埃尼石油 (E) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the ENI third quarter, 2002 results presentation conference call. Presenting Vittorio Mincato, CEO; Marco Mangiagalli, CFO. During this conference call you will be on listen only mode but there will be a question-and-answer session at the end. If you need any assistance during the call, please press star and zero and the conference coordinator will be happy to assist you. Thank you.

Ladies and gentlemen, good afternoon and thank you for attending this conference call [inaudible] the 2002 first nine months results.

Today I will focus mainly on the [inaudible] economic results and I will record very shortly the business results achieved in E&P and [inaudible] in the past months. Then Marco Mangiagalli will give you a detailed comment on our economic results, business by business.

For the Q&A session, here with us are Luciano Sgubini [inaudible], and Gilberto Calera [ph], ready to answer any questions you may have later on.

In the third quarter of 2002 we reported an adjusted operating income. We're up around 15% on a year-on-year basis. The increase is mainly related to growth of 6.5% in oil prices, higher hydrocarbon production [inaudible], positive contribution of the gas and power business and lower losses in the petrochemical business. These positive results have been achieved despite the weak trend in the refining margins less 51% versus the third quarter, 2001 and the negative impact of the appreciation of the Euro versus the U.S. dollar.

In the first nine months of 2002 our reported operating profits totaled EUR6.43b and adjusted operating profits clean of recurring items totaled around EUR6.5b with a decline of 17% and 16% compared to the 2001 results.

In the first nine months the over marked scenario was still negative compared to the same period of last year and in particular 6.8% lower in price, a significant decline of 72% in refined margins only partially recovered in the third quarter. This weak scenario was partially recovered by higher hydrocarbon production sold in the [inaudible] business, better contribution of gas in the power business, growth in the oilfield services activities, and finally by cost cutting of around 34% of EUR340m. I repeat, EUR340m.

On a year-over-year basis, the third quarter, 2002, reported net income shows an increase of 7.8% thanks to growth in operating profits to EUR110m. Positive contribution of the net extraordinary income of EUR150m mainly related to the asset disposal in R&M business and the net income from financial investments of around EUR60m. The increase in the net profit of the quarter has been partially offset by the change in the tax regime according the decree law issued by the Italian government last September. The tax rate posted in the third quarter has been around 45%. [inaudible] of the new tax regime on a nine-month basis.

In summary, the new tax law limited the deductibility for the export relief of the write down of investments in subsidiary and changes for calculating the portion of taxable income subject to the fuel income tax.

Our estimate for the first nine months of 2002 is still based on the draft law. The final version should be approved we think the end of this month. We think that the impact of this tax regime in 2002 will be an increase of around 1 point percentage in ENI's fiscal rate. The adjusted net income for the third quarter of 2002 net around EUR60m positive for recurring items showed a decline of 9% on a year-on-year basis. If we take into consideration the market scenario and the overall performance in 2002, I think that the results achieved so far have to be considered positive.

I reported an adjusted EPS based on [inaudible] of EUR3.83b decreased by 26% and 11% respectively. It will return on cash flow per share- we see a decrease of 9% on a reported basis while we achieved the same result on an adjusted basis compared to the corresponding period of 2001.

Let me now focus very briefly on some important business achievements in the third quarter, 2002. Daily hydrocarbon production reached around 1.45 million BOE, showing a growth of 8.5% versus the corresponding period in 2001 [inaudible] increase of 6.5% reached [inaudible]. Of course this goes [inaudible] reduction which in the third quarter accounted for 22,000 [inaudible] per day.

In the first nine months of 2002 daily hydrocarbon production shows a 7.2% decrease versus the same period of 2001 despite a reduction of 30,000 BOE per day due to OPEC cuts. In October, the daily average production net of OPEC cuts has been 1,000,541 BOE, an important result in line with our plan which as you certainly remember forecasts 1.7 million BOE per day in 2005 with a 6% [inaudible] average increase leveraging in organic growth [inaudible] of our portfolio.

Regarding the gas and power business, [inaudible] sold in Italy and the volumes sold abroad [inaudible] we are up 7.6% and 3.6% for the third quarter and in the first nine months of 2002 respectively.

