Terna, the Italian electricity transmission system operator, presented a robust financial performance for the first half of 2024. The company reported an 18% revenue increase and a 32% surge in net income compared to the previous year's same period.
Terna also highlighted significant progress in its capital expenditure plan, focusing on key projects such as the Tyrrhenian Link, SACOI 3, and the Adriatic link, which have all secured full authorization and procurement contracts. Reflecting Italy's growing reliance on renewable energy, renewables accounted for 44% of the nation's demand in the first half of 2024, peaking at 52.5% in May.
Terna's capital expenditure exceeded €1 billion for the first time within a six-month span, while net debt was approximately €10.3 billion at June's end. The company maintained its 2024 guidance, emphasizing its dedication to value creation and financial stability amid a challenging macroeconomic climate.
Key Takeaways
- Terna reported an 18% increase in revenues and a 32% rise in net income for H1 2024.
- Capital expenditure surpassed €1 billion, a first for the company in a half-year period.
- Renewable energy sources covered 44% of Italy's national demand in H1 2024.
- Major projects including the Tyrrhenian Link, SACOI 3, and the Adriatic link have full authorization and contracts.
- Net debt stood at around €10.3 billion at the end of June 2024.
- Terna confirmed its 2024 guidance, focusing on value creation and financial stability.
Company Outlook
- Terna plans to execute development projects from its 2024-2028 industrial plan.
- The company aims to maintain financial stability and a low-risk profile.
- About 75% of CapEx plan is secured by contracts, indicating strong procurement and authorizations.
- Terna expects a slight increase in the cost of debt, estimating around 2.5% by year-end.
Bearish Highlights
- The company anticipates a slight rise in the cost of debt for the full year due to higher interest rates.
Bullish Highlights
- Terna has experienced a significant increase in grid connection requests, especially for offshore wind plants.
- The company is prepared for the necessary development of electrical infrastructure to support renewable projects.
Misses
- There were no specific financial or operational misses reported during the call.
Q&A Highlights
- Terna addressed the gradual implementation of loss regulation.
- The company discussed the renewal of the output-based incentive scheme.
In the broader context of Italy's energy landscape, Terna's earnings call underscored the country's accelerated transition to renewable energy, with a national goal of 63% renewable share in electricity consumption by 2030. The installation of 6 gigawatts of renewable capacity in 2023 and an additional 3.7 gigawatts in the first month of 2024 reflects this commitment. The company is well-positioned to support this shift, with 150 gigawatts of photovoltaic and over 100 gigawatts of onshore wind connection requests, as well as a threefold increase in offshore wind connection requests since 2021. The upward trend in storage plant connection requests further cements Terna's pivotal role in Italy's renewable energy expansion. The company's ticker, TRN.MI, represents its listing on the Milan Stock Exchange, where investors closely monitor its performance and strategic initiatives in the face of global market challenges.
Full transcript - None (TERRF) Q2 2024:
Giuseppina Di Foggia: Let’s move to the Tyrrhenian Link, the biggest product in our plan in terms of investment – the project is at double underwater cables that will link the Italian mainland, Italy and Sardinia. It will increase the security of supply for our two main islands, enable the integration of new renewable energy sources and consequently contribute to the energy transition of Italy. Both links have already obtained full authorization and procurement contracts for both HVDC cables and patients have been awarded and signed. Two other relevant projects in our CapEx plan, the SACOI 3 and the Adriatic link has also obtained full authorization and the main procurement contracts signed. SACOI 3 is a subomary connection between Savina, Corsica and the Italian mainland, that will continue to increase the security of supply in Sardinia and allow us to eliminate bottlenecking area. The [indiscernible] is a submarine connection between a broadband market, which will increase market efficiency and allow for the integration of renewable energy sources. These are examples of major projects that confirm that we are well on track with the execution of our CapEx plan in the coming years. All these interventions are fundamental to face the changes, the Italian energy system is experiencing. This can already be seen from the evolution of electricity demand in recent months. Going over to the next slide. As you can see from this chart, in the first 6 months of 