Gas Natural's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Gas Natural (GASNF)

Gas Natural Sdg (OTC:GASNF) Q2 2012 Earnings Call July 24, 2012 4:30 AM ET

Executives

Rafael Villaseca – CEO

Carlos Álvarez – CFO

Analysts

Fernando García – Espírito Santo Investment

Alejandro Vigil – Cygnus Asset Management

Megan Medina – JB Capital

Alberto Gandolfi – UBS

Pablo Cuadrado – Bank of America/Merrill Lynch

Gonzalo Sánchez – BPI

Carolina Dores – Morgan Stanley

Javier Suarez – Nomura

Javier Ruiz – Paribas

Jorge Alonso – Societe Generale

Antonio López – HSBC

Operator

Good morning. Welcome to the presentation of results for the first six month period of 2012 of Gas Natural Fenosa. A presentation will be done by the CEO, Mr. Rafael Villaseca; together with the General CFO, Mr. Carlos Álvarez; and the Development and Strategy Director, Mr. Antonio Basolas, after the presentation we’ll have a time for questions and answers for people here in the room and those of you who are following us on the Internet or by teleconference.

So I will pass the floor to Mr. Villaseca.

Rafael Villaseca

Good morning, everyone. I want to first of all thank you for being here physically and remotely. And we’re going to start with the day’s program. First of all, I’m going to talk about the highlights of the period, the first six months last quarter, then we’ll talk about growth of international operations and then we’ll talk about financial, most relevant financial events, analysis of operations and conclusions. After that, we’ll have time for questions and answers.

So if we go into the main magnitudes, the main figures of this six-month period, we have to underline that the net income of the Group has gone down by 6.7%. That has to do mainly with the lower levels of production income as a result of divestments. And if we adjust for that, profit after tax grew by 24% this year as regards last year.

The EBITDA, consolidated EBITDA for this six month period is €2,559 million, which is a growth of 7.3%. If we adjust that EBITDA and we bear in mind that last year, there were divestments, and this year there have been none, we have less assets in operation in this EBITDA, the EBITDA would have grown by 10%. So we’ve had this growth of 7.3% in spite of those disinvestments, in spite of the market conditions in Spain and the impact of the Royal Decree Number 13 in Spain that I’ll talk about later.

In terms of investments, they’ve gone up by 3.3%, up to €535 million and in line with our strategic plan and objectives and this we’ll deal with later too. Our net debt is €16.9 billion, that’s minus 2.3% as regards last year and we continue to comply with the aim that we set ourselves of finishing the year between €15 billion, €16 billion.

It’s important to point out given the relevance of our financial matters for our company at this time. As you know, one of our aims in our plan is to organize our finances and we no longer need to go to the financial markets, we’ll not need to do so over the next 24 months because we have enough cash, more than enough cash. And we have to also insist that our cash – structural cash flow is positive. So we generate money after CapEx and dividend payments to cover our investment needs.

And these investments, only one-third of them are maintenance operation, so our margin as regards capacity for investment is really very high. We’ll talk about that more later. I want to now have a look at the shareholder remuneration policy based on the strategic plan. Our payout is 62%, which gives us a profitability per dividend of more than 6% than last year. Our total dividends paid out at the beginning of this six-month period were €821 million, which means an increase of almost 11%. The scrip dividend had a success rate of 18%, which meant that payment in cash was €379 million.

It’s important to point out the regulatory measures introduced by the government and we’re going to talk about the new measures that might be come into force. You’re very familiar with all these things. We’ve spoken about the problems, the electric sector in Spain, three measures have been approved by the current government since it changed.

One was the Royal Decree, 1/2012, which meant a temporary suspension of financial incentives for new facilities under the special regime. This has been a measure whose effects won’t be felt until – practically until 2014 because there’s still commitment to cover the subsidies in some of our end plants that were inscribed under the pre-registry or pre-registered, so this Royal Decree, unfortunately, this year or next year will not practically have any impact.

Then we’ve got Royal Decree 13, which we’ve spoken about, we’ve mentioned, which was associated with a tariff increase of €1.39 billion and which led to a reduction in costs, especially in the traditional sector of €1.7 billion. The impact for our company, we’ll see the details later, was as regards distribution with a reduction of €111 million as regards what we had foreseen for this year. And finally, we’ve got the Royal Decree 20, which shows introduced a series of measures in costs, extra peninsulars, transmission, higher access charges for low voltage and territorial supplements to cover regional taxes.

As from now, these taxes will be associated to the tariffs of the different regions of Spain. These are the three measures that the government has introduced and we are waiting for the more definite adjustments that are pending. Why are they pending?

Well, you know that we still have an unbalanced system and that it will be difficult for to comply with the €1.5 billion deficit that’s been foreseen for this year. The government’s made some statements, that have been appeared in the media about what sort of measures that a pending might be introduced.

We’ve known through the press, but this hasn’t been officially confirmed, there are some supposed measures of the government that haven’t been confirmed officially. In accordance with this and the statements, general statements of some members of the government, we would be facing a spread of deficits using a new tax regime and there’d be different taxes that would try to solve the problem that we’re in.

And there’s talk, this is not official, but there’s talk about putting a tax on generation on the basis of an amount that would be set based on how much you sell with a progressive increase. And there’s also talk about tax on hydraulic and nuclear production, which would also be unofficially associated, no confirmations being given, associated with the periods of the concessions.

Good, we’re waiting for all this to be confirmed, if it is confirmed, but at Gas Natural Fenosa, we still see the things in the same way. The regulated tariff deficit system in Spain has €10 billion a year in subsidies. Until that problem is solved, we believed it is simply impossible to solve the tariff deficit problem. We’re talking about huge amounts that affects the whole electric system and there is no comparison with any other country in the European Union.

So something will have to happen. Obviously, one of the alternatives is to apply taxes on the cost of the product and another one is to address it in a different way. To say that the solution has got nothing to do with the problem that you can see clearly in this chart would be to turn a blind eye and it will be useless because these €10 billion, which is still growing, is going to have an impact.

We believe the government is working on this. This is a clear situation and I think that they’ll have deal with it and whatever they do they’ll have to solve the main problem which is, as you see, almost 60% of the costs that are administered by the government under the Spanish system are subsidies of different kinds.

Now if we go to a very important chapter, I’m going to allow the second section of this presentation to talking about our international operations. Now, the EBITDA generated from international operations accounts for 42% of the company’s total EBITDA, we’re very satisfied. It was one of our aims, which has really sped up in the last few years and we’ve got 43% of our EBITDAs international of which 57% corresponds to our Latin South American activities, 33% to our international gas activities where we include infrastructures and sales, finally 6% of that is the rest of Europe and 12% the rest of the world.

So in accordance with our strategic plan and the circumstances that we’re in, we are highly satisfied of how well our international business is going and this can be seen clearly, it’s not just that the EBITDA of the international activity is just 42%. No, but on top of that EBITDA has grown in the six-month period by almost 32% as regards the same period of the previous year.

