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Edited Transcript of A2A.MI earnings conference call or presentation 13-Nov-19 1:00pm GMT

Nine Months 2019 A2A SpA Earnings Call

Milan Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of A2A SpA earnings conference call or presentation Wednesday, November 13, 2019 at 1:00:00pm 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, MD & Director

* Renata Bonfiglio

A2A S.p.A. - IR Manager

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Conference Call Participants

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* 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

* 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 2019 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 very much. Welcome to everybody to our conference call. Valerio Camerano, CEO; and Andrea Crenna, CFO, will present to you the first 9 months the results of the company. The material of the presentation has been sent to you and is also available on our company website.

I now leave the floor to Valerio Camerano.

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

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(foreign language) and thank you to everybody for being -- following this presentation. So I will start from the -- typically we have from the highlights for the first 9 months. First of all, I think it's -- we want to underline the fact that we had a very strong third quarter, as you will see in the following numbers.

So let's go through to the major plus and minus regarding this first 9 months. On the retail side, we're continuing our growth in terms of market share, again, by translating our regulated customers into free markets. And we continue also to improve our market shares on the B2B. So on the B2B side, we can record increasing volumes and accordingly, increasing margin, absolute margin in -- for the B2B.

On the fleet, we had a very, very positive third quarter in terms of CCGTs. So we have assisted to a strong coal-to-gas stay dispatching in the quarter. So we had our fleet functioning very well, so we were able to capture more in increasing spreads. We have seen, for the entire quarter, spreads above EUR 10 megawatt hours in spreads. So that has an impact in the region of EUR 22 million addition, EUR 20 million for the gas fleet.

Photovoltaic. On the solar plants, we have an increase of 10 billion -- EUR 10 million versus last year. So we continue to build up our solar base. On waste. We confirm the strengthening of waste treatment prices, in particular, the WTEs and the industrial treatment, which posted the positive result. On the networks, we have the positive contribution from water cycle. That's the -- basically, the tariff increase effect. And we also have positive contribution coming from district heating, in particular, not from the volume side, the volume slightly below in terms of margins, and the pricing structures to the final market. And last but not least, we were consolidating the ACSM-AGAM for the first 9 months, which provides an additional EUR 18 million versus the same period of 2018.

And also hydro was quite important. Hydro production in the quarter was up by 130 gigawatt hour more. Also we had quite (inaudible) in the quarter, which we were able to exploit. On the negative side, we have -- that's known, of course, the -- we've spoken about this effect in the last conference, the negative effects coming from the expiry of green certificates that accounts about EUR 100 million. And the second element is new. We had the negative impact coming from Grottaglie landfill. You might remember that this was a question mark in the last month. We had now the -- definitive the sentence coming from the court, which basically prevents us from filling the landfill. So the landfill technically has now stopped and we have taken the view that that's not going to operate. So we have all the impacts from the EBITDA, which accounts for EUR 11 million, but we also have taken the decision to devaluate the participation. So we have also, including in these numbers, the full effects of the devaluation of the Grottaglie landfill.

So if you go to the numbers, Page 4. So we have revenues up if you look at the year-on-year effect. So on the quarter, we have -- revenues are up by 16%, and EBITDA of this quarter was also up by almost 40%, 39%, as you see in the delta Q3 effects. And also in terms of net income, the effect of the quarter was positive, up by EUR 16 million. So you can see in the slide, the strong contribution of the third quarter versus what we have already posted in the first half. And as you will -- we will comment on pretty soon, most of these effects are coming from the generation side, generation, but also from the contribution of the market division.

On net income, you'll see that, again, the contribution on the third quarter is strong. Of course, you need to take into account the effect coming from the [CB] we already comment on. And the full effect of Grottaglie, it's included in the 9 months. We have taken the decision to devaluate entirely the asset, and the effects are included in these numbers. On net financial position, if you take out, isolate (inaudible) IFRS effects, net of this effects, we are pretty much in line with the net financial position of 2018.

Let's move forward and let's discuss more in general terms the group EBITDA overview. So if you, we concentrate on the recurring effects, we have a recurring effects up by EUR 18 million, which is basically 2% versus the first half -- versus last year, sorry. And generation, I mean we have, in the negatives again, the green certificate down by EUR 100 million. But then we have the positive contribution of CCGT, which is in the quarter was extremely strong. Volumes of -- hydro volumes in the region of EUR 18 million. And we also -- the contribution -- positive contribution of gas portfolio and the solar plants by EUR 10 million. So globally, we have recovered significantly versus last quarter for generation. And we'll comment on also, perspectively, what the capacity market provides us in terms of future, but that's the 9 months results.

