ELEZF - Endesa S.A. (ELEZF) Q3 2023 Earnings Call Transcript

2023-11-04 07:33:02 ET

Endesa, S.A. (ELEZF)

Q3 2023 Earnings Conference Call

October 31, 2023, 5:00 AM ET

Company Participants

Mar Martinez - Investor Relations

Jose Bogas - Chief Executive Officer

Marco Palermo - Chief Financial Officer

Conference Call Participants

Alberto Gandolfi - Goldman Sachs

Manuel Palomo - Exane BNP Paribas

Javier Garrido - JPMorgan

Jorge Guimaraes - JB Capital

Peter Bisztyga - Bank of America Merrill Lynch

Jose Ruiz - Barclays

Robert Pulleyn - Morgan Stanley

Jorge Alonso - Societe Generale

Presentation

Mar Martinez

Good morning, everybody and welcome to the Nine Months '23 Results Presentation, which will be hosted by Jose Bogas our CEO, and Marco Palermo, the CFO.

Following the presentation, we will have the usual Q&A session open to those connected on the call and on the web. We kindly ask you to limit your question to the financial and operational performance of the company during the period and to wait until the 23rd of November for the Strategic Plan update.

And now thank you and let me hand over to Jose Bogas.

Jose Bogas

Hey, thank you, Mar, and good morning everybody. Let us start with the highlight of the period. 2023 has been characterized by a gradual normalization of the extraordinary market and energy condition seen in 2022.

In this context, we recorded an EBITDA of EUR3.4 billion slightly lower than in the nine months of 2022 heavily affected by negative delta of non-recurring impact which we will detail later on.

Without these effects, EBITDA like-for-like would have grown by 7%. FFO reached EUR2.8 billion with an outstanding improvement thanks to the normalization of the negative market dynamics that affected the evolution of working capital last year.

Finally, Endesa has distributed to its shareholders a gross dividend of around EUR1.59 per share against 2022 results. These dividends implies an additional 9% dividend yield to the stock market performance, bringing the total accumulated return in 2023 to 18.3%.

On slide number four, you can see the solid development of the main operative indicator across all businesses. Mainland renewable capacity stand at around 9.3 gigawatt up 0.8 gigawatt over the past year with an emission-free output of 79%. It should be noted that in August, we receive the green light to shut down As Pontes power plant, taking the plant out of operation at the beginning of October.

This closure will make way for the company's future plan in the area aimed at developing renewable projects as well as reinforcing our social commitment within the region. The set of fixed price contract covered with emission-free sources is slightly reduced by the greater proportion of fixed price sales.

The number of customers in the liberalized market remain stable at the 6.9 million consolidating our leadership position. We continue to accelerate the deployment of charging station, which increased by around 50% in the last 12 months, showing our commitment to drive demand electrification, continued improvement in network quality metric with an interruption time reduction of 4% versus the previous year.

On slide number five, we summarize how market dynamics evolve over the period. European gas references have remained stable, consolidating the EUR40 per megawatt hour flow. TTF PVB spot reference prices were down by 69% and 64% year-on-year. Despite this hard drop, price still remain high.

In Iberia, average spot electricity prices were down 51% due to the reduction in commodity prices, the falling demand, and the record level of renewable energy production. Mainland demand decreased by 4.4%, strongly influenced by the combined effect of the economic slowdown that lies behind industrial and small and medium business demand destruction and higher self-consumption, which accounts for 1% of this drop. Demand in Endesa's area decreased by 3.4%.

On slide number six, sales to liberalized customer with the scope of our free power margin amounted to 57 terawatt hour, out of which fixed price sales increased by 6% to 40 terawatt hour, 75% baked by our CO2 free generation. Solid development of free power margin would reach EUR54 per megawatt hour, which shows a gradual normalization for early years record, mainly resulted from, first, the generation margin improvement, mainly due to better achieve prices in renewables with a thermal margin increase in a favorable market context.

Second, the normalization of supply margin attaining levels around EUR30. And lastly, the positive result obtained in the management of our short position. On the forward sales side, we continue to make steady progress in hedging energy sales with more than 90% already closed for 2024.

Now on slide number seven, let's focus on the evolution of the gas margin, which compare negatively with last year of the standing results. Demand at country level recorded a 13% drop. In this context, our total gas sales were down 8%, mainly as a result of the normalization of CCGT load factor and a decline in conventional demand of our clients in the Iberian market that has been compensated for by sales in other market.

