Terna Rete Elettrica Adr

Good afternoon ladies and gentlemen and welcome to Terna 9 Months 2023 Consolidated Results Presentation. At this time all participants are in listen-only mode. Please be advised that today's conference is being recorded. I'd like to hand the conference over to our host speaker today, Mr. Omar Albayati, Head of Investor Relations and Sustainability. Please go ahead, sir.

Good afternoon everyone and welcome to Terna 9 Months 2023 Results Presentation. The call will be hosted by our CFO, Francesco Beccali. Following the presentation, we will have the Q&A session. We kindly ask you to send any questions to investor.relation at terna.it. Please, Francesco, the floor is yours.

Thank you, Omar, and good afternoon, everybody. Before starting, let me say that I'm really proud to take on this new challenge, and I would like to thank the company for the opportunity I was given and I'm tackling with a lot of energy, motivation and commitment, fully aware, due to my experience, of Ternas' huge potential. Now, let me show you the main achievements of the period. Regarding regulated activities, let me say that we are really well on track for what concerns authorization processes and procurement of the main projects included in our strategy plan. Indeed, in September, the Ministry of Environment and Energy Security as authorized the western branch of the Terranial Link and the final project of the SACOI-3. As you know, the Terranial Link is a direct current submarine power line that will connect Sardinia, Sicily and Campania. It is a strategic project for the Italian electrical system within the framework of the energy transition targets set by the National Integrated Plan for Energy and Climate, the so-called PNIEC. It will contribute to achieve the phase-out of coal by increasing the transport capacity, enhancing the security, adequacy and flexibility of the National Electricity Transmission Grid, as well as promoting the integration of the domestic market and renewable sources. For what concerns the SACOI-3, the project aims to connect Sardinia, Corsica and Tuscany with a total capacity of up to 400 megawatts. Once operational, PsychoE3 will contribute to strengthen the European electricity market, promote the development of renewable sources and increase transport capacity between central and northern Italy, Sicily and Sardinia. This will bring a great reliability and security of the national transmission grid and a reduction in cost for the dispatching service market. In addition, regarding procurement, At the beginning of September, Terna awarded Prismian the contract for the supply and laying of submarine and underground power cables of the Adriatic Link, the 1000 MW HPVC connection between the Abruzzo and Marche regions. The cable supply is another milestone in the rapid implementation of the project. Moving to our sustainability achievements, Sterna reaffirms its status as a Global Sustainability Leader. Indeed, this is the 13th consecutive year that the company has been listed in the Stocks Global ESG Leaders Index, which selects the best companies globally based on ESG best practices. Finally, regarding shareholder remuneration, today Board of Directors approved to hand to In the first 9 months of 2023 National demand was about 233 TWh, recording a decrease of 4% on last year, when national demand was set at 242 TWh. The reduction in electricity demand in the first nine months of the year is mainly due to the decrease in industrial consumption and the increase in average temperature. In the first nine months of 2023, renewable sources covered about 37% of national demand, five percentage points higher than last year. National net total production stood at 197 teV, about 7% lower than the same period in 2022. Despite that, let me highlight the remarkable increase in hydro production, which grew by 29% In the first nine months of 2023, group revenues and EBITDA were up by 13% and 10% respectively versus last year, which means 255 million and 144 million euros higher than the first nine months of 2022. We also reported a group net income of 642 million euros with an increase of 9% versus last year. Group CAPEX was set at 1434 million euros, recording a double digit increase of 39% versus the same period of last year. Reconfirming our solid cap acceleration to serve the system needs and enable the energy transition. To support this acceleration, at the end of September 2023, net debt stood at 9.5 billion euros versus about 8.6 billion at 2022 ERA. Now, let me give you a deeper analysis of the figures of the period, moving to slide number 8. Let's start with the revenues analysis. Total revenues in the first nine months of 2023 increased by 12.8%, reaching 2,247 million euros, up by 255 million versus last year. The growth was attributable both to regulated and non-regulated activities, which contributed for 184 million and 71 million respectively. Let's now go into details of the revenues evolution, moving to the next slide. Regulated revenues reached 1,904 million euros, 184 million better than last year. The increase was mainly driven by the investments acceleration made on the national grid and the higher output-based incentive effects related to the higher benefits generated for the system. Non-regulated and international revenues reached 343 million euros, 25.9% higher than last year. Non-regulated growth was mainly attributable to the increase in revenues coming from Brook and