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Edited Transcript of IRE.MI earnings conference call or presentation 12-Apr-19 1:30pm GMT

Full Year 2018 Iren SpA Earnings Call

Torino Apr 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Iren SpA earnings conference call or presentation Friday, April 12, 2019 at 1:30:00pm GMT

TEXT version of Transcript


Corporate Participants


* Massimo Levrino

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

* Vito Massimiliano Bianco

Iren SpA - CEO & Director


Conference Call Participants


* 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




Operator [1]


Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Iren Full Year 2018 Results Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Massimiliano Bianco, CEO of Iren. Please go ahead, sir.


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


Thank you. Good morning, everybody, and thank you for attending the presentation of Iren's '18 full year results.

Starting from Page 2, you can find an overview of the key elements of the presentation. The first concept to highlight is the significant growth path that the group began 4 years ago, which led to a remarkable improvement in all the economic and financial KPIs. In particular, compared to '14, the adjusted EBITDA has substantially increased by EUR 220 million with a CAGR higher than 8%. The financial flexibility of the group has constantly improved, thanks to a net debt-to-EBITDA ratio that has moved from 3.6x to 2.8x considering the recurring EBITDA equal to EUR 866 million. The bottom line has more than triplicated due to the operating result and the reduction in cost of debt.

Finally, DPS has grown, on average, by more than 12% per year, turning the efficiency higher reached in the higher remuneration for shareholders.

As far as the asset base is concerned, I would like to point out a remarkable 25% increase in networks RAB, 340,000 of new clients in the energy sector, reaching a total of 1.78 million, a significant increase in waste collected and waste capacity.

Furthermore, it's worthy to highlight how the enhancement in the group asset base made possible to achieve positive result despite the volatility in the energy scenario experienced last year.

The sound cash flow generation allows for keeping commitment on DPS growth as the proposal for '18 stands at EUR 0.084 per share, with a remarkable 20% increase compared to previous year.

On Page 3, you can find a graphical summary of the concepts as I said before. I would like to spend just few more words on the achievement of the financial flexibility that characterized the strategic path of the past years.

In '18, the group reached net debt-to EBITDA ratio of 2.8 when considering the EBITDA recurring, moving from 3.6 in '14. Such a remarkable grow result has been supported by significant increase in cash flow generation, leading to the improvement in all the key economics indicator. It is very possible trend can be also seen in terms of net profit. The bottom line has increased from EUR 69 million in '14 to EUR 242 million in '18 with a constant stable growth.

Moving on to Page 4, I would like to deepen the analysis of the EBITDA bridge. The comparison between '17 and '18 result needs to take into account some nonrecurring elements. In particular, concerning '18, the positive effect of EUR 101 million is the sum of the sale of White Certificate for EUR 60 million and the recognition of EUR 41 million related to the revision of the estimates of credits for invoices to be issued impacting the market business unit. On an adjusted basis, the average growth of our EBITDA is higher than 3%, reaching EUR 866 million. It's crucial to highlight the exceptionality of energy scenario variables that characterized the last 2 years.

As in '17, we experienced the French nuclear outage; in' 18, we assisted through a remarkable production from renewables due also to unique climatic condition, which imply a necessity for flexibility met by thermal production. These aspects contributed to a substantial increase the value of ancillary services.

Finally, because of the stronger contribution for renewables, it was not possible to recover in the full price the increased cost of gas and CO2. Those lost elements lead to lower spark spreads compared to previous year. In total, in '18, we experienced a negative impact of EUR 28 million related to scenario variables, especially with regards to supply EBITDA partially offset by the positive EUR 20 million related to higher hydro volumes.

Moving on, as can be seen by the graph, the contribution of organic growth synergy and consolidation follows the path outlined in the business plan. In particular, I would like to emphasize again the crucial role of organic growth not only in the past, but also in the coming years driven by the development of our activities on a larger scale. This aspect is already clearly visible in the remarkable increase in CapEx, which, during the year, have grown by almost EUR 100 million. In this context, the impact of synergies in the future will be always substantial, but softened if compared to the company rationalization and processes streamline that characterize the last 4 years. As a matter of fact, higher cost will be necessary in order to phase the expansion of activities. It's also important to highlight that the target of EUR 15 million of synergies provided in business plan for '18 have been successfully met, thanks to the substantial contribution of the first 9 months of the year.

