ERG SpA

MIL:ERG

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ERG First Quarter 2022 Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Paolo Merli, CEO of ERG. Please go ahead, sir.

[Paolo Merli, executive]

Good afternoon, everybody, and welcome to our webcast on the first quarter results. Here with me is Michele Pedemonte, our CFO, who will take you through the results in more detail after my opening remarks.

Let me summarize the key figures of the period. For the sake of clarity, those numbers are based on the continuing operations. As such, any comparison is on a like-for-like basis, that's excluding Hydro and CCGT from the scope. Results are strong and better than expected, mainly thanks to the growth of the portfolio. EBITDA, EUR 168 million, up 69% year-on-year. Significantly stronger volumes, plus almost 30% in all geographies, thanks mainly to the contribution from new assets that progressively entered into operation in the second half of 2021 and as of January 2022. In a nutshell, results reflect the ongoing growth of our portfolio of assets following significant investments in 2021.

In Italy, despite a lot of talk about extra profits, the scenario was basically neutral, as the significantly higher merchant prices were offset by negative mark-to-market of derivatives and the lower value of incentives inversely correlated to it. We invested EUR 146 million during the first quarter of 2022, which is 5x more year-on-year. A significant portion was related to the solar acquisition in Spain, EUR 96 million, whilst the remainder refers to the plans currently under construction, U.K., Poland, France, Sweden and Italy, both repowering and greenfield.

Net profit from continuing operations was EUR 84 million, more than double year-on-year, reflecting the stronger operating results and lower financial charges. Let me be clear once again, this number, I mean, the EUR 84 million does not include any windfall taxes either in Italy or in Romania, as those are temporary and extraordinary measures subsequently as accounted to say as nonrecurring items for a total amount of EUR 17 million, out of which, EUR 14 million Italy and EUR 3 million in Romania. To be even more clear, the EUR 14 million in Italy are based on a tax -- extra tax rate of 10%.

Finally, net financial position at the end of March was EUR 890 million, down significantly compared to the EUR 2.51 billion at the end of '21, mainly reflecting the cash in of the Hydro disposal.

Let's now move on the next chart, I'm on Page #5. To say that our journey forward continued over the period with some significant achievements. As far as asset rotation is concerned, we've finalized the Hydro disposal and also reached an agreement for the thermal plant sale, the closing of which is expected to take place in the third quarter of this year, subject to antitrust approval. We continued to expand our portfolio of renewable assets in Europe.

We entered in Spain with 92 megawatts of solar. And in Italy, we secured, through auction, tariffs of 97 megawatts, of which 50 from repowering and 47 from greenfield projects. Most importantly, we ordered wind turbines for a total of 240 megawatts of repowering projects in Italy, which are now finally under construction.

We entered into the storage market with the awarding of a tariff through the last capacity market auction for 2 projects, totaling 22 megawatts. We strengthened our quasi-regulated business model by closing 2 long-term PPAs with Engie in U.K., covering assets that are about to enter into operation in the coming months. As discussed during our business plan presentation, the integration of ESG into our strategy proved to be successful once again with some important connections, as you can see in the chart, such as the entry into the Bloomberg Gender Equality Index and into the Suppliers Engagement Leaderboard of CDP.

Let's move now on Page #6. Execution of our business plan is very well on track. Following the sizable investments made in 2021 and early 2022, we had about 400 megawatts of fresh installed capacity in service in the period, which drove up our operating results. This considerable step up in scale allowed us to strengthen both technological and geographical diversification even further. With 170 megawatts out of the 400 made of solar and all the 400 megawatts spread across for different countries outside Italy, as you can see from the chart.

Looking at the coming months, we expect to add further 250 megawatts currently under construction, again, in 4 different countries: U.K., Poland, France and Italy, which is the first project of repowering. This fresh capacity is going to enter into operation in a time of high energy prices, which we have now reflected in our full year guidance, which I'll discuss later on.

But before I do that, I now hand over to Michele for his review on results.

[Michele Pedemonte, executive]

Thanks, Paolo. And now let's have a look at our Q1 results. Page 8. As a premise, please note that after the disposal of our Hydro and the signing of the sale agreement for our CCGT plant, we are presenting figures on an adjusted basis including only wind and solar operations. CCGT is considering amongst the discontinued operations.

Let's start with an overview of unitary revenues trend. All in unitary revenues for wind was strongly up year-on-year in all countries where we operate, with the exception of France, where we have fixed price schemes and Italy. As the rise in electricity prices have been offset on one hand by the hedging run in line with our risk policy. And on the other hand, by the level of incentive, which declined from EUR 109 per megawatt hour to EUR 43 per megawatt hour, being inversely correlated to last year electricity prices.

As regard to solar, unitary revenues in Italy was slightly up year-on-year, thanks to rising electricity prices, partially offset by hedging. Overall, a positive scenario in particular for our foreign countries.

