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Edited Transcript of TRN.MI earnings conference call or presentation 20-Feb-17 1:00pm GMT

Thomson Reuters StreetEvents

Preliminary 2016 Terna Rete Elettrica Nazionale SpA Earnings & Strategy Presentation

Rome Feb 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Terna Rete Elettrica Nazionale SpA earnings conference call or presentation Monday, February 20, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Catia Bastioli

Terna Rete Elettrica Nazionale SpA - Chairwoman

* Alberto Ponti

Terna Rete Elettrica Nazionale SpA - Head of Strategy and Market Analysis

* Matteo Del Fante

Terna Rete Elettrica Nazionale SpA - CEO

* Tiziano Ceccarani

Terna Rete Elettrica Nazionale SpA - CFO

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Conference Call Participants

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* Javier Suarez

Mediobanca - Analyst

* Stefano Gamberini

Equita - Analyst

* Enrico Bartoli

MainFirst - Analyst

* Dario Michi

Banca Akros - Analyst

* Anna Maria Scaglia

Morgan Stanley - Analyst

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Presentation

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Catia Bastioli, Terna Rete Elettrica Nazionale SpA - Chairwoman [1]

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Good afternoon, and welcome, and thank you for being here to the Board, the Members, to the investor community and to the media. And welcome to the presentation of the Terna Strategic Plan.

I have the task to frame the Terna plan in the international context after the Paris conference. Paris conference is a key milestone in the growth of the worldwide responsibility towards decarbonization and the preservation of the natural capital.

Indeed, our nowadays society is showing a growing emphasis and efforts on sustainability issues. This has been shown recently in the Marrakech Climate Change Conference, held in November last year. The conference successfully demonstrated to the world that the implementation of the Paris Agreement is underway and the constructive spirit of the multilateral cooperation on climate change continue to go on.

Furthermore, the United Nations started to mobilize efforts to achieve a sustainable development agenda to improve the quality of life of everywhere people -- everywhere by 2030. The United Nations also settled 17 sustainable development goals in order to reduce (inaudible) inequality and limit climate change by the end of the next decade.

Also at European level, the European Commission adopted an ambitious circular economy package, which includes revised legislation in the sector of waste. And the strong support towards a circular economy is aimed to boost global competitiveness, foster sustainable economic growth, and generate new jobs. This means the connection between economy and society again.

These world trends are translating also in European guidelines looking at decarbonization, market efficiency, security of supply and to ensure that Europe will have a secure, affordable and climate-friendly energy.

The targets are key elements to measure progresses in meeting the goals of the complex energy transition we have in front of us. By 2020, the EU -- at EU level, mainly we have to reduce the greenhouse gas emissions by at least 20%, increase the share of renewable energy to at least 20% of consumption and achieve energy saving of 20% or more.

Furthermore, the targets are set also for the member states. And Italy is well on track for meeting their targets for 2020. Targets for 2030 instead, as reported in the slide, as far as -- is more demanding. And countries like Germany and France have set already the goals for 2050. And in order to meet the goals we need multilateral collaboration and further collective efforts.

To do so, priorities are making Europe more energy efficient by accelerating investments, building a Pan-European energy market, by constructing the necessary transmission lines, protecting consumer's risks and achieving high safety standards in the energy sector and implementing the strategic energy technology plan.

In this context, in this complex context, innovation is crucial. And Terna will and has to develop -- be in the center of this energy transition. We plan the energy transition through the adoption of a new shared innovation process. And innovation is organized in clusters and needs partnerships. Innovation in the logical clusters is based on transmission technologies with, for example, sustainable innovative materials, new green transformers and smart metering. Electrical power system operation is aimed at improving the security and cost effectiveness on the transmission grid management. Grid and market development includes a new market model to support the transmission grid planning.

We continue to develop the smart grids, leveraging on our know-how, on storage, renewables, thermal balancing and network control while we continue to improve our business implementing integrating business with the project management and smart management of our Company's resources.

Our open approach, as I said, will be based on partnerships, partnerships with supply -- the supply chain, with the other energy sectors with academia research centers, with start-ups and SMEs as well as with infrastructures in different fields like is happening and he said with Ferrovie della Stato the railways operator.

We point to concentrate on case studies interconnection, interdisciplinarity. And we try to turn ideas into new strategic initiatives and with a more sustainable approach to environmental teams and concentrated on high standards, high stringent standards and trying to attract, develop and retain talents as always. We have to frame Terna plan in this context.

And I thank you for your attention. And now I will launch the video. Thank you for your attention.

(Video Playing)

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Alberto Ponti, Terna Rete Elettrica Nazionale SpA - Head of Strategy and Market Analysis [2]

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Good afternoon, everybody. As you have seen from the video, the utility sector has changed and continues to change very quickly. As already mentioned by Catia, the three main challenges we have identified are decarbonization, market efficiency and security of supply.

To tackle these new challenges in a proactive way we need to account, of course, of a number of new trends. And we highlight here growth in non-programmable renewables; and secondly, at the same time we see a reduction in thermal generation capacity; and thirdly, technology evolution that is mainly linked to energy savings and digital grids.

Combining the new challenges and the sector trends that results in new needs for the system and first with the integration of renewables and then adequacy and reliability. Now we want to fulfill these needs at the lowest cost possible for the system while guaranteeing the highest quality of standards.

