Rafael Villaseca – CEO
Carlos Alvarez – CFO
Antonio Basolas – Director, Strategy and Development
Alejandro Vigil – Cygnus Asset Management
Miguel Medina – JB Capital
Javier Suarez – Mediobanca
Javier Ruiz – Macquarie
Carolina Dores – Morgan Stanley
Manuel Palomo – Exane
Martin Young – RBC
Gas Natural SDG SA (OTC:GASNF) Q4 2013 Earnings Conference Call February 18, 2014 4:30 AM ET
Thank you very much. We begin the event. We’re going to present the results of Gas Natural Fenosa 2013. As usual, the presentation will be done by our CEO Mr. Rafael Villaseca and our CFO Mr. Carlos Alvarez, and our Director for Strategy and Development Mr. Antonio Basolas.
After the presentation, we have Q&A session with the people in the room first and then we’ll have questions from people following us on the internet or on the phone. And we cannot be, we have to finish because of our program limitations by 12 o’clock.
Good morning, I’ll pass the floor to CEO Mr. Rafael Villaseca.
Good morning to everyone, those of you here and those of you following us on the internet and by phone. I’m going to give you the details of 2013. First of all the most relevant issues then regulatory affairs, then financial highlights and a breakdown of operations and logistics of our operations and then conclusion before we have a Q&A session.
If we go to the more relevant, to the highlights I will say that we think our results are being good, in spite of the bad situation of the electric business in Spain. We’ve had results after taxes of €1.44 billion, slightly above last year’s that means EBITDA which is growing about 0.1%.
We’ve had, we’ve made material and immaterial investments to grow – have grown by 10% to reach €1.4 billion. And finally the debt and net debt has gone down by 8.5% as regards to the end of 2012. And it is now at €14.6 billion.
This would have dropped down to €14.1 billion had it not been or if we discounted the deficit, the tariff deficit of the end of this year. We think these points are very important. Now what’s the impact of the regulation in Spanish operations? Well, there has been various tight and strict regulations in electrical sector.
And our EBITDA comes from electricity Spanish operations as Spain has gone down by more than 1%. But distribution, electricity distribution we’ve dropped by 4%, electricity dropped 0.7% and special regime 1.9%. So, we’re talking about €455 million before taxes that we’ve lost there, in line with what we had said. No surprises but there has been a very, very straight and heavy impact on our operations as a result of the regulations, especially in electric generation.
All this fortunately has been made up and that’s why our results are slightly above last year with a very good behavior of our business especially in the international area of the €5 billion of our EBITDA that we have totally 44% is comes under international entities. So we’re talking about €2.2 billion.
And 58% of that goes to Latin America and 33% has to do with international gas operations. The rest 6% is other operations of distribution in Europe, basically Italy and there is remnant of 3%. It’s important to point this out, because it’s the key, which has helped us place another company, severe impact of the regulation in Spain. And it has allowed us to reduce costs and make up for the huge problem we’ve had.
Operations have grown by 2.2%, we go in Latin America, 2.5% but if we look to this in local currency, we’re talking about 10.6%, we talk about this business by business. Our strategic plan envisions did deterioration because of the rate of exchange changes, which have impacted us no sooner than we thought and the same, the rest of the businesses, which have grown by 1.0%.
So the impact, this has been the impact on international activities of exchange rates and conversion into national currencies.
Gas is sold well, in spite the fact that in the last quarter, there has been some delays from one quarter to another, not significant. And we are satisfied with the good behavior and performance rather of all the units of our business which is the base of our sound activities.
The other instrument that has made up for this big problem that we’ve had with electricity in Spain is the efficiency plan. 2013, we have had – we have made – we have achieved €112 million in savings with our bearing in mind the new NIF changes.
And foresee in the strategic plan 2013/2015 to achieve €300 million in savings. This year we hope to reach €202 million. We’re acting on 90 projects that are now going on and the effective operations, maintenance, trading and corporate structure.
In 2013, the main activity which I focused on special and specific services, saving on commercial operations and reduction of operational costs of the company. This plan has been strategic move, we have experienced from the past. And we will – we hope to make up for all the problems we’ve had. 2013 is a good example.
We’ve had tremendous adjustments in terms of our electric business in Spain. But this is made up for by good operations internationally and in other areas. And this is I made it possible to achieve the bottom line in the EBITDA, slightly above what we got last year.
Now, I have to say that this will be a company that if it’s approved by the GSM will produce a good dividend for the shareholder. And the board will deal with this.
So, we will look at the possibility of a total dividend of €198 million that’s a 0.3% increase, which increases in line with profit, which will mean a payout of 62.1%. And all that is in line with what we foresaw in the 2013/15 strategic plan which was presented to you. That means, it will be paid in cash. So that would mean profitability reviewed 4.8% as compared to the end of last year.
We also have to say that together with this dividend, our performance on the stock exchange has been good. We had a – our value went up by 37.7% on the stock exchange in Spain which is in contrast with the 24.1% of the EBIT went up on average and 9.2% for the year end utilities.
So, stock really went up and our prestige went up on the stock exchange, very well in comparison with other companies. In the last three years, 2011, ‘12 and ‘13, our company in spite of the big difficulties we’ve had with the regulator and the Spanish market have increased our value by almost 63% as regards what we were valued at the end of 2010.
