Good afternoon and welcome to our nine-month 2018 results presentation, which will be presented by our CEO, José Gálvez, and by our CFO, Luca Passa. Following the presentation, we will have the usual Q&A session open to those connected both on the call and on the web. Additionally, we kindly ask you to limit your questions to the financial and operational performance of the company during the period and to wait until next 21st of November for the update of our strategic plan. Thank you for your attention, and now let me hand over to José Gálvez.
Thank you, Mar. Good afternoon, ladies and gentlemen, and thank you for joining us today. As usual, let me start this presentation with the main highlight of the period. I will start by pointing out the good results obtained by our liberalized business, with an increase of about 23% at EBITDA levels in a context of normalization of market conditions during the first nine months of 2018. That, combined with the stable contribution of the regulated business, which rose by 3%, has resulted in a 10% increase of overall EBITDA in the period. The fixed costs have remained substantially flat, as efficiency measures put in place over the last few years are absorbing the effects of inflation and growth. Regarding the bottom line, the sound performance of the liberalized segment and stability of the regulated business evolution have led to a 10% increase at net income level.
In slide number three, you can see the main financial figures of the period. As I just mentioned, EBITDA and net income both increased by 10% compared with nine months 2017. The main drivers behind this evolution are the following: the liberalized business has performed above expectation as a result of a full recovery of extraordinary market circumstances experienced last year. It has been positively driven by the favorable evolution of hydro conditions in Spain and by the better fundamentals of the gas market. Moreover, the regulated business benefited mainly from the consolidation of the remuneration update in distribution. Finally, net debt increased by 33% over the last nine months to 6.6 billion EUR, mainly driven by the increase in CapEx and the full dividend in 2017 results paid in January and July this year of 1,463 million EUR.
Now, I would like to comment on the market context in Iberia for the period of this financial release, as can be seen on slide number four. Electricity demand showed moderate growth rates in both gross, 0.9%, and adjusted term 1.1%, affected negatively by milder temperatures in the period, especially in June, July, and September compared with 2017, as well as by a slowdown of consumption by large companies, particularly in the chemical and metallurgical sector. In Endesa's concession area, gross demand decreased 0.4%, mainly driven by the closure of some chemical plants, as we already mentioned in the previous quarter, and as well as by the low demand for temperature reasons. Electricity prices went up significantly in the third quarter of 2018 to EUR 65.8 per megawatt hour, triggering an average pool price of EUR 55.4 per megawatt hour to date.
Despite the recovery of the hydro conditions that have increased system production by 80% and a rise of the levels in reservoirs up to the last 10 years' average, the large increase in commodity prices, mainly in CO2, led to average prices 10% higher than nine months 2017. Considering the high prices in commodities, together with the likely increase of thermal gap in the last quarter of the year, market references of electricity wholesale price point to closing at EUR 57.58 per megawatt hour for the full year. We can see that Endesa, moving to slide number five, that Endesa's output decreased 5%, aligned to the reduction seen in the thermal gap in the period, and the nuclear output affected mainly by Vandellós outage.
On the other hand, in the first nine months of the year, our hydro production increased 64% to 6.9 terawatt hour, reaching the hydro output level of an average year. For the full year, we now foresee hydro production reaching levels close to 8 terawatt hour, well above a normal year and slightly ahead of our business plan. Regarding electricity sales, the 7% decrease in the energy sold, as mentioned on the previous slide, is mainly due to B2B sales affected by the closure of some chemical plants, and as a result of our value-based strategy management targeting and retaining high-value customers in a market context of increasing competitive pressure. While the total number of customers slightly decreased during the period, we must highlight the liberalized customers have increased. This is due to the nearly half of those customers who left a regulated tariff having been recaptured as liberalized.
