Terna Rete Elettrica Nazionale SpA

MIL:TRN

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to today's Terna's 9 Months 2020 Consolidated Results. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, the 11th of November, 2020.

I would now like to hand the conference over to your speaker today, Agostino Scornajenchi, CFO. Please go ahead.

[Agostino Scornajenchi, executive]

Good afternoon, and welcome to Terna 9 Months 2020 Results Presentation. As you can appreciate from this chart, the first chart is Page 4 of the presentation that you should have.

In the first 9 months of the year, due to the COVID-19 health emergency, national demand was 225-terawatt hour, 6.9% lower versus the same period of 2019, where the national demand was about 242-terawatt hour. Despite this situation, let me highlight that starting from the month of July, we started to register a recover with a monthly flash demand in September compared to September 2019.

Let me also underline that in the first 9 months of the year, renewable sources scored about 40% of the total demand compared to 35.7% in the corresponding period of 2019. Concerning national net total production, they stood at 206-terawatt hour, with a strong increase registered in solar and hydro generation, which grew by 8% and 4%, respectively, versus the same period of last year, and confirming the strong world plan for renewable in Italy.

Despite the challenging situation on the electricity market caused by COVID-19, Terna continued to manage the grid and ensuring a high quality of service and high quality and high security of supply.

Now let's move to the main figures of the period at Page 5. In the first 9 months of the year, group revenues and EBITDA were up by 7% and 4%, respectively, which means EUR 115 million and EUR 45 million higher than the last year. Moreover, we reported a group net income of EUR 569 million, EUR 17 million higher versus last year, while group CapEx stood at EUR 749 million, 12% more versus September '19, confirming the strong CapEx acceleration even in this challenging scenario of emergency. To support this massive CapEx acceleration, our net debt stood at EUR 8.8 billion versus above EUR 8.3 billion at year-end 2019.

And now let's make a deeper analysis of the figures. Let me start with revenues analysis. Total revenues in the first 9 months of 2020 increased by 6.9%, reaching EUR 1,781 million, up by EUR 115 million versus the same period of last year. The growth was mainly attributable to regulated activities, which contributed for more than EUR 27 million. Moreover, I'll remind you that from the last quarter, we consolidated the new acquired Brugg Kabel for which the closing was signed in February.

Let's now go into the details of the regulated and nonregulated revenues evolution moving to the next slide. Regulated revenues reached EUR 1,545 million, EUR 27 million better than last year. This increase reflects part solutions driven by our investment activities, while other regulated revenues increased by EUR 5 million, mainly as a consequence of higher revenues related to quality of service. Nonregulated and international revenues reached EUR 236 million, about 60% higher than last year. This growth was mainly due to the already mentioned integration of Brugg Kabel.

Now let's go through operating cost analysis and on Page 9. As shown in the chart, total leveraging cost stood at EUR 457 million, 18% higher than last year. The increase was mainly attributable to group consolidation.

For a deeper analysis of the group's OpEx components, let's turn to the next slide. Starting from regulated OpEx, we reported EUR 284 million, substantially in line versus last year despite the strong increase of our asset base and some extra costs related to the COVID emergency. Nonregulated and international operating expenses amounted to EUR 173 million, EUR 70 million more than last year, mainly due to the Brugg Kabel integration. Net of this for either effect, nonregulated and international OpEx, were substantially in line versus last year.

Let me now analyze EBITDA, moving to the next slide. Considering the above-mentioned effects, group EBITDA reached EUR 1,323 million, EUR 45 million better than last year. We registered a positive EBITDA contribution, both from regulated and nonregulated and international activities, which grew by EUR 27 million and EUR 18 million, respectively, versus last year. This increase was mainly attributable to higher regulated revenues as well as to the contribution coming from Brugg Kabel acquisition.

Let's now have a look to the lower part of the profit and losses, turning to the next slide. I am now at Page 12. Depreciation and amortization amounted to EUR 458 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 865 million, EUR 23 million higher versus the first 9 months of 2019.

We reported net financial expenses of EUR 70 million, EUR 9 million higher than the same period of last year, mainly as a consequence of the lower capitalized financial charges and the adjustment of the valuation of equity -- of some equity investment in associated companies. Taxes stood at EUR 223 million, EUR 4 million lower versus last year due to high income not relevant for tax purposes recognized in the period. As a consequence, tax rate stood at 28% versus 29% of the first 9 months of 2019. Consequently, the group net income reached EUR 569 million, EUR 17 million higher versus the same period of last year, despite higher depreciation and amortization level linked to the business acceleration of the period.

