In its first quarter 2024 earnings call, Terna, the Italian electricity transmission system operator, showcased a solid financial performance with a significant increase in investments and net income. The company announced a 65% increase in its 2024-2028 industrial plan investments, totaling €16.5 billion, and confirmed its financial guidance for 2024.
Terna also highlighted the authorization of the Adriatic Link project and the financing agreement for the Tyrrhenian Link project. The company's revenue and EBITDA rose by 20% and 26% respectively, while net income saw a 34% increase to €268 million. Group capital expenditures (CapEx) were up 53% at €483 million, and net debt was reported at €10.6 billion.
Key Takeaways
- Terna's investments for its 2024-2028 industrial plan have increased by 65% to €16.5 billion.
- The company authorized the Adriatic Link project and secured financing for the Tyrrhenian Link project.
- Two successful bond issues were launched: a fixed-rate bond and a hybrid green perpetual bond, each worth €850 million.
- Terna reported a 20% increase in revenues and a 26% rise in EBITDA, with net income growing by 34% to €268 million.
- The company confirmed its 2024 financial guidance, reflecting confidence in its business strategy.
Company Outlook
- Terna has confirmed its financial guidance for 2024 based on strong performance in the first quarter.
- The company's strategic investments are aimed at enhancing grid resilience and energy continuity.
Bearish Highlights
- No specific bearish highlights were mentioned in the earnings call summary.
Bullish Highlights
- Strong growth in all profit and loss (P&L) lines, indicating robust financial health.
- Successful bond issues reflect positive market confidence and demand for Terna's financial instruments.
Misses
- The summary does not indicate any misses or shortfalls in Terna's performance or expectations.
Q&A Highlights
- Francesco Beccali addressed questions on net debt, procurement authorization, and the company's CapEx plan in light of renewable development and electricity demand trends.
- Net debt will align with CapEx and earnings per share (EPS) guidance, excluding green hybrid bonds.
- Terna has secured most of its procurement needs until the end of 2024, ensuring operational readiness.
Terna's first-quarter results demonstrate a strong financial position and commitment to investing in the future of Italy's electricity infrastructure. The company's increased investments and successful bond issues signal confidence from both the company and the market. With the confirmation of its 2024 guidance, Terna (TRN) is poised to continue its trajectory of growth and resilience in the energy sector.
Full transcript - None (TERRF) Q1 2024:
Operator: Good afternoon, ladies and gentlemen, and welcome to Terna's First Quarter 2024 Consolidated Results Presentation. [Operator Instructions]. 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, Corporate Development and Sustainability. Please go ahead, sir.
Omar Al Bayaty: Good afternoon, everyone, and welcome to Terna First Quarter 2024 Results Presentation. The call will be hosted by our CFO, Francesco Beccali. Following the presentation, we'll have a Q&A session. We kindly ask you to send any questions to investor.relations@terna.it. Please, Francesco, the floor is yours.
