Endesa SA

MAD:ELE

Earnings Call Transcript 2019-Q3

[Mar Martínez, Head of Investor Relations]

Hello. Good morning and welcome to our Nine-Month 2019 Results Presentation, which will be presented by our CEO, José Bogas, and 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. Additionally, we kindly ask you to limit your questions to the financial and operational performance of the company during the period and to wait until next 27th of November for the update of our strategic plan. Thank you for your attention.

And now, let me hand over to José Bogas.

[José Bogas Gálvez, Chief Executive Officer]

Thank you, Mar. And good morning, ladies and gentlemen. And thank you for joining us today. Let me start this presentation with the main highlight of the period. EBITDA increased by 4% compared to last year, mainly due to the positive performance of the liberalized business. Distribution business EBITDA kept at a steady pace during the period.

Fixed cost remained almost flat as our continuous focus on efficiency absorbed the increased investment effort.

At the bottom line, net ordinary income increased by 3% compared to nine months 2018.

And lastly, I would like to underline the acceleration of our energy transition plan by promoting the discontinuity of production at our mainland coal thermal power plants, as we will explain in more detail on the next slide.

Moving to slide number three. During 2019, we have seen a dramatic change in market condition, which heavily affected the competitiveness of mainland coal thermal power plants.

First and foremost, the upward trend of CO2 prices due to the effectiveness of the new market stability reserve mechanism in effect since January of this year.

Additionally, the drop in natural gas prices has led to the displacement of more carbon-emitting plants for the benefit of other technologies, namely CCGTs. This change has become structural and means that mainland coal-fired thermal power plants are not competitive now, not in the foreseeable future.

This decision implied an accounting record of an impairment in the value of these assets for a total growth amount of €1,398 million, which includes the total provision to dismantle this plant. This figure incorporates an effect of €1,356 million in D&A and other minor effects in margin and fixed costs.

This impairment is not considered in the calculation of the ordinary net income in accordance with the current dividend policy. So, it has no impact on the determination of the shareholders' remuneration.

In order to compensate for the lack of activity from coal plants and align to our strategic target to become a relevant player in renewables, we are now accelerating our commitment to the decarbonization process, planning a significant increase in renewable capacity during the upcoming years as it is depicted in slide number four. As proof of this, you can see that, today, asset development CapEx amounted to 55% of the total €1.3 billion, deployed as of September.

Regarding businesses, Enel Green Power Spain took the lion's share with 45% of the total CapEx. We intend to put the 879 megawatt awarded in 2017 auctions into commercial operation by year's end.

There is no better evidence of this step forward than our having committed 80% of development CapEx to the deployment of new renewable capacity.

In the same way, we are currently working on the implementation of renewable addition plant to come into operation in 2020. It is now more important than ever to foster our pipeline of renewables project in order to be able to meet the new challenges. Currently, our total pipeline stands at 12 gigawatt up to 2030, out of which around 40% with TSO awarded connection points.

Now, on slide number five, I would like to comment on the market context in Iberia for the period of this financial release. Spanish electricity demand showed a decline, both in growth, minus 2%, and adjusted term, minus 3%, affected negatively by milder temperatures during the period as well as a sign of an economic slowdown reflected in the decrease of industrial consumption.

In Endesa's concession area, gross demand decreased by 0.7%, better than mainland figures, and had a slightly positive behavior in adjusted terms. This development is mainly driven by the drop in the residential segment for the said temperature reason, not fully neutralized by the increase of the service sector activity.

Electricity pool prices decreased to €49.9 per megawatt hour on average during the period, below 2018 full-year prior references and 10% lower than nine-month 2019. These prices scenario is the result of the combined effect of a drop in commodity prices, mainly gas and coal, and the increase in CO2 prices.

In this context, Endesa's total output dropped by 16%, largely due to the reduction in hydro and coal generation, minus 43% and minus 66%, respectively, while nuclear output was 10% up, fully normalized after the last year stoppages.

CCGTs' higher load factor, which increased 46%, partially offset this reduction. As a consequence of all of these factors, CO2-free technologies increased their setup to about 58% of our generation mix versus their 51% in nine months 2018.

Moving to power operational highlight on slide number six, notwithstanding the drop in Spanish demand, despite increasing competition in the sector, total gross sales remained almost flat. Consumption by segment shows a slight reduction in residential volumes, while industrial sales remained flat.

