe is mainly explained given the optimization performed of gas networks in Spain focusing on greater consumption customers, centralized portfolios and industrialized portfolios, so that contributing a similar remuneration. We have reduced the number of points and worked with the of equivalent connection points, it is also necessary to bear in mind that in the previous year we were including the GLP purchases that this year have not taken place.

 Investments in growth totally represents 52% of the total invested amount and we expect to have a total figure of EUR 2 billion for the entire year, EUR 400 million below what had been budgeted, given the delay of the delivery of 2 new methane tankers in the fleet, although this would not mean a payout, as I already said. The focus for growth, as I've said, is in Latin America in networks and in the electricity generation, internationally.

 If we now go into greater detail about our activities in these 9 months and starting with the network business. As you can see, the network business in Europe, EBITDA was EUR 1.160 billion, slightly above what we had been generating on the previous year. But growth had been around 2% higher if we had discounted the restructuring cost of the current efficiency plan, which are just one shot.

 As regards electricity distribution in Spain, exact same thing. There is a cost of EUR 7.5 million. Given the incentivated offboardings, including non-recurring expenses, EBITDA would have increased at 2.4%. In the case of gas distribution, it experiences a growth above 4% given the investments perform and amongst them, the purchase of Connection Points to GLP Moldova has an important drop of EUR 20 million, giving a series of penalties because of lack of compliance and problems with the regulator, which we expect to solve.

 With new negotiations on course, we must stress that investment continues to support growth and we trust that with a regulatory framework which is quite stable and ongoing, we can continue along these similar tracks for the rest of the year and next year.

 As far as Latin America networks, they have been a strong driver for growth. EBITDA grows by almost 16%, supported by the increase of connection points or supply points and the evolution of local currencies. Chile grows by 16%; Colombia has been negatively affected by the El Nino phenomenon with a strong drop of hydro generation, because in 2016, the drop of hydrogenation led to a strong increase in combined cycles and gas sales that has not taken place this year in Brazil. We also experienced a growth above 20%.

 Thanks to the increase of the activity, the evolution of interest rates, and the update of regulatory enforced tariff indexation, the EBITDA in Mexico grows by 14% given greater volumes and also the updates, regulatory updates for tariffs, EBITDA reached EUR 42 million in Argentina, last year it was [EUR 2 million] because we applied the first stage of the comprehensive tariff review. The second one will take place November this year. And next year, the third one.

 This situation becoming totally regularized in Argentina, so gas distribution networks in -- and gas continue to be a strong focus for growth and investment and out of the EUR 253 million invested in the period, EUR 167 million correspond to growth activities which have allowed to increase in over 300,000 the number of supply points.

 Now moving on to electricity distribution in Latin America with Electricaribe dis-consolidated, the EBITDA excluding Electricaribe increased by 1.2% and this increase is mainly due to Chile and Argentina. In Chile, the increase of the EBITDA in electricity networks was 4.8%, with greater sales and greater efficiencies, with less and lower margins given the tariff review, which has been approved and ongoing, almost 5% of growth and in Panama, a drop of 14%, strongly affected by lower demand basically affected by climate situations in this case, well temperatures that were relatively cold that prevented the use of air conditioning as in the previous year.

 And finally given compensation or offset applied, given regulatory situations for adjustments for the period 2002-2006, finally, EBITDA in Argentina grew over 66%, thanks to the general tariff review which has taken place in the country for regulated business. Out of the total investment EUR 274 million, a EUR 120 million are investment in growth.

 As far as gas business is concerned, we would like to indicate that infrastructure had remained stable and in supply, it reached to EUR 547 million, 9.6% lower than the same period on the previous year, mainly and essentially due to a drop on the unit margin in Spain and volumes of sales have grown by 9.8% levered in the international LNG, which has grown notably, and also the growth of gas sales to combined cycles in Spain as a consequence of climate conditions that we were mentioning before.

 However, the sales to the residential sector in Spain dropped over 10%, given the smooth temperatures of last winter. However, the margins have been higher than in the rest of mentioned businesses. It is exceptional and relevant to explain that the months of July and August, there was (inaudible) of the spread between LNG and (inaudible), which negatively affected the renewal of some contracts in that quarter, and as a consequence, a drop of the unit margin of this quarter, which dropped from 1.4% in the first half of the year to 1.3.