On market. We have here, it's no surprise from our from our side. I mean, the combined effects of the working fibers that we have in our strategy, which is basically more free clients and the related absolute margins that would bring in our portfolio. More volumes and margins coming from the B2B market as we continue to grow in terms of the market share. And also the effects coming from the safeguards that is -- it's included in these numbers versus the 2018.

We have some results coming from public lighting, it's up EUR 3 million. And of course, the consolidation effects of ACSM in the market results, which is in the region of EUR 14 million. On waste, we have, in line, I should say, with what we already said in the first half. Positive trends in the waste collection, but in particular, we had positive effects coming from the treatment. So the treatment, WTE industrial, and to a certain extent, also the urban treatment is up, which was a way to more than offset the negative effect coming from Grottaglie, which is included in this number, of course, and it's in the region of EUR 11 million. So the good trends, stable trends in prices and functioning of plants in treatment is more than offsetting the effects coming from Grottaglie.

EUR 30 million up for networks. That's good news on oil and gas. We have the hydro, the water distribution, which is up by EUR 6 million. That's, again, the consequences of revised tariffs. On the district heating up by EUR 11 million. It's a combination of pricing structures and growth. And we have also -- the consolidation of the ACSM in the networks that accounts for EUR 9 million. So overall, that's EUR 18 million up in the EBITDA and recurring EBITDA. And some effect on the one-off, EUR 26 million the accumulated one-offs so far. There, basically, items related to the electrical networks. We're talking about the sets of an open item which relates back -- dates back to 2008, 2009.

And last, going to the conclusion on Page 7 that provides you a -- more analytics on the Q3. As you may see, the EUR 74 million in the Q3 are mostly coming from CCGTs and MSD, hydro, as I said before, and the retail. So out of the EUR 74 million, EUR 65 million are related to the CCGT margins and MSD margins and some hydro volumes effects in the quarter. And the other effects are quite marginal in waste. The other important effect is coming from the retail, which is up by EUR 10 million in the third quarter. And again, on Grottaglie, you see the impact in Grottaglie that it's been accounted in the third quarter.

So that's the general view regarding the group, and I'm going to pass the stage to Andrea for more details in the values of BUs.

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Andrea Crenna, A2a - CFO [4]

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Thank you very much, Valerio, and good afternoon to everybody. There is not much to be added on top of what Valerio just commented. The quarter has been very solid, but the underlying business dynamics have not been really different from what we have already commented in our 2 previous quarters.

On Page 8, the usual waterfall in generation. The Q3 has been very, very strong, differently from the previous 2 quarters. The ancillary markets, the MSD market has not been the cause for the variance year-on-year. This quarter, we got EUR 46 million of contribution from the MSD market versus EUR 33 million, so only plus EUR 10 million, whilst the previous 2 quarters, the first 1 in negative and the second 1 in positive, the MSD market explain most of the variance.

On the 9 months, the total result on the ancillary services is EUR 118 million, 1-1-8, versus EUR 137 million last year. Q3, therefore, has been very strong in generations, mostly from hydro productions, which was up 33% with no negative price effect thanks to the hedging. We've got most of our production hedged at positive rates versus the spot rates, clearly. Productions on the gas plants, gas-fired plants was also very strong, 17% up, and spreads were actually more than twice as much what we recorded last year.

The market, as I was commenting 1 second ago, the underlying dynamics have not changed. Customer base on the free market volumes, unit margins are all in good shape. Once again, we're not experiencing unit margin to reduce. And actually, in the B2B, as Valerio said, we are experiencing an increase in the unit margin. The only negative effect you see is on the energy efficiency. And the reason is what we commented in Q2, it's on the lower optimizations opportunities we have on the white certificate markets since when a cap price was introduced.

On waste, the news is Grottaglie landfill. We have written off basically 98% of the value of the landfill. It's -- EUR 43 million. That turns into an impact of EUR 16 million on the net income of (inaudible). Clearly, there is a minority here because part of the landfill is on [steel] by LGACA and the minority shareholders of LGACA.

Just to remind you, when you look at these numbers on the waste business that we got the well-announced stop in the WTEs. So if you -- if we accumulate the impact of Grottaglie landfill and waste, it's a minus EUR 18 million year-on-year. And in light of this minus EUR 18 million, we should assess the growth, actually, the small growth we are reporting on the 9 month. So the plus EUR 4 million is actually after overcoming EUR 18 million of headwinds.

On the network, the only thing that's worth mentioning is on AGSM. I think we'll start briefly at this point, the point I'm going to make in the last call, you will see a reduction in the 9 months versus the semiannual results. This is completely due to a negative comparison since in Q2 2019, ACSM-AGAM recorded that EUR 8 million positive nonrecurring income.

