U.S. markets closed

Edited Transcript of FKR.MI earnings conference call or presentation 12-Mar-20 10:59am GMT

Full Year 2019 Falck Renewables SpA Earnings Call

Milan, Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Falck Renewables SpA earnings conference call or presentation Thursday, March 12, 2020 at 10:59:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Enrico Falck

Falck Renewables S.p.A. - Executive Chairman

* Paolo Rundeddu

Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer

* Toni Volpe

Falck Renewables S.p.A. - CEO, GM & Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Enrico Falck, Falck Renewables S.p.A. - Executive Chairman [1]

--------------------------------------------------------------------------------

Before going ahead, I should open on the current situation that we are experiencing nowadays. During these last months and most probably in the forthcoming period, our community is facing an unprecedented threat. The new coronavirus is deeply harming our economy. But most of all is taking lives at enhancing rate. Italian economy and community, and in particular, Lombardy is paying the highest price of this epidemic. This is why we felt it was our duty in social and ethical commitment to revolve more than EUR 0.5 million through the Falck Group, of which EUR 200,000 from Falck Renewables, to hospital and organizations to both sustain applied research and the work and sacrifice of our sanitary workforce.

New brand positioning introduces the concept of being enablers. An enabler generates and passes power to achieve our stakeholders' goals by sharing our expertise, spreading knowledge and nurturing competence in others. We want to provide them the chance to reach their own potential, power to grow in a sustainable manner.

In the green energy industry, we might consider ourselves intrinsically sustainable. However, for Falck Renewables, sustainability is a pervasive concept which embraces every aspect of our business. Sustainability is about creating shared value for all our shareholders and maintaining the conditions that allows for such creation. We create sustainable value, transforming 4 different classes of capitals depicted in the chart. The economic and productive capital is about cresting value through technical excellence in all our fields, operations, development and finance, and increasingly looking for responsible consumption clients. We measure it, calculating the distributor, the added value to our stakeholders as a representation of the prosperity generated by our business.

The social generational capital is about our impact on communities that host our assets for whom we care and have implemented multiple initiatives to support local development, procurement and employment. This is recognizable ethically rewarding aspect of our business practice. We want to measure it in terms of ratio of projects with a significant community engagement program, where significant means having a community benefit scheme or a community ownership scheme up and running and locally enabling sustainable energy services.

The environmental and climate capital is about how we contribute to climate action and how we respect and protect the environmental features in the areas where we operate. Focus here is on quantifying the greenhouse's gas emissions avoided through our green energy production.

Last but not least, the human capital is about our efforts for the development and well-being of all our employees, offering a stimulating and creative work where we keep learning, enhancing diversity and work-life balance. We have decided to measure it through a simple proxy. That is the hours of training each employee follows per year. For each of these 4 KPIs, we have many others that we include in our sustainability report and which are at the basis of a long list of actions and plans we implemented day by day.

Finally, our commitment is directly contributing to 9 of 17 sustainable development goals put forward by the United Nations.

Let me now turn to Toni.

--------------------------------------------------------------------------------

Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [2]

--------------------------------------------------------------------------------

Let's start from 2019 results. We are commenting today another set of remarkable figures better than last year and better than our updated guidance provided in the third quarter call.

We achieved strong growth in 2019. Wind generation up 9% versus last year due to better wind production in Italy and larger perimeter from the acquisition of wind assets in France, 56 megawatts, and the full operation of 20.5 megawatts of solar in Massachusetts and the start of operation in the Nordics reached in December.

We experienced a minor reduction in energy prices in Italy and the U.K. during the second semester. However, thanks to our hedging strategy, we were able to limit the downtrend, reducing the gap in Italy and in the U.K. at minus 2% and minus 1%, respectively, while average market price were down 14% in Italy and 24% in the U.K.

From an operational standpoint, we took our first decision to revamp 6 megawatts at Spinasanta solar to improve significantly the expected performance. And at the same time, we renegotiated the credit facility of Actelios Solar, improving conditions and providing EUR 13.3 million of additional funding. We also extended by 7 years the useful life of our biggest wind farm in Sardinia. The new useful life today sits at the end of 2038.

With a continued benefit to our bottom line because of reduced depreciation and a one-off effect at tax level, resulting in group net earnings improvement of approximately EUR 4 million. Developing new wind, solar and solar project is crucial for our future growth, and we are painstakingly working to increase the number of schemes we have in our pipeline of projects. We now have 2 gigawatts under development globally.

In the U.S., we successfully signed an important agreement with a prestigious partner like ENI to develop, codevelop and acquire up to approximately 1 gigawatt by 2023. In Italy, we have acquired 230 megawatt of solar projects at early development stage from Canadian Solar. In U.K., we signed a JDA with REG Windpower for 200 megawatts. We are growing strong in the long-term PPAs. We signed them in Spain and in Sweden, and we are making further progress on other projects.

Energy management is central to our strategy, dispatching in Italy, 964 gigawatt hours in 2019, 100% of our production and also dispatching activity for third parties, approximately 100 megawatts. This amount is significantly higher than 360 gigawatt hours dispatched during 2018. The services dedicated to energy-intensive industrial and commercial customers performed strongly, with solid results from energy team that grew 10% on a year-to-year basis.

Innovation is what defines us as a company. We have deployed for our assets NUO, a completely revolutionized digital solution for real-time monitoring and asset management, which we are also providing to the customers. We continue to perform strong on CloE, a software subscription platform for energy-intensive customers. And finally, in December, our first battery coupled with solar started to operate in the U.S.A.

Let's now look at the main financial figures for full year 2019. I remind you that 2019 figures are exposed including the adoption of IFRS 16 related to leases, while 2018 figures include the impact of a nonrecurring transaction for EUR 7.1 million on EBITDA. We reached in 2019 the highest EBITDA ever at EUR 204 million, EUR 13.8 million more than 2018, benefiting also from EUR 6.6 million adoption of IFRS 16 leases from January 1, 2019. This compares with the 2018 adjusted value of EUR 184.4 million that excludes the impact of the above-mentioned nonrecurring transaction in assets, an increase of EUR 13 million or about 7%.

