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

Good evening, everyone, and welcome to the Terna 2024 Capital Market Day presentation. I would like to thank people here in Milan as well as those on the web. Here with me today, Terna CEO, General Manager, Giuseppina Di Foggia; and CFO, Francesco Beccali. Today's agenda includes the explanation of the evolution of Terna's role, the presentation of our strategy, full year 2023 results, 2024, 2028 financial targets and dividend policy. After the presentation, there will be a Q&A session. Thank you. Let me now hand over to our CEO, Giuse.

Thank you, Omar, and good afternoon, everybody. Let me start the presentation with an overview of the role of Terna as a transmission system operator, as the TSO Terna is a double responsibility for our country. On the one hand, to develop and maintain the transmission network on the other hand, to guarantee the balance between energy demand and supply in Italy to dispatching activities. To fulfill its TSO role there. There are some key objectives that Terna need to aim at and continuously improve. First of all, we need to guarantee energy continuity in the country, ensuring service, quality and continuity of supply in the energy system in a first moving scenario from a traditional system with centralized generation facilities and one-way flows, we are quickly moving over to a complex, integrated and less predictable system characterized by multidirectional flows among a large number of players. A resilient grid infrastructure is paramount for energy continuity, the intensity of extreme weather events registered in recent years requires us to increase the ability of the electricity system to withstand stresses and return to normal operations quickly and efficiently, minimizing the possibility of outages for end users. In addition, we are committed to an ever more efficient energy system, guaranteeing supply and quality of service at the lowest possible cost for end users, 24 hours a day, 365 days a year. Finally, ensuring the security of electricity grid in an essential mission is an essential mission for Terna to address new challenges coming from the transition toward the more complex energy system, Terna as a UC leader needs to guarantee the highest level of physical and cybersecurity to predict and prevent any harmful event. The global economic environment is evolving and brings with it unprecedented challenges for the energy sector. This is mainly related to the ongoing global energy transition from a fossil-based system to an emission 31 combined with the foreseen increase in electricity demand. These challenges have been embraced by the EU, which has set ambitious decarbonization targets in the coming years. The clean energy package was adopted at the end of 2018 in response to the commitments made in the Paris agreement. It set the target of a 40% reduction in greenhouse gas emissions versus 1990 levels by 2030 and the ambition of a net 0 emissions by 2050. The bar was further raised with the publication at the end of 2019 of the Green deal and subsequently of the Fit to 55 package. These measures confirm the aims to transform the European Union into a net 0 economy by 2050, but increased the intermediate goal of a reduction in greenhouse gas emissions to 55% by 2030 compared to 1990 levels. To adopt the increased target a draft update of the Italian national climate and energy plan was submitted to the European Commission on the 30th of June 2023. The final action will have to be ready by June 2024. This has important implications for the evolution of the Italian electricity sector targets. The updated plan foresees a 65% share for renewable energy and electricity consumption. This equates to around 228 terawatt hours of renewable generation. This will be mainly achieved through strong growth in installed capacity of wind and solar generation, reaching 108 gigawatts by 2030. Overall, the national climate and energy plan scenario set challenging targets for the Italian energy system confirming the need for investments in the grid. In fact, TSOs in the coming years will need to announce their efforts to increase the resiliency of their networks and to support the energy transition by meeting decarbonization targets. The success of the Italian decarbonization plans depends on the timing and challenging development of 4 key areas, which will need to be supported by all actors in the surrounding energy ecosystem and by a speed up of authorization processes. First, we needed to accelerate the development of a new renewable generation capacity. In this regard, we have observed significant progress in recent years. In fact, from 1 gigawatt in 2021, new renewable installation grew to about 3 gigawatts in 2022. This acceleration continued in 2023 with about 6 gigawatts installed. Nevertheless, this trend needs to further accelerate in order to be able to sustain the gradual replacement of fossil-based generation systems and achieve decarbonization targets. In addition, and this is our main call to action, the network infrastructure needs to increase the transmission capacity in order to safely integrate and manage the significant growth in renewables and enhance the resiliency of the grid to withstand potential stresses. Network development needs to be complemented with the new forms of flexibility such as storage systems in order to fully leverage the integration of intermittent energy sources like solar and wind. Recently, the European Commission approved the national scheme to incentivize storage system development and the auction process will be managed by Terna. Finally, system operator activities we need to focus on guaranteeing the adequacy of the system, in particular during the transition phase towards renewables. They will need to make sure that the available production capacity, including imports and storage is sufficient to meet the demand for energy. As you know, Terna plays a crucial role as a system operator by managing a capacity market auction. As already mentioned, the energy system is becoming more complex with several challenges to be phased in the coming years to achieve global decarbonization targets. Network development is necessary to sustain the energy transition, but it will not be enough on it on -- in fact, the large scale transition we need cannot happen without similar innovation of the system, combined with the digital capabilities. This is why we have developed our new plan to support transition in Italy based on the concept of a [ twin ] transition, energy and digital. For the energy digital transition, we will contribute to the resolution of our country synergy trilemma, namely energy sustainability, energy affordability and energy security. To do so, we plan to increase investments to deploy infrastructures required to achieve Italy's decarbonization targets and guarantee continues a reliable energy supply with a close control of our CapEx efficiency. The increase in investments needed to be supported by the regulatory environment, recognizing the relevance of a Terna's network and of value creation initiatives for the country's energy system. [ Corativities ] will also be supported