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Earnings Transcript for ELEZY - Q3 Fiscal Year 2022

Mar Martinez: Good morning, ladies and gentlemen, and welcome to the Nine Month 2022 Results Presentation, which will be hosted by our CEO, Jose Bogas; and the CFO, Luca Passa. [Operator Instructions] Thank you, and now let me hand over to Jose Bogas.
Jose Bogas: Okay. Thank you, Mar, and good morning, everybody. Let's start with some key consideration for the period. First, persistent volatility in the gas market and high electricity prices led both the European Union and the Spanish government to unveil new set of emergency measures, in order to mitigate the consequences of the energy crisis, while discussing bolder proposal for the medium term. The deterioration of the macro context has shown no sign of recovery during the last quarter. The growing concerns on the main economy's performance and inflation exceeding all records in the Eurozone, trigger a new round of corrective measures from central banks, including significant interest rate hikes. The sound performance of our liberalized business is clear evidence of our management integrated strategy resiliency to overcome market headwinds. Like-for-like EBITDA, excluding sale of Endesa X Way to Enel, increased by 11%, while net ordinary income increased by 1%. And finally, an extraordinary shareholder meeting has been called on November the 17th, to approve a set of preventive operational and financial measures within the usual related party transaction practice with our parent company. Its adoption will provide the company with greater operational and financial flexibility in the event of extraordinary energy market volatility occurring again in the near future. On the next slide, we will further elaborate on the dynamic of the market context. 9-month cumulative mainland demand decreased by 1.4% compared to the previous year, showing a further leveling off in the negative trends seen during the year. In Endesa's mainland distribution area, figures were slightly better, as demand increased 0.5%, that is minus 0.8% adjusted, relying on the service segment solid performance, offset by a reduction in Residential, minus 1.3%, and Industrial, minus 4% segments, the latter being affected by the economy slowdown, mainly in the metallurgical and paper sector. The European energy crisis also affected by the geopolitical tensions, resulted in a challenging market context with record high prices during the summer. The European gas reference TTF index reached the historical high of around €316 per megawatt hour on August the 26, while the Spanish reference, MIBGAS or PVB surpassed €230 per megawatt hour, additionally showing a relevant decoupling since June. Against this background, Iberian average pool price reached €186 per megawatt hour in the period, up 137% year-on-year, and also affected by the cap on gas for electricity prices, limiting the imputed gas costs at €40 per megawatt hour since mid-June. So far, 2022 has been the most expensive year in the Spanish electricity market. In the absence of such similar gas cap as the Iberian exception, most European energy market recorded average price around €300 per megawatt hour, driven by the gas record high and extreme volatility. Let's now focus specifically on the worsening of third quarter context on Slide number 5. While there is no doubt that 2022 is being characterized by record high gas prices, in particular, the third quarter has seen an extreme and unprecedented rise. For instance, MIBGAS PVB, which is the reference for the Iberian market, short an average by more than 180% quarter-on-quarter to €138 per megawatt hour. This price level compares with the €90 to €100 per megawatt hour range since -- during the first half of the year. When it comes to the TTF, which currently is the leading European gas benchmark, declining gas export from Russia and the buying spree to top-up winter reserves, mean an average price of €200 per megawatt hour in the third quarter, which compared with the €50 per megawatt hour recorded in the same quarter of the last year. With these commodity prices increases, quarterly average power price also reached record high in all the markets, except in the Iberian market, where the price cap enforced in June the 15th has allowed to keep pool prices under control compared to other European countries. Although considering the thermal compensation, last quarter prices also represented an all-time record in Iberia. Power pool prices forward references for the last quarter point to similar levels, while natural gas futures linked to TTF and MIBGAS are trading around €75 and €70 per megawatt hour, respectively, close to level not seen since mid-June, unless than [third] of their summer peak. Moreover, an usual world weather, high floats of LNG and a strong storage bill have eased some pressure on the gas market in the last two months. European storage is almost 94% full, and Germany has reached 98%. On Slide number 6, we can see a summary of the regulatory initiative unveiled during the last quarter, and aim at containing electricity prices and mitigate the -- its social impact. At the European level, as a complement to the different packages approved to date, a new set of emergency measures to control energy prices was approved last