Enel SpA (OTCPK:ENLAY) Q3 2022 Earnings Conference Call November 3, 2022 12:00 PM ET
Company Participants
Monica Girardi – Head of Group Investor Relations
Alberto de Paoli – Chief Financial Officer
Conference Call Participants
Operator
Good day, and thank you for standing by. Welcome to Enel Nine Month 2022 Results Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today’s call is being recorded.
I would now like to hand the conference over to your speaker today Monica Girardi. Please go ahead.
Monica Girardi
Good evening, ladies and gentlemen. Welcome to our nine month 2022 results presentation, which will be hosted by our CFO, Alberto de Paoli. In the presentation Alberto will provide you some highlights of the period, and we 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 email at investor.relations@enel.com.
Before we start, let me remind you that, media is listening to both the presentation and the Q&A session. Thank you. And now I hand over to Alberto.
Alberto de Paoli
Thank you, Monica. Good evening, everybody. Let’s start with the highlight of the period on page number 1. During this first nine months, the operating evolution of the business grew strongly. Renewable development continued to be robust. Volumes in the free market segment have grown significantly and investments in networks increased by 15% year-on-year. The challenging market context created by the energy crisis in Europe prolonged and amplified its magnitude long quarters. This coupled with the measures implemented by the government, which weighted increase in our working capital.
Notwithstanding all of this, our strong liquidity was a solid support to our business and allowed us to face the market disruptions observed in the last few months. Disposal progressed as planned aiming at simplifying crystallizing value and improving the risk return profile of our asset base. Given the year-to-date performance of LATAM and Iberia, we have good visibility on EBITDA trajectory for the full year. We can confirm our EBITDA target ranging between €19 billion and €19.6 billion.
On the bottom line, the combination of higher contribution of our subsidiaries vis-à-vis the domestic market, and a higher bad debt driven by a two times turnover increase will result in a moderating earnings growth compared to our original expectations. Additionally, we see amount in risk associated with windfall taxes in Spain that we prudently want to reflect in our guidance.
The business evolution and all the managerial actions that we will activate in the last quarter supports our confidence in the net debt target for full year, which we see landing between €58 million and €62 billion. Worth to highlight, that changes in guidance do not impact the fixed EPS of $0.40 for 2022.
Now in the next slide, I drive into some business development indicators for the nine months, and I’m on page number 2. In renewable, we built 2.1 gigawatts year-to-date, resulting in an increase of 4.8 gigawatts compared to September 2021. In customers, electricity sold in the free market grew by 14% versus previous year as a result of a larger customer base and a higher unitary consumption, as I will detail later in the presentation.
On networks investments reach almost €4 billion, 40% of the group’s total CapEx. We continue investing to consolidate further progresses in the quality of the service delivered to our clients in infrastructure that are protected by regulatory frameworks that recognize automatically an adjustment for CPI and reflect pricing rates.
The evolution of our business considered with an unprecedented energy crisis, which triggered government’s intervention weighing on our financials as represented now on slide number 3.
As you can see from the chart, in Europe, governments intervened on tariffs and fiscal matters over the past months, adopting measures which were detrimental to our financials. All these measures had a limited impact on profit and loss, but have affected progressively our net debt in 2021 and 2022, accruing as of September, a total of around €8 billion in items that are pending to be collected from governments, or public entities in Italy in Spain and in Romania. These items have grown €5 billion since December last year.
Over the third quarter, existing measures have been extended and new ones introduced for additional €3 billion deteriorating the group’s working capital as you will see later in the presentation. Government intervention overlapped, with extreme energy trends and I’m now on page number 4.
Looking at Italy. Strong operating dynamics bode extremely well for our future, as we added 1.5 million customers year-to-date. Volumes sold increased more than 41% on a combination of higher unitary consumption and lower level of churn. However, extreme trends this year affected our short-term results in particular, the unprecedented low level of hydro production, which remained below the historical average in each quarter, higher energy volumes absorbed by our customers, and low hydro created an unexpected open position, which accounted for a total of nine terawatt hour in the nine months.
The average pulp prices increased almost three times versus last year resulting into materially higher cost to cover the open position. Under normal conditions, the growth of retail fundamentals would have returned €1.7 billion on EBITDA and €1.2 billion on net income.
Then on slide number 5, we talk about the strong liquidity position that helped us in navigating these turbulent weathers. As you can see this €25 billion of liquidity, of which almost €7 billion in cash and the remaining €18 billion in readily available committed credit lines.
Notwithstanding the extremely volatile commodities environment, we have been able to manage the situation. We consider the group’s liquidity position has more than satisfactory to face the turbulences we are leaving and we don’t see any short-term risks that might impact the solidity of our balance sheet. We have progress in streamlining our asset base. On Slide number 6, you see summarized what we have been done so far. We have as of today, executed and are in the process of completing several deals. The disposal of our stake in Russia had an impact in the nine months net debt of around €500 million, due to the deconsolidation of Russia debt. While the equity value of around €140 million has been cashed in early October. In July, we announced the sale of the transmission activities in Chile, which is expected to be closed by the end of the year and will generate a cash of around $1.3 billion.
