Endesa SA

MAD:ELE

Earnings Call Transcript 2021-Q1

[Mar Martinez, Head of Investor Relations]

Good afternoon, ladies and gentlemen, and a warm welcome to the Q1 2020 results presentation, which will be hosted by our CEO, José Bogas; and the CFO, Luca Passa. Following the presentation, we will have the usual Q&A session open to those connected on the call and on the web. Thank you. And now let me hand over to José Bogas.

[José Damián Bogas Gálvez, CEO & Executive Director]

Thank you, Mar, and good afternoon to everybody. Let's start with the main highlights of the period. In the first quarter 2021, we have faced a complex and turbulent market context in which we have managed to achieve an EBITDA slightly above EUR 1,000 million, in line with our full year guidance announced back in November last year. The investment in digitalization undertake -- undertaken in recent years and the provision booked so far devoted to coal fleet accelerated closure, and digitalization have allowed for a high degree of operational efficiency. Clear evidence of our progression in reshaping our company towards a cleaner and more sustainable business approach is delivering more than 90% of our CO2-free output on mainland, while all of our bank debt was linked to sustainable metric. Our active management of current assets and liabilities has allowed us to deliver a sound cash generation, doubling operating cash flow when compared to 2020 first quarter. And finally, the 2020 shareholder remuneration proposal, which is the highest since 2014, was approved at our recent AGM. A final dividend of EUR 1.3136 per share will be paid on the first business day of July, which, on top of the EUR 0.70 per share of the interim dividend already paid in January, represents a 37% increase versus last year.Moving now to Slide #3. In terms of ESG, 2021 will be a turning point for Endesa. The acceleration of the coal fleet closure has allowed us to exceed 2023 CO2 emission pre-output target 2 years in advance. Further proof of our strong commitment to decarbonization was the recent approval of the AGM, complementing the variable senior management remuneration with the renewable deployment doing the time frame of the current plan. Concerning the social aspect, we strongly believe on the commitment to alleviating the needs of the most vulnerable group. In this sense, Endesa and the Catalan government agreed to write off energy debt for more than 35,000 vulnerable families. Within the secular economy objective under the European Union recovery plan framework, we have presented 17 projects for a total of EUR 3.6 billion for this initiative. 40,400 new jobs could be created. We have also achieved a further step forward in our plan to promote gender diversity with the presence of women in position of responsibility reaching over 36% of Director on the Board from the former 30% and well on track to reach the announced 40% by 2022. I would like to point out that regarding health and safety, it should be noted that Endesa's continuing effort to protect employees and contractor in the work environment. The combined accident frequency rate on our own workers and contractor has improved, confirming the downward trend recorded for many years now. The deployment of all of our initiatives and the integration of the ESG scope across all areas has been recognized by the most prominent ESG rating worldwide. Endesa has recently been included in the top ranking position by ISS QualityScore Index. I would like to comment on the evolution of the scenario over the period on Slide #4. First quarter of 2021 clearly shows that electricity demand in Spain is still far from recovering from the effects of the pandemic. Despite the cold waves experienced this winter, we have seen one of the most hesitant first quarter in recent times. Mainland power demand has increased by 0.6%, but decreased minus 0.4% adjusted by calendar and temperature [ effect. ] Likewise, in Endesa's concession area, gross demand has slightly increased by 0.4% in non-adjusted term and 0.1% in adjusted term. These figures are mainly driven by the drop in industry and service segment, partially offset by the increase in the residential sector activity. As far as prices are concerned, the 30% increase over the period mainly stems from the effect of lower temperatures due to the Filomena Storm in January, which can be clearly seen in the chart as well as the rise in gas references. Let's move now to Slide #5, where, thanks to a continued effort on decarbonization, mainland renewable capacity represents around 45% of the total, well on track to reach the 62% target set out in our business plan. Likewise, CO2 free sources constitute 64% of our installed capacity in the peninsula. As a consequence of the coal phase-out process, today's, thermal generation represent just 9% of the total mainland production mostly from CCGTS, a decrease of 21%. It means it has allowed us to reach a renewable output of 4.1 terawatt hour, 14% increase versus the first quarter 2020. 73% of this production increase is due to the combination of new wind capacity, which came on stream at the end of 2020 and higher load factors. Emission-free production boosted to 91% of the mainland total output, already exceeding the target set for 2023. On Page #6, let us now focus on the main drivers supporting our ambitions to grow in renewables. We continue to maintain a constant effort to fit our renewable project pipeline, which is key to achieving our ambitious 2030 capacity development plan. Our gross pipeline was boosted to 44.4 gigawatts from 41.8 announced in the full year 2020, out of which around 15% has TSO awarded connection points and 2.3 gigawatts under execution. Considering the latter project and the mature pipeline, solar technology weights 70%. All of this provides comfort to be well on track to meet the 700 megawatt of renewable capacity target. In March 2021, Endesa acquires a photovoltaic portfolio of 519 megawatts from the Spanish developer, Arena Power. Total CapEx, including acquisition and construction, will amount to EUR 350 million. Regarding storage project, we have built up an important pipeline of 6 gigawatts in batteries, out of which 0.4 gigawatts are already in our mature pipeline. When it comes to electrification on Slide #7, total energy sold dropped by 3% quarter-on-quarter as a consequence of the COVID impact on economic activity. This last quarter has been fully affected, whereas, in the first quarter of 2020, it impacted barely 15 days, but also the high competitive intensity in the market, the labor effect of 2020 being a leap year and the different Easter Holiday period must be taken into account. By segment, the most affected is B2B, minus 9%, hit by the economic deceleration due to the COVID impacting industry activity. B2C sales showed an increase of 10%, mostly as a consequence of the low temperatures due to the Filomena Storm and the still important home working mode. Total power customers decreased by 1%, or around 110,000, of which 63,000 in the free market due to the strong increase in competitive intensity. At the same time, we have been putting in place a number of commercial strategies for both the B2C and B2B sectors, helping us to [ reverse ] this trend. Our approach is based in -- on our client knowledge and an increasingly sophisticated range of products and services aimed at retaining and attracting higher-margin clients through increased value proposal. All this is possible, thanks to the digitalization investment carried out by the company in the last years, the reinforcement of the commercial channels and the continued focus on efficiencies. Regarding electric mobility, we continue to deliver on our deployment plan of charging points, reaching a total of 7,500. This continuous effort enable to maintain our leadership position in Spain with more than 2,000 public charging points. Regarding our energy management in Slide #8, the unitary integrated margin resulted in EUR 30.3 per megawatt hour, a 12% decrease versus the EUR 34.3 per megawatt hour of 2020, while electricity sales in the liberalized business are down by 4%, minus 0.7 per megawatt hour. This margin normalization was already anticipated and in line with the business plan expectation of EUR 29, EUR 30 per megawatt hour in 2021, moving to EUR 31 in 2023 backed by a higher stake of renewables in our mix and better market condition as COVID fades. The main factors behind this margin decrease were lower generation margin mainly due to the application of the new Catalan tax and lower OTC references, the absence of the positive effect recorded last year around the effective management of the short position versus a flat situation in this quarter, and the supply margin almost flat having a better sales mix with a slightly higher unitary margin, mitigating lower sales and higher ancillary service costs. Regarding power sales, we have hedged for 2021 97% of our estimated price-driven output at a price of around EUR 71 per megawatt hour. Once we consider our total sales mix, the all-in revenue that is including index energy, will reach EUR 67 per megawatt hour. For 2022, hedge volumes stand at over 60% at a price around EUR 74 per megawatt hour. All in all price and estimated all-in revenue will be similar to 2021 once all of the estimated price-driven output has been hedged. And now let me hand over to Luca Passa, who will give you the financial results.