Moving to CapEx analysis. For the first 9 months of 2020, total CapEx amounted to EUR 749 million, 12% higher than the same period of last year, confirming Terna's ratability to pursue its objectives despite the nowadays emergency context. Indeed, we invested about EUR 705 million in regulated activities.

Among the main projects of the period, it is worth mentioning the works to increase exchange capacity between the different market zones in Campania and Sicily, the rationalization of Naples metropolitan area as well as the progress on construction side for the Italy-France interconnection. Among CapEx categories, development CapEx represented 35% of total regulated CapEx. Asset renewal and efficiency was 48%. Defense represent the 17%. Nonregulated and other CapEx stood at EUR 45 million, which includes capitalized financial charges and other investments.

Regarding net debt and cash flow analysis. Net debt for the end of September 2020 was EUR 8,825 million, EUR 566 million higher than 2019 year-end level, and mainly as a consequence of the CapEx acceleration made on national grid. Let me say that on the working capital side, we confirm that during the COVID emergency, we registered no relevant delays on cash settlements. There was no issue with bad debts. Moreover, the working capital increase shown in the chart was related to the increase of market payments connected to the uplift evolution that will progressively normalize in the coming months.

Let's now make a deeper analysis of our debt profile at Page 15. Our debt management approach is aimed to keeping a higher level of efficiency and a solid financial structure, potentially mitigating any potential financial risk. Indeed, at the end of the period, we registered a fix over floating ratio on gross debt of about 84% at an average duration of about 5 years. Regarding the proactive debt management activities delivered, as usual, also in this period, let me remind you about the bond issue made in September for EUR 500 million with the duration of 10 years and a coupon of 0.375%, the lowest for an Italian corporate bond with this duration. This bond followed the green bond launched in July for a total nominal amount of EUR 500 million and an actual cost equal to 0.78%, confirming our absolute leadership in the sustainable financial market.

Finally, it is worth mentioning that at the end of October, Standard & Poor's affirmed the long-term corporate credit rating on Terna at BBB+, well much above the sovereign rating, while revising the outlook of Terna to stable from negative. At the same time, the agency also affirmed Terna's stand-alone credit profile at A minus. And you remember that this decision follow a similar decision on debt rating of the Italian republic.

To conclude this presentation, I would like to remind you that on 19th of November, we will present the new industrial brand. Moreover, we also remind you that on the 25th of November, we will pay the 2020 interim dividend of EUR 9.09 per share as decided in the Board of Directors of today.

So thank you very much for your attention. We are now ready for the Q&A session.

[Operator]

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

[Harry Wyburd, analyst]

I appreciate that you'll be taking the sort of big issue questions next week. So just one from me. And I understand that the regulatory review process has formally kicked off. And I think you and your peers have said fairly consistently over the course of this year that the formula as it stands implies no change to the allowed return. But if I'm not wrong, I think the formula is due to be reviewed under the current regulatory review.

So I'm just interested in your thoughts as to what the timeline, firstly, of the regulatory review process will be from here and then specifically whether you envisage any changes to the formula for how the allowed return is calculated.

[Agostino Scornajenchi, executive]

Well, in general terms, as you know, according to current rules, the 5.6 WACC has been set until the end of '21. Regarding the post-'21 WACC update, the process just started with the resolution published only a few weeks ago. The document was pretty general, and it refers only to the overall regulatory principle without entering in any specific detail. But we can say that the resolution highlights the intention of the regulator to operate in full continuity with past methodology in order to preserve the stability of a regulatory framework. This is something that, as you know, is of the mandatory importance for us.

For what concern the duration, the document indicates that the new WACC period will last at least for 4 years, maintaining the principle to have an interim review to adjust eventually the parameters in accordance with some evolution of the macroeconomic scenario. So to make a long story short, we expect to have a little bit more visibility in the second part of '21, maybe in between that -- yes, let me say, in the third quarter of '21. But again, we expect full continuity in the principles.

[Operator]

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

[Javier Suarez Hernandez, analyst]

Three questions also on the third quarter numbers. The first one is on the CapEx that I think it has been a surprise, the level of CapEx that is ahead of expectations, I guess. So the question here is that if the company -- what is behind that increase of CapEx if the company feels an improvement in the overall process for administrative approval for reinvestment, if that is something that is happening and you as a company are feeling that tailwind coming from less of a heavy administrative burden? That is the first question.