 A phenomena we'll look at later on, we believe have been temporary and we are already experiencing an improvement in this quarter of these conditions, especially in the wholesale segment in the Spanish market.

 As regards the electricity business in Spain, we must say that is, once again, the negative protagonist of our crude results because the EBITDA has dropped from EUR 553 million to EUR 260 million in the current 9 months period. The climate factors have been determining, the contraction in production, in electricity production; the hydroelectric production doping 72%, with greater generation costs that could not be transferred to the trading margin, the pool increased by 47% and the sale prices, which are currently linked on index to the forward -- one-year forward, which is established by the OMIP only increased by 12.5%. That has been quite unexpected, but that has been the behavior of the sector. The final customers have not received the increase.

 Finally, for customers who have voluntary price -- whose prices are linked to the wholesale market, however the de-regularized market, essentially in the industrial market, which is also very important, has not transferred more than just a minimum of this increase of production costs. So the accrued result has led to this very important and significant drop of our results.

 We want to indicate that the hydroelectric phenomena, well there is 99% of likelihood that next year this is better, of course, more favorable for our interests and as far as the delay of transfer of prices to customers, we must say that we're starting to see that this is changing, experiencing a gradual improvement in this last quarter of the year.

 In terms of the international generation business, it has increased by 14.2%, mainly based in Mexico with an increase of 21% mainly due to good management of use of energy upgrades in our facilities and also placement of the de-regularized market through our networks in the country, better availability of facilities and better profitability. We also like to indicate that we have already commissioned the operations in the photovoltaic plant in Brazil and the wind project in Australia. We believe that increasingly our international business, electricity business in terms of generation, starts to have visibility, supported by a profitable solid projects with clear long-term contracts.

 This would be our vision for 2018, which we will be more specific in the strategic plan that will be presented next February together with the 2017 results. But this would be an advancement of how we see it nowadays and networks we expect the very positive trend to continue driving our investment in Mexico and Chile mainly. And also in Argentina, given the fact that the increase and the tariff review will be ongoing is still -- is pending finalization.

 In gas, we are moderately optimistic, thanks to these swings in trends and prices that we are seeing and I will try to give you additional specific details later on. We also expect to have better supply conditions, and in the year 2018, there will be an ordinary review of half of our supply portfolio. It is also true that not all reviews will see their results reflected in the 2018 accounts, given the fact that some of them will be applied in 2019 with retroactive effect. But with some difficulties to be accounted for in 2018.

 But in any case, the conditions of market and the conditions of the renewal of our supply cost make us or lead us to be moderately optimistic versus 2018 or for 2018. We are also advancing new models, which internationally allow us to continue incentivating the liquefied natural gas business. In Spain, the electricity business in Spain, we expect to have a normalization of the hydro situation and gradual improvement of supply prices in order to transfer this situation to our customers.

 We also expect advancements in the renewable energy projects, solar and wind that increase the installed capacity next year, at the end of the year mainly with ongoing projects. In international generation, we will have a full year in the activities in Brazil and Australia.

 Also, this is a positive to bear in mind the efficiency plan, which has already been launched and which will have a positive translation next year, as we also expect to continue having a positive resolution of the cost of debt given the optimization of its cost and also the financing structure. In terms of negative aspect and if we listen to the forwards, which are currently enforced in the exchange rates of currencies, the translation effect of foreign currency would be negative. (inaudible), we will see how these markets evolve and whether finally these highly volatile circumstances take place or not.

 And as regard of the effective tax rate, we expect to maintain this 21.5%. We expect prospective for 2018 to be better than in 2017 and we will include them in the strategic plan 2018-2020 together with the management of our asset management portfolio that I have also mentioned. It is interesting to focus on the 2 businesses where we expect to see some change in trends and this needs to be confirmed in the next few months, but that is where we are.

 Let's start with the gas business, the wholesale gas business for 2018; as regards volumes we expect we'll be stable or quietly downwards -- or slightly downward because of the early quantities that we won't have in 2018, and given the sales of gas supply activities in Spain.

