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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. I'm Monica Girardi, Head of Group Investor Relations. A warm welcome to the First Quarter 2020 Results Presentation which will be hosted by our CFO, Alberto de Paoli. We hope you and your families are well and safe in these difficult times. In this presentation, Alberto will walk you through the highlights of the quarter as well as the operational and financial performance for Enel Group. During the call, we will also touch base on the main evidences that we have seen during the quarter in terms of the impact related to coronavirus as well as how Enel has a solid liquidity position and balance sheet that allow withstanding even the most volatile scenarios. Following the presentation, we will have the usual Q&A session. Similarly to what was done for the full year results, we ask those connected to send the questions only via email investor.relations@enel.com. Before we start, let me remind you that the media is listening to both the presentation and the Q&A session.
Thank you. And now let me hand over to Alberto.
Thank you, Monica. Good evening to everybody. As usual, our opening slide is dedicated to the highlights of the period and I am on Page #1. During the first quarter of 2020, the group delivered solid financial results, showing a high level of resiliency against rather a temporary shocks. EBITDA grew 6% and net income increased double digit. Financial effects associated with COVID-19 crisis were limited. But the group integrated model offered an operating protection.
I will elaborate on this later in the presentation.
More than 400 megawatts of new renewable capacity were built in the first 3 months of the year following an exceptionally high level of new capacity installed during the last quarter of 2019, which contributed in full to first quarter financials. Thanks to the acceleration of new renewable installation, ongoing actions on coal power plants and the reduction of thermal gas, 65% of the group production was emission-free. Simplification of the group structure continues, and we made significant progress to reach a 65% stake in both Enel Américas and Enel Chile.
Before analyzing financial indicators, let me spend the next couple of slides, wrapping up on COVID-19. I'm on Page #2. Before we're diving in the Q1 results, let me go to the main business and financial evolution that we have seen during the quarter in relation to COVID-19. Focusing on our business lines. During the quarter, we did not experience any material disruption in the supply chain of renewables, and this allowed us to build more than 400 megawatts as already said. On the conventional generation side, our structurally short position and our hedging policy offsets lower volumes and decreasing market prices impact overall. Since the outbreak of the virus, we also witnessed high activity on the balancing services due to a more difficult prediction of the network load.
Regulatory frameworks in Europe proved protective against 5% and a 3% drop in distributed volumes in Italy and Spain. In Latin America, the decrease has been a mere 1% decrease with almost 0 impact on our accounts. Energy sold in the free market has decreased by 4% globally. So the most evident impact on our retail business has been in terms of composition of the demand as lockdowns have caused an important shift from business to domestic consumption.
In Italy and Spain, in particular, we have witnessed a 3% decrease in business demand, coupled with a 1% increase in domestic demand due to lockdowns. Overall, our retail EBITDA has increased by 9% year-on-year, as we will see later in the presentation.
And finally, the negative FX impact on the quarter, driven by the valuation of Latin American currencies amount to around EUR 130 million, of which more than half is linked to the depreciation registered from the beginning of the year, so registered due to the COVID outbreak. The negative impact at net income level was around EUR 20 billion. Moving now on the financial management. Liquidity is abundant. It's amounting to around EUR 26 billion as of April, the end of April. Around EUR 6 billion in cash remains [ and remains ] readily available committed credit lines. Even though this liquidity does maturities -- the debt maturities up to the end of 2021 because they're totaling EUR 5.9 billion, we have a coverage ratio of total 4.4x. And in addition, the current level of available liquidity covers 2.1x the debt maturity through 2022.
In the first quarter, working capital increased by approximately EUR 400 million due to the bills delayed payment attributable to COVID-19. We had a strong balance sheet with a lower debt leverage compared to our average peers, allow us to face even the most volatile scenarios as the one we have been seeing in the last couple of months.
Moving now on Page #3. This is a quick look of the initiative that Enel has taken so far. Current COVID-19 prices, as highlighted the importance of Enel past investments in securing business continuity even in the most adverse scenarios. As of today, 37,500 Enel employees work remotely that are 55% of our global workforce. And so we can demonstrate that people can work from remote with an unchanged level of efficiency and effectiveness. Enel has protected its workforce, not only through smart working and the safe measures implemented, but also through insurance policy covering all of our employees worldwide, that is renting a cash allowance in case of hospitalization.
In Italy, for employees engaged in operational activities that cannot be carried out remotely and which are currently reduced or suspended for periods of inactivity, a Vacation Day Bank mechanism has been created as of every third, around 21,000 days have been voluntarily donated by Enel employees and around 30,000 by the company. In addition, as recently communicated, the MBO targets of this year has been changed in order to tackle employee safety and service continuity during the COVID-19 crisis.
As an immediate response to the emergency, Enel Group identified in all of its countries or presence over 200 initiatives, 70% directly support health organization while the remaining is -- are mitigating the social economic impact on communities with a specific focus on areas close to our power plants and construction sites.
Group donated around EUR 50 million globally for a series of measures to support key organizations involved in providing health services and support in response to the COVID emergency. Moreover, the CEO and the top management reporting directly to him has committed to donate an amount equal to the remuneration matured during the lockdown period in Italy or almost 50% (sic) [ 15% ] of the total remuneration.
And finally, Enel is also leveraging its crowdsourcing platform, openinnovability.com to launch internal call for [ ES ] to help countries dealing with the emergency.
