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Edited Transcript of ENEL.MI earnings conference call or presentation 12-Nov-19 5:00pm GMT

Q3 2019 Enel SpA Earnings Call

Rome Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Enel SpA earnings conference call or presentation Tuesday, November 12, 2019 at 5:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Alberto de Paoli

Enel SpA - CFO

* Francesco Starace

Enel SpA - CEO, GM & Director

* Monica Girardi

Enel SpA - Head of Group IR


Conference Call Participants


* Alberto Gandolfi

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

* Anna Maria Scaglia

Morgan Stanley, Research Division - Research Analyst

* Antonella Bianchessi

Citigroup Inc, Research Division - Director and Head of European Utilities Equity Research

* Elchin Mammadov

Bloomberg Intelligence - Utilities Analyst

* Emanuele Oggioni

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

* Enrico Bartoli

MainFirst Bank AG, Research Division - MD

* Harry Peter Wyburd

BofA Merrill Lynch, Research Division - VP and Junior Analyst

* Javier Fernandez Garrido

JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst

* Javier Suarez Hernandez

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

* Lueder Schumacher

Societe Generale Cross Asset Research - Equity Analyst

* Stefano Bezzato

Crédit Suisse AG, Research Division - Lead Analyst on Southern European Utilities

* Tancrède Fulop

Morningstar Inc., Research Division - Equity Analyst




Monica Girardi, Enel SpA - Head of Group IR [1]


Good evening, ladies and gentlemen. I'm Monica Girardi, Head of Group Investor Relations. A warm welcome to the 9 months 2019 results presentation, which will be hosted by our CFO, Alberto de Paoli.

In this presentation, we will provide some highlights of the period, and Alberto will take you through the operational and financial performance. Following the presentation, we will have the usual Q&A session open to those connected, both on the call and on the web. I would ask you to focus only on the performance of the period and to reserve strategic questions for our Capital Market Day scheduled on November 26.

Before we start, let me remind you that media is listening to both the presentation and the Q&A session. Thank you.

And now let me hand over to Alberto.


Alberto de Paoli, Enel SpA - CFO [2]


Thank you, Monica, and good afternoon, ladies and gentlemen. Let me start with the highlight of the period. I'm on Page 1. In the first 9 months of 2019, group net income increased by a solid 14%, supported by the ongoing delivery of our strategic pillars. Ordinary EBITDA is up by 11% driven by networks and conventional generation, thanks to nuclear margins and efficiencies.

Development CapEx growing by 24% drove the increase in investments, which reached EUR 6.6 billion overall. Efficiencies exceeded EUR 200 million in the period, on track to reach our full year target.

On group simplification Enel Americas' capital increase was successfully completed. We are now executing a second share swap contract, which will be -- enable us to increase our stake to around 62%.

During the period, we have stepped up on our sustainable strategy. We have completed the sale of Reftinskaya coal power plant in Russia. Following recent and relevant changes in market condition, we have impaired our coal asset globally. Our CO2 emissions target in 2030 has been certified by the Science Based Targets initiative as aligned to the Paris Agreement. And we have innovated a sustainable finance field by launching the ever -- the first-ever corporate SDG-linked bond, both in U.S. dollars and euros, to support our sustainable strategy with proper funding.

And now we move to Slide #2, on industrial growth. As said, overall CapEx in the first 9 months was 19% higher than last year and equal to EUR 6.6 billion. Asset development represented around 60% of total investment and came in at EUR 3.9 billion, increasing 24% year-on-year. 2/3 of this development CapEx was allocated to Enel Green Power, to our renewable development, mainly in North America, Latin America and Iberia; and 1/3 to networks, in digitization and smart meters.

From a geographical perspective, gross CapEx was deployed mainly in Italy, Latin America and Iberia. As of today, 100% of 2019 and 2020 asset development CapEx is addressed, providing high visibility on industrial targets for the planned period.

Now moving to Slide #3 and switching to operating efficiencies. OpEx have remained roughly stable despite the full consolidation of Enel Distribuição São Paulo. The effect on our cost base of inflation and the development of our activity, we recorded efficiencies for around EUR 210 million mainly in conventional generation, networks and retail. And we are on track to reach our target of EUR 1.2 billion cumulative OpEx savings in the 2019-2021 period.

On Slide #4, we would like to highlight some important strategic decisions we have made regarding our asset base. In 2019, we have seen drastic changes in market conditions, which heavily affected the competitiveness of the coal plants. As a result, our coal production has decreased by 32% year-on-year, with marginality associated that dropped substantially between 2018 and '19.

During the first half call, we have announced the decision to exit coal generation in Chile and the sale of Reftinskaya coal plant in Russia, which is now becoming effective. During the third quarter of 2019, the Board of Directors of Endesa ruled in favor of the interruption of production associated with 2.5 gigawatts coal-fired plants in the Iberian Peninsula.

In Italy, on top of the changes in market conditions commented, the exclusion of coal from the capacity market resulted into impairments mainly affecting 3 plants for a total of 3.3 gigawatts. In total, the impairments affected coal power plants for a capacity of around 10 gigawatts. Worth reminding that ordinary figures, hence dividends, will not be impacted.

Enel aims at decarbonizing quickly this asset base to tackle climate change promptly and effectively. In September this year, the Science Based Target initiative certified our target to reduce by 70% the direct CO2 emission in 2030 compared to 2017. This goal is consistent with the well below 2 degrees scenario, in line with the Paris Agreement.

And on the impact -- the overall impact of the impairment, we -- in the first 9 months, we have, therefore, booked a total of EUR 4.2 billion impairment costs, out of which, EUR 3.2 billion are associated with assets, EUR 800 million with dismantling provisions, and EUR 200 million with inventories. The financial impact on reported net profit is set to be EUR 2.6 billion.