Now, as you know, fully well, after January this year the new IFRS standards were applicable. And joint ventures will be accounted for using the equity method instead of the promotional integration method or proportionate consolidation method.
What would have happened had we applied this to the figures of last year which was still done with the old system? Well, the net debt would have gone down by €389 million, the EBITDA would have gone down by €236 million, investments would have gone down by €68 million and net profit would have not been affected. There are three affiliates, Union Fenosa Gas, Ecoeléctrica and Nueva Generadora del Sur who have been affected by the change in the method.
This impact will be absorbed in the accounts in the results of 2014. Now if you look at regulation in Spain, we’ve got to begin by looking at the electric sector. Now, the big problems we’ve got and we’re trying to address, the administration is trying to address, as you can see Spain and since the beginning of the crisis 2008, strong increase in final consumer prices in accordance with euros stat. Prices have gone up by 44% for private homes. And they’ve also grown significantly for companies.
Now, in accordance with the euros state and national authorities, in these past six years there has been an accumulated tariff deficit of more than €28 billion. So, we’ve got final prices that are above the average in Europe and then the tariff deficit which is continued to grow. And that means that that has led to snowball effect since the beginning of the crisis.
So, if we look at what’s happened since the beginning of 2013, you see that old system costs that reach €45 billion, the cost of energy meant – has accounted, meant 26% with the cost of energy. That was what the part that was attributable to the cost of energy, 26.3%.
But we’ve also got taxes that were applied since the 1 January 2013, in accordance with low 15/2012 and this you see in the section of taxes. We’ve broken that away so that you can identify them clearly, because we’re talking about taxes, not the cost of energy.
If we don’t bear in mind the taxes that – the taxes, the cost of producing electricity went down by 22%. The cost of energy for 2013 in Spain was 22.2% lower. If we’re taking into consideration taxes, it would be only 6.5%. But what is clear is that the cost of the raw material in 2013 went down, very notably had there not been changes in taxes.
As regards to regulated costs, costs of the system that is transmission and distribution were 2.5% and associated costs premiums and debt servicing 32.3%. And after the most recent changes in the tax loss, taxes went up by 31.1% to a total of €11.9 billion. Now the cost of producing electricity in Spain is similar to other countries in the European Union but we got regulated costs that are 41% more expensive than the other countries, member states in accordance with the calculations and estimates of the ministry.
Now, if we analyze what’s happened with the wholesale price, also market, the famous pool, since the beginning of the crisis in 2011, the electric pool has gone down by 31% and that is gone down practically year-on-year.
In 2013, it went down 22% or 6% depending whether you take into account taxes or not. But it went down and has gone down since the crisis began. If you look at it at the right and you compare this with the average coal price, in other countries you would see what I said before. And the ministry itself said that the prices in Spain are in-line with the European market. But the price, the Spanish price, 44.26 per megawatt hour in Spain includes taxes that were not applied in 2012.
But, even including taxes, we’ve got electricity in-line with the prices in Europe, so we may conclude that the problems that we were referring to at the beginning as the ministry itself says, have not really have much to do with the performance of the wholesale market, electric market. So, we can continue to look at the cost of the electric system.
And here you see access costs, sets as charges were €17.6 billion last year, which together with the other costs are the regulated costs, €21.2 billion. If we associate that with income we got a deficit of €3,600 million euros, which for this year.
Recently, a couple of days ago, it seems that provisional liquidations – in the provisional liquidations and calculations, the figures are slightly higher but all the information we got – but based on that information it would be more like €3.6 billion because there is income also coming – there will be income coming from taxes that have to be returned.
But anyway, irrespective of whether the final provisional liquidation take us published by the CNMP talk about €4 billion made up probably be more like €3.6 billion which will give us an accumulated figure of €29 billion.
Now, the most important chapter in this department of costs or the subsidies and inspire the administration has made they went up by 6% last year. And we must also remember it is subsidies to renewables which according to the administration are about €9 billion or the highest in EU in terms of Europe megawatt hour.
We believe that if you look at all this, I know this is quite clear, so, we’ve got a very clear problem. Government has developed a series of measures in recent years that you see here, huge amount of them, lot of complex measures were taken. Extensive measures and some of them are still pending approval.
And they’re all aimed at serving those problems and that’s how – that’s what the public sector, the sector in the public opinion has been told. Started with the decree in 2012 which froze new investments, it’s a moratoria of own investments into renewable energy, two more decrees in 2012, number 13, number 20, which reduced remuneration of distribution transmission capacity payments, extra peninsula compensation and others.
Then after that there is a series of what we call ministerial acts or orders, one in 2012 which increased active carriage. And then the actual ore of 15/2012 which introduced fiscal measures for energy as from January 2013 for energy sustainability supported by generators and auctions of CO2 allocated regulated costs covered.
Then there is another decree in 2013, introducing urgent measures to reduce costs of the system. There is another law act number 24, which establishes general principles of the sector. And then there was the new, still pending approval, the new framework for distribution – transmission and distribution.
And this has to be developed, yeah, and approved. And we got law of 15/2013 which the ministry no longer has to contribute to the deficit of the previous year and the decree to 2013, whereby there is a change in CPR index for the update of the remuneration of regulated activities.
So, all these measures are aimed at solving a problem that are described for and some of them still require approval, full approval. And all this, together with the opinions that the ministry has, in comments with the ministry has declared and published, lead to a series of adjustments in the last two years equaling about €10.5 billion a year.