In the regulated market, the sales decrease is above 8%, mainly explained by the reduction in the demand and the loss of regulated customers.

Despite intensive competition, the total customer loss is very limited, less than 1%, with a healthy 2% improvement in the liberalized market. We have managed to retain about 60% of the regulated customer loss in the liberalized market, thanks to the new customer acquisition strategy and the retention plan put in place last year.

Moving to slide number seven, electricity sales in the liberalized business remained almost flat in Spain and Portugal, roughly minus 0.2 terawatt hour in terms of volume. The unitary integrated margin in the electricity business increased by 6% to €27 per megawatt hour that will gradually convert to an average of €26 per megawatt hour for the full year.

This remarkable margin improvement was mainly supported by the increase of €1.9 per megawatt hour in the all-in revenues, driven by the higher OTC references, the positive impact of the temporary suspension of the generation tax in the first quarter, a higher nuclear output and the increase in supply margin. These offset lower hydro availability and lower thermal spreads.

On the sourcing side, the flexibility of our energy management allowed us to maintain the variable cost, despite the increase in energy purchases. Our liberalized supply margin is now above €9 per megawatt hour from around €8 per megawatt hour in nine months 2018, mainly due to lower cost of ancillary services this year.

As we commented last quarter, we have already hedged around 100% of our 2019 estimated output at an average all-in price of €72 per megawatt hour. For 2020, we have hedged around 93% of our estimated output at an average all-in price of around €75 per megawatt hour that will gradually normalize along the year and convert towards €73 once we hedge our total estimated output. Once we consider our total sales mix, the all-in revenue will convert to levels slightly above 2019 reference.

Regarding slide number eight, on the performance of our gas business, milder temperatures during the period impacted on total sales with a 4% drop, mainly in the retail activity due to a reduction of 21% of international sales. On the other hand, as mentioned before, hydro scarcity and fuel switching in generation boosted sales to CCGTs by 26%.

At the bottom of the slide, you can see that the number of customers increased by 2%, consolidating levels of 1.6 million. Gas unitary margin increased to €3.30 per megawatt hour, mainly driven by steady performance of retail margin and the excellent results of the wholesale and supply to CCTGs, thanks to better sourcing which benefited from an active management of our portfolio contracts.

We have already hedged around 71% of our 2020 estimated sales.

And now Luca will continue with the financial results.

[Luca Passa, Chief Financial Officer]

Thank you, Pepe. And good morning, ladies and gentlemen. Further deepening on the analysis on the main financial results, I'm now on slide 10. EBITDA increased by 4% compared with nine-month 2018.

The net ordinary income increased 3%, affected by a higher financial cost and D&A in the period, while reported net income decreased to €176 million, mainly driven by the impairment effects, as discussed previously.

A remarkable increase in free cash flow, 11 times higher than last year figure.

Finally, net debt increased by 25% over full year 2018 to €7.2 billion, mainly driven by higher CapEx, IFRS 16 impact for €271 million and the total dividend on 2018 results paid this year amounting to €1.511 billion.

Moving to the detailed analysis on EBITDA on slide 11, let me now summarize the main drivers. Endesa reported an EBITDA of €2.898 billion, plus 4% versus nine-month 2018, an increase driven by the good performance of the liberalized business, both in electricity and gas and the stability of the distribution business as well as by the ongoing efficiency drive with a 1% reduction in OpEx in adjusted terms.

Generation and supply EBITDA rose by 18% to €1.160 billion, supported by the sudden increase in the integrated electricity and gas margins. Distribution EBITDA remained almost flat, at €1.526 billion. Finally, non-mainland generation EBITDA reached €212 million, a 26% drop that will be commented on in the following slide.

Regulated business contributed to total EBITDA with 60%. And now, on slide number 12, EBITDA decreased by 4% to €1.738 billion, affected by a lower regulated margin of €54 million, while fixed costs increased by €14 million.

Distribution margin remained almost flat, incorporating now the full-year consolidation of Ceuta. The non-mainland generation gross margin reduced by €61 million due to lower production by 7%, the reduction of the revenues related to fuel and CO2 compensation as a result of the settlement mechanism in non-mainland which uses reference with six months of delay. Additionally, a lower financial remuneration income due to lower RAB was also booked in the period.

