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Executives

Rafael Villaseca – CEO

Analysts

Pablo Cuadrado – Bank of America/Merrill Lynch

Fernando García – Espírito Santo

Alejandro Vigil – Cygnus Asset Management

Javier Suarez – Nomura

Javier Garrido – JPMorgan

Carolina Dores – Morgan Stanley

Gas Natural Sdg (OTC:GASNF) Q3 2012 Earnings Call November 6, 2012 4:00 AM ET

Operator

Good morning, welcome to the presentation results of the nine months of 2012 for Gas Natural Fenosa. The presentation will be given by the CEO, Mr. Rafael Villaseca together with the CFO Mr. Carlos Álvarez and the General Director for Development, Mr. Antonio Basolas.

As usual, after the presentation, we’ll have a ton of questions and answers. For people in the room and people who follow this remotely. And without further ado, I'll pass the floor to the CEO, Mr. Rafael Villaseca.

Rafael Villaseca

Good morning, I want to thank you for being here either physically or remotely and want to tell you that what I am going to talk about is what you have on the slide. We've got highlights, then we've growth of international operations, then the consolidated results will analyze the lines of business, most relevant lines of business and then we’ll have the conclusions and the questions and answers. If we start, first of all I want to point out that in the first nine months, the net income has been 1.115 million euros which is practically the same as last year. Although it’s absolutely necessary to remember that we've had a drop because of the added value and then there has been an impact of the Royal Decree Number 13 of this year on regulated business, electricity business. Despite all that, net results are more or less the same.

Secondly, EBITDA has reached 3.8 million euro which is 8.1% on the last year in spite disinvestment and this royal decrease that I mentioned before and that's clearly due to better results of our businesses outside of Spain because in Spain, things have not gone so well in general.

Thirdly investments, gone down 1.2%, 122 million euros and that trend we’ll analyze later or continue over the next few quarters for sure. And fourth, the net debt is 16.9 billion which is lower than December, which would be 15.6 and the financial control of the company, debt proactive management of expires and capital of fundamental, all this is very important for our company and we've got a structural cash flow which is still positive and this allows us to face the commitments that we had acquired or taken on, priority of liquid cash flow in the company and Russian realization of investments and we've got to insist also the investments in maintenance reach only one-third of our full investment.

We had to look at the regulatory issues, they are very important in the electric sector in Spain and the history of this is these three were decreed, that will be supplemented by the very important logs is going through parliament at the moment right now. First of all we've got Royal Decree one 2012 which basically suspended temporarily the investments in the special regime renewable especially, but however, its effects as we’ll see later are not going to be immediate. They’ll start as from 2014 and unfortunately, subsidies continue to renewables continue to increase and in this case they are solar energy, that's the first measure that was taken by the government and in 2014 we’ve barely seen its effects, but not before that.

Secondly, we've got royal decrease 13 of this year which established the series of measures which can from the judgment of the higher court, the Supreme Court that you all remember, and one of the measures was the increase of rate, of almost 1.7 million euros. Was a result of that ruling from the Supreme Court and then reduction of costs in several regulated activities, transmission, distribution, capacity charges and other, that accounted for about 1.8 million euros and finally, we got another Royal Decree, number 20 this year. Which imposed a lower remuneration for extra peninsulas and transmission, higher access charges below voltage and territorial, supplements to cover regional taxes in the sector. As I said, this is the history and there is a lot going in the parliament that will have to face the problem that you see here which is we still think that without a doubt that the most important problem of the electric sector in Spain industry is that the access costs are slightly more than 19 billion euro, almost 60% of that is subsides and this year, they are probably going to be more than 11 billion euros and it’s a big problem for the electric sector, it won’t allow things to move forward. That's the big problem we've got. It’s a political decision. And government has made a clear decision with the law that is now being, they said they are going to supplement without the measures and when you know, we've already said this, that those subsides, not that alone, but this special regime subsidies account for 73% of all subsidies. We’re talking about more than 8 billion euros that will go to special regime subsidies and there’s been enormous growth in solar power which is going to get twice as much in subsidies than last year and same might happen next year because up until 2014, the conditions of this Royal Decree this year won’t come into full force. That's the reality of the problem. Other costs are not just controlled. Some of them have come down or in line with the rest of Europe but this requires some kind of approach and this Royal Decree, this as a project for new (inaudible) going through Parliament right now and measures are being introduced and is being said that there will be other regulation measures that the ministry for industry will consider.

