Red Electrica Corporacion SA

MAD:RED

Earnings Call Analysis

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen. We are now ready to begin our presentation for the results for the First Half of the Year. We'd like to welcome all of you following us on the telephone and on the website. Today, we're joined by the CEO, Roberto García Merino; and by Emilio Cerezo, our CFO. I'd like to give the floor, first of all, to our CEO.

[Roberto García Merino, Chief Executive Officer]

Thank you very much, [Sul], and hello to everyone. First of all, I'd like to share with you the content of today's presentation. I'll start by talking about the Company's new brand, which was presented at the last Annual General Meeting, which encompasses all the Group's different companies. And I'll also be discussing the global environment and the highlights of the first half of 2022 for Redeia. The CFO will then flesh out the results for the 6-month period. And finally, we'll close this presentation, giving you an outlook for 2022 and reviewing the objectives of the '21 to '25 strategy plan. Additionally, please note that at the end of the presentation, we'll also have time to respond to a round of questions, which you may wish to ask us.

So let me begin today's presentation by sharing with you the Group's new brand, Redeia. It was presented at the last Annual General Meeting. In a complex environment, such as the one we are currently experiencing, it's clear to Redeia that the only way forward is to respond with determination and agility without deviating from the mission that gives meaning to our Group, to promote a sustainable, connected, prosperous, equitable, and cohesive future. As a global operator of essential electricity and telecommunications infrastructures, we are an active agent of this change that is already underway, a role we take on with a deep sense of responsibility. Being firmly determined to pursue this mission, we are moving forward under our new brand.

The Company thus is renewing itself in order to make further progress. And we do so under the name Redeia, the brand that will drive our journey in the coming years. With Redeia, we are clearly and unambiguously defining, who we are communicating what a sound and diversified Group we are, a benchmark in the power and telecommunication sectors, an international Group, with a high profile in Spain and Latin America, firmly committed to progress.

A group that after successfully completing its corporization process is moving forward based on the strength of its 5 main companies, Red Electrica, Spanish TSO; Redinter, which is performing our international business in LatAm; Reintel, which manages our dark fiber business; Hispasat, one of the main worldwide satellite operators; and Elewit, which has now been providing its innovation capacity both inside and outside the Company for 3 years. This new brand reinforces our cohesion, as a Group, and with our various businesses separate and distinct, but aligned with our process, which we developed through responsible and ethical leadership in each of the areas in which we operate.

Now that we've presented this change of corporate image, we'll briefly comment on the current global environment, an environment that undoubtedly affects the Group's performance. The global scenario we're living through could be described as difficult with high financial stress and economic slowdown, as major fear following the escalation of geopolitical tensions, supply chain disruptions, rising energy prices, drastic monetary tightening and the scenario of high inflation that envelops us. Nonetheless, we do believe that this new paradigm presents opportunities that can't be ignored.

The ecological transition is one of the main drivers for the European Union's broad transformation program. And it's the cornerstone of the response required to emerge from this difficult situation. The wheels have already been set in motion at EU level and member states have announced various measures to mitigate the impact.

Thus, the new energy policy embodied in the European Commission's Repower EU plan provides the guidelines for temporary measures to mitigate the impact of the energy crisis and defines lines of action to increase the EU's energy security by promoting decarbonization and eliminating dependence on natural gas from Russia. This plan, therefore, marks a turning point in EU energy policy towards better interconnection between European member states and greater energy independence.

Spain, in turn, has adopted an array of solutions to contain the rising prices in the electricity and gas sectors. These temporary measures are set out in various royal decrees enacted in 2021, which have been continued in 2022, with further royal decrees, adopting additional initiatives, such as the new production cost adjustment mechanism to reduce the price of electricity on the wholesale market and at the same time, extending other measures until the end of 2022, such as reducing the electricity tax to 0.5%, suspending the 7% tax on electricity generation and reducing VAT from 10% to 5%.

These initiatives also include the definition of a new mechanism for financing the social bond, which will be funded by all agents participating in the electricity supply chain on the basis of their turnover, including Red Electrica. However, for companies with regulated tariffs that are required to finance this social bond, as is the case with Red Electrica, the regulation states that the cost will be recognized as such when calculating the Company's corresponding remuneration.

Having discussed the rather delicate situation we are in, we now turn to the highlights of the first half of the year. During the first months of this year, we've seen significant advances in the targets presented in our strategy plan that allow us to advance with optimism in the fulfillment of the plan. The most important milestone that's been met during the period has been the approval of the transmission network plan for the period 2021 to 2026, which as you all know, underpins the National Energy and Climate Plan, which runs until 2030 as well as the European energy policy, meeting its clear guidelines, integration of renewables, interconnection of systems and electrification of the economy.

Around 90% of the planning investments directly address needs associated with the decarbonization of the economy. The remaining 11% is for operational requirements, transmission grid upgrades connecting generation and storage and internal improvements associated with international interconnections. All this becomes the driving force for achieving the energy transition ensuring the Group's investments in the coming years have a visible impact.

Another relevant milestone for the fulfillment of our strategy plan has been the conclusion of the sale of 49% of Reintel after obtaining the pertinent permits. This is underlying the value of our fiber optic assets, as well as strengthening our balance sheet so that we can meet the ambitious investment plan we have for the coming years. It also enables us to further develop the Reintel business, thus highlighting its potential for generating value.

