ERG SpA

MIL:ERG

Earnings Call Analysis

Improved EBITDA Forecast Amidst Global Expansion

The company's annual production soared to 6.1 terawatt hours, primarily due to expanded operations and favorable weather conditions, contributing to a net EBITDA of EUR 155 million for Q4 2023 - a EUR 44 million increase from Q4 2022. Despite a general decrease in market prices, the firm's financial position remains robust with a 2023 adjusted net profit of EUR 226 million, including clawback revenue. Investments reached EUR 489 million in 2023, mainly on greenfield projects and asset repowering. Anticipating the addition of 600 megawatts of new capacity in 2024, the company projects an EBITDA estimate between EUR 520-580 million, likely adjusting to EUR 540-600 million factoring U.S. portfolio contributions. The anticipated investment is EUR 550-600 million, with a net financial position forecast between EUR 1.75-1.85 billion at year-end.

Steady Production Growth and EBITDA Performance

The company has made significant strides, reaching a full-year production of 6.1 terawatt hours, which is a substantial increase of 1.2 terawatt hours compared to the previous year. This growth can be attributed to perimeter effects as well as favorable weather conditions in most of the countries where the company operates. The production originating from new routes now constitutes a majority of 55% of total group production. Financially, this has translated into a robust EBITDA net of clawback totaling EUR 155 million, outpacing the previous year by EUR 44 million, aided by better wind conditions and perimeter effects which helped mitigate the impact of a less favorable market scenario.

Expanding Infrastructure and Future Growth Projections

With 359 megawatts currently under construction and a scheduled completion for 282 megawatts by year-end, the company has set a clear path for sustainable growth. They anticipate reaching a remarkable capacity of almost 3.9 gigawatts by the end of 2024, indicating a strong development pipeline and continued emphasis on increasing their renewable energy footprint.

Forward-Looking Guidance

Management has provided guidance for 2024, setting the EBITDA expectations between EUR 540 million and EUR 600 million, factoring in the anticipated volatile commodity market. This range is based on the assumption that current forward prices persist, with a downside scenario accounting for a potential 20% price reduction. Investments are projected to be around EUR 550 million to EUR 600 million, encompassing acquisitions in the U.S. and assets in France. This capital deployment strategy is expected to culminate in a net financial position nearing between EUR 1.75 billion and EUR 1.85 billion at year-end.

Capital Efficiency and Debt Guidance

Despite the sizable capital expenditures and dividends expected, the company’s high cash flow is projected to moderate the net debt to around 1.8%, excluding the impact of IFRS 16 which accounts for an additional EUR 200 million. This strategic financial management underscores the company's efficiency in maintaining a strong balance sheet amidst aggressive growth and investment initiatives.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the ERG Fourth 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.

[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 through our business performance over the period in more detail.

So let's get started with the overview of results in 2023. I'm on Page #5. Full year EBITDA closed at EUR 520 million at the very top end of the latest guidance range from EUR 490 million to EUR 520 million and basically in line with our original guidance. The sharp decline in electricity prices, coupled with zeroing of incentive value in Italy, resulted in a negative price effect year-on-year of about EUR 90 million, which was more than offset by the contribution of new installed capacity, roughly EUR 70 million and a better performance on the existing assets for about EUR 50 million, in particular, in the fourth quarter, characterized by stronger windiness.

Clawback at EBITDA level during the period were EUR 12 million against EUR 5 million in full year '22, basically concentrated in the fourth quarter last year -- of '22. Michele will elaborate further on those figures in a while. Results in bottom line were very satisfactory because against the backdrop of our low cost of debt fully hedged, we enjoyed a high yield on our liquidity, thanks to the excellent work done on cash management by our finance partners. Over the full year, adjusted net income was EUR 226 million, up 75% year-on-year. Please consider the easy comparison given the win for taxes paid in 2022. And again, Michele will provide you with more details in a while.

CapEx in 2023 amounted to EUR 489 million, slightly below the last guidance due to some delays in construction to be reabsorbed or already reabsorbed in the very few weeks of 2024. CapEx was related to the advancements for assets under construction both in powering and greenfield projects, in addition to some M&A. Net financial position at the 2023 year-end was EUR 1.445 billion, basically in line year-on-year as cash flow generation, including proceeds from the disposal of the gas fired plant and the absorption of negative fair value on derivatives balanced the cash out for CapEx, dividends, share buyback, financial charges and taxes for a total amount of nearly EUR 800 million. So all in all, I would say, resilient economics and solid balance sheet, based on which we can confirm easily the dividend at EUR 1 per share.

Let's move on commenting Page 6. '23, let me say, was also a crucial year for ERG as we finally completed our energy transition and we became a pure renewable and international player. Our strategic transformation was highly recognized by external ESG ratings, which put ERG demand the top tiers as far as our ESG approach. After the disposal of the CCGT plant, we basically became 0 carbon Scope 1 and 2, paved the way for hitting our net zero target by 2040 including Scope 3. And I would like to remind you that our commitment in this respect being certified by SBTi.

Capital employed now is 100% renewable based on taxonomy. And let me spend a couple of minutes on the achievements -- summary of the achievements in '23 and early '24. I'm on Page #7. Say, we made significant steps forward in delivering our strategy with major accomplishments, among which the disposal of the CCGT or instead our entry in the U.S. market. They both are quite historical events for ERG. We inaugurated our first power in Sicily with Partinico-Monreale and Camporeale, and most of you were there with us. Finally, both plants are up and running. We further consolidated our presence in Spain, U.K. and France. We also started the construction of our first battery storage plant in Sicily to have 0.5 megawatts, which will enter into operation in '25. This is the first investment in the storage for the group.