September and will be applicable from December the 1st of this year to December the 31st, 2023. Among others, those include a reduction in electricity consumption, the introduction of a cap of €180 per megawatt hour for the marginal technologies, and a solidarity contribution tax for oil and gas companies. Moreover, the European Union reached a consensus to work on a gas purchase platform and alternative reference in gas market, and a solidarity scheme to allocate gas between member states. Finally, an overall energy market reform debate carries on. In Spain, since August, the government has approved through three different Royal Decree Law, several cost reduction measures for the most vulnerable customers such as implementing energy saving and efficiency measures, reducing energy dependence on natural gas, while promoting electrification and deployment of renewable energies, lowering value-added tax, but from 21% to 5% on supplies of natural gas, and increased protection for the most vulnerable energy consumers, particularly on natural gas. On the non-mainland proposed fuel auction, we welcome the recommendation of the CMC report [which] consider inadequate to use the brand formula, and advocates market references such as MIBGAS. Considering regulated tariff, a new draft for public consultation has been put forward which consider longer-term market price references for the energy cost indexation. Lastly, the tax proposal on energy companies and banks required as a social contribution, has started the allegation process in parliament. While the final outcome is still unclear, we reiterate our disagreement with the proposed taxation. The tax will not be levied on extraordinary results since it will be applied on consolidated tax revenues, clearly affected by the context of high prices as well as the associated energy cost, and most expressly excluding regulated businesses. Obviously, this tax goes against the spirit of the current European Union proposal. It must be highlighted that last year, our tax contribution represented more than €3 billion, which places us as the 5 largest taxpayer in the country. Now we turn to the evolution of the generation operating parameters on Slide number 7. Over the last 12 months, we have continued to make progress in our decarbonization commitment, bringing into operation more than 700 megawatts of renewables. Mainland renewable capacity is 10% higher than in nine month 2021, while CO2-free sources now constitute 70% in -- of our installed capacity on the mainland. Over this nine month of 2022, we connected 156 megawatt of new wind and solar capacity to the grid. In addition, on October the 21st, a new solar plant was commissioned in Seville with an installed capacity of 50 megawatt. All in all, 100% of this year target additional capacity, 1 gigawatt, is on track. We expect it to be operational in the fourth quarter with no foreseen delays. As for the renewable pipeline, the 65% of the 4 gigawatt of new addition targeted for 2022 to 2024 are already addressed, while the rest is ensured with a gross pipeline almost of more than 80 gigawatt, the major portion of which covers more than 6x, that is 35% of 4 gigawatt, the residual target of new capacity. Total mainland output reached 39.9 terawatt hours, plus 16% higher than previous year. Year-to-date output figure consolidates the lower hydro availability suffered mainly in the first semester. In that context, the increase in wind and solar production due to the entry of new capacity, together with the recovery of the thermal production, mainly CCGTs, more than offset the drop of hydro production. And finally, let me highlight the fact that Endesa was provisionally awarded the Andorra Fair Transition tender, obtaining the right to connect 953 megawatt, and the option to step up to a total of 1,200 megawatt. This project reinforced the company commitment to future projects in areas affected by planned closure, creating value in the local communities. In power retail, we continue increasing the liberalized customer base, liberating on our successful commercial strategy -- and we are now on Slide number 8. The implementation of attractive offers in the current price context has resulted in a remarkable increase in our liberalized customer base during the last 12 months, adding around 1.2 million new clients. Customer acquisition runs well above what was in our plans and boost sales in the liberalized market up 4% versus previous year. Sales to liberalized residential customers have more than offset the decrease in sales to B2B customers. Looking at Endesa X, both e-Home contract and charging points associated with electric mobility are increasing significantly by 30% and 43%, respectively. On Slide number 9, the good evolution of our free power sales came together with a sound performance of the free power margin that reached €38 per megawatt hour, 35% above previous year, despite the complex and challenging market and price scenario resulting from unitary revenue that rose to €161 per megawatt hour, associated to an increase of index sales and higher pool price context, and increasing variable costs driven by lower purchase volume at high prices and fuel cost increases. Free power margin amounted to around €2.2 billion, well above the previous year, and the main drivers being the following
