Enel SpA

MIL:ENEL

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Enel Q1 2023 Results Conference Call. At this time, all participants are in listen-only mode. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Monica Girardi. Please go ahead.

[Monica Girardi, Head of Group IR]

Thank you, and good evening, ladies and gentlemen. Welcome to our first quarter 2023 results presentation, which will be hosted by our CEO, Francesco Starace; and our CFO, Alberto de Paoli. In the presentation, Francesco will provide some highlights of the period, while Alberto will walk you through the operational and financial performance of the group. Following the presentation, we will have the usual Q&A session. We ask those connected to the webcast to send questions only via email at [e-mail].

Before we start, let me remind you that media is listening to both the presentation and the Q&A session.

Thank you. And now let me hand over to Francesco.

[Francesco Starace, CEO]

Thank you, Monica, and good evening, everybody. So let's start with the highlights of this period. 2023 starts with a very strong operating and financial performance that offers ample visibility on the evolution of the rest of the year, improves the solidity of our business fundamentals. EBITDA is up high double-digit versus 2022 has reached a EUR5.5 billion benchmark on the back of a less volatile environment that is allowing the group to show in full its industrial growth potential.

FFO is robust and accounts for almost EUR4 billion with an EBITDA conversion into FFO at around 70%, well above the historical trend for the first quarter. The execution of our EUR21 billion strategic repositioning program is well on track with deals closed in 2022 or agreed more recently, totaling around EUR11 billion, of which around EUR4 billion still to be cashed in. This positions us early in the year already halfway through the completion of the target.

The solid operating performance, the strong FFO conversion and the progress made on the group strategic repositioning and there have been ample visibility on the evolution of the coming months and supports our strong confidence that 2023 targets will be achieved. Operating delivery came in quite strong as well.

I am now on Page 3 of the main business KPIs. Our developing machine continues to de-risk, enhance generating capacity. This has increased 4,500 megawatts over the last 12 months. The share of renewable capacity on total is now close to 70%, providing further support to our integrated business commercial strategy that can benefit from the high share of sales covered by our own production, which now stands at around 90%.

The electrification trend continues to accelerate leveraging on new services and infrastructure. Storage behind the meter is up 1.3 times versus previous year. Public charging points reached 23,500, up to 1.2 times. Our effort in the digitalization of the distribution network resulted in grids of higher quality with the average interruption rate down by more than 14%.

Now I will hand over to Alberto that will walk you through the details of the operating and financial performance. Please, Alberto.

[Alberto de Paoli, CFO]

Thank you, Francesco. I will now start with a snapshot on our investment in the period. I'm now on Page number five. In Q1, we deployed investments for around EUR3 billion. In particular, EUR1.8 billion was allocated to support our integrated strategy with renewables accounting for 1.4% and the remaining portion to customers' development. EUR1.2 billion were allocated to grids.

From a geographical perspective, around 70% was devoted to Europe, with the lion's share spend in Italy and accounting for around 54% of total, followed by Spain and the remaining 30% in LatAm and in the United States. Around 65% of the total was spent in core countries and in continued operations, while the remaining portion worth around EUR1.1 billion is mainly associated with investments in non-core countries and on assets included in the strategic repositioning program is not impacting net debt after their disposal.

Let's now move to the main drivers of the EBITDA evolution on Slide number six. As you can see, we posted an EBITDA of EUR5.5 billion, marking a sound 22% growth year-on-year. Looking more closely to the components of this growth, the management of the integrated business stood at EUR3.3 billion, EUR750 million higher than the same period of last year, marking a notable 27% growth year-on-year in a normalizing external context.

In particular, generation is up EUR400 million, driven by EUR300 million growth in renewables on the back of three terawatt hours, increase in volumes and higher hedge prices partially offset by the clawback measures implemented in Italy. And EUR100 million contribution from conventional generation, mainly associated with the higher thermal margin in Iberia, partially offset by the effect associated with the deconsolidation of the asset in Russia and Brazil.

Customer activities filled a remarkable EUR900 million growth year-on-year, driven by the retail operations in Italy and Spain, which are now benefiting from the increase in volumes recorded last year and from the rebound of all the negative dynamics that affected 2022 evolution.