Saying this was a tight scenario, we have been able to sign several major PPA with Tier 1 offtakers, which made our revenues more stable going forward. Thanks to our sound financial conditions, we also launched and completed a buyback program for 3.7 million own shares.

Let me give you a bit of color on the U.S. entry, as I said, a historical move for the group. We believe that it's a unique opportunity to increase geographical and technological diversification. We consider this partnership with Apex a major achievement. Apex is a leading player in the renewable space development, with strong know-how and an excellent [Audio Gap]. In addition to the acquisition of our operational portfolio of assets. We have also signed a cooperation agreement for about 1 gigawatt under development at a very advanced stage.

Let's see what's going on in the next few months. We tend to see it as a first step in the U.S., I mean, the acquisition of the operational portfolio, because it's a market that offers interesting growth and return opportunities.

Let's see now Page 9. The execution we continued over the last 3 years. A quick summary of what ERG has done in this cycle since we announced the transformation into a pure wind and solar player. Here we are now. Through a combination of M&A and organic growth since the end of 2020, we managed to have 1.2 gigawatts of new installed capacity, wind and solar, in different geographies. Say, another way of looking at it is -- we basically succeeded, let's say, in making a big shift from conventional to renewable power in 3 years' time. So quite satisfactory execution.

Let's move to Page #10. Say, another pillar of our strategy is our commitment to securing the route to market for our production. So this is becoming particularly important in a time of high volatility and uncertainty about energy prices. In '23, we signed several major PPAs with big names, Luxottica, STMicroelectronics, telecom, Google. So as you can see at today, if you some -- the other PPA we signed the year before, we are -- we can rely on about 2 terawatt per hour per year or about 30% of our entire portfolio stabilized through long-term contract with this corporate names. This is an efficient way, say, to reduce exposure to volatility of market prices.

Page #11. Here are some more details on our financial structure. As said, we can rely and leverage on a very flexible and efficient balance sheet. We do not have any further refinancing needs until '25 and our cost of debt is very low, thanks to the liability management signed in the past when interest rates were at their minimum. Paradoxically, this high interest environment boosted our bottom line, as you see in '23, as we paid much less financial charges than normal, thanks to high-yield cash management. So from a financial point of view, the storytelling hasn't changed. We have an investment grade rating from Fitch and we want to maintain it. In other words, we keep seeking sustainable growth on a financial basis. So return on profitability, say, is more important than volumes from our point of view.

And now to Michele who will take you through our '23 results.

[Michele Pedemonte, executive]

Thank you, Paolo. In Q4, electricity market prices has been significantly lower than previous year. This trend has partially influenced our all-in wind revenues, which are, in any case, mainly dependent on incentives, feeding schemes, long-term PPAs and short-term margin made in the past. In wind, Italy, for example, unit revenues are influenced by developing incentive on the majority of our assets, which is nil in 2023 versus EUR 40 megawatt per hour in 2022 and by the lower market price captured in Q4 '23 compared to Q4 '22. So all-in-all, unit revenues declined from EUR 120 megawatt per hour, EUR 106 megawatt per hour.

The structure of the Italian green incentive will allow a recovery of electricity pages below EUR 180-megawatt hour this year. This will be a positive reversal expected in 2024. In France, most of our assets operate under fixed scheme without exposure to market prices. In Q4 2023, the capture price is higher than previous year, mainly due to the adjustment of fixed price value related to inflation. Please note that in Q4 2022, France has been affected by a retroactive application of clawback measures.

In Germany, captured price in Q4 was lower than previous year because the previous year benefited by the one-way structure that allowed us to capture higher merchant prices. East Europe unit revenues decreased in Q4, driven by Bulgarian and Poland mainly due to lower merchant prices. In U.K., capture prices mainly reflects our PPA prices, includes at EUR 96-megawatt per hour in Q4 2023, lower than previous year by EUR 38 megawatt per hour. When the PPAs have not started yet on our Scotland asset and they could get higher market prices. Please note that the all-in price does not include revenues from balancing services market.

As regard the solar all-in unit revenues, there is an increase of value in Q4 in Italy, thanks to higher enterprises, coupled with the end of the Italian clawback rule that impacted our asset in Q4 2022. In Spain, where our assets have attached margins, that operates the floor to our revenues, all-in prices are influenced by short term engine made in line with our response.

And now focus on production on Page 14. Full year production reached 6.1 terawatt hours, 1.2 terawatt hours higher than previous year, mainly due to perimeter effect, coupled with better weather conditions recorded in most of our countries. Production coming from the route represents 55% of the group's total production. As regard the Q4, we have in Italy 851 gigawatt hour, plus 50% year-on-year, thanks to better wind condition compared to Q4 of last year, coupled with some perimeter effects related to repowering plans entering into operation in the second half of the year.

In France, 435 gigawatt hour, plus 27%, thanks to better wind condition in comparison to a weak Q4 last year. In Germany, 217 gigawatt hour, plus 40%, again, thanks to better wind condition. In Eastern Europe, 236 gigawatt hour, plus 47%, the volume that is higher than Q4 2022 thanks to better wind condition recorded in each country. In U.K. and Nordic, in Nordics 129 gigawatt hour, plus 60%. Thanks to the asset energized by the end of 2022 and early 2023 installed energy. Production in U.K. are influenced also by remunerated balancing services market in Scotland and grid containment in Northern Ireland.