by Terna's presence in nonregulated businesses. We will make use of our equipment companies to maximize value creation through synergies with DSO competencies and know-how on the Energy Services business. To maximize the effectiveness of the investments for the energy transition, we need to allocate additional resources to innovation and digital tools that will allow our network to become more connected in intelligent, efficient and reliable. We will, therefore, accelerate digitalization internal, leveraging technologies such as artificial intelligence, data driven technologies and robotics with active support from cybersecurity tools. We will announce not only our network digital capabilities, it is -- but we also aim at leveraging digital transformation to improve decision-making and analytical processes within the organization. This will increase the operational efficiency of our team. The twin transition cannot happen and coexist without solid and adequate organization at its foundation. This is why we are working to have the right competencies and capabilities within our company. We are planning initiatives to build acquire, retain and transfer know-how and skills across the organization, rewarding talent that will come that will become the bedrock of the company in the forthcoming years. The new plan shows us ready to face the challenges of the twin transition in order to achieve a just transition as we will see in the next slide. One of the ways to achieve action on climate change and optimize benefits for the energy transition is to ensure an inclusive transition. If managed properly, the transition will prevent the human and economic cost of climate disruption also improving growth, generating new jobs and reducing in quality. For this reason, we need to consider all the aspects and consequences of the transition. We cannot ignore the social impacts of the large-scale changes that are ahead of us. To overcome this challenge, the goal of a just transition for workers and communities was included as part of the 2015 Paris Agreement on climate change. Consequently, Terna has included sustainability and social impact at the core of each strategy summarizing them in the concept of a just transition. With this concept, we mean a process that is fair, inclusive and attentive to the possible impacts on all stakeholders paying attention to jobs, communities and supply chains. All these associated with a fair distribution of costs linked to the transition. Thanks to my experience in the telecommunication industry, I'm very familiar with the long-standing problem of the digital divide, which prevents people who live in certain areas from having broadband access and businesses from running as they should. A similar exclusion is unthinkable in the energy ecosystem. Energy must be available to everyone always. Every project we undertake must guarantee a positive impact on the system sustainable for the oil population. This is what fairness and sustainability means for us and what we intend with the concept of just transition, an equitable solution for everyone. This priority of delivering adjust transition is followed to the company's sustainability plan, which is an integral part of this plan. The sustainability plan connects to 2 main trends: environmental and social. These concepts are built up on 2 different characteristics of Terna. Terna is a sustainable for what the company does. Terna's role as transmission system operator is vital for achieving the energy transition and for living to future generation at decarbonized environment. This is why Terna is green by nature. Equally important, Terna is a sustainable for how the company acts. Terna's way of doing business is driven by a solid structure of safeguard and care for its stakeholders' needs. This makes the company sustainable by choice, so social by purpose. The strategic pillars that we just described are the foundations of our 2024, 2020 plan, which I'm going to present more in detail in the next session. As anticipated in the previous sections, investments are a crucial part of our plan. We foresee to invest EUR 16.5 billion by 2028, of which EUR 15.5 billion in regulated activities, making it the biggest investment plan ever for Terna with a growth of 65% compared to the previous plan. The plan aims to strengthen and expand the transmission grid as well as to develop the interconnection capacity with the neighboring countries in order to guarantee greater security, reliability and efficiency of the system and allow for increased integration of renewables. This is a challenging plan that foresees a strong acceleration in terms of execution, but also in terms of our [ position] and supply chain. Let me underline that we are well on track regarding authorization and procurement on regulated CapEx. Indeed, over the 2024, 2028 CapEx plan, about 80% has been already authorized and more than 70% is covered by existing procurement contracts. We have reinforced our execution capabilities to enhance project controlling certified project management, structuring integrated teams with end-to-end responsibility for the delivery of large projects. Terna is already active in nonregulated business, leveraging the synergies with our core activities. For example, the vertical integration with the cable and transformer manufacturers, Brugg and Tamini. We will develop our business based on the 3 strategic guidelines, margin optimization, synergy maximization and portfolio scale up. This strategy will make sure that our nonregulated investments are not only profitable by themselves, but also providing support to regulated activities. In order to achieve our objectives in a scenario of increasing complexity, we are embarking upon innovation and digitalization initiatives, which will be essential in enabling the twin transition to which Terna is committed. We plan to invest around EUR 2 billion in the company's digital transformation, which represents about 12% of the total CapEx plan. The investments will impact the entire -- to value chain as well as Terna's corporate organization. initiatives include, for example, the announcement of a building information modeling for engineering, artificial intelligence enabled algorithms for system operations, digital team for transmission operations and digitalization of HR processes to support employee management in our corporate structure. The plan will not only introduce new tools, but also involve significant efforts to scale up and increase the adoption rate. This will transform ways of working and increase the efficiency and effectiveness of the decision-making process. Let's look now at the main projects included in our plan. First, we are aiming to expand the Italian network mainly through key development projects that target the reinforcement of all sound backbones and connections with the islands. This will maximize the transfer capacity between market zones and reduced congestion. Projects include the Tyrrhenian link for which last month, the European Investment Bank and Terna signed the contract for the final tranche of the EUR 1.9 billion refinancing loan, the Adriatic link joining the market and the [indiscernible] regions and the second, the interconnection between Corsica Sardinia and Italia Peninsula. Foreign interconnections will also play an important role with the Italy Tunisia link crucial for the optimization of energy resources between Europe and North Africa. In addition, the 2023 national development plan provided for the launch of innovative projects. Examples are the Milano-Montalto and the Central Link, which will be deployed following a modular planning based on our generation and demand evolve. These projects will bring several benefits for the system, which will comment on in the next slide. The projects we have included in our plan will sustain Terna's enabling role in the energy transition contributing to the resolution of the energy trilemma of the country by enhancing affordability, security and sustainability. The tangible impact of such a contribution is quantified in the benefits that our plan will provide to the electricity system. I will now provide some examples for -- of an improvement that we will bring with the execution of our plan. Regarding energy affordability, we have already achieved significant developments in increasing transmission capacity between market zones. But we are committed to doing more. Indeed, our new plan aims to increase interzonal capacity to 20 gigawatts by 2028 from 15 gigawatts in 2023, allowing an increase of more than 30% in the energy exchange between market zones. Concerning energy sustainability, we will reduce the emissions from generation activities with a cut of more than half in emission factor. Lastly, regarding energy security, thanks to our investments over the life cycle of the plan, that the active capacity of our grid will increase by about 70% compared to the 2023 enhancing the ability of the system to understand they were more frequent stresses. As anticipated earlier, over the period of the plan, we will focus on innovation and digitalization activities in this respect Terna plans initiatives for each link in the TSO value chain as well as for the corporate organization. Let me share some examples. For engineering, we aim to ensure the continuity and execution of our projects through digitalization of construction sites, we will adopt building information modeling, which offers 3D models of the network and stores all the related information in one repository to manage data and designed with a greater flexibility. For transmission operator activities, we will leverage digital prints enabled by IoT sensors on our assets to guarantee adequate service level and cost control also working on the adoption of the tools across the whole network. For system operator activities, we will support control room operators with ever more precise and intelligent algorithms powered by artificial intelligence, a necessity for integration with the renewable sources that we will face in the coming years. For example, co-pilot algorithms will support our operators in monitoring and predicting the energy flows that we will need to manage and balance. For our corporate activities, we aim to monitor and proactively manage risk associated with the core activities through the digital addition of enterprise processes. These include HR processes, supporting employee careers and supply chain risk control tower to mitigate the project execution risk. At every step, we will announce cybersecurity to guarantee defense and support innovation of the digital and physical assets as well as internal processes, internal people. Digitalization will improve employee safety and the company with skill and skill staff to support the Twin transition. Moving now to our ESG ambitions. As mentioned earlier, we aim to be leaders of the Twin transition, ensuring a just transition and highlighting Terna's sustainable DNA. Aligned with its role as energy transition enabler, Terna has adopted an ambitious emission reduction target within the framework of the size-based target initiatives. With this target Terna is committing to reducing its Scope 1 and 2 CO2 equivalent emission by 46.2% by 2030 compared to our 2019 baseline. Terna's target is in line with the 1.5-degree scenario, the most ambitious goal established by the 2015 Paris agreement. Besides its size-based target, Terna aims to position itself among the most committed company at a global level, protecting the neutral environment. We will take the preliminary steps towards the adoption of a science-based target for nature in line with the framework currently being developed. Terna commits to assess its impact on nature using current methodologies to be ready to set targets as soon as the validation process opens. We are sustainable, not only in what we do, but also how we do it. Terna is actively reshaping its business model through the circular economy strategy and road map, an ambition action plan that teams to fully integrate the circular economy principles at all stages of the value chain. As we saw in my overview of the current scenario, being at the center of the energy transition requires us to foster adjust transition, also considering related social impacts. Therefore, being social by purpose means for us a greater focus on people and communities starting from our employees and their safety, a fundamental priority in running our business. Terna's approach to occupational safety is based on a system of tools applied to all corporate processes. This system calls for clear safety policy guidelines, health culture promotion and prevention. Adjust transition also means an inclusive transition. This is why we commit to enhancing hiring programs and employee career development programs that guarantee equal opportunities and inclusion throughout the plan and all organizational levels. Our focus on people also meets a focus on local communities and the ability to engage them in every phase of the planning of electrical works. It has long been one of our keys to success. In this regard, Terna undertakes to achieve 100% of its main projects accompanied by stakeholder engagement initiatives by 2030. Another example of a concrete action regarding the just transition will be the innovation hub we are opening in Tunisia. It will serve us as a center of a technological innovation and skill development in the Tunisian energy sector, promoting sustainable growth and employment as part of our ambition to be social by [indiscernible], we are glad to announce the establishment of our Terna foundation. Its mission will be to achieve an inclusive transition by foreclosing on 3 different areas. The diffusion of energy culture also to the active involvement in education initiatives for the younger generations, the fight against energy, poverty and the support for programs to guarantee access to the labor market and career opportunities. Opportunities for all with particular reference to the energy sector. With the ESG strategy of the 2024, 2020 plan, I have now presented all the strategic guidelines that will govern our journey for the next 5 years. I will now hand over to our CFO, to present the starting point of this journey, the results of the full year 2023. Thank you for your attention so far. Please Francesco. Francesco Beccali.,