And now we can move to Slide #4 on our sustainable CapEx base. As you can see from the chart, overall CapEx in the first quarter was equal EUR 1.9 billion in line with last year. Around 90% of total investments was devoted to infrastructure and network and renewables to the ongoing effort to digitalize grids and decarbonize our generation fleet. Development CapEx stood at EUR 1 billion and represented more than 50% of total investments, of which 70% was allocated to renewables, mainly in Latin America and North America.
Looking at 2022 period, around 70% of asset development CapEx is already addressed, proving high visibility on industrial targets for the time period.
Now moving to Slide #5 and focusing on our decarbonization strategy. As you can see from the chart in the first quarter of the year, as already said, we leaved more than 400 megawatts, and we sold around 200 megawatts of managed capacity reaching 46 gigawatts in total. In terms of production, it is worth highlighting that renewables production increased by 9% versus previous year, while coal production collapsed by almost 80%, as a consequence of shrinking thermal gas and the ongoing coal phase-out process. As a result, the emission-free production increased to 65%, 12 percentage points higher than in Q1 2019. The deployment of new renewable capacity will be supported by 3.2 gigawatts that are in execution trades and 0.4 gigawatts fully permitted. Before going through the details of the financial performance, let me comment on our projects' efficiencies, which will be analyzed in the following slides, and I am on Slide #6. In the first quarter of the year, operating expenses decreased by around 4% or around EUR 80 million mainly thanks to the efficiencies recorded in the period. The level of OpEx, which amounts to EUR 1.7 billion has been positively affected also by the provision released in Spain for around EUR 356 million. We provide detail in the following slides. Over the period, we recorded efficiencies for around EUR 80 million, twice the amount registered in the same period of the last year, mainly in conventional generation, retail and networks. The level of efficiency lock during the Q1 bodes well for full year target. We will now go to the details of the operating and financial performance for the period, and now we are on Slide #8. As you can see from the recap, EBITDA grew by 6%. It came in at EUR 4.7 billion, excluding the impact of FX devaluation for around EUR 130 million, EBITDA would have grown by up 9% to EUR 4.9 billion. The FX negative impact attributable to COVID-19 has been around EUR 80 million, representing the devaluation effect in the period January, March 2020 since the start of lockdown measures in China. Group net ordinary income came in at EUR 1.3 billion, 11% higher versus last year. FFO reached EUR 2.1 billion, down 17% year-on-year due to around EUR 400 million increase in working capital attributable to COVID-19 crisis. Group net debt stood at EUR 47.1 billion, increasing by 4% to BRL 1.9 billion versus year-end 2019. Let's now take a look on the group EBITDA on Slide #9. As already commented, total EBITDA grew 6% or EUR 290 million. Main drivers of this evolution are the following: EUR 90 million associated with global power generation. The new business line we have created to take full advantage of the energy transition, networks and Enel X representing our enablers of the decarbonization strategy accounting for almost EUR 140 million. And finally, retail recorded an EUR 80 million growth. I will detail key drivers for each business in the next slide, starting from global power generation on Slide #10. In this slide, we take a look at the performance of the global generation line from which we will now comment on the main factors that have driven these results, while we will go in more detail through the performance of the constituents of Enel Green Power and the conventional generation in the following slides. Global power generation ordinary EBITDA reached EUR 1.8 billion, making an increase of 5%. It is for reminding you that last year, performance included around EUR 100 million capital gain associated with the full consolidation of our North American assets as well as EUR 160 million positive contribution associated with the early termination of our PPA contract in Chile.
This year, the quarter has been positively impacted by a provision reversal in Spain for around EUR 170 million. These are not replicable items recorded in both Q1 '19 and Q1 '20. The underlying operating performance has recorded an overall improvement of 12% or around EUR 180 million, a remarkable achievement whose components I will analyze in the next 2 slides dedicated to Enel Green Power and conventional generation. I will start from Enel Green Power on Page 11.
As you can see from the chart, ordinary EBITDA came in at EUR 1.1 billion. As mentioned previously, Q1 2019 EBITDA has been positively affected by a net capital gain and the positive contribution associated with the early elimination of PPA contract in Chile. As a result, the underlying operating performance has recorded an improvement by 7% or more than EUR 70 million, of which EUR 40 million for new renewable capacity is mainly in North America and Iberia, EUR 50 million coming from higher volumes, particularly in Spain and Italy, where renewable production overall increased by 1.6 terawatt hours, driven by better hydro performance and plus EUR 40 million as a result of higher prices fully hedged, driven by Italy and Latin America. We had a negative impact on delta perimeter for around EUR 20 million, mainly attributable to the EBITDA of the capacity sold in Brazil at the very start of 2019.
And finally, it's worth highlighting that FX depreciation went negatively for around EUR 50 million with the effect mostly attributable to Latin America [ contract purchase ], with more than 2/3 of the impact occurring in the first quarter of the year as an effect of the COVID-19. Moving now to conventional generation, and I'm on Page 12. Ordinary EBITDA increased by 39% and came in at EUR 700 million. The current quarter was positively impacted by the provision reversal in Spain for about EUR 170 million. While last year, the ordinary EBITDA included the positive contribution associated with the early termination of a PPA contract in Chile for EUR 80 million. Net of these items, the underlying new operating performance has recorded an improvement of 25% or around EUR 110 million, mainly due to EUR 60 million as a result of the group short position, EUR 60 million, resulting from higher prices hedged and from balancing services in Italy and Spain and more than EUR 30 million from efficiencies, mainly in Spain and Italy. Delta perimeter impacted negatively for around EUR 20 million attributable to EBITDA over its new Nevinnomysskaya plant in Russia, and FX depreciation of Latin America impacted for EUR 20 million negatively. Let's now take a look at our infrastructural network on Slide 13. As you can see, ordinary EBITDA increased by 7% year-on-year and came in at EUR 2 billion. The reversal of the provision in Spain impacted the ordinary EBITDA for around EUR 180 million. As a result, the underlying operating performance has been broadly stable year-on-year.
