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Edited Transcript of ERG.MI earnings conference call or presentation 14-Nov-19 8:30am GMT

Q3 2019 ERG SpA Earnings Call

16149 Genoa Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of ERG SpA earnings conference call or presentation Thursday, November 14, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Luca Bettonte

ERG S.p.A. - CEO & Executive Director

* Paolo Luigi Merli

ERG S.p.A. - CFO

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Conference Call Participants

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* Emanuele Oggioni

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

* Roberto Letizia

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

* Sara Piccinini

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

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Presentation

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Operator [1]

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Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the ERG Third Quarter 2019 Results Conference Call.

(Operator Instructions)

At this time, I would like to turn the conference over to Mr. Luca Bettonte, the CEO of ERG. Please go ahead, sir.

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [2]

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Good morning, everybody, and thanks for coming to this conference call on our third quarter '19 results. As usual, here with me, there is Paolo Merli, Corporate General Manager and CFO. We start from the Chart #4, showing the highlights of this quarter. Like the previous quarters, we posted slightly higher result in each technology of our generation portfolio but for hydropower.

Let me give you a general overview about the main business drivers and trends in our industry that has affected the performance for this quarter, while Paolo will take you through a deeper and thorough analysis of the figures, also for the 9 months.

Talking about EBITDA as well as focusing on energy prices that, in Italy, on average, were lower year-on-year in all the different zones. It was due mainly to the drop in natural gas prices that began in January and became stronger also in the third quarter and despite the significant growth of the CO2 cost per ton, while electricity demand in the country was almost stable in the period.

On one hand, these trends, associated with a very poor wind availability, have penalized the results in wind in Italy, though partly mitigated by the hedging transactions. But on the other hand, they have underpinned the good performance in thermal generation, plus 59% year-on-year, to give the top line in wind, we adjusted 30 megawatts results on the incentivized scheme in this quarter.

On the contrary, energy prices abroad were higher than last year. This trend is associated with an overall higher production, also boosted by a larger permit of 83 megawatts in France and 55 megawatts in Germany, allowed us to post in wind abroad very good in our results by doubling last year's results for the quarter. In hydro generation, the performance was very low year-on-year, minus 47%. So on top of the mentioned lower energy prices, we had lower price volatility, and above all, a very low water availability as compared with last year. This lower availability of water has reduced the modulation and flexibility of the hydropower plant to take part, as usual, today, in dispatching market services. Today, we can define 2019 as a year for Central Italy, like in 2017, while bearing in mind that 2018 was an extraordinary wet year.

Let me conclude with solar generation whose results have been very high, plus 85% versus last year. That witnesses once again the very high quality of the solar panel acquired in January.

Moving to the net profit, where profit was lower year-on-year, EUR 75 million versus EUR 92 million. Looking into the 9 months now. It was as a result of EBITDA, as just commented, coupled with much higher depreciation from the larger-assets perimeter. All of that, partly offset by the quite lower financial charges, thanks to the positive outcome from the efficient liability management program carried out over the last several quarters.

As for the net debt, it grew to EUR 1.57 billion. It takes into account the latest acquisition of 34 megawatts in Germany paid some EUR 84 million and the benefits from the reduction of the timing of the payments and the -- or the incentives accrued that has been made by GSE. So far, it includes some EUR 400 million CapEx, EUR 120 million dividend distribution, aside from the EUR 50 million costs related to the reversal effect of the fair value book to the purchase price allocation date of ERG Wind in 2013 of the project financing loans early repaid. That's very quickly what happened in this first quarter for our result.

Moving on to Chart #5. On this chart, we have proposed our latest relevant developments. So we keep on deploying the business plan through a mix of increasing capacity associated with stable cash inflow from medium-term contracts as of the new capacity in coupon investing by seizing an opportunity in our selected countries, where we are developing also a pipeline of about 1,000 megawatts, adding up, France and Germany while in the U.K., there are some 200 megawatts under construction. We have also entered an agreement with ACEA to sell some 1.5 terawatt power over the next 3 years. We think this contract has very important, for it paves the way for much larger and long-standing supplies of energy to ACEA as well as because it includes a specific provision to sell under the mechanism defined pay as produced, all the energy generated by our first ever re-bladed wind factory of the year. It is a pure fixed price medium-term PPA.

