Endesa, S.A. (ELEZF) Q1 2023 Earnings Call Transcript

Endesa, S.A. (OTCPK:ELEZF) Q1 2023 Earnings Conference Call May 9, 2023 4:00 AM ET

Company Participants

José Bogas - CEO

Marco Palermo - CFO

Conference Call Participants

Alberto Gandolfi - Goldman Sachs

Manuel Palomo - Exane BNP

Jorge Guimarães - JB Capital

Rob Pulleyn - Morgan Stanley

José Ruiz - Barclays

Javier Suarez - Mediobanca

Peter Vestia - Bank of America

Operator

Good morning, ladies and gentlemen, and welcome to the First Quarter 2023 Results Presentation, which will be hosted by our CEO, José Bogas; and our CFO, Marco Palermo. Following the presentation, we will have the usual Q&A session open to those connected on the call and on the web. Thank you.

And now let me hand over to Jose Bogas.

José Bogas

Thank you, Mar, and good morning, everybody. Let's start with the highlights of the period. During the first quarter of this year, we saw a significant reduction of gas market tensions that characterize 2022 and that have resulted in a certain relief in power prices. The sound operative performance at the turn commitment to decarbonization that led to the commissioning of new renewable capacity in the past 12 months. allowing us to reduce our sourcing costs. In this context, we have recorded an excellent set of results, thanks to the resiliency, versatility of our business model, which clearly proves the competitive advantage of being an integrated player.

2023 Annual Shareholders Meeting held last April 28, approved the distribution of a gross dividend of €1.85 per share against 2022 results to be paid on July 3, improving -- implying a dividend yield of 9%. In that sense, I would like to mention that all proposed resolutions submitted to the general shareholders' meeting passed with a quorum of more than 84% of the shareholder base.

On Slide number four, we analyze the main dynamic of market context. During the first quarter, European gas references dropped sharply, thanks to a milder winter, weak industrial consumption and several gas demand reduction measures promoted by the European Union and implemented in different countries, all of which have ensured to maintain historically high levels of gas storage.

TTF spot reference was on average, 46% down quarter-on-quarter in PBB reverted past decoupling trend and recorded a similar evolution with 47% decrease over the same period. Cumulated mainland demand fell by 2.7%, clearly affected by energy saving measures, the increase in sale consumption and abnormally mild winter.

And this as Mainland demand performed better and decreased by 2% with services and residential segment, trimming its demand by 3.9% and 2.1%, respectively, due to the aforementioned effects. Against this backdrop, average spot power prices in Iberia fell by 58%, driven by the comparatively more normalized gas inflow and record results of renewable output, thus limiting the application of the gas card mechanism in this context of a beginning to return to normal normality, the European Commission has opted to maintain these time limited measures in place as long as needed, reducing the rigs of additional regulatory measures.

Likewise, to prevent future crisis, such as the one experienced in 2022, the European Union has launched the discussion of electricity market reforms. There is no doubt that the main lesson learned is the need to accelerate the deployment of renewables in order to reduce dependence on fossil fuels and avoid new crisis.

And with this aim, and I am on Slide number five, we continue to derisk our generation capacity, which increased around 900 megawatts over the last 12 months, attaining new milestone in shifting our generation mix towards a cleaner one. Renewable capacity is 10% higher than previous year, while CO2 free sources now represent 71% of our mainland installed capacity. It should be noted that around 100% of the 1.1-gigawatt capacity addition target for 2023 is already in execution.

Total mainland output reached 13-terawatt hour, 4% higher than previous year with a significant 32% increase in renewable production, allowing us to obtain an 83% share of CO2 free sources over total mainland mix. In the specific case of hydro, production increased by 33% -- 32%, recovering from an extraordinarily dry 2022 first quarter. Nevertheless, reservoir levels are currently below the 10-year average and 2023 points to being yet another dry year.

Now on Slide number six, our successful commercial strategy enabled us to consolidate the liberalized customer base with close to 0.5 million new customers in the last 12 months. This commercial approach that builds on protecting customer in a scenario of still high prices and volatility enables us to lead the Spanish market. As a consequence, liberalized power sales increased by 3%, offsetting the drop in regulated sales.

More in detail, sales to B2C segment increased 13% versus the 1% decrease in B2B sales. In this sense and in line with the proposed reform of the marginal market, we continue to develop our commercial offer, or long-term energy sales to our industrial customer, which ensures the hedging against market volatility.

