Hello and welcome to the Terna nine-month 2022 consolidated results. My name is George. I'll be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call, your lines will be in listen-only mode. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I now hand the call over to host today, Mr. Agostino Scornajenchi, Chief Financial Officer, to begin today's conference. Thank you.
Good afternoon, everybody and welcome to Terna nine months 2022 results presentation. Before starting to analyze the figures, I would like to share with you the latest main achievements of the period. First of all, in line with our institutional role of guaranteeing security of supply, system adequacy and quality of service at the lowest possible cost to the end users, as well as meeting our clients commitments, we are proud to announce that the East Branch of the Tyrrhenian Link has been authorized in October by the Italian Ministry of Ecological Transition. The authorization process was completed in record time. In fact, it took less than one year from the start of the procedure to the definitive approval of the project.
Moreover, on the twelfth of October, the Ministry of Ecological Transition also started the authorization procedure for the West Branch of the Tyrrhenian Link that will connect Sicily and Sardinia. Another step toward the construction of one of the most important infrastructure projects in Italy has been completed. Let me highlight our strong ESG commitment. Indeed, Terna has been conferred for the twelfth consecutive year in the STOXX Global ESG Leaders Index, which selects the best companies globally based on ESG best practices. This international achievement testifies the company's performance in ESG areas. In fact, sustainability is a strategic driver and one of the pillars of group's operation.
99% of the approximately EUR 10 billion of investment planned by Terna in the 2021-2025 driving energy industrial plan are, by their nature, sustainable, based on the eligibility criteria introduced by the European Taxonomy. Let me say that our ESG commitment is also reflected in Terna's financial structure. Indeed, during the last three months, Terna signed four ESG linked credit facility agreements for a total amount of EUR 600 million. The credit facility will have a term of three years with an interest rate linked also to Terna's performance in relation to specific environmental, social and governance indicators. In addition, on the fifteenth of September, Terna launched a fixed rate single tranche bond through a private placement procedure for an overall amount of EUR 100 million.
The proceeds from the issue are expected to be used by the company to fund the needs of the group's industrial plan and to meet the group's ordinary financial needs, as well as contribute to optimizing Terna's financial management. I would also like that yesterday we signed a EUR 1.9 billion contract with the European Investment Bank for the financing of the Tyrrhenian Link project. Finally, regarding our shareholders remuneration, today's board of directors approved the 2022 interim dividend of EUR 0.1061 per share, up by 8% compared to the previous year and fully in line with the dividend policy communicated to the market. After this 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 nine months of 2022, national demand was about 241 TWh, with an increase of 1.3% versus the same period of last year, when national demand was about 238 TWh. I would like to remark that despite the current challenging scenario and in line with our institutional role, we continue to guarantee security of supply for families and businesses. Concerning national net total production, this stood at about 210 terawatt-hours, 2.2% higher than the same period of 2021, with a strong increase in wind and solar production, which grew by 8% and 10% respectively. Moreover, let me also highlight that in the first nine months of 2022, renewable sources scored about 32% of the demand at about 37% of national net total production.
Now, let me introduce the main figures of the period moving to slide number six. In the first nine months of 2022, group revenues and EBITDA were up by 5% and 3% respectively versus last year, which means EUR 102 million and EUR 47 million higher than the same period of 2021. While group net income was EUR 587 million, about 1% more versus last year. Group CapEx exceeded EUR 1 billion for the first time ever in nine months, with an increase of 12% versus the first nine months of last year, reconfirming our solid CapEx acceleration to deal with the current energy scenario. Despite such CapEx acceleration, at the end of September, net debt was well below EUR 9 billion, at about EUR 8.7 billion versus about EUR 10 billion at 2021 year end.
