U.S. Markets closed

Edited Transcript of TRN.MI earnings conference call or presentation 21-Mar-19 9:00am GMT

Full Year 2018 Terna Rete Elettrica Nazionale SpA Earnings & 2019-2023 Strategic Plan Presentation

Milan Mar 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Terna Rete Elettrica Nazionale SpA earnings conference call or presentation Thursday, March 21, 2019 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Agostino Scornajenchi

Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO

* Catia Bastioli

Terna - Rete Elettrica Nazionale Società per Azioni - Chairwoman

* Luigi Ferraris

Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director

* Omar Al Bayaty

Terna - Rete Elettrica Nazionale Società per Azioni - Head of Investor Relation

================================================================================

Conference Call Participants

================================================================================

* Anna Maria Scaglia

Morgan Stanley, Research Division - Research Analyst

* Bartlomiej Kubicki

Societe Generale Cross Asset Research - Equity Analyst

* Dario Michi

Fidentiis Equities S.V.S.A., Research Division - Analyst

* Enrico Bartoli

MainFirst Bank AG, Research Division - MD

* Javier Fernandez Garrido

JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst

* Javier Suarez Hernandez

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Stefano Gamberini

Equita SIM S.p.A., Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Unidentified Company Representative, [1]

--------------------------------------------------------------------------------

(presentation)

Good morning, everyone, and welcome to Terna 2019-2023 Strategic Plan presentation.

We are very proud to all see you today in Milano. I'd like to thanks also people following us from the web. Today's agenda includes description of new strategic targets as well as the presentation of 2018 full year results. And finally a Q&A session.

Let me remind you that reporters are following our presentation from a room nearby.

Now we are ready to start. So let me introduce Terna's Chairwoman, Catia Bastioli, who will kick off; the CEO, Luigi Ferraris; and the CFO, Agostino Scornajenchi. Thank you.

--------------------------------------------------------------------------------

Catia Bastioli, Terna - Rete Elettrica Nazionale Società per Azioni - Chairwoman [2]

--------------------------------------------------------------------------------

Good morning, ladies and gentleman, and welcome to Terna 2019-2023 Strategic Plan presentation. The Club of Rome, the first global think tank of sustainable development, which has become known throughout the world with their effort of 1972, The Limits to Growth, one does about the risk of a development without boundaries with forecasts that today turned out to be perfectly centered.

When the Club of Rome was founded, there were 3.5 billion human beings on the planet. Today, there are 7.6 billion. The forecasts are of 9 billion for 2050. The concentrations of greenhouse gases in the atmosphere have increased from 322 to 403 parts per million. The growth of products volume takes place at an impressive rate less in congested to plastics, reaching more than 300 million tons per year -- this year, with the forecast of 1 billion for 2050. It means that we were in an empty planet and today, we are in a full planet. The global environmental crisis has been joint in the last 2 decades by the financial, industrial and social crisis. The current economic system is not resilient and certainly, is not circular. The 2018 IPCC report published in October 2018 is far from positive and the planet, despite decades of discussion on the subject, continues to see increase in emissions, destroying resources and the social fabric, which is equally relevant. There is a growing awareness that climate change and biodiversity are 2 sides of the same coin. Over 4,000 species worldwide have decreased by 60% since 1980. The oceans had warmed up by 40% faster than previously thought. Also for these reasons, we have the duty to accelerate this past and multiply the cases of integrated value chain that start from the diversity and the specificity of the territories, also developing the ability to monitor the results on the field.

This is an extraordinary opportunity not to be missed to overcome the business as usual and decarbonized economy, trying to solve the problems of degradation of ecosystems where it is still possible and including the communities.

The keywords for this accelerations are 3: transforming; regenerating; contributing. We need transformative technologies that can transform business as usual and also integrated projects able to regenerate resources, relying on a contributive society in which it is clear that we must give more than we expect to receive. All this requires an unprecedented individuals and collective responsibility with the change of mindset that must take place in the shortest time if we still want to affect the events.

The global energy system plays a key role in this change model. With a quick evolution from centralized to widespreads, 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, starting from the absence of inertia of the system itself, the growth of energy demand, the energy independence, the resilience of systems to increase in extreme climate conditions, the effect on agriculture, industry and communities.

At EU level, the climate energy package, the alignment of the European authorities and the transmission system operators as well as the national plans are helping to implement concrete projects of change today.

Terna has demonstrated in the field that it is able and wants to play a central and third-party role in this cultural revolution around the national and European electricity system. The weapons of Terna are the significant investments already planned and strengthened as we are going to see from the plan that today will be presented, oriented to the innovability of the electricity grid in which aspects of innovation and sustainability are integrated and inter-penetrated. Accelerating the conversion process means promoting interconnection breaches with other infrastructures of the country.

Let's think, for example, of agricultural water or the hydrogeological problems and the possibility to turn these challenges into concrete opportunities. Accelerating also means connecting small and large innovation realities through common projects, developed in the field that encourage business biodiversity, another essential ingredient to change the development model. It means rethinking the boundaries and processes of innovation by playing extensively the games of digitalization of owning provisional and monitory models of the aspects of strengthening the network resilience in the face of increasing intensity or natural phenomena and the diffusion and micronization of sources as well as their bidirectionality.

Accelerating, moreover, means that being aware of the fact that this revolution will be such, if we have the local communities by our side. Because only by promoting the cases of territorial regeneration, so that they prevail over those of degradation. We will have the chance to redesign our society with roots in sustainable territories, making it more inclusive, contributory and a place where big and small realities could find a first space.

Lastly, accelerating for Terna means that paying a great attention to people, Terna's people, an extraordinary asset of the company, because without the ability and willingness of each of us to overcome business as usual outside the comfort zone, our comfort zone, the selection process that we need will not be achieved.

In this regard, Terna continues to be strongly committed on sustainability that will be more and more important in our day-by-day life and management actions. For this reason, we announce our effort, committing ourselves of specific sustainability key performance indicators integrated in our strategic plan. Just to mention some examples. We target 100% of operative employees to receive a special training on health and safety issues by 2021. Moreover, the target number of employees selected to be trained on digital competencies is 700 to be reached already in 2020.

Regarding suppliers, the share of them requested to have certified environmental and safety-at-work management systems is expected to reach 100% in 2020.

As far as environment is concerned, during the planned horizon, new invisible cables will represent the 60% of the total new lines in order to reduce environmental and social impact of the infrastructure. These key performance indicators represent also a way to mitigate the long-term risk profile of the group, monitoring not only economic and financial aspects, but also environmental, social and governance performances.

Now I'll leave the floor to Luigi Ferraris for 2019-2023 Strategic Plan. Thank you.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [3]

--------------------------------------------------------------------------------

So thank you, Catia, and welcome again to Terna's 2019-2023 Strategic Plan presentation. The energy transition process that we discussed last year is not only confirmed, but has even moved faster than expected, as Catia already anticipated and as I am going to illustrate you more in detail.

At global level, an unprecedented transformation of the energy is underway and the electricity vector is going to increasingly lead the overall economic scenario. Moreover, renewable resources growth, the phasing out of fossil fuel as well as future energy efficiency policies will have an increasing impact in the near future. As a consequence, the electricity vector is set to play a larger role in the global energy system. As you can appreciate from the chart, global demand is expected to increase by 60% versus now-a-days level. Along with this, renewables share on electricity generation mix will move from 25% to 41% in 2040.

