Endesa SA

MAD:ELE

Earnings Call Transcript 2018-Q2

[Mar Martinez, Head, IR]

Good morning, and welcome to our first half 2018 results presentation, which will be presented by our CEO, Jose Galvez; and by our 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 for your attention, and now, let me hand over to Jose Galvez.

[José 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. I will start by pointing out the good results obtained by our liberalized business, with an increase of about 42% at the EBITDA level in a context of normalization of market conditions during the first half. That, combined with a stable contribution of the regulated business, having risen by 6% in [indiscernible], has resulted in a 12% increase of overall EBITDA in the period.

Fixed costs have remained substantially flat, as efficiency measures put in place over the last few years have been absorbing the effects of inflation and growth. Regarding the bottom line, the sound performance of the liberalized segment and the stability of the regulated business evolution have led to a 15% increase at net income level.

Moving to Slide 3, you can now find the main financial figures of the period. As last commented on, EBITDA increased by 12%, while net income by 15%, compared with first half 2017. The main drivers behind this evolution are as follow: the liberalized business has shown robust performance as a result of the recovery of the extraordinary market circumstances experienced last year. It has been positively driven by the favorable hydrologic evolution in Spain and by the better conditions in the gas market.

Also, the regulated business benefited from the consolidation of the remuneration update in distribution. Finally, net debt increased by 19% during first half to €5.9 billion, mainly driven by the interim dividend paid last January that amounted to €741 million.

Before analyzing the operative and financial performance of the period, let me briefly touch upon the evolution across the key pillars of our 2018-2020 strategic plan. In this context, just, yes, a few words regarding Slide 4 on the new European Union's energy policy target one step further on the common road to decarbonization. Last June, the European Union Council agreed to adopt a new set of ambitious energy target to increase renewable contribution from the former 27% to 32% of total final energy consumption in 2030; to achieve energy efficiencies of 32.5% versus former 27%; and finally, to boost interconnection up to 15% of total capacity. Our company is clearly committed to the above target.

On the right-hand side of the slide, you can see that Endesa's strategic vision for Spain presented in our business plan update is fully aligned, or even exceeds, European Union target while enable us to comply beyond 2030 milestone. To fulfill this decarbonization target, Spain will need to add more than 46 gigawatts of new renewable capacity and boost demand of electrification. Moreover, nuclear, thermo and hydro, together with interconnection capacity, will have to play a key role to ensure security of supply in this period.

Moving to Slide 5, Endesa's 2018-2020 strategic plan intends to capture opportunities that arise in the energy transition. At this point, a brief update on the progress of each strategic pillar. Endesa is focused on maximizing value from customers. We've recorded a sound increase of 19% in the integrated margin, mainly as a consequence of our leadership in Spain and in our customer-based, value-based strategy. For the more, Endesa X, our rebrand value-added service business, recorded a 6% margin increase, one of our growth levers. Committed to energy transition and decarbonization target, we continue to pursue and deliver growth, both organic and inorganic, in renewable capacity and network, as I will detail in the coming slide.

We're racing ahead on the digital transformation with the company, with around €110 million in investment devoted to digitalization over the first six months of 2018. In line with the business plan guidance on efficiency, different methods put in place over the last few years led to an absorption of inflation and growth effects in fixed cost. And last but not least, we are focused on creating value for our stakeholder, not only with a more than sound total shareholder return of 16% during 2018 after a dividend payment of €1.382 per share against 2017 result, but also with several initiative aimed to contributed to United Nations sustainable development goals.

Moving now to Slide 6. Let me elaborate on the progression of our growth commitments. On renewable, we have already identified, deployed, awarded in the 2017 auctions, and we are finalizing the permitting phase after having assigned supply contracts. We expect to be operative even before the official deadline of January 2020, and to be prepared for the auctions in non-mainland announced to be held in the second half of the year.

As announced last quarter, the closing of Gestinver took place, 132 megawatts of wind farms, with a total investment of around €170 million that should contribute around €20 million per year of EBITDA. When it comes to inorganic growth in networks, today, Endesa closed the public offer for Empresa de Alumbrado Electrico de Ceuta, a company operating in that city with more than 30,000 supply customers and a similar number of points of delivery. The tender was accepted by 94.4% of its shareholders, and the total financial investment amounted to approximately €83 million.

Regarding network, we continue our grid automation process, with 97% of smart meter deployed so far, improving our loss reduction during the period by 3%.

Let's move now to the three pillars leading the digital transformation we identified in our last business plan. First of all, we are increasing digital contact with customers through the e-billing system, digital sales, and e-care interactions. When it comes to asset, our extensive digital metering plan, grid automation boost through smart remote control devices in our network and large scale battery [indiscernible] are progressing according to plan. The advanced progress of our 20-megawatt pilot project in Litoral imported coal power plant, which will improve its flexibility in response to the fluctuation in the electricity system, should be noted.

