Gas Natural Fenosa (GAS.MC)

Transcription

1 Europe/Spain Equity Research Multi Utilities (Utilities) Rating NEUTRAL* Price (24 Oct 12, Eu) Target price (Eu) 13.00¹ Market cap. (Eu m) 11, Enterprise value (Eu m) 27,776.2 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Research Analysts Stefano Bezzato Vincent Gilles Specialist Sales: Mark Whitfeld Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Price Price relative The price relative chart measures performance against the MADRID SE INDEX which closed at on 24/10/12 On 24/10/12 the spot exchange rate was 1./Eu 1. - Eu.77/US$1 Performance Over 1M 3M 12M Absolute (%) Relative (%) Gas Natural Fenosa (GAS.MC) INITIATION Uncertainty ahead We initiate coverage of Gas Natural Fenosa (GNF) with a Neutral rating and a 13 per share target price, indicating 10% potential upside. Long-term uncertainties: We forecast EBITDA will drop by 4.5% in 2013 and rise by an average of 2% in the following 5 years. We see 3 key issues affecting this performance: (i) sustainability of volume growth in gas midstream (+44% in H1 2012); (ii) a decline in profitability for power generation in Spain (high reserve margins, energy market reform, no CO2 free allocation from 2013); and (iii) modest growth in network activities. As a result, our current 2014 EBITDA forecast ( 5.1bn) is well below the company s existing targets ( bn). Short-term positives: We expect GNF s EBITDA and EPS to be up 11% and 37% (on a normalised basis) in 2012E, driven by the international gas division and ongoing deleveraging. Catalysts: Q3 results (6 Nov.) should be a positive. We are 6 8% above 2012E consensus EBITDA and EPS. We see continued uncertainty on a business plan date (the last one was in 2010) as a potential negative. Discount looks justified; we prefer Iberdrola: GNF currently trades at a discount to the sector (8x 2014E P/E vs 11x) and its free cash flow and dividend yields (18% and 9%, respectively, in 2014E) look attractive versus European peers. We believe the discount is justified by the lack of clarity on future strategy, the volatility of the gas midstream business and potential M&A risk given the improved leverage. We would need the stock to trade near the bottom of its two-year trading range to take a more positive view. Iberdrola (Outperform, TP 4.7) remains our preferred utility in Iberia because of new deleveraging, potential upside on securitisation and energy tax pass-through, as well as clearer growth outside Spain. Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Revenue (Eu m) 21, , , ,378.9 EBITDA (Eu m) 4, , , , Adjusted Net Income (Eu m) 1, , , ,462.0 CS adj. EPS (Eu) Prev. EPS (Eu) ROIC (%) P/E (adj., x) P/E rel. (%) EV/EBITDA Dividend (12/12E, Eu) 0.91 IC (12/12E, Eu m) 31, Dividend yield (%) 7.7 EV/IC 0.89 Net debt (12/12E, Eu m) 15,978.1 Current WACC 9.1 Net debt/equity (12/12E, %) Free float (%) 28.0 BV/share (12/12E, Eu) 13.5 Number of shares (m) 1, Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Gas Natural Fenosa GAS.MC Price (24 Oct 12): Eu11.79, Rating: NEUTRAL, Target Price: Eu13.00 Income statement (Eu m) 12/11A 12/12E 12/13E 12/14E Sales revenue 21,076 24,439 24,811 25,379 EBITDA 4,645 5,168 4,935 5,131 Depr. & amort. (1,966) (2,053) (2,063) (2,095) EBIT (CS) 2,679 3,115 2,872 3,036 Net interest exp. (934) (915) (863) (829) Associates Other adj, 2 PBT (CS) 1,754 2,213 2,023 2,222 Income taxes (496) (553) (506) (556) Profit after tax 1,258 1,660 1,518 1,667 Minorities (201) (206) (197) (205) Preferred dividends Associates & other Net profit (CS) 1,057 1,454 1,321 1,462 Other NPAT adjustments 268 Reported net income 1,325 1,454 1,321 1,462 Cash flow (Eu) 12/11A 12/12E 12/13E 12/14E EBIT 2,679 3,115 2,872 3,036 Net interest (934) (915) (863) (829) Cash taxes paid Change in working capital 815 (178) Other cash & non-cash items 3,101 3,174 3,123 3,128 Cash flow from operations 5,661 5,196 5,132 5,335 CAPEX (1,265) (1,480) (1,559) (1,588) Free cash flow to the firm 4,396 3,716 3,573 3,747 Acquisitions (99) Divestments 403 Other investment/(outflows) (638) Cash flow from investments (1,599) (1,129) (1,309) (1,335) Net share issue/(repurchase) Dividends paid (728) (823) (914) (1,005) Issuance (retirement) of debt Other (1,524) (1,928) (1,801) (1,827) Cash flow from financing (2,253) (2,751) (2,715) (2,832) activities Effect of exchange rates Changes in Net Cash/Debt 1,809 1,316 1,108 1,168. Net debt at start 19,103 17,294 15,978 14,870 Change in net debt (1,809) (1,316) (1,108) (1,168) Net debt at end 17,294 15,978 14,870 13,701 Balance sheet (Eu m) 12/11A 12/12E 12/13E 12/14E Assets Cash and cash equivalents 3,098 3,098 3,098 3,098 Accounts receivable 5,192 4,734 4,734 4,734 Inventory Other current assets 1,411 1,246 1,246 1,246 Total current assets 10,580 9,957 9,957 9,957 Total fixed assets 22,744 22,106 21,509 20,902 Intangible assets and goodwill 11,080 11,412 11,755 12,107 Investment securities Other assets 2,098 2,098 2,098 2,098 Total assets 46,502 45,573 45,318 45,064 Liabilities Accounts payable 4,671 4,137 4,137 4,137 Short-term debt 2,853 2,853 2,853 2,853 Other short term liabilities Total current liabilities 8,332 7,531 7,531 7,531 Long-term debt 17,539 16,223 15,115 13,946 Other liabilities 6,190 6,457 6,707 6,959 Total liabilities 32,061 30,211 29,352 28,437 Shareholders' equity 12,792 13,507 13,914 14,371 Minority interest 1,649 1,855 2,052 2,256 Total equity & liabilities 46,502 45,573 45,318 45,064 Net debt (Eu m) 17,294 15,978 14,870 13,701 Per share data 12/11A 12/12E 12/13E 12/14E No. of shares (wtd avg) 992 1,001 1,001 1,001 CS adj. EPS (Eu) Prev. EPS (Eu) Dividend (Eu) Dividend payout ratio Free cash flow per share (Eu) Key ratios and 12/11A 12/12E 12/13E 12/14E valuation Growth(%) Sales EBIT (7.8) 5.7 Net profit (9.2) 10.7 EPS (9.2) 10.7 Margins (%) EBITDA margin EBIT margin Pretax margin Net margin Valuation metrics (x) EV/sales EV/EBITDA EV/EBIT P/E P/B Asset turnover ROE analysis (%) ROE stated-return on equity ROIC Interest burden Tax rate Financial leverage Credit ratios (%) Net debt/equity Net debt/ebitda Interest coverage ratio Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Price Price relative The price relative chart measures performance against the MADRID SE INDEX which closed at on 24/10/12 On 24/10/12 the spot exchange rate was 1./Eu 1. - Eu.77/US$1 Gas Natural Fenosa (GAS.MC) 2

3 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul October 2012 Key charts Figure 1: Share price performance ( ) Figure 2: 2013E Spanish output % 90% 80% 70% 60% 7% 8% 11% 20% 17% 21% % 40% 36% % 20% 10% 54% 8% 17% 0% Gas Natural Iberdrola Gas Natural: Stock price two year low two year high CCGT Other thermal Nuclear Hydro Renewables Source: Thomson Reuters Figure 3: Gas margin evolution ( /MWh) Figure 4: Gas supply volumes (TWh) A 2009A 2010A 2011A 2012E A 2009A 2010A 2011A 2012E Source: Company data, Credit Suisse estimates Figure 5: Net income forecast ( m) 1,800 Source: Company data, Credit Suisse estimates Figure 6: FCF yield 19.5% 19.3% 1,600 1,454 1,462 1,560 1, % 1,400 1,200 1,000 1,057 1, % 18.0% 18.4% % 17.0% 17.4% 17.1% % A 2012E 2013E 2014E 2015E 2016E 16.0% 2012E 2013E 2014E 2015E Source: Company data, Credit Suisse estimates Gas Natural Fenosa (GAS.MC) 3

4 Table of contents Key charts 3 Investment summary 5 1. Expect 2012 targets to be met 6 Leverage targets appear within reach 7 Midstream gas driving EBITDA performance 9 2. Slower growth after 2012E? 10 Distribution networks 11 Power generation 16 Midstream business Financial outlook 22 Leverage Valuation 29 Valuation blend 29 SOTP Shareholding structure 32 Appendix I Company profile 33 Appendix II Spanish power market 35 Appendix III Financial statements 40 Appendix IV WACCs 43 Appendix V Credit Suisse HOLT 45 Appendix VI PEERs map 46 Gas Natural Fenosa (GAS.MC) 4

