Iren SpA (IRE) Earnings Call Transcript & Summary

Good afternoon, everybody, and thanks for spending part of your time with us. I have beside me, our CEO, Mr. Gianni Armani; and our CFO, Ms. Anna Tanganelli. And before starting, let me give you the agenda. First, we will show a video which features the various challenges that we have been facing over last year. Then the top management will guide you through the full year '22 results and the business plan update. At the end of the presentation, we'll have the first Q&A session dedicated to the financial community, analysts and investors. And finally, the Q&A session for journalists only. Let's get started. Play the video, please. [Presentation]

Thank you, Giulio. Good afternoon, everybody. Thank you for attending our call on full year results 2022 and the update of our business plan to 2030. It's another statement to say that last year was really a challenging one. You have just seen on the video geopolitical tensions, adverse climate conditions, regulatory uncertainties, strong inflation, soaring interest rates, all these impacting our sector. And despite all these headwinds, the performance of the company once again was pretty impressive, showing that we are a resilient company. We deliver results. And most of all, we keep our promises. And in addition to this, our strategic vision is presented in 2021, was properly drawn and is confirmed even in this completely changed scenario. Starting on Slide 5 -- Slide 4 on 2022 results. We would like to give you a snapshot of the key financials. Iren reported an ordinary EBITDA of EUR 1.06 billion, up 6.4% versus last year, excluding nonrecurring items. And we experienced several extraordinary conditions, some that were generally in the sector, somewhere company specific. The company -- the group overall carried out the highest level of gross investments in its history, EUR 1.5 billion of gross CapEx, up 56% versus last year, anticipating part of the plan. This is a signal that we are able to seize opportunities, anticipating industrial targets and set up the path for future growth. Finally, thanks to the robust EBITDA generation, combined with extremely good managing of working capital, the group has been able to minimize that growth, bringing our leverage below the target initially set in the plan with net debt over EBITDA ratio below 3.2x. Moving to Slide 5. It is important to highlight the main factors that occurred in the plan that led to 6.4% growth in the ordinary EBITDA evolution, excluding nonrecurring impacts. On the negative side, as presented in the quarter calls, the lowest level of water reported in our basin the lowest ever reported, 770 gigawatt hour of production, reduction of 36% versus previous year, resulted in a loss of EUR 85 million in profitability, equally split between energy and market business unit. In absence of hydro volumes to match the consumption of clients in natural hedging, market reported a loss due to the need to purchase energy in the market at higher prices. The absence of hydroelectric volumes will no longer even next year impact on market margins as we changed our hedging policies on this element. And the reduction on heat volumes, minus 14%, 2.8 terawatt hour -- [ 2.9 terawatt hour ] distributed in 2021 in 2022. This is a result mainly of higher temperatures in Q4 and a combination of energy saving actions that were brought out during the last part of the year. This determined EUR 20 million reduction in profitability. On the positive side, the capacity market contribution was EUR 68 million renewable, the new plants acquired at the beginning of the year resulted in a contribution -- a positive contribution of EUR 50 million. Thanks, to the favorable energy prices. And organic growth brought additional profitability of EUR 30 million, thanks mainly to efficiency in the business, in the network business and increased profitability from new plants that were entered in operations, particularly the biomethane production in waste business. On network, the allowed revenues increased, thanks to the increased RAB, especially in water and electricity, partially offset by the reduction in WACC that was led by the regulatory review and higher operational cost. On waste, we reported supportive pricing scenario on energy sold by via WTE and the phase-in of new plants with higher prices and volumes of recovered material in waste intermediation. On collection, otherwise, the margin reduction is caused by the higher operational cost, mainly on fuel, partially offset by the consolidation of Sei Toscana in the second half of the year. In energy, prices and clean spark spread of electricity and waste were up, where MSD, dispatching market was down compared to the exceptional results of 2021 to EUR 80 million. And thermoelectric and cogeneration production decreased by 17%. This was a combination of cooling problems that were experienced, especially in the summer for the drought and the failure of a turbine, particularly in Turbigo, in Q4 that has recently restarted operations. More than EUR 20 million of higher contribution coming from electricity efficiency projects that were registered in the energy business unit. Finally, market, the strong reduction in electricity margin, as I said, was mainly driven by the impact of extraordinary high prices on unhedged volumes, combined with the prohibition in H2 to activate the planned repricing campaign that we communicated. And on top of that, the exposure to market prices was greater than expected due to the hydroelectric production reduction that we mentioned before and the higher supply volumes that were unexpected due to higher consumption in electricity on client and the lower churn. Overall, we registered an increase in demand on electricity of 34%. But let's now take a look at the main -- a video that summarizes the main achievements. [Presentation]

Thank you. Turning on Page 7. We would like to summarize the key achievements -- business unit by business unit. On network, we reported 8% EBITDA growth leveraging on the growth of RAB that was up to EUR 2.5 billion, thanks to almost EUR 330 million of investments. 2 small operations contributed to the result with the acquisition of SAP company, which is not an IT company, of course. It's Liguria water service distributor with 34,000 of inhabitants. And the acquisition of gas networks in Vercelli and Savona from Ascopiave as an optimization of A to A gas network acquisition. On waste, 16% profitability growth was driven by the additional treatment capacity of over 360-kilo ton per year, resulting from 3 plants that entered into operations by the end of 2021 and beginning 2022, one paper and plastic selection plant, Two organic treatment plans. The consolidation of Sei Toscana and the company managing the collection service in South of Tuscany and favorable energy prices on, as mentioned on WTE. Almost EUR 200 million investments were carried out during the year, mainly for the construction of treatment plants that will start operating in the next years. The first plant that will enter into operations is going to be wood recovery and pallet production plant in Vercelli in the Q2 2023. In energy, we reported a high level of profitability sustained by solar assets acquired at the beginning of the year, counterbalanced by the drought and the thermoelectric production difficulties. On the positive achievements where the start-up of the new combined cycle in Turbigo, a 400-megawatt plant that has a long-term capacity market and the construction of new renewable capacity for 70 megawatts that is currently going on at this moment. We also reached 101 million cubic meters of district heating. On market, market was strongly affected by the volatility of the electricity prices and the impossibility to adapt the contracts to the new scenario. On the other hand, the performance commercially was quite exceptional. We reached 2.2 million retail clients, adding more than 200,000 to the total number. Also thanks to the acquisition of ALL GAS, the company that is active in Alexandria. And we also experienced significant growth in the penetration of IrenPlus services on our clients that reached a rate of 32%. Finally, Smart Solutions reported a spike in profitability sustained by government incentives, particularly super bonus, 110%, leading to almost EUR 300 million of gross investments. I will now hand over to Anna that will illustrate the performance and the key P&L items.

