Terna Rete Elettrica Nazionale SpA

MIL:TRN

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to the First Quarter Consolidated Results Conference Call. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions]

I will now hand over to your host, Agostino Scornajenchi, Chief Financial Officer, to begin today's call.

[Agostino Scornajenchi, executive]

Good afternoon, everybody, and welcome to Terna's first quarter 2022 results presentation.

Before starting to analyze the figures, I would like to share with you the main latest achievements. Firstly, let me remind you that on the 24th of March, we presented the update of our '21-'25 Industrial Plan Driving Energy that foresees EUR 10 billion of total investments. This includes EUR 9.5 billion of regulated investments aimed at developing, modernizing and strengthening the national transmission grid, confirming our role in driving the energy transition and enabling an even more complex, sustainable and innovative electricity system.

From a financial standpoint, we continue to enhance our financial structure. In this regard, let me underline that in February, we successfully launched the first green non-convertible, perpetual, subordinated hybrid bond for a nominal amount of EUR 1 billion. Regarding our rating profile, I would highlight that in March, Standard & Poor, Moody's and Scope ratings confirmed Terna's long-term rating as BBB+ with a positive outlook, Baa2 with a stable outlook and A- with a stable outlook, acknowledging the stability of the updated '21-'25 Industrial Plan.

As already announced, at the end of April, we signed an agreement with CDPQ, a global investment group, for the sale of about 100% of Terna Group's portfolio of power transmission assets in Brazil, Peru and Uruguay for an equity value of over EUR 265 million. This transaction will allow Terna to focus on domestic core activities and refocus in low-risk markets with an attractive growth potential. The closing of the deal is planned in the second half of '22.

After this brief introduction, let me give you the usual overview of the Italian electricity market, moving to the next slide. As you can appreciate from this chart, in the first 3 months of 2022, national demand was about 80 terawatt hours with an increase of about 3% versus previous year when national demand was 78 terawatt hours. As you can see in this chart, in the last 12 months, we registered a full recovery of the national demand, which returned to 2019 levels, recovering the decline related to the COVID-19 pandemic.

Moreover, it is important to underline that in the first quarter of '22, renewable sources covered about 29% of the demand with a strong increase in wind and solar production. Concerning national net total production, they stood at 71 terawatt hours, 6.7% higher than the same period of '21, mainly thanks to the solid contribution of wind, hydro and solar production. Renewable cover about 33% of total generation.

Now let's move to the first quarter '22 key numbers at Page 6. In the first quarter of '22, Group revenues and EBITDA were up by 5% and 3% respectively versus last year, which means EUR 29 million and EUR 13 million higher than first quarter '21, while Group net income was EUR 192 million, 1% higher versus last year. Moreover, Group CapEx stood at EUR 293 million, 21% more versus first quarter '21, confirming the robust CapEx acceleration in line with the implementation of our updated Industrial Plan.

At the end of March '22, net debt stood at EUR 8.7 billion versus about EUR 10 billion at '21 year end. Let me remind you that 2021 results have been restated for international activities held for sale according to IFRS 5 accounting principle. Finally, at the end of April, Terna's AGM approved the total dividend for '21 of EUR 29.11 per share, including the interim dividend of EUR 9.82 per share already paid in November '21 and the final dividend of EUR 19.29 per share to be paid in June '22, all in line with the dividend policy announced in the updated Industrial Plan.

Now let me make a deeper analysis of first quarter figures, turning to the next slide. I am now at Page 8. Let's start with revenues analysis. Total revenues in the first quarter of 2022 increased by 4.7%, reaching EUR 644 million, up by EUR 29 million versus last year. The growth was mainly attributable to regulated activities, which contributed for EUR 25 million and to the successful integration of LT Group, one of the main Italian operators in the maintenance of solar systems acquired in October '21.

Let's now go into the details of the regulated and non-regulated revenues evolution, moving to the next slide. Regulated revenues reached EUR 562 million, EUR 25 million better than last year. The increase was mainly due to the ongoing investment acceleration made on the grid and outlook-based incentives effects. Non-regulated and international revenues reached EUR 82 million, 4.3% higher than last year. Non-regulated growth was mainly attributable to the overall contribution coming from the already mentioned integration of LT Group, while international revenues were set to zero in application of the already mentioned IFRS 5 accounting standard and referred to assets held for sale in Latin America.

