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Executives

Rafael Villaseca - CEO

Analysts

Alejandro Vigil - Cygnus Asset Management

Pablo Cuadrado - Merrill Lynch

Javier Suarez - Nomura

Jorge Alonso - Societe Generale

Carolina Flores - Morgan Stanley

Michael Ridley - Mizou

Gas Natural S.A. ORD (OTC:GASNF) Q4 2012 Earnings Call February 19, 2013 4:00 AM ET

Operator

Good morning and welcome to the results presentation for 2012. The presentation will be given by the CEO, Mr. Rafael Villaseca together with the Finance Director Mr. Álvarez and the Director for Strategy and Development, Antonio Basolas. After the presentation, we’ll have questions and beginning with the people in the room and then people who followed us on the phone or on the internet.

And I'll now pass the floor to the CEO, Mr. Rafael Villaseca.

Rafael Villaseca

Good morning, those of you here, physically in the room and those of you listening on the phone or on the internet. As usual, we are going to have this presentation based on this agenda. We are going to talk about highlights first. Then, we are going to talk about our capital structure. Then we will talk about growth of international operations. We will analyze the consolidated accumulated results of the year. Then we will refer to each of the businesses, lines of business of our company and then we will conclude and have questions and answers.

If we begin with the highlights, we have to say with a great deal of satisfaction that we have complied with our targets in the strategic plan for 2010 to 2012. We had established a target of an EBITDA of more than €5 billion by 2012 and we've had an EBITDA of €5.80 billion which is a growth of 9.4% over the previous EBITDA.

On income earnings was about €1500 million and we've got, we've achieved €1441 million so that's 8.8% more than the previous year. Our net debt target was as of 31 December 2012 of about €16 billion and it was, it has been €16 billion which means a reduction of 7.5% in terms of the debt that we had the previous year. And the net debt by EBITDA ratio we wanted to achieve a target of about 3 and its 3.1. So I say that we are very, very happy to have complied with all our strategic targets. We think they will really stick and we worked in a very complex, very tough environment, macro, micro economically very complicated and we are very happy to present these results which we are now going to analyze with greater detail.

We have to also say that the Board has approved the distribution of dividend for a total dividend for 2012 of €895 million which means an increase of 8.7% as regards to dividend in the previous year; a payout of 62% and a yield of 6.6% as regards the closure of the previous year. All this will be paid in cash. We won't have the script dividend system this year.

Also important in the highlights, we have to underline the very good performance on the stock market. If you look at IBEX and Eurostoxx Utilities indicators, if you look at the previous year, we went up by 3.35%, which is in contrast with the drop in 4.66 of IBEX and our 8.32% of Eurostoxx and this can be seen yesterday when after the closure yesterday, we can see that our company has had a very big growth, important significant growth. This also happened in 2011, it happened again in 2012 and we're going to see whether we can do in 2013.

I would like to also comment some of the most recent events as regards our activities in several areas; all of them important. The first is as regards the financial structure, we have to say that in 2013, as you know, and I want to underline this, we have issued €800 million in two bonds issuances. The first one was €600 million, 10 year, €100 million issuance and the second one was €250 million in Swiss francs six year issuance, both were done in very competitive conditions and were the high level of demand, which reflects clearly the interest that there is on the market for our paper. And over 2013, in the first quarter of 2013, we securitized €140 million of tariff deficit.

This is for the securitization of the tariff deficit and as we said recently we have sold our share in the two electrical distributors we have Nicaragua for $58 million and we have after negotiating for quite a long time acquired 10% of the gas line there, the Medgaz pipeline and that allows us to participate in the infrastructure of the gas line between Algeria and Spain and also access a contract of gas for 10% that is an additional 0.8 Bcms for 18 years that strengthens and diversifies the portfolio of gas contacts.

Very importantly too, I will have to talk about regulation measures that have been introduced since the end of the previous year, until the beginning of this year. At the beginning of the year, the fiscal measures aimed to tackling the electricity tariff deficit finally were approved. They are imposed since the first of January; the nuclear tax, the green tax, the hydraulic tax etcetera. All these measures have been introduced in operations. They were introduced, they were evaluated at about €3 billion, was the total package of €450 million which would be an estimate of the cost of the auctions of CO2 which this year was completely as you know free rates disappear. The impact for the company is, well of all these fiscal tax measures, the impact is about €340 million, but we must disclose the following exceptional, these tax measures naturally apply to variable and direct cost in a system which is marginal in terms of cost.

So it can be translated into the final or end price, but it’s also true that commercial situation and the idiosyncrasies of the market which is sometimes full of interventions is measures which prevented from working as flexibly and quickly as a liberalized market should makes it difficult to know when finally we are going, be able to translate into cost into final costs.

We believe that this will be a process that will move forward, return the code, but its difficult to know how it will actually end, the moderate cost will be and how that will be brought to the final price. These are variable directs cost and as I say they can be applied to the final bill, the consumer price.

Now we must also say that on the 1st of February the Royal Decree-Law 2/2013 was approved, sorry before that the 29/2012 Royal Decree-Law at the end of last year, there were other terms that are really important that led to a situation where deficits were not limited for 2012 and 13 and opening up the possibility of securitizing the excess over the €1500 million the previous year, more will be generated this year, also limited the premiums for special regime installations were limited beyond certain installations that were already in operation.