In September, we signed a deal for the sale of Goias rural network in Brazil, which was no more fitting with our strategy to grow in highly urbanized areas and fully size, the opportunity arising from the group’s integrated footprint in the context of the energy transition. The total consideration will amount at around $1.4 billion. The closing is expected by year-end.
We disposed thereafter thermal plants in Brazil for around €100 million. And the disposal plan announced so far in total will impact positively 2022 net debt for around €3.5 billion, out of which only €500 million are visible in the third quarter of the year. In the next months, we will continue to focus on the creation of a much simpler group exiting from non-core business and geographies and improving the risk return profile of our portfolio of assets.
Now before diving into economic and financial results, let’s have a look at the last transaction on the stewardship business model I’m on Page number 7. A couple of weeks ago we have announced the sale of a 50% stake of Gridspertise, our company focused — new company focused on the acceleration of the digital transformation of power grids through advanced network technologies and solution offered to DSOs worldwide.
The agreement valuized the company at €625 million for the 100% enterprise value, a value that could reach up to €1 billion based on potential deferred payments included in the agreement. CVC will pay a total consideration of approximately €300 million for the 50% stake and the overall transaction is expected to generate a positive impact in the EBITDA group and the group’s EBITDA of approximately €500 million. And the positive effect on the group’s consolidated net debt of around €300 million. The closing of the sale is expected by the end of 2022.
And now, we move to the economic results on Slide number 9. Starting with the EBITDA evolution. Despite a strong volatility, our operating deployment offset the challenging environment and ordinary EBITDA came in 1% up versus 2021, if we exclude around €200 million of non-recurring items recorded last year. In the first nine months, the main dynamics observed can be summarized as follows: networks came in almost flat year-on-year, as tariff indexation in LatAm and efficiencies offset the WACC reset in Italy and the government’s measures implemented in Romania, which we expect to recover by the year-end in light of the agreement reached a few days ago with the regulator in Romania.
The management of the integrated margin was negative for around €200 million with generation contributing positively for around €900 million, customer segment dropping around €2 billion on the back of the dynamics already anticipated in Italy and that I will detail later on. And portfolio optimization activities contributed positively for €1 billion, almost entirely absorbing the negative effect recorded on customer segment. Finally, the stewardship model added €330 million, mainly through Ufinet money disposal.
I will now dive into the EBITDA evolution for Networks on Slide number 10. Ordinary EBITDA stood at €5.3 billion decreasing by 3% versus previous year. Going in detail by country. Italy, decreased around €80 million, due to the negative effect associated with the last year regulatory review, partially offset by efficiencies recorded in the period. Iberia decreased by around €100 million on lower tariff and increase in fixed cost. The weak performance in Romania is related to the delay in the recognition of the higher cost due to price spike incurred to cover network losses.
A few days ago asset we reached an agreement with the regulator. And starting from the next quarter we can fully book the differences between the realized cost and the recognized cost for 2022. Latin American countries net of Argentina performed extremely well contributing for around €350 million, mainly thanks to tariff indexation for €280 million entirely — almost entirely in Brazil.
Currency devaluation contributing for around €160 million in efficiencies for other 80. This positive has been only partially offset by impact of CPI increase and lower margin associated with the IFRS 12 and development OpEx in Brazil. Argentina continues to show no sign of improvement, recording a negative year-on-year results of more than €60 million, once again lacking the overdue recognition of the investments in tariff. And finally, EBITDA evolution has been negatively impacted by a negative non-recurring for around €180 million in Iberia.
Moving into the EBITDA evolution of Global Power Generation and analytics global retail we are now on Slide number 11 where you can see that in nine months ordinary EBITDA lands at €7.2 billion, flat year-on-year excluding €200 million of non-recurring recorded in 2021. I will now dive into the dynamics observed in each geographies. As you can see from the chart, Italy suffered the most from energy tensions with EBITDA decreasing more than €1.3 billion on the back of a contraction of the integrated margin for around €1.7 billion, originated by a widening open position, covered by expensive sources. And I will detail later on in the next chart. And rest of Europe, down of €120 million, due to the impact associated with the retail price cap introduced in Romania.
In Iberia, integrated margin management contributed positively for €740 million, as the net effect of increasing generation margin and lower marginality on the retail business, impacted by increase in sourcing costs has been positive for around €250 million. Additionally, portfolio optimization added around €470 million.
In North — in Latin America the development of renewables added more than €300 million, of which €150 million in the US and FX contributed positively for around €180 million. To conclude, the nonrecurring items recorded in 2022 amount to €150 million.
Now, let’s have a focus on the operating dynamics that affected our margins in Italy during the third quarter. I’m on page number 12. In the third quarter, we expected to sell around 10 terawatt hours to clients contracted on fixed price. Our expectations were based on a normalized temperature and the churn rate almost in line with the semester.
