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Gas Natural Adr (NYSEMKT:EGAS)

Q4 2011 Earnings Call

February 21, 2012 4:00 am ET

Executives

Rafael Villaseca Marco – Chief Executive Officer

Carlos J. Álvarez FernándezChief Financial Officer

Antonio Basolas Tena– Director of Strategy & Development

Analysts

Pablo Cuadrado – Bank of America Merrill Lynch

Jorge Alonso – Societe Generale

Manuel Palomo – Citigroup

Alejandro Vigil – Cygnus Asset Management

Javier Suarez – Nomura

Virginia Sanz De Madrid – Deutsche Bank

Anna Maria Scaglia – Morgan Stanley

Operator

Good morning. Welcome to the presentation of results of Gas Natural Fenosa for the Fourth Quarter of 2011 by Mr. Rafael Villaseca our CEO, accompanied by the CFO, Mr. Carlos Álvarez, and the person responsible for Development, Mr. Antonio Basolas.

After the presentation, we will have questions and answers, we will begin with the people in the room, and then we will continue with the people they have followed the presentation on the Internet or by telephone. I am going to pass the floor to our, CEO, Mr. Rafael Villaseca.

Rafael Villaseca Marco

We need the sound please. Thank you, we’d lost the sound. I will repeat. Good morning and we will begin with the first highlights. Then I'll talk about stronger capital structure that we have, then I'll speak about Spanish electricity regulation. Then I will talk about the consolidated results for the last year.

And then I will analyze the different operations. And then there will be conclusions and questions and answers. Without any further ado, let’s go to the more relevant issues. We have generated a net income of which has reflected a growth of 10.3% up to €1.3 billion.

In spite the fact that in 2011, we’ve had less surplus value than the previous year. Secondly, the EBITDA has reached the figure of €4.64 billion that is a growth of 3.8% as compared to the previous year, in spite of these investments. Thirdly, investments have decreased by 8.9% we'll analyze this in detail, and have gone down to €1.4 billion, within the lines of our strategic plan. And finally, on the 31st of December of last year, that figure was 9.5% less than the previous year that is €17.3 billion.

So we are continuing with the reduction of debt that we had become committed to. Our good results of the company who is profits aftertax have grown by more than 10% is due to three reasons activity in South America, which will go into later good progress of the natural gas market in the world. And the application in 2011 of the synergies resulting from the integration between Gas Natural and Fenosa, we will talk about the three topics in detail.

Also we have to talk about the shareholder remuneration policy and underline two relevant issues questions. The first is an excellent stock market behavior in 2011, in spite of the volatility and difficulties of the market in our sector and in our company, whereas the utility, European utilities have come down on the stock market by 23%, Gas Natural Fenosa last year, grew by 15% more than 15% in fact, we’ve grown almost 40 points as compared to average European utilities. Secondly, in terms of the shareholder remuneration and in accordance with our strategic plan, we will apply pay out of 61.8% which will be approved by the shareholders, and that will give a profitability of 6.2% per dividend.

So the dividend will all told, go up to €221 million, which is an increase of 10.7% in line with the increased profits. This dividend will be paid out as partly being paid out last January and will be complemented with a dividend in the form of shares, if a scrip dividend if it’s approved by the General Shareholders Meeting.

We would now like to look at the main factors that affect the soundness of our financial structure, and first of all I have to talk about our debt. As we have said, now for sometimes since we launched the plan, the reduction of debt and the strengthening of our financial structure. Financial discipline was a basic, and we announced about objective has continue to be so in 2011. So our debt has dropped by €1.8 billion and it reached a figure of €17.3 billion, thanks to what.

Well basically, to our ability to reduce to generate positive structural cash flow of company as a cash flow resources, which are positive. Secondly, as a result of the sale of assets less than other years and we’ve continued to sell our assets that have given a significant figures to reduce the debt, and also because of the securitization and the collection of some amounts related to the electric tariff deficit and also thanks to the scrip dividend that was subscribed by a very practically all our shareholders, and finally also because of the increase of capital subscribed by Sonatrach.

So, this has strongly, this has strength significantly strengthened our balance, so the ratio of debt-to-EBITDA is 3.7 times and if the tariff that disappeared we’ve still got about €1 billion it would be €3.5 billion. All that within our strategic plan and continues to be one of our main priorities and policies in terms of the operation of the company.

We also have to add the proactive asset management we've developed. There’s been a decrease in investments, we’ll see why, basically for two reasons, the end of the combined cycle plant program in Spain and Mexico. And the obligation of synergies CapEx synergies have been very significant, They've been applied to chapters of annual return investment and they remain hundreds of millions in savings every year, but we are still investing in our regulated businesses, which especially in South America leading to high rates of growth within the policy of investing by maximizing our return and shortening the maturing periods. Also we must remember that this investment plan we had was for a €3 billion, and we’ve disinvested in this period since 2011 €5 billion €2 billion more than we than those €3 billion that we have said.

We’ve lost EBITDA obviously, as regard those assets, but we have complied with our growth objectives. So I think that the portfolio management has been adequate and has been in line with what we had agreed until the markets. And in terms of securitization of tariff deficit, we’ll talk about this more in detail. We have to say that, the end of 2011 last year therefore throughout the last year Gas Natural Fenosa had collected €1.17 million, as a result of securitization through five bond emissions in several private placements by FADE.

At the end of the year, we have to securitized, we still have to securitized €1.23 million, which included what we have been generated throughout 2011. So far this year the company has collected €259 million, so we can say that at this time the amount that is pending to collect in terms of tariff deficit is about €1 billion.

If we go back to strengthening the significant strengthening of our own resources of our equity this has been strengthen by the increase of 10.3% in our profit after taxes. And we should also remind you that this scrip dividend also strengthen this. As we said before, it was 96% of our shareholders, who went positively to collect this in the form of shares that meant about €400 million to which we have to add the over €500 million from the increase of capital of Sonatrach as a result of this strategic arrangement that we subscribed by that company that provisions is our suppliers from Algeria.

That obviously leads to an increased equity in a positive impact of about €1 billion. That the great success last year in terms of the scrip dividend policy has encouraged us the Board to propose to the GSM. Once again that this second part optionally it can’t be also collected in shares.

We have to point out that we have debt structure that makes us feel comfortable and the way of looking this is looking at three figures. The first 70% of our debt is fixed debt, by the way very competitive. Secondly 84% of our debt is in euros. And thirdly, our debt is depends more or more on the capital markets unless on bank financing so 53% of our debt is directly financed through the capital market. This lack of bank intermediaries gives us a very advantages situation and avoids the tension in our traditional banking markets.

As regards the costs of funding and debt, here you can see that the cost of debt that we have, which is extraordinarily competitive. The average cost of debt in 2011 was 4.3% and as increased only by 0.1% as regard to the previous year 2010. This average cost is lower than that of other companies in our industry that are given ratings that are more better than ours even. And in spite the fact of that 4.3% includes interest in Latin American currency and which involves debt for our subsidiaries in that continent.

So our debt profile is really very, very compares very favorably with that of our competitors. We should say that since June 2009, our company has issued more than €9 billion on the market capital with an average cost of 4.2%, and then average life of more than seven years.

In January this year as we go-to-market, we issued an oversubscribed overwrote €750 million. And all this the low level of our debt and our stability have lead to a situation where at this time the CDS of the Gas Natural Fenosa debt is quoted below that of comparable companies with much better ratings. This is a key issue all the solvency and financial structure and reliability of our financial position is a key goal that we will continue to pursue with the energy.

