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Edited Transcript of TRN.MI earnings conference call or presentation 9-Nov-18 2:00pm GMT

Q3 2018 Terna Rete Elettrica Nazionale SpA Earnings Call

Rome Jan 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Terna Rete Elettrica Nazionale SpA earnings conference call or presentation Friday, November 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Agostino Scornajenchi

Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO

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Conference Call Participants

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* Dario Michi

Fidentiis Equities S.V.S.A., Research Division - Analyst

* Enrico Bartoli

MainFirst Bank AG, Research Division - MD

* Harry Peter Wyburd

BofA Merrill Lynch, Research Division - VP and Junior Analyst

* James Brand

Deutsche Bank AG, Research Division - Research Analyst

* Javier Suarez Hernandez

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Juri Zanieri

Kempen & Co. N.V., Research Division - Analyst

* Stefano Gamberini

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to your 9-month 2018 consolidated results conference call. (Operator Instructions) I must advise you that your conference is also being recorded today on Friday, the 9th of November, 2018.

I'd now like to hand the call over to your host, Agostino Scornajenchi. Please go ahead.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [2]

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Good afternoon, everybody. Welcome to the first nine months' 2018 result presentation. Before starting to analyze the figures, I would like to share with you the recent trend of the electricity demand in Italy. In the first nine months of the year, we registered a demand of about 242 terawatt hour, higher than the same period of 2017, when demand was about 241 terawatt hour. Let me underline that in the period, about 36% of national demand was covered by renewable sources versus the 34% of the same period of last year. Moreover, national net total production stood at 210 terawatt hour, with a strong contribution coming from hydro.

Now let me spend few words on the key achievements of the period. First of all, as usual, 2 main figures: net income, up at EUR 542 million; and group CapEx at EUR 561 million, respectively 2% and 3% more versus previous year. As you may have perceived, this positive set of results is fully consistent with the target provided in the 2018-2022 Strategic Plan presented back in March. Moreover, group revenues and EBITDA were up by 3% and 2%, respectively, which means EUR 55 million and EUR 23 million higher than last year.

Let me highlight the reduction of our net debt, which stood at EUR 7.6 billion versus about EUR 7.8 billion at year-end 2017, mainly thanks to the operating cash flow generation of the period. The positive set of results and the strong cash generation confirm the provided guidance for the full year and will support the payment of EUR 0.0787 per share of 2018 interim dividend, fully aligned with the dividend policy presented in 2018-2022 Strategic Plan. Finally, let me underline that in September, Terna was awarded as world industry leader in the electric utility sector for its sustainability performance within the Dow Jones Sustainability Index 2018.

So let's now have a deeper analysis of the figures at Page 6. Total revenues in the first 9 months of 2018 increased by 3.5%, reaching EUR 1,625 million, up by EUR 55 million versus the same period of last year. This growth was related both to regulated, for EUR 23 million, and to nonregulated activities for EUR 26 million. As far as international activities are concerned, the contribution was EUR 5 million higher versus the same period of 2017.

In this regard, I'm happy to announce to you that in October, the first of our 2 Brazilian projects, the Santa Maria line, entered into operation 2 months before schedule. This project is strategic for integrating clean energy into the Brazilian national electricity grid. The second project will be completed in the coming months.

Let's go into detail with the regulated and nonregulated revenues evolution, moving to the next slide. Regulated revenues reached EUR 1,481 million, EUR 23 million better than last year. The increase was mainly due to the recognition of higher transmission and dispatching fees, mostly due to asset evolution and the one-off component related to dispatching activities. Other revenues increased by EUR 1 million, mostly thanks to higher insurance reimbursement registered in the period.

Nonregulated revenues stood at EUR 138 million, EUR 26 million higher than last year. The growth was mainly due to the increasing contribution from Tamini, that showed an increase of order intake of about 24% and higher out of nonregulated activities related to the Avvenia acquisition and Italy-France interconnector.

