Terna Rete Elettrica Adr

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

Good afternoon everyone and welcome to Terna First Pass 2021 results presentation. The call will be hosted by our CEO and General Manager Giuseppina Di Foggia and our CFO Francesco Beccali. Following the presentation we will have a Q&A session. We kindly ask you to send any questions to investor.relations at terna.it. Please do see that the call is yours.

Thank you Omar and good afternoon everybody. Before starting to analyze the figures, I would like to share with you our main achievements and highlight some of the key topics in energy transition that we have focused on. First, let me start by reminding you that our 2024-2028 industrial plan is based on the concept of a twin transition, energy and digital, with innovation leveraged to support grid development. Therefore, on the one hand, we are moving forward with the execution of our CAPEX plan to deploy the structures required to enable energy transition and meet the European decarbonization targets. But at the same time, we are investing in digital tools and technology that will help to maximize the efficiency of the whole energy system. In December 2023, a new law charged Perna with the task of creating and developing a digital platform for institutional communication on transmission grid development. Connection Request of Renewable Energy Sources and Storage Systems. In May of this year, TERNA launched TERRA, a new portal available to local and national administrators, the regulatory authority ARERA, and applicants that will enable efficient, environmentally sustainable territorial plumbing. Digitalization will also increase efficiency in dispatching activities. In May, Herrera published consultation document 170-2024 regarding the renewal of incentive scheme for the reduction in dispatching costs, providing high visibility for the 2025-2030 period. This mechanism is designed to align the interests of the PSO and the Italian system, above all, guaranteeing the security of the network. At the same time, Terna will be rewarded for its ability to manage the system at a lower cost, generating savings for customers. Let me move on now to talk about sustainability. For us, sustainability is not only in what we do, but more importantly, in how we operate. This is the main reason why Ternas' sustainability plan is embedded in the industrial plan. The activities envisaged by the sustainability plan include the projects and actions conforming Ternas' commitment to delivering a just transition, a fair, inclusive process that takes into account the potential impacts on all stakeholders, including the workers, local communities, and suppliers. Thelma's recent efforts in sustainability field have also been publicly recognized by rating agencies with our inclusion in the new SMP Global Indices focused on SDGs and biodiversity. The company has also been recognized for its best practices in the ESG field and included among the 500 most sustainable companies by China. Sustainability is also one of the pillars for our financing operations. In fact, in addition to the hybrid green perpetual bond issued in April, in May and July, This year, Terna signed two ESG-linked credit facility agreements for a total amount of 450 million euros. The transactions will allow Terna to count on a liquidity appropriate to its financial soundness and confirm, once again, the group's commitment to a model that aims to reinforce sustainability as a strategic lever for creating value for all its stakeholders. This includes obviously shareholders and on June 24th we paid 22.50 euro cents per share as the 2023 final dividend. This, when added to the interim payment of last November, brings the total... 