The summer and September proved to be much hotter than expected and clients churn rate went further down, taking advantage of our favorable commercial offerings. All this created around 2 terawatt hours of unexpected open position that pushed down our margins in retail versus the expectation that we had for the quarter.
I am now on slide number 13, where you can see that Q3 was expected to generate around €400 million positive contribution to EBITDA, thanks to sales to customers with fixed price contracts of the already said 10 terawatt hours, repricing activities driving revenues up by 20% versus H1, and a full hedging of expected cost for the 10 terawatt hour set.
We secured the repricing in line with expectations. But the other dynamics of the quarter yielded instead a negative impact of €700 million on margin, due to the open position of only 2 terawatt hours that we had to hedge at a price almost of €450 in the quarter. Eventually, such deviation resulted in around €300 million of EBITDA reduction during the last three months.
Let’s now see how the evolution of EBITDA will play out in the last quarter of the year. As you can see from the chart, we are going to confirm the guidance for the EBITDA 2022 built the way you see. We started from the ordinary EBITDA of the nine months, the €12.7 million. In the last quarter of the year we expect network to contribute for around €2.5 billion, thanks to the positive regulatory adjustment in Romania and an additional benefit from LatAm countries.
Generation and trading to range between €2.8 billion and €3.1 billion, supported by around €300 million renewables growth, a ranging contribution of our conventional generation and trading activities, depending on the volatile evolution of the commodities market and between €300 million and €500 million negative impact from further contraction in hydro production, vis-à-vis, last year.
Global customers is set to contribute €500 million to €800 million on the back of the growth in Enel X, the expected reduction of sourcing cost in Romania, partially compensating from the lower EBITDA contribution in Italy. The range shown in the slide is linked to the evolution of consumption in the last quarter.
Finally, our stewardship business model will contribute for around €500 million, thanks to the already said Gridspertise deal announced in October. All these elements allow us to confirm our ordinary EBITDA guidance for 2022 despite the extremely volatile environment we are operating in.
Let’s now continue the analysis of the results at the nine months. I’m now on slide number 15 where we show the evolution of earnings. Ordinary group net income came in at €3 billion, on the back of the dynamics commented at EBITDA level and higher D&A recorded in the period only partially offset by lower taxes.
D&A are up year-on-year by €600 million as a consequence of €400 million amortization on higher investments deployed and FX impact, €200 million bad debt accruals, mainly in Italy, up on higher turnover in the period.
Net financial charges marked an overall net income improvement of around €100 million, thanks to the accelerated debt refinancing carried out during the last 12 months, which brought down cost of debt by 20 basis points versus September 2021.
Income taxes decreased by around €400 million, mainly driven by the lower economic results and the adjustment recorded in previous year on deferred taxes that more than offset the negative one-off accounted in Italy for the legislative decree on energy bills rise that worth €70 million.
Higher minorities interest due to the higher contribution from our subsidiaries, versus the result of Italian entities resulted in a lower net income for around €100 million. Well, despite an EBITDA that we see still in line with group year-end targets, its composition is profoundly different from expectations and triggers and adjustments to the bottom line guidance as shown in slide 16.
The dynamics explained at EBITDA level leads to a different geographical mix in our earnings, with a different contribution to the bottom line. D&A are expected to be around €200 million higher than in the plan on the back of the higher bad debt, driven by higher revenues on an unchanged unpaid rates.
Worth to highlight that we took a prudent approach in our revised estimates for the full year, as we added also an hypothesis of the possible new taxation in Spain on which discussions are ongoing and there is no clarity if it is approved and on the final outcome.
We consider this proposed taxation to be illegitimate and contrary to the provisions of the European community regulation. And we are monitoring the ongoing parliamentary process with the aim to assess litigation actions if and when the regulation is approved.
Considering these moving parts and in light of our cautionary approach, we set a new range for our ordinary net income between €5 billion and €5.3 billion.
Let’s now move to the cash flow on slide 18. Group FFO stood at €1.1 billion. Similarly to what happened in the first part of the year, the group’s cash production was affected by a severe swing in the working capital for €8.6 billion associated with government measures and the current energy market context.
Deep diving into the working capital the dynamics are as follows. €5 billion of government and regulatory measures, accounting for about €8 billion in total on our debt figure as analyzed on slide number 3.
Compared to first semester, this item increased €2.8 billion, as it includes also the mandatory coal and gas stocks, the cap on gas prices in Iberia and the recognition of the tariff equalization mechanism in Italy.
€3.7 billion impact from the energy market context, which is up by €2.3 billion versus first half, due to the increase in the total turnover, due to a combination of higher volumes sold and the price dynamics observed during summer.
Then, €1.1 billion of CapEx seasonality, flat versus the first half that will be fully reabsorbed by year end in line with historical trends. The remaining positive €1.2 billion impact is driven by the managerial actions implemented in the third quarter to tackle all the previously mentioned negative dynamics.
Worth to highlight, that net of government intervention and electricity prices dynamic the evolution of our working capital would have been completely in line with what can be considered, a normalized and recurrent business trend.