Now let me focus on each of these three needs, and we start with the next slide on renewables integration. On the left-hand side, we show the growth achieved so far in renewables capacity in Italy. And focusing on wind and solar you can see that over the past seven years these have grown five-fold to around 30 gigawatt at the end of last year.

For the future, we have elaborated two scenarios with renewables capacity rising up to 38 gigawatt to 57 gigawatt by 2030 in a low and high case scenario respectively. Now let me point that as the new European energy package has been -- it will be approved this is likely to require an extra effort by the member states to increase renewable penetration. And this means that probably the high case we are showing here is not just a mere possibility but it could be in the end a sort of best case on which to work on.

However as renewables capacity have grown and are likely to keep growing, thermal capacity has diminished in aggregate by about 15 gigawatt between 2012 and the end of last year. And we also think that the pattern is likely to continue and up to 12 gigawatt in a sort of an extra decommissioning scenario. So 12 gigawatt could close, leading to thermal capacity installed base by 2020 to be between 50 gigawatt and 56 gigawatt range.

Now having said that, we want to give you an example of what it means for us to actually manage the new system with the higher penetration of renewables. On the left-hand side, you can see that on April 25, at 2 o'clock p.m. renewables covered up to 80% of the demand, the highest level ever recorded in Italy.

Now admittedly this was quite a unique case because it was a bank holiday, demand was low and temperatures were not that different from the average. But if you focus on the full day at April 25, still you see renewables have caught up 61% of total demand. And obviously one could think that April was a bit of an exception, but actually, if you look at June, the month of June, still 45% of total demand was still covered by renewables 34% for the full year.

Moving on the right-hand side, we go a bit more into the details of the balancing market itself. The increase of renewables, as I was saying, has changed the way we manage the balancing market. In the past, the residual load curve, which is the grey line in the chart, i.e. the hourly demand less non-programmable renewables production, was following nicely the pattern of demand, the blue line in the chart.

But due to non-programmable renewable production, which is the green dotted line, the situation now is very different from before. And the residual load differs substantially from demand. So for example, while before we had a peak in the morning, now we don't. And in fact, residual demand keeps failing until early afternoon. And this is largely driven by solar production that picks up in the morning. And we call this phenomenon peak inversion.

And this reverses as we approach the evening hours, because solar production starts rapidly to fall so the residual load, the one we need to manage, grows much faster than demand itself. Now this gives you a broad idea of how much more complex the system is today. And to tackle this we actually need two things. One, of course, is more flexible source of production. But also, we need more investment to have a more robust grid.

On the next slide, what we try to show is that aside from the balancing market itself we also look at the broader implications for the system as a whole. So, for example, on the left-hand side we show the growth achieved so far in the renewables. And you can see that the majority of it is actually in the center south and the south of Italy. And nearly 60% of renewables is actually located in this part of Italy.

The three key factors that are very important when analyzing renewables and the impact on the system are three. One is how much capacity will be developed, the capacity we have now that will be developed in the future. But also very important second point is which renewables will be developed i.e. the mix between -- within renewables i.e. solar and wind for example. And thirdly is where, where the new renewables are located because clearly this requires a different effort in terms of the grid availability.

Overall you can see that this asymmetric presence of renewables throughout the system has changed the way electricity flows in the grid. So before it was flowing from north to south but now the flows have reversed. But more importantly, the new renewables being built are creating congestions between zones and also more recently within zones.

If we look forward, the question is is this pattern going to change. Well, actually we don't think that because the new renewables if and when will be built are likely to be again focused primarily on the south or the southern part of our territory. So reinforcement of the grids are certainly needed. And in fact, as we will show we are investing to strengthen the backbone south to north.

Now let's move to the next slide where I want to address the two last topics, which are adequacy and reliability. As I was, mentioning thermal capacity is being decommissioning and could be decommissioned later on in the coming years. Now to avoid adequacy problems more investments are needed, for example, in new interconnections. In the slide you see, you can see what we have put in the plan. But there are also other solutions we are studying, for example, interconnection between Italy and Tunisia or interconnection between Italy and Slovenia.

Other investments are also needed, it has to be said, to reinforce the transmission grid between the market zones for what I have just said but also to replace and strengthen the grid. The aim is that of reducing the risks of interruption of service to users. But we are also implementing technologies that are more respectful of the environment.

Another tool we have at hand is the capacity market. As you probably know, this will be based on competitive auctions and where the selected counterparties will be paid a premium to make their capacity available. And we expect the first of such auctions to be run by yearend.

Finally, we have also complementary tools in the digital solution camp that need to be developed, such for example, demand response, just in time metering or storage solutions that should increase security of supply.

And I'll finish my part and I will conclude on a brief recap on the rationale for the need of new investments on this slide. A stronger and more robust grid is needed to integrate the existing and the new renewables that will be built. And this is to resolve zonal and local congestions and to increase cross-border interconnections. Also, the quality of service and the level of reliability need to be guaranteed going forward, together with the increase in digitalization of the grid.

We need to make sure that investments planned generate benefits for the system. And on this, I would like you to know that our CapEx plan is already compliant with the new CBA 2.0 methodology that was recently introduced. And is also aligned with the forthcoming output relation.

That concludes my part, so I will leave the rest of the presentation to our CEO, please Matteo.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [3]

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So let me start thanking all the colleagues that have supported Terna's activities and also the building of this plan starting with Chairwoman Catia Bastioli and Alberto Ponti in charge of market research that has done this excellent introduction.

