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Edited Transcript of A2A.MI earnings conference call or presentation 15-May-19 12:30pm GMT

Q1 2019 A2A SpA Earnings Call

Milan May 31, 2019 (Thomson StreetEvents) -- Edited Transcript of A2A SpA earnings conference call or presentation Wednesday, May 15, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Crenna

A2a - CFO

* Luca Valerio Camerano

A2A S.p.A. - CEO, GM & Director

* Renata Bonfiglio

A2A S.p.A. - IR Manager

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Conference Call Participants

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* Alberto Gandolfi

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

* Emanuele Oggioni

Banca Akros S.p.A., Research Division - Analyst

* Enrico Bartoli

MainFirst Bank AG, Research Division - MD

* Javier Suarez Hernandez

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

* José Javier Ruiz Fernandez

Macquarie Research - Analyst

* Stefano Gamberini

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the A2A First Quarter 2019 Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Renata Bonfiglio, IR Manager. Please go ahead, madam.

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Renata Bonfiglio, A2A S.p.A. - IR Manager [2]

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Thank you. Good afternoon, and welcome to our presentation with Mr. Valerio Camerano, CEO; and Andrea Crenna, CFO. The deck material has been sent to you and is also available on our website.

I now hand you over to Mr. Valerio Camerano.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [3]

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Thank you, Renata. Good afternoon, everybody. So welcome to the presentation of our Q1 '19 data. So let's go directly to Page 3. I'm sure you have it on the website, the presentation where we basically recap the key messages on the quarter. So on the positive side, as you will see soon in details, so we have positive evolution of the energy retail margin. So we continue our strategy to grow the free market. And in this quarter, we have also an evidence of the growth in our market share on large accounts, large clients as a result of the weakening competitive positions of other players in the market. So positive energy retail margins.

On the waste side, we have some strengthening in the prices of the waste treatment both on the urban side and industrial side. We have -- though, as you know, the first quarter was quite weak in terms of temperature, we had a price effect just positive on the district heating, which slightly compensate some of the volume effects on district heating. We have the inclusion of the solar plants. We acquired -- we're close to 100 megawatts at the moment. So we have now the full evidence of this asset base in our accounts.

And finally, on the positive side, we have the full consolidation of the ACSM and AGAM in the quarter. On the negative side, we have -- on the environmental market, we have sold the long position we had on the CVs, on the green certificates, for EUR 63 million. And then we have also the end of the feed-in tariffs on some of the plants -- in 1 plant. By the way, we have in Friuli EUR 10 million. So we have a global effect of minus EUR 73 million (sic) [EUR 72 million] on the environmental market. So both of these elements and phenomenon were already expected, as you know, since years now. So there's no surprise from our side. The second point is ancillary services. The quarter was very weak in terms of ancillary services. We will get to the point soon, more in details. And finally, as I said earlier, we had also volumes effect negatives due to warm winter in terms of gas and district heating volumes.

So I think we have the -- so we can go to Page 4. So we have the key financial indicators. On the revenue side, we have the revenue with quite a significant up movement. This is mostly due to the earnings coming from the sales of electricity, and then mostly on the 3 markets. Big clients, giants and also in general terms due to the increase of unit -- higher prices in electricity and gas. On EBITDA, minus EUR 80 million. Most of this is coming from the environmental markets and the volumes effect on the district heating.

EBITDA ordinary is pretty much the same. The effects of this minus EUR 80 million in terms of EBITDA is almost entirely reflected in our group net income.

On the net financial position, i think you may -- we may -- I may underline the fact that at the perimeter level, we have a decrease by 1% to EUR 24 million. So this in the same perimeter, we are -- we continue to decrease our net financial position. And of course, we have some effects coming from the inclusion of ACSM for EUR 71 million in our net financial position. And also other effects which are purely accounting, effects on the IFRS16, but we'll comment on that pretty soon.

So let's move to Page 6. That's a comprehensive view of our views. So looking at the minus EUR 115 million for generation. Again, EUR 72 million are coming from green certificates and feed-in tariffs, and the rest, which is almost EUR 50 million is mostly -- entirely coming from decreased MSD, ancillary services. But if you are -- the phenomena is linked as well to the low load. We had both in the north side of Italy and the south of Italy. So we had our plant Scandale in the south which was compared to 2018 working less, same thing for the north on the country. With such a low load, the MSD was called less than 2018. So those are mainly transition effects on the first quarter of the year.

The good news on the rest of the business, I mean, the rest of the business, which is the market, waste and networks. All of our views are growing from a recurring point of view. So the strategic goal of the company is concerned by this quarter. We have significant improvement coming from waste -- sorry, from market. This is again the growth of the clients. Value coming from the safeguard tenders we have won this year. We have never participated with tenders before. We have the inclusion of EUR 12 million coming from [AGSM]. And we have more clients, of course, in the free market of electricity and gas.

