Terna S.p.A. ($TRN)

Good afternoon, ladies and gentlemen, and welcome to Terna's Q1 2026 Consolidated Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. I'd like to hand the conference over to our host, Stefano Gamberini, Head of Investor Relations. Please go ahead, sir.

Thanks a lot. Good afternoon, everyone, and welcome to Terna's First Quarter 2026 Results Presentation. The call will be hosted by our CFO, Francesco Beccali. And following the presentation, we will have the Q&A session. So we kindly ask you to send any questions you might have to our e-mail address, [email protected]. I leave the floor to Francesco, please.

Thank you, Stefano, and good afternoon, everyone. Let me start by sharing with you the key highlights of the first quarter of 2026. Regarding infrastructure, in Q1 2026, 10 projects aimed at developing the national transmission grid were authorized by the Ministry of Environment and Energy Security and the relevant regional authorities for a total value of approximately EUR 167 million. This confirms our ability to streamline internal processes and our constructive collaboration with the authorities, enabling shorter approval time lines. In terms of execution, let me remind you that in early January '26, the installation of the first submarine cable of the Tyrrhenian Link western branch between Sicily and Sardinia was completed, reaching a record depth of 2,150 meters, below the sea level. In addition, in April, we completed the installation of the eastern section of the Tyrrhenia Link, making the conclusion of submarine works between Campania and Sicily. Finally, in line with the strategic refocusing outlined in the update of our 2024-'28 industrial plan, in February, we signed a binding agreement for the sale of 100% of Terna Peru, as part of the enhancement of our power transmission assets in South America. The transaction is valued at approximately USD 15 million with closing expected by the third quarter of 2026. Coming to finance and confirming once again the group's strong commitment to a business model that reinforces sustainability as a strategic lever for value creation. In January, we issued an EUR 850 million hybrid green bond, achieving a record low subordination premium for corporate hybrid instruments in Europe, below 60 basis points. In addition, in March, Terna signed an ESG-linked Credit Facility agreement for a total amount of EUR 100 million, the facility has a 5-year maturity with an interest rate also linked to Terna's performance against specific environmental, social and governance indicators. On the ESG side, our continuous commitment to sustainability is also recognized externally by different institutional bodies. In the first quarter of 2026, Terna achieved the Top 1% distinction, the highest possible recognition in the Sustainability Yearbook 2026 of S&P Global based on the result of the 2025 Corporate Sustainability Assessment, where Terna ranked first worldwide. In the same period, Standard Ethics, a leading international non-financial rating agency, confirmed Terna's EE+ corporate rating, corresponding to a very strong assessment, positioning the group in the top sustainable range and among the leaders in the utility sector. We have also recently learned that MSCI has upgraded Terna's ESG rating to AAA, the highest possible level, thereby placing the company among the leaders in the utility sector. Moreover, Terna was confirmed in the main ESG indices in which its already included. The STOXX Global ESG Leaders Index, where the group has been listed since 2011. Euronext Sustainable Index and the MIB ESG Index, Italy's blue chip index dedicated to best practices in environmental, social and governance matters. Let me now briefly touch on the evolution of the Italian electricity system. Since the beginning of the year, we have already seen encouraging progress. Starting with renewables, more than 1.6 gigawatts of new capacity have been installed over the last 3 months. Overall connection request remained broadly stable. But more importantly, projects that have been secured, preliminary connection solutions rose to about 84 gigawatt from 79 gigawatt at the end of December. Ready-to-build pipeline also adds up to around 12 gigawatts versus about 11 gigawatt at the end of last year. Turning to storage, around 1 gigawatt-hour of new capacity was installed in the first quarter of the year. In addition, with the decree#95 of 27 of March 2026, the Italian Ministry of Environment and Energy Security approved Terna's proposal for a new MACSE auction for 2029 delivery. Approval of the auction volume up to 16 gigawatt-hour is expected shortly, and the auction is likely to take place by year-end. As of the storage pipeline, overall connection requests remained broadly in line with December level at around 300 gigawatt, while projects that have obtained preliminary authorization increased to around 63 gigawatts, up from 56 gigawatts at the end of December. Ready-to-build projects also