Also, at Group level, we delivered robust first half results with net profit up by 1.4% against the same period of the previous year. The Group's investments reached €273 million, increasing investment in the TSO by more than 10% year-on-year. And the final dividend was paid out against the 2021 results, making a total of €1 per share distributed to our shareholders, as confirmed in our objectives presented in the 2021 to '25 plan.

Furthermore, our commitment to sustainability continues to make progress, as we move towards our climate change goals to achieve climate neutrality by 2050. Taking on targets to reduce our Scope 1 and Scope 2 emissions by 55%, and our Scope 3 emissions by 28% for 2030 as compared to the baseline in 2019. Achieving these emission reduction targets is directly linked to our continued commitment to 0 deforestation in the performance of our own activities and those of our supply chain. Thus, the Company has set a net positive impact target for natural capital in the area around its facilities for 2030. Thus, Redeia is committed to compensating all the trees eliminated in the surroundings of our facilities in order to comply with safety criteria going beyond our previous commitment to compensate 50% of the failing -- sorry, of the felling of native vegetation.

We are also working under an integrity due diligence model regarding third parties, which allows us to assess the risks to which the Group is exposed in order to mitigate them through the establishment of appropriate control measures. This model provides the necessary tools to ensure that the Group's relations with third parties are governed by integrity and transparency, which are key to maintaining Redeia's trusted reputation among stakeholders.

On the financial side of things, Redeia has a green financing framework, which has been adopted to the taxonomy of the European Union. It's enabled us to replace the concept of projects with that of assets. With all Red Electrica's assets being eligible when considering, [which is] activity, as TSO complies with the technical environmental criteria and minimum safeguards required by the European Union. As a result of its ongoing efforts, Redeia has recently obtained an excellent ESG rating from Standard & Poor's, which scored the Group at 82 points out of a maximum of 100, highlighting that Redeia is robustly equipped to take on future risks and opportunities or sustainability due to its role as a facilitator of the decarbonization of the whole energy sector.

The agency commends the Group's efforts to protect biodiversity and is talent management with a highly committed and diverse workforce. This sustainability effort is embodied in our national and international regulated activities, as we carry out our electricity transmission projects. At the national level, Red Electrica continues progressing on significant projects, such as the commissioning of the undersea link between Lanzarote and Fuerteventura and the commissioning of the Torrent substation on the Ibiza-Formentera link.

In June, the last phase of the government-managed process began for the future electricity interconnection between Spain and France via the Bay of Biscay. With this step, the second public information period for the project begins in Spain, seeking the best technical, social and environmental solution stemming from the agreement.

We also continue to successfully implement the special maintenance plan, which, as you know, involves maintaining critical assets ahead of schedule in order to reduce risks and increase the security of supply. This plan will last 2 years and will cost more than [€80] million.

Finally, in this area, it's worth mentioning the publication of the draft remuneration methodology for the Chira-Soria pumping station, the first major energy storage system in the Canary Islands. This includes remuneration for work in progress. A particularly important factor is the Company has always argued in favor of the need to remunerate ongoing work, especially when investment periods are becoming increasingly longer and more complicated.

In the international area, we highlight the acquisition of Rialma III in Brazil at the beginning of the year. As you know, the Company is the concession operator of 322 kilometer, 500 kilovolt transmission line already in operation in Eastern Brazil. This deal was carried out through the Brazilian company, Argo Energia, in which the RE Group holds a 50% stake. It's already been integrated into Argo's operations. In addition, we highlight the sound progress on the ongoing projects we have in Peru and Chile, which we'll give you more detail on later.

Our telecommunications businesses continue to support the Company's growth, playing an important role in ensuring connectivity and access to telecommunication services. In the 6-month period, and after that sale I just told you about 49% of Reintel, new prospects have arisen for the Company in its future after the incorporation of KKR as a shareholder. This will facilitate the achievement of the target set for the Company and provides it with greater strength in the dynamic Spanish market for the transmission of communications over fiber optics. The strong performance of this activity during the first 6 months of the year is also noteworthy, underpinned by the inflation index nature of its contracts.

As for our satellite subsidiary, Hispasat, we can highlight the imminent completion of the process to acquire 100% of Axess Networks after obtaining due regulatory authorizations and fulfilling other conditions precedent. Axess is a telecommunications company specializing in satellite services and solutions for the corporate market and government administrations operating in Latin America and EMEA. This purchase is part of the investment plan and actions defined in Redeia's strategy plan for the satellite business aimed at making Hispasat, a provider of satellite solutions and services in its target markets.

Involving Hispasat, working more intensively in the managed services value chain, providing customer proximity, adaptability and the rapid evolution of its service offering. We are also promoting a project to bring satellite Internet at a speed of 100 megabits per second to 100% of the general public in Spain.

Hispasat manages the wholesale service. So we've already signed agreements with a large number of distributors for them to sell the service to the end user. In addition, during the 6-month period, we've initiated the deployment of several projects related to rural connectivity in Latin America, such as the agreement reached to roll-out 324 digital centers in Colombia using Amazonas 5 Ka-band and the agreement reached in Brazil to develop a school connectivity project in the country. We've also established several capacity leasing agreements with leading operators in the maritime sector, in particular, for connecting cruise ships in the Caribbean and the Mediterranean.