On the waste, up EUR 7 million. And we have treatment. Most of the well is coming from treatment. There's an increase in price for treatment of new build waste, industrial waste, as well. And also there's a positive effect coming also from the sale of electricity produced by WTEs at the current prices in the market.

For the networks, networks -- it's EUR 11 million up. This is -- EUR 7 million coming from ACSM. So it's part of the consolidation of ACSM and EUR 2 million are coming from the price effects coming on linked to the district heating, partially offsetting the negative effects coming from the volumes decrease we experimented in the first quarter. So we ended up with an EBITDA EUR 323 million. Again, it's a double-faced situation in generation, with the quarter performance is really impacted by the MSD and the general conditions of the winter in Italy. And the rest of the company, it's marching ahead well in all its strategic and operational targets. Andrea, please.

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Andrea Crenna, A2a - CFO [4]

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Thanks, Valerio. Good afternoon. I'm now on Page 7 of the presentation. There is not much to add to what Valerio has said on the generation. If you add up the green certificate and the ancillary services effect, so you actually get to more than 100% of the variance of the whole business unit. So we, as a matter of fact, recovered a little bit in the other items, which I will touch later on if you have specific questions. If you move to Page 8, differently on our market division, differently from generation. This business unit is actually reporting a strong performance, and I think it's fair to say better than we were expecting. And this clearly, excluding the contribution of ACSM-AGAM, which is a variation in the consolidations perimeter on the quarter.

In the retail business, as you know, makes the lion's share of the business unit. We recorded all of the KPIs with positive trends. There are 3 customer based on the free market was up 50,000 customers, which is very much in line with the 200,000 we have on the full year. Unit margins are basically holding or slightly increasing in some segments. So we're not seeing for another quarter -- or everybody, including ourself, is somehow stating a decrease in the unit margin. This did not happen in Q1. We got positive effects from the revisions by the authority of certain components -- regulated components in the electricity prices. With more volumes on the B2B business, we have the positive effects of the Salvaguardia auctions, which we carried out and partially won at the end of 2018. And clearly, we got some more acquisition costs. But overall, excluding ACSM-AGAM, as I said, and the Salvaguardia, which is once again a variations in perimeter, we are reporting a strong double-digit growth in the retail business.

If we move to Page 9. Once again, a very strong quarter. It's something like 7% growth, excluding once again ACSM. Here, I have to say that the negative effect on the business unit, which we already commented on the full year 2018 results, which we are expecting this year, i.e., the potential full year negative impact on the Grottaglie landfill as well as the program stops for maintenance of our turbine, saying, the WTE plants have not occurred in Q1. So we have a "full normal quarter", which not differently from the full year 2018 record of 7% year-on-year growth.

Once again, not many things to add. All the underlying drivers, the prices -- electricity prices, volumes, so on and so forth are performing normally as they did last year that there are no -- there are no being major changes. I think it's worth mentioning that in this quarter, we got one more authorization for the [10] plants that we presented with the business plans. So we have one more, which was not here 1 month ago for -- it's almost, as Valerio correctly pointing out, that adds up to the number of plants which represents almost 75%, 80% of the expected EBITDA coming from this line in the plant.

If we turn to Page 10, electricity and gas growth is about [1%]. It's plain vanilla. It's out of the work revision and a bit of higher ramp. Basically, it's a 4% growth despite the warm winter here we benefit -- more than benefit from higher prices. And the water actually you see a flat performance, 0 growth because the increase in size that we got was offset by negative volumes in the quarter. I will leave -- actually below the EBITDA there's really nothing too specific, nothing which is worth to comment. Of course, I'm very keen to pick up any questions you might have later on. The only thing, as Valerio said, in the free cash flow, you will see impact, I already commented on a full year 2018, that the impact of the introduction first time adoptions of the IFRS16. This is up EUR 100 million on the net financial position creates an incremental net financial position. And to be complete in the representations of being part of the IFRS on side of the effects of the net financial position, that would imply on the full year, on the 12 months, roughly EUR 20 million of effects on the EBITDA and clearly 0 impact on the net income. We have a chart, Page 14, on the guidance, which will clearly, after 1 month, are confirming to be exactly the same target, which we have already discussed 1 month, 1.5 months ago.

This is it as far as the presentation of Q1 and clearly, we can open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Javier Suarez with Mediobanca.

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

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This is Javier Suarez of Mediobanca. I have 3. The first one is on the energy supply business. I think that the big surprise this quarter has been the very good performance on the energy supply business. During the presentation, there has been some explanation, but can you help us to understand, again the underlying business dynamic? I think that the company mentioned during the presentation that the customer base is up, unitary margins are holding well and there are some acquisition -- higher acquisition cost that are playing on the negative side. I'm just questioning myself if what we have seen during the first quarter 2019 is applicable through the year, which is the underlying dynamic for the supply business that you are expecting for the company in 2019. That is the first question.

