Endesa SA

MAD:ELE

Earnings Call Transcript 2022-Q4

[Mar Martinez, IR]

Good morning, ladies and gentlemen, and welcome to the 2022 Results Presentation, which will be hosted by our CEO, Jose Bogas; and our recently appointed CFO, Marco Palermo. Following the presentation, we will have the usual Q&A session open to those connected on the call and on the web.

Thank you. And now let me hand over to Jose Bogas.

[Jose Bogas, CEO]

Okay. Thank you, Mar, and good morning, everybody. Let's start with some key considerations for the period. 2022 was marked by an unprecedented energy crisis after the Russian attack on Ukraine one year ago, whose implications have far exceeded the European scope. The persistency and depth of the imbalance cost in the gas market, and consequently, the high electricity prices led the European Union to develop a set of coordinated emergency measures for all the member state in order to mitigate its consequences.

In parallel, the overall deterioration of the worldwide macro context has been a sort of major concern, which drove downward reviews on the main economic performance estimates. Against this complex backdrop, the sound performance of our integrated strategy, coupled with a final commitment to decarbonization being the only long-term solution is clear evidence of our resiliency to overcome market headwinds.

Net ordinary income exceeded the top range of the updated guidance provided back in our November 2022 Capital Market Day, which allows us to propose the distribution of a gross dividend of €1.585 per share, [6%] higher than our last estimate for approval at the next General Shareholder Meeting.

Moving to the slide, the next slide. Before diving more deeply into details and performance of the period, let me comment on the target delivery. As previously noted, we greatly exceeded our business plan target for EBITDA and net ordinary income. EBITDA like-for-like reached €5.3 billion, increasing by 29% versus the initial target set in Capital Market Day 2021. While net ordinary income rose by 33% versus the same reference, reaching €2.4 billion, becoming around €1.6 per share of gross DPS.

On generation, we have further strengthened our position in renewables, adding more than 900 megawatts of new capacity, attaining a total of 9.3 gigawatt at the year-end. Let me also highlight the good evolution of the power free business where our competitive commercial strategy has allowed us to increase our customer base reaching close to 7 million customers, that is 0.9 million improvement year-on-year.

Investment in grid were in line with last year, implying a final regulatory asset base of €11.5 billion. We invested more than €2.3 billion in the period, an increase of 8% versus last year, and representing the largest amount ever. Out of this total, 76% is aligned to the European Union Taxonomy criteria due to the substantial contribution to climate change mitigation.

On Slide #4, we detailed the main dynamic of the market context shaping the basis of 2022 results. Full year accumulated mainland demand fell by 2.9% compared to the previous year after a certain recovery in the negative trend since by mid-year and especially in the fourth quarter, so a drop in demand due to the combined effect of record high prices, energy saving measures and an abnormally mild winter.

Endesa's mainland demand decreased to a lesser extent by 1.1% despite the solid performance of Service segment increasing by 4.6%, mainly hampered by reduction in Residential consumption due to the already aforementioned saving measures and the economic recession driving industrial demand down.

Gas market swings have beyond any doubt being the main factor behind the European energy crisis in 2022, which peaked during the summer with historically high gas prices. Since then, European gas references have come down sharply to level close to September 2021. The main reason of these partial normalization are warmer than expected fourth quarter and high renewable contribution, coupled with higher levels of winter gas storage increasing the availability of additional cheap gas.

Against this background, Iberian average pool price reached an average of €168 per megawatt hour, 50% up year-on-year. The implementation of the cap on gas for electricity prices since June also contributed to this abatement, allowing a very favorable comparison with most European energy market. In any case, 2022 remains as the most expensive year in the Spanish electricity market.

Last year was very likely the most prolific in terms of -- for reaching regulatory development and initiative. In Slide #5, we summarized the main outcomes both at European and Spanish level. The European Commission has continued to implement a series of temporary emergency measures to intervene in the energy market. In Spain, the government approved around the year a number of Royal Decree-Law, saving an extreme array of measures mainly aimed at offsetting high energy prices and protecting vulnerable customers.

The last of them finally in force last January 1, 2023 being the 1.2% extraordinary levy on liberalized revenues. Regarding the legal action, as we consider this levy to be discriminatory and unjustified, we have just filed an appeal before the Audience National against it. It should also be taken into account that Endesa is among the top 5 tax payer in the Spain, and the total tax contribution increased by 28% compared to fiscal year 2021.

Moreover, among the several initiatives also in discussion, back in September, the President of the European Union Commission promised a broad and deep reform on the electricity market to decouple the influence of gas on the price of electricity given the severe price volatility over the past year. Certainly, regardless of the final approach of the European Commission and the Spanish government, the main priority of any future reform of the wholesale market design should be to guarantee security of supply, affordable energy for customers and the right price signals to ensure the required investment in renewables and grids.