It’s based this growth on the activity of the gas activities in the world, infrastructures and sales, which have come very well and Latin American activities, you know that we’ve clearly committed ourselves strategically in the company with these operations and we’re trying to capture opportunities in the whole world in energy and especially in natural gas.

Now if we look at the sales, international gas sales, the international – sales to international customers have grown by 45%, that’s more than 47,000 gigawatts per hour per year. On the international markets, 30% of the volumes of gas that we sell go are – for these are sold on the international market and we have a very important network of activity. You know that we’re not pure traders, we have final customers that we try to make loyal in the long-term. This has been a success. We’ve got commercial activity in France, Belgium, Germany with customers.

The final portfolio at the end of the last six-month period was about 16 terawatts hour per annum, sales in this region have grown by 18%. This is all based not only on our organization but our own fleet of methane distributors and generators, our liquid gas facilities and the expansion of our activities the world over and a good example of this is that the sales of gas in countries beyond the EU has grown in the last year by 60% compared to the previous year.

That’s all due to the fact that we have a situation where the segments of the gas market present with opportunities that we think will be preserved and will be maintained over time. It’s absolutely clear that our strategy will focus on maximizing the value of supply contracts on the Atlantic and Pacific.

In the Atlantic and Pacific Basins, we will make use of the fluctuations of these markets and we are going to try to maintain and consolidate that strategy by or through two to three-year commercial agreements. In the Atlantic Basin, for instance, the Puerto Rico contract and several contracts in South America that we’re working on right now. And the Pacific Basin, you know that we have mid-term contracts with customers in India and the Far East. And within that strategy, we would include the contract with Cheniere for 5 bcms of LNG without limits on destination.

Continuing with our international activities, in Latin America in terms of gas distribution, there’s a higher potential for growth. In terms of growth of networks, we’re almost near 6 million points of supply, connection points. That’s an increase of about 4%, and the sales of gas through these networks have grown by 7%/, the EBITDA has grown by 3%.

As regards the same but for electricity, the importance of our growth can be seen in the fact that we disinvested in Guatemala but our electricity sales have gone up by more than 6% and the connection or supply points have grown by almost 4% EBITDA increased by 32% although as we warned last year, this figure should be taken – should be adjusted because there was an exceptional tax supplied in Colombia last year, which is not applied this year so the comparison is affected by that factor. But apart from that in any event, growth is significant and clearly positive.

Now if we go to our P&L account, these are the results. Our net sales and EBITDA have grown by almost 8%, more than 7%. EBITDA is €2.5 billion. And apart from disinvestments, this 7% growth of our EBITDA, if it hadn’t been for those, disinvestments would be about 10%.

Amortizations have increased by 2%. Our provision is 24% basically due to the situation of the Spanish market and the operating income is €1.58 billion. Financial results are negative logically, but lower than those last year because of the lower cost of our debt. And those are the reduction in our debt, which is sustained that leads us to an income before tax of €1.15 billion, which ends up in €1.6 billion after tax. The reason for that is the adjustments that we have not had to introduce this year. Had it not been for that, our income before tax would have grown by 24%.

Now if we analyze EBITDA, the makeup or breakdown of the EBITDA, you’ll see that distribution in Europe has been 5% less in the EBITDA breakdown than last year. Why has that dropped almost 11% that EBITDA distribution? Well, because of the Royal Decree Number 13 this year, which led to a reduction of 10% in this regulated activity.

In terms of gas, practically flat as regards last year. This has to do with divestments that we’ve made. A comparison of connection points in the region of Madrid when you compare to last year’s situation that can be seen.

In terms of the electric business, there’s a negative result, 2% and it focuses on the Spanish business. Why is that figure negative? Well, because of the divestments in Arrúbal (inaudible) last year and also the energy mix problem from two points of view. One of them is that we’re selling less because of divestments and because of the costs. Hydraulically, this year has been very bad and that mix increase leads to margins that are slightly worse, so all told the ordinary regime has gone down by 5% in electric results in Spain. Not the same applies to the special regime, whose EBITDA now has gone up by 15% that has mainly to do not only but mainly to do with the wind energy activities of the Group who have been very positive.

In terms of gas, there’s been a 52% increase mainly due to the international activity of the company which has led to an increase of volumes and margins. And in Latin America there is a growth of 9% of our results, very much based on electric distribution but also the gas distribution is very positive. So at the end of the day, we’ve got a total growth of 7.3% in our EBITDA, 10% if we don’t take into account divestments of last year.

In terms of our investments, €535 million, €17 million more than last year, so there’s practically – well it’s the same, slightly higher, and this has to do with regulated business as you see and we’ll talk about this in a minute. And also the investment in Torito, the hydraulic plant 50-megawatt hydro plant in Costa Rica.

We are very, very well disciplined financially, continuing to be so and this will reflect the adjustments and cut backs, regulatory cut backs, the Royal Decree 13, this year we knew about it in April. And, obviously, the company introduced the measures that were necessary to adjust its investments to the regulatory situation of the country. So naturally in the second six-month period, in electric distribution especially, we’ll fill up the effects of the adjustment as a result or consequence of the reduction of the remuneration of that activity in Spain.

But anyhow, one-third of our investments, only one-third of our investments have to do with maintenance. So two-thirds are decisions of the company that will be reviewed at the time. And our actual priority is to maintain our financial targets based on what other regulatory adjustments are introduced.

As regard the securitization of tariff deficit, it’s nothing new here. But we must say that in the six-month period, the company had an income of €367 million from the FADE fund, which reduced the debt that we have with the electric system. The total deficit at the end of June including not just the deficit before but also in that period is €1.67 billion. So we are waiting for the financial situation improves and we can solve this big issue that the system has. But it would be good before we move forward to analyze our debt.

First thing we should remember is that we have a very strong financial control policy. That’s our main priority and will continue to be so. If we look at our commitments since we took on debt to acquire Unión Fenosa, we’re talking about €1.16 billion, which is near the €16 billion – €15 billion to €16 billion that we had agreed on and that’s 53.3% as a whole.

In this first six-month period, we’ve had a negative impact that has to do with the fact of the new regulation to pay taxes beforehand and also the Supreme Court decision as regards exports which we lost, the case that we took to the Supreme Court, which led to a loss of cash availability. That won’t happen again. If that hadn’t been the case, we would have even reduced our debt further. But in any event, it’s important to remember that since the beginning of our debt, we’ve reduced it by €1.9 billion since we started taking on debt. And this has to do with the structural cash flow system and the stability of our company and the disinvestments, the divestments that we’ve made.

As regards to the debt structure, 75% of it is fixed, 25% is floating debt and the prices are very competitive of our debt. As you can see, if you look at the cost that come up in the P&L account, 82% is in euros and 59%, which would be 62% if we discounted the deficit, is in the capital markets.

As regards our profile, debt maturity profile as regards to this €16.9 billion, we’ve tried to extend the profile, the maturity profile significantly, so that 77% of our debt will mature after 2015 and the average life of our debt is five years and we now have our needs covered for this year – for next year and we’re working on 2014 right now. And that is the case because we have a very ample liquidity, €2.5 billion to cover those 24 months, of which about €4.3 billion are in cash and €4.5 billion in loans and available credit.