If we look at the profile of maturity of our company, these are the maturity schedule on the first of January of this year. The maturity schedule is quite comfortable for us. 68% of net debt matures from 2015 onwards and we’re reasonably comfortable in this situation. Our needs, financial needs are covered for 2012 and 2013. And is important to point out that at the end of the January, we issued €750 million in bonds on the year-over-year market, so to the amounts that you see on the graph corresponding to 2012, we have to take away from that €750 million.

As regards liquidity of the company, we have a high level of liquidity and that has been recognized by the markets. We have a liquidity of €7.3 billion, which would allow us to cover, completely cover our needs for more than 24 months. And this is the breakdown. This is €3.1 billion as in the form of cash and the rest in lines of our loans that are available to us. And we should also add €6 billion in programs that are pending, are going to be launched on the capital markets. That has led Standard & Poor’s to give us our liquidity a strong qualification, has been qualified as and rated as strong.

It’s important to underline when we talk about our position on the markets and our competitors that it is clear that we enjoy a financial strength on our risk profile that is better than what our rating would seem today. We could talk about a lack, maybe, homogeneity as regards to other European utilities. If we look at the coverage of net debt and the cost of liquid resources that have been generated, we see that our coverage ratios or hedging ratios are 20% and 5.5 times of our financial costs which should justify an improvement in our rating, which we hope by the way will occur.

And this is due to our sound credit profile, which is based on our sound business profile, a liquidity that is called strong has been qualified, described the strong. The fact that in 2011 we solved some problems like our conflict with Sonatrach and the evolution of wholesale markets. And I would like to insist that this policy is continuing. We’re being very rigorous as regards our financial situation.

Let’s now go to talk about the situation of the Spanish electricity regulations. I would like to begin to talk about the situation of the tariff deficit, which is a very significant capital problem that we know is being looked at by the current government. It is necessary and it’s a good news to underline that the first quarter of this year, the tolls of the access charges were increased by 13% for households. That happened after a reduction last year, in the third and fourth quarters, a reduction which as you know has been invalidated provisionally by the Spanish Supreme Court.

However, unfortunately that has led to a situation where last year the deficit among other reasons instead of being 3,000 will probably closed at about 3,900. And that in this current year, unless measures, which I’m sure will be introduced by the government, are introduced might reach €4.2 billion but we’ll talk about that in a minute. I also say that the Royal Decree Law of 1/2012 which was recently approved in January basically will affect only those installations which will be in service beyond 2014 mainly.

And, therefore, it’s going to be difficult for these positive measures that we agree with them. We celebrate we’ll have an effect in 2012-2013. As you know, the ministry is working. We know very deeply and very rigorously on this issue and as requested a report from the National Commission for Energy, which collected the opinion of all the involved parties to analyze measures. Gas Natural Fenosa obviously worked and we will continue to work to contribute ideas and collaboration to address this very significant problem.

And we think, we don’t, this is not, they’re not the only ones we should talk about reasonable increase in access charges. We have to talk about a reduction of premiums to renewables especially solar energy maintaining or keeping the reasonable profitability, which the Supreme Court talks about in three sentences, but it’s obvious that for a sector like renewables, regulated renewable energies.

The reasonable profitability criterion is not a free-market criterion as the Supreme Court said [bleating] that will have to be dealt with. We’ll also think that we should apply the measure of devoting as from next year. The amount of the auctions of CO2, which until now have been free rights although they have been problems in Spain. But anyway after 2013 the auctioning half of those rights will give income to the system which should be applied to the coverage of those renewable energies.

And we think that the obligation of financing the tariff deficit as in a hands of five companies, we don’t think that’s reasonable and that should be extended to cover all operated in the systems. We think that we should improve our competitiveness on the retail market and this should include measures like eliminating to that affects practically all the markets in Spain and go to a scenario as envisaged by the European Union.

The electric bill should be more transparent with the clear explanation to customers of the breakdown of that bill. And finally the costs for system interruption should be reduced and made more consistent with other ways of paying for this like for instance, but that's capacity guarantees.

These measures we are sure will have to be applied to the solution of the problem which we sure the government is going to work on. As I was saying, these are the figures that we might be talking about currently. The advance of closer of 2011 pending the final report in a couple of months from the National Commission for Energy will be about this. But deficit will be at about 3.9 versus 3,000, 3 billion that it should have been in our forecast for 2012 but it is obviously without including the measures that the government will certainly introduce to face this deficit, which will be about 4,200 million and to which the excess of the previous year should be added.

The aim of this graph is explain to you what the costs of the systems, regulated systems are that is leading to the deficit and they’re all here sometimes when we debate how to solve this problem. We don’t focus on the costs and the potential savings, you have it on this sheet, we’ve classified costs as our own and associated costs, associated cost have to do with what has been applied to the or loaded on the system with, and which decision that should have been taken in other ways, it’s important to point out that the electric system carries about half the costs that are not costs of the system. And their support to renewables, coal, support for capacity guarantee, system efficiency, that’s almost their account for half, last year more than €8 billion.

And when you look at costs quickly we could answer what the costs will really be that can introduce savings, significant savings obviously there is also the alternative of increasing the rates or the prices. When we look at how things are going we have to say that there will be a problem in 2012, as a result the Special Regime by €1 billion, whereas costs have been limited or contained to a certain extent in accordance with the renewable energy plan that’s being developed this year 2012, we'll probably have €1 billion more to pay. And that is going to cause a deficit that’s going to go above €4 billion.

Also we have to point out that net payments capacity payments are negative that is an income into the system the reason is that although significant amounts are collected to guarantee payments capacity payments, these amounts are not allocated to capacity payments they have been allocated to cover other needs of the systems. And those are issues that we will have to be regulated and borne in mind. But when it comes to suggesting alternatives I think it’s very important to look at the actual costs that we have to bear in mind and if we look at the costs. In my opinion, it’s obvious that we reached a conclusion that the tariff deficit is directly an inexcusably related to Special Regime premiums.

If we look to 2012 to 2011 and therefore we compare the deficit with the impact on this electric system of the wind and solar energy programs. We see a correlation. And if in this period the deficit went up by 300% and Special Regime premiums went up by 400%, the reason is almost perfectly understandable. And I think that if we look at the relation between the problem of the deficit this has to do with the increase of the subsidies to renewable energies as a way of avoiding the debate in depth and going to areas which will not give us a solution because the problem as you can see on the following chart that in accordance with the recently published report by the National Commission for Energy last year average costs of conventional energies sold to the pool was €48.52 per megawatt-hour.

And in the same period this was the cost that conventional so-called convention on received. Solar energy got €371 per megawatt-hour, photovoltaic, solar 392 and finally the cheapest wind 88. So the problem should be looked from this point of view by bearing in mind two things. First of all, the enormous imbalance in costs, whereas conventional does not reach €50 that are costs that are near €300 and €370 in renewables.

And the second thing, this time the generation of 48.52 is stable but the installed capacity in power is growing in photovoltaic and thermal solar energies, so unless measures are introduced, the production of cheap energy is going to be stabilized and the very expensive energy is going to grow. In the phase of this, some people say that the solution is not to reduce the cost from €370, €292 but to reduce the cost of €48.52. And I think that that is, frankly, ironic; but especially it’s wrong. It’s impossible because at some stage subsidized energy would not be 8, or, 10, it would be 15, 20 times because they will get rid of the cheaper technologies and subsidize the most expensive ones.

If we look at this graph, cost graph and we look at the volume increases, I think the situation becomes clear. And if we look at the next graph, we can compare why and know why, why has this happened? It’s happened because we have carried out, we’ve carried out, we’ve developed renewable energies that over and above anything that’s been done in Europe, which we want to compare ourselves with.

