Naturgy Energy Group, S.A. (NTGY) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Naturgy's results presentation for the 9 months of 2020. This is Abel Arbat speaking from the Capital Markets team at Naturgy. We hope you and your families are well and remain safe, and we thank you for participating on the call. The results will be presented by our Head of Financial Markets, Steven Fernández; and our Head of Controlling, Jon Ganuza. Following the presentation, there will be an opportunity for live Q&A, as usual, addressed to analysts and investors. So without further addition, I will hand it over to Steven to kick start the presentation.

Thank you, Abel, and good afternoon, everyone. I'd like to start the presentation in Page 4. I think you've received the presentation earlier today. It is obviously related to the evolution of electricity and gas demands in the various countries where we operate. Now what's pretty clear here is that the impact of COVID-19 has continued during the third quarter of 2020. Power and gas demand across geographies seem to be hinting towards a path to recovery. But obviously, they remain below last year's levels. And I think it's worthwhile noting a tone of caution regarding the future evolution on the light of all the recent developments that we are seeing across Europe and across different geographies related to the evolution of the pandemic. If we move on to Page 5. What you'll see here is basically a comparison between the average of key commodity prices during the first 9 months of 2019 compared to 2020. And what you'll see is that they experienced decreases in the range of between 30% to 5% depending on what you're looking at. Obviously, you guys are very familiar with this data, so we're not go into more detail beyond, again, mentioning the fact that the evolution of the pandemic could have an impact on these figures moving forward. If we look at the FX evolution. It's clear, and you've seen it from the results published earlier today, that FX has had a pretty negative impact on our 9 months results. And indeed, LatAm currencies have continued to show an ongoing weakness compared to the average exchange rate of last year, and this is notably in the case of Brazil and Argentina, which have continued to deteriorate during the quarter. As regards Chile and Mexico, the currencies have remained more or less flat, as you can see here. Since the appearance of the pandemic and the start of the pandemic, currencies have depreciated against the euro, of course. Again, much like in the previous slide, it's worthwhile highlighting that the evolution of the pandemic may have an impact on the evolution of currencies moving forward. It's also worth noting that these important depreciations have not had an impact in inflation, and that plays negatively in terms of the tariff evolution in some of our markets. If we move on to our consolidated results, and we go to Page 8. Clearly, the energy scenario has remained challenging during the first 9 months of the year and specifically in the third quarter, with continued pressure on gas prices and the loss of competitiveness in gas procurement conditions in the liberalized activities, which by the way were also affected by the one-off costs linked to the recent gas procurement contract renegotiation. The 9 months results have also been impacted by the new regulatory framework, specifically in electric distribution in Spain as well as the volume capacity step-down, which was flagged well in advance in the case of EMPL, as a reminder, since February of 2020. On the flip side, it's worth mentioning here the progress on the renewal development plan with 2 new attractive agreements signed in Australia, which Jon will detail later on. And it's worth noting that with these new projects, the company increases its current capacity in Australia by than 50% to over 600 megawatts and confirms its commitment to renewables growth moving forward. As for results, group ordinary EBITDA stood around EUR 3 billion in the period, that's down 12% versus 9M '19, while ordinary net income reached close to EUR 700 million, that's down around 31% versus the same period of the previous year. Notwithstanding this difficult quarter, the company is still on track to deliver on its ordinary EBITDA guidance for 2020. If we move to the Slide 9. EBITDA evolution by businesses. Again, EBITDA reaches around EUR 3 billion in the first 9 months, primarily affected by lower energy demand and energy prices compared to the previous 9 months, which particularly impacted gas supply and International LNG. It's also worth mentioning the impact of the depreciation of LatAm currencies, which I highlighted before, to the tune of EUR 151 million in ordinary EBITDA. And again, to highlight that this devaluation has not had an impact on inflation and therefore on some of the tariffs. It's also worth noting that excluding the EMPL step-down, Infra EMEA has remained -- remains relatively resilient despite the negative scenario in regulation, which underscores the stability of the regulated businesses in our portfolio. Non-ordinary impacts in the first 9 months amounted to close to EUR 230 million. And they mostly correspond to restructuring costs linked to the implementation of the efficiency plan that's close to EUR 180 million and also upfront costs from gas contract renegotiations around EUR 30 million. Moving on to Slide 10. We also like to show the evolution of EBITDA from a different perspective, not just a business unit perspective but taking into the key account drivers. Here, you can conclude, again, as I pointed out before, that demand, FX and gas prices are responsible for most of the decrease, clearly very impacted by the COVID-19 pandemic. Efficiency has contributed to offset the negative scenario, while the benefit of gas contract renegotiations is something that hasn't been really visible on the quarter given that we are just now signing some of those contracts. In terms of cash flow, if we move on to Slide 12. Free cash flow after minorities and CapEx stood at around EUR 1.3 billion. It was mostly allocated to shareholder remuneration. It's worthwhile highlighting that during the third quarter, the company completed the cash payment of its first interim dividend for 2020. That was, as a reminder, EUR 0.31 per share. And we have also announced the payment of the second interim dividend, which corresponds to EUR 0.50 per share, paid on 11 November. We are committed to our shareholder remuneration as defined by the strategic plan to 2022. Net debt as of the end of this period, i.e., 30 September, stood at around EUR 14.7 billion. That's around EUR 500 million less than the year-end net debt of 2019. And this is as a result mostly of FX but also of the free cash flow that was generated in the period. As a result, net debt to the last 12 months EBITDA stands at around 3.6x and slightly above the 3.3x published in December of 2019. And with that, I'll hand over to Jon Ganuza to go over the performance of the different businesses.