Thank you for your attention, and now I'll hand you over to Marco Mangiagalli.

Thank you, Vittorio and good afternoon, ladies and gentlemen. Before commencing the nine-months figures I would like to remind you that ENI results are affected by several factors, including the seasonality in demand for natural gas and for petroleum products to be used in residential heating, the demand for which is highest in the first quarter of the year which includes the coldest months and lowest in the third quarter, which includes the warmest months. Therefore, ENI's operating income and change in net debt for the first nine months cannot be extrapolated for the full year.

Let me now start with a quick outlook over some of the recent data. In the third quarter, 2002, the hydrocarbon production rose by 8.5%, improving the positive trend of the previous six months. Production sales grew by more than 20% thanks also to lower domestic gas production stored in comparison with the same period of 2001.

Natural gas business shows an increase in gas primary distribution sales both in the third quarter and in the nine months. Up to September, the overall 2002 increase in gas sold is the combined result of the decrease of 2.7 billion cubic meters in the Italian market and the growth in European gas sales of 4.34 billion cubic meters. The gas sold in Europe reached at the end of the nine months 5.76 billion cubic meters.

In the third quarter, 2002, the natural gas sales in primary distribution rose by 7.6% to 10.8 billion cubic meters over the corresponding period of 2001 as a result of higher sales in Europe, partially offset by the sales reductions in Italy. In R&M, the volume sold showed a reduction of 2.6% in the third quarter and 1.4% in the first nine months. In 2002, the overall volume sold in the petrochemical business grew slightly, 1.4%, despite a weaker first quarter trend due to a partial recovery of the demand and the end users inventory build up.

Let's comment now on our operating performance business by business. In ENT, the third quarter, 2002 operating income goes up by 16%, EUR1.3b over the corresponding period of the previous year. The result is mainly related to the 6.5 increase in Brent prices which accounted for EUR130m, the growth of 20.8 million BOE in hydrocarbon production sold, in particular natural gas, both in Italy and abroad, which accounted for around EUR200m.

The increase in production sold is due also to the fact that in the third quarter of 2001 [inaudible] of natural gas produced in Italy was set aside for rebuilding the stocks. The preceding years in fact it was assumed that the increase in stocks was made up entirely of domestically produced gas, which therefore, did not contribute to quarterly results of operation. From 2002, due also to the merger of [inaudible] and [inaudible] increases in the stock are proportionately attributed to imported and equity gas produced in Italy. Finally, the positive impact was partially offset by the appreciation of the Euro against the U.S. dollar for an amount of about EUR83m.

In the third quarter, the impact of the non-recurring items has been negligent. Thanks to a recovery in the third quarter, the first nine months of stream operating income totaled EUR3.8b which represents a decline of 17% versus the corresponding period of 2001. Although it is negative, this trend improved the one we experienced in the first half of the year, which was 26.3% on an adjusted basis.

In the first nine months of 2002, the result is merely affected by a EUR736m decrease, due to lower hydrocarbon realization prices; EUR83m of assets write downs, mainly in the Gulf of Mexico; EUR80m of negative impact related to the new storage tariff system and EUR83m related to the appreciation of the euro versus the dollar. These main elements were partially offset by the increase of hydrocarbon production sold, the gains on the disposal of assets and the [inaudible].

As far as the gas and power business is concerned, reported operating income increase by 10.6% over third quarter, 2001, reaching EUR375m thanks to the higher gas volumes sold and the reduction in fixed costs, particularly in gas transport activities, partially offset by the different sales mix.

The operating income in the first nine months amounted to EUR2.4b with a slight decrease of just 1% over the corresponding period of last year. The decrease is mainly related to the negative impact of the change in sales mix related to the higher gas volumes sold in Europe, environmental tax in Sicily, the asset write down in South America.

These negative affects were substantially offset by the higher commercial margin in secondary distribution related to the new methodology set by the authorities for revenues calculation for companies distributing natural gas to non-eligible customers, about EUR160m. The new methodology increases the margins in the secondary distribution in the first nine months of 2002 for EUR42m. The remaining amount relates to tariff adjustments for the year 2001.