In this graph made by the European regulator for energy which is for 2009, the most recent one, you can see in the circles that the volume, not for volume of money that’s devoted to renewable energies and Spain devoted this year, 2009, €6,214 million, the same volume of the Germany, more or less much more than other countries. Of course, but Germany has twice as much as, twice the production of Spain. So Europe devoted €6.3 million per megawatt-hour to renewables, Spain devoted €22.5 million, three times more.

Now if we devote three times more to renewable energies and their cost now currently is between six to eight times higher than conventional energy, it’s absolutely obvious the energy in Spain is going to be more expensive than in Europe, there is no alternative. We’ve got to think seriously, whether we have not taken, we’ve not overdone it with renewable energies in terms of our possibilities because naturally the impact that this will have on competitiveness of our companies in Spain is obvious, because they’re going to have fight against an electricity, which by definition as a result of the effort that’s been devoted to renewables is much higher than the competitors and the solution is not to reduce the conventional energy, because then we would arrive at an absurd situation.

Unidentified Company Representative

So those are the comments, I wanted to make and I’m sure that they will be part of the discussions that are now taking place. I would also like to make some comments about combined cycles and capacity payments. As you can see in this chart, the load factors of cycles have come down from 66% in 2004 to 23% last year. Combined cycle plants and most of them built in the last four or five years are operating at less than 25% of their potential. So capacity has been reduced.

And this is due, not so much to a fall in the market. Obviously the operators of the system need to be able to spend drop sales for 5%, 6% of the ones we've had. These are downfalls that any operators should be able to do with. Let’s not forget that combined cycle plants operate in free market conditions. But the problem is that this downfall, this reduction is due to the fact that energy is coming to the system, which also the free market, when the market function renewable energies come along and you are forced to buy them, even though they are much more expensive.

And then there’s coal too where there’s an obligation to buy as well. So the problem is not so much the fact that there is no reaction to free market conditions. It’s just that the free market conditions have been altered benefiting the regulated energies, which has a much higher costs. And there is a second thing which is that these energies, energies from combined cycle plants are back-up for the systems.

And the minute the electric system goes through a dry year or years with little wind. It is essential for combined cycle to come along in order to guarantee the security of the system because renewable energy by definition is not a stable energy. All of this can be seen in the next chart. All of this has been clearly established by the EU regulation, which obviously has something to do with power guarantee.

There is the obligation of having this energy ready to operate in gas contracts in case there is no wind, no sun or no water. Obviously, adjustments need to be made as acknowledged by all legislations including the Spanish one. At the end of last year, the first step was taken increasing modestly but in a relevant way, statements from 20,000 to 26,000 that this is an annual payment per megawatts of combined capacity and a new payment for availability have been set.

On top of that, the national energy commission has received the mandate to establish in six months, system of capacity payment that will make it possible to remunerate appropriately those who provide this service that guarantees the sustainability of the system. Therefore we have two problems here. Number one, displacement of combined cycles to save our much more expensive energies that do not behave in market conditions, improve market conditions and certainly – secondly the compository nature of this combined cycle to guarantee security in the system.

And now please pay attention to the developments of installed capacity on the basis of government plant obviously the chart just entering plant to the left you can see installed capacity in combined cycle plant by the end of 2011 compared to the capacity established by the government of 2005.

As you know, combined cycle plant or any other plant may take between four and five years to be build most of these facilities or renewable facilities we have now and combined cycle plants today were planned in the year 2005 where they were built taken into account all these factors.

Whereas you can see cut rate to what is usually stated installed combined cycle plants are 10% less than what was planned by the government in 2005. Nevertheless renewable as a whole are 22% more of than those approved by the council of ministers in the year 2005, and were seem to be operational for 2011. And installed fordable stake energy at the end of 2005 was almost 1000 times greater than what was planned by the council of ministers for that year. So the problem is that what you see on the right had a cost of €371 megawatt-hour compared to the €48 on the left. So there is two things that are easy to see. First of all, why we can make and meet and also because the systems doesn’t work.

Finally, let me make another comment about the Royal Decree Law in Spain. We believe it’s great and very reasonable. We believe that’s a way to go. Therefore, we’re happy that this kind of initiatives has been adopted. We believe that well the numbers are what they are and there is no choice but to get it. But we hope this Royal Decree Law will be accompanied by other measures. We propose them, but there are other utilities that make proposals there as well. So the governments will need to decide what needs to be done to balance the system. We believe this Royal Decree goes in the right direction and its impact will be felt in quantitative terms as of the year 2014. In 2012 and 2013, the impact will be moderate because we will see the implementation of thermo solar energy at a very high cost and this couldn’t be avoided with this legislation, but as I said, we welcome this new measures by the government.

Now, we talk about our P&L account for the year, while we’ve already seen the numbers, I would just like to mention briefly that our gross margin have increased by 5% and EBITDA 3.8% even though we need to take into account choosing first of all divestments which have led to a drop in EBITDA, we will talk about this on a year-on-year basis.

And the second thing is that our profit and loss account has become increasingly international. We’re increasingly focused on businesses outside of the Spain. Amortizations increased by 2%. We had less capital gains due to the sale of assets and financial results were 18 times lower, 18% lower than last year, previous year. All of this brought us to this profit after tax, an increase of 3.7%.

If we look at the breakdown of EBITDA, you know that electricity and gas businesses in Europe increased by 5.7% and decreased by 3.2% respectively is due mainly to divestments of distribution assets. EBITDA in the electrical business shows a global drop of 17% in Spain, this drop was 20% and we also have the divestments of our Arrubal and Plana del Vent and also we see the increase in fuel prices which is being transferred very slowly to the markets. The pool has increased versus the previous years but final markets in Spain do not reflect this increase in costs very fast.

When it comes to gas activity, we’ve seen an increase in EBITDA of 17% basically because of our international business because in Spain there’s been a decrease in volume. EBITDA in Latin America has fallen 9% basically because of the sale of assets in Mexico and Guatemala and also the extraordinary tax impact of taxes in Columbia. With all of this, we come to an EBITDA, which has increased almost 4% in spite of divestments made.

If we want to look at EBITDA on a comparative basis discounting the impact of divestments in Latin America and also the divestments in generation and distribution assets in Spain, in the field of gas, then EBITDA would have grown 6.5%. In spite of the fact that in the previous year conditions were unfavorable not on the market conditions, but also temperatures which had a very negative impact on residential markets here in Spain.

Let me also remind you that fuel costs have increased, we also have the tax problem in Columbia and the negative behavior currencies in Latin America versus the euro. All of this those going to 6.5% increase in EBITDA and non-hemogenesis terms 4%, which shows that we have a very sound business model.

A very sound business model, which has been leveraged by these synergies in the profit and loss account, which averaged €715 million divided into while €475 million that come from the EBITDA P&L account yearly. And the rest comes from return CapEx maintenance growth in the network et cetera.

These are important because almost €500 million more in our P&L account is one of our great successes we’re very proud of it. And it has compensated for some of the divestments we’ve achieved our goals. The goals we set ourselves when we acquired Union Fenosa would have almost traveled the initial amount, and even though we will never conclude with our efficiency goals. We have already met the goals that we had said ourselves for 2012 this is just what we achieved to our success last year.

Now let’s look at what this means in our business, what’s International operations means for our business. Last year 40% of our EBITDA came from international transactions and operations. This is the factor were our sales have increased the most, especially in Latin America and the contribution is very important and this increases our potential to grow in profits and in other way as you can see we’re now at this level, because of the end of a combined cycle plant both in Spain and abroad and also because for the equipment of synergies, which they required less recurrence investments per year.