Thanks, Steven, and good afternoon, everyone. Starting with Gas & Power on Page 14. Ordinary EBITDA declined 19% in the period, impacted by depressed energy prices and lower demand. In the gas, power and service sales businesses, industrial sales have been affected by the decrease of demand in COVID-19 and lower cash margins due to a low cash price environment. In the residential segment, we have been negatively affected by the decrease in customers in gas and electricity as well as mild weather conditions impacting gas residential demand. The agreement with several gas suppliers that Steven already mentioned should help to improve our commercial competitiveness and profitability in all our gas businesses going forward. In the case of International LNG, the loss of competitiveness in our open position has been particularly [ flat ] during the second and third quarter, where the spot prices have been at historical lows. Contracted sales already stand at 97% for 2020 and 85% -- 84% for the aggregate of 2021 and 2022. And hence, the upside of any rebound shall be limited, particularly in 2020. On the supply side, Naturgy has reached an agreement to extend its long-term LNG supply contract in Puerto Rico Electric Power Authority. The agreement extends the contract until 2032, increases the annual volumes to 2 BCMs with the possibility of reaching up to 3 bcms depending on Puerto Rico's gas needs. With regards to Europe power generation, our renewable capacity coming into operation and improved hydro production compared to last year have been offset by lower crude prices. Finally, international power generation has been lower compared to last year due to lower sales and margins in merchant activity. Naturgy has continued to progress on its renewable development plan and recently reached 2 agreements in Australia: first, a 218-megawatt wind farm located in Victoria state, which will start operation in second half 2022, consisting of a 15-year PPA contract with the retailer Snow Hydro; second, we have the award of 107-megawatt wind farm with a 20-megawatt hour battery energy storage system with the Australian Capital Territory at a regulated tariff, which is expected to start operation in the second half of 2022. With these 2 new projects, Naturgy increases its installed capacity in Australia by more than 50% and will reach 600 megawatts by the second half of 2022, confirming its commitment to renewable growth. So to summarize Gas & Power, it suffered from a decreased energy scenario in gas, but its ongoing contract renegotiations will help improve competitiveness. Turning to Infrastructure EMEA on Page 15. Ordinary EBITDA reached EUR 1.393 billion in the 9 quarter -- or in the third quarter of 2020. Gas distribution in Spain was negatively impacted by lower volumes due to mild weather and the economic slowdown related to COVID-19, especially in the first 2 quarters. Electricity distribution has not been negatively impacted by COVID-19 on an EBITDA level but was hit by the negative impact on the new regulatory framework which started in 2020. EMPL is impacted by the capacity step-down from February. Excluding this EMPL impact, Infrastructure EMEA results were relatively resilient despite the impact of COVID-19 and regulation, which are mainly compensated via efficiencies. Moving on to Infrastructure South LatAm on Page 16. Ordinary EBITDA amounted to EUR 590 million in the period, 17.7% lower than the previous year, mainly affected by the negative FX evolution of minus EUR 127 million across LatAm regions. It is important to stress that net of FX, the business in LatAm have had stable results. Besides the FX, COVID-19 is having 3 main impacts in our LatAm businesses: [ EBITDA ] reduction, which depending on the country and the client mix ranges from minus 1% to minus 30% since the bulk of the reduction is on the large industrial customers, which, on the other side, they have low energy margins. And therefore, the impact on the EBITDA is small. To give an example, Mexico and Brazil have experienced demand reductions of 14% and 25%, respectively. However, margin reduction on both cases have been of only around 6%. The second effect is an increase on delinquency, mainly in Chile electricity and Panama, mainly due to the provision to disconnected customers. Finally, there has been a deterioration in working capital due to the obligation to finance vulnerable customers, though part of the impact has been ameliorated by passing -- sharing this burden of the financing with the suppliers and the transporters. Finally, turning to Infrastructure North LatAm on Page 17. In the third quarter of 2020, ordinary EBITDA amounted to EUR 262 million, down 6.8% vis-à-vis last year. On the back of weak demand evolution, especially in second quarter and third quarter following COVID-19 crisis and a negative FX impact of minus EUR 17 million, which has been partially compensated by tariff indexation in Mexico and operational improvements of the Mexico and Panama. LatAm North has remained relatively stable despite the negative effects from FX and COVID-19. I will now turn it over to Steven for conclusions.

