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Edited Transcript of ERG.MI earnings conference call or presentation 11-Mar-20 10:00am GMT

16149 Genoa Mar 11, 2020 (Thomson StreetEvents) — Edited Transcript of ERG SpA earnings conference call or presentation Wednesday, March 11, 2020 at 10:00:00am GMT

ERG S.p.A. – CEO & Executive Director

ERG S.p.A. – CFO

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

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the ERG 2019 Annual Results Conference Call. (Operator Instructions)

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

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

Welcome to all related to our 2019 annual results. Here, as usual, with me is Paolo Merli, our Corporate General Manager and CFO. In order to comply, let me say, that the last government decree to [lead] the decision of Covid-19, we are talking to you from different locations, exploiting most our remote connection system. Apologize then for any potential misfunctioning during the webcast. However, if it might be the case, our investor manager is at your disposal for further, deeper and [querying] functions at the platform, of course.

As usual, we start with the Chart #4. I give you a quick overview of the main figures of the year while Paolo will take you through them in-depth also for the fourth quarter. Anyhow, before any comments, let me say that the fourth quarter went very well, and therefore, we have met all expectations for the full year guidance. And let me also remind you that the 2019 saw ERG overcoming 3 gigawatts of installed capacity.

And now some numbers. 2019 EBITDA came in at EUR 404 million (sic) [EUR 504 million], some EUR 13 million higher than last year. Net profit was 105 — EUR 104 million, sorry. It is pretty in line with our EUR 107 million for 2018 while net financial position ended at EUR 1.47 billion versus EUR 1.34 billion, as expected. We posted better operating results in all technologies we have been running in 2019, but for hydropower due to lower water availability. The production in this sector has been of the 1.2 gigawatt hours lower than 1.7 gigawatt hour of the value at 2018.

Going quickly through each sector. We went — wind went well as the lower result in Italy was more than offset by the higher result growth while we are massively investing. The main reason for the Italian performance has to do with the weaker energy prices and lower unitary incentive value while power generation was some 150 gigawatt hours higher. These are some — is the result of incentivized schemes that was (inaudible) this year for just 32 megawatts have gone out. Abroad, we benefited from the large install capacity in France and in Germany of more than 147 megawatts in [ERS]. That contributed some additional 270 gigawatt hours. These figures are [matter] the contribution from Brockaghboy, a 38 megawatt (sic) [48 megawatt] wind farm we [bid] and then sold in Northern Ireland in 2018.

Talking about Solar. We doubled the results, thanks again for [other operators], as we move from that 90 megawatts at the end of 2018 to 141 megawatts at the end of 2019 by acquiring a quite efficient solar plant.

As for hydro power, in order to understand the lower results versus last year, on top of what we just said, one will take into account the lower production flexibility of the plant (inaudible) drought and weaker energy price scenario that brought about also lower price volatility peak/off peak.

Thermal power posted on the contrary a quite high result as compared with 2018. The main reason for such performance comes from a significantly higher clean spark spread from the cost of natural gas that almost dropped this lowest [in their] floor in 2019, allowing to more than offset both the decline in energy price and the increase of CO2, carbon dioxide cost.

Net profit for the year is EUR 104 million. Last year, it was a bit higher to EUR 107 million. In 2019, we had a large depreciation due to the relevant acquisition we made in wind and solar just — but offset by lower financial charges of the green bond issuance. The rate introduction of ACE tax easements on the investment earnings have been improving the bottom line with the attractive effect in the fourth quarter. Let me underline, this is the second year in a row that we overcome the EUR 100 million for net profit, and that is what counts the most to me.

Net financial position at year-end was EUR 1.47 billion. It’s higher than the previous year, but lower than expected, at the bottom end of our guidance. There’s no specific items to be highlighted but for better net working capital dynamic due to a shorter collecting time frame from green incentives and from new regulations. Let me conclude that we have been meeting all the requirements set forth by the rating agency in order to keep the [saving] and investment-grade ratings.

Now on Slide #5, where we have compared 2019 actual results with the last guidance. EBITDA at EUR 504 million is at the high end of the range of revised projections, and it meets also the central (inaudible) of initial guidance. The projections were met in all the business lines but hydro as 2019 was a very dry year. In wind and solar, we had a strong contribution from new install capacity while thermal benefited from higher clean spark spreads.

CapEx stands at EUR 432 million, are in line with the revised guidance range and above the highest limit of the initial guidance. The large amount versus the initial guidance is mainly due to the acquisition of Barkow wind farm and of the pipeline in Germany. Both transactions from (inaudible) never predictable deal, I dare to say that conclusion.

And net financial position, again, EUR 1.47 billion, below the lowest range of the revised guidance range. The targeted outcome was possible for the lower financial costs and the issuance of the green bond and related optimization of our [gross and] debt restructure. and as a result of the net working capital dynamics that benefited from the shorter time to cash in (inaudible) incentives as to the new regulation introduced in the year.

