Enel SpA
Q2 2021 Earnings Call Transcript

Published: 2 Aug 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Enel first half 2021 results. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session I will now like to hand the conference over to your speaker today, Monica Girardi, the Head of Investor Relations. Please go ahead.

[Monica Girardi:]

Thank you. Good evening, ladies and gentlemen. Welcome to our first half 2021 results presentation, which will be hosted by our CEO, Francesco Starace and our CFO, Alberto De Paoli. In the presentation, Francesco will provide some highlights of the period and will sum up the milestone achieved, while Alberto will walk you through the operational and financial performance for the group. Following the presentation, we will have the usual Q&A session. We ask those connected to the webcast to send questions only via e-mail at [e-mail]. Before we start, let me remind you that media is listening to both the presentation and the Q&A session. Thank you. And now let me hand over to Francesco.

[Francesco Starace:]

Thank you Monica. Good evening everybody. Let's start with the highlight of the period. We are at chart number one of the presentation pack. The operating dynamics of the quarter of the year showed a trend of significant recovery and the industrial pickup is now visible in the financials of the period. As we detail later, the second quarter represented a turnaround across all industrial KPIs that are now accelerating and getting back to the levels of pre COVID-19. Progresses were made also in simplifying the group with the completion of the merger of EGP assets into Enel Americas and the corporate reorganization in Colombia. In light of the predictable evolution of the business, we can therefore confirm our targets of the year including the guaranteed dividend per share of €0.38 per share for the 2021 year. On slide number two, we dive into some industrial KPIs of the second quarter. In renewables, we tripled the capacity builds with 1,100 megawatt installed only in the second quarter of the year making a strong acceleration that supports our target of the year around 5,800 megawatts. Our networks volumes of electricity distributed are now back to pre-COVID-19 levels, increasing 11% versus the second quarter of 2020, highly impacted by lookdown measures, especially in Latin America. In customers, the electricity sold to our customers in the free market is up remarkable almost a 20% year-on-year. So industrial performance is back on track. The next slide shows the upward trend on investments that we are deploying. We invested €4.9 billion in the period, an increase of 20% versus the same period of the previous year. In the ownership business model, almost half of the investments were devoted to networks with the remaining half allocated to the generation business, out of which around €2 billion to renewables. From a geographical perspective, €2.5 billion growth CapEx was deployed in Europe, €1.4 billion in Latin America and the remaining portion mainly in North America with around €700 million. We have invested around €3 millions through the stewardship business model focused primarily on Enel X and renewables capacity managed through our joint ventures. Investment catalyzed and deployed by the third-parties associated with the stewardship model amounted to around €1 billion. Moving on to our global generation business on slide number four. We can see that the totally install capacity is approaching the 90,000 mark fueled by the growth in renewables fleet which now stands at 50,000 megawatts and accounting for 56% of the total capacity we manage. The green repositioning of our generation portfolio is evident and it is progressing at full speed with 3,600 renewable megawatts additions and 1,000 megawatts of conventional generation capacity closed in the last 12 months. Generation output increased overall by 8% year-on-year. It reached more than 110 terawatt hour recovering from the contraction that was observed in 2020 as the consequence of COVID-19. The total electricity produced is almost back to 2019 levels but with significant changes in the output mix. In fact, if we consider pre-pandemic levels, the reduction of thermal production is notable as well as the significant increase in renewable contribution up to 15% by 2019. It's worth to highlight that coal production was down a further 5% year-on-year after the steep decrease of around 16 terawatt hour last year and that the increase in thermal production is mainly driven by gas and by the low levels of hydro resources in Latin America, namely in Chile. Thanks to the continued effort on the carbonization emissions, emission free production is up nine percentage point versus 2019 reaching 65%. That positions us well on track to reach our decarbonization targets. If we focus on the progress made on renewable growth, we go to slide number five on Enel green power when we see that total renewable capacity stands now at around 50,000 megawatts, approaching 60% of our total installed base roughly. Renewable capacity built over the last 12 months is equal to 3,600 megawatts despite challenging conditions imposed by COVID-19. Year-to-date, it would be 1,300megawatts, almost doubling the amount of megawatt deployed in the same period of previous year. We will scale up the magnitude of new renewable capacity additions. We expect to commission over the next two quarters about 4,500 megawatts. As of today, 100% of these projects are in different degrees of execution phases offering high visibility on the deployment by year-end. Our global footprint and development capabilities allowed us to secure 100% of our supply of goods and materials until 2022, offering protection against inflationary environment that was observed during these months and the spike in commodity prices. Such a remarkable acceleration are made possible thanks to our pipeline which is also backing growing and backing up future growth projects. We see that in the following chart. As of today, this is chart number six, pipeline surpassed 300,000 megawatts, broadening project optionality, securing flexibility of capital allocation and more than everything protection on returns. Mature pipeline is now worth 73,000 megawatts, out of which 23,000 megawatts are earmarked for the period 2021-2023 and 46,000 are already covering projects for the 2024-2025 period. Over the last 12 months, our mature pipeline grew by almost 30,000 megawatts and almost 6,000 megawatts entered the execution phase. The mature and early stage pipeline dynamic positions us optimally for both the plan period as well as for the years to come, offering an advantage into the new decade of the 2030 and supporting our growth ambition. With respect to the 19,500 megawatts targeted additions for year 2021-2023, today we stand at around 70% of this target addressed with around 1,300 megawatt already built as of now and around 12,000 currently in execution. The residual target is covered therefore 3.6 time by the related portion of mature pipeline which translates in negligible delivery risk, high confidence of achieving even more than this by end of the period. We can leverage on this extensive and well-diversified pipeline also to further push the implementation of the stewardship model in renewals, thanks to our origination capabilities, crystallizing over time the value that sits in this large portfolio. Let's move now to the operating achievement on global infrastructure and networks and we are on chart number seven. In the first six months of 2021, volumes in electricity distributed stood at 246 terawatt hours, up 6% year-on-year showing a progressive recovery from the dynamics that we observed in 2020 affected by lockdown measures. Looking more closely at the evolution across the two quarters of the year, the first quarter recorded a mere 2% increase. The second quarter is up by 11% versus the same period of last year which is a clear evidence of the acceleration of the recovery. This acceleration has been observed across all geographies which now stand at level of distributed energy almost in line with the pre-COVID 2019 level. In Europe, volumes increased 11 terawatt hours versus last year. In Latin America, the uplift is driven by Brazil where we distributed 2.4 terawatt hours more than the same period in 2020. And thanks to our continued commitment in fostering the quality and resilience of our networks, SAIDI improved by 6% and stands now at 250 minutes. The rollout of the second generation smart meter progressed further with another number of smart meter installed to reach 21 millions, up more than 40% versus the previous year. Let's look now at customers on slide number eight. Our position on free customer strength in the last 12 months, both via our retail operations as well as our services and platforms offered by Enel X, more than one million new customers have been added to the free market mainly in Romania due to the end of the regulated tariff and Italy added 300,000 customers. Energy sold in the free market is up 10% with volumes increasing in both B2B and B2C segments, driven by economic recovery. Looking at Enel X, this business line performed extremely well with double digit increase recorded on all product lines. More than 100,000 charging points have been added to our electricity network for electricity vehicles reaching more than 200,000 figure, up 2.2 times versus last year. Lighting points increased 2.9 million, up 21%. Battery storage increased by 27 megawatts, more than 7,000 megawatts of demand response capacity was offered globally. In fiber, we reached 12.1 million households passed, up 39% year-on-year. The industrial development goes together with the progress on group simplification. We are now at chart number nine and you see here that after the completion of the merger and the public tender offer, we now own 82.3% of Enel Americas. This has aligned our corporate structure with the other subsidiaries of the group. This integration of renewables will unlock synergies will reduce operational and financial risks for Enel Americas resulting into an earning accretion of the group which we estimate to the tune of 13%. Our aim of reaching a streamlined and more efficient structure continues, as testified fined by the agreement reached in Colombia with the creation of a single corporate vehicle that will support the growth in the country. Let's now open up the section of financial results. I hand over to Alberto for that part. Alberto, the floor is your.