increased, reaching around 8 gigawatts compared to 6.8 gigawatts in December. Let's now turn to the overview of the electricity demand evolution moving to the next slide. As you can appreciate in this chart, in the first quarter of 2026 national electricity demand continued to confirm the upward trend observed since last September, reaching around 80 terawatt-hour, up 3% year-on-year. During the period, renewable sources covered about 36% of total demand, improving versus last year when the share was approximately 34%. National net electricity production amounted to around 68 terawatt hour up 4.1% year-on-year and with renewables covering roughly 42% of domestic production from around 41% in the first quarter of 2025. The growth in renewable electricity generation was mainly driven by photovoltaic and wind, which increased their production by 19.2% and 26.3%, respectively. Given the data center deployments are expected to be a key long-term driver of electricity demand, let me briefly update you on data center connection request. As of end March, data center connection request totaled around 83 gigawatt up by approximately 13 gigawatts compared with end 2025, confirming that Italy is increasingly perceived by investors as a reliable platform for energy-intensive digital infrastructure. Turning now to the main figures of the period. In the first 3-months of 2026, the group achieved satisfactory results across P&L lines. Indeed, group revenues and EBITDA rose by 10% and 7%, respectively, equating to increase of EUR 87 million and EUR 46 million compared to the first 3-months of 2025. We also reported a group net income of EUR 277 million, broadly in line with the same period of last year, despite higher IRAP taxation introduced by the energy decree for 2026 and 2027. Adjusting the first quarter 2025 figures for this effect, net income is in the first quarter of 2026, would be up 4%. Group CapEx amounted to EUR 511 million, down 9% versus the first quarter of last year due to a different timing of investments. At the end of March 2026, net debt stood at EUR 12.2 billion, approximately EUR 800 million lower than the value registered in 2025 year-end of about EUR 13 billion, mainly as a consequence of the EUR 850 million hybrid issuance accounted as equity. For a deep analysis of the first quarter figures, let's now turn to the next slide. Revenues posted a significant increase of around 10% in the first quarter, reaching EUR 989 million. Regulated activities grew by 5% to EUR 795 million, while the most significant acceleration was driven by Non-Regulated activities, which rose by over 30% to EUR 194 million. Let me now take a closer look at the evolution of revenues turning to Slide #9. Regulated revenues reached EUR 795 million, with an increase of 5% compared to the same period of last year. The growth was mainly driven by the higher RAB and the recognized depreciation from new assets entered onstream. A change in consolidation perimeter following the acquisition of part of Rome's high-voltage grid from Acea closed in September 2025, and only partially offset by lower fast-money component following the update of the notional capitalization rate for the 2026, '27 regulatory period. No change in revenues, however, arises from the WACC, which remains unchanged at 5.5%, in line with the previous period. Non-Regulated revenues reached EUR 194 million, up 32% versus last year. The Equipment segment grew by around 20%, supported by a strong market environment and higher order intake with both Brugg Cables and Tamini Group as key contributors. Revenues for the Energy Services segment grew by EUR 25 million following also the acquisition of STE Energy in May 2025. Now let's go through operating cost analysis. As you can see in this chart, total operating costs stood at around EUR 291 million, 17% higher than last year. In Regulated Activities, the cost base rose by 11%, mainly due to higher external and other costs. Labor was up by 4%, largely due to a higher average headcount. This increase was mostly offset by higher capitalization. Non-Regulated OpEx dynamics were mainly impacted by higher service costs related to the development of activities in the Energy Services and Equipment segment and higher raw material costs. Let me now analyze EBITDA moving to the next slide. Thanks to the acceleration in revenue, in the first quarter of 2026, group EBITDA reached EUR 698 million, 7% higher than the previous year. The increase was mainly attributable to regulated activities, which contributed for about EUR 26 million more versus last year, showing an EBITDA of EUR 652 million. Non-Regulated Activities EBITDA rose by approximately 80% to EUR 46 million, plus EUR 20 million versus last year. The increase was led by the Equipment business, reflecting both stronger market revenues and margin expansion. Energy Services also reported very strong acceleration, mainly thanks to the consolidation of STE Energy from May 2025. Let's now have a look to the lower