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Edited Transcript of IRE.MI earnings conference call or presentation 8-Nov-19 9:30am GMT

Nine Months 2019 Iren SpA Earnings Call

Torino Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Iren SpA earnings conference call or presentation Friday, November 8, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Massimo Levrino

Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control

* Vito Massimiliano Bianco

Iren SpA - CEO & Director

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Conference Call Participants

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* Emanuele Oggioni

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

* Enrico Bartoli

MainFirst Bank AG, Research Division - MD

* Javier Suarez Hernandez

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

* Roberto Letizia

Equita SIM S.p.A., Research Division - 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 Iren Group 9 Months 2019 Results Conference Call. (Operator Instructions). At this time, I would like to turn the conference over to Massimiliano Bianco, CEO of Iren. Please go ahead, sir.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [2]

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Thank you. Good morning, everybody, and thank you for attending Iren's conference call on 9 months '19 results, which reported a remarkable growth trend compared to 9 months '18 recurrent EBITDA. Starting from Page 2, the bridge shows the positive contribution of each business unit to the growth. If we exclude the white certificates contribution of EUR 60 million reported in '18 and the expiry of green certificates for EUR 27 million, EBITDA increased by EUR 56 million, equal to a significant plus 9%. The good performance has been achieved, thanks to the positive contribution of all the strategic pillars outlined in the last business plan.

More in detail, the organic goal is worth EUR 24 million and affected each business units, thanks to an increase in networks allotted revenues in waste volume managed in this plants flexibilization in energy efficiency projects and finally, in the expansion of our customer base. Synergies follow the path shown in the previous quarters. In 9 months, we achieved EUR 7 million of cost savings more than half of them in Networks division. Now we are exploiting all the possible synergies using our operating costs and improving the asset and workforce management through digitalization projects. I would like to remind that the digital initiatives and the upgrading of some processes and organizational frameworks are leading to margin costs, as highlighted in the business plan presented in September.

The consolidation process is still ongoing, not only because of the last transaction closed in July FG Ferrania Ecologia but also thanks to deals mentioned in the previous results presentation like ACAM, which is accounted only for the first quarter, San Germano and Spezia Energy Trading. The contribution of these companies was EUR 11 million in the period. We expect a result of EUR 12 million in the full year '19, and the positive contribution of EUR 18 million in 2020. Due to the integration costs and planned investments, we expected a full contribution from M&A transactions started in the firm 2021. On the other hand, the effects of M&A is visible on net financial position level due to the acquisition cash out, debt consolidation and the future investment planned to improve the activities.

Concerning the energy scenario, which reported a positive result of EUR 25 million, the trend outlined in the first half of '19, has been confirmed also in this quarter. The lower PUN price that has affected the hydroelectric production followed the downturn of gas prices, allowing for further improvements of spark spread of thermoelectric and cogeneration plants. These elements, combined with higher volumes due to the decrease of electricity produced by renewable sources, made it possible to offset the reduction in the ancillary services profitability. The energy scenario affected also market business unit, improving margins, mainly in the electricity sector. As far as climate effect is concerned, we partially recovered the lowest sales volume affected the district heating and gas sold due to the mild temperatures recorded in the first quarter of the year. In addition, we reported a negative trend of the hydroelectric production also compared with the national average because of shortage of rain in our territories. Concerning to EBIT, it was affected by higher CapEx due to capital-intensive investment that supported the future growth of the company and the consolidation process, mainly related to ACAM and San Germano. The reduction of group net profit is a consequence of the lower EBIT, but on this topic, the CFO will explain better later.

Now we can move on the analysis of details of each business unit. Let's start for the business unit section, as usual, with the network sector, page 3, which during the first 9 months of '19 reported a growth in EBITDA of 7%, depending on several effects. First of all, the organic goal of EUR 8 million, thanks to an increase in RAB, plus 4% compared to full year '18. The increase in RAB has been supported by the important investment made in previous years that had allowed the company to increase the regulated revenues. Secondly, the consolidation of ACAM equal to EUR 5 million related to the lack of the company in the first quarter '18. This impact is in line with the yearly contribution expected to be around EUR 22 million in the water cycle.