The second question is on the ancillary service market. That obviously has been very weak this quarter. Can you give us the number of their contribution during the first quarter of 2019 and also your expectation for the full year 2019 on the ancillary service market? And the third question is on the generation business. Obviously, here, the quarter has been difficult because the lower contribution on the -- from the environmental market. Can you give us your expectations? Or what do you see in the market as main dynamics affecting your generation business during the next few quarters? And can you give us some details on your latest hedging strategy.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [3]

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Andrea, you want to answer on the first one?

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Andrea Crenna, A2a - CFO [4]

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Energy supply, yes. First and foremost, yes, Javier, I apologize, I don't have here with me all the numbers, but you might remember that Q1 2018 in the retail business, we reported some negative temporary effect, which actually reversed completely during the second quarter, by the end of the first half, all these temporary effects were completed last year, last year. So last year Q1, the quarter Q1 was for temporary effects pushdown. This is to say that up to a certain extent, the growth that we are recording into this year is basically due to favorable comparison, okay? Having said that, carrying out this impact, which more or less might account for short of EUR 2 million, all the rest of the drivers are actual drivers. Customer base, 50 -- I repeat myself, customer base, 50,000 customers more. You have to take into consideration that more customers are migrated to the free market, the larger is the free market customer base. So whatever increase in margins, which happens for whatever reason applies to a larger base. So this effect is going to improve both direction, of course. The more the customer base is migrated to the free market customer base. Then we have sold more volumes to the B2B customers both in electricity and in gas, sizable growth, double-digit growth in volumes. Once again, we are not seeing reduction in the unit margin. So we have no compression in the unit margin, but we are seeing a positive impact on the larger volume. Usually, you have more volume, lower unitary margin. This quarter, we only had more volume and not a negative impression on the unit margins, on the B2B in order to sell more volumes.

Then we got -- part is due to optimization of the cost in gas, okay, which is more on the cost side, so it's in the contribution margin, not on cost, gas, optimization cost. And then on the electric, as I quickly mentioned, we got kind of EUR 1.5 million improvement for this regulated components, which I was mentioning. This is clearly an effect that not only it's having, this is basically to whoever gets customers on the electricity. They are called (inaudible) for those who are familiar with the technicalities of these regulated components. That is out of decisions by the authority, which happened in December 2018. And then we got bit more than EUR 1 million from the Salvaguardia, which is a 2-year contract. Thank you, Valerio, 2-year contract. So we won this portfolio for some specific regions, customers and some specific regions for 2 years. And then after 2 years, there will be a new tenant. So these 2 years, we won this portfolio and we have this EUR 1 million -- a bit more than EUR 1 million on the quarter of positive variance. So when you add up all these different components, we come up with 10% -- a bit more actually than 10%. Is this going to be the growth rates which we are expecting on the full year? Not necessarily. Not necessarily. But we clearly are -- not necessarily of this magnitude, I mean. But certainly, let's say, we have a very good visibility today that the year is not going to be negative on the retail. I mean we -- I think we will grow nicely on the full year. Certainly, we can comment more in a 3 months’ time when we will add a bit more data to be more precise, and we will.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [5]

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So to sum up, I mean, we, Javier, we have a bit of increase in market share, there's a bit of increase value coming from safeguard. There's a bit of regulation. It's a component that will stay in our accounts, of course, in our numbers. And there's an interesting growth in the market share for large clients. This is a sign of better competitive landscape, the markets from us, where it's coming from the fact that some of the medium, small players, for various reasons exited the market, are now not already in the market compared to last season. So we were gathering some more market share also on the B2B side. So B2B, B2C, regulation safeguard. That's pretty much the 4 elements underpinning our growth on the market.

So on MSD, the quarter result were around EUR 20 million, which you need to compare this number with EUR 77 million last year. It was an exceptional year last year. So there are elements, favorable 2018. So it was a year in particular attention in electricity market in 2018. In '19, we had normal market on plus. On top of that, we had an extremely low load on the side. So we end up with EUR 20 million of ancillary services. We have lost some value in the north. And also an important portion of MSD, which was coming from Scandale in the first quarter for the conditions -- market conditions. So what do we expect in terms of full year? So we do expect something in the region of EUR 100 million for MSD. As you know, the second quarter typically, it is not an MSD quarter. The MSD quarter is more -- usually come -- will come in the third and the fourth. So for the second quarter, the elements we have in this moment are positive. So we have a slight improvement on the market scenario, also even including compared to our expectation. So that's pretty much regarding in MSD. We will also -- we're targeting EUR 100 million full year, which we need to compare with EUR 170 million -- sorry, EUR 160 million in 2018, okay? So EUR 100 million of MSD.