Now let's go through the operating cost analysis at Page 8. As shown in the chart, total operating cost stood at EUR 395 million, with an increase of EUR 31 million versus last year. The increase was attributable both to regulated and to nonregulated activities as a consequence of the higher volume of activities.

Let's move to the next slide for deeper analysis of this OpEx. We reported regulated OpEx of EUR 288 million, EUR 16 million higher than last year, mainly related to the reinforcement of the great maintenance activities consequence of O&M metals and process revision also connected with increasing needs in terms of the resiliency against extreme weather condition events, as you have appreciated in the last 2 weeks. Regarding nonregulated, operating expenses amounted to EUR 101 million, EUR 30 million more than last year, mainly due to higher Tamini turnover.

Let's now move on to the EBITDA analysis. Considering the above-mentioned effects, group EBITDA reached about EUR 1,230 million, EUR 23 million better than last year. We registered a positive EBITDA contribution, both from regulated and nonregulated activities, which grew by EUR 7 million and EUR 13 million, respectively, versus last year.

Let's now move on the lower part of the P&L at Page 11. Depreciation and amortization amounted to EUR 400 million. The increase versus last year was mainly due to the new assets becoming operational. As a consequence, EBIT reached EUR 830 million, 1.6% better than September 2017. We reported net financial expenses of EUR 67 million, substantially in line versus the same period of last year. Taxes stood at EUR 218 million, with a tax rate of about 29%. For the full year, we confirm a normalized tax rate at about 29%, 30%. Consequently, after the exclusion of EUR 3.5 million of minorities, the group net income reached EUR 542 million, EUR 13 million better than last year.

Let's now move to CapEx analysis at Page 12. For the first 9 months of 2018, total group investments amount to EUR 561 million, EUR 16 million higher than last year. EUR 478 million were related to the regulated activities, of which about 14% related to projects that might be eligible to the 1% in good wage incentives, as they have been included in the current incentivized categories. Among the main projects, it's worth mentioning the public interconnection between Italy and Montenegro and between the Italy and France as well as the Venice cables. Other CapEx stood at EUR 84 million, which includes capitalized financial charge and other investments.

Let's now move on to net debt and cash flow analysis. Net debt at the end of the period was EUR 7,592 million, EUR 205 million lower than 2017 year-end. Indeed, thanks to the strong operating cash generation of about EUR 900 million, we were able to more than cover the CapEx spending of the period and the dividend payments.

Let's now make a deeper analysis on our debt profile at Page 14. Our financial structure remains solid. Indeed, our maturity and our level of fixed to total debt allowed us to keep control on our financial charges and maintain a solid balance sheet. In detail, the fixed-floating ratio was that still at 100%, and the debt maturity after 5.4 years substantially in line with year-end 2017, it was 5.5, further reduced the financial risk of the company.

On top of this, after the success of the first lien bond issued in July for EUR 750 million, with a bid-to-cover ratio of approximately 6x and a cost of debt below 1.1%, at the end of September we signed a credit facility linked to sustainability Indexes for EUR 900 million. And this facility has been extended today with additional EUR 200 million.

Thank you for your attention. We are now ready to open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Harry Wyburd from Bank of America.

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Harry Peter Wyburd, BofA Merrill Lynch, Research Division - VP and Junior Analyst [2]

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Three linked questions from me, please. So -- and they're all related to the consultation document that came out yesterday evening. So firstly, am I correct to assume that if I take all of the parameters that were released last night that, that would add up to a WACC of about 5.6%? So I wonder if you could confirm that?

And then secondly, am I correct to assume you have 5.1% in your business plan? And could you give us the figure for your expected tariff ramp next year, so we can figure out what the delta would be there on revenues?

