EDP Energias de Portugal SA

ELI:EDP

Earnings Call Transcript

[Miguel Viana, executive]

Good morning, ladies and gentlemen. Thank you for attending EDP First Quarter 2023 Results Conference Call. We have today with us our CEO, Miguel Stilwell de Andrade; and our CFO, Rui Teixeira; which will present to you the main highlights of first quarter '23 financial performance. We'll then move to the Q&A session, in which we'll be taking your questions, both by phone or written questions that you can insert from now onwards at our web page. Please note that later this morning will host our -- sorry, and I will give now the floor to our CEO, Miguel Stilwell de Andrade.

[Miguel de Andrade, executive]

Thank you, Miguel. Good morning, everyone. Again, thank you for attending this results conference call. I suggest we go into Slide 3 and kick off the presentation. Essentially, what I'd say is that -- what you can see on the slide is that the first quarter was marked by a very strong financial and operational performance, mainly supported by the recovery of hydro conditions in Portugal. We had a very strong EBITDA of EUR 1.4 billion, mostly driven by the recovery of the hydro conditions in Portugal, as I mentioned, but resulted in a production of around 3.5 terawatt hours, so 0.4 terawatt hours higher than expected for the quarter.

Wind and solar EBITDA, EUR 0.1 million higher year-on-year, driven by higher installed capacity, higher generation and the ramp-up of selling prices. Electricity Networks in Brazil also grew given inflation impact in tariff updates and transmission expansion in Brazil, and we had improved energy management with a decrease in electricity and gas sourcing costs from the peak levels in 2022.

Overall, going down to the bottom line, we get recurring net profit above EUR 300 million. And this can be explained obviously by the EBITDA growth. It's then mitigated by an increase in financial costs and income taxes given the improved results in Portugal in Brazil, 2 countries that have an effective tax rate above portfolio average and no asset rotation gains in the first quarter of 2023. I know this is something that some of you have commented in earlier this morning and basically just to give you a highlight on that.

Also, just to mention, 2 days ago, EDP paid a dividend of EUR 0.19 per share. That represents a dividend payout ratio of around 86%. So on 2022, recurring net profit.

If we move on to Slide 4. As I already mentioned, hydro generation recovered from the very first -- or very weak first 9 months of 2022 and absolutely disastrous hydro over the first quarter of last year.

So on the left, you can see that we moved from a hydro shortfall of 2.6 terawatt hours first quarter last year to 0.4 terawatt hours above expected in the first quarter of 2023. So quite a strong recovery here to more normalized levels. Additionally note that although February, March and April were dry months, our reservoir levels remain high at around 80% of the maximum capacity, which is higher than the historical average for this time of the year. And it's considerably higher versus the 2022 abnormally low levels.

This being said, good hydro generation levels in 2023 so far and high reservoir levels provide some comfort for the remainder of 2023. So I think the fact that we're at these levels as of today already in May, has set us up well for the rest of the year.

Moving on to Slide 5. Once again, I think this showcases really the robustness of the Portuguese electricity system in terms of stable energy prices. So as you know, Portugal has a significant weight of long-term contracted renewables in the energy mix and was able to maintain stable end-user electricity prices during the European crisis, energy crisis of 2022. So as I say, good resilience, good robustness to the high electricity and gas wholesale prices. The Portuguese consumer, the domestic consumer was basically insulated from last year's escalation of prices and even this year as well. So in general, we've been able to keep relatively stable and flat prices throughout this crisis.

You can see that on the left, so both residential and industrial segments had essentially price increases in the second semester of 2022, but very low. According to the Eurostat data, 2% for residential, 5% for industrials. We also had some Eurostats data which came out recently, which showed that Portugal has actually become much more competitive in terms of the cost of energy versus the rest of Europe. This was all done without compromising financial stability, and the Portuguese electricity system debt decreased by more than EUR 2 billion over the last 2 years. So it's reduced in approximately half over this period.

For 2023, I mean the lower-than-expected wholesale prices in this first quarter implied some short-term negative deviations. This should be corrected very soon as the Portuguese independent regulator has already communicated its proposal to review the access tariff starting from the 1st of July 2023 already taking into account these lower wholesale prices. And so adjusting the access tariffs to take this into account.

If we move on to Slide 6, wind and solar, very much focused on execution. As I've mentioned earlier this week, we've already contracted 1.5 gigawatts since the Capital Markets Day, mostly in Europe and in the U.S. This leaves us with around 8.5 gigawatts of secured capacity, about 50% of the capacity targeted for the business plans since 2026 -- or until '23-'26. And then of these 8.5 gigawatts, 5.7 are secured for '23 and '24. So around 75% of the target additions for this period, we're on track to deliver on our growth ambitions.

Also highlighting that we have 5 gigawatts of capacity under construction, of which we expect to sell around 3 gigawatts in 2023, and we continue to ramp up the capacity under construction over the next couple of months. As I mentioned on Wednesday, we have about 0.9 gigawatts of solar PV installations in the U.S. that are moving from 2023 to 2024, essentially related to the delay of solar modules from [ Longi ]. As I've mentioned, this is unfortunately taking more time than expected to fulfill the customers and Border Protection documentation requests, and I believe Longi is working to get that done as soon as possible. In any case, we are assuming that this 0.9 are moving to 2024.

