Ren Redes Energeticas Nacionais SGPS SA

ELI:RENE

Earnings Call Transcript 2024-Q3

[Gonçalo João Soares, executive]

Hello. Good morning to you all, and welcome to REN's 9 months 2024 Results Conference Call. As usual, I'm here joined by Rodrigo, the CEO; and João, the COO. Madalena is still on maternity leave, so I am still here with João Pedro, who is filling her shoes for the next couple of months also.

So let me start going over the presentation. This has been, I'd say good in the fact that it's very well inside our expectations, a good quarter, but not very, very eventful. So if you want to go to Slide #4 with the key messages we can go over them. So we have EBITDA coming down a little bit below 2% versus last year. This is slightly better than the first 6 months, and it's probably more or less in line with what we expect for the full year.

No major news. So the main trends and what you were seeing in the first 6 months, this is what you are seeing here. And it's mainly also impacted by some positive non-recurrence that we have both domestically and in Chile last year, okay.

In terms of net income and given this decrease in EBITDA, it's coming down also around 12.5%, mainly driven by EBITDA, also by higher financial costs, which were very much expected. And they will probably end up a little bit better than we expected given the lower rate environment that we are seeing.

Net debt increased 3%, but it is actually decreasing versus year-end and it is decreasing, I'd say, at a slightly faster pace than we anticipated, given the fact that we are recuperating tariff deviations at slightly faster pace also.

In CapEx, it's increasing 20% and we'll talk to you, but we are, I'd say, pretty confident on a positive increase this year more than we were in the previous call. I think the execution has been strong, and so we are, I say, delivering with the numbers that we promised on the Capital Markets Day, okay. So I'll pass it on to João to give you an overview of the main operational highlights of the quarter. João?

[João Conceição, executive]

Well, thanks, Gonçalo. Good morning to you all. On the operational side, and on Slide 5, one of the most important issues is the fact that this year compared to 2023, we had an increase on the hydro production from 23% to 31%. And that's together with the fact that solar is picking up in Portugal. We managed to raise the renewables penetration from 55% to 73% in this first 9 months of 2024.

On the natural gas side, what we see is the [ flip kind of that ], which is the fact that due to the increase in electricity generation from renewables, we decreased the electricity generation from combined cycle plants. And as a consequence, the volume of natural gas decreased accordingly.

In terms of quality of service of our operations, no big issues to report. We managed to continue above the thresholds that the regulatory framework keeps us in terms of quality of service and on regulatory incentives. And on the regulation highlights, besides the [ wells ] that we have reported in this slide, I would have the fact that we received by the end of July, the approval from the government of this CapEx related to the seniors industrial area with a significant amount of [ EUR 536 million ] to be done on the next years.

Moving to Slide #7, you'll have a bit more detail in terms of the operational figures and in addition to the ones that I've already mentioned, we see the consumption -- the electricity consumption increased slightly, 1.7%. But if we make the normal correction on the workdays and the temperature, this increase comes to 2.3%, which is approximately what we are forecasting for the full year of 2024. So an increase in electricity consumption.

Another point that is normal. More renewables means inevitably a little bit increase of the transmission losses, but nothing substantial. And we are also working internally to develop the generation of renewable electricity from solar in our sites, precisely one of the points to compensate these losses on the grid.

In terms of natural gas, no big issues besides the ones that I mentioned. In terms of availability, quite high, both in transmission and distribution activities and as well as the fact that we keep assisting a decrease on the consumption, as I mentioned, derived from the decrease in generation from -- the use of natural gas to generate electricity. With that, Gonçalo, I give back to you.

[Gonçalo João Soares, executive]

Thank you, João. So Slide #8 is just the main highlight. I will jump to Slide #9 directly with an evolution of EBITDA. As I said, the main explanations are very much in line with what we have told you in the second quarter. So this decrease in assets [ in OpEx ] have much to do with one side, a decrease on rates on the gas side, so not only because of the review of the regulatory period, but also an evolution of rates. And also the issue of the OpEx that, as you may remember, last year, we had a particularly strong OpEx contribution given the electricity costs at LNG terminal. In this year, they are more normalized. And so we have a positive impact this year that -- last year that we don't have this year.

On top of that, you start to see the contribution also on the positive side of solar agreement which is already around EUR 5 million at this stage at this quarter.

