Terna S.p.A. (TRN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Terna Strategic Plan 2020-2024 Presentation. [Operator Instructions] I must advise you that this conference is being recorded today. Now I would like to hand the conference over to your speaker today, Chairwoman Catia Bastioli. Please go ahead.

Good afternoon, everybody, and welcome to Terna's 2020-2024 Strategic Plan presentation. Our world is facing interdependent and unprecedented challenges in human history. To the environmental, social, political and economic challenges, a health emergency, as you know, has been [Audio Gap] these days forcing us to make our presentation from remote. The system is certainly not sustainable and not resilient at all. 2019 reports of IPCC and of IPBES, respectively, on climate, soil and biodiversity show emissions grow steadily. Global temperature is already up by 1 degree Celsius. 13% of land area is at immediate risk. Health of soils and waters is worsening dramatically, not only for global warming, but also for pollution. In this scenario, phenomena of great intensity within shorter and shorter time lines may have disruptive consequences, which can become a positive or a negative at macro level depending on our adaptability and resiliency. For this reason, we have the duty to increase our resiliency and to accelerate this path as much as possible. The local dimension is essential to effectively manage the transition while being incisive in the short term. The strong social and environmental pressure are certainly going to have an influence on future norms and regulations. The Green New Deal of the new EU Commission and the 5 missions launched on September 2019, among them are soil, health and food, climate, cities, oceans and healthy waters are tangible examples. Exit from fossil fuels and energy transition are major themes in this change of paradigm. Indeed, the National Integrated Energy and Climate Plan, recently updated in Italy, sets ambitious targets toward full decarbonization with renewables share at 33% on total energy consumption and at 55% on total electricity consumption to be achieved by 2030. Also traditional thermal generation is scheduled to reduce with the coal phaseout expected by 2025. More specifically, the global electrical energy system plays a key role with a quick evolution from centralized to widespread, with renewable energies and explosive growth, with the need to overcome the problems of non-programmability and non-stability of the sources. The lower resilience is starting from the absence of inertia of the systems, growth of energy demand, energy independence, the resilience to increasingly extreme climate conditions, the effects on agriculture, industry and communities. Terna is addressing the challenge of the evolution and the resilience of the grid and of the electrical system in the context of the global transition, working since years toward a sustainable development model that is rooted in the local area and has put in place concrete tools to be a driver of change in the electricity and energy system of our country and of Europe. Besides the very positive economic return that will be presented soon, relevant technical results have been achieved. Terna investments, in line with the European and Italian energy and climate strategy, are mainly focused on security, resiliency, efficiency, adequacy of the grid and on quality of service. The organizational structure of Terna has been starting to adapt to the task of accompanying the energy transition, to tackle the climate targets and allow the conversion towards an interconnected circular economy. The policy on people and grid safety, the digital training, with 882 employees involved in 2019, the introduction of skills in the field of innovation and ICT are some of the tangible actions put in place. The strengthening of the grid is in progress through the extension of optical fibers network, the concentration on analytics and on smart towers, increasing the system monitoring capability, creating at the same time opportunities of territorial control in connection with extreme phenomena that are occurring and that are being intensified. Finally enabling the market flexibility tools. An impressive work has been done by Terna to strengthen their presence in the territories. 469 meetings just in 2019 give the sense of the efforts done; the creation of efficient interconnections, such as the relevant infrastructure realized between Italy and Montenegro as a door to the Balkans; the promotion of the conditions for a sustainable storage system suitable for the country, fundamental for maximizing the return on the investments in renewables necessary for the energy transition; and the identification of synergies with other infrastructures to minimize the investment, maximizing at the same time the benefits for the territories. The creation of organizational solutions on cross-sectorial innovation and sustainability, see the INNOVATION HUB created and NEXT ENERGY programs, for example, which are permitting the Terna structure and connecting Terna to start-ups to major players like [ SPA ] and Eni as well as to other infrastructures like SNAM or [ AMBI and Co. Rete ]. The result is accelerating the development of an advanced innovative culture capable of generating, in addition to greater profit and competitiveness, induced incremental innovation with the potential to really overcome the business as usual. The increase in attention to sustainability goes beyond the flattering results of the Dow Jones Sustainability Index for Terna. The strengthening of Terna's regulated unit outside Italy by leveraging the skills and models developed in Italy that's creating new value for the company, for our country and for the territories in which we operate. All of this is Terna, a fundamental asset for a country -- for our country, for the investors, in this moment, without precedence for the history of our country and of humanity. With the 2020-2024 plan, Terna aspires to continue playing a driving and leading role while focusing on leveraging its established model. I think that now, I can leave the floor to the CEO, Luigi Ferraris, for the main 2017-2019 important achievements and for the new strategic plan. Thank you, Luigi.