 We like to indicate that 75% of the sales for 2018 have already been contracted and guaranteed a level very close to our closing targets of this year. In terms of supply, we are also optimistic, because we're opening the possibility of an ordinary review of half of our portfolio. So the conditions indicate that these renegotiations must be favorable to our interests and finally indicate that in the Iberian Peninsula, there have been a changing trend in prices, which can be observed here in the one-year forwards. If we compare with the one-year forwards, which are the red lines in the graph, we have the same one-year forwards this year.

 Analyzing 2018, we clearly see 2 things. The first one is the strange phenomenon of the third quarter, which has taken or led to a worsening in the industrial market in Spain, but which now clearly changes in the rest of this year and the forecast for next year. So, we expect for this to have a positive impact in contractual negotiations that we're now having and the next few months of 2018. But if we also listen to international markets, LNG international markets, you can see the evolution of one-year forwards of the Japanese index to the left and the National Balance Point to the right.

 Once again, we observe this very curious phenomenon in the third quarter of the year, but we also have observed that from September on, things follow the trends at the beginning of the year and things seem to become consolidated. We need to be watchful to see what happens, but we are consolidating some higher priced windows in the Far East and in Europe.

 This situation is now a reality and also an increase in demand in Asian markets, that's also a reality. Also, for 2018, we expect to start having new opportunities and business focuses for the LNG business that includes appealing markets, mid-sized customers bunkering and also final customers' guarantee, which are a reality in the case of Puerto Rico, but now the Island has been paralyzed because of the natural disasters and we can't make the most of it in the current year.

 The electricity business, well, we also like to indicate that there are also some recovery symptoms. The hydro part statistically must become a reality as I said, but also selling or supply prices once again looking at the evolution of the OMIP for 2018, we have sort of a positive trend, we trust will remain stable for the next few months and that will naturally allow us to transfer the phenomena that we've experienced and that we continue to experience high production cost to final customers.

 As a conclusion to all that, there is a strong performance in this first 9 months in regulated activities, which have been really well, especially in Latin America and a worse evolution of de-regulated business, largely in lead generation and electricity generation and supply in the Spain. In any case, we expected to repeat income between EUR 1.3 billion and EUR 1.4 billion, subject to completion of the Italian disposals, as I mentioned before and according to the strategic plan we would be along the forecasted figures.

 Outlook for 2018 are more positive for this year -- than for this year, because of the reasons I mentioned. However, we already announced that we will present a new strategic plan 2018-2020 together with the 2017 results. Trying to explain all details and continuing our interest to offer an appealing profitability for our shareholders that is everything.

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Questions and Answers
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 Unidentified Company Representative,    [1]
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 Thank you. Rafael. So we will now start with the Q&A sessions. All the questions that have been received through the website. I'd like to remind you that from this minute on, the reception of questions has been disabled. So if you have any pending questions, please get in touch with the team of relationship with investors once this presentation is over.

 We will start with the first block of questions. We will start in the first place with the questions that are not specific to the activity and we will change the focus and do it by blocks. We will start then with questions related to management portfolio, M&A, proceeds and remuneration or conversation for shareholders.

 In the first place we have (inaudible) from BBVA, who mentions that the sale of 20% for gas distribution in Italy -- a 100% in Spain and a 100% in Italy represents higher amount of funds. So what is the destination forecasted or foreseen for these funds? There are other analysts such as Manuel Palomo from Exane BNP who also ask whether we're using or thinking about potential purchases of assets? And likewise, Jorge Alonso from Soc Gen asks whether we are excluding inorganic growth to gain exposure in new areas and if that were so, what business areas and geographies we would look for?

 We will start with this first block and we will continue after that, okay.

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 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [2]
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 Well, excluding or ruling anything out -- we're not ruling anything out, of course, but we're not currently contemplating any corporate operation which is relevant to a singular, in any case. It is precisely on the strategic plan that I announced, where we will be more specific about all this. And specifically those things we want to focus on, which are the organic growth of our Group through the businesses that I have presented and which will be focused on the network businesses. And the business for international generation always subject to clear profitability criteria in the strategic plan. We need to contemplate of course, the investments which will be necessary to maintain and to grow organically and the Group. And also naturally, the indebtment policy -- the dividend policy that we want to attend to. And altogether, we are going to present it globally, bearing in mind of course the different profits that we are going to have in the first quarter of next year. That liquidity -- extraordinary liquidity have not yet taken place, so we will have it precisely when we present the strategic plan, where we will naturally have to, of course answer all these things specifically.

