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Executives

Rafael Villaseca – CEO and Managing Director

Analysts

Jorge Alonso – Societe Generale

Pablo Cuadrado – Bank of America Merrill Lynch

Javier Garrido – JPMorgan

Alejandro – Seaplus Asset Management

Antonio Cruz – Banesto

Bruno Silva – PPI

Javier Suarez – Nomura

Jose Javier Ruiz – Exane

Gas Natural Fenosa (OTCPK:GASNY) Q3 2011 Earnings Call November 8, 2011 6:00 AM ET

Operator

Hello. Good morning. Welcome to the presentation of results of Gas Natural Fenosa for the Third Quarter of 2011 presented by Mr. Rafael Villaseca who is here with the Financial Director, Carlos Álvarez and the General Manager for Strategy Development, Mr. Antonio Basolas. Once we finish we will open up a debate and we will begin with the people in the room and then we will go to those who have followed this remotely over the phone or webcast.

And then without further ado I’ll pass the floor to our Managing Director, CEO, Mr. Villaseca.

Rafael Villaseca

Good morning. Good morning to all of you in the room and everywhere else, over the Internet and the phone. We are going to explain the five points on the order of the day, the agenda. We’re going to start with the main magnitude of this year. We are going to talk about the strong points of our current strong financial situation, consolidated results for the period, the first nine months and we will continue analyzing the different business lines and then we’ll have some conclusions, and then we’ll go to debate.

If we begin with the first point, main magnitudes, these are up on this slide that you can see here and I would like to underline, I would like to say that the first nine months, these dates were of the first nine months, the recurring net income was – or the net income was EUR1.114 million. But if we look at the recurring net income that is the profit after adding and taking away the disinvestment operations, there has been a growth of 11.6%.

So 11.6% growth in the recurring net income EUR896 million. In the same period EBITDA – consolidated EBITDA EUR3,539 million, growth of 0.5% in spite of disinvestments. And in terms of investments, it’s gone down – they’ve gone down by 9%, EUR832 million in line with the rationalization plan that we will explain later. As a result of all this, our net debt as of 30th of September is EUR17.3 billion, that’s a reduction of 12.5% over the figure of last year.

If we look at the second point, I’d like to underline the stronger capital structure of our company with the following arguments. First of all, we see here that the disinvestment program, the divestment program has finished, has been a success and we’ve collected more than EUR5 billion which is in contrast with the EUR3 billion that we had as our aim and we’ve obviously exceeded those EUR5 billion. We just need to collect EUR38 million that are pending for sale of gas customers in Madrid and the rest is collected and it includes compliance of the commitment we had as regards competition.

And that has exceeded the financial economic plan in two aspects; in the amount and the term, the period. We’ve completed the program one year ahead of schedule, but at the same time, we have done it with added value. And that should be underlined because there is a significant contradiction because on the one hands aside the company has a value on the market, on the stock exchange, which is lower than its accounting value; but when we did invest, we do with added value, with surplus value, so that from my point of view we are not valued at our true worth.

We’ve also got to say that in accordance with what we had decided to do; our CapEx discipline is very strong and the investment figure has to do with three things figure. We got rigorous criteria in terms of investment. We want to maximize return and shorten the periods of investment, but with two other things. The first one is that we – there has been a drop – reduction in the growth of gas and electricity supply point, so there is less need for investment; and the second thing is that in accordance with the synergies that we had programmed, we are reducing our annual investment on more than EUR200 million. As a result of the savings that we have in recurring investments in CapEx basically of the disinvestment – sorry, distribution activities, and also generation maintenance activities, so all together this has produced this very significant series of savings.

Third point, the securitization of tariff deficit; this year has been significant. We had at the end of the previous year a debt – pending debt of EUR1.8 billion. Throughout this year we have collected as a result of securitization more than EUR1 billion, it’s through the – that’s going to increase due to the deficit by EUR400 million and what’s now pending at the company including what we’re going to accumulate this year is EUR1.27 billion. But it’s gone down by more than EUR600 million and we hope that therefore we expect to collect additional amounts before the end of the year and bring this debt down even further.

We’ve also strengthened our shareholders’ equity by two operations. The first one is the scrip dividend that was completed with an unprecedented 96.4% success ratio, which gave us an increase of resources and a lower cash outflow of about EUR400 million. But as you know this summer, we increased our capital by EUR550 million as a result of the Sonatrach operation that improved our own resources and our liquidity by more than EUR900 million.

Altogether that meant a substantial reduction in debt. As you can see on this graph, in fact if we compare this with what we had at the end of last year, we’ve reduced it by more than EUR2.1 billion and we are now – we have a coverage of 3.9 times net debt over EBITDA. So our debt is now at EUR17.3 billion versus EUR19.4 last year as a result of sale of assets, collection of accumulated tariff deficit and the cash flow growth. So our net debt over EBITDA ratio is 3.9 times and if we had collected our pending securitization, it would be 3.6. So we are on the road as planned in our strategy and we are complying with our aims.

If we look at debt breakdown, the breakdown of our financing sources clearly shows that the risk profile is very well balanced. I want to underline that 71% of our debt is fixed and very competitive, 82% of the debt is in Euros, 53% of the debt is on the capital markets that exceed bank loans which is 37% of our debt.