Finally, EUR 4 million of synergies achieved, mainly in the water business. Thanks to the continuing implementation of the performance improvement initiatives. On top of this, the positive trend in investment continues mainly for water and electricity in line with the growth prospects outlined in the business plan where we plan to invest EUR 1.8 million to each overall, EUR 2.9 billion of RAB in 2024. Improving efficiency, quality of services and consistency of networks. As far as the outlook is concerned, the positive trend experienced in the first 3 quarters is expected to occur also in the last 1.

Moving on the waste sector, Page 4, the 8% growth reported in EBITDA is related firstly to the contribution of the consolidation of ACAM and San Germano for approximately EUR 5 million. Second, to the organic growth equal to EUR 4 million. The organic growth has benefited from a better disposal plant situation, higher prices for waste treated in our plants and the increase in collection margins related to door-to-door extension. All these positive elements made it possible to overcome the costs associated within the scheduled maintenance activities on our waste-to-energy plants. Regarding to the consolidation process, San Germano as explained in the last conference call has allowed to increase the volume of the waste collected with a positive contribution of EUR 4 million on EBITDA. The last transaction carried out in July FG Ferrania has had a negligible impact in terms of EBITDA, but had significant impact on net financial position increase due to the financial cash out for the acquisition of approximately EUR 7 million, debt consolidation and future investments on treatment plants, leading to an increasing margins since 2021. The strong investment increase around EUR 16 million is aimed to increase the collection services, mainly widening the waste collection fee supporting also the extension of door-to-door collection system. This way made possible to achieve the 66.5% of sorted waste collected plus 3% better when compared to full year '18 and a step forward to reach 70% at '24.

According to our business plan assumption, characterized by circular economy approach, we are carrying out the activities and the authorization process for new treatment plants that will start contributing at the end of '21. In terms of outlook, the results expected marginally better than '18. The positive result due to consolidation process and the higher volumes treated will be partially offset by scheduled maintenance activities on waste-to-energy plant. Going beyond '19 time horizon, I would like to say a few words about the waste collection regulation document published a few days ago. I would like to confirm the purpose of the regulation that unified our business that has been very fragmentated up to national level, and this will bring in the medium and longer term, important benefit to the entire system. This method is based on an symmetric regulatory approach with 4 different schemes to intersect the peculiarities of sector. The definition of OpEx based on reference cost with 2 years' time lag with the application of extra work of 1% to offset the time lag, the improvement in terms of governance to the authority is monitoring of the implementation carried out by the territory competent body. Regarding the impacts, qualitative and quantitative assessment are underway. But at the time being it is not possible to indicate precise effect because some parameters are expected only in terms of range, and not the asset, and that will be defined locally by authorities. Generally speaking, we expect a slight negative impact in short term. More details will be available by the end of the year. Although there is a general appreciation for the regulatory action by the authority and resolution as implemented by proposal formulated by the stakeholder that contributed to upgrade the consultation order. But in our opinion, the RAB methodology approach on the waste collection business does not reward those companies. And at the same time, does not encourage the quality improvement of services.

We expect that the implementation of the RAB methodology, which is more suited to the treatment and disposal sector will be helpful for the sector, but also in this case, should be associated with the system of incentives that guide the transition to the circular economy. We wait in 2020, the regulatory framework relating also to treatment and disposal plans in order to evaluate the profitability balance of the entire waste sector. Assuming a way for treatment and disposal consistent with collection, we can expect in the short-term and overall neutral impact on our profitability in urban waste cycle. In any case, we confirm the positive view in the medium term.

Moving to Page 5, I want to analyze the drivers underlying the result of the energy business unit. The positive energy scenario, combined with the organic growth in the energy efficiency sector, allowed it to partially offset the absence of '18 extraordinary recognition of white certificate for EUR 60 million and green certificates expire for EUR 27 million. Excluding the contribution of these nonrecurrent elements, the result of the business unit would have been positive for an amount of roughly EUR 30 million. More in detail. As far as the hydroelectric sector is concerned, the decrease in volumes due to the absence of any (inaudible) and low working price contributed to an overall negative margin equal to EUR 15 million. The cogenerative and thermoelectric generation have benefited a positive clean spark spread with a recovery in the region of EUR 5 per megawatt hour compared to the same period last year and higher volumes, mainly related to thermoelectric production, which reported a significant increase, more than 100%.