(inaudible) Chart #6. In this chart, you can see that in 2019 has been a very good year for us. We have been carrying out our relevant investments, authorization programs and obtaining some very important awards. Going through the chart very quickly. Expansion in France, plus 90 megawatts; wind capacity at 400 megawatts. Expansion in Germany, plus 56 megawatts; wind capacity, approaching 300. Expansion in Italy, plus 51 megawatts; solar capacity at 141 megawatts. Organic growth abroad, We have secured capacity at 100% of — versus business plan targets at 2022. And repowering, very advanced stage of authorization process for 241 megawatts as-is (inaudible) before being repowered.

In terms of revenues stability, it was of that our growth path. Talking about revenue stability, we signed PPA with ACEA Energia, 1.5 terawatt hour, paving the way for the longer duration, and capacity market in Italy. We’ve been awarded 340 megawatts of our CCGT, secured EUR 11 million revenues per year in 2022 and 2023.

And last, but very important for us, ESG Award: ESG rating AA from MSCI, very, very important, very, very proud; again, ranked among the 100 Corporate Knights Global Index. So we went 35th in this quite important index worldwide; we confirmed the rating B from CDP and let me say — and saw a very good year again [rated by Gaia]

Now some charts relating to where we are with the different countries. First of all, in Chart #8, there’s the comparison of the megawatt installed in 2019 versus 2018 in the countries where ERG is exposed. Easy to say that 2019 shows a decline in development of the onshore wind due to longer timing procedures, that many times had gone longer due to the accumulating delay of the transmission system operators in deploying their investments. so as to get the brief [fleet] for the development of the renewables as it is in the national climate and economic plan, so a longer time to market for new capacity in our, say, core countries.

But in spite of that, if you look at Chart #9, despite of what we’re [adjusting] in the previous chart, we are on track and on the assets after the development of our business plan that we shared with you 2 years ago. As of today, we’ve increased by 342 megawatts our capacity. That represents the 40% of the 850 megawatts that will be up and running by 2022. Let remind you that in M&A, we have overcome the business plan targets of 250 megawatts for we have already acquired 265 megawatts.

On Chart #10, we have simply summarized what we got in 2019. We grew by 198 megawatts. We do see different (inaudible) and to different technology, and all of these assets are entitled to get fixed energy prices for 11 years on average. 198 megawatts represent some 10% of our renewable energy source capacity at the beginning of the year.

In Chart #11, a (inaudible) of what we are doing abroad. We referenced to our greenfield development projects with a longer side — with M&A in the power are one of the key stream of our growth. You can see that in the next couple of years, we will be bringing under construction 285 megawatts. That, if I add the 77 megawatts already growth in operations in the previous year, allowed us to confirm that we will achieve by 2022 the target in business — in the business plan.

Okay. If I were to bring Chart #12, there is — in this chart, our investment program in Italy through repowering and rebladings. All the wind farms eligible for repowering, 407 megawatts with COD is expected in 2022 at very advanced stage, and all of them have already secured their grid connection. We are confident to have them up and running by 2022. And finally, we have started the authorization process of further 415 megawatts to be brought to COD from 2023 onwards. As for the blading — as for reblading, we plan to have completed the process for all 4 wind farms by 2021. By and large, we are on time and on budget despite of (inaudible) authorization is sometimes harder than expected. And ahead of all the repowering projects to get the (inaudible) status, we are now (inaudible) working hard in order to make the regulators extend the possibility for off-shores also for repowering through the amendment of the farm (inaudible) so-called farm incentives law. As we believe, we strongly believe it’ll be essential for Italy to reach the targets set out by the national climate plan. Just let you know that is an area, it’s working progress, very important.

And finally, Chart #13, our pipeline. We saw (inaudible) ERG in this chart. That includes both installed capacity and pipeline. Let me bring to your attention that ERG, by carrying out these projects, could get a dimension of some 5,000 megawatts, 3,600 megawatts by 2022 and the remaining afterwards. So paving the way for a steady, continuing growth.

And now I will hand you over to Paolo for his analysis.

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

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Thanks, Luca. Good morning, everybody. I’ll start by commenting on the price scenario over the fourth quarter. I try to go a little bit quicker than usual as Luca has already commented on the main effects that drove our results over the quarter and the full year. Nevertheless, I tried to add some more details for you.

I’m on Page #15. Power demand in Italy, down 2% year-on-year in the fourth quarter. Here, you have the trends for the different sources in Italy all up year-on-year with the exception of thermal production, which was down. Looking at our operations in general terms, we can say our assets performed in line with those national trends in the renewable space, net, of course, of the new installations in Italy for wind and solar during 2019 while our portfolio was broadly in line with last year. As far as thermo is concerned, our CCGT plant produced up 8% due to favorable trading conditions in Sicily and its higher resilience given our plant captive markets toward the industrial side nearby.

Let’s comment on electricity prices in Italy. I think the chart is self-explanatory, a fairly weaker price scenario brought down by the falling gas prices, only partly offset by the rise in CO2 price. Price indicator for renewable in Italy, including feed-in-premium, was EUR 140 per megawatt hour driven down year-on-year by both the lower merchant price and the lower value of incentive, which, as you know, is calculated on the basis of last year’s average national electricity price. It’s important to underline here that most of the merchant effect was new price thanks to the hedging actions taken over the period according to our risk policies.