Low production in Sweden is due to prolonged person commissioning activities on our forbidden power. In Spain, 57 gigawatt hours, that's more than double year-on-year. Thanks to the production of the newly acquired big plants that are entering operation between July and December 2023.

In the fourth quarter of the year, we have an overall EBITDA net of clawback equal to EUR 155 million, EUR 44 million higher than the Q4 2022, thanks to better wind conditions and perimeter effects, partially offset by the lower market scenario. Net debt to EBITDA is EUR 81 million, higher than Q4 2022 by EUR 27 million, thanks to better weather conditions and perimeter effect coming from repowering plants, partially offset by lower captured price, driven by the lower value in spending that is moving into 2023.

In France, the EBITDA of EUR 30 million, benefiting from better wind condition compared to lower production of Q4 this year. In Germany, the EBITDA is EUR 20 million lower than the previous year due to lower capture price, partially offset by better wind condition. In Eastern Europe, EBITDA is EUR 11 million, almost aligned with last year, with lower sales price that are partially set by better weather conditions in this area. In U.K. and Nordics, EBITDA is higher than Q4 2022 by EUR 10 million, mainly due to perimeter effect. In Spain, the EBITDA is EUR 3 million higher than Q4 '22, thanks to perimeter effect coming from new acquisitions and better capture price, thanks to short-term margin made in the past.

Full year EBITDA is EUR 520 million, higher than previous year, in perimeter -- due to perimeter effect and better weather condition, only partially offset by worse market share. In 2023, around 45% of EBITDA comes from assets outside of Italy in line with previous year.

Let's comment now on investment in the period. In the full year, we invested EUR 489 million, an amount which is lower than the one invested in 2022, EUR 946 million. But last year, the investments were influenced by EUR 610 million of acquisition of wind and solar plant in Italy and U.K. versus EUR 184 million this year for solar assets in Spain. In addition to 2023, we made about EUR 286 million of organic CapEx in wind and solar, in particular, EUR 196 million of CapEx in Italy for wind repowering and greenfield projects in Sicily and EUR 70 million related to activities revamping and the repowering of solar assets.

Let's now move on to the financials, commenting on other items of the profit and loss. In Q4 2023, amortization, depreciation at EUR 54 million, lower than previous year as an effect of the life time extension project on French and German assets. Net financial charges at 0 versus EUR 7 million in Q4 2022 mainly influenced by increased regulatory remuneration in a scenario of higher interest rate, that structure almost completely at very competitive fixed rate. We have a gross debt with a cost of around 1.3%. Tax rate in the quarter is 24%, lower than previous year, which was influenced by continued scenario in Italy for a total amount of EUR 19 million.

As a result of all this, the adjusted net profit for the quarter amounts to EUR 77 million, higher than EUR 14 million in Q4 2022. The adjusted net profit of 2023 amounts to EUR 226 million, including EUR 9 million of clawback revenue versus EUR 129 million in 2022. That included, again, a series of extraordinary taxes or group of taxes clawback measures contribute extraordinary for a total amount of EUR 83 million. In this chart, you can find a summary of effect of the clawback measures and windfall taxes that affect our figures. The impact on EBITDA and net profit in Q4 2023 is lower than Q4 2022, mainly related to the sharp electricity prices decrease. And it refers mainly to semi-urban funds.

In Romania, the government set a compulsory PPA mechanism at the cap price of terawatt hour, which has the same substantial effect of the clawback measure, but it is not the part of the year of the -- frankly speaking of clawback. Comparing the net profit net of clawback, we see a substantial increase versus the previous year that was affected by other windfall profit taxes.

Finally, let's take a look at the cash flow statement and net financial position for the full year 2023. The net financial debt closed at EUR 1.445 billion substantially in line with the previous year driven by a solid cash generation from EBITDA, cash in from a power disposal and the reduction of mark-to-market derivatives and commodities. It is substantially 0 at the end of the year. These impacts are netted by the recommended investment for the period, EUR 489 million, dividend payment for EUR 154 million and buyback transaction for EUR 61 million.

Thank you again for your attention. I will now hand over to Paolo for his comments on guidance and final remarks.

[Paolo Merli, executive]

Thanks, Michele. Before commenting on the guidance, let me put it in context. In the last few years, we have grown past to dealing with high uncertainty around the energy prices. Recent months have been no exception. Since the last webcast in mid-November '23, there has been a strong downward trend for both gas and CO2. For all other commodities, I would say, but those 2 are basically setting out as you know the price for electricity in the European markets.

As a consequence, electricity prices in recent months have dropped by about EUR 60 per megawatt hour, as you can see in the chart, where there are just 3 countries represented for electricity, but more or less, the same trend happened to all our geographies. This contest is difficult to have a clear view on the scenario going forward. That's why the strategy we are implementing a revenue stabilization in our PPA or CfD is extremely important.

As you can see in this chart, most of our '24 production is hedged through a mixture of short-term hedging, long-term PPA, CfD and among which some are one-way CfD, which basically means they are aware partially exposed to the market whenever prices are above the guaranteed floor. A significant portion of merchant production is backed by incentives similar to green certificates, the value of which in Italy is inversely correlated to the spot merchant price from the year before. So the less you are gaining maybe this year because the prices are lower, the more you will not recover the following year.

