Terna Rete Elettrica Nazionale SpA

MIL:TRN

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Terna's First Quarter 2019 Consolidated Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 9th of May, 2019. I would now like to hand the conference over to your speaker today, Mr. Agostino Scornajenchi. Please go ahead, sir.

[Agostino Scornajenchi, executive]

Good morning, everybody, and welcome to the first quarter 2019 results presentation. Before starting to analyze the figures, I would like to share with you the recent trend of the electricity demand in Italy. In the first 3 months of the year, we registered a demand of about 80 terawatt hours, lower than the same period of 2018 when demand was about 81 terawatt hours. Let me underline that in the period, about 32% of national demand was covered by renewable sources versus the 30% of the same period of last year. However, national net total production stood at about 71 terawatt hours, with a strong contribution coming from solar and wind generation.

Now let me spend a few words on the key numbers of the period. First of all, as usual, 2 main figures. Group net income up at EUR 186 million and group CapEx at EUR 164 million, respectively 2% and 16% more versus the previous year. This is the best demonstration of Terna's capability to accelerate on investments ensuring at the same time, excellent returns to our shareholders. Moreover, group revenues and EBITDA were up both by 3%, which means respectively, EUR 14 million and EUR 11 million higher than last year.

Let me highlight that we were able to keep our net debt under control at about EUR 7.9 billion, substantially in line with year-end 2018 level, mainly thanks to the operating cash flow generation of the period. This positive set of results and the strong cash generation are fully consistent with the targets for the full year provided in the 2019-2023 Strategic Plan presentation of last March.

So let's now have a deeper analysis of the figures on Page 7. Total revenues in the first quarter of 2019 increased by 2.7%, reaching EUR 537 million, up by EUR 14 million versus the same period of last year. The growth was mainly attributable to regulated activities, which contributed for EUR 12 million. As far as international activities are concerned, the contribution was EUR 1 million higher versus the same period of 2018. In this regard, let me just remind you that in April, we signed an agreement aimed at acquiring the controlling stake of 2 concessions to build and operate a total of about 350 kilometers of additional electrical infrastructure in Brazil.

Let's go into detail with the regulated and nonregulated revenues evolution, moving to the next slide. Regulated revenues reached EUR 500 million, EUR 12 million better than last year. The increase was mainly due to the 2019-2021 weighted average cost of capital update that as you know, was set by the regulator at 5.6% starting from the 1st of January.

Other revenues increased by EUR 1 million, substantially in line with last year. Nonregulated and informational revenues stood at EUR 37 million, EUR 2 million higher than last year. The growth was mainly due to the increase in contribution from Tamini and International.

Now, let's go through operating cost analysis. As shown in the chart, total operating costs stood at EUR 117 million, with a slight increase of EUR 3 million versus last year. The increase was fully attributable to nonregulated activities as a consequence of the higher volumes while regulated OpEx remained stable.

Let's move on to the next slide for a deeper analysis of the group's OpEx. We reported regulated OpEx of EUR 95 million, substantially in line with last year. Regarding nonregulated and international, operating expenses amounted to EUR 23 million, EUR 3 million more than last year, mainly due to a higher volume of activity related to Tamini and other nonregulated activities.

Let's now move on to the EBITDA analysis at Page 11. Considering the above-mentioned effects, group EBITDA reached about EUR 420 million, EUR 11 million better than last year. We registered a positive EBITDA contribution from regulated activities, which grew by EUR 30 million versus last year.

Moving to the lower part of the P&L. Depreciation and amortization amounted to EUR 140 million. The increase versus last year was mainly due to new assets becoming operational. As a consequence, EBIT reached EUR 280 million, 1.1% better than first quarter 2018. We reported net financial expenses at EUR 16 million, EUR 8.7 million lower than the same period of last year, and this was mainly due to the inflation evolution effect. Taxes stood at EUR 78 million, with a tax rate of 29.5%, almost in line with year-end 2018. Consequently, the group net income reached EUR 186 million, EUR 3.3 million better than last year.

