ENEL Societa per Azioni ADR (ENLAY) Q3 2018 Results - Earnings Call Transcript

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About: ENEL Societa per Azioni ADR (ENLAY)
by: SA Transcripts

Start Time: 12:00 January 1, 0000 1:17 PM ET

ENEL Societa per Azioni ADR (OTCPK:ENLAY)

Q3 2018 Earnings Conference Call

November 06, 2018, 12:00 PM ET

Executives

Alberto De Paoli - CFO

Monica Girardi - Head, Group IR

Analysts

Alberto Gandolfi - Goldman Sachs

Harry Wyburd - Bank of America Merrill Lynch

Javier Suarez - Mediobanca

Enrico Bartoli - MainFirst

Meike Becker - Sanford Bernstein

Jose Ruiz - Macquarie

Anna Maria Scaglia - Morgan Stanley

Antonella Bianchessi - Citi

Sam Arie - UBS

Roberto Letizia - Equita SIM

Lueder Schumacher - Societe Generale

Monica Girardi

Good evening, ladies and gentlemen, and welcome to our Nine Months 2018 Results Presentation which will be hosted by our CFO, Alberto de Paoli. I’m Monica Girardi, the Head of Group Investor Relations.

In this presentation, we will provide some highlights of the period, and Alberto will take you through the operational and financial performance. Following the presentation, we will have the usual Q&A session open to those connected both on the call and on the Web. I would ask you to focus only on the performance of the period and to reserve strategic question for our Capital Markets Day, scheduled on November 20.

Before we start, let me remind you that media is listening to both, the presentation and the Q&A session.

Thank you, again, and now let me hand over to Alberto.

Alberto De Paoli

Thank you, Monica. Good afternoon, ladies and gentlemen. Let me start with the highlights of the period. I’m on Page 1. Ordinary EBITDA came in at €12 billion, up 6% versus last year. Net of FX impact ordinary EBITDA would have increased by a remarkable 10%. Group net income shows a double-digit increase of 12%. Growth EBITDA is confirmed as driving force for the Group, with around €670 million contribution.

On operational efficiencies, the third quarter shows dynamics that bode well to reach our full year targets, as I will detail later on. As per active portfolio management, we have successfully completed the BSO transaction in Mexico, recording a capital gain of around €200 million. In January, out of the minimum EPS of €0.28 per share, we will pay an interim dividend of €0.14, 33% higher than the interim dividend paid last year.

Moving to Slide 2. Now we analyze the details of the semester. Now let me summarize the main drivers of the nine months results. The EBITDA was positively impacted by the following drivers; growth that contributed for €670 million, mainly led by renewals. Improved availability of resources in Italy and Spain, where the ongoing normalization of hydro led also yield €350 million, overall.

Further €250 million are related to retail margin improvement, mainly in Iberia and Romania. And the final positive contribution of €140 million paid from the positive effect of regulatory review in Argentina. Overall, impact of these four items is roughly €1.4 billion on the positive side.

On the negative side, we have the devaluation of currencies, mainly in South America. This is coupled with the hyperinflation in Argentina that are the two main headwinds in the period and that account, respectively, for €330 million with FX impact and €90 million with hyperinflation impact.

Then we have the CPI that we did our cost base for around €180 million. And lastly, thermal generation that is still impacted by lower volumes accounting for €140 million. The negative impact amounted to roughly €700 million.

Now moving on Slide 3. Let me drive you on the growth CapEx. So as you can see from the chart, the total CapEx has been flat year-on-year. The change in accounting principle impacting retail in Italy, Spain and Romania drives increase in maintenance CapEx.

The growth CapEx is down roughly 4% versus last year. And this networks increase by 66% driven by the deployment of smart meters and quality programs in Italy and the acquisition of Eletropaulo in Brazil.

Renewable CapEx decreased on the back of the spending profile that investment strongly accelerated at the end of 2017 mainly in Brazil and Peru, normalizing thereafter. Reduction of the investment unitary costs, mainly as a consequence of a different technological mix between solar and wind.

The currency effect and worth to highlight that for the full year, we expect the overall additional build capacity to grow by around 3 gigawatts versus the 2.6 of the last year, despite a roughly 20% decline in year-on-year investments affected by the same above-mentioned dynamics that I touched.

Around 85% of growth CapEx for the 2018-2020 plan is already addressed. And in detail, out of the 12.3 billion CapEx addressed, 8.1 billion are related to renewables for the construction of roughly 7 gigawatts of additional capacity and 3.9 are related to networks, mainly thanks to the second generation meters rollout in the quality program implementation in South America.

Moving to operational efficiency on Slide 4. Cash cost is up by 2% in nominal terms. Our maintenance CapEx there increased. It’s driven largely by the change in accounting criteria for IFRS 15 and for the capitalization overall in the Spanish nuclear power plant.

