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Edited Transcript of GAS.MC earnings conference call or presentation 24-Jul-19 10:00am GMT

Half Year 2019 Naturgy Energy Group SA Earnings Call

Barcelona Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Naturgy Energy Group SA earnings conference call or presentation Wednesday, July 24, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Francisco Miguel Reynés Massanet

Naturgy Energy Group, S.A. - CEO & Chairman

* Jon Ganuza

Naturgy Energy Group, S.A. - Director of strategy

* Steven Fernández

Naturgy Energy Group, S.A. - Director of Capital Markets

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Conference Call Participants

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* Alberto Gandolfi

Goldman Sachs Group Inc., Research Division - Head of European Utilities Research

* Fernando Garcia

RBC Capital Markets, LLC, Research Division - Analyst

* Harry Peter Wyburd

BofA Merrill Lynch, Research Division - VP and Junior Analyst

* Javier Fernandez Garrido

JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst

* Javier Suarez Hernandez

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Jorge Guimarães

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst

* Manuel Palomo

Exane BNP Paribas, Research Division - Analyst of Utilities

* Meike Alina Becker

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

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Presentation

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Unidentified Company Representative, [1]

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Good morning, everyone, and welcome to our results presentation for the first half of 2009 (sic) [2019]. Today, we come with the presence of our Executive Chairman, Francisco Reynés, who will be presenting the results; together with our Capital Markets Director, Steven Fernández; our Controlling Director, Jon Ganuza; and our CFO, Carlos Álvarez. At the end of the presentation, we will open it up for Q&A, where you will be able to ask your questions live through the call. As a reminder, for any press-related questions, please get in touch with our communications team.

And without further addition, I will hand it over to our Chairman.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [2]

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Okay. Good morning to everyone. And first of all, I need to apologize because of my voice. I'm having a [chilly] cold, and probably, I will not be easy to be understood. But I hope -- hopefully, it will be clear enough.

Before I start, I would like to make some comments on our presentation that you have probably already had access to that. It has been hand at 11:30 on our website. The disclosure I wanted to make here is that we are going to introduce to you our assessment on the CNMC first draft resolutions, but I want to highlight that we have only drafts on the table and with still 2 more circulars missing. That means that we have done our preliminary assessment, and we will share with you the main qualitative aspects of them. We are now focusing on preparing the allegations in the interest for all our stakeholders, and that's the reason we are not still in a position to provide quantitative assessments with sufficient accuracy. Please apologize for our nonresponse on any questions you may have around what we are going to present to you because we don't want to compromise our allegation process. And again, remember that we are talking about draft circulars for the time being. Thank you very much for your understanding, and let me start with the presentation and the agenda.

We will talk first about the CNMC proposals. We will then go for a small recap on the progress on our Strategic Plan 2018-2022, which I would like to -- again, remember that it has been disclosed 1 year ago and which has a horizon of 5 years ahead. We will then make comment on the first half of 2019 consolidated results, going then in detail business by business unit. And finally, we will remark our main conclusions.

If we start with the Point 1 on the agenda. The assessment that the company makes around the CNMC draft resolution proposals on circulars on gas and electricity are clear. On the gas networks, we consider that this is a change, important change, on model that has been given long time stability since many years compared to the electricity networks, which is a model that is continuing with some important adaptations.

On the gas networks, our first assessment is based on the following 7 pillars. First is a misdiagnosis of the Spanish gas system. Within that, we have still room to understand a little bit better what is the role of the gas system that may play in the further models of the energetic metrics in the country. Second, the asset base is not enough remunerated. Third is that there is an asymmetrical sharing of efficiencies as per the draft that we have read. In certain manner, there are some obligation of performing certain investments, which are clearly not meeting golden rules as the ones we have established for our investments. There is clearly a lack of incentivation for growth in this business. We understand that the 6 years' period of adaptation to a new model is not long enough for a business, which has a much longer life of utilization. And yes, therefore, uncertainty on how we may go further up to 2026, which is the end of this period that we have today on the table. That's why we have assessed that this is an abrupt model change and the main reason why we are working towards a proper process of allegations to reinforce this argument with clear metrics.

On the electricity, it's a completely different world. The model introduces changes, but it's a continuation of the one that is ruling the industry for the time being. WACC as a based remuneration procedure has been introduced, and from our point of view, with insufficient risk recognition within the figure. And also compared to other countries, the efficiency factor is harsher. And the transition compared to the gas networks is clearly introducing sense of a stability beyond the end of that period. This is probably one of the most important reasons why we consider this model much more predictable and stable than the one that has been written in the draft circulars that are now on the table.

What is Naturgy going to do in the next coming months to mainly protect the interest of all our shareholders? First is that we are working in the preparation of allegations as per the process is conducting, and this allegation is going to be focused in preserving and protecting the business in the following pillars. First is about the asset-based valuation, which we will demand for a fair valuation. Second is to introduce an adequate risk return adjusted by the circumstances of this business. Third is asking for a stable and reasonable model that may sustain growth for the future. We want to continue the investing, and we want to consolidate growth in the future with visible return. And finally, if a model needs to change, should also be in a calendar that has a fair implementation.

