Endesa SA

MAD:ELE

Earnings Call Transcript 2019-Q1

[Mar Martinez, Head of Investor Relations]

Good morning and welcome to our first quarter 2019 results presentation, which will be presented by our CEO, José Bogas; and by our CFO, Luca Passa.Following the presentation, we will have the usual Q&A session open to those connected both on the call and on the web. Thank you for your attention. And now, let me hand over to José Bogas.

[José Damián Bogas Gálvez, CEO & Executive Director]

Thank you, Mar, and good morning, ladies and gentlemen, and thank you for joining us today. As usual, let me start this presentation with the main highlights of the period.EBITDA increased by 5% compared to last year, mainly due to the positive performance of the liberalized business despite market conditions having been unfavorable, both in electricity and gas businesses.Regarding the regulated business, it is stable. EBITDA evolution contributed to 61% of the -- of total EBITDA. The ongoing efficiency effort resulted in a remarkable reduction of 5% in adjusted fixed cost. At the bottom line, net ordinary income remained stable over the period. And finally, let me remind you that a total gross dividend of EUR 1.427 per share on 2018 results was approved in the Annual General Meeting held last 12th of April.Moving to Slide #3. Before diving into the details of the first quarter 2019 results, I'd like to review the main regulatory milestones of the first part of 2019. In January, the Spanish government, complying with the European directives, handed back certain regulatory powers to the CNMC. It will be responsible for defining the remuneration of transport and distribution in electricity and gas, among others, and has announced the calendar of the [Foreign Language] for 2019.In the [indiscernible] [ of sats ] reacquire functions [Foreign Language] containing the remuneration standards for the second regulatory period, that is 2020 to 2025, should be published before year-end. In February, the government elaborated 3 separate documents for the European Union, energy and climate [ ST ] framework, the so-called Green Package. In particular, the draft integrated national energy and climate plan, the PNIEC, established the pathway to align a Spanish environmental target for 2030 to the European Union, while setting a specific milestone for the transition to a modernized economy.While these targets are certainly challenging, the plan represents a fair and achievable commitment in view of the above. The European Union will issue recommendation to amend the plan by June 30 and the final plan is due to be submitted at the end of the year.In March, according to the draft, PNIEC will sign a protocol agreement with Endesa and the rest of the plan owners, which defined the calendar for an orderly phaseout of the nuclear plants by 2035. We think this agreement is positive and it is based on the firm belief that nuclear technology is essential to provide competitive prices, while meeting emission target and ensuring security of supply.And it is on the latter that the agreement should be able to provide enough flexibility to ensure it going forward. In order to reach renewable capacity target foreseen in the PNIEC, that is plus 57-kilowatt, the government announced new capacity auctions on the island in which Endesa will be present. Currently, a specific pipeline is under development.On April 5, the Council of Ministers approved the national strategy against energy poverty, to be put into effect over a 5 years' time frame, that is 2019 to 2024, developing the conference contained in the Royal Decree fitting of the year 2018 and introducing the definition of energy poverty and vulnerable customers.Finally, on April 6, the Royal Decree on self-consumption, regulating the administrative, technical and economic condition of self-consumption of electricity, was published. The Royal Decree opens a very attractive business scenario for Endesa X, ready to participate in this new business as well.Now I would like to comment on the market context in Iberia for the period for this financial release, as can be seen on Slide #4, which was characterized by a number of factors, both international and domestic. The Spanish electricity demand showed a decline both in gross, minus 2.8%, and adjusted term, minus 2.1%, affected negatively by milder temperatures in the period, especially in March, with minus 5.9%, as well as via reduction in the consumption by large companies, particularly due to the slowdown of the industrial customer activity.In Endesa consumption area, gross demand decreased by 1.7%, slightly better than Mainland figures, while it increased 0.2% in adjusted terms. This development is mainly driven by higher industrial demand in the [ cattle ] and chemical sector and services activities, which could not offset in non-adjusted term the drop in the residential segment for safe temperature reasons.Electricity prices rose significantly to EUR 55 per megawatt hour, on average, during the quarter, slightly below 2018 full year price references and 40% higher than in the first quarter of 2018. Behind this price scenario lies the combined effect of the comparatively lower hydro availability and wind load factor and a material increase of CO2 prices since during this period.In this setting, Endesa's total output dropped by 8%, largely due to the reduction in hydro and renewable generation, minus 28% and minus 6%, respectively, similarly to the Spanish system. While nuclear output, which was fully normalized after last year's stoppages, partially offset this reduction.Finally, as a consequence of all of these effects, CO2-free technologies increased their share up to 57% of our generation mix versus the 53% in the first quarter 2018.Now on Slide #5, we can see Endesa's power operational highlights. Electricity sales decreased by 5%, mainly driven by the drop in Spanish demand as a consequence of mild temperatures and the increase of competition. Total gross sales decreased 1.3 terawatt hours, minus 5%, mainly due to lower residential, while industrial sales maintained a more moderate drop.You should take into account that commercial strategy loans by Endesa at the end of the year 2017 stemmed from a value-based management that targeted the rotation of the high-value customer, while triggering the exit of strong industrial customers with very low margins along 2018.To the contrary, electricity customers remained in line with last year's figures, although it must be underlying the improvement in the mix following the switch between regulated and liberalized settlement. Our objective remains keeping our overall market served thoroughly stable.Moving to Slide #6. Let me go through the main factor explaining the evolution of the unitary electricity margin. Electricity sales in the liberalized business decreased in Spain and Portugal by 4% in terms of volume, that is 0.9 terawatt hours.The unitary integrated margin in the electricity business increased by 16% to EUR 28.4 per megawatt hour. This remarkable evolution is mainly due to higher OTC reference prices and the positive impact of the temporary suspension of the generation tax, all of which more than offset the increase in variable cost arising from the higher commodity prices, particularly CO2, also underlying the soundness of the -- of our liberalized supply margin, which stay comfortably above EUR 8 per megawatt hour. Up to now we have already hedged around 94% of our 2019 estimated output at an average all-in price of EUR 73 per megawatt hour.As far as year 2020 is concerned, we have hedged around 46% of our estimated output at an average all-in price of around EUR 78 per megawatt hour, corresponding mainly to hydro, nuclear and renewable production. This price reference corresponds mainly to low-voltage customers, therefore, prices will gradually normalize along the year at around EUR 72 per megawatt hour, similar to 2019.Regarding Slide #7. The backdrop of our global gas market affected the performance of our gas business. Total sales dropped by 10%, mainly in the wholesale activity and international sales, mainly in France. At the bottom of the slide, however, you can see that the number of customers slightly increased by 1% consolidating levels of 1.6 million customers. Our unitary margin reduced to EUR 1.7 per megawatt hour, very close to our 2018 full year margin of EUR 1.9 per megawatt hour, mainly due to the reduction in the diversion opportunities caused by the drop in global LNG demand, while the retail business remain remarkably stable.Among the main drivers of this lower demand, we can mention the milder temperature, the Japanese nuclear restart and the falling Asian demand. We expect this gas oversupply situation in Asia and, to a lesser extent, in Europe to be temporary and LNG prices to partially normalize once this context is reverted. Up to now, we have already hedged around 90% of our 2019 estimated sales among retail, combined cycles and diversion. As far as year 2020 is concerned, we have hedged around 40% of our estimated sales.Now Luca will continue with the financial results.