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

Thank you, Pepe, and good afternoon, ladies and gentlemen. Let's now have a look at the financials of the period on Slide #10. Reported EBITDA stood at EUR 1.019 billion, decreasing 31%. On a like-for-like basis, once netted from the last year personnel provision effects, the EBITDA would have decreased 9%. Net ordinary income dropped by 41% year-on-year, reaching EUR 491 million, 13% lower deducted the first quarter 2020 provision mentioned above. Funds from operations reached EUR 583 million, doubling last year reference. Finally, net debt increased to EUR 7.5 billion, up plus 9% versus full year 2020. Moving to the detailed analysis of the like-for-like EBITDA on Slide #11. Let me now briefly discuss the main drivers. As already commented, like-for-like EBITDA stood at EUR 1.019 billion, minus 9% versus first quarter 2020. Generation and supply EBITDA decreased by 16% to EUR 462 million, mainly affected by the market conditions impacting in the business as well as we will explain later on. Distribution EBITDA declined 3% at EUR 476 million. Finally, non-mainland generation EBITDA remained stable at EUR 81 million. Moving into a deeper analysis, we are now on Slide 12 on the regulated business. Like-for-like EBITDA decreased by 2% to EUR 557 million, with a lower gross margin, partially offset by a 13% reduction in the fixed cost. Distribution margin decreased by 3% mainly due to the application of the new remuneration parameters of the second regulatory period. The non-mainland generation gross margin fell by 15%, negatively affected by the demand drop associated to COVID, the absence of the positive regularization from previous years recorded in 2020 and the lower remuneration in the new regulatory period, partially offset by better fuel and CO2 compensation. Fixed costs were EUR 26 million lower once deducted the net provision release effect of last year mainly due to the lower maintenance cost in the islands. Moving to the liberalized business on Slide #13. EBITDA reached EUR 462 million, 16% decrease, with 5% of lower gross margin and 15% increase in the fixed cost on a like-for-like basis, mainly as a consequence of the positive update of workforce provision booked last year. The liberalized electricity margin amounts to EUR 766 million, being positively affected by the recognition to Endesa of the right to be compensated for the CO2 clawback in 2006 for EUR 188 million booked in 2021. In addition, as mentioned before, it has been negatively impacted by the new Catalan tax enforced since 1st of July 2020, the absence of the positive results in the short position booked last year and by lower OTC references. Supply margin remains fairly flat, with a slightly higher unitary margin overcoming lower sales and higher ancillary services costs. Enel Green Power gross margin reached EUR 103 million, plus 26%, thanks to the new capacity in place and a 36% increase in the production. Gas gross margin fell EUR 64 million in first quarter 2021 to EUR 11 million, mainly affected by the negative mark-to-market delta of EUR 61 million due to the steeper amount of gas prices triggering this opposite noncash effect. We expect this impact to be diluted or fully neutralized along the next quarters as the contracts have been settled. Excluding this mark-to-market impact in both quarters, gas gross margin is aligned to guidance. Endesa X contributes with EUR 30 million on gross margin, minus EUR 5 million versus first quarter of 2020, mainly due to the perimeter effect. Moving now to the next slide, more details on the evolution of fixed costs. Total of our fixed cost reached EUR 513 million, 4% increase on a like-for-like basis. Once adopted after no recurrent effects as the update of provisions for workforce restructuring plants in place, indemnities and tax and labor-related risks, fixed costs would have decreased by 3% due to several efficiency plans booked in previous years that will further contribute to the full year results. Moving now to Slide #15, on the P&L evolution from EBITDA to net ordinary income. D&A increased by 13%, explained by the higher amortization mainly in renewable and distribution, the negative delta resulting from the reversal of the coal impairment booked in 2020 and a slight increase of EUR 10 million in bad debt provisioning, partially linked to COVID pandemic. Net financial results were strongly affected by the financial revenue from interest rate for late payment in relation to Endesa right to be compensated for the 2006 CO2 clawback. This was partially offset by the financial update of workforce and dismantling provision. While rates increased by 0.91% in the first quarter of 2020 -- in the first quarter 2021, rates remained almost flat. The effective tax rate resulted in 24.4%, slightly higher than last year and aligned to the business plan expectation, and this has been the consequence of lower tax deductions in the Canary Islands. On the bottom line, net ordinary income decreased by 41% over the period, minus 13% on a like-for-like basis. Moving to cash flow on Slide #16. Funds from operations increased by 111% year-on-year, reaching EUR 583 million due to the following effects. Lower EBITDA after provision paid of minus EUR 471 million, out of which EUR 356 million are explained by the net provision reversal booked in the first quarter of 2020. Working capital and others improved by 71%, mainly thanks to the above-mentioned net provision release in the first quarter 2020, the improvement of regulatory receivables, a lower net balance of receivables and payables accounts and lower inventories, the effect of derivatives and other noncash provision. Income tax paid amounted to minus EUR 2 million versus plus EUR 74 million in the previous year, mainly due to the EUR 73 million corporate tax refund corresponding to fiscal year 2018. Cash-based CapEx, 16% lower than the previous year, also led free cash flow to positive EUR 158 million in this period, EUR 390 million higher than the first quarter 2020. Let's now have a look at net debt on Slide 17. Net debt amounts to EUR 7.5 billion, EUR 600 million higher than full year 2020. This increase is attributable to the payment of the interim dividend against 2020 results paid in January. Record working capital remains slightly below last year figures at EUR 848 million. Our leverage remained stable, with net debt to EBITDA ratio at 1.9x on a like-for-like basis once deducted the provision effect booked in the second quarter 2020. [ It's also allied ] the extraordinary low cost of debt, which is maintained at 1.7%, marking historical minimum and placing Endesa as the European utility with the lowest cost of debt as well as the increase in the coverage of debt maturities to a very comfortable 35 months. And now let's take a deeper look in our sustainable finance on Slide #18. During the first quarter, Endesa has continued to deploy an intense activity in sustainable finance with EUR 2.8 billion in new sustainable linked transactions, and this assigned credit lines for an aggregate amount of EUR 2.1 million with 11 leading financial institutions mean that all of its liquidity bank facilities are linked to an SDG criteria. We have also reached a new milestone by linking EUR 150 million 7-year bank loan to a new SDG KPI of Scope 1 with greenhouse emission reduction. Sustainable finance now accounts for almost 50% of total gross financial debt versus 45% at December 2020, right on track towards the 60% goal in 2023. With the official 2020 award for the best sustainable loan, we confirm our leadership in sustainable finance, developing [ innovative ] structures, applying to a wide range of instruments and engaging a significant portion of our financial and commercial counterparties. And now let me hand over to Pepe for his final remarks.