Group net earnings reached EUR 48.4 million versus EUR 43.7 million in 2018, benefiting from lower financial charges and in particular, from reduced taxes, thanks to the combined positive contribution coming from: first, the extension of useful life at our biggest wind farm; second, the favorable tax regime for energy team, namely Patent Box, due to the usage of some intangible assets, know-how and brand; number three, lower minorities, linked to the lower contribution of our U.K. plants versus 2018. In fact, excluding the impact of IFRS 16 and the impact of nonrecurring transaction of EUR 7.1 million, group net earnings would be higher versus same period of 2018 by EUR 13.3 million, equal to an increase of 36%.

Our net financial position stands at EUR 721 million, including EUR 81 million due to the adoption of IFRS 16. The net amount without IFRS 16 would be EUR 640 million. The increase of net financial position is mainly due to the acquisition of the French assets, which occurred in March and the CapEx plan for the construction of wind projects in the Nordics and Spain for an overall amount of EUR 191 million, counterbalanced by the generous cash flow generated by the operating assets. The ratio, net financial position to EBITDA, is equal to 3.5x, slightly higher than 2018, essentially due to the increase in net invested capital.

Total energy production 2019 was up 9% compared to 2018. Wind production in 2019 was 10% higher than 2018, driven by better performance of wind farms in Italy, headed by our biggest wind farm Geopower, with 18% versus '18 and 11% versus expectations. The contribution of the increased perimeter, the Julia portfolio in France, closing March, produced higher output than expected, plus 9%. Finally, Hennøy and Åliden added 50 gigawatt hours of energy in the Nordics.

Solar production showed a better performance in 2019 versus 2018, thanks to the full contribution of additional capacity in Massachusetts and a strong recovery of IS 42. The amount of energy produced at our Trezzo power plant was up in 2019, while Rende biomass was above 6% in 2019 versus 2018. Rende will be subject in 2020 to the biennial maintenance work.

Comprehensive captured prices in Italy decreased slightly compared with the year before. Our captured energy price stood at EUR 54 megawatt hour or 7% above the same period of last year, even though zonal prices were below relative to previous year, thanks to the hedging strategy we put in place by energy management.

In the U.K., group net captured prices were down 6% year-over-year resulting in comprehensive captured price almost aligned with previous year, including the growth of incentives of 4% in 2019 and excluding the impact of ROC Recycle. The energy price component, GBP 51 per megawatt hour, was much better compared to 2019 versus average market price of GBP 44 per megawatt hour. And this, again, was due to hedging.

In Spain, captured prices showed a decrease of 13% compared to 2018. In France and the U.S.A., the situation instead was stable, thanks to the feed-in tariff and PPAs.

Let's now move to our road map 2025. The renewable energy market prospects continue to be strong. The U.S.A. and Europe are expected to add significant amounts of new generation in the range of 45 gigawatt per year in wind and 28 gigawatt per year in solar, and that's between 2018 and 2030. Even if we exclude the significant contribution of solar residential and offshore, we can conclude that there is plenty of space in the market. These numbers also do not include the potential impact of the European Green Deal. Notably, according to the IEA, now 75% of new additions between now and 2030 will be wind and solar. And solar represents half of that installed capacity.

Last year, we commented a Sky scenario from Shell, where these numbers in terms of mix were supposed to be hit much later. Between now and 2030, global renewable capacity is supposed to double from 2,500 gigawatts in 2018 to 3,000 gigawatts in 2030. Please keep in mind this fact of a growth 2x in 12 years. Because while the world already plans to do a lot, as you will see, we at Falck are planning to a lot more. So in essence, volumes will be there, and new capacity needs are accelerating.

In addition to that, cost decreases continuously and the technological progress accelerates, Solar PV modules have fallen by around 80% since the end of 2009, while wind turbine prices have fallen about 30%, 40%. In the next decade, the costs will continue falling down, especially for new technologies like storage, according to the figures that are provided by all sources, essentially.

So if volumes will be there, what about prices? The current electricity market design is still largely the product of early 2000's regulatory decisions where energy-only markets aimed at improving production efficiency by reflecting short-term price signals. The second 2000 decade regulators favored and encouraged the development of renewable technologies through the introduction of decarbonization targets. However, these new technologies are intrinsically very different because they have a high percentage of fixed cost and close to 0 variable costs.

Notwithstanding this completely different cost structure, the additional renewable generation entered into the same market structure and price structure of conventional technologies. With incentives, things still worked. But now the incentive are no longer needed, for the benefits, of course, of our final rate payers, the pricing structure needs to change.

The essence of this slide of the IEA is the following. The market continues to present an absence of market price signals for new investments in the long run and also adequate scarcity pricing, limiting security of supply. The energy component is not the only one that would be necessary to cover generation investments is the green portion of the right graph. And in essence, this is already happening. Check the 2010 and the 2017 figures. The uplift from CO2 prices coming from these years is not yet enough to contain pricing inefficiency for the different technologies. Other sources of revenues, therefore, are needed to be found by the sector. And renewable clients need to be technologically ready to access them.

On this last point and in reorienting electricity supply, policymakers must look beyond technology cost and consider the value of all the services provided to the system, there are no benefits. Our view is that these additional revenues could be delivered, for instance, through capacity and flexibility markets.

So how can we move from a pricing based on electrons to pricing based on benefits and services provided to the system? The graph on the left shows how the current price of a green electron is structured to the average price for all fuels, dark blue column, here represented by the wholesale market price of the Italian South zone is first deducted the uplift from the EU ETS CO2 price, the light blue column. This uplift is influenced by the wholesale market margin of technology. Hence, renewables benefit from avoided CO2 cost only when fossil fuels set the price. And as renewable generation continues to grow, while demand remains relatively stable or slightly increases, renewables are more often setting the price on the wholesale market to their detriment.

The other light blue column represents the captured effect, including both the zonal difference with the notional price, which in the South zone is quite relevant as well the cannibalization effect from the production profile. Close to 0 variable cost generation covers a high share of daily demand, depressing prices during the mid-day week. What remains the green electron today with this pricing structure is roughly EUR 40 to EUR 45 per megawatt hour, nominal in the light green column.

