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Executives

Rafael Villaseca - CEO

Carlos Alvarez - CFO

Antoni Basolas - Director for Strategy and Development

Analysts

Raimundo Fernandez-Cuesta - Nomura

Manuel Palomo - Citigroup

Alberto Gandolfi - UBS

Bruno Silva - BPI

Pablo Cuadrado - Merrill Lynch

Javier Garrido - JP Morgan

Javier Suarez - UniCredit

Antonio Lopez - HSBC

Jorge Alonso - Societe Generale

Gas Natural, Adr. (OTCPK:GASNY) Q2 2011 Earnings Call July 27, 2011 8:00 AM ET

Unidentified Company Speaker

Good morning and welcome to the presentation of results of Gas Natural Fenosa for the first six months of 2011. The presentation will be given by our CEO, Mr. Rafael Villaseca, who is with the CFO, Mr. Carlos Alvarez; and Director for Strategy and Development, Mr. Antoni Basolas. After that we will have a question and answer beginning with the people in the room and then those that have followed this on the telephone or the internet and that will be done by filling in the question form, the form for questions on the internet page. I will pass the floor to Mr. Villaseca.

Rafael Villaseca

I wanted to thank you for being here and these are the main points that I am going to present main issues, summary of main results and events, analysis of operations and then we will look at the different business lines, and conclusions before we have the questions. So, we are going to start with the main issues in the year. You see this here, the recurring net income of the company without taking into consideration the extraordinary results as a result of extraordinary gains last year and this year is €605 million, which is an increase of 11% over previous year. If we bear in mind the income is a result of added assets, the net income is €822 million. The consolidated EBITDA is €2.3 billion which is a growth of 0.4%. Our investment of €118 million, a decrease of 12% over the previous year and the debt is below €17 billion that is 14% than the first half of the previous.

If we look at the main issues, first of all, I would like to tell you that the litigation process with Sonatrach has finally come to an end, and then we will talk about the disinvestment program, asset disposal plan, our capital structure has got stronger, how our businesses have developed, and then I want to tell you about the consolidation of our presence in renewables.

So, if we start with the litigation process with Sonatrach, the problems we had with Sonatrach, I want to tell you that officially we have made a statement and I think we made it clear to the markets I hope about the happy end of this conflict. We have reached agreements of the prices of 2007, 2008 and 2009 and this will be the new prices as from January 1, 2010. The amounts that have to be paid that were in litigation, as you know, this began in 2005 and the figure is $1897 million. That covers deliveries between January 1, 2007 and May 31, 2011. So we are talking about four and a half years of adjustment of prices. What we had then was provisional, and we had been making provisions for the amounts that we thought would be deliverable at the end of the conflict. As a result of all this there are a few things. All other claims have been waived as a result of the proceedings the court in Switzerland and also the action in Paris. All this business has finally finished. It will have no further impact on our P&L account. some amounts will go to some customers depending on the contracts that we have with them and then the provisions covered all that we needed to pay and that won't have any more impact on our P&L account. But there is another part that I would like to underline and it is that this agreement allows us to open up a new stage of relations with Sonatrach. This has been a long conflict that has gone on for a long time but finally we have reached an understanding that we think will be solid and long lasting. One of the results of the decision has been approved by both board, both of Sonatrach and Gas Natural Fenosa that Sonatrach would take their shares 3.95% of the company. And then we are going to sign a series of agreements to study projects of collaboration in other areas of energy exploitation, and we are analyzing those projects and we hope that these conversations lead to agreements, specific agreements.

So, this is not only the end of past controversy, not only do we set the playing field again for the current situational gas supply, but it also will lay the foundations for good relations and projects in the future.

Regard to something else, I have to underline the advance of our disinvestment plan our asset disposal plan. We had a commitment which we have compiled with perfectly well, in dates and quality and conditions. We have collected €5.5 billion and since the last presentations we have collected €450 million from disinvestment in 300,000 points of connection of supply in Madrid. So, everything that we had foreseen has gone ahead, and it's all come to a conclusion very satisfactorily.

Also it's important to point out that, we have signed the agreements for sale of assets that will mean an another €350 million. We are waiting for some final authorizations and these have to do with this gas supply contracts in Madrid, associated with the points of supply that we have sold and also the sale of the combined cycle plant at Arrúbal. So, this will produce about €350 million. As the fuel authorizations spending which will be approved imminently and that would be the end of our policy and the end of the operation that began with the purchase of Union Fenosa and then the commitments that we had agreed at the CNMV.

We have always wanted to have a strong capital structure and our idea was to reduce our debt at this much as possible after the Fenosa operation, and I think we have complied with that very well. Our net debt is going down by €2.5 billion. €2.5 billion less than we had at the beginning of the previous year, and its now €16,900 million, so less than €17 billion and that is due to three things which are clearly explainable: this sale of assets that I have just mentioned, the collection and securitization of our deficit, and the generation of cash flow which is sound and stable. Due to all this, the net debt over EBITDA was 3.8 times ratio which follows along the lines that we had included in this strategic plan. So, we are complaining with one of our main objectives. Part of this policy of strengthening and reduction of debt had to do with the securitization of the tariff deficit.

Gas Natural Fenosa has collected €836 million and we have pending a €11,775 million pending securitization and €1,330 million correspond to Gas Naturals Fenosa. So, we are waiting for the financial markets to allow us to continue with the securitization plan that began and we hope we will finish at the end of the year or through out this year. And if that is the case, our debt will go down below €16 billion and it would be about €15.6 billion. So, that would be a debt over EBITDA which would be 3.5 times just by that securitization process.