Finally, we further widened our range of service. And in particular, I would like to highlight that we continue to accelerate returning points deployment, reaching more than 15,000 that is 51% up that allows us to maintain a solid leadership position in Iberia.

On Slide number seven, free sales included within our integrated margin amounted to 19-terawatt hour, plus 2% versus previous year with a strong increase of 9% in the fixed price sales while index sales decreased by 16%, reverting the trend seen last year. Fixed price sales were cover almost 80% by our CO2 free generation ensuring competitive course of energy to our customers and providing further support to our integrated business commercial strategy.

Some performance of free power margin that reached €65 per megawatt hour, more than double versus past year, mainly resulting from first, the outstanding marginal thermal margin, which is still benefiting from a favorable market environment.

Second, the higher renewable margin, thanks to hydro output recovery quarter-on-quarter and the contribution of new installed capacity, which altogether have contributed to narrow pool purchases, higher supply margin, returning to normalization level of €11 per megawatt hour fully recovered from the negative margin of the first quarter of the last year, which was affected by sourcing cost increases, not transfer to fixed price customers.

And finally, the positive results obtained in the management of the short position. Regarding forward sales, we continue to make some progress in hedging energy sales to fixed price customers for the coming years.

A focus on the gas business on Slide number eight. Total gas sales remained flat with a slight increase in retail demand offset by lower CCGT volumes compared to previous year. Total gas unitary margin significantly increased from €1 per megawatt hour to €6 per megawatt hour year-on-year, supported by a positive evolution of our gas business in a still favorable market context. Volumes hit on our sourcing contract come to 87% and 35% for 2023 and 2024, respectively.

Moving to the operational parameters on networks. And I am now on slide number nine, distributed NRE remains stable in 33-terawatt hour. Our effort in digitalization of the distribution network resulted in higher quality grid with the average time of inter-production down by 12%. However, despite all of our efforts, losses slightly increased as a result of a record high levels of fraud seen in this period. REITs are the fundamental enabler of the energy transition, which have to manage not only new renewables asset capacity and charging points, but also the penetration of new distributed generation.

In this regard, our e-distribution brand experienced a strong boost in 2022 and has already managed around 150,000 self-consumption connection to the REIT. Therefore, huge investments are needed to guarantee security supply. And given the current inflationary environment, it is particularly important to adapt the regulatory framework to ensure the attractiveness and stability of investment.

And now I will hand over to Marco, who will detail the financial results.

Marco Palermo

Thank you, Pepe, and good morning to everybody. 2023 starts with the strong financial performance that proves the solidity of our business model. I'm on slide 11. EBITDA stood at €1.5 billion, marking a 60% growth year-on-year, while the net ordinary income came in at around €600 million in an extraordinary quarter that still benefits from the inertia of the second half of 2022, something that we expect to be normalized over the course of the year. Main drivers of this performance will be detailed later on. Reported FFO improved 80% despite being impacted by regulatory working capital increase.

Finally, we continue with our investment effort to secure future EBITDA growth with investments up to 2%, reaching €0.4 billion, clearly focusing on decarbonization and networks.

Turning now to the detailed analysis of financial results, and I'm on slide 12. We posted an EBITDA close to €1.5 billion, marking a sound 60% growth, mainly driven by the management of the integrated business contributing more than €700 million to the quarterly growth with a positive evolution in conventional generation and renewable businesses, enjoying as well a normalization in the supply business, as Pepe mentioned before.

Distribution EBITDA slightly increased by 4% to €451 million. And lastly, it should be stressed that EBITDA is impacted by the 1.2 extraordinary levy, which we have booked in the structure line in the grey color in the chart, and that's it, not passed to our customers.

I will now dive into the EBITDA evolution. We are on slide 13. Starting with the generation and supply business, we were successfully managed the different market context in this period. EBITDA reached around €1.2 billion with a positive contribution of the free power margin of €672 million. That is basically due to three things:

First, a better marginality of the generation business, driven by higher thermal margin following 2022 inertia and infra marginal volumes increase. Second, the expansion of the supply margin now back to more normal levels, partially offset by higher ancillary services and shape costs, resulting in a unitary margin at approximately €11 per megawatt hour, as commented before.

Third, the positive contribution from short position management. Gas business improvement as well. And lastly, a negative delta of €51 million in other effects, which includes the negative net impact of mark-to-market gas and power, partially compensated by a higher contribution of the non-Mainland business of €53 million due to the recovery of the fuel margin compensation that, however, remains negative. Finally, fixed costs and others slightly increased, mainly explained by the inflationary context and higher activity.