Francesco Beccali: Thank you, Omar, and good afternoon, everybody. Before starting to analyze the figures, I'd like to share with you the latest main achievements. First, let me remind you that on March 19, we presented the group's 2024-2028 industrial plan, which aims to consolidate the company's strategic role in managing the Italian electricity system and more generally, strengthening the commitment to enable the country's energy transition. To do so, Terna plans to significantly increase its investment over the life of the plan to €16.5 billion, the highest level ever in the group's history, 65% up versus the last industrial plan. We are now focused on the execution of the new plan. In this regard, let me underline that we are well on track for what concerns authorization processes and procurement of the main projects included in our '24-'28 plan. Indeed, in January, the Ministry of Environment and Energy Security authorized the realization of Adriatic Link, the submarine power line that will connect the regions of Marche and Abruzzo. These development projects recognized as strategic for the country by the MASE authorities with strengthened energy exchange in Central Italy addressing the security and flexibility needs of the national integrated systems and the target for a further growth of renewables. Execution is not only about delivering investment, but also about ensuring the finance ability of the plants. In this respect, on January 10th, the company successfully launched a fixed rate single tranche bond issue for a total amount of €850 million. The proceeds will be allocated to meet the ordinary financial requirements and to fund the needs of the group's industrial plan. Moreover, in February, Terna signed a financing contract with the European Investment Bank for the last tranche of the €1.9 billion loan for the Tyrrhenian Link project, the submarine electricity cable connecting Italian Mainland with Sicily and Sardinia. In addition, on April 4th, as part of the financial strategy outlined in the new industrial plan, Terna successfully issued an hybrid green perpetual bond with a total nominal amount of €850 million. All these operations that will be better described in the next section of the presentation, enhance the solidity of our financial structure further diversify the investor base. Terna's leadership in the field of sustainability is once again demonstrated. Indeed, the sustainability plan has been embedded in the industrial plan. The activities in business by the sustainability plan include projects and actions confirming Terna's commitment to delivering a Just Transition: a fair, inclusive process that takes into account the potential impacts of all stakeholders, including workers, local communities and suppliers. Moreover, Terna has been included in the list of international leaders for efforts against climate change according to CDP's climate change to rise... Furthermore, Terna was also included in the list of leading international campaigns for the suppliers' involvement in the fight against climate change. After this brief introduction, let me give you the usual overview of the Italian electricity market. Turning to the next slide. As you can see from this chart, in the first three months of 2024 national demand was 78 terawatt hours, with an increase of almost 1% versus last year when national demand was at about 77 terawatt hours. In the first quarter of 2024, renewable services covered about 36% of national demand, 7 percentage points higher than last year. Regarding national net total production, this stood at 61 terawatt hours, 4% lower than the same period of 2023. Let me also say that in this first quarter, renewable services covered about 46% of the national net total production. The increase versus last year is also due to the contribution of wind and solar production, which grew by 13% and 6%, respectively, versus first quarter of 2023. Now let's move to the main figures of the period. In the first three months of 2024, we registered a strong growth in all P&L lines encountered. Indeed, group revenues and EBITDA were up by 20% and 26%, respectively, versus last year, which means €146 million and €128 million higher than the first three months of 2023. We also reported a group net income of €268 million with an increase of 34% versus the same period of last year. Group CapEx was €483 million, recording a double-digit increase of 53% versus the first quarter of last year. Let me underline that this is a record-breaking level of CapEx for the first three months of the year. This confirms, once again, our third CapEx acceleration to serve the system needs and enable the green transition in line with our recently presented industrial plan. To support this acceleration at the end of March 2024, net debt stood at €10.6 billion versus about €10.5 billion at 2023 year-end. Now let me give you a deeper analysis of the figures of the period. Moving to Slide 8. Let's start with revenue analysis. Total revenues in the first three months of the year increased by 20.4%, reaching €858 million, up by €146 million versus last year. The growth was attributable both to regulated and nonregulated activities, which contributed for €116 million and €29 million, respectively. Let's now go into the details of the revenues evolution moving to the next slide. Regulated revenues reached €730 million, €116 million better than last year, which means about 19% more than the same period of last year. The increase was mainly driven by the increase in RAB and by the updated value of WACC remuneration and the higher ARPU base incentives effect related to the higher benefits generated for the season. Nonregulated and international revenues reached €180 million and €128 million, 29.8% higher than last year. Nonregulated growth was mainly attributable to the increase in revenues coming from Tamini and to the higher contribution of LT Group Services. International revenues were set to zero given to the requirements of IFRS 5 as we met, the overall results of 2023 and 2022 are attributable to the South American subsidiaries included in the planned sale of assets have