Terna Rete Elettrica Nazionale SpA

MIL:TRN

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the 1Q 2020 consolidated results for Terna. [Operator Instructions]

I must advise you that this conference is being recorded today, Wednesday, the 13th of May 2020. And I would now like to hand the conference over to your speakers for today, Agostino Scornajenchi, CFO. Please go ahead, sir.

[Agostino Scornajenchi, executive]

Good afternoon, everybody, and welcome to the first quarter 2020 results presentation. Before starting to analyze the figures, I would like to share with you the latest trend of the electricity demand in Italy. In the first 3 months of the year, due to the lockdown measures imposed by the COVID-19 health emergency, national demand was of 77 terawatt hour, a 4.5% decrease versus the same period of 2019 when national demand was about 81 terawatt hour.

Let me highlight that about 33% of it was covered by renewable sources versus 31% of first quarter '19. National net total production stood at 66 terawatt hour, with a strong increase registered in hydro production, which grew by 19% versus the same period of last year, confirming the strong growth trend for [ HUGO ] already highlighted in the past months.

Before going deep into the results of the period, let me underline that in this COVID-19 emergency, employees' health and safety has been and will continue to be the top priority for Terna.

Following the guidelines and the restrictions established by the government and the regional authorities, Terna introduced a series of measures to guarantee the continuity of the electricity service in full safety. Terna set up a crisis committee in constant contact with the Civil Protection Department, authorities, trade unions and major Italian companies. We introduced a smart working for 100% of our non-operative employees with the suspension of all nonessential travels.

We also provided with periodic sanitization of offices and construction sites, and we introduced temperature measurement on 100% of our employees through thermal scanner installed in all our facilities.

And now let's move to the main figures of the period at Page 5. Despite the lockdown related to the COVID-19 emergency in the first 3 months of the year, group revenues and EBITDA were up by 6% and 3%, respectively, which means EUR 31 million and EUR 14 million higher than the last year. Moreover, we reported a net income of EUR 187 million, EUR 1 million higher versus last year, while group CapEx stood at EUR 218 million, 32% more versus the first quarter '19, confirming the strong CapEx acceleration set in the 2020-2024 strategic plan presented last March, even in the fresh, complex framework of national emergency.

To support this CapEx acceleration, our net debt stood at EUR 8.4 billion versus about EUR 8.3 billion at year-end 2019 and fully in line with our expectations. Regarding the impact of the restriction imposed by the COVID-19 emergency, we do not expect to see significant direct effects, given the largely regulated nature of our business.

So let's now perform a deeper analysis of the figures. As usual, let's start with revenues analysis at Page 7. Total revenues in the first 3 months of 2020 increased by 5.7%, reaching EUR 567 million, up by EUR 31 million versus the same period of last year. The growth was mainly attributable to regulated activities, which contributed for about EUR 17 million. Regarding nonregulated and international activities, the increase versus the same period of 2019 of EUR 11 million and EUR 3 million, respectively, was mainly related to Tamini, to the Italy-Montenegro private interconnection and to our projects in Latin America, as we will analyze more in detail later on in the presentation.

Let's now go into the details of the regulated and nonregulated revenues evolution, moving to the next slide.

Regulated revenues reached EUR 517 million, EUR 17 million better than last year. The increase was mainly attributable to tariff evolution, while other regulated revenues increased by EUR 5 million, mainly as a consequence of higher revenues related to better quality of service for the period. Mind that the impact related to volumes, consequent to the COVID-19 emergency was limited in the region of a low single digit. Nonregulated and international revenues reached EUR 51 million, about 37% higher than last year. This growth was mainly due to the increase of Tamini transformers [ through Nova ], the entry into operation of the Italy-Montenegro private interconnection, and the contribution of the Brazilian projects, which entered into operation between the end of 2018 and the first half of 2019.

Now let's go through operating cost analysis at Page 9. As shown in the chart, the total operating cost stood at EUR 133 million, 14% higher than last year. The increase was mainly attributable to Tamini as a consequence of higher volumes of activity, partially offset by lower cost related to quality of service.

For a deeper analysis of the group OpEx components, let's turn to the next slide.

Well, starting from regulated OpEx, we kept full control of our costs, reporting EUR 98 million, substantially in line versus last year and despite the strong increase in our asset base.

Nonregulated and international operating expenses amounted to EUR 35 million, EUR 13 million more than last year, mainly due to Tamini orders evolution.