Indeed, access to reliable and affordable electricity capital with environmental targets will represent the center pillar for future global actions.

Increasing global electrification and renewables generation capacity to be integrated will entail higher needs for grids investment. As you can appreciate from the chart, in the next 2 decades, about $20 trillion will be invested in the power sector globally, mainly to enhance renewable sources and grid infrastructures. As you already know, these investments are almost equally split between the 2 categories. Every euro spent in new renewables capacity will entail more than EUR 1 in grid infrastructures and grid-related services. Therefore, the ongoing energy transition as well as global racemization targets will call for relevant acceleration on grid investment.

In Italy, this transition is already ongoing. Renewables growth register in the last 10 years impacted significantly on the electricity system management. As shown in the chart, installed photovoltaic capacity to reached about 20 gigawatts compared to 0.5 gigawatts of [28], while wind capacity reached already about 10 gigawatts compared to 3.5 gigawatts of 2008. And this trend is expected to continue with the target photovoltaic and wind store capacity of 51 and 18 gigawatts, respectively, by 2030.

Consider that already in some hours of 2018, renewables cover more than 80% of the demand. At the same time, the significant reduction of conventional thermal capacity is progressively entailing a potential growing impact on the quality of the service. All these variables brought into the system increasing adequacy issues as indicated by the declining trend of the reserve margin registered throughout the past years. This overall framework is putting the system under pressure and is creating new challenges that will translate into opportunities, thanks to our managerial actions. The overall scenario just illustrated is therefore putting under pressure the main pillar of the TSO mission. In particular, these pillars are security or either capability of the system to deal with unforeseeable events; resiliency, the ability of the system to withstand grid stresses; efficiency, guarantees security, adequacy and quality of the services at the minimum cost; adequacy, to meet the expected demand in any condition; sustainability and finally quality. That means ensuring continuity of the surface.

People, regulation as well innovation and digitalization became key to put in place a set of managerial actions. These actions will turn this pressure into the opportunity of playing a leading role for a sustainable energy transition, leveraging innovation, skills and distinctive technologies with the goal of generating value for all stakeholders. In other words, we will continue to follow our mission through an effective approach on sustainability that is a fundamental part of our day-by-day business management and a growing factor that contributes to the achievement of our objectives. A deep knowledge and a cost of presence goes to local communities to facilitate a dialogue with all the relevant stakeholders and build up solid, friendly and collaborative relationships, the increase of Terna's people core competencies as well as the creation of new relevant skills.

An innovation plan that will make it possible for Terna to become innovation frontrunner, coping with the constant evolution of the electricity system.

Let me know be more detailed in the strategy moving to the next slides. The mission just outline will be developed on the basis of 3 strategic guidelines and will be supported by 2 enabling factors. More specifically, domestic regulatory activities are confirmed as a key priority. We will play a leading role in the ongoing energy transition, focusing on the execution of the Italian grid reinforcement projects.

Regarding domestic nonregulated activities, we will continue to develop new value-added products and services. Concerning international, we will finalize ongoing projects leveraging our industrial know-how. Moreover, innovation and digitization will be even more important and will support us in the path of enabling the energy transition. But people are a fundamental asset. We will continue to strengthen our core competencies and develop new skills in order to enhance an open-innovation approach.

Let me now spell out each of the 3 strategic guidelines, starting from domestic regulated activities. Indeed, we will accelerate on relevant investment, driven by system needs, playing a leading role in managing system complexity. We will also continue to enhance our core competencies, optimizing control of projects and guaranteeing process efficiency.

In addition, dialogue and collaboration with stakeholder will become a relevant tool to extract value from and for local communities.

Focusing on the Italian grid reinforcement.

Well, over the next 5 years, domestic regulated CapEx will reach about EUR 6.2 billion, that represents the highest investment level ever recorded by Terna. This is driven by the resolution of network constraints, development of interconnection, new projects for resiliency and sustainability increase while strengthening the digitization and innovation plan.

This CapEx acceleration will also drive a robust RAB growth with a compound annual growth rate higher than 4% over the plan period versus 3% of the old plan. Thanks to this, our asset base will reach EUR 18.5 billion in 2023. Mind that the share of work in progress on total calendar RAB will be single-digit during the plan period, following the CapEx curve and the entry into operation of main projects.

Let's now have a look at the evolution by category, turning to the next slide. Development CapEx will reach about EUR 3.3 billion accumulated over the planned period, about EUR 0.5 billion more versus previous plan. Most relevant projects are the Sardinia-Corsica Italian Peninsula connection, the debottlenecking of critical zones as well as the rationalization of major metropolitan areas. This investment will enable us to develop more than 1,500 kilometers of new lines. As for renewable and efficiency CapEx, it will be about EUR 2.2 billion, EUR 300 million higher than the old plan. We will focus mainly on the acceleration of asset replacement projects and grid digitization. We will also implement more sustainable solution and materials. In this regard, it is worth mentioning the replacement of more than 100 kilometers of all oil-insulated cables. We will also be focused on the introduction of new technologies for cable monitoring and new predictive maintenance technique to improve quality of service.

In addition, the defense plan is foreseen at EUR 0.9 billion accumulating, EUR 200 million more than the previous plan, mainly for the development of technological devices aimed at enhancing grid stability.

Over the planned period, we will be able to install 16 new synchronous compensators.

Let me now have a focus on the main development projects. The ongoing transformation of the Italian system will be supported by Terna through a strong, solid and safe development CapEx plan. The projects, including the new plan, will be focused mainly on the increase of cross-border interconnection on the debottlenecking of critical areas such as main islands and internal backbone and on the increase of resiliency. Moreover, mind that, in the first years of the plan, almost all the CapEx is already being authorized. In details, 94% in 2019 and about 70% during the plan period. Furthermore, concerning procurement, it is important to highlight that most of the plan period requirements are covered by contracts or tenders already in place. In details, 65% in the plan period, about 100% if referred to 2019.

Within this context, let me remark the positive and constructive cooperation with the regulator, that is one of the fundamental assets for the development of our strategy.

Moving to domestic nonregulated. Well, we will continue to reinforce our position as energy solution provider, developing high value-added services for energy players, enabling additional digital applications. Regarding connectivity, we will scout new business opportunities, leveraging the dark fiber infrastructure. Concerning to Tamini, we will consolidate the company growth and enhance its contribution to group's profitability. Our business proposition here is to leverage these activities to serve our regulated operations thus contributed to the energy transition.

Domestic nonregulated activities will generate accumulated EBITDA of about EUR 400 million in 5 years, EUR 50 million increase versus the previous plan. Regarding our services portfolio, this includes EPC and our [M4 third party's] energy efficiency solution, also leveraging Avvenia [know-how], the development of new mainframe solution for renewals plant as well as the supply of innovative digital services.

Regarding connectivity, we will remain focus on the dark fiber business and ousting of TLC equipment.

