Terna Rete Elettrica Adr

Hello and welcome to the first quarter consolidated results conference call. 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 listener only. However, there will be the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question at any time. If at any point you require assistance, Good afternoon everybody.

and welcome to TERNA first quarter 2022 result presentation. Before starting to analyze the figures, I would like to share with you the main latest achievements. Firstly, let me remind you that on the 24th of March, we presented the update of our 2125 industrial plan driving energy that foresees 10 billion of total investments. This includes 9.5 billion of regulated investment aimed at developing, modernizing and strengthening the national transmission grid, confirming our role in driving the energy transition and enabling an even more complex, sustainable and innovative electricity system. From a financial standpoint, we continue to enhance our financial structure. In this regard, Let me underline that in February we successfully launched the first green non-convertible perpetual subordinated hybrid bond for a nominal amount of €1 billion. Regarding our rating profile, I would highlight that in March Standard & Poor, Moody's and Scope Ratings confirmed Terna's long-term rating and BBB+, with a positive outlook, BWA2, with a stable outlook, and A- with a stable outlook, acknowledging the stability of the updated 21-25 industrial plan. As already announced, at the end of April we signed an agreement with CDPQ, a global investment group, for the sale of about 100% of Terna Group's portfolio of power transmission assets in Brazil, Peru and Uruguay for an equity value of over 265 million euros. This transaction will allow Terna to focus on domestic core activities and refocus in low-risk markets with an attractive growth potential. The closing of the deal is planned in the second half of 2022. After this brief 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 three months of 2022, national demand was about 80 TWh, with an increase of about 3% versus previous year, when national demand was 78 TWh. As you can see in this chart, in the last 12 months we registered a full recovery of the national demand, which returned to 2019 levels, recovering the decline related to the COVID-19 pandemic. Moreover, It is important to underline that, in the first quarter of 22, renewable sources covered about 29% of the demand, with a strong increase in wind and solar production. Concerning national net total production, they stood at 71 TWh, 6.7% higher than the same period of 21, mainly thanks to the solid contribution of wind, hydro and solar production. Renewable cover about 33% of total generation. Now, let's move to the first quarter 22 key numbers at page 6. In the first quarter of 22, group revenues and EBDA were up by 5 and 3% respectively versus last year, which means 29 and 13 million higher than first quarter 21. while group net income was 192 million, 1% higher versus last year. Moreover, group capex stood at 293 million, 21% more versus first quarter 21, confirming the robust capex acceleration in line with the implementation of our updated industrial plan. At the end of March 22, net debt stood at 8.7 billion, versus about 10 billion at 21 year end. Let me remind you that 2021 results have been restated for international activities held for sale according to IFRS 5 accounting principle. Finally, at the end of April, Ternas AGM approved the total dividend for 21 of 29.11 euro cent per share including the interim dividend of 9.82 euro cent per share already paid in November 21 and the final dividend of 19.29 euro cent per share to be paid in June 22, all in line with the dividend policy announced in the updated industrial plan. Now, let me make a deeper analysis of first quarter figures turning to the next slide. I am now at page 8. Let's start with revenues analysis. Total revenues in the first quarter of 2022 increased by 4.7%, reaching 644 million, up by 29 million versus last year. The growth was mainly attributable to regulated activities, which contributed for 25 million and to the successful integration of LT Group, one of the main Italian operators in the maintenance of solar systems, acquired in October 21. Let's now go into the details of the regulated and non-regulated revenues evolution, moving to the next slide. Regulated revenues reached 562 million, 25 million better than last year. The increase was mainly due to the ongoing investment acceleration made on the grid and output-based incentives effects. Non-regulated and international revenues reached 82 million, 4.3% higher than last year. Non-regulated growth was mainly attributable to the overall contribution coming from the already mentioned integration of LT Group, while international revenues were set to zero in application of the already mentioned IFRS 5 accounting standard and referrer to asset health for sale in Latin America. Now, let's go through operating cost analysis. As you can see in this chart of page 10, Total operating costs stood at 183 million, 9.4% higher than last year. Regarding regulated activities, the increase was mainly attributable to the insourcing of new competences, while non-regulated activities have been impacted by LT Group full integration. Let me now analyze the BDA, moving to the next slide. Due to the previously mentioned dynamics, first quarter 22 group EBDA reached 461 million, 13 million better than last year. This increase was mainly attributable to regulated activities, which contributed for about 15 million versus last year, and showing an EBDA of 448 million in the first quarter of 22. Let's now have a look to the lower part of the profit and losses, turning to the next slide, page 12. Depreciation and amortization amounted to $168 million. The increase versus last year was mainly due to the impact of new assets becoming operational in the period. And as a consequence, EBIT reached $294 million, $8 million higher versus first quarter 2021. We reported net financial expenses of $24 million. The increase versus last year was mainly due to the rise in inflation registered in the last month. Taxes stood at 76 million, 1.5 million lower versus last year, essentially due to non-deductible costs registered in the same period of 21. As a consequence, tax rates stood at 28.3%. As a result, group net income reached 192%, 1% higher versus the same period of last year. Moving to CapEx analysis, In the first quarter of 22, total capex amounted to 293 million, 21% higher than last year, showing a double-digit acceleration to drive the energy transition process and to deal with the ongoing energy crisis. Indeed, we invested about 281 million in regulated activities. Among the main projects of the period is worth mentioning the terrain link, the Paternò Pantano Prioglio and Esther Sicili, and investment in stabilization devices as synchronous compensators. Among CAPEX categories, development CAPEX represented 38% of total regulated CAPEX, defense CAPEX stood at 15%, while asset renewal and efficiency was 47%. Non-regulated and other CAPEX stood at 13 million, This includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis, at page 14, net debt at the end of March 22 was about 8.7 billion, about 1.3 billion lower than 21 Iran levels, 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 371 million, thanks to which we were able to more than cover the capex spending of the quarter. 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 quarter we registered a fixed overfloating ratio in gross debt of about 86%. and an average duration of about five years. As already mentioned, with the aim of confirming our leadership in the sustainable financial market, in February 22 we successfully launched the first green hybrid bond from an Italian corporate for a nominal amount of 1 billion euro. The issuance was very successful in the market with an order book at peak over 4 billion euro. In the same period, we also signed a bilateral ESG-linked term loan for a total amount of €300 million, with a term of two years and an interest rate linked to Terna's performance in specific ESG indicators. Thank you for your attention, and we are now ready for the Q&A session.

