REN - Redes Energéticas Nacionais, SGPS, S.A. (RENE) Earnings Call Transcript & Summary

Thank you all on the line for your time and availability this morning to join us on our full year 2023 results conference call. As per usual, we have our executive committee with us today. We have Rodrigo Costa, our CEO. We have Goncalo Morais Soares, our CFO; and Joao Conceicao, our COO. Rodrigo will start with his opening remarks and then Joao and Goncalo will guide you through the main operational and financial highlights of the year and we will then move to the Q&A session on which we will be able to be taking your questions.

Thank you, Madalena. I think today, even as we announced the good set of results, we're not really the big news in Portugal. The big thing is the elections coming out in a couple of days. The year was good in spite of all the licensing and construction delays we have. I think we also had a lot of political events that were also a distraction, but we were able to keep moving and deliver in our multiple fronts. I think overall, we should be happy. Both in Portugal and Chile, we see a good set of operational and financial results. We kept moving on our energy transition journey, where we see plenty of projects coming forward and that will keep us very, very busy in the coming years. I think this is a very positive aspect. That's the fact that we -- if we look forward, we feel very confident that we have a lot of things to do and a very good framework. In a nutshell, a good year. I think we kept our -- being very well regarded from an operational point of view. Again, the financial results are quite solid with some nonrecurring contributions and being said, the thing that still is an issue but I'm sure we will talk about that. We made also very good progress on a new front on ESG front, and we will go through those -- some of those results also. And we believe that the energy transition is also a very important catalyst in our internal transformation, creating opportunities for our teams as well. It's really helping us to attract new talent to the company. And 2023 is a year where we saw that in a new way and very positive. Now we will go through the presentation and we will share the [ main ] events and results and then we will go through Q&A as you know. Goncalo?

Thank you, Rodrigo. Good morning to you all. So as Rodrigo said, we are presenting a strong set of results, reached at the EBITDA level at the CapEx level, both of them were good news. There are some non-return that impacted mainly the last quarter, but I think the overall is positive. So looking at the EBITDA grew 5.5% to EUR 514 million. And this is basically on the back book of international and national businesses on the domestic side impacted overall by the rates and a good gross performance. Net income grew 33.5%, almost EUR 250 million. Net, if you look at recurring, the growth is only 15%, but still growth -- strong growth. You can see that this is impacted not only by EBIT, but also by good financial results, and by some nonrecurrent effect, namely on the tax side. Net debt came down almost 5% without taking into account the tariff deviations, showing strong cash flow, tariff deviations increased as we already have acknowledged that they would. The good news that these big changes have been happening are going to stop as the REN trading situation is ending of this year. But I'll come back to that and comment a little bit more, okay? CapEx, very strong performance, almost more than EUR 300 million, almost EUR 300 million only in Portugal. So I think that we are accelerating, recuperating and some of the projects that we have before. So more on the operational side, I'll pass to Joao. Joao, do you want to...

Thanks, Goncalo. From the operational side, the most important issue to highlight is the fact that we have recovery the share of renewable generation within the electricity consumption in Portugal. As you may remember, in 2022, we had a quite a dry year. And as a consequence, hydro generation dropped significantly. And in 2023, we get back to the values on the right trend and we reached the 60.6% of renewable share in the electricity system. Quality of service, we kept the high levels of quality of service. And in a moment, I will go through a couple of figures. And within ESG. The good thing is that we have improved in several ratings, ESG ratings, and we consider to be above the sector average within the -- at least ESG ratings. Jumping to Slide 7, where you have a couple of figures. So in terms of consumption, electricity consumption, there is a slight increase in consumption, a 0.8% electricity consumption. Although if we do the adjustments to the weekdays and the temperature adjustment comparing to 2023, this increase reduces a little bit into 0.3%. Having said that, our forecast is that we will keep evolving slightly on the overall consumption within the country. Renewable share, 60.6%. As I mentioned, as a result of a significant increase in the hydro generation share, which has reached in 2023, 23% of the total energy to total electricity generated in Portugal. As a consequence of this higher share of renewables, and this is perfectly normal, there is a slight increase in terms of losses. This is because of the fact that more renewables means more dispersed generation within the grid and as a consequence, a slight increase in losses. In terms of the quality of service, we increased a little bit the average interruption time within the electricity transmission assets. But even so, this is clearly below the target set by the regulator, namely within the IMDT incentive for quality of service. Gas, this is a flip coin. A higher penetration of renewables, namely hydro implies that the electricity generated from the combined cycle plant reduces, and that's why you see this important drop in electricity and gas consumption is about 7% versus 2022, mainly explained by an important drop in electricity generated from these combined cycle plants. In terms of availability rate of our infrastructure, both transmission and distribution, quite high levels of quality of service both in the gas transportation and distribution assets. With this, Goncalo, get back to you.