Now, I will discuss the results achieved during the first half of 2022. First, we turn to the performance of the main figures for the first half of the year, which continue to be positive despite the difficult environment we are facing. In this sense, look at the growth, both in EBITDA and the net profit compared to the same period last year. The strong reduction in net financial debt and above all, the increase in TSO investment, where we focused all our efforts on the Company.

Redeia's net profit grew by 1.4% in the year driven by the positive results generated from our diversification businesses, mainly the positive contribution of Argo in Brazil. Additionally, financial expenses were lower throughout the period.

The Group's investments amounted to €273 million. That's an 8.2% increase in line with the investments established in the strategy plan for this financial year with significant investment being made in the Spanish transmission network, up almost 11% against the first half of the previous year, as a result of the implementation of several investment acceleration initiatives that are already underway.

Net financial debt reached €4,375 million with a significant reduction of €1,273 million compared to the first half of 2021. This reduction is mainly due to the €995 million collected from the sale of the Reintel stake. So it's been a good first semester marked especially by the first effects of the investment acceleration plans that will be consolidated throughout the year. And by the strengthening of Redeia's financial capacity after closing the sale of 49% of Reintel.

I now give the floor to Emilio Cerezo, who will analyze these results in greater detail.

[Emilio Cerezo, Chief Financial Officer]

Thank you very much, Roberto. So let's look at the key financial highlights. You've heard already from the CEO, and I'd like to turn now, of course, to our profit and loss account. First of all, revenues for the period amounted to €1.03 billion. That's an increase of 4% with a positive contribution made from all businesses, but especially those businesses related to diversification.

The EBITDA increase was the result of the healthy turnover already mentioned, offset in part by higher operating expenses. As the special -- it is an ad hoc plan, maintenance plan for critical assets progress as planned in order to enter the network with greater security and reliability. There was also an increase in personnel expenses associated with the incorporation in [past of the] businesses in the middle of the previous year. EBIT recorded a 0.7% decline due to increased amortization, depreciation in the regulated businesses, and also a result of our satellite business.

Our financial loss amounted to €44 million, €5 million better than in the first half of 2021 due to two different factors. On the one hand, there was a reduction in the average interest rate, 1.4%, [1.6%] compared to the 1.53% in financial year 2021. On the other hand, it was also due to a lower average gross financial debt balance, which fell from €6.79 billion to €6.43 billion approximately in the same period of this year.

Net profit amounted to €363 million, that's 1.4% up on the figure recorded last year.

If we now analyze how business lines have performed in terms of revenues, and one highlight is the contribution of the diversification businesses, strong organic and inorganic performance of those businesses have allowed Redeia to contribute €34 million of the €39 million increase in the Group's revenues.

The revenues from the international business rose by €20 million linked to the following aspects: increased activity in Chile, Peru and Brazil with the commissioning of certain assets, Argo II and Argo III, for example, the acquisition also of -- or rather the updating of regulatory parameters in Brazil. And finally, the favorable effect of exchange rate, that's a Brazilian real and the U.S. dollar rate.

The telecommunications business also contributed to the strong revenue performance. Indeed, the satellite business grew by €10.5 million. Now that was driven mainly by higher sales and also the full half year effect of the acquisitions completed in the previous year in Peru and the favorable trend in the exchange rate, Brazilian real and U.S. dollars, I mentioned before. The revenues from our fiber optic business also increased due to the positive effect of the inflation index nature of some contracts.

EBITDA rose by €13.3 million, that's 1.7% up compared to the previous year in the first half of this year. Firstly, due to the €39 million increase in revenues I mentioned earlier; and secondly, because of operating expenses of €27 million, that's 10.9% up compared to the previous year.

For a proper understanding of how these operating expenses have been performing, the increase should be broken down into non-comparable and like-for-like expenses. The non-comparable operating expenses have increased by €19.7 million and stem from the previously announced roll-out of our critical asset maintenance plan and other expenses associated with the new business lines, mainly the new Hispasat satellite business in Peru, which has been consolidated since May 2021.

Now like-for-like operating expenses for the year increased by only 2.1% despite the high inflationary environment we're operating in. Now this is mainly due to the proactive measures that were taken in previous years to sign medium-term contracts with suppliers, as well as our ongoing search for efficiency in all of our activities.

Now in this slide, you can see Redeia's revenues and EBITDA broken down by businesses. The positive evolution of international EBITDA, up 61%, and of the satellite business, up nearly 7% was the outcome of those factors I described to you just a moment ago, as regards to the weight of revenues and EBITDA by business compared to the total. As you can see on this slide, income from diversification activities have slightly increased [when] compared to the previous year.

Turning now to total investments made during the period. Let me highlight the fact that there has been 8.2% increase in the first half of the year, driven by significant progress in domestic international projects. The TSO's investment was almost 11% higher than in the first half of the previous year.

The key milestones for the six-month period are as follows: the progress as we made in meshing projects and projects to improve reliability and quality of the network, particularly in certain main lines, the Sabinal in -- axes on the island of Gran Canary and the East Madrid Plan axes.

