Terna Rete Elettrica Adr

Good afternoon, ladies and gentlemen, and welcome to Turner's nine-month 2024 Consolidated Results presentation. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would like to hand the conference over to our host speaker today, Mr. Stefano Gamberini, Head of Investor Relations. Please go ahead, sir.

Good afternoon. and welcome to Ternas' nine-month 2024 results presentation. My name is Stefano Gamberini and I'm proud to be here today as Ternas' new head of investor relations. After 30 years as a financial analyst, I'm very excited about this new challenge. Together with the IR team, I hope to continue and improve the excellent relationship that has been built with the financial community supporting our company's growth. The call will be hosted by our CFO, Francesco Beccali. Following the presentation, we will have the Q&A session. So we kindly ask you to send any questions you might have to our email address, investors.relations, sorry, at terna.it. Francesco. Please, the floor is yours.

Thank you, Stefano, and welcome on board. Thank you. Good afternoon, everybody. Before starting to analyze the figures, I would like to share with you the main highlights of the period. First, I remind you that at the end of July, the Authority published three documents regarding out-of-date incentive schemes, three new ones. The out-of-date update of the allowed WAC and the plethora test. More in details, the resolution 326 of 2024 provides for the start of the new ancillary services market incentive scheme for two periods of three years each, 2025-2027 and 2028-2030. According to the resolution, for each year of the period 2025-2030, Terna will receive 12% of the overall MSB cost reduction. For each year of the period 2025-2027, the baseline will be represented by 2023 actual MSD cost, increased by an extra component to take into account the expected changes coming from energy scenario evolution. Then, as part of the definition of the work for the period 2025-2027, in addition to updating market parameters based on a predefined route, The consultation document 342 of 2024 addresses different themes, including the update of the beta parameter and the recognized corporate tax rate. The regulator is also evaluating to confirm the trigger mechanism to adjust the work to material changes in market conditions, as done in the period 2022-2024. Finally, with the consultation document 340 of 2024, The Authority initiates the process for evaluating possible revisions of the capital cost revaluation criteria for electricity and gas infrastructure services in relation to the use of the deflator. The Authority is consulting on the possibility of continuing to use the deflator with corrective measures or replacing the deflator with other inflation indicators. Moreover, for what concerns the Italian transmission grid, I would like to announce that Terna signed a term sheet with the Chair for the acquisition of a portion of the high-voltage grid in Rome and suburban Agra. We are going to talk about it more in depth in the next slide. From a financial standpoint, We put a lot of effort on ensuring a balanced and solid financial structure. In this regard, let me remind you about the agreement signed on October 24th with the European Investment Bank for a 400 million euros loan for the renewal of the Italian transmission network. Let's now talk about our sustainability commitment. As already stated in the past, for us, sustainability is not only in what we do, but also in how we operate. This commitment is reflected in our financial structure. Indeed, besides the ESG credit facilities already publicly disclosed to the stakeholders with the second quarter results and financial statements, in July and October, Tern assigned two ESG-linked credit facilities for a total amount of 800 million euros. The credit line will have a maturity of five years with financial charges linked to Terna's performance in relation to specific environmental, social and governance indicators. Finally, regarding our shareholders' remunerations, today's Board of Directors approved a 2024 interim dividend of 11.92 cents per share. Up by 4% compared to the previous year, in line with the baseline dividend policy communicated to the market. Let me now spend a few words regarding the new deal. Moving to the next slide. As mentioned before, Tecna signed a term sheet with the Chair for the acquisition of a portion of the high voltage grid in Rome and suburban areas. This deal is driven by several key factors that are aligned with our long-term goals. By consolidating our high voltage operations, we can greatly reduce operational complexity, including congestion resolution and the improvement of quality of service. This simplification allows us to respond more swiftly to challenges and enhances our overall service delivery. Another crucial aspect of this acquisition is the centralization of high voltage management activities under the control of the transmission system operator. It is worth to underline that this process is aligned to ARERA Resolution 616 of 2023, which introduced an incentive mechanism aimed at promoting the transfer of the high-voltage grid assets from distributors to terminal. The purchase price of 224 million euros represents