And now a focus on production. Italy production at 706 gigawatt hour, plus 7.5% year-on-year due to better wind conditions, coupled with better sun radiation. In France, production was up 23% and to 322 gigawatt hour, thanks to 8 gigawatt hour coming from the 2021 investment, M&A and organic growth that more than compensated the weaker asset base production of the period in the comparison with Q1 '21. In Germany, production was up 73%, benefiting from a generalized battery production, coupled with 42 gigawatt hour of perimeter effect due to acquisition done in 2021. Eastern Europe production was up 32%, which reflects stronger wind conditions in all the counties with Poland up 41%, Romania, 32% and Bulgaria, 21%.

Finally, we have the contribution to the portfolio of the assets based in Northern Ireland in 2021 and acquired in Spain in January of the year. This chart clearly shows that the increase in technological and geographical diversification of our portfolio, which will be further enhanced in the business plan period.

Now I am at Page 10. Q1 2022 EBITDA per country reflects the production and the trend in electricity prices. Starting from Italy, EBITDA was EUR 82 million, up year-on-year 14%, mainly due to higher wind. The strong rise in prices proved to be almost neutral in Italy. As a result, has been penalized by lower value of incentives, coupled with hedging policy in the period. In France, EBITDA was up 12% year-on-year, benefiting mainly from the consolidation of the assets acquired in 2021.

Perimeter effect in France was EUR 5 million, compensated by weaker asset-based production. In Germany, EBITDA grew consistently in the quarter, due to the following items: perimeter effect, EUR 5 million, better volume, EUR 7 million and better scenario, which accounted for EUR 6 million. In Eastern Europe, EBITDA benefited mainly from rising volumes, which accounted for EUR 9 million and better scenario, which resulted in a EUR 14 million contribution. It is worth mentioning that at the beginning of 2022, U.K. and Spain started to contribute to our results for EUR 12 million and EUR 4 million, respectively.

Again, also the EBITDA showed a strong rise in the geographical diversification in the first quarter of 2022. More than half of our EBITDA comes from a diversified panel of stable European country. And this was 21% in 2021, considering all energy assets, Hydro and Thermo included. This means a more reliable cash flow generation from an analogical market point of view and also in terms of regulatory risk.

Now at Page 11, a brief overview of investments in the period. We invested EUR 146 million, an amount which is almost 5x more than what we invested in Q1 '21. CapEx are composed as follows: about EUR 96 million of M&A related to the recent acquisition in Spain, 92 megawatts of solar assets. And about EUR 51 million related to organic CapEx in wind, referred to construction activities, mainly in U.K., Poland, France and Sweden. It includes also EUR 21 million of CapEx in Italy for the starting of construction of the repowering projects at [ Camp-Monreale ], Partinico-Monreale and the beginning of the solar revamp in coupled with the greenfield project at Roccapalumba in Sicily.

Let's now move on to financials at Page 13, commenting on profit and loss on a recurring basis. I have already commented on EBITDA. Here, we have higher depreciation of EUR 5 million that reflects the contribution of the new assets, so a perimeter effect. Net financial charges at EUR 6 million versus EUR 8 million in Q1 '21, thanks to a lower cost of gross debt, mainly following the issuance of our third green bond in September last year and to all operational of liability management brought forward during last year.

Tax rate in the quarter was 22%, against 20% in Q1 '21. Taxation in the quarter is not including the effect of windfall taxes in Romania and Italy as they are accounted as nonrecurring items. I will show you the impact of this taxation for ERG in the next dedicated slide.

As of January 2022, CCGT is consolidated in discontinued items, with a contribution of EUR 5 million. As a result of this, adjusted net profit amounted to EUR 89 million versus EUR 65 million last year.

Now I'm on Page 14. And now I comment on the windfall tax, the Italian government is implementing in Italy. First of all, this starts to the best of our knowledge as of today, does not apply to effective earnings, but the difference of the VAT balances recorded during the period October '20-March '21 compared to the period October '21-March '22. The VAT balances do not consider the hedging transactions and the incentives. These extraordinary tax is intended to allocate extra profits deriving from exceptional high electricity prices in the period due to the benefit of Italian assets.

As already explained in previous slides, we didn't get any extra profit increase as we had a neutral impact from price trends due to the hedging policy, which is usually negative in the context of rising electricity prices, in addition to the trend value for incentive. So figurative EBITDA in Italy was only EUR 40 million up, due to higher volumes, coupled with lower depreciation. It is particularly frustrating that in such a context where we do not have any extra profit led by electricity prices, we have additional taxation to the tune of EUR 14 million, with windfall tax rate at 10% or EUR 35 million with windfall tax at 25% as rumored. In this scenario, the most probable one, the tax rate reaches an unreasonable 90%.

So in a few words, tax out of any logic against Italian constitution, with the only outcome to increase country risk and to be again [indiscernible], which is crucial to fight the climate change and for reliable power market.

Finally, let's take a look at the cash flow statement at Page 15 and the net financial position for the first quarter. Net financial debt closed at EUR 890 million, close to EUR 1.2 billion down from the end of 2021. Starting from the left, where the cash in from hydro disposal, the effect of Thermo and Hydro net financial position deconsolidation than our EBITDA the investment made over the period of change in working capital, financial charges and others. A strong deleverage as expected, that gives us the flexibility to accelerate our growth in wind and solar.