As far as our people are concerned, we have launched several initiatives to boost the digital transformation among our employees, such as the successful Tech-Bar internal service model and our E-Talent program, which was widely accepted. During 2018, we have invested around €110 million to boost digital transformation in the three main areas of action. This amount, together with the €300 million invested during 2017, represent almost 32% of the €1.3 billion digitalization CapEx committed to in 2018-2020 business plan.

On the left-hand side of the chart on Slide 8, we show the results of the many efficiency initiative implemented over recent years, which allow us to more than absorb the effect of growth and the inflation impact on fixed cost. Now focusing on OpEx optimization, the efficiency programs are implemented across all business lines. Regarding distribution, workforce optimization, together with the continuous efficiency plans in O&M activities, the full deployment of the smart meetings and new digitalization initiative have led to a reduction in our unitary costs per client by 8%. Likewise, in generation, continuous best practice [indiscernible] and improving program in each of the technologies, together with the efficiencies coming from digital plan, have kept our generation unitary costs flat despite [indiscernible] factors.

Similarly, concerning Enel Green Power Spain, several cost synergy initiative have already made a 6% decrease in the unitary fixed costs possible. Lastly, a review of main processes, and leveraging on the already commented on digitalization initiative, enable us to reduce by 7% the cost to serve in supply despite higher volume of service rendered to customers. Overall, we are well on track across the industry pillars of our strategy to deliver our efficiency plans, and we are committed to progressing even further.

Now moving on to Slide 9, I would like to comment on the market context in Iberia for the period of this financial report. Electricity demand showed moderate growth rate in both gross, 1.2%, and adjusted there, 1.1%, affected negatively by lower temperatures in June compared with 2017 but recovering levels during July. In Endesa's concession area, gross demand decrease by 0.2%, mainly driven by milder temperatures during the period, especially in June and likewise by the closure of some chemical plants as already advanced in the first quarter.

Electricity prices showed a slight reduction of 2% during the first half 2018, down to €50.1 per megawatt hour despite the recovery of hydro conditions leading to a 74% increase in system production. I should also say that reservoirs are currently over the average level of the last 10 years. The high prices of commodities and the problem and non-problem stoppage of three nuclear plants, Vandellos, Trillo and Almaraz, avoided greater reduction in electricity prices. Considering the high prices in commodities, together with the likely increase of thermal gap in the second half of the year, market [indiscernible] of electricity wholesale price point to around €57 per megawatt hour for the full year.

Now on Slide 10, we can see the Endesa's output decreased 7%, aligned to the reduction seen in the thermal gap in the period and nuclear output affected mainly by Vandellos outage. On the other hand, in the first six months of the year, our hydro production increased 68% to 5.2 terawatt hour, whereas our expectation for the full year are now to reach output level well above seven terawatt hour, in line with our average hydro production and slightly ahead of business plan.

Regarding electricity sales, 6% decrease in energy sold, as mentioned in the previous slide, is mainly due to B2B customer affected by the closure of some chemical plants and a result of our value-based strategy management targeting and retaining high-value customers. While the total number of customer remain almost flat during the period, a natural transfer from regulated to liberalized market occurred. In this sense, more than half of the customer who left the regulated tariff has been captured by Endesa as liberalized customer. The customer loss recorded during the first quarter has rebounded in the second quarter, resulting in a positive net balance. Additionally, we are implementing a customer retention plan, which is expected to reinforce these positive trend within the second half of the year, allowing us to keep our customer base stable for the full year.

Moving to Slide 11. Let me go now through the evolution of the unitary electricity margin. Electricity sales in the liberalized business decreased by 6% in terms of volume. As a consequence of the positive hydro conditions and lower pool prices, the mix used to cover our sales commitment has been slightly different from last year. In this context, energy purchases remained almost flat when compared to first half 2017 at 11.9 terawatt hours, while mainland output decreased by 9%, or around 2.7 terawatt hour, mainly due to a narrower thermal gap and the stoppage of Vandellos nuclear plant. That was more than compensated for by higher load factor in our hydro and wind plants.

The unitary integrated margin in the electricity business has shown positive evolution, increasing by 19% to €25.4 per megawatt hour, benefiting mainly from the higher unitary revenue, plus 7.3% to €64.5 per megawatt hour and a positive contribution of the short position following a different hedging strategy carried out for 2018. This unitary margin will convert to close to €23 per megawatt hour along the year, slightly above our business plan assumption due to higher thermal output and high commodity prices expected for the second half of 2018.

Also, it is worth mentioning that the current level of supply margin, close to €8 per megawatt hour in the liberalized market, has been better than last year, and is slightly better than guidance stands to the better customer volume management strategy, as mentioned. As of today, we have already hedged around 100% of our 2018 estimated output at an average all-in price of €67 per megawatt hour. As far as year 2019 is concerned, we have hedged around 52% of our estimated output at an average all-in price of around €74 per megawatt hour. This price reference corresponds mainly to low voltage customer; therefore, prices will regularly normalize along the year, converging to 2018 levels.

