Terna Rete Elettrica Adr

Good afternoon everybody and welcome to TERNA's full year 2021 results presentation. Before starting to analyze the features, I would like to share some important highlights of the year. Firstly, regarding regulated activities, it's important to highlight that during 2021, 37 new projects for the development of the Italian grid were authorized. For a total value of over 1 billion investments, in line with the 2021 National Development Plan. Concerning international activities, Terna started the valorization of South American assets for the disposal of its portfolio, lowering even more the risk profile of the group. The due diligence process is ongoing. Closing is expected by year-end. Regarding sustainability achievements, let me say that Ternas' strong commitment in measuring and improving its sustainability performance is positively reflected in its ESG ratings, and consequently its inclusion in the most relevant international sustainability indexes. For instance, I can mention the Dunn-Town Jones Sustainability Index, Stocks Global ESG Leaders, the MIB40 ESG, the Feeds for Good Index. Finally, regarding our shareholders' remuneration, today's Board of Directors approved the 2021 final dividend of 19.29 euro cents per share to be paid in June and to be proposed to the next AGM. The 2021 interim dividend of 9.82 euro cents per share was already paid last November. In line with our dividend policy, total dividend for 2021 is 29.11 euro cents per share. After this brief introduction, let me give you the usual overview of the Italian electricity market, moving to the next slide. As you can see in this chart, in 2021 national demand was about 318 TWh, an increase of 5.6% compared with the same period of 2020, when national demand was about 301 TWh. I would like to underline that in 2021 electricity consumption in Italy substantially returned close to 2090 values. recovering the sharp decline recorded in 2020 caused by COVID pandemic. In 2021, renewable sources covered about 36% of national demand. Regarding national net total production, this stood at 278 TWh, 2.4% higher than 2020. Rest covered about 41% of national net total production, mainly thanks to the contribution of hydro and solar generation. Finally, let me highlight that in line with our institutional role of ensuring security of supply and quality of services at the lowest possible cost for final users, Ternach held in February a capacity market auction for 2024 delivery. With this auction, we awarded all the capacity that had to be allocated, thus covering the system needs. In addition, coverage took place with a good mix of technologies, including the storage system with about 1.1 GW allocated. Now let's move to the main feature of 2021. Regarding 2021 numbers, it is firstly important to clarify that, given the ongoing LATAM revalidation process, according to accounting principles, 2021 and 2020 results attributable to LATAM subsidiaries have been classified as activities held for sale, with impact on revenues and EBITDA and no impact on CAPEX, net income and net debt. Considering this change, group revenues and EBITDA were up by 5% and 2% respectively versus last year, which means 114 million and 44 million higher than last year. Moreover, we reported a group net income of 789 million Almost 4 million higher versus the same period of 2020. Group CAPEX stood at 1521 million, 13% more versus 2020, confirming our strong CAPEX acceleration. To support this huge CAPEX acceleration, our net debt stood at about 10 billion, but about 9.2 billion at 2020 year-end. Regarding 2021 guidance, Considering the statement of international activities held for sale, as you can appreciate from the chart, all these main features met and exceeded the provided guidance for the year, showing Terna's commitment on the execution of the plan. Plan update which is about to be presented on the 24th of March. Now let's make a deeper analysis of the 2021 key features, leaving the floor to the CFO, Agostino Scornaiechi. Please, Agostino.

