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

Hello, and welcome to the Terna 9 Months 2022 Consolidated Results. My name is George, I'll be your coordinator for today's event. Please note, this conference is being recorded. And for [Operator Instructions] I now hand the call over to your host today, Mr. Agostino Scornajenchi, Chief Financial Officer, to begin today's conference. Thank you.

Good afternoon, everybody, and welcome to Terna's 9 months 2022 Results Presentation. Before starting to analyze the figures, I would like to share with you the latest main achievements of the period. First of all, -- in line with our institutional role guaranteeing security supply, system adequacy and quality of service at the lowest possible cost to the end users as well as meeting our clients' commitments, we are proud to announce that the East branch of the Tyrrhenian Link has been organized in October by the Italian Ministry of Ecological Transition. The authorization process was completed in record time. In fact, it took less than 1 year from the start of the procedure to the definitive approval of the project. Moreover, of the 12th of October, the Ministry of Ecological Transition also started the authorization procedure for the west branch of the Tyrrhenian Link that we [indiscernible] and Sardinia. Another step towards the construction of one of the most important infrastructure projects in Italy has been completed. Then let me highlight our strong ESG commitment. Indeed, Terna has been confirmed for the 12th consecutive year in the success and global ESG Leaders Index, which selects the best companies globally based on ESG best practices. This international achievement testifies the company's performance in ESG areas. In fact, sustainability is a strategic driver and one of the pillars of group's operation. 99% of the approximately EUR 10 billion of investments plan by Terna in the 2125 driving energy industrial plan are, by their nature, sustainable based on the eligibility criteria introduced by the European Texan. Let me say that our ESG commitment is also reflected internal financial structure. Indeed, during the last 3 months, Terna signed 4 ESG-linked credit facility agreements for a total amount of EUR 600 million. The credit lines will have a term of 3 years with an interest rate linked also to Terna's performance in relation to specific environmental, social and governance indicators. In addition, on the 15th of September, Terna launched a fixed rate single tranche bond through a private placement procedure for an overall amount of EUR 100 million. The proceeds from the issue are expected to be used by the company to fund the needs of the group's industrial plan and to meet the group's ordinary financial needs as well as contribute to optimizing Terna's financial management. I would also highlight that yesterday, we signed a EUR 1.9 million -- EUR 1.9 billion contract with the European Investment Bank for the financing of the Tyrrhenian Link project. Finally, regarding our shareholders' remuneration, today's Board of Directors approved the 2022 interim dividend of EUR 10.61 per share, up by 8% compared to the previous year and fully in line with the dividend policy communicated to the market. After this introduction, let me give you the usual overview of the Italian electricity market. Moving to the next slide. As you can appreciate from this chart, in the first 9 months of '22, national demand was about 241 terawatt hour with an increase of 1.3% versus the same period of last year, when national demand was about 238 terawatt hour. I would like to remark that despite the current challenging scenario and in line with our institutional role, we continue to guarantee security of supply for families and businesses. Concerning national net total production stood at about 210 terawatt hour, 2.2% higher than the same period of '21 with a strong increase in wind and solar production, which grew by 8% and 10%, respectively. Moreover, let me also highlight that in the first 9 months of '22, renewable tools scored about [ 32% ] of the demand at about 37% of national net total production. Now let me introduce the main figures of the period. Moving to Slide #6. In the first 9 months of '22, group revenues and EBITDA were up by 5% and 3%, respectively, versus last year, which means EUR 102 million and EUR 47 million higher than the same period of '21, while group net income was EUR 587 million, about 1% more versus last year. Group CapEx exceeded EUR 1 billion for the first time ever in 9 months with an increase of 12% versus the first 9 months of last year, reconfirming our solid coverage acceleration to deal with the current energy scenario. Despite such CapEx acceleration, at the end of September, net debt was well below EUR 9 billion at about EUR 8.7 billion versus about EUR 10 billion at '21 year-end. Now let me make a deeper analysis of the figures of the period, turning to Slide #8. Let's start with revenues analysis. Total revenues in the first 9 months of '22 increased by 5.4%, reaching EUR 1,992 million, up by EUR 102 million versus last year. The growth was attributable both to regulated and nonregulated activities, which contributed for EUR 77 million and EUR 26 million, respectively. For the details of the revenue evolution, let's move to the next slide. Regulated revenues reached EUR 1,720 million, EUR 77 million better than last year. The increase was mainly due to higher output-based incentives effects related to the other benefits generated from the system, net of the WACC reduction recognized in '22. Nonregulated and international revenues reached EUR 272 million, 10.5% higher than last year. Nonregulated growth was mainly attributable to the increase in revenue from energy solution, mostly related to LT Group, and to the increased contribution coming from Tamini. International revenues were set to 0 in accordance with the IFRS 5 accounting standard refer to assets held for sale. Now