Thank you, Catia, and welcome again to Terna's 2020-2024 Strategic Plan Presentation. Before starting, let me first state that in front of this very sad situation related to the COVID-19, Terna has promptly reacted and adopted all the necessary actions in line with the new rules in order to ensure safety for all its employees and all the people interacting with the company. Regarding our economic and financial main achievements, let me briefly give you a snapshot of the main results of our mandate. All the relevant economic and financial figures show a very robust increase with revenues, EBITDA, net income and total group CapEx growing, respectively, by 9%, 13%, 20% and 48% versus 2016 year-end level. This is really the best way to address the message of Terna's capability to accelerate on investment execution while at the same time generating value for all of our stakeholders. More specifically, let's see Slide #6. In the last 3 years, dividends distributed grew by 20%. Indeed, in the last 3 years, we paid about EUR 1.4 billion of cumulated dividends. Overall, in the period, despite all the fluctuation related to the impact of the coronavirus, we have been able to report a total shareholder return in the region of 40% plus. Regarding investment execution, let's turn to Slide #7. As you can appreciate from the chart, relevant projects entered into operation in 2017 and 2019. In this regard, let me just mention the Italy-Montenegro interconnection, an electrical bridge entirely visible connecting the Balkans to Italian peninsula for the first time ever. The cable enables Italy to reinforce its role as European and Mediterranean electricity transmission hub and plays a strategic role for the integration of renewable sources. Moreover, let me also mention the following relevant projects. The Venice cable aimed at increasing the quality of the service in the Venetian area, the connection between Capri and the Mainland and the rationalization of major metropolitan areas, such as Rome, Naples and Milan. In order to guarantee the full sustainability of each new project, we established a new model of stakeholders' engagement, aimed at promoting a direct and continuous dialogue with local communities, explaining the projects and looking for shared solutions, the so-called participatory planning aimed at engaging with local communities and citizens in every phase of project planning and realization. Within this framework, we organized more than 1,000 meetings with local communities, of which about 500 just in 2019, twice the amount reported in 2016. This is a clear demonstration of Terna's commitment on the execution of the plan while taking care of local communities and territory needs. Let's now move to the new strategic plan, starting from an overview of the energy scenario at Page 9. While the unprecedented transformation of worldwide energy industry related to the ongoing energy transition is accelerating year-on-year, this acceleration is, at the same time, reinforcing even more the central role of electricity, intrinsically efficient and, therefore, a primary tool for decarbonization. Indeed, at global level, the electricity vector is at the heart of modern economies and is providing a rising share of energy services. Demand for electricity is said to increase further, thanks to new sources of demand, such as digital connected devices, air conditioning and electric vehicles. Electricity demand growth is said to be particularly strong in developing economies. According to 2019 World Energy Outlook, global electricity demand will grow at a rate of about 2% per year until 2040, twice the rate of primary energy demand. This will rise electricity share on total final energy consumption from 19% in 2018 to 24% in 2040. Moreover, global electricity demand is expected to increase by about 60% versus nowadays level. This increase, coupled with the need to achieve the environmental targets, is deeply transforming the system and is the outlook of the global energy scenario. Moving to Slide #10. The Italian electricity system entered into a deep transformation process from a centralized model to an extremely complex integrated and distributed one. As a matter of fact, the traditional system made of large thermoelectrical and hydroelectric generation plants is, today, shifting to a system based on smaller and fewer traditional generation plants coupled with other production and consumption units, such as variable renewables, storage, distributed energy and demand response resources. This implies an increasing complexity in the way the system operates and in the way Terna guarantees security, adequacy and real-time balance between supply/demand through a highly technological control system. This unprecedented evolution creates the need for an important review of the ancillary service market as well as growing investments in innovation and digitization. In particular, the ancillary service market will have to evolve in order to expand the range of resources necessary to cope with the growing flexibility needs. Furthermore, in order to deal with this new complexity, it is essential to guarantee the availability of timely and reliable information on an increasing number of points connected to the grid, the so-called observability. Indeed, key elements of this transformation are circling the new digital technologies which allow to collect low-cost information, transfer large data flows and store and analyze data effectively and promptly. Therefore, we can say that the system is shifting from watts to bytes. This evolving scenario is therefore bringing relevant challenges in the management of the electricity system as explained in Slide #11. In detail, 4 main challenges need to be addressed by the system. First, renewable intermittency determines increasing periods of structure over-generation and increasing steepness of the residual load evening ramp as a consequence of the sudden reduction of photovoltaic production in the evening hours. On the other hand, the decommissioning of a significant portion of thermal capacity limits the reserve margin to cover this peak. Second, renewables generation is also located far away from consumption centers. Thus, it can potentially increase grid congestion cases. Moreover, the growing penetration of renewables means limited availability of resources able to provide voltage and frequency regulation when compared to traditional generation plants. This brings a reduction in system inertia and, therefore, in its stability. Finally, higher frequency of extreme weather events has been observed in the last few years. This generated a higher risk of lower quality of services. Therefore, it is clear that the energy transition is bringing crucial challenges in the electricity system, and these impacts will be even more evident in the future. As a consequence, to cope with this new complex energy framework, Terna is moving towards a new phase of its evolutionary path. Now let's analyze more in depth each of the mentioned challenges by turning to Slide #12. Regarding the intermittency of renewables, well, on April 27th of 2019, 2 p.m., renewables covered about 80% of the national demand. Daily record was equal to 60%. While in the month of June, more than 40% of demand was covered by renewables. The annual share was 35%. However, this share is set to increase. Indeed, the National Integrated Energy and Climate Plan recently updated in Italy sets ambitious targets towards full decarbonization. More specifically, the plan foresees renewables share at 30% on total energy consumption and at 55% on total electricity consumption to be achieved by 2030. Also, traditional thermal generation is scheduled to reduce with the coal phaseout expected by 2025. This increasing presence of variable renewables is changing also the way we manage demand of markets. While in the past, the residual load curve simply followed demand patterns, now the situation is totally different. In the past, we had a peak in the morning. Now residual load keeps falling until early afternoon, largely driven by solar production that increases in the morning. Then as we approach evening hours, the problem reverses as solar production starts rapidly to fall so that residual load grows much faster than demand itself. Therefore, increasing over-generation periods during the substantial hours of the day and the increasing steepness of residual load ramps makes it necessary to increase storage capacity, a role will be played by electrochemical storage and high-capacity storage in the near future. This represents a unique opportunity to accelerate our infrastructure, especially in Central and Southern Italy. Let's turn to Slide #13, regarding renewables geographical distribution. As you can appreciate from the chart, in 2019, cumulated photovoltaic and wind installed capacity in Italy reached more than 31 gigawatts, of which more than 60% located in the South and in the main islands. This uneven distribution could increase grid congestion situations and requires the strengthening of the north-south backbone as well as grid reinforcement in the south and in the islands in order to integrate the production from renewal plants and bring this closer to the consumption area. In addition, the development of photovoltaic and wind plant is challenging also because of the distributed generation and the increasing relevant growth of the so-called consumers. Therefore, it is essential, as already mentioned, to guarantee the availability of timely and reliable information, the observability of consumption and production. Finally, the development of additional renewables capacity and the way in which this development is taking place entails increasing investment in innovation and to increase grid mesh. Let's turn to Slide #14. Regarding other relevant renewables technical characteristics, increasing penetration of renewables coupled with the reduction of traditional generation is causing a reduction of system inertia and stability. Inertia represents the ability of the system to resist the temporary imbalances between generation and load in the very first moment after a disruptive event occurs without any great variation in grid frequencies. As described in the graph, in case of disruptive events, the system characterized by higher penetration of intermittent renewables has a higher rate of frequency change compared to the one characterized by lower penetration of renewables. Therefore, it becomes necessary to adopt faster frequency regulation systems. Let's analyze the last main challenge, if you turn to Slide #15. Besides the issues coming from renewables growth, the electricity system is facing further challenges arising from the environment. Recently, we have observed an increase in the frequency and intensity of extreme weather events connected to climate change, which led to significant impacts on infrastructure and consumption and to a higher risk of grid local power congestion. The main events that can cause disruption on the grid are strong wind, flood, landslide and tornadoes, which may cause power failures, layers of ice [indiscernible] pollution deposits such as saline pollution. For example, let me remind you, the strong winds registered in the north east of the country back in October 2018 that put some relevant portion of the grid under great pressure. As a consequence also climate changes are calling for necessary investment in order to increase grid resiliency and security of supply. Let's move to Slide #16. Well, to support the path toward this new energy scenario, all the relevant energy players have to work systematically and in tight coordination to immediately implement a set of coordinating and coherent actions aimed at assurance, adequacy, the quality of services, efficiency and sustainability of the system. More specifically, from a TSO standpoint, the relevant main key enablers of the transition can be grouped into 4 categories: grid investments, long-term price signals, storage and flexible thermal capacity as well as flexible market tools. Grid investments are essential to allow the best use of the national generation capacity, minimize grid congestions and develop interconnections with neighboring countries. Long-term options would be necessary to support investments in new storage capacity. New services are necessary to encourage the participation of [Audio Gap] resources in the electricity market, while promoting their integration at European level. Investment and innovation and digitization are fundamental for the growing observability need and real-time grid monitoring at all voltage levels. Moving to Slide #17. Within this context, Terna will continue to follow its mission, playing a leading role for a sustainable energy transition, leveraging innovation, skills and distinctive technologies in order to generate value for all stakeholders. This will be done through the main pillars of the TSO which is security, resiliency, efficiency, adequacy and finally quality of services. People, regulation as well as innovation and digitization remain key to pursue this measure -- this mission. Let's now move to our strategy, turning to Slide #19. Our strategy will continue to be developed following our 3 strategic guidelines and supported by the 2 relevant enabling factors. Domestic regulated activities remain our key priority. We will continue to reinforce our core activities in the country, leveraging competencies as well as new technologies. Through nonregulated activities, we will continue to develop new value-added products and services to support the energy transition. Concerning international, we will finalize ongoing projects, leveraging our core competencies growth. Innovation and digitization are becoming increasing sections. Regarding our people, we will enhance competencies to build an agile and innovative workplace through competencies, diversity, inclusion and [ work ]. Let me now analyze more in depth each of the 3 strategic guideline, starting from domestic regulated activities at Slide #20. Our long-term growth will be supported by the National Development Plan that includes all the development projects, driven by increasing system needs and fully compliant with cost-benefit analysis set by the authority. Grid development represents one of the main enabling factors of the complex and challenging transition process towards the energy system of the future. The goal of the National Development Plan is to design the grid of the future by planning the development of infrastructure based on fundamental drivers. These drivers are decarbonization, market efficiency, security, quality and resiliency as well as sustainability. The projects included in the new plan will be focused mainly on the reinforcement of islands and internal backbone, on resiliency and quality of service increase as well as on the development of cross-border interconnections. Moving to Terna's regulated CapEx plan, turning to Slide #21. Well, over the next 5 years, domestic regulated CapEx would reach EUR 7.3 billion, that represents the highest investment plan ever. This is driven by solving network constraints, developing interconnection, making new projects for resiliency, adequacy and sustainability increase, while strengthening digitization and innovation. This CapEx acceleration will also drive a robust RAB growth with an average growth around of 5 years of over the -- of 5% over the plan period versus more than 4% of the old plan. Thanks to this, our asset base will reach about EUR 20 billion in 2024. Let me also highlight that about 60% of the 2024 CapEx plan has been already authorized, while 2020 CapEx has been almost entirely authorized. Now it is time to have a look at the evolution by CapEx categories, turning to Slide #22. Development CapEx will reach about EUR 4.2 billion cumulated over the plan period, almost EUR 1 billion more versus the previous plan. Most relevant projects are the Tyrrhenian Link that will ensure an increase of the interconnection capacity between Sicily, Sardinia and the mainland, enabling full integration of market zones with important benefits in terms of efficiency. The Sardinia, Corsica, Italian Peninsula connection as well as the projects aimed at increasing transport capacity. Asset renewal and efficiency CapEx will be at about EUR 2.3 billion. We will focus mainly on quality of service increase, re-digitization and development of solutions to increase grid sustainability. In addition, the defense plan is foreseen at EUR 0.9 billion cumulated mainly for the development of synchronous compensator and stabilization of device, aimed at enhancing grid stability. Over the plan period, we will have sold 21 new synchronous compensators. Moving to non-regulated at Slide #23. Nonregulated will generate a cumulated EBITDA of EUR 450 million in 5 years, an increase of about EUR 50 million versus the previous plan. Regarding the service-based area, this includes EPC and O&M for third-party and energy efficiency solutions. Regarding the asset-based area, this will remain focused on dark fiber business and hosting of telecommunication equipment. Moreover, thanks to Tamini and the newly acquired Brugg Cables, we will continue to resource fundamental technology for TSO activities. On Tamini, we can confirm that we have reached the breakeven point at net income level, and that we will continue to consolidate the company's growth. Finally, our business proposition is to develop services and industrial activities to support core activities, leveraging skills and assets. Moving to international, Slide #24. Regarding international, we turned projects into delivery with more than 700 kilometers of realized infrastructure and almost 2,500 people involved in the construction activities. In detail, our 2 Brazilian lines, Santa Maria and Santa Lucia entered into operation between October 2018 and April 2019. These projects which are strategic for the region allowed the integration of energy generated by renewable sources. Moreover, we've commissioned our project in Uruguay in October 2019, 200 kilometers of transmission line aimed at strengthening and increasing clean energy production as well as ensuring the safety and security of Uruguay's national grids. Let's move to Slide 25 for an overview of our ongoing projects in Latin America and our international strategy. Concerning our international strategy, in Europe, we will continue to hold a proactive position on the FCO governance to support the European Union in the achievement of the energy and climate target for the energy transition, while strengthening our role as Mediterranean energy hub. In Latin America, we remain focused on the completion of existing projects, leveraging our ability to manage all the phases of the value chain from building to construction, while consolidating our presence in the target class. In other countries, we will offer energy solutions and innovative services as well as capital light activities with high-grade [ solutions ] to support energy transition and environmental sustainability. Our international strategy will remain based on the limited capital expenditure and a low-risk profile. Concerning projects to be identified, 2024 potential maximum capital allocation will be lower than EUR 150 million. Cumulated EBITDA in 5 years will be around EUR 200 million, which includes the contribution carried from financial income related to the project in Uruguay. Moving to innovation and digitization on Slide #26. Well, regarding innovation, we will continue to develop initiatives in the fields of full Internet of Things, advanced materials and energy tech. We will also launch new initiatives in the fields of digital and computing, cybertech and analytics, specifically development tools and know-how for increasingly intelligent grid management. Regarding digitization, we will develop an enabling platform for the digital evolution in future grid management. We will innovate the transmission of [ regulated ] activities through the digitization of assets and the evolution of core process. Thus, we will invest about EUR 900 million cumulated during the plan period, all included in regulated CapEx, mainly focused on our domestic regulated activities. Before leaving the floor to the CFO, Agostino Scornajenchi, for a deeper analysis of 2019 figures and 2024 group financial targets, let me give you the guidance for 2020-2024, turning to Slide #27. Regarding 2020, we expect revenues at about EUR 2.5 billion and an EBITDA at about EUR 1.8 billion. In 2020, we expect CapEx of EUR 1.3 billion, while cumulated CapEx will reach EUR 7.8 billion during the plan period. In 2020, EPS will reach EUR 0.38. Concerning 2024, we expect revenues of EUR 2.95 billion and an EBITDA of about EUR 2.2 billion, while EPS will reach EUR 0.48, about EUR 0.10 higher than in 2019 or 26% up versus last year. Now I will leave the floor to Agostino for 2019 results and 2024 group financial targets. Agostino?