So all that should be improved by more than €5 billion that we have both in Europe and in Latin American programs. It’s important to underline that after the closure of this – after this closure in the month of July, the company has signed for loans for up to €1.2 billion at five years and €300 million at three years, which increased the capital that we have available. The average weighted life of our debt is slightly less than three years and that is the result of our very proactive policy of maintaining healthy levels of liquidity.

Carlos Álvarez

And now let’s talk about the analysis of our operations and I’ve already talked about the non-European operations. Now I’m just going to have a quick review of those that we have in Europe and most specifically Spain, with regard to the power distribution, sales have maintained a slight drop in activity of about 0.5%.

The Spanish market is almost flat. We’ve put in a lot of effort there. We’ve improved our quality of service and we’ve improved efficiencies, this means that we can recover the €111 million that it cost us per year according to this Royal Decree 13/12 and we have reacted to this with regard to our policies, we have increased our operating efficiencies and we’ve been able to minimize the impact of this loss of sales.

And therefore EBITDA has reduced by 11.7%. And I would like to say we will try to reduce it with regards to these efficiency measures, which I’ve already mentioned and they are now up and running, they’ve been implemented. We’re talking about the gas distribution in Europe would fall here. Well it’s basically related to Spain as the majority of this drop is in Spain and the drop in sales is around – is 2% and mainly just related to the divestments that were carried out last year. If you remember, we sold connection points in Madrid. Had that not been the same, this ratio would be almost flat with regard to the volumes of our sales network.

But what we are growing in with the connection points as you can see here is more than 90,000 connection points in six months, which we’ve been able to capture, and what this is a result of the fact that the Spanish gas market isn’t mature yet and in spite of the situation in the country at the moment with especially the real estate market still means that there are important opportunities available to offer gas to homes, which to date they were not enjoying the benefits of natural gas.

But despite the fact that there’s very low activity in the new construction market for homes, but the inhabited properties that exist in the market but it didn’t have gas, which means that there’s still possibly there to grow because there’s a very low level of gas in these properties compared to other European levels.

And as I said basically due to the divestment, EBITDA we’ll achieve €451 million, which is a decrease of 2.4% when compared to last year. Had the divestments not occurred, the EBITDA would have grown by 5%.

With regard to the gas and electricity supply, which are almost practically totally liberalized, it’s important to highlight that the traditional demand for gas in Spain has grown 7%. This demand is reasonably consolidated and this is – well even our sector has gone up 8%, and this is due to the residential market to a certain extent and this is due to the weather has improved. This has been an increase of around 6% in the large consumption market, which is due to the industry. With regard to demand for electricity, this is almost flat demand, hardly any changes with regard to the previous year.

Now let’s go into further detail about this. As you can see here in the screen, the production, we’re now talking about the production of our Group for electricity, it went down 2.7% and mainly this is due to the ordinary regime. The ordinary regime, there was a reduction of 3.7% mainly due to the fact that we have 70% of less hydro production because it’s been a very dry year and especially in the Basins where our company works, which is in the Galicia area and in the Tajo River. So this has caused an important impact as I said due to hydro and it’s had an impact on the cost since there’s been less generation of hydro power.

Now with regard to currency, the other side of the question is that we have had higher volumes within the special regime and in co-generation. It’s important to highlight the fact that these lower volumes in ordinary regimes that are related to the divestment in Arrubal and (inaudible). And when we’re talking about the supply, it’s very important to say that our policy to maintain our portfolio on profitable levels because we’re convinced that the market has still not been affected by the slight increases and that will take place in the electricity pool.

So our policy is to give something in the short-term within the supply portfolio. And this is because the final market will have to include the higher costs of electricity production. With regard to generation costs, they have gone up. And I would like to say yet again that this is due to the higher weight of the hold to mix under the drop of the hydro production.

Now we can see the wind energy had grown 18% here and coal generation went up almost 10%. The EBITDA of the business there went up 16%, reaching €181 million. We’ve got a series of projects in the pipeline, which at the moment are just in the permitting phase both in Spain as well as abroad. And according to the regulation and of course, the financial objectives, which are our priority, we are developing all these.

With regard to the gas market, well, as I’ve already said, the gas market within the residential traditional sector is a positive situation because almost 7% in Spain and 80% with regard to natural gas, the residential market have got double-digit increases and, obviously, this is related to the thermal issues but also the high consumers within the graph, you can see there’s a 6% growth and that’s highly leveraged with the industrial consumption.

Well, at the end, natural gas in the face of a negative market seems to taste a drop in the consumption of gas for electricity, which as a whole gives a negative 2% but natural gas has had an increase of 4.7%. And the VAT is added to the increase in our sales outside Spain, which is around 50%, it means that our gas activity and volume has gone up almost 14%.

While with regard to Unión Fenosa Gas, with regard to the EBITDA, it’s gone up by 27% and mainly due to the good situation of the international gas market where this company operates, where we have, I should say, we were 50% with an Italian company. The gas supplies in Spain has had 7.3% increase mainly because of the electricity generation and that has been developing favorably.

On the business as you can see on the left hand side, on the national and domestic, you can see there’s been around a 20%. And on the right, you can see the relation of the infrastructures, which are negative due to the less use of the Sagunto regasification plant, also because there’s less activity in the Damietta plant, mainly due to the political situation in Egypt.

And as conclusion, well, I would like to say that we are reasonably satisfied taking into account obviously the very challenging situation. And we think we had reasonably good results in this period. It’s a very difficult market at the moment but we have still managed to get a growth of 7.3% and a net income of 24% growth, which is reported net income minus 6.7%. And we take off – as we said, we strengthened financial structure and we are strengthening our financial policies and we’re still offering good remuneration to our shareholders.

And we’re still convinced that we can continue to fulfill the objective for the targets that we establish for our strategic plan for this year. And we are now going to concentrate our efforts over the next few months to achieve the strategic plans, so now we would like to start our question and answer session and we would start with the questions that are being asked here in the – the people who are present so if you could start please by introducing yourselves.

Question-and-Answer Session

Fernando García – Espírito Santo Investment

I’m Fernando Garcia from Espiritu Santo Investment. I have three questions. The first one is related...

Operator

Good morning, ladies and gentlemen, the Q&A session starts now. (Operator Instructions)

Fernando García – Espírito Santo Investment

The current what is coming from a higher demand of gas, for example from Asia, maybe from Japan. And the second question I would like to ask, you mentioned the possible solution that would come from the generation, all the generation. And I would like the company to evaluate this possible position also from the legal point of view. What is your opinion there? The company has also been mentioning in this presentation possible corrective measures taking into account that the financial situation, the regulation may get more complicated.

And that I think you mentioned that there may be a reduction in investments would take place taking into a case the maintenance issue and that maybe a third of the investments will reduced. Now so could you mention other possible measures, corrective measures in the case that this very difficult situation should continue.

Rafael Villaseca

For the first question, the international market situation, the gas market, which obviously it depends on supply and demand issues. The gas market has various situations, there has been a reduction in price not volumes in the U.S. and also the negative gas prices in Europe and there’s been an increase – an important increase in Asia and the Far East.

