Terna Rete Elettrica Nazionale SpA

MIL:TRN

Earnings Call Transcript 2023-Q1

[Operator]

Good day ladies and gentlemen and welcome to Terna's First Quarter 2023 Consolidated Results. My name is George, I will be your coordinated for today's event. Please note this conference is being recorded and for the duration of the call your lines will be in listen-only mode. However you will have the opportunity to ask question at the end of the presentation. [Operator Instructions]

I would now like to hand the call over to your host today, Mr. Agostino Scornajenchi to begin today's conference. Please go ahead, sir.

[Agostino Scornajenchi, Chief Financial Officer]

Good afternoon everybody and welcome to Terna First Quarter 2023 results presentation. This was the last set of results released before the next week's AGM. As we remind you that its agenda includes among our items, the renewal of the Board of Directors.

As usual, before starting to analyze the figures, I would like to share with you the latest main achievements of the company. Without being regulated activities, let me remind you that on the 16th of March, we published the new 10-year National Development Plan, which foresees more than 21 billion of investment confirming our key role as energy transition enabler, the investments foreseen in this new National Development Plan, aimed at continuing the integration of renewable sources in the progressive phase out of coal fired power plants, in line with the targets set at national and international level.

Our over March thermosyphon agreements with the European Investment Bank for the second and third tranches of the 1.9 billion loan for the uranium in the submarine cable connecting the Italian peninsula, with CCD and then to Sardinia.

The contract signed established a fourth or two tranches totaling €900 million for the construction and the commissioning of the east and west sections of the perennially. For DC infrastructure, we will be fully operational in its entirety by 2028 Terna plants plans on overall investment of around 3.7 billion.

Finally, regarding Terna financial structure, on the 14th of February, the company successfully launched a fixed rate single trench bond issue for a total amount of €750 million. This issuing with received a great market response with demand outstripping supply by almost four times the offer the amount represents a part of the €19 medium-term notes program.

The bond has a duration of 60-years and will pay a component of 3.625%, well below the market standard for this period. The proceeds will be allocated to meet the ordinary financial requirement and to fund the needs of the groups in that plan. After this basic introduction, let me give you the usual overview of the dynamic electricity market.

Turning to the next slide. And now at Page 5. As you can see from this chart, in the first three months of 2023 national demand was about 77 terawatt hours with a decrease of 4% versus last year when national demand was about 81 terawatt hours.

The reduction in electricity demand observed in the first three-months of the year shows a decrease in trend compared to the same period of last year. This is mainly due to the increase in average temperatures and to the reduction in industrial consumptions. And the first quarter of 2023 renewable sources covered about 20% of national demand with a slight increase respect to last year.

Regarding national net total production, this stood at 64 terawatt hours 10% lower than the same period of 2022. Despite that, let me align the increase in solar generation, which grew by 4% versus 2022, let me also say that in this first quarter, renewable sources covered about 36% of the national net total generation.

Now let's move to the main features of the period. The first three-months of the year continue to be characterized by a complex scenario. Despite the challenging and very volatile context, Terna recorded a significant improvement in both economic and financial indicators.

Indeed, group revenues and EBITDA were up by 11% and 8%, respectively versus last year, which means 68 million and 3 9 million higher than the first quarter 2022, while group net income was €200 million and with an increase of 4% versus last year.

Group CapEx stood at 350 million, 7% more the first quarter 2022 confirming once again Terna's CapEx acceleration driven by increasing system needs to ensure efficiency, resiliency and security of supply aligned with Terna's institutional role for the country. At the end of March 2023, net debt was 8.8 billion versus about 8.6 billion at 2022 year-end and fully aligned with our internal expectations.

Now, let me make a deeper analysis of the first quarter 2023 figures turning to the next slide, then now a Page 8. Total revenues in the first quarter of 2023 increased by 10.6%, reaching 730 million, up by 68 million versus last year, as you can see, registered positive results both from regulated and non-regulated activities, which contributed for 52 million and 60 million, respectively.

For the details of the renewals evolution, let's move to Slide 9. Regulated revenues reach 614 million, 52 million better than last year, which means about 9.2% more than the same period of 2022. The increase was mainly due to higher output based incentives effect related to the higher benefits generated for the system.