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 Unidentified Company Representative,    [3]
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 Thank you very much. We will continue with another question, portfolio management; Manuel Palomo from Exane BNP, What is the rationale for the sale of Italy? Because he understands that margins in Italy are relatively good. And how far do we trust to account for the sale in Italy in 2017? Can we give a bit of a guidance on the calendar and the closure of operations in Italy?

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 Antonio Basolas Tena,  Gas Natural SDG, S.A. - MD of Strategy & Development   [4]
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 Yes. The rationale for the Italian sale in the gas distribution business, well we didn't have the critical mass for the consolidation process that was going to take place. And the price that we have obtained is a price that creates value for our shareholders and which is above the expectations which we initially had. Once the distribution -- gas distribution network has been sold, this is true that the supplies business in Italy has good margins nowadays. But its size was too reduced to maintain and if we're going to sell the gas distribution business, we were also forced to sell the supply business, because the entire corporate structure that we had in Italy did not make sense to maintain a business that was already very reduced. So we decided to sell at good prices. As far as the calendar is concerned, we're already in authorization processes in the gas distribution once the Italian authority, is the regulating authority; and in the supply stage, it's the European Union and we expect the process to be completed before the 31st of December.

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 Unidentified Company Representative,    [5]
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 Thank you very much Tony. We continue with the portfolio management and use of proceeds. There is 3 questions by Harry Wyburd, Carolina Dores from Morgan Stanley and Pablo Cuadrado, HSBC. The 3 of them ask, after -- whether the company would have any preference when it came to paying an extraordinary dividend, increasing the dividend policy or any other option of shareholder compensation?

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 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [6]
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 The company has not considered any preference, it will do so within the framework of this strategic plan. Once we have defined the investment needs for the development of our activities and the indebtment policy, we will very naturally attend to the remuneration policy for shareholders, making it as appealing as possible, but we are currently not in good conditions to anticipate any specific position in that sense.

------------------------------
 Unidentified Company Representative,    [7]
------------------------------
 Thank you very much Rafael, we will now continue in the same portfolio management block. Jorge Alonso from Soc Gen, Jorge Guimaraes from Haitong, and Rui Dias from UBS ask about additional shares in portfolio management and specifically, they ask about processes in Moldova and what is the status of the rumors around our gas assets in Columbia? Likewise they mentioned, whether we have any additional divestment plan in the short term in the sense?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [8]
------------------------------
 Yes, Moldova and also some other geographies where we are present in a very residual fashion are subject to analysis to analyze the possibility of an asset optimization through divestments. We still have no specific news, but there are some geographies where we are obviously, given the situation, has these specific characteristics there under analysis. As regards assets in Colombia, we don't have -- well we naturally review these assets in Moldova, Kenya, Colombia, and the entire Group we review them permanently. But as you know, we have not reached an agreement with anyone to perform this operation.

------------------------------
 Unidentified Company Representative,    [9]
------------------------------
 Thank you very much Rafael. These are questions that have also been asked by Fernando Lafuente, Isidoro del Alamo related to what we're going to do with the proceeds, and they have already been answered by Rafael. We also have a question by Javier Suarez Mediobanca who asks about the impact the recent sale and supply distribution in Spain and the sale of assets in Italy have?

------------------------------
 Carlos Javier Álvarez Fernández,  Gas Natural SDG, S.A. - CFO   [10]
------------------------------
 Well, we've already mentioned this throughout the presentation, and I think it has been showed in a well done manner, the divestment operations of 20% of the gas distribution business in Spain has no impact in results. But it will use the equity through reserves. When it becomes materialize, we expect it to happen in the first quarter of next year. And this involves an increase of equity of around EUR 1 billion. The consequential impact of course is that having sold this minority stake in next year's P&L account, we will need to discount the 20% of the contribution of this business to the consolidated figure. And in annual terms, we were thinking this would be around EUR 80 million. As far as Italy is concerned, as Tony Basolas was saying before, the calendar; well want it to become materialized this year in 2017. So that is why, what we have been doing according to financial standards and accounting standards is to make the decision of sale in the first 9 months of the year. We see all the operations in Italy from January 1 up until now and also in the previous year. They are all reclassified as discontinued operations in the P&L account and there [line or entry] is EUR 22 million, which have been the contribution of Italy both this year and the previous year for this concept. And this also disappears from the balance sheet. So the assets and liabilities appear in a single line as assets maintained for sale. This is the snapshot of first 9 months, and if we conclude the sale before the December 31, then the capital gains expected for both businesses would be slightly below EUR 200 million -- EUR 190 million after tax.