Luca Passa: Thank you, Pepe, and good morning to everybody. On the financial highlights, I'm now on Slide number 13. Reported EBITDA increased by 19%. EBITDA like-for-like increased by 11%, excluding the capital gain obtained from Endesa X Way transaction. Net ordinary income was up by 1% year-on-year, amounting to close to €1.5 billion, not considering the net effect of the Endesa X Way transaction. Reported funds from operation figure, which amounted to €0.6 billion, turned positive versus first half 2022. This figure was strongly affected by the increase in the regulatory working capital during the period, of close to €1.2 billion. Once strip-out of this impact, both years, FFO would have reached €1.8 billion, more than doubling the adjusted FFO in nine months 2021. Moving to the detailed analysis of the period on Slide 14. We invested approximately €1.5 billion in the period, 20% more than the previous year, mostly allocated to the two main strategic pillars
Jose Bogas: Thank you, Luca. And to close this presentation on Slide number 22, I would like to share some final remarks on the main achievements of the period. First of all, the resiliency of our long proven integrated business model has allowed us to successfully overcome one of the most challenging context in recent years, both in terms of market volatility and regulatory intervention. We continue to attract new customers, leveraging on a successful commercial strategy based on the range of products and services, providing stability to their energy bills. In renewables, we continue to deliver on capacity addition, and are on track to deliver the full year target. We remind you that on the 17th of November, an extraordinary general shareholder meeting will be held to approve a set of operations to reinforce our position on international gas market as well as to strengthen our liquidity, providing a solid backup in case of new extreme volatile spikes. To wrap up, despite the many headwinds encountered during the period, the sound results reached in nine month support the achievement of the net ordinary income target set for the year, even considering prudently the proposal of taxing utilities for about €400 million. Ladies and gentlemen, this concludes our nine month 2022 result presentation. Thank you very much for your attention, and we are ready to take some questions.
Mar Martinez: Okay. Thank you, Pepe. We'll start with the Q&A session and open to take all the questions you may have.
Operator: [Operator Instructions] Mrs. Mar Martinez, Head of Investor Relations, please go ahead.
Mar Martinez: The first question comes from Alberto Gandolfi from Goldman Sachs. Probably Alberto has some technical issues. We can move forward to the next analyst that is Javier Garrido from JPMorgan.
Javier Garrido: Did I understand correctly that you are including up to -- a potential impact of up to €400 million from the Spanish energy tax that would be included in the reiteration of the ordinary net income for 2022? That's the first question. Second question, if you can quantify, or at least give some approximate figures about how much of the €724 million you increased in the gross margin in the first 9 months, in the free markets, is due to the repricing of contracts, and how much is due to higher profits from CCGTs? And then the third question is, I've noticed the continuation and the acceleration in the increase in index sales in your portfolio. Is this increase sustainable? And is it a strategic decision to reduce the economic exposure to a short energy position in the future?
Jose Bogas: Let me say, you are absolutely right. We have prudently, as I have said, include this taxation of €400 million in the net ordinary income. That means that we will maintain our net ordinary guidance -- net income ordinary guidance even with this taxation. With regard to the last question, in the sense of the index sales, well, let me say that this is not a strategy to increase or decrease our index sales as a consequence of the market and the dynamic of this market. There are many customers, many clients that they will prefer -- that they prefer in the future just to be indexed, because they are expecting, I mean, a reduction in the prices. We try to advocate them in the sense to give them the best alternative for their supply. Well, from time to time, we have different strategies. One of them trying to give clues, yes, to fixed prices or to continue in the indexation, but it depends on the kind of client and the way indeed in which they would like to go ahead.
Luca Passa: And on your second question, Javier, regarding the impacts on the €724 million of increase in our liberalized margin, as far as the generation part, basically, we have obviously the positive effect of the bilateral contracts, which impact for €440 million in generation. And in particular, when it comes to the CCGTs, here, obviously, for the increase in volume, we have a positive effect of about €200 million. Then, on the supply side, you have the negative effect on generation still for €440 million regarding the bilateral contract and the net effect there of €60 million, assuming that obviously repricing for the full 9 months is giving us in the region of €350 million.
Mar Martinez: I think that we have now Alberto Gandolfi from Goldman Sachs.