In terms of interconnections, you can also highlight the following aspects. The commissioning of the link between Lanzarote-Fuerteventura reinforcing security supply between those islands. The commissioning of the Torrent substation within the link between Ibiza and Formentera, which will enable this important infrastructure, the [Balearic Islands] to be commissioned by the end of 2023.

Also, there's the Spain North Portugal interconnection, which has received a favorable environmental impact statement. Now that's a project that has been declared to be of common interest by the European Union, and it will enable annual savings estimated at €22 million and a CO2 reduction of 150,000 tonnes per year by increasing the use and integration of renewable energies.

And lastly, it should be noted that the last phase of the administrative process began for the future electricity interconnection between Spain and France via the Bay of Biscay. Now with this step, the second public information period for the project begins in Spain. The idea is to seek the best technical social environmental solution stemming from the agreement.

In our international business, work is continuing to progress favorably on Tesur 4 in Peru, as well as on the construction of the Redenor, [Redenor 2] assets in Chile, which are expected to be commissioned by the last quarter of the year.

Hispasat is making progress with the construction of the new high-performance Amazonas Nexus satellite, which will allow access to new customers and markets and provide high-capacity mobility services in the end maritime transport sectors, among others, as well as continuing to provide service to existing customers of the Amazonas 2 satellite, which [we will replace].

Our strong commitment to a net zero world guides our debt financing structure and is underpinned by the strong support from the investment community in our financing. We already have more than 30% of our funding linked to ESG criteria, and we are continuing to work very hard to increase that percentage. Proof of that is the updating of our green framework, which we have aligned with the EU taxonomy throughout 2021. And we've also extended it out to all Redeia companies.

Our road map is to continue to increase green financing with the issuance of new green bonds that will gradually replace ordinary bonds, as they mature. The last one will be in 2027. At the same time, we'll also be linking the pricing of some financing to the Group's overall ESG performance, and that will provide a strong incentive for continuous improvement in all 3 aspects of sustainability.

The average maturity of the debt is currently 5.3 years with an average cost of 1.46% compared to 1.53% in the same period last year. Now as a result of all of that, we're continuing to maintain some attractive credit ratio showing a strong improvement compared to the -- to last year. So as of 30th of June, 2022, we've reduced our net financial debt by €1.27 billion. This significant reduction is mainly due to the proceeds from the sale of 49% of Reintel, which amounted to €995 million, as well as the healthy performance of operating cash flow, which amounted to €765 million.

Now this performance of cash flow derives from two key aspects: the generation of FFO, €621 million, that's a similar figure to last year's figure. And also healthy working capital, mainly a result of the higher payments from the transmission tariff, as it continues to be considered a provisional tariff. However, I need to point out to you these higher challenges will be fed back into the system in coming quarters. So taking into account all of those points, the investments made and the dividends paid out, the net financial debt at the end of the first half of this year was €4.37 billion.

Let's focus now on the structure of our financial debt, which is characterized by diversification in financing sources. 85% of our financial debt is at a fixed rate until maturity, and there is a clear predominance of the euro compared to other currencies. Redeia will, over the next five years, be facing maturities of approximately €3.5 billion. That amount is fully covered by our liquidity position, which is currently closed to €3.7 billion. And it's also being boosted by funds received from that sale I've talked about before, the 49% of Reintel. We anticipate additional financing needs, as we increase our investment volumes with a high credit rating in order to meet these needs at a very competitive cost.

Let me give the floor back again to our CEO, who will conclude this presentation.

[Roberto García Merino, Chief Executive Officer]

Thank you very much, Emilio. Well, to conclude this presentation, we'd now like to briefly outline our vision for 2022, as well as our financial objectives for 2025. As we've already mentioned on other occasions, 2022 is set to be the year of acceleration in the roll-out of the Company's strategy plan. With the plan already approved, our efforts are focused on a fast and efficient execution of its projects, taking decisive action on the ground, attempting to speed up the required approvals and passing on the benefits to the community at large.

Focusing on the coming months, in 2022, the investment in the TSO will amount to more than €500 million. Following the growing investment path that should lead to us meeting this strategic plan objectives. Additionally, during the year, we expect the remuneration model for storage facilities in island systems, specifically, Chira-Soria following the proposed order, setting out the methodology for calculating the remuneration for this facility. This, in turn, will allow the development of new projects on the islands to favor the integration of renewable energy and increase the flexibility, efficiency and security of the isolated system.

Internationally, we will continue developing those transmission infrastructures in which the Group is already positioned with several assets to be commissioned by the year-end. Specifically, in Peru, we expect to complete the construction of Tesur 4. And in Chile, we envisage the completion of Redenor and Redenor 2. This increased activity will boost EBITDA growth from international business year-on-year.

The satellite business will continue to make steady progress on its new road map to become a managed service provider, and thus, an essential instrument in the fight against the digital divide. In this regard, investments of more than €150 million and EBITDA higher than in 2021 planned.

Finally, in the fiber optic and 5G businesses, investment continues to focus on upgrading the railways fiber-optic backbone and exploring new avenues [for placing] our electricity infrastructure at the service of 5G deployment in order to accelerate its roll-out. EBITDA in this business is also expected to be better than in the previous year.