Thank you, Gianni, and good afternoon, everyone. Moving to Slide 8. Let's take a look at the main metrics below EBITDA. Depreciation was up EUR 45 million versus prior year as a result of the investments made during the year and the acquisitions and consolidations carried out during 2022. Provisions for bad debt increased by EUR 10 million versus the previous year. This is linked to the exceptionally high revenues in the period and as a result of the high receivables, which obviously grew also the provisions for bad debt. But please note that to date, we have not yet experienced any significant deterioration in our overall credit portfolio nor in our past Qs. As for other provisions and write-downs, here, as you might remember, in H1 '22, we released a legal provision for EUR 12 million as a result of the positive settlement of certain claims with suppliers and with other institutions, while 2021 had been negatively affected by an asset write-down. Please note that in this line item, we also booked the impact of the [indiscernible] decree, i.e., the price cap on renewables for approximately EUR 5 million. As for financial charges, they were positively affected in 2022 by the reduction in our average cost of debt. This is a remarkable result, especially considering that the overall market is actually moving as you very well know, into the opposite direction. And we closed the 2022 with 1.6% of average cost of debt versus 1.7% in 2021. This result was achieved thanks to our high share of fixed rate debt. I would say an optimized sourcing of our funding during 2022 and the overall prudent management of our liquidity. In this line item, you see also there is an impact for EUR 21 million of a derivative as a result of the unforeseeable sudden change in the ARERA index used to set gas and heat prices. The index was changed from Pfor to PSV in the summer of 2022 and this, as I said, affected a derivative, which accounted for EUR 21 million negative. No particular remark on taxes here, I would only comment the impact of the Contributo di solidarietà decree for EUR 27 million. out of which EUR 3 million are related to 2023 Italian government budget law. Minorities were up EUR 40 million year-over-year. This thanks to the good performance of our non-fully owned subsidiaries, above all the WTE in Turin. And as a result, our group net profit reported for the year reached EUR 226 million, which is down EUR 77 million versus prior year. However, if we adjust above this number and 2021 for all nonrecurring and one-off effects we experienced in the year, and I remember in [ 2021 reminder, ] in 2021, the impact was positive for the one-offs for EUR 40 million. And in 2022, it's negative EUR 27 million. The adjusted net profit number was EUR 253 million, i.e., down only 3.8% versus prior year. If we move to Slide 9. If we look at the net financial position evolution, net debt increased by EUR 441 million year-over-year, reaching EUR 3.3 billion at the end of 2022. This is a result mostly of the acquisitions made during the year and the dividends distributed while industrial investments, as you can see from the chart, were fully almost fully absorbed by the strong operating cash flow generation in the year. Here, I would like to stress and bring your attention to the very good performance of our change in working capital, which remained more or less flat year-over-year as a result of 3 main factors: one, the partial disposal of our gas storage towards the end of last year to accelerate the related monetization and also to avoid the potential write-downs. Second, an optimized time to cash. And third, we continue to benefit throughout 2022 of favorable payment terms with our energy suppliers. These 3 elements more than offset the negative impact of the increase in receivables as well as the impact of [indiscernible] installment payment provision and of the temporary elimination of system charges introduced by the Italian government in 2022. Last comment, the mark-to-market or fair value of derivatives, which was positive for EUR 117 million at the end of the year. This mostly linked to our interest rate hedging positions. I would like to stress the fact that throughout 2022 and as of today, Iren does not have any meaningful exposure to margin calls on its energy derivatives. I would now hand it back to Gianni to go through our 2023, 2030 business plan.