The main moving parts have been the following: EUR 30 million increase related to investment; efficiencies for around EUR 10 million; and the negative impact on CPI on OpEx was EUR 30 million; and currency devaluation that impacted negatively for around EUR 60 million, of this amount, around EUR 40 million attributable to COVID-19 crisis. On the operating side, volumes dropped by 4% in Europe and 1% in Latin American countries. European regulatory frameworks are based on revenue cap systems that are not exposing networks remuneration to volumes volatility. In Lat Am, price cap mechanism leave a certain rate of exposure to volumes within the regulatory period. During the first quarter, the corresponding financial impact has been negligible. And finally, on retail, and I'm on Page 14. Full year EBITDA reached more than EUR 900 million, increasing 9% versus last year. The increase is almost entirely attributable to the free markets. In particular, free market EBITDA grew by around EUR 75 million or plus 10%. The main components of this performance are as follows: In Spain, a 40% increase in power unitary margin more than offset a 3% decrease in electricity volumes; in Italy, the results in the period were mainly driven by gas operations. In fact, gas retail EBITDA was down around EUR 30 million on decline in consumption, coupled with declining unitary margins.
Electricity retail EBITDA proved broadly stable, protected by a change in volumes mix, more skewed towards B2C and unchanged unitary margin. Regulated market EBITDA slightly increased by 3%, reaching EUR 150 million at the end of the period, mainly thanks to the contribution of Romania and Spain. And finally, we recorded efficiencies for around EUR 10 million, made in Italy and Spain, both in the free and in the regulated markets. Now we have gone through business drivers, and we can now move to the financial management section. And I'm now on Page 15. Ordinary group net income came in at EUR 1.3 billion, 11% higher than last year mainly thanks to the increase in ordinary EBITDA and lower financial expenses, which more than offset increase in G&A and the higher tax rate. G&A slightly increased, mainly the first investment deployed in part compensated by lower depreciation in Italy and Iberia, thanks to coal impairment made in 2019.
The decrease in financial expenses reflects the continuous decreasing of the cost of debt, which declined by around 20 basis points versus year-end 2019? Results from equity investments stood at EUR 14 million loss. Tax increased by EUR 185 million year-on-year, mainly due to EUR 105 million for higher earnings before taxes. And because in 2019, we recognized the first tax assets in U.S. and in Argentina. Minorities increased by 11%, reflecting a higher total net income. Moving now on Page 16 on the cash flow. FFO stands at EUR 2.1 billion, about EUR [ 400 ] million lower than last year. Delta is mainly attributable to movements in working capital, which reached EUR 1.5 billion in the first quarter 2020 versus EUR 1.1 billion last year. The increase is due to delays in this collection related to the lockdown status in different countries. We expect to partially recover the negative working capital in the second half of the year, as a consequence of the return to a stabilizing situation worldwide, hoping that the worse is over. Free cash flow stood at EUR 200 million, confirming the capacity of the group to cover the investment and growth with the operating cash generation notwithstanding the extraordinary rationale. And now on Page 17, have a look on the net debt. Net debt stood at EUR 47.1 billion. Changes are driven by the positive free cash flow of EUR 200 million, as already commented, dividends paid for EUR 2.2 billion in the quarter, cash outflow related to the further increase in the share of Enel Américas through the equity swap, the EUR 200 million positive effects impacted from evaluation of local currencies against the euro. The level of net debt as the FX rate set through hedges amounted to EUR 46.1 billion. Our gross debt increased by around EUR 1.5 billion, mainly explained by the evolution of net debt already commented. Before the closing remarks, let's take a deeper look into our liquidity position and forecoming debt maturities at Page 18.
Our total liquidity at the end of April stood at nearly EUR 26 billion, EUR 6 billion in cash on hand and the remaining EUR 20 billion in readily available committed credit lines. The level of liquidity covers 2.1x the debt maturing throughout 2020, 2022, and amounting at EUR 12 billion, net of short-term debt that is rolled over every month and every period, also including the short-term debt, the liquidity-to-debt coverage ratio would still be at 1.3x. Our counterparty risk is minimized through a number of diversification. Our cash is invested in a total of around 70 banks, with 95% of cash in current accounts or overnight deposits. Our committed credit lines encompass a total of around 50 banks. And now on Page 19, some closing remarks. The first quarter of the year showed a solid evolution of the underlying performance despite anti-COVID-19 measures that have been implemented in some of the markets where the group operates. For the time being, we project limited impacts associated with lockdowns. Moreover, we see this impact as manageable and not affect the growth trajectory in the company. The efficiency of the group is due to a robust integrated business model, which absorbs temporary shocks and limits economic and financial volatility. Additional, we acted promptly to deinfect the business, guarantee its continuity, protecting our people first. Action we put in place are not a detriment of business performance, they are sustainable in the medium and long term and set to last at least until December. As scheduled, the Annual General Meeting is to be held on May 14, will approve of the final dividend payment in July and the new remuneration policy where sustainability will take a central role. In the short term, protecting the health of our employees and in the long term to support the economic recovery of our country operations. Thank you for your attention, and let's now open for the Q&A session.