Let me now analyze EBITDA. Moving to the next slide. Considering the above-mentioned effects, group EBITDA reached EUR 434 million, EUR 14 million better than last year. We registered a positive EBITDA contribution, both from regulated and international activities, which grew by EUR 13 million and EUR 3 million, respectively, versus last year.

The increase was mainly due to higher regulated revenues as well as to the contribution coming from the full operation of the new lines in Brazil. Let's now have a look to the lower part of the P&L.

Turning to Page 12. Depreciation and amortization amounted to EUR 152 million. The increase versus last year was mainly due to the impact of new assets becoming operational in the period. As a consequence, EBIT reached EUR 282 million, EUR 2.2 million higher versus the first quarter of 2019. We reported net financial expenses at EUR 19 million, EUR 3.4 million higher than the same period of last year, mainly as a consequence of inflation and capitalized financial shares dynamics for the first 3 months. Taxes stood at EUR 76 million with an average tax rate of 29.1%, almost in line with the same period of last year.

Consequently, the group net income reached EUR 187 million, substantially stable versus the same period of last year despite a higher depreciation and amortization level linked to the already mentioned acceleration of investments.

Moving to capital expenditure and analysis. For the first 3 months of 2020, total expenses amounted to EUR 2,018 million -- EUR 218 million, sorry, 32% higher than the same period of last year and well on track to meet the full year target set in the strategic plan despite the suspension of the main construction site occurred between 13 and the 20th of March as a consequence of the restrictive measures linked to the COVID-19 emergency.

Indeed, in Phase I, only the activities considered essential have been assured. Now with the Phase II, all activities are progressively normalizing. Indeed, we invested about EUR 206 million in regulated activities. Among the main projects of the period, it is worth mentioning the rationalization of Naples metropolitan area, the installation of synchronous compensators and asset renewal. Among CapEx categories, development CapEx stood at EUR 74 million, which means EUR 36 million of total regulated CapEx.

Asset renewal and efficiency was EUR 93 million, so 45%, while defense CapEx was EUR 39 million, meaning 19%. Non-regulated and other CapEx stood at EUR 11 million, which includes capitalized financial charges and other investments.

Regarding net debt and cash flow analysis, let's move to Page 14. Net debt at the end of the first quarter 2020 was EUR 8,409 million, EUR 150 million higher than 2019 year-end level and mainly linked to the strong CapEx acceleration of the period. Let me underline that on the working capital side, we registered no [ real ramped ] delay on cash settlement, plus we do not expect any issue with bad debts in the coming months.

In this context, we generated an operating cash flow of EUR 306 million, thanks to which we were able to more than cover the CapEx spend of the period.

Let's now make a deeper analysis of our debt profile. We confirm our solid financial structure, with a duration of 4.8 years and the level of fixed to total gross debt of about 80%. Moreover, we do not see relevant financing needs until 2021. As a consequence of the debt management activities delivered, cost of net debt at the end of the period remained substantially in line with year-end 2019 levels.

Finally, let me highlight that following the presentation of the 2020-2024 strategic plan, all the main rating agencies confirmed the rating assigned to Terna. To this extent, let me also highlight default [ recent ] rating information coming from Fitch despite the downgrade of the rating of Italian government bonds decided just a couple of weeks ago.

Well, thank you very much for your attention, and we are now ready to open the Q&A session. Please.

[Operator]

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

[Harry Wyburd, analyst]

I've got 3, please. So first one, there's been some press mention of the idea of a tie-up between SNAM and Terna. So I just wondered what your view was on the plausibility of that ever happening. The second is just on demand. So you gave us some good detail of what happened in the first quarter. It'd be really interesting if we get your view based on -- in terms of what you've been seeing in the last few days as the lockdown has started to lift.

So -- or is there any trends that you've seen in your role as the system operator in terms of a resumption in business demands that are important that might help us understand what the impact of demand is going to be, not just on you, but on the wider sector? So just the trends on demand over the last few days.

And then the final one, just on the regulatory review, still some way off. But I'd be interested in your thoughts on whether the crisis might have a bearing on the review. Clearly, I presume the government will be keen to keep investment going, given that it has a very high GDP multiplier. Do you think, therefore, that the regulator perhaps, either directly or indirectly, might end up being perhaps a bit more lenient in terms of the returns allowances that it gives at the next WACC review?

[Agostino Scornajenchi, executive]

Well, let me start from the last one. No, honestly, I do not see any implication coming from the crisis regarding potential changes in the regulatory approach of the Italian managerial authority, in general, regarding the approach of the government vis-à-vis the realization of investment.

