ERG SpA

MIL:ERG

Earnings Call Analysis

Company Ramps Up EBITDA Guidance for 2023

In nine months, the company's investment reduced to EUR 377 million compared to 2022. Despite increased interest rates, financial charges were reduced to EUR 1 million from EUR 6 million the year before, leading to a net profit of EUR 35 million for the quarter, equivalent to the same quarter in the previous year. Year-to-date, adjusted net profit stands at EUR 149 million, including EUR 9 million of clawback measures, a rise from EUR 115 million in 2022. The company is progressing with its growth strategy, adding 400 megawatts of renewable operating capacity (ROS) by year's end, in advance of plan targets, with 210 megawatts already operational. An additional 387 megawatts are under construction, planned for 2024 and 2025 completion. The firm increased its EBITDA guidance for the last part of 2023 to EUR 490 million to EUR 520 million, thanks to strong third-quarter results and a promising start to the fourth quarter with better wind availability.

Navigating a Transition to Renewables and Market Price Headwinds

The company has made significant strides in its transformation into a pure-play renewable energy provider. With the completion of a pivotal deal, the disposal of CCGT to Achernar Group, it has exited the combined cycle gas turbine business. This decisive move towards renewables was accompanied by a review of the financials based on continuing operations, leaving out CCGT from the figures. However, the decision came with its costs as the year-on-year earnings before interest, tax, depreciation, and amortization (EBITDA) level was EUR 102 million, representing a decrease, driven by a challenging comparison with last year's price scenario where Q3 2022 saw peak electricity prices.

Increasing Production Yet Lower EBITDA Amidst Price Volatility

Despite a significant 26% increase in production year-on-year due to larger installed capacity and favorable wind and solar conditions, the decline in electricity prices hit the firm hard. A rough estimate puts the impact of this price effect at EUR 40 million, partially cushioned by the boost in production. This scenario ultimately led to a lower EBITDA, down from EUR 118 million the previous year to EUR 102 million, with the price factor being a prime reason for this downturn.

Resilience with Robust Financials but Savings on Investments

The company's economics remain resilient and its balance sheet solid. This strength in financial position led to several strategic initiatives, including the launch of a share buyback for a maximum of 2.5% of its shares. Moreover, the company is progressing with expanding its renewable energy portfolio in Europe, marked by the commissioning of projects in Italy and Spain. The structural changes and growth in assets echo a commitment to reducing carbon footprint and gearing towards net-zero targets.

Strategic Growth Through Asset Expansion

Growth efforts are far from stalled, with the commissioning of a new 50 MW project in Italy and wrapping up construction on a 149 MW solar plant in Spain, showcasing a clear path to diversification and expansion. These projects are more than mere investments; they represent steps towards a diversified energy generation portfolio, reinforcing the company's position in the renewable energy landscape.

Revenue Influence by Changing Incentive Structures and Market Prices

Investor attention is brought to the impact of varying incentive and market price structures across different regions on unitary revenues. Notably, due to a decline from EUR 183 per megawatt-hour to EUR 93, the lower prices captured in Q3 compared to peak levels in the same quarter the previous year was a significant factor. The net financial debt position saw improvement, closing at EUR 1.4 billion, which is EUR 28 million lower than the end of 2022, and driven by sound cash generation and investment capital flow management.

Investment and Financial Performance amidst a Tough Market

The EBITDA stood lower than the previous year, mainly due to downward pressure from a less favorable price scenario, with 2022 marking a historical peak. Investments were lower in comparison to the previous year, with a focus on expanding wind capacity through organic capital expenditures, notably in Italy. The quarter saw an aligned adjusted net profit on continued operations and a healthier net financial debt position, with an overall reduction indicating a careful navigation through financial commitments and growth initiatives.

Envisioning a Robust Pipeline and Future Growth

With the integration of a combination of M&A and organic growth strategies, the company is on track to deliver an additional 400 MW of renewable energy capacity by the end of the year. This effort exceeds the expected growth trajectory, and with some of these assets operational, this initiative is poised to be a key driver for future results, particularly entering 2024, when these investments are projected to reach their full operational potential.

Guidance for 2023 Reflects Optimism and Adjusted Expectations

The guidance for the closing part of 2023 has been updated to a projected EBITDA ranging from EUR 490 million to EUR 520 million, showing slight optimism in the outlook following Q3 results aligning with initial budgeting. This forward-looking statement reflects better-than-expected wind availability in Europe and is key information for investors gauging the company's short-term financial expectations.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the ERG Third Quarter 2023 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 morning, everyone, and welcome to our webcast. Here with me, as usual, is our CFO, Michele Pedemonte, who will later run you through our business performance over the period in more detail. So let's get started with the overview of results of the period.

I'm on Page #4, numbers here are based on continuing operations, excluding CCGT which is still present in our reported figures up to the end of September. As already announced on October 17, we finally closed its disposal to Achernar Group, thus completing our transformation into a pure renewable player. For the sake of clarity, figures are presented also net of clawback measures and windfall taxes. Anyway, later on, Michele will provide you with all details.

In a nutshell, I would say results are pretty much in line with our expectations, though lower year-on-year at the EBITDA level, mainly as a result of the very tough comparison in terms of price scenario. As in Q3 2022, prices were at peak levels. This factor -- this price factor was only partly offset by significantly higher productions up 26% year-on-year as a result of the larger installed capacity and better wind or solar conditions in the period. So in the end, EBITDA closed with EUR 102 million, down compared to EUR 118 million last year.