let's go through operating cost analysis at Slide #10. As you can appreciate from this chart, total operating costs stood at EUR 580 million, 10.5% higher than last year. Regarding regulated activities, the increase was mainly attributable to the insourcing of new competencies, while nonregulated activities have been impacted mainly by healthy group contribution. Let me now analyze EBITDA. Moving to the next slide. Due to the previously mentioned effects, 9-month '22 group EBITDA reached EUR 1,412 million to [ EUR 47 million ] better than last year. This increase was mainly attributable to regulated activities, which contributed for about EUR 49 million, showing an EBITDA of EUR 1,376 million in the first 9 months of '22. Let's now have a look to the lower part of the P&L at Page 12. Depreciation and amortization amounted to EUR 516 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 896 million, 2.6% higher versus September '21. We reported net financial expenditures up EUR 56 million, substantially in line with the same period of last year as a proof of our resiliency in cost of debt management. Taxes stood at EUR 237 million, EUR 8 million higher versus last year, essentially due to increased profits. Consequently, our tax rate stood at 28.2%. As a result, group net income reached EUR 587 million, 1.1% higher versus the same period of last year. Moving to CapEx analysis. And now at Page 13. In the period, total CapEx amounted to EUR 1,033 million, about 12% higher than last year, showing a double-digit acceleration despite the challenging scenario. Indeed, we invested about EUR 985 million in regulated activities. Among the main projects of the period, it's worth mentioning that Tyrrhenian Link, the Paterno-Pantano-Priolo in Eastern Sicily [indiscernible] and investment in StatComs, reactors and synchronous compensator for the grid security. Among CapEx categories, development CapEx represented 41% of total regulated CapEx. Defense stood at 40%, while asset renewal and efficiency was the residual 45%. Nonregulated and other CapEx stood at EUR 48 million. This includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis. Net debt at the end of September '22 stood at about EUR 8,651 million, about EUR 1.4 billion lower than '21 year-end level, mainly due to the hybrid issuance made in February and to the cash generation of the period. Current debt structure allow us to be comfortable in serving investment needs for the next future. Let's now make a deeper analysis of our debt profile. Moving to Page 15. Thanks to our long-term debt management approach of the latest PS, at the end of September, fixed over floating ratio on gross debt stood at about 87%, and the average duration was about 5 years. With the aim of confirming our leadership in sustainable finance market and to meet our financial needs, let me just remind you that in February '22, Terna launch its first-ever hybrid bond for a nominal amount of EUR 1 billion, successfully accepted by the market with an order book at peak of over EUR 4 billion. This is proof that in recent years, we took advantage of favorable market conditions, carrying out a refinancing activity and extending the average maturity of our debt. This allowed us to have enough flexibility for the coming months. Indeed, in the short, medium term, we are able to look at the bond market more as an opportunity, whether that has a need. In this context, let me remind you that in September, Terna launched a fixed rate single tranche bond through a private placement procedure for an overall amount of EUR 100 million. The notes with the duration of 5 years and a maturity date falling on September '27, we'll pay a coupon of 3.44%. As already anticipated, just yesterday, November 8, we signed a EUR 1.9 billion contract with the European Investment Bank for the financing of the Tyrrhenian Link project. This loan will be draw down for a first statement of EUR 500 million. That will be the first tranche of the total EUR 1.9 million, approved by the European Investment Bank for the project. The 22-year loan has a longer maturity and more competitive cost than those generally available on the market, fully in line with Terna's policies to optimize the financial structure. Thank you very much for your attention. But now before the Q&A session, let me conclude this presentation with some closing remarks. First of all, I would like to underline that, as previously said, our net debt and our cost of debt are fully under control. As you have seen, our net debt stood at about EUR 8,651 million, about EUR 1.4 billion lower than '21 year-end level. I would like to underline that Terna CapEx plan is strong, solid and safe. Indeed, almost all the CapEx plan was already authorized. As already said, we have had an important step forward on Tyrrhenian Link. One of the Italy's most important infrastructure projects aimed at ensuring the development and security of the national electricity system, which Terna will invest around EUR 3.7 billion. For what concern procurement, despite the extremely challenging scenario, potential shortages of raw materials do not represent a risk for [indiscernible], also thanks to [ Brooks ] contribution. So I can see that we are on the right path regarding the authorization process, construction activities and procurement in line with the milestones set in an updated industrial plan and in 10-year development plan of the company. Concerning international activities, just 2 days ago, we completed the first closing for the sale of Latin American assets in execution of the agreement signed in April and also already announced with the update of our 2125 industrial plants last March. And finally, regarding 2022 guidance, thanks to the initiative aimed at further increasing benefits for the system and efficiency, Terna expects an EBITDA of EUR 2 billion and an earnings per share of EUR 0.42. Thank you very much for your attention. We are now ready for the Q&A session.