And finally, portfolio optimization is down EUR600 million as a consequence of the stabilization of the price environment. Networks stood at EUR2.2 billion, up EUR500 million versus last year. Benefiting from the recognition of the higher costs recorded last year in Romania, the tariff indexation and higher volumes distributed in LatAm, excluding the perimeter effect from disposal and the higher regulatory remuneration in Italy. The non-recurring component associated with the stewardship business model is negative for around EUR200 million as in the first quarter 2022, we recorded the gain from Ufinet disposal.

I will now drive -- dive into the EBITDA evolution of the integrated business by geographies, and now we are on Slide number seven. As you can see, the result of the integrated business is EUR3.3 billion in the first quarter of 2023, with an increase of 27% versus the first quarter of the last year. Italy is down overall EUR200 million, as I will comment in the next slide. Iberia, here the integrated margin contributed positively EUR700 million. This is a result of the recovery of the retail free market segment, the positive contribution from the renewable generation and the higher contribution of the conventional generation and trading on the back of improved thermal margins and the positive impact from the portfolio of gas contracts.

Latin America is up by around EUR100 million, mainly as a result of renewable volumes, which are up by 14%, thanks to the new capacity built over the last 12 months and the indexation of the PPA contracts. North America is almost flat year-on-year. While rest of Europe increased EUR100 million as a consequence of the positive resolution in Romania of the regulatory measures that have impacted 2022.

Let's now deep dive into Italy in the next slide. I'm on Page number eight. In Italy, the EBITDA associated with the integrated business stood at EUR1 billion in the first quarter. The main moving parts were as follows: power free recorded a remarkable increase of EUR600 million on business dynamics that I will detail in the next slide, and which are mainly associated with the retail business. In light of the underlying evolution, we see power free in Italy at the end of the year to land in the EUR4 billion to EUR5 billion range, in line with our plan.

The item of power regulated proved flat year-on-year on the back of a stable contribution of the regulated plants and retail. Gas recorded a positive EUR100 million increase associated mainly with the last year price review of some contracts and the higher marginality of the retail segment. The positive dynamics of the power free and gas segments were offset by the commodity portfolio management accounting for minus EUR900 million. These negative results is mainly associated with two main factors. One, the normalization of the commodity price environment we observed in the first-three months of the year; and roughly EUR400 million of purely accounting effect of the fair value of derivatives on commodities contracts, which will be fully reabsorbed in the coming quarters.

Let's now deep dive on the power free dynamics, which as said accounted for EUR600 million increase in the first quarter. I'm now on Page number nine, where you can see that the positive performance was mainly driven by a normalization of the price environment and a more balanced position between sales and generation. Fixed power sales stood at around 12 terawatt hours, almost in line with last year. This level of sales was covered almost in full by our own generation. And in particular, 7.4 terawatt hours were covered by thermal sources, four by renewables and purchases on the market accounted for a mere 0.4 terawatt hours, 1 terawatt hours less than 2022.

Despite the 1.6 times increase in the cost of sourcing due to higher commodity costs, the repricing executed last year and the management of our hedging strategy allowed us to expand 3 times the unitary integrated margin, which is now moving to a more normalized level. Churn rate came in at 9% lower than our expectations.

I will now dive into the EBITDA evolution for grids on Slide number 10. Ordinary EBITDA for network stood at EUR2.2 billion, a 29% increase versus last year. Going in details by country, Italy increased by around EUR100 million, thanks to higher regulatory remuneration mainly associated with the higher RAB contribution and the tariff indexation to CPI. Iberia is flat year-on-year. Romania contributed positively for almost EUR300 million due to the recognition of the higher costs accrued in 2022 needed to cover network losses. And Latin America contributed for EUR100 million, mainly thanks to tariff indexation mainly in Brazil and higher volumes of energy distributed in Brazil and Argentina.

I hand up this part on business performance with some operating achievements of the grids on Slide number 11, where you can see that excluding the perimeter effect from the sale of Goias in Brazil, volumes of electricity distributed would have been flat. Our effort to quality and efficiency resulted into a remarkable progress with SAIDI across all grids by around 14%. Activities on network remain centered on the digitalization of the network with the installation of further 600,000 square meters in the last 12 months, resulting now in more than 60% of our end users digitalized.