So what are these measures that are now being debated in Parliament? Well you know them. Here we've got a list in general we’re talking about a series of taxes really, taxes and duties that are going to be applied not just to electricity but also to gas and the aim is to get money which next year would be about 7 billion euros to allow to phase 7 billion euros a year to face the tariff deficit very solidly. So we’re talking about tax measures and these tax measures, as you can see here also completed or supplemented with a series of resources that will be taken out of the budget for the state and passed on to the electric industry so to spread things out more. And probably the law will include those, we’ll see what happens that partially the cost of the subsidies before special regime renewable will be included directly in the general budget, 38% according to what is being discussed in parliament. So we think that these measures really respond to this need to face this problem but we want to insist that costs have to be limited, there causing the imbalance in the electric system in Spain and they have to do with a very, very high level of subsidies that the system is carrying as regards any other country in Europe and these are the measures and we’ll soon know what the final result of this law, this act will be and when it will come into full force although probably it will happen in next year. With these measures, in our opinion in 2013, there's a high probably that we will no longer have a tariff deficit. Later, if you want, in the question and answer time, we can talk about the impact of all these measures, not just on companies but on the electric industry and the gas industry which is also affected.

Now, if we go to the most relevant things which are the evolution of growth of international operations, we have to say that we have two things. First of all you see on this slide that more than 40% of our EBITDA is in the international area and of that 43%, almost 60% is Spanish America, more than 30% is the gas activity all over the world. Now we've always been committed to this Spanish America and gas as you know and things are working very successfully. In Spanish America we will talk about this and also gas, but we can say that we foresee a different rate of growth. Growth will actually continue and that be part of our strategy, but it’s not just the importance of our international activity, it’s how it grows. In fact the EBITDA from international operations has grown more than 27% as regards to the same period for last year and that's very important because the growth of our activities in Spanish America is almost 10% and gas activities have grown more than 60% for final uses outside the European area. So we’re really very, very satisfied with the sound growth of our business internationally and the weight that these operations have within our activities.

Now, if we look at gas, you can see the amount of gas we sell internationally has almost been 25%, foreign sales, 25% growth in our gas sales in the world which means that we are a strong player globally in natural liquid gas or liquid natural gas. that means that 30% of the gas that we sell, we sell outside Spain and that's our strategy and to date, its being notably successfully since the business, we don't depend on the Spanish gas market for our sale of gas and we can make up for worse markets with better markets and we've got different alternatives to keep our P&L account growing well. We've been successful in Europe, more than 13% growth in spite the situation on the continent based on stable customers. Our commercial gas activity is not focused at all on the spot markets but on the establishment of commercial relationships, long lasting relationships in mid-term and long term markets. It’s leveraged with our fleet of ships and with the flexibility of our supply so that we can continue to be leaders in the Atlantic Basin and continue to grow in the Pacific Basin. You know the model; I just want to digress slightly. We continue to be convinced that the LNG is the business of the future because the percentage of gas that is consumed in the world is still very large and the need to globalize convenience, globalizing and interconnecting all these different demands is going to increase and that's why we think this business model is very interesting, is quite unique. There are few companies in the world that have the same approach and I think this will allow us to have a very good strategic and financial position. It’s an integrated model that aims at reducing the commodity risk by diversifying the sources, having a (inaudible) LNG gas pipeline structure, making use of the flexibility of the (inaudible) contracts and index rating our contracts in such a way that we can have a basket of diversified final markets which together with France mission assets that we can manage basically based on the fleet allow us to access the most convenient markets at each time always within dynamic and stable relations and not pure trading on the spot markets.

And to this we have to add the joint vision of gas and electricity industries and that gives us a flexibility that we are making use of so successfully as regards our P&L account. This higher degree of flexibility of the transmission assets we have has allowed us to make use of the opportunities that have been coming up for some time and this leads us to a situation where we are always alert as to prices in order to very rapidly respond to markets that should be optimized and keep a balanced position because we've got not only to optimize our margins but reduce our risks, the risks that come up because we have a global approach. So we are now balancing our Atlantic position with the Pacific position. We've taken our positions in India. For some time we've been present in Japan and Korea and in India we’re working to balance out the risks in our commercial positions. So we think this will lead us to increase our export market international exposure, maximize income and reduce risks. We continue with the policy of maintaining mid-term contracts. In the Atlantic basin, we’re focusing as you know, on Puerto Rico and South America and in the Pacific Basin as I said, the Far East and India. Our contract 5 bcm, LNG contract with Shania will give us huge opportunity too.

If we continue with our international activities, one of the important businesses is gas distribution in Spanish America. The EBITDA there is growing 4%, almost 500 million and there is still a very high potential for growth. We've exceeded 6 million supply points and markets like Mexico and Columbia still have very high rates of growth. Sales of gas have exceeded 6% and the connection points as I said, almost 4% in the growth of those connection points.

If we look at the business of electricity distribution in Spanish market, the EBITDA has grown by 26%. While that is necessary to underline the comparison is not totally fair because last year Columbia had the effects of the tax that was introduced, a special tax. But anyway the growth has been very significant. And growth in terms of sales has been more than 6%, almost 7 and as regards connection points, it’s also been 4%. So all the markets continue to grow appreciably.

As regards generation in Spanish America, the first thing we’re going to say is that this is a business where availability is the most important thing in spite of the accident we had last year to Spain which forced us to reduce our activity. In spite of that, the EBITDA has grown almost by 5% and it has exceeded 190 million euros. And if we look at financials, well the gross margin and the EBITDA have grown by 9 and 8% respectively that they are 5.6 and 3.8 billion euros. And that, I don't have to remind you within an environment, macro, energetic and financial environment which is very demanding and very hard at this time for our company. And all this is the result of the balance between liberalized markets and regulated markets, gas business and electric business and of course, our international presence.