Thank you, Stefano, and good afternoon, everybody. Let's start with revenues analysis. Total revenues in 2021 increased by 4.6%, reaching 2,605 million, Up by 114 million versus last year. So, as you can see in this chart, we registered positive contributions both from regulated and non-regulated activities for 105 million and 10 million respectively. Then, as already mentioned by Stefano, international activities now include mainly the structured costs related to those activities. For all the details, Let's move to the next slide. Regulated revenues reached 2,254 million, 105 million better than last year, about 5% more than 2020. The increase was mainly driven by the investment acceleration made on the national grid and output-based incentives effects, partially offset by lower revenues coming from quality of service. Non-regulated and international revenues reached 351 million, 2.9% higher than last year. This growth mainly reflected the higher contribution coming from Tamini and Brook. Indeed, Transformers orders intake was up by 69% versus 2020, while high voltage cable production coming from Brook increased by 26%. Regarding energy solutions, we registered higher revenues from the LT Group acquired in October 2021 and higher revenues from connectivity services. Now, let's go through operating cost analysis on page 11. As shown in the chart, total operating costs stood at 750 million, 10.4% higher than last year. The increase was mainly attributable to raw material purchases from Brugge and Tamini due to higher manufacturing volumes and to higher contribution of the LT Group. Let me now analyze EBDA, moving to the next slide. Considering all the previously mentioned effects, 2021 Group EBDA reached 1,855 million, 2.4% higher versus 2020. despite the one-off component related to Brugge acquisition that positively impacted full-year 2020 non-regulated activities. The increase was therefore mainly attributable to a higher regulated contribution of about 80 million versus last year, showing an EBITDA of 1,801 million in 2021. Let's now have a look to the lower part of the profit and losses, turning to the next slide. The precision and amortization amounted to 654 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 1,200 million, 2% higher versus 2020. We reported net financial expenses at 79 million. 8.3% lower versus the same period of last year. This extremely lower level was mainly due to forex effect. Taxes stood at 318 million, 21 million higher versus last year, due to the higher pre-tax result and higher income not relevant for tax purposes registered in 2020. Consequently, tax rates stood at 28.3%. As a result, group net income reached 789.4 million, about 4 million higher versus the same period of last year. Moving to capex analysis, at following page 14, in 2021, total capex amounted to 1,521 million, an increase of around 13% compared to last year. confirming Terna's great ability to pursue its mission. Indeed, we invested about 1,461 million in regulated activities. Among the main projects of the period, it is worth mentioning the Tyrannial Link project, the Paternò-Pantano-Criollo in Eastern Sicily, the rationalization of the Alto Bellunese area, and the Italy-France interconnection. Moreover, Let me underline the investment in stabilization devices such as synchronous compensators, mainly located in southern Italy, that will enhance the national grid stability. Among CAPEX categories, development CAPEX represented 39% of total regulated CAPEX. Defense CAPEX stood at 19%, while asset renewal and efficiency was the remaining 42%. Non-regulated and other CAPEX stood at about 60 million. This includes capitalized financial charges and other investments. Now, regarding net debt and cash flow analysis, let's move to the next slide. Net debt at the end of 2021 was around 10 billion, 830 million higher than 2020 RAND level, mainly as a consequence of the CAPEX acceleration made on the national grid. Let me highlight that we generated an operating cash flow of 1,359 million, thanks to which we were able to cover almost all the capex spending of the period. Let's now make a deeper analysis of our debt profile, moving to page 16. At the end of 2021, we registered a fixed overfloating ratio on gross debt of about 91% and an average duration of about 5 years. In line with our strategy of combining sustainability and growth to promote the energy transition, last July, Terna signed an agreement for a 300 million euro loan with the European Investment Bank at very competitive conditions, represented by a 22-year loan to strengthen and develop the national transmission grid and supporting the 21-25 industrial plan. This agreement followed the new green bond launched in June for a nominal amount of 600 million euro and an effective cost equal to 0.398%. Moreover, let me remind you that at the end of October Standard & Poor's rating agency improved Terna's outlook from stable to positive as a consequence of the same action taken for the Republic of Italy. In December, Tern assigned an amending agreement to the 2018 backup ESG-linked revolving credit facility, with spreads and fees linked to companies' performance on specific ESG indicators. The agreement extended its duration to 26 and increased the amount of credit up to a total of €1.65 billion. I would underline that last February, Terna successfully launched the first green non-convertible perpetual subordinated ivory bone, either for an Italian corporation, for a nominal amount of 1 billion euro. The issuance has been very successful in the market with an order book at peak over 4 billion euro. Lastly, in February, Terna also signed a bilateral ESG link term loan for a total amount of 300 million euro Thank you very much for your attention. Now, before starting the Q&A session, I would like to leave the floor to the CEO, Stefano, for his closing remarks.

Thank you, Agostino. Let me conclude this presentation with some closing remarks. As illustrated at the beginning of this presentation, excluding the first two months of the year, Italian electricity demand substantially returned to pre-COVID levels, with a 5.6% increase compared with 2020. Then we also launched the process of valorization of South America activities, thus lowering the risk profile of the company. Moreover, as mentioned by Agostino, the launch of the new hybrid green bond of 1 billion euro added even more flexibility to Terna's financial profile. As you appreciated, we were able to present a solid set of results for 2021, meeting and even exceeding the guidance provided for the year, demonstrating once again Terna's strong commitment to execution of its plan. From this positive starting point, let me remind you that on the 24th of March we will present the 2021-2025 industrial plan update. Thank you for your attention. We are now ready for the Q&A session.

Apologies for the technical issue there.

We will now go into the question and answer session. Our first question comes from the line of Harry Wybert from Bank of America. Please go ahead. Good afternoon, everyone. Thanks for taking my questions. Glad it wasn't just my life that went a bit quiet. OK, so I'll just keep it to two questions, please. Firstly, I guess it's a fairly obvious one that Can we just get your views on the immediate impact from Ukraine? So I guess what we've seen so far, I believe Enel mentioned that it was no longer going to go ahead with some gas plant conversions. Presumably we're going to see an acceleration in renewables with a big impetus to add new capacity in the next couple of years. And also perhaps a push on interconnection. So just interested in your thoughts on the immediate impacts of Thank you very much. I think it'd be probably sensible to assume that for a company that's now going to grow quite significantly, perhaps having an 8% dividend, Chagar might not be perhaps sort of corporate financially sort of suitable nowadays. So I just wondered whether you could give us any kind of flavour or sense ahead of next week as to whether you think that 8% dividend growth target is going to remain or perhaps whether you perhaps look to do something a little bit less Okay, thank you for your question. Starting from the first one that is regarding the Ukrainian-Russian war.