Also, in this first six months period, we have gone to the capital markets and one of the policies that we began more one year ago, almost two, diversify our financing and refinancing sources by going to capital markets and issuing debts. So at the beginning of June last year, we had issued € 9.7 billion in debt in capital markets, €8.4 billion last year. In the first quarter, as we said, we had issued €600 million debt with success and to that we should add a fact that in May we issued € 500 million with an eight-year period that contributed to enlarging our investor population, and another series of €240 million by our branch in Mexico. So this has all contributed to diversification of our financing sources.

Another part has been the strengthening of our own capital through two decisions that have been very favorable, the scrip dividend which you are familiar with, which had a success ratio of 96.4%. We are very satisfied. It is one of the highest ratios we know, and this meant a lower cash outflow of €400 million. And then the purchase of 3.85% of share capital of Sonatrach will contribute with €515 million. So that will be less. That 915 million in terms of positive impact on our own resources and we are very happy that is because may be able to increase our own resources by almost a €1billion.

We should also say that in view of all this, how things are going and the also the operations we are going to tell you that in a minute, we think that there is a lack of consistency in terms of the criteria that the rating agencies give us when we are compared to other utilities in Europe. We believe and hope this is corrected in the future because the coverage of our net debt and the cost as regards liquid assets show a very positive development with the ratio coverage of the debt of 20% and almost six times of our financial costs. If we add the solid business risk profile with 70% approximately by EBIDTA of course are regulated and a creative management of liberalized businesses. If we also add to that the limited exposure to other European utilities risks, (inaudible) and the proven expertise in the emerging markets and you have seen that this company has not as a result to take or pay at any time. All these facts make us or give us a continuous improvement, and we have no risk of refinancing because as you will see that we have spoken about this in previous quarters dates are more than ample to cover our commitments, and we think that these rating should undoubtedly get better in the immediate future.

The other thing that I have to tell you is that we continue with our policy of growing in renewable especially those that are more interesting from a commercial point of view. We have pulled almost 100 megawatt small from ACS. That means that 1000 megawatts in terms of our installed capacity for this. But we have done more things in this area definitely with Eufer. As regards Eufer, we shared out the assets that we had with Enel in a friendly manner. We arrived at the end of the joint ventures, shared out the assets and we did that in May. Also, we began to develop the green field wind projects in Galicia and other places and we are beginning to develop them in order to comply with the dates that we had agreed to.

We acquired from ACS, we purchased that I have just said recently, and we also reached an interesting agreement with Repsol to develop a series of offshore wind parks in the UK through the SeaEnergy company in a joint venture of 50-50. So we continue to be interested in developing as significant operator in renewable energies.

If we look into the situation on markets, we should say something that is quite clear and that is that there is an increase of the price of energy all over the world. That is something that we all know perfectly. All the rates in indexes of Brent and BP, the Spanish Pol(ph) , the US, have all registered very -- this increase of almost 50%. So, the markets increasing their prices very much and in some cases they have arrived at the final markets and sometimes they have not yet, such as the case in the electrical market. Brent has gone up 43%, and BP has gone up 61% a spectacular increase, and in Spain, the Pol has gone up by 55% which has not yet hit the consumers, and it will be unavoidable that the increase will finally affect the consumers. So, things are very much different from 2010, and we think that if these are the trends that are still going to go for at least another 18 months.

Dynamics of markets. Well, markets might have noted this increase, and in terms of Spanish market their gas demand has been negative with a drop of 3%, and especially due, you will see this later, to the production of electricity through gas, and with the pleasant surprise the industrial consumption has gone up. As regards the consumption of electricity, there has been a drop of 0.6%, but we must say that the conditions of the weather have influenced and are continuing to do so right now, and this influenced the situation in lower consumption of electricity. In Latin America, however, now American markets practically gas and electricity of growing up to rates of just over 1%.

If we look at the results for this six month period, again you have, this is the general income statement, consolidate income statement, you see that the gross margin and EBITDA have grown about 1.6% and 0.4% in these environments, in these complicated situations. The balance between our different businesses, regulated, unregulated etc has consecrated to balancing these phenomena and allowing these slight growth of our results. If we look at the consistent development of our EBITDA because in 2010, well this situation was rather different from 2009; the real increase, the net increase, if we look at consolidated results would be about 3%. Then there is a series of disinvestments that have not been so significant this year and financial results have increased by 13%. Net profit is $822 million, which is lower than last year, but for the same reason the existence of extraordinary income that we spoken about in 2010 and 2011, if we do not bear that in mind our results after taxes would have gone up at 11% and is to say results after taxes recurrent results in our company have gone up 11%.

If we look at the situation of investments, there is a strong situation of financial discipline and there is also the beginning of different programs including the renewable program but that has not really picked up speed yet. We had green field projects that is only just starting up, so most investment is in regulated business in gas and electricity. Despite the prices in Spain there has been an increase of just over 1% points of supply.

If you look at the debt breakdown, we can see that almost 70% of our debt is fixed and in excellent conditions, and the average cost as a result of this and refinancing is perfectly competitive. 82% of our debt is in euros and 54% of our debt is in the capital markets i.e. 6% in bank loans. This diversification which we have tried to achieve for several years has been a success and we are very satisfied.

If we look at our schedule for debt maturity, we can see what I had already said, there’s a very low risk of refinancing because we have arranged the periods in such a way that almost 70% of the debt will become due after 2015. so, we are very happy with this situation. But in addition to this, we have to bear in mind that the average age of the debt is more than five years and bear in mind, the high level of liquidity that we have. Our availability for cash at this time is €7.7 billion, half of which is available. So, at this time, we could finance and refinance our operations for about two years at this time. In addition to that €7.7 billion we would have an availability on the capital markets of €3.7 billion. So we are convinced about the strength of our current financial situation.

If we go into the operations, it’s interesting to look at the breakdown of our EBITDA. There are three things that we have to point out we’re going to do for. The EBITDA has grown by 0.12% but we should remember that it would 3% if we did this in consistent disinvestment situation, would be 3%.