Focusing on the progress we made in renewables on Slide #6. Despite last year being marked by tough constraint in the sector logistics chain, we made some achievement in our decarbonization commitments, bringing into operation more than 900 megawatts of renewables. Additionally, we have 100 megawatts already built and pending to start operation in the coming months. Mainland renewable capacity is now 11% higher than in 2021, while CO2-free sources now constitute 71% of our installed capacity.

We are in the process of closing down As Pontes the last mainland coal plant in which Group 1 and 2 are currently functioning alternatively pending the final closure authorization. Total mainland output reached 52.4 terawatt hours, 13% higher than previous year, 73 of which came from due to non-emitting sources.

Year-to-date output figure consolidates the lower hydro availability suffered mainly in the first semester. In that context, the increase in wind and solar production due to the entry of new capacity, together with the recovery of thermal output, mainly CCGTs and nuclear, more than offset the drop of hydro production.

In the next slide, as of December, the renewable pipeline -- and I am on Slide #7. The renewable pipeline reached 90 gigawatts supporting our growth ambitions to accelerate renewable deployment. Mature pipeline is now worth around 18 gigawatts, out of which 8 gigawatts are ESO-awarded connection points. We promote the gradual incorporation of energy storage technologies in our project as it is becoming increasingly evident that they are a very important instrument to provide short-term storage and flexibility services, thus reducing the unpredictability in the system and improving the efficiency of the energy mix.

Mature in -- mature and in execution project with COD, that is COD or commercial operation date, 2023 to 2025 are able to cover by 2x our capacity deployment for 2025 with around 30% of target additions already addressed. Finally, it is worth mentioning that we have met the January 25th ministry deadline to obtain the necessary environment impact declaration permits without any meaningful impact on our projects.

In Power Retail, we continue increasing the liberalized customer base, leveraging on our successful commercial strategy, and we are on Slide #8. The particular price context seen last year increased the appeal of our commercial offers, preventing rising volatility, particularly compared to index clients' bill. This resulted in a remarkable increase in our liberalized customer base during the last 12 months, where we added around 0.9 million new clients.

Therefore, liberalized sales grew by 4% versus previous year. By segment, sales to liberalized residential customers have more than offset the decrease to sale to -- in sales to B2B. Remarkable operative performance also at Endesa X level where E-home contracts and charging points grew by 18% and 47% respectively. Our electric mobility brand, Endesa X Way, maintains a solid leadership position in Iberia, achieving the largest network of public and private recharging points.

On Slide #9. As you can see in the first graph, free sales included without -- within our integrated margin amounted to 76 terawatt hours, plus 4%, with a strong growth -- within a strong growth in index sales, while fixed price volumes decreased by 8% to 51 terawatt hours. It should be noted that our inframarginal output reached 39 terawatt hour, insufficient to cover fixed price demand. The good evolution of our free power sales came together with a sound performance of the free power margin that reached €42 per megawatt hour, 31% above previous year despite the complex and challenging market and price scenario.

This mainly resulted from the strong increase in CCGT's output attained an important margin improvement. The renewable regulated output sold to spot market and the supply margin that is below €8 per megawatt hour compared to the -- around €10 per megawatt hour achieved last year as a result of the higher ancillary service cost.

Regarding forward sales, 98% of our 2023 from marginal output and 85% for 2024 has already been hedged at the €65 per megawatt hour base load price reference set in the bilateral contract between our generation and supply subsidiary.

Our focus on the gas business, and we are on Slide #10. Total gas sales slightly decreased by 3% due to a demand contraction resulting from the economic slowdown, high gas prices and consumption reduction measures, which was partially offset by very strong sales to our CCGTs. Gas unitary margin, including wholesale, retail and CCGTs activity recovered from the previous year's abnormally low level to around €6 per megawatt hour in 2022.

The positive evolution of the wholesale business especially in the second half, due to the opportunities arising from lower retail demand that we were able to sell in the wholesale market. To the contrary, retail business margin decreased, mainly driven by the already referred to lower-than-expected gas demand especially from industrial customers affected by the high price context. Volumes hedged of our sourcing contract came to 70% and 32% for 2023 and 2024, respectively.

Moving to operative achievement on networks, and I'm now on Slide #11. Distributed energy stood at 132 terawatt hours, up by 1%. Our effort to improve quality and efficiency resulted in losses in line with last year, while time of interruption was cut by a sound 11% despite suffering some spring weather conditions during the year. Regulated asset base decreased by 2% as new investment during 2022 were not enough to compensate for the regulated amortization. In this end, we must draw attention to the need of ensuring a stable regulatory framework, allowing for the high capital deployment required for the net zero transformation.

And now I will hand over to Marco, who will detail the financial results.

[Marco Palermo, CFO]

Thank you, Pepe, and good morning to everybody. On the economic results on Slide 13. Reported EBITDA increased by 30% while EBITDA like-for-like rises by 25%, excluding the capital gain obtained from the Endesa X Way transaction. Net ordinary income was up by 26% year-on-year, amounting to €2.4 billion, not considering the net effect of Endesa X Way transaction, not considering the impairment booked in both years and other minor impacts. Reported funds from operation amounted to €1.7 billion. This figure was strongly affected by the increase in the regulatory working capital during the period by €1.5 billion. Once we strip out from this impact both years, the FFO would have reached €3.2 billion, 26% higher than the adjusted FFO in 2021.