On Page 12, there's really nothing to be said after we just commented impact of the write-off. All the other drivers on which we gave indications and I mean, the tax rate, the net financial expenses, depreciations and provisions in terms of full year guidance remains basically the same. I would skip because there is no really relevant things to be said. I will pick up questions if you might have later on.

And I will go to Page 15, and leave Valerio to comment the new improved guidance.

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

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Thank you, Andrea. And so we -- first of all, I -- we have decided to improve our guidance, despite the inclusion of the write-off of Grottaglie. So as you may remember, in the first half, we had a guidance of a range between EUR 1,155 million, EUR 1,185 million. So -- which, whose average was EUR 1,170 million, so we have decided to increase that by EUR 30 million, roughly EUR 20 million are coming from ordinary recurring business, which is basically the new effects -- positive effects from the business. And also increase the vision -- the forecast on the one-off, which is now up by EUR 10 million to EUR 35 million of one-off. So that's today, our new guidance for EBITDA, so which strengthened versus last forecast.

On net income, we're also moving on the upper part of the range. The first half was EUR million 300, EUR 330 million, (inaudible) was [EUR 350 million], we're now on EUR 330 million, which includes an improvement of the EBITDA. (inaudible) if you want improvement EBITDA by EUR 30 million and the effects of Grottaglie by EUR 16 million, which is negative, of course. So that adds also an improvement despite the Grottaglie effect.

We have also refreshed our view on the CapEx. So we'll be basically down by EUR 100 million. We'll end up around EUR 600 million of investments by year-end. So that's revised down by EUR 100 million. And the free cash flow is improved to minus EUR 50 million. You might remember that this was minus EUR 200 million, so we're now adjusting by improvement of EUR 150 million.

So we feel comfortable that the variables underpinning our next months are reasonably positive. We can take the immediate decisions on Grottaglie in this quarter, and at the same time, improving debt. We also some -- in terms of perspective, we are working on -- we might maybe discuss this a little bit more over your questions with our M&A pipeline, which is building up. And also, I want to take the opportunity to -- and again, we will comment this maybe more in details over your questions regarding the outcome of the capacity market tender and auction, which we consider extremely positive from our perspective. And by the way, not only positive, but in line with what we have anticipated. I think I'm not wrong in our first business plan. This was 5 years ago. Almost 100% in line with what we were expecting from (inaudible). So we had a view in this view (inaudible), and I think we will have the opportunity to discuss this in more details in your questions.

So thank you very much. I think we hand over to Renata.

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

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Please 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 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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I have 3. This one is a follow-up on the latest statements on the new capacity auction or the latest capacity auction. You had mentioned that you're expecting or you reached an extremely positive from that latest capacity auction. If you can elaborate on that and your expectations on EBITDA impact on the company from that capacity auction in terms of EBITDA?

And obviously, that has to be related to the expectation on the evolution for the ancillary service market. That is the first question. The second question is also on the regulatory side. The ARERA has recently published a new regulation for [human] waste. If you can help us to understand your evaluation on that, on this new regulation and the positive or negative effect that this may have on A2A. And the third question is on the guidance. You have been reducing guidance for CapEx by something like EUR 100 million. If you can explain where that minus EUR 100 million should be coming from. And also, there is an improvement of something like EUR 150 million of net free cash flow assumption. If you can help us to understand from that is where that is coming from as well.

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

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Okay. So thank you, Javier. Let's start from the capacity. I mean why we believe the capacity is an extremely positive news for us. First of all, the order of magnitude, we had all our capacity, which was, of course, submitted, truly submitted and accepted at cap, maximum cap. You might remember also in our discussions in the last 4, 5 years that the cap originally was EUR 20,000 per megawatt has been increasingly during the discussions that would reflect the real market scarcity. So we have now a considerable amount of our capacity under management -- under sorry, I mean, capacity. Of course, the order of magnitude for us is in the region of EUR 170 million, 1-7-0. And you might remember that this is non budget number was clearly the sum of capacity and MSD. So clearly, the fact that it's the same amount of money today is 100% regulated, so it's fully regulated. That brings a considerable stability in conceptual terms of our revenues. So there's a transformation of our division, gradual transformation, there's a gradual decrease of increased risk in our generation,affected by the decision to enter into the renewables, which is also, again, mostly regulated, is a transformation of the existing CCGT functioning into the regulated manner.

So the first thing is that we have a good -- very good coverage, which is 100% of our combined figure, which is EUR 170 million. Today, it's fully regulated. Still, there's an opportunity to operate on MSD. You know that our vision was that the MSD global part is going to reduce, of course, as a matter of the introductions -- a result of the introduction of the capacity market. But at the same time, I know that [ARERA] came out with a figure that, according to them, this -- the (inaudible) market globally may be reduced around 30%. We are not prepared at the moment to express clearly because we think we need to assess the second tender, which is important, according to the -- to us. And then also the first functioning of the market, including the capacity fully working.