Well, we had envisaged this a few years ago but perhaps there’s been exceptional changes in this market especially in Asia on the supplies as we have more demand from the positive exporting gas to countries that don’t have them, for example, the U.S. and also in three or four years we know that we are involved in such projects. And in two, three, four-year period, it would be very difficult to talk or even consider increase of the supply.

With regard to the demand, it continues even though there’s a lower growth level. The Asian countries, China, India are growing at a lower rate but it’s still important growth and of course there is an increase of gas from should we say the Japanese power plants are not working at the moment, so therefore they have higher demands of gas.

We do not envisage important changes and regardless, that will be the global analysis. And in ours, most specifically, well we have launched a general policy for midterm contracts two or three years, which is what we’re finding at the moment. So therefore, it’s very difficult to be certain what’s going to happen in such a very difficult energy market. We don’t think there’s going to be an important change in two or three years in the world situation for the natural gas market with regard to this business rather couple of years, maybe in three years, we started to develop outside Spain.

With regards to the generation tax that you mentioned. I would say, well, we really do not know. There’s not even a draft, legal draft or text that will allow us to study the actual legal scope or the financial scope of the measures. We know the measures could have been published in the press under the declarations that have been quite general one that our politicians have mentioned. But we are not aware of any draft text or any legal text which allow us to actually analyze such message.

But we’ll say the Spanish legislation allows them to apply certain taxes and charges, and this could be developed. But with regard to the scope and obviously with regards to how much this will be, I think it’s too soon to talk about that because we really don’t know what the volume will be or the tax base or what such tax activities would be based on. We will have to look at them. I’m afraid we don’t dare to have an opinion on that. Obviously, we are convinced, we are totally convinced but the problem is not related to generation, it’s related to the subsidies that are being considered for such generation.

So one way to conclude this is to cover this with taxes, with charges, which could be transferred to the products. But another way of doing so would be just to attack the subsidiaries directly. But I have to say yet again it’s too soon to have an opinion on this because we’re not aware of any text that they have asked to analyze the legal relations of this.

Obviously today, when we say that we have certain measures, which means that we can face the restrictions in the market, we are reducing two things at the moment, one is the situation of having extreme liquidity. We’ve got more than €8,000 million in liquidity. That’s one of the ways of doing that. And the other one is that our capacity to reduce investment is quite remarkable.

But we hope that we will not have to apply such measures that we have envisaged to change the current business of the company. But should it be necessary, obviously, not only the excess liquidity that we currently have plus a reconsideration of our investment policy, we think would be more than sufficient to better face up to the hypothetical contingencies but we’re not envisaging them but it seems that today everyone should have some sort of hypothesis to be able to cover such events.

Within that frame, in July we have anticipated certain launches related to the credit facilities of the company and we had maturities during 2012 and 2013. We’ve carried transactions of over €1,200 million and they mature beyond three years and so the current situation means that we’re working to be able to ensure the liquidity of the company, and so we have some sort of leeway there. And so today we have not had to touch the liquidity situation. And therefore, we hope that we won’t have to do anything related to the investments envisaged. Any other questions from the people here in the room?

Alejandro Vigil – Cygnus Asset Management

Good morning. Alejandro Vigil from Cygnus Asset Management. I’ve got three questions too. The first one is a question of time, so this question for which Spain could lose the investment grade over the next few months and this could also have an effect on the companies like your company because to lose the investment grade, what consequences would this have on our current situation of debt or this access to liquidity that you said of €8 billion?

The second question is related to the tax that you’ve mentioned on the CO2 or should we say the green cent on gas, obviously in line with the sort of thing mentioned. I understand that there would be a possibility to apply a pass-through related to tax, not for the regulation of the gas for the tariff deficit for this gas. It seems the situation has improved considerably but have there been any comments with the ministers to be able just to review the regulatory framework related to the gas here in Spain?

Rafael Villaseca

I’ll start with the last question. We don’t think that the problem, the gas deficit is a structure problem. It was a situation last year based on the fact that the volumes went down and so therefore the figures didn’t tally and it was logical that they didn’t tally and so therefore that’s why you have some deficit. Because if you have some deficit when we don’t have good provisions or good budget and so you need to have certain tariffs ready to be able to cover this and so when we talk about the first figures that we got from CNM. So we don’t think it’s that important problem and measures were taken and therefore we don’t expect that there will be more measures necessary to cover this issue and since the government hadn’t launched it even then.

And now the second question, the tax from CO2 and gas. As I said, I said we have no formal evidence or any formal doctrines that we can study, I thought I have read in the press that these €0.04 that may be applied through some gas fuels. This is what we’ve read but this measure is something that obviously will be applied to the product and it will be obviously be applied to the product itself and that’s what we think may happen. But I must say again, we do not have any evidence that will allow us to carry out a detailed analysis.

The first question we’re talking about the Spanish economy, well as we say we will have to react when necessary to apply the measures. When they come up, we will react with our liquidity, with our investment policies in order to fit the company into a new scenario.

Today, it’s not worth thinking there’s going to be more catastrophes unless of course the company will be working to have a very strong financial position. But we’re talking about the free cash flow that’s positive and we need to generate cash. And this is what is happening and this will continue to happen.

The second is the policy for liquidity, which is quite considerable and we have that. And the third one is the capacity to adjust should be a message to our investments.

So we’ve got three strong instruments that naturally they could be complemented along with some other should any catastrophes come up. But obviously we really don’t think that will be the situation.

Operator

Thank you. Any more questions from the floor?

Megan Medina – JB Capital

Good morning, Megan Medina from JB Capital. I’ve got now three questions but they’re very quick ones. The first one, you mentioned the effect of the change in the corporation tax. This is for the first semester, the administration has made several, another change for the corporate income tax, especially on international business. Could this have any consequences on the second semester or on the midterm?

And then second question, what you’ve already mentioned related to the lines that you have refinanced to prolong the maturity dates. Are the conditions very different to the ones you previously had for your other investments or your other finance? And the last question that you said about the Egypt situation, if the government changes in Egypt, could this have any consequences related to the legal situation of the joint venture you have there with the way that the gas investments in Egypt will be carried out?

Rafael Villaseca

I will start with the last question and then I will give the floor to my colleague the other one. The Egypt situation, well I think we see the change is positive. I think it’s necessary the most determining factor in this financial has been the uncertainty in Egypt because there were pending elections, et cetera, et cetera. We positively think that now the new government will affect us positively and so we then think that things will start to be regulated.

We obviously think this change of government is positive, but we obviously have to wait to see that they come into power. And then we get the name, the new ministers and the people who are responsible for running the country and then we would be able to carry out analysis of the issues. So I think we were concerned in the past because there was a lot of uncertainty in the country because we didn’t know exactly who was responsible for things in that country but that is the situation. I think that’s all what we can say related to Egypt.