Another measure is the Royal Decree-Law 2/2013 approved by the Spanish Parliament, passed by Parliament on the 1st, February and there are two main measures in this decree. The first is to change the updating index of all the regulated activities, it is not just a CPI, the CPI without certain products being included, it’s a correct and adjusted CPI which means that will go from 3% updating to zero which would be the practical result of this.

Also there's an elimination of the option to opt whenever you wanted to for the special regime generation and to choose between regulated tariff and market price. There's been two other measures that must be considered, the first one is that as a ministerial order which assigns as from 2014, 100% of extra peninsular costs to the state budget.

So that means that in 2013 that won't be assigned. Those amends will be assigned, it won't be carried by the electric system and also the government has announced that there's going to be, proposes approval of 2.2 billion line of credit to fund the mainland tariff deficit. This leads us to believe that in 2013 the tariff deficit will be under control and quite surely will be well balanced and will not increase the deficit in our system on increase.

I must also say and this was yesterday that the order, the updates, the obligation of companies to buy and burn national coal to produce electric energy. That order was approved yesterday and that will change the cost situation to them. We are analyzing this to see what the impact would be in our position as regards, this new order which is another example of interventionism in liberalized markets which is unfortunate in our opinion and we will have to see what the effect is.

I must insist that these measures are going to balance out the electric system this year and we are on the road to recognizing these problems and to look for solutions. The Ministry has said several times and we hope that the necessary measures are implemented this year to deal with this problem and we really are happy that important measures are being taken to deal with these problems.

If we go into our financial our capital structure we have to say that we are also very satisfied with the effort that we've done to reduce our debt which we reduced by 10 billion Euros in the period between 2009 and 2012. The result of the operation of buying Union Fenosa obviously that increased our debt and that's gone down by 10 billion.

In 2012, we reduced our debt by 1.3 billion without any extraordinary items having been resulted to. At the end of 2012, our net debt was 15.9 billion and it would have been 1 billion less had we collected the tariff deficit that hadn't been securitized or collected yet. So we've got our net debt EBITDA ratio of 3.1 and which would be 2.9 once we get the tariff deficit amounts that we are owed.

And complying with our commitments has allowed us to now have a good amount of capital available. We've done this overtime, you know, and we've done it years in different measures by selling assets. We increased capital, refinanced debt and all this has been done in a very complicated environment.

We have to say since 2009, we've issued 11 billion Euros in bonds, in different operations and markets and that’s been done in spite of the very bad environment that the markets in and we think that is due to a sound business model which is based on a generation of positive cash flow that we want to continue to have in order to continue to do things properly in the near future and in this respect, allow me to tell you that we've been successful in this debt issuances.

In 2012, we contributed with three new issuances, two billion Euros and 130 million in Colombian pesos and two issuances more in January 2013 for 600 million Euros and 250 million Swiss Francs that has allowed us to increase the average life of debt by five years or up to five years and very good conditions. The issuances in Euros that had been done, the average period is seven years and the average coupon is 4.8%.

As regards to the securitization of tariff deficit which is a problem that we believe is now on the way to being solved thanks to (inaudible) and to the decisions of the Ministry by limiting the increase of these things and what we have to underline here is that we had 1.2 billion at the beginning of the year. We got 1.065 billion at the end of the year.

Now, 1.065 is part of the 7.7 billion which in total the electric system in Spain owed electric companies as a result of the tariff deficit amounts. The royal decree 29, 2012 allows for the access in 2012 that was a wide access and be carried out by Friday and we also believe that the problem is on its way to being solved and we hope that it will be completely sorted out soon.

As regards to the profile of our debt, we are always conservative when we look at these problem of refinancing and it has always led us to extend our period of growth and give ourselves enough space to refinance our activities, the expiry dates, we are talking about net debt of 16 billion and a gross debt of 20.4 billion.

So, our financial needs are covered until the year 2014 and we are beginning to solve our problems in 2015. And all of this, we think we are doing with a quite efficient structure, financial structure because the risk profile is very well balanced at the top left you see the 80% of our debt is fixed and the 20% is floating.

Our debt in 2012 our average debt and debt level was 4.8%, 86% is in Euros, 7% is in dollars and another 7% is in other different

Spanish American mainly currencies. And we have a significant amount of that on the capital markets and 67% is finance on the capital markets and that would go up to 72% if we had securitized or discounted the amount that correspondence to the tariff deficit that we are owed. In addition to all this, and in line with our policy for many years, we have and we tried to have ample of liquidity available, 9.6 billion at the end of last year which was momentum which product sales could cover 24 months of our financial needs. This liquidity is less than 10 billion is broken into 4,400 million in committed lines of credit and then the rest in non-committed lines of credit.

And then we got 3.7 billion and we got additional capital market availabilities of about 3.7 billion in both euro and Latin American programs Mexico, Argentina, Panama complimented by recent CRP Columbian pesos 500 billion program. So the liquidity enhanced in the first quarter of 2013 was enhanced by 1 billion after bond issues, tariff taxes securitization and disposals.

So I think its clear that we have an ample liquidity and that will continue to be our objective. Let's look at our growth of international operations which are the key to our results because our results in Spain don't show the effect of regulation, the impact of regulation and also the impact of the economic situation. In 2012, the international activity handed 42% of our EBITDA on these international activities accounted for 2.19 billion euros. Of that EBITDA 58% corresponding to Spanish America, 32% to international gas market activity, infrastructure and wholesale market and then regulated activities in Europe and the rest of the world account respectively 5%.