Also we have to say that these P&L accounts, these results that we are resulting, include the effect of disinvestments in 2011 which were very significant and the effect of the Royal Decree this year which had a tremendous impact on our P&L account, more than 80 million euros. Amortization have increased by 1.6 and the operating income is 2.3 billion euros. Financial results last year is the result of the reduction of the absolute figures of debt, and the improvement in the cost of our debt in spite of our risk situation, the management of our financial has been clearly been positive. So the income before tax is almost 1.7 billion and net income is 1.1 billion, so much flat. But if we adjusted it, it would have been a growth of almost 30% and you must remember that that includes the reiterated effect of this Royal Decree. If we look at the breakdown of our EBITDA, we see that the distribution business in Europe gives us a reduction of 5% basically because of the drop in 12% of our distribution business and electric and gas distribution has remained the same. So there has been a drop in electricity and gases remain the same. The measures contemplated by the Royal Decree of number 13 this year, penalized with a rate of 12%, the electric distribution business and that a hard blow for the electric distribution but, I’d like to adjust to that and we’ll do it by correcting by our OpEx and CapEx to the new situation that we have. We have to say also that the gas business is affected by this investments in region of Madrid. So our EBITDA, we have managed to preserve in spite of the reduction of the scope of our business in gas.

In terms of electricity, we've got an increase of 5.6%, strong growth of special regime renewable and co-generation basically renewable, wind energy and the improvement of our marketing or electric trading business in Spain which we’ll talk about later. As regards gas activities there is an increase of 44% and basically because of the notable increase of our activity in the international gas marketing business. We've already spoken about how that's going. We’ll talk later about gas business in Spain which is not so good at all. And then in Spanish America, EBITDA growth almost 10% on a leverage based on the increase of electric distribution although the comparison with last year is not how much (inaudible) because of the special tax that was introduced in Columbia last year. So there is an 8.1% growth in our total EBITDA. Now we should underline that growth in EBITDA, the international growth by 27 and the Spanish drop EBITDA growth drops by 3%.

As regards our investments, this is the breakdown, the figure is slightly below last year, 80% is regulated activities and distribution in Europe and Spain, its lead to accounts of 46%, Latin Spanish America 28%. So it’s necessary to underline that 63% of our investment has been done in Spain and 37% on the international markets. But investment in Spain is being reduced as regards last year but investment internationally has grown by 15%. We’ll talk about this with more detail later when we talk about the distribution situation where we should insist that the measures of March forced us and will force the company to reposition ourselves clearly in terms of its activities within the new framework of regulation. This year, it won’t be so noticeable because these measures were introduced at the end of March and the adjustment measures practically this year will have effect but we won’t notice till next year probably and adjustments in investment and current expenses will be noticeable at the end of the year but especially next year.

So, as regards to the tariff deficit, securitization of tariff deficit, throughout the year we've collected 367 million euros to which we should 11 million that have been collected in the present quarter, at the end of September we had 1.357 pending which includes the result of the deficit this year. Securitization by Faraday continue on the 5th of October, that was an approval of an obligation to issue in a period of 12 months and we’re convinced that in accordance of the founding mission and the necessity to do something about this situation we will securitize this significant account that we had owed. We got to talk about our structure too. Our net financial debt and say that we got a risk profile that is really well balanced and it's based on a several pillars, one of them is that the 78% of our debt is a fixed debt and very competitive, our average debt throughout the year is 4.1% which is a figure that compares well with the same period for last year, 84% of our debt is euros and we have up to 60% of our debt in the capital markets not in the bank markets and as regards to maturity, our maturities we have significantly increased the maturity profile.

We got wider margins to give us a breather and maturities as from 2015 account for 70% of our gross debt and 16.9 billion in terms of net debt. The average life of our net debt is five years and we all of our financial needs are covered up until 2014 and we are working on 2015. Together with this you should bear in mind the ample liquidity we have available, more than 9.3 billion euros of which 4.400 are held in cash and almost 5 are based on different credit lines that we have over with different banks.

But in addition to that the company has credit, has loans up to 3.5 billion euros to which we should add the Colombian peso program implemented October. It is at the end of September there were two bond issues that are not included in our debt which are 1.500 million in the midterm debt programs on the European markets and the another one 130 million on the Colombian market. The average life of these loans is about three years and all that will allow me to say allows me to say they will continue with one of our priorities is the active management of all of our debt.

Now if we analyze the operations now. First of all let me tell you about distribution of electricity in Europe. The electrical business in Europe basically Spanish also in Moldova but basically in Spain has fallen by more than 12% in EBITDA terms. The reason is that there has been general cut in the distribution business in the sector. So this will force us to reconsider our investments and running cost because this drop in income and revenues will not allow us to continue investing as we wanted to do. Next year, we will see the impact of these new policies. We also believe that the situation of the sector should have been taken into account and comparison with other European operators rather than generalizing this cut but well this is what we have and we will react the best we can. The amount of these cuts this year about 80 million accumulated till September although for the whole year it will be a 110 million.