[Operator Instructions] First question may be coming from Mr. Enrico Bartoli calling from Mediobanca.

First question is related to your international strategy. You recently announced this agreement with Meridiam for entering U.S. market. I was wondering what kind of opportunities you think Terna would have in that market? Some color is possible on this joint venture with Meridiam. And also considering the challenges that you think you could face considering that this is a brand-new market for your company. Second question is on the request of connection by renewables in Italy. I think that the latest figure was outstanding 285 gigawatts. So definitely this highlights a strong interest by developers in the Italian market, but we know that the bottlenecks are still on the authorization process. I'm wondering what is your feeling about the possible easing all the authorization processes in the Italian market? And if you think that the new government could have some impact or try to further speed up this kind of processes. Last one is related on the new environment on interest rates. If you highlighted the decline in net debt that you had at the end of the period, I was wondering what are your expectations in terms of the evolution of your cost of debt in 2023, also considering the credit line that you achieved with [ EIB ].

Okay. Let me start from the last one. As you know, we are working a lot in order to set the lowest possible level for interest cost. I think that we did a good job with the issuance of the hybrid we mentioned before and also with the agreement we just concluded, specifically with the agreement with European Investment Bank, the level of cost is undisclosed by the [indiscernible] significant premium versus the market. So we do continue to do our job. We are not any -- we're not under any kind of pressure. We are not under any kind of pressure. We have time. We have plenty of available cash and we are working, as you have seen with a lot of different instruments versus the standard bonds. So we continue to do our job in this way, and we will take the opportunity at the right moment also in the coming months. Coming back to the first question. Well, as you remember, at the beginning of October, we have concluded an agreement with Meridian and Boundless Energy. You know Meridian is a financial -- respectable financial institution, and Boundless Energy is an American developer. We have signed a joint development agreement to capture all the business opportunity connected to potential acquisition, development, implementation of infrastructure project in the U.S. U.S. is a booming market. There is an outstanding amount of projects and the increase of needs for the electrification. So we are more, more [indiscernible] means that we can have [indiscernible] keeping always in mind that our costs remain always the same as it was in the past, low capital absorption and low risk profile. Regarding the level of investment in renewable. You have mentioned an important figure that represents the [indiscernible] for -- from not only Italian, but from private entrepreneurs and investing in renewables in Italy. There are, of course, some concerns regarding the level and the speed of the authorization process. Of course, it is not up to us. This is a government role to decide and to deliberate on this topic. It will support as much as possible the government in taking the right decision to ease this process to make the realization of renewable more easy for the next future.