On slide 14, distribution EBITDA increased by 4% to €451 million, explained by the positive delta of gross margin due to the negative previous year's resettlement booked in the first quarter of 2022. And a slight fixed cost increase as a result of some positive non-recurrent booked last year and CPI impact.

Below EBITDA, I'm on slide 15. Net ordinary income came at €594 million, up by 76% year-on-year on the back of the dynamics commented at EBITDA level. D&A grew by €47 million year-on-year mainly due to the investment efforts carried out in renewables, distribution of retail, while bad debt stays almost flat. Financial results increased by around €100 million, mainly due to three things: higher expenses on debt on the back of average gross debt increase, coupled with an interest rate worsening scenario affecting the cost of debt.

Second, a negative delta from the financial update, both for the workforce restructuring and the dismantling provisions. And third, all of it partially offset by positive net exchange differences as a result of the favorable euro-dollar exchange rate evolution. Rise in income taxes by €160 million, mainly driven by better achieved results and the increase of effective rate up to 31%, affected by the 1.2% revenue levy that is not deductible.

At this point, it is worth highlighting the high tax contribution made by Endesa, which in 2022, increased by 28% versus previous year and continues to rank among Spain's top three largest tax payers with more than €3,800 million of tax contribution.

Moving to cash flow on slide 16. FFO recorded a slight negative figures but with a sound improvement versus last year. Deep diving into the different dynamics that affected the working capital and others, regulatory working capital increased by around €0.3 billion, most of it on non-mainland business. €0.6 billion negative impact from the usual first quarter seasonality additionally affected by high prices at the beginning of the year that is set to rebound in the next months and the temporary cash out impact on working capital from the collateral settlement in March amounting to €0.3 billion.

Let me highlight that the quarter-on-quarter EBITDA increase of roughly €550 million has translated into an almost equivalent FFO improvement. Finally, absolute FFO would have amounted to more than €200 million positive net of regulatory working capital effects, which should improve over the year.

I will now move on debt evolution on slide 17. Net debt stood at €11.6 billion, increasing by 6% versus previous year, impacted by the negative FFO already commented and around €600 million of CapEx cash outflows. Move to highlight that regulatory working capital stands now at €2.6 billion. This is an abnormal situation that means accumulating at depth, which tripled versus 2021 and that's the regulator should be aware and seek to resolve in the short term, especially in the current rate context.

Solid credit metrics in the period with leverage measured as net debt-to-EBITDA ratio remaining flat at 2 times well below the industry average. And adjusted FFO to net debt ratio at 32%, increasing by 2 percentage points versus last year. Gross debt decreased by 9% due to the sharp margin call reduction of 37%. As a consequence of the recent rising progression in interest rates, the cost of our debt reached 2.8%. Hedged debt ratio stands at 74% once deducted energy market cash collaterals and once considered the recently AGM approved intercompany transactions.

Regarding the financial position on slide 18, the company is facing a revised scenario, both in the energy markets and in financial context after multiple interest rate raises at fast pace. Following a volatile 2022, we have implemented a number of financial initiatives to strengthen the l position, ensuring levels we find adequate, both in the medium and long-term.

End of March, available liquidity amounts to €10.8 million reinforced in early May, we recently executed €1.1 billion credit line and €1.9 billion loan, both executed with Enel. The first quarter closed with 3.2 years debt average life. Our aim is to further extend such ratio, providing a more flexible maturities profile. So we are quickly progressing to sign in the second quarter new bank long-term transaction for more than €1 billion. Together with the already executed €1.9 billion loan with Enel, the resulting ratio will be above 4 years.

Let me now hand over to Pepe for the final conclusions.

José Bogas

Okay. Thank you, Marco. And now some closing remarks before the Q&A. 2023 start with a strong operating and financial performance that proves how solid our business fundamentals are, although we expect some normalization of thermal and gas margins over the course of the year. We continue to strive in our commitment to the energy transition in the development of new renewable capacity already in this first quarter, practically 100% of the target set for this year is under execution.

All-in-all, this set of result and the high degree of visibility of the business evolution for the rest of the year supports our confidence in achieving 2023 target. Finally, we would like to highlight the visible improvement in shareholder remuneration with an outstanding dividend yield of around 9%. And this concludes our first quarter 2022 results presentation. And I think we can now open the Q&A session.

Question-and-Answer Session

Operator

We are now open to answer all the questions you may have. [Operator Instructions] First question comes from Alberto Gandolfi from Goldman Sachs.