In the first nine months of 2002 the Powergen operating income stayed almost stable at EUR36m. It was EUR35m in 2001. In the third quarter, the negative non-recurring items accounted for EUR71m and are mainly related to the EUR16m of operating non-recurring items in Argentina, the assets impairment for around EUR25m in Brazil, environmental tax in Sicily for around EUR33m paid by Snam Rete Gas. Therefore, on an adjusted basis, the third quarter, 2002 operating income for the G&P business reached EUR146m, with a 32% increase over the corresponding period of the previous year.

The third quarter reported operating income in R&M amounting to EUR122m with a decrease of 54.1% over the same period in 2001. This action is mainly related to the still weak refining margins and the closing and disposal of service stations in Italy. These negative affects were partially offset by better results in the GPL activity and the lubricant segment in Italy. It's worth mentioning that the refining margins in the third quarter show a slight improvement compared to the trend we had in the first six months of the year.

In the first nine months, reported operating profit in R&M decreased by 73.8% reaching EUR244m versus the corresponding period of 2001. The result was mainly affected by the falling refining margin, as I said, related to the weak demand and the high inventories level; the closing and disposal of service stations; 720 stations less compared to the same period of 2001; and the profit on inventories for EUR29m realized in the first half of 2001. As I said, the declining trend in refining margins which negatively affected the operating economic results was partially offset by better results in the GPL activity and the lubricant segments in Italy and the cost cutting.

In the third quarter, 2002, the petrochemical business reported on a homogeneous basis a loss of EUR26m with an improvement of around EUR90m. This result is mainly due to an increase in unit margins of EUR38m and inventory write down of EUR38m too. Oilfield services and engineering operating income amounted to EUR73m with a 40.4% increase on a year-on-year basis. The recent acquisition of Bouygues Offshore contributed positively for EUR17m before EUR10.5m of good will amortization.

In the first nine months, petrochemicals reported an operating loss of EUR167m with an improvement of EUR53m versus the same period of 2001 as a result of lower amortization related to the write downs both in 2001 and in inventory write ups. These positive affects were partially offset by the low margin from products. It is worth mentioning that [Polima Europa] has been consolidated line by line starting on January, 2002. In 2001, [Polima Europa] was consolidated with the equity method because, as you remember, we were negotiating the sale of a significant stake to [Savage].

In order to facilitate the comparison of the business trend, we have consolidated [Polima Europa] line by line on a pro forma basis starting from January, 2001. Oilfield services and engineering registered an operating profit of EUR232m, up 63.4% compared to the first nine months of 2001.

And now I'd like to focus on third quarter net income. But before analyzing these results, I think it's worth commenting on the recent change of the tax regime that occurred in Italy since the law decree issued by the government last September the 25th. The main topics are the following- limited tax allowance on subsidiary write-downs; spread out payments over five years for the tax allowance on subsidiary write-downs; and change in the calculation of the percentage of income subject to the reduced income tax rate according to the dual income tax.

The impact of the new tax regime on a nine-month basis is EUR90m and is fully accounted for in the third quarter. In this aspect, it is important to remember that in the third quarter, 2001, ENI had a very low tax rate due to the fact that capital gains on non-core asset disposal benefited on a tax rate of only 19%. For our models, I think it should be appropriate to consider the normalized tax rate of ENI at around 41%.

Having said that about taxes, the third quarter, 2002, reported net income amounting to EUR921m, a 7.8% increase versus the corresponding period of 2001. The result is mainly determined by more than EUR200m increase at the operating level, mainly related to higher prices in hydrocarbon production sold in the upstream business as well as the positive contribution of the gas and power business.

Around EUR60m positive for non-recurring items compared to EUR19m negative non-recurring items in the third quarter of 2001 and this figure is a result of capital gains from disposal of assets in R&M and inventory write ups in the petrochemicals, partially offset by asset write downs and the environmental tax in Sicily.