And now let me also mention that we have entered the capacity market, for we took part last week to the first auction of capacity in Sicily. And we have been awarded with some 340 megawatts, securing some EUR 11 million revenues in 2021 (sic) [2022]. Let's say that our thermal plant once again confirms this solid source of profit. On the last bullet, we have reported a further yearly reward.

Let me put it this way, simply, we all are proud of it. And now I will hand you over to Paolo.

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Paolo Luigi Merli, ERG S.p.A. - CFO [3]

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Thanks, Luca, and good morning, everybody. Let's comment the quarter, which wasn't good as we could have reasonably expected in August when presenting our June results. It was poorer in terms of both price scenario and volumes. Volumes driven down by a prolonged dry season in Central Italy, where we have our hydroelectric plants. And also poor or weaker wind availability in some regions in Italy where we have significant exposures. These negatives were, nevertheless, compensated by the contribution of the new assets, which is the main key message of this set of results and the solid performance of our CCGT plant in Sicily. But as I mentioned, the price scenario wasn't supportive. So let's start commenting on that.

I'm on Page #7. You see here, power demand in Italy was up 1% year-on-year in the quarter. And you can here see the trends for different sources in Italy, all up year-on-year, and particularly, hydro and wind, up 7% and 8%, respectively, in the count. So the rise in hydro was particularly driven by the heavy rains in the north, but very, very poor in Central Italy as said. This should explain the gap between the performance of hydro on average in the country and for ourselves.

Wind more in line because the 8% increase was backed by the increase in its total capacity in the country, which, more or less, rise for the same amount. In our case, with our asset base, which remains flat year-on-year, we had reduction in wind production also because of some exposure in some regions, like Puglia and Calabria, where the anemology was particularly weak. This shortage from hydro and wind was nevertheless in terms of volumes offset by higher solar production in Italy, thanks to the larger perimeter and as well as higher production from wind, in particular, in France and Germany, where we have -- we had a significant increase of our assets.

Last but not least, our CCGT volumes were up, driven by very favorable trading conditions in Sicily. As said, electricity prices in Italy were not so good during the third quarter. I think the chart is self-explanatory. Weak PUN, national price of electricity driven by the pressure we have seen over the last few months but in particular during the summer on gas price, this was only partly offset by the rising CO2 price.

All in all, the price indicator for us in Italy was EUR 143 because the weakness -- at the weakness of the electricity price, you should add the lower value of the incentive, from EUR 99 last year to EUR 92 per megawatt hour in 2019. As said, the hedging actions taken over prices, both in 9 months and then in Q3, mitigated the effect of the price scenario. Price scenario, which was very supportive in terms of thermal generations, you can see here from the chart that this fast spread moved up from EUR 16 to EUR 23 per megawatt hour, and in particular -- was particularly good in Sicily because there we still enjoy 15% premium compared to the national average prices. Abroad, again, you have here all the unitary revenues related to our assets in the different countries. Remember that in France and Germany, we have basically a feeding direct system. So the prices are related to the tariffs. Actually, while in Poland and in Romania, the price is part made of the merchant price. And I shall underline that the trend of the prices are quite good in Poland and Romania, but basically in Poland related to the increase in origin certificates value.

Let's move now to Page #8. Here, I will comment in a nutshell, the results for the first 9 months. It's the only page where I'm going to focus on the 9 months, but just to give you a better and comprehensive picture of our trends in this year.

So we posted EUR 380 million, slightly up but basically in line with last year. But this has incredibly resulted in a 0-sum game, but actually very, very different effect, as you can see here. First of all, I comment on hydro, you see a drop of EUR 54 million. It's a very, very large drop. We have already commented in several ways, but in the end, the volumes turn out to be much weaker than we could reasonably expect the cause of the very dry season started at the end of 2018 and was prolonged till a few weeks ago when fortunately started raining and our reservoirs are now starting raising a little bit more. Then the higher wind production here. The increase in production were mainly driven by the new assets in France and Germany. In solar, again, we have a solid contribution from solar and this is due to the new assets we have consolidated since January 1.

While the CCGT is on a like-for-like basis on the same plant, but the business environment was much, much better for this brand. So all these segments are up but unfortunately offset by a large drop in hydro segment -- in the hydro segment.