There are three points here. The distribution of electricity has grown by 20% but it’s not a consistent comparison because at the end of 2010, the updating of electricity regulation tariffs was regulated. So, we will have to wait until the year to have a more consistent comparison but in accounting terms, we are talking about 20%. In terms of electricity, we have to point out how our generation and marketing business has gone down 20%, and in gas, the provisioning and marketing business has also grown by 20%. In South America, you will see the electricity distribution goes down 28% for two reasons, the special tax introduced by the Colombian authorities in January, which is atypical and non-recurrent, and investment in Guatemala. So, this justifies this drop of 28%. Finally, €2,386 million EBITDA so that is 0.4% over the previous year.

If we analyze these businesses, first of all, we have the electrical distribution in Europe, Spain, Moldavia a €364 million in EBITDA an increase of 21% that is not homogenous in terms of comparison. As I explained before, we will have to wait till the end of the year to have the exact figures, but it is obvious that the whole sector has benefited finally from the updating by the government of remuneration within this regulated sector, practically the tariff integral or comprehensive tariff has just a bit difference in Spain in spite of the crisis in which we are has been an increase of 1% of the supply points. The company has achieved the situation with the quality of supply the TIEPI is at a value of 20 minutes which is another decrease of 38%. With regard to the first quarter of this year and we have continue to invest in quality and maintenance.

With regards to gas, distribution in Europe includes basically stand but also Italy, EBITDA has reached €501 billion, that is a 3% increase in spite of the disposal of assets. Had we not sold these assets, once we have divested in Madrid, due to antitrust conditions our EBITDA would have increased 6%, basically, because of increase of volume in the industrial market and also improvement of efficiency. All the plan that we told you about at the time of synergies when we launched this operation have been exceeded in almost all business lines for the efficiency of the company in all of these business areas has been improved and exceeded and this has been reflected in our bottom line.

Gas sales has fallen by 2% due to lower residential income function for climate reasons and this has been partially compensated by the recovery of the industrial market of gas. Points of supply have increased since the crisis by 75,000 compared to the previous year, December 31 of previous year. And in Italy, we continue to do quiet well with an EBITDA increase of 18%.

Now, we will talk about generation and commercialization of electricity in Spain. There has been a phenomenon, which has led to substantial increase in the sales pool in the market, quiet high compared to the same period in the previous year. The fuel prices as you know have also increased substantially, so that difference has let to reduction of our margin in the previous year. So, our margin has dropped compared to the previous year, because of the increase of sales price and an increase in provisioning cost. So our margin has been reduced, because when it comes to domestic and industrial customers as you know there is a gap in terms of pull prices, its takes a while to see the impact on the markets. And because of these reason for a certain period we were out of sync, but we expect in the next few quarters to see an improvement in margin. For the same reason we are short in terms of sales because we expect to see an improvement to margins, this will hike the pool prices which have increased by 55%. Well, this will be reflected in the future it has not been reflected yet and in few months time we should see this impact once markets adjust to the real situation of cost in the sector.

The market in -- the ordinary market has fallen 4%, while production in the group has gone by 6% and the market has been reduced by 1.4% in general and Gas Natural 4%. There has been left generation of hydro power both in the industry in general but in Gas Natural particularly and thermal energy has increased dramatically due to the government policies that have decided to support native goal. When it comes to general demand there has been a slight drop of 0.7% in the first quarter of 2011. When it comes to special regime, which is a drop of 6% of our company due to the fact those there has been less wind and less water power, hydro power. But were still at €70million and here I would like to underscore that our portfolio has grown through the one in operation due to the acquisition of the power stations from ACS and also the green field projects that we will continue to earn in the next few auctions that will take place here in Spain.

When it comes to gas infrastructure, the pipeline in Magrath(ph) has seen an increase in its usage of 4% compared to its previous year due to the increase of demand from Portugal. Our methane ship fleet has been dedicated all the time with the exception the Libyan crisis. As you know Libyan supply has been taken care of by the unique ship and while it could not operate because of the fact that we were not getting any supply from the Libyan market. Union Fenosa Gas has kept its operational parameters. The Damietta liquefaction plant has the highest levels of production ever compared to the previous year and the re-gasifying plant in Sagunto has worked 18% less than the past year. All-in-all we see a drop in EBIDTA of 11%, reaching a number of €117 million.

Now if we talk about out provisioning or supply of gas business. Our gas supply business, the Spanish market fell by 2.3% during this period. I am talking about the Spanish market and this is due to two very different circumstances. First, an almost 10% reduction in gas dedicated to electricity production whereas the consumption market has been more or less stable with an increase in gas dedicated to industry greater than 6%. That is the market in general. But in Gas Natural in Spain we did not see this 3.3% drop but only 1.8% drop and this was leveraged because in the electric market which did not see a 10% reduction, only 5% reduction and in other markets we behaved better than the market in general and we have to include here the divestments made in the area Madrid in the residential markets.

So all-in-all, the Spanish market fell by 2% more or less and this has a lot to do with temperature of residential markets. This still continues in months of July for central is less warm than usual, and this phenomenon which for Gas Natural has been a lot milder and less pronounced has been compensated for in the case of gas by an increase of 15% of sales international markets.

As of February and March we saw a huge take off of finance and very high margins. We have was also expanded in new markets that we have started to consolidate with a strategy of not being traders in the market although, of course we take advantage of opportunities but whether to diversify markets with different clients. Union Fenosa has kept its sales more or less stable in Spain although internationally we have had a small drop of sales. All-in-all we had EBIDTA for more that €300 million. That is 20% higher than last year.