5 Investment summary We initiate coverage of GNF with a Neutral rating and a TP of 13. We believe the equity story relies on strong 2012 results, successful deleveraging and an attractive valuation. However, we expect uncertainty and slow growth to prevail after Short-term positives: Expect strong 2012 results: our forecasts indicate 2012E EBITDA at 5.2bn (from 4.6bn in 2011) and net income at 1.45bn (from 1.1bn net of capital gains in 2011). Strong performance of gas supply: our 30% estimated volume growth for FY 2012 (from +44% in H1) should be enough to beat the business plan targets by 60%. And leverage rapidly falling to desired levels: strong operational results and disciplined financial management should lead to 20.6x FFO/debt (using S&P metrics) and 3.1x ND/EBITDA (using GNF targets) in Therefore, we see no risk to the current dividend policy (10% annual DPS growth) and dividend yield (c8% for 2013E). Long-term uncertainties: After 2012E, we see EBITDA falling by 4.5% in 2013E (driven mainly by power generation) and growing by 2% on average in the following 5 years. We see 3 key issues: Visibility of gas supply, which has been driving the 2012E performance, remains limited: our current forecasts, based on flat volumes and unit margins internationally, lead to a broadly flat EBITDA for the whole division. We see limited scope for upside (c5% on divisional EBITDA, 3% on group EPS) should international gas volumes grow at 7% p.a. (per the Credit Suisse oils team s view on the global LNG market). A recovery in power generation profitability does not look likely, with Spain s reserve margin above the 20% level until We estimate c. 300m of new taxes in 2013 (Spanish energy market bill) and 60m of additional CO2 costs (no free allocations). We believe the final bill was a positive compared to the early drafts, with a higher proportion of taxes that can be passed through to customers. However, given its output mix (only 20% non-thermal vs over 70% for IBE), GNF looks less likely to benefit from any windfall profit originating from the power price increase, in our view. Growth in network EBITDA remains modest, at c3% p.a.: gas distribution was one of the areas for expansion identified by the last business plan, given the low penetration in most of GNF s markets. However, the economic crisis has taken its toll, and Spanish gas connections grew at a lower rate than expected (+80k vs 185k in 2010/11). Upside risk on a recovery looks limited, given the regulated nature of the business (1% earnings upside for 10% increase in connections, on our estimates). As a result, we see 2014E at risk: without a new business plan (no date announced), we refer to the latest 2010 targets and note that these are above our estimates ( bn vs 5.1bn). The upside potential to our forecasts (c 200m EBITDA), mainly linked to Spanish power generation and international gas supply, is not enough to match the targets. Shares have been trading in the range for most of the past two years (see Figure 1). At the bottom end of the range, we would view c20% FCF yield and 10% DY as unique in the sector. We believe more clarity on future growth would be needed to justify valuations in line with the sector (10.5x 2013E P/E) implied at the top end of the range. Our GNF TP implies 10% upside potential, with an 8.5% 2013E dividend yield. With 19% upside and a 7.6% dividend yield, we prefer Iberdrola (OP, TP 4.7). We believe the current 2014E premium (Iberdrola at 9.7x P/E v. GNF at 8x) is justified by higher clarity on growth outside Spain and potential upside on deleveraging/securitisation on tariff deficit, as detailed in our 25 October Iberdrola note, E plan: defensive but not dilutive. Gas Natural Fenosa (GAS.MC) 5

6 1. Expect 2012 targets to be met We expect GNF to reach the targets set for 2012 in its 2010 business plan, with leverage falling within the range targeted for 2012 ( 15 16bn) and EBITDA meeting the goal of beating 5bn. We forecast net debt to fall to 15.9bn by the end of 2012 from 17bn in 2011A, a result of prolonged discipline on the capex front and some tariff deficit securitisation in 2012E (c. 550m, with 1bn still on the books). In particular, despite a high component of recurring capex (65% of the total, we estimate), the total capex remains at 30% of EBITDA, below business plan targets set at 38%. As a result of the prolonged financial discipline, GNF currently shows FCF yields at the top end of the sector, with 18% versus a sector average of 3%. The ongoing crisis has continued to negatively affect the growth in connection points in Spain (+80k p.a. vs a targeted +185k) and distribution EBITDA (2012E 2.65 vs a target of 2.8bn), while healthy reserve margins and poor hydro conditions maintain electricity EBITDA (2012E: 1.15bn) well below business plan targets ( 1.4bn). The weak performance in the regulated and power businesses should be offset by a 60% beat of targets by the midstream gas division, which we expect to report 1.3bn EBITDA. This is driven by a significant increase in sold volumes (+44% yoy in H1 internationally), owing mainly to volumes diverted outside Spain. We believe the sustainability of this increase from 2013 is one of the key questions the company will have to address in the coming months. GNF presented its latest business plan in July 2010, with three stated aims: Strengthen the balance sheet following the acquisition of Union Fenosa by Gas Natural. Optimise the combination of Gas Natural and Union Fenosa by extracting synergies, improving the gas procurement portfolio and taking advantage of dual fuel opportunities. Capture growth by leveraging on organic potential in the regulated (gas penetration in Spain) and Latin American (mainly gas distribution) businesses and by taking advantage of any market recovery for the liberalised business. Figure 7 illustrates the key financial targets for 2012 compared with our current forecasts. We highlight how we expect most of the targets to be met: in particular, the leverage has been reduced according to plan, while the recent performance of the gas supply division has helped the company to meet the EBITDA target. Figure 7: 2012 business plan targets vs Credit Suisse forecasts in billions, unless otherwise stated Business plan ( ) CS Forecast (2012) Business plan ( ) CS Forecast (2012) EBITDA ( bn) >5bn 5.2 Net debt Net income ( bn) Net 3x 3.1x debt/ebitda DPS ( ) >10% CAGR +10% Leverage 50-55% 57% Capex ( bn) Credit Rating A BBB+ Source: Company data, Credit Suisse estimates Gas Natural Fenosa (GAS.MC) 6

7 Leverage targets appear within reach Despite the results achieved on debt reduction up to H (see Figure 8), we believe deleveraging remained the most prominent goal of the latest business plan, setting a target for net debt to reach 15bn 16bn by the end of 2012, equivalent to 3x net debt/ebitda. Figure 8: debt evolution in billions, unless otherwise stated Initial net debt Capital increase Asset disposals Other H Source: Company data We believe GNF will succeed in reaching the highest end ( 16bn) of the range targeted, considering that c. 1bn of securitisation for the historical tariff deficit remains pending. In particular, we note that the measures adopted in 2011 (see Figure 9 for the historical evolution of net debt) included: Divestments for c. 700m (Arrubal CCGT, Madrid supply portfolio, Guatemala s power distribution). 515m equity contribution from Sonatrach, in the context of the agreement reached to resolve the dispute on historical gas prices. 1.2bn tariff deficit securitisation. Strict capex control, with total investments in 2011 reaching 1.4bn, or 30% of EBITDA, below business plan targets of 38% ND/EBITDA for Scrip dividend resulting in a lower cash dividend for 400m. Furthermore, we expect GNF to cut net debt by a further 1.3bn in 2012 (see Figure 10), helped by: Continued capex control, estimating 1.5bn investments for the full year, or 29% of our 2012 EBITDA forecast. A lower cash dividend of c. 80m due to the scrip dividend (however, the take-up was significantly lower than in 2011, at 18.19% versus 96.39%). 551m tariff deficit securitisation. Gas Natural Fenosa (GAS.MC) 7

8 Figure 9: Net debt change in billions, unless otherwise stated 25.0 Figure 10: 2012E debt reduction in billions, unless otherwise stated (3.5) H ND Op Cash Flow Capex Cash dividend 2012 ND Source: Company data Source: Company data, Credit Suisse estimates As a result of the financial discipline shown over the past few years, GNF today shows levels of free cash flow yield well above the sector average (currently 3% for 2013E), as highlighted in Figure 11. At the same time, we believe it is premature to expect an increase in capex and/or dividend upside on the back of these strong cash generation levels. Leaving future capex at current levels (i.e. c. 1.5bn per year, driven by recurrent capex for the network divisions and maintenance capex for the rest of the group) and maintaining a 10% annual growth rate in the dividend (implying 8-10% dividend yield in E) leads to 2.7x ND/EBITDA (see Figure 12) 1 by the end of 2014E, in the middle of the targeted range. Figure 11: Free cash flow yield 2 Figure 12: Net debt/ebitda (x) 19.5% 19.0% 18.5% 18.0% 17.5% 17.0% 17.1% 16.8% 18.1% 19.0% % % % 2012E 2013E 2014E 2015E E 2013E 2014E 2015E 1 Assuming no further tariff deficit securitisation 2 Defined as: CS net income + D&A + change in working capital - capexr. 2012E excludes the impact of 551m tariff deficit securitisation Gas Natural Fenosa (GAS.MC) 8

9 Midstream gas driving EBITDA performance Despite a significantly changed environment compared with the 2010 business plan (see Figure 13), we expect GNF to reach the EBITDA target set for 2012: our forecasts point to 5.2bn EBITDA for the current year, in line with a goal of rising above the 5bn level. Figure 13: 2012 assumptions versus actual Business plan assumption Current Brent (US$/bbl) c Spanish pool price ( ) c50 54 NBP (US/MMBtu) c8 3 US$/EUR c Source: Company data, Credit Suisse estimates We believe this should be driven mainly by a strong performance from the gas division (including import infrastructure, wholesale & retail and the Union Fenosa Gas JV with ENI), which we expect to reach 1.3bn in 2012 as opposed to a target of 0.8bn. Figure 14 illustrates the targets, key drivers and our forecasts for each division: Networks ( 2.65bn forecast vs 2.8bn target) in Spain, we believe cost-cutting and synergies partially offset a slower rise in gas connection points (80k on average per year instead of 185k as originally targeted), the disposal of the Madrid gas connections and the recent cut in electricity distribution revenues (-c 110m). In Latin America, we see weather impacts and currency effects as the key reasons for GNF not reaching its targets. Electricity ( 1.15bn forecast vs 1.4bn target) the key difference is in Spain, where we see 200m lower EBITDA than originally targeted due to lower hydro availability (estimated 9% load factor based on H data) and high reserve margins continuing to put pressure on CCGT utilisation (34% for GNF). Gas ( 1.3bn forecast vs 0.8m target) a 60% beat, on our estimates, compared with the original EBITDA targets helped to offset the miss in distribution and electricity in Volumes of gas supplied in H outside Spain were up 44% yoy (+60% yoy outside Europe) representing c30% of total supply 3. We assume growth slowing in the second part of the year, in particular to +30% for the volumes supplied outside Spain. This leads to a total 39bcm supply portfolio, as opposed to a 32-34bcm target, already reaching the top end of the 2014 goal. Figure 14: 2012 EBITDA targets vs Credit Suisse estimates in billions, unless otherwise stated Target CS Diff Spanish distribution (0.05) LatAm distribution (0.10) Other distribution Total distribution (0.15) Spanish generation (0.19) LatAm generation (0.06) Other generation Total generation (0.25) Gas Other (0.07) Total Group Source: Company data, Credit Suisse estimates 3 Excluding Union Fenosa Gas Gas Natural Fenosa (GAS.MC) 9