In terms of other revenues, it's mostly onwards, given that we are doing more CapEx. So it's normal. It's also services that we render to connect up with promoters and we do that. And it's also some corrections in terms of tariff deviation of previous years. So all of those increased a little bit the other revenue. OpEx core coming down a little bit, mainly because of personnel costs, and we'll go to that.

And in international, it's mostly driven by the nonrecurrent last year of around EUR 4 million. There is a small decrease in [ Electrogas ] and the previous year was also a record year in terms of volume. But so I'd say that those are the main reasons. So I'd say very much in line with what you have already seen in the first half.

On Slide #10, you see the evolution of the rate of return. You see this trend in terms of stabilization of rates and decreased since the last time. And you see mainly that, that has a very small impact in electricity, but it does have a larger impact in gas because of the change in the new regulatory period that we started this year.

In terms of investment and overall. As you know, this now is going to be the strongest quarter and the last quarter of the year. But what we are seeing is clearly in terms of CapEx pickup. We were in the first half of the year a little bit concerned about some delays of licenses and other things. Things have now, let's say, picked up again. And I think we are on route to achieve the numbers that we have in the business plan. So you'll see, I'd say, a strong increase already in CapEx this year versus last year, okay?

In terms of RAB returns and on Slide #12, this is a little bit what I already told you. So you see in terms of rates and negative impact across the board, but mainly in gas transportation and distribution. And then in terms of asset base evolution, you see positive impact on both electricity and gas. In electricity, if we start to see more transfers to RAB, which will [ you'll ] start probably next year, given the strong CapEx this year, you'll start to see a more positive evolution here in terms of asset base. But in gas transportation, you still see a negative impact given the decrease in RAB that we all know.

On Slide 13 and in terms of OpEx. So you are seeing OpEx increasing. As you see, it is basically driven by personnel costs. These are not only driven by value increases that you still have this year on the back of inflation that came from previous years, but also because we have been doing an effort to increase people. We are increasing operational activity. So we have to increase people, and we have been increasing last year, this year. And I would say that next year, we will still see that. I think that probably to 2025 will be a top year in terms of growth of people. And then it will kind of start level and will probably be at the level that we want to be in terms of personnel. We are now at 753, but still increasing a little bit this year.

In terms of external costs, and it's what I told you, most of the impact comes from electricity costs. And that in the LNG terminal, I have a positive evolution versus last year. In terms of maintenance costs, there are some delays, so it's decreasing and there are some delays. And some of them we will probably see next year, but I'd say nothing material. Most of the impact comes from the electricity.

Chile, also with the story I told you. So the main impact is because of that nonrecurring in Transemel. If you adjust for that, what you see is that this year in Transemel is a little bit -- a flat year. Some of the new constructions that we have forecasted for this year were a little bit delayed, so they are coming online now. So the impact here is not going to be that meaningful, given that the new CapEx is basically going to be done next year. So you'll probably see the organic impact of doing the CapEx there in Transemel start to reflect itself more next year and don't expect any major growth this year.

In terms of Electrogas, there is a slight decrease, given that last year was a record year in terms of gas volumes. The volumes are a little bit below. That being said, we do not expect that it is much lower than the previous year. It will decrease a little bit, but not by a very large amount.

So below EBITDA, in terms of financial results. And what I want to highlight is that -- we given the lower interest rates scenario that we are now leasing, we see our own average cost of debt coming down a little bit despite the fact that we refinanced everything with longer maturities. We see now this cost stabilizing. It's now at 2.8%. At year-end, this should be at 2.8%, 2.7% around that, and we see it more stabilizing at this level rather than the 3% that we have told you about in the Capital Markets Day, so slightly better. And in terms of -- versus the end of the year, it is decreasing the level of debt. So versus the end of the year, it's decreasing a little bit versus 9 months on 9 months, it's increasing a little bit, but this was also compensated by the higher dividends that we registered this year.

In terms of taxes, the effective tax rate except for the Special levy is more or less in line. This year, 26%, last year it was 27%, so it's more or less in line. We recuperated something last year we did this year also. [ As said ] no major change quarter-on-quarter versus last year. In terms of special levy. There are no significant news, but what we can tell you is the things that we have already told you in the past. First, this year, we have won 2 court cases in the constitutional court as of now. We are now waiting for those decisions to be completely final, which they are not, but -- we are not expecting them at all to be reversed, but we are expecting them to be completely final as we are conservative in the way that we treat them.