I think I have touched on all the relevant items. Thank you for your attention. I will now hand over to Paolo for his final remarks.

[Paolo Merli, executive]

Thanks, Michele. Here, we are with guidance for 2022. We revised the EBITDA range upward by EUR 50 million. And therefore, the new range is EUR 450 million to EUR 480 million. The upward revision is mainly due to the stronger contribution we experienced during the first quarter and coming from the new installed capacity and the contribution that we expect in the -- for coming months coming from the further new installed capacity, which is about to enter into operations in, I said, against a backdrop, say, of a favorable price scenario.

CapEx remains unchanged compared to the previous guidance, with a range of EUR 420 million to EUR 480 million. Investments are almost entirely related to assets under construction and the acquisition closed in Spain at the beginning of the year. So here, in this number, there is no further assumption of M&A, which, as you know, are a little bit unpredictable at least till the moment of closing.

Net financial position based on the assumption of EBITDA and CapEx is confirmed within a range of EUR 750 million and EUR 850 million. So we expect that the higher EBITDA, net of tax will be more or less offset by the negative effect of the windfall taxes in Italy and Romania, which prudently or cautiously, we have decided to insert in our cash flow. As well as the higher negative mark-to-market of derivatives.

Before starting the Q&A, I'm glad to say that Fitch has just issued, a few minutes ago, its rating letter confirming our investment grade rating, BBB- based on the '22-'26 business plan. But most importantly, the agency revised upwards the threshold of FFO net leverage ratio from 4.2 to 4.4, which basically means more financing power for the company. The upgrade, reading the letter, reflects our execution, the asset rotation strategy, the acceleration of the geographical diversification process, the solidity of our infrastructure business model, the extension of the average life span of the incentives, as well as the recent track record in the PPA market and the award of auctions in Italy for greenfield and repowering plants. So I think it's a key achievement for ERG that recognize the validity and resilience of our business model. Very happy of this.

Thank you very much for listening, and now, we are ready for -- to take your questions.

[Operator]

[Operator Instructions] The first question is from Enrico, Bartoli with Mediobanca.

[Bartoli Enrico, analyst]

First one is related on some details as possible on your capacity to include in your revenues in the energy prices in the main European countries where you operate, particularly. I don't know -- in that, for instance, the U.K., if I'm right, you have some beta contracts, the price was close to the base load that the same was also related to the Eastern countries. So if you can provide some details on how your contracts are leveraged to the current scenario. And if this level of prices can be the considered sustainable over the next quarters?

Second question is more general on what is happening at political level in European level, mainly after the European crisis, there is a political push for speeding up authorization of renewable projects. Also in this case, if you can elaborate what you are seeing actually happening in the main countries where we operate. The Italian government, political parties have approved some measures to try to ease the authorization processes. If you are seeing actually some speeding up happening in the main countries where you are.

And the third one is related to M&A. We are very clear about what is going to happen this year in terms of organic growth. I was wondering if you are discussing any additional -- any transactions that we can easily expect over the next quarters.

[Paolo Merli, executive]

Okay. Thank you, Enrico, and very pleased to hear from you. So I try to go through your questions. So the first one was about the terms and conditions of the PPA. We have confidentiality, say, agreements on the condition. What I can say is the very last PPA we signed, which are not yet effective because are related to the assets are about to enter into operations in the forthcoming months. Are at the level -- in terms of pricing, they reflect the price of today's market. So let me say, I wouldn't be wrong to say that EUR 8,000 for 10 years is a collar then can provide you the right latitude of the market right now.

The reflection must be , I think, must be taking into consideration is the fact that PPA levels right now overtake the value of prices through auctions. So in this inflationary world, in this green inflationary world, I think regulators must accelerate their thinking about changing the auctions throughout Europe in order to make more appealing, the investments in the real world. That's my personal opinion. Otherwise, the flamboyant targets for capacity -- installed capacity in 2030 are very, very challenging.

The second one is about the simplification. Simplification is a part of the equation in the sense that the other one is the pricing has just touched the point through auctions. About simplification, it's true. Yes, the governments say, over the last 12 months -- governments because it's not just a matter of Italy. In every country where we are, in particular, in France, in Germany, in the U.K., they are trying to accelerate the permitting processes.

But still, in general, and I'm sorry to say that, but in Italy, in particular, the permitting and the landscape is not absolutely what we need. It's -- we are not where we need to be, but I think it's a fact. We started the repowering project in 2018, and now, we are reaping the benefits. But just because we launched this project in the right time, in the right moment. So for instance, in the solar, we see more acceleration, but as long as our projects require the sole authorization, which means the VIA Decree, and plus the Autorizzazione Unica yet remains a little bit painful process. But this is not jeopardizing our targets because the plan was already considering those hurdles.