Having said that, of course, allegations is not the only way we have to defend the interest of all of the shareholders, and we have also opened up to that, the possibility to start judicial alternatives and will also try to pursue the optionalities for the company. This is the reason why from the point of view of Nedgia, which I remember all of you, which is the company that holds the stakes in the different gas distribution affiliate, is today in the process of studying, analyzing all different business alternatives for the future. We want to be clear saying that for us, all options are open today on the table.

In the meantime, what we have done is to halt active commercial operations without putting at risk any commitments that we had and we agreed. We will never go against that these commitments, and we will honor them clearly and not, of course, altering neither the safety or the maintenance investments to guarantee that the level of our assets is continuing being at the state-of-the-art level. We will stand up for all of our shareholders. And of course, as long as we will have more clarity of what is finally approved, we will update all of you during the process of the next results presentations in the third quarter and so on.

I would like now to take the opportunity to remember how the strategic plan that has been disclosed in -- during 2018 -- 27 June, 2018, in London with a horizon of 5 years, how it is evaluating and just moving on Page 7, when we have summarized the 4 key dealers under which this value creation proposal is based on. The first one is about simplicity and accountability. The second one is about optimization. The third one, it refers to capital discipline. And the fourth one, about shareholders' remuneration. I would like now to go one by one to see what we have done in this regard in the last 12 months.

Talking first about simplicity and accountability. I would just highlight 2 important things. We define in our strategic plan that there were around EUR 3 billion coming from the disposal of noncore assets or minority stakes in different companies. We have already made and captured EUR 2.7 billion of them, and we have signed agreements to go ahead with the rest of the different businesses, which amounts around the EUR 3 billion we committed. It is go -- goes clearly in the direction to make the company more simple. We have reduced 33 companies -- subsidiaries companies that we had in our vast organic room of different societies around the globe. In terms of simplicity, we have flat the organization from 6 to 7 -- to 3 levels on the management structure. We have fully exited of 4 countries where we had primarily operations: Italy, Colombia, South Africa and Moldova. And as you have seen, we have incorporated more simplicity but more disclosure across the different board of the different businesses and information to the market.

On optimization. The first part is about OpEx. We have established an important target of OpEx reduction, but we are clearly working towards that even more, we can tell you today that the target we have fixed for the year 2019, we expect to be achieved with more than 50% above the initial target of EUR 100 million. And we are expecting that it will come to EUR 150 million, at least. That's just a matter of conversion. In the first half of 2017, the total OpEx on constant perimeter, and it's important to see that we are comparing peers to peers, first half of 2017, OpEx was around EUR 1.2 billion. First half 2018, EUR 1.1 billion. First half of 2019, [outgoing] EUR 0.97 billion.

Other optimizations we have come into the table is the launch of office premises relocation and optimization in all the processes, targeting 50% reduction on corporate centers by 2022. We are progressing on our Lean project, which is going to give more flexibility around IT and the different procedures within the company. We have already outsourced to IBM the infrastructures of IT, and we are in very clear progress of awarding in the next weeks other businesses' stacks to first level of outsources. And three, we have refinanced EUR 1.5 billion within the half to subsidiaries in order to cancel intra group debt. We are clearly, in this regard, working on the same direction that we fixed in our strategic plan.

In terms of CapEx discipline, looking backwards 12 months. In the last year, we have invested almost EUR 1.9 billion. This investment has been focused mainly in electricity and renewables in the same direction that we fixed in our strategic plans was moving towards the electrification of the company. Of course, all these investments are clearly meeting our golden rules as well as the investments we have in our pipeline of renewable exposure that, as you may see in Page #10, right side, we have a vast number of projects in our pipeline, which doesn't mean that this is a full commitment to invest. Because all of these projects, which are already identified or opportunities which are under analysis, will not be agreed if they don't meet the golden rules. Just as a comparison, in 1 year, we are expecting to achieve 1 gigawatt more of electricity power installed in renewables.

On shareholder remuneration, we are just going to meet our commitments, as we disclosed in the strategic plan. And that's the reason why the Board yesterday has approved the first interim dividend for the group payable on the 31st of July, this month, next week, EUR 0.29 a share, with a commitment in the 3 different payment dates to achieve the level of EUR 1.37 a share, which means 5% above the dividend that has been paid in the year 2018.

In parallel, our shareholders' remuneration was also considering share buyback. In this regard, EUR 400 million for the first 12 months were already now were booked by the 30th of June and consistently with the delegation that the AGM has given to the Board. Yesterday, the Board has decided and approved the cancellation of these shares in August. On top of that, the Board has also approved the new tranche of share buyback for the next 12 months, July 2018, June 2020, with the same amount of EUR 400 million. This is, again, a demonstration that our Strategic Plan 2018-2022 is a plan which is going to be delivered, and our commitment continues being there.