A relevant milestone in 2022 was the closing of the sale of 49% of Reintel, which has exceeded what we initially had in our strategy plan, and which allows us to consolidate 2 of the most relevant aspects of Redeia's strategy plan, strengthening the financial capacity of the Group to address the Group's investment plan in the coming years; and secondly, improving profitability for our shareholders. Thus, the proceeds from the sale of 49% of Reintel will be used primarily to strengthen the balance sheet of Red Electrica de Espana, S.A. in order to take on the challenges of the energy transition.

Likewise, as we already announced, shareholder remuneration has been improved by raising the dividend to be distributed from the 2023 fiscal year to €1 per share. This sale is part of the diversification strategy that Redeia has developed in recent years and has allowed Reintel's latent value to materialize within the Group, highlighting its leadership in the Spanish dark fiber optic market.

Finally, regarding our 2021 to '25 targets, we continue to make progress on the objectives we established in our strategy plan, making progress and meeting our investment targets, reinforcing our financial capacity and improving our dividend policy by extending the distribution of dividends of €1 per share for another year. So we'll now be covering the 2021 to 2023 period, maintaining the floor of €0.8 per share for the last two years of our plan, 2024 to '25.

So that concludes today's presentation. Many thanks for your attention. And after the presentation both Emilio and I will be available to answer your questions.

[Operator]

[Operator Instructions] Jose Javier Ruiz from Barclays will start.

[José Javier Ruiz, Barclays]

I've just got one question. I'd like to know whether you're working with the government on measures to speed up the works that you have in your investment plan for getting licenses. Are you having any parallel discussions with respect to renewables permits.

[Roberto García Merino, Chief Executive Officer]

Jose Javier, thank you very much for your question. And yes, and not just Red Electrica is doing this, but all of the operators in the sector are very much involved in this challenge that we are facing, which is to get all the processing of licenses and permits in place before we move to the execution is we, of course, are working with the ministry of the government and the CNMC. We're looking at trying to put forward improvements also with the autonomous regions, we would like to give them the benefit of our experience, our expertise and our ideas to try and improve things and see if we can actually speed up this permitting process, which as you have rightly said, is one of the key challenges that we have to face to be able to deliver on those objectives of the plan.

And there is also the experience of other countries, such as Germany, where I know that measures are being taken to change legislation with regard to permitting process, and perhaps in the short and mid-term here in Spain, it would be a good idea to perhaps also to put in practice to measure like this to cut down these periods and move forward with the plans.

[Operator]

The next question is from Ignacio Domenech from JB Capital.

[Ignacio Domenech, JB Capital]

I have three questions, actually. The first one is about that windfall tax on energy companies in Spain. What is your position on that? What is the position of transmission companies like Redeia? Will you be left out from the scope of this type of tax?

And the second question is about whether you can give us more details on Brazil. What will be the contribution made by Brazil by the end of the year?

And the last and third question that I have for you is about your positive working capital because of that transmission tariff there that you talked about in the system, what would be the total impact given that they will have to be voted over coming quarters? And what about your financial debt figure for the end of the year?

[Roberto García Merino, Chief Executive Officer]

Right. Thank you, Ignacio, for your questions. If you wish I'll answer the first two, and then Emilio will give you more color on our working capital and the estimated debt figures for the year-end. Okay, that windfall tax, I think you all know about it, but we all know that Redeia is a regulated Company. We don't get any kinds of profits from the electricity business. We are the regulated core business, which is regulated in terms of all our installations and everything they do. So we don't get any benefit, any additional benefit because of a higher price of energy or the energy flows that go through our transmission grid. So here, we don't see the impact of this possible tax coming to us, it won't affect us.

And in Italy, if you look at Italy, I think the same would be true. It's a matter of just looking at the essence of our business. It's a pure regulated business and the price of energy and the volume of energy that comes through our grid doesn't affect the bottom line in any way.

So you asked about -- see our performance there in the Brazilian investment has been very positive. You saw that in the results for the first half year. And we're expecting that over the year, the positive impact will be maintained with the assets we have there in Brazil. And moreover, I think Brazil in electricity transmission has a very sound, stable framework, a good environment, highly competitive.

We are moving with 2 international investors, and we have a very positive idea about our investment in Brazil and its impact on our accounts. And in the second half of the year, we do think the impact will be positive again. And we will be quite high in terms of the positive performance of the business towards the end of the year. So I think we're expecting a significant impact on the growth of our international business throughout the second half of the year. So Emilio?

[Emilio Cerezo, Chief Financial Officer]

Thank you, Ignacio, for your question. Operating capital, working capital, we're benefiting from the fact that we continue to collect our transmission revenues on the basis of a temporary tariff, which needs to be regularized. To-date, at the end of the half year, the positive impact of this collection of this provisional tariff was about €450 million. We do think that at the end of the year or maybe the beginning of the following year, we'll see a regularization. As the months go by, that €450 million will increase. And in the end, we will probably have to return what we've collected.

And so as time goes by, we could be talking about returning €500 million -- [€500 million] something at the end of the year. So our net financial debt, we think that by the end of the year -- well, it will depend a bit on the amount of the amount that we have to get back into the system at the end of the year or the beginning of the next year, but it will be about €5 billion.

In the second half of the year, that in July, the beginning of July, we already pay out the final dividend for the previous year. So that obviously has an impact on debt. So we've got about €5 billion, as a ballpark figure for our net financial debt at the year-end. Now the following year, we think [and the] the years after that, we've estimated in our strategy plan that there will be an increase of the net financial debt, as our investments above all in [Spain's] transmission grid come up to cruising speed and increase.