2023 dividend to 33.96 euro cents per share. And now let's have a closer look at the execution of the main project. Before analyzing in detail the main project, Let me once again underline that we consider the execution of our development projects the core of the agenda in the coming years and we are working to mitigate and minimize any risk. In fact, of the 2024-2028 CAPEX plan, more than 80% has been already authorized and approximately 75% is already covered by existing procurement contracts. Concerning the main project, I would first like to highlight that on 10th of May, the interconnection between Italy and Tunisia was fully authorized by the Ministry of Environment and Energy Security. Procurement activities have started with tenders now ongoing. The link will connect Europe and Africa and is a concrete example of Italy's role as the Mediterranean hub for energy transmission between the two continents. I can further report that earlier this month, Tunisia also confirmed authorization of the project. Let's move to the Tyrrhenian link. The project is a double underwater table that will link the Italian mainland, Sicily and Slovenia. It will increase the security of supply for our two main islands, enable the integration of new renewable energy sources, and consequently contribute to the energy transition of Italy. Both links have already obtained full authorization and procurement contracts for both HDDC cables and stations have been awarded and signed. Two other relevant projects in our CAPEX plan, the Sacoitri and the Adiatic link, have also obtained full authorization and have main procurement contracts signed. SACOITRI is a submarine connection between Slovenia, Corsica and Italian mainland that will contribute to increase the security of supply in Slovenia and allow us to eliminate bottlenecks in the area. The ADIATIC link is a submarine connection between Abruzzo market which will increase market efficiency and allow for the integration of renewable energy sources. These are examples of major projects that confirm that we are well on track with the execution of our CAPEX plan in the coming years. All these interventions are fundamental to face the changes the Italian energy system is experiencing. This can already be seen from the evolution of electricity demand in recent months. Going to the next slide. As you can see from this chart, in the first six months of 2024, national demand was about 152 terawatt hours with an increase of 1.1% versus last year when national demand was about 150 terawatt hours. In the first half of 2024, Renewable sources covered about 44% of national demand, 9 percentage points higher than last year. In this regard, let me highlight that in May, renewable sources covered 52.5% of electricity demand, the highest ever value on a monthly basis. This figure was also repeated in June. Regarding a national net total production, this stood at 126 TWh, almost 1% higher than the same period of 2023. Let me highlight that considerable increase in hydro production, which grew to a value of 25.9 TWh, Up 65% compared to the same period last year. Let me also say that in this first half of the year, renewable sources covered about 53% of the national net total production, overtaking production from fossil fuels for the first time. The increase versus last year is also due to the contribution of wind and solar production which grew by 11% and 70% respectively compared to the first six months of 2023. I mentioned three topics at the start of this presentation and one of these is the adequacy of the electricity system. Expected adequacy margins are higher than in past years. The gradual improvement is the result of capacity market auctions organized by CERNA. The capacity market has ensured efficient use of gas-fired plants and promoted the construction of a new power capacity by means of long-term contracts that guarantee Remuneration for Investors The new capacity is also useful for enabling the gradual shutdown of coal-fired generation under conditions of system adequacy. And now let's move to the main figures of the period. In the first half of 2024, We registered a strong growth in all PML lines and CAPEX. Indeed, group revenues and EBITDA increased by 18% and 23% respectively versus last year, resulting 269 million and 238 million euros higher than the first six months of 2023. We also reported a group net income of 545 million euros, up by 32% compared to the same period last year. For the first time in term of history, group capex crossed the record threshold of 1 billion euros in the first six months of the year, with an increase of 26%. Thank you very much. Let's start with revenue analysis. Total revenues in the first six months of 2024