As anticipated in the previous results presentation, performance in non-mainland generation has improved in the third quarter due to seasonality. In any event, our full-year estimation is now slightly below €300 million of guidance that we referred before.

Fixed costs slightly increased year-on-year. Net CapEx amounted to €343 million, mostly devoted to distribution where the digital transformation of our network continues to be implemented according to our business plan.

Moving now to slide 13, on the liberalized business, EBITDA reached €1.160 billion or a 16% increase, driven by €173 million improvement in gross margin and flat costs.

The increase in the electricity-integrated margin, as commented before, was driven by higher OTC reference prices, the positive impact of the temporary suspension of the generation tax in the first quarter, higher nuclear production and the higher supply margin, partially compensating the lower hydro availability in the period and lower thermal spreads.

Within the integrated margin, Enel Green Power had a positive contribution, thanks to somehow the Gestinver full-year contribution.

In gas, as already mentioned, the combined effect of last-year hedging strategy for the customers and the extra margin brought by the flexibility of our procurement portfolio triggered a 71% increase in the gross margin to €183 million.

Endesa X gross margin slightly decreased by 3%. Fixed costs remained stable compared to last year in a context of a strong acceleration of growth investments, mainly devoted to the renewables development for an amount of close to €600 million.

Moving now to slide 14, a few more details on the evolution of fixed cost. Total reported fixed cost reached €1.492 billion or a 1% increase over last year figure. Once deducted the non-recurrent effects, fixed cost would have been decreased by 1%.

Adjusted figures exclude mainly the accounting effect of the application of IFRS 16 on leases, the provision related to the discontinuity of coal plants and its related materials impairment as well as other O&M non-recurring cost booked in both years.

And now moving on slide number 15, on the P&L evolution from EBITDA to net ordinary income. Starting from the €2.898 billion of EBITDA, D&A increased by 123% to €2.563 billion. This is mainly due to the impairment on mainland coal fleet worth €1. 356 billion, as commented before.

D&A also has been affected by the impairment of IFRS 16 implementation for €23 million, the investment effort in digitalization and grid optimization, the update of useful life in relation to the domestic coal plants booked last year and the acquisition of Gestinver and Ceuta.

Net financial results increased mainly due to the update of the financial provision derived from the workforce restructuring plans, contract suspensions agreements, updates and facility dismantling for €26 million, together with adoption of IFRS 9 for €7 million and IFRS 16 leases for €4 million.

Stripping out these effects and other minor adjustments, net financial results would have decreased around 3% due to the reduction in the cost of debt that partially compensated the higher average gross debt in the period.

Associates and others item, positive, for an amount of €2 million.

Income tax expenses amount to €14 million, 96% lower than in nine months 2018, basically explained by the positive fiscal impact of the non-mainland coal impairment, amounted to €346 million.

Deducting said effect, income tax would have increased by 6%, with an effective tax rate of 22.6%, slightly higher than the 22.1% recorded in nine months 2018. As a result, net ordinary income increased by 3% over the period.

Moving now to slide 16, on the cash flow evolution from EBITDA to free cash flow. Cash flow from operating activities increased by about 60% versus nine months 2018, reaching €1. 810 billion, which has exceeded the financing needs required to carry out the important investment effort.

This increase is due to the following effects. Higher EBITDA after provision paid for about €80 million; working capital and others improved by 52% to €634 million, mainly due to the higher cash-in from trade receivables; the decrease of the negative net rebalance; lower inventories and by higher cash-in from non-mainland compensation.

Income tax increased by €110 million, mainly due to lower funds than in nine months 2018.

Net financial expenses paid decreased by minus 5%.

The increase on cash-based CapEx by 29% was entirely financed by the cash flow from operations increase and led to free cash flow of €385 million, 11 times higher than in 2018.

Now, moving on slide 19, on the evolution of the net financial debt. Net debt amounts to €7.225 billion, €1.184 billion higher than the previous year once considering IFRS 16 impact of €271 million.

This increase is due to the payment of €1.520 billion in dividends, corresponding mainly to the total gross dividend against 2018 results and the positive effect of cash flow from operations, which, as explained in the previous slide, was more than enough to finance the cash CapEx increase.

The regulatory working capital increased by €358 million, up to €1.168 billion. This amount is affected by the delay in non-mainland settlements that accumulates a balance of €816 million.

