Terna S.p.A. (TRN) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Terna Full Year 2020 Results Presentation. It's Omar Al Bayaty, Head of Investor Relation. Here with me, Mr. Stefano Donnarumma, CEO; and Mr. Agostino Scornajenchi, CFO. The presentation will be followed by a Q&A session. Let's start. Stefano, the floor is yours.

Good afternoon, and welcome to Terna's Full Year 2020 Results Presentation. Let me start with an overview of the Italian electricity market. As you can see in this chart, in 2020, due to the COVID health emergency, national demand was about 303 terawatt hour, a reduction of 5.3% versus previous year when national demand was about 320 terawatt hours. Despite this situation, let me highlight that there have been signs of recovery starting from the month of July. Indeed, in the month of December, demand increases by 1.1% compared to December 2019. It's important to underline that in 2020, renewable sources covered at about 58% of the demand compared to 55% in 2019 and about 42% of national net potential net total production. Concerning national net total production, this stood at 273 terawatt hour with a strong increase in photovoltaic production, which grew by about 10%. At the same time, nonrenewable production decreased by 7%, confirming the consolidation of the energy transition process. However, let me underline that despite the challenging situation on the electricity market caused by COVID, Terna was able to manage the grid, always ensuring quality of service and security of supply. Now let me move to 2020 key numbers. In 2020, group revenues and EBITDA were up by 10% and 5%, respectively, versus last year, which means EUR 218 million and EUR 89 million higher than the last year. These figures represents a solid ground to support the further growth of the group for the next years. Moreover, we reported a group net income of EUR 786 million, EUR 28 million higher versus last year, while group CapEx stood at EUR 1.35 billion, 7% more versus 2019, confirming the strong CapEx acceleration even in this challenging emergency scenario. Indeed, as you can see it from the chart, all these main figures meet and exceeded the provided guidance for 2020, demonstrated Terna's strong commitment on the execution of this plan. To support this deep CapEx acceleration, driven by the ongoing energy transition, our net debt stood at EUR 9.2 billion versus about EUR 8.3 billion at year-end 2019. Now let me spend a few words on the main achievements of the second half of 2020, turning to the next slide. 2020, as you know, was characterized by the COVID emergency. Despite this challenging scenario of global crisis, Terna continued to develop the national grid, moving on in all its main projects. We accelerated the starting from the end of the second quarter of the year and then with the presentation of the new '21-'25 Industrial Plan, Driving Energy, which foreseen investments in Italy for EUR 8.9 billion during the period. Regarding regulatory activities among the main projects, we can mention the integration in October of the connection between Capri and the Mainland made before the prime minister. Thanks to this line, 19 kilometers long, Terna was able to eliminate emissions on the island, decommissioning of the old diesel power plant. Moreover, let me highlight that important steps for what have been made on the Tyrrhenian and the Adriatic links in the last month, following the great light -- the green light from the regulator. For what concerns not regulated activities, as you know, in February 2020, the closing for the acquisition, 90% of Brugg Cables was assigned, and then the integration started. Brugg is one of the leading operators in the underground cable sector. The deal allowed Terna to source an excellence in research, development and testing of one of TSO's core technologies, namely underground cables. Regarding international activities in the second half of 2020, we finalized the closing with the Quebec for the acquisition of the Linha Verde I, the second of 2 concessions acquired by Terna in Brazil. Despite the difficult situation caused by COVID, we accelerated with all the main construction sites after the lockdown also abroad. Regarding our people, this difficult scenario is requiring us to adopt new methods based on the new digital technologies. Therefore, in order to support Terna's evolution, in December, we launched the "new ways of working" project, to which we aim to transform working methods from the simplification of activities to a new use of physical and virtual spaces as well as the adoption of new digital tools to once again be the director of the transition. Moreover, confirming the central role of sustainability in our strategy in the second part of the year, Terna was confirmed for the third consecutive year in the Bloomberg Gender-Equality Index for the 16th consecutive year in the FTSE4Good and for the 10th consecutive year in the STOXX ESG. In addition, recently, Terna was also ranked first among the electric utilities of the Dow Jones Sustainability Index World for the third year in a row and was acknowledged as one of the 50 most sustainable companies in the world at the 2020 Seal Business Sustainability Awards. Finally, let me remind you about the bonds launched in July and September for EUR 500 million as well as the confirmation of long-term ratings from all the main rating agencies as a recognition of Terna's central role in driving and enabling the energy transition. Now let's make a deeper analysis of 2020 results, leaving the floor to our CFO. Please, Agostino.