Thank you, Anna. As mentioned, all our pillars are actually confirmed and strengthened by the new scenario. The -- first of all, the 2022 results and the investment carried out last year that anticipated plan from what was forecasted. Confirm the effectiveness of our capacity to put in place the investments that are foreseen. Most of all, the 3 pillars are in line with what we expect the major trend that will lead to particularly green, the leadership in green transition is reinforced the trend towards the expansion of renewable capacity and we have been successful last year in implementing, for the first time, the structure that is operating in this sector. As well as the investment in new waste treatment capacity is going in the right direction, supporting this pillar. Local presence. We have proven that this pillar is able to generate value for the company and for the community that we serve. With our know-how and the relation that we have with local institutions, we are the ideal partner to capture opportunity deriving for, for instance, Repower EU funds, we have been able to capture funds and contribution this year for EUR 160 million . To define private partnership contracts that solve local needs and extend our concessions, to boost energy efficiency programs in partnership with local authorities and to exploit energy community opportunities. In addition, quality excellence in service quality across all business is an [ abilitator ] of our 3 pillars, stretching from client coverage and effective physical presence and contact -- direct contact with our clients, enhancing also and taking advantage of the digital technology, but recent sector macro trends have further reinforced our vision as we can see on next slide. In particular, geopolitical effect that we experienced last year, like energy crisis has increased and the increased commodity prices reinforce our intention to carry out investments on and expand our renewable capacity and develop energy community using our local presence as an accelerator. The disruption of logistic supply chain, reinforce the value of having recycling plants. They recover a wide range of materials such as electronic waste plastic, wood but also rare materials from electronic waste. The European regulation framework has pushed electrification on all sorts of [ consumption heat ], of course, but also acceleration in e-mobility will lead to increased consumption in electricity. And energy efficiency has become one of the pillar of main initiatives that EU is putting in place. Moreover, Repower EU funds are focused in most of the area where we invest and strategic projects can be developed in partnership with our local authorities in order to capture the opportunities. On the macroeconomic front, we experienced a strong increase in inflation and interest rates and our reinforced position on regulated activities is acting as a shield, confirming the intention to go in this direction in our strategy. Having confirmed the pillars, we also confirm the targets that we presented last year. First of all, we are confirming and reinforcing the investment plan that we have in place that will grant growth in the future. And we are projecting EUR 10.5 billion accumulated gross investments in 2023, up EUR 200 million versus a similar figure of last year. EBITDA grows 7.4% out of compound rate -- average rate versus 6.9% reported in last plan . And we confirm the commitment to keep our leverage below the 3.4x target, of course, arriving too much better performance by the end of the plan. Additionally, we confirm the intention to invest mainly in sustainable growth. 80% of our total investments are going to be inside the sustainable frameworks, particularly we committed to reduce the carbon intensity of our electricity generation to 175-gram of CO2 per kilowatt hour, a path that will lead us to the carbon neutrality in 2020 -- in 2040, in line with science-based target initiative. We also aim to double our treatment capacity of waste up to 5 million tons per year in 2030. And we are targeting 20% losses in our network leakages in our water network from our current performance of 31%, which is already much better than the average in Italy that is 40%. On the local presence front, we confirm the intention to invest in our reference areas and reference regions, 85% of our resources, expanding our presence and our client base, both in water collection and in water distribution and waste collection of water distribution and district heating. We are going to develop energy community as a mean to grow in renewables, but also to reinforce the relation that we have with our clients, targeting 400 megawatts by 2030 with more than 250,000 clients linked to this form of contract. 50% our investments are going -- are intended to improve quality of service in order to reach leadership in the areas and in the services that we will provide. This is a key success factor in order to grab the opportunities that we envisage in the business plan. And we are going to improve on different dimensions. On industrial KPIs, such as increased purification capacity of water by 15%, we will increase the structuralized water network to 90% in order to manage real-time operations also in this network. We will improve commercial KPIs increasing by 55% the new stores and improve the physical connection with our clients. In addition, we will in-source 75% of customer care key activities in order to grant the highest quality of service to our [ final class and ] customers. And on the digital front, we will take advantage of technologies arriving to 100% of energy meters installed and improve the quality of service, for instance, the reduction in interruption frequency by 40%. An example of how our investments interrelate and take advantage of the 3 pillars of our strategy is the way we are developing renewables in our business plan. And first of all, the starting point in 2022, starting from scratch, we have been able to install 145 megawatts of new capacity, of course, in part from acquisition, 70 megawatts are under construction and will enter into operations during this year and more than 400 megawatts are under authorization. So this is internal development and 900 megawatts of new capacity has obtained the connection to the grid, the first element of the authorization process that will lead to additional pipeline. This enables us to increase the target that we envisaged last year to [ 3 gigawatt ] of new capacity by 2030 instead of [ 2.2 gigawatt ] as we presented last year. And thanks also to a combination of energy community solutions that will boost the development of our initiatives, especially in the North, but also a program of offshore wind that we are developing and from which we had already the connection to the grid granted. This will be developed with a new model in which Iren will develop and operate the plant without minimizing the investments that are going to be performed by the company directly. In order to improve the stability of our -- and the returns of these investments, we have also included in our portfolio, PPAs with clients reaching 60% of total capacity and this will stabilize returns in the long term. And in addition, the growth will be accelerated using and taking advantage of a minority partner that will be included in the venture next year. Overall, here, you see that our plan is sustainable with 80% of investments classified as sustainable and 75% is eligible in the EU taxonomy. But overall, we can report that our investments are 70% in 2 businesses that are regulated or semi-regulated. And in addition, our plan is significantly flexible because 30% only of our total investments are devoted to maintenance and so they are not -- cannot be deferred. 12% of investments are foreseen as external growth. So the plan is highly controllable. And 20% of investments planned are backed by external funding, both from private sectors and from public funds. In addition, we have identified additional opportunities for growth that are not included in our plan that are all involving regulated businesses. Some of these you already know, such as Gioia Tauro LNG plant, regasification plant that might be included in the [ Mate ] reinforcement plant that is aiming to create a Mediterranean hub for LNG. This is going to be, of course, an investment that eventually will be granted tariff to be implemented. But we are looking also additional WTE infrastructures in the South in investments in the water network also in the south of Italy where leakages are extremely high above 50%. And purification of water is highly -- is very far from a European standards. New district heating infrastructures will be an option in case new funds and contribution will be granted on these kind of projects. Overall, we have spotted EUR 1.5 billion of additional investments in which we aim to play the role of developer and manager, bringing with us professional investors that will guarantee returns on -- and sound financial management of these initiatives, minimizing capital expenditure from Iren . Let's move forward to the action plan. We are going through the different networks. I will briefly highlight the main elements of the action plan to show that the concrete actions that we are putting in place. On networks, we focus on provide high quality. So most of the investments are improving the networks that we serve and also in improving our operational efficiency. Infrastructure improvement will lead to a doubling of the RAB, which will reach EUR 5 billion at the end of the plan. This is a combination of investments in our areas plus geographical expansion. In particular, on water networks, where the RAB will grow the most. We are investing in -- particularly in purifier. We have 5 plants under development and the revamping of existing plants, plus inorganic growth outside our regions. In electricity, we invest in order to have by the end of the plan, a Smartgrid that is ready to serve higher consumption per client and to host mobility electrification. On gas network, instead, most of the investments are in granting high-quality standards on our networks, but -- and additional tenders are envisaged after 2026. Of course, I recall the fact to all of you that we are project in 2023, the sale of a minority stake in a special purpose vehicle that is collecting all the gas assets of our network. Overall, the project just described amount to EUR 3.6 billion of investments, of which 60% (sic) [ 59% ] are located to water network and the rest evenly split between electricity and gas. And this will lead to 7% year average increase, reaching EUR 730 million by the end of the plan. It's worth mentioning that this EBITDA growth is envisaging the constant WACC remuneration, even though interest rates and inflation have increased significantly over this period. In waste, we are [ waste is the ] one of the areas in which we are investing the most and is part of the green transition pillar. Starting on collection. We -- in order to guarantee flows to saturate our treatment capacity, we are envisaging the expansion of our geographical presence. This is going to be through consolidation, M&A and tenders and we are projecting to grow collection flows to 80%, reaching 3.4 million tons per year collected. We are also pushing for sorted waste share, reaching 77% by the end of the [ plant ], using also and pushing the rollout of “pay-as-you-throw" model on the tariff scheme. On Waste Management, instead, we are going to develop 22 plants over the plan, 70% of which are authorized and under construction and will enter operation in -- before 2026. Most of the capacity is focused on material recovery, organic fraction, wood, paper and plastics. But we are adding to our business lines, also electronics, textile and batteries. In the plan, we are also -- a reprogram the capacity of organic waste treatment plants in the north due to overcapacity signals that we are experiencing in the short term. EUR 2 billion are planned to invest in this sector, 64% in new treatment capacity and 36% in collection, leading to a 7% growth in EBITDA, as shown in the figure. On energy, the development of renewable capacity to adding 3 gigawatt to our current hydro capacity. This is going to focus mainly 70% on solar, 30% of wind. And on top of this, we are projecting to extend our hydro concession, thanks to the renewable we have recently posted presented to the institution's private -- public-private partnership proposal that is under evaluation by the Piemonte region. By the end of 2030, as said, we will reach 3.6 gigawatts of renewables under management. In this area, as I said before, we are projecting and looking to develop our renewable portfolio with a strong share of long-term PPA to be developed along with our plant, but also that will involve third-party plants, so without our direct investments, strong support of energy communities will be performed through 2 models, the producer model and the seller model that I will explain better in the following slide and the codevelopment of offshore wind plants in order to exploit the value of development of new infrastructure in this sector. Furthermore, we will develop storage systems combined with renewable capacity as this will come into the money. Thermo electric generation is part of the carbonization program that we are envisaging. So we are -- we will invest in flexibility, particularly on air cooling facilities in our plants in order to tackle the incentives that Terna is envisaging for the future. But during the next months, we will conclude their cooling system in Moncalieri. And we are studying a similar option for Turbigo. As already said in previous year, we are assuming to sell off in 2026, Turbigo facility that is the only plant that is market exposed and not linked to a district heating infrastructure. Regarding district heating, we will focus our plan mainly on expanding the existing network and to connecting new clients on existing network, whereas we will analyze new areas and opportunity to invest in different municipalities if the economic conditions will be there and the contribution will be granted. On energy, driven mostly by the renewable investment plan, 70% of total investments in this area will be focused on this area, whereas all the district heating and thermal will evenly share the rest of the investments. Overall, EBITDA will grow 5%, also taking into consideration the exceptional remuneration that we had in 2022 on production. On market, we will improve client satisfaction as a priority in this area. But we are also -- we are giving an impulse to energy expansion of energy clients, reaching 2.6 million clients also leveraging on liberalization of the market that is planned in 2024. And we will also push for PPA agreements with clients in order to stabilize the relation to -- in long-term fashion. Cross-selling of IrenPlus services as reported in 2022 will be pushed even further arriving to 40% target by the end of the plan. We will focus also on rebalancing acquisition channels, pushing and changing the push channels that have a higher churn and concentrate on lower-cost channel that habilitate clients to better contractual opportunities. Greater attention to customer satisfaction is part of the plan. In doing this, we will reinforce our networks of shops with new -- 42 new facilities and increase the number of clients and the interactions that will be internalized with our personnel. Most -- almost EUR 90 million per year will be the investment in client acquisition that will be performed during the plan. This will lead to an average 7% growth in profit -- I'm sorry, 5% growth in profitability, taking into consideration an average normalized profitability in 2022 that had said before, exceptional downturns. On Smart Solutions, the main focus of this business will be on energy communities that become a key success factor, both in the relation with our institution and with our clients. In particular, we have developed 2 types of model, the producer model in which Iren is the owner of the plant and the investment will be financed from the sale off of the energy plus the interaction and the contribution from clients that will take advantage of the incentives by the tariff. And the seller mode in which Iren sells the plant and then plays as the manager of the asset software back office activities, charging a fee to the members of the communities. Also a key element of the development of Smart Solutions will be the interaction with public institutions with the renovation of public buildings, such as schools, hospitals, and public offices. Here, energy efficiency services are the key to tackle this kind of business. And smart services such as security, parking areas, access to limited traffic areas in cities and integrated management of complex projects, such as public transport for which we are going to develop a public partnership -- private and public private partnerships. Normalized for the exceptional results in 2022. Also, this business has a significant growth in EBITDA of 10% on average during the plan. I will now hand on to Anna for the financials of the plan.

