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

Ladies and gentlemen, thank you for standing by, and welcome to 9 months 2021 consolidated results. [Operator Instructions] I would now like to hand the conference over to the CEO Agostino Scornajenchi. Please go ahead, sir.

Good afternoon, everybody and welcome to Terna's 9 months 2021 results presentation. Before starting to analyze the figures, I would like to share with you a snapshot of the main latest achievements. As shown in the chart, we continue to be focused on the execution of 21-'25 industrial plan presented last November, thus reinforcing our central role as the director of the energy transition. Indeed, Terna continued to develop the national transition with moving ahead in all its main projects. We concluded the first consultation phase for the Tyrrhenian Link and Adriatic Links, and we started the second phase of consultation for the Tyrrhenian Link. In the meantime, we launched the purchasing program. Thus, we are well on track also on procurement. From a financial standpoint, we continue to enhance our financial structure. In this regard, let me remind you about the agreement signed on the 13th of July with the European Investment Bank for a EUR 300 million loan to support the energy transition. In addition, at the end of October, Standard & Poor Rating Agency raised terms outlook from stable to positive and affirmed long-term and short-term rating, BBB+ and A-2, respectively. Regarding non-regulated activities, it is worth mentioning the resident deal signed with LT. In detail, last October, Terna through its subsidiary Terna Energy Solution, signed an agreement to acquire 75% of LT. One of the main Italian operators in the management and maintenance of solar infrastructures. LT is also active in the revamping and repowering of existing systems as well as in the design, installation and maintenance of system. Moreover, as a demonstration of our ESG commitment, in the first 9 months of the year, Terna was confirmed for the 11th consecutive year in the Stoxx Global ESG Leader Sustainability Index. In addition, let me also remind you about the inclusion in the mid-40 ESG, the first Italian blue chip index dedicated to environmental, social and governance best practices. After this brief introduction, let me give you now to the usual overview of the Italian electricity market. Moving to the next slide. As you can appreciate from the Chart #5, in the first 9 months of '21, national demand was 239 terawatt-hour, 6.2% higher versus the same period of 2020, when national demand was about 225 terawatt hour. As a confirmation of this recovery, it is important to underline that since March '21, we have registered only positive monthly variation in national demand compared to last year, which was heavily impacted by COVID-19. Therefore, we can confirm that electricity demand returned stably to pre-COVID levels. Let me also highlight that in the first 9 months of '21, renewable sources covered about 37% of national demand and about 43% of national net total production, confirming the ongoing energy transition process. Regarding national net total production, this stood at 207 terawatt-hour, with a strong increase in wind production, which grew by 5%. Now let's move to the main figures of the period on Page 6. In the first 9 months of 2021, Group revenues and EBITDA were up by 7% and 4%, respectively, versus last year, which means EUR 121 million and EUR 51 million higher. Moreover, we reported a group net income of EUR 580 million, EUR 11 million higher versus the same period of 2020. Group CapEx stood at EUR 925 million, 23% more versus 9 months 2020, confirming the robust capital toleration in line with the implementation of our industrial plan. To support the strong investment acceleration driven by the energy transition and system needs, our net debt stood at about EUR 9.6 billion versus about EUR 9.2 billion at 2020 year-end. Therefore, we confirm to be well on track to meet all 2021 communicated targets. Now let me make a deeper analysis of the figures. Moving to Slide #8. Let us start as usual with revenues analysis. Total revenues in the first 9 months of '21 increased by 6.8%, reaching EUR 1,902 million, up by EUR 121 million versus last year. As you can see in the chart, we registered positive contribution both from regulated and nonregulated activities from EUR 99 million and EUR 28 million respectively. For all the details, let's move to Page 9. Regulated revenues reached EUR 1,644 million, EUR 99 million better than last year. This increase was mainly due to the investment acceleration driven by system needs. Nonregulated and international revenues reached EUR 258 million, quite -- almost 10% higher than last year. This growth was mainly reflective of the greater