Terna Rete Elettrica Adr

Good day ladies and gentlemen and welcome to Tarana's first quarter 2023 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 have been listed only in mode. However, you will have the opportunity to ask questions at the end of the presentation. This can be done by pressing star one on your telephone keypad to answer your question. If you require assistance at any point, please press star zero and you will be connected to an operator. And I'd like to hand it over to your host today, Mr. Agostino Svrayenko, to begin today's conference. Please go ahead, sir.

Good afternoon, everybody, and welcome to Tarana's first quarter 2023 result presentation. This was the last set of results released before the next week's AGM. Let me remind you that its agenda includes, among our items, the renewal of the Board of Directors. As usual, before starting to analyze the figures, I would like to share with you the latest main achievements of the company. Regarding regulated activities, let me remind you that on the 15th of March we published the new 10-year National Development Plan, which foresees more than 21 billion of investment. Confirming our key role as energy transition enabler, the investment foreseen in this new National Development Plan aims at continuing the integration of renewable sources in the progressive phase-out of coal-fired power plants in line with the targets set at national and international level. Moreover, in March, Terma signed agreements with the European Investment Bank for the second and the third tranches of the 1.9 billion loan for the Tyrannian Link, the submarine cable connecting the Italian peninsula with Sicily and then to Sardinia. The contract signed established a further two tranches totaling 900 million euros for the construction and the commissioning of the east and west sections of the Tyrannian Link, For this infrastructure, which will be fully operational in its entirety by 2028, Terna plans an overall investment of around 3.7 billion. Finally, regarding Terna's financial structure, on the 14th of April, the company successfully launched a fixed-rate single-trans bond issue for a total amount of 750 million euros. This issuing, which received a great market response with demand outstripping supply by almost four times the offered amount, represents a part of the 9 billion euro medium-term notes program. The bond has a duration of six years and will pay a coupon of 3.625%, well below the market standard for this period. The proceeds will be allocated to meet the ordinary financial requirements and to fund the needs of the groups in that cell plan. After this brief introduction, let me give you the usual overview of the Italian electricity market, turning to the next slide. I'm now at page five. As you can see from this chart, in the first three months of 2023, national demand was about 77 terabyte power. The reduction in electricity demand observed in the first three months of the year shows a decrease in trend compared to the same period of last year. This is mainly due to the increase in average temperatures and to the reduction in industrial consumptions. In the first quarter of 2023, renewable sources covered about 30% of national demand, with a slight increase respect to last year. Regarding national net total production, this stood at 64% of the power, 10% lower than the same period of 2022. Despite that, let me highlight the increase in solar generation, which grew by 4% versus 2022. Let me also say that in this first quarter, renewable sources covered about 36% of the national net total generation. Now, let's move to the main figures of the period. The first three months of the year continue to be characterized by a complex scenario. Despite the challenging and very volatile context, Terna recorded a significant improvement in all economic and financial indicators. Indeed, group revenues and EBITDA were up by 11 and 8% respectively versus last year, which means 68 million and 39 million higher than the first quarter 22, while group net income was 200 million euro and with an increase of 4% versus last year. Group CAPEX stood at 315 million, 7% more than first quarter 22, confirming once again Terna's CAPEX acceleration driven by increasing system needs to ensure efficiency, resiliency, and security of supply in line with Terna's institutional role for the country. At the end of March 23, net debt was 8.8 billion, versus about 8.6 billion at 2022 year-end and fully aligned with our internal expectations. Now, let me make a deeper analysis of the first quarter 23 figures, turning to the next slide. And I am now at page eight. Total revenues in the first quarter of 2023 increased by 10.6%, reaching $713 million, up by $68 million versus last year. As you can see, we registered positive results both from regulated and non-regulated activities, which contributed $452 million and $16 million, respectively. For the details of the revenues evolution, let's move to slide number 9. Regulated revenues reached 614 million, 52 million better than last year, which means about 9.2% more than the same period of 2022. The increase was mainly due to higher output-based incentives effect related to the higher benefits generated for the system. Non-regulated revenues reached 99 million, 19.7% higher versus last year. Non-regulated