Terna Rete Elettrica Nazionale SpA

MIL:TRN

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Q1 2018 consolidated results conference call and webcast. [Operator Instructions]

I must advise you that this call is recorded on Wednesday, the 9th of May, 2018.

I would now like to handover to Agostino Scornajenchi, Please go ahead.

[Agostino Scornajenchi, executive]

Good afternoon, everybody, and welcome to the first quarter 2018 results presentation. Before starting to analyze the figures, I would like to share with you the picture of the electricity demand evolution over the last 12 months.

In the first quarter of the year, we registered a national demand of about 82 terawatt hour, 1.8% higher than the same period of 2017 when demand was about 80 terawatt hour.

Regarding net total production of the period of 69 terawatt hour, it is worth mentioning that wind production registered an increase of about 16% versus last year, while hydroelectric generation increased by 11.5%. Overall, RES contribution was about 30% for the period.

Now let me spend few words on the key numbers of the period. Page 5. First of all, 2 main figures. Net income up at EUR 183 million and group CapEx at EUR 142 million, respectively, 2% and 42% more versus previous year. I believe that this is the best way to align the capability of Terna to accelerate on the realization of grid infrastructure, while at the same time ensuring the excellent value to its shareholders. As you may appreciate, these figures represent solid ground to support the growth of the group for the rest of the year.

This positive set of results is fully consistent with the guidance provided in the 2018-2022 Strategic Plan with values just presented on the 22nd of March. Indeed, group revenues and EBITDA were up by 3% and 2%, respectively.

Regarding net debt, it is worth mentioning that notwithstanding the CapEx increase, our net debt stood at EUR 7.6 billion, lower versus 2017 year-end level, mainly thanks to the operating cash flow generation of the period.

So let's now have a deeper analysis of the figures moving at Page 7. Total revenues increased by 3%, reaching EUR 538 million, up by EUR 14 million versus the same period of last year. As usual, most revenues remain linked to our regulated business, substantially in line with first quarter '17. The growth was mainly due to nonregulated activities and the increase in Tamini's turnover that will be both be analyzed in the day later on.

Furthermore, please note that regarding international activities, as already stated during the planned presentation, starting from this quarter, we began to account the construction margin, while, in the past, revenues and costs were shown separately.

Let's start with the regulated and nonregulated revenues evolution moving to the next slide. Regulated revenues reached EUR 488 million, almost in line with last year. Transmission and dispatching fees were almost stable versus last year, while bear in mind that 2017 other revenues were positively affected by some exceptional one-off items.

Nonregulated revenues stood at EUR 47 million, EUR 14 million higher than last year. The growth was mainly due to the increasing as well as expected contribution from Tamini. The increase of order intake registered in last quarters garnered into EUR 28 million revenues. Moreover, we registered an increase also in the other nonregulated activities related to the Avvenia acquisition and Italy-France interconnector.

Now let's go through operating cost analysis, moving at Page 9. As shown in the chart, total operating costs stood at EUR 129 million, EUR 7 million increase versus last year, mostly attributable to the growth in order registered by Tamini, as already mentioned.

Regarding regulated activities, it is worth mentioning that notwithstanding the increase of the asset base, we will be able to maintain high efficiency level in and with management, also thanks to the integration process of the railways high-voltage grid.

Let's move to the next slide for a deeper analysis of the group OpEx. We reported regulated OpEx of EUR 95 million, substantially in line versus last year. Regarding nonregulated activities, operating expenses amounted to EUR 32 million, EUR 5 million higher than last year, mainly due to higher Tamini costs related to the increased turnover volumes.

And let's now move on the EBITDA analysis at Page 11. Considering the above mentioned effects, including some 2017 one-off on regulated activities, group EBITDA reached about EUR 409 million, EUR 7 million better than last year, with total group profitability margin at 76%.

The EBITDA increase was mostly related to nonregulated activities, which grew by EUR 9 million versus last year, reaching EUR 15 million in the period. The improvement was mainly attributable to Tamini, to the Avvenia acquisition and to the contribution of international activities. Please bear in mind that over 95% of our margin remains wholly linked to our regulated business.

Let's now move on the lower part of the P&L, and I'm at Page 12 now. D&A amounted to EUR 133 million. The slight increase versus last year was mainly due to the impact of the new assets becoming operational. As a consequence, EBIT reached EUR 277 million, 2% better than 2017.

We reported net financial expenses at EUR 25 million. The EUR 4 million growth was mainly related to the gross debt increase, also as a consequence of the 10-year bond issue for EUR 1 billion made in July 2017 at particularly favorable conditions. The cost of net debt was 1.45%, substantially in line with the level expected for the full year.

Taxes stood at EUR 69 million, with a tax rate of about 27%. The EUR 5 million reduction was mainly due to a positive one-off registered in this quarter. For the full year, we can expect a normalized tax rate in the region of 29% to 30%.