Total gas unitary margin decreased year-on-year, reaching a negative EUR3 per megawatt hour, essentially due to first, the effect of the above mentioned conventional demand reduction compared to contracted volumes has resulted in a negative effect and that has had an impact throughout the year and affects in particular, the second and third quarter. Second, some inefficiencies that arose in the hedging strategy due to exceptional and temporary mismatches between TTF and PVB closed at the end of the last year for 2023, affecting mainly in the second and the third quarter. And lastly, other non-recurring effect booked in the third quarter.

It is important to stress that the weakness of the third quarter result will not be repeated to the same extension during the fourth quarter when we expect a strong gas rebound supported by a high level of visibility, allowing a return to positive levels, and partially neutralizing the nine-months figure.

And now, I will hand over to Marco, who will detail the financial results.

Marco Palermo

Thank you, Pepe, and good morning everybody. As commented before, EBITDA reached EUR3.4 billion, slightly lower than previous year in comparable terms, while net ordinary income came in around EUR1.1 billion, 28% lower than previous year because of financial cost increase and higher taxes.

On the other hand, FFO is robust and accounts for EUR2.8 billion, improving by EUR2.3 billion versus previous year, mainly due to the normalization of working capital that was heavily affected by the market context in 2022, as we will see later on, on charts.

Moving to the main drivers of the EBITDA growth, I'm now on slide 10. First of all, it is worth to highlight that the EBITDA evolution has been negatively impacted by the delta of non-recurring items for EUR364 million. You can see in gray color on the chart -- in the chart.

The 1.2% extraordinary levy negative impact was recorded in 2023. While in 2022, it was booked the positive effect of the social bonus, both of them affecting the structure line of the P&L. If we strip out these effects, EBITDA would have increased by 7%. The generation and supply results in the dotted box on the chart remained almost flat versus previous year, with a positive performance in supply recovering from extraordinary low levels of last year.

Renewable increase, thanks to higher volumes at better prices. And these positives were offset by the deterioration of conventional generation, in particular of gas margins, as I will summarize in the next chart. Networks stood at EUR1.4 billion, up by EUR230 million in the absence of negative resettlements that we booked last year. Overall, gross CapEx amounted to EUR1.5 billion in line with previous year, with 76% devoted to our main strategic pillars, renewable deployment, and network digitalization.

If we move now into a deeper analysis on Chart 11, generation and supply EBITDA reached EUR2.2 billion, flat versus previous year, with a sound increase of the free power margin by EUR882 million, as Pepe has just commented, with all the components providing positive results. The gas business recorded a negative change year-on-year for around EUR700 million when compared with last year's outstanding results.

The negative performance seen in the nine months is explained by a weak retail margin affected by lower demand and inefficiencies in some derivatives, as was mentioned before. I want to stress here that the weakness of the third quarter results will not be repeated to the same extent during Q4. And we have ample visibility that gas results in the last quarter will show a significant rebound back into positive territory.

Lastly, other margin decreased by EUR122 million, mainly explained by the negative net impact of mark-to-market, partially offset by positive contribution of the non-Mainland business with better recognition of fuel margin. And finally, a slight increase in fixed cost largely due to the inflationary context and higher activity.

On slide 12 now, distribution EBITDA increased by 20% to EUR1.362 billion, explained by a positive delta of gross margin due to the negative one-offs recorded in 2022 of around EUR200 million and a slight fixed cost improvement.

Continuing with the analysis of the results, now going below EBITDA, I'm on slide 13. Net ordinary income amounted to around EUR1.1 billion, down 28% compared to previous year, reflecting the dynamics observed at EBITDA level and strongly impacted by the increase in D&A and provisions by EUR128 million year-on-year, mainly due to higher investment in renewables, distribution and retail, and an increase in bad debt figures as a result of worsening collections from residential and B2B customers.

Net financial results increased by EUR284 million on the back of a higher financial cost as a result of higher interest rate market environment affecting the cost of debt. The average gross debt remains stable, thanks to the collateral's reduction. A negative delta from the financial provision update only partially offset by positive net exchange differences. There is also a decline in income taxes by EUR149 million, driven by lower results, while the tax rate increased to 29%, heavily affected by the non-deductible revenue levy. Finally, minorities decreased by EUR28 million.