With regard to when we’re talking about the impacts related to the P&L of the Royal Decree. But what are they are related to especially in our case to the interim payments and so when we carry out the calculations of the interims payments that were done in April, well the amount was higher than the amount that we had envisaged in our internal calendar and possibly in the second semester we will have to carry out other interim payment that wasn’t contemplated within our accounts. But maybe it’s another €70 million, €80 million.

The other measures have not affected us in an important manner. With regard to our credit facilities, what we have done is to anticipate the maturities so what we’ve done is renegotiate it with the current financial entities, which are possibly the same credit facilities that we had. But they’ve refunded, so the €1,200 million has been refinanced at five years and €300 million have been refinanced for three years. And this was done in June. This means that we’ve increased the liquidity, which is this €1,500 million is higher than what we had envisaged.

And with regard to the conditions, I’m not going to say that if we’re talking about the conditions for the spreads that are being applied to this, obviously they are higher than the ones we have obviously because the term is longer. But also in general, the situation we have related to the credit facility is we maintained our backup lines. We haven’t drawn any money on them yet.

We operate on the short-term rather than a capital, rather having, so I said where these credit facilities are that back up the current cost of our debt, which I’ve already said is a competitive one is less than 4.1%. This is the global figure for the company. But these credit facilities, well, if we were to draw them in total, the costs would not be a lot higher than what I’ve mentioned. If we, of course, there’s not just one credit facility, but if we use some of them, it wouldn’t be much higher than 5%.

Megan Medina – JB Capital

Thank you very much.

Rafael Villaseca

Any more questions from the people here in the room? So now, we would like to move on to the questions that are coming in on the phone. We will start with the questions that have been asked in Spanish. First question please?

Operator

Good morning. The first question will come from Mr. Alberto Gandolfi from UBS. Please, your question please. Mr. Gandolfi.

Alberto Gandolfi – UBS

Good morning, everyone. I’ve got four questions. But I’m going to be very quick. The first question is could you please talk about how much you sold for the Spanish generation for 2013 and how do you see the spreads and the prices for 2012? And secondly, could you mention a little bit about the contribution to the EBITDA related to the domestic coal?

And thirdly, the regulation, this is a bit of a follow up about the previous question by Alejandro. I didn’t quite understand, do you think that there could be some new debate about the remuneration related to gas distribution in Spain because the CNM have made some sort of proposal?

And finally, this is a more a question that is basically related to the strategy. I talked about the scrip and that’s very good to be able to help to reduce the debt, but when we’ve got like more structural measures, when the profit pressure has gone down. So do you think the balance sheet will be sufficiently strong to stop taking or applying the scrip dividends or we will have to adjust the amounts of the dividends per share?

Rafael Villaseca

I’m going to answer some of these and then Carlos Álvarez will help me on for some. First of all, the gas market. I have not got any evidence that the gas distribution is going to change here in Spain from the CNM, the government plan, (inaudible) can study this and the government can apply any changes that they consider necessary. However, it doesn’t really seem to make a lot of a sense to do this.

Why? Well, for one reason, with the current gas distribution system, the remuneration, which is completely different to the power sector, is basically related to the volumes that go through the network and the new customers that are captured. So therefore the result is that the increase in the cost, which means the captured customers and to have higher volumes to the system is less than the income that this represents. Or in other words, the more we charge the distributors, there’s more deficit in the system or more surpluses because they pay off to capture customers and to distribute gas, which is less than the customer pays the system for the gas that they consume for the regulatory payments, for the tolls so the gas system has no problems whatsoever.

It has been devised in such a way that the operators will only win money, if we manage to capture new customers and they obviously have volumes of use. And if we grow or if our income grows, if they want to go right up, it would be because the customers are paying this, and also they are offering another positive amount to the system. In that if you look at that from a different aspect, we are a country that there’s not a lot of gas and certain urban areas that do not have gas at present, it would mean that this isn’t an important problem or is it a problem that needs to have changes at the moment.

Why? Because any changes would be against the actual balance of the system in itself. So I just want to insist on this either more money that the operators earn, the better the system works. Why? Because we collect payment for the customers that we acquire and the volumes that goes to the system and that’s very important. And it justifies very clearly the fact that it obviously is not a priority to change the gas distribution system.

Independently, anything can be changed, anything can be improved because it is not a problem at the moment and it hasn’t been really considered because it’s not considered to be against general interest.

With regards to forward sales, I don’t know if Carlos can answer this. In our opinion, in general, the Spanish market has pending some sort of transfer of the prices from the wholesaler to the end customer. So therefore over the next few months or next year, inevitably, this transfer of course will have to moved on. And so therefore, our policy is to be very cautious when we are finalizing our customer portfolio because the increase in the pool price, which has taken place this year will end up being transferred without a doubt to the end customer. I don’t know, Carlos, you wanted to add anything there?

Carlos Álvarez

Well, our portfolio that’s being contracted for wholesale is about over €55 megawatt. And of that portfolio is halfway through the year for next year, we’ve got about 30%. That’s what we got committed. Now the question about the scrip dividend, as regards what you said about the scrip dividend, our Board in the last two years has made the decision that the dividend would be paid traditionally and that just the complementary dividend would be based on the scrip dividend formula. That’s a decision. That’s not our established policy that has been made, a decision that’s been made from one year to the next. And we haven’t decided what we’re going to do next year whether we’re going to continue to do that or not. And the Board based on the current circumstances will decide whatever it has to decide as regards both the main dividend and the complementary dividend.

I’ll just point out that when it was first decided to do this, it didn’t have anything to do with our debt. It was because we wanted to offer the option to our shareholders. And it was well accepted the first time and that’s why we repeated the formula. That’s the main factor.

For the company, it was also good but it was also a question of offering shareholders an option. In other circumstances like you, Alberto have mentioned, I’m sure the Board will bear in mind when they make their decision in future.

There was a question about the issue of local coal, Spanish coal, the increases in Spain and our company’s production of energy, coal energy are spectacular. In fact, the increase of coal has been 66% in Spain, but national coal has had a 45% increase and imported coal 100%, the figures show that production with imported coal is doubling due to the prices of coal and have to do with the North American situation as we know and Gas Natural Fenosa at its plants at the Meirama plant especially is making use of this situation.

As regards to national coal, increases are very important and significant, obviously this is associated with the subsides that are being given to coal, which remain the same, well it has gone down and led to the conflict, social conflict that we know there are subsidies directly – direct subsidies to mines. But the obligation to burn coal remains and it’s subsidized based on the figures I’ve given you. Gas Natural Fenosa is against this policy, obviously. We accept it because we have to, but we would prefer absolute freedom since it’s a liberalized sector to work in accordance with the market but we are prepared to compete through coal as we’re showing, as is being shown now because coal plays a part in the mix.

Next question? Next question is by Mr. Pablo Cuadrado from Bank of America Merrill Lynch.

Pablo Cuadrado – Bank of America/Merrill Lynch

Yes, good morning to you all. My name is Pablo Cuadrado from Bank of America Merrill Lynch. I’ve got four very brief questions. The first one is, could you give us an idea of the provisioning, the procurement – I see that it’s increased as regards last year. Could you give us an idea of what’s going to happen by the end of the year with that?