Thank you, Joao. So looking at Slide 8, just the main numbers that is financial-wise. So EBITDA going up 5.5%. CapEx, going up quite a bit to over EUR 300 million. Despite that effect, you can see -- you see that average RAB still declining a little bit, namely given some lag on transfers to RAB, that is normal. Looking at Slide #9 and looking at the consolidated view. So what you can see is that the increase comes mainly from -- in the domestic part from the asset and remuneration part, okay? There is also some impact from costs, but then it's also the impact from the international segment, which is now this year, reaching around 5% of EBITDA from 3.9% last year. So moving to Slide 10, you can see that this impact of the rate of return came on the back of the yield on the Portuguese bond increasing materially last year versus 2022, where there was already an increase. And that has made the base rates of return increase across the segments from -- in the case of electricity from 4.3% to 5.3% and in gas transportation, 5.3% to 5.7% and distribution, 5.5% to 5.9%. That is the main driver in terms of the impact that you see in the [ remunerates ]. In terms of investment in Slide #11. So good news. I think that it's a little bit in line with what we've been saying, but it's good to be able to see the numbers reflecting this. So we are recuperating a lot of investments that we have delayed from the past year, and so we are close to EUR 300 million. That gives us an average in the last three years of around EUR 250 million per year, which is clearly above what we have in the business plan. So we are clearly on trend. This is mostly electricity, as we would expect, so line, substation sort of what we were expecting, and this is what is translating. Transfers to RAB are also increasing quite well, but they still laid a lot because a lot of the investment was done in the second half of 2023 and so they will show up during this year. So we're not anticipating any values because, as you know, we'll be having a Capital Markets Day in a few months. We believe that CapEx is going to continue strong in the coming years. In terms of RAB returns in Slide #12. So a little bit difference between the segments. So in electricity, most of the impact comes from an evolution of the asset base, although it's also positive on RoR. In gas transportation, it's basically the evolution of the rate of return as it is compensated by a negative evolution of the asset base. In gas distribution, it is also positive in both the rate of return and the asset base contributes to increase the remuneration from these assets. In terms of OpEx, so this is in trend with what we've had in previous quarters. What you can see is that there is an increase in personnel costs. This is coming from two sources, both inflation lines because you have to correct. And this is already -- have already seen it in other quarters and also in increasing people, overall people in REN went up from 719 to 748. Only in Portugal, if you're only looking Portugal it went from 710 to 736. So as we have this acceleration in terms of investment and operations, it's normal that we are increasing the people. We are continuing to do so in 2024. In terms of external costs, this is mainly driven by a decrease in electricity costs that decrease, which is around [ EUR 10 million ] then is compensated by other -- some other indices, the overall number is still positive, it's still a decrease, but we did have an increase in O&M. We recuperated some maintenance from also past quarters and so debt also increased, the IT costs also increased, so these legal costs also increased. So there were some costs that increase in compensation fees overall and there was a strong performance. Of course, this is not to be replicated in 2024 at least decrease in electricity. We will not exist. We will have almost certainly an increase in OpEx in 2024. Moving to the international part in Chile. What you can see is the continuous positive evolution of both companies. And so Chile is already contributing almost EUR 28 million in terms of EBITDA to the group. Electrogas, still performing quite well, not increasing as much as in previous years, but still performing quite well in terms of both revenue and EBITDA as the gas users in Chile is still strong. Transemel also contributing quite well, increased a lot. Part of this, as you know, is nonrecurring because there were some recognition of revenue that exists, but that are from several years and not only this year. So part of it is not of 2023, but it also reflects the growth in the assets, although part of the CapEx in Chile was a little bit revised during the year of 2023. Looking at below EBITDA and starting to talk a little bit about the funding part. So you can see that there is a strong performance on the financial results. There's -- let's say, two impacts here. On one side, there is an increase in the average cost of debt that we already know and knew, so from 1.5% to 2.5%. Bear in mind that the base rates and the RoR versus grew 3%. So this is actually an excellent performance in terms of the evolution of the average cost of debt. And that pushes that interest cost. On the other side, and as I'll go, I'll spend a little bit more, the tariff deviation went from being very positive in our favor. So a large amount that we owe to the system that was paid during the year to becoming positive and so an amount of money that the system owes, that balance generates the interest, which were recognized in the last quarter. I have to tell you that normally, we only recognize this in the last quarter and perhaps that mainly for analysts. It's not the easiest because up until now, not only with electricity and gas, we also have brands trading those PPAs -- that less PPAs that [ gen ] is a little bit more uncertain in terms of how much the balance is going to be at the end of the year. And so sometimes it's hard to estimate the exactly the amounts and we only made it at the end of the year. As this issue -- as this PPA is coming to an end at the end of this month in March, we should have less fluctuation in terms of these balances. And so in 2024, we