The result on MSD market was equal to EUR 50 million, weaker compared to last year by EUR 20 million. Overall, the contribution of cogeneration and thermoelectric production was equal to roughly EUR 13 million. The district heating reported a considerable increase in margin, EUR 14 million, thanks to higher spark spread, higher heat spark spread that benefited of the decrease in gas costs. The negative effect equal to EUR 2 million of the mild temperature reported in the first quarter has been partially reduced by the increase in organic growth that included business by ensuring SEI Energia for 5 million cubic meter that we expect to consolidate in the next months. The energy efficiency sector followed the part outlined in the first half, reporting a positive contribution of EUR 5 million, mainly related to organic growth.

I'd like to give you some numbers in order to underline the positive performance of the new branch called Iren Smart Solutions. In '19, we reported more than 100 projects accepted them as client mainly for building, revamping and heat management. Furthermore, we presented more than 180 offers that are our potential clients are still evaluating.

As a last detail on the organic growth, I want to explain the contribution of the capacity payment, that is the transitional regime before the start of the capacity market. Thanks to the investments in our plant in '19, we received from the regulator, a balance worth EUR 5 million in order to remunerate the capacity of our plant, which is expected to become recurrent until the start of the capacity market.

It's important to remember that the cogeneration and thermoelectric sector reported in the first half of '19 a positive contribution by the recognition of energy certificates for EUR 50 million related to investments made in previous years, slightly offset by a negative cash out for (inaudible) in the balance.

As far as the outlook is concerned, we expect a confirmation of the energy scenario reported in 8 months, also in the last quarter. Combine it with a normalization of direct production in the area of 1.2 terawatt hour, which will confirm a result in line with last year net of the contribution of energy certificates. In light of the capacity market auctions closed yesterday, the result has been positive because 100% of our capacity offered have been assigned at the cap price. Iren has offered in auction, the maximum of its available capacity based on the system requirements, including also the new investment for Turbigo repowering presented in the other strategic option in the business plan, but not included in figures. The investment of EUR 160 million will increase the plant's capacity by around 400 megawatts. The result of the auction have been the following. Roughly 1,800 megawatts of existing capacity allocated for 2022 with cap price of 33,000 per megawatt for a total amount of approximately EUR 60 million. A large portion of Turbigo's repowering 180 megawatts was also included in the existing capacity. Roughly 93 megawatts of new capacity connected to the new to the new Turbigo plant assigned at the cap price of 75,000...

(technical difficulty)

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Operator [3]

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Ladies and gentlemen, please hold the line. The conference will resume shortly.

Please go ahead (inaudible)

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [4]

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Thank you and I apologize for the problem. So we understood that we end the connection at the beginning of my explanation about energy business unit and the outlook. So I will restart from there. As far as the outlook is concerned, we expect a confirmation of the energy scenario reported in 9 months, also in the last quarter, combined with a normalization of hydroelectric production in the area of 1.2 terawatt hour which will confirm a result in line with last year, net of the contribution of energy certificates. In light of the capacity market auctions closed yesterday, the result has been positive because 100% of our capacity offered have been assigned at the cap price. Iren has offered in auction the maximum of its available capacity based on the system requirements, including also the new investment for Turbigo repowering presented in the other strategic auction of the business plan, but not included in the figures. The investment of EUR 160 million will increase the plant's capacity by around 400 megawatts. The result of the auction have been the following. Roughly 1,800 megawatts of existing capacity allocated for 2022 at the cap price of 33,000 megawatt for a total amount of approximately EUR 60 million. A large portion of the biggest repowering, 180 megawatt was also included in the existing capacity. Roughly 93 megawatts of new capacity connected with the new Turbigo plant assigned at a cap price of 75,000 per megawatt, with an annual amount of EUR 7 million with a term of 15 years. The overall effect is positive because we expect the balance between the capacity and the MSD market led to a potential upside compared to '22 business plan numbers. In addition to significantly increasing the stability and predictability of the results. The contribution of the capacity market isn't included in the latest business plan, and a clear quantitative assessment, which takes into account the MSD market, the capacity payment and the effect of the strike price will be available only in the coming weeks after the auctions for the year 2023, which could outline a perspective trend of the capacity market.

Concerning the market sector, the results show that Page 6 confirm our expectation stated in the last conference call, for recovery margin starting from the second part of the year.