been classified in the item profit loss for profit loss for the period from assets held for sale in the group's diversified income statement. Now let's go through operating cost analysis. As you can see in this chart, total operating costs stood at €230 million, 8.3% higher than last year. Regarding regulated activities, the decrease was mainly attributable to the increased capitalization of labor costs after taking into account an increase in the average headcount compared to the first quarter of 2023. While nonregulated activities were impacted mainly by higher cost for the purchase of raw materials and services related to Tamini and LT Group. Let me now move to analyze EBITDA, moving to next slide. Due to the previously mentioned effects, first quarter '24 group EBITDA reached €628 million, 25.6% higher than the same period of last year. The increase was mainly attributable to regulated activities, which contributed of about €124 million more versus the first three months of last year, showing an EBITDA of €610 million in the first quarter of 2024. Let me underline how this growth in EBITDA attributable to regulated activities is not only linked to an increase in regulated revenues, but also to a remarkable reduction of operating expenses as a demonstration of our ability to maintain cost structure under control. Let's now have a look to the lower part of the P&L, turning to Slide number 12. D&A amounted to €209 million. The increase versus last year was mainly due to the full recognition of depreciation relating to the entry into operation of new assets. As a consequence, EBIT reached €419 million, 33.6% higher versus the first quarter of 2023. We reported net financial expenses at €27 million. The increase versus last year is mainly attributable to the subscription of new financings and the increase of interest rates partially mitigated by the lower level of inflation related to inflation in bonds expired in September 2023 and by the higher financial income on availability. Taxes stood at €112 million, €30 million higher versus last year, essentially due to increased profit. Our tax rate stood at 29.2%. As a result, group net income reached €268 million, 34% higher versus the same period of last year. Moving to CapEx analysis. In the first three months of 2024 total CapEx amounted to €483 million, 53% higher than last year, confirming the robust acceleration in line with our institutional role on guaranteeing. Let me underline that this is a record-breaking level of CapEx for the first three months of the year. Indeed, we invested about €462 million in regulated activities. Among the main projects of the period, it is worth mentioning the Tyrrhenian Link, the Adriatic Link, the Colunga-Calenzano connection, the modernization of the [indiscernible] first grid in the locations due towards the Winter Olympics in 2026 and the investments in stabilization devices for grid securities, including synchronous compensators. Among CapEx categories, Development CapEx represented 64% of the total regulated capital. The DefenseCapEx stood at 10%, while asset renewal and efficiency was at 26%. Nonregulated and other CapEx stood instead at €21 million. This includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis. Net debt at the end of March 2024 was about €10.6 billion, around €93 million higher than 2023 year-end level, mainly as a consequence of the CapEx acceleration made on the national grid. During the period, we generated an operating cash flow of €461 million, thanks to which we were able to cover most of 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 cautious and proactive debt management approach and maintaining a solid financial structure. At the end of this first three months 2024, we registered a fixed or floating ratio on gross debt of about 89% and an average duration of about six years. As already mentioned, since the beginning of the year, Terna successfully launched two bond issues. In general, the company issued a fixed rate single tranche bond issue for a total amount of €850 million, the issue part of the €9 billion Euro Medium Term Notes Program received from very favorable market response with demand outstripping supply by almost 3x the offered amount. The bonds issued with a spread of 100 basis points over the mid-swap has a duration of seven years and will pay a coupon of 3.5%. Then in April, Terna successfully launched an issue of a perpetual green hybrid bond with a total nominal amount of €850 million. Also this received a great market response with a maximum demand of over €3 billion outstripping supply by approximately 4x the offered amount. The bond is noncallable for six years and was issued with a spread of 214 basis points over the midswap with a subordination premium of 130 basis points. One of the tightest for this type of instruments since the end of 2021. The issue will pay an annual coupon of 4.750% until the first reset date scheduled on April 11, 2030, and will have an effective rate equal to 4.8%. With regards to bankers in February, the European Investment Bank Terna signed the contract for the final tranche of the €1.9 billion financing of the Tyrrhenian Link. This contract establishes a final tranche of €500 million in addition to the previous financial contracts signed on November 8, 2022, and March 30, 2023, for the construction and commissioning of the East and West sections of the project. Let me remind you that with terms of 22 years from each drawdown, the loans have long maturity and more competitive costs than those generally available on the market. This makes them align with Terna's policy to optimize its financial structure. Moreover, in April, Terna also increased to €2.25 billion, the total amount of the ESG-linked revolving credit facility signed on May 12, 2023, signing an amendment and restatement agreement. All other terms and conditions on the credit line remain unchanged. Before moving to Q&A session, let me underline that with a strong set of results that just presented for the first quarter we can fully confirm our guidance for 2024. Thank you for your attention. We are now ready for the Q&A session.