So, in reduction in subsidies in that chapter we’re talking about €2.2 billion, €2 billion for special regime, €210 million for extra peninsulas and the state budget €900 million, approximately you know half of the subsidy to extra peninsulas. And what we might call traditional utilities is about €2.24 billion as transmission distribution capacity payments and the social voucher.
Also new taxes have been levels are being approved up to a value of €3.1 billion and tariff increases up to €2 billion. So, the total adjustments in the wholesale truck €10.5 billion. And we hope that this year, the balance in the budget will be achieved for the electric sector. Well, that’s true that there are important pending issues in terms of how these measures will be applied.
It’s important to talk about the gas situation, completely different this situation. And it’s recognized in that way. In the year 2013, profits have been practically non-existent the second year that there is no tariff deficit in the gas sector. We’ve got an accumulated deficit and it went through 2013 and 314, it’s not significant deficit both in the ordinary sense of the word because there is no profit in last two years and because the figures are different.
We hope that the government is launching a plan which includes four basic aims for the gas sector, to review the remuneration frameworks, it seems reasonable to do that. And update all the framework of remuneration.
Secondly, they want to get rid of the deficit, it’s not too great but it would seem important to work on it. The third one is to create secondary gas market, which would be an excellent measures to make things more flexible and transparent in the gas industry in Spain. And the fourth aim that’s been announced and we think it’s very good is to increase competition. But it’s necessary to know that the Spanish market is one of the most competitive in Europe without a doubt.
However, any offer that is made hold that to continue along those lines, we think would be okay. For 2014, we’re waiting for some issues to be solved, but we’re waiting for adjustments in the tariff for there to be reasonable balance in these accounts.
Now, to conclude in terms of the gas deficit, the very significant specificity which differentiates the gas tax from the distribution, the electricity distribution sector and this happens all over the world, in like of the electrical sector, gas is not a universal service.
And therefore it has a commercial activity that the electrical sector doesn’t have because any household in Spain is to have electricity but not gas. So there is not only a cost but a risk based which is the commercialization of the supply point by the distributor because there is no obligation to supply households with gas. And this is linked with the fact that Spain is the non-gasified country, the gasification rate is 27%. So, there is still room for development and room for investment that we will discuss later.
And secondly, this is not just risk based factor there are other risk based factor because it’s the income of the gas factories, conditioned by the volumes of gas that goes for the natural at the supply point that are installed by the distributor every year. So there is a very significant difference reasonably the electrical sector.
Also, remember that through the distribution network, on the conventional gas deposits, and now it combines cycles. And in that respect, there has not been a significant or a spectacular fold in conventional capital assumption. What I mean is, the consumption set by the distribution network, there is still a demand for distribution network to service the 150,000 supply points that are established every year.
I also want to say that if you look at the figures of the sector, every time there is a new customer, it has obtained the system improves because what the distributor receives is less than what the customer pays. So this resolves the problem of any system because the growth helps to reduce the problem. Sometimes of host dysfunctions arise.
But this means that this problem has been resolved but we are in a sector that’s completely different from the electrical sector.
Now, having said this, we will go on to the financial data, which was explained about towards ago. But the gross margin at the EBITDA of our company, have grown by 1.9% so there is stability at the level of EBITDA. And this happened in a very demanding environment, where from the macroeconomic and the regulatory points of view. This has been terribly hard year because of these reasons.
Our monetizations have increased by 6.1% basically due to the impairment test that we applied to the Damietta plant. We made provisions at similar level, the previous year and the operational profit is €2.9 billion.
The financial results have been 4.1% lower than those of last year and this means that the profit before tax reached €2.1 billion. Finally, after applying the taxes that benefited from more positive rate because of the updating of balance sheets that has been applied, this takes us to a net profit of €1.4 billion that is an increase of 0.3% with respect to the previous year.
Now, if you look at the different business lines, we look at our EBITDA, you can see that we have a series of business lines with negative performance. The most negative of these would be electrical business in Spain which fell by 15% because that was a very significant impact of the ordinary regime of electrical generation in Spain also Union Fenosa gas and the base distribution, electrical distribution business in Spain that I also mentioned.
Now, on the positive side the gas sector has performed reasonably well and the international gas supply business have managed to offset the negative results I mentioned before.
Of course in Latin America, we had a problem with the conversion rate of the Latin American currencies but we already contemplated this and the strategic plan but this has been faster than we had expected. So, this would be an overview of our EBITDA situation.
Now, in terms of investment, we have invested 10% more. And electrical distribution Europe, the investments have fallen in a significant way over 16%. Investments in gas have stayed because the investments in the development of transfer network was still being made and this is a good thing, not just because this is business of the company but also because it helps, it contributes more resources to the gas system.
And in Latin America, while the growth has come from two investments that we have underway, one of them is the wind farm in Bii and the other one is the hydro power plant in Costa Rica.
Now, as you got the debt profile, you have the gross and the net debt. We have a net debt of €14 billion and the maturity calendar is quite comfortable. We have always been very cautious and very conservative in terms of our financial provisions. And that’s why 78% of our debt has a maturity after 2017.
In other words, all our financial needs until 2016 have been covered. And all of this would have been possible with a structure which is extremely efficient. 82% of our debt is fixed than last year, the rate was 4.2%. And 86% is denominated in euros which is larger not because we basically operate in the euro zone.