However, we haven't been stopped, obviously. We've been adapting and diversifying our solar supply chain strategy to make sure that we can continue to deliver on the business plan. So we secured 1.5 gigawatts with First Solar in the U.S. for the post 2024 CODs, and we're now working with more than 5 solar manufacturers for 2024 installations to guarantee we do not have similar setbacks in the future.

All in all, I think we continue with good performance on securing new capacity to be installed, and that gives us confidence on achieving the targeted additions until 2026, despite some setbacks on the U.S. solar additions in '23.

If we move on to Slide 7, and let's talk about our solar DG business. As of March, we had an installed capacity of 0.8 gigawatts, of which 0.3 were installed over the last 12 months. So very meaningful 66% capacity growth over this period. Since 2020, we've already secured 1.8 gigawatts, of which 0.8 are installed, 0.4 are transactional, meaning that they're built and then transferred to the customer, and 0.6 are under construction or secured to be added.

We continue to be very confident on this technology's future prospects. Last week, we signed a framework agreement with Google to install up to 500-megawatt AC in local energy communities in the U.S. In Europe, DG is going through a high growth momentum with more than 100 megawatts AC of new DG capacity signed over the last 2 quarters. In Asia Pacific, we have around 120 megawatts AC of solar DG under construction. So in this region, we've already secured 40% of the additions for 2023 to 2026.

If we move now to Slide 8 and talking about interest rates. So we continue to manage our exposure to interest rate risk. As of March, we have 73% of our debt with fixed interest rates and part of the debt with floating interest rates is matched by asset exposure to inflation in Brazil. Debt in Brazilian real represent around 15% of our total debts and the EBITDA from Brazil represents around 30% of the total, which clearly demonstrates that we are inflation hedged here.

As we mentioned in 2022, we closed around EUR 2 billion of pre-hedge interest rate for '23 and '24 refinancing needs. So we have EUR 1 billion and $1 billion pre-hedged at around 1.8% and 2.6%, respectively, very competitive prices versus the current one. So reducing the interest rate risk for upcoming refinancing needs.

Regarding expectations on asset rotation, we stick to the capital gains of around EUR 0.3 billion, given that the clean energy and ESG components of the assets more than compensate the move of interest rates over the last 2 years. So we're continuing to see demand. We're continuing to see the value there. I've talked about that also as well. So overall asset rotation transactions, plant fraternity on track to deliver the expected returns.

Move on to Slide 9 and just a quick word here on an update on the tender offer on EDP Brazil minorities. The auction is expected to happen in the third quarter. We've been working on this and already completed several milestones, and we expect the CVM approval, so the market regulator Brazil approval between May and June. As we mentioned in the Capital Markets Day presentation, the expected EUR 1 billion of investment was already funded through the share capital increase on -- at the EDP level carried out in March. So we're very confident that the success of this transaction will be translated into a simplified corporate structure, and it's fully aligned with our strategy, focused on renewables and electricity networks.

Moving on to Slide 10, and just before I pass over to Rui. Good performance in terms of emission reductions in the first quarter of '23. We're fully committed to decarbonization with Scope 1 and 2 emissions intensity decreasing year-on-year by almost half. You can see this put us on the right track to achieve our ambition of reducing those emissions by 95% in 2030 compared to 2020 levels.

I'd also highlight that EDP's climate transition plan was submitted for advisory vote at the 2023 AGM, and it was approved with 99.73%, which clearly shows the confidence that investors have in our ambition regarding net zero targets. Also supported by the normalization of hydro resources in Portugal and the subsequent decrease in thermal activity this year, renewals accounted for 88% of total generation, which is 10 percentage points increase year-on-year, and the revenues from coal decreased 4 percentage points year-on-year to 4.7%. We also improved our alignment with the EU taxonomy, so 67% alignment for revenues was 14% higher year-on-year, a 97% alignment for the CapEx investments.

Finally, just to reiterate our ambition to reduce Scope 1 and 2 emissions, supported by being coal-free by 2025 and 100% renewable by 2030, focusing our investments in renewals and electricity grids.

So with that, I hand it over to Rui to deep dive on the financials, and then I'll come back for closing remarks. Thank you.

[Rui Manuel Rodrigues Teixeira, executive]

Thank you, Miguel. Good morning to you all. So I'd like to go through the EDP's financial performance in the first quarter. So please go to Page 12. Recurring EBITDA increased by 2x year-on-year to about EUR 1.4 billion in the first quarter of 2023. As you see, recurring EBITDA for renewables, clients and Energy Management was up by EUR 0.7 billion, mainly driven by the recovery of hydro in Portugal to normalized levels, improved energy management results due to lower electricity and gas sourcing costs and higher wind and solar EBITDA on the back of 11% increase in generation, an 8% increase in average selling price.

Moreover, in the Electricity Networks, EBITDA increased by 5% year-on-year, driven by the growth in Brazilian networks due to the positive annual tariff updates and the growth in the transmission business. Please do note that in the first quarter in 2022, we were heavily penalized by the extreme droughts together with record high energy prices.