Keep in mind, of course, that this is more than enough to cover LCOE, which is fantastic news compared to a few years ago. The point, however, is that the mechanism is not rewarding renewables for their full decarbonization effect on the system. We have a view that in the long run and with regulatory discussions that will start relatively soon, renewables energy players should be able to capture other revenue streams to have all the benefits.

The graph on the right shows an example of how the new pricing structure could evolve. In this hypothetical case for 2040, if we just look at tools already available in the existing regulatory framework, first 3 bars, no support mechanism is envisaged. The renewable price is directly linked to the technologies LCOE where solar and wind will be integrated in batteries and will provide capacity, energies and system services to address intermittency.

The indirect carbon of current ETS uplift has an important impact as the assumption is that carbon prices reach above EUR 70 per ton. But there might be an even bigger potential upside for those that are long, renewable energy and generation like us. What if instead or in addition of an indirect mechanism like the ETS, renewable generators will directly be rewarded for the reduction in CO2 emissions for the customers they serve with green energy. In this case, the uplift could be much bigger directly into the value of extracting a ton of CO2 from the atmosphere, for example, an estimate today goes from $200 to $1,000 per ton. In such a new scenario, green electrons will be priced finally differently from gray electrons, and they would capture the full value they offer to the system and to the decarbonization effort.

Of course, our business plan is solidly and entirely built and fully sustainable around the current market design. But I just wanted to share some concept that it was taken by the regulators in the future that had a substantial upside, not accounted for in our figures.

We have regulatory system and market design we will have, this, for sure, are no regret choice for us. Investing more in technology that increases flexibility and investing in the competencies needed to manage such flexibility. Please let me introduce some real facts in both those cases.

A storage facility can be of great support to transmission operators, distributors and C&I customers by reducing the peak requirement. Terna in Italy has already developed some pilot projects. In the U.S.A., our first 6.6-megawatt hour storage system actually serves this purpose for the local DSO. The large amount of renewable energy foreseen into our power systems will make ancillary services crucial for the system stability. In Italy, for example, a fast frequency reserve pilot project, called UVAS, is already planned for 2021, with an expected value of about EUR 70,000 to EUR 110,000 per megawatt authorized, and we are evaluating how to have a role in that. More and more countries are also introducing dedicated capacity payment mechanisms, where assets are paid not for the produced energy, but for their availability to produce when and if requested.

In the last tender for capacity, Falck was one of the few players that was able to bid and win the auction with 2 renewable solar assets coupled with storage, with an expected additional revenue of about EUR 10,000 per megawatt per year in relation to the planned capacity or EUR 34,000 megawatt per year for each megawatt of storage installed.

As the industry transitions to something new, how do we adapt? We've been rethinking our business model by reorganizing our organization around 2 customer segments we serve and their needs. In the first group, we have invested in new large renewables capacity, back ourselves when we invest with our balance sheet. Second, we have energy-intensive commercial and industrial clients. For the first segment, new large-scale green assets development is enhanced by a strong integration with engineering, construction, finance, asset management, long-term power purchase agreement origination and energy management.

For the second group of customers, which are the energy-intensive consumers, we assisted in the procurement of green energy and co-location of high-efficiency solutions. We have them improve their consumption, and we make it more flexible. Ultimately, we provide know-how and competence for their decarbonization efforts. Two set of competencies work across and on transfers to these market segments. Market access and energy management lead the energy from where it's generated to where it's consumed in compliance with always evolving rules of organized markets. Digital technologies that enable operational excellence, new hardware and software solutions for PV and IoT systems for energy management and energy efficiency.

So let's look at the targets for our 2025 road map. As the world is expected to double installed capacity in 12 years, we think we should care to do better. Therefore, our goal is to more than double installed capacity in half the time versus the global market, so in 6 years from now to 2025.

Let's see the figures. In the new plan, we expect the installed capacity consolidated on balance sheet to reach approximately 2,300 megawatts by the end of 2025, and 1,900 megawatts by the end of 2023. We will rely on the existing pipeline and future pipeline expansion to reach these goals. M&A will be considered as an opportunistic way to accelerate growth with a strong preference towards JDAs or JVs. Consequently, EBITDA in 2023 and 2025 is expected to reach approximately EUR 250 million and EUR 280 million. EUR 280 million represent a plus 40% versus 2019. To support this growth, we expect a growing net financial position to reach approximately EUR 1 billion at the end of 2025, consistent, however, with the acceleration in business development investments and subsequent capacity growth.

Group net earnings will grow from EUR 48 million in 2019 up to approximately EUR 80 million, representing a steep increase of 65% compared with the results in 2019. This number is realized with the benefits of better operational results and growth, the impact of the growing business in asset development, supported by energy management and downstream services. For 2021, we expect EBITDA to be in line or exceeding the previous figures communicated last year during our Capital Market Day.

In addition to financial targets, we are happy to commit to targets relative to our 4 main sustainability KPIs. Along the plan, we foresee to distribute, to our stakeholders, accumulated amount of EUR 1.3 billion. This number includes the value transfer to our employees, to the communities, to the financial institutions, to the public administration and to the shareholders. Today, we experienced a significant community engagement program in 41% of our assets. We want to raise this value to 55% by the end of the plan, an effort that will correspond to implementing our local engagement model to more than 70% of the new assets we are going to add by 2025. We foresee our green energy production from wind and solar, roughly 5 terawatt hours in 2025, that will contribute to subtract from the atmosphere accumulated amount of 6 million tons of CO2 equivalent between 2020 and 2025. Such simulation has been calculated at constant emission factors using a set of coefficients provided by third parties institutes updated to year 2017.

Last, we want to double up the individual hours of quality training we supply to our colleagues today to reaching 2025, the target of 40 hours per year, which corresponds to 1 full week of working time entirely devoting to training and improvement of our competencies.

In terms of capital allocation, 87% will be dedicated to assets and 7% to asset development. In particular, we believe that if we develop and manage the assets we invest in, we can add to the base return of our ready-to-build assets, which we estimate to be about 150 basis point, another 100 basis points on average. We have updated the capital allocation and targets of energy management and downstream services, taking into account the strong refocusing of our activities on energy-intensive industrial and commercial customers. This means that, for example, we will not pursue any more initiatives with clients of the public administration, but also that we will invest more in technology, like storage to improve the consumption of our industrial customers. We continue to increase the funds that we allocate to digital and technologies to strengthen our infrastructure, our core processes and the digital solution to manage assets for our 2 cluster clients as mentioned before.