Thank you very much Guise. I will now go through the main results we achieved last year. In 2023, group revenues and EBITDA were up by 7% and 5%, respectively, versus the previous year, which means EUR 222 million and EUR 109 million higher than 2022, while group net income was at EUR 885 million with an increase of 3% versus 2022. Group CapEx stood at EUR 2.3 million, an increase of 30% versus 2022, confirming once again the robust acceleration in line with Terna's institutional role for the country. To support this CapEx acceleration, at the end of December 2023, net debt was at EUR 10.5 billion versus EUR 8.6 at 2022 year-end. As you can see from the chart, all the main figures of the period met and exceeded the provided guidance for the year. Now let me just spend a few words to deep dive on the presented figures for 2023, turning to next slide. Let's start with revenues analysis. Regulated revenues reached EUR 2.67 billion, EUR 128 million higher than last year, which means a growth of 5%. The increase was mainly due to by the impact on transmission and dispatching revenues from an increase [indiscernible] and the higher contribution coming from the output-based incentives recognized in P&L related to the higher benefits generated from the system. Nonregulated and international revenues reached 517 million 22.4% higher than last year. Nonregulated growth was mainly attributable to the increase in revenues coming from Brugg and from the Energy Solutions, mostly related to the LT Group International revenues were set to about 0 in accordance with the IFRS 5 accounting standard referred to asset held for sale. Now let me realize EBITDA, moving to the next slide. In 2023, Group EBITDA reached EUR 2.17 billion, 5% higher than last year. The increase was mainly attributable to regulated activities, which contributed for about EUR 79 million more than last year, showing EBITDA of EUR 2.1 billion for 2023. Let's now have a look to the lower part of the P&L, turning to next slide. D&A amounted to EUR 806 million. The increase versus last year was mainly due to the impact of new assets becoming operational for the period. As a consequence, EBIT reached EUR 1,362 million, 2% higher versus 2022. We reported net financial expenses at EUR 119 million. The increase versus last year was mainly due to the increase of interest rates, which affects the cost of the new net, partially mitigated by the lower level of inflation. Taxes stood at EUR 364 million, EUR 9 million higher versus last year, essentially due to increased profits. Tax rate stood at 29.2%. As a result, group net income reached EUR 895 million, about 3.3% higher versus the same period of last year. Now moving to CapEx analysis. In 2023, total CapEx amounted to EUR 2.3 billion, about 30% higher than last year, confirming Terna's ability to reach its goals despite the macroeconomic scenario in which we operate. Indeed, we invested about EUR 2.2 billion in regulated activities. Among the main projects of the period, it is worth mentioning the Tyrrhenian Link, the Adriatic Link, the [ Elba ] Mainland connection, monetization of the high-voltage grid in the locations due to as the Winter Olympics in 2026. The Paterno-Pantano-Priolo in [ instant ] Sicily, the [indiscernible] power line between [indiscernible] and [indiscernible] and the investments in stabilization devices, such as [indiscernible] for grid security. As far as CapEx categories are concerned, development CapEx represented 56% of our total regulated CapEx. Defense CapEx stood at 12%, while asset renewal and efficiency was at 32%. Nonregulated and other CapEx stood at EUR 106 million. This included capitalized financial charges and other investments. Regarding the net debt and cash flow analysis. Let's move to the next slide. Net debt at the end of December 2023 stood at EUR 10.5 billion, about EUR 1.9 billion higher than 2022 year-end level, mainly as a consequence of the CapEx acceleration made on the National Grid. During this year, we generated an operating cash flow of EUR 1.6 billion, thanks to which we were able to cover most of the CapEx spending of the period. Well, after the explanation of our strong 2023 starting point, let's now move to 2024, 2028 group financial targets, turning to next slide -- as anticipated earlier, the 2024, '28 plan includes a strong acceleration of our investments. Focusing on the regulated business, our plan foresees domestic regulated CapEx for EUR 15.5 billion, that represents the highest investment plan ever with a growth of 60% compared to the previous plan. As a consequence of our ambitious investment plan, the value of our regulated assets will increase from EUR 20.4 billion in 2023 to EUR 22.5 billion in 2024 and EUR 30.6 billion in 2028. With a compound annual growth rate of 8% during the plan. Now let's have a look at the breakdown of the CapEx plan, turning to Slide 24. Development CapEx, we reached about EUR 10.8 billion cumulated over the planned period, about EUR 5 billion more than the previous plan. The most relevant projects are represented by high-voltage direct current installations, the Tyrrhenian link, connecting Campania, Sicily and Sardinia, which will lead to a significant increase in volumes, the Sardinia-Corsica Italian Peninsula connection, the so-called SACOI 3, the Adriatic Link as well as the Central Link. The remaining non-HVDC installations include interconnections project to reduce bottlenecks, solving grid connection and integrate renewables. Asset renewal and efficiency CapEx will be at about EUR 2.9 million. We will focus mainly on quality of services and processes as well as development of solutions to improve the sustainability of the grid. The defense plan and other CapEx account for EUR 1.7 billion accumulated during the planned period. This category includes works aimed at digitalizing and managing the network, improving at the same time, our physical and cybersecurity. We want to improve our ability to provide a technical and technological response to the needs of the system in order to have an increased flexibility and functionality for the system itself. We are talking about investments on regulated machines such as synchronous compensators, for example, resistors and STATCOM. All the CapEx spending of the period has been planned, taking into consideration the favorable regulatory environment with the new regulation by expansion and service objectives, the so-called ROS [Foreign Language] defined by ARERA. Regarding the regulatory environment and regulatory milestones, let's move to the next slide. As you know, the work for the electricity transmission service have been set at 5.8% for 2024 by ARERA. Looking ahead, work values for the 2025, '27 period will be updated by ARERA by the end of 2024 based on the update of the main macroeconomic and fiscal parameters on the application -- and the application of the so-called graduality rule set for calculating the allowed cost of debt. At the end of last year, the regulator approved the ROS Regulation Integrated Text containing ROS general principles and criteria for setting the lot cost valid for the period 2024, 2031. ARERA confirmed the gradual approach for implementing the ROS regulation foreseeing a first phase, the so-called [indiscernible] framework starting in 2024. For the development of the [ Ros Integrale ] model, which is going to be applied in 2026, ARERA has defined a 2-step approach. The framework resolution concerning the general criteria and the second resolution regarding specific sectoral measures aimed at defining methods and possible experimental applications of the ROS integral model. In 2028, the new regulatory period will start with updated WACC, updated general tariff criteria and incentive regulation. Now let's have a look at nonregulated activities. Turning to Slide 26. As anticipated before, we will evaluate additional opportunities for nonregulated business development, which will need to comply with specific criteria, margin optimization, synergy maximization, core business support and portfolio growth. Consequently, potential areas for development are the equipment sector with industrial presence in high-voltage cables and transformers, also aiming at reducing supply chain risk through vertical integration. The energy services sector, we -- the development of EPC and O&M services for metros and renewable energy service plans. The connectivity sector with dark fiber and hosting and/or housing services, the interconnector field with the development and management of interconnection lines for third parties. Finally, nonregulated activities will account for about EUR 600 million in terms of cumulated EBITDA over the plan period. To summarize the key metrics of the new plan, this is an overview of our revenues, margin and CapEx will evolve throughout the planned period. For what concerns 2024, we foresee EUR 3.55 billion of revenues and an EBITDA of EUR 2.42 billion, which we expect to grow to EUR 4.6 billion and EUR 3.25 billion, respectively, in 2028. The margin growth will be reflected also on EPS that will increase from EUR 0.49 to EUR 0.55 in 2028. As far as total capital expenditures are concerned, in 2024, we plan to invest EUR 2.6 billion, while 2024, '28 cumulated CapEx will reach EUR 16.5 billion, as already mentioned -- as we just showed, we plan to increase EPS to EUR 0.55 in 2028, a growth of EUR 0.11 versus 2023 with a CAGR of about 5% throughout the planned period. The growth in earnings will be paired by dividend policies that foresees a dividend per share, 4% minimum annual growth over the planned period, taking 2023 as the reference year. For 2024, EPS will be equal to the higher of 4% growth versus 2023 and 75% payout ratio. Anyway, and greater distribution in 2024 will not impact dividends from 2025 onwards. We believe that such dividend policy ensures constant and predictable growth as well as full visibility. With these earnings projections and dividend policy, we want to sustain an investment proposition that balances yield and growth with a long-term visibility. As far as our financial structure is concerned, the company is committed to maintaining a solid financial structure during the plan. Also through actions aimed at keeping the financial leverage under control, including the possibility to increase the stake of hybrid capital within our capital structure. Indeed, despite the high CapEx increase for the system, within the plan consistent with our current rating level with an FFO to net debt at around 11% in 2028, well above the thresholds indicated by the rating agencies for our current rating level. The average cost of net debt foreseen in the plant will be at around 3.3%. To conclude, the assessment of the main ESG rating agencies place Terna in the leadership group, demonstrating the effectiveness of the approach adopted by the company with respect to sustainability issues. For example, Moody's ESG rewarded Terna with the highest rating level advance. Similarly, [indiscernible] has placed Terna in the best risk band negligible. Now before the Q&A session, I would like to leave the floor to the CEO for the closing remarks.