Tamimi and to the higher contribution of the energy solutions mostly related to the healthy group. International revenues were set to zero in accordance with the IFRS 5 accounting standard, referred to asset L4C. Now, let's go through operating cost analysis. As you can see in this chart, total operating cost stood at 691 million euros, 19.1% higher than 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 mainly by higher costs for the purchase of raw material and services related to BRUC and LC Group. Let me now analyze the BDA, moving to the next slide. Due to previously mentioned effects, 9 months 23 Gruppe BDA reached 1,556,000,000 euros, 144 million better than last year. The increase was mainly attributable to regulated activities, which contributed for about 132 million euros more versus the same period of last year, showing an EBITDA of 1,508,000,000 euros in the first nine months of 2023. Let's now have a look to the lower part of the P&L, turning to slide number 12. DNA amounted to 577 million euros. The increase versus last year was mainly due to the impact of new assets becoming operational in the period. As a consequence, EBIT reached 980 million euros. 9.3% higher versus the result of the nine months of 2022. We reported net financial expenses at 81 million. The increase versus last year was mainly due to the cost of the new financing and to the increase of interest rates partially mitigated by the lower level of inflation in the period, the increase in capitalized financial expenses and the higher financial income on available liquidity. Taxes stood at 252 million euros, 25 million higher versus last year, essentially due to increased profit and positive one-off items recorded in 9 months of 2022. As a consequence, our tax rate stood at 29.1%. As a result, group net income reached 642 million euros. 9.3% higher versus the same period of last year. Now moving to CAPEX analysis. In the first nine months of 2023, total CAPEX amounted to 1,434 million, 39% higher than last year, confirming the solid acceleration in line with our institutional role as a country. Let me underline that this is a record-breaking level of capex for the first nine months of the year. Indeed, we invested about 1 billion 360 million euros in regulated activities. Among the main projects of the period, it is worth mentioning the Tyrrhenian Link, the Adriatic Link, the Elba mainland connection and the investments in stabilization devices as synchronous compensators. Among CAPEX categories, the development CAPEX represented 56% of total regulated cards. Defense CAPEX stood at 12%, while asset renewal and efficiency was 32% of the total. Non-regulated and other CAPEX stood at 74 million. This includes capitalized financial charges and other investments. Regarding net debt and cash flow analysis, net debt At the end of September 2022 was about 9.5 billion euros, around 900 million higher than 2022 year-end levels, mainly as a consequence of the investment in the period and the payment of the 2022 final dividend made in June. During the period, we generated an operating cash flow at 1.168 billion euros, thanks to which we were able to cover most of 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 cautious and proactive debt management approach, aimed at maintaining a solid financial structure, at the end of these first nine months we registered a fixed floating ratio on gross debt of about 87%, and an average duration of about six years. Moreover, Terna aims to establish itself as one of the leaders in the sustainable financial market. This strategy has been confirmed also during the first nine months of this year and in the process of updating its green bond framework, Terna achieved by Moody's in late October the highest possible score in the second party opinion, the sustainability quality score 1. In this sense, let me remind you that in July, Terno launched a 10-year fixed-weight green bond for a total amount of 650 million euros. The issuance was very successful on the market, with an order book at a peak of approximately 4 times the offered amount and a final spread of 90 basis points over the mid-swap. The green bond will have a duration of 10 years and will pay a coupon of 3.875%. Moreover, let me remind you that last May, Terna signed an ESG-linked revolving credit facility for a total amount of 1.8 billion euros. The transactions allow Terna to count on a liquidity appropriate to its current rating, further strengthening the company's financial structure. With regard to bank debts, two EIB loans totaling 900 million euros For the construction and commissioning of the east and west sections of the Tirania Link project, signed in March, were drawn in June and in October respectively. To conclude, given the strong set of results for the period, we confirm once again all the guidance for 2023, waiting for the new business plan that we expect to present by the first quarter of 2024. Thank you for your attention. We are now ready for the Q&A session. Thank you Francesco.

Let's start the Q&A session. We received a strong set of questions. We have grouped some of them together. First set of questions is related to the nine-month figures. The first point is related to the output-based incentives and we received three main questions on that item. How many output-based incentives? Did you account in 9 months 23? Do you confirm about 300 million expectations for the full year? And what do you expect for the coming years?

