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Edited Transcript of A2A.MI earnings conference call or presentation 13-Nov-18 2:00pm GMT

Nine Months 2018 A2A SpA Earnings Call

Milan Dec 20, 2018 (Thomson StreetEvents) -- Edited Transcript of A2A SpA earnings conference call or presentation Tuesday, November 13, 2018 at 2:00:00pm 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 - MD

* 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 9 Months 2018 Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Renata Bonfiglio, IR Manager of A2A. 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 conference. A2A CEO Valerio Camerano; and CFO Andrea Crenna will present the first 9 months results. The presentation 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 we go to the presentation.

You can flip to Page 3, typically, we highlight the major plus and minus on the first 9 months. So on the positive side, we have volumes on CCGT and hydro up. We have 25% up production at CCGT. 80% up production on Hydro. We have positive trend in treatment prices on Waste, so the net effects from increasing energy prices and increasing the operating costs is positive. So we have a positive contribution from treatment. On the environmental markets, we have sold a quantity of EUR 60 million and a global effect of EUR 30 on environmental market, and we have the photovoltaic contribution in the first 9 months that now accounts for EUR 50 million, roughly. Last but not least, we are consolidating for July 1, the ACSM-AGAM company and group.

On the negative side, we had to register a sudden and sweeping rise on the gas, which had an impact -- negative impact on spread and also on gas margins. If we compare clean spark spread both from base and peak and we compare '17 and '18, we have certainly a stronger decrease. And last, on paper prices. Due to the stop of the paper import from China, paper prices dropped quite dramatically from EUR 120 per ton to EUR 50 per ton, which had an impact, of course, on our numbers.

Page 4. So key financial indicators. We have revenue of up by 9%, this is the result of higher volumes on the wholesale market and retail green certificates and also the inclusion of EUR 67 million for the deconsolidation of HSM-AGAM. The EBITDA is in continuity with '19 -- with 2017. If you carve out the nonrecurring effects in 2017 and '18, which are clearer in the next page, we come up with an increase by 6% of the EBITDA ordinary in 2018, 10% -- 6%, sorry. On group income, there is a pretty strong rise in the net income. You will see later in more details, but this is the effect of more [utilization] due to perimeters and investments but also less provisions and less financial costs, mainly less extraordinary items in 2018. And if you adjust the net income in 2017 it's mostly with the EPCG effects, so the effects coming from the extraordinary items in Montenegro accounted roughly for EUR [19] million, if you remember, in 2017.

Good news, also, on the net financial position. We're down. We're down also including the -- thanks also to the cash in from the first and second tranche of put options from Montenegro, it's roughly EUR 120 million, additional cash coming from Montenegro, and then EUR 15 million are coming from dividends, again, from Montenegro and a number of other items. Of course, we have some negatives, also, in the investments on the renewable side, accounts for EUR [40] million and other items, but the net effect is certainly decreasing our net financial position we have in first 9 months of 2019 -- '18, sorry.

If we go to put Page 6, you will have a group overview EBITDA, we will have, also, the opportunity to look more in detail for each BU in a minute. So if you concentrate on the slide, on Slide 6. We had to take out the extraordinary effects of a one-off in 2017, mostly coming from the sale of white certificates, roughly EUR 44 million came from -- out of the EUR 54 million came from the sale of white certificates. Then we have to take out the effects of after the contribution of assets, so we did in the HSM group deal. So if we go to the ordinary comparison, we are up roughly by EUR 6 million comparing ordinary 2017, ordinary 2018. So we have Generation, EUR 5 million up, which is the result of governmental markets, which accounts for roughly 50 -- 70 -- sorry, EUR 60 million.

The effects of the different items are mostly the sale of the long position we had on green certificates. Then we have the negative effects coming from the portfolio gas and the decreasing spreads versus 2017. As I said before, these are due to the sudden and sweeping rise in the gas prices in the market. On the market, we have more free market quantities for B2B. So we're increasing our market share on B2B, but we have also an increase in margins for electricity and gas. This is due to the increase in the clients we have on the free market, 128,000 of customers more compared to last year.

But we also had to account around EUR 30 million of marketing costs we have posted in the -- especially in the last 3 -- 3rd quarters to increase and to strengthen our channel sales and marketing activities.

On the Waste, we have a double view. We have a decrease on the, what do you -- collection. This is due mostly on the -- due to the increase in cost, the increase of prices of paper, EUR 4 million, and also, bulky -- multimaterials and bulky. So globally, we had increasing costs versus 2017 for the -- some of the waste items, waste collection items.

On the other side, we have a very positive trend on the treatment, so up by EUR 11 million compared to 2017, mostly due to the prices and volume effects on WTEs and on the treatment of industrial waste on the WTEs of Filago and Corteolona. On the Networks, we have lower allowed revenues for power, electricity, which was expected.

We have Gas which is pretty much in line with last year. We have a positive effect coming from water cycle, this is due to the increase in tariffs we have obtained last year we are now billing to clients, but we have negative effects on the District Heating. This is due mostly to the scenario, CO2 and coal scenario impacting our District Heating activity.

So all in all, we will be -- we have an ordinary EBITDA of this 9 months, the level of EUR 824 million. Then if we have to go -- to go to EUR 875 million, we need to add EUR 33 million of one-off. These are -- they have to do with the sale of -- gain of white certificates we have in the [BDPO] Market and some other small items regarding the environment and the networks. And then, we have the effects. And for the first time, the effects coming from the inclusion of HSM-AGAM in our accounts for EUR 18 million, basically, for the period going from July 1 to September 30.

That's pretty much the global view. And I would like to hand over to Andrea for the detailed analysis of each of the BUs starting from Generation.