2024, national demand was about 152 terawatt hours with an increase of 1.1% versus last year when national demand was about 150 terawatt hours. In the fourth half of 2024, renewable sources covered about 44% of a national demand, 9 percentage points higher than last year. In this regard, let me highlight that in May, renewable sources covered 52.5% of electricity demand the highest-ever value on a monthly basis. This figure was also repeated in June. Regarding national net total production, this stood at 126 terawatt hours, almost 1% higher than the same period of 2023. Let me highlight that considerable increase in hydro production, which grew to a value of 25.9 terawatt hours up 65% compared to the same period last year. Let me also say that in this first half of the year, renewable sources covered about 53% of the national net total production, overtaking production from fossil fuels for the first time. The increase versus last year is also due to the contribution of wind and solar production, which grew by 11% and 7%, respectively, compared to the first 6 months of 2023. I mentioned key topics at the start of this presentation, and one of these is the adequacy of the electricity system. Expected adequacy margins are higher than in past years. The gradual improvement is the result of capacity market auctions organized by Terna. The capacity market has ensured efficient use of gas fire plant and promoted the construction of a new power capacity bandings of long-term contract that guarantee remuneration for investors. The new capacity is also useful for enabling the gradual shutdown of coal-fired generation under conditions of a system adequacy. And now let’s move to the main figures of the period. In the first half of 2024, we registered a strong growth in all P&L lines and CapEx. Indeed, group revenues and EBITDA increased by 18% and 23%, respectively, versus last year, resulting €269 million and €238 million higher than the first 6 months of 2023. We also reported a group net income of €545 million, up by 32% compared to the same period last year. For the first time, in Terna’s history, group CapEx crossed the record threshold of €1 billion in the first 6 months of the year, with an increase of 26% versus the first 6 months of 2023. This confirms once again our efforts accelerate CapEx in order to fulfill the needs of the Italian energy system and enable between transition. To support this acceleration at the end of June, net debt stood at around €10.3 billion versus about €10.5 billion at 2023 year end. Now I leave the floor to our CFO, Francesco Beccali, looks at the results of the first half of 2024. Please Francesco.
Francesco Beccali: Thanks, Giuse. Let’s start with revenue analysis. Total revenues in the first 6 months of 2024, reached €1.754 billion, increasing by 18.1% up by €269 million versus last year. Such increase was attributable both to regulated and non-regulated activities, which contributed for €209 million and €60 million, respectively. Let’s now go into the details of the revenue evolution. Moving to the next slide. Regulated revenues in the first half of 2024 were €1.473 billion, €209 million higher than last year, which means an increase of about 17% compared to the same period of 2023. The increase was mainly driven by increase in RAB and the updated value of regulatory WACC, which was set at 80 basis points versus – plus 80 basis points versus previous year. Non-regulated and international revenues reached €282 million, 26.9% higher than last year. Non-regulated growth was mainly attributable to the increase in revenues coming from the Equipment business and to the other contribution of Energy Services. International revenues were set to zero. Given that the requirements of IFRS 5 have been met, the overall results in the first half of 2024 and 2023 attributable to the South American subsidiaries included in the planned net sales, sale of assets have been classified in the item P&L for the period from assets held for sale in the group’s reclassified income status. Now let’s go through operating cost analysis. As you can see from the chart, total operating costs were €497 million, 6.7% higher than last year. For what concerns 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 half of 2023. Non-regulated activities instead were impacted mainly by higher costs for the purchase of raw materials and services related to Tamini and MSD Group, driven by the increase in volumes reflected also in revenue. Let me now analyze EBITDA. Moving to the next slide. Due to the previously mentioned effects, first half 2024 Group EBITDA reached €1.257 billion, 23.4% higher than the same period of last year. The increase was mainly attributable to regulated activities, which contributed for about €223 million more versus vis-à-vis the first 6 months of last year, showing an EBITDA of €1.212 billion in the first half of 