At the moment in Italy there are no impact in terms of gas flow. The flow is regular and the quantity are exactly the same, sometimes also more of the previous period. And so I am not able to say if something will happen or not on this topic. But You ask also on a long period impact and let me just explain which is the role of Terna on this table. Terna is the infrastructure operator for electricity in Italy. We cannot produce energy, we cannot buy, we cannot sell energy. We have to manage the energy, the electrical energy flow to our country and in the interconnection with other countries. Starting by the fact that Italy produces energy at 35%, between 35% and 40% with the with the renewable plants. Then we produce also with the carbon and oil and then we buy energy specifically from France, the nuclear produced energy and all these quantities are more than the 50% of the total amount. The other part is produced by gas and the acquisition of gas in Italy is about the 60% coming from Russia. And so if we can hypothesize a stop of this feeding, but it's really difficult to imagine in this moment and is not happening at the moment. But in any case, if it will happen, we may lose the 30% of the total amount of energy We can produce more energy with carbon. We are studying how to do in Italy. We can produce more energy also with other gas coming from other countries and our government is working on these agreements. and we can also ask for the other imports of energy coming from other countries. So that may be possible that the worst case is a certain difficulty, but speaking about our role, our role is to manage this traffic, let me say, of energy on our network and to allow The increase of renewable installations to allow the increase of interconnection, everything is inside our plan. So that if we continue to implement our plan, and if we continue to manage with the right methods, and we have methodology, we have systems, we have technology, we know how to do this, I think no impact direct on our company may arrive from this situation. So, speaking about the hybrid, I can give the floor to Agostino.

Thank you very much, Stefano. Well, regarding the significant capital increase that is needed to fulfill the needs of the system and to enable the energy transition, This will of course drive an increase of the financial leverage and this is something that is already visible at Euro M21. However, as you probably remember, we communicated on this during the market presentation in November 2020 and we confirmed that the company is fully committed to maintain a strong financial structure during the plan and beyond, also to action on the TEP side. This is not only a declaration, this is a matter of fact, given as communicated to the market and also as stated in this presentation, we have just recently issued our first hybrid wind bone, aimed precisely in strengthening our balance sheet. Let me remind you that the market warmly welcomed this instrument, so we are fully in line with the communicated strategy about

about the managing of our long-term debt.

And again, I confirm that we do consider the level of our rating an important element to demonstrate to the market the solidity of our business case and also the credibility of our managerial actions. So we are here to confirm that In order to continue to do whatever it will be necessary to defend such a credit level, credit scoring level, even for the future. At the end, you already said, so it will not be a surprise, regarding dividends, what can I say today is that the dividend policy for 2021 has been fully confirmed regarding the update. Let's talk about it next week.

Okay, fair enough. Thank you.

Thank you very much. Our next question comes from the line of Javier Suarez from Mediobanco. Please go ahead.

Hi, good afternoon and thank you for the presentation. Two or three questions on my side as well. The first one may be a follow-up on the lessons to be learned on what to do next. I think that the crisis is so deep and probably so unthinkable. that may require a complete rethought on our energy supply strategy. So what that may imply in terms of design for the Italian electricity transmission grid, if that has any implication, and what new concepts that may bring into the table. I'm thinking about maybe new technologies or more impactful technologies such as offshore, et cetera, et cetera. So any life in terms of your technology Thank you very much. and the European Financial Pools to help the economical recovery. And the third question is on the disruption in the value chain that we see globally. Do you see that having any impact on Terna and the deployment of its CAPES plan? Thank you.