If you would like to ask a question, please press star 1 on your telephone keypad. Please ensure your line is unmuted locally as you will be advised when to ask your question. So once again that's star one if you would like to ask your question. And the first question comes from the line of Harry Wybird from Bank of America. Please go ahead.

Hi there, good afternoon everyone. Just two from me. The first is on the cost of debt going up and inflation. If I remember correctly I think there's a Just one bond that you have that's inflation linked. Perhaps you could remind me how big it is because I'm afraid I can't remember. But I think it was quite small. And what's the precise inflation linkage of that bond? And is there any other inflationary impact on your interest costs, i.e. like your floating rate debt getting more expensive or is it just that single bond? Inflation-linked bond that drove the increase in debt costs. So that's the first one. And the second one, I think the last grid development plan was published last July. Can you just remind us when the next one is going to be published? And are you able to give any kind of sense as to what, you know, the last one I think had about a 20% increase in expenditure in it. I'd be interested if you could give us any kind of flavour of Thank you for your question.

First one, you're right, there is a residual bond expiring in September 23. The total nominal amount of the bond is 500 million euro and this explains most part of the increase of the cost of debt related to the evolution of inflation. Regarding our next development plan, this will not take place in 2022 because it will happen every two years. So this is something that we will discuss together starting from the beginning of 2023.

Okay, got it. And maybe just, sorry, one follow-up on the Inflation Link Bond. When it matures in September 2023, would you expect or would you intend to replace that with another Inflation Link Bond or will you go back to having non-inflation links?

I don't think so, but as usual, we will evaluate market condition at the time we will have the need to do something. Okay, many thanks.

The next question comes from the line of Stefano Gamberini from Equita. Please go ahead.