growth was mainly attributable to the greater contribution coming from BRUC and TAMENI, the increase in revenues of the energy solution most related to LC Group, and the entry into operation of the private section of the interconnector Italy-France. International revenues were set to about zero in accordance with IFRS 5 accounting standards, referring to assets held for sale. Now, let's go through operating cost analysis. Total operating costs stood at $213 million, 16.1% higher than the same period of last year. Regarding regulated activities, the increase was mainly attributable to the insourcing of new competencies and increased level of activity. while non-regulated activities have been impacted mostly by higher costs for the purchase of raw material related to group and to me and by the LT group contribution. Let me now analyze EBDA, moving to slide number 11. Considering the previously mentioned facts, first quarter 23 group EBDA reached 500 million euros. 8.4% higher than the same period of last year. The increase was almost fully attributable to regulated activities, which contributed for about 38 million versus the first three months of last year, showing an EBDA of 486 million in the first quarter of 2023. Let's now have a look to the lower part of the profit and losses, turning to the next slide. Depreciation and amortization amounted to 187 million. The increase versus the same period of the last year was mainly due to the impact of new assets becoming operational in the period. As a consequence, EBIT reached 313 million, 6.7% higher versus the first quarter of 1922. We reported net financial expenses at 32 million. The increase versus last year was mainly due to the rise of inflation registered in the period that impacted our inflation-linked exposure and to the increasing level of interest costs registered on the debt capital market. Taxes stood at 81 million, 5 million higher versus the same period of last year, and essentially as a consequence to increased profit. Tax rates stood at 28.9%. As a result, Group net income reached 200 million euro, 4.4% higher versus the same period of last year. Moving to CapEx analysis at page 13. In the first quarter of 23, total CapEx amounted to 315 million, about 7% higher than last year, and confirming the solid CapEx acceleration fully aligned with the target set in the industrial plan. Indeed, we invested about 288 million in regulated activities. Among the main projects of the period, it's worth mentioning the Terrenian Link, the Elba Malian Link, the Paternò Pantano Triolo in Eastern Sicily, and the investments in stabilization devices such as synchronous compensators for grid security. For what concerns CAPEX categories, development CAPEX represents at 43% of total regulated CAPEX. Defense CapEx stood at 13%, while Asset Renewal and Deficiency was 44%. Neuroregulation and other CapEx stood at 27 million. This includes capitalized financial charges and other investments. Regarding the debt and cash flow analysis, let's now move to the next slide. Net debt at the end of March 2023 stood at 8,847 million, 271 million higher than 22 year-end levels, mainly linked to the progressive settlement of net trade payables related to 2022. During the period, we generated an operating cash flow of 368 million, thanks to which we were able to cover all the capital spending of the period. Let's now make a deeper analysis of our debt profile, moving to page 15. Thanks to our efficient and proactive debt management approach over the last few years, at the end of March 23, fixed silver floating ratio in gross debt stood at about 87%, while the average duration was about five years. As already mentioned, in March, Turner signed contracts with the European Investment Bank for the second and third branches of the 1.9 billion loan for the two annually. After the first branch of 500 million euros signed at the beginning of November, the loan represented the two fourth branches of a total amount of 900 million euros for the construction and commissioning of the east branch and the west branch of the submarine cables. The loans have a duration of approximately 22 years from the first date of disbursement and are characterized by a longer duration and more competitive costs than those currently available on the market. Thus, they are part of Terna's policy focused on optimizing its financial structure. Finally, on April 14, Terna successfully launched a fixed-rate single-trans bond issue for a total amount of 750 million euro. The bond issued at a price of 99.281% with a spread of 70 basis points over the mid-month at a maturity of 60 years and the payment of an annual coupon of 3.625%. Now, before moving to the Q&A session, let me underline that also after the end of this first quarter, We are well in track on the execution of our plan, and we are confident to maintain our strategic path toward the energy transition also for the future. Thank you very much for your attention, and I am now ready for the Q&A session. Thank you.

Thank you very much, sir. Ladies and gentlemen, once again, if you wish to ask any questions, please press star 1 on your tuple keypad. Please also ensure that your new function is activated by signaling to your equipment. Our first question today is coming from Mr. Javier Suarez of Mediobanca. Please go ahead, sir.