Thank you very much, Luigi, and good afternoon, everyone. Let's start with 2019 figures. First of all, as usual, 2 main figures. Group net income up at EUR 757 million and total group CapEx at EUR 1,264 million, respectively, 7% and 16% more versus last year. As you may appreciate, these figures represent solid ground to support growth of the group for the next years. Moreover, revenues were up by 4% and EBITDA by 5%. Despite the strong CapEx acceleration, we were also able to keep the net debt under control at EUR 8.26 billion versus about EUR 8 billion of 2018 year-end, also thanks to the many actions we took on the financial market in the recent years. All these main figures are much better than the provided guidance, demonstrating Terna's commitment on the execution of its plan. So let me now start the deeper analysis of the figures, turning to Slide 30. Regulated revenues reached EUR 2,055 million, EUR 65 million better than last year. The increase was mainly attributable to grid fee evolution. Other regulated revenues increased by EUR 22 million, mainly as a consequence of higher revenues related to the quality of service. Nonregulated and international revenues reached EUR 240 million, about 16% higher than last year. Regarding nonregulated, the increase was mainly attributable to the entering into operation of the Italy-Montenegro private interconnector, the evolution of Tamini's orders intake and higher revenues coming from the energy solutions. Concerning international, the increase was attributable to the full contribution of the Brazilian lines that entered into operation between the end of 2018 and the first semester of 2019 and the commissioning of the project in Uruguay in October 2019. Let me now analyze the EBITDA, moving to Slide 31. Considering the above-mentioned effects, group EBITDA reached about EUR 1,741 million, EUR 91 million better than last year. We registered a positive EBITDA contribution, both from regulated and nonregulated and international activities, which grew by EUR 71 million and EUR 20 million, respectively, versus last year. This increase was mainly attributable to higher regulated revenues as well as with the higher contribution coming from Tamini and from our projects in Brazil and Uruguay. Let's now have a look through the lower part of the P&L, turning to Slide 32. Depreciation and amortization amounted to EUR 586 million. The increase versus last year was mainly due to the impact of new assets becoming operational in the period. As a consequence, EBIT reached EUR 1,155 million, 5.3% better than year-end 2019. We reported net financial expenses of EUR 78 million, EUR 11 million lower than the same period of last year, mainly as a consequence of our proactive approach toward capital markets as well as inflation dynamics and reduced interest rates. Taxes stood at EUR 313 million with a tax rate of 29.1%, almost in line with the same period of last year. Consequently, the group net income reached EUR 757 million, EUR 51 million better than last year. Moving to cash flow and net debt evolution on Page 33. Well, the debt at the end of 2019 was EUR 8,259 million, EUR 359 million higher than 2018 year-end, mainly as a consequence of the strong CapEx acceleration of the period. In any case, we generated an operating cash flow of EUR 1,240 million, thanks to which we were able to cover almost all the CapEx spending for the period. Overall, thanks to our actions, cost of net debt at the end of 2019 was 1.1% versus 1.3% at the end of 2018. Well, after the explanation of our strong 2019 starting point, let's now move to 2020-2024 group financial targets, turning to Slide 35. Thanks to our managerial actions within the plan, we achieved a robust financial structure. Indeed, the average cost of net debt during the plan is expected at 1.4% versus 1.6% presented in the previous plan. Moreover, mainly at the end of 2019, the fixed rate portion of our gross debt was about 80% in order to fully exploit current financial market conditions while maintaining a solid balance sheet. As far as main financial ratios are concerned, this will be kept at a fully sustainable level in compliance with our rating agency thresholds. Funds from operation over net debt ratio is expected to be kept higher than 13% over the plan period. Net debt over RAB will remain lower than 60% over the plan period and in line with previous plan. Let's move to P&L targets, turning now to Slide 36. Thanks to all our managerial actions just illustrated. We expect revenues and EBITDA to annually increase on average by 5% and by more than 4%, respectively, reaching about EUR 2.94 billion and EUR 2.17 billion in 2024. The share of domestic core regulated activities will remain above 90% of group EBITDA. The remaining portion will be provided by the contribution of nonregulated and international activities. Thanks to these solid results, we expect an EPS yearly average growth of 5% versus more than 3% of previous plan. And now let me leave the floor to Luigi for the new dividend policy and closing remarks.