Good afternoon, everybody. Three questions from my side. Regarding during the presentation of the business plan, you underlined that you could close A deal in the storage business for the coming months. Could you give us some color about this and if this deal could have some significant impact on your EPS or not? The second, taking into account the current inflation expectations, what could be the rub deflator that we could expect in 2023 or in 2024 and the upside compared to The trend you have in your business plan. Finally, regarding working capital, I noticed an improvement in the first quarter. While seasonally speaking, usually the first quarter was negative. Could we expect a positive working capital year-end despite all the measures from the government to reduce the bill for final customers? Or do you expect... Thanks a lot.

Let me start from the last question. Evolution of working capital is in line with what we've announced in the past. You remember that we suffered a little bit an increase of working capital due to some lateral effects connected with the beginning of the first pandemic cycle in spring 2020. in which we were forced to ask suddenly a relevant amount of auxiliary services with a relevant increase of uplift and I already announced at the time that this would have been reabsorbed in a couple of years and we are there. For the rest you know the first quarter of the year is an excellent quarter in terms of cash generation given that there are no dividends and no tax to be paid. This explains the improvement of the period but in any case we are talking about some seasonality effect and we will follow on on this in the coming quarter. Regarding your second question, we do not have info about the future RAP deflator that the authority would introduce in the future. Today, the RAP deflator that we expect is in line with the inflation rates that we have seen at the moment we have prepared the business plan that was beginning of this year. Regarding storage, Storage capacity is something that is needed for the electricity system in order to cope with the energy transition process. The more renewable you will install in the country, the more storage facility you will need. It is not so important to understand who will build these new facilities. It's important that someone will have to do that. And we are here to provide The maximum support in order to have this infrastructure realized.

Thanks.

We currently have no questions in the queue. So as a reminder, please press star one if you would like to ask a question. And the next question comes from the line of Bartek Kubicki from Societe Generale. Please go ahead.

Thank you. Hello and good afternoon. Two quick questions. If we look at this international transaction, can you give us some indications related to valuations in terms of multiples, implied PE or implied EVABDA? And secondly, I guess you will start or you have maybe already started your Totex discussions. Can you actually give us some sort of Timing, when can we expect first indications how Totex will look like for sort of consultation papers from the regulator regarding the new regulatory regime? Thank you.

Well, as you know, we have concluded, we have signed an agreement for the disposal of more or less 100% of our Latin America portfolio for a total equity value of around 265 million euro and this will allow us to book a potential capital gain at closing given that the closing will take place with a different time frame in the coming months with a potential capital gain, total capital gain of around 60 million euro. The transaction is fully in line with market municipal for similar transaction of this period and we have also take benefit from a positive FX rate of the latest weeks. Regarding your second question, application of TAUTEX, the first potential application of TAUTEX is something that probably will take place starting from the next regulatory cycle. But you know that something is already happening, given that the authorities already confirmed a tendency announced already in the past to move from a full input-based methodology in which you are basically paid on the base of the money that you spend through a more output-based oriented remuneration policy. This is something that is taking place already today. Given that, if you look at the total output-based contribution of the previous business plan, we were talking of around 200 million euros in five years and now we are talking about two times this amount. That is the update of the business plan that we just presented to the market. So something has already happened. And as said several times, we believe that the authority will start with a sort of progressive introduction of the output-based methodology that for sure will take more and more space in our remuneration scheme in the coming years.

Okay, but do you think in the next regulatory cycle the full TOTEX will be implemented? Meaning you will be able to show some TOTEX outperformance or potentially TOTEX underperformance if things go wrong? Or it's still too early? 2024 is too early for that.

I think there are details about the regulatory mechanism. will be part of the discussion, a specific consultation between ARERA and operators that will take place already in the second part of 22, but it's too early to imagine which could be the precise mechanism that the authority will apply.

Okay, thank you very much.

The next question comes from the line of Roberto Ranieri from Intesa San Paolo. Please go ahead.

Yes, good afternoon everyone and thank you for the presentation. I have two questions, please. The first one is a clarification. I didn't catch when do you expect the Latinas disposal to be completed. My second question is on inflation and cost inflation. Did you have any Any negative impact on your CAPEX for the project you are executing and do you expect this to have any impact on your major projects in the future? Thank you very much.

