Enel SpA (ENLAY) Q4 2022 Earnings Call Transcript

Enel SpA (OTCPK:ENLAY) Q4 2022 Results Conference Call March 16, 2023 1:00 PM ET

Company Participants

Monica Girardi - Head of Group Investor Relations

Francesco Starace - Chief Executive Officer

Alberto de Paoli - Chief Financial Officer

Conference Call Participants

Operator

Ladies and gentlemen, thank you for standing by. And welcome to Enel Full Year 2022 Results Conference Call. At this time, all participants are in a listen-only mode.

I would now like to turn the conference over to Head of IR, Monica Girardi. Please go ahead.

Monica Girardi

Good evening, ladies and gentlemen, and I apologize for the late start. Welcome to our full year 2022 results presentation, which will be hosted by our CEO, Francesco Starace; and our CFO, Alberto de Paoli. In the presentation Alberto will wrap up on 2022 numbers. Following the presentation, we will have the usual Q&A session. We ask those connected to the webcast to send questions only via email at investor.relations@enel.com.

Before we start, let me remind you that, media is listening to both the presentation and the Q&A session. Thank you. And now let me hand over to Francesco.

Francesco Starace

Thank you, Monica. Good evening, everybody. Let's start with the highlights of the period.

We had a very challenging market context, but in this context, our business model proved very resilient and testified, once again the importance of being an integrated player. Our economic and financial performance was supported by a sound operating delivery that did not stop on the strategic aims in spite of the disruptive events that materialized in the past three years. All that, coupled with managerial actions that were promptly put in place allowed us to hit the guidance set out at our Capital Market Days in November.

Our strategic repositioning program progressed better than planned in 2022, we are well in track on the execution of the 2023 deals, as I will comment later in the presentation. In light of the results achieved, we will propose to the next assembly fixed dividend per share of the €0.4 per share against the 2022 earnings, which underpins a high single digit growth versus 2021 and implying a 7.5 dividend yield at the current share price.

We move now to Slide number three that shows the importance of managing the business in an integrated way. We posted an EBITDA of €19.7 billion marking a 3% growth year-on-year above the guided range. Worth to highlight the composition of this growth. The management of the integrated business contributed €1.5 billion in a context of severe energy market disruptions. Our generation trading and portfolio optimization activities more than offset the negative performance of customers in Europe, resulting from dynamics that Alberto will detail later.

Networks net of stewardship benefited from the focus on efficiencies and geographical diversification as LATAM tariff indexation and past adjustments more than offset adverse regulatory changes in Europe. The growth year-on-year is normalized and organic, driven by our operations. In fact, the stewardship business model contributed for around €900 million to the 2022 EBITDA, which is €900 million less than the previous year, which recorded the contribution of the open fiber capital gain of €1.8 billion. Non-recurring items around €100 million in 2022, weighted on growth negatively for €500 million.

Our operating delivery supported targets achievement over time, as you can see in the next slide. During the last three years, the group delivered financial results that were very strong with EBITDA and net income increasing 10% and 13% respectively, despite an exogenous environment that stress tested our business model in many ways.

I am on Slide number four. Leveraging on the strategic decisions taken in the past, we have been able to implement managerial actions that compensated extreme volatility and allowed us to reach and exceed the targets that we set for 2022. The ability of the company to deliver financial results demonstrate that leveraging on integrated position combined with the flexibility of the asset base and the geographical diversification of the group is crucial to absorb and adapt to abrupt changes. The ‘22 performance is set to support future growth prospects and provide visibility on the target set for the future years of the plan.

Let's now move to the key drivers that allowed us to reach a level of debt within the guidance provided back in November last year. We are now on chart number five. Group’s net debt stood at €60 billion, €10 billion’s lower than what was reported at the nine months’ results. This was expected and was a result of the actions implemented in the two prior quarters of the year, in light of the evolution of the crisis.

We have been able to meet the €58 million, €62 million guidance range despite the distress environments and measures that were implemented by governments, which still weigh in for about €5.4 billion on our financials. This result has been achieved thanks to €9 billion of FFO contribution, which improved €8 billion in the last three months, driven the EBITDA performance already commented, in a recovery of more than €4 billion in working capital.

Furthermore, the successful implementation of our strategic repositioning had a positive impact on the net -- on our net debt evolution.

In the next slide, number six, I dive into the business delivery of our group in this last three years of disruptions. The developing machines, they risked our generation capacity. The share of renewables capacity increased progressively over time, reaching 66% of the total in 2022, which is a jump of 14 percentage points in just three years.

Over the last three years, we added more than four million customers to liberalize market, providing them a wider portfolio of infrastructure and flexibility services to cope with their needs. And our continued effort in the digitalization of the distribution network resulted in grids of higher quality with the average interruption down by more than 20% compared to the pre COVID year and now 63% of our customers are digitalized.

In the next slide, I show you how our renewable development machine worked and is set to work in the future. We added more than 10,000 megawatts in just the last 24 months. Despite supply chain issues that have marginally impacted our construction activities. We will not stop, we target to end around 21,000 megawatt of new capacity over the next three years, of which 5,500 megawatts in 2023, a target that is already fully addressed.

Our future ambitions are backed by a pipeline of more than 450,000 megawatts, of which around 130,000 are located in Italy and Iberia, demonstrating that we are in the best position to accelerate in the energy independence in Europe. The increasing share of clean energy resulted and will result in a benefit for our customers enjoying affordable prices, particularly in Italy and Spain.