2024, partially driven by regulated activities OpEx reduction and the demonstration of our ability to maintain cost structure under control. Also non-regulated activities contributed to the EBITDA increase with a 50% growth vis-à-vis the first 6 months of 2023. Let’s now move to the lower part of the P&L, turning to Slide #13. D&A amounted to €421 million. The increase versus last year was mainly due to the entry into service of new assets. As a consequence, EBIT reached €836 million, 30.8% higher versus first half of 2023. Total net financial expenses at €63 million. The increase versus last year is mainly attributable to the subscription of new financing and the increase of the interest rates, partially mitigated by higher financial income on available liquidity and higher capitalized financial expenses. Taxes stood at €227 million, €59 million higher versus last year, essentially due to increased profit. Our tax rate stood at 29.4%. As a result, group net income reached €545 million, 32% higher vis-à-vis the same period of last year. Now moving to CapEx analysis, in the first 6 months of 2024, total CapEx amounted to €1.042 billion, 26% higher than last year, confirming the robust acceleration in-line with our institutional role for the country. Let me underline that this is a record working level of CapEx exceeding €1 million for the first time in the first 6 months of the year. Indeed, we invested about €996 million in regulated activities. Among the main projects of the period, it is worth mentioning, the Tyrrhenian Link, Adriatic link, SACOI 3, the modernization of the [indiscernible] agreed in the locations due to as the winter linked games in 2026 and the investment in stabilization devices for grid security, including a long [indiscernible] since compensators. Among CapEx categories, development CapEx registered a significant increase in the contribution on total CapEx, representing the 62% of the total, vis-à-vis 50% in the first 6 months of 2023. For the remaining categories, defense CapEx stood at 10%, while asset renewal and efficiency accounted for 28%. Non-regulated and other CapEx stood at €47 million. This includes capitalized financial charges for €32 million and other investments. Regarding net debt and cash flow analysis. Let’s move to next slide. Net debt at the end of June 2024 was about €10.3 billion, €166 million lower than 2023 year-end level, mainly due to the positive impact of the [indiscernible] issuance recognized as an equity instrument, partially mitigated by the dividend payment and major CapEx acceleration. During the period, we generated an operating cash flow of €931 million, thanks to which we were able to cover almost all the CapEx spending of the period. Let’s now make a deeper analysis on our debt profile moving to Page 16. In-line with our cautious and proactive debt management approach, aim and maintain a solid financial structure. At the end of this first 6 months of 2024, we registered a fixed floating ratio on gross debt of about 89% and an average duration of about 6 years. Let me remind you that in average, Terna successfully launched an issue of a perpetual green bond with a total amount [indiscernible] bond, sorry, with a total loan amount of €850 million. The bond is non-callable for 6 years, and will pay an annual coupon of 4.65% – 75% until the first visit date. Moreover, on top of the amendment and restatement agreement situated [indiscernible] ever to increase to €2,265 million and [indiscernible] facility previously signed in 2023, in May and July year Terna signed 2 ESG increased facilities for a total amount of €450 million. The lines will have a total term of 5 years and will be linked to Terna’s performance in relation to specific environment of social and governance indicators. Thank you for your attention. Now before we conclude session, let me leave the floor to Giuse for a closing remarks.
Giuseppina Di Foggia: Thank you, Francesco. Let me conclude this presentation with some closing remarks. First of all, Terna will continue to guarantee value creation for our shareholders and communities, focusing on the execution of the development projects foreseen by our 2024, 2028 industrial plan for which we are well on track. In this regard, despite the €16.5 billion CapEx level foreseen in our plan and the challenging macroeconomic environment in which we are called to operate, Terna will remain committed to maintaining financial stability and a low-risk profile. Before moving to the Q&A session, let me underline that with the strong set of results just presented for the first half, we can fully confirm our guidance for 2024. Thank you for your attention, and we are now ready for the Q&A session.
A - Omar Al Bayaty: Thanks, Giuse. Let’s move to the Q&A session. The first one, some questions were related to the upcoming introduction on [indiscernible] Any update on that to your view.