Regarding the gas business, in Slide 12, the recovery of market condition has resulted in an improvement of the gas margins. Sales have decreased slightly by 2% mainly due to the milder temperatures of the second quarter that affected residential demand in Spain. This was partially offset by higher sales to wholesale business, driven by international demand. There has been no relevant variation in the number of customer, which has maintained flat year-on-year. Our ordinary unitary margin has increased to around €1.1 per megawatt hour as a result of better procurement costs on some of our brand index contract as well as the recovery of gas price references.

And now I will hand over to Luca Passa, who will present details of our financial figures.

[Luca Passa, CFO]

Thank you, Pepe, and good morning, ladies and gentlemen. I'm now on Slide 13, focusing on gross margin as seen before, and this has reached €2,823 billion, 8% more than in our first half 2017, a 7% increase ex nonrecurrent impacts which are related to mark-to-market and others in gas, small customer volume to replace [indiscernible] booked in the second quarter 2017 for €20 million, and previous settlements in non-mainland that amounted to €52 million, as highlighted on the left-hand side of this chart.

The improvement in gross margin is driven by both generation and supply, which is at plus-4% adjusted thanks to higher unitary margin in electricity and the recovery in the gas and distribution business, plus-5% adjusted, as a consequence of the improvement in distribution of regulated revenues.

When it comes to regulated business, on Slide 14, the adjusted gross margin improved 4%, as distribution already recognized the revenue increase awarded by the Draft Ministerial Order published in December last year, contributing with about €55 million in the period. On the contrary, the non-mainland generation gross margin remained barely flat in adjusted terms. Additionally, it must be stressed that the regulated businesses contributed to Endesa total gross margin with 57%.

Moving now to Slide 15. On the liberalized gross margin evolution, gross margin in the liberalized business reached €1,227 billion, or a 12% boost year-on-year, compared to the adjusted first half 2017 figure. In power, the recovery of [indiscernible] condition seen last year has led to a significant increase in the integrated margin, supported by higher unitary revenue and the balanced strategy followed in the management of the short position this year. That has shown a positive delta of €58 million.

When it comes to the gas business, the improvement of these market fundamentals has meant a remarkable increase of €30 million in the recurrent gross margin up to 65. The main drivers have been the higher selling prices and the increased competitiveness of our portfolio. As notice, after a very strong first quarter, the recovery has been more moderated in the second quarter, and we now expect this path to be maintained along the rest of the year towards a guidance of €100 million for 2018.

And finally, I would like to take a light in increasing contribution of Endesa X business line, our rebranded value-added service business, with 6% of growth at gross margin level compared with last year being e-home and e-industry the main margin generators, well on track to meet targets.

Moving now to Slide #16. On the fixed cost evolution, total reported fixed costs reached €1,090 billion, in line with last year figure. I would like to refer to the like-for-like fixed cost evolution. Adjusted figures exclude mainly the update of the provision for obligation relating to ongoing workforce restructuring plans and the voluntary departure agreements, provisions to deal with the redundancy plans, compensation, and other tax and labor risks as well as other O&M nonrecurrent costs booked in both years.

On a like-for-like basis, fixed costs that would have slightly decreased, proving once again the delivery of the main initiative implemented, which allow to more than absorb the effect of growth and inflation impact. Personnel cost on adjusted decreased by 1.1% due mainly to reduction of the average workforce of 2%, about 100 employees.

Moving to Slide now 17 on the EBITDA evolution. When it comes to EBITDA, adjusted EBITDA split by business line in summarizing all of the already-mentioned effects, it must be noted that a 12% increase which has been driven by the good performance of both the liberalized and the distribution businesses. In this sense, adjusted generation and supply EBITDA rose by 26% to €616 million. Distribution EBITDA in adjusted terms increased by 8% to €1,012 billion, recording the effects of higher regulated revenues and lower OpEx.

Non-mainland generation EBITDA reached €176 million, slightly below last year once deducted one-offs. Finally, Enel Green Power Spain EBITDA obtain a result quite aligned with the one of 2017 first half figure, including about €4 million of the Gestinver consolidation. These solid results obtained in the period allow us to feel comfortable in reaching the guidance established for this year of €3.4 million. For the second half of the year, we expect a normalization of the integrated margin, as mentioned in the previous slides, that would converge to the €20 to €23 megawatt hour expected. We also foresee a stabilization of the gas margin at around €100 million at year-end.

On the OpEx evolution, the second part of the year usually attracts a slightly seasonally increase. All in all, in the second half, we expect an EBITDA run rate approximately 8% to 10% lower than in the first half, allowing us to meet our guidance.

Moving now to Slide 18. On the P&L evolution, from EBITDA to net income, starting from the €1,800 billion for EBITDA achieved, D&A increased by 7% to €751 million. This is mainly due to the adoption of IFRS 15 in 2018 for an amount of €23 million, while 2017 benefited from a reversal of impairment losses for about €50 million. Without these effects, the D&A would only have increase of 1.3%. The net financial results increase mainly due to the following factors: the reduction of the cost of debt, which was offset by a higher average gross debt; the update of financial provision derived from workforce restructuring plans and contract suspension agreements and facility dismantling, together with the adoption of IFRS 9.