OpEx, on the other hand, are down by 2%, despite the impact of perimeter changes and growth. Over the period, excluding the impact of the above-mentioned IFRS 15, we recorded efficiencies for about €70 million in real terms on improved KPIs across all the business lines. The consolidation of Eletropaulo weighted on the perimeter around €190 million.

Before moving to the consolidated financial results on Slide 5, we have a deep dive on the BSO in Mexico. We completed the sale of our assets in Mexico under the BSO model, which remains for us a flexible instrument to crystallize the value of our pipeline, reducing overall risk and accelerating value creation.

The enterprise value of 100% of the assets sold amounted to approximately $2.6 billion. As a result of the transaction, we recorded in our ordinary EBITDA, the capital gain of around €200 million. The disposal will not have an impact on the Group’s net debt in the nine months, as it was already represented as held-for-sale in the previous quarter.

Now let’s have a look at the financial results that we have on Slide 7. As said, ordinary EBITDA is up 6% to €12 billion. Growth and efficiency have offset currency headwinds in the period. Net of FX hyperinflation in Argentina, ordinary EBITDA would have been – would have increased by 10%.

Net ordinary income came at 2,888 million, up 12% versus last year, driven by EBITDA increase and reduction on our financial expenses. Let me highlight that the impact of currency headwinds are totally reabsorbed at D&A and financial charges level.

FFO stands at around €7,300 million, 2% higher versus last year. Group net debt reached €43.1 billion, despite a strong improvement into free cash flow, which was up 31% versus last year. The increase is mainly attributable to dividends paid to shareholders and extraordinary operations completed in the period for around €3.7 billion.

Let’s now have a look to group EBITDA on Slide 8. As said, ordinary EBITDA came at €12 billion, plus 6%. Growth EBITDA increased by €673 million year-on-year, of which 80% from renewables and 20% from distribution. I have already commented on efficiency, which amounts to €193 million in real terms, including IFRS 15 impact for €122 million, as well as a negative FX effect and on Argentina hyperinflation impact.

As for scenario and energy margin, we reported a positive contribution of €100 million, as the increase in retail margins and the contribution from renewables more than compensated negative FX on thermal margin and CPI on OpEx, in particular.

Retail margins increased by €329 million, thanks to Iberia where we recorded better commercial results and better margin for both power and Romania, mainly due to negative price shock occurred last year and a good result in customer acquisitions.

Then we had a higher contribution from renewables for about €195 million, mainly thanks to improved resource availability. We had lower thermal margins in Italy due to the reduction in generation margins and in Brazil, mainly due to the Fortaleza gas supply stopped until September 2018. Now the plant is running and started from 1st of October. And then we had a negative effect of CPI on OpEx for about €180 million.

Moving to Page 9. I will now analyze the adjusted EBITDA, which is net of one-off items. EBITDA from Global Infrastructure and Networks is €5.5 billion, 1.4% higher than last year, was adjusted for the FX impact and hyperinflation in Argentina.

The evolution of the EBITDA is associated with growth project that accounts for €130 million, margin increases €48 million, mainly in Spain and South America, partially offset by Italy and Romania, and negatively impact from CPI for €90 million.

EBITDA in Global Thermal Generation and Trading is equal to €814 million, including a negative FX effect of €93 million. The decline is attributable to lower thermal margin for around €270 million, already commented, and efficiencies for €32 million fully offset by CPI increase.

Global Renewable Energies’ EBITDA is €3,328 million, and I will comment more in detail in the following slide. In the Retail business, EBITDA is €2,163 million supported by an improved performance, mainly in Iberia.

I will now go into the analysis of Global Renewal Energies on Slide 10. We reported an ordinary EBITDA of €3,328 million, higher versus previous year of an outstanding 23%. Net of the negative FX effect and hyperinflation, EBITDA would have increased by 27%.

New capacity generated additional EBITDA for €540 million, of which €270 million in Mexico, €127 million in U.S., €110 million in Brazil, and €17 million in Peru and €10 million in Chile. Efficiency also increased by €27 million.

And finally, we recorded a positive effect from scenario and resources of about €166 million, mainly due to higher contribution from improved resources availability, high availability for about €195 million as a negative impact of CPI on OpEx.

Moving now on Slide 11. We focus on the Italy results. Italy recorded an ordinary EBITDA of €5,422 million or plus 4% versus last year. EBITDA in networks was €2,767 million or plus 4%, thanks to the Resolution 50 and EBITDA growth partially offset by tariff adjustments and CPI effects.

In Thermal Generation, we reported an ordinary EBITDA of €29 million, with a decrease year-on-year of €149 million, due to the contraction of generation margins and volumes. Renewable EBITDA increased by €108 million on higher availability of resources, partially offset by lower incentives. And finally, in the Retail business, EBITDA stood at €1,607 million, increasing 5% year-on-year.

Moving to Page 12. Now I’m going to explain the main drivers of the Retail business in Italy. The increase in ordinary EBITDA, excluding the impact of accounting principal, is around 2%. This growth has been mainly achieved, thanks to pricing and margin strategy. We continue to see a strong increase in volume sold, which are up by 10% in the nine months, supported by both business-to-business and business-to-consumer segments.