[Alberto De Paoli:]

Thank you Francesco. Good evening to everybody. I am knocking you off on an analysis of financial results and then I am starting on page 11. EBITDA stood at €8.4 billion, in line with the expectations for this semester with a second quarter that shows clear signs of recovery compared to the last year. Group net ordinary income came in at €2.3 billion, decreasing by 4% versus previous year. I will detail later some nonrecurring items into the net income that are weighing on performance. For now, let me just highlight that excluding the negative impact of variability management and operating and fiscal nonrecurring items, net income would have been up by 10%. FFO reached €27 billion, up 31% versus to the first half of 2020 and broadly in line with the seasonality of cash flow dynamics that we always experience. Now moving to an analysis of the period. We will kick off with the evolution of EBITDA on page 12. You can see from the chart and as already during the Q1 presentation, in the first three months of the year, the economic results have been negatively impacted by the lack of some one-off items booked in 2020 and forecastable business dynamics. The second quarter of 2021 was driven by the recovery of the operating performance across all the business lines and marked a clear turning point supporting our targets for the year. Since April, devaluation of currencies and nonrecurring items have smoothened the negative impact while the industry growth has become visible contributing around €400 million in the period. We observed the recovery of the operating performance across all the business segments with lion's share associated with global power generation where, amongst other effects that I will detail later, the development of new capacity contributed remarkably. This evolution was supported by better volumes dynamics in the retail business in Italy and Spain and the stabilization of the level of electricity distributed in LatAm, particularly in Brazil, as Francesco mentioned previously. We expect these dynamics to last in the coming months. And now moving into our divisional deeper analysis, we are on slide 13 on global power generation. The ordinary EBITDA stood at around the €3.2 billion, down around €200 million year-on-year or 6%. Results have been supported by the positive contribution of renewable new installed capacity for around €250 million that is being offset by some negative items detailed as follows. We had lower hedging prices, mainly in Italy and Iberia, around €150 million. We got around €60 million of negative impact due to the weak hydrology in Chile, €90 million negative impact associated with the normalization of the ancillary services market and around €150 million of negative impacts from currencies devaluation. Trading activities contributed negatively for around €20 million and so almost flat and also almost zero. And this is the consequence of the normalization of gas portfolio management and the short position in Spain counterbalanced by a temporary positive effect on portfolio optimization in Italy. It's worth to highlight that, first, the negative price effect will be completely reverted next year, as of today we have already hedged more than 90% of the 2022 production at prices that are on average €5 more but mainly in Italy and Spain. So we are talking about an increase in the range of 7% to 10%. Second, negative impact from the weak hydro production in Chile can be considered a black swan, so an exceptional situation in 2021. And lastly, we don't see further devaluation of currencies affecting numbers on future year-on-year comparisons as we see the erosion effect being close to an end. Considering all these and the push from the last 12 months and future quarter's developments, we see the growth trajectory of, in particular, the renewable part of the global power generation to come back strongly supporting future trends and targets. Let's now take a look on the infrastructure network on page 14. Here EBITDA stood at €3.5 billion, down 9% versus last year. The dynamics of the quarter can be summarized as follows. €90 million increase associated with the higher electricity distributed across all the Latin American countries with Brazil contributing for more than half of this amount. Then we got €70 million positive related to tariff indexation mainly coming from Brazil and €75 million coming from efficiencies. These positive items were offset by €120 million negative impacted associate with half regulatory adjustment and half on so the effect of CPI on OpEx. Then it has been offset by the tariff indexation. €340 million is the negative impact of nonrecurring items that we accounted in 2020. So net of this, distribution would have growth also in the period. And then negative impact from currency devaluation in LatAm for €110 million. So all-in-all, if we get this €340 million and €110 million of affecting factor, we come up €450 million. And so, without this we would have obtained a growth to in the distribution network because of the positive items that I have commented before. From a geographical standpoint, in LatAm, excluding the impact of FX, EBITDA increased by 6% versus the same period of last year, benefiting a set of tariff indexation and increasing volumes. Net of nonrecurring items, the performance in Europe is almost flat year-on-year. Now we move on, on retail on page 15. As you can see from the chart, EBITDA came in at €1.6 billion with a recovery from the extreme conditions experienced in 2020 associated with the COVID-19 pandemic. Group expanded its free market customers by adding one million of new clients over the last 12 months on the back of the end of the regulatory tariff in Romania and the increase in the customer base in Italy. Looking closely