But as interesting as this breakdown is, this other breakdown where we see we must underline that the EBITDA that's been contributed by our international operations grew last year by almost 23% and that's the key of our results. We are therefore growing healthily in our international operations and especially in activities that are described here as well, that include wholesale gas sales mainly on international markets.

However, our activities in Latin America continue to maintain a robust and sustained growth with figures that are close to 9%, and I think that this is a good example of the soundness of our business model.

If we look at gas, international gas sales there's 21% growth in this year in international gas sales, 12% in Europe and 24% outside of Europe, growth which is quite important and places us as one of the most important players in the international liquid gas market business. We reached almost 90,000 kilowatts per hour in foreign sales. 30% of the Gas Natural Fenosa deals with it goes to international markets.

In spite of the bad movement of European markets to have a commercial strategy on European markets that is significant, we have our own commercial facilities in France, Benelux, Germany. That allows us 32 terawatts an hour yearly in Europe. The ability to be so flexible to generate our own gas and our commercial activity have all allowed us to open up market, not just in Spanish America but also in Asia in such a way that the growth of gas sales outside of Europe has reached 24%.

And all this I'm not going to go into too many details, but this is a model that covers the China, goes from procurement through the gas pipelines or liquid natural gas. The transport of all this using ships or pipelines and then placing the product in the adequate places. We must underline that we are interested in final physical markets, not trading so much apart from exceptional cases.

We want to deal with physical markets and establish medium and long term commercial relations with markets. So the diversity of our system the way that we use gas products and liquid natural gas; the character of our contracts and the range of prices we have is allowing us to cover this complex market very well, and all that together with electric generation assets, and the gas assets allow us to develop a join gas electricity strategy which for several years now has revealed itself to be very successful.

One must add now that we have recently acquired 10% of the shares of the company that exploits the Medgaz pipeline and contract for the 10% 0.8 bcm a year and that’s an 18-year contract. So this will reinforce the portfolio of contracts and agreements in our company and allow us to be present in this significant infrastructure of gas supply from Spain.

In terms of liquid, international liquid natural gas business, allow me to insist and tell you that’s our situation allows us to make use of the opportunities that the market gives us. We're present in the Atlantic and Pacific basins. Practically, on a 50-50 basis, this together with logistic and commercial organization to follow the markets very strictly allows us to develop operations that we think are good by not getting involved in take or pay operations that are not attractive and optimize this exposure to most profitable markets.

Now how are we going to act. Undoubtedly, natural gas and therefore liquid, natural gas, we're sure is going to continue to be the main fuel or one of the main basic, maybe the basic fuel for the energy development of the world and we're sure, we're convinced that our presence in this market will be undoubtedly rewarded.

We have to see what will happen with the producing countries, not just for conventional ones but the ones that are developing shale gas that are present there see what happens another places. What’s going to happen with the plants to treat and process the liquid gas and take the gas to the markets that need it what’s going to happen with the variation in demand not just in Europe we hope it recovers but also in Asia and Spanish, America and as I have said in Europe and even Turkey, and we follow with great interest the progress of the Egypt with our plant in [Damiata].

We have a 90% share in that plant, our group has a 40% share in that plant. A political social situation in Egypt has led the situation where this plant has been out of supply for a couple of months and we hope that this will be solved soon and they can start up again soon. Altogether for the immediate future, we believe that margins for LNG are going to remain the same. They have gone up slightly recently may be because might be a temporary thing, but for the year may be we hope that they will stay the same or may pick up a little bit and in terms of volume we also expect stabilization and may be a little drop due to the situation in Egypt.

We will continue to try to arrive mid-term agreements to place our gas like we have done in India, like we have done in Japan and also in the Atlantic Basin. We have just signed a 2 bcm contract in Puerto Rico and we are going to continue to work along those lines, and in terms of supplying we have got the Medgaz contract there in addition to the Shania contract.

If we go to Spanish America, the EBITDA has been $1.267 billion euros and here you see the distribution [$640 million]. This is distribution $366 million and 21% other sources of generation. Cash is predominant as you see, if you go by countries you see that the country that most contributes is Columbia followed by Brazil 310. Although we have to underline the situation of the Brazilian currency is penalized as the results there, past this year.

So we got a sound profile in every quarter we continue to be positive and well balanced. If you look at each different business, distribution gas activities still have a higher potential of growth. We have exceeded the 6 million points of supply with an increase of almost 4% in the number of connection points, and we go to underline the growth in Mexico and Columbia.

As regards to the sales of gas they’ve gone up 10% and they exceed 210,000 gigawatts an hour. So the EBITDA grew by 3% and reach 640 million Euros. As regards electric distribution apart from comparing with Guatemala and including Nicaragua which as you know we have taken our investment there, but the business is continuing to do well, electric sales go up by 7% and the supply points have gone up by 4% and they exceeds 3700. The key is the increased amount.

EBITDA grows by 20% however we must remember that the previous year it was penalized by the special tax in Colombia that we told you about so the comparison is not consistent but in any event growth is clear and positive. As regards generation activities in South America our business is 100% regulated in South America basically PPA contracts, the increase of EBITDA has been 6.2% and has reached €261 million. Production increased by almost 12% and has made up for the lower degree of activity of the two span plant but all the other plants had a positive performance of almost 6%. Two new projects are in development and are very important that we finish this year. The Wind Park of Bii Hioxo in Mexico and the Hydro Plant in Torito, Costa Rica, the 50 megawatt Hydro Plant.