part of the P&L, turning to the next slide. D&A amounted to EUR 248 million. The increase versus last year was mainly due to the impact of new assets coming on stream during the period. As a consequence, EBIT reached EUR 450 million, up 4% versus the first quarter of last year. Net financial expenses were EUR 47 million, up EUR 8 million versus last year, mainly reflecting a higher average debt level in the first quarter of 2026 versus 2025, along with higher interest rates on new financings compared to the average cost of existing debt. The cost of debt in the first quarter 2026 was around 2.7%. Taxes stood at EUR 125 million, EUR 7 million higher versus last year, attributable to the higher profit before tax and to the temporary 2 percentage point increase in the IRAP tax rate for '26 and '27. Our tax rate was 31.1% versus 30.1% in the first quarter of 2025. As a result, group net income reached EUR 277 million, broadly in line with the same period of last year, adjusting the first quarter of 2025 figures for higher IRAP tax introduced by the so-called energy decree, net income in the first quarter of 2026 would be up 4%. Moving to CapEx analysis. In the first 3 months of 2026, total CapEx amounted to EUR 511 million, down compared to the same period of last year. Of this amount, approximately EUR 463 million were invested in the Regulated Activities. Among the main projects of the period, it is worth mentioning the Tyrrhenian Link, the Chiaramonte Gulfi-Ciminna power line, the Sa.Co.I.3 and the Adriatic Link. In addition, we should also consider the investments envisaged under our defense plan, which are essential to ensure grid resilience and security, including the installation of synchronous compensators, shunt reactors and damping register systems. As far as CapEx categories are concerned, development CapEx represented 57% of our total regulated CapEx. Defense CapEx stood at 10%, while asset renewal and efficiency was 33% of the total. Non Regulated and Other CapEx reached EUR 49 million. This mainly included capitalized financial charges and other investments. Let me underline that the year-on-year decrease mainly reflects a different timing of investments with spending more concentrated in the second half of the year as well as a higher comparison base in early 2025. Regarding net debt and cash flow analysis. Now turn to the next slide. At the end of March 2026, net debt stood at EUR 12.2 billion, around EUR 0.8 billion below the 2025 year-end level, reflecting our continued discipline in managing leverage. Cash flow generation was around EUR 510 million, enabling us to fund almost all the CapEx spending during the quarter. Let me also reiterate that our financial policy focuses on efficiency and on maintaining a solid, sustainable capital structure. In this context, net debt at the end of March includes the benefit of the EUR 850 million Hybrid Green Bond issued in January accounted as equity. Let's now make a deeper analysis of our debt profile. Moving to Slide 15. At the end of March 2026, the fixed to floating ratio on gross debt stood at around 75%, with an average debt duration of approximately 6 years. In full alignment with the group strategy, Terna aims to position itself as one of the leading players in the sustainable finance market, an approach that was further confirmed in the first quarter of 2026. As of March 2026, senior green bonds issued under our two Euro Medium Term Notes programmes amounted to EUR 3.75 billion. These are complemented by 3 perpetual subordinated green hybrid bond issuances for a total of EUR 2.7 billion, including a third tranche issued in January 2026 of EUR 850 million just mentioned. This latest transaction represents Terna's first perpetual subordinated hybrid nonconvertible European Green Bond issued at a record low subordination premium for corporate hybrid instrument in Europe, below 60 basis points. In addition, Terna can rely on a solid ESG-linked loan structure, including ESG-linked term loans for a total of EUR 2.6 billion as well as 3 ESG-linked revolving facilities key performance indicators for approximately EUR 4.3 billion. This is complemented by a EUR 2 billion commercial paper program providing further flexibility in shorter-termfunding. Before we move to the Q&A, let me briefly highlight that in the current context of rising geopolitical tensions, the expansion of renewables is crucial to strengthening energy independence and helping stabilize electricity price level. The first quarter of 2026, the energy transition advanced further with around 1.6 gigawatts of new renewable capacity and 1 gigawatt-hour of new storages added. Key pipeline indicators also continue to improve, notably ready-to-build projects as well as ones that have already secured preliminary authorization. Regarding targets, given the strong performance delivered in the first 3 months, we confirm the full 2026 guidance shared in March. Thank you for your attention. We are now ready for the Q&A session.