[José Damián Bogas Gálvez, CEO & Executive Director]

Sorry. Thank you, Luca. To close this presentation on Slide #19, I would like to share some final remarks on our performance during the first quarter. 2021 guidance is confirmed, despite the exceptional condition in this quarter that we expect to normalize during the year. We keep advancing in our decarbonization and electrification process in an efficient way, lowering costs, while increasing our share of CO2-free emission production. To this effect, we increased by 22%, up to EUR 23.3 billion the project presented to the recovery transformation and resiliency plan. Strong cash generation capacity shown during this first quarter of the year, a relevant set of innovative sustainability-linked financial operation confirmed our commitment and leadership in sustainable finance. In such a context, the outstanding dividend yield in 2021 is the strongest evidence of sound value creation to our shareholders. And ladies and gentlemen, this concludes our first quarter 2021 results presentation. Thank you very much for your attention, and we are ready to take some questions.

[Mar Martinez, Head of Investor Relations]

Okay. Thank you, Pepe. Thank you, Luca. We are now open to take any question you may have.

[Operator]

[Operator Instructions]

[Mar Martinez, Head of Investor Relations]

Okay. The first question comes from Alberto Gandolfi from Goldman Sachs.

[Alberto Gandolfi, Head of European Utilities Research]

I guess the first one is I was looking at the evolution of the customer numbers, and it looks like you're broadly down 100,000. Maybe it's a rounding, just -- but it's about 100,000 in the quarter, which would be like nearly 4% annualized. So I was wondering if you can comment on the dynamics in this segment and if you have a counter plan to basically stop this from happening. The second question is on the financial expenses line. Can you tell us maybe, without those nonrecurring elements, what we should expect for normal quarter? It should have been about EUR 40 million, perhaps. So just trying to see how normalized would be. And last, not least, when do you think you're going to start to see the benefits from higher power prices? I guess, that's a question on your hedging policies. And just to double check, you have more than 30 terawatt hour, about 32 of nuclear and hydro, but also some of the renewables is exposed to power prices. So would you agree that we should think about your sensitivity to power prices for next year at about 40 terawatt hour and growing? And I know you look at it on an integrated margin basis, but just trying to understand when you can reprice the portfolio and see all the benefits.

[José Damián Bogas Gálvez, CEO & Executive Director]