So -- but anyway, that certainly is going to be an ancillary service contribution, which is going to be on top of existing EUR 170 million under capacity. Now whether this is going to be 70%, 50% or 60% of existing MSD, we believe at the moment is premature. But certainly, it's going to be positive. And it's going to be on top of the EUR 170 million of fully regulated capacity market. Then a few other consideration and some observation on this. Clearly, this is the first auction. The second, of course, it's not going to be, we believe, very much different because there's no more capacity coming onstream these days. Situation confirms our long-standing view to the market. It's stretched and it's short. And then it's going -- certainly going to affect the next 2 years, so 2020, 2021, and we believe that it's going to orientate the capacity mechanisms also beyond '23 and '24. So we do expect -- we do expect that the market will be (inaudible) this market will be built around this concept of having a sound and solid regulated capacity market. On top of which, it will still be room for the ancillary services. We will come back to you, of course, with a clear idea after the second tender and after the first market functioning that we will see in the coming weeks and months. But certainly, that's very positive from our perspective. So we are increasing the percentage of the EBITDA regulated as a group, overall. That's, I think, quite important because you will reduce statically what is typically falls under definition of volatility EBITDA, which is certainly really now extremely reduced as far as A2A is concerned.

Okay. On the waste, on the waste side, I think we have -- of course, we do see from 1 side, positive elements because the idea that the market will be clearer and the returns are going to be regulated, this will open considerable opportunities according to us in the center, in the south of Italy, mostly.

So we will -- in our business plan, I think we will revise our appetite up in this perspective because we now feel that there are the minimum conditions to go in the market beyond our existing traditional territories. So that's certainly positive. On the treatment side, we have no elements at the moment to comment because the authority has postponed to 2021 the basic regulation mechanism. So we had to develop this more.

On the existing assets, on the waste collection, we have the following view. We have -- our most important contract is in Milan. Clearly, the other are pretty much slightly positive. I mean globally, beyond Milan, we have positive effects because we have here and there, there more plus than minus. On Milan, we know that it's a competitive auction. So in our business plan, we had already included, going forward, a decrease of global marginality of this contract, which is already included in your numbers -- in the numbers that you have based on the last business plan. So some of these effects, which we consider market effects, are already included in the existing figures. There might be some slight adjustments to make on top of the already included numbers, but we know that these adjustments, we might be slightly negative, could be -- have be -- are going to be more than offset by other initiatives that we have in place in our plan.

So in synthesis, no comments on the treatment so far because there's no more opportunities, we will take up in the next business plan in the center in the South of Italy. On the existing contracts, the small ones, they're going to be slightly positive. On the big ones, Milan, it could be slightly negative, but most of it is already included in our numbers. And we certainly have a pipeline of initiatives strong enough to more than offset the potential, even slight negative effects coming from the big contract. On the CapEx side and on the guidance, Andrea is going to answer you with more details.

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Andrea Crenna, A2a - CFO [4]

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Yes. On the CapEx, the lower number we have adjusted our guidance for is due basically in 2 reasons. One in the waste deal and another one in the market. The market is easier. It's on tenders, mostly on tenders on the public illumination, which either not been celebrated by the time that we were expected, or on the other hand, have been celebrated, we have won the tender, but there is a delay by the time the contract is actually signed to the winner.

So there is a time lag which is proving of about 6 months by the time that you win a tender and when you actually start operating the new concessions and roll out the investments. This accounts for about EUR 50 million, so half the amount we're talking about. And the other EUR 50 million is under waste. Here, part -- the lion's share is made by the treatment plants for the humid fractions, the (inaudible). Here, you might know that there has been a law -- disputes in the law about the end of waste qualification in the end of waste material at the end of the other treatment plants, which has delayed the implementation of our 4 new plants in the business plan. This is a delay which we are now expecting to be overcome by the end of the year or at the latest, the first quarter in 2020.

And the last point for this rollover is on 1 of the 2 authorized WTE, which have been authorized, both. On 1 of them, there is a condition precedence that we have to fulfill, which is the cleanup or the bonification, I don't know if we can call it, of the area, which we have to carry out, which will take about 6, 8 months. So we are doing that, and we have delayed the associated CapEx.

The -- the reduction in CapEx is also part of, though not 100%, of the explanation of the improved guidance on the free cash flow on the full year. There are 3 reasons for the improved guidance. One is lower CapEx.