Let's now continue the analysis of the results with the earnings evolution and I am on line number 12, where you can see that ordinary group net income came in at EUR1.5 billion, increasing 2% versus last year. D&A are up year-on-year for around EUR100 million as a consequence of higher amortization of [indiscernible] investments deployed while bad debt proved flat. Net financial charges increased by around EUR450 million year-on-year, out of which EUR160 million associated with the -- an accounting effect of FX dynamics in LatAm currencies. The remaining EUR290 million splits as follows: around EUR110 million for higher financial expenses on that due to the increase of around EUR7 billion in gross debt versus March 2022. Around EUR80 million related to a worsening scenario on interest rate environment affecting the unhedged part of the debt, roughly 20% of our total debt.

And finally, around EUR100 million in other financial expenses because of a higher amount of charges related to the temporary managerial action implemented to stabilize working capital dynamics on the back of an higher turnover that we have registered last year because of the energy crisis. For the coming quarters, we expect financial expenses to soften and lending at levels in line with the plan. Thanks to a decrease in the level of gross debt and the reduction already visible year-to-date of the cost to manage working capital dynamics associated with the normalization we set -- the normalization of the energy context.

Income taxes are slightly higher versus previous year due to better results achieved. And finally, the higher level of minorities is associated with the improved contribution from Iberia and rest of Europe and LatAm compared to the results recorded in Italy. On the minorities evolution, we see a progressive pickup of the Italian operation. And as a consequence, we see here a level of minorities on total group income decreasing in the next quarter from 26% at the end of March to roughly 15% at the end of the year.

Now I move to the cash flow on Slide number 13. As you can see, FFO stood at EUR3.7 billion, showing a sound EUR4.3 billion increase versus the first quarter of last year, thanks to the improvement in working capital dynamics, which are now back to a recurring evolution. The quarterly cash conversion was around 70% stronger than the historical Q1 trend of around 50%.

Deep diving into the working capital, the dynamics and the underneath it can be summarized as follows: government and regulatory measures had a positive impact for around EUR2.2 billion, also thanks to an initial reinstatement of system charges into the builds in Italy. EUR400 million impact is from the energy market context, showing an improvement versus last year, thanks to the set stabilization of the price environment.

CapEx seasonality and other items stood at minus EUR3.4 billion, in line with the historical trends. Overall, we expect this item to be reabsorbed in -- for coming quarters by at least 50%. And finally, financial charges paid increased versus previous year by around EUR200 million, mainly for the rise of interest rates, while taxes were slightly higher versus previous year.

Before we move to the net debt, let's take a closer look at pending government measures that have still to be collected. I'm now on Page 14. Over the course of 2022, working capital, as you remember, was affected by the pileup of measures to tackle the energy crisis in Europe, which, at the end of the year accounted for EUR5.4 billion. As of Q1 '23, this number reduced to EUR3.2 billion, mainly associated with system charges in Italy for around EUR1.6 billion, the coal and gas stop for around EUR500 million and the gas price gap in Spain.

The reduction versus '22 is driven by Italy with a decrease of around EUR2.3 billion versus the end of 2022 after the partial restoration of system charges into the energy bills and the reabsorption of the impact deriving from the equalization mechanism on the back of market price evolution. In Iberia, we recovered around EUR300 million. While the EUR400 million worsening in Romania is driven by the cap on the supply business.

We move now to the progress on the group repositioning on Slide number 15. Following the leap forward of our simplification effort in '22, as expected, we are off to a strong start in 2023. LatAm restructuring is running ahead. We have sold the thermal generation assets in Argentina, and we have agreed the sale of distribution, retail and Enel's asset in Peru.

From a multiple perspective, worth to highlight that the sale in Peru was agreed at around 14 times EBITDA, signaling the high quality of the assets. Based on current exchange rates, the two deals have been agreed for a total consideration of around EUR2.8 billion and a positive net debt impact of EUR3.2 billion. On Eastern Europe, we agreed the sale of the asset in Romania to PPC for a total consideration of EUR1.3 billion and an impact on net debt of around EUR1.7 billion. The closing of the deal is expected by the third quarter 2023.