So if we move now to Slide 13. EBITDA for EDPR increased 14% year-on-year, and that was the result of 5% growth in installed capacity to 14.8 gigawatts. That, together with good renewable resources, led to an 11% increase in electricity generation. The generation was sold at an average selling price of EUR 62.5 per megawatt hour, which is 8% higher year-on-year. And this was across all the different regional hubs with year-on-year growth, Europe growing, 21%; North America, 14%; and South American and APAC, more than 6x mainly due to a strong delivery of organic growth in Brazil, namely the commissioning of a couple of -- or actually 3 large plants, [indiscernible] with a total of 0.6 gigawatts, and the impact of Sunseap integration since February 2022. Also, please note that we have no results from asset rotation gains neither in first quarter '22 nor in the first quarter of 2023.

So now on Slide 14, from an integrated perspective, hydro, clients and energy management was marked by an overturn in operating conditions following the extreme adverse first quarter 2022. In Iberia, results were positively impacted by the normalization of hydro resources with generation being 3.5 terawatt hours, which is more than double versus last year and approximately 0.4 terawatt hours above our expected production. This positive impact was mitigated by the decrease in thermal generation with coal and gas fire power plants producing almost half of first quarter 2022 volumes. On Energy Management, there was a decrease in electricity and gas sourcing costs. This has mainly to do with the 58% decrease in electricity spot price in Iberia to an average of EUR 96 per megawatt hour in the first quarter of this year and 47% decline in gas spot prices to an average of EUR 52 per megawatt hour gas. In Brazil, EBITDA slightly decreased by EUR 2 million with better hydro conditions but lower volume from the sale of Mascarenhas hydropower plant in the fourth quarter of last year.

So now as we move into Slide 15, just highlighting the year-on-year dynamics of the integrated portfolio. So hydro, clients and Energy Management has a negative EBITDA in the first quarter of 2022, mainly impacted by the negative EUR 0.4 billion from the hydro shortfall, simultaneously with this record high electricity prices that we observed in the first quarter last year. And the mark-to-market on gas hedging contracts that last year was not recognized through hedge accounting, and that suffered from a sharp increase in the spread TTF to Henry Hub.

In the first quarter this year, we saw a strong rebound in Iberia. So we have lower electricity and gas sourcing costs given the decrease in electricity and gas spot prices, normalization of hydro resources in Portugal versus the first quarter last year, and finally, a positive year-on-year comparison with no material negative impact from mark-to-market on energy contracts in the first quarter this year. And this is mostly related to the derivative Cheniere Gas Contract. You may remind that we addressed this and solved this since Q3 last year.

So this being said, we reached an integrated EBITDA of EUR 0.53 billion in Iberia, which we believe is above a normalized level per quarter, which should be more in the range of EUR 0.3 billion to EUR 0.4 billion.

So now looking to the Networks performance on Slide 16. Networks EBITDA increased 5% year-on-year, reflecting mainly a 16% increase in Brazil with transmission expansion and the tariff of trades to inflation. In Iberia, EBITDA decreased 2%. In Portugal, actually, it increased EUR 2 million year-on-year with increase in the rate of return on RAB being mitigated by the increase in OpEx. But in Spain, EBITDA decreased 7%, given that first quarter of '22 was impacted by a recovery of revenues from previous years. Excluding this impact, EBITDA in Spain would have been flat year-on-year. So please note that we will continue to work to be done in efficiency, digitalization in terms of -- overall in our Electricity Networks.

As of March, we have 6.7 million smart meters installed across all the geographies, of which 0.8 million installed over the last 12 months.

So now let's move to the financial costs on Slide 17. If we exclude FX differences and derivatives, adjusted net financial interest increased 27% year-on-year to EUR 243 million, resulting in a 90 basis point increase in the average cost of debt to 4.8%.

But this is mainly explained by 2 factors. One is Brazil that represents around 15% of EDP's debt and more than 40% of the interest costs, given the higher cost of debt in Brazilian reals from last year's 12.6% to more than 14.3% in the first quarter this year. Please note that Brazil also has revenues index inflation, and that's why we have this floating debt on the financial side and therefore, hedging at the net profit level.

Euro and U.S. dollar-denominated debt was also experienced increasing. So we also saw the increase in the cost given the higher interest rate environment. Overall, cost of debt increased from 4.8% versus the 3.9% in the first quarter of 2022. If we were to exclude Brazil, cost of debt reached only 3.1% in the first quarter 2023.

And this is, of course, important also looking at financial liquidity on Slide 18. Strong financial liquidity remained in our balance sheet in the company with more than EUR 10 billion of available liquidity, of which more than $4 billion are cash equivalents and the remaining $6 billion of available credit lines for more than 25 counterparts.

As we can see in the right-hand side of the slide, this liquidity covers the refinancing needs beyond 2025. Moreover, and as Miguel said before, we already have around EUR 2 billion of pre-hedged benchmark interest rate for a 5-year maturity, representing about 70% of 2023 and 2024 bond maturities. And this will provide a positive impact on the evolution of the average cost of debt over the next 2 years.

On Slide 19, our net debt decreased to EUR 13.1 billion as of March 2023 from 4 different factors. First, of course, is the recurring organic cash flow of EUR 0.4 billion on the back of a very strong EBITDA performance in the first quarter; regulatory working capital of EUR 1.1 billion from the reversal of cash inflow that we registered in 2023; net expansion investments that amounted to EUR 1.2 billion; and finally, the EUR 2 billion from the capital -- the equity raises -- equity capital raises, of which EUR 1 billion at EDP and 1 billion at EDPR.

