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

Good day, ladies and gentlemen, and welcome to Terna's First Quarter 2023 Consolidated Results. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd now like to hand the call over to your host today, Mr. Agostino Scornajenchi, to begin today's conference. Please go ahead, sir.

Good afternoon, everybody, and welcome to Terna's First Quarter 2023 Results Presentation. This was the last set of results released before the next week's AGM. Let me remind you that it generally includes among other items, the renewal of the Board of Directors. As usual, before starting to analyze the figures, I would like to share with you the latest main achievement of the company. Regarding regulated activities, let me remind you that on the 15th of March, we published a new 10-year national development plan, which foresees more than EUR 21 billion of investments, confirming our key role as energy transition enabler. The investment foreseen in this new national development plan aims at continuing the integration of renewable sources and the progressive phase out of coal-fired power plants in line with the target set at national and international level. Moreover, In March, Terna signed agreements with the European Investment Bank for the second and the third tranches of the EUR 1.9 billion loan for the Tyrrhenian Link, the submarine cable connecting the Italian peninsula with Sicily and then to Sardinia. The contract signed established a further 2 tranches totaling EUR 900 million for the construction and the commissioning of the East and West sections of the Tyrrhenian Link. For this infrastructure, we will be fully operational in its entirety by 2028. Terna plans an overall investment of around EUR 3.7 billion. Finally, regarding Terna financial structure, on the 14th of April, the company successfully launched a fixed rate single tranche bond issue for a total amount of EUR 750 million. This issuing which received a great market response with demand outstripping supply by almost 4x the offered amount represent a part of the EUR 9 billion medium-term notes program. The bond has a duration of [ 60 years ] and will pay a coupon of 3.625% well below the market standard for this period. The proceeds will be allocated to meet the ordinary financial requirement and to fund the needs of the group's Industrial Plan. After this brief introduction, let me give you the usual overview of the Italian electricity market, turning to the next slide. I'm now at Page 5. As you can see from this chart, in the first 3 months of 2023, national demand was about 77 terawatt hour, with a decrease of 4% versus last year, when national demand was about 81 terawatt hours. The reduction in electricity demand observed in the first 3 months of the year shows a decrease in trend compared to the same period of last year. This is mainly due to the increase in average temperatures and to the reduction in industrial consumptions. In the first quarter of 2023, renewable sources covered about 30% of national demand with a slight increase with respect to last year. Regarding national net total production, this stood at 64 terawatt hour, 10% lower than the same period of 2022. Despite that, let me highlight the increase in solar generation, which grew by 4% versus 2022. Let me also say that in this first quarter, renewable sources covered about 36% of the national net total generation. Now let's move to the main figures of the period. The first 3 months of the year continue to be characterized by a complex scenario. Despite the challenging and very volatile context, Terna recorded a significant improvement in all economic and financial indicators. Indeed, group revenues and EBITDA were up by 11% and 8%, respectively, versus last year, which means EUR 68 million and EUR 39 million higher than the first quarter '22, while group net income was EUR 200 million and with an increase of 4% versus last year. Group CapEx stood at EUR 315 million, 7% more the first quarter '22, confirming once again, Terna's CapEx acceleration driven by increasing system needs to ensure efficiency, resiliency and security of supply, in line with Terna's institutional role for the country. At the end of March '23, net debt was EUR 8.8 billion versus about EUR 8.6 billion at 2022 year end and fully in line with our internal expectations. Now let me make a deeper analysis of the first quarter '23 figures, turning to the next slide. And I'm now on Page 8. Total revenues in the first quarter of '23 increased by 10.6%, reaching EUR 713 million, up by EUR 68 million versus last year. As you can see, we registered positive results both from regulated and nonregulated activities, which contributed EUR 452 million and EUR 16 million, respectively. For the details of the revenue's evolution, let's move to Slide #9. Regulated revenues reached EUR 614 million, EUR 52 million better than last year, which means about 9.2% more than the same period of 2022. The increase was mainly due to higher output-based incentives effect related to the higher benefits generated for the