Terna S.p.A. (OTCPK:TERRF) Q3 2023 Results Conference Call November 8, 2023 10:00 AM ET
Company Participants
Omar Al Bayaty – Head of Investor Relations and Sustainability
Francesco Beccalli – Chief Financial Officer
Operator
Good afternoon, ladies and gentlemen, and welcome to Terna Nine Months 2023 Consolidated Results Presentation. At this time, all participants are in a listen-only mode. Please be advised that today’s conference is being recorded.
I’d like to hand the conference over to our host speaker today, Mr. Omar Al Bayaty, Head of Investor Relations and Sustainability. Please go ahead, sir.
Omar Al Bayaty
Good afternoon, everyone, and welcome to the Terna nine month ’23 results presentation. The call will be hosted by our CFO, Francesco Beccalli. Following the presentation, we will have the Q&A session. We kindly ask you to send any questions to investor.relations@terna.it. Please, Francesco, the floor is yours.
Francesco Beccalli
Thank you, Omar, and good afternoon, everyone. Before starting, let me say that I’m really proud to take on this new challenge and I would like to thank the Company for the opportunity given that I’m taking with a lot of energy, interaction and commitment fully aware in my experience of Terna’s [indiscernible]. Now let me show you main achievements of the period. Regarding regulated activities, let me say that we are really well tracked for what concern authorization processes and procurement of the main projects included in our strategic plan. Indeed, in September, the Ministry of Environment and Energy Securities has authorized the Western range of the Turanian link and the final project of the SEC oil 3.
As you know, the Turanian link is a direct current submarine power line that will connect Sardinia, CCD and [indiscerrnibe]. It is a strategic project for the Italian Pensula system within the framework of the energy transition targets set by the national integrated plan for energy and climate, the so-called MIX. It will contribute to achieve the phase-out of coal by increasing the transport capacity, enhancing the security, adequacy and flexibility of the National Electricity Transmission WiT as well as promoting the integration of the domestic market and renewable sources. For what concerns the [indiscernible], the project aims to connect Sardinia, Corsica and Pascal with a total capacity of up to 400 megawatts. Once operational, [indiscernible] will contribute to strengthen the European electricity market, promote the development of renewable services and increased transport capacity between Central and Northern Italy, CCD and Sardinia.
This will bring a great reliability and security of the national transmission WiT and the reduction in costs for dispatching service market. In addition, regarding procurement, at the beginning of September, Terna awarded premium in the contract for the supply and lane of submarine and underground power cables of the Adriatic Link, the 1,000-megawatt HBVC connection between [indiscernible] regions. The cable supply is another milestone in the rapid implementation of the project. Moving to our sustainability achievements. Terra reaffirmed its status as a global sustainability leader.
Indeed, this is the 13th consecutive year that the Company has been listed in the stock of global ESG leaders index, which selects the best companies globally based on ESG best practices. Finally, regarding shareholder remuneration, today, Board of Directors approved 2023 interim dividend of $0.116 per share to be paid at the end of this month, up by 8% compared to last year, in line with our dividend policy.
After this brief introduction, let’s now look at the latest trends regarding electricity demand in Italy turning to the next slide. As you can see from this chart, in the first nine months of 2023, national demand was about 233 terawatt hour, recording a decrease of 4% on last year, when national demand was set at 242 terawatt hours. The reduction in electricity demand in the first nine months of the year is mainly due to the decrease in industrial consumption and the increase in average temperatures.
In the first nine months of 2023, renewable services covered about 37% of national demand, 5 percentage points higher than last year. National’s net total production stood at 197 terawatt hours, about 7% lower than the same period in 2022. Despite that, let me highlight the remarkable increase in hydro production, which grew by 29% compared to the first nine months of last year. Moreover, in the considered period, the renewable services covered about 44% of the national net total production. Now let’s move to the main figures of the period.
In the first nine months of 2023, group revenues and EBITDA were up by 13% and 10%, respectively, versus last year, which means €265 million and €144 million higher than the first nine months of 2022. We also reported a group net income of €642 million with an increase of 9% versus last year. Group CapEx was set at €1,434 million, recording a double-digit increase of 39% versus the same period of last year, reconfirming our solid capital acceleration to serve the system needs and enable the energy transition. To support this acceleration at the end of September 2023, net debt stood at €9.5 billion versus about €8.6 billion at 2022 year-end. Now let me give you a deeper analysis of the figures of the period.
Moving to Slide number 8. Let’s start with the revenues analysis. Total revenues in the first nine months of 2023 increased by 12.2%, reaching €2,247 million, up by €255 million versus last year. The growth was attributable both to regulated and non-related activities, which contributed for €184 million and €71 million, respectively. Let’s now go into details of the revenues evolution, moving to the next slide.