Excluding the impact on non-recurring items at the operating level, EUR47m, and the extraordinary items, EUR109m, clean income amounted to EUR869m with a decrease of 9% compared to the same period of 2001.

In the first nine months of 2002, reported net profit totaled EUR3.2b and adjusted, the net profit clean on non-recurring items and before [inaudible] gas minorities reached around EUR3.5b showing a decline of 27.5% and 13.4% respectively if compared with reported and adjusted net profit in the corresponding period of 2001.

As I already said, 2001 results were sustained by higher oil prices and refining margins as well as by positive non-recurring items for more than EUR300m. During the first nine months of 2002, any result was affected first of all by negative non-recurring items of around EUR150m related to write offs in ENT and GNT activities only partially offset by capital gains related to the disposal of assets and to expect about EUR85m charges to increase group's deferred tax provision for the supplementary corporation tax in the U.K. upstream business to EUR150m, environmental team transportation business issued in Sicily offset by the revised regulated asset base in the secondary distribution business and its affects plus EUR9m. These factors were partially offset by the release of the deferred tax accrued for advanced amortization net of the taxes paid, EUR95m, and inventories write ups in the petrochemical business, EUR50m.

In addition, we have to account for EUR200m posted in the first six months of 2002 for minorities due to the 40.24% listing of non rated gas in December, 2001. Clean or non-recurring items on a year-on-year basis adjusted to net profits presents a decline of 13.4%.

To conclude, as far as investments are concerned, in the first nine months of 2002, ENI capital expenditure amounted to around EUR5.3b of which more than 87% invested in exploration and production and gas and power concerning our strong financial effort to sustain the growth in the core business. As far as the buyback program is concerned, the total cash out from January to the end of September, 2002, amounted to around EUR600m. And finally, the debt as of September 30th, 2002, amounted to EUR9.3b, EUR800b lower as compared to 2001 year end figures. This result is relevant if you consider the strong cash requirements we face in relation to CAPEX, the payment of [inaudible] EUR2.9m and the Bouygues Offshore acquisition, EUR870m cash out in the third quarter.

We come to the end. Thank you for listening and now we are pleased to answer any questions you may have.

Ladies and gentlemen, your question-and-answer session is about to begin. If you wish to ask a question, please press five and one when you're told to do so. All questions will be asked in the order received and you will be advised when it's your turn. Thank you.

Your first question comes from Ms. Caroline Cook from Deutsche Bank.

Hi, good afternoon, gentlemen. I have two questions. First of all, Italgas announced on Monday some financial benefit from renegotiating their gas purchase contracts from ENI. I was wondering if you could comment for us on the potential implications of that for your profitability over the next couple of years and whether there will be any other similar deals reached with other distributors.

And secondly, on-I wonder if you could give us a bit more color in terms of the improvement of your downstream refining, your marketing performance in the third quarter compared to the first half.

OK, Caroline. I'll hand you over to Luciano for the first part of the question.

Thank you.

Yes, good afternoon. As Marco said, the contract with Italgas, I can confirm that we reached an agreement with Italgas just last week and we have agreed to a new formula, contractual formula, in line with all the other distributors in Italy. The new criteria of this contract is based on cost plus, so it's a completely different contractual form of the previous contract and this is the principle that underlies the new contractual formula.

I can say that the contract with Italgas has a duration of one year and after one year, we will renegotiate the contract and I can say that according to the new fold principles, we agreed to a different price, to the different delivery points. So it's a very complicated contractual formula and the different price is based on the different transport costs for each place. There are 400 city gates that add 400 different prices, so it's a very complicated structure of the contract, but again, it's based on cost-plus criteria and the same formula applies to all the other distributors in Italy.

OK. And can you give us any idea at all of the financial impact of that renegotiation?

This is in line with our provision that the market is already aware of and so this implies a reduction for our market but it's already accounted in our provisions.

OK, thank you. I'm sorry-just one more on that. When you renegotiate at the end of one year, do you renegotiate-

In 2003.

And is that both the volume and the price or is just the volume-or just the price?

No, no, also the price. It depends. As we had mentioned, each new city gate we have to review the market together.