And if I may, I would also be positive in the sense that the projects that we are now bringing forward are larger than the one -- already now are larger than the one in the business plan. I think you might have seen in newspaper that one of our projects has been approved, let's say, by the presidency of the Council of Ministry, which is quite a significant project and [indiscernible] is more than 100 megawatts. So in this respect, some acceleration are there. But in my opinion, not enough to ensure the country to reach the targets, the national plan have set out for [ 2030 ].

In terms of M&A, yes, you are right. In the guidance for CapEx in 2022, there is nothing about M&A because M&A for its nature, is unpredictable. I, yes, confirm that the group is working on several decisions right now. There are some more advanced than others. And for sure, the hope from our point of view is to grasp something by the end of the year, at least to accelerate the growth, but also to accelerate the reinvestments of all the proceeds that came from the asset rotation.

Enrico, I hope to have answered your questions. If not, then...

[Bartoli Enrico, analyst]

Yes, very clear. Just a follow-up on the second one. Of course, we know the situation in Italy and your comment was very helpful. But some more color on, for instance, on France and Spain. You are experiencing some faster development in terms of authorizations. So also there, let's say, things are moving a bit but not so much like in Italy.

[Paolo Merli, executive]

In Spain, for instance, we are working on some agreements on kind of a co-development approach. And we have seen a quite important step forward in the sense that as you probably know, in Spain, there is big problem on overbooking for the capacity, because every operator is booking capacity, maybe without having all the authorization to build the megawatt. And then there has been an overbooking say, of the capacity.

Now with this process called [indiscernible], they are trying to streamlining this process in order to avoid bottlenecks. And some projects we are looking at are in this kind of situation, and we are, say, confident that the country got the right fundamentals to invest. And from a solar perspective, in particular, the countries -- the ideal area for us to invest. So I would say, Spain, yes, we have seen important steps forward.

In France -- even in France, here, we have a proprietary pipeline, and we struggled very much in the last few years to bring forward -- to carry forward our projects. But right now, we have seen some accelerations, which reflects also a change in attitude for the [indiscernible], in France is basically the person in charge to give the final authorization and -- at least related to some projects we have in our pipeline, we have this kind of feedback.

Also in the U.K., there has been some changes over the last few months. For instance, till, say, mid-2021, the warrant auction for onshore installation. The last auction was opened also for onshore. We decided to go down the way of PPA because PPA is much more convenient. That's at least our analysis, even though maybe, based on base load and blah, blah, it's more convenient right now in terms of pricing compared to the -- to a CFD awarded through auction.

[Operator]

The next question is from Nash Cui with Barclays.

[Naisheng Cui, analyst]

Congratulations for the great results. Well done. I have 3 questions, if that's okay. So the first one is on dividend. I know in the past, ERG paid a special dividends, and I just wonder, under what circumstances are you going to consider a special dividend going forward? Are there any criteria you can make for that to happen? Just want to have a bit of color on that.

And the second question is on your CCGT assets. So remind me, if that's okay, where do you source your natural gas from and can you give an update on the sale process to [ ESAB ]? Do you think that is still going up pretty well? Just want a bit of update on that.

And my last question is on project development. So looking at the current market, spot power price is very high, and you have a very strong balance sheet. So it looks to me that probably, having more spot exposure is going to be very favorable, a very natural thing to do. So I wonder what's your view on that. I know PPA probably is preferred, but I just want to understand what's your view just given the current condition.

[Paolo Merli, executive]

Okay. Let me go -- let me start from your question about the dividend. So we just announced our dividend policy in March when we presented the business plan. We raised the dividend from EUR 0.75 to EUR 0.90. And I clearly said that this dividend must be seen as a kind of floor, because it's perfectly sustainable based on the bottom line expectations going forward and the stronger balance sheet the company is sitting on right now.

The special dividend, maybe in the past, we have paid a special dividend usually following a large capital gain on transactions. So I cannot exclude these aspects, but let me say I would see more likely, and that's my hope -- even my personal hope that the company keeps growing. Creating the conditions maybe in 2, 3, 4 years to revise upwards our dividend as it happened in the past. If you see our dividend over the last 15 years, moved from EUR 0.20 and then EUR 0.40 then EUR 0.50 then EUR 0.75 and now EUR 0.90. So on average, this company managed to increase it every 3, 4 years, something like that. That's my expectation. But let's see and we will discuss in 1 year, right now, we have to pay the dividend, which is I think mid -- by the end of this month. I hope anyway to have answered your question.

The second one was about the CCGT. The sales process is going on as predicted for the time being, in the sense that still remains subject to the antitrust approval. The other CP, which was the Golden Power has already cleared. So just one left, which is the antitrust. We expect to receive the so-called reversal to the Italian antitrust from the AU antitrust. And when we receive this green light, we'll proceed with the normal traditional filing to the agency. And I confirm that we expect, say, the closing to take -- to become effective over the third quarter of 2022. So that's our expectation.