Income tax expense increased to €128 million, negatively affected by the impact of €9 million resulting from a fiscal inspection. Stripping out these effect, the effective tax rate of the period would have been flat compared to the first half of last year. As a result, net attributable income increased by 15% in the period.

Moving to Slide 19. On the evolution of net financial debt, starting from the €5 billion at the end of 2017, cash flow from operations was €659 million positive, showing a clear sign of convergence to a normalized level after the exceptional low figure booked last quarter. In this respect, we reiterated that cash flow with commercial [indiscernible] was a normalized level along the year, just above €2 billion for year-end.

On the other end, cash outflow related to CapEx and other items amounted to €862 million, including cash outflow earmarked for the Gestinver acquisition as well as the [indiscernible] debt consolidation. It also must be noted that the regulatory working capital substantially increased by around €200 million up to €742 million due to the different number of regulatory settlements book in both periods.

Finally, Endesa paid €748 million in dividends, mainly corresponding to the interim dividend against 2017. The result of the aforementioned effects led to a net debt at the end of the period of just under €6 billion, with a leverage ratio of 1.6x.

Moving now to Slide 20, as of the end of the semester, gross debt increased to €6.8 billion, driven by an exceptionally high cash portion due to dividend payment on the following 2 July. Gross debt has an average lifespan of 5.4 years at an average cost of 2%, which implies a significant reduction versus the 2.3 reported at the end of the first semester of 2017. When it comes to the mix by interest rate and currency, 52% of the company gross financial debt accrued interest rate at fixed rates, while the remaining 48% accrued interest at floating rates, and 100% of the company gross financial debt was denominated in euros. Finally, Endesa liquidity increased to around €3.9 billion, sufficient to meet debt repayments in the coming 32 months.

Let me now hand over to Pepe for some final remarks.

[José Gálvez, CEO & Executive Director]

Thank you, Luca. Now I would like to conclude with some final comments on Endesa's performance during the first semester. First of all, I want to remark on the continuous and timely delivery of our strategic plan as well as the validity of these underlying assumptions. Our commitment with the full decarbonization of the economy by 2050 and strategic vision of the energy transition up to 2030 is now fully aligned to the initiative recently approved by the European Union.

The strong EBITDA evolution supported by the sound performance of the liberalized business base on the proven flexibility and resilience of our integrated energy management strategy and the positive contribution of our distribution business have been, once again, the main factor of the 12% increase in reported EBITDA. Our constant effort on fixed cost contention across all business line have enabled us to maintain a flat cost base. All of the above has led to a strong bottom line figure, which represent a 15% increase compared to first half of 2017. Lastly, these good results confirm we are well on track to meet 2018 announced guidance.

And ladies and gentlemen, that concludes our First Half 2018 Results Presentation. Thank you very much for your attention, and we're ready to take some question.

[Mar Martinez, Head, IR]

Thank you, Pepe. We are now open to answer any question you may have.

[Operator]

[Operator Instructions].

[Mar Martinez, Head, IR]

The first question comes from Alberto Gandolfi from Goldman Sachs.

[Alberto Gandolfi, Goldman Sachs Group]

I have three questions on my end, please. The first one is a bit more on short-term earnings in, say, 2019 mainly focus. I'm trying to understand if I got it right. You are saying that half of your expected production is already hedged at about €74 per megawatt hour versus €67 in 2018. Did I understand right in saying that you do expect that, over the course of the year, that price will come down and, therefore, will be somehow close to 2018? It feels very weird to expect that, in the second half of '19, prices will be down that much versus the €74. So probably I didn't understand right. And if I didn't, could you maybe quantify what upside do you see in 2019 versus your latest plan? Because I think that you were, by far, not assuming to hedge at €74. So I'm trying to figure out what you think is the upside risk to your 2019. Second question is a little bit more on the Spanish energy policy. I think in the slide you mentioned 46 gigawatts of new renewables effectively just over 10 years to meet 2030 European Union targets. Considering some of the prices we are seeing around the world, and some of the projections that you are seeing also for Spain, the question I guess is twofold: first of all, what do you think is going to be, over the next 3 to 5 years, the marginal cost of building solar and wind in Spain? Because some of the figures are between €20 and €30 per megawatt hour, and what do you think is the impact on the power price that that will have? Secondly, what type of market share would you - hoping to capture out of this 46 gigawatts? And the last question is about capital allocation. Assuming you were capable of increasing your CapEx in renewables in Spain, let's say Spain becomes a growth area again in renewables for you, would you be happy to continue to gear up your balance sheet, or would you be open to revise your dividend or your dividend policy?

[José Gálvez, CEO & Executive Director]

Let me make some comments, and then I will pass the questions to Luca Passa. First of all, you should take into account that the €74 per megawatt hour correspond to low voltage mainly, low voltage mainly. So that means that, in the future, we should add the high voltage that has lower margins, and then that is the main reason why we are expecting to convert to the €67, more or less. And then, I will pass questions to Luca.