system. Nonregulated revenues reached EUR 99 million, 19.7% higher versus last year. Nonregulated growth was mainly attributable to the greater contribution coming from Brugg and Tamini. The increase in revenues of the energy solution mostly related to LT Group and the entry into operation of the private section of the interconnector, Italy, France. International revenues were set to about 0 in accordance with IFRS 5 accounting standard referred to assets held for sale. Now let's go through operating cost analysis. Total operating costs stood at EUR 213 million, 16.1% higher than the same period of last year. Regarding regulated activities, the increase was mainly attributable to the insourcing of new competencies and increased level of activity, while nonregulated activities have been impacted mostly by higher cost for the purchase of raw materials related to Brugg and Tamini and by the LT Group contribution. Let me now analyze EBITDA, moving to Slide #11. Considering the previously mentioned effects, first quarter '23 group EBITDA reached EUR 500 million, 8.4% higher than the same period of last year. The increase was almost fully attributable to regulated activities, which contributed for about EUR 38 million versus the first 3 months of last year, showing an EBITDA of EUR 486 million in the first quarter of 2023. Let's now have a look to the lower part of the profit and losses, turning to the next slide. Depreciation and amortization amounted to EUR 187 million. The increase versus the same period of last year was mainly due to the impact of new assets becoming operational in the period. As a consequence, EBIT reached EUR 313 million, 6.7% higher versus the first quarter '22. We reported net financial expenses of EUR 32 million. The increase versus last year was mainly due to the rise of inflation registered in the period that impacted our inflation-linked exposure and to the increasing level of interest costs registered on the debt capital market. Taxes stood at EUR 81 million, EUR 5 million higher versus the same period of last year and essentially as a consequence to increase profit. Tax rate stood at 28.9%. As a result, group net income reached EUR 200 million, 4.4% higher versus the same period of last year. Moving to CapEx analysis at Page 13. In the first quarter of '23, total CapEx amounted to EUR 315 million, about 7% higher than last year and confirming the solid CapEx acceleration fully in line with the target set in the Industrial Plan. Indeed, we invested about EUR 288 million in regulated activities. Among the main projects of the period, it's worth mentioning the Tyrrhenian Link, the Elba-Mainland link, the Paterno-Pantano-Priolo in Sicily and the investments in stabilization devices, such as synchronous compensator for grid security. For what consumers CapEx categories, development CapEx represented 43% of total regulated CapEx. Defense CapEx stood at 13%, while asset renewal and efficiency was 44%. Nonregulated and other CapEx stood at EUR 27 million. This includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis, let's now move to the next slide. Net debt at the end of March 2023 stood at EUR 8,847 million, EUR 271 million higher than '22 year end level, mainly linked to the progressive settlement of net trade payables related to 2022. During the period, we generated an operating cash flow of EUR 368 million, thanks to which we were able to cover all the CapEx spending of the period. Let's now make a deeper analysis of our debt profile, moving to Page 15. Thanks to our efficient and proactive debt management approach over the last few years, at the end of March '23, fixed or floating ratio on gross debt stood at about 87%, while the average duration was about 5 years. As already mentioned in March, Terna signed contracts with the European Investment Bank for the second and third tranches of the EUR 1.9 billion loan for the Tyrrhenian Link. After the first tranche of EUR 500 million signed at the beginning of November, the loan represented there are 2 further tranches of a total amount of EUR 900 million for the construction and commissioning of the East branch and the West branch of the submarine cable. The loans have a duration of approximately 22 years from the first state of disbursement and are characterized by longer duration and more competitive in force than those currently available on the market. Thus, they are part of Terna's policy focused on optimizing its financial structure. Finally, on April 14, Terna successfully launched a fixed grade, single tranche bond issue for a total amount of EUR 750 million. The bond issued at a price of 99.281% with a spread of 70 basis points [indiscernible] maturity of [ 60 years ] and the payment of an annual coupon of 3.625%. Now before moving to the Q&A session, let me underline that also after the end of this first quarter, we're well on track on the execution of our plan, and we are confident to maintain our strategic path toward the energy transition also for the future. Thank you very much for your attention, and I am now ready for the Q&A session. Thank you.