As I said, this was entirely due to the sharp decline in electricity prices coupled with zeroing of incentive price in Italy resulted in this very tough comparison. Say, the price effect, just to give you an idea of an impact of about EUR 40 million or slightly above this number. This was almost in big part, offset by higher productions. Notwithstanding those trends result at bottom line were very satisfactory and in line year-on-year as the lower operating results were fully offset by lower financial charges, thanks to higher yields on our liquidity.

Over the 9 months, adjusted net income was EUR 149 million, so up 30%, almost 30% year-on-year partly, thanks to no windfall taxes in 2023. We invested in over the 9 months, almost EUR 400 million lower than the same period last year, which was boosted by M&A or more M&A. CapEx was related to the advancements for assets under construction, both recovery and greed projects. As far as powering in the third quarter, we completed the construction of our second wind farm in Italy at Camporeale. Net financial position at the end of September was EUR 1.406 billion, slightly down compared to '22 year end. As cash flow and dividends from our power ahead of the sale of CCGT to Achernar more than compensated dividend payments to our shareholders and investments amounting, as said, to almost EUR 400 million. All in all, I would say, a resilient economics and very solid balance sheet.

Now we update on our main achievements during the quarter on Page #5. So I've already said, first of all, I think it's worth mentioning the closing of the CCGT deal. This was a tough target for us for the year and the fundamental milestone in our strategic journey. As we work towards this disposal for 2 years, with this transaction, we completed the transformation of ERG into a pure renewable player. And it's also, say, a crucial step to reducing our carbon footprint, pursuing our net zero carbon target as shown clearly in the graph.

As far as our growth, we are also moving forward with the expansion of our RES portfolio in Europe. We started up our said settlement powering projects in Italy at Camporeale, 50 megawatts, we made an important step ahead with our diversification in PV solar in Spain with the completion of construction on the Garnacha solar plant, 149 megawatts, which is now at an advanced stage of commissioning, and we expect the solar farm to be fully up and running by the end of the year.

Also, thanks to our strong financial position, we launched a buyback for a maximum amount of 2.5% shares -- own shares as we believe that ashore price performance was overly penalized by extreme volatility in the financial markets exacerbation and also had by the negative performance of the renewable energy sector as a whole at a global day.

Now over to Michele for his comments on the third quarter and 9 months results.

[Michele Pedemonte, executive]

Thank you, Paolo. First of all, please note that all the figures presented here are net of the effect of clawback or windfall profit taxes. In third quarter, electricity market prices have been slightly lower than previous year. This trend has partially influenced our all-in unitary revenues, which are mainly dependent on incentive, finances, long-term PPA and a short-term margin mainly in the past. In Italy, for example, unitary revenues are influenced by the value incentives on the majority of our assets, which is new in 2023 versus EUR 43 megawatt hour in 2022. By the lower market price captured in the quarter compared to the market price at its historical peak in the third quarter 2022. So all in all, unitary revenues had a strong decline from EUR 183 megawatt hour to EUR 93 megawatt hour.

The structure of the fund and great incentive will allow recovery of the electricity price below EUR 108 megawatt hour next year. This will be a significant positive effect the full next year 2024. In France, a large majority of our assets operate under fixed scheme without the exposure to market prices. Anyway, the portfolio all in price is lower than previous year because of the few assets at merchant prices.

In Germany, captured price in third quarter, lower than third quarter last year, because previous year was influenced by the one way tax structure that allowed us to capture higher merchant price. East Europe unitary revenues decreased in third quarter, driven by Romania and Bulgaria, mainly due to lower merchant prices. In U.K., the unitary revenues in the quarter is influenced by new PPA prices of our recently completed assets in Scotland and by revenues from merchant services market. Year-over-year unitary revenues in the quarter are higher than on captured by the old PPAs on our Northern Ireland assets in third quarter '22 by EUR 78 megawatt hour. Clearly showing the improvement of the PPA conditions over time.

As regard as the solar unitary revenues, there is an increase of value in the third quarter in Italy. Thanks to higher fixed price than the hedging of the previous year. [indiscernible] with the end of the Italian clawback rule that impacted our asset in the third quarter of last year. In Spain, where our [indiscernible] that operates as a floor to our revenues, all in prices are influenced by short-term matching in line in our recent policy.

And now a focus on production. 9 months production reached 4.2 terawatt hour, 0.6 terawatt hour higher than previous year, mainly due to perimeter effect. Production coming from abroad represent more than 50% of the group's total production. As regard to the third quarter, we have in Italy 584-gigawatt hour plus 80% year-on-year. Thanks to battery condition and battery aviation compared to last year, coupled with a perimeter effect plus 39 gigawatt from wind asset acquired in September 2022. And repowering plant and [indiscernible] operation from June 2023.

In France, 229 gigawatt hour plus 23%, thanks to bettering condition in comparison to a very weak third quarter last year. Germany, 107 gigawatt power plus 30%, again, thanks to bettering conditions. In Eastern Europe, volumes higher than the third quarter of 2022 mainly due to asset entering operation in Poland in the last quarter 2022. In U.K. North and Nordics, we have 109 gigawatt hour, almost 3x year-on-year. Thanks to the asset energized by the end of 2022 and in early 2023 in Scotland. Production in Scotland and Northern Ireland are influenced also by remunerated balancing services market in Scotland and great curtailment in Northern Ireland. Low production in Sweden due to prolonged protest and commission activities on the fully wind farm where we are progressing on the technical issues in terms of the [indiscernible]. In Spain, 56 gigawatt hour plus 14%, thanks to the production of the newly acquired plants that entered in the operation in July.