Moving to the detailed analysis of the period on Slide 14. We invested approximately €2.3 billion, it's an 8% more than in previous year focused on decarbonization and networks, being 76% of these investments aligned to Taxonomy. When it comes to EBITDA like-for-like, it reached €5.327 billion. It's 25% vis-a-vis full year 2021. The main drivers are basically generation and supply EBITDA that showed an improvement of 57%, mainly thanks to the outstanding performance of the gas business both from the high CCGT contribution and the gas wholesale business.

This was partially compensated by no recurrence impacting renewables and by lower supply results. Distribution EBITDA declined by 13% to €1.703 billion. Within the non-recurrent effects in addition to those recorded in the 9 months 2022, we have booked €113 million related to regulated renewable plants.

Moving into the EBITDA evolution of generation and supply, and we are now on Chart 15. Despite the strong volatility, our liberalized business portfolio strategy has successfully overcome market headwinds. EBITDA like-for-like lands at around €3.6 billion, increasing more than €1.5 billion excluding the net effect of non-recurrence.

If we go to free power, contributed positively with €841 million. Mainly thanks to, first, the generation margin expansion mainly due to higher thermal margin increasing by €0.5 billion mostly due to higher CCGTs activity and the increase in revenues from renewable regulated output sold to spot market, this for about €200 million; then second, the deterioration of supply margin that has dropped by €130 million, mainly affected by higher ancillary services and ship costs, resulting in a unitary margin well below previous year reference as commented before; and third, finally, a positive contribution from short position management in line to previous years.

If you go to the building block of Endesa X margin, there was a positive evolution with €27 million. And then the last green building block, that is others, there were positive effects of €780 million, including improvement in gas business by around €480 million, supported by the positive evolution of wholesale activity as mentioned before and around €300 million, mainly from trading. Non-mainland margin improved around €60 million, mainly thanks to previous year's resettlement. Finally, fixed cost evolution was negatively impacted by the inflationary context and higher activity.

On Slide 16. Distribution EBITDA dropped by 13% to €1.7 billion, mainly affected by lower gross margin, impacted by the update of the regulatory remuneration for 2017 to 2019 in accordance with the ministerial order issued last August by around €180 million and then minus €40 million due to previous year resettlements and others. Finally, fixed cost increase affected by CPI and maintenance costs.

On the P&L evolution from EBITDA to net ordinary income, we go on Slide 17. Net ordinary income came in close to €2.4 billion, up by 26% year-on-year on the back of the dynamics commented at the EBITDA level. D&A is down by €444 million year-on-year, explained by plus €587 million of variation in impairments minus €106 million of higher amortization based on investments increase as well as activated customers acquisition costs. The bad debt was slightly increased -- bad debt slightly increased, representing now 0.46% of total revenues that is below historical trend.

Net financial charges increased mainly as a result of late interest payments net effect for minus €100 million and a higher debt financing costs due to the increase on the average gross debt despite the lower cost. This was partially offset by the positive update of workforce reduction plans provisions. Rising income taxes by around €400 million, mainly driven by better economic results and increase of the effective tax rate to 25.6%. Minorities increased by €33 million.

Moving to the cash flow on Chart 18. The FFO evolution came in €1.7 billion positive, below the cash generated last year. Net working capital was equal to minus €2.9 billion, strongly affected by the €1.5 billion of the regulatory working capital increase, most of it in the non-mainland business due to regulatory settlements at historical fuel costs far below current market. Apart from this effect, negative working capital amounts to minus €1.3 billion, mainly as a consequence of the logical evolution of the business dynamics in a context of higher prices, which has led to an increase in the volume of net balance of receivables. FFO would have amounted to €3.2 billion, that is a 26% increase, net of the regulatory working capital effect, which we hope should normalize over 2023.

I will now move on the debt evolution that is in Chart #19. Actual net debt stood at €10.9 billion, increasing by €2.1 billion versus previous year. The main operating moving parts described in the chart are the following: there is a positive FFO for €1.7 billion, as already commented; €2.4 billion of cash-based CapEx; and €1.5 million of dividends paid corresponding to 2021 results. As mentioned before, regulatory working capital stands at €2.3 billion, almost tripling 2021 figure driven by non-mainland pending compensation. Despite the recent rising progression in interest rates, the cost of our debt remained at still very competitive level, even lower than in 2021, reaching 1.4%.

Gross debt increased as a consequence of the already mentioned dynamics on the net debt being additionally expanded by the rise of financial guarantees required for the commodity financial hedging contracts. Let me remind you that these derivative contracts are used to hedge margins for our native portfolio in both power and gas that are clearly not speculative. Moreover, collateral requirements are temporary. In fact, since September the figure has notably dropped, reaching €6.7 billion due to the gradual decline in commodity prices after the third quarter peak. And to date, the amount of collaterals is even lower.