So let's now comment on segment-by-segment, starting from Page 9, wind. But Q3 EBITDA was EUR 43 million, almost 8% up for the reasons I've already commented. Let me just underline, stress, the large increase in volumes we had in our countries outside Italy, particularly in France, you see from the chart, plus 80% of volumes; and in Germany, plus 131%. I also like to say that this growth in terms of megawatts came about 60% from M&A, it's true, but 40% came from the development of our pipeline, which is the first evidence of the delivery and the roll out of our business model, which relies on different growth stream, and this trend should accelerate going forward.

Let's move now to Page #10. Solar. Here, again, there is no more to say compared to what we have already commented. Just let me underline the huge, again, huge increase in volume, 75 gigawatt hour produced over the quarter, which means plus 68%, and this reflects the larger perimeter and consider also that the unitary revenues went up from roughly EUR 300 per megawatt hour to roughly EUR 320 per megawatt hour because the new asset Andromeda enjoyed even better incentive scheme than the portfolio of ForVei.

So let's moving on, hydro. I think, really, there is no more to say. And we are touching from different angles the performance of the hydro business. And let me add that everything played against the economic performance, not only the availability of water, not only the scenario, the incentive but also the MSD market, so the secondary dispatching service market, which provides very, very little revenues to the plant in the quarter and actually in the 9 months.

Let me add maybe as a relevant information that our water reservoirs at the end of the quarter were broadly in line compared to the same period last year but higher than the situation at the end of December. And fortunately, they have been rising in recent days, in recent weeks, following heavy rains, finally, also in Central Italy.

CCGT results. I'm on Page #12, the EBITDA was EUR 25 million, plus 39% year-on-year. I think this plant once again proved the fit in our portfolio, which is quite complementary to the other assets. The performance, I've already commented, was driven by the higher clean spark spreads, the location of the plant in Sicily and the higher volumes driven by the better business environment. And let me also underline that the EUR 59 million of EBITDA posted by the plant in the first 9 months are already higher than the amount posted for the full year 2018. So this, I think, speak by itself that the performance of the plant is very good.

Let's now comment quickly on investments because I think Luca has already touched all the factors that drives our portfolio, our megawatt installed up quite considerably. We have invested, and let me comment on the 9 months, which I think is more or better representation of what the group is doing. We invested EUR 401 million over the 9 months, out of which EUR 364 million were invested in M&A, including the Andromeda acquisition in the solar in Italy, the acquisition of 52 megawatts in France and the 34 megawatts most recent acquisition in Germany.

I think all these moves have been object of a specific press release, so you know everything, but I think it's important to underline the amount, the considerable amount of investments we went through during 2019. EUR 25 million was invested organically in wind developments, the conclusion and the finalization of the construction of Linda wind farm in Germany, which was up and running since June, plus other activities in the U.K. and the carry-on of the preliminary activities in -- for powering and re-blading.

I shall also remind you that in the period -- in the third quarter period, that the re-blading at Avigliano in Basilicata, 13 megawatts was completed with good satisfaction and is now up and running. EUR 12 million of maintenance CapEx is spread across all our technologies. So obviously, I think it's an important number because if extended to the fourth quarter, it will lead to a number which is below EUR 20 million, which gives a sign of how much we are investing to grow and how much we are investing to maintain our prices, considering also that maintenance OpEx are already in our profit and loss.

Let's now comment on the financials. I'm on Page #15. Adjusted profit and loss. Adjusted, why? Because let me again remind you that these figures are shown on an adjusted basis, so without including the effects of IFRS 16 and 9 as we believe this gives you a representation that is more consistent with our cash items. In any case, all these effects are included in the reported figures and well explained in our profit and loss statements. So that said, let me comment on the profit and loss. I've already said about EBITDA. Depreciation is quite on the -- on its upward trends, given the capital intensity of our investments and mainly reflects all the new assets we have already commented. It's positive to see that despite the increase in the asset base, the financial expenses were in line with last year, even though the net debt has increased following the investments because the cost of power debt is still on its downward trend. As a matter of fact, the gross debt cost was 2.7% in the quarter compared to almost 3% in the same quarter in 2018.