Our unitary margin declined by 8%, but this decline is fully due to the higher rate in our portfolio of top and large clients. Excluding this mix effect, margins proved to be resilient despite an increase in supply cost. The potential competition due to the new entrants is not affecting the margin growth strategy in our Retail business in Italy. Our free capital base increased by around 700,000 customers, while the churn rate associated with the free market declined by around 1% year-on-year and sits well below our expectations.

Let’s now take a deeper look on the main drivers on our group net ordinary income on Slide 13. As you can see from the chart, D&A increased by about €450 million. This is due to the implementation of the new accounting principle for around €115 million, a one-off associated with the recognition of Resolution 50 in Italy, a delta perimeter associated with the acquisitions in Brazil and in the U.S., and the commissioning of a renewable plant in South America and U.S.

Financial expenses and others stayed at €1,720 million marked an overall 16% decrease year-on-year. Other financial expenses within this aggregate decreased by €383 million, mainly related to lower consolidation of [indiscernible] in Argentina, and accreditation of credit was mainly related to Argentina. Group tax rate reached 30% as a consequence of the impact deriving from the sale of BSO Mexico, and recognition of the deferred tax asset in Italy already booked in the first quarter.

Minorities increased only by 4%, mainly due to the 4% higher results in South America because a vast majority on the team can increase in this year coming from countries in which we have very low minorities or we own 100% of the stake. Minorities and the group net ordinary income increased at the end by €305 million, reaching €2,888 million or plus 12% versus last year.

Moving now to the cash flow on Slide 14. Free cash flow improves year-on-year by around €500 million or plus 31% due to better FFO and lower level of organic CapEx. FFO stands at €7.3 billion, so up 2% versus last year. This is thanks to the higher EBITDA after provision of around €780 million.

Higher tax paid, mainly due to advanced settlement tax payment dynamics mainly in Italy. And higher financial expenses paid of around €650 million, mainly due to the delta one-off year-on-year related to rolling forward derivatives associated with other countries.

As announced in the last result presentation, we continue to focus on working capital improvements, notwithstanding a temporary negative one-off associated with an increase in CO2 inventories. By year end, we are fully confident to reabsorb this negative effect and we expect to enhance net working capital in line with our business plan guidance supported by seasonality profile of CapEx dynamics.

Now moving on net debt on Slide 15. Our net debt stands at €43.1 million. The increase is due to free cash flow after dividends of around €1.2 billion, cash out for around €3.6 billion related to the acquisition of Eletropaulo and the Chilean restructuring, negative impact from FX of about €900 million.

For the full year, we see a net debt to range between €41 billion and €42 billion versus our initial estimates, because we see an improvement of cash flow which will only partially compensate higher rate of organic investments, net of BSO assets, the different profile of our active portfolio management activity and the impact of currencies.

Our gross debt increased by about €9.7 billion, mainly due to the above-mentioned dynamics of net debt evolution, higher financial receivable by about €1.4 billion due to the disposal and a temporary increase of €2.6 billion, mainly due to the U.S. bond issued on September that we have already optimized at the beginning of October.

Net financial expenses on debt were basically unchanged versus last year with an average cost of 4.6%, down 20 basis points versus last year and 10 basis points versus the full year 2017.

Now let me end this presentation with some closing remarks. Our performance in the nine months underpins a really strong acceleration in our strategic pillars in the course of the third quarter.

Growth confirms to be a driving force of our performance, largely offsetting adverse macro scenarios linked with currency devaluation, leveraging on our diversified corporate structure, and additionally operating efficiencies performance paved the way to reach our year-end target.

The generation of cash flows continues to improve year-on-year, while the increasing net debt is mainly associated with our active portfolio management activity and currency devaluation.

The evolution of financials in the first nine months of the year supports comfortably our EBITDA and net income target for 2018 as well as our EPS. Let me remind you that according to our dividend policy, we have guaranteed an EPS of €0.28 for the current year and we’ll pay €0.14 in January 2019.

Thank you very much, and let’s now open the Q&A session.

Question-and-Answer Session

Monica Girardi

Okay. The first question comes from the line of Alberto Gandolfi from Goldman Sachs. Alberto, your line is open.

Alberto Gandolfi

Thank you, Monica, and good evening. I have a few questions, and I’ll just stick to the results. So apologies, it’s going to be quite boring. But the first one is, can you a little bit maybe give a breakdown of net debt what you were previously expecting versus the 41 billion, 42 billion? And I understand there’s some perimeter here effect, but maybe can you talk about what type of disposal you are counting on that did not materialize by year-end? How much you think is a delta in CapEx versus your previous plan?

And I understand – when you see FX impact, FX in theory should have helped reduce your debt, not increase. So that’s why I’m trying to understand what maybe comes from CapEx, what maybe comes from portfolio management? And then the question would be a little bit below the line, I can see that few things are moving here and there. And I was wondering if it may be possible for you to provide full year guidance for the depreciation and amortization line, minorities and the financial expenses? And I’m going to stop there. Thank you so much.