reached 1,754,000,000 euros, increasing by 18.1% up by 269,000,000 versus last year. Such increase was attributable both to regulated and non-regulated activities, which contributed for 209,000,000 and 60,000,000 euros expected. Let's now go into the details of the revenue evolution, moving to the next slide. Regulated revenues in the first half of 2024 were 1,473,000,000 euros, 209 million higher than last year, which means an increase of about 17% compared to the same period of 2023. The increase was mainly driven by the increase in RAB and the updated value of regulatory WAC, which was set at 80 basis points versus previous year. Non-regulated and international revenues reached 282 million euros, 26.9% higher than last year. Non-regulated growth was mainly attributable to the increase in revenues coming from the equipment business and to the higher contribution of energy services. International revenues were set to zero. Given that the requirements of Alphabet 5 have been met, The overall results in the first task of 2024 and 2023 attributable to the South American subsidiaries included in the planned sale of assets have been classified in the item P&L for the period from assets held for sale in the groups reclassified in consideration. Now, let's go to operating cost analysis. As you can see from the chart, total operating costs were 497 million euros. Non-regulated activities, instead, were impacted mainly by higher costs for the purchase of raw material and services related to Tamini and NC Group. driven by the increase in volumes reflected also in revenue growth. Let me now analyze EBITDA moving to the next slide. Due to the previously mentioned effect, 1,024 group EBITDA reached 1,257,000,000 euros, 23.4% higher than the same period of last year. The inquiry was mainly attributable to the regulated activities, which contributed for about 223 millions more vis-à-vis the first six months of last year, showing an EBITDA of 1,212,000,000 euros in the first half of 2024, partially driven by regulated activities' obvious reduction as a demonstration of our ability to maintain cost structure under control. Also, non-regulated activities contributed to the EBITDA increase, with a 50% growth vis-à-vis the first six months of 2023. Let's now have a look to the lower part of the P&L, turning to slide number 13. DNA amounted to 421 million. The increase versus last year was mainly due to the entry into service of new assets. As a consequence, EBIT reached 836 million euros, 30.8% higher versus first half of 2023. We reported net financial expenses at 63 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 higher financial income on available liquidity and higher capitalized financial expenses. Taxes stood at 227 million euros, 59 million higher versus last year, essentially due to increased profits. Our tax rate stood at 29.4%. As a result, group net income reached 545 million euros, 32% higher vis-à-vis the same period of last year. Now moving to capex analysis. In the first six months of 2024, total CapEx amounted to 1 billion and 42 million euros, 26% higher than last year, confirming the robust acceleration in line with our institutional role for the country. Let me underline that it is a record-breaking level of CapEx, exceeding 1 billion euros for the first time in the first six months of the year. We invested about 996 million in regulated activities. Among the main projects of the period, it is worth mentioning the terrestrial link, the azelatic link, the SACOI-3, the modernization of the high-voltage grid in the locations due towards the Winter Olympic Games in 2036, and the investment in stabilization devices for grid security, including among which, synchronous compensators. Among CAPEX categories, Development CapEx registered a significant increase in the contribution on total CapEx, representing the 62% of the total, vis-à-vis 50% in the first six months of 2023. For the remaining categories, Defense CapEx stood at 10%, while Asset Renewal and Efficiency accounted for 28%. Non-regulated and other CapEx stood at 47 million euros. This includes capitalized financial charges for 32 million euros and other investments. Regarding net debt and cash flow analysis, let's move to next slide. Net debt on the end of June 2024 was about 10.3 billion euros, 166 million lower than 2023 year-end level. mainly due to the positive impact of the hybrid green bond issuance recognized as an equity instrument partially mitigated by the dividend payment and by the CapEx acceleration. During the period, we generated an operating cash flow of 931 million euros, thanks to which we were able to cover almost all the CapEx spending of the period. Let's now make a deeper analysis on our debt profile moving to page 16. In line with our cautious and proactive debt management approach, aimed at maintaining a solid financial structure, at the end of these first six months of 2024, we registered a fixed floating ratio on gross debt of about 89%, and an average duration of about six years. Let me remind you that in April, Tecna successfully launched an issue of a perpetual green bond with a total nominal amount of 850 million euros. The bond is non-callable for six years and will pay an annual coupon of 4.75% until the first reset date. Moreover, on top of the amendment and restatement agreements created in April to increase to 2 billion and 255 million euros and ESG Link Credit Facility, previously signed in 2003, in May and July this year, turn aside two ESG Link Credit Facilities for a total amount of 450 million euros. The lines will have a total term of five years and will be linked to Turner's performance in relation to specific environmental, social and governance indicators. Thank you for your attention. Now, before you finish the session, let me leave the floor to Gigi for a closing remark.