As far as the interconnected projects are concerned, we confirm our full commitment for the completion of Italy-France and Italy-Montenegro lines and for the construction of Italy-Austria line. According to the interconnected rules, the private portion of each line is taken over by a specific private investor who have the right to use each line for a certain period and -- by specifically, 10 years. And after that, the project will be returned into turnaround, creating further value in the long term.

Moving to international. As far as international activities are concerned, in Europe, we will continue to play an active role on TSO governance to support the European Union and the achievement of the energy and climate targets for the energy transition through a reinforced relationship with the main European TSOs as well as within ENTSO-E association.

Last year, we launched a new organizational structure to support our international activities. In Latin America, we will remain focused on the completion of existing projects while scouting for potential low-risk profile opportunities to optimize our presence in the region.

In other geographies, we will offer capitalize services that will include technical assistance and energy solution with the high strategic value and low capital absorption. Our guidelines, will remain limited capital expenditure and low-risk profile.

Few words about the status of the projects. In October, 2 months ahead of the scheduled time, the first of our 2 Brazilian projects, the 158 kilometers long infrastructure, located in Rio Grande do Sul, entered into operation. The project that have seen the involvement of 10 companies and 500 technicians working during the 12 months of construction is considered of significant importance for the region as it allows for the integration of energy generated by wind farms in the south of Brazil into the Brazilian transmission grid.

With over 80% of electricity produced from natural resources and with the wind production have an increase by 20% in the last year, Brazil currently represents the largest Latin America energy market and is among the top 5 in the world for its development potential.

Going forward, in Brazil, our second construction is the 500-kilovolt, 350 kilometers long power line in Mato Grosso. The project is currently in the commission phase and will enter into the service by the second quarter of this year. Just tonight, we have run into the first energization of the project itself. In Uruguay, Terna is moving forward with a construction of 500-kilovolt power line extending 213 kilometers. The new line will increase the efficiency and the security of the Uruguay national electricity grid, promoting great energy diversification and supporting the integration of renewable production from wind and biomass. We expect the project to be completed during the second half of this year.

In Peru, we are building up the new 138-kilovolt power line, extending for 132 kilometers. And again, here, the completion is expected in the second half of 2020.

Considering the above mentioned projects under execution, residual CapEx is in the region of EUR 50 million. While on projects to be identified, we commit ourselves for a potential maximum capital allocation of EUR 300 million. Cumulated EBITDA in 5 years will be equal to EUR 150 million, including the contribution coming from financial income related to the project in Uruguay.

Let's move to the enabling factors. Innovation and digitization will enable us to improve security and efficiency of transmission and dispatching activities.

Regarding digitization, we will continue to develop the fiber for the grid projects and innovate the transmission operating activities through asset digitization. In this regard, we aim at covering the grid with sensors, data collection infrastructure, data processing platforms and advanced analytics. In addition, we will also promote the digital transformation of internal processes and the involvement of our people through new digital spaces and smart offices.

Regarding innovation, we will identify new trends and define new portfolio initiatives such as drones, robots and satellites for grid monitoring. Moreover, we will also strengthen the industrial vision on innovation through open-innovation initiative and the launch of new innovation hubs in our main transmission-operating assets. Specifically, innovation hubs will aggregate business know-how, startups, academics and local research centers to develop and test innovative solutions. With this purpose, we will invest about EUR 700 million accumulated during the plan period, all included in regulated CapEx, primary focused on our domestic regulated activities.

Let me now talk about our second enabling factor, moving to the next slide. People. People are key and will remain at the center of Terna's group. The ongoing transformation will call for a new mindset, therefore, investing in reskilling and upskilling of our people will remain strategic to strengthen even more our core competencies and create new capabilities with training systems that quickly react to changing job requirements.

Indeed, in 2018, we already provided 55 hours of training for employee with the coverage ratio of 100% of resources with a main focus on digital skills and safety. In 2018, to support talent acquisition, we signed 17 partnerships with primary University in Italy and abroad, and we organized 30 recruiting and career-based events. All of our action will be based on our values. Specifically, loyalty is crucial to build relationship with our stakeholders based on trust, integrity and transparency, passion, which allow the integration of different know-hows through collaboration and proactively develop a new solution. Responsibility, that drives us to ensure security of supply in an affordable and sustainable way.

Now let's talk about numbers. Thanks to all the managerial actions just illustrated, the group's EBITDA will move from EUR 1.65 billion to more than EUR 2 billion in 2023. Regulated activities will contribute to about 80% of this increase. Input-based incentives reduction work-in-progress effect will be more than compensated by the higher recognized weighted average cost of capital and the CapEx increase. On top of this, nonregulated and international activities will generate the residual 20% of the additional EBITDA.

Before having a look on the full guidance for 2019 and 2023, let me express my full satisfaction for the excellent 2018 results that register growth in all profit and loss light. This is the outcome for the relevant effort of all of Terna's people and by the way, some of them are here well-represented.

We expect 2019 revenues at about EUR 2.3 billion and 2019 EBITDA at about EUR 1,720,000,000.

In 2019, we expect CapEx at EUR 1.2 billion in acceleration versus 2018. And during the time period, cumulated CapEx will reach EUR 6.8 billion.

2019 EPS will reach EUR 0.36 and concerning 2023, we expect revenues at about EUR 2.7 billion. EBITDA at EUR 2 billion, 21% increase versus 2018 and EPS will reach EUR 0.42, which means 7% -- $0.07 higher than 2018.

Regarding 2018 figures and 2019, 2023 group targets, I will now leave the floor to our CFO, Agostino Scornajenchi, for a deeper analysis.

Thank you. Agostino?

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [4]

--------------------------------------------------------------------------------

Thank you very much, Luigi, and good morning, everyone. First of all, 2 main figures: net income up EUR 707 million; and total group CapEx at EUR 1,091 million, respectively 3% and 6% more versus last year. I believe that this is the best way to outline Terna's capability to accelerate on the realization of grid infrastructures. While at the same time, ensuring excellent value to our shareholders. As you may appreciate, these figures represent solid ground to support the growth of the group for the coming years.

Moreover, revenues were up by 2% and EBITDA by 3%. Notwithstanding CapEx acceleration, we were also able to keep the net debt under control at EUR 7.9 billion, not far from 2017 year-end level.

All this main figures are fully in line with the provided guidance, demonstrating again, Terna's commitment on the execution of its plan.

So let me now start a deeper analysis of the figures. Regulated revenues reached EUR 1,990 million, EUR 22 million better versus last year. This increase was mainly due to the recognition of higher transmission and dispatching efficiencies, mostly due to some oneoff components related to dispatching activities. Nonregulated revenues stood at EUR 207 million, EUR 12 million higher than last year. The growth was mainly due to the increase in contribution from Tamini that continues the path to recover its marginality and international.

Now let's go through operating cost analysis at Page 31. We reported regulated OpEx of EUR 403 million, EUR 22 million lower than last year, mainly thanks to LIBOR and external cost reduction.

Regarding nonregulated, operating expenses amounted to EUR 143 million, EUR 10 million more than last year, mainly due to higher Tamini's volume of activity and the full integration of Avvenia.