For what concerned consolidation, the majority of reported EUR 32 million are related to ACAM, EUR 19 million in water networks and EUR 2 million in waste. In addition, we had EUR 8 million positive contribution from Iren Rinnovabili.

Finally, it's important to underline the absence of positive balances for approximately EUR 25 million reported in '17 and related to networks, mainly in the water sector. Below EBITDA, the growth in D&A is mainly related to ACAM consolidation started in April. Net profit is impacted by several nonrecurring elements as the CFO is going to focus on later.

Let's start the business unit section from Page 5 with the networks sector that, during the year, reported 2% EBITDA growth, which is the sum of several efforts.

Firstly, the whole sector has benefited from significant synergies achieved, thanks to the implementation of further performance improvement initiatives. More than half of the synergy of the group come from this business unit. On top of these, the operating margin has been impacted by the absence of about EUR 25 million positive balances reported in '17, which has been offset by the consolidation of ACAM and by the organic growth, thanks to previous year investments.

The organic growth has benefited from the significant increase in CapEx, plus 29%, that led to an increase in RAB by 9%. It confirms networks as the business unit leading the growth of the group in the next 5 years. The positive contribution of investment will be reflected in [tiles] and solid operating margins within 2 years. It's important to realize that the increasing water RAB is mainly due to the inclusion of the score -- in the scoreboards consolidation of ACAM, which has contributed EUR 440 million. The investments are aimed at improving the efficiency and the quality of services for our clients, especially in water sector, pursuing the sustainability principle defined in our business plan.

In the energy networks, we want to improve the resilience to avoid service interruption, and we deliver our target to remote control in the development of new infrastructure.

The second business unit to examine is waste sector, where we highlight a 4% increase in EBITDA. This is mainly linked to the saturation of our disposal plants, waste-to-energy plants, the full contribution of our REI disposal landfill, synergies and ACAM consolidation, in combination with an increase in PUN, which allowed to benefit from higher margin for waste-to-energy plant.

The positive result, both in price and quantity term, in waste disposal sector have been partially counterbalanced by higher door-to-door collection cost. Indeed, the completion of development of door-to-door system in Reggio Emilia and the start-up in Turin ramped the cost up also in '19. Higher cost will be recovered in tiles starting from 2020.

Nowadays, the 79% of year-round waste are collected by means of the door-to-door system, which allowed to increase the percentage of sorted waste collection by 4 points with respect to 70 -- to '17. The overall -- overall, the waste collection sector grew, on an average, by 13% in terms of volume, thanks also to ACAM waste collected equal to roughly 80 kilotons.

More in detail, we highlight the increase in special waste volume, plus 17%, mostly to the internally, which contributed to improved saturation of our plant. Despite the saturation of our waste-to-energy plant, the electricity and heat sold highlight a decrease compared to last year. This is due to the lower calorific value of waste sent to waste-to-energy.

With regard the energy sector, which includes generation, district heating and energy efficiency, the EUR 70 million increase in EBITDA is affected by the extraordinary sale of EUR 60 million of White Certificate. Net of these, the residual increase in EBITDA for EUR 24 million is the sum of several elements.

As far as the volumes are concerned, the aggregate volume of electricity production are in line with last year, resulting from a strong increase in hydroelectric volume, combined with a decrease in thermoelectric and cogenerative volumes. The hydroelectric sector gave us an important contribution, benefiting from the average increase in PUN price. The reduction in thermoelectric and cogenerative clean spark spread, led by an increase in cost of gas and CO2, has been partially recovered by the PUN increase. The spark spread has decreased by roughly EUR 3 per megawatt hour compared to last year. This negative scenario has negatively affected for about EUR 25 million the thermoelectric production, but it has been partially offset by the ancillary services profitability of EUR 20 million higher than last year. In fact, the flexibility of thermoelectric and cogenerative plants allowed for taking [probable] opportunities on the MSD market.

As far as CapEx are concerned, the growth is due to the extension of district heating network in mainly Turin area. The investments made in the last 4 years have allowed to increase district heating volumes to 89 million cubic meter from 80 million cubic meter in '14. The consolidation of renewable activities with small hydroelectric and photovoltaic plants and energy efficiency business [brought] EUR 6 million of EBITDA.