Non-regulated revenue and fresh 99 million, 19.7% higher versus last year. Non-regulated role was mainly attributable to the greater contribution coming from Brooke and Kamini the increasing revenues of the energy solution monster directed to LC group and the entry into operation of the private section of the interconnector Italy, France. International revenues were set to about zero, in accordance with IFRS 5 accounting standards refer to assets held for sale.

Now, let's go through operating costs analysis. Total operating costs stood at 113 million, 16.1% higher than the same period of last year. Regarding regulated activities, the increase was mainly attributable to the sourcing of new competencies and increased level of activity, while non-regulated activities have been impacted mostly by higher costs for the purchase of raw materials related to group and meaning and by the LT group contribution.

Let me now analyze the EBITDA, moving to Slide 11. Considering the previously mentioned facts, first quarter 2023 group EBITDA reach €500 million, 8.4% higher than the same period of last year.

The increase was almost fully attributable to related activities, which contributed for about 38 million versus the first three-months of last year, showing an EBITDA of 486 million in the first quarter of 2023.

Let's now have a look to the lower part of the profit and losses. Turning to the next slide. The procession and amortization amounted to 187 million. The increase versus the same period of last year was mainly due to the impact of new assets becoming operational and the period. As a consequence, EBIT reached 313 million, 6.7% higher versus the first quarter 2022.

We reported net financial expenses of 32 million. They increase versus last year was mainly due to the rise of inflation registered in the period that impacted our inflation linked exposure into the increase your level of interest calls registered on the that capital market.

Access to that 81 million, five million higher versus the same period of last year, and essentially as a consequence to increase profit. Tax rates stood at 28.9%. As a result, group net income reached €200 million 4.4% higher versus the same period of last year.

Moving to CapEx analysis at Page 13. In the first quarter of 2023 , total CapEx amounted to 350 million, about 7% higher than last year, and confirming the solid CapEx acceleration fully aligned with the target set in the NASA plan.

Indeed, we invested about 288 million in regulated activities. Among them a project of period is worth mentioning the Turanian link the LBMA literally the paternal Pantanal, we all have in eastern Sicily and investments in stabilization devices such as synchronous compensator for grid security.

For what concerns CapEx categories, development CapEx represent that 43% of total regulated CapEx. The same CapEx stood at 13%, while asset renewal and efficiency was 44%. New regulated and other CapEx stood at 27 million. This includes capitalized financial charges and other investments.

Regarding net debt and cash flow analysis, let's now move to the next slide. Net debt at the end of March 2023 stood at 8,847 million, 271 million higher than 2022 year-end level main linked to the progressive settlement of metric tables related to 2022. During the period, we generated operating cash flow of 368 million, thanks to which were able to cover all the CapEx spending of the period.

Let's now make a deeper analysis of our debt profile. Moving to Page 16. Thanks to our efficient and productive debt management approach over the last few years. At the end of March 2023, six over floating ratio and gross debt stood at about 87%, while the average duration was about five-years.

As already mentioned in March, Terna signed contracts with the European Investment Bank for the second and third tranches of the 1.9 billion loan for the perennially. After the first tranche of €500 million assigned at the beginning of November, the loan representative for two tranches of a total amount of €900 million for the construction and commissioning of the East Branch and the West Branch of the submarine cable.

The loans have a duration of approximately 22 years from the first date of disbursement. And that is characterized by a longer duration and more competitive in both than those currencies available on the market. Thus, they are part of fairness policy focused on optimizing its financial structure.

Finally, on February 14, Terna successfully managed to fix a great single transport issue. For a total amount of €750 million, the bond issued at a price of 99.281% with a spread of 70 basis points over the network is a maturity of six-years, and the payment of an annual coupon of 3.625%.

Now before moving to the Q&A session let me underline this also after band of this first quarter. We are well in fact on the execution of our plan, and we are confident to maintain our strategic path toward the energy transition also for the future.

Thank you very much for your attention. And I'm now ready for the Q&A session. Thank you.

[Operator]

Thank you officer. [Operator Instructions] Our first question today is coming from Mr. Javier Suarez of Mediobanca. Please go ahead sir.

[Javier Suarez, Mediobanca]

Hi everyone and thank you for the presentation. First question is a follow-up after last statement by CFO. Again that is hopefully a legitimate question, there are recent change in the management team after the Annual General Meeting. And the question for you is that the viewer besides any significant changes in the company's statistical path and any color on that would be much appreciated. That would be the first question.