Let's now move onto the EBITDA analysis. Considering the above mentioned effects, group EBITDA reached EUR 1,651 million, EUR 47 million better than last year. This increase was mainly due to the positive EBITDA contribution coming from regulated activities, which grew by EUR 45 million, reaching EUR 1,587 million.

Let's now move on the lower part of the profits and losses. Depreciation and amortization amounted to EUR 554 million. The increase versus last year was mainly due to new assets becoming operational. As a consequence, EBIT reached EUR 1,097 million, 1.8% better than full year 2017.

Reported net financial expenses at EUR 89 million, in line with the same period of last year. Taxes stood at EUR 296 million with the tax rate of about 29% as expected.

Consequently, after the exclusion of EUR 5 billion of minorities, the group net income reached EUR 707 million, 3% higher than last year and better than the provided guidance.

Moving to cash flow and net debt evolution. Net debt at the end of 2018 was EUR 7,899 million, EUR 103 million higher than 2017 year end. Thanks to the strong operating cash generation of about EUR 1.2 billion, we were able to more than cover the CapEx spending over the period.

Moreover, let me also analyze the Green Bond issued in July 2018 for EUR 750 million with the bid-to-cover ratio of approximately 6x as well as a afforded Green Bond launched in January 2019 in a private placement format for a total amount of EUR 250 million, both with the cost of debt below 1.1%. Overall, cost of net debt at the end of 2018 was 1.3%.

Well, after the explanation of our strong 2018 starting point, let's now move to 2019-2023 group targets and move to Page 36. Let me first spend a few words on the main regulatory assumptions. Indeed, 2018 was an important year for the regulatory context in which we operate. At the end of last year, the new board of authority set the values of the regulatory weighted average cost of capital formula parameters, fixing our allowed return at 5.6% for the period 2019, 2021. This provided us full regulatory continuity and represents a strong increase versus previous plan.

On top of that, during last year, the output-based scheme was totally defined through resetting of a maximum Cap of EUR 300 million as output-based contribution for the plan period. These 2 elements helped us to increase visibility of our regulatory horizon over the medium term, transforming the regulatory framework into an important enabling factor for our actions.

Regarding TotEx, consultation is ongoing. In any case, the potential versus implementation is expected after 2022. Regarding the assumptions about TotEx, the plan is based on a continuity with the previous plan. We expect revenues and EBITDA to increase annually by more than 4% on average, reaching about EUR 2.7 billion and about EUR 2 billion respectively, in 2023.

Domestic core regulated activities will stay above 90% of group EBITDA. The remaining portion will be provided by the contribution of domestic, nonregulated and international activities. Thanks to the solid results, we can target a more than 3% EPS yearly average growth up to 2023.

Thanks to our managerial actions, EBITDA growth will be supported also by operational efficiencies.

Indeed, despite the relevant increase of the asset base, we will be able to decrease OpEx on 1,000 equivalent assets from EUR 9.7 million in 2018 to EUR 8.9 million in 2023, maintaining at the same time the ratio between headcount on kilometers of lines at 5% over the plan period.

Our EBITDA will also benefit from external cost efficiency. Indeed, by the end of the plan, we will be able to reduce regulated external cost by about 15%. This result will be obtained, mainly thanks to the insourcing of activities, digitization efforts and rationalization of relevant processes.

Moving to financial efficiency and financial structures. Thanks to our actions within the plan, we will be able to provide also financial efficiency and maintain a solid financial structure.

Financing cost will be kept fully under control. Indeed, the average cost of net debt during the plan is expected at 1.6% with the back-end loaded profile and in line with previous plan. Moreover, mind that, at the end of 2018, the fixed rate portion on our gross debt was close to 100% while maturity was slightly above 5 years, again, in line with what we presented last year.

In addition, it is worth also mentioning that our financing needs are substantially covered up until 2021. As far as main financial ratios are concerned, this will be kept at a fully sustainable level in compliance with our rating agency thresholds. FFO over net debt ratio is expected to be kept higher than 13% over the plan period.

I will now leave the floor to Luigi for the new Dividend Policy and the closing remarks. Thank you.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [5]

--------------------------------------------------------------------------------

So thank you, Agostino. And let me conclude the presentation with our new Dividend Policy and some closing remarks. As you saw, the group generated a solid sets of 2018 results as well as the sound financial position, we are, of course, fully committed to create a strong growth for the future through specific and managerial actions. Therefore, we enhanced our shareholder value through a tougher growth and an improved Dividend Policy. Specifically, we start from 2018 DPS at EUR 0.23, then for the years from 2019 to 2021, we offer a higher DPS compound annual growth rate of 7% versus the 6% of the Dividend Policy presented last year. We also increased visibility. Indeed, for 2022 and 2023, the Dividend Policy will be based on a 75% payout with the floor at 2021 DPS level.

Let me now spend a few words on closing remarks. As you appreciated from this presentation, we will be focused on execution and speeding up of domestic regulated activities to play a leading role in the energy transition process and generate further benefits for the Italian system, always taking care of local communities and sustainability.

Nonregulated activities are providing a supported contribution to the business, enabling us to create innovative new value-added solution, to support our core regulated business. Our international projects are related to the execution and the execution is ongoing as expected, always leveraging Terna's know-how and with a limited capital absorption.

Digitization and innovation will be key also to drive operational efficiencies. Thanks to our strong managerial efforts and the positive set of results, we will be able to maintain a solid financial structure and generate further value for all of our stakeholders, offering our new enhanced Dividend Policy.

Finally, let me conclude by accessing that the true game-changer of this story will be innovation, digitization and our people, Terna's people. I'm strongly convinced that altogether, we will be able to work to energize available future.

Thank you for your attention and now let's go over the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Omar Al Bayaty, Terna - Rete Elettrica Nazionale Società per Azioni - Head of Investor Relation [1]

--------------------------------------------------------------------------------

Let's start the Q&A session. Please state your name and company name before asking the question. Javier?

--------------------------------------------------------------------------------

Javier Fernandez Garrido, JP Morgan Chase & Co, Research Division - Head of Utilities and Senior Analyst [2]

--------------------------------------------------------------------------------

Javier Suarez at Mediobanca. Three questions on my side. The first one is on the CapEx plan. I think that the new management of the company presented last year a significant increase in the CapEx plan. I think it was plus 30%. This year, again, the CapEx plan has been increased significantly. Can you explain us the reason for that? What do you see in the system that implies significantly higher CapEx for Terna? And the reason for that is, is there any specific project that is -- that justifies that increase on CapEx? And extending the visibility to the next 10 years, if you believe that the CapEx plan that you have been presented, that is EUR 1.2 billion of CapEx per year, is something that we can assume is sustainable for the next 10 years or so? Do you see a structural need of higher CapEx in the network? That is the first question. The second question is on the contribution from the output-based incentive. I think that on the previous business plan, you assumed EUR 100 million of higher contribution from this incentive. What do you include in this new business plan as output-based incentive? And the third question is on the non-traditional activities. I think that you have been increasing the contribution from EUR 350 million to EUR 400 million, if you can explain us the reasons for that.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [3]

