Terna – Rete Elettrica Nazionale Società per Azioni (OTCPK:TERRF) Q2 2022 Results Conference Call July 28, 2022 10:00 AM ET
Company Participants
Stefano Donnarumma – CEO
Agostino Scornajenchi – CFO
Conference Call Participants
Enrico Bartoli – Mediobanca
Stefano Gamberini – Equita
Operator
Hello, and welcome to the Terna First Half 2022 Results Presentation. My name is Jess, and I’ll be your coordinator for today’s event. For the duration of the call, your lines will be on listen-only. However, there will be the opportunity to ask questions. [Operator Instructions]
I will now hand over to your host, Stefano Donnarumma, CEO to begin today’s call. Thank you.
Stefano Donnarumma
Good afternoon, everybody, and welcome to Terna’s First half ’22 results presentation. Before starting to analyze the features, I would like to share with you the latest main achievements. Firstly, let me remind you that on the 24th of March, we presented the update of ’21-’25 industrial plan driving the energy that foresees a €10 billion of investments, of which €9.5 billion of regulated investments confirming our role in driving a more complex, sustainable and innovative electricity system.
In this regard, the important steps for a work that have been done regarding authorization process and construction activities. In April, we concluded the public consultation on the West branch of Tyrrhenian Link. And in May, we have submitted to the Italian Ministry of Ecological Transition the request for the authorization to construct and operate the West branch.
Concerning international activities, we already announced that the LATAM, the consolidation process is ongoing. The signing was completed in April, while the closing of the deal for these multiple steps most of which in the second half of ’22. All operational activities are in line with the milestone set in the deal.
Regarding people, in April, Terna launched the Tyrrhenian Lab initiative, a project aimed to set up a training center in collaboration with the main universities of the three cities where the cables of the Tyrrhenian Links will end, namely Cagliari, Salerno and Palermo. In addition, in July, we launched the Terna Academy, new training research hub aimed to developing the expertise of employees within the group, in line with the goals set with the update of the Industrial Plan, Terna wants to strengthen and promote the new schemes through an innovative culture and training offer to support the energy transition.
Then I would like to confirm our strong ESG commitment in line with the upgrading Industrial Plan. Indeed, for the second consecutive year, the Company was included in the MIB ESG, the first Italian blue chip index dedicated to our environmental, social and governance best practices.
Terna has also once again been confirmed as one of the top companies at international level for sustainability best practice according to the EURONEXT VIGEO EIRIS that fits for good and S&P Global’s ESG index.
Finally, regarding shareholders’ remuneration. Let me remind you that in June, we paid €0.1929 per share as ’21 final dividend in line with the dividend policy presented in the updated Industrial Plan back in March.
After this brief introduction, let me give you the usual overview of the Italian electricity market. Moving to the next slide. As you can associate from this chart, in the first six months of the ’22, national demand was about 158 terawatt hours. an increase of 2.7% versus the same period of the last year, when national demand was about 154 terawatt hours.
I would like to underline that despite the challenging scenario related to the ongoing energy crisis, in the first half of ’22, electricity consumption returned to the values registered in the first half of 2019. Concerning national net total production, this stood at about 158 terawatt hours, 3.4% higher than the same period of 2021, mainly thanks to the contribution of wind and solar production.
Let me also underline that in the first half of ’22, renewable sources covered about 53% of the demand and about 57% of the national net total production. Now let me introduce the main features of the period. In the first half of ’22, group revenues and EBITDA were up by 6% and 4%, respectively, versus last year. which means €75 million and €37 million higher than the first half of ’21, while group net income was €398 million, about 4% higher versus last year.
Group CapEx stood at €661 million, an increase of 10% versus the same period last year in line with the targets set in the 10-year development plan and in our updated industrial plan. Despite this CapEx acceleration, net debt was below €9 billion. Now I leave the floor to the CFO, Agostino Scornajenchi, for a deeper analysis of the features of the period. Turning to the next slide.
Agostino Scornajenchi
Thank you, Stefano. Let’s start with revenues analysis. Total revenues in the first half of ’22 increased by 5.9% reaching €1,331 million, up by €75 million versus last year. The growth was attributable both to regulated and nonregulated activities, which contributed for €60 million and €15 million, respectively.
Let’s now go into the details of revenue evolution moving to the next slide. Regulated revenues reached €1,154 million, €60 million better than last year. The increase was mainly due to higher output-based incentive effects related to the higher benefits generated from the system, net of the WACC reduction recognized for 2022. Nonregulated and international revenues reached €177 million, 8.8% higher than last year. Nonregulated growth was mainly attributable to the increase in revenues of the Energy Solutions mostly related to LT Group and to the increased contribution coming from Tamini.
International revenues were set to zero in accordance with IFRS 5 Accounting Standard referred to asset held for sale. Now let’s go through operating cost analysis. As you can see in this chart, total operating costs stood at €384 million, 10.8% higher than last year.
Regarding regulated activities, the increase was mainly attributable to the insourcing of new competencies, while nonregulated activities have been impacted maybe by the LT Group recent acquisition.