Alberto Gandolfi: I also have 3 questions, please. The first one is continuing on margins in the liberalized business. If I observe your Slide 15, it looks like the non-mainland will normalize at some stage when fuel somehow settles. And what I'm trying to understand is how much of these benefits from gas contracts, CCGT spreads, are going to also repeat in 2023? And can you tell us maybe how much of this €2.3 billion EBITDA in the generation and supply is a function of the gas contract and/or export to France that when the -- may no longer be there. I'm trying to understand the sustainability of this profitability, which you admitted is extremely strong into next year. Because if you keep that plus the normalization in Mainland, it will be really strong numbers. So I'm just trying to figure out that. The second question is on interest expenses. You've been really good at keeping costs at 1.1%. I wonder how sustainable is that, considering half of your debt is variable and considering that we are seeing refinancing rates being something like 300, 350 basis points higher than what you're paying right now? How much of a headwind is this going to be on the accounts going forward? Last question. I'm not going to ask about CapEx and the revenue tax because I think that's going to be assumed in -- addressed in the next couple of weeks. But maybe the last question. I'm a bit surprised that you are booking 0.4% bad debt, which is less than average. I would have expected, with bills going up, you would be booking a higher percentage. I know the absolute amount is going up anyway because your revenues are growing. But I -- what's the rationale for booking a lower ratio of bad debt in a moment where energy bills are up and doubling basically?
Jose Bogas: Alberto, I will hand over to Luca to answer. But let me say something with regard to the fuel cost for the airline or the remuneration of the airline. I agree absolutely with you that it's something that it would be resolved in the future. Let me say that the fuel remuneration in regulated. Fuel remuneration must be based on the pass-through rule that we used to have always in this regulated business, and it is clear than the current, I would say, customs, fuel cost is not working now. Having said that, the [CNMC] on its report -- last report of September -- published a report on the proposed fuel remuneration in the airline, and the [CNMC] recommends using indexes that reflect market quotation in a better way, explicitly mentioning the MIBGAS. Therefore, we are currently waiting for a new draft ministerial order aligned to the CNMC recommendations. And Luca?
Luca Passa: And just adding on this first question. Obviously, the gas business has had a very good performance in this period, and we had expected this to be sustained towards year-end. But for 2023, let me not comment until we get to our -- well, Capital Markets Day in about 2 weeks. Then, when it comes to interest expense, I can give you basically our -- the evolution towards year-end. So we currently have €1.1 billion cost of debt. We are expecting to reach €1.5 billion at the end of the year, and that is based on an assumption of the fixed rate component just over at 2% -- at around 2.3% and a variable rate component at 90 basis points in terms of cost of funding. And obviously, in the future years -- and again, we will comment at the CMD, we will have an increase in interest rate expense as all other operators are basically experiencing, given the normalization of interest rates across Europe. And then the third question was on the rationale on the percentage of bad debt. We always had a percentage that was ranging between 0.3% and 0.5%. So 0.4% is more or less in line with the past. We have an increase in basically billings volumes of about 60% in these nine months, which is a huge number. And the usage of this percentage is in the average of our past, basically, periods. Therefore, this is also based on expected evolution for the futures, because, obviously, not all the increase in billing will basically come down as bad debt, given what we are experiencing it currently in basically payments by our customers. Therefore, we deem appropriate using the 0.4 percentage point, given the higher increase in billing that we've seen basically this year.
Mar Martinez: Next question comes from Antonella Bianchessi from Citi.
Antonella Bianchessi: A very quick question on your CapEx. You reported €1.6 billion. Your plan is [€2.6 billion] for the current year. Are you on track on that? Or you think some of the CapEx will flow into the next few years? Also, I noticed that the demand is coming down a lot. And therefore, how this can change the position of Endesa going forward, particularly on its ambition on the renewable growth?
Jose Bogas: Antonella, well, Luca will explain deeper, but we are on track on our CapEx, and we don't see any change in the future. We feel comfortable with what we are doing, and we will reach this CapEx. With regard to the second question, isdemand going down, it's going just to reduce our position -- long-term position in generation. While it is clear, if the demand is reduced, our long-term position will be reduced also. But we feel comfortable in the way in which our, as I have said, strategy is working, and we feel comfortable continuing with this strategy. And Luca?
Luca Passa: Just confirming again the CapEx expectation for the full year at €2.6 billion. And regarding demand decrease in our development in renewables, I confirm that 1 gigawatt of additions expected for this year. We're already over -- in around €250 million. The rest of the capacity will come on line in these last two months of the year, as we experienced also in the previous two years. While basically the evolution going forward, again, let's wait for the CMD in a couple of weeks.
Mar Martinez: We'll move to the following questions that comes from Jorge Guimaraes from JB Capital.