The leverage ratio was 1.9 times. Gross debt as an average cost of 1.8% at historical lows, which implies a further reduction versus 1.9% reported at the end of 2018.

Net debt by year-end is now expected to be around €7.1 billion, €7.2 billion, slightly better than last estimates, mainly driven by the expected improvement of the regulatory working capital.

Moving now to slide 18, let me hand over to Pepe for final conclusion.

[José Bogas Gálvez, Chief Executive Officer]

Thank you, Luca. To close today's presentation, I would like to conclude by underlining some remarks of our performance during these nine months.

The proven resilience of our integrated business model, underpinning the positive EBITDA result and cash flow generation, we record once again high standards of efficiency, thanks to the continuous efforts in digitalization we have been carrying out.

The acceleration in the decarbonization of our generation mix according to our commitments with the National Energy and Climate Plan. This move is triggering a strong investment effort, mainly in renewable capacity development in order for us to lead the energy transition.

All the above results in an outstanding total shareholder remuneration of 23% as of the 30th of September, providing sound value to our shareholders.

Lastly, we are highly confident that this set of result will allow us to meet our 2019 announced guidance.

And, ladies and gentlemen, this concludes our nine-month 2019 results presentation. Thank you very much for your attention and we are ready to take some questions.

[Mar Martínez, Head of Investor Relations]

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

[Operator]

[Operator Instructions].

[Mar Martínez, Head of Investor Relations]

The first question comes from Javier Suarez from Mediobanca. Please go ahead.

[Javier Suarez, Mediobanca SpA]

Hi. Good morning to everyone. Thank you for taking my questions. I have three. And the first one is on the recent document on electricity transmission [indiscernible] by the energy regulator. Also, the document is not final. I just wanted to know your reading on the document. It seems that the latest proposal on electricity distribution includes an improvement on the asset base, maybe related to the utilization and better OpEx recognition. You can help us to understand how do you read this document and possible implications on Endesa's business plan. That is the first question.

The second question is coming back to the profitability of your supply activity, both on electricity and gas. You can, again, help us to understand the expansion in the margin on the supply electricity business from €8 to €9 per megawatt hour and your expectation for 2020? And also, the dynamics on the gas margin and expectation for 2020 and also the hedging policy update on the gas activity.

And finally, on the cash flow statement in the slide, on the provision page, there is a 15% increase on total amount of provision base. What is your expectation by the year-end? And on the working capital where there is a significant decrease, your expectation by the year-end as well? Thank you.

[José Bogas Gálvez, Chief Executive Officer]

Okay. Javier, I will try as to answer the two first questions and then I will pass the word to Luca just to comment the first question and also the last one.

In relation with electricity and distribution, remuneration and the last proposal regulation, I'd like to say that we are analyzing this proposal. And although it's not going to be the final or could be now the final and definitive singular proposal, we would make a positive assessment. But, nevertheless, in our opinion, there are some issues that should be, in our opinion, again, improved.

But you're right in the sense that the digitalization investment will be considered out of this current year's [ph] term without any cap. That means all these investment needed by the grid, like an enable of the energy transition, should be done without any problem. And also, it has been improved. The efficiency in the cost that the CMC will recognize to the distribution.

All in all, I should say that this proposal is more or less aligned with our hypothesis in our business plan.

Talking about the profitability of the power and also gas. In relation with power, I should say that one thing that has helped us a lot is the very low ancillary solutions during this year, 2019.

Nevertheless, I will underline that, despite the very high competition, we are able just to maintain this margin – healthy margin in the future. And the reason is, as we have commented before, our acquisition plan, customer acquisition plan, and also our retention project, customer retention project.

When we talk about the gas margin, I should say that there is a change since the first half of the year to the nine months of the year. You know that we have a portfolio, which is very flexible. We try to manage this portfolio. That is what we have done in the last quarter. And then, we have created some situation in which we have improved the sourcing by mean of this flexibility in the wholesale market.

[Luca Passa, Chief Financial Officer]

And on your last question relating to cash flow, basically, the increase in provisions of 15% in the period has been mainly driven by two penalty fines, one for FENIE, the other one for the fire of [indiscernible]. There is in and about €50 million for both. So, that's the increase.

In terms of what do we expect as far as provisions at the end of the year is a number which is close to where we are today as far as provisions, which is basically around – less than €300 million for the full year.