Not 100% of them turn into better CapEx because some of this CapEx would have represented an improvement in the net working capital, indeed to more part of the Q4 CapEx usually don't have any effect on the cash, but part of them certainly do. Then we clearly accounting for the better EBITDA that we have just disclosed. And then a part also out of a revision in our assumptions over the net working capital. The 3 of them accounts for this EUR 150 million roughly improvement that we have plugged into the guidance.

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Operator [5]

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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 [6]

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First one is regarding the Waste business. You highlighted that in Q3, there was an improvement in the marginality, which offset the impact of the Grottaglie landfill then and I guess, also the stop of some WTEs for maintenance. Can you guide us on what you expect for the fourth quarter? If this trend is going to continue and for -- in 2020? And regarding the Grottaglie landfill, what you expect that would be the impact on 2020 EBITDA compared to what was the previous assumption?

Second question is related to M&A. According to what you disclosed in the press, you are involved in several dossier, you announced the agreement with Gelsia. I wonder how the situation is regarding your possible involvement and integration between Verona and Vicenza. I guess you're participating also to the tender for (inaudible), and you are involved in the Sorgenia situation. So if you can give us an update on, let's say, how these dossiers are at the moment and if you can provide some details. The third one is more strategic. First of all, on the press was reported that you are considering investing some peak [cities] mainly related to the conversion -- reconversion of the sites where you're going to shut down the coal plants. If you can update on the ideas that you have on this, I guess, that this would be just some upside potential to what you had in terms of targets in the business plan. And also on strategic, if you would consider discussing about a possible acceleration in investments, renewables in the future, considering the possible evolution of the LTC market in Italy, in light of the energy transition.

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

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Okay. Enrico, We'll start (inaudible) from the last question. And so on the peak, yes, you're right. We've been -- first of all, we've been awarded for additional capacity to be installed in our existing plants. So we have decided to tender for 2 out of other projects that we had, we had awarded. So we have, of course, authorization process in place. So you may expect -- because I cannot share with you details, but you might expect that we will be more focused and more -- we have more appetite in gas flexibility in our plan. Also, with regard with 2 existing reconversion projects -- three, by the way, Monfalcone, Brindisi San Filippo. By year-end, we will clarify what are our ambition in terms of converting plants more than what we were thinking to a gas fleet. So in other words, we might be more -- we might have more appetite in terms of constructions of new plants. Given also the fact that this tender, this capacity tender has declared and has identified still a gap of existing gas capacity between 2,000 and 4,000 megawatts.

So we have also an order of magnitude of the market interest in terms of market opportunity in gas. So yes, we do see potentials on that. And we will go for them, we will go for them. And the decision will be also formalized in the future authorization process request that we will be issuing it by the end of December. So pretty soon, pretty soon. And again, also, the award that you have seen, the award that was also awarded price was also at the cap, aligned with the cap, which, again -- once again, underlines the fact that also the new capacity is needed by the system and confirms the shortness of the market.

On renewables, yes, we do have increasing appetite. And on this front, we'll come back more details with the plan, an action plan over the next plan -- business plan. So I cannot comment the details on that, Enrico, but I can confirm to you that we have -- we are going to disclose more appetite on renewables. On the M&A, yes, we have an active pipeline. And globally, the pipeline we have, at the moment, goes above EUR 250 million because, of course, the (inaudible) aggregation is something around -- I'm talking about EBITDA, of course, so EUR 250 million of EBITDA of the existing dossier. Some of them, of course, are related to the Veneto situation. Also, we have -- we know that Veneto -- the Veneto dossier is moving forward. As you know, the 2 companies, Vicenza and Verona, have publicly declared that they would go for the search of a third partner, and we believe that we have considerable opportunities to offer our ability to be an important corner investors of this deal. And the discussion is going on, and I believe that it will be fuel -- refueled in the next coming weeks.

On Gelsia, Gelsia is an M&A deal of EUR 35 million of EBITDA. We have given the certain exclusivity time. We are working on that. We are quite positive. You know that these deals are always -- they still retain some complexity. But we like Sorgenia -- sorry, we like Gelsia, Gelsia likes A2A. There have been public statements from the political sides. Nevertheless, majority or minority that have publicly stated that they it would support this marriage. So I believe that they are all the ingredients to move forward. The deal is quite hot. I mean we need to see it quite hot. We are discussing these days. So we might -- in your horizons of the next month or the latest couple of months, we might come up with a defined vision on this. Sorgenia is -- we are -- it's -- there's an aggregated potentially amount of EBITDA related to the deal in our terms of around EUR 30 million, between EUR 30 million or above EUR 30 million, considering that we are interested selectively on the client side only on a specific assets on their portfolio.