On the other side, I see some opportunities here. I confirm that acceleration of investment in infrastructure is one of the main tools to assist the economy for a fast recovery. That's what we are doing on operational side. As I just say, during my speech, we were obliged to take some decision to stop some work somewhere, not because we were not allowed, given that the electricity transmission is a sector that has a special authorization to continue its work. But the problem was logistic issue, given that the country was basically closed until 3 weeks ago. So it was not possible to move goods and people around the company.

What we are doing now, and we already started 2 weeks ago, is progressively reopening of our sites, and we are also scheduling all the activities we're seeing for the second half of the year, trying also to anticipate some activities that originally was expected in the first half of 2021.

And we are also asking assistance through the government from an authorizational side in order to obtain some acceleration also in the authorizational process in order to allow us to recover.

What can I say is that today, we are close to the 80% of activity normally restored. So we have more than 100 sites, construction sites that have been reopened in the latest weeks.

And let me start here to comment the second question, about the demand. Of course, during the lockdown, especially starting from the second half of March, at the end of April, we have seen a relevant decrease in the total energy demand. Also in some weeks, we have seen a huge reduction with respect to the same weeks of the previous year. In some weeks we have seen a reduction of almost 20%.

Today, we expect, at year-end, an average reduction between 8% and 10%. This is the view that we have today. This will not have relevant implication on our margin, given that, as you know, only a very limited portion of our revenues are directly connected with the volumes that are transported and weighed. So consider that on -- out of EUR 2.2 billion of regulated revenues, less than EUR 200 million are related to volume. So you can consider something slightly less than EUR 2 million for each percentage point of reduction. So as I said before, we see some millions of reduction that we can easily manage by year-end. So that's why I don't see any impact in the marginality for 2020.

Coming to your first question, of course, the merger between Terna and SNAM is a topic that has been already discussed several times. What can I say here? We have continued in a framework of technical collaboration, working together in order to build the joint energy scenario for the future. That is something that is interesting for both of us.

[Operator]

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

[Enrico Bartoli, analyst]

3 questions also on my side. First of all, a general question about, let's say, the impact that you expect from the COVID emergency on the approach, the support at political level to the energy transition. If you can elaborate a bit some hints on possible discussions or signals that you receive at political level, both on the EU and the Italian side.

And linked to this, on the press, there were -- some were indicated -- some discussions about with the government about the possibility to speed up the authorization processes to increase -- accelerate the CapEx execution on also on your side, if you also can give us some comments on this.

Then you expect an impact on your operating costs from the lockdown or the emergency at the level of 2020? And the third one, you are quite clear, but if you can elaborate a bit more on any possible impact of working capital because of the economic situation. Maybe there can be some delays over debt in the electricity system, if you can also provide some more details on this point.

[Agostino Scornajenchi, executive]

Okay. So there are 4. Let me give you the answer for the question 1 and 2, let me manage them together. So what about investment? And what about government approach in terms of authorization? Well, from a technical perspective, the investments that were needed for the energy system before the COVID emergency are still needed even after the COVID emergency. Let me spend 1 minute on this. I think that emergency was an excellent tool to let us understand which are the physical and the practical implication of a system that is based more and more on renewable. As you can imagine, in the second half of March and the first half of April, we were -- the country was basically closed; industrial consumption were very low. Weather conditions were excellent, so the contribution coming from renewal were impressive. And of course, the technical implication to manage this increase were also impressive. That's why we have the practical demonstration that investment with -- are necessary in order to allow, from a technical standpoint, a massive acceleration in distributed renewable generation. We were already convinced about that. But now we also have the practical demonstration. This is something that is perfectly known at Terna level and this is something that is also known at government level. And as I said before to your colleagues, we are working -- we are closely working with the government, given that it is clear that investment in infrastructure is one of the best way to stimulate the economic recovery of the country. And there is a multiplier effect beside this. We are working with policymakers on how the authorization process could be shortened in order to accelerate the investment process also for the coming years.

Regarding the operational cost. Of course, we have seen an increase in some specific type of costs, but they are being, basically, more than compensated by savings in other areas. As you can imagine, no one is traveling anymore in the company today. Also the variable part of the FTE compensation has been dramatically reduced as a consequence of the application of the smart working. So also on operational cost side, we fully confirm the guidance that we have indicated.