Moving to Capex analysis, Page 13. For the first 3 months of 2019, total group investments amounted to EUR 164 million, 16% higher than last year. EUR 144 million were related to regulated activities, of which about 6% related to projects that might be eligible to the 1% input-based incentive as they have been included in the current incentivized categories. Among CapEx categories, development CapEx stood at EUR 53 million, assets renewal and efficiency CapEx was EUR 52 million, while the sales CapEx was EUR 12 million. Other CapEx stood at EUR 20 million, which includes capitalized financial charges and other investments.

Let's now move on to the net debt and cash flow analysis at Page 14. Net debt at the end of the period was EUR 7,919,000,000, substantially in line with 2018 year-end level. Indeed, thanks to the strong operating cash generation of about EUR 300 million, we were able to more than cover the CapEx spending of the period, the evolution of working capital and other effects.

Let's now make a deeper analysis of our debt profile. Our financial structure remains solid despite the CapEx acceleration. Indeed, our maturity and our level of fixed to total debt allow us to maintain a solid balance sheet. More in detail, the fixed floating ratio and gross debt remains at about 100%, and the debt maturity remains at 5.2 years that is in line with year-end 2018.

On top of this, let me remind you, the successful launch of the new Green Bond issued on the 3rd of April for EUR 500 million. The other subscription ratio was approximately 7x, while the old inclusive cost of debt was in the region of 1%. Moreover, we supposed to have the ESG-linked revolving credit facility issued on the 23rd of April, for a total amount of EUR 1.5 billion. Overall, 2019 cost of net debt will remain substantially in line with year-end 2018 levels.

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

[Operator]

[Operator Instructions] Your first question is coming from the line of Harry Wyburd, Bank of America.

[Harry Wyburd, analyst]

Just 1 question for me today and it's an operational one. Last night, Enel reported that they had got a good EBITDA performance from ancillary services. And I know that ancillary service performance has been a focus area for you in the system over the last few years. Can you just help us understand what happens with ancillary services in the early part of this year? And what you think the outlook is for ancillary services, given the increasing contribution of renewables that you flagged in the demand figures that you gave for this year?

[Agostino Scornajenchi, executive]

Okay. As you know -- yes, thank you, okay. During the first 3 months of the year 2019, if you look to the evolution of the MSD market, what we the call the Mercato dei Servizi di Dispacciamento related to ancillary services. With some wins, there's some ups and downs with respect to first 3 months of 2018. It remained more or less stable. We registered EUR 145 million in January, EUR 116 million in February, EUR 156 million in March for a total amount of more or less EUR 400 million. That is more or less in line with the figures of last year for the same period.

[Operator]

Your next question is coming from the line of Javier Suarez from Mediobanca.

[Javier Suarez Hernandez, analyst]

I have 2 and the first one is on the new national development plan that had been presented for the period of 2019-2028, for the next 10 years. I just wanted you to help us to understand the implication that this CapEx plan has on your visibility on future CapEx that goes beyond the current length on your business plans. So I'm interested to see how this new business plan is affecting your capacity to continue accelerating on CapEx for the next 10 years. And then the second question is on Latin America. I think that during the beginning of the second quarter, you announced the acquisition of 2 concessions to build up 2 transmission lines in Brazil. So I just wanted you to help us to understand what may be the EBITDA contribution from these 2 concessions that could be beyond the current length of your business plan and the implications that these may have? And related to that also, there has been some press articles on arguing that the company may be interested in finding partners for this project in Latin America, but not in the disposal of those assets. So if you can elaborate, help us to understand the rationale for this.

[Agostino Scornajenchi, executive]

Let me start from LatAm. As you know, regarding Latam, during 2018, we remained concentrated in the realization of the construction of the projects that the company start acquiring faster, and we successfully concluded the construction of the first line in Brazil and the second one will be concluded in the coming weeks. I'd say during the business plan presentation, we remain focused in interventional sector, especially in LatAm but as usual, with a limited capital allocation in the region of additional EUR 300 million and the low risk profile. We remain concentrated on projects that will have a relevant advantage in terms of technology development for us. And on this extent, we recently acquired -- we recent signed a preliminary agreement for the acquisition of additional 350 kilometers of line in Brazil. Of course, the commercial operation date for this project will arrive not before 2023, and we expect a contribution starting from the date -- day. And we expect regarding our business plan, a contribution only in the final part of the business plan in the region of EUR 50 million.