Our CCGT clean spark spread was up significantly year-on-year from EUR 0 to EUR 8 per megawatt hour during the quarter. These positive numbers also reflect the higher premium versus PUN in Sicily on a year-on-year basis, which almost doubled, EUR 8 against EUR 4 last year.

Abroad. In the graph at the bottom right of the chart, you can see here the average reference selling prices for our productions country by country. I think it’s worth noting that significant upward trend in prices in Bulgaria and Poland partly offset by poor scenario in Romania.

Let’s move on. Now I’m at Page 16, commenting on economics in a nutshell. I’ll prefer to comment on full year results here, which I think gives you a more comprehensive picture of what happened during the year and its main trends. EBITDA amounted to EUR 504 million, at the top of our last revised guidance but also at the low end of the initial guidance given at the beginning of 2019. The number is, in a way, up 3% year-on-year, which is not bad considering the tough, the very tough comparison in the hydro segment. In fact, among the main items to comment on are significant weaker contribution from hydro that was driven down by consistently lower volumes in a business environment, anyway characterized by a weaker price scenario.

Conversely, I should remind you, full year 2018 was an exceptionally strong period from this standpoint. So as I said, we suffered a very tough comparison, which numbers translates into a more than EUR 50 million of volume effect on a year-on-year basis, EUR 50 million. That’s a clear idea what happened in the hydro segment. Then fortunately, higher wind production, especially abroad, driven by a larger asset base in France and Germany following the successful M&A season, but also the contribution from our first greenfield installations, again, in France and Germany. Contribution of solar assets doubled, which is a quite important number, thanks to the acquisition of Andromeda, consolidated as of January 1 and to better solar availability in the period. CCGT plant was up, thanks mainly to stronger and better profitability, especially in Sicily.

So I think there is another and quicker way to look at our results for the full year, maybe could be the following. On one side, as I said, we had EUR 50 million less from hydro. That amount was compensated by more or less EUR 50 million more from the new assets. So these 2 effects neutralized each other. So the remaining growth came from a better performance in wind and thermo. It’s as simple as that.

Let me now go segment by segment, starting with wind and focusing on the fourth quarter again. I’m on Page #17. EBITDA in Q4 was EUR 87 million, up 16% year-on-year, thanks to a better performance, both in Italy and abroad. Better wind conditions over the period, more or less everywhere, but in particular, we have a good performance in France and Germany, also thanks to the new assets, which contributed EUR 7 million during the quarter and, please note and keep this number, EUR 20 million for the full year. I’ve already commented on the price scenario, so I move on.

Just a quick overview of production, which is the consequence of what I have already commented. But let me once again underline the strong increase in volumes, plus 21%, for sure, thanks to better wind condition in Italy, but in particular, to a huge rise recorded outside Italy, in particular in France, plus 51%, and in Germany, 34%, this thanks to the new installed capacity in service. No more to say here.

Let us move on commenting on Solar, which include, as you know, the 51 megawatts of Andromeda portfolio effective as of January 1. I’m on Page #18. Here, again, production was up 60% year-on-year, thanks to the new asset. Unitary revenues for the entire portfolio was EUR 302 per megawatt hour, up compared to the EUR 284 million in the same period, so in the fourth quarter of 2018, as the new assets, I’ve already commented several times, enjoy an even stronger incentive scheme. So the combination of the higher production and the selling prices brought in from this acquisition led to an EBITDA in the quarter of EUR 7 million compared to the EUR 4 million in the same period last year. But probably, it’s more important here, again, to focus on the full year results, which have almost doubled EUR 32 million in 2018 against EUR 63 million in 2019. And here, it’s important to say that notwithstanding the increase of installed capacity was about 40%. And in reality, the EBITDA doubled, and that is the result of the, let’s say, outperformer — outperforming capacity of the new asset.

Let’s move now commenting on hydro. As you know, I already commented this is the biggest effect all over our results. EBITDA, even in the quarter, was EUR 23 million, minus 18% driven by a poor scenario, even though during the quarter, we had the first recovery volume with production up 7% year-on-year. But I think here, again, it’s important to focus a little bit also on the full year results with production down 30% year-on-year. And in terms of EBITDA, you see we had for the full year, rough, more than EUR 50 million less, which is mostly attributable to the volume effect. Here, also the scenario wasn’t helping. The unitary revenues, on average, were at EUR 94, down against the EUR 114 recorded in 2018. That’s for mainly the same reasons, the lower unitary incentive price coupled with a lower merchant price. Let me also underline this is a positive item to be said, that our water reservoirs at the end of the quarter and even to these days, say, are — were up year-on-year and even higher quarter-on-quarter, following the heavy rains reduced during the fourth quarter. So as a matter of fact, as today, we have roughly 90 gigawatt of energy stock in our lakes to be used probably during the course of the year.

Let me now comment on the CCGT results on Page #20. EBITDA in the fourth quarter was EUR 11 million, plus — more than double, so plus 120% year-on-year. The strong performance is mainly, say, explained by 3 factors in order of magnitude: the higher clean spark spread due to lower gas costs and the larger premium on the Sicilian market, which was almost doubled in the quarter compared to the quarter of the same period the year — the previous year; the higher volumes, which are also a consequence of the increased spark spreads; and also, the greater volumes of white certificates given the highest steam withdrawal from the use of [refinery].