Moving now on Page #5. As you can see from the chart that we are the first corporate to have issued general-purpose SDG-linked bond, both in U.S. dollars and euros, with the aim to support our sustainable strategy. These bonds are linked to the achievement of 2 Sustainable Development Goals, SDG 7 and SDG 13. We believe that a sustainable strategy and the scale-up of sustainable finance will eventually improve our credit metrics and, therefore, positively affect our cost of debt, thanks to investors and rating agencies factoring in sustainability in their risk assessment.

In 4 tranches, we raised around EUR 4 billion, with an average maturity of 7 years and a weighted average coupon of 0.4% in euro terms. The value of sustainability, indeed, has been reflected in the demand, which covered roughly 4x the amount offered, and in the pricing of the issuance, allowing us to obtain a discount versus a plain vanilla bond of around 15% across the weighted average cost of the transaction.

Let's now have a look to the financial of the period on Slide #7. As said, ordinary EBITDA was up by 11% to EUR 13.3 billion. Ordinary group net income stood at EUR 3.3 billion, 14% higher versus last year. FFO reached EUR 8 billion, up 10% mainly driven by higher EBITDA. IFRS 16 accounting effects and FX weight for 54% of the increase in the group net debt. The remaining portion is mainly associated with the acceleration in investments.

On the next slide, we focus on the main global business lines drivers. Ordinary EBITDA, as said, is up EUR 1.3 billion. This outstanding result were achieved mainly thanks to our existing asset base, which contributed for around EUR 800 million out of the EUR 1.3 billion mentioned.

This EUR 800 million of asset management increase was mainly due to higher electricity prices in Latin America, Iberia and Italy; a negative impact for lower volumes for around EUR 200 million; fully contribution of Fortaleza, the Brazilian plant that was out last year for several problems of the contract for gas, now is fully in operational and it's around EUR 100 million of increase; around EUR 340 million from positive tariff adjustments in Latin America, particularly in Brazil and Argentina; efficiencies, mainly in conventional generation and networks; the consolidation of Enel Distribuição São Paulo; then FX weighted negatively on our asset base for around EUR 120 million, basically due to the Argentinian peso devaluation; and then we had the delta associated with the disposal of our asset in Mexico made last year.

The contribution of asset development, that is roughly EUR 300 million, was indeed relatively low, in line with the first half due to the shift of renewable capacity addition toward the last quarter, as I will detail later in the presentation. Customer contribution is attributable mainly to the positive performance of the retail free market.

Let's move to Page 9. In this slide, you can see the performance summary of our businesses. And notwithstanding, as said, an unusual contribution from Enel Green Power year-on-year, for reasons that I'm going to detail in the next slide, network and conventional generation contributed to the growth of the EBITDA.

Now moving then on Page 10 on the renewable Enel Green Power analysis. As you can see from the chart, we reported an ordinary EBITDA of EUR 3.3 billion, broadly flat year-on-year. The performance was mainly impacted by the following dynamics: first, the lower production volumes due to lower resource availability that had a negative impact of around EUR 250 million in Italy and Spain; then we had another EUR 150 million negative impact from asset rotation; a positive contribution of the early termination of PPA in Chile, already commented in the first half; and higher prices that impacted for around EUR 320 million mainly in Italy, Latin America and Iberia. EBITDA contribution from new renewable capacity during the first 9 months of the year was almost at 0 as if the deployment has not been linear, as I will show you in the next slide.

Now move on Page 11. As you can see from the chart, today, the renewable capacity has increased by around 700 million -- 700 megawatts in the first 9 months. But year-end, we expect to install additional 2.4 gigawatts of capacity. As already commented during the first half result call, in order to comply with the target to scale up the renewable development to 4 gigawatts from 2020, we focused our activity on the opening of new sites and fine-tuning on the whole development processes, which explains the peculiar phasing of installed capacity during 2019. We will reach more than 3,000 megawatts of new installed capacity at the end of 2019 that will fully contribute for around EUR 320 million to the 2020 EBITDA growth targets.

Move now to Page 12 on Infrastructure and Network. EBITDA came at EUR 6.1 billion, EUR 600 million increase or 10% versus 2018, reflecting our well-balanced geographical mix. Around EUR 230 million of the overall increase are due to the outstanding performance of Enel Distribuição São Paulo, where we accounted EUR 70 million of efficiencies and EUR 70 million of regulatory improvement. The perimeter impact associated was EUR 95 million.

The remaining EUR 304 million were driven by: investments in digitization and improved service quality that contributed for around EUR 140 million; regulatory changes for around EUR 250 million, out of which around EUR 100 million associated with new regulatory frameworks in Rio, Goiás and Argentina, and the rest to the recognition of the ativo regulatório in Argentina; then we had higher connection fees for EUR 45 million mainly in Italy; and CPI, FX and hyperinflation weighed negatively for around EUR 120 million.

On retail, and I'm on Page 13, ordinary EBITDA came in at EUR 2.4 billion or plus 5% versus last year. In particular, EBITDA associated with the free market increased by around EUR 100 million or 5% year-on-year mainly driven by a 10% increase in power unitary margins in Italy and Spain, where we added around 900,000 new customers in the period. Volumes declined by around 1% as a consequence of a specific commercial strategy targeting B2C clients and small and medium enterprises.

EBITDA associated with the regulated market proved broadly stable at EUR 470 million, on different combined effects: one, the ongoing migration towards the free market in Italy and Spain that affected the regulated market; and second, the positive contribution from Latin America mainly due to the consolidation of Enel Dx São Paulo and the effect of the ativo regulatório, Argentina. Efficiencies of around EUR 50 million have been achieved mainly in Italy, both in the free and in the regulated market.

Moving to conventional generation on Page 14. Ordinary EBITDA increased by 66% and came in at EUR 1.4 billion. The remarkable EUR 500 million increase in the first 9 months of 2019 is mainly attributable to: the performance of the nuclear fleet for EUR 250 million driven by the higher volumes and better prices, coupled with the temporary suspension of the generation tax; efficiency for EUR 110 million mainly linked to operational and maintenance cost reduction in coal plants as a reaction to the volume and margin contraction; the full contribution of Fortaleza; and the effective hedging strategy implemented in Latin America.