We have also maintained our investments and distribution retail business, this has had a clear impact on the quality and the improvements of our network especially the electric network in Spain the grid. Investments were made basically in regulated businesses 75%.

Now we go into the last chapter before we draw some conclusion on distribution of electricity in Europe, we can see that it has dropped 1%, EBITDA $700 million that means an increase of 6% in line with ministry orders increase in the distribution activity in Spain has been around 4% and this together was improved efficiency has allowed us and will allow us to maintain our current positions an EBITDA of $710 million with an increase of 5.7%.

Investment effort has continued we’ve grown in electrical distribution by 9% in terms of investments all of this has been dedicated to new demand and improvement of quality. So TIEPI had a record of now that you can see here 32 minutes. So our investment efforts has been recognized and acknowledged.

When it comes to gas distribution, there’s been a fall in volumes in Europe, 3%, greater drop in Spain, 7%. In Spain, basically the reasons are very clear downfall in the residential market due to climate reasons, drop in the electrical market and increase in the industrial consumption 5% increase.

Overall and because of electrical consumption the downfall has been 7%. I also want to say that in spite of the real estate crisis in Spain, they coming into service of new gas contracts have increased by almost 60,000 and this is the key because contrary to what happens in electricity in the gas distribution sector, retroversion is connected to new points of supply, that is new clients we’ll look at the importance of all those later on.

We have continued to invest in order to grow the network, and attract new customers and that is why EBITDA is now that’s $966 million, a 2% drop vis-à-vis the pervious year even though this has to do with divestments in points of supply by Gas Natural.

Let me now say something about the gas distribution business. And I will do using this chart to explain what you can see on the left. First of all, contrary to what happens in the electrical sector, which is much more matured, gas penetration in the Spanish market is very low and this is how it compares against the European average. The conclusion is clear. Spain is far from having a mature gas distribution system and there’s still great potential to increase the number of clients.

The proof of this is that even during the crisis in 2011, we added 160,000 clients to our business. And this is relevant because as you can see on the right hand side, the gas distribution business gets its retribution not so much from investment, but it depends on new point of supply. And there is an important characteristics here as an average the company receives about €110 per year per new customer that is connected. This is retribution of distribution but new clients contribute to the system, a €180 per year of revenue.

So the more customers we add to those systems, the more profitable the system is and the more surplus it has. This is something that distinguishes us from the electrical business and it’s one of the keys when it comes to dealing with the problem I’m going to discuss now, the tariff deficit for gas in Spain.

In the year 2011, there has been a €210 million shortfall, which is the modest number, but it brings to an end our tradition until then which was no deficit in the gas sector. The reason is clear there’s been no imbalances in the costs. There is no structural cost problem as is the case in the electrical sector. It’s a primarily a shortfall in volumes, volumes felled by 7% then since demand volumes run down, unit prices were not high enough to cover the costs and that’s why this deficit. Fortunately at the beginning of this year, tariffs have increased by 4.35% and the mechanism has been established to review these tariffs on a quarterly basis.

There are two more things we were glad to discuss, which we have already communicated to the government. We hope that the ministry will taken them into account, when it developed its plan. There is the need to review the gas infrastructure program taken into the account the fact that growth of the system has been slowed down due to electricity. When it comes to residential demand, residential demand did not grow, industrial demand did grow and it was electrical demand that decreased total consumption.

So we need to review the infrastructure plan, maybe we should go so fast now. And the second thing is that since there is going to be no increase in gas consumption unless some steps are taken by the governments. We should increase consumption to the residential and industrial markets.

None of the opportunities we have to take advantage of this wonderful gas system that Spain has is to make people consume more gas in a country that is not very much gasified. Whenever retailers get a new client the system not only needs those costs, but it contributes revenues to the gas system in general.

Therefore, we almost know that electrical deficit is transferred to this gas tariff deficit combined cycles doesn’t operate so the gas systems doesn’t operate. When we talk about combined cycle problems, we should also take into account what happens to regasification plants and gas transmission and redistribution networks, which were designed to meet a demand that is not there, so we believe one of the solutions is to increase the level of gasification of a country by attracting new customers, something that can be done and that we’ve already started to do.

Now talking about demand, conventional gas demand in Spain last year that is residential gas demand and industrial gas demand was almost the same quite flat minus 0.8%, and this compares. Well residential demand decreased much more due to climate conditions, residential demand fell almost 20% none the less industrial demand grew around 5% this is a fact. And so it’s when it comes to electricity demand it fell by 2%, because of low temperatures and also because of the fact that there was less consumption of electricity.

Now, if we go into detail about the situation of electricity in Spain, here you have it this is our market and let me say that even though there was an almost a 6% global decrease in Spain, we fell by only 3% then our generation came down by 3% and demand by 2%.

If we analyze the different sources of supply, what happened to Gas Natural Fenosa is similar to what happened to the rest of the country, compared to a previous country, there was a shortfall in hydropower a notable increase in coal production due to the enactment of the Royal Decree that benefits the use of coal and also the maintenance of the special regime because the year was not positive in wind term.

In general there was an increase in generation costs due to increase in fuel costs, and in our case we have to take into account divestments in plan of events and Iberia, which explains this negative EBITDA. As far as the gas energy, gas market in Spain, we sell by 6% in Spain the global shortfall were 7%, this 5.6% shortfall in our sales in the Spanish market was compensated for due to the fact that we sell more to the international market.

As you can see in this chart there was increase was over 3% in our sales to industrial market, 27% drop in our sales to the residential market although it’s true that divestments explain much of this shortfall and in electricity this drop was 13% less under rest of the market but essentially nonetheless.

As you can see on the next page, we grew in our international sales by more than 30% that is why our sales have remained stable. We would also like to say that our policy is not to do trading transactions, which are to sign long-term trunk trucks with our clients use of methane carrier fleet, use flexibility in liquefied natural gas contracts and expand our activities all over the world operating in new markets in the over height of the Spanish market is not going that well.

Sales to international markets, already accounts for one fourth of all natural gas sales and we hope that this will continue at the same time that there has been an improvement in the natural gas market in the world.

Now talking about Latin America, please allow me to show you this chart to explain exactly what’s happened in Latin America. Our EBITDA fell by 9%, but there are very unique reasons for this, which I believe should be known in order to understand what’s happening here. First of all, there have been several divestments in Mexico and Guatemala, which make this figure not be comparable with previous year’s figures. There is also the $67 million impact of non-recurrent tax payments in Colombia and also the depreciation of currencies, which goes against us.

So that is why in the year 2010, the number was $1.13 billion and this year it’s less – sorry, it’s $1.17 on a head-to-head comparison basis. But we have grown in all of our activities in Latin America, with the exception of these three unique sectors that I have mentioned. So we have great hope that we’re going to grow in the gas market in Latin America, especially in Mexico City, where we have a potential growth of more than 2 million clients. And with this let me move on to conclusions.

We’re happy with those results in such a difficult year, our EBITDA has grown almost 4% in spite of disposal of assets, which obviously have just accounted from our EBITDA and which make our results a little worse than in 2010. Our net profit has grown 10.2% and we’ve strengthened our financial structure by reducing our level of debts substantially. The behavior of our stock price has been very good compared to what’s happened to our competitors in the European markets, and we have been able to maintain our shareholder retribution policy.

So we have achieved all the goals that we set ourselves in our strategic plan for 2010 until 2014. For the year 2011, we wanted to have an EBITDA greater than $5 billion, net profit of around $1.5 billion, or net debt between $15 billion and $16 billion, and our net debt-to-EBITDA ratio of almost three times, and maintaining a good remuneration to shareholders. So we’re convinced that, we’re going to be able to achieve their goals this year as well, which will not be easy either. Thank you.