The second question is on also taxation during -- so far this year, it looks a little bit lower than expected, if you can help us to understand the level of taxation by the year-end.

And the third question is on the cash flow statement on Slide #14. There is a working capital negative impact of EUR 350 million, if you can help us to understand where that number should be by the year-end.

[Agostino Scornajenchi, executive]

So thank you, Javier, for your questions. So let me start from the first one. Nothing magic behind the evolution of the CapEx, only let me say, an impressive, huge commitment, a huge sense of belonging to the team demonstrated from our operational people. They did something really exceptional. Given that in 9 months, we had basically 2 months in which the country was completely closed. We were not obliged to stop our jobs, our works, our realizations. The problem was the logistic in the country. It was not possible to move for our providers, for our suppliers, for our technicians in the different areas of the country.

So the team demonstrated huge flexibility. They, of course, were obliged to postpone some activities, but they also decided in the meantime to reschedule other activities in order to cover with something else what was missed. So on the very end, the fact that we are able to show an increase of 12% respect the same period of 2019. And if you compare also these figures with our internal expectation, we are full in line with our internal expectation at the end of September. But again, they basically worked 7 months out of 9, because for 2 months, the company was completely locked. So really an excellent job made by the operational team.

Regarding taxation, slight decrease in the tax rate, yes. Slight decrease in the tax rate from the average 29% to 28%. It's mainly related to nontaxable items, nonrecurrent, nontaxable items. So we expect that in the long term, nothing will change.

Last question on cash flow. So we -- due to the nature of this figure on one side, the positive effect of our net debt registered in the last year has started to be resulted. In particular, with reference to net energy-related as to payables during these months, there has been an increase in the cost of service against the lower cost of energy and the lower demand of energy. So in other terms, we were obliged to buy on the market ancillary service in a particular part of the period in which we had a lot of very, very low demand, a lot of renewable generation. So a lack of stability service on the system, we were obliged to buy for this. So we pay for this.

And on the basis of the agreement that we have with authority, this cash out will be compensated by corresponding cash-ins from the distributor in the coming months. So it will be reabsorbed, but we expect by the first half of 2021.

[Operator]

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

[Stefano Gamberini, analyst]

Three questions from my side. First, regarding what happened during the summer in the renewable sector, are you experiencing an acceleration of demand for new connection from this sector as well? And your CapEx also related to this acceleration or at the end of the day after the lockdown, no main changes on this point of view happened?

The second, regarding the financial charges. Could you elaborate a little bit more what happened in the third quarter with these higher financial charges and if you have a guidance for the full year?

And the last one, just if you can remind us the main guidance for full year in terms of EBITDA, CapEx and net debt.

[Agostino Scornajenchi, executive]

Well, so regarding the first question, we -- this is something that we will discuss more and more in detail on the 19. What I can anticipate here is that, yes, we had a lot of additional new requests for connection coming from private entrepreneurs that are investing in renewable. And no, there is not a direct connection for the time being from the CapEx were last. Because in any case, we were talking about CapEx that were already planned for 2020. Of course, it will be not the case for the future because in the future, a relevant part of our business plan will be connected with the increase of renewables in the system.

The second question was related to net financial charges. Okay, we are talking about an increase of EUR 90 million that is connected to 2 main items. The first one is that we have less capitalized financial charge for a reduced capitalization rate. And the second one is that we decided some adjustment evaluation of investment in some minor associated company. But in any case, we are talking about a one-off impact of low single digit, nothing relevant.

The third one, for the guidance, yes, of course, we are going to confirm the guidance already communicated last March. So we will confirm EUR 2.49 billion of revenues, EUR 1.79 billion of EBITDA and EUR 1.3 billion of CapEx. Yes, so all the other, we confirm everything was communicated already. Nothing changed.

And let me add that this is a really impressive demonstration of the resiliency of our business model. Because what happened in 2021 and what is still happening unfortunately, it's something that has a massive impact on the economy. But if you look to the September figures, they are basically COVID-free.

[Operator]

If there are no further questions, I will hand the conference back to your speakers.

[Agostino Scornajenchi, executive]

Well, really, thank you for your time, and let's have additional conversation on 19 in which we will dedicate all our attention and all our effort to have a good presentation of our business plan updates for '21/'25. Thank you very much.

[Operator]

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