And now looking to execution of the broader disposal plan, and I'm now on Page number 16. Deals already closed or announced year-to-date accrue for a total of around EUR11 billion net debt impact, positioning us more than halfway through the EUR21 billion disposal foreseen for the '23-'24 period.

Out of the EUR12.2 billion plan for 2023, EUR5 billion have already been announced. EUR2.8 billion will come from deals that are currently under advanced negotiations and that we expect to announce by the first half of 2023. The rest is associated with deals that are already ongoing and at various stages of progress, but that we expect overall to be announced by the third quarter of the year. All these are expected to be closed and cashed in by year-end.

Let's now move on now to net debt on Slide number 17. Net debt stood at EUR58.9 billion. Over the period, CapEx was fully funded by FFO, recording a positive difference worth around EUR700 million. This is worth to highlight that assets under disposal are included in the CapEx figure and accounts for around EUR1.1 billion in the period where their contribution to the FFO is limited. Dividends paid in the period amounted to EUR2.1 billion, while foreign exchange dynamics were only marginally positive, recording an impact of EUR500 million. Active portfolio management contributed only for EUR1.2 billion as the bulk of the deals announced so far have yet to be closed.

Accounting for the agreed financial terms, the pro forma net debt would have stood at around EUR55 billion, down EUR5 billion versus full year 2022. The debt management, coupled with the strong economic and financial performance resulted in an improvement of credit metrics with FFO on net debt over the last 12 months at 23% versus 15% of the last year. And net debt-to-EBITDA at 2.9 times. We're on track to reach the 2.4 times, 2.5 times at the end of '23, in line with guidance. The stage of completion of our repositioning plan coupled with the visibility over the underlying dynamics of the business plan, both extremely well for the target lending point of EUR51 billion, EUR52 billion we have in our guidance for '23 and that we see comfortably at reach.

Financial solidity was instrumental to the extreme volatility of '22, and it improved further in Q1 2023. We are now on Slide 19, where you can see that along 2022, the group had to financially manage 3 black swans at the same time, merging coal requirements triggered by severe commodity fluctuations, the measures introduced by governments as well as the impact from the broader energy market context. All these factors peaked in August last year when we recorded around EUR21 billion impact. The financial discipline followed in '22 allowed the group to remain unscaled by this unprecedented situation, which has instead severely affected other players, leveraging also on our ample available liquidity.

In the last quarter of '22, the impact was reduced by EUR6 billion. And in Q1 '23, this has further decreased by additional EUR6 billion, thanks to a sharp margin COVID action, the removal of some government measures and the evolution of energy prices. Our total liquidity as of Q1 '23 stood at more than EUR30 billion, almost in line with December '22 and worth highlight that this does not include the EUR12 billion credit line signed with SACE that can be used in case of a further increase in margin call requirements.

On the back of what we have observed and managed, let us turn to full year guidance on Slide 19. The quarter of the year has progressed in line with our expectation and the visibility we have for the rest of the year allow us to be fully confident in reaching the targets provided back in November '22. As a matter of fact, the evolution of the business proved strong in a normalized environment and the business growth translated into strong economic and financial results. The strategic repositioning program is well on track. So we confirm EBITDA to land in the 20.4% to 21% range, net income in the 6.1% to 6.3% range, net debt in the range of EUR51 billion to EUR52 billion and FFO on net debt at 28%.

I'll now hand over to Francesco.

[Francesco Starace, CEO]

Thank you, Alberto. As you observed, the turbulence of '22 is receiving. The strength of our business model is indicated by the results of this quarter. You know the inertia of this cycle provides great visibility going forward in the year. Strategically, Enel is positioned to benefit from the ongoing accelerated trend towards decarbonization and electrification of the main economies of the world.

The nine years I've passed with you on this job, have been all very satisfying. They've have been all full of excitement for the wonderful development of this group. And I am convinced that the next years will be equally satisfying and wish you all the best success with -- following the evolution of Enel.

Thank you, again. Monica, it's up to you now.