contribution coming from Tamini and Brugg and higher revenues from connectivity services and Energy Solutions. The EUR 6 million decrease in international revenues was mainly due to the slowdown of activities on construction sites in Brazil, caused by COVID-19 and already mentioned in first half '21. Now let's go through operating cost analysis. As illustrated in the chart on Page 10, total operating costs stood at EUR 528 million, 15.4% higher versus last year. The increase broadly reflects the business acceleration issues in the period. Indeed, on the non-regulated side, the increase was mainly due to Tamini Group, while regulated increase was mainly related to higher O&M costs linked to the growth of our asset base. Let me now analyze EBITDA, moving to next slide. Well, considering all the previously mentioned dynamics, 9 months '21 group EBITDA reached EUR 1,374 million, 4% higher versus 2020. The increase was mainly attributable to higher regulated contribution of about EUR 67 million versus last year, showing an EBITDA of EUR 1,327 million in the first 9 months of '21. Let me remind you that in September 2020, nonregulated activities were positively impacted by the one-off related to Brugg acquisition, it was EUR [ 560 million ]. Therefore, net of this one-off nonregulated and international contribution would be almost in line with last year, with a relevant increase coming from nonregulated activities. [ Technical Difficulty ] to the next slide. Depreciation and amortization amounted to EUR 491 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 883 million, 2% more versus the first 9 months of 2020. We reported net financial expenses of EUR 68 million, in line with the same period of last year. Taxes stood at EUR 232 million, EUR 9 million higher versus last year, due to lower income not relevant for tax purposes registered in the period. Consequently, tax rate stood at 28.5%, slightly higher versus last year. As a result, group net income reached EUR 580 million, EUR 11 million higher versus the same period of last year. Now move to CapEx analysis at Page 13. In the first 9 months of '21, total CapEx amounted to EUR 925 million, 23% higher than last year, showing a robust acceleration to enable the ongoing energy transition process and to support the decarbonization path. Indeed, we invested about EUR 882 million in regulated activities. Among the main projects of the period, it is worth mentioning the Paterno-Pantano-Priolo in Italy. The interconnection between Italy and France, the realization of -- the rationalization of tourist metropolitan area. Moreover, let me underline the investment in stabilization devices, such as synchronous compensators, mainly located in Southern Italy that will enhance the grid stability. Development CapEx represented 37% of total CapEx. Defence stood at 18%, while Asset Renewable and Efficiency was 45%. Nonregulated and other CapEx stood at EUR 43 million. That includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis, represented on Page 14. Net debt at the end of September '21 was EUR 9,573 million, EUR 400 million higher than 2020 level. Let me say that we generated an operating cash flow of EUR 1,020 million, thanks to which we were able to more than cover the CapEx spending of the period. And now let's make the analysis of our debt profile, moving to Page 15. Our prudent and proactive debt management structure is aimed at keeping a robust and diversified financial structure. Indeed, at the end of this 9 months, we registered a fixed/floating ratio on gross debt of about 90% and an average duration of about 5 years. In line with our strategy of combining sustainability in the world to promote energy transition, last July, Terna signed an agreement for a EUR 300 million loan with the European Investment Bank at a very competitive condition, represented by a 22-year loan to strengthen and develop the national transmission rate supporting the '21-'25 industrial plan. Moreover, I've already mentioned, just a few days ago, Standard & Poor's global ratings raised term outlook from stable to positive and affirmed company's long-term and short-rating, respectively, BBB+ and A-2. Regarding shareholder remuneration in line with our dividend policy, on the 24th of November, we will pay the '21 interim dividend of EUR 9.82 per share are decided in today's Board of Directors. Lastly, regarding the adjustment of weighted average cost of capital, in the next few days we accept the second consultation document by the Italian authorities while the final resolution is expected by year-end. Consequently, let me remind you that the new industrial plan will be presented in the first month of 2022. Thank you very much for your attention. We are now ready for the question-and-answer session. Thank you.

