Iberdrola's (IBDSF) CEO Ignacio Galan on First Half 2016 Results - Earnings Call Transcript

| About: Iberdrola S.A. (IBDSF)

Iberdrola S.A. (OTCPK:IBDSF) First Half 2016 Earnings Conference Call July 20, 2016 3:30 AM ET

Executives

Ignacio Cuenca - Director of IR

Ignacio Galán - Chairman and CEO

José Sáinz - CFO

Francisco Martínez-Córcoles - Business CEO

Ignacio Cuenca

Good morning, ladies and gentlemen. First of all, we would like to offer a warm welcome to all of you who have joined us this morning. We are delighted you are able to be with us for the presentation of our 2016 first half results.

The presentation will as usual follow our customary format. Firstly, we will begin with an overview of the results and the main developments during the period given by the top management that usually we have with us, our Chairman and CEO, Mr. Ignacio Galán; Mr. Francisco Martínez Córcoles, Business CEO; and finally the CFO, Mr. José Sáinz.

Afterwards we will move onto the Q&A session. We would also like to point out that we are only going to take questions submitted via the web, so please ask your question only through our webpage www.iberdrola.es. We expect that the event will last no more than 60 minutes hoping that you find the presentation both useful and informative.

Now without further ado, I will hand over to our Chairman and CEO, Mr. Ignacio Galán. Thank you very much again. Please, Mr. Chairman.

Ignacio Galán

So, good morning everyone and thank you very much for participating in this result presentation conference call. As we anticipated on our first quarter presentation, the result of the first half of 2016 are starting to reflect the Group operational performance of all our businesses, with a progressive dilution of the extraordinary impact that affected the first quarter results.

As a consequence, recurring net profit has increased almost 14% to €1,427 million. EBITDA improved growing 1.4% to reach €3.9 billion. The underlying EBITDA excluding extraordinary items and foreign exchange effects has grown by 5.8%. Net investment increased by over 40% to almost €1.9 billion. As we made good progress with implementation of our strategic plan, 68% of these investments is allocated to growth. And operational cash flow amounted to €3.2 billion with a 6.5% growth rate, and finally reached €1,457 million on a year-on-year basis, decrease of 3.3% to the one-off fiscal provision reversal in Spain last year. This excluded net profit grew 13%. As previously mentioned EBITDA continues to increase atypical factors achieving 1.4% growth compared to the 6% decrease in the first quarter.

In Networks, EBITDA increased 4.3% due to the improved business performance in the Spain and United States, which more than offset the negative foreign exchange impact. In Spain, the approval of the new tariff scheme increased our revenues in 2016 by 2.5% compared to 2015 to €1,650 million. As for the United State, this improvement is mainly due to the contribution UIL and the higher transmission revenues.

The Renewables business’ EBITDA has been affected by 26.2% lower output in U.K. after extraordinary year in 2015, both for onshore and offshore. Nevertheless, Spain and United States increased output by 7% and 10% respectively. In total, overall Renewables output grew 5% year-on-year.

For our Regulated Generation activity in Mexico, CFE has reduced reference tariff on which some of our contrast are indexes. Nevertheless, this tariffs has already been increased in dollars by 9.2% since July.

In Generation & Supply, EBITDA is recovering decreasing only 1.9% versus 19.6% in the first quarter as atypical impact of offset. In Spain, higher output is up 68.4% reaching 30% of our total output. In the U.K. higher CCGT output partially compensated closure of Longannet. The overall energy produced globally by our company was 5% higher than in 2015.

Proof of this strong operating performance of our businesses, the 3.9% increase in EBIT during the period, which excluding foreign exchange impact grew 5.7%. And thanks to the financial management of our company including foreign exchange hedging, recurring net profits has grown by 14%. Consistent with our strategic investment plan to 2020, net investment had already increased by 43% to almost €1.9 billion on which 68% are allocated to growth projects and over 80% to regulated activities.

The operational cash flow has increased 6.5% to €3.2 billion exceeding investment by almost €1.4 billion. At the business level, operating cash flow since investment across all businesses, except for renewables due to the investment undertaken in our offshore projects.