Our customer base in the liberalized market in these two countries increased by 2.6 million customers in one year, as our commercial policies protected people from an extremely distressed price environment. This is chart number eight. 65% of sales to customers were at prices on average around 40% lower than market prices and fixed throughout the period. This contract signed before energy tensions preserved our customers on the liberalized market throughout the entire turbulent period.

We honored these conditions, even if at an economic loss as we prioritized consumers’ protection against an unsustainable pricing pressure. The operating delivery of our networks will be key to accelerate the penetration of distributed generation. And you can see that on slide number nine.

The investment deployed over time on networks have been instrumental to create the electricity grid of tomorrow with high level of security, resiliency, and reliability to accelerate and a clean electrification. The yearly request of connections from distributed generation have increased 50% since 2019 and have reached 5,600 megawatts in 2022.

These requests are associated with renewable distributed capacity, including decentralized energy management system and virtual power plants. And our networks have been able to create hosting capacity capable to integrate these new generation sources seamlessly and unlock future value for the energy system. Furthermore, we have continued to focus on digitalization with almost 46 million smart meters installed at the end of 2022.

Let's now have a look at the strategic reposition implemented so far on Slide number 10. Group simplification has always been a cornerstone of our strategy. In 2014, we engaged in the transformation of Group structures with the aim of simplifying governance, while maximizing efficiency and efficacy of our actions, aligning priority at country level with the Group's strategy, upgrading growth prospects, leveraging on synergies and accelerating delivery capabilities. Overtime, we have executed this strategy, implementing all necessary steps to transform the Group into a simpler and leaner organization, focusing on the execution and value creation.

We are concluding on the right hand side of this chart, you can see it, this big effort as Eastern Europe and LATAM repositioning, LATAM on the left, Eastern Europe on the right. This kicked off in 2014, as you can see from the chart, and it now enters the final phase. 2022 has marked a leap forward in the simplification effort, and by early '23, the Group will evolve further into the leaner form we targeted since the beginning. You see this on Page 11.

Over the course of 2022, portfolio management delivered better-than-expected executing €5.9 billion of asset valorization. '23 is also off to a great start. We already announced the signing of the sale of the assets in Romania to PPC for a total consideration of €1.3 billion and an impact on net debt of around €1.7 billion. The closing of the sale is expected by the third quarter of '23, a sale of generation assets in Argentina. All the pending disposals that you see in this chart are ongoing and we are confident that execution will be completed as planned.

Finally, let's move to shareholder remuneration on Slide number 12. The resiliency of our business model, the high standards of operating and performance and all the actions that management have put in place during this 22 year allowed us to deliver a sound set of numbers. So we will propose to the AGM a dividend per share of €0.4 per share, up by more than 5% versus previous year.

It is worth to highlight that, the business model we built since 2015 guaranteed a solid and visible improvement in shareholder remuneration, and the share price appreciation result in a total shareholder return exceeding 110%.

Now I hand over to Alberto. He will go through the details of the 2022 financial performance. Please, Alberto.

Alberto de Paoli

Thank you. Thank you, Francesco. Good evening, everybody. I am now kicking off the analysis of financial results on Page 14.

EBITDA stood at 19.7% and Group net of the ordinary income came in at 5.4%, both above the guidance we communicated at the Capital Market Day. Net debt as anticipated totaled €60.1 billion and reached the midpoint of the guidance range, thanks to the delivery on operations and the managerial actions implemented. I will detail later all the moving parts underlining the '22 economic and financial performance.

Let's now take a look at the investments of the period on Slide 15. We deployed investments for around €15 billion to secure future EBITDA growth. In particular, €8.6 billion of the total has been allocated to support our integrated strategy, with renewables accounting for 6.4%, up by 11% versus 2021, and the remaining portion focused on widening our portfolio of beyond commodity offering, and almost €6 billion were allocated to our grids to improve their level of digitization, quality and efficiency.

From a geographical perspective, also, almost 90% of CapEx has been allocated in the six core countries in line with our strategic repositioning, with the lion share spend in Italy and accounting for around 35% followed by the United States.

Francesco has already shown you the main drivers of the EBITDA evolution. So I will kick off the analysis of the performance with a deep dive into the some KPIs on Slide 16.

On the integrated business, our generation assets packed in full -- the increase in the fixed power sales, preventing margin contractions, deriving from spot wall sales market exposures. Notwithstanding this, the exception of hydro scarcity weighted on renewable sales coverage, particularly in Italy, as I will explain in a few slides.

Our wrap per customers increased by in the year by 7%, thanks to a higher CapEx intensity, particularly in markets where regulatory frameworks are supportive and the protection against macro volatility is the highest.

I will now dive into the EBITDA evolution of the integrated business by geographies. So we are now on Page 17. The integrated business increased 16% year-on-year, thanks to Enel’s geographical diversification and ability to manage a generation portfolio that hollowed us to deliver strong results in a year affected by volatility and external disruptions. As you can see from the chart, Italy suffered the most for the energy transition -- tensions with EBITDA decreasing €1.5 billion.

In Iberia, the integrated margin management contributed positively for €1.6 billion, of which around €700 million as a net debt effect of the higher generation margin, partially offset by lower marginality on the retail business, impacted by increasing sourcing cost, and roughly €900 million from the gas business and the optimization of the power world sales portfolio.