Alberto Gandolfi

Thank you Marco, good morning. I have three questions, please. The first one is specifically on the numbers. I mean it seems to me that some of the conditions that helped you deliver very strong numbers in Q1 kept repeating in April, prices very low during weekends, quite a lot of volatility. So I'm trying to gauge why you told you stressed continuously a normalization throughout the year, but it looks like you're trailing way above guidance on earnings. So my question is, what is it that is worrying you right now? Is it considering what you just delivered with the €200 million tax booked in? Is it because maybe some energy management or trading profit cannot be repeated? I don't know if you can quantify those for Q1? Maybe you're very worth by refinancing? Or is it just a matter of we never changed guidance at Q1 let's see at the end of July there with us?

The second question is what is happening to the 40-gigawatt renewables that have already received environmental approval the DIA in January, do you think they will be approved by July from an administrative perspective. Do you think the construction permits will follow suit? And how many of those do you believe can actually be developed in Spain? And what do you think is going to happen to the power price by 2025 based on your answer? And perhaps really the last question here is, can you give us maybe a bit more clarity on the timing of the recovery of the regulatory working capital? And can that be an incremental offset to maybe some of the refinancing pressure you're going to see? Thank you so much.

José Bogas

Okay. Thank you very much. Let me try to give some color about the question, and then I will give the word to Marco just to explain more precisely this question. When you ask about what are we worried about in the future, and you mentioned normalization. What I should say is that this first quarter 2023 has been extraordinary. And extraordinary because many things, but let me highlight three.

One is the thermal margin that we have got in this first quarter due to the exceptional conditions and due to the hedging that we did in the past year. The second, the increase just because of the normalization of the supply margin. And the third I would say is how we have managed the short position. So it's going to be the same context in the rest of the quarter.

Well, we think no, it is very early just to say that or not. But in our case, we are thinking about that it had been a little bit extraordinary. So although we confirm we feel very comfortable with our guidance, and I would say, perhaps even in the high range of our guidance. We prefer to be conscious and to see how this year evolve.

With regard to the 40 gigawatts of renewables and how many -- let me let me say something. Well, I think that the record of construction in Spain in 1 year is a year. That means that it would be in the next 2.5 years, we should think something around, let's say, 15 gigawatt. In any case, you could increase that, and I think it's going to be increased this figure, but it's going to be very difficult just to get, in my opinion, these 40 gigawatts of renewable in operation. Also the net working capital, Marco will…

Marco Palermo

Okay. So if you allow me, just to give you a few more numbers, Alberto good morning. On the one on normalization, I mean, of course, we have to remember that we are in the first quarter. And -- but yes, you're right. I mean we are -- we feel comfortable on EBITDA particularly. There is still -- there are still components in the first quarter that we think should not be replicable, then we will see.

And in particular, I would say, on the thermal margin around €200 million on the short position, approximately €100 million and on the gas margin, €100 million, so totaling €0.4 million. So of course, this is looking at the situation right now. Then it can happen that there is some tension in France on the new and the thermal margin rises again and so on. So I mean, we are thinking that everything stops here in the first quarter, but we'll see in the near future.

And as I said, I mean, this is the reason why we continue to stress it on normalizing. But yes, we feel very comfortable on the EBITDA in particular. Then in -- on the regulatory working capital, the third question, the timing of recovery. I mean, frankly, this increase of another €300 million in the regulatory working capital, we were not expecting an increase, okay? We do see some recovery this year. Of course, we have been very prudent in our estimation, but we think that we should be somehow recovering part of it along 2023. And thank you for your question.

Operator

Okay, thank you Alberto. Next question comes from Manuel Palomo from Exane BNP.

Manuel Palomo

Hello Marco, hello everyone good morning. Thanks for taking my questions. I will stick to three. So first one is on the margins. We've seen a significant increase in margins from 1 to 6. You remember our in gas, 30 to 65 or in electricity. And if I recall well, last year 2022 electricity margin, unit margin was at 42%. So I mean, given the volatility, when you talk about normalization to be honest, I'm not sure where it could land by the year-end? And any reference that you could give us would be very welcome. So that is number one.

Second one that I have is about well, an update asking you an update on the potential sale of a portfolio of gas assets that your parent company announced back in November. I wonder whether you could at least share a bit of light on what will be the assets that could -- I mean, you could be considering selling.