Now, let me make a deeper analysis of the figures of the period, turning to slide number eight. Let's start with revenues analysis. Total revenues in the first nine months of 2022 increased by 5.4%, reaching EUR 1,992 million, up by EUR 102 million versus last year. The growth was attributable both to regulated and non-regulated activities, which contributed for EUR 77 million and EUR 26 million respectively. For the details of the revenues evolution, let's move to the next slide. Regulated revenues reached EUR 1,720 million, EUR 77 million better than last year. The increase was mainly due to higher output-based incentive effects related to the higher benefits generated for the system, net of the WACC reduction recognized in 2022. Non-regulated and international revenues reached EUR 272 million, 10.5% higher than last year.
Non-regulated growth was mainly attributable to the increase in revenues of Terna Energy Solutions, mostly related to Terna Group and to the increased contribution coming from Tamini. International revenues were set to zero in accordance with the IFRS 5 accounting standard, referred to assets held for sale. Now, let's go through operating cost analysis at slide 10. As you can appreciate from this chart, total operating costs stood at EUR 580 million, 10.5% higher than last year. Regarding regulated activities, the increase was mainly attributable to the insourcing of new competencies, while non-regulated activities have been impacted mainly by Terna Group contribution. Let me now analyze EBITDA, moving to the next slide. Due to the previously mentioned effects, nine-month 2022 group EBITDA reached EUR 1,412 million, EUR 27 million better than last year.
This increase was mainly attributable to regulated activities, which contributed for about EUR 49 million, showing an EBITDA of EUR 1,376 million in the first nine months of 2022. Let's now have a look to the lower part of the P&L at page 12. Depreciation and amortization amounted to EUR 516 million. The increase versus last year was mainly due to the impact of new assets becoming operational in the period. As a consequence, EBIT reached EUR 896 million, 2.6% higher versus September 2021. We reported net financial expenses at EUR 56 million, substantially in line with the same period of last year, as a proof of our resiliency in cost of debt management. Taxes stood at EUR 237 million, EUR 8 million higher versus last year, essentially due to increased profits.
Consequently, our tax rate stood at 28.2%. As a result, group net income reached EUR 587 million, 1.1% higher versus the same period of last year. Moving to CapEx analysis and now at page 13. In the period, total CapEx amounted to EUR 1,033 million, about 12% higher than last year, showing a double-digit acceleration despite the challenging scenario. Indeed, we invested about EUR 985 million in regulated activities. Among the main projects of the period, it's worth mentioning the Tyrrhenian Link, the Paternò-Pantano-Priolo in eastern Sicily, the Elba mainland link and investment in STATCOMs, reactors and synchronous compensator for the grid security. Among CapEx categories, development CapEx represented 41% of total regulated CapEx. Defense stood at 14%, while asset renewal and efficiency worth the residual 45%.
Non-regulated and other CapEx stood at EUR 48 million. This includes capitalized financial charges and other investments. Regarding net debt and cash flows analysis, net debt at the end of September 2022 stood at about EUR 8,651 million, about EUR 1.4 billion lower than 2021 year-end level, mainly due to the hybrid issuance made in February and to the cash generation of the period. Current debt structure allow us to be comfortable in serving investment needs for the next future. Let's now make a deeper analysis of our debt profile, moving to page 15. Thanks to our long-term debt management approach of the latest years, at the end of September, fixed over floating ratio on gross debt stood at about 87%. The average duration was about 5 years.
With the aim of confirming our leadership in sustainable finance market and to meet our financial needs, let me just remind you that in February 2022, Terna launched its first ever hybrid bond for a nominal amount of EUR 1 billion, successfully accepted by the market with an order book at peak of over EUR 4 billion. This is proof that in recent years, we took advantage of favorable market conditions, carrying out a pre-financing activity and extending the average maturity of our debt. This allowed us to have enough flexibility for the coming months. Indeed, in the short, medium term, we are able to look at the bond market more as an opportunity rather than as a need.
In this context, let me remind you that in September, Terna launched a fixed rate single tranche bond through a private placement procedure for an overall amount of EUR 100 million. The notes, with a duration of five years and a maturity date falling on 27 September will pay a coupon of 3.44%. As already anticipated just yesterday 8 November , we signed a EUR 1.9 billion contract with the European Investment Bank for the financing of Tyrrhenian Link project. This loan will be drawn down for a first statement of EUR 500 million. That will be the first tranche of the total one point nine, approved by the European Investment Bank for the project.