[Luca Passa, CFO]

On this topic, I mean, obviously for 2019, we hedge 52% at the €74. What are we hedging at the moment is mainly what we call the price-driven type of production, i.e. hydro and nuc, and we are awaiting to start hedging the rest of the core production. And that's driven by the fact that we are seeing pressure on spreads as far as coal is concerned. So as of today, I mean, yes, we think we're going to, let's say, land to a similar level of 2018 overall, but we still need to start to hedge on the core production. So as of today, I don't see any upside vis a vis our 2019 guidance regarding our hedging policy. Pepe, on the Spanish legislation?

[José Gálvez, CEO & Executive Director]

Yes. About the Spanish legislation, let me say in terms of - because I think that I didn't catch well the question.

[Alberto Gandolfi, Goldman Sachs Group]

I can repeat very happily. Sorry, Pepe. The question was about the 46 gigawatts of renewables coming, according to your slide, by 2030. What do you think that will do to power prices, considering we are seeing forecasting between €20 and €30 per megawatt hour? And what market share would you expect to capture from it?

[José Gálvez, CEO & Executive Director]

First of all, let me say that we would like to be one of the leaders in this transition period, so we will try to do our best in the deployment of new renewable capacity, but always looking for creating value for our shareholders. That means that we will take care about what we do. The second thing is about the prices in the short term, let's say that with the cost of the renewables. What we think is in the next years, due to the very high commodity prices as we are seeing now, perhaps the evolution of the CU2, we will see prices flat around €50 per megawatt hour.

[Luca Passa, CFO]

And regarding the third question on capital allocation, I mean, definitely the opportunities of growth in renewables is there, especially on the organic side. We are definitely committed to grow this business, and I would say we will update obviously the market with a business model update in November. But definitely that's one of the key, I would say, growth area for Endesa. How this, let's say, compares with getting up the balance sheet, et cetera, and the dividend policy, again, I think we have flexibility to increase our investments, and this obviously would not obviously affect our dividend policies of now. The more obviously we'll invest, the more we will have to trim in case our dividend policy obviously still grow that we are, let's say, expecting to deliver to the market is, I would say, much greater than what it is today. So that, I will say, is our priorities on the capital allocation side.

[Mar Martinez, Head, IR]

Next question comes from Harry Wyburd from BofA Merrill Lynch.

[Harry Wyburd, Bank of America Merrill Lynch]

Three questions from me, please. Firstly, just on nuclear lifespans, things have gone a little quiet in the press. I wondered if you'd had any dialogue with the new government on that issue, and whether they've clarified their thinking on what kind of timeline they're going to look at for nuclear and coal closure. Then secondly, on pool prices, pool prices remain extremely high, perhaps higher than might be explained by just commodities alone, particularly given how well hydro's doing. And the forward curve remains very heavily backward-dated, as well. Is there anything else going on in the Spanish power market? Is there some competitor behavior or something else that's leading to such high pool prices which obviously negatively impacts your business model? And then, finally, on Slide 18, I just wanted to drill down on your net financial results line. You mentioned that you had some workforce and facilities decommissioning provisions in there this year. Could you just clarify the exact amount of provisions booked in the first half of this year and the exact amount of provisions booked in the first half of last year in the net financial results line?

[José Gálvez, CEO & Executive Director]

In relation with the first question related to nuclear lifespan, let me say, first of all, that at least in our opinion, the early closure of the nuclear fleet would have a major negative impact on [indiscernible] supply, on system costs, and on CO2 emissions. And in our opinion, it is impossible to carry out all nuclear decommissioning processes at the same time. We agree that there will be an orderly phase-out beyond the technical reference of 40 years useful life. Around 7 gigawatt will reach 40 years operation, or life, starting in 2023, finishing in 2028. So I think that it would be impossible to go ahead with this shutdown in these various short period of time. In any case, I should say that we have been talking with the ministry. They are looking for the challenges that we will face in this transition period, and they are absolutely open, yes, to look for solutions.

[Luca Passa, CFO]

As far as pool prices is concerned, as you said, I mean, the commodities, Harry, are really influencing what we see in terms of pool price. We don't see other, I would say, drivers to this improvement. However, as you say, it's a very peculiar situation in the market. And hence, basically, we haven't started to hedge, let's say, on this basis our spread-driven production for 2019. As far as your question on Slide 18, the provisions of our workers restructuring plans and contract suspension agreements and facility dismantling for 2018 are minus five, and for 2017, plus-10.

[Mar Martinez, Head, IR]

We have now Javier Garrido from JPMorgan.

[Javier Garrido, JPMorgan Chase & Co.]