Thank you.

Gilberto Calera is addressing the issue on the refining margins.

Well, I want to confirm that the better results in the third quarter for refining and marketing-we had to consider that in the third quarter the profitability on Brent has been increased from about $.5 per barrel in the first half of the year to about $.75 in the third quarter. It is mainly an item apart from also the program of cost reduction that is taking place and that gives an increase for each quarter of our performance.

We have another question from Mrs. Irene Hemona from Morgan Stanley.

Yes, good afternoon. It's Irene Hemona, at Morgan Stanley. I had a question concerning first of all gas storage. Could you clarify for us how you expect that business to develop? Do you see it sitting in [inaudible]? Do you expect a removal from that business? If you could just clarify the position? And secondly, I note that gas sold at the border destined to Italy has risen very substantially to 5.5 BCM for the nine months. Can you give us some guidance on what you expect for the full year and perhaps say something concerning the margin on these border sales? Thank you.

As far as gas storage [inaudible]. And as you well know, at the moment the gas storage business is [inaudible] with ENT. And that means that for the time being we are getting a privilege for the risk, for the geological risk of running the storage. They are, as you know, a form of producing fields which are in the course of depletion-depletion that in production is topped. So for the time being, the reason for the consolidation of the E&P is the geological risk. In the future, we shall analyze the business and we'll see whether it's more consistent with other parts of our business and we'll review the situation.

Yes. Sgubini is on the line now to reply to your question about gas sold at the border. We are planning to estimate to arrive at the end of the year at a total figure of about 9 billion cubic meters and as Marco said, the price-you have to consider that the operator that is buying the gas is taking a risk for a long-term contract as well as a risk to trade the gas in Italy. So for sure the price-the margin for us is less. But you have to consider this is something that is related to the risk that the operator is taking by buying the gas at the border. So this is-some effect on the margin for sure is real.

OK, thank you.

Thank you. Your next question comes from Mr. Igor Rubikov from Thornberg Investment Management.

Yes, good afternoon. This is Igor Rubikov from Thornberg. Two questions, just to follow up on the gas sold at the border. You said you have a lower margin there. Can you magnify the impact on the margin, whether it's a big difference or not compared to the margin that you get when you distribute gas in Italy? And another question is on your power generation, two write offs in Argentina and Brazil. Shall we expect more write offs in the next quarter and if you could also comment on the carrying value of these assets on your balance sheet.

Well, again, I would like to say that the margins that we are making here by selling the gas at the border is for sure less than the margins we get in Italy to the final client. This is something that we know, and in our forecast we can confirm that we are expecting pressure on the margins in Italy for the coming years but this pressure is not so strong as we expected some 2 years ago because of the recent substantial equilibrium between the demand and the offer of the gas in our country until new gas will arrive in Italy.

And according to the information that we have, there is no new infrastructure now under construction in Italy to bring new gas into Italy. So we don't expect gas-to-gas competition in the coming four-year timeframe.

As far as the second question, we don't have any Powergen assets in South America so we don't-

The reference was made to the gas in power division but in fact it refers to our distribution activity in Argentina and in Brazil. And we do not expect- at least as far as Brazil is concerned, we do not expect major further write downs. Argentina is still to be definitely considered.

Um hm. Shall we expect kind of the same level of write downs in Argentina or will it be significantly less?

We are still considering that. I would prefer not to comment on it.

OK. And a small last follow up. I realize that you reported net profits this time and I don't remember you doing-

It's the second time.

It's the second time.

Yes, it is.

OK. And we shall expect the same thing to go into the future?

Yes. We committed to report the net results on a quarterly basis starting from June this year and we are trying to stick to it.

Thank you very much, gentlemen.

You're welcome.

Thank you. Your next question comes from Mr. Ian Reed from UBS.

Good afternoon, gentlemen. I've got three questions please. Firstly, I think I heard you say cost cutting to date during the year was EUR340m. I wonder if you could update us on what you're expecting for the year, how that fits your plans, and which business areas this is coming from.