Unidentified Company Representative

(Foreign Language)

Question-and-Answer Session

Unidentified Company Representative

Now, we will start with the Q&A session. We will start, as I said before, with questions from the floor, from the audience present here in this auditorium. If you wish to ask a question please raise your hand, tell us your name, and the institution that you represent. Yes Pablo?

Pablo Cuadrado – Bank of America Merrill Lynch

Good morning. I’m Pablo from Bank of America Merrill Lynch, and I have three or four questions. The first one has to do with the scrip dividend. I believe, it was quite surprising today to see the announcements of this scrip dividend taken into account, that the interim one while you announced that it was going to be paid in cash. So, what do you think is going to happen in the future?

Do you think that you will maintain the current scrip dividend policy will this year one-off paying, because last year there was talk about all this, I would like to know whether in the mid-term in this business plan that you have whether scrip dividend will be maintained or not? The second question has to do with well, could you give us an update of that negotiations with Sonatrach that were announced last year? Have you had any, do you have any news or do you believe that in the short-term something might happen in that regard?

And the last question in the wholesale and retail business, where there have been some changes in 2011, looking at the general situation and the Gazprom that has opened lately, do you think this may have an impact on your wholesale and retail business in 2012? Now the first question, last year interim dividend was paid in cash and then we decided to pay the (inaudible) encrypted on this year. The decision has been made based on the success we had last year. This doesn’t mean that it's going to be the same next year. We just made the decision for this year we will see what happens in the future. This gives us a little freedom to shareholders to do they want. So we believe it's a positive thing, it's not negative at all. Shareholders can do what they want. So, this is not a policy for the future, it’s just a decision for 2012.

With Sonatrach, the agreement we signed with Sonatrach contemplates the possibility of collaborating in common businesses. This one or any other we're still looking at the possibility and many others we haven’t reached any agreements yet, but we collaborate very closely with Sonatrach to try and reach industrial agreements that will allow us to collaborate in the future.

Rafael Villaseca Marco

With regard to gas business, we satisfied and optimistic despite the fact that there are a lot of variables involved, there is not doubt that it's recovered in the whole world quite a bit and also even in Spain especially in Spain margins not volumes have been recovered, not volumes at all. But we believed that the gas business, gas will be a very important fuel in the next few years, which will be more and more relevant and we will have to be able to adjust to the new environments.

Contracts are continue especially in Europe but in the other world we will see what happens because renegotiations in the other world with those contracts have different margins. All operators are renegotiating these contracts the situation of oil is a typically and must be flexible and adapt to the new market. Gas Natural due to its diverse portfolio is experiencing presence in different markets. We believe it has the expertise and know-how and we foresee that this situation of gas will continue in the future.

Jorge Alonso – Societe Generale

Hello good morning. Jorge Alonso from Societe Generale I've got several questions. The first one has to do with the gas market in Spain and the international markets. And gas consumption and electric plants seems to not be doing too well in the first few months of this year. What do you think the situations of the margins of gas in 2011, will it be, will it be the same in 2012?

What do you think there will be more competition this year and on the international market, if the increased volumes that we've seen, if you see room for this to continue to develop positively over the next few years? And the last question has to do with the objectives of 2012, which are those in the strategic plan. The economic circumstances, given the economic circumstances, what do you think? I’ve looked at, I’ve noted your objectives for profit €1.4 billion and if we remember that the recurring amounts in 2011 will probably be €1.1 during a month. The investment, these investments what do you think that €1.5 is slightly optimistic or are you considering just investing more this year? Thank you.

Rafael Villaseca Marco

Now, we’ll begin with the end. No, we haven’t planned any divestments in this year. It would be portfolio management, divestment policy and initially we’re going to try to maintain the goal established for 2012. We think the business is that we have, will allow us to achieve that goal. In terms of gas margins, it’s obvious that in Spain, this is balancing out because it’s really hitting the floor. The consumption has been reduced basically due to two reasons the temperature which is very warm relatively speaking last year and the second one is combined cycle plants. We don’t think that the temperature will have such an influence this year, so there will be the issue of the combined cycle plants, which will be pleasant but we’ll be nearing the ground but we expect a situation that is not so negative as last year but this isn’t an event is not going to really influence prices very much.

Spanish operators are not talking about Gas Natural in general have learned how to, what to do. People are driving gas to other markets. Gas is globalized in many respects it’s not as much as oil, it is globalized and operators everybody is interested in, operators and suppliers are interested in taking it to the markets where it is necessary in the countries where it is necessary, where there is demand. So what it’s not leading to what happened two years ago. In 2010, there was excessive pressure in the market because there was an excess of gas, but I think that that finished practically in 2010. Operators with gas, it’s not the same flexibility, but it’s very similar. So that has led to a situation where margins will not be different and the prices are going to increase for the same reason, the other raw materials have increased because demand has a very strong international component.

In that respect, we’re convinced that the volume, the drop is going to slowdown and the prices will move along the lines of international prices. As regards to the international market, we have to say two things. General situation is the gas continues to be a fuel with a lot of features. It’s difficult to think over the next five years, the structure without a very strong role for gas. Problems that some nuclear power plants have had plus the financial or economic problems associated with massive policies of investments in renewables lead to situation where alternatives are going to include natural gas.

So we’re convinced that the demand of gas will continue and we also believe that the prices will even now not only because fuel, oil has become more reasonable in its prices in some respects, because the arrival of gas in other market will make the situation different all that helps us to think that the international situation would be favorable especially in terms of companies that have invested in the logistics needed to do that. And the commercial teams that are needed to established clients will have a world Gas Natural Fenosa has been doing this for many years and its giving they are improved. As regards international sales in 2012, if we look at the contracts we’ve got in operating markets and sales. In other markets like France and that the figure of sales will be above 2011 and 2012. Good, next question.

Manuel Palomo – Citigroup

Good morning, I’m Manuel Palomo from Citigroup. I had several questions. The first one is about combined cycles, spreadsheets et cetera, and the strategy of Gas Natural when it comes to offering those cycles to the pool. My question is whether the low load of Gas Natural is due to the fact that the company is offering gas at opportunity cost prices and not the price associated with the combined cycle plants.

And another question that has to do more with free cash flow in net debt. In 2011, we’ve seen a lot of divestments in the company this investments I think its $5.2 billion. And the deficit, net deficit of – is about $600 million, and we will also seen a drop in CapEx and scrip dividend, which helps to unleverage, but that has come from €19.1 billion to €17.3 billion and that’s €1.8 billion, why I have those items not being reflected in debt?

Is there being any additional increase in working capital and if there is so why? And my third question is about regulation and renewables, you’ve said that you agree with the Royal Decree whereby the growth of your renewables in the future will be reduced, but on the other hand you talk about reducing those premiums. So my question here is whether you are suggesting that there might be retroactive effect in terms of the premiums and I also have that combines with Gas Natural continuing to invest in our renewables.

Rafael Villaseca Marco

Yes, and I’ll do the second question. And then the free cash flow I think that you are forgetting about the tariff deficit of the year in 2011 which makes our working capital worse. No but than that, because from the figures you’ve given us 1.2- 1,200, and we have generated 1,500, yeah the net difference is positive but I would say that, there is a small worsening, but not of the magnitude and working capital there is certain delays especially in the public sector in collection, but we are talking about $100 million not more.

In the rest of the picture there is nothing strange that effects generation, you know this company generates respective of tariff deficit 1 billion of free cash flow for next year, which is what we base ourselves on to say that that will be the levels 15 and 16.