Finally, given the strong performance in the first Q this year and the referred EUR 2 billion of equity raise, we reinforced our credit ratios. Net debt to EBITDA at 2.8x and FFO net debt at 23% in the first quarter, and this is 3 percentage points higher year-on-year.

To finalize, and before handing over to Miguel, I would like to highlight on the net profit on Slide 20 as recurring net profit amounted to EUR 306 million. That's a recovery versus the negative EUR 76 million in the first quarter of 2022, slightly below the previous quarter, although this time, without any impact from asset rotation gains or any material impact from nonrecurring items.

So below EBITDA, just to highlight that financial costs increased, as explained before, due to the higher cost of debt mostly coming from Brazil; higher income taxes given that we had higher weight of earnings before taxes from Portugal and Brazil, which have higher corporate tax rates than the average of the portfolio.

So with this, I would now hand over to Miguel for closing remarks. Thank you very much.

[Miguel de Andrade, executive]

Thank you, Rui. So just to wrap up the first quarter performance, a good start to the year. That's for sure. sound results, recurring EBITDA of EUR 1.4 billion and net profit over EUR 300 million. EBITDA growth supported by the normalization of hydro in Portugal, hydro volumes recovering, obviously, from a very weak 2022, particularly the first 9 months, and generating around 2.5 terawatt hours of energy, 0.4 higher than expected. Wind and solar, very solid as well, 5% increase in installed capacity year-on-year, 11% increase in generation and also an increase in average selling price. In Electricity Networks, as I mentioned, positive impact from inflation updates on revenues.

For the remaining part of 2023, we have a positive outlook. So we're seeing improving average selling prices as the hedges made last year roll over. Hydro reservoir levels currently above average at around 80% and lower electricity and gas sourcing costs. On renewables, regarding capacity deployment, it's a CMD, we've secured 1.5 gigawatts of renewables, reaching the 8.5 gigawatts, I mentioned, around 50% of the target for '26, expecting to install around 3 gigawatts in our key markets and reinforcing our strategy to diversify the solar supply chain to avoid further constraints.

Funding and financial costs, positive on delivering target after rotation for '23. Average cost of debt being impacted by Brazil, but being balanced by having 100% inflation-linked revenues. EUR 1 billion and $1 billion pre-hedge new debt issues for 2023 and 2024. And finally, the reinforced balance sheet with the EUR 2 billion raised in EDP and EDPR that will support the renewables growth and the EDP Brazil minorities buyback.

So once again, thank you for attending this quarter's results. Miguel tells me a lot of questions have already come in online. But we can now move to Q&A, and we'll take as many as we can. Thank you.

[Miguel Viana, executive]

Okay. So we can go to the first question on the phone, which comes from Alberto Gandolfi from Goldman Sachs.

[Alberto Gandolfi, analyst]

Given we spoke about already quite a lot about the IRA opportunities in EDPR, I wanted to ask maybe 2 specific questions on numbers and one again, a follow-up, on IRRs from the other day. So I guess the first question is that I was wondering if you were surprised somehow by the evolution of the net debt in the first quarter. You raised 2 billion. The net debt is unchanged. I think that your waterfall chart is very clear. It looks like this is still entirely an issue having to do with the regulatory working capital. So I guess my question is, is this correct? And when do you expect this to reabsorb or should we expect incremental regulatory working capital for the rest of the year? Because this seems to be the biggest delta, if I'm right.

The second question is that I see that there was no guidance for earnings. Usual question, Bloomberg consensus seems to be between 1.1 billion and 1.2 billion, call it, EUR 1.5 billion net income. May I ask if you're perhaps comfortable, very comfortable or no comment? I mean you just delivered more than EUR 300 million with lots of taxes in it, and you're talking about rising prices and lower sourcing costs and more capacity for the rest of the year. So to which we need to add asset rotation gains. So it seems that if I were to guess, I would guess you must be very, very comfortable with consensus.

Last question. The other day, you talked about PPAs moving to 60 to 70 euros or dollars per megawatt hour. May I ask if this is anecdotal or actually you see this pretty consistently in the new auctions, the new PPAs. I just was trying to understand how sustainable is that because the other day, you reiterated you're comfortably above 200 basis points of a WACC of returns. And given so many investors was skeptical on the ability to create value, any extra light you could share will probably be much appreciated.

[Miguel de Andrade, executive]

Thank you, Alberto. So a couple of comments, and then I'll ask Rui also to comment on the net debt issue. But I'll just say there, it's well within expectations and something that didn't surprise us. But going to your comment on the guidance. So we are comfortable with the EUR 1.1 billion, in line with what we said in our Capital Markets Day 2 months ago. And maybe just going a little bit deeper and giving you a little bit more color on that.