Regarding the credit metrics, and I'm now on Chart 20. We have put in place a number of financial initiatives to strengthen the liquidity position, reaching levels we find sufficiently comfortable both in the short and in the medium term. Current liquidity position amounts to €9.2 billion with maturities averaging 3.2 years, and the fixed rate gross debt represent 58% once excluding the collaterals. Despite the net debt increase by €2.1 billion along the period, the leverage measured as net debt to EBITDA ratio slightly decreased to 2x from the 2.1x in 2021 at healthy levels and well below the industry average. Adjusted FFO to net debt ratio increased by 1 percentage point reaching 30%.

When it comes to the details of the sustainable finance on Slide 21. Throughout the year, we closed sustainable-linked financial transaction for an aggregate amount close to €14 billion. The most remarkable transaction is the increase in the limit of our "SDG 7 - Euro Commercial Paper Programme" that went from €4 billion to €5 billion. Additionally, our 2024 goal has been set for the greenhouse gas emission KPI related to the reduction of Scope 1 emission in some of our financial transactions. We have also issued an innovative circular confirming credit line, linking invoiced discounts to suppliers' sustainable performance. As a result, sustainable finance now represents 64% of our gross debt, above the initial 2023 target and gradually approaching our 87% target in 2025.

Let me now hand over to Pepe for the final conclusions.

[Jose Bogas, CEO]

Okay. Thank you, Marco. Our achievement generated significant value creation for our shareholders. Considering a 70% payout of net ordinary income in 2022, the Board of Directors has proposed, subject to General Shareholders' Meeting approval, a total gross DPS payment of €1.585 per share. This dividend is expected to be paid in July 2023 in a single payment. This dividend is significantly above the initial guidance committed to in the business plan 2022 to 2024 and represent an increase of 10% versus previous year.

Progress in our operations is reflected in our target for the period, and I'm on Slide #25. As shown throughout this presentation, we can be proud of succeeding once again in beating the target we set for 2022, taking into account the challenging market conditions marked by record high commodity and electricity prices. After this set of results, which has been absolutely extraordinary, we expect to recover the growth path with 8% EBITDA and 80% net ordinary income CAGR by 2025.

For the year 2023, we maintained the target range announced in the Capital Market Day, assuming a return to the growth path from a more normalized year such as 2021, considering the extraordinary market circumstances we have faced in 2022.

More specifically, we foresee an EBITDA of €4.4 billion to €4.7 billion, a 5% rise versus 2021 or 10% if the impact of the 1.2% levy in 2023 is removed. This levy implies an additional tax burden of more than 15% of the net ordinary income.

Lastly, in terms of gross CapEx, it must be taken into account that Endesa plays a fundamental role in society by guaranteeing security of supply, which is why we will continue to invest close to €9 billion in Spain over the next 3 years both for decarbonization and to improve the competitive offer to our customers.

And now some closing remarks before the Q&A. The resiliency of our loan proven integrated business model has allowed us to successfully overcome one of the more challenging context in recent years both in terms of market volatility and regulatory intervention. We continue to retain and attract new customers, leveraging on a successful commercial strategy based on a range of products and services that protect them from price spikes. We invested €2.3 billion, a historically high amount, 8% more than the previous year, having announced for 2023 a further 20% increase, a clear demonstration of our commitment to energy transition process in order to foster energy independence and lower electricity prices.

Finally, we would like to highlight the visible improvement in shareholder remuneration with a 10% increase in DPS compared to the previous year and an outstanding dividend yield of around 9%.

This concludes our full year 2022 results presentation, and I think we can now open the Q&A session.

[Mar Martinez, IR]

Many thanks, Pepe. And Marco, we are now open to answer any questions you may have.

[Operator]

[Operator Instructions]

[Mar Martinez, IR]

First question comes from Alberto Gandolfi from Goldman Sachs.

[Alberto Gandolfi, Goldman Sachs]

Welcome, Marco. I have three, please, if you don't mind. The first two are a little bigger picture industry and the third one is specific on your numbers. So the first one is, can you tell us what are you seeing regarding response to the U.S. IRA in Europe, what I would call the Europe IRA? We are seeing Germany proceeding at the high pace, high speed with legislation on production tax credits, supporting incremental renewables. Spain has sped up the approval, at least environmental approval of permits. What are you seeing in Spain? And how could this legislation on a one, two, three-year basis be helpful to you and to your business?

The second is we are beginning to see a bit of a split in Europe when it comes to a power market reform amongst countries like Spain that are suggesting essentially to bilateralize almost entire merit order, almost; and other regions like Germany, for instance, that are suggesting to maintain a merit order, to maintain an hourly competitive merchant market. What do you think is going to happen on power market reform? Are we going to have a standstill situation with no actual outcome? Do you think countries will have the ability to flex a little bit so every country will have a slightly different approach? Or are we going to stick with the marginal pricing system with the current price caps, maybe for the foreseeable future?