[Luca Passa, CFO and GM of Administration, Finance & Control]

Thank you, Pepe, and good morning, ladies and gentlemen. I'm now on Slide #9. The main financial figures of the period. EBITDA increased by 5%, while net ordinary income reduced by only 2% compared with the first quarter 2018. The main drivers behind this performance are: the positive evolution of the liberalized business in a challenging market context for both electricity and gas businesses, while the regulatory business remains stable compared to previous year. The continuous effort in efficiency led to a 2% decrease in the fixed cost, 5% in adjusted terms.EBIT increased by 3%, affected by higher D&A in the period, as I will comment later on. Net ordinary income slightly decreased 2% due to higher financial costs, mainly driven by the workforce provision financial update.As commented before, an important investment effort is being carried out, mainly in renewables and the digital transformation, translating into a sound 140% increase of net CapEx. Finally, net debt increased by 20% over full year 2018 to EUR 6.9 billion, mainly driven by higher CapEx, the first adoption accounting entry of IFRS 16 for EUR 186 million, and the interim dividend on 2018 results paid in January this year amounting to EUR 741 million.Moving to Slide 10, let's now analyze EBITDA evolution, and this has reached EUR 928 million of EBITDA, plus 5% versus last year, an increase which has been driven by the good performance of both the liberalized and distribution businesses as well as by the ongoing efficiency drive with a 2% reduction in OpEx, 5% in adjusted terms.Generation and supply EBITDA rose by 14% to EUR 365 million as a result of the increase of the EBITDA margin that more than offset the revision of the gas business, affected by the aforementioned market conditions. Distribution EBITDA increased by 4% to EUR 501 million due to the increase of gross margin and lower OpEx. Finally, nonmainland generation EBITDA reached EUR 62 million, as I will comment in the following slide.When it comes to the regulated business, on Slide 11, EBITDA remained almost flat, up to EUR 563 million as distribution margin increased EUR 13 million, plus 2%, mainly thanks to the contribution of Empresa Eléctrico de Ceuta and associate revenues. On the contrary, the nonmainland generation gross margin was EUR 17 million lower, mainly due to lower margin related to fuel as a result of the settlement mechanism in nonmainland, which use references with 6 months of delay.Fixed cost decreased 3% year-on-year with the majority of the improvement in distribution. Overall, the regulated businesses contributed to Endesa total EBITDA with 61%. Regarding net CapEx, the vast majorities in networks where asset development, represent 40% of total CapEx, as a consequence of the digital transformation in which our network is involved.Moving now to Slide 12. On the liberalized business, EBITDA reached EUR 365 million or a 14% boost quarter-on-quarter and driven by an increase of EUR 42 million in gross margin. In power, the increase in the integrated margin was driven by the improvement of the reference prices that have been more -- that have more than offset the rise in the variable cost arising from higher CO2 prices and the reduction of sales affected by the lower demand. And was also supported by the positive impact of the generation tax temporary suspension. Within the integrated margin, it must also be highlighted that the positive contribution of Enel Green Power España, many thanks to the contribution of [indiscernible].In gas, the worsening of the gas market conditions triggered a 30% reduction in gross margins to EUR 38 million, mainly affected by lower [ overall ] selectivity as commented before by Pepe. Endesa X decreased by 13%, or just EUR 4 million, its gross margin compared with last year affected by lower activity in the period.Fixed cost decreased around EUR 4 million, mainly due to lower O&M cost in a period of increased investment for growth, most of which there were renewable projects awarded in 2017 auctions, absorbing EUR 184 million, which will be in operations by 2019 year-end or before.Moving now to Slide 13 on the P&L evolution from EBITDA to net ordinary income. Starting from the EUR 928 million EBITDA, D&A increased by 9% to EUR 406 million. This is mainly due to the increase of amortization as a consequence of the strong investment effort carried out during the last 12 months, mainly in digitalization, and the update of the useful life in relation to coal plants implemented in 2018. Additionally, it includes EUR 7 million as a consequence of IFRS 16 implementation.Net financial results increased mainly due to the update of financial provision derived from workforce restructuring plans