--------------------------------------------------------------------------------

Thank you, Javier. Well, let me start with the first and second, and then I'll leave to Agostino the third. Well, first of all, let me tell you that the acceleration is coming basically through the -- from the new requirement of the system. So we have updated the system needs and therefore we have increased our CapEx program. It's mainly due to solve the natural constraints, which is something that -- of course, it is expected also to increase if we are going to have an acceleration, as we are going to have, into the renewables. The finalization, the developer interconnections, increased grid resiliency. Let's not forget that we have to accelerate the investment also to face new climate changes which are more and more extreme versus what was the old normality, and sustainability. We have also updated our investment into innovation and digitization. Last year, if you remember, I spoke about EUR 600 million of investment. This year, we are talking about EUR 700 million. And this is again is a consequence of what is required from the system. So this year, I think as I said at the very beginning, the change in the system not only are confirmed but are even more accelerated. That's why we have updated our plan in this regard. Specifically, basically, EUR 400 million out of the EUR 900 million in the regulated business will go for development plan, EUR 200 million for defense, EUR 200 million for maintenance plan, and as I said before, EUR 100 million on digitization and innovation. Now is that sustainable, this path? First of all, as I said during the presentation, I would say that this plan is even more robust than the previous one if we wanted to make a sort of comparison, first of all, because last year, when we presented to you the plan, we said that 65% of the projects included in the plan were already authorized. This year, the average is 70%. The other major challenge will be the procurement because we are not the only one accelerating the plan, but also in Europe there is a strong acceleration. Just think about Germany, the announcement that they have made. So it is key to work on the procurement side. And as I said, 2019 is fully locked in, and I think we are also in good shape when it comes to the following years. So we are covered for about 70% in terms of procurement. It is sustainable. It is sustainable also in terms of internal forces because in the meantime we have adapted our organization, we have focused our organization, and we have also increased the workforce and investing a lot in developing or vetting, internal competencies. The second question about the output base, last year, we had incorporated about EUR 100 million in terms of output base. You might recall that last year I said even if the potential for the output base is -- was at the time in the region EUR 200 million, we feel more confident and prudent to stick to what is -- it is feasible and, in some way, preliminary agreed with the authority, or at least the project that we are confident that they would fit with the new rules regarding the output base. This year, the authority is upgrading the potential up to EUR 300 million. We have incorporated EUR 200 million in our analysis. In particular, the vast majority is at the end of the period because, of course, we talk about project that we are starting now and that will be delivered at that very moment. And at the end of the plan, you can also take advantage of the new regulation. Third question, Agostino.

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [4]

--------------------------------------------------------------------------------

Third question regarding non-regulated activities. As you have heard during the presentation, we start to have back coming contribution -- increasing contribution from Tamini. That is a good news. In addition to that, the different business lines composing our non-regulated sector are confirmed. Talking about TLC, grid infrastructure, hosting innovative services. We see a substantial increase coming from the TLC business, okay? As you know, we leverage on our existing infrastructure and we operate in the business of dark fiber. We use this fiber for our internal purposes, but we also have the possibility to sell, to rent this fiber to TLC company and to third operators that need these kind of connections. And it's adding a bit of marginality to our P&L in this business line.

--------------------------------------------------------------------------------

Omar Al Bayaty, Terna - Rete Elettrica Nazionale Società per Azioni - Head of Investor Relation [5]

--------------------------------------------------------------------------------

Next question. Dario?

--------------------------------------------------------------------------------

Dario Michi, Fidentiis Equities S.V.S.A., Research Division - Analyst [6]

--------------------------------------------------------------------------------

Dario Michi, Fidentiis. The first question is a follow-up on Javier's question on the sustainability of the CapEx plan. Do you have any update on the 10-year initial investment plan and the rumored EUR 12 billion of investment reported by the press? The second question is on the capacity market, if you have any news on this element. And then regarding international -- the international strategy based on low capital absorption and low risk profile, are you looking for a new partner on the international activities? And lastly, it's clear, the strong commitment for the dialogue with local territories. Is there a direct impact with the high percentage of projects already authorized, and thus, the speed up of the CapEx program?

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [7]

--------------------------------------------------------------------------------

So let me take the question related to Latin American and the capacity market, and then I leave to Agostino. Well, you read on the press that we have -- I read personally that we gave -- we are given a sort of mandate to look for a potential partner. The point is that today we have no deal, no discussion with anyone. The point is that we are open if there is a possibility to have a partnership with some long-term investor, financial investor. This is open. Our role in Latin America, in particular, is to play and to act as an industrial player, leveraging on our key competencies and on our skills. And since we have decided to allocate a limited portion of our capital to the international development, if there is opportunity to find the right partner, we could consider. For the time being, there is no deal ongoing, there is no content with anyone. Capacity market. Well, I think -- I read, basically, if I'm not wrong on the press that, yes, they -- it was said that the Ministry of Industry has sent to Bruxelles the notification to start and finalize the process. So if everything goes right, hopefully we should be able to see the mechanism in place by the end of December -- I mean, by the beginning of December. And that would be very important to start the auction, to start seeing some capacity coming into operation 2022, 2023.

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [8]

--------------------------------------------------------------------------------

As regarding the CapEx plan, as you heard during the presentation by the speech of Luigi, in this plan we are confirming the necessity of a further acceleration and the realization of infrastructure for the Italian electricity grid. This is something not asked by Terna. This is something that's asked by the system. So in order to achieve this goal, you need 4 different elements. The first one is regulation. As we said before, today, we are in a more comfortable position with respect to where we were 1 year ago. If you remember, 1 year ago, we were without any authority. The previous one was in the expiration phase. Now we have a steady mechanism, 2022, 2021. We have a bit of additional visibility until the end of the business plan. The second element is the procurement. As you know, we operate as a monopolistic player, and we need to have a certain level of anticipated procurement that can confirm that the average level of procurement during the business plan horizon is above 70%. And by the way, 2019 and 2020 are already committed for more than 90% of the total amount of the needed procurement. The third element is the authorization. Of course, we can write on the PowerPoint what we want, but we need authorization from the competent authorities. Again, 2019 is authorized for more than 95% and the remaining part of the business plan is already authorized at an average level higher than 70%. The fourth element is the technical capacity, the technical ability to sustain this acceleration. But I think that is something that we already demonstrated, that our engineer already demonstrated during 2018 with the acceleration of infrastructure -- the realization of infrastructure in Italy and abroad that we have delivered. So coming to the end, we confirm that our CapEx plan is fully sustainable for us. Of course, this will imply an increase of the net debt at the end of the business plan. We already presented, anticipated the business plan of the main rating agencies. We can expect that no, nothing will happen. The plan is fully sustainable, and we expect that all the rating agencies that will confirm that in the coming days.