And the last one, it's on the evolution of the supply clients. We've seen a significant increase year-on-year. However, the figures pretty flattish versus full year 2022. I think it's at €6.8 million. So I wonder whether you could share with us what is the company's strategy towards the evolution of supply clients, whether you are being or not aggressive market with your campaigns to well capturing your new clients? Thank you very much.

José Bogas

Thank you Manuel. Again, let me give you some clues of your question, and then Marco will answer more precisely. Talking about margin, you're right, we have increased the gas margin from 1 to 6, and we have increased the integrated margin up to €65 per megawatt hour is going to be the same at the end of the year. Being honest, I think, is going to be high, but not as high as the first quarter. This is why we have said that we are expecting a certain normalization that as Marco has said, we will see what happened or what not happen. But in any case, I should say that during this first quarter, all the contracts have been very good for us. So we will see. But our expectation is a higher margin versus the previous year, but not as higher as we got in the first quarter.

With regard to the potential sale of gas assets, we are starting this the contracts have changed a lot. When we decided just to look for the possibility just to sell some asset set prices of ETFs, etcetera. If I remember well, we're higher than €100 per megawatt hour.

Today, lower-40, 50 -- so the contract changes a lot. There are some interests. We have some contact and there are some interest. But we need really to understand this context just to take or to go ahead with the next step.

In any case, we continue thinking about that at the end of the year, we will solve this or part of this -- our portfolio of gas assets, but we will see. We will see. We want just to really understand the context.

With regard to the customer evolution, I should say that, well, the year 2022 was an extraordinary year in which we got we increased a lot our customer base. It is true that things had changed a little at the beginning of this year. The first thing is that what we have seen is an increase in competition. This increase in competition of our competitors offset our acquisition trend that we have continued with this acquisition trend during this first quarter, but the losses due to the increase in competition of our competitors has decreased almost has been flat our evolution.

Well, we are thinking about -- for us, the customers are very, very important within as we have said many, many times that customer sustainability will be the two important in the future for any company. So we will try us at least to maintain our customer base as always try not to enter in a price war. I'm trying just to reactivate our campaigns to attract more customers. We are not worried about this situation. Let me say that we increased a lot our customer base the last year. So we are maintaining with -- if you allow me, better marginality of this customer in the future, Marco?

Marco Palermo

Manuel, on your first question on margin, just to give you a few numbers, I would say that we do expect for what is the free power unitary margin 2023, around €48 megawatt hour, basically in line, even slightly higher than what we have seen you are correctly mentioning in 2022 of 42.

In terms of gas, I would say that we do not expect to stay on this €6-megawatt hour, but not even lowering down to the minimum of the first quarter of 1 or that has been also the minimum in 2021 of €1. So we will be something in the middle. And in terms of clients, I mean, and just to give you a few numbers, I mean, we have not campaigning hardly in the first quarter. Actually, we have been saving CapEx there.

And still, we have seen a slight increase in the free liberalized in liberalized customers. So I mean, I think that we do see still the trend affecting last year that are continuing, maybe at a slower pace. And we do see that this could be another good year in terms of acquisition of liberalized customer because still there is a kind of movement between the regulator coming from the regulator tariff to the liberalized tariff. Thank you.

Operator

Okay. We move now to Jorge Guimarães from JB Capital. Please go ahead.

Jorge Guimarães

Good morning. I have two questions. The first one is a follow-up on gas. If you can explain to us why is the market so high if the dynamics are the same as in electricity because of the time lag between the setting of prices and the cost that you book? And the second one is a clarification on the working capital movement. I believe you mentioned that it was €0.3 billion from a temporary effect of some settlements in March. If you can clarify on that and to understand how much of that is temporary and how much would unwind later in the year. Thank you very much.

José Bogas

Okay. Okay. Let me say something about the second question. Well, regarding the working capital, we have today, €2.6 billion regulatory working capital we have today, €2.6 billion. Let me say that a normal situation would mean to have less than €1 billion. So that means that we have an extraordinary regulatory working capital of more than €1.6 billion. This should be -- let me use the same word normalized. And we really think that it's going to be normalized. We have some discussion with the ministry with the regulator. The good news, well, this is something that we have got in the remuneration mainly in the airline. That means that the airline evolution are in the right direction.

Some years ago, we have some problems with the recognition of some of the costs, etcetera. Well, we have passed this situation, and we feel comfortable with that. The bad news, well, there is a strong time of adjustment of the remuneration that creates this working capital -- regulatory working capital. We are, as I have said, trying just to speed up this remuneration. And we hope that in the next month, we will have good news about this, Marco.

