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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good evening, ladies and gentlemen, and welcome to our first quarter 2018 net results presentation, which will be hosted by our CFO, Alberto de Paoli. I'm Monica Girardi, the Head of Group Investor Relations.
In this presentation, we would provide some highlights of the quarter, and Alberto will take you through the operational and financial performance.
Following the presentation, we will have the usual Q&A session open to those connected both on the call and on the web.
Before we start, let me remind you that media is listening to both the presentation and the Q&A session.
Thank you, again. And now let me hand over to Alberto.
Thank you, Monica. Good afternoon, ladies and gentlemen, and let me start with the highlight of the period.
I'm on Chart #1. We reported an ordinary EBITDA of EUR 3.9 billion, 4% higher versus last year.
Net income shows double-digit increase driven by growth and a decline in interest charges and taxes. I will comment in detail on the drivers later in the presentation.
Growth EBITDA has been a driving force for the quarter. And as of today, we have secured almost entirely our gross EBITDA target for 2018.
Operational efficiency is well on track, with flat cash cost in nominal terms and OpEx down by 2.6%.
As per group simplification and active portfolio management, we have successfully completed the restructuring in Chile.
Last but not least, we are pleased to report that we have proposed to the AGM to correlate the components of our management team long-term compensation to a nonfinancial metric to corroborate our strong commitment to a low carbon world.
I would be more specific on this later on.
And now moving to Chart #2, into detailed analysis of the quarter. Let me summarize the main drivers for Q1. And in this chart, we can see the compounded effects, at EBITDA level of investor actions put in place as well as the overall impact of macro headwinds. The steady growth and partial normalization of external conditions allow us to secure a positive contribution through EBITDA of EUR 450 million, despite a negative environment worth around of EUR 320 million.
Growth driven mostly by Renewables and Networks contributed to our quarterly EBITDA for EUR 130 million, around 45% above previous year.
Retail margin improved on the back of the recovery in Iberia and Romania. A further EUR 70 million are related to better resources availability and the positive effect of regulatory review in South America, that was around EUR 120 million.
The really challenging context highlighted in 2017 result presentation is normalizing with some effect still persisting in the first quarter of the year.
In particular, negative impact of FX, mostly in South America, Italian Thermal Generation EBITDA, that is impacted by thermal gas reduction and contraction in generation margins. And lastly, CPI did weaken our cost base.
Let's now look at CapEx executed in the quarter and -- on Slide #3.
Maintenance CapEx increased versus 2017 on the back of accounting principles impacting both Networks and Retail in Italy and Spain.
On growth CapEx, Network increased 64%, in line with our strategy to digitalize rates, improvements of quality and efficiency.
Renewable CapEx decreased in the first quarter this year only due to different profile of spending.
Around 70% of growth CapEx for 2018-2020 plan period is addressed. Out of the total EUR 10.2 billion CapEx addressed, EUR 6 billion are related to Renewables and will be spent for the completion of around 5.4 gigawatts of new capacity.
In Networks, committed CapEx amounts to EUR 3.6 billion and this is related to the second generations by meter roll out to the ongoing quality program implementation in South America.
Moving to efficiency at Page 4. We achieved flat cash cost in nominal terms. This increase in maintenance CapEx is offset by a 2.6% reduction in OpEx.
On maintenance CapEx, the increase is driven by the change in accounting criteria for IFRS15, which has also a positive impact on OpEx reduction.
OpEx decreased EUR 72 million in real terms. On improved KPIs across all the business lines with exception of networks, recording higher cost for bad weather expected to be reabsorbed by year-end.
In Renewables, we keep on achieving efficiency through large scale operation and operation and maintenance synergies. OpEx reduction include also the previously mentioned impact of IFRS15.
Now on Page 5. As far as active portfolio management. We have completed the reorganization in Chile. All of the group's Chilean renewable assets held by Enel Green Power Latam have been merged into Enel, Chile.
The public tender and exchange offer growth with an acceptance of 84%.
As a result of this, our stake in Enel, Chile increased by 1.3%, whilst the overall economic interest in Chile grew by around 10%. In line with our strategy, the transaction is EPS accretive and brings benefits to all shareholders involved. And the shareholders will benefit from reduction of minorities, optimization of the financial structure in Enel, Chile, hedging on generation followed by the integration of the renewable platform.
This reorganization was an important step towards the full simplification of our Latam American operations.
And now moving on Page 6 to the sustainable value creation. We see a growing attention to the sustainability of business models, with a specific focus on risk and opportunities associated to climate change.
The CEO and I believe that, in particular, climate change will have a significant impact across many factors, and that we, as a business leader, have an important role to play in entering transparency around climate-related matters.
To date, we have set up a multidisciplinary work group around 3 main activity platforms, developing long-term climate scenarios based on the location of our assets, mapping the impact of climate-related risks and opportunities on the organization's business, long-term strategy and financial planning and developing the related financial reporting package.
As a further testimony of our commitment to sustainable strategy, we have proposed at the AGM, a modification of the LTI plan to strengthen the link between the long-term valuable remuneration and our business plan.
The target is our committed level of CO2 by 2020, and its weight 10% on the total long-term valuable remuneration. Let me remind that the remaining targets are the total shareholders return, with a weight of 50% from 60% prior to the introduction of the CO2, and return on average, capital employed, that is weighted 40%.
Now before we go to the financial summary on Slide #7, as promised, we will start from this quarter's reporting the Enel X results.
Revenues came at EUR 260 million and gross margin at EUR 84 million with the organization on track to deliver cumulated EBITDA contribution of EUR 800 million over the planned period.