at EBITDA, free market EBITDA is up by 12% year-on-year, thanks to a better performance in Italy, mainly attributable to a 10% increase in volumes which are now back to pre-COVID levels. In Italy, EBITDA increased 19% or around €170 million in the year so it has been driven by a pickup of volume in both B2C and B2B segment set and also a better marginality, unitary margins up 7% on average. In Iberia, net of nonrecurring items, EBITDA declined by 12% said. This is driven by an increase in B2B segment due to higher unitary consumption associated with economic recovery post-pandemic and a reduction in unitary margin for the B2B statements partially compensated by higher marginality for business customers. So in Romania, retail EBITDA increased by around €15 million or 50% by the end of the regulatory tariff. Regulated markets, EBITDA is down around €90 million users on the back of the elimination of the regulatory tariff in Romania and a decrease of the regulatory customer base. OpEx per customer stood flat year-on-year and worth to highlight that Enel X EBITDA increased four times since versus 2020 reaching more than €100 million driven by the energy efficiency programs and customer needs of our energy flexibility services. Now in the next slide, we will show in detail the earnings evolution during the period. I am on the page 16. Here you can see that ordinary group net income came in at €2.3 billion, down 4% year-on-year. This performance is affected by some nonrecurring items, net of which the growth in the first half would have stood at 10%. We commented already the moving parts of the EBITDA level, therefore let me now move on to other lines so the profit and loss. D&A are lower than the last year as a consequence of currency devaluation, lower bad debt accrual for more than €200 million and lower depreciation thanks to the impairment made in 2020 on coal asset in Chile which more than offset the impact of the investments deployed. The evolution of financial charges was significantly impacted by the liability management transaction on the Euro denominated debt security performed in June which is worth to remind, it is part of the liability management program we expect to compete by year-end. So we have already completed in July but it's not accounting is in June results. I want to highlight that the debt refinancing strategy carried out during the last 12 months reduced by 20 basis points the cost of debt leveraging on cheaper sustainable instruments and hybrids. Then, equity investments contributed for around €70 million. Taxes increased by €95 million, driven by the adjustment of the deferred taxes in Argentina following the recent increase in the nominal tax rate and minorities decreased by 21% reflecting the increase in Enel Americas and Enel Chile and the higher contribution of Italian companies. Moving now to the cash flow on slide number 17. FFO stood at €2.7 billion, up by more than €600 million versus last year, supported by an improvement in working capital which recovered from the COVID-19 impacts recorded last year. And the negative working capital is expected to be fully reabsorbed by the end of the year. Dynamics underlying the FFO evolution can be summarized as follows. High EBITDA asset provisions mainly associated with lower bad debt accrual, net working capita at minus €2.7 billion improving versus last year mainly thanks to the reabsorption of the residual COVID-19 effect recorded in 2020. It worth to highlight that working capital dynamics are in line with historical seasonality and include temporary items to be reabsorbed in the second part of the year, higher taxes paid mainly due to the advanced settlement tax payment at the end of the last year, higher financial charges paid related to liability management program executed in June. By year-end, we expect our cash generation to fully cover investments. Now let's have a look on net debt on slide number 18 in which you can see that net debt is equal to €50.4 billion at the end of the semester. The main changes services versus the end year or the past year are driven by the negative already commented €2.2 free cash flow, dividends paid for €2.4 billion, €1.4 billion associated with active portfolio management activities mainly related to Enel Americas PTO, hybrid bonds accounted as equity and negative impact from FX of around €1 billion. Gross dent stand at €62.1 billion, increasing 5% versus December 2020, in light of the already mentioned dynamics on the net debt. And before the closing remarks, let's take a look on our sustainable finance strategy. As already mentioned, I am now on page 19. As already mentioned that during the second quarter of 2021, we implemented some liability management actions with the aim to further accelerate our sustainable finance path while optimizing the financial structure of the group and further reducing the cost of gross debt. As a consequence, the shape of sustainable finance sources on total gross debt are expected to reach 46% at the end of 2021, 15 percentage points higher than full year 2020 and we are now two years in advance to reach our target of 48% in 2023. Thanks to do these two transactions we refinanced in advance conventional expensive bonds with cheaper sustainable instruments that will allow us to reduce the cost of debt with a saving of financial expenses of around €100 million per year from 2022 crystallizing the value of the current low rates environment. And finally, we remind you that this refinancing program as affected the financial expenses for around €200 million in the first half while the impact for year and \following the completion of the whole program is expected to be in the range of €500 million. And now I hand over to Francesco some closing remarks. Francesco, the floor is yours.