And as far as working capital, we are assuming working capital at the end of the year in and around €700 million, but including €400 million of working capital – recorded working capital.

And then, just coming back to the question number two, you were also asking about the hedging policy as far as gas. We have already hedged 71% of our sales for 2020. As far as gas margin, we recorded for this period €183 million of gross margin in gas, with basically 2019 year-end guidance now about €20 million higher than what we forecasted before. So, just above the €200 million thresholds of the last guidance that we gave on gas. And, obviously, we are planning to confirm this guidance also for 2020 in gas.

[Mar Martínez, Head of Investor Relations]

Next question comes from Harry Wyburd from Bank of America Merrill Lynch. Please carry on. The line is open.

[Harry Wyburd, Bank of America Merrill Lynch]

Hi. Morning, everyone. Two questions for me, please. And they're both on coal. So, the first one is, you mentioned that the coal closure won't have a significant impact on operating margin. But does it affect how you manage risk? Because, obviously, your short position in electricity is much higher. It's about 50% for this year versus last year.

And also, as I understand, you've always been a net payer of ancillary services and you just mentioned that lower ancillary services payout has helped this year. But, of course, if you have less flexible thermal plant, you're kind of more beholden or you're more of a net payer of ancillary services in the future. So my sort of outline conclusion here is that perhaps the closure of coal maybe increases the risk of managing your power book. So, I'd be interested to get your thoughts on whether you think that's right or not and what measures you might take to keep that under control.

And then, secondly, on the coal operating margins, you mentioned in the press release on the coal closure that you expected no material impact on operating margin. But was that sort of relative to your expectation for this year or was it relative to last year? Or in other words, could you give us the EBITDA and EBIT that you got for – that you made for your coal fleet for the full year of 2018? That'd be very helpful.

[José Bogas Gálvez, Chief Executive Officer]

Harry, let me say something and then I will pass it over to Luca. First of all, we have said that these – I don't like to say closure of the imported coal because we have said discontinuity and we haven't sent yet the request for closure. But, in any case, very low production just because of the market of this coal, imported coal.

And we have said that it's not going to affect meaningful our operating margin. So, because as you know, the spreads were very low. Very low. So that means that we are not going just to be impacted with – in the operating margin.

And how we manage the risk. While it is clear that this year, we need to buy more electricity, more energy in the wholesale market, but take into account that the last year, if I'm right, we produced something around 15 terawatt hour with coal. This year, we're going to produce, let's say, 5 terawatt hour. But we are managing very well, I think, the liquidity of the market. We have been able just to increase also the integrated margin. So, we feel comfortable. And also, we think that the risk is manageable, the one that we have to assume.

[Luca Passa, Chief Financial Officer]

Yes. Going back to the – basically to the profitability of coal and the potential loss of profitability. First, there is no, let's say, impact in this period because marginality in EBITDA contribution was slightly negative to our accounts. While for 2018, imported coal was positive. And the positive is in the region, I would call it, between €70 million and €90 million overall in terms of EBITDA contribution.

And then just commenting further on potential increase of risk, let me just comment that production has dropped this year to 5 terawatt hours from our coal generation. So, we need to substitute 5 terawatt hours of production, starting from when we're actually going to close completely these plants. And to be honest, the liquidity in electricity market is there, plus we have also the flexibility on CCGTs. So, we estimate basically that we need to cover basically an increase in our short position lower than 3 terawatt hours between now, basically, and the end of the plan, which is something very manageable in the current OTC market. And, I guess, I gave you all the numbers also for 2018. So, this should be answered.

[Mar Martínez, Head of Investor Relations]

Thank you, Harry. We have now Fernando Garcia from RBC.

[Fernando García, RBC Capital Markets]

Hi. Good morning. I have a couple of questions. Regarding gas, you just say that you have improved your source of gas. I will assume that means that you are buying a spot in the LNG markets. And I wanted to know how sustainable is this improvement of margins because of that.

And second question on coal. I wanted to ask you, when do you expect to decommission effectively the plants? And in the interim, if market conditions change, do you plan to continue producing with your coal plants? Thank you.