Throughout the 4 business lines, we are focusing on extracting efficiencies from mature businesses, promoting growth and innovation for semi-mature businesses leveraging across the utilization across countries operating in and accelerating the development of start up businesses, mainly in the software platform side.
Let's now have a look to the financial of the quarter, and I am now on Slide #9.
Ordinary EBITDA is up 4%, FX to EUR 3.9 billion. No one-offs items have been recorded in the period. Worth mentioning that without the negative effect of currencies, ordinary EBITDA would have increased by roughly 8%.
Net ordinary income expense at EUR 1,041,000,000, with a remarkable plus-10% increase versus last year, driven by growth, reduction of interest charges and taxes.
Excluding negative currency effect, net income would have increased by around 14%.
FFO stands at around EUR 1.9 billion, up 9%, driven by EBITDA increase and lower financial expenses.
Group net debt stands at EUR 37.9 billion, plus 1% versus December last year, after having paid around EUR 1.4 billion of dividends in the periods.
Let's now have a look to the group EBITDA on Slide #10. As said, EBITDA at EUR 3,909,000,000, net of one-off items recorded in 2017 of EUR 72 million, and net operating effect EBITDA increases by 2%.
Group EBITDA increased EUR 130 million year-on-year, of which 74% from Renewables and 26% from Distribution.
I have already commented on efficiency, which amounts to EUR 72 million in real terms, including IFRS15 impact for around EUR 40 million as well as a negative FX effect and perimeter.
As far as scenario and energy margin are concerned, we reported a positive contribution of EUR 22 million, as the negative effects of thermal margins and PPI on OpEx are more than offset by the increase in retail margins and the contribution from Renewables.
In particular, we have lower thermal margins for around EUR 150 million, mainly in Italy due to the contraction of thermal gas and reduction in generation spreads.
We have roughly EUR 45 million of impact of higher CPI on OpEx and we have retained margins that have increased by around EUR 125 million, thanks to Iberia, where we recorded better margin for both power and gas.
And then we have higher contribution from Renewables for about EUR 40 million. Worth mentioning that the recovery accelerated in March and also in April.
Let's now let have a look at group EBITDA by global business line. And I am on Slide #11. In this chart, I will comment on the adjusted EBITDA, which is net of one-off item recorded only in first Q, 2017.
EBITDA from Global Infrastructure & Networks is EUR 1,721,000,000, substantially flat versus last year, once adjusted for the FX impact. The evolution of the EBITDA is associated with positive growth project for around EUR 34 million. That has increased in South America for around EUR 40 million, based on tariff increase in Argentina, counterbalanced by lower revenues in Italy for EUR 35 million due to tariff adjustments, higher costs, driven by negative CPI effect for about EUR 26 million and weather conditions mainly in Italy, South America and Romania.
EBITDA in Global Thermal Generation & Trading is equal to EUR 286 million, including a negative FX effect of EUR 26 million. The decline is attributable to lower thermal margin for around EUR 160 million, primarily in Italy due to the previously commented market condition. And the negative scenario is partially compensated by Iberia margin on the short position and by efficiencies for EUR 32 million.
Global Renewable Energies' EBITDA is EUR 1,030,000,000 and I will comment more in detail on the following slide. Retail business is EUR 835 million, supported by the improved performance in Iberia already commented.
I will now go to the analysis for the Global Renewable Energies on Slide #12. As you can see from the chart, we reported an ordinary EBITDA of EUR 1,030,000,000 or plus 10% versus last year. Net of the negative FX effect, EBITDA would have increased by 16%.
New capacity generated additional EBITDA for EUR 96 million, of which EUR 46 million in South America, EUR 47 million in North and Central America and EUR 3 million in South Africa. Efficiency also contributed with EUR 17 million of cost cutting.
Finally, we recorded a positive effect from scenario and resources of about EUR 35 million, due to higher margin in Italy, Iberia and South America, lower margin in Romania due to the reduction in regulatory incentives for green certificates.
In Page 13, you can see the split for countries.
And now we move on Page 14 to a detailed analysis on the Italian operation. As you can see from Page 14, Italy recorded an ordinary EBITDA of EUR 1,815,000,000 or minus 7% year-on-year.
EBITDA and distribution was EUR 828 million, slightly decreasing versus last year on lower tariffs and higher cost related to weather conditions.
In Thermal Generation, we reported an ordinary EBITDA of minus EUR 8 million, with a decrease year-on-year of EUR 153 million, due to the reduction of thermal gap and the contraction of generation margins and lower OpEx.
Moving to retail business, EBITDA stood at EUR 668 million, increasing by EUR 27 million year-on-year. I will explain the main drivers in the following slide.
And finally, Renewables business in Italy increased at EUR 300 million on higher margins and efficiencies.
Moving to Italian retail business on Slide 15. As said, EBITDA increased by EUR 27 million.
In the quarter, we consolidated further our competitive position within B2C segment customers. While compared to last year, the increase in volumes sold over B2B is still strong but moderating. So we are increasing our -- further our position in B2C and also in B2B, but with a less strong growth.
Volumes sold into the free energy market increased by a notable 14%. It is important to mention that our free customer base, overall, has increased by 700,000 clients and the churn rate improved.
The B2C segment did not show any competitive pressure on prices during the first quarter of the year. The relatively increasing weight of large clients into our volume mix is the main driver of the decline in power unitary margin that you see are represented in the slides.
Overall, divisional EBITDA is stabilizing year-on-year and it's well progressing towards its full year targets.