If we move into the third paragraph. I would like to hand over to [Steven].

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Steven Fernández, Naturgy Energy Group, S.A. - Director of Capital Markets [3]

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Thank you, Paco. Hello, everyone. I'm going to move over to Page 13 of the presentation that we've sent. And as we do on every quarter, we published earlier this morning, you've had the chance to look at those, so we'll just highlight some of the key elements that we think are relevant.

On Page 13, now the first 6 months of the year have been marked by quite relevant headwinds and a very challenging energy scenario, as we will explain further on. Nonetheless, the solid performance of the infrastructure businesses, mainly in Lat Am, and the derisking strategy pursued in our merchant activities has allowed us to navigate the headwinds with remarkable resilience and stability.

Now during the quarter, our -- the first half, Naturgy has continued to make progress on its efficiency plan, and indeed we have accelerated it and expect to deliver now at least EUR 150 million in efficiencies by year-end, which exceeds our initial commitment of EUR 100 million for the year. All in all, ordinary EBITDA is up 8% compared to last year, while net debt has been reduced by around 4%, thanks to a strong focus on cash flow generation and strict capital discipline with investments primarily devoted to electricity and obviously meeting the minimum hurdle rates of investments established in our golden rules.

If we move over to Page 14, EBITDA in the first half of the year reached 2 point -- almost EUR 2.2 billion after nonordinary effects. So if we strip these out, ordinary EBITDA rose 8% to almost EUR 2.3 billion, mainly supported by the improvements in the infrastructure businesses and the efficiencies across the company.

Nonordinary impacts in the first half amounted to around EUR 127 million, and the bulk of them corresponding to capture costs reached to the implementation of the efficiency plan and the CNMC's CCGT fine. We have conservatively provisioned, but as you can imagine, plan on disputing.

It is important to highlight that all business units have improved on an ordinary basis, despite the significant headwinds and the challenging energy environment. And in particular, on the infrastructure side, relevant tariff updates in Lat Am, recognizing the FX and inflation movements during 2018, together with stability in the European operations, has contributed to an overall strong performance in the first half of the year.

In Gas & Power, the first half results have been driven by a notable improvement in gas and power services and sales, which have experienced a strong margin recovery in power supply, more than offsetting the headwinds in international LNG and Europe power generation. Now the company's new commercial policies and derisking efforts, together with an acceleration in efficiencies, have also helped offset the global decline in gas prices during the period.

So all in all, it's been a positive performance across all businesses despite the significant headwinds.

Now let's move on to Page 15 to analyze the evolution of net income in the first half. Net income amounted to EUR 592 million, while ordinary net income rose 30%, that's 3-0, to EUR 692 million, supported by the activity improvement and lower D&A. Here again, nonordinary items mainly relate to the capture costs incurred. And in terms of D&A, the lower amount is a consequence of the substantial write-down completed last year as well as the life expansion of Spanish nuclear plants following the agreed calendar, both having a positive effect, and obviously, partially countered as well by the impact of the implementation of IFRS 16. So overall, earnings growth was supported by activity, obviously, and as I've mentioned, lower D&A.

I'm going to conclude with some remarks on the cash flow and the net debt evolution on Page 16. We've generated operating cash flow of almost EUR 2.5 billion, which is substantially higher than in the first half of last year. In addition to the stronger operating results, the company has experienced a positive evolution of its working capital, which is explained by a number of factors. Some of these effects are related to better working capital management, the shortening of receivable base and extension of payables, as well as to other cash-generating initiatives, including an increase in factoring, while other effects are mainly related to seasonality or are merely coincidental.

CapEx in the period amounted to almost EUR 700 million, mainly reflecting ongoing investments in renewal projects as well as investments in networks, all of which are consistent with our golden rules of investments.

Also, during the period, the company completed its 2018 final dividend payment of EUR 560 million and bought back an equivalent amount of almost EUR 380 million in its own shares, thus, completing the first tranche of EUR 400 million of its share buyback program. Despite all the investments and cash outflows for shareholder remuneration, net debt under IFRS 16 amounted to EUR 14.8 billion as of the end of June, which is down 4% versus December 2018.

And with that, I will now hand it over to Jon Ganuza, who will be reviewing the results by business units.

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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [4]

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Thank you, Steven. Good morning, everyone. Let's review the operating performance of each of the business units.

Starting with Gas & Power on Page 18. Ordinary EBITDA increased by 8.8% in a period with significant headwinds during the first half of the year with especially low gas prices. In particular, the improvement in Gas & Power and service sales unit is mainly explained by efficiencies and the unitary margins recovery in gas and power supply. It is important to remember our new commercial approach, which has reduced the portfolio of electricity fixed-price contracts by almost 1/3 in order to match power generation mix. The result has been a reduction in volatility.

Additionally, our contracts are down 3% as a result of our ongoing change in our customer acquisition channels, moving away from traditional high reliance on conventional sales approach towards a more digital approach and trying to select less but more valuable customers. In this sense, we are posting our cross-selling actions to increase the services penetration in our customer base.