Generation, there are no fundamental shifts in the scenario apart from the fact that there is intention of Sorgenia potentially to get out from the market. So it might be that we will see future market concentration, more market concentration going forward. So we stick with the view that between 2021 -- around 2021, the market will be potentially more and more shorter than today. So no other comments on that. There are no big shifts apart from this continuing shrinking market. And on the hedge side, we have hedged 62% in 2019 at an average price of EUR 62.6. In 2020, we are around 80%. We have an average price of EUR 60.4. So we are hedging the market still dominated by reasonable price, I mean compared to 2 years ago, 3 years ago, 4 years ago. So that's what we believe. So I think we answered your questions.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [6]

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Yes. Maybe as a follow-up. You mention Sorgenia and the market consolidation. Can you -- there has been several press articles on potential interest by A2A on Sorgenia. Can you elaborate on latest thought by the company management on Sorgenia?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [7]

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Yes, of course. I mean, the rationale of our interest is twofold. At one side, we continue to search at measures to improve our profitability generation, okay, which means basically to search opportunities to increase industrial synergies and market synergies. And the only way to do that is actually to try to deal more with -- on aggregated demand -- offer, sorry. You may remember that, in fact, we have swapped an asset with Sorgenia a few years ago and we swapped back. So the idea is that we want to continue to achieve opportunity to improve that. At the same time, we want to understand whether an important portion of the asset base may change ownership, but it's, I mean, I think, it's clear that we are participating with a partner. And it's clear that most of the appetite for the CGT is coming from the other partner. So we will definitely -- we are more interested in understanding our interest on the sales side. So for the sale portion, though we might be interested in a cherry-picking approach for the assets of Sorgenia in the framework of improvement on market and industrial position. So that's what we can share with you so far.

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Operator [8]

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The next question is from Enrico Bartoli with MainFirst.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [9]

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The first one is regarding the waste business. You mentioned that prices had been going up in the quarter. If you can give us some more details about this and if you expect that this trend is going to continue over the next quarters. And then on this business, if you can give us an update on the situation at the Grottaglie landfill, if there was any change recently? And also I think that you would expect some stop on some WTE plants for maintenance. I guess that there was no impact in this quarter. When do you expect to have most of the impact over the next quarters?

The second question is regarding back on the power generation. If you comment a bit on the evolution of spark spread in the first quarter, particularly if you had any benefit from the decline -- significant decline in the gas price in the quarter and how you see the evolution of the spark spreads over the next quarters and what is the assumption in your guidance?

And the final one, if you can give us an update, if there are any, regarding the situation, regarding Ascopiave, there were a lot of articles on the plants recently. Actually if you can provide more detail on what strategically you're seeing that they're also -- the role of A2A would be in relation to Ascopiave if you're adjusting to seeing the clients, if you would be interested in taking part as a minority shareholder in the aggregation of the local utilities in the area or you see any interest even in the gas distribution business?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [10]

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So Enrico, I'll start from the bottom, from the Ascopiave. Clearly, it’s an ongoing situation so we're not be able to, unfortunately, share with you many details. But maybe we can a little bit elaborate the large discussion on the scope of -- [solid] scope, okay? So we have a double effects. I mean we have a double interest there. The first interest is try to move it in terms of geographical presence. So there's an asset for sale. And of course, we're looking at that because this asset is for sale. It is our interest to optimize and reduce our presence of distribution in Veneto. We have gas distribution points in Veneto, which are not crucial to our strategy and they are not around our existing hubs. So there's no point in keeping them. A portion of that is coming from ACSM, which is Serenisima. And again, our point of deliveries in Veneto. So the whole idea behind that is that we might be more interested in growing our clients business and selling, at the same time, our existing point of deliveries in gas in Veneto in order to be more focused on one of our business. So that's the general framework of the discussion.

Now we believe that participating with other 2 players in Veneto would have strengthened our position. So we developed the discussion with Vicenza and Verona, that's why we are bidding together. The whole idea behind our -- of course, I cannot comment too much on details because we're still in the face of selection. But the whole idea of partnering with them is to make the comprehensive offer, so the offer -- it could be shared offer and to be more competitive. But the idea -- the fundamental idea is the same. I mean growing in the clients and losing our PDR in gas Veneto. So we believe that those partners may be -- the partnership with those people, those companies may be successful. So this is why we are talking to them, and no we're not talking to others, which are still indeed betting on the futures. Then on the same time, there is a discussion between Vicenza and Verona regarding their future. So they had already taken the decision to get married at one point. And the point is that they are wondering whether they could add value to their decision by involving in this process a -- an additional industrial player that can support and strengthen their original decision to get together. So in this framework, I think, we jumped in and we said we would be happy to develop the discussion, both of those are on the table, both (inaudible) confirm interest to develop a position in Veneto, either in one or in the other way. So of course, there is going to be -- we're strictly linked to the rationale of this business. So we'll do something, which is in line with our business, something we know how to run, something we know that we can generate value -- additional value on. So which means that we'll not participate, which are not in line with our expectations in terms of return, numbers, profitability, et cetera, et cetera. So that's our intent. So things are moving. We hope that at least 1 of these 2 discussions will become concrete and we'll see in the next weeks whether or not we will be selected for the second phase. So on waste, I think, Andrea, you are welcome if you have something on waste.