We're now -- from 20, we're now to go down to 7 participants of this tender. So the tender will -- clearly, was expected -- tender process was expecting the outcome of the capacity auction. I think it was important to wait for the outcome in order to clarify that conditions and numbers in terms of this deal. And we will go for it at the end of December. Then we have, of course, at (inaudible), we will present tomorrow the signing offer. It's a deal of -- in the region of EUR 40 million of EBITDA. There are 4 or 5 tenders -- bidders. We like the deal. We like the ability for us to tap in, in the wind market as we did in the solar markets. So we are serious. It's serious. We are serious on the dossier. We have then a couple of deals we are very close to finalize. On the environmental side, it's a small deal, region of EUR 4 million, EUR 5 million. And we're pretty much close to the end of the discussion with the sellers. Another deals, we have a biomass deal that the group is looking at, in particular, (inaudible) Group. So there's a lot in terms of value that can come up -- come out as a result of the M&A discussion. So we'll make sure that is -- the spotlight, of course, result in concrete deals. But at the same time, we will continue to fuel the pipeline in order to have -- as we did in the past also, beyond the organic, also the M&A opportunity to grow. Clearly, we look always at the same 3 main sources of growth, so renewables, recycling opportunities and the client/market opportunities on the sales side. Of course, we will look at the environmental also deals. But typically, this is a market dominated by middle, small-sized deals. This is why when I talk about these deals, so normally, we come up with the [5 3s], EUR 6 million of additional EBITDA per deal but it's important. They are important according to us also to strengthen our position locally in the areas where we operate. So that's pretty much regarding the M&A. I think Andrea is going to comment on the waste.

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Andrea Crenna, A2a - CFO [8]

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Enrico, yes. Definitely. We believe the performance this year has been very good and will be good given the stop in the WTE and the Grottaglie. Now as I was said in my initial speech, the underlying business drivers remains very solid in terms of treatment prices, efficiencies of the plants, quantities, cost control. So in Q4, we're actually expecting result which is not going to be very different from Q3 of this year. And will be clearly a little bit lower than Q4 of 2018 for the very same reasons, i.e., last year, we got Grottaglie, and this year, we don't. So on the full month, we are expecting a waste business unit with a flattish EBITDA year-on-year. Now what's going to be the impact of Grottaglie starting 2020? If you compare versus 2019, 0, basically -- as a matter of fact, it's going to be EUR 2 million, EUR 3 million lower because we operated the landfill for 1 month in 2019. If you compare versus our business plan, so what our expectations were, this is going to have a negative 25 -- roughly EUR 25 million. EUR 25 million, but this is a variance, all the rest being equal. Of course, we will do different things.

We do have already projects in the pipeline on top of the external growth that Valerio just explained. So clearly, on the long run, there will be ways to mitigate the negative impact of what certainly has been a bad news, of course. Then if you're looking more in perspective, the Waste business unit, also on top of what Valerio just commented on the ARERA impact, keep in mind that starting from last year, we will have 100% of our WTEs back into operations so no additional maintenance stops on the 2 lines, which are the most impacting. Treatment prices keep on going pretty well and efficiencies of cost. So we will discuss more with the new business plan on the perspective. We believe that there will be ways to mitigate the single Grottaglie landfill point, which, of course, is not positive. Okay?

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Operator [9]

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Next question is from Stefano Gamberini with Equita SIM.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [10]

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A few questions also from my side, if I may. First of all, regarding the power generation market, could you give us an idea of the hedging for 2020? What is the situation right now? Considering the weak gas prices and the trend of spark spreads, which were so strong in the third quarter, what is the trend in your view in the forthcoming quarter? So it was just a one-off due to some market conditions? Or do you still expect a strong margin source of (inaudible) during 2020? Still on this power generation item, considering that the capacity market will start from '22. In '21 and '22, do you expect that the ancillary services and the capacity payment will be in excess of this EUR 170 million that you have in your budget due to this shortage on the market?

The second question is still on '20, sorry for that, but the consensus now is in the region of EUR 1,270 million, more or less, on -- from Bloomberg in terms of EBITDA from the EUR 1.2 billion in '19? Do you feel comfortable with this consensus? Or do you see some risks? One could be the Grottaglie for EUR 20 million, but probably you said you can offset in some way? Or do you think that this consensus is too aggressive?

And the third question regarding still the waste business. In your business plan, you expect an increase of EUR 113 million to 2023 of EBITDA. We can exclude the impact of Grottaglie. But anyway, considering the new regulation, do you see some risks regarding these targets and on top, considering also the trend of your authorization for your 10, 11 new treatments and WTE plants that should come onstream in this period? Do you see that this target in 2023 could be a risk today with new rules from ARERA? Or do you confirm that target?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM, MD & Director [11]

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Okay. Yes.