Thank you, Stefano, and good afternoon to everybody. Let's start with revenues analysis. Total revenues in December 2020 increased by 9.5%, reaching EUR 2,514 million, up by EUR 218 million versus last year. The growth was attributable to regulated activities, which contributed for EUR 94 million and to the consolidation of Brugg Cables, for which, as already mentioned by Stefano, the closing was signed in February 2020. Let's now go into the detail of the regulated and nonregulated revenues evolution moving to the next slide. Regulated revenues reached EUR 2,149 million, EUR 94 million better than last year. The increase was mainly due to our investments, while other regulated revenues increased by EUR 18 million, mainly as a consequence of one-off component. Nonregulated and international revenues reached EUR 365 million, about 52% higher than last year. This growth mainly reflects the overall contribution coming from the integration of Brugg Cables. Now let's go to operating cost analysis at Page 11. As shown in the chart, total operating costs stood at EUR 683 million, 23.3% higher than last year. The increase was mainly attributable to Brugg Cables consolidation. Regulated operating expenses increased by $31 million, mainly as a consequence of one-off items. Net of the perimeter effect related to the Brugg acquisition, the group's OpEx increased by about EUR 28 million versus 2019. Let me now analyze EBITDA. Moving to the next slide. Considering the above-mentioned effects and despite 2020 global health emergency condition, group EBITDA reached EUR 1,830 million, EUR 89 million better than last year. We registered a positive EBITDA contribution, both from regulated and nonregulated and international activities, which grew by EUR 63 million and EUR 26 million, respectively, versus last year. The increase was mainly attributable to higher regulated revenues as well as to the contribution coming from Brugg Kable acquisition. Let's now have a look to the lower part of the profit and losses turning to the next slide, and I am now at Page 13. Depreciation and amortization amounted to EUR 644 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 1,187 million, EUR 32 million higher versus 2019. We reported net financial expenses at EUR 94 million, EUR 16 million higher than last year, mainly as a consequence of the interest expenses on the debt of foreign companies and to the adjustment in the valuation of equity investment in associated companies. Taxes stood at EUR 298 million, EUR 16 million lower versus last year due to the higher income not relevant for tax purposes recognized in the period. As a consequence, tax rate stood at 27% versus 29% of 2019. As a result, group net income reached EUR 786 million, EUR 28 million higher versus the same period last year despite higher depreciation and amortization, mainly as a consequence of the business acceleration. Moving to capital expenditure analysis, Page 14. In 2020, total capital expenditures amounted to EUR 1,351 million, 7% higher than last year, confirming Terna's grid ability to reach its goals despite the proactive challenging scenario. Indeed, we invested about EUR 1,233 million in regulated activities. Among the main projects of the period, it is worth mentioning synchronous compensators, the Paternò-Pantano-Priolo line in Eastern Sicily as well as the progress on construction size for the Italy and France interconnection. Among CapEx categories, development CapEx represent 39% of total regulated CapEx. Asset renewal and efficiency CapEx was 42%, while defense CapEx represented 19%. Non-regulated and other CapEx stood at EUR 118 million. This includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis. Net debt at the end of 2020 was EUR 9,173 million, EUR 914 million higher than 2019 year-end level, mainly as a consequence of the CapEx consideration made on the national grid. In any case, we generated an operating cash flow of EUR 1,343 million, thanks to which we were able to cover almost all CapEx spending of the period. Overall, thanks to our actions, cost of net debt at the end of 2020 was stable versus year-end 2019. Let's now make a deeper analysis of our debt profile. Thanks to our conservative debt management approach aimed at keeping a solid financial structure mitigating any potential financial risk, at the end of 2020, we registered a fixed/floating ratio and gross debt of about 83% and an average duration of about 5 years. Regarding the proactive debt management activities delivered in the period, let me remind you about the bond issue made in September for EUR 500 million with a duration of 10 years and a coupon of 0.375%. 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, I would like to underline that today's Board of Directors also approved the 2020 final dividend of EUR 0.1786 per share to be paid in June. The 2020 interim dividend of EUR 0.0909 per share has been already paid last November. In line with the communicated policy, total dividend for 2020 therefore was EUR 0.27 per share. Now before starting the Q&A session, I leave the floor to our CEO, Stefano Donnarumma, for some closing remarks.