And also 72% of our debt is in the capital market, so we’ve applied a policy of bank – to removing bank in (inaudible). We have a high level of liquidity of over €11 billion. And so, this covers all our obligations for 24 months. And in addition, we also have €3 billion more for corresponding programs approved in the capital market.
I think €4.2 billion are in cash, €7 billion are in committed lines of credit and we still have some amount from loans that we haven’t yet availed ourselves of.
Now, in terms of the deficit, well, because of the changes of the regulations, we had to face some changes that the government imposed. So throughout the year, a new deficit occurred for about €600 million but of course the company has a result. And thanks to the securitization plans, we made over €1 billion. And the electrical system obtained €104 million.
So, at the end of the year, the amount pending from the system was €485 million which includes the debt corresponding to 2013. And all of this has made it possible for us to have a very robust capital structure which you can see in the ratios on the left and the right of the screen.
So, our cash flow, free cash flows shows that our situation is improving and the coverage of net debt, with respect to EBITDA is also improving. We are improving our position and the figure is 4.2% with the lack of currency exchange risk because there are subsidiaries in Latin America are denominated in local currencies. And so we believe that we have quite a healthy situation on that score.
Now, if we analyze our operations, let’s start by distribution in Europe. Now distribution in Europe, our investments that I was saying fell by 16.5% as the result of a reduction in investment in Spain, the new regulations which still have to be defined. There is not much margin for us to maintain investment plan. And also you’ve got to take into account that the supply ports are stable and are given. And therefore, this is what it is. And sales fell by 3% because of the economic crises.
EBITDA fell by almost 4% reaching €600 million, and this was basically in Europe a result of the situation in Spain, the situation moreover was stable. The supply point was stable and €3.8 million supply point. And we should stress the bad weather last year which infested the company’s TIP.
Now, in terms of gas investment fell by almost – rose sorry by almost 4% because the market is still not mature but it still grows. And it is growing because of the weather the company is now investing in building new things. But it did invest in existing constructions. So those existing constructions are adopting natural gas as the most efficient type of energy.
And this has involved an increase in €150,000 new points in sale but of course the net figure was lower because some people in second residences have disconnected themselves from the network. So, the new contract amounting to €150,000 but €100,000 well disconnected themselves and these were second residences. But this something that is not likely to carry on for the next year because the impact of the crisis is going to abate next year.
So this €1 billion in EBITDA of response, well, approximately response to Italy and the rest of response to Spain. And we should emphasize that both in terms of gas and electrical distribution, the EBITDA achieved was made possible by the efficiency plans I mentioned before.
I also want to say that this year, Gas Natural reach to 36 new municipalities in Spain and the network was increased by 1,000 kilometers.
Now in terms of the energy market I would like to mention that the electrical demand fell by 2.2% in Spain. However, the demand of the conventional gas fell by 2.2%. This includes residences and industries but not combined cycles. This is the similar factor to other years. And this has been affected negatively because the weather was milder than the previous year in the last quarter of the year.
In general, in terms of the reduction in electrical demand, we believe that the main reason has to do with the economic crisis, which is fortunately improving in Spain.
Now, if we now jump into the electrical business, you can see here the production of natural – Gas Natural Fenosa, which had reduction with respect to the previous year of 9% production basically because of lower production in coal and combined cycles. It is true that there has been a larger margin because this lower production of coal and combined prices were largely compensated for by higher driven mine and mini hydro production.
Here, as you can see the increase in hydro production of the company last year was 166% and the mini hydro was 41%. And wind power also increased by 10%. So this generation which has a margin of a lower margin of operational cost and coal and combined cycles, which lost production share managed to offset the offense of the lower production in total terms.
Now, the markets here is similar in ordinary regime with standard 10.6% last year, we stood at 20.7%. So, the only new thing – the only new elements are the folds in these consumption in Spain and the change in the mix because of weather conditions, basically water and wind.
Now, in terms of the energy market, well, the electricity, the electrical energy has had 15% impact in our business because it’s been a 15% reduction because it’s a severe impact of all the regulations that have been enforced this year. Partly, there have been partly compensated by the change in the generation mix, there has been more hydro and wind energy and also by the efficiencies that we have introduced.
Production fell, the sales of electricity also fell, but we’re to emphasize something very important because the pool or the weighted pool, if you take into early production fell by 9%. All of these factors made the problem more severe because there has been a severe impact of regulatory problems. And there has been a fall of EBITDA of over 15%.
In terms of the special regime, it fell by 2%, 2% of the result of the regulatory changes that have been quite significant and this has been offset by a significant impact of the hydro and mini hydro production. New small hydro products in Galicia have been commissioned. And in terms of the make-up of our wind production, you can see that with power we increased over 10% and in small hydro over 40% for reasons I mentioned before.
Now, in terms of gas, the Spanish market fell last year by almost 8%. But not the conventional market, the conventional market was slightly lower than last year, 0.6% lower. The problem is still the fall of consumption to produce electricity. I want to remind you that distribution doesn’t really pay attention to cycles, it only pays attention to conventional cycles. And so, the distribution network is not really idle because it serves the market that is stabilized and which could still grow.