And now investments. I’m on Page #21. You are focusing again on the full year 2019. I think it gives a better representation of what we are doing. We invested EUR 432 million, which is a quite big number and is composed as follows: EUR 364 million in M&A. According to our plan, the M&A was expected to deliver in the first 2 years of the plan, and that was exactly the case. So the EUR 364 million in M&A, I was saying, are mostly related to the wind acquisition in France and Germany as well as the acquisition in solar space of Andromeda’s portfolio, 51 megawatts, in Italy. But it also include the amount spent to buy the ready-to-build Craiggore wind projects in U.K. as well as the amount related to the acquisition of a pipeline of roughly 200 megawatts of projects at a different stage in Germany; about EUR 40 million — on top of this EUR 364 million, about EUR 40 million was invested organically in wind developments, of which about EUR 15 million in Germany related to the construction of — in the wind farm, which is now up and running since June 2019, while the remaining CapEx was spent in other initiatives, especially for the repowering and reblading in Italy, but also in the U.K. to pave the way to start construction in 2020; EUR 23 million of maintenance CapEx spread across all our technology. So you can break down our investments for the year in these 3 streams, basically, EUR 364 million, M&A; EUR 40 million, more or less, the development, organical development in wind; and more or less EUR 23 million in maintenance. But the key message here is that we still invested significant amount of money in growth in 2019 as well.

Let’s now move on the — on to the financials, commenting on profit and loss on a carrying basis. I’m on Page #23. Let me again remind you that these figures, as usual, are shown on an adjusted basis. So without including the effect of IFRS 16 and IFRS 9 as we believe this gives you a representation that is more consistent with our cash items. In any case, all these effects are included in the reported figures and explained in our profit and loss statements.

That said, let us continue. Already commented on EBITDA. So going down and focusing again on the fourth quarter, we had higher depreciation mainly reflecting the consolidation of the new plants. Net financial expenses were at EUR 13 million, lower year-on-year despite the higher net debt. Please note that, that was also the trend and the case for the full year. That was made possible as the new medium, long-term project financing debt from the new assets was more than offset by the lower cost of gross debt, mainly as a result of the swap between the project finance with corporate debt at much better conditions. So basically, we did EUR 500 million of liability management program, and in parallel, we issue EUR 500 million green bond in April 2019 with an important and significant effect on our cost of debt, which in the end was practically 1% less than it was in 2018.

Taxes. Tax rate in the quarter was 16% against 29% in the third quarter. This quarter also reflects the reintroduction with attractive effect in 2019 of the tax breaks known as ACE. So minority is a small number, but we commenced the refresh to the only minority we have in our portfolio, which is the 21.5% stake in Andromeda as by Soles Montalto. As a result of all this, adjusted net profit amounted to EUR 29 million in the quarter versus EUR 15 million in the same — over the same period in 2018. But even more important, here again, the full year net profit was about EUR 100 million, EUR 104 million in the full year 2019.

Now finish, let me comment on the cash flow statements for the full year. Again, I’m Page #24. Net debt closed at EUR 1,476 billion, say, at the bottom end of the range given in our guidance, but up by EUR 133 million from the end of 2018 as a consequence all the cash items shown in the picture. So touching on all the items from left to right at EBITDA, investments, the positive working capital trend, EUR 49 million, which is basically related to the fewer outstanding days for payment of incentives by GSE. Financial charges, already commented. The dividends paid remain at about EUR 40 million paid in taxes, which are included in the EUR 81 million taxes and others, which also includes EUR 43 million associated to the write-off of the positive fair value written at the time of the ERG Wind project finance acquisition, which was unwinding — unwinded and the early prepaid, as said, in April 2019, along with the issuance of the green bond. So all these effects led to the debt I commented with a leverage of 45%, which I believe is very much consistent with the nature of our business.

So as strong as I try to to go through the results a little bit faster than usual, but it’s still hope to have touch on all the key items. So it will now hand you over to Luca for his final remarks.

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

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Thanks, Paolo. Now the guidance for 2020 compared to 2019 actual figures. Before going through the main assumptions forecast ranges, let me bring to your attention that 2020 can be seen as a tipping point year for ERG. In fact, for the first time since we started deploying the business plan ’18-’22, we’ve improved in the following CapEx projections, mainly investments to the wind farms from greenfield projects abroad that we have previously included in our pipeline.

Going to the figures. EBITDA will come in between EUR 500 million and EUR 520 million, higher than last year. Wind is expected to post a result in line over last year. For Italy, we see a slightly lower production based on historical performance. We see also lower zonal energy prices, but it will be offset by higher green incentives unit value. No significant megawatts will be phasing out from incentivized scheme, just 6 megawatts. Net EBITDA will be initially — is expected to be as high as last year. Abroad, the contribution of the new acquired (inaudible) wind farms along with the better energy price scenario in Eastern Europe, we have (inaudible) a projected lower average production in all of the countries.