I will now briefly review the main capital expenditure projects and the way we show our progress in the strategy of our 2016-2020 plan. In Networks, in United States, the New York rate cases has been approved including higher tariff for the three years starting in May. Also the filing of the Connecticut electric rate case has been made.

Furthermore, several transmission project are in progress. Among these, let me highlight. Metro-North Railroad aimed at increasing the capacity and reliability of the transmission line along the Metro-North Railroad in Connecticut with an investment of $175 million over the next few years. The Rochester Area Reliability Project in New York, which include the extension of 25 miles of lines in the substation with an investment of $100 million for the next few years as well. And a new project in Maine for the reconstruction of 50 miles of transmission lines with an investment of $80 million.

In Spain, after several of years of negotiations, we have achieved the establishment of a regulated assed base value fixed at €8,690 million, and a new remuneration scheme has been approved as well. The first regulatory period goes for January 2016 to the end of December 2019 and each increase the remuneration of 2016 by 2.5% to €1,650 million.

In Renewables, significant milestone has been achieved in offshore. We have already laid 50% of the foundation of our 350 megawatt Wikinger wind farm in the German-Baltic Sea. And the Jackets service station are ready to the installed. For our British East Anglia I project with 714 megawatts capacity, the turbine order was signed with Siemens. In relation to our offshore wind farm, we continue the construction of 1,326 megawatts in United Kingdom, United States and Brazil.

Finally, we have our contracted generation in Mexico. We have over 2,500 megawatt of additional capacity under construction, of which almost 700 mostly from Baja California III and Monterrey V will be commissioned during the second half of 2016. The remaining 1,800 megawatts will be delivered between 2016 and 2018, totaling 8,000 megawatt of installed power in the country by this date.

So the execution of our investment plan is on track with good progress in the development of our transmission and distribution network in all countries and almost 5,000 megawatts or new wind farm and regulatory generation, which will increase our future results.

Our American company, AVANGRID, continues to prove its operational strength, increasing adjusted net income by 45% in the first half to $295 million. Adjusted EBITDA is up 9% to $1,048 million. The investment plan and integration process are on track with $774 million invested during the period, funded by cash for an operation of $900 million. Following our AVANGRID Board approval, the third dividend of $0.432 per share is payout on October 3. This good performance is also reflected in the evolution of the stock price of AVANGRID increasing by 25% to a market cap over $14,000 million since the company was listed on New York Stock Exchange last 17 of December.

So far, this growth has not been reflected in my opinion in the stock value of Iberdrola Group yet.

Given our presence in United Kingdom, let me now briefly comment on the impact of the result of the European Union referendum. As we have already put forward in many occasions, our currency diversification helps mitigate potential foreign exchange impact. Our net profit 2016 is 100% hedged against exchange rate fluctuate eliminating any risk for the present year. And almost 76% of our U.K. EBITDA is in regulatory networks and contracted renewable businesses which had remuneration scheme indexes to inflation.

As currency devaluation could lead potential to higher inflation, this scheme mitigates any foreign exchange impact.

Finally, we believe the British government has the opportunity to implement additional measures to attract investment and secure greater economic stability.

With regard to the balance sheet, the strategy of financing of our investment in the same operational currency project, our credit ratio foreign exchange rate protect our credit ratio foreign exchange rate fluctuation.

As for our capital expenditure plan in the U.K. 2020 three quarters of our expected investment has no currency risk and 21% mainly includes a part of East Anglia I offshore wind farm investment in Networks with both, as I mentioned before, include price revision formulas linking to inflation.

Lastly I would like to mention the integration between Gamesa and Siemens Wind which has led to the creation of a global leader in wind generation industry. Both companies are highly complementary in terms of global footprint, existing product portfolios in technologies, and synergies are expected in areas as such as design, production, et cetera.

The main goal of the agreement signed by the Iberdrola and Siemens Wind is the protection of the interests of minority shareholders while intending the best corporate governing practices are put in place. Moreover, Gamesa shareholders will receive a cash payment of €3.75 per share. We will generate total dividend for Iberdrola more than €200 million in 2017.