Marco Palermo

Yes, Jorge. So basically, on your first question on gas, we are still benefiting from the wins of the end of last year so with some of the hedges that we did. So that's why it's positive. And that's why we believe that will not be so positive for the rest of the year. In terms of working capital, actually, it has been kind of a perfect storm because whatever you see on the chart is basically a kind of non-recurrent. So what to expect for the future? Basically, on regulatory working capital, we expect to see it in the next quarter, but exactly the other way around.

So recovering it at least partially. And in terms of the seasonality, I mean, we do see this reverting and of course, we have the numbers of April, we are seeing also May. So we know that this is going exactly the other way around. And in terms of the cash, cash out impact for the collateral settlements, actually, it was temporary at the end of the month, but this, of course, has turned the other way in April. So basically, I mean, it's -- we do see this, and we have evidence of this turning the other way around.

Operator

Thank you Guimarães. Next question comes from Rob Pulleyn from Morgan Stanley.

Robert Pulleyn

Hi, good morning thank you. I have one question, and that's regarding the government interventions that you've seen in Spain. Could you provide a bit of an update as to your expectations as to when they expire or get extended? There's been a lot of talk across Europe that obviously with commodity prices having fallen that some of these interventions may be less necessary. It would be great to hear your perspective. Thank you very much.

José Bogas

Okay, thank you for the question. First of all, let me say that I think that gas and power prices have happened notably fallen from the record high levels that we showed in the past year. So I don't like to say that the energy crisis are over because it's not real. But we feel we are in a better context than the previous year.

Nevertheless, there are still important, in my opinion, uncertainties that makes sense just to maintain some measures in the band of something happened with this crisis, in my opinion. That is what -- but the important thing is just to work in the future. And what I mean working in the future is how to develop the networks, how to incentivize this investment in network, how to resolve the bottlenecks that we have in the deployment of renewables, how to improve the market. I mean the market before trying to give more or trying to benefit from what we know very well, the marginal market and improving the long-term contract with customers trying to avoid volatility, etcetera. This is most important thing that we should do.

In the meantime, just to extend during the year 2023, some measures just to take care about if just in case, it could happen something, just to mitigate the impact to the customer, I agree with this position. But again, this measure should be avoid as soon as possible, and we should work in the real important thing for the future, which is how to incentivize the investment, how to incentivize the transition to net sale net mix of generation and it's so also contamination in the sense of electrification, etcetera. That is the important thing.

Operator

We move now to the next analyst, José Ruiz from Barclays.

José Ruiz

Good morning and thanks for taking my question. I just have two and their focus on working capital, sorry to insist on that. The first one is focus on the first quarter, and I would like to understand, you said in the presentation that you had a €53 million improvement in the islands. So do I understand that instead of 305, which was the actual number, you were expecting €358 million and is that because the cost of fuel went down.

The second question is going forward. You're saying that the €305 million will go down. So it will progress to a number lower than 305. Is that correct? And is this going to be driven by lower cost of fuels? Or are you expecting an increase in tariffs? Thank you very much.

Marco Palermo

Thank you, Jose, Marco speaking. So basically, let me clarify a bit. First of all, on the €305 million of working regulatory working capital, almost all is coming from the island. So correct. What we do see is this is coming because still there is a negative effect on fuel. And so basically, we are not recovering all the cost of the fuels as it should be. So of course, there has been an improvement versus last year with what was published in December.

So we fixed basically the gas cost. There is still something to be done on fuels, okay? Now what we do expect for the future, for the future months, the future quarters, we do expect that we will start to recover the working capital, the €2.6 billion of working capital that we have been accumulating a long years for the effect of this gap between what we pay, what are our real costs and what is then recognized to us, okay?

So of this basket of 2.6, we believe that in the next quarters, we will recover some, okay? So we are kind of conservative at the beginning, we hope that it will be better at the end. So we hope that this will be recovered because this is accumulating. This has been accumulating over the years. So some of the years, some of the settlement will be decided along the 2023. So at the end, should be recovered.

And in terms of margin on the islands, as we said, yes, I mean they are improving, but not that they should at the end. So we really hope that we could end up fixing also the rest of the fuel in the islands in order for us to recover fully the cost of fuels. Thanks.

Operator

We have now Javier Suarez from Mediobanca.