a 10% premium on the estimated 2024 calendar wrap. and in this subject to some adjustments, including the 2025 CAP expending. Moreover, the deal includes the purchase of optical fiber network, part of which, for the portion exceeding the national transmission grid needs, is commercialized to third parties. The acquisition will simplify the investment decision process and increase the basket of potential projects on high-voltage green in the Rome area and central Italy. It should also be pointed out that the acquisition of existing assets, as compared to the development of a greenfield project, allows for an immediate recognition of the full-time, which, together with the expected contribution from optical fiber network commercialization, allows the deal to be EPS-accretive from the first year. In conclusion, let me remark that the transaction is fully aligned with the objectives outlined in our 2024-2028 strategy plan, with neutral effects as far as our credit rating is concerned, and aimed at reinforcing our commitment to growth. Now, 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 nine months of 2024, national demand was about 236 terabytes, with an increase of 2.1% versus last year, when national demand was about 231 terabyte hour. The increase mainly concerns the first quarter of the year. Indeed, as you can appreciate from the graph, also due to the high temperature registered during the summer, national demand in the third quarter was about 84 TWh, almost 4% more versus the same period of last year, when demand was about 81 TWh. In the first nine months of 2024, Renewable sources covered about 43% of national demand, 6 percentage points higher than last year. Regarding national net total production, this stood at 199 TWh, 2% higher than the same period of 2023, with a remarkable increase in hydro production, which grew by 45% compared to the same period of last year. Let me also highlight that in the period renewable sources covered more than half of the national net total production. The increase versus last year is also due to the contribution of solar production, which grew by 17% compared to the first nine months of 2023. To conclude, let me share with you that in 2024 the operating renewable capacity increased of 5.3 gigawatts. This value is 33% higher compared to the same period of the previous year. Now let's move to the main figures of the period. In the first nine months of 2024, we registered a double-digit growth in all P&L lines and categories. Indeed, group revenues and EBITDA increased by 18 and 22% respectively versus last year, resulting 400 million and 336 million euros higher than the first nine months of 2023. We also reported a group net income of 813 million euros, up by 27% compared to the same period of last year. Group CapEx was about 1.7 billion euros in the first nine months, with an increase of 19% versus the first nine months of 2023. This confirms, once again, our effort to accelerate investments to fulfill the needs of the Italian energy system and enable the clean transition. To support these accelerations, at the end of September, net debt stood at around 10 billion euros versus about 10.5 billion at 2023 year-end, as described in the upcoming slide. Now, let's make a deeper analysis of the results turning to the next slide. Let's start with revenue analysis. Total revenues in the first nine months of 2024 reached 2 billion 647 million euros, increasing by 18% up by 400 million euros versus last year. Such increase was attributable both to regulated and non-regulated activities, which contributed for 317 million and 83 million euros respectively. Let's now go into the details of the revenues evolution moving to the next slide. Regulated revenues in the first nine months were 2 billion 222 million euros, 317 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 update value of regulatory work. Non-regulated and international revenues reached 426 million euros, 24% higher than last year. Non-regulated growth was mainly attributable to the increase in revenues coming from the equipment business related to Tamini, plus 32 million, and to the higher contribution of LFC Groups Energy Services, with a contribution of 37 million euros. International revenues were set to zero. Given that the requirements of FRS 5 have been met, the total results for the first nine months of 2024 and 2023 attributable to the South American subsidiaries included in the planned sales of assets initiated at the end of 2021 have been classified in the item Profit and Loss for the period from assets as foreseen in the group's reclassified income statement. Now, let's go to the operating cost analysis. As you can see from the chart, total operating costs were 755 million euros, 9.3% higher than last year. Regarding regulated activities, the difference year on year is almost flat. The impact on personal expenses resulting from the growth in the workforce for the implementation of the group's investment plan was offset by a corresponding increase in capitalized costs. Non-regulated activities were mainly impacted by higher costs for the purchasing of raw materials and services related to the LC group and families. These includes were driven by higher volume of activities, reflected also in revenue