Thank you, Gianni. So looking at the evolution of our profitability across the plan, we see that both EBITDA and net profit are expected to grow substantially by 2030 with target COGS at 7% and 9%, respectively. This is in line with the previous plan. Similarly, also in line with the previous plan, both profitability metrics are expected to generate significant value already short medium term with EBITDA expected and targeted to grow at an [ 80% ] net profit at a 10% CAGR within the first 4 years of the plan. The slight contraction of the net profit in the second half of the plan beyond 2026, is mostly a result of the overturned interest rate scenario, as we've all seen in the markets, which obviously contracts slightly our net profit in, as I said, in the second part. If we focus on EBITDA and its growth between 2022 and 2030 on the right-hand side of the slide, out of the EUR 800 million of value being generated across the plan, EUR 580 million will come from organic growth, i.e., from the development of renewables, the SOPs of the new waste plants and the investments in water networks. EUR 170 million will come for inorganic growth, i.e., M&As, consolidations and the participation to new tenders. Asset rotation will impact negatively for EUR 60 million. This is, as Gianni already said, the sale of the Turbigo plant. EUR 100 million will come from efficiencies and synergies. While as for the energy scenario, we are expecting, first of all, a full recovery of the profitability of our market business unit, a normalization of hydro volumes and of bonds, contraction of the capacity market and then a partial termination of our energy certificate. So overall, the scenario and regulation will impact positively for EUR 30 million by 2030. Last but not least, we will continue to see a balanced growth of our EBITDA with the share of regulated and semi regulated activities expected to remain constant at around 70% across the plan. Moving to Slide 33 (sic) [ 32 ] We see the net debt evolution across the plan. So net financial position will grow from EUR 3.3 billion at the end of 2022, as we already saw to EUR 5.1 billion by 2030. And mainly as a result of the investment plan Gianni went through in the previous slides. So with net CapEx of EUR 9.5 billion. This figure here differs from the EUR 10.5 billion we saw earlier simply because this number here is net of the related contributions. This amount will be funded through the EUR 8.7 billion of operating cash flow generation you see in the chart and then EUR 1.2 billion of equity injections and asset disposals. This is the sale of the Turbigo plant and then the equity contributions of minority financial partners into our gas distribution vehicle and to support the development of our renewables. This robust operating cash flow generation, if we focus shortly, the EUR 8.7 million is a result of the strong EBITDA growth we saw in the slide before and then a continuous optimized management of our working capital. If we move to the next slide, the debt profile evolution on the left-hand side of the slide. Net debt-to-EBITDA will remain flat and constant across the plan and always very well below the 3.4x and this gives us, obviously, confidence in reconfirming our commitment in maintaining our current financial ratings with our 2 rating agencies, S&P and Fitch. As for the average cost of debt, you see on the right-hand side, we start obviously from a very good position. We saw it at the beginning of the presentation, we closed 2022 with 1.6% average cost of debt. Then obviously, compared to the 2021 plan, the interest rate scenario has completely changed. So we updated our assumptions here. But as you can see, we will still maintain our average cost of debt below or around 2% for the next 24 months, and then it's going to gradually increase, reaching an average of 2.4% across the second half of the plan. Again, we feel this to be a very good objective and good result, and it will be achieved, thanks through, again, our high share of fixed rate debt, our strong and long duration. We will continue to have an optimized sourcing of our funding and always continue to tap sustainable finance resources. As you see here, we even expect to increase the share of sustainable finance from 76% at the end of 2022, even reaching almost 100% by the end of the plan. Moving to Slide 35 (sic) [Slide 33]. Here, we've summarized the key elements, which confirm the resilience and the low level of execution risk of our plan. First of all, our strategy is perfectly in line with EU directives and in particular, with the related ESG standards, which by definition are obviously at no risk. Gianni already said, 80% of our investment will be sustainable and 75% eligible for EU Taxonomy. And on top of that, several strategic projects and several investments will be funded through REPowerEU resources. We expect and we assumed in this plan EUR 150 million of funds from Repower EU. And to date, compared to 2021 plan, we obviously have a much better visibility on this fund. Third, we will continue to invest on regulated assets. This is, as you very well know, the real main shield against inflation and interest rates. As Gianni already said, also here, we assumed constant WACC across the plan. So any change in this assumption will obviously be an upside to the plan. The plan -- this updated plan is also with limited execution risk given a reduced amount of inorganic investment. This is because we already fast tracked several acquisitions and consolidations over the past 1.5 years plus beginning of this year, we were also -- we won important tenders in relation to waste collection service [indiscernible] and to water service in Reggio Emilia. We also have a much better visibility on some of the investments embedded in this plan, especially in relation to the waste business unit. 80% of the incremental EBITDA by 2026 is linked to the SOP of new plants, which are either already authorized or in the process of being authorized. On top, 70-megawatt of renewable capacity will come on board by the end of this year and we already have a pipeline of construction authorizations underway of more than 400 additional megawatts. Finally, we believe this plan to be less exposed to the volatility of the energy scenario. For example, because the renewables growth, as we saw in the previous slides, is strictly connected to the development of PPAs also with clients. And this will maintain our margins very well-protected and constant across the value chain and would also help us reducing the churn rate at our clients. I would now hand it back to Gianni to go through our 2023 outlook and guidance and our closing remarks.