As a result, group net income reached EUR 183 million, EUR 3 million better than last year.

Moving to CapEx analysis at Page 13. As we already mentioned on Slide 5, in the first quarter, total group investment amounted to EUR 142 million, EUR 42 million higher than last year. Please note that the acceleration on CapEx spending confirms the trend provided in March with our full year guidance. EUR 114 million were related to the regulated activities, of which 17% to projects that might be eligible to the 1% input-based incentive as they have been included in the current incentivized categories. Among the main regulated projects, it's worth mentioning that public interconnection between Italy and Montenegro, of which the cable laying on the Italian side has almost been completed. The connection between Capri and Sorrento, where the contract for the supply and the construction has been awarded. And the interconnection between Italy and France, on which we completed the civil works and we are executing the cable line.

Other CapEx stood at EUR 28 million. This category includes capitalized financial charges and nonregulated investments.

Let's now move on to net debt and cash flow analysis at Page 14. Net debt at the end of the period was EUR 7,618 million, EUR 179 million lower than 2017 year-end. Indeed, thanks to the operating cash flow generation for the period for about EUR 300 million, we were able to more than cover the CapEx spending of the same period.

Let's now make a deeper analysis on our debt profile. We confirm solid financial structure with a gross debt at about 100% fixed rate and a debt maturity at 5.9 years. It was 5.5 at the end of 2017. Our solidity has been reaffirmed also by rating agencies. At the end of March, Fitch ratings affirmed its senior unsecured rating on Terna at BBB+, 1 notch above the Republic of Italy's rating with stable outlook.

And now let me spend a few words on some closing remarks. For this quarter, we showed growth in all our P&L lines, fully consistent with the guidance provided in the 2018-2022 Strategic Plan, with group revenues and EBITDA up by 3% and 2%, respectively, and group net income 2% more versus previous year.

The CapEx acceleration reflecting total group investment 42% higher than last year confirms that the planned execution is well on track. We will remain focused on our investment proposition, driven by system needs and mainly concentrated on domestic regulated activities that will ensure security of supply and benefits for the system.

Furthermore, we preserve rock-solid financial structure, with gross debt of about 100% fixed rate and debt maturity at 5.9 years. Moreover, bear in mind that we already covered our refinancing needs up until 2019. As for Terna, debt market represent an attractive and competitive opportunity rather than a necessity. Furthermore, remember that any volatility on sovereign bond yield that may be registered in the next months will be reflected in the WACC interim review, thanks to the revision of the country's premium.

And finally, let me just remind you that next June, we will pay the final installment of EUR 0.1457 corresponding to a total 2017 dividend per share equal to EUR 0.22 as already communicated to the market.

Thank you for your attention. We are now ready to open the Q&A session.

[Operator]

[Operator Instructions] And your first question comes from the line of Javier Suarez, Mediobanca.

[Javier Suarez Hernandez, analyst]

I have 3. The first one is on the Slide #14 and on the cash flow evolution and working capital evolution. I was expecting for verification on the positive effect that you have on the working capital by the end of the last year. I think that the positive effect was EUR 400 million, and I was expecting a reabsorption of that working capital effect. And this hasn't happened apparently. Can you just explain us the dynamics in working capital and what with -- what may we expect in the next quarters? That is the first question. The second one is on the previous slide, the Slide #13, on the evolution of the CapEx. There is sizable increase on the CapEx, particularly on non -- on other activity. Can you give us the breakdown on the -- on this increase and nonregulated activities that is increasing its CapEx from EUR 9 million to EUR 28 million? The breakdown on that CapEx would be appreciated. And then on the Slide 11, on the evolution on the growth on the EBITDA, again, for nonregulated activities. I just wanted to ask for the breakdown of that EUR 15 million of additional EBITDA that you have been reporting this quarter.

[Agostino Scornajenchi, executive]

Okay. Let's start from the first question, Page 14, regarding working capital evolution. Yes, it's true. We communicated at the end of December positive impacts coming from the working capital dynamics related to the payment to the so-called essential units in the market. As you know, we recover money from the market that we will pay to the owner of those essential unit. But in order to do that, we need specific resolution coming from the energy authority. That resolution -- the list of those resolution has not been issued by the end of 2017, has not been issued yet until the end of March. We expect to start partial recovery on the -- in the second -- starting from the second quarter. Regarding your second question, yes, the increase of -- we are at Page 13, yes. The increase of CapEx related to the nonregulated activities is mainly related to the works on the Italy-France interconnection that are accounted under the responsibility of nonregulated activities. So we are talking about civil works and interconnection -- advancement of physical works with respect to previous year. Because as we just said, we started laying of the cable also in the highway part of the interconnection. The third part -- the third question was related to the contribution, again, on nonregulated activities at Page 11. And the unregulated -- nonregulated activities, we recognize some relevant progress in Tamini, as we said, as a consequence of the increase in order intake. On top of that, we recognize a positive contribution coming from Avvenia as a consequence of the full integration of the company and the completion of the closing process of the company. And the third part was related, again, to the margin on the interconnection just amended.

