ENDESA Will Appeal to the Minister for Industry against the National Energy Commission's (CNE) Decision Regarding Gas Natural's
November 09 2005 - 3:46PM
Business Wire
ENDESA (NYSE: ELE) will lodge an appeal tomorrow with the Industry
Minister directly citing the CNE, contesting the two decisions
adopted yesterday, Tuesday 8 November, by five of the nine CNE
members concerning i) the transfer of gas distribution
installations from Gas Natural SDG to two subsidiaries and ii) Gas
Natural's hostile bid for ENDESA. ENDESA considers that the CNE's
decisions are distinctly inconsistent with previous decisions made
by that regulatory body in similar cases. ENDESA also believes that
the decisions suggest that regulated activities can be used to
finance operations that go against the public interest, and that
the decisions impose conditions that do not go no further than the
strict legal minimum requirements. ENDESA also believes that the
procedure followed by the CNE was patently unorthodox in denying
ENDESA access to the bulk of the existing documentation, preventing
ENDESA from practicing a petition of proof and awarding ENDESA the
minimum legal timeframe to launch an appeal against its decisions.
In this latter respect, we note that only a few hours before the
appeal timeframe conceded to ENDESA expired, the CNE approved a
resolution proposal of roughly two hundred pages, which suggests
that the final resolution had already been decided upon. Separation
of Gas Natural's regulated activities The first of the two
decisions taken by the CNE authorises Gas Natural to create two
subsidiaries destined to takeover the regulated activities of
natural gas transport and distribution that have until now been
controlled by the mother company. The CNE's decision is very
surprising indeed, especially as the regulatory body now admits the
creation of companies founded more than a year ago and a transfer
of activities that Gas Natural has already carried out, despite the
fact that authorisation should have been obtained before such a
transfer was made. Moreover, the authorisation, that was adopted
without any explanation of its technical and /or economic
rationale, allows and approves the transfer of more than three
billion euros of regulated income to other types of activities -
essentially the financing of Gas Natural's takeover bid. This
transfer - authorised by the CNE - is a direct negation of the
public interest, particularly in respect of the gas markets in
Madrid and Catalonia, and it completely ignores the authorities of
these autonomous regions. Authorisation conditioned by the
take-over bid The second decision adopted by five of the nine CNE
board members yesterday authorises the take-over of ENDESA by Gas
Natural, subject to conditions. Examination of the resolution
reveals that the CNE adopted the resolution on the basis of data
put forward by Gas Natural, the bulk of which it describes as
"prudent". In this heedless way, the CNE has given the green light
to an operation that will affect 52% of the regulated income of the
gas and electricity sectors based on data provided - in the main -
by only one of the parties involved. In addition, the document
signed by the CNE asserts that the majority of the arguments are
completely "generic", such that the resolution, or any other
resolution, could have been adopted without any necessity
whatsoever of examining or assessing the risks or negative effects
highlighted by ENDESA. Below we enumerate ENDESA's main arguments
against the CNE ruling: -- The ruling clearly differs from
precedents set by the regulatory body itself. This lack of
consistency is all the more surprising if considering that: -- The
precedents are relatively recent (2001 and 2003). -- Case history
relates to the same sector and markets as the Gas Natural - Endesa
bid. -- The earlier instances relate to the same companies. --
These previous cases generated the same issues and uncertainties as
the Gas Natural bid for ENDESA in terms of the so-called 14th
Function: financial viability of the transaction, potential for
conflict between regulated and unregulated businesses, etc.
Therefore it is surprising that the same regulatory authority
should take contradictory decisions within such as short timeframe
in respect od similar operations taking place in the same sector
and affecting the same companies. -- This contradiction generates
serious uncertainty surrounding the rules of the game governing
this and other potential corporate mergers since it gives the
impression that the body of decisions taken by the regulatory
organism do not constitute a reliable and useful precedent. It also
suggests that that decision-making process is subject to other
variable factors or criteria, undermining the credibility of the
regulatory framework, of legal protection and of the sector
players' legitimate confidence. -- It is surprising that the
conditions on the takeover bid are restricted to the minimal legal
requirements: information disclosure obligations, investment in
transmission assets, etc. -- The conditions imposed clearly allow
the regulated businesses to finance the debt taken on to fund the
acquisition. They essentially mean that the customers will pay the
price of the deal, resulting in an inevitable upward pressure on
tariffs. -- Some of the conditions confirm that the deal poses
serious uncertainty for ENDESA shareholders, as they significantly
limit the newco's ability, if the deal goes ahead, to pay dividends
in the future, calling into question the commitment made publicly
by Gas Natural to the market just a few short weeks ago to pay out
Euro 5 billion in dividends through 2009. -- In terms of the
newco's financial situation, should the deal go ahead, the CNE's
ruling quotes word for word that "Gas Natural has requested
Standard & Poor's to determine what credit rating it would
apply to the newco in the wake of the transaction. To this end,
Standard & Poor's unofficially indicated to Gas Natural that
the newco's rating would be between a single A and A-. Both group's
current financial strength and solvency would therefore remain
intact although at the low end of the range should the final
outcome be an A- rating". It is astonishing that the CNE should
base its judgment on something as essential as the newco's
financial strength on undocumented statements made by the company
promoting the takeover in question, which is in turn based on
unofficial information attributed to a ratings agency. -- Regarding
the transaction the CNE ruling actually states that "it is possible
that the transaction timeline will not coincide with the previously
outlined regulatory reforms. On the other hand, the fact that the
Commission is not in a position to guarantee the completion of the
new regulation in the short term, this cannot and should not be a
reason to rule against the deal". This statement by the CNE means
that the takeover bid will determine the course of the future
regulatory framework. -- Finally, we find the 10th condition
particularly serious, since it leaves the exercise of the so-called
14th Function in the hands of the CNE in the event that Gas Natural
modifies the terms of its bid. The regulatory framework is very
clear on this issue setting forth exactly when an approval of this
nature can be requested. In no instance can a decision of this
nature by taken by the CNE itself. -- The CNE ruling does not
provide for efficient mechanisms to ensure compliance with the
conditions imposed, which are woefully insufficient in light of the
potential damage and risks posed to the regulated businesses and,
accordingly, to the interests of both shareholders and customers.
-- In any event, the conditions imposed by the CNE, despite their
limitations and lack of thoroughness, introduce an element of
uncertainty to the deal which is incompatible with guaranteeing
protection of shareholder rights and complying with applicable
securities markets legislation. ENDESA to appeal the CNE rulings
Tomorrow, 10 November 2005, ENDESA's legal services will appeal the
above rulings before the Minister for Industry, Commerce and
Tourism. ENDESA trusts that, given the importance of the decisions
in question, the government will rule on the appeal in an
expeditious manner, without applying the period of administrative
silence provided for. In addition, ENDESA will lodge a formal
complaint with the competent European authorities in the coming
days. * This document may contain certain forward-looking
statements regarding anticipated financial and operating results
and statistics that are subject to risks and uncertainties as well
as to material risks, changes and other factors which may be
difficult to predict, including, without limitation, those factors
described in the Documento de Registro de Acciones of Endesa filed
within the Comision Nacional del Mercado de Valores and in the Form
20-F of Endesa filed within the Securities and Exchange Commission,
both for the fiscal year ended December 31, 2004. For all of these
forward-looking statements, we claim the protection of the safe
harbour for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
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