[Operator Instructions] Okay. James, you can proceed with your question.

I'm sorry, I didn't hear you say my name. I am -- I just had a question on the funding actually on the EIB debt because normally it's pretty good to issue EIB debt, the rates are normally very favorable. I guess there's 2 parts to the question. Firstly, what rates did you get on the EUR 300 million that you issued? And secondly, do you think this is a one-off to be able to access the EIB debt? Or do you think you might be in a position where you can continue to access significant amounts of EIB debt year after year?

Sorry, James, correct the funding. So you're asking us about the funding, Regarding our last...

EIB, yes. Okay. So regarding EIB, the condition behind that loan are undisclosed. What I can say is that they are extremely competitive and below the official statement with lease on the bond that we concluded only a few weeks before. Just for the sake of clarity, it was [ 0.374 percent ] for a 7-year duration.

Okay. Brilliant. And do you think you might be in a position where you can continue to raise meaningful amounts of the EIB debt year after year or should we view this as a one-off?

Sorry, James, the line was a little bit noisy. Can you kindly repeat your question slowly?

Sorry. I was just asking whether you thought you could continue to raise significant amounts of EIB funding in the future? Or whether we should view the EUR 300 million that you raised this year as a one-off?

We do consider EIB an excellent counterpart. We have an outstanding relation with them. We consider them available partner also for the future. They are extremely supportive in the financing of our activities, especially in the framework of energy transition. So I am more than sure that we will have additional deals that we will sign with them.

We have the next question coming from the line of Sara Piccinini from Mediobanca.

The first question is on the good news that you received on the Tyrrhenian Link. So this obviously accelerate the process for the development of the cable, but what do you think about the delays on the investments in renewable energies? And what could be done to accelerate the process to help the system to actually deploy renewable energies and then transfer this energy through the Tyrrhenian Link? And if you think that offshore energy could be a solution to accelerate the process? The second question is on the regulation. Is there any update on the next regulatory document RERA? Should we expect that for this week? And also, what do you expect for the implementation of TOTEX that will now start the consultation process? And last question is about cost inflation. You say that on the Tyrrhenian Link, you already had made procuring -- procurement, so you should be protected on that. But in general, would you expect in the future, some -- the higher commodity prices that we see today to reflect also on the CapEx for your raw materials for your cables?

Thank you very much, Sara, for your questions. First of all, Tyrrhenian Link, indeed, it was an excellent news and the fact that -- now we have the formal launch of the authorization process of this really infrastructure. Let me remind you that we are talking of a total investment cost of around EUR 4 million, of which EUR 1.9 million are included in the '21-'25 Industrial Plan. So it is pretty important. It's an ambitious plan. We always see and I'm sure you remember this that we ask the governments and institutions to fast track of authorization given that normally time needed for the authorization is longer. Things are moving as expected. I think that this is really an excellent news. It is a strategic plan. So it's the connection -- strategic connection between the mainland Sicily and Sardinia. You know the reason already an open discussion about the energy future of Sardinia. I think that this will be one of the main important -- maybe most important enabling factor for the energy sustainability of the island. Regarding your second question on offshore. Offshore is for sure is an interesting element that is popping up more and more. We have a lot of requests. We have already received a lot of connection requests coming from private entrepreneurs and the private operators. Today, we do not include costs related to the connection of offshore wind in our business plan. They are, for the moment, out of our forecast. If we should consider them, it will be a relevant upside because you can easily imagine that the cost of this kind of connection is pretty high. So up to date, there is no impact, if any, it will have positive impact. Let me say, let me add that it's a little bit maybe too early to comment on this because we are at the beginning of the discussion, it was -- it will be a first of a kind in Italy. So I think that we will have more time in future to comment about it. On the other question, updating process of . Well, let me say I think that today is the worst day to comment on it given that we are expecting something new coming between tomorrow and the end of the week. So honestly, I can only confirm that we have received the first document that described the , the processes and the variables with a very wide range. We have participated through our consultation process. We agree with the approach proposed by the authority based on continuity of the regulatory principle, the concept of graduality. We know that on one side, we have seen a reduction of the cost of corporate debt. But also, we also assisted to a period that was all out of standard period because the observation period started in November '20 then landed in November '21. It was a period in which the fluctuation of interest rates was not a market fluctuation but was something related to decision coming from central government. I think that all the elements are in the end of the authority to take the final decision. The final decision will not arrive this week. It's something that we will understand with the complication of the final resolution that historically comes up normally at the end of December. What we can expect is that, in any case is reasonable and impacts will be compensated with our managerial actor -- action, sorry. Let me also add that the regulator has shown a consistent track record that has been always proven and considered reasonable. They were always able to catch the historical moment. I have no doubt that this will be the case also for the future. Application of TOTEX, nothing new. I expect that principle will be introduced starting from '24 On this, I confirm what I said several times. So we do not any relevant concern about the application of TOTEX. The application of TOTEX of will be a sort of access to a profit sharing respect to the general level of benefits that we will provide to the system. So we are not in the position to imagine, which will be the former, the mechanism that the authority will introduce, but we already have the order of magnitude of such benefits. We do operate already in line with the methodology designed by the authority. We are already obliged to present the cost benefit analysis for each project that we include in the development plan. And we do consider that the level of benefit is huge. So we expect that we will confirm the same principle of continuity with the current tariff structure that we have today. Final question was about inflation. That's for sure. There is -- it's an interesting matter now. And there is, of course, an impact on price of raw materials. I think that this impact -- we can divide a shorter impact on cash, but it will be quite marginal. We have, as you know better than me, huge flexibility. In the midterm, I do expect a [ Technical Difficulty ] a positive impact because inflation will affect our ramp in the mid- to long term. So at the end of the process it will provide us additional remuneration. So regarding price evolution, no concern at all. Let me say, there is something regarding availability, of course. And this is something that we are analyzing and monitoring quite strictly on the non-regulator side. We have to purchase aluminum, we have to purchase copper for group activity, for Tamini activity. And we reinforced a lot, the anticipation of the purchasing process in order to secure the manufacturing process of our affiliates