And now that we have gone through business drivers, we can move to the financial management section. Ordinary group net income -- and I'm on Page 15. Ordinary group net income came in at EUR 3.3 billion, EUR 410 million higher than last year or plus 14% mainly thanks to the increase in ordinary EBITDA, which more than offset increase in D&A, other financial expenses, income taxes and minorities. In particular, D&A increased by around EUR 130 million. 80% of this increase is related to the implementation of new accounting principles, IFRS 16, and the consolidation of Enel Dx São Paulo. The remaining portion is related to the higher investment plan we have been implementing.

The increase in financial expenses is solely due to other financial expenses, while the cost of debt in the period declined by around 20 basis points. Other financial expenses grew by around EUR 120 million, following the consolidation of São Paulo, and the higher actualization on termination benefits and pension fund in Iberia. Result from equity investments stood at minus EUR 73 million mainly due to the North America JV unwinding already commented in the first half.

Taxes increased by around EUR 80 million mainly due to EUR 270 million for higher EBT that has been totally offset by positive impacts related to fiscal incentives on intellectual property in Italy; the recognition of deferred tax asset in Argentina and Chile; the fiscal reform in Colombia, where the nominal tax rate moved from 37% to 33%; and higher taxes in 2018, deriving from the sale of BSO in Mexico.

During the first 9 months of 2018, we also booked some positive one-off items, such as the recognition of the deferred tax asset associated with 3SUN hub in Italy.

Net of one-offs, the normalized tax rate stands at 29%, in line with the guidance. Minorities increased by 23%, thanks to the performances recorded in Latin America.

Moving now to cash flow on Slide 16. FFO stands at EUR 8 billion, EUR 700 million higher than last year or 10%, supported by ordinary EBITDA growth. In detail, the cash generation evolution comes from higher EBITDA after provisions for around EUR 1.4 billion or plus 13%; a negative 100 -- EUR 400 million net working capital versus previous year, that is mainly due to the recognition of regulatory adjustment in Argentina already recorded in the first half; and temporary effects associated with the increase in CO2 inventory that we have already commented in the last analyst presentation, and that will be reabsorbed in the last quarter.

Compared to the first half results, working capital dynamics showed an improvement of around EUR 600 million quarter-on-quarter. Our focus on working capital optimization, together with the seasonality profile of CapEx dynamics and the above-mentioned reabsorption of the CO2 inventory will allow us to recover the EUR 1 billion negative working capital during the next quarter.

Higher taxes paid are due mainly to advanced settlement tax payments dynamic.

And free cash flow stood at EUR 1.4 billion, confirming the capacity of the group to cover the investment growth with the operating cash generation.

Before the closing remarks, let's now take a look on our net debt on Slide 17. Net debt stood at EUR 46.5 billion. Changes are driven by: positive free cash flow of EUR 1.4 billion, as commented; and dividends paid for EUR 3.9 billion, up by EUR 500 million or plus 15%; neutral active portfolio management on the period; and EUR 1.5 billion negative FX impact from revaluation of local currencies against the euro. The impact on net debt from currencies is a mere accounting impact. They almost entirely neutralized on the reimbursement value, thanks to our hedging derivatives.

We expect net debt to decline by year-end, thanks to further improvement in FFO and considering active portfolio management activities that we can -- we have cashed in during the month of October, such as the disposal of Reftinskaya. Our gross debt increased by around EUR 4 billion versus the start of 2019 mainly relating to the above-mentioned dynamics on net debt evolution.

And now some closing remarks. So we had a strong performance in the 9 months, processed solidity of our integrated business model, solid cash flow generation fully covers the acceleration in investments, and we'll continue to fuel our growth ambition in the medium and long term.

Our decarbonization strategy is accelerating, as proved by strategic decisions on coal assets globally and our new target on CO2 emission in 2030. The operating growth, the continuous effort on efficiencies and the simplification on the corporate structure put us in the ideal condition to exceed our EBITDA target and to reach EUR 4.8 billion net income.

Thank you for your attention, and let's now open to the Q&A session.


Questions and Answers


Monica Girardi, Enel SpA - Head of Group IR [1]


Okay. We are now ready for Q&A. The first question comes from the line of Harry Wyburd from Bank of America Merrill Lynch.


Harry Peter Wyburd, BofA Merrill Lynch, Research Division - VP and Junior Analyst [2]


Three questions for me, please. So the first one is on the capacity payments. So you won, I think, about 10 gigawatts worth of contracts at the end of last week. So I wonder if you could update us on how that outturns versus your expectation? And whether you could give us any kind of guidance in EBITDA terms on what impact that might have going forward?

And then the second one is on the -- on 2.4 gigawatts of renewables that you commissioned in the fourth quarter. You mentioned that they were going to generate about EUR 320 million of EBITDA in 2020, if I heard correctly. But I wondered how much of that had you originally included in your budget for 2019? Because, clearly, it seems like these projects have commissioned a little bit later than you'd expected. So how much behind budget are you due to late commissioning? So that just gives us a flavor for how much you've kind of made up on an underlying basis to hit or even exceed your EBITDA guidance for this year, or you hit the original EBITDA guidance?

And then the third one is on the coal impairments. Could you give us some color on the timing of cash flows here? So the tax saving on the EUR 4 billion of impairments could be pretty significant. So when would that tax cash savings hit?

And then also, when do you expect the dismantling cash flows to occur? I think you booked an extra EUR 0.8 billion of dismantling provisions, but I presume there were pre-existing dismantling provisions there as well. So if you could give us some idea of the phasing of the cash flow impacts from the coal impairments?