I would like also underline that Iberdrola considered the new company a long-term investment, supporting the industrial model of a Group, they will become the largest global turbine supplier with headquarters in Spain and listed in the Spanish stock exchange.

I also like to highlight briefly the contribution of Iberdrola to the associated during the first half of 2016. Firstly, we maintain our commitment to creation of the stable and high quality employment with hiring of almost 1,300 new employees. We have also made purchases of goods and services for over €2,800 million in the period, which is 37.3% more to almost 14,000 suppliers.

In the last 12 months, from June 2015, our total direct fiscal contribution in the countries in which we are present rose €5,457 million. This figure includes our own taxes and those collected by our Group to repay to the fiscal authorities.

Just to conclude, the result we are presenting today allow us to improve the outlook of our net profit for the full year. With the strong performance across Networks, a good evolution in Generation & Supply businesses, and a stability in Renewables businesses. This positive evolution reaffirms the achievement of our 5% expect to grow in result at EBITDA level for 2016 despite foreign exchange fluctuation in a typical impact.

Our net profit as I mentioned, growth rate is expected to be significantly higher than that expected for EBITDA.

I will now hand over to Pepe Sainz who will present the Group result in further detail. Thank you.

José Sáinz

Thank you, Chairman. Recurring net profit grew 13.8% and operating cash flow rose 6.5% to over €3.2 billion. Reported net profit decreased 3.3% affected by €220 million. Positive tax impact accounted for in the second quarter of 2015. UIL consolidation increased EBITDA by €224 million and net income by €46 million. FX lowered EBITDA by €75 million but is mainly hedged at the net income level.

Revenues decreased 7.6% to €14.9 billion while procurement fell 14.4% to €8.1 billion due to a better generation mix. As a consequence, gross margin increased 2.1% to €6.8 billion; €400 million of UIL contribution more than compensated €129 million of negative FX impact.

Net operating expenses were up 4.5% to €1.9 billion. The consolidation of UIL added €138 million, partially compensated by the FX impact that reduced the expenses by €47 million. On a like-for-like basis, net operating expenses improved 1%. Net personnel expenses grew 5% and fell 2% excluding FX and UIL. Net external services were up 4.4% and only 0.8% including - sorry, excluding FX and UIL.

Analyzing the different businesses and starting by Networks, its reported EBITDA grew 4.3% reaching €1.9 billion with the US as the main driver. Net operating expenses rose 20%, improving the 40% increase in the first quarter, driven mainly by the UIL consolidation. Taxes were up 15% due to the above mentioned perimeter and the increase in US property taxes.

In Spain, EBITDA rose 3.5% reaching €784 million and improving the first quarter 2.9% decrease. The 2.5% increase of the remuneration according to the new framework more than compensates the €29 million impact of positive settlements accounted for in the first quarter of 2015. Operating expenses improved 5.6%.

In the U.K., EBITDA fell 2% to £404 million with a £17 million decrease in gross margin affected by the profiling of the RIIO-ED applicable from April 1, 2015. Gross margin dropped 3.2% but net operating expenses improved 9% as operating income rose £8 million due to larger works for third-party.

In the U.S., EBITDA was 36% up to $550 million including $250 million coming from the UIL consolidation and the normalization of certain seasonal impacts. Nevertheless, still EBITDA in the US GAAP is $739 million, $189 million still above the IFRS at EBITDA level. In the annex of this presentation, you have a reconciliation between the US GAAP and the IFRS.

Finally, Elektro EBITDA fell 12% to R$387 million with 3.5% lower energy circulated and lower tariff due to the August 2015 full-year review reducing gross margin by 7.7% while net operating expenses remained flat.

Generation & Supply EBITDA decreased 3% improving the first quarter 18% full, reaching €1,226 million, with improvements in operating results, partially offsetting lower gas results in Spain and €23 million of customer compensations in the U.K.