Jorge Guimarães: I have two questions. The first one is, if you can go back to the liberalized margin in Q3, an electricity margin close to €50 megawatt hour. So if you can help us to understand how did you achieve such a high margin and how sustainability is going forward? And the second one, it's not directly related to the results, but -- I can tell but ask it. Do you have any opinion about the news last week in Spanish press about the inclusion or not of [TIEPI] [Technical Difficulty] [clawback] exemption?
Jose Bogas: Well, again, Luca will explain better, but we think that it is not easy to obtain these kind of margins, and it's the consequence of a very good job, trying just to -- first of all, to give a very good price to our customer base in the – from marginal cap that we have of [€67 million] where price is [€65 million]. And then managing all the rest of the cost, the ancillary cost, the shape of the customer, et cetera. It's not easy, but I think we are doing a very good job. With regard to the second question, first of all, that is in relation with what we call the responsible declaration that we have, that we do just to the CNMC, taking into account our infra-marginal generation and the fixed prices to our customer. I should say that -- I think that there is no any problem, or at least material problem with respect to our declaration. As I have said, this -- we have done some kind of repricing of contracts to levels consistent, as I said, with the €67 per megawatt hour clawback. And I think that this repricing will be -- or will have a sustainable positive impact, and we are not going to be penalized because of any clawback.
Luca Passa: And just on the liberalized margin again, I mean, basically, the effect and the sustainability of this result in nine months is based on the fact that we are repricing our generation at a level of €65 starting from previous years where we were ranging in the €45 to €50 area. Again, respecting also the regulation of the €67 clawback imposed by the regulator. Therefore, I think it's part of the evolution of our generation and supply margins together, as I commented before, with the impact of the bilateral contract for €440 million positive in generation and negative in supply, and obviously, the improvement when it comes to thermal output, given the higher volumes in generation.
Mar Martinez: We have now Manuel Palomo from Exane BNP.
Manuel Palomo: I will stick to two. One is just a confirmation to make sure that the €2.4 billion impact is in net profit and not in EBITDA. So that would be the first one. Second one is, whether you could please explain the rationale why you have materially increased the number of clients in the liberalized market, 21%, if I'm not wrong, while volumes have gone only up by 4%? Is this the trend that you will expect going forward?
Jose Bogas: Well, first of all, you are right. It is clear that this increase in the net ordinary results will be support by the increase in the EBITDA that Luca will explain later. The second thing -- the second question is with regard to -- okay, Luca.
Luca Passa: I'll take it, Pepe. So the first one is up to €400 million of, let's say, prudently tax provision on -- the new proposed taxation is at a net income level, so confirmed. On the second question, 4% volumes versus 20% increase in clients. First of all, volumes are affected by demand. You've seen the evolution of demand that we commented by sectors, but basically, you have an increase in demand only on services, while both Residential and, in particular, Industrial, are down in terms of demand, given the high prices scenario. The evolution of demand obviously will depend also on the macroeconomic evolution, and basically GDP evolution for next year. You know that GDP evolution for this year and for next year have been lower several times during the last months. But basically, volumes are affected by macro and sector evolution, while customers notwithstanding the increase, or the inversion in trend that we experienced in the last 9 months. Obviously, the flows is slowing because also customers acquisition in liberalized market in the third quarter is much lower than what we experienced in the first 2 quarters. So I expect the customer basically trend to slow again in the future quarters, while volumes will depend on demand on each of the sector, and Industrial, I think, will be impacted in the next few quarters in that respect, by the energy context.
Mar Martinez: Next question is coming from Javier Suarez from Mediobanca.
Javier Hernandez: Three follow-up questions also on my side. The first one is on the working capital. So the question for you is when -- how are you expecting the recovery of this working capital, which should be the amount of working capital that we should see by the year, and how confident you see on the positive evolution, a reduction on this regulatory working capital? Related question is on the level of cash collaterals that you are expected by the year-end, and implication that this may have on your capital going forward? Third question is on the guidance. The company has confirmed this morning the net -- ordinary net income for 2022. Can you please elaborate on latest guidance for EBITDA and then payout policy, and therefore, increasing dividend yield in 2022? And the final question is, what is your layout -- if you can update us on your contribution to the ongoing debate on how the European Union should [change] the structural reform of the European equity market through both short-term and then medium-term measures?