Let's now move to our renewed dividend policy. There are no changes to our existing policy up to 2021. From 2022 to 2025, the floor will remain constant at EUR 0.069 per share, and there will be a potential upside, what we call the cap, that will be lowered, however, from 40% to 30% payout ratio of the yearly group net earnings. This new scheme will support better our faster growth rate in terms of investment. On the 2019 results, paid in 2020, we reached the cap of our policy and distributed a higher dividend, EUR 0.067 compared to the floor of EUR 0.065. So our proposal for the shareholders meeting is EUR 0.067 per share. If we can see that the overall amount of dividend distributed in the period 2020 to 2025, we forecast a group net earnings payout ratio in the region of 36%.

Let me give you now a few more details about our business lines, starting from asset development. We made the choice to bring the company back to organic development 3 years ago, well aware of the tremendous advantages deriving from taking full control of our own projects portfolio. It is not a question of adding projects available at lower cost only but also better quality and sustainably develop projects. We will continue to be in the regions of current presence. In each market, we play with a combination of strategy and solutions: greenfield, joint development agreements and M&A of projects, portfolios and platforms. As you can see in the slide, while most of our pipeline of project is, however, coming from our greenfield development. While pursuing this main strategy, we keep M&A as an optionality to accelerate growth in our current markets and in (inaudible), like Finland. Development is not only about getting permits and interconnection, but it is about integrating design, engineering, procurement, project management, long-term contracting of PPAs, energy management and asset management. We are continuing to align our organization around these very concepts.

Technology options also expand. Last year, we added battery storage, which is highly complementary with the existing tool. And since then, we have a department in charge of developing storage projects. They can be stand-alone, combined with new initiatives and additional 2 operated plants. We have a centrally coordinated team of 40 people today, divided in local teams, originating and developing projects, they go from Milan, Rome, Madrid, New York, London, France, Amsterdam. And on top of that, we have a global organization like Vector Cuatro with strong basis in Madrid, Milan, Tokyo, Mexico and London.

Looking at the pipeline, we have 2 gigawatts under active development, about 70 projects in Europe and in the U.S. This portfolio does not include neither M&A nor prospects opportunity, only projects with one or more real development milestones completed, which can be land, grid or planning are considered in pipeline. By geography, the pipeline is distributed, as you can see in this slide, 1.2 gigawatts in South Europe, 0.3 gigawatts in North Europe, 0.2 gigawatts in the Nordics and 0.3 gigawatts in the U.S. For Phase 1 projects, about 1,400 megawatts, either land or grid or both have been already secured. For about 500 megawatts, 1/4 of the pipeline, the final planning application has been submitted. These are the projects in Phase II. Finally, we have 95 megawatts under construction between Sweden and Norway, what we call Phase 4 projects.

When we weigh the pipeline for country-specific success rate aligned with market standards, we have about 300 megawatts which exceeded the expected according to the current time line for permits and consents within 2021. No matter where we develop, we pay special attention to local and sustainable partnership. We engage early on with landowners, communities, developers, small and medium enterprises, institutions and public administration to hear their opinions, to make them participate in the benefits of the project and to ensure the project full compatibility with the environment. We truly believe this approach is beneficial not only to all our stakeholders, but also to the chances of success of our development process.

We can proudly say this has been, and it is a distinctive feature of Falck Renewables. This is also why we took on a specific sustainable target for 2025 in this area. We develop projects for our final consumption, but also for and with partners.

I am very proud and excited to share with you the details of the partnership we have recently established with Eni in the U.S. This is a combination of 2 Italian excellences in a market which is unquestionably crucial in the world of renewables. Eni was looking for more exposure to green energy, and Falck, for quicker growth and a larger development footprint in the USA. Eni needed a partner with local presence, track record and expertise in Falck, one with big and long-term view. This is exactly what brought us together. The deal is structured around 2 different joint vehicles: a development company, DevCo, 50-50 owned by 2 parties; and an asset company, NewCo, 51% owned by Falck and 49% by Eni. DevCo has the target to develop and originate, at least, 1-gigawatt of new capacity by 2023.

At Board level, its governance is shared. Falck has the right to appoint the President; and Eni, the Vice President. The projects delivered by DevCo will go to NewCo, 400 megawatts, and to Eni 600 megawatts. Development will be funded 50-50. DevCo will be staffed with people from Falck Renewables North America, Eni and new hires.

NewCo is controlled and consolidated line by line, 100% by Falck Renewables, owns the 112.5 megawatt operating portfolio contributed by Falck Renewables North America to the partnership, and we'll have rights, as mentioned before, to additional 400 megawatts developed by DevCo. Eni will get about 600 megawatts of the 1 gigawatt developed by 2023, and they will consolidate that 100%, as mentioned before. Thereafter, parties will split the megawatts produced by the development company equally. Of course, along the life of development company, parties will also share the results of the development effort in terms of development fees. We will target technologies, which we know well, like wind onshore, PV and storage. We will be mutually exclusive in the United States, and we will target projects above 5 megawatts.

Technical and commercial asset management will be provided to the entire portfolio by Falck Renewables and Vector Cuatro. As a result of this sale, we expect a book gain of about $15 million on balance sheet, which will have no effect on P&L for the sale of the 49% stake in the 112.5 megawatt operating. This impressive result was achieved less than 3 years after we set foot on the American soil. We believe that the partnership with Eni sets an example that we could repeat with Eni or also with other partners in the future.

We intend to accelerate our growth and to maintain it sustainable, balancing our investments across the main identified geographies and technologies shown in this slide. 70% of our non-installed capacity will be solar PV. At the same time, wind will continue to grow for Falck, especially in North Europe and in the Nordics, where we want to keep a strong presence. In the U.S., we see a solid growth centered around the joint venture with Eni, where we combine our know-how in the renewables industry, with the partners' technological and financial capabilities.