[Francesco Starace:]

Thank you Alberto. As you have appreciated, the second quarter is showing a solid and visible recovery in the opening performance with most of the dynamics expected to continue with a similar trajectory also in the second part of the year. This will support delivery of our targets for the full year 2021 the simplification in Latin America has reached a fundamental milestone. The increased stake in Enel Americas and the reorganization in Colombia are contributing to earnings accretion. And the next steps in the region will unlock further value. The growth trajectory of our renewable fleet is confirmed and it is progressing at full speed. Indeed, the remaining capacity to get to year-end target addition of around 5.8 gigawatts is fully secured. Future years are abundantly covered by the growing pipeline which is helping also in stabilizing the returns. Finally, it's worth to remind that in 2021, we already set a fixed remuneration for our shareholders with a dividend per share of €0.38 per share. So the compounded growth of dividend per share and earnings per share will result in a total returns to shareholders of more than 10%. Thank you for your attention and let's now open the Q&A session and Monica will manage this.

[A -Monica Girardi:]

Thank you Francesco. Thank you Alberto. Before entering in the queue, let me thank all of the analysts that sent the question over. We received them from Javier Garrido, Jose Ruiz, Emanuele Oggioni, Stefano Bezzato, Chris Laybutt, James Brand, Lueder Schumacher, Roberto Letizia, Rico Bartoli, Manuel Palomo, Alberto Gandolfi, Javier Suarez and Antonella Bianchessi. We unfortunately have to stop at 7

[Alberto De Paoli:]

Okay. So first of all, let me in confirm the targets we gave to the market. So the targets are fully confirmed. I have already the chance to comment some important moving parts. And I remember you that when we gave the targets in the Capital Market Day, we assumed a range in the EBITDA between €18.7 billion and €19.3 billion. And in those that, we were including around €1.4 billion contribution from the disposal of open fiber and we assumed a €1 billion associated with the managerial action to optimize commodity portfolio of the group mainly referring to the gas portfolio. Now today, so we see no room to go ahead with the latter and open fiber gain and the increase of the potential open fiber gain at €1.7 billion will be used to compensate €1 billion of currency devaluation that is day-to-day is the mark-to-market of the new FX versus our assumption in November. Net of all these moving parts, the operating deployment of the group remain unchanged. And so this is the guiding star of our development. The operating results are unchanged versus the assumption we had. On the net income, well, bottomline ranging €5.4 billion, €5.6 billion. We are assuming a significant liability management in the range of €600 million. And so that is, more or less, what we are now accounting. We are just closing the program in, more or less, at the level we assumed. And the increase of €300 million in the increase of open fiber now is going to offset the impact in net income of the FX impact. On debt, so we project to stand at 2.7 times debt to EBITDA guidance, in line with the plan.

[Monica Girardi:]

Okay. We stay on the guidance, Alberto, with you. What do you expect to happen in the second part of the year that will bridge you to the full year guidance?

[Alberto De Paoli:]

Well, after this second quarter, I think that we have clear visibility to what is going to happen in the second half yet, so we don't know if another pandemic wave is coming or not. But looking at the normalization of the situation like we saw in the second quarter, we think that now we would be driven by this trend. So summarizing this, we see in the second quarter, so no impact coming from the scenario, softening off the impact of FX. And so we are not assuming now a better share of FX. We are only assuming to neutral impact in the second quarter. And all the operating activities will perform very well. So we see a further increase in the demand of energy. We see a strong deliver of renewables in the second half. And on the other side, we see some improvement really of the high level of prices. It's true that we are almost fully hedged but we have some part of the production of still unhedged because we keep some part not hedged. So we may have some improvement on the side and also Enel X doing good. So we think that the operational result, again we saw in the second quarter will last and would drive the company towards the target that we have already reaffirmed.