Well, the output-based incentives recognized this year are about 200 million euros related to the statue services market sufficiency, which are connected to cost saving related to the reduction of the volumes traded on the market. and to interzonal incentives connected to the creation of additional transport capacity among Italian pricing zones as regulated by the resolution 567 of 2019. In 2023 we are assuming an amount of outdoor based incentives of about 300 million euros mainly related to the dispatching service market efficiency incentives. For the remaining years of the business plan We expect our tool-based incentives contribution to continue consistently with the performance we will register on the relevant KPIs.

Thank you Francesco. Now let's move to cost of debt and financial charges. First question, can you give us more details on actual cost of debt and our expectations for full year 2023?

Sure, the cost of debt at the end of the first nine months of 2023 was 1.7%. As to the cost of debt for the full year 2023, we expect it to be slightly below 2%, reflecting the sharp interest rate increase observed in the last month, associated with the ambitious capital plan of the company.

Thank you, Francesco. And can you give us more color on financial charges in nine months 2023?

In the first nine months of the year, net financial charges were equal to 81.2 million euros, which is higher, 25 million more or less higher than nine months 2022. The increase in net financial charges is mainly attributable to the increase of interest rate, as we were also pointing out in the presentation, which affects the cost of the new debt together with the floating portion of the existing one, and is partially mitigated by the lower level of inflation in respect of 2022. On top of it, let me also underline the increase in capitalized financial expenses and higher financial income on available liquidity, which both contributes to diminish the cost of debt for the period.

Thank you, Francesco. And let's have a look to guidance and output. Any upset risks for Guidance 23?

As stated during the presentation, we confirm once again all the guidance for 2023.

And can you give us any comments about 24 outlooks?

Unfortunately, as for the 2024 guidance, as well as future years, we will wait for the discussion which we are having at the moment Regarding the new business plan that we foresee to present as already stated by the first of next year. Thank you Francesco.

Now let's move to execution. Could you provide us any updates or details on project execution status?

Sure. I can say that we are on the right path regarding the authorization process, construction activities and procurement. in line with the milestone set in the updated industrial plan. Regarding authorization in particular, almost all the budget capex has already been authorized. For what concerns procurement, potential shortage of raw materials do not represent relevant risks for Turner, given that we have already locked in almost all the procurement needs till the end of 2023, also thanks to blue contributions.

Thank you Francesco. Now let's move to a more technical one regarding deflator and CPI. Do you have any comment regarding the deflator trend versus CPI evolution?

Well, the only comment that I can make to this extent is that we observe that historically the deflator trend is less volatile than CPI. But this is true both on the upside and on the downside.

Thank you, thank you Francesco. And let's move to dividend policy. Can you give us any updates on dividend policy?

First of all, let me say that our current dividend policy is fully sustainable and is aimed at maintaining the right balance between fair shareholder generation and the sustainability of the investment plan. I believe that this dividend guarantees constant and predictable growth as well as full visibility over the plant premium. Any other considerations about dividend policy will be part of the discussion of the new business plan that we foresee to present at the quarter of 2024.

Thank you Francesco. Now let's move to regulation. We have several questions regarding the recent resolution of the authority regarding the ROS. Are you able to give us any comments about the resolution? Concerning the implementation of criteria of the ROS regulation?

Sure. With the resolution 497 published at the beginning of this month, ARERA establishes the application criteria for the ROS-based regulation, introducing the following regulatory measures, which represent an improvement compared to the current regulations. First of all, Starting from 2024 investments and with effect from 2025, depreciation on assets will be recognized in the year following the entry into operation. Let me remind you that within the current regulatory framework, in the tariff year T, it is recognized the depreciation of assets that came into service up to year T-2. Moreover, let me also highlight The revaluation based on the plateau for the first four years of assets under construction, which are currently not revalued, and the application of the remuneration rate of the first two years, also to years three and four. Furthermore, this rate is extended for the first six years for a specific subset of capital incentive assets. which are typically above 1 billion euro. Finally, there is also the possibility of requesting the activation of the corrective data factor to account for operational cost increases related to new activities and changes in the scope of managed assets. With reference to the capitalization rate, let me also add that the latest resolution provides to determine if for the years 2024 and 2025 based on the average rate of years 2021, 22, 23. And those are historical levels. And years 2024 and 2025 which are instead prospective values. For the capitalization rate, Of the years 26 and 27, ARERA proposed using the average rates between 2023 and 2027, with update or reopening possibly. The assessment of the impact coming from this new regulatory framework will be part of the discussion of the new business plan, obviously. So we will give you more color on this in due course.