Thank you, Jon. And so we go on to Page 19. It's clear the COVID-19 has impacted the results up until the end of September. As we mentioned throughout the presentation, power and gas demand across geographies seem to be hinting at a recovery, but we have to be careful drawing conclusions based on the evolution of the pandemic. Meanwhile, currency weaknesses in Latin America have continued during the first 9 months. And in some cases, such as Brazil and Argentina, this has further deteriorated. In this context, the energy scenario also remained particularly challenging in gas, where we lost competitiveness in procurement conditions and have recently renegotiated terms and conditions on more than 50% of the committed volumes to mitigate the scenario. So in essence, we are taking steps to protect the results moving forward. On the bright side, we've also continued to make some progress on renewable growth. And as you've seen, we've reached 2 important agreements in Australia, making us one of the leading operators of renewables in the country and confirming our commitment to growth in this area. Considering the progress to date, again, we continue to state and reiterate our guidance of delivering on EUR 4 billion of ordinary EBITDA for 2020. Look, I think it's worthwhile bringing a dose of reality here. The 9 months results are unsatisfactory for the company. But you can rest assured that the company is not standing by idle. We are currently working hard on the strategic update, and to be frank, we're actually very excited about how the work is progressing. We are convinced that the new plan will address key market concerns, and we will be communicating the dates of the next CMD within the next few weeks. And with that, we can open up the line for Q&A.

[Operator Instructions] The first question comes from Fernando Garcia of RBC.

Fernando Garcia from RBC. First one is, could you explain the EUR 29 million upfront cost of the gas contract renegotiation? The second one, in the gas contract renegotiation as well. Are you reporting already some improvement in the -- of this renegotiation in the Q3 results? And finally, in your results note, you mentioned that you are seeing an improved outlook in demand and prices in gas. I wonder if you can provide more color on that.

Thank you for the questions. I didn't quite get the third one. But I will start with the second question. There is no -- in the figures that we have for the first 3 quarters, there is almost no impact due to the renegotiation. So the impact will be seen moving forward. And as far as the upfront cost that Steven mentioned, that is due to the renegotiations. It depends on how the renegotiation has been structured. So in this case, in case of one of the renegotiations that we've done, part of the settlement that we achieved that we think it has been satisfactory as far as improving the competitiveness of our contract, it has also led to some kind of adjustments that had to do with these contracts.

Regarding the last question, I mean, I think it's fairly obvious when you look at [ Forbes ] and when you look at your Bloomberg screens that there's a bit of what you could call perhaps an improvement in the outlook of prices. Key question here is whether or not it is structural, whether or not it's something permanent. Again, based on the evolution of the pandemic, it could change. But also bear in mind, very importantly, our open position is very limited. We have details on that on the Excel balance sheet that we provide you guys with. So just to be fair, any improvement into the gas prices moving forward, we are not going to be able to capture the upside 100%. We'll capture just part of that upside.

Next question comes from Javier Garrido at JPMorgan.

I would like to make an additional follow-up question on the contract renegotiations. You mentioned that has had basically 0 impact on the 9-month results. But if I am correct, the renegotiations were looking for a retroactive impact to 1st January. So can you maybe elaborate on why there's been an impact and you still expect positive impact going forward? And the second question on these renegotiations is -- I know that the contracts are obviously confidential, but if you could elaborate on what you were particularly targeting with these renegotiations, if you were targeting a shortening of the duration of the contract, reduction in the volumes or uptake. Basically, what I want to understand is what is going to be the profile of the business going forward, if you are reducing the risk and reducing the open position, even before doing any hedging, or if there is any other structural change in the profile of your contracts. And then the second question is on your dividend policy. You just reiterated again your dividend policy, but dividend policy with 5% annual growth to 2022 was predicated on, if I am incorrect, the distribution of free cash flows in a way that leverage were to be stable. You are forecasting -- you're guiding to approximately 14% drop in EBITDA, and your net debt is only dropping by 3%. So even though the net debt is falling, in absolute terms, in relative terms, your leverage is increasing. So what is the rule here? What is the cap you feel comfortable with from a net debt to EBITDA point of view? Or what is the metric that you're going to monitor in order to continue reiterating the dividend policy or start to reconsider the dividend policy?

