Terna Rete Elettrica Nazionale SpA

MIL:TRN

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the First Quarter 2021 Terna Consolidated Results Conference. [Operator Instructions] And just to remind you all this conference call is being recorded.

I would now like to hand over to Agostino Scornajenchi, CFO. Please go ahead, sir.

[Agostino Scornajenchi, executive]

Good afternoon, everybody, and welcome to Terna first 2021 quarterly presentation. Let me start, as usual, with an overview of the Italian electricity market.

As you can see in this chart, in the first 3 months of 2021, national demand was about 79 terawatt hour with an increase of 2.2% versus previous year when the national demand was 77 terawatt hour. Let me highlight that in the month of March, demand in Italy returned to 2019 levels, showing a relevant increase of 11.8% compared to March 2020, a month that, as you remember, was heavily impacted by COVID-19.

Moreover, it is important to underline that in the first quarter of 2021, renewable sources covered about 34% of the demand and 40% of national net total production compared to the 28% registered in 2020. Concerning national net total production, they stood at 67 terawatt hour, with a strong increase of renewable generation, which increased by 6.5% versus 2020, while nonrenewable generation decreased by about 2%, confirming the consolidation of the ongoing decarbonization process.

Now let me move to the first quarter '21 key numbers on Page 5. In the first quarter of 2021, group revenues and EBITDA were up by 10% and 5%, respectively, versus last year, which means EUR 54 million and EUR 19 million. Moreover, we reported a group net income of EUR 190 million, EUR 4 million higher versus last year, while group CapEx stood at EUR 242 million, 11% more versus the first quarter 2020, confirming the P&L growth and the robust CapEx acceleration continued also in this first month of 2021 and fully in line with the implementation of our industrial plan.

To support this acceleration, driven by system names, our net debt stood at EUR 9.3 million versus about EUR 9.2 million at 2020 year-end. Finally, let me remind you that in June, we will pay the 2020 final dividend of EUR 0.1786 per share. The 2020 interim dividend of EUR 0.0909 per share was already paid in November.

[Operator]

Ladies and gentlemen, if you could kindly be patient. We are trying to reconnect the mainline for you.

[Technical Difficulty]

Ladies and gentlemen, your conference will start now.

[Agostino Scornajenchi, executive]

Okay. Sorry for the interruption. I understand that we lost the line at the beginning of Page 8. So I will kindly ask you to let me restart from the same page.

So again, Page 8, first quarter 2021 results. Regulated revenues reached EUR 537 million, EUR 20 million better than last year. The increase was mainly due to the investment acceleration pressure in the recent years.

Nonregulated and international revenues reached EUR 85 million, 67.2% higher than last year. Nonregulated growth was mainly attributable to the overall contribution coming from the already mentioned integration of Brugg Cables and to the increase in revenues related to the connectivity business, while international revenues were almost stable versus last year.

Now let's go through operating cost analysis. As you can see in the chart of Page 9, total operating costs stood at EUR 168 million, 26.2% higher than last year. The increase was mainly attributable to Brugg Cables' consolidation. Regulated operational expenses increased by EUR 5 million, mainly as a consequence of one-off items. Net of those nonrecurring adjustments, operating expenses remained stable despite the massive increase of the asset base.

Let me now analyze EBITDA, moving to the next slide. Due to all the previously mentioned dynamics, first quarter '21 group EBITDA reached EUR 454 million, EUR 19 million better than last year. The increase was mainly attributable to regulated activities, which contributed for about EUR 15 million versus last year.

Let's now have a look to the lower part of the profit losses, turning to the next slide, on Page 11. Depreciation and amortization amounted to EUR 163 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 291 million, EUR 9 million higher versus first quarter '20. We reported net financial expenses of EUR 22 million, in line with our expectation.

Taxes stood at EUR 78 million, EUR 2 million higher versus last year, essentially, due to a higher pretax results registered in the period. As a consequence, tax rate stood at 29%, in line with the same period of 2020. As a result, group net income reached EUR 190 million, EUR 4 million higher versus the same period of last year despite higher depreciation and amortization, mainly thanks to the business acceleration we've mentioned before. In light of those results, we are able to confirm all the provider targets for the year 2021.