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Andrea Crenna, A2a - CFO [4]

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Thank you very much, Valerio, and good afternoon. I'm on Page 7, on the Generation. As you may recall, at the end of the first half the performance of the Generation business unit was very strong, was up 18% year-on-year. That clearly means that we had a weak or weaker third quarter, specifically, actually, on July and August with minus EUR 33 million compared with the same quarter last year, for basically 3 reasons. The hydro production has been lower in the quarter, about 100 gigawatt hours, and we did not have any positive effect on the storm crisis since, as you well know, we commented several times, we were 100% hedged. We had a lower performance on the MSD for about EUR 5 million. And we had a much weaker clean spark spread. We have put a box into the presentation reducing from roughly EUR 11 to EUR 3. This is clearly, the [add] we have achieved clean spark spread. And this, per se, explain 78%, almost 80%, of the total negative value. And so the lion's share was taken by the clean spark spread. All the other drivers, San Filippo del Mela, the gas portfolio, renewable in the quarter, basically offset each others'. Despite this weak quarter, as we can certainly discuss later on with Valerio, we still have expectations on the full year in line with our expectation, which we gave at the beginning of the year.

The next page, on the market. Q3 has been and clearly is a quarter with seasonal limited gas volume. And as Valerio was just recalling, we got a very strong marketing and sales activity both in retail and as well as in energy solution. The quarter is flattish year-on-year as we didn't record any growth in gas, but we did record a plus 13% in the contribution margins on the electricity business, and then we had EUR 5 million of higher costs. The total customer base, the total customer base was flat. The free market customer base with the increase of 130,000 customers since the end of December last year, basically, arrive to 1 million customers on the free market, which is 3x the target we gave ourself at the beginning of 2015, if you remember, with our initial plan reaching the target 1 year in advance.

The unit margin remains strong, higher than 2017 and higher than our budget. On the mass market, we are, on the contrary, same as in -- at the end of the first half, seeing contractions in the unit margins on the B2B, where on the other hand the growth in volumes more than offset the margin pressures. And overall, here again, we are quite confident to record on the full year results that we were expecting if not better, if -- allow me for a joke, if winter will come.

On Waste, well, you might recall at the end of the first half, we were growing 1%. Q3 was up 5%, and we are expecting an even stronger Q4. I think we already commented on that in the last conference call mostly because we will have an easy -- "easy" comparison versus the Q4 last year.

There are no news on the business drivers prices. Valerio just mentioned it's very strong. Volumes up to 4%, depending we're talking collections or treatment. New plant development is in line. We just switched off the new plastic plant in Cavaglià -- I'm sorry, switched on the new plastic plant in Cavaglià a few days ago.

Next page, Networks. I would quickly pass over the Networks. The good news here is we are seeing a reversal into the trends on the electric rubber. We commented several times that electric rubber in [Aguiar] had been decreasing for years, but now we are flexing that irrespective from the aggregation ACSM and AGAM. And on the negative side the scenario explains more than 100% of the negative performance of the District Heating, where on the other hand, the new contracts and volumes have been growing.

Next page, to the waterfall to the net income. The D&A is the stronger, clearly higher for reasons we already discussed. We got lower provision for risks in this quarter only because we released some provisions for risks and bad debt we accounted over in the previous years. And the reasons for release is because we settled, basically, the underlying disputes at better conditions that we were -- than we had provisioned for. The net financial expenses, net debt is -- or sorry, the cost of debt is flat at 3%. We still have a forecast in line with our guidance we gave during the last conference call at about EUR 120 million on the full year.

CapEx, we're growing clearly and nicely. We keep on investing more and more alongside the lines of the plan in the business unit we were expecting to invest. The full year forecast is about EUR 550 million. We will see that in a second on the guidance, including the M&A sites, i.e., the M&A we just announced early this afternoon.

On the free cash flow, we're clearly reporting a very strong cash flow at the end of the period, fueled by -- basically by low seasonality. I mean, the net working capital, especially in retail, is reducing. This is clearly an effect which is expected to partially reverse in Q4. We have a positive variation in the perimeter, which Valerio already commented.

On the full year, we are slightly improving our guidance. We gave around EUR 100 million. We're now more optimistic, though clearly, part of the effect that you see in -- at the end of September will be reversed.

I will leave to Valerio to comment on the updated guidance.

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

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Thank you, Andrea. So we go to Page 14. So we're slightly improving our -- increasing our guidance EBITDA. So we'll give you -- we're giving you a new EBITDA range, EUR 1.2 billion, EUR 1.240 billion. We are expecting a quarter at the end of the year this year quarter -- the last quarter in 2018 quite strong, actually, stronger than last year. We have signals coming from the markets and the environment, and the Generation itself that it's going to have a quarter which is in line with last year.

So globally, we do confirm it's up slightly increase our EBITDA. Net income, as commented by Andrea, we expect above EUR 100 million. So this is certainly, extremely a good result. And the free cash flow, for reasons mentioned before, we're providing you a range, EUR 170 million to EUR 200 million. So we're also, on this side, we are quite positive. So globally, the year looks slightly better than the last view. And so I think I will hand over to Renata to conclude and give you the stage.

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Renata Bonfiglio, A2A S.p.A. - IR Manager [6]

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Okay. Thank you very much for your attention. Now you can go ahead with your questions.

