Terna Rete Elettrica Adr

Good afternoon, ladies and gentlemen, and welcome to TERNA's first quarter 2024 consolidated results presentation. At this time, all participants are in listen-only mode. Please be advised that this conference is being recorded. I'd like to hand the conference over to our host speaker today, Mr. Omar Al-Bayati, Heaviness Relations, Corporate Development and Sustainability. Please go ahead, sir.

Good afternoon, everyone, and welcome to Terna's first quarter 2024 result presentation. The call will be hosted by our CFO, Francesco Beccali. Following the presentation, we'll be having a Q&A session. We kindly ask you to send any questions to investor.relations at terna.it. Please, Francesco, the floor is yours.

Thank you, Omar, and good afternoon, everybody. Before starting to analyze the figures, I'd like to share with you the latest main achievements. First, let me remind you that on March 2019, we presented the Group's 2024-2028 Industrial Plan, which aims to consolidate the company's strategic role in managing the Italian electricity system and, more generally, strengthen the commitment to enable the country's energy transition. To do so, Ferma plans to significantly increase its investments over the life of the plant to 16.5 billion euros, the highest level ever in the group's history, 65% up versus the last industrial plant. We are now focused on the execution of the new plant. In this regard, let me underline that we are well on track for what concerns authorization processes and procurements. of the main projects included in our 2428 plan. Indeed, in January, the Ministry of Environment and Energy Security authorized the realization of the Adriatic Link, the submarine power line that will connect the regions of Marche and Abruzzo. These development projects, recognized as strategic for the country by the regulatory authorities, will strengthen energy exchange in central Italy. Thank you very much. will be allocated to meet the ordinary financial requirements and to fund the needs of the Group's industrial plan. Moreover, in February, Terna signed a financing contract with the European Investment Bank for the last tranche of the 1.9 billion euros loan for the Terranial Link project, the submarine electricity cable connecting the Italian mainland with Sicily and Sardinia. In addition, on April 4th, As part of the financial strategy outlined in the new industrial plan, Cerna successfully issued an hybrid green perpetual bond with a total nominal amount of 850 million euros. All these operations, that will be better described in the next sections of the presentation, enhance the solidity of our financial structure, further diversify the investor base, The leadership in the field of sustainability is once again demonstrated. Indeed, the sustainability plan has been embedded in the industrial plan. The activities envisaged by the sustainability plan include projects and actions confirming CERNA's commitment to delivering a just transition, a fair, inclusive process that takes into account the potential impacts on all stakeholders, including workers, local communities and suppliers. Moreover, Terna has been included in the list of international leaders for efforts against climate change. According to CDPs, climate change survives. Furthermore, Terna was also included in the list of leading international companies for their suppliers' involvement in the fight against climate change. After this brief introduction, let me give you the usual overview of the Italian electricity market. Turning to the next slide. As you can see from this chart, in the first three months of 2024, national demand was about 78 terabytes per hour, with an increase of almost 1% versus last year, when national demand was at about 77 terabytes per hour. In the first quarter of 2024, renewable sources covered about 36% of national demand, and many more. versus last year is also due to the contribution of wind and solar production, which grew by 13.6% respectively versus first quarter of 2023. Now, let's move to the main figures of the period. In the first three months of 2024, we registered a strong growth in all P&L lines and categories. Indeed, group revenues and EPDAs were up by 20 and 26 percent respectively versus last year, which means 146 million and 128 million euros higher than the first three months of 2023. We also reported a group net income at 268 million euros with an increase of 34 percent versus the same period of last year. Group capital was 483 million euros, recording a double-digit increase of 53% versus the first quarter of last year. Let me underline that this is a record-breaking level of capex for the first three months of the year. This confirms, once again, our solid capex acceleration to serve the system needs and enable the twin transition, in line with our recently presented industrial class. To support this acceleration, at the end of March 2024, net debt stood at 10.6 billion euros versus about 10.5 billion at 2023 EOM. Now, let me give you a deeper analysis of the figures of the period, moving to slide number 8. Let's start with revenue analysis. Total revenues. in the first three months of the year increased by 20.4%, reaching 858 million euros, up by 146 million versus last year. The growth was attributable both to regulated and non-regulated activities, which contributed for 116 million and 29 million euros respectively. Let's now go into the details of the revenue evolutions moving to the next slide. The revenues reached 730 million euros, 116 better than last year, which means about 19% more than the same period of last year. The increase was mainly driven by the increase in VAT and by the updated value of VAT remuneration and the higher output incentives effect related to the higher benefits generated for the system. Non-regulated and international revenues reached 180 and 28 million euros, 29.8% higher than last year. Non-regulated growth was mainly attributable to the increase in revenues coming from Taminis and to the higher contribution of LT Group's energy services. International revenues