and facility dismantling, which amounts to EUR 15 million, together with the adoption of IFRS 9, financial instruments EUR 4 million and IFRS 16 leases for EUR 1 million. Net effect of these 3 amounts is EUR 20 million versus the first quarter of 2018. Stripping out these effects and other manual adjustments, net financial results would have just increased around 3% due to the reduction in the cost of debt, 1.8% versus 2.1% in first quarter 2018, partially compensating the higher average gross debt.The associates and other items remain almost flat in absolute terms. Income tax expenses amounts to EUR 107 million, at 3% less than in the first quarter 2018, basically explained by lower profit before taxes. The effective tax rate for the period has been 22.6% similar to the 22.7% in first quarter 2018. As a result, net ordinary income showed a slight reduction of 2% in the period.Moving now to Slide 14 on the cash flow evolution from EBITDA to free cash flow. Cash flow from operating activities increased 13x the figure of first quarter 2018, reaching EUR 335 million as a consequence of the following effects: higher EBITDA after provision of around EUR 30 million; working capital variation and others improved by 39% to EUR 544 million mainly due to the decrease of the negative trade balance, higher cash in on nonmainland compensation, partially offset by higher inventories. Cash in income tax decreased 70%, mainly due to a lower refund than in first quarter 2018. Net financial expenses paid decreased mainly due to the lower cost of debt almost compensated by higher average financial debt in the period.The increase on cash-based CapEx by 41% is a consequence of the development of renewable capacity. And the digital transformation in which we are investing lead the free cash flow to minus EUR 191 million in the first quarter. These figures improved by 45% versus first quarter 2018.Moving now to Slide 15 on the evolution of the net financial debt. Net debt amounts to EUR 6.897 billion, EUR 941 million higher than the previous year, once considering the first adoption accounting in IFRS 16 for EUR 186 million. This increase is due to the free cash flow that was negative for EUR 191 million, as explained in the previous slide, and the payment of EUR 741 million of dividends corresponding to the interim gross dividend against 2018 results in the amount of EUR 0.70 per share.The results of the above-mentioned effects led to a net debt in the first quarter 2019 of EUR 6.9 million with a leverage ratio of 1.9x. The regulatory working capital has increased by EUR 71 million up to EUR 881 million.Our gross debt structure shows an increase in the fixed income -- the fixed interest rate share of 5 percentage points versus 2018 closing, as a consequence of a strategy aiming at taking advantage of the current context in historical interest rates to close long-term fixing hedges.Gross debt has an average lifespan of 5.2 years and an average cost of 1.8% at its historical lows, which implies a further reduction versus 1.9% reported at the end of 2018. Financial liquidity amount to EUR 3.340 billion, out of which EUR 235 million in cash and EUR 3.105 billion available in credit lines.As advancing full year 2018 results presentation, Endesa signed this quarter the first-degree loan with the EIB for over EUR 300 million and very attractive terms. Likewise, we are working on a similar transaction with the aim to efficiently finance our energy mix evolution.Moving now to Slide 16, let me hand over to Pepe for the conclusions.

[José Damián Bogas Gálvez, CEO & Executive Director]

Thank you, Luca. And to close this presentation, I would like to conclude with some remarks on our performance during the first quarter. First of all, the resilience of our liberalized business, despite the adverse market condition coupled with a stable regulated business evolution, underpinned the positive EBITDA result.Our strong investment in [indiscernible], mainly in renewables capacity development to lead the energy transition while we confirm the 879 megawatt of renewable capacity under the 2017 auctions, will be in operation by year-end or even earlier. In this new investment cycle, we are continuing to maintain our high standard of efficiency.Lastly, we are confident that this set of results will allow us to meet 2019 announced guidance. And ladies and gentlemen, this concludes our first quarter 2019 results presentation. Thank you very much for your attention. We are ready for taking some questions.

[Mar Martinez, Head of Investor Relations]

Thank you, Pepe. We will start now with the Q&A session.

[Operator]

[Operator Instructions]

[Mar Martinez, Head of Investor Relations]

The first question comes from Harry Wyburd from Bank of America Merrill Lynch.