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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 of 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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Three on the guidance on Slide #14. The first then is on the EBITDA. I would like you to elaborate on how do you see the evolution of the underlying EBITDA versus your previous expectations versus the guidance that you gave by -- just before the summer. So I'm interested on, not on the one-off or the consolidation of the new ACSM and AGAM but on the underlying business dynamic. Am I right in saying that the EBITDA has remained relatively unchanged the underlying? And related to that, I just wanted to see or to confirm that in the number of EBITDA that is coming from ACSM-AGAM, this EUR [18] million, there is any one-off that should be removed from an adjusted number. That is the first question. Second question is regarding the outlook. You have been mentioning that you are expecting on a strong fourth quarter of the year. If you can kindly elaborate on the reason for this strong quarter, what is the number, if the number that you gave last year that I think is something like EUR 310 million is something that comes back to you, that number is something that we may expect for the fourth quarter 2018? And the very final question is on the cash flow, free cash flow generation. You have been upgrading the number from, roughly speaking, EUR 100 million to almost EUR 200 million, you can unravel the reason for this increase on the net free cash flow generation that you're expecting by the year-end?

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

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Okay. Javier, so let me go back to your questions. I mean, let me start from the Generation. We're expecting an EBITDA from Generation in the fourth quarter in the region of EUR 100 million, okay. So that will take Generation to something in the region of EUR 355 million, which is more or less what we expected last year -- what we had last year. So why are we expecting such number on fourth quarter? Basically, we have a hedge ratio for the fourth quarter of 72% already hedged at EUR 63 per megawatt hour, roughly. So globally, so that's also the result of different hedge ratios with different technology. But that's what we have already hedged, so it's already in our hands. So we do expect under that the circumstances, the amount of money we shared with you. So then we are expecting an MSD in the region of EUR 25 million, which is, of course, much less than last year. We think it's reasonable, so it's part of our numbers. So on the basis of all that -- all those assumptions, we believe that the fourth quarter for the Generation will close at a number, which is, again, around EUR 100 million of EBITDA. If you sum up all the 9 -- the last 9 months, you come up with a number which is EUR 355 million for the Generation. And then if we go to the other businesses. So we're expecting the present running rate of the energy retail going up and the public lighting going up also, so we do expect a better result on the BO Market versus last year. So last year was something around EUR 40 million. We expect something in the region of EUR 10 million more. On the Networks, we're pretty much in line with last year quarter. And on the environment, we are expecting a stronger quarter, mostly coming from the treatment of the urbans and industrial, mostly the urbans that we already contractualized. So we have a fourth quarter which is in the region of EUR 330 million, roughly, we're expecting. So from this number, you come -- you can go easily to view the conclusion of the EBITDA that we have provided to you. If you want me to help, I mean, basically, this is something in the region of [104 million to 2 5], which is basically the number we are providing you in the guidance. Second question was regarding the one-off. So on ACSM-AGAM, yes, we have a one-off of EUR 6 million, so you need to take that into consideration. And your third question, Javier, was on the strong fourth quarter. I think I answered that premise to answer why we are expecting an EBITDA, year-end EBITDA, slightly better what we were expecting. So I think we just need to answer your question regarding the cash flow. Andrea will...

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Andrea Crenna, A2a - CFO [4]

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Okay. Rather than explaining the reason of the variance between previous guidance and current variance, let me try to answer your question on why starting from the net, the free cash flow at the end of the 9 months, the number we just disclosed basically the EUR 350 million. We believe that into the fourth quarter, part of this cash will be reversed, basically, okay, because the new guidance is basically the outcome of what will happen to the fourth quarter, okay. So what will happen in the fourth quarter is basically stronger EBITDA implicit in the guidance we gave. It's easily -- you can easily calculate that. Then as I said, the first negative variance is going to be the reversal into the net working capital, especially into the retail business. We will enter into -- clearly seasonality is one of the -- we believe we are going to have a good quarter. I mentioned before that we are in line with margins, with volumes, with customers acquisition. Prices are higher. You know that prices doesn't make any difference on the margin, but it makes a difference on the turnover, hence on the receivable. So the amount of the net working capital, which is currently basically 0, let me round the number, it's going to be negative at the end -- net working capital variation, I mean, is going to be negative at the end of the year. Then we have the M&A we just announced, this is expected to close by the end of the year...

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

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Talesun.

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Andrea Crenna, A2a - CFO [6]

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Talesun. Yes, exactly. If it closes as we do hope, of course, that also will take a chunk of the net free cash flow. Then we have the net financial expenses, the fourth quarter, we have lots of interest expenses to be paid. And then we have the CapEx. Usually, the fourth quarter is a quarter when our CapEx are stronger. So for all these reasons, basically, it's an estimate, of course, between EUR 150 to EUR 180 million of free cash flow generated into 9 -- into the 9-months would be reversed. I hope this helps to explain the guidance that we gave.

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

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Did we answer your question, Javier?

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [8]

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No, no, no, it's clear. Yes. As a follow-up -- no, no, it's clear. As a follow-up, is the -- while the company has been upgrading the reporting -- the reported EBITDA, why the net income guidance has remained unchanged? I know that previously that you were saying around EUR 400 million. I understand that, probably, there is no impact of ACSM-AGAM in the bottom line, but I was -- I just question myself why the company has decided to be maintaining that EUR 400 million of net income for 2018 unchanged.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [9]

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Just a couple of observation, Javier. I mean, the first one, you should have noticed that we have added a sign before EUR 400 million, which is the bigger than EUR 400 million, which is a slight difference versus last guidance. So we are expecting to be more than last time. And the second is that, prudently, we also have to go through the impairment test in the last quarter, which we don't know yet what would be the outcome. As always -- and this is not a new approach. I mean, there's no -- on the basis of information we have today, I'm not saying that we have elements to think about that we will have major impairments. We don't at the moment. Otherwise, we would have done. So we don't, but the exercise will have to be carried out entirely at the end of the year. So again, the difference with compared to last guidance is that we expect above EUR 200 million. So not up EUR 200 million, maybe above. By the way, ACSM-AGAM has a very limited impact on that, so you should not worry about that. It's like EUR 4 million or EUR 5 million. That's the order of magnitude of ACSM-AGAM. So you should not be moving drastically your numbers.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [10]

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And just a very final thing. I have seen these -- obviously, the reversal of that -- of those historical provisions, and you can give us a number of the level of provision that we should estimate for a normalized year, let's say, 2019 in our model?