But I think you've got to know our revenue structure but I also think it was useful to do a quick recap on the matter. In the end, we cut the story short, notwithstanding these -- all these stabilization mechanisms, a portion or limited of our portfolio production is still exposed to merchant volatility. That's unavoidable, also considering the intermittent nature of our sources, wind and solar.

Let me also give you a little bit of visibility on asset additions we expect in the very short term. Here, you will find a quick update on assets currently under construction. We still have roughly 359 megawatts right now under construction, with 282 should be completed by year-end. So you can count on highly sustainable and visible growth. If you add probably, say, assets under construction or the M&A, some we have already done 5 in France and some should come soon in the U.S., you see that we should expect to reach almost 3.9 gigawatts by the end of '24. So almost 600 megawatts of new capacity to be added in '24 and basically all secure as parties in construction and part already contracted. So our journey is continuing with a visible growth despite uncertain business environment out there.

Let me wrap up by looking at the guidance for '24 in detail. I should mention that EBITDA figures here include the effects of IFRS 16 for about EUR 15 million of the '24 full year because after conducting a survey on peers, we came to the conclusion that the old panel is aligned in applying the principle when reported in their accounts. So we believe this format makes our accounts more comparable with others. But nevertheless, we will keep providing you with all the details about those items on EBITDA and on net financial position.

The EBITDA, let me also add the guidance reflects the very last trend in electricity prices. So it's very up-to-date -- updated today, let's say, and it's based on the most recent forward for 2024. Based on that, EBITDA is expected to be within a range of EUR 520 million, EUR 580 million. So a little bit wider range to take into account the volatility of the commodity. And let me also add that the U.S. portfolio is in this number consolidated just in the second half of the year to make a pro forma considering the full year contribution of the U.S. portfolio, which by the way, is ours because the lot of data was before -- was in the second part of '23, The full year guidance should move up in the range of EUR 540 million, EUR 600 million.

In '24, as far as CapEx, we expect to invest roughly EUR 550 million, EUR 600 million, which includes also the cash out for the acquisition in the U.S. and they're already done in France. And this will translate into a net financial position at the end of the year between EUR 1.75 billion and EUR 1.85 billion at the end of the year, pending the closing of the U.S. deal and the appointment of the new Board in April. I can confirm you that we are currently working on the new business plan, which we expect to present to the financial community and to the market in the coming months, most likely when we publish our first quarter results.

So we are now -- thank you for listening. Thank you for your attention, and we are now ready to take your questions.

[Operator]

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

[Enrico Bartoli, analyst]

First of all, some clarification on the guidance. If I understood well, actually, in November, you provided less indication of something around EUR 600 million could be reasonable. So the current number is the result mainly of the impact of the new prices on the 20% of your volumes that are exposed merchant. If you confirm that and if you can provide some details. And if in the merchant part, you also include the volume which are in Italy entitled to get the green certificates because, of course, you have lower energy price during '24, which is going to partially compensated by high green certificate prices in '25. Also, some details about the volume assumptions that you have there compared to what you are seeing in first 2 months in terms of wind production in the country when you operate.

The second question is related to the coming guidance for '26 in the business plan that you have at the moment I was wondering if the current forward curves are more or less in line with the assumption that you had last year when you presented the plan, if there has been an acceleration on the downward trend or there are significant differences compared to what you are assuming last year and particularly on Italy where we see that the forward price for '26 are still above EUR 70 per megawatt hour. And the last one, if you can give us some visibility on the hedged volumes that you have for '25 in terms of both volumes and prices.

[Paolo Merli, executive]

Okay. I'd say the first about the indication of the guidance, yes, I confirm that all the difference is deriving from the strong downward trend that we have seen in the energy price over the last, say, couple of months. I like to remind you that during the last webcast, a question, if an indication of EBITDA in the region of EUR 600 million would have make sense. I replied, and I remember very well, yes, it made a lot of sense. But at that time, the forward electricity were well above EUR 100 per megawatt hour or even EUR 140, for instance in Italy, and more or less the same in France and Germany. So consider that the numbers we have provided today about the breakdown of our volumes also includes a component, a portion of production covered by one way CfD.

At that time, the contribution we legitimately expected from those production where above, say, the floor guaranteed by the one-way CfD. And the number -- the precise number we got in our portfolio is 0.8 terawatt hour called by one-way CfD. You can simply work out the impact moving EUR 50 in energy prices, EUR 50 multiplied by 0.8 is just for those kind of contracts, the one way CfD, which we feel to consider hedged even from a financial point of view, feature the operating agency considers those volumes covered than secured. But the P&L is going to have an effect if the price is at EUR 140 or, like now, below the floor.

So right now, we cancel the, let's say, the volatility on this kind of volumes because the prices we are assuming to -- for the guidance are below the floor of these contracts. So -- and you can see from the chart, the '22, the one I just presented, we still have 1.6 more or less terawatt hour of production exposed to merchant. And let me say, and I think I've been always clear about that, it's unavoidable to maintain a part of our production exposed to market. If not, the risk is to over hedge the production because our production is intermittent. So you can't predict with certainty if wind or sun is there. And if you simply multiply the 1.5 terawatt hour by the difference in energy prices, you can arrive at a very important number. So that's why we're so confident in November with a completely different price scenario to say, yes, EUR 600 million or even more than that is reasonable.

Finally, I confirm, Enrico, that a big part, more than 1 terawatt out of the 1.6 that we consider exposed to market are covered and backed by the green. Green is the name of the certificate, there are many certificate which formula is -- the value which is related to a mathematical formula. So now we should expect based on the current forward that next year, the green certificates will be higher than the current one at EUR 40, EUR 42, should be in the region of EUR 70. So part of the downward -- theoretical downward compared to consensus estimates will be recovered next year, thanks to an higher green certificate as well. So I hope to have answered. And about '25 I think that the precise number, maybe Michele will be more precise about the volume exposed to market.