Thank you. So now let's move to International Strategy. Should you please give us a comment on future steps in international strategy, i.e. U.S. transmission markets?

Well, let me start with an update on the reconciliation process of LATAM activities that will allow to maximize the value of the international portfolio, optimizing the group's risk return profile. At the same time, we will continue to scout for other opportunities. These may also be with partnerships and will be selected ensuring a low risk profile and limited capital absorption, leveraging the know-how developed by CERC. Our focus will be addressed on markets with high growth profile and low country risk as, for example, United States that you've mentioned. We will take a gradual approach, offering and leveraging our know-how in the design and operation of infrastructures.

Thank you, Francesco. We received a question regarding the financeability of CapEx plans in current rate environments and balance sheet headroom. Can you confirm on that, in this context, do you plan to issue another hybrid?

Well, first of all, let me confirm that as already communicated to the market last year, we are committed to maintain our crazy risk profile and are comfortable with the current solid investment rate rating area. The annual issuance of February 2022 is the first evidence of this approach. Even though so far our financial ratios are Thank you very much. Our funding strategy going forward is to spread the hybrid issues over time in order to optimize the portion of hybrid capital within our capital structure at any time. Therefore, we will come back to such markets in the upcoming months slash years, as soon as it will be necessary and with the amount needed in order to protect our credit profile, potentially filling our whole hybrid supply. Let me highlight that we are also open to rely on other tools in order to maintain our financial standards. The agreement for the disposal of our international activities that we were discussing before and that we signed at the end of April 2022 is an evidence of our willingness to focus on our co-activities and to maintain the leverage under full control. Let me finally tell you that we have several levers at our disposal and we will choose the most efficient ones from time to time.

Thank you, thank you Francesco. We receive also some questions regarding Ternas potential involvement both in offshore wind and storage. Can you elaborate?

Our current CAPES plan does not include any investments related to offshore wind and storage. Let me be clear on that. Grid collections requests from large-scale offshore wind power plants have significantly increased recently. We will continue to monitor the evolution of this technology and any other considerations about it will be part of the discussion of the new business plan. For what concerns storage, it should be developed through market options and CERNA cannot be directly involved in. We strongly reiterate the importance of storage development for the electricity system and we will actively monitor its evolution.

Thank you Francesco. We receive a couple of follow-on questions, the first regarding regulation and the second regarding working capital. Starting from the first one, what's your expectation about What is the WACC value for 2024 tariff?

Well, I'm stating the obvious when I say that for 2024 final WACC value we have to wait the resolution of the authority to be published by year end.

Having said that, at the current stage we are looking at an estimative WACC evaluation of about some details on working capital dynamics for 9 months 23, And what are your expectations for the full year 2023?

In the first nine months of 2023, working capital reports a decrease of about 204 million euros compared to the end of last year. This result, that has a negative impact on net financial debt, is mainly due to, on the one hand, the reduction of about 96 million in net rate variables, We are talking about net pass-through energy payables due to lower debt from the essential plants for the security of the electricity system, only partially offset by lower credits from the cost of procuring resources on the dispatch and service market. On top of it, we also had an increase of about 214 million euros in net receivables resulting from regulated activities mainly due to the dispatching market incentive mechanism revenues and to internal incentives revenues which will be collected in accordance with the timing defined in the resolution itself. Both previous items are partially offset by an increase of net tax valuabilities of about 128 million due to the increase of income tax expenses for the period and of the net VAT payable. Please bear in mind that in 2022, Terna benefited, as we already discussed, of a positive cash flow effect deriving from net working capital decrease. The expectation for the full year 2023 is to reabsorb, at least partially, the benefits coming from the pass-through energy items booked at the end of 2022.

Thank you Francesco, we cover all the points.

Thank you Omar, thank you everybody for attending this call and see you at the next business plan presentation. Thank you. The first quarter of 2024. Goodbye everybody. Bye.