In the third quarter of the year, we have an overall EBITDA net of clawback equal to EUR 102 million, lower than one of the third quarter 2022, mainly due to lower captured price than previous year. When prices benefited from extremely high [indiscernible], partially offset by perimeter effect and bettering condition. In Italy, EBITDA, EUR 66 million lower than third quarter 2022 by EUR 19 million, mainly due to lower capturing price driven by lower value [indiscernible], which is known in the third quarter 2023, partially offset by the perimeter effect and bettering condition also witnessed loss.

In France, EBITDA of 8 million in the city from bettering condition compared to the extremely low production of last year. In Germany, EBITDA of EUR 9 million, aligned with the previous year, mainly due to better production in the period offset by lower captured price. In Eastern Europe, EBITDA at EUR 7 million lower than last year due to lower sales price, partially offset by the perimeter effect. In U.K. and Nordic, the EBITDA is higher than third quarter by EUR 10 million mainly due to a perimeter effect. In Spain, EBITDA is EUR 8 million higher than third quarter 2022, mainly due to higher capture price and perimeter effect, as already commented in on the production line. 9-month EBITDA is EUR 365 million lower than previous year, mainly due to a lower price scenario, where 2022 was a historical peak, only partially offset by perimeter effect.

In 2023, around 40% of EBITDA comes from assets outside versus 13% for this year.

Let's comment now on investment in the period. In 9 months, we invested EUR 377 million, an amount which is lower than the one invested in 9 months for 2022. Please note the previous year investments were influenced by EUR 610 million of acquisition of [indiscernible] solar plant in [indiscernible] versus EUR 184 million of M&A this year for solar assets in Spain. In the first 9 months of the year, we executed about EUR 195 million of organic CapEx in wind. In particular, I underline EUR 129 million of CapEx in wind in Italy for repowering and greenfield projects in the city.

Let's now move to the financials, commenting on other items with the profit and loss. In the third quarter 2023, net financial charges at EUR 1 million versus EUR 6 million in the third quarter last year, mainly influenced by increased liquidity remuneration in a scenario of higher interest rate with the destruction or may almost completely very competitive fixed rate. Gross net cost of around 1.4%. Tax rate in the quarter is 27%, in line with previous year. As a result of all this, the adjusted net profit on continued operation of the quarter amount to EUR 35 million, in line with the previous quarter -- in line with the third quarter of 2022. That included windfall profit taxes for a total amount of EUR 14 million. The adjusted net profit on continued operation of the 9 months amounts to EUR 149 million, including EUR 9 million of clawback measures versus EUR 115 million in 2022. That included the Italian and Romanian [indiscernible] taxes for a total amount of EUR 54 million.

In the quarter, we still have the CCGT consolidated in the discontinued items. On this chart, you can find a summary of the effects of the clawback measures and windfall taxes affecting our fees. The impact on EBITDA and net profit in the quarter is negligible because of the sharp electricity price decrease. And this refers mainly to Eastern Europe and France. In Romania, the government set a composite [indiscernible] mechanism at the cap price roughly at unit of power, which are the same substantial effect of a clawback measures. But is not reported here. Comparing net profit net of clawback, we see a substantial increase versus 9 months 2022, that was in affected by time in full profit tax.

Finally, let's take a look at the cash flow statement and the next financial position for September 2023. The net financial debt closed to EUR 1.4 billion. EUR 28 million lower than the end of 2022, driven by a solid cash generation on EBITDA 365 million cash from equity distribution from power, a reduction of mark-to-market of derivatives on commodities.

These impacts are netted by the already commented investments of the period of EUR 377 million and dividend payments for EUR 162 million, including payment to minorities. Consider the equity distribution from ecopower in the quarter and that the net financial position of the asset is already accounted in the discontinued items, the adjusted net debt at the end of September already shows effect at the disposal of the CCGT closed at the beginning of October.

Thank you for your attention. I will now hand over to Paolo for his comments on the guidance.

[Paolo Merli, executive]

Thanks, Michele. Before going through guidance for 2023, let me update you on the execution of our strategy and targets over the year so far. As you can see from the chart, through a combination of M&A and organic growth, we expect to add a further 400 megawatts ROS by year-end, which is bang in line with and I would have to say in advance of the trajectory of the business plan.

It's worth mentioning that out of this 400 megawatts, a total of 210 is now fully operation. In addition to that, as I said, we just completed the construction of the 149 megawatts in Spain and the site is now in the commissioning phase, and is expected to be at full speed by year-end. We'll start this week the win to buy interaction at Roccapalumba wind farm in Sicily, the 47 megawatts, they signed with the blue which is the last asset expected to enter by year-end. And with this full contribution as all the other assets in 2024. This growth, let me say will continue to be a driver of our results going forward when -- particularly in 2024, when we expect all those assets to reach their full potential.

Let me move on Page 17. This chart, I think, has visibility to execution of our growth strategy. All in all, we still have 387 megawatts under construction, of which 47 should be, as said, completely by year-end, and the remaining will be completed during the course of 2024 and 2025. On top of those assets under construction, we have roughly a further 150 megawatts that is now fully authorized and in a sort of preconstruction assessment. So we can count on sustainable and visible growth in line with our objectives.