[Javier Suarez Hernandez, analyst]

And does Tamini has a positive EBITDA?

[Agostino Scornajenchi, executive]

Sorry. Could you repeat, please?

[Javier Suarez Hernandez, analyst]

If the EBITDA of Tamini is positive in first quarter 2018?

[Agostino Scornajenchi, executive]

It's more or less, more or less -- we are more or less on the turnaround point. So it's close to 0. It will be -- we expect we'll have positive contribution -- a slight positive contribution by the end of the year.

[Operator]

Your next question comes from the line of Enrico Bartoli of MainFirst.

[Enrico Bartoli, analyst]

Just a couple of questions on my side. First of all, on Tamini, if you can provide a bit more color on what is happening? Because I think that you -- in your presentation in March, you were expecting a breakdown. Now it seems that the situation is getting a bit better. Also in terms of revenue, there was some increase. So if you can -- you provide some more details on this? And secondly, on the net debt, considering the expected evolution of the regulatory working capital by the end of the year, could you please give us some guidance for what you expect in the end?

[Agostino Scornajenchi, executive]

Let me start from the second question. Regarding the evolution of working capital, by definition, we are not going to provide guidance. In addition to that, we are not in a position to do that, given that, that kind of evolution is fully connected with decision that will be taken by the energy authority. A specific resolution need to be issued, so it's something that is completely out of our control. What we can do is keep you updated in the coming months. Regarding Tamini, in the first quarter '18, we are continuing to register the relevant increase in the order intake. We have realized something like more than EUR 8.5 million more than first quarter '17 that is more or less 42% increase. So we are still pushing to obtain a full turnaround of the company. The increase of the order intake is starting to change into turnover as expected. This is something that became visible already in the first quarter. As you know, due to the industrial nature of the business, we will continue to work on this turnaround. We are going to confirm and we will keep you informed about the achievement of breakeven for the full year as stated during the business plan presentation.

[Operator]

The next question comes from the line of José Ruiz from Macquarie.

[José Ruiz, analyst]

Just 2 questions. The first one related -- if you could specify a little bit more on the EUR 5 million one-off at the tax level in the first quarter. And the second question is about the timing of the WACC review. If you see any risk of moving to 2019, considering the political situation of Italy.

[Agostino Scornajenchi, executive]

Okay. The tax one-off was simply the consequence of an adjustment in some tax litigation, so a settlement on a specific tax litigation that has been concluded during the first quarter. So it's a really nonstructural item that we simply declare in the quarter. We obtained a settlement with the tax authority. This implies a reduction of the average tax rate. But as I said before, we -- you cannot consider that structural. You should remain in the region of 29%, 30%, as specified during the presentation. Regarding the WACC evolution as -- the potential adjustment on WACC evolution, this is something that we have also discussed when we presented the business plan. As you know, we have taken, I don't want to say conservative but ground and rational position on 5.1% of average WACC for -- starting from 2019. This is simply an outcome of the observation period in which we are today, in which we started the observation of the evolution of the country's premium starting in October 2017. The observation period will be completed in October 2018. For the moment, the most rational assumption is to move from 5.3% to 5.1%. Of course, as you can imagine, as a consequence of potential evolution of country's premium that we do not consider as possible for the moment, but we will see. In any case, it will not [ depend ] from us. We are more on the safe side than on the aggressive side. That's why we have taken this assumption in the business plan.

[Operator]

Your next question comes from the line of Maurice Choy from Royal Bank of Scotland (sic) [ RBC ].

[Maurice Choy, analyst]

This is Maurice from RBC. Just 2 questions from me. The first one is just going back again to Tamini and the Latin American activities. I guess, would it be fair to say that the performance that you've had for this quarter is still in line with the strategic plan? And then the second question is more big picture into Latin America. Any updates on deploying the remaining, I think, EUR 140 million left for CapEx allocated for international operations? If you could just update us on those fronts, that would be great.

[Agostino Scornajenchi, executive]

Yes, of course. First quarter 2018 is fully in line with expectation of the business plan. The contribution of Latin America and nonregulated activities is important. We are ready for that. But it's absolutely not relevant compared with the contribution coming from our regulated asset base. That's why we will continue to develop our CapEx plan as we did in the first quarter. Regarding LatAm, I think work's moving quite well. We are well on track with the execution. The first 2 plants that will be delivered will be based in Brazil. We expect to have marginal contribution starting from the second part of '18 and full P&L contribution starting from our Brazilian activities starting from 1st of January, 2019. The other 2 countries that are Uruguay and Peru are moving on quite well. So we are well on track with the execution. But again, we expect a good contribution to our P&L, but our P&L will remain fully based on our domestic activities.