To year-end, we will maintain our focus on the implementation of all the managerial actions that allow us to optimize the working capital movements and we will continue to closely monitoring the external context in order to manage these dynamics, as effectively as we can.
Finally, income taxes and financial charges paid accounted for €3.2 billion decreasing year-on-year, mainly thanks to the liability management program executed in 2021.
Let’s now take a look at net debt on slide number 19. Actual net debt stood at €69.7 billion. The main operating moving parts described in the chart are the following. The positive €1.1 billion FFO already commented, investment for €9.4 billion up 17% year-on-year.
Dividend paid for €4.8 billion, €0.7 billion associated with our disposal program, mainly disposal and acquisition program, mainly related to the consolidation of the Enel’s renewable assets and the debt the consolidation of Enel Russia and around €4.1 billion linked to currencies revaluation and new leasing.
I would like to remind you that our net debt figure must be adjusted for around €3 billion of accounting effects, related to FX hedging. And additionally, it does not include the €3 billion positive impact associated with the disposal transaction in Chile and Brazil that we have already announced and that will be cashed in by the year-end.
Net of currencies and disposal, our operating net debt would have been equal to €64 billion. And out of the impact of the working capital would be by far less than €60 billion. In the next slide, I will guide you through the evolution of net debt, at the end of the year.
Now I’m on page number 20. Starting from the net debt figure at September, we expect the following moving parts. Positive FFO contribution expected in the eight to 10, range driven by the dynamics on EBITDA already commented and working capital evolution.
In particular, on the net working capital we expect to recover between €5.5 billion and €7.5 billion, mainly thanks to the managerial actions, we will continue to implement and the absorption of the nine months negative dynamics associated with the business seasonality.
These allow us to improve the EBITDA conversion into FFO in the last quarter of the year. We will account for additional CapEx of around €5 billion, and we are projecting further active portfolio management up to €2 billion reaching around €5 billion, including the transaction in Chile and in Brazil already said.
I want to stress here that, we will also work to neutralize, the impact on our net debt of currencies movements, to tackle the volatility induced by the pure accounting of currencies devaluation and strengthening.
At the end of the year, therefore, we see a range of net debt between €58 million and €62 million depending on the group cash flow generation and the timing of the cash in associated with the disposal, still to be announced.
And now some closing remarks before the Q&A. The operating underlying of our business, were extremely strong and their evolution bodes well to the achievement of medium-and long-term objectives.
The focus for the last quarter of the year will be on cash generation and balance sheet strengthening, as we will implement all the managerial action needed in order to reinforce and restore the recurring EBITDA conversion into FFO and bring the level of net debt in line with the target set.
We will continue to progress in creating a much simpler group focusing on activities only in countries and businesses that fit with our strategy. This will allow us to unlock additional resources enhance the profitability.
Despite the revision of the net income target for the full year our transparent and simple dividend policy remains unchanged. Therefore, we confirm the fixed DPS of €0.40 for 2022. On November 22, we will present our 2023-2025 strategic plan. We look forward to seeing you there.
I think we can now open the Q&A session. Monica?
Question-and-Answer Session
A – Monica Girardi
Okay. Thank you Alberto. Just allow me a couple of minutes to pack lots of questions that came through and I’ll be back in literally 30 seconds.
Okay. I’m back. Thank you so much. Thanks for your patience and thanks to all of the analysts that sent the questions through. I’ll start with a number of — well a few questions around our integrated margin management. The first one is on the Q3 dynamics which generated further negative unexpected impact on margins and how can we be confident in the fourth quarter dynamics.
Alberto de Paoli
Well, what happened in the third quarter is as I said in the presentation is simple to explain. This is a year in which keeping the prices unchanged there was a very little increase on one side and with seasonality that are — has been strange because we had a very, very strange level of temperatures in summer in this long summer because last also on September.
Together with the fact that having the better price in the market so we are having we are experiencing a very low churn rate. This also in the third quarter moved to have two terawatt-hour of open position. And we matched this needs to cover with the highest price seen along the year with around €500 per megawatt hour. This was the unexpected impact on the third quarter.
On the repricing activities and on the EBITDA expected out of this two terawatt hour everything was in line on what expected. Now, — — and was as I said in the presentation around €400 million of EBITDA. Now, we are — we have completed the repricing effort because the overall repricing is in the range of 40% increase versus the previous prices.
So, the 20% of the third quarter is half of the full repricing that now we have completed. And I want to stress the fact that all these repricing happened at the end of the previous contracts and not — so in the period of validity of them. And for the last quarter without an increase in the not cover energy we foresee the number that we gave to you because it’s more or less in the range of €600 million €700 million.
The range is related mainly on the consumption that may be higher than expected. And on the other side on the level of prices versus the prices expected. What I have to say to you is that October was completely in line in terms of consumption on what expected.
And so it seems that this quarter is now coming in line with what has been expected before also because the increase in prices are driving a reduction in the overall consumption of customers.
Monica Girardi
Okay. Staying into the retail segment, what is the impact of the expansion in Italy of the decree which is capping the price to the retail segment? Does it play out for 2022 or 2023 only?