Our objective continues to be keeping our market share stable. Let me go now through the evolution of the unitary integrated electricity margin in slide number six. Electricity sales in the liberalized business decreased in Spain and Portugal by 7% in terms of volume, minus 4.5 terawatt-hour, as I commented on before. The unitary integrated margin in the electricity business has shown positive growth evolution, increasing 25% to EUR 25.5 per megawatt-hour. It has mainly benefited from a higher unitary revenue, plus 9.5% to EUR 65.8 per megawatt-hour, and a positive contribution of the short position following a different hedging strategy carried out since the beginning of the year 2018. As expected in the third quarter, the unitary margin slowed down by 4% compared to the second quarter.
We now expect this unitary margin to convert to an average figure around EUR 23 per megawatt hour for the year, slightly above our business plan assumption due to higher thermal output and high commodity prices expected for the last quarter of 2018. Also, the current level of supply margin, around EUR 8 per megawatt hour in the liberalized market, has also been better than last year and slightly higher than guidance, thanks to the better customer value management strategy as mentioned. Moreover, as of today, we have already hedged 100% of our 2018 estimated output at an average all-in price of EUR 67 per megawatt hour. As far as year 2019 is concerned, we have hedged around 55% of our estimated output at an average all-in price of around EUR 73 per megawatt hour, corresponding mainly to hydro, nuclear, and renewable production.
This price reference corresponds mainly to low-voltage customers. Therefore, prices will gradually normalize along the year. Under current conditions, we now expect prices around EUR 70 per MWh once we have sold all customer portfolio. Regarding the gas business on slide number seven, the recovery of market fundamentals has resulted in a significant improvement of gas margin. Total sales have slightly decreased by 1%, mainly due to the lower power output with CCGTs compared to nine months 2017. To the contrary, we have a higher retail sales, plus 2%, and wholesale sales, plus 19%, supported by higher gas demand in Asia. On the right of the slide, you will see that the number of customers has increased by 2%, reaching 1,594,000 customers.
Our ordinary unitary margin has increased to EUR 1.5 per megawatt hour as a result of better procurement costs on some of our Brent index contracts, as well as the recovery of gas price references, and now I will hand over to Luca Passa, who will present the details of our financial figures.
Thank you, Pepe, and good afternoon, ladies and gentlemen. I'm now on slide number eight, focusing on gross margin. As seen before, Endesa has reached EUR 4,271 million, 7% more than in nine months 2017, implying a 10% improvement ex non-recurrent impacts, which are related to EUR 142 million of social tariff reimbursement of years 2015-2016 booked in the third quarter of 2017, negative EUR 79 million from mark-to-market and others in gas, small consumer voluntary price re-billing booked in the second quarter of 2017 of EUR 20 million, and previous year's settlements in Non-Mainland that amounted to EUR 52 million, as highlighted on the left-hand side of the chart.
The improvement in gross margin is driven by both business generation and supply, plus 19% adjusted, thanks to higher unitary margins in electricity and recovering the gas and distribution business, plus 6% adjusted, as a consequence of the improvement in distribution regulated revenues. Moving to slide number nine, when it comes to the regulated business, the adjusted gross margin improved 5% as distribution mainly recognized the higher revenue awarded by the draft Ministerial Order published in December last year, as well as previous year re-settlements. On the contrary, the Non-Mainland generation gross margin remained barely flat in adjusted terms. Additionally, overall, the regulated business contributed to Endesa's total gross margin with 56%. Moving now to slide 10, gross margin in the liberalized business reached EUR 1,870 million, or a 19% boost year on year compared to the adjusted nine-month 2017 figure.
In power, the recovery of adverse market conditions seen last year has led to a significant increase in the integrated margin, supported by higher unitary revenues and the balanced strategy followed in the management of the short position this year that has shown a positive delta of 69 million EUR, despite the decrease in sales of 4.5 terawatt hours in the period. When it comes to the gas business, the improvement of these market fundamentals has meant a remarkable increase of 72 million EUR in the current gross margin, up to, as of today, 107 million EUR. The main drivers have been the higher selling price and the increased competitiveness of our portfolio. As noticed, after very strong first and third quarters, we now estimate that the gas business could exceed the 100 million EUR expected for 2018.