If you go into the financials I won't go too many details here about the P&L account for 2012, just tell you that our net sales went up by 18%, the EBITDA as we've said, went up by 9.4% and the result after-tax is 8.8%. If we had adjusted for after-tax for the year, this investment and the extraordinary income of both the years this figure would be 28.8%.

If we talk about the make up of our EBITDA, the breakdown of EBITDA that's grown by 9.4%, we have to say that distribution business in Europe has gone down. The reason is the drop in electric distribution and this is in Spain. The measures at the end of the March last year were introduced notably reduced remuneration of electric distribution and its results and then we will tell you how we've reacted in the face of that very, very severe drop in electric distribution in Spain.

That's stable behavior and maintenance increased to the gas business registered an increase because of the international activities I mentioned in Latin America, on the whole grew by 8% which is quite significant, so this final figure with 9.4% increase for EBITDA and if we take into account divestitures the figure would be 11%.

Now if we now turn to investments, you will see that they were lower by 3.5%, 66% were regulated. But let me highlight that the electrical distribution in Europe investment in this distribution went down by 20% and investments in generation in Spain went down by 20%. As a result, the first of, the as a result of the regulated measures and of the situation at the market our investments in both areas especially distribution have gone down and will keep going down in line with OpEx in order to compensate for the severe regulatory adjustments we've been subjected to in spite of the fact that if you compare the distribution, the remuneration of Spanish the Spanish market vis-à-vis other markets per customer, per kilometers of lines, per kilowatts hour sold, our efficiency ratios are undoubtedly one of the best in Europe.

Now if we go on to operations and if we start by electrical distribution, if we speak about our company you can see as you know that demand in Europe has been flat, although in Spain, the electrical demand fell by 2%, well 1.7%. The Royal Decree degree I mentioned in the month of March had an impact of €110 million on our books and it led to a reduction of 10% in EBITDA. So against this background, we have implemented a program to reduce OpEx and CapEx in order to be able to react to this significant fold in income.

The investments went down in Spain by 21%. However, as a result of the investment against the backdrop of policy geared to achieving high-quality, it would still enjoy high-quality level and the quality index went down by 21%, now it's only (inaudible). So the improvement is of 21%. So we will follow this up very closely in order to try and compensate for the severe regulatory adjustment.

Now in terms of gas distribution, you can see that the fall in sales was of almost 3% basically because of divestitures, as you know in the Madrid area, we are still expanding the distribution network because Spain is not a gasified country and not a gasified country; we are far behind Europe and I am not talking about new buildings, we're talking about existing homes. So we're working to take gas to existing homes. So supply points have risen by 2% and now the total is of about 5.1 million supply points. And we also have portfolio of non-connected in homes that has increased and the reason for this is that gas prices for heating is highly competitive and so we can go to existing buildings in order to switch them to natural gas, because of the low penetration of this fuel in our country, the business has contributed about €900 million EBITDA and so the figure of previous years has remained stable.

Now in terms of the energy business in Spain which is deregulated on the whole and subject to severe regulatory interventions, so the demand can be as follows. In terms of gas, the conventional demand that is residential and industrial demand has risen by about 6% unlike electricity gas based electricity demand which fell significantly and so the overall figure was significant; still consumption of gas for electricity went down by 23%, but conventional demand didn’t go down it had a positive performance both with the residential and the industrial areas in terms of the demand for electricity for the third year in a row we had a full of 1.4%.

Now if we now speak about the electrical area, our business sales has gone down and this is because a reduction in the ordinary regime of 3.6% and an increase in the special regime basically wind energy of 14.2%. This year as you know higher volumes and coal plants that resulted into two factors, the Royal Decree to support coal and the low price of imported coal, and so there has been a full hydro production because of the lower rainfall and also a significant production of combined cycles influenced by the divestitures (inaudible).

In our sales we upheld the policy to optimize that position and trying to optimize our margins and not our share and this had a very positive results. In previous quarters, I mentioned that we were not going to uphold the policy of market share, but we went to trying and optimize our commercial policy, and this has given optimal results and this together with the evolution of fuel price markets and the CO2 emission rise and the change in the production makes the impact on generation cost have been such that EBITDA rose specifically because of our selling policy.

Now in terms of the special regime, let me tell you that production rose by 14.2% because of the fall of 21% in wind energy and the reduction of 8.5% in hydro energy, co-generation increased by almost 4% and so EBITDA increased by 11% reaching €155 million. Now we are still working and we are going to finish the work this year on Belesar II and Peares II in Galicia and we are still so working on the wind farms in Australia and Mexico.

Now if we turn our attention to the gas markets, you can see our evolution this year. We have had sales in the Spanish market of plus 1.6% which is in contrast with reduction of the Spanish market as I would say. Overall, well this figure was quite good. This has been possible thanks to an increase in industrial science and sales to third parties of 3.4%, an increase in residential customers of almost 12% thanks to the weather changes and then a reduction of gas devoted to electrical generation of 8.1%.

We are still actives on commercial activities a bit of it strongly, most of our sales were focused on industrial sectors and we also made an effort to reach a figure of 1.4 contracted customer and this is an increase of 4% and an increase of 5% in maintenance contract so focused on dual fuel policies and achieving a good commercial situation in the market where clearly we are the leaders and we are so want to be leaders I'm talking about the Spanish gas market.