Let me now analyze EBITDA, moving to the next slide. Due to the previously mentioned effects, first half ’22 group EBITDA reached €947 million, €37 million better than last year. The increase was mainly attributable to regulated activities, which contributed for about €41 million versus last year, showing an EBITDA of €923 million in the first half of ’22.
Let’s now have a look to the lower part of the profit and losses, turning to Slide number 12. Depreciation and amortization amounted to €340 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 €607 million, 4% higher versus the first half ’21.
We reported net financial expenses at €36 million. The increase versus last year was mainly due to the rise in inflation registered in the recent months, partially offset by increased capitalized charges and positive exchange rate effect.
Taxes stood at €161 million, €4 million higher versus last year, essentially due to increased profit. As a direct consequence, our tax rate stood at 28.1%. As a result, group net income reached €398 million, about 4% higher versus the same period of last year.
Moving to CapEx analysis. The first half of ’22, total CapEx amounted to €661 million, 10% higher than last year, confirming the solid acceleration aimed at enabling the energy transition process. Indeed, we invested about €629 million in regulated activities, among the main projects of the period, it is worth mentioning the Tyrrhenian, the Paterno-Pantano-Priolo in Eastern Sicily and the investment in stabilization devices as statcoms and synchronous compensators.
Among CapEx categories, development CapEx represented 37% of total regulated CapEx. DefenseCapEx stood at 16%, and while asset renewal and efficiency was 47%. Nonregulated and other CapEx stood at €31 million. This includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis net debt at the end of June ’22 was about €9 billion, about €1 billion lower than ’21 year-end level, mainly due to the hybrid issuance made in February that in line with accounting standards has been accounted as equity.
During the period, we generated an operating cash flow of €740 million. Thanks to which we were able to more than cover the CapEx spending of the period. Let’s now make a deeper analysis of our debt profile, moving to Page 15. In line with our prudent and proactive debt management approach, at the end of this first half, we registered a fixed over floating ratio on gross debt of about 86% at an average duration of about five years.
With the aim of confirming our leadership in the sustainable financial market, let me just remind you, the launch made in February of the first green hybrid bond from an Italian corporate for a nominal amount of €1 billion successfully accepted by the market as well as the ESG-linked term loan for a total amount of €300 million.
Thank you very much for your attention. Now before the Q&A session, let me leave the floor to Stefano for his closing remarks. Thank you.
Stefano Donnarumma
Thank you, Agostino. Let me conclude this presentation with some closing remarks. As you have associated from the previous chart, despite the challenging scenario, we registered a full recovery of the Italian electricity demand, which is now in line with the 2019 levels. Tragic events in Ukraine and the ongoing international energy crisis have made it necessary for the country to reduce the dependence on fossil resources, and to continue developing renewables in line with the targets set by the European Union.
In this context, the grid is a crucial enabling factor. And for this reason, Terna is continuing to boost its investments, confirming its institutional role on guaranteeing security of supply, system adequacy and quality of service.
As you know, a portion of our remuneration comes from the incentive mechanism linked to the achievement of specific targets. For example, the improvement of the quality of service and the increase in transport capacity between market zones. Thanks to the output based incentives, we are able to rebalance overall remuneration, maintaining our economical and financial stability as well as our ability to invest, providing a fair capital remuneration.
Our constant dialogue with the regulator will lead us to deliver a more efficient electricity system that will translate into lower costs for the final consumers. Finally, thanks to this solid set of results and our managerial actions, we are able to confirm all the provided guidance. Thank you for your attention. We are now ready to open the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Enrico Bartoli from Mediobanca.
Enrico Bartoli
Actually, I have three, two are more general. First of all, if you can update us on request of connections to your grid that you have been seeing in the past — in the past months from renewables. And considering also the political push for independence from Russian gas, if you are seeing an acceleration in the request and an effective impact on the simplification measures that the government has taken in order to spin up the authorization processes. Second question is on just an opinion if you — on your side, if you see any risk in the coming winter from, let’s say, possible cut of gas from Russia for the electricity system in Italy, considering that the reservoirs and the hydro production is at historical lows this year?
And the last one on results, if you can give us a figure on the output-based incentives, that you recorded in the first half and possibly an indication of what you expect for the second part of the year.
Stefano Donnarumma
Thank you for your question. I start on your first point request for connection. Sure, we cannot serve a continuous increase of request of connection. We are now at a level of more than 180,000 requests and I think that the increase is continuously and constant. We don’t see any acceleration at the moment, but in any case, it’s a continuous process.
In terms of authorization process and the installation — real installation. For sure, this year seems to be bigger than the year before, and the — not only last year, also the last two, three years. And so the — let me say that the rate of installations is increasing, and it depends also by a different and an accelerated process for authorization.
For the winter situation, we see that the stock of gas is increasing. And so I think that if the situation doesn’t change until October, I think that there will be — maybe enough gas in our Italian storage to go in front of the winter period. But in any case, we can suppose some suggestion or decision by the government related to the reduction of the demand.