A - Omar Al Bayaty: Thank you, Francesco. We received several questions. Let's start from the first one, please, Cristiano.
Cristiano Bertoldi: Okay. Thank you, Omar. Let's start for the first one. We received several questions regarding the amount of output base incentives accounting in the first quarter '24. Please Francesco, can you comment on that?
Francesco Beccali: Sure. As to the output-based incentives recognized in the first quarter of 2024, the figure is about €60 million relating to dispatching services market efficiency incentives connected to the cost savings related to the reduction of the volumes traded on the market.
Cristiano Bertoldi: And again, on output-based incentives, what are the assumption for 2024 and for the term period?
Francesco Beccali: The strategic plan assumes about €400 million cumulated during the time horizon of the plan, with the front-end loaded distribution.
Cristiano Bertoldi: Okay. Thank you. Maybe last question regarding output-based incentives. Can you comment about when there could be more visibility in relation to the potential ancillary service market incentive scheme renewal?
Francesco Beccali: Well, given the high reduction of the services market cost over the first two-year of incentive schemes, the Italian regulator authority is assessing the potential extension of the scheme for the coming years. Anyway, any decision on the possible scheme of renewable is expected by the end of the year.
Cristiano Bertoldi: Always being in the regulatory environment, we are reaching to another argument because we received a few questions about the potential reassessment of the deflator for 2024 tariffs. Can you please give some color on this point?
Francesco Beccali: Sure. According to the resolution, 615 of 2023, the deflator applied for the 2024 tariffs is equal to 5.9%. And it is the cumulative result of the deflator of the last three quarters of the year 2022 not included in the 2023 tariff equals to 4.2% and the variation in the 2022 fixed income in 2023, so fixed income investment deflator with an expense estimation equals to 1.6%. This value will be, let me stress this point, reassessed by the regulator in 2025 with [indiscernible] were historical series published by [indiscernible] will be subject to other quarterly revisions and ARERA [ph] will take the final value in the first month of 2025. So it is now too early to make projections on 2024 the [indiscernible] assessment.
Cristiano Bertoldi: Okay. Thank you. Still about regulation. Maybe can you comment about the WACC assumption from 2025 onwards?
Francesco Beccali: Sure. Our estimate of the WACC from 2025 onwards stands currently at 5.5%, which is the same level that we share with the market during our business plan presentation. And it is based on the shift from 66% to 33% of the weight of the cost of debt of the previous inventory period, which is equal to 2.4%. And the latest available data, the mark-to-market of the values recorded from February 2024 of all the parameters that have to be updated for the calculation of the cost of equity. Please note that our assumptions related to regulatory WACC are made consistent with those related to the cost of debt, which provides a kind of partial natural hedge for the company. For what concerns the fiscal parameters, the value from the second period, the one which was from 2025 to 2027, will be determined based on an analysis of the relevant tax legislation and the actual level of tax incidence observed in 2022-2023. Finally, with reference to better assets, revision of the methodological criteria calculation is planned during 2024 for all regulated electricity and gas infrastructure services.
Cristiano Bertoldi: There are also some questions received about ROSS framework. Could you please comment about the ROSS system regulatory update?
Francesco Beccali: Well, in the ROSS approach, we see an opportunity to create further value for the electricity system and shareholders. It is consistent with the past already undertaken towards an up base approach. At the end of last year, the regulator approved the ROSS regulation integrated test containing ROSS Terna principles and criteria offsetting the cost [indiscernible] of the period, which goes from 2024 to 2031. ARERA confirmed the gradual approach for implementing ROSS regulation foreseeing the first phase, so-called ROSS [indiscernible] starting in 2024. The main change introduced by ARERA in the ROSS-based framework concerns the application of the capitalization rate to split the overall expenses between low and fast-money components as the measure to support financially of investments. Further development of ROSS-integrale model which is going to be applied in 2026. ARERA has defined a 2-step approach. A favorable resolution concerning the general criteria and the second resolution regarding specific sectoral measures aimed at defining methods and possible experimental applications of the ROSS-integrale model. The resolution of ROSS-integrale will take place through a process of dialogue between ARERA and operators. During this process, ARERA will publish presentation document in order to share and discuss objectives and tools underlying the new framework with the regulatory.