[Monica Girardi:]

Okay. Still with you, Alberto. A really popular question. Can you just please provide an indication of guidance 2021 separating earnings from ownership model versus earnings from stewardship model and one-off that should partially offset gains from disposals.

[Alberto De Paoli:]

Well, I think I have a ready answered the question, saying that, so the operating results that we had and we have in our target are unchanged. The moving parts are related to other parts of the results to capital gain and so liability program and others. I want to stress the fact that while this year, so this question is still comparable with the fact that we are starting the stewardship model with a big capital gain that will come from open fiber disposal after this, so the business will be composed in the target on the next three years that is set at €3.3 billion would be composed by several parts, not only capital gain and the capital gain are fully within the operating model and business model that are pointing at. So these the way in which we want to look at the business. So separating from one to other in the future will be more and more difficult. Having said that, I say that, so looking at the net income will point to a net income that is in the range of pre-open fiber at roughly €5 billion. So the open fiber capital gain that will come on top of this €5 billion will be partially offset by, on one side the effect of FX that is roughly €300 million at the net income level and second to the liability management impact that is range in the €500 million. So all-in-all, these three parts together will drive final results that will stay in danger off for €5.8.

[Monica Girardi:]

Okay. And next, another popular question. Is the mark-to-market on currencies still pointing to a €1 billion shortfall versus EBITDA that you had in the plan?

[Alberto De Paoli:]

Well, so we choose to run after changes in scenarios one month to another. So volatile context. So it's possible that today would be a little bit. So it would be a little bit less negative. But we do prefer to stick on an impact of €1 billion it just they speak on that I need back to 1 we knew those who drive on the results of 2021 and to stay at the end of the year looking if some better news on FX side will come and will soften and will power our final results.

[Monica Girardi:]

Okay. Still linked somehow with FX, Alberto, where do you see EBITDA 2021 for your LatAm activities?

[Alberto De Paoli:]

Well, so net of FX effect, LatAm should function in line with the plan. This is coming from netting of different results and different performance in different countries. Chile has been impacting negativity this year. So several reasons that can be grouped in the black swan, I said. So it is going to be offset by better results in other countries.

[Monica Girardi:]

Okay. I think there was a question around Chile but I think and hear and there you answer that question already. So I would move to guidance on 2022. EBITDA, net income, net debt, how this compares with the plan?

[Alberto De Paoli:]

Well, so we have already said it. So we don't change our view, particularly after this good operating results. So the mark-to-market allow our plan on the new FX will be impacting the 2022 results of about €1 billion. but looking at several parts that we are working on in terms of better price shape and also better hedging strategy, we have already completed on one side. On the other side, an increase in investment potentially increasing investments that we may do pushing on our pipeline on one side and also increasing investment in distribution, on the other side by the big push that will come from the next generation EU funds that are due to be deployed in the next month. We can confirm the target we gave notwithstanding the €1 billion impact of FX. So we are ready to fully recover this gap and to confirm the target.

[Monica Girardi:]

Okay. A few analysts were asking about the liability management program and the cost associated. But I they think again here and there you answered that question too. We moved to the CEP for a set of question around M&A and simplification of the structure. The first one, Francesco, is around recent press speculation, financial signs to suggest Iberdrola is considering spinning off it's renewable business, following a similar move by a Acciona. Do you still think the benefit of vertical integration outweigh the negatives?

[Francesco Starace:]

Yes. We think that the vertical integrated utility model is still safe option. Actually, it's even more the case now that we are getting to the turbulent phase of the energy transition. In fact, I think the announcements that we see here go in the direction confirming as I don't think that we are going to see this company's breakup as others have done in the past because the model has proven to be, the integrated model so far has proven to be a winning modeling in the energy transition. I believe that spinning off renewable business or even portion of it, like the offshore renewable business might make sense in those companies where there is perhaps they need to shore up the balance sheet or increase the exposure to this sector because it seems not probably being understood by the market. This is not the case of Acciona or Iberdrola for example. So I can't comment on the logic that they apply here. Believe me, I think that the overall integrated market player will withstand the shocks and will benefit from the integrated business model much more in the energy transition than other players. And we think that the market is going to appreciate this as it is starting to do already during that the last two years. If you look at that relative valuations of integrated and non-integrated players, you see the change in the dynamics.

[Monica Girardi:]

Okay. Staying in our home, looking at Enel Americas, what are your plans on Enel Americas now that you own more than 80%.

[Francesco Starace:]

We have some plans. And of course, the first to be exposed to these plans will be our co-shareholders in Enel Americas. Now that we have the possibility, we will streamline to the extent possible the corporate structure and we will restart a growth trajectory now that we have a very well-balanced and integrated portfolio of options to grow, both in renewables and greens. We will identify together with them the geographies where we think growth is more likely to happen with valuable contributions and those portion of Latin America where growth perhaps is not as promising and value is maybe a little bit behind in the curb. So this is something that we intend to do with our co-shareholders in the next months.

[Monica Girardi:]

Okay. Still on Americas, Francesco. Analyst are asking, what are our plans in Brazil? If we are considering any IPO?