So we see in 2023, obviously, and as you've noticed in the first quarter, a higher expected contribution from the Iberian integrated Generation and Supply business. And I know there have been comments about the way we're presenting this, but more and more we see this as an integrated, let's say, value chain to on the generation supply. So we're not splitting it out. We may evolve again if we get additional comments on this, but we do think it reflects sort of this integrated margin that we see. So rather than the volatility on some of the pieces underlying it. But anyways, higher expected contribution here. As we mentioned, we have had some capacity additions that have been delayed from '23 to '24 and also some decline in the average selling price for an EDP renewal, so some significant clawback. So we've been guiding, I think, EDPR down, Certainly, that's what we mentioned on the call on Wednesday, I just wanted to reiterate that now.

Financial results slightly higher than last year, but penalized by the higher cost of debt, but we expect it to be stable at around 4.8%. Effective tax rate, as you mentioned, in the first quarter is high, but we expect it to settle at around the mid-20s over the rest of the year. This is because of the mix of where the profit is being generated. So it's got a lot of Brazil, higher weight of Portugal, which has a higher effective tax rate, as you know, around 31%. So it's really a function of the mix. Over the year, this mix will evolve as we also have asset rotations and other things coming in and so it should be at the mid-20s. And then going forward after that, probably in the low 20s, so post 2023. So hopefully, that's a little bit of color on -- in terms of guidance, but that's -- just coming back to the beginning, so we're comfortable with the 1.1 billion.

On the PPAs, so the 60s, 70s is definitely dollars per megawatt hour. It's definitely something we're seeing in the U.S. I mean that's -- we're very comfortable with that. EUR 60, EUR 70 per megawatt hour in Europe, in Northern Europe is also something that we are seeing. In Southern Europe, typically also has a higher resource, both solar and wind, probably more in the 40s. So this is not anecdotal. This is concrete PPAs that we're signing and that we're locking in. So as I mentioned, we secured 1.5 gigawatts over the last 2 months, and these are sort of the prices that we're seeing the set of projects.

This is obviously reflecting higher CapEx, higher cost of capital, but then you're having these higher PPA prices. And so I've talked about on previous calls, we reverse engineered the PPA prices to make sure that we get the desired returns. And then we go out and we market it at that prices -- at those prices, and we've been able to lock them in for -- with good customers, both corporates and also regional utilities, particularly in the U.S. So it's definitely not anecdotal or it's very concrete specific data points. On the -- yes, Rui, do you want to comment a little bit more?

[Rui Manuel Rodrigues Teixeira, executive]

Thank you, Miguel. Alberto, so under that, we -- in December, when we presented the results, we had about EUR 1.1 billion of a positive impact in our net debt by then. And this was about approximately EUR 0.6 billion as regulatory payables effectively, and EUR 0.5 billion, so that was EUR 0.6 billion and then EUR 0.5 billion of working capital, so some cash anticipation from 2023 into 2022, that we also provided visibility. So as of March, this impact in our balance sheet has decreased significantly. It's approximately 0 right now. So that's why we are booking -- or we're showing this EUR 1.1 billion of negative outflow in terms of regulatory receivables.

This pace of reversion, we were expecting this to take -- to impact the first quarter because as the wholesale prices started to decrease throughout the quarter, then that's [ sporadic ] that is created between the wholesale price and the renewables tariffs, that goes into the system. That positive delta started to reduce and tariffs were fixed. So we were expecting this to have this impact by the end of the first quarter. Given that right now, the regulator presented already the proposal for the tariff revision for the second half in 2022, 2023, we see that what's being proposed, it will adjust the access tariffs to reflect the current wholesale market prices, and this should be stabilizing the regulatory receivables.

In any case, this only applies to the second half of the year. So we are expecting to see some increase in regulatory receivables during the second quarter in 2023.

So what we are expecting that this will still -- we'll see that increase, then we should see sort of more flattish into -- or settle into the second half. And we are also expecting that whatever deficit or deviations could be created, that we will also would be working to securitize those throughout the rest of the year. So our expected -- let's say, our forecasted debt for 2023 is around EUR 15 billion. So -- but that's really what explains the EUR 1.1 million delta that you see now in the first quarter.

[Miguel Viana, executive]

Thank you, Alberto. So going to the next question on the phone from Javier Garrido, JPMorgan.

[Javier Garrido, analyst]

In most of my questions have been answered. The only remaining question I would have is on the comment that we made on the call that a normalized contribution from the Iberian hydro client and energy management business will be between EUR 0.3 billion and EUR 0.4 billion per quarter. I was wondering, what is normalized? I mean do you -- when you think about normalized as normalized contribution with power prices around EUR 100 per hour at our level or normalized contribution with lower power prices in line to where we were before the Ukraine innovation? Just wanted to understand what is the concept of normalized you are thinking of for this range.

[Rui Manuel Rodrigues Teixeira, executive]

Javier, Rui here. So yes, I mean, normalized in the sense that production was also higher than what we were expecting. Also the fact that, all in all, from an integrated perspective, we are seeing a margin that should be reducing for the -- I mean, on a normalized basis for the coming quarters. So that's why I wanted to highlight, so you don't take the 0.53 billion as sort of what you referenced for what the normal quarter should be and adjusting for volume for the integrated margin more towards the EUR 0.3 billion, EUR 0.4 billion.

[Miguel Viana, executive]

I think I was in mute. Just thank you, Javier. Going to the next question from Jorge Guimaraes from JB Capital.