And if we go into the cost of debt, as you can see we are at a complete cost of 4.3% annually, which is one-tenth small than we had last year. So we’ve got an average cost that is very competitive and clearly lower than that of other companies in the sector that are being given a higher rating than we are. So our situation is very good in terms of debt in spite of the fact that that 4.3% includes the debt in Latin American currency, which is financed basically through local currency and with a face value – higher face value rates of interest. But our 4.3% cost of debt shows how competent we are.

The good perception of risk of Gas Natural Fenosa was made clear when EUR8 billion were issued in instruments and capital markets since June 2009 with an average coupon of 4.77% and an average life of 7.1 years. So, 8 billion issued in capital markets since June 2009, and this is really a truly amiable situation. And we’ve – despite this – despite higher volatilities in spreads, we have maintained good stability throughout the year.

You can also see what the profile is in terms of maturity schedule of our debt. You follow this in other presentations. This is extremely comfortable for our company. We got an average life of our debt is about 5 years, which means that we have practically covered all our needs up to 2013 included – inclusive, and we will have to focus on 2015, and after that we’ll then – after 2015 there will be the maturing of almost 70% of our debt. So we have a program of – as regards our debt, which is really very manageable.

And now we’ve also got to add the very good liquidity we have. We have at this time enough liquidity available to cover needs for at least the next 24 months. We’re talking about EUR7 billion. This is broken down into EUR2.7 billion in cash and EUR4.2 in loans, available loans. And also we have got tell you that the European Investment Bank has just given a loan for EUR500 million, a 15-year loan in good conditions, and those 500 million would be added to the EUR7 billion we’ve already told you about. And we’ve also got available capacity of another EUR4 billion available in euro programs and LatAm programs, Mexico, Argentina and Panama.

It’s very important to point out here and this is literally on the screen, on the slide, it’s very important to quote Standard & Poor’s statement, which says GNF’s liquidity is strong based on its proactive financing and healthy cash flow generation. It also says that GNF’s proven access to the debt capital markets both in Spain and Mexico, its ability to dispose off assets, its sound bank relationships and its prudent financial discipline further support our assessment of its strong liquidity position. This has – this is a literal quote from S&P, S&P’s report.

We have to talk about our ratings and underline, we are BBB according to the Standard & Poor classification that there is a slight lack of consistency as regards to other utility companies which have got better ratings than we have, we have when the situation is not so good. We hope these irons out these differences in the future. The coverage of net debt and the cost of net debt are really evolving very, very well. If we compare this to last year, the coverage ratios are 20.5 as regards to the debt and almost six times financial cost that gives us a solid – sound business risk profile as I’ve already said because our business profile is sound 70% of activities that are regulated quasi regulated and an integrated management of liberalized businesses which gives us straight flexibility and stability in terms of our results as we’ve shown quarter-after-quarter.

We’ve also got limited exposure to other European risks and lower than other utility of the companies as regard risks like the nuclear risk or the take or pay closes in the gas supply contracts and we have proven expertise in emerging markets not just these business, but these businesses in emerging markets and to (inaudible) we have strong liquidity which is been qualified as such and lack of refinancing risk as you’ve just seen.

Now we’re going to go to summary of results of the period. I’d like to underline a few things we’ve already said, our gross margin is going up – is going up by 1.4 EBITDA, 0.5% EBITDA EUR3.5 billion. All of this within very hard demanding scenario as a result of our balance well balanced situation by growing internationally is no doubt one of the elements that we stand align is also that. And this has allowed us to make up for the EBITDA that we’ve lost as a result of these investments in 2010-2011. If we have marginalized this factor, if we spread all this out our EBITDA would have gone above 3%, amortizations have gone up 5%, provisions gone down 8% and there are less added value levels or surplus value levels because of what I’ve already explained.

Financial results are 11% better lower than last year, and all that leads to a profit before tax of 1.1 billion and that’s the net income 1.4 billion, which is practically the same as last year although after take– if we took away from that surplus value taxes to make it consistent our income would go almost 12% as regard last year. If you look at the breakdown of EBITDA when compared to last year, you’ll see that every chapter distribution of electricity and gas in Latin America, there are four very important points that come up. Electric distribution in Europe we have to underline, electric distribution 23% basically as a result of Spain but there are technical and accounting reasons they have to do with this. As regards electricity, there is a drop of 22.8% basically in Spain. As regards the gas business, it’s gone up 37% in terms of supply, and in Spanish America there is a drop in 25% of the electric distribution business. All these has its reasons which I’m going to explain to you.

The EBITDA however has increased by 0.5% in spite of the disinvestments that took place in 2010 and ‘11, as regards – we’ll go back to that in a minute. As regards consolidated investments the drop is 12%. I want to remind you that the implementation of synergies means that we are talking about an amount of about EUR200 million and this has to do with the end of the combined cycle plant program which finished in Mexico and Durango and the efforts we’ve made in distribution especially in Spain, there has been a drop in demand, by sectors distribution in Europe accounts for most of distribution followed by regulated businesses in Spanish America.