And then finally, you have SNAM earlier in the week giving positive update on the dividend because they included a higher allowable return. If you were to include a higher allowable return -- or when you include a higher allowable return in your future business plans, and let's say, that maybe gives you something like a EUR 80 million or so increase in annual revenues for the sake of argument, what kind of areas do you think you could use that extra revenue on? You've obviously already increased the dividend outlook this year. Is that something you might look at again? Or are there any other areas that you would look at?

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [3]

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Okay. Right, as you know, the authority started a consultation process just last month, and yesterday night issued a consultation document that is pretty rich. There are a lot of details in this consultation document. And there are lot of elements that are useful to have a precise estimation of the level of the expected WACC for 2019 and the following years.

But before entering and comment in details the impacts as you required, first of all, let me express our satisfaction for the fact that the authority has confirmed the methodology. This is something that is important for us. And the authority also confirmed the fact that the parameter of the formula are able to cover the evolution of the macroeconomic scenario. So you're perfectly aware then to expect also the assumption that we've taken -- at the moment we've taken for the business plan, something that has really changed because we have seen a relevant increase in the company's premium that has been recovered in 4 months. As you can imagine, this is the most evident element of the consultation document that is possible to understand. Of course, we are continuing to analyze in detail this document. And given that it's a consultation document, we will discuss internally it is the case to start a discussion for us, additional clarification and some additional modification to that. But again, I think that we're in line with the expectation. And this is an important element for us because I said several times we have to count on a stable and predictable remuneration scheme given the target that we have and the fact that we have to invest a lot of money in reinforcing the Italian grid as announced in the business plan presentation, and as we will confirm in the future business plan presentation. In order to do that, we need a predictable remuneration scheme, okay.

Coming back to the second part of your question, to say that, okay, so we have -- at the time we have taken hypothesis for the business plan, we were somewhere in February 2018, so in a completely different scenario. You can expect an additional impact coming from the WACC that is spread easily to be calculated because we are in the region of EUR 10 million, EUR 15 million to withstand the point of increase.

You have expressed the concept of extra revenues, yes. But on the other end, you have to consider that this additional revenues are there to cover additional costs. As you can imagine, they include the spreads that we have seen, will have an impact -- could have an impact on our average cost of debt. That fear, we are talking only about first impression of the consultation document. This is something that we will analyze in detail, and it is something that will be officialized by the authority by year-end, and that we will have to incorporate in the business plan.

And now I come to the -- your final question, what we are going to do with our dividends? This is something that we will communicate at the moment we will present the business plan. Today, we confirm a dividend policy that is in place and is remaining in place.

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Harry Peter Wyburd, BofA Merrill Lynch, Research Division - VP and Junior Analyst [4]

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I wanted just to follow up just on one of the numbers. If you could just confirm the expected level of tariff ramps for 2019. If that number is in front of you, that will be very useful.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [5]

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We have not given any specific guidance for that.

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Operator [6]

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And your next question today comes from the line of the Javier Suarez from Mediobanca.

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Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [7]

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Three questions on my side, too. Again, coming back to the previous question on the consultation document that the authority published yesterday evening. If you can help us to understand if there is any element that the company could argue or discuss with the regulator and could make the theoretical calculation somehow improved. If there is any element that you have seen that can be discussed with the regulator and moving that needle, that in principle, leads into that 5.6% of allowed return? And that would be helpful.

Second question is on the working capital. You have in the Slide #13 positive contribution of EUR 179 million (sic) [EUR 169 million]. If you can help us to understand what that number is likely to be by the year-end and the working capital dynamic in 2019?

And the third question is on the guidance. And specifically, for the guidance in 2018, at the previous conference call you reiterated the guidance of EUR 1.61 billion. So if you can give us an additional guidance on your EBITDA level for 2018? And I think that is it.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [8]

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Well, so regarding your first question, do we have some element of discussion to argue with regulator? I think that is not a matter of negotiation. You know my position on that. We are a regulated company, and we apply the decision taken by the authority. We have appreciated the document because I've said before the document incorporates something that was pretty visible and impacting the macroeconomic scenario that was the increase of company's premium that has been included in the elements disclosed yesterday night. There are also other elements, formula like gearing, like the tax rate, that will have a lower impact, that we are analyzing in details, and we will guess, internally, if and when open discussion table vis-a-vis the authority.