There is -- about the supply of the gas, I think you touched this point. Everything is going well. Remember, ESAB as an Italian company, which is controlled from LITASCO, which is a Swiss company. And according to our understanding, there is no restrictions, no sanctions on say, on ESAB. So we are -- we keep providing them with all the utilities based on the contract we renewed last year.

The third question, if I got -- what your point is our view on the energy prices going forward. I'll say, it's quite evident. It's quite evident that prices are going up, not just because the situation in Russia, which definitely exacerbated the situation. But the trend -- this trend for energy prices started mid-2021. So we had several reflections, strategic reflections on that in the company.

The peaks in the price, we're already touching early December 2021. So I think there is something more structural. And you may remember that when we presented the business plan in May 2021, and we had, that time, the first sign of some reversal trend for the energy prices. I said, on some PPA, we are slowing down, and I was referring at that time the one we then signed just a few months ago in Scotland because we have the feeling something is going to change structurally.

Of course, Russia, the Russians invasion on Ukraine has created a very, very particular situation where climate change has been, say, taken over by the necessity of guaranteed security to supply in Russia because security means liberty, freedom and It means democracy and blah, blah. So now, all the states are changing the plan to accelerate on renewables or any other, say, solution to these dependents.

In this context, I think even though the war could finish tomorrow or in a month as we all hope, the geopolitical risk in the market is there and will remain for long. So I think the market is going to face long-term high volatility and higher prices. And it's not me saying that, it's the market saying that. Because the forward are well above EUR 100 per megawatt hour, even looking at '25 and '26. So I think that some part of this on the market have changed.

I don't know if it was that kind of the answer.

[Naisheng Cui, analyst]

Yes, that's helpful, Paolo. I guess, on the last question, I just want to follow up. Just wonder if ERG is willing to take more spot exposure? Because I guess, you have a stronger balance sheet, you can take on more risk. Are you willing to take more spot exposure, at least for the short term?

[Paolo Merli, executive]

I'll say you know that one of the hallmark of our business model is relying on a portion of revenues be backed by incentive, tariffs and so on, because this also influence the rating and the capacity of leverage of the group. But definitely, what you are seeing is a reflection we had, not now, not 6 months ago. But more than 1.5 years ago when we were elaborating our plan with the asset rotation.

Because for the CCGT and the Hydro, it was a necessity to have a knowledge and know-how about energy management. And we ask ourselves if going forward, with a more purer, say, wind and solar model, maybe we would have need just a sales department able and capable of signing PPA.

The answer was not. We have to maintain energy management know-how because through these competencies, we can optimize the way of saving energy, doing it lucky what you did. Some optimization, maintaining, for instance, PPA may be on baseload terms, not covering 100% say, of the P50. But just covering 70% and leaving some space for say, increase our cash flow and revenues, leveraging on the current market conditions.

So the answer is yes. And I think it's, yes, because of our background. Because if we were an infrastructure fund, maybe we shouldn't have -- we couldn't have that kind of competence built over the last 10 years, probably.

[Operator]

The next question is from Roberto Letizia with Equita SIM.

[Roberto Letizia, analyst]

I'll be -- I apologize, I'll be a bit more technical on the guidance and figures. So I was wondering whether you can also give us an indication. I promise I will not take it as a guidance, but just an indication on how the EBITDA at the end of the plan, maybe potentially increase from the scenario you are envisaging and is this leading you for a significant higher figure for the end of the year? Maybe just an indication of sensitivity of what can be a potential upside.

Again, I will not consider it as a guidance, but just qualitatively say what's the space to go beyond that target. What is going to be probably the EBITDA contribution of Germany and Eastern Europe, which are the one who experienced the best results in the first quarter by the end of the year? Just to get a sense on what is the upside on those regions that you're already materialized in the first part of the year. Can you remind us how many megawatts will you add through this year -- for the whole year?

And then a more general question on the M&A that you touched, you have not included. I was wondering if you feel that the current environment that -- it's a bit more stressful on the debt side, actually it improves or not the condition for doing M&A. So if you feel that under this current environment, you have more equal or less options to achieve attractive deals?

Very last one, we touched it also in the past call, but maybe you can update us over time, what's the view on potential offshore deal participation from your side, given the relevant space in your balance sheet and increasing opportunity that this is materializing also in Italy. Maybe this is a new frontier from you that may arrive in a shorter period of time than initially expected.

[Paolo Merli, executive]

Okay, Roberto, let me try to address your questions. Probably you have -- sorry, but in a qualitative way, the sensitivity is very difficult to say because the plans are really what kind of assets we are looking at, and let me try to explain better. So for instance, right now, we are -- the stronger contribution as you spotted, say, looking at the numbers came from our foreign operations. Because, for instance, in Germany, we have this year, this one way CfD, so whenever the price is higher than the tariff, you got the upside.

That's why Germany performed better than France, for instance, even though we have more assets, more megawatts in France. For instance, vice versa in France, the tariffs are kind of a feeding tariff. So it's fully blocked. Another area where we are enjoying higher contribution is the U.K. because the plants that enter into stream, say, at the end of 2021 are enjoying, say, sort of a grace period before starting the fixing of the PPA exposed to merchant. And in the Eastern Europe, we have some part of the production, which are very well exposed to the market, and that's why this area is generating good results.