Finally, I would like to highlight the increasing contribution of the Endesa X business line, our branded business, with 20% growth at gross margin level compared with last year, being e-Home and e-Industries the main margin generators, well on track to meet year-end targets. Moving now to slide number 11, a few more details on the evolution of the fixed cost. Total reported fixed cost reached EUR 1,480 million, slightly higher than last year's figure. As usual, I would like to refer to the like-for-like fixed cost evolution. Adjusted figures exclude mainly the update of the provision for obligations related to the ongoing workforce restructuring plans and voluntary departures agreements, provisions to deal with the redundancy plans, compensation, and other tax and labor risks, as well as infringements, proceedings, and taxes booked in both years.
On a like-for-like basis, fixed cost would have slightly decreased, proving once again the delivery of the main initiative implemented, which allowed to more than absorb the effect of growth and inflation impacts. Personnel cost, once adjusted, decreased by 1.2%, mainly due to the reduction of the average workforce of 1.9%, or around 200 employees. Moving now to slide number 12 on the EBITDA evolution. When it comes to the adjusted EBITDA split by business line, and summarizing all of the already mentioned effects, it must be noted that a 10% increase, which has been driven by the good performance of both liberalized and distribution businesses. In this sense, adjusted generation and supply EBITDA rose 37% to 985 million EUR.
With this result, we remark that Enel Green Power Spain EBITDA obtained a result quite aligned to the 2017 nine-month figure, net of the inclusion this year of about EUR 8 million from the Gestinver consolidation. Distribution EBITDA, in adjusted terms, increased by 10% to EUR 1,520 million, recording the effects of the higher regulated revenues and lower OpEx. Non-Mainland generation EBITDA reached EUR 286 million, slightly below last year's once-deducted one-offs.
These good sets of results confirm that the full-year EBITDA will likely end up slightly above our expectation, enabling us to improve our guidance at EUR 3.5 billion and allowing us to reach more comfortably the objective of EUR 1.4 billion of net income. Moving now on slide number 13 on the P&L evolution from EBITDA to the net attributable income. Starting from the EUR 2,791 million of EBITDA achieved, D&A increased by 7% to EUR 1,147 million.
This is mainly due to the adoption of the IFRS 15 and 9 in 2018 for an amount of 48 million EUR, while 2017 benefited from the reversal of impairment losses of 50 million EUR. Without these effects, EBITDA would have only increased by around 1%. Net financial results increased mainly due to the following factors: higher average gross debt, despite the reduction in the cost of debt, 1.9% versus 2.2% in nine months 2017. Such low cost of debt, which is a historical record for Endesa, has been achieved mainly due to efficient financial liability management. And second, the update of the financial provision derived from workforce restructuring plans and contract suspension agreements and facility dismantling, together with the adoption of IFRS 9. Stripping out these effects and other minor adjustments, net financial results would have increased just 1%.
Income tax expense increased to 340 million EUR, negatively affected by the impact of nine million EUR resulting from a fiscal inspection. Stripping out this effect, the effective tax rate of the period would have been 21.5%, almost flat compared to nine months 2017. As a result, net attributable income increased by 10% in the period. Moving to slide 14 on the evolution of net financial debt, starting from the five million EUR at the end of 2017, cash flow from operation was 1,141 million EUR positive, showing a clear sign of convergence toward normalized levels after the exceptional low figure booked at the beginning of the year.
On the other end, cash outflow related to CapEx and other items amounted to EUR 1,326 million, including cash outflow earmarked for Gestinver and the related debt consolidation, the acquisition of the Empresa de Alumbrado Eléctrico de Ceuta, as well as other CapEx devoted to renewable capacity awarded in the 2017 auctions projects in which we are properly progressing. It also must be noted that the regulatory working capital has been substantially increased by above EUR 500 million, up to EUR 1,077 million, due to the different number of regulatory settlements booked in both periods. Finally, Endesa paid EUR 1,470 million in dividends, mainly corresponding to the full payment of the dividend against 2017 results, out of which EUR 722 million corresponding to the final dividend distributed on the 2nd of July.