First question is specific on the Vandellos plant. Please, if I missed that in your speech, but is the Vandellos plant back online and full capacity? Or if not, when do you plan it to be online? The second question is on your energy management. You are guiding to a drop in the average unit margin in the second half. If the full year is an average 23, that means that, in the second half, you are seeing 21 approximately. At the same time, you are talking of being fully hedged at €67 for the second half all in. So that implies a very significant increase in the variable cost. Is this link to just the increase in the wholesale market price, and therefore your purchasing cost, or should we expect to see a very significant increase in your average production cost due to higher coal prices? Just simply you could elaborate a bit more of the constituents of this evolution of the unit margin for the second half. Then the third question is on your renewable growth strategy. Luca just mentioned that that strategy is mainly organic growth based. Could you let us know whether that organic growth is based on players that you have developed by yourself since the last year's auction, or whether it is linked to acquisitions of players in the initial stage of development? And what size of capacity do you think you can be ready to build in the next couple of years in the Spanish market?

[José Gálvez, CEO & Executive Director]

Well, Vandellos is back online, but you should take into account that they have been stopped - stoppage during this long period. We should test different things. We are back online, but probably we will test - we will do in some days the [indiscernible], we will stop and test, and whatever [indiscernible], there is not any problem with Vandellos.

[Luca Passa, CFO]

On the second question of the unit margin for the second part of the year, yes, we are assuming basically a stabilization overall for the €20 to €23, which means that let's say the €45, kind of what ours expect for the second part of the year, we've come with unitary margin of about €20. So on average, it's going to be between €22 and €23. As you say, this is linked to an increasing variable cost, and I think it's a combination of both the drivers that you mentioned, i.e. higher acquisition cost in the market for the part that we hedge in D. C market as well as the higher price for producing on our thermal fleet. And this is driven by the evolution of spreads, as I mentioned before as well as overall cost of commodities. I can't obviously comment more on what percentage of the two, but definitely those two drivers are there for us, assuming hedging, unitary margin, [indiscernible] margin for the second part of the year around €20. And Pepe, you want to comment on the third one on organic projects and growth in the new ones?

[José Gálvez, CEO & Executive Director]

Currently, we are open, yes to go ahead with our pipeline, or this pipeline could be increased by acquisition of some project in [indiscernible]. Well, it depends on prices, and it depends on how to deploy the new capacity. As I have said, we would like to be one of the leaders of this transition period, but we don't have a fixed figure established for the year 2020 or 2021. We will have this figure in the next Capital Market Day in the occasion of the presentation of our strategic plan.

[Luca Passa, CFO]

And as I may complement, obviously all the projects are in-house developed as of now. So for the moment, that's our line as far as organic growth in renewables.

[Mar Martinez, Head, IR]

Next question comes from Rui Dias from UBS.

[Rui Dias, UBS Investment Bank]

I have three brief questions. One is on gas supply margins, can I just ask if you see this €100 million of margin for the full year as a normalized level, going forward? So this is the first question. Then on the second question, just to go back to renewables, and to touch base on solar specifically, there seems to be a lot of excitement, or there's a lot of excitement around solar developments in Spain. And several players, including small ones, are claiming that the economics of these projects, even at power prices significantly below the current levels, are very attractive. And this seems to be very, I would say, quiet, or unexcited, around this topic. And the question is, is this just the wrong perception from my side, and are you actually doing some work on solar in the background? Or if not, what are your concerns in this topic? Then a third question, just to follow up on the nuclear asset last question, we understand that you believe that the plant should not be closed after 40 years, but if the government decides to limit the life to 40 years, what would be the impact on your P&L? And given that this will not be a cash move, could this eventually lead to a change in the recent policy, which is a link to earnings?

[José Gálvez, CEO & Executive Director]

In relation with gas margin, you are right. We're expecting €100 million for the full year 2018. Let me remind you that, in our strategic plan, our figure was €50 million, so that means that the evolution of the gas market, and the outlook that we have for the second half of the year, or for the full year 2018, is better than the one that we have in our strategic plan. We will see what happen in the future, but certainly, the market context and the outlook for the gas business has improved. If we are in solar calm and quiet, well, we try to be quiet and calm all over the business to take the right decision. Within that, solar will be one of the drivers of the renewables in the next decade, and also will be, yes, now. Let me say that, in the second auction of the year 2017, we were awarded with 330 megawatt of solar. So that means that we will go ahead not only with wind farms, but also with solar. And I will pass the question of nuclear to Luca.

[Luca Passa, CFO]

Yes, Rui. If, let's say, the [indiscernible] that you planted, I mean, ending of life, or use of life of 40 years for the nuclear plants, where through the impacts for us will be an IR D&A of about €190 million. And to the second question, would this affect our dividend policy, to be honest, we will consider at the time. At the moment, we consider this as a remote event, as Pepe highlighted before, for the several reasons that he mentioned.

[Mar Martinez, Head, IR]

The next question comes from Enrico Bartoli from MainFirst.

[Enrico Bartoli, MainFirst Bank]

My first question is on your commercial policy. There was, as you mentioned, a reduction in [indiscernible] in the second quarter. Could you update on what can be expected over the next quarter if we continue to focus on high margin clients, and if we are going to see a further drop in the total figure for [indiscernible]? Second question regarding the plans, if you had any discussions with the government on coal plants, if you stated your intention to close the domestic coal in a couple of years, if there are any discussions regarding this matter. And the third one is related to the value-added services. There was an increase in EBITDA from Endesa X. Can you give us some details on what are the services that actually seems to be successful in the market with your clients, and what can be the outlook over the next quarters for this?