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Andrea Crenna, A2a - CFO [12]

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Hedging.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM, MD & Director [13]

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Okay. So in the hedging, Stefano. We -- this time, we will provide to you directly the Q4 hedging ratio in '20. We're not going to give you globally in 2019. So we'll give you only '20. And I guess, you're interested in the open quarter. So we have close to Q4, 57% of hedged ratio at EUR 63.2 million. That's the already hedged in the last quarter of the year. In 2020 -- for 2020. So now I'm talking about the entire year, the hedge ratio at the moment is 35% at the price of the EUR 62.3 million. So that's the situation on the whole hedging. So on terms of a consensus in 2020, I mean, the consensus, it's EUR 1.260 billion, that clearly doesn't include the Grottaglie effect, which is between EUR 20 million and EUR 25 million. So that has to be taken into account immediately, of course. At this time the company has, again, as I said, is working to try to find a potential opportunity to mitigate to balance these effects. But the number you have in mind already included Grottaglie, which is now clear that it's not going to be going to be done in 2020.

In the question regarding the 2023 environment. Yes, globally authorization, I mean, you pick up the -- you mentioned the authorization issue. Authorization was an issue for the organic treatment plant -- we've been postponing those plans for some time. Finally, now the end of waste regulation came out. So we expect that we are coming weeks or months, we will get at least 2 out of this 4 that will be authorized. So we think that on that front, we don't have a regulation risk at the moment. We were working on a different opportunity. If, for any reason, we didn't see -- we wouldn't have seen the regulation changing on this front, regulation need, so we now have a backup plan. But we believe that the authorization will come. So we don't see considerable risks going forward. The WTEs, as you remember, they have already been approved. They have been authorized. So we are signing now the contract to the company, which have been identified to build the plants. So plastic plants already up and running. So if the only risk which we had in our radar was the end of waste, which is now not, frankly speaking, really is still considerable. So I don't see on that front, future risk. For the rest, I think it values what we already commented on. So we will see on the treatment side, on the waste collection side, there could be some effects, some already included. And anyway, the order of magnitude effects can be, according to our analysis, balanced and mitigated or offset by other initiatives we have in mind. So on the environment, we feel that the fundamentals that work, which we have chosen in our business plan are still solid and sound.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [14]

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And regarding the ancillary services for 2021?

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

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Yes, sorry. No, I thought this point somewhere, was already included in my answer before. But -- so the market is going to be shorter, it's going to be not different from what it is in the market today. So we do expect still the ancillary service market in place before the capacity market will be fully in place in 2022. So yes, I mean, we do expect ancillary services working, well, at a level not distant and not very far from what we have experienced so far, which was already in our plan.

Talking about the -- if you remember, we've already reduced, and we always use the number for MSD, which was an individual of EUR 100 million, coupled with the EUR 70 million of capacity. This was our global vision. Of course, now the capacity is going to be EUR 170 million but for 2020 on. So in the meantime, yes, we expect ancillary services, still a source of revenues for the company, not very far from what we have been experiencing so far.

So not -- it's not going to change. When the market -- capacity market will be in place, fully in place, yes, again, we will expect a reduction, as I said before, but still something which is more than 0, still above -- substantially above 0, which will have to be add on the capacity market number that I shared with you, which is EUR 170 million.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [16]

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If I understood correctly, so we could expect (inaudible) plus capacity market, 2021, around EUR 170 million we will see? Or even north from '22, '23, '22, in this moment, '23,we will see, EUR 170 million is sure and then probably an upside due to this new market for ancillary services? So a balance there?

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM, MD & Director [17]

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Yes. I mean, I confirmed that ancillary services will be on top for '22 versus '23 on for the 2 years of capacity, but also beyond those 2 years because our view is that capacity market is going to be in place beyond 2023 as well in a way or another. Between now and '23, yes, I think it's going to be not far from what we have ever experienced today.

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Operator [18]

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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 [19]

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Actually, most of them have already been addressed. So just 2 quick clarifications. One is on the capacity market, the second auction. From your wording, I understood that the plans such as Monfalcone, Brindisi and San Filippo del Mela are revamping, will be decided by year-end so after the second auction. So basically, I understood that you are not able to participate to the second auction, with 3 plants, these 3 plants? This is my first question.

The second one is on the minorities. As a current positive to EUR 13 million in Q3, so 1-3 million, compared to minus EUR 9 million in H1. So I would like to understand what happened there and your guidance for the full year.

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

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Okay, sorry. On the second auction, yes, you're right. I mean you understand correctly. I mean, we -- it's not that we cannot participate to the second auction with Monfalcone, Brindisi and San Filippo. It's that we don't want to participate because we believe that the balance of opportunities is at risk. We require some more time. So we will -- what we will do, in the meantime, certainly, is to initiate the process to get the authorization for the -- I'm talking about the big plants, of course, I'm not talking about the small plant, I mean, the big plants. I mean, we have in mind for Monfalcone Brindisi, San Filippo, not subscale plants. We have in mind scale plants, so hundreds and hundreds of megawatts. For those plants, we will not submit the plants in the second auction. We could, technically, but we prefer not to do it, and we'll go for a different strategy.