We have come to electricity generation in Latin America. As you can see in this chart, it has fallen by 11%. Production has fallen by this percentage due to the disposal of over 2000 megawatts or million megawatts. But if had not done this our production would have increased by 24%. Something similar can bee seen in an EBIDTA. This remains stable. They would have gone 27% had this data been homogenous without including the divestments in Mexico. All these data that I am giving you make us tell a conclusion which is that these divestments were very positive for the company because we could be able to cover of EBIDTA and at the same time we have seen improvements in our account. We did not have to sell with accounting problems.

When it comes to gas distribution in Latin America, we have also grown 5.8 million of points of supply and EBITDA has grown 6%, basically, because of higher activity more volume. Sales have grown by 1% and again we see the strength of Brazil that continues to grow 10% growth in EBITDA, Colombia more than a 150,000 new clients with an EBITDA of 82 million. Mexico that has grown an EBITDA by 2%, and lastly Argentina, well there has been a drop in EBITDA, although it is less relevant when it comes to our bottom line, the case is Argentina is less relevant. When it comes to electricity distribution, 3.5 million points of decline Latin America, sales continue to grow by 1%, in spite of the sales of our subsidiary in Guatemala, so we see that the total number of clients has dropped by 27% because of the diverse in Guatemala.

EBITDA a 137 million, 28% less on the previous year, due to the two reasons I explained before, Guatemala and the special tax to be paid in Colombia which is atypical, but which has had a substantial impact on this years account. Those are the two reasons that explain why which it impact in electricity distribution in Latin America, although there is a one of thing.

Looking at businesses in general, let me come to some conclusions. EBITDA almost was €2.4 billion of 0.4% growth, even though this is not homogenous it will 3% if it were homogenous. Our recurrent net income is growing at a rate of 11%. Our asset sales program has been almost completely executed very successfully. We have strengthened our capital structure those because of our reduction of debt and also with an increase in our equity and our risk profile and we continue to believe that we should have a stronger presence in renewable energies at an error rate. And as a final conclusion, we are still making an effort to try and achieve the goals that we set ourselves in our strategic plan, the strategic plan that goes from 2010-2014, that’s all I wanted to say.

And now if you have any questions feel free to ask.

Unidentified Company Speaker

Next we will start the Q&A session, we will take questions from the room first from the floor first please identify yourself; tell us your name and the institution you represent.

Question-and-Answer Session

Raimundo Fernandez-Cuesta - Nomura

I am Raimundo Fernandez-Cuesta from Nomura. Two questions; one is about the dividend policy the other one about sale of gas and provision. First about dividend, the company has not abandon its dividend policy, if I am not mistaken its 10% annual growth average annual growth. Last year's dividend after what happened with final track did not grow, I guess this will be a decision to be made by the board, but should we expect dividend to grow at least 10% her in the next two years, bearing in mind that the balance sheet of a company is quite helping out?

The second question, well, I would like to know what kind of weakness could you have in the near future? What is recurrent, what is not recurrent? It's not clear to me whether the provisions that were made which ended there in the right one, as we saw as after the agreement with Sonatrach, were those provisions made at an EBITIDA level in the gas division or somewhere else? When we see those 300, 350 or up to €400 million EBITDA in previous years, are those EBITDA realistic or not?

Unknown Company Speaker

I will come to the first question, we don’t think as we got to be a problem to maintain our dividend policies not at all, you just have to compare ourselves against companies. Now, to answer your questions, we have not changed our target, which is the growth of 10% until 2014, so the idea is still the same. So the different thing, our annual moves decisions will be made by the board at the end of the day, but the objectives of the strategic plan remain the same, they have not changed for provision, yes there in the EBITIDA yes, they are contained in the EBITIDA. We are talking about gas supply and it will continue to be a recurring one which have already been done and the extraordinary one that we have presented here while the official accounts are always in the right business line.

Raimundo Fernandez-Cuesta - Nomura

Can you say then that provision that were estimated such as the real gas price to be paid were the right ones, those provisions, those results that we have seen recent years? Obviously they will depend on the temperature and other things but do you think they are reasonable results in line with today's reality and the agreements with Sonatrach?

Unidentified Company Speaker

If you look at the gas supply line of 2010, the prices are still in place, and if you look at the first semester of 2011 the cost is incorporated there based on the contracts we have with different gas suppliers including Sonatrach.

Any further questions from the floor?

Manuel Palomo - Citigroup

Good morning, I am Manuel Palomo from Citigroup and I have several questions. Throughout your presentation you have focused very much on the deleveraging process that has been quite significant from 2.2 trillion to 16.9 trillion that have been announced now in the first semester. My question basically is, do you think that you have achieved your goals, your targets? Do you think that from now on you will be able to go back to CapEx that you wanted, not just organic CapEx but also some kind of acquisition like the one with ACS 95megawatts? And the second question, of course from this acquisition of 95 megawatts from ACS, there have been rumors in the press about a new talk of 505 megawatts from ACS that Gas Natural might be interested in acquiring. Can you make any comment on that? And bearing in mind that the new focus for growth could be renewables both when another type of technology, is it true that you are not only acquiring businesses that are also working on green field projects and what will be the remuneration for renewables not only now but in the future as 2013? And lastly, if possible could you give us an update on your view of MetGas not just its impact on Spain but also whether you might be interested in taking a stake in that project, MetGas?

Unidentified Company Speaker

I will answer your questions in order. First of all, our objective in terms of debt is contained in our strategic plan that goes on until 2014, and that’s going to be the plan. We are very happy that we have moved even faster in achieving some of our goals and targets but having a healthy financial structure is still our main and therefore, the level of debt that we want to have is a one we explained in our 2014 plan. That does mean that we will not be able to acquire like those almost 100 megawatts from ACS, because it was already contemplated in the plan, a plan already contemplated on acquisitions like that. But our financial objectives for the period 2010-2014 were fundamental then and will be fundamental in the next few years. It does not preclude us from making investments or acquisitions like the one in ACS which are fully in line with our plan.