Regarding the question on working capital, I refer to Slide Page 13. We had, at the end of September, EUR 7.6 billion of net financial position that show a relevant improvement with respect to last year. Here as usual, we are suffering, if I may say that, we are not suffering at all for sure. But we are expecting, since quite a lot of months, authority to issue some resolution to allow us to, to oblige us to pay the -- sorry, the master plan fleet. This is something that is expected by year-end, and that could have a relative impact. Of course, this is something that is not in our hand, but we are discussing with the energy authority to understand if those resolution will be issued by year-end or the beginning of next year. And of course, we will keep you fully informed. On the last question about the guidance, EBITDA guidance at the end of 2018, EUR 1.6 billion. As we have seen already in June, we have a slight advantage with respect to this year in the region of EUR 20 million, which is something that was confirmed also in -- at the end of September, we are obliged to increase. So you can expect that we will keep this advantage for us. And you will have also similar positive impact by year-end. So you can expect something in the region of EUR 1,640 million.

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Operator [9]

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And your next question today comes from the line of Dario Michi from Fidentiis.

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Dario Michi, Fidentiis Equities S.V.S.A., Research Division - Analyst [10]

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Most of my questions have already been answered, but I would like to ask something on the capacity market where the state of the art of the situation because, if I'm not mistaken, from your side, everything is okay. What is going to stop there, the application of this new initiative?

And then an update of -- on the international assets, the second project in Brazil and on nonregulated activities on Tamini, please.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [11]

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Yes. So for -- on capacity market, on the 13th of April, as you remember, the authority published a resolution that provides the criteria for the implementation of the capacity market. And the document follow a consultation document that was issued in August 2017. Now we can expect that the authority should make public the maximum cap and the strike price with a final resolution and also this resolution will be followed by a formal approval of the final mechanics by the Ministry of Economic Development. For a full technical standpoint, Terna is 100% ready to start the auctions.

Regarding the international activities, I said before, we have 4 different projects in Latin America. The first one has been concluded in Brazil. The second one will be concluded in the coming months. We expect full P&L contribution from Brazilian projects starting from January 2019 and the other 2 projects will follow in 2020 and 2021. Let me say that the moment we will have concluded the construction activity in Brazil, we will have an international asset base that will be almost completed, given that when we talk about Brazil, we are talking about more or less 70% of the total lines that we have in South America. So we are pretty satisfied with the results of our team that has been appointed recently in order to conclude this development and this construction. We will continue to look to international activities, and hopefully in the future, with the same speed, the same approach we will follow until today. We do not consider international as a relevant principal -- how can I say, pillar of our future evolution, but we consider international important for us, given that it's something that will stimulate our technical evolution, our technical skill. It is important to have a confrontation with other guys from other countries that are competing on the same sector. And we will continue to follow international development with the same approach, low-capital absorption, low-risk profile and if possible finding company which Terna could express specific and technical competences.

On last question on Tamini, as you know, Terna, is assisting Tamini in the turnaround process. We are looking to the first positive outcome of our efforts started last year. Last year, we have increased the level of the order intake. Now we are putting into revenue this additional order intake. We have to continue to assist the company in this process, and we expect the company will recover marginality, positive marginality starting to -- beginning of next year.

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Operator [12]

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(Operator Instructions) We'll now take our next question from the line of Enrico Bartoli from MainFirst.

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Enrico Bartoli, MainFirst Bank AG, Research Division - MD [13]

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First of all, I have a question regarding the dispatching revenues. In the third quarter, if I calculated well, there was a significant increase compared to last year. Can you elaborate a bit on the reason for this? And if it's possible to have a guidance for the evolution of this revenues for the next part of the year?