The 22-year loan has longer maturity and more competitive cost than those generally available on the market, fully in line with Terna's policies to optimize the financial structure. Thank you very much for your attention. Now, before the Q&A session, let me conclude this presentation with some closing remarks. First of all, I would like to underline that, as previously said, our net debt and our cost of debt are fully under control. As you have seen, our net debt stood at about EUR 8,651 million, about EUR 1.4 billion lower than 2021 year-end level. I would like to underline that Terna CapEx plan is strong, solid and safe. Indeed, almost all the CapEx plan was already authorized.
As already said, we have had an important step forward on Tyrrhenian Link, one of Italy's most important infrastructure projects aimed at ensuring the development and security of the national electricity system, in which Terna will invest around EUR 3.7 billion. For what concerns procurement, despite the extremely challenging scenario, potential shortages of raw materials do not represent a risk for us, also thanks to group's contribution. I can say that we are on the right path regarding the authorization process, construction activities and procurement, in line with the milestone set in the updated industrial plan and in ten-year development plan of the company. Concerning international activities, just two days ago, we completed the first closing for the sale of Latin American assets.
In execution of the agreement signed in April and was already announced with the update of our 2021-2025 industrial plan last March. Finally, regarding 2022 guidance. Thanks to the initiative aimed at further increasing benefits for the system and efficiency, Terna expects an EBITDA of EUR 2 billion and an earnings per share of 0.42 EUR. Thank you very much for your attention. We are now ready for the Q&A session.
Thank you much, sir. Ladies and gentlemen, as a reminder, if you'd like to ask any questions, please press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star two. Once again, please press star one. First question today will be coming from Mr. Enrico Bartoli calling from Mediobanca. Please go ahead.
Hi, good evening and thanks for taking my question. First question is related to your international strategy. You recently announced this agreement with Meridiam for entering the U.S. market. I was wondering what kind of opportunities you think Terna would have in that market. Some color is possible on this joint venture with Meridiam and also considering the challenges that you think you could face, considering that this is a brand new market for your company. Second question is on the request of connection by renewables in Italy. I think that the latest figure was an outstanding 285 gigawatts. Definitely this highlights a strong interest by developers in the Italian market but we know that the bottlenecks are still on the authorization process.
I'm wondering what is your feeling about the possible easing of the authorization processes in the Italian market and if you think that the new government could have some impact or try to further speed up this kind of processes. Last one is related on the new environment on interest rates. If you highlighted the decline in net debt that you had at the end of the period. I was wondering what your expectations are in terms of the evolution of your cost of debt in 2023, also considering the credit line that you achieved with EIB? Thank you very much.
Okay, let me start from the last one. As you know, we are working a lot in order to set the lowest possible level for interest cost. I think that we did a good job with the issuance of the hybrid we mentioned before and also with the agreement we just concluded, specifically with agreement with European Investment Bank. The level of cost is undisclosed but I can highlight significantly it is premium versus the market. We do continue to do our job. We are not under any kind of pressure. We have time, we have plenty of available cash and we are working, as you have seen, with a lot of different instruments versus the standard bonds.
We will continue to do our job in this way and we will take the opportunity at the right moment also in the coming months. Coming back to the first question. Well, as you remember, at the beginning of October, we have concluded an agreement with Meridiam and Boundless Energy. You know, Meridiam is a financially respectable financial institution and Boundless Energy is an American developer. We have signed a joint development agreement to capture all the business opportunity connected to potential acquisition, development and implementation of infrastructure project in the U.S. The U.S. is a booming market.
There is an outstanding amount of project and increase of needs for the electrification, so we are more than convinced that we can have a positive role in this, keeping always in mind that our approach will remain always the same as it was in the past. Low capital absorption and low risk profile. Regarding the level of investment in renewable, you have mentioned an important figure that represents the positive willingness from not only Italians but from private entrepreneurs in investing in renewables in Italy. There are, of course, some concerns regarding the level and the speed of the authorization process. Of course, it is not up to us. This is a government role to decide and to deliberate on this topic.