Our sales, in spite of having the market fell by 8%, our sales only fell by 3.8%, slightly less than 4% because in the conventional sector, we’re still having small growth. And in the electrical sector we didn’t fall as much as our competitors. You can see here, the figures on this graph. We fell by 26% in gas supply cycles. And the whole country fell by 33%.
I want to mention that we have over 11 million active contracts, our number of customers increased by 1.7 million residential contracts and 114,000 commercial contracts. And we are happy that we still have an active participation in this market, which is one of the most competitive markets in Europe. And which is fully open and transparent.
The infra utilization or the underutilization of our plants makes it very easy to enter the Spanish market and sell here. That forces us to be very efficient both in logistics and commercial terms.
Now there is fall in the Spanish market of sale, this fall in sales in the Spanish market of sales sold by 4% and the sale has been compensated for by the increase and international activities which of course give us greater profit. We grew by almost 9% in our international sales in Europe, 42% and the rest minus 3. This minus 3 don’t pay too much attention to it. This is a very specific situation.
The different circumstances give rise to these miss-adjustments. The different sales made in Asia and Latin America, fundamentally will still be thriving in the future. Okay. Now, please allow me to insist that our commercial strategy in Europe is success with an increase of 42%.
The rest of the world, outside the Europe, well, we’re also going to thrive and they have business that is still priority, still our capacity in terms of our well, our priority is flexible conference, especially for G&L which allows us to combine gas and electricity strategies. And this combined with a position of new vessels will make it possible for us to serve this market which is a growing market, which has margins that are still very, very significant as we contemplated in our strategy plan.
And please let me tell you that international natural liquefied gas is still growing. And 2009, our G&L exposed, L&G exposed, probably accounted for a minor percentage of what we sold, but last year they accounted for over 40% which is a spectacular increase which allows us to become an international scale or a world level operator. And this will increase in 2006, when our contract which near the United States takes off.
Now, in terms of Union Fenosa gas, the news here is that the Damietta plant, is still at a standstill because each of this is supplying. And this led us to a fall of almost 18% in terms of the gas supply received where the company would still have other sources from Oman but not from Egypt.
So, this man that we had to moderate sales, both in combined titles and industrial sales. And the company still developed international activities for the sale of liquefied gas and also the company’s infrastructural results have also been positive to the company, provisions familiar because of the problem of Damietta, we still have the problem of the temporary stoppage. We haven’t managed to reach a satisfactory even with the Egyptian authorities in terms of how the resolution of this problem. But we believe that we’re in the current political situation in Egypt stabilizes and we hope it will happen soon.
We can start discussing the details of the new agreement that should bring things back to normal. In terms of Latin America, you know that – you can see that our EBITDA was €1.3 billion and this is in spite of the negative translation of exchange rates which was quite significant last year.
In any case we are diversified, how is this distribution 26% electrical distribution and the rest electrical generation. Businesses have distributed and we are satisfied with all of them, in terms of the countries, the first country that contributes in most with Columbia with 33% and then Brazil and then Mexico, 22%. Now the problems have had to do with the exchange rate basically in Brazil.
But our borrowing level in local currency will make it possible for us to control this problem and we will make it possible for us to benefit from the high growth in these businesses in these countries.
And we are positioned in a very good way, especially in gas, it should be precisely in the areas where the growth potential is the greatest both in Mexico and Brazil. The potential growth is enormous, and we are bound to benefit.
In Columbia it is true that the potentially marketed lower but it is not, no less true that in the area we’re operating for gas distribution in the Bogota area. The market is still increasing and therefore every year there is more and more contrast. And I’m sure that next year we will have further developments.
In Brazil and Mexico, in the areas we are acting, the potential is without any sheer of a doubt without very, very large. Now, and for now, dwell into gas distribution, EBITDA was €686 million and improved by 7.2% in local currency would have grown by 18%. So, it’s been a really sharp growth.
Sales grew by 9% over 9%. And the connection points grew by almost 4%. So, this has been a very good performance, we are applying best practices also developing efficiency programs. And considering the possibility of finding interesting growth areas, such as that in Peru as you know we in the South of the country, we achieved a concession to develop gasification.
In terms of the electrical distribution business, it decreased by 7.1% because of two factors, local currency and divestitures Nicaragua. If we hadn’t considered these two problems, divesture in Nicaragua in local currency, it would have grown by 6.6%. So, this has also been satisfactory, the most important investment was in the Caribbean. And it enjoys a very significant market with a growth and demand of 7%, we are confident that these two markets the Panamanian and the Columbian market will still be very active and will allow us to even improve these figures.
In terms of generation last year, production increased by 5% and EBITDA also increased by 5%, in spite of the fact that there was things were not connected. But €235 million and there are two projects underway, one of them is the 50 megawatts hydro power of Torito in the Costa Rica and the 234 megawatt plant in Mexico, which is a wind farm.
Finally, as a conclusion, as I to say that we are satisfied with the results. We’ve had poor electrical results in Spain compensated for by the international business which has had a very good evolution and with a wonderful efficiency plan which has been very, very effective. We’re still de-leveraging apart from the fact that we had to finance part of the Torito deficit that had not been contemplated before and maintaining the average debt of our company.
We have updated our strategic plan and nothing today indicates that we should change one single comma of it. And we will still have 62% payout in our dividends and that’s all I had to say. Thank you.
So, we’ll now have the question-and-answer session. First of all, the questions from the room here. So, if you have any questions please identify yourselves and say where you come from. Please first, question.