Thank you, Agostino. Let me conclude with our new dividend policy and some closing remarks, and I am on Chart #38. Well, as you appreciated from this presentation, the group generated a solid set of 2019 results, while maintaining solid financial position. As a consequence, we improved our dividend policy. In detail, we started from 2019 EPS of about EUR 0.25. Then for the years from 2020 through 2022, we will offer a higher EPS growth of 8% versus 7% of the dividend policy presented last. Then for 2023 and 2024, the dividend policy will be paid on a 75% payout with the floor at 2022 EPS level. Let me now spend a few words on some closing remarks, turning to Slide #39. In the next years, we will be focused to further reinforce our domestic core activities, play a leading role in the energy transition process and generate value for all of our stakeholders. Regarding nonregulated activities, we will continue to develop innovative and new value-added services to support our core regulated business. On international projects, we will leverage Terna's core competences to finalize ongoing projects and consolidate our presence growth with a limited capital absorption and low-risk profile. Digitization and innovation as well as our people will remain key. Thanks to our strong managerial efforts, we've been able to maintain a robust financial structure and also, as you have seen, a new enhanced dividend policy. Finally, our commitment as a management team is to finalize the technological transformation of the company, which represents an essential condition in order to bring Terna to play a key role in the European TSO, in line with the European Green Deal and national decarbonization strategy. I am sure that the enthusiasm and passion of our people, Terna people, will continue to be the key to win the challenges ahead of us. Thank you for your attention, and we are now ready to open the Q&A session.