In Spain, EBITDA fell 2.5%, reaching €756 million, thus improving the 31% fall in the first quarter. Gross margin was up 1.4% as higher output driven by a 22% increase in Hydro production and a 3.8% increase in nuclear together with our better retail results compensated the lower gas results. Net operating expenses were up 15% still affected by $42 million of non-recurring results.

Levies were down 3% as new positive court rulings in the first half of 2016 were higher than the one in the first quarter of - in the first half of 2015 by €70 million. This is mainly due to a €60 million of a positive court ruling accounted for in the second quarter.

In the U.K. EBITDA grew 1% to £206 million with a 1.2% decrease of gross margin and a 2% and 2.9% increase in net operating expenses offset by 23% decrease in levies. Wholesale & Generation business gross margin increased 7.9% following Longannet closure and higher gas output and lower procurement costs are positively affected by a negative £20 million derivative impairment in Longannet in 2015, partially compensated by higher carbon tax for £17 million.

Retail business, gross margin fell 2.7%. Higher unitary margins in gas did not compensate 15% lower gross margin retail power due to the increase in non-energy-related costs, lower volumes driven by milder weather conditions in last year and the already mentioned customer compensation.

In Mexico, EBITDA fell 7.9% to $235 million affected by lower margins in contracts with private customers as a result of the fall of the CFE tariff. EBITDA will recover throughout the year as new capacity comes in operation, and as the Chairman has mentioned, CFE tariff has increased in July.

Renewables EBITDA fell 3% versus the first quarter 3.1% increase, reaching €836 million due to the weaker performance in the U.K. in the second quarter of 2016, partially offset by better performance in Spain and the U.S. Gross margin fell 3.9% but net operating expenses improved 6.8% with €21 million of positive one-offs accounted for in the first quarter.

Spain. In Spain, EBITDA reached €320 million, plus 23%, driven by a 7% higher output and including €54 million of an account receivable generated in the first half due to low prices in the market. In the U.K., EBITDA fell 34% to £160 million as a consequence of 26% lower output, lower prices and LECs removal from August 2015.

In the U.S., EBITDA increased 4% to $311 million, as a result of 10% higher output more than offsetting the lower and merchant prices. ITCs are now accounted for as other operating income both in 2016 and in 2015, with an impact of $34 million in 2016 and $40 million in 2015.

In Latin America, EBITDA decreased 2.2% to €37 million, negatively affected by the real devaluation. In local currency, Mexico EBITDA improved 6.2% as a consequence of additional capacity but Brazil is down 14.4% in euros due to 25% real devaluation despite growing 7.4% in local currency.

In the rest of the world, EBITDA reached €50 million, 4.4% down due to the 11.8% lower output partially offset by lower net operating expenses. EBIT increased 3.9% improving versus the first quarter 77% fall to €2,254 million. Amortizations fell by €56 million driven by the closure of Longannet and the extension of the useful life of wind farms, more than compensating the UIL consolidation.

Provisions grew €23 million, up €123 million affected by the UIL consolidation and an €8 million of one non-recurrent positive impact in the first half of 2015. Net financial expenses improved 30% to €361 million. Thanks first to €50 million reduction in debt-related costs driven by a cost improvement of 69 basis points from 4.2% to 3.5%, and despite at €2.2 billion increase in net average debt due to the UIL consolidation. And second due to €107 million lower non-debt related costs including €97 million of market value of positive FX hedges mainly due to the British pound depreciation and a €25 million as a consequence of other positive feedbacks.

Recurring net profit increased 13.8% to €1,427 million, thanks to the already explained improvement in operating results and lower financial expenses. Reported net profit increased - sorry, decreased 3.3% to €1,456 million, driven by the €220 million of non-recurring tax profit in the first half of 2015 that will be offset by €230 million after taxes of Longannet impairment accounted for in the fourth quarter of 2015. I repeat this, there is going to be an onset of this €220 million by €230 million after taxes of a Longannet impairment accounted for in the fourth quarter of last year.