Moving on the last business unit, the market sector on Page 8, the EUR 26 million increase in EBITDA derives mainly by the extraordinary contribution of the revision of the estimates of credits for invoices to be issued that was accounted in the last quarter for EUR 41 million. This nonrecurring item partially offset the effects of the adverse energy scenario and the negative impact of the gas sector. Such negative contribution of the gas sale sector is due to the absence of more than EUR 10 million reported in '17 linked to the utilization of stored gas purchased in '16 at a favorable price.

Moreover, the warmer year compared to '17 led to flat volumes related to end clients despite the increase in number of new clients. These negative elements were partially offset by the presence of positive balances related to gas supply.

In the electricity sector, the impact of shrunk margins have been reduced, thanks to the increase in volumes sold and hedging policy on procurement.

It's worthy highlighting that the number of clients is continuing to grow, around 65,000 more, reaching approximately 1,708,000 (sic) [1,780,000] clients. In addition, the further investment, the improvement of new gas stream and the proactive customer value management allowed to significantly reduce the churn rate, already one of the lowest in the market.

Also for this business unit, it's important to stress the consolidation of Spezia Energy Trading acquired in September. The transaction is considered strategic for the group because it allows to acquire small and medium enterprises customers in the (inaudible) area.

If you look at EBITDA in the entire energy value chain, stripping out the nonrecurring elements, it's possible to highlight that margins are higher than '17. This is a good result reached, thanks to an active portfolio management of sources and uses and thanks to an integrated industrial policies between energy and market business unit.

Now I hand over to Massimo Levrino, the CFO of the group, for comments on financial performance on the company.


Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [3]


Thank you. Good afternoon, everybody. We are going to Page 9, the sharp -- show the 2018 result from EBITDA-to-net profit.

Starting from EBIT that stand at EUR 345 million, it increased by EUR 110 million. This growth is affected by the increase of depreciation and amortization that grows by (inaudible) mainly related to the station in the scope of consolidation of the company ACAM and Iren Rinnovabili. Provision to bad debt stands at EUR 52.2 million, and they show a slight growth of about EUR 6 million compared with the full year 2017. The increase is related to the new accounting standards, IFRS 9.

EBT stand at EUR 389.5 million. It had an increase of EUR 50 million. The impact of the financial items are positive, referred to the financial charges that stand at EUR 59.5 million. They decreased by EUR 10 million roughly. The reduction is due to other cost -- lower cost of debt, 15% -- the reduction -- the cost of debt.

The other items gave a [net debt] contribution. In particular, the other financial charges had a growth of EUR 34 million, and this trend is due to -- in particular to the activity of the liability management by EUR 30 million higher than in 2017.

The net profit of the company consolidated using the equity method decreased by about EUR 22 million mainly related to higher nonrecurring result in 2017 of the subsidiaries, OLT. The different was EUR 14 million, about OLT. In addition, in 2017, we had the subsidiary, Astea and ASA, had extraordinary result of EUR 6 million.

The participation adjustment stand at EUR 35.5 million and includes the write-down of a royalty equity book value for EUR 28 million. And adjusting to other participation after (inaudible) for a total amount of EUR 7 million.

Coming back to OLT, we have adjusted the royalty participation value as it was triggered by the classification as noncurrent assets held for sale, allowing for its evaluation based on market value instead of the impairment process as it was in the past.

The positive result in 2018 for EUR 8.7 million is due to the positive contribution of some subsidiaries, in particular to the revaluation of the equity invested in Salerno Energia for EUR 8 million according to the international accounting standard IFRS 3.

The group net profit stand at EUR 242 million, a bit higher than in 2018 due to the growth of EBT. And the tax rate is quite stable, 30%, in line with 2017. Minority was EUR 31.1 million, a short increase of EUR 4 million due to the increased result in the particular of the company in Iren Acqua.

With the reference to the guidance of EUR 270 million that we estimated, I would like to point out that we included in our guidance only the positive extraordinary impact of White Certificates are very, very positive in the first 9 months without considering all the other nonrecurring elements before mentioned are covered in last quarter; I'm referring to the revision of the estimate of credits for invoices of EUR 41 million, and referring to the liability management of -- for EUR 30 million and to the participant -- participation adjustment for EUR 35 million that I already mentioned.