As far as the electricity sector is concerned, I want to highlight the profitability increase underpinned by the client growth combined with the pricing policy implemented this year and the recovery of the negative impact from previous hedging policy. Concerning the gas sector, the lower profitability is led mainly by lower volumes to climate (inaudible) because of the first quarter mild temperatures.

We expect to fully recover this negative impact by the end of the year taking advantage of the same action put in place for this sector, replacing -- pricing policy and hedging policy recovery. Both the sector are affected by the positive contribution coming from the consolidation of Spezia Energy Trading focused on the sale of gas and electricity, small medium enterprises.

Customer base is still going and is following the path outlined in the business plan. Increase show that the goodness of our commercial policy, our digital approach and our products and services offered to the new downstream project. Contributing the organic growth increase, thanks to the 7% adoption rate. It's important to highlight the commercial strategy and the base of new downstream such as the same sale of the multiproduct, photovoltaic systems and insurance policies and e-mobility projects. These initiatives allow to increase customer loyalty and to improve their experiences through value-added services. As far as the outlook is concerned, thanks to the margin recovery in electricity and gas. We are confident to reach higher than EUR 100 million. Now I hand over to Massimo Levrino, the CFO for the group, for comments on our financial performance of the company.

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Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [5]

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Thank you. Bianco. Good morning, everybody. We are going to Page 7. You can see the results from EBITDA to net profit. Starting from EBIT that stands EUR 344 million, with a decrease of EUR 66 million, but excluded the (inaudible) the growth we have EUR 21 million. I outlined that depreciation and amortization increased by (inaudible). This is linked mainly to the growth of fixed asset firstly and to the IFRS 16 application to the extension in the scope of consolidation, in particular, to the company San Germano and ACAM. The increase in depreciation and amortization was partially offset by the reduction in provision that added to bad debt, that stands at EUR 23.7 billion and show a decrease of EUR 10.6 million. These positive trends allow us to reduce our forecast for the full year from EUR 40 million to EUR 35 million. EBIT stands at EUR 303 million, decrease was EUR 60 million, but excluding, again, the nonrecurring effects of energy certificates growth of EBITDA would have been EUR 27 million.

In the 9 months, we had a positive contribution of the financial charges for loans and bonds that stands at EUR 47.9 million. They decreased by EUR 5.4 million, and this is due to the lower cost of financial debt from 2.8% to 2.5%. Secondly, on the positive contribution the net profit of the company consolidated from using the equity method stands at EUR 4.7 million. The increase is EUR 5.4 million, and this is due to the positive results in 2019 of company consolidated and to the absence of negative result in 2018.

Going to the other financial income stands at EUR 1.1 million and shows a worst result of EUR 5.4 million, mainly due to the financial charges for EUR 2.5 million linked to the application of IFRS 16 and to the absence of positive contribution of the fair value of derivatives reported in 2018.

Going to net profit that stands at EUR 191.6 million. It has a decrease of EUR 42.6 million, but excluded in the recurring effect of energy certificate growth of profit, net profit, that being EUR 20 million roughly. The tax rate was about 30%. We confirm this tax rate for the full year 2019. Minority was EUR 21.2 million. The slight increase of EUR 1.8 million is due to higher net profit of the consolidated company and ACAM.

Now we are going to Page 8, you can see the cash flow and the net financial position. The net financial position at the end of September 2018 shows a growth of EUR 57 million without considering the effect of the application of IFRS 16 that has a significant impact of EUR 105 million. But 2 other items have to be taken into consideration for the change in the scope of consolidation of EUR 72 million; and second, the change in the surveyor derivatives for EUR 38 million. Net of this (inaudible) net financial debt would have been down by roughly EUR 53 million. About consolidation detailed affects the next (inaudible) related to the acquisition of FG Ferrania Ecologia, of San Germano and of (inaudible)

Now going to the cash flow, we see a very strong cash flow of more than EUR 500 million. The strong cash generation also tend to slight reduction in net working capital, the possible to finance investments and pay dividends. The total investments were EUR 324 million. So it is higher compared with last year, but are in line with our business plan assumption. The dividend were EUR 150 million. There is an increase of EUR 37 million, of which, say, EUR 18 million are related to Iren shareholders and EUR 19 million are extraordinary dividend of the company in account to other shareholders. Derivatives had a negative impact of EUR 38 million. In detail, the way derivatives affected negatively the net financial position for about EUR 24 million, in the same way, the commodities derivatives contributed to the other financial debt for EUR 40 million.