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Andrea Crenna, A2a - CFO [11]

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First, on growth target. The negative impacts are going to be recorded starting from the second quarter as last year. The landfill was working, and this year will be not. The overall negative impact year-on-year is going to be roughly EUR 18 million, 1-8, and splits linearly, I would say. It's a question of the volumes so, more or less, it's linear on the three quarter. Clearly, today, we do not have any visibility on when specifically the TAR, the administrative court, which is due to pronounce on our course is going actually to do it. So we'll keep on assuming as we did in our guidance, discounting the full negative effect on all the months yet to go. As far as prices, instead, yes, we have clearly seen roughly EUR 5 million -- a positive impact of EUR 5 million, which is basically about 9% price increase of the contracts on which we can review the price, clearly, on the contracts where we cannot reprice because they are no longer tenor of fixed price, you don't see this effect. So the 9% is not the impact of 100% of the contract. It's the impact on the prices on the contracts we can renegotiate this sort of percentage, which gave the signal what's going on the contracts that you can rediscuss. Last year on the full year was likely both, 10%, so slightly less, but still remains very strong. And yes, we are expecting a similar percentage to be applicable on the 9 months yet to go. I don't know if answer all your questions.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [12]

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So I'll take up the question on -- Enrico, I'll take up the question on spreads. So let's start from the first quarter. I mean we had spreads in the region of between EUR 4, EUR 5 per megawatt hour spreads. So your question is where the market is going. So we have already hedged spreads up to 60% of our potential production, 60%, 6-0. And we have hedged the at the value which is in the region of EUR 8 per megawatt hour. So in essence, I mean the spreads for the rest of the year looks better, first part of the year, but that's in line with what we already shared with you when we presented our 2018 numbers.

So according to our information and expectations, spread both, the ones we already locked in through hedging, which is 60%, again, are in line with our expectations, so better than the first quarter. And of course, the residual portion of the fleet has not hedged because we keep the portion of our fleet open to capture the potential MSD coming from the summer season. So we have already hedged what we believe was interesting for us. But we, of course, believe that the residual portion of the capacity will have to be left open in order to capture the value coming from the summer season.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [13]

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Okay. Just I was missing an indication of when you expect the WTE plants to be off for maintenance over the next quarters.

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Andrea Crenna, A2a - CFO [14]

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Third and fourth.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [15]

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It's going to be spread between second, third and fourth because, actually, I think that Acerra will be the fourth and Silla will be the second, so will be second -- the next quarter. So it will be equally spread across the next three quarters, starting from the first -- starting from the second.

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Operator [16]

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The next question is from Alberto Gandolfi with Goldman Sachs.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [17]

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I have 3. The first one is kind of a clarification. You already explained that you expect an MSD at about EUR 100 million. But in terms of these other, let's say, items in the generation business, would you see this EUR 100 million as a recurring level? Or what would be the drivers in your mind, more renewables and therefore up or more competition, reregulation and down? And maybe if you can talk about, big picture, the evolution of the other item. You call it green certificate feed-in tariffs. Any more expiry of feed-in tariffs we should be aware in the next 12, 24 months?

The second question is a follow-up on, again, you talked about a potential interest for some parts of Sorgenia. Don't want to put words in your mouth, but it seems to me you're potentially more interested in clients and, maybe so, renewable pipeline. My question would be, how would you plan to fund it? And will it just be through extra debt?

And the last question would be. The government had to present an energy plan to the EU, and in theory, once it comes back with comments, it should be approved and turned into law by year-end, which should give us sort of a road map on how to decarbonize the system by 2030 -- well, partly decarbonize, I should say. How do you think this is going to reshape the generation mix? And would you have the balance sheet and the capital to be part of that transition? Or would you prefer to deploy capital in other parts because you talk about Sorgenia, Ascopiave, it seems you're more focused on external growth than developing renewables? And if so, how do you plan to protect the margins in the traditional legacy generation business?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [18]

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Okay. I think on the MSD, as you know, maybe the ancillary services prediction is always somewhat complex. It is a very complex mechanism through which we predict the behavior of our plants, the behaviors of competition's plants, the evolution of load temperature, et cetera, et cetera, et cetera. So it is quite a complicated effort. And we know that mostly on the third and the fourth quarter, the functioning of our fleet would -- will be more involved. So our fleet will be more involved. And the amount of MSD that we are expecting, which is roughly EUR 75 million or EUR 80 million of MSD, mostly will come from the third and the fourth quarter according to the -- our forecast.