[José Bogas Gálvez, Chief Executive Officer]

Okay, Fernando. You are right regarding gas. We are buying the spot and we are selling our portfolio. That is due to the flexibility of our contracts portfolio. What would we have done is just to manage this flexibility, not only selling and buying, but also a change in the scope of the contract for the year? And managing that, well, always you find opportunities in the market during each year just to improve the sourcing. We have done this in the past, and we are doing that this year also. Being honest, the gas market is very tough now. And, well, we are doing our best, but at least, and as always, we are in the guidance, let's say, that we have given you.

In terms of coal and in terms of the assumption for the closure, I should say that, first of all, the closure procedure requires to prepare the necessary documentation according to the current legislation as well as the proposal for a transition plan presentation.

So, while we are preparing all the things, we are studying all the different alternatives for the site and the local region possibilities just to mitigate the negative impact of this discontinuity, let's say that. Well, we will continue producing with the coal power plant up to the end of the useful life of this plant. But being honest, we don't expect just because of the cost of the imported coal versus the combined cycles as to produce very much.

[Luca Passa, Chief Financial Officer]

Yes. And to add to this, for accounting purposes, we estimate basically useful life at the end of 2021.

[Mar Martínez, Head of Investor Relations]

Next question comes from Enrico Bartoli from MainFirst.

[Enrico Bartoli, MainFirst]

Hi. Good morning. Thanks for taking my question. First one is related to the cash cost that you expect to be associated to the shutdown of the coal plants. If you can give us a magnitude of what you said.

And second question is related to the [indiscernible] business. So, if I understand well, you expect that this effect of the delay of the recognition of fuel cost will also impact fourth quarter. Can you elaborate a bit on that? And if you can give us a hint of what you expect in terms of EBITDA from this business in 2020? And the level of ramp that you expect for the end of the year?

The third one is related to the currency impact that you had from the impairment of the coal plants in the third quarter.

And the last one is related to an update possibly on the renewable capacity that you expect to be installed in the fourth quarter and in 2020.

And in general, since you highlight the significant pipeline you have in renewables, if you expect that the profitability on merchant plants to be attractive and if you think that it would be worth also to invest or accelerating some investments in these kind of plants over the next quarters. Thank you.

[José Bogas Gálvez, Chief Executive Officer]

Thank you, Enrico. Let me try to answer your last question regarding the renewables.

As you know and as I have said before, our target is to reach a minimum of 15% market share in the renewable capacity addition forecasted by the Energy and Climate National Plan. So, we plan to make a relevant investment that we will disclose all the details in the next Capital Market Day. You know that we currently have around 900 megawatt under construction that will be operative in 2020. And also, we are building our pipeline of roughly 12 gigawatt until 2030.

Also, we have to substitute this drop in imported coal output by these renewables. And as Luca explained before, we are going just to have a shorter position in the next two, three years, but lower than 3 terawatt hour compared with what we have today this year. And we will cover – I think, in the year 2022, 2023, we will be in the same figures that we have today.

[Luca Passa, Chief Financial Officer]

Yes. Regarding…

[José Bogas Gálvez, Chief Executive Officer]

And regarding merchant plants, I should say, and I'd like to say, that one of our main advantages is that we enjoy a natural hedge with our customers. For sure, the future of the utility sector will be depend on the client side for sure. So, our hedging strategy for new development assumes, one, let's say, a part being hedged with a long-term agreement, the so-called PPAs, but we will cover also with our customer portfolio and also with the – in the merchant market.

[Luca Passa, Chief Financial Officer]

Thank you, Pepe. Going to the first question on cash cost of this closure. Obviously, all this provision and the dismantling provision that we booked in this year, the important coal is, let's say, fixed cost in and around between €50 million and €60 million per year. So, once the plants are closed, that is the amount that we're going to save in terms of cash cost. Obviously, this is not in the horizon of the plan because, as I said before, the accounting useful life at the moment for imported coal is 2021.

Regarding the second question on the mainland, yes, you understand correctly. We had basically an improvement in terms of profitability in the third quarter vis-à-vis the performance in the first and second quarter. However, this is, let's say, a reduction of about €60 million of contribution vis-à-vis last year due for lower demand, as I said, lower RAB and the recognition of fuel and CO2 allowances. What we do expect for the remaining of the year is basically to be slightly below our full-year guidance, which was €300 million, but very close to this guidance. So, we're going to recover a bit of this delay.

As far as the impact on D&A for the fourth quarter from the impairment is in the region of about €40 million, which is driven by about €50 million from the imported coal and the remaining is for domestic coal. And, I guess, I gave you all the answers.