Going to Page 9, you can see the interest rate and the debt structure. The debt structure is not -- figures are not yet influenced by the issue of the new green bond on October. But that this issue even has the possibility to lengthen the maturity, average maturity. If you see the pie chart on the right, that represents the breakdown of the gross debt and see now that 93% is fixed rate or hedged with swap. But if we consider the new green bond, this percentage grew up about 100%. The average duration on the long-term is 5.1 year. But considering the new issue, it would be 5.9 years. The cost of debt is 2.5%, and it grew to 2.8% in the first month '19. But thanks to the recent new issue -- bond issue and through the liability management already done, we forecast to reduce our cost of debt from the full year to 2.4%.

The second pie chart on the right represents the breakdown of the debt structure. The pie chart shows that even total gross debt is formed by bond 66%. If we consider revenue issue, the percentage is a little bit higher and were up to 77%. At the end of June, Iren subscribed to sustainability linked to the revolving facility for a total amount of EUR 150 million that support the rating level and there are penalty or premium mechanism linked to the achievement of specific environment goal. In July, Iren signed with EIB a new loan of EUR 120 million to support initiatives in the hydroelectric production sector and the environment sector.

In addition, we still have the availability of EIB fund for an amount of EUR 150 million. All these loans are with a maturity of 15 years amortizing. So the total amount overall is EUR 270 million.

Now I hand it over to Mr. Bianco for the closing remarks.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [6]

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Thank you, Massimo. In conclusion, I'd like to underline the following main elements. In light of the sound 9 months' performance, we are confident to overcome the EUR 900 million EBITDA in the case of a normal last quarter led by [an average temperature] and a positive energy scenario trend. All the strategic pillars of our business model are contributing to the company goal. The strong cash flow generation and the financial flexibility achieved led us to accelerate the investments supporting further growth. We are confident to expect synergy and value from the last M&A deals in the next years. Currently, the positive contribution from the last M&A transaction is not visible in our numbers due to the start-up and integration costs.

Having said that, in light with the positive results achieved in the 9-month '19, we improved our expectation for full year '19 results: EBITDA between EUR 900 million and EUR 910 million; investment at EUR 530 million, EUR 550 million; net debt-to-EBITDA ratio of approximately 9 -- 2.9%; and group net profit at roughly EUR 250 million.

Thank you for your attention, and we can start now the Q&A section.

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Questions and Answers

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Operator [1]

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This is the Chorus Call conference operator. (Operator Instructions) The first question is from Enrico Bartoli with MainFirst.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [2]

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The first one is regarding the comments that you made on the impact of the capacity market. I understand that the capacity addition at the Turbigo plant actually was not in the targets of the business plan. If you can give us an indication of the contribution to EBITDA that you expect from this project and the CapEx associated with that. And in general, compared to the assumptions that you had in the business plan, what may be roughly a positive impact from the outcome of the capacity auctions?

The second one is still on power generation. If you can elaborate a bit more on the outlook in the fourth quarter that you expect also considering what happened in October and, particularly, on the MSD contribution that you expect in the fourth quarter. If you can give us the EBITDA from the MSD in the 9 months compared to the one in the 9 months of 2018. And if I'm right, there was a decline in the contribution in the third quarter. Can you give us some details of the reason for this?

And the third one is on the new regulation regarding the waste collection. So you commented that you expect a slight negative impact from that. Can you give us some details on which are the drivers, if this is related to the remuneration of the capital, the amount of capital recognized, if there is some difference in the operating costs that are implied by the new regulation? And if I understand well, you expect that the overall, once the -- also the regulation of the treatment and the disposal will be issued, a negative -- a neutral impact. So if you can give us some hints also on what you're seeing that the orientation of the authority would be regarding the other 2 steps in the cycle for waste treatment.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [3]

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Thank you, Enrico. So starting from the capacity market related to our project of a new part of the Turbigo plant. As I said before, this project is not included in our business plan. We said in the presentation of our business plan that, that was an option that we were evaluating in combination with the permit to realize the new CCGT and the auctions. So it is clear right now that we have a permit to construct a new 400 megawatt group in the Turbigo site. This new group, because of the permit we have and the rules about the capacity market, is allowed to participate to the auction for roughly 180 megawatt hours existing capacity and roughly 93 megawatt hours new capacity. So the project will allow for a combination of capacity market, the utilization of the new group. And this will worth overall EUR 20 million, EUR 25 million [new] in terms of EBITDA. For a CapEx, that is roughly EUR 160 million. Out of this EUR 20 million, EUR 25 million, for sure, right now, EUR 7 million are related to new capacity, so have the capacity market mechanism issued for 15 years. So this is the contribution for the Turbigo plant.