So for time being, the most relevant element for us is the dynamics of the temperature and, of course, the plant's border energy coming from France, which is still linked to the global European load, okay? So gradually, we do see some marginal capacity being closed that will be assigned to capacity market. So that will be beneficial for the MSD. At the same time, it's -- still, the key variable, it's is still the temperature because the temperature will affect the load, at the same time, the gas storage, especially at the beginning of autumn.

So I think we consider EUR 100 million normal level of MSD. So the answer is yes. We consider that normal. It's fair to say, excluding the first quarter of this year, that normally in the last 3 years, 4 years, we have made an average of EUR 150 million, so more, because that's, again, we always avoid to realign to last year numbers. We will stick with the idea that EUR 100 million, it is today a normal year for us. So we don't expect nothing sparkling or particularly complex to happen in order to secure that amount of money.

So we expecting for the second, third and fourth quarter a normal "year." Again, second quarter appears a little bit better, we're expecting. But I think, again, for generation in second quarter, it's is not particularly meaningful.

So maybe I'll jump a bit on your third question, and then I go back to Sorgenia. Our fundamental decision will be to try to realign to the European and Italian objectives of our generation fleet, which is basically fleet -- gas and renewables fleet. So in order to cope with that, clearly, we need to conserve our hydro capacity, clearly. We need to close our coal plant, which we decided to do, both the one in Brescia and the one in Monfalcone. And then we need to reinforce our appetite on gas for the peak case and so for the flexibility, which is what we're doing at the moment. And on the renewables, we would like to grow more. What we have put in our business plan is the minimum appetite.

Then we have in a different page of the plan, additional quarter. We consider the company is holding 2 key success factors in order for that to happen, which are the dispatching capacity and ability, the customer base and industrial cost competitive. The third element. We were liking the third element because we had already client with [dispatching] capacity. We created -- reinforce our competence on the operating costs by partnering with Talesun. We have already agreed with Talesun that we have a potential portfolio, 300 megawatt -- additional megawatt for grid parity. And if these are the conditions, we'll go for it. We don't have neither financial doubts nor financial constraints. So we will be happy to do it.

So on the rest -- on the renewables, if we will have more opportunity to grow in terms of M&A and in terms of greenfield, we'll go for it. We only -- with the only -- again, the only ingredients we were lacking was solid and sound partners to get operating costs competitive, which we have now. Plus, I think we have also capacity to do it, that we have all the capabilities to do. So clients, PPA, ability to -- PPA ability, dispatching ability and et cetera.

So I expect that in the next 5, 7 years, A2A will look like as a gas and renewables player. So that's our key objectives. So we'll get out of this timing -- time with a substantially repositioned duration asset base. So renewables compared to the market in gas, flexible, modern and able to occupy the portion of the market to some flexibility. By the way, in this direction goes the Brindisi project, which is Brindisi, a project for the next 10 years, being able to provide tension services to the -- to Terna. In Sorgenia, I think will -- again, I cannot give probably many details but clearly want to make a tailored deal. And it's a deal that when it's tailored, it's absolutely able, with the components, will be able to fund through the most convenient source, and clearly, the debt. So debt will be the first option, clearly. But of course, the order of magnitude of the deal is such, that, of course, we can absolutely afford that.

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Andrea Crenna, A2a - CFO [19]

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I think Alberto, if I may, answering your point on the green certificate. I take the chance to be clear to all the community. Last year, 2018, including green certificate and the feed-in tariff, we sold -- we got revenues for roughly EUR 120 million. This year, 2019, we will only have feed-in tariff, green certificate portfolio zeroed out, no more left, for about EUR 20 million. That is the amount we are expecting. So the overall variance year-on-year will be EUR 100 million. Of this EUR 100 million of negative variance, EUR 70 million have been accounted in Q1, and the remaining EUR 30 million will be accounting into Q2.

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Operator [20]

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The next question is from José Ruiz with Macquarie.

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José Javier Ruiz Fernandez, Macquarie Research - Analyst [21]

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Just one question. I would like a little bit more clarification on something you said before, which is basically you're moving to B2B market in Italy. You were saying that mid-and small players are exiting. I would look to understand the dynamics. We have seen NL entering this market very aggressively in the last few years. My question is basically, one, what's the competitive advantage of NL and A2A or, more specifically, A2A? And secondly, considering that these markets have a very high churn rate, why -- what makes you think you're going to stay in this market for long?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [22]

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So José, just to clarify a little bit this point, I think, it's -- we've always been in the B2B market, clearly. But 3 years ago -- somewhere also 3 years ago, we decided to decrease our presence because the market was overcompetitive. So we were not prepared to accept the fact to sell, to serve this market at almost 0 margin. So we lost market shares, we lost volumes and we lost opportunities. And we did it in purpose, okay? So nothing unexpected.