Giuseppina Di Foggia: Well, the authority has confirmed the gradual approach for implementing a loss regulation. This foresees a first half called [indiscernible] that began this year in which expenditure is allowed largely in continuity with the previous regulatory period. The transitional of budgets will be followed by the Rose-Integrale framework starting potentially in 2026. The resolution of Rose-Integrale will take place to a process of dialogue between Arera and operators. During this process, Arera will publish consultation documents in order to share and discuss objectives and tools, underlying the new framework. Let me underline that the ROS approach represents an opportunity, an opportunity to create further value for the electricity system and the shareholders confirming the part already undertaken towards an outward approach, is focused on targets and benefits for system and with rewards the award linked to outcomes, promoting an even higher overall efficiency through new output-based regulatory measures.
Omar Al Bayaty: Thank you, Giuse. Another question about regulatory mergers. Could you please comment on the last consultation document on the renewal or the output base incentive scheme for reduction of dispatching cost.
Giuseppina Di Foggia: Well, output-based incentives in recent years have represented a successful makes to increase system efficiency and provide benefits to the final customers. This has been achieved through the reduction of ancillary services market cost and the reduction of a bottleneck among and within market zones. The regulator recognize the Terna’s efforts result in this direction. The consultation document you mentioned is further proof of debt. With this document, the authority proposed to renew the incentive scheme for the reduction of ancillary services market costs, providing visibility for the coming years. So we – the incentives spended until 2030. And this is a further confirmation of a Terna a role in the Italian energy system and a recognition of the benefits that our company can bring to the final customers while enabling the energy transition in our country. Please Francesco, if you can elaborate on the new mentioned proposal.
Francesco Beccali: Sure. Thanks. As you already mentioned, this document foresees the extension of the incentive scheme from dispatching cost reduction for two periods of 3 years. First one starts from 2025 to 2027, and the second one goes from 2028 to 2030. According to the documents, for each period, of mid year of the period 2025 2027, Terna will receive the 12% of the overall MSD cost reduction. For each year of the period 2025, 2027, the baseline represented by 2023 MSD actual costs, increased by an extra component to take into account the expected changes coming from Energy scenario evolution. In the period 2028, 2030, the makers would work in continuity with the previous period. With the reset of the dead line according to 2026 and [indiscernible] cost, increased by an extra component to be recalculated in future years. The final view of moving is expected by the end of this year.
Omar Al Bayaty: Thanks, both. One more on regulation. We received a question about potential assessment of the deflator for 2024 tariffs. Can you please provide your view on this point?
Giuseppina Di Foggia: Well, first, let me underline that when we talk about the regulatory framework, it is important to focus on the overall picture. Not only on the specific measure. However, regarding a deflator – regarding your question, there are discussions going with the authority to evaluate the best solution to preserve the regulatory asset base protection against inflation and for the assessment of the 2024 deflator, please Francesco could you provide some details about the ongoing discussions?
Francesco Beccali: Sure. Thanks Giuse. These are complicated ones. As you know, according to resolution 2015 issued in 2023, the deflator applied to 2024 time is equal to 5.9%. And it is the cumulative result of two main items. The deflator of the last three quarters of year 2022, not included in the 2023 guide, the so-called linkage, which was equal to 4.2%. And the estimation of the variation occurred in 2023 of the fixed income investment deflator, which is 1.6%. This value will be reassessed by the regulator in 2025, with latest stat values. Since the reflector historical series published by Istat will be subject to other quarterly revisions until ARERA will take the final value in the first month of 2025. It is now too early to make a projection on which would be the 2024 deflator reassessment.
Omar Al Bayaty: Thank you. One more about resolution, can you comment about what assumptions for 2025?
Giuseppina Di Foggia: Well, what value for the period 2025, 2027 will be updated by ARERA by the end of 2024 based on the update of the main macroeconomic and fiscal parameters embedded in the formula. Let me stress again that for us, it is important to focus on the overall blended return coming from the regulatory framework more than on a single item. And I will leave again the floor to our CFO for the technical aspects of the work formula, please Francesco.
Francesco Beccali: Thank you. Our strategic plan assumes, as you know, work at 5.5% from 2025 onwards. This value reflects the application of the so-called passivity [ph] rule set for calculating the other cost of debt. And the mark-to-market of the latest values recorded at the time of the presentation of the plan. Now, since the update involved not only market-related parameters, but also other elements of the formula such as, for example, the fiscal and potentially also the beta parameter. At current stage, we expect a final value, which should be substantially in line with the one assumed in our 2024-2028 strategic plan.