In the first half of 2015, reported net debt on a pro forma basis includes UIL debt. As a consequence on a pro forma basis, first half 2016 net debt decreased €576 million to €27.28 billion, thanks to €899 million favorable exchange rate impact, more than compensated the €323 million of cash flow needs driven by higher investments and dividend payments.

On a reported basis, our debt increased from €26.2 billion to €28 billion. Our business performance along with our hedging and strategy on a pro forma basis improved slightly our leverage ratio, reaching 41.4% at the end of the first half of 2016 versus the 41.6% in the first half of 2015.

All our pro forma financial ratios including the 12 months of UIL improved. Our net debt to EBITDA reached 365x from 3.75x in the first half of 2015. Our FFO over net debt has strengthened to 22.4% from 21.1% improving also on a reported basis, and our retained cash flow net debt also improved on our pro forma and reported basis to 19.7%.

The Group has a very strong liquidity position in this volatile environment covering more than 24 months that has an average maturity of our debt of 6.2 years keeping a very comfortable maturity profile. Thank you very much.

Question-and-Answer Session

A - Ignacio Cuenca

Okay. We are going now to start with a Q&A session and thank you very much for using our web page for doing it. The first block of questions are coming from Javier Suarez, Mediobanca; José Javier Macquarie and Stefano Bezzato, Credit Suisse, and is related to the Brexit. Measures the company is taking to mitigate the Brexit? How are you going to offset the negative impact of the pound depreciation with trending the 2016 guidance? Do you envisage any negative impact on your targets from 2017 from the new post Brexit FX scenario?

Ignacio Galán

So as I mentioned during the - normally our company is already hedging currencies at the beginning of the year, so all our - for 2016 result as I mentioned all the currencies are already hedged and the pound is fully hedged. So also I think it’s in our portfolio of businesses is a certain, as I mentioned as well, it’s certainly balanced in currencies. So I think it's practically we have already seeing contribution of the British operation to the American operations, so I think if normally if we have certain natural hedge between one another because one is already devaluating normally the another one have already have better performance. In any case, we will see what is going to happen from now to the beginning of the year in what is sure is next year. As always, we make, at the beginning of the year we will make the hedge, but I think we had already these natural hedge as we have seen for instance with reals in Brazil. I think we had been already - the beginning of the year already was already - was rate of a change and now it’s improving. So dollar is already a bit moving in the better position and pound is slightly devaluated but we should see.

In any case what issuer is doing this year, the thing is fully covered and this year we shall see what is the situation to made necessary hedges as well.

Ignacio Cuenca

The second block is coming from Carolina Dores, Morgan Stanley, and Martin John, Royal Bank of Canada, and it’s related to the guidance given in this first half presentation. What are the drivers that are leading to the increase in net income guidance but not EBITDA? Is it lower financial expensive taxes, renewable guidance took it down to equal but net profit guidance boost? What are you performing versus prior expectation?

Ignacio Galán

Well, one is precisely the consequence of this hedging. So we are hedging the net profit and I think the consequences is already that EBITDA is suffering but I think the net profit is up [ph], so financial expenses is more which is already conducted to the situation probably as well in taxes we’ll have something but I think certain in the area of financial expenses, we will have already the advantage. Related - you mean something about renewables as well, do you?

Ignacio Cuenca

Yes, that the renewables has been tweaked down to equal, but the net guidance of the Group is boost, if that means something related to the evolution of every year or was that at the end of the year?

Ignacio Galán

Well, the experience is that the normally the wind - we are dependent very much of the wind condition in the period but I think normally second half of the year, wind is already improving in certain areas. I think we’ve been affected very much in the first half because of the low wind condition in Britain that we expect in the second half that will improve a bit. Same in United State. Last year was very bad. This year the first half is improving because [indiscernible] is already affecting most positively and we expect that this is going to continue.

In any case I think what we are putting is already to maintain but could be to maintain to increase EBIT to decrease EBIT that is going to be a significant effect on the full result of the Group in this context.

Ignacio Cuenca

The clarification link to this guidance given is coming from Isidoro del Álamo from BBVA and from Fernando Lafuente, N+1, and is related to the net profit guidance growth is based on recurring or reported basis?