Alberto de Paoli, Enel SpA - CFO [3]


So on the first question, on the capacity payment. Yes, we've got this 10 gigawatts contract at the price of EUR 33,000 per megawatt, and this is for 2022 only. So now, so for the -- it's because it -- we have been awarded in this first tender only on existing capacity. So this is -- the calculation is easy, it's roughly EUR 320 million. It's clear that, first of all, we are getting, in this year, before 2022, we are getting roughly EUR 45 million, EUR 50 million of the mechanism that is in place now. So it's clear that, focusing on 2022, we have -- we will have a higher level of regulated revenues coming from this auction.

Then tenders for 2023 and onwards, will have to be called, say, we think, end of this month. And so we will have the visibility for new plants, and so for 2023 auction because, for the new plants, you will get 15 years of payment, while, for the existing capacity, you will get 1 year only, and then you have to review the tenders.

So all in all, when we will show the new plan, it's clear that -- so 2022 will be in, so then this result, and then we will expect the outcome of the tenders for 2023 and onwards to understand what it would be, so the level of this revenue stream for the year ahead.

Related to the second question on the impact to 2020. Well, when we start, so when we -- if you ask me what was the impact on the previous plan, we were already aware of the fact that we will -- we would have this, say, stop in 2019; stop, meaning that we will increase the most and in the last quarter. Because it was already said the fact that we had to scale up our processes and scale up the number of sites that opened in 2019 to be ready to comply with our target that we have already shown in the previous plan.

So it's clear that in the target we had, we had already a very limited impact in 2019. And on the other side, we add the full impact in 2020 of the 2019 building because, if you also -- if you build all the plants on 31 of December, you have the full impact in 2020. But on the other side, what we have assumed, and we are assuming for the next plan is, in the 2020, our profile will be more linearized. So we will think, not to say 50% of the development in the first half because it's difficult, but not so the 10% that we had in 2019.

And for the dismantling cash flow, it will be paid after the closing of the plants. Remember, that -- so now we are in a little bit in -- try to understand what is the following events because today, we have impaired the asset. Now we have a closure plan that we will show in the Capital Market Day. And there is a path that if we want to follow, remember that we have to get all the approvals then to properly and effectively shut down the plant. This is something that is starting now. And so the solution would be different. So you know -- so there is, in some countries in which, at the end, you will take this plant not ready -- not dismantled, but ready in the second step to enter the market if some gas shock or other things could happen.

So it's something that now that we have taken the decision to shut down and to impair the asset is on the table of all the countries in which we have plants, and so the final outcome will come from the discussion that we will have with -- within the various governments in the country.

The tax effect of the impairment, worth around EUR 200 million on cash flow, and so we will cash in, in 3 years from the impairment.


Monica Girardi, Enel SpA - Head of Group IR [4]


Okay. Next question comes from the line of Javier Suarez of Mediobanca.


Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [5]


I have 3 as well. The first one is on the guidance for 2019. You have been -- if you can explain why the adjusted EBITDA has been increased? The single factor, I guess, that there are several factors, but you can elaborate on the reason for that increase on the guidance now? And also why that is not impacting the net income? So the net income has remained stable, while the EBITDA target has been increased. If there is any specific reason for that?

Also on the -- in terms of guidance, if you can, you had mentioned during your presentation that the base would be a lower debt by the year-end. If you can confirm the number that you said during the first half presentation, that EUR 44 billion number of net debt by the year-end? That is the first question.

The second question is on the effort that the company has been doing on efficiencies. The company has mentioned EUR 200 million. That is exactly the same number that we have during the first half of the year. So if there is any specific reason why efficiencies has not accelerated during the third quarter of the year, and we are still -- we should still expecting EUR 400 million of efficiencies by the year-end?

And then the third and final question is on Latin America. Since the latest conference call with the company management, there has been some changes, particularly on the social situation in Chile and the political situation in Argentina. You can share with us some views, particularly on any conversation with the new Argentinian government. Or you can share with us some views on the new legislation on the -- with the tariff stabilization system that has been approved in Chile.


Francesco Starace, Enel SpA - CEO, GM & Director [6]


Okay, Javier. I'll start with the last question, and then I go to the numbers. Situation in Chile and Argentina, well, so let's start from Chile. So as already commented in the Chilean call, so we do think that now -- so the government is moving the right way to stabilize the country. The government is taking a lot of actions on the several aspect on the -- where the process -- the protest was based, and has already taken action on our specific field, where -- so we think that, at the end, the measures are well designed. It will impact -- will have a limited impact on the sector, while having a big impact on people, so leaving the tariff unchanged for a certain number of years.

Because of Chile -- because Chile has the long-term PPAs already signed and have a very, very long visibility on prices, and because the long visibility of contracts already signed is suggesting -- it's saying that prices, the average, the blended prices will go down, it's clear that proper policy to offer today discount that will happen in years on people that are asking not to have an increase in tariff is, I think, well designed. And I think that if the government will move with these steps so it can solve the situation in Chile, and we are backing these actions. And while you will see also in our business plan -- on our Capital Market Day, you will see that -- so the apuesta for Chile of this group will be strong to support this path.

In Argentina, well, so now it's early to say what would be a clear policy. It's clear that Argentina has been already impacted by FX inflation. So it's clear that the overall business perspective have changed. But on the other side, so the first interaction, we -- so we came home with an idea that some changes will happen, but that these changes will not -- so against a proper business development in the country. So also here, so we have already offered our contribution to try to design and to implement changes that, on the other side, will -- so will support an increase in quality and an increase in investment in the country. And we are so quite optimistic on the fact that this could be implemented.

On guidance. So yes, we have this increase in EBITDA, not an increase in net income. This because -- so then, we have a lot of up and down in this 2019 because, as we said, we got roughly EUR 250 million of impact on volumes. We had impacts on prices on the other side. We had a delay in renewables, but we have some one-off like the AngloAmerican one-off that covers this gap. So all in all, if you leave all this up and down unchanged on the target of EUR 17.4 million, we can say that from EUR 17.4 million, that was the original target, to EUR 17.8 million, the big difference of the EUR 400 million are mainly related to things that don't have an equal impact on net income.