The second question is on the positive deviation versus I guess expectations this quarter. That is I guess due to higher collection of out of date incentives, you can please quantify the amount of collected out to-date incentives during the quarter an update on your expectation for the full-year.

The third question is on the recent documentaries director with the definition of the general guidelines for the implementation of the tax system in Italy from 2024. If you could give us the brilliance of this document and your latest view of how these may impact their business plans going forward? Thank you.

[Agostino Scornajenchi, Chief Financial Officer]

Thank you very much, Javier. Let me start from the second question, I will come back to the first of then. We will see correctly, the result of the first quarter of 2023 are impacted by higher output based incentives.

With respect what has been originally foreseen this is something that we already analyzed at the end of 2022. What I can confirm is that we have during 2023, we do expect around €300 million of output based incentives, of which two thirds so you can consider €200 million more or less connected with MSD incentives.

Regarding the progressive change in regulations work and the loss implementation, as they say. First of all, let me remind you that we strongly believe that introduction of loss would be consistent with the path that we already follow toward. This output based approach is something that we discussed already. The more benefits we provide for the system, the more rewards that we could obtain.

As a consequence of that invoice approach, we see an opportunity to create a filter value for the system and shareholders because this could promote, let me say an overall efficiency through new output based regulatory measures. We are fully committed to do that and we are happy about the steps taken with by the authority with the resolution of and out of the base incentives.

More in detail, at the end of April, if I'm not wrong, it was the 20th of April 2023 , ARERA publish specific resolution to which approve the 24 Tier 2/1 Ross regulated integrative text containing at this time, the general principle and the criteria for setting the allow cost for that period.

With this resolution that we say initial one on the general principle, but it is important because with this resolution ARERA confirm the gradual approach for integration of the auto regulation for seeing the first phase, so called the SPC Ross base framework.

We are - at the beginning, the standard are we allowed in a substantial continuity with the current rules and the overall expenditure will be split between slow money components, and the fast money components according to their capitalization rate. I think that this is what we have in front of us up today. We do expect for the clarification of porta de from the authority and we will come back to you as soon as possible on this.

Regarding your first question about potential impact coming from the change in the management. Well, as I say it is pretty simple. You can assume at Terna will continue to pursue the goal of driving the energy transition process supporting the country and this let me say difficult task. Always providing highly professional state of the art services and ensuring security of supply and efficiency for end users.

As a part of the management team, I'm personally aware of the high level of responsibility that comes with this role. I believe that with that coming appointment of [indiscernible], who brings a wide range of technical competencies in developing and deploying critical networks, and management skills and business vision, I’m more than certain the Terna will continue to expand and strengthen its role in helping the country to develop the electricity system of the future.

[Operator]

Thank you sir. Our next question today will be coming from Stefano Gamberini from Equita. Please go ahead sir.

[Stefano Gamberini, Equita]

Good afternoon everybody. I have a follow-up regarding the question on the simplified topics. And in particular, the fact that the regulator will monitor the return or introducing the return on regulatory equity. So what is your comment on this measure, could the regulator then share the excess return with clients would you expect on?

The second guarding the aim of the government to require, to the public companies to use the NIP funds. And so which projects in your business plan could be financed through these measures and could you receive some way or remuneration, if you use this money, otherwise, we know that this should be deducted by the ramp?

Last question regarding the net working capital that you experienced that the positive impact of around one billion at the end of the years, you underline €300 million more or less, we already restored in the first quarter was the surpass of the full suite invest trend for this US$1 billion, when this will be fully restore.

And the very finally sorry, as we got the storage. Your 10-year development plan includes 70 gigawatts of new installed capacity, renewable installed capacity, but also 11 gigabytes of utility scale storages. Could you share with us if something is changing, what are the incentives that the government is working on in order to accelerate the investment in our store? This in particular could then be directly involved in storages sooner or later? Thanks lot.

[Agostino Scornajenchi, Chief Financial Officer]

Stefano also remember all the questions, I can try. So the first one.

[Stefano Gamberini, Equita]

I could repeat.

[Agostino Scornajenchi, Chief Financial Officer]

I know. I'm sure about that. So the implementation of - and remuneration on equity. I think that is a little bit too early to provide comments. We don't have and as information. I said before the revolution taken by the authority at the end of April and initial one jointly general principles that are more or less in line that are confirming what we do expect before.