Now let's go through operating cost analysis. As you can see in this chart of Page 10, total operating costs stood at EUR 183 million, 9.4% higher than last year. Regarding regulated activities, the increase was mainly attributable to the insourcing of new competencies, while non-regulated activities have been impacted by LT Group full integration.

Let me now analyze EBITDA, moving to the next slide. Due to the previously mentioned dynamics, first quarter '22 Group EBITDA reached EUR 461 million, EUR 30 million better than last year. This increase was mainly attributable to regulated activities, which contributed for about EUR 15 million versus last year and showing an EBITDA of EUR 448 million in the first quarter of '22.

Let's now have a look to the lower part of the profit and losses, turning to the next slide on Page 12. Depreciation and amortization amounted to EUR 168 million. The increase versus last year was mainly due to the impact of new assets becoming operational in the period. And as a consequence, EBIT reached EUR 294 million, EUR 8 million higher versus first quarter '21. We reported net financial expenses of EUR 24 million. The increase versus last year was mainly due to the rising inflation registered in the last months. Taxes stood at EUR 76 million, EUR 1.5 million lower versus last year, essentially due to non-deductible costs registered in the same period of '21. As a consequence, tax rate stood at 28.3%. As a result, Group net income reached 192%, 1% higher versus the same period of last year.

Moving to CapEx analysis. In the first quarter of '22, total CapEx amounted to EUR 293 million, 21% higher than last year, showing a double-digit acceleration to drive the energy transition process and to deal with the ongoing energy crisis. Indeed, we invested about EUR 281 million in regulated activities. Among the main projects of the period, it's worth mentioning the Tyrrhenian Link, the Paterno-Pantano-Priolo in Sicily and the investment in stabilization devices as synchronous compensators. Among CapEx categories, development CapEx represented 38% of total regulated CapEx. Defence CapEx stood at 15%, while asset renewable and efficiency was 47%. Non-regulated and other CapEx stood at $13 million. This includes capitalized financial charges and other investments.

Regarding net debt and cash flow analysis at Page 14, net debt at the end of March '22 was about EUR 8.7 billion, about EUR 1.3 billion lower than '21 year end level, mainly due to the hybrid issuance made in February that in line with accounting standards has been accounted as equity. During the period, we generated an operating cash flow of EUR 371 million, thanks to which we were able to more than cover the CapEx spending of the quarter.

Let's now make deeper analysis of our debt profile, moving to Page 15. In line with our prudent and proactive debt management approach, at the end of this first quarter, we registered the fixed over floating ratio on gross debt of about 86% and an average duration of about 5 years. As already mentioned, with the aim of confirming our leadership in the sustainable financial market, in February '22, we successfully launched the first green hybrid bond for an Italian corporate for a nominal amount of EUR 1 billion. The issuance was very successful in the market with an order book at peak over EUR 4 billion. In the same period, we also signed a bilateral ESG-linked term loan for a total amount of EUR 300 million with a term of 2 years and an interest rate linked to Terna's performance in specific ESG indicators.

Thank you for your attention. And we are now ready for the Q&A session.

[Operator]

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

[Harry Wyburd, analyst]

Just 2 for me. The first is on the cost of debt going up and inflation. If I remember correctly, I think there's sort of just one bond that you have that's inflation-linked. But perhaps, you can remind me how big it is, because I'm afraid I can't remember, but I think it was quite small? And what's the precise inflation linkage of that bond? And is there any other inflationary impacts on your interest costs, i.e., like your floating rate debt getting more expensive or is it just that single inflation-linked bond that drove the increase in debt costs? So that's the first one.

And the second one, I think the last grid development plan was published last July. Can you just remind us when the next one is going to be published? And are you able to give any kind of sense as to what -- the last one I heard I think that had about a 20% increase in expenditure in it. I'd be interested if you could give us any kind of flavor of whether we should expect another increase in the next plan?

[Agostino Scornajenchi, executive]

First one, you're right. There is a residual bond expiring in September '23. The total nominal amount of the bond is EUR 500 million and this explains most part of the increase of the cost of debt related to the evolution of inflation. Regarding our next development plan, this will be not take place in '22 because it will happen each -- every 2 years. So this is something that we will discuss together starting from beginning of '23.