Northern Latin America contributed positively for €1.2 billion in North America for 300, 1.2 LATAM, in 300 North America for a total of €1.5 billion, mainly thanks to €700 million linked to new capacity built, which €500 million in the United States, €200 million for FX impact, and the remaining for the gas polarization in Chile.

On the stewardship result, Ufinet money transactions generated around €400 million. Worth to highlight, the performance in LATAM in U.S. was backed by long-term PPAs that are allowed to stabilize prices for customers and secure returns, while Iberia has benefited from the cap and gas prices implemented by the government, that allow the stabilization of power, price, evolution, and a better marginality of the generation business.

And now let me deep dive into Italy in the next slide. I start describing quickly the different business clusters that from now on will represent our integrated business. The first is power free. This includes renewable thermal generation and the retail free markets and Enel Italia [ph] services. Then we have the power regulated that includes must run regulated power generation and retail regulated market.

Then we have the gas market that includes retail gas annual sale, and last trading and generation services, that includes portfolio optimization activities and balancing services.

In Italy, the EBITDA associated with the integrated business stood at €2.7 billion down 54% versus 2021 as power free dropped €1.6 billion on peculiar business dynamics that I will detail in the next slide.

Power regulated declined by €500 million due to a change in the status of the coal plant located in the south of the country that is no longer considered as mass run, and due to lower prices associated with green certificates recorded in the year. Gas, recorded a negative €300 million associated with mainly with the price review of some contracts that entails future positive impacts. And these negative dynamics were only partially offset by both power and gas portfolio optimization performed by our trading activities and generation services accounting for around €900 million.

And now let's deep dive on the Power Free dynamics, which as said, generated a drop in the EBITDA integrated of around €1.6 billion in Italy. The negative performance was mainly driven by an unexpected and exogenous open position for around 13 terawatt hours generated by six terawatt hours of higher sales and seven terawatt hours lost in idle production due to a persisting growth.

This unexpected open position came together at the beginning of the year with around 10% unhedged position of around six terawatt hours, a level that that was in line with our historical risk policies. This overall 19 terawatts hours’ open volumes were covered through a combination of thermal sources and market purchases, that accounted for additional €4.3 billion insourcing cost, out of which only 60% translated into customer bills.

In fact, as Francesco already mentioned, we decided to honor contracts sign in a completely different environment and to protect our clients from power market volatility.

I will now dive into the EBITDA evolution for networks on Slide 20. Ordinary EBITDA stood at €8.3 billion. Going in details by country, Italy proved almost flat. As the negative effect associated with last year regulatory review was offset by efficiencies. Iberia decreased by around €70 million on previous year. Reset them at an increase in fixed cost. Romania contributed negative for more than €150 million still delay into the recognition of the higher cost, due to spike in power prices needed to cover network losses. This delay has been already recovered in January this year.

Latin America countries performed extremely well, contributing €600 million, mainly thanks to tariff indexation for around €350 million, currency devaluation for more than €100 million and efficiencies for another €100 million. EBITDA was also impacted by a negative delta non-recurring for around €300 million due to the regularization of past years' remuneration in Spain and the positive effect of Resolution 50 recorded last year in Italy. Excluding this negative impact, EBITDA would have grown by 12%.

Stewardship business model added around €500 million thanks to the valorization of Gridspertise. I will end this part of business performance with some highlights on RUB evolution and tariff.

Investment in networks stood at €5.7 billion, around 66% have been deployed in Europe, mainly in Italy to cope with the increasing request of connections from distributed generation. Investment in quality, resilience and digitization resulted in higher RUB across almost all the countries of present with a 7% increase at group level on a like-for-like basis. Furthermore, our networks in Latam benefited from regulatory adjustment that resulted in a 70% tariff increase in Rio, 25% in Ceara and 12% in Sao Paulo.

And let's now continue the analysis of results with the earnings evolution and I'm on Slide 22. Ordinary Group net income came in at €5.4 billion on the back of the dynamics commented at EBITDA level, higher D&A and minorities only partially offset by lower taxes and financial expenses. D&A are up year-on-year €600 million as a consequence of €500 million amortization on higher investment deployed an FX impact and €100 million of higher bad debt paid in Italy, up on higher turnover in the period.

Net financial charges decreased 11% with a positive impact at net income level of around €240 million thanks to the accelerated debt refinancing carried out during the last 12 months, which pushed down cost of debt by 20 basis points versus December 2021. Income taxes decreased around €200 million, mainly for the adjustment recorded in previous year on deferred taxes, partially offset by higher taxes for higher taxable results. And finally, higher minorities interest, due to higher contribution from our subsidiaries versus the result of the Italian entities, resulted in a lower net income for around €550 million.

And let's now move to cash flow on Slide 23. FFO stood at €9.1 billion showing a strong recovery versus the nine months, thanks to the improvement in working capital dynamics, inline with our expectations. It was to highlight that FFO has been affected by €4.2 billion impact in working capital in the year, associated with the government measures in the current energy context. Excluding these effects, FFO would have reached around €13.5 billion.