Turning to cash flow, and now on Chart 14, FFO reached EUR2.8 billion in absolute terms, showing a sound improvement compared to last year, thanks to the positive working capital dynamics. In particular, the regulatory working capital continues to improve in the third quarter, recovering EUR0.7 billion from the negative peak recorded in Q1, mainly thanks to the collection of settlements related to the non-Mainland systems.

Positive impacts also from the net trade receivables and payable due to energy and commodity price normalization, which recovers from the unusual market environment in 2022. All this was partially offset by an increase in tax payments, as a consequence of better results in 2022, and by higher net financial expenses paid.

I would now like to turn to the evolution of debt on slide 15. Net debt came in at EUR11.6 billion. Over the period, the FFO contributed positively to net debt evolution for EUR2.8 billion, more than enough to cover this period's investments. Dividends paid last July amounted to EUR1.7 billion. Gross debt decreased by 24%, driven by a strong reduction in collateral requirements.

Moreover, the cost of our debt remained at 3%, so in line with our first half 2023, following the substantial increase in interest rates in the first months of the year. Finally, our financial management shows strong credit metrics over the period. Net debt EBITDA leverage remains at healthy levels, while FFO to net debt ratio stands at 34%, up 19 percentage points year-to-date.

And now let me hand over to Pepe for the final conclusions.

Jose Bogas

Okay and thank you, Marco. And now, some closing remarks before the Q&A. As we were previously anticipating, the nine-month results are in line with our expectation, including a correction in the third quarter in the gas margin, offset by the strong performance in the power business.

Cash flow generation remained even stronger than historical levels. Thanks to the recovery of the negative impact that affected the working capital last year as well as affected financial management. Overall, we'd remain on track to achieve the 2023 target, underpinned by the high level of visibility of business development for the rest of the year. On November '23, we will present an update of the business plan, where we will unpack the strategic vision we foresee for the company for the next three years.

This concludes our Nine Month 2023 result presentation. And I think we can now open the Q&A session.

Mar Martinez

Thank you, Pepe. Thank you, Marco. And now, we are open to answer all the questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions]

Mar Martinez

Okay. First question comes from Alberto Gandolfi from Goldman Sachs. Please Alberto go ahead.

Alberto Gandolfi

Thank you, Mar, and good morning, everybody. I have three, please. The first one is on your 2023 guidance. And I appreciate that you just basically just reiterated right now, but is there any narrowing of the guidance you can provide? Do you see yourself more at the top-end, midpoint, low-end? And perhaps, could you comment on what's going on to refinancing? And if you don't want to comment on the guidance, maybe be a bit more specific on refinancing costs, provisions, mark-to-market, and maybe gas losses in the quarters that we can make our own assessment for Q4. The second question is on slide six. I saw that you're talking about supply margins going from about, I believe, EUR5 a megawatt hour to EUR13. And you talk about well-hedged '24. So do you think that on electricity that level of mid-teens supply margin is a sustainable figure into 2024? I'm just trying to gauge where supply would be once normalize for gas losses into next year. And my third question is not anticipating your Capital Markets Day. So I'm just trying to understand your mindset and your philosophy here, no numbers, just conceptually. Do you still believe it makes sense to continue to develop renewables in Spain? Or is it better at this point in the cycle to stay capital light, maybe boost the PPA portfolio as a client you sign PPAs, and maybe wait to acquire any operator that could become distressed over the next two, three years, given the big pipelines and capital requirements to finance that development in light of interest rates. So I guess the question is, is the current credit environment leading to a shift in the way you're thinking about renewable development? Thank you.

Jose Bogas

Okay. Thank you, Alberto. I will try as to give some clues, and then Marco, please, go deeper in this. First of all, the guidance. Well, we maintain our confidence in reaching the guidance, and I would say we continue in the upper range of this guidance. Marco will explain the gas losses, the refinancing, et cetera. With regard to the supply margin, I would say that these EUR50 per megawatt hour will be sustainable in the future. If you allow me, I hope just to improve this by means of many measures that we will implement or we are implementing in the future but really, it is sustainable. With regard to the third question about the development of renewables, I would say that our strategic point is to continue following the energy transition and then supporting the distribution investment and the renewable investment. It is true that the market is changing. It is true that there are some regulatory items pending, mainly the design of the market model in the future. But we are confident, as far as we know, how it's evolving the discussion in this design and new model that it will be absolutely -- we will face the condition just to continue developing the renewables. It is true that we should optimize the context. And in that sense, one of our pillars also is the strength in our financial position. For sure, this is going to be a huge effort just to reach this energy transition. So we will do our best but maintaining our financial strength in the future. Marco, could you explain a little bit more?