[Operator Instructions] Our first question today is coming from Mr. Javier Suarez of Mediobanca.

First question is a follow-up after the last statement by CFO. I think that is hopefully a legitimate question. There are different change in the management team after the Annual General Meeting. The question for you is that if you envisage any significant change in the company's strategical path and any color on that would be much appreciated? That would be the first question. The second question is on the positive deviation versus, I guess, expectations this quarter. That is, I guess, due to higher collection of output-based incentives, you can at least quantify the amount of collected output-based incentive during the quarter, an update on your expectations for the full year? And the third question is on the recent document published by ARERA with the definition of the general guidelines for the implementation of the topic system in Italy from 2020 and '24. If you could give us your briefing of this document and your latest view on how this may impact Terna's business plans going forward?

Javier, let me start from the second question. I will come back to the first then. Well, see correctly, the results of the first quarter of '23 are impacted by higher output-based incentives with respect to what has been originally foreseen. This is something that we already analyzed at the end of '22. What I can confirm is that we have, during 2023, we do expect around EUR 300 million of output-based incentives, of which 2/3, so you can consider EUR 200 million more or less connected with MSD incentives. Regarding the progressive change in regulations were and the ROS implementation, let me say. First of all, let me remind you that we strongly believe that the introduction of ROS would be consistent with the part that we already follow toward this output-based approach. It's something that we discussed already. The more benefits we provide for the system, the more reward that we could obtain. As a consequence of that, in ROS approach, we see an opportunity to create further value for the system and shareholders because this could promote, let me say, an higher overall efficiency through new output-based regulatory measures. We're fully committed to do that, and we are happy about the step taken with -- by the authority with the resolution of output-based incentives. More in detail at the end of April, if I'm not wrong, it was the 20 of April '23, ARERA published specific resolution through which approved the [ 24-31 ] ROS regulated integrated text containing at this time, the general principle and the criteria for setting the allowed cost for that period. With this resolution, let me say, is an issue on the general principle, but it's important because with this resolution, ARERA confirmed the gradual approach for the presentation of the ROS regulation for seeing a first phase, so called, let me say, ROS-based framework, where at the beginning, the expenditure will allow in a substantial continuity with the current rules. And the overall expenditure will be split between low-money components and fast-money component according to the capitalization rate. I think that this is what we have in front of us up today. We do expect further clarification and further detail from the authority, and we will come back to you as soon as possible on this. Regarding your first question -- yes, no problem. Regarding your first question about potential impact coming from the change in the management, well, let me say, it's pretty simple. You can assume that Terna will continue to pursue the goal of driving the energy transition process, supporting the country in this, let me say, difficult task, always providing highly professional and state-of-the-art services and ensuring security of supply and efficiency for end users. As a part of the management team, I'm personally aware of the high level of responsibility that comes with this role. I believe that with the upcoming appointment of Giuseppina Di Foggia, who brings a wide range of technical competencies in developing and deploying critical networks and management skills and business vision, I'm more than certain that Terna will continue to expand and strengthen its role in helping the country to develop the electricity system of the future.

Our next question today will be coming from Mr. Stefano Gamberini from Equita.

I have a follow-up regarding Javier's question on the simplified TotEx. And in particular, the fact that the regulator will monitor the return on RAB, introducing this return on regulatory equity. So what is your comment on this measure? Could the regulator then share the extra return with clients? What do you expect on it? The second, regarding the aim of the government to require to the public companies to use the NIP funds and so which projects in your business plan could be financed through this measure? And could you receive some way a remuneration if you use this money, otherwise, we know that this should be deducted by the RAB? The last question regarding the net working capital that you experienced a positive impact of around EUR 1 billion at the end of the year as you underline EUR 300 million, more or less already -- were already restored in the first quarter. What is the path of the full reabsorption, full -- sorry trend, invest trend for this USD 1 billion when this will be fully reabsorbed? And the very finally -- sorry, as regard the storage, your 10-year development plan includes 7 billion -- sorry, 70 gigawatt of new installed capacity, renewable installed capacity, but also 11 gigawatts of utility-scale storages. Could you share with us if something is changing? What are the incentives that the government is working on in order to accelerate the investment in storages and in particular, could Terna be directly involved in storage sooner or later?

Well, Stefano, I hope to remember all the questions. Let me try, what's the first one.

I could repeat.

No, I know. I'm sure of that -- sure about that. So regarding first the implementation of TotEx remuneration on equity, I think that it's a little bit too early to provide comments. We don't have an as information. I said before, the resolution taken by the authority at the end of April is only an initial one, only general principle that are more or less in line that are confirming what we do expect before. But let me insist on this again. We are not concerned at all from the implementation of this new mechanism. At the very end we do expect to have benefits. Of course, we will have managerial effort, given that our ability to control the business in real time to provide details to be, let me say, to stick on the efficiency in our project in terms of respect to the margin, respect to the timing will be more crucial in the future, but I think that we are very well prepared to do that, that we say that let's wait the second part of the year, at the moment, we will receive more detailed information by ARERA, and we will more than happy to share it with you. Regarding the second question about the PMR implication for us. Well, let me say, we are talking only about residual implication. Our business case is remunerated business case on a regulated asset base. The moment we get a public incentives we deduct it from the RAB. So at current regulation, I do not see major interest in doing this. Of course, if we can provide our contribution to the realization of national critical infrastructure, we'll be more than happy to do that. There are some projects that have been identified that again, I consider this receivable option for us. Third question, net working capital. We are in the first quarter of '23. Normally in the first quarter, you have a deterioration of your working capital given that there are a lot of payments related to invested that have been accounted invoices that have been received in the last part of the year, so that standard deterioration of that. On top of that, we have the progressive absorption of the advantage that we get in -- that we got, sorry, in '22, coming from that pass-through regulatory items that we were not able to liquidate to our market counterparts due to lack of resolution that the authority was not able to take in time by the end of the year. Now they started. We do expect a progressive absorption on the amount that you have seen at the end of '22 during the second part of '23. Regarding storage, it's a critical item as the more we insist, the more we increase our expectation in terms of renewable, the more we will need some modulation, some storage, some stabilization on the system and storage will play a crucial role on this. Up today, from, let me say, formal managerial point of view, nothing changes, we are not allowed in play any role in storage. We will be more than happy to have a discussion about that to provide our ideas and contribution. I do expect that we could facilitate and provide a good contribution for country needs also on this extent.

Our next question is coming from Mr. James Brand of Deutsche Bank.

Congrats on another good set of quarterly results. I was just wondering on the incentives, you've got this EUR 300 million target. If you could give us a bit more detail in terms of what you're actually doing to deliver those incentives? And in particular, I know you've done very well on the targets, which involved reducing system costs, where you reduced the system cost quite substantially. I was just really interested in what you're actually doing there to reduce that cost? How you've gone about it?