So during the first quarter for this reason our EBITDA has fallen by almost 13%. I also want to tell you that we will continue with our policy to improve our efficiency in the electric, coal business. We have improved our quality and all the management parameters. Our goal will be to do more effective management in order to lower the impact or to elevate the impact of these regulatory measures. When it comes to gas distribution, EBITDA was more or less stable due to the fact that we have divested. Had we not divested in gas in Madrid we would have grown 20% approximately and this has to do with a 7% more investment an increase in connection points and additional 90,000 points of connection and sales which have dropped by 2%.

Gas distribution is business which is very much connected, not so much to investment but to better business and increase in connection points. As you can see this market is not mature. We have accumulated 90,000 more connection points this year. It is true that there have been no new constructions as was the case in the past but lot of private homes that did not have gas are now connecting themselves to the grid due to the good terms and conditions of this field but in terms of price and in terms of efficiency. So we have grown in terms of connection points, we will continue to add new connections and we hope that we will be able to attract new homes in the future because the level of gasification in Spain is way below the European average.

The distribution network increased by almost 2500 kilometers and as I said EBITDA stays more or less flat due to divestments in supply points. Now talking about gas and electricity demand in Spain and this includes deregulated part. The conventional natural gas business has grown by 6.3% in accumulated terms here in Spain whereas electricity demand and these all are gross numbers has fallen by 0.7%.

I should tell you that the first number is due to the situation of the residential market, temperatures have been lower this year, not lower than the average temperature but lower than the previous year which was warmer and when it comes to the drop in demand while it's true that demand has fallen by little less than 1% of electricity demand but there are other things we need to take into account. The problem of the electricity sector is not benefiting from improvements in the market but we should not blame the current and balance to demand problems because when it comes to generators demand has grown substantially during the first half of the year mainly because of pumping and the export (ph) of energy. So all in all the generation business in Spain grew by 2% in production terms even though demand in the country went down by 0.7%.

If we analyze this in great detail we can see that production has fallen by 3.3% in the ordinary regime and in the special regime 11.8%. In the case of Gas Natural our production fell by 1.1% as a whole and when it comes to the ordinary regime, 2.2% were up but a 13.8% increase in the special regime. In general we can say that there have been higher volumes of coal for two reasons, first of all because it was compulsory to burn national coal but also because there was an interest in consuming international coal because of a good prices, I should also mention that there has been less rain this year so our water, hydropower plants have been less used and the same with the combined cycle plans in plan of event.

This has been a key thing and they wouldn’t go compared to the last quarter of last year may not look as good, thanks to our marketing and commercialization policy we have achieved good results was given full priority to margins even when it means losing market share, the reason is clear in our opinion it wants to be expected that electrical costs were going to go up and that is why our company decided not to increase its commercial policy after share or market share and that’s why we have been able to benefit from better results in electricity commercialization.

So that is why our EBITDA has grown by almost 6% in the nine first months of the year. When it comes to special regime, more than a 110 million EBITDA has grown 5.5%, production has been substantially higher almost 14% and this has a lot to do with more than 20% increase in hydropower production because of the greater capacity and the fact that there has been wind.

We also see drop in mini-hydro which has suffered from the fact that there has been less rainfall, code generation also increased by this amount. Mini-hydro and Galicia and in other places well we’re also working on a wind project in Mexico. More than 200 megawatts which we hope that we will start construction soon so that it will be fully operational at the end of 2014.

Now talking about gas supply in Spain, our gas business has grown, our business has grown by 3% and here you have the basic variables. When it comes to the wholesale business it has grown by 4.5%, the residential business almost 18% and the electrical business has fallen by almost 7% due to the fact that combined cycle plans have decreased their production.

All in all our gas sales have increased by 3%. Now talking about Union Fenosa Gas, our company owned 50% with (inaudible). Its performance, its EBITDA rather has grown almost 7% close to 20 million euros; this result has lot to do with a situation of international liquid five natural gas sales. This sales have grown by almost 20% as you can see in the international market whereas they have remained stable here in Spain.

In Spain volumes have fallen, they are more or less stable and when it comes to infrastructure the stable contribution to generation is maintained and now all I have to do is mention some conclusions. We are happy because even though the situation is quite complex and very hard from all points of view, in spite of this our EBITDA has grown 8%, bear in mind that we have sold some assets and the regulatory situation is not very good. Net profit, adjusted net profit grows almost 23% and all of this has happened by improving our financial structure. Strengthening our financial position as shown with this three benchmark issues of over 2 billion euros, so we are very happy, we’re reasonably happy with this results which I carried so as to think as we have told you in previous quarters that we are going in the right direction but we are doing the best in order to achieve the goals of the strategic plan that you received for 2012. We think we are going in the right direction and we think we will achieve all of our goals.