International LNG was negatively affected by excess cash globally and the consequent decline in prices, which has translated in lower sales and margins versus -- vis-a-vis an extraordinarily strong 2018. Currently, 90% and 68% of our volumes are closed and secured for 2019 and 2020, respectively, providing significant visibility on reducing exposure to fluctuations in the energy scenario. In this respect, we have added increased disclosure on LNG volumes and exposures beyond 2019 in our quarterly Excel disclosure, which we hope increases transparency and visibility on this particular business.

Power generation in Spain has been affected, especially in the second quarter by low hydro, which has produced 43% vis-a-vis last year. Lower rain falls and lower gas prices have increased CCGT utilization that has significantly eroded merchants due to greater competition. Furthermore, this comparison versus last year is also affected by the suspension of CCGT's availability capacity payments.

International power generation has performed well on the back of new installed capacity of renewable solar in Brazil and wind in Australia and favorable evolution of the FX.

Investment in renewables in the first half of 2019 has been EUR 100 million greater than last year. The overall CapEx has been circa EUR 300 million lower due to the 2 LNG that started operations in first half in 2018.

In summary, strong margin recovery in power supply and efficiencies partly offset by lower margins in power generation in Spain and international LNG.

Moving on to our Infrastructure business unit in EMEA on Page 19. Ordinary EBITDA reaches EUR 970 million, up 8% in the first half of the year as a result of organic growth and efficiencies across businesses. In particular, the improvement in Spain gas network has been mainly driven by lower FX -- or lower OpEx from efficiency improvement, which has more than compensated for a relatively mild winter with high temperatures and subdued demand.

In electricity in Spain, efficiencies, investments and lower interruption times compared to last year has supported a positive evolution.

Finally, EMPL has benefited from the annual tariff increase and favorable FX euro evolution.

In summary, solid ordinary growth and efficiencies across businesses.

Turning now to Page 20 on Infrastructures South Lat Am. Ordinary EBITDA amounted to EUR 449 million in the period, 12.3% higher than the previous year driven by tariff updates and efficiencies and despite the negative FX evolution which has impacted negatively by EUR 3.6 million. Overall, results have been driven by tariff updates, recognizing the FX and inflation movements during 2018 as well as efficiencies across businesses.

In Chile electricity, the revenues associated to the investments done for la Norma Técnica, tariff indexation and efficiencies have been partially offset by lower activity and FX. In Chile gas, we have seen higher sales and margins and efficiencies.

In Brazil, results have been driven by the tariff updates since January, lower demand especially in thermal generation due to high rainfall and efficiencies.

Finally, in Argentina, the tariff updates have significantly increased. Nonresidential demands have been offset by the still significant FX depreciation in the period.

CapEx has gone down due to different reasons. In Chile, electricity is mainly delay in permit. In Brazil, as a result on the change of the growth strategy towards higher consumption clients. And Argentina, awaiting to see how the country's situation evolves. All in all, Infra South Lat Am had experienced strong improvement, mainly driven by tariff updates and efficiencies.

Finally, moving into Infrastructure North Lat Am on Page 21. Results have equally been impacted by regulatory updates and efficiencies. First half 2019 ordinary EBITDA amounted to EUR 190 million, up 57% on the back of positive regulatory impacts, higher demand and efficiency improvement.

In Mexico, the positive evolution was driven by the regulatory tariff update and annual tariff indexation, demand growth and better supply margins as well as efficiency improvements.

In Panama, the positive evolution is explained by the tariff update under the new regulatory period and the higher demand as a consequence of the temperatures increase compared to last year.

CapEx in Mexico is down as a result of the change in the growth strategy.

So to summarize the first half results on Page 23. The first 6 months of the year have been marked by quite relevant headwinds and a very challenging energy scenario, including, amongst others, excess gas and declining gas prices; low hydro and margin pressure on thermal generation or a winter with very mild temperatures. Despite this, the solid performance of the infrastructure business and the derisking strategy pursued by our merchant activities has increased visibility and resources stability with ordinary growth across the 4 business units compared to last year.

In addition, we have accelerated on the delivery of the efficiency plan and expected to deliver at least EUR 150 million efficiency by year-end, exceeding our initial commitment of EUR 100 million for 2019.

In terms of investment, we have -- we would highlight that during the last 12 months or since the launch of this -- the launch of the strategic plan, the company has allocated 70% of its total CapEx to renewables and electricity networks.

Finally, cash flow generation has led to a reduction in net debt.

As a result of the above, and take it into account the current FX and commodity prices forwards for the second half of the year, we are confident that we are on track to meet our guidance for 2019. We are aware that some might be skeptical, taking into account that taking 2x the first half ordinary EBITDA reached 4.5% ordinary EBITDA, out of which we should subtract nonordinary items, which by first half, as Steven has already said, amount to EUR 127 million.