Okay, great. We now jump on Q&A. So far, we have questions receive from Equita, Santander, Mediobanca, MainFirst, The Deutsche Bank, JPMorgan, Morgan Stanley, Merrill Lynch Bank of America, Akros, Crédit Suisse, Berenberg, Deutsche Bank, SocGen, Exane, Goldman Sachs and Barclays. Thanks to all of you.
As usual, we aim at having a hard stop at 7:30 p.m. Central European time. So let's get started. We'll start with a number of questions, which are related to COVID-19. The first one is on renewables capacity build. Q1 delivery came in as planned?
Well, Q1, as I said in the speech, yes, so the delivery was broadly in line. We had minor delays associated with interconnection and permitting issues. But our delays that were anyway recovered during April and so during the second quarter.
Okay. Next, do you foresee any change in the shape of delivery of the 14.1 gigawatt for 2020, 2022? What is the target for 2020? And how much of it is at risk?
To remember, we have a total commitment of 14.1 gigawatts for the new plan. And it is well addressed, and it doesn't change. We have now 65% of this commitment to this delivery under construction or ready to build. The target for 2020 is 4 gigawatts. Here, we could have some reshaping of 2020, some delays that will be shaped 2020 and 2021. But it's a matter of not more than 2 months for just the number of megawatts, and it depends really on how so the crisis will develop in the next months and when the lockdowns in the different countries in which we are developing capacity will be changed and will be prolonged. But the overall target of the plan is unchanged.
Do you foresee any impact to your pipeline?
No, no material impact. We had some issues related to debt negotiation of some permitting -- so some delays in permitting, but nothing that is meaningful from affecting the rate of development of our pipeline.
Still linked with the development of renewables. Are you facing any bottlenecks on capacity delivery, permitting licensing, supply chain, logistics or/and construction?
So I said, permitting supply chain situation is not critical. And on the construction side, we have tied up some delays in the lockdown. And now we are going to recover these delays. And as I said, some little reshape of the schedule of activities may -- might provide in some countries, mainly focusing on Spain, Brazil and South Africa.
We move specifically on Spain, possible response of renewable auction in Spain. Any discussion with the government after he confirmed the target of the [ FIACA ] for 2030?
Well, no. No, we have no sign that there will be change in the draft of the low timer change. So we think that next auction in Spain -- that means we will push forward new options once the situation will fully stabilize.
The last news on this is Ministry has just launched a new renewable auction in the Canary Island. And we expect to auction about 150 million megawatts. And the same is due to be done in -- for the Balearic Island. So those are signs that the recovery will be focused mainly on the renewable development in almost all the countries in the world.
So you keep on saying you have little disruption to your activities. What has made your projects more resilient than for other developers?
Well, I don't know. So I talk about myself and about my company. We think that we rely on 3 main drivers. The first is our scale. And this is coupled with the wide capital diversification. And so this -- so allow us to [ serve ] the crisis and so try to have different timing and different push for different countries, there are different situations.
The second is the flexibility of our capital allocation and a deep pipeline that give us the possibility to fine-tune and reshape CapEx.
And the last is the widespread digitization of our asset base and operations. Our renewable asset base is fully digitized and can be remotely controlled and managed. And we have almost all the application for renewables and also for the other processes of our group, 100% in cloud. And this provides us the possibility to operate plants from different parts of the world. This is the flexibility that gives us -- they continue to see if this is not a disruption in any situation that might occur.
Okay. A quite articulating question around the EU. There has been offer that the European Union might prioritize the renewables in its worst crisis economic stimulus efforts. What specific measure could the European Union state to stimulate renewables? For example, greater subsidies, lower taxes, [ that means they are committing ]?
Well, yes, it's not the great question, but if I think it's a very relevant one. So you know that we are full in the European great deal. We are fully supporting Europeans in deal. We think it is an excellent framework not only for the direction of the new effort, but also for the restructured contraction plan. It's clear that we think that for the key initiative, an acceleration of renewable development will be centered in the new -- in the recovery actions, based mainly on 3 pillars: one, new capacity with short time to market; the second is the repowering and refurbishment of existing capacity, very relevant and also with a lot of investment ready to begun. And then the replacement of coal with green technologies.
And these are the 3 directions, we think, are very relevant. And then talking about the enablers. We think that simplification and harmonization at the EU level of permitting procedures for red plants coal-to-gas, invest and storage, and monetization of hydro plant will be fundamental.
And then stages and roles for a new financing instruments should be driven by sustainability and long term while boosting development already to bid projects. We see sustainable finance as a combination of all those form of capital that accelerate the achievement of SDG of Sustainable Development Goals. It can contribute to generation of environmental, social and financial value.
The recovery fund is -- so now that is due to take off, this recovery fund could trigger the scale-up of sustainable investments in our region through interest subsidies to reduce cost of debt for sustainable instrument, regulation and standardization to improve corporate access to sustainable debt and temporary equity partnership to reduce corporate need capital. Improved corporate capital return paved a way to boost the sustainable investment in Europe and to rely with the push on the -- as a big part of the relaunch of Europe in the next month.
Okay. A completely different subject, more about competition. So do you think financial difficulties at oil companies might mean there are no longer -- they are no longer able to compete aggressively in renewables? Or might it prompt them to be even more aggressive in a bid to speed up their move away from oil?