As for ACS, acquisition of more megawatts from ACS, well, the first acquisition included the acquisition of shares of renewables plan where we were already shareholders. ACS, as you know, is in the market and they want to reduce their exposure to some of these businesses, and Gas Natural Fenosa will study those opportunities with gas interested. And there is nothing else we can say for the time being. We will analyze the possibility with great interest and of course it will be part of our strategic plan which is fundamental and which is still what guides us.

As for renewable energy, our idea is that remunerations will have to adapt to market condition. The opinion we have, we have to fight against climate change, we have to achieve that 2020 goal set by Brussels, but you know our opinion as well. You know that the way we have done this means that we have -- there are certain efforts that are not sustainable. We believe this is a phenomenon that is here to stay, and we will have to try and see how we are going to subsidize these technologies because I think both can be achieved in many different ways not just by subsidizing energy at 10 times its costs, but there is a case that probably(ph) will take energy. So, we will focus in those possibilities like fighting against climate change with renewables that are closer to the market, the ones are more developed, those that are closer to standard conditions instead of those that are extraordinary and that would require huge investments. So, yes, we are committed. We are very interested in those sources of electricity production, but the idea not.

As for MetGas, that is one of the alternatives we have to see whether both Sonatrach and Gas Natural Fenosa end up developing them. Something similar was Sonatrach. so, we believe that with those possibilities -- this is one of the possibilities and we will see whether we can finally do something about it.

Any further questions from the floor.

Unidentified Analyst

(inaudible). to continue with the dividend policy of objective of 10% average dividend annually while there has been a capital increase and there will be another one for Sonatrach, has this to do with the unit amount or the total amount of dividend to the distributed? The payment to Sonatrach and capital increase I believe this hasn’t been made yet. Do you expect to pay this in the third semester, and guidance for CapEx this year? Well, I think the number you showed is a little below what's stipulated in the strategic plan. Is there going to be an acceleration before the end of year?

Unidentified Company Speaker

Well, the plan was established, the strategic plan in 2010, we said that growth was based on the dividend base paid in the previous year. So, we are talking about the amounts paid then about €700 million. We said that we wanted to grow in a cumulative way up to 10% in the period 2010 until 2014. That is what we said then and that’s our objective still to-date. Shall I continue?

When it comes to payment to Sonatrach, it hasn’t been made yet. We are waiting to receive once authorizations arrive we will -- when we get the invoices we will start paying, but this is consent that we will have them in the next few weeks.

As for CapEx, traditionally if you look at the different semesters, the first semester is usually slower in terms of investment, although there is a bit of everything. There is an administrative claim, there’s certain delay and for that reason, the second quarters are little bit lower than the second one. So, this can extrapolated to the previous year. The second part of the year, there was more investments. We have to add this 95MW from ACS and other things that will compliment this investment.

Unidentified Company Speaker

Any further questions from the floor? No, well then we will now starting taking questions on the phone through the videoconference system. First question please.

The first question will be asked by Alberto Gandolfi from UBS.

Alberto Gandolfi - UBS

Good Morning. I have three questions. The first one has already been asked, but I just want a little clarification. You have very strong cash flow generation, which is getting stronger every year. I don’t really understand what your priority is. Is it having more dividends, more CapEx or the two things? What are your priorities? If you could please tell me, because I believe Gas Natural in the next three years it’s going to change a lot, and the way it operates, because it’s going to invest much more and will continue to pay very attractive dividends. Could you tell me one, you’re going to be able to give us an answer? Let’s talk about a new strategic plan to be announced throughout this year.

The second question is about the gas sales business in Spain. It all seems very stable. It seems as the resolution with Sonatrach was very positive for you. Could you talk a little bit about the competition, what’s happening with your main competitors? And what’ going to be your coverage for the year 2012? What’s the volume you have already committed with your suppliers and what’s the margin of those volumes? And one last question. Could you give us some guidance for the year 2012 at least an EBITDA terms, because it looks like your business is mainly regulated with an increase of volumes in Latin America and where do you think we might see a surprise in terms of EBITDA?

Unidentified Company Speaker

My colleague Carlos Alvarez will give you some details I’m sure, but cash flow my question about priorities and as regards guidance, well the answer is the strategic plan. Our priorities are and will continue to be those that are included in this strategic plan, but in terms of cash flow into the company for investment and for that and for dividends, we are going to focus on what we said in this strategic plan. As regards competitive environment of cash, well, the cash market in Spain works quite well very different from the electric market. It moves faster than the electric market for obvious reasons sometimes, because it’s more transparent, more immediate, more open to international markets, because the regasification plant is very fast, it’s also a shock of the crisis we’ve gone into an excess offer and then we have gone into an adjusted situation why because operators, players have learnt some of them have paid the price, but they have adjusted because of the excess gas and the non-competitive gas that there was. So there has been an adjustment offer and supply have adjusted and that has been two factors have increased the price. First one is the gas market continues to be intimately associated with the Brent, rates on the Brent market and secondly because of the increase of margins the world over which took place before the crisis in Japan. Before that the world market, the end of last year began to adjust and as a result of that there was an increase in margins that also affected Spain especially as regards, both similar to other European markets, it’s our view of the market which will probably continue over the next 12-18 months and I don’t know. Carlos, do you want to say something about this?

Carlos Alvarez

As regard to the objectives of the strategic plan I want to remind you that this strategic plan which represented 2010 to 2014 had a half way point which is 2012. So there was a guidance for 2012 which continues to be the same and again as far as try to get and achieve those objectives, the financial objectives and we had determined the plan, as regard to priorities well on 2012 was the turning point for the new plan that might be after 2012 the new investments if we have the financial strength about three points or three times the EBITDA that and we are working towards the end and that’s the priority at this time and that together with investment with growing in the market and some opportunities, and those are the priority, that’s the priority, but the dividend payment with the growth and the growth of investments that we engaged in.

