Terna Rete Elettrica Adr

Hello and welcome to the Turner First Half 2022 results presentation. My name is Jess and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question at any time. If at any point you require assistance, please press star zero and you will be connected to an operator. I will now hand over to your host, Stefano Donnarumma, CEO, to begin today's call. Thank you.

Good afternoon everybody and welcome to Terna's first half 22 results presentation. Before starting to analyze the features, I would like to share with you the latest main achievements. Firstly, let me remind you that in the 24th of March we presented the update of the 21-25 Industrial Plan Driving Energy that foresees 10 million euros of investments, of which 9.5 billion of regulated investments confirming our role in driving a more complex, sustainable and innovative electricity system. In this regard, important steps for a world have been done regarding authorization process and construction activities. In April, we concluded the public consultation on the west branch of the Terrenia Link. And in May, we submitted to the Italian Ministry of Ecological Transition the request for the authorization to construct and operate the west branch. Concerning international activities, the already announced LATAM deconsolidation process is ongoing. The signing was completed in April, while the closing of the deal foresees multiple steps, most of which in the second half of 2022. All operational activities are in line with the milestones set in the deal. Regarding people, in April, TURN announced the Mediterranean Lab Initiative. A project aimed to set up a training center in collaboration with the main universities of the three cities where the cables of the Titanian Links will land, namely Cagliari, Salerno and Palermo. In addition, in July, we launched the Aterna Academy, the new training and research hub aimed to developing the expertise of employees within the group. In line with the goals set with the update of the industrial plan, Terna wants to strengthen and promote the new skills through an innovative culture and training offer to support the energy transition. Then I would like to confirm our strong ESG commitment, in line with the updated industrial plan. Indeed, for the second consecutive year, the company was included in the MIB ESG, the first Italian blue-chip index dedicated to environmental, social and governance best practices. Terna has also once again been confirmed as one of the top companies at international level for sustainability best practices, according to the Euronext BGO Harris, the Feeds for Good and SAP Global ESG Index. Finally, regarding shareholders remuneration, let me remind you that in June we paid 19.19% 19.29 euro cents per share as 21 final dividend in line with the dividend policy presented in the update in the Russell Plan back in March. After this brief 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 six months of the 22, national demand was about 158 TWh, an increase of 2.7% versus the same period of the last year, when national demand was about 154 TWh. I would like to underline that despite the challenging scenario related to the ongoing energy crisis, in the first half of 22, electricity consumption returned to the values registered in the first half of 2019. Concerning the national net total production, this stood at about 138 TWh, 3.4% higher than the same period of 2021, mainly thanks to the contribution of wind and solar productions. Let me also underline that in the first half of 2022, renewable sources increased covered about 33% of the demand and about 37% of the national net total production. Now let me introduce the main features of the period. In the first half of 22, group revenues and EBITDA were up by 6 and 4% respectively versus last year. which means 75 and 37 millions higher than the first half of 21, while group net income was 398, about 4% higher versus last year. Group capex stood at 661, an increase of 10% versus the same period of last year, in line with the targets set in the 10-year development plan and in our updated industrial plan. Despite this capex acceleration, net debt was below 9 billion. Now, I leave the floor to the CFO, Agostino Scornaienchi, for a deeper analysis of the features of the period. Turning to the next slide.