Thank you, Agostino. As you have seen in this presentation, despite a challenging situation related to the COVID emergency, we were able to present you a solid set for 2020 results. On this ground, we are also able to confirm all the guidance provided last November in the '21-'25 Industrial Plan. We are committed and well on track with 2021, for which, I remind you, we expect revenues of EUR 2.57 billion, EBITDA of EUR 1.84 billion, total CapEx of EUR 1.4 billion and an EPS of EUR 0.39. Moreover, from an industrial state point, we are also well on track on authorizations and procurement. Regarding relevant projects, let me just mention that in February 2021, Terna began the public engagement process of the Adriatic Link. This is the new undersea cable which will connect Brugg's market for which we will invest over EUR 1 billion involving about 120 companies. The new interconnection, completely invisible, will further reinforce our role of energy transition management and facilitator. Furthermore, we also started the public in-consultation on the new Tyrrhenian Link, the undersea power line, that will link Sicily to Sardinia and Campania. The Tyrrhenian Link is a strategic project for the Italian electricity system, for which Terna will invest about EUR 3.7 billion over the next few years, involving 250 companies. Finally, let me point out again that 2021 will also be the year of the new ways of working that will bring benefit from improved logistics and a higher quality of life for our employees, a top priority for us. Thank you for your attention. We are now ready for the Q&A session.

[Operator Instructions] Our first question comes from the line of Javier Suarez from Mediobanca.

I have 3 questions, more top-down than bottom-up. It's on the new administration, a new Prime Minister, new Minister for Ecological Transition. So the question for the CEO is if he can update us on any conversation with the new administration and the implication that new administration may have for the energy sector in Italy for the implementation of the energy transition and for the role of Terna within that energy transition. So any update on conversation with the new administration and particularly with the ministry for economical -- ecological transition would be appreciated. Second question is on the document that has been published by the -- yesterday by the antitrust authority that is suggesting Prime Minister Draghi to introduce changes to make the system a little bit more virtuous. I wanted to make sure that the antitrust authority's suggestion is to increase the -- to simplify the approval for new investment. And there is also a reference to the high level of congestion in the electricity network, something that may give a particularly high market power to certain operators in certain areas. So you can give us your view on what the antitrust authority is saying and the implication that this acceleration in the approval process for new investment may have on Terna. And the third and final question is on regulation that maybe a little bit more difficult to answer, but is, if you can update us on any conversation that you may have had with the regulator on the regulatory review. I'm not pretending to have a number, but just both body language from the regulator in the conversation with the developers of infrastructures.