The results of the above-mentioned effects led to a net debt at the end of the period of EUR 6.6 billion, with a leverage ratio of 1.8 times. Moving now to slide 15, at the end of the nine first months, gross debt increased to EUR 6.8 billion, driven mainly by the full dividend payment. Gross debt has an average lifespan of 5.2 years and an average cost of 1.9%, a sound low cost of debt level at an historical low, which implies a significant reduction versus the 2.2 reported in nine months 2017. When it comes to the mix by interest rates and currency, 52% of the company gross financial debt accrued interest at fixed rates, while the remaining 48% accrued interest at floating rates, and 100% of the company gross financial debt was denominated in euros.
Finally, Endesa's liquidity amounted to around EUR 2.5 billion, sufficient to meet debt repayments in the coming 20 months. Let me now hand over to Pepe for some final remarks.
Thank you, Luca. Now I would like to conclude this presentation with some final comments on Endesa's performance. First of all, I want to remark the continuous and timely delivery of our strategic plan, as well as the validity of its underlying assumption. In a couple of weeks, we will present our updated strategic plan, and we will expand on this. As for the nine-month performance of the main figures, it is to note that a strong EBITDA evolution supported by the sound performance of the liberalized business based on the proven flexibility and resilience of our integrated strategy management and the positive contribution of our distribution business have been once again the main factor of the 10% increase in reported EBITDA. The constant effort on fixed cost contention across all business lines has enabled us to maintain a flat cost base.
All of the above has led to a strong bottom line figure, which represents a 10% increase compared to nine months of 2017. Lastly, this good set of results confirms that the full-year EBITDA will likely end up slightly above our expectation, enabling us to improve our guidance at EUR 3.5 billion and allowing us to reach more comfortably the objective of EUR 1.4 of net income. And ladies and gentlemen, that concludes our nine-month 2018 result presentation. Further information in relation to our strategic plan will be presented on the 21st of November, when I hope to see you again. Thank you very much for your attention, and we are ready to take some questions.
Thank you, Pepe. We are now open to answer any question you may have.
Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you don't mind, please press star followed by two. And when preparing to ask your question, please ensure your phone is unmuted locally. As a reminder, that's star followed by one to ask a question.
The first question comes from Harry Wyburd from Bank of America Merrill Lynch. Please, Harry, go ahead.
Good evening, everybody. Two questions for me, please. The first one's on gas. If my math is right, I think you did a unit margin in the third quarter, specifically of about EUR 2.3 per megawatt hour. And my question is, how sustainable is that? I think, if I remember correctly, your long-term guidance for 2020 was EUR 2 per megawatt hour. It seems like you're already above that. So how sustainable is the EUR 2.3 per megawatt hour you did in the third quarter? And is there still upside to that, looking forward to 2020? Second one is on the proposed price caps for nuclear and hydro. It seems that that hasn't had enough immediate political support to be passed in the Parliament. But I just wanted to hear from you what your views are on those price caps.
Also, if the PSOE and Podemos were determined to introduce price caps for hydro nuclear, what is the political process that they would need to go through in order to implement them? And how long do you think that would take? Thank you.
Okay, thank you, Harry. First of all, in relation with the gas margin sustainability, let me say that, well, it is true that the gas price and gas margins have improved a lot if we compare with the previous year. I should say that the gas fundamentals have significantly improved in the last nine months. That is improvement in the market conditions because of the higher Brent prices, because of the stable Henry Hub prices, because a tight spot market in Asia with the Chinese LNG imports. All in all, it has resulted in gas price reference recovery, higher spot gas prices, an increase in the competitiveness of our procurement contract, and also an improvement in the profitability outlook of the US gas.