[Francesco Starace:]

I think I have always maintained that if we are a significant player in the space, in the utility space in any country that has a liquid and working stock exchange, then we should have a listed entity in that country. This is the case of Endesa in Spain. This is the case of Enel Chile in Chile. And I think now that we have reached a certain dimension in Brazil and if this dimension keeps growing with additional renewable capacity, maybe it would be a good idea to do that also in Brazil but clearly this must be discussed with our co-shareholders in Enel Americas. And I think it's something that we need to discuss with them.

[Monica Girardi:]

Okay. We look at one of the slides we presented about the Colombian restructuring. So analysts are asking, what this reorganization means strategically?

[Francesco Starace:]

I would say that the agreement that we have reached with our partner and co-shareholders in Colombia has created a single corporate vehicle that can now feed growth in the country at the 360 degrees, so no limitations. It offers a benefit of a more efficient and streamlined organizations. It focuses all the companies, regardless of what is the business line they have, on pursuing growth with value creation. So it is exactly what we would like to keep doing in all countries in Latin America in general. So it is, I think, a very, very effective step and we see benefits coming also from, let's say, a more constructive climate between investors which are setting aside all the past claims and are focused now on value creation and growth in this big country. So it's a big step.

[Monica Girardi:]

Okay. A set of three questions around M&A. Many times you mentioned, Francesco, potential acquisition in the U.S. Can you update about the process of scouting?

[Francesco Starace:]

The U.S. is a large space. The scouting is ongoing. And we know that there is value creation in this window. I agree with some of the comments that were given to us in the past and perhaps some that we just might have received in the recent and days. Clearly, we need to find the right assets and we need to find an agreement with the owners of these right assets. And this is something that will probably come up but it hasn't come up to our attention yet. To be honest, we were also focused on the restructuring in Latin America and that got the lots of attention at work. And now it's done. So we can now devote ourselves to this.

[Monica Girardi:]

Okay. Another M&A question around press reports about of the both the ERG disposals in Italy. Can you share any information around the acquisition of ERG assets in Italy?

[Francesco Starace:]

Not really. We cannot comment on the sale of the assets with ERG. As you know, we don't comment on processes that are ongoing, in particular this kind of news. What we can say is, we are always associated to any transaction that happens in Italy, whether we are pursuing it or not. But this is something that I think will be clear in the next weeks. So bear with us a little bit more and we cannot put up comments at this point.

[Monica Girardi:]

Okay. Another recurring question about the elephant in the room, as Alberto called it. When do you expect closing for the open fiber deal? Any change to the capital gain in case of delay?

[Francesco Starace:]

I don't think there is a delay. And the delay is not envisagable at this point. We are working to get a signing in the next few days. I think this is something that might happen for sure within the end of the year. So we don't see it likely that the transaction will be dragged on further.

[Monica Girardi:]

Okay. We move to more business related question. I am staying with you, Francesco. Are you concerned about the impact of the fast rise in power prices on the competitiveness of the European industrial sector?

[Francesco Starace:]

I think there is a little bit of tendency to overreact to market dynamics when they are in the rise and not when they are on the down which is normal by the consumers and in particular by the industry. I think that these spikes might be slightly overblown in their overall impact. We are not concerned. I think there are however several tools available to safeguard competitiveness. And one of them which the industry in Europe has largely overlooked over the past, I would say, almost 20 years, is contracting energy on the long term. This is a very peculiar system that why not we have in Europe when compared to the rest of the world. And the industry is not used to capture the benefits of having a long term stable supply of energy at a discounts rather than a ride to the rollercoaster of pricing going up and down year-by-year. Maybe this is the time that we all agree that we should restart the long term pricing habit in customer in Europe too. And I think that would provide great edge and would put the European industry at par with industries around the world.

[Monica Girardi:]

Okay. Spanish government. The Spanish government is proposing a clawback of the benefits of CO2 prices for legacy fixed cost capacity. Where are we in the approval process? And what is the likely impact of, would that be compensated by the elimination of the generation tax?

[Francesco Starace:]

First of all, we think that this measure, like all measures that tamper with market prices is going to backfire, is not going to be the solution. If there is a solution that needs to be found, it's not this way. There is no windfall profits for hydro and nuclear plants that are already taxed and further tax could jeopardize the targets that are stated in a national climate plan. That's why I just really believe this is not the right approach. There is however an ongoing process which is at county level but there is also a European side of it because clearly playing with ATS mechanism has an impact on the credibility of this mechanism across Europe. So we think that the final version of the draft bill proposal will incorporate substantial improvements. The government is pursuing a fast track implementation. So we believe that somehow this will end up in a resolution before the end of the year. We think this is slightly possible. But we believe that Europe will have a say and that there will be a lot of modifications before we see the end of the story.

[Monica Girardi:]

Alberto, I am just adding one more bit. Analysts are asking if we can assess the financial impact?

[Alberto De Paoli:]

There are two moving parts to have a clear view on what the final impact might be. Only to the stress the fact that with a couple of changes before the beginning the first proposal, we have already have the potentially impact versus the previous one and we think we are not really at the floor of this discussion that may result in some law that will be at the end with everybody not meaningfully impacting, if only. So some of our suggestions, our and the other utilities is suggesting to create a sheet for further increase of prices not impacting certain level the situation and the economical impact. On the other side, I would say, we now are not accounting big impact for 2022. I may say that so with the situation of hedging already done and hedging is also part that we have to discuss to understand the hedge prices will fall in low or not. But I can say that, for now we see limited impact coming from this law for 2022.