Europe will remain central with strong emphasis in the southern markets, where we are creating optionality with a robust greenfield pipeline in rapid maturation. Note to Europe, particularly in the U.K., historically, one of our main countries, our in-large portfolio is highly potential and will benefit from ambitious green policies and decarbonization targets. For 2020, we expect capacity commissioned and operating before year-end to be between 1,250 megawatts and 1,280 megawatts. So this is a figure that could be up to 14% relative to the consolidated figure of 2019, which stood at 1,123 megawatts.

For 2021, we expect installed capacity to be in line or exceeding the figure we communicated in the previous industrial plan. In addition to this, by 2025, our fully integrated development team, whose origination capacity exceeds 1 gigawatt of new projects per year, plans to develop a mature pipeline that could deliver an addition of 0.8 to 1 gigawatt of projects available for sale to third parties or partners with a COD of 2025.

In the next 6 years, Falck Renewables will continue pursuing its path towards operational excellence. The main drivers are described in this slide. NUO improves the asset remote monitoring by offering real-time and in-depth performance analysis and maintenance effective. Energy management services that we provide enable an active management of power limitations, production forecasting and grid balancing benefits. Asset management and technical advisory, take advantage from all these services and leads our operational excellence approach.

By 2025, our target is to have 75% of our wind assets with light O&M scope, provided by wind turbine manufacturers or independent service provider. The same approach will be used for solar assets starting with Italian ones, for which ad hoc targets will be set during the next 3 years.

In terms of KPIs, O&M per megawatt, our main indicator, is targeted to be lower than EUR 25,000 per megawatt. This is calculated on a weighted average of wind and solar plants. And as far as system energy availability, we are targeting 97% in 2025.

Moving now to our second cluster of customers, industrial and commercial energy-intensive clients, we address mainly these kind of customers, energy-intensive organizations. There are about 3,700 in Italy. And we also address customers that have several consumption points, like financial institutions. We have a market share of more than 20% of the energy-intensive clients in our portfolio and more of 600 large organizations in Italy.

We generate value with 4 type of services: left of this chart, from bottom to top. First, what we call smart energy technology solutions, where we deliver meters, gateways and other devices for energy measurement & control, including technologies for demand response services. Leveraging on our hardware solutions, we provide digital and advisory services to both commercial, industrial clients and Falck itself. These include energy audits, bill verification, flexibility and storage, feasibility audits and a brand-new software platform, CloE, dedicated to data management. Both smart energy technologies and digital services are delivered mainly by energy team, which is already fully integrated with Falck since last year.

Should clients ask for capital-intensive energy-efficient upgrades in their energy infrastructure, we also deliver PV and CHP energy solutions. We can also provide the required CapEx to make projects happen, also co-investing with more PV assets owner to improve deteriorated performance plan, as we did in Spinasanta.

Energy is not physical, but it's also a market. With the market access team, we complement our previous solutions by giving access to energy markets and ancillary services to C&I clients and power producers. We started in 2018 by dispatching Falck's Italian assets. At the beginning of 2020, we begin the eighth wind operator in Italy by capacity under management. We have about 440 megawatts. With our large C&I client base, we discussed several corporate PPAs opportunities, dealing new solar and wind projects developed by us to final customers. Finally, as balancing service provider, we are managing a portfolio of UVAMs profile and a large group of interruptible energy-intensive industries.

In terms of targets for 2021 for this group of customers, I'd just like to mention a few notable ones. Regarding market access services, we expect to be operational, not only in Italy, but also in the U.K. and possibly in Spain and in the Nordics. Dispatching assets and providing fixing services to more than 4.5 terawatt hours of energy, of which 54% would be from Falck Renewables itself. We expect to have a base of more than 120 megawatts of demand response under UVAM scheme and to be involved in more than 1 gigawatt of corporate PPAs. Energy solution targets about 9-megawatt of cumulative distributed PV capacities to C&I customers and 4.5 megawatt of co-generation assets.

For digital and advisory service line, we are budgeting EUR 1 million of revenues. Moreover, the data management platform, CloE, just launched, is expected to increase the licenses and associated services turnover to up to EUR 3 million from the EUR 1 million of today by 2025, also creating a repetitive long-term relationship with users. The smart energy technologies business line is expected to increase its product sales to more than EUR 4 million.

In summary, from an actual results in 2019 of about EUR 4.6 million of EBITDA, we expect to grow to EUR 12 million by 2025. If the above (inaudible), of course, our net. The CapEx needed to sustain such a plan are about EUR 39 million to EUR 40 million.

And now over to Paolo for our road map in numbers.

--------------------------------------------------------------------------------

Paolo Rundeddu, Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer [3]

--------------------------------------------------------------------------------

Thank you very much, Toni. Before turning to the financial review of our updated 2025 road map, let me start by presenting the main updated assumptions included in the business plan. I remind you that all figures presented today in this updated industrial plan have been prepared in accordance with IFRS current in force and the related interpretation, with the exclusion of any new standard which is effective for annual reporting periods beginning on or after January 1, 2020.

Since April 2019, we have been experiencing a downtrend in the electricity prices which has accelerated all over Europe in the last month of 2019. This sharp reduction of power prices has been driven mainly by the decrease of gas prices which is the main driver of power price in Europe. In all the main European hubs, the grid competitiveness of the European market, together with drastic reduction of Chinese imports, minus 10% year-over-year, due to the above normal temperature. The completion of the new pipeline from Russia and CO2 reduction in prices of the EU emission trading scheme has had a further negative effect on electricity prices. Market operators expect that the gas market will rebalance by the end of 2020, allowing power price to strengthen again.

Our energy management team, considering these premises, prepare medium-term power curves, geographically diversified based on gradual surge of prices supported by the progressive replacement of the existing polluting energy plants, oil, coal where renewable capacity and expected increase of green energy demand. However, the coronavirus, the COVID-19 epidemic, might negatively affect global economic potential impact postponing the rebound of power prices of some months.

In our 2020 guidance, we took into consideration a potential market volatility, providing a range for EBITDA and other financial indicators, based on what would be the results. If we adjusted from the industrial plan assumption for 2020 to current commodities forwards. Since it is uncertain, however, whether the commodities will rebound, we have provided such sensitivity, and we will keep adjusting guidance in the next quarterly releases. In our business plan in the U.K., we expect an average energy price of GBP 42 per megawatt hour in 2020, minus GBP 9 versus our previous target and with a much closer trend in 2023 and 2025. Similar expected trend in Italy, where the average wholesale price in 2020 is expected at EUR 50 megawatt hour versus EUR 59 expected last year. While the green certificates are higher than what we expected by EUR 7 due to the green certificates formula that takes into consideration the previous year's average energy price.