The growth factor you’re talking about for the sector is 23, for us is 37. So the rest is not too bad, the difference. The rest make up 17, and in our policy naturally we just burn gas in the combined cycle plants, but that’s not profitable ever. Whenever and whereas if we don’t have any other options better options we’ll continue to do that. So since we have good provisioning and in supply control some of them are associated with the pool price, this allows us to work very efficiently and that’s why we have higher participation shares. We would like to have more 37 is okay, but we’d like to have more, but it has to do with these supply contracts in a very clear policy, whereas marginally it continues to generate profit, but we do it and we do it positively, and that is what leads us to this situation, which we hope we’ll get better when the issue of renewables clears up.

In terms of renewable energies, renewable energies are regulated businesses, very strongly regulated they got a subsidized price and they have no commercial risk, because all the production is compulsory it has to be both necessarily since its regulated business they’re not subject to market conditions, which the retroactive nature of all this, whether the rules are changed for the future, if you talk about retroactive effect. As regards the past, that’s not going to happen, but as regards the future. I think that there is no news as regards to that, if you say retroactive that would mean, giving that what you’ve collected now.

We’re talking about what might happen in the future, the electric industry rules have changed ever year, unless that’s been happening for many years, and the rules changed and the prices of what you collected, but finally what is – this is a legal problem, I’m not going to go into. However, the Supreme Court has now pronounced itself several times I believe for, we’re saying that since it’s a regulated sector, the government cannot allow or in spite of that the government cannot allow or must contemplate that there is a profitable margin, what it says is that as a regulated business it has to be reasonably profitable, it would be curious for regulated risk free business to have the same profitability is the parameters established five years ago. And the other regulated businesses are subject to change every year.

The feeling we get is that the criteria, our perspectives are a bit elastic and but to be more specific. I’d go back to that chart, if you want the system to tally out, the situation. The most important cost in the Spanish electric system is, subsidies to renewable energies, which these subsidies are growing by one billion a year, well I don’t know it’s absolutely clear. I don’t see many alternatives. Basically there are very few.

As regards retroactive nature of this, no it would be to change in the laws for the future or rules for the future, whether that can be done or not is legal, I’m not a lawyer, but I would say something in a regulated business, you should guarantee profitable – a reasonable profitability, that’s what being said legally, but I can’t tell you anymore.

What do we invest? Well, we are investing only in wind energy. The reason is very clear, wind energy is subsidized, which is almost at market levels, since certain areas of the pool, we are investing reasonably, because we’re convinced that those energies will soon reach balance situation and therefore are not and will not be the course of this adjustment. And if technology moves forward just a little bit more and we – the Spanish pool nears the level of the current European pool, we would be, if not at market levels, very near those levels. When an energy costs 400% more than the market, it’s difficult to think that you can really support this in the long-term.

Next question please.

Alejandro Vigil – Cygnus Asset Management

My name is Alejandro Vigil. I would like to – I have two or three questions. The first one is about the objectives – 2012 objectives, which I’m surprised, that you’ve repeated in spite of what you said before the complicated environment? I would like to understand your reasons?

Rafael Villaseca Marco

More than 5 billion EBITDA, you see that there is an operational environment that is positive and you don’t see too many risks in the electric or gas businesses, that’s obvious. And then at the bottom when you’ve reiterated more than 1.5 means that you can see less depreciation, some extraordinary amounts that will lead you to that final amount of 1.5.

Then the second question about gas, you’ve said that you hope it’s not structural, what do you think the solution is for this deficit bearing in mind that there is an entry plan or investment plans for investment very expensive. Do you see any solution in terms of extending the depreciation of those assets or a change, regulatory change in [transport] what’s the solution? And then the third one is the debt CapEx for 2012 that you’ve seen and as regards acquisitions, which is more perhaps for Tony? Thank you.

Antonio Basolas Tena

Well, as regards to the gas tariff deficit, I’ve said there are several measures one has been taken, the increase of toll of excess charges for full tier, I think has been increased. And since the figure is relatively low, €200 million that’s more or less can be adjusted. The second thing and I’ve also said about this, it’s necessary to adjust the investment plan in a situation like this. I think that obviously we have to review whether it is necessary for the gas system to continue to grow or not, and we would have to review all those issues. I’m convinced that this will be done and therefore in those readjustments, we will have to introduce the cruise speed. And I think that that will be done and I think it’s logical.

And the third one, since the problem is volume not costs, because costs are not – are under control and if they’re not, they can be adjusted. It’s a question of making up for volume, and I think that distribution can do that, why? Because Spain is not the gas – the gasification level in Spain is low. Last year we increased 160,000 new points of supply. So we can see these are new – not new houses, that existed and they have gas. So what we have to do is try to increase the speed of distribution in order to add new customers and those new customers will help infrastructures to get paid off.

Rafael Villaseca Marco

And most of the distribution, well, yes, naturally we’re going to support all the mechanisms that are possible for distribution. There are several countries and Spain that which are incentivated and want to do it, because when you capture new customers, however much you increase the payment, distribution payment in the system, the income is greater than what goes out. So since we have operators not only us, we have Gas Madrid for instance trying to do the same. We are convinced that this measure can also help by adding volume.

And finally, I insist that the issue of renewables at some stage the adjustment will have to effect the situation, because if not and if we increase this exponentially, I’ll leave this to the end I don’t know how to evaluate it, something will have to happen because if not, we are in a situation with greater debate. We talk about externalities and debate all this. We usually forget about the negative externalities of the backup to renewable energies, they’re going to have to pay someone for all the investment and all the infrastructure in addition to the cycles in order to cover this at some stage. I have not even considered that. But with the first three, with the moderate adjustments in the excess charges, adjustments in the investment plans and we are going to work on this to promote distribution, I think we can deal with those programs.

Carlos J. Álvarez Fernández

As regards regulatory risks, we are contemplating the situation as this. We have distribution with ministerial decrease in orders that will then become definite, we have liberalized businesses, we have one-fourth of our business from outside, 40% of our EBITDA comes from outside of Spain. And in the respect, without extraordinary amounts, we think that we can approach our goal of 1.5 billion for next year, and we’re working on this.

Therefore we’re not altering our commitments. I don’t know what extraordinary things, positively or negatively, might happen, but that’s not in our plans. Yeah, the sale of the Madrid customers for instance, which I think €15 million, €20 million compared to – as regards the results, there are no secrets. Amortization will be at around that level that I've mentioned before and the EBITDA will be above 5,000, we’ll reach that profit level of around, net profit of about 15 – 1.5 billion about, it might be below or above but it will be about 1,500 million, 1.5 billion.

As regards the CapEx for 2012 and then I’ll pass the floor to Tony for him to say, it will be at around 1.7 billion also depending on anything basically we're talking about doing, continuing on what we've been doing this year, focusing on regulated businesses in Europe and Latin America, because it's where we are investing and that is the figure investment.

As regards the CapEx, there are some investments generation in Costa Rica, there are so many hydraulic plants belong to Union Fenosa two years ago and we are also looking at what opportunities for investment there would be after 2012, in the event that the macroeconomic environment gets better as regard for the situation now.

Unidentified Analyst

(Foreign Language)

Antonio Basolas Tena

As regards the gas deficit, the industry the Minister for Industry in Parliament talked about a deficit of €315 million. You’ve spoken about deficit of €200 million, and I told that the minister had included the increase by 4% of excess charges. However, bearing in mind that deficit that you calculate what excess charge increase would be required in order to cover this deficit. Can you give us the split as per customer group combined, large industrial customers? Obviously, one of the possibilities to cover this deficit would be to increase the distribution points. But based on the figures that have been given, that would mean an increase of supply points of that €3 million to cover this deficit. Is there any possibility that the excess charges are also increased in distribution? As regards, gas deficit that €350 million figure that you’ve quoted I haven’t got – I’m not aware of.