[José Gálvez, CEO & Executive Director]

With regard to the first question in our commercial strategy, I would say that, as you know, we commented before, at the end of the year 2017, we launch a new commercial strategy stemming from a value-based management that targeted the retention of high-value customer. While that is our strategy, we are looking for the whole margin and not for the market serve. What we want really is to give value to our customer and to obtain value from them. In relation with the coal shutdown planned, well, let me say that Spain has currently 10 gigawatt of coal plants which for sure will be closed gradually. The aim, in our opinion, is to avoid investment in other fossil fuels plants, like new [indiscernible], which will have to be closed before 2050. In relation with our domestic coal power plants, I should say that, under current regulatory and market condition, as we have said in the past, the IED are uneconomical. And this plant need to comply with the IED vision June 2020. So that is the position that we have today.

[Luca Passa, CFO]

On your last third question, Enrico, the evolution of Endesa X in the quarter and outlook for the remainder of the year, I mean, the margin grew up 6% to €57 million, which is in line with our business plan expectation. We have, let's say, a margin of in and around €120 million for the full year. We had an increase of 1.4, about €50 million in the B2B, and about 8% in the B2C market for a total of €42 million. The drivers here are many of the services that we are using, it's mainly maintenance and repair to the B2C customer, and some energy services to the B2B customers. Obviously, this, as you know, is a new global business line. It's operating well as of now. We plan to expand, let's say, further, especially into the B2B segment, which at the moment is the minor part of the business, while consolidated our services in the B2C segment, which is the largest contributor at the moment.

[Mar Martinez, Head, IR]

Next question comes from Anna Scaglia from Morgan Stanley.

[Anna Scaglia, Morgan Stanley]

Just two questions, if I may. The first one is regarding distribution in non-mainland regulation. I was wondering if you, given the new government, if you had any chat on that, what are the expectations, if you think there is any evolution possible there. And the second question is regarding the nuclear plants. Most of the plants you are partners; therefore, to ask for the extension of the nat life, you need to have an agreement with them. I was wondering if you had a dialogue with them in terms of applying for nuclear life extension, or if this is too early.

[José Gálvez, CEO & Executive Director]

In relation with the distribution and non-mainland generation, that is the regulated business, I should say that, at least in my opinion, one of the government main focus should be and will be the transition period and the transition of the generation mix. Therefore, it will tend, in my opinion, to promote renewables, and also network investment for the next decade to support the decarbonization processes. In SAP context, we expect regulatory returns to be aligned to the capital costs and to the rest of the European countries. And this is the same for the non-mainland generation, regulated non-mainland generation. It is very important, yes, for the security of supply as because of the environment and framework, et cetera. So in our opinion, I think, yes, because of the very high commitment of these new [indiscernible] with the decarbonization, we will see all the measures that will help and support this transition period.

[Luca Passa, CFO]

On the nuclear plant extension, as you probably know, Anna Maria, let's say the first key date for us is March 19, and we will have to agree with our partners to extend this plant. We will start obviously discussing this after the summer.

[Mar Martinez, Head, IR]

Next question comes from Meike Becker from Bernstein.

[Meike Becker, Sanford C. Bernstein & Co.]

I have three. The first is on Slide 8, on your cost evolutions in the distribution segment. Can you remind me again what you will do apart from having deployed, or deploying the smart meters, or are you now at 97% of deployment, right, to get to this 41 of unitary costs? And how confident do you feel? Because you mentioned before that you are committed to outperforming your efficiency, so could you elaborate a little bit more what you're doing specifically in distribution? And by how much, or how confident you are in terms of outperformance on your efficiency targets? That is my first question. And the second one is on PPAs in solar, coming back to the renewables. For your organic growth strategy, how happy or how confident would you be to do that on market prices? And how strongly are you pushing, or how strongly are you thinking about signing PPAs with customers to do this?

[Luca Passa, CFO]

This is Luca. On the first question, as far as, let's say, distribution efficiency, I mean, obviously, the first goal for us is to fully implement 100% the digital meters, which should happen this year, and that obviously will improve the performance of the network. Already in the first part of this year, we had an improvement in terms of, let's say, minor losses of 3%. And what are we doing else? I mean, basically, it's a digitalization not only to smart meters of the networks. I mean, how much you can remotely control the networks from the central station. And that means that investments in remote control items within the network, which will increase this type of efficiency, and that, obviously, will be reflected not only in the proof in terms of, I would say, losses, but also in the reduction of frauds. How confident are we that we can actually, I would say, exceed, let's say, the KPIs that are in our plan? I mean, already we are at, say, €43 customer, which is the KPI that we have chosen for the distribution network, and we have a target of €41 at the end of the plan. So I mean, I think we are on track. We have two further - 2.5 years, right, so we definitely are on track to meet this target. On the PPA topic, I will pass on the word to Pepe.