Deep diving into the working capital, the dynamics underneath can be summarized as follow. €2.5 billion of government regulatory measures still to be collected. And in the next slide, I will show you how the government to related debt is piled up over time. Worth to highlighted that in Q4, a decrease of €2.6 billion versus the nine months has been achieved, mainly thanks to the reabsorption of tariff equalization in a partial recovery of FX related to the cap on gas prices in Spain. €2.2 billion impact are from the energy market context improving versus last September due to the decrease in power prices in the last quarter of the year.

As planned, we fully recovered the €1.1 billion related to the CapEx seasonality in line with past years. Excluding exogenous impact associated with governed measures and energy market context, the evolution of working capital would've been completely in line with historical trend. Finally, financial charges paid declined by €400 million, mainly thanks to the liability management program executed last year, while taxes proved flat. Before we move to the net debt, let's take a closer look at pending government's measures that have still to be collected.

I am on page 24. Over the course of the past month, working capital was affected by the pilot of measures to tackle the energy crisis in Europe, reaching the share amount of €8 billion as of the nine months, 2022, at the peak of the crisis. As of the full year, we still suffer from €5.4 billion to be recovered, reduction is said by Italy, Spain whereby the recognition of the tariff equalization in Italy accounted for around €1.4 billion and the price cap on gas in Spain for around one.

Net managerial action that already partially compensated for this burden. We still have to cash in more than €4 billion. That, as you probably remember, we don't anticipate to be collected nor in the short term, nor in full. In fact, our targets for 2023 do not include any repayment. Why we expect Enel for the €4 billion to be reintegrated by the end of the plan period. And now let's move on net debt on slide 25.

The debt is stood at €60.1 billion, lending a set the midpoint of the guidance communicated last November. Net debt has strike amounts of €59.6 billion, there is €500 million below the reported level. Net debt EBITDA ratio stands at 3.1% at the low end of the range we announced at the capital market day, this level coupled with the visibility over the underlying dynamics of the business plan, both well for the targeted landing point of 51, 52, we have in our guidance for 2023.

But financial solidity was instrumental through the extreme volatility of the past 12 months. We are now on page 26, where you can see that along the year the group had to financially manage three black swans at the same time. Margin code requirements triggered by severe commodity fluctuation. They already mentioned measures introduced by governments as well as the impact from the broader energy market context. All these factors picked in August, when we recorded around €21 billion impact.

The financial discipline followed along the year, allowed the group to remain unscripted by this unprecedented situation, which has instead severely affected other players, leveraging also on our ample available liquidity. In the last quarter of 2022, the impact was reduced by €6 billion, thanks to the managerial action implemented at evolution of energy prices.

Our total liquidity as at the end of 2022, stood at more than €30 billion healthier than ever, and worth to highlight that this does not include the €12 billion credit line signed with SACE, that can be used in case of a further increase in emerging coal requirements.

The work we have been done so far on our financial position bear fruits in 2022, where liability management has always been a staple of our financial discipline effort have accelerated further in 2021 in order to safeguard, the group from the rising rates environments through the execution of the €8 billion equivalent program, building a cost of 0.6%. That allowed us to decrease further the cost of our gross debt, which is now at 3.3% 80 basis point down compared to 2019. The average majority of our long-term debt remains stable over time at on, at around seven years.

Thank you. And now hand over to Francesco for the closing remarks.

Francesco Starace

Thank you, Alberto. As you see in the presentation, we have navigated two very turbulent waters, maintaining a soil, a solid operating, economic, and financial delivery, as well as a trajectory along the structure of our strategy. We reached our targets thanks to an integrated business model, which protected us against extreme volatility been proving to be a very solid and useful tool. This protection combined with the productivity and fast response attitude of all our colleagues work properly in good years, but also in bad years proving that this strategy is appropriate to face very different cycles.

The crisis we have faced is an opportunity to leverage the focus on tier one country and the growth that we can pursue in these areas of increased focus, reducing the risk profile of our investment, and maintaining a sustainable growth of our results.

We now move to Q&A with Monica leading.

Question-and-Answer Session

A - Monica Girardi

Thank you, Francesco. We'll move to -- we are moving to Q&A now. If you -- Just a reminder, if you have any question shoot an email to investor.relations@enel.com.

First one is for you, Francesco, you have highlighted the significant operational progress accomplished through a global pandemic and the energy crisis in Europe. What do you think was pivotal for these results?

Francesco Starace

Well, as I said already during the presentation, it's the integrated business model. This model has been tested through these three years since 2020 from every possible angle, even the unthinkable ones, like a global pandemic in a lockdown. And it proved to be very, very useful to increase our resiliency.

We saw the acceleration of the energy transition. We positioned as early as possible, convinced that being integrated was really the best option to successfully strive in this transition. And this model is not only integrated across value chain, but also diversified geographically. So that also proved to be very valuable beyond expectations. So, I think that was basically the most important observation and the pivoting in that direction was crucial for this last two years.

Monica Girardi

Second question, I stay with you, Francesco, additional capacity with 5.2 gigawatt market, a new record, but is behind planned targets. The first question is, can you tell us what has created this lag? And when do you expect to recover it?

Francesco Starace

I think there was clearly a lag that started to surface during 2022 -- sorry, during '21 and continued during '22, it has to do with basically supply chain, stressful situation during '21 that then morphed into a very specific problem of importing PV panels into the U.S. market. So, the lack of additional capacity was basically due to this one effect. The U.S. import slowdown of panels imported from China was the real reason behind this 5.2 not being six basically.