[Harry Wyburd, analyst]

And maybe just -- sorry, one follow-up on the inflation bond. When it matures in September 2023, would you expect or would you intend to replace that with another inflation-linked bond or will you go back to having non-inflation-linked?

[Agostino Scornajenchi, executive]

I don't think so. But as usual, we will evaluate market conditions at the time we will have the need to do something.

[Operator]

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

[Stefano Gamberini, analyst]

3 questions from my side. First of all, regarding during the presentation of the business plan, you underlined that you could close a deal in the storage business in the forthcoming coming months. Could you give us some color about this? And if this deal could have some significant impact on your EPS or not?

The second. Taking into account the current inflation expectations, what could be the RAB deflator that we could expect in '23 or in '24 and the upside compared to the trend you have in your business plan?

Finally, regarding working capital. I noticed an improvement in the first quarter, while seasonally speaking, usually the first quarter was negative. Could we expect a positive working capital again despite all the measures from the government to reduce the bill for final customers or do you expect a worsening of working capital in forthcoming quarters?

[Agostino Scornajenchi, executive]

Let me start from the last question. Evolution of working capital is in line with we've announced in the past. You remember that we suffered a little bit an increase of working capital due to some lateral effects connected with the beginning of the first pandemic cycle in spring 2020, in which we were forced to ask suddenly a relevant amount of ancillary services with a relevant increase of uplift. And I already announced at that time that this would have been reabsorbed in a couple of years, and we are there. For the rest, the first quarter of the year is an excellent quarter in terms of cash generation given that there are no dividend and no tax to be paid. This explains the improvement of the period. But in any case, we are talking about some seasonality effect and we will follow-on on this in the coming quarter.

Regarding your second question, we do not have about future RAB deflator that the authority would introduce in the future. Today, the RAB deflator that we expect is in line with the inflation rates that we have seen at the moment we have prepared the business plan that was beginning of this year.

Regarding storage, storage capacity is something that is needed for the electricity system in order to cope with the energy transition process. The more renewable you will install in the country, the more storage facility you will need. It is not so important to understand who will build these new facilities, it's important that someone will have to do that. And we are here to provide the maximum support in order to have this infrastructure realize it.

[Operator]

We currently have no questions in the queue. [Operator Instructions] And the next question comes from the line of Bartlomiej Kubicki from Societe Generale.

[Bartlomiej Kubicki, analyst]

2 quick questions. If we look at this international transaction, can you give us some indications related to valuations in terms of multiples, implied PE or implied EV EBITDA? And secondly, I guess, you will start or you have maybe already started your TotEx discussions. Can you actually give us some sort of timing when can we expect first indications how TotEx will look like for sort of consultation papers from the regulator regarding the new regulatory regime?

[Agostino Scornajenchi, executive]

Well, as you know, we have concluded -- we have signed an agreement for the disposal of more or less 100% of our Latin America portfolio for a total equity value of around EUR 265 million. And this will allow us to book potential capital gain at closing, given that the closing will be -- will take place with a different timeframe in the coming months with the potential capital gain, total capital gain of around EUR 60 million. The transaction is fully in line with market multiple for similar transaction of this period. And we have also taken benefit from positive FX rate of the latest weeks.

Regarding your second question, application of TotEx, the first potential application of TotEx is something that probably will take place starting from the next regulatory cycle. But you know that something is already happening, given that the authorities already confirmed attendance announced already in the past to move from a full input-based methodology, which are basically paid on the base of the money that you spend through a more output-based-oriented remuneration policy. This is something that is taking place already today.

Given that, if you look at the total output-based contribution of the previous business plan, we were talking of around EUR 200 million in 5 years. Now we are talking about 2x this amount. That is the update of the business plan that we just presented to the market. So something has already happened. And as said several times, we believe that the authority will start with a sort of progressive introduction of the output-based methodology that, for sure, will take more and more space in our remuneration scheme in the coming years.

[Bartlomiej Kubicki, analyst]

But do you think in the next regulatory cycle, the full TotEx would be implemented? I mean, you will be able to show some TotEx outperformance or potentially TotEx underperformance if things go wrong or it's still too early -- 2024 is too early for that?

[Agostino Scornajenchi, executive]

I think that details about the regulatory mechanism will be set -- will be part of the discussion, a specific consultation between ARERA and operators that will take place already in the second part of '22, but it's too early to imagine which could be the precise mechanism that the authority will apply.