As a result, we have reached this gas gross margin ahead of the guidance for the year 2018 included in our last strategic plan, but still away from the EUR 2.5 to 3 per MWh we used to achieve in the past. You remember, in our business plan, what we said is that the full normalization, it was not expected up to the year 2022. Nevertheless, what we have seen is that the market conditions are improving, and within, you never know how these prices, Brent, etc., are going to evolve, but we think that it will improve even in the future. In relation with the price cap in nuclear and hydro, first of all, I should say that this comes from the agreement between the government and the Podemos party. It has to be with, let's say, the windfall profit.
First of all, I should say that there are no real bases just to maintain that the nuclear and hydro have windfall profit. These technologies, first of all, are not fully amortized, neither for accounting nor for financial purposes. Every year, we make very high or important investments. Let me say that we have invested since 2001, EUR 2 billion in nuclear and EUR 0.8 billion in hydro. That is around EUR 130-140 million per year in nuclear and EUR 40-50 million per year in hydro. And that our net book value in nuclear is EUR 2.8 billion and EUR 0.8 billion in hydro as of the 30th of September 2018. So it is clear for us that there is no any windfall profit in these technologies. So it has no sense just to put a cap, in our opinion, in these technologies.
We will see what I think could happen in the future because you know that just because the Royal Decree-Law 15/2018 is going to be managed like a bill in the Parliament, we will see what happens and we will see what are going to be the proposal of the different political parties. Nevertheless, we are having meetings with the different political parties trying to explain the reality of these two technologies.
Next question comes from Alberto Gandolfi from Goldman Sachs.
Yeah, hi, good evening, and thanks for taking the question. The first one is on the dividend. Just wanted to ask you if, in terms of capital allocation, that is going to be your priority, considering that, I mean, at the moment, your yield is not even 8% and you could potentially invest in solar at an IRR higher than that. If you don't want to answer the question because you want to address it at the capital markets, I guess the sub-question would be, what type of equity IRR do you think you could achieve on developing renewables in Spain at the current stage, given that we are seeing a growing pipeline of projects, particularly in solar? And the second question, could you provide some guidance for year-end net debt, please? Thank you so much.
Thank you, Alberto. This is Luca. On the dividend question, as you pointed out in your questions, I'd rather refer on the 21st when we present the plan. As far as IRR that we foresee in terms of we're seeking in terms of renewable developments, as you are aware, with the auction developments, we explained that the IRR we are looking at, it's an 11% type of IRR. Now, obviously, LCOE for solar is going down, but also prices under the PPAs where you basically have to develop or you mark-to-market your solar are coming down. So I would say that, obviously, we are talking about numbers in the low two-digit numbers for renewable developments as far as internal rate of return.
As far as your second questions, guidance on net debt, I mean, what I can say is we will be approaching between EUR 5.9 billion and EUR 6 billion, and that is driven mainly by the regular working capital, which, as you've seen in nine months, is at EUR 1.077 billion. It should evolve between EUR 1.1 billion and EUR 1.3 billion at the end of the year, depending on liquidation for about just north of EUR 300 million from Non-Mainland payment.
We have now Javier Suárez from Mediobanca.
Hi, good evening. Three questions on my side too. The first one is a follow-up on the new electricity bill, and if you can give us some guidance or visibility on the timing for the approval of this new electricity bill. Obviously, the political situation at the Parliament is complicated, and I guess that that is making any negotiation on the approval for a new law a complicated exercise. So any light on the timing or your view on the timing of how long this could take would be appreciated. That is the first question. The second question is on the document that Comisión Nacional de los Mercados y la Competencia has published on Friday last week on their proposal for the remuneration for the networks and renewable energy. If you can give us your view on the document and the document that has been published by CNMC.
The third question is on the guidance. The company has been increasing its likely the EBITDA guidance for 2018. Can you help us to explain which are the offsetting factors that are you maintaining the net income unchanged? Why the company is increasing guidance on the EBITDA and maintaining guidance on the net income? Many thanks.