Thanks, Francesco. Let's now open the Q&A section. Okay. We grouped some questions by topic. So let's start with the first one. Can you quantify the contribution from output-based incentive in the first quarter.

In this quarter, there was no contribution coming from OBI. It will be recognized during the year when there will be the certainty in line with the accounting principles.

And what is the level of out-based incentive you expect for the full year and for the next years?

Well, as we already stated in March, for the current year, considering both dispatching and interzonal and including the potential grants incentive, we expect to book over EUR 200 million of incentives overall. For what concerns coming years, let me remind you that in the existing industrial plan update guidance, are based on OBI's assumption of about EUR 900 million cumulated. EUR 360 million more or less of which are accounted in 2024. Mostly of this amount, it refers to the existing output-based incentive framework and only a residual part is related to the new ROSS Integrale scheme. The higher performance that we registered in 2025 should be considered on top of this cumulated amount and not as an anticipation of incentives planned in following years. For any consideration regarding future periods though, including those beyond 2028, i.e., the end of the existing strategic plan, we believe it is appropriate to postpone a detailed discussion later on where we could have greater visibility on the ROSS Integrale incentive scheme, and we also expect to present the new investor plan of the company.

Now could you provide more color on the contribution from fast money in this first quarter and for the rest of the year?

Well, fast money contribution in 2026 grid fee is equal to about EUR 65 million. On the quarter, as the old components of the grid fee, the contribution is regularly split. So for this reason, the fast money impact in the first quarter is about EUR 15 million.

Now moving to regulation. What are your expectation for regulatory developments over the remainder of the year? Do you expect more details on how the full ROSS will work?

But one of the fourthcoming coming decisions, expected from ARERA relates for sure, the potential next steps on the ROSS regulation, which is aimed at further aligning the TSO objective with the overall interest of the whole system. The authority currently provides no information on when the consultation paper, on the ROSS incentive schemes will be presented. So given that the application of the schemes under the existing resolution is also envisaged for 2026 and 2027 period. It is possible that ARERA may open a public consultation process later this year.

Now moving to WACC. What is the mark-to-market 2027 WACC base based on? For what do you expect the regulator could change the bucket of peers?

From a mark-to-market perspective for 2027, the current -- let me remind and restate that the current geopolitical situation and the resulting volatility both in energy and financial markets, as well as in macroeconomic conditions suggest caution in extrapolating any short-term signals. We can express some potential outcomes only in the following months. As part of the consultation process for this interim update or for the whole WACC period renewal, ARERA could revise the current bucket of comparators in case recent trends in the interest rate spread or credit rating may persist. The regulator has not provided any indication today such changes are being considered.

Now moving to the CapEx. Could you explain why first quarter '26 CapEx were down 9% compared to the same period of last year?

The lower CapEx performance in the first quarter of 2026 versus the first quarter of last year reflects a different timing profile as we stated in the presentation, with investments more concentrated in the second half of the year and also a base effect due to spending anticipated in the first quarter of 2025. This is mainly reflected in different relevant mile stones in the Sa.Co.I.3 project for example and in the synchronous compensator plan, all included in the security plan. Nevertheless, let me be clear on the fact that we do confirm the full year investment guidance.

Could you comment on the 10 year project authorized in the first quarter '26 at least in addition to the EUR 17.7 billion CapEx plan. When are they expected?