Jose Bogas: I will try just to give you some coloring on the last question, the debate in the European Union around these changes. Well, in my opinion, it is absolutely clear that we have realized that, with extreme unpredictable volatile context like the one that we are suffering now, the marginal system pricing that we have, I would say, doesn't work correctly, in the sense that the combined cycles are fixing very high prices, that it has no sense for the infra-marginal technologies. Another question is, what should be this price for the infra-marginal technologies. As you could see in Spain, the regulator had decided he has to cap with €67 per megawatt hour. And in Europe, this figure is €180 per megawatt hour. Well, in any case, what I think is that, it should be a difference between the signal price and the remuneration price for this -- for the different technologies. I think, if we go back to a normal situation, again, there is no any problem, and this marginal price has been working during a long period of time, and during the last years, and I think that very efficiently -- because it allocate the resources in the right way, and we have obtained a lot of cost reduction in the sense of the European Union cost of energy. But as I have said, we should think how to change this. In any case, if you think in the future, in the mix in which we are only -- we will have only renewables, then the marginal cost will be zero, or close to zero, and it has no sense. So these remuneration systems [would] change in the future just because of this extreme context, or just because we are going just to have marginal technologies with marginal costs close to zero, and you should pay in any case the capital cost or the fixed cost. So we are really open to this chain, and, well, it's not easy, but it is normal and rationable just to think about a new remuneration system for the future.
Luca Passa: On the first question regarding working capital reabsorption, as I said, regulatory working capital, we expect it to basically lower into the stock that we are registering of €2 billion at the 9-month by -- €400 million by year end, and hopefully, something more if it comes. When it comes to the -- let me say, the ordinary evolution of working capital, which has a negative effect of about €1 billion in 9 months, we're expected to recover almost all of it, because, obviously, the impact of €1.1 billion of the cap on gas will be reabsorbed quite substantially towards the fourth quarter, given the evolution in price and the fact that in certain recent days, the cap on gas do not apply. Therefore, we do not -- will not have any impact on demand. As you might recall these measures, basically is settled on generation on a weekly basis in the system, and then is transfer or financed through bills to final customers. So we have basically a delay in terms of timing of when the settlement goes into the bill, and when actually we are basically -- getting the money, basically from the final customers. On cash collateral, expectation for year-end, given the current prices, is €8 billion gross for year-end 2022. And as I said, for 2023, we are expecting a decrease of about €400 million per month. And then in terms of, let me say, EBITDA evolution in the fourth quarter, we are expecting basically an EBITDA evolution similar of what we had in the third quarter, driven by obviously the absence, as I mentioned, of a negative run-off in distribution that we already recorded in this third quarter, the recovery of non-mainland generation, but slightly below the guidance, so in -- around €400 million in terms of margins. Stable free power margin also for the fourth quarter, which has been quite strong, as discussed before, for the third quarter, and some worsening on the gas wholesale and mark-to-markets for -- about €300 million. So that's basically what we are guiding for in terms of EBITDA evolution for the fourth quarter. And we gave formally guidance on net ordinary income, net of basically the provisions for this proposal as that is the base for dividend payment.
Mar Martinez: We have now Fernando Garcia from RBC.
Fernando Garcia: I have two. So first one is on the -- if you can expand the explanation on the €180 million in the distribution update. I think this is related to an inventory. So my question here is, do you think this inventory in the case of Endesa [Technical Difficulty] [directly]? And the second one is related -- a follow-up question on the previous question of Javier Suarez, on the guidance of net debt to €10.5 billion. So I assume here that you are including €1 billion recovery for the gas -- the cap of gas and then €0.4 billion as well on regulatory working capital? If I am not correct here?
Jose Bogas: Let me try to answer the first one, the one regarding to the distribution remuneration. First of all, I should say that it is a negative impact, not only for Endesa, but for all the sector. This figure comes from the inventory, that is the asset, and also for the operational maintenance [context]. Well, we don't agree with this resolution because of many things. And we have appeal our wind -- our main -- or we have -- or we will intend -- just to explain because I think there are some mistakes in this regulation, not only for Endesa, for all the sector. But the main impact -- negative impact is not in the value of the asset, but in the recognition of the operational maintenance.
Luca Passa: On the second question, the assumption of net debt year-end at €10 billion to €10.5 billion is based on FFO generation of €2 billion and regulatory working capital at €1.7 billion. So it's a recovery of €400 million regulatory working capital, and, let's say, ordinary working capital recovery of about €1 billion, which is obviously the cap on gas plus other recoveries.
Mar Martinez: Next question comes from Rob Pulleyn from Morgan Stanley.