[Operator Instructions] And we have the first question coming from the line of Javier Suarez from Mediobanca.

I have 3. The first one is on the CapEx increase that, again, is very significant in this business plan update. In the previous business plan update, the CapEx was increased by 17%. In this business plan, CapEx is increased also significantly by 20%. So my question here is, what the company does see new in this business plan versus the previous one? And why the company has seen the necessity of increasing so significantly the CapEx? And maybe 2 related questions is what managerial aspect or concern this imply because, obviously, the amount of annual capital that the company plans to deploy is significant, and obviously, that may be putting in difficulties the company, if how do you plan to increase the -- to ensure that level of CapEx can increase up to EUR 1.4 billion, and that that is sustainable, and the company can execute on that. And also, a related question is that obviously, this 5 years plan. So I can put this question in plenty of different ways, but the thing that I am interesting to hear is how many years of significant CapEx as strong as the CapEx that you are forecasting up to the year 2024 do you think is realistic to assume? So the more we think we are looking electrification process, we think that the need of CapEx is significantly higher down the road. Do you think that if we are seated together in a year time, the CapEx increase that you see is going to be significantly higher? And if so, why? And then a second question is related to probably the comparison with the previous business plan. In the previous business plan, you were talking about an EBITDA of plus 4%, net income plus 3%. This time, you are talking about EBITDA growing by 5% and net income also by 5%. So can you help us to understand what is -- what has changed in your assumption for that growth of the EBITDA be translating also at the bottom line level? Obviously, apart from CapEx, what other assumptions have you changed? And the very final one is nontraditional activities, there is an increase on contribution for EUR 350 million -- excuse me, for EUR 400 million to EUR 450 million, if I'm not wrong, if you can help us to understand from that, that is coming from that increase.