Now bringing about the results in 2020-’19. Solar resulted also equal to what we achieved in 2019. Some same install capacity in operation and more differences in terms of generation and enterprise scenario. That, in the end, will offset one another. Hydro, on the opposite, could achieve better results. It simply comes from normalizing the annual production on the middle of the 10-year historical performance. Remembering that in 2019, there was (inaudible). The plan, we benefit also from higher use value of the green incentives. Moreover, please not forget the largest traction improve the plant flexibility, that is to take advantage of both (inaudible) and the [dispatching] market services. And last, but not the least, I think today, we have roughly 90 gigawatts power (inaudible) as a consequence of the rain force at the end of 2019 while (inaudible) was [practically] 0. Thermal, in the end, was lower result as last year, that to do with lower (inaudible) in Italy and the phase out from the white certificate mechanism of the second models of the plant, [1 6 1] was already out. But here, we are working to renew this white certificate program. While this scenario also in light of what’s going on these days, let me say that about 70% of renewal production and 90% of our CCGT spark spread are covered against price situations. So regardless, we’re giving to you right now are (inaudible) feedback. In summary, now we expect 2020 results to be better than in 2019 as well.

CapEx, to say the range EUR 185 million-EUR 215 million, lower than last year. Investing in 2020 are mainly for the construction of some wind farms’ growth that were being developed from our pipeline. If we exclude the new acquisition of 38 megawatts in France and the usual (inaudible) CapEx, the larger remaining amount will be to spent to be 4 farms in U.K., some 200 megawatts; one in Poland, 36 megawatts; and 3 in France, 50 megawatts. CapEx in 2020 also includes some [layers] refer to the initial investment in thermal generation in order to allow CCGT plants to benefit once again of (inaudible) as a component of the national energy climate plan broader energy [strategy].

Net investment position is, say, between EUR 1.36 billion and EUR 1.44 billion, lower than last year. Let me mention that the [align] will be lower, so higher expected EBITDA; lower CapEx than in 2019, that in 2019 included some large investments through M&A transactions; a lower financial charges, thanks to the positive effect from the (inaudible) operations made in the previous year, in particular, the green bond issuance. Dividend will be EUR 0.75 per share as envisioned in the business plan.

I finished my speech. Then let’s — now we are ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Roberto Letizia of Equita.

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

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I would like to initially focus on the guidance for 2020 and particularly regards the power prices. If it’s possible, I would like to understand on how much of your production is currently exposed production margins. Of course, it’s currently exposed to the fluctuation in the power price. And on — actually include the low end and the high-end part of the guidance that you provided on EBITDA.

I noticed you’re well ahead in the program for the repowering, that the ratio of which you will increase the capacity from the repowering is very high. And can you please provide some details on any indications on what is the breakeven price for those projects on repowering, in the case you will never achieve the allowance to participate in the tenders? And if you can provide more details on when do you expect any decision to change the law to participate in the tenders will occur and if you have any idea on how the second tender resolved in the past weeks. Have you got an indication of the fact that standard is going to be short of capacity again as it was in the first standard outcome?

A clarification on the, water reservoir availability. So you’re mentioning the gigawatt availability in the lakes. I was wondering if this is because the beginning of 2020 has been weak in terms of hydro productions or it seems like this is something that is simply the water production is okay in the first weeks of the first quarter and then these rainfalls are adding up to a normalized first quarter. Can you please clarify this picture?

The last one and maybe some follow-up later. You’re pointing to lower spark spreads in [size] this year. But actually, the gas price are very, very low. So I was wondering if this may provide to be wrong in the sense that throughout the remaining part of the year, the very low gas price will allow you to get higher spark spread.

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

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Okay. Thanks, (inaudible) answering. You better try to answer. Let me — let me ask you, please, to consider that we are connected from different locations. So the answer may rather have some delay, let’s say. Anyhow, power price exposure as per our guidance. So the exposure is quite low today in the situation of the prices in the market because, as you know, we have a 3-year rolling hedging procedure. Based on that, the year of delivery, power to be delivered in a specific year has to be hedged during the 3 years before the year of delivery.

So now we have already hedged most of our production, and say, more than 65% as for the production relating to the unpredictable sources of energy and almost more than 90% of the spark spreads related to the execution date.

Having made such an exercise in 2018, in ’17 and — sorry, ’19, 2019, 2018 and 2017, the level as for the hedging price is quite higher than the forward curve that you can see on the screen today as well the price. So the amount of power, subject to, say, the risk of the fluctuation is quite small compared to the total amount of the power that we are about to sell this year.

Moving to…

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Roberto Letizia, Equita SIM S.p.A., Research Division – Analyst [4]

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Sorry if I interrupt you. But when you say about 65% of the unpredictable sources, for what [legal part] grants the hydro? Is that 65% to be accounted on the portion that is not — does not have green certificates?

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

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Yes. Hydro, solar and wind altogether. We — they are classified as less in our origin point, then we have the spark spread, which relates to the CCGT because they have 2 different cost structure and different volatility, and then we hedge that according to.

Repowering, good questions. Very important to us. Say that power price in the long run. As I said, when I launched this project 30 years ago, I said that it’s very difficult to predict what will the price in the long run be. But that we made a quite stronger and deeper stress test on the return. And we said that — I said that also with the poorest and weakest scenario applicable. The return on these investments have been worth having and then making this investment.