10 2. Slower growth after 2012E? We believe that operational growth will slow down in the coming years, from 11% EBITDA growth in 2012E to a five-year EBITDA CAGR of +1% from 2013E. We see this as a result of (i) growth in gas supply volumes normalising and (ii) the profitability of the power generation business being hit by the energy market reform in Spain as well as by the elimination of free CO2 allocations in We believe the existing EBITDA target for 2014 ( bn) is too ambitious. We see upside potential to our current estimates limited to c 200m, which would leave our bull-case estimate at 5.3bn, still below original targets. Distribution EBITDA in Spain remains fairly insensitive to faster increases in gas penetration (currently among the lowest in Europe), with 2% upside potential for every 10% increase in customer connections. We see more room for upside in Latin America (8% upside to our EBITDA estimates), but results remain highly linked to noncontrollable factors (regulatory changes, weather impact, exchange rate evolution). We see upside potential from power generation (c 85m in 2014E) from pass-through of the new generation taxes, but we believe the generation mix skewed towards CCGT capacity (54% of portfolio) limits the windfall profit potential. 70% of the recent growth in gas EBITDA (+52% yoy in H1) remains driven by the procurement and supply division, which remains a trading business, in our view. As such, visibility on future growth prospects remains limited, although we see growth in global LNG demand continuing to be driven by Asia until 2016E. Unlike for 2012, we believe 2014 targets look ambitious compared with our current forecasts (see Figure 15), owing to the prolonged economic crisis and the recent regulatory changes, particularly in relation to the Spanish generation business. In this section, we analyse our current forecasts and the potential upside for growth, with particular attention to: Growth in gas penetration in Spain reverting to pre-crisis levels (currently +80k connections per year versus a business plan target of +185k). The possibility of the Spanish generation taxes being passed through to final customers in the near term. The sustainability of the recent growth in volumes of gas supplied outside Europe. Figure 15: 2014 EBITDA target versus Credit Suisse estimates in billions, unless otherwise stated Target CS Diff Spanish distribution ( ) LatAm distribution (0.25) Other distribution N/A 0.10 Nm Total distribution ( ) Spanish generation ( ) LatAm generation ( ) Other generation N/A 0.01 nm Total generation ( ) Gas Other (0.07) Total Group (0.6-1) Source: Company data, Credit Suisse estimates Gas Natural Fenosa (GAS.MC) 10

11 Argentina Colombia Brazil Mexico 26 October 2012 Distribution networks (56% of 2014E group EBITDA) The latest business plan identified gas as the main area for growth within the regulated distribution business, driven by the low penetration levels in some of the markets where GNF is currently present. In particular: Spain remains well below the European average, with c. 7m connection points in 23m homes, representing c. 30% penetration in the residential market (Figure 16). Assuming an average penetration for Europe at c.60% implies a potential of c. 2.5m new connections for Spain before even considering any recovery in the real estate market. Based on GNF s current market share (c.70%, according to our estimates), this implies 1.8m potential new connections for Gas Natural, equivalent to eight years of expansion at the rates targeted by the latest business plan (+230k per year). Mexico and Brazil show significant potential compared to other Latin American countries in which GNF also operates, with penetration rates at, respectively, 2% and 7% (see Figure 17). Figure 16: Gas penetration Europe in % Figure 17: Gas penetration Latin America in % Source: Company data Source: Company data Spain (60% of distribution 2014E EBITDA) Allowed revenues for gas distribution in Spain are set by a formula first introduced in 2006 and are a function of: Inflation, i.e. 85% of the average between retail price index and industrial price index. An efficiency factor set as the sum of: o o 60% of the growth in customer connections multiplied by a coefficient of 0.426; 20% of the growth in gas consumption multiplied by a coefficient of Gas Natural Fenosa (GAS.MC) 11

12 As a result, we note that the impact of any increase/decrease in customers/volumes distributed on revenues is mitigated through the formula. Given the difference in the efficiency coefficient, customer connections remain the key driver of revenues: The latest business plan forecast 185k new connections on average in the period, while in reality an average 80k was added (excluding disposals in the Madrid area) in 2010 and 2011, followed by 30k in H Based on a 230k average (as per business plan) addition in the second half of the business plan, Gas Natural would have reached 5.8m connections by the end of 2014 (see Figure 18). Figure 18: Gas connections in Spain 000 s Source: Company data, Credit Suisse estimates After steady growth in the first part of the past decade (see Figure 19), conventional gas demand (i.e. excluding power generation) became volatile after 2005, with drops in 2006A and 2009A (economic crisis). We also note that: o For 2012, Enagas forecasts conventional gas demand to be up 6% versus the previous year, mainly reflecting weather factors. o o In a December 2011 forecast, Enagas targeted 3.4% growth for conventional gas demand in 2013 and a c. 1.6% CAGR until In its latest forecast for 2013, published in September 2012, Enagas set conventional gas demand growth at 0.7%, corresponding to an absolute level of 280TWh (from the 286TWh targeted in the December 2011 estimate). Gas Natural Fenosa (GAS.MC) 12

13 2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 26 October 2012 Figure 19: Conventional gas demand evolution in TWh Source: Enagas Our current base case forecast of 973m EBITDA in 2014 (2.8% CAGR from 2011) is based on the following assumptions: 60k new connections for 2012, from +30k in H1. c150k new connections per year in 2013E and 2014E, reaching a total 5.4m connections at the end of 2014 vs. 5.8m in the latest business plan. Conventional gas demand growing at 1.5% per year in 2013E and 2014E, broadly in line with the CAGR forecast by Enagas. A bull case up to 2014E would be based on the following assumptions: 230k new connections, respectively, in 2013E and 2014E, in line with the target presented in the 2010 business plan. Conventional gas demand growing by 3.4% in 2013E and 2.3% in 2014E, in line with the forecasts presented by Enagas in December In contrast, a bear case would assume new connections in line with 2012 (+60k) also in 2013/2014 and demand falling at 2% p.a. Figure 20 shows our sensitivity analysis. We highlight that the upside potential on faster penetration remains limited, with 2% potential upside to divisional EBITDA (1% on group earnings) for every 10% increase in customer connections. Gas Natural Fenosa (GAS.MC) 13

14 Figure 20: Gas distribution EBITDA sensitivity Spain in millions, unless otherwise stated E 2013E 2014E Bear case Current forecast Bull case Latin America Two markets stand out as offering the highest growth potential for GNF in gas distribution in Latin America: Brazil (representing 50% of GNF s EBITDA in LatAm s distribution) driven by the potential increase in gas demand, linked mainly to the introduction of new CCGT capacity. Mexico (representing 17% of GNF s EBITDA in LatAm s distribution) driven by low penetration of gas (only 2% as opposed to 45% in Colombia and 66% in Argentina). In contrast Colombia, the second largest market in LatAm gas by exposure for GNF (30% of LatAm s gas distribution EBITDA), is seen by the company as a mature, lowgrowth market. In particular, we highlight the growth potential for Brazil, as detailed in the 2011 report published by the Credit Suisse oil team on Latin American gas demand (Sleeping Giant, 22 November 2011). We expect demand to grow at an 8% CAGR for power plants (see Figure 21) and at 5% for residential and industry (see Figure 22). Figure 21: Gas demand thermal power in mm cm/day Figure 22: Gas demand conventional in mm cm/day E 2020E E 2020E Source: Petrobras, Credit Suisse estimates Source: Petrobras, Credit Suisse estimates Gas Natural Fenosa (GAS.MC) 14

15 However, the reliability of Latin America s growth prospects remains limited, as a result of exogenous factors which we believe will continue to affect the performance of the business. We note that since 2008, gas sales and EBITDA performance have remained particularly volatile, driven by factors outside the company s control, in particular: Weather patterns, specifically in relation to the hydro levels in Brazil and the consequent utilisation levels for gas-fired capacity. Translation effect linked to exchange rate evolution. Tariff changes in local distribution areas. Figure 23 and Figure 24 show the evolution of gas sales yoy over the past three years and of the respective EBITDA in euro terms by country. Figure 23: Brazil Figure 24: Mexico 60.00% 40.00% 20.00% 12.9% 50.50% 30.8% 20.8% 50.00% 40.00% 30.00% 41.4% 0.00% % % % H % -3.8% -22.4% % Volumes EBITDA 20.00% 10.00% 0.00% % 9.6% 7.40% 3.70% 1.10% H % -4.2% -0.6% Volumes EBITDA Source: Company data Source: Company data Our current forecasts are based on the following assumptions: After 2012, EBITDA in local currency growing in line with H for Brazil (+2.4%) and Colombia (mature market, +0.5%). EBITDA growth in local currency halving in Mexico from c10% in H to 5% from 2013E. Flat exchange rates, in particular /US$ at 1.27 and /BRL at The result is EBITDA in LatAm gas distribution growing to 667m in 2014E, implying 2.5% annual growth. Our bull case involves keeping EBITDA growth in Mexico at 10% for five more years and aligning Brazil s EBITDA performance to the expected growth in volumes (+9% CAGR up to 2015E). Our bear case assumes flat EBITDA in nominal terms for Brazil and Mexico. Figure 25 shows the upside potential on Latin America s gas EBITDA. We estimate that our bull case could add c. 3% at the group earnings level. Gas Natural Fenosa (GAS.MC) 15

16 Figure 25: Latin American gas distribution EBITDA in millions, unless otherwise stated E 2013E 2014E Bear case CS Forecast Bull case Power generation Power generation stands out, in our view, as the main area of negative difference compared with the 2010 business plan. This is due largely to: The persisting overcapacity in the Spanish system (see Appendix II for a detailed analysis of Spain s generation market). The introduction of new taxes on power generation, part of the energy market reform unveiled by the government on 14 September, which will be implemented from January In particular, in comparison with our 1 August initiation reports on Iberdrola (Time to reconsider) and Enel (Challenges remain), there have been two key developments in the generation sector in Spain: The decision by Iberdrola and Enel not to apply for life extension of the Garona nuclear facility (466MW of installed capacity), scheduled to cease operation in July So far, this is the only indication of retirement of capacity in Spain and only modestly modifies our reserve margin assumption (see Figure 26, c1% reduction by 2014E) which remains well above 20% for the rest of the decade. Figure 26: Change in reserve margin forecasts 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E old new Gas Natural Fenosa (GAS.MC) 16