[Mar Martínez, Head of Investor Relations]

We have now Javier Garrido from JP Morgan.

[Javier Garrido, JP Morgan]

Yeah. Good morning. First question would be on your gas supply business. When you are discussing about flexibility, are you in a position to discuss also what is the potential impact of a change in Henry Hub price? My understanding is, with a 10-year contract, it's now – should now be under pressure because of the prevailing LNG prices internationally. Have you been able to hedge that position with no loss or is that simply being offset by your operations in the spot market, as you mentioned before? And actually, on other business, Luca, would you mind to clarify what is the guidance for 2020? And that will be the first question.

Second question is on the increase that you mentioned for the all-in realized price for 2020. The first half call, you were talking of €72, now you're talking of €73 per megawatt hour. Is this related to an underlying improvement in pricing conditions? Or is it linked to a change in the mix or a reduction in the amount of sales that you're expecting, which, in the end, would mean keeping a higher proportion of average hedging that you have closed so far? Basically, the question is, is this a structural improvement or linked to a change in volumes?

And the final question is on Endesa X. When do you expect to see a recovery in profitability? We've seen some small, but some deterioration in the trend for gross margin in the third quarter. Is this related to electric vehicle charging stations and when should this trend change? Thank you.

[José Bogas Gálvez, Chief Executive Officer]

Thank you, Javier. And I will try to give you some color in this question and then I will pass the word to Luca. First of all, talking about gas, flexibility and hedging of our Henry Hub. Well, we try to do our best. Believe me, it's not easy just to do that, but we are doing well. And let me say, could be the 10-year contract be under pressure in this moment, but life is [indiscernible]. And at least what I believe is that, today, we have a bubble of gas. Let's say that. But in two or three years, things could change or could change even earlier because we have seen these changes all our life in the business. I really believe that the Henry Hub will be one of the price setters in the future. So, we have a portfolio with 50% based on Henry Hub and 50% based on Brent. So, I think we feel comfortable with these. That doesn't mean that, in these special market conditions, we have really to work very hard to obtain results.

Talking about guidance. If I remember well, the last quarter, we said that we will be below the guidance, a little slightly below the guidance. Now, I should say that we are expecting to be slightly better than the guidance.

And let me say something about Enel X. First of all, what we are trying to do with this new business is just to create the base for the new businesses in the future. What we are talking about is based on the decarbonization, the deelectrification, et cetera, et cetera, all the actions on climate just to create the opportunities in the future. We're talking about the storage, we're talking about electric vehicle, we're talking about demand response, et cetera.

What does this mean? This means that we continue with the – I don't like to say old business, but very good one – businesses that we have. But we are investing and we are increasing costs in this new development for the future. And I think that we are right. But that means that we have slowed down a little our growth in this Enel X.

[Luca Passa, Chief Financial Officer]

And just finishing commenting on Endesa X. Basically, yes, there was a decrease of 3% in terms of gross margin, but we are fully on track to meet the full-year guidance, which is in around €120 million of gross margin for the full year.

Then going back to your questions, 2020 guidance for gas. As I said, will be very similar to what we expect to end this year. This year, we expect to end with a gross margin of €220 million, €230 million. So, that's the guidance also for 2020 in terms of gross margin for gas.

And then, on your question regarding the increase of all-in price for hedging, that is also driven by a reduction in terms of volumes. So, for 2019, we expect actually 83 terawatt hours as far as output of sales covered vis-à-vis the initial expectation of 86 terawatt hours. So, that is 3 terawatt hours less that makes basically the average expected unitary margin – integrated margin of €26 million for the full year.

So, just to comment on the fourth quarter, you should expect basically a similar performance in terms of integrated margin of last year, obviously, deducted the one-off for last year, which was a suspension of 7% of generation tax. So, an integrated margin for the fourth quarter of this year in and around the €24 per megawatt hour with what is left in terms of volumes, which is about 21 terawatt hours of energy.

[Mar Martínez, Head of Investor Relations]

And the last question comes from Jorge Alonso from Société Générale.

[Jorge Alonso, Société Générale]

Hi. Good morning. A couple of questions still. Can you please clarify on the financial costs, the impact of making the mark-to-market of interest rates or what is really non-cash there and if you really expect to do some more or higher impact for the full year?