For Nordic wind farms in 2020-'25 period, we expect an average wholesale price of about EUR 35 in Sweden and about EUR 34 in Norway, plus an average incentive of approximately EUR 2 expiring at the end of 2023, keep in mind that 71% of our volume are already hedged. With reference to the interest rate evolution, we reduced our previous forecast of the 6-month Euribor for the period 2020-2023, reflecting essentially its lower economy trend in Europe. We added new projection for year 2025, estimating the Euribor to be equal to 1% per year.

For the 6-month LIBOR, we adopt the same approach described for Euribor reducing the forecast for the period 2020-2023 and assuming a slight increase in 2025 at 1.4%. Keep in mind that this number do not reflect potential volatility of the coronavirus situation and it's difficult to estimate what the impact might be at this stage. with reference to the exchange rate, we forecasted for 2020, 2025 an average of GBP 0.878 per euro, exactly the same as 2019 average, but lower than the GBP 0.91 per euro, including our last Capital Market Day for the period 2020, 2023. And we did the same for the euro/dollar, forecasting an average foreign exchange at $1.14 and below our previous forecast at $1.18. These numbers are in line with recent figures, but as you might have noticed, volatility has been very high in the last week.

Last but not least, the assumption regarding the average CapEx per megawatt. The all-in cost of CapEx is lowered by 14% for wind investment and lowered by 4% for solar investment in comparison with last Capital Market Day presentation. The combination of lower prices we observe in the wind market is mainly due to the economy of scale created by large wind turbine generation, reduction in incentive and strong market competition. With reference to the average solar price, we need to consider the blended figure, the impact of the cost of partners for the U.S. market, generally higher than euro, that has a higher weight in the mix, thanks to the expected expansion in U.S. after the signing of the development agreement with ENI. We expect for the period 2020-2025 average value of EUR 0.99 million per megawatt for wind and EUR 0.81 million per megawatt for solar. We think that solar CapEx might decrease further in the future, depending also on what will be the balance of demand and supply. But over time, solar project will need to become hybrids, with some storage flattening more the curve of CapEx per megawatt.

Let's look at the hedging of revenues. As last year, this year, we provide insight on the market price exposure of our expected result, which has been partially reduced through the hedging action carried out by our energy management department in order to secure the expected energy revenues on existing fleet and new build project. Compared to the past year, in 2020, volumes with market price exposure to our portfolio are expected to increase by about 0.4 million megawatt hour. Due to the beginning of the commercial phase of 3 new build wind farms, Carrecastro in Spain, Hennøy in Norway and Åliden in Sweden, which are fully operational since the beginning of 2020.

Despite the increase of the weight of fully merchant volumes in our portfolio, the [series A] situation without hedging action is that we have around 43% of the revenues that are exposed to energy price fluctuation and 57% are not exposed to the energy price, thanks to green certificates, ROCS, fixed price PPA and Conto Energia, which is almost in line with what we presented during last Capital Market Day, 44% and 56%, respectively.

Looking at the 3 countries where most of our volume are produced, U.K., Italy and Nordic countries. And in which around 97% of our portfolio's energy prices is concentrated, we expect to generate about 1.2 million megawatt hour in the U.K., about 0.9 megawatt hour in Italy, and we expect to generate around 0.4 million megawatt hour in Norway and Sweden, assuming that the commissioning phase of Brattmyrliden will begin by the end of the year.

Since 2018, we have been implementing flexible and dynamic hedging policy through forward sales aimed at securing and stabilizing a significant part of the group's revenues, exposed to prices and fluctuations year-over-year. In fact, the bulk of our hedging actions consist of forward sales before entering into the delivery period. Then depending on the market opportunity, we can implement adjustments on our open position through informal sales of monthly or quarterly forward products, and the rest is sold in the spot exchanges. Hedging decision, forward sale of production carried out for year 2020 up to now allowed to secure around 31% of expected quantity production in Italy, approximately 36% in U.K. and more than 70% in Norway, Sweden.

In addition to hedging actions carried out in the financial market, we've enhanced our long-term hedging strategy by signing 2 long-term PPA with 2 energy companies, for our new build wind farms, Carrecastro in Spain and Hennøy in Norway, which we allowed to secure around 70%, 75% of the expected revenues of those 2 plants in the medium, long term.

Therefore, after the hedging action implemented by the group, only 24% of 2020 revenues are now exposed to spot prices volatility in 2020. This means that a pound of decrease of energy price would negatively impact 2020 EBITDA by about GBP 0.7 million with reference to the U.K. production. A euro decrease of energy price would negatively impact 2020 EBITDA by about EUR 0.6 million, with reference to the production in Italy. While from what concerns the rest of our European fleet, Spain, Nordic and France, a euro decrease of energy price would negatively impact 2020 EBITDA by around EUR 0.2 million.

In U.S., we have almost no market exposure since all the revenues of our plants have been secured through forward sales long-term PPA or linked to regulated tariff whilst fluctuations are much smaller year-over-year. There are 2 main important aspects that need to be reminded. One, hedging through standard derivatives need to be adjusted on physical market whenever actual production differs from profile and volume hedge. This is volume risk of hedging, in addition to the general volume risk of our business. And two, hedging through standard derivatives, and that's a bad decrease, since it's not a perfect hedge due to the other 3 components of the price risk, zonal price, in Italy and Nordics, captured effect and unbalanced cost. In fact, the price that each of our plants receive is a function of the zonal price, CCT, that is the transmission capacity, which is the price due to the grid bottleneck in Italy and Nordic, or the market area where the plant is located.

Two, captured effect, which has led to the fact that solar and wind farms had a shape reduction mostly produced by the hours, and the same price is equal to the average of the 24 hourly prices weighted by the hourly production of that day. Therefore, depending on the day, captured price can be higher or lower than the baseload price of that day. In general, over a year, the price captured by wind or solar plants in the current market condition, thanks to be lower than baseload, 5%, 10%.