I think that this is the most important point. But in any case, for the electricity system, we don’t see any particular impact at the moment. And so we are absolutely in line with the normal, let me say, conduction and normal driving of the system. For the output-based incentives, Agostino, if you want to…
Agostino Scornajenchi
Yes. Thank you, Stefano. We accounted something like €90 million of output-based incentive at the end of the first half of ’22 that is in line with the expectation that we do have for the year ’22. Consider that we have a total expectation on the business plan horizon as communicated in March of something close to €500 million, €490 million to be precise on three different categories.
Incentives to reduce bottlenecks among and within market zones that are the incentives that have been already posted during the first half of ’22. And also incentives for reducing ancillary service and market cost that will be posted starting from the second half of ’22.
Operator
The next question comes from the line of Stefano Gamberini from Equita.
Stefano Gamberini
Three questions also from my side. The first, regarding your financial flexibility in the new scenario with higher interest rates, you can face the acceleration of CapEx that you have in the forthcoming years in your plan and even ahead. If you can elaborate a little bit about this and on the other side also, if you can share with us what are the expectations you have in terms of increase of allowed WACC from 2024 onwards. And also regarding the [indiscernible] update is the 2.7% for 2023.
So, is something set or still to debate with the regulator. The second question regarding the storage, you said in the past that there could be some opportunities in the storage that could arrive in this month. Now the government has changed — sorry, left fortunately.
What could happen on this topic? Could we still expect some novelties or everything will be postponed for this reason. The last thing regarding steel renewable, the minister said that the authorization increased by 9 gigawatt, you just said that there are 180,000 requests. Could you elaborate a bit, and — sorry, another interesting thing is, according to the minister to 2025, the renewables could offset around 9 Bcm of gas consumption. So this means a reduction of production — electricity production through this way.
So what is your visibility on this part, on this topic? Do you see this acceleration? And in particular, I’m interested to see what are the main players that are now asking the authorization, still small entrepreneurs or are there some big players that are now asking the authorization that could drive this change in the trend of new renewables. Many thanks.
Stefano Donnarumma
Yes. Let me start with the first question on interest rate rise impact, potential impact on Terna cost of debt. Well, let me remind you that the rise of interest rates will not be translated in an immediate impact on our overall cost of debt, given that the duration of our debt is around five years.
In addition to that, you know that the percentage of debt represented by fixed rate liabilities is more than 80%, to be precise, 86%, so most of these issuances will not be affected by any interest rate hike.
On top of that, Terna implemented a proactive funding strategy in the context in which we executed already in ’21, but also in ’22, the prefinancing of the most relevant part of our funding needs. You have seen what we have decided to do also in the recent months. And at the beginning of February, we also issued hybrid instruments that provide us more than, let me say, sufficient flexibility not to be concerned for the evolution of interest rates in the mid short term.
On top of that, you know that the regulatory formula that we apply includes also a correction related to the evolution of interest rates. We are not yet to the degree that the trigger set from the authority for an anticipated review of the remuneration. But in any case, we do expect starting from the 1st of January ’24, this interest rate increase will be recovered in the tariff. So we don’t have any pressure. We do continue to operate in the financial market, looking at it more as an opportunity, not as an obligation.
We have something not far from €2 billion of available cash at the end of June. So we have huge flexibility for the coming months.
Agostino Scornajenchi
Then you are commenting about the storage and the possible position in the next future coming from authorities and institutions, also government position. So I think that on the storage, we have to consider that in the national plan is provided a number that is between 6 gigawatts and 10 gigawatts of storage totally for our country, and they are absolutely necessary, so the discussion that we had during the last months endorsed some proposal for new low and new decisions has to go on as to be defined.
And I think that, in any case, our electricity system and the energy system needs to reach some appropriate dimensions on this topic. I don’t know when it will start again and the discussions at the government. But I think we will push a lot in any case to continue in this direction.
Regarding renewables and who are the main actors. I think that at the moment, we can register a great number of requests, but in any case, they are of a certain dimension. So not so little dimension, but more in the direction of utility dimension are similar firms and private utilities and the general strategy regarding the energy transition process, I think it will not change. Maybe also it will accelerate, it’s absolutely important to guarantee the substitution of a certain part of the gas resources with renewable installation, the possibility are all on the table. Requests are more than enough.
The authorization process is, in any case, accelerated in front of the past condition and in comparison with the last year. And so I think this kind of strategy will be continued.
Operator
There are currently no questions in the queue. [Operator Instructions] The next question comes from the line of Stefano Gamberini from Equita.
Stefano Gamberini
Yes. There are no other questions. Just a clarification, an update regarding the procurement situation. you see a worsening in the procurement for your investments? Or — and you can give us an update of the already procured investment you have for this year and eventually also for next year?
Stefano Donnarumma
I’d consider that at the moment, we are near to 86% of coverage for our plan, so in terms of procurement. So we don’t see any particular difficulty coming from this situation at the moment. So I think for us, no problem on this .
Operator
There are no further questions in the queue. So I will hand the call back to your host for some closing remarks.
Stefano Donnarumma
Okay. Thank you to everybody for your attention.
Operator
Thank you for joining today’s call. You may now disconnect your lines.
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