--------------------------------------------------------------------------------

Enrico Bartoli, MainFirst Bank AG, Research Division - MD [9]

--------------------------------------------------------------------------------

Enrico Bartoli, MainFirst. First question, I'd like to go back to Javier's question regarding the potential in terms of CapEx beyond the business plan horizon. First of all, how much do you expect to have as a CapEx from the projects that are not going to be completed by 2023? And I saw from the presentation that also you indicated a project like the connection between Sicily, so the mainland, the Adriatic connection. How much is that going to contribute after 2023? And I guess that you recently updated the 10-year CapEx plan for the grid with the government. If you can give us some details about this. Second question is regarding the OpEx. You mentioned some significant efficiency that you expect over the plan period. You mentioned the internalization of services, if you can give us any taste on this. And how much this is contributing to EBITDA growth over the planned period. And the first one -- the last one is related to the work in progress. You mentioned single-digit contribution, if you can give us the details, particularly on the RAB at the end of the plan.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [10]

--------------------------------------------------------------------------------

Well, first of all, if I'm not wrong, we leave -- we left a demand without the answer related to the relation with the local territories. I give you a number just to tell how it is important to us and how committed we are to manage the relation with the local stakeholders. Last year, our people met or made basically 330 meetings in the local -- with the local communities, with the local institution. Basically, more than 1 meeting per day. I think it has never been done in Terna, something like that. It is definitely very important, because this helps us in understanding the need of the local communities. If necessary, we are open, and we have done to really discuss some specific projects. And we have a few examples of that, taking care of the request of the local communities and matching these requests with the availability of new technology or new solution. An example is related to what happened in Veneto, where we discussed the project called Dolo-Camin. For the vast majority of you, it's an unknown name. For us, it's a well-known name, I can assure you. But anyway, that is the outcome of an important interaction. It allowed us to have EUR 400 million projects. Now I think with the quick authorization process and implementation with no conflicts or no negative discussion with the local community. So it is key. It is mandatory. It is a pillar of our strategy. Now let's go to the other question. Potential CapEx beyond the business plan horizon. Well, you mentioned, for instance, the connection between the Peninsula, Sicily -- sorry, Sardinia and Sicily. This is -- in this 5-years horizon, there is nothing related to this plan. Clearly, this is part of our 10-years development plan that every year we present to the relevant authorities. And in this 10-years plan, we provide the authorities and the institution with our view to -- how to support specifically the energy transition in place. And definitely, what we can do is a portion of what the system has to do to maintain the level of adequacy of security, of resiliency of the system. Last year -- and I think this is the last number public, so we cannot say -- I look to Luigi Michi who is in charge also of regulation. I don't think we can mention the new one. We can go back to the EUR 12 billion plan of last year. What they can tell you is the direction. It is very likely that it should be increased if we go ahead for -- with this change. But clearly, we are talking about projects in the chart that they presented to you are at a design level or with, of course, some calculation -- preliminary calculation already done, but we need to go through, first of all, the approval of the 10-year plan, the sharing of the global strategy of how to handle this transition and then to the local transition. If we want to match all due dates that are coming to horizon, we need an acceleration process to authorize these key projects, which is something that you -- or is under debate. So going back to you, I think -- well, for sure, we have 10 years of sizable investment in front of us. Financially speaking, as Agostino said, we are, in 2023, below 60% in terms of net debt ratio versus RAB. We can sustain the same level of path also for the following years. So I think financially, it's manageable. Technically, should we further increase our CapEx program? Well, we need to do some internal efforts to be prepared to face such a change. But if we have the possibility to view -- to have a view for the next 10 years, we can organize ourselves. OpEx efficiency?

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [11]

--------------------------------------------------------------------------------

Yes. OpEx and also work in progress.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [12]

--------------------------------------------------------------------------------

Work in progress, please.

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [13]

--------------------------------------------------------------------------------

Just to close the topic regarding CapEx. As you know, I said it several times, we are moving from a company that was spending something in the region of EUR 700 million to EUR 800 million per year to a company that will spend on a steady basis, just said by Luigi, EUR 1.1 billion, EUR 1.2 billion, depending from the precise scheduling of the project. This is the EUR 6.2 billion on the regulated asset that we have just presented. We need 1 year, 2 years to realize a single infrastructure. So coming back to work in progress, we're not going to provide a precise guidance from that, but as you can imagine, we are again in the region of the same span of the yearly amount of CapEx, more or less. Regarding OpEx, I said during the presentation that we have operator that bids through internal efficiency effort also with the contribution of innovation. There are -- there is a different way to manage our activities. Today, there is a market that is providing us additional technology, increasing technology to have real-time monitoring of our asset in order to reduce the human effort and using more contribution coming from digital. That's the principal reason why we were able to reduce by 15% our OpEx.

--------------------------------------------------------------------------------

Stefano Gamberini, Equita SIM S.p.A., Research Division - Analyst [14]

--------------------------------------------------------------------------------

Stefano Gamberini, Equita SIM. Sorry, just 2 quick question. First of all, regarding the Slide #16, the interconnector SACOI 3 between Italy, Corsica and Sardinia. Could you explain a little bit more information regarding the investments, the authorization phase? And which part of these investments are for the Italian network and which part for France, if are there some questions regarding the situation? The second, regarding the scenario you have in front of you. What I mean is batteries, CCGTs in long run, what is the role of these assets in your scenario? Or do you expect that the renewables will continue to grow such strong that investments will -- for the network will continue as you underlined, EUR 1 for renewables and EUR 1 for the networks. The third regarding the regulatory risk, both in terms of the regulator, which should update the regulation for the next 4 years as well as from the government. If I'm not wrong, they are working in through a fuller shape of the energy sector. Do you see some risks related to this decree started by the government?

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [15]

--------------------------------------------------------------------------------

Well, let me take the second question. Where are you? Well, this is our view regards to the -- let's say, to next 10, 15 years just to reach the target of 2030 stated by the government into the clean energy package program which has been submitted to the European Union. Well, we think that we need to put in place a set of action. Of course, renewables is the first important part of the program. We are talking about 40 gigawatts, 30 solar photovoltaic and 10 wind capacity in addition. We are talking about investment in grids, and we are talking about investment also in storage capacity. Now I think we have to appreciate what could happen in 2030 to understand what are the needs that we have in front of us. If we assume for a while to be in 2030 and that we see -- and we assume that all the new renewable fleet will be fully operational in a normal day. So with the right water, with the right wind, with the right solar, at lunchtime, it is very likely to assume that there will be an excess of capacity. Therefore, there will be a potential that has to be stored. That's why there is a lot of discussion about, not only for this, but in particular for this to store the electricity. One possibility, according to the existing technology, is to use water. In other words, if there is possibility to expand the pump and storage capacity, particularly in southern -- in central and south Italy, we could assume that during the day, when you have excess of renewable capacity, you can use this capacity to pump the water up to the reservoir that's on the top of the hill, and then during the night, you -- or at the end of the day, you can turbine this water down. Batteries. Batteries is part of the scenario. According to the existing technology and to the existing capacity, well, you know that the capacity available today to support the acquisitions and service to the grid issues is the one that we have, which is not commercial. It has been authorized by the regulator. We're talking about, in total, 50 megawatts, but the market have not yet installed significant battery capacity to store energy, as I said. So it is clearly one part of the scenario. In total, we said, by 2030, we need 6,000 megawatts equivalent of storage capacity. The mix, it is very much depending also on the availability of pump and storage, either/or the availability of battery technologies. When it comes to the gas and to the [pickers ,] more than CCGT, well, we need to have a fleet of clean and thermoelectrical capacity. Clean means in line with the limit fixed by the European authority community and in line with the target the current government is fixing which will help to support the coverage of the peak moments. So again, 7 o'clock in the evening, when the sun goes down or when you need to have thermoelectrical capacity to face the demand, which means that we are moving from remuneration of the kilowatt hours into remuneration of the kilowatt. Or if you want, remuneration of the invested capital, and the capacity market goes in that direction.