Thank you, Francesco. Let me conclude this presentation with some closing remarks. First of all, Terna will continue to guarantee value creation for our shareholders and communities, focusing on the execution of the development projects foreseen by our 2025 For which we are well on track. In this regard, despite the 16.5 billion euro CAPEX level foreseen in our plan and the challenging microeconomic environment in which we are called to operate, Terna will remain committed to maintaining financial stability and a low risk profile. Before moving to the Q&A session, let me underline that with the strong set of results just presented for the first half, we can fully conform our guidance for 2024. Thank you for your attention, and we are now ready for the Q&A session.

Thanks, Giuseppe. Let's move to the Q&A session. The first one, some questions were related to the upcoming introduction of ROS Integrale. Any update on that? What's your view?

Well, the authority has confirmed the gradual approach for implementing ROS regulation. This foresees a first step called ROS Base. that began this year in which expenditure is allowed largely in continuity with the previous regulatory period. The transitional ROS base phase will be followed by the ROS Integrale framework starting potentially in 2026. The resolution of the ROS Integrale will take place through a process of a 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. Let me underline that the ROS approach represents an opportunity to create further value for the electricity system and the shareholders, confirming the The path already undertaken towards an output-based approach. It is focused on targets and benefits for systems with rewards linked to outcomes promoting an even higher overall efficiency through new output-based regulatory measures.

Thank you, Giuseppe. Another question about regulatory measures. Could you please comment on the last consultation document on the renewal of the output-based incentive scheme for reduction of dispatching costs?

Well, output-based incentives in recent years have represented a successful mechanism to increase system efficiency and provide benefits to the final customers. This has been achieved through the reduction of ancillary services market cost and the reduction of bottlenecks among and within market zones. The regulator has recognized Terna's efforts and results in this direction. The consultation document you mentioned is further proof of that. With this document, the authority proposed to renew the incentive scheme for the reduction of ancillary services market costs, providing visibility for the coming years with the incentives extended until 2030. And this is a further confirmation of a thermal central role in the Italian energy system and a recognition of the benefits that our company can bring to the final customers while enabling the energy transition in our country. Please, Francesco, if you can elaborate on the new mechanism proposed.

Sure. Thank you. Yes. As you already mentioned, this document foresees the extension of the incentive schemes on dispatching cost reductions for two periods of three years each. The first one starts from 2025 to 2027 and the second one goes from 2028 to 2030. According to the document, for each year of the period 2025-2030, will receive the 12% of the overall MSD cost reduction. For each year of the period 2025-2027, the baseline will be represented by 2023 MSD actual cost, increased by an extra component to take into account the expected changes coming from energy scenario evolution. In the period 2028-2030, The mechanism would work in continuity with the previous period, with the reset of the baseline according to the 2026 MSD effort cost increased by an extra component to be recalculated in six years. The final new ruling is expected by the end of this year.

Thanks both. One more on regulation. We received a question about potential reassessment of the deflator for 2024 tariff. Can you please provide your view on this point?

Well, first let me underline that when we talk about the regulatory framework, it is important to focus on the overall picture, not only on the specific measure. However, regarding the deflator, regarding your question, there are discussions ongoing with the authority to evaluate the best solution to preserve the regulatory asset base protection against inflation. And for the reassessment of the 2024 deflator, please, Francesco, could you provide some details about the ongoing discussions?

Sure. Thanks, Giuseppe. These are complicated ones. As you know, according to resolution 615 issued in 2023, the deflator applied to the 2024 types is equal to 5.9%. And it is the cumulative result of two main items. The deflator of the last three quarters of the year 2022 not included in the 2023 type, the so-called linkage, which was equal to 4.2%. And the ex-ante estimation of the variation occurred in 2023 of the fixed income investment deflator, which is 1.6%. This value will be reassessed by the regulator in 2025 with the latest ISTAT values. Since the deflator 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, it is now too early to make projections on which will be the 2024 deflator reassessment. Thank you.

One more about regulation. Can you comment about work assumptions in 2025?

Well, the work value for the period 2025-2027 will be updated by ARERA by the end of 2024 based on the update of the main macroeconomic and fiscal parameters embedded in the formula. Let me stress Again, for us it is important to focus on the overall blended return coming from the regulatory framework more than on a single item. And I will leave again the floor to our CFO for the technical aspects of the work formula. Please, Francesco.