Now if we go into the analysis of our operations and we begin with distribution in Europe in electricity specifically we have to say that investments with regards to previous year have grown sorry by 15.3% and the TIEPI has improved significantly as have the sales. Europe – electricity distribution in Europe, Europe sales dropped by 2%, EBITDA EUR556 million which is an increase of 23%. However a lot – this has a lot to do with the fact that last year the adjustment was made at the end of the year. So until the end of this year we won’t be able to compare figures consistently, because they will reflect an update on 2010 in accordance with the law that was published on 29th of December 2010 which set the tariff of distribution but the current tariff – so until we close the year we don’t have definite – we haven’t got definite figures but I think it will be comparable by this fourth quarter. Increase of investments has had to do with the slight growth even in supply bonds still exists and I would like to say that the TIEPI of the company is the best in the whole Spanish market with a record value of 30 minutes that goes down that is 30% less than last year. There is no doubt that we are the Spanish company with the best TIEPI in Spain.

And we go to gas there has been a slight increase of investments. There is also, in spite the recession been an increase of the connection points. This is important. These figures are adjusted. We’re not bearing a month these investments in terms of supply points that we carried out because of regulatory issues. So bearing that in mind, the supply points have increased by more than 80,000, which is obviously quiet far improved from the good years but it’s a positive figure and it’s really good. I’m talking about the worst real estate crisis that’s haven’t been known in this country.

Sales have gone down by 1.3% because of the residential market conditions, weather conditions very much more benign less code, less gas been used in the winter – was used in the winter but industrial markets recovered. We’ll go back to that. And as I’ve said growth of the supply ponds and for all this and because of all this, there has been an investment effort which is not the same as other previous years but is quite significant due to the fact that you know the network has to continue to grow in order to have more connection points because the low level of gas penetration in Spain gives room for quite a lot of growth in our country still. If we go into energy markets, here we have four graphs to show you what the situation is. I’m sure you know it. Scenario is quite complicated.

All these figures seem to shoot off into percentages of more than 40% Brent has gone up 45%, Spot market has gone up by 47%, the increase of the pool, the Spanish pool, electric pool has gone up to by 41% and the price of coal API2 has gone up by 43% to do relation with what we had to once ago. Energy markets clearly are the process are increasing and we think that they are going to continue to do so in the medium and long-term future.

Has the demand in Spain, general view is the demand, conventional gas demand in Spain has gone up by 0.6% in spite of the decrease in residential demand and that is due to the strong increase of industrial demand as regards to the preceding year. so there is contrast with other estimates and calculations for the gas market, or the economic market in the Spain, but the truth of the matter is that the residential market went down by almost 18% due strictly to weather conditions, but the industrial market, the large consumption market in Spain went up by about 6, almost 6% in the period, that’s – proceeding nine months, that led to growth of 0.6% in conventional demand.

As regards electric demand in Spain, it’s gone down by 1%. We should underline here our portfolio commercial – business portfolio has been flexible enough and commercially minded enough to stabilize our economic financial results. We must now talk about the situation of the tariff deficit. Unfortunately, as regards the situation for the last quarter, there has been a 12% reduction in excess charges for quarter – for the fourth quarter, and this is a step-back in the reduction of the tariff deficit that will add an additional deficit, an additional deficit of EUR800 million in 2012. So the financial mismatch for the industry 2011 will be EUR3.1 billion. If no measures taken, it will be difficult to achieve the tariff deficit target to 2012. Urgent measures need to be implemented to cut the tariff deficit in order to keep things pickup the tariff deficit and keep the balance. It’s urgent and we are not alone in demanding this.

Urgent measures need to be implemented and taken to, as I’ve said, to cut tariff deficit. Especially as regards renewable energies, high-cost renewable energies we need true reasons to justify what we need and we need a moratorium so that the problem doesn’t get worse, especially as regards to technologies that are completely outside of the market in terms of what they cost. It’s absolutely vital that the CO2 revenues are rightly auctioned and measures be taken for the payment of the renewables bill and we think that allocated CO2 revenues for the payment of the renewables bill is very important, and finally we have to urgently not only decrease – not decrease, but increase access charges for energy. These are urgent measures and we hope that they will be addressed as soon as possible.

In terms of the regulatory situation, another thing is that, there is an absolute need for capacity payments to be made. How come people talk about the externalities as they say, the external negative external circumstances associated with traditional forms of energy. The same applies and is often even worse as regard to renewable energies, which is subsidized very significantly to cover up lack of capacity when there’s no window, no sun which are circumstances that come up quite regularly. So the backup of the system requires an excess cost and we hope that soon that will be addressed by the government. In fact it seems imminent that they’re going to set up some kind of measure to palliate this and do something about this mismatch and this tremendous (inaudible) renewable energies are very costly and they need handsome backup by or with the conventional energy sources, so it’s urgent that all this be taken care of.

If we go into further detail and talk about production of electricity in Spain, as I told you, the sector, the industry in general, has had a decrease in generation of 2.3%. But in spite of this generation production in Groupo Gas Natural Fenosa have now been reduced, but have increased by 2%. And here I’d like to underscore that there has been less rainfall, and together with lower wind and density, thermal generation in the Group has grown more than 8% compared to the previous year. Our own generation pool in combined cycle have decreased by 2% due to the disposal of the rubble and (inaudible) event for different reasons, for competition reasons we have to divest. But the rest of thermal technologies, coal and fuel, have increased by more than six times due to the different measures adopted by the government that have promoted the use of coal. So, all in all, our Group has grown by 2% whereas in the rest of the country the decrease was about 5%.