[Jorge Guimarães, analyst]

I have 3 questions, if I may. The first is if you can elaborate on the EUR 0.2 billion of hedging mark-to-market that you mentioned in the presentation, what is exactly this gain. The second one is if you see any risk for the takeout of the buyout of minorities in Brazil. And the third one and probably the one where I'm most interested in, it's the -- if you see the current run rate of pumping in Portugal, it's sustainable because there was no rainfall in Portugal in April, yet reservoirs are stable month-on-month and you are pumping a lot. But as time goes by, the reservoirs will go down. So how far can you sustain the current pumping levels as the year progressed?

[Miguel de Andrade, executive]

Okay. Thank you, Jorge. So Rui can probably talk about the first one. I'll just give you some color on the second one on the buyout of Brazil. And then I think we can comment also on the pumping. So just in Brazil specifically, we're very comfortable. I mean if we think about the current price is at around -- we came out at BRL 24 per share. Dividend adjusted, it's at 23.73. The current market price is below that is at 22.58, which is basically, that value discounted for the Selic. So I'd say it makes financial sense for the minorities to accept this offer, and we're certainly working on that basis. So I'd say the risk of not achieving this is low or at least for a rational investors. So we're confident about that. in terms of the mark-to-market, Rui, do you want to take that?

[Rui Manuel Rodrigues Teixeira, executive]

Sure. Jorge, so on the mark-to-market, it's really a year-on-year impact. So the EUR 0.2 billion is a year-on-year impact. Just to recall, in the first quarter last year, we booked EUR 80 million negative impact from mark-to-market, and that was related to the Cheniere contract, the gas contract, and then accumulated negative impact of approximately EUR 0.2 billion by the end of the semester. Since June then, we, as you may remember, we start moving these contracts into hedge accounting. In the first quarter, we have no negative impact related to this -- to any mark-to-market and we are benefiting from the higher gas margins given the low sourcing costs that are booked in this quarter and also related to the negative mark-to-market last year. So the negative mark-to-market was because it was hedging, then we would see this positive impact in '23, '24. It was actually mostly in '23. So I mean, the 0.2 year-on-year. And of course, now we're seeing the margin that the reversal of that negative impact.

And concerning the third question on the pumping, I mean, I guess what we are -- what we have been doing is from an energy management perspective, given that we have a much more balanced position than we can, at some point, as we see the market price going down, we go short go short in the sense that we will stop producing maybe definitely the coal or stop producing less -- or produce less gas. We may reduce as well the hydro production. And ultimately also buying electricity for the pumping. So that's something that has been managed very actively over the first quarter and that active management will continue to happen throughout the remaining quarters.

[Miguel de Andrade, executive]

And Jorge, I just add that we see this as sustainable also not just short term, but mid- to long term. And one of the things you probably have seen certainly over the last 2 months is the DUC curve, right, with more solar coming in and pressuring the prices sort of midday. So I think pump storage is really coming into its own now, and it's creating quite a lot of value as we've all been defending. So we see this sustainable both in the short term, as we talked about and also long term.

[Miguel Viana, executive]

Moving to the next question on the phone from Manuel Palomo from BNP Paribas.

[Manuel Palomo, analyst]

Sorry to insist on the first one, but I'd like to ask a bit more on the hydro, on the hydro levels we use. Previous analysts have been saying it's that there's been a big recovery in the months of November, December, January, but since February, I mean, rainfall has been previous case, I would say, Iberia. So I wonder whether you could give us an indication on what is your better expectation about the hydro -- about the electricity production from hydro in Portugal for the year 2023, given that, I mean, it's been pretty volatile in the last 3 years, 12 terawatt hours in 2020, 9 in '21, and not even 6 in 2022. So if you could give us on what's your production expectation, that would be great.

The second one is just a follow-up on one of our questions. He was asking about debt and about working capital. I was wondering whether you could give us an estimate on what is the level of case that you assume for the year-end.

And the last one, in the EDPR presentation, I could see that the impact from noncash items on the financial charges was in the region of EUR 35 million. I wonder whether you could quantify what was the figure for EDP in this first quarter.

[Miguel de Andrade, executive]

Thank you, Manuel. So in relation to the hydro, yes, as you said very rightly, so December, January, very wet month and a huge buildup of the reserves. And then we've been managing that over the last couple of months. As we mentioned, this is actually -- we've actually been managed to conserve a lot of water and just take the margin, buying it cheaper in the market. So we're above the average for the year. For the rest of the year, we assume an average year. So that's the typical -- I mean, as you know, it's almost impossible to do any predictions really more than 2 weeks or so. So it's very volatile.

I mean we've looked at all types. We could have a morning discussion on predicting weather patterns and well, whether El Nino will come back and the implications of that in the U.S. and then in Europe. And I mean, we look at that. We have a great team for energy assessment, which looks at that. But basically, bottom line is almost impossible to tell. The best predictor is to just assume the average for the rest of the year. There is more volatility, at least intuitively, it feels like there's more volatility, but around, let's say, stable long-term trend. But that's certainly the case more for hydro because, as you know, wind and solar tend to be much less volatile than hydro. In relation to debt and the impact of noncash, Rui?

[Rui Manuel Rodrigues Teixeira, executive]

Sure. Manuel, it's Rui here. So just to be clear, I think your question was related -- the second question was related to the level of the tax equity partnerships forecasted for 2023. Is that it?