And let me start my presentation with restating our mission strategy. Terna will continue growing its domestic regulated business to facilitate the energy transition. At the same time, we will keep leveraging on our core capabilities to benefit from known opportunities in the non-regulated and international space. Nothing new and the plan is under execution and today we will give you the data and a strong feeling, I hope, about our commitment to execution.

The ranking of our priorities is also reconfirmed. So we start with the domestic regulated business, and today we will detail an increase in CapEx. The second focus for the plan is the new regulation that will be introduced in the coming years. And this is clearly an excellent opportunity for the system, for the electrical system to save money and to be more efficient. And Terna will have to support the new regulation and try also to benefit and to achieve an outperformance for the shareholders in terms of the new regulation.

The third priority in the plan is the domestic non-regulated business where on the wholesale side we will target energy solution projects. And we will keep leveraging on our core capabilities. And finally, the international presence remain with a low-risk profile providing an upside potentially for our investors. And the ranking is the ranking we use and we follow since three years ago, and we reconfirm that this is the best way to maximize the shareholders value in the current framework.

The energy market as we stated is experiencing a very important and rapid change. The energy transition is taking place very quickly and is leading to a more efficient, a more secure and a cleaner environment. And Terna wants to be the actor at the center of the transition and facilitating the transition with all the tools possible that we can bring to the table.

It's clear to us and I believe to any market operator that there is not such a thing in the transition has a killer application one solution that is solving all the problem of the future energy market. There needs to be focus and use of different tools one-by-one. And the position of Terna at the center of the electricity system is allowing us to use all the tools possible.

We are going to start with our tool kit with hardware solutions. And clearly, grid expansion is the first tool that we are going to use as we are going to detail today in more detail. But certainly, cross-border interconnections are very important in the energy union path and so is storage. And there is going to be, as we started telling the market last year, an increasing role and focus on software solution what we call system operator solutions where new R&D and digital solution will take slowly more space. I am referring to demand response and local grids.

So Terna is clearly focused in creating synergies among all the tools in our possibility in our box. And the aim remains the one of security of supply in an efficient market and in a cleaner environment at the lowest cost possible. We want to help the market to find the best technological solutions at the lowest cost possible.

And let's now finally focus on a summary of the financial targets of the plan. You will be familiar with this page that we used two years ago last year. Sometimes we are a bit boring. That is part of the job and we confirm today a safe, organic growth for Terna for the next five years.

On the domestic regulated, we are increasing annual CapEx spending by 30% versus last year plan. And we are targeting therefore EUR4 billion CapEx in five years, which compares with the EUR2.6 billion in four years of last-year plan. As a consequence, RAB will continue to have a positive trend with a 2% annual growth reaching EUR15.6 billion at the end of the plan in 2021.

We also increase our focus, as we announced last year, in non-regulated activities where we have an annual EBITDA target contribution increasing by 40% on an annual basis versus the old plan. As a matter of fact, we are targeting EUR350 million EBITDA in five years that compares to the EUR200 million in four years of last year.

And international we continue to be limited in absolute and relative terms, as we want to maintain a prudent approach. So we are confirming our equity commitment of EUR50 million per annum on average in line with the commitment of last year.

In terms of consolidated targets, this is bringing us to an increase in EBITDA by 2% per year. And also thanks to the efficiencies that we have announced in the last few years and sustained -- we will be able to sustain a 3% increase in earnings per share. And giving today to our investor base longer visibility on the 3% EPS targets into 2020 and 2021.

More in detail into the CapEx, starting from last year EUR2.6 billion four-year plan we have done a lot of work last year. We invested EUR850 million in 2016. Let me just remind three important projects we completed in 2016, starting obviously with the interconnection of Sicily to the mainland that we concluded in May 2016 that is bringing significant savings to the system since.

The very important line linking Villanova to GC and allowing, as Alberto was asking, for energy produced from renewable sources in the south to be channeled towards demand in the north. And we kept working on the interconnection of Italy to the Balkans.

Starting from last year taking away the EUR700 million we invested we have an acceleration in the next three years of already planned CapEx, which is mainly driven by new connections of renewable developments. The use of green transformers and in our replacement plan and the beginning of a new line, a new connection from Italy through Sardinia through the Island of Corsica that is impacting our plan in the back end of 2020 and 2021.

On the top of that, we have an inclusion of the two extra years, which we are assessing at EUR1.4 billion. And this is clearly driven mainly by projects that we are in development phase and there is replacement needs that are taking place in 2020 and 2021.

The increase is basically spread on an equal basis over the plan and will have an impact on the RAB as we anticipated of a 2% increase on the calendar RAB. And this is bringing at the end of the plan the portion of incentivized RAB in our balance sheet at the end of 2021 at 40%, four zero. Obviously, for revenue calculation purposes you should consider also the time lag and the work in progress element that will be remunerated only at completion of the project, as we indicate on the slide on my left.

Importantly, we want to also remind our investors that we have a long-term horizon; we have a 10-year national development plan that is a 10 plus two, so technically we can call it a 12-year national development plan that goes beyond 2021. And in that plan from 2022, there are an additional EUR5.3 billion of CapEx, which are included in the national development plan but are clearly beyond our five-year strategic plan time horizon. But there are there and they are in our opinion creating a backbone of investment down the road.