Marco Palermo

Thank you, Pepe. Alberto. So basically I guess that Pepe answered it all, but let me give you some numbers on that. On the first one, you were asking for guidelines. I guess Pepe was clear on that. But just to highlight a few numbers for you, just to take into consideration. Regarding the refinancing costs, you should assume something around EUR550 million as a total cost for the financing in the year 2023. And when it comes to D&A, you should think about another quarter that would be probably in line with the current one. So bringing us basically between EUR1.9 billion and EUR2 billion in terms of D&A. When we go to the power margin, you were referring to this 13. Yes, I mean, it's without anticipating anything, but at least talking about 2024, that's what we are seeing also for the near future. And regarding the third question, I guess that it would deserve a long talk. But here the point is that trying to answer without giving too much details, is that as you have probably seen, we recently signed a PPA with Solaria was a small one, but we came back in signing PPAs in [indiscernible]. And if you see our development in terms of megawatts along the year, probably we will end up installing less. So spending, probably installing less megawatts than we thought, because we are somehow, it's not waiting and see, but it's somehow taking maybe a slower pace. So this should give you probably some hints about what we are now thinking. But this will be somehow discussed during the Capital Market Day and that will be the right place to have this kind of talk.

Mar Martinez

Thank you, Alberto. We move now to Manuel Palomo from Exane BNP Paribas.

Manuel Palomo

Hi. Thank you. Thank you for taking my questions. I have same as Alberto, two to three. The first one is on the cost of debt. I see that it's now at 3% versus 1.4% one year ago. But also I see that maturities for the year 2024 stand at EUR4.5 billion. So my question is, after what we are seeing in terms of big increase in financial charges, what we could expect going forward or at least if you could provide with some detail on the amount of the debt which is already fully fixed or hedged. Second question is on the gas margins. On the gas margins, we see that the margin year-to-date, it's minus EUR3 megawatt hour versus EUR6 last year. And the standard part of this is due to the correlation between the TTF and the PVB. So my question is whether you have or you will change your hedging strategy as a result of this year's de-correlation between these two indexes. And the last one is a bit of detail on the last PPA that you signed with Solaria. I mean, I attended the company presentation. It looks like the company said that PPA price was between EUR45, EUR50 megawatt hour. So my question is not just whether you are happy with that price, but also what is the levelized cost of energy that you see for solar PV in Spain as of today? Thank you very much.

Jose Bogas

Okay, Manuel, I will try to answer the second one with regard to the gas margin and the cost debt and the PPA with Solaria, Marco will answer. Your question is if we are going just to change our hedging strategy or not? Let me say that we have learned a lot of things with what had happened the past year. But giving you, allow me just to explain a little bit this. I would say that the evolution of the gas margin in the year 2023 is the consequence or the result of an absolutely exceptional 2022 market context with very high prices and a volatility never seen before, affecting, as we have seen, the year 2023. The margins of Endesa's gas business have historically been around EUR200 million, with good years reaching EUR300 million and less with years reaching EUR100 million. The gas margin target for the year 2023 in the last Capital Market Day include some negative impact. Let me say that this gas margin targeted was around 140 that means below the average of 200. This is just because we already take into account a negative impact from inefficiencies of derivatives closed in the third quarter 2022, which were compensated for by good operating results. These inefficiencies of derivatives were due to the mismatch between the PVB and TTF prices caused by the war in Ukraine and the impact of gas supplies in Europe and our TTF coverage policy in the clearinghouse. But let me say it was an extraordinary context in which we never have seen this mismatch between the TTF and the PVB. That is a lesson learned for us. In 2023, we have seen that the result of these inefficiencies has finally been even more negative than expected by us. In addition to this effect, I should say that the margin has also been affected by the fall in demand versus contracted volumes. And finally, this is one of the gas margins that was also penalized by previous year other known recurring effect. All-in-all, in the second quarter and the third quarter, we see a negative impact in our gas margin. So we saw gas margin deterioration. I should say that since this 2022 context, things have changed a lot. First of all, since the beginning of the crisis, the European Union has taken numerous measures to increase security supply by replacing Russian gas supplies by pipeline with gas from other sources, mainly LNG. With these measures and other measures, the European gas market is becoming increasingly homogeneous, helping to align the different gas price references in Europe. So we think excuse me for this long explanation, we think that the context has changed again, and this was a one-off. Nevertheless, we have learned the lesson. We will take care. We are really closing and taking into account. We don't expect this mismatch between the TTF and the PVB in the future. Even more, we expect a better fourth quarter, mainly due to the operational margin. We don't expect material impact in the year 2024. But we have learned that we didn't have in our mind these mismatches that have penalized us during the second and third quarter. So are we going just to change our hedging strategy? Yes and no. We will continue by taking care of this very important point that we didn't take into account or we don't expect in the past. So we have learned the lesson.