Let me also say that the first quarter was quite good also in terms of anemology. So the presence of wind, especially when compared to the first quarter. So all this together gave the set of results we are today presenting to you. But the sensitivity is exactly the same I've already -- I already gave during the business plan presentation. So every EUR 10 per megawatt hour for the energy prices -- when I say energy prices, take a mix of the prices in the countries where we operate, roughly turns into EUR 10 million EBITDA, more or less, this is the sensitivity.

About M&A, I can't comment on -- but I can comment on the situation, the specific situation we are working on. Yes, you are right. The environment out there is quite complex because I think it's just the mirroring of the difficulty of growing organically because of the difficulty of the permitting, et cetera. There is a strong focus on the secondary market. So that's why we, as a company, we try to pursue a cherry-picking strategy, looking for maybe a smaller asset, where there is less -- little less competition and so on.

So that's the way we are trying to operate in the secondary market. And also, looking at some co-development agreements. And we made some steps forward in this redirection, which allow you to enter, say, in a earlier stage instead of buying pipeline and paying, let me say, not sustainable value sometimes it may seem from public, say, transactions you can find on the market.

And there was maybe, a fourth question, but I didn't write it, so...

[Roberto Letizia, analyst]

The offshore and the additional contribution specifically of Germany and Eastern Europe, please, this year. Only this year.

[Paolo Merli, executive]

The last piece, I believe, is Michele is to answer. But the offshore is not part of the business plan. But as I said, in the angle of innovation, we stated that we had -- we would have looked at it and that's what we are doing. I can confirm you that we are -- we have spotted a couple 2, 3 projects in a very, very early stage. So please don't take it as a target. They are in a very early stage, but are quite big in terms of scale. Maybe, it means a few hundred megawatts each, and we are performing some due diligence, we are performing some analysis.

But let me say, especially floating offshore for the moment is an idea because there is not yet a framework agreement, a framework -- a regulatory framework, sorry, in order to sustain the development of this technology at least in Italy. So it's unthinkable that offload -- floating offshore, sorry, can survive and can repay the capital invested with a tariff of EUR 60 or EUR 65 or EUR 70 per megawatt hour, okay?

Easily understand that the capital intensity of this technology is 4, 5x the onshore. And then it would require a specific auction ensuring the right return. If not, the investment would remain just on paper. But yes, I think the only breakthrough to reach our targets as account is to, at some point, open up this kind of technology. That's my personal opinion.

But I would see more in the, say, in the 2025, 2030 than in the first 5 years of the decade.

[Michele Pedemonte, executive]

In relation to the contribution of Germany and Eastern Europe, these 2 areas are areas where the production was very good in the first quarter. And in addition, in these 2 countries, the structure of the incentives is such that we have some exposure to the current market prices. And this is the reason why we have such a good result in Germany and in Eastern Europe in the first quarter. At the end of the year, we foresee a contribution of Germany, assuming a more production in line with budget, so not so positive as in the first quarter, in the region of EUR 40 million, EUR 50 million. And in Eastern Europe, in the region of EUR 70 million, EUR 80 million.

[Roberto Letizia, analyst]

Sorry, can you repeat the numbers? I missed it. Sorry. Just the numbers.

[Paolo Merli, executive]

Germany, EUR 40 million, EUR 50 million. Eastern Europe, EUR 70 million, EUR 80 million.

[Operator]

The next question is from Carlos Razuri with Schroders.

[Unknown Analyst]

Hello, can you hear me?

[Paolo Merli, executive]

Yes. Perfectly.

[Unknown Analyst]

Okay. Perfect. Yes, I have 3 questions. The first one is on the Slide 14, I believe, where you show the windfall tax impact. I'm just trying to understand what were you trying to show here? And if you could provide more details on how you arrived to your estimate for the for the full year impact? And also if this has already been provisioned in the first quarter?

My second question is about the cost of wind turbine components, the key purchase during the quarter. I just want to know how does that compare to your business plan CapEx?

And finally, given that you haven't rolled out more M&A, I'd like to understand more about your strategy. How do you think about acquisitions, which type of assets are you targeting? My understanding is that you've mostly acquired operational assets with a certain pipeline component, but it's mainly operational. So you're paying quite high multiples for these types of assets. Is that something that you expect to continue going forward? Or could you change that approach post your new business plan?

[Paolo Merli, executive]

Okay. Let me try to answer starting from the windfall tax. I'd say in the -- at the profit and loss level, we have, say, accounted EUR 17 million as a nonspecial item in our profit -- reported profit and loss, which refers EUR 14 million on the so-called extra profit in Italy or windfall tax, call it like you want. Based still on the Article 37 of the law measures against the conflict in Ukraine. Now, the government seems, at least, that rumors and some draft are circulating since they are working on a revision of the tax rate from 10% to 25%, extending the period to April 2022. And will be -- this article will be inserted in a new decree, so extended the timing of conversion in law. But if you want to know the general impact moving up the tax rate to 35%. The impact should be roughly EUR 35 million, EUR 40 million for the group. Out of which, EUR 15 million have already been accounted in our profit and loss.