And the point number 3 is the question on the crisis on supply. If I am not mistaken, in Q4, you generated -- you delivered €340 million of supply clients retail EBITDA. Can I ask you if this is correct and how much would this be recurring? So I don't know how much gas wholesale maybe -- I wouldn't call it one-off, but how much of this comes from gas wholesale maybe doesn't repeat? Or by contrast, is this the proper run rate we should now be thinking for 2023? So you're going to deliver more than €300 million, €350 million, whatever, in Q1 this year.

[Jose Bogas, CEO]

Okay. Thank you, Alberto. And I will try to answer the 2 first questions and then I will give the third to Marco. With regard of the so-called European IRA, I should say that the Europe needs for sure a mix of renewables and low-carbon energy sources to ensure, on the one hand, the energy independence, and on the other hand, the low electricity prices. Sweet robust European response to ensure the best framework conditions should be done to encourage the rest -- the renewable energy and avoid the gap between Europe and the United States in terms of competitiveness. That is something that is based on the competitiveness of the different -- and the attractiveness of the different regions, Europe versus the United States.

If I'm right, the European Union will discuss this plan along the first quarter. So details so far are limited, but I'm sure that the plan in terms easing restriction on tax credit, boosting state aid. This is something that we need to do because we are living in a global world in which we should take care about how we could go ahead with our plan of decarbonization without -- with the same tools of other regions, I would say. So we really celebrate this initiative, and we will be expecting the result of that.

With regard to the second question, that is the structural reform of the European market, I should say that this structural reform was needed before this energy crisis. The energy transition and the current energy scenario require a new market design. As I have said, this new market design is something that we need previous to the energy crisis.

The outcome of the reform is uncertain. Let me say that it is a very complex subject. Within that -- this reform should be based on common sense, that is supporting and encouraging the commitment of the main alliance with strong collaboration, public-private collaboration and should be aligned for sure with the objective of decarbonization. But it is a very complex subject, complex subject because in my opinion, we should maintain the marginal pricing that we have today at least in the short term and also in the long term, but we need just to increase the long-term contraction that we don't have.

But it's not only a question of the European Commission. It's also a question of the member states in which there are many restrictions for this long-term contract. Indeed, this restriction in the long-term contract should be removed, in my opinion, for the small customer. Things that are not allowed in many countries today, you know that you should be obliged to renewal for the contract with a small customer each year. Well, there are many things.

On the other hand, how to really extend and increase the PPAs contract, it's how to perform with the so-called contractor differences. In any case, we think that this should be done in voluntary measures, trying to reduce as much as possible the intervention of the market having an open and free market. And you're right, there are many different positions between different countries and member states.

What I also ask is just to try to prevent a fragmentation of the market. The worst thing would be that the European Union decided just to give a general guidelines and then the countries will go deeply in different rules. I think that would be a strong mistake. So the European Commission and the different countries should try to work to get a common agreement for the market in the future.

And now, Marco, do you want?

[Marco Palermo, CFO]

Thank you, Pepe, and [foreign language] Alberto. So basically, thank you for the question. You're right, Alberto. We have been along the 2022. If you look at the supply, of course, we have been suffering a bit during the first couple of quarters. Then in the summer, we started to somehow increase also price and translate the increase in -- also to our customers. And therefore, that's why the figure that you see in the fourth quarter, it's probably a good proxy of what we are seeing in 2023, so something in the range of €300 million. It's something that you should probably expect for the rest of the quarters, at least what we are planning right now for 2023.

[Mar Martinez, IR]

Next question comes from José Ruiz from Barclays.

[José Ruiz, Barclays]

I have two. The first one is regarding Slide 7. I would like to confirm that I understand what you're saying there. Are you implying an installation rate of renewables for the period 2023 to '25 of 3.3 gigas per year? I'm just dividing 10 gigas divided by 3 years. And secondly, you have beaten the 2022 guidance you gave in the Capital Markets Day. And I was wondering, I know it's a little bit early, but if there is any possibility of also beating the 2023 earnings guidance.

[Jose Bogas, CEO]

Okay. Thank you, Jose Ruiz. First of all, our commitment and our forecast for the deployment of renewable during the period 2023 to 2025 is 4.4 gigawatt. That is the right figure.

With regard to the second question talking about the guidance, well, as you have said, it is a little bit early. We maintain the guidance communicated in the last Capital Markets Day assuming the normalization of the market from the extraordinary context gas that benefited 2022 results and assuming also the impact of the 1.2% revenues levy, the recovery or the return to the growth path from a more normalized year such as 2021.

For sure, we will be obliged to manage different issues or subject in the business that will arise for sure, because we are in a very complex and challenging market today. You should take into account that we are thinking that these extraordinary results based on gas. And if you want the CCGTs performance due to the very high output that we have had with a very good one operation in our CCGTs, and also the gas wholesale context that have given us the possibility to sell gas to this market with extraordinary results. So there are many things. It's a little bit early, but we maintain and continue our guidance. For sure, we will work just to improve these results.