Business margins have been lower due to the increase in pool. This phenomena explains why we’ve seen substantial reduction of EBITDA because pool costs have increased, but our higher portfolio, due to the fact they have one, one and half year as maturity, while it takes a while for electrical power to catch up. So that is why we are now in a situation where the increase of raw material cost takes a while so they transfer to the market. That is why our electricity generation business has had decrease in EBITDA compared to the previous year. But we are convinced that commercial management of the portfolio will compensate for this tax in the next few quarters. Now when it comes to the Special Regime, we are growing.

We have a growing presence in this business, especially in wind and mini hydro which are the two technologies that we have greatest hopes in. and here we have acquired almost 3 Megs from ACS, sorry, 96 megawatts from ACS and the production of renewables in spite of this has decreased by 3% due to hydro and wind reasons. That cogeneration increased by 3% and that is why our EBITDA is close to EUR100 million with a 10% increase. All and Gas Natural Fenosa has consolidated itself for the significant operator in renewables. Thanks to the development of these technologies that I just talk about.

Now, for the gas results, commercialization of gas reached almost to 180 megawatts hour in the year, which means drop of 1% in the Spanish market, but this was compensated by a substantially increase in our foreign operations. So total demand has remained stable even though in the domestic Spanish market there has been a drop of 1%, the reasons are sales to the residential segment which decreased due to temperatures and also some of the divestments that we had to make. And also we sold less gas for generation. This decrease was about 6% that is why all in all the Spanish market we’ve had this 1% drop but our sales in the international market went up by almost 20%. So this is compensated for the rest of the portfolio. I have to insist on the good behavior of sales to the industrial segment both nationally and of Gas Natural Fenosa.

In the case of Gas Natural Fenosa, our sales to this segment to the industrial segment have increased by 8%. As I told you, internationally we have grown quite spectacularly but I’d like to say that these are not trading transactions. No, we’re talking about stable permanent operations with stable contracts made involve certain contracts towards stable clients that is why we’ve had 19% increase with good margins which are compensating for the ups and downs some sections that we’ve had in some markets.

Our presence in Europe is very strong opening more and more commercial offices in order to attract stable clients. This together with our methane carrier fleet, the flexibility of our portfolios provisioning contracts has allowed us to expand our activities to new markets such as the South Cone and the Far East amongst others. I want to say that this is not an opportunistic thing, no quite the contrary the idea is to place our provisioning portfolio in the best possible terms and conditions. Now if we talk about Union Fenosa Gas, a company that we own 50% of together with (inaudible) well the sales have remained more or less the same in Spain, although internationally there has been a decrease in business. In spite of this, EBITDA during this period has grown by 23%, thanks to higher margins.

Now when it comes to infrastructures, the liquefaction plants have had 34% more volume and the Sagunto Regasification Plant has produced 16% less than last year. Now talking about Spanish retail business, our idea is to maintain it as a factor to compensate for other risks and the number of contacts has increased by 2% in spite of a crisis, and what’s more striking is that the number of maintenance contracts have grown by 100%, electricity and gas maintenance contracts which are a good way to lock in our clients. This will allow us to maximize the value of our customer portfolio and keep them stable at such volatile periods like this. When it comes to Latin America, I have already told you the situation in distribution, how EBITDA has come down in distribution. One of the reasons is currency parities. You can see the evolution of these currencies vis-à-vis, the Euro has been towards depreciation while the Colombian peso and Mexican pesos all of them have been depreciated.

In the next chart you’ll be able to see what’s happened with EBITDA in Latin America. EBITDA in Latin American last year during the first nine months reached to an amount of 958. Divestments in combined cycle in Mexican Guatemala has had a negative impact on us. That is why we have to deduct EUR51 million. And here we should also note that there has been non-recurring tax measure in Columbia which had a negative impact of EUR55 million that is why in comparative terms we’re talking about EUR851 million of EBITDA for last year.

Now for exchange rate reasons, we have EUR25 million less and in the region there has been an increase in activity of EUR38 million or 1.5% increase and this together with the above mentioned factors, the special rates in Columbia, disposal of assets and exchange rates that is why we have this negative number that I mentioned before and which is the one that you can see the balance sheet. At any rate, we’re still optimistic but with regards to our investments in Latin America. We’re fully convinced of the stability and sadness of our businesses in the Latin American area.

And now we talk about distribution in Latin America, which is regulated both for gas and electricity. We consider it has grown continuously. We’re now at 5.8 million points of supply and a joint EBITDA for the business of EUR681 million. We are talking about a regulated business in gas, and we are talking also about improved service quality in the case of electricity, with the high potential of growth, especially in gas in the Latin American area, particularly in areas like Mexico. Now, when it comes to electricity generation, we have commissioned France and Durango. It’s a PPA, a 25-year PPA. This was commissioned in August 2010 and sent to sales – its output to the Mexican CFE. We can see that this has been a very interesting move.