Yes, go ahead please, this person here. Go ahead.
Alejandro Vigil – Cygnus Asset Management
Hello, good morning. Alejandro Vigil from Cygnus Asset Management, I have a couple of questions. One of them has to do with the prospects for 2014 I know you’re not giving specific guidance. But perhaps in a qualitative way, which is going to be the key aspects for 2014 and whether you will be able to compensate for the negative impacts of the regulatory measures introduced by the government in Spain?
And the second question has to do with investment plans organ investment plans for 2014. And the third question is whether you can tell us anything about non-organic plans because your balance sheet seems more robust now. So, what other possibilities are you considering outside your organic growth?
Well, for the first question, 2014. Well, 2014 we will have to follow similar lines. We in terms of the annualization of measures in generation, it’s such measures will affect the second half. So the impact will have to be higher because now that will be annualized.
So, this situation, this negative situation will persist. And we have to compensate for with the good performance of the rest. So, the good performance of the international market and this is going to occur. And also the efficiency plan, which has gone off to a good start and which it has been taken very seriously. So, things will evolve the lines contemplated in the strategic plan of the company.
Now in terms of the organic investments, if we take 2013, I think it’s a good indication of what will happen in 2014. But more on more, the international business because of the projects that we are completing, especially the Bii Hioxo project in Mexico, well, the international were reason, they will increase more and more.
And then one additional investment in 2014 has to do with the new investment that we’re going to buying which don’t really investment from the point of view of cash outlays. But we will still increase the gas business with using electricity and in the rest of the areas we will more or less stay at the same level in terms of investments.
Additionally, to the investments contemplated in the strategic plan, we are trying to create our portfolio of projects, basically internationally in the areas we felt this non-strategically namely international electrical distribution and the development of L&G, internationally we’re looking at Brownfield projects, both in Asia and in Latin America, but there is nothing specific on that front.
So, to summarize, this is basically what we said in the strategic plan.
Any other questions.
Miguel Medina – JB Capital
Good morning. Miguel Medina from JB Capital. Two questions. The first one, something attracted my attention was the strong increase in the 30, is that because of deployment or does that explain 100% increase of these the consequences of cut-backs in investment among this happening in the future.
And the second question is about, one of the factor, one of the player that is complaining, literally everybody is complaining but the co-generator station is complaining very bitterly they’re talking about closing down plants, not paying contracts etcetera. Can this or could this have some effect on the gas activities in Spain?
Well, as regards to first, basically the problem of the TAP has to do with Galicia. Last year there was strong, very strong storms in Galicia which very severely affected the situation in contrast with 2012 which is very good, 2013 was terrible.
Now, the cutback in investments has not had that effect, it couldn’t have had any effect. As regards cogeneration we would have to look at what the true actual impact is. And secondly what we’ll replace, what replace of that – what alternative there would be if we’ll go from co-generation to simple generation, what will happen. There is no doubt that the measures are effecting the co-generators yes, that the industry is having sold.
Any more questions in the room?
Hello, good morning (inaudible). Two questions. One is about the possible changes in regulations in the gas market. I’d like to know whether after the arguments on the differences between gas and electricity whether you expect any change in regulation that makes gas more similar to the electric situation or will it continue to be more associated with consumption.
And then, as regards the gas supply business I’d like to know whether you can give us any guidance as regards to the margins, you expect for the next year or two years in contrast or as compared to previous years.
Well, as it regards to the second question, we still think the same that we thought it’s going to be a good those margins all will be more or less the same. They’re going to have because of the climate, what happened. But we wouldn’t move from the estimate for margins and volumes that we had few months ago when we presented the strategic plan.
As regards to the gastro regulation system and distribution which saw a business, we don’t think it would make much sense. And we’ve heard that the ministry says that it would be reasonable to associate remuneration with demand with the market. So, if that relationship between remuneration and consumption and supply points changed and became fixed that would go against the logical ups and downs of income depending on what the sector situation is.
So, that wouldn’t be positive. I think that would be negative for the sector. I think the gas system as shown over time that it’s being going through hard times and even then it works well and it doesn’t cause any problems, €300 million odd we’ve got now of deficit. That’s how our opinion. Problems have to be self-depose and update everything. But there are no reasons to change things radically in terms of what’s happening because things work reasonably well.
Any more questions?
Hello, good morning. My name is (inaudible). Two questions, one is you said there is no agreement in terms of gas for the additional impairments throughout 2014 and the second one is financial structural issues. I think there is lot liquidity, lot cash in the company this year. What are you going to do without cash?
Reinvest. Well, see if I will tell you more about this. Union Fenosa Gas, has adjusted in-line with the accounting standards adjusted everything, all the numbers figures. The plant that you’ve mentioned is very strategic for Egyptian interest because it’s the way out. It’s the – it’s fundamental for the Egyptian economy. I think there will have to be a reasonable solution to this. Obviously, it depends, it’s a matter of time.
But we’re convinced that as soon as we can have a clear dialogue with the new government there, and we can talk to people reasonably and in calm relaxed conditions, the solution will be found that benefits to all parties involved. If it’s necessary we might have to introduce some adjustments and we’ll do so if need to be.