17 On 14 September, the announcement by the Spanish government of a long-awaited energy market reform aimed at eliminating the tariff deficit from the system starting in Please refer to Appendix II for a detailed description of the measures announced. We estimate an annual impact on GNF, before any potential pass-through to final customers, of c. 300m, as outlined in Figure 27. Figure 27: Impact of new taxes in millions, unless otherwise stated 2013E 2014E 2015E 2016E Total generation tax (123) (128) (130) (137) Total hydro tax (38) (38) (38) (39) Total nuclear tax (21) (21) (21) (22) Green cent (145) (145) (145) (147) Total (327) (333) (334) (344) In our 17 September report, Spanish energy market reform: Better than expected, we highlighted three key positives of the reform bill, currently going through Parliament: (1) Renewed clarity on the Spanish generation sector, after years of uncertainty on the potential introduction of new nuclear and hydro taxes to offset the rising tariff deficit. (2) A lower overall amount of new taxation on power generation compared to a draft bill circulated by the press in July (Cinco Dias, El Pais), namely 1.8bn from 2.5bn. (3) A higher proportion of taxes that apply to the marginal gas power plant (overall generation tax at 6% of revenues instead of 4% as in the July draft, green cent on fossil fuel consumption) compared to nuclear and hydro taxes. With regard to the last point, we have updated our power price forecasts (see Figure 28) to reflect the pass-through of: The green cent on fossil fuel, now applicable also to power generation consumption, set at 0.65/GJ or 2.34/MWh, starting from The overall generation tax at 6% instead of 4% of revenues, starting from Figure 28: Changes to our power price estimates in /MWh, unless otherwise stated 2013E 2014E 2015E 2016E Old New We highlight that further potential upside to our power price forecasts could derive from a full pass-through of all the measures announced in 2013E, rather than only in 2016E. As highlighted in Figure 29, this results in further c 3.5/MWh upside in the E period. Figure 29: Potential upside to our power price estimates in /MWh millions, unless otherwise stated 2013E 2014E 2015E 2016E Current Bull case Potential upside Potential impact on GNF We believe the risk to our estimates for GNF s generation division is on the upside and linked to any faster pass-through of the measures announced by the government in September. At the same time, we believe the upside risk is lower for GNF as opposed to Iberdrola, due mainly to their different generation mix. As highlighted in Figure 30, over Gas Natural Fenosa (GAS.MC) 17

18 50% of GNF s output comes from CCGT capacity (see Appendix I for a full breakdown of capacity), which is unlikely to benefit from any windfall profit originated by the passthrough. On the contrary, Iberdrola s output from nuclear and hydro (overall 57% of the Spanish output) should benefit from the full power price increase. Figure 30: Breakdown of 2013E output 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 7% 8% 11% 20% 54% Gas Natural 17% 21% 36% 8% 17% Iberdrola Source: Company data, Credit Suisse estimates CCGT Other thermal Nuclear Hydro Renewables Figure 31 shows a sensitivity analysis for GNF s generation EBITDA depending on the different pass-through scenarios: Base case: we assume full pass-through of the green cent in 2014E and full passthrough of the overall generation tax from 2016E. Bull case: we assume full pass-through of all new taxes starting from 2013E. Bear case: we assume no pass-through of the new taxes. Figure 31: Electricity 2014E EBITDA sensitivity analysis in millions, unless otherwise stated 1,200 1, , Bull case CS Forecast Bear case Gas Natural Fenosa (GAS.MC) 18

19 Midstream business GNF s midstream gas business currently controls a 29bcm procurement portfolio through regasification and liquefaction plants as well as long-term gas contracts. The business is organised into three divisions, namely: Procurement & Supply, representing 56% of our estimated divisional EBITDA in This is mainly a gas trading business, controlling 24bcm of procurement, of which 9bcm is currently imported from Algeria (Sonatrach contract). Union Fenosa Gas, representing 26% of our estimated divisional EBITDA in This is a parithetic joint venture with ENI, controlling 6bcm of procurement, selling mainly to Spanish customers, including GNF s power generation division. Infrastructure, representing 16% of our estimated divisional EBITDA in This is a regulated business, controlling the Maghreb Europe gas pipeline, maritime transportation, LNG project development as well as hydrocarbon exploration, development, production and storage. We believe the sustainability of the growth reported in H is the key question mark for the division. Procurement and supply, whose EBITDA grew by 76% in H yoy, representing 70% of the growth in the gas division, as highlighted in Figure 32, can be seen as a low-margin trading business (in H1 this year, unit EBITDA margin was 2,000/GWh as opposed to 7,700/GWh for Union Fenosa Gas). Figure 32: 2012E EBITDA growth in millions, unless otherwise stated H Procurement & supply UF Gas Infrastructure H Source: Company data, Credit Suisse estimates Analysing the cyclicality of the business, we see two key trends: The volume levels that, according to our estimates, will be reached in 2012 (Figure 33) represent a peak in the history of Gas Natural s Procurement & Supply division. The proportion of sales outside Europe as a percentage of the total has moved from 16% in 2008 to almost 28% in H (business plan target was 27% for 2012, see Figure 34). Gas Natural Fenosa (GAS.MC) 19

20 Figure 33: Historical supply evolution in TWh A 2009A 2010A 2011A 2012E Figure 34: Historical supply breakdown in % 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 14.0% 12.6% 11.1% 14.9% 2.1% 5.6% 6.9% 8.1% 83.8% 81.8% 82.0% 76.9% 19.5% 8.0% 72.4% E Spain Europe Other Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Looking at global LNG demand, and particularly at the Pacific region, GNF s recent area of expansion, we continue to see significant growth prospects driven by concerns on the future of nuclear energy in core LNG markets. We refer to the report published by the Credit Suisse oil team (Global LNG Sector Update: Tighter then looser, 7 June 2012), where we see Asian countries continuing to drive LNG demand (Figure 35) until 2016E, although with a temporary slowdown in 2013E (Figure 36) due to possible nuclear resumptions in Japan. Figure 35: APAC geographically segmented LNG demand E in MTpa MTpa Figure 36: Recent change in CS LNG demand forecast for Japan in MTpa MTpa Japan Korea Taiwan China India Singapore Other SE Asia Previous CS forecast Current CS forecast In 2012, GNF added two new supply deals to its current customer portfolio, representing c. 6% of the volumes sold by its Procurement & Supply division in 2012E: India, with a contract, signed in August, with Gail for the supply of 3bcm over 3 years. Puerto Rico, with a contract, signed in April, for 2bcm supply over 2 years. On the procurement side, we do not see any significant change until 2016, when the agreement with Cheniere will become operational for 3.5bcm of annual LNG for 20 years. Gas Natural Fenosa (GAS.MC) 20

21 Analysing unit margins, we note (Figure 37) a significant improvement in We believe this reflects better sale conditions, mainly in relation to volumes sold outside Spain. On the procurement side, the deal reached with Sonatrach in 2011 was mainly aimed at settling a dispute over historical prices, with no impact on future prices. Figure 37: Gross margin evolution - Procurement & Supply in /MWh A 2009A 2010A 2011A 2012E Source: Company data, Credit Suisse estimates Our forecasts and potential upside risks We take the following assumptions for our base-case estimates, leading to a broadly flat EBITDA in 2012E 14E for the gas division: Volumes we assume GNF to be able to maintain the 2012E levels of supply after 2012E, with the new deals announced in India and Puerto Rico compensating for some slowdown in Pacific demand in 2013E. Margins with no renegotiation in sight, we assume flat margins from 2013E. From 2016E, with additional procurement from Cheniere and the global gas market becoming looser again (see the Credit Suisse oil team s 7 June report, Tighter then looser) we assume a 20% reduction in unit margins. Figure 38 shows our base case together with a sensitivity analysis around our key assumptions. In particular, our: Bull case is based on international volumes growing at 7% per year in 2013E 16E, in line with the Credit Suisse oil team s assumption on Pacific demand. Bear case is based on volumes and margins reverting to the average of the previous four years in 2013E and remaining flat in 2014E. Figure 38: Procurement & Supply EBITDA sensitivity analysis in millions, unless otherwise stated Bull case Base case Bear case Gas Natural Fenosa (GAS.MC) 21

22 3. Financial outlook We expect GNF s earnings evolution to remain volatile in the next few years, with a strong 2012E followed by some slowdown due to regulation in 2013E. We also expect significant leverage reduction, bringing relevant ratios (FFO/debt) above S&P targets starting from 2012E. We expect a strong increase in 2012E earnings on a normalised basis (i.e., excluding 2011A capital gains), reaching 1.45bn from 1.06bn in 2011A. Compared to Reuters consensus, we are 6% above at the EBITDA level and 8% above at the net income level. We see the energy market reform in Spain driving earnings 8% lower in 2013E, leaving our estimates broadly in line with consensus. On leverage, we believe GNF will reach 3.1x net debt/ebitda at the end of 2012E (broadly in line with the company s 3x business plan target) as well as beat the S&P target of 18% by reaching 20% at the end of the current year. We forecast EBITDA growing at 2.7% CAGR over the next five years (see Figure 39). We currently forecast a 6% EBITDA contraction in 2013 as a result of the introduction of the new generation taxes in Spain, which we expect will be only partially passed through, while we assume margins in gas to reduce at the end of the five-year period as a result of the increase in supply volumes. Figure 39: EBITDA Divisional breakdown in millions, unless otherwise stated 2011A 2012E 2013E 2014E 2015E 2016E 5-YR CAGR Spain , % Latin America % Italy % Total gas distribution 1,587 1,640 1,673 1,711 1,749 1, % Spain % Latin America % Moldova % Total electricity distribution 1,016 1,006 1,057 1,112 1,167 1, % Spain % Latin America % Kenya % Total electricity 1,068 1, ,001 1, % Infrastructure % Procurement and supply % Union Fenosa Gas % Total gas 905 1,320 1,335 1,324 1,345 1, % Other % TOTAL 4,645 5,168 4,935 5,131 5,296 5, % Source: Company data, Credit Suisse estimates Our estimates are based on the following assumptions: Gas distribution: We forecast gas distribution EBITDA to grow at a 2.4% CAGR over the next five years. o For Spain, we assume 60,000 new connections in 2012E (double the level achieved in H1 2012) followed by 150,000 new connections per year until 2020E. We assume gas sales fall by 1.7% for FY 2012E (in line with the H1 level, including the effect of the disposal of the Madrid network) followed by a normalised annual 1.5% growth. Also, we assume 2% inflation (both for industrial and retail prices). Gas Natural Fenosa (GAS.MC) 22