Alberto de Paoli
Well, we have — so no — so this decree is not expected to generate negative impacts in 2022. For 2023, we need to run an in depth analysis on the methodology to be applied and — so we are going to present in two weeks of the new plan and we will — can show what our expectations are during the presentation of the plan.
Monica Girardi
Okay. Bad debt, how the trend is going and of the bad debt and unpaid, when do you expect the bad debt to peak?
Alberto de Paoli
Well, so let me split in two for this answer. The first is Spain campaign levels remain unchanged. And so we don’t see major changes in terms of unpaid level. So, when we talk about bad debt and unpaid you have to split the answer in two. One is the debt increase that is related to the fact that having an increase in turnover and having a certain unpaid historical level if the turnover goes up. The bad debt is technically linked to the turnover that goes up.
The second is the increase in the unpaid. So, we are not experiencing an increase in the unpaid or only in some segments but a very limited impact. It’s because the vast majority of our customer base is not paying an increase in price until so the repricing that we are having now. So what we experienced along the first nine months is a stable level of unpaid or in some segments a sort of decrease of the unpaid versus the historical level.
If we now look at what can happen and when the unpaid can peak without government intervention to reduce the impact of the price increase of — so the last part of the month of the year, we may think that looking also that prices now are little going down that the peak maybe in correspondence of the bills that are coming in the last semester of the months, so November and December where we can look at it at the very first month of the next years.
Monica Girardi
There is a clarification around the repricing I think Alberto, because an analyst is asking, if we can share the average increase in price that we are applying to customer and if it’s in line with what we have guided back in June.
Alberto de Paoli
Well, we are applying an average increase in prices versus the previous ones that was set during the COVID crisis that was set at a very low level of that time, at around 40% increase. That is by far lower than the increase that we are experiencing on the market prices. When we said that the overall impact on EBITDA was 20% in the third quarter is because we have not completed the repricing, because repricing happens along the quarter and so it has been completed versus the end of the quarter in September. So now, it will give the full impact in the last quarter of the year.
Monica Girardi
Okay. We move on the guidance, lots of question on guidance for 2022 and beyond. So, the first one is on the expected contribution of the stewardship business model and to our numbers, if you can just dig into that.
Alberto de Paoli
As I said in the presentation, we have already a contribution of €300 million in the nine months results that are related with the Ufinet deal and the Money deal. And we have now just closed signed. So we are going to close in the last quarter the Gridspertise deal. And the Gridspertise deal worth around €500 million of EBITDA contribution. This will bring all the effect to €800 million that is on the upside of the range we gave for the stewardship impact. This comes from the fact that we got a very, very high valuation for the Gridspertise deal that was assumed on a lower level in our first expectations.
Monica Girardi
Can you quantify the nonrecurring items included in the full year guidance?
Alberto de Paoli
They are not meaningful. So they are around zero, because we have — on one side, we — so the Iberia is full offsetting on itself, because we got the bonus of roughly €150 million. And we got the distribution tariff adjustment negative in Spanish network of around €180 million. So overall, it’s minus 20 or near to zero.
Monica Girardi
Net income guidance, this question came before the presentation. But just to be clear, does this guidance include the projected impact of new taxation in Spain? How much?
Alberto de Paoli
Well, yes, so it includes this potential impact. And so we are assuming — and as I said, so it’s only to be careful on the judgment that we have already expressed our thoughts around this taxation, we are assuming in our guidance an impact of around €300 million at net income level.
Monica Girardi
Okay. Net debt and working capital, a really popular ones. Do you feel the current level of yearly CapEx, are sustainable with this level of net debt?
Alberto de Paoli
Well, for these and other questions like this, I think it’s better to suspend the answer and to discuss the overall figures for the next years and also the financial and debt level that we foresee for the next three years during the strategic plan presentation in two weeks from now.
Monica Girardi
I will ask you anyway. I cannot stop asking inbounding questions. Second question around the net debt figure and the financial expenses associated. Recent debt issuance appears quite expensive. Can you comment on the rationale?
Alberto de Paoli
Well, first of all, so we tapped the US market because US market offers a long-term tenure. And we catch a window of opportunity that may not materialize in the following months. And now we have a buffer of additional liquidity to face any potential further collateral requirement.
And this together with the fact that having done this accelerated liability management last year almost at zero cost. This can — is helping us to be absorbed the higher current financing rates. And so we will discuss around what will be the cost of debt — the future cost of debt of this company during the strategic plan presentation.
For the cost level, let me split — so I think we have to split the cost into the three main components. One is the rate. The second is the credit spreads, and then the new issue premium. If we look these trends comparing the period from September 2021 in October the sixth, where we issued the latest sustainable in bond, these are the trend observed.
The US treasuries have increased 200, 300 basis points. And the credit spreads have increased around 190 basis points, depending on the tenure. But this widening is broadly in line with what experienced by the other peers that have had assurance at the same time. And the new issuance premium was around 45 basis points, which is high compared to the historical level. The comparable also this to the one paid by comparable companies.