Well, regarding your first question, we have signed an agreement with CDPQ in the latest days and we will perform four different closings, given that we are talking about different companies and different assets that we have in Brazil, Peru and Uruguay. More or less 50% of the deal will be closed already in 2022, somewhere before or immediately after Summer 22 and the second part that is connected to the completion of the construction of an infrastructure called Linea Verde 1 in Brazil in which we will have to complete the construction and after we will close the deal with the counterpart after the completion will take place in a second moment. Regarding inflation, Let me say, we do not have any impact coming from inflation, or maybe we have some cash impact because we have to pay a little bit more, the goods that we buy, but we have more than enough financing flexibility to do that. But in the mid-long term, inflation will provide us some benefits, given that Inflated cost will be part of our remunerated RAB and remunerated OPEX, so in the long term we will take an advantage from the increase of inflation. So we are not concerned at all for this.

Okay, thank you very much.

You're welcome.

The next question comes from the line of Stefano Bisatto from Credit Suisse. Please go ahead.

Yes, hi, good afternoon. Three questions for me, please. The first one on regulation. If I remember correctly, the latest review has introduced the possibility of an update of the allowed return every year based on some trigger mechanism. Do you have any expectation or an estimate of where the allowed return could go in 2023, given how fundamentals have moved in the last five months? The second question is on OPEX evolution, if you can give us some color on the increase in OPEX for the regulated activities. And finally, one clarification on the capital gain from the LATAM asset disposal. Are you planning to distribute any of that capital gain as dividend? Thank you.

Let's do it again.

So, regarding your first question, I think that you refer to the potential triggering mechanism in case of change, massive change in the macroeconomics fundamental behind the WAC, the allowed WAC. Well, we are not there. We do not expect to be a trigger. We do expect that remuneration will remain, even if we align with the current one, we are still not there. If we will be closer, we will inform the market, of course. OPEX evolution is simply a consequence of the implementation of our business plan. Let me remind you that this company was spending only a few years ago something around 700-800 million per year. Now we are two times, respect that amount. And this happened without any massive, let me say, increase We have not doubled our organization, we have not doubled our operational cost. On the contrary, if you look at the ratio between the asset that we have and the cost, if you make a simple calculation between the total asset and the cost to manage the asset, the marginal impact is lowering, it's not increasing. Regarding capital gain, it is part of our, let me say, I don't want to say day-by-day business because this is something that is not happening every day, but we're not going to modify our dividend policy that was already announced in the update of the business plan. It's confirmed and we're not going to change it.

Thank you very much.

The next question comes from the line of Emanuele Ogioni from Capitolo Gioffro. Please go ahead.

Good evening, everybody, and thank you for taking my question as well. Sorry, I joined the conference late, so maybe you already answered. But my question is, basically, if you could provide a sensitivity for RAB, for EBTA, for a 100 basis point increase in deflator for one year. Thank you.

Yes, the sensitive is the following. Consider that for each variation plus and minus 100 basis points of the deflator, you have a consequent variation in the remunerated asset base of around plus and minus 140 million euros.

Thank you.

The next question comes from the line of Jose Ruiz from Barclays. Please go ahead.

Yeah, good afternoon. Thanks for taking my question. I just have one. You had a 31 million increase in dispatching revenues. And in slide number 22, you're saying that the 2022 Dispatching revenues are going to be flat versus last year. Should I assume that there was a concentration of revenues in the first quarter and we will see a more normalized level in the following quarters? Thank you very much.

I think that 31 million are related to some output-based incentives that have been accounted in the quarter. You will see in the coming quarter additional revenues coming from this source because as anticipated before, we do expect an increasing contribution from output-based revenues in the current business plan.

Thank you.

There are no further questions in the queue, so I will hand the call back to your host for some closing remarks.

Well, thank you very much for your time and let me wish you good afternoon, good evening and see you in the first half presentation at the end of July. Thank you.

Thank you for joining today's call. You may now disconnect your lines.