[Operator Instructions] We have the next question from the line of Stefano Gamberini from Equita SIM.

Two quick questions. Regarding the trend of cost on one side, if you can give us a sort of guidance for the full year, both on regulated and unregulated costs. And the second, regarding the nonregulated activities. You underline that in the 9 months, the EBITDA should be in line with 9 months '20, excluding one-offs. However, what do you expect for the full year and the progression that we could expect on 2022? Or do you see some risk related to the procurement activity in Brugg and Tamini? The second, regarding the trend of CapEx, in the 9 months, these were up in 23%, if I'm not wrong, you confirm the USD 1.4 billion of CapEx for the full year. Could we expect a further acceleration in 2022, even excluding clearly the investments for Tyrrhenian Link or Adriatic Link that will arrive later on?

So regarding your first question, we are not going to provide any guidance for our level of OpEx. Let me say that we are exceptional in line with expectation. And we are still moving toward a part of efficiency that we already announced a few years ago. The ratio between the asset base and the total cost is going to be reduced with respect to the past. We are still on that path. Of course, we have an increase in absolute terms, but it's less and less, let me say, proportional to the increase of our asset base. This is the consequence of an increasing level of digitization in our operation and maintenance activities and also is a consequence of the massive organization process that the company put in place to accelerate the CapEx process. So let me say that this was a company that was spending EUR 600 million, EUR 700 million only a few years ago. Now we are suddenly above EUR 1 billion. The guidance that they confirmed for '21 is EUR 1.4 billion. We are doing that more or less with the same size in terms of FTE. So I think this is the most important sign of efficiency that we can show to you. Regarding, let me say, general efficiency, we confirm EUR 1.84 billion of EBITDA for '21. We have -- as you have seen, we had an excellent year on non-regulated business side. We had a very good year on the regulator side. We have some delays in the realization activities of the international sector, especially in Brazil, but we do consider this guidance fully achievable. For potential acceleration of CapEx. This is something that we will discuss more in detail the moment we will present the new business plan and the guidance for '22, what can I say today is that we are accelerating. We are at the beginning, let me say, at the acceleration process. So it's a little bit early to anticipate that I would expect a sort of continuity in the size of investment that we have to provide in the coming years.

We have the next question from Roberto Ranieri from Intesa Sanpaolo.

Three questions, if I may, some of them are follow ups. The -- about the EBITDA decline in the nonregulated and international activities, the minus EUR 16 million decline, are there any one-off items or items which could have some recovery in the last quarters? Or so basically -- and specifically, which are the main drivers which led to this EBITDA decline? My second question is on renewables sector as a whole, we understand that the simplification -- the degree on simplifications is not doing its part. It's not working very well. So I'm wondering if there are some actions from the government, which could be given and which could be made and in order to accelerate the authorization process for the onshore wind and solar? My third question is cost inflation again. In particular, on the supply chain, also cost inflation and delays, which are -- are you suffering from this kind of problems at the time? And the Brugg acquisition could -- we imagine that Brugg acquisition could accelerate and cover some of the problems in the supply chain or Brugg itself is also suffering this kind of issues?