Let me conclude this presentation with some closing remarks. First, as illustrated at the start of the presentation, we are going to evolve Terna's role taking into consideration all the challenges that the future holds in store. To do this, Terna needs to put energy and digital transitions at the core of its agenda fostering investments to enable what we are calling the Twin transition. In addition, the investment foreseen in the plan will contribute to creating value for all shareholders and communities. This will bring an increase in returns, which, together with our new dividend policy will generate a balanced mix of yield and growth, also providing long-term visibility. Despite the challenging macroeconomic environment in which we are core to operate and a further acceleration of investments foreseen to fulfill the needs of the system Terna will remain committed to maintaining financial stability and low-risk profile. To conclude, we aim to do whatever is needed to enable the twin transition, making sure it has positive impacts on all stakeholders and environment in other words, in our wider vision a Twin transition for a just transition. Thank you for your attention.

So now let's start the Q&A session. Javier Suarez, Mediobanca.

Thanks for the presentation. Three questions. The first 1 is philosophical on the strategy of the company. The company has increased historically significantly both CapEx and dividends. And this time, again, the company increased CapEx and dividends with a cost of financing that is significantly different versus the previous one. I think that the last business plan that the company presented was in 2022, and there has been a change in the global scenario. So when you are thinking about level of green that is appropriate for a [ bank ] like Terna, how could you define that level of Terna. I think that the indications that has been given in slide 29 which has Circa 11% in 2028. But can you be more granular on how do you see green in 2026, 2024, '26, '28. And if you are embedding into the business plan extraordinary action, for example, as a disposal of, for example, issue of hybrid instrument. That would be the first question. The second question is on IT implementation. I think that you make a very interesting statement on the capacity that the company has of utilizing new technologies to be significantly more efficient. So I see that there is some expansion in the EBITDA margin from 68% to 70% by 2028. But shouldn't we expect from a company like Terna getting more benefit from implementation of new technologies and that should be something significantly impacting your business going forward, improving your EBITDA margin beyond 70%. And then the third question is on the output-based incentive. I think that until 2025, you should have embedded in your numbers and a big output-based incentive because that is very visible. So can you share with us what is embedded in your business plan in terms of output base in 2028?