We will support, as much as possible, the government in taking the right decision to ease this process, to make the realization of renewable more easy for the next future.
Does that answer your question, sir?
Yes, thank you very much.
Thank you so much . Next question today is coming from Stefano Gamberini calling from Equita. Please go ahead.
Good afternoon, everybody. Two questions from my side. The first regarding the output-based incentive. You said you improved, sorry, the guidance by $100 million at EBITDA level for 2022, if I understood correctly, due to a better trend that you expect from output-based incentive. Could you give us an idea what is the total amount that you expect in 2022? And if this is an anticipation bring forward of the future output-based incentive that you already set for your 2022-2025 business plan or is something on top of the already expected output-based incentive for the period. The second regarding the trend of interest rates. You underlined that you were able to get a finance at 3.5% five-year period.
This is an increase in the region of 250 basis points compared to the average cost of debt that you expected in the five-years period. Could you elaborate a little bit what could happen on the other side regarding the regulation? What is the higher WACC that you expect probably in 2024 or 2025 onwards? What are the advantage or the benefit that you expect with an inflationary scenario in order to understand if your return on investment, on the marginal investment that you will do, considering the huge amount of investment you have in front of you, will be higher than the marginal cost of debt that we should expect for coming years. Many thanks.
Well, regarding the first question, the level of output-based incentives foreseen in the whole 2021-2025 plan was in the region of EUR 500 million. This is an amount that we increased in the latest year compared to 200 and after the 240, if you refer to the previous business plan approved by the company. This is a tendency that we always declared, given that the output-based component is becoming more and more relevant in our marginality. When we look at 2022, the expectation for 2022 was in the region of EUR 200 million and given the positive performance that we already see for this year, we increased this amount up to EUR 300 million.
You can consider this increase structural, so you can consider this not as one-off contribution but it's something that you can consider on top of the current estimation of our business plan, that I just mentioned. For the future, we will communicate the moment we will be in the position to update the current business plan with a new one. Second question, regarding interest rates. Yes, of course. Now we see on the market interest rates growing, we're growing. We do expect some news in the behavior of the central banks. You have seen a sort of alignment between European Central Bank and the Fed. Let's see what will happen in the future. For sure, we are in a challenging scenario.
We are not concerned for that given the tariff structure that we have. If we will see now an increase in the cost of debt that we are managing as best of our capacities, we also expect a corresponding increase in the WACC.
Just a quick clarification on this. You expect a huge increase in allowed WACC from 2024? Because I think that clearly in 2023 there isn't any trigger.
We do expect a corresponding increase in WACC.
Thanks a lot.
Thank you much sir . The next questions are coming from Bartłomiej Kubicki of Société Générale. Please go ahead.
Hello, good evening. Thank you for taking my questions. Three issues, two of them which were already discussed but I would like to get some clarification, please. Firstly, on what was just mentioned about the allowed WACC. Indeed, we expect it to increase in FY 2024 but not necessarily the allowed cost of debt. I wonder if you actually feel the necessity to speak to the regulator, maybe somehow adjust the regulations to capture the fact that cost of debt is increasing. The cost of new debt is increasing quite rapidly, while the allowed cost of debt takes into account predominantly past cost of debt. That was my first question, meaning whether you would like to talk to the regulator and change the regulations or you would like to keep them as they are.
Secondly, on the EIB credit facility, because you are fixing it for 22 years. Okay, you didn't mention the rate. Let's say it's 3.5, 4%, something close to the bond case right now. But if we imagine a scenario where bond yields go down again to 1%, is it possible to exit this long-term loan to refinance at lower rate without paying any penalty or any premium to buy it back? I have no idea how it works. I would like to know whether there is any exit potential from this long-term loan should yields go down.