[Mar Martinez, IR]

Okay. Many thanks, Jose. We move now to the next analyst, Manuel Palomo from Exane BNP.

[Manuel Palomo, BNP Paribas Exane]

Welcome, Marco. Three questions from my side. Number one is on M&A. I wondered whether you could please update us on the evolution of the potential sale of gas contracts or gas clients that was announced by Enel in last November presentation. That would be the number one.

Second one is on the views about the integrated margins and supply for the next year. We've seen a massive increase in the integrated margin in '22 to 42-megawatt hour, a decrease in the supply margin to below 8 according to the presentation. And I was wondering whether you could give us any, well, any view about what you think we will see by the end of the year 2023.

And the last one is a bit on the dividend. The dividend that you are proposing is close to €1.59 per share. And if I take the midrange of the 2023 guidance and according to the 70% payout ratio, this would mean that by 2023 or in 2023, we would see a significant decline in the dividend, around 50%. I also see that your balance sheet is very healthy, below 2x net debt-to-EBITDA. So I wonder whether you have any plan to at least partly offset the cliff in the dividend?

[Jose Bogas, CEO]

Thank you, Manuel. Marco, could you please answer the question.

[Marco Palermo, CFO]

[Foreign language], Manuel, so thank you very much. Let's start with the first one, that is the easy one on the M&A. On the M&A side, we didn't even start actually with our dialogues, reason also being that the market has been very volatile. Now probably what we are seeing is a few weeks with less volatility. And probably with this environment, it could be the good environment just to start talking and understanding whether that could be subject interested in dialogue with us. But for the time being, we are really at the beginning. So there is -- it didn't even start actually.

On question #2, on the integrated margin and on supply and actually on guidelines 2023, you're right, there was -- there has been an increase. You've seen it at Page #9 in our free power unitary margin. What we see for 2023 is that we're confident we could maintain this level even before we imporve it a bit. And I would say that this also apply actually even more to the supply margin. We have been suffering, as you can see in Chart #9 this year, but we believe that in 2023 we can go back to something similar to 2021, probably also there a bit better.

So -- and on question #3, yes, you're right. There is -- there will be a significant decline, but it's -- I know that it's difficult. But here, if you look at historical the trends of the results of this company, what is really somehow strange is result of 2022. If you take and look at the historic results, this -- the 2023, we are somehow guiding you now is 2023, there is still an increase when compared to a year like 2021.

Of course, it's only a 5% increase. But because you have to take into account the levy on the revenues, that we are suffering somehow and that will suffer next -- this year and next year. If you neutralize that, would be an increase of 10%. So I mean, for the time being, that is our target.

[Mar Martinez, IR]

Okay. Next question comes from Jorge Guimarães from JB Capital.

[Jorge Guimarães, JB Capital Markets]

I would ask you if you can elaborate a bit on the evolution of working capital in Q4 2022 because apparently it deteriorated slightly against the September '22 figure, and not only for the regulatory working capital, also for normal working capital. So if you can elaborate, namely in the context where raw material costs have come down. And the second one would be if you can give us some light about the evolution of the collaterals or guarantees, the €6.7 billion value that you mentioned in the presentation. Just you told us that it's going down, but if you can be a little more specific on that. So those would be the 2 questions.

[Jose Bogas, CEO]

Okay. Thank you, Jorge. Marco will answer, but let me say when you talk about the [Graviton] from September in the working capital, it is due mainly to the regulatory working capital. And that is due to the recognition of the mid gas prices in the gas -- like the gas price reference for the island. In terms of the collateral also, what we said is that during the year 2023 and the year 2024, we will see a decrease of these collaterals. And on top of that, what we have seen is a reduction in prices. So the reduction of the collaterals are higher than the ones that we prevent previously. But in any case, Marco will go deeper in these questions.

[Marco Palermo, CFO]

Thank you, Pepe, and [foreign language] Jorge. So let's start with the working capital in 2022. Here, I mean, we painted the 2 blocks, because we really believe that it's paramount importance that you have a look at both. The regulatory working capital, of course, is kind of astonishing. It's a very big number and it's somehow impacting us. It is something that came clear at the end of last year in December. So I mean, that's why it is there. And we hope that this will somehow resolve along the year. When you go to the remaining, to the rest and to the other building block, to the rest of the working capital, I would say that, that is a consequence of the logical evolution of the business dynamics because we have higher prices.

If you look at our revenues, it's a very important year in terms of our revenues. And this, of course, with higher prices, leads also to an increase in the volume of net balance of receivables. So I mean, somehow this is something that goes with the flow of the business. The more -- and with some time, you see prices somehow dropping and the more of this will somehow squeeze.

When it comes to collaterals, you remember that in the third quarter last year, they were at top high. We closed 2022 with this €6.7 billion. The number now, what we were expecting was a decrease in this number of short of €0.5 billion per month that what we are actually seeing it's something more than that. That is somehow leading us today to something close to €4.5 billion, even closer to €4 billion, I would say.