And a question going back to the international gas sales, you’ve explained quite clearly what you’re doing internationally, but could you help us to understand more what the level of growth is based on those volumes that you expect for the end of the year and even 2013, because I think in the past we’ve spoken about double-digit volumes, but that might go from 10% to 40-odd percent, so to get a better idea of that?

The third question has to do with the regulation, but not as regards to measures, but the issue of deficit, use of deficit. Could you confirm whether you’ve spoken to the Ministry in recent weeks about commitment, some kind of commitment, because of what the process is, what the situation is in these months? And the other question is about the debt, net debt guidance, you talk about €15 billion, €16 billion for this year. I would like to know whether that is based on net debt adjusted to deficit or is it €15 billion, €16 billion by end of the year supposing that no further securitization is done?

Rafael Villaseca

Well, as regards the last question, it’s without discount in the securitization, yes, €16 billion would be without additional securitization and €15 million would be the difference. As regards securitization, the process is ongoing. It began positively the beginning of the year. The situation of the markets leads to a situation where that is not one of the priorities of the government at the moment. We are convinced that as soon as the situation allows it, that will be taken up again.

As regards the international market, well, rather than giving you figures I can tell you this is a structural policy. It’s not temporary. We’re going to continue with our strategy of leverage in the areas that we know about, supply activities through our trading sector. But we believe that in the next 12 months at least, the current policy in the current results will continue. The contracts that we’re signing and we’ve informed the media about regularly, will allow to continue with these policies, these margins, these increases, these results in the next 12 months. That’s what we believe, based on what we’re achieving and what we’ve signed. Carlos, I don’t know whether you want to add anything about this.

Carlos Álvarez

Well, we believe that it’s something that is temporary and that the second part of the year figures will be better than the first half of the year. Basically, this is because of debt, bad debt provisions. You know that the policy of the company is to – whatever has expired for more than six months to cover that and include it in the provisioning based on our registry. The difference as regards the last – previous year has to do with Latin America and the electric distribution, as you’ve seen in the details of the report.

And when I spoke about provisional situation or temporary situation, when there’s an increase of sales and an increase in prices of electricity in those markets, it leads to a situation where the final amount of provisions also goes up, which is logical. And I think this is something temporary and in the second half of the year it will be less. Good. Next question, please.

Operator

The next question is from Mr. Gonzalo Sanchez from BPI.

Gonzalo Sánchez – BPI

Hello, good morning. I had two questions. The first one as regards the cost of debt. After the operations in the first half of the year, I want to know whether you could give us a guidance, an idea of what the debt will be for the end of the year, next year, if possible?

And then as regards regulatory issues, this has to do not directly with the measures that has been mentioned in the press. I’d like to know whether you expect the rate, as regards generation, whether a pass-through to customers will be introduced.

And as regard to the CO2 emission free rights, whether a mechanism in that area would be introduced to recover from – some values from the system?

Rafael Villaseca

Well, I insist, we’ll have to see what this rate is, what this amount is applied and how it is applied.

Generation, as we know it, it doesn’t really have margin and we – hasn’t got the required margins to carry more taxes. It’s important to see what electric generation is, if you compare the situation of Spain as regards to the costs of the pool and the rest of Europe. And in recent years, you all see that it’s probably been the cheapest pool in Europe. In fact, of all the components of the cost of energy, the cost of the pool, wholesale, the generation cost in Spain is the only cost that’s been – that’s come down since the beginning of the crisis, come down by 30% since 2000 – beginning of 2008.

So it’s obvious that any solution to the problem of the deficit cannot be based on the existence of further profits in generation, because there are no additional profits. And it’s obvious, if you look at the prices at which energy is being sold in the wholesale pool in Spain, the costs of distribution as compared to Europe, you can conclude that there is simply no extra profit. There is just no extra profit.

Solutions, taxes, well, that will have to be done in line with what can be accepted. I think that that’s quite clear. And it’s also clear that the €10 billion have to be carried by the electric system in Spain as a result of national policies or other problem. And that has to be solved, because that is what we believe.

As regards the cost of debt, I’ve referred to this previously, our guidance for the year 2012, about 4.2% in this first half. We’re at 4.1%, that’s more or less the value. I don’t know whether the second half will be more or a bit less, but it’s more or less the same. That’s about the figure, and that is based on, as Mr. Villaseca said, more than 60% of our debt is fixed, so variations will be small, will not really affect the process.

As regards 2013, we won’t give you any guidance, but we have to say that everything we’re doing, the operations that we’re doing, it’s true that one of our aims is to continue with our average debt life of about five years. If we continue with some activities the debt will get a bit more expensive. The cost of debt will be slightly higher maybe next year. Next question.

Operator

Next question is from Ms. Carolina Dores for Morgan Stanley.

Carolina Dores – Morgan Stanley

Good morning. I’ve got two questions. The first one is whether you’ve done anything about the social bond payments?

And the second one, what’s the situation as regards the regions of Spain?

Rafael Villaseca

Could you repeat the second question, please?

Carolina Dores – Morgan Stanley

What agreements do you have with the regions of Spain for supply to hospitals and things like that? Have you had to provision for the regions in this half of the year?

Rafael Villaseca

No, we haven’t taken anything back. Last year we had a cost. This year we haven’t. We’re talking about €5 million, €6 million, that’s the impact in the first half as regards the social bond.

The second question, if I’ve understood it correctly, the global – that the situation with the regions, I mean this is not provisioned. We don’t consider that they are in a situation of non-payment, in a situation of delay. So there’s been no change as regards – there was no provisioning for the regions. There’s been no change, obviously.

Operator

The next question is from Mr. Javier Suarez from Nomura.

Javier Suarez – Nomura

Hello. Good morning. My name is Javier Suarez from Nomura. I got three questions. The first, if we go back to the situation of the company at this time. I appreciate the effort of the company to reduce its debt and show the market that it’s making an effort. The question is, if we consider a worst scenario in the future, what reduction of debt, annual reduction of debt over the next three years do you envisage and would you feel comfortable with?

This question can be asked in many different ways, but it’s really basically the question is how urgent – I’m worrying, does the company consider the problem of the debt is and what’s going to be done with it over the next three years? As you see, the free cash flow generation, what do you think of that and reduction of debt annually over the next three years and what level of debt a company should have over the next three years in order to feel comfortable with it?

The second question, if we go back to what’s been said, one of my colleagues has mentioned, the generation – electric generation in Spain, I’m surprised by the figures in the second half. Are there any extraordinary items that we should know about and how the accounting has been done for the recovery of the social bond for 2009 to 2011?

And the third question is to – going back to – one of my colleagues has also asked about the scrip dividend. I would like to know about the low level of acceptance of the most recently issued dividend and whether that would lead the policy – the company to change their policy and pay part of the dividend as a scrip dividend.

Rafael Villaseca

Good. I will answer these questions and then pass the floor to Carlos. First thing, the question, yes, can be asked in many, many different ways. But maybe it’s already been answered. We in – if the scenario gets worse, we feel reasonably comfortable.