Alberto De Paoli

Okay. So for the debt guidance, the point is that we have – we had a target of €39.9 billion, so say €40 billion. Now the guidance we are giving is €41 billion, €42 billion, so we can stay in the middle say, in €41.5 billion that is the middle of the range. What are the main differences? On one side, we have this FX impact because of the impact – the revaluation of the U.S. dollar. As we have – notwithstanding, we have the 80% about that hedged in euros. For the accounting principles, you have to account for the different effects. So in accounting principle, we have an increase in debt of roughly €900 million. This is not the impact that we have on the debt at the time of the expiration, because we have 80% of this is hedged. But in these numbers, it counts. And this is roughly €900 million.

On the other side, we had an increase versus what we had in the target, we have an increase in the acquisitions, because we have Eletropaulo on one side, and on the other side we had a key structure in Chile. So the overall impact is roughly €1.4 billion, higher than the numbers that we have in the targets. And we are driving on the other side to increase, already from this year, the organic CapEx versus what we had in the target of roughly €400 million. So these are the three main impacts that is going to increase the targets. This would be – so it would result in a debt of roughly €42.5 billion. But we have already arranged to have better financial results, better financial performance of around €900 million, and this drives the final numbers to €41.45 million.

What we are not cashing in this year in our M&A is roughly €500 million that we are going to cash in the first half of 2019. And this is related to some deals that we have already signed, but we don’t see for several reasons that we can cash-in within the year. If you think about this €500 million, so this is a time difference, the overall increase in debt was – it is only associated with the FX, because if we hedge cash-in this €500 million, the increase in the M&A being only €900 million, and €900 million is the financial improvement that we made.

So all-in-all, it would be only the FX impact. Because of this delay in the cash-in on M&A, we have also added €500 million of increase and it drives the final target to €41.5 billion. On the other side, you asked that the guidance to the full year of everything that is below EBITDA. D&A is around 66.1%, financial charges is around 2.2%, taxes will be around 2.1% and the tax rate that we see is roughly 29%. And minorities will be in the range of 1.7%.

Alberto Gandolfi

Thank you.

Monica Girardi

Thanks. Next question comes from the line of Harry Wyburd from Bank of America Merrill Lynch. Harry, you can go ahead.

Harry Wyburd

Hello, evening. And just two for me and I’ll also keep it just to the nine months numbers. So just to come back on the debt hedging, so there’s a 900 million move from FX and 80% of that is hedged, although that hedge doesn’t show up in the headline net debt number. And so can I just confirm that if we were to look at your balance sheet notes and full accounts, we would see an 80% credit, so it’s about 700 million benefit in your FX hedges. So that would show up I presume as a financial asset on the balance sheet, but if you could just confirm that, that would be very useful.

And then secondly, on currency impacts on the P&L, I think it’s the second quarter in a row where the overall impact of net income has basically been zero. Are you effectively fully hedged against the FX at a net income level? Obviously, there are a big minorities in most of your FX exposures. But should we – when we look forward to 2019 effectively assuming the FX impacts are largely hedged and largely negligible at a net income level? Thank you.

Alberto De Paoli

First of all on debt. So what is – the level of debt hedged is in the range of 80%. When it comes to FX change, what we account on one side is the change in the level of debt and this is what we report like what we are reporting now, the change is €900 million. And on the other side, we have the change in the derivatives that are on another side. And then we have also the cash settlement of derivatives that we account in the other items of the debt, the gross debt and the cash item and the financial receivables. This is because all these three things together have to approach at the level of the debt that we are going to close at the time of the expiration of the debt.

What I can see is that at the level of dollars that we see today, more or less we have – we are in the range of the level of the debt that we are going to close when the debt will be expired. So we have no impact on the exposition of debt. Everything in the items of level of debts and accounting of derivatives will change at the end to put the level at the right number that is the number that we have hedged. And I can say that this level is more or less what we’ve seen, what we are – is exactly the level of debt that we will return at the end of the maturity.

The other is on FX impact on net income. So we have several aspects that are impacting the net income on FX this year. Because we have, on one side, the FX impact on EBITDA that is related mainly on two main things. One is that we have several businesses in Latin America that are indexed versus dollar. In this case, we have the transition effect. So there will be an increase because of this. On the other side, we have the translation effect. When we translate all these businesses in euros, then we have the second impact. So it depends on what is the level of the portion of the business indexed in dollar in the specific country that triggers at the first level, what is the impact on the EBITDA.

The second impact is on the other items below. And the third impact is because we have only 40% of economic interest in Latin America, but this economic interest is different country-to-country is lower in Colombia and is a little bit higher in Brazil. And then we have – we own only 51% of Enel Americas, so this is the second level of reducing this impact. Then we have other items, like we have some credits in Argentina that is linked to dollars.