So thank you, Javier, this is Luigi. I will take maybe your 3 questions and maybe I will leave the reconciliation to our CFO then. Well, the CapEx increase, the reason for that. Clearly, as I said at the beginning of my presentation, we are facing a major transformation, which is ongoing. And I think the end gain that could be considered, the new Green Deal instigated by the European is a clear target share at the European level by all state members, which is perfectly in line with what the Italian government already stated in the new Clean Energy package. So I think now we have in front of us, a clear and stable scenario in terms of targets. And therefore, we have also been able to finalize the 10-year strategic planning horizon that we used to do when we simulated the evolution of the system, in particular, in Italy. And actually, the upgrade of EUR 1 billion comes after a process of deeper analysis of the evolution of the system. Today, I can say that this EUR 7.3 billion just for Italy that we have reported in the past is mainly driven by, again, the need to respond to the new requirements of the system. And I think they have been very clear in what are the challenges in front of us. These challenges now are clear, the timing is also clear. The targets are crystallized. The entire European state members are working in the same direction. Just think about that, in the next 10 years, we expect that the 3 major countries Italy, France and Germany, altogether will invest about EUR 100 billion in high-voltage grid. And as Terna, we will be -- we're contributing to that with a number, which is in the region of EUR 14 billion. So clearly, I think we are all working in the same direction. Having said that, do we expect any further increase in the future? Well, I think as of today, now we are entering the phase of execution, not only at the Italian level, but also the European level. So we do expect a substantial stabilization of this CapEx need. The challenge will be to deploy for what we are committed to in the next 10 years because we're talking about a transformation, which is going to take place in the next 10 years. We are assuming that in the next 2 or 3 years, we will need to sort of cap of CapEx, which will be in the region of EUR 1.5 billion, EUR 1.6 billion per annum, that will be the [ cooling speed ] that we assume to have in -- also in the following years. Clearly, we have prepared, and we are preparing the company to face such a major effort because, as I said, already today, we have increased our CapEx profile for more than 50% versus 2016. So we are talking about another CapEx here. And the transformation process is not only driven by the CapEx need, but it's also driven by the increasing need in digitization, in innovation that will contribute also to speed up our internal process and will also contribute to develop the role of Terna as a system player, the system operator, in particular, in facilitating the new services that we have to develop in the future. The more we go ahead with the reduction in thermoelectrical capacity which, let me remind you, the thermoelectrical power plants were basically serving -- entirely to serve the ancillary service market. This, of course, is going to change aggressively, the more we use the thermoelectrical capacity. The more we will have to develop new solution to aggregate small and distributed capacity, and that, of course, calls for investment in innovation and digitization. So to cover the first and second question, the reason for that is also mainly driven in terms of CapEx brought by the Tyrrhenian Link project, which is connecting the higher and the southern part of Italy which already today is representing the 60% of the renewable capacity, and then in the future, will represent even more. So it is mandatory to connect islands with the peninsula in south and with north part of Italy. And this is what we have reflected in the 5-year plan. In terms of the workforce organization, I have to recall that we have hired about 1,000 people in the last 3 years. The net income in workforce is about EUR 400 million. So we have the voluntary exit in the region of EUR 600 million. But all this new force is set for, I would say, 20% have been utilized to support this CapEx growth. And so they are already part of the effort of the company in managing this growth. Of course, the CapEx growth is the basis of the RAB growth and the basis of the EBITDA growth. EBITDA growth, which has been driven in the plan by the expected increase in CapEx and the RAB. As I said, at the end of 2024, we expect to reach EUR 20 billion of RAB. But also, I would say, we have incorporated in our numbers a positive impact of the work in progress because at the end of last year, the regulator, as I told you, 1 year ago, has definitely approved the acknowledgment, 2/3 of the work in progress, because of the effort that we are doing in terms of growth in CapEx, in terms of supporting the transition of the system, and that's the reason why, starting from 2022, we can benefit of this work in progress for the coming years. Just to sum up, we are talking about EUR 40 million, EUR 50 million on average per annum in terms of EBITDA growth. Thanks to the effort, thanks to the fact that we have a carry out of about 10% of work in progress. So this is clearly coupled with the managerial efforts to increase the CapEx spend as a basis of our growth. On top of that, there is also growth coming from nonregulated and from the international, we started to grow at regime by the end of the plan and providing us with something in the region of EUR 40 million to EUR 50 million EBITDA horizon. When it comes to the nonregulated, if you just want to say, the EUR 50 million increase.

Yes, sure. The increase on regulated -- in nonregulated is, of course, a consequence of the increasing contribution from the TLC business that is still a growing business. And on top of that, let's also recall, what's already said by Luigi, there is an increasing contribution coming from Tamini that finally is giving its positive contribution to the marginality of the group. And on top of that, also starting a little but not meaningful contribution coming from the recent acquisition of Brugg Cables.

Next question comes from the line of Enrico Bartoli from MainFirst.

There's few of them. First of all, I would like to start with the nonregulated business. These new services that you highlighted in the new business plan, my feeling is that, actually, also the evolution of the outlook related to the need of investments in the grid due to the renewables is also providing some additional opportunities in terms of these new businesses. If you can give us a hint of, let's say, if you are in, let's say, also in a development phase on understanding how the demand is going to be over the next years and if you think that we can also expect a positive evolution in the opportunities for you in these kinds of services. And if you can give us an indication of the kind of returns that you expect from the investments in these businesses. A second question is related to the regulatory scenario. I saw in the Slide 41, you highlighted the possible introduction of the TotEx regulation in 2023. If you can give us some comments on what could be an impact on this kind of regulatory change on you, if you have any discussions with the regulator at the moment. Another question is related to the evolution of the CapEx. If you can give us some indication of the yearly evolution of the investment per year over the plan period. I guess that you indicated you're going to end around at EUR 1.5 billion, EUR 1.6 billion, if you can give us a comment there. And related to this, what you expect in terms of evolution of the work in progress, considering that most of the project that you highlighted in the presentation will be -- will take several years for their final execution.

So thank you, Enrico. Well, let me start with the second question with regards to the TotEx, and then I will leave the floor to Agostino for the other 2. Well, I think that in the TotEx, we see an opportunity to further increase value, not only for us and for our shareholders, of course, but also for a system. Because in the end, it could promote an even higher overall efficiency through new output-based regulatory measures, ensuring benefits for the system. And I think this is very important. And as Terna, we are very -- we are fully committed to it and more than anything about the solution instigated -- or regarding the output-based incentives. It was in the right direction. I think the TotEx mechanism also a space that the company, the transmission, the distributor have to commit themselves to with respect to the budget in terms of CapEx program. And of course, this is one of the issue that we will have to manage in the future, but we have -- we are prepared, we are preparing our organization, we are in talks with the authorities. We do expect that there might be some testing in '23, I would say, 2023 as a starting point. But as Terna, we are definitely in favor. We see it as an opportunity. As you know, we're already testing the output-based mechanism which is -- has been reflected in the numbers. We have been entitled up to a maximum of EUR 300 million. And we have replaced in our plan about EUR 200 million, well identified -- with well-identified projects that should contribute to solve some projection problem and contribute to the reduction of the cost of the energy. So we are definitely in favor to this and we are working in order to be ready to capture these opportunities in the very moment it will become effective. For the time being, I think we should wait 2022, 2023. Let me leave the floor to Agostino with regards to the nonregulated, he will be more precise than me. But definitely, the EUR 50 million increase is also related to the contribution that we do expect in terms of the utilization of our assets with regards to the optical fiber. As you know, we are increasing investments in optical fiber to serve this -- the regulated business, and we also offer these services in terms of hosting it, so with a faster growth in exchange of we have a fee that we have also reflected in the number. On top of that, we are also developing some new services that Agostino could better explain.