Marco Palermo

Thank you, Pepe, and, hi Manuel, just answering now after the question number two, then question number one and the three. So on the first one, regarding the cost of debt and in particular, the refinancing, the looking forward in 2024. Without commenting too much and without discussing too much regarding our Capital Market Day and things, what I can tell you is that the big refinancing next year is the 3 billion financing from Enel that we have in place from 2014. That ends in October 2024. If you ask me right now, of course, I mean, it's -- we cannot say much. But if you ask me right now, I'm not sure we will refinance at all. So this is somehow is giving you part of probably the answer. And the other point is that right now our coverage at fixed rate of our financing is approximately 70%. It's even more than 70%. So 70% is fixed. So also this, I guess, that is giving you some hints there about 2024. And when we go to question number three, frankly, it's a bit embarrassing because we were not expecting Solaria to give you any kind of detail, even more if they were not exactly correct. So your statement that this price should be between 45 and 50 range is not correct. It's not that range. You can guess what somehow where probably the price stand. So I mean, those are the kind of prices that makes for us interesting signing PPAs.

Jose Bogas

Thank you, Manuel.

Mar Martinez

Okay. Thank you, Manuel. We will move now to Javier Garrido from JPMorgan.

Javier Garrido

Good morning, everyone. Thanks for taking my questions. First one is a clarification on the comments on the gas margin for Q4. Should I understand that this should be positive, as you said, but is it positive enough to offset the negative gross margin that you have accumulated to nine months or is not enough to make the gas margin in full year '23 be zero or positive? The second question is on net debt. Apologies, you have said that in the presentation and I missed it, but have you got the net guidance and updated net debt guidance for '23? And what are you expecting by way of working capital moves in the fourth quarter? And then the final question is on the 1.2% special sales tax. Would you be assuming from now that this is going to be permanent, that this is going to become recurrent and not just a tax for '23 and '24? Thank you.

Jose Bogas

Okay, Javier, I will try just to answer the third one and Marco will clarify this gas margin and the net debt and the working capital. Well, first of all, I suppose that you asked me this question of the permanent of this 1.2% sales tax just because of the agreement between the PSOE and Sumar parties. First of all, I should say that reading what they have written, what we read is readapting and maintaining this tax once the current period of application expires. So first of all, we need to understand what means this readapting issue. Nevertheless, I have to say that we have tried to explain, first of all, that we don't have, many times, that we don't have win for profit. And this is true even more if we have this clawback cap, this is the 67, lower than the one in the European Union, which is 180, that means that there is no extra benefits. So we don't have win for profit. Having said that, you know that we have legally appealed the tax claiming. First of all, that it is discriminatory and unjustified. And the second thing is that it does not follow European regulation. You know that this kind of tax should be applied not in the case of the electricity companies, just because of the clawback, but in any case should be applied over the profit and not the revenues. In any case, we say that it is discriminatory for the Spanish utilities since it decreases our capacity to invest compared to other European players. We have then a competitive disadvantage in terms of the European market. And this has no sense. I think that we should focus all our potential in the development of renewables, the reinforce of the distribution, et cetera, et cetera. So we should be focused as the European Commission, not trying just to explain in this energy transition. If we don't have win for profit, if it is discriminatory versus the rights of the European companies, it has no sense just to continue with that. We will continue appealing in that and we will see what happens.