Okay, Javier, I will try to answer the first two questions, and then I will pass the last question to Luca. With regard to the timing of the approval of the electricity bill, let me say that nobody knows exactly. It seems, in principle, that it should be three months, but the time can be cut and extended. So we don't know exactly how much time it will take to achieve the final law. With regard to the 2020 regulatory revision of the regulated business by the CNMC, first of all, I should say that the report of the CNMC is not binding. Nevertheless, we understand that the government will endorse and approve the CNMC report. We consider very positively the CNMC proposal to align the rate of return, that is, the remuneration rate, to the cost of capital of the regulated businesses.
The final CNMC remuneration rate proposal has slightly improved the initial draft, and the result that would be obtained with the Spanish 10-year bond methodology for distribution and non-mainland generation is 5.58, and for renewables, 7.09. If there are no additional remuneration rate improvement or changes, I would say that time will tell us if remuneration rate approved are reasonable, as the law says, to carry out the estimated EUR 100 billion investment that are necessary to undertake by the regulated business during the energy transition period until 2030.
On your third question, Javier, yes, we have slightly raised our EBITDA guidance to 3.5 while maintaining our net income guidance at 1.4, although we said, obviously, we are more comfortable now than before. That is because 100 million of EBITDA doesn't translate in 100 million net income. Our EBITDA to net income ratio is about 40%. So definitely, we are more comfortable with the 1.4 guidance, but we are not able today to raise it to 1.5.
Next question comes from Javier Garrido from J.P. Morgan.
Yeah, good evening. I have two questions. The first one is, could you please elaborate a bit on how can you target EUR 23 per megawatt hour gross margin for the year when you have achieved 25.5 in the first nine months on a very quick back-of-the-envelope calculation? That would mean 17 to 17.5 euros per megawatt hour in Q4. So you could explain why the dramatic drop in Q4? That would be very useful. And the second question is, the new guidance of EUR 3.5 billion, does it include any one-off? Thank you.
Hi, Javier, this is Luca. I mean, as far as your first question, I mean, we are targeting an integrated margin for the last quarter, which is between, I would say, 19 and 20 EUR/MWh, which translates in a blended integrated margin for the full year of 2023. We have been very cautious, as you remember, back when we announced our first half results. Obviously, there's been, let's say, a reduction in integrated margin in the third quarter, less than what we expected. But fourth quarter, also on a historical basis, has integrated margin which are both in 2017 and as well as in 2016, well below 20 EUR/MWh. So at the moment, that's what we're targeting, which is basically giving us a blended of 2023, which is 1 EUR/MWh higher than our, let's say, assumption in the business plan.
As far as the guidance, the guidance doesn't include any recurring items.
Now we will answer two questions received by email. The first one has to do with the explanation, the rationale behind the increase in the regulatory working capital, and the next one is asking about the potential impact on net debt as a result of operating and financial leases from 1st January next year.
Yeah, the first one comes from Manuel Palomo. Why is the rationale for an increase of EUR 300 million in regulatory working capital? Actually, the increase is even more. It's about EUR 500 million, and that is driven mainly by non-mainland payments, basically, or receivables that we need to cash in. And that is something that we don't basically we cannot manage. I mean, we are waiting basically to get them. And the second question comes again from Manuel Palomo. What is the impact of operating and financial leases? So basically, IFRS 16 from 1st of January 2019. Obviously, we're working on these numbers. We gave some disclosure in our 2017 full-year consolidated results. On page 15, we gave an estimation of that impact between 0.46%-0.56% as first-time adoption on our total assets with the contracts at that date.
So obviously, this number will evolve, but that, to give you, let's say, a reference which has been publicly stated by the company so far.
Okay, many thanks. That's all. Just remind you that Investor Relations will be available for any clarification you may need, and thank you very much for your attention.