I'd say the first is IFRS 16 for EUR 200 million, and you know that the impact on net income of this increase in EBITDA is 0. Then we have the RAB, the General Electric joint venture unwinding, and you know that this kind of effect is increasing EBITDA, but not increasing the net income because you have a deduction in net income that is more or less the 70% of the overall impact on EBITDA. And then we have -- so the Resolution 15 (sic) [Resolution 50] in Italy for EUR 100 million. This is an accounting effect that you have -- you increase EBITDA, but you deduct the whole amount on the D&A. And so you got 0 impact on net income, while you have the whole impact on cash, because this is a debt portion. That's why -- so EUR 17.8 million are not translating to an increase in net income.

On the other side, when we -- on the debt side, so the target -- the guidance that we have today is not EUR 44 billion. The guidance we gave for the full year is now 49 -- EUR 45.9 billion or EUR 46 billion. So this is EUR 2 billion higher than the target we gave in March.

So to redefine what is the steps from the original target, EUR 14.8 billion, to EUR 46 billion or EUR 45.9 billion, these are the steps. So first of all, we have an impact of roughly EUR 2 billion of FX impact because now we are assuming the final figure of -- or EUR 1.11 billion, and this gives us EUR 2 billion of increase in debt. Remember that this increase is not a real increase in debt because our dollar debt is fully hedged, so this is only an accounting impact. This is our EUR 2 billion.

Then we have EUR 1.4 billion, that is the impact of IFRS 16, and this is another accounting effect. And then we have a EUR 700 million impact of a delay of a disposal that was assumed at the end of this year, and it probably will be moved at the first half of 2020. With the exception of the accounting impact and this delay in 1 disposal, the debt is fully in line with our targets.

The third question is on efficiencies. And so -- yes, so the -- normally, the efficiency plan will get the maximum impact at the end of the year. This is because of some of the closing effect that each year we have. So we have an acceleration of -- not acceleration, but -- so at the end, the vast majority of action will come at the end of the year, because it was -- has been implemented at the beginning of the year. This is something that every time will happen, so you will see the last quarter efficiencies that will be higher than -- so not higher than the EUR 200 million over the first 3 quarters, but a big proportion of the entire target of the year.


Monica Girardi, Enel SpA - Head of Group IR [7]


Okay. Next question comes from the line of Anna Maria Scaglia from Morgan Stanley.


Anna Maria Scaglia, Morgan Stanley, Research Division - Research Analyst [8]


Three questions, if I may. The first one is related to CapEx. Can you give us an indication of what you expect CapEx to be at year-end? And also, maybe if you can provide a view of how much is related to assets that will enter in operation then in 2020?

The second question is regarding D&A, and in particular, what could be the impact of the write-offs on D&A going forward? I mean, next year and/or the coming years? And as you're doing the write-down this year, I guess, the G&A should be lower next year, already, but I'm happy to have your view.

And the last one is, we've seen news flow about Open Fiber over the last few weeks. I was wondering if you can provide an update there or if there is any new news or it's rumors of the press or whatever.


Alberto de Paoli, Enel SpA - CFO [9]


So Anna Maria, I'll take first the last question on Open Fiber. So update on Open Fiber is -- so we have no updates on Open Fiber. Open Fiber is doing well on its operating model, and so it's deploying the network, is going to close a good year also in terms of economics, and this is it.

So we know that -- so there are rumors of processes in place to try to buy the company. These processes are not seeing us involved in any kind of involvement in these processes. So for us, today, I could say, are only rumors, and there is nothing more than this that I can say.

For the CapEx indication, we drive to roughly EUR 9.9 billion, and you -- when you ask how much related to asset in operation in 2020, so I'll say, if I understand correctly, so this EUR 9.9 billion, so we have roughly EUR 6 billion in asset development and -- for the 2019. And roughly EUR 2.3 billion in asset management and EUR 1.7 billion related to customers. So it's clear that, more or less, asset in operation, or what we call asset management, we don't see major changes on average on -- for the next year in this asset class. The vast majority of changes, if changes will arise, are related to the asset development class.

And when it comes to D&A impact. So the D&A impact coming from 2020 will be roughly EUR 120 million each year. Okay. This is the D&A impact on -- of the write-offs. It's roughly, on average, is EUR 120 million each year.


Monica Girardi, Enel SpA - Head of Group IR [10]


Okay. Next question comes from the line of Enrico Bartoli from MainFirst.


Enrico Bartoli, MainFirst Bank AG, Research Division - MD [11]


I have 3 of them as well. The first one is regarding the net closed business in Italy. The result in 3 quarters, if I'm right, was even higher than last year when you had a one-off of EUR 150 million related to the Resolution 50. So I wonder if there are any one-offs there and if you can give us some guidance on what you expect in terms of EBITDA from this business for the full year?

The second question is regarding still on Italy. If you can update us on the discussions regarding your expectations regarding the liberalization of the retail clients that should happen in next year?

And the last one is related, again, to that. First of all, you mentioned the issue of bonds are very favorable conditions related to SDG bonds. If you expect any additional issues of this kind, and the impact on your cost of debt?

And the other one, if you have any impact on your debt from the recent evolution of the Latin American countries due to the political evolution there?


Alberto de Paoli, Enel SpA - CFO [12]


Okay. Enrico, first of all, on Italy on liberalization of retail clients. Well, I would say that the discussion are now starting a little bit. And so we will say, restarting around the way to liberalize. I think we are at the very first stage. So now, an open public discussion has been held by the regulator to gather what are the position of all the parties. So it's the very beginning of this process.

Today, we don't have any other way to try to understand how and when the liberalization will be, so we'll stay stick today with the date of July 2020 for the full liberalization. It's clear that, starting from now, 6 months are not so such a big period to sort of discuss and then to decide how and when to open the market.