And why so? For what I was saying before, actually what we are experiencing is a lower volatility, and this lower volatility is somehow, not only the price, somehow impacting the request of collaterals. So somehow the situation seems unlocking faster than we thought.

[Mar Martinez, IR]

Thank you, Jorge. We have now Robert Pulleyn from Morgan Stanley.

[Robert Pulleyn, Morgan Stanley]

I have one question, just a follow-up on the comment around collateral and working capital. Would you be willing to give a direction on net debt by the end of the year given the comments you just gave around those two big moving parts?

[Marco Palermo, CFO]

So on guidelines on next year on the net debt, I mean, what we are seeing, it's an increase. Why so? There are things that are facts. I mean, we know that there are higher cash taxes. We spoke about this levy. We know that there will be also a higher financial payment. There will be higher cash CapEx because of our -- you have seen our plan of CapEx for next year. And there will be also an increase in the dividend and payment because of the -- of what we are somehow communicated to you.

So all of this is somehow leading to an increase in net debt. Then, of course, there is this 1.5 of regulatory working capital that we have to see how this would evolve. So I mean, if it is -- if there are good news that, that will be positive news for us. And then we have also to see in the different cash components of the EBITDA along the year, depending also on how things evolve. So we expect an increase because of some facts, but then we have to see what happen on the regulatory side.

[Mar Martinez, IR]

Thank you, Rob. We have now Javier Garrido from JPMorgan.

[Javier Garrido, JPMorgan]

I think I have just two questions left. First one is one point you have not mentioned about the guidance for 2023, which is the management of the short generation position. What are you assuming in your guidance for that? What contribution from this management and the short position are you assuming whether you see upside to that assumption or not?

And then the second question on the islands. While we wait for our working capital normalization -- or actually 2 things, firstly, what should be in the contribution of the islands in 2023 now that you have got this government ruling that products that reference to the mid-gas? And secondly, if you could provide some indication, I know it's difficult, but an indication on when you can see the working capital normalizing particularly in a context where commodity prices are now lower, whether that could help you also to see normalization of regulatory working capital in the islands?

[Jose Bogas, CEO]

Okay. Let me give you some color to this question and then Marco will answer. The short position, well, we have not considered short position in our business plan. We reached something like €200 million in the year 2022. And it is true that it's going to be an opportunity in the future for us because we are a little bit short and prices are going down. So that means that perhaps that will give us -- or we feel comfortable with this position for the year of 2023. And with regard to the island and the working capital, I would say that what we are expecting in the year 2023, first of all, is our results very similar to the one that we have obtained this year 2023, perhaps a little bit lower just because we have had some kind of resettlements -- positive settlements in the year 2022.

And the working capital normalization, let me say, we started the year 2022 with, if I'm right, something around €700 million to €800 million. And we have reached €2.3 thousand in the year 2022. That is absolutely an abnormal situation. That -- it's due to a huge delay in the settlements of the regulator, and on the other hand, the increase of prices, not the update of these prices by the regulator with the settlement based on historical prices. So I don't know. It's going to be something that depends on the regulator. But we, for sure, pushed to obtain the right settlements as quick as possible.

And Marco, do you want just to...

[Marco Palermo, CFO]

No, I guess there is nothing else actually to add. You did it very well.

[Mar Martinez, IR]

Thank you. Next question comes from Javier Suarez from Mediobanca.

[Javier Suarez, Mediobanca]

A follow-up question on the working capital, the working capital thing. Again, on the regulatory working capital, obviously there is an increase that is significant and is related to the lack of settlement for the non-mainland operations. So what do you think is a reasonable expectations in people's mind? Is that the expectation that this is going to be recovered in 2023? Or do you think that the period to recover that €1.5 billion is going to be a longer period of time? That would be helpful.

The second question is also on the working capital. The rest working capital, the thing that you define as rest working capital this €1.3 billion. Is it a fair assumption to make that there is going to be a reduction this year, a significant reduction because of the lower need to finance gas-related collateral? And if so, how do you see that number evolving and be by the year-end?

Then the third question that I have is on the evolution of the power market, the electricity-free power market where the company has shown a significant increase in the number of clients, plus 15%. The question for you is can you help us to understand the dynamic on new contracting and implication for your profitability in 2023 and '24? And then the final question is on the levy, the 1.2% Spanish levy. If you can remind us your -- what do you include in your guidance for 2023 and '24?

[Jose Bogas, CEO]

Okay. Javier, I will try to answer the third, the fourth question and then Marco will answer the first questions. With regard to the 1.2 extraordinary levy, let me say that our assumption was something around €250 million for the year 2023, around €300 million for the year 2024. Having said that, the updated estimate for 2023 impact is something around €200 million instead of €250 million. In any case, let me elaborate a little bit more in this. Well, we will see what happen. As you know, we consider this levy to be contrary in our opinion to the provision of the European regulation. And perhaps in -- also in our opinion, it is unfair, in my opinion, taxing revenues and not extraordinary profit. So well, we will see what happens. And in any case, going to the point of your question, we are expecting now €200 million in the year 2023. And now Marco, if you want to...