Monica Girardi
Okay. Next is on the working capital. If we — if you can walk us through the actions that we expect to put in place in order to see a absorption of the negative impact of the working capital?
Alberto de Paoli
Well, as said, so we have some technical reabsorption that we foresee for the last quarter that are related with the CapEx level and also related with some of the higher turnover that we have had, because we don’t see any increase in the turnover in the last quarter. So we are going to absorb some part of this increase in the third quarter. And then we foresee some regulatory measure that will come back, because they are picking, technically speaking and not for any other kind of reasons like I don’t know the price cap.
The gas price cap in Spain that peaked in the third quarter, because of the first implementation and now that is technically ready will start in deploying also the reduction in the working capital. For the other managerial actions that we are implementing, clearly, we are so keeping the financial system as a backup to have — to soften the impact also using the banks to reduce the working capital credits that we are piling up because of the situation.
Monica Girardi
Okay. Question for 2022. Is there any risk, I would say, probably, it extends beyond that. If there is any risk on dividend?
Alberto de Paoli
No, there is no risk on dividend for 2022. You will see then the dividend policy for 2023, 2025 period during our Capital Market Day. I cannot give you the details now, but I can anticipate it will remain simple visible and will aim at granting stability and attractiveness to the share price.
Monica Girardi
A few questions around government intervention. What’s our view on the priorities of the new government in Italy in terms of course energy policies and if we expect any further intervention.
Alberto de Paoli
Well, right now, so there is a limited disclosure. We are also working to offering our view and so the possibility of intervention clearly, the first integration will aim to reduce the impact of the price increase that is expected for the last months of the year. And it’s clearly the most urgent intervention that the government will have to take.
After this I think that the government will stay — stick on so on one side the definition of this price cap on gas, and so the discussion around the decoupling of the price of gas and renewable, and also to draft a new proposal of extra profit. These all things are on the track of what the European Commission has said.
There are also the things to be addressed to manage the energy crisis. As you can see, so we have always advocated with our government for the cap to gas price. And for were concerned decoupling, we have been working by quite some time on a different price base for our generation.
With renewables getting the price from our customer base, I’m stressing the fact that being renewables are not subject of volatility of commodity. They are ready also to have and to participate in a long-term market not only a spot market offering and giving long-term price signals that are the best way to have renewable developed in the foreseeable future.
Looking at the profit has so far limited impact on our numbers also because we have said always that having kept the price fixed along all this month of crisis and prices set last year, we were not making any kind of extra profit. But — so an overall framework on extra profit is not something that we see in a bad view, because we think that framework on extra profit may be so put it in for the companies that are companies who are subjects that are really doing extra profit during this period. I think we must wait to see the final form or whatever measure it will be designed and decided by our government in — and also in the talks that we had — the government is having with Europe.
Monica Girardi
Okay. Another one changing country. Our view on the law to claw back extra profits in Spain.
Alberto de Paoli
Well, we reiterate our disagreement with the proposed taxation, as it is not extraordinary profits that are being taxed, but gross income that in this period is impacted by higher energy prices that are not resulting in extraordinary margins as the sourcing costs are increasing too.
In Spain, like in Italy we have sold our energy at a price below the threshold the government deemed reasonable proving that the gas price cap is already limiting windfall profit. In addition, Street reading strict of the proposal might hint to the possibility that even revenues generated by the regulated activities will be taxed, which makes absolutely no sense.
We consider the proposed taxation to be contrary to the provision of the European community regulation, which grants autonomy to the state members on the solidarity tax, but it’s also foresee exclusion of electricity utility as it only applies on oil and gas companies. Application on profits and not revenues and the time frame is 2022 and not 2022 and 2023.
We trust the text to be altered during the parliament process in line with the different amendments introduced by the political parties. We will keep monitoring the parliamentary process, and analyzing devices of illegality of this tax, in order to assess possible litigation actions once the regulation is approved.
Monica Girardi
Okay. Another one, another country. Can you update us on the current status of the discussion with the regulator in Romania?
Alberto de Paoli
Well, on retail there were positive developments in the discussion with the government. Regarding the return to a regulated market, with a fixed selling price and the regulated profit as well as the introduction of bilateral contracts negotiated among producer, suppliers, distributors, with a maximum price of 550-megawatt hour. We have addressed also the topic of removal of the cap for the reimbursement of sourcing price and we think there are good chances to happen.
On networks, the new ordinance solve the economical impact of 2022 was said in the presentation for losses for price difference. The financial recovery from a regulatory point of view will come in a period of five years, starting with April 2023 by setting up a separate and additional component in the RAP in the DX tariff, not subjected to the 7% cap in the RAP increase defined for the normal RAP. We expect the change in legislation, in order to conclude this bilateral contract at 550-megawatt hours. So all in all, positive stance in Romania after long discussions in all the items that are impacting in nine months, our economical and financial results.
Monica Girardi
Pack of question on M&A. First one is, if we can provide more color on disposals and timing of the repositioning in LatAm.