Hi, everyone, and thank you for the presentation. The first question is a follow-up after the last statement by CFO. I think that is hopefully a legitimate question. There are a lot of changes in the management team after the annual general meeting. The question for you is that if you envisage any significant change in the company's strategic path and any color, that would be much appreciated. That would be the first question. The second question is on the positive deviation versus, I guess, expectations this quarter. That is, I guess, due to higher collection of output-based incentives. You can please quantify the amount of collected output-based incentives during the quarter and update on your expectations for the full year. And the third question is on the recent document published by ARERA with the definition of the general guidelines for the implementation of the TOTEC system in Italy from 2020 and 2024. If you could give us your reading of this document and your latest view on how this may impact Terna's business plan going forward. Thank you.

Thank you very much, Aliette. Let me start from the second question. I will come back to the first at the end. Well, to say it correctly, the results of the first quarter of 23 are impacted by higher output-based incentives with respect to what has been originally foreseen. This is something that we already analyzed at the end of 22. What I can confirm is that we have During 2023, we do expect around €300 million of output-based incentives, of which two-thirds, so you can consider €200 million more or less, connected with MFD incentives. Regarding the progressive change in regulations and the ROCS implementation, let me say, first of all, let me remind you that We strongly believe that the introduction of ROS would be consistent with the path that we have already followed toward this output-based approach, something that we discussed already. The more benefits we provide for the system, the more reward that we could obtain. As a consequence of that, in ROS approach, we see an opportunity to create further value for the system and shareholders because this could promote Let me say an idol for the role efficiency through new output-based regulatory measures. We are fully committed to do that and we are happy about the step taken by the authority with the resolution of output-based incentives. More in detail, at the end of April, if I'm not wrong it was the 20th of April, 23, ARERA published a specific resolution through which approved The 2431 ROS regulated integrated text containing, at this time, the general principle and the criteria for setting the allowed cost for that period. With this resolution, that, let me say, is an initial one, only general principle, but it's important because with this resolution ARERA confirmed the gradual approach for the implementation of the ROS regulation foreseeing a first phase, so-called, let me say, ROS-based framework, where at the beginning the expenditure will be allowed in a substantial continuity with the current rules and the overall expenditure will be split between low money components and fast money components according to the capitalization rate. I think that this is what we have in front of us up to date. We do expect further clarification and further detail from the authority and we will come back to you as soon as possible on this. Regarding your first question about potential impact coming from the change in the management, well, let me say it's pretty simple. You can assume that Terna will continue to pursue the goal of driving the energy transition process Supporting the country in this, let me say, difficult task. Always providing highly professional and state-of-the-art services and ensuring security of supply and efficiency for end users. As a part of the management team, I am personally aware of the high level of responsibility that comes with this role. I believe that with the upcoming appointment of Giuseppina Di Foggia, who brings a wide range of technical competences in developing and deploying critical networks and management skills and business vision I am more than certain that Perna will continue to expand and strengthen its role in helping the country to develop the electricity system of the future.

Thank you, sir. Our next question today will be coming from Stefano Gamberini from Equita. Please go ahead, sir.

Good afternoon, everybody. I have a follow-up regarding the question on the simplified topics and in particular the fact that the regulator will monitor the return on RAB introducing this return on regulatory equity. So what is your Comment on this measure? Could the regulator then share the extra return with clients? What do you expect on it? The second, regarding the aim of the government to require to the public companies to use the NIP funds, and so which projects in your business plan could be financed through this measure and could you receive some way a remuneration if you use this money otherwise we know that this should be deducted by the RAB. The last question regarding the net working capital, you experienced a positive impact of around 1 billion at the end of the year as you underlined, 300 million euros more or less We are already reabsorbed in the first quarter, which is the path of the full invest trend for this 1 billion US when this will be fully reabsorbed. And the very final story as regards the storage. Your 10-year development plan includes 70 GW of new installed capacity, renewable installed capacity, but also 11 GW of utility-scale storages. Could you share with us if something is changing? What are the incentives that the government is working on in order to accelerate the investment in storages and, in particular, Could Terna be directly involved in storage sooner or later? Thanks a lot.