Let's now take a deeper look at the main drivers of our group net ordinary income on Slide #16.
D&A increased by about EUR 110 million, due to higher amortization in Italy and Iberia for the implementation of the new accounting principal mainly. Commission of Renewables' plants in South America and U.S. and a delta perimeter associated with Enel Distribuçao Goiás and U.S. acquisitions.
Financial expenses and other at EUR 531 million mark an overall 14% decrease year-on-year.
The group tax rate decreased by around 6%, reaching 25.5%, thanks to the positive impact deriving from the recognition of deferred tax assets in Italy.
Minorities increased by 42%, mainly due to the higher results in South America versus previous year. And as a result, the group net ordinary income shows a double-digit growth, standing at EUR 1,041,000,000, or plus 10% versus last year.
Moving now to Slide #17 on the cash flow. Free cash flow improves year-on-year, due to better FFO recorded and lower level of CapEx. FFO stands at EUR 1,900,000,000, over EUR 150 million higher than last year, supported by EBITDA growth and lower financial expenses.
Cash conversion stands at 49% versus 46% last year. And this is thanks to lower financial expenses paid for around EUR 200 million, and lower taxes paid mainly due to the advanced settlement tax payment dynamics. By year-end, we expect to have a significant improvement in the net working capital, absorbing the negative impact recorded in this quarter due to seasonal profile of CapEx dynamics.
Net free cash flow stands at minus EUR 725 million, mainly due to the interim dividend payment executed in January, marking a -- nonetheless, a 6% increase versus last year.
Moving now to net debt. And I am on Slide 18. Our gross debt increased by about EUR 800 million versus December, 2017, due to EUR 1.4 billion loan draw down related to the Chilean restructuring that now have been settled in April, higher commercial paper for EUR 1.6 billion, partially offset by net impact between emissions and reimbursement for minus EUR 1.7 billion and positive FX impact.
Net financial expenses on debt declined by a remarkable 8%, equal to around minus EUR 50 million versus last year, with an average cost of 4.5%, down 20 basis points versus last year.
Our net debt increased by EUR 500 million, touching EUR 37.9 billion, and excludes assets held for sale for EUR 1.4 billion, mainly related to the Mexican Renewable asset, whose disposal is expected to be finalized by the first half of the year.
In more detail, the change in net debt is mainly due to the free cash flow after dividends of around minus EUR 700 million, a positive impact from FX of about EUR 170 million.
And now, at Page 19, some closing remarks.
I would say that first quarter results showed finally some mild recovery from adverse scenarios, particularly looking at availability of natural resources while currencies devaluation continues to decline.
The increase in EBITDA was and will continue to be fueled by growth in Renewables and Networks, in line with our strategy. We showed an ongoing focus on operational efficiency, will -- which will be, in future months, further supported by our investments in digitization.
FFO generation proved to be solid, thanks to our operating growth and decline in financial cost. And in the light of the high visibility and prospective growth delivery, further expected improvements into availability of natural resources, operating and financial cost reduction, we confirm that the delivery of our financial targets is on track and we confirm our full year guidance.
Thank you, for your attention. And now let's open the Q&A session.
[Operator Instructions] The first question comes from the line of Harry Wyburd from Bank of America Merrill Lynch.
Three questions for me, please. The first one is on commodities in Italy. I'm trying to make sense of your comments on the numbers on the thermal gap and spreads in Italy. Is this because gas and coal are moving closer together on merit order? And, therefore, is that something that you expect to persist for the rest of the year? And how has that turned out relative to what you're expecting in [indiscernible]
Harry, Harry. Sorry. Harry.
Harry, sorry. We had a problem, technical problem. Can you restart the questions?
Sure, yes. No problem. So first one, just on commodities in Italy. So you talked about the thermal gap in spreads having a negative EUR 100 million impact. I wondered, is that because gas and coal have moved closer together on the merit order and do you expect that, therefore, to persist for the rest of the year. And what does that mean relative to what you're expecting in your guidance that you set in November? That's the first question. The second one, you've kind of asked -- answered this already on Slide 2. But the earnings bridge, I wondered if you could extend that out for the full year and you've listed lots of items on there. Then you've also had a change in scenario in Argentina since the end of the first quarter, and you've got the Mexican BSO coming in the second quarter. Could you just list for us the big ticket bridge items? What's going negatively? What's going positively on a full year basis, just so we can understand why you're still confident that you can hit your full year 2018 guidance? And then, the third and final one is on the hybrids. So that the press release saying that you're going to refinance them. I presume that's in response to the change in the rules by S&P. Can you give us some kind of gauge as to what the benefit of refinancing those would be, if you did that at current rate?
Okay. So the first one, I think you are asking the thermal gap in Italy, the different situation of thermal gap in Italy. I think we have here a couple of important things. Because you remember that we are comparing this year with a year -- with a quarter last year, with 2 events that are completely different from this year. One was the rate volatility and the second was the outages of the nuclear plants in France.
So these are the 2 things that are changing completely the outlook of the thermal gap in 2 years. I could give you the number of the two, the thermal gap is down in Italy of roughly 12%, year-on-year. So, what we call the thermal gap, so what is the space for the thermal generation is narrowing roughly 12%, year-on-year.
And the -- order bridge for the bridge and the full year bridge. So what I see. Well, so we had -- so this -- the main impacts we have in this quarter, I said in Page 2, is mainly based, I'd say, on the FX effect. Because we think that also, one important point is that -- the recovery we had in Renewables and now the -- where we're on Renewables versus last year, have been made in March. So March was the first year -- first month in which we have a production higher than previous year. And if we're looking at, we'll -- this is increasing a lot. So we have, on this side, good signs on the renewable production and also renewable margins.