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Andrea Crenna, A2a - CFO [11]

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On a normal year, it's a very -- I mean, historically -- let me say historically, over a long period of time, you can take anything between EUR 50 million, EUR 60 million of gross provision. Then being risk provision -- let's put in this way, on the bad debt provision, okay, the amount is EUR 20 million roughly. I'm giving you number which do not include by now the ACSM and AGAM, okay. But the all that we have perimeter, on bad debt provision, we usually provision about EUR 20 million. The quality of the portfolio is very good. This year has improved. We don't have reasons to believe that it will worsen over the next future. And on the risk provision has been EUR 40 million. But the risk provision, I mean, historically, the number is fair. Then whether it's going to be more, touch wood. Or on the other end, we, as we did this quarter, we settle risks at better conditions than we were expecting will -- would reverse. But both ways, it's really unpredictable.

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Operator [12]

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The next question is from José Ruiz of Macquarie.

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José Javier Ruiz Fernandez, Macquarie Research - Analyst [13]

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Thanks for taking my questions. A couple of them. Just on Talesun, if you could tell us what is likely to be the EBITDA contribution for 2019 or what were the contribution this year. Secondly, I mean, on your comment on the reversing trend in the electric RAB, I would like to understand what is causing that and if you're expecting more than a flattish RAB going forward. Is that -- has that anything to do with smart meters basically? And the last question is if you -- I mean, the fact that you're buying Talesun, you're dropping your interest in Glennmont assets.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [14]

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So is that -- so the contribution of -- Talesun EBITDA contribution full year will be around -- roughly around EUR 9 million, EUR 9 million. Clearly, scope and the objective of this deal goes beyond the acquisition of Talesun because Talesun will be our partners in developing more than 300 megawatt of grid parity plants in our province. So as you know, Talesun is one of the most reputable players in the solar business worldwide with assets of about EUR 3 billion. So we believe that the scope of the deal will go beyond the acquisition of their assets. On the electric RAB, this is the result of a number of reasons. We have started to reinvest. This is now more than 2 years. Now you'll start seeing the effects in 2018, but we have -- we started to invest in the electric RAB 2 years ago, mostly in projecting and strengthening the entire network of Milan. And also, there are some effects. They are not effects on the meters because on the power meters, we have not started to install power meters. We will be doing that hopefully by the end of 2019, beginning of 2020. So this is simply the result of returning to invest on the electrical power networks, mostly in Milan. And on Glennmont, no, we were -- we are shortlisted. I believe we -- there are only 3 players shortlisted, and we are receiving additional information from the seller these days, and we expect that the final outcome of the tender will be communicated at the beginning of next week. Do I answer your question? Is it okay?

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José Javier Ruiz Fernandez, Macquarie Research - Analyst [15]

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It's very clear.

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Operator [16]

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The next question is from Enrico Bartoli of MainFirst.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [17]

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A first question is regarding your hedging policy in the power generation business. Can you update on the level of prices and volumes that you have secured for 2019? And also, if you can provide us also some details on your gas hedging. You highlighted that because of the rising gas prices in the third quarter, there was some compression in the margins from gas procurement. If you have a visibility on kind of a reversal of this effect in the fourth quarter and particularly in 2019. Then I have a question. If you can give us a hint, call it, because I know you're not giving guidance for next year at this point, but just some hints about the drivers that you expect for evolution of EBITDA in 2019. I mean, there are several moving parts. There have been an increase in gas prices or CO2 prices. The -- probably some comparison for either volumes. And in the waste business, what you expect in terms of -- you highlighted an increase in the margins from the treatment part of the business. There are some plants that started operations and probably in 2019 will go on. And also, in the market division, I think that probably, you will not have any more of this EUR 30 million plus kind of one-off cost for margins and what you expect in the evolution of your client base and margins for next year. And then the third one is on your hydro concessions. There has been a lot of speculation also due to some statement by the government on the hydro concession. I was wondering if you have any discussions on this matter with the government. Some concessions are expiring in 2020. And if you can give us your -- say, your thoughts about what probably is going to happen in 2020 after the concession expires, also considering that there are some legal matters under discussions -- under discussion at the moment?