------------------------------
 Unidentified Company Representative,    [11]
------------------------------
 Thank you, Carlos. We now move on to the next block, which relates to the strategic plan and the perspectives for 2018 including targets. We start with Rui Dias from UBS. He asks whether we should expect a significant change in the strategy of the Group as far as the existing plan is concerned.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [12]
------------------------------
 Well significant change, we would need to define this more specifically, but without a doubt, the following significant changes have taken place. The change in scope in the first glance and this is a significant change that we are going to include in the second place; the changes in the behavior of the regulated markets and commodities. We will bear this in mind without a doubt too and also take to account the positive aspects of the efficiency plan which had not been forecasted and that's fairly significant and also the entry into force of renewable investments, which are going to be very notable within Spain and abroad. All these factors are the ones that without a doubt, will modify the current targets for the following years. And in the month of February, we will explain this in greater detail.

------------------------------
 Unidentified Company Representative,    [13]
------------------------------
 Thank you Rafael. We now move on to the block of perspectives for 2018, we will start with Javier Suarez Mediobanca. This is a question that has already been answered but it's (inaudible) he asks about the net income guidance for 2017 excluding the capital gains of Italy and changes of scope.

------------------------------
 Carlos Javier Álvarez Fernández,  Gas Natural SDG, S.A. - CFO   [14]
------------------------------
 Well excluding the atypical factors, we've mentioned this specifically on Slide 15. So excluding these atypicals, we would have a net result around EUR 1.2 billion. In Slide 15 precisely, we can see the different concepts that would take us from the EUR 1.2 billion to the EUR 1.3 billion to EUR 1.4 billion, which is the total result that we expect to have.

------------------------------
 Unidentified Company Representative,    [15]
------------------------------
 In this sense Javier Garrido from JPMorgan also mentions whether this EUR 1.2 billion include or exclude changes in scope for 2018?

------------------------------
 Carlos Javier Álvarez Fernández,  Gas Natural SDG, S.A. - CFO   [16]
------------------------------
 Well they exclude the capital gains of Italy as I was saying. But as Rafael, the CEO was saying throughout his presentation, this EUR 1.2 billion would be the recurrent equivalents discounting atypicals and we would need to add to this the effects, given the change in scope, which would obviously be discounting the profit contributed by Italy and the profit contributed by the 20% of the gas distribution in Spain, which is around EUR 110 million annually.

------------------------------
 Unidentified Company Representative,    [17]
------------------------------
 Perfect. I have 1 question more related to perspective and targets Carolina Dores from Morgan Stanley asks about the targets for 2018, given the fact that we have consensus around EUR 1.4 billion, EUR 1.5 billion. So what is our perspective in this sense?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [18]
------------------------------
 Well, this is what was reflected in the current strategic plan. But as I have indicated and because of the reasons I gave before, we are going to modify this target and the scope of the new strategic plan, which we will communicate in the month of February for now. As a reference, you could look at the details that we have explained in the charts we use for each one of the businesses and the projections for each one of them. But in any case, we are going to have news, which are the ones that you can see on Slide 30 in our presentation and which are now being quantified for the new strategic plan.

------------------------------
 Unidentified Company Representative,    [19]
------------------------------
 Thank you Rafael. We now continue with the -- we change blocks now, and we go to efficiency plan Fernando Lafuente by Alantra Equities asks about the operation of the new efficiency plan whether it's aligned, express or better? And whether we think any -- have any capacity of increasing it?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [20]
------------------------------
 Well, we're currently meeting it. We're complying with it. It was an ambitious plan and we will include it in the strategic plan in the month of February. The way you know it, it's still very soon to start thinking about its improvement. We launched it in the last quarter and we are now starting to implement it. We are working on it, for now.