Okay. Thank you, Alberto. I will try to answer the first one, give some ideas about the last one, and then Luca to complement what I am going to say and to answer the second one about finance. First of all, with regard to the supply competition, let me say, first of all, that supply margin -- our supply margin in the first quarter of this year 2021 remain almost flat. With a slightly higher unitary margin overcoming, I would say, the lower sales, B2C sales showed an increase of 10%, but B2B sales decreased by 9%, as we have said, and the higher ancillary services costs linked to a very special situation of the Filomena Storm and also the very reduced thermal gap in February due to the very high renewable production linked to the very high CO2 -- or higher CO2 and gas prices. Having said that, it is true that total power customer decreased by 1%, that is 100,000. But in the free market, which is the important figure for us, 60,000 customer, which is very, very important. So all in all, we have faced first quarter 2021 with lower demand than expected due to the COVID restriction, but in line with last year. Perhaps, this higher ancillary and, let's say, factor costs, mainly due to Filomena that it's -- give us minus EUR 25 million and a strong increase in competitive intensity, a strong increase that we saw in the fourth quarter of 2020, and it has continued in the first quarter of 2021. This strong increase in competitive intensity, it was produced, at least in my opinion, by one of the of incumbents, which has increased the -- its aggressiveness, I would say, doing 3 things, in my opinion, 2 of them with a sense, in my opinion, and the other without any sense. The first one is the brand and commercial campaigns, a huge increase. The second is high sales channels remuneration, okay ? It's okay. And the third is a price war in the sense that trying to reduce prices to the customers. And then the rest of the competitors have started to respond to this incumbent and also following not as this first quarter, but following this strategy. So we are facing a situation that has a high probability to occur, that is a price war. But in my opinion, this situation, a price war is never linked to an intelligent or a smart market management. It is usually executed, in my opinion, by new entrants who normally do not seek to remain in the business, but to, I would say, extract value quickly by selling their customer base. When one of the main incumbents execute this strategy, it is usually due, in my opinion, again, to a specific action for a [ shorter ] interest this time or, I would say, to a lack of ideas or ability to make an offer to customer that adds value to both the company and the client, in my opinion. We remain being the market leader. And we have, again, in my opinion, a very clear commercial strategy. We are perhaps the most advanced utility in Spain in terms of digitalization, which will allow us, for sure, to approach our customer in a completely different and personalized ways. Therefore, we have to continue with our medium long-term strategy based on the extraordinary effort we are making in digitalization to build a future unique value proposition for our clients, personalize and adapt it to their needs. However, in the short medium term, as you have said or [ asked ], we are launching a set of actions -- short-term actions to mitigate the negative impact of our competitors' strategy, looking for a not meaningful deterioration of our client portfolio marginality. In that sense, we are increasing all channels capacity and performance, looking for a greater number of acquisitions just to compensate the losses. And also we are allocating additional resources to strengthen loyalty and retention based on our knowledge of the customer and the functionality. All this, with a continued focus on efficiencies based on the digitalization and the platformization of the business, should allow us to mitigate and navigate in these troubled waters, let's say that. But being honest, I think that sooner or later, and I think that sooner than later, we will recover the very high competitive market in which we are living, but with more sense than the ones that we have had. We -- in my opinion, we should not be nervous. We should manage the situation, which is not easy. We should manage, but we should continue with our commercial strategy that will give value to our customers and will give value to us. With regard to the -- when we are going just to benefit from the higher power prices, for sure, in the year 2022, for sure. And also just because of the volatility of these prices, and not only the power, but also the commodities, you should know that we have a long position in CO2 and in oil, et cetera. We will try to mitigate, to compensate and really to benefit from this situation. But absolutely clear in the year 2022. And now, Luca, if you want to answer and complement.

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

Yes, Pepe. No, I'll give just the right numbers. When it comes to customer loss, it's 63,000 in the liberalized market. And the rest, the complement 110,000 in the regulated market. And just probably underline the totals, if we look at the liberalized customers as the main objective for us to reduce this kind of customer loss. On the regulated front, I can tell you that the trend is reversing, and this is a trend that started last year with actually the evolution of pool price where the tariff became the most [ effective ] tariff in the market. With obviously the pool price increasing, this is already reverting, and we will see the reversion in the coming months. So regulated customers are not an issue for us, but when it comes to liberalize, is the strategy that Pepe pointed out. For the second question, when it comes to a normalized cost of debt, for us, it's in the region of EUR 40 million per quarter with a guidance in the region of EUR 170 million for the full year. And for the, say, the third and fourth questions, as Pepe said, I mean, we still have about 40% of our production to be hedged into 2022. So therefore, there, we will realize some of these higher prices because, if you recall, we started hedging with our residential customer base, and we're leaving, I would say, volumes in B2B to the latter. And obviously, B2B are more, let's say, linked to the evolution of pool prices. Therefore, this remaining 40% will benefit from higher prices.

[Mar Martinez, Head of Investor Relations]

Okay. Thank you, Alberto. The next question comes from Harry Wyburd from Bank of America.

[Harry Peter Wyburd, Vice President and Junior Analyst]

Two questions for me, please. So first one is on the CO2 gains. I just wondered if you could remind everyone on the call the background to those. And then I just want to check I'm understanding correctly. So there's EUR 188 million in EBITDA and EUR 70 million in financial income. And obviously, if you add that up, that's nearly 40% of pretax profit. So have I thought about that right? And was this assumed in your guidance? Or is this different to what you're expecting? So that's the first one. Second one, totally different topic. On the project you've proposed for EU stimulus, so a couple of things on this. Firstly, how do you envisage returns and competition on these projects? So what kind of IRRs do you think are realistic to assume here? And do you think you're going to see the same level of financial competition on these as you do in sort of generic renewables? And then also, if you've got all of those projects funded, would that represent an upgrade to the CapEx plans that you outlined back in November?