As we stated, the second priority in our plan is automize the new regulation taking place in the system. There are new trends in the electricity sector that we have touched upon. And the regulator has decided to change the remuneration models evolving in order to accommodate the new trend and the transition. This is the very first plan of Terna that will be significantly affected by the new regulation. Because last year plan we were, going up to 2019 and we were not exposed to output days and only limited exposure to the new system.

There is some consistency with the past because the allowed return, the WACC is confirmed up to the end of 2021. There is a mark-to-market recalculation at the end of next year that will impact the last three years of the plan 2019, 2020 and 2021. This mark-to-market recalculation will touch the[risk-free, the countries premium, inflation, tax and gearing. And our current expectation under market conditions that we can observe today is that we have some upside on the specific methodology.

But beyond the allowed return, there is already in 2017 the willingness by the regulator to put more focus on output-based incentives. And as you know from 2020, Totex regime will be introduced in the system. And to be clear in the plan given the lack at the moment of detail and visibility on the new systems we have made no assumption on additional outperformance that has to be analyzed and proven.

What we know is that the new mechanism foresees incentives to be linked to the benefit for the system that Terna has to try to bring to the table and the efficiency in our spending both in terms of CapEx and OpEx. And this will improve and will change our approach to the execution of our investment in order to find the best solution to reduce the cost for the system and to optimize all the different tools that we mentioned.

Finally, towards on non-regulated we keep our capital light approach in the non-regulated space. We carry on our focus on telecommunication, the broadband, the engineering and construction for third parties and the O&M for mainly Italian clients. We want to become and we have some examples, the wholesale energy solution provider for some projects.

And as Catia hinted, we signed an agreement with the railway operator on the back of the acquisition of the high-voltage railway grid of 2015 where we aim together to build up to 200 megawatt of PV plants around our substations and the substations we bought in 2015 from the railway company. And we have already started executing on this project. This is a very simple example of a non-regulated activity where we co-develop for the benefit of the customer the project and for the benefit, we believe, of the system as well.

We increased quite significantly our pipeline in private interconnectors that are allowing us to decrease the weight on the electricity bill. It's also important to remind investors that the asset that we are selling to private investors, the portion of the asset we are selling to private investors, will be bought back by Terna in the long run after the exemption period granted by the European Commission is finished. So this represents for us also a potential long-term growth for our investors, which we believe is positive.

In terms of the EBITDA that we are creating from non-regulated the increase of the EBITDA in the period at EUR350 million for the five year from the EUR200 million for four years of last year, is also leveraging on an increase on the EBITDA margin of this business that is growing from 50% to 60% in the period.

And finally, on international I restate our aim that it remains a limited business focused purely on transmission activities with a low risk profile. And I will let the CFO go more into details of the plan and the international activities, and introduce Tiziano Ceccarani, the new CFO of Terna.

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Tiziano Ceccarani, Terna Rete Elettrica Nazionale SpA - CFO [4]

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Thank you, Matteo. And good afternoon, everybody. Let's now focus on the main assumption of our strategic plan. First, we will start from the domestic core regulated business for which we can confirm the 2017 revenues at around EUR1.91 billion for the remuneration of our transmissions and the dispatching activities as already approved by the regulator last December.

When we go over to the plan period, as Matteo already said, our regulated asset base is expected to grow at 2% basically affected by the EUR4 billion investment plan. And on top of that, we are expecting regulated remuneration at 5.3% even after 2019. And this will lead the blended return of the Company to a 6.3% all over the plan period thanks even to the 40% RAB, four zero.

Additional upsides are expected to come from the Totex and the output-based regime, as already experienced in other regulation i.e. in the UK. Some other positive news already mentioned last year will come from the alignment of the useful life of the assets, which move from 40 to 45 years on high-voltage transmission lines, which will positively affect the P&L of around EUR35 million per year. And on top of this, we main assume a 1.5% cost of debt all over the plan period.

Let's now move on to the key assumption of the non-regulated and international activities. Let's start from the domestic non-regulated. The main contribution is expected to come from EPC where Terna will act as a general contractor for the interconnector projects where we build up 800 new megawatts of interconnection capacity for over EUR800 million reduction of cost to the system. And where we expect to deliver all of this interconnection by end of 2019. On O&M and TLC, we confirm our previous business plan estimates both in terms of revenues and in terms of EBITDA margins.

I'll now have a look on the international activities as anticipated by Matteo. We recently turned our strategy and declared last year into projects. So as you know, we recently signed two new deals in Latin America to be completed both by 2019 for a total CapEx of around EUR250 million.

Specifically, when we come to the first one, Brazil, we are expecting a EUR180 million of CapEx which we expect contribute to the P&L of the Company for EUR30 million of revenues and EUR20 million of EBITDA starting 2019. Uruguay on the other hand, will bring low-single-digit returns at the early before tax level starting from 2020.

So now that we have reviewed our main assumptions we can move to the consolidated results. During the plan period, we expect revenues and EBITDA to increase 2% per annum on average reaching respectively EUR2.3 billion and EUR1.7 billion at the end of 2021. Domestic core activities, which is our priority, still stand well above 90% of the Group EBITDA while for non-regulated and international activities we confirm the delivering of the strategy and targets as promised.

EBITDA contribution also will -- takes benefit from previously announced efficiency program, which are now under implementation. In the light of these results, we can confirm a 3% earnings per share yearly growth up to 2021, which as you know is already incorporating the improvement in corporate income tax reduction foreseen by the 2016 Italian budget law.

