Gas Natural SDG S.A.

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Gas Natural SDG S.A.

Avda Portal de l'Angel 22
Barcelona
E-08002
Spain
Telephone: +34 902 199 199
Fax: +34 93 402 58 70
Web site: http://www.gasnatural.com

Public Company
Incorporated: 1992
Employees: 6,150
Sales: EUR 5.63 billion ($7.35 billion) (2003)
Stock Exchanges: Bolsa de Madrid
Ticker Symbol: GAS
NAIC: 221210 Natural Gas Distribution; 221122 Electric Power Distribution; 238210 Electrical Contractors; 532310 General Rental Centers

Spain's Gas Natural SDG S.A. is one of the three largest natural gas companies in Europe, and the largest in South America. The former state-owned natural gas monopoly remains a leader at home—with more than 72 percent of Spain's natural gas market—although legislation has forced the company to begin reducing its market share to 60 percent before the end of the 2000s. Yet that same legislation, which liberalized Spain's utility market, has provided Gas Natural with the opportunity to expand into new areas of business, including electrical generation. The company expects to have more than 6,000 MW of power generation capacity online by 2008. Gas Natural is the leading supplier of natural gas to the Latin American market, with operations focused on Argentina, Colombia, and Brazil, as well as to Mexico and Puerto Rico. Since the beginning of the 2000s, Gas Natural has begun an expansion into the European market as well, with Italy as its first target market. In December 2004, the company reached an agreement to purchase 35 percent of Greece's state-owned gas company, Depa. The company also joined with its major shareholder Repsol-YPF in acquiring the construction and operation contract for Algeria's Gassi Touil integrated gas production and pipeline project, strengthening Gas Natural's supply base. Gas Natural also has invested in alternative energy sources, including buying some 50 percent of five wind farms in Spain at the beginning of 2005. In addition to its gas production and distribution operations, Gas Natural operates a fleet of ten methane tankers, making it one of the world's leading transporters of natural gas. Gas Natural is listed on the Bolsa de Madrid and produces revenues of more than EUR 5.6 billion ($7.3 billion) per year.

Gas Beginnings in the 19th Century

Spain's interest in natural gas as an energy source began in the first half of the 19th century, when in 1826 professor Josep Roura became the first in Europe to succeed in producing a gas light using gas from coal. Roura was commissioned by then King Ferdinand VII to provide lighting for the Queen's procession during a celebration in Madrid in 1832. Roura built the country's first gas plant in Madrid and built a temporary grid of 100 gas-powered streetlights. Following that display, Roura was asked by the royal family to build a gas-powered lighting facility for the royal palace in Oriente.

The first wide-scale use of gas in Spain came in the 1840s when a group of investors, including Frenchman Charles Lebon, established Sociedad Catalana para ele Alubrado por Gas (SCAG) in order to build a public lighting grid in the city of Barcelona. SCAG quickly attracted investors and by 1845 had become one of Spain's largest companies. SCAG listed its shares on the Bolsa de Madrid as early as 1853.

In Madrid, meanwhile, another group of investors, backed by British capital, launched Madrilena por Gas (Gas Madrid) in order to install a gas lighting network in that city as well. That business started up in 1846 and remained one of Spain's major gas producers and distributors. In 1864, it was joined by another company, Gas Lebon, founded by Charles Lebon.

The advent of electrical lighting put an end to the growth of the coal gas-based networks by the dawn of the 20th century. As Spain phased out its gas-light networks, SCAG and the other gas distributors reacted by investing in electrical power generation. In 1896, for example, SCAG and Gas Lebon joined together to build the Central Catalana de Electricidad. In 1911, SCAG founded Sociedad General de Fuerwas Hidroelectricas and built its first hydroelectric plants in the Pyrenees mountains. The following year, SCAG bought Central Catalana de Electricidad. The company's growing interest in electrical power generation was reflected in its name change to Catalana de Gas y Electricidad (CGE). That company continued to grow until the Spanish Civil War. Acquisitions remained a part of the company's growth, and included La Energia de Sabadell and Propagadora del Gas.

The bombing of the company's Barcelona gasworks reduced CGE's production capacity during and after the war. Shortages of raw materials, exacerbated by the outbreak of World War II, made it difficult for CGE to rebuild. The lack of coke also hampered CGE's ability to produce gas into the late 1950s.

Gassing Up in the 1960s

CGE began investigating new sources of gas in the early 1960s, and in 1963 the company began producing gas based on naphtha, rather than coal, for the first time. More important for the company, however, was the discovery of vast natural gas fields, including off the coast in nearby Algeria. The promise of producing gas more easily and less expensively encouraged CGE to abandon its electricity wing in the early 1960s and refocus itself entirely as a gas business. The company then began an extensive modernization effort in order to adapt its distribution network for the reception of natural gas.

