Enel SpA
Q4 2020 Earnings Call Transcript

Published: 18 Mar 2021

[Monica Girardi:]

Ladies and gentlemen, I'm Monica Girardi, the Head of Group Investor Relations. Welcome to our Full Year 2020 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 take you through the operational and financial performance for the group. Following the presentation, we will have the usual Q&A session. In line with what we have done recently, 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. So let's start with the highlight of the period. I am in Slide number 2 of your deck. Net ordinary income came in at the top of the range, up by 9% year-on-year, demonstrating the resiliency of our business model even in a year of unprecedented disruption. Our remarkable operating and financial delivery results in a proposed dividend per share of €0.358 per share, which marks a 9% increase versus 2019. It's worth to highlight that the 2020 dividend per share is higher than the €0.35 per share guaranteed dividend per share for the year, demonstrating once again the capability of our business model to generate value to our shareholders. We made significant progresses on decarbonization. We have achieved a new record on additional renewable capacity with 3,100 megawatts of new builds, while at the same time, accelerating our exit from coal generation. Simplification of group structure accelerated further with the approval of the merger of Enel Green Power Latin America assets into the Enel Américas asset base. Lastly, in January, Moody upgraded the group credit rating to Baa1. In the next slide, we will have a closer look at our operating and financial performance. We are now in Slide number 3. 2020 has brought exceptional challenges with a pandemic that imposed radical changes to the way we operate and live. Notwithstanding this long emergency, we have been able to progress on all our key strategic priorities. We have built 3,100 megawatts of renewable capacity. When I say built, I mean, built and connected to the networks. With the share of digitized, end users reached 60% with a total of 44 million smart meters installed. Our retail customer base in the free market grew by 200,000 customers, and a further milestone in the electric mobility was achieved with more than 100,000 charging points installed. The widespread digitalization of our asset base and the use of platform ensured operational continuity as well protected the health of our colleagues and suppliers. This top-notch delivery translated into a 22 total return for our shareholders, driven by a 17% share price appreciation and a 5% dividend yield, significantly outperforming the broader utilities sector. We are quite well positioned to meet our ambitions in the long term, and we see that in Chart number 4. Over the last decade, we have created the world's largest renewable asset base, standing now at 49,000 megawatts worldwide. We have been the fastest-growing player in the renewable space, creating over time a robust, reliable and widespread development platform capable of managing multiple projects simultaneously as well as building on an extensive pipeline. In 2020, we have marked up the next step-up of our delivery capabilities with around 4,000 megawatts new capacity build expected. This goal was not achieved because COVID-19 caused delays in projects for around 800 megawatts, which were supposed to be commissioned in late 2020. However, our building platform proved its resiliency. Therefore, we expect a quick recovery of these delays into 2021, with further progress on new installation that are expected to exceed the 5,000 megawatts during 2021. We will triple our capacity by 2030, confirming our position as a renewables super major. New renewable capacity needs to be connected to a resilient and digitized network as a backbone for the energy transition. We are the biggest private network operator with 74 million end users and the most -- and we are also the most advanced in digital transformation. Over the last five years, we have expanded our grids. Our -- with end users connected growingly by over 20% and the regulated asset base reaching €42 billion in 2020. The efficient management of our networks relies on the adoption of a platform operating model. This allows us to increase the level of service quality. In fact, SAIDI decreased 12% in this year and is expected to decrease further to 100 minutes in 2030. Higher quality will couple with an expanding value of our asset base, which will reach €70 billion by 2030. Now we move to our positioning on customers and the value associated with them. This is Chart number 6. Our group manages the largest customer base worldwide. Benefits from a unique position of around 60% of our customers are in developed areas, and a very large portion is living in megacities. The composition of our commercial portfolio allows us to minimize the impact on COVID-19 and position us for the years to come. The acceleration of electrification will dramatically increase the market dimension, and the ongoing elimination of the regulated tariff are creating new value pools. In this concept, our B2C, B2B and B2G customers managed through a single- and cross-company platform, are offered with beyond commodity services that represents a crucial competitive advantage that will drive the increase of retail value that we see over the next decade. This positioning of the group has been built over time. We have invested significantly in this. Now let's focus on the CapEx that we deployed in 2020 on Slide 7. We deployed in 2020 more than €10 billion of CapEx. In the ownership business model, 50% of this CapEx was devoted to the generation business, out of which, €4.2 billion is for renewables development and more than 40% has been invested in networks to foster digitalization and quality improvements. From a geographical perspective, gross CapEx was deployed mainly in Italy, Spain and Latin America. Through the stewardship model, we have invested €800 million, of which €100 million through equity injection by further capitalizing around €1.5 billion of investment from third parties. These investments were devoted to renewables, where we continue to add capacity managed by our joint ventures and then by Enel X and open fiber. Looking closely at our global generation business on Slide number 8, we can see that thanks to a continued effort on decarbonization, renewables production is up 5% versus last year, accounting for more than half of the total 217 terawatt hours generated in 2020, overtaking the conventional generation. As a consequence of the coal phaseout process, we are putting in place any contraction in demand, which resulted from the COVID pandemia, thermal generation declined by 22% year-on-year, driven by these two factors

[Alberto De Paoli:]

Thank you, Francesco.