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [16]

--------------------------------------------------------------------------------

Maybe there is 2 questions, one is the regulatory horizon and the second one was on SACOI. Regarding regulatory horizon, we confirmed that we are in a good position. We just -- the authority have been just renewed, and the petition phase of the remuneration formula was concluded at the end of 2018. I'm not here to comment if 5.6 is fine, is good or not. I think that the best news that we have is that we have a mechanism in place that is able to promptly react to variation in the macroeconomic scenario. This is something that the authority declared immediately at the beginning of its mandate, and this is what the authority did. So this is something really important for us. As I said before, we expect full continuity until the end of 2020 -- '21. We prepared our business plan on a continuity basis also for the period '22 and '23. Probably, we will have some difference. Probably the authority will start discussion about new mechanism, maybe the TotEx, maybe a progressive introduction of additional output-based contribution, as happened between 2018 and 2019. But we considered that we are not running any relevant high risk coming from that side. We know and we explained that the infrastructure are needed for the system. The authority is perfectly aware of the fact that we need the proper remuneration for that. So we consider that our business plan is conservative. Regarding SACOI, this is the reinforcement, the replacement of an historical interconnection between Sardinia, Corsica and Italian Peninsula, is a very complicated project, as you can imagine, because the project starts in Codrongianos in the middle of Sardinia with a standard connection after the submarine cable between Sardinia and Corsica -- again, a standard line in Corsica, by the way, is part of our network. Arriving in Bastia, another sub-marine interconnection, arriving in Suvereto in Tuscany. So this is a good example of what Terna is able to realize -- was able to realize in the past because we are talking on an historical infrastructure that now needs to be replaced. It is a process that will start during this business plan and would be completed after the current business plan horizon because we're talking of a project of something like EUR 650 million. 2/3 will be completed during the business plan horizon, and the remaining part will be completed after the business plan horizon. Our French friends will contribute in proportion with their capacity to absorb energy from this interconnection. We are talking of, more or less, 25% of the total amount.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [17]

--------------------------------------------------------------------------------

Bart.

--------------------------------------------------------------------------------

Bartlomiej Kubicki, Societe Generale Cross Asset Research - Equity Analyst [18]

--------------------------------------------------------------------------------

Bartlomiej Kubicki, SocGen. Just a couple of things. As you tend to surprise us positively every year, I wonder whether you can surprise us again in the future. So regarding your investments and CapEx, the question would be what scenarios are not here yet, which are in your mind, which could materialize in the future? For instance, you don't talk about electric vehicles. I wonder if this could also impact your CapEx in the future. And given that also, I wonder -- you also mentioned about all this procurement, your in-house competencies, but I wonder if there is -- if you are able to quantify the level of annual CapEx you are able given the competences in Italy in your own company, given the sort of infra boom in Europe, the level -- the maximum level of CapEx per annum you will be able to execute without much risk. Then on non-regulated activities, I assume you described your base-case scenario. So I wonder if you can maybe talk a little bit about your best-case scenario and your worst-case scenario, how do you see it in the next couple of years? And last thing about OpEx. You, of course -- you mentioned this drop in potential costs in external services, but what about internal costs? Where is the trajectory of the internal costs? Do you see any inflation there? How is it going to increase in the next couple of years?

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [19]

--------------------------------------------------------------------------------

Well, let me try to -- I'm hoping to confirm your positive surprise. Well, I think this year what really happened is, we have, at a system level, consolidated a certain assumption with regards to the future of the system. So in other words, I think we are all convinced that the decarbonization and the way we traced last year is not only confirmed, but as I said at the very beginning, even more accelerated. And this is a fact. If we look all the statement of the different governments, I think we definitely go in that direction. And when I said at the very beginning, this is an opportunity to us, because, of course, we are one of the key player into the system, and the grids is going to play definitely a very important role. I do not expect major impact in the 5-years horizon on the transmission grid with regards to the electric vehicles because, of course, there will be an increase in consumption. Assuming that, for instance, we reach millions of electric vehicles in 5 years from now, but the grids -- let me remind you, the current transmission already managed in the past a demand in the region of 340 terawatt hours. So this is not a problem to us. I think it's something, of course, more to be valued, analyzed at distribution level. So empty and low- and medium-voltage level. When it comes to the -- what could be the right number or the maximum number that we are managed to run. Now the point is that the EUR 6.2 billion that we went through together with the colleagues, I think -- it's feasible, of course. We went through that. We have the technical capability to manage that. One of the risk in this case is the procurement -- is on the procurement side because as I said at the very beginning, we are facing in the next years an increasing demand of certain materials, in particular, in Europe, like the cables and -- just think about what Germany announced. We're talking about 80 -- EUR 76 billion of investment. We are in a good shape with regards to this 5-year horizon, as I said. Of course, strategically, we need to look beyond these 5 years. And that's why it is very important to have a clear guideline, and I think we are going in that direction, from the institution to see if we have to go, for instance, in the direction of building a project and realizing the connection Peninsula, Sardinia and Sicily. That, of course, calls for immediate action from our side, once the regulatory framework is clear, to start accelerating on the procurement side. So there is not a magic number. The EUR 6.2 billion is feasible. We are fully committed to do that. I have to say that it is challenging because all the Terna people sitting here with us are under tension. Also -- not only because they work on the high voltage but also because we are on a positive. I think it is positive to be a little bit tense, no, when we work because it helps to be reactive in the right area. But we are definitely fully committed and the passion in what we do. Agostino?

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [20]

--------------------------------------------------------------------------------

Regarding non-regulated, I can't confirm whether I already said before, we have foreseen a slight increase of contribution coming from TLC and coming also from Tamini that is recovering progressively its marginality. And we consider that business plan assumption are fully sustainable.

--------------------------------------------------------------------------------

Omar Al Bayaty, Terna - Rete Elettrica Nazionale Società per Azioni - Head of Investor Relation [21]

--------------------------------------------------------------------------------

Javier?

--------------------------------------------------------------------------------

Javier Suarez Hernandez, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [22]

--------------------------------------------------------------------------------

Javier Suarez again, Mediobanca with 2 or 3 follow-ups. The first one is on the -- you have been increasing the CapEx plan, increasing the EBITDA growth guidance, but the net income growth guidance is staying more or less at the level of plus 3%. Have you changed any hypothesis below the EBITDA that is making -- the net income growth is not growing and is sustained at plus 3%? Then second question is on the -- if you have changed your assumption on the remuneration for the work in progress. And if not, do you see some regulatory upside coming from that front? And the third question is on the deflator assumption that you have been considering sort of the length of your business plan.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [23]

--------------------------------------------------------------------------------

Now let me say that as I think we stated, I think it was right to assume that we could foresee in the next years an increase in the cost of that. Now I think it's on the prudent side, but it is good to have because we still do not have the right visibility. So this is one of the reason to that. Then you have the decline or the work in progress remuneration, because it goes to 0, the old one. Though, this is the combination of the two. There are no other major changes related to that.