So now let's move on the cash flow analysis, operating cash flow on a cumulated basis is expected to be over the business plan period at EUR6 billion, which will definitely cover the EUR4 billion investments needs that Matteo previously anticipated. This means that EUR2 billion cash flow generation, which will be available for dividends payments of debt service and additional international activities developments.

We can move onto the next slide, so coming to the net debt situation. Net debt at the end of 2016 is expected to be at EUR8 billion. And considering the commitment of the Company to stay above 80% for what regards the gross debt fixed component, we are able to estimate the 1.5% cost of debt all over the plan period. As you can see, financial ratios are in line with a solid investment grade rating, basically FFO on net debt will be around 14%, when net debt on RAB will be lower than 60%.

Let's finally move to the 2016's preliminary results and 2017 guidance. As per the 2016 preliminary results, we confirm revenues and CapEx which are in line with the guidance discussed and disclosed with the market on July while EBITDA improved to EUR1.54 billion, which is EUR10 million better than expected.

Regarding 2017 guidance, we expect revenues at EUR2.25 billion, while EBITDA will be around EUR1.58 billion. It's important to remind that on revenues, EUR1.91 billion is already referred to grid fee remuneration, which as I mentioned before, is already approved by the authority. On top of this, we will have around EUR320 million of revenues mainly from non-regulated and international activities.

CapEx are confirmed as last year at EUR0.9 billion. And then it's really worth to mention that as for the previous main assumption, we can confirm earning per share at EUR0.34, which is EUR0.05 increase versus last year.

So, thank you very much. Now I'll leave the floor to Matteo for final remarks.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [5]

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So, this will bring us to reconfirming our dividend policy that we stated last year with a 3% nominal growth and we're now in the position of extending the growth into 2020 and 2021, bringing the total dividend at the end of the plan just short of EUR0.24. And as we stated, this is based on a solid EBITDA and earning per shares growth, which is supported increasingly by non-regulated activities as we have seen in the plan that are slowly supporting our growth.

And the final comment that I want to make before we jump into questions is restating what we consider the key elements of the investment thesis on Terna. Terna represents a very predictable business focused on domestic regulated that stays, that gives us a visibility on RAB growth and earnings and our CapEx are clearly supportive of our long-term growth opportunities.

We're also taking the position and seizing the opportunity to outperform when possible. We're doing it with debt management, you've seen in the assumptions of the plan from the CFO that we're assuming for the plan a cost of debt, which is 1.5%, as an average cost of debt for the plan, which you all know is way below the peer group and this is based on our very focused risk management activities and we have shown you that there are some additional upside in our plan that we will try to bring to the table.

And together with that, the simple fact that we are in the market that will allow us to seize opportunities like the one we mentioned agreement with the railway company that will create additional revenues which are not yet priced into our plan.

And all this is reinforcing our commitment on the dividend growth, which I think we can say that is more sustainable than in the past, because we have a relatively low, if not, some might say too low dividend payout ratio. So, we are also conservative in terms of how much we release of our bottom line, but we believe that this is the best answer we can give to investors in a growing business with -- growing uncertainties and maybe growing opportunities down the road.

So, I think we are now ready to take questions from all of you and hopefully you have enjoyed our presentation. Thank you.

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Unidentified Company Representative [6]

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Thank you. We are now ready to take some questions from the financial analysts who are present in the room. So, probably Javier is the first.

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Questions and Answers

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Javier Suarez, Mediobanca - Analyst [1]

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It's Javier Suarez, Mediobanca. Two or three questions. At the latest strategy presentation, last year, I got the impression that the Company CapEx was front loaded and I had the impression that most of the CapEx was concentrated in 2016, 2017, 2018 and lower down the road and now it seems that the Company (inaudible) see an opportunity to invest through the period and particularly in the year 2020 and 2021. Can you explain as what had changed and why the Company believe that now there are very significant CapEx down the road up to the year 2021?

Then the second thing is on the synergies. I think that the Company management in the latest conference call mentioned significant synergies in this business plan. Maybe I missed that, but there is nothing on synergies in the business plan. Can you elaborate on possible synergies that could enhance the profitability of the shareholders' space?

And then the final question is on the necessity, no, no, -- is on the EPS, sorry. Can you drive us and explain us why the EPS of the Company should increase from EUR0.29 per share to EUR0.34 per share in 2017, because the EBITDA movement is relatively small and I was interested to know what is moving the EPS up in 2017. Thank you.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [2]

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Okay, we should one-by-one. There are several projects that are bringing us to review our CapEx plan and you know that as I stated, we have a 10-year national development plan. We look at the level of authorization of every single CapEx in the plan and we put in the five of the plan what we consider will be authorized before and is allowing us to invest money. So, every time we get an authorization, we increase the amount of CapEx.

So, there is one factor which is early authorization of some investments that up to last year were not authorized, so they were in the backend of our national development plan and additional investments that we have identified and I mentioned in the presentation the SACOI3 which is Sardinia-Corsica-Italy. 3 is the replacement of an existing line, dating 1960. And then additional investment that we deem very important to link the south the north. And the result also which was not clear last year, a significant investment related to connection of wind farm, newly approved wind farm.