As regard to Union Fenosa gas, EBITDA was 256 million and there was a reduction of 7.6% because of a higher cost of sourcing. The reason that can explain this best is the uncertainty in terms of supply from Egypt. In Egypt, the situation is precarious because of the situation of the country. We are negotiating with the people responsible for that about the political level and the industrial level in Egypt to try and address the problems so that all these difficulties can be solved.

We are also acting internationally to supply from Oman but the gas coming to Spain is now 2.2% lower. The lower levels from Egypt have been offset by other suppliers and by other purchases in international markets. And now if I go on to conclusions, I will repeat that we are highly satisfied.

We delivered on our commitments for 2012. EBITDA grew by 9% and 11% really on homogeneous basis. And we managed to strengthen our financial structure in a very significant way and both markets have recognized this because and this is shown because we managed to exit those markets in a favorable way and this is perfected by an 8% increase in our dividend.

In terms of the prospects of this year, we need to analyze the impact of the fiscal measures imposed by the government most of them are connected to a (inaudible) through but of course its going to be some transfer time and its difficult to say how long this period is going to be and so how this is going to impact our cash positions.

But we will have to be as fast as possible but at the end of the day these are taxes that will have to be transferred to the consumer. Also the reduction in supply to inert gas because of the Egyptian crisis will still affect us but we hope to solve the problem in the near future. That has been a good performance of the Latin American market especially in gas distribution and of international market in LNG and the margins have been quite good. We don’t do and see but we're also, we have to say that we're still expanding our activities in GNL or in LNG in Asia and in the Americas and sourcing has improved thanks to the signature of the contract with Medgaz.

Now if we still look at the current tier, the cash structure, the financial structure has been reinforced by the issuance of bonds and securitization and the business structure would also be stronger because of the conclusion of two projects, namely the (inaudible) to retail and that of (inaudible). This is one of them is hydro and the other one is wind-based.

We are distinctively working on our program to increase the efficiency of our operations. We're highly satisfied. This has been one of the key to the development of our strategic plan. We have reduced our OpEx. As a result of the synergies that we've been able to identify, we're still going to walk down this path and we're convinced that we can obtain wonderful advantages in this way and in the second quarter of this year, we hope to be able to present to you once our board has approved it, our strategic plan for the next year.

The basic lines where we expect to work is strengthening of efficiency, retrenchment and operational costs and management of our assets, the maintenance of financial discipline which has been our motto in the last 30 years. It's still going to be very important for us. And we will adapt our growth to areas and segments where the markets showed growth and possibilities to have margins and the deregulated market that justify an investment and asset and we are going to work hard to keep creating growth platforms that allow us to capture business for the future in whatever geography may be relevant.

And I have finished my presentation and I am looking forward to your questions. So we will start by questions from the floor here. So I would like to ask participants to raise their hands and identify themselves before asking their questions. Thank you.

Question-and-Answer Session

Unidentified Analyst

Hello good morning, I come from (inaudible) and I have several questions, the first one has to do with regulations. I know that in previous quarters we have spoken about duration of the gas distribution business but now when you see other people having probably you should get ready to probably --- I would like to know your opinion about the new policies of the (inaudible) energy and his idea to converge all regulated activities and I wanted to know whether you had a conversation with Ministry of State what’s your take on the new electrical reform (inaudible) said yesterday in the presentation --- energy he spoke about a comprehensive reform I would like him to elaborate on these comments? Now the second question has to do with the margin of the wholesale and the retail market because it’s been a spectacular growth this year of 55% of the EBITDA per megawatt hour sold and you said that you that these margins to be stable.

Unidentified Company Representative

So I would like you to add some more information because the growth that has been spectacular, so I would like now whether you think this is sustainable, certainly in terms of the electrical generation business has been a good, the figure (inaudible) we might have touched rock bottom and 2012 and this business taken into account that the handful of the clients to have it, and now in terms of the regulatory reviews and (inaudible) was taken these reviews are going to be taken place in Mexico and Columbia, conversations had been start in this countries and in terms of the debt and the dividend there has been a good reduction in debt and good control of working capital, I want to ask you whether you believe that your management of working capital is still be positive in the 2013 and whether you think that you can remove or deal away with this dividend policy for good.

Now it’s a long listed question, now intensive gas distribution, I can't really tell what the Ministry is going to do, as the regulated business could be whatever they like, but in 2013 the gas system didn't have, they didn't have the deficit only 14 million, so in 2012, 17 million, so there is no really a big problem and in terms of the of the remuneration of the gas distribution, it has not (inaudible) and indictment and the remuneration of distribution is linked to obtaining customer and getting customers to consume so its anti-deficit really because that Gas Natural is not going to invest if they are not going to get more customers to buy gas, because otherwise we won't get any money, and if customers do buy gas and the deficit shrinks. So in principle that’s another reason why we should be more optimistic than when we consider the electrical [center].

Now the country is not gasified; our percentage is that’s 20 something. When the European average is 50% so the country needs significant investments for the gas distribution. We are convinced that whatever policies the government may implement they will have these considerations in to account.

Now in terms of our contract of course we've greeted the new secretary and we are very highly satisfied and to the efforts that he has made which is a very good conjunction, we believe that the new measures may be appropriate to address the current problems. The minister said that the current electrical factory had to change and we assure that the new Secretary of State will do what it takes to resolve this problem. But I'm serious that with last measures they have already shown a good attitude.