Regarding the potential evolution of our presence in LatAm. We are not taking consideration to exit from LatAm and this is pretty clear in the guidelines we have presented last March. Of course, we want to considerate our presence also bearing in mind the requirement of limited capital absorption and low risk profile in scouting the opportunities including the possibility to do something different with our portfolio. I said several times today, we have a portfolio that is realized. So now, we have the possibility to do different things. We could stay as we are today, but if we decide to buy something else and sell something or what we would like or also to open the shareholder structure of our Latin American vehicle, allowing the possibility for a finance investor to assist us. In any case, we consider international importance in order to level up technologies and to be in the area of the world in which things are happening. That's why we consider international still important in our activities.

Regarding the first question on the national development plan. I think that the national development plan confirms what we already announced at the moment we have presented the business plan. We are basically moving from a company that was spending an average of EUR 800 million, EUR 900 million every year to a company that would spend EUR 1.2 billion, EUR 1.3 billion [indiscernible] the moment we presented the business plan. 2018 was a transition year and in 2019, we will continue to accelerate in this direction. And I think that the figures that we have presented today are demonstrating that. This will be a long-term acceleration so we'll continue to focus in the mid to long term at this level of commitment. It's a challenging plan but we are fully committed to realize it.

[Operator]

Your next question is coming from Enrico Bartoli from MainFirst.

[Enrico Bartoli, analyst]

I have 3 of them. First is on other charge. Actually, there was a significant drop in interest charges in Q1 this year compared to last year. Can you elaborate a bit on the driver of this performance? And you've seen fiscal '19, there were any one-offs in this figure? And then if you can update us on the regulatory situation regarding the capacity markets, the principles to get some stakeholders have tried to postpone the final application and publicly pushed you to revisit the process. Do you think that the path of the capacity market by the end of the year is still realistic? And the third one is regarding regulation. Recently, there was approval by the regulator of the finance specific regulation regarding gas transports. There was allowed a return on working process for the business. I was wondering if you are discussing this net with the regulator and if there are any chances that similar allowance would be recognized also during this transition.

[Agostino Scornajenchi, executive]

Well. So the first question was related to the reason underlying the financial share decrease in the first quarter '19. I said the decrease in the first quarter was mainly due to a seasonal effect on the Italian inflation index, that the way where we expect to be recovered in the second part of the year. The second and the third question are related to regulatory aspect. The first one was on capacity markets. Well, with regards to the state-of-the-art on the Italian capacity markets, we confirmed that Terna recently sent to the Ministry of Economic Development an updated version of capacity market rules, modified specifically to take in account some specific limits on CO2 emission. Our proposal is now under the assessment by the Ministry of Economic Development. And the moment the minister would carry out a notification process of updated capacity market renewal to the European Commission. This process has been already started and now, it's up to the government and European institution to continue to this path. From an imperative and operational standpoint, we are 100% ready to start with it. The third question was related to the evolution of work in progress. As you know, of course, we are well aware on the contents of this cash and then the decision taken regarding our peers, and that's thinking about Terna. Regarding work in progress today, we don't have specific work in progress remuneration because the specific work in progress remuneration was present in the past, starting from the 1st of January, 2016, is not any more in place. But you know that after the beginning of 2018, the regulator interviews have changed in the rules set at the end of 2015. And this change will allow Terna to discuss the application of work in progress for a specific list of projects. We are talking about complex projects with a middle term duration that will have a more -- a duration of more than 3 years. Of course, we will have to apply, we will have to prepare a specific lease to present this lease to the authority and obtain, by the authority, an official confirmation that will be communicated to a specific resolution. We consider this as positive. They ring through the action of the principle of remuneration at work in progress is a good news for us. Of course, we can continue discussing with the authority at the same way we discussed and I said today, not with a confrontation or more demand with a proactive and cooperational mood approach with that.

[Operator]

Your next question is coming from the line of Stefano Bezzato, Crédit Suisse.

[Stefano Bezzato, analyst]

Yes, my question was already answered. Thank you very much.