Thank you, Stefano. Let's start with revenues analysis. Total revenues in the first half of 2022 increased by 5.9%, reaching 1,331 million, up by 75 million versus last year. The growth was attributable both to regulated and non-regulated activities, which contributed for 60 million and 15 million respectively. Let's now go into the details of revenue evolution, moving to the next slide. Regulated revenues reached 1,154 million, 60 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-work reduction recognized for 2022. Non-regulated and international revenues reached 177 million, 8.8% higher than last year. Non-regulated growth was mainly attributable to the increase in revenues of the energy solutions, mostly related to LT Group and to the increased contribution coming from TAMENI. International revenues were set to zero in accordance with IFRS 5 accounting standard, referred to asset L4SAVE. Now, let's go through operating cost analysis. As you can see in this chart, Total operating costs stood at 384 million, 10.8% higher than last year. Regarding regulated activities, the increase was mainly attributable to the insourcing of new competences, while non-regulated activities have been impacted, maybe, by the LT Group's recent acquisition. Let me now analyze the BDA, moving to the next slide. Due to the previously mentioned effects, first half 22 group EBDA reached 947 million, 37 million better than last year. The increase was mainly attributable to regulated activities, which contributed for about 41 million versus last year, showing an EBDA of 923 million in the first half of 22. Let's now have a look to the lower part of the profit and losses, turning to slide number 12. The precision and amortization amounted to $340 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 $607 million, 4% higher versus the first half of 2021. We reported net financial expenses at 36 million. The increase versus last year was mainly due to the rise in inflation registered in the recent months, partially offset by increased capitalized charges and positive exchange rate effect. Taxes stood at 161 million, 4 million higher versus last year, essentially due to increased profit. As a direct consequence, Our tax rates stood at 28.1%. As a result, GroupNet income reached 398 million, about 4% higher versus the same period of last year. Moving to CAPEX analysis. In the first half of 22, total CAPEX amounted to 661 million, 10% higher than last year, confirming the solid acceleration aimed at enabling the energy transition process. Indeed, we invested about 629 million in regulated activities. Among the main projects of the period, it is worth mentioning the Terranial Link, the Paternò Pantano Priolo in Eastern Sicily, and the investment in stabilization devices as STATCOMs and synchronous compensators. Among CAPEX categories, Development capex represented 37% of total regulated capex. Defense capex stood at 16%, while asset renewal and efficiency was 47%. Non-regulated and other capex stood at 31 million. This includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis, Net debt at the end of June 22 was about 9 billion, about 1 billion lower than 21 year-end level, mainly due to the hybrid issuance made in February that, in line with accounting standards, has been accounted as equity. During the period, we generated an operating cash flow of 740 million, thanks to which we were able to more than cover the capex spending of the period. Let's now make a deeper analysis of our debt profile, moving to page 15. In line with our prudent and proactive debt management approach, at the end of this first half we registered a fixed overfloating ratio on gross debt of about 86% and an average duration of about 5 years. With the aim of confirming our leadership in the sustainable financial market, let me just remind you The launch made in February of the first green hybrid bond for an Italian corporate for a nominal amount of 1 billion euro, successfully accepted by the market, as well as the ESG link term loan for a total amount of 300 million euro. Thank you very much for your attention. Now, before the Q&A session, let me leave the floor to Stefano for his closing remarks. Thank you.

Thank you Agostino. Let me conclude this presentation with some closing remarks. As you have appreciated from the previous charts, despite the challenging scenario, we registered a full recovery of the Italian electricity demand, which is now in line with the 2019 levels. Tragic events in Ukraine and the ongoing international energy crisis have made it necessary for the country to reduce the dependence on fossil resources and to continue developing renewables in line with the targets set by the European Union. In this context, the grid is a crucial enabling factor. And for this reason, Terna is continuing to boost its investments, confirming its institutional role on guaranteeing the security of supplies, system adequacy and quality of service. As you know, a portion of our remuneration comes from the incentive mechanism linked to the achievement of specific targets. For example, the improvement of the quality of service and the increase in transport capacity between market zones. Thanks to the output-based incentives, we are able to rebalance overall remuneration, maintaining our economic and financial stability, as well as our ability to invest, providing a fair capital remuneration. Our constant dialogue with the regulator will lead us to deliver a more efficient electricity system that will translate into lower costs for the final consumers. Finally, thanks to this solid set of results and our managerial actions, we are able to confirm all the provided guidance. Thank you for your attention. We are now ready to open the Q&A session.

If you would like to ask a question, please press star 1 on your telephone keypad. Please ensure your line is unmuted locally, as you will be advised when to ask your question. So once again, that's star 1 if you would like to ask a question. And the first question comes from the line of Enrico Bartoli from Mediobanca. Please go ahead.

Hi, good afternoon and first for taking my question. Actually, I have three. Two are more general. First of all, if you can update us on the request of connections to your grid that you have been seeing in the past months from renewables and considering also the political push for independence from Russian gas markets If you are seeing an acceleration in the request and an effective impact on the simplification measures that the government has taken in order to speed up the authorization processes. Second question is on just an opinion on your side, if you see any risk in the coming winter from, let's say, possible cut of gas from Russia for the electricity system in Italy, considering that the reservoirs and the hydro production is at historical lows this year. And the last one on results, if you can give us a figure on the autobase incentives that you recorded in the first half and possibly an indication of what you expect for the second part of the year. Thank you very much.

Thank you for your question. I start from your first point, request for connection. Sure, we can observe a continuous increase of the request for connection. We are now at the level of more than 180,000 requests I think that the increase is continuously and constant. We don't see any acceleration at the moment, but in any case it's a continuous process. In terms of authorization process and installation, real installation, per sure this year seems to be bigger than the year before. And not only last year, also the last two, three years. and so the rate of installations is increasing and it depends also by a different and an accelerated process for authorization. For the winter situation, we see that the stock of gas is increasing and so I think that If the situation doesn't change until October, I think that there will be maybe enough gas in our Italian storage to go in front of the winter period, but in any case we can suppose some suggestion or decision by the government related to the reduction of the demand. I think that this is the The most important point, but in any case, for the electricity system, we don't see any particular impact at the moment, and so we are absolutely in line with a normal, let me say, conduction, a normal driving of the system. For the output-based incentives, Agostino, if you want to...