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

Okay. On the first one, so this is -- first of all, the numbers are correct. The EUR 188 million in gross margin and about EUR 70 million of financial revenue for accrued interest, this is the final judgment of the [ Comisión Nacional ] recognizing Endesa's rights to be compensated for the reduction in the remuneration in 2006 in the amount of the internalization of CO2 emissions rights, freely assigned by the national emission rights allocation plan, NAP, which is basically has no legal duty to be there, and that's what is the sentence that we received basically a few weeks ago. Now the impact in net income level is basically EUR 194 million, which is basically deducted for the taxes. And whether it was included in guidance, obviously, not. It wasn't included in guidance. But obviously, we now feel more comfortable to achieve obviously the guidance, including this regularization given that, obviously, the market [ confidence ] in the first quarter has been slightly worse than what we were expecting, especially for the slow demand recovery, the extraordinary events such as the Filomena Storm as well as, obviously, high prices in the period, which is effectively has on the managing of the short position. So that's on the first question. On the second one, when it comes to basically the projects that we have put forward for the EU recovery -- or the next-generation EU funds, they total to 122 projects, EUR 23.3 billion in terms of total CapEx. Now we are targeting the same returns as for other investments, i.e., if there are, obviously, grants to some of these businesses, they will have basically to reach in terms of our financial target returns the same return. So if it's renewables, and bear in mind that renewables per se cannot be eligible for the next-generation EU, but they have to have some specific features. So we have some projects in renewables, which are either linked to green hydrogen or either linked to the -- basically the right transitions in some of the coal facility we are shutting down. So there are projects in renewables, but they need to have some kind of, let me say, different features because, obviously, renewables are, let me say, competitive in the market as of today without this next-generation EU fund. So the target returns are spread to WACC of 200 basis points when it comes to this business, and we also put forward in the region of EUR 3-and-something billion of projects in distribution. And there is the same gain. We have a target IRR returns in distribution, which is a spread to WACC of [ 400 ] basis points. Now to the second part of this question, whether these are on top of our, basically, business plan? Yes. I mean, we -- in the business plan, it's only a very small portion of these projects. So the majority, I would say, 95% to 97% would be on top. Now the probability of us being assigned, let me say, 100% or a very high percentage of all these projects, I think, is low in the sense that obviously, will be a competitive process. We understand although it is not being made public that will be basically auctions for different, basically, areas for these funds, which will be, obviously, run by the government. So we will see going along. But for us, let me say, even when it comes to next-generation EU, potentially grant funding on our projects, we need to reach the same economic returns.

[Mar Martinez, Head of Investor Relations]

Okay. Thank you, Harry. The next question comes from Javier Suarez from Mediobanca.

[Javier Suarez Hernandez, Research Analyst]

Two remaining questions. The first 1 is on the Slide #19, when you are saying that the guidance for 2021 is confirmed. You are mentioning as well that the exceptional conditions in the third quarter should normalize through the year. So would you please help us to understand to what conditions you are referring to? And can you detail how do you expect those conditions to normalize, and therefore, to see an improvement, I guess, in the margin during the next few quarters? That would be the first question. The second question is on the working capital and the cash flow generation during the quarter in Slide #16. There has been, obviously, a very significant improvement in working capital absorption. So the question here is that you can help us to understand if there is a managerial effort there to reduce structurally the working capital absorption? Or putting the question in slightly different terms, what is the number evolution during the next few quarters? Is that first quarter an extraordinary thing or is something that we should see as a more recurring reduction in the absorption of working capital? And maybe a third question, a follow-up from previous question on the recovery fund. So obviously, I think that it was Luca that mentioned the fact that renewables per share are not eligible. So can you help us to understand the logic behind the over 100 projects that you have presented that are eligible for grant financing, and which is maybe those projects that you believe that are particularly attractive. So any granularity on an example of project that you would be willing to finance would be very helpful.

[José Damián Bogas Gálvez, CEO & Executive Director]

Okay. Javier, thank you very much for the question. I will try to answer the first one. And then Luca will complement this one -- will answer the 2 more questions. With regard to the guidance, well, first of all, as you know and as we have said, the first quarter of this year, 2021, was a challenging quarter. As is also expected to happen, in my opinion, in the second quarter of this year 2021, both as forecasted for us, affected by the uncertainty about the speed of the economic recovery and the extreme volatility in the commodity and electricity prices. This, in our opinion, we really forecasted this, and what we were waiting for is that recovery in the second half, an important recovery in the second half of the year. I should say that in demand, et cetera, we are seeing these results in this second quarter. But on top of these forecasts that we have, what we have seen is that with demand lower than expected, as we have said, higher ancillary low sale cost due to the restriction of the COVID linked to the Filomena and, as I have said, the very low thermal gap in February linked also with the CO2 and gas prices. We have been not able yet to manage the [ 4 ] position that we have a lot of benefits in the year 2020 due to the forward -- high forward and low spot prices that we have in the year 2020. And also, we have had a negative mark-to-market in gas in the 2020 -- the first part of 2020, and positive in the third quarter of 2020, negative in 2021. So despite of all of this, I think that we got very good results, let's say, EUR 1 billion, EUR 1 billion. If you compare with the first quarter of other years, 2019, '18, '17, '16, higher than this. Lower than the previous year, yes, because it was extraordinary, and we have, on top of this sole position value that we got many other good results in mark-to-market, et cetera. So we remain confident to reach our guidance by the year-end. And believe me, this is not a win, but is based on our view about the integrated margin. And in the year as forecasted, also, the growth -- gas margin that will meet our guidance supported by the positive -- also by the positive results from the reopeners processes that were scheduled this year. We think that there will be no surprise in the regulated business. And finally, the efficiencies will arise from the plans adopted in the last few years. All in all, we feel, as I have said, comfortable, absolutely sure that we are going to reach our commitment with the market. Another note, Luca?