[Francesco Starace:]

Yes.

[Alberto De Paoli:]

Good afternoon to you all. So let's now have a look on the financials of the year, and now we are on Page 17. EBITDA stood at €17.9 billion, in line versus previous year. Group net ordinary income increased to 5.2, 9% higher versus last year. FFO reached €11.5 billion, broadly in line versus last year, mainly thanks to the improvements in working capital, which has been almost totally reabsorbed in the last quarter of the year despite the second wave of COVID-19. And finally, group net debt stood at €45 billion, increasing by 1% versus the end of 2019. Before going through the details of the financial performance of the each division, let me comment the evolution of the scenario over 2020, and I'm on Page 18. As commented during previous releases, this unprecedented global emergency translated into a strong deterioration of the market context, impacting negatively demand and triggering a severe devaluation of currencies. FX represented the main headwind to our 2020 results and worth around €1 billion at EBITDA level. LatAm currencies devaluated by 20% on average over the year, with Brazilian reais as one of the currencies that has weaken the most. As you can see on the right side of the chart, electricity demand has shown a progressive recovery in the second half of the year across all countries of presence, even if still shows negative trends compared to the last year. I will show in the next slide, the impact of business headwinds. We are now on Slide number 19. The group's EBITDA was mainly affected by the following negative impacts

[Francesco Starace:]

Thank you, Alberto. So gentlemen, ladies, we have experienced an extreme and foreseeable scenario. Headwinds came from all over the places, ranging from macro variables to operating dynamics. Despite this challenging environment, we have been able to deliver a very solid operating and financial performance with a 9% growth in net ordinary income. This confirms once again the sustainability of the business model we have. This has been able to deliver an outstanding growth level, even against sudden disruptions. Our solid operating deployment across all the business lines positions us as a leader in the utility space, a renewable super major that can rely on a resilient and digitized network, which will be the backbone of the energy transition of the future, supporting also the increasing electrification of consumption. This opens up new business opportunities that will enhance the value to our customers and shareholders. Our highly digitized- and platform-based business has allowed us to act promptly and to take proactive measures to protect our people first and ensure that, at the same time, business continuity. I have to underline here the extremely professional behavior of all our workforce that made all this possible. The delivery recorded in 2020, coupled with the managerial actions we put in place to cope with this exceptional year, have generated further value that resulted in a top quartile performance of the utility sector with a 22 total shareholder return during the 2020 year. So, thank you for your attention. Let's now open the Q&A session with Monica leading us in this.

[A - Monica Girardi:]

Thank you, Francesco. We will now move to the Q&A session. Before starting, I want to thank all of the analysts who send the question through. We receive them from Goldman Sachs, Banca Akros, Barclays, Morgan Staley, Mediobanca, Citigroup, SocGen, Santander, Crédit Suisse, Equita, Capitol, Stifel, JPMorgan, Deutsche Bank, Exane, UBS and Merrill Lynch. Thank you all. I will start from the first one to the CEO. I think he's one of the most popular. So far, 2021 has seen some doubt on renewable, which led to a rebalancing and sell-off of the most exposed names. Can you share with us your view on the sector and our returns going forward?

[Francesco Starace:]

Okay. There are basically two questions here is -- two observations. One is the one on the dynamic of prices and competition, with one on the, let's say, share performance of some players. I think there is some technical adjustments that took place. There are some technical adjustments that took place with the rebalancing of the indexes. I think the markets seem to have switched quite quickly the sentiment also on the back of some business events that were kind of surprising during the year. I think the key common conclusion deriving from this event is that the returns may not be at par with the expectation, and that delivery in terms of capacity commission might not be in line with targets communicated by several players. Now let me recall some of the measures, some of the messages that we set out when we delivered our Capital Market Day. The first one is that the dimension and the expansion of the space in renewables is such that it can accommodate for all the relevant players today and more. And that it does not really have any threat of becoming congested or crowded space. So there is not an issue on space of growth. And we didn't see any change during the 2020 year. Prices will go down over time, and this is something that we have also clearly stated. It is -- has always been our view. And this clearly will shave off some of the expected returns of some players. But the access to customers, the platform of the development, the management of the assets and the efficiency of the organization, so that means the competitiveness and the size and the focus of the organization will determine the capability of any player to deliver on the expected returns. The adoption of an integrated business model and a multi-technology integrated business model allows to better absorb external shocks to optimize the risk return profile. I think you will see that even more evidently, when you start to see and it is beginning to show the divergence between pure players and integrated companies. So we believe the market is getting this logic, is getting also the protective mix of activities that the group has. And therefore, it is not a surprise that we did not see the same trend in our share when compared to other peers or other players that have not the same risk profile. Overall, I think the story is still very solid. There is a trend competitiveness in renewals. It's always been our view, and it's now showing maybe more clearly than before. And therefore, some say some companies might get a little bit penalized by that.

[Monica Girardi:]

Okay. We move to a completely different business, but again, a really popular question, open fiber. Francesco, can you share with us some update when the transaction with Macquarie is expected to be finalized? And what's the stake that you expect to sell?