The company is aware of the changes that have happened in the regulatory markets and we will update at the beginning of 2013 our strategic plan. We are currently working to achieve our goals and fulfill our commitments in 2012 and we will do the same for the following year. Thank you. And if you have any questions or comments. Now the floor is open for questions and comments. We will start with those that come from the floor.

Question-and-Answer Session

Operator

(Operator Instructions).

Pablo Cuadrado – Bank of America/Merrill Lynch

I’m Pablo Cuadrado from Bank of America/Merrill Lynch. The first question has to do with net debt where a quarter after quarter has gone down by 50-100 million. I think you were talking about 16,000 or 17,000 for the end of the year. Is it that CapEx is going down, what’s the reason for this performance and the second question has to do with the provision line which has increased by 25%? Do you have any guidance at the end of the year and any problems when it comes to collecting bills and the other one has to do with this number of 25%? Could you give us some idea of where you see there is going to be growth in the years 2013 or 2014, do you think this double digit growth will be substantial?

Rafael Villaseca

When it comes to international gas sales as well 27% growth is something we don’t expect for this year but we do hope this will consolidate and we will continue to grow. There are several reasons, the percentage of liquefied natural gas in the world is still very low and the possibilities of interconnection as well as the needs are increasing substantially. So we don’t think that we will reach that 25% again. But I think we will achieve something similar. In Latin American markets we see that demand is growing, the Asian market, in spite of the volatility of Japan they are demanding this type of fuel and I believe that liquefied natural gas will continue to grow for that reason. We have been betting on it as one of our core businesses and even though things will not be exactly the same because this is not recurrent numbers, I think this business will still deserve our attention. That objective of 15,000 or 16,000 dependent on tariff deficit, so depending on what happens we will be closer to 50,000 or 16,000.

But the way things are I think we are going to be around 16,000. What’s happened in the first few quarters well as we said before well as you saw in our presentation, tariff deficit the net number is bad for us? There has been more generation due to tariff deficit so that has really comprised our debt situation. To this we have to do add the payments we had to make, corporate tax advances which were more reduced in previous years and for all these reasons the debt we have accumulated so far has moved less than what we had expected.

What’s going to happen in the last quarter, I think we are going to come closer to 16,000 and as a Managing Director and as you very well said this contention of investments will help us reduce our debt more this quarter than in previous quarters and global investments will be closer to those than last year. So I don’t think the number is going to be more than 1.5 billion.

Now talking about your second question about provisions well there are two fundamental factors here, first, exchange rate especially in Northern America. There have been two operations in some countries, Colombia and Nicaragua where provisions have increased due to the fact that sales and volume are greater relatively because of exchange rate and other reasons and that is why provisions have increased both in Latin America and in Spain. There has been deterioration of collection ratios and there are things that will help us contain this but yes there is a certain level of deterioration. Any further questions from the floor?

Fernando García – Espírito Santo

I’m Fernando García from Espírito Santo. You spoke before about gas, could you tell us what do you think are going to be the margins of gas in the next few quarters especially I would like for you to talk about spot sales of gas. I believe that at the end of second quarter there was three spot sales of gas, what about this year?

Rafael Villaseca

Our spot sales are not significant, they are non-significant. Our gas business is a business with end clients; with mid or long term contracts and we don’t work much on the spot market only residually. And we haven’t done in the past and we won't do it in the future. As far as margins well the truth is that the situation is quite volatile. There are lots of phenomenon in the world market that is why the we manage our business is so important, we have to pay attention to the changes and this also has a lot to do with a situation in some countries. China, India whether the plans go into operation all of this will change the close but it's also clear that in spite of this the deterioration in some markets there is a pressure to reduce supply prices and this is what our company is doing.

And we are making some adjustments. We have had some suppliers already and the markets in a situation that justify this and we’re already benefiting from it. Movements in international markets where we could question volatility, well we believe that we will be able to maintain it it's not (inaudible) margins.

Any further questions from the floor?

Alejandro Vigil – Cygnus Asset Management

I’m Alejandro from Cygnus Asset Management. I have three questions, the first one is while maybe it's too early to talk about the strategic plan that you anticipated but could you tell those what do you think is going to happen in the year 2013. I know there are still some areas of uncertainty but in qualitative terms could you tell us how you see that year 2013 gas business, international part of the business et cetera, the second one has to do with securitization of deficit. Your timing for the next securitizations and your conversations with the administration. And the other one has to do with acquisitions, you spoke about your interest in tat gas, now that you have levels of debt that are more comfortable, maybe you could say something else.

Rafael Villaseca

It's obvious that we are going to have to develop this; we will present it in as much detail as we can. It's true that we expect to have lower growth than we contemplated due to the situation of markets. We still believe that our international activity will be relevant; internalization will continue to be key both in businesses of commercialization and another businesses. Our priority will continue to be the strengthening of our financial situation.

We believe that even though this is still pending decision by our board, our net debt EBITDA ratio will continue to be three and our financial structure will be around 50-50 as a main access of our policy and there is no doubt and this will give continuity to what we have been doing so far. The efficiency plan both in OpEx and CapEx will continue.