Now we are going to Page 10. You can see the cash flow and net financial position bridge, and the financial position bridge at the end of December 2018 was EUR 2,453 million and worsened by 3.4%. Actually, without considering the effects of the net financial position or the consolidation, EUR 182 million led the disposal of EUR 23 million. The net financial position would have been EUR 2,294 million. It showed a reduction of EUR 78 million. This positive result is due to the growth of the cash flow and to the decrease of net working capital of EUR 49 million. And it is a good result, also considering the increase in the revenues of EUR 340 million.

The cash outflow invested (inaudible) EUR 447 million, EUR 19 million higher than in 2017. The dividend paid was EUR 113 million, EUR 23 million more than in 2017. The increase of liability in management did it 2018 impacted on the net financial position for EUR 30 million.

As I mentioned before, the consolidation in M&A stands at EUR 182 million and was related for EUR 158 million to the consolidation of ACAM and to the EUR 4 million to appreciation of the control of other smaller companies like Spezia Energy Trading, Maira and ReCos.

And now we are going to Page 11. You see the interest rate and the debt structure. The first pie chart on the right shows the breakdown of the gross debt. As you can see, only 6% of the gross debt is at a variable rate. The remaining 94% is at fixed rate or hedged with the swap. The average maturity of long-term debt is 5.5 years. It was 5.9 years in 2017. In 2018, Iren issued the second green bond of EUR 500 million, 7-year tenures, and raised along from the EIB of EUR 80 million.

The cost of debt is 2.7%, a bit better than expected as it was 3.1% in the full year 2017. This is due to the activity of liability management in 2018. And to -- of course, the issue on new bond, the last one was at 2% roughly and to new loan, we had lower cost that -- the average cost of debt.

The second pie chart on the right, present the breakdown of the debt structure. And this shows that the Iren total gross debt is formed by bond for 77 -- 67% higher than in December 2017 when it was 56%. The other financial services on EIB funds for 25% and loans for only 8%. The total amount of financing from EBIT -- from EIB still available is EUR 155 million.

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


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


Thank you. The full year '18 remark 2 main strategic elements. Firstly, the company delivered result in line with the business plan pillars, confirming the effectiveness of our strategy. Secondly, as highlighted in business plan presentation in September '18, the direction that Iren will pursue in the next years will include a deeper focus on organic growth, with the aim of enhancing organization and processes in light of a larger scale -- business scale. All those elements connected are also to a remarkable growth on investments already started in '18 are leading to sustaining new development costs in order to cope successfully with the come-and-go opportunities.

As far as the guidance '19 is concerned, in line with our business plan target, we expect an EBITDA at EUR 880 million, EUR 890 million, taking into account Green Certificate expiring for about EUR 30 million, the negative thermal impact on first Q '19 for roughly EUR 10 million and normalized hydroelectric volumes of 1.2 terawatt hour in reduction when compared to last year.

On top of the before-mentioned negative elements versus '18, we confirm all the other business plan growth drivers coming from synergies for EUR 10 million organic growth and full contribution from the recently acquired company. Investment in '19 will be in a range of EUR 550 million, EUR 570 million, an increase equal to EUR 100 million, EUR 120 million compared to last year. The ratio net debt-to-EBITDA at 2.9, considering the negative impact of the implementation since January 1, '19, of the accounting matter IFRS 16 affecting the net financial position for about EUR 90 million.

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


Questions and Answers


Operator [1]


(Operator Instructions) The first question is from Javier Suarez from Mediobanca.


Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]


The first one is related to your last comment on 2019 EBITDA guidance. So again, if you can help us understand the difference between latest consensus number at EUR 910 million and the guidance that you are giving now at, let's say, EUR 885 million. That is a difference of, roughly speaking 20 -- EUR 25 million. And I just wanted to, if you can, again, explain us the reason for that different. I think that part of the reason is the lower thermal contribution that you have seen already during the first quarter of 2019, but I guess that is not everything. So you can help us to understand that, that would be helpful.

The second question is on the underlying growth for the company in 2018. So the underlying EBITDA growth has been at plus 3%. If you can help us understand which is then the bottom line underlying growth for the company. If my calculation is correct, the underlying bottom line growth is lower, and I just wanted you to elaborate on the reasons for that.