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

Maybe just complementing on this. Basically, we are expecting obviously a liberalized margin in the region of EUR 2.3 billion for the end of the year, which is aligned to guidance. And that is based on normalization, obviously, with a unitary margin -- interunitary revenue and margin in the region of EUR 29 to EUR 30 per megawatt hour. Obviously, we are increasing sales that are more concentrated in the second part of the year as COVID impact, obviously, should be lower. And basically no additional negatives from ancillary services, which affected us in terms of cost for an additional EUR 25 million in this quarter, obviously, considering a normalization of this market for less volatility. In gas, obviously, we expect as well to meet guidance. There are -- also on the back of, let me say, the positive results coming from the openers process that we are basically working on this year. And the fact that, obviously, the flexibility of our contracts will allow us to contribute -- to continue obtaining additional value in the diversion of shipments in other markets. We have already few cargoes already diverted this year. So this is, I would say, working well. And when it comes to the regulated part, obviously, distribution in island [ CBA ] also are, I would say, in line to reach the targets of 2 billion and 200 million, respectively. Concerning distribution. Basically, we had a result in the first quarter with slightly below expectation due to delays in revenue for smart meters, rentals as well as connection fees for EUR 13 million, 1-3, and this should be obviously expected to be recovered along the year. And then finally, on efficiencies, obviously, we are expecting to reach the guidance of EUR 1.9 billion of target because all the provisions that took last year should impact in the region of just slightly more than EUR 60 million in terms of efficiency this year. So that's to give some numbers on the guidance. So on the second question regarding working capital. I would say that this was an exceptionally good quarter when it comes to working capital and cash flow generation in general. We are expecting working capital to be basically neutral along the year, i.e., not having an either a negative or positive impact. But let me tell you that managing working capital in, let's say, a COVID environment is probably the most difficult thing a CFO has to manage. So we are, let me say, working on the assumption. But to your questions, first quarter has been exceptionally good in terms of managing our working capital. So you shouldn't expect the same performance for the rest of the year. And then when it comes to, I would say, some details for our projects that we submitted to recovery fund, as I said, EUR 23.3 billion in total in terms of CapEx, 122 projects, geographically, I mean, obviously, the majority on mainland, about EUR 20 billion. Then we have in the region of EUR 3 billion on the islands, and something also in Portugal. When it comes to the type of projects, we have about EUR 3.7 billion in smart grids, of which EUR 2.5 million in grids of [indiscernible] and EUR 1.2 million [ resilience. ] And again, none of what I'm saying was included in the business plan.We have about EUR 800 million in sustainable mobility, about EUR 2.2 billion in building refurbishment and efficiency. As you know, there's been a recent approval of tax incentive also in Spain regarding, basically, energy efficiency for buildings. We have -- and I think we discussed this in the past, about EUR 3 billion in green hydrogen, which includes electrolyzers as well as renewables. And obviously, in this case, renewables are basically supported by the Next Generation EU fund, who are eligible. And then we have about EUR 4.6 billion in storage and flexibility. Storage is eligible for the Innovation fund. And then another EUR 8.2 billion in renewables, which, again, are not straight renewables, but are either synchronic generation linked to renewables or other type of innovation in renewables. And the majority, for us, are projects linked to the basically refurbishment of the sites where we are shutting down core facilities. And then we, obviously, have some others for upgrading of existing plants. So those are, I would say, more or less the areas in which we are putting our projects. And obviously, we have, let me say, a good understanding of what could be eligible and what could be not. And in terms of returns, I think I commented before. So, that's more or less, should answer your third question.

[Mar Martinez, Head of Investor Relations]

Next question from the line comes from Enrico Bartoli from Stifel.

[Enrico Bartoli, Managing Director]

I have 3 as well. I would like to go back to the guidance. And particularly, we are seeing a continuing upward trend in the power prices to the evolution of CO2. I was wondering, let's say, how safe the guidance is in this context if this trend upward for prices in 2021 continues and if you are protected in some way through the -- your hedging policy? The second one is related to Slide 7. Actually, I -- you highlighted this decline in electricity sold on the B2B segment. I was wondering how much this is related to the weakness of demand still due to COVID? How much is related to the competitive environment in the commercial side that you mentioned before? And if you can share with us your view on the evolution of your electricity sold to this segment over the next quarter? I understand that you expect some recovery in the second half of the year, but if you can provide some additional comments. And the last one is related on the net debt guidance for the full year. If I remember well, you had EUR 8 billion, if this is confirmed?

[José Damián Bogas Gálvez, CEO & Executive Director]

Okay, Enrico, I will try to give you some color on this question, the first and the second question, and Luca will complement this. Our guidance, how confident we are, as I have said, absolutely confident and comfortable with this. It is true that power prices are increasing and our powerful sole position has been negatively impacted in the first quarter of 2021 by the higher than expected, let's say that, power prices in Iberia. But has been compensated by the positive result of our long position in commodities, mainly CO2 and oil, in which we have a clear bullish view. And well, looking at the full year, our dynamic strategy that we will apply will lead us to limit the impact of higher power prices. At the same time that we take advantage of the anticipated CO2 purchases. That is an opinion and an [ odd ] thing, but Luca could complement.And in relation with the -- what about the reduction in the B2B segment? It's mainly due to the COVID effects that has really hit this segment, mainly industrial. You seem, yes, SME companies. Let me say that during the whole year, that is during the lockdown and the pandemic situation, the drop was something around 10% in the industry, 10% in the services and a slightly higher B2C. Now services and SME continues around 10% of drop compared with the same period of the last year. And only the industry is recovering little by little the situation. So in my opinion, the first thing here is, yes, the COVID effect. But Luca, could you complement?

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

Sure. Now when it comes to the first question, I think you touched upon, I mean, basically, we still have obviously some open position when it comes to electricity position, but as Pepe said, basically, this is counterbalanced by long position when it comes to Brent and CO2. Obviously, for the production that we were expecting in the islands. And these 2 effects are basically mitigating themselves. So even though you could expect, let me say, higher pipe prices throughout the year, we have, let me say, an edge that is working perfectly in order not to suffer any negative effect. When it comes to the third question, the guidance was EUR 8.2 billion when it comes to net debt for this year, and we confirm the guidance, assuming a regular working capital of about EUR 600 million. So some improvement in [ the amount of ] working capital along the year.

[Mar Martinez, Head of Investor Relations]

The next question comes from José Ruiz from Barclays.

[José Javier Ruiz Fernandez, Research Analyst]

Just to -- the first 1 is within the integrated unit margin, are you including the EUR 188 million from the CO2 regularization and if you can share what is from that EUR 30 the retail margin? And the second question is basically, if you can make a comment on the proposal of the new capacity market in Spain? And if there is any impact, I was wondering if you had included it in your business plan?

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

Okay. So maybe, Pepe, I will answer the first one, you will go for the second one.