Thank you for your questions. First question about new government and ministers. Yes, we have started some discussions and meetings with different government members and my approach is, in any case, to show, which are the main topics and the [ electricity ] in -- for our plan in terms of authorizations, in terms of meetings of the systems for the energy and energy transition and -- sorry. And my point of view is that there is a great interest on our position on the electricity market and the energy market in terms of role of [ rehabilitator ] for the transition. We will continue in the next week a list of meetings just to go more in deep in some topics and to give our support to define possible new rules for the next future. In any case, I am really positive on this. Second point is the antitrust information that we had yesterday and today on the newspaper, and what I can see is that I agree on 2 topics that the cost for the congestion may be a problem in the future if we will do not in a right speed, which is absolutely necessary for the system. And so it's -- everything is really in line with our Industrial Plan, our strategic plan for the next 10 years. So my opinion is that it seems that all the stakeholders are coming on this track, let me say. Everybody, our understanding, which is really important for the next future to allow and ensure this plan that is a national plan is not a Terna plan, only-Terna plan. On the third point, let me say that, first of all, the process for the WACC update started only in October, and we expect to have more details just before or during the summer period. But in any case, we are experiencing a unique period characterized by COVID crisis. And for this reason, we expect the situation to be appropriately taking account, let me say, has done for the other regulatory aspects in different economic activities in this period, also in the Italian energy sector, where there have been several corrective measures or determinations and the postponements. Indeed, regulatory track record over years has always been characterized by a balanced and careful approach to the evolution of the reference context. In our plan, we assume that, in any case, a stable regulatory work. But on the other hand, we have not included all the potentially positive components related to incentives forcing by regulatory reviews already planned. So for me, nothing is changing. And I -- also, on this, I feel a positive overview.

Our next question comes from the line of Harry Wyburd from Bank of America.

I've got 3. First one is just a bit of a follow-up really on the regulations. You mentioned that you had some offsets, the formula moved against you, or at least it was my interpretation. The specific question, though, is, do you expect the formula for the regulatory return to change? Because I think some of your peers have suggested that there might actually be a change in the way the formula works as well as an update of the input. So I'd be interested to get your thoughts on what you think there might be a change in the formula? And second question is on EU stimulus. I believe that Italy is due to submit its stimulus project proposals by the end of April, so I'd be interested to know to what extent you're involved in that and whether you think there might be some opportunities to do projects there which weren't until now included in your CapEx plans? And then the final one, I know it's not been long since you set out the strategy, so this might be a little bit premature. But just looking at what some of your peers are doing across Europe, obviously, you just had the [ WPD ] deal in the U.K., sort of attaching a very high premium to electricity networks. You've got some of your peers in -- or you've got Sam, obviously, in Italy, talking about doing investment platforms for kind of energy transition assets. You've got Red Eléctrica talking about potentially getting an investment partner in -- on their fiber and satellite operations. So the question I'm asking is, if you look at your nonregulated and perhaps your international activities, is there an opportunity here perhaps to look at bringing in an outside investor or maybe sort of somehow monetizing these or crystallizing value given that there seems to be a huge amount of capital looking at these kind of assets and big valuations being paid?

Okay. On the first question, I only want to clarify that, I think, maybe we're not so easy a change of the formula, but may be useful a different evaluation of KPIs coming from the analysis of this range and difficult period, in which the observation period is really so strange and not really connect to the reality over the next month and to the proxy of the period. Then speaking about our recovery plan, we presented, also with the previous government organization, we presented some projects that are in line with our strategic plan. And if during the discussion that are provided for the next weeks on this term, we may be involved in such kind of investments. It will be not a problem for us, only a way to better confirm our trend and our guidance. Regarding the U.K., what we see change meant, no, I just answered different -- on different banks. On this, I think no problem for us, it's a completely different situation, starting by the different country, different geography, different energy sector and different also period, let me say. On the last question on nonregulated activities and international, as you can see, our plan is, let me say, a calmer plan on this because we are so focused on regulated activities. So at the moment, we don't provide any change about this plan, and we are trying only to obtain more value coming from these activities, more industrial activities and also other energy services, but no more than this at the moment. Thank you.

Our next question comes from the line of Meike Becker from Bernstein.