And the third question is on -- is twofold. The first one is on the implications of new capacity market for you and the contribution from the MSD market, the ancillary service market.

And the very last one is on the waste management business. The EBITDA margin of the waste management business, if I'm correct, has decreased from 27% to 25%. If you can help us to understand why the profitability of the waste management activities in terms of EBITDA margin is down in 2018 when compared with 2017.


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


Thank you for your question. So starting from the guidance, let's say that the 2 main elements, in my opinion, that will help to understand the difference between consensus and our guidance is mainly related to our expectation because of what happened in the first Q '19 in terms of negative impact of the very mild temperature we had. We've quantified this impact, but of course, we will have a better understanding when we report first Q. But we can assume a negative impact of EUR 10 million.

The second elements could help is our cash [flow] synergies. We reported a constant value synergy in the last years in a range of EUR 15 million, EUR 20 million, 15 looking at 18. What we expect for '19 is in an area of EUR 10 million. This is because we are in a phase of our growth where we are [softening], let's say, some development cost in order of the larger business that we are working to implement. And so we can expect a reduction in the part of synergy, even if we confirm the target we have in 2023. So these are, I think, the 2 main elements in the guidance. I cannot tell other elements because it's not too easy to understand the rationale behind the consensus.

About the capacity market and the MSD contribution in '18, we had a contribution of EUR 80 million. And '18 was, as you know, near where we -- the thermal production was lower in terms of volumes, very poor in terms of spark spread. And on the other hand, we had a very significant contribution from the flexibility of our plan.

What we expect in '19 is something different. So a very lower contribution from MSD [if I see] was tapping the first -- in first months of '19. We had the highest spark spread, a very low contribution from ancillary service.

So what we can expect in a substantially constant profitability of the thermogeneration, a different mix between MSD and spark spread.

About the capacity market, we are -- our sense is always the same. We don't expect any positive contribution in our guidance or business plan because of the capacity market. And our assumption is that the capacity market will offset the profitability of our MSD market.

Of course, this is a quite prudent stance because the implementation of our capacity market making has allowed for a higher profitability. But right now, it's difficult to understand if it will start by '19 or later or if it will start. About -- Massimo, please, about the liability management and...


Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [4]


Yes. About the net profit adjustment, without any extraordinary items, our estimate is EUR 230 million. It's roughly in line with 2017 result.


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


And about the waste and the margins on waste business unit, you have to consider that including in the scope of consolidation, ACAM, La Spezia increased the business that is related to the poorest phase of the cycle, so the collection. So this, I think, is the main reason because we have, overall, lower margin in waste business.


Operator [6]


The next question is from Enrico Bartoli with MainFirst.


Enrico Bartoli, MainFirst Bank AG, Research Division - MD [7]


I have a few of them. First of all, with regarding 2019, if you can provide us some details on the outlook for the market margins. In '18, there was an increase in the power prices, so this has had a negative impact on the electricity margins there. What do you expect in '19 if you expect the stabilization of the margins or an improvement?

And in the gas business, if you expect some positive impact from the recent drop in the gas prices in the wholesale market.

The second question is regarding OLT. You made this write-off in the fourth quarter. I think it's connected to the transaction regarding (inaudible). If you can provide some details on the rationale behind this. And if you think that the price in the transaction is, in your opinion, a fair market price. If you think that you are going to sell your stake. Or what is going to be your strategy regarding this stake.

And third question is regarding M&A. Is -- in '19, can we expect some further transaction? If you can update on the state of the art on this. And you recently proposed a transaction regarding CVA in (inaudible). If you can update us on this and elaborate a bit on the strategic rationale of this possible transaction.

And the very last one, if you can give us some details about the next steps, the timing for the renewal of the Board. If you can share some feelings on the possible reconfirmation of the COO or what you think is going to happen there.


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


Thank you, Enrico. So maybe can start from your last question. As you know, either the appointment of the Board belongs to our controlling shareholder so I cannot say anything. I just can say that, I'm -- there are lots of things to do here. I'm convinced that they can continue to give a significant contribution in order to meet our target, and I'm -- we'll be very happy to continue to do that. So we will see in next few days because the deadline for the presentation of the list of Board member will be before the end of this month.