Yes, sure. As said by Luigi, there is an increasing contribution, especially from the hosting on the TLC, on what we call asset-based business. On top of that, there are 2 contributions coming from the service-based and from what we call the competence-based, Tamini and group. On service-based, we provide services, grid infrastructure owned by other operators. We operate in energy efficiency. We operate in identified smart solution for our customers. Let me say, we operate in a field that, today, we can consider as nonregulated, but in a certain way, we will consider as the regulated business of the future because, in any case, it's an area in which it's important for us to make markets to understand, which would be the evolution of the energy sector. And this type of business is helping us a lot. The remaining part is related to the so-called competence-based. And in here, we have -- we see the contribution of Tamini, and we see the contribution coming from the recent acquisition of Brugg Cables which are 2 realities that today are needed for us to understand, to develop competencies from specific technologies that we consider mandatory to have in our hands in order to cope with the increasing and the changing needs of the energy system of the future. Let me move to your third question which was related with the evolution of CapEx. I say it several times, we moved practically a company that was spending until 2016, 2017, around EUR 700 million, EUR 800 million per year to a company that already today is spending on average of EUR 1.1 billion, EUR 1.2 billion. We will progressively increase in the business plan horizon up to the EUR 1.6 million mentioned by Luigi a few minutes ago.

Next question comes from the line of Meike Becker.

Would you mind elaborating a little bit more on the project of the Tyrrhenian Link. I believe it's one of the bigger projects. So when does the CapEx start? For how long is the project going to run? Is it going to continue after '24? A little bit of color around that. It would also be -- you have given or, I would say, confirmed your guidance for 2020 as well. Would you mind elaborating on risks to those numbers? And the last question, cost reduction potential. So the growth you're envisioning, how do you expect your cost base to develop? And what are key projects that you're working on, on the cost side?

So thank you. Let me start with the first question with regards to the Tyrrhenian Link. When it comes to the number in the 2024 numbers, we have including just a little bit less than EUR 1 billion. So we're talking about EUR 900 million of the projects, which will last, of course, beyond 2024. This project is strategic to support the coal phaseout at the national level by optimizing the integration of the renewable sources and the expected storage capacity that we might develop, in particular, in Central and South Italy and is going to be, of course, represented by a summary cable connecting the Italian Peninsula, Sicily and Sardinia. So it's sort of a circle, which will allow us in the system to manage on an integrated basis, in particular, the renewable resources because that is going to be key to support, as I said, the phaseout of the coal in Italy by 2025. We expect that 50% of that would be ready by 2025 and the remaining portion will be finalized by '26, but in line to support the coal phaseouts. The total value of the project is in the region of -- is between EUR 3.5 billion -- is in the region of EUR 3.5 billion, EUR 3.6 billion. And in 2024, we have EUR 900 million, as I said. It is a key project. It is a strategic project because it will complete the reengineering of the Italian energy system once in operation because, as I said at the very beginning, one of the key challenges we have is managing the different geographies of the distribution of the generation points. The more we go ahead, the more we will have a concentration of renewables in the southern part of Italy, in the islands, and we will have a reduction of thermoelectrical capacity in particular in Sardinia, in Sicily and also EDR in Central and Southern part of the peninsula. So it's going to be one of the key projects of the future, it's part of our 10-year business plan. Should we have any problem in terms of potential delay in this project, anyway, I think that the 5-year plan is well locked in. So we don't see any risk in finalizing the EUR 7.3 billion. But as I said at the very beginning, this project is strategic for the country. So I assume that those numbers will be delivered also in 2024. But anyway, we have enough flexibility to maintain our growth, as I said at the very beginning. Now with regards 2020, for the time being, we don't see any delay in the execution of our projects. So we are in line with our programs. And for the time being, we do not expect significant risk in terms of results for the year-end, also because we are here to present the numbers today. So I think it will be safe to say that we already have a risk in what we tell you today. So we are confident that in terms of EBITDA, revenues for 2020 is, I would say, locked in, but we feel very, very confident at this stage of the year. I will leave -- I will ask Agostino to answer the third question by providing you with some numbers. Just one general comment with regards to cost reduction, the efforts that were put in place in terms of digitization of the company, clearly will contribute and will have in optimizing our cost base, despite the increase in volumes that, as you have seen, we are facing and that we will have to face in the coming years. Agostino?

Yes, regarding cost, as mentioned Slide 42 of our presentation, despite the massive increase of our asset base, that basically is exploding -- already exploded in 2019 and will continue to grow until 2024, the OpEx equivalent asset will continue to be reduced. This is something that we already started to analyze in the 2 previous business plans, it is something that is confirmed. Let me remind you that last year, when we had presented the 2019-2023 strategic plan, we also launched an efficiency -- an extraordinary efficiency process in order to reduce by 15% the perimeter of the so-called external costs that were in the region of EUR 140 million. Let me confirm you that at the end of 2019, we are fully in line and we were a bit in advance with such saving plan.

Our next question comes from the line of Stefano Gamberini from Equita.

There are 3 questions, if I may. First of all, coming back to the Tyrrhenian Link and in general to development CapEx of EUR 4.2 billion. Could you give us also some colors about the authorization of this EUR 4.2 billion? You said 50% of overall CapEx are already authorized. But just regarding the development one and in particular regarding the Tyrrhenian Link, when you expect the final going live and what are the main obstacles to go ahead with this investment that clearly is significant for -- also for the system at all. The second, if I'm not wrong, your estimates and targets are with -- in continuity guiding regulation as regard to your specific regulation, which you already said, to 2024. But regarding the allowed WACC, this could change. So what is the sensitivity you have in term of results, but also in term of dividend policy or investments regarding each 10 basis point of reduction in allowed WACC from 2022 onwards? And the third regarding the cost of debt there, which sounds quite high at 1.4% on average, considering the 1.1% in 2029 as well as the leverage, the leverage should be below 60% debt on RAB in 2024. But if you go ahead with such kind of investments, EUR 1.5 billion, EUR 1.6 billion per year in the following years and this kind of dividend policy, you think that the leverage could be a little bit stretched the following years.