Now the last chart, let me take a look at the guidance for the last part of 2023. Q3 results, as I said, were bang in line with our budgets and the fourth quarter started off well with better wind availability across Europe, a structure in line with our policy to update our Board and the financial community on a quarterly basis. We have moved up our expected EBITDA range slightly now seen at EUR 490 million to EUR 520 million. So compared to the previous EUR 480 million, EUR 510 million. We are maintaining our guidance on CapEx and net financial position. Let me underline that the latter, in particular, remains unchanged despite the expected cash out relative to the ongoing buyback program with an expenditure in excess of EUR 60 million by year-end.

We are moving forward very well to create the conditions for a stronger 2024. So thank you very much for listening, and we are now ready to take your questions.

[Operator]

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

[Enrico Bartoli, analyst]

The first one is regarding a possible outlook for next year. I know it's a bit early for the guidance. But just to understand, first of all, some hint about the capacity that you expect to install next year. You provided in the slide that you have around 150 megawatts under construction. So what you expect more or less to end up? And if you expect also some additional M&A to occur in 2024. And on 2024, if you can update us on the comments that you gave during the past conference call on the hedged volumes and prices? And how do you expect on a qualitative point of view, the evolution of EBITDA over next year?

Second question is related to the guidance for full year '23. If I made my calculation well, last year, the last quarter was -- EBITDA was around EUR 100 million. And considering your EBITDA in the 9 months this year, the guidance that you provide is significantly higher than that. So I was wondering, considering the current price scenario, what do you expect to be the drivers of a strong performance in the fourth quarter?

And the last one is, let's say, more strategic, particularly on Spain, in the presentation, you had in Sicily that you have 1.3 gigawatts pipeline there. There are some assets starting to operate. I'm curious about your view on this market considering that there is a lot of capacity expected to demonstrate their particular [indiscernible]. And we are seeing some pressure on prices in some hours. So I was interested in your view on the potential for -- from this market for ERG.

[Paolo Merli, executive]

Okay. Good morning, Enrico to you. And let me go in order of your questions about the outlook for 2024. I can just stress what I already said in the previous webcast and in the current one. So we expect in 2024, we have almost all the investments done over the last 12 months in all operations. So we think we are able to reap the benefits of all the investments done.

And on top of that, the hedging you mentioned for 2024 was slightly better than the numbers in 2023. And all in all, 2024 will enjoy the coming market of the incentive in Italy, because according to the mathematical formula, say, and considering the expectation for on price for 2023, the incentives should be -- go back in the region of EUR 40 per megawatt hour. Which based on our numbers means more than EUR 40 million of EBITDA on top of the one of 2023 business. But even more in particular, I think the main contribution will come from the larger installed capacity.

So it's early, as you said, to give a guidance, but I'm positive and confident that 2024 should see huge increase in our EBITDA. And as you mentioned, in order to touch the last part of your question, Q4 2023 is seen as a quarter where the early direction showed change because over the first 9 months of the year, we suffered from the very tough comparison in terms of prices. But in Q4, given the larger in-store capacity, given the low load factor registered in the fourth quarter of last year, we expect the reverse and this trend should continue over 2024.

So I hope -- Spain, the last question was about Spain. Yes, you're right. First of all, let me say that we are happy that our last solar farm, 149 megawatts was -- that the construction was completed, and we are now under the last phase of commissioning, and we expect the assets to be fully up and running by the end of the year. And this is a major step, a major milestone for us in the development in the country. We have, as everybody a view that brings a larger discount in terms of capture price compared to the average, the base oil price in Spain because of the penetration of renewable and particularly on solar. But this is already included in our business model. And going forward, the CapEx.

The investments we are envisaging in the country that, as you said correctly, are based on organic growth because it's sort of co-development. We are moving on and is based on a few projects, a very large one, sizable projects. And for those kind of projects, we expect notwithstanding the price scenario, the return to be positive because the capital intensity is going down in the solar after we reached a peak in 2022, but now is moving down quite significantly. And given the size, we expect further synergies in terms of efficiency, OpEx and whatever around the asset. But in particular, we are still positive on the pricing because based on a PPA, you're going to reach a significantly higher pricing compared to a few years ago and put all these factors together, the return is -- should be higher than our order rate. But if it's not, we will not moving forward with the investment because we are not obliged to do it.

So that's our philosophy. All the projects should meet our financial discipline. And if they don't, we have to find the mitigants in order to make them. You had recently a quite clear example on that. We had inauguration of Camporeale in Sicily, that was our first repowering project, and I hope we have a view that team has joined the event have appreciated the quality of the asset, but let me remind you that on those -- on that asset, we had a CFD awarded in an option. The price of that option was not any longer, say, able to yield the right return for the project, and we abandoned on the CFD and we moved to PPA that's got a value that's more in line with the market trend and the return was absolutely in line with our return. This is a strategy that we want to pursue whenever we don't have the [indiscernible]. That's our philosophy. So I hope to have answered your question.

[Enrico Bartoli, analyst]

Just if you can provide just a comment on capacity evolution in '24 on top of the capacity under construction, if you expect additional M&A, what kind of development is reasonable?

[Paolo Merli, executive]

Okay. But according to organic growth, I can say just repeat what is already written in the chart of the webcast. Those are the projects, we are now under construction or reconstruction. So it's quite -- anyway, quite significant amount because we are talking about if you sum all the projects we call in 2024, which value of more than 200 megawatts. But on top of that, and that I think was your question, yes, we are pursuing several deals on the M&A field.