23 o For Latin America, we assume a flat US$/ at 1.27 and a flat exchange rate for local currencies into US$. We assume Mexico will be the highest contributor to growth, although at a slower pace (+5% after 2012E from +c10% in 2012E). We assume EBITDA growth at 2.4% in Brazil (in line with our expectations for 2012) and flat EBITDA for Colombia from Electricity distribution: We forecast EBITDA to grow at a 3.8% CAGR in the next five years. o We believe the higher EBITDA level compared to the gas distribution business is mainly justified by the Latin American area, where we forecast 2012E EBITDA growth of 20% from 2011, mainly reflecting the one-off negative impact of the Colombian wealth tax in o For Spain, we assume a 110m decrease in allowed revenues in 2012E, reflecting the cut in remuneration passed by the Spanish government in March with a retroactive effect to the beginning of the year. After 2012, we currently assume no change in regulation: we forecast annual capex at 340m, flat in real terms vs 2011, WACC for new installations normalised at 6.9% (normalising from 7.4% in on the back of lower 10-year bond yields) and 2% annual inflation. Electricity: We forecast EBITDA to return to 2011A levels by 2016E, with Spain being negatively impacted by new generation taxes and Latin America growing at a c1% CAGR. o o For Spain, we assume CCGT load factors remain around 34% until 2015E and hydro load factors at the average of the last four years (c19%). We assume power prices to recover to 59/MWh by 2014E and 62/MWh by 2016E, and spark spreads of c /MWh (in GNF s case, the price of gas is linked to the evolution of the pool price and the gas division bears the risk of the rise in gas cost). We assume c. 340m of new taxes, with the green cent being passed through from 2014E and the overall generation tax by 2016E. For Latin America, generation facilities operate on the basis of PPA contracts, which are mainly linked to inflation. We model the division on a country-by-country basis, growing the EBITDA margin in local currency by inflation and translating it to euros based on spot rates remaining flat after We model production levels on the basis of flat load factors from 2011A levels. Gas: We forecast EBITDA in the gas midstream to grow at a 5.7% CAGR over the next five years. On a sub-division level: o o Infrastructure: We expect significant growth in 2012E vs 2011A (+27% for FY, +34% in H1), mainly driven by the currency effect with the revenues being USD-denominated and 5% growth in volumes transported. After 2012E we assume c.3% volume growth and flat USD/ exchange at Procurement & Supply: We assume stable volumes from 2013, after a 10% increase (including Spain and International) estimated for We expect 1.5% volume growth in Spain (in line with Enagas assumptions, at the expense of international supply). In 2016, we assume the increase in global supply and GNF s additional procurement from Cheniere should result in a 20% cut to unit margins (up 32% in 2012E vs 2011). Gas Natural Fenosa (GAS.MC) 23

24 o Union Fenosa Gas: We see 6% EBITDA 2012E CAGR, although we note that most of the growth is in 2012E (+27% yoy EBITDA in H1). With Spanish supply to CCGT representing the majority of the business, we model revenues linked to our power price forecasts while costs are driven by oil price and /USD fluctuations. Moving down through the P&L statement, we forecast: The interest expense falling by 5% per year on average, mainly driven by the reduction in net debt (from 17.3bn at the end of 2011A to 11.4bn at the end of 2016E) and assuming the average interest rate grows to 4.5% in 2015E from 4.3% in 2012E. This assumes 80% of debt remaining at fixed rates (from 75% in H1, after the recent bond issuances) and no refinancing need before Tax rate: We estimate the average tax rate stays at 25% for two more years, with GNF benefiting from tax credits on disposals, which we assume have a seven-year duration. We forecast the tax rate to gradually go back to a normalised 30% starting in 2015E until 2017E. Therefore (see Figure 40), we expect net income to fall by 9% in 2013, once the regulatory reform on the generation market in Spain is implemented, growing at an average 5% p.a. from 2014E, driven by degearing and operational growth. We note that the 2011A net income is adjusted for the non-recurring effect of capital gains on disposals. Figure 40: Net income evolution in millions, unless otherwise stated 1,800 1,600 1,454 1,462 1,560 1,539 1,400 1,321 1,200 1,000 1, A 2012E 2013E 2014E 2015E 2016E Source: Company data, Credit Suisse estimates Leverage We forecast GNF will cut its indebtedness by c. 4.6bn in to c. 11.4bn. Looking at the business plan period, we expect GNF to reach 13.6bn net debt in 2014E, including the tariff deficit for c. 1bn, implying 2.6x net debt/ebitda, slightly above the 2.5x business plan target. Figure 41 and Figure 42 highlight the net debt evolution over the coming years and the cash flow profile, based on the following assumptions: Capex plan: We estimate annual capex of 1.6bn per year in 2013 and 2014, with a slight increase from the 1.4bn level we forecast for This represents c.31% of EBITDA, compared to a 33% target reported in the latest business plan. We believe this assumption is consistent with our estimate of a lower EBITDA in 2014E ( 5.1bn), below the lower-end of the bn range provided in the business plan. Gas Natural Fenosa (GAS.MC) 24

25 Dividend policy: We assume the company to continue in its policy of 10% annual growth in DPS until 2014E, then leave the implied payout ratio flat at 76%. Given the low take-up of the latest scrip dividend programme (c.18%), we do not estimate any dividend in shares after Securitisation process: We are not taking into account any further securitisation of the remaining historical tariff deficit, amounting to c. 1bn for GNF, on our estimates. We remain confident that the historical tariff deficit will be securitised in the future, as it remains a legal obligation. Figure 41: Net debt evolution in billions, unless otherwise stated Figure 42: E summary of cash flow in billions, unless otherwise stated 20, ,000 16,000 14,000 12,000 10,000 8,000 6,000 17,294 15,978 14,870 13,701 12,526 11, ,000 2, A 2012E 2013E 2014E 2015E 2016E 5 - Cash flow from operations Capex Net financial charges Dividends 6 Cash flow for debt reduction Source: Company data, Credit Suisse estimates Credit rating considerations GNF is currently rated BBB at S&P (one notch below Enel and Iberdrola) and Baa2 at Moody s. Spain is now BBB- (negative outlook) at S&P and Baa3 (under review for potential downgrade) at Moody s. Assuming no further change on the sovereign front, we have analysed GNF s leverage ratios using the S&P s methodology and key assumptions. In particular, we have assumed the following: FFO adjusted for changes in assets and liabilities, estimating the historical average % FFO/EBITDA at c75%; and Debt, including pension provisions and a net of surplus cash. Figure 43 includes the result of our leverage analysis. Figure 43: Leverage ratios using S&P s methodology 2012E 2013E 2014E 2015E 2016E FFO/debt 20.6% 20.9% 23.3% 25.9% 28.0% Debt/Total cap 55.0% 52.6% 49.8% 47.0% 44.4% Debt/EBITDA 3.6x 3.6x 3.2x 2.9x 2.7x Gas Natural Fenosa (GAS.MC) 25

26 We note the following. S&P has a negative outlook on GNF and Moody s has a credit watch negative. Under the current rating, GNF has a minimum target of 18% FFO/debt, which we estimate has already been widely met. Even with the effect of the energy market reform in Spain, owing to a strong free cash flow generation and the consequent ongoing reduction in debt, we see a slight improvement in the leverage metrics in 2013E. According to the latest S&P report, the agency would consider a rating upgrade should the company sustain a 20% FFO/debt or higher, assuming no change in sovereign rating in Spain and/or in the company s business risk profile. o o o We cannot rule out further downgrades of the Spanish sovereign rating, after S&P downgraded the country to BBB- on 10 October An improvement of the business risk profile could be triggered by structural changes in the utility environment; i.e., some political intervention to support the sector, which we see as highly unlikely. A deterioration of the business risk profile could be caused by an acquisition increasing the exposure of the company s business mix upstream. We cannot rule this out at this stage, but we see it as unlikely (see following section). Based on our current forecasts and no new acquisitions, GNF could theoretically become a good candidate for a rating upgrade, but we see it as practically unlikely in the current macroeconomic context. Furthermore, based on rating action at the sovereign level, we still see possibilities of downgrades considering the assumed link between the company and sovereign rating (two notches above for S&P, as long as Spain remains Investment Grade, one notch above for Moody s). Room for acquisitions? Given the ongoing improvement in GNF s leverage profile, in line with the rating agencies parameters, we assess the impact of a potential acquisition. Earlier this year, Repsol (GNF s second largest shareholder with a 31% stake) launched a disposal process for its LNG assets (please refer to the 24 September 2012 Credit Suisse report Growing confidence on execution for a detailed analysis). On 11 September, GNF was reported to be among the bidders in the sale process for Repsol s LNG assets (see Reuters: Oil and gas firms eyeing Repsol LNG assets). In this context, we note the following. The portfolio of assets up for disposal includes shares in liquefaction trains (Trinidad & Tobago, Peru and offtake agreements), a 75% stake in the Canaport regasification plant and a 50% share in a JV with GNF controlling a 2.5bcm/y supply contract with Qatar. Based on our estimates, Repsol s LNG business contributes c10% to the 2012E EBIT of the group, falling to c5% by 2015E, considering the EBIT growth profile of the group and the expected evolution of the LNG contracts. At the latest interim results presentation, Repsol stated its aim to see cash inflow from the sale on top of removing the current debt and leases (c. 4bn combined). Therefore, we estimate a targeted achieved EV above 4bn. Equally, however, we question whether Repsol will be approaching these negotiations from a position of strength. We believe Repsol will favour bidders offering for the full package of assets. Gas Natural Fenosa (GAS.MC) 26

27 We expect an announcement to come at the earliest by November/early December. We have analysed the potential impact of an acquisition by GNF and, in our view, an acquisition remains unlikely based on various perspectives: Company perspective: Based on our estimates ( 4.5bn EV for LNG assets or 8.8x EV/EBITDA on 2013E), the acquisition would raise GNF s net debt/ebitda ratios well above the current business plan targets (3.2x in 2014E vs a target of 2.5-3x). Rating agency perspective: While the implied FFO/debt would remain within the parameters set for GNF s BBB rating (see Figure 44), the increased exposure to LNG would likely increase the risk profile of the business. Shareholder perspective: Repsol is at the same time the main shareholder of GNF and the seller of the assets. We believe as a shareholder it would have no interest in seeing a potential deterioration of GNF s leverage profile, while as a seller it would try to maximise the cash proceeds and avoid a partial sale. Figure 44: Scenario analysis: Potential impact on FFO/debt of LNG acquisition 25.0% 23.3% 20.0% 20.9% 18.4% 20.1% 15.0% 10.0% 5.0% 0.0% 2013E 2014E Current Pro-forma Debt structure analysis Based on GNF s latest results, the company has: An average life of debt in the region of five years, with 77% maturing from 2015 (see Figure 45); 82% of debt is Euro-denominated and 75% is floating, as of 30 June We expect the latter to have increased to c. 80% as a consequence of the recent bond issuances. o Since 30 June, GNF has come back to the bond market, like other Southern European corporates, and raised 1.3bn ( 800m at 6% maturing January 2020; 500m at 4.125% maturing April 2017); 8.8bn of available liquidity, of which 4.3bn is cash and 4.2bn committed credit lines (see Figure 46). Gas Natural Fenosa (GAS.MC) 27