Thank you, Anna, and thank you, everybody for the patience to be connected up to now. We -- first of all, we want to communicate the guidance for 2023. As you have seen, we have presented significantly and sound results in 2022 and a strong strategy that is confirmed for the future years. In line with these 2 elements of strength, we are projecting for 2023, an EBITDA growth of 6% versus 2022 coming from the recovery of the profitability of the market view. The organic growth coming from waste plants that phase in and of course, the growth in RAB and the full availability of the terminated plants for this year, plus the full contribution of Sei Toscana for the full year. We also project above EUR 2.2 billion of investments, of which they include, I'm sorry EUR 1.2 billion, yes, I'm optimistic -- that includes EUR 300 million of third-party investments and contributions. And we also project a very sound financial management as last year, that will project EUR 3.3 billion plus net financial position over EBITDA by the end of the year. This is also thanks to the cash-in of the sale of the minority stake in the gas network. Going to closing remarks. First of all, the strong performance this year enables us to confirm the dividend policy that we communicated last year with a 10% growth since 2020. And so targeting EUR 0.11 per share for this year. This will be the proposal to the shareholders. And the visibility of the future growth allow us to sale the targets of our plan with significant confidence. This is because of taking advantage of the 2022 results and the fact that most of our initiatives come from internal development with authorized investments. In additional, we presented to you additional opportunities that can be developed, finding financial partners that will bring added value to our strategy in the future. Thank you for the attention and I will leave the floor to Giulio for a Q&A session. Thank you, Giulio.