Let me specify -- let me specify that the guidance we gave today, we are giving today to the market of net financial position, is already including the 25% assumption for the windfall tax. Okay. But I don't want to comment, but I think you all know that we are a little bit just to, for a lack of a word, disappointed by this kind of tax because it's not linked to the real profit of the group because this measure just on the items, say, relevant at purposes.

And for instance, this -- the taxable base doesn't include the negative effect of derivatives, does not include the reduction of incentives in Italy because incentives are inversely correlated to the energy price. So it's really unfair. In fact, I think the chart, Michele, our CFO, showed -- showed you demonstrates basically that applying this tax, the tax rate would be 90%. 90%. That's why we isolated say, this item as a nonrecurring because the law is a temporary measure. But again, it's not consistent with the Article 53 of our constitution, which says any tax must be consistent with the capacity of paying those taxes. So it means with the profits, not with the supplement of that items. But let's see.

[Unknown Analyst]

Can I ask a clarification before we move to the next question? So for that assumption, I understand like there's a retroactive period. I believe it's October 1 to March 31. Is that correct?

[Paolo Merli, executive]

Yes, it is correct, but that's the period through which they measure the taxable base, but everything...

[Unknown Analyst]

Even for profits?

[Paolo Merli, executive]

Everything was already accounted in the first quarter. I mean based on 10% tax. Now, if they raise it to 25%, we will make the right provision in the -- during the second quarter. Yes. But anyway, there is a retroactive period.

And another aspect, which must be considered, the comparison. Because the period -- the same period of 12 months before was right in the middle of lockdown. They are comparing very high period prices with a very low period of prices. So that's another aspect to be considering when put jurisdictional, say, claim.

[Michele Pedemonte, executive]

Maybe, an additional point in the last it is also included the potential to expansion. And this April, these additional months will be included in the next quarter results in any case.

[Paolo Merli, executive]

But let's see. For now, for the time being, it's just rumors, there is a draft. So we don't know yet what's going on exactly. So it's a little bit too early to -- but anyway, the size, the latitude is EUR 35 million, EUR 40 million. It's not the amount that is worrying us. It's the way they are trying to collect it, which is very unfair. And the consequences on the capacity of the country to attract further investments.

[Michele Pedemonte, executive]

And this is, in any case, the full year impact, because the law is a temporary measure. So we expect that according to the current load, the impact in the quarter or maybe ending April that remains in this area of valuation that Paolo just mentioned can be considered the full year impact for this -- especially extraordinary taxation in Italy.

[Paolo Merli, executive]

Sorry. The second one, CapEx. Let's see. Again, very difficult to say, not for the time being, we have just presented our CapEx plan. But for sure, this kind of situation, never seen with the price of steel that has doubled, all the materials related to energy transition are going up very, very significantly.

Fortunately, we -- the biggest part of our megawatts in the pipeline and then in the plan were already secured through, say, a framework agreement with wind turbine suppliers. We had already signed the BOP contracts in most cases. So I wouldn't see a major risk related to this business plan. But going forward, the new installments that are not yet covered by those kind of contract will have -- will be submitted to a strong pressure from the cost side, the CapEx side. That's not an ERG problem. It's an industry issue.

And it was my point before when I said that I think the regulators around the world, but especially across Europe have to think about mechanisms that are capable of attracting investments, allowing energy companies to obtain the return, which is consistent with the LCOE of the plant. That's my point. And I think the EUR 50 per megawatt hour world is not there anymore. That's the point, I think.

And M&A, what kind of M&A. On paper, if you bring me a business combination with megawatts, with the right mix of wind and solar, with the right mix of countries, with a large pipeline, some early stage, some almost ready to build, that would be the ideal target, say. Because we believe in the energy transition. We believe this is a long wave trend, not finishing in 2, 3, 4, even 10 years, but a long way secular trend, let me say.

The problem is whenever you go for assets like that, the competition is very strong. Sometimes competition comes from oil company. From big infrastructure -- infrastructural fund that maybe, have different logic compared to a company like ERG. So we have a strict financial discipline. We have our way of valuing pipelines. We have also accumulated important know-how and when we scrutinize pipelines, we can see the value that some others may be can see. Because we have maybe more strict criteria. In this, against the backdrop of this, we prefer to build inside the competencies. In fact, we have invested on our own organization, on our own pipelines, starting from scratch. And we are trying to accelerate on the co-development agreements.

So to answer your question, we are now looking more at operative assets, without excluding if there is some chirping situation pipeline. But for the time being, for us, given also the bulk of cash in our balance sheet, the idea would be to invest it in something that already generates cash flow and is fully derisked.

[Unknown Analyst]

Okay. Can I add just one final question? If you think about your own development pipeline, so what you call the repowering and greenfield projects, including this order that you place of wind turbines for your project in Italy with a CfD, what percentage of the cost save has already been locked in?