[Roberto García Merino, Chief Executive Officer]

Next question.

[Operator]

The next question comes from Fernando Lafuente from Alantra Equities.

[Fernando Lafuente, Alantra Equities]

I've got 2 questions. First of all, your international business. That's been important this half year, your EBITDA is nearly €50 million, €58 million, €48 million in the half year. And what's your outlook for EBITDA on your international assets this year? And what kind of performance do you think we'll be seeing in 2023 and '24.

My second question has to do with the performance of the investments this year, you're putting in some €500 million into the grid, the international grid. Now -- how do you think that investment will evolve over time? I know this is a difficult question to answer because it depends a lot on the permitting. But in line with the conversations that you're holding with ministry, with your regulator, what are you expecting for 2023 and '24.

[Roberto García Merino, Chief Executive Officer]

Thank you so much, Fernando for both of those questions. And as you yourself have said, the performance of international business is absolutely positive, contributing a lot of growth to our key financial figures in the Group. Yes, you're talking -- we're talking about €50 million in a bit, but more or less, we would hope that, that be difficult, will continue to rise during the second half of this year. And I don't think it would be a surprise if we hit the end of the year with about [€80] million linked to our international business, that would be our [bit] bigger estimate that we will give you for the full year.

And I would just repeat what we said about the long-term growth in our strategy plan. Good news then, about our international section in our strategy plan. So yes, we're expecting EBITDA to be about [€80 million] for that business for full year.

And then CapEx investment, I believe that we are taking very resolute steps forward here. Remember that up until Q1 this year, we didn't have an approved planning that allowed us to actually, actually move forward with the execution of the works. And I think in some earlier presentation, we had told you about the preparatory work that we were doing, and we're now reaping the rewards now of that preparatory work because we have approved planning now, plus €500 million in investment, as a goal for this year. Yes, it's a major challenge for Redeia, but we are in a good position to be able to deliver on that goal. And once we have managed to hit that figure and perhaps outperform at €500 million.

Then, if you look at our strategy plan, the -- the approximately €1 billion that we're expecting by the end of the plan is something that we think is within our reach, in fact more within our reach. We've changed some of the dynamics with regard to the way we are making investment. We made some internal changes. And we have really stepped at the pressure in that -- the early part of the process, do get the permits, and then figures are starting to come through with that €500 million figure for this year, which is absolutely key.

And over the next couple of years, too, we will roll-out the planning period. And that preparatory work that we did last year, as I said, is bringing in its results, and we would expect to enter the plan period for with about €1 billion. So there's a couple of years left beyond this year. So positive progress. And as I said, the prior work that we did before we got the approval of our planning is showing that good results now. We'll see that as we move forward.

[Operator]

[Operator Instructions] Please go ahead with the next question.

[Unidentified Analyst]

I have three questions for you. The first one is about the possible discussion or dialogue that you will have with the regulator with regard to the regulation of Redeia, as we move forward. There are 2 issues that are outstanding. And one -- you mentioned one although, that is remuneration for work in progress and secondly, the [personal] adjustment for inflation. Could you give us an update on any discussions that you are currently having with the regulator? And give us your impression about whether these amendments or these changes could perhaps be made to the regulation covering you at some point. It would be interesting to hear from you on that.

The second point that I wanted to raise with you is the environment. You mentioned a couple of times in your presentation, the environment itself didn't you? And that environment means that we will have to step up with the investment to connect Europe. How could Red Electrica help to improve the situation in Spain, the rest of Europe. And if you can help, what is your view on whether that means that you will have to increase your CapEx for Spain and Europe and maybe do something with hydrogen, does that mean that the Company, at some point, might be looking at asset rotation, as an option to be able to focus more on the domestic business or the core business just to be able to speed up its CapEx?

And the third question I have for you is about the EBITDA margin. In your strategy plan that you have presented that you're looking at a [70%] EBITDA margin. That's -- that is currently higher, I believe, than that. Do you think that, that figure that 70% is still valid? Or is it now starting to become conservative? And can you give us some additional details on Hispasat results?

[Roberto García Merino, Chief Executive Officer]

Right. Many thanks for your questions. And let's start with your first question about our contact with the regulators. Well, it's permanent. We have a very close relationship with our regulator and contact at all levels, is constant. Evidently, there are aspects in the regulation that do impact us, and they have to be debated. We discuss these things with them. We have a regulatory framework established for us, which has been signed off for the whole period until 2025. And that regulatory framework is stable, and it has fair remuneration.

But we're always talking to the regulator to try to improve things in line with many other countries in Europe, other TSOs because, as you said, they've included the remuneration for work in progress and the recognition of the impact of inflation in the short term, sometimes in their regulatory frameworks. And it is true that our model makes it possible to take up the impact we might get from inflation for the forthcoming regulatory period.

And at the moment, we're discussing this with the regulator to see if it's possible to amend the current regulatory framework in order to incorporate this extraordinary impact that we're seeing with such high inflation on our regulatory model in the short-term, and also the incorporation of the remuneration for work in progress.