You're welcome. We are now ready to take questions from the financial community first. Please follow the instructions from the operator.

[Operator Instructions] And the questions come from the line of Javier Suarez from Mediobanca.

I have several questions. The first one is on the supply display activity that has been obviously a difficult business unit in 2022. I think that during the presentation, you mentioned a normalization in the profitability of this unit in 2023. I think that you mentioned changing hedging strategy and also kind of the commercial promotion of new PPA contracts with your client base. So can you elaborate for us on the lesson that has been learned on the commercial strategy of the company in 2022 impacting the new strategic path in 2023, and that is supporting that improvement in profitability for the supply division. That would be the first question. The second question I have noticed the significant improvement in net working capital in 2022 and also that the business plan is not assuming any working capital absorption through the plant. So you can elaborate for us in the assumption behind this improvement in the working capital absorption that again has been paid through last year. Then the second question is, obviously, the company is reflecting higher cost of financing, but the company is not affecting if I'm not wrong, the assumption on remuneration for the network and the assumption for the remuneration of the [indiscernible] stability, so you can help us to understand why the company has taken that decision? And then on the dividend policy, I noticed that the dividend policy has been maintained to 2025 and then while the range has been improved for the payout if we position ourselves in the middle of that range in absolute terms, the dividend versus your previous guidance should be lower, both in 2026 and 2030. So do you think that, that is a fair comment on a fair decision or what would be the answer to that? And then the very final one is on the logic for the M&A activity. And so you have been mentioning the possibility of the commission in [indiscernible] also selling a minority stake on the [indiscernible] . So the question here is a strategical one, which is the logic behind through exercise of M&A strategy, what do you want to change from the profile of [ period ] moving into 2026 and then 2030?

Thank you, Javier. I'll take a couple of questions, and then I'll leave the others to Anna. First of all, what changes in supply versus last year? First, we have, as mentioned in the presentation, we have changed the way we hedge and we consider a natural hedging in terms of volumes given the high variability that we need to expect on hydro volumes. So for a significant share, we basically adopted a double hedging strategy, both on the value of hydro production and on the cost of sourcing of client consumption. This is -- will protect us in the future from -- and this year specifically, given the fact that we are experiencing a significant drought also this year. This will protect us from the impact of this drought on the market on the supply side. We also, by winning the recourse on the provision that was issued by the antitrust, we have been able as all the rest of the market, but also the norm is supporting us. We have been able to reprice the clients that we projected to reprice last year. This, of course, allow us to rebalance particularly on electricity, the cost of sourcing versus the cost of delivery. And of course, in a scenario in which cost of energy is reduced the fact that we have higher pricing value recovers significantly margins. We are, of course, monitoring churn in order not to be impacted by this effect that has been significantly lower last year. We are also I would say, what else on supply?

I think you said it all.

Yes. On the working capital, we -- closing of the year, given the fact that repricing was not possible, the supply business focused on rebalancing the payment deadlines versus the cash-in terms. And this has led to a significant improvement in working capital restoring the negative contribution on working capital that was present before the crisis in 2021. And this is the element that will continue next year given the fact that the contracts that have been signed by the end of the year are -- have a longer period of time duration, I'm sorry. In addition, we have been able, as Anna was mentioning, to sell the working capital, the storage of gas before the end of the year. This has had an impact on working capital. We will not have a similar effect next year because we have participated to the tenders of [indiscernible] storage. So we have already acquired all the storage facilities for 2023 that we need without having any impact on working capital. So we are not expecting any change in this effect. We also intersected the risk of having to write off the value of the storage by selling it before the market price of gas dropped during the winter.

Gianni, if I may, one thing, that in any case throughout the plan, we did assume a slide, the working capital absorption between EUR 200 million and EUR 300 million in any case with decreasing scenario, as you might remember also in the past, Iren has always benefited from limited to non-working capital absorption or actually working capital generation, especially at our market business unit. So throughout the plan, as I said, the scenario is going to normalize gradually and this has gone -- will have a positive impact on our working capital because as Gianni was saying, we'll continue to benefit as we saw even in a difficult year like 2022, Iren was able to benefit from very favorable payment terms from our suppliers similarly to the past. So this will continue also in the next years.

On the difference between the rising financial costs and the fact that we have not updated the regulatory returns, this is just taking into consideration the normal approach that we always applied to our business plan. As we did last year, where we presented the plan before the update of the WACC and therefore, we projected similar WACC all through the plan. We are doing the same this year. We are projecting the same WACC that we have from regulatory business all through the year. Basically, we are not betting on the review or the level of review that will be granted by ARERA in 2 years and even next year because we expect a review of the WACC, given the fact that interest rates have changed so much. Yes. This will be an upside. You can have -- make your own calculation on this. I think it's quite straightforward. The logic on M&A and then I will leave the dividend answer to Anna. We are looking -- or we see a value in creating partnerships with professional investors. That, of course, has 2 dimensions. First of all, contribution in capital can allow us higher investment rates. So to capture more growth opportunities and it is straightforward. So to accelerate renewables, we are looking for a partner so that a business that is not able to generate by itself, its own cash can be financed by external contributors. We also see a value in partnering with professional investors in order to guarantee to all our shareholders that we have a sound financial approach in capturing investment opportunities, and we are not investing to conquer any local authorities. And this is definitely an approach that we will try to develop even more. In addition, we have identified specific businesses in which we act as a developer itself. So we generate the opportunity for investment and we envisage this investment to be for third parties. We see a market opportunity or actually an opportunity to generate investments -- sorry for the repetition -- investments opportunities on regulated business that Italy is not as a market providing. In general, infrastructure funds are under invested Italian assets that are -- have normally a sound profitability. And the ability of Iren to generate investment opportunities can be a source of value generation for our shareholders if we put it in place and this will generate additional cash flow that is not projected in our business plan.