Three, unpredictability of wind and more limited solar plants, mainly to expensive unbalancing cost, due to potential large variations between forecasted and actual production.

On the reason what I just explained, as you can see from the table, for example, we expect to have a blended weighted average price of sale of energy, including green certificates, for wind Italy of EUR 145.1 in 2020, EUR 152.2 in 2023 and EUR 151.5 in 2025. In the U.K., for example, we expect to have a blended weighted average price of sale of energy, including ROCS, for wind of GBP 95.4 in 2020, GBP 109.6 in 2023 and GBP 116.8 in 2025.

Now let's focus on our guidance for 2020. We expect 2020 EBITDA in the range of EUR 196 million to EUR 206 million. In particular, the amount of EUR 206 million is current with the assumption we already discussed. And that based on this main consideration. First, price is in line with our planned assumption, whilst in Italy and especially in the U.K., they are expected to be lower than the previous year. Second, we will benefit for the full contribution from 95 megawatt in the Nordics, 56 megawatt in France and almost 11 months from 10-megawatt in operation in Spain, since early of February. The biennial maintenance work at our biomass plant in Rende will reduce the EBITDA contribution of our thermal sector. While fourth, their development expense will be higher to cope with our strategy of increasing the activities in this business line.

On the top of this consideration, given recent market volatility, if we had to extrapolate current commodity feature into our estimates, we would extend the range of EBITDA to a lower amount of EUR 196 million, including also some management actions to improve results. It's, however, as mentioned before, still uncertain how much of current condition will be carried forward to the rest of the year.

Of course, we are not incorporating into these estimates any systemic risk of the coronavirus escalation or related restriction on the economy or global supply chain that could have other indirect or direct impacts to our business or to our plants. Keep in mind, however, that the very nature our business relying primarily on distributed asset with 0 cost of fuel, our global diversified footprint characterized [additionally] that it should be less impact than others. Moreover, the fact that we are less levered by our peers, puts us in a much stronger position than others.

With reference to the group net earnings, which are the net earnings after minorities, consider the same approach already described for EBITDA, we expect to reach in 2020 an amount in the range of EUR 40 million to EUR 44 million below 2019, of course, essentially due to higher financial charges related to the increase of net financial position, due to the significant CapEx plan expected for the year. And we do not anticipate any foreign exchange gains, while in 2019, we had EUR 2.8 million.

Higher taxes in 2020 in comparison to 2019, when we benefit by some special events, like the positive impact from prepaid taxes for the increase of the useful life at our biggest wind farms in Italy, 138-megawatt in Sardinia. The carbon tax regime for energy team, namely Patent Box, for the use of some intangible assets, know-how and brand, and the tax consideration income, EUR 1.4 million. The overall effect was around EUR 6.4 million. This figure represent our guidance before impairment and provisions.

Our 2020 year-end net financial position is expected to grow in the range from EUR 775 trillion to EUR 785 trillion (sic) [EUR 775 million to EUR 785 million], as mentioned before, by the CapEx plan related to the construction of the ready-to-build wind projects in the Nordics, for which we expect to have additional 95-megawatt capacity installed by the end of year 2020, (inaudible) related to the service sector of about EUR 7 million, and the investment need to secure our 2020 installed capacity target. Overall, the total 2020 investment would be around EUR 190 million, very close on 2019 figures.

The contribution to the increase of EBITDA from 2019-2025, comes from the business lines, new assets and services. While the operating assets shows a decrease mainly due to some incentive expiration mainly at our wind farms in Italy, Minervino, 52 megawatt in 2024 and some softening, 79 megawatts in 2025. While in France, there will be the expiration of the fee-in-tariff for 32 megawatt.

In addition, our waste-to-energy plant in Trezzo will complete its useful life at the end of 2023. And we potentially decided not to include it in our group results. These assumption offers us the potential upside with Trezzo because we are going to compete for a new concession period.

Services will benefit from the consolidation of energy team results. The company acquired in October 2018 and focused in energy management and energy efficiency, and from a smaller but significant contribution, in asset management by Vector Cuatro. We expect also further boost represented by some selected investment acquisition to be completed by 2025.

EBITDA in service business in 2025, will represent approximately 6% of our group EBITDA compared with 3% in 2019 and nil in 2018, due to startup-based costs. To reinforce the important transition explained before, we put below the EBITDA bridge, the evolution of revenues and the related incentives from 2020 to 2025. Our top line will rise, notwithstanding a decrease of incentives, partially mitigated by a price recovery over time, supported by an increasing component of new business with its own sustainability, whilst premises and efforts started back in the previous years.

Let's now take a deeper look at the main components of this net financial position and its changes starting from end 2019 to end of 2025. During the period 2020-2025, we expect to create EUR 1,217 million of cash. Net of development expenses completely absorbed by EUR 1,234 million of CapEx. Financial charges will impact for EUR 250 million, including the effect of fair value derivatives, dividends to shareholders and to minorities will account for EUR 2,002 million (sic) [EUR 202 million].

The snapshot of the net financial position at the end of 2025 shows an increase of EUR 314 million versus the end of 2019, a reduction in project financing by EUR 198 million and the draw down under the corporate committee credit lines coupled with additional corporate financing, aided by the growth plan for the amount, overall, of EUR 592 million. With a receivable amount of cash available at holding level for EUR 24 million. The cash available at project level is slightly lower at EUR 100 million.

The reduction in project financing outstanding is due to 3 main reasons. First, the new additional capacity can be financed through a lower leverage and the difference is compensated by the corporate committee credit lines. Two, the service business and development expenses cannot be financed through project financing. And three, each year, the stock of project financing debt is repaid through installments. All new financial would be interest rate hedged for an amount which will be at least 70% in order to mitigate any unexpected interest rate increase. The currency risk of our tight investment in equity will not be hedged since we wish to have a basket of the euro, U.S. dollar and sterling as investments.

According to the cash needs already explained, we are considering a wide range of financial instruments that will allow us to fund at better or more flexible conditions. We expect to act in advance to the time of our need, as we did in the past. Our 2025 road map is current with the strategy adopted in the previous addition of the Capital Market Day, even if more focused on growth. The availability of financial resources is a significant starting to concentrate our development efforts to deliver new projects.