[Francesco Starace:]

The transaction is going to be finalized. It is going to be between 40% to 50% maximum, in the next few months or weeks and months, this is going to be basically completed. To where do we stand? The discussions are now being held between Macquarie, the buyer of our share and Cassa Depositi e Prestiti, CDP, the other shareholder, and the discussions are about the governance. So what kind of governance the two players want to have going forward. Let's say that this is not rocket science. It's a governance about -- a company that has one infrastructure as a mission. It is in one country, Italy, and the shareholders are 2, out of which one has a consolidating stake. So let's say, it's governance 101 for -- as far as this is concerned, and it will not take that much to be finalized. We expect, therefore, the transaction by -- to be certainly closed by year-end. Of course, we will update you as soon as this is clear, as soon as the last steps are completed. Again, this is a very clear example of how much we can create value when we implement a stewardship model in this kind of infrastructure place.

[Monica Girardi:]

Okay. We still stay with you, Francesco. Merger of EGP LatAm.

[Francesco Starace:]

Sorry, let me just add one thing.

[Monica Girardi:]

Sure.

[Francesco Starace:]

Just to preempt another question that will come up eventually, that is the change of government hasn't changed a little bit, the outlook of this deal to come through? No. We did not get any signal that this still is an item of discussion at all in the present situation at the present government. So there is no signals on that, okay? So that we don't get a question on this.

[Monica Girardi:]

Fair enough. So we moved to the simplification of Enel Américas. So merger of EGP and Enel Américas, once the PTO will be completed, what are the next steps you envisage for the perimeter of Américas? Will there be any disposals?

[Francesco Starace:]

I think as soon as we finished with the PTO, we will sit with the residual minority shareholders and define what are the key strategic options that Américas has to maximize value creation going forward? One of the many options is also to be more selective in terms of the geographies where we want to continue to operate in Latin America in the light of their growth perspective, their stability and the potential creation of value that we can pursue in different geographies. Based on this, we will decide having listened also, of course, to all the minority shareholders. And therefore, we will proceed to simplify maybe also the geographical positioning in the four countries that are today part of Enel Américas. I said four, but it's wrong. They are actually seven because there are three minor countries in Central America that are now part of the portfolio of the country. So there are seven countries.

[Monica Girardi:]

Okay. We move to the CFO for another really popular question. Currencies were a major headwind in 2020 and are still showing weakness. In light of the gap between your scenario and the forward curves, what is the expected impact for 2021? There is any clear risk to the guidance?

[Alberto De Paoli:]

Yes, we are. Sorry. For 2020, yes, we -- it was the main headwind we had, €1 billion of impact. So there is -- so we recovered the COVID impact, but we will leave a €1 billion impact on FX. First month of the year, some signs of weakness still present in FX currencies, with some signs of different win to move, mainly in Brazil, which headwinds had been more impacted by some things and not by the general scenario? It's too early to say because the first two months, vaccination in progress. So we think that we will have a clear view of the overall impact, looking at the second half of the year and not in the first two months of this year. A pure mark-to-market now may, so are applying €300 million, €350 million impact that we think will not stay along the year. But on the other side, I said we have many party movements in our profit and loss, mainly the good results of our stewardship model that can -- so I'd say it's not easy but can cover some headwinds if, at the end, we will have some impact from FX.

[Monica Girardi:]

Okay. So I guess the bottom line is that no, the guidance is not at risk. Now we still -- another one on guidance, actually. Net debt is well below the guidance provided for the year. Will this improvement carry over to the 2021, 2023 net debt figures?

[Alberto De Paoli:]

Well, the general answer is no. So we think we have -- the trend of our debt is fully in line with what we have presented for the three years' plan. The main driver of changes in 2020 is based on sort of the timing of the hybrid bond equity accounting because in our projections, we included only €600 million because we didn't include the concepts of solicitation that we launched at the end of 2020 that occurred. So -- but we had projecting these solicitation for 2021. So it's only the main part is a timing difference then we have some saving but not in the numbers that you see. And so savings, better results is in the range of €200 million, €300 million, and the rest is timing difference on hybrid accounting.

[Monica Girardi:]

Okay. Alberto, still with you on working capital dynamics, which are the main drivers of the strong improvement in working capital from the nine months, is the reduction fully associated with the reabsorption of the negative COVID effects?

[Alberto De Paoli:]

Well, yes. First of all, yes. So the vast majority is the absorption of COVID effect that we have shown in the first half. Well, I think a combination of two things

[Monica Girardi:]

Okay. Still on the COVID-19, analysts are asking if we can provide a breakdown of the COVID-19 impacts on business segments.