Three things we would like to point out. First, the acceleration efforts efficiencies plan has 2 main benefits: on the one hand, the earliest results improvement; but on the other hand, most of these new efficiencies are targeted on non-FTE costs. Therefore, we can miss this year's commitment to efficiencies whilst reducing the need for -- to capture costs. We will only incur more capture costs in as much as we identify nonordinary positive effects that allow us to undertake them.

Second, Lat Am sales have several effects that improve the outlook of second half risk-through investments at first half. On average, and if we look at historical data, we are always better in the second half than on the first half due mainly to onshore wind. And on top of that, we have the positive effect of the asset swap for Argentina we have already mentioned.

Third, new assets are coming online meeting distribution, transmission, renewables or others. There is also a potential aspect, but we do not rely on this, is that many of our business have had a first half weather conditions that have been under the historical average, and a certain reversal to the NIM ought to be expected.

I will now hand it over to the Chairman for final remarks.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [5]

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Thank you, Jon. Again, I would like just to highlight how we are now 1 year after we present our first strategic plan on a 5-years basis and what we have done.

On simplification and business positioning, EUR 2.9 billion divested in businesses, which incorporated the complexity or lack of future growth.

On the efficiency, one of the key pillars of the company's transformation, we have already achieved an OpEx reduction comparing the first 6 months of this year to the 6 months of last year with around 15%.

On capital deployment for the energy transition, which is under the scope of meeting our golden rules, we will increase by almost a gigawatt on projects, which have been developed organically at home.

And finally, on shareholders' remuneration, we have already delivered what we committed. In the last months, our shareholders have got EUR 1.7 billion across dividends and share buybacks.

That means that we confirm for these reasons, not only by the results of these first 12 months, but also looking ahead, for the coming years that we will strong delivering the commitments established in our Strategic Plan 2018-2022.

I'll hand it over to Steven, which is now going to manage the Q&A results. Thank you.

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Steven Fernández, Naturgy Energy Group, S.A. - Director of Capital Markets [6]

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Thank you, Mr. Chairman. So we are ready to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Javier Suarez from Mediobanca.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]

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This is Javier of Mediobanca. I have 3. The first one is on the guidance. I think that on the full year 2019 presentation, there was an outlook for 2019 that was included in EBITDA, net income, CapEx and net debt. Can you clarify that when you are saying that you are sticking to those targets, you are including the 4 of them: the EBITDA, net income, CapEx or net debt? Or the -- or we should expect any deviation at this stage in any of these 4 targets? That is the first question.

The second question is on the regulatory proposal. On Slide #4, you have -- we have put a detail of quantitative assessment on your view on the latest proposal by CNMC. The question is that, if the regulatory cut were to be confirmed, which would be Naturgy's managerial decision, but becomes worse and then the regulatory proposal remains unchanged, what is the decision that you would managerially are taking? What is the first project that you would have? And the second -- and the third, that would be including reducing CapEx or the dividend. Which is the last line of defense that the company has against these regulatory proposal?

And then the third question I have was on an update on the pending regulatory settlement or discussions on Colombia on Electricaribe and then the possible settlement on Egypt -- in Egypt, if you can give us which is your latest realistic assumption for those 2 things.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [3]

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Thank you, Javier. This is Francisco Reynés answering the question #2, probably the easiest one because as I said before, we were not going to disclose more information than what we have already said. And of course, we are now targeting as first and only priority for the next days is about the allegation process. And just to reinforce what is already written in our slide is that we will not give up to any optionalities we may think around Nedgia depending on how the CNMC saga finishes, which means, as we have written, all options are on the table.

On Colombia, just 2 ideas. One of them is we are expecting arbitrage resolution for the second half of 2020, which means almost 1 year and something ahead. But we are open and working to, if possible, settle out, out of the court, which is always an option but never a warranty.

On Egypt, as we said in the last presentation, it's our intention to solve the issue as soon as possible. But although we are engaged with discussions with our partners, I would say that we will not give up to the legal proceedings, which are still alive than our strategy to protect the interest of our shareholders forces to be in both sides of the table.

And I will hand over to Jon, who will clarify clearly what is about the guidance question.

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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [4]

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We reaffirm ourself for guidances that we give.

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Operator [5]

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The next question comes from Manuel Palomo from Exane.

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Manuel Palomo, Exane BNP Paribas, Research Division - Analyst of Utilities [6]

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My first question is on the specific guidance on the full year 2019, that EUR 1.4 billion reported net profit guidance, I listened to what Jon said about what could be some of the drivers that -- given that the first half, the net profit was slightly below EUR 600 million. I wonder whether you are now considering any one-off that the market might not be aware of and I would ask you to -- well, if you could share with us.

Secondly on M&A. In the last few weeks, we've read a press news about Naturgy being interested in increasing its stake in the Medgaz pipeline. And also on the -- well, in apparently [AdP] hydro assets, I wonder whether this is true, whether you could give us an update. And also I mean whether this did cause some high risk in that initial intention to your core assets given the weather uncertainty that now you haven't doubled the table.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [7]

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Okay. Jon, first, please.