Okay, Javier, if I understood, you want to come back to the Ukraine crisis and to better analyze or understand which is the possible impact, and also which are the future perspectives to solve this situation also in the future, also maybe after this war. which will be the consequences of this, if I understood. So that's what I can say. First of all, like I said before, for Terna what is really important is to manage in a better way possible the energy flow. We are going in front of the... The good period for weather and so the winter is finishing. So in Italy just now temperature are increasing and I think like I hear during these hours also SNAM announced that the Giacomo Donnini Now we start to accumulate gas because we will consume less and we will accumulate if the situation will continue in this way. In the meantime, we have to follow the indications of the national authority and national institution, our ministry, that asked to Terna to analyze the situation of different operators, production operators, and if it's possible to ask for an increase of production of the different sources. In the meantime, we are helping also authorities and institutions to define the new rules to authorize with a faster methodology and approach All the installation of new renewable sources. We are ready to catch these sources. We are going on with our investments plan. It is absolutely in line with the solution to fill the gap of more than 40-50 gigawatts in Italy. so that we can accelerate and we are accelerating as you can see in our results and we will speak about this also in the next week but we are accelerating our process and our investments to allow these conditions. So the most important solutions for me in the next period for Italy will be to allow more installation of renewable sources and to arrive in few years to the 50, 60 and more percent for this kind of production. and in the meantime also to provide the installation of a storage electrical storage energy storage in the different technologies for this may be useful the battery technology but also the the hydro pumping storage but also maybe the hydrogen and other solutions so that it's important to to go in deep to this and to to push to the installation for the installation We are also going on with some important interconnections. We want to interconnect not only French, it will happen during the next months, Thank you very much. This industrial plan and some years more, it will be possible really to have good conditions in Italy on this side. For the recovery plan, we are really not directly involved in this. As I said also in the past, we are more an abilitator of the system in this sense. Thank you. Thank you very much.

Our next question comes from Enrico Bartoli from Stifel. Please go ahead.

Hi, good afternoon. Two quick questions on my side. First of all, sorry to be back on the new outlook due to the Ukrainian crisis. Regarding the possibility of speeding up the installation of renewables, there are a lot of discussions at European level, at Italian level, What is your feeling on the possibility and, let's say, the actual implementation of simplification of the authorization processes because it seems that this is really the bottleneck for this development. The Association of Renewable Companies in Italy said that they would be ready to install 60 gigawatts in the short term, but actually the authorization processes remain a problem. Just a feeling and if you have some discussions on this side with the government. And the second one is related to the announcement that you made about valorizing the assets in LATAM. If you can give us a flavor on, let's say, the possible timing that you expect for this transaction to happen and if you have any actual discussion with possible buyers for those assets. Thank you.

Thank you for this question because for the first one it's interesting to understand what is moving now in our country because you are right there is a A strong and a big discussion on this, but in the meantime I see that a few days ago were approved some wind plants, wind installation that were stopped from a lot of years. And so it means that something is really happening. Somebody said, yes, a few days ago that All the operators in Italy are able to start with this foundation of 40, 50, 70 gigawatts of renewable plants. I think that it's true, because on our table at the moment there are requests for connections that are between 150 to 200 gigawatts in all areas. It doesn't mean that they are ready to be installed. It means that they are ready to be authorized and to be planned. Then they have to be realized and then connected. But it means that the first step of the process is really ready to start. So if we consider that in this kind of projects The main time is not the construction. The main time is always the authorization. So if our government that is working really a lot on this may find some solutions to accelerate this authorization, I am positive in this direction. I think positive in this direction. I think that it's really possible to accelerate. What it means to accelerate may be that, you know, to fill the gap that is provided in Italy by the national plan, it's necessary to install not less than five gigawatts per year. At the moment, we are more near to one gigawatt per year. So if we will accelerate, maybe we can try to arrive to the real target, to arrive to the targets that are provided for Italy by the European agreements. Then you asked about the LATAM timing. The timing is that we are just now discussing with some possible partners of this initiative and I think that we will find a solution in the next months May be possible that we will be able to give you important updates and news until the first half of the year.

Thank you.

Thank you very much. And our final question for the call today is from Stefano Gamberini from Equita. Please go ahead.

Good afternoon everybody. Just a few questions. Question on my side. First, regarding the role of the regulator in this situation, can you discuss a little bit about the output-based incentives that the regulator introduced and this 150 million euros accumulated to 2024 and if you expect some other measures that could help you to go ahead with all the investments that you see in forthcoming years. The second, regarding the authorization and the construction of the Tyrannian Link, could you update us about the situation if you are on track both on authorizations and also procurement of all the needs you have on this topic. Many thanks.

Yes, regarding the first topic, I think In terms of the role of the regulator, it will be really important, sure. I think that our discussion with the regulator is, as usual, at a good level of agreement on which are the most important topics and which are the most important solutions for the future. I think that Terna will have opportunities for diffusers, but about this topic I will prefer to speak next week during the plan presentation. On the second point, the Tirrenia link is in line with all the process in terms of authorization and also in terms of supply chain. Consider that regarding the supply chain criticities, we have analyzed during the last week the situation also by analyzing the possible impact of the war criticism. And we are really in a comfort zone, let me say, about this topic because our purchasing is organized in a way that it will be not impacted in few months by this situation. If the situation will have a duration of one year, we have to discuss again. but if not, no problem for this.

Thanks a lot.

Thank you very much. We have no further questions in the queue so I'll hand you back over to the speakers.

Well, thank you very much for your time and see you next week for the business plan update presentation. Thank you. Thank you to everybody.

Thank you for joining today's call, you may now disconnect