[Alberto De Paoli:]

Okay. So first of all, as said, so the €1 billion impact of FX, so it's not directly connected to COVID, but so it's clearly related to this. Out of this impact, as said, we had a €730 million impact on EBITDA because of COVID. As I said in the presentation, €600 million are mainly related with the contraction volumes and €130 million related with other things, and the main are losses on the network front. So the time in which we can't act against frauds. So fraud, we had a huge increase in frauds, then another €60 million, €70 million was a delay in the development. But on the other side, we can have also -- we had also positive impact because we have a huge decrease in OpEx. I don't know, travel expenses and other kind of OpEx that was main related with the new situation for COVID. When it comes to countries, I would say that Italy was resilient at all, so the impact is 0, with different moving parts that bring the country to these results. Iberia impacted the more, roughly €100 million, mainly because of this long position in the hedge contracts that -- so it's the one-off effect of the sharp contraction of demand. And the rest is Latin America. And Latin America is both the volume contraction and on the other side, bad debt and stop of downing activities. When it comes to the business lines, the most impacted lines are the lines that work on volumes. So retail mainly for the loan position in Italy, Spain and distribution, mainly for the demand contraction in Latin America, where -- so regulators, so the regulatory framework don't give any kind of shed to the reduction in volumes.

[Monica Girardi:]

Okay. Francesco, we go back to you on a -- with a question on renewables. So renewable addition came in at 3,100 megawatts but were impacted by COVID. Can you remind us what would have been the level of new capacity in absence of the pandemic? And what do you expect for 2021 in terms of delivery? Is there any further risk from COVID you see now?

[Francesco Starace:]

Yes. No. So let's see, the additional built that we missed to put into the 2020 year is around 800 megawatts, as we said. So we would have been slightly below 4,000 megawatts without any COVID impact, if we have no COVID impact. Now what happens during 2021 is that, yes, this 800 megawatts are rolled into the 2021 target. We expect to recover fully during 2021. And then, therefore, to go above the 5,000-megawatt threshold quite substantially during the 2021 year. So '21 year will not only recover the delay of 2020, but also accelerate further compared to 2020. Frankly, no, we don't see any residual risk, so COVID in term -- as far as installations are concerned. You might recall that I mentioned these facts at the beginning of the pandemic that we anticipated some slowdown on permitting because of public administrations around the world being confined at home or not really as effective or as productive. If you can use this word, on the permitting phase, and therefore, some impact on further down the road. So far, we don't see an impact in '22. We are assessing if there is anything on '23, so no impact at this point. We think this is over.

[Monica Girardi:]

Okay. Again with you, Francesco, you have shown meaningful progress in 2020 on phasing out generation from coal. What is the status of discussion with governments in shutting down coal plants, especially in Italy?

[Francesco Starace:]

So you know that we have a commitment to phase out coal. And during the CMD, we said '27 as the end date. And we are working basically with screed operators, governments, local communities in order to do this by then. This is -- let's face -- let's understand what we are talking about. We are talking about disconnecting plants from the networks, okay? So if you look at phasing-out action, this is already taking place in a spectacular way. We went down 65% on coal this year 2020. This will continue to go -- to come. So the production will be extremely marginal going forward, but the symbolic and substantial disconnection from the grid of an infrastructure requires an agreement from network operators that need to be, let's say, comfortable with the fact that if this capacity is withdrawn from the system, the system can withstand shocks of all kinds. So where do we stand with this? We have an early shutdown during 2020. We got an early shutdown from Italy -- from Italian network operator and authorities to take out the first unit of the Brindisi power plant, which is now being dismantled, and to take up two out of four units of the Fusina power plant by 2021, which is going on. So this is according to plan. That's okay. We have discussion in Spain with the phaseout of [indiscernible] following the decision of closing, which has been communicated and has been accepted. The question today is basically, therefore, not a question of reducing production. It's basically going to stop way before 2027, but rather making comfortable the operator -- network operators that's taking the plants off the grid, poses no risk to the stability of the grid itself, which is something that we are working at, and it's something that we are quite confident we can achieve by 2027. So we are in good track in this space. And we are ahead of the curve when you look at the actual production from the existing facilities.

[Monica Girardi:]

Okay. We move a little bit to the future. You have made some announcement in hydrogen projects. How do you see the business evolving? I think, Francesco, it's for you.

[Francesco Starace:]

So this is a little bit more in the future than people would think, but anyway. So yes, we have a commitment on the green hydrogen front, so on hydrogen produced by hydrolysis. And the commitment we have is to -- through the implementation of some projects, push the boundaries of this technology and drive the evolution of this technology in order to find out if the cost of the electrolyzers can drop a factor of six. So it can drop from $1,200 per kilowatt to about $200 per kilowatt. This is what it takes, coupled with the renewable energy costs. So today, we have already reached. This is what it takes to bring green hydrogen at par with the present hydrogen costs. Without that, failing that, this technology will never really pick up, if not for some niches of very specific applications. So our goal is to work with various partners in different countries. We have projects in Italy. We have projects in Spain. The largest one are in Spain. And we have project in Chile, and we have projects in the U.S. to use these projects in order to push and get possibly a solution to this, cost issue on investment, cost issue on the electrolyzers and understand this technology fully. The next 10 years should be enough in order to establish whether this happens. And there are times when this happens, and there are times when it does not happen. And you might recall, for example, that TV panels have done this. Batteries are doing it. But solar -- thermal solar generation did not succeed. And there are examples of one and the other kind. So we are engaged in this kind of discovery trip.

[Monica Girardi:]

Really clear. So another one for you, I think, Francesco. Italy has highlighted the country we received more than €190 billion from the EU recovery fund. When should we expect project proposal for the use of these funds to start to come through?