[Operator]

Your next question comes from the line of Stefano Gamberini from Equita.

[Stefano Gamberini, analyst]

Just few questions, if I may. Regarding the full year guidance of EUR 1.1 billion of CapEx, could you give us a split between regulated and nonregulated considering the -- around EUR 40 million of nonregulated in the first half. And if I understood correctly, the EUR 1.61 billion of EBITDA for full year is confirmed or not? The second, regarding the Montenegro interconnector. Could you give us an idea regarding the timing for the partial disposal of this interconnector to merchant operators. Is there -- are there some updates? Finally, regarding the presentation of the new 10-year Italian CapEx plan of EUR 12 billion. On the press, there were some articles regarding, in particular, the interconnection with Tunisia. Are there some novelties you could share with us, if -- some [ step higher ] of this project?

[Agostino Scornajenchi, executive]

So regarding your first question about guidance, we confirm the guidance provided to you of EUR 1.1 billion CapEx at year-end. We consider that figures at the end of March. I confirm that. We are not going to provide the split. But again, you have to consider that there is residual activities, especially on the completion of projects in Brazil in the second part of the year that the most relevant part of this EUR 1.1 billion will be, again, related to regulated activities. Regarding interconnection Italy and France that was your last question, if I'm not wrong, we expect to conclude the agreement -- sorry, to Italy and Tunisia, we expect to conclude the agreement between the parties by the end of the year. Regarding Montenegro, we are working with the private part. There is an open discussion with them. In the meantime, the works are moving on quite well. The installation activities of the cable is being almost completed and we are working on the substation on the Italian and Montenegrin side and that are quite well on schedule.

[Stefano Gamberini, analyst]

Just a quick follow-up, if I may. As regard this new interconnection with Tunisia, how big could be the investments? And I was thinking of a merchant connection, so your party is just ready to the EPC contract, if I'm not wrong.

[Agostino Scornajenchi, executive]

Yes. As you know, the interconnection between Italy and Tunisia is out of the current business plan. This is something that will be developed after 2022. So it's a little bit too early to give an indication. But we can -- for the moment, to give just you a general picture, we can consider something like EUR 600 million, 50-50 split by private and public parties.

[Operator]

Your next question comes from the line of Stefano Bezzato from Crédit Suisse.

[Stefano Bezzato, analyst]

Two questions from me, please. First off, can you give us some color on the EUR 5 million or 20% increase in net financial charges that you reported in Q1? And second, in your 5.1% assumption for the allowed return from 2019, what is the allowed leverage that you are currently assuming?

[Agostino Scornajenchi, executive]

Okay. Regarding the net financial charges, the increase of EUR 5 million is mainly a consequence of the refinancing that we started before summer 2017. As you remember, we launched an admission of EUR 1 billion. So this is the impact of the recovery that we are taking in our financial position. Regarding the leverage allowed in the [indiscernible] that we expect into this plan, we are at 50%.

[Operator]

Your next question comes from the line of Antonella Bianchessi from Citigroup.

[Antonella Bianchessi, analyst]

Two quick questions. The first one is, which is the strategic fit of Tamini in your company and is -- this is something that you would consider to keep in the long run or in future considering other option on that? And the second question is on OpEx. I noticed that the number of employee have increased materially. Can you explain why 100 -- more than 100 people more in Q1 and how this will impact on the regulated OpEx?

[Agostino Scornajenchi, executive]

Yes. Regarding Tamini, Tamini is part of the Terna Group. We are focused, as I said before, on the turnaround of the company. So our target is to lead the company to structurally contribute to the group's profitability. Regarding the increase of FTE yes, it's correct. It is part of our strategic plan. As you know, we have declared a huge acceleration of our CapEx plan. And in order to deliver that 30% acceleration, we have to enforce some specific skills and we are doing that also through acquisition of external skills when needed and to modify and fully adapt the blend of competencies within the group.

[Antonella Bianchessi, analyst]

And you think this will impact the OpEx and how much?

[Agostino Scornajenchi, executive]

This will only marginally impact the OpEx. Given that, as you know, we are also performing the integration process of the railways high-voltage grid that is providing us additional efficiency. And so we consider that the effort and the margin that we will squeeze from that positive integration that is moving on quite well. We will more or less compensate the additional effort needed on the OpEx side.

Okay.

[Operator]

We have no further questions at this time, sir.

[Agostino Scornajenchi, executive]

Okay. So if there are no additional question, thank you very much for your time, and see you soon. Thank you. Bye.

[Operator]

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you all for participating, and you may now disconnect.