Marco Palermo

Thank you, Pepe, and, hi, Javier, just going to the question number one and number two. On gas margin on the Q4, yes, you are seeing it right. In Q4, we see a positive in gas margin. Is this enough just to compensate the negative? No, it will not be enough. So we plan to end the year probably slightly negative. Could be something, I don't know, around 100 million. And just to elaborate a bit more on this, generally this is historically a business that in one good year gives us, I don't know, in a bad year gives us, I don't know, EUR100 million, EUR150 million, and in a very good year gives us EUR300 million. This is not the case for what we have seen, and we have listened by Pepe regarding the TTF and PVB. This will not be the year. So I mean, in this case we will arrive, we will improve in the fourth quarter, but this will not be enough just to neutralize all the negatives that we have been accumulating along the year. And if we go to question number two, that is on net debt guidelines, no, you didn't miss, we didn't give it, but we give it to you right now. We confirm that we do see 2023 with a net debt between EUR10 billion and EUR11 billion will be in this range. And, of course, this has -- this is very, very related, of course, with our working capital recovery, but also with the regulatory working capital recovery. We have been after the peak, the lowest peak actually, the highest in terms of exposure on the regulatory working capital that was 2.6 at the end of the first quarter. We have seen this improving slightly at the beginning. We're still seeing a slight improvement this quarter, but we do expect for the last quarter this to become stronger. And of course, the job will not be done yet, but we see a stronger recovery in the last quarter of the year, and this should somehow bring us where we think in terms of net debt guidelines. Thank you.

Mar Martinez

Thank you, Javier. We move to the next questions that come from Jorge Guimaraes from JB Capital. Please Jorge go ahead.

Jorge Guimaraes

Good morning. I have two questions. Most of them are follow-ups. The first one is if you can clarify your comment about the sustainability of the electricity margin. When you say that the nine-month '23 margin, you want to maintain it or even improve it, do you mean the supply margin or the integrated margin? This would be the first one. The second one is if you can provide some visibility about the EBIT from the non-Mainland system as of nine months. And the third one is a clarification on the question about the PPA with Solaria. Can we understand from your words that you see the LCOE of solar PV in Spain in the low 40s range? Thank you very much.

Jose Bogas

Jorge, I will try to answer the first one, and then Marco will answer. Just in terms of the electricity integrated margin and the supply margin, I have to say that this figure that we have in this nine-month result presentation, that is the EUR50 per megawatt hour, it is sustainable in the future, as I have said. Also the sustainable, the EUR30 per megawatt hour in the supply margin. So we feel comfortable with these figures. We will try, as I have said, just to improve these figures. And now Marco.

Marco Palermo

So thank you. Hi, Jorge. So basically on non-mainland, yes, the EBITDA at nine months is approximately EUR350 million, and we do expect this to close year 2023 around half a billion. In terms of PPA, I mean, I guess that there was in the PPA with Solaria there were two counterparties with a common interest, basically. I guess that even though the PPA is not very big in quantity, to us there is a point where it is interesting vis-a-vis building renewables. So basically it was in a range of price that made us interesting to buy, even though we have our own project, our own pipeline that is huge, and our own renewables in construction. So that is it. And I guess that on the other side there was somehow also the interest of having a counterpart like Endesa signing a PPA also for future development of the company. So I guess that I would not probably see too much more behind such a deal. And the margin that I've given you on the non-mainland is the margin. It's not the EBITDA, unfortunately. So it's the margin that we are seeing the same. So the classical number that we give you just in order to fill your models and having visibility on the contribution of the non-mainland business. Thank you.

Mar Martinez

We move to the next questions. That comes from Peter Bisztyga from Bank of America Merrill Lynch.

Peter Bisztyga

Hi. Good morning. Thanks for taking my question. So two from me. Firstly, I think your guidance on the windfall tax payable from 1.2% levy payable in 2024 was around 280 million. Is that still valid after what you've reported for the nine months? And then secondly, how are conversations with the regulator going on, remuneration regularization for 2020, and is there any risk that you could see another hit in networks like you did last year? Thank you.