Regulated revenues reached €1,904 million, €184 million better than last year. The increase was mainly driven by the investment acceleration made on the national win and the higher output-based incentive effect related to the higher benefits generated for the system. Non-regulated and international revenues reached €343 million, 25.9% higher than last year. Non-related growth was mainly attributable to the increase in revenues coming from Brook and Tamini and to the higher contribution of the energy solutions, mostly related to the [indiscernible]. International revenues were set to zero in accordance with the IFRS 5 accounting standard referred to asset and for sale.
Now let’s go through operating cost analysis. As you can see in this chart, total operating costs stood at €691 million, 19.1% higher than last year. Regarding originated activities, the increase was mainly attributable to the insourcing of new competencies and increased level of activity, while non-regulated activities have been impacted mainly by higher cost for the purchase of raw materials and services related to group and LPG. Let me now analyze EBITDA. Moving to the next slide.
Due to previously mentioned effects, [indiscernible] group EBITDA reached €1.556 billion, €144 million better than last year. The increase was mainly attributable to regulated activities, which contributed for about €132 million more versus the same period of last year, showing an EBITDA of €1.508 billion in the first nine months of 2023. Let’s now have a look to the lower part of the P&L, turning to Slide number 12. D&A amounted to €577 million. The increase versus year was mainly due to the impact of new assets becoming operational in the period.
As a consequence, EBIT reached €990 million, 9.3% higher versus the result of the nine months of 2022. We reported net financial expenses at €UR 81 million. The increase versus last year was mainly due to the cost of the new financings and to the increase of interest rate, partially mitigated by the lower level of inflation in the period, the increase in capitalized financial expenses and the higher financial income on admirable liquidity. Taxes stood at €263 million, €25 million higher versus last year, see to increase profit and positive one-off items recorded in nine months of 2022. As a consequence, our trust rate stood at 29.1%.
As a result, group net income reached €642 million, 9.3% higher versus the same period of last year. Now moving to CapEx analysis. In the first nine months of 2023, total CapExamounted to €1,434 million, 39% higher than last year, confirming the solid acceleration in line with our institutional role of the country. Let me underline that this is a record-breaking level of CapEx for the first nine months of the year. In this, we invested about €1.36 billion in regulated activities.
Among the main projects of the period, it is worth mentioning that Iranian Lean, Madian, the Albanian connection and the investments in stabilization devices as syncreopensato. Among CapEx categories, development CapEx represented 56% of total regulated cars. The fee CapEx stood at 12%, while asset renewal and efficiency was 32% of the total. Non-regulated and order CapEx stood at €74 million. This includes capitalized financial charges and other investments.
Regarding net debt and cash flow analysis. Net debt at the end of September 2022 was about €9.5 billion, around €900 million higher than 2022 year-end level, mainly as a consequence of the investment in the period and the payment of the 2022 final dividend made in June. During the period, we generated an operating cash flow at €1.168 billion, thanks to which we were able to cover most of the CapEx spending of the period. Let’s me keep an analysis of our debt profile, moving to Page 15. In line with our cautious and proactive debt management approach aimed at maintaining a solid financial structure.
At the end of this first nine months, we registered a fixed floating ratio on gross debt of about 87% and an average ratio of about six years. Morule, Terna aims to establish itself as one of the leaders in the sustainable financial markets. This strategy has been confirmed also during the first nine months of this year and in the process of updating its green bond framework, Terna achieved by Moody’s in late October, the highest possible score in the second-party opinion, the sustainability policy score 1. In a sense, let me remind you that in July Terance a 10-year fixed rate month for a total amount of €650 million. The issuance was very successful on the market with an order book at peak of approximately 4x the offer amount and the final plant of 90 basis points over the mid-swap.
The Green bond will have a duration of 10 years and will pay a coupon of 3.875%. Moreover, let minimize the last May Terna signed an easing revolving credit facilities for a total amount of €1.8 billion. The transactions rose Terma to count on a liquidity appropriate to its current rating, further strengthening the Company’s financial structure. With regard to bank debt, two EIB loans totaling €900 million for the construction and commissioning of the East and West section of the Turanian link project, signed March were grown in June and in October, respectively. To conclude, given the strong set of results for the period, we confirmed once again all the guidance for 2023, waiting for the new business plan that we expect to present by the first quarter of 2024.
Thank you for your attention. We are now ready for the Q&A session.
Question-and-Answer Session
A – Omar Al Bayaty
Thank you, Francesco. Let’s start the Q&A session. We received a strong set of questions. We have grouped some of them together. First set of question is related to the nine-month figures.