[Monica Girardi, Head of Group IR]

Thank you, Francesco. Before moving into the Q&A session, let me clarify that I will pick up only questions related to financials, and that any questions related to governance and the functioning of the upcoming AGM will not be answered by the management.

I'll start with the set of questions that arrived through our e-mail address, all for Alberto. The first one is on guidance. There is a set actually of the question on guidance. The first one is on 2023 targets that have been confirmed. Can you walk the market through the moving parts to reach the EBITDA and net income that you target?

[Alberto de Paoli, CFO]

Well, as we said, we have an ample visibility so to be in reach of the target we set. If we start from the first quarter EBITDA at EUR5.5 billion to reach the guidance, we have to account for around EUR15 billion, EUR16 billion of cumulated EBITDA ending three quarters. As of today, we see the integrated business that will perform in line or better than the first quarter where we accounted for EUR3.3 billion. So we can achieve easily a EUR10 billion increase in the next three quarters also because power free will continue to recover, and this recovery will also offset some negative impact from hydro availability that we are experiencing in the first quarter.

Grids will see a more normalized evolution versus the first quarter because in the first quarter, we have accounted some assets that will be deconsolidated at the end of closing, and some -- like in Romania, some results related to the recovery of the losses of the last year. So this is -- so the visibility we have, that is driving us to have full confidence in reaching our targets for the group net income. We see no deviation from expectation and therefore, in line with EBITDA dynamics. We can easily confirm also the target levels at the group net income.

[Monica Girardi, Head of Group IR]

Thanks. The market is pointing to potential upside to target. What needs to happen to have an upgraded guidance?

[Alberto de Paoli, CFO]

Well, I think you saw that the business is performing strongly, particularly in the integrated business. And this is leaving an upside potential. Said that, we still see a lot of moving parts which may, at the end, played out differently than expected, for example, in the hydro production, government interventions. And so as of today, we can therefore confirm the numbers we shared with the market in November, adding, as I said, they are highly visible and achievable.

[Monica Girardi, Head of Group IR]

Okay. Net debt for 2023 has been confirmed at EUR51 billion, EUR52 billion. What are the possible upside that could bring that further down?

[Alberto de Paoli, CFO]

Well, I can confirm that EUR51 billion, EUR52 billion we have in our guidance for '23, we see this level comfortably at reach. Upsides, if the underlying dynamics of the business continue to be as good as in the first quarter and if no new government intervention come and the reabsorption of the past year's intervention will continue in the next quarter, we might probably see some upsides versus the target.

[Monica Girardi, Head of Group IR]

Next question is on financial expenses. Financial expenses appear to be higher than expected. Can you provide more color on the driver for the Q1? What is the projected level for year-end?

[Alberto de Paoli, CFO]

Well, I'll reply what I said in the presentation. Yes, so financial expenses are up versus the first quarter '22 because -- mainly for a higher level of gross debt versus the third quarter of last year. And this is coupled with a worsening scenario of interest rates that are affecting our high-edge portion of debt that is roughly 20% of our total debt.

Now -- so looking at for the year-end, clearly, now we are bringing forward our strategic repositioning, and this will contribute to the reduction of the gross debt. So we expect for year-end financial expenses to be on the -- in the range of EUR3.1 billion. Worth to highlight and stress that 2024, the steep reduction in debt that will combine with the normalization of the interest rate and energy price that will affect our total turnover, will drive cost of debt down and in line with what our strategic plan envisages.

[Monica Girardi, Head of Group IR]

The next question is on the level of minorities in 2023. What is your expectations?

[Alberto de Paoli, CFO]

Okay. So this is another reply. In the first quarter, the impact of minorities has been 26%. There is approximately EUR500 million. What we expect is this 26% to going down to 15% at the end of the year because of a different geographic mix of our results expected for the next quarter. This 50% that is roughly approximately EUR1 billion for the whole year will drive a lower impact on net income, so we'll drive our net income up.

[Monica Girardi, Head of Group IR]

This grid -- a set of question on disposals. So this grid are showing higher multiples versus plan expectation. Will you end up doing more than EUR12.2 billion or you will still stick to the number and cancel some of the ongoing transactions?