But as you know, M&A is not completed until you have signed. So hope we can give any more indication on that. But given the financial strength of the company, for sure, M&A will remain a channel of growth for area. And let me say that the headwinds, the challenges the sector in spacing right now is changing a little bit the secondary market, and we are even more confident that we can achieve better results from this channel, I mean, M&A.

[Operator]

The next question is from Roberto Letizia from Equita.

[Roberto Letizia, analyst]

I would like to continue on Enrico's question about '24 what is possible. Just doing a few months, if you allow me, just to have a reference on where there is something more or something less, which I missed in the overall picture. But for what regards just the green certificate size on EUR 40 per megawatt hour assumption for next year development that there is one of terawatt hour of production expected on green certificate, which is around EUR 40 million.

Then you have the additional capacity that should produce roughly 700 gigawatt hours of additional production next year, which we can take, of course, whatever number, but this may be potentially additionally EUR 30 million of EBITDA. But just looking at volumes, added to your production. Then you have the price effect at the end because actually you're doing hedging, I guess, in the region of EUR 15, EUR 20 per megawatt hours above what you did this year? And if I assume only 20% of your production here, that's another probably EUR 40 million EBITDA on the price side, which drives me to a number that is what well above EUR 600 million for next year in terms of EBITDA. What am I wrong? What am I actually missing on the regular side, If I do this math.

Then the second question is on this year, whether you can help us working and figuring out the net income level that is associated to your guidance because you are continuing to do very well on the interest cost. So probably also I think who is going to benefit, can you provide any guidance on this element.

And finally, wondering if the disposal of the CCGT in your assumption is also producing cash in within the year.

[Paolo Merli, executive]

Must say your -- let me go to your first question. I think you are very good at math. So your analysis makes a lot of sense. We have -- as you said, we have the incentive, which is worth more or less EUR 40 million or a little bit in excess of that. Then we have new productions, of course, based on a P50 statistic estimate for wind and the variation, but let me say, it's reasonable than 700 gigawatt hour. I'm taking your analysis, but this makes sense.

So let me say, it's EUR 70 million, EUR 60 million, EUR 70 million based on the average price per megawatt hour. So if you sum just these two items, we are moving up by about EUR 100 million, then we have some negative, some positive, but let me say, it's a good analysis. So we could expect an increase of this and conclude, I mean, the sum of these two elements that you have mentioned before.

According to net profit, I think the company is doing a tremendous job on financial charges on the debt over the last few years. And now we are in a nice position to have a liquid -- [indiscernible] that is invested at 4% or even a little bit more than that is compensating for almost the financial charges we are paying on our gross investments. And as you can see, paradoxically this high interest rate environment is supporting our profit and loss. Because basically, we didn't pay very much financial charges.

So net profit will enjoy this trend. We are also doing some good job on expanding the technical life of our existing assets and consider that when we are lowering our depreciation means the existing technical life has been tested by the external and internal auditors and the extension is based on lifetime extension programs. So all in all, you see that the net profit is going very well, and we expect a solid -- a very solid number for 2023 in excess to EUR 100 million. That's, I think, answer -- to answer your question.

[Roberto Letizia, analyst]

Yes. And on the CCGT, if you expect the cash in will be within the year?

[Paolo Merli, executive]

Must say the cash in from the CCGT was basically all included at early September because all the so-called permitted leakage were paid as a dividend from Power to Air Group for an amount of roughly EUR 90 million. On top of that, the price paid by the buyer was basically offset by the de-consolidation of our reported debt that was -- we already de-consolidated the company.

So you couldn't -- the debt wasn't included in our adjusted net debt side. The answer is all the effects coming from the transaction has already been accounted at early September when talking to the adjusted net debt. Going forward, in the fourth quarter, you won't see any longer and higher debt on a reported basis because the asset went away from our portfolio.

[Operator]

The next question is from Francesco Sala with Banca Akros.

[Francesco Sala, analyst]

I just wonder whether you can give us some comments on the price trends that we saw in the U.K. [indiscernible]. Whether there is something outside the general market trends we should keep in mind that it's more specific to you speaking about maybe PPA? Secondly, there was a quite a big release of cash from the net working capital in Q3. I wonder whether -- I wonder about the moving part of this, let's say, big release we saw in Q3. And these are basically on the prices and net working capital.

And also, there was quite a decrease in cost in [indiscernible] Italy. I wonder, again, whether this is something sustainable? Because if I, let's say, run them up the costs we have seen in the first 6 months are way higher than the one we saw in Q3, obviously divided by two. So I wonder whether there's something specific or this is something that there are some efficiencies that we'll keep on hitting your numbers going forward.

[Paolo Merli, executive]

Say I'm going and try to answer your three questions. So let me start from cash flow. The cash flow, as I said at the beginning of the year was already expected to be stronger vis-a-vis the EBITDA because we have enjoyed, say, the reversal of the derivatives, so the mark-to-market derivatives and on top of that, all the items, the cash flow items coming from the transaction for the CCGT. Those are the two items that further increase our cash flow over the year, and they are almost over now because we recovered all the mark-to-market of derivatives and the transaction -- the sale of CCGT as said, it was basically accounted -- all accounted in our adjusted net debt.

In terms of price trend, you mentioned Italy and U.K., I would say market remains very volatile. You can see just looking at the TTF price every day, up and down, up and down because the market is very, let me say, fragile because the Russia gas has been substituted basically almost by LNG, which is a little bit more unpredictable. So depending on the weather port, depending on whatever, the price is more volatile. But our view is stay stronger going forward, and we expect prices to remain higher, much higher than in the past. And I can tell you that whenever we discuss a PPA, long-term PPA, that's also the view of private companies, private takers with prices, let me say, above EUR 100 per megawatt hour or more or less in that region.