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

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So thank you, Enrico. So for the hedging policy -- I will also start from the hedge ratio. So for 2018, we have 62% of production hedged at an average price of EUR 56.1. In 2019, we have 34% of production hedged at the price of EUR 60.2, so 6-0-point-2. That's our -- the -- our hedging position at the moment. So maybe a couple of observations on the [residual] months, over the next months. Clearly, prices are going up, so better than -- compared to last year. So we have probably additional market volumes on hydro. So we expect a favorable effect coming from additional volumes, additional price, which is the forward price. At the same time, the hedge price already -- as I said to you earlier, for the last quarter, is above last quarter. So broadly speaking, as you know, we mostly guide our hedging policy with the main purpose to protect our targeted objectives in the plan and the budget. More than taking risks to gain more, we more -- tending most to use our view on our instrument, energy management instrument to protect our existing targets under the plan. So that's our primary goal in our hedging policy. And gas, your -- which was your second question. I mean, gas was certainly unexpected, and you're right. And also, in our -- the summer was quite unexpected as well because usually, we're expecting LNG cargoes in the market to ease a little bit the prices, but then most of the LNG market went to the Far East, given this very high rise in the prices in the gas in [Servista], which made the [southern] market, [that market] a little bit more short, shorter. And also, this year to upgrading -- actually, to rise somewhat for us to have a little bit more of a gas -- coal-to-gas conversion, which required additional gas in the market, in a market which was already short. So everything was getting to the short side quite unexpectedly, quite rapidly. So we had a different view. This is why the -- we suffered from the gas dynamics. We don't expect any on universal gas from the full quarter. Andrea commented on the portfolio gas [in Lyon] but again, the global effects for the generation business will provide a gain in EBITDA in the region of EUR 100 million, which is roughly the -- what we were making last year. And again, most likely, we will make a result which is satisfactory for the generation. On 2019, speaking about drivers -- okay, we have an energy scenario which is certainly encouraging. We have higher prices going forward, the market. So we have a relatively positive view on the generation. On the treatment, waste treatment, we do expect better conditions in the market. So it's a plus from our side. And also, we do expect increasing revenues from the retail business coming from the continued growth in the market, as we're expecting, so on the organic growth and on the free market. On the water, water tariffs, we expect also positives because we do see -- of course, we already in place, new tariffs approved, which is positive. And of course, we do expect 100% full year consolidation of [HSM]. Of course, on the negative, we do know we will have but you know that less environmental green certificates that -- we already announced that a long time ago. We might have some more stop for maintenance on WTEs, which may be due over time in the next year, and certainly some less green certificate -- white certificates, as you said, Enrico. We expect not the same amount of white certificates on the market as we did. And then potentially more D&A coming from the additional depreciation that we -- as a result of additional investments we did last year. So globally, 2019 looks quite favorable at the moment. I think this was your last question, Enrico, right? On hydro concession -- sorry, hydro concession, you're right. I mean, hydro concession, there has been a lot of talk following the tragic fall of the bridge in Genoa. There was a little bit of confusion in the market going forward. I mean, there's no doubt that we operate our concessions under strong and proper concession rules. We are compliant, fully compliant with the concession. So we do not expect nothing apart from a continuation. For the concession expired, we had meetings with the region, Lombardy region and with the Ministry of Economic Development. And the discussion look quite aligned between the parties. So we have made clear that we don't -- we have no fears regarding the -- any potential tender. We're used to tenders. We're used to the free market. We just closed one in the gas market. The question is to make it where it's reasonable for the parties and in a context of reciprocity in Europe. Both arguments were fully in line with the expectation from the region and from the Economic -- Ministry of Economic Development. So what can happen? I do expect that at the beginning of next year, a table -- a triangular table between the companies, the Ministry and the Lombardy regions or the other regions because that's -- of course, the national matter will take place with the scope to define a common, going-forward path to the tenders. So I do see alignment between the parties. We don't have -- of course, we don't see the potential tenders that may come up but you know according to the good sense organizing a tender, the participated tender, attributing a tender that will take something in the region of 3, 4 years maybe longer than that. This is why we've got to look at this issue, but it doesn't seem that have a -- may have an impact on the existing horizon of this -- of our business plan. Is it okay? Would you...

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [19]

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Yes, very, very clear. Sorry, just a last one, if I may. On the agreement with Talesun, if you can give us the possible [pushout] for the 43 megawatts and a clarification if that is included in the EUR 550 million guidance for CapEx or not.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [20]

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Yes, it's included in the CapEx. In the CapEx, which you have in the guidance, it's already included. And the acquisition is around EUR 70 million.

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Operator [21]

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The next question is from Alberto Gandolfi of Goldman Sachs.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - MD [22]

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I have 3. The first one. If I'm not mistaken, at the back of the envelope, it looks like the margins in your markets division are down more than 10% and closer to probably 15% in terms of EBITDA per volumes. So I was wondering, can you maybe shed some light on what's happening? Because you should have a positive effect from your portfolio mix of clients more moving to the free market yet your margins are down. Does it mean that there's a typical lag in passing through higher procurement costs, or is it simply getting quite expensive to basically retain clients versus new entrants? And so I was trying to understand a bit the dynamics here. The second question is -- probably, you've already gone through it, but I don't think I quite got it right. Could you please specify how much you booked in 9 months 2018 in terms of proceeds from white certificates and green certificates, I'm trying to understand what we should expect for '19? I think approximately 0 probably. And the third question is a bit longer term and bigger picture. I think it's great the fact that you're putting more emphasis in when you discuss, in general, the business on solar, considering how competitive it is becoming. The counter to that is that clearly, Italy is very well suited for building solar even through corporate PPAs. So I was wondering, how do you see the trade-off between pushing on investing in solar vis-à-vis having your core business in generation being perhaps cannibalized by it? So for how long can margins in Italy hold in generation, if we're going to see maybe about 4 gigawatts of renewable additions per year from now to 2030?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [23]