And the second thing that we can tell you is that the government has still included this in the budget as of now for next year. So the preliminary version of the budget still [ helps ] that.

On the plus side, you also have a 1% decrease on the corporate tax rate that is in the budget. And this government is saying that their aim is to decrease 1% in the following years every year. So at the end of some years, that should see some impact and 1% is 1%, and we should see that flowing through the P&L next year.

So in terms of net profit, Slide 16, it's kind of all of these impacts together. So we have this 12.5% decrease versus last year. We'll see how it is at year-end, okay? But perhaps a little bit better.

On Slide 17, net debt. So this is something I have already told you about. So what you see is a very positive evolution, and this is mainly driven by a decrease of around EUR 120 million and also on the tariff deviations. This was a little bit faster than we anticipated. But even in terms of net debt without the tariff deviations, it is decreasing as we are having now very strong quarters of CapEx. I would assume that without tariff deviations, evolution net debt should be more or less stable on a year-on-year basis, but you should still see some decrease in tariff deviations until yearend, okay?

In terms of cost of debt, I already told you. So I would say that this level of 2.7%, 2.8% is where we are going to be. In terms of maturities, what you see here is [ debt ] at the end of September. At the end of September, we have not renegotiated all the loan term. As I told you, we have now signed all the renegotiations of the loans to extend maturities over 5 years. We are now at this [ account ] but we are now above 5 years, so 5.3, 5.4 years. We should be the full year at 5% or slightly above in terms of maturity. So this was the effort that would -- we did and we promised on the Capital Markets side.

In terms of ESG and not to go into much details. Basically, the main news is that very strong decreased that you see there in Scope 1 and 2 greenhouses. This is on the back of what João told you about the evolution of renewables. So as you can see, there is a strong evolution in terms of greenhouse intensity and the impact of greenhouse gas emissions is decreasing quite a bit, given the fact that renewables increased to 73%. Last quarter is not expected -- and João can comment. But normally, it's a good quarter in terms of renewables. Typically, it's not worse than the other quarters that there's already rain, there's wind. So we are not expecting this to change significantly. It could even improve, but we are not expecting to change significantly.

What you can see is that this is clearly looking at very much on track in terms of the evolution, the evolution of the promise that we made in the Capital Markets Day, okay?

So you have a little bit more detail in terms of ESG on Slide 20. But as you can see, it's about the 73%. We also expanded our self-consumption. We already certified our network to have hydrogen. So we are all doing all of these tests and to increase and to show our commitment in terms of ESG, which has been translated, and you can see that on Slide 21, has been translated in terms of the impact that you have in terms of the ratings and in terms of ESG, okay?

So closing remarks, mainly the main numbers. So -- this decrease in EBITDA that was already expected and net profit. I said strong signals in terms of CapEx and good evolution of net debt. So I'd say everything much in line with what we said in the Capital Markets Day, very much in line with what we already also told to you in the first 6 months, okay? So with this I conclude the presentation, and we will open the floor to any questions that you may have. Thank you.

[Operator]

[Operator Instructions] And the first question comes from the line of Enrico Bartoli from Mediobanca.

[Enrico Bartoli, analyst]

The first one is related to the outlook for next year, for '25. If you can provide some comments on the drivers in particularly on what you expect in terms of evolution of the rate of return in the current interest rate environment or RAB and if possible, to have an indication on the CapEx that you expect for next year.

A general question regarding the regulatory environment, if you can have any update any discussion that you can have with the government on the regulator on, let's say, the level of investments in electricity transmission going forward, and in particular on a possible improvement on the regulatory framework starting in 2026 through a better rate of return.

And the last one is on the transfer to RAB that, let's just say from the 9 months numbers is still significantly lower than the CapEx. If you can give us an idea of when we will start this figure to ramp up, considering that you are accelerating investments and then the investment you are making now to start to flow significantly into the RAB evolution?

[Rodrigo de Araújo Costa, executive]

I will start with just a brief comment and then I will pass to João. On -- just overall, it's important to say where are we? We -- in terms of comments on negotiations or talks with the regulators, we -- as you can expect, we don't do that. But when we look forward, where are we? This is -- the energy transition is a task that the country decided to move on. We had very recent talks from the new Minister of Environment. And I think she is fully committed and the government is fully committed to keep the levels of investment and at some point, even to increase from what was expected before. Then I would say that the situation is when we -- when we look to it and in the coming, let's say, 2, 3, 4 years, it's quite positive.