[Operator]

The next question comes from the line of Roberto Ranieri from Intesa Sanpaolo.

[Roberto Ranieri, analyst]

I have 2 questions, please. The first one is a clarification. I didn't catch when do you expect the LatAm asset disposal to be completed? My second question is on inflation and cost inflation. Did you have any impact -- negative impact on your CapEx for the project that you are executing? And do you expect this to have any impact on your major projects in the future?

[Agostino Scornajenchi, executive]

Well, regarding your first question, we have signed an agreement with CDPQ in the latest days and we will perform 4 different closing given that we are talking about different companies and different assets that we have in Brazil, Peru and Uruguay. More or less 50% of the deal will be closed already in '22, somewhere before or immediately after summer '22. And the second part that is connected to the completion of the construction of an infrastructure called Linha Verde I, in Brazil, in which we will have to complete the construction and after we will close the deal with the counterpart after the completion will take place in a second moment.

Regarding inflation, let me say, we do not have any impact coming from inflation or maybe we have some cash impact because we have to pay a little bit more, the goods that we buy, but we have more than enough financing flexibility to do that. But in the mid-to-long-term, inflation will provide us some benefits given that inflated cost will be part of our remunerated RAB and remunerated OpEx. So in the long-term, we will take an advantage from the increase of inflation. So we are not concerned at all for this.

[Operator]

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

[Stefano Bezzato, analyst]

3 questions for me, please. The first one on regulation. If I remember correctly, the latest review has introduced the possibility of an update of the allowed return every year based on some trigger mechanism. Do you have any expectation or an estimate of where the allowed return could go in 2023 given how fundamentals have moved in the last 5 months? The second question is on OpEx evolution. If you give us some color -- can you give us some color on the increase in OpEx for the regulated activities? And finally, one clarification on the capital gain from the LatAm asset disposal. Are you planning to distribute any of that capital gain as dividend?

[Agostino Scornajenchi, executive]

So regarding your first question, I think that you referred to the potential triggering mechanism in case of change -- massive change in the macroeconomic fundamentals behind WACC -- the allowed WACC. Well, we are not there. We do not expect to be a trigger. We do expect that remuneration will remain even for '23 in line with the current one. We are still not there. If we will be closer, we will inform the market, of course.

OpEx evolution is simply a consequence of the implementation of our business plan. Let me remind you that this company was spending only a few years ago something around EUR 700 million, EUR 800 million per year. Now we are 2x respect that amount. And this happened without any massive, let me say, increase. And we have not doubled our organization. We have not doubled our operational cost. At the contrary, if you look at the ratio between the assets that we have and the cost, if you will make a simple calculation between the total asset and the cost to manage the asset, the marginal impact is lowering, it's not increasing.

Regarding capital gain, it is part of our, let me say, I don't want to say day-by-day business because this is something that is not happening every day, but we are not going to modify our dividend policy. That is already announced in the update of the business plan is confirmed and we are not going to change it.

[Operator]

The next question comes from the line of Emanuele Oggioni from Kepler Cheuvreux.

[Emanuele Oggioni, analyst]

Sorry, I joined the conference late, so maybe you already answered that. But my question is basically, if you could provide a sensitivity in -- for EBITDA for 100 basis point increase in deflator for one year?

[Agostino Scornajenchi, executive]

Yes, the sensitivity of the following, consider that for each variation plus and minus 100 basis points of the deflator. You have a consequent variation in the remunerated asset base of around plus and minus EUR 140 million.

[Operator]

The next question comes from the line of Jose Ruiz from Barclays.

[José Ruiz Fernandez, analyst]

I just have one. You had a EUR 31 million increase in dispatching revenues. And in Slide #22, you are saying that 2022 dispatching revenues are going to be flat versus last year. Should I assume that there was a concentration of revenues in the first quarter and we will see a more normalized level in the following quarters?

[Agostino Scornajenchi, executive]

No, I think that EUR 31 million are related to some output-based incentives that have been accounted in the quarter. You will see in the coming quarter additional revenues coming from this source, because as anticipated before, we do expect an increasing contribution from output-based revenues in the current business plan.

[Operator]

There are no further questions in the queue. So I will hand the call back to your host for some closing remarks.

[Agostino Scornajenchi, executive]

Well, thank you very much for your time. And let me wish you a good afternoon, good evening and see you on the first half presentation at the end of July. Thank you.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.