28 Figure 45: Debt maturity profile in millions, unless otherwise stated 10,000 9,000 9,203 8,000 7,000 6,000 5,000 4,000 3,786 3,000 2,485 2,000 1, Source: Company data Figure 46: Liquidity breakdown in millions, unless otherwise stated Limit Drawn Undrawn Committed credit lines 4, ,226 Uncommitted credit lines Undrawn loan Cash 0 0 4,330 Total 5, ,841 Source: Company data Gas Natural Fenosa (GAS.MC) 28

29 4. Valuation We derive our 13 target price using a mix of SOTP, market multiples and our DDM model, assigning different weights to each valuation method. Our SOTP is the key component of our target price, with a weighting of 50%. The SOTP is based on a mix of individual DCFs, EBITDA multiples and book values. Key drivers of the SOTP valuation are our assumptions on Spanish power prices, gas supply volumes, gas supply margins, divisional WACCs and FX rates. Valuation blend Our target price of 13 is based on a weighted average of: SOTP, using DCF models, EBITDA multiples and book values. EV/EBITDA, with 2013 as a reference year and a 5.5x multiple in our central case. P/E, with 2013 as a reference year for earnings and an 8x multiple in our central case. Dividend yield, with 2013 as a reference year for DPS and 7% DY in our central case. DDM, assuming 13.6% COE and 2% terminal growth rate. This approach is in line with the one we use in valuing the other utilities in Europe. Figure 47: Valuation blend ps Central case Weight SOTP % 2013E EV/EBITDA % 2013E P/E % 2013E DY % DDM % Target price 13 Figure 48: Valuation sensitivity ps SOTP EV/EBITDA P/E DY DDM Gas Natural Fenosa (GAS.MC) 29

30 SOTP Methodology Our SOTP is based on the following valuation methodologies: Discounted Free Cash flow models, with explicit forecasts for the period. After 2020, our terminal values are based on a normalised free cash flow and 2% nominal terminal growth rates. The discount rate used is specific to each business and country and varies depending on risk-free-rates and tax rates, unlevered betas and gearing levels (depending on the nature of the business see Appendix IV for details of the WACC used). We derive an implied 9.1% group post-tax WACC, as an average of each divisional WACC weighted for the EBITDA contribution of each division. We believe the value reflects the company s business mix, with 22% of EBITDA sourced from Latin America and over 30% from volatile gas midstream activities. 4 6x 2013E EBITDA for GNF s activities in Kenya and Moldova, 7x 2013E EBITDA for the gas distribution network in Italy. Book value of the equity stakes at year-end Output We highlight the following key points for each business: Spanish generation our DCF valuation is based on power prices remaining set by the marginal cost based on our power price model where the gas price is the key driver at 28/MWh in 2020E (flat in real terms after 2015E based on the current TTF forward curve). This leads to our power price estimate of c. 62/MWh in We assume pass-through of the recently introduced green cent tax on fossil fuel by 2014E, with the overall 6% generation tax passed through only in 2016E. For our terminal value, we assume power prices being set by the cost of a CCGT new entrant, implying 74/MWh power price. We estimate this will add c 12MWh margin to non- CCGT plants. We note that the price for gas paid by GNF s CCGT to the supply division is linked to power prices; therefore, we do not see any change in CCGT margins moving to cost of new entrant. Distribution we base our valuation on a DCF with a 7.4% WACC for Spain and a 10-11% WACC for Latin America. For Spain, we assume no change in the current regulatory framework and a long-term growth in gas connections of 150k per year. Furthermore, we consider unpaid bills at an annual 4% of total regulated revenues, in line with the provision levels for Gas we base our valuation on a DCF with a 10% WACC. We assume supplied volumes flat at the average of the period until 2016E, with a 2bcm increase in 2017E to reflect the beginning of the Cheniere s procurement. Our forecasts are based on a flat US$/ x-rate at Net debt in our adjusted net debt calculation, we include pension provisions ( 733m estimated at the end of 2012E) and provisions with a payment date between 1 and 5 years (as indicated in the latest annual report) amounting to 450m. In line with the approach adopted for the other Southern European utilities, our adjusted net debt is net of financial receivables, therefore assuming that the remaining historical tariff deficit ( 1bn for GNF) will be securitised at some point in the future. We note that GNF s reported net debt figure does include the historical tariff deficit, like the approach adopted by Iberdrola and unlike Enel s. 4 Using year-end 2012E net debt for our SOTP (therefore already including the impact of 2012E cash flows), we start our DCFs from the beginning of Gas Natural Fenosa (GAS.MC) 30

31 Figure 49: SOTP Valuation % of per 2013E Methodology ( m) total EV share WACC EV/EBITDA Gas distribution SOTP 12, % 27.4 n.a. 7.3x Spain DCF 8, % % 8.6x Latin America DCF 3, % % 5.4x Italy 7x EBITDA % 1.2 n.a. 7.3x Electricity distribution SOTP 7, % 16.2 n.a. 6.8x Spain DCF 4, % % 7.5x Latin America DCF 2, % % 5.9x Moldova 6x EBITDA % 0.4 n.a. 5.7x Electricity SOTP 6, % 13.8 n.a. 7.4x Spain 60/MWh from 2016E, 4, % % 7.9x implying 357/kW 2012E Latin America DCF 1, % % 6.2x Kenya 6x EBITDA % 0.2 n.a. 5.8x Gas SOTP 7, % 17.0 n.a. 5.7x Infrastructure DCF 1, % % 7.4x Procurement and supply DCF 3, % % 5.2x Union Fenosa Gas DCF 1, % % 5.5x Financial assets Book value % 0.2 n.a. n.a. Total enterprise value 33, % x (-) Net financial debt Credit Suisse estimates, 2012E (15,978) (104.0%) (35.8) (+) Regulatory receivables Credit Suisse estimates, 2012E 1, % 2.4 (-) Pension provisions Credit Suisse estimates, 2012E (733) (4.8%) (1.6) (-) Other provisions Credit Suisse estimates, 2012E (450) (2.9%) (1.0) Net debt (16,094) (104.7%) (36.0) (-) Minority interest (1,855) (12.1%) (4.2) Total equity value 15, % 34.4 (./.) Total number of shares 1,000.7 n.m. n.m. (m) Equity value per share ( ) 15.4 n.m. n.m. Gas Natural Fenosa (GAS.MC) 31

32 5. Shareholding structure Figure 50 shows GNF s current shareholding structure, as reported on the company s website. Figure 50: Shareholding structure Free float 28% La Caixa 37% Sonatrach 4% Repsol 31% Source: Company data We do not see any overhang risk emerging and in particular we note that: In July 2012, Repsol secured a 1bn credit line with three banks and pledged a 10% stake in GNF as a guarantee for it. We do not see any need for Repsol to dispose of its GNF stake. We believe that with the disposal of the LNG assets currently underway, the company will reduce significantly the balance sheet risk associated to with a potential credit rating downgrade (see Credit Suisse s 24 September 2012 note, Growing confidence on execution). Sonatrach s stake was acquired through a dedicated capital increase in 2011, after the settlement of the dispute with GNF on the gas contracts, at a price of per share. o o o o In June 2011, GNF and Sonatrach reached an agreement to settle a dispute on gas prices paid by GNF between 2007 and The agreement included the payment of US$1,897m by GNF for gas deliveries between 1 January 2007 and 31 May At the same time, Sonatrach agreed to become a shareholder in GNF, acquiring a 3.85% stake for a total cash contribution of 515m. Furthermore, the agreement opens the possibility for GNF to be involved in gas-related projects with Sonatrach. Gas Natural Fenosa (GAS.MC) 32

33 Appendix I Company profile Following the acquisition of Union Fenosa in 2008, electricity represents c.40% of group EBITDA (see Figure 51 as of 2013E, from 20% before the merger), factoring in the impact of the new Spanish generation taxation introduced in September Regulated activities, namely power and gas distribution, remain the predominant component of GNF s business mix, as indicated in Figure 52. Figure 51: Breakdown of 2013E EBITDA (I) Figure 52: Breakdown of 2013E EBITDA (II) Electricity generation 23% Electricity distribution 19% Gas distribution 32% Gas upstream 26% Unregulated 44% Regulated 56% The group is organised into four macro divisions, including: Gas distribution it represents 34% of the group s 2013E EBITDA and includes activities in Spain, Latin America (Brazil, Colombia, Mexico and Argentina) and Italy. Electricity distribution it represents 21% of the group s 2013E EBITDA and includes activities in Spain, Latin America (Colombia, Panama and Nicaragua) and Moldova. Electricity it represents 17% of the group s 2013E EBITDA and includes capacity in Spain (see Figure 53 for a detailed breakdown estimated at the end of 2012E), Latin America (as detailed in Figure 54) and Kenya (CCGT power plant for a total installed capacity of c. 100GW). Figure 53: Breakdown of Spanish capacity Type Hydroelectric 1,905 Coal 2,048 Fuel Oil + Gas 157 Nuclear 603 CCGT 6,998 Ordinary Generation 11,711 Wind 975 Mini-hydro 69 Other special regime 67 Special regime 1,111 Total Spain 12,822 Source: Company data, Credit Suisse estimates MW Gas Natural Fenosa (GAS.MC) 33

34 Figure 54: Breakdown of Latin American capacity (in MW) CCGT Oil Hydro Total Mexico 2, ,035 Puerto Rico Costa Rica Panama Dominican Republic Total 2, ,569 Source: Company data, Credit Suisse estimates Gas the midstream gas business (27% of 2013E EBITDA) is split into three divisions, namely: o o o Infrastructure, managing the Maghreb-Europe pipeline and receiving US$-denominated fees linked to volumes. This area generates m EBITDA per year depending on volume and currency fluctuations. Future investments, mainly an LNG plant off the Trieste coast in Italy, are currently on hold. Union Fenosa Gas, a parithetic joint venture with Italy s ENI controlling c6bcm of annual gas contracts from Egypt and Oman. The division sells gas to GNF s own CCGT plants, with revenues linked to power prices and costs linked to evolution of the oil price. In a constant oil price scenario, EBITDA can range between 230m (corresponding to a 40/MWh pool price) and 300m (corresponding to 60/MWh pool price). Procurement and supply, Gas Natural s legacy midstream gas business, controlling c24bcm of annual gas volumes, of which c9bcm originates from Algeria. Gas Natural Fenosa (GAS.MC) 34