were set to zero. Given to the requirements of 5.5 as we met, the overall results of 2020 As you can see in this chart, Total operating costs stood at 230 million euros, 8.3% higher than last year. Regarding regulated activities, the decrease was mainly attributable to the increased capitalization of labor costs after taking into account an increase in the average headcount compared to the first quarter of 2023, while non-regulated activities were impacted mainly by higher costs for the purchase of raw materials and services related to TAMI and LT Group. Let me now move to analyze EBITDA, moving to next slide. Due to the previously mentioned effect, first quarter 24 group EBITDA reached 628 million euros, 25.6% higher than the same period of last year. The increase was mainly attributable to regulated activity, which contributed for about 124 million more versus the first three months of last year, showing an EBITDA of 610 million euros in the first quarter of 2024. Let me underline how this growth in EBITDA attributable to regulated activities is not only linked to an increase in regulated values, but also to a remarkable reduction of operating expenses as a demonstration of our ability to maintain cost structure under control. Let's now have a look to the lower part of the P&L, turning to slide number 12. DNA amounted to €209 million. The increase versus last year was mainly due to the full recognition of depreciation relating to the entry into operation of new assets. As a consequence, EBIT reached 419 million euros, 33.6% higher versus the first quarter of 2023. We reported net financial expenses at 37 million euros. The increase versus last year is mainly attributable to the subscription of new financing and the increase of interest rates partially mitigated by the lower level of inflation related to the inflationary bond expired in September 2023 and by the higher financial income on available liquidity. Taxes stood at 112 million euros, 30 million higher versus last year, essentially due to increased profit. Our tax rate stood at 29.2%. As a result, group net income reached 268 million euros, 34% higher versus the same period of last year. Moving to capex analysis, in the first three months of 2024, total capex amounted to 483 million euros, 53% higher than last year, confirming the robust acceleration in line with our institutional role for the country. Let me underline that this is a record-breaking level of CAPEX for the first three months of the year. Indeed, we invested about 462 million euros in regulated activities. Among the main projects of the period, it is worth mentioning the Terrenial Link, the Adriatic Link, the Colunga-Calezzano connection, the modernization of the high-voltage grid in the locations due towards the Winter Olympics in 2026, and the investments in stabilization devices for grid security, including synchronous compensators. Among CAPEX categories, development CAPEX represented 64% of the total regulated CAPEX. Defense CAPEX stood at 10%, while asset renewal and efficiency was at 26%. Non-regulated and other CAPEX stood instead at 21 million euros, This includes capitalized financial charge and other investments. Regarding net debt and cash flow analysis, net debt at the end of March 2024 was about 10.6 billion euros, around 93 million higher than 2023 year-end levels, mainly as a consequence of the CapEx acceleration made on the national agreement. During the period, We generated an operating cash flow of 461 million euros, thanks to which we were able to cover most of the capital 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 three months of 2024, we registered a fixed floating ratio on gross net of about 89% and an average duration of about six years. As already mentioned, since the beginning of the year, Terna successfully launched two bond issues. In January, the company issued a fixed rate single-strand bond issue for a total amount of 850 million euros. These issuings, a part of the €9 billion Euro-Medium Terminals programme, received a very favourable market response, with demand outstripping supply by almost three times the offered amount. The bond, issued with a spread of 100 basis points over the mid-trade, has a duration of seven years and will pay a coupon of 3.5%. Then, in April, Serna successfully launched an issue of a perpetual green hybrid bond with a total nominal amount of 850 million euros. Also this issue received a green market response with a maximum demand of over 3 billion euros, a slipping supply by approximately four times the offered amount. The bond is non-collable for six years and was issued with a spread of 214 basis points over the mid-swap. with a subordination premium of 130 basis points, one of the titles for this type of instrument since the end of 2021. The issue will pay an annual coupon of 4.75% until the first reset date scheduled on April 11, 2030, and will have an effective rate equal to 4.8%. With regard to payments, In February, the European Investment Bank, Interna, signed the contract for the final tranche of the 1.9 billion euros financing of the terranial league. This contract establishes a final tranche of 500 million euros in addition to the previous financial contract signed on November 8, 2022 and March 30, 2023. For the construction and commissioning of the east and west sections of the project. Let me remind you that with terms of around 22 years from each drawdown, the loans have a long maturity and more competitive cost than those generally available on the market. This makes them aligned with Terna's policy to optimize its financial structure. Moreover, in April, Terna also increased To 2.255 billion, the total amount of the ESG-linked revolving credit facility signed on May 12, 2023. Signing an amendment and a statement agreement. All other terms and conditions of the credit line remain unchanged. Before moving to Q&A session, let me underline that with the strong set of results just presented for the first quarter, we can fully confirm our guidance for 2024. Thank you for your attention. We are now ready for the Q&A session.