Taxes. Tax rate in the quarter, even though is not very representative, was 43% against 26%, mainly reflecting the lower pretax. So there is a little bit of distortion in this number. But also given to the abolition of the tax breaks known as ACEA, which accounted for EUR 2 million positive in the third quarter of 2018. Minorities, it's a small number but still there. And following the acquisition of Andromeda which we own 80% -- 79.5% -- 78.5%, sorry.

As a result of all this, the adjusted net profit was EUR 7 million in the third quarter against the EUR 17 million posted in third quarter 2018, but when looking at the 9-month number, though a little bit lower than last year, was still solid, EUR 75 million of net profit. But as always, we are -- we like to say, it's more important to focus on the cash flow generation and see that in the quarter where there was no dividends to be paid or investments were a little bit lower than in the first part, the leverage is appearing again in our cash flow statements. The net debt is going down from EUR 1.662 billion to EUR 1.569 billion, underlining a leverage of 47% against the 49% registered at the end of June. So just commenting, item by item, from left to right, we have the EBITDA, the CapEx, which includes a portion of M&A. A very positive net working capital, but we have said during the last webcast that we would have expected a reversal effect in the third quarter, maybe a little bit higher, but because we cashed in also the White Certificates during the quarter and financial charges and others -- tax and others, which basically are the prepayment we made for tax purposes in July. So all these effects resulted in a lower net debt, which I've already commented.

And I hope now I have touched on all the key items, so I will now hand you over to Luca for his final remarks.

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [4]

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Yes. Now it's time to share with you all the guidance for this year. We confirmed it as per EBITDA while fine-tuning of the projections for CapEx and net financial position is envisaged. Adding to the third quarter results, without October's outcome, that came up in line with our estimates and the forecast for the remaining 2 months, we confirm the range of EUR 495 million, EUR 505 million, that's being stuck with our previous forecast. Analyzing the main reasons for such projections in Italy, we expected to end up with higher production in 2019. With lower energy prices associated with lower incentive, unit revenues would lead to get the results below what we had got in 2018. On the opposite for wind abroad, we expect higher results compared to 2018, a better performance of the existing assets, both in volumes and for the energy prices. A larger perimeter in France of about 52 megawatts, full operating, over the whole year; and a larger installed capacity in Germany of about 55 megawatts, thanks to the last acquisition of some 34 megawatts. All of that partly offset by the lower presence in Northern Ireland. You know that we sold the wind factory of some 48 megawatts in March this year -- last year. All in all, the resulting wind will be anyway higher than last year. For the larger capacity and higher production abroad, this should overcome the projected domestic weaker economic results.

In solar, the result expected for year-end will be significantly higher than this in 2018, I would say, twofold, thanks to ForVei and good performance and to the contribution of the new acquired Andromeda plant.

In hydro, at the same time, we expect a quite significant lower result at year-end versus the previous year. Lower availability of water affecting the other portion of the production remunerating merchant one, entitled to get incentives that were very high last year. A weaker scenario is for the energy solar prices, and because of the lower availability of the water, reduces the capability of the plant to modulate and take advantage of these patching market services like it did in 2018.

As for the thermal generation, we expect higher results than last year. There were very low natural gas prices and higher energy price in CCD, more than offsetting the growing trend in carbon dioxide prices, thus resulting in higher clean spark spread. As you usual, the better performance is being achieved both through cost control and the medium-term PPA with our largest Sicilian industrial customers. That's as per the EBITDA.

So we expect 2019 EBITDA to be higher than last year. Although it's worth saying that the weak performance of the other power hydro plant also in comparison with this extraordinary high result of last year is almost affecting the by far better performance of all the other assets and from the energy management.

As for the CapEx, we changed the existing forecast that ranges between EUR 340 million and EUR 370 million to a larger EUR 430 million, EUR 450 million, so taking into account the last acquisition in Germany. As of today, we have already invested some EUR 400 million, out of which some EUR 364 million in M&A transaction and the remaining for greenfield development and the power and re-blading, some 50 -- EUR 25 million and maintenance CapEx for the rest. And finally, we adjust upward our projection for the net debt at year-end, moving from the existing range of the EUR 1.59 billion to EUR 1.47 billion to the new one of 1.50 billion and EUR 1.56 billion.