Well, so I think that the magnitude of growth of renewables is so huge that also before this crisis, there was space to accommodate a vast number of new entrants. It's a market that for the next years, there's no limitation. It's so big that our company that is the world leader in renewables is only 3% market share, as we already said. So we didn't see before, and we don't see now. So no major changes to this even a scenario of more addressable away from oil. So in the case of another, we think for the foreseeable future, the market is so big that there is space for a big competition without a major price or margin compression.
Okay. The next is on the short position. Can you provide details on the short position? Are you expecting to benefit from these also in Q2?
Okay. First, the -- as you know, we have this long position, mainly paying and the drop in pulp price implied a positive effect with the short position. Now that this is for the first quarter. Entering the second quarter, contribution will depend on the evolution of electricity prices. We saw another swing down in April, and it has been a positive impact in April. And for the other months, more or less, the prices were almost flat or a little bit increasing and the increase in price is reduced the magnitude of the short position gains. So we will continue to manage the position, and we expect to benefit from it in a context of low oil price. But now we have to experience what is going to happen to put prices in the Phase 2 of Italy and Spain.
Okay. On balancing service, can you quantify the factor of balancing service? And will this expand to Q2?
Well, balancing services contributed to the margin mainly for Italian Global Power Generation, and the contribution was around EUR 290 million first quarter, EUR 50 million up versus previous year. The increase was mainly based on the fact that the system had and still have difficulties in rearranging models to understand what kind of the balancing is needed in a situation in which you have industries closed and people living at home. So in this case, in this space, so you have an increase in demand of balancing services and this is why we got the increase. Expectation for Q2 as debt balancing services will follow the same trend of Q1. And then the tangible amount will depend then on the development of Phase 2. This normalization will come suddenly, so mix of balancing services will go down if normalization will be -- will come slowly. So this need will be higher. So it's something that we will assess better looking at the trends in the second Q.
Okay. Then does the performance in conventional generation changed the schedule for capacity closure?
No, the change strategy is not affected by market shutdown. It's something already taken and following the developments. And all the steps that we have to follow toward the completion down of the compliance.
Now we move to a set of questions around -- about networks. The first one is a decrease in volumes is the following. The decrease in volumes does not affect remuneration in Italy and Spain. Is cash flow impacted? What is the projected impact?
Well, Italy, reduction of distributed volumes does not have any impact on the Q1 cash flow. And we have a drop of approximately 4% in the energy distributed. And we may face limited negative impact at year-end because there is a quarter of transportation fees that might be not cashed in from third-party traders.
I remember that for -- as Italy works, what you didn't get in the year, you will get in the next year or so. Everything that we will not get in the transportation fees in 2020 will be cashed in 2021. To explain the reduction of distributed volumes, that does not affect cash flows at all.
Okay. Then networks in Italy and Spain, how are they impacted if consumers do not pay their bills?
Okay. So Italy, regulator, they don't issue any resolution that extends securities for payments. It's possible for postponement according to deliver us 116 and 149 and so regulatory is expected to define timing and recovery mechanism in case of clients that do not pay the bills on time. This resolution extended back to the previous one. And envisage the possibility to partially postpone the payment up to 30% of the invoicing related to consumption points.
And generally, the cash-in from ended contracts are covered by recovery mechanism of system fees as ready -- as I have already said. So there are in other resolutions. So all this mechanism will be to completely cashed in between this year and the next year. In Spain, the Royal Decree 11 approved all of some customers, small businesses and enterprises, to temporarily suspend the payments of those things for 6 months. The retailer must pay the energy revenues to distribution companies after this period. Therefore, there is no impact estimated by the year-end. Today, we have an impact that, at the end, will be fully reabsorbed for the year-end.
Okay. Lat Am. In Lat Am, there is a volume impact. What has been so far? And what do you expect for the year-end?
During the Q1, we had roughly 1.5% decrease in distributed volumes. We think that it will depend on how the COVID will impact these countries. Today, we have an expectation to end up with a minus 2.5%, the full year result. That means 3.5 terawatt hours.
Okay. Staying in Lat Am, what measures have regulators taken to offset the crisis impact?
Well, regulators are looking to implement a wide range of response measures, adapting to large solution to facilitate the economic situation of customers and smoothing the impact on distribution companies. In South America, regulators execution are activating special funds, all liquidity payment facilities to provide financial resources for the regulatory interventions that will support the overall [ situation ]. We are closely monitoring the development of this supporting mechanism to understand potential impact deriving from the unfolding COVID situation. The authorities decided also, in some countries, the postponement of all infections and sanctions procedures in charge of distributors related to quality of service. It is an important -- there is an important impact because the possibility to manage properly the network and also the quality of some networks that we manage in Latin America mainly.
Okay. We move to retail. Can you provide more color on margins for B2B and B2C for both Italy and Spain?
Okay. Italy and Spain, no relevant impact in margin because of COVID prices. We have a reduction on the B2B gross margin, and that is due to lower volumes. But it's quite completely offset by positive impact on B2C gross margin. That's because the unitary marginality is completely different from the marginality of B2B and B2C. So these 2 things notwithstanding, we have a big decrease in volumes B2B -- an increase in volume, B2C, that is lower compared with B2B. B2B, completely different composition of unitary margin, the impact of global margin is neutral. And this is something that is the same, more or less, in Italy and Spain.
Okay. Next, what is the demand evolution you have experienced? Is it showing any recovery? What can we expect for Q2 for Italy and Spain?