So what counts much in this moment is not really the price in the long run. In particular, if we take into consideration the actual situation, that is not something that could be, say, affordable and that should stay as is in the medium term. That’s a specific situation worldwide, but for the virus, but also the price of gas and the like.

But on a normalized situation and based on the stress test that we made and that are still valid, it’s important to do — to go ahead with these investments is very important, and it’s more timing in terms of value creation.

This story has to do with the stability of the prices. And then we go back talking about the famous (inaudible) degree that you mentioned. We are working and have been working very hard over the last, say, 18 months with the most relevant authorities. We are working also, along with our peers. Because everybody — not everybody right now, but almost everybody. Recognizing that the powering is crucial to, say, open up a, say, a wave of new investment in the country, very important amount of investment. Positive to the country, positive in order to support the achievement of the peak targets. And then say we are still in discussion with the Minister of Economic Development. But we are — let me tell you that we are not alone now. We have good companions with us and maybe that, also on the basis of the outcome of the auctions, something could change going forward. Based on the deployment of our investment in that specific direction, I dare to say we have strict time for this change in law.

And I’m confident that at the end of the day, something could really change. Because it’s a win-win situation for everybody. But for the time being, let me stay with what I said and what I’m telling you now.

So investment is worth doing, also in quite a low price scenario because investments are efficient, production is very, very high. And we are talking about, say, the most insight in our cash. As for the new — for the last auction, I don’t have any information on that. But we almost say that I heard it exactly that machine have gone well. That’s what I can tell you. But they are rumors so please consider that. Anyhow, it would be normal to say that going forward, also in Italy, auction could be undersubscribed, and that should help us. On the other hand, as for the change in law, allowing also the wind farm to build power, to take part to the tenders. In terms of the market production, say that the high production is eligible to get incentives. So we try to optimize the production in that direction.

So far, let’s say that, by and large, after a couple of months, we are even more than on budget as for the performance, the EBITDA performance of 2020. So let me tell you just that. The reason why we had, say, some power store in our late — at the end of last year, it was 2 big project. There were some rainfall close to the end of 2019. And of course, because we thought it was better to keep this power for 2020 based on what I just said to you as for the incentivized mechanism.

Last question, spark spread, yes, the price of gas is very, very low. But let’s say that we tend to be conservative when we give projections regarding our natural gas side brand because we expect that the price, the power price could be a bit lower in Sicily compared to last year. So that’s the main reason.

We want to be conservative in that direction. And that’s why I input in forecast, a lower, let’s say, level of clean spark spreads. Though I agree with you, the price scare of gas that is very, very low. Anyhow, price of gas is very, very low, but it’s due to the, say, in actual situation, is based on the COVID-19, the impact on the price of natural gas worldwide and the like, I don’t think in the medium-term, it’s a situation that could be representative enough of the industry.

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Paolo Luigi Merli, ERG S.p.A. – CFO [6]

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Luca, just Paolo speaking for a follow-up to the question of Roberto. As far as the hydro price wars is concerned, this day, this precise moment in time, we have roughly 100 — 100,000 — 100 gigawatt hour of energy stocked in our lakes, which is a number significantly higher than the one that we had at this time 1 year ago. So it’s a positive, and we are still keeping in our lakes because waiting for better prices. I offer to have answered this question and support this past spread. Let me had a couple of considerations. Consider that we are in Sicily. So one of the reasons behind the strength of our spark spreads, it’s also the premium we are enjoying in Sicily, which was EUR 10 per megawatt hour in 2019.

When coming to 2020, as Luca said, let me elaborate a little bit more on that. We are assuming much more conservative projection for 2020, both for this spark spread, the baseload spark spread, and for the Sicilian premium. So that’s why our guidance is already updated to this more conservative projection, but let’s see what happens because Sicily, in a way or in another, keeps surprising us on the upside. Roberto, I hope to have answered…

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

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Yes. Though what was remaining on the least idea — sorry for taking so much time, but the hydro is going very well if the majority of the margins are hedged and the exposure of the profit — production is slow to the power prices. What actually is the case of the low end of the guidance account stage?

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Paolo Luigi Merli, ERG S.p.A. – CFO [8]

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Let’s say, the range of the guidance reflects the volatility of production, but for our integrated portfolio. Because we have 4 different technologies and time to time, we can demonstrate more or less empirically that when there is good wind, maybe there is no water or compensated by higher solar if the rest are weaker than the CCGT is performing well. So this is based on the volatility of productions and also, on the volatility of prices.

So it’s what we call the profit at risk. And the range is more or less consistent with profit at risk we have right now after 2 months of actual numbers because, as Luca said, I repeat it, January and February went well. So we are more than in line with our budget and the volatility of the range is then consisted — consistent with the profit at risk we see, say, and today. And consider that 70%, more or less, almost 70% of the production is covered, is fully hedged against the price for sure.

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Luca Bettonte, ERG S.p.A. – CEO & Executive Director [9]

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Let’s move on. Okay.

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Operator [10]

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The next question is from Sara Piccinini of Mediobanca.