The second question is on gas sales in Italy. Your sales dropped between 6 and 7 percent, direct gas sales in Italy. Can you tell us, is that purely in line with the reduction due to regulation or are there other affects such as weather, etcetera?

And the third question, if I may, on the Snam Rete gas minority. Do you intend to take that only at the half-year stage? The half-year and the full-year stage or are we going to expect to see it in the quarterly results? Because I don't appear to see it in the third quarter results here.

Listen, I'll address the first question and then I'll hand you over to Luciano for the second one, while I must admit, I didn't entirely understand the third one. So maybe we'll come back to that one later on. As far as the cost cutting is concerned, we-as we said, we are going ahead with our program. We are now at a level after the first nine months of about EUR340m out of an overall expected amount which we announced to be in the range of EUR420m, EUR450m for the complete 2002 year. So I would say that we are on track.

As far as the contribution of the several business segments, I'll stick to the first nine months and I can say that EUR150m out of the EUR340m are coming from E&P; about EUR50m from gas and power; EUR39m from R&M; EUR55m from petrochemicals and another EUR345m, EUR346m are what we call inter-groups projects which are very difficult to be allocated to each single business segment.

As Marco said, the gas sold in Italy-the reduction of volume-this is fully related to the [inaudible] the year 2000. You know that we have a limit to import-the year 2002, the limit is 75%, so we have been forced to sell the gas abroad just to comply with this limit. Just for your information, last year we imported 83% of the total consumption and this year we arrived at the limit imposed by the limit of 75. So this is the reason why we are selling the gas. It is in line with the strategy that we fixed already two years ago.

I'll try to answer the third one. The fact that we reported as we did is because we restated the first six months already. So we just made reference to the proportional portion of the third quarter. That is the answer to your question?

Yeah, maybe if I can just ask another question. The EUR103m of minorities then in the third quarter, 2002-does that include gas minority?

Yes.

OK, thank you very much.

Thank you. Your next question comes from Mr. Tim Whitecare from Lehman Brothers.

Yep, good afternoon, gentlemen. Two questions. Firstly, on the margin pressure in the gas business, a couple of years ago you estimated the impact would be EUR600m over the coming years. I hear today that you're suggesting it might be less. Do you have a revised estimate and could you give a timeframe over which that applies?

And secondly, in the special items, could you just itemize what comprises the EUR122m of net extraordinary income. You did go through several things, but I just wanted to be clear what the EUR122m in the third quarter was.

Yeah, I can confirm that the pressure of the margin is the same magnitude as we anticipated a time ago. What I can say, that we realized a delay at the top of this pressure so now we expect to have in four years time this reduction in terms of margin. We now realize that the market-until new gas will not arrive in our country, the margin will be-the pressure will be less.

Listen, I tried to make-to put together the answer on the EUR122m and I'll come back in a few moments. If we can go ahead with the other questions.

Thank you.

Thank you. Your next question comes from Mr. Rod McLean from CSFB. Thank you.

Yeah, hi. Good afternoon. Two quick questions. Can you tell us what the OPEC effect was on your October production? And also, on-the second point is on share buybacks. You seem to have very strong cash flows again in the nine months of 2002 but the degree of buybacks this year is substantially less than it was in 2001. Can you just explain a little bit of the thinking behind that?

Rod, as far as the impact on the October production if I understand right, I should say that the pressure is equally decreasing as you-I'm sure you well know. And the pressure at the moment is felt mostly in Nigeria and a little bit in Libya. The impact is around 12,000, 13,000 barrels a month.

Thanks very much.

Rod, if you'll permit me-before addressing the share buyback I'll go back to the previous answer which I was not really positioned to give immediately and was directing it to the 122 net extraordinary items. I mean I would say that the largest portion of them, something like 109, are coming from the sale of our retail activities in Nigeria and from the sale of our service stations in Italy, while 13 in fact are really peanuts and presently I'm not in a position to put together which elements [inaudible].