[Harry Peter Wyburd, Vice President and Junior Analyst]

Three questions for me, please. So first on provisions. Looking through the earnings report, it looks like you booked EUR 12 million provisions above EBITDA and EUR 50 million below, if I'm not wrong. So I wonder, why did you not strip those out in the ordinary net income because ordinary net income would have been about EUR 20 million higher on my maths, if you'd stripped them out. And do we expect any more provision activity in the remainder of the year that we should take into account? So that's the first one. And then the second one, on your unitary revenues, this is Slide 6. I believe, last year if you look at the transcript of your full year call, you'd flagged that you'd hedged your 2018 unit revenues at EUR 64 a megawatt hour and the number for first quarter 2018 is also EUR 64, so that's in line. This year, a few weeks ago, you mentioned a figure of EUR 74 for full year 2019, but the number we see here on the slide is somewhat lower, it's EUR 69. So I wondered why your realized price in the first quarter of 2019 was so much lower than what you mentioned you'd hedged at earlier, so that's the second one. And then, thirdly, on the nonmainland, you mentioned a negative impact on the fuel margin settlement. How is -- what's that compared to your guidance? Was that something you're expecting? And do you expect that to reverse or change in the full year results?

[José Damián Bogas Gálvez, CEO & Executive Director]

Okay. Thank you, Harry. I would like to answer the last one, and I will pass the 2 first questions to Luca. With regard to the nonmainland reduction, you should take into account that the settlement of this business are made with the average of the last 6 months. I'm talking about commodities. It is -- we have a seasonal situation due to the cogenerator of the fuel cost evolution. This situation for sure will be recovered in the coming quarters.

[Luca Passa, CFO and GM of Administration, Finance & Control]

Regarding provision, I mean, why they're not stripping out all the ordinary EBITDA, because ordinary EBITDA has been defined at the end of last year and what we adjust in ordinary EBITDA is just for, basically, impairments regarding physical assets as well as capital gains or capital loss on the sales of assets.Again explained the EUR 50 million provision below EBITDA regarding to basically financial update of the workforce provision. And there, basically, we suffered a decrease of interest rate of about 40 basis point in the first quarter this year, which has not basically happened. It was flat interest rates in the first quarter of last year and it affected for EUR 50 million, basically, financial cost. We are not expecting, at least from what we see now, further reduction of interest rates during the rest of the year. Therefore, we shouldn't expect any other impact for the remaining of the year regarding financial provision for workforce below EBITDA.On the third question, sir, regarding the -- sorry, on the second question regarding the realized price that we see regarding what we say on our hedging activity, I mean you should take into account that low-voltage customers are added towards the end of the hedging and those customers basically drawdown the final realized price when it comes to hedging. So also this year, 2019, so for the next year 2019, we said that we have hedged about 94% at EUR 73 megawatt hours. So today, you will see a realized price next year when we discuss first quarter obviously below this number.

[Mar Martinez, Head of Investor Relations]

Thank you, Harry. Next question comes from Anna Maria Scaglia from Morgan Stanley.

[Anna Maria Scaglia, Research Analyst]

I have a few questions. The first one is regarding the gas unitary margin and integrated unitary margin evolution in electricity. What are your situations for the remainder of the year, especially for gas given that your guidance was predicated on an increase of this margin? The second question is regarding the electricity sales. We have seen this drop in volumes and of course, there was a seasonal effect. And we know that you want to maintain this stable market share. But what's the impact of this increased competition? Are you worried about that or are you still comfortable? The third question is regarding Enel X. We have seen this drop in margin. I was wondering if that's seasonal or related to specific contracts or something else we need to take into account? And last, the D&A, you haven't adjusted them for the nuclear life extension. I was wondering if there is any plan on that or we will have to wait for the end of the year.

[José Damián Bogas Gálvez, CEO & Executive Director]

Okay. Anna Maria, I will try to answer your second question in terms of the electricity market and how do we feel about competition. First of all that I should say is that the competition in Spain had been very high during the last years. And at least in my opinion, we have dealt with very successfully. So we are not worried about this competition. As you know, we have changed our strategy, focusing on the most valued customers; the ones that we could give them more value and we could also obtain more value from them. It is true that in this market, being the incumbent, the way ahead is just to reduce our customer base. That is normal and we are not worried about this. What is important for us is just to increase the value of our customer work base. We continue switching customers from regulated to liberalized market. We have a target just to increase during this state plan or business plan to increase almost 1 million customer, of the liberalized customer. So at the end, we could reduce a little our -- the number of customer but increase a lot the value of these customers.

[Luca Passa, CFO and GM of Administration, Finance & Control]

Thank you, Pepe. On the first question, evolution of integrated unitary margin and then on gas. Obviously, the evolution will reduce in terms of integrated margin that we're going to reach for the full year. We had strong first quarter with EUR 28.4. You should see basically a drop towards the remainder of the year towards that EUR 25. For an average, I would say, integrated margin of about EUR 26 for the full year, which is about EUR 1 above our business plan expectation. As far as gas, we are basically currently EUR 30 million below our business plan expectation for the full year 2019. We have, obviously, some levers to recover partially this gap, but obviously, the gas market context is in the situation that Pepe has commented before. And then regarding Enel X. Yes, we have a drop of EUR 4 million vis-à-vis first quarter 2018, but respect to the business plan, it's just EUR 1 million drop for the first quarter. The evolution for the remainder of the year is basically an expectation of gross margin of about EUR 140 million for the full year and EBITDA contribution of about EUR 60 million for the full year. There are no particular seasonal effects. The first quarter is always the -- probably the less strong in this kind of business for Enel X. And then finally, on nuclear life -- useful life. Yes, we haven't adjusted our nuclear useful life after the signing of the ENRESA protocol and that's because the ENRESA protocol, as you know, is based on the national energy plan which, at the moment, is in draft form, indicative and needs to be finalized with the European Union towards the remainder of the year. So we will decide during the year what -- whether we need to adjust or not. Bear in mind that the impact in terms of increased D&A for Almaraz I and II, which are the plants where we actually asked for an extension shorter than the usual extension of 10 years, is for a full year of EUR 15 million, 1-5.