Now that has been brought up and is going to be used for what we have into [Redeia]. And that could be applicable as well. Why not? 2 other significant projects like the possible interconnection with France or other high-level projects, which are quite a long way ahead in their planning. So I'd say that the regulator is receptive to our arguments about the extraordinary environment that we're working in. So we're talking with them in order to improve the regulatory framework above all in these 2 aspects [the EU] mentioned.

And then your second question, the possible speeding up of investment. Well, obviously, for Redeia, the absolute priority is to accompany the energy transition, and that's in our strategy plan, which gives an estimate for the possible roll-out of investments related to planning. So you've seen that. And with the sale of Reintel, I think we've managed to shore up our balance sheet for Red Electrica de Espana in order to roll-out its CapEx. So we're not expecting to see any need to rotate assets in order to get a more robust balance sheet than what we've already got in Red Electrica de Espana in order to carry out its investment program.

We've got a balance sheet, which is sufficiently robust to deal with any investments that are required for the transition, and that's an absolute priority for us. And we don't really see any need to start thinking about rotating assets because the financial capacity of Red Electrica de Espana is more than sufficient to cover our requirements. We have established targets for financial solvency throughout the strategic period in order to take on even more investment should needs be. And we are fully solvent in order to cover everything we have with the capacity we already have in Red Electrica.

And then finally, you talked about our EBITDA margin for the end of the strategy plan that [we set at 70%]. And I think that although right now, we're showing higher margins, you should remember that in 2024 and '25, there will be a readjustment because of the assets that we have, and we'll have to contain some of that impact. But -- if you look at the operating income, we will have to maintain that and be efficient, so that in 2024, '25, we will nonetheless see a drop in that margin.

So at the moment, yes, we are going through a positive period this half year with our efficiency policies working as well. But nonetheless, the plan we have for 2024 and '25, will mean that the margin will go down. And we're committed to maintain that EBITDA margin of around [70%]. And that obviously has to take into account that adjustment that we'll be managing in the years 2024 and '25. Javier?

[Unidentified Analyst]

What about the Hispasat results?

[Roberto García Merino, Chief Executive Officer]

Oh, yes. In Hispasat, we have good news, too. I think that after having managed complex years with COVID and the problems of mobility and such like, right now, there's growing demand for satellite services, and we're seeing that in Hispasat. And really, we're taking on very interesting projects through the Company, which is giving excellent results.

As you've seen in our EBITDA, we are managing the universal connectivity service for the high connectivity that we're going to be providing. And I think it's going to be a beautiful process. It can have a very positive impact on the bottom line for Hispasat.

The activity in Latin America is also performing very positively. And we've got the Amazonas Nexus satellite, which is being manufactured, and that will mean that the revenues of the Company will go up and that will be consolidated over the time. So in 2022, EBITDA should be higher than the EBITDA we got last year, and that is a sign that the needs for connectivity and satellite services from Hispasat are increasing.

Demand is going up, and we're seeing the results of that for the year-end and for 2022. We -- as we've said in the presentation, we're expecting to see a positive performance in the Company's EBITDA.

[Emilio Cerezo, Chief Financial Officer]

And can I just add, Roberto, that the results of Hispasat are very sound, in line with those of the previous year, slightly higher and the exchange rates are favorable with more organic growth than we had last year. And so we're satisfied with the business. If you look at the bottom line, there is, yes, a slight drop against last year. But fundamentally, that's due to one-off non-recurring aspects. Hispasat last year had a contribution to -- from its subsidiary, Hispasat. And also, we look at the results of last year with the application of certain non-recurring tax impacts, which we won't have this year.

And coming back to what Roberto said, the Amazonas Nexus satellite is getting good tax rebates, and we benefited from that last year and getting even more from it this year.

[Roberto García Merino, Chief Executive Officer]

No more questions then on the Spanish channel. So let's hand over to the English channel for questions in English.

[Operator]

The first question comes from Arthur Sitbon from Morgan Stanley.

[Arthur Sitbon, Morgan Stanley]

The first one is on the critical maintenance cost budget. I think in the past, you had mentioned [€80 million] accumulated in 2022 and 2023. I was wondering if you were confirming that budget or if that budget has evolved over the past few months?

The second question is on Brazilian transmission. You're mentioning that you have involvement there. I know it's quite a competitive market. So I was wondering if you could help us with your assumption or your targets in terms of real returns targeted in this segment?

And the last question I have is on the CapEx in Spanish transmission based on the numbers that you are disclosing for 2021 to 2025, I suspect you may be close to €1 billion of annual CapEx at the end of the period. I was wondering if this sounds fair to you, and if this is something we should extrapolate the second part of the decade?

[Roberto García Merino, Chief Executive Officer]

Arthur, thank you very much for those questions. Your first question about that special maintenance plan that we announced a few months back. Yes, the volume of activities that we suggested, yes, is exactly the same, 2022, '23, yes, total €80 million. That is the figure overall. For the work to make -- to carry out maintenance on those critical assets, there's certain to be able to ensure we have security of supply. And so it's just a 2-year plan, and it's for that €80 million budget, and we've already carried out some of that work in the first half of the year.

So some of the impact of the plan could be seen in this first half of the year, but you'll be able to see, as we move into the second half of the year in 2023 on a straight-line basis, how we roll-out that plan with that investment. I said it's a very specific ad hoc plan for 2 years with that [€80 million] budget investment, which has already had an impact, as you've seen in our first half year results.