Thank you, Francesco. We received several questions. Let's start from the first one. Please, Cristiano.

Okay, thank you, Omar. Let's start from the first one. We received several questions regarding the amount of out-of-base incentives accounting in the first quarter of 2024. Please, Francesco, can you comment on that?

Sure. As to the out-of-base incentives, recognized in the first quarter of 2024, the figure is about 60 million euros relating to the dispatching services market's efficiency incentives connected to the cost saving related to the reduction of the volumes traded on the market.

Thank you. And again on out-of-base incentives, what are the assumptions for 2024 and for the plan period?

The strategic plan assumes about 400 million euros accumulated during the time horizon of the plan, with a front-end loaded distribution.

Okay, thank you. Maybe last question regarding after-business incentives. Can you comment about when there could be more visibility in relation to the potential ancillary service market incentives scheme renewal?

Well, given the high reduction of the NCI services market cost over the first year of incentive schemes, the Italian regulatory authority is assessing the potential extension of the scheme for the coming years. Anyway, any decision on the possible scheme renewable is expected by the end of the year.

Thank you very much. Always being in the regulatory environment, we are switching to another argument. Because we received a few questions about the potential reassessment of the deflator for 2024 tariff. Can you please give some color on this point?

Sure. According to the resolution 615 of 2023, the deflator applied to the 2024 tariff is equal to 5.9%. and it is the cumulative result of the deflator of the last three quarters of the year 2022, not included in the 2023 tariff, equal to 4.2%, and the variation in the 2022 fixed income in 2023, so fixed income investment deflator, with an expense estimation equal to 1.6%. This value will be, let me stress this point, reassessed by the regulator in 2025 with ex posta, since the Fletcher historical series published by ISTAT will be subject to other quarterly revisions until ARERA will take the final value in the first month of 2025. So, it is now too early to make projections on 2024, the federal assessment.

Okay, thank you. Still about regulation, maybe can you comment about the WAC assumption from 2025 onwards?

Sure. Our estimate of the WAC from 2025 onwards stands currently at 5.5%, which is the same level that we share with the market during our business representation. And it is based on the shift from 66% to 33%, of the weight of the cost of death of the previous regulatory period, which is set equal to 2.4%. And the latest available data, the mark-to-market of the values recorded from February 2024, of all the parameters that have to be updated for the calculation of the cost of equity. Please note that our assumptions related to regulatory work are made consistent with those related to the cost of debt, which provides a kind of partial natural age for the company. For what concerns the fiscal parameters, the value from the second period, the one which goes from 2025 to 2027, will be determined based on an analysis of the relevant tax legislation and the actual level of tax incidents observed in 2022-2023. And finally, with reference to beta assets, a revision of the methodological criteria of calculation is planned during 2024 for all regulated electricity and gas infrastructure services.

Thank you very much, Francesco. There are also some questions we received about ROS framework. Could you please comment about the ROS system regulatory update?