For distribution in Italy, we don't have any other one-off. And so the guidance will stay around EUR 3.8 billion.

Issue bonds, so we -- 2 main important points are, so first of all, that from now on, our debt -- so our new issuance will be made on the full sustainable prospect. After this EUR 4 billion, we don't have any maturity. So in the foreseeable future, so that we can only understand or sense to do some issuance to get some other advantages, but I think for 2019, we will not add any other issuance.

Impact on cost of debt, I ask you to wait a couple of weeks to discover how this strategy and the future strategy we will do will affect our cost of debt. And I would say that we are not seeing any relevant impact on debt from latter currencies evaluation. It's clear that the overall currency devaluation, if you take into consideration also the euro-dollar worth EUR 2 billion, as I said before, in 2019, but -- so if you look this EUR 2 billion and you look the -- our hedging levels of our debt, this EUR 2 billion are a pure accounting number. But because at the end of the period, so for the cost of the final debt, we will not have any impact on the FX volatility.


Monica Girardi, Enel SpA - Head of Group IR [13]


Next question comes from the line of Javier Garrido from JP Morgan.


Javier Fernandez Garrido, JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst [14]


I think most of my questions have been addressed. So I just would like to get some -- firstly, to check if I understood correctly, that the 3.3 gigawatts that have been impaired in Italy are all coal or if there is any other capacity there.

And secondly, you just mentioned a EUR 3.8 billion of EBITDA guidance in Italian networks. Would you mind to strip out what is recurrent and what is nonrecurrent?


Alberto de Paoli, Enel SpA - CFO [15]


So for the 3.3 gigawatts impaired, Javier, in Italy, yes, they are all coal.

On the EUR 3.8 billion guidance, so we have roughly EUR 150 million related to the liberalization quanta. That is not recurrent because it will end, not this year, not the next year, but one year in the future, will be ended. So out of this, the other part is fully recurrent.


Monica Girardi, Enel SpA - Head of Group IR [16]


Next question comes from the line of Stefano Bezzato from Crédit Suisse.


Stefano Bezzato, Crédit Suisse AG, Research Division - Lead Analyst on Southern European Utilities [17]


Two questions from me. Going back on the impairment of the coal assets in Italy, 3.3 gigawatts. The total installed capacity, if I'm correct, is around 6. Can you explain how to reconcile this difference?

And the second question, if you are planning any asset rotation deal by the end of the year.


Alberto de Paoli, Enel SpA - CFO [18]


Stefano, I think your first question is -- so I don't know it's -- of -- on the overall impairment we made. So I tried to explain what we did. So we have impacted in our impairment or selling, so in Chile, Russia, Iberia and Italy, roughly 10 gigawatts of capacity. So we didn't impair a certain number of assets and gigawatts related to different condition of this plant, mainly because we have -- for instance, the number of -- the megawatts not impacted is, say, around, in Italy, 3,000 megawatts; and then we have another 115 megawatts in Chile that are not impacted for different economical condition.

In Italy and Spain, because these plants are fully regulated, so our essential plant in Italy or our Highlands plants in Spain that are a different regulation. And because in Chile, one of the plant is -- so the agreement of the shutdown of this last plant is in 2040. And so this is not forcing us to impair the other assets in Chile, where the agreement was to shut down the plant early in the year, and so triggering an impairment.

As I said, we don't have any asset rotation deal by year-end. We have to -- so we have already cashed in the first and second step of Reftinskaya coal plant that we have sold in Russia. We do think that other minor deal could come, but -- so we are -- so now we can understand if this would be exactly within the 31 December or 1st of January, but we have other minus asset rotation deals in place while the asset rotation of the selling that we add in the target, and I said, we have moved at the first half of the next year surely will not come within the year.


Monica Girardi, Enel SpA - Head of Group IR [19]


Our next question comes from the line of Elchin Mammadov from Bloomberg.


Elchin Mammadov, Bloomberg Intelligence - Utilities Analyst [20]


I have 3 questions, please. The first one is on sustainable bonds. What is the spread over nongreen bond, basically? Is it the 25 bps penalty that you mentioned? Or is it higher?

The other question is on capacity additions. We've see that these were back-loaded for 2019. Should we expect a more equal distribution for 2020-'21 in terms of new capacity additions in renewables or not?

And finally, on the -- on Spain. I mean, we've seen the new elections and possible corporate tax increase. Is it some area we should be worried about in your view or not? I'm not sure whether you can comment on that, but I thought I'd ask.


Alberto de Paoli, Enel SpA - CFO [21]


Well, Elchin, I'd say, on SDG bond, a couple of points. We have a spread over nongreen bonds of 25 basis points. And the second is -- so at the end, if you take the U.S. bond, what we were seeing is that getting this discount of 20 basis points versus a brown bond, for 5 years, this means 100 basis points of discount. So the mechanism is that, after 2 years, if we don't achieve our target, the step-up is 25 basis points. So all in all, having issued at 100 basis point discount over 5 years, the step-up is 75, so you are getting always a discount, a minimum discount 25, that could be 100 if we achieve the target of the SDG bond.

For capacity additions in renewables, yes. Taking account that never in the life of Enel Green Power, we can say that we can achieve a linear development. So saying, having 50% of capacity -- new capacity in place in June. But a distribution like this year, that is roughly 90% or 70% in the last quarter is unusual. So more or less a normal distribution of renewables is roughly 40% first half, 60% second half.

Well, so every time that we have new elections, so every time there is a discussion about around an increase in corporate tax, really. So I think it's too early today, too. The government has to be formed and the coalition. So it's unknown today to talk about a corporate tax increase. It's clear that -- so Spain, so coming to our sector, is involved in a deep, big change in terms of energy transition. This change will ask for huge amount of investments in all the sector of the energy sector, in distribution, in renewables and everything. It's clear that increasing corporate tax in a period of big investments needed would be something that the new government will take into consideration for the new policies.