Our business plan is characterized by predictable strong cash flows by low risk, low interest rate risk, thanks to the hedging policy. Low currency risk because cash flows in the currency are balanced by the debt in the same currency. And the low-risk of financing investment, due to our long-term debt profile to EUR 325 million committed corporate credit lines by 2023, on which we based our research of new funds, leveraging our money available at common condition and the sector appreciation by the lender. And last point, a very important, very professional finance team with strong bank relationship and strong reputation (inaudible) which we are present. All these intangible values will allow the group to continue to access through the financial market, the best condition in relation with ratios and to the most innovative financial instruments.

In this slide, we show the cash movement expected in our strategic plan. On the cash outside, the principal role is played by the CapEx program over the 6-year period covered by our strategic plan, which stands for more than that of the total uses mainly composed by onshore wind and solar investments. A second component is represented by repayments of the installments of the project financing in place that are expected to absorb around EUR 0.5 billion, significant impact expected by the commodity financial charges that reflect in Falck's CapEx program through the increase of the net debt mitigated by the cash flow generation.

Dividends have always represented a clear committee towards our shareholders. And of course, we keep on considering the related financial outflows according to the mechanism already showed by Toni in his presentation.

If we look at the sources, as already anticipated, the main part is played by the operating cash flow, which basically consider EBITDA less taxes plus, minus, the variation of the main balance sheet items, with the same percentage of CapEx on cash out, equal to 56%. Furthermore, we consider to increase our corporate debt at the moment based on our revolving credit facility of EUR 325 million that will expire at the end of December 2023, that we plan to expand leveraging on different options that will be available on the financial landscape during the length of the plan.

We can also rather expect an increase of new project financing that we forecast to sign from 6 to 12 months after COD for an estimated overall amount of EUR 273 million. Final contribution is linked to minorities of projects considered in line by line, like those in the U.S. through the partnership with Eni, just as an example.

Let's have a look at the evolution of Group net earnings. We expect to significantly increase our group net earnings over the period of 2019-2025. Furthermore, I remind you that 2019 group net earnings benefits from special events already described and essentially linked to some positive effects on taxes for an amount of EUR 6.4 million. The expected uplift, it's a consequence of growth plans and additional operating results. This is represented by the strong contribution from EBITDA in 2025, added to an expected support from the financial efficiency of which approximately 8% comes from the service business that it's a low capital-intensive business, and therefore, it can benefit the bottom line.

As previously commented, the financial efficiency and equity investments, including above all the sale of projects to third-party will contribute to the rise of net earnings. Higher depreciation reflects the impact of the increased installed capacity.

A key component of our financial goals for 2025 is to confirm our commitment to maintain a sustainable leverage of ratio as we present in our last presentation to the market. As you can see, the performance indicators are very solid, confirming our well-balanced and solid growth based on stable and predictable cash flows coming from proven technologies and low-risk countries. Another important factor that I wish to remind you is that the group creates a significant amount of cash. Over 60% EBITDA is transformed into free funds from operation in 2019, allowing a solid and sustainable growth aiming to increase it to 81% in 2025.

EBITDA is expected to grow by 40% during the 2020-2025 period, from approximately EUR 200 million to approximately EUR 280 million, almost in line with the net financial position to EBITDA ratio, moving from 3.5x in 2019 to 3.7x in 2025. We will remain within the covenant of our corporate financing, which is 7x until expiry date, which is the end of December 2023.

The debt-to-equity ratio will remain as well within our 3x covenant, assuring the full respect of the financial reach. This room between our financial ratios and the corporate facility covenants provide us with an important financial flexibility to take advantage of future growth opportunities. Toni will describe it better through a dedicated sensitivity.

As you may have understood from the previous slide, our industrial plan is solid, with a clear and well defined strategy, whilst implementation doesn't provide any financial risk in the medium term, thanks to significant cash flow generation, coupled with the availability of credit corporate line, which provides us enough time to explore and select the best additional funding options.

Now I leave the floor to Toni for the concluding remarks.

--------------------------------------------------------------------------------

Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [4]

--------------------------------------------------------------------------------

Thank you, Paolo. Our plan is about growth. We set ambitious targets for 2025, but we think that with the right financial conditions and the right project opportunities we could do more. And this is because we are today one of the less leveraged players relative to our peer group in the industry, and we have a net financial position to EBITDA ratio of 4.0 and this is alongside our plan.

We prepared a rather simple sensitivity analysis that should be only to demonstrate the ballpark effect of what we could still do if we were to lever up our balance sheet further. If we were to add 1,000 megawatts to our existing plants, and if we assumed to put them in service by the end of 2022, we would on one had peak in 2023 at around 6.0x or 6.5x in terms of net financial position to EBITDA ratio because of construction activities. However, this level would be progressively mitigated by cash flow generated by the new assets.

EBITDA in 2025 will grow additional EUR 60 million, while net financial position reached about EUR 700 million. We are assuming 100% ownership of the incremental assets. Leverage in this scenario would stabilize at 5.3x in 2025, net financial position to EBITDA.

In summary, if we look at these figures, they look still fairly sustainable. That we indeed require additional funding, but leverage would be in line with the other peers, if you look at recent numbers. Moreover, in these simulations, we have not considered additional asset recycling as in the 51-49 situations like the ones we have with Eni or cap. Therefore, we think there is a sizable untapped potential in, what we consider, already a very strong plan of growth.

To conclude, we feel that our company can fulfill its new mission of being an enabler of green growth for us, for our partners, for our customers and for our stakeholders, with a unique business model revolving around the 3 core values of innovation, competence and care.

As a final remark, before we move to Q&A, the Board has approved yesterday a new management incentive plan for the 2020-2022 time frame, that is built in a similar way to our previous one, targeting both sustainability of our growth and performance and dedicated to around 10 people of the top management group. Such a plan creates alignment with shareholders based on performance shares. The cash plan can be customized also to serve the needs of the various business lines, in addition to creating alignment to group calls. For the previous plan, 2017-2019, all conditions have been met for the performance indicators.

Let's now move to the Q&A session.