Yes. On dividends, the target was to maintain dividends in absolute terms, unchanged versus the previous plan. So since the net profit, as you already spotted and as we said, is going to contract slightly versus the old plan in the second part of the period. We revised the payout ratio accordingly to make sure that in euro millions the numbers were going to remain the same as the old assumptions.

[Operator Instructions] And the questions come from the line of Emanuele Oggioni from Kepler Cheuvreux.

I have a few questions. The first one is on 2023 targets. You explained before that one of the main driver of the growth will be the recovery in the customer portfolio profitability. I'd like to check if I wonder if the EBITDA could reach the 2021 level, so above -- from EUR 14 million to above EUR 100 million at least or what else? And the other -- what are the other positive or negative moving parts you are seeing in 2023, in particular, as regards you already mentioned the hydro production could be -- could suffer the current drought in Italy in -- at least in West -- North and West part of Italy, so in your core regions, the Western [ ARPs ]. So what's the expected volumes for the hydro production in 2023? Focusing on 2026 EBITDA target, I noticed that compared with the old plan, there is a lower contribution from networks by some EUR 100 million compared with the previous plan. So could you explain why? Because I suppose also last year, also the old plan included the unchanged WACC in the longer plan period. And I noticed an increase in the generation business EBITDA from EUR 230 million to EUR 370 million. So I wonder if you could detail if you have more color on the breakdown of the generation business in 2026 in terms of organic growth, acquisition contribution, in particular in renewables and the price effect so the energy price scenario compared with the previous target for generation business EBITDA in 2026? And in general, my question on 2026 targets. The third question is on the organic CapEx and the organic EBITDA at the group level and not only asked before for the generation base, also at the group level on a like-for-like basis without acquisition, without further acquisition or consolidation in a waste business or renewables or whatever? And in a final question, if I may, could you clarify this EUR 1.2 billion equity injections and also disposals compared with only EUR 60 million of EBITDA lost from the asset disposals?

Yes. Thank you very much. First of all, a hint of the profitability that we target for the market is in a slide in the presentation where we normalize the profitability at EUR 120 million. So we expect, as a matter of fact to recover the profitability given the fact that we have a higher number of clients versus what was projected in the plan last year. We have recovered the individual profitability per kilowatt hour or per cubic meters of gas sold. And therefore, we are able to extract more value. And in general, higher prices with a similar marginality in absolute terms give a higher profitability. So this is more or less the trend. Of course, we have invested and we have a policy that reinforce at this point in time, our hedging policies over 85%. So we will be limitedly exposed to variation of prices from now on, but this is more or less what we expect on our clients. Then of course, we are still exposed to climate. As you know, a mild winter determines lower consumption in gas and in district heating, but that is something that we have to average out on a longer period of time. On hydro profitability, as mentioned in our 2022 results, we had an impact of the reduction in hydro production that was EUR 85 million versus previous year. This was evenly split between generation and supply. On the supply side, as mentioned, we are not going to experience a similar impact because we have changed the quantities that we assume as natural hedging. And therefore, on the sourcing side, we have been more conservative on considering the production of hydro. We are foreseeing a similar production of hydroelectric plants versus last year in the range of 800 gigawatt hour in our projections. Even though the rain that has been limited has been slightly higher than last year, even though the level of basins is much lower. Overall, so the impact will be concentrated on generation given the fact that on average, last year, prices of hydro was very low, considering the cap that was imposed on 50% of hydro production. We will -- we are expecting a slightly higher per unit price for kilowatt hour. So the impact should be lower than last year and recover part of the profitability that we're expecting. On lower network contribution, as said last year, you mentioned EUR 100 million of lower contribution. Last year, we projected WACC 100 basis points higher than what is currently the regulation with an underlying cost of capital and inflation on costs much lower. We are now on the flip side in projections. We have included in our forecast increased operating costs due to increased inflation, higher cost of capital, but we have -- for all the period until 2030 a lower WACC. The delta is probably even split between the higher estimates that were in the plan last year and the lower estimates that we have in current plan.

I would add only one thing, but probably you spotted it at last year in 2021, plan district heating was within networks. So there is also a change in, let's say, representation. So district heating in this plan is within energy. But if we take into account this change and as I said in the presentation, I would say, having said what Gianni just commented, the changes are negligible, I would say. I mean, the networks EBITDA is very much in line with the old plan.

Okay. Can you...

Yes. I would -- yes, on the EBITDA growth between 2022 and '26, your question in relation to the organic portion. Organic growth is a little bit less than EUR 200 million. This is compared to the EUR 580 million over the 8-year period. And the inorganic portion is around EUR 80 million compared to the EUR 170 million until 2030. The contribution of the scenario on the other hand is much higher in the first part of the plan, obviously, because the normalization of the energy scenario comes more towards the second part after 2026.

Organic CapEx?

Organic CapEx. I'll come back to you.

Okay.

You wanted to comment to the EUR 60 million.

The equity contribution.

Exactly the EUR 60 million. So the reason is the sale of [indiscernible] is a sale of 100%. So obviously, we will consolidate also the related EBITDA after 2026. While the entrance of the minority partner into the gas distribution vehicle and into the renewable SPV and the renewable newco is going to be for a minority stake. So we will continue to consolidate the EBITDA also after the entrance of the minority investor.

I would assume that the EUR 1.2 billion are a combination of external contributions.

