Terna — Audit Report / Information 2019

Apr 24, 2020

Board of Statutory Auditors' Report to the Annual General Meeting of Terna S.p.A.'s shareholders pursuant to article 153 Legislative Decree 58 of 24 February 1998 (the Consolidated Law on Finance) and article 2429, paragraph three of the Italian Civil Code

Dear Shareholders,

During the year ended 31 December 2019, the Board of Statutory Auditors di Terna S.p.A. (also the "Company") fulfilled its statutory duties in accordance with the law, complying with the code of conduct for the Statutory Auditors of listed companies (the "Code of conduct") issued by the Italian Association of Chartered Accountants ("Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili"), the recommendations of the CONSOB (the Commisione Nazionale per le Società e la Borsa, Italy's Securities and Exchange Commission) regarding corporate controls and the activities of the Board of Statutory Auditors and the guidelines in the Corporate Governance Code published by Borsa Italiana (the "Corporate Governance Code").

Responsibility for the statutory audit required by Legislative Decree 39 of 27 January 2010 (Legislative Decree 39/2010) has been assigned to the independent auditors, PricewaterhouseCoopers S.p.A., appointed by the Annual General Meeting of 13 May 2011 for nine years from 2011 to 2019.

The Board, which also took into account the indications contained in CONSOB announcement DEM/1025564 of 6 April 2001, as amended, reports the following.

• We verified compliance with the law and the By-laws.
• We attended the meetings of the Board of Directors and specific preparatory meetings regarding the agenda items, as well as meetings of the Audit and Risk, Corporate Governance and Sustainability Committee. We periodically obtained information from the Directors on the overall operating performance, the outlook for the Company and on the most significant transactions, in terms of their impact on the results of operations and financial position, carried out by the Company, satisfying ourselves that the decisions taken and implemented were compliant with the law and the By-laws and were

not manifestly imprudent, risky or in potential conflict of interest or in contrast with resolutions approved by General Meeting, or such as to compromise the value of the Company. In the course of our activities, we found no evidence of transactions of an atypical and/or unusual nature. In carrying out our duties, we analysed information flows from the various departments and also conducted interviews with the Company's senior management, with the independent auditors and with the oversight bodies of subsidiaries.

• At the meeting of 10 March 2020, the Board of Directors, on the recommendation of the Remuneration Committee, approved the "Annual Remuneration Report", prepared in accordance with article 123-ter of the Consolidated Law on Finance and in compliance with the provisions of article 6 of the Corporate Governance Code.
• We monitored compliance with and effective application of the "Procedure for Related Party Transactions", recently revised by the Board of Directors on 15 December 2016 and compliant with article 4 of the CONSOB Regulation referred to in Resolution 17221 of 12 March 2010, as amended.
• The Company has prepared the financial statements for the year ended 31 December 2019 in compliance with International Financial Reporting Standards (IFRS). These financial statements were audited by PricewaterhouseCoopers S.p.A., which issued its report on 16 April 2020 without any qualification or emphasis of matter. The financial statements, together with the Directors' report on operations, was made available to us within the deadline required by law and we have no particular comments in this regard.
• The Company also prepared the consolidated financial statements for the year ended 31 December 2019 in compliance with International Financial Reporting Standards (IFRS). These financial statements were also audited by PricewaterhouseCoopers S.p.A., which issued its report on 16 April 2020 without any qualification or emphasis of matter.
• Among the most significant transactions carried out in 2019, we note the following, referring you to the report on operations for more detailed information:
  • the entry into service of the Italy-Montenegro Interconnector (445

km long and with capacity of 600 MW) and the subsequent sale of the special purpose vehicle, Monita Interconnector S.r.l., to the consortium of energy-intensive users, Interconnector Italia S.C.p.A.;