Well, now, we had the first decrease in Italy, Iberia in the first quarter, mainly for the restriction that affected, more or less, 2 weeks of the Q1 results. We expect a further reduction in Q2 due to lockdown because we had a complete shutdown in April, and then we have a positive recovery in May to June. And -- so this is that seem to be roughly 5 terawatt hours in Italy and Spain of lower demand in the second Q. And -- but we have seen a recovery in consumption, in particular, in corporate segments in Italy and Spain, just right after the Phase 2 beginning that was and is already higher than expected. So we have good signs in terms of recovery of demand in the second phase.
Okay. A few questions around financial management. Worsening of net working capital of around EUR 400 million. What is the net working capital poised to be at year-end? When it can be reabsorbed?
Well, the expectation we have is to reach roughly EUR 2 billion of temporary impact on working capital as an increase in working capital at the peak of the crisis. And we think the peak will be reached within the end of the second Q and the beginning of Q3. We think that half of this amount will be potentially recovered by year-end as the situation will normalize.
Yes, more technical on working capital, receivables within working capital. At which point do you conclude the customers will not pay and write-off the receivables in earnings, 3 months, 6 months, 12 months?
Well, this is made in accordance with IFRS 9 guidelines. So recognition in the profit and loss of the non-payment of the customers will have an impact due to the accrual of that debt according to the loss rate of each country. So regarding the write-off, it is a different thing. It is important to remark that it depends on each country's local valuation and the execution of all the previous debt in order to support the operation. Taking this into consideration, the average term of this loss recognition is between 2 to 5 years for Enel Group countries.
Okay. Now what is the impact on your bad debt provision? And what are the measures that will be implemented in order to recover it?
Well, so we expect an increase in the level of bad debt as local regulators have stopped regarding activities and have closed physical collection channels in some countries. The magnitude of the increase will be a function of the timing of the lockdowns and the pace of recovery when the situation will normalize. Key drivers to smooth on this impact will be far more towards the digitalization of payments. And this is something that we are doing to try now to move a lot of people on digitized payments. All in all, we think that the bad debts, we don't know how well the recovery phase will be, but the first assumption, we think that a 15% increase in bad debt versus the normal 15%, 20% increase versus the normal size of bad debt will be profitable along 2020.
Okay. A recurring question on taxes and new taxes. Now governments are in need for cash. What is the mood in Italy and Spain towards increasing taxes to the sector?
Well, so I don't think there are any upcoming risks for government intervention. I think on the contrary that the governments may push the Gigabit Economy. And the utility sector can play an essential role because the investment into sustainable activities will address 2 important things: to have short-term investment increase on one side and on the other side, addressing the sustainable path that mainly in Europe and also in other countries, that is the main task for recovery.
Okay. We go back to the business with a set of questions that are more, say, ex-COVID topics. We start from renewables. Are you expecting any portfolio rotation on renewables for 2020?
No, we don't expect any major portfolio rotation on renewables.
Okay. Another really dedicated question on renewable. Headlines suggest you are seeking a JV partner in Africa. What is the current status of the JV initiative? And how quickly could we see progress in signing agreements and adding gigawatts?
Well, the process is in place and is also at an advanced stage. So we are confident that we can sign an agreement before year-end. The development to the African development through joint venture is part of the additional growth projected for 2022. And so it's clear that the additional gigawatts will be also dependent on the region and how the region will address the rates pretty much in the coming months.
Okay. Now on Hydro availability. How 2020 has been so far for Hydro availability? And what is the expectation for the full year?
Well, so talking about hydro resource, resources in the first quarter has been quite poor. Hydro generation in Q1 has been very strong, thanks to the reservoirs. We think that the full year expectation is aligned to the trend experienced in Q1. So we will have a strong production and based mainly on reservoirs.
What we think, with the exception of some countries, that at the end, we can stay at the level of reservoirs at the beginning of the year and having done the production expected.
Okay. On conventional generation, can you provide more color on efficiencies recorded over the period?
Well, here, that really is in progress. It's clearly based mainly on -- based on employees on one side because we moved employees to other more efficient way out of the coal plant and also external costs. So the vast majority is the efficiency program that pertains to the shutdown of coal plant programs that we have in progress.
Okay. Staying on conventional generation, any progress on hedging for 2021?
Yes, you have also gained [ -- we have seen ] the situation today, but we have progressed our hedging. Now we are ranging at 50% 2021 production hedged in Italy, 80% for Spain. We have now an average hedge price of EUR 52 in Italy. And EUR 75 in Spain. Spain, EUR 75, included also the marginality on retail.
So this is more or less the situation today. So we are moving, notwithstanding still the very low price at the spot level. And so we are trying our best to cover 2021 almost in line what the level of the business plan.
Okay. Networks. What is the outlook of regulatory frameworks across countries of operations?
Well, I'd say, neutral to positive. It's clear that a big discussion now is going to be done in Europe and also in other countries to discuss about the central role of distributors in the energy transition, and also grids will be the center of an increased investment plan that could be triggered also by this recovery mix.
So renewables and distribution can be big basket of increase in investments in Europe and also in other countries. It's clear that in Europe, regulators are trying to understand how regulatory principles will be -- would converge among the European countries. And so it just happened in Spain with the division of regulatory framework has also happened in Romania. And where the perimeter now rollout has been planned for the next years.