------------------------------
 Carlos Javier Álvarez Fernández,  Gas Natural SDG, S.A. - CFO   [21]
------------------------------
 If you will allow me to add just to Rafael, it is true and the way it's been contemplated and this is how we saw in the Outlook 2018 Slide 30, the fruits expected in the plan are -- I don't know what have been expected, savings will be next year about hundred-and-something-million according to what has been projected. But it is also true that in order to accelerate the -- essentially the savings, we will try to save and capturing costs or to invest in capturing costs in order to precisely increase savings. These are going to be neutralized in 2018. That's why we were using the equal sign in the outlook for 2018. As far as the efficiency plan is concerned, this does not mean that it does not meet our targets but in order to speed up savings as much, we are adapting the capturing cost to capture those savings as much as possible.

------------------------------
 Unidentified Company Representative,    [22]
------------------------------
 Okay. So we're now changing blocks. There is a question related to Electricaribe, Pablo Cuadrado from HSBC asks related to recent articles that have been suggesting that Colombia would be interested in returning Electricaribe to Gas Natural Fenosa, do we have anything to say as far as this is concerned?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [23]
------------------------------
 No, we have nothing to say. We have no updates. We only know about this news that has been published. The current situation is that we continue to have our arbitration for [UNCITRAL] in the United Nations knowing that we have more than enough reasons in the litigation process, given the lack of regulatory compliance, the Colombian state has had with us, and for now nothing else to add.

------------------------------
 Unidentified Company Representative,    [24]
------------------------------
 Perfect. So we now move on to the questions related to your activity and we will start with the network business, particularly we start with gas distribution where Jorge Alonso from Soc Gen has a question related to the tariff review in Argentina and whether it is along expected tracks?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [25]
------------------------------
 It is true that the plan that we have projected for this year, well the Argentinian government divided into 3 or split it into 3; 1/3 has already taken place; the second one is taking place this month of November; and next year, we'll have the third one. I've been able to personally be with higher representatives from the Argentinean government and things are coming out perfectly well, according to plan.

------------------------------
 Unidentified Company Representative,    [26]
------------------------------
 We are very sorry, but no microphones are being used in the hall. Thank you very much. We now move on to -- we now continue with the network business and electricity distribution particularly Carolina Dores from Morgan Stanley asks about the additional loads Panama is experiencing and whether they are going to continue affecting 2018 or whether it is just a one-off element for 2017?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [27]
------------------------------
 No, this is just old results, negative results from Panama growth. In this case, all are atypical. As far as these singular costs are concerned, it is just one shot for adjustments of previous years with a regulator, which disappear and do not come back. And the rest, which is lower demand, it has also been very atypical and we don't expect this to happen again. Thank you.

------------------------------
 Unidentified Company Representative,    [28]
------------------------------
 Also in electricity distribution, Carolina Dores from Morgan Stanley asks about the evolution of Moldova and the impact of the tariff review there, whether if it's only for 2017 or it can be also reflected in the rest of years?

------------------------------
 Antonio Basolas Tena,  Gas Natural SDG, S.A. - MD of Strategy & Development   [29]
------------------------------
 Well the impact we have in the year 2017 essentially is non-recurring sub-investment impact, but we need to see how tariffs are left for the year 2018, but the impact that we have in 2017 accounts is a non-recurrent impact.