Second question is related to the meetings that Terna and other companies had with the government a couple of weeks ago regarding the possible increase in investments were reported by the press. If you can give us some flavor of what you get from the meeting? And if you think that the approach of the government could determine some favorable environment for your investments.

And the last one is, again, -- sorry, on the working capital evolution. So you mentioned that you could have this payment for the master [development] plans by the end of the year. If it's possible to have an idea of the amount of that?

And possibly, if you can give us a guidance for the net debt at the end of the year?

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [14]

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Okay. Let me start from the last one. Regarding the guidance for year-end, we confirm the guidance we have provided in the business plan presentation. Of course, I said before, the evolution of this element is something that is not on our hand. What we can do is to keep you informed about that. And once we received the authorization from the authority to pay for that, we will do that. No more than this.

So let me come back to your first question. The increase that you've seen in the dispatching revenue is due to the recognition of revenues coming from outstanding receivables related to past year, as the ARERA Resolution 2018 will be taken at the beginning of this year. And the recognition of other cost reimbursements previously not included in the dispatching tariff. This element has already included in the EBITDA that's already provided to you and as I confirmed before in my previous answer.

Regarding this so-called [Foreign Language] you mentioned regarding the government activities in order to put an additional effort in the realization of infrastructure. What can I say? Honestly, and not a new for Terna, we only provided our full cooperation with the government in order to provide a full disclosure of what we are going to do in terms of reinforcement of the grid in order to enforce the resilience of the grid to investor on additional development plan and to, in any case, let me say, in relative terms to do everything that's needed to give additional benefit to electricity national system. I think that the government pretty appreciate that. This is something that we are commenting since more than 1 year because, as you know, since the beginning of the mandate, we started communicating that it is important for us to react to the inputs coming from the energy transition, increasing the level of quality of our grid, increasing the resiliency and the capacity also as seen in the recent months and the recent weeks and particularly, the resilience also against massive and violent weather events.

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Operator [15]

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We will now take our next question from the line of Juri Zanieri from Kempen.

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Juri Zanieri, Kempen & Co. N.V., Research Division - Analyst [16]

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I just want to inform you that all my questions just have been answered.

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Operator [17]

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Our next question comes from the line of Stefano Gamberini from Equita.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [18]

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Three quick questions. Regarding the CapEx guidance, could you give us an update? And what is the part of the total CapEx that you expect will be invested in the network?

The second, what is the trend that you expect for '19, considering that the project that you already have in your hands and if you can expect an acceleration of CapEx next year?

The second question regarding Montenegro and the -- all the other investments that have to be -- have to enter, sorry, on stream by 2019 in order to get the over return set by the regulator. Do you have some delays on this item? Or everything is in line with your expectation?

The third regarding the one-off. Could you give us an idea of the level of one-off exactly that you expect for -- in this year?

And finally, sorry, if you remind me the guidance on the year-end, the EBITDA that you spent during the business plan presentation?

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [19]

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Okay. So the guidance for EBITDA was EUR 1,610 million for the end of 2018.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [20]

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Sorry. The guidance for net debt was -- I made a mistake.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [21]

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We didn't give any guidance for net debt.

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Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [22]

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Okay.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [23]

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Well, on CapEx, we confirm you the guidance of EUR 1.1 billion at the end of 2018. Regarding expectation for 2019, this is something that we will discuss when we present the business plan. As I said several times, we have to continue in accelerating investment in order to cope with increasing need of the national grid.

Regarding interconnector project, France and Montenegro, for the moment, we construct -- for the moment, works are proceeding in line with this new schedule. I will confirm that the project will be completed by the end of 2019.

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Operator [24]

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(Operator Instructions) We'll now take our next question from the line of James Brand from Deutsche Bank.