[Michele Pedemonte, executive]

Yes. Yes. I mean, for 2025, where the merchant exposure in the region between 2 and 2.5 terawatt hour. That means that we have already covered the 65% of our production. And in order to reach our target, it's in the region of 80%, 85%, we have worked in the month of this year to cover with short-term managing the remaining portion of this quarter by the end of 2024 to end of 2025 with the percentage around 80% lease of coverage products. Then the average figures for considering all the instruments that they have, so also CfD, PPAs, not only short-term margin is between EUR 90 and EUR 100 per megawatt per hour. This percentage excludes the U.S. contribution that, as you know, and as said by Paolo, it's fully covered by PPA. So it's 100% hedged from this aspect. So also the contribution of U.S. will allow us to increase our percentage in term of coverage against the merchant prices.

[Enrico Bartoli, analyst]

And sorry, a comment on '26 guidance.

[Paolo Merli, executive]

Yes. Yes. Enrico, sorry, I forgot to say, right now, if you look at the forward, there is this kind of backwardation curve with prices going further down in '25, '26. In our scenario or the one we believe in, we expect slightly better prices in the sense that when market approaches the delivery time, we expect this backwardation shape will disappear. We think now the market is overshooting, that's our personal view, overshooting in the downside for energy prices.

But please consider that those especially March, April, May are months where forward are suffering a little bit because we are in the middle of the winter season, which was not very say, colder and summer season. So we expect volumes and consumptions to recover and then price to stabilize maybe at a better value. But if I have to be more precise say, yes, our -- depending on the countries where we are because we have different price expectations, but let me say that for '26, prices are in the region of -- in a range of EUR 80 to EUR 100 per megawatt hour. This is the price estimates range we are basing our expectation for '25 and '26.

For the time being, we will see in a couple of months, we expect both from a megawatt point of view, installed capacity point of view to be perfectly in line with the trajectory of the business plan we have already announced last year and as well for the EBITDA. So we expect, given the huge additions of megawatts, we expect starting from '24, because as you see roughly 600 megawatts will be added to our portfolio. And we expect to be in line also with the trajectory for the EBITDA. And last but not least, please consider, but I already said that the current guidance for '24 is just including half year contribution from the U.S.

[Operator]

The next question is from Roberto Letizia from Equita.

[Roberto Letizia, analyst]

Of course, I remain on the guidance. Just wondering if you can give us some more details of what sits behind the low and the high end of the guidance in terms of power prices and production. So actually, what's the scenario that takes you to EUR 520 million and what's the scenario that takes you to EUR 590 million? Because this is a very large range. So you can maybe help us to compose this minimum and maximum with underlying assumptions.

I have a question also on the debt because the guidance on the debt seems very low. If you can help me to compose the numbers. But you have some EUR 600 million of CapEx, you have some EUR 270 million of acquisition in the U.S. You paid EUR 140 million dividend and you have the remaining EUR 40 million from the buyback. This is almost EUR 1.050 billion, EUR 1.1 billion. But you have an operating cash flow from net income and depreciation of around EUR 500 million.

So basically, if I only take these 2 numbers, you should be in the range of EUR 2 billion for the net debt of 2024, but your guidance is significantly below. So I'm wondering if you can help me to understand what's the delta in terms of cash contrition expected to arrive from this year.

A very quick clarification on the debt guidance. So I see now your EBITDA includes the IFRS 16 completion. But I think, if I'm not sure, the debt numbers which you put in the press release does not take into account the IFRS 16. So can you help us reconciliate these 2 differences?

Just wondering if the full year correct contribution expected from the U.S. plant is now a EUR 30 million, because now half contributes for EUR 20 million in your guidance. So is it EUR 30 million, is it EUR 40 million? What's actually the expected full year contribution of the U.S. plant?

And then please comment on the new Fenix decree. Do we see the first indication on prices, which are in the region of EUR 80, EUR 85 per megawatt hour. Just wondering if this is satisfying for you and if you can tell us what's the potential in terms of megawatts in the hands of ERG to participate in those tenders which have currently now more attractive prices?

[Paolo Merli, executive]

So Roberto, I'll try to navigate through your many questions. The first one is to explain the range of the EBITDA. Let me say that the central point is very much based on the current today, more or less, forward price of '24 which definitely is different country by country. But for sure, it's, let's say, in line with current forward price for '24. The bottom part of the range, the EUR 520 million, assumes a conservative view that the prices could move down by further 20%, more or less. So we decided to enlarge a little bit the wideness of the guidance based on the current volatility, which is much higher than it used to be, as you can see from the screen.

Let's say, this is the answer to your first question. In May, when we will provide the results of the first quarter, we could narrow a little bit probably this range. And if I may, I can tell you that the January and February went quite well, performed well, including the U.S., which is not in our accounts yet because we have not yet closed the deal waiting for the last clearance. But I'd like to remind you that the contract make us owner of the cash flow even in the first part of the year because the contract was based on a lot of them obviously. Just to say that from my point of view, the better KPI for the EBITDA is the one including also the U.S. for the first part of the year.