Next question today is coming from Stefano Gamberini calling from Equita .

Two questions from my side. The first regarding [indiscernible] incentives, you said you improved -- sorry, the guidance by EUR 100 million at EBITDA level for 2022, if I understood correctly, due to a better trend that you expect from out of base incentive. Could you give us an idea what is the total amount that you expect in 2022? And if this is an anticipation bring forward the future out-based incentive that you already set for your 2025 business plan? Or is something on top of the already expected out-of-base incentive for the period. The second regarding the trend of interest rates, you underlined that you were able to get finance at 3.5%, 5-year period. This is an increase in the [indiscernible] of 250 basis points compared to the average cost of debt that you expected in the 5 years period. So could you have about a little bit what could happen on the other side regarding the regulation? What is the higher WACC that you expect probably in '24 or '25 onwards, what are the advantage or the benefit that you expect with an inflationary scenario to understand if your return on investment on the marginal investment that you will do considering the huge amount of investment you have in front of you will be higher than the marginal cost of debt that we should expect for the coming years?

Well, that's the [indiscernible] question, the level of output based incentives foreseen in the whole [ 2125 ] plan was in the region of EUR 500 million. This is an amount that we increased in the latest year respect to [ EUR 200 million and up EUR 240 million ] , if you refer to the previous business plan approved by the company. And this is a tendency that we always declare given that the output-based component is becoming more and more relevant in our marginality. When we look at '22, the expectation for '22 was in the region of EUR 200 million, given the positive performance that we already see for this year, we increased this amount up to EUR 300 million. You can consider this increase as structural. So you can consider this not as a one-off contribution, but is something that you can consider on top of the current estimation of our business plan that I just mentioned. For the future, we will communicate. At the moment, we will be in the position to update the current business plan with the new one. Second question regarding interest rates. Yes, of course. Now we see in the market, the interest rates growing -- are growing. We do expect some news in the behavior of the central banks. You have seen a sort of alignment between European Central Bank and the Fed. Let's see what will happen in the future. But for sure, we are in a challenging scenario. We are not concerned for that given the tariff structure that we have. If we will see now an increase in the cost of debt that we are managing as best of our capacities, we also expect a corresponding increase in the WACC.

Just a quick clarification on this. So you expect a huge increase in -- under with WACC from 2024 because I think that clearly 2023 there isn't any [indiscernible] l .

Expect a corresponding increase in WACC.

The next questions are coming from Bartek Kubicki of Societe Generale .

Three issues, 2 of them, which were already discussed, but I would like to get some clarification, please. Firstly, on what was just mentioned about the allowed WACC. Indeed, we expect it to increase in FY '24, but not necessarily the allowed cost of debt. And I wonder if you actually feel the necessity to speak to the regulator, maybe somehow adjust the regulations to capture the fact that cost of debt is increasing, okay, the cost of new debt is increasing quite rapidly while the allowed cost of debt [indiscernible] dominantly past cost of that. My first question, meaning whether you are -- you would like to talk to the regulator and change the regulations and you would like to keep them as they are. Secondly, on the EIB credit facility because you are fixing it for 22 years. Okay. You didn't say that -- you didn't mention the rate, let's say, it's 3.5%, 4%, something close to the bonds right now. But if we imagine a scenario where bond yields go down again to 1%, is it possible to exit this long-term loan to refinance at lower rate without paying any penalty or any premium to buy it back? I have no idea how it works, I would like to know whether there is any exit potential from this long-term loan, should yields go down? And third thing, on the France, Italy interconnection, which has been delayed. If you can tell us what are the reasons for the delay, the lessons learned for future projects, let's say, the Tyrrhenian Link And I presume the interconnector sits in the work in progress, which means get lower remuneration. So I wonder if you can maybe tell us how much money you have potentially not earned because it is not a completed project, but it is a work in progress project.