So thank you, Javier, for the questions. I will answer the first one. You are fully correct that in past results calls, we said that we should expect to see some kind of retroactive effect because if we applied what would be the revision clause, that's how it actually should work. But implementing the price revision clause would also have implied that we would have gone through a lengthy process of arbitration. What we've done is we've reached a negotiated settlement with several gas suppliers on which I think that we feel very satisfied with the agreement that we've reached. And we think that although in the renegotiation, what we have -- we are not going to see is retroactive effect on the past quarter results, we think that moving forward, the level of price that we're reaching is satisfactory. So I think that therefore, both things are consistent. One thing is what we should have seen, if we should have applied the price clauses per se. That means going through the full arbitration process. And what we are right now seeing and what we are going to see moving forward is the result of the negotiation. And in that case, what we've seen is that when negotiating with the suppliers, trying to implicate or trying to have a retroactive effect was something that would have meant other kind of sacrifices. And we thought that the best and the most important thing was to reach a settlement that was satisfactory without going through the lengthy process of arbitration. So how -- does that mean in the terms of volumes, we have increased the flexibility in the volumes that we have in some contracts. So we cannot go into the specifics. And in some cases, in some of the contracts, we even reduced the full volumes. We are giving the outlook of how our open position is for 2021 and 2022. And therefore, what you will see is the results of both, what we've been able to do through commercial activity and also what we've been able to do by reducing the volumes that we have due to flexibility or due to the contract -- the full contract volume reduction of the ACQ of that contract. On the dividend policy, what we said is that we reiterate our commitment to the dividend path that we set until -- established until year 2022, absolutely. I don't think looking at the results on a standalone basis in COVID-19 year, which is this year, 2020, exclusively, is a fair analysis to be frank. It's a good thing rating agencies don't look at it from a spot basis, but they look at it from a rolling basis. So they understand that the business may be better or may be worse at certain parts of the cycle. And that's why they take a longer-term view. So the objectives here are to -- as we've always said, we have a BBB rating right now. We could be willing to sacrifice that rating if the right conditions come along for the sake of growth. We don't see a scenario right now where the rating is under threat, but we have to work towards making sure that for next year, for example, the FFO to net debt as opposed to net debt to EBITDA, the FFO to net debt is reestablished at levels where the rating agencies feel comfortable with. And so we are working hard on that front. But moreover, beyond that issue, just remember, when we think about rating, other elements also play a role. So for example, the business risk profile is something that rating agencies are going to be looking at from a qualitative perspective. And so I think you can appreciate from our results as well that although the results, as I've mentioned previously, have been unsatisfactory for the last 9 months, it's also true that I think the company has been taking steps to derisk its operations. And this is something that also has a role and an impact when considering the rating.

[Operator Instructions] Our next question comes from Jorge Guimarães from JB Capital Markets.

I have one which is a follow-up and then another 2, if I might. Firstly on the follow-up, still regarding the upfront cost in renegotiation of gas contracts. Since the renegotiation of the contract with Sonatrach was announced in Q4 already in October, should we assume -- or could we expect more of this cost in Q4 resulting from the Sonatrach agreement? This would be the first one. The second one is the -- and also on a kind of follow-up. If the gas prices -- if the long term, the -- what would be the impact on your profitability on your view of the market if the long-term gas to oil relation does not improve? Does it question your long-term target? And finally, it's just for me to understand. You said you are working on the details of the strategic CapEx. Should we expect it to happen until the end of this year?

Thank you very much, Jorge, for the first 2 -- for questions. I will answer the first 2 and then Steven will answer the -- sorry. Regarding the upfront cost, 2 things that they were implied in your question, and I would like to make clear. First of all, we have not implied that the upfront cost is related to the Sonatrach renegotiation. We are not going to disclose the upfront cost to which of the several negotiations that we had it corresponds. So I would like to make it clear that we have never said that it's due to Sonatrach, first thing. And no, there's not going to be more upfront costs related to the negotiations that have been already settled. So -- and that's due to how the accounting practices are. Once we sign an agreement, all of the one-offs that there are, be it positive or negative, we have to account them in the moment in which we know them. So there are not going to be any further upfront or one-off associated to the negotiations that have been already signed. Moving to the second question, one of the gas prices and how the indexing -- the percentage that it has regarding to oil, the gas prices. I think that first of all, there are 2 things that we have to keep in mind. One is that if we look at the forward curves already in 2021, it's improving. So for example, if you look at NBP today, it's already reaching levels of 10% when this year it's expected to close at a 7% level. And the same happens to JKM. So we are looking at improving the price. And also in this sense, we have to also incorporate the fact that moving forward, the gas supply contracts -- the gas procurement contract prices that we're going to have are going to be better than the ones that we had these past quarters. But also, we have to be cautious because the closed volumes that we have is 94% for 2020. So that means that -- 97% for 2020. That means that upsides are going to be limited. And even for 2021, '22, we are talking of the closed volumes at 84% level. So that means that the level of the swing that we can have is going to be limited to that. So I think that we have to see how you all of these things play out.

Yes. On the CMD, as I mentioned previously, we're working very hard on the presentation on the strategic update. Again, I want to emphasize that the preliminary things that we're seeing are actually pretty exciting. But to be frank, I mean we've been working so hard. We haven't finished the discussion on the date. So we expect to have the date to publish for you guys within the coming weeks. So as soon as we have it, we'll communicate it.