We learned a lot and we have managed to obtain very good annual savings and we will continue along this line. So that is what we’re going to do with our strategic plan but I cannot tell you anything else about next year. What we do expect is that deterioration of the macro variables gas consumption and electricity consumption will let us do a similar year next year. Maybe slightly worse in electricity but we are now at 0.7% minus 0.7% following 1%, it's something that we should be prepared for it.

The final adjustments of regulations we will see what the impact is and in the gas segment the results has been positive. We don’t think it's going to be exceeded next year but we don’t believe that next year is going to be worse. It's not going to be better either, I don’t want to be overly optimistic but it is quite probable that next year will be in a macro demand situation but will be similar to today’s maybe a slightly worse but not much worse.

When it comes to securitizations, we’re convinced that after all of the bureaucratic obstacles we will start with securitization and these amounts will be collected. I also want to say that what seems to be sure from the steps taken by the government, it looks like next year it is going to be finalized and that would be a good piece of news, we will no longer have this problem, a structural problem and we will end liquidating this amounts that are due to us. We are doing what it takes to make sure that this happens and it's resolution will depend on different things but I believe that when it comes net gas, we continue to negotiate with Sonatrach, the potential acquisition of 10% and we’ll see whether this can be done.

We’ve had some positive news when it comes to tariff deficit and the different measures contained in Royal Decree13. There were certain things that were going to happen but have already happened so that’s going to have a good impact on our company. So that is something that is positive because it will counteract the other problems. Royal Decree 13, well is going to help in that regard. Any further questions from the floor?

Unidentified Analyst

I have three quick questions, first one about dividend, everything it seems to indicate that the goal to this year will be achieved. Can we expect change in the dividend policy. What about is it going to be in cash or what and the other one has to do with preferred shares, we see that there are no major maturities for debt this year but I think Union Fenosamade an issue of preferred shares that can be cancelled next year by holders. What can you tell us about it and when it comes to the strategic plan you have talked to us several times about CapEx and OpEx discipline as a way to protect cash generation in view of the fiscal measures that will be adopted next year in Spain. Can we think about a program of divestments as was done by IBERDROLA for example?

Rafael Villaseca

Now when it comes to dividend, traditionally the board of Directors of Gas Natural Fenosa and in its November Board Meeting decides what to do with it and this should also be the case as here. No decision has been made to change the dividend policy so far and no decision has been made when it comes whether we are going to have scribed dividend or not. Although in the past when it was done, it was done on the basis of complimentary dividends but as I told you no decision has been made as yet on that regard and I’m sure that the board will make the best decision in the November board meeting. This was May, we are looking at this issue even though it's already been regulated how it should work. We are trying to see, we will see whether we can, we have to take some additional measures. When it comes to divestments, well first of all our business portfolio is subject to this situation and we will take advantage of any situation.

We’re very happy with our position, with the position of some of our businesses and we will always be open to any further consideration but we believe that our generation cash flow of free cash flow of generation program will be more than enough to guarantee this without having to use anything exceptional.

Unidentified Analyst

I have got two questions one about the LNG Repsol business, could you give us some details about how much the STREAM business contributes that you have together with Repsol contributed to that and whether there is going to be any change once Repsol got rid of that business and then secondly I would like to know what forecast you have for average cost of debt bearing in mind the coverages you have right now for over the next two years. Thank you.

Rafael Villaseca

As regards to the first quest STREAM is not within the assets, the scope of the assets were we invested in it's an instrument company. So, if Repsol doesn’t continue with that LNG activity we don’t know what happen but that doesn’t come within the period of this investment the way considering. As regards to the debt well I think slightly above 4.1% that we have right now. We’re talking about these our own aims are try to increase the original life of our debt and our liquidity and if we could come below 4.9 it would be magnificent. We have managed this year and we have managed to be below the cost of the debt of last year but when it comes to budgeting I would go slightly higher. As regards to STREAM it's an instrument, it's doesn’t contribute anything to the company.

Any more questions in the room? Well there are no more questions in the room, so we will go the questions over the telephone. Go ahead please.

Operator

We got question from Javier Suarez of Nomura. When you’re ready.

Javier Suarez – Nomura

I got three or four questions actually the first one is going back to the reform of the electric industry, the law going through parliament. I like to know what do you think about the impossibility of introducing modifications that could make it difficult for applying these taxes to the final uses. We are hearing a lot of noise in the industry because obviously there is strong opposition to increasing the prices of electricity. So how could you square the circle? How could you try to reduce the impact on the industry and as regards there I would also like to know your opinion after the new measures applied to gas, what about the green scent (ph) it's been called, it's going to be applied to the gas industry and then as regards to gas we have seen strong growth on the international markets. The CEO has commented that our national business accounts for 30% of the total. How much do you think that growth is going to be internationally, structurally, logistically? Seems to be a very, very strong growth in the Atlantic and Pacific basins. Where do you think that international growth is going to be located and the third question is about the gas North America gas business. In 2013, there is going to be new regulations in Brazil, Colombia, Mexico. Could you tell us your vision, what do you think, what are your expectations are for those countries?