Javier Suarez

Thank you Marco, many thanks for the presentation. Two or three remaining questions. The first one is on the big picture and the European debate on the market reform. The question for the CEO, if you can give us an update on that European debate and Endesa's position on that on-going debate. And related to that question also, how do you see that affecting the contracting of Endesa going forward? How do you see that the PPA contracting impacting Endesa in the medium to long-term as a way to stabilize the business? That is the first question.

The second question is on a comment that has been made during the presentation on the level of the reservoirs. So the drought is likely to be intense in 2023. So how do you see that impacting your target for 2023? And what are the other factors that are compensated for the drought is effectively that in 2023 is higher than initially expected.

And then the final question is on the debt on slide 17. There has been a decrease that I guess is corresponding to the decrease in commodity prices in the cash collateral. Now they stand by the end of first quarter, €4.2 billion. If you can share with us how do you see that number being by the year-end? And also a related question, there has been an increase in the cost of debt to 2.8%. How do you see the cost of debt for the company by the year-end?

And making this question because during the presentation, you mentioned to be particularly comfortable with the EBITDA guidance is that common implies that maybe by the bottom line, it's a little bit more tricky because of the increase in financial costs. Many thanks.

José Bogas

Okay. Thank you, Javier. And I will try to answer the first one and then Marco will answer the second and the third. With regard to the market referral First of all, I think that we need a market report that is clear. And we need this market reform because the mix, the generation mix is changing a lot. And at the end of this trip, let me say, if all the technologies are in from marginal or renewable technologies, we need to have a different market.

Having said that, I think that what we have today have been working very well, very well. But we have some difficulties for the future in the sense that we are changing this mix generation. On that sense, in my opinion, I think that we should maintain the positive aspect of the marginal [Ph] market that we have today and to try to have an evolution mainly in the future prices and contract trying to incentivize these future prices on that.

In any case, we have said many times that these reports should be homogeneous at the European level and carried out in our opinion with the highest degree of consensus. Therefore, that means that no particular solution should be put in operation because, in our opinion, this could break the market. And one of the strengths of the European Union is this unitary market energy - - of energy. With regard to the proposal of the European Union, we have positive feedback on this proposal presented by the European Union Commission.

As I have said, it doesn't imply a discontinuity, but evolution, I would say, of the current market, avoid the price intervention on generation and incentivize a longer-term contract in the market. So we will see what happened and the discussion that we will have or the European Union will have in the next month. But we have a positive feedback on this proposal.

Marco Palermo

Javier thank you. This is Marco. So basically, on hydro. On hydro, the situation, so the second question, the situation for us is that our hydro reservoirs are feel that 30% of their total capacity. So yes, it is true that basically, there is not so much water, not so much now on the Ebro region. That is the one where the most part of our hydro power plants insist. Do we see a situation like last year? No, the truth, we don't see such a draw like last year, where we actually produced 3.5-terawatt hour of hydro.

But on the other side, we do not see exactly what we were forecasting. So the 6 terawatt hour of hydro production. So what we do expect. We do expect to stay approximately around 4-terawatt hour of hydro production at the end of the year. That means that somehow we are losing, we are having an effect of approximately €50 per megawatt hour on these 2 terawatt hours, so approximately €100 million less.

Just to remind you that last year, given that, of course, it was 3.5% and there was also an effect of over hedging on this hydro. We ended up having a negative effect of a bit less of €200 million. So I mean that's -- those are the kind of effect that we are forecasting for the end of the year.

Now coming to the cash collaterals and then again to the guidelines. On cash collaterals, yes, they went down to 4.2% at the end of the quarter. Now this number is even lower if you look at it today, it's 3.5%. So it's going down at a very fast pace. What we do expect for the future? I mean we do expect this trend to continue but at a lower pace. And of course, we can't exclude that there is a rebound on prices on gas prices.

So I mean, in that case, this number probably will not go down so fast. And that's why coming to your question about guidelines and about EBITDA, we are very confident, I would say, on EBITDA, while net income, that's why we are continuing to somehow confirming our guidelines. There is this question mark related to the real cost of debt at the end. And it's a doubt on the amount of debt and as well also of the cost because still, we have part of our debt that is anchored to variable. It has to be said that with the last transaction that we are executing the fixed cost, the fixed part of our debt will be around 70%. So we are open on the 30% on the variable. So that's why basically you correctly pointed out, we are very confident on EBITDA level. But then when it comes to net income, we confirm our guidelines.

Operator

Okay, thank you. Next question comes from [indiscernible].