Our next question comes from Manuel Palomo from Exane BNP.

I've got a couple of questions on LNG. First of all is one that comes out from the Excel spreadsheet that you published. And the thing is that when looking at the LNG volumes on the first half, you stated you had 148 terawatt hours, of which 98% contracted sales. So today, we see that you have not 148 but 129 terawatt hours and that there's 96.9% contracted. Could you explain, please, these changes? And also on the LNG, second one is on the margins. We've seen that in this third quarter, you have sold around 33 terawatt hours with 0 EBITDA margin. What's your expectation? If you can share some light for the following quarters. And then I've got one on Mexico. I missed your views about what's going on in Mexico with the CFE and with all these things that are happening. If you could please share with us your views on regulatory developments in Mexico and whether it is good or could be a hurdle or could impact the returns of the existing PPA agreement. And finally, one on Capex. The CapEx has seen, again, a significant decrease, 26% down year-on-year and very well below the D&A figure. When could we expect some CapEx acceleration to at least match the D&A figure?

Manuel, thank you very much for the questions. I will try to answer all 4 of them. First of all, you are fully correct in -- if you look at the Excel sheet that we have in the first half and the one that we have right now, there is a decrease in the volumes. And that's basically resolved of the negotiations that we had with the suppliers that, as we mentioned before in earlier questions, one of the things that happened, so one of the results that we have of these negotiations is a reduction on the volumes in some of the contracts on a temporary level due to flexibility. And in some cases, structural level, that is a reduction of the contract volume or the ACQ of the volume. So I think that we have to understand it in that sense. The way that we have to close our open position is twofold. One is by the volumes that we have -- how we sell the volumes and how much -- how many bcms we will have to sell. And that's one of the levers that we are working on, and that's the one that you identified on the Excel sheet. Regarding the margins, it's true. And if we look in the results presentation for the third quarter of 2020, the EBITDA that we have seen is 0. So that's basically the margin that we have for the sales of the LNG contracts is negative in this quarter. It's true that this quarter, even though that we had a close position -- the open position that we have, we had to sell it at really low volumes because we've seen in this third quarter some of the lowest prices that we've seen historically. And we think that this is something that should improve already in the fourth quarter and also next year. So I would say that in that sense, when we look at it, the third quarter of this year has been the low point. And if you go -- moving forward, it should go forward and should improve. Regarding the third question, the input that we get from our businesses in lower power generation regarding the Mexico situation is that for the time being, we have nothing to worry about. And it should not change the outlook that we gave about the evolution of the business there. We don't see it right now either as a threat or as an opportunity, and that's the input that we're getting currently from our businesses in Mexico. Moving to CapEx. It's true what you say. But I think that first of all, there are 2 things that we have to keep in mind, that FX not only impacts negatively our LatAm businesses. It also impacts negatively our CapEx in LatAm. And also, we have to keep in mind that in some of the businesses that we had due to the COVID and the fact that there has been lockdown, the level of activity that we had has gone down. But moving forward and how the CapEx is going to go, I think that answer will be -- that will be answered in the Capital Markets Day that will come in the next few weeks. It will be announced.

Next question comes from Lillian Starke at Morgan Stanley.

I have just 2 questions. The first one is if you could provide a bit more detail on the competitive landscape that you're seeing on the supply side in Spain. And then the second question is when we think about this broadly -- and maybe this will be discussed at the CMD, but I'll just ask anyway and claim my luck. When you think about renewable growth, just wondering if at this point, you have a preference for M&A versus developing your -- building your own pipeline?

Lillian, thank you. I will answer the first question. I think Steven is going to take the second one. Regarding the competitive landscape in supply in Spain, I mean it is true we are seeing an increase on the activity of the new entrants, be it small new entrants or be it [ not small ]. But I must say that the way we see it is that most of the competition is still we are seeing it from the big traditional players, which are the ones who in the end are making the most active commercial activity. At least when look at our figures, I would say that at least in these past few months, I would say that it's true that the competitive pressure is increasing but also from traditional players. And in that sense, I think that in the CMD that we're going to -- we will have something to communicate regarding this commercial pressure and how we are reacting to it.

Lillian, on the renewables growth, I like your question because it presupposes that we want to grow in renewables. And I think it's the right assumption, actually. We want to grow in renewables in a way that is disciplined. And I think we would probably all agree in this call that there are certain segments in the renewables world where in terms of the competitive landscape, it may be difficult to grow in any significant way in a manner that generates value or creates value, okay? So we have to be mindful of that. And in that sense, perhaps we need to scale the risk ladder a little to find the lower competition -- or less competition rather and focus on projects that are at an earlier stage. But again, this is something that, you're right, we will be spending quite a bit of time in the Capital Markets Day and providing more visibility with them. But the overriding principle again is we have to be very mindful of the discipline that we think has categorized this company for some time.