Third thing, on the France-Italy interconnection, which has been delayed, if you can tell us what are the reasons for the delay, lessons learned for future projects, let's say the Tyrrhenian Link and I presume the interconnector sits in the work in progress, which means gets lower remuneration. I wonder if you can maybe tell us how much money you have potentially not earned because it is not a completed project but it is a work in progress project. Thank you. Thank you very much.
Let me start from the last one. The delays, the interconnection between Italy and France, have a lot of reasons. Please consider that the physical infrastructure has been completed already many months ago. There was an open discussion regarding the electrical part of the project that has been solved. In the meantime, no impact at all, given that the lack of remuneration wasn't meaningful, because as you know, already since a few years, we are fully remunerated on the work in progress amounts that we do have. Of course, it is important to keep on time and keep the budget. We are fully committed to confirm our ability to conclude investment on time and on budget.
As I said before, the Tyrrhenian Link, now we are still in the authorization phase but we already procured the most relevant portion of the physical infrastructure, meaning the submarine cables and we already procured the conversion stations on the three sites, both in the peninsula, in Sicily and in Sardinia. We will do our best, as always, to keep the right path in delivering investments that are needed for the energy transition process. Coming to your first question, connection between WACC and evolution of interest rates. Honestly, there is not so much to elaborate on this. Given that the rules are set, there is nothing to discuss. There is an observation of the evolution of the parameters and you know that interest rate is one of the most relevant parameters to be included in the WACC flow.
We do expect that WACC flow formula will naturally incorporate the higher level of interest rate that we are observing on the market today. You know, which is the tariff structure and the tariff principle, Terna is let me say hedged, naturally hedged by the formula. Of course, it's up to the management to try to do its best to maximize the advantages coming from this. Your question regarding the condition that we just concluded with the European Investment Bank. Of course, things could change. Interest rates could increase, interest rates could decrease. Our job is try to do the best as possible given the market condition. In principle, all the bank loans including European Investment Bank loans could be reimbursed in advance.
Honestly, I do not see so much sense to discuss about that. I think that we just concluded the deal with a significant premium versus the market. We are extremely happy for this result and we will continue to do our job. Consider that when I say significant premium, I mean more than 100 basis points. I think that the team, not me, the team did an excellent job and we will continue to force the best condition that we can obtain from the market, given, of course, the market condition that we find from time to time.
Okay, thank you very much.
Thank you, sir. We'll now move to Mr. James Brand of Deutsche Bank. Please go ahead. Your line is open.
Hi. Thanks for taking my question. I just have one question and it is probably a clarification on the answer earlier around EUR 300 million of incentive payments you now expect to receive this year and you said that was structural. I was just wondering whether you could expand a bit on what you mean by that because I understood certainly the kind of system management incentives that you had as being capped. So my kind of initial feeling was that you were maybe bringing money forward from future years to this year and the higher incentive payments this year might mean less in future years. If it's structural, it sounds like you think it might be able to be maintained at the higher level or certainly a high level than maybe we had previously expected.
Maybe you could just clarify that possibly that would be really useful. Thank you.
Well, I do apologize given that there was some noise on the line but if you all understand, you are asking some details and some elaboration about the level of output-based incentive. Let me resume that. We have an output-based contribution that is an increasing output-based contribution. In the business plan horizon, that is in the region of EUR 500 million. This is what we communicated six months ago, seven months ago. There are three categories: interzonal incentives, intrazonal incentives and MSD, reduction of ancillary services. The expectation for 2022 are in the region of EUR 200 million. We are now in the condition to announce that we performed quite well, especially on MSD, in which we have something that was expected in 2023 already available in 2022 but this is not only an anticipation.
This is an increase in the absolute value. That's why you can consider this increase of EUR 100 million a structural increase and not a one-off effect.
Okay. Effectively, not to put new numbers out there but effectively what you're talking about is, you know, another EUR 100 million being added on to the incentives over the business plan and that coming this year. Is that the right interpretation?