But let me see on these. Again, we are not concerned at all from the implementation of this new mechanism. At the very end, we do expect to have benefits. Of course, we will have managerial efforts given that our ability to control the business in real time to provide the data to be.

let me see, to stay current on the efficiency in our project in terms of respect to the match with respect to the timings will be more crucial in the future. But I think that we are very well prepared to do that. And we say that last week, the second part of the year at the moment, we will receive more detailed information by our ARERA, and we will more than happy to share it with you.

Regarding the second question about the BM our error implication for us. Well, let me say we were talking earlier about residual implication, our business case is remunerated business case, on our regulated space. The moment we get a public incentives, we deducted from the rap. So at current regulation, I don't see major interest in doing this.

Of course, if we can provide our contribution to the realization of national critical infrastructure, we will be more than happy to do that. There are some projects that have been identified that agreement. I consider this residual option for us.

Third questions, networking capital. We hire in the first quarter of 2023 . Normally, in the first quarter, you have a deterioration of your working capital, given that there are out of payments related to invest in that mean accounted invoices that have been received in the last part of the year. So that standard, the duration of that.

On top of that we have the progressive the selection of the advantage that we get in that we have got for it in 2022. Currently from that pass to regulatory items that we were not able to liquidate to our market counterparts, counterparts due to lack of resolution that authority was not able to take in time by the end of the year. Now they started, we do expect a progressive reabsorption on the amount that you have seen at the end of 2022 during the second part of 2023.

Regarding storage, it is critical item as more when sees that the more we increase our expectation in terms of renewables the more we will need some regulation, some storage, some stabilization of the system, and storage will play a crucial role of this.

Today from as we say, formal and political point of view, nothing changes, we are not allowed in play any roles in storage, we will be more than happy to have a discussion about that and to provide our ideas and contribution. I do expect that we could facilitate and provide a good contribution for countering is also on this extent.

[Stefano Gamberini, Equita]

Very clear. Many thanks.

[Operator]

Thank you. Our next question is comes from Mr. James Brand of Deutsche Bank. Please go ahead sir.

[James Brand, Deutsche Bank]

Hi, another good set of quarterly results. And I was just wondering on the incentives, you have got this 300 million target. If you could give us a bit more detail in terms of what you are actually doing to deliver those incentives and in particular now you have done very well on the targets, which involve reducing system costs where you have reduce the system cost quite substantially. It is just really interested in what you are actually doing there and to reduce that cost, how you have gone about it?

[Agostino Scornajenchi, Chief Financial Officer]

We are in line with what we already announced it two years ago. They are all the way that the average weight of the output-based incentive will be increased during the different years. Let me remind you that today we have a general target in the business plan of €500 million and we are extremely well on track to reach this target. It was not the case only few years ago, it was 250, the previous business plan 200, and back.

So the more we move on, towards the future, the more these aspects will have an increasing role. And sitting in details here we are talking about incentives to create efficiency in terms of reduction of price difference internally different electricity zone energy areas and also between the different zones.

Stabilization of prices and different geographical areas, it is an ambitious target. And I think that we are well on track to reach it is something that we started also in the past. Let me remind you that already in 2017, we started doing something similar with the introduction of the interconnection.

Agenda, the sequence in which we were able to reduce price difference among, the different zone in some parts of the country expressing a big value. We are doing the same today and we are also working a lot starting from last year on that reduction on MSD. You know that MSD is an important component of the total energy cost.

We completely, we adopted our inspection strategy. In order to try to reduce this cost for the final user is not an easy task. I think that the team did an excellent job. Given that we decided to enter in a completely new, let me say implementing a lot of IT tools.

And also a lot of technical tools as stabilization devices synchronous compensators to have the possibility to reduce as much as possible the necessity to ask. We say emergency services sorry to say not in technical terms that are really, really expensive for the system.

In 2022, we reached first important result that we have already discussed the one or the one to come back on date. So we discussed that in March, when we presented the direct financial statement and we are moving on the same path also for 2023. I say before we do expect by the end of the year at least €300 million of our today's incentive which the main path will be represented by MSD incentives.

[James Brand, Deutsche Bank]

Thank you very much. I’m all done again.

[Operator]

Thank you sir. We now go to Sarah Lester of Morgan Stanley. Please go ahead.