The figure we have is the one we’ve given you. Sorry? I'm sorry, I don’t know, but this in those terms would be less than 10, we’ve already gone up 4% it would be enough to have 5% odd, it doesn’t seem to me that if you look at the picture at the end of last year and what’s going on, I naturally think that all the measure should be taken not just to rise the tariffs. We have to go to a higher control of investment, so that there is not too sharp an increase and also for the to increase the distribution our supply points, to increase consumption and I don’t think that this is too complicated especially as compared to the electric problem, the measures are relatively accessible, this is not the word but anyway it can be taken.

Unidentified Analyst

Yes, hello I am from BBVA. I have two very quick questions, if you look at the regulatory scenario and the review that is pending, we’ve spoken about distribution you say that is true that the TIEPIs were record levels that distribution of electricity is quite mature, I wanted to see whether there might be any risk of regulation review or revision in terms of distribution.

And then on the other hand within the visibility, the low level of visibility will whether you have any dates for possible potential revision of regulations in Spain and then as regard to dividends you’ve maintained the guidance for 2012 is the objective of 10% growth for us, going to be maintained for the following years.

Rafael Villaseca Marco

Yeah, we’re talking about 2010-2014. Yes, of course, the same goals that we had at the time. Regulation, we don’t know. We’ve convinced that the government is working on this, and there will be changes. Distribution, electric distribution, electric distribution a year ago, there was an increase and now after one year ago it was reviewed, it was all revised.

We think is difficult. However, that was the national series of measures that were being introduced to improve the situation, because when we talk about reasonable remuneration that’s not just for renewable energies, it should for all businesses in these sectors.

There are new electric investments to be made the smart leases (inaudible) et cetera. We all need more continue to invest to guarantee quality in many areas of Spain and guarantee quality in the areas that aware so. But I think once again in the same situation, let’s look at the figures that we had before in that chart. If we destroy the distribution system, what do you think, we can go down that answers the question.

The problem is not there, the problem is where it is and well obviously there are interests. You can see that these are the things that are not going to solve the problem. We can adjust the amounts yes, but that will have consequences. Distribution has never been an extremely well treated activity, has been the Cinderella of the electric system. It’s not in a favorable position, but it is including challenges in many areas of Spain. For instance in Galicia and Spain, we have supplied problems and we’ve got to continue to invest to avoid problems.

Let us say that we want to do away with all of that, which is not going to be the case. But in theory what will come out of that will maybe might to solve 10% of the problem in exchange for a series of immediate practical problems because investment increased by 9% last year and our colleagues, I don’t know but more or less the same. So my message is that we have many different theories about this, but if we look at the data there is not so much to argue about.

Good. There are no more questions in the room. So we will go to the questions on the telephone.

Operator

The first question will be asked by Javier Suarez with Nomura. Sir when you’re ready?

Javier Suarez – Nomura

Hello good morning to everyone. Thank you for accepting my questions. Practically there are three. First of all, as regards to the credit rating, I think that this is, we should say that I’m surprised that the credit rating is still so low of the company when the financial cost is competitive and there are other companies in the sector that have higher rating with the similar situation.

The question is more as regards to timing and your dialogue with the rating agencies, what do you think this situation? What’s going to happen as regards to this situation? And also where the evolution of the debt over the next few years? Do you think that that will be sustained?

Second question is, as regards the general scenario of the gas market I would like to comment on the agreement that you signed in November, with American company import filled gas, I think it’s a significant contract for BTMs. I would like to look at your interpretation of the evolution of the world gas market.

And also comment as regard to the most recent news that Gazprom is reducing their gas prices in Europe. And as regards the evolution of the business in Latin America, I have seen on slide 43, the recurrent growth of EBITDA is 4%, if we just for sales the tax in Columbia. And those exchange rate, but I think that growth is slightly low is there any other factor that could explain this growth in Latin America the fact that it is still a single digit growth.

Unidentified Company Representative

(Foreign Language)

Carlos J. Álvarez Fernández

The objectives we set ourselves when we designed our strategic plan, went until 2014, the idea was to have an A category by 2014. We continue to believe that we will achieve that goal. That’s what we are working on as you can see from the materials we’ve presented and now what we have to do is convince everyone else especially rating agencies. That we are going to achieve this goal.

We are starting conversations, I cannot tell you whether we are going to achieve this tomorrow the day after tomorrow or in three years time. But we hope that as a result of those conversations we will be able to improve till the in the year 2014, we will have an A minus category.

Now, when it comes to debt costs for the year 2012, we believe that's going to be similar to what we’ve had this year and maybe slightly higher, but this will depend very much on the evolution of the debt in Latin America, especially the actions we undertake in order to maintain this rating. While we have recently had an operation of €650 million in the Eurobond market, a 5% coupon I think, it’s the very good decision from a financial point of view, because we postponed due dates by more than five years, but the cost of debt goes up.

If the average is vision we increase it well. The cost of debt we believe is going to be slightly higher in the year 2012. Higher than what we had but it will never be over 4.5% that’s what I can tell you about estimation of debt.

As far as America, while, there are climate conditions that have had an impact on demand especially in Brazil and Columbia and they have had, in a normal year profits in gas and electricity distribution might have been higher with those climate conditions has been similar to those of the previous year and the distribution system – business would have grown 7% and electricity around 5%.

Gas market. First of all, this has to do with non-conventional gas. Cheniere has launched two trains. We’ve signed an agreement to of almost five DCMs of gas. So what’s our philosophy? One comment, the gas market is globalized or not fully globalized and they’re poorly interconnected.

Gas in the U.S. has a price which in spot terms, it's lower than in the Europe. Let’s not confuse spot markets with positioning markets because contrary to what happens with oil, most markets are not spot. Only 10% to 15% gas markets are spot. Basic market especially in Europe had to do with long-term contracts that's do not go through the spot market.

Having said this in the U.S. a large amount of gas has started to be sold at very low prices compared to traditional markets, which cannot be exported until liquefaction plan for the year, which allow you to export.

We want to maintain the best provisioning possible. So we've signed contracts in the long-term to buy this gas in favorable conditions and to be able to dedicate it to our market. That means that we will be right at the beginning of the gas exporting activity of the U.S. through a liquefaction plant, because there is no other way, and also with the fleet that we now have and what we might acquire in the future.

In the Atlantic basin, we want to take advantage of our positioning and marketing possibilities. When it comes to Gazprom I don’t know how reliable that news is, but let me make a comment. Countries, like the Central European market is completely different from the Spanish market. Some years ago, we were judged by the same parameters, and it was a mistake and in Spain two-thirds of gas, come by vessel. So that means it can go somewhere else, and usually suppliers agree on profit sharing clauses for markets that presents better opportunities.

So, when in a market like a Spanish one, there is too much gas all suppliers learned to send that surplus gas somewhere else. When there are pipelines you cannot do that, you cannot do it, because gas either gets there or it doesn’t. So surplus gas together with the take or pay obligation makes things very different from the Spanish market, where two-thirds of the gas comes by vessel.

So in a situation of depression in the market, and with the impossibility of sending that gas somewhere else, because it comes via pipeline, it’s only natural that those countries were thinking about that possibility, but that is not the case for Spain and as I said, we’re not aware of any of those plants. Next question?