Well, Stefano, I hope you remember all the questions. Let me try the first one. I could repeat. I know, I know. I'm sure of that. I'm sure about that. So we have the first implementation of Toltec's remuneration on equity. I think that it's a little bit too early to provide comments. We don't have enough information. As I said before, The resolution taken by the authority at the end of April is only an initial one, only general principles that are more or less in line, that are confirming what we do expect before. But let me insist on this again. We are not concerned at all from the implementation of this new mechanism. At the very end, we do expect to have benefits. Of course, we will have managerial effort given that. Our ability to control the business in real time, to provide details, to be, let me say, to stick on the efficiency in our project in terms of respect to the budget, respect to the timing, will be more crucial in the future, but I think that we are very well prepared to do that. Let me say that last way, the second part of the year, at the moment, we will receive more detailed information by ARERA, and we will be more than happy to share it with you. The kind of the second question about the PMRR implication for us. Well, let me say, we are talking only about residual implication. Our business case is a remunerated business case on a regulated asset base. The moment we get a public incentive, we deduct it from the RAB. So, at current regulation, I don't see major interest in doing this. Of course, if we can provide our contribution to the realization of national critical infrastructure, we'll be more than happy to do that. There are some projects that have been identified, but again, I consider this a residual option for us. Third question, networking capital. We are in the first quarter of 2023. Normally in the first quarter you have a deterioration of your working capital, given that there are a lot of payments related to investors that have been accounted, invoices that have been received in the last part of the year, so the standard deterioration of that. On top of that, we have the progressive distortion of the advantage that we got in 22, coming from that pass-through regulatory items that we were not able to liquidate to our market counterparts due to a lack of resolution that the authority was not able to take in time by the end of the year. Now they started. We do expect a progressive reabsorption on the amount that you have seen at the end of 22 during the second part of 23. Regarding storage, it's a critical item. The more we insist, the more we increase our expectation in terms of renewables, the more we will need some modulation, some storage, some stabilization of the system. and storage will play a crucial role in this. Up to date from, let me say, a formal and juridical point of view, nothing changes. We are not allowed to play any role in storage. We will be more than happy to have a discussion about that and to provide our ideas and contribution. I do expect that we could facilitate and provide a good contribution for country needs also on this extent.

Very clear. Many thanks. Many thanks.

Thank you, Mr. Gamberini. Our next question is from Mr. James Brand of Deutsche Bank. Please go ahead, sir.

Well, hi. I was on another good set of quarterly results. I was just wondering on the incentives, you've got this 300 million target. if you could give us a bit more detail in terms of what you're actually doing to deliver those incentives and in particular I know you've done very well on the targets which involve reducing system costs where you've reduced the system costs quite substantially I was just really interested in what you're actually doing there to reduce that cost how you've gone about it thank you very much

Well, you know, we are in line with what we already announced a few years ago. The rule, the way, the average weight of the output-based incentives will be increased during the different years. Let me remind you that today we have a general target in the business plan of 500 million euro and we are extremely well on track to reach this target. It was not the case only a few years ago. It was 250, the previous business plan, 200 and back. So the more we move on toward the future, the more this aspect will have an increasing role. Entering in details, here we are talking about incentives to create efficiency in terms of reduction of price difference internally at different electricity zone energy areas. and also between the different zones. Stabilization of prices in different geographical areas is an ambitious target and I think that we are well on track to reach it. It's something that we started also in the past. Let me remind you that already in 2017 we started doing something similar with the introduction of the interconnection Sorgente-Rizzico in which we were able to reduce Price difference among the different zones in some parts of the country expressing a big value. We are doing the same today and we are also working a lot starting from last year on the reduction of MSD. You know that MSD is an important component of the total energy cost. We completely readapted our inspection strategy in order to try to reduce This is not an easy task. I think that the team did an excellent job. Given that we decided to enter in a completely new era, let me say, implementing a lot of IT tools and also a lot of technical tools as stabilization devices, synchronous compensator to have the possibility to reduce as much as possible the necessity to ask for, let me say, emergency services, sorry to say not in technical terms, that are really, really expensive for the system. In 2022, we reach a first important result that we already discussed. I don't want to come back on this. We discussed that in March when we presented the Durand Financial Statement, and we are moving on the same path also for 2023. As said before, we do expect by the end of the year at least 300 million euro of output-based incentives, of which the main part will be represented by MSD incentives.