And when the dollars increase, we have an increase in these credits that are – that reduce the impact on net income. So all-in-all this year, all these things and also the hyperinflation in Argentina that accounts minus €90 million at the EBITDA level, accounts receivable on the net income level because the accounting principle is build exactly that way, so you have to have a mutual impact on net income that you have different impacts on EBITDA and on financial costs.

So having said that, it’s clear that the impact on net income of the FX impact in Latin America is very limited. I’m not saying that every year is proximal to zero, but it is a very limited impact versus what the impact on EBITDA could be. For 2019, I think – so when we have in a week from now, we have the Capital Markets Day, so we can go there and have another discussion of the impact of FX on the three-year spend that we are going to present.

Harry Wyburd

Okay. Thank you. And just a --

Monica Girardi

Thank you, Harry. We move to Javier Suarez from Mediobanca. Javier, you can go ahead.

Javier Suarez

Thank you, Monica, and good evening. So on the – again on the new guidance for the net debt evolution of €41 billion, €42 billion, can you confirm that there is nothing related to working capital evolution? I think that most of the explanation is based on Forex. But is there anything related to working capital deterioration? I’m mentioning this because during your speech, it seems that during the third quarter, there has been a temporary negative effect in your new companies. Explain us again what has happened during the third quarter related to working capital? And what – how that situation should be reverted by the year-end? That is first question.

Second question is on the Slide 14 on the cash flow statement. On the releases and utilization of provisions of €1.2 billion, if you can help us understand how that’s compared with your business – the latest business plan expectations? And also on the organic CapEx on the right-hand side of that chart, organic CapEx is down by minus 7% because I think that there is an increase on maintenance CapEx and a decrease on overall CapEx. How that’s compared with your latest business plan expectations? Many thanks.

Alberto De Paoli

Javier, so for the net debt, so we don’t have any working capital impact. What we said in the Page 14 is related to the fact that we had an impact in the first half, because we bought some CO2 to hedge position on the CO2. And that’s – so now we are improving the position in the third quarter and we are going to improve further our position at the end of the year.

So no negative impact was something accounted in the first half, and now we are improving the position. And we see at the end of the year that – so we are confident we’ll absorb the negative effect of working capital. So in the third quarter, we have a negative impact of €900 million. But because of the dynamics of the CapEx spend in each year, what we see is that with minus €900 million we’ll be around zero by the end of the year. And this is for the net debt guidance.

And the second question. For the guidance for the full year for CapEx, now we are at around €8.6 billion of the nominal CapEx. If you net the CapEx from the BSO CapEx, roughly €400 million what we call organic CapEx, that is the total CapEx less the BSO. It’s roughly €8.2 billion.

Then you asked me on the provision utilization. So here in – and also you asked me on CapEx, the composition between the maintenance and the growth CapEx. So in maintenance CapEx, the vast majority I’m saying 90% of the difference is only an accounting difference, because we have higher capitalization of some costs, mainly in the nuclear fields in Spain.

And the second is that for the new accounting principle, we capitalized the cost to acquire. Now we are classifying all these items in maintenance CapEx, what you will see in a week from now that we are changing. So the way we will present CapEx because it is meaningful to say that capitalization cost to acquire is a maintenance CapEx. We are doing this until we will change the classification of investments. And we will do it in the Capital Markets Day. Can you repeat the last question on provisions, because I --?

Javier Suarez

Yes. On the provisions, the question is €1.2 billion that the cash flow statement is showing on as releases and utilization of provisions during the first nine months of the year, how that’s compared with your expectation and if you can give us a guidance for the full year expectation on that number?

Alberto De Paoli

Well, so I think on the provision utilization, we are in line with the normal rate of provision utilization because the vast majority is explained by the debt that is in line with our expectation. And the second is all the cash out related to all the retirement plan in Italy and Spain that we have on personnel. The only difference is that in these provisions, the Delibera 50 [ph] is the way we account for Delibera 50 that perhaps is a cash-in of money that we didn’t collect because of the bankruptcy of some traders last year. If that – the accounting is one-off on EBITDA on one side and an increase in the debt that is already one-off of the same amount. And the amount is roughly €150 million. This is the increase that you see here, but this is only an accounting effect. The other items are in line with our expectations.

Javier Suarez

Many thanks.

Monica Girardi

Okay. Next question comes from the line of Enrico Bartoli from MainFirst. Enrico, you can go ahead.

Enrico Bartoli

Yes. Hi. Good evening. A few questions from my side. First of all, on the Retail business in Italy, you made a comment saying that margin was resilient despite higher supply costs. Can you please elaborate a bit on the dynamics on the cost, on probably the fact that you are able to translate those costs to the final customer, so a bit more details on the evolution of the unit margins in this business? And also you made a comment on the limited impact from competition. So can you elaborate a bit on this?