Here I’d like to mention our asset work. We have continued to build the higher-efficiency combined cycle plant. That is why we have had an EBITDA of EUR183 million, which is almost as same as that of the previous period.

And now having said this let me move on to conclusions. We’re quite happy with what we believe our good results in a very complex environment in a very difficult period. EBITDA, in spite of everything, has grown by 0.5%. Recurrent net profit has grown by almost 12%. And our financial structure has become stronger with a 13% reduction of our net debt. All of these shows improved, sound most of our business model which has taken be right balance between regulated and deregulated gas and electricity businesses. We continue to be involved and we continue to focus our efforts on the achievement of the Strategic Plan 2010-2014 with very important landmark for the year 2012. You can see these landmarks on the slide, and we’re fully committed to achieving these targets. We want to achieve an EBITDA greater than EUR5 billion, net profit of about EUR1.5 billion, net debt between EUR15 billion and EUR16 billion, and the net debt ratio over EBITDA will be three times, all of these with very attractive shareholder reservation, maintaining our dividend policy.

That is all I wanted to tell you. And now, if you have any questions or comments?

Well then, we will start now taking questions. We will start with questions from the floor. Whoever takes the floor, please mention you name and institution that you come from?

Question-and-Answer Session

Operator

Good afternoon, ladies and gentlemen. The Q&A session begins now (Operator Instructions)

Jorge Alonso – Societe Generale

Good morning. My name is Jorge Alonso from Societe Generale. I have several questions. One is about gas commercialization or sales. Could you tell us more details about margin, evolution for the Iberian Peninsula and the rest of our worlds, whether it’s been a strong increase in volumes? And also what do you expect is going to happen with margins in Iberian what do you say is going to happen with volumes in those other markets?

The next question is about wind plants, wind power plants. I saw what your opinion is about the new plants. I would like to know how your investment plans could change. And the other question is about dividend policy. Again you said you are going to maintain your dividend policy, but I would like to know whether there is a delay in securitization of deficit. Would you maintain the same dividend policy, will you increase your payout, will there be a change in CapEx?

Rafael Villaseca

Well, when it comes to the evolution of the gas market and its margins, well, yes, it’s true that in 2010 we had very low margins. In the Spanish market, margins have improved, but they are still not as good as they should be and we expect them to be in the near future. So we hope next year we’ll have better results, better margins.

But anyways the truth is that the Spanish market, the different players have learned to operate in the Spanish market. So past surplus supply is something of the past. Now the different players have learned to take that supply to other markets. So we no longer have excess supply. Markets outside of Spain are very much influenced by the different things that have happened throughout the year like the nuclear crisis in Japan et cetera. But all in all we believe that we can expect an improvement in margins in both markets.

An improvement in energy in general and in natural gas, particularly both in Spain and outside of Spain. When it comes to volumes, it would be reasonable to see an increase in residential markets because of climate conditions of last year were exceptionally negative and we can expect them to be the same this year. Now the Spanish market is growing by 6% with (inaudible) growth for more than 12 months, although we started from a very low basis. But we believe things are going to get better and when it comes to gas or electricity, we don’t think they are going to be huge increases. Probably the situation will remain the same.

This year, the decision of the government to give priority to national coal has had a negative impact and I think next year things will get better. Now talking about when the plants – when power plants, well here I would like to share with you my surprise because of some contradictory policies which I am sure will generate changes in the way the industry is regulated. On the one hand, they are working on some plans that will reduce retribution to the wind sector but on the other hand the renewable energy plan will increase solar generation. And I am unable to understand this contradiction. Wind power which is a renewable energy has a cost two times less than solar power, so it seems a contradiction. In view of the financial situation of the industry, it seems a contradiction to promote solar power which costs so much and with the current problem of tariff deficit and at the same time if reverse or negative incentives to wind power which is so much cheaper in terms of cost.

So this contradiction we believe will be noticed sooner or later and I’m sure that the government will reconsider those premium and will give less emphasis to solar power because we’re having bubble here and this additional costs are having a huge impact on tariff deficit and on tariff themselves. So we believe that this is a situation that the government is going to have to face because it’s a contradiction, it doesn’t help achieve our goals of climate policy, but it doesn’t help stabilize the system more through effective tariffs. We believe this cannot continue like this and I’m sure there will be more sensible regulation, not only from an environment point of view but also for the economic and financial sustainability of the system. When it comes to the dividend policy, our goal is to maintain our policy and continue with our commitment with 10% increase in absolute terms.

This is our commitment and we maintain it from now until the year 2014. So we’re going to work with all the instruments we have available, I mentioned some of them as many instruments as we need to use to comply with our dividend policy.

With the debt is now at 17, we’re talking about EUR1 billion more or less without taking into account the tariff deficit our debt is more or less at that level. So we don’t think we’re going to have to do anything else. Any further questions from the floor.

Pablo Cuadrado – Bank of America Merrill Lynch

Good morning. I’m Pablo Cuadrado from Bank of America Merrill Lynch. I have several questions. The first one going back to the dividend issue you had mentioned, could you tell us whether you have made any decision to maintain the split dividend? I’m sure you haven’t discussed this yet, but could you give us some indication. And another technical question about tariff deficit, you said that you expect to end the year with about 3.1 billion for the whole of the system, I would like for you to clarify whether you are aware that in order to reach 3.1 capacity payments will be transferred to the company and will not make that smaller. I also have a question about the balance sheet or cash flow rather. I saw some working capital moves, pretty strong moves in working capital.