• the acquisition (completed in February 2020) of 90% of Brugg Kabel AG, a leading manufacturer of terrestrial cables;
• the issue two green bonds with a five- e and seven-year terms and a total value of €750 million at a fixed rate of 1%, as part of the Company's €8 billion Euro Medium Term Notes (EMTN) programme;
• the arrangement of a five-year revolving credit facility of €1,500 million at a rate of EURIBOR plus a variable spread of between 0.60% and 1.45% based on Terna S.p.A.'s credit rating (at the same time, the Company cancelled two facilities totalling €1,300 million expiring in 2020 and 2021);
• the issue bonds with a term of 6 years and a value of €500 million at a fixed rate of 0.125% (an effective cost of 0.25%), as part of the above EMTN programme;
• the arrangement of a new €490 million loan from the EIB (European Investment Bank), to be disbursed in two tranches (€147 million in June 2020 and €343 million in March 2021) at fixed rates of 0.717% and 0.78%, and with terms of approximately 22 years.
• We oversaw, within the scope of our responsibilities, the adequacy of the Company's organisational structure, compliance with the principles of good governance and the adequacy of the instructions issued by the Company to its subsidiaries pursuant to article 114, paragraph 2 of the Consolidated Law on Finance, by obtaining information from the heads of the relevant departments, through meetings with the independent auditors and with the oversight bodies of the most important subsidiaries in terms of size. With regard to the provisions of article 15, paragraph one of the Markets Regulation adopted by CONSOB Resolution 20249 of 28 December 2017, the Company's non-EU subsidiaries are not of material importance as defined by the articles in Chapter II, Section VI, Part III of the Regulations for Issuers adopted by CONSOB Resolution 11971 of 14 May 1999, as amended (the "Regulations for Issuers").
• We monitored the adequacy of the administrative and accounting system, assessing its reliability in providing a true and fair view of operations; this activity was carried out by obtaining information

from the heads of the various departments, by examining company documents and analysing the results of the work carried out by the independent auditors. The Chief Executive Officer and the Manager responsible for the Company's financial reporting have, with in reports attached to the financial statements for 2019, attested to: a) the adequacy and effective application of accounting and administrative procedures; b) the compliance of the financial reports with international financial reporting standards; c) the consistency of the documents with the underlying accounting books and records and their ability to provide a true and fair view of the financial position and results of operations of the Company. A similar attestation is attached to the Terna Group's consolidated financial statements.

• We assessed and oversaw the adequacy of the internal audit system through: a) examination of the report prepared by the Head of Internal Audit on the internal audit system; b) examination of the Internal Audit reports, as well as information on the results of monitoring; c) meetings with the oversight bodies of the most important subsidiaries pursuant to the first and second paragraphs of article 151 of the Consolidated Law on Finance; d) participation in the meetings of the Audit and Risk, Corporate Governance and Sustainability Committee and acquisition of the relevant documents; e) meetings with the Manager responsible for financial reporting and the Chief Risk Officer. Attending the Audit and Risk, Corporate Governance and Sustainability Committee meetings allowed the Board of Statutory Auditors to coordinate its activities with those of this Committee in performing our functions as the "Internal Control and Audit Committee", assigned to us on the basis of article 19 of Legislative Decree 39/2010 and, in particular, to oversee: a) the financial reporting process; b) the effectiveness of the internal quality control, risk management and internal audit systems; c) the statutory audit of the accounts; and d) matters relating to the independence of the audit firm.

On the basis of the activities carried out and considering the evolving nature of the Internal Audit System, in the view of the Board of Statutory Auditors the system is adequate overall and we have no observations to report to shareholders.

In accordance with art. 149-duodecies of the Regulations for Issuers,

the financial statements include the required disclosure ofthe overall fees charged for auditing Terna S.p.A.'s separate and consolidated financial statements for the year ended 31 December 2019, and for the review of the half-year report, the assessment of the regular nature of accounting systems, and for the other tasks assigned to the audit firm; the fees for these other tasks (inclusive of expenses) amount to €275,987, as follows:

-	audit of the unbundling for ARERA	35,200
-	audit of reporting packages	17,600
-	opinion on payment of the interim dividend	35,200
-	assurance of the sustainability
	report/non-financial statement	54,192
-	issue of EMTN comfort letters and
	other documents	133,795

The independent auditors have notified us that, based on the best information available, and taking into account the regulatory and statutory requirements for auditors, it has, in the period in question, maintained a position of independence and objectivity towards Terna S.p.A. and that there have been no changes regarding the absence of any form of incompatibility with reference to the situations and persons provided for in article 17 of Legislative Decree 39/2010 and the articles referred to in Chapter I-bis of Section VI of the Regulations for Issuers.

• We held periodic meetings with representatives of the independent auditors pursuant to article 150, paragraph 3 of the Consolidated Law on Finance, and there are no matters worthy of mention in this Report. We also note that on 16 April 2020 the independent auditors issued their report pursuant to the third paragraph of article 19 of Legislative Decree 39/2010, and the additional report required by article 11 of the European Regulation (EU) 537/2014, in which the auditors do not report on significant issues or shortcomings relating to the system of internal controls over financial reporting and which we have submitted to the Board of Directors without observation.