[Francesco Starace:]

Let me answer also for the other three countries in Europe where we are present, which are Spain, Greece and Romania. So the deadline that a commission has set has -- as a latest possible date, the end of April. Some countries like Spain have already advanced their proposals. Some countries like Italy have not yet done the full homework. But let's say that within April, all the initiatives will have to be presented to the European task force that manages this incredible task of understanding which projects fit and which projects do not fit the logic and the criteria of the EU. To do that, the European Union has eight weeks, so two months to respond with various feedbacks. And then the European Council needs to have an approval of four weeks. So we think that including a potential pre-financing of 10%, member states could get the first money streams within 2021, okay? I'm saying this because you need to have -- in order for this flow of money to really materialize, you need to have to establish the allocation procedures on a competitive basis in respecting all the guidelines on state aid that are important for private players like we are or you need to have regulatory framework changes in order for the same to happen on regulated concessionary businesses as we have also that cannot play on a competitive basis. So there are two parallel tracks that need to be established. All in all, I think there are several areas where this can happen. Let me just give you a little bit of a rule of thumb. It's easier to accelerate the pace of project implementation and activity of something that is already moving -- that something that already has an entrant on its own. So in other words, if we have, as we do in many countries, a large flow of investment already in some businesses, it's easier to increase that and therefore be at the early part of the disbursement of these funds. It's less easy to jump-start something that does not exist. Let's take the hydrogen things. They need to be designed. They need to be permitted, and therefore, they will be able to capture flows of money, sizable flows of money only probably a little later than networks, for example, or accelerated deployment of digital meters or infrastructure of this case. But because we are in both fields, we are optimally positioned to benefit from this flow of money in a uniform way across the different geographies. So we are very confident that this will be quite possible for us. Let's not forget the dimensions that European Unions are facing are looking for are totally in line with our strategy. So renewables, electrification, networks, digital content, they're exactly in line with our strategy. So we think we will benefit from this quite substantially.

[Monica Girardi:]

Okay. So we move to the situation in Brazil. Alberto, the market is asking if you can share with us the -- an update on the situation in Brazil.

[Alberto De Paoli:]

Okay. So we have.

[Monica Girardi:]

So, both -- sorry. I divided the question in two because it's a little bit long. So, the first one is on financial and economic impact in 2020. And the other one is on the -- and the other part is on the ongoing discussion with the regulator for the outstanding regulatory issues, and if you are confident that we will get to a positive solution.

[Alberto De Paoli:]

Okay. For the -- in the 2020 impact, so we had an overall impact coming from Brazil of €730 million, €430 million for FX impact and €300 million related with the COVID impact. When it comes with this €300 million, the three main items were roughly 6 terawatt of lower demand, that's worth around €200 million; the said increase in losses for around €50 million; and then we have the delay of new renewables projects for around €40 million. And then we had another item that is related with the bad debt associated with the fees of downing of roughly €70 million. And these are the main headwinds in our LatAm activities are coming from Brazil. On the other side, for the ongoing discussion with the regulator, that I remember that is a discussion of the economical restore of the impacts because the financial, once they have been restored with the COVID -- the Quinta COVID agreement. Right now, Enel has opened the third phase of public hearing for the discussion of this economic rebalance. Regulatory is going to assess the overall impact suffered by the distribution companies and is still looking into options to restore the impact while avoiding a tariff increase for the final customers. So a solution that now is on the table is to have a recourse of tax clean. So the taxes that are present in Brazil. And this may smoothen the tariff increase, making such benefit immediately available. We believe that Enel will respect the concession agreements and the methodology proposed that the public hearing will be improved in order to rebalance the economic situation along 2021.

[Monica Girardi:]

Okay. Alberto, again, another really popular question for you that was also asked by BTIG that I forgot to mention before, so the cold spell in Texas has impacted several companies operating in the area. Can you provide some more color on your operations there? Has there been any economic impact?

[Alberto De Paoli:]

Well, so first of all, the cold spell in Texas affected our wind farms, as of -- for the majority of the players operating in the area. Main impact was due to the rising of blades. The main components of the towers and for a period of approximately two weeks then we were able to resume operations quickly, and so to limit -- so the reduction in the production and damages to people or equipment. Now we have filed in March 12, two petitions with the Public Utility Commission of Texas, PUCT, one asking to reprice the electricity market; and a second to receive an North America rights to further appeal the PUCT orders to reprice the market. So far, PUCT has declined to take up the issue for the crisis period. But political pressure to the price is bounding, and also it is the recommended action of the independent market monitor. So we continue to look closely as we are asked promptly to push that way to resolve the issue. But as of today, we see a maximum potential economic impact that at a net income level is set to be eligible, even if the PUCT actions filed are not successful, like we think that in some way, they will do. We have some corporate actions, insurances and also legal actions that so we are to -- in a combining way, are putting so the final outcome of this issue, not really impacting our overall results.

[Monica Girardi:]

Okay. Alberto, we still stay with you with a question on inflation. As the market is becoming increasingly concerned about inflationary trends, how is your business protected against inflation?