[Mar Martinez, Head of Investor Relations]

Thank you, Anna Maria. We have now Enrico Bartoli from MainFirst.

[Enrico Bartoli, Managing Director]

A few questions on my side. First of all, if you can elaborate at least on the impact on CO2 prices on your margins in the first quarter. And what do you expect for the full year? Particularly if you can provide some details of -- on your hedging policy regarding the CO2 price. The second questions is regarding Slide 14 where you have this almost EUR 600 million cash out related to net working capital. Can you elaborate a bit on what you expect in terms of evolution from this figure over the next quarters? And finally, just, as I say, some flavor on the guidance for the year. You reiterated that -- how confident you feel about this considering that you [ allowed ] in the first quarter the difficult outside environment.

[José Damián Bogas Gálvez, CEO & Executive Director]

Okay. Enrico, I will try to answer the last question with regard to the gas market. Well, I should say I don't like to say that the gas market is like a box of surprises, that you should have [ to manage ] like this. Well, I will answer this question and also I will answer the CO2 question. Let me say the gas market has been very volatile for some years and will continue like this, in my opinion, up to the year 2021 at least. And there are multiple factors to take into account. The main one -- main ones are the drop in the LNG demand. This drop in LNG demand is mainly based on Asia. First of all, we have China. As you know, throughout the year 2018, China bought gas, especially during the summertime, and store it just to cover the winter 2018-2019 demand. But finally, the mild weather conditions during the winter 2018-'19 have turned China into a gas exporter instead of importer. And the second effect is the Japanese nuclear restart, about 9 gigawatt of nuclear capacity since 2015, which with nearly 5 gigawatt of this capacity returning within the last year. So first of all, we have a very low demand mainly in the LNG; on the other hand, we have new supply, mostly the increase in supply coming from the U.S.; and lastly, we have milder temperatures in Europe than expected also that means Europe gas needs were lower than planned. As a consequence of all of these, lower gas prices has declined significantly since the end of the year 2018. What we have seen is with all this excess gas, how a decoupling between the Brent which has increased something higher than 20%, versus the TTF gas price, which has declined a little bit more than 20%, has created a situation, a very tough situation that we have been dealing with during the first quarter. I should say that the margin, we have reduced EUR 60 million and mainly the EUR 60 million comes from the wholesale deviation because the retail in Spain has been remarkably good for us. What is going to happen in the future? I think that perhaps beyond September, we will recover a better condition in gas. In any case, we have been doing some kind of actions just to reduce the negative impact during this year. That is in relation with the volumes we have been negotiating and reduction in our [ Southern ] volumes, and we will be aware also of any opportunities to make a specific diversion that will happen for sure in the next month. All in all, what we think is that we will have a volatile market but we are dealing, in my opinion, very well. And as Luca has told, we are expecting at the end of the year, for the full year, EUR 30 million less than our initial assumptions. But we have other levers just to really deal with this problem.In relation with the CO2. Well, first off all, I should say that we have seen a huge change in this market. If you remember and if I am right, in April, more or less, of the year 2017, the price of the CO2 was 5 -- something around 5, could be 4.8. Then the last year, it could be something around 12, 13 and now, we are in the level of 25. These have changed a lot the market. The first thing that we have seen during the month of March and April of this year 2019 is the switch between coal and gas being much more competitive, the gas than the coal. This is something that will happen in the future. But just because of the special situation of the cost of gas, what we expect is an increase in the cost of gas, more or less the same levels in the price, in the cost of the CO2. And again, a switch from gas to coal. So we will be in this situation in which being the marginal technology with CO2 very high prices, it would depend on the evolution of the CO2 that, in my opinion, will remain at least during some time flat at the level of EUR 25. And what it is expected is an increase in the prices of CO2, let me remind you that the TTF for the first time that I remember was below the EUR 14 per terawatt hour. And our hedging policy will answer, Luca.

[Luca Passa, CFO and GM of Administration, Finance & Control]