[Paolo Merli, executive]

What percentage? Sorry, I didn't get the last point.

[Unknown Analyst]

So I see like you have contracts with the suppliers of these wind turbines. I just want to understand what percentage of a cost base for your development projects has already been fixed?

[Paolo Merli, executive]

Michele, our CFO, is responsible also for the procurement.

[Michele Pedemonte, executive]

I would say that all the 2022 CapEx are under framework agreement as part of our -- in the large part of 2023 CapEx, just for the framework agreement. That's over 100% against this inflation, but it's a very strong mitigation against these inflation on CapEx. So we're speaking of 100% over 2022 and a large majority of 2023.

[Unknown Analyst]

And nothing beyond 2023?

[Michele Pedemonte, executive]

No.

[Operator]

The next question is from Emanuele Oggioni with Kepler Cheuvreux.

[Emanuele Oggioni, analyst]

Congratulations for results, first of all. I have a few questions on my side. The first one is on the hedging policy. Could you update us on the hedging policy for 2022 and 2023?

The second one is on the -- still on the cost inflation, but not as regard the risk on -- because I think the IRR is safe considering the -- which will be more than offset the current power pressure scenario. So my question is more about the risk or the disruption for the supply chain in the next few quarters. What -- if you could elaborate on that. This is the second.

And the third question is on the pipeline. If you could update on the portfolio of the projects in the pipeline, which you consider as a major pipeline.

[Paolo Merli, executive]

Michele, cost hedging and cost inflation disruption.

[Michele Pedemonte, executive]

Yes. Regarding the hedging policy, this year, we have roughly -- for 2022, we have roughly 80% of our production covered and dispersed through short-term hedging in future some similar instruments. This is to decrease to 50% in 2023.

What is important to say that with our new business -- last business planning -- business plan, we moved our hedging policy from a short-term hedging policy to a more infrastructure business model where the hedging is on the short term, but we try to target long-term hedging through PPA or as we already did in the past, thought auction and incentive. So -- and you have seen this through this year, the PPA that we closed in U.K., last year in France and also in Northern Ireland and so on. So there is a change in our strategy with the short-term hedge in future. So it remains as an optimization tool. This should be residual part of our production to be covering this way. And the idea is to have a more long-term hedging through PPAs and auction.

Regarding cost inflation, this is not an issue as commented by Paolo before. We are having, in front of us, very tough months. For sure, the supply chain is under stress. We are seeing it in different countries. The idea, again, is to -- that ERG has selected right partners. So [ First tire ] in turbine manufacturer. [ First Tire ] is a panel -- PV flier as a way to mitigate this risk. But in any case, the supply chain is [ understood ]. What I can say is that our assets under production are currently performing. We cannot exclude short-term delays. But at the moment, everything is in the right direction.

And finally, I'll leave to Paolo to comment on the pipeline.

[Paolo Merli, executive]

Pipeline, we presented the plan a couple of months ago. No major changes from that. We had -- compared to what we said in March, we had some advancement in the repowering in Italy. I mentioned the [indiscernible] project, which was in our plan, expected to enter into operation in 2026. But according -- compared to the assumptions we had a few months ago, there has been a strong acceleration because, as I said, the presidency of the council seems -- because we still have to receive Decreto VIA, but seems that have signed the approval for this project. So it's on a major acceleration.

We had some advancement also in the solar pipeline. And as I said, not just in Italy, but also in Spain. So we hope part of the securitization of the target for '25, 2016 (sic) [ 2026 ], will be covered by these new additions.

We have also -- you may remember that there is a part of the pipeline also related to storage. Now, storage seems it's becoming even more crucial because of the acceleration all the countries must put in place in order to say, substitute the Russian gas. And then storage is becoming even more important. And from this point of view, I have to say that the government has simplified very much the storage permitting and now, neither the Decreto VIA nor Autorizzazione Unica for some kind of projects are acquired. But it's just needed a [ dealer ], which is basically a communication to the commune, to the municipality. So that's something that should be streamlining very much the process. And I hope the deployment of the pipeline and at least, the one -- the projects we have already well identified.

So we are really working on several angles in all the countries. After all, remember that our idea, strategic idea to spread out in more countries. It's not just based on trying to diversify the availability of sources, wind, solar, but also to be in the position to seize opportunities wherever they come. And so we are working to enlarge the pipeline. But surely -- I said -- I personally said that pipeline is a dynamic KPI, but it takes anyway time to make it evolve. But everything is going well. Hope to have answered your question.

[Emanuele Oggioni, analyst]

If I may, a quick follow-up on the level of the pricing for the hedging.

[Michele Pedemonte, executive]

For 2022 and 2023, 65%. More or less 65%.

[Emanuele Oggioni, analyst]

The same as well for -- 2023 is the same, 65%? Okay.

[Operator]

Mr. Merli, there are no more questions registered at this time.

[Paolo Merli, executive]

So thank you very much to all, and see you next occasion, which should be the first semester results. Thank you very much again.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.