[José Damián Bogas Gálvez, CEO & Executive Director]

Okay.

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

So when it comes to the CO2 basically claw back for EUR 188 million, yes, those are included in the integrated margin. Let me add that, obviously, we have this positive effect, but we also have some negative effects in the first quarter of this year. The sum of all these effects are not recurrent for a positive EUR 100 million. So it's a positive EUR 188 million for the CO2, as we mentioned, and then we have negative for ancillary services cost for the volatility we experienced in the first quarter of EUR 25 million. We have a negative mark-to-market in gas and electricity for about EUR 50 million, majority in gas, and some other [ nonrecurrent ] fixed costs. So let me say that we have a positive nonrecurrent of about EUR 100 million in the first quarter. And when it comes to the, basically, retail margin, we have, as mentioned during the presentation, a slightly higher than EUR 10 margin in supply and is slightly better than first quarter last year. And for the second question, I'll hand over to Pepe.

[José Damián Bogas Gálvez, CEO & Executive Director]

Okay. Okay Luca and Enrico. First of all, we have not consider this capacity payment in our business plan because of all up to the last -- if I'm right, the 19th of April, we didn't know anything. So -- but it is true that the minister, Teresa Ribera, announced that the Spanish Government is launching a consultation on a draft regulation to create a capacity market, in order, on the one hand, to secure the deployment of renewables in line with the Spanish National Energy Plan 2021 to 2030. And on the other hand, to improve the security of supply, which is very, very important. Let me say that, if we are expecting forecasting to have more than 70% of the output in the year 2030 coming from renewables, you should really try to improve or to give some kind comfortability to the security supply. And the only -- the only way to do that is the capacity remuneration of pure capacity. And I'd say, not only new capacity, but also the existing one. And looking for, in my opinion, [ decent ] market signals needed to attract new investment on the 1 hand, and to maintain a system plan, which are absolutely necessary to ensure that demand is met. So we are very happy with this new regulation. We will see what happens. It will take, in my opinion, around 2 years just to deploy and to start with this, with also all discussions that we will have with the -- we will have a meeting or the companies with the minister and also the minister and the government of Spain with the European Union. But it's some good news, good news for us. The second thing is, but we don't have any euro or any payment in our business plan linked to this.

[Mar Martinez, Head of Investor Relations]

The next question comes from Javier Garrido from JPMorgan.

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

I think there's only 1 question left. If you could explain a little bit more in detail the evolution of the liberalized margin in electricity, where you are reporting a EUR 26 million increase and this includes EUR 188 million CO2 regularization, while the drop in sales in liberalized sales and the drop in integrated margin of EUR 4 per megawatt hour would explain a EUR 100 million drop in the gross margin. So what is driving the delta, if you have EUR 188 million one-off in CO2 and the EUR 100 million drop in the gross margin from liberalized sales? And why is on the electricity gross margin growing by EUR 26 million? And apologies for the convoluted question.

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

Hi, Javier, this is Luca. So just to give you the integrated margin evolution, basically, we have a generation margin, which is down about EUR 54 million, and this is driven by the negative impact of the government tax for about EUR 30 million. We have EUR 25 million of lower office references vis-à-vis basically last year. Flat margin in generation for ancillary services, which is a cost in retail and an output, which is slightly higher for basically renewables for 0.3, but there's no relevant impact when it comes to generation. In supply, as I mentioned, it's more or less flat, but we have basically a EUR 22 million plus impact from a better sales mix, i.e., lower sales for about 0.7 terawatt hour, but slightly higher-margin that is basically 0.2, and that is driven by B2C sales. But basically, EUR 25 million of cost in ancillary services. We are a long, basically, customer position. We have a long customer position. So we are a net payer when it comes conciliary, especially when you have this volatility because we cannot recover basically this cost in generation. And obviously, the short position, which was positive for EUR 44 million last year and it's basically 0 this year. So these are basically the effects that are driving basically down the park in electricity. Then when it comes to gas, obviously, the mark-to-market is the one that is affecting this quarter, but you asked for [indiscernible].

[Mar Martinez, Head of Investor Relations]

The next set of questions come from Jorge Guimarães from JB Capital.

[Jorge Guimarães, MD & Analyst]

I just have 2. The first is if you can clarify the negative mark-to-market in gas, where it is coming from? And the second one, related to your very detailed explanation about the strategic behavior in the supply market in Spain. From your words, I understand that it's not the incumbent that has started a price war, but the other -- you and the other 2 or 3, so far, did not responded. My question is, what do you believe will happen to the other incumbents, which, from your words, not entering to this war so far? Do you expect them to remain still? Or do you see any risk of them entering into this struggle, this fight?

[José Damián Bogas Gálvez, CEO & Executive Director]

Well, let me try to answer the second question. And then Luca, again, will complement and also will answer the first one. In my opinion, there must be a rationality and economic sustainability supporting any business. That is the first thing. When some agents only intends to speculate in the short term instead of seeking to create value in the medium, long term, a bubble is created. That is what happened in the renewables, and that is what happened in the supply, new supply. But just because this is -- this has no -- is not sustainable in the future, what I think, and what I would like to think is that it is more a tactical situation that will finish shortly. Well, the thing is that you should maintain yourself calm doing things, of course, of course, doing things because what we are looking for is just to create value for our customers and also for ourselves. As I have said, being incumbents, which means for me, big players that wants to stay in the business for long. So being incumbents or being new entrants, but trying to be for a long time in the market, in the business, you should take care about the market. That doesn't mean you are not going to compete, of course. You are going to compete. You should compete in technology, you should compete, trying to reduce cost. You just compete, but never you should try to go below your cost. Let me say, many suppliers, I would say, new entrants or some -- I believe some of them, if you go to the P&L, it is amazing. They're negative. So what are they looking for? If they have negative P&L, they are looking for increase the customer base and sell the customer base. But that doesn't fit very well with an incumbent, I mean, a big company that wants to stay in the business for a long time. So that is why I have said -- first of all, I don't think it's going to last a long time.Second, it's our strategy. On the one hand, continuing with our effort in digitalization, looking for the platformization, looking for a unique value proposal to our customer, looking for creating value. Creating value. And on the other hand, of course, trying to mitigate this, let's say, a good -- I like to say, short term situation, short term situation. And that is what I have said navigating in troubled waters. But I think that sooner or later, and I think sooner, we will see how things go to what it should be. That means a very high competition [ that is, ] but not as silly competition. That is my opinion. And Luca?