Yes, for the hedging policy on CO2, we have hedged around 90% of our CO2 needs for 2019, which is basically the thermal output we already hedged for 2019, about 12 terawatt hours, only 2 terawatt hours remain. So basically, combined cycles, and we have not hedged anything for 2020 because we haven't started to hedge our thermal production for 2020. Regarding your second question on working capital evolution. Yes, we have a negative working capital and that is in Slide 14 for EUR 544 million. Let me remind you this improved substantially vis-à-vis last year by about 40%. The evolution for the remainder of the year is basically a reduction towards getting into positive figures in basically the last quarter of this year. And then finally, on the guidance, how do we see the year going forward from here onwards. I mean, basically, the main risks that we see at the moment are the EUR 30 million that I discussed before of, let's say, expected less gas margin vis-à-vis our budget. Then we have EUR 30 million of basically lower thermal spreads given this evolution that Pepe commented, the fact that the change in [indiscernible] vis-à-vis coal and combined cycles. And then also, regarding hydro output, as you remember, we had about 7.2 terawatt hours of expectation of output this year. Given the situation in the first quarter, we revised this to 6 terawatt hours for basically full year 2019 and this should affect for another EUR 40 million in terms of gross margin. Where do we see the opportunities in order to meet our guidance? Definitely the better generation and supply margin, as I commented before, we see 1 year or more of integrated margin, vis-à-vis our budget. This is mainly driven by better OTC references and also lower ancillary services cost. Then we see obviously basically an improvement as far as efficiency for another EUR 30 million. As you've seen, we have managed to reduce vis-à-vis last year, and we continue to maintain this efficiency, I would say, rate towards the end of the year notwithstanding we're investing much more than the previous years. And then obviously, we had the positive news in -- basically in April regarding nuclear attacks in Catalonia, which has been declared unconstitutional and that should basically have a positive impact starting from the second quarter for 2019 of about EUR 20 million.

[Mar Martinez, Head of Investor Relations]

Thank you, Henrique. Next question comes from Javier Garrido from JP Morgan.

[Javier Fernandez Garrido, Head of Utilities and Senior Analyst]

I just wanted, if possible, to clarify the last figures discussed by Luca. When you talk about a reduction in the thermal margin of EUR 30 million versus your expectations and the EUR 40 million of lower margin due to a lower higher output, should we assume that this is already factored in the overall EUR 1 per megawatt improvement in your unit gross margin, because all those items are part of the unitary margin? Or in other words, is it fair to say that EUR 1 per megawatt hour times around 80 terawatts an hour of energy management for the year is the net improvement in your gross margin for electricity? It would be very helpful if you could clarify those figures. And then the second question is on the volumes for 2019 and 2020. You mentioned in the call that you expect broadly a flattish realized price of around EUR 73, EUR 72 per megawatt hour in 2019 and 2020, but that is based on your estimated output. Could you disclose what are the differences in coal and renewables output that you expect for both years? You just mentioned 12 terawatts hour of coal output expected in 2019. What will be the figure in 2020 with the capacity closures? And what is your expected output from renewables in 2020 versus 2019?

[José Damián Bogas Gálvez, CEO & Executive Director]

Well, let me try to give you some ideas about this estimated output and the prices of EUR 72 per megawatt hour in 1 year and in the other. First of all, I should say that just because the switch between coal and gas, today the coal power plants are not producing very much. So we are in a situation, let me say, very close to the ground what we are going to face in the year 2019, in which the competitiveness of the goal would be higher but the production could be similar. But the next year, we will have around 1,000 megawatt of new. That is the 879 megawatts coming from the 2017 auctions. That will really help us to improve our unitary integrated margin. We don't expect a huge contribution of the thermal capacity, a conventional thermal capacity just because the very low spread that we will have in any case being less or more competitive than the combined cycles. The same is going to happen with combined cycles. So what we're really expecting is improvement in the unitary integrated margin just because the more production based on renewables.

[Luca Passa, CFO and GM of Administration, Finance & Control]

Yes. And being -- giving you figures regarding our expected output. As far as coal, basically, we have in 2019 an expectation of about 16 terawatt hours more or less of coal and obviously, this drops in 2020 to 13 terawatt hours because obviously all the old domestic coal, as you know, will be closed in 2020, so there is a reduction as well in coal production. And as far as renewables, these numbers are based on just above 4 terawatt hours for 2019 and about more than 7 terawatt hours for 2020. So there is a shift in the mix regarding these 2 items. Regarding your first question, I mean yes, obviously, the hydro reduction with respect for the year as well as worse thermal spread than what we budget for, for EUR 30 million. So in total about EUR 70 million of -- that affect of the integrated margin, I mean I'm not saying that we recover with EUR 1 of improvement all this effect. But obviously, it's more than enough in order to confirm our guidance. So we will see the evolution towards the end of the year. Obviously, we've been surprised of the realized integrated margin for the first quarter as well, and we will see the evolution towards the remainder of the year, which at the moment we expect EUR 1 better than the forecasted.

[Mar Martinez, Head of Investor Relations]

Thank you, Javier. We have now José Javier Ruiz from Macquarie.

[José Javier Ruiz Fernandez, Analyst]

Just 2 questions. The first one if you could quantify what was the impact of the lower generation tax, the 7% in the first quarter, of course? And secondly, if you're looking at EDP's hydro assets, if -- if there will be any competition issue and if they make any strategic rationale?

[José Damián Bogas Gálvez, CEO & Executive Director]

Thank you, José Javier. I will try to explain our position in the EDP potential disposal asset. First of all, I should say, that any potential asset purchase will depend on valuation. So far, we are more interested in distribution and in the renewable asset. Investment in CCGTs, in my opinion, are discouraged. We will analyze EDP's disposal plan in search of potential generation assets, such as hydro plants in Portugal that may fit strategically with our position given that we already have exposure to this market and it is integrated with the Spanish market. Nevertheless, our first objectives is looking for the creation of value for our shareholders. And with this idea is with the one that we will see this asset.

[Luca Passa, CFO and GM of Administration, Finance & Control]

And regarding your first question on the generation tax suspension of the 7% for the first quarter, the net impact is about EUR 40 million for us.

[Mar Martinez, Head of Investor Relations]

We have now Antonella Bianchessi from Citi.