We do not right now have the full element to, let's say, do an update of our business plan because we want to wait the auctions for existing capacity for '23 in order to understand if -- as it has been yesterday for '22, there is a positive impact also for '23, considering the existing capacity. And if looking at these 2 auctions, we can assume a benefit that will last in the year after 2023.

About the capacity, the MSD '19, in the 9 months, '19, we did roughly EUR 50 million of MSD. And last year, it was the EUR 70 million. So we had EUR 20 million less in the first 9 months. This is because the cogenerative and thermoelectric plants ran as -- because -- with higher volumes and higher spread, so we did not exploit the flexibility as profitability driver, but mainly, the volumes are profitability driver. For the last Q, we can, let's say, assume, but it will be related also to the climate and to the market condition, something, let's say, close to what it was last year as an overall profitability of thermal generation.

Waste regulation. As I said, we cannot right now quantify impact on collection because -- squarely to -- some parameters are in a range. Some of them are related to a discussion that will be done with the authorities. But as I said, we can expect by the end of the year to have a clear view. We expect, let's say, a slight negative impact on collection because, in some cases, we benefit from, let's say, a contract that borne in a painless procedures that allowed for, let's say, fixed and profitability regarding less efficiency in the operating cost that we had. So in the short term, this could lead to a slight reduction in the overall profitability.

As correctly you said, the overall expectation for the new regulation, including also the regulation for treatment plants and disposal plants, is expected to offset this slight negative impact. And the overall expectations in the short-term is for a neutral-ing factor considered in the current profitability of the group. In any case, we confirm our positive view for this regulation. We expected more elements regarding quality incentives for quality performance and for -- especially in the collection right now, we are not seeing anything about these, but we can expect the medium term, some positive impact because of this.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [4]

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Sorry, just a quick follow-up on the first question. I understand that it's difficult to extrapolate for the next years what happened on the capacity auction in 2022, but it's possible to have an idea of the difference between what you were assuming for 2022 in terms of contribution from a capacity market and what actually has been the result from the auction.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [5]

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The auction ended yesterday, but -- and we are -- the point is that we -- actually, we are not sure to quantify how we'll work the strike price in terms of the reduction of MSD because of the capacity market mechanism. Let's say roughly but without any confidence about this figure, we can say roughly EUR 10 million as an upside per year.

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Operator [6]

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The next question is from Roberto Letizia with Equita SIM.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [7]

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A follow-up on Enrico's questions on the capacity market. Can you just remind what was your assumption of ancillary and the contribution within the plan in 2022, just to let us make an assumption, and if everything on the MSD is captured by the capacity market, and the difference is what you gain? And anything that you can then preserve on the MSD, that would be an additional upside.

Yes, I would like also to understand if you can provide any indication about Sorgenia for the capacity market auction considering that you're looking to make a bid for the company. Maybe you can anticipate what they have been recognized in terms of capacity auctions participations.

On your comment about the waste, considering that you mentioned a short-term negative on the collection side. But actually, you [preside] that the difference comes from the type of regulation that you had, which has no consideration about the level of efficiency. Have you mentioned just the short-term negative because you think that starting to have more attention on the cost side of that business, you can then, at the end, arrive to a profit gain if some efficiency are introduced in the cost management so that also in that part of the business, you will end up with profit recognitions in this rate?

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [8]

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Okay. Thank you, Roberto, for your questions. About capacity market, it's something -- in our business plan, the MSD contribution in the -- for the coming year is in an area of EUR 40 million, EUR 50 million. So as we said, the contribution that we'll have in '22 for the capacity market, assuming the Turbigo new group, is roughly EUR 60 million. Most -- Sorgenia, I mean, I cannot quantify the impact on our plans. I don't know at all what they did about the capacity market because you cannot see what the other player bid in the auction. You all know the overall capacity bid for the capacity market auctions. So right now, I can -- I know how the -- about the strategy and the impact of the strategy.