Prices are still high. And as you know, mainly -- this -- mainly in Italy, we don't hedge the production which is in excess of our targets. So these are something relevant to us. High prices and production, not hedged. This is on the positive headwind. So I just think that on the thermal generation and other headwinds on Page 2, they will stay relatively flat after this quarter. So we will see sign of recovery on this side and the linear impact on the CPI. On the good and positive effect at [indiscernible], I'd say that we will have this improvement in renewable production. We have also an accelerated growth profile. You would see this in the next quarter. So we are accelerating on the growth profile. And this year, we are keeping a linear development. So in the last year, we had the vast majority of development happening in the second half. This year, we have a more linear growth, mainly in Renewables.
And then, we have -- that we will have the final at the completion of the Mexican asset selling. It's going to be closed in the first half. And this will give us an improvement, because the capital gain, as you know, the BSO model, it will be in operating results of this year.
On hybrids, we have now -- between 2019 and 2021, we have roughly EUR 3.5 billion of hybrids that will come at maturity. And so we have already our -- the target of the refinancing in our plan are consistent with what we are doing. And so we have now targeted to refinance this hybrid at an average cost of roughly 3.5% versus the 6.5% that we have already in -- with the cost of the -- the present cost of the hybrids. For sure, because we can do some liability management because we can't do something in advance. We will take any opportunities that the market will offer in these 2 years to do some liabilities management of this hybrid and to get an extra remuneration of these refinancing of the [ ET ] .
Next question comes from the line of Javier Suarez from Mediobanca.
I've 3 questions from my side. The first one is on the working capital evolution. In Slide 17, there is minus EUR 1.2 billion of FX. You mentioned that -- during the presentation. But can you elaborate again why there is this negative working capital during the first quarter of the year? And or the reasons why this would be reabsorbed through the year and at what level this column should be by the year end? That should be at 0. That is what we should assume by the end of 2018 or not? Second question is on the taxation. The tax rate this quarter looks particularly low. You have kind of give us a guidance on what you are expecting for the taxation by the year-end or for the full year 2018? And the third question is on the CapEx evolution. CapEx is down by minus 5%. With the growth CapEx down by minus 10%. If you can help us to understand the dynamics behind and what we should expect by the year-end in terms of ex total CapEx and expansion CapEx?
Okay. First of all, on the working capital evolution. So this is a CapEx dynamic. So if you look what we spent in the last quarter of 2017, we had EUR 2.1 billion of capital expenditure, and we have, in the first quarter 2018 EUR 1 billion. So this is more or less -- because this is more or less the time in which we pay investments. This is something that is normal in these 2 different quarters. Because at the end of the year, the overall investments are more or less the same. But here, we will reabsorb this EUR 1.2 billion during the quarter. And in fact, our assumptions at the year-end is that more or less, working capital will be near 0. On the tax rate. From the tax rate, what happened in the first quarter. So I think, I don't know if you know that we have now redefined -- we have merged our factory in Catania. That is our diamond factory. And because we revised completely the business plan and we'll make all the efficiency actions. So we have new business plan. Now that we have some deferred taxation recognized, that is the impact that we have now in the net income. So that's why the tax rate is so low in the first quarter. And we see that the tax rate, without this effect, is going to be flat during this year, ranging between 30% and 29%. On the CapEx growth. So we -- as said, so this is a seasonality effect. It is mainly because on the renewable side, we anticipated an amount of investments last year. So now we have an increase in megawatt installed. But a vast majority of this megawatt installed in the first quarter have been paid last year -- in the last year -- in the last quarter. So at the end, we will have a seasonal recovery. And we're going to close that. The CapEx level of this year will be in line or slightly higher than CapEx of the last year.
Okay. So the next question comes from the line of Stefano Bezzato from Crédit Suisse.
Three questions from me. First of all, Latin America, reorganization, now that the reorganization in Chile is completed, what are the next steps that you can anticipate, in particularly, in terms of minority buy out? The second question on CO2. Given the current levels, do you think the recent size is sustainable, the current levels are sustainable? And can you start quantifying what would be the positive impact on your targets?
And finally, on Italy, given the current political uncertainty, what is the latest view on the timeline for the liberalization of power supply?
So first on Latam. Net debt for minorities. First of all we have on the 2 sub-holdings in Latam, where we have the limitation, so we can exceed from the bylaws of the 2 companies, we can exceed the 65% ownership in the 2 companies. So on the, on the -- in the Chilean side, we did restructuring. We are close to 65%. So we can do something else in the future, but it will be not so meaningful. In Americas, we can increase our participation from until 65%. We are keen also to increase our participation. It's something that we can do. It's something that we will see in the following year. But for sure, it could be a stage of growth for us in reducing the reduce kind of minorities. Below these 2 sub holdings, we have several minorities. So we will see us acting during the year and trying to buy out some minorities. It is not an easy task because there are some minorities that are not meaningful and others that are. So 2 different situations but so you will see us working on this. On the other side, as I think you are seeing from the news, the other way for us to invest in Latin America is through acquisition, in which we think that is one of the more important steps to make the Enel Americas company, the real growth platform that we have in mind at the moment in which we decided to split into sourced the American operations. One more based on the country that is a natural country with a high cash flow. And then other plus, that is in order to growth. On CO2, so yes. We have an assumption in our business plan of EUR 6 per tonne. And that is almost stable. So now we have in a different scenario. On the other side, we have -- we are fully covered for 2018 and we have a hedge for the next year -- for the next 3 years of around 40% of the needs. And out of this, we have, on one side, CO2 would be, for the group, mightily positive, because we will have some negative in Italy, mainly based on our thermal generation fleet and some positive in Spain, because Spain relies on nuclear capacity and renewable capacity that will benefit from this increase. So all in all, what we see from the trend out of the hedge that we have is mildly positive for the group due to prices increase. Italy -- so for the market liberalization, only one important point when we talk about market liberalization is that we are stressing that the market in Italy is already liberalized. Because everyone can go wherever he wants. So he want to stay in the regulatory market or the free market. So today, we have migration of customers from regulatory to free market. So what we are waiting for is the closure of regulatory tariff, not to have the market open -- the free market opening in Italy. Having said that, I think that if possible, because now time is not [indiscernible], and things to do to fully open the market are [indiscernible] is now possible. So we think that another year will be needed to have the full opening of the market. If you ask me, what the impact is of this delay, I would say that in the medium term we don't see any major impact on our business plan numbers of such Italy, because on one side we will have less customers, but on the other side, like this year in which we don't see any competitive pressure on retail Italy margin, we think that the competitive pressure will happen at a time when this market will be fully liberalized and so we will -- we are postponing this pressure on one year together with the liberalization of the market.