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So Alberto, I will start on this from the last one. I think it provides me the opportunity to give you a little bit more broader framework on the agreement on how this is placed in our framework. We have the Italian market that we'll all see whether the new government will be in favor to reopen the discussion on the energy strategy in the country. But certainly, if they do it -- they will do it, they will increase the targets of solar and wind and other renewables to deploy in the market. So we're trying to place our strategy within the already declared initial strategy of the country, which will be, going forward, a mix of renewables and gas in the -- in our fleet portfolio. So this is why we're trying to increase our presence on the solar with -- the ultimate goal will be to be able to participate to the future market for grid parity in the country and that we both require a certain platform on certain sides of the market, a certain level of competence. This is why we are targeting an amount of megawatt to be sold -- sorry, to buy on the secondary market on the power market in the region of 150 megawatt. So we need -- we will need to strengthen a little bit our presence, our competence and our platform to operate those plants. And so we don't see -- certainly, we will see in certain areas of the country, especially in the south of Italy, certain forms of cannibalization and certain time of the -- and certain hours and certain timing. Clearly, the prices will be -- the bulk of the prices will be the solar prices that we only run our CCGT with the objective to provide flexibility to the system potentially at any time in the day but mostly between 6:00 p.m. and 8:00 a.m. So we do see a nice combination. The solar increasingly will serve the daytime, and the CCGTs will be basically delivering energy for the flexibility. So yes, there will be a certain amount of cannibalization, but that will not impede CCGT platform to be crucial in the market going forward, not only in Italy but to the north, in markets in Europe. So of course, that may be -- this installation will require more time but to be synthetic, we do see our solar strategy as a strategy which is in line with the idea to remain a generator and a generator with increasing capabilities on the renewable side to balance our presence on the slide side, the customer base side. You mentioned the PPA. Yes, you're right. Certainly, the PPA, you will need to have a solid customer base to build PPAs on the existing -- with future solar assets. So the combination of solar capabilities and client for us is very suitable for developing a position of the generation company going forward. On the green certificates, I think -- yes, do you...

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Andrea Crenna, A2a - CFO [24]

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I can answer. In fact, I will answer maybe first on the -- well, on the green certificate, it's easy. On the white certificate, we are just starting up on the numbers. On the green certificates, I'll give you the numbers on the full year, okay. On -- in 2018, so this year at the end of the year, green certificate plus feed-in tariff, the incentive which have taken over the green certificates since last year, we are expecting EUR 128 million, 1-2-8, okay. Last year, 2017, was EUR 63 million. Next year, 2019 onwards, we are expecting green certificates will be 0. All the position we hold has been sold this year. So the inventory is 0. We will only generate feed-in tariff. The amount expected is about EUR 25 million per year flat over the plan time horizon. So if you compare 2019 versus 2018, basically, we will have a negative comparison of about EUR 100 million. The white certificates, just running the numbers because they are split among 2 or 3 different business units, okay, the total amount in 2018 sold was EUR 26 million. That's an impact on the EBITDA. Last year was EUR 35 million. So in '17, 3-5; '18, 2-6. And '19 will be lower. It's going to be a lower amount as the price of the white certificate has basically been capped. So first and foremost, we don't have any inventories any longer. We sold 100% of that. And secondly, with the flat cap on the prices, the volatility of the market, i.e. the possibility to optimize the portfolio of the white certificate is certainly lower. And this explains why we are expecting a lower amount of white certificates from now on.

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

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But clearly, the divisions -- the market divisions will be continuing to propose projects, may deliver white certificates. So we cannot predict today with 100% provisions if we're not -- if we will have or not increased the amount of green certificates or white certificates. Secondly, we will try to increase our green -- our white certificates base by providing new project and some big new projects either to B2B or to B2C customers. We will give you a broader range of this potential over the next business plan that we'll be presenting.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - MD [26]

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But if I may, just a quick follow-up. You're saying, Valerio, that you're talking about generation could be EUR 355 million this year. That includes all of these items. So I think next year, if I want to use it as a base for focusing 2019, the EUR 355 million is actually EUR 255 million. Is that correct? Because I'm structurally going to lose about EUR 100 million at least, of green certificates. That's correct, right?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [27]

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Yes, you're right. We...

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - MD [28]

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And then you expect a strong year next year, you were saying. So from there, we grow.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [29]

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Globally, yes. Globally, yes, you're right. Don't -- just be reminded on the white certificates, they're not included in generation. Generation is not the...

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - MD [30]

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Yes.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [31]

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We get green certificates only.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - MD [32]

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Absolutely.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [33]

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Right. So maybe a few words on the first question. I mean, I think, globally -- I mean, before I hand over to you, Andrea. As you know, we don't provide the specific numbers on each of our segment, but let's talk about the fundamental of the business, okay. We increase clients, okay. And of course, by increasing clients, we increase the absolute value of the margin linked to the clients. We were expecting a decrease in unitary margins in the BU -- in the retail business as a result of double factor. On the existing customers, pressure coming from competitions, I mean, to spend money to retain and make those clients more loyal, they have a decrease in unitary margin. And of course, the marginal client that you are acquiring will have a smaller margin than the existing customers. Having said that, we -- for the second year in a row, we don't -- we're not seeing a drop in the unitary margin of retail business as a result of an increasing competition. So there is no effect coming from the margin -- the unitary margins on the retail business. But since we are increasing our market share on the B2B side, the B2B side, of course, incorporates much lower unit margin per cubic meter and for -- and of course, for mega hour. I believe that, that may be the reason of your calculation. I mean, we have a different customer base compared to last year. We have a higher number of clients on the free market base. And again, on that front, we don't see decreasing margins. In fact, we're expecting increasing margin. But of course, the inclusion of a larger portfolio on the B2B with lower margins can have an impact on the global unitary margin overall. That, I think, is the -- we'll work it out more in details, and we'll provide it to you afterwards [eveter].