Then the question about Brazil and investment in Brazil. I totally agree with you. Brazil is an opportunity for investment, a very attractive investment opportunity for transmission for international investors, both 4 projects already ongoing and also 4 new concessions, new tenders that have been announced recently. There was one actually for a number of tenders that did attract top caliber bidders and our experience there with our international partner that is very positive, but we have that vehicle that we have that -- with that Company.

We have set out redefined about €125 million in our strategy plan already. But in Brazil, we're seeing further opportunities, which could generate added value for the Company, and we're tracking those opportunities, as they come up. And quite clearly, Brazil is something, an area we're focusing on us in our international business for further investment. We are constantly on the watch for opportunities. And I don't think it would be odd given our strategy plan that we would increase our investment there through Argo.

The returns that we're getting in Brazil are higher than the returns we're getting in our regulated business in Spain. And of course, the investment environment, the context in Brazil, I'd like to -- [our view], is highly secure, very protected with those high return rates, and we're seeing in the experience of the activity with Argo recent years, but that is the case. Brazil is an attractive market. Of course, we have certain parameters there, that we -- that we have set out those thresholds, as part of our strategy plan that we presented last year.

And then your third question was about our CapEx, our investment plan. That €1 billion ballpark figure is a midterm target. Quite obviously, we have the planning that has just been approved, and we will be -- we did our proprietary work there, but it's all about timing and deadlines. We have to work on this part of the process, the permitting process. And then we have a commissioning work to do or even though we are stepping up what we're doing, we're speeding up as much as we can. I think it will take us 2 years, maybe even 3 years to deliver on those minimum investment CapEx thresholds.

The good news is that if we've looked at the national plan investment figures for Spain, and we've also looked at what is going to be needed for the energy transition. And in the mid and long-term, the €1 billion investment figure might just continue to be an average figure following on from 2025. So we still have a couple of years to roll-out investment that have got €1 billion. And then as of that figure, that cruising speed of €1 billion might still be valid to cover all of those investment [metrics] for the National Energy and Climate Plan in Spain and the transition plan.

[Operator]

The next question comes from Antonella Bianchessi from Citi.

[Antonella Bianchessi, Citigroup Inc.]

Just a quick question. The first one is, if you can give us your view on the return that you can achieve on CapEx? The second is, which is your cost of capital in your view? And the third is, do you see a scenario, where in a rising rate environment actually, your CapEx plan might turn out to be value destructive. And in this case, what the Company would be ready to do, how much flexible you are on CapEx, which type of intervention or you will just go ahead with your CapEx plan? Is the CapEx flexible or -- and depending on rates or once it's committed that you have to go ahead on [CPS].

[Roberto García Merino, Chief Executive Officer]

Well, thank you, Antonella. If you wish, maybe I'll answer your last question and then, Emilio can talk about the cost of capital. Okay, then. Right, inflation, how does that affect our CapEx plan? I think the regulatory framework we have protects us, recognizing that there can be an increase in inflation, and there's a high percentage of our investment plan that's what we call one-off projects. These are projects that don't have standard parameters. And so they're managed with recognized cost. So that's something that the regulator has to approve.

But in the framework that we work in, in which all of our investments are subject to a cost benefit analysis, and they are all profitable for the system. We don't think the regulator will have any problems in recognizing the increases in investment that we might need because of the impact of inflation. We've already seen that in the first cases that we've had to manage.

And then the part of the investment that isn't for one-off projects. Well, there, we have a mechanism that recognizes half of the possible overruns on costs that we get because of increasing in prices above the standard prices that are regulated. So on that side of things, the mechanism recognizes at least half of the potential overrun of costs. And we're also working with philosophy of looking at things in the long-term with contracts for supply, which cover a medium to long-term, and that protects us against the increase in inflation, which is really a short-term impact for other activities, that's important. But we are protected by this long-term supply contracts. So perhaps for us, the impact is less intense.

[Emilio Cerezo, Chief Financial Officer]

Yes. Thank you, Antonio, for your question. The cost of capital. It depends what business we're talking about. The biggest business for us is the transmission business in Spain, the cost of capital here is [558], which is [4.2] after tax, and that's reasonably applicable in the current circumstances, where we're seeing that some of the interest rates are higher, but we could say our cost of capital is approximately around those figures.

And in general, in our investments and what we're commissioning in Spain, the IRR on the project we are obtaining is usually higher than the cost of capital that we have in other businesses, which aren't regulated, telecommunications and our international business using the methodologies that we've already talked about. Our cost of capital is higher with higher-risk associated to the investments. And obviously, we are monitoring our cost of capital and updating them according to the circumstances and adapt2ing the kind of returns we demand on our investments to the context of the cost of capital that we have in -- right now and in the future.

So basically, to sum up, we are always trying to get value from our investments. We're always working on that. And to-date, and we've done that. And we think in the future, we'll continue to. And the internal rate of returns that we get have been and will continue to be higher than the cost of capital, which is the whole point of making investments.

[Roberto García Merino, Chief Executive Officer]

The final question has already been answered. So I think we can then declare that we have finished this presentation of results for the half year. The Investor Relations team is here, if you've got any additional questions. So many thanks for being here with us today, and have a good summer.