will change this a little bit so that we can give you a little bit more predictability in terms of these interest and so at least at the middle of the year we will make our first estimate, and then we will find one at the end of the year. But -- so the good news is that as this kind of dives away is a large part of tariff deviations. I think these fluctuations will be easier to accompany. In terms of taxes, the normal effective tax rate, I'd say nothing changes. The levy is still there. And to anticipate questions, there is no, I'd say, material news that we can share with you. We'll see if the elections bring any difference in the that we don't know. So as far as we know, everything stay the same, it's still in the budget that is now being executed by the government. We did benefit from some large than usual nonrecurring fiscal impact, mainly in the last quarter. And so that has a material impact. So we are talking about almost EUR 19 million of impact in the quarter. So that was a little bit what pushed net income a little bit above expectation. So on Slide 16, looking at net profit, basically, is the story that there is always a saw positive impact both in EBIT and financial results and income tax also being impacted by those nonrecurring impact that I explain. Looking at debt and looking at Slide #17. So what you can see is this improvement in terms of net debt without the tariff deviation. So good cash flow generation from the assets. If you take into account the tariff deviations, you see that actually net debt goes up by EUR 700 million because as I said, we were funding those EUR 500 million that was in our favor and generated, and it's mostly in those -- in that RAB trading tariff deviation that was generated. And as I said, not only does this contribute to [indiscernible], but it is stopping. And so you should not -- we should not expect this to continue creating large deficits in the future, okay? New [indiscernible] as well in terms of average maturity around 4.1 years and this is going also to improve the recent issuance that we made in the market this year. That was a big success in terms of demand and it is going to push maturity a little bit more and consolidate the liquidity policy that we have. As you see, all of the ratings are being maintained and we continue to have a strong focus on credit risk and this should be a constant in the coming. Just to comment a little bit on the execution of the strategic plan. And looking at Slide 19, as you remember, we have these three pillars of growth, starting with some service quality, ESG and some solid financials. And we just wanted to let you know and you can see that on Slide 20 that we've been delivering on all of this. So EBITDA this year and on average, we were clearly within the targets of the three years. Net profit is the same. We clearly surpassed the target that we had proposed ourselves in the business plan. Net debt, if you don't -- if you take out these issues of the tariff deviation, and not only are we okay, but we also surpassed. And CapEx, we clearly surpassed in every single year and on average, what we have said, that will be on the business line. So it's a good sign that we are delivering on what we are telling you. Not only did we deliver in terms of financials, but also in terms of sustainability. And moving to Slide #22. And remember, we had made several commitments. One of them actually was already revised because we adhered to the Science Based Target. So we have an objective to decrease emissions by 50% in the business plan that was revised already by -- to 55% by 2030 SBTi. But as you can see, we are already at 45% in 2023, so this is truly impacted also by the decarbonization of the country. So do not be surprised if in the next business plan in a couple of months, we will be revising this target and be a little bit more ambitious. Again, in social and in terms -- in this case of the target of women in first line, we are also already at the target that we have proposed in the business plan and in [ governance ], it's the same. So we are fulfilling what we said before. In Slide 23, we have a little bit more detail on ESG. You can see these decreases in green gas emissions both in Scope 1 and 2 and Scope 3. We along CapEx -- really the wage that we've aligned with yield become also increasing. And as electricity continues to deploy more and more CapEx, you should expect this to continue it's way at least to stabilize at very high levels as a number of alignment. And so I think that we are clearly delivering in ESG. And there is -- I will not go through Slide 24, all of it. There's a lot of initiatives that we are doing, environment with self-consumption systems with electrification of the fleet. On governance with measures and in terms of anti-corruption call, there's a lot of measures that are being put in place to improve our standing in ESG, which is a strong commitment. And that is translating, although this is not our aim that is translating into the ratings. You can see that in Slide 25, we have been improving clearly. The last one that we have improved and this is very recent, as Joao was mentioning also is the CDP rating, we are now at A-. We came from around C some years ago. So I think it's a good sign and we are very happy that ratings are translating the strong effort and commitment that we have in this year. So just some closing remarks in Slide 27. So strong results, with growth delivering on CapEx. At the same time, solid financials, you can see that we are maintaining financial, very strong and increasing maturity. As we can see, although this is going to the AGM, the policy in terms of dividend is what we have published before. So we are going to be paying EUR 0.09 additional in the next time, which is going to fulfill the EUR 0.154 per share that we had in the plan. And the last remark, as you know, we have a Capital Markets Day on the 13th of May and we expect there to give you a new version of our business plan and of our strategy for the coming years, okay? So please put that on your calendar. So with that, we conclude the presentation, and we will open to any questions that you have.