growth. Let me now analyze a bit that, moving to the next slide. Due to a previously mentioned effect, 9 months 24 group EBITDA reached 1 billion 892 million euros, 22% higher than the same period of last year. The increase was mainly attributable to regulated activities, which contributed for about 316 million euros more versus the same period of last year. showing an EBITDA of €1,824,000,000 in the first 9 months of 2024. Also non-regulated activities contributed to the EBITDA improvement with a 42% growth versus the first 9 months of last year showing an EBITDA of €68,000,000. Let's now have a look to the lower part of the P&L moving to the following slide. DNA amounted to 635 million euros. The increase versus last year was mainly due to the entry into operation of new assets. As a consequence, EBIT reached 1,257,000,000 euros, 28% higher versus the first three quarters of 2023. We reported net financial expenses at 105 million euros. The increase versus last year was 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 339 million euros and our tax rate stood at 29.4%. As a result, group net income reached 813 million euros, 26.6% higher versus the same period of last year. Moving to capex analysis. In the first nine months, total capex amounted to 1,699,000,000 euros, 19% higher than the same period of last year. Confirming the robust acceleration in line with our institutional role for the country. Indeed, we invested about 1,625,000,000 euros in regulated activities. Among the main projects of the period, it is worth mentioning the Terrania Link, the Adriatic Link, the Sakhoi 3, the modernization of the high-voltage grid in the locations due towards the Winter Olympics in 2026, and the investment in stabilization devices for grid security, including synchronous compensators. Among CAPEX categories, development CAPEX registered an increase in the contribution on total CAPEX, representing the 61% of the total versus 56% in the first nine months of 2023. For the remaining categories, asset renewal and efficiency accounted for 29%, while defense CAPEX stood at 10%. Non-regulated and other capes stood at 75 million euros. This includes capitalized financial charges for 52 million and other investments. Regarding the debt and cash flow analysis, net debt at the end of September 2004 was about 10 billion euros, almost 500 million lower than 2023 year-end level, mainly thanks to the positive impact of the hybrid green bond issuance recognized as an equity instrument Partially mitigated by the dividend payment in June. During the period, we generated an operating cash flow of 1,388,000,000 euros, thanks to which we were able to cover more than 80% of the capital 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 low-risk profile and a solid financial structure, at the end of this first nine months of 2024, we registered a fixed floating ratio on gross debt of about 86% and an average duration of about six years. In line with our strategy of combining sustainability and growth to promote the energy transition, as said at the beginning of the presentation in October, Terna signed an agreement for 400 million euros loan with the European Investment Bank at a very competitive commission. This is a 22-year loan to support investments for the renewal of the electricity transmission grid in Italy aimed at improving resiliency and reliability. Moreover, besides ESG credit facilities already publicly disclosed to the stakeholders with the second quarter results and financial statements, in July and October, CERN assigned two ESG-linked credit facilities for a total amount of €600 million. The lines will have a total term of five years and will be linked to TELA's performance in relation to specific environmental, social and government indicators. Thank you for your attention. Now, before moving to the Q&A session, let me share with you some closing remarks. First of all, I would like to underline that we are well on track in the execution of our CAPES plan and accelerating on 2028 plan targets through the term sheet signed for the acquisition of a portion of From High Voltage Grid. This represents a solid ground for the future, especially regarding the integration of renewable energy sources into our grid. By enhancing our infrastructure, we are not only increasing efficiency, but also having the way for a more sustainable energy future. Moreover, As you appreciated from the presentations, we were able to deliver a very strong set of results for the first nine months of the year, with a double-digit increase in all PNL lines. To conclude, Thanks to the increased contributions from the output-based incentives related to the current MSV scheme, which will finish at the end of this year, a low internal dispatching cost and related charges for end-customer reduction, we are now able to improve our 2024 guidance. We expect revenues of 3 billion and 610 million euros, almost 2% more compared to the previous guidance. Maintaining regulated revenues from the tariff in line will be estimated. We will also improve 2024 EBITDA guidance, now set at 2.5 billion euros, as well as EPS guidance, which rises to 52 cents per share, 6% higher compared to the previous one. Thank you for your attention. We are now ready for the Q&A session.