Yes, I confirm the guidance is including the effect of IFRS 16 because we conducted during '23 survey with other peers in the industry. We came to the conclusion after the first year since the publication of the principle. There were different behaviors, some accounting the ordinary numbers, some are specialized. Now there is quite big alignment in applying the principle in the P&L. So we came to the conclusion that we use -- including the IFRS 16 made our numbers more comparable with that. But for sure, as I said, we will keep providing you and providing the financial community with all the details in order to calculate.

In the net financial position, yes, I confirm the guidance we expect notwithstanding EUR 600 million of investment, more or less, which includes already acquisition in the U.S. and also the dividend for more or less EUR 150 million. Thanks to the cash flow, the high cash flow of the company, we expect to close the year with a net debt in the region of 1.8%. This number does not include the IFRS 16 effect, which is in the region of EUR 200 million.

[Michele Pedemonte, executive]

Yes. It is there in the same slide, you have book figures. So we are going to provide book figures on adjusted net financial position without the IFRS 16 and report the net financial position as we are always doing with this figure, just to say.

[Roberto Letizia, analyst]

So just the last point, just to be kind of sure. So the EUR 600 million CapEx indication of EUR 424 million, includes already the U.S. asset acquisition?

[Paolo Merli, executive]

Yes. Because -- yes, it may seem low compared to the 600 megawatts we expect to install in '24. But please consider that a big portion of those CapEx were already spent in 2023 last year as our advanced payments for wind turbines and BOP and other activities. So you have the detail of the construction expected the date, and that is in the first half of the year. So the large portion of our CapEx for the construction has been already spent in 2023.

And you also asked about the Fenix. Yes, we have been waiting for longer for having this first indication. We are still in the middle of the process because this is just a draft. From some point of view, there are positive elements. For instance, the amount of wind and solar capacity the government expect to install in the next 5 years because the decree is going to cover '24, '28. And if you divide the number of megawatts, 16.5 for wind and roughly 50 for solar, you can come to a number which is 6x, 7x higher than the country has installed, at least looking at large-scale plans over the last few years. So this is implying a very, very strong acceleration.

In terms of -- and the auction are finally independent from a technological point of view, meaning there will be auctions for wind and auctions for PV. The point we are not absolutely happy with is the fact that the price set up of wind is lower compared to the one for solar, which is nonsense. Honestly, let me say, there is no other example across Europe.

And we think it's kind of a misunderstanding because if you see the table both in the CapEx -- the expected CapEx per megawatt technology, I mean, the reference investments needed for this kind of technology in the draft is reported is almost EUR 1 million for solar and just EUR 1.3 million for wind. But anybody following the sector know that for wind, the capital intensity is much higher in the region of EUR 1.5 million, EUR 1.6 million or sometimes even EUR 1.7 million, while for solar is much lower than EUR 1 million, is in the region of EUR 600,000, EUR 700,000 per megawatt.

So I think the assumptions currently made for working out the reference price are wrong. That's my opinion -- our opinion, but we are working with the ministry and with the department, the technical department of the ministry to, say, improve this decree. And we are -- we remain confident that a better outcome will be released in the next few months. Let's wait. We can't control this by just commenting and giving a constructive view to the decision makers in order to improve the quality of the decree with a win-win situation in the sense that the target be set out for the country will be reached just if will be the right conditions.

If not, as I always said, we will slow down the investments because the generation capacity of the group is very big, and we will divert investments in countries or in areas where there are some more stable in the period. So the rule of thumb is value over volume. So we want to reach our other rates, our term in this very volatile market business environment, not just for the energy projects, but also for the interest rates that are still very high. So Roberto, I hope to have answered...

[Roberto Letizia, analyst]

Yes. On this one, maybe I was more interested in what the potential for ERG for participating in those tenders, which are a bit more attractive I would say, now. You can just start there...

[Paolo Merli, executive]

We are still assessing our investments, in particular, the power because we got several projects already fully authorized without those . So ready to get started in terms of construction. But we are assessing the return on those investments because, as you know, power means dismantling an existing asset that could produce for the next 15 years without EUR 1 of investments and to substitute it with a new platform, which requires a lot of investments. And we are assessing, always like this, the return on investment on a differential basis, not in absolute terms.

So we are working to improve the decree in order to prompt, say, this kind of investments and also to cancel the penalization, the power is still subject. You should remember that with our price in the auction is discounted by a farther 5% because of the mentioned TV role regulation that was issued in 2013, so quite a different era. So we think this is a totally -- I don't know, out of fashion. We are working to cancel this penalization. And whenever we'll be succeeding in doing this and we are succeeding in having a further renovation through auction, we will assess our investment.

Still there are not this condition, we prefer to maintain investments in the pipeline. Because, as I always said, power is like a good wine. We can wait and the return is going to improve. So that's the answer for the time being. But we are working on assessing project by project, monitoring the evolution of the regulatory in Italy and then in Europe. And we will provide you and the financial community with more indications during the business plan presentation.

[Operator]

The next question is from Nash Cui of Barclays.

[Naisheng Cui, analyst]

I have two, if that's okay and I'll ask them one by one. So the first question, if I'm not wrong, the wind condition year-to-date, especially in January, February has been pretty strong. And I wonder what is your assumption of utilization? Because I remember 2023 in Q2, the wind condition was very weak. Are you assuming a similar wind condition as in 2023? Or are you assuming a normalized utilization rate overall across your portfolio?