The first shipments of natural gas arrived in Spain via methane tankers in 1969 for treatment in a purpose-built re-gasification plant in Barcelona. Meanwhile CGE had begun to expand beyond the Catalan region, buying Compania Espanola de Gas, a distributor of gas to the Valencia region.

Over the next decades, CGE continued to construct a national network. The company also began building a fleet of methane tankers, and later became one of the world's leading transporters of natural gas. Limited supply (as Spain had no natural gas fields of its own) meant that the use of natural gas was slow to spread in Spain, however. In Madrid, for example, Gas Madrid continued to rely on its production of naphtha gas until the late 1980s.

The 1990s marked a new era for CGE and for Spain's natural gas sector. In 1991, the Spanish government led a restructuring of the domestic gas industry, merging CGE with Gas Madrid to form a new company, Gas Natural. To this business was added the gas distribution pipeline operated by Spanish petroleum giant Repsol. That company then became one of Gas Natural's major shareholders.

Gas Natural's relationship with Repsol (later Repsol-YPF) brought it to Repsol's primary expansion market in South America. In 1992, Gas Natural joined Repsol in Argentina, taking 50 percent of Gas Natural BAN. That company became primarily active in service to the area around Buenos Aires.

Back at home, Gas Natural strengthened its grip on the Spanish natural gas market when the government pushed through a merger between it and far larger competitor Enagas. The absorption of Enagas gave Gas Natural control of the country's gasification plants, as well as its transport network. The merged group now not only controlled the Spanish natural gas market, but also had become Europe's third largest natural gas company.

The acquisition of Enagas also gave Gas Natural control of Sagane, which owned more than 72 percent of Metragaz, a joint venture created in 1992 to build and operate the Mahgreb-Europe natural gas pipeline linking Algeria and Spain across the Gibraltar Strait. By 1996, Metragaz had completed the pipeline. With this new supply of natural gas, Gas Natural was able to extend its natural gas operations across Spain for the first time. In 1999, Gas Natural created a dedicated subsidiary for its natural gas purchasing needs. Natural Gas Aprovisionamientos, as the subsidiary was called, supported Gas Natural's operations not only through Metragaz pipeline-based purchases, but also through supply contracts with natural gas producers in Norway, Qatar, Nigeria, and elsewhere.

Latin American Expansion in the 1990s

Gas Natural expanded rapidly in the Latin American market in the late 1990s, and by the end of the century had become the single largest provider of natural gas to these markets. The company entered Brazil in 1997, joining a consortium that acquired gas distribution rights to the state of Rio and the Rio de Janeiro market and gaining control of newly privatized CEG and CEG Rio. In 2000, Gas Natural formed a new wholly owned subsidiary, Gas Natural SPS, which was awarded a gas distribution concession in Sao Paulo State. In that year, the company also formed Serviconfort Brasil to lend support services to its distribution businesses in Brazil.

Gas Natural also entered the Colombian market in 1997, acquiring 59 percent of the privatized ESP group of companies, renamed as Gas Natural ESP. Gas Natural then began expanding across Colombia, acquiring another ESP company, Gasoriente ESP, operating in Santander, Bucaramanga, and elsewhere. The company also was awarded a distribution concession for Cundiboyacense plateau in 1998. The company extended its Serviconfort operations into Colombia the following year.

Company Perspectives:

Mission, Vision and Values of the Gas Natural Group: The Mission of the Gas Natural Group is to meet society's energy needs, providing its customers with quality services and products which do not harm the environment, providing its shareholders with growing, sustainable profitability and its employees with the possibility of developing their professional skills.

Its Vision is to be a leading energy and services Group with ongoing growth, with a multinational presence which stands out for providing its customers with excellent quality service, its shareholders with sustained profitability, its employees with broader opportunities for personal and professional development and for making a positive contribution to society, acting with commitment to global citizenry.

The Values which guide the Gas Natural Group's actions are based on: Customer Orientation, Commitment to Results, Sustainability, Interest in People, Social Responsibility and Integrity.

Mexico was also a Gas Natural expansion target, with the company acquiring the concession for the Toluca region in 1997. The company extended its Mexico operations to the Monterrey region and into the Bajio market in 1998, and then added businesses in San Luis Potosi, Bajio Norte, and Aguascalientes in 1999. A big boost for the company's Mexico operations came in 2000 with the purchase of Metrogas, which enabled it to penetrate the Mexico City market. The Metrogas acquisition also transformed Gas Natural Mexico into the leading natural gas supplier in that country. Gas Natural continued to seek out other Latin American expansion opportunities, including the purchase of failed energy conglomerate Enron's Puerto Rican natural gas assets in 2003.