Monica Girardi

Associated with the in new installed capacity, what is the expected run rate in terms of yearly development that we can expect?

Francesco Starace

I think that we have to be cautious that this single issue is not fully resolved during '23. It is being worked out, but there is still a backlog to be sorted out. We expect to deliver 5.5, something north of 5.5 during the '23 year. I think that's really safe enough to commit to that during 2023. So, we will beat again the 2022 number, but we still have a conservative view of what can have in the U.S. on PV imports from China during '23.

Monica Girardi

Okay. So, with you, Francesco renewable capacity in Italy, can you quantify the level of pipeline you currently have? And by how much you could step-up your yearly deployment in the country?

Francesco Starace

So, the overall pipeline of renewable projects in Italy today accounts to around 40,000 megawatts, of which, probably you can say 17.5 gigawatts are late stage. That means, they are very close to being investment opportunities. They are in different degrees of permitting and that is a little bit the bottleneck in Italy as you all know. We foresee to deploy 1.8 gigawatts in Italy in the next three years, accelerating gradually.

We are absolutely ready to do more, should this acceleration be faster. So, you can see that, we have about 10 times the late stage pipeline vis-à-vis what we think will put on the ground, based on a negative view of the acceleration of this permitting. If that would change, there are signs of improvement, I should say, then definitely, you will see us doing much more than 1.8.

Monica Girardi

Coal production spiked in 2022 for obvious reasons. Do you see this as a threat to your coal phase out trajectory? Francesco, do you want to take it?

Francesco Starace

Not really. I think this was a very special contingency because of what happened in '22. In fact, we have been requested and actually instructed to work with coal to reduce the dependence on gas during the '22 year and through March this year. We see this now easing out. We don't think that the '23 outlook is that to such to require, let's say, a forcing of coal production from a government standpoint. So no, we don't think this will change our decarbonization strategy vis-a-vis coal. So we still maintain the 2025 date.

Monica Girardi

Okay. Alberto, the market is definitely picking up the new clusters on the integrated business, then analysts asking clarification on activities about activities that we account into the regulated power and the gas business?

Alberto de Paoli

Okay. So it is useful to reiterate this new cluster and items. So in the regulated power segment, as I said, we include all generation assets that are subject to a regulatory remuneration scheme. For example, I don’t know, the mass run power plants or the no mainland generation and Iberia and all the retail customer’s business under regulated tariff. We have this kind of business in Italy, it is called SEN [ph]. We have in Spain, as CVPs, and also in all the LATAM for the not liberalized market. In the gas business item, we classify the margin from the management of the gas wholesale portfolio and the gas retail.

Monica Girardi

Alberto, stay with you on grid's performance, grid performance was driven by South American stewardship gains. What is holding back Italy and Iberia?

Alberto de Paoli

In Italy, main changes were associated with the WACC review. We have the WACC review down from 5.9% to 5.2%, and on the other side also a reduction in the OpEx remuneration mechanism through the risk factor. There is a factor that, so at the end draw down a part of the efficiency you gain in the previous years.

One point on the Italian WACC, is that based on the WACC for mechanism of adjustment, now we see room for a trigger event that would bring back WACC above 6% in 2024.

In Iberia, impacts were mainly generated by the famous ministerial orders for the 2017, 2019 period issued last August. And this as I already detailed in his presentation.

Monica Girardi

Alberto, still with you and still on grid. Can you break down by region that RUB of 2023?

Alberto de Paoli

Yes. We have – all-in-all roughly €38 billion or RUB associated with the six countries in which we will focus our effort in the next years. €31 in Europe, and roughly €7 in South America. The remaining €6 billion are related to grids or countries that are included in our disposal program.

Monica Girardi

I think you mentioned in the presentation, but just to make sure I repeat the question, what would have been a normalized level of FFO for the year, Alberto?

Alberto de Paoli

Yes. We have levelled exogenous impact on our FFO in 2022, because of the energy crisis of around €4 billion related to the government actions on one side and exogenous increase in the total turnover triggered by the variable fixed offers that have suffered suddenly the price increase. Because we have the €9.1 billion of FFO together with this exogenous factor, we would've done €15.5 billion of FFO marking a double digit increase versus the previous year.

Monica Girardi

Still on net debt, can you provide more color on the €1.5 billion impact from FX?

Alberto de Paoli

Well, this €1.5 billion is associated with the accounting effects of currency devaluation against euro. In this €1.5 billion, it includes also new leases for €0.5 billion. Worth to highlight, that, as I said in the presentation, our data strike amounts to €59.6 billion. It is 500 million lower than the reported level. And within this €59.6 billion, it includes €2.7 billion of accounting effects related to operating leases.

Monica Girardi

Net debt on EBITDA landed at the end of the year at 3.1 times. How confident are you to reach your guidance of 2.4 -- 2.5 times in 2023?

Francesco Starace

Well, we land as expected and at the low end of the guidance, we gave at the Capital Market Day. Based on the visibility we have today, we are more than confident that net debt will reach a target landing point in 2023.

Monica Girardi

Net working capital set of question. I think again here you mentioned, but maybe, it worth to repeat again. Which items within the government and regulatory measures have been recovered in the last quarter?