[Antonella Bianchessi]

A follow-up question on Enel X. So what do you expect for the full year in terms of contribution of this division to the gross margin? The second question is on net debt. If you expect that the working capital to be reabsorbed during the year, and which are your estimates for the full year numbers? And finally, I wanted to know your view on the [indiscernible] which are as well on sale.

[Luca Passa, CFO and GM of Administration, Finance & Control]

Regarding Enel X, as I mentioned, or Endesa X, as I mentioned, gross margin expectation for the full year is about EUR 140 million and EBITDA contribution, about EUR 60 million for the full year. On working capital evolution, I think I commented before to another question but basically, we expect a reabsorption of this negative working capital in the first quarter towards positive figures in the last quarter basically of the year. And this, obviously, affect net debt expectation. We have an expectation on a debt of about EUR 7.3 billion at the -- basically, at the end of 2019 and that also takes into account obviously IFRS 16 impact. And then on the ESCO's asset, I don't know whether, Pepe, you want to comment.

[José Damián Bogas Gálvez, CEO & Executive Director]

Well, it's the same answer that I have given for the EDP asset. Just like with the rest of the opportunities that may arise in the market, we will be attentive to any potential transaction like this one, always, as I have said, with a very clear priority, which is the creation of value for our shareholders.

[Mar Martinez, Head of Investor Relations]

Thank you, Antonella. Next question comes from Meike Becker from Bernstein. We have some problem we make. Next question comes from Manuel Palomo from Exane.

[Manuel Palomo, Analyst of Utilities]

I've got a couple of questions. The first one is about these renewal options in the islands, both in the Balearic and the Canary Islands. Do you have any view on what is the amount to be auctioned in these Q2 and Q3 '19 auctions? And also, well, regarding this item, do you expect them, these auctions, to be as competitive as the full year '17 auctions? And do you feel like Endesa has any competitive advantage in them? And another one is just a follow-up on the new depreciation question. Luca, if I'm not wrong, you gave guidance of what is the impact for the first 2 assets on which you have already requested the lifetime extension, but I wonder whether you could provide with what would be the impact, yearly impact for the full fleet.

[José Damián Bogas Gálvez, CEO & Executive Director]

Okay. Manuel, I will try to answer your third question. With regard to the renewables in the island, you are right in the sense that, if I am right, at the end of the last year, the government called for a wind auction in the Canary Island for a total of a little bit more than 200 megawatts, with an endowment of EUR 80 million for investment grants coming from the European Regional Development Fund, the so-called FEDER. The deadline of the auction was at the beginning of April and the official outcome is still pending. I should say that we are developing our pipeline and as we have said, we will be present in this auction. What it is clear for us is just because our situation in the island, we will be -- we will have the advantage of that synergies that we could obtain over there. And with regard to the Balearic Island, I don't know if there are figure in terms of megawatts. What I remember is that in [indiscernible] was something around EUR 40 million, that will give me the idea that should be half megawatts, that is 100 more or less. The deadline to submit offers ends on July, the beginning of July more or less. Again, we are developing our pipeline and we will be present also in these auctions.

[Luca Passa, CFO and GM of Administration, Finance & Control]

And regarding the nuclear plants increase in terms of D&A, yes, I gave the impact on Almaraz I and II where we asked an extension, as I said before, shorter than the 50 useful life that we had in our balance sheet. For the full fleet, the impact will just be shy of EUR 50 million, for the full year, for the full fleet.

[Mar Martinez, Head of Investor Relations]

Thank you. I think that we have Meike Becker from Bernstein now. Meike?

[Meike Alina Becker, Research Analyst]

I have 2 questions. The first one was would you mind elaborating on the renewables pipeline? You mentioned a little bit more where you are now in terms of overall pipeline and maybe how that's split into wind and solar? And we have talked, the second question, a lot about 2019 guidance and outlook. Could you just also share your level of confidence that you have for your 2021 numbers now?

[José Damián Bogas Gálvez, CEO & Executive Director]

I think Luca could answer the pipeline. But let me say at the end, we are -- we continue developing the pipeline for the year 2021 -- 2020 and 2021. As you could remember in our investor business plan, we contemplated 500 megawatt in the year 2020 and another 500 megawatt in the year 2021. We are trying to have 9 gigawatt of pipeline. Up to date, I think that we should have 2 gigawatt more or less but Luca will clarify this. In terms of the guideline of the year 2019 and 2020, again, with the result that we have obtained and our view for the future, we feel comfortable and confident just to reach the announced guidance.

[Luca Passa, CFO and GM of Administration, Finance & Control]

Yes, on the pipeline, Meike, I mean it's about 2 gigawatt of pipeline at the moment and it's basically shifting towards solar. So with about 65% to 70% of solar and the remainder is actually wind. Regarding the same question on 2020 guidance, I think the fact that we already hedged about more than 45%, 46% of our output for 2020 at such high prices, obviously, give us confidence that the 2020 guidance is in reach.

[Mar Martinez, Head of Investor Relations]

The next question comes from José Alonso from Societe Generale.