------------------------------
 Unidentified Company Representative,    [30]
------------------------------
 Thank you Tony. We now move on and we continue with the business block and we now we move on to the gas supply questions. We have quite a few here, I'll try to be quite orderly. We start with some questions by Rui Dias, UBS; Isidoro del Alamo, BBVA; Harry Wyburd from Bank of America Merrill Lynch; and Pablo Cuadrado, HSBC; Carolina Dores, Morgan Stanley, et cetera. They ask about the evolution of margins in the quarter and whether we can give a better explanation of what has happened in this quarter as far as margins are concerned?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [31]
------------------------------
 Well, I think this has already been explained in the presentation, and I think that this is the situation that we've seen especially in the months of July and August, which have affected all markets and particularly the Spanish market, because there was a surplus of gas and this excess has come contractually to Spain and has affected specifically the field of renewals that have taken place in those years. That's the situation that has taken place in the year and these 2 months, July and August, these are circumstantial situation. What are we seeing is that this situation has ended. This gas excess does not exist anymore, and demand -- international demand perspective has changed and the circumstantial upturn that took place in July and August is not taken place anymore. So now with the outlook of this fourth quarter, but also more importantly the 2018 outlook, we're moderately optimistic and we're seeing that that clear position in July and August is just circumstantial and temporary and is not being repeated in following months. I'd also like to add that it's true there is worsening in the gas business, but despite this situation, I will now mention in greater detail and despite the third quarter, the resilience of this business and strength is notable and significant, despite the unfavorable circumstantial situation. Our negative results this period versus the previous ones are mainly due to the electricity business. But in the gas business and as far as this quarter is concerned, I would like to indicate that there has been, in all markets a gas excess or supplies that has -- it has several reasons, very likely one is the very smooth Austral -- very warm and smooth Austral Summer, well consumers of LNG, important consumers of LNG only consumed a minimum part of those tankers. Same thing happened with Chile, because of the mild temperatures and that made consumption drop very notably, this linked to a very singular international circumstance led to trading operations in all markets to be very notable as we've already seen in the graphs I showed before, and as you can see also on Slide 31 and Slide 32. This has changed already and we expect these trends to become more solidified in the next few weeks.

------------------------------
 Unidentified Company Representative,    [32]
------------------------------
 Thank you, Rafael. Continuing now in the gas block. There is a series of questions by Antonella, Citi; Harry from Bank of America; Jorge Guimaraes, Haitong. They asked about the gas supply contracts for 2017 the ordinary review, can we quantify the impact and can we somehow gave an estimate of the timings for the review of all these supply contracts?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [33]
------------------------------
 Without a doubt, these are reviews that take place every 3 years. They are ordinary and they are related to the situation of the market in those 3 years related to the initial hypothesis. We are optimistic because contracts in this case, the ones expiring are Trinidad and Tobago, Qatar, Nigeria and Algeria. Those that are opening the period of ordinary review and negotiations (inaudible) last month, quite a lot of time. And in any case they always have retroactive effect once -- 1st of January 2018 knowing how long they will last, well that's complicated and difficult to forecast. They are not fast re-negotiations. But in any case, we should have, throughout the year, a clearly idea of how they're doing. We expect to see a reduction, significant reduction of our supply contracts given the behavior of markets. But it's difficult to anticipate things now. And in any case, we are going to work to see whether in the month of February, we can anticipate something more specific.

------------------------------
 Unidentified Company Representative,    [34]
------------------------------
 Thank you very much. And now to finish with this gas block, Stefano Bezzato from Credit Suisse and Isidoro del Alamo from BBVA. Isidoro ask whether we can give a better visibility on gas volumes for 2018 and Stefano and Isidoro mentioned whether we can give an EBITDA estimation for 2017 in the gas business.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [35]
------------------------------
 As regard volumes, we already indicated that for next year the volume will be stable or slightly downwards. We clearly expect to see a recovery in the residential market in Spain, which this year has been atypically low given the temperatures. And once again, statistics show that this should not happen again. We also expect to see a recovery in the LNG market, which is already taken place in Asian markets, and also, once again these smooth Austral Summer and mild Austral Summer should increase LNG consumption in that area of the world and that region of the world. And for us, the value market should become stable worldwide. We think that the market will grow. As far as figures are concerned, it would, they would lie within the trend for the last quarter, we expect to see a relative improvement of EBITDA and the margins that we have had in these 9 months, in any case, better than the third quarter.

------------------------------
 Unidentified Company Representative,    [36]
------------------------------
 Thank you Rafael. Continuing now with de-regulated businesses, but I'm going to electricity in Spain, there is a question by Manuel Palomo from Exane BNP and he asks whether we can talk about our hedging strategy in the electricity sector in Spain for 2018?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [37]
------------------------------
 Well, we continue to have a hedging strategy which is to match in volume the transactions adjusted to poor margins to poor risk in supply and volume for instance, they have been hedged. The problem is that this hedging and physical volume is not equivalent to financial hedging, it depends on many different factors, such as hydro production, wind production, the cost of gas, et cetera. So in terms of volumes, we will continue to have the hedging policy. We are not -- I know other competitors have different policies. We're not going to be too long in supply, because this is true, this is a recurrent reflection in the sector for years being quite long in supply has benefitted because of unstoppable trend to reductions in the electricity pool. Our opinion for getting about specific occasions, this is difficult to sustain to go back to the pool levels of 1 year or so. It's difficult to sustain the generation market in Spain altogether and costs do not justify this at all, especially when we're starting to see important renewable generation, we will have to go to market risk, those that are auctioned and those that are now seizing to be subsidized. That is why they're entering markets in such favorable conditions. So we think that physical hedging is a reasonable measure and that the volatility of markets -- well, we need to try and reduce it as much as possible and for this reason we're not going to have speculative positions in supply.