I think I have 2. You mentioned once or twice a one-off in the results of 2020. If you would mind sort of like elaborating a little bit on that one and what we should expect for 2021 or not? And also, the second question is also slightly broader on expectations for 2030 and target, to some extent, sort of like extending from the previous questions. I mean we have, I would say, on the 2030 horizon, 3 things that can move. It is the higher emission reduction targets on the European level which should eventually end up in more ambitious country plans by the individual countries, increasing the 2030 ambition. And I was just wondering what that could mean in Italy in terms of potentially higher renewable ambitions, and if that has any follow-on investment potential for Terna? So in the second, we have already covered it, but it is the green recovery fund, what that sort of like means for you. And the third, I see the hydrogen strategies being developed across Europe. So if you don't mind sort of like on here the next 5- and also 10-year horizon, what sort of upside is there for Terna from all of these various strategies and development?

Yes. Agostino Scornajenchi speaking. Regarding the first question related to one-off, well, let me say, no relevant one-off in the -- your end financial account 2020, the only one -- the only relevant one was related to the acquisition of Brugg Cables that can indicate what we've foreseen in our forecast for the year 2020 included in our estimate, internal estimate. That starting from together we've become a structural part of our business for the future. Of course, we are happy for this acquisition, but this is something that was already in our plans. Please, Stefano?

Okay. Thank you, Agostino. If I well understood, you asked me about the possible review of a target over the next 10 years for the near in Italy and also the European plan. I think it will increase in terms of targets, in any case, as to be increased, but also in an execution way, let me say, so it's absolutely necessary that all the targets are possible to be realized. And I think that in Italy, just now, there is a good level of targets, but it's possible also to increase this. It's absolutely a necessity to create the conditions for this in terms not only of our authorization, that is the most important part of this, but also with some different rules for the market and maybe also with some incentives for some parts of this market. For example, we have to speak about how to habilitate the new renewable installation, and this part of the national plan has to be helped not only with authorization also with incentives. And I think also it's important to advertise starting -- a faster starting of the storage systems. And I think during the next month, it will be really discussed in this and maybe also that we will be involved in such a way in this kind of activities, and I think that this may be also a possibility for increase of our investments in some of the phases of the value chain. Then also speaking about recovery, I think that also for recovery fund, it will be an opportunity for Italy to use a part of these investments to accelerate the transition. And we are giving our opinion on this to the government members and to the authorities, and I hope that something will really change, but I think so. On hydrogen, I think that the impact of hydrogen is not in the next 2, 3 years on our side, but may be really interesting on the -- on field of energy -- how to say, no, the energy storage -- for the energy storage may be really interesting. And we are also starting something in this -- on this track with those so SNAM to apply some possible experiments for this, but it's not a real fast impact on our plan. I think that the transition plan followed by Terna in terms of habilitation of the system in Italy will continue on this track for another 10, 15 years with no big changes. It's absolutely necessary, also coming back to the concept of the congestion cost, and it's important to avoid this cost and also to allow a better services securitization. Thank you.

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

A few questions, if I may. As regard the submarine interconnectors, could you spend a few words about that? Because if I'm not wrong, you have many of them in your CapEx plan and the authorization process is clearly a key driver for the investments in these activities, so if you can update us on this on top of what you already said about the Tyrrhenian Link. The second question regarding the renewables. During the presentation of your strategy plan, you underlined that, clearly, you are an enabler of the renewable growth, but there are some problems mainly regarding the authorization, but also regarding the target scheme, we can say, your incentive scheme for the evolution of -- for the growth, sorry, of renewable. Could you also, in this case, give us an idea, if I'm not wrong, the target was of around 6 gigawatt of new capacity by 2026, are there are some novelties, some more visibility because if I'm not wrong, there are some delays in the investments for renewable? And the third, regarding steel -- again, sorry, the topic of the regulation, could, in your view, the regulator differentiate the remuneration for electricity and gas sectors, ensuring some add-on to the electric sector because this is involved in the energy transition in your idea? Or you excluded that some of this -- sorry, this kind of approach could be followed by the regulator? And again, on this topic, when you said that some other incentives --not incentives, sorry, output-based incentives could arise in order to help the growth of the company, if we can expect some further output-based incentives from the regulator during 2021?