[Alberto De Paoli:]

Well, yes. So the markets are becoming sensible to do inflation signs that we think that this is not the case. We don't think that we will see any inflation pressures for all the 2021. We are also look forward in 2022, but having said that, as for the business, our business is well covered by any increase in inflation. Network tariffs are adjusted yearly by inflation in almost all the countries. the Generation business, in the generation business, PPI, if we see different types of pricing mechanism. In fact, the majority of the PPA are covered index to inflation. And also on the retail business, we have. So year-by-year, we can -- we adjust our tariff also looking at, despite of inflation. It's clear that potential impact of rising inflation may be on bond yield, while we don't see no major issues on the issuance side, but also on the stop of that because almost 80% of our debt is at fixed rate or hedged.

[Monica Girardi:]

Okay. Alberto, we are receiving lots of messages addressed to you about a clear statement around the guidance for 2021, if you can confirm that you don't see any risk at the targets that we shared with the market back in November.

[Alberto De Paoli:]

We do confirm our target for 2021.

[Monica Girardi:]

Okay. Perfect. Well, I think it's the byproduct, but let's open also the discussion around the dividend payment. Francesco, if you want to comment if you see any risk to the dividend payment for 2021? Francesco, you are on mute?

[Francesco Starace:]

No. We don't see any risk on dividend payments on the back of the guarantee we gave already in the Capital Market Day, on the back of our view, as we just said, that the guidance needs no change. And on the back that this year would probably be a little better than 2020, where we did not change our dividend policy, so no, no change.

[Monica Girardi:]

Okay. Now we move to a set of questions, and we hope to go through quickly around the business. The first one is for the CEO, and it's about the pipeline, which has increased enormously versus last November. If you can provide some color on the underlying dynamics of such a big step-up.

[Francesco Starace:]

I think we need to get used to this going forward because the ambition of the growth objectives that we have outlined for the decade as such that this gross pipeline needs to start now in order for this to be delivered three, five years down the road. So people should not look at the pipeline. And what we're doing in the same year because the pipeline is about three, five years down the road, and what we're doing in the year is what the pipeline was three, five years ago. So the pipeline grew because our ambition are of growth and because there is space for growth. And there is an ongoing effort, which is not going to stop. This will continue. Today, we have a mature pipeline that went up 4,000 megawatts in this period. It's about in the few months, mostly concentrated in Europe, Africa and Oceania. The step-up of the early-stage pipeline includes projects in Spain, where the growth is now happening in a large space. U.S.A., more than 31% is there, Latin America, and a little bit in the rest of the world. So this will continue. It looks a lot, but if you look at what we have in mind and the kind of growth that is available out there, it's -- I think it's just right.

[Monica Girardi:]

Okay. Again, Francesco, I think this is for you. In light of the results of the Italian renewable auction, which is your view in terms of renewable development in Italy, what are your expectations in terms of price evolution?

[Francesco Starace:]

I think I have anticipated this trend about a year ago. You might recall that I have said Italy tracks Spain with 1.5 years delay because of the slow process of optimization and permitting that separates these two countries. Italy is a little bit -- it's quite slower in terms of permitting. So there is an inertia that needs to be bridged. And that is shown in the fact that tenders are not full. I mean, the capacity is not fully satisfied. And obviously, prices are higher. Will this continue? No. I think it will be gradually picking up with that delay that we had in mind that is showing now finally in its dimension. But prices will stay higher for the next probably 12 to 18 months. Yes.

[Monica Girardi:]

Okay. Again for you. Comment on the measures approved by the Mexican government, which is restricted -- restricting access to the wholesale market. Can you share any thought?

[Francesco Starace:]

We think these measures are wrong. They are against the law. In fact, I think the judges in Mexico think the same, and they have ruled quite robustly against them. We hope that the governments understand that this is preventing a flow of investment in the country and damaging the trust of investors in the country itself. So we guess this will finally get to the right attention level. I think the decree prevents free market competition. It promotes monopoly and also eventually compromises environmental targets of the Mexican government itself. So I think the supreme cart and the judges have already ruled against this decree on constitutional level. We are ready to go wherever it needs to be done in terms of iteration and rolling. But clearly, this marks a little bit of slowdown on the investment cycle in Mexico, which, by the way, for us, was basically idling, waiting for this to happen. So we're not particularly hit. I might recall that we have a joint venture in Mexico in which we have a minority stake already. So the impact is -- on the accounts, it's small. But I think it's a proof that if a country wants to inflict its damage on itself, it can. And I hope this ends quickly.

[Monica Girardi:]

Okay. Alberto, we go back to the auctions, and we change a country though. Analysts are asking about the auction since Spain that have been awarded at a really low price. What is your view on the underlying economics? And if you think that the returns are sustainable at such a low price.