So as we're factoring the expected lowering of interest rate curve that entails higher-than-expected mark-to-market value for the interest rate swap agreement in place, on top, as we already mentioned, of the higher CapEx for the year. That's all for the time being. And as usual, we are ready to take 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 Roberto Letizia with Equita SIM.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [2]

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I would like to spend a few minutes on the numbers below the EBITDA because it seems, actually, in the quarter, is the net income being slightly lower than expected because we saw the issue related with production, but the net income seems to be particularly weak. So can you please help us, driving on the main topics for the full year net income? Can you give us a guidance for what do you expect to achieve bottom line? Or at least if you don't want to spend a full guidance, can you tell us an indication about at least what level of full year depreciation you are looking to achieve in the tax rate that we should assume for the full year considering the 43%, which is unusual on the third quarter?

I would like to understand what is the difference on the hydro productions, but related only on the volumes rather than the price because the volume is more interesting. So what have been the impact in terms of production versus the internal index or the normalized production year-to-date? Can you provide an update on the pipeline development, including the repowering and the re-blading? Can you update us on what do you expect to add in terms of megawatts in 2020 and 2021?

I would like also to ask you, what do you expect in terms of interest charges next year? Because I understood and I want to confirm that possibly next year interest rate charges will get benefits from the refinancing program?

Very last one is related to the capacity market. So you've got first participation with the existing capacity on the 2022, which everyone got almost 100% of that cap price, meaning that the competition in the capacity market is very low. I was wondering if you are going to participate as well for the 2023. And in case, if you are looking to participate into the capacity tender process also with the wind capacity and maybe -- I was wondering if the repowering can get access to the capacity and possibly could be considered as a new one which would be interesting because of the 70,000 megawatts for 15 years. So if you can clarify if there's an option to participate into the capacity market also with the wind capacity?

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [3]

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Okay. Fine. I'll try to answer maybe that you can help me in going back to your question because there are many as usual. So as far as the -- as for the net income that we usually don't give any net financial position. What I can tell you is that the trend for the year is what you have just said as for the first 9 months. So we are investing a lot, because last year, we invested some -- in a range of EUR 400 million, EUR 450 million. And we have already achieved such an amount over the first 9 months of this year. So the impact of the depreciation is the main item that explains why we have this reduction compared to the previous year. So the trend is going to be the same from now to the end of the year. So our expectation is to have a lower net profit compared to last year. So that's the point.

Tax rate is affected mainly because of last -- in the past, we had the ACE that we no longer have. So that's an impact in that direction. On the other hand, we are benefiting from the reduction in the financial charges, that's where we changed our net indebtedness profile entering the debt capital market, as you know.

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Paolo Luigi Merli, ERG S.p.A. - CFO [4]

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Anyway, as far as the tax rate, consider the third quarter is a little bit distorted by the fact that the pretax is so low. And then if you look at the -- for the full year, you can take a tax rate of 30% -- in the region of 30%, I think, is a good estimate.

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [5]

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Right. Anyhow, let me tell you that if you take the -- let me put it this way, if you take the number that we landed last year as net profit it was EUR 107 million, that the difference versus the projection should be lower. So the number as for the projection should narrow the year-end results for 2018. So the difference between the 9 months net profit and year-end net profit compared to last year is going to be lower, right?

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [6]

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So meaning the fourth quarter net income is going to be higher, that's the reason? That's what you're saying?

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Paolo Luigi Merli, ERG S.p.A. - CFO [7]

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Please consider that the pressure on the bottom line comes mainly from the depreciation items. Because if you look -- so a good estimate for the depreciation is in the region of EUR 300 million for the full year, just taking the 9 months and summing up what we had in the third quarter, more or less. That's the point. We are -- we tend to look at our numbers in terms of cash yield and cash flow.

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [8]

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Right. As for the hydro production, you know that we don't take any position as for our budget. So we look backwards on what's happened over the last 10 years. So that's the average. As for our projection, we think that by year-end, some 15% lower should be the final outcome. So it's not -- something better than 2017, let's say, that's what we think it should be. Although if I look at what's happening in October and what has been happening in November, production is in line with budget, so it's better than expected as you know. Look outside your window, you see that the weather has changed, so now in our favor, let's say. But anyhow, today, let me say, minus 50% is what we put in our forecast.