[Jorge Alonso, Research Analyst]

I have a couple of questions, please. Do you think that it could be an acceleration of -- in your renewables portfolio, organic or due to acquisitions, due to the weakness in the thermal spreads or lower output may be expected on the coal due to CO2 prices? And the 2 remaining questions are: did you expect any impact on the corporate tax rate due to the government plans for the budget going forward? And the last one is on the thermal spreads, on the clean dark spreads, what do you think should change for the thermal spreads to recover? The weakness is due to the low demand is the cause that thermal gap is narrowing due to the renewables? It's just weather driven? So what should happen, in your view, in order to see these clean dark spreads to recover again?

[José Damián Bogas Gálvez, CEO & Executive Director]

José, I will try to answer the first and the last question. In terms of the acceleration of our organic growth in renewables, I would say that in our investor business plan, what we have is the almost 900 megawatt coming from the 2017 options that could be in operation at the end or even before the end of the year 2019. And then we have another 1,000-megawatt half-and-half in the year 2020 and 2021. Having said that, the other thing that we have said is that we would like to reach something around 10% to 15% of the needed capacity in the Spanish electricity system. That means that we will reach more or less at the end of the year 2030 8,000 megawatts more or less. But in any case, we will be aware of what is going to happen in the future and, of course, our aim is just to improve our position in renewables, merchant renewables. So I don't discard that we will -- we could increase this figure that we have today. And in relation with clean dark spread, well, many things happen. In my opinion, the most important thing is the increase in the CO2. As you perfectly know, an increase of EUR 1 per ton in the CO2 price impact in 0.5, 0.6 in the wholesale price, but impact in 0.4 in the cost of the combined cycle and in 0.9 in the cost of the coal. So that means that this increase in CO2 prices reduce the clean dark spread of the coal. Nevertheless, if the, let's say, gas prices increase in the future, let's say, because at least in our opinion, it's a seasonal situation, the one that we have today is decoupling between the Brent and the TTF gas prices again disappear trying to -- or recovering the normal situation of a certain correlation between these 2 prices, but we expect that it's an increase in daily price of CCGTs and then an increase in the price of the wholesale. So again, increasing the spread, the clean dark spread. So it would depend on this factor mainly this evolution. Nevertheless, let me -- should say that what we have discovered, let's say that, is that the forward of these coal power plants regarding the clean dark spread are very different in the spot prices, let's say that, than in the forward prices. Because these -- if the coal power plant produce, that means that the clean dark spread is positive. And depends on a lot of things, assumptions in the future prices, in which we are seeing some difficulties because this clean dark spread are negative. So you need to manage with care and really be aware of the opportunities to obtain results and that is what we are doing now.

[Luca Passa, CFO and GM of Administration, Finance & Control]

And José, regarding your second question, whether do we fear an increase in, let's say, the corporate tax rate given the recent elections. I think it's very premature to state basically what could be the impact of any change in corporate tax. But definitely, I mean from the electoral campaign, it is -- it appears, to be clear, that there will be some kind of increase. I think I will evaluate as soon as the government is formed, and they put forwards, I would say, tangible proposals.

[Mar Martinez, Head of Investor Relations]

Thank you, Jorge. I think that Antonella comes back with some additional question. Antonella, please.

[Antonella Bianchessi]

Yes, just to understand, so you are expecting a net debt for the full year of EUR 7.3 billion, if I understood well. Can you elaborate on the dynamics that are basically causing the increase of the debt?

[Luca Passa, CFO and GM of Administration, Finance & Control]

Yes, Antonella, it's Luca. Basically, the dynamics are driven by the increase in CapEx. I mean we have an estimation of CapEx for the full year of EUR 1.8 billion, EUR 1.9 billion. And obviously, that increase over the last year is what drives the increase in debt this year. I think we manage obviously to secure a financing at [ very little cost ] cost in order to basically fulfill this increase in CapEx, and that's where this is driven. Bear in mind that the IFRS impact for the full year as far as where estimation as of today is just north of EUR 300 million. So there is another EUR 100 million, EUR 150 million more vis-à-vis what we have stated in the first quarter. And then regarding obviously the impact of our regular working capital, we have an expectation of about EUR 700 million more or less towards the end of the year.

[Mar Martinez, Head of Investor Relations]

Okay. Thank you, Antonella. We will answer now a couple of question received by e-mail. Isidoro del Álamo from BBVA and [ Elsie Mammadova ] asking about if we expect some changes in Spanish energy policy following the recent election results. And also, if the current government will fully eliminate the generation taxes.

[José Damián Bogas Gálvez, CEO & Executive Director]

Well, Isidoro, let me say, first of all, we don't expect any material changes or relevant changes in the regulation with the next government. I should say that the most significant measures adopted recently are unlikely to change with a new government as they were approved to comply with the European Union authorities mandated. Besides, all mainstream political parties seem to be committed to the European Union 2030 target and largely agree that the energy transition is a big opportunity for Spain. In this context, as I have said, we don't expect any material change. I don't know if that is...

[Luca Passa, CFO and GM of Administration, Finance & Control]

Yes, the other question was on the -- whether they're going to eliminate the generation tax. I think already they have stated there was a suspension for 2 quarters. So we don't expect, let's say, an elimination. Obviously, as you remember, this was a reaction to very high [ pool ] prices which affected the regulatory bills. So unless we get into that kind of a scenario, I think it's very unlikely it will be eliminated.

[Mar Martinez, Head of Investor Relations]

Okay. We have answered all the questions received so far. So that's all. Thank you very much for your attention, and have a nice day.