Now I've said in my presentation that we should shy away taking new measures every three or four months, since we don’t seem to be well managing to tame this deficit beast. But of course the new measures of the government are in the right direction and of course the problems that we are facing are related to the high levels of subsidies that are gravitating around the Spanish electrical sector last year. Subsidies were more than 11 billion euros.

So this should be contemplated as well as any other questions, so as to create an environment where we can go back to investing as soon as the demand starts recovering and demand starts requiring investment. Smart, great, as I said that all of these things will be necessary. We will of course need support investment for renewable energy to set all of it. We will require a very rigorous approach and we are sure that we are on the right track.

Now as regard to gas margins to talk about a global market - but this is really three global markets, the United States, Europe and Asia and the truth is it’s very difficult to have a crystal ball here and for the long term because when you forecast you normally make mistakes, but this year we don’t anticipate significant changes.

In the first quarter we’ve had a set increase, a certain improvement in our margins but of course this maybe due to short term trend. Now in terms of the whether the electrical generation problem has hit rock bottom, we don't think it has. The government still has to take steps and we need to witness recovery of demand So probably this year will also be a difficult year like we had last year and it will require a very minute care for management and things will become more stable probably in the near future when backup policies for subsidize energies clarifies and we also have to see the difference, fiscal measures, the impact to the market.

This is going to be a transition here but in a good direction towards a better situation. Now, with respect to Latin America; Colombia and Brazil are the two markets where they will be price reviews. This year in Brazil we're already started. Colombia will start briefly and this is quite normal. These are countries where the rules of the game are clear and we're convinced that things will be resolved with normalcy.

Working capital has been one of our obsession and it will still be. There are things like deficiency and capital fortitude, our hobby [hoses] and it will still be. Our Director General knows that this is something that he needs to be very careful about, and in terms of the script dividend there was definitely policies, where just the Board of Directors by analyzing the situation, may decide whether it wishes to offer share holder that possibility. We never had a skip dividend policy and we don’t have a policy to avoid script dividends either. The next question please.

Unidentified Analyst

I have three questions regarding gas margin for 2013 and 2014, 2015, ’16. The new counter capacity engineer comes into the market. I wanted to ask you whether this new capacity will be additional to the supply capacity contracted by the company and how this may impact margins. I guess (inaudible) gas is cheaper than the gas supplied by the company at present and how this may impact customer contracts whether there is going to be adjustments over the margins will improve in this regard.

Unidentified Company Representative

Now in terms of the debt looking at the plant for 2010, ‘12, ‘14 that you had the plant had a debt target that was lower than EBITDA which we have reached with the securitization of the tariff deficit.

Unidentified Analyst

So let’s say out in 2014 I am sure that we will have more information about this in the second quarter, but we will see our outlook in this respect and looking at the evolution of debt and cash generation I would like to know whether you are thinking of making acquisitions. There has been talk about privatizations in Brazil, Turkey, so I would like to know the opinion you have about this.

Unidentified Company Representative

Okay now in terms of margins we are convinced that natural gas will be a key fuel in the next few years. I do not make forecast because even in more predictable market such as the oil market the situation is very uncertain, but yes it still tend to remain a key fuel in (inaudible) and I can’t see any reason why the prices may fall but it’s so difficult to anticipate what may fall.

For supply it’s quite easy because there’s not going to be various significant changes but we know them anyway. In terms 2016 and 2017 with the first traction trains in the United States things may change, but of course this is just going to be 10 bcm, and in terms of demand we have got to see what happens with nuclear policies of country such as Japan and Germany, under developed countries such China, India and Indonesia because this will determine any intentions that may exist. Potentials in our opinion upward and downwards, but this of course have very strong speculative components.

Now the Shania contract at the current prices will be of course below the prices in Europe and the Far East, but we will see what happens when the moment comes. So this is a new source of sourcing in highly advantages conditions. Of course the supply is independent of customers and so we are free to sell this to whoever we may decide.

Now in terms of the debt we had a strategic plan and we of course included some aspirations so that we can have longer term perspective and we feel comfortable with the situation, we are going to analyze it under the new strategic plan and when we submit the strategic plan, we will be able to tell you in detail what our policy will be in terms of debt, and at present we are not considering any takeovers, thank you.

Any further questions from the floor here, yes go ahead please.

Unidentified Analyst

Good morning, (inaudible) JP Morgan. I have three questions. The first question is about the results of the third quarter. You didn't give any guidance in terms of 2013 but you did say that you would do your best to reach the same results in 2012. Do you think this is still possible that the level of (inaudible) and specifically in terms of two businesses generation and sales in Spain. Well, regardless of whether there maybe a pass through or not, what really accounts is the price at which you sell your product to your client. If this price going to be stable with respect to that of 2012 it will be slightly higher, what can you say about it?

Now in terms of selling gas globally you already gave us an idea about margins, but in terms of volumes, I think I understood that you said in your presentations that you were expecting stability in terms of volumes regardless of Union Fenosa again. So I wanted to know in the contract with Medgaz when do you think you will be able to absorb those volumes and when are we going to start seeing the growth associated with to those volumes; is it going to be in 2013 or is it going to be late or what?