Well, regarding the mentioned EBITDA decline, it is not a decline. I think that you are referring to Page 11 and I said during my speech, the decrease was only, let me say, nominal given that you remember that last year, we have accounted a relevant value increase post acquisition increase coming from Brugg. The total amount at year-end level was something in the region of between EUR 80 million and EUR 90 million, with respect to what we have seen is it was additional value with respect to the value we pay. So if you exclude this impact, regarding nonregulated activities, '21 is an excellent here. Things are moving quite well. There is a pretty interesting increase of the order intake of Tamini, there is a pretty interesting increase in the order intake of Brugg. Let me continue on these aspects where I will address also your third question, and I will come back on renewables in a few minutes. But let me say this, if you look to Tamini Group, we are talking about a nonregulated market. So it is important that these activities will generate profit. And this profit is important for us, but it's not, let me say, strategic for our general profitability. If Brugg and Tamini will perform in an excellent year, we will have EUR 10 million, EUR 20 million of contribution that is important, base, they will perform a bad year, they will consume EUR 10 million, EUR 20 million. But nothing will change at consolidated level because we are talking of a group that will show EUR 1.8 even more billion at the end of '21. So for sure, if we spend money on nonregulated side, we want to be profitable, and this is what we do. But there is something that is more and more important. We are investing in non-regulated business because they are part of our regulated profile. We do invest money in Brugg because produces cables. And we do consider cables, a strategic asset for the development of the future grid. Cables have been always considered as a sort of exception in the electric -- in the electricity system. Now they are not anymore an exception. If you consider the 10-year development plan, more than 50%, 5-0, of new installation will be realized through underground or submarine cable. So you can easily imagine how important to have coming from other cultures -- coming from other countries that will have in their hands the knowledge, the skills to discuss, to be counterpart of our external provider. It was not the case until today. Until a few years ago, we did not have any access on strategic industrial and engineering information about cable infrastructure and the same was on transformers. Now in the framework of energy transition, we will see an increasing importance of this element of our grid. So to have the knowledge, have additional skill of this is more important than EBITDA. And we'll have also EBITDA impact. While we are talking, we have concluded the first part of the procurement process for the Tyrrhenian Link. You remember that when we utilize the new infrastructure, we have to provide anticipated authorization process. This is what we did for Tyrrhenian Link and also anticipated procurement process. You can easily imagine how it was important to have for the first time cable expert in the table of negotiation with Prysmian and Nexans. We are extremely happy for the outcome of this negotiation. And now we have, let me say, an additional negotiation power and additional knowledge that we protect development of the company, the development of the company in the coming years. This is the key. This is the strategic rationale of our investment in nonregulated activities, especially on the industrial side. Your second question about renewables, nothing new. With the exception that we continue to see a massive increase of the request of connection. We already received in '21 something more than 150,000 megawatt of additional connection. Of course, we expect that the scrap rate will be, in any case, higher. We do not expect that all these projects will see the light. But this is a signal of the fact that the private market, the private operators are pushing a lot to invest or renewable. And as usual, the key element here is the authorization process. I think that this is an element that is already the first point of the agenda of the government. And as you have seen also on Tyrrhenian Link side, when you want to do things, it is possible to do things. So we do expect that the government will take action to facilitate the authorization process.

[Operator Instructions] The next question is from Enrico Bartoli from Stifel.

A couple left. One is related to the Adriatic Link. You mentioned that the first phase of the authorization has been completed, if you have any visibility on when the second phase will start, similar to what that we announced recently on the Tyrrhenian Link? And on the Tyrrhenian Link, you provided some, let's say, granularity on the expected years for the start of operation you said in '25, '28. Is it -- would it be fair to say that the contribution to EBITDA in the target of the current business plan from this project is still limited considering the treatment of work in progress? And then most of the contribution will be after 2028 when the project is completed? And the very last one is related on the business plan update if you have any -- decided any date, any period when you plan to update the current business plan?

Well, regarding Adriatic Link, we are talking about more or less EUR 1 billion, EUR 0.9 billion to be precise, total investment cost that will start a little bit later than Tyrrhenian Link, strategic project and in line with what I said before, full in cable technology. The authorization process is just at the beginning, but we do not see any issue for the moment. Second question was related to the Tyrrhenian Link. So Tyrrhenian Link will start operation in '25. Let me say that the expected commissioning date on the first link is in '25, the full project will be completed in '28. So you can consider that you will see a relevant investment in '24 and '25. So you will see a first tariff impact starting from '25 given that the remuneration of work in progress related to the project will be based on the investment spend in '24. We do expect that '24 will be the first year in which you will see a relevant amount. Regarding your last question on business plan, I do expect that we see the consultation document of the authority in the coming days. We do expect to receive the final resolution by the end of the year. Let's imagine that you can consider that at the end of the first -- by the end of the first quarter '22. As usual, we will update our business plan. We are not in the position to confirm any date for the moment, but more or less in the same timeframe, maybe 1 week later we will respect the presentation of the year-end financial account, but we will communicate on this.

There are no more questions. I will hand back the conference over to the CFO.

I really thank you for your time. I do apologize for some connection issue at the beginning of the Q&A. Thank you again, and see you in the year-end presentation. Goodbye.