Obviously, the word reasonable – reasonably is ambiguous, but it’s difficult to be more – to be clearer than that. Why do we feel reasonably comfortable? Well, because the situation is bad enough as it is. So we feel that we are covered for the next 24 months and even for the third year. We’re working on solving the year 2014. So at this time, we believe that we have a clear capacity to face a scenario that gets even worse. We don’t want to think about catastrophes, but things might get even worse. But they already are bad enough and we think we are not going to have to go to capital markets over the next two years, which is quite good really.

And we are – our cash flow generation is positive and we can also allow ourselves to reduce our investments even further. So that makes us feel quite comfortable. I mean, we could, for the next two years, do absolutely nothing and we are obviously going to do things over the next two years. But that allows us to feel comfortable and answer your question and say that we believe that we have already done what we had to do to get through the worst of this. We will do more things. We feel reasonably comfortable that we can face extreme situations, which we hope do not arise. And if they do, we’ll face them as we – best as we can.

The second thing about the – the second question, one thing I’ve already said, in our opinion, and as we stated this, I think I said – I stated it last time, the final market is not really reflecting the true increase of prices on the wholesale market.

What’s our reaction? Well, we’ve fallen short in terms of trading and we’ve increased the pool. This has increased our profits. But this is provisional, temporary, because we believe that this will be translated into the final market and the situation will consolidate. That would explain why the second – profits in the second half are higher than in the first half. There’s – we’re talking about a slide, €1, €2, €3 no more. But it’s true and that’s happened.

As regards to the last question, I don’t remember, oh, the scrip dividend. Well, we repaid. This is something that the company has always suggested and has been approved by the Board based on options for the shareholder. The investor has decided that they prefer cash, 18% prefer shares. Well, that’s all very well. If they prefer – they want something else, we wanted to offer investors and shareholders. We didn’t want to impose anything. We wanted to offer. The possibility in the first year was tremendously successful. In the second year, it was only 18%. We’re happy with it.

Next year we’ll see. We offer the best alternatives to shareholders. There was no other idea behind that. That was the only idea behind it. If we look at electricity in Spain and profits of generation and trading, there’s nothing extraordinary apart from what we mentioned before, the social bond is not extraordinary bond. It’s the – simply that there was one last year and there has been none this year. That’s why the EBITDA in that sector has grown by 18%.

And in addition to that Rafael was saying, in trading we’ve operated better, thanks to the circumstances of the market, we bought from the pool. And the mix, production mix, has been more economical for the company. So the margin has been higher than the previous quarter. And our mix, generation mix, has been more favorable from the point of view of costs. So social bond, plus trading, plus all those circumstances that has led to the results that we’ve had. Good. Next question.

Operator

Next question will be asked by Mr. Javier Ruiz from Paribas.

Javier Ruiz – Paribas

A couple of questions, quick questions. The first one, I wanted to know whether the comments of Repsol would affect you. They are going to sell their liquid natural gas assets. Would that affect your contracts, specific contracts with the company for gas supply? Secondly, if there’s been – the coverage levels in terms of production for 2012, the end of the second quarter or second half. You want to reduce your debt in the second half of the year through free cash flow. That’s part of the year where a lot of CapEx comes together and I don’t know whether I’m missing any information here. Could you tell me, or is it just free cash flow?

And the final question is, well, it’s a bit of a trick question. If Sonatrach – Sonatrach after having – after all the problems that you had with Sonatrach in the past and if you look at the margins of the mix, don’t you think they are getting slightly perturbed. Is there a risk that we go back to the problems that you had with Sonatrach in the past?

Rafael Villaseca

I’ll start with the last question and I’ll leave the middle two for my colleague. But anyway I’ll start with the last one. I’m sure the reason it can’t be done is very clear. Sonatrach, who was part of the controversy, it’s a sales contract to the gas pipeline, so the margins are known, that can be measured quite rightly. International activity is related to contract, obviously, but related to liquid natural gas, which is not naturally a case, or they are sub-contracts or they’ve got profit sharing clauses, so therefore we share that with our suppliers. And mostly this is already discounted.

So everything is totally normal. And when you buy gas through the gas pipeline, well there’s no alternative to this. So this is the philosophy for both companies, whilst when you are selling liquid natural gas you can do it CIF, FOB or whatever, that’s the gas world. And we’ve been working that for many years.

And the problems with Repsol – sorry, with Sonatrach came up when there were international margins, but they’re not applicable to the gas we supply, rather to their own appreciation of what the gas price levels were in the Spanish market. In the other – the first question related to Repsol, yes, we have been asked by Repsol to be part of the tender, this opportunity. Well, they want to sell their assets in liquid natural gas. Obviously, taking into account our strategies and our situation we’re going to analyze this and we are going to see what our opinion is on that and the decision that we should make.

And where we do not have any gas supply contracts with Repsol at the moment, so that’s not a problem. But we do have certain assets with them outside Spain, which – well, they’ve decided to sell and they have asked us if we’d like to study, whether or not we – the fact that we’re interested in that. Of course we’ll be studying that and as we say, one of our shareholders have asked us to consider it this year.

What’s related to the contract, or whether we’ve got coverage for this year, but I think we’re talking about an 80% cover, so I really think we’re covered for the rest of the year. And the other question made a reference with something about reducing the debt level during the second semester.

But I think the CEO has already made reference to this, of a first part semester we have had certain situations which could be the payment of certain amounts which are related to the situation in the first semester and so this will affect the free cash flow in the second semester. But with the current situation, if you look at our funds, you’ll see that dividends that were paid by the company are higher than those from last year, and these dividends are related to those that were paid by some of our subsidiaries. Whereas the previous year, they were paid in the second semester, but this year they’ve been paid in the first semester.

So when you’re making the year-on-year comparisons that was the advantage that we had compared to last year. But these were main issues. It’s around, as I said, €18 million. But these extraordinary issues, to a certain extent, are going to contribute to the fact that the cash flow in the second semester will vary somewhat. Next one with regard to electricity distribution, it doesn’t mean necessarily that our investments are going to really go up, but when we’re saying that we are containing the investments and distributions through the second part of the year.

I have to contract myself, sorry, I’ve forgotten the contract we have with Repsol, which is one for our generation markets, I think it’s one-point-something bcms. I think that’s the only contract that we have in our portfolio, which is one or something of 6 bcm. This is a long-term contract. It’s well, I should say, I think the issue is – still remains the same, but we – I’d like to correct myself, we do have one contract with Repsol.

I’d like to now take the next question. This will be done by Mr. Alonso from Societe Generale.

Jorge Alonso – Societe Generale

Good morning, everyone. I had a couple of questions. The first one is related to the Mexican market, the distributions market there, which has recently been commented on, on other quarterly results. They were talking about the conditions which would be offering a lot growth in this area. So I would like to know the situation there in relation to Mexico.

And also the other one is the CapEx flexibility that you are saying that you’re giving is the minimum committed CapEx for the next couple of years. So I would like to have an idea of the capacity of the company in very adverse situations to be able to make CapEx or to advance the investments on the short term?