Unidentified Company Representative

You know we do not provide any guidance so I'm not going to anticipate what may happen, nothing new under this time. We are not going to anticipate anything. We are not going to anticipate this year’s budget, you may obtain for the reference when we provide information about the strategic plan; but in terms of generation and sales in terms of the price of energy, throughout the year it would be logical to expect an increase in prices of electricity, because of fiscal policies, meaning taxes have been introduced and so inevitably this will have an impact upon prices paid by the final customer. The electrical pool has gone up a little already and as far as final customers, they are going to inevitably feel this because we cannot internalize all of these costs. It would be completely impossible.

Now in terms of selling of gas, we already had increases in volume of 0.8% so they are already a part of our supply portfolio. I was going to use them to operate on the market and this is going to be all at our disposal. As regards to second part of the question, we’ve got about 15 (inaudible) contracted for this year.

Anymore questions in the room? Alejandro?

Alejandro Vigil - Cygnus Asset Management

Hello good morning, Alejandro Vigil from Cygnus Asset Management. This has to do with one of the questions before as regards conversations with the Secretary for State Energy. He has inherited a system of new taxes for generation that are affecting the pull in the marginal system and increasing prices in Spain. Do you think that they have any intention of changing that model to do away with the deficit and look for other alternatives; do you think that tax model will be continued with or you don't think that that law that came into force on the 1st of January won't be changed?

Unidentified Company Representative

Not that I don't know. Anymore questions in the room?

Unidentified Analyst

Good morning. I am from Bankia Bolsa. Three quick questions; the first one has to do with the preferential options. There are no bonds that are going to expire this year. What are going to with that amount of money? Are you going to, the second thing, the CapEx for 2013, closed 2012 with €1.4 billion? Strategic plan, I think looked to €1.6 billion, are you going back to €1.6 billion for the aim or is it going to be 1.4? And then as regards to regulation, the European Union and national co which is, acquisition process have been approved but don’t include surplus costs because of tax.

Unidentified Company Representative

Well, as regards preferential auctions, the interest cannot be paid; normally been paid and contrast with other situations in Spain, we continue to pay and we haven't made any decision as to what we're going to do; we haven't made any decision.

Regarding the CapEx, the thing that we will probably in 2013 going to be near the figure that we have had in the past two years, €1.4 billion, something; that would be a modest figure. And I think that the trend will be to increase our investments, 2014, 2015, maybe we we’ll have more investments and also the cash flow that we are able to generate each year, our ratio as regards to EBITDA goes down, that will also give us flexibility to address some of the projects that we are looking at in generation etcetera. So those investments figures will probably higher in 2014 and ‘15.

As regards National Co. I would suggest that we are looking at this ministerial order. We are not pleased with it and the generation market is a liberalized market so we are not at all pleased with having to be obliged by and burn coal and we are not pleased at all and we are looking at the exact content to how this would affect us and what we can do but we are not pleased. We know that it’s a temporary measure and principle until the end of next year that we think it is another measure which interferes with the market and so strange situation we are not regulated situation and we are not liberalized either and this introduces uncertainty, complexity and we don’t like it at all.

Pablo Cuadrado - Merrill Lynch

Hello, good morning Pablo Cuadrado from Merrill Lynch. Three quick questions, one is regards provisions that’s increased as regards to 2011, what will happen in 2013 with the provisioning and then the cost of debt we have seen the issuances at the beginning of the year, the level of liquidity what’s the cost of the debt that well how is it going to improve as regards to 2012? And then the final question from the technical point of view in the gas distribution business in Spain changes at the beginning of the year regarding the level of updating of the revenues, can you confirm whether in the case of the distribution business the multiplier of the inflation has gone to zero or is the formula of the same last year?

Unidentified Company Representative

Yes, it’s been the updating of CPI has been zero, yes. Its now change of the formula, the formula has equaled zero, as regards provisions where there is an increase over the previous year, has to do with Latin America some being, some growth in Spain based especially in Latin America and Nicaragua but in general, we want things to improve and we have that (inaudible) at least that have the (inaudible) situation and in terms of debt, if you look at the operations we are doing are for liquidity and to lengthen the average life of debt and long-term operations the average general cost, although they are provisions but we have done as going to make the cost of debt more expensive.

So if we had 4.1 this year, it will probably be 4.5, 4.3, 4.4 it would be the cost of debt that we could have in 2013. Any more questions in the room?

Good, there are no more questions in the room; so we will go to questions on the telephone. And we will start with the questions in Spanish, please.

Operator

(Operator Instructions) The first question is from Javier Suarez at Nomura.

Javier Suarez - Nomura

Hello good morning thank you very much for accepting my question. I've got two or three. The first one as regards obviously cash flow generations being mentioned often. These are more conceptual. What level of debt over EBITDA is the company comfortable with the things that the CFO had said at the CapEx margin increased by 2014-2015 as a result of the strong reduction in the company's debt. What level of debt over EBITDA would the company feel comfortable with and what level of payout would the company feel comfortable with. It’s now gone up to 62%. Does the company feel comfortable in this?

The second question is about provisions this year. They are gone up to 235 million Euros. Could you give us the detail and all the breakdown where those provisions have come from and they have been distributed geographically and what's your opinion about how they could evolve?

And the last question has to do with the February 13, order ministerial order. The managing director has referred to this. What could the company do? How could the company react to this imposition?