The independent auditors' additional report notes that, as a result of the health emergency caused by the outbreak of the Covid-19 virus and the subsequent restrictions imposed by the authorities, its audit activities had to be completed "at a distance", but that in any event they were able to complete the collection and adequate and sufficient evidence to support their conclusions, without encountering limits on audit procedures. The independent auditors also notes that Terna S.p.A. considers the above emergency to be a non-adjusting event and that a specific disclosure has been included in the notes to the financial statements.

• On 16 April 2020, the independent auditors issued their report on the consolidated non-financial statement prepared pursuant to article 3, paragraph ten of Legislative Decree 254 of 30 December 2016 and article 5 of CONSOB Regulation adopted with Resolution 20267 of 18 January 2018, which states that no matters have been brought to the attention of the independent auditors that would cause them to conclude that the Terna Group's consolidated non-financial statement for the year ended 31 December 2019 has not been prepared, in all material aspects, in compliance with the requirements of articles 3 and 4 of the above decree and the Global Reporting Initiative Standards (GRI Standards).
• The Terna Group's consolidated non-financial statement constitutes a separate report with respect to the Directors' report on operations, as permitted by article 5, paragraph three of the above decree.
• We monitored the procedures adopted to ensure effective implementation of the Corporate Governance Code adopted by the Company, as set forth in the Report on Corporate Governance and Ownership Structures approved by the Board of Directors on 10 March 2020. With reference to the recommendations falling within the purview of the Board of Statutory Auditors, we state that:
  • we have verified the correct application of the criteria and procedures for assessing independence, adopted by the Board of Directors;
  • with regard to self-assessment of the independence requirements for members of the Board of Statutory Auditors, we have verified their existence in keeping with the procedures adopted by the Directors;
  • we have complied with the provisions of the regulation governing the management and handling of confidential and privileged company information.

Finally, it should be noted that the independent auditors have expressed its opinion regarding the consistency of the information provided, in accordance with paragraph 4 of article 123-bis of the Consolidated Law on Finance, in the Report on Corporate Governance and Ownership Structures with the separate and consolidated financial statements.

• We have conducted the review of the Board of Statutory Auditors and prepared the summary of the activities carried out by members of the Board in 2019, as required by Standards Q.1.1 and Q.1.6 of the Italian Association of Chartered Accountants.
• With reference to Legislative Decree 231 of 8 June 2001, the Company has, for some time, adopted an organisational and management model, which is regularly revised and which is compliant with best practices. Similar models have been adopted by the subsidiaries. During the year, the Board of Statutory Auditors regularly exchanged information with members of the Supervisory Board. The information gathered did not reveal any critical issues with respect to the proper implementation of the organizational model, requiring mention in this report.
• We have not received any complaints pursuant to article 2408 of the Italian Civil Code, nor are we aware of any events or petitions requiring mention during the Annual General Meeting.
• We have verified compliance with the laws regarding the preparation of separate and consolidated financial statements and the report on operations, directly and with the collaboration of the heads of departments and through information obtained from the independent auditors, and we have nothing significant to report.
• We expressed the opinion required from the Board of Statutory Auditors by the third paragraph of article 2389 of the Italian Civil Code (the remuneration of executive Directors).
• The independent auditors issued the opinion referred to in paragraph 5 of article 2433-bis of the Italian Civil Code (the interim dividend).
• The members of the Board of Statutory Auditors have complied with the obligation to notify directorships and appointments as statutory auditors in Italian companies within the deadlines and according to

the procedures provided for in article 148-bis of the Consolidated Law on Finance and the articles in Chapter II, Section V-bis, Part III of the Regulations for Issuers.

• During 2019, the Board of Statutory Auditors met seven times, attended the thirteen meetings of the Board of Directors, the six meetings of the Audit and Risk, Corporate Governance and Sustainability Committee and the Annual General Meeting of shareholders held on 8 May 2019.

On the basis of our activities and the information obtained, the Board of Statutory Auditors is not aware of any omissions, shortcomings, irregularities or any other circumstances that require reporting to the supervisory authorities or mention in this report.

Having reviewed the financial statements for the year ended 31 December 2019, the Board of Statutory Auditors has no objections to raise as regards the proposed resolutions submitted by the Board of Directors.

Rome, 17 April 2020

For the Board of Statutory Auditors The Chairman Riccardo Schioppo