As regard to the second question how much we have covered of sales of gas for the next year, we are about 70% more or less. Remember that in gas contracts we have some dates that become due at the end of 2011. So it’s not 100%, so gas contracts in contrast with electricity contracts are longer year and a half. So apart from some contracts that expire at the end of the year we have got a coverage of about 70%. The next question please.

Unidentified Company Speaker

The next question from Mr. Bruno Silva from BPI.

Bruno Silva - BPI

Good morning, I have three questions, the first one can you give us some idea of what do you think it’s impossible to increase the credit rating of the company with your increase of the P&L account in the last few quarters? And the other question if you look at the cash flow statement you have got a total about €1.8 billion in the first six month period for disinvestment and then at the second half has another amount that you have mentioned how does this fit in with investments? On the third question, is about the profits achieved in generation in Spain and how much do you think it will be until the end of the year? Thank you.

Unidentified Company Speaker

Well, as regard to the rating we told you in the presentation we think we obviously want to improve the rating of the company. We haven’t set ourselves a date, but over the next few months we work towards getting a better rating, but in the strategic plan we said that we want to reach Category A by 2014. We still got two notches to go, but that’s what we are going to try and do before 2014. Category A that won’t be immediate as the ratios get better we will see how the rating agencies will deal with this for Category A, the objective for 2014 and we are still working on that. As regard to the magnitude that you are mentioning, I haven’t got exact figures here, but the cash flow status as the name says has to do with cash. These are investments that have been accounted for the cash status is what you have paid. So it includes payments of the last six months period and not this six months period. Our investments are stronger since the end of the year, that period is a delay period, administrative delay period and there are more investments because that includes the last payments of 2010, but it doesn’t yet include payments of this final quarter. If you look at that quarter that always be more or a greater amount, but investment as regard to payment and cash is what you have in cash and the same happens regard to disinvestment, but if you want more details about the exact data released investor relations department can give you the exact tallying up of the figures.

Generation and then you can deal with that one. Well, at electric price level in the poll we are trying to achieve some increases although they are lower than last year, because the process are higher and what we are trying to do is to transfer that increase electric price to the final trading price although there is a certain delay which we have to adjust for over the next few months. Next questions please.

Unidentified Company Speaker

Next question is from Mr. Pablo Cuadrado from Merrill Lynch.

Pablo Cuadrado - Merrill Lynch

Yes, good morning. My name is Pablo Cuadrado from Bank of America Merrill Lynch. A lot of my questions really have been answered already, but I have two far questions one as regard to the business in Spain, the delay that you explained in terms of trading and why you think that as contracts are reviewed things will be adjusted. But I wonder but you give us more details of that when you expect the approval of capacity payments. The report was sent to CNE(ph). Could you give us some more details about that your perspective as regard to the increase in remuneration and also and we asked you in the past, but I think there is still doubt in the market as regard to the script dividend, the operation has been very successful in terms of the level of (inaudible) and I would like to know whether you can confirm whether you are going to keep that over as regard to the future or this has been a one of thing?

Unidentified Company Speaker

As regard to the delay yes, well I think it’s clear it’s the same happens when the market goes down. It’s not directly associated or the wholesale and retail markets not exactly adjusted to each other and that produces delays and that was seen in previous years where the drop of the poll did not transfer that change didn’t transfer or didn’t reflect immediately at the same speed I think that is obvious.

As regard to the faculty payments the report draft proposal was sent to the national energy commission is interesting it looks at the current year and also talks to little more in depth in longer term. I think that the government has understood the importance of the issues, it’s impossible to regulate the Spanish situation unless capacity payments are regulated. Especially bearing in mind the back up that we require which have a combined cycle plant. So it’s impossible to maintain even the renewable policy unless we don’t establish a capacity payment system that can back up these energies, which the government is trying to protect and develop. It’s true that there has been changes at the National Energy Commission all the members changed recently the new president come in last week. This has contributed to delaying the situation we are also going into August, but we believe these delays are explainable and we will soon have a solution which is very-very important and the script dividend, well the decision was made as regard to dividends for 2010. There is no decision have been made about 2011.

Unidentified Company Speaker

Are there any more questions.

Javier Garrido - JP Morgan

The first question is about taxes if I don’t, if I remember rightly the disinvestment that were ordained by the CNE free from tax but if you look at your adjusted net income of profit it would seem that the taxes have not been fully included I would like to know more about this and the second question is about Colombia you have said that they drop in EBITDA as to this new tax in Colombia but that tax was accounted for in the first quarter and yet EBITDA at six months dropped by 48% was exactly the same amount was there anything in the second quarter that influenced the situation or is the second quarter or what happened as regard to that and the third question could you tell us about the ACS assets that you bought you spoke about €74.8 million could you tell us what the debt is for those assets?

Unidentified Company Speaker

With regards your question the rate, tax rate includes in the case of these gains there is a tax. All assets are free from payment but they are subject to a delayed or deferred tax you pay less but that is registered in the account so we have 18% of those gains that have been registered with that tax this year and the previous year so it’s more or less the rate and is more or less the same.

As regards payment we are not that is being registered at 18% so there is a deferred tax there as regards Colombia I think that the profits the current profits more or less we cover the six months, there are some changes between one quarter, the first quarter and the second quarter there are some amounts that are registered in the second quarter but I think that the tendency that a trend minus those 50 million which is what the effects of EBITDA which is also the tax that was paid the first quarter that although is due on the 1 January is paid in four years. And there are a series of adjustments for sales for the first quarter and there is also an amount from the previous year that have been registered in the second quarter which leads that slight change.