35 MW 26 October 2012 Appendix II Spanish power market The recent growth in renewable capacity (see Figure 55) and falling power demand (2011 levels 3.2% below the highest level reached in 2008) have pushed reserve margins well above the safety threshold (10%, on our estimates). From now on, we believe a slow demand recovery (c. 1.5% p.a. forecast), a continued increase in renewable capacity, although at a slower pace than in the past, and no significant closure of thermal capacity will imply only a slow reduction in reserve margins, as shown in Figure 56. Figure 55: Historical renewable capacity Figure 56: Projected reserve margin 40,000 35,000 30,000 29,054 31,923 34,230 35, % 35.0% 30.0% 25,000 20,000 19,142 20,809 24, % 20.0% 15, % 10, % 5, % A 2006A 2007A 2008A 2009A 2010A 2011A 0.0% Source: Red Eléctrica de España Spain s key price-setting technology remains gas, with CCGT accounting for c70% (see Figure 58) of the output at margin for our forward price calculation. Unlike Italy, however, a more liquid gas market (see Figure 57) means that power prices reflect a lower gas price, mostly set by spot rather than oil-linked levels, and therefore trade at a significant discount (c 20/MWh) to their Italian equivalent. Figure 57: Breakdown of gas procurement 100% 90% 80% 70% 76% 66% 60% 50% 40% 30% 20% 10% 24% 34% 0% 2010A 2011A Figure 58: 2014E split of marginal technology CCGT 73% Nuclear 21% Coal 6% NG LNG Source: Company data Gas Natural Fenosa (GAS.MC) 35

36 /MWh /MWh /MWh 26 October 2012 After 2012E: We assume an average cost of gas driven by our TTF forecasts (66% weight) and our oil-linked gas price forecasts (34% weight). Therefore, we forecast only a modest increase in the system power price, as indicated in Figure 59. At the same time, when compared with an oil-linked market such as Italy, we see less potential downside on current power price levels. Lastly, with no significant tightening of reserve margin expected, we forecast clean spark spreads (see Figure 60) to remain depressed until Figure 59: Projected power prices Figure 60: Projected generation spreads E 2013E 2014E 2015E 2016E CSS CDS E 2013E 2014E 2015E 2016E We believe the difference between power prices in Spain and Continental Europe will remain positive, owing to the higher cash cost of the marginal plant in Spain (CCGT) as opposed to Germany (coal), as shown in Figure 61. Figure 61: 2014E marginal cost Spain Germany Fuel Carbon O&M Gas Natural Fenosa (GAS.MC) 36

37 Tariff deficit The build-up of a sizeable tariff deficit has characterised the Spanish power market since 2002: The deficit was the shortfall (see Figure 62) originating from total tariff revenues not matching the total system costs (including the remuneration of transmission, distribution, island generation and renewables, among others, see Figure 63). With the energy component having become a full pass-through following the liberalisation of the sector in 2009, the tariff deficit ended up being allocated to the access tariff and financed by utilities through their distribution arms. The deficit was then scheduled to be recovered through tariffs over a 15-year period. Figure 62: 2011 access revenue/costs Demand TWh 249 Average access tariff /MWh 50 Access tariff revenue m 12,450 Other components m 597 Total tariff revenue m 13,047 Total system cost m (16,817) TARIFF DEFICIT m (3,770) Source: CNE, Credit Suisse estimates Figure 63: Split of system costs Pending deficit 5% Islands 3% Interruptability 3% Other 5% Renewables premium 41% Distribution 33% Transport 10% Source: CNE At the end of 2011, the cumulative tariff deficit in the system reached c. 30bn, as detailed in Figure 64, with Endesa being the most exposed utility (with a total share of 50% vs Iberdrola at 30%). While part of this deficit was already securitised through private placements in 2005, in 2009 the government approved a securitisation process for c. 14bn of the historical tariff deficit. The financial receivables were transferred to an ad-hoc vehicle (FADE) and the resulting securities were granted government-debt status. At the same time, the government set limits for 2011 and 2012 at 3bn and 1.5bn, respectively, with the aim of eliminating the structural deficit by Gas Natural Fenosa (GAS.MC) 37

38 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012E m m 26 October 2012 Since the beginning of 2011, 13bn of historical tariff deficit has been securitised by FADE in different tranches (see Figure 65). Including 2011 (not included in the original approval) and 2012 to date deficits, we estimate that c. 8bn of deficit remains to be securitised. Figure 64: Tariff deficits A 35,000 30,000 25,000 20,000 Figure 65: Securitisation of deficit 14,000 12,000 10,000 8,000 15,000 6,000 10,000 5, , ,007 3,026 1,571 5,108 4,300 5,554 4,056 1,500 4,000 2, ,762 2,000 2,000 2,000 1,500 1, Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Public Private Source: Company data, Iberdrola, Credit Suisse estimates Source: Enel At the beginning of March, the CNE forecast the system to generate over 25bn of additional tariff deficit in , had no action been taken by the government. A first set of measures was announced at the end of March by the government, including: A 1.4bn increase in access tariff, equivalent to a 7% increase in average residential tariff; and A reduction of system costs by 1.7bn, including: - A cut in the remuneration of distribution activities ( 700m), - A reduction in capacity payments ( 80m), - The use of funds due to CNE and IDAE ( 660m) please note this is a one-off measure, - A postponement in the remuneration for 2011 capex in transmission to 2013 ( 200m), - Other measures (for 130m). On Friday 14 September, the Spanish government announced a bill which includes measures to eliminate the tariff deficit starting from The government estimates the future tariff deficit will reach 5.2bn in 2013 and raise 5.5bn per year in total through: A general tax applied to all types of generation amounting to 6% of revenues. According to the figures disclosed by the government, this new tax should annually raise 571m from ordinary and 688m from renewable generation; A nuclear tax applied to the amount of waste produced ( 2.190/kg), totalling 270m per year in the period; A hydro tax totalling 304m per year in the period; A surcharge on fuel (Green Cent), raising 804m per year from natural gas, 268m from coal and 38m from fuel oil/diesel; Gas Natural Fenosa (GAS.MC) 38

39 Proceeds from auctioning CO2 rights for a total of 450m per year; and Removal of the financial cost of the historical tariff deficit from the future tariff deficit calculation, for a total of 2.1bn per year. Figure 66 shows a comparison between the draft bill presented on 14 September and the draft reported by the Spanish press (Cinco Dias, El Pais) on 12 July. Excluding the reduction in remuneration for non-mainland generation and power transmission, approved with a decree in July, the final outcome is c 1.2bn lower than the reported July draft. Figure 66: September bill versus July reports in millions unless otherwise stated September July Difference Ordinary generation Renewable 688 1,180 (492) generation Nuclear (310) Hydro (100) Total generation 1,832 2,542 (710) taxes Green cent 1,110 1,150 (40) Co (450) Interest on tariff deficit 2,100 2,100 - Total measures per year Source: Spanish government, Cinco Dias In particular, we would highlight the following differences: 5,492 6,692 (1,200) The tax on ordinary generation was increased from 4% to 6% of revenues; The 6% generation tax applies also to renewables, while the July draft had variable levels depending on technology, ranging from 3% for mini-hydro to 19% for solar PV, including 11% for wind; The current bill includes 400m less tax on nuclear and hydro; previous proposals of 10/MWh for nuclear and 15/MWh for hydro have been replaced by taxes on nuclear waste produced and water usage. The bill will be presented to Parliament and a final approval is expected in the coming months, in order for the measures to be implemented from 1 January We would highlight that: Changes to the proposed measures are still possible, but given the absolute majority the current government can rely on in Parliament, significant changes seem unlikely; The impact of the nuclear and hydro taxes was presented by the government for a three-year period. However, we believe it would be premature to rule out these taxes also staying in place after 2015, especially before the final law with the exact terms is passed by the Parliament; and So far, the government has not commented on the possibility of passing through the 6% generation tax to final customers. It appears that some of the utilities affected by this measure are assuming this scenario in the medium term. In the short term, however, we believe a pass-through is unlikely, as (i) a large portion of the 2013 production has already been sold forward and (ii) the current system overcapacity can limit the scope for price increases. Gas Natural Fenosa (GAS.MC) 39

40 Appendix III Financial statements Figure 67: P&L in millions, unless otherwise stated 2010A 2011A 2012E 2013E 2014E 2015E 2016E EBITDA 4,477 4,645 5,168 4,935 5,131 5,296 5,316 % change 14.1% 3.8% 11.3% -4.5% 4.0% 3.2% 0.4% Gas distribution 1,620 1,587 1,640 1,673 1,711 1,749 1,788 Electricity distribution 1,062 1,016 1,006 1,057 1,112 1,167 1,223 Electricity 1,252 1,068 1, ,001 1,076 Gas ,320 1,335 1,324 1,345 1,195 Rest Adjustments (305) Other results Depreciation (1,716) (1,750) (1,786) (1,814) (1,842) (1,871) (1,900) Change in provisions (238) (216) (267) (249) (253) (256) (260) EBIT 2,893 2,947 3,115 2,872 3,036 3,169 3,156 % change 18.3% 1.9% 5.7% -7.8% 5.7% 4.4% -0.4% Income from disposal of financial instruments Income from associates Net financial expenses (1,059) (934) (915) (863) (829) (790) (739) Recurring PBT 1,513 1,754 2,213 2,023 2,222 2,394 2,432 Non-Recurrent Items Discontinued PBT 1,883 2,022 2,213 2,023 2,222 2,394 2,432 Income tax (468) (496) (553) (506) (556) (622) (681) Minorities (214) (201) (206) (197) (205) (211) (212) Net Income 1,201 1,325 1,454 1,321 1,462 1,560 1,539 % change 0.5% 10.3% 9.7% -9.2% 10.7% 6.7% -1.4% Adj. Net income 831 1,057 1,454 1,321 1,462 1,560 1,539 Source: Company data, Credit Suisse estimates Gas Natural Fenosa (GAS.MC) 40