Now what's happening, it's happening that due to a number of reasons, middle players are exiting or have more difficulty in accessing guarantees in financial markets, difficulties in getting guarantees to cover their distribution site, et cetera, et cetera, et cetera. And on the other side, you might know that some of these players were founding their competitive advantages in basically leaving their position open, a decreasing price scenario, which helped them to be competitive. But at one point, when the market reversed, it'll put them in serious positions and difficulties because they were not players with able to -- who are able or wanting to hedge regularly on the market. So by leaving their positions open for a certain number of quarters, they were extremely competitive, so we were not. So now what's happening, the reverse. The market is going up. They have difficulties. So basically, they literally left market. So we have more opportunities.

On the other side, the B2B clients were willing to pay a small premium on top of that to secure continuity in the service provided by solid and sound players. In order to capture this market shift, we -- basically, we went back in this market. So there is no magic behind this decision. There's a margin now from a client that we knew before, which we were not prepared to follow before because we were not prepared to accept ridiculous margins. Now the margins are attractive. So we'll continue as long as we continue to see this opportunity, we'll continue to do that.

Second point, of course, we cannot bet towards the future, but we are trying to enlarge a little bit the horizon of those contracts. So we meet in the market companies that are willing to buy for 2 years, 2.5 years, 3 years. And so they want to have a horizon which is a little bit longer. So we're slightly improving -- strengthening our average life of our portfolio, which gives a little bit more comfort.

And third element, given the fact that we have now A2A Energy Services -- A2A Energy Services, it's a company that is deploying -- sorry, Energy Solutions. A2A Energy Solutions is the company that's selling energy services like energy efficiency, which typically goes to this type of clients. So we're able to cross-sell these clients potentially to make them little bit stickier to our portfolio. So that's pretty much the rationale behind our decision to get back to the market.

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Operator [23]

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Your next question is from Stefano Gamberini with Equita SIM.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [24]

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Three questions. First of all, regarding the capacity market. When you expect the final kickoff for the, say, capacity market is now [included] in your guidance of 2019. There is also a contribution on the region of EUR 30 million from capacity market. Is this correct or not? And if after this first quarter result, you should confirm the guidance even without the kickoff of capacity market in the last part of the year. Finishing on this item, the EUR 100 million of contribution from ancillary services in the plan is on top of around EUR 60 million of capacity market in '19. This is not the case. So is it correct that '19 is a special year with very low contribution from ancillary services or not due to, probably, weather conditions or some other items?

The second, regarding the market, why are you expecting 2021 short-term market in the power generation? And are you prepared to arrive at that time? I understood that you are not interested in growing your CCGT. You prefer market consolidation but not to be part of that. And you will invest in renewables. So could we see an acceleration of these investments in the next few years in order to be prepared for that opportunities that could arrive on the market?

Last question, regarding your M&A strategy. Could you help us to understand better what are the main pillars regarding the industrial strategy to go ahead with an aggregation with Verona, Vicenza -- with a potential aggregation. Or because you invested a lot of time and energy in order to go ahead with aggregation, but it seems to me that in the last case, ACSM-AGAM, the additional net profit for A2A would quite low. So what are the main value added that could arrive from this strategy that probably are on some other industrial reasons?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [25]

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Okay. Stefano, so on capacity market, I mean, where do we stand? We stand in entirely with the Italian government, modify the capacity market mechanism. The European offices are reviewing it. They are after a few clarifications that which the government -- Italian government provided. So then we would just need to wait 60 days from the date of the last clarification, so which was, I think, 20 days ago or something. So we expect the capacity market will be -- would be approved. Recently, the ministry has confirmed the necessity of this mechanism. So the market tenders could be on in the second half, which basically means that according to my forecast between the -- either just in the beginning of the summer, so June or July, or just after the summer.

In our plan, we have additional EUR 12 million of capacity market -- residual capacity market in 2019 versus 2018. So we just have EUR 12 million on top. They're already included in our guidance. And I believe that if the tenders don't take place, the market, again, as we've commented on many times, will still need that -- will still produce the volatility under which MSD market will be for functioning. So it could be absorbed by the MSD market.

So at the moment, we confirm our view that the capacity market will be in place. And again, we're talking about something that in 2019 is quite immaterial on our EUR 1.1 billion. Still, I mean -- and I go to your third point. I mean yes, we consider '19 a special year, depends on how you define special, in the sense that it's a transition year with quite an unusual quarter, first one. And the rest of the year we expect will be normal. So it is a year of transition from our side.

What's going to happen. I mean, why do we expect around '21? I mean that's because the combined effect of the facts that we -- there will be plants getting out of the market, especially because according to our judgment, some of the players will not continue to invest in marginal and old plants. So some plants will get out from the market in the Italian market. We'll start seeing some effects coming from closures, including our closure, by the way, of our coal. Coal will gradually get out from the market in Italy but also in Europe, so from 2001 (sic) [2021] on. And we believe that with the plants -- with some coal plants being closed, we expect a coal-to-gas switch in the market. So it would be more space for CCGTs to dispatch in the market.