------------------------------
 Unidentified Company Representative,    [38]
------------------------------
 Thank you very much, Rafael. And with this, we would close the peer activity block. And now we go to the last block of questions related to the P&L account. The first question is Rui Dias, UBS; he asks about the average cost of debt and what do we expect this to be at the closure of 2017 and whether we believe that there still some room to improve in 2018.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [39]
------------------------------
 We have guided throughout the presentation and I think this has been made explicit in Slide 10, the average of debt cost, the first 9 months of the year is around 3.6%. But we are estimating that for the entire year altogether we close in 3.5%. So the expectation is to close with a slight improvement of this figure. And as we've also mentioned, the CEO has mentioned, we continue working these debt optimizations that we have carried out. Some of them have taken place in April, liability management and the operations of EUR 3 billion of loans, they have affected in the third quarter. So all these operations and transactions will have their full reflection in the P&L account of next year because they have taken place halfway through this year. And we're also going to continue performing additional operations that will allow you to continue improving in our cost of debt and we will also approach this as one of parameters to be included in the strategic plan for the next 3 years.

------------------------------
 Unidentified Company Representative,    [40]
------------------------------
 Okay. One more question related to debt, Jorge Alonso Soc Gen. He asks whether the leveraging levels in terms of net debt-to-EBITDA of 3x continues to be a reasonable level? Whether the company feels comfortable or do we expect to be below that in 2018?

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [41]
------------------------------
 Well in principle, with the divestments that we expect to collect in the first quarter of next year. We would be around 3x with the amount. And in principle, there is no additional figure. Our initial figure that shows that we will have a different figure to this one. Having said this, whenever we launch the strategic plan and whenever we present it, we will contemplate how this verbal moves throughout the plan and what our targets for 2020 would been, depending on the investment plan and the levels of debt that we want to have and also remuneration and compensation for the shareholders.

------------------------------
 Unidentified Company Representative,    [42]
------------------------------
 Okay. So we now go to the last question which I think is something that has been explained to the market in previous occasions, but it is a question about whether we have any hedging of the type of currencies, et cetera.

------------------------------
 Carlos Javier Álvarez Fernández,  Gas Natural SDG, S.A. - CFO   [43]
------------------------------
 Well, if we look at the P&L account and there is a line of plans with exchange differences, we can see that the operational ones, financial ones in this group are zero. This means that the Group in all its operations and transactions, where we negotiate and deal and payments and collections affecting operations the company performs all necessary hedging so that there is no differences -- exchange differences and this is shown in the P&L account. You can see it, both positively and negatively, you can see that that item or entry is there when we speak about forwards and the effects and implications for next year and repercussions for next year. And this year, it is true that the company has not to date and essentially because this is not common practice or accepted by accountancy regulations is to hedge the positions of results in the financial statements that are not denominated in Euros. Here we are subject to volatility of conversion on those financial statements to Euros in the consolidation process and this is to the effect or the effect we've spoke about it in the past. To-date, as I said, the company has not agreed to do so. And maybe in the future; well, we will always think about these things, of course, but they have not yet been done to-date.

------------------------------
 Unidentified Company Representative,    [44]
------------------------------
 Thank you very much, Carlos. So this was the last question. So we will now close this Q&A session. I would like to remind you that if you were not able to send your questions, you can get in touch with the team relationship with investors and we're totally at your disposal. And now Mr. Rafael Villaseca.

------------------------------
 Rafael Villaseca Marco,  Gas Natural SDG, S.A. - CEO, MD & Executive Director    [45]
------------------------------
 Nothing more. Thank you for your attention and we expect we can talk to you again soon, in 3 months' time. Thank you very much.




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