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Sara Piccinini, Mediobanca – Banca di credito finanziario S.p.A., Research Division – Research Analyst [11]

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And I hope for you and your families are well in this critical situation. So first question is on the — more on the long-term guidance. So for 2022, we are expecting EUR 560 million according to your business plan. So starting from EUR 520 million, so the higher end of your guidance for this year. This EUR 40 million are mainly coming from repowering? And also, again, sorry for coming back on the question — on the guidance for 2020. But is it correct to interpret that starting from this year, basically, you would have the negative effects from CCGT, the expiration of White Certificates, about EUR 50 million and then around EUR 5 million? So basically, going back to the level of last year, around EUR 50 million of CCGT, which means less EUR 20 million on CCGT. And this should be more than compensated by the hydro. So production coming to a more normalized level and also maybe benefited from the ancillary services is just to see if the moving parts that I’m assuming are correct. Then I have a specific question on repowering. So what is the duration of the contract for the right-of-use of the land. And when you extend this contract because of the repowering, is there a risk that the land owners may ask to increase the fee?

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Luca Bettonte, ERG S.p.A. – CEO & Executive Director [12]

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Right. As for the 2022, it’s very difficult projection to make in the back of reconciliation between the numbers. Let’s say that we are on track, on budget, on time, on budget, and then we are happy with that.

As you know, this EBITDA at the end of the business plan is, say, today confirmed. We started a quite important development program. And if you want to put that this way, say, transformation of the group in a sense that since last year, we had been growing mainly through M&A starting this year, and you have seen in our projections as for the Capex, we have changed. It’s a turning point for us. And now we are investing on what we’ve been able to develop on our own in the sense that we got pipeline and we develop from greenfield. And that’s very important because it’s quite relevant proof of the evolution of the group from oil to renewable, through M&A and now being the renewable industry to be able to grow, say, on our own 2 feet, let’s say. That’s important.

So the growth from now on is mainly linked to the capability that we have worked to build new capacity. It’s a mix of different revenue streams, a portion from repowering and a portion from what we call business development abroad. That’s really the amount, let’s say, from the amount from — sorry, from a BD, and it could be a bit higher than it was from repowering because it’s faster and broader to some new capacity.

As you have seen in this presentation, we are working, we are building almost 300 megawatts. And all of them are, say, outside of the country, of Italy because we’re talking about Poland, France and in the U.K.

And so it’s telling you that stateside could be, say, faster than in this country. So let me take — so far so good in a sense that we are complying, we are meeting the expectations that we shared with you a couple of years ago , to the program to transform this group from an M&A investment, let’s say, to an (inaudible) of its pipeline, and this is very, very important.

As for the guidance relating to this year, yes, it’s the sort of the — I mean, much for the specific number, maybe that, Paolo could give you some more precise figures. Really, it’s quite — it was — it has been very, very easy, let’s say, to identify the number for 2020 simply because we are relying on the same asset base of the previous year, more or less. And that sometimes difference is because some assets came into force, became operating during the year in 2019. So there may be some impact in terms of larger perimeter, but not relevant than March. So we are forecasting, say, to achieve, to have a better result because of — we have a bit larger perimeter because we have already hedged most of our production, as for the sale of the power, relating to. And because we are, say, forecasting a year that should be a normal year. Normal, what does it mean is that solar is going to be, in Italy and abroad, could bring back the same result approximate to last year. While we are simply, say, bringing to the normality, the production of the hydro plant.

Last year, there was a drought, if we say, and now we are simply forecasting that in 2020, the production to be aligned with the 10-year average, as it should be. So nothing particularly, say, new or difficult to be understood and to be projected. And we have some power, say, stored in our lakes that could give me the opportunity to tell you that we are confident that we achieved such a result by year-end.

Also, on the upside of the coin, yes, I have already discussed the performance, the projected performance of the gas-fired plant here. Based on what I just said, what Paolo has just told you, and based on the valuation of the — what specifically that is in line with the existing regulation that we are talking about, so say, EUR 250 per megawatt hour based on the production that is affected by the fact that we are phasing out from this specific certificate mechanism. So lower performance sensitivity from a natural reason, we are exiting our certificate mechanism and higher performance from hydro simply taking it to its, let’s say, normality, a normal production over the last 10 years average.

So the land relating to the repowering. It’s a part of the game. So we have we been discussing the months and been closed in agreement for months. As for the landowners when it’s the case, sometimes, we have still agreements in place that last for a long period of time. Anyhow, for sure, before starting the construction, we have in our hands on the right to that as for the line.

Increasing amount of fees, yes, but not that much. That’s something that we had already included in our projections when we made the decision to start with this program of investments, and they are already reflected in the numbers that I’ve just commented.

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Operator [13]

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The next question is from Emanuele Oggioni of Banca Akros.

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Emanuele Oggioni, Banca Akros S.p.A., Research Division – Analyst [14]

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Actually, my question have already been addressed.

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Operator [15]

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The next question is from Roberto Ranieri of Banca IMI.

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Roberto Ranieri, Banca IMI SpA, Research Division – Research Analyst [16]

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Yes. Good morning, everyone. I’ll try to be very short. 2 quick questions on figures. The first one is on the 2019 results, EBITDA. Could you confirm if — it is not clear for me if the lower EBITDA in hydropower has also, it is only due to hydro volumes? Or there are also ancillary services contribution lower than last year?