[Alberto de Paoli, CFO]

Well, yes. So first of all, blended multiples have been as of today better than what we put into the plan. And this leaves us with a certain degree of optionality. Now given that most of the deals are still under negotiations, we have not still have enough visibility today to change what was originally planned.

[Monica Girardi, Head of Group IR]

Okay. About the business, CapEx is up year-on-year. What is the expected level of CapEx over 2023?

[Alberto de Paoli, CFO]

Well, we do confirm to have -- we will have a CapEx spend of around EUR13 billion, as said during our Capital Market Day presentation.

[Monica Girardi, Head of Group IR]

Okay. We move to rest of Europe, which benefited from the regulatory agreement in Romania. How much more is expected to come from this segment in coming quarters?

[Alberto de Paoli, CFO]

Well, we are not expecting any other changes in the regulatory framework. We will continue to apply the current regulation in distribution by capitalizing into a specific RAB portion. The negative differences in price resulted from network losses, acquisition versus recognized. Regarding supply, all the customers are capped until March 2025. We expect to recover the overdue related to the software scheme implemented by the regulator in the upcoming months.

[Monica Girardi, Head of Group IR]

Italian EBITDA, I said a number of questions here. Can you provide more color on the EBITDA of the renewable segment?

[Alberto de Paoli, CFO]

Well, first of all, performance of the renewable segment or performance of Italy must be seen first within our integrated business, that as I have shown in the presentation, saw a seven-fold increase in the free power segment. With regards to the specific question, so the negative EBITDA of renewables segment, if we isolate the still negative performance, we can allege two impacts. First, the persisting low hydro production, which caused increasing cost in electricity purchasing made by the renewables segment to fulfill the missing part of production. And second, the application of the clawback mechanism that, as you know, is not linked with the margins accrued being applied only on the price offer, so being applied only on the revenue level.

[Monica Girardi, Head of Group IR]

Power, you mentioned the power free market in Italy. Unitary margins are up by 3 times and costs are up as well. How do you expect this to play out for the rest of the year? What is the level you expect for 2023?

[Alberto de Paoli, CFO]

You saw a big margin improvement in the Q1 '23, we have -- as we have shown in the presentation. But this is still halfway through what we achieve in a normal year. Now with the commercial policy, we are adopting, we will see along '23 a progressive realignment to historical levels. Worth mentioning that we have temporarily extended also our commercial offering to include indexed pricing offers also to residential customers that in 2023, will offer a natural hedge against potential exogenous volatility.

[Monica Girardi, Head of Group IR]

Well, retail, we see in Italy, what is the level of bad debt in Q1? And how do you see it evolving in the next quarters?

[Alberto de Paoli, CFO]

Bad debt in the first quarter had a little increase versus previous year, remaining well below our expectations. Overall, the share of bad debt on billing is around 1.5%, in line with forecast. So currently, there is no material worsening in unpaid levels as we maintain a strong focus on unpaid and credit evolution, especially in Europe. And we are ready as we -- to support if and when necessary, customers with dedicated installment plans in order to manage their payment obligations.

[Monica Girardi, Head of Group IR]

What is the expected negative impact from lower hydro availability?

[Alberto de Paoli, CFO]

Well, hydro production at group level amounted to 13.5 terawatt hours in Q1. There is an increase of around 11% versus last year. And this mainly thanks to our strong recovery in Spain and a good performance in Latin America. In Italy, production was 2.7 terawatt hours. It was 8% up versus previous year, but still pointing to the expectation of a dry year.

Based on current observation, we can estimate a lower hydro variability for around 2.53 terawatt hours versus a standard year. Considering the economic impact, our projection assumes already low hydro resources and worth reminded any additional negative will be partially mitigated by the corresponding avoidance of application of the clawback mechanism.

[Monica Girardi, Head of Group IR]

Clawback measures, you just mentioned them. What has been the impact in the first quarter? And is it confirmed that clawback in Italy has not been extended to the second half of 2023?

[Alberto de Paoli, CFO]

As said, clawback application amounted to around EUR100 million in the first quarter. And so as of today, we have no evidence that the clawback will be extended further to the official expiry of June '23.