Unidentified Analyst

The next question will be by (inaudible). I have a couple of questions for you. The first one is. Do you see any changes in this trend from gas to coal? I would relate this to the comment we make about load factors and combined cycle reaching a low level this year? And secondly, when do you expect to close a gap between oil and gas? Number three. After the agreement with Sonatrach, you said that you expected €3 billion EBITDA in the retail, wholesale activity and the amount you got this year is different. What’s the volatility factor those €144 million, where do they come from. And I believe that those taxes in Columbia are divided into four parts. Have you already felt how the negative impact in 2012 was taxes in Columbia and could you tell us how many points of supply you have in Mexico City. I just wanted to know what’s the investment effort and in time.

Rafael Villaseca Marco

When it comes to gas supply, we don’t give guidance by businesses. So I don’t know what you’re referring to, but it’s true that what our Managing Director said is that the main driver for the EBITDA we’ve had in 2011 has been growth in sales abroad together with good margins of those sales abroad. So the driver of growth comes from those two things.

First of all, higher sales, more volumes almost 30% more and secondly higher margins to the ones that do expected and that is why EBITDA has grown so much.

In Spain, margins are more or less similar to the once we had in 2010 and we expect them to be similar in 2012, the difference is in international markets. When it comes to taxes in Columbia, the accounting impact is different from the cash impact. This is paid in four years that was the case in the past and that is also the case now as of 2011

So the impact in cash, we paid one-fourth in 2011 and 2012 we will pay another fourth and so on and so forth, but the mix is comparable. For this period, we accounted for the total impact so in the P&L account of 2011 those 57 million would correspond to the impact of the four years. In the 2012 P&L account you won’t see those 56 million, one fourth of the 54 – 56 million because the accounting impact has already been recorded in 2011. When it comes to points of supply in Mexico, 1.3 million right now in the whole of Mexico.

For coal, the Royal Decree has already been applied more or less with the percentage of adjustment. We believe that there won’t be anymore of changes there and therefore the impact. This is the discussion which is eternal, (inaudible) while we have formulated that relief tax prices with oil prices when oil prices go down suppliers every three years usually they want to change this formula when oil goes up the opposite happens and that’s what happening now, everyone is negotiating lower margins now because of this. So I don’t know what’s going to happen with oil, I do know that the issue of negotiations that all operators have with suppliers will now to be subject to negotiation and that’s what probably happening. It’s the news about Gazprom are true. Now, next question please.

Virginia Sanz De Madrid – Deutsche Bank

The next question comes from Virginia Sanz from Deutsche Bank. Good morning. I have several questions. As you’ve said over and over again while you spoke about adverse climate conditions in 2011. I want to know whether this impact can be measured in million of euros and where just you think that in the year 2012 we’re going to have normal climate conditions and now that you have achieved your goal in terms of synergies. Do you see any possibility of identifying additional synergies, which might contribute to the achievement of goals you set yourself for 2012? And lastly, when it comes to the debt you have for 2012 between €12 billion and €15 billion. What are the options? Are you going to securitize the pending deficits truly this year? And do you have tariff you have do you think there might be an additional deficit of €5 billion?

Rafael Villaseca Marco

I will start with your last question about debt. I believe if there is no securitization, there’s already been securitization, so, yes as we said we’ve had securitization, but if there isn’t securitization we’ll be closer to €15 billion and if there is no securitization, we’ll be at €12 billion. So that gap covers for that effect. So let’s come to the first question that refers what we would have sold in the free market if it had been colder last year well compared to normal years, while this year we think it’s going to be a normal year. We don’t expect 2012 to be very cold but not as more in the 2011.

So sales especially in residential markets should be greater. And with the tariffs we have we get the margins where you spoke about but this also has an impact on distribution. Distribution of gas, remuneration for the year is at in terms of new points of supply and also volumes especially in the residential sector and in the year 2011, we made an adjustment to the remuneration than we expected because of the impact of lower volumes and you saw that from a remuneration that we expected to be around 3% to 4% over and above that of 2010, while it wasn’t higher than 2010 because of the adjustments. For the year 2012, remuneration is what we told you and we expect the year to be a normal year and therefore we expect a 5% increase compared to last year.

When it comes to synergies, of course, we’ve already concluded, our basic synergies plan, which is almost $800 billion and we’ve launched not synergies but an efficiency plan, three year plan with ambitious goals maybe not as ambitions as in the past but we’ve so convinced of that. There is still great potential to get huge savings and improvements in CapEx in the current year that plan was launched several months ago and we believe we’re going to achieve all of those goals. Well, for agenda reasons, we only have time for one last question on the phone.

There are no more questions in Spanish. Now questions in English.

Operator

The first question comes from Anna Maria Scaglia from Morgan Stanley. Please go ahead with your question.

Anna Maria Scaglia – Morgan Stanley

Hi, good morning. The first question is the following. Can you please detail what are the key areas of course in order for you to reach the target in terms of EBITDA for next year and for 2012? And second question, can you please discuss a little bit in terms of CapEx, so you are expecting an increase in CapEx in 2012, which are the main areas? You talk about Costa Rica. Are there any other areas where you expect further CapEx increases? Thank you.

Rafael Villaseca Marco

Well the EBITDA target as well is to continue as we are. There wasn’t be many acquisitions, maybe a little been in renewables. In 2011, we made some acquisitions of some wind parks, already in operation which in the year 2012 which will give us an increase in EBITDA. That will give us a bit more than what we had in 2011, but the rest will continue the same.

With growth of our operations, I mentioned before that a very important driver for gas will be our business abroad where we expect to have more sales, so we expect to grow in international markets and the rest will be consolidation of our regulated businesses and non-regulated businesses. And that will allow us to grow and we want to reach those €5 billion with that. That’s for CapEx. I think Tony said this before. We have Costa Rica as you said, and there is also organic investment in our distribution businesses, both in Spain and Latin America.

I would mention in electricity distribution, we will continue to invest, investments in meters, smart bids, et cetera and also in gas. We will continue with the same goals to attract new points of supply. The idea is that they will require higher investments. We expect to consolidate in Mexico too.

Undefined Analyst

Now questions asked on the Internet that hasn’t been answered. There are three brief questions. What capacity of international wind capacity do you expect to add in 2012 and in which countries?

Rafael Villaseca Marco

Well after the acquisitions we made recently. You mean internationally, well, in the international market, we continue to work on our project in Mexico and the projects that Unión Fenosa had in Australia, we’re at the advanced permitting phase and we’re trying to conclude the PPAs with them and this year we hope we’ll be able to close both permitting and PPAs and the investment will take two more years. So they will go into operation in 2014, 2015.

Unidentified Analyst

Next question from [Rodrigues] from Fidelity. What’s the reason for the shortfall in EBITDA of about 20% in one of your businesses, it has, well it’s a comparison with the previous quarter. Remember the adjustments in 2010 and the retribution of a year, so it’s a comparison on a head-to-head basis, that the fourth quarter of 2010, 2011. [Avril] at about the cash flow, net debt ratio. Do you have any mid-term goals for that?

Rafael Villaseca Marco

That goal is inline with the metrics that have we presented before, so that in 2014 we can have an A minus rating. So we continue to work along those lines, it is not one of the ratios that we usually publicized, but it’s a consequence of everything else. We expect to consolidate our position and depending on what the rating companies require. We may be able to get that rating in 2014.

Operator

Well, no more questions, with this we conclude the Q&A session. And now I give the floor again to Mr. Villaseca, Managing Director.

Rafael Villaseca Marco

Thank you very much for dedicating sometime to us. And we will meet soon to talk about the results of the first quarter of 2012. Thank you.

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