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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [8]

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I mean there is little to add. I think that like what I tried to explain is how it's possible to bridge from the EBITDA that we have in the first half, which quite would be the full year EBITDA. I think that if you look at the net profit, it translates almost this high result. There is no need for any nonrecurrent issues in order to get to the EUR 1.4 billion in net profit, the guidance that we gave for 2019.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [9]

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Thank you, Jon. And about M&A and in particular Medgaz. First, let me, again, reinforce the idea or the commitment that we have established in our strategic plan about capital discipline and golden rules, then it does only -- doesn't only apply to Medgaz but also for any other potential project that may come to us. We have the right and almost the obligation to look at all of them, but we are not obliged to do any of them. And of course, all will be subject to the achievement of minimum returns according to our golden rules.

And on Medgaz, in particular, I want to remember 3 things about Medgaz. First is that existing shareholders, we have a right to match. Any transaction that may come will be subject to a right to match. That today is in the hands of Naturgy and shall attract as shareholders, together with Cepsa in this infrastructure. Number two is that Medgaz as a business has ship-or-pay contracts with super class clients like Iberdrola, Erbesa, Cepsa and same Naturgy until 2031, which are not subject to any instability in the country of origin. But point number three, I would just to, again, report the idea that the relationship with Algeria is over 50 years today, and it has not been any problem in deliveries and supply from Algeria to Spain on gas. Having said that, this is a potential idea, which is under analysis, and of course, subject to our golden rules for investment.

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Operator [10]

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Our next question comes from Harry Wyburd from Bank of America.

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Harry Peter Wyburd, BofA Merrill Lynch, Research Division - VP and Junior Analyst [11]

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Harry Wyburd from Bank of America. I've got 3. The first is back on Medgaz. I just wondered, according to the press report, the stakes that you were considering looking at would take you to a majority ownership. Is there any physical benefit for controlling the pipeline business that would help you manage your gas business that would go beyond just the simple impact of maybe some accretion earnings-wise from having a higher stake? And then if, hypothetically, you did buy that stake, would the consideration for that come out of the part for the buybacks? I think previously, you said that the buyback is subject to inorganic opportunity. So if you spend a certain amount on Medgaz, should we then deduct that from what we have in our model's fees to spend on the buyback? That's the first one.

Next 2, just on the gas business. So thank you for the extra disclosure on -- in the Excel on the gas business. Just scanning it now. The key message that jumps out to me is that the open volumes are heavily skewed towards non-Henry Hub volumes, so you just called it rest. But be very useful to know what rest actually means or how we should try and model or think about that. And as a starter for 10, should we think of that oil versus gas spreads-driven? So -- or is it something else? If you could just give us a bit more color on what rest actually is and how to model it.

And then finally, Iberdrola sold the Midstream gas activities. Obviously, they are much smaller than yours, but they still got a reasonable consideration for it. I wonder whether that perhaps altered your thinking in some way about the gas business given that it's a frequent source of volatility in your earnings.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [12]

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Okay. First, #1, I apologize for my answer, but we are not going to make any comment on any press release that has been already -- press article that has been written by people, which is not in the matter. I mean the company, as I said, is considering any alternative of inorganic growth that may have sense for our strategy but subject to minimal level of returns. And of course, any solution that it may come, which should not only be the yes but could also be the no, would be fully disclosed, and the reasons will be shared with the market. But as you may imagine, there are many speculations every day about every company, what they may do, and we will not make comments on the potential alternatives that may be either on the table or invented by someone else, yes?

Having said that, on the share buyback, very clear. I mean our commitments are firm, and we agreed yesterday in the Board that we will pursue the EUR 400 million for this year. Of course, we don't know what may happen in the next 12 months and if there is any opportunity that may alter this decision will be disclosed. But for the time being, we are not seeing any reason not to perform the decision that has been taken yesterday.

Talking about your idea about whether or not we may follow the decisions taken by other competitors on different business lines, I want to remember 3 things here. Number one is that our strategic plan considered only EUR 3 billion of disposals, and we have already achieved between realized and committed agreements, the EUR 3 billion that we committed. Having said that, second idea I want everyone to be aware of is that there is no sacred cows in our portfolio, which means that any option may be open. But point #3, which is fully consistent with #2, is that any attractive proposition has to be always analyzed under the consistency of our commitment to capital discipline and return. Then it does mean a yes or a no, it depends case-by-case and how they convert to other opportunities that we may have. And one of them is the stand-alone basis, but others are clearly always available for discussion.

I think that, Jon, you want to highlight...

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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [13]

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Regarding the disclosure that we're giving where we separate between Henry Hub and non -- the rest, we've given this split, first of all, because all of the analysis that everyone does always seems to assume that we only have them with us, which is understandable because it's the only public information that you might have about our prices, but we also wanted to show that, that extrapolation is going to be not good enough. And the rest, as you said, is basically oil index and different kind of oil index or other indexes that we have.