Could you tell us something about it? And finally when it comes to renewables and tariff deficit et cetera, could you give us more details about what could be the amount of money that the industry could get by auctioning those CO2 emission rights and thanks to that how much deficit can be eliminated in that way?

Rafael Villaseca

Very well. As far as your first two questions, we haven’t made any decisions on split dividend. Usually in November we decide at the Board what’s going to be the dividend to be paid and at the end of the year the final decision is made. But there is no – we haven’t done any analysis or r had any discussions to date. Now, talking about tariff deficit, the ministry expected to pay on the basis of capacity. We’ve heard that the draft is now being processed. So probably quite soon we will understand what the impact is going to be. Those amounts were already contemplated in this 3, 3.1, 3.2 deficit number. So there should be no change. When it comes to the other two, my colleagues will help me now.

Yeah, if we come to cash flow, then we remind you that in August we reached an agreement with Sonatrach and paid the amounts. Well until now we have talked about provisions and now we have to make some payment. So basically this is – well, the main move is – well that’s the number compared to the working capital movement that we had before. It’s true that we have to see what are the CO2 rights available to auction. I wouldn’t be able now to tell you what the volume is, do you have idea? 1000. So please it’s a very random number, but we have to see what’s going to be the distribution, the allocation and what the capacity of the government to act upon.

Operator

Next question from the floor.

Javier Garrido – JPMorgan

Good morning. My name is Javier Garrido from JPMorgan. To continue with Pablo’s question about cash flow, could you say something about where you are going to be able to reconcile CapEx with the payment to suppliers? I know this is a seasonal item, but this year there has been a significant increase, and I’d like to know what is included there and why such divergence vis-à-vis the evolution of CapEx, and whether you could give us some idea for next year?

Well, the second is about Columbia. It’s true that you’ve included different taxes here, but in spite of everything, the evolution of Columbia and distribution of gas and electricity from my point of view it’s surprisingly mall, so I’d like to know whether there has been any element that has brought about some change and whether the decree that was adopted for winter measures had any impact. Could you tell us something about margins in Columbia in the future?

And then a third question, about the gas commercialization business; could you please tell us whether you expect to reverse the provisions that were made due to the agreement with Sonatrach? Will these provisions be the necessary ones or will – do they be revised?

Rafael Villaseca

When it comes to the cash flow, there is nothing extraordinary there. We’ll give you some more information. So most relevant thing that might be happening here is that because of financing where payments can be included, but there is nothing extraordinary there. What’s going to happen throughout the rest of the year, while the last quarter, usually is low in payments, high in investments and low in payments and somehow this should reflect at least this year, it should – but nonetheless I will send you a quotation that – it will just show that last year we paid such and such, so that’s all I can do, but there is nothing extraordinary that can tell us that we are paying earlier or nothing like that.

But when it comes to the third one about provisions, we mentioned this last year, when we made a provisions, an extraordinary provision, this is the agreement that we reached. So at the time, provisions were the ones we expected and the ones that include the agreement with Sonatrach. So we don’t expect to have neither a positive or negative impacts. So that’s all.

Now as far as the situation in Colombia, we are as optimistic and as happy as we were before with some new answers. There has been a problem with volumes because of the climate here, because of (inaudible) which also affects the gas business, but Colombia is still growing. In terms of gasification of the Bozita area and with the exception of climate irregularities, there is no other problem. We believe that about the area of the Caribbean is the one that is recording the highest increase in activity and we hope that next year we will again take higher speed and we will grow more in the Caribbean area, but there is no substantial problem there.

Has to do with sales and seasonality, last year there was some (inaudible) storm. The extraordinary year was the previous one. And it’s – and as far as the electricity there is another phenomenon. The disaster in the electrical sector gave rise to series of transactions, spins, stopped or halted. The disaster in the Caribbean area was huge. I never know whether it is in Armenia or Lanenia but it cost some consumption problems, but no substantial ones. Any further questions from the floor?

Alejandro – Seaplus Asset Management

Good morning, I’m Alejandro from Seaplus Asset Management. I have a couple of questions about CapEx and acquisitions. What’s your forecast of CapEx for 2012 and seeing that you are achieving your targets in terms of deleveraging and debt, what are your targets in those two areas?

Rafael Villaseca

Well, Carlos will give you more information about CapEx, but in our strategic plan, we mentioned two things. First, the financial situation should be the right one and secondly there should be opportunities if the financial situation was the right one we could take advantage of some opportunities and invest more. We are now focused on achieving our target for 2012, which did not include any special growth investments. As of 2012 if in our markets we see a situation of growth – sustainable growth which justifies an investment we will look at that opportunity but we are not going to do anything until that happens. Our goal is still to confine with the strategic plan for 2012 and once we see that our financial situation is stable enough we will invest and we will make decisions as we go.