[Operator Instructions] First question is from the line of Enrico Bartoli from Mediobanca.

I have three of them. First of all, actually, at the beginning of the presentation, you mentioned the election in Portugal over the next few days. I was wondering if you can give some flavor of what can change if you expect that considering the programs of the parties, there could be some changing outlook for them? Or if you expect some stability, whatever is the outcome the election? Second question regarding the CapEx, the EUR 300 million that you achieved full year is above the EUR 250 million that you indicated before. I was wondering if you can give some color on what happened in the last quarter that allowed this kind of acceleration. And I'm aware that you are presenting soon a new business plan. But if you can also give some comments on, let's say, the sustainability of this kind of level? And on results, I realized that there was a very significant increase in the OpEx revenues, both in electricity transmission and in gas transport. If you can give some details on this evolution and the impact on EBITDA? And what can be a possible evolution of this kind of revenues in 2024?

Okay. Enrico, on the -- your first question elections, well, we were asked before more or less the same question. And our position is always the same. We are here, we have a mission that will not change whoever is the governing -- and then -- and also, we believe that the energy transition is something that all the parties understand that first. Portugal is not a stand-alone geography. We are part of the world. We are part of Europe. We follow the strategy that has been designed by -- or for the European Union. And with that, we do not expect major change in, let's say, the regulatory environment, in the philosophy of work because one way or the other, this is something that we need to keep to move on. To be honest, as a philosophy of the company, we try to stay away from, let's say, from politics. we are here to work to deliver on our operational targets that are super important also on our financial commitments. And we will design our -- we will design the business plan for the next few years the same way we did it in the past years, independent from really the people who are governing the countries. If you ask us if we have an opinion, I'm sure all of us we have our own opinion. We all have our own expectations, but we keep them private because the company has to -- just to fulfill their mission. That's how we look to the Sunday results. We will be around Monday doing the same work we will be doing today.

So just commenting on the CapEx. So it was a little bit, I'd say, stronger than we had expected. We were a little bit cautious because last year, we were also expecting a little in the under worse than the later end of the year in terms of permitting, that delays Joao team is on the ground this year, things went well. But we were being very cautious because it was more concentrated in the last quarter and so it came out a little bit ahead of our expectations, I'd say, but in line with the general trend. So -- again as I've already said, we are expecting CapEx, namely in electricity to say pretty strict. You have to wait for May to have a exact number commitment. But this we can tell you. These are not levels that are completely out of think what we expect in the coming years, okay? In terms of the results in revenues, I think what you are referring to are debt to costs and revenues that appear in the last quarter, namely the cost and revenues of balancing between borders and things like that. I think that's it -- that is something else, [ trying to ] recall, let me know and I'll clarify then with Madalena and with you. Okay. Thank you.

We will now take the next question from the line of Thomas [indiscernible] from Caixa Bank.