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

Yes. And when it comes to the first question on the mark-to-market of gas, I mean, obviously, these are the position that we have on gas. So noncash the delta is EUR 61 million. It's negative for EUR 32 million this quarter, and it was positive for about EUR 29 million in the first quarter 2020. Now as I said, this is basically -- we don't have any cash effect, and we expect basically the impact to be diluted on fully neutralized basis along the next quarters as contracts are being settled. So it suggests, let me say, the current mark-to-market on the position as of today. And I guess this is the first question. We don't have any other questions, Mar.

[Mar Martinez, Head of Investor Relations]

The next question comes from Lillian Starke from Morgan Stanley.

[Lillian Starke, Research Associate]

Just 1 question for me. You had in the past mentioned that you were focusing more on the SME segment. Given the trouble rates had so far from what you mentioned that they're still seeing declines in demand, I was just wondering if there's any concern on your behalf around counterparty risk, that some of these businesses may just be under pressure for a bit longer given how they might have been affected by the COVID situation?

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

Pepe, you want me to answer this?

[José Damián Bogas Gálvez, CEO & Executive Director]

Yes, please.

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

Okay. So when it comes to, let me say, managing of bad debt and what we are seeing on bad debt evolution, let me say that once we have seen still some tail of COVID in the first 2 months of this year, already in March, in April, this has been recovering quite well, especially in all the B2B sector, including SMEs. Now where we see more, let me say, potential increase in terms of provisioning throughout the year is on B2C. B2C is the 1 that is most affected as of now. So it depends a lot on, let me say, the recovery, the GDP recovery of the country and the impact of this on basically main street in order for us basically not to basically increase provisioning in B2C this year. But when it come to SMEs in particular, we have seen already a rebound, a positive amount in terms of evolution of basic counterparty in the last 2 months, so the month of March and the month of April.

[Mar Martinez, Head of Investor Relations]

Okay. Alberto Gandolfi is back with some additional questions.

[Alberto Gandolfi, Head of European Utilities Research]

Just 1 actually. And just because the magnitude is big, so apologies for following up -- abusing your kindness. But look, you said a EUR 100 million is the net positive effect in the quarter. Am I right in thinking that you're just talking about above EBITDA? And then we also have the EUR 80 million financial expenses, or is it EUR 100 million all in at the, let's say, just the entire level at the bottom line?

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

So the financial expenses affect debts. It comes, obviously, with the rest of the sentence, but to be honest, we are not planning on the bottom line. So the nonrecurrence in the quarter are positive EUR 100 million. And the majority of the, especially the CO2 was not, obviously, let me say, accountable budgeted for, but we had obviously a tougher situation in the first quarter we had to face. So that's why we are basically confirming guidance expecting a normalization of the situation along the year and counting on this basically EUR 100 million positive that we recorded in the first part of the year.

[Mar Martinez, Head of Investor Relations]

Sure. This was the last question from the call, and we have received a couple of questions from the web, okay? The first 1 comes from [ Eric Mamado ] from Bloomberg. And I guess that is for you, Luca. How do you expect your cost of debt to evolve in the coming years is the increase in bond yields and inflation continues?

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

So to date, we have 60% of gross debt, which is interest rate hedged. The average life of this hedge is similar to the 1 of the debt, [indiscernible], which is 4.5 years in terms of duration. So given the absolute level of rates in the Eurozone and a significant percentage of risk hedged, we will not expect -- we do not expect basically any material impact or we expect a very moderate impact. Now the current estimation for the full year is still 1.7% in terms of cost of debt. And obviously, if really interest rates tends to go higher, like we have seen in the U.S. recently, obviously, we can also basically start fixing more because we've been probably one of the utilities with the more variable stance in the past that obviously has allowed us to reach this basically low-cost of debt. But obviously, as soon as we see a change in the environment, we could actually fix more maintaining or limitating any impact on the overall cost of debt.

[Mar Martinez, Head of Investor Relations]

Okay. And the last question comes from Gonzalo Sánchez from UBS. And he is asking about our view of the potential auction for the access capacity from the coal plants that will be shut down. If we have some advantages by presenting a fair transition project, or we will go through the competitive process that the government is planning to land?

[José Damián Bogas Gálvez, CEO & Executive Director]

I will say something and then, Luca, please complement the answer. We will go to the competitive processes that we will see in the future. Having said that, just in the so-called gas position, we have many projects linked to the special coal power plants closure that will create really employment and will restore the place in which we have this coal power plants. So having said that, well, mainly, we will do these tenders, let's say that, competitive processes. And perhaps, some of them, we will have an extra premium, let's say, that just because we are trying to repair the situation due to the closure of this coal power plants.

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

Yes. And if I may complement, Pepe, basically, the regulations for basically [ governing ] the auction for which of this processes are still being approved. According to recent statements by the Ministry of Ecological Transition, the first capacity auction should be for the plant of Teruel, which is not in Andorra. And the word criteria will be, obviously, socioeconomic and environmental height of the economic criteria. And obviously, we are working to obtain, obviously the necessary capacity for the renewable developments we are planning in this area.

[Mar Martinez, Head of Investor Relations]

Okay. There are no more questions. And just to remind you that, as always, IR team will be available in case you need any help or you have any further questions. Thank you very much for your attention.