And again, that applies for the 3 of them. On the minority, I think it's simply the reverse of Grottaglie. So Grottaglie minority assets that goes to minority shareholders of LGH [EMEA] group. So as you know, we have 49% of EMEA group is owned by the other -- the local towns. That's the portion that goes to the minority shareholders of (inaudible)group . Sorry, I didn't quite catch your last question. Could you -- can you repeat it?

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [21]

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The guidance for the full year, if you count the minorities.

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

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On the full year, right? You mean 2019?

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [23]

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'19, yes, yes.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM, MD & Director [24]

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Hold on just a sec. We can give you the number.

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Andrea Crenna, A2a - CFO [25]

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So it's 0.

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Luca Valerio Camerano, A2A S.p.A. - CEO, GM, MD & Director [26]

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0. Today, we have the 0 in mind.

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Operator [27]

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(Operator Instructions) The next question is a follow-up from Stefano Gamberini with Equita.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [28]

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Yes. Sorry, just a quick follow-up on the 2020. So what -- I understand that you can't spend figures regarding the plant, but what are the main pillars of '20 in the different markets? In the different areas where you are? Because the waste should be up, if I understood correctly, 100%, WTE in exercise. Could you spend a few words also regarding the other areas?

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

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Yes. I mean it's -- we're still rather positive on spreads. So on the CCGTs, we do believe that there is no effects coming from the -- there's no change -- basic change into the coal-to-gas switch. So we expect the gas fleet working more. And therefore, with the decreasing gas scenario, we do expect some good environment for the spark spreads on gas. Then we will have, of course, the compensatory -- (inaudible) compensator in Brindisi. So the new plants in Brindisi will be working away. We do have some more coming -- revenues coming from that. So generation is pretty much a more positive view, outlook or as positive as we are experiencing today in terms of gas.

When I draw it, very difficult to comment on depending on -- depends on the winter season. So on the power generation for hydro generation, as you know, we have already accounted in our numbers, a decrease of roughly about EUR 20 million, which is coming from the payment to the regions of Lombardy, of the existing fees, concession fees. So that's pretty much EUR 20 million of that we will be out in 2020, but that's already in our numbers.

We're going to have some effects coming also. So in terms of networks, not be the facts, the only one may be the slight decrease in the regulated (inaudible).

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Andrea Crenna, A2a - CFO [30]

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In the allowed revenues.

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

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Yes, in the allowed revenues. Sorry, in the allowed revenues, which is something in the region of 5% but we're not talking big numbers, Stefano. So the big numbers will be coming positive from the spreads, gas in terms of difference, and negatives from the increase of concession fees for the hydro. The rest of the market will be functioning in line with our expectations.

So WTEs would be up and running completely. So the prices on waste treatment will be still quite sustained. So we don't see forces at work that may change the scenario. We do see some development in district heating, slightly a little bit better in terms of what we've been doing this year. For the rest, we confirm our basic view...

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [32]

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And in the retail business, do you still expect further improvement.

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

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In the retail business we have -- going forward, we, of course, we have the issue of the regulated market, okay? So we continue to grow in the free market. So no change on the market, no change. We will continue to that. On the safeguards, it will be not changed because we have another year of the management of safeguards. On the B2B market, we do see what is happening these days. I mean we continue to gain some market share. So we have no issue to believe that this is going to change.

It is not going to be any impact -- negative impact from the regulation in 2020 because the question regarding the free market -- [regulated] market -- the full liberation is going to be postponed in 2020, '21. Then we can discuss maybe in a different table what is our view. We will elaborate our view in the plan. But it will be -- but something I can share with you is that we do believe today, there could be more opportunities for that way, in terms of market liberalization process.

It's not going to be probably a big bank, as it was anticipated before. But there will be some segments that certainly will be put under for tender -- out for tender. And from that, we do see more opportunities. So on the sales side, we continue to grow in B2B, in retail, and there's going to be some more opportunities on the retail side, in line with the expectations of the authority and also in line with the European guidelines, which will have to be enforced in 2022 as far as declines are regarded.

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Operator [34]

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(Operator Instructions) Gentlemen, there are no more questions registered at this time.

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Renata Bonfiglio, A2A S.p.A. - IR Manager [35]

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Thank you very much, just to all of you for listening to our conference call. Investor Relations team is available for any follow-up questions, even in more detail. Goodbye to everybody.

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Operator [36]

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Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.