Thank you, Francesco. Let's start from the questions about nine-month results. We received many ones about out-of-date incentives. Could you give more details about how many out-of-date incentives have been accounted in nine months 24?

Sure, Stefano. The occupancy incentives recognized in 9 months 24 are about 200 million euros, substantially in line with previous year. These are mostly related to dispatching service market sufficiency incentives connected to cost saving related to the reduction of the volumes traded on the market. and residually linked to the interzonal incentive schemes connected to the creation of additional transport capacity among Italian pricing zones.

Again on incentives, could you provide your new expectations on 2024 overall contributions from auto-based incentives?

Let me underline once more that the output-based incentives for 2024 are mainly related to the mechanism of incentives for dispatching activities and the NVIDIA, a scheme which was aimed at rewarding the efficiency of dispatching activities and, as a result, reducing dispatching service market costs. Our expectations reflect the update in the performance estimates for 2024, which will allow to book incentives slightly over 300 million euros, in line with MSD incentives accounted in the year 2023. In addition to this, for what concerns the incentives for additional intrazonal transmission capacity, the expected value in 2024 is approximately 15 million euros, already accounted in September.

Thank you. Last question about this topic. Could you guide on the expected contribution from the recently approved new auto-based incentive framework on dispatching for next year?

Well, as already stated during past months, In the 2024-2028 strategy plan, we assume about 400 million euros of accumulated output-based incentives in the business plan period, with the front-end loaded distribution. At current stage, we will not provide the precise guidance on the further contribution we could have from new frameworks approved during 2024.

Now regarding OPEX. Could you comment about the regulated labor cost trend in 9 months 24? Sure.

The labor cost in the first three quarters decreased versus the same period of 2023. Despite the increase of the gross personal expenses for the growth of the number of employees, we are more or less 330 full-time equivalent more than the previous year, the labor cost decreased as a result of higher capitalized personal costs compared to the previous year to support capitalization.

Thank you. Regarding financial structure, could you update us on your plans to finance your current CAPEX plan? What is the current hybrid capacity and what are the additional levers to manage the financial sustainability?

As already stated during the Capital Market Day and then confirmed by rating agencies, the 2024-2028 CAPEX plan is fully sustainable under a financial standpoint. As to the levels to manage the creditworthiness of the company, we confirmed that we could, if needed, use all the full IRA capacity of the company, and we estimate to be, by 2028, up to 4 billion, which includes the 1.85 billion already outstanding. Moreover, we could have further flexibility through additional grants that we could use if infested.

Going now to recent regulatory updates, could you please give some color on the potential shift from deflator to CPI for the RAB indexation?

Sure Stefano. Consider that as mentioned during the presentation, on July the 31st the Authority started the consultation process. To evaluate if continuing to use the deflator with corrective measures or replacing the deflator with other inflation indicators. To overcome the issue of lower capital revaluation levels compared to inflationary trends and of low stability and predictability of the deflator. The consultation process will conclude at the end of April 2025. With regards to deflator applied to the 2024 Tide, which was set by the regulator at 5.9% on October 4th, ISTAT published the value of the fixed investment deflator by also valuing the second quarter of 2024. In this publication, ISTAT made a revision of the whole historical series, which brought back the 2023 variation to a positive value. from minus 0.8% to 1.2%. In this regard, we expect the 2024 deflator for tariff-exposed value will not differ substantially from the current 5.9% which was set ex-ante.

Good. Could you comment about what expectation for 2025 onwards, please?

The work value for the period 2025 to 2027 will be updated by era by year end. The observation period for the update of the main macroeconomic parameters concluded in September. Current market markets, including the application of the graduality rule set for calculating the allowed cost of debt and assuming any change on fiscal and beta parameters, would lead to a 5.4% loss. By the end of the year, ARENA will issue the resolution with the final value, including the decision on meta and tax rates.

Now we have a question about storage systems. Could you provide an update on the Italian so-called Maxe framework, please?