Let me introduce Francesco to complement. First of all, I want to underline that our dividend policy is based on the assumption on the ambition to maintain the right balance between yield and the growth in our investment proposition guaranteeing the sustainability of our investment plan. And let me say that such dividend policy ensures a constant predictable growth as well as full visibility over the plan period and -- regarding our increase in investment, the increase of around EUR 6 billion of cumulated regulated activities is driven by the need to respond to the new requirements of energy transition in particular, with the projects to connect the renewable power plants to reinforce North sound backbones and the connections with islands to maximize the interzonal transport and to reduce congestion. And then coming to the output-based incentive, right? This was the other question. Let me say that in the ROS approach, we mentioned -- in the ROS approach, we see an opportunity to create further value, further value for shareholders and this is -- it is consistent with the path already undertaken towards the output based approach. And let me say that our regulator in Italy ARERA has a very good track record aligning all the stakeholders objectives to maximize the benefit for the system, for the energy system. And let me conclude saying that I'm confident can continue to work with them in the effective way we are working with now.

If I may, I try to complement a couple of questions. Starting from the first one, which is the more financial one. So I stay in my comfort zone. As far as the drivers of the financial structure of the company. It was tough challenge because we had to find the right balance between the [indiscernible] on the one end we have to drive the energy transition in Italy. So we have to do investments in order to integrate nonregulated non-programmable energy sources. On the other hand, we wanted and we made it clear since the beginning of this experience with this new management to maintain the current low-risk profile of the company because we did it consistent with the regulated nature of our business. So on the one end, the first thing that we do is to go through a prioritization exercise of our CapEx. We basically divide our CapEx in different clusters. And together with our colleagues from the engineering department, we decide which are the more needed immediately for the system. In doing so, we try to be consistent with the velocity of the energy transition in Italy. So trying to be consistent with the growth on the renewable energy versus installation in Italy. For example, I mean, line, which is needed in order to increase the transport capacity between the south and the northern part of the country will have a very high priority, whereas an asset renewal of substation, which are still some years before getting to all and needs interventions has medium priority level. So that's the first thing that we do. Then we try to couple this exercise with the -- what the rating agencies give us as guidance for maintaining the current rating level. The main ratio KPI that they look at is indeed the FFO to net debt. And to this extent, coming to your questions, I cannot give you the precise I mean development year per year of the FFO net debt, but I can tell you that, I mean, we come from time where the FFO net debt is in the order of 14%. So what we are doing is to kind of optimizing our financial structure, increasing the level of debt, but without putting at risk the financial stability of the company. Indeed, the commitment that we are taking to maintain the FFO net debt at 11% is significantly above the threshold needed for maintaining the current rating level, the [ Travel ], which is far away for -- from the investment -- the sub-investment grade level. As to the levers that we have our end in order to get to the results, Indeed, as I said, we commit to keeping the FFO net debt and the leverage under control. And for sure, the first tool that comes to my mind when we have to deal with controlling the financial leverage is added capital because we already did an issuance in 2022 of EUR 1 billion. And we do have significant additions per hybrid capacity according to the methodologies of the 2 rating agencies that are evaluating our credit risk. So we are prepared even to fill all the residual added capacity from rating agencies, if needed. Then we also add the possibility to rely on the new contribution, the P&L and [indiscernible] fund. Typically, those are not -- those were not our first idea when it came to reducing the financial leverage because our main task is to make investment and get paid for those investments. So it doesn't make a lot of sense to make an investment, which is not remunerated because let me remember that grants are basically -- do not increase the up. So they don't increase the debt neither the up. But to this extent, 2 things have changed. On the 1 hand, vis-a-vis the past years, we are now in a situation where the leverage has become a focus of the company. So we have to deal in a second best scenario, as it this way. On the other hand, the regulator set a specific framework, which incentivize regulated entities to use those kind of tools in order to increase the financial flexibility foreseeing an incentive of 10% of the value of the debt, which was paid over 5 years. By the way, the most recent resolution published by ARERA at the beginning of this year have further improved these routes because now the incentives can go from 5% to 15%, depending on how useful is the object of the grant, I mean, for the electricity system and reducing the period in which we received this incentive to -- from 5 to 3 years. So we have several tools. This asset disposal is something that we have done with the international activities. We might consider to open the capital of our nonregulated business to potential partners, if needed, again, in order to support rating. I would say that it's not the priority at the moment because we want to invest in the nonrelated activity because we have made very positive results in my view. We are planning to extract EUR 600 million of EBITDA coming from those activities. And therefore, this is not the first priority, but we are open to do so, particularly for those nonregulated activities, which are not related to our supply chain. It will be more difficult to open the capital of Brugg and Tamini. Let me finally say because it's the [Foreign Language] Italian, we -- Standard & Poor's just published the rating affirmation of our rating at BBB+. It was like half an hour ago. So we can confirm that, I mean, our commitment is, for instance, confirmed. For the auto based incentives in the plan, just the last number cruncher moment. We currently have more or less EUR 400 million in the upcoming spread over the upcoming years of the plan that still have to be deployed. We are only talking about auto base incentives, which have already been granted by ARERA. In the plan, there is no additional EBITDA coming from new 2-base incentive schemes. So neither the one which are already included in the resolution published in next February. You might have noticed that there is incentive schemes related to interzonal in incentives, which is extending to 2024, the previous cap for interzonal incentives and which will change the parameters, but still extend the intrazonal schemes also for '25 and '26. And also the quality service have been extended. And again, conservatively, following the common practice of the company, we are not considering anything coming from those. And obviously, not considering anything coming from other incentive schemes that might be implemented in the upcoming weeks or months, you know better than me that there have been discussions, there are discussions related to a potential extension of the MSD incentive schemes. I do want to let to the ability of the company to reduce the cost of the dispatch market. So I think that our projects are quite conservative in line with the standard approach of the company.