[Alberto De Paoli:]

Well, I have already expressed in other times. So what we think about, so the very low price that we see at tenders. First of all, so the outcome price has to be assessed because every tender is seeking to have price that is very low, and then you have to look at other items that are eaten in the offer that may increase the price. That's the first for all the tenders in the world. Second is it's clearly that the timing which a lot of developers is only this way to develop. It's clear the tenders will be very, very, very competitive. And because -- so everyone is seeking to have these PPAs to have a higher level of leverage coming from banks and reducing the level of equity. And sometimes, so the -- with faith in the future that may -- so at the end of the PPA may say in the business plan that the next 10 years after the business plan will be the years that will set the clear return on projects. We don't think that is the case. We think that the prices in renewable will go down, so there is no future in which still in the second part of the useful life of plant, you will see prices that will be higher than today. We think that with a spot price that is in the range of 45, offering 24 is a strange offer because at the end, you are losing €20 per megawatt hour in the year in which you have this difference. And you are also hoping that it will stay also for a longer time. And that we saw offers by far down versus the average levelized cost of energy that today is an average in the country in the case in Spain. Having said that, we participate in the tender, and we lose tender because we offer prices that are in line with our levelized cost of energy. But the real development that we see in countries in which we are integrated is not to tenders, but is developing capacity and integrating the capacity with the demand offered by our retail segment.

[Monica Girardi:]

Okay. Again, for you, Alberto. Given the extreme weather events that can occur like Texas, how is the resource availability in 2021? Could you please provide the sensitivity or resource availability for 2021?

[Alberto De Paoli:]

Well, year started very well. In the past, we have mainly Europe have very high level of. And also Chile is recovering the very dry situation of the last year, while wind and solar resources are aligned with what's expected. So today, so we -- clearly, we do not foresee any impact coming from resource and ability, while -- so we are now looking at having some better results because of the result of the first two months are encouraging.

[Monica Girardi:]

Okay. There was a question for Francesco about the coal phaseout that we expect for 2021. But if I'm not wrong, Francesco, you explained the road map quite clearly before. So I would jump this, while for Alberto, there is a question around the hedging level for 2021 and 2022, and if you -- if we see any impact from prices volatility?

[Alberto De Paoli:]

Well, for the hedging for 2021, we have already completed more or less the hedging activities. We are now at 85% for Italy, 97% for Spain. And we have an edge price that is stable versus the previous year. While for 2022, we stand at 41% for Italy and 57% in Spain. Remember, that we -- our hedge is on an integrated position. So we cover at the same time, production and retail activities. So it's for everyone to look on how the integrated margin is covered. And as I said, so now we are working on integrated margins stable along the years.

[Monica Girardi:]

Okay. We move to networks, Francesco. What is that in Italy? Here we go again. Will happen at the end of 2021, with the current interest rate environment and low BTP bond spread, how can the regulator keep the current 5.9% WACC level included in your plan assumption?

[Francesco Starace:]

Two good question, in fact. But we think from one side, there is this. On the other side, there is the fact that distribution companies in general network investment, is the first kick of the party of the recovery fund and the investment. So the regulator in general will be extremely careful not to discourage a very high level of investment in distribution networks required by the energy transition. I have to also recall that the regulator during the last regulatory negotiation indicated that they wanted to switch from RAB-based to a RAB Totex mix during this next, the one that will start now regulatory period. So we are quite positive that there would not be a drastic change. The first consultation document will be issued in May. The negotiation will start at the end of '21. So we think that we are not that concerned in the returns where we are more curious to see what is the mix of the two -- what this migration from RAB to Totex that they have in mind, how they want to carry that out, in the context of the big push that the government is now throwing into the network development and infrastructure development for the next electrification phase in Italy. So we are widely optimistic that this -- the end results of, let's say, the equivalent of 5.9 WACC can be achieved perhaps with different tools.

[Monica Girardi:]

Okay. We move to different type of question, really popular one again. We have heard -- and I think Francesco, it's naturally for you. We have heard you were looking into the acquisition of WPD in the UK. Can you explain the rationale of that type of transaction? How does it fit with your strategy? And I would add if we are interested -- if it means that we are interested into potential M&A in Europe?

[Francesco Starace:]

We have not offered for WPD. And this is -- we did not present a bid. We looked into it because we, of course, are interested in distribution networks around the world in the EU, in particular. Let's say, UK was in the EU when we had this thing in our mind, but it doesn't matter. It is still a very important part of Europe. When we looked at it, and we saw the way it was managed and also the way in which the regulator in the UK is looking at these kind of assets, we decided not to offer, which doesn't mean that we cannot do that in other opportunities in Europe or elsewhere and when they will come along. So this time, we passed because they were not -- it was not interesting enough. And by the way, we saw the UK as increasingly risky place to go.

[Monica Girardi:]

Okay. Considering the exposure dynamics in LatAm.

[Francesco Starace:]

If I can add.

[Monica Girardi:]

Sure.

[Francesco Starace:]

It looks like the winner is a UK company. So I think for them, the risk is different. The risk profile of the UK is a little bit more palatable than for a company that does not sit in the UK.

[Monica Girardi:]

Okay. Now considering the exposure -- and another question in relation to networks, but it's LatAm. So Alberto, I think, given its volumes, it's for you. So considering the exposure to volumes dynamic dynamics in LatAm and the impact recorded in 2020, how is 2021 so far? And what are your expectation for the year?

[Alberto De Paoli:]

Well, we saw first level of recovery of demands already in the second half of 2020 and now also the first month of 2021. So our expectations is that energy demand in 2021 will go back to 2019 levels. Right now, for the numbers we have on February, we can say that we see a demand that is in line what with February last year. So the level of demand that was before the starting of the lockdown for COVID. So this is encouraging because we think that this trend is -- there are no other fell out of COVID without further lockdown is progressively recovering.