[Paolo Merli, executive]

Okay. Say, in '24 -- in '23, actually the availability of wind during the fourth quarter completely offset the lack of production in the first 9 months. So in the end, in particular in some countries, we had production that came out stronger than the P50. Let's take, for instance, Italy. The fourth quarter production were 50% higher than the one recorded in the fourth quarter of '22, much higher than our budget for the quarter, let's say, compensating for the lack in the first 9 months.

When looking at the guidance for '24, we are a little bit more conservative in terms of production sanction compared to what we had registered in '23. So in other words, if the wind in '24 will blow as much as it did in '23, results could be better. But we can't say -- can't have this kind of certainty. I hope to get the message across.

[Naisheng Cui, analyst]

Yes. That's very clear, Paolo. And my second question, if that's okay, I can ask about the chart in Slide 22, Page 22. And I just -- I'm a bit confused with that chart. I just want to get a bit of clarification. On the CfD one way, that is 0.9 terawatt hour. I'm assuming your law of protection will kick in if power prices drop to a certain level. Do we know about that? And can I assume this EUR 520 million guidance is a floor?

And also on that chart, the green part, you have 1.6 terawatt hour there, of which 1.1 is the incentive plan. What is the other 0.5? Do you have merchant exposure for the other 0.5 terawatt hour? Is that the only merchant exposure you have for 2024? And that was my last question.

[Paolo Merli, executive]

Okay. I'd say the -- as I said, out of the 1.9 terawatt hour powered by CfD, roughly 0.8 confirms are based on one way CfD. And according to our guidance, it is not more risk to those contracts because the merchant price is below the floor guaranteed by those CfD offer. In other words, a few months ago, we expected those production to give us an upside compared to the floor of the feed entirety for CfD, while now with lower forward price they went below the floor. So there is no downside risk.

Still, there is an upside risk if the prices rebound and went up going beyond, above the floor, for sure, this is upside we have, but not downside from those kind of contracts in our guidance. You said correctly, we have more than 1 terawatt hour of production in Italy, which is part of the green bid, the 1.6 that are enjoying -- still enjoying and benefiting from the green certificates in Italy. Those value is worked out through a well-known mathematical formula, 118 minus the , so the merchant price registered in the year before.

So looking forward, if right now, let's say, the price is EUR 90, more or less the forecast for '24, if you make the calculation, you will conclude -- you will come to EUR 70 for the green compared to the EUR 40 this year. So just to say that probably EUR 30 million like-for-like, I mean, with said for price scenario. But the price scenario remains flat in '25, we should have roughly EUR 30 per megawatt hour more for green certificate, which translates into EUR 30 million more. So part of the disappointment, let me say, compared to the market estimates for '24 will be recovered in '25 through this mechanism.

[Naisheng Cui, analyst]

Paolo, can I just add a further clarification on that? Because I did a bridge analysis based on my previous over EUR 600 million EBITDA for '24 than to the new guided. And I thought the new Italian power price should be around -- implied in your guide should be around EUR 80 to EUR 90. Is that fair?

[Paolo Merli, executive]

I think so.

[Michele Pedemonte, executive]

Yes. More or less, yes.

[Operator]

The next question is from Paolo Citi of Intermonte.

[Paolo Citi, analyst]

I have a follow-up question on wind Italy and particularly on green volumes, green incentive volumes. Clearly, this is quite important issue taking into account the falling electricity prices and the increasing value of the green incentive, around EUR 40 this year and maybe EUR 67, as you said before for '25. My question is, can you recap the expected trend in volumes backed by these incentives? It should be around 1.1 terawatt hour this year, almost stable '25. And then if I remember correctly, a first step down in '26 and the second one in '27. Can you remind us your expected volumes evolution for this particular output?

[Paolo Merli, executive]

Thank you, Paolo, for the question. Yes, you are definitely right. The 1.1 in '24 is slightly less than '25, but more or less stable, about 1 terawatt hour then going down at 0.8 terawatt hour. And then the big phaseout would be in '27 with just 0.3 remaining covered by green certificates. Yes, you are right.

[Operator]

The next question is from Stefano Gamberini of Equita.

[Stefano Gamberini, analyst]

Could I come back to the Fenix decree, please. Just to understand, Paolo, what is your view regarding the actual acceleration of investment in Italy considering the rest of the conditions? You're right, the price of wind is too low probably. So if this price will be improved, all the rest of conditions, I mean, regarding the length of incentives, the volumes granted and so on are fine. And so we can expect an actual acceleration of installed capacity or not.

The second is regarding solar, the solar price, it is more fair. Do you expect an actual acceleration in this business? And are you interested eventually to enter this business. The third, regarding what are the total amount of capacity that you currently have that could be repowered if the decree will be adjusted as you require?

[Paolo Merli, executive]

[Foreign Language], Stefano. Yes, the target they set out in terms of megawatt are very, very aggressive because, I repeat, if you take the number written on the decree 16.5 for wind and 50 for PV, and you divide it by 5 years, it will reach a number in the region of 12 gigawatts of installed capacity per year. And as I said in many occasions, public occasions, we have to analyze the actual data. And if you take the number in 2023, you will realize that just 1 gigawatt of larger-scale plant, less than 500 in wind and less than 500 in solar are being installed because the remaining part, 4 gigawatt roughly, because the total capacity installed in 2023 was 5.7 according to the official data.

But the more than 4.5 were plants below 10 megawatts or even below 1 megawatt, I mean, rooftop plants. And we all know those kind of development has been propelled by the super bonds, the 110 fiscal bonus that was available till last year. But you know this bonus is phasing out quickly. So we shouldn't expect the same support from this point of view. And the objective is quite evident on the Fenix, the government is to push now on the large installations. But I keep repeating that if you look at other countries such as Ireland, such as U.K., such as France or Germany, you see that the price for wind allocated through auctions are much higher than the ones awarded for solar PV.