The Spanish government began breaking up Gas Natural's domestic monopoly in 2000. Under terms governing the liberalization of the Spanish market and in line with European Union directives, Gas Natural was required to reduce its position in the Spanish market to just 60 percent by the end of the decade. By 2004, the company had made progress toward that goal, dropping its market share to 72 percent.

Diversified for the 2000s

Gas Natural's response to the liberalization of the Spanish market took two approaches. On the one hand, the company decided to return to the electricity market, launching an ambitious construction program designed to boost the company's production capacity to nearly 6,000 MW by the end of the 2000s. By 2004, the company's first plants were already producing some 800 MW, with another 800 MW in testing and 1,200 MW more under construction. In 2003, Gas Natural launched an ambitious takeover offer for Iberdrola, Spain's second largest electricity producer. The offer quickly met with refusal from Iberdrola and then was struck down by the mergers and monopolies commission.

In the meantime, Gas Natural had put into place the second prong of its expansion strategy, that of expanding its energy distribution business onto the European continent. For this, the company chose Italy as its first target, creating Gas Natural Vendida in 2002 to take advantage of the deregulation of the Italian gas market. Gas Natural Vendida became operational in 2003. The following year, the company acquired Sicily's Brancato Group, that region's leading privately held gas business. That purchase was followed up by another Sicily-based company, Smedigas, which operated in the natural gas distribution sector. Then in September 2004, Gas Natural bought Nettis, extending its gas operations to the Publia and Calabria regions of Italy as well.

Gas Natural boosted its access to the North African natural gas fields in November 2004 with its 40 percent stake in a consortium with Repsol-YPF that won a bid to construct and operate the $3 billion Gassi Touil integrated gas project in Algeria. The company then returned its attention to its European expansion. In December 2004, the company agreed to purchase a 35 percent stake in Greek government-owned Depa. The purchase was to be completed in 2005.

As it continued construction of its energy generation capacity, Gas Natural turned toward the renewable energy field as well. In January 2005, the company acquired stakes in five Spanish wind farms. As it turned into the mid-decade, Gas Natural had successfully built a geographically diversified energy empire.

Principal Subsidiaries

Companhia Distribuidora de Gas do Rio de Janeiro (Brazil); Gas Natural Aprovisionamientos; Gas Natural BAN (Argentina; 50.4%); Gas Natural Comercializadora; Gas Natural ESP (Colombia); Gas Natural Internacional; Gas Natural Mexico; Gas Natural Servicios; Gas Natural SPS (Brazil); Gas Natural Trading; Gas Natural Vendita (Italy); Grupo Brancato (Italy); Metragaz.

Principal Competitors

Royal Dutch/Shell Group; ENI S.p.A.; Repsol-YPF S.A.; TRACTEBEL S.A.; SONATRACH; Galp Energia SGPS S.A.; Union Fenosa S.A.

Key Dates:

1826:: The first successful gas lighting experiment in Spain is conducted.
1843:: Sociedad Catalana para ele Alubrado por Gas, the predecessor to Gas Natural, is created.
1896:: The company enters electricity production, building Central Catalana de Electricidad in partnership with Gas Lebon (founded in 1864).
1911:: The company founds Sociedad General de Fuerwas Hidroelectricas, and builds its first hydroelectric plants in the Pyrenees mountains.
1912:: Central Catalana de Electricidad is acquired and its name is changed to Catalana de Gas y Electricidad (CGE).
1963:: Gas Natural spins off its electricity generation operations to focus on the gas market.
1965:: Compania Espanola de Gas is acquired.
1969:: The company receives its first natural gas imports.
1991:: Gas Natural is merged with Enagas.
1992:: The company enters Argentina's natural gas market.
1996:: The company opens the first pipeline linking Spain and natural gas fields in Algeria.
1997:: Operations are launched in Brazil, Colombia, and Mexico.
2000:: The Spanish government begins liberalizing the Spanish market, breaking up Gas Natural's monopoly; Gas Natural expands into electricity generation, sales, and distribution.
2002:: The company launches its first 800 MW of electricity generation, with expansion plans to 6,000 MW; company expands into Italy with the creation of Gas Natural Vendida.
2004:: The company acquires Brancato Group, Smedigas, and Nettis in Italy.
2005:: The company acquires stakes in five Spanish wind farms.