Yes, thank you, Stefano. We accounted something like 90 million euros. of output based incentives at the end of the first half of 2022 that is in line with the expectation that we do have for the year 2022. Consider that we have a total expectation on a business plan horizon as communicated in March of something close to 500 million euro, 490 to be precise, on three different categories, incentives to reduce bottlenecks among and within market zones. These are the incentives that have been already posted during the first half of 2022 and also incentives for reducing auxiliary service and market costs that will be posted starting from the second half of 2022. Thank you.

The next question comes from the line of Stefano Gamberini from Ecuador. Please go ahead.

Good afternoon everybody. Three questions also from my side. The first regarding your financial flexibility in the new scenario with higher interest rates, how you can face the acceleration of CapEx that you have in the forthcoming years in your plan and even ahead. If you can elaborate a little bit about this. And on the other side also, if you can share with us what are the expectations you have in terms of increase of CapEx from 2024 onwards and also regarding the rub up sorry the rub deflator update is the 2.7 percent for 2022 23 sorry something set or still to debate with the regulator the second question regarding the storage you said in the past that there could be some opportunities in the storage that could The last thing regarding steel renewables. The Minister said that the authorization increased by 9 gigawatts. You just said that there are 180,000 requests. Could you elaborate, sorry, another interesting thing is, according to the minister, to 2025, the renewables could offset around 9 bcm of gas consumption, so this means a reduction of production, electricity production through this way. So, what is your visibility on this part, on this topic? Do you see this acceleration? And in particular, I'm interested to see What are the main players that are now asking the authorization? Are still small entrepreneurs or are there some big players that are now asking the authorization that could drive this change in the trend of new renewables? Many thanks.

Yes, let me start with the first question on interest rates rise, impact, potential impact on turnover cost of debt. Well, let me remind you that the rise of interest rates will not be translated in an immediate impact on our overall cost of debt, given that the duration of our debt is around five years. In addition to that, you know that the percentage of debt represented by fixed rate liabilities It's more than 80%, to be precise, 86%. So most of these issuances will not be affected by any interest rate hike. On top of that, Terna implemented a proactive funding strategy in a context in which we executed already in 2021, but also in 2022, the pre-financing of the most relevant part of our funding needs, You have seen what we have decided to do also in the recent months and at the beginning of February we also issued high-end hybrid instruments that provide us a more than, let me say, sufficient flexibility not to be concerned for the evolution of interest rates in the mid-short term. On top of that, you know that the regulatory formula that we apply include also a correction related to the evolution of interest rates. We are not yet at the degree that the trigger set from the authority for an anticipated review of the remuneration but in any case we do expect starting from the 1st of January 2024 this interest rate increase will be recovered in the tariff. So we don't have any pressure, we do continue to operate in the financial market looking at it more as an opportunity, not as an obligation. We have something not far from 2 billion of available cash at the end of June, so we have huge flexibility for the coming months.

Then you are commenting about the storage and the possible position in the next future coming from authorities and institutions, also government positions. So I think that the On the storage, we have to consider that in the national plan is provided a number that is between 6 and 10 gigawatts of storage totally for our country and they are absolutely necessary. So the discussion that we had during the last month and also some proposals for new law and new decisions I think that in any case our electricity system and energy system needs to reach some appropriate dimensions on this topic. I don't know when it will start again and the discussion inside the government, but I think we will push a lot in any case to continue in this direction. Regarding renewables and who are the main... I think that at the moment we can register a great number of requests, but in any case they are of a certain dimension. So not so little dimension, but more in the direction of utility dimension or similar. Funds, private and utilities. And the general strategy regarding the energy transition process, I think it will not change. Maybe also it will accelerate. It's absolutely important to guarantee the substitution of a certain part of the gas resources with the renewable installation. The possibilities are all on the table. Requests are more than enough. Many thanks. There are currently no questions in the queue, so as a reminder, please press star 1 if you would like to ask a question.

And the next question comes from the line of Stefano Gamberini from Ecuador. Please go ahead.

Yes, there are no other questions. Just a clarification, an update regarding the procurement situation. Do you see a worsening in the procurement for your investments? And you can give us an update of the already procured investment you have for this year and eventually also for next year. Thanks.

I'd consider that at the moment we are near to the 86% of coverage for our water plan, in terms of procurement. So we don't see any particular difficulty coming from this situation at the moment. So I think for us, no problem on this. Thank you again.

There are no further questions in the queue, so I will hand the call back to your host for some closing remarks.

Thank you for joining today's call. You may now disconnect your line.