Omar Al Bayaty: Thank you, Francesco. And thank you, Giuse. One question about procurement and authorization, do you see any risk on project execution?
Giuseppina Di Foggia: And as already mentioned during the presentation, our CapEx plan is solid step, and our projects are well on track for procurement and authorizations. Regarding procurement, despite the challenging scenario, the risk of potential shortages of raw materials is well managed to an array of actions to handle possible drawbacks in a timely and efficient manner. Thanks to this approach. About 75% of our CapEx plan is already secured by signed contracts. And please note that this number rises to about 85%. If we include ongoing tenders, I can further say that we are on the right path regarding the authorization with more than 80% of the plan already authorized.
Omar Al Bayaty: Thank you, Giuse. And one more question. Any update on renewables installation rating impact.
Giuseppina Di Foggia: Yes, sure. The acceleration in the increase of renewable capacity is clearly visible. Indeed, until 2021, the installation rate was around 1 gigawatt per year while in 2022, around 3 gigawatts were installed. And this growth in the period of installations was also confirmed in 2023 when about 6 gigawatts were installed. And in the first month of 2024, indeed, since the beginning of the year, about 3.7 gigawatts of new renewable capacity has been installed. And this acceleration is a good signal of the implementation of a target included in the updated national climate and energy plan centered by the earlier government to the European Commission in June 2024. The new plan targets a share of 63% renewable energy in electricity consumption by 2030.
Omar Al Bayaty: We received a follow-up on renewables. Could you please provide an update of grid-connection request.
Francesco Beccali: Sure. Let me premise, first of all, as you all know, last year, there was a huge increase in grid connection request from both [indiscernible]. As to the number of reconnection request from further update in 2023, the number increased by 21% from 2021 and by almost 80% from 2022, sorry, by almost 80% from [indiscernible]. At the end of the first half of this year, the grids connection requests are 150 gigawatts from photovoltaic and slightly more than 100 gigawatts from wind onshore for a total of about 255 gigawatts, increasing by 17% from the first half of 2023. Over 70% of these connections requests are related to UTB scale plans.
Omar Al Bayaty: Thank you, Francesco. If I may, can you comment about possible on CapEx from offshore wind such as…?
Francesco Beccali: Sure. Thanks Omar. The number of connection requests from large-scale offshore wind power plants increased more than 3x at the end of December 2023, compared to 2021. We are talking about 60 gigawatt additional of requests. At the end of the first half of 2024, the grid connection requests from offshore wind plants are now about 85 gigawatts. Having in mind that we are not in charge of building the direct connection of the offshore wind plant, let me state that all the related necessary development of electrical infrastructure has been already included in our investor plan as a consequence of 2023 development plan elaboration. For what concern instead storage plants, the trend of connection requests for storage is increasing both in number and power due to auctions scheduled for the beginning of 2025. Also in this case, we do not see any impact on the CapEx embedded in our strategic plan.
Omar Al Bayaty: Thank you, Francesco. And we have got one more for the CFO. How many output [Technical Difficulty] account in the first half?
Francesco Beccali: As to the Terna’s incentives recognized in the first six months of the year, we are at about €132 million. These are related mainly to dispatching service market efficiency incentives connecting to the cost savings related to the reduction of volumes traded on the dispatch market in past years. And also to include one-off for a smaller part to interest and it’s connected to the creation of additional transport capacity among Italian pricing zones.
Omar Al Bayaty: Thank you. I think the last one, okay, given the first half ‘24 financial charges, was the expected cost of debt for full year.
Francesco Beccali: Well, considering the persisting high interest environment, the second half of this year, we expect a slight increase in cost of debt, which at the end of 2024 should then be around 2.5%.
Omar Al Bayaty: Thank you, Francesco. I have one more question, so please, Giuse.
Giuseppina Di Foggia: Thank you. Thank you very much for your time today and for taking part in this call.
Francesco Beccali: Thank you.
Omar Al Bayaty: Thanks everybody.
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