Moving to CapEx analysis. In the first quarter of 2021, total CapEx amounted to EUR 242 million, 11% higher than last year, showing the double-digit acceleration to drive the ongoing energy transition process and to contribute to the Italian economic recovery. Indeed, we invested about EUR 227 million in regulated activities. Among the main projects of the period, it is worth mentioning the realization of new lines as, for example, the Paternò-Pantano-Priolo in eastern Sicily or the Italy-France interconnection. And the investment in stabilization devices and synchronous compensators that will allow the enhancing of our grid stability. Nonregulated and other CapEx stood at EUR 15 million. This includes capitalized financial charges and other investments.

Regarding the net debt and cash flow analysis, let me move to Page 13. Net debt at the end of March 2021 was EUR 9,321 million, EUR 148 million higher than 2020 year-end levels mainly as a consequence of the CapEx acceleration made on the national grid. In any case, we generated an operating cash flow of EUR 333 million, thanks to which we are able to more than cover the CapEx spending of the period.

Let's now make a deeper analysis of our debt profile with the last slide on Page 14. As you know, Terna follow a prudent and proactive debt management approach aimed at keeping a solid and diversified financial structure. Indeed, at the end of the first quarter, we registered fixed over floating ratio of gross debt of about 81% and an average duration of about 5 years. In line with our strategy, which plays sustainability as a driving force for value creation, Terna aims to confirm its leadership in the sustainable financial market. Indeed, starting from January 2021, Terna become the first Italian electric utility to join the Nasdaq Sustainable Bond Network.

Moreover, let me also like that from February 2020, Terna is also part of the CFO Taskforce for the SDGs, an initiative launched by the United Nation Global Compact for the development of sustainable finance. In particular, the task force aims through the implementation of principles and guidelines that aligns corporate finance and investment with a sustainable development goal promoted by the United Nations.

Finally, Terna is also present in the corporate form of sustainable finance, the network of European companies, committed to develop sustainable finance as a tool to promote a more sustainable and responsible society.

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

[Operator]

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

[Harry Wyburd, analyst]

Two questions. I apologize because actually neither of them are specifically on the results, but hopefully, they'll be interesting and relevant nonetheless. The first one is on inflation, given obviously dominatingly -- the news out of the U.S. today.

Just wondered if we could explore your exposure to inflation a little bit because, I guess, you're one of the few remaining pure-play, inflation-exposed companies in sort of infrastructure in Europe. So I just wanted to understand from you, maybe you could give us a bit of color on where you see the sensitivity in the plan? So I'm not just talking about a single year, but the planned period if inflation sort of outturns higher than what you assumed? So if I remember correctly, I think you're only assuming about 1% inflation in the plan? So what could the upside be, say, inflation was 100 bps or so higher than that on your targets?

And then also, just so I can understand correctly, so if your input costs increase, whether there's cost of raw materials and components from suppliers and stuff, presumably you pass those all through to actually inflation -- higher inflation can actually result in sort of increases in your CapEx just straight into the RAB as well. So if you just sort of confirm that understanding? So that's the first question.

And the second one, this is slightly left field, but it's been a very important topic I know for a lot of investors. You were briefly earmarked to be included in the S&P Global Clean Energy Index earlier in the year. But actually, when they did the rebalance in April, you weren't included. But it's a bit of a cliffhanger because I believe S&P have said they're going to open a consultation on whether to include smart grids in the next rebalance, which I believe would be in -- or at least the next constituent rebalance should be in October.

So the question is, have you had any dialogue with S&P on potential inclusion in that? Certainly, it would be really interesting if we could get any color on what you've spoken to them?

[Agostino Scornajenchi, executive]

Okay. So let me start on the second one. We are not present in that index. So you shoot us directly to summer recruits for this. Regarding the first question you mentioned, of course, we have seen this relevant information coming from the U.S. today with the update of inflation rates, of course, it's pretty interesting for us.

What is important to remember is that, in the midterm, all of the regulated activities and specifically Terna-regulated activities will be positively impacted by the increase in inflation and the degrees of connection to the inflation. You remember that each year, both the RAB, the related asset base, they allowed the precision and allowed OpEx are evaluated by these indices.