Okay. Next question comes from the line of Anna Maria Scaglia from Morgan Stanley.
Got a few questions, if I may. The first one, if you can discuss about the situation in Argentina? If you have any views there? What are your expectations? If you see any risk in terms of the tariff increase? And then, in Italy, if you can make a comment about your business, the planned assumptions in terms of Forex rate in the region? The second question is regarding this IFRS15 impact, which you quantified for the first quarter. Should we multiply that impact by 4 in the full year? Is that something that you are going to include in your ordinary net income for the rest of the year? And can you -- I mean in terms of the tax and deferred tax impact, you wouldn't expect that to be in [indiscernible] through the year. So should we keep it for the remainder of the year?
Okay, Anna Maria. Argentina, so what is happening in Argentina -- in Argentina, we have, on one side, so we have more or less 3 effects that we have to take into account. The first is an FX effect, because of the devaluation we had and also the situation of the currency that also we are experiencing today. The second is the settlement of the [indiscernible]. And then some macro scenarios impacts. On the [indiscernible], I would say that we are very close to finalizing agreement. We can't comment on potential outcome because we are now in the finalization phase. But I would say that in due time this will be announced, and that the final outcomes are not -- are close or are more or less the assumption that we have in the business framework. On the IFRS impact, the first year -- the first quarter is roughly EUR 40 million. It depends on different impacts, because we have an impact that is related to the connection fees. And the impact on the connection fees is more or less close to 0. And the overall impact that we have on EBITDA is based mainly on the acquisition cost that, from this year, would be -- are being capitalized. So all in all, the overall impact that we see from the IFRS change in the year is in the range of EUR 100 million. This is on the EBITDA. While on the net income, this has a neutral effect. On the tax, yes, because the -- this is a sort of one-off effect. So we can take it for the overall year as it will be -- not be reabsorbed. It's clear that at the end of the year we will see in tax rate that will stay in the range of 28%, 29%. So will be not normalized, because normalizes between 29% and 30%, but would be less than 1% -- 1% less because of the presence of this one-off.
Okay. Next question comes from Alberto Gandolfi from Goldman Sachs.
I also have 3, please. The first one is talking about a little bit your Italian thermal business together with what's happening in renewables? So in a world where we are seeing 24 gig of demand for Spanish solar, could you perhaps elaborate what you are seeing for Italy as well, because the Southern part of the country seems quite similar to Spain, maybe a bit more densely populated. And in light of that, what's the point of continuing to dedicate management expertise and time to run a business where EBITDA barely breaks even? So I'm trying to talk about here portfolio reorganization involving your legacy generation assets. If you can maybe elaborate a little bit on that particularly in light of what's happening within renewables? The second question is going back to your balance sheet hedge room, I'm not asking you again for a number. But this time, could you elaborate on your criteria. Your Chief Executives, Starace, was I think on CNBC talking about acquisitions no larger than EUR 5 billion. If that's the case, could you please tell us what type of return are you targeting? How are you planning for your bids because what's been happening in Electropaulo seems perhaps a bit weird for a company with historical discipline that you have. And the third question, in Slide 17, you said about EUR 370 million change in provisions. Could you please tell us how much of that is purely a cash outflow that goes into the cash flow statement and has nothing to do with your P&L? I don't know it could be workforce restructuring, for instance. And how much of that is perhaps capitalized cost that boost EBITDA -- the internal cash boost, if makes sense.