About the M&A, for sure, we are continuing to have a very long list on our table. And we are looking both at small transaction inside our reference area as well we are starting because of our, let's say, biggest (inaudible) that we reached in last years also biggest targets. So we are [looking] (inaudible) everything is compliant to our growth path. And we are very confident to finalize some transaction on the small side of the deal flow, and mainly in the waste sector. And we will start also to do something more in the next 12, 18 months. About (inaudible), as you mentioned, we just -- we present them an option to discuss some kind of partnership focused on the hydroelectric generation. Right now, we didn't receive any, let's say, answer from the controlling the regional (inaudible) about our proposal to discuss. What we are seeing is that in (inaudible) and they are discussing about the option that (inaudible) has in order to continue to grow. And they are considering as a first option the IPOs, but I know that they are not decided yet.

About royalty, will ask Massimo to answer about the accounting. And I will say something about our view on the stake we have.


Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [9]


Yes. About the accounting. The -- first of all, the sale of our (inaudible) stake allowed us to classify the participation as an asset available for sale. So the valuation is different. It's made according to IFRS 5, and the valuation is made in relation to a fair market value estimated by an independent adviser. So it's quite different. About (inaudible)


Vito Massimiliano Bianco, Iren SpA - CEO & Director [10]


About our decision on royalty stake, as is known, we negotiate a tag along cost-sale option that will last for the next -- a bit less than 6 months. So we lever the time to understand what is better to do.

In the meantime, we can also receive other offer and evaluate them. So about your question on price, and we will see because the fair value is the market does. So we will see if we will have a better price on the market. So it's too early to say what we will do. Right now, we didn't decide anything. On the other hand, our -- a new potential partner, [FSI], has a very good feeling about the growth of royalty assets. So we can also evaluate, continue to have our joint venture with them and to exploit the maximum value as is possible from royalty with the new [parties] very committed to do that.

About your first question on expectation in energy margins mainly related to the drop in cost of gas, as I said before, we expect a reduction of the contribution in MSD, and on the other hand, an increase in (inaudible) the spark spread margin. So on the overall, we expect constant profitability in the thermal-related cogeneration.

About the -- also about the portfolio, we already covered 80% of it in order to stabilize the margin. And so we can expect an improvement compared to '18, but we cannot get the wall upside. It could arise from a strong decline in cost of gas.


Operator [11]


The next question is from Roberto Letizia with Equita SIM.


Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [12]


Very few question on my side. Well, first of all, the consideration on Javier's question at the very beginning because I believe consensus probably also as I am part of the consensus as included also the M&A. Because for example, my number include some EUR 10 million, EUR 15 million of M&A contribution during the year. So I guess 1/3 component of the M&A of the consensus figure being it should be probably the M&A.

Just a clarification on the fiscal effect of the extraordinary items. So you ended up with EUR 230 million of adjusted net income. So wondering what is the fiscal treatment of the nonrecurring element that you have reported.

And then if you can go into more details, for example, of the drivers for the performance of the other division you didn't mention, so the waste and the network themselves. So you touched more on the market division and the energy. Can you please tell us the drivers for the other divisions?

Finally, would like you to spend a few words if you have any kind of update on the possible changes on the regulations as mentioned in the past month. So any possible update on the issues of the water service, on the issues of the hydro productions. If you have any expectation or anything is moving in different directions.


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


Thank you. Start from your last question about regulation. On water, Five Star Movement proposal or new law, what for sure happened last year is a very slow process in our Parliament. And the last -- the latest news about this is the postponement of the starting discussion in the Parliament that will -- it is expect to be after the European elections. So the discussion in the (inaudible) Commission in Parliament didn't finalize text to propose to the Parliament. And the discussion now in the Parliament is expected after European election.

About the impact of new law on either production (inaudible), what we can say that we can expect, let's say, an impact on the asset value that is related to the new rules about evaluation of (inaudible). The total compensation indemnity for this, in our calculation, of course it is a past exercise because you don't know detail about this. But total indemnity, in our expectation, is higher than what we have in the book value. So the main risk could derive from the concession fees side where we can estimate an additional charge would be in the area of EUR 3 million, EUR 5 million per year. This is the highest risk that, right now, we can say about the -- either new regulation.

Of course, it will last time to understand because right now, the -- at the region, I expect it to study what to do in relation to the new state law. And so we can expect, in the next months, that something will happen. In our case, the region where we have the largest power of our plans is (inaudible), and also because there are -- the regional election at the end of May, it is reasonable to understand something by the end of this year or later.