Alberto de Paoli
Well, as you can — have seen from the presentation. So we are accelerating, a lot in terms of portfolio rotation because we are taking advantage of a window of opportunity that are putting the level and the value of our assets up, because of the situation we are living in Europe. And you see that we have already sold and we are going to cash in the next months the transmission line in Chile and the Goiás distribution in Brazil and other single assets in the generation, the generation field. This trend will continue in 2022, and will extend further to 2023 where we have to achieve other major steps in simplifying our presence in LatAm. I ask you for all the other items that we said before to bear, with us as they have coming Capital Market Day will answer all of your questions on these topics.
Monica Girardi
Still looking to acquire grids in North America?
Alberto de Paoli
But scouting never stopped. Clearly, the inflationary act is under observation to understand what trend US, will take in — with this act and also all the transformation that it will — in use. So it remains a very promising market and with a very promising path towards the energy transition. Clearly, the current scenario suggesting to look carefully at the changes and the improvement in the United States, but not to move in a very quick time but take a position to make this possible step further in the future, but not in the very near future.
Monica Girardi
Gridspertise deal, can you detail what generated a contribution of €500 million of EBITDA with a consideration of €300 million?
Alberto de Paoli
Well, the enterprise value of the company is set at €625 million. This is the enterprise value and CVC’s offering €300 million for almost 50% of the company. So, this is the €300 million the caching we will do. In terms of upside, we are getting the upside related to the 50% we sold, but also the revaluation at the same fair value for the quarter that we will retain the 50% we will retain. So both of them are tricking the capital gain that we are accounting for.
Monica Girardi
Can you provide some indication on multiple of the Gridspertise deal?
Alberto de Paoli
Well, enterprise value EBITDA 2022 is around 37 times. And it is around 11 times EBITDA 2023. That is the most idea, with a fair valuation.
Monica Girardi
What are the mechanisms that can bring the enterprise value to €1 billion?
Alberto de Paoli
Well there is deferred consideration that is — that are related with — if so starting from 2026, Gridspertise will achieve certain operational and economic results.
Monica Girardi
Okay. We move into the global business line. A question on the target for renewables in 2022. Are you on track with your 6.1 gigawatt development target?
Alberto de Paoli
Well, we have achieved roughly 1.8 gigawatts of development in the nine months. So as of September. Right now, we are working — we have achieved 2.2 gigawatts of capacity and our target of 6.1 gigawatts. So there are some targets are facing some delays, and may shift in the first quarter of 2023, mainly related with the US solar panel that are today stack, so not possible today to be installed because of the problem related with the similar rights, in terms of labor rights for the Chinese panel.
And so we think that given the solution, is not already given. It’s possible that the time, it’s not enough now to have them install at the end of the year, so that it’s possible they will shift in the first part of the 2023 We are talking about 800 megawatts that are in this situation may affect the final numbers that we are going to install this year. But the delay could be in the range of three to six months next year maximum.
Monica Girardi
Hydro availability, what’s the level of resources that you consider to — that you consider in your full year 2022 guidance?
Alberto de Paoli
Well, so it’s — so the guidance is related to the overall print that we have in the world. So we are having a good publicity in Chile different from the last five years, in which we had a very, very poor production, and good production also in the other part of the Latin America. Italy and Spain, we are having a lower production. What we are assuming for Italy as said is this kind of production is going to remain at the level of the previous year with a little increase because we are entering in the winter time in Spain as well. All-in-all, what we are getting for the forecast is at 0.89, the normal value is one. With Italy and Spain with European level that is working around 0.7, 0.75.
Monica Girardi
I try, but I guess I know the answer. What’s the assumption you’re using for next year?
Alberto de Paoli
Let’s — we’ll have to wait 15 days to have everything answered during the Capital Market Day.
Monica Girardi
Okay. We move to customers. Are you projecting continued growth of your customer base and volumes sold? Is the onboarding of new customers still ongoing?
Alberto de Paoli
What I said in the presentation in the first nine months, we have reached a free market net growth of approximately three million customers roughly €2 million in Italy, and one in Iberia and this due to activations and reduction of the churn rate. In the fourth quarter, we expect net growth of approximately 300,000 new clients with a slowdown in the acquisition campaign. I say that in this period, we have also diversified our sales strategy. So we are now offering also index products for all segments. And then we have defined a selective growth strategy on different customer segments.
Monica Girardi
Do you expect a normalization of the churn rate?
Alberto de Paoli
Well, yes, so we think that churn rates could gradually rise to normal market standards. The very point depends on how the price set to our customer base will remain below or in line of the market price offered from the other competitors for new acquisitions. This is the very point that made the change. So we think that if prices will go down like they are doing in the last weeks this will tend to have a normalization also on the churn rate levels.
Monica Girardi
In light of the evolution of demand competition and prices, are you afraid of a potential risk of over-contracting in your customer operations?
Alberto de Paoli
Well, I think looking at everything that is something that we are assessing is a risk that we are looking closely not to have you tune of the impact on our profit and loss. But right now I would say that is not to be considered a material risk particularly in the short-term.