Okay. So the first one is on the thermal generation. First of all, take an account that this is a quarter in which -- so it's very -- we have real pressure on the thermal generation in Italy. In fact, what we see for the next quarter is different profile. So we see a recovery in the thermal generation also because now we are going to the summer and in the summer, especially if the summer will be hot. So the picture will be completely different. On the other side, I would say, this year we have a headwind that we didn't see the headwind of the capacity market, that's been postponed to 2019 now. There is an important part of the overall way in which we look forward to this business. Now we think that everything could be set to start this mechanism from the first quarter 2019. The third is, well, we think that managing this, you know that we have -- and the other target is to build fully the carburized company until 2050. That doesn't mean that we want to run assets until 2050, but that also today this position -- our position is triggering decisions or to shut down branches in Italy, we've already shut down more than 15 gigawatt of capacity. And we are doing this in each year, because each year looking at what is the final results of our plants, we decide to keep alive or to shut down some plants on one side. And on the other side, also the substitution between thermal capacity and renewables, is something that we can manage keeping alive the capacity and substituting the capacity is a different job that increasing accounts renewables and it is something that you will see us do not only in Italy, but also everywhere we have thermal generation capacity in place. So it's clear that we will see ever the cash flow generation from our assets because we have already stated that if the assets that will not generate cash, they will come into the asset rotation or to a pruning activity. And through this way, along the years, you will see that we were still progressing the reduce in our thermal footprint and increasing on the other side our renewable capacity. We think that it's better not to bet on one side of the value chain because this year is the way we are talking about, but last year was completely the opposite. So we will think that we have to steer and to drive big transformation, working on the entire value chain, pointing at where we want to go, renewables, distribution, retail, but not leaving ourselves from a side of the value chain, because betting on one side or another of the value chain during the transformation could be a risk. On the balance sheet hedge room, so first of all, as we discussed a lot on the site of the hedge room, so it's something that also -- it's a discussion that we had in side because now we are doing the first discussion on the new business trend. And for sure, the balance sheet hedge room is something that we have to deeply assess exactly in the terms you are asking us. So what kind of acquisition and size and what is the returns that we are seeking for utilizing this balance sheet. So we have already said that we -- so we exclude any big acquisition because we think that we have already a footprint and also we have a trend in which we want to grow that makes difficult to combine with something that is exactly fitting well from the path that we are following. So it is better for us to try to create with the small assets that are fitting 100% on the direction we are following. And this is, more or less, what we expressed every time, reducing minorities is a big value creation because minorities is something that are relying on the business that we know very well. And so because we know that the growth will [ weight ] higher the minority. So we do prefer to try to have an increase in minorities. On the other side, on medium-sized assets in which we said, and we are -- we are saying that we think that infrastructure investments mainly in distribution is something that we think will be of key importance in the future. And we think the value of this asset is not completely understood today, and some match on the value perception of us is possible because of different strategic perspective additions that we could have versus others. And then we can discuss later on deeply these aspects. And on the other side, we are involved in creating our growth platform in Enel X and all the new [indiscernible] you will see us very active in buying companies that will help us in building our software platform that, we think, will be [indiscernible] asset that will manage the distribute generation and the energy transformation that we are experiencing in -- along these years. In this case, so it's [indiscernible] on Electropaulo, you know on Electropaulo, I can't disclose something today, because we are in the middle of tender and offer in others. The only point I could stress is that -- so we do think until the limit in which we think the things we do creates value for ourself, for the company and for our shareholders and usually we not pass this [indiscernible] for all the investment decisions that we do in P&L. On the change in provision, [indiscernible] the numbers, we have EUR 300 million are cash outs. So our provision are [ utilization ] and the vast majority of this [ utilization ] is related to the personnel plans, so the early retirement plans that we have in place.
Okay. Next question comes from the line of José Ruiz from Macquarie.
Just one, and it's a follow-up on Electopaulo. I know your limitations, but could you tell us what is your next step? And particularly, if you think that the aggressive initiatives -- legal initiatives from [indiscernible] could derail the whole process?
Well, so the next steps now are set by the authority. I think you know but I [assume] for all. There are -- so almost 3 dates. But the last one is the 4th of June, on which an auction will be held and another date is 24 of May, in which -- so there could all the end of process of 24 May if some things will happen, and the tender and -- will stop the date or still to go and to proceed to 4th of June for a bid offer. So we think that the final outcome of this tender will be out or in 24 of May or maximum in 4 of June. On the second question. Well, so I don't know, the sense that our position is quite easy. So we have our valuation. We have our business plan. We think that we can do some things on the target. We think that the value is [indiscernible] and we are competing only on price on the assets. So we are not acting any other way to try to have this competition. So I don't judge what the others think is good or not to do. So I don't know what would be the outcome. I know that this arbitration [indiscernible] has just started. I rely on what the Electropaulo Board is saying, that is they are sure that it has no ground. And I think that Electopaulo Board would got the final decision after having looked at everything pertaining to this because they were canceling an agreement. So I think that is the only information I have. So following this information, I think that this is something that will not affect the process but we will see. Because as such and we expressed this is in many time, we are keen to buy this asset on the price that will still create value, but the world is full of assets, Brazil is full of assets that we'll be interested perhaps. So we'll stay in this tender until we think that we can create value, we play with the things we think are normal win. So we are offering the price, and we think that we offer the price until we can get there. This is the way in which we play in tenders.
Okay. Next question comes from the line of Enrico Bartoli from MainFirst.
First of all, I have a question regarding Slide 9, the difference between the reported and ordinary EBITDA. Could you clarify what this EUR 128 million are? I think they are related to the net of business in Italy. The second one is related to the disposal. You are having the DSO in Mexico in the next few months. First of all, if you have -- are planning additional DSO during the year? And if you can update us on the possible disposal of Reftinskaya in Russia and remind us what is the assumption in terms of cashing in from disposal that you have in the target for net debt at the end of the year? And the last one is on the capacity market in Italy. If you can remind your expectation in terms of impact on your EBITDA? And in terms of timing, what you think is going to happen, considering the current situation at the board of the energy authority?