Correct. Equity injections.

And equity injections.

Yes.

Correct. So...

Equity injections and then the disposal of the Turbigo plant. Obviously, you mean the upfront cash-in and then the contingency support of -- also after the entrance also through equity -- further equity injections, yes. On the organic investments, I'm sorry, we don't have the number now until 2026 off the top of our heads, but Giulio will provide you the figure after this call.

And the questions come from the line of Roberto Letizia from Equita.

If I can stay for a while back on hydro. So pleased to hear that you've got already a very conservative assumption, but I'm a bit confused on the fact that you also mentioned some different way of hedging between the size of your business, the supply and generation. So I was actually wondering what happens if instead we recover working across, we will not go below that. But in case we recover some 10% or even more production on the hydro side, so I wonder if we get improving through the year on the hydro production, do you get the benefit or because of the fact that you hedged everything to avoid any volatility from prices and availability of hydro, you don't get any benefits on that. Can you just let us understand how it works in 2022, which seems to be a bit different from everyone, trying to protect against this volatility elements? Can you give us some more visibility on how -- on when do you expect minority gas to be disposed? So just a little bit of timing on how these components are going to happen in the plan. And just wondering if you could give us some visibility more on how much renewables do you expect to install in '23 and '24, just to have a sense on the short-term quality of the pipeline that is going to be added in the next years very short term? And then a detail on the impact from the derivative on the change of the indexation from ARERA? So the EUR 21 million that you reported as a negative impact this year. Just wondering if this is going to happen also in '23 or by the way, it is still tough. Now you're full up and running with the new indexation, and we are not going to have this minus EUR 20 million on profit -- on interest rates, sorry, in '23?

On hydro hedging, maybe I had to clarify better. We were assuming a great part of the volumes, netting them from the consumption in order to taking into account the natural hedging elements. We have now decided to limit the amount of hydro production that is naturally hedged with clients, consumption and to decouple the hedging. So we have 2 hedging contracts, one on the sale and the margin on hydro production, which will take into account volumes that are lower than the one that, on average, you estimate. And on the other hand, clients the supply business has a higher share of sourcing that is hedged from market prices and so assumes purchase of energy from the market with a hedging contract as back up. A sterilizer of the oscillation of the prices. So in this case, if we have a reduction of consumption overproduction on hydro, we will not have uncovered clients that we need to source of energy for and we can take full advantage actually of extra production of hydro that is not hedged, and therefore, can deliver full market price if it comes. So we are still...

So basically, the upside and downside is just linked to the pure margin of hydro margin of a single additional or negative megawatts from hydro? Is that correct? So no market risk on that?

Maybe I didn't make -- I didn't understand that.

No. Just mentioned, if I get -- if I get 1 megawatt hour more from hydro, I get fully the pure hydro margin on that megawatt hour. I don't have coverage risk because you change the hedging policy.

I don't have -- I have a full upside for extra production of hydro. So we are praying for rain every day.

Yes. But just to be sure, of course, so I do every day. And -- but I just to be sure because I have to repeat it to. You have flat hydro production this year?

We assume 800 gigawatt hour of -- so is a slight increase, but very small. On gas disposal, we are projecting at the end of this year as the finalization of the contractor. So the closing -- on P4, we -- this is a totally exceptional measure. Of course, we covered all our position. There is a policy here and that we cannot, of course, neglect. And we covered all our winter positions with P4 that was the index that for regulated businesses was driving the tariff. And this, for us, works for all gas contracts that are on the regulated clients and for all the heat consumption. So it's very important for our supply side and the authority in August changed the contract -- terminated the contract.

The index.

The index. So we have reported the loss on that derivative that it doesn't have any more, any real asset as a counterpart. In part on the EBITDA for around EUR 40 million and that is to take into account the fact that from the moment in which we signed the derivative from the -- to the moment in which the authority decided the change of the index even though no gas was consumed, the spot price, of course, changed and therefore the mark-to-market value of the derivative changed. And this is more or less a EUR 40 million of exceptional loss on EBITDA that we have reported this year. Plus we have a part, which is the variation of the index after August that is reported as a financial impact -- extraordinary financial impact below the line. And that is the variation of the same index after August to the end of the year. We are not expecting any additional impact this year of this variation.

Derivatives resolved at the end of last year. So they were fully executed then in December, I mean, Q4, so the result within December.

So basically, '23 interest charges theoretically will benefit from 21 million in positive comparison?

Correct.

On the bottom line, plus EUR 40 million on the EBITDA line.

Of course, of course. Yes.

This is an important point, if I may, because it was a long debate we have with our auditors. And in the end, we agreed that until the termination, as Gianni was saying, of the index, the value of the derivative was going to impact EBITDA because it was still effective. Then until it was terminated, it became no longer effective and so we were able to at least account EUR 21 million below EBITDA. But to be honest, this is a great point because the full impact would have been -- is actually EUR 60 million, but for the...

The underlying asset disappeared in the moment in which the authority decided the change of indexes. So you have a derivative with no commodity, no underlying. And therefore, for us, it's a totally financial investment. But we adopted this conservative approach that impacts both the EBITDA, so the operational activity and the financial activities. But it will be -- of course, both of the impact are exceptional.

Renewables?

On renewables, we are projecting in 2023, 215 megawatts; in 2024, 300-megawatt; in 2025, 600 megawatts of its total capacity. And I think we answered to all of the questions.

We have no further questions at this time. I hand back the conference to you for any closing remarks that you may have. Thank you.

Well, thank you for the patience. It was a long call, but I think we have been -- we have tried to explain the results and to deliver the value of the program of investments that we are projecting. And I believe that we will deliver significant results in the future in line with 2022 performance. Thank you very much.

Okay. We thank all the investors and analysts connected. I'll be available for any follow-ups that you all have. And now let's have 5 minutes break, then the management will be available for journalists.