[Manuel Palomo, analyst]

Yes. Yes.

[Rui Manuel Rodrigues Teixeira, executive]

Okay. I think -- I mean, it will -- I would probably see it pretty much in line with what we have today, depending also -- and increasing also with some of the wind farms that will be commissioned this year, so around this 1.1 commission this year. So I would say, excluding the plants that we are delaying for 2024, maybe an additional 600 million, give or take. So from where we are today, an additional 600 million. Yes. So -- and then related -- the third question here, I think that you were referring to the negative impact on the financial costs from ForEx mark-to-market, is that it?

[Manuel Palomo, analyst]

Yes.

[Rui Manuel Rodrigues Teixeira, executive]

Yes. So basically, what we have is, as we -- on our net investment policy, we are, of course, protecting our equity against FX variations. So we are contracting forwards on the FX for the different currencies. But there will always be some inefficiency because [ company ] will be rolling this forward. So there is a delta that is created by the difference between interest rates between euro and the currency that we are covering. That delta, we need to mark-to-market that and goes into our books. It's a noncash item. It will be varying over each quarter. It will depend on the volatility of the different currencies versus the euro, but it's effectively bad. So that's -- in consolidated levels in the first quarter of 2023, we have about EUR 22 million coming from that. But it will depend really on the evolution on the ForEx, on the different exchanges. But really, it's just hit the consequence of having this net investment policy to protect the equity.

[Miguel Viana, executive]

Okay. So the next question comes from Fernando Garcia, Royal Bank of Canada.

[Fernando Garcia, analyst]

Only 2 left for me. First, on the recurring term rate of 31% in the first quarter. My question is if this is a good indication going forward is asset rotation. My second question actually is a couple of questions on regulation. Do you think that there is any read-across from the constitutional court rolling on gas distribution about the Portuguese extraordinary tax for electricity? That will be my first question on regulation. And the second one will be, if you can update on the Portuguese social tariffs financing.

[Miguel de Andrade, executive]

Okay. Rui, do you want to take the first one?

[Rui Manuel Rodrigues Teixeira, executive]

So yes. So I think that the tax rate for the year-end, we were estimated to be around mid-20s, as we've said this morning -- sorry, this year because of the impact from first quarter results coming from Portugal and Brazil where we have high -- highest tax rates. That's where we lend into this 31%. If you exclude the 1.2% tax in Spain, this actually comes closer to 29%. So as we move towards the year-end, then we see, of course, an increased contribution coming from the renewables from EDPR and also, as you know, on the gas rotation side, those typically are not -- you don't -- we don't book any taxes on those capital gains, we expect the tax rate to come down. So that's why we are guiding around the mid-20s.

[Miguel de Andrade, executive]

Okay. On the regulation. So in relation to the sales of the extraordinary contribution, what came out from the constitutional court, for those of you who haven't followed is, relating to the natural gas sector and essentially reopen the debate on the maintenance of this contribution, certainly over the short, medium and long term. Essentially, what it says is that as of 2018, the extraordinary circumstances are no longer -- were no longer in place, particularly in relation to the gas. It made no sense for them to be paying it when a big part of it was going into the electricity sector, was being sort of put into paying down the debt of the electricity sector.

So I think this -- we are looking at the arguments that have been used by constitutional courts. And we are looking at what should be our approach to this, whether it can be applied also to the electricity sector. We maintain, as we always have, that this is a tax or contribution, which makes no sense. It incentivizes investment because it's a -- the percentage on investments. So the more you invest, the more tax you pay. So it's not a good incentive for investment and Portugal needs that. We've been -- it's been public that it would be reducing over time with the reduction of system debts. 2/3 of this tax paid is going into paying the system debts. And so we believe it makes sense and that it will happen at some point, that this will start to reduce, hopefully, sooner rather than later.

On the social tariff, 2 messages here. One, as you know, we appeal to the European Commission. The European Commission said that we were right that -- I mean, we have no problem with the social tariffs. We think that's -- it's fine, and it's obviously government's policy that we see a lot of merit in it, but it should not be financed the way it's currently being financed, which is by -- mainly by EDP in Portugal. So as I said, the European Commission said that we are right, it should not be financed by EDP or mainly EDP. You should either finance it through the government budget or you should find an alternative way. For example, in Spain, this is done by socializing it between the different markets operators. The minister came out and said that they were looking at it and that they were going to review the financing scheme. And so -- well, we expect that in the short term, that this will be resolved and that there will be a fairer and more equitable way of financing the social tariff than the current one. So basically, that's what I'd say about that.

[Miguel Viana, executive]

Thank you, Fernando. So the next and last question on the phone is from Olly Jeffery from Deutsche Bank.

[Olly Jeffery, analyst]

So a few different questions, please. The first one is going back to -- if you go back to the CMD and what's changed since the CMD, I'm just interested to understand how are you seeing kind of incremental changes on EBITDA. So you got the headwind in EDPR was moving, the 1 gigawatt of solar into next year. Is there anything else we should consider that's change in the CMD in terms of your view on the incremental EBITDA change? I believe it's a slight negative, but if you're able to quantify that, that would be useful.