Regarding technology, one question was about that -- let me set the scenario in Italy, better than the me that renewables are intermittent, not programmable. And the renewable power plants are not located efficiently. Now taking into account that in our national development plan for Energy climate. Italy will need to add 74 gigawatts additional capacity from renewable by 2030 and we are accelerating because in 2021, 1 gigawatt was added in 2022 to 3 gigawatts in 2023 nearly 6 gigawatt. And we need to continue to deal with this considerable challenge. So we have first to coordinate the request and demand with the development of the infrastructure. This is why the increase in our CapEx plan of over EUR 6 billion. On the other hand, we have to increase the storage capacity and we have to support our government and local administration to -- with the authorization process and also locating the infrastructure efficiently. All these make more complex, the ecosystem, more complex, the energy system. And this is why it's important technology to make simpler our activities and our processes and to help people to work. This is a revolution also a cultural revolution, not only from infrastructure point of view.

Stefano, Equita.

The first regarding the scenario of renewables. So considering that it is true that in 2023, there were 6 gigawatt of new capacity, but most of them on the roof. So these utilities plans are still lagging. So what are, in your view, the risk of a delay in terms of investments? And what could be, we can say the measures from the government that you expect in order to really accelerate growth of utility-scale capacity, mainly in the south of Italy in order to, we can say, justify and accelerate your CapEx plan on the other. The second question regarding the financial structure. Do you include this hybrid bonds in this plan or some other disposals in this plan or this is something we can say, a contingency plan and the 3.3% cost of debt includes also this we can say, issue of hybrid bonds. If I'm not wrong, the existing one should have some expiry or could be recall in 2026 or in '23. I do not remember how you -- or clearly not change its nature and that date if this is also considered in this plan. And if you can help us also in terms of debt on RAB, we usually worked on these metrics, the debt on RAB shouldn't exceed 60%. Could you help us to understand what is this trend right now? The third question regarding the CapEx, the EUR 15.5 billion includes also EUR 1.1 billion of grains, if I'm not wrong. So the regulated RAB is 14.5% at the end and -- sorry, the regulated CapEx are EUR 14.4 billion. and this is the value included in the 2028 RAB. And what are your assumption for this plan. What I mean is the regulated WACC, '25, '27 and '28, and they are up the [indiscernible].

Well, let me introduce saying that our plan, our CapEx plan is a strong, solid safe to meet the national plan for energy and climate in Italy. And let me add that also from execution point of view, our plan is a strong, solid from, let me say, regarding the authorization, we are on the right path, regarding procurement despite the challenging scenario any potential shortages of raw materials do not currently represent a risk for Terna indeed, in 2024, 2028 plan, as we said, 80% has been already authorized, and more than 70% is covered by existing procurement contracts. So we are -- we have a very solid plan. Then I leave Francesco to complement with the financials.

I'll go -- be faster than before. As to the average and the cost of debt, the 3.3% cost of debt does not include additional hybrid issuances. Are there any maturities or hybrids over the plan horizon, yes, because the 1 -- the issuance that we made in 2022 will have the non-call date in 2027. So we will also have to deal with the renewal of the first issuance that we made. Again, I said hybrid market is the ideal landscape for initial September. We saw it in our first issuance. The investors like very much the business position of regulated entity, associated with this kind of capital. Lots of investors, which are not able to buy our bonds because of the fact that our spread is too narrow for that. specifically for being an Italian name, are instead able to buy us on the hybrid side. So I strongly believe there is enough room on the hybrid capital market for implementing the plan. And let me say the rating agencies clearly say that they agree with us. Let's put it this way. Then as far as the grants are concerned, it's true in the plan currently have EUR 1.1 billion of grants, both repowering [indiscernible] and also the connecting Europe facility grant that we received for the Italian-Tunisia interconnections,; which was granted by EUR 307 million, half of it will rely on the Italian part of the connection because we are in charge of half of the interconnection. We do have additional room for additional grants that we might ask for during the plan horizon. But in the plan, the -- at the moment, we assume 0, we don't assume. We know that we might have up to EUR 500 to EUR 1 billion of additional grants if needed. But at the moment in the plan, there is no further recourse to grant in our capital structure. As far as the assumptions were concerned for the WACC starting from 2025 we assume around the mark-to-market and we assume a 5.5% up until the end of the plan and we assume an average deflator at 2.7%. And driven by the 2024 call, we've been object of 1 of the resolutions that I was mentioning before and which basically set the deflator in 2024 at 5.9%. So the 2.7% is related and affected by the very high level of 2024, and the inflation average is 22.1%.

Just a quick follow-up. This 2.7%, I didn't catch how it's based on the release on the solution from the regulator because at the end, it was just an adjustment for the past. But if I'm not wrong, this is still related to the gross trend of inflation for industrial users.