As for the pipeline, repowering and [BD]. We are happy with what we are doing. So we are on time and on budget. So as for the specific indication, in terms of number of megawatts that we are going to install in 2021, 2022, let me ask you to refer -- to go back to what we have already said as for our business plan. So we will give you a specific update every 6 months. That's what we have said.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [9]

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Yes. But is it everything on time? Or actually, are you accelerating versus what the...?

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [10]

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No, that we -- this secured us for the development, 95% of the pipeline. So we are opening and we have begin -- we have already begun working in the U.K. where we have 200 megawatts under construction. As for the authorization abroad, we are on time and budget, say that we have, to a given extent, anticipated for one wind farm, where in France we took part and won an auction. Picardie 1 is the name of the wind farm. So far -- let's say, so far, so good. In Italy, for repowering, let's say that we have got most of the positive opinion from the Environmental Impact Commission that pertains to the Minister of Environment. Now we are in process to get the positive answer, which is our expectation next month from the Ministry of Finance. And then go back to the Minister of Environment for the final authorization, I mean, the Environmental Impact Commission.

So, so far, so good. This time we're working very well. We have finalized most of our engagement that we put this way in the sense that for the connection, we don't see any problems. So, so far, let's say, so good. And now looking back to the figures, it's -- they reflects the moment the group is leading, in a sense that we've been working very hard in order to secure the pipeline done and to keep on deploying the business plan the way that you were and you are expecting. What is important to underline is what we have agreed with ACEA that witnesses as a possibility to enter in real PPA also in the country. Today, the agreement lasted just for 3 years because we are opening up this new revenue stream by anyhow securing the sale of -- -- the prices that I can't disclose because there's a confidentiality with our customer. But in general terms, let me say that we are quite happy because we are, by far, higher than our LCOE, and so that's what counts much for us in this way. As for the capacity market, it's a new market. We are very happy because, at the end of the day, we secured more than EUR 10 million of revenues in -- for 2022 -- fortunately, we will have to wait for 2022. It's going to be another auction in a couple of weeks, so wait and see. But my expectation though can change the way the auction will be -- have an expectation to achieve the same result also for the '20 -- also for 2023. Because in my opinion, there shouldn't be any relevant investment in the grid that should change the picture in terms of what then should need as a capacity disposal in 2023 as comparing with 2022. But anyhow wait and see what is going to happen for that. For us, it's a good opportunity. We take part to the auction just with the gas-fired turbine plant, cost sale to the penalties relating to the wind funds and the volatility so far, and going forward, associated to the production from a wind farm. We are not confident to use this power for the capacity market, also because of the rating is so huge that, at the end of the day, the risk to incur penalties is by far larger than the benefit to bring on some hundreds and thousands euros of revenue. So at the end, we made the decision not to proceed with wind farm as for capacity market.

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Operator [11]

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The next question is from Sara Piccinini with Mediobanca.

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Sara Piccinini, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [12]

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I apologize because I have a few as well. First question is about the contribution of the MSD that you expect this year in comparison with last year if it's possible to have this figure. Also, on the hedging, are the hedging that you have already secured for next year and if you are hedging your production at these lower prices?

Then another question is on Germany. The thermal market seems to be experiencing a tough situation with most of the auctions not reaching the available capacity, difficult with permits. So I would like to ask your feeling about this situation. And if this is changing your growth expectation in the country? And how would you compensate eventually for that? Then the other question is on the PPA with ACEA. I understand that your price is -- sorry, the price that you reached is higher than your LCOE. Is it possible to have an idea of the EBITDA that you expect to stabilize from these contracts? And also, what would be the factors in your view that would lead to an extension of this contract to 10 years?

And finally, the results of the Italian auctions has not been unveiled yet. When do you expect the results to be unveiled? And also, if you have an initial indication on how did they go?

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [13]

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Okay. Right. As for the contribution of...

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Paolo Luigi Merli, ERG S.p.A. - CFO [14]

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For the [SD], frankly speaking, the contribution we are going to expect this year is a bit marginal for the hydro business incredibly because, since last year, we had a huge contribution from Italy. We are trying to understand the reasons behind the fact that we are not all on these markets, but for the time being, let me say that the contribution expected for 2019 is very limited in the hydro and a little bit higher for the CCGT.