[Marco Palermo, CFO]

Thank you, Pepe. [Foreign language], Javier. So let's go back to the working capital, the first one on the regulatory. There, I mean, the stock of regulatory working capital right now, it's €2.3 billion. It is basically most of it or almost it related to islands. So it's an important stock of working capital. It's very difficult to make an assumption on this, at least to know what will happen. What we are seeing is that actually, this is the stock. There was this increase of 1.5. This is the stock and that's it. But we, of course, will work to recover at least part of it. But for the time being, that is what it is.

On the remaining component of the working capital, you were correctly referring to the fact that it looks like there are events that are probably pushing this number down: on one side, the evolution of the business that we are foreseeing these first few months; the other side, the reduction on collaterals. So yes, there are somehow inputs that could see these numbers somehow squeezing, but -- and I mean, let's see how the rest of the year would evolve.

Regarding the third one, that is the new clients. Actually, you've seen we had almost 1 million of new clients. And as you have seen probably in our business plan, we foreseeing even increasing this number along the period, another 400,000.

Now what are the implications of these new clients? Actually, you have, on one side, you have a higher CapEx because of the cost of acquired. So you have also some impacts on the D&A, on the amortization of this CapEx. But of course, you have also positive impact on margins. Those are free power market clients and there is -- there could be a higher margin there. So those are actually the impact that you will see. We are seeing a normalization in this acquisition of clients, even though what we are seeing for these first few months, it's a positive, but of course, the market is continuously changing. So we do see a normalization and not on the same level that we have experienced in 2022 that were really extraordinary.

[Mar Martinez, IR]

Okay. And now we have the last set of questions that come from Jorge Alonso from Societe Generale.

[Jorge Alonso, Societe Generale]

I mean, I have just a couple of questions left. It's more related to the gas and potentially to have some gas trading activity as well in 2023. If you still see the demand of gas to remain weak and leaving some gas availability for potential opportunistic transactions. I know that there the prices that probably are not the ones seen last year, but you never know what's going to happen in the rest of the year. So just to see if there is potential room to see again some upside on the gas trading.

And the other question is related to the -- your view about the installation of solar capacity in Spain in the coming years following the amount of environmental permits that the central government and local administrators have granted recently. If you see things can change and accelerate or for financing reasons or PPA market conditions, you do not see an acceleration of installations.

[Jose Bogas, CEO]

Thank you, Jorge. Let me answer and then I will give the word to Marco just to go deep on the question. First, with regard to the potential upside in the gas market and the gas trading, you should take into account that the prices in this year 2023 are lower than the ones in the year 2022. So that opportunity is lower than the one that we have in the previous year.

On the other hand, we believe that this gas market will continue being weak. So that means that we will have, in my opinion, some kind of opportunities that absolutely not comparable with the previous year. With regard to the second question, you are right. If I'm right, it has been approved, something like 55 gigawatts that should be put into operation before June 2025. That is almost, let me say, impossible. I mean, it's impossible because if I'm right again, this year -- last year, 2022, we have to increase at the level of the Spanish market, 5-point something, 5.5, let's say, gigawatt. We have deployed that in this year 2022.

So if we want just to really fulfill the dates that we have now at the level of the Spanish electricity system, it could be needed just to deploy, let's say, 20 gigawatt each year the next 2.5 years. So that is important. I don't know if that is going to happen in the future.

Let me give you another figure. We have today installed capacity, wind, solar, something around 50 gigawatts that we have been building during a very long period of time. And now we have to add, let's say, the same amount in 2.5 years. So I don't know what could happen. But I think that it could be possible to stand the date or we will see what happened. But it's very, very difficult and incredible situation. We will see what happened. And Marco, if you want...

[Marco Palermo, CFO]

Thank you, Pepe. Again, on the gas trading. So basically, there, Jorge, Pepe was right. There is a much lower price right now and lower volatility, so less chances. Now that said, you were right also on the trends. We still do see a trend in clients to try to save on gas and therefore also in consumptions. This means that this could free gas for other uses. Now this prices doesn't look so interesting. We have to see what will happen in the future when probably the storage be filled again. So there, I guess that if there will be chances and spikes and volatility, we will probably be ready just to catch them.

[Mar Martinez, IR]

Okay. Thank you, Jorge. We are done with the questions from the call, and we have just one pending question received from the web. That is, by when do you expect the levy rolling on the 1.2% tax levy on revenues? And how confident are you about the outcome?

[Marco Palermo, CFO]

Well, I guess that on the levy, the real news there is that, of course, together with all the other utilities and actors, I mean, we have decided just to go against it. We believe -- we do believe that this is something that it's unfair, and we do believe that we have chances to win this. But I mean, the timing for this, it's -- of course, we all know also what the impact of this could be. But I mean, on the timing, it's difficult to say.

[Mar Martinez, IR]

Okay. This was the very last question of the call. And just to say thank you for your participation. And as always, we are open to answer any questions you may have through IR department. Thank you very much. Have a nice day.