So that brings the investment and the CapEx line more stable and extended over time and let me remind you that this CapEx plan is the first one as we stated that has been analyzed investment-by-investment, with the new cost/benefit analysis and Terna in this respect is at the forefront among all the regulated companies using the new technology of analysis set by the regulator, which is exactly the one that the national -- the European organization is setting for the system. So, all investment have a benefit, which is greater than the cost that we bring to the system.

In terms of the synergies, I mentioned the bulk of the synergies are coming from the railway high voltage grid integration. We confirm the synergies of last year. The regulator has given us a very steep x factor. So, OpEx are going down very significantly and that you know is we have to follow and if possible, to outperform.

And finally, the bridge of the EUR0.34 to the CFO please.

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Tiziano Ceccarani, Terna Rete Elettrica Nazionale SpA - CFO [3]

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Thank you, Matteo, thank you, Javier. The point of the increase is basically due to EBITDA improvement. If you see the chart you have EUR40 million improvement on EBITDA from 2016 to 2017, which accounts for most -- 80% of that increase in EPS. And then we'll have some expected potential upside on financial charge and taxes.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [4]

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Stefano Gamberini, Equita.

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Stefano Gamberini, Equita - Analyst [5]

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Good afternoon, just three questions from my side. The first regarding this EUR4 billion of CapEx, could you give us a breakdown of -- for each kind of activities of what I mean the new investments for connection, renewables A, and also the investments for the different interconnectors that are included in the plan.

The second is linked, what is the trend of authorization, if you can spend some words regarding I don't know 60%, 70% of this investment already authorized, so the visibility on these investments.

The second regarding the dividend policy, you stressed that he payout was quite low and in effect is by far lower compared to other operators in the sectors. So, if you can spend or if you can give us more color regarding what are the additional investments or opportunities that you expect in the forthcoming years or months, which justify a lower payout compared to other operators.

And the very last question regarding the 2019-2021 return, a lower return considering the current spread between BTP and Bund, probably the return should be even higher than the 5.3 you plug into your model. So, what is the risk that you see in the update of this return in 2019? Many thanks.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [6]

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I will start with the last two questions and then let maybe -- Antonio, if you want to take the first two. Okay, yes, you're right, the current market condition as I stated are hinting to even higher allowed return from January 1, 2019, mainly based on country risk premium, the BTP spread over core Europe has widened significantly over the last three to five months, but the observation period is October 1, 2017 to September 30, 2018, so it's hard for us to anticipate the actual average that we will observe in the market and that's why we remain, which is you know, our usual style, conservative, kept the number low and if the market stays, if not worsen, we will benefit from the increase.

The more strategic question, Stefano, on dividend policy, I don't have an answer why are we quote/unquote conservative keeping a low payout. We believe that already a 3% growth is a significant one, when you are adding that to a 2% growth in RAB, a 2% growth in EBITDA, and therefore we felt and obviously, these are considerations that we keep analyzing day by day together with our major investors, we felt that it was not needed to do more. But we are looking for more strategic potentially investment and that's probably another reason why we are cautious about payout.

In terms of the EUR4 billion breakdown and the authorization process, please, Antonio.

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Unidentified Company Representative [7]

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Yes, in the annexes of the presentation we foretold the breakdown for the national development plan and also for the replacement plan and defense plan, so you can see all the direction of each line of CapEx and I think it's something that is useful also for the analyst.

Then there is another --

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [8]

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Yes, then I think there is a question on authorization --

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Unidentified Company Representative [9]

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On the authorization of the CapEx put in the strategic plan in this five years is authorized for what regards the development.

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Enrico Bartoli, MainFirst - Analyst [10]

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Enrico Bartoli from MainFirst. Three questions from my side. First of all, on the EUR4 billion CapEx plan, could you elaborate your assumption in terms of how much you expect this (inaudible) incentives, considering that the regulation will change in 2020.

And always -- on regulation, my impression was that you seem quite confident on, let's say, some possible upside from the introduction of Totex, the possibility to eventually beat the targets. Could you give us some comments on your discussion with the regulator and your expectation on that?

And finally, on the non-regulated businesses, if you can give us some details about what you expect in terms of EBITDA from the PV project and from the two international projects that you mentioned in the presentation. Thank you.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [11]

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Thank you and good questions. The incentivized portion of the EUR4 billion and I think there is a footnote in the presentation, but is 11%. So, it's a different world. We were coming two years ago, with more than 80% incentivized, we're now at 11% and this is part of the new regime that the regulator has put in place.

On Totex, our performance is -- we have spent a lot of time studying the National Grid/Ofgen exercise and if you talk to the CEO of the time of National Grid, he tells you that in UK they were surprised their self of the benefit to the system that the new framework created. When they set the framework, they didn't believe that could have been so beneficial to the system.

But in a nutshell, the new methodology tells you that if you want to spend money and charge the tariff, charge the bill with a CapEx or with an OpEx, you have to show that you are bringing some value to the system, and you have to show that there is not a better alternative to achieve the same results, which is cheaper for the system.

And that creates within the Company positive dynamics of comparing CapEx, new CapEx of development with replacement CapEx, with services, with digital solutions provided you bring, you achieve the same debt target at the lowest cost capital. So, if Terna is able to achieve and implement this model, the benefit that we bring to the market would allow us to negotiate and to ask the regulator to be incentivized for that result.