Next question comes from Harry Wyburd of Bank of America.

I'll try to make them very quick. Firstly on asset sales. You alluded at first half to potentially wanting to reduce your emerging market exposure. And I wonder whether -- and this may be something you don't want to comment on ahead of the CMD, but I thought I'd try my luck, whether you could comment on what kind of assets. I mean if we presume that's LatAm that you're talking about, what kind of assets in LatAm might you be open to selling or rightsizing. And in particular, should we assume that, that will be a gas asset or what you think about selling down in electricity as well? And secondly, just on the same theme of balance sheet. So I don't know whether you can comment. You mentioned about you could potentially be open to dropping a rating notch and you also mentioned that rating agencies were sort of happy to look beyond the current year. Do you have any balance sheet headroom? Or is there any way you could quantify how much balance sheet headroom you have if you don't sell any assets? So what balance sheet headroom do you have to expand on sort of today's perimeter? And perhaps as part of that, I don't know whether you could give us some guidance on maybe net debt or net debt to EBITDA at year-end or your projection because obviously, FX has sort of hurt your earnings, but it's also helped your net debt quite considerably. And then finally, just on EMPL and the renewal of your contract there. I wonder whether there's any sort of implication or tie between the contract renegotiations you've done in Algeria and whether that alters the outlook for potentially renegotiating an operating contract for EMPL. And maybe I don't know whether you could give us some kind of rough envelope for what -- and I know EBITDA is not going to be anywhere near what it used to be, but what kind of EBITDA level we could be thinking of in our models for 2022 and beyond for EMPL.

So Harry, thanks for your questions. The last one is the easiest one. We can definitely give you EMPL guidance for 2022 at the EBITDA level and that will be 0, okay? Hopefully, between now and the time the concession expires, we'll reach some sort of agreement with the Moroccan authorities where it's no longer 0 and it's something higher than 0, okay? It's 0 right now. No, it's not affected by the ongoing renegotiations of contracts. On asset sales, I think this is -- instead of calling them sales, we'd rather call them perhaps asset rotation. We are currently in the process of undergoing, as you could imagine, a very in-depth portfolio review. This is certainly something that will form a basis of a part of the presentation on the CMD. We've reached certain conclusions already. But again, we ask for your patience until we provide you some indications. As a general rule of thumb, the one thing that we have been telling the market, as you are very aware of, the overall story here is one of derisking, okay? So there are -- if you think about derisking, you can think about derisking from a business perspective, you can think about derisking from a geographical perspective. You can think about it from both perspectives, okay? So I think that's something to keep in mind when you consider potential changes in the asset portfolio that we operate. And finally, in terms of the balance sheet. Again, a wonderful question. We do take your feedback actually very much to heart. And this is why when one of your colleagues asked about CapEx moving forward, et cetera, these are all elements that will be addressed in the Capital Markets Day. That's why I said initially that if you remember, at the beginning, I mentioned that we are convinced that the content of the CMD will address basically a lot of the concerns that you guys have, if not more than, so go beyond that. And in terms of the balance sheet headroom, to make the long story short, and I apologize for that, the short answer is yes, there is balance sheet headroom right now to continue growing. Remember that there are different alternatives to finance growth as well if we want to go down the road of leverage. I think some of our competitors, for example, recently showed some examples of instruments that can be put on the table to finance growth. And this is a key element that will be addressed in the CMD to give you a sense of the firepower that the company thinks it has on a longer-term view.

Next question comes from Javier Suarez from Mediobanca.

Three questions. The first one is on the -- on Slide #12 and the cash flow statement. When you are showing the evolution of the free cash flow after minorities, obviously, there is a significant positive contribution from working capital. So you can explain us the reason for that number and what we should expect by the year-end. What is behind that contribution of almost EUR 550 million positive on the cash flow of the company coming from a positive change in working capital? Then the second thing is coming back -- I think it was Manuel's question on Capex. So the fact that the company has reducing Capex. I think the thing that I wanted an explanation on is that if the reduction on CapEx comes from a managerial decision of the company of reducing CapEx at this point in the cycle because, as Jon said, it has to do simply with the COVID environment. I'm asking this question because, obviously, there is an energy transition in place. I think that plenty of companies are accelerating on CapEx as we expect. And I think that the fact that you are reducing CapEx is obviously something that probably is [ baseline ] at the next Capital Market Day. And the final question is on the guidance for 2020. You are reiterating the EUR 4 billion of EBITDA target for 2020. I think that in the previous conference call, you mentioned that this number did not include the capture costs that were defined as a one-off. So if you can update us on the number that we should expect as one-offs or additional capture cost or whatever you can call it by the year-end and what should be your guidance of EBITDA in terms of reported EBITDA as well.