Sure. As you know, To ensure the development of the required storage capacity, Terna has been working on the design of the Maxe, the long-term procurement mechanism dedicated to storage technology. The Maxe, which has been drafted in compliance with the Legislative Decree 210 of 2021, has been approved by the Ministry of Environment and Energy Security at the beginning of October. These methods will ensure that new storage capacity will be procured progressively over time and the first option is expected to be had by the first task of 2025.

Okay, so there are also a few questions about the progress of procurement and authorizations. Could you give us an update on that?

Regarding authorizations, I can say that we are on the right path and the capital is strong and very solid. All the main HPDC projects are authorized. For more concerned procurements, we are sensitive to potential short gauges and bottlenecks along the relevant supply chains investing in the industry. We manage this risk, setting up an array of actions to handle possible drawbacks in a timely and efficient manner. So, also on the procurement side, we are very 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, of the 2024-2028 CAPES plan, more than 80% has been already authorized and more than 75% is covered by existing procurement contracts. This percentage increased to more than 80% if you include the procurement contracts which are under negotiation because the tender is ongoing.

Thank you. We have a few questions about potential capital update and the main new grid development project. Could you comment on that?

Well, we are now in the process of shaping the new National Development Plan that will be presented during the first part of 2025. So, for this purpose, we could be more precise on potential updates on future capital needs in the first months of next year.

Thank you. Now, on the guidance increase just presented. Could you comment on the drivers behind 2024 target improvement and if we have an impact also on the future years? Thank you.

Thanks to the strong set of results presented today, as we said during the presentation, The increase of our 2024 guidance is mainly linked to higher than expected contribution of the output-based incentive schemes related to a significant reduction in the MSD costs and the greater benefits for the system that we were able to generate. Let me remind you that the current output-based incentives framework will conclude at the end of this year. For this reason, our 2024 performance will not imply any upside in the following years.

Okay, now on the dividend policy. Will the increase in 2024 guidance affect your dividend policy?

As you may remind, our dividend policy which ensures constant and predictable growth as well as full visibility and litigies at least 4% annual growth over the period taking 2023 as the reference year. Only for 2024 minimum dividend per share will be equal to the higher of the 4% growth versus 2023 and the 75% payout threshold. Let me remind you that any higher dividend in 2024 will not have any impact from 2025 on us.

Okay. Let's move now on the deal with Acea. Can you please give some color on the rationale underlying the agreement with Acea for high voltage grid acquisition you announced today?

So, this agreement, as we said in the presentation, reaffirms Ternas' key role within the national electricity system, allowing for more efficient planning and operational management of the national transmission grid, especially in Romaria, to strengthen service continuity and security. Moreover, the acquisition of these assets will also support a better decision-making process in renewal and development investments for the national transmission grid again in Rome and central Italy, unlocking potential new growth opportunities. This is a transaction which has a very strong industrial rationale. But let me also underline that this deal will be ETS accretive starting from year one.

Okay. What is the timing of the purchase process, please?

We expect to proceed with the signing by, let's say, January 2025. The closing is expected to happen around mid-2025.

How will this deal affect your 2025 EPS?

As we said earlier, this deal is expected to be closed around mid-2025, so the impact will be limited. However, we expect it to be EPS-accreted from year one, with a contribution of a few euro-million starting from the closing date.

How large is the fiber optic network and what is the expected revenue contribution?

As we said, part of the network is contrasted out to third parties. So we have a guaranteed revenue stream from year one. And we can expand the network capacity further in the future.

Last two questions. What is the level of capital that you may add to your investment plans thanks to this deal?

The network included in this deal will require in the coming years the necessary investments for the maintenance and renewal of the assets. In addition, there are further investments we may consider undertaking for the development of the network in order to improve the management of the system, strengthen its service security and continuity.

Do you plan other acquisitions on Italian regulated assets?

As we said during the presentation, this deal is included in the ARERA resolution 616.23 perimetre, through which the authority incentivizes distributors to divest certain assets. These assets are formally considered part of the electricity distribution network, but from a technical point of view, they are more functional to the high voltage transmission system. Having said that, at current stage, we do not have any other potential deal in an advanced stage discussion. However, other smaller transactions are not excluded in the future.

Okay. So, thank you very much, Francesco. There are no more questions. So, Francesco, please.

Thanks, everybody.