[Monica Girardi, Head of Group IR]

I'll stay with the taxes. An analyst is asking, what is the figure expected for the extraordinary solidarity contribution in 2023, referring to the EUR322 million impact, there's the difference between the ordinary and the reported?

[Alberto de Paoli, CFO]

Windfall tax in Spain is EUR208 billion, plus EUR14 billion in Romania, which has been already recorded in Q1 and EUR322 billion is discontinued operation effect. The impact of this extraordinary contribution is EUR222 billion.

[Monica Girardi, Head of Group IR]

I move back to general financials. What is the expected level of FFO for the full year?

[Alberto de Paoli, CFO]

Well, we expect an FFO of around EUR14 billion, EUR15 billion. This is based on a basic 65% EBITDA conversion and initial recovery of the government intervention that affected the FFO in 2022.

[Monica Girardi, Head of Group IR]

Net working capital, can you provide some details on the reabsorption of the impact from government measures?

[Alberto de Paoli, CFO]

As you remember, so we said that along 2022, we have been affected by a stock of EUR5.4 billion of the peak of regulatory intervention that affected our working capital. And this went down to 3.2% in the first quarter of 2023. I said, reduction, mainly driven by Italy, that decreased EUR2.3 billion. This is a partial restoration of system charges in the range of EUR600 million in initial restoration and the reabsorption of the impact deriving from the equalization mechanism, and this is on the back of the fact that the market price evolution and the price reduction drove this rate of reduction in the equalization mechanism. In Iberia, we are also in a bit of recovering part of the regulatory measure implemented last year. This is a recovery of around EUR300 million in the first quarter.

[Monica Girardi, Head of Group IR]

Can you share an updated number on margin cost and expectation of the evolution for the rest of the year?

[Alberto de Paoli, CFO]

At the end of March, we had an amount of around EUR3.8 billion, as said in the presentation. If we take the current price level, this amount is technically expected to decrease by year-end of around 70% because of technology, because it's related to the expiration of the 16 derivatives contracts.

[Monica Girardi, Head of Group IR]

There is a question around the level of carbon intensity that we expect to reach at the end of the year. If the level -- we are expecting to reach a level of 148 grams per kilowatt hour, triggering potentially a step-up for our sustainability linked bond?

[Alberto de Paoli, CFO]

Too early to answer. We have a lot of moving parts because -- now thermal production is down. But as I said, we have a low list on the other side, while we got the mandatory production on coal, if needed, for the next two quarters. And so we have to understand this mandatory if it will translate in mandatory production only, so an early call to stay with plant ready. So clearly, it's difficult to predict. Clearly, we are working to stay within the target. And that's it. So at the end we will account or would do if we will pass or not. And so in the case, we will pass the target, we will pay, as I said already, the step-up included in our bond contracts.

[Monica Girardi, Head of Group IR]

There is a clarification around the EUR400 million of derivative fair value adjustment, I think the one that we booked in Italy. Possible to provide more details around this and reverse during the rest of the year or expanding to the future?

[Alberto de Paoli, CFO]

Well, it's a technical aspect. So we have to account a mark-to-market of a specific class of derivatives, but because they provide an edge on the commodity as well as others at the time in which the contract will expire, this will be regained in the final results.

[Monica Girardi, Head of Group IR]

Sorry, I'm scrolling down all of the question. I think we are actually going close. Okay. What assets -- sorry, there is one on the discontinued operation again. What are the assets included into the discontinued operations?

[Alberto de Paoli, CFO]

For 2023, these assets in Romania and Greece, following the Russia exiting the triggered -- the discontinued operation of the East Europe for the group.

[Monica Girardi, Head of Group IR]

Okay. I think it's closed down all of the questions related to financials. Before closing the call, I need to pass the voice of people who want to thank Mr. Starace for his past years at Enel, appreciating his incredible industrial view and knowledge, creating value, not only for the financial market, but for all of the stakeholders. So on behalf of investors and analysts, thank you, Francesco.

[Francesco Starace, CEO]

Thank you. It's been a real pleasure and honor to work with all of you.

[Monica Girardi, Head of Group IR]

And with this, I end the call today. Thanks, everybody, for participating.