As far as the share buyback is concerned, you're right. We've slowed down our path in purchasing shares. But it was just the business of the strategy which we adopted to apply a formula which took into account several items. And I have to say that some of those items such as the target prices, the gap between-the devaluation between ENI and the peers-the analyst recommendations led to a lower path. I think we think that since it worked so far and we are at the end, at more than 50 percent of the overall program, we could continue to respect the strategy which we followed. But we-maybe we'll reconsider that. But we-today, we think that we should stick to it.

Thanks very much.

You're welcome.

Thank you. Your next question comes from Mr. Andrew Matharos from Casanove.

Good afternoon. It's Andrew Matharos from Casanove. I've got a couple of questions. The first one relates to the gas business. Could you give us an update on what the status is with the Sicilian environmental tax and what potential that could have on any sell down of your stake in Snam Rete Gas. And secondly, a question on your E&P business. Following the disposal of some assets in the North Sea, U.K. North Sea, could you just confirm how far you are through your program of upstream asset disposals?

Listen. As far as the Sicilian tax is concerned, you know that the authorities resolved already--well, first of all, you know that it would be on non-rated gas, it counts [inaudible]. But as a matter of fact, the resolution adopted by the authority is such that when the legal processes which have been put in place will come to a conclusion, there will be one of the two. Either the environmental tax is not legal, and then we'll have the right to get back-well, non-rated gas will have the right to get back the money, or it will be considered legal and the authorities stated already that it will become a part of the cost to be incorporated in the tariffs with a retroactive aspect.

So the-our subsidiary will be in a position to recover all of what has been anticipated. So I would say that since another question was what kind of impact it might have on a hypothetical further sale of non-rated gas shares, I think that being as clear as it is, it shouldn't have any impact.

OK.

As far as the deposition program, what we have realized so far is the sale of the field [inaudible] which we have in Katar and the sale of our stake in [inaudible], a field in south of Italy which is still to be developed. As well as we have concluded phase one of a North Sea [inaudible] whereby we have sold participation in 10 producing fields and four exploration blocks.

By the way, in the process we have also acquired additional participation in blocks where we are either operator or we have a major stake, in particular T-Block and Liverpool Bay. We have also launched phase two of a U.K. naturalization, which we'll see at the end of the ongoing process at the moment, the disposal of nine producing fields plus 10 marginal or dormant discoveries and 10 exploration blocks. Overall, I'll give you an order of magnitude-during the course of 2003, we have to--we expect to have an impact on the production-in terms of production-production of around 30,000 barrels per day.

OK. Thank you very much.

Thank you. Your next question comes from Mr. Paul Speering from Tesner.

Hi. Good afternoon, gentlemen. Two questions. Firstly, could you update us on what you're intending to do with the [inaudible] joint venture? There have obviously been various comments in the press about it. And secondly, in regard to your stake in the Gulf, if the government prevented you from increasing your stake in any future privatization or additional privatization, what would your reaction be? Would you be happy with the status quo or would you consider exiting?

As far as [inaudible] and in particularly the joint venture with [inaudible] operating in Azerbaijan and a little bit also in a field in Egypt, I can tell you that as you know we have a number of exploration licenses in the Bouygues Offshore and a 10% stake in [inaudible], in the gas field at [inaudible] together with [inaudible] in a 50-50 joint venture.

You heard from my previous answer that we are running a complete review of the E&P portfolio and we are rationalizing all the assets which we don't consider consistent with our portfolio based on a number of criteria which we assess. In this process, we might consider also selling this participation, but I think we'll come back once the situation will be more clear. At the moment, it's only an intent of considering a possibility rather than an actual operation ongoing.

As far as that is concerned, I mean we have talks ongoing with the government, so I would say it would be a little bit too early to draw any conclusion. It is an evolving situation and we stake our decisions on the basis of the outcome of these talks.

Thank you.

Thank you. Another question comes from Mr. Stefano Gambarini from [inaudible].

Good evening to everybody. Just a quick question about the gas area. You said that the performance in the third quarter, an increase of EUR35m at the EBIT level-was due to the transport costs and increasing volumes partially offset by a off mix in sales. So could you elaborate a little bit about it as you did, you know, for E&P, you know, to understand better the impact. Because as far as Italgas, for example, they recorded a decline in EBITDA in the region of EUR50m in the third quarter as well as Snam Rete Gas recorded EUR32m of higher costs related to Sicilian tax. So if you could help us to understand what happened in the third quarter in the gas area. Thanks.