Francesco Starace

We recovered €2.6 billion in the last quarter, and this is mainly related to the reabsorption of the tariff equalization in Italy and also with partial recovery of the impacts related to the cap on gas prices in Spain. The equalization effect worth it, roughly €1.3 billion, and the rest is on Spain cap gas.

Monica Girardi

Second question on working capital. What has driven, I think you mentioned, again, this factor in the presentation, but what has driven down the energy market context item?

Francesco Starace

This is mainly related to the fact that in the last quarter we saw steep decrease in power prices and this drawdown the effect of the energy market context.

Monica Girardi

In a slide of the presentation, we sum up the impact of margin cost, government measures, and energy context. Can you remind analysts how do you see them evolving over time?

Francesco Starace

Well, yes, so what we see is that this exposure is going to shrink significantly and taking the current level of commodity prices, we expect another 30% of reduction within the first quarter of this year. We can therefore assume absorption of 50% by year end 2023 and the remaining part in 2024. And so just to stress that, potentially in our net debt estimate is for 2023, we are not anticipating any meaningful re-absorption associated with government measures. Therefore, if it happens it will represent upside to numbers.

Monica Girardi

So, a few questions about the disposal plan. So the first one is, can you share with us, which deals you expect to happen by the first semester?

Francesco Starace

So which deals, if you see there is a chart, I think we showed before. I think it's chart 10 or 11. Maybe it's 11. Let's see. If you look at Chart number 11, you see that we have basically announced Argentina and Romania, we will probably have within the first -- within the next trimester, so within June, July, at the end of the semester, some stewardship deals and most likely the Peru negotiations to the point that we will have to be able to make exclusivities and announcements in that sense. The other deals will come the following. But I think Peru is the biggest deal we have outstanding. So we are confident that, we can wrap it up before the end of the semester.

Monica Girardi

So just to stay with you for also the second question on disposal. Is there any change in the list of assets that we put on the block?

Francesco Starace

No, we don't see any change at this point. I mean, these are assets that have been put on the process way before. So no, we don't see any change.

Monica Girardi

Alberto, disposals and value associated with disposals. Can the €12 billion we plan into our net debt level for 2023 be higher? Are you discussing any deal at any level that shows materially different values from CMD expectations?

Alberto de Paoli

Well, we can clearly not disclosed the details on ongoing negotiations. Let me say that, some differences may arise, but the overall portfolio is sort of taking and bringing the value, the overall value that we gave during the Capital Markets Day.

Monica Girardi

So the other one is kind of a consequence of the one that I just asked. As the analysts are asking 8 times EBITDA is still valid or you feel there is potentially upside?

Alberto de Paoli

From the visibility we have today, we see the multiple as appropriate.

Monica Girardi

Francesco, group repositioning. You feel that anything could have been done differently or maybe sooner?

Francesco Starace

Honestly, I think that there are basically two large fronts, one is Europe, one is Latin America. And we can maybe observe that the COVID years slowed down the European exit a little more. So I think -- we could have probably wrapped up Romania earlier and then now, but because -- but during the COVID, this was impossible. So I think not in Latin America where we followed quite strictly a sequence of steps that finally brought us where we are today. Remember, we had to go through a sequence. I think there is a chart showing the sequence coming before, I think Latin America did okay in the timing, but Europe -- we could have maybe exited a year earlier, something like that, if not for the COVID.

Monica Girardi

Okay. We have now a quite large section around 2023 expectations and plan delivery. Francesco, maybe you want to pick this up. How is 2023 shaping up versus the plan expectation based on what you have observed so far?

Francesco Starace

I would say so far things are, I should not say this, because so is dangerous, but so far things are unfolding according to our estimations, if not slightly better. For what is the outlook on commodities and the way in which the markets are behaving. A little worse, but not that much on hydro. We were negative already. So it's unfortunately looking like that. And I would say we don't see reasons to deviate from what we observed at the beginning of the year at this point, not yet.

Monica Girardi

So do you see your -- sorry.

Francesco Starace

Yes. So, I think you can say what we projected three months ago, still is there, which means after a trimester you can say it's already quite more solid than that. It was three years ago -- three months ago.

Monica Girardi

So, do you see your 2023 guidance confirmed?

Francesco Starace

Yes, of course. Yes.

Monica Girardi

Okay. Francesco question about policies. What's your view on the U.S. IRA, and what opportunities could it bring for Enel?

Francesco Starace

It's a great -- first of all, we were not expecting the IRA to be finally approved as it is. It has been. So, it's been better than expected, and then that's positive. We think it has intrinsically an incredible acceleration potential for all the major strategic direction that we intended to pursue in the U.S. both in the range of decarbonization.

So more clarity on all the fiscal treatment of power plants going forward, much more than before, because it's a 10-years’ timeframe that we finally have in front of us, not just three years. And also much more emphasis on electrification and a push into electricity that the U.S. is finally shifting into. So great. Also, for all the analytics and the electric mobility and all the customer added value services that we were launching that are picking up speed quite strongly in the U.S.

It has also a potential of adding value in terms of potential production of solar panel and supply chain of solar. As you know we are committed in Italy to build the factory. We are building one of 3000 megawatts a year factory in Europe. But we can say that the U.S., IRA clearly opens up the window for similar identical factory to be deployed also there. To ease out, the problems we have as you all know we have mentioned them before, that we think we will continuously face in that path of the world, because of tensions on the panels being manufactured outside of the U.S. namely in China becoming difficult to import increasingly.