[Monica Girardi:]

Okay. Next, I go back to Francesco. Do you think there is a risk that a similar initiative can be implemented in Italy? I think you are on mute.

[Francesco Starace:]

We hope not. We don't think so. We have seen the Italian government choosing a different pattern, at least on the short term using the ETS generated extra money to compensate for the additional cost to some of the additional cost of the customers. We think it would be the wrong answer in Italy too. We have not seen signs from the government in that direction. It would probably also be incompatible with legal framework and the regulated tariff system that we have here in Italy, even more now that the release for 55 targets indicates clearly that the ETS is going to be the way to go, not only for generation for full power but also for other segments that are not part of it. So we don't expect this contagion to spread to Italy. And by the way, I think if in theory, if it would go across Europe, they would finally kill the idea in itself because Europe will then have to basically reject it overall. So I think it's not going to happen.

[Monica Girardi:]

Okay. Renewable delivery. CEO, following a lower-than-expected Q1 delivery of new renewable capacity, Q2 started to show some growth. Can you meet the 5.8 gigawatt target for 2021?

[Francesco Starace:]

I think, yes, we will meet the target with a very strong third and fourth quarter. I recall everyone that we are recovering 800 megawatts that were delayed from the 2020 years already. So it's very heavy this one, in terms of installations. We are also building a mitigation plan of additional megawatts that we could draw back from 2023 in case we would see problems in some of the projects. But overall, I think we are going to reach more or less this target. And we might be up or down maybe 100 or 200 megawatts but that's a ballpark and it's a big step.

[Monica Girardi:]

Okay. On the side of GPG, you have a target to shut down 2.9 gigawatts of coal this year. Is this confirmed? Any upside potential?

[Francesco Starace:]

Yes, it's confirmed. The large part is coming from Spain because we have received the green light from Red Eléctrica and CNMC to close down the two big plants Litoral and As Pontes. This alone it covers 2,600 of thee 2900 megawatts. The one 300 that are missing should be coming out of Italy, out of the Fusina power plant which we expect to be given green light by the end of the year. So the answer is yes. Let me underline that the fact that we shut down, that means we get a formal green light from the network operator and the regulator to do that, does not change much the production profile. These units were already not producing because of economic displacement, given the price of CO2 that we were saving. So there is no impact on the production of terawatt hours and therefore on the CO2 emissions. It's just a question of removing the megawatt from our megawatt theoretical base. But these megawatts are, by all practical reasons, already a muted theme in terms of production.

[Monica Girardi:]

Okay. A question for the CFO. Prices had a negative impact on result. Can you provide more details on the underlying dynamics? Can you elaborate on your hedging strategy?

[Alberto De Paoli:]

Well, yes. So on the lower hedging prices, the y impacted the results of 2021 of round the €140 million, mainly in Italy and Spain. This negative effect is already fully reverted because we, in 2022 today we have so the Latin America, hedged already 100% for 2022 at an average price that is aligned with 2021. So no changes and no reduction in this price. Well, when it comes to Italy and Spain, so we are ranging around, say, 75%, 80%, 90% of hedging ratio with prices that are in the range of 5% higher in Spain and more than 15% higher in Italy. So this is the outlook for 2022.

[Monica Girardi:]

Okay Francesca, for you. We stay in the Italy. And an analyst is asking, Enel recently signed a new PPA in Italy. Other operators have been signing PPA contracts in the past months. This is the actual start of a developed PPA market in the country?

[Francesco Starace:]

I think it is the beginning of it, yes. And again, it's a welcome moments because as I said before, it's time that the European industry uses this tool. It's a very useful tool to have clarity on energy prices and stabilize the cost structure of the industry on the long term benefiting from the stability of a lower price that a PPO offers. So I think it's a beginning. As I said, the European industries are very dense and extremely large platform of operators. So it will take time for everyone to be comfortable with PPAs. But I think it's beginning to show that this logical tool starts to make its way into the Italian system and therefore it will mitigate the short term hikes of spikes of gas and commodity prices on the short term.

[Monica Girardi:]

Okay. Alberto, for you. Analysts are asking if you can provide and update on the availability of idle resources?

[Alberto De Paoli:]

Well, this year and also the last years. All-in-all, we see a. neutral impact of the different situation of hydro electricity in our country. So this year, we got some severe impacts in Chile and also in Spain but on the other side we had better hydrological resources in Italy, Colombia, In Panama and Peru. So at the end, we had a neutral impact on hydro. That is, more or less, what we are seeking for the net effect that spreading our global print in all the technologies may offer to us to have, at the end, a neutral impact between offsetting different situations in different countries.

[Monica Girardi:]

Okay. Francesco, we go back to you. Analysts are asking if you can share preliminary thoughts around first consultation document released by the Italian authority a couple of weeks ago? If you can anticipate the range of allowed return? And what do you think the impact might be?