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Operator [34]

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The next question is from Stefano Gamberini of Equita SIM.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [35]

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Three questions, if I may. First of all, regarding the hedging on next year. [Some strong] during the previous conference call, you said that 60% was hedged at 54% -- EUR 54 per megawatt hour. Now you are speaking about 37% at a higher price. So why, and if you can elaborate a little bit about what we can expect next year on this item. The second question regarding the EUR 500 million of investment in renewables. If I'm not wrong, this year, we will invest more or less EUR 150 million. Do you expect to improve it, increase this investment for the coming years also considering the strong free cash flow that you are generating? The third question regarding just compared to July, the 70 -- EUR 100 million of higher free cash flow are recurring or because at that time, the guidance was EUR 100 million improvement of free cash flow. So is this something recurring or the improvement is a one-off related to this sale of the put options on EPCG. And very last question regarding this EUR 26 million of green certificates in 2018. Are part of these in the one-off components? Because I noticed that in the energy solution, you have more or less a EUR 60 million one-off in the 9 months.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [36]

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Sorry, EUR 26 million in green certificates. I need a supplemental question to understand better your question on the third -- and your third and -- or fourth question, Stefano. Can you explain a little bit better what you mean by recurring -- not recurring free cash flow? Because I didn't quite capture your question. And maybe going back a little bit on this EUR 26 million because I didn't hear you well. Stefano? Hello?

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [37]

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Sorry, sorry, sorry. I was on the mute function. Just to understand, the EUR 26 million of white certificates that you expect in 2018, are...

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [38]

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Because you said green. You said green, sorry.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [39]

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I understood that it was EUR 26 million white certificate in...

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [40]

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Yes, yes, white.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [41]

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Okay, okay. Are part of these included in the one-off component that you expect for full year? Because I noticed that the energy solution EBITDA was EUR 30 million in the 9 months but ordinary was EUR 14 million. The second question was regarding the free cash flow, the increase of free cash flow and that you expect for full year, compared to July when you still quoted an improvement of EUR 100 million on net debt. Is something recurring or is more related to EPCG and so more a one-off?

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Andrea Crenna, A2a - CFO [42]

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Okay. I'll pick up the last question on the free cash flow, Stefano, which is straightforward. It's certainly not related to variation in what we call perimeter, i.e. EPCG or deals like M&A. It's, in this sense, recurring. So it comes from the ordinary management of the company, okay. The white certificate, I can pick up this question because it's also straightforward. The EUR 26 million split into EUR 15 million, which we put into the nonrecurring or one-off, this is because these were part of white certificates related to projects developed over the previous years and recognized last year when we held into our inventories, which we sold this year. All the others, basically EUR 11 million, this instead is the day-to-day activity, the optimization of the portfolio where we either generate or buy, at good conditions, the white certificates that then are written off by our distributor basically who gets the obligations to write them off. And this is the part which answers Alberto's previous question. I was commenting we are expecting to reduce because of -- basically, a [scene] (sic) [scenario] market given the cap which was set by the authorities, okay?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [43]

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Okay. So I'll go back to your first 2 questions, Stefano, so on the hedging. If I correctly took your question, I think you were -- you asked what is the comparison between today, 2019 and the first half conference we did. So on the first half conference, we were projecting a hedge ratio of 28% at the price of EUR 54, 5-4. Today, we have hedged for 2019, 34%. So we're up more than 5% with a price of EUR 60.20 per megawatt hour. Basically, you see the result and the fact that each of the technology we are hedging, so hydro, CCGT and coal, are being hedged at a price which is higher than 2018 hedging prices. So that's simply a math calculation. That's on the basis of what I was commenting before. So we -- on the base of today's information, we do see the generation pointing a reasonably positive scenario in 2019. Then on the questions regarding the renewables, I think we may have more appetite, of course. But for us, it was extremely important to joint venture with somebody with extremely strong and capable economy of scale, ability. At the end of the day, this is a way to decrease the LCOE on the grid parity. So let's say it this way, the -- our appetite will not be a function of the cash we have enhanced, but it's a function of the opportunity that we find in the market in line with our expectation to deliver value. So it is -- there is not a linear linkage between the 2. Anyway, clearly, we have also the Glennmont offer, which is out. We don't know whether this is going to be successful or not. But clearly, that will have an impact on the existing cash flow because it's not included in the CapEx we provided you in the guidance 2018. Is it okay?

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [44]

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Yes. Just a quick follow-up, if I may. When you said reasonably positive scenario for '19, if I understood correctly, we have, on the positive side, the hedging that could be positive. Could you elaborate a little bit on the other items, the MSD and the capacity market? Finally, also, on the gas margins, do you expect a year '19 weak as '18 or better?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [45]

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Okay, okay. On the capacity, of course, that will be -- we will discuss this when we go out -- when we come up with a plan. Clearly, we are moving eventually in the second half of the year. The data for the tender is to be initiated. So that's our forecast for the [capacity]

(technical difficulty)

that's again the sum of the 2 as we are basically the same situation we are living for 2018, so MSD and capacity in the region of EUR 170 million. So again, what happened in 2018, unfortunately, we didn't have capacity as we were expecting, but we had a stronger MSD, as we already commented with you going forward. I cannot -- of course, we cannot provide you a view on MSD because as you know, the MSD is purely assumption of the demand and offer in the market going forward. So it's very difficult to do that.

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Andrea Crenna, A2a - CFO [46]

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Gas.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [47]

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On gas, we are projecting basically the nice -- similar to 2017, so price in line...

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Andrea Crenna, A2a - CFO [48]

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'18.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [49]

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With '18 -- sorry, with 2018. So on the basis of that, I think we would move also in terms of hedging policy, With [MB], we are not expecting big changes there on the gas price dynamics. Okay?

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [50]

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Okay.

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Operator [51]

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The next question is a follow-up from Alberto Gandolfi of Goldman Sachs.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - MD [52]

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Just very brief one. Going a little bit through your balance sheet and changes in trade receivables, this is about -- down about a couple of hundred million versus last year. And I was wondering if there has been any factoring on any securitization of receivables maybe we should think about that was a positive to the cash flow statement.