Jose Bogas

Okay, Peter. I will try to answer the second question. We are continuously talking and discussing with the regulator. I should say that many times we don't get what we want, but we have a very fluid conversation with the regulator. Let me say that we are in a very, very important point, trying just to create something positive to create value with the regulator. And I will try to explain myself. It is true that we are involved in the energy transition, and the energy transition is very, very important for Spain, for Europe, and even for the world, as you know. And it's very, very challenging. It is clear that these policies focusing or aimed just to de-carbonization, the increasing renewables, the reinforce of the networks, the electrification of the consumption, et cetera, it is very, very, very important. What we think is that we have taken this responsibility, but we need just to implement the regulation that will make successful all these energy policies that we are trying to implement. We need a lot of changes, a lot of changes in the remuneration distribution, a lot of changes in the incentivization of renewables, et cetera, et cetera. And at the end, in any case, any measures adopted at the end should not be, and I would say, an obstacle to further progress toward the energy transition objective. It will be only possible, and this is very important, on top of the different bottlenecks that we have. It will be not possible if, first of all, it is not competitive for the customer, and second, if it is not profitable for the investor. It is absolutely clear, absolutely clear that all the things that we do, if we want to be successful in the energy transition, should be competitive for the customer, but also should be profitable for the investor. So at the end, I think that we will reach an agreement because we are in the same boat, regulators, and ourselves.

Marco Palermo

Thank you, Pepe, and, hi, Peter, then getting back on question number one, that is on the windfall tax and on the impact. Yes, short answer is yes, we do see this north of 200. So impact, this is both for 2023 that is calculated on the 2022 results, of course, on the Iberian Peninsula netted by regulated activities and blah, blah, blah. And this is very similar to what we see also in 2024 calculated on the results and the revenues of 2023. Thank you.

Mar Martinez

We move to the next question that comes from Jose Ruiz from Barclays.

Jose Ruiz

Yeah, good morning, and thanks for taking my questions. I only have two. The first one is if you are still maintaining the one giga renewables capacity addition for 2023. And the second question is you're doing very well in terms of regulatory receivables from non-mainland. You have already reduced by 700. I was wondering if you're still maintaining a level of -- optimal level of 1 billion for regulatory receivables. And when will you achieve that? That should be more 2024, I guess. Thank you.

Jose Bogas

Okay. Trying to give and then give you the first answer. First of all, our 1 gigawatt, in my opinion, will reach something around 700, 800 more or less. And the rest will be put in operation the first half of the next year. And this is due some delays and some problems in the supply of different materials and different things. But that means that we will reach this figure, but we will spend some month of the year 2024. On the regulatory receivables, well, we are working just to reduce even more than 1 billion. But we will see. We will see what happens. But, Marco, could you?

Marco Palermo

Yes, on that, hi, Jose. On that just elaborating a bit more. When we started the year, you correctly remember that we were figuring and we were saying that like probably 1 billion was the normal amount that we should see in this place. I mean, working capital, regulatory working capital. And we also said that our target for the year was basically the one-off trying to reach this by the end of 2023. So I would say that we are still, I mean, abiding by this kind of challenge that we gave to ourselves.

Mar Martinez

Thank you. We have now Rob Pulleyn from Morgan Stanley.

Robert Pulleyn

Hi. Good morning. Just a couple left from my side. The first one is just to follow-up on, I think, the first question on capital allocation. And could you maybe share management's thoughts around the dividend payout ratio in the current environment? Previously, you paid as high as 80% or even 100% in previous years. And we'd love to just see how the thought process is evolving. Secondly, on non-mainland business, could we see a big step up in CapEx there, given some of the fire damage? And would that offset some of the slowdown in renewables CapEx that you indicated? And lastly, just to return to the topic of the PPA with Solaria and your comment that the price was interesting versus building it yourself. Is that to effectively say that smaller solar developers can build projects at the same cost as Endesa, given where relative finance costs are across the industry? Thank you very much.

Jose Bogas

Okay. Thank you. I would try just to say something. Well, about the capital allocation, about the dividend payout, we will see our policy in the Capital Market Day. So I ask you just to wait for the Capital Market Day, yet to have this figure. With regard to the mainland and the big step or not in capital allocation and investment in CapEx, I would like to say that there is an important structural deficit of capacity in the island, mainly in the Canary Islands. We are expecting the launch of different options for the new capacity. In our opinion, the whole remuneration model should be reformed and adapted to the new environment and the new circumstances. And we will see. But it is true that it will be an opportunity. I should remind you that we have a restriction because we have more than 40% of the capacity in the island. So that means that we should shut down some capacity just to replace this capacity. And we will see what happens in the island. But it will be an opportunity if the regulatory environment is adapted to the circumstances that we have. Well, I am not going just to say nothing about the Solaria PPA, which Marco is the expert in this -- for this question. In any case, let me say we are doing our best. I always think that these competitors are always very good one competitors. We are open just to learn about these competitors. In any case, we think that we are also a successful competitor in this renewable business.