On the other side, also South America, regulatory frameworks are moving towards European schemes. And so regulatory authorities are stabilizing initial step also there for smart meters. So we see a normalization. We see discussion around the central role of distributors in the energy transition. The fact that networks will need higher investments to get this role. And on the other side, to not to decrease -- to try to decrease step-by-step remuneration of networks at the time in which investments would be needed and will have to flow in the networks in all the countries in which we are also on the countries that are addressing the energy transition.
Okay. Staying on networks. Is there any regulatory risk to be taken into consideration?
Well, not in the foreseeable future. So regulatory cycles have just started in Spain, new tariffs have been defined in Colombia, and they are all aligned with our expectations. In Chile, regulatory authority is working to design elements for the new cycle that will start in November 2020. 2020, we expect the result could be close to our expectation. These are -- so the outcome of the first discussion we are having with the regulators.
Okay. Retail. How is the commercial portfolio change over the first quarter in terms of customers acquired and lost?
Well, in Spain, customer base is up by around 200,000 customers driven by a solid performance in Italy and Spain that remains broadly flat over the period. So say -- on the other side, on the customers lost, more or less, in line with the previous quarter. For the first quarter, the expectations are that -- so the market will go -- it's going down in terms of acquisition and in terms of lost customers during the lockdown. That is something that we are experiencing along April and so along the last 2 weeks of March and the longer -- the month of April, whereas all the activities of acquisition have been suspended or very, very reduced.
Okay. So quickly -- quick question on retail. What's the level of churn rate?
Well, churn rate in Italy was roughly around 12%. In Iberia, the churn rate declined 1.1 points versus the previous year, and we are working around 10%. This is also because the reduction, now we will see in the second quarter will be bigger because of the lockdown of April that will impact in the churn rate, reducing a little bit because of less lost customers in April, mainly.
Okay. Now we move to a set of questions that I think are the most growing one, related to general financials. The first one is looking at the guidance, what are the main threats to your full year guidance? And what can be the financial impact?
Okay. So first of all, I want to underline that this question is peculiar. It might result in lots of moving parts, both positive and negative. And we are totally monitoring to act properly. So if I have to summarize the main headwind that we are seeing at the moment, we have devaluation of local currencies in Euro, and based on current tax projections, might have an impact on EBITDA of around EUR 500 million. And this might translate into a net income impact of around EUR 150 million, out of the EUR 5.4 billion target we have in 2020. Impacts of volume exposure in Lat Am will depend on the regulatory protective measures that would be made available by local regulators. This is for Lat Am because in Europe, regulatory activities are not exposed to volumes as frameworks are revenue-capped.
Yes, another headwind will be bad debt, that potentially will increase, but the final number will depend on how long the lockdown persists to now quickly the economic recovery materialize. Regulators also might have to recognize this cost, and therefore, neutralize the economic impacts. We have to make a longer observation of all these things to understand what is the final bad debt impact might be.
Next 3 months and recovery curves in countries of presence are key to properly assess positive and negatives on numbers. As of today, we can confirm that the underlying business continues to prove very solid, and the strategic trajectory of the group is well on track. Monica, I guess you are on mute.
Sorry, I put myself on mute without remembering it. So cost of debt. Cost of debt is down by 55 basis points versus '19. Can we expect a steeper reduction versus planned assumptions?
Cost of debt Q1 was 3.9%, and it has been in line with our planned assumption for 2020 of 4%. We have limited refinancing hydro [ works ], and we will continue with our active liability management activities. So more or less, not having a big refinancing in the next quarter, we think that so we will stay -- stick to the targets that we have taken in the strategic plan.
Okay. A really popular question on the provision reversal in Spain. Can you provide more details? Was it included in the 2020, 2022 plan?
Okay. So this is a new collective agreement signed last January, and it provides for a new and more flexible social benefit scheme. And it establishes a modification of certain social benefits, mainly that corresponding mainly to electricity subsidies for active and passive employees, now more aligned to the average family consumption in Spain.
The provision reversal was included in the plan as the negotiation with the unions on this collective agreement were ongoing by the time of presenting the strategic plan 2022 last November. It's clear that this impact might not be the final impact of this reversal provision because -- so other measures are going to be taken in Spain, and one has been already taken in the first quarter. So other provisions who have flexibility in managing others cost or -- so the [ personnel ] cost will be taken accordingly with further future agreements with unions that are now progressing, and they are now discussing during this period.
Okay. Another question, more on the nonorganic part of the business. So has your outlook on M&A changed as a result of the prices? Do you think it's prudent to false acquisitions or could this actually be good opportunity to build attractive multiples?
Well, so we have no -- first of all, we have no change in the approach of our M&A approach. So in the preference, we have 4 bolt-on midsized deals, mainly on networks because of renewals. And so we think that we can rely on our organic capacity to develop our fleet.
I think current prices now is putting a break on M&A in this period. It's difficult now to press from any part in M&A during the lockdowns and recovery. I think that current crisis would potentially open up opportunities, and mainly for who has big financial shoulders. And I think that to the year-end, it would be possible to identify those players that managed through the crisis and those that did not. And yes, financial difficulties may trigger asset sale or consolidation of players, that in turn, can bring us to the market. So we think that the new phase of M&A will arise, not now, but in the last part of this year. And so we are -- we will be looking at the markets, and we will evaluate opportunities and maybe to capture some opportunities, as always happened in the past.
Okay. Staying into non-organic, how is the minorities buyout acting in South America?