[Michele Pedemonte, executive]

Let me have a note regarding U.K., because you see an increase in price in the U.K. Because you have to consider that last quarter -- or in third quarter of last year, we had just the old PPA in Northern Ireland that was where PPA is signed several years ago, so in a different market environment. While this year, we are starting selling with the new PPA finance cost. That has a much higher price. And explaining together with some merchant production that is an addition of the production 2022, we explained this increase in our unitary revenues. So the trend is strongly -- a strong increase, thanks to these new PPAs signed entering into commercial operation this year.

[Paolo Merli, executive]

And if I may, just to add a color to what Michele just said, consider that the first PPA we signed in Northern Island, the duration of those PPA was not longer, so it was 5 years. So we expect in a few years to renegotiate those contracts at a much higher price.

And your last question was about the cost. Let me say, yes, I confirm that we have done a tremendous job also on the cost side. and enlarging the portfolio, we are having for sure, some synergies. So whatever you have seen in the first 9 months, yes, we believe is structural, and we believe is sustainable also going forward, and we are not at the end. We are continuing to try to squeeze as much as possible our cost to become even more efficient today.

[Operator]

The next question is from Naisheng Cui with Barclays.

[Naisheng Cui, analyst]

Just a few follow-up questions, if that's okay. If I go to Slide 7 of the presentation. I still want to ask about the U.K. or in wind price over there, EUR 144 per megawatt hour quarter. I think Michele, you had planned earlier, it's because of higher PPA price achieved. Should they assume the similar price level will be sustained for the next few quarters or next year? That's my first question.

And my second question is still on 2024 EBITDA bridge. I did a similar thing as Roberto. And I also want one more thing, which is normalized when conditions because I remember, we had a very low volume in Q2. And I just want to understand, do you see improved volume in Q4? Will you see 2023 in terms of volume is a normal year? Or do you think the volume is slightly below our average year. In that case, will you also see an extra EBITDA for 2024 because of the normalized wind condition?

And my third question is on solar in Spain. I understand the one-way collar pricing structure benefited you a lot. And are you going to look for similar pricing structure for other assets, especially the new one coming online and was in the offline.

[Michele Pedemonte, executive]

Yes. Regarding the U.K., just to add some additional states. In the U.K., in particular, in Scotland, these figures are EUR 144 per megawatt hour is also benefiting from some managing market services that we are into the degree that had additional remuneration to the Scotland assets in particular. And so this is the reason why we have some additional unit revenues in respect to the merchant price and the PPA price. Yes, I think that this balancing market services can be structural, at least for the next few years. So we expect to -- even if they are not fixed asset PPA we expect that we're continuing to offer these kind of services to the business so we can have this kind of extra remuneration.

So the answer regarding U.K. Obviously, there is also a part from merchant component because of our PPA in U.K. are basal that I'm not covering 100% of the production. So we maintain some exposure, some the disposal to merchant price and this and some additional potential upside to our unitary revenues.

The second question about the EBITDA, yes, I can just stress what I already said. Of course, there are a few elements and the first two, we have already mentioned the coming back of the Italian incentive plus the contribution of the larger installed capacity, but you are right as well as so we expect load factor to normalize in '24 because it's based on our P50 estimate, but let me also say that the fourth quarter of 2023 is slightly not likely. It's recovering right now. I don't know how it's going to finish the year, but in the first months until mid-November, we have been recovering partially the gap we had accumulated from this point of view in the first 6 months. But you are right, in 2024, if load factor will normalize, then we'll have also a contribution from the existing assets. Those three elements should make a compelling growth 2024 versus 2023.

[Paolo Merli, executive]

And the third question was about Spain again. I would say Garnacha solar farm is provided with our PPA, a long-term PPA with Google. And this structure of this PPA is based on a floor leaving all the upside also to the producers or ERG, apart from a commercial discount of you per megawatt hour. Let me also say, honestly, that we are still waiting to understand or to gain a better understanding what's going on from a gas point of view because there are several rumors in Spain that are thinking of extending clawback measures and these kind of things.

So we still don't know about that. But we expect -- we should expect them not to be extended according to the strong position the European Commission has taken on this item. And let's see member state -- state member have -- so sometimes, I'm not respecting these indications, let's see. But again, if the market is in line with the forward right now, 2024 should be better than compared to 2023 because 2023 was affected by those revenues cap at a much lower prices compared to power market.

So for the time being, let me say, all the KPIs are showing a recovery for 2024 versus 2023. But we'll be more precise, say, March, 1% in the full year -- 2023 full year results and the business plan and the guidance for 2024.

[Operator]

The next question is from [indiscernible] of MetLife Investment Management.

[Unknown Analyst]

Just a very high-level question on the factor, I guess, we've been reading about a large renewable players canceling projects, mainly in the offshore space, the canceling projects because of cost overrun, delays, issues with the turbine suppliers. I was wondering to what extent you've been affected on that front, whether there has been any project canceled because of these reasons and just I guess, a little bit of commentary on your end?

[Paolo Merli, executive]

Okay. We are leaving in a very particular time because from one end, governments around the world, has said, ambitious targets, the in case of climate change, which as my personal belief is the greatest challenge of our time. But despite this aggressive target, say, the deployment of CapEx and historical fact not just across Italy, not just across Europe, but across the world is lower than needed.