If I had to say that the question was totally clear, I--

Just to understand-we can say that three different effects you recorded in the gas in the third quarter, if you could give some indication as you did for the E&P. So which is--

The different margin mix, the decrease in the transportations and the effect of the volumes.

Thanks.

OK. Let's have a look.

Thanks.

Next question, please.

Thank you. Next question comes from Mr. Daniel Samamai from Exxon.

Hello, good evening. Daniel Samamai, Exxon. I would like to follow up on the previous question. Could you give us more detail on how you could manage to increase the results in the gas and power division by 31.6% if you address for exceptional items. Even though sales in primary distribution in Italy declined by 6%.

How we can manage to-- Daniel, can you repeat your question, please?

Yes. What are the main elements explaining the big increase in results in the gas and power division on an adjusted basis despite lower sales in primary distribution in Italy?

Well, I think there are different items that must be considered. Even if we have sold less gas in Italy, we sold higher volumes in South Italy. This has a positive effect. Later on we have a [inaudible] distribution. We have the affect of the last deliverer of the authorities that fix new criteria as far as concern the distribution costs that are recognized to the distributor company a higher price for [inaudible] transportation costs for this business. So this is another positive affect. Then we have some other volume gas we sold in Europe that gives us another advantage, another positive affect. So these are the main positive affects that bring the result that we anticipated to you.

Going forward, could you-do you think you may achieve such increases in the next few quarters or are there many from--?

Well, the [inaudible] that is the third quarter of this year is affected positively because the renegotiation of the contract with our clients was longer than expected. So the new contract will start in October/November until June, as expected before. So this is a positive affect. So in the last quarter the results-we can extrapolate the same margin as the third quarter.

OK. And I have an additional question on your-what have been your financial expenses in the quarter and the results for other affiliates.

For other affiliates. The financial charges have been in the third quarter 2002, EUR164m negative, of course. And then just one second to elaborate on the associates line, that is, in the third quarter 2002 was positive. I'll come back to you in a few minutes, Daniel, OK?

Thank you.

Can we pass to the next question, sir?

Yes.

OK. Another question comes from Mr. Alister Symes from Merrill Lynch.

Yeah, good evening. A couple of quick questions. One, I noticed in the presentation that you calculated the EPS on a reduced number of shares. Can I just get a confirmation that the intention is to cancel the shares that have been bought back or will they potentially be still held as acquisition currency? The second question, just-I was after another quick explanation of the increased tax rate and whether you see any potential tax saving from writing up the book value of [inaudible] on your books.

Well, as far as the first question, it's true that the EPS has increased because of the reduced number of shares, but it doesn't mean that we will cancel them, because you remember we had the occasion to comment already in the past to go-it's a long and I would say painful process, as the one which leads to the actual cancellation of shares. But at the same time, we cannot use these shares as an acquisition currency, as you called it, because the resolution adopted by the annual general meeting didn't give the management any possibility to use those shares without going back to a new general meeting to be convened on [inaudible]. That would be an extraordinary occasion to use the shares.

We had--you might have noticed it, a small exception also this year when the general meeting was asked to permit to use a small portion of those shares for the service of the stock option plan. As regards to the second question, would you mind repeating it?

I was just after another quick explanation of the increased tax rate going forward and whether you think you might be able to do what you've done in the past in that-writing up the value of Snam Rete Gas on your books would give any tax break.

Well, today we can't foresee an exercise of this kind. As for our own-and that's why I was telling you that it could be advisable to adopt a 41 percent average tax rate for the year to come, we are taking that assumption also for our own use

OK, thank you.

We haven't got any more questions at the moment, sir.

OK. We can close the conference call. Regarding the [inaudible] for the associates we'll come to you, Daniel, later on. OK? Thank you everybody for joining us today to this conference call. Bye bye.