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Operator [14]

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Our next question is from Javier Garrido from JP Morgan.

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Javier Fernandez Garrido, JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst [15]

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Most of my questions have been already answered. I would just want to clarify, now that you have increased your efficiency targets for 2019 from EUR 100 million to EUR 150 million, is this offsetting any specific negative performance as well? What I mean is you are keeping your targets unchanged despite the larger cost-cutting efforts. Is this signaling some business areas performing below your expectations?

And then the second question is on the LNG business, and you say that you are gradually shifting from short-term to longer-term contracts. What sort of durations are you looking for your long-term contracts? Are we talking of 2- to 3-year contracts? Or are you able to move into longer-term 10, 15-year contracts?

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [16]

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(foreign language) Thank you, Javier. Let me answer -- this is Francisco Reynés. Let me answer the first question and hand over to Jon for the second one.

On the first one, yes, you are right. As we have said, we have headwinds, but that is a demonstration that this company is fully committed to the targets. And therefore, when we see winds coming against us, we do our best to overcome them with enough work, with enough targets that we'll be able to offset them. That's a demonstration that our commitments are firm, and we do the most we can to deliver what we commit.

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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [17]

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Yes. This is Jon Ganuza to answer to the second question. I mean historically, we felt more comfortable as a company with having a long position because the underlying idea was that on the long term on an average, it made sense to have an open position. The problem is that the volatility that it implies was way too high, and this has been one of the main changes that we've done, is in order to increase visibility and lower volatility, we are moving from having an open position to having a closed position and as far in time as possible. What does that mean? That actually what we want to sign is contracts that are as long-dated as possible. If we can sign a 10-year contract, it's better than a 5-year contract. And if we can sign a 20-year contract, it's better than a 10-year contract. So we are looking to sign contracts that are as long as possible.

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Operator [18]

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Our next question is from Alberto Gandolfi from Goldman Sachs.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [19]

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Yes. Mostly follow-ups as well. The first one is on -- basically, gas distribution in Spain. Is there any reason why we should not be using EUR 5.86 billion invested capital, which I believe you gave at the Capital Markets Day, as a proxy for your RAB. Is there any reason why we should not basically apply that 5.8% to this figure? I'm asking because with sort of borrowing cost at or below 1%, a 5.8 return suggested by the regulator doesn't appear overly tough in the interest rate environment we are in at the moment. And so I was just trying to understand it, maybe it's the other part of the equation that we're getting wrong. So that's the first.

The second one is, can I ask, again, sort of a bit more detail on the LNG EBITDA? I understand the philosophy of extending the duration, the maturity. But what are the margins you've locked in for 2020 already versus the ones you have locked in for 2019? And more crucially, if you go out today to sign a new contract, what are the margins on a marginal contract versus what we have seen now in the first half. It feels the answer should be much lower, given what happened to the gas market in the past 9 months, but I just want to make sure I'm not missing anything.

And the last one is on supply margins. Is there any way on Spanish supply margins you can give us an idea of EBITDA, EBIT margin euro per megawatt hour? Or at least if you can tell us if you see an H1 level, a kind of a peak level? Or if you actually see this level sustainable into the second half and next year, and part of the driver here again is cost efficiency?

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [20]

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Okay. The first one is, again, very easy to be answered. Until we will not have any firm situation on the [figures] for CNMC, we will not adapt any figure. But keep that in mind, as I would like to reiterate again, is that all options are on the table after we have a clear scenario, under which regulation is being going to rule. Then today, as I said, we are working on the allegations. And of course, if we need to change any figure, we will do it after the circulars are becoming firm, not as they are now.

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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [21]

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And going back to margins, you know that the level of disclosure that we give is the level of disclosure that we give, I mean they keep on insisting.

Talking about LNG, I think that it's obvious that if you make right now with the current energy scenario, a spot sale really showed time sell, you are going to make it at a loss on your loss, and I think that that's something that's obvious. But as we try to stress several times, we don't want to sell a spot or we don't want to sell short term. What we want to sell is long term. And when you're selling long term, the kind of margins that you're looking, different kind of margins are the ones that you're looking when you're selling on a spot basis. But if you are selling a spot cargo, it's going to be with a really low, even negative margins in with the current environment.

Regarding the supply business in Spain, we think that the level of margins that we're seeing in 2019 reflect more what should be the average margins that we should be looking and we should be seeing in the next few years.

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Operator [22]

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Next question is from Fernando Garcia from RBC.

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Fernando Garcia, RBC Capital Markets, LLC, Research Division - Analyst [23]

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This is Fernando Garcia from RBC. First question is a follow-up of Alberto question on supply. My understanding here is that a part of the (inaudible) margins is because of lower cost of procurement of the gas contracts of Naturgy at the -- particularly selling at similar prices. But my question here is that, at some point, probably you will need to sell as well to your clients at a lower cost. So that was my first question.

Second question is regarding Argentina. I wanted to know if you are receiving any dividends coming from Argentina. And the -- and regarding Argentina as well, do you think that things will change there after the elections? And if that will stand of EBITDA of the business will be at a raise because of political reasons?