Ignacio Galán

No, I think it’s in recurring. So I think what we are expecting is in recurrent basis as a consequence of the things which are going on and the investment which is we’re put in service and the reduction in cost et cetera, et cetera. We are already - there is reported but I think what we are making already - what we are already making is that - what we are seeing is a convergence from beginning of the year to the end of the year which was recurring and reported. So when we are talking about a growth, probably two-digit growth in net profit, we are saying recurrent and we are saying already reported, both.

Ignacio Cuenca

Okay. Manuel Palomo, Exane BNP; José Javier Ruiz, Macquarie are doing the traditional question related to Paco Martínez-Córcoles about the hedging level in Spain for 2016, 2017 and 2018?

Francisco Martínez-Córcoles

Well, for 2016 all the expected production is already sold or better said hedged at a price of around 16, so 58.4 or something if I remember well. For 2017, it’s about, if I remember well to 85% of our expected production is already hedged at a price little bit higher than the previous one, so it’s 59-something.

Ignacio Cuenca

Okay. Carolina Dores from Morgan Stanley is asking us about the - as a reference if we can detail something about the final RAP [ph] approved for in the Spanish distribution business linked to the current regulatory scheme that has been approved.

Ignacio Galán

I think it’s €9,000 million - as I mentioned it’s €9,600 million. Let me check. €8,690 million, so which is after long negotiation which is something which looks reasonable and that as well has been approved a new remuneration scheme which this remuneration scheme is already, let's say, transparent basing these graph and from now onwards like in the rest of the countries, it will have the new investment. It will be the depreciation et cetera, et cetera and that is allows ourself to increase the remuneration because of as a consequence of the investment done by 2.5% to €1,750 million in 2016, and next year will be made review of these in the same terms as well.

I think these framework it stands up to December 2019, so January 2020. So from now to 2020, we will cover with a system and with a methodology which is perfectly transparent and is already in the real decree which is already all this one.

Ignacio Cuenca

Okay. We have now a question related to Mexico from Virginia Sanz, Deutsche Bank and Carolina Dores, Morgan Stanley. Can you give more color on the Mexican operations? Should we expect EBITDA to continue to decline in the second half of the year? Are price stable in 2017 versus 2016? Could you explain how the CFE tariff review work? Is that on the annual basis? Thus the new higher tariff effect all existing output under CFE contracts?

Ignacio Galán

So first I think almost 80% of our business, correct me, Paco, is already not affected by CFE tariff. I think it’s already a contract with - is already linked with asset with performing of those assets not linked to the variable cost of this one. With the tariff of CFE as a methodology which the CFE approved but I think is very complicated put in lot of things in the basket and I think during the last months, these basket has already worked in negative manner. Now it’s already working in positive one and that’s way this increased by 9.6% for the next few months I think probably up to the end of the year, Paco. But that is only affecting to 20% of our businesses which is already related to that one. But in any case, Carolina, you like I kind of already provide to you the detail how that is already made by CFE because this already is a public system how they evaluated all those things. Saying that I think that is an opportunity thing [ph].

Nevertheless that you know at this moment the 2,500, 2,800 [indiscernible] contraction so most of them are already not CFE related price. It’s already, yes, bilateral contracts with CFE which are already paying in terms of the fixed costs we are incurring, okay. And I think certain I think is very important to say that because of this increase in the tariff plus the put in service of the 700 megawatt, the EBITDA by the end of the year increases, no doubt on that one. I think Mexico is growing our businesses as a consequence of the investment we are just going to put it in the place with this GRE [ph] 700 megawatt the new ones plus this increase in the tariff which has been negative affecting the first half of the year. They will affect during the second half.

And I think that growth will continue. Next year we’ll put in service another 1,000 megawatt. In the following year, we will make another 1,000-some personnel. So I think that is going to be a recurring increase in our EBITDA contribution for Mexico business during the next three years, four years.

Ignacio Cuenca

Okay, the next question comes from Manuel Palomo, Exane BNP. And he says, could you please comment on the drop in the unitary revenue, Euro megawatts hour in the U.K. for the onshore wind assets and what is your expectation for 2017?