Thank you. Our strategy plan assumes, as you know, work at 5.5% from 2025 onwards. This value reflects the application of the so-called graduality rule set for calculating the allowed cost of debt and the mark-to-market of the latest values recorded at the time of the presentation of the plan. Now, since the update involves not only market-related parameters, but also other elements of the formula, such as, for example, the fiscal and potentially also the beta parameters, at current stage, we expect a final value which should be substantially in line with the one assumed in our 2024-28 strategy plan.

Thank you, Francesco, and thank you, Giuseppe. One question about procurement and authorization. Do you see any risk on project execution?

As already mentioned during the presentation, our CAPEX plan is solid and safe and our projects are well on track for procurement and authorization. Regarding procurement, despite the challenging scenario, the risk of potential shortages of raw materials is well managed through an array of actions to handle possible drawbacks in a timely and efficient manner. Thanks to this approach, about 75% of our CAPEX plan is already secured by signed contracts. And please note that these numbers to about 85% if we also include ongoing tenders. I can further say that we are on the right path regarding authorization with more than 80% of the plans already authorized.

Thank you, Giuseppe. One more question. Any updates on renewables installation rate in Italy?

Yes, sure. The acceleration in the increase of renewable capacity is clearly visible. Indeed, until 2021, the installation rate was around 1 gigawatt per year, while in 2022, around 3 gigawatts were installed. And this growth in the pace of installations was also confirmed in 2023 when about 6 gigawatts were installed. And in the first month of 2024, indeed since the beginning of the year, about 3.7 gigawatts of new renewable capacity have been installed. And this acceleration is a good signal of the implementation of targets included in the updated National Climate and Energy Plan sent by the Italian government to the European Commission in June 2024. The new plan targets a share of 63% renewable energy in electricity consumption by 2030. Thank you.

We receive a follow-up on renewables. Could you please provide an update of grid connection requests?

Sure. Let me remind, first of all, as you all know, in the last year there was a huge increase in grid connection requests from both photovoltaic and wind. As to the number of grid connection requests from photovoltaic and wind in 2023, The number increased by 21% from 2021 and by almost 80% from 2021. At the end of the first half of this year, the grid's connection requests are 150 gigawatts from photovoltaic, and slightly more than 100 gigawatts from wind onshore for total of about 255 gigawatts, increasing by 17% from the first half of 2023. Over 70% of these connections requests are related to utility scale plans.

Thank you, Francesco. If I may, can you comment about possible upside on CAPEX from offshore wind such as solar development?

Thanks so much. The number of connection requests from large-scale offshore wind power plants is more than three times at the end of December 2021 compared to 2021. We are talking about 60 gigawatts additional gigawatts of requests. At the end of the first half of 2024, the grid connection requests from offshore wind plants are now about 85 gigawatts. Having in mind that we are not in charge of building the direct connection of the offshore wind plants, let me state that all the related necessary developments of electrical infrastructure have been already included in our industrial plan as a consequence of 2023 development plan elaborations. For what concerns instead storage plants, the trend of connection requests for storage is increasing, both in number and power, due to auctions scheduled for the beginning of 2025. Also in this case, we do not see any impact on the CAPEX embedded in our strategy plans.

Thank you, Francesco. One more question. For the CFO, how many output-based incentives did you account in the first half?

As to the output-based incentives, recognized in the first six months of the year, we are at about 132 million euros. These are related mainly to dispatching service markets efficiency incentives connecting to the cost savings related to the reduction of volumes traded on the dispatching market in past years. And also for a smaller part to inter-zonal incentives connected to the creation of additional transport capacity among Italian pricing zones.

Thank you. I think the last Okay, given the Fed Pass 24 financial charges, what's the expected cost of debt for full year?

Well, considering the persisting high interest environment, the second half of this year, we expect a slight increase in cost of debt, which at the end of 2024 should then be around 2.5%. Thank you, Francesco.

No more questions, so please continue.

Thank you. Thank you very much for your time today and for taking part in this call.

Thank you. Thanks, everybody.