Some of these projects are part of the 2024-'28 CapEX plan, only a remaining part concerns projects after the business plan horizon. Let me remind you that all these projects account for a total amount of EUR 167 million.

Now moving to the Non-Regulated activities growth. Should we consider a growth trend in the remaining part of the year similar to the first quarter?

Well, Stefano in the first quarter Non-Regulated activities recorded a very strong acceleration with EBITDA up by more than 80%. As we said, the increase was led both by the Equipment business, reflecting a very dynamic market and the Energy Services thanks to the consolidation of STE Energy. However, the trend of growth could not be taken as a reference for the full year results. In -- from this perspective, we remind you that we expect a low double-digit growth in Non-Regulated Activities EBITDA in 2026.

Could you comment on how the current geopolitical situation may impact Terna CapEx and earnings plan, you think the investment opportunities have improved following the Middle East conflict?

The current geopolitical situation in Middle East does not entail any direct impact on Terna. This is primarily due to our regulated nature, with a regulatory framework that provides strong visibility on returns and offers protection against inflation. In addition, our investment plan is focused on domestic infrastructure, which significantly limits our exposure to international volatility in general. That said, we do acknowledge that geopolitical tensions could have some indirect effects, particularly on the cost of certain key materials and on supply chain dynamics. For these reasons, we have already put in place mitigation measures and [indiscernible] project time line and preserving capital expendiuture discipline. In conclusion, let me remind you that about 90% of our CapEx plan is covered by existing procurement contracts. Looking at the broader system level, the current scenario further reinforces the strategic relevance of the energy transition and of the grid development. It highlights the need to accelerate progress towards energy independence. In Italy, today, this can only be achieved by focusing on renewables and green grid investment.

Now about the IRAP tax expectation, do you think there is a risk of an extension beyond 2027?

For what concerns IRAP, the decree foresees the application of additional 2% taxation only for 2026 and '27, and this is the only financial impact on Terna current accounts.

Where do you expect net debt to land by year-end?

Considering the hybrid issuance and based on the guidance provided on CapEx and net profit, we expect an increase of net debt at the end of 2026 which would be slightly below the one registered in '25.

Okay. And are you planning any further hybrid bond issuance in the next 12 months?

Well, as always, let me state that our balance sheet is currently solid and does not require an increase in the outstanding hybrid component. At the same time though, the company maintains a flexible and opportunistic approach and at evaluating potential market opportunities.

Considering the significant volumes of investment envisaged for 2026, do you see a need of any action to better underpin your balance sheet solidity?

Let me be very clear on this point. Our financial position will remain solid also in 2026, also thanks to the hybrid issuance completed in January. In this respect, let me also reiterate that our CapEx plan through 2028 is fully sustainable from a financial standpoint. This has also been clearly confirmed by the rating upgrades that we received in 2025 from both Standard & Poor's and Moody's, following similar rating actions that occur to the Italian sovereign, and these decisions reaffirm the strength of our capital structure over the business plan horizon without the need for additional financial instruments. That said, if it will be required as of today, the range of flexibility tools that we could consider includes, on the one hand, the remaining hybrid issuance capacity as well as the possibility of securing additional public contributions to further strengthen the financial structure and also evaluating options to monetize our Non-Regulated Activities.

We have the last question remaining. What could we expect -- sorry, when could we expect Terna to publish an update of the business plan? It is realistic to expect it is already in H2 '26?

Well, according to our 2026 financial calendar, the new industrial plan is expected during the second half of the year. Any update on the date of the industrial plan presentation will be communicated to the market through an update of the financial calendar, also considering the renewal of the Board that is going to be formalized in the next assembly on May 12.

Very well. Thank you, Francesco. We completed our Q&A. So we think that we addressed all the main topics. And as always, the Investor Relations team is available for any follow-up or additional questions you may have. Thank you for joining our presentation and have a great evening.

Thanks, everyone. Bye-bye.