[José Gálvez, CEO & Executive Director]

Well, first of all, let me say that we are seeing the first movement in this, let's say, market of PPAs. This is a trend that we have seen in other countries. And for sure, they will see it here in Spain. Even more we're seeing, as I have said, the first movement. That is related with the customer mainly, and of course the producer, but the customer in the sense that they are looking for green supply to their factories, or whatever. We are in a very early stage, but I think that will be a reality in the next future. In my opinion, there should be - clarify some mismatch today, because the life of a renewable plant is longer than the willingness of the customer to sign a contract. But well, I think that this kind of thing will be resolved in the future, and for sure we will have this market.

[Mar Martinez, Head, IR]

Next question comes from Jose Javier Ruiz from Macquarie.

[José Javier Ruiz, Macquarie Research]

Just one question left, if I may. I mean, independently from the debate about the lifespan of nuclear, what is becoming clear is that the cost - the total nuclear liability is increasing. I remind that the [indiscernible] increased by 9% compared to last year, this liability. And there is increasing comments about a shortfall in terms of financing. So my question is, what do you think about this; and secondly, if you are seeing the possibility, or the risk of having to increase the contribution to the Empresa fund?

[José Gálvez, CEO & Executive Director]

Let me say that the news that we have seen recently in the newspaper are something that we knew before, yes, because of the expert panel in which we could see some figures. And these figures are very clear. These figures said that, with some assumption, if we continue with the Empresa tax that we have today, it would be - and we stop the nuclear power plants when they reach 40 years, it will be definitely something between €1 billion to €3 billion. It would depend on the assumption used to calculate this figure. But well, on the other hand, if you want nuclear power plant continues up to 50 years, then with this Empresa tax, it wouldn't be any deficit. So it's what we know, and this - what it is.

[Mar Martinez, Head, IR]

Javier Garrido comes back with another questions.

[Javier Garrido, JPMorgan Chase & Co.]

Yes, a clarification. You mentioned the unit margin for this year should be around €23. What was your assumption in your business plan for the year?

[Luca Passa, CFO]

Javier, it was €22, so it's just slightly better than the business plan.

[Mar Martinez, Head, IR]

Okay, thank you. Now we will answer the question received by e-mail. The first one is in relation to the potential impairments, that if we believe that is [indiscernible] in the generational supply division.

[Luca Passa, CFO]

Thank you, Mar. I mean, in our company, the assets impairment tests are carried out at least once a year, and we carry out our tests in December 2017, and concluded that no impairments were required on our asset base. The current regulation make it mandatory to run a subsequent test if there are any evidence, internal or external, that actually might lead to impairment. At present, we don't have any evidence that suggests the need or a new test.

[Mar Martinez, Head, IR]

We have received some question in relation to the loss of supply clients in Spain. What is the level at which we expect the number of supply clients is going to stabilize, and if this is a result or not of higher competition coming from the new entrants.

[José Gálvez, CEO & Executive Director]

Well, of course it's higher competition coming from the new entrants, and also the higher competition between the incumbents. Well, as we have said, we are looking for value, not for market share. That is the first thing. But in any case, as I have said, we have launched a special program targeting the retention of the customer, and also managing the value of the customers on trying to increase the value of our customer base.

[Mar Martinez, Head, IR]

Another different topics. We have been talking, or not, with the minister, if we have some information about the second regulatory period, or talking about the regulated activities.

[José Gálvez, CEO & Executive Director]

We have held some meetings with some representative for the minister. And the only thing that I should say is that it has been very constructive dialogue, look for challenge and looking for solutions. So we are very confident about the next step of the regulations.

[Mar Martinez, Head, IR]

And finally, we have a same two question on the dividend policy. First is in relation to the potential update of the dividend policy that Luca has commented in the call, if this is in relation to the potential M&A opportunities, the revision could be after 2020. And the second one, sorry, has to do with the dividend that we are going to pay during this year, in 2018. Assuming that the second half of the year will be weaker, if we will pay the minimum dividend floor that we have announced, or if we could increase it.

[Luca Passa, CFO]

Okay, starting from this second one, for this year, and our dividend policy is very clear, we have 100% payout in a floor. So whatever is going to be the results for the year, that is what we're going to pay, according to the dividend policy. And [indiscernible] confirming our guidance of net income for 2018. As far as my comment earlier on, I would say, our priorities of capital allocation and potential growth, what I said is, if we can deliver expectation of growth different from the one that we have today, we might think of revising the dividend policy. Obviously, this is part of, again, the investment plan that we have for the company. So we revisit this on an annual basis when we present today, and that's our plan, so that's when we are - we will consider any change, if need be, according to the growth of the company.

[Mar Martinez, Head, IR]

Okay. At this stage, there are no more question. Just remind you that Investor Relation team will be available for any further question you may have. That's it. Thank you very much. Have a nice summer.