Marco Palermo

Okay. So thank you, Rob. And I guess that also question number two actually on non-mainland CapEx is probably something that we should discuss more during the Capital Market Day because it needs a thorough and deeper discussion. On question number three, let me allow. First of all, I guess that Solaria is not whatever IPP. It's one of the big builders of renewables together with Iberdrola and Endesa on the market. So I don't know if you can extract and somehow apply the same reason to other IPPs. What is there, and just trying to give you more color in that, is that as I mentioned, this PPA, it's on -- if you want unlimited quantity, if I remember correctly, is 0.2 terawatt hour. So I mean, it's on small quantities. And I assume that on one side, the price and availability of this power immediately to us was interesting because, of course, we have our own projection for the short-term and medium-term. And so this compared to our scenario, this price make the acquisition of this energy attractive to us because we are kind of somehow, I guess, probably we are seeing this market environment to somehow continue. And on the other side, I guess that it could -- was somehow making sense. Of course, as I said, maybe not a big quantity, but it was making sense for Solaria to have a buyer, a long-term buyer with the solidity of Endesa there on a PPA. So I mean, basically, that's it. Thank you, Rob.

Mar Martinez

And the next question comes from Jorge Alonso from Societe Generale.

Jorge Alonso

Hi. Good morning and thank you for taking my questions. I have three, if I may. The first one is just to understand, because you pointed that the weakness this quarter was on the gas activities, but basically on the gas supply, right? But in conventional generation, EBITDA in the third quarter was negative. And if non-mainland was okay, I just wanted to understand what happened with the nuclear coal and CCGT plants in order to provide a negative EBITDA in the third quarter. The second question is if you can provide some color on volumes of energy hedge for 2025? And the last one is if you can give us as well some color about the amount of energy that you already have on the PPA in the sense of you acquiring energy from a third-party through PPAs. Thank you very much.

Jose Bogas

Okay, Jorge. Well, I will ask Marco just to answer you, but in any case, let me say that perhaps there is a misunderstanding because the conventional generation has been strong. Perhaps the confusion is that I think that we present that not differentiating the gas margin. We say something like generation and others. Well, the generation, the power generation is going very well, very well, yes, but in others we include the gas impact. And I think that could be the confusion and I excuse myself here because we could confuse with this center part. Marco, could you explain?

Marco Palermo

Okay. So, hi, Jorge. So basically, on gas, yes, and on generation, basically all the impact is coming from the negative of gas that you can then better see at page 11 whether you see on one side the very positive power margin. So basically whatever is behind that is what you were mentioning. It's supply, it's the hydro, it's the nuclear, it's the renewables. So it's basically all of those that basically was positive. But then when we come to the gas business, it's when things went the other way around. So basically somehow giving us this negative surprise, if you want. On question number two, regarding the hedge on 2025, yes, we started to hedge also 2025. That's kind of normal business to us because we generally look at two years' time in front of us. But in order to comment how much, I guess, that is more something that we will somehow comment more on during the Capital Market Day. And regarding the PPAs, yes, of course, I mean, you have seen that there is some market activity. We are very, very, very active in terms of PPA on the sell side. We have been very interesting since years, I would say, also on the PPA on the buy side. And what we have seen during the last year, it has been that there has been not so much activity, at least on the Iberian Peninsula, on the -- at least for us, for PPA acquisition. Now we are seeing the market somehow starting to move. And the Solaria PPA was the fact that we went back to sign it. Something was kind of -- this was showing that something is again moving. But for the time being, there is not so much quantity somehow available on the market. At least to us, there is not enough match between the price that is interesting for us and the price that could be interesting for other counterparts on the other side. Thank you, Jorge.

Mar Martinez

Thank you. This was the last question of our call. So thank you very much for participating. And just remind you that the IR team is available in case you have any other question or you require further details. So thank you very much and have a nice day.

For further details see:

Endesa, S.A. (ELEZF) Q3 2023 Earnings Call Transcript