I think João mentioned the fact that we got the approvals for a series of projects that they were being under evaluation for some time already. And we finally got the green light. That green light will allow us to do a lot of work in the coming years. Those investments will be a catalyst for industrial investments that are being prepared in the country, which is also quite positive. That means a higher demand for electricity. It means that this is basically unstoppable. And with that, João?

[João Conceição, executive]

Well, thanks, Rodrigo. Regarding the last question on the transfers to RAB and lowering CapEx. Well first, this is normal because usually, we have a seasonal transfers to RAB which concentrates some of our worst on the end of the year. Actually, this year, that's what is going to happen. We have a big project that we are expecting to put into operation by the end of the year, which will increase -- an important increase with the values of transfer to RAB.

Having said that, bear in mind that much of the CapEx that we are doing now refers to multiyear projects that will be transferred during the next year. So this is not a one-to-one relationship between CapEx and transfers to RAB on the current year. Gonçalo, I don't know if you will...

[Gonçalo João Soares, executive]

I'll just add a little bit. So we don't really give any outlook, and you know that, okay? But just to give you a color. So on the rates on, I'd say, on a steady state, we are not expecting any major changes in terms of rates for the market. It's decreasing a little bit, but I don't think that, that will impact materially or very much the rates of return that you'll see next year, okay?

Second comment I can give you is that we are expecting a strong year in terms of CapEx execution next year. So we are -- I think we'll be a little bit ahead even of our expectations, so I think it will be a good year. And just a final comment. We'll see what comes out in terms of regulation from Spain. I think we are all in the moment of expecting regulators to recognize the increasing cost of capital in the market, and that will be reflected somehow and compensate all of the TSOs. So this is the expectation that we told you in Capital Markets Day, and it's what we are expecting.

[Operator]

And the next question comes from the line of Ignacio Doménech from JB Capital.

[Ignacio Doménech, analyst]

Just the first one, a follow-up on the next regulatory review. Just wanted to know if you can give us time line on when will the regulator publish out the, as they say, first draft?

Then my second question is on the EUR 600 million investment plan in Sines. If you could clarify this -- first the calendar, okay, of this investment? And if -- all of these were already embedded in your business plan or if we could expect further upside in terms of the investments?

And my last question is just a clarification on taxes in the third quarter, okay? I think you received the reimbursement from -- in 2023 of EUR 25 million, somewhere around EUR 25 million. So I just wanted to clarify why the mechanics or the reason behind this? And if you -- if this was already expected, you had a [ calendar ] ready for this.

[Rodrigo de Araújo Costa, executive]

João.

[Gonçalo João Soares, executive]

For the regulatory review, the time line, we are expecting to follow the normal time line. So in the first semester, typically, the regulator puts into consultation the basic regulatory pieces, so the regulatory framework. And by October 15, presents its first proposal on the parameters. So typically, we are expecting them to follow exactly this normal procedure.

Regarding your second question on the CapEx of Sines. So this is divided in 3 phases. And roughly, the first phase is going to happen until mid of 2026, and includes, I would say, 1/4 of the total CapEx, rough numbers. Then you have a second phase that goes up to the beginning of 2029, which is half of the total amount, and then the last phase up to mid of 2031, and it's the last quarter of the values. And as this goes beyond the time frame of the investment plan considering in our business plan, we only consider a small part of it on our investment -- on our business plans.

[Rodrigo de Araújo Costa, executive]

So relative to taxes, so this is only a cash flow thing. If you may remember, in the last quarter, in the fourth quarter, we registered a sizable tax benefit, okay? That was around EUR 20 million. And so what happened is that we have been paying too much given that fiscal benefit, the amount of taxes that we paid was too high versus what we have actually to pay. So it was kind of a correction that we received now in September. So it's a normal thing but the difference is that sometimes it's EUR 5 million. This year, it was larger because we have that very, I'd say, sizable tax benefit at the end of the year that made this kind of -- but it's a balance sheet things, okay.

[Operator]

[Operator Instructions] As there are no further questions, I would now like to hand back to Gonçalo Morais Soares, CFO, for any closing remarks.

[Gonçalo João Soares, executive]

Thank you very much for joining. I think that as you see, it was a good set of results, very much in line with what we have expected. And I hope to see you at the final year. And if you have any other questions, please reach out to me or to João Pedro Pires. Thank you and have a very good day and a great weekend. Thank you very much.