In this kind of environment, despite this flamboyant target, the sector, the rest sector is facing some challenges. In particular, the interest rates and the cost -- the rising cost of capital, reflecting the higher interest rates, the green inflation, the bottlenecks in the supply chains and whatever. But we remain very positive. You ask a top-down questions and high top-down view is that we remain very positive because I don't see any different options but renewable for tackling the climate change because also other options, I think they are facing big challenges, for instance, nuclear. It's a fresh news that the one that's small reactor projects in U.S. was canceled because the cost -- the higher cost than expected and the higher cost of producing energy. So I think wind and solar remains very competitive.

For sure, as you said, offshore is facing another business environment, and we have been starting possibility to enter in the offshore, in the floating offshore in the Mediterranean, and we came to the conclusion that it's not yet time. So we stayed out of this business segment for the time being, and we do not have any short-term plan not to enter. Looking at our investments the ones we have already approved, I repeat, they are all yielding a term, which is consistent with the theoretical cost of capital.

Why I'm saying theoretical because our policy is to assess all the projects based on another rate that is consistent with current market trends. Even though our cost of capital is much less because we have EUR 2.1 billion of gross debt already negotiated with a cost of 1.4%. But when I -- when we are assessing our projects, we consider a walker and another rate, which is pretty consistent with the current market trends. And even under these current market trends, all our projects are yielding a higher return. Why? Maybe because we were good at supplying the wind turbines. You know that the supply of wind turbines for the projects so far was covered by a supply framework agreement with some major OEM competitive cost.

Probably your question is more about the future. About the future, I repeat we have several projects fully authorized, but the final investment decision to go on with these investments will be based only on the return at the time of the fee. So if the return is higher than our on the rate we go on. It's not that we will be waiting for a different time. That's our philosophy. We are investing capital, private capital, and we need to have a fair return on our investment. But for the time being, we are confident.

So for instance, just to give you an example, we approved recently in our Board a small investments. It's powering in Germany. For sure, the capital is a wind project. For sure, the capital intensity is much higher than the one we were used to. But at the same time, the wind farm was awarded with a tariff, which is above CFD, which is above EUR 100 per megawatt hour. So the two effects are resulting in other term, which is above our other rate. So I hope to have answered your questions. So for the time being, we do not have any issues on our assets either on the one where we have completed the construction or the one that are currently under construction.

[Operator]

The Next question is from Davide Candela, Intesa Sanpaolo.

[Davide Candela, analyst]

I just have two and maybe the first one following on the procurement side. You said and you mentioned that we saw solar capital intensity lowering, I was wondering if you can share your view on wind as well apart from the last answer you made in the sense that we have seen manufacturing wind turbine players suffering the margins. So I was wondering if you can share your expectation also on the evolution of the wind costs in terms of procurement? And if you can share -- maybe you also on the euro medium per megawatt you are expecting or embedding in your assumption?

And maybe related to that, the second question, very high level related to the European wind power action plan that was published by you by end of October. I am aware that we are in the very early stage of this kind of action. But I was wondering if you can share with you on the potential impact of this kind of regulation of action plan and which could be the effect on the industry going forward.

[Paolo Merli, executive]

Okay. I think your analysis was right. We still facing more hurdles in solar in terms of capital intensity because the major manufacturers are the European and Western manufacturers are suffering, their P&L are still in red. They are struggling to recover marginality. But I think -- and my view is based on the fact that Europe and the world needs both technologies. You can't just survive on solar. Solar is providing energy just 8 hours, 9 hours per day, while wind is producing also in the night. And you need both technologies in the portfolio.

Over the last 6 months, 12 months, we have seen divergent trends in CapEx for the two technologies. But I think the answer -- the regulatory answer to this point is to have different options separated -- technological separated options for wind and solar. And in any states in Europe, this is the direction it seems it's going to be pursued. Even coming to the wind action plan you mentioned, you're right, that has been issued this action plan. It is an emergency action plan in order to support above all the OEM and the wind industry in Europe. We are a producer, we are a buyer of technology.

So we are enjoying EBITDA. We are enjoying profit, but those companies are struggling. And this plan is thought -- has been thought in order to support the industry as a whole. They want to -- the main line of actions of this plan is simplifying the permitting in order to make more visible the growth and then help the OEMs also to program and to plan their production lines. And in this respect, the development of RES should become an overriding public interest lowering and reducing massively the time of permitting. We are not yet there. But I think 2024 will be the year when we could accelerate could we. I mean we -- as Europe, we can accelerate on this point. The other point -- the plan is pushing on is to set out CFD mechanisms that are providing a fair remuneration.

And in fact, in every state where this has already been done, let's take Germany, I mentioned the example in Germany. You see fair held subscription to options, where you didn't do that like unfortunately, in Italy, where the tariffs are still the one issued in 2019, and now they have just upgraded to take into consideration the normal inflation, but the green inflation has been much higher than that the auction keep remaining severely undersubscribed. Those are the two moves we expect and we perceive more important. So simplifying the permitting, but above all to increase the CFD system. For a company like us, we have another option which our PPA. And in fact, whenever CFD is not sufficiently high to meet the returns, we switch to PPA. But let me say, for the industry as a whole, we would need higher CFD in order to deploy capital and historic capacity in line with national plans.