Thank you, Javier. I think I will answer the first 2, and I will leave Steven with the third one. Regarding the working capital, I think that one of the main things that is helping us with the improvement in working capital is the fact that we are invoicing less. We are invoicing less because we are selling less volumes due to the reasons that have been mentioned across the results presentation and also because the energy prices are also lower. I think that Steven also gave a view around that. So that's one of the main reasons why the working capital is improving so much compared with -- in our next -- in our cash flow statement. Regarding how it's going to close, I think it's important to remind you that the level of invoicing that we do during the year is seasonal. So -- and there's a high level of seasonality so that the seasonality that we have in Spain is the opposite to the seasonality that we have in LatAm. But I think that we should be closing the year with the level of contribution, the one that we're currently seeing or even, I would say, even better. And moving to the second question, the CapEx reduction that we have to bear in mind that the lockdown, it has been important not only in Spain but also in some of the LatAm countries in which we are present. And again, we also have to stress because I don't think it doesn't have to -- it hasn't played a minor role, the fact that a sizable part of our investment is in LatAm where it has the FX depreciation has been big. So when you take into account all factors, a big part of the decrease in CapEx is explained by that. Also, if you take into account that last year in renewables in Spain, we finished building or we finished installing almost 1 gigawatt in renewables. I think that also at least in that sense, we cannot compare at least in Spain 2020 with 2019. So I think that those 2, 3 factors, depending on how you count them, have to be factored in, in explaining the CapEx evolution 2020 against 2019 and whether -- how we're going to -- we see ourselves moving forward, I think that's something that will be answered in the Capital Markets Day. And there, we will give you further visibility about how the CapEx is going to be moving forward.

And Javier, on the 2020 guidance, non-ordinary effects would amount to somewhere between EUR 280 million, 2-8-0, and EUR 290 million, 2-9-0, somewhere around that.

The next question is from Alberto Gandolfi at Goldman Sachs.

The first question is given you've been very clear about the intention of increasing and stepping up exposure to renewables, I would say that maybe you disagree, but my rule of thumb is that until an activity probably reaches about 20% of the business, it's not really quite a driver. And so I was wondering, for you to get to about 20% of your EBITDA, even in a tricky year like this one, where EBITDA is hopefully temporarily depressed, we're probably talking about EUR 1 billion of EBITDA, which implies EUR 9 billion to EUR 10 billion of invested capital, which means that -- I appreciate your balance sheet headroom, but not EUR 9 billion to EUR 10 billion, I suspect. So I guess long intro to say, should we expect this to be the size broadly of your asset rotation? Clearly when you build capacity, you will generate operating cash flow, which you can use to fund further Capex. But it's a reasonable logic, the one I adopted. The second question is apologies to go back again to the gas renegotiation. But I guess my question is very simple. If we take the 9 months ordinary gas -- effectively the LNG EBITDA you reported, what would it be with the renegotiations you have already achieved? I'm trying to understand the EUR 1 million improvement that you may have or maybe you can guide it on Q4 or next year or whatever, but just the EUR 1 million tangible element to appreciate. And the last question. I understand you might say we don't do that. But considering it's already November, we are amongst friends, would you be comfortable with the ordinary net income of about EUR 1 billion that consensus seems to be targeting? I mean you have achieved an average of EUR 400 million net income in the past couple years in Q4 ordinary, and you're down 30% year-on-year, which seems still to suggest probably about EUR 300 million. So I was trying to see clearly an underlying ordinary of about EUR 1 billion this year.

So I think that, Alberto, although you addressed the question to Steve -- and Steve, jump in whenever you want to. So I guess maybe it's a bit of a disappointment because you wanted Steve, but I think that at the beginning you're going to get me. Sorry about that. But I will start with LNG because it's one of the classics. And sorry, but we cannot disclose what would have been these past new 9 months after the renegotiations because to a certain level, it would disclose the level of improvement that we had. And as you know, that is something that is confidential. So I think that we're not going to be able to give that kind of guidance. But I think that is one thing that is important, and I think that when we go to the CMD, we will make it clear that we have more renewables than the ones that we see that we do. And the problem is that we have renewables in international power generation. We have renewables in Europe. And if we look at that and we look at the figures of these first 3 quarters, I would say that probably ordinary EBITDA that we have, we could say that almost 15% of our EBITDA has been due to renewables. And I include hydro within that renewable. So I mean it's true that we're still lagging behind, and we have a commitment to improve the weight that the renewables have in our portfolio. But I think that also sometimes the market seems to underappreciate the position that we have and the efforts that we are making like, for example, the 2 projects that we've announced today that we won in Australia. But I think that hopefully, that's something that we will at least help -- at least give more visibility in the CMD.