[Monica Girardi:]

Okay. I think we move to retail now. Francesco, for you. It's a kind of a recurring, recurring question. The end of the regulated tariff in Italy has been postponed further. What's the impact -- what is the impact you see from this on your business plan?

[Francesco Starace:]

This is, as you know, very well, those that follow this saga since now 4 years, 3.5 years, you know very well that I have always maintained that every new government has this wildcard to postpone the tariff. And this, again, has happened. I think -- by the way, it happened with the old government before they left. So I mean, it's even more the cooler. So I think this is not a surprise for anyone. I think it is not a big game changer. For us, we've always factored in, in the next three years, somehow this thing, but we have always kept our strategy of gradually and inexorably, I would say, grow our customer base, getting customers out of the related tariffs while this regulated tariff was in place, and this is now continuing. So I think it is mildly positive going -- looking at the track record that we have in this field, it is very stable. Looking at how the market looks, it is changing nothing in terms of competitive pressure. It is prolonging the actual situation, which for us, I would say, is a well-known territory in which we will continue to implement the strategy of growth that we have so far successfully pursued. So I see a very, very small impact in terms of economic returns, but a very stable continuity in the growth of our customer base.

[Monica Girardi:]

Okay. We move -- we stay in Italy, and we add Spain. Alberto, this question is for you. Analysts are asking if you can provide a little bit of granularity around power volumes sold to B2B and B2C customers for Italy and Spain in 2020, of course.

[Alberto De Paoli:]

Okay. So in Italy, power sold in 2020 had been down overall by 3%. B2B segment was down 6%. That it means roughly 3 terawatt hours. In B2C was up by 7%. That roughly is 1 terawatt hour more. In Iberia, volumes are down overall 11%. B2B contraction was up 13%. We are talking about roughly 8 terawatt hours, with B2C down 4%. Also here is less than 1 terawatt hour. Overall, the contraction of industrial activities is the main driver for the contraction. And now we see a progressive recovery. Worth mentioning that the reduction in the B2B segment is the -- as the less marginality in the overall portfolio of our selling, that's why -- so the increase in B2C, with a higher level of marginality, covered almost entirely the reduction in marginality coming from B2B. And the only impact, really impact that we had on retail in 2020 was the long position, the temporary long position that was created by the sharp contraction in the B2B demand following the lockdown.

[Monica Girardi:]

Okay. So you spent a few words on the margins, which I think is also answering another question associated with B2B and B2C for Italy and Spain. So we move to a question which asked the latest observation around demand in Italy and Spain. So have you seen recently any recovery? What are the residual risks associated with COVID?

[Alberto De Paoli:]

Yes. So in the first two months, we know a big bump, but we are observing a little trend of recovery that started in the second half of last year with some stop and go along the second part of 2020. Today, we see the electricity demand is flat in Italy and with minus 1% in Spain. So this is a steady recovery of demand that we observed along the month.

[Monica Girardi:]

Okay. I think we are approaching the two last questions and are both for the CFO. One is on the hybrid. So we move to the financials. So you have €2.1 billion hybrid bonds still accounted as debt. Are you going to change the maturity to perpetual and accounting as equity from now onwards? Will all the hybrids be accounted as equity?

[Alberto De Paoli:]

Well, so we have started the process last year, as you know, and so we are looking to continue to do so also in the next year. We will use, depending on the overall impact, consent solicitation like we did for the first time in the last year or so we will wait the refinancing time for other. So it will depend on the market condition. And so we will evaluate accordingly with the best approach. At the beginning of this month, I remember that we have just issued the new hybrids for €2.25 billion, and these new hybrids will be fully accounted as equity.

[Monica Girardi:]

Okay. Last one, the expectation of a less favorable interest rate environment can change or accelerate the deployment of your financial strategy?

[Alberto De Paoli:]

Well, we constantly monitor the evolution of economic and financial environment. To give you an example, we took for the hybrid bonds, a clear wind between 2x of some tool bullets in the market. The window was very clear. And so we get a very, very low level of cost. So the hybrid we issued had the overall cost of 1.7%. I think the lowest level of cost for a hybrid bond. And so we will do it also looking forward. I think that a lot of windows will be ready to refinance the debt. And so I would say, so we will -- I think we will have another one year or one. Five years of level-playing fields to finance or refinance the debt, but we worked that way. So the final answer is, I think, that we don't have any kind of impact for the foreseeable future, but also tactically speaking, we are working on windows being ready to do something soon as the condition are so easy for us.

[Monica Girardi:]

Okay. I think this concludes the list of questions that we received. So I want to thank our CEO and CFO, and I want to thank all of the participants to this call, reminding all of them that we are open to any follow-up they may desire. Just give us a call or drop us an e-mail. Thank you so much.

[Francesco Starace:]

Thank you, Monica. Thank you, everyone else. Thank you for the attention and the questions.

[Alberto De Paoli:]

Thank you.

[Francesco Starace:]

Bye-bye.

[Alberto De Paoli:]

Bye-bye.

[Operator:]

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