And my last question is related to the fact that on a European level we are seeing renegotiations of the gas contracts with the large suppliers or the large operators, and I would like to ask if you have the opportunity to renegotiate the contract. I’m not just thinking about Sonatrach because that’s been mentioned, but when thinking about other suppliers, are you able to negotiate better conditions for your contracts? And what timeframes are we talking about or what do you think about the situation, because it seems that the market is moving towards gas contracts which have got more spot aspects and less fuel-related aspects?

Rafael Villaseca

Several comments. Yes, effectively in Mexico, the historical comments, but I haven’t said them, but I said they are related to the federal – Mexico DF. They are complex issues to supply gas to very complex cities, such as Mexico DF. We’re talking about the connection points. But the thing I’m certain to remember, there’s about 30% growth this year, the project is going to last for a long time.

We are continuing – we are very happy about that and without any doubt to offer gas to a city. Well that’s one of the most important ones in the world at the moment.

Talking about capital expenditure, and Mr. Alvarez is going to talk about this in more detail. But I already mentioned this. A third of our current investments are related to maintenance of our systems. From there, you can deduce what our base levels are.

Well, as far as gas contracts in Europe, we can say two comments. The first one is related to the fact that in effect we have renegotiated some. The situation isn’t the same, because our European colleagues have enormous contracts, well almost, within the bilateral relationship, which is closed with large suppliers through gas pipelines. Our large supplier is Sonatrach, but the Spanish market is much more competitive than the European. Well, much, much more competitive, which is clearly seen in the gas prices in Spain as Eurostat publishes.

But, however, taking into account the world markets, we’ve already renegotiated some talks with Nigeria and recently, more recently with Norway, better conditions, taking into account the markets, the Spanish markets and the reference prices that the contracts are indexed to. So we’re talking about Sonatrach and the other ones have been the other way round, for example, the renegotiation of the Sonatrach contract took place for the year 2007 and 2008 and 2009, which were completely different to the current situation. So, obviously, the price renegotiations Europe-wide are being negotiated down shall we say thinking about the current position. We are in agreement that really we should now be more related to the spot markets.

The spot market doesn’t necessarily mean that’s the way we’re going to go. We could have a favorable opinion on that and we would have to think about the spot markets. Well basically, our opinion is, what I’m going to explain now in the Continental Europe, the spot markets are fueled by the excess or surplus from the operator of the exchange, because they have surplus from their national markets.

So, for example, certain suppliers – well they actually are the same suppliers in the bilateral contracts with the operators like us and our European colleagues, as those supply the spot markets, they are the same suppliers, except, of course, when operators like us in Europe are going to sell our surplus on a timely basis to the spot market. To date, and very explicitly the countries that supply Europe, mainly Russia, Qatar and Algiers have declared their non-interest in selling gas related to the spot markets.

They are not going to – well, only under certain specific times they are going to use the spot markets. But the spot markets normally are fueled by the surpluses of suppliers like us. This we’ll not be able to consolidate at a referential spot market because that would be impossible, because the reference market is one that comes from the supply markets, i.e., from the three countries I already mentioned. And as they (inaudible) this is normally applied to the Brent that’s taken as a referential price.

Now, obviously, and timely circumstances take into effect, for example, if there’s surplus in Europe, there will not be, especially a liquid market, rather than to take into account the mis-adjustments on a timely basis. So the contracts are still going to be indexed to the Brent price based on the supplying country’s decision in the Continental Europe.

Rafael Villaseca

Well, thank you very much. Any more telephone questions?

Operator

Yes. We have one more question from Mr. Antonio López from HSBC. Yes, Mr. López, you have the floor.

Antonio López – HSBC

Yes. Good morning. José Antonio López. Thank you very much. I have a couple of questions, but some have been answered, but I have one still pending. It’s related to logistics. I would like to know in relation to what you have mentioned about taxes on generation, what guarantees do you have that what is going to be collected for these taxes is going to be used? As you actually know these taxes will be used to cover the tax – the tariff deficit so that’ll be used by the government for other things. Do you have any guarantee that it will be used to cover the tariff deficit?

Rafael Villaseca

Well, we don’t have any guarantee, but, as I’ve already said, we don’t have any official confirmation that that is going to be a measure that the government is contemplating at the moment. We know what’s published in the press but we don’t know, we have no detailed information about this measure whatsoever.

Thank you very much. Any other questions? No questions in Spanish and we don’t have any questions in English either. So thank you very much. So therefore let’s go to the questions that we’ve got through the web page. It seems that the majority have already been asked and answered. I think we have three questions which we actually have questions, I’m going to group together.

The first one makes a reference to credit issues, i.e., if natural gas price should fall below the investment grade, and this refers to all the bank loans, the committed ones. And also if we need new collateral for our gas contracts and if the counterparts are prepared to still deal with us with natural gas. But in both cases, of course, the question is – the answer is no. There’s no effect, not on any of our credit facilities, not even the ones that have been signed recently. This will not have any effects from the fact that these credit facilities would disappear.

And also, I think certain loans, the traditional grid for the spreads which could affect the cost according to the rating, but anyway – but only in a very few cases. But it’s not important in the whole – and when taking into account the whole credit facilities that we have. When we’re talking about gas, the gas contracts wouldn’t affect us, if where the investment grade will change, as already been mentioned.

Antonio López – HSBC

The second group of questions make a reference of possible impacts from the new regulatory measures, more specifically which measures could be implemented if we are – our contingency measures or if we get more efficiencies in distribution, or could you be a bit more specific about what contingency plans could be set up?

Rafael Villaseca

Well, we’ve already – as related to the distribution, we’ve already set up plans to be more efficient. Two plans were to be implemented. One is to reduce the operating cost and the other one, of course, is in as far as if we have less retribution certainly in certain projects that are not so profitable and these are issues that have already been set up and the company has been working for a long time now on getting more – or being more efficient. And we – initially, we’re working on the synergies from the integration. But now, what was a bit more efficient to get higher levels of profitability for our distribution business.

Antonio López – HSBC

The next question is can we have some sort of comment on possible area of common interests with Sonatrach?

Rafael Villaseca

Well, we are studying and it’s known that the first one would be our participation in the gas pipeline, a quite progress, quite a lot there and just with the things to explore together in Spain and abroad, the process is very slow and we think that we will come to some sort of agreement with them.

Antonio López – HSBC

And finally, certain questions related to – well, in the previous presentation for the first half, you talked about your strategic plan objectives. Can you offer any information on the calendar for the review of that of the strategic plan or...

Rafael Villaseca

No, not yet. We will do that at the end of the year, that’s our plan. But also we’re waiting to see what happens to the regulatory issues, because they need to be clarified. And our objective would be that at the end of the year, or beginning of next year we will be able to update this plan and we would update it obviously and that we’re able to show all this to reflect the regulatory changes and the market conditions at that point. Well they are all the questions then. Well, thank you very much.

Operator

We can consider that now the question-and-answer session has finished. And I would now like to give the floor to the CEO.

Rafael Villaseca

Well, once again, I would like to thank you for coming here today and we will see you in three months’ time. So thank you all very much.

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