So, all in all extremely positive views and encouraging for our development in the USA, definitely.

Monica Girardi

France stay with you with another question on the regulation and policies. What's your view on new power market design? What's the ideal market design that you think should be implemented?

Francesco Starace

As, there is a proposal that just came out, after quite a debate different levels. This is not a bad, this is quite a good proposal because it finally compliments the short-term market design we used to have in Europe with a longer-term market tool that is being formed that combines CFDs and PPAs that gives the European buyers. So, they demand the visibility on longer term time horizons, which we always thought was the missing point in the energy policy of Europe.

And I think, so that is a very, very positive evolution. It does not fully re recognize our ideas that this should also be coupled with some mandatory long-term buying quotas on retailers because that will imply that they would be intrinsically better edged and also, they will have an interest to sell long-term to customers that would trigger a faster development of this long-term market, which I think is eventually going to happen.

I also like the fact that it is giving the member states some discipline in what kind of creativity they want to put in place in ruling on information and technology retrospectively and extension of price caps that I think at this point in time, if the volatility remains contained, make no more sense and therefore should be no more allowed under the European system. And I think that's quite strongly mentioned.

So, it's a very good step. Clearly, it's still not the end of the story, but it moves in the right direction for us.

Monica Girardi

Alberto, jump a second with you, analysis is asking a clarification around the guided range net debt to EBITDA in 2023. If you can just confirm the range.

Alberto de Paoli

Yes. As I said, so based on visibility we have today, we do confirm the 2.4 times, 2.5 times net debt to EBITDA in 2023.

Monica Girardi

Okay. Alberto, still 2023 onwards, I would say, power prices have changed quite substantially since your CMD, how this affect your 2023 targets?

Alberto de Paoli

Well, so in impact maybe relatively small because we have already hedged around 95% of Italy and Iberia for 2023. Clearly, being a decent year coming from another with high volatility, there are still areas of titans and it is mainly the Quebec in Italy. And also, the churn rate. There is something that we are carefully assessing along the year, and we are working to reach better than plan results, combining the effect coming from prices Quebec management and churn rate.

Monica Girardi

Okay. Another set of question on retail, EBITDA positioning and strategy. So, Francesco, maybe I'll address that to you. So, based on experience in 2022, on retail activities, are you considering any change in your commercial strategy or is still worth to a fixed price or index contract can secure better your marginality?

Francesco Starace

There is not a really fundamental change on commercial strategy. We have been adapting and evolving the commercial proposition, while we have widened the range of the offerings. The point is here that, what we have in our hands is now a very flexible tool. How do we want to value our fixed price generation, fixed cost generation, be the sum of the renewable portfolio, and also the hedged portion of thermal generation?

And I think it's still good to have that play on a fixed price level hedging customers from further volatilities. We will have, obviously, always a variable price formula for those customers that would like to go into this kind of logic. But definitely, we think it's still best to play the integrated margin, although with less volatility risk, but it's much more safe. And also, I would say, much more respectful of the deal that we have with all our customers.

Monica Girardi

Another one on retail. Is there any change in your hedging strategy to prevent the impact recorded on the open position in 2022?

Francesco Starace

I think if there is some change that we want to describe is that, we will make this hedging loops more frequent and continues, rather than before they were kind of discrete every month. And that was because the regulation in particular in Italy had a monthly timeframe attached to customer switch, so that we were adapting the demand of customers and therefore the hedging on a monthly basis.

I think we will bypass this. Although the regulation might remain on a monthly basis, we will do much more frequently, hedging loops so that we will be much more precise in adapting to eventual changes. And that is probably the last, I mean, the improvement that we have learned to during this 2022 crisis.

Monica Girardi

Another one on retail coverage of sourcing cost. Alberto maybe I'll move to you. How does either availability compare with your plan expectations? How are you hedging against the hydro levels?

Alberto de Paoli

Well, we foresee for the first quarter a lower level of hydro electricity production versus what we have budgeted before. But this year is not impacting a lot our numbers, because we are well prepared to manage this specific situation. And taking in account that -- so economically speaking, it would impact lower than the previous year. One, because we have done different hedging strategies, also taking into account the possibility to have a lower hydro, on one side. Remember that until June, we work under the claw back scheme that will change. So, we will make a sort of natural hedge on the lower hydro production.

Monica Girardi

Okay. Alberto, stay with you, can you provide some details on the expected sales of for 2023?

Alberto de Paoli

Well, at global level, if we excludes the asset under disposals, so for the six core countries, we expect SACE volumes of around 200 terawatt hours, which nearly alpha sold at fixed price. And for Italy and Iberia, the overall amount is around 165 terawatt hours on the 200 I said.

Monica Girardi

Alberto, how much of the fixed price volumes will be covered by own production in our expectation and how much by renewables?

Alberto de Paoli

Well, in Italy, we plan to cover 100% of our fixed price sales by our own production. Also, more than this, because as I said, on the hedging strategy, we are putting in place to front any kind of hydro reduction. We have for 2023, an extra cover of a fixed sales. So, we go in excess of 100%. And renewable energy standalone will cover 50% at the budget at level.

In Iberia, we have roughly 70% of fixed price sales covered by our own production with energies, renewable energies covering 20% and remaining 50% covered by nuclear production. And sourcing, as I said before, sourcing already hedged in Italy and Spain is around 93%.