So first of all, what will happen to our O&M costs? It will have an inflation process, of course, finance cost will be impacted by also the level of recognized officer will be immediately impacted as well. So I do not see any relevant change in our margin. What could change -- what we will see on the top line because consider that for each valuation of 1% on the expected inflation, the impact on regulated revenues is about just a little bit lower than EUR 20 million, EUR 19 million to be precise. And the same impact on our regulated asset base is in the region of EUR 130 million.

Consider that in the industrial plant 21, 25, we have assumed a display or at slightly above 1%. It was 1.1%, if I'm drawn on average during the planned period. So we consider this more as an opportunity than as a risk.

[Operator]

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

[Javier Suarez Hernandez, analyst]

Three questions on my side as well. The first one is a one-off context and then the second and the third are of detail. The question on the context is if you can help us to understand which has been the participation of Terna in the pricing of the proposal by the Italian government of the recovery plan, which could be the implication of that plan and the European funding for a company like yours? That would be the first question.

And the second question is on the increase that we have seen on the underlying cost for the company of EUR 5 million on the regulated activities. I think that you mentioned that during the presentation that this is a one-off -- this is due to a one-off impact. Can you elaborate on that? And explain to what that one-off impact is related to?

And the third question is on the working capital dynamics that you have seen during the first quarter. If you can elaborate also on them? And what we expect -- you are expecting by the year-end?

[Agostino Scornajenchi, executive]

Sorry. Can you hear me?

[Operator]

Yes. We can hear you, yes.

[Agostino Scornajenchi, executive]

Okay. Let me start from the third question. Sorry, we were on mute. Let me restart on this working capital. Of course, we still have some impact in our working capital connected with what happened last year. You remember, just 1 year ago, in the middle of the pandemic, it was April and May, we have seen a massive reduction of the national demand. And as a consequence of that, a massive decrease of electricity generated by renewables.

This was a very good thing because we covered a lot of our needs with renewables. The problem is that this has some implication in terms of stability of the grid. So we were obliged to purchase some stabilization services from micron unit, from balancing services, from thermal generation plant, and we are obliged to pay that cash.

The tariff structure implies that the recovery of this cash out would take something like 12, 11 months. So we expect to absorb this impact by the -- more or less, the second and the third quarter 2021.

Relating to the one-off of evolution of our revenues, we expect first quarter 2020, consider that we are already talking about a different accounting methodology on probably your service revenues and cost in respect what we did in last year. Nothing [indiscernible] and nothing that would continue the future.

Regarding the first question, that is really an open one question. Of course, we are part of the discussion about the recovery plan and therefore in our resilient plan, it is a consequence of the damages created by the pandemic to the international economy. In this context, the European council created this fund to develop on different assets, including digitization, innovation, a global competition sort of improvement.

Regarding Italy, the fund foresee something slightly lower than EUR 200 million, EUR 191 million, between '21 and '26. On top of that, there are other EUR 13 million related to REACT European Union program, which foresees also a short time horizon of spend in '21 and '22. So the total amount is slightly lower than EUR 300 million. I think that here the key question is the way the government institution and companies, including Terna, will be able to spend this money.

Of course, an element that will become key is the authorization process. We are already there independently from the side of the recovery plan, we are already there with a massive amount of investment related with the evolution of the national grid. As you remember, we have presented a business plan with more than EUR 9 billion in the 5-year horizon. And as you probably will see in the coming weeks, we have also confirmed this amount with the 10-year development plan that has been approved today by the Board of Directors.

I cannot mention figures, but for sure, you will not see a reduction there. So here, the key question is how execution? How the political organization and how public communities will be able to implement this plan, giving a list of authorization of fast-track projects in order to realize this investment really in a very ambitious time frame? Because most of the investments need to be completed by '26, that is 5 years starting by today. So it's 2x the average speed that we have seen in the recent years in Italy.

[Operator]

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

[Enrico Bartoli, analyst]

First question is relating to the Tyrrhenian Link. The press reported that you started discussion with local authorities in Sardinia. So if you can update us on the status of the discussions? And when you expect that the authorization process will be moved to the central government level?

The second question is related to the increase in revenues in the regulated part of the business. If you can provide us the amount of output-based incentives that were included in the first quarter maybe compared to the first quarter last year? And the amount that you expect to cover in the rest of the quarters?