Monica Girardi
Are you afraid, or do you have any signal that our customers are not paying us?
Alberto de Paoli
As I said, this is not something that we are experiencing right now, because of the strange situation our customers are leaving where most of them are paying less than what they are used to pay in the past years, because of a combination of fixed price offered by us and an impact of the regulatory intervention. And so we are not experiencing an increase in the unpaid, though we are experiencing a decrease in relevant segments of our customer base in the unpaid. Clearly we are so now carefully looking at the trend of the unpaid after having completed the reprice of our customer base to see if this reprice will trigger an increase in the unpaid in the next months.
Monica Girardi
Okay. I have a few questions on financials Alberto. The first one is on margin calls. What’s the current level of margin calls and what is the projected level at year end? And if you can to share with the market the remain, if it’s still an issue for 2023?
Alberto de Paoli
Well, so today thanks to the level of gas prices that we are experiencing in these days, our margin calls are ranging around — for commodity ranging around €9 billion. We got the higher level of this impact during August.
This is — technically speaking, this is going to decrease month-by-month if prices will stay at the level as they are today, we foresee this exposition to be almost 7.5 in December, so reducing €1.5 billion and tending to zero along the next year because of the expiration of the contract that we have done.
For the contracts and the coverage at the hedging we are doing now, right now that for 2023 and onwards. We are doing them at the prices that we foresee that we see today and also in the last months of the market. So we think that the risk that prices will go up and picking goals. So this hedging is less probable than what happened for the hedging that we have observed in these months.
Monica Girardi
Okay. A few random questions. The first one is on the capital allocation between CapEx and dividends. In light of a profound change in related scenario is a more aggressive asset rotation strategy likely to be part of the equation?
Alberto de Paoli
Well, the equation financially speaking, everything that we do financially speaking a part of the equation because our aim is to have a balanced mix between dividends, investments, EBITDA growth and results. So clearly — so the asset rotation has ever been part of this equation it will be also in the future.
Clearly, the asset rotation is not related to making cash to have to fulfill the equation. But it’s mainly tends to have a strategic direction in which we want to simplify the group and to streamline the group. And clearly so then all the financial flows will be used in the better way to offer to our shareholders the best mix for this company.
Monica Girardi
Okay. Talking about rotation. There was a question around Romania and — sorry I’m not actually losing the question Romania and press reports that we are close to sign a deal to sell the asset if you can confirm or not.
Alberto de Paoli
We can confirm. So we also as everything happened when we are assessing a new strategic plan. We clearly look at every option available as I said looking at our strategic direction and the possible asset rotation. And clearly some news can appear on — we are doing something or something else. I may say that we are looking and assessing like every time all our asset base. And that also for this in 15 days we may be more clear on what are our direction during the Capital Market Day.
Monica Girardi
Okay. I keep then all of the questions around the future. One on the managerial action that we intend to onboard again as a follow-up to the one that you just answered to reduce net working capital in the fourth quarter. And how much of the working capital is expected to reduce in the last part of the year.
Alberto de Paoli
Well, as I said before so we are working on the working capital on several aspects. First of all so there are technical reabsorption that we only are looking that they’re going to happen. Others that are related with this technical way to implement the government measures that will have to work. So in this case we are working with governments regulators to have mechanically speaking — and financially speaking this new regulation will work properly and this will trigger a reduction in the working capital.
We are acting also to see if something will not go the way we foresee. Also the bank system may come in and helping us in driving and bridging some part of this exposition to bring down the debt. What we see is that we are looking at keeping and so to managing this working capital exposition of €8.6 billion we had in September and to reduce it of around €f5 billion in — with the actions that we are so aiming at. And the way I said so trying to have them reduced because of — so the technical things that’s going to happen with possible some help from banks that we also try to avoid, but so we will keep as a backup to reach these targets.
Monica Girardi
Okay. Sorry, I’ll try to take just the shorter part of the questions. Lots of questions around the cost of debt. Most of them are actually beyond 2022. Maybe this one cost of debt has decreased 20 basis points in the nine months after the bond — the four billion bond at 6% and the track upwards in rates. What do you expect for the following months I presume for the full year?
Alberto de Paoli
It’s not future. It’s only the next two month.
Monica Girardi
Exactly.
Alberto de Paoli
We don’t expect nothing that is going to increase our cost of debt for the next months. While the overall financial cost, the financial strategy, the cost of debt. And so we will — are going to consider to drive our cost of debt in the next three years is related with the our financial strategy. We will be very clear during the Capital Market Day also related with the debt level we are going to expect or drive for the next three years. So please keep these two weeks further to have this question answered.
Monica Girardi
Okay. I think, we cover all the themes. Thank you for staying with us. And as always the Investor Relations team is open for you. And just be in contact or send us an email, and we will be super happy to answer. Thank you so much and we’ll see in a couple of weeks.
Alberto de Paoli
Thank you. Bye-bye.
Operator
Thank you. That concludes today’s conference call. Thank you for participating. You may now disconnect.
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