Monica Girardi, Enel SpA - Head of Group IR [22]


Next question comes from the line of Antonella Bianchessi from Citigroup.


Antonella Bianchessi, Citigroup Inc, Research Division - Director and Head of European Utilities Equity Research [23]


Just a few questions. On the ForEx impact on your data, can you tell us when this will be reabsorbed? When we will see the accounting effect with a positive impact on the net debt?

The second question is related to the renewable numbers for the U.S. Are you still comfortable with the guidance for EBITDA of distribution on a full year basis?

Another question is on the sort of distribution in Italy. You already explained but upgrading the guidance from 3.7 to 3.8 is actually due to IFRS? Or there is something else in this part?

And then also on the financial charges, you were targeting EUR 2.2 billion for the full year. This seems now to be a little bit off. So do you expect to benefit from the refinancing of the debt in Brazil in Q4? Or we will see this benefit only in 2020?

And last, on the asset consolidated metadata, there is a negative. Can you explain where it's coming from? And it was also in H1, but continued to remain negative. And if this would be reversed in the next 2 years?


Monica Girardi, Enel SpA - Head of Group IR [24]


Antonella, sorry, your line was pretty bad. We are not sure to have catch your first question. Can you just repeat that, please?


Antonella Bianchessi, Citigroup Inc, Research Division - Director and Head of European Utilities Equity Research [25]


Yes. The first question is on the timing of the reversal of the negative impact of the ForEx in the past. When we would see the hedging coming through and before the debt having the benefit of this EUR 2 billion?


Alberto de Paoli, Enel SpA - CFO [26]


Antonella, first of all, time of reversal, negative impact of FX in the debt. So as said, it will not be reversed in the debt, because the debt is already hedged 100% at the strike price. So everything that is negative or positive today is negative, will not affect the debt at the reimbursal time. So this is the way in which we account the debt.

But on the dollar, roughly 90% of debt in dollar is fully hedged at the time in which we do the hedge. To give you an example, so we have now the last issuance, and we have fully hedged the issuance and we fully hedge this issuance with CSS, that is also sustainable. And it's the first sustainable hedging that we had, combined with a sustainable bond. And this is, I think, the answer. So when you got something related to FX impact, it's something that happens only in the accounting field, not in the real financial field.

Second is renewable targets. Yes, we -- so if you say we are comfortable, yes. So more or less, the guidance is around EUR 4.5 billion and EUR 4.6 billion. It's clear that now it's raining, so it's -- the guidance of renewables depends a lot on the last quarter rains and wind so we have this range of EUR 4.5 billion to EUR 4.6 billion.

Distribution in Italy. Say -- so the difference is for the IFRS impact. And on the financing charges, in EUR 2.2 billion, now -- we have -- EUR 2.2 billion is now EUR 2.3 billion because of the IFRS 16. So also here, we have an impact because you know that the operating leasing now would be accounted as the financial costs. So the EUR 2.2 billion with the IFRS 16 is EUR 2.3 billion. And so we don't expect any impact on refinancing in Q4 because what we are doing in the issuance is something that is needing for our needs in 2020. And so -- but we don't have any cost of carry in taking the money now because we got this money at almost 0 cost.

And for the equity consolidated asset, as you can remember, we had this EUR 120 million of upside in the EBITDA, because we -- both from the joint venture we had with the General Electric at better prices. So we got this impact on EBITDA level. But because we both, on the 50% -- because of the joint venture from which we bought this asset was 50% ours, so we got the impact of a bad sell in the EBIT line. So you have to look at these 2 things together to get the final impact of this good deal at the net income level.


Monica Girardi, Enel SpA - Head of Group IR [27]


And the next question comes from the line of Emanuele Oggioni from Banca Akros.


Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [28]


The first one is on the capacity market on the second auction. My question is, if you are planning to add new capacity for 2023 in the second auction, such as gas peakers or other efficiency plants, et cetera.

The second question is on Chile, which is the current situation for your day-by-day operations? And also, as regards the tariff deficit mechanism in Chile, could you give us your current estimate on the net working capital impact on your figures starting next year on a constant ForEx basis?

And the third one is on the -- you give us the net debt guidance for this year. And I wonder what you said you were sanctioned embedded in this guidance as regards to net working capital?


Alberto de Paoli, Enel SpA - CFO [29]


So Emanuele, first of all, let me take the secret about what we are going to offer in 2023, because it's an auction and you understand that if I say something, so I can help competitors in this auction. So I think the auction is due at the end of November, so something could be disclosed in the Capital Market Day and something could be disclosed soon after.

So on the current situation on day-by-day operations in Chile, first of all, we are out of our office. So this is the big difficulty we are facing now, because -- so we are now -- our colleagues have spread to different offices around the burnt one. And this is the most difficult that we are facing now in Chile. And this is something that is difficult also for the day-by-day operations. So we have a lot of issues. But we are doing well in managing the situation.

On the other side, on the impact on the net working capital, I would say that it will depend a lot on what will be the level of FX in the different tiers of -- in which we will have this tariff freeze. My first cut of calculation is giving us an impact on the net working capital of roughly $500 million.

Then on the net debt guidance, so we are driving to 0. I would say that a range between 0 to minus EUR 200 million will depend on the timing of the last quarter investment, and other some minor aspects.


Monica Girardi, Enel SpA - Head of Group IR [30]


Next question comes from the line of Alberto Gandolfi from Goldman Sachs.


Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [31]


Just a couple left on my side, please. The first one is that you were talking about more than EUR 100 million of EBITDA per gigawatt added for this year. Would it be fair to assume that, as the share of solar grows in the portfolio, wherever it's not merchant, perhaps a good rule of thumb is 1 gigawatt, EUR 100 million of EBITDA? So when you move to 4 gigawatt a year, are we going to expect about EUR 400 million of EBITDA, which is probably nothing more than a 6% reduction term on these investments at EBIT level?