So I think in order to reach the target, especially for wind, the government should revise upwards this value. And for solar, so the amount is very big. It's including -- and this is an improvement in the regulation is including also the agri solar because agri solar wasn't eligible for -- to participate the auctions in the previous lateral framework. Now it is. So this is purely positive. And I think 80 is a quite good price for solar because it's price based on a pay as produced production, okay? So that's why I insist the 85 for wind, which has not got the DAC profile in the production -- in the daily production is too low on a relative terms.

So let's see what's going on because still this is a draft and that's been well specified. We are working to correct this, let me say, the effect of the current draft. Based on the final one, we will assess our investments.

[Operator]

The next question is from Davide Candela of Intesa Sanpaolo.

[Davide Candela, analyst]

I just have two. The first one is, I would say, more strategical, and I was wondering if you could share the view about the renewables market in Europe. So do you see that despite the decline in prices that we observed in the recent months, still there is room for developing and the IRR and the projects are in the money? And compared to that, looking at this decline in prices and, of course, the interest rates environment, if other regions, meaning U.S. and then if you can elaborate on the strategic rationale, U.S., if this regions are becoming much more competitive compared to Europe looking at this scenario.

And the second one is just a clarification on the P&L and the results in 2023. You recorded a capital loss on the CCGT sale. I was wondering if you can provide a little bit more color on the nature of this capital loss. Maybe you said before and I lost it.

[Paolo Merli, executive]

Okay. Let's go to your questions in order. I'd say, absolutely, we are still absolutely positive on the future for renewables. Because, let me say, the current negative model is very much related to the trend in prices, which has nothing to do, in my opinion, with growth of renewable, yes or no. It's very much related to the fundamentals of demand for gas. So there are now official data that are showing that over the last 2 years, there's been a demand disruption for gas in the region of 100 billion cubic meter in Europe, so then substituting basically a big portion of the Russian gas that we lost.

We expect, nevertheless, and this is what all the price scenario providers are saying, we expect the demand to start growing again because the electrification process is ongoing. It's ongoing just, for instance, the intelligence -- the artificial intelligence or the software, the data room are requiring a big, big step-up in the electricity consumption. So from this point of view, we expect this is just a phase for energy prices. As we didn't believe 1 year ago that prices would have stayed above EUR 200 per megawatt hour. Now we don't believe prices will go down to EUR 50, EUR 60.

If not, energy transition will definitely stop. But don't forget that the objective of the states, the government, decision maker is to combat the climate change. We can't combat combine the climate change building gas stations or reactivating coal plants. And also the nuclear, there is a lot of talk about nuclear. We are not against nuclear, let me be clear on that. But we think to install new nuclear or fresher nuclear capacity will require a lot of time, in particular in Italy, where it's banned by law. So in the meantime, we think the right way is to keep growing the renewable and working -- this is a work the regulators has done to, say, redesign the market. Because it's evident more and more that those kind of installations needs stability in prices.

They're not looking for match price but price that are consistent with the capital intensity required to installed megawatts wind, solar and storage and so on. And I think this is the next step Europe and each member states will go through in order to find the fixing for the energy transition. It's not, the target will remain targets, will not transform into reality. So we are positive because we expect this improvement in the regulation to come soon. We also expect, honestly, reduction in interest rates going forward, even though a reduction in ERG has been a positive contribution, the one we received from the higher interest rate because we had all our debt hedged at 1.4% cost of debt, while the liquidity was invested with a higher yield.

But going forward, we expect the cost of debt to start declining because if I come back to the fundamentals, and I said this is official data, the gas market has lost roughly 100 million cubic meter, just partly because of the warmer temperature during the winters, the last 2 winters, but in particular, in natural production. So I think the central banks, the European central banks has to lower the interest rates in order to reactivate the industrial production in major countries in Europe or in Germany, like in Italy, in France. So we are moving on step-by-step, keep growing and keep delivering solid results. That's our point. And we will assess project by project, taking the final investment decision just and when we have a return, which is consistent with our value proposition.

You ask -- yes, you asked if there are other markets -- say, we announced we enter in the U.S. in December. But let's be honest, we have been working 1 year on this opportunity. And the ABC of the decision was exactly this, to find the area in the world where the stabilization mechanism in the U.S. is particular -- they are particularly strong through PPA and production tax equity partnership are supporting the development of renewal. So U.S. will ease and will become, according to our analysis, an important stream for our growth. And given the financial resources are limited, we will allocate them based on the return each country, each area, each project we provide to our profit and loss and to our margin. That's for sure.

So U.S. it's reasonable to think that it's going to be part of the next business plan, not just the portfolio we currently have, but in terms of development. About the CCGT, yes, you read well the profit and loss statements but was already in our estimates, absolutely that the capital employed recorded in the balance sheet was more than EUR 300 million, then the write-off is consistent with the price we sold the asset, which was more in the region of EUR 500 million or I see like I remember, is slightly higher or lower than that. So -- but it's all included in our -- it was already all included in our guidance estimates and so on.

[Operator]

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

[Paolo Merli, executive]

Okay. Thank you very much for the attention, and we will be speaking soon when presenting the first quarter results in May and likely also the business plan. Thank you very much, and have a nice day.

[Michele Pedemonte, executive]

Thank you.

[Operator]

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