The first point is related to the output base incentives, and we received three main questions on that item. How many outbase incentives did you accounted in nine month ’23? Do you confirm about €300 million expectation for the full year? And what do you expect for the coming years?
Francesco Beccalli
Well, auto-based incentives recognized this year are about €200 million related to restructuring services market efficiencies, which are connected to cost savings related to the reduction of the volumes traded on the market and to internal incentives connected to the creation of additional transport capacity among Italian pricing zones as regulated by the resolution €567 million of 2019. In 2023, we are assuming an amount of outdoor based incentives of about €300 million, mainly related to dispatching service market efficiency incentives. For the remaining years of the business plan, we expect AutoBased incentives contribution to continue consistently with the performance we will register on the relevant KPIs.
Omar Al Bayaty
So now let’s move to cost of debt and financial charges. First question, can you give us more details on actual cost of debt and our expectation for full year ’23.
Francesco Beccalli
Sure. The cost of debt at the end of the first nine months of 2023 was 1.7%. As to the cost of debt for the full year 2023, we expect it to be slightly below 2%, reflecting the sharp interest rate increase observed in the last month associated with the ambitious CapEx plan of the Company.
Omar Al Bayaty
And can you give us more color on financial charges in nine months, ’23?
Francesco Beccalli
In the first nine months of the year, net financial charges were equal to €81.2 million, which is higher €25 million, more or less higher than nine months 2022. The increase in net financial charges is mainly attributable to the increase of interest rate, as we were also pointing out in the presentation, which affects the cost of the new debt together with the floating portion of the existing one so — and is partially mitigated by the lower level of inflation in respect of 2022. On top of it, let me also highlight the underlying the increase in capitalized financial expenses and higher financial income on available liquidity, which both contributes to diminish the cost of debt for the period.
Omar Al Bayaty
And let’s have a look to guidance and outlook. Any upside risk for guidance ’23?
Francesco Beccalli
As stated during the presentation, we confirm once again all the guidance for 2023.
Omar Al Bayaty
And can you give us any comments about ’24 outlook.
Francesco Beccalli
Unfortunately, as for the 2024 guidance as well as previous year, we will wait for the discussion which we are having at the moment regarding the new business plan that we foresee with event as already stated by the first quarter of next year.
Omar Al Bayaty
Now let’s move to execution. Could you provide us any updates or details on project execution status?
Francesco Beccalli
Sure. I can say that we are on the right path regarding the utilization process on structure activities and procurement in line with the milestones set in the updated and industrial plan. Regarding the authorization in particular, almost all the budget CapEx has already been authorized. Forward contract procurement, potential shortage of materials do not represent reentry for Terna, given that we have already obtained almost all the procurement needs to the end of 2023, also thanks to [indiscernible].
Omar Al Bayaty
Now let’s move to a more technical one regarding Sedo and CPI. Do you have any comments regarding the flat trend versus CPI evolution?
Francesco Beccalli
Well, the only comment that I can make to this extent is that we observed that historically, the flat trend is less volatile than CPI. But this is true both on the upside and on the downside.
Omar Al Bayaty
And let’s move to dividend policy. Can you give us any updates on dividend policy?
Francesco Beccalli
First of all, let me say that our current dividend policy is fully sustainable and is based on maintaining the right balance between share remuneration and the sustainability of the investment plan. I believe that this needed guarantees at and predictable growth as well as full visibility over the plant. Any other considerations about dividend policy will be part of the discussion of the new business plan that we foresee to present as we stated, the quarter of 2024.
Omar Al Bayaty
And now let’s move to regulation, with several questions regarding the recent resolution of the authority regarding the ROS. Are you able to give us any comments about the resolution concerning the implementation of criteria of the ROS regulation?
Francesco Beccalli
Sure. With the resolution 497 published at the beginning of this month, ARERA establishes the application criteria for the ROS bad regulation, introducing the following regulatory measures, which represents an improvement compared to the current measures. First of all, starting from 2024, investments and with effect from 2025, depreciation on assets will be recognized in the year following the ending two operations.
Let me remind you that within the current regulatory framework, we said, in the tariff BRP, it is recognized the depreciation of assets that came to service up to 2022. Moreover, let me side the revaluation based on the playoff for the first four years of assets under construction, which are currently not revalued and the application of the remuneration rate of the first two years, also to year three and four.
Furthermore, this rate is extended for the first six years for a specific subset of capital incentive assets. which are typically above INR 1 billion. Finally, the results of the [indiscernible] of requesting the activation of the corrective data factor, the account to account for operational cost increases related to new activities and changes in the scope of managed assets. With the reference to the capitalization rate, let me also add that the latest resolution provides to determine for the years 2024 and ’25, based on the average rate of PS2021, ’22, ’23, and those are historical efforts. Well, and year, ’24 and ’25, which I set prospective.