Second question is related to the networks. I saw that EBITDA in the third quarter was up very, very strongly. I guess probably there is some impact from this resolution that you mentioned, but could you also in this case provide a bit more details on this. And finally, if you can give some hints on what kind of contribution are included in the difference between the reported EBITDA and the ordinary and also the 120 million one-offs that you utilized to get to the adjusted EBITDA? Thank you.

Alberto De Paoli

First of all, on Retail, this is something that didn’t change versus the third quarter. We are in the same situation. So what I say is that when it comes to the overall impact on margins, the overall blended margins are down 8%. When you look at the single margins of the three segments that we have; so business-to-consumer, business-to-business and the split of the business-to-business in large and top consumer, I would say that with every margin per megawatt hour of large and top customer is roughly €0.5 per megawatt hour. So the real point of the blended margin is down is that, that includes in volumes in one year in this segment has been roughly 3.54 terawatt hour on the overall increase of 6. So the vast majority of increase is here. So on the blending level, the average net margin is going down because of this impact.

On the relevant margins, the B2C margins, we don’t see any compression. And taking into account that last year, the cost of sourcing was €49. This year, the cost of sourcing is €52. So having the margin at the same level of the last year that of the same level, but increasing the entire level of increasing the cost of sourcing. This means that we have been able to pass on to customers 100% of increasing the cost of sourcing. And we see that we are – we have been successful in doing this because of the limited competition where this is present in Italy because in another situation, not 100% of the increase and cost of sourcing would have been possible to be passed onto customers.

And it is the same when we look at the smaller and medium segment with other important segment in terms of margins, exactly we have the same dynamics. So we don’t see pressure on margins. We have completed the increasing margins because of increasing supply. And remember that when we say that the increase in supply is passed on to the customers, on the other side it means that on our renewables production, that we hedged 100%. So for our customers in Italy, we have already got the increase there and the Retail has been successfully in passing 100% of this increase to customers. So we have fully hedged our position.

And this is something that I can spend now and not in a week time that we have already done it for roughly 100% of this increase in prices in 2019. So also for 2019, we don’t see yet any increase in competition in this side. So this is the fact [ph]. For the metric EBITDA, yes, so the vast majority of increase is related to the Delibera 50. And regarding the increase would be lower than €150 million that the increase you’re not seeing in the chart. So for the one-off, we have 129 million in 2018, and 111 million in 2017.

In 2018, we have -- this one-off of the Delibera 50, that is €150 million one-off. And we have minus 21 million because we had some provisions for the headcount reduction in Argentina. In 2017, we had planned [indiscernible] the accounting for account reduction in Brazil. We have roughly €35 million for the fines in Argentina, the regulatory fines. Then we have some island settlement in Iberia, some regulatory issue for the island in Iberia. And then we have the successful – of the Bono Social, the dispute on the Bono Social that the operators won last year. For us, it accounted for €140 million.

Enrico Bartoli

Thank you very much.

Monica Girardi

The next question comes from the line of Meike Becker from Berstein. Meike, you can go ahead.

Meike Becker

Yes. Good evening. Thank you for taking my questions. I have two on the conventional generation in Italy please. What is your dark and spark spread in Italy? And how much of your income was from the ancillary market? Thank you. And the second question is – sorry, can you remind us of any one-offs in Q4 that we should be aware of?

Alberto De Paoli

The second question, so we have no one-off debt. In the visibility as of today, we have no one-off in the Q4. And for the dark and spark spread in Italy, I can’t remember [ph] is that we have the level that is still the market spot, so what we see in the market and the level that we have hedged last year. So when it comes to the level that we see in the market today, the clean spark spread is 6.4. And the clean dark spread is 8.7. We have hedged last year the clean spark spread to 6.6 and the clean dark spread of 13.

Monica Girardi

Okay. Next question comes from the line of Jose Ruiz from Macquarie. Jose, you can go ahead.

Jose Ruiz

Good afternoon. Just two very quick questions on just Argentina. The first one is trying to understand the effect of the hyper-inflection. Is there a possibility of recovering this negative impact through tariffs, like it has happened in gas tariffs? And the second question, if you can update us on converting into euros, what is the total impact of the tariff increase in Argentina? Thank you.

Alberto De Paoli

For hyper-inflection, so this is the full standard option and the impact on September is the full standard option of the hyper-inflection impacts. So the overall impact on the EBITDA is €92 million. As you know, there are two; one is this impact is related to the financing exchange that you see on the Bloomberg at the final day of the quarter. And the second is that the overall impact at the net income level is zero. So when it comes to EBITDA, and today we have that if the final close of the FX will be the level that we have today, we will have an increase – so a decrease in the negative impact of the hyper-inflation from €92 million to around, say, €30 million. So we would have an increase, a better EBITDA of roughly €60 million, if the closing at 31 December at [indiscernible] will be the level of today, we will have a lower impact on the transaction. So the final impact on the trends in Argentina will be €140 million that will be a split of €40 million in distribution and roughly €100 million in the generation basis.

Jose Ruiz

Thank you. Very clear.

Monica Girardi

Okay. Next question comes from Anna Maria Scaglia from Morgan Stanley. Anna Maria, you can go ahead.