The assets of ACS you have to remember that there was some wind parks that we were consolidate in partially so that it was being consolidated in a proportionate manner but the balance has been increased as a result of the 72 million that we paid in equity plus 20 million additional million is a result of debt which will be incorporated when we close the figures completely so the total we are talking about in terms of enterprise value in 1995 million.

Unidentified Company Speaker

Good, are there any more questions.

Javier Suarez - UniCredit

Javier Suarez from UniCredit. Good morning. I have got three questions the first one we go back to the guidance for 2012-2014, are we going to, but what I am wondering is whether you can tell us strategic presentation was done before the conflict with Sonatrach and the statement that you sent on the 1 October where you spoke about the maximum effect for 100 million for 2012 obviously the payment that you are going to make will correspond with payments made for those four and a half years but why doesn’t a company review this EBITDA after this renegotiation process with Sonatrach which has to do with volumes for the future to 31 May 2011. Can you give us some more details and why does the company maintain its targets without modification?

The second question about the debt of the company the debt of the company is 3.8 times in the second half of the year this amount of money will have to be paid to Sonatrach some disinvestment will be done and company might make some purchases the question is what level of debt to expect for under the what level of debt do you think you would be comfortable with?

The third question is to know your opinion about the recent agreement signed with Promgas Gazprom and Enel. Will Gazprom and Enel have reduced significantly reduced the price of supply to (inaudible) and I think I was wondering whether this might have some kind of impact on the gas sector what do you think about it? Thank you.

Unidentified Company Speaker

As regard the first question, as you have said when we spoke about October that was the worst case scenario that didn’t happen since they haven’t happened those 400 million don’t have to be adjusted but in the strategic plans targets or anything other things have happened both positive and negative but at this time everything we are saying we continue to work on the objectives and targets that we had so we don’t have any need to say that Sonatrach has impacted our strategic plan it’s the same. Obviously, as always when we arrive in 2014 we will comply with the objective and there will be more or less here there that will be a bit of everything as happened in the last strategic plan in the next one but on the basis of the information that we have available the worst case scenario is not applicable within this period and that’s the explanation.

As regard the debt, our debt objective we don’t give any objective in terms of debt that’s for 2012 that was about three times the debt over EBITDA and our debt was about 15 to 16 billion which we said in the strategic plan and we think that at the end of the year we will be in line with that objective and I would say we even get ahead of it so we are going to achieve it, we might even achieve it before we expected.

As regards the agreement we don’t know the details about this agreement that in any event would involve the other party (inaudible) would come under EDF more we don’t know we can’t give you an opinion there are no details have been made public and we don’t know but we are not surprised in the sense that the whole European market, the gas markets are not strongly interconnected the gas markets are not globalized we could talk about three areas the US, Europe and the South East of Asia they are different, obviously they have connections but they are not connections strong connections like the oil market they are not it will take some time to be connected the European market has been a lot of dis-adjustments which have to led a situation where companies like NE and others have declared publicly that they have had (inaudible) problems excess volumes and it was obvious that there was going to be there were going to be strong renegotiations so we are not surprised that NE has agreed to re-channel all this situation it’s a situation that is quite similar to the one that we were had with Sonatrach but it’s also different because ours had to do with different problems but in any event we are not surprised but we haven’t got the details.

Unidentified Company Speaker

Good, are there anymore questions? Next question is Antonio Lopez from HSBC.

Antonio Lopez - HSBC

My questions some of them have been answered and basically what I wanted to ask what is the average cost of the debt this last quarter? The second question is to renewals. Would you look at putting renewals into another company and make them public, and then what are the perspectives for electricity and gas consumption in Spain? What about the investment trend in Brazil where demand is growing above the CapEx plan is biased to investment in Spain, not they go to markets that are growing.

Unidentified Company Speaker

Well, as regards to the first question, the average in 428 for the quarter which is slightly above the first quarter. The first quarter in which 4.2, that’s 428, a small difference. Through out the rest of the year I think will be the trend, it will probably go up, but it will never reach 5. In this regards the other two questions, no. We haven’t looked at change, may cover in your bulls public, no. And the third one as regards, the first thing we have got to say the reality is and the truth is that growth of markets in Spain, of energy markets is not as electric ones come down by 0.6% which is very little. So we can tell that there is a more or less flat situation and its importance. So, we are not talking about markets. The economic situation is not very good. We are not talking about collapsing market, anything like that and this negative 0.6% has a lot to do with the weather this year, in the winter and the summer. In June, electric consumption is not very much as it is not hot. So is you look at all of this, the electric market is not really dropping. It’s more or less stable and if the weather had been slightly hotter, it would probably be flat or positive even.

As we go to the gas market, there is something slightly more positive. Yes, it dropped by 3%. But that drop is in the amount of gas devoted to electricity in the conventional home residential markets also going down, because of weather reasons but only because of the weather and the industrial markets spending about that 6%. So I have to underline this for gas net throughout the Spanish market in the first six months period only dropped from just over 1%. So our basic market which is the Spanish market and in spite of the general crisis that is none the less true that energy consumption is more or less is stable. I think this is important to remember. If the weather were more normal and industrial situation was more or less the same, energy consumption would increase. This is the fact but it is also very true that as we can see in this strategic plan, the investments of Gas Natural have a lot to do with market. So we identified in our strategic plan, the areas that we wanted to focus on and that’s what we are going to do and I want sooner.

In underline two things. First of all, our market in Spain remains and is going to be the same even in spite of the situation and, secondly, our investment plan the Gas Natural is more focused on growth market. Market allows diversification and makes use of significant growth and this is reality in gas. We have grown 15% (inaudible) outside of Spain. I insist we try to do no trading sales, our policy is to sell to final customers by using the organization that we have in the market where we already are.

Unidentified Company Speaker

Any further questions?

Yes, we do have another question from (inaudible). Go ahead

Unidentified Analyst

Sir, well actually my question has already been answered.