In the UK system, it was more than 2% outperformance on return on capital, the Totex experience, hard to say what it's going to be in the Italian Totex figure. What is important is that today there is nothing in these figures, okay. We have no visibility, so we're not taking any commitment, we're not taking any risk, we're just showing the steady state and then work to build something on the top of it.

Again, very conservative also on the non-regulated because there are no assumptions in terms of revenues of the railway PV plan. It's premature, it's not going to be a game changer, but it's going to be an EPC margin and it's going to be O&M because clearly once we build this PV plant next to our substations, we are going to be naturally doing the O&M. And the plan will be the cheapest plan possible, because the ground we own it and there is nothing else we can do on that ground, so the ground is very cheap. Interconnections is the cheapest possible, because you're already on the grid.

The PV and the panel cost and the technical equipment cost as you have seen, if you follow the market, has gone down again very significantly, so we're taking a very low price for the technical equipment. And if you consider it from a financial standpoint, we're also fixing a debt cost for the project which is one of the lowest. So, if you put everything together, you get into an implicit price of the energy, which is extremely competitive, but there is nothing in our figures.

In terms of what we have in our figures and that's why we call it assumptions on the international, Tiziano.

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Tiziano Ceccarani, Terna Rete Elettrica Nazionale SpA - CFO [12]

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Okay, for the international activities, we are expecting Brazil to contribute to EUR20 million on EBITDA after 2019, which is the expected date of commercial operation for the concession. On Uruguay, we are expecting a low single digit and it will be on a profit before tax level, with the account it will be slightly different.

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Dario Michi, Banca Akros - Analyst [13]

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Thank you. Dario Michi, Banca Akros. The first question is on the CapEx plan, I mean notwithstanding the sizable increase in the CapEx plan, do you believe it is possible to see room for a buyback? And if yes, at which condition you believe this might be activated?

The second one is on Tamini, could you please give us an update on Tamini? Thank you.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [14]

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Buyback is the same answer as the dividend. Nothing in the cards at the moment. And Tamini, as you know from middle of last year, we have ask -- is present here our former CFO to take the lead of the Company that is going through a turnaround and we are targeting for next year some good news on the specific file. Please.

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Unidentified Audience Member [15]

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Deutsche Bank, three questions please. Firstly, just on -- well, they all relate to CapEx and kind of gearing. The first question is, you've increased your CapEx plans significantly today and you've outlined scope for more projects coming into your plan period, how complete do you think your plans are now? Might we be sitting here in a year's time and we might have another increase in CapEx? So, any kind of quantification on how complete you think that is be useful. And I'm wondering whether or not part of the caution or conservatism on the dividend is related to an anticipation for further CapEx going forward.

Second question is on gearing. You mentioned the less than 60% net debt to RAB at the end of the period. I was just wondering if could be any more specific on that. Do you think you might de-gear over the plan period as [current] CapEx.

And the third question is just on the long-term development plan, the EUR5.3 billion after 2021. Could you just give us some more details on that, what kind of things it involves and is that over the decade after 2021 or a shorter period? Thank you.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [16]

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Okay, starting with the first question, are we quote-unquote completed or there is much more? We are constantly reassessing the needs of the system, but we have done this time around very thorough analysis of the system needs. So, hard to tell you today that there is significant increases or like we are going to present our self-next year with another similar jump which is to be pragmatic. We don't think this is actually going to be the case.

Notwithstanding the fact that if you look, and we don't have figures today, but I think this is an excellent opportunity to mention it, if you look at detailed data from the European Commission on cost of networks and specifically transmission networks, Italy ranks extremely well. So, technically we would have the room compared to our peers, keeping our weight on the tariff lower than European average, lower than Germany, France, UK, Spain, whichever country you want to take. And not in terms of percentage, but in terms of euro per megawatt, which is the most clean benchmark you can take. So, there would be the room, but we don't think we're going to take that room.

I link into the second part of your question, again, if you go to page 32 of the annex, you have a lot of details I hope or some details of the breakdown of the total national development plan and you can see the categories of the specific investment, but maybe on a one-by-one basis, we're happy to go even more into the detail. It's anyway the national public development plan that we formally submitted to the regulator and authorities end of last month, so it's our official proposal.

And on gearing, please.

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Tiziano Ceccarani, Terna Rete Elettrica Nazionale SpA - CFO [17]

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Yes, on gearing, you may consider a 55% or 56% starting 2016, then moving up through the plan period considering this EUR4 billion investment CapEx. At the end of period, cash flow generation will be higher than cash required for investments and even the capital allocation for international activities is expected to be lower. So basically, there will be an improvement which will account for lower than 60% net debt to RAB at the end of the period.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [18]

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Yes, Anna Maria. Anna Maria Scaglia from Morgan Stanley.

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Anna Maria Scaglia, Morgan Stanley - Analyst [19]

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Hi, Anna Maria Scaglia from Morgan Stanley. I have got a few questions from me. The first one is on CapEx in 2020, 2021, the EUR1.4 billion that you mentioned, which is through the Totex period. I was wondering you seem to be very confident that that CapEx will be there. What's the risk that with Totex you will be asked to consider spending in OpEx rather than CapEx and therefore what's your ability to really say this is 100% sure as a CapEx, so I'm referring to the 2020, 2021 CapEx.

The second one is on debt. Can you give us a number for the net debt at the end of the plan period or a rough number, please?