Rafael Villaseca

They are obviously very important for the growth of the company. Thank you. Well there are several things, first of all as regards to the, the first question I don’t know about any initiatives to try to prevent the pass through, there are initiatives to try and prevent gas and electricity from going up as a result those measures. But my opinion is that these are measures that mean will have an impact directly on the impact on the industry both of gas and electricity and since its marginally system if you add further direct cost to that system, it is going to be pass through there is no doubt about it. There is no other way.

But in the electric market, the situation of the market where 50% of the offers are being subsidized given priority access together with the series of interventionist measures on the bull market, it’s really difficult to know what this be of pass-through will be for these activities and what their impact will be in the market.

The electrical is strongly influenced by regulatory measures that the operations of the markets, there is a question mark there as to how, what's going to happen with those costs, but there is no doubt at all, variable and direct costs will always be added to the bill and also, another possibility is just not possible because it will mean that the measures wouldn’t be adequate 6% tax on generation with a tax like that. I mean operators can’t absorb that, can’t carry that. So in our opinion the nitrate sale of taxes will remain more expensive. And in the electric sector the market is a very unique situation, regulation makes strange things happen.

And in the gas market, it’s even more the case. Although the degree of intervention is much more transparent, much more global but it’s impossible for this higher cost of gas, it’s as if providers put their prices up. It’s going to go on the bill. It’s impossible for this not to happen. Who’s going to pay for it? Well it will have to be paid by final user. It’s going to go on the bill and we’ll see how that happens, but that's going to happen, there is no doubt about that.

What will that be in the gas market, well it will depend on the final amends that are approved, about 3-4% might be the impact in the gas market. We have to see what's going to happen and as we've seen in the past, 3-4% have been frequent in the gas sector, 3-4% increases as a result of the increase of prices by providers or the (inaudible) index linking because as you know, gas prices are linked to oil prices, but partly will take place. We don't know at what speed, at what rate, but it will happen.

And another question, what’s the increase of our ability to sort of in the international market where we've got our growth potential which is quite big because our percentage that we've got pipeline gas that we get is low. So we have in theory the ability to grow a lot, different metrics, we would sometimes have to talk to our providers etcetera.

But we have ability to grow, especially in the face of the weakness in the national market, except for finalist contracts which are not just pipeline contracts, there are some others, some electrical contracts, the rest is rather free because of its nature or it can be associated to internationalization contracts.

We still have a margin, we don't continue. We don't think we’re going to continue at a rate growth of 22%. It will continue to grow but not at that rate which is truly very high. As regards Latin Americas, Spanish America, there is a (inaudible) in Brazil, Columbia, not Mexico. In Brazil and Columbia, we are beginning the process that usually goes on for long time, a year. we negotiate the new conditions to access new areas, new investments and the dialogues always new investments that are going to be captured, but we have confidence in both markets and we hope the regulator will favor the regasification of the countries and we’re working along those lines.

Good, next question.

The next question is from Javier Garrido with JPMorgan.

Javier Garrido – JPMorgan

I had three questions as regards the results of the third quarter. First of all, you’ve just spoken about regulations in Brazil, could you explain what is behind the distribution business in Brazil in addition to the rate of exchange, there’s been an increase in volumes and the margin of energy has increased. What has led to the Brazilian EBITDA dropping at nine months?

The second question is as regards the volumes of international gas sales. You’ve spoken about the accumulated or consolidated increase throughout the year but in the third quarter, there is a drop of 10% in sales of gas on the international markets. Could you give us some more details about why that has happened? I was presuming you mean specific quarters; could you give us more details?

And then the third question is, Union Fenosa Gas. Could you give us a bit more details on results of this division in the third quarter that been a significant drop in EBITDA. Could you tell us more about the motive for this problem, what we can expect for the next few quarters?

Rafael Villaseca

Well I'll start at the end and Carlos Álvarez to answer the other question about Brazil. The Union Fenosa Gas has benefited from the exceptional situation of international markets. Union Fenosa Gas had spot markets more notable positions. Union Fenosa Gas has had operations on the spot market which were not at the same level as the beginning of the year, so this is being reflected on the EBITDA and this being a lower profitability, as a result, those operations is also true that the ups and downs of the gas supplier, the Damietta plant in moths of summer, the backup supply is greater because of the energy demands of Egyptian, electric systems and we’re getting less gas in the summer and more gas in the winter. So in the third quarter, the company has had less provisioning. Those things put together explain what's happened in this quarter.