Anna Maria Scaglia

Hi. Good evening, everyone. Just two very quick questions. The first one is relating to your hedging levels which are on Page 21. I was comparing to the first half and I see that you have just increased the hedge production in Italy by 10%. I was wondering whether – that’s already improved, if you can make a comment why the improvement is being just 10% in the quarter. And the second question is just for clarity. The capital gain of the BSO is booked in the other line in the EBITDA. Thank you.

Alberto De Paoli

Okay. So the first question is on hedging on 2019, why we don’t have hedged more in 2019. Look, the point is this. We have a factor when it comes to Italy and Spain. As you know, we hedged the integrated position. So we hedged at the same time our position on one side is the commodities, the second side is the price, and the third side the Retail effect. We hedged directly what the level of production that we call price reintroduction with our long-term specific customers. This is because these are the first-line in hedge. We’re hedging on the power sensitive production. And we pass onto customers if we have enough power to do it, like we did in 2018 and we have already done for 2019, the overall increase in sourcing that we are getting because we’re selling the energy.

On the other side, we have the second level of hedging that is the spread-driven hedging. Why we didn’t hedge more than we did in the first half, because today the spreads are – spreads that doesn’t allow for production. What I mean is that the level of poor prices today and the level of poor prices of coal, for instance, the results with the price is a spread that is not possible that someone will get to produce. So in this case, what we have to do is wait more closer to the timing that energy will be needed to have better hedge. So in this case, we stopped to have a hedge strategy because these spreads are not possible to be reached at the time in which the production will be needed. On the BSO, I said BSO is an ordinary line because this is the second business line of our renewable business. The first is build, sell and own – and the second is build, sell and operate are two operated businesses. And for this, the result of BSO is in the ordinary EBITDA.

Monica Girardi

Okay. Next question comes from the line of Antonella Bianchessi from Citi. Antonella, you can go ahead.

Antonella Bianchessi

Yes. Just a quick question on the minorities at your end. You mentioned 1.7 billion. Can you explain why in Q4 there will be an increase in the minorities? The second question is on the dividend. First of all, if you can specify the dividend to minority paid in the first nine months? And – yes, that’s it. Thank you.

Alberto De Paoli

The minorities, the increase in the third quarter is because the vast majority of net income would be purely in the third quarter – in the first three quarters is out of Latin America, because Latin America is highly impacted by the FX impact of the hyper-inflation. So all the increase – roughly 90% of this is out. So the level of minority is stable. And what we see at the end for – in the full year guidance is because we think we see that in the fourth quarter, we’ll have a more balanced increase in the fee income in and out of Latin America, because we see a sort of stability in the FX impact that will balance more the results in the last quarter. Then you have the dividend paid to third parties. So the dividends paid to the third parties is roughly €1 billion.

Antonella Bianchessi

Can I ask a follow-up question? Can you also specify on provision that you booked in the P&L in Q3?

Monica Girardi

Antonella?

Antonella Bianchessi

Yes.

Monica Girardi

Do you have any follow-up questions?

Antonella Bianchessi

Yes. If you can specify the provision booked in the P&L in Q3, so what they were about and some details on that, if there is an increase?

Alberto De Paoli

The vast majority of the increase versus an average that is in line with the other quarters is the Delibera Cinquanta. We booked in provision because of increase in net debt – in bad debt. The way we have to account this special impact is €150 million. It is the only difference versus on average that is in line with the other quarters.

Antonella Bianchessi

Okay. Thank you.

Monica Girardi

Okay. Next question comes from Sam Arie from UBS. Sam, you can go ahead.

Sam Arie

Hello. Thank you. Thanks for a very helpful presentation. I have a quick one on FX and then two – probably very quick ones, two on Italy. So firstly on FX, you spoke very hopefully about some of the negative FX you had to deal with from FX this quarter. I just wondered if there was a possible positive effect that I’m thinking about just the timing of the cash out for Eletropaulo. And if I’m right, the cash has gone down. I just wondered if you had benefited from that sort of temporary movement in FX on what that might have been worth.

And then secondly, my two quick questions on Italy. So first on networks. I think everybody noticed that currently bond spreads moved in the quarter, but that is also an input to the [indiscernible] return calculation. So I just want to know your current expectation is of where the [indiscernible] return is likely to go when it moves next. And I think previously you were expecting to go from about 5.6 to 6.2 and is that still about right what I could perceive?

Secondly on the generation business, I also think that there was something in the plan for the – originally for the capacity market which didn’t come through. I’m just wondering, what the latest developments are on that and if we should still expect a positive impact from the capacity market to come through at some point in the future? And if so, what kind of timing would you expect from that? Thank you.