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James Brand, Deutsche Bank AG, Research Division - Research Analyst [25]

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Two questions, please. The first is on your borrowing costs. I saw that you have slide in there where you've highlighted that you fixed almost the 100% of your borrowing costs going forward. When SNAM presented its business plan earlier this year, it presented a borrowing costs profile where even though it hedged a lot its costs, it would see borrowing costs increasing over time because of the structure of forward curves. So I just wanted to ask you given that you hedged all of your borrowing costs, whether -- what that meant to you, whether you have hedged as an absolute rate and we should expect a flat rate of borrowing costs over the coming years? Or whether you hedged against the curve, and therefore, maybe we should see some increases even though you've locked in your rates? That's the first question.

And the second question is on your nonregulated activities. You gave a bit of color as to the improvements at Tamini. But you also had a meaningful improvement in profitability from your other nonregulated activities. So just wondering whether you can give a bit of context there on what's driving the improvement ex Tamini?

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [26]

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Yes. So regarding borrowing costs, please know that we have an average cost of debt of 1.4%, fully hedged at fixed rate, which was something that we have decided during the year. And we confirm this guidance of 1.6% for the existing business plan. So this is something that we have communicated more or less 9 months ago and back in March 2018. At the moment, we communicated 1.6% for the period '18-'22. Starting from that date, we hedge 100% of the fixed rate. Such conversation was included in the dialogue, deal on the debt market that were also concluded in mid-July, which we were able to finance more or less EUR 1 billion at a total cost of 1.1%. So what can I say, that what we said is confirmed, maybe we are in a slightly better position with that where we was at the end of 2018 -- sorry, at the end of 2017.

In addition to that, the duration is more or less the same. There the duration 1 year ago was about 5.5 years, now we are at 5.4 years. So we have another year -- we have gained another year of stability, I should say. What we can expect for the future, of course, today, we are in a very, very safe position because -- with the deal that we have concluded. In mid-July, we were able to cover all the refinancing needs until 2019. On top of that, we also enlarged, as communicated at the beginning of my speech, the revolving credit facility. So we have a huge financial flexibility today. We have something like EUR 2 billion in cash available. That is, in fact, in a very low-risk profile activities and fully available for -- to be used in a very, very short time frame. We continue on -- that we continue to look to the financial market more than -- as an opportunity than an obligation, and we will evaluate if we will have the possibility to gain additional opportunity for the future. But we are not concerned at all. Regarding the guideline for the future business plan and the evolution of the cost of debt for the future business plan, this is something that we will communicate in the coming months.

Regarding Tamini and the other non-Tamini, as you say, as you mentioned, nonregulated business. Tamini, as anticipated, we are continuing working on the turnaround. We expect that the company will start positive marginality, starting from January 2019. We are continuing to reduce the -- a strong increase of order. So we are also, let me say, filling the order intake chain through the years after 2018. Now it's time to execute, okay. So we'll have to remain fully concentrated in the execution, in the construction plan of the company. And I think that the management is fully committed -- the management of Tamini is fully committed to do that and the management of Terna is fully committed to support those guys and deliver what they ask from us.

Regarding Avvenia. Let me remind you that the acquisition of Avvenia will allow us an enlargement of the range of services included in our energy solution offer. We are talking about consolidated skills on construction, of maintenance, of transmission system, renewable power plants, good generation, storage energy system. With Avvenia, we are now able to offer all energy efficiency services as energy audit and energy requalification on industrial processes. I think that Avvenia is working quite well. We are fully in line with the expectation that we have presented in our business plan. As you probably remember, the nonregulated operation, including TLC, private interconnection, Tamini, energy efficiency of Avvenia, we provided guidance of accumulated EUR 350 million of accumulated EBITDA in 5 years. SO, we are fully in line with this guidance.

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Operator [27]

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We have no further questions at this time. Please continue.

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Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [28]

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Okay. Thank you very much for your time, and have a nice weekend.

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Operator [29]

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Thank you. Ladies and gentlemen, that does conclude your presentation for today. Thank you all for participating. You may now disconnect.