As regards, well the truth is that the situation in the markets we think will be more similar to what we have now than what we had at the beginning of the year. So growth will probably slowdown in terms of the trading operations of the Union Fenosa Gas. As regards the international LNG sales, via the third quarter has to do with the fact that last year we began adjustment of the third quarter had a comparison is based on what happened last year. There is no exception or measures. This year we continue but the third, fourth year, the situation in the market will be more stable. Growth will happen in 2012 as regards the first six month period of 2012. In the third quarter of 2012 we began to produce or the market began to return to normal. Brazil has to do with a different mix as regards the previous year and especially the rate of exchange that you’ve mentioned was nothing that has affected the margins is not due to those reasons and the rate of exchanges as you’ve said, I just want to say in the international business, sometimes well, depends on the quarter as one ship more or less and that does affect the EBITDA. So that previous period, the international business was higher percentage than what was usual in a normal quarter and that has affected the comparison.

Javier Garrido – JPMorgan

Yes the next question, most of the things that I wanted to know have been answered but could we have more details about the situation of the gas margins in Spain whether they are becoming stable or whether the weakness we’ve seen and demand is putting more pressure on the situation or has happened in another quarters, the situation is more stable.

As regards the portfolio of gas provisioning or procurement, could you give us some details as to whether they are going to, you have any contracts that are nearing expiry? Thank you very much.

Rafael Villaseca

Well as regards the gas contracts, no. the Libyan contract ends this year, but it’s true that before the crisis, or as a result of the crisis, the supplies to the Spanish market seized last year, so that's over. And we continue to negotiate and we’re trying not just to renew but new contracts rather Shania when there are other possibilities, we’re analyzing to consolidate the gas market. As regards to the gas margins in Spain, is true, that colleagues learn, they need to not pressure the market. There is no greater demand of gas. together gas have the Spanish markets been a practice of our colleagues in such a way that we've provided pressure on the margins and it’s also necessary to indicate that in residential markets, home markets and wholesale markets in Spain, growth rates have been very significant. If you talk about Spain, the growth of residential markets being 10%. So those companies that we’re marketing in Spain have had a policy to deal with the potential excess of gas have seen that the Spanish market is increasing the consumption levels. The electric market is going down. So the two phenomena lead us to believe that this is something that will maintain margins reasonably higher over the next few months.

Carolina Dores – Morgan Stanley

Bond issuances, you’ve got 5 billion euros in the cash flow. Are you going to maintain that level of cash flow or are you going to, what's going to be strategy for the debt. And the other question is for the taxes for the year. Is that sustainable, thank you?

Rafael Villaseca

Well, I'll answer the second question first. We’re talking about 24.9 which is the estimated rate which we hope to continue to have by the end of the year. so we’re slightly below 25% and as regards the bonds we began to think that next year, I don't know whether here to the end of the end of the year, it all depends on circumstances but we’re talking about things to do or for next year and then next year, we’ll analyze everything, we’ll analyze the basic objectives, liquidity are aimed to increase the life of our debt and we will continue to look at all the possibilities we have for our expiry date in 2015.

Good, that's the end of the questions. We’re going to read the questions that are being sent by email. The first one from Barclays, refers to the impact of tax on the prices of energy and whether we believe that the forward price curve is currently absorbing the possible impact of those taxes and whether we could say how much we've sold for 2013.

Well as regards the first part, we could say that the impact of the measures that have been taken would be about 8 euros more or less, the forward market is about half. The reasons in my opinion have to do with what we’re saying before. The electric market is very singular first specific market. First of all, the singularity of the market and then the marketing GAAP that exists, companies in excess and some are not long enough. If you are in either of these situations, you’ll have to adjust for the commercial situation, but the first thing is that the bull market is a market that is tremendously under the effect or under the pressure of regulations. So a lot of strange things happen. Because if we've not, it would be difficult to understand what happens. I've explained it before. Half of the offering parties on the market are subsidized, so what happens or does not happen off late, so the time which is not explained by theory are not explained by theory and they are very volatile. We believe that in more reasonable period, or term things will have to adjust to the realities of the industry. The amount is higher for next year, 15 (inaudible), I think it’s about over 60 euros.

Unidentified Analyst

Good, the final question is from (inaudible) Credit Suisse. And the question is, what were the consequences for gas and natural be, if the sovereign debt of Spain was reduced? What would be the consequence of Gas Natural?

Rafael Villaseca

Well really, the consequences would not be good in the sense that we got an activity that is about 50%. We got another in Spain. We are worried about this and try to get ready for this. First of all, we want to generate free cash flow to face our commitments. Secondly, colander of debt, expiry dates, that is can face a more sort of delicate moments that we can have in the financial markets. A very hard percentage of our debt expires after 2015 or as from 2015.

The third thing is will open up to our markets in such a way that we can go to other markets where we’re not so exposed to the risks of the Spanish markets. So all that's been achieved. It’s been achieved with a policy that makes the rating agency put us above the Sovereign risk, as you know. So these are the instruments that we have to face this and rigor of our administration and prevention measures in the short term will allow us to be not exactly prepared because you can’t always be fully prepared but we think we could face confront any situation that arises.

Good, well, if that's the last question, I'll pass the floor to the CEO for him to close the meeting.

Rafael Villaseca

Well, that's all, thank you very much for being here. Physically or virtually and hope to see you next time. Thank you very much.

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