And the second question is on the capacity market. Can you please share with us your expectations of what's going to happen to the MSD ancillary services in 2022 and onwards? So how much of the EUR 320 million in EBITDA increase on the capacity market could be shaved off by a reduction, perhaps, in ancillary services?


Alberto de Paoli, Enel SpA - CFO [32]


So first of all, what we are -- we have out on, so, what we call EBITDA on CapEx, so more or less today, so we have a range of -- so 1 gigawatt -- 1 megawatt for EUR 1 million. We have out roughly 12%. So, say, because of solar is a little bit less on the CapEx per megawatt and on EBITDA, it's EUR 100 million is a good calculation, it's a good rule of thumb to define what is the EBITDA addition coming from the solar development.

So what is going to happen to ancillary services? I'd say, God knows, because the problem is that you have a lot of parity movement to try to understand what is going to happen -- so not -- so long term. On one side, the shutdown of coal will impact differently the way which the coal plant will be shut down. The second is, that a huge amount of renewables, storage, demand response is needed to comply with the shutting down of coal. And obviously, the reserve margin will be different in different cases.

Having said that, we had already, in the previous plan, an idea on what would be the impact related to a decrease in the service market. I do think that you can take an overall 30% -- 20%, 30% reduction in ancillary service coming from the outcome of these tenders, tenders that have been awarded for 2022 at the maximum price. So this is, all in all, what you have to take into consideration in the calculation that, for sure, 2022 is giving us a profile that will be more based on regulated revenues versus what we have today.


Monica Girardi, Enel SpA - Head of Group IR [33]


Next question comes from the line of Lueder Schumacher from SocGen.


Lueder Schumacher, Societe Generale Cross Asset Research - Equity Analyst [34]


Three very quick questions from my side. The first one is on Argentina. You mentioned that the government was very keen for you to commit to CapEx, which is not surprising, I guess. Are you still committed to only invest any money earned in Argentina in Argentina? Also it's kind of ring fenced? Or would you be prepared to commit more CapEx if it does appease the new government?

The second one is on Italian retail. I mean, the question about the time line for full liberalization, when it will be moved, comes up on every quarterly result call, and every time you tell us that nothing is happening. We're getting closer and closer to the deadline. I mean, what's your best guess as to when the government will finally move? Or do you think we go all the way to July before something is happening there?

And last one, sort of following up, I guess, from Antonella's question on the FX hedges. You said they're fully hedged. Is it on the time line of the bond you're issuing dollars? So in other words, you're issuing dollars, and then immediately swap everything back into euros?


Alberto de Paoli, Enel SpA - CFO [35]


Okay. So for the first question, Argentina, say, we got the impression for the first talks that the government is looking not to stop the foreign companies to invest in their country. It's clear that now there are talks, and so now facts will happen, so in 2020 and onwards. So it's clear that we are very keen in this and commit ourselves to do more CapEx, because the line we followed, also during the last government, was to work with the government to ease and to -- mainly to restore a regulatory framework that would allow us to invest more. But we invest in the last 3 years exactly what we generated in the country. So it's clear that the line is not going to change in the next month, mainly because now we have to understand clearly what the policies of this new government will be in practice.

On Italian retail. Well, it's true that every time we met, we say this is the year in which the market will be fully liberalized, and then, it has been postponed. It's clear that it is not an easy decision because it's not affecting a huge amount of energy produced and sold, but it's affecting a huge number of people, because we are talking about 18 million of customers and people. So it's a very delicate political decision. And we understand that a little bit of stability is needed to put in the right light the discussion and to take the proper decisions.

And for the third question, so we -- at the time in which we issue bonds or other kind of lines, we do immediately, the hedge of the issuance. So the cash flow hedge is effective from time 0. So we do the 2 things in parallel.


Lueder Schumacher, Societe Generale Cross Asset Research - Equity Analyst [36]


And that's all the lifetime of the bonds?


Alberto de Paoli, Enel SpA - CFO [37]




Monica Girardi, Enel SpA - Head of Group IR [38]


Next question comes from the line of Tancrède Fulop from Morningstar.


Tancrède Fulop, Morningstar Inc., Research Division - Equity Analyst [39]


I have just one left on my side. I just wanted to know how would you effect the lost volume from coal plants to serve your customers, especially in Italy? And also, if you could confirm that the coal plants were all vacating in 2019?


Monica Girardi, Enel SpA - Head of Group IR [40]


Can you just repeat quickly your question? Because your line is a little bit disturbed.


Tancrède Fulop, Morningstar Inc., Research Division - Equity Analyst [41]


Okay, sorry. Yes. Just one question. How would you offset the lost volume from your coal plants to serve your customers, especially in Italy?

And also, if you could confirm the profitability contribution from the coal plants that you will close?


Alberto de Paoli, Enel SpA - CFO [42]


Well, first of all, on volumes. Remember that this has been and is already today a very low variable part of our production. So as we presented last year, you take Italy and Spain together, and the gross margin of our production in 2018 was EUR 5 billion, only 10% is related to the thermal generation. And I'm not saying in the thermal generation, we have gas and coal. So this is the very point. It's not so big, the impacting margins of such a big reduction in production.

And as said already in 2019, I said that we have already got EUR 100 million of cost cutting related to the low utilization of coal plants. So the first offsetting of this low margin is on cost cutting.

And for the profitability of the plants that we will close, we have, on one side, as said, more or less, today, on the impairment side, we are improving. So we are reducing the D&A of the next years of roughly EUR 120 million because of the impairment. We will suffer some reduction in EBITDA because of the lower volume, also the lower margin. And today, the contribution to profitability of the plant that we are going shut down, if you ask me what is the contribution in 2019, the contribution is negative. And that's why we are driving this impairment.


Monica Girardi, Enel SpA - Head of Group IR [43]


Okay. All of the questions that were registered have been answered. So we are now closing our 9-months call. As always, the IR department is at your disposal in case you need any clarifications.

Thanks for participating. And we truly hope to see you in 2 weeks' time. Thank you.