It's not the right time to discuss about future business plan. What I can confirm is that you can consider this EUR 100 million increase as a structural increase, with respect to the original expectations.
Okay, fair enough. Thank you very much.
Thank you much, sir. We'll now go to Stefano Gamberini of Equita. Please go ahead.
Yes, many thanks. Just a follow-up regarding the current situation. There are the first signs of deterioration in terms of credit quality for the retailers and we can see a risk that could be similar to the COVID-19 period, when the regulators introduced some delays, some postponed delays in the payment of your fees by retailers. Do you have some talks with the regulator what could happen in your view if the situation will deteriorate in the forthcoming months for retailers and some extraordinary measure could also impact Terna or do you expect that at the end of the year, some other solution could arrive? Thanks.
Well, you're right. The situation that we do see now is pretty similar with the situation we faced in the initial phase of the COVID-19 emergency. Also at the time, we've seen a deterioration of the credit on the retailer and this is something that is happening. That's something that has already an impact on a lot of financial institutions. You know, our tariff structure that is pretty protected by the regulatory scheme, there is no possibility, let me say, for distributor and generators to skip from the payment of the transmission services, given that the regular payment of the transmission service competences are mandatory to remain in the market structure, in the market system.
We have, of course, to monitor the situation, given that, it's not only a matter of Terna but it's a matter of the general evolution of the economic system in the nation and we are of course a part of it but we do not see any specific additional risk for us.
Thank you.
Thank you, Mr. Gamberini. We'll now move to Ms. Antonella Bianchessi from Citi. Please go ahead.
Yes, hello, good afternoon. Just a quick question. Given that the formula is stated and fixed until 2027, I was wondering, do you still see value creation given the new regulatory, the new market environment? Because obviously it's not only the issue of the cost of debt which is partially fixed but it's also the fact that equity risk premium is adjusted depending on if there is an increase in real rates. Does this is a subject of debate with the regulator? At which level of rates you will say this regulation is destroying value? Which is the level of rate that you need that to basically change your CapEx plan?
The second question was on the cost of debt, if you have some idea, some indication on a full year basis and also the net debt at, you know, at the end of the year, if you have any type of guidance. Yeah. Thank you.
Let me start from the end. No guidance for net debt for year end 2022. No indication also on the cost, on the related cost. We will do our job. Regarding the first part of your question, there is value or this value, this is something that we already discussed several times. What is important for us is that we have a stable, predictable formula that will protect us from the evolution of the macroeconomic variables included in such formula that are affecting our business, interest rates, the country's premium, the inflation and that's it. We do have a formula that is set, is predictable and we have to play with such formula. I've said several times I would prefer to exchange some basis point of remuneration with some years of additional predictability.
We are pretty satisfied with the approach followed by the authority. Of course, the moment we have to negotiate with them, we do our job and we hardly negotiate but we are not there. Now we have a formula that has been set, it's not up to us to comment. Where you can create value, I think that this is not the right place to create value. We are not playing with formulas. We try to realize investment that are needed for the system. I think that one area in which we could create additional value is the output-based incentive area. We have already commented that the more we move toward the future, the more the output-based component will have an increasing role in our general remuneration.
I think that we have started quite well because we are increasing the level of output-based contribution and also the acceleration that we just released regarding 2022 is a right demonstration of the validity of our approach.
Well, you know, my question was the firm has in his mind a level of rates. After that, you know, the formula will be value destructive or, you know, the CapEx plan will not change depending on the dynamic of the market.
I've said before, we have a formula that is protecting us from the variation of the macroeconomic variable. This is not up to me to comment that.
Okay. Thank you.
Thanks so much, ma'am. As we have no further questions, I turn the call back over to Mr. Scornajenchi for any additional or closing remarks. Thank you.
Thank you, gentlemen. Thank you very much for your time and let's see you in the next appointment for the full-year financial statement in the coming months. Thank you very much.
Thank you much, sir. Ladies and gentlemen, that will conclude today's presentation. We thank you much for your participation. You may now disconnect. Have a good day.