Ignacio Galán

So I think, you know, during this year the onshore has been affected by something we [indiscernible] which has already reduced approximately £11 per megawatt hour. So I think in the case of Britain we’ve been affected for two things, lower wind results and lower price because there are certain tax allowances. They has already disappear which represent roughly €11. So nevertheless the price we obtain in Britain, I don’t know if we sell in this moment but I think it’s onshore is on the line of £90 or £100 on this line. So I think it’s a reasonable price but it has been affected for that one. Offshore the prices is much higher, so in the case of West of Duddon Sands is on the range of 140, 150 and in the case of East Anglia is on the range of 120, 130. So but I think on the onshore is on the range of let's put the number. I can't give you the percent, I don’t have in front of me now but on the range of £1,900.

Ignacio Cuenca

Okay. We have now a block of politically driven questions coming from Javier Suárez, Mediobanca and Cosma Panzacchi from Bernstein. And the first one is US election risk and opportunities after that coming election, and regarding Spain, kind of generation outlook. And Cosma says, given lately particular [indiscernible] and considering that one of the key points of [indiscernible] program was to reform the taxation on these new tech solar generation. Do you expect that current regulation on self-production to change? If yes, how could this impact solar growth power demand and prices in the country?

Ignacio Galán

So well, related to United States, I think it’s the only thing we know is that is already the primary election seem that there are two candidates, one from the Republican side that has been already a nominated, another one from the Democratic candidate. We’re probably going to nominate in the next few days. So you know the system in America is very counterbalance. I think we are more dependent on the regulation of the state and the federal itself. So lot of regulated business is important there already our rate case signed in New York is important too to have already the main rate case sign and to have a good negotiation with a main rate case. And in the case of Renewables I think all of them are already done so those one which are under PTC system and ITC system their own way and they are already PPAs in which we are already contracts with private people selling our energy for the next 15 or 20 years.

So the changes in development, they can already depending one another one. They can make a policy which had be more in favor or at least in favor of certain technologies and that will already affect our decision to make more or to make less in due time, but I think I would like to insist that the effect of the regulators of the different state has a tremendous influence in decisions for our businesses, and that is today is the case of New York is fully covered. In the case of Maine, it’s fully covered. And in Connecticut we are already now in negotiation of the new rate case.

So really to Spain please, let's say what is going to happen. I think in last opportunity we met already I was saying that the Spain is a democratic country that we are sure that we will reach a good government in due time. We will already produce the stability that the country requires and that then we’ll get for ready continue making the reform that the countries need. So I think the things are going on and going not to pronounce what is going to be the partners in this government, let's see, let's meet that the politician made the awards and they have already done something yesterday important, the nomination and members of the channels and now they see what is going to happen from now to the date in which they will decide to go to these nomination of the government. So we should see what is going to be the government and afterwards we’ll kind of already be able and ready to tell you what can be the consequences why we - they make anything but we cannot say things before even they are already the people which is going to run this business in the country.

Ignacio Cuenca

And this question is coming from Cosma Panzacchi as well, and its related of possible fiscal measure in Spain given the European Union procedure due to the excessive Spanish deficit and the plan to increase in corporate taxes. Could you please give us an idea of how you expect your tax rate to evolve from 2017 onwards?

Ignacio Galán

Well, that is not something new. That has been imposed as well in 2012, not Pepe?

José Sáinz

Yes.

Ignacio Galán

So the fact I think we are collecting in this moment is already we have balanced taxation, so I think when we make already the final liquidation, we are already been compensated and I think in this year we compensated. What they are trying now is that we could continue already funding and financing the system. I think you don’t remember by the number, the range of €200 million of - or the advance payments of taxes which I think is an important amount but it’s an amount in our case which we can, as you see, easily already manage.

Ignacio Cuenca

Next question comes from Javier Suárez and it’s related to the Brazilian situation and expectation for the next tariff review in the second half of this year?