[Operator]

Your next question is coming from Emanuele Oggioni from Banca Akros.

[Emanuele Oggioni, analyst]

I had one on the Italy, the power line connection between Italy and Tunisia that should be completed by 2023, but is not yet included in your business plan target. So could you give us some more details on EBITDA and CapEx, et cetera? I know the total CapEx is roughly EUR 600 million and that's which provided by European Union and also by STEG?

[Agostino Scornajenchi, executive]

So I think that we are really in an early stage. I think that this is not the right moment of talking about CapEx. And you have to consider that this 600-megawatt submarine connection, that as you know will connect the North African electricity system with the European one is expected to enter into operation not before 2027, okay? Of course, the project was included in the 2017 list of projects of common interest of the European Commission. The construction would be provided half by Terna and the Tunisian TSO STEG, while the remaining part will be financed by the European Union. In this context, as you know, at the end of April, the Italian minister of economic development, Mr. Di Maio and the Tunisian minister of industries, Slim Feriani has signed an integral agreement for the development of joint construction of this interconnection. Consider that the project it is not included in the 5-year business plan horizon, but is included in the national development plan that was published a few days ago.

[Operator]

Your next question is coming from the line of José Ruiz from Macquarie.

[José Ruiz, analyst]

Just a very quick one. In your strategic update, you mentioned the main risk on your execution plan was procurement. And I was wondering if you could update us particularly, the coverage of your procurement needs beyond 2019. You mentioned at that time 70%.

[Agostino Scornajenchi, executive]

No, no, the contrary. What we presented was not in the terms of your concern on the other end, to show a positive message with respect of the level of procurement we already have with the project included in our business plan. Consider that regarding procurement, more or less 96% for the activity that will have to be concluded in 2019, the procurement is already in place. And on average, 70% of the procurement needs for the business plan horizon are already in place. Of course, this percentage will decrease from 96% in 2019 to 90%, 85% in 2020 and 2021. But on the contrary, we are quite positive on procurement. I think that structure in our organization has acted very well with the acceleration of CapEx. Of course, procurement is one of the main enabling factors, that's why we have reinforced in our structure in order to anticipate as much as possible, all the procurement activities needed for the completion of the business plan.

[Operator]

Your next question is coming from the line of Stefano Gamberini from Equita.

[Stefano Gamberini, analyst]

Just 2 quick questions. The first regarding the trend of investing in senior renewable in Italy. Do you see some risk of delay of investments due to postponement of the decree on renewables and also, some delays on PPA agreements that are not arriving. So could this cause some postponement or some risk of postponement of your investment as well? The second question regarding the CapEx plan. Now you said, we will increase to EUR 1.2 billion, EUR 1.3 billion CapEx per year. According to the CapEx that you presented probably at the end of the period of the plan probably your level should be even higher, this level. So just to understand if you can exceed the EUR 1.3 billion of CapEx per year during the business ramp period.

[Agostino Scornajenchi, executive]

Okay. Let me start from the second one. No, I confirm what we said. We don't see any risk. I think that the machine is already set to deliver, say, the EUR 1.2 billion, EUR 1.3 billion with work at the loft. Of course, there's a prompt acceleration with respect to the past with what we have to reinforce also the structure of the company. And as commented in the previous question regarding procurement, regarding authorization of process, I think that is a challenging plan, but we are fully committed to deliver, and I think that the machine is ready to do that. Regarding your first question on the potential delay of some rules or renewables. Honestly, we do not see this risk for the moment. We continue to see an increasing retention even from private entrepreneurs interested in the future connection of development of new renewable projects. As you know, the increase of renewable is one of the most important, maybe the main important enabling factor for the process of energy transition also defined by the government. So if you want to reach the carbonization target set for 2025, including the complete shutdown of coal generation, an increase in renewable in the country is mandatory. So I'm pretty confident that the government will act in this direction.

[Operator]

There are no further questions in the line. Please, continue.

[Agostino Scornajenchi, executive]

Okay. Thank you very much for your time, and see you on the first half presentation. Bye.

[Operator]

That does conclude our conference for today. Thank you for participating, you may all disconnect.