Regarding the working capital, considering that maybe you will accelerate investments due to renewal installation, what could be the – let's say, excluding regulatory working capital, what could be the recurrent working capital to see in the company in the coming years?

And the last one is about the recovery of the regulatory working capital. Have you been in touch with the regulator in order to accelerate or do you foresee any kind of early recovery of that regulatory working capital? Thank you.

[José Bogas Gálvez, Chief Executive Officer]

Trying to answer the last one question. Of course, we are in touch with the regulator, trying just to improve the situation that we have today with the working capital. As Luca mentioned before, it's account for almost 1000-almost-200 million euros and it has no sense.

In our opinion – what could be the working capital, in our opinion, is something around €400 million, not €1.2 billion. So, we are in touch with the regulator and we are trying as to resolve this situation.

[Luca Passa, Chief Financial Officer]

Yes. In terms of your question, Jorge, the first one, what is the impact as far as interest rates on the financial provision for the period, it's €26 million. And then you have two other impact IFRS 9 for €7 million and IFRS 16 for €4 million. So, net of these, as I said before, basically, the financial results would have decreased around 3%, which is driven by, obviously, a reduction in the cost of debt that partially compensated the higher average gross debt.

Regarding the expectation for the full year, we expect – this was driven by a reduction on the periods. So, from 2018 to 2019 of 80 basis points in terms of interest rates. We don't expect to have such, obviously, further reduction between now and the full year, but it's driven mainly by interest rates. So, the expectation at the moment that this stays more or less where it is in terms of negative impact for financial expenses.

And then, as far as working capital – all-in working capital, as I commented before, full year expectation is in and around €700 million, of which €400 million is regulatory working capital. So, the ordinary, let's call it, working capital is in and around €300 million for 2019 full year. And, I guess, we answer all your questions.

[Mar Martínez, Head of Investor Relations]

Okay, thank you. We are now with the question received from the call. And, yes, the pending question received from the mail. The first one comes from Anna Maria Scaglia from Morgan Stanley that ask about the impact of the ENRESA tax increase.

Second one comes from Jorge Guimarães from JB CM. And he's asking about if we are considering any inorganic growth in order to speed up renewables growth in Spain. And if we have a target in terms of leverage, net debt EBITDA

The third one comes from Isidoro del Álamo from BBVA that is asking about, in particular, a potential M&A transaction and is referring to EDP assets or COE.

[José Bogas Gálvez, Chief Executive Officer]

Let me say that in relation with M&A transaction, we are always attentive to all the opportunities for the inorganic growth. And as you know, perfectly, what we're looking for is a strategic sense, for the first thing, rationale – the strategic rationale. And the second thing, and also very important, to create value for our shareholders. These are the two conditions that we impose to any potential M&A.

In relation with the EDP offer, higher offer, I should say that we made a non-binding offer – if I'm right, the last 31st of August. And of July. I think of July, before the summer. But we have finally not been included in the second round. We continue in the so-called COE. But, again, it could have sense, strategic rationale for us. So, what we are looking for now is the value creation for our shareholders. But, in any case, any opportunity, we will analyze in detail the asset case.

[Luca Passa, Chief Financial Officer]

Yes. Regarding the question from Anna Maria Scaglia, Morgan Stanley. ENRESA tax increase, as you know, it was approved the 31st of October. The increase was from €6.9 to €7.98 per megawatt hour, and this should drive higher cost for us, about €30 million per year in terms of the impact.

And then, as far as considering inorganic growth for the renewable developments, there's nothing in the plan. As far as inorganic, as Pepe commented, obviously, we look at opportunities. And whether it makes sense from a strategic standpoint and financial standpoint will – might push these kind of opportunities.

And do we have a target leverage for this? Obviously, we are below 2 times net debt-to-EBITDA. The sector is between 3 and 3.5. So, we have, let's say, financial flexibility to pursue even large opportunities. But, again, the two condition has to make strategic sense and, for us, our generating assets which are CO2-emission free. And definitely, let's say, valuations which makes sense in order to create value, given our existing business and are, let's say, long-term strategic.

[Mar Martínez, Head of Investor Relations]

Thank you, Pepe, Luca. And at this stage, there are no more questions. Just remind you that you have the IR team in case you have any additional questions.

Thank you very much for your attention.