Good. We are calm, we got the two possibilities, we can cover things one way or the other. We haven’t made the decision yet. In the long run, without our liquidity and cash situation will change what we do throughout this year, maybe we’ll reduce the cash flow available amounts. That doesn’t mean to say that we’re going to do anything special. Well, of course there will be a change in the balance of cash flow.
Any other questions in the room? No more questions. We go to the questions from – on the telephone.
Good morning. The first question is by Javier Suarez from Mediobanca.
Javier Suarez – Mediobanca
Good morning everyone. My name is Javier Suarez from Mediobanca. I have got three questions. The first is, as regard, the review of the gas system. I would like to know whether you started to set-up meetings with the government and whether you think that the gas renewal of the gas factor is building up and would it take place in 2014. And what’s your proposal to cancel out the tariff deficit which is not large but which exists and which would depend obviously on entry into production of Cash or not.
The second question has to do with also our gas market, which has enormous growth, especially abroad. We’ve seen great growth in Europe than in other parts of the world. Could you tell us what are the implications of this for your European margins, obviously significantly different in Europe from other parts of the world. I think they’re dropping by that 3%.
Then, the last thing I wanted to ask you is the tariff deficit in the electric sector, we’ve seen the liquidation number 12, you’ve mentioned this slightly but would you – could you give us more details about this? Thank you.
As regards to the first question, yes, there have been context, gas sector has had context with the ministry. We’ve had meetings with the ministry to perform the preliminary studies that have – that led up to the full points that the government has presented.
I don’t know when all this will come together, it might be the second quarter but quite frankly I haven’t got the information or the ability to give you a more specific answer. The tariff deficit €300 million issue that can be solved easily. And the monetization with an interest, a reasonable interest that’s a figure that can, “be observed by the gas market with relative ease. It’s nothing to worry about.”
Although it is true that at this time it is that deficit is being financed by everybody in the gas regulated gas market who is receiving an income. So it would be a question of introducing a plant so that we can get back that money, that deficit in a reasonable term of time. I don’t think it’s that difficult.
Cash, I can’t answer whether Cash starts up or not. Introduction of costs in the system, what those costs will be I’m sorry, I don’t know the ministry is looking at that or don’t know exactly what the conditions are. Well, income and what – Cash will have income also produce income but this is something that I can’t tell you about.
As regards the wholesale gas market, remember that we’re talking about gas sales in the final market. Most of these sales are not wholesale market but industrial, sometimes residential market. I would like to remind you that we got a contract we’ve got to supply public centers of El du France. Now, apart from specific one-off operations we want to go to final customers.
And that’s what we’re doing in Europe with our own commercial network and we’ll continue to do that with the margins that we have. If we don’t make money we’re not going to do it obviously. If this doesn’t work and it doesn’t necessarily have to work we’ll take Cash other places using our logistic and commercial capabilities.
We’re very pleased with our position, commercially in Europe and we will continue along those lines in France, Belgium and for some time we started in Germany now.
Liquidation 12, the information I have is what has been published. Well, that’s clear that there are some new costs that hadn’t been contemplated in our opinion, it’s nothing but we think it’s reasonable. There are income, some income is lacking, the return of certain taxes that we haven’t been paid back because the procedures are very slow.
And also the special regime contributes with the adjustments that are being approved since the 1 July 2013. So once that – those – that work associated with the renewable energy is finished there will be costs from the second half of 2013 that will be taken off while the amount that is now being calculated. We think that probably the final deficit will be to the growth I told you before.
Next question please.
Next question is Javier Ruiz from Macquarie.
Javier Ruiz – Macquarie
Good morning to everyone. I would like to ask two questions. One of them is about Brazil, distribution of gas, whether if the draft goes on in the first three months of the year what are your expectations in terms of volumes of gas as compared to last year which was truly tremendous growth. But the problem of the draft in Brazil is going to affect this.
Second question is how the discussions are developing as regards distribution trends in Columbia, when we will be seeing the excess charges of last year recovered in that country?
As regard to Brazil, yes, they still got the trial on. I know it’s been two months. And they’re using gas appliance to produce electricity. It’s too soon to say what’s going to happen but it continues. As regards to distribution rates or tariffs, that’s started. Negotiations have started but they’re only preliminary yet for the review of ordinary rates cash rates in Columbia. But the renegotiation of the cash distribution tariffs in Brazil has concluded in Rio, they were proved at the end of last year in line with what the strategic plan had foreseen. So it’s solved in Brazil.
In terms of cash distribution, in Columbia, we are beginning conversations and negotiations for this to be done and that would be throughout this year.
Next question please.
The next question is by Carolina Dores from Morgan Stanley.
Carolina Dores – Morgan Stanley
Hello, good morning. Thank you for taking my questions. I’ve got, the first one is – in the fourth quarter, the activity of procurement and trading of gas, the margins went up but the gross margin and the EBITDA remains stable. For 2014, other margins are going to be near the average of 2013 or nearer the average for the last quarter.
And the second question is about well, in 2014 you’re going to reduce your debt by €1 billion to €1.5 billion. Will there be an increase in the dividend payout or not?
Well, what happened in the fourth quarter in terms of procurement and monetization I think has to do, and in the wholesale gas or international or we call industrial there are no changes. The margin tomorrow is the same. And then, there is a certain increase. But the change takes place in the retail market which includes the Spanish retail market.