[Francesco Starace:]

First of all, this is the beginning of a negotiation. It's a very technical, quite complex document. It is a first step of a process. You may have noticed that there are no figures thrown at people. So in that, it's positive because it leaves a lot of flexibility to the negotiation. I think there are different ranges of potential outcome, given that there are many moving parts at play. We are going to submit our responses to the regulator with whom we have an ongoing dialogue as all the other players. The second consultation document is due in October. I think it is likely to be a reduction of the allowed return but the extent of the cut will only be possible to be ascertained as some of the key variables would be known. Let me tell you that my hunch and my feeling is that this time the regulator is conscious that although there is mathematically, if you want from a pure mathematical walk standpoint, the ground for some reduction to the allowed return. On the other side, there is a need to convince the industry to add and not subtract investment given the opportunity that the PNRR is giving. So they have to manage this to, let's say, different forces and try to find the right balance. So far, we have seen that it is extremely balanced and the discussion is quite encouraging. So I am positive that this will end better than the worst ideas that we have seen on some of the hot reactions coming out.

[Monica Girardi:]

Okay. Francesco, we stay with you for a more general question around Fit for 55 package. What's your view on that?

[Francesco Starace:]

I think it's a great document. I think the European Commission asks, put down the last missing piece of the puzzle that is first of all the strategy of the green deal, then the amount of money thrown at the green deal and now the Fit for 55 want governance and changes to the governance of the energy sector and the industrial sectors in Europe need to be implemented in order for this really is two parts to play and coming into effectiveness. We are in favor of higher targets such as the 40% of 2030. We are in favor of specific target for energy efficiency. We are in favor of expanding the ETS to other sectors provided that it's done in a proper way. We think it makes a lot of sense. For us, it's also helping to prepare for the necessary acceleration towards the further electrification of final energy uses, for example road, transportation, heating which is already today a very and much better than fossil fuels. So we think this is a bold move and I think it is very ambitious and extremely forward-looking document that will be hotly discussed. I mean it's going to be a very large lobby battleground. But I believe the European Union has set a very good starting point for that purpose.

[Monica Girardi:]

Okay. We will now on the recovery funds that you just mentioned. When do you expect the funds to be distributed and how?

[Francesco Starace:]

I think this is probably a question that relates to Italy, but more or less we are in four counties in Europe but more or less they follow a little bit the same logic. In Italy, we got the approval in July. That means that a small portion of the total funds are located could be paid in advance as early as the fourth quarter of 2021 should the Italian government and the EU define it through a specific agreements. This is an agreement that the two governments and this is perhaps also valid for Spain and other government. So there should be a bilateral agreement between the country and the EU. But we are talking about a small portion that, it's a lots, it's about 13% or 14% of their total allocated amount. So quite a large package. We expect the first tenders to award projects. So we are talking about the rest of the money to be out in October 2021, so after the vacations. And after the project we are initiated and investments financed by the recovery funds, Italy will be in position to ask for the disbursement of the fund. This will happen twice a year. So there would be two moments in each year in which this disbursement will happen. And the request will have to be supported by the achievement of the targets that are defined under the PNRR. So first disbursement, probably end of the year for an amount that will be around 13% to 14% subject to definition on agreement between the government and the EU.

[Monica Girardi:]

Okay. Before moving into another general question associated with the recovery fund, there is a super re-tweeted question, Alberto, that I have to ask you as the time is running by quickly. And it is about the returns associated with the 5.8 gigawatt that we expect to lay down this year? If you can confirm what's the EBITDA on CapEx or IRR over WACC that you expect to have from this?

[Alberto De Paoli:]

Well, I do confirm on both the measure in which we want to look at investments because EBITDA on CapEx is more front-loaded results of a project and then IRR and WACC and spreads are along the full life with the plants. But for both, we do confirm that we are on the level that we have targeted for in the business plan for such development. So we are talking about 11% to 12% EBITDA CapEx and 150 to 200 basis points over WACC.

[Monica Girardi:]

Okay. We have may one minute. I think that one of the most burning questions that we received was about the simplification decree in Italy. So I would end with that on, Francesco, with your comment around that decree and what you might want to make it better eventually?

[Francesco Starace:]

Let's say that there isn't. It's a good decree. So it's a step in the right direction. We all commented that this is an encouraging move by the government. It is not enough to unlock a real ambitious green acceleration. So there are still steps to be made. We think, for example, two major improvements have to do with the fact that they should fix a timing, a fixed timing for the transition process that would be binding that for the player, the developers and investors to know what kind of time frame they are going to be stuck with when they get into the authorization process. So fix a time and make it binding. And second, align their regional authorization processes to one model in order to remove the diversification that is a result of different regulation and different systems being implemented by different regions which adds to the complexity and therefore the pain in having projects authorized in the proper amount of time. I think these two things that are not yet fully implemented. They would definitely improve the text.

[Monica Girardi:]

Okay. And I have stopped. We have a list of questions that have been unanswered but we will answer directly to analysts. So thank you so much for your time. Thanks to the analysts and investors connected and we wish good vacation to everybody and see you in September.

[Francesco Starace:]

Thank you. Bye, bye.

[Alberto De Paoli:]

Thank you. Bye, bye.

[Operator:]

That concludes the conference call today. Thank you for participating. You may all disconnect.