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [15]

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Yes. So I say, let's say, it's approximately a bit lower than what we got, of course, at the end in the MSD in the Central Italy.

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Paolo Luigi Merli, ERG S.p.A. - CFO [16]

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Below -- because of technical reasons at the end of the day, nothing but for that. As for the hedging, we have hedged most of the production -- as for the renewables production, let's say, some 70%, as for the production stemming from the renewables assets, so hydro plus solar plus -- sorry, hydro plus wind. And almost more than 85% as well as CCGT, so pricing impact on our profit and loss going forward, that's going to be quite low and match on the impact just to the point.

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Sara Piccinini, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [17]

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Sorry, you are referring to 2020 or...?

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [18]

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I'm referring to 2019.

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Sara Piccinini, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [19]

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Okay. And is it possible to get 2020?

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [20]

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We covered more than 60% in 2020 as for renewables and some 85% as for CCGT, that's for the gas via pipeline. As you know, it's a rolling hedging procedure. So every year, we hedge on a 3-year basis price than we are...

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Paolo Luigi Merli, ERG S.p.A. - CFO [21]

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Anyway, let's consider that the price we had for 2020 is quite satisfactory by the low prices in 2019 because of the steeping curve of the forward market, at least, still a few weeks ago that with a price which pointed near EUR 60 per megawatt hours. So price in line with -- it is even better than our budget within the business plan.

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [22]

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Right. As for the German market, it's something that we are having not just in German -- in Germany, but overall, let's say that the amount of auction -- the megawatts, not allowed, not awarded to the auction is something in the range of 1.7 gigawatts. And it's a point. It's a point that is telling us that something -- that the pace, the speed is going down. But anyhow, let me go back to what we said in the past as for ERG. We had our pipeline. We are developing some 200 megawatts, let's say, that's for an operator like us, that's enough headroom looking after the auctions, in terms of number of megawatts to be allowed, to be awarded and in terms of price because the lower is the number of the participants, the higher, for sure, is the price that the participant that win can get.

As a trend, you are right. It seems that there's a slowdown and you can intercept it also looking at what is happening. As for the WTG producers and providers, recent events for (inaudible) -- for the (inaudible) Nordics and the like. So the industry is in (inaudible) but not just in Germany, in case. And Germany it is going through a specific period of reassessment, in my opinion. The trend is not under discussion. I mean investment in renewables is key for the future.

What I think is that we've achieved a situation whereby by adding renewables so the marginal megawatt that you sold in terms of technical impact is higher and heavier than in the past. And they're going to be heavier and heavier, because what is the main problem today, European-wise, is the grid development and to get the grid fit for the purpose. But anyhow, all the TSO have announced that they are pushing very, very hard in order to increase the amount of investments and to speed this process. Wait and see. Going back to us. In Germany, we have something less than 300 megawatts. We have a pipeline of 200-and-something megawatts working on, so in line with our expectation on our side. That's what I can tell you. Anyhow, as a trend, you are right. Keep an eye on what is happening. Anyhow, the trend going forward, in my opinion, shouldn't change.

All right. In terms of -- sorry, Paolo.

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Paolo Luigi Merli, ERG S.p.A. - CFO [23]

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About the -- she was asking about the PPA we signed with ACEA. As you can easily understand, we can't give particularly details on it more than what we already reported in our press release, but this provides a color. So we give up to some upside, but we are hedged on the floor, and the value, it goes around EUR 60. That's the point around which the color is set. So it's a quite satisfactory level. The idea is in the key message through this PPA is the fact that you are working hard on securing going forward part of our portfolio, ahead of the repowering capacity, which will come on the market in a couple of years, we hope.

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [24]

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Yes. As for the last question about Italian auction, there's not any official indication so far, but for what has been said in key energy exhibition that was held in Rimini. It seems that out of 730 megawatts under -- was -- that were under auction, 70 -- 172 megawatts was the amount offer -- or asked for. So at the end, it is in line with what -- but it's quite different from what we saw in France and Germany. So at the beginning, the amount of megawatts, the 2 parties to those auctions was very, very high, and by far, larger than what was at that time offered by the regulator.