Monica Girardi

Another one on retail, how does churn rate compare with your plan expectations?

Alberto de Paoli

Well, churn rate is in line with our expectations. All in all, we expect in Italy a churn to go back in line with historical average. In the first quarter, we are seeing a little increase versus the previous year we are working in a 7%, 8% range. And for Iberia, we have no relevant variation for 2023.

Monica Girardi

Francesco, question for you. Do you have any expectation of additional government intervention for 2023? Or do you believe the current measures will be extended or are the new ones in the making?

Francesco Starace

You know that there are some measures that have not yet finished to have their effects? Some measures in Italy and Spain continue through June, but given the situation that is quite normalizing, given the strong message that the commission gave to several governments, that if there are not special circumstances, then special measures should not be any more warranted.

Honestly, we think, the likelihood of extensions of these measures might fade out, if this situation remains as stable as it is today. Again, this is an if because we have to see what happens in the next few months on the gas side. I'm not aware of additional measures being planned at this point, no.

Monica Girardi

Alberto stewardship business model, just a question coming from an analyst that wants us to remind the market, how much of stewardship is expected for the plant and for 2023?

Alberto de Paoli

Was to recall numbers on the stewardship business model, we said at the Capital Market Day, that in the three years’ period stewardship will contribute for €1.5 billion out of which €900 million of capital gain and €600 million of service and fees sold to the joint ventures that we will establish. For this €900 million of capital gains, of the three years, we see around €600 million in 2023. Then, so the business will going to zero on the capital gains at the time in which we will establish all the joint ventures that we think we need to work. And then the result will be only related to the fees and service result to joint ventures.

Monica Girardi

Alberto minorities in 2023 -- minorities in 2022 were up on EBITDA mix. What's the level you can consider for 2023 following the completion of the repositioning?

Alberto de Paoli

Yes. So, in 2022, minorities stood at €1.6 billion, as triggered by the EBITDA mix as explained in the presentation. This is 23% on the total net income compared with an historical level of 19%. If we see the future also in light of the simplification plan and the normalization of the business, we can expect that this level will be around 15%.

Monica Girardi

Francesco, a question on the dividend policy, is the dividend for 2023 confirmed at €0.43 per share?

Francesco Starace

Yes, that is the number we provided during the Capital Market Day. We confirm it. Remember this time is our dividend that could improve if the conditions allow that. So there is a slightly different flavor when compared to last year's commitment, but that's confirmed.

Monica Girardi

Okay. A number of question around future of the Board. Analysts are asking if you can remind them what's the path to Board renewal? And if you can share any latest thoughts around the composition or what you expect?

Francesco Starace

The Board renewal is something that happens every year. So because the Board is appointed for three years, and the Board is composed of nine members, they are all up to renewal. I think they likely, and there are three board members appointed by so just the only which typically it's not absolutely certain maintains the Board members for a maximum period of three terms. So for this term, only one of them reaches this level. So one of them will be changed, but the other two most likely will remain. The rest of the Board members are all up to renewal, and that is a part of a list that is compiled by the treasury and then voted at the general assembly. Where remember the treasury has a 23.06% of voting rights.

So it will most likely be some Board renewal. Yes. This is something that has more or less happened in the past years -- in the past three terms that I witnessed. And that is a process that will be happening within the next three weeks, I guess. This is 25 days before the general assembly date, so that list will be published. But I have no indication of who is going to be in the Board. There are headhunters at work. There is a process in the treasury that is being carried out, and the headhunters have been now selecting Board members or confirming the existing ones and the work will, like I said, conclude in the next two, three weeks. So we are almost at the end.

Monica Girardi

Alberto, an analyst is asking an update regarding the likely refinancing costs, given the level of the 10-year bond in Italy. And the recent issuance. I guess it compares to the CMD guidance that we gave for 2023.

Alberto de Paoli

This year in 2023, we really don't have major refinancing needs. This is because we have done them along our liability management last year because we refinanced in advanced €8 billion at 0.6% interest rate. And because all the needs we may have this year will be financed through the use of proceeds of the M&A disposal that we will progressively do in the year.

On the other side, we have a very, very high level of fixed or swapped into fixed debt, that's why all the combination around these items will give us stability and a reduction in our cost of debt.

Monica Girardi

Alberto staying with you with the SLBs. PPC just announced that with the increased coal generation this year, it means its KPI for its SLB. And consequently, the coupon has stepped up. Where does Enel stand on the KPIs? And if there is an expectation that coupon might step up?

Alberto de Paoli

Well, it's too early to predict. As we know, we are working under an energy crisis that we think is far to normalize in 2023. While -- so we have to see what is going to happen in the summer to refill the stocks, and the impact on prices and everything. And if different way to produce to save gas will be needed or not along the year. We are working, clearly, to stay in the targets. And -- so we will look at the end what will be the final outcome. And so we will see in 2024, if target will be mature or not, and if you have to step-up our cost of financing or not.

Monica Girardi

I think that was covering all the questions we received mostly. So if anything was us leaving out, just bear with us, we will answer via email or we will call you. So thank you so much. Thanks for attending the call and I guess we'll see you at the first quarter. Thank you.

Alberto de Paoli

Thank you.

Francesco Starace

Thank you.

Operator

This concludes the conference for today. Thank you for participating. You may now disconnect.