Unidentified Analyst

Hi, good morning and thank you for taking my questions. Yes, I would like to make a follow-up on the financial costs, just to understand what could be the financial results expectations for 2020? Three, or at least to know this impact of the dismantling and workforce provisions were in the Q1, right? The other question is regarding -- just to confirm that in the end on the hydro, you have already hedged all the expectations and now it will be this short of 2 terawatt hours by the end of the year?

And finally, a view about renewable capacity installation in 2024 and 2025 because it is expected to be an acceleration versus 2023 levels? And how visible is this? And if this is because you have bigger projects in those years because you have seen an acceleration in the pemitine? Or you expect more capabilities to be put in place in order to really deliver a materially higher amount of megawatts in 2024 and 2025. Thank you very much.

José Bogas

Okay, thank you [Indiscernible]. And I will try to answer the third one question related to the renewables deployment. As our plan is just to put in operation 1 gigawatt in the year 2023, 1.5% in the year 2024 and 1.8% in the year 2025. As we have mentioned before, almost the 1 gigawatt of the year 2023 are under execution. So we feel comfortable that if nothing stray happen. We will reach this position. Also this 1 gigawatt into operation during the year 2023. We have long some managerial actions just to guarantee the human resources needed just to guarantee the different elements that we need just to go ahead with this fleet in the future.

Let me say, we feel also very comfortable with the 1.5% and 1.8%, but it is true that just because of the huge amount of capacity that should -- has been approved and should be put into operation in the next years up to if I’m right July of 2025. We are trying to secure our construction trying just because we are an integrated company trying just to discuss with the different suppliers and trying to guarantee, as I have said this. We will see. But in any case, we feel comfortable with this development of renewables.

Marco Palermo

So [Indiscernible], regarding your first question and second question. So the first one on financial costs. Actually, what we do see by year-end is something slightly higher than what we commented during our Capital Market Day. So basically, we there we are talking about €400 million, and we are slightly above that number.

As I said, because it could be both an effect of volumes and costs, so price and volumes. And in terms of hydro, actually with what we are forecasting, there is no over hedge effect for the time being. So with this condition, I mean, our effect is only that we are losing production, and we are losing the margin. And that's why, of course, I mean, given that it's proven that as much renewables as we plug in and as much as we feel our short position, we earn money. That's why there is somehow we are trying to accelerate on the renewable installed capacity. Thank you.

Operator

Okay. Rob Pulleyn from Morgan Stanley is back with some further questions. Please Rob go ahead.

Robert Pulleyn

Yes, I'm back. Apologies if you have commented on this, but I didn't think anyone had asked about the regulatory review of 2020 to 2022 distribution revenues. And I believe there was a suggestion that there could be a €160 million charge relating to this. Could you just please clarify to what extent this is accurate? And when we can actually hear timing in terms of resolving that particular topic. And apologies if it has been covered earlier, I may have missed it.

José Bogas

Thank you for the question. Let me say that we are discussing with the CMC about this remuneration. You should take into account that there had been changed in the responsibilities of the ministry and then in the responsibilities of the CMC, let me say, in a colloquial way, just to say that the CMC increased the responsibility going beyond the audit responsibility to really regulator of the distribution. In that chain, some kind of misunderstanding has happened.

But I should say -- and this is the reason why we are discussing the remuneration of some kind of investment like the digitalization that we have done. When we talk about iron, it's very easy for the CMC just to really know what should be the standard or not when we talk about software, let me say that, it's more difficult. In any case, we feel confident with the conversation that we have with the CMC just to get a solution for all these kinds of things.

So we are confident that we will recover as always the main amount of our investment and nothing with regard to the first suggests that the investments are not the real one that we need, etcetera. So summarizing, again, well, we are improving the relationship with the CMC in this new role that they are playing, and we are confident that we will recover our investments.

Operator

Now we will answer a couple of questions that we have received by email. Peter Vestia from Bank of America is asking if we can give some color on the short position book in the first quarter and also our expectation for the full year guidance. Thank you.

José Bogas

So in terms of EBITDA of the short position impact on the quarter, the short position impact is around €150 million in the quarter. So -- and what we do see for the rest of the year is that probably this will be positive at the end of the year for something above €300 million.

So as you've seen, it's a higher impact in the first quarter, and we are not forecasting just to have the very same impact but on the following quarters. And then on guidelines, well, as I said, in our guidelines, we are now assuming our low contribution from the short position, so something approximately around €300 million.

Operator

Okay. With this, we end our conference call. Thank you very much for participating, and have a nice day.