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [24]

--------------------------------------------------------------------------------

Yes, if I may, you should also remember that there is a time lag between the time you realize the investment, you put it into operation and the investment recognized in the tariff. It takes a couple of years. So you should consider a sort of time lag that is not included in the figures. It will be included in 2024 and 2025.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [25]

--------------------------------------------------------------------------------

Just concerning -- to complement what Agostino said, we are talking about single-digit percentage of work in progress, no? We are talking about 6% to 8%, roughly speaking, of work in progress which are not generating revenues and, therefore, EBITDA in a growing CapEx program. That's why you have this -- of course, once we have fully implemented all these projects and goes into operation, you will see the benefits. This is the assumption that we have here.

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [26]

--------------------------------------------------------------------------------

Regarding the question about a possible work-in-progress remuneration, there is nothing in the current business plan. Nothing is included.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [27]

--------------------------------------------------------------------------------

There are discussions with the authorities, of course, to obtain the recognition of some specific projects of this remuneration. For the time being, we have not factored any numbers.

--------------------------------------------------------------------------------

Omar Al Bayaty, Terna - Rete Elettrica Nazionale Società per Azioni - Head of Investor Relation [28]

--------------------------------------------------------------------------------

Anna Maria?

--------------------------------------------------------------------------------

Anna Maria Scaglia, Morgan Stanley, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Anna Maria Scaglia from Morgan Stanley. I've got 2 questions. One -- please forgive me, as a start, but you have a plan where there is a lot of CapEx and a growing CapEx. And when TotEx discussions was introduced by the regulator, the idea was we don't want to over-emphasize CapEx, we want to look at our other solutions in terms of cost to improve. So with this plan, what's the point to still discuss about TotEx? Why should the regulator go around TotEx? Is there any incentive? As the regulator change their mind, do you really think TotEx will happen? That's my first question. And the second question is regarding the international activities. Once again, what is the point to keep those assets for the long term? Have you thought about a kind of asset rotation model, a BSO model, where basically you can crystallize the value as [TEPL] would turn apart in the past?

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [30]

--------------------------------------------------------------------------------

TotEx.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [31]

--------------------------------------------------------------------------------

So regarding TotEx, I think that we should divide the concept of infrastructure and the concept of remuneration of infrastructure. So what we have tried to explain to you today and what we also tried to explain last year is that there is an enormous need of additional infrastructure in the energy sector coming from the energy transition process. This is something that is not happening only in Italy. We just showed you a chart in which this is a worldwide direction. And we know that this kind of infrastructure need to be realized, especially in Italy, in which we already have a relevant contribution from the renewable already today and we expect the additional contribution in the future. So first of all, we need to realize infrastructure. This is something that is not the statement of Terna. This is a statement that is generally agreed in the Italian system. How we can remunerate that? Today, we are in a transition phase between the previous input-based scheme. Okay, we are moving progressively to an output-based and a TotEx scheme for the future. But at the very end, we need a proper remuneration to realize our infrastructure. We can have a full application of the TotEx. If the authority would like to do that, there is some decisions that need to taken in the coming future. We are ready to discuss with them. We will be -- probably, maybe a transition phase. We will mix -- a sort of a mixed regime, and we will have a remuneration of the RAB, as we have today, plus an output-based contribution for a precise list of projects that will provide a certain level of benefits. The benefits will be calculated by us with our cost-benefit analysis, shared with the authority, blessed by the authority. And end of the time, the authority will give us the possibility to retain a little percentage of this additional profit. In any case, we are so confident that the amount of benefits that we're going to provide to the system with the realization of an infrastructure, and this is what our long-term development plan already demonstrates. You will see when it will become published that the quality of our cost-benefit analysis that has been recognized by the authority has the high quality -- the highest quality analysis provided in the energy system, is so high that we are confident that we will receive a proper remuneration from the authority independently from the specific system of remuneration that the authority will introduce. Now when it comes to the international activities, first of all, if you go back to 1 year ago, we have no project in operation. So I think we need a little bit -- a couple of years of track record before seeing what are the strategic option to follow. I think we are in a good shape now. As I said, we put in place in a record time, I would say, a new international organization. The second project will go into full operation in the coming weeks. I look at Giovanni. So I think this -- at the end of this year, we should have a portfolio of project in execution -- a portion under execution sizable enough to start to think about future strategic option. For the time being, I think we have to stick to the plan to continue executing and implementing the project. And then if there is a partner, which will be willing to act as a long-term investor with the right capital, our target is to remain and to act as an industrial player. So we want to value our competencies, we want to develop our energy solution, and that's the framework to which we are looking for. Of course, now we will see in the next year, we'll update you about this, but first of all, I want to see our track record. And I think we are in a good shape to have the possibility to choose between the 2 option or an asset rotation, i.e. a portfolio management, as you said, or differently, marrying some long-term investor and keeping limited our capital absorption and value our competencies, which, in this case, could be, of course, some cash in for us.

--------------------------------------------------------------------------------

Omar Al Bayaty, Terna - Rete Elettrica Nazionale Società per Azioni - Head of Investor Relation [32]

--------------------------------------------------------------------------------

Enrico?

--------------------------------------------------------------------------------

Enrico Bartoli, MainFirst Bank AG, Research Division - MD [33]

--------------------------------------------------------------------------------

Enrico Bartoli from MainFirst again. A couple of follow-ups. First of all, on Slide 34, regarding the evolution of net debt this year, you showed a positive contribution from working capital of around EUR 300 million, if you can elaborate a bit on that. And what do you expect to be the evolution of the regulatory working capital over the next year? So during the plan period. And secondly, if you can give us an indication of the net debt level that you expect by the end of the plan.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [34]

--------------------------------------------------------------------------------

Okay. Regarding working capital, this is something that we discussed also last year. As you know, we have, again, short-term benefits coming from the time delay related to the management of the so-called -- how can I say, non-EBITDA-related component for MSD market. We obtain flows coming from the market with a rule that has been defined by the authority. But to repay this tariff component that again are not part of our P&L to the market operators, we have to wait a specific resolution for the authority. This is what's happened at year-end. We expect the authorization of the authority to pay for this market operator. But it was a bit of delay, and we received this authorization only at the beginning of 2019. So you should consider that this short-term benefit would be progressively absorbed during the coming years. Regarding the net debt, we are not going to provide any guidance, as you can imagine. But of course, it will be connected with the effort that we are going to provide with increased level of investment. But again, it will be fully sustainable from a financial standpoint.

--------------------------------------------------------------------------------

Agostino Scornajenchi, Terna - Rete Elettrica Nazionale Società per Azioni - Group CFO [35]

--------------------------------------------------------------------------------

It will stay always below 60% of the RAB.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [36]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Omar Al Bayaty, Terna - Rete Elettrica Nazionale Società per Azioni - Head of Investor Relation [37]

--------------------------------------------------------------------------------

If there are no further questions, the Q&A session is over. Thank you for joining us.

--------------------------------------------------------------------------------

Luigi Ferraris, Terna - Rete Elettrica Nazionale Società per Azioni - CEO, GM & Director [38]

--------------------------------------------------------------------------------

Thank you.