Francisco Martínez-Córcoles

Yes, the only time review that we are going to have in Brazil is the inflation effect that will be included in Elektro area partly and these could - I mean partly of the year because he has asked the second half and this could account form if I remember well, about five - [indiscernible].

Ignacio Cuenca

Next question is for Paco as well and it’s coming from Cosma. Spain Generation & Supply, could you please detail how much of the improvement in the second part of this - part of this semester can be attributed to the performance of your retail operations? Could you comment on the update of your new commercial offers and the average retail margin that we are recording in the market?

Francisco Martínez-Córcoles

Okay. Well, the new offers are going very well to the market and we have increasing demand of these things especially all the efficiency related and new products as solar or other tariff second residence and et cetera. So the offerings are going very well and these will for sure improve or help to improve the results of the next and coming months. And which part of the first half has been devoted to margins in retail? I would say 50% of this is very difficult to split the retail part from the wholesale operation because we operate there within integrated but I would say about this.

On margins it’s probably the secret then best kept so it’s almost impossible that somebody tells me the margins in retail.

Ignacio Cuenca

Two last question. First one coming from Fernando Lafuente, N+1. The impact of the change in accounting of the ITCs. On this basis, can you give an estimate of where could the depreciation and amortization ends in 2016? Lastly why have provision increased in H1 versus 2015?

José Sáinz

Okay, the ITCs actually have a slightly negative impact on the growth of the EBITDA because the ITCs reclassification and this year is €35 million and last year it was €40 million, so actually I mean the impact is even slightly negative in the EBITDA growth in the U.S. because we are also reclassifying past exercises.

In terms of the amortizations and provisions, I think that this year it’s going to go below last year. This is due to one, the closure of Longannet. Second, as we commented the extension of the useful life of the wind farms. And third is the depreciation of the currencies, the Sterling and the Real. All of that impacts are going to more than compensate the increase in the UIL contribution. So we think that the amortizations and provisions are going to be for the year somewhere between €3.2 and €3.3 billion.

In terms of the increasing provisions, as I mentioned the €20 million increase is basically explained first by the contribution of UIL which adds €10 million to the provisions and second to an €8 million of a positive non-recurrent impact that we had on the first half of 2015, and that explains 90% of the increase in provisions. There is a slight increase also in provisions for bad debt but the impact is negligible.

Ignacio Cuenca

Okay. And the final question is coming from Carolina Dores, Morgan Stanley, and it's can you give more details on the positive court ruling which benefited the Spanish liberalized business in the second quarter of this year? Will that imply a positive effect from 2017 onwards?

José Sáinz

Well, the impact - well, the reason for that is that there has been some regional governments that have input kind of environment double taxation to us and we have actually won that case because you cannot double taxes, same item in the - for two times and that has bring and deliver us business around €60 million. This is not going to be that exact case. It’s not going to be repeated next year but still we have several court cases that we think that we will be winning this year and next year, so we are still expecting positive performance on the taxes in the following years on the levies for the following years.

Ignacio Cuenca

Okay. If there are some additional questions for the question we will be pleased to answer them from our Investor Relation department. And just to comment to end with this event, we are now going to introduce you our new line magazine called Actualidad Accionistas, Shareholders’ Update, which covers the company events happened since the last annual shareholders meeting. And now I will pass the word over to Mr. Ignacio Galán to conclude this event.

Ignacio Galán

So thank you very much for attending this presentation. So already particulars are this five because I think once again we were saying to you that negative effect in the first quarter is consequences of certain non-recurrent situation is going to be diluted across the year and you see the result is going in this direction. So I would like to summarize in the sense that the company continued performing well that our expectation in terms of net profits is very positive for this year and probably we will go levels of growth on the two-digit and even with negative effect of the TX [ph], we will expect already the EBITDA as well to maintain our growth in the levels of 5%. And that’s allow ourselves to keeping to maintain our dividend policy in the levels we have already said that the shareholders will benefit from these situation always on the payout ratio 65%, 75% area.

So thank you very much and we will have the opportunity to contact with yourself again after summer. Enjoy your holidays. Thank you.

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