My second question is on maintenance cost, EUR 22 million. Can we assume this figure as a stable value, of course, related to the — to a different asset base also in the longer term? Or if you can give us some value on maintenance cost in the long run?

The other 2 questions are on competitive scenario. Terna announcing a very huge CapEx program for the national grid. I’m wondering if there is also an important investment in the connecting Peninsula with Sicily and Sardinia. I wonder if this could be a risk for the thermal power generation in Sicily in terms of margins or in terms — also in terms of the premium price?

And my very last question is on the greenfield development all over the — globally and all over Europe. Do you — many companies also, non renewables company entering into the renewable sector. Do you see this new scenario and new competitors to have an impact on power option prices or to cause any cost inflation for equipment supply in the mid, long term?

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Paolo Luigi Merli, ERG S.p.A. – CFO [17]

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Maybe — Luca, I’ll try to answer the first question, which is really related to the performance, the results of hydro in 2019.

As said during the webcast, the main effect is related to the, say, to the volumes. But consider that the volumes is anyway associated to the selling price because part of the production is eligible for green — for incentives, say, through a mechanism, which tends to award the extra production.

So in 2018, when we had productions well above the budget, for sure, we had the benefit of the merchant price on that production. But we also enjoyed incentives on part of that production. So that’s the reason why on a year-on-year basis, the hydro EBITDA in 2019 was more than EUR 50 million less compared to the one recorded in 2018. This is the — I mean, it’s only related to volumes, but part of the economic value is also associated to the fact that we had less contribution from incentives.

And for the maintenance Capex, let me say, the EUR 20 million, EUR 25 million, which is the amount spent in 2019, is more or less stable going forward because it’s not going — because the wind, the capacity additions are mostly related to wind, where everything — or more or less everything is expensed in the profit and loss. So the maintenance CapEx for the asset base of the group should remain in that region.

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

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Okay, right. As for your question #3. We are very — we are happy that Terna wants to invest a lot on the grid in order to get it fit for the portal, that means to receive more, say, green energy from the operators like us.

But specific question, no, I don’t fear — I don’t have any — I don’t have any fear over the 3 cables and than how they’re going. So the cable that should connect Sicily to Sardinia and then go to the mainland. Because our Sicily is the profitability. But for the specific, say, impact of the differential in price — dollar price of Sicilian versus the rest of the mainland. The profitability is mainly linked to the long-term agreements that we have with our customers in the region. We are providing steam and power refinery to the service, and we are working there, as we have just mentioned, in order to obtain again the right to be considered highly co-generative and then to benefit for some carriers, 10 years further of the White Certificates mechanism. We had already obtained all the authorization from the GSE. We are, say, improving the agreement with our customers as for the, say, supply of power steam. And so wait and see when we are ready — or I give you specific numbers that are quite interesting figures. So at the end, no, I don’t — I’m not afraid. I’m not worried about this cable as for the impact on CCGT. And so, roughly speaking, for sure, if they connect, disconnect us, will be, say, put in place maybe some impact on the price could happen for sure. But it’s the same when we were talking about what would happen when they have finished — we have finished the connection between Sicily and mainland, (inaudible) and we are still here benefiting from the location named Sicily.

So, no, on the opposite, I’m really — very curious to see then we’ll be able to deploy these investments because they could improve the way that they can accept, receive larger amount of power coming from the intermittent source of energy.

As for your last question, yes. So there’s a lot of competition coming. For sure, everybody like to invest in this industry. Also, the major oil companies, maybe that you were referring to them. And for sure, when competition is fiercer, price could try to increase as for the components and for the time to market and the like. But it depends when you started. We started, let’s say, 3 years ago, and now we are on track. We are on time. We’re on budget because as I just told you, we have announced that this year, we will be building almost 300 megawatts. But in order to get the authorizations on that, you had to start your work earlier, even earlier. So competition could be fiercer. But we have already set up all instruments, organization, and we are still improving them in order to be competitive.

In terms of supply chain, we have almost finalized a medium-term agreement with our suppliers in order to be sure that we will get all items that we need in the quarter in order to meet our expectation in terms of both cost and timing. Anyhow, the industry is quite interesting for a lot of, say, operators and some are coming from outside the box, let’s say.

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Roberto Ranieri, Banca IMI SpA, Research Division – Research Analyst [19]

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So basically, the — for the investments that you have to do in this business plan, you already secured all the supply — equipment supply. Is that correct?

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

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Yes.

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Roberto Ranieri, Banca IMI SpA, Research Division – Research Analyst [21]

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Okay. Very good.

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

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We have medium-term agreements with the main win to buy suppliers, and that’s what we have been working here and we’ve been working many, many months. And now we are about to close this agreement. And so I’m not worried about that.

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Operator [23]

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Gentlemen, there are no more questions registered at this time. Back to you for any closing remarks you may have.

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

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Right. No, simply to say, take care, everybody. Stay at home. Now I’m going to my house after this conference call. Thanks for being here with us anyhow, and we are at your disposal. Good day. Bye-bye.

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Paolo Luigi Merli, ERG S.p.A. – CFO [25]

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Bye, everybody.

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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.

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