Unidentified Company Representative

We try to reply to what you asked, strategic plan for 2010 to 2012 without those additional investments we were going to invest from 1.8 per year and 2010 was slightly below 2012 were clearly below be about we’re quite a bit below. The third quarter there is more – always more investment until it’s paid the last year but and that’s where the level would be in for 2012 I think that will be the round average. What we were made – we’re not going to invest everything the excess in 2012, in 2012 is going to be around the average value. Another question?

Antonio Cruz – Banesto

Yes, good morning. My name is Antonio Cruz from Banesto. I wanted to ask you – I’ve looked at the programs, the electoral programs on the table right now and it surprised me to see the popular conservative party program talks about making Spain a natural gas reference market in the Mediterranean. Have you had the chance to figure out what that means?

Rafael Villaseca

Well, no but makes sense – in sense that the sales of the Mediterranean, in generally Spain in particular, is a high-traffic – gas traffic – gas consumption area. As pipelines has the greatest re-gasification possibilities in Europe, there are markets still growing. And except for storage facility, we got everything in the Southern Europe. There is no strong market in Iderian Peninsula because of the geographic position, and its consumption could be that strong market. There is ideas of setting up a hub of secondary market and also promoting the connections through the France through the western – the eastern access connection. These are valid ideas and hope that they bear fruit in the next few months.

Antonio Cruz – Banesto

Good. We’ve also got – when we think about – we would like to know about your perception as regards energy infrastructures 2012 to 2020, what do think about the program that we had at the end of August, forgetting of September, whether we can use that as reference that draft plan? Or do you think that if there’s a change of government, there might be significant changes in that respect?

Rafael Villaseca

Well, I was referring to that before as regards planning for the electrical sector – electric sector I think we’re going to need significant changes if the energy – renewable energy’s plan is simply approved which the ministry had prepared. As a result of that, there will be investment in sun energy basically of such magnitude the subsidies needed for covering the tariff deficit and other problems are not sustainable.

So I’m completely convinced that given the real – the actual situation and perspectives, it is going to be indispensable while maintaining the (inaudible) subjectives through act and different ways more efficiently economically. Our opinion is that we need to be sustainable environmentally but the current system is not economically sustainable. We will have to work along but its larger and that’s possible for instance, instead of incentivating energies that cost 10-12 times what conventional energy costs, we could incentivize wind energy without having these tremendous costs with much cheaper technologies. Another thing I’m convinced that where I have to look at the small (inaudible) debt and not just because it’s a matter of opinion, political opinion, no, it’s not – nothing to do with that. The economic aspects are so important that we’re going to have to take measures and we think that we can and we should – must and we should take these decisions without forgetting environmental aims.

Any other questions in the room? No questions in the room. Well, then we’ll go to the questions sent in or made by telephone. We’ll start with the Spanish questions. The first question is from Mr. Bruno Silva from PPI.

Bruno Silva – PPI

Good morning. Thank you for allowing me to ask this question. It’s a follow-up to Alejandro Vigil’s question. Could you give us more details, more specific details in strategic terms about what’s happening in Spanish, America, Brazil – some information that – there is news that there are attempts to consolidate the market non-regulated activities. Do that make sense, would it make sense for you to look for greater integration on that market and participate in that strategy with some other player? And secondly, could you comment or could you tell us what you think about the renewable energy business, whether it makes sense to you to integrate the capacity that you have today within greater initiative, larger scale initiative? Thank you.

Rafael Villaseca

I understand that you’re referring to consolidation in the electric distribution more than the part that has to do with gas distribution. We must remember, today in Brazil we are present in gas distribution and some sales of G&L – liquid gas, natural liquefied gas. We are looking at the market to see whether there might be opportunities in electricity generation, but we haven’t yet participated. I would say that we have projects about – for renewable energies we don’t require financing today to increase our scale and finance, the projects that we have ready. We’ve got projects in Mexico and Australia which we hope to get going in the next few years. Good. Next question.

Operator

Next question is Javier Suarez from Nomura.

Javier Suarez – Nomura

Good morning. My name is Javier Suarez, Nomura. I have three questions; one is about CapEx what you said about we’ve seen in the results that CapEx has reduced. It has gone down significantly in the first nine months of the year. I understand that this in 2011 refers especially to expansion CapEx but you’ve mentioned the possibility you said that you might reduce the coverage by EUR200 billion. The question is what does this have to do with specifically because I don’t think that’s reflected in 2011 CapEx values for 2011. The second question is as regards the royalty decree for domestic coal, could you tell us what effect that has had on the company this year? And the third question is going back to the working capital, I’d like to ask you whether in addition to payments to Sonatrach and the increase of the tariff deficit, is there is any kind of deterioration associated with the macro economic situation in Spain? Thank you.

Rafael Villaseca

Well, as regards to the CapEx, what we were saying about investments as an absolute value, there is a decrease as regards to the previous year, but if you look at the two most stable in terms of investment businesses that is gas distribution in Europe and electricity distribution in Europe. In both cases the increases in investments are significant. So investment as a whole are the most stable investment is increasing. When we mentioned and said that that increase doesn’t mind the fact that we’ve had synergies in parts of those investments. That means that those increases would have been less – sorry, higher had we not applied synergies to those investments.