Unidentified Company Representative

I'll answer the third question. Well, we feel and this also we've got to analyze in it detail, but we feel quite comfortable and we believe that the market too with the debt policy, multiplies the EBITDA three times with a payout of 60%-62% but I'm pleased this is just no guidance at all, this is just an opinion that I'm giving you right now. As regards with coal imposition well we are going to look at it on Thursday, it was probably just yesterday. We looked at the business development and we are going to see what impact this will have and what we can do about it.

I think as I said in my previous answer I will repeat the volume of provisions more or less half corresponding to Latin America and the rest is Spain but when you talk about variations it’s been different. Latin America has grown about over 19% and in Spain it has grown less. So, clearly the increase of 19% has taken place in Latin America, not in Spain and when I say Latin America I'm talking about electric generation especially both in Columbia and Nicaragua.

Good question, next question.

Operator

Next question is from Jorge Alonso from Societe Generale

Jorge Alonso - Societe Generale

Hello good morning. I've got a couple of questions. The first one has to do with the renegotiation of contracts. Well contracts are being, gas contracts are being renegotiated what volumes of gas are we talking about and when do you expect to have news about these negotiations and the results of these negotiations?

The other one has to do with Argentina and how to what extent gas is going to be sold to Argentina and so when do you think the situation will last, this situation that they have in their country that's good situation. Can this be an opportunity for you and also the final question as regards provisioning meaning these 235 million, does any part of that include the problems in Egypt or will you have to allot money to that just in a couple of situation or will you have to add in order to cover for the deficiencies there in supply?

Unidentified Company Representative

Well, gas contracts. Well it's a normal activity of the company every year. There are reviews of the contracts, and we always have negotiations with a more or less complex, more or less wrong, which are within what our every day business principles. We have (inaudible) closings another, and we are always in the same will so to speak. As regard to Argentina, the amounts, I think, will be similar to those in the previous year. We believe that Argentina will continue to demand Natural LNG over the next few years quite significantly, because it has needs in the winter there, important amounts until we don’t know when or how, until it exploits its own reserves, they will need to cash there.

There would be three or four years during which there will be needs for gas in Argentina, liquid natural gas. In terms of provisions, we're talking about full bad debt. There is nothing that has to do with Union Fenosa Gas, it's not that we have bad debts. There is no provisioning of procurement, provisions are being made for anything else at this time.

Operator

We will go to the next question. The next question is by Carolina Dores from Morgan Stanley.

Carolina Flores - Morgan Stanley

I got two, the first one is you saw distributors in Nicaragua that were active that didn’t have a good performance weren’t performing well. Have you got any assets planned that you might sell in 2013? Could you give us an idea of the size? And the second thing is if you have looked at the increased opportunities for LNG in Brazil because of the risk of rationing in the country this year? Thank you.

Unidentified Company Representative

As regard to first question yes, we consider if you bear in the mind the offer, it was convenient for us to do this divestment in Nicaragua. We don’t foresee any other divestments, its true there are portfolio is always are going to better management, but not initially. It’s also true that in Latin America we got new opportunities for liquid natural gas one of them in Brazil, where we have done a series of operations already.

Mexico possibly the market will be opened at some time of the year. So we are very closely watching all these opportunities in order to maximize in the area, in the region our situation with contracts that can be profitable for us. Are there any more questions on the phone? No more questions. Let’s go to the --.

Operator

The first question comes from Michael Ridley from Mizou. Please go ahead, sir.

Michael Ridley - Mizou

Question may have been asked already but I just wanted to check, you repeatedly talked about your pride in bringing net down to the $16 billion target that you had really for four years now, but I am aware of no target going forwards, is it the case that you are not going to update the market until May when you have a strategy presentation on your leverage goal, thank you very much?

Unidentified Company Representative

We haven't defined any targets, I just have to say that we are satisfied with this level and we will obviously the strategic claim which will be presented next quarter will give you more details.

There don’t seem to be any more questions in English. Now let's go to the questions asked on the internet, particularly all of them have been covered, so I will go to the one that hasn't

Unidentified Analyst

It’s Ritesh Patel from [Ambus Research] in India. Two questions, whether we are thinking of going into the hybrid market for requirements of capital in the near future, if you consider it as an option?

Unidentified Company Representative

No, we don't say no, to anything but we are contemplating on anything now right now.

Unidentified Analyst

And the second question refers to the currency debt, what's your opinion about the fact that the currency regime might affect your debt and results in the future since there are possibilities of having currency war in the near future, How would the change in the value of the euro affect you.

Unidentified Company Representative

Well, our policy in general initially is conservative. We try to be in debt in accordance with our cash flow for every activity that we develop. We develop our activities in euro, where we get debt in euro, and in Latin America depending on the cash flow that we have in each country.

So we always try to strike a balance between our cash flow and the currency that is applicable and the debt that we have and that's what we are going to basically continue to do. If we are talking about evaluation of euro, breakup of the euro, exit from the euro, well we’ll have to see what happens. But I think at this time the best thing the company can do is to continue to do things like we've done them until now and establish a balance between cash flow and debt and that's how we are going to continue to do.

Another matter might be opportunistically we might use other currencies like the Swiss franc but that's an opportunistic, those are opportunistic operations, one-off things. We might do this again now and again, but at the end of the day we generate what we generate is what we generate.

Good well thank you very much. That's all. So we finish the question-and-answer session and I'll pass the floor to our CEO Mr. Rafael Villaseca for him to close the session.

Rafael Villaseca

Well, thank you very much to you all and we hope to see you here again next quarter. Thank you.

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