Yes. And moving on that, I think clearly, it's -- we're actually having a discussion about this with [indiscernible]. And we all in the company agree that we haven't communicated sufficiently well on our position on renewables to the point that some people categorize us basically almost like a new entrant in this sector. And we're not. We already have an important contribution from the renewable business to the EBITDA. And this is clearly something that we would like to grow. Now as far as saying -- I'll go as far as saying that if we are to rotate assets, all proceeds will be dedicated towards growing renewables. That's an assumption that you'll have to wait until we have the CMD. And certainly, we're not going to comment in today's conference call on the potential size of potential disposals and the use of proceeds from those disposals. Again, to emphasize, we are making great progress in the definition of the new strategy plan. We heed your advice, Alberto, that your colleagues. We hear your concerns and investors' concerns. We share a lot of those concerns. And we are not a company that stands by and wait for issues to be resolved on their own. We take our future in our own hands. And this is why we are excited about what we have to tell you guys in the CMD. This is a key element. Our portfolio review will yield, we think, important results and interesting results that may come in the form of asset rotation. Asset rotation implies not only selling but also buying asset. This is an issue that we will be addressing for sure in the CMD as we will be addressing the potential firepower the company has, et cetera. So all we ask from you, and I understand that this is maybe frustrating -- trust me, it's frustrating for us as well because we would love to be able to answer this question to you today. But let's wait until the CMD. On the ordinary net income for 2020, we don't guide on net income. So we're not going to comment on your work or your colleague's work. I'm sure you guys do the best you can with the available information that you can. And we'll have to wait until February to have the answer for that.

Next question is from José Ruiz from Barclays.

So 2 questions. The first one, if I look at the third quarter, both in gas, power, services sales, the International LNG, which touch a minimum level, which one would you expect to recover quicker in the coming quarters? And secondly, I will give it another try. Can you share with us the pay -- sorry, payback period of the upfront cost or penalties of renegotiation? You don't have to give you me a precise number. I just wonder if it's lower than 1 year or larger than 1 year. I'm just trying to understand when we will see the benefits from these renegotiations.

Thank you very much for the questions. Regarding the first one, I think that we will see improvement on both businesses. On which will it be faster or not, I mean, I think that it depends on how you see it. But I think that we should be seeing improvement definitely on both businesses. Regarding the payback, I think that giving you an idea of the payback, I don't know whether that would be helpful, and if it were helpful, I would be giving you insight about the level of discount that we've had. So I think I'm not going to go through this one.

The final question comes from Jorge Alonso from Societe Generale.

Yes. I also just have 3 questions, please. Can you just give us an order of magnitude about the pipeline of renewables that -- GPG and the ones you have in Spain? The projects that you have identified, this typical definition of the pipeline in renewables. The second one is related to the bad debt, the impact of bad debt in the 9 months results. And what do you expect in coming quarters if thing seems to be improving? Or do you still think that in terms of bad debt, there is more to come until full recovery will be felt in consumers' pockets? Okay. On the last one is regarding the Mexico gas solution. In the past quarter, we have seen even more decline or bigger decline in volumes but an improvement in the margins basically because you just said that you were optimizing the portfolio and the part of portfolio is not regulated but it's on the supply side. But in Q3, we have seen a big decline in the margin and the EBITDA for [indiscernible]. If you can tell us if something has changed or why it has happened in this quarter.

So on the renewables pipeline, we're going to give you more than that, but we'll give you more than that in the Capital Markets Day. So we'll give you the pipeline of GPG in Spain. We will give you the targeted CapEx that we have for the next prolonged period of years. We'll give you our strategy in terms of the capital structure that we are targeting, the strategy on whether or not to incorporate business partners, the preference on whether or not to go wind, solar or others. All these elements will be addressed in the CMD. So just I can -- just wait. It's not going to be -- you're not going to have to wait too long for the answers.

Jorge, moving to your 2 questions regarding bad debt, the main cost that we have seen for the past deterioration is basically the provision that we have in several countries to disconnect the customers. As far as those provisions are limited, we think that there's going to be improvement in the bad debt that we've seen in those countries. So I think that we are already seeing that in some of the countries on which we are present. And actually, moving forward, the thing is how those provisions are going to be, and it will depend on how the COVID evolves or not. We have -- it what is the main trigger in the past for introducing those measures. But as long as they are listing, we should be seeing an improvement on bad debt. Moving on to Mexico. I think that what we're seeing basically on this third quarter is mainly an FX deterioration that is greater in this quarter than in previous ones. But I don't think that we've seen substantial changes. I mean in the tariff, it's exactly the same as the one that we had the rest of the year. And in the volumes, although there are some swings, the swings are basically -- the big swings in demand are basically in the industrial customers, the industrial customers and some generation, which do not have a big impact on the demand. So I would say that what we're witnessing is mainly FX.

Thank you. Thank you, Jon and Steven, and everyone, for your questions. This concludes our Q&A session and our results presentation. So we thank you very much for joining and participating. If any questions come up or feel unanswered, feel free to reach out to the Capital Markets team. We look forward to continuing our discussion with you guys. And we're going to continue working hard in preparing the Capital Markets Day that should be announced fairly soon. So thanks, everyone, for joining, and be safe, and be well. Thanks very much. Bye-bye.