Further capitalization rate of the years ’26 and ’27 are proposed using the average rate between 2023 and 2027, with update or reopening pose. The assessment of the impact coming from this new growth deferment will be part of the discussion of the new business plan, obviously. So we will give you more color on this in due course.
Omar Al Bayaty
So now let’s move to international strategy. Should you please give us a comment on future steps in international strategy, i.e., U.S. commission markets?
Francesco Beccalli
Well, let me start with an update on the consolidation process of LATAM activities that will allow them to maximize the value of the international portfolio, optimizing the group’s risk return profile. At the same time, we will continue to count for other opportunities. This may also be with partnerships and will be selected incuiding a low-risk profile and limited capital absorption leveraging of the new developed like [indiscernible]. Our focus will be addressed on markets with either profile and low country as, for example, United States that you’ve mentioned, we will take a gradual approach offering and leveraging our new outlook in the design and operation of infrastructure.
Omar Al Bayaty
We received a question regarding the financeability of CapEx plan in current rate environment and balance sheet headroom. Can you confirm on that in this context, do you plan to issue another hybrid?
Francesco Beccalli
Well, first of all, let me confirm that as already communicated to the market last year, we are committed to maintain our screen risk profile and are comfortable with current solid investment-grade rating area. The [indiscernible] of February 2022 is the first evidence of this approach. Even though, so far, our financial ratios are indeed comfortably consistent with our rating, we decided to the market enough to be from opportunity market conditions and so to mitigate an issue that will only materialize years later and that we will continue to monitor and keep under control.
Our funding strategy going forward is to spread the hybrid issuances over time in order to optimize the portion of it capital within our capital structure at any time. Therefore, we will come back to such markets in the coming months next year, as soon as it will be necessary and with the amount needed in order to protect our credit profile, potentially seeing our four to five weeks capacity. Finally, let me highlight that we are also open to rely on other tools in order to maintain our financial standards.
The agreement for the disposal of our international activities that we were discussing before, and then we signed at the end of May 2022 is an evidence of our willingness to focus on our connectivities and to maintain the leverage under full control. Let me finally tell you that we have several levers at our disposal, and we will choose the most efficient ones from time to time.
Omar Al Bayaty
We received also some questions regarding Terna potential involvement both in offshore wind and storage. Can you elaborate it?
Francesco Beccalli
Of course. Our current CapEx plan does not include any investments related to offshore wind and storage. Let me be clear on that. Grid collections request from large-scale offshore wind power plants have significantly increased recently. We will continue to monitor the evolution of this technology and any other consideration about this will be part of the discussion of the new business plan.
For workforce storage it should be developed through market options and Terna cannot be directly involving. We strongly [indiscernibe] the importance of storage development for the LCC system, and we will actively more into its evolution.
Omar Al Bayaty
We received a couple of follow-on questions. The first regarding regulation and the second regarding working capital, starting from the first one, what’s your expectation about WACC value for ’24 tariff?
Francesco Beccalli
Well, I’m stating the obvious when I say that for 2024 final WACC value, we have to weigh the resolution of the authority to be published by year-end. Having said that, at the current stage, we are looking at an estimate work variation about…
Omar Al Bayaty
Some details on working capital dynamics for nine month ’23? And what are your expectations for the full year ’23?
Francesco Beccalli
In the first nine months of 2023, working capital reports a decrease of about €204 million compared to the end of last year. These results that had a negative impact on net financial debt is mainly due to on one the reduction of about €96 million in net trade payables. We are talking about net pass-through energy payables due to lower debt from the essential plants for the security of the electricity system partially offset by lower credits from the cost of procuring resources on the dispatch and service model.
On top of it, we also had an increase of about €214 million in net receivables resulting from regulated activities, mainly due to space market in sensing mechanism revenues and to test internal incentive levels, which will be collected in accordance with timing defined in the resolution itself. Most various items are partially offset by an increase of net tax liabilities of about €128 million due to the increase of income tax expenses for the period and of the net VAT payer.
Please bear in mind that in 2022, Terna benefited, as we already discussed, of a positive cash flow effect deriving from net working capital decrease. The expectation for the full year 2023 is to reabsorb at least partially the benefits coming from the pass-through energy items booked at the end of 2022.
Omar Al Bayaty
Thank you, Francesco. So we covered all the points.
Francesco Beccalli
Thank you, Omar. Thank you, everybody, for attending this call and see you on the next business presentation.
Omar Al Bayaty
Thank you.
Francesco Beccalli
In the first quarter of 2024. Goodbye, everybody.
Omar Al Bayaty
Bye.
Operator
Thank you. This concludes today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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