The other chapter that we got to bear in mind which is probably more relevant when you look at more investments are going down is that the plan for combined cycle plant construction has finished in Spain, Malaga, Barcelona where there are last plants to be built in Spain and the one in Durango, Mexico are finished. So that completion leads to a situation where as compared to last year, the investments that we don’t have this year, that’s why you see the drop in CapEx as regards to the previous year, but there is also an effect of synergies. The generation plants have benefited from those EUR200 million that have resulted from synergies in CapEx management associated with our generation infrastructures. There has been notable growth in regulated business and a decrease in the others, but that’s because of the generation infrastructure reduction.

The third question about working capital; I would say that initially – the effect, I would say that it’s true that there is an element that had to do. The previous year we had to deal with some problems that had to do with the normal industrial business. We are having significant – we had a volume full of accounts or pending amounts that were – a series of pending amounts that was higher, and also there is also the weather problem, the weather situation which led to less residential consumption. But this has become stable right now. There is no negative aspect to this. But what has increased, and you know this, debt with the public administration has increased slightly. So – but it’s not – if you compare one year with the other, I would say that there is nothing relevant as regards pending debt. What is relevant when you look at the analysis of the working capital or has been payment to Sonatrach, that’s what affected the accounts, but that’s not going to happen again because that’s completed.

As regards to coal, domestic-coal, the effect is clear. There is these domestic coals incentive. We got national coal plan for the – operated much more energetically than last year, and that has affected the combined cycle plant, which have produced less. We have covered the gap quite well due to the flexibility of our contracts, good conditions and good placement geographically of the plant and that has allowed us to have a level of deterioration, which has been less bad than our competition. So we have worked – our combined cycle plants worked less hours, but more than the competition and many, many hours of operation of our coal plants, which are subsidized for using domestic coal.

Rafael Villaseca

Good, let’s go to the next question.

Operator

The question is Jose Javier Ruiz from Exane.

Jose Javier Ruiz – Exane

Yes, good morning. Thank you for accepting my questions. I’ve got couple of them. First of all could you give us the coverage ratio of production for 2012, coverage ratio? And the second it seems that at the beginning of the presentation you were suggesting that you’re getting close to an increase of your debt rating, I just wanted to confirm what that was about. And finally I’d like to know whether you could help me understand how you’re going to reach the objectives for 2012 in terms of net profit and EBITDA because for two years you’ve been investing below the average value that you’d mentioned. I don’t know whether you’re going to announce more cost reductions. As regards to gas prices that’s not benefited you too much either, so how are you going to jump ahead from 2011 to 2012? Thank you.

Rafael Villaseca

Well, I start with the last question I don’t understand what you mean when you referred to the price of gas, gas prices are a factor that come into -comes into play and is actually making the market grow or increase, the prices are increasing, and we were satisfied. We said the last time as regards Sonatrach that one of the key points of the one-third of our portfolio of the contract was such that in competitive conditions we could market that gas, so there is no special problem there. We believe that the – well, the data for 2012 will be achieved exactly by applying this strategic plan. We trust our synergies.

Those EUR200 million in CapEx, 1.8, 1.6 in consistent conditions, we expect those are to be in more efficient conditions to benefit from scale economies and many other things we’ve done, and we hope that recovery although, very slight recovery of the market helps us. The international gas markets are growing in our area tremendously, 19%. These are final customers, not trading operations, so that will continue in the Spanish market, except for gas, for electricity, the residential market we have to go up as a result the weather, and industrial market is also on the increase. So there is not going to be many great new things next year.

In electricity, there will be a reestablishment of the margins because the pool cost increase will transfer itself to the portfolios and we move along, so the pieces are in position so that if we continue along these lines in 2012, we’ll achieve what we had foreseen and we are committed to that.

As regards to the other questions, the coverage ratio is about 50%. And the rating, you mentioned in the short-term, we spoke about this in the last meeting. Next year, I think if we think about the second half of the next year, we got to see our rating evolve positively, I think. Before that, I don’t know. We’ve got to continue to work internally and show the evolution of our metrics every quarter, and then we’ll see how the rating companies write us. And we’re talking above the end of next year we will probably consolidate about situation as regard to that rating.

Good. Next question?

Operator

No more questions.

Rafael Villaseca

No more questions. In English?

Unidentified Company Representative

No questions. Well then, I don’t know whether there are any more questions in the room. Good. Let’s see. We got a question here. Yes.

Rafael Villaseca

I have just received these questions that have come in by email some of them have been answered. This one of James Barrow about Sonatrach asking about Sonatrach operation, the payment. Well, the payment when we announced the agreement of payment was made in the next few weeks I think the meeting in July we said about this I think it was in the next few weeks I can’t remember whether it was end of August, beginning of September we made the payment. At that time everything very retroactive, everything went on until the end of the process may plus the other bills that are coming along with the new prices so all accumulative when we paid when it was had to be paid and all that’s being liquidated. All the invoices issued by Sonatrach have been honored and now we are payments in accordance with whatever comes in. I see the rest of the questions have already been replied to during the presentation.

Operator

So if there are no questions we can finish the session. I will pass the floor to our CEO.

Rafael Villaseca

Good. I just want to thank those of you who’ve been here or followed us remotely. Thank you for your interest and see you next time for the end of the year results. Thank you very much.

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