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Andrea Crenna, A2a - CFO [53]

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Major driver is the seasonality, as I was commenting. In the quarter, we did sell, without recourse, a portfolio of about EUR 30 million, 3-0, of long-dated receivables, which are one of the reasons why we have reversed part of the provisions that we were commenting before, because these were 100% provision receivables, which we had sold at basically more than 0. But apart from that, we are not a seller of receivable neither through asset securitizations program nor systematically, let me say, by the end of the quarter. We tend to sell on a spot basis. Typically, it's more portfolios of receivables towards public administrations, for much lower amount at the end of any quarter -- I don't know, EUR 3 million, EUR 4 million, EUR 5 million. And just with the purposes of -- if, of course, we got very good quotations, which basically means above 90%, well above 90% of the face value. And we just do that because it's easier for certain counterparties who gets much higher volumes towards the public administrations to manage the collections process for receivables, which requires a lot of administrative works and dealing with the public administration. That's the reason, but we don't have a systematic program to sell receivables at the end of the quarter or systematically. This quarter, EUR 30 million for the reason I gave before.

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Operator [54]

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The next question is a follow-up from Javier Suarez of Mediobanca.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [55]

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So on the EBITDA for 2019, looking at the consensus, there is an increase expected by the consensus something like, let's say, EUR 50 million. So adjusted by the decrease on green certificates, there should be an increase, an underlying increase of EUR 150 million. The question is, do you feel comfortable with that number, that increase on the underlying EBITDA to fill the gap that the lack of green certificates create or not? Any visibility on that would be appreciated. And also [Luca] -- coming back again on the net free cash flow generation, if you can give us some light on your expectation, again, for 2019. For that net free cash flow generation of EUR 200 million, let's say, what that number should be in 2019?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [56]

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Javier, sorry, we want to be very constructive with you and we understand the scope of the question, but you know very well, honestly, that we don't provide numbers on 2019, not for the EBITDA neither for the cash flow. We only can comment at the stage -- at the moment on the drivers and trends for those items. And so I'm sorry not to be able to give to you the answer, but I'm sure you understand our position.

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Operator [57]

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The next question is a follow-up from Enrico Bartoli of MainFirst.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [58]

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A couple of follow-ups. First of all, on the gas tender process, there was an appeal by your competitor in the gas tender for Milano. If you can give us, say, your confidence that there will be no impact on the reward of the gas concession to you and possibly the timing, if you have some visibility on when clarity will be made on this matter. And regarding the other gas tenders, if you can remind us the first year when your business plan assumes some contribution from the increased RAB resulting from gas tenders in other areas of Lombardy and if you can update us on the state of the art of these tenders. And the second one, very, very quickly, on possibly a D&A -- an indication of the total D&As, including provisions that you expect for 2018.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [59]

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Okay. On the gas tender process, I think it's -- you know that we were officially appointed. The -- from the (foreign language), mayor of the town of Milan. Then we got this appeal and one of the practical effects, and the practical effect is that we are delaying our investments until this date or the tribunal will come up with the first orientation whether or not to suspend the effects of the tenders -- of the tender, sorry. We do expect from the tribunal basically at the end of this year -- so at the end of 2019, the outcome of this decision. So what could be the outcome? Again, it could be, okay, yes, we will discuss in the merit the questions during the process, the trial. Well, this will take, of course, months and years, et cetera, et cetera. This may be coupled or not with the decision to suspend the tender. If the tender will be suspended, basically, we will continue to operate. We'll continue to take the underlying EBITDA, but will not invest along the lines on the new tender. In case of B, the tribunal will not consider -- will not provide a suspension in which case they have to generate the first who will start to make the investments as we were fully empowered to be the new manager of the gas distribution in Milan. So practically speaking, it state is only date of the start of the material effects of the gas tender, basically. I hope it was clear enough, Enrico, on this part.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [60]

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No, no -- it was clear, yes.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [61]

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And on the...

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Andrea Crenna, A2a - CFO [62]

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On the gas tender, in the plan, the -- we've got EUR 14 million, 1-4, in 2020. This is the incremental contribution from the new gas tender versus the existing scenario. And what was that -- no, no, the forecast for the D&A, EUR 440 million, D&A, and about EUR 10 million of provisions, so EUR 450 million.

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Operator [63]

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The next question is a follow-up from José Ruiz of Macquarie.

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José Javier Ruiz Fernandez, Macquarie Research - Analyst [64]

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Just the last one on M&A. If you can comment your interest in the retail and gas power units from [Ascopiare] and what will be the rationale behind this.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [65]

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First of all, we need to understand better whether this is -- deal is crafted as a simple sale of a client versus a strengthening in the gas business. So it's not clear yet, what is the final goal of the seller. So we will see. In case we will be interested in developing a regional presence, as we did before [Pina Gruppo] or Montedison, there is no big differences compared to that. If the deal goes for a simple sale of clients, we will look at that with the idea to strengthen our position in the northern markets in Italy. As you know, we have -- we're not, today, 100% your national player. We are mostly concentrated in Lombardy, in Piedmont, in Veneto. That will be basically another possibility to strengthen our presence in the northern, east part of the country, so with the idea to come up with the position of -- a solid, sound position of a player in the northern part of the country. That's pretty much -- of course, we will do that along the lines of our returns and work assumptions, et cetera, et cetera, if we will go after it. But that is basically the goal.

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Operator [66]

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Gentlemen, there are no more questions registered at this time. Back to you for any closing remarks.

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Renata Bonfiglio, A2A S.p.A. - IR Manager [67]

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Okay. Thank you very much for your time and attention, and goodbye for now. Bye-bye.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM & Director [68]

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Thank you, and goodbye.