And that chapter in November, December there was a decrease in activity because of the climate. It’s been warmer. And sales have been – we’ve had less sales and less income. And then because of those components as in association between the tariff and the two, so they hadn’t really got much to do with the wholesale market. But with the retail market and that’s a specific situation that has to do with the winter of 2013.
Sometimes of the forecast, we think that in 2014, and probably into 2015 that margins will continue to be in line with what we had in 2013 as an average as you said. The second question referred to the leveraging. We, as we said, what we think for 2015 is to be – is to have a level of two times the value or the figure for the EBITDA.
We don’t foresee any extraordinary action there in 2014, there is not going to be any big significant differences in terms of the ratio at the end of the year. Below three times EBITDA value but there is not going to be a tremendous variation there.
Good, let’s pass. Let’s go to the next question. The next question is by Manuel Palomo from Exane D&P.
Manuel Palomo – Exane
Hello, good morning to everyone. I would like to ask you a couple of questions. The first is about combined cycle plants and renewables, we’ve seen that the load factors of the combined cycle plants have gone down. Do you think there will be any change there?
And also as regards, renewables after what the government has published recently, do you think there will be any changes? You said you’ve been in touch with the government to review and revise gastro regulations. My question is whether you’ve also spoken about revising electricity and what the reform of the housing and residential market might imply? Thank you very much.
As regards the first question of course, we will do whatever tests the legislation demands but it’s true that we, combined cycle plants are still providing key backup service for the system. We’re waiting for the hibernation standards, from the government and what standards will regulate the capacity payments which are contemplated by the European legislation.
There is a strange situation here that we have to clarify. These payments are vital for the functioning of the electric system because they’re acting in the adjustment market but also as a back-up for renewables. There has to be so deficiently for the sake of the security of the system.
We’re waiting for that to be dealt with and that would give us where the main combined cycle plant operators that would give us the possibility of guaranteeing electric supply in the system. I think that in spite of everything when we talk about the crisis “of consumption in December” due to the lack of water and wind, combined cycle plants were absolutely clear and vital and crucial to keep the electric system in Spain going. That is something that has to be solved and we are convinced that it will be.
Yes, the new factor for the combined cycle plants in 2012 was 28%. And the sector has been about 11%. Our average was 28%, our logistic capacity, our contracts and availability of all our plants rather other country.
In terms of regulation of the gas sector, of course we’ve had conversations and every time that the government asks for our opinion, we would gladly give it whatever information they request. We’ve had no news of the reform of the hotel markets, some information some requests for information have been made. But we don’t know undoubtedly this is a reform very deep and complex reform because it involves not just Spanish issues but really conceptual problems such as how do you organize and market where practically half of the offer is subsidized.
That’s a tremendous problem and we’re convinced that it will require deep and meticulous careful care. I couldn’t tell you what the solution will be, although we have given our opinion and we continue to do so, the time we ask for it.
Good, let’s go to the next question please. No more questions in Spanish.
The first question comes Martin Young from RBC. Please go ahead sir.
Martin Young – RBC
Yes, good morning to everybody. I just have couple of questions. The first relates to the roll-out of your strategy in Latin America. I know you say that the strategic plan has not changed by one, but any sort of tweaking of your thoughts on a country by country basis given the depreciation recently of the Latin American currencies, just wanted your thoughts there.
And then, secondly we’ve seen the gas prices in the U.S. moving up with direction over the past month or so. To what extent does that impact the profitability of your L&G business and does it have any impact on your thoughts around the profitability of the Shah Deniz contract that you signed?
In terms of our situations in Spanish America, we’re not going to change. We’ve surprised the speed at which the exchange rate have been adjusted. We thought so that in the strategic plan but its taking place even before we thought. And but it’s also true that it hasn’t happened in every country in Mexico for instance it’s not being very serious. The impact and that’s where we have a lot of money invested. It’s happened more in Brazil but not in Mexico.
We are sure that a lot of the business, our business is especially Mexico in dollars, that’s not affected by this problem. And the third thing is that normally the phenomenon like this, the depreciation of devaluation generates in those countries, inflation which is carried on to the terrace of regulated service that we give.
So, we’re convinced that there will be an affect that will be made up for in our income. And finally, we and I was saying this before, in the case of Columbia, we must remember the very, very high rates of growth, almost 7% in electric demand, in that area. We think that in, if we put all this together there is not going to be a change in strategy there would be minor adjustments in some areas but nothing more.
As regards to the Shah Deniz contract, we don’t think that is not important. It’s true that Henry Hub is going to in winter and in all markets there because of the climate crisis in the U.S. especially on the East Coast, which has increased, as it’s natural and it happens every year at the Henry Hub. These are very volatile markets and its reached 7A in the American market and the Japanese market has gone above 20.
It’s a transient situation, as soon as the climate gets better no more than a drop again, it was somehow foreseen in our strategic plan that it would go up as regards the older values but nothing that’s really dressed dramatically changes our forecasts in the strategic plan happened.
Well, as we said at the beginning of the presentation, we’ve got to finish by 12:00. We’ve got a few questions that have been sent in via the internet. Most of them have been replied to. Those that are pending we will get in touch with the people personally by e-mail or phone and reply. So, without further ado I’m going to pass the floor to the CEO the close the event.
Thank you. Nothing more. Thank you for being here. And we’re here at your disposal. We can continue to clarify things that maybe haven’t been verified for lack of time. And thank you very much for your interest. Thank you very much. Good-day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!