41 Figure 68: Balance sheet in millions, unless otherwise stated 2010A 2011A 2012E 2013E 2014E 2015E 2016E Net Fixed Assets 23,206 22,744 22,106 21,509 20,902 20,286 19,659 Associates Intangible assets 11,223 11,080 11,412 11,755 12,107 12,471 12,845 Total Fixed Assets 34,534 33,923 33,617 33,362 33,108 32,855 32,603 Deferred tax Non current financial 694 1,024 1,024 1,024 1,024 1,024 1,024 assets Non-current assets for sale Inventories Receivables 4,592 5,192 4,734 4,734 4,734 4,734 4,734 Cash 1,203 3,098 3,098 3,098 3,098 3,098 3,098 Other current financial 1,901 1,388 1,223 1,223 1,223 1,223 1,223 assets Current Assets 9,158 10,580 9,957 9,957 9,957 9,957 9,957 Total Assets 45,343 46,502 45,573 45,318 45,064 44,811 44,559 Shareholder s Equity 11,384 12,792 13,507 13,914 14,371 14,826 15,185 Minority Interests 1,590 1,649 1,855 2,052 2,256 2,467 2,679 Government grants Provisions 2,865 1,712 1,979 2,229 2,481 2,738 2,998 o.w Pension Fund Long Term Debt 18,176 17,539 16,223 15,115 13,946 12,771 11,688 Deferred tax liabilities 2,704 2,642 2,642 2,642 2,642 2,642 2,642 Other LT Liabilities 1,040 1,033 1,033 1,033 1,033 1,033 1,033 Total Long Term 25,442 23,729 22,680 21,821 20,906 19,987 19,164 Liabilities Short Term Debt 2,130 2,853 2,853 2,853 2,853 2,853 2,853 Payables 3,658 4,671 4,137 4,137 4,137 4,137 4,137 Liabilities related to assets for sale Current provisions Other ST Liabilities Current Liabilities 6,927 8,332 7,531 7,531 7,531 7,531 7,531 Total Liabilities 45,343 46,502 45,573 45,318 45,064 44,811 44,559 Source: Company data, Credit Suisse estimates Gas Natural Fenosa (GAS.MC) 41

42 Figure 69: Cash flow in millions, unless otherwise stated 2012E 2013E 2014E 2015E 2016E Net income 1,454 1,321 1,462 1,560 1,539 Depreciation 1,786 1,814 1,842 1,871 1,900 Minority Interest Change in working capital (178) Operating cash flow 3,268 3,331 3,508 3,642 3,651 Capex (1,148) (1,216) (1,235) (1,254) (1,274) Acquisitions Divestments Investments in goodwill/intangibles (332) (342) (353) (363) (374) Change in provisions Capital increase / decrease FCF 2,139 2,022 2,173 2,281 2,263 Dividends (823) (914) (1,005) (1,105) (1,180) Increase in Cash (+) / Debt (-) 1,316 1,108 1,168 1,175 1,083 Source: Company data, Credit Suisse estimates Figure 70: Debt in millions, unless otherwise stated 2010A 2011A 2012E 2013E 2014E 2015E 2016E Short-term debt 2,130 2,853 2,853 2,853 2,853 2,853 2,853 Long-term debt 18,176 17,539 16,223 15,115 13,946 12,771 11,688 Total debt 20,306 20,392 19,076 17,968 16,799 15,624 14,541 Cash 1,203 3,098 3,098 3,098 3,098 3,098 3,098 Net debt 19,103 17,294 15,978 14,870 13,701 12,526 11,443 Source: Company data, Credit Suisse estimates Gas Natural Fenosa (GAS.MC) 42

43 Appendix IV WACCs Figure 71: Divisional WACC Riskfree rate Spread Cost of Marginal debt Tax Rate (pre-tax) Cost of debt (posttax) Market equity risk premiu m Levered beta Cost of Gearing equity (D/D+E) (posttax) Unlever ed beta Spain 5.0% 2.6% 7.6% 27.0% 5.5% 5.5% % 59.4% % 11.9% US 2.0% 2.0% 4.0% 35.0% 2.6% 5.5% % 59.4% % 9.0% Italy 5.0% 2.0% 7.0% 44.0% 3.9% 5.5% % 59.4% % 13.6% Colombia 7.0% 5.0% 12.0% 33.0% 8.0% 5.5% % 59.4% % 16.6% Brazil 9.0% 5.0% 14.0% 34.0% 9.2% 5.5% % 59.4% % 19.2% Argentina 9.5% 3.0% 12.5% 27.0% 9.1% 5.5% % 59.4% % 17.8% Mexico 5.4% 5.0% 10.4% 28.0% 7.5% 5.5% % 59.4% % 14.3% Nicaragua 9.0% 3.0% 12.0% 35.0% 7.8% 5.5% % 59.4% % 18.1% Moldova 9.0% 3.0% 12.0% 30.0% 8.4% 5.5% % 59.4% % 17.5% Kenya 13.7% 3.0% 16.7% 30.0% 11.7% 5.5% % 59.4% % 23.0% Costa Rica 4.8% 3.0% 7.8% 20.0% 6.2% 5.5% % 59.4% % 11.9% Gas Natural Group 5.4% 3.1% 8.5% 28.6% 6.1% 5.5% % 59.4% % 12.9% WACC WACC (posttax) (pre-tax) Figure 72: Sub-divisional WACC - Spain Riskfree rate debt Tax Rate Spread Cost of Marginal (pre-tax) Cost of debt (posttax) Market equity risk premiu m Levered beta Cost of Gearing equity (D/D+E) (posttax) Unlever ed beta Power generation 5.0% 3.0% 8.0% 27.0% 5.8% 5.5% % 40.0% % 12.0% Supply and distribution 5.0% 2.0% 7.0% 27.0% 5.1% 5.5% % 50.0% % 10.2% networks Gas upstream 5.0% 3.0% 8.0% 27.0% 5.8% 5.5% % 40.0% % 14.0% Spain 5.0% 2.6% 7.6% 27.0% 5.5% 5.5% % 44.1% % 12.0% WACC WACC (posttax) (pre-tax) Figure 73: Sub-divisional WACC - LatAm gas distribution Riskfree rate debt Tax Rate Spread Cost of Marginal (pre-tax) Cost of debt (posttax) Market equity risk premiu m Levered beta Cost of Gearing equity (D/D+E) (posttax) Unlever ed beta WACC WACC (posttax) (pre-tax) Colombia 7.0% 5.0% 12.0% 33.0% 8.0% 5.5% % 40.0% % 15.3% Brazil 9.0% 5.0% 14.0% 34.0% 9.2% 5.5% % 40.0% % 18.1% Argentina 9.5% 3.0% 12.5% 27.0% 9.1% 5.5% % 40.0% % 16.8% Mexico 5.4% 5.0% 10.4% 28.0% 7.5% 5.5% % 40.0% % 12.7% Gas Natural Group 7.8% 4.9% 12.7% 32.4% 8.6% 5.5% % 40.0% % 16.3% Gas Natural Fenosa (GAS.MC) 43

44 Figure 74: Sub-divisional WACC - LatAm electricity distribution Risk-free Spread Cost of Marginal Cost of Market Levered Cost of Gearing Unlevere WACC WACC rate debt Tax Rate (pre-tax) debt (posttax) equity risk beta equity (D/D+E) (post- d beta (posttax) (pre-tax) premium tax) Colombia 7.0% 5.0% 12.0% 33.0% 8.0% 5.5% % 40.0% % 15.3% Panama 5.0% 5.0% 10.0% 35.0% 6.5% 5.5% % 40.0% % 13.0% Nicaragua 9.0% 3.0% 12.0% 35.0% 7.8% 5.5% % 40.0% % 17.5% Gas Natural Group 6.7% 4.8% 11.5% 33.6% 7.6% 5.5% % 40.0% % 14.9% Figure 75: Sub-divisional WACC, LatAm electricity Risk-free Spread Cost of Marginal rate debt Tax Rate (pre-tax) Cost of debt (posttax) Market equity risk premium Levered beta Cost of Gearing Unlevere equity (D/D+E) d beta (posttax) WACC WACC (posttax) (pre-tax) Mexico 5.4% 5.0% 10.4% 28.0% 7.5% 5.5% % 40.0% % 15.4% Puerto Rico 2.0% 2.0% 4.0% 35.0% 2.6% 5.5% % 40.0% % 10.7% Costa Rica 4.8% 3.0% 7.8% 20.0% 6.2% 5.5% % 40.0% % 13.0% Panama 5.0% 2.0% 7.0% 35.0% 4.6% 5.5% % 40.0% % 14.7% Dominican Republic 2.0% 2.0% 4.0% 20.0% 3.2% 5.5% % 40.0% % 9.4% Gas Natural Group 4.7% 4.3% 9.1% 28.3% 6.5% 5.5% % 40.0% % 14.4% Gas Natural Fenosa (GAS.MC) 44

45 HOLT - Credit Suisse Analyst Scenario Data change to forecasts) 26 October 2012 Appendix V Credit Suisse HOLT Figure 76: HOLT table GAS NATURAL SDG, S.A. (GAS) Current Price: EUR Warranted Price: EUR Valuation date: 19-Oct-12 Sales Growth (parallel % point change to forecasts) Dec-10A Dec-11A Dec-12E Dec-13E Dec-14E -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % EBITDA Margin (parallel % point EBITDA Mgn, % % -61% -42% -21% 2% 27% Asset Turns, x % -43% -23% -1% 23% 49% CFROI, % Disc Rate, % % -26% -4% 19% 44% 72% Asset Grth, % % -8% 14% 39% 65% 95% Value/Cost, x Economic PE, x % 9% 33% 58% 86% 117% Leverage, % More than 10% downside CFROI & Discount Rate (in %) Within 10% Historical CFROI Historical Transaction CFROI More than 10% upside Sales Growth (in %) Forecast CFROI Forecast Transaction CFROI Discount Rate Operating Margin and EBITDA (in %) - see note* Asset Growth (in %) Historical Asset Growth Rate Historical Growth Incl Intang Forecast Growth Forecast Growth Incl Intang Normalised Growth Rate Asset Turns (x) Source: Credit Suisse HOLT. CFROI, HOLT, and ValueSearch are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. * Operating margin (yellow) is EBITDA (grey) plus rental expense and R&D expense Source: Company data, Credit Suisse HOLT Gas Natural Fenosa (GAS.MC) 45

46 Appendix VI PEERs map PEERs is a global database that captures unique information about companies within the Credit Suisse coverage universe based on their relationship with other companies their customers, suppliers and competitors. The database is built from our research analysts insight regarding these relationships. Credit Suisse covers over 3,000 companies globally. These companies form the core of the PEERs database, but it also includes relationships on stocks that are not under coverage. Figure 77: PEERs map Source: Credit Suisse PEERs Gas Natural Fenosa (GAS.MC) 46