We are well advanced the program, supported also by the weakening of FX of the Lat Am currencies. As you know, we have launched share swap transaction on both Enel Américas and in Chile. On Américas, we expect to complete the outstanding share swap and reached 62.3% by May 2020. And we have already entered into 2 new share swap transactions to reach 65% of our stake. Enel Chile, we are progressing well, and we'll announce shortly the outcome of the shared swap transactions that we have in place.
Okay. Now 2 questions on the upcoming AGM. Considering your current share price, is it likely to have a share buyback as soon as the AGM will approve it in May?
Well, on March, the Board of Directors asked the AGM to renew the authorization to purchase and subsequently dispose of trade shares to be carried out in one or more transactions up to a maximum of 500 million of ordinary shares of Enel. That represents about 4.9% of shares capital. We, as we already expressed -- and this is at a value of around EUR 2 billion. As we have always said, we have elected to retain this optionality, but it will always be benchmarked against other options for capital deployment and the value accretion that is attached to that.
All in all, as I said, always looking forward. It's clear that these opportunities to stay in the basket. But looking at the prices, for instance, the prices at which we are doing the share swap in Latin America, it is more EPS-accretive to devote capital to this kind of transaction than this one. So we will benchmark and we will rank all the opportunities. And so we will decide to deploy capital on our strict financial discipline to the -- to give money to options that are the best that we are ranking.
Another really popular question. Is there any risk on dividend payment?
There are no risks. So now we have the Board approved the payment of the dividend equal to EUR 0.328 per share. So in 2019, EUR 0.16 already paid as interim dividend, the balance to be paid in July. And so we confirm the current dividend policies not only for -- so what is the payment for 2019, but also for the 2020, where we set the minimum payment -- minimum EPS at EUR 0.35 per share.
Okay. Now 2 questions on the remuneration policy. Can you provide more color on the rationale of the recent changes to the MBO and LTI programs?
Well, so the rationale was clearly the fact that after having set MBO, LTI programs before the crisis, prices have changed the priorities for 2020. And so priorities for this company in 2020 are now more set on the ability of the service on one side and on to make our employees safe in working for the stability of service. So this is the bigger part of the effort that we are doing, and the Board so decided that was right to put this as the priority that this management has to follow in 2020.
On the other side, because the sustainability effort, there is towards already the LTI program because of the emission, and was set for the renewable development, has been defined as a big import and the relevant target for the medium term for the LTI plan. And this because it is unchanged. So it's not because some delay might arise in 2020, that we have room to reduce these efforts in the medium term.
And on the other side, also to underline that these kind of investments will have to be the key for the restarting trends, not only for us, but also for Europe or for the countries that for to take 2 things together. Today, if we start on one side and a big debt towards sustainability and energy transition. This is the main philosophy under this change of targets.
Okay. Before going into the list of questions that keeps on going through our inbox -- coming in through our inbox, one question that is again another popular question is on Open Fiber. If you can just share with the market update on possible merger sale of Open Fiber?
Well, I said. So I think the priorities in this period have changed. So the real priority the company has is to provide continuity of service on one side and to speed up in the development of this project because it has been proven central in a crisis like this. And I think after this, the central role of fiber optic in a country will be more and more important because also, it's the way in which we will work, in which we will act I think this crisis will change completely the things and new needs will arise. And this need will stay to have a future-proof network that like the ones the Open Fiber is developing. So this is the real focus of the company. We have no signs of any steps in other direction. Our company is fully busy in doing this sale.
Okay. I would take a few questions, starting from the beginning. I will try to be order -- I will try to pick them up orderly. So the first question that came through was on the working capital in the first quarter due to COVID. Can you elaborate on that? And can you please provide the guidance for Q2? I think that we have already addressed this question.
Popular question on the provision release at Endesa. Basically, some analysts are asking if this release and the inclusion of this release in the ordinary results is an insight downgrade of the guidance that we provided last November or there are some items that we go through and will basically potentially offset this impact at the end of the year.
Well, I said, I think we have already answered the question. First is, this is the first step. So the first step was a release in -- of this provision on one side, but we have also put another provision that is going to cover some agreements with unions for -- related to personnel on fees, on distribution, on generation that we have already had.
What we think is that a lot of other things will be needed in Spain because Spain is entering, like the other countries, in these energy transition phase is going to shut down complaints, is going to digitalizing the networks. Now that the far working is coming at a very big, big part of the new way of working. So this is -- these are things that Spain will have to discuss with until the next month. And that's why the final impact on, economically speaking, at the end of the year, would not stay at level because other provision will arise following the discussions that they are doing the union business lines.
Okay. I'm going through quickly the questions that came through. I think there is a question that we really didn't answer, although you were clear in assessing the commitment of the group on the 2020, 2022 targets, but it's linked with the -- our SDG Bond. And the question is, do you expect to hit the KPI targets on your sustainability-linked bond, despite the slowdown in the renewable industry?
Yes, technically. So we don't see -- so looking what the headwinds we had this year -- we might have this year and also looking at or now we are entering Phase 2, and we will not come back to Phase 1. So looking at this normalization of activity, everything -- the maximum impact we might have is 2, 3 months delay in some of development of 2020 that will translate successfully will move in 2021, but the overall KPIs is not impacted. So today, the visibility we have today.
Okay. We have some questions that I think have been already addressed. So if any was left behind, we will do it via e-mail. So I think this can conclude our call perfectly on time. So thanks, Alberto. Thanks to all of the people that were connected and that continues to support us. And let's talk soon. Thank you.
Thank you very much. Bye-Bye.
Bye.