And the third one is an update, if you can, on the cost of debt that you had in the first quarter?

[Agostino Scornajenchi, executive]

Let me start from output-based incentives. The amount of the output-based incentives included in the first quarter 2021 is 0, and not a relevant piece or factor for the rest of the year. I confirm the guidance provided in the business plan something in the region of EUR 200 million for the period '21 and '25.

Second question, first question, sorry, was on the Tyrrhenian. Okay. Let me remind you that the total investment cost for Tyrrhenian Link is confirmed at EUR 3.7 million, of which EUR 1.8 million included in the '21, '25 horizon. According to the last opinion of the Italian regulator, the new Tyrrhenian Link will be planned in the next national development plan '21, with 2 singles separated by 2 other links, the East Link and the West Link.

What is happening now is that the public consultation in the region involved and by the new interconnection is ongoing. The authorization procedure will be launched and are expected to be completed within the coming 2 years. The expected commission date is the same we have already communicated 6 months ago is 2025. This interconnection will be key in order to ensure stability and security of network and markets on integration, integration of additional renewable for Sardinia, but not only for Sardinia, but specifically for Sardinia, give adequacy services, stability of the grid in the context of the carbonization of the island that today, as you know better than me, is strictly linked with coal generation that, of course, needs to be abandoned in line with the guidelines communicated by the Italian and the EU government in the recent years.

Regarding the cost of debt, nothing to add, [indiscernible] respect, what we already said at year end -- at year-end 2020, we are still confirming the 1.3 average cost of debt that we have communicated for the financial plan horizon.

[Operator]

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

[Stefano Gamberini, analyst]

A few questions also from my side. Just an update on the talks with the regulator regarding the date of the regulation on the WACC. If you can share with us something on top of the possible disclosure of the first consultation paper? Last time you still expected no severe cut in returns.

I don't know if this guidance or this expectation could be confirmed. The second you confirm that all the projects, your '21, '25 and Stefano confirms also the total investments. In the case of some delays related to the Tyrrhenian Link, which is a very complex program, could you confirm that the additional EUR 800 million, EUR 900 million CapEx that you disclosed last November are already in place and are going ahead to offset an eventual postponement on this project?

And the final, if you have a judgment regarding the authorization process that is going ahead for old renewable in order to accelerate the installment of new renewable is going ahead? Last time you said that the requests are growing a lot, but on the other side, everything is stopped, ready to authorization process. Have you seen some steps ahead in the last 3 months?

[Agostino Scornajenchi, executive]

Okay. Well, regarding the -- what you should review. The process for this review started at October 2020 with the opening of the consultation process and over the observation period that will last until this October '21.

So we expect to have some additional retail, let me say, immediately before, immediately after the summer break. What we have seen, what we see today, if you ask for a comment what we see today, what will also, as we have commented already during this presentation with what happened today with inflation expectations in the U.S., for sure, we are experiencing a unique period. That is a consequence of the COVID-19 crisis. We expect that the situation, after we have been taking in account, as you know, the track record of the regulator on this extent is excel. And over the years, they have always decided with the balance and couple of talks and the evolution of the red context, so we have no doubt that, as usual, the discussion will be dropped. But again, nothing to have now, we will come back on this topic in the coming months.

Last question -- sorry, second question was related to the level of investment. Yes, we confirm the guidance. What I can say here is that first quarter '21 was an excellent quarter, more than EUR 200 million of investment committed. We have 1.4 to be delivered. As you know, at the guidance provided for '21, we are still far from there, but it was a good beginning, better than 2020, and 2020 was a good beginning.

So my position is the following, including also the comments you acquired on the Tyrrhenian Link. We are in line with our expectations. We are fully committed to respect the guidelines. We have some flexibility. It's not only a declaration. It's something that we have demonstrated last year, when in a particular framework, we were able to schedule a lot of projects, but at the end of the year, we were able to deliver the same size of the announced investment.

We are in the same situation. We are not concerned specifically for Tyrrhenian Link. We know that there is an important amount related to that. But consider that we have already demonstrated to have enough flexibility to reach in any case target that we have communicated.