Well, in the ROS approach, we see an opportunity to create further value for the electricity system and shareholders. It is consistent with the path already undertaken towards an up-to-date approach. At the end of last year, the regulators approved the ROS Regulation Integrated Text containing ROS general principles and criteria for setting the old cost values of the period which goes from 2024 to 2031. ARENA confirmed the gradual approach for implementing ROS Regulation foreseeing the first stage, so-called ROS budget, starting in 2024. The main change introduced by ARENA in the ROS-BASE framework concerns the application of the capitalization rate to split the overall expenditures between slow and fast money components as a measure to support the flexibility of investment. For the development of the ROS-Integrale model, instead, which is going to be applied in 2026, ARERA has defined a two-step approach, a framework resolution concerning the general criteria and a second resolution regarding specific sectoral measures aimed at defining methods and possible experimental applications of the ROS Integrale model. The resolution of the ROS Integrale will take place through a process of dialogue between ARERA and operators. During this process, ARERA will publish consultation documents in order to share and discuss objectives and tools underlying the new framework with the regulated end.

Okay, thank you Francesco. Now let's move to the depth of the vial. Some questions are regarding hybrids. Specifically, some people are asking if do you plan to issue any other hybrids and what is the maximum potential capacity for factory issuances?

Well, following the recent issues that we have just mentioned during the presentation of the first quarter results, our funding strategy moving forward remains focused on optimizing from time to time the average capital portion within our capital structure. The group will continue to monitor the market for potential opportunities and will return to ensure the protection of our credit profile and to capitalize on any suitable opportunities that may materialize. After the 150 million euros recently issued, we do have remaining capacity for further initiatives of about 2 billion euros within the industrial power plan horizon to be exploited if needed and if suitable opportunities will materialize.

Perfect. Thank you very much, Francesco. We also received a question regarding the expected net debt evolution following the last five editions that you mentioned. Can you please comment on this?

Well, as you very well know, we do not provide any guidance on net debt. Net debt will reflect the guidance provided on CAIBEX and EPS and the level of working capital at the end of 2024. However, Let me remind that hybrid bonds are accounted as debt under Acta Res, given the perpetual nature of the securities and given also the ability to defer coupons at the term of discretion. So our hybrid issuances will not be accounted in our net debt and the coupon payments will not be recorded as financial charges in the payment statement.

Thank you very much. Now we switch to the procurement authorization. Since we received your question about the procurement authorization status, can you give us an update on this?

Well, regarding authorization, I can say that we are on the right path and the CAPEX plan is strong, solid and safe. The main HPDC projects are authorized. and Italy and Tunisia Connection is about to be authorized. For what concerns instead procurement, we are sensitive obviously to potential shortage and bottlenecks along the relevant supply chain investing in the industry. Nevertheless, we manage this risk setting up an array of actions to handle possible drawbacks in a timely and efficient manner. So also on procurement side, we are well on track, given that we have already locked in almost all the procurement needs till the end of 2024, also thanks to group contributions. Indeed, as to the strategic plan is concerned, about 80% has been already procured, and about 70% is covered by existing procurement contracts.

Thank you. Now a very popular question. Is there enough time on 2024 guidance?

And the only answer that I can provide you with is that I stated during the presentation, thanks to the strong set of results just presented for the first quarter, we are able to fully confirm our guidance for 2024.

Thank you very much again. Finally, we received some questions regarding electricity transport, regarding supply and demand side, so we summarize this question as follows. In case of slowdown in renewables development, or in case of new trends on electricity demand, such as data centers, for example, what are the impacts on our CapEx plan?

Well, on this aspect, let me remind the key objectives that TERNA needs to aim Thank you very much. and one-way flows. We are quickly moving over to a complex, integrated and much less predictable system characterized by multi-directional flows among the last number of players. Then we need to enhance the resilience of the grid to withstand potential stresses, which is paramount for energy continuity. In addition, finally, we need to ensure the security of the electricity grid to address new challenges coming from the transition towards a more complex energy system. Our CAPEX plan is driven by all these increasing needs of the system, and it is aimed to manage and anticipate any foreseeable trend that can impact the electricity system.

Thanks, Francesco. There are no more questions. Yeah, quite a number of questions. So thanks, everyone, for joining the call. Please consider IR department at your disposal for any follow-up. Thank you very much.

Bye.