Unidentified Company Speaker

Well, then Jorge Alonso from Societe Generale will ask a question now.

Jorge Alonso - Societe Generale

Good morning everyone. I have a couple of questions. The first one is could you give us an update on the renegotiation or update of the contract prices in Egypt? Is it going to have any impact in 2011 results, because of a higher provision and cost in 2012? I would also like for you to clarify and what are the markets that you believe will have the greatest potential if you want to increase your sale outside of Spain. Which are your favorite markets, where you are going to focus your effort and what flexibility do you have with gas contracts that you able to sell more gas in international markets taken advantage of what you said before about margins taking up and also what your view on all of this.

Now, what about prices in Egypt? It’s true that the situation in Egypt is quite unstable, but we continue to operate even over and above last year’s volume 30% higher volumes. Renegotiation of prices is something that we have been doing all the time and we will continue to do it in the future. It’s a possibility with Egypt and it’s usually the case with all contracts that we sign, so we hope we will be able to reach a reasonable agreement with Egypt. Now, when it comes to potential gas market, outside of Spain, Gas Natural has made an effort to open new markets in the countries where we operate, our sales have increased substantially in the Argentinean market, in the American market especially in Puerto Rico we expect to increase our sales and other markets in central and South America which are now regulating the gas system taken advantage of gas import opportunities in order to complement the energy system. The case of Argentina is a (inaudible) point, but with Mexico and other countries where we operate, we have also started to have very good relations with countries like India and others. So we are trying to diversify and most importantly we were trying to become stronger in countries where we are already operating in that thing. Flexibility has a lot to do with our position in contracts and the fleet we have. About one third of our portfolio comes through pipeline and two thirds by boat. Boats or ships give us enough flexibility and this allows us to mobilize gas to the best potential market, but you need both things(ph), you need to have a good contract portfolio which is our case and at the same time you need to have a good fleet of cargo boats and those two things are not very frequent in the gas business, but it’s something that we do have and we have taken advantage of it in the last two years, it will be more competitive during the downturn and also to take advantage of new opportunities.

Unidentified Company Speaker

Any further questions? No more questions in Spanish. Now we will take questions in English.

Operator

This question comes from (inaudible) Morgan Stanley. Please go ahead with your question.

Hi, my name is (inaudible) and I’m from Morgan Stanley. Most of my questions has been answered, just one confirmation on Sonatrach payment, so I then understand the $1.8 billion payment to be made to Sonatrach hasn’t been effected in the accounts and also the capital increase of$500 million has (inaudible) transactions is not given in the cash balance, I just wanted to confirm that.

Unidentified Company Speaker

We have already answered this question. As far as our agreement with Sonatrach nothing has been realized yet. We haven’t paid anything to Sonatrach yet, we are waiting to receive their invoices and we are about to do the capital increase. This should be done with the exclusion of the preferred agreement. That will be done in the next few weeks, okay so that would be my answer. Those payment of invoices and capital increase will happen in the next few weeks since it takes a while to do all the paperwork and to register everything maybe the capital increase will take a little longer.

Unidentified Company Speaker

Any further questions?

Operator

There are no more questions

Unidentified Company Speaker

I think there is one more question from the floor

Unidentified Analyst

Just one thing, another question I am from Nomura. Thinking about the potential change of government any efforts to reduce the costs of energy as the company that’s really felt gas and electricity? Do you have any opinion about the green tax debate whether part of a cost of renewable energies should move from electricity to other fields or energy types like natural gas any comments about this?

Unidentified Company Speaker

No, we don’t believe in tax solutions we don’t as a matter of creating new taxes even though it's true that lots of fields are already under the pressure of a lot of taxes. We think taxes are high enough already and if there were to be another tax it would distort competition. So, we don’t believe that the solution is to increase tax burden. Obviously, the electrical sector is making a huge effort to try and achieve the 2020 agreement. The average this year and renewable and electricity is between and 30% and 40% somewhere like 36%. Obviously, it’s a lot higher than what its obligation is which is 20 and that is introducing some distortion but we don’t think the solution is to introduce more taxes or to increase taxes on fuels because all this will mean is that the cost of energy will go up and will introduce its functionalities between in the competition between the field.

Unidentified Company Speaker

Okay, so there are no further questions we will now read the questions that for our website we have questions that have been already been answered. Most of them refer to the impact of the agreement with Sonatrach and also things to do with liquidity and cash flow but there are three questions that haven’t been answered yet. The first one is asked by Goldman Sachs. (inaudible) were not able to securitize more debts how many more months sorry, how much liquidity do you have for how many months?

Unidentified Company Speaker

Well, we have 1.3 billion that haven’t been securitized and we have four months but there won’t be a big difference by year end. I just want to dwell on two things. We think not being able to place this debt as impossible, it’s not foreseeable. There might be a delay but we don’t think it’s going to happen, but if it were to happen all the securitization pending in our balance is sheet is 1.3 billion and we have much more liquidity then that.

Unidentified Company Speaker

Another question from Barclays Monica Gerardy could you give us some idea of what the percentage of electricity that we sold with future contracts and at what prices for 2012?

Unidentified Company Speaker

For 2012 50% has been sold with futures contracts and when it comes to fuel price over 50.

Unidentified Company Speaker

The last question from Credit Suisse. Do you think there is going to be a new strategic plan that will be presented this year?

Unidentified Company Speaker

Well I think we have already answered that question. We continue to work on the basis of the current strategic plan so we have no plans to present any plan for this year nor the next year.. Well, I think there are no extra one more question. No more questions.

Well with this, we conclude the Q&A session, the presentation comes to end and I will effort to our CEO.

Rafael Villaseca

I just want to thank all of you for coming and asking your question on the phone and I wish very good holiday this month of August.

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