Okay. On the main -- the first question is on the main projects that we have on the authorization process. I think we are really on track. The most important project is the Tyrrhenian Link, and the good news is that during the last couple of months, we had important confirmation also coming from the authorities on this kind of project, and we are discussing with the region organizations to define the main aspect of the execution of projects. I think that we are on track on our planning, and I think we will be in time of this. And it is also valid more Adriatic Link, another as you would see cable project that is so important on the other side, Italy and also for other important projects that are not HVDC, but also normal connections, but important connections on other areas in Italy, like in the north of Italy, Veneto, [ Trentino ] and so on, but also on Tuscany. Coming back to HVDCs, we are following a good track on the SACOI 3 project for Sardinia, Tuscany and Corsica. But in the meantime, we are also doing a good job on Campania and Sicily for the new connections. So my opinion at the moment is that more than the 60% of our plan is just now authorized and another 15% of this plan is now on -- we are working on this, and so no really important [ electricity ] on this. So the execution of the plan, at the moment, after only a couple of months over the new year and the first year of the 5 years. So plan, it seems to be absolutely in line. On renewables activities, your question is, it will start or not, let me say. I think that it's absolutely necessary acceleration, but my opinion is that the mood also at authority and institutions level is, at the moment, a good mood. So it's necessary to define -- to decide some important aspects of this, but it's really possible that in few months, it will change. So my opinion, it's necessary to define some new rules and maybe also to define some incentives to help the system to start. In any case also, Terna wants to continue to start to observe, first of all, but then also to study possibility for investments, as you know, not to manage production plant because we cannot -- but 12 of the system, yes to start. Then on the -- what we see -- you spoke about the difference between gas and electricity, but we are on 2 different, let me say, a word, the more we've gone, more is different. And I spoke only for electricity sector, and my opinion is that the electricity transport, but also distribution are too important for the next future. And to have the real reaching of targets that it's important that all the stakeholder involved, first of all, authority but also institution. As in mind, the needs, the strong needs of these investments for our account.

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

It's Stefano Bezzato from Crédit Suisse. Two questions, if I may. The first one on your 2021 guidance, you are targeting EUR 0.39 EPS which is the same level that you reached in 2020. Is there any particular headwind or risk that makes you conservative for this year, considering that you had 4% earnings growth in 2020 and you go flat in 2021? The second question is on the regulatory review and the impact on your earnings and more, in general, on the dividend. I would like to understand if there is a maximum level of payout, above which you are not willing to go from 2022?

Let me say, first of all, 2021 guidance, no any change, no more risks. We see absolutely continuity with what we said before. On the second point, the impact of the regulatory review on our dividend policy and so on, no, I think that it will be no problems also because like I said before, we have considered a constant level of remuneration, but we will not also not to consider the some important opportunities that we can have during the next 2, 3 years. So we are not afraid at the moment about these conditions and situation. Sorry if I use this moment, this minute, but I would like also to give another information on a previous question on renewable plants because what is really interesting that we are observing a continuous increase of demand for authorization, a continuous presentation of new projects. At the moment, if I took all of the demand that they have presented or the operators have presented, it cover -- historically, it covered the complete plan over the next 10 years. So it's really interesting to see that there is an acceleration, starting into the intention of investors and operators on this, then we will see what will be the behavior. Thank you.

We have no further questions at this point, so I hand the conference back to the CEO, Mr. Stefano Donnarumma.

Thank you for your attention. Thank you for your question and for your -- that you follow our company with interest. Thank you.

Ladies and gentlemen, thank you for your participation today. This concludes this conference. You may now disconnect your lines. Thank you.