[Sarah Lester, Morgan Stanley]

Thanks so much for taking my questions. I have just got two please. Sorry, just to push a little bit more on the output based incentives and I understand the regulation has gone through on this. But just wondering how confident you are that the regulator will allow the kind of levels of output based incentives that you are achieving to continue on an ongoing and persistent basis? So beyond, say, one, two years, do you think the regulator is okay with these levels becoming normalized if they do persist?

And then secondly, just on grid connection requests and wait times, any updated commentary around what you are seeing there would be great and also any commentary around renewables permitting the bottleneck in place?

[Agostino Scornajenchi, Chief Financial Officer]

Well to make a long story short, what you can expect is that long-term will be represented by wash. Now regulator is writing the rules. We will add, as we see an interim period assayed several times, I do expect personally a sort of mixed regime that will have a joint component of a basal regulation and investment capital and additional regulatory regulation nowadays, with Ross mechanism.

Today, we have already some clear signs of the ultra bass principle that is represented by this specific project that I have mentioned before, reduction of price difference among different zones, internally the different zones, reduction in MSP costs. So today, we have specific big projects that have set the stage to be easy to be measured.

In the future, we will have a more complicated system. Now they will change. Meaning that I do expect, as we demonstrated last year and that we are going to fit in this year with the results representing today. This will require additional managerial effort, but this will put us in the position also to obtain additional results.

[Sarah Lester, Morgan Stanley]

Thank you.

[Operator]

[Operator Instructions] The next question is coming from Marcin Wojtal of Bank of America. Please go ahead.

[Marcin Wojtal, Bank of America]

Yes, good afternoon. Just one question, if I may. I wanted to ask you about the evolution of your operating expenses in your regulated perimeter. I think they were up around 13% in QR, which is let's say in-line or maybe above the rate of inflation in Italy. Would you expect your operating expenses to be rising at a similar rate for the rest of the year or perhaps as inflation is starting to normalize, you would expect also last compensation. Thank you.

[Agostino Scornajenchi, Chief Financial Officer]

Well, in general sales, the rise in operational expenses has two different reasons. If you come back to the stand, you see that they have increased in the regulator business, this is a consequence of the effort we are putting in increasing or enforcing our internal organization to follow the increasing activity.

So let me remind you that the target for the year 2023 in terms of CapEx is 2.2 billion. We have not far from three times the target that we had only two years ago facility in 2018, which were well below one billion.

We are allowed to do that without makes three times in terms of staff, in terms of operational expenses, but of course, we have to reinforces ever made that is why, we have increased our hiring process and we will reach more than 5,000 FTE at year-end 2022 and we do expect to grow again also in 2023.

So, we are reinforcing our staff we are adding different competencies. And of course, we absolutely suffer as a result of external costs. This is also called current and fully in line with the communicated targets, no surprises about that. Of course, a portion of such increase, sorry, this is for the related business.

Second commenter is for denoted with the business. We are growing [indiscernible] we are growing and we have an explosion of the backdrops of the orders. And of course, we have more than happy to have this, but we have also to suffer an increase in raw material price. So, this is the explanation of the increased of €15 million that you see on page 10 for the -.

Both elements, operating costs are regulated and operating costs on non-regulated site are impacted of course, by inflation the type of an impact, but you know that this inflection in any case is fully covered by our regulatory system on the regulated part.

Maybe with a bit of timeline, maybe we will have a short-term impact on our cash or something negligible if you continue to compare it with the sides of the credit lines that we do have. So an increase of OpEx due to acceleration of inflation dynamics will be offset by higher allowed CapEx that will be recognized in the time.

Finally, regarding my expectation, on inflation that is pretty seems complicated to take a position on that. What we do expect and we will continue to see some increase until the second part of the year and we do expect the starting from October before we should see some sign of stabilization in inflation rates. This is what we see today. This is of course, a volatile item that we will have to continue to observe and of course, we will keep you informed.

[Marcin Wojtal, Bank of America]

Thank you very much.

[Operator]

Thank you very much sir. [Operator Instructions] As we do not appear to have any further questions at this time. I turn the call back over to Scornajenchi for any additional or closing remarks. Thank you.

[Agostino Scornajenchi, Chief Financial Officer]

Ladies and gentlemen, thank you very much for your time for the attention and the patience you dedicate to answer. Let me say that we will wait you with a new CEO at the end of July for the presentation of the first half of 2023 financial statements. Thank you very much.

[Operator]

Thank you, sir. Ladies and gentlemen, that will conclude today’s presentation. We thank for your participation. You may now disconnect.