[Davide Candela, analyst]

Maybe just a follow-up, if I may, on the second part. So reading through, if we can make an assumption on what you said with regard to the wind action plan. we should expect the procurement cost not very so much in wind for the ones we are seeing today in the sense that they should support the wind turbine operators. But on the other hand, the pricing environment and the auction should be much more visible and supportive for the power generators, so as to crystallize the returns the industry seeking for.

[Paolo Merli, executive]

Yes, yes. I think you're right. And sorry, maybe I didn't answer your question with numbers you asked me before. We see the cost of wind. And let me say that all the projects we have already started up, and we are in the last phase of construction at a cost of EUR 1.2 million, EUR 1.3 million per megawatt, which is very good pricing for -- compared to the current environment because they were covered by this framework agreement in the supply chain.

Now looking forward, we expect the intensity, the capital intensity in the wind to be more in the region of EUR 1.5 billion, EUR 1.7 million per megawatt. But as you said and I said, the importance is to find the right CFD in order to make all the equation for concurring to the return sustainable. And we think that's the case, that would be the case.

[Michele Pedemonte, executive]

If I may add these can vary a lot among different countries in Europe. So we have countries much more expensive and expect [indiscernible]. Germany, for example, is if you look at the statistics is one of the more -- the most expensive country where we built wind farm but at the same time, it's one of them where the base schemes are more in the [indiscernible] more channels. On the other side, there are much more than in the past being the BOP cost more relevant in the overall plant of a project more relevant. So the local factor affected the overall cost of the project. So if you did a rough project that's more efficient than as well on if the connection is close to the plant, this can increase significantly the efficiency and cost of the project.

So again, execution becomes -- the execution of the specific project becomes a different shipping factor in this specific moment because you need an enough approach also in the construction of new projects, much more than in the past.

[Operator]

And the last question is a follow-up from Roberto Letizia, Equita.

[Roberto Letizia, analyst]

Yes, very quickly, say, you almost installed some 400 megawatts per year in the last year. You got 375 megawatt, 530 megawatt, 370 megawatt this year. So you're roughly in the 400 megawatts per year. You're still out with a target of 4.6 gigawatt on the old structure. I was wondering if this rate of growth will be maintained in the next 3 years, so something in the region of 400, 450 megawatts per year. That's including' 24. Can you please [indiscernible].

[Paolo Merli, executive]

I Say, yes, Roberto, we haven't changed our targets. The targets remain the ones of the business plan, and we are confident that we are in the -- what I would have to say slightly ahead of those targets. I repeat through a combination of organic and M&A, we want to maintain more or less the same pace even going forward. So the 400 megawatts was the average increase per year than by our business plan, and we want to going on with this space, yes, absolutely.

And 2024, we will work for this. Of course, I couldn't exclude an acceleration or a slowdown depending on M&A, but I would say we are working for an acceleration because right now, we still have a balance sheet that significantly under-geared compared to our financial policy and thresholds set out by the rating agency in order to maintain our BBB- rating, which is a core target for us. So to maintain investment grade profile.

[Operator]

We have another question from Emanuele Oggioni, Kepler.

[Emanuele Oggioni, analyst]

I have two left. One is you see the risk of the further of an extension basically of clawback price caps, et cetera, in some markets, such as Spain or Romania, for example, East Europe for 2024, what are your expectations on that?

And second, if you can update us on the hedging policy. Maybe in the -- if you remember well, in the last call, you mentioned that for 2024, has already covered 0.5 terawatt hour. It's roughly more than EUR 150 per megawatt hour, but these volumes could have been progressively increased up to 1 terawatt hour. So if you update on these figures.

[Paolo Merli, executive]

I say about clawback is very difficult to say because I say every state member have proved to be a little bit erratic on these points. For instance, in France, there are huge probability according to our insights that the price cap should be expanded for 2024 at EUR 100 per megawatt hour. But according to the draft amends that are circulating this should be applied just by -- to 50% of the production.

So this price capital anyway is expected to improve compared to 2023. Still a question mark what's going on in Spain because the government is information and we have to wait for instance, the name of the ministry of the energy transition and there are circulating some rumors, but it's too early to say, even though there is a risk. In Eastern Europe, in some countries, yes, there are risks already factored in our numbers, especially in Poland, let's say, the last government changed the rule of obligation quote for CO2 than major the value of Origin certificates to collapse and it's already included in our guidance for 2023, but the new government is more European oriented.

So we should expect in the next few months, change to improve these law that was issued just a month before the public election in Europe. So it's a very difficult business regulatory picture to make estimates, but we are confident that those measures should progressively phase out [indiscernible]. Because it's not the energy transition that will stop because the investments are not there as they should be. And it's a kind of a make or break it scenario. Let me say like this, so if they have -- if they want to progress on the installment and deployments of investments, they will have to create a better and safer regulatory environment. And that's my view. That's what in my opinion will happen in 2024. We will see a lower and lower extraordinary measure.

Sorry, the hedging. Yes, I confirm what we said what -- if you remember about -- the last webcast was confirmed in the sense that right now we have covered roughly 1 terawatt hour for 2024. The price, which is between EUR 130, EUR 140 per megawatt hour. This is just the short hedging. I mean the one we which is over the say by financial instruments, but all in all, even including the recent PPA and [indiscernible]. So we expect a slightly better selling price for 2024 against 2023.

[Operator]

Mr. Merli, there are no more questions registered at this time. I turn the conference back to you for the closing remarks.

[Paolo Merli, executive]

Well, thank you very much for listening and your attention and speak to you soon in March for the full year results and the business plan. Thank you very much again.

[Operator]

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