The next question is just going back to the Cheniere contract. Just to understand this. So the mark-to-market last year was EUR 200 million, which is meant to roll back, I think, 70% this year. Are you expecting anything else to roll back through the rest of the year? Or is that now done? That would be helpful to know.

The next question on the normalized hydro, I didn't quite catch your answer. Did you say that you thought for the following quarters, you'd expect EUR 300 million to EUR 400 million? Or is that just in Q4?

And then just one more, just on the asset rotation. I mean I understand that you made it quite clear in the EDPR call that you're looking to do EUR 300 million kind of irrespective of pricing this year. I presume at the EDP level that you're -- it's probably unlikely that you'll get through any rotation this year to give an indication of whether it's -- that's more likely a 2024 event. And then yes, I'll leave it at that.

[Miguel de Andrade, executive]

Okay. Thanks for the questions. So in relation to the CMD, I mean it was only 2 months ago, so I don't think anything structure has changed really. I mean we've -- you talked about the 1 gigawatt or 0.9 moving into 2024. I mean you'll see some different moving pieces. Maybe the hydro in general has gone quite well. EDPR, a little bit less well for this year. But certainly, we see 2024 and beyond as staying -- we're reaffirming the guidance. I mean we see no reason to change what we talked about in the CMD 2 months ago.

On the and normalized hydro, Rui you can probably talk about. But maybe just -- I didn't quite catch the fourth question of asset rotation EUR 300 million. I didn't quite catch what was the 2024 event that you mentioned?

[Olly Jeffery, analyst]

No, that was just ask at the EDP level. Should our assumption be this year that is probably unlikely you'll do in any rotation at the EDP level. I'm thinking of the transmission line in Brazil. My expectation is for more of a 2024 event. But if you're able to comment on that, either way would be helpful.

[Miguel de Andrade, executive]

Yes. Okay. So just before I turn it over to Rui, on that -- on the EDP level, I mean, we'll continue to look at different transactions including, for example, as we've talked about, we'll be doing sure. So it's not exactly asset rotation, but just in terms of disposal, probably hydro, hydro in Brazil. and anything else that feels attractive to us. In terms of the transmission line, I would say, probably not a 2023 event, but we can talk about that maybe in future calls. As of today, we're not necessarily counting on it for '23. But we'll update you again if you want on the July call. In relation, Rui, if you want to take number 2 and 3?

[Rui Manuel Rodrigues Teixeira, executive]

Sure. So on the what we said in fact also last year is that -- about 70% of those mark-to-market losses would be reversed through 2023 and the rest in 2024. So what you're seeing now in the first quarter is really a part of that, but we'll see more coming through the rest of the year. Again, overall -- for the overall losses that we booked in 2022 or the mark-to-market loss of throughput in 2022, 70% of those should be recovered during this year.

And then what might -- so to be clear, my normalized comment is more normalized first Q. So as you know, typically in the -- on the hydro, first and fourth quarter are stronger. Second and third are typically not so strong. I just wanted to make sure that as a first quarter result, that EUR 0.53 billion, you don't take it as a normalized first quarter. That would be more within the range of the 3.3 3.4.

[Olly Jeffery, analyst]

And then just one follow-up. On the social tariff, within the kind of the soft guide that -- I know you haven't given a guide, but you spoke about consensus at 1.1. Are you assuming that any of the social tariff comes off this year? Or is that more mainly 2024?

[Miguel de Andrade, executive]

We are assuming that they will find a model which is more equitable this year and which probably reflects better, something like the Spanish model. So there's already built into that forecast some expectation of a change in financing given that the minister and the European Commission are both been relatively clear about the need to do that. So yes.

[Miguel Viana, executive]

Okay. So we will move now to a couple of questions on the phone -- on the web. From Jorge Alonzo from SocGen, regarding the update on Brazilian assets potential disposals.

[Rui Manuel Rodrigues Teixeira, executive]

Sorry, Jorge, it's Rui here. So just to be clear, Brazil, we are considering as of now, the sale of PSA, the coal plant. That is going as planned. We should be getting the binding offers over the second quarter or during the second quarter. And of course, we'll update you with that. Then we have the transmission lines that Miguel just said. We may update you as well coming further into the -- well, on the next conference call, the results in the earnings call. And then within the Renewables segment, this is one of the countries that we are also assessing whether we do or not an asset rotation this year on the renewable space. But we have already started engaging with potential investors and will also update you as we go further into the process.

And also on the hydrocele, I mean this is something that we'll be preparing. As you know, we concluded the sale of Mascarenhas in December last year. We know that at some point, we'll also work on this potential sell-down. So we'll provide you more color as these processes actually move forward. Thank you.

[Miguel Viana, executive]

So I think the other question that we have, more or less, they were mostly covered. So if pending lines, we'll do follow-up FIR level. And so I'll move now to our CEO for closing remarks.

[Miguel de Andrade, executive]

Thank you, Miguel. Listen, just very briefly, I think a great start to the year, very strong start on the hydro business and setting this up well for -- to achieve the consensus targets for the year. EDPR, a little bit slower. We've talked about that on the previous call. But everything else, I think, going well. And I won't reiterate everything that we said, but I do think we have a very solid start to the year and that will continue to go well. We also have some visibility on April, which is also going pretty well. So I'd say we'll update you again in July, but we are very comfortable with the consensus and with the targets.

Thank you.