Cristiano Bertoldi: Okay. Now let's move to the debt profile. Some questions are regarding hybrid. Specifically, some people are asking if, do you plan to issue any other hybrid? And what is the maximum potential capacity for [indiscernible] issuances?
Francesco Beccali: Well, following the recent issuance that we have just mentioned during the presentation of the first quarter results, our funding strategy moving forward remains focused on optimizing from time to time, the average capital portion within our capital structure. The group will continue to monitor the market for potential opportunities and will return such market in the future as needed to ensure the protection of our credit profile and to capitalize on any suitable opportunities that may materialize. After the €850 million recently issued, we do have remaining capacity for further initiatives of about €2 billion within the industrial part land horizon to be exploited, if needed, and if suitable opportunities will materialize.
Cristiano Bertoldi: Perfect. We also received a question regarding the expected net debt evolution following the last acquisitions that you mentioned. Can you please comment on this?
Francesco Beccali: Well, as you very well know, we do not provide any guidance on net debt. Net debt will reflect the guidance provided on CapEx and EPS and the level of working capital at the end of 2024. However, let me remind the green hybrid bonds are accounted under IFRS given the perpetual nature of the securities and given also the ability to defer coupons at Terna's discretion. So our [indiscernible] will not be accounted in our net debt and the coupon payments will not be recorded as financial charges indicated statement.
Cristiano Bertoldi: Now we switch to the procurement authorization since we received a few questions about the procurement and authorization status. Can you give us, can you give us an update on this?
Francesco Beccali: Well, regarding authorization, here, I can say that we are on the right path and the CapEx plan is strong, solid and safe. The main HVDC project was authorized and the entire Italy and Tunisia collection is about to be authorized. For what concerns in term of procurement, we are sensitive, obviously, to potential shortage and bottlenecks along the relevant supply chains, investing in the industry. Nevertheless, we managed this risk setting up an array of actions to handle possible drawback in a timely and efficient line. So also the procurement side, we are well on track, given that we have already obtained almost all the procurement needs until the end of 2024, also thanks to group contribution. Indeed, as to the strategic plan is concerned, about 80% has been already procured and about 70% is covered by existing procurement contracts.
Cristiano Bertoldi: Now a very popular question. Is there an upside on 2024 guidance?
Francesco Beccali: And the only answer that I can provide you is that I stated during the presentation, thanks to a strong set of results, just presented for the first quarter, we are able to fully confirm our guidance for 2024.
Cristiano Bertoldi: Finally, we received some questions regarding electricity trend costs regarding supply and demand side. So we summarize this question as follow: in case of slowdown in renewables development or in case of new trends on electricity demand, such as data centers, for example, what are the impacts on our CapEx plan?
Francesco Beccali: Well, on this aspect, let me remind the key objectives that Terna needs to end and continuously improve to fulfill its [indiscernible]. First of all, we need to guarantee energy continuity in the country, ensuring service quality and continuity of supply in the energy system in a fast-moving scenario. From a traditional system with centralized generation facilities, and one-way flows, we are typically moving over to [indiscernible] integrated and much less predictable system characterized by multidirectional flows among the less number of players. Then we need to enhance the resilience of the grid to withstand potential stresses, which is paramount for energy continuity. In addition, finally, we need to ensure the security of the electricity grid to address new challenges coming from the transition towards a more complex energy system. Our CapEx plan is driven by all these increasing needs of the system, and it is aimed to manage and anticipate any foreseeable trend that can impact the decision.
Omar Al Bayaty: There are no more questions. So thanks to everyone, for joining the call and please consider IR department at your disposal for any follow up.
Francesco Beccali: Thank you very much. Bye.
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