I have two. The first one is related to Transemel. I would like to ask you just to give us a date again, what is the main driver of the higher revenues of [indiscernible] this year compared to last year? Is it mainly the increase in asset base, is its remuneration, is it both, just to have something from that? And then maybe another second question about net debt. Could you give us -- I know you're working on the business plan, so maybe you won't give us many details, but could you give us your expectations for net debt at the end of this year 2024 and maybe how you see the cost of debt evolving in 2024, so where it be -- it would be?

Okay. Thank you, Thomas. So in terms of Transemel, the normal main driver is the asset-based evolution. So it's mainly by putting more assets and CapEx and that is -- this is pushing the growth. In 2023, in particular, as I said, there was the recognition, and this may happen several years because it is something that we are doing on a continuous basis, recognition of past revenues. So this revenue for several years. In this case, I think it was '21, '22, '23, that were recognized in '23 because there is a discussion with regulator and at the end of a certain time, they recognize these revenues and we recognize them. It may happen that in '26 to recognize more, so this is a process that is done on a continuous base. But is the -- I'd say, the recurrent push is that push from the asset base as you put more -- as you execute the CapEx and you put more on [ money ]. In terms of net debt, I think that's what you should expect is some decrease over the year as we are going to ease some of the tariff deviations that were created, okay? So without tariff deviation, there is more stability, and there's a decrease because we will receive not all, but at least a good part of the tariff deviation that we're creating. In terms of cost of debt, there should still be an increase in cost of debt in line with the increases that you've been seeing in the market as we stabilize -- and as we continue to refinance the debt normally, we will, as most of the companies continue to see an increase in the cost of debt, which is normal. I don't know if it's going to increase 30 or 40 basis points. So we are now in the process of that, but it's, again, going to increase a little bit over the year.

[Operator Instructions] We will take the next question from the line of Ignacio Doménech from JB Capital.

The first one is related with the core OpEx on the electricity costs. I was wondering if this year we could see a similar movement in the case that electricity prices continue to come down. You -- I think on -- some of you were mentioning that you don't expect lower OpEx in 2024, but I don't really understand if this was the case. We have lower electricity prices. The second question is related with financial costs. If you could give us some crux of what would be the impact from tariff deviation in 2024. Just a reference with the information you have today. And the third question is related with the nonrecurring tax if you could elaborate more on the effect related to the capitalization of operational companies. So they -- just to explain a bit better, what was this effect? Or why shouldn't we expect this taking place in the next few years.

Thank you, Ignacio. So on the core OpEx, you may be right. So I was being a little bit cautious. So it's true that the prices and electricity have continued to come down. We might still see some impact. You will not see as large an impact because they came from a very high level to another, but it's true. There may be still some positive impact that you'll be able to see on the cost this year, you are right. On the financial costs. So it's a little bit hard to tell you, but we finished the year with a EUR 300 million balance in our favor. And that generated around EUR 14 million to EUR 15 million of interest costs in the year. So as this moves to, I don't know, 1/2, 2/3, you may see that this will decrease. I'm not certain if this will generate [ EUR 5 million, EUR 7 million ] positive interest. So it will still generate positive interest. As I said in the call, we will try and give you precise numbers or more precise numbers in the middle of the year. In the first quarter, it's a little bit difficult, but at least in the second quarter, we will give you a more precise number. But I mean, you can assume that there will be some, but it will not be this. Is it half, a little bit less then half, something like that, okay, in terms of the impact of the financial cost. So in terms of the tax. As I said, it was something that we did in the year. Same accounting measures that we took and we capitalize more certain companies. This is also important to us. It was basically accounting movements, but it's important to us. It was basically accounting movement, but it's important because as we are investing more. And there a concession, we also have to -- some metrics that we have to abide. We offer some capitalization of the subsidiaries. And given the budget law that you have for 2023 that has a positive impact relating to that year. So we cannot know if that has any impact this year, but it's expected to be on the sales side, and we are not expecting and you should not put that, I mean, your estimates for next year, okay? That's what we would tell you. Thank you.

There are no further questions at this time. I will hand it back over to Madalena Garrido for closing remarks.

Thank you very much to everyone on the line. Of course, we remain available on the site to answer any additional questions. And thank you for your time today.

Thank you.

Thank you.