It's correct. It's correct. They will continue to monitor on a quarterly basis. The releases from step and define the final level in the first months of 2025. At the moment, the assumption is a very high level for 2024.

So, reporters are waiting for us, so we'll take together, if fine with you, Bartek and Virginia.

Just 2 very quick ones, not to take too much time. Firstly, if we can look at OpEx, in the previous regulatory period, there is a certain degree of OpEx underperformance because you are increasing the employment. Now you are talking about increasing the employment further, which will push costs up again. So I wonder is whether in this regulatory period, will we see the same trajectory, meaning there will be a gradual OpEx sort of underperformance increase or there are factors which could somehow offset it. So that's the first one. And second, if we can translate all those EBITDA and EPS numbers into maybe return on capital employed on regulated activities, and on nonregulated activities, what are your targets here?

Yes, I wanted to ask also 2 questions. One would be on the CapEx plan you have presented, if you can tell us a bit if it will be more back-end loaded or how it will be splitting along the years because the average is around EUR 3.3 billion, and you start with EUR 2.6 billion for 2024, okay? So I guess it will be accelerating, but when? And if this FFO to net debt target of 11% that you have set for '28, would that be the bottom? Or could there be years where it may be below that? And then on -- you said that you would be using up your maximum hybrid capacity that you have discussed with the rating agencies. Is that a number that you can tell us where there's additional hybrid issuance capacity could be. And I would also like to know if you would fully roll out a capital increase to fund the plan to 2028.

As far as OpEx underperformance is concerned. In the resolutions that were published in February, there is also the recognition of the Z factor, which is the mechanism by which the regulator will allow further increase in OpEx -- in [ load ] OpEx as far as it is related to an increase of the perimeter of the activities performed by Terna. At the moment in the plan, we are assuming 0 contribution from that again, we are conservative. We -- but obviously, then we don't think that we'll be underperformance. Let's put it this way. So let me turn it the other way around. We are assuming no benefit from the introduction of the Z factor. Then as to the shape of the CapEx curve, it will basically follow the Tyrrhenian Link and transit operation because the Tyrrhenian Link is the biggest project of Terna EUR 3.7 billion and the entrance into operations is foreseen during the current business plan. So it will enter operations spread over years. So mainly in -- most of it will enter into operation in '26 and '27 and a very small part '28. So I think that the CapEx curve will, I mean, kind of grow and then slightly decrease at the end of the plan because of the peculiarity of the Tyrrhenian Link. As to the FFO to net debt, then you would understand the 11% is clearly the bottom. As I said at the beginning, we start from a position where our FFO to net debt revolves around 14% at the moment. So we will use our headroom -- financial headroom and we will get it at the end of the plan to this target, which again, let me stress, is why significantly above the threshold for current trading level. As to the bit capacity, let me put it the other way around. I mean we will do whatever it is needed in order to maintain current trading. So we will raise as much hybrid or any other potential instrument that we need in order to maintain the FFO to net debt above the level that we are targeting. I'm not disclosing the maximum level -- maximum capacity also because for example for [indiscernible] there is no maximum level -- maximum capacity of issurance. It's only for standard. Let me tell you that the amount will be significantly higher than the current one. Let's say, something above -- at the end -- I mean, after regime, we will be more than EUR 2/3 billion -- is probably on our capital market structure -- capital structure. But I mean we don't commit to an amount of hybrid. We commit to maintaining the FFO net debt at the level where we want it to be. The way we will do it will depend on situation. As to the capital increase, I don't know if I can -- I mean the answer is no. We are ruling it out, not because we are not able to it. I mean, we think we could be a potential good target for this kind of exercises. And we were together in a roadshow of Virginia, where we had this discussion with potential investors. But we don't need it necessary. At the moment, issuing Capital, for example, is a much more financially convenient instrument rather than doing a capital increase. So we'll -- we don't need it at the moment. We think that the plan is fully sustainable. Rating agencies are following us, and therefore, we stick to the plan.

So I think last very quick one, but...

So only 1 quick is about the evolution of the main KPI or the financial leverage. So the funds from operation on net debt, your target is -- or your guidance is 11% in 2028. I'm asking more details on the time table on the journey during the plan in '25, '26. What could be the shape of this ratio? And also, if you provide a target or the equivalent about net debt on RAB.

Let me start from here. We don't look at net debt on RAB as a trigger a threshold that can lead our financial structure because mainly we follow the rating agencies. You are all right. In the past, rating agencies used to look at -- ended RAB . It was 2010 up until 2015, if I'm not wrong. Then now they are focusing much more on what they call the cash flow KPIs rather than stock KPIs. So we don't use and don't set our financial strategies on that RAB. So we don't have any guidance to share with you because we really don't look at it as the main KPI. As to the FFO net debt, I'll be very fast because it's almost the same question that [indiscernible] asked for. And we are not providing the level here per year. What I can tell you is that it will decrease because we have -- the good thing of the situation is that we are in a situation where the financial structure give us some headroom because at the moment, we are in the area of 14%, high above 13%. Therefore, we have financial headroom that we will use during the deployment of the CapEx. What I can tell you is that '27 and '28 will be the years where the FFO net debt will indeed go closer to our product target.

So the Q&A session is over. Obviously, any follow-up question, Investor Relations department is at your disposal.

Thank you all.

Thank you.