Third question -- Thank you. Third question related to the renewal development in Italy and possible solution. Again, you have the key element of the discussion is authorization, simplification and acceleration of permitting procedure for the different plans. We have a clear view about the renewable option mechanism, the remuneration scheme. It is something that, of course, is not in our hands, but is something that we are clearing, supporting with the authority, with the government, with the institution because this will be a key enabling factor for the decarbonization target communicated by the government, not only the Italian government, of course, but also the European Union target defined in the recent years.

[Operator]

Our next question comes from the line of James Brand from Deutsche Bank.

[James Brand, analyst]

I was wondering, lots of people are posting at the moment on the taxonomy rules. And I would imagine that most of tenants activity should be compliant, but sometimes there are some unusual works around how the rules are working, like, for instance, LNG supply don't really considered to be compliant with the rules.

So I was wondering whether you could comment on your understanding of which of your activities and the proportion that's going to be compliant with the rules?

[Agostino Scornajenchi, executive]

Well, you know that a few weeks ago, at the end of April, the European Commission published the new taxonomy regulation delegated passed on climate change mitigation and adaptation. This is the official link. The document confirms, let me say, that the eligibility of electricity transmission with to the taxonomy as one of the main enabling activity that substantially contribute to the climate change mitigation and adaptation.

I think that this is an important [ orchestration ] and also is the confirmation of what we have announced in the presentation we made on the '21, '25 industrial plan in November. At that time, or before this transition, we already announced that more or less 95% of our regulated investment could have been considered eligible according to the criteria that at the time, the European Union was in the process of definition that now has been defined.

This criteria are expected to enter in force, I think, the beginning of 2022, after the final approval of the delegated act by the European Council and the European Parliament. That is something that is foreseen in the coming months. So we are fully in the framework we have communicated in November. And of course, we are more than happy for this.

[Operator]

Our next question comes from the line of Bartek Kubicki from Societe Generale.

[Bartlomiej Kubicki, analyst]

Two questions from my side, please. Firstly, I would like to ask you about storage. I think there's quite an ambitious plan to have around 5 gigs of storage in Italy in the next years. I just wanted to ask you where the country is in terms of constructing this? What your role could be in actually building storage, providing it's not delivered by the market? And should the storage be created, what is actually the upside to your CapEx plan, not only from the storage side as such, but also from the transmission lines, which will be connected to those storage sites?

I think many of them needs to be constructed on the south. And I guess south, the country is less interconnected than the north. That will be my guess. So that will be the first thing.

And second, on your output-based incentives, you confirm this EUR 200 million for your business plan. I think the whole scheme is for EUR 300 million. I just wonder what are the upsides? Meaning, whether you are in the discussions right now with the regulator to actually either extend the scheme or increase the scheme? So I would like to sort of ask you to what extent -- to what numbers they actually -- the output-based incentive scheme could go up in your next -- maybe, of course, you will not tell us this, but in your next business plan, what increase can we actually see from the output-based incentives?

[Agostino Scornajenchi, executive]

Well, let me start from output-based. I confirm what we said before. We have in the region of EUR 200 million, to be precise EUR 220 million. This is the extra figure we have communicated in November, and we're going to confirm this. Of course, we're looking, there are a lot of other discussion with the authorities for the period after the current business plan horizon. And if we will have something to communicate on this, you will see the moment we will update the business plan.

Regarding storage, I want to be really -- let me give you really an easy answer to your question. Are the storage needed? Yes, of course, we need. Are they needed in the southern part of the country? Yes. Not only the southern part of the country, for sure, they are needed. Do we plan to build storage? Not at all. We are waiting for private investors to do that because we are not entitled to do that. Of course, we do know what is happening on the market. We need storage, let me repeat on this. If nothing will happen, we will open a discussion on this. It is not part -- it's not a central case for our business plan. It is something that is needed, not for business reason, but let me say, for electro technical reasons, so someone will have to do that, and we are expecting that will happen.

[Operator]

We have no further questions at this point. So I hand the conference back to you, sir.

[Agostino Scornajenchi, executive]

Okay. Thank you very much for your time. I really hope to see you in presence as soon as possible. And again, have a nice rest of the afternoon. Goodbye.

[Operator]

Ladies and gentlemen, thank you for your participation today. This concludes today's call. You may now disconnect your lines. Thank you.