And last question, probably, you are not going to provide the data, but anyway, because this factual I wanted to ask is regarding gas distribution. I wanted to know what sale of your assets were built before 2002 in gas distribution.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [24]

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I mean could you please clarify, again, your first question because I didn't get it?

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Fernando Garcia, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Okay. No, regarding supply, my understanding is that part of this improvement is that Naturgy is getting a cheaper cost of procurement, but it's still selling at high prices to the customers. So then I wanted to know if there was a lag there that it will mean a worsening of the results versus H1 in the second part of the year.

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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [26]

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No. I think that -- first of all, I mean I don't think that the -- that would be fair to say that -- I mean if you're saying that there is cheap gas for LNG vessels, there's cheap gas for the supply business. So I think that's what's going to happen in the second half. Most of the sales that we have in our segment have already been closed, so we should be looking at the level of margin that should be more or less consistent with the margin that we've seen in the first half.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [27]

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On Argentina, just 2 clarifications. One of them is that our dividends -- our flow of dividends from affiliates to the headquarters is not relying at all on dividends coming from Argentina. There are non-financing from the parent company to the Argentinian affiliate, non-corporate debt, non-debt, local debt with the corporate warranties. But yes, we are getting some money from Argentina in form of management fees. During this year, the management fee has been continuing at the same level that they were in the last years, yes, increasing with inflation. That's the situation.

And I would like, if you don't mind, if you could repeat again the question on the assets on regulation that you raised before, please?

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Fernando Garcia, RBC Capital Markets, LLC, Research Division - Analyst [28]

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Yes. On -- in gas distribution, I wanted to know what sale of your assets were built before 2002.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [29]

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This is an information that is today in hands of the CNMC and forms part of the allegation process. And of course, this is quite a sensitive figure that we cannot disclose for the time being, sorry.

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Operator [30]

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The next question is from Meike Becker from Bernstein.

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Meike Alina Becker, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [31]

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This is Meike Becker, Bernstein. I have one at this point, and it regards the long-term outlook for LNG. So when you make your business plan last year, the scenario you had in mind for a 2022 LNG world, I was just wondering how that has evolved over the last 12 months and how your expectations have changed.

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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [32]

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I think that in these past few months and these past few years, what we've seen is that it's completely useless to try to have a long-term outlook in LNG or any of the energy commodities. And that's why instead of trying to kind of guess how the outlook is going to be, what we're going to do is try to close as much as possible for our volumes, and therefore, have a higher level of certainty of the results that we can get on the mid and the long term regardless of what happens with the energy scenario. And that's the kind of strategy that we're currently following. And also in that line, the greater level of disclosure that we're giving to the market be carried into the volumes that we have already closed.

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Operator [33]

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Final question comes from Jorge Guimarães from JB Capital.

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Jorge Guimarães, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [34]

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Just 2 follow-ups. Firstly, on the arbitration process going on, can you clarify the situation on Egypt?

And secondly, when you mentioned that first half '19 margins are good proxy for next year in Spain, do you mean just gas or gas and electricity supply margin?

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [35]

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Excuse me, excuse me, we have not heard you well. Would you mind to repeat the question louder because the volume was so low that it wasn't captured here?

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Jorge Guimarães, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [36]

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Okay. Okay. Do you hear me now?

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [37]

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Could you -- a little bit louder, please?

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Jorge Guimarães, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Analyst [38]

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Okay. My first question was on Egypt. If you can provide us with an update on the arbitration process in Damietta.

And the second one was on the margins for supply in Spain. When you mentioned that first half '19 is a good proxy for margins for next year, do you mean both electricity and gas? And those were the 2 questions.

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Jon Ganuza, Naturgy Energy Group, S.A. - Director of strategy [39]

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Regarding the second question, the question -- I answered the question that was regarding to the gas supply cost, therefore, what I answered was regarding the gas supply margins. In electricity margins, there are dynamics that they are a bit different, so we could see a difference in the second half vis-a-vis second, third -- first half, but I answered regarding basically that margins.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [40]

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Yes. On Egypt, as you know, the resolution has been disclosed last year, giving us the right to be paid for compensation. The Egyptians were legally fighting against that. And it's -- now we are in the phase of enforcement and alignment, which is going to happen within the next months, no? Then that's the reason why I said before that we're not giving up to any legal opportunities that may be, we are engaged with discussions with our partners because our intention is to solve it out of the court, if possible.

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Steven Fernández, Naturgy Energy Group, S.A. - Director of Capital Markets [41]

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And with that, we settled the conference call for the H1 results. As always, be reminded that you have additional information in our websites, and of course, the whole team in Capital Markets are available to answer any additional queries you may have. For those of you lucky enough, enjoy your summer and we'll see you back in September.

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Francisco Miguel Reynés Massanet, Naturgy Energy Group, S.A. - CEO & Chairman [42]

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Thank you very much.