So thank you, Stefano. Well, first of all, with regards to the authorization process level related to Tyrrhenian Link, we expect the final green light in the first Q of 2022. The project is already part of the 10 years development plan. So now we have all the usual process, and we do expect to get the final green light by the first Q of 2022. Having said that, the level authorization on average, as I said, with regards to the entire plan that we have is in the region of 60%, so it is 6-0. 2020 is substantially inside of authorized. 2021 is in the region of 80%, 85%. And I think in the last 2 years, as usual, are I would say in the region of, say, 30%, 40%, but that's normal course of business. So we are perfectly in line with the normal course of business. So we feel confident both in terms of authorization and procurement as well, because I think it is very important these days, so what I said before, to recover also in terms of procurement because we are all investing in the same period, in the same sector and in the same technologies, but we feel confident as well in this regard because we are running at the same rate. I will leave it to Agostino to answer with regards to the sensitivity of the weighted average cost of capital.

Yes. So regarding the sensitivity of the weighted average cost of capital, we know that each 10 basis points of variation, you can consider something like EUR 15 million increase or decrease in case of positive or negative variation. The main assumption here, as said by Luigi, is continuity. We don't see any reason why this is something that should change in the near term. The authority will have the possibility to introduce new mechanisms. But as said several times, we have no doubt that even with new mechanisms, we will be in the position to get additional remuneration in respect to the situation that we have today. So we are quite positive about this. Regarding the cost of debt, yes, it's true. Today, we have on our cost of debt in the region of 1%, 1.1% at the end of 2019. The figure that we have presented is 1.4%, that's including the contribution coming from international projects. If you look at -- let me call it, the corporate cost of debt, excluding the international project especially in Latin America, that, of course, have an additional cost. With respect to the national projects, we have in the region of 1.2%. That is not far from where we are today.

And as regard the leverage in the long term?

Yes. Sure, right. We also presented the business plan to our rating agency. We have discussion with them. We consider the level of that fully sustainable. We have also pressed a little bit, we've tried to make some analysis to put it a little bit to the extreme but we remain fully, fully sustainable. We are not concerned at all about this. Consider that also the deal that concluded during 2018 and 2019 in term of anticipation of funding are putting us in a very, very comfortable position. Do not forget, we don't have any specific need for the year 2020. We have nothing to refinance in 2020. If we will decide to go on the market, it would be our decision, but we are not obliged to do that.

Our next question comes from the line of James Brand from Deutsche Bank.

It's James Brand from Deutsche Bank. Look, just before I ask my questions, I just want to, obviously, congratulate you on the plan, but obviously, it comes at a pretty difficult time to the country. So I just wanted to wish you and your families and your employees and anyone on the call as well just good health. I had 2 questions. The first is on just work in progress, and you had a slide on work in progress in the presentation, which kind of explained how that works, but I didn't quite pick that up. So I was just wondering, on Slide 41, whether you could just clarify, is it that you get the 5.2% if it's work in progress within a year. And if it becomes a very long-term project and it lasts 3 or 4 years, then you get knocked down to 2.4%? Or maybe it works differently from that, and maybe you could just explain again how that works? And then secondly, I just had a question on the indexation of the RAB. If we go into a deflationary environment, I'm not saying that that's what's going to happen, but just so I can conceptualize as outside risks. If we go into a deflationary environment, can the RAB be revised down? Or is there a floor of 0 on the inflation component of the RAB?

So let me start from -- let me start from the first one there. So regarding the remuneration of work in progress. So this is something that has been reintroduced by the authority starting from the 1st of January 2020, was not anymore a part of our regulation since 2015, now it's been reintroduced as the consequence of a very extensive discussion that we had with them. Consider that we have on average of between EUR 900 million to EUR 1.1 billion, EUR 1.2 billion of work in progress at the end of each year, so if you consider a sort of plan with respect to the new projects and the projects that are with more than 2, 3 years of age, you can consider an increase in contribution starting from EUR 40 million up to EUR 50 million and even more at the end of the business plan coming from this specific tariff component.

Well, as a quick comment on what Agostino said, clearly, this work in progress mechanism incentivize the fact that the company has to rush up to implement the projects. That's the reason why there is this modulation. And I think it's fair and correct. So we are prepared with that. But I think the most important, as we said also in previous conference call, is the rate reduction of this work in progress remuneration. Well, the impact of the inflation on the formula is going to be, I would say, marginal. We do not expect any major impact for the way the formula works. So should we stay in a deflationary period, we are talking about a few million euros. So nothing very significant.

Okay. But can the RAB be revised down in a deflationary environment, was my question.

Yes. It's something that could be adjusted. But as said by Luigi, we don't expect any meaningful impact from this.

Our next question comes from the line of Emanuele Oggioni from Banca Akros.

The first one is on -- a follow-up on the work in progress. You mentioned the total, but could you disclose the volume for each year, if possible? The second question is, so regards the output-based incentives included in the new business plan. Compared to the previous plan, it was some EUR 200 million. And the third one is your assumption on the macro assumption on Italian inflation embedded in your business plan targets.

Now let's go to the second question with regard to the output-based, the output-based that we are expecting, the number is EUR 200 million as we said. We expect to have a contribution starting from 2022 because we are talking about projects which will go into operation by '23 and '24. So the impact of that is going to take place at the end of the plan in terms of EBITDA. We're talking about projects that are already authorized. So no major issues, it's just a matter of executing and finalizing. When it comes to the assumption of our -- of the inflation, well, we are assuming to have a level of assumption in the region of 1% in the plan period. That's basically, on average, the amount that we have factored in our projection. When it comes to the work in progress, well, the first of the work in progress is in the region of high single digits, so 8% to 9%. So we are talking about of net, the work in progress which should be in the region of, say, EUR 1 billion depending also on the year, but that's what we're talking about and the numbers are there. Because if I say that the impact on EBITDA is in the region of EUR 40 million, EUR 50 million, clearly, that's what we are talking about.

There are no more questions. Please go ahead.

So thank you, everybody. Thank you for calling us.

This concludes the conference for today. Thank you for participating. You may all disconnect.