Thank you very much and well done again.

Thank you, sir. We now go to Sarah Lester of Morgan Stanley. Please go ahead.

Thanks very much for taking my questions. I've just got two, please. Sorry, just to push a little bit more on the output-based incentives, and I understand that the regulation has gone through on this, but just wondering how confident you are that the regulator will allow the kind of levels of output-based incentives that you're achieving to continue on an ongoing and persistent basis. So beyond, say, one to two years, do you think the regulator is okay with these levels becoming normalised if they do persist? and then secondly just on grid connection requests and wait times, any updated commentary around what you're seeing there would be great and also any commentary around renewables permitting the bottlenecking plate.

Well, to make a long story short, what you can expect is that long term will be represented by Ross. Now regulators are writing the rules. We will have, let me say, an interim period. I say it several times. I do expect, personally, a sort of mixed regime that will have a joint component of a base regulation on invested capital and additional regulation on output base with a ROS mechanism. Today, we have already... Some clear signs of the output-based principle that is represented by this specific project that I've mentioned before. Reduction of price difference among different zones, internally the different zones, reduction in MSD costs. So today we have specific big projects that have the advantage to be easy to be measured. In the future we will have a more complicated system. Nothing will change. meaning that I do expect as we demonstrated last year and as we are demonstrating this year with the results that we are presenting today, this will require additional managerial effort but this will put us in the position also to obtain additional results.

That's your question then?

Yes, thank you. Thank you very much.

Ladies and gentlemen, once again, if you have any questions or follow-up questions, please do press star one at this time. The next question is coming from Marcin Mocztang of Jagdlum Airfield. Please go ahead.

Yes, good afternoon. Just one question, if I may. I wanted to ask you about the evolution of your operating expenses in your regulated perimeter. I think they were up around 13%. Thank you. Well, in general terms, the

The rise in operational expenses has two different reasons. If you come back to page 10, you see that we have an increase in the regulated business. This is a consequence of the effort we are putting in increasing or enforcing our internal organization to follow the increase in activities. Let me remind you that the target for the year 2023 in terms of TAPEX is 2.2 billion. We have not far from three times the target that we had only a few years ago, 2017-2018, which we were well below 1 billion. We realized to do that without makes three times in terms of staff, in terms of operational expenses, but of course we have to reinforce this a little bit. That's why we increased our hiring process and we reached more than 5,000 FTE at the RN22 and we do expect to grow again also in 23. So we are enforcing our staff, we are adding different competences and of course we suffer a little bit also external cost. This is also coherent and fully in line with the communicated target, no surprises about that. Of course a portion of such increase Sorry, this is for the regulated business. Second comment is for the non-regulated business. We are growing on Tamini, we are growing on Brugge, we have an explosion of the backlogs, of the orders, and of course we are more than happy to have this, but we have also to suffer an increase in raw material price. So, this is the explanation of the increase of 15 million euros that you see at base plan for the non-regulated business. Both elements, operating costs on regulated side and operating costs on non-regulated side, are impacted, of course, by inflation. That has an impact, but you know that this inflation, in any case, is fully covered by our regulatory system on the regulated part. Maybe with a bit of time left, maybe we will have a short-term impact on our cash, Thank you very much. Thank you very much. We will continue to see some increase until the second part of the year and we do expect the starting from October, I hope, before. We should see some sign of stabilization in the inflation rate. This is what we see today. This is, of course, a volatile item that we will have to continue to observe and, of course, we will keep you informed.

Thank you very much.

You're welcome. Thank you very much, sir. Ladies and gentlemen, as a final reminder, if you have any questions or follow-up questions, do please press star 1 at this time. As we do not appear to have any further questions at this time, I turn the call back over to Mr. Skodaianchi for any additional or closing remarks. Thank you.

Ladies and gentlemen, thank you very much for your time, for the attention and the passion you dedicate to us. Let me say that we will wait you with the new CEO at the end of July for the presentation of the Source Alpha 2023 financial statement. Thank you very much. Thank you, sir.

Ladies and gentlemen, I'm looking forward to this presentation. Thank you for your attendance. You may now disconnect.