So of course, if we -- that's our view. I mean we had this view 3 years ago. We continue to give this view. And you might remember that 3 years ago, when we discussed this view, average prices were around EUR 30, EUR 35, EUR 40, EUR 45. So I think what we all should agree that trend in prices reveal a shortening market. Why? We would not prefer to increase our generation base because our goal will be to improve our pivotal role, where we're already strong, which is the north of the country.

As you know, for example, most of the assets of Sorgenia were -- are in the South. So working by priorities, we should focus on the north side of the country. Normally, we will stick with the North unless we have a great opportunity in the South that we don't see at the moment. So increasing our pivotal role in the North and also being ready to provide flexibility in the Northern market as the market becomes shorter, so from 2021 on.

But of course, this process will take time. So more than quantity that will become available in the market, I do expect prices, both high and low prices may be interesting for the company. So we're working to capture the value coming from the increased volatility in the market. To do that, you need to increase the flexibility of your plants or to build facilities devoted to provide flexibility in the market, which is the case in Brindisi, for example, but is also the case of 2, 3 other projects we have under study, underway at the moment, including the Monfalcone that might become industrial site to provide additional flexibility in the market.

So strategy from a generation point of view is very clear from our side: increase renewables whenever it's appropriate in line with our expectation and industry ability; increase in gas flexibility; and then reinforce our gas and pivotal position in the north of the country. By doing that, we believe we have an extremely balanced and competitive position for our generation.

So that's pretty much regarding your third question. I remember, it's third and second, but that's the question.

Then on the M&A. Yes, it's a complex deal. We've been used to that. We are used to that. We have complex deal also on the LGH AGSM the value do see is more strategic in the sense that we aim to become partner for companies that may need a partner. That may offer opportunity to scale up in the future, to accelerate some synergies, to -- synergies also for activity that we already planned -- we already do for which we would be -- we would like to get more market, for example, procurement, for example, ICT, for example, public lighting. There is a lot of our existing businesses that may be enlarged even if you get a minority in an existing JV because you may be the sourcer, technology, the sourcer; you may make synergies on your existing investments in ICT; you may make synergies on your existing investments on procurement, on gas storage and so on.

So there are opportunity to generate value in the short term by participating also from minority point of view in existing JVs. And of course, there is a clear value in the medium term because you retain an option to step up and increase your participation in those entities. So it's another way to create options. You buy options for future growth. That's the reason why we believe there is rationale to spend time, people and attention to develop those kind of JVs.

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Operator [26]

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The next question is from Emanuele Oggioni with Banca Akros.

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [27]

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The first one is on generation. You mentioned before the hedging policy, your hedging policy on gas, on thermal generation on spark spread. Now I'm referring to hydro production. So if you could give us an update on the hedge policy as regards to the covered part of the hydro production. I expect production in the region on 4 terawatt hour in hydro for this year.

Then the second one is -- the second question, I didn't get the positive effects from the salvaguardia customers in Q1, if you have quantified it, and also if you could quantify the impact in the next quarters, if any.

And the third one, or the third question, as regards to the market business, the quarter weather in April and May, so basically in Q2, could have a positive effects on EBITDA margin in order to recover -- to partially recover the Q1. So could you quantify the impact thus far, if any?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [28]

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Okay. So Emanuele, on the hedging policy on the hydro business, so we have hedged something in the region of 75% in 2019, so 75% and something in the region of 30% for 2020, okay? So of course, so when I draw business, we have -- that's what we have already hedged. On safeguard, I think we -- Andrea commented we made EUR 1.3 million in the first quarter, and we will end up at the end of the year between EUR 3 million to EUR 4 million in full year.

As far as the second quarter is concerned, I think we will comment on the second quarter. But we have positive effects. So it was colder. But of course, the issue regarding the second quarter is that even if it's colder, the load factors of demand goes down anyway. So we have several millions of euro accrued. And that, we're not -- of course, we are not keeping those numbers -- we're keeping those numbers in the weather, but again, the point regarding the generation will be mostly on the third and the fourth quarter. So -- for which I already commented on, most of the CCGT already hedged at the highest spreads. And I commented also on hydro. So yes, we had a positive April, a positive May. But from our perspective, several millions of euros are not negligible but, of course, not relevant.

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [29]

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And could you disclose the euro per megawatt hour in hydro production?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [30]

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I think they are not very distant from the one -- the numbers I have given to you before.

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Renata Bonfiglio, A2A S.p.A. - IR Manager [31]

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I think we have room only for one last question, if any.

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Operator [32]

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Ms. Bonfiglio, gentlemen, there are no more questions registered at this time.

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Renata Bonfiglio, A2A S.p.A. - IR Manager [33]

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Okay. Then, we thank you all for your time. There is the Investor Relations is available for any follow-up. Goodbye to everybody.

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Andrea Crenna, A2a - CFO [34]

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Goodbye.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [35]

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Thank you.