Let me start from the last one. The delays in the connection between France, a lot of reasons. Please consider that the physical infrastructure has been completed already many months ago. So there was open discussion regarding the electronical part of the project that has been solved. In the meantime, no impact at all, given that the lack of remuneration was meaningful because, as you know, already since a few years, we are fully remunerated on the work-in-progress amounts that we do have. Of course, it is important to keep the time and keep the budget. We are fully committed to confirm our ability to conclude investment in time and in budget. As I have said before, Tyrrhenian Link, now we are still in the authorization phase, but we already procured the most relevant portion of the physical infrastructure, meaning the submarine cables and we already procured the conversion stations on the [indiscernible] side, both in the Peninsula and Sicily and in Sardinia. So we will do our best, as always to keep the right path in delivering investment that are needed for the energy transition process. Coming to your first question, connection between WACC and the evolution of interest rates. Honestly, there is not much to elaborate on this given that the rules are set there is nothing to discuss. So there is an observation of the evolution of the parameters and you know that insurance rates is one of the most relevant [indiscernible] So we do expect that [indiscernible] naturally incorporate the level -- the higher level of interest rate that we are observing on the market today. So you know which is the tariff structure and the tariff principle, Terna is, let me say, as naturally hedged by the [indiscernible] of course, is up to the management to try to do its best to maximize the advantages coming from this. Your question, yes, well, regarding the condition that we just concluded with the European Investment Bank. Well, of course, things could change. Interest rates could increase. Interest rates could decrease. Our job is trying to do the best as possible, given the market condition. By principle, all the bank loans, including European investment bank loans could be reimbursed in advance. Honestly, I do not see so many sense to discuss about that. I think that we just concluded a deal with a -- significantly, sorry, premium versus the market, we are extremely happy for this result, and we will continue to do our job consider that when I say significant premium, I mean more than 100 basis points. So I think that the team, not me, -- the team did an excellent job, and we will continue to force the best condition that we can obtain from the market given, of course, the market condition that we find from time to time.

We'll now move to Mr. James Brand of Deutsche Bank.

I just have one question. On a clarification on the answer earlier around EUR 300 million of incentive payments you now expect to receive this year. And you said that was structural. I was just wondering whether you could expand a bit on what you mean by that? Because I understood the -- certainly the kind of system management incentives that you had as being capped. So my kind of initial feeling was that you may be bringing money forward from future years to this year and the higher incentive payments this year might [indiscernible] in future years, but it is structural, it sounds like you think it might be able to be maintained at a high level [indiscernible] a high level than maybe we have previously expected. . So maybe you could just clarify that possible that would be really useful.

Well, I do apologize given that there was some noise on the line. But if I well understand, you are asking some details at some elaboration about the level of out based incentive. So let me resume that we have an output-based contribution, it is an increase [indiscernible] a contribution. In the business plan horizon that is in the region of EUR 500 million. This is what we communicated 6 months, 7 months ago. The expectation -- there are 3 categories: intrazonal incentives, intrazonal incentives and MSD reduction of ancillary services. The expectation for '22 are in the region of EUR 200 million. We are now in the condition to announce that we performed quite well, especially on MSD, in which we have something that was expected in '23 already available in '22, but this is not only an anticipation. This is an increase in the absolute value. So that's why you can consider this increase of EUR 100 million structural increase and not a one-off effect.