About the consensus, because the guidance includes, as usual, only the M&A transaction that we already finalized. So in our case, the contribution is quite small, let's say, from EUR 6 million to EUR 8 million. That is the implementation of the transaction already finalized at the end of last year.

Massimo, please...


Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [14]


Yes. About the taxation extraordinary items. White Certificate and the estimate of credit invoices are subject to IRES and (inaudible). Adjustment of participation are not deductible at all, and the liability management is subject to IRES.


Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [15]


Yes. And the drivers for '19 on the other sector, hence, the waste in the network, please?


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


Yes. Yes. As we as we said in commenting in the '18 for regulated activities, the RAB based -- the more important driver will be CapEx. As we've seen in '18, we had a significant increase in the CapEx, and it will be the same in '19. So overall, we expect an increase on more than EUR 100 million, even in '19. And for sure this will be the most important driver of growth for the future in RAB business, so in all the networks businesses.

About waste, as we say, what we can expect is continuing to, say, develop the door-to-door activities mainly in Turin and in Emilia -- Reggio Emilia. And these, in the short term, will be not fully recovered in tariffs that we expect will be in 2020.

On the asset side, so exciting plans. As you know, in our business plan, there are 4 new plans. Two are related to the organic waste treatment and 2 related to the recovery of plastic and paper material. We are continuing to finalize the permitting process. And in one case, a palm recovery plant for paper and plastic, we already had the permit. And we will start the construction in next few months. We -- and in the -- for Reggio Emilia organic growth plan to expect to obtain the permit by September.

About La Spezia, we presented yesterday our proposal for a new treatment plant for organic waste in La Spezia, and we expect to obtain the permit by the end of this year. And about the plant in Turin for plastic and paper, we expect to finalize, as was in our business plan, the permitting process by the end of the first half '19. So in all of our development project, we are in line with our business plan, and we expect to finalize the largest part of the construction by 2020 in order to start on the plant by 2021.


Operator [17]


The next question is from is from Emanuele Oggioni with Banca Akros.


Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [18]


My first question is on generation. If I got it right, the -- on hydro production guidance for this year, we should expect to be quite in line with last year.

Then in -- if you could give us an update on the hedging policy as regards the forward power prices. You covered part of the production.

The third one is on market division. If you could give us more details on gas-associated margin for this year after the quite huge contraction of last year.

And the final one is on -- with your guidance on net financial position as basically the CapEx is in line with expectation, the EBITDA is 2% less than consensus. So -- but the increasing net debt is roughly EUR 100 million above. So this is -- do you expect some net working capital absorption or other items?


Vito Massimiliano Bianco, Iren SpA - CEO & Director [19]


About your last question on our financial debt that we expect in '19, as I said, it is due by the new accounting principle, IFRS 16, that will negatively affect the net financial position for about EUR 90 million, starting from first -- January 1, '19. So this is the reason why there are -- there is a difference between our expectation and consensus.

On generation, either production, we expect a strong reduction in volumes. We expect to produce 1.2 terawatt hours compared to 1.45 that we had in '18.

In terms of prices, we will not have, right now, material change in average price that we expect. So the difference will be volumes on either production.

And on market, we can expect an increase in the profitability in an area of 10% because we will recover the negative impact of the strong increase in current cost of gas that we suffered in '18. And we are going to finalize the full repricing on our customer base in order to recover the, let's say, normalized profitability on gas supply. Of course, we will not have, because of our hedging policy, some kind of extra profitability. If the -- we will see long time stronger decline cost of gas.


Operator [20]


(Operator Instructions) The next question is a follow up from Roberto Letizia with Equita SIM.


Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [21]


Sorry, as you mentioned the IFRS impact on the debt, can you also mention the IFR (sic) [IFRS] impact on the EBITDA line?


Massimo Levrino, Iren SpA - Financial Reporting Manager and Manager of the Administration, Finance & Control [22]


We can assume in the area of EUR 5 million.


Operator [23]


(Operator Instructions) Mr. Bianco, gentlemen, there are no more questions registered at this time.


Vito Massimiliano Bianco, Iren SpA - CEO & Director [24]


So thank you very much for everybody for attending our presentation. Bye.


Operator [25]


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