On the EBITDA side, the difference is EUR 128 million, set because this is one of the -- also on the second question, is one of the disposal because we got -- we made an agreement with the F2i fund to have and to close a mild agreement that we had following the sending of the gas network to the F2i. So we had in place, this is not that due to be paid or to be calculated rather in 2023, 2024. So we reach an agreement with them and we close in anticipation. These are now with this payment that is the value that you see this is the difference between the adjusted and the reported EBITDA. On the disposal, yes, we have [indiscernible] that is just arriving, I think that is another half a quarter. On the additional DSO, as already we said, we are now looking at other assets to be [indiscernible] but they can account like last year the final decision on the DSO will depend on the offer for sure. In the second, also on the way in which we need or we want to act on the debts or not. And this is because, as you remember, last year we hedged to do roughly [ 900 megawatts ] of DSO that we decided at the end not to proceed and we kept with us in our asset base. And this was one of the important items we did to recover the headwinds that last year we had and to reach notwithstanding the [indiscernible] impact the results the target we had last year. So every time we will retain flexibility to go ahead with DSO disposal or to keep this capacity in our base. So we are active now in doing this. We are doing some disposal. You will see us announcing something in the very close days. But the final decision will be taken on a strategic perspective of some assets. On Reftinskaya, I would say also, yes, I can't disclose the situation but I'll just say that we are proceeding very, very well. And this is something that has to be agreed with the buyer on one side and the second also with the minority of -- Enel Russia that has to be prepared to accept this kind of transaction. We are working very closely with the buyer and we think we are in a good position to close. On the other side on the Russian activity, it is clear that we have to discuss not only the selling of the asset but also the way in which -- what the plan of the Enel Russia would be after the Reftinskaya selling. So what is the new equity story that it is something that we are now building with them. So I have positive signs on this. And on capacity market, well, the capacity market had an impact in our business plan of EUR 150 million. So this is a headwind that we have to recover with our other actions. What we think also because we have -- we had several discussions that everything will be set to have the mechanism in place starting from first quarter of 2019.
Okay. Next question comes from the line of Meike Becker from Bernstein.
I've got 3, if I may, The first is on the Italian retail business. How much of the growth is coming from your gas distribution business? And if you could just update us on your growth expectation for that business? The second question is on your renewable growth in new countries, specifically in Africa, in India and also in Argentina. If you could elaborate a bit how you think about the new countries? The competition you're facing, and also, if you include any risk markup when you think about the work or your return expectations? And my last question is on Latin America. In L. Americas, is it -- would it be an option to do something similar to in Italy where you are considering to integrate the renewables into -- in L. Americas?
So okay. On the first answer, your question was what is the impact in the overall -- in the change from one year -- from 2017 to 2018 on gas business, it's correct?
Yes, yes. And your outlook going forward for this year and the business plan?
So the impact is the difference between one year and other is EUR 10 million. Then I will provide you with the total number of gas of -- then I'll take the other question and then I will take also the question on gas. On returns, one point, I'll say, we have one important point is today our investments in the countries in which you are pointing at is mainly related to our renewable development. First of all, I remember that in the business plan we presented, we also said that the investments now would be -- we are going to increase investments in the developed countries. So after an expansion that we did mainly in Latin America, now we are looking at increasing the investment in the developed countries. So mainly in the United States and Europe, and this is because different trends is we are looking at, that our innovation is mainly coming in the United States and also in Europe so -- and Enel needs to be investing there because digitalization and networks are mainly happening in Europe. So we are regaining investments in Europe. And also because now that the new energy package is going to exit in Europe triggering the energy transition. And we think that also on the renewable space in which the investments in Europe has been very low in the last years. So we're trying to regain and so we think that big request of investment to support the transition will come from the developed countries. When it comes to our development -- our developing in the emerging markets, I would say that we work every time with WACC that are based exactly on the country in which we develop, not only with the specification but also with the specification that different technologies. So we have WACC for the different technology we have within the different technology WACC that is differentiated, if we had PPAs and the length of the PPAs. So we work with these wide range of WACC in which we have because we have an investment committee that approve the investments only if the profit presented is 150 basis points minimum over the WACC set for the development of the specific investment. So now, I can provide you with some numbers but this is our investment discipline. And the last one that is Latin America is -- look, the point is that we don't do this because we think we want to -- we don't see that there is an intrinsic value in merging the business without specific reason. Why we did it in Chile? Because Chile has a specific situation within Latin America. What is the specific situation? It's a situation in which we have an overcapacity and on the other side, we have the capability to develop renewable plants utilizing huge cash generation coming from the terminal capacity. So we can have this financial strength in doing the things together and because on the other side, we can offer to customers the right profile of needs of the customers, combining in efficient way the renewables the today have the lower cost possible with the thermal generation in a country in which you have overcapacity. So you need to have -- to create your space to take your plant alive and to develop other plants getting directly customers. So in this case, the rationale to integrate to this is clear because we'll create value and that's why we decided to integrate the 2 businesses. In other times in which this is not already present in the development of the country, we think that in the meantime, there is not strong reason to do this, but we don't exclude that also if in other countries these conditions will come, we will take into consideration only in the value creation optical to do other things. Today, we don't see in the other countries a situation of the business that will trigger in short time other action of [indiscernible].
Okay. Next question comes from the line of Antonella Bianchessi from Citigroup.
Quick -- I would be very quick. So first of all, can you elaborate on why the EBIT of your supply in Italy is coming down while the EBITDA is growing? Can you detail on the capitalization of the cost and distributions? And also on losses on the receivable losses. The second question is on the networks. Networks are down EUR 35 million on the quarter in EBITDA in Italy. Should we annualize this number, which is the view on a full year? Do you think that this [ triangle ] will remain? And the last question on Argentina, can you remind us how much was in your target for 2018 the impact of the change in regulation that you are expecting to be completed over the next few weeks?