Regarding working capital, of course, if you are in a crisis environment, you can imagine that final customer could decide to delay payments to the sale companies. Sale companies could decide to delay payments to distribution companies, same that the end distribution company could decide to reverse this impact on transmission company, as Terna is. Let me say 2 different things on this. The first, from a formal standpoint, the authority clearly say that this is not allowed with a specific resolution taken in the month of April. So the transmission tariff is due by law. And from a practical perspective, we have seen no delays. We cash in an average of EUR 160 million per month for the transmission component of our tariff, and you will not see any kind of delay.

[Operator]

Our next question comes from the line of Stefano Gamberini from Equita SIM.

[Stefano Gamberini, analyst]

Three quick question, if I may. First of all, regarding -- if you can repeat what is your estimates in terms of power generation consumption at year-end. The decline was 10% in March, which kind of recovery do you expect for the full year? Or what is the target on that? And in particular, which kind of summer can we expect in terms of electricity consumption, considering that the smart working increased a lot and probably the situation will remain this during this summer. The second regarding the renewables. During '19, if I'm not wrong, 1 gigawatt was installed and on stream. What happened in these 2 months and in particular, if you have some feedbacks from all the investors on the other side that are asking for new capacity and new interconnection for renewables. Are they postponing their investments, if you have any visibility? The last is just on the guidance, if possible, of net debt at year-end.

[Agostino Scornajenchi, executive]

Well, let me start from the last one. As you know, no guidance will be provided on net debt. Regarding volumes, let me repeat what we see at year-end. Accumulated at year-end is a reduction of total consumption between 8% and 10%. So it was not related to March. It was related to the whole of 2020.

Regarding renewables, no, we continue to see progressive acceleration. We already start to see this acceleration in 2019 with additional 1 gigawatt installed. We are still working with a lot of private operators. As you know, we have a direct information coming from the demand that we see for new interconnections, new technical connection on the voltage network. So of course, there is probably some delays related to the lockdown, but I don't see any relevant changes on this.

[Stefano Gamberini, analyst]

So just to understand, in the next quarter, so during the summer, you see still a weak demand going ahead?

[Agostino Scornajenchi, executive]

I see a progressive recovery of the demand or expect the previous -- the volumes previously expected. It will depend from the duration of the measures and the level of, let me see, a release of the actual restrictions that we see in our normalized. It will not depend so much, of course. It will then by the evolution of the crisis from a health and safety perspective.

[Operator]

Next question comes from the line of James Brand from Deutsche Bank.

[James Brand, analyst]

Nice to see relatively uneventful results at this kind of time. I had 2 questions on different topics. The first is on the LatAm operations that you have. I appreciate they're obviously a pretty small part of the overall group, and the overall group as a whole is very stable in the current environment. But I was just wondering if you could give us a bit of detail what the COVID impact was on the operations in LatAm, i.e. which of those projects are dollarized and which are in local currency. Obviously, there's been pretty big depreciations, and whether there are any volume impacts that we should be thinking about there?

And then second question is on your 10-year plan, which you published kind of subsequent to the business plan. Or obviously, you set out the targets over the medium term. But the 10-year plan was a pretty punchy overall number in terms of CapEx and seemed to suggest annual CapEx going up quite substantially further than the kind of numbers that you'd outlined over the medium term, possibly up to over EUR 2 billion per annum, if my calculations are reasonable. So I was just wondering whether you could talk a bit about that? And what's driving the higher CapEx in the second half of the decade? And where your -- where the opportunities are for going to investment?

[Agostino Scornajenchi, executive]

Okay. So regarding LatAm, as we know, we have some activities in Latin America, especially in Brazil. And we have some assets under construction in Peru and Uruguay. Regarding Peru and Uruguay -- but with limited size. Regarding Peru and Uruguay, of course, we see some slight delay in the realization, but we are absolutely not concerned, and we count on the possibility to recover the timing that was lost. Regarding Brazil, we are -- we have assets in operation that have performed quite well without any negative implication coming from the COVID emergency. Let me say that, as you say, there is only a limited portion of our capital allocated in Latin America. That is expressed in local currency that we consider hedged in the long term.

Second question was related to the path, let me say, about our investment spending. Let me confirm that we are moving progressively from a situation coming from the past in which we were spending an average of EUR 700 million, EUR 800 million per year, to an average of EUR 1.2 billion, EUR 1.3 billion, even EUR 1.4 billion dependently from the precise scheduling of the different projects, and this is confirmed by the 10-year development plan that we have just published a few weeks ago. And we consider that EUR 1.3 billion, EUR 1.4 billion, it is the standard part. And we are -- if you look at the actual that we delivered to the market and the rest in 2, 3 years, we were moved from EUR 700 million, EUR 800 million, progressively to EUR 900 million, EUR 1 billion, EUR 1.1 billion in 2020. So we are reaching that part, and we will reach that part in the coming years. And we will remain there.