But if these numbers are confirmed, I would say that in Italy, we are already in a situation whereby the amount offered is similar, equal to the amount asked for. So I don't want, that this is a quite strong signal that just starting from the next auction, they're going to be a leakage, a lack of megawatt with enough, let me say, authorizations to take part in the auction. And then water, to a great extent, we've been deeming because that we are working very hard for the repowering, and one of the reasons is that we didn't believe and -- to give it a sense, we don't believe that to achieve the target set for the climate plans, particularly in Italy, going through the new store capacity is going to be, for sure, not enough.

So what is important to underline also in this conference call is that to debottleneck a huge amount of investment, the regulator should change and say raise the change -- to take out the change, to raise the specific provision that everybody knows the name of aforementioned key that is blocking a huge amount. I'm talking about billions of investments in the country as for power. We are pushing very hard in that direction. We are having many meetings with the most relevant authorities in that direction, and we hope that they could change their idea, in particular, after this first auction. When I was talking to the Minister of Development, they told in the ministry, let's say, rather than the minister, the ministry. I was told that they had to look at the first auction outcome in order to go back thinking about to take away from the increasing legislation this specific growth associated with this aforementioned key decree. Now the first auction is on the table. If the numbers -- the number, let's say, is confirmed, I think that they have a lot of reasons for going back thinking about the way that repowering is allowed in this country.

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Operator [25]

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Our next question is from Emanuele Oggioni with Banca Akros.

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [26]

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Well, I have a few. The first one is on the thermal generation. I wonder, which is your -- what is your outlook for the spread in 2020, so next year?

And the second one is on the hydro generation. You mentioned -- you previously mentioned that the reservoirs are recovering in Q4. So I wondered if you could give us more details on this recovery if you quantify a bit more.

And the third is -- the third question is on the deal, the Aquila Capital deal in Germany. You mentioned the potential industrial synergies, which are possible as the location of the acquired farms is near to your plans. So if you could give us more color on -- add more color on that?

And the final one is on the 224 megawatt projects acquired in Germany. Also, in this case, if you could give us more details on the -- for example, for next year or in the next 2 years, how much of this pipeline of these projects could become into the pipeline or enter into the pipeline?

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [27]

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Right. As for the hydro recovery, when determined, I will give you an answer, why, because my colleagues are providing me with that specific figures. Hydro recovery -- no, come on, I can't tell you yet how much because we are talking just about 10 days in November, so end of October. So production is in line with our -- it's a bit better than our expectation. As I told you, we are expecting to end up with a production that should be 15% lower than the 10-year average and that's all for the time being as for this end. And also, let's say, keep our fingers crossed because that's really important.

As for the -- in Germany, partner synergy. As for the synergy, that's a part of our in-sourcing processes. So in the end, you can consider what we got in Italy. Now we are trying to replicate the amount of that. And in the end, synergies has to do with the insourcing of the operational maintenance activities as usual and is a portion of what we got from this investment. Anyhow, the most important item is that what we bought was a very good asset with a quite stable revenue profile.

As for the pipeline, we acquired the pipeline, as I just told you. Germany is a quite tough market based on the analysis and the discussion just had with your colleagues from Mediobanca. So today, we are at an early stage. And we don't think we see anything installed before 2021 for this pipeline. For spread, clean spark spread, going forward, we are talking about the indication that's stemming from projection as for the main relevant components of the clean spark spread. So I'm talking about cost of LNG, I'm talking about, let's say, CO2 and the like. We are talking about something which is a bit lower than EUR 10 per megawatt hour.

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

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Also, a quick follow-up on the Renvico auction -- Renvico selling process. When we could expect the outcome of the selling process?

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Luca Bettonte, ERG S.p.A. - CEO & Executive Director [29]

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See, as usual, I don't want to be impolite, but we never comment when an auction is on air, let's say. So wait and see.

Thanks, everyone for being with us and speak to you soon anyhow when we're going to comment on the results for the year-end and with an update, deeper update and thorough update about our business plan. Thanks a lot.

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Paolo Luigi Merli, ERG S.p.A. - CFO [30]

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Thank you. Bye.

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Operator [31]

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