Alberto De Paoli

So on – the first was on FX. So I don’t see any impacts on the cash out of acquisition because of the FX changes. So we have no impact on cash. On the metric, look, we are in the range of 5.96%. And these are the expectations that are made based on the calculation on what are the elements of the formula that we’re going to change, and what is the rules to be applied to change these items. And on the capacity market, so we have this year in the target, we had roughly €140 million looking at the capacity market. And this is for the full year and 110 million until September. Looking forward, it’s clear that – so now we are in November, so auctions are not – have not already been called. So it’s very [indiscernible] that the system will start at the beginning of 2019. So that’s the outlook if the system will start to meet of the next year.

Monica Girardi

Okay. Next question comes from the line of Roberto Letizia with Equita. Roberto, you can go ahead.

Roberto Letizia

Yes. Good evening. A few comments, if you can, on the political comments and the potential consequences of the budget law. If you see any risk or potential benefit that may arise from the decision of the government? But I’m especially – which refers to the possible green tax introduction which seems to be a fiscal advantage actually for the less polluting companies. I wonder if this may have direct impact to you on the tax rate or indirect because you sell green electricity that may certify anyone else to get to the green tax achievement, or if you see any consequence or benefits on the change of the pension reform because possibly the 100 as a sum of working age and natural age may allow you to work on the retirement, or maybe you did already anything that was possible in the past years, or whatever other possible consequence that you see in the budget law? Thanks.

Alberto De Paoli

So we have no already enough things to understand what potential impact the budget law would have to our business. I say it’s clear that we have to understand better the case on the pension reforms because it is something that will favor some – so hiring of new employees, because as you know all these companies like us and on utilities need to have this change because we are seeking or looking at new expertise on the digitalization, all the things that we are doing are requiring different experience. So the change, if there is some means in the budget law that will favor this change for us, will be positive.

On the green tax, and I would not say something that we haven’t seen in the budget law. So there is – and also there are discussions in the political level that are not now also defined in specific article or specific law. And having said that, I think that perhaps – so the budget law would be neutral to positive, but – so we need a lot more of details to understand whether what kind of action plan, what kind of impact this budget law will have to us – to our business.

Monica Girardi

Okay. We have a few questions coming from the web. The first set of question comes from Stefano Bezzato from Credit Suisse. The first one is around our BSO. And Stefano asks if we expect to announce more BSOs in 2018?

Alberto De Paoli

More BSO in terms of 2018? Well, yes. We are working on another deal with – we will be able to close the deal at the end of each year, that yes. So we are working on other things on the BSO.

Monica Girardi

Okay. Then we have a couple of questions from Oscar Najar from Santander. The first one is about our interest on Electricaribe. And the second one is about the Eletropaulo pension funds, if we are potentially considering a capital increase in Enel Americas to increase our stake beyond 57%?

Alberto De Paoli

Well, on Electricaribe what we did is only now to pay the fees at the chance to look at [indiscernible] because we’ve seen that every time there is something that is moving in the business in which we think that we have our bulk strategic part, we have to look what is happening. So it’s common sense. So we all know that Electricaribe needs a lot of changes at the level of the business, at the level of the regulatory, at the level of – because that for us it’s not possible today to take another resolution in Colombia, because we are going to hit the market share limitation in the low proceeds. So we think that a lot of things have to happen before we will have a clear interest in those. And for the time being, now we’re looking at papers [ph] to understand from the inside what this company means.

On the pension fund, I think there are three things together that [indiscernible] explain. So one is that we will welcome the pension fund in Eletropaulo for several reasons, so we are now looking at pension fund, how we can manage it, how we can – so when you see the other things that we will do in the – with the pension fund to optimize the pension fund. If the capital increases, we’ll be needed to something that I can’t say today. I can’t say because I think this is a niche that will have to be expressed to us by the Board of Directors, if the Board of Directors of Enel Americas will decide or will look at this capital increase as a measure of increase in the financial expense of the company.

It’s clear that perhaps – so we’re not looking at any capital increase to increase our stake in Enel Amaricas. You know that we have already launched because we have publicly announced that we are buying shares in Enel Americas with 1,200 [ph] for last month with the objective to increase our stake of around 5%. So this is already in place. So this is the way in which we think we are looking at increasing our stake and not through a capital increase that will have other results that the Board of Directors will drive if they will think that a capital increase would be needed.

Monica Girardi

The last second question from Lueder Schumacher from Societe Generale. Lueder, you can go ahead.

Lueder Schumacher

Yes, just one follow-up question on one of the previous ones. You said that there could well be more BSO happening before the end of the year. Just wanted to clarify that the 41.5 billion or 41 billion to 42 billion full year net debt guidance you’ve given that assumes that no more BSO will take place before the end of the year. So in other words, if it were to happen, the number could well look lower than the 41 billion to 42 billion?

Alberto De Paoli

Before the guidance – the debt guidance includes partially another deal on the BSO. Not what [indiscernible] but a part of the proceeds are included in the debt guidance.

Lueder Schumacher

Okay. Thank you.

Monica Girardi

This was the last question. As always, the IR department is at your disposal, if you need any further clarification. And we hope to see you in a couple of weeks in Milan. Thank you.