Okay. So effectively, not to put new numbers out there, but effectively, what you're talking about is another EUR 100 million being added on to the incentives of the business plan and that coming this year? Is that the right interpretation? .

It's not the right time to discuss about future business plan. What I can confirm is that you can consider this EUR 100 million increase -- structural increase in respect to the original expectations.

We'll now go to Stefano Gamberini of Equita.

Just a follow-up regarding the current situation. There are the first signs of deterioration in terms of credit qualities for the retailers, and we can see a risk that could be similar than the COVID 19 period when the regulator introduced some delays -- delays in the payment of your fees by retailers. Do you have some talk with the regulator? What could happen in your view, if the situation will deteriorate in the forthcoming months for retail less and some extraordinary measures could also impact Terna or do you expect that at the end of the year, some other solution could arrive?

Well, you're right. The situation that we do see now is pretty similar with the situation we faced in the initial phase of the COVID-19 emergency. Also at the time, we've seen a deterioration of the credit on the retailer, and this is something that is happening. And this is something that we have already an impact on a lot of financial institutions. But our tariff structure that is pretty protected by the regulatory scheme. There is no possibility, let me say, for distributor and generate to skip from the payment of the transmission services given that the regular payment or the transmissions segment competencies are mandatory to remain in the market structure, in the market system. So we have, of course, to monitor the situation, given that it's not only a matter of term, but it's a matter of what general evolution of the economic system in the nation, and we are, of course, a part of it, but we do not see any specific additional risk for us.

We'll now move to Ms. Antonella Bianchessi from Citi.

Just a quick question. Given that the formulized stated and fixed until 2027. I was wondering, do you still see value creation given the new regulatory -- the new market environment? Because obviously, it's not only the issue of the cost of debt, which is partially fixed, but is also the fact that the equity is premiums adjusted depending on if there is an increase in real rate. So does -- this is a subject of debate with the regulator to use at which level of rates you will say this regulation is restoring that deal, which is the level of rate that you need to basically change your CapEx plan? The second question was on the cost of debt. If you have some idea, some indication on a full year basis, and those today net debt at the end of the year, if you have any type of guidance if -- yes.

Let me start from the end and a guidance for net debt for year-end '22. So no indication also on the cost on the related cost, we will do our job. Regarding the first part of your question, there is value or this value. This is something that we already discussed several times. What is important for us is that we have a stable, predictable formula that will protect us from the evolution of the macroeconomic variables included in such formula that are affecting our business, interest rates, the countries premium the inflation. And that's it. We do have a formula that is set is predictable, and we have to play with such formula. I said several times, I would prefer to exchange some basis point of remuneration with some years of additional predictability. We are pretty satisfied with the approach followed by the authority. Of course, the moment we have to negotiate with them. We do our job and we hardly negotiated, but we are not there. Now we have a formula that has been set. It's not up to us to [indiscernible] where you can create value. I think that this is not the right place to create value. We are not playing with formula. So we try to realize investments that are needed for the system. And I think that one area in which we could create additional value is the outward based incentive area. We have already commented that. The more we move towards the future, the more the out-based component will have an increasing role in our general [ remuneration ]. So I think that we have started quite well because we are increasing the level of output-based contribution and also the deceleration that we just released regarding '22 is a right demonstration of the validity of our approach.

Well, but my question was the firm as in his mind, a level of rates after that, the formula will be value destructive or the CapEx plan will not change depending from the dynamic of the market. .

As said before, we have a formula that is protecting us from the variation of the macro economic variables. This is not up to me to comment that.

As we have no further questions, I'd like to turn the call back over to Mr. Scornajenchi for any additional or closing remarks.

Thank you, gentlemen. Thank you very much for your time, and let's see you in the next appointment for the year-end financial statement in the coming months. Thank you very much.

Thank you, sir. Ladies and gentlemen, that will conclude today's presentation. We thank you for your participation. You may now disconnect. Have a good day.