So Antonella, first of all, the retail. So on retail, this is what is happening. We have on the overall that you see -- because we see on the chart that we have this margin that is decreasing from 22 -- Slide 15, from 22 to 20. So what is happening? First of all, we have -- on the B2C side, we have no change in the unitary revenues from customers. So this is -- so we have no impact on price pressure on that side. On the other side, we have an increase in the cost of sourcing. And this because we made some hedge last year. So this is all the related to the increase in the cost of sourcing and this is why we have an almost -- India the decrease in our cost. So all in all, more or less, the margin is in line and it is only something related to the cost of sourcing and not for the competitive pressure. On the B2B, here we have different effects. Because first of all, we have a reduction in the average revenues per user, depending only on the fact that the increase in volumes that we did is mainly based on the large customers, they are the customer that have the lower unitary revenues and margins. So also in this segment, there is no major competitive pressure. There is only an effect of different segments of customers that we are getting. On the other side, [ churn rate ] mainly on the B2C side is going down a lot significantly. We are ranging at 10% versus 12% last year.
So why the EBIT is down 10%?
Well, on network, yes the first year is -- the first quarter was almost flat. This is related mainly on some things that are going to be reabsorbed during the year because okay, we have already -- we have already to settle the [indiscernible] in Argentina. On the other side, we have a lot of investment program improving quality that are going to be finished, and now are going to create the value package. And on the other side, we had an increase in cost that usually we have in the first quarter because we have a lot of cost that are front-loaded but would be reabsorbed along the year related to the fact that the resiliency of networks that has been asking from the regulators -- from the government requires to ask to put in place a lot of means to avoid any outage of the networks during the winter. And so we spent higher cost for doing this in Spain, Italy and Romania, but it's something that in the plan and will be reabsorbed along the year. And so the regulatory impacting Argentina in -- is EUR 150 million. And so it's something that is happening. So don't be -- it's not to be afraid of the delay, short delay within the discussion and rationality of the Argentina government in this things. There is a lot of pressure, for sure, but -- so we see that the attitude of the government is to keep the things already discussed and negotiated alive because they think that it's the only path the country could follow to reach credibility that [indiscernible] for to improve the country and to be a rival country.
Okay. Next question comes from the line of Roberto Letizia from Equita.
Follow-up on the IFRS15 and 9. You mentioned a EUR 100 million positive impact on the EBITDA, which is neutral on the net income. Wondering what is going to be the impact on the debt side? And if you can now clarify that the EBITDA target for this year is 16.3% now adjusted for the IFRS impact? You mentioned that the output side is going very well I guess, you mentioned the wind conditions and hydro conditions in Italy and Europe in general, there is known hedge. I was wondering if you already have a dimension of how much production is currently in excess versus your expectation that plays a positive role on the full year numbers? And the last one very quickly, I found the statement in which you specifically remind us that a buyback is possible. Just wondering if there's a specific reason why you are reminding us so clearly and wondering if you are thinking to look more closely at the buyback?
Well, on IFRS 15, the impact on debt is 0, because it's neutral also at the debt level. Then on hydro, well, so we have not already done a full view of the year because like I said, the situation now is happening now. So March was one -- the first month. I would say I could say that network, because we have already the [indiscernible]. We have -- we are up versus last year of roughly 20% in the first quarter. I already said, we were 14%. So the increase versus last year is improving because these are months in which we have very, very relevant hydro and also wind production. And on the buyback, as I said, so we are proposing to the AGM to have another period of option to buyback for the same amount of EUR 2 billion, because we think and we will keep this as an optionality that we can utilize out of the minorities buyout or other kind of releverage actions. If -- so we think that other valuable actions would not be ready, we can decide to drive growth that increase the shareholders through this way.
Okay. Next question comes from the line Lueder Schumacher from Societe Generale.
Just one quick question. Going back to an earlier one, I'm not quite sure if I got the answer there. Can you remind me of the exchange rate you -- from your business plan for the Argentine [ payable ]?
Exchange rate for Argentina?
Yes.
Lueder, can you -- you asked the exchange rate for Argentina?
Your usually business plan for the LatAm targets. Can you give us Brazil, Colombia, Chile but Argentina also knowing what rates you use there.
Okay. So for Argentina, we have for 2018, we have 20.3. And then in the business plan, we have 21.5 2029 (sic) [ 2019], 22.5 2020, 23.5 2021. So it's clear that so we -- in the new business plan, we have to review the numbers because of the devaluation of the peso happened last year and is also happening this year.
Actually, we also had a few questions from the web. Most of them have been answered. The only one that is still pending is from Oscar Nájar from Grupo Santander. The question is around the financial expenses. Why they have been so good in the quarter? And that's it.
Well, so I think, they are not so good in the quarter. I think that is a path that we are following the beginning of the story, so you know that we are committed -- we were committed and we are committed to track EUR 600 million of financial cost from 2014 into 2019. So we have already tracked EUR 300 million in the first period '14, '17. So we are now committed to further track our financial cost of EUR 300 million. And this is because we are on the -- on one side, we are refinancing our bonds at the lowest rate because we have already hedged roughly EUR 8 billion of new admissions, so we have already set the interest rate for new admission and those were also because we are doing a lot of liability actions to take the advantage of the interest rate today. And so I would say, this is only the outcome of the old actions that we are taking on this side. I do think that we will accelerate this strength after having done the first step in refinancing the hybrid bonds that are taking the lion's share of the cost today within our asset base.
This concludes our call. Thanks a lot for everyone to having participated to this call. As always, the IR Department remains at your disposal if you have any follow-up questions. Thank you.