About waste, it's not -- maybe I didn't explain well what I wanted to say. Right now, we have some contract where the efficiency -- the cost base and because of the efficiency are already fixed. The new regulation change the cost base and, of course, because of this, including the new cost base, some of the efficiency that we already done. And because of this, of course, we expect a slight reduction in the profitability. There are also some other parts of the profitability that are related to the benefit that, in some cases, we have a bit of the material sale. We can see the overall impact will be slightly negative because there are a lot of change in some cases. So we cannot yet quantify exactly because -- the reason why the impact will be what I said, but we can say that the slight negative impact, we will see.

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Operator [9]

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The next question is from Javier Suarez with Mediobanca.

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

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3 questions on my side as well. The first one is on the guidance, you can help us to understand the increase in the guidance for the EBITDA from EUR 900 million before to EUR 900 million to EUR 910 million, if you can explain the reasons behind, and also why that increase in the guidance is not impacting net income. Because if I remember well, in the latest conference call, you mentioned that the previous guidance was consistent with EUR 250 million of net income and that this net income that has been availed at if that is not should be seen as conservative. And also, I have noticed that on the guidance, there is a decrease on the CapEx guidance, if you can elaborate on the reason for that decrease in the CapEx guidance. That is the first question.

The second question is on the regulation for the European waste collection as a follow-up of -- on the question from my colleagues, if you can help us to understand the total invested capital that you have on this activity. And also, I'm interested on some comments on the possibility that the regulation opens for some regulatory compensation for previous year for 2018 and '19 and that is included in your assessment that the new regulation is slightly negative. And also a comment on -- interested on your comment that you have a positive midterm view on this regulation, why you are making that difference between short-term impact and medium-term impact. So what do you think can change in this business for that bidding of that regulatory [comment] becoming from a slightly negative to -- into a positive.

And then the final question is on the supply activity. There has been some recovery during the third quarter after a difficult [first half], if you can help us to understand the dynamics and what you are expecting from this business in 2020. Obviously, margin has been improving due to lower gas prices. What do you see? I'm interested on your commercial strategy on the supplies business and how this impact in the business evolution.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [11]

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Thank you, Javier. So starting from the guidance to be on the slight increase is mainly related to the energy scenario. And the positive impact of this in the energy value chain, so generation and supply, and because of this, the increase in guidance, it is not so worthy -- didn't allowed us to make any change on the net profit. So we can assume, of course, backed the net profit guidance but, of course, going down the impact of plus 0 to EUR 10 million, it was difficult to quantify. So of course, we -- there aren't any reason that allowed us to not improve also the net profit but just because it was difficult to quantify figures of some million.

About the decrease on CapEx is mainly related to 2 businesses. First is waste where we expected to spend a bit more by the end of this year for the new plants, and they are a few months delayed, but this will not have right now any impact on our business plan assumption in terms of the end of new plants realization and so the starting of EBITDA contribution. The other are some, let's say, efficiency on IT CapEx by the end of this year.

About the waste regulation, the total ramp in collection right now is roughly EUR 180 million. And in our expectation slight negative impact are also included the balances for the 18, '19 years, and this is also the reason why I said in the short term, it could have a slight negative impact but we still confirm a positive view in the medium-term because of this and because we can expect, let's say, an evolution of the regulation in order to give some incentives of premium for the quality of service, let's say, we are very confident we can reach because of our quality performance.

In terms of the impact of the expected regulation on treatment and disposal plants, we can have a positive contribution because the RAB we have right now, mainly in Emilia, have a regulation that is much lower because of the regional law that what we can assuming -- look at what the authority did in the collection phase. So this will have a positive impact on the -- on our profitability, and the is -- will lead to an overall neutral impact in the short term.

About the supply recover, we expected this phenomena where we see even more in the fourth Q because of the [hand of] hedging policy and the restructuring of our hedging policy. And for 2020, we can expect the full recovery. So we can expect a contribution of supply that will overcome EUR 120 million.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [12]

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As a follow-up, you mentioned that the RAB on the collection business is something like EUR 180 million. Can you give us a number for the treatment and disposal activities?

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [13]

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In just a moment, to be sure. Roughly EUR 400 million.

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Operator [14]

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The next question is from Emanuele Oggioni with Banca Akros.