[Operator]

Our next question comes from the line of Javier Suarez from Mediobanca.

[Javier Suarez Hernandez, analyst]

Two questions remaining. The first one is a follow-up after the previous question on the 10-years developed plan. So what the company has done and agreed with the different administration [ exam on a ] sizable [indiscernible] CapEx plan, that means an increase versus the previous plan.

So I just wondered if you can help us to understand the philosophy for all of this 10-years investment plan. What has been approved versus the previous version? I know that this is an annual recovery on the -- on this 10-year plan, but I just wanted to see what has changed in the latest version versus the previous one.

And the second remaining question is on the acceleration on CapEx. There has been several separate question on the capacity that the company has to contribute to -- to give a contribution to the economical recovery through an acceleration on CapEx. The question for you would be, to what level do you think that the company can increase its annual CapEx with its current structure? Therefore, you just mentioned that CapEx has been increased to EUR 1.3 billion, EUR 1.4 billion per annum. To what level of CapEx the company could move into in order to help with economical recovery?

[Agostino Scornajenchi, executive]

Well, I think that it is always possible to do better. I think that EUR 1.3 billion, EUR 1.4 billion, it is already quite ambitious. Never forget that the company was at EUR 700 million only a few years ago. If I'm not wrong, in the business plan 2017-2021, EUR 3.7 billion was the total CapEx expectation for the 5-year horizon. Now we are at EUR 7.4 billion. So it's 2x basically with the same organizational structure and with -- basically, we are asking to our engineer to deliver between 50% and 100% more. So it's an unbelievable effort that we are asking to our people.

Of course, regarding our 10-year development plan, there are some relevant projects included. Let me mention the Tyrrhenian Link. That is a project that will connect the south of the peninsula with the north of Sicily and the south of Sardinia. It will have a relevant and dramatic impact on the functioning and the functioning of the electricity system in Sardinia. But more than that, we will close sort of ring in order to move electricity around the country without moving through the peninsula, but moving through the island. You can imagine which will be the level of benefits that we will -- that this will provide to the stability of the overall system. Of course, this sole investment will be something in the region between EUR 3.5 billion and EUR 4 billion, of which EUR 900 million are already included in the 5-year business plan and the remaining part will be completed after 2025. An additional EUR 1 billion will be connected to the Adriatic Link, another submarine interconnection that is included this time in the long-term development plan, but not in the business plan because it will start after 2025. So if you exclude some specific spike as those -- these type of projects, I think, again, that EUR 1.3 billion, EUR 1.4 billion is an ambitious path for the future. And I consider it fully sustainable also from that profile.

[Operator]

Our next question comes from the line of Olivier Van Doosselaere from Exane.

[Olivier Van Doosselaere, analyst]

I only had one question remaining. It's actually on -- again, on volume FX, I understand you say that you don't see implications or risk of people not paying the deals, but I wonder what the implications would be of the overall volumes actually just coming down, as you mentioned, between 8% to 10% this year. Obviously, you get paid your transmission share. But if the volumes are down, does that mean that also the regulated costs of facing a shortfall in that order of magnitude, which would subsequently be recovered through a tariff increase, are you paid in a different manner that might not be volumetric? And if there is a need for tariff increase to recover that, could you please indicate over what time period that normally gets spreads?

[Agostino Scornajenchi, executive]

Well, I consider that -- first, the impact coming from variation in volumes is marginal, because let me repeat that 90% of our tariff fee is fully independent from the volumes that we transport on our lines.

Of course, this is an extraordinary situation. And what we will see at the year-end will depend basically from what we have done in the coming 2 months. Now we see a progressive and fast recovery of the demand. And this is the consequence of a progressive reopening of country, of the industrial activity and the commercial activity that we are seeing day-by-day increasing. Of course, this will have to be confirmed from a medical perspective. I'm not a doctor. I'm not here to convince anyone that we are out of the story or not. Of course, if we will see some additional decision to reintroduce lockdown measures, of course, situation will worsen.

I hope that at the very end, we will able to contain such a reduction as much as possible. And in any case, the impact on our figures will be negligible.

[Operator]

There are no further questions.

[Agostino Scornajenchi, executive]

Okay. So thank you very much for the time you dedicated us, and have a nice afternoon.

I hope to see you in the coming months. Thank you.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.