And last question just to clarify, if I may, on the D&A, you mentioned this EUR35 million in positive impact. Is that fully in 2017 so the EUR0.34 include the EUR35 million of lower D&A? Thank you.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [20]

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I think the first question is an important one. We're assuming at the moment that we will carry on in 2020, 2021 the CapEx that the national development plan allows us to carry in 2020, 2021. If starting from this year and mainly I believe the first part of 2018, the new Totex regime will give us a different view. We will reassess, but the read that we have at the moment is that if this CapEx are deemed necessary, it's going to be very difficult that we're going to review and reconsider the necessity of the CapEx. What is going to change in 2020, 2021 is the way the regulator will pay for that necessary CapEx and that might mean that the cost can be slightly lower, so maybe they're going to ask us to spend more than EUR1.4 billion and that might mean on the same amount a list of CapEx is slightly lower amount of investment, then maybe a higher return if we perform.

And then on the last two question, Tiziano please.

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Tiziano Ceccarani, Terna Rete Elettrica Nazionale SpA - CFO [21]

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Yes, I would start with the one on depreciation, so that EUR35 million is coming starting from 2016. So, also in the at preliminary figures of 2016 you find that EUR35 million included and then will be all over the plan period, of course fully compliant with the CapEx plan according to high voltage transmission lines.

On debt, we are not used to provide that specific and retail numbers at the end of 2021 basically because strongly affected by past two items which is not that simple to predict on a yearly basis or even at worse on the 2021 period, but if you look at slide 22, we represent and reported our cash flow evolution with dividend, payments, CapEx and maybe I think easy for you guys to come to a very clear number.

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Javier Suarez, Mediobanca - Analyst [22]

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So coming back again, on the EPS of the Company, so maybe I did something wrong, but looking at your EPS for 2017 at EUR0.34 per share, it looks like the EPS of the Company is going to be flat in the period 2017 to 2021. Is that a correct interpretation of your number and there is a spike on the EPS and then a flattish performance to 2021.

And the second thing is on the RAB growth for the Company. In the previous business plan presentation, the CapEx was lower and the RAB growth was higher. So, can you explain why the dynamics why the RAB growth per year is lower while CapEx is higher? Thank you.

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [23]

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No, I think in terms of the earning per shares that's a good observation, the answer is that we keep our commitment at 3% EPS over the plan, but we're not stating that it's going to be evenly distributed over the plan and that means that there is additional upside from the EUR0.34 of next year in our figures.

And in terms of the second question, I think the answer is basically last year we were embedding the M&A deal, which was creating a higher RAB growth and is a RAB element because it's accounted for in the RAB, but it was not considered strictly speaking in the CapEx because it was not an investment on a new grid. I think this is the answer.

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Unidentified Company Representative [24]

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Another question from Enrico.

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Enrico Bartoli, MainFirst - Analyst [25]

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Hi, sorry. A very quick follow-up. If I understood well that the impact of the longer life of the assets will be also in 2016 --

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Unidentified Company Representative [26]

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That's correct.

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Enrico Bartoli, MainFirst - Analyst [27]

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And secondly on the tax rate, what do you assume? Do you assume the year has to go down to 24% starting this year?

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Tiziano Ceccarani, Terna Rete Elettrica Nazionale SpA - CFO [28]

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Yes, confirm that the depreciation will start contributing to the P&L from 2016 already included. So, the preliminary results you saw before already include these figures. And tax rate we expect budget low to be confirmed, so 24% starting 2017.

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Unidentified Company Representative [29]

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Stefano Gamberini.

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Stefano Gamberini, Equita - Analyst [30]

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A quick follow-up regarding the [channel] that you have for power generation market. If I am not wrong, you expect a huge reduction of thermal electric capacity by 12 gigawatts in three years and this means probably that the volatility on the market will continue and so this is the reason why we'll accelerate all these investments in next three years.

And the second, why do you not include also batteries in your investments that you expect for the next three years?

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Matteo Del Fante, Terna Rete Elettrica Nazionale SpA - CEO [31]

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Yes, the assumption that Alberto Ponti has shown you of decrease of thermal capacity is based on official declared plans from producers. Obviously, the producers will adapt the plans to the system needs. So, at the moment, maybe the plan will be less sizable because otherwise the volatility, as you correctly pointed Stefano will increase.

Good question on storage. I briefly mentioned it in the plan, so it is in our plan and specifically we are not going to ask any additional room to the regulator in the space of storage, but we are taking 2017 for finalizing the review of how the initial CapEx has performed in the system and the review has started in 2016, so we have now evidence of the positive contribution that the installed storage is bringing to the Tamini system. And then we are assuming to complete the approved storage CapEx plan from 2018 onwards to a residual EUR50 million, which is not that relevant but is we believe useful especially in terms of research and development, because that allows us to drive the new technologies.

And bear in mind that on storage, there are also important considerations being developed at the European level, the winter package is stating some very clear message on storage and ownership of storage. So, everything has been analyzed also within a European regulatory framework that slowly is coming into place also in Italy, let's say, between 2018 and 2019 at the latest.

So, if there are no additional questions, we thank again on behalf of all the management team, the Board and Chairwoman Catia Bastioli, all of you for being here and available further on, on a bilateral basis to development any of the topics we outlined today. And on the March 15, we will be approving and bringing to the Board of Directors in the morning the 2016 results of which we gave some guidance today and then announce it after the Board for investors' benefit. Thank you very much.