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [15]

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I have 2. The first one is on power generation in the hydro business, in particular, the hydro generation. Could you give us an update on your hedging policy for next year, for 2020, as with regards to the former price as you covered the part of the hydro production? And also, as regards to the hydraulic levels, so my question is if the basins are recovering. Or basically, you are shifting the production from this year to H1 2020.

And the second question is on the waste business. Could you give us an update on the new permit authorization process for the plastic treatment and also of your organic treatment in La Spezia, Reggio Emilia, Parma, Turin, et cetera?

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [16]

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Thank you for your question. I will start from the waste, just a quick update on each plant that is in our business plan. Remember that there are 2 organic waste plant that we bought this year in Vercelli and Savona. Both of them, we bought already permitted that we already started the revamping of them, and we expect to finalize the CapEx and start the production -- the new capacity with the production of [biomethane] by the end of next year. The other 2 are 1 in Reggio Emilia and 1 in La Spezia. They are -- in this case, both are new plants. The permitting process in Reggio Emilia is expected to end in the next 2 weeks. And so we expect to start at the beginning of 2020 to work, and we expect by the end of 2021, to work with the new plant.

In La Spezia, we expect to finalize the permitting process a bit. We have a delay, and we expect to finalize not anymore in the first half of 2020 but in the third Q, 2020. But we are confident to recover this delay in the execution phase. So we expect to end the construction by the end of 2021. And we are already permitting the plant for good in Vercelli, where we expect to finalize the permitting process in the first half of 2020, and we expect to start to run the plant in the beginning '22.

And the other 2 plants that we are already permitted for plastic and paper in Parma and in Torino, we expect to start the construction phase by the end of this year. We have a delay of 2 months, but they are not material for the -- and we expect in our business plan, and the delay was related not because of the permitting but the equipment process.

The last one is the plant for sorting urban waste in general, where we are the promoter for project finance initiatives. We already have been chosen as the promoter. Right now there is a tender that is expect to end by the end of this year. Next week is the deadline for the bid if there are other proposals, but we have preemptions on this.

And so this is the scenario, permitting new plants for treatment, and I cover that we have right now under construction. And as I said, in no one, we have right now any change compared to our business plan presentation.

About hydro generation, there are no shift production to 2020. The added level is in line with the historical average. About hedging policy, of course, we started also to cover 2020 production, and our policy is to have, let's say, a portfolio hedged at a level of 80% in order to stabilize our margin.

(technical difficulty)

as you expected for...

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [17]

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Actually disclosed the price.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [18]

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No. And the production in terms of expected production is on average, of course, right now, in 2020, so roughly 1.2 terawatt hour provided production.

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Operator [19]

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The next question is a follow-up from Roberto Letizia with Equita.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [20]

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Very rapidly. I would like to have your view about the -- all the discussion about the plastic tax introduction. And then I want to understand if -- especially if the plastic tax is introduced in a way that makes lower cost for a higher percentage of recycling material included into product that could potentially translate in mild, nil significant or whatever you can make as a judgment impact on the future of the waste collection treatment activities.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [21]

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Thank you, Roberto. But I can say with not any deep study about this that we can also call this plastic tax as a VAT tax on plastic because it's just a source of financing or something else. It does have any impact on the, let's say, circular economic cycle in the country.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [22]

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No, that's the reason why I was saying that if it is introduced in a way that is phased depending on the level of recycling of plastic, that means that if you're making to sale a product that have a higher percentage of recycling material, you don't pay the tax and vice versa, which means that, that could potentially be a big push on the treatment and recycling activity.

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [23]

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Yes, if I well understood, it is not what they are discussing about. They are just looking at a new taxation so we can call an additional VAT for plastic products. So the impact will be on the final clients. Any impact on us, and I don't -- I cannot evaluate if this kind of taxation can have an impact on the -- on other industries for -- except for packaging. So it could be interesting if, as you said, there is, let's say, a project in terms of -- to modulate the impact of this taxation in order to incentivate (sic) [incentivize] the use of recycling or to use the proceed of this kind of taxation on plants or activities that allow for a higher recovery of plastic. But in my very, very superficial understanding of the -- there isn't any view about this.

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Operator [24]

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

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Vito Massimiliano Bianco, Iren SpA - CEO & Director [25]

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So thank you very much, everybody. Bye.

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Operator [26]

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