Robert Pulleyn: At this stage, I'll limit it to one question, given lots of others have already been answered. And can I just revisit for clarification this renewables capacity for delivery in 4Q. You've said it twice that you aim to still hit your 1 gig target. But could I ask the status of those projects? Are all the components just awaiting installation and commissioning, or are there any pending delays in delivery, especially in solar? And as a follow-up very quickly on a previous question as you referred to cost of financing. Would you be willing to say where you expect your leading-edge borrowing costs to go for those refinancings due in 2023 and 2024?
Jose Bogas: With regard to the first one on the renewable delivery, as usual, we used to deliver at the end of the year. So, as we have said, if you take into account the last 12 months, we have put in operation 700 megawatt, and in this year, taking into account what we did in October. We are -- or we have now a little bit more than 200 megawatt. But we don't expect any material delay. We will reach -- or we feel comfortable just to reach our target of 1 gigawatt at the end of the year.
Luca Passa: And let me add, Pepe, that this was the same performance in terms of capacity additions that we had both for 2021 and 2020. Therefore, lots of the capacity coming basically on line in the last two months. So, construction is almost basically finished for the major of the projects that we have. As far as cost of financing, Rob, I can comment for the evolution up until this year-end, and therefore, 2023 and 2024 refinancing. But you need to wait a couple of weeks. Clearly, you can expect an increase given the interest rates, basically, normalization that we are seeing in Europe.
Mar Martinez: Next question comes from Jorge Alonso from Societe General.
Jorge Alonso: A couple of questions, please. You have hedged 90% of the energy for 2023. I just wanted to know on what hydro output -- if you are assuming a full normalization, or which is your assumption for 2023, just in order to be sure that you're not going -- overhedging again? The second one is related to the gas procurement costs, if you expect that your procurement cost for gas next year would increase materially? Or would it stay more or less at the same level that you have seen this year? And the last one is about the distribution business. If you can give us some more color about the underlying performance of the business considering the run-off, if it is recovering or is it still a little bit weak? And what are the reasons for that?
Jose Bogas: Let me say that we always consider another tier in hydro. But in this case, I think what we have considered is a little bit lower than the average for the rest of the year. With regard to the second question, the gas cost procurement, well, it is clear that these costs are more or less aligned with some indexes like Brent, Henry Hub, or even the indexes of MIBGAS, et cetera. So it would depend on the evolution of these indexes. But nevertheless, well, what we see is that this index is increased, and the reference that we have increased, our aim is just to try to maintain the margins that we have today. With regard to the distribution, we don't expect any more negative news in terms of the regulation. So we think that the evolution in the future should be -- or will be -- if you take into account what had happened in this year 2022, without this negative regulation impact, is similar to other years. But Luca, could you…
Luca Passa: When it comes to the last one on distribution, as we said, we have allocated this amount that has been requested. Therefore, if our [allegation] goes through, we might have some recovery of that amount. Now I cannot comment on the amount specifically, but clearly, this is basically something that we are trying to recover. When it comes to the second one on the gas procurement cost, there's been, and there will be, as always, some repricing in contracts. But let me say that it's -- the pricing, it's only in the money vis-a-vis the current market scenario. Clearly, I cannot comment on the level at which we are basically tracking repricing with our sourcing counterparts.
Mar Martinez: And now I think Antonella Bianchessi from Citi is back with some additional questions.
Antonella Bianchessi: A very quick one. I noticed that in your CapEx -- you have materially increased the CapEx related to the customer base. Is this capitalization of losses of new customer or its marketing cost? What is this? And which is going to be the evolution over the next few years?
Luca Passa: Yes, Antonella. We increased, obviously, activation for customer acquisition, which is basically the component that then also has an effect in D&A, as I commented before. The impact on D&A for this month is only €24 million. The evolution will depend on how much customer will continue to attract, given our strategy. Now, as I said, we will comment the evolution for 2023 and onwards in a couple of weeks. For this year, we do not expect further acquisition cost that will affect basically D&As. In terms of cost of acquisition of customers, we are ranging in the €65 to €75 per customer in terms of the cost at which we are carrying customers currently.
Mar Martinez: Okay. This was the last question of the call, and all the questions received by e-mail has been addressed in the conference call. So thank you very much for participating. As always, our team is available to help you in case you have further questions. And that's all. See you next 23rd of November in our CMD. Have a nice day. Thank you.