2018

Half-Year Report 30 June Terna Group

Energy is our responsibility

INTRODUCTION

The Terna Group's interim report for the six months ended 30 June 2018 has been prepared in accordance with the requirements of art. 154-ter of Legislative Decree 58/98 introduced by Legislative Decree 195 of 6 November 2007 (the "Transparency Decree"), as amended by Legislative Decree 254 of 30 December 2016.

The Terna Group	5
Highlights 1H2018	6
The Company and our strategy	8
Structure of the Group	11
Shareholder structure	12
Key events during the first half of 2018 and after the end of the reporting period	14
Operating environment	19
Macroeconomic environment	20
Market environment	22
Regulatory environment	26
Social environment	28
The Group's businesses	31
Regulated activities in Italy	32
Non-Regulated activities	38
International activities	42
Terna's people and innovation	44
Financial review for the first half of 2018	49
Financial review for the first half of 2018	50
Terna's shares	60
Risk management	63
Risk management	64
Outlook and Other information	67
Outlook	68
Other information	70
Annexes	73
Legislative and regulatory framework	74
Changes in the dimensions of the NTG	76
Alternative performance measures (APMs)	79
Reconciliations	80

Highlights 1H2018

CORPORATE EVENTS

Strategic Plan 2018-2022 GRIDS AND VALUES

Presented to the financial community on 22 March 2018

Annual Report 2017

Approved by the Annual General Meeting of shareholders on 4 May 2018

FINANCIAL HIGHLIGHTS

(€m)	1H2018	1H2017	CHANGE
Revenue	1,080.3	1,045.5	+3.3%
EBITDA	814.9	794.8	+2.5%
Profit attributable to owners of the Parent	360.2	351.3	+2.5%
Capital expenditure	337.9	325.7	+3.7%
	1H2018	FY2017
Net debt	7,895.5	7,796.4

SHARE PERFORMANCE AND SHAREHOLDER RETURN

Total Shareholder Return

+506% from the IPO to the end of June 2018

Closing price at the end of June 2018

4.632€ per share

OPERATIONAL HIGHLIGHTS BY AREA OF BUSINESS

Regulated Italy	› 90.5 km of new power lines and 1 new electricity substation › Resolutions on output-based incentives published
Non-Regulated	› Acquisition of Avvenia The Energy Innovator Srl completed › Telecommunications: - award of contract to provide connectivity service to RaiWay - partnership with Open Fiber proceeding › Monita Interconnector: ARERA issues Ministry for Economic Development with favourable opinion on exemption for 150 MW (Resolution 338/2018)
International	› Implementation of South American projects continues. Works in Brazil due to be completed by the end of the year.

CROSS-BUSINESS ENABLERS

€	Capital structure	› New fixed-rate green bond s issued, raising €750 million › Subsidised financing: €184 million loan (€148 million from the Ministry for Economic Development and €36 m from Sicily Regional Authority)
	Innovation & Digitalisation	› Scouting for new opportunities (Horizon Europe project)
	Workforce	› Partnerships with LUISS University and Stanford University

PERFORMANCE DURING THE PERIOD

(*) Provisional data. RS: renewable sources. NRS: non-renewable sources.

The Company and our strategy

The Terna Group's main activities are the transmission and dispatching of electricity in Italy. Terna performs these activities in its role as the Italian TSO (Transmission System Operator), under a monopoly arrangement and a government concession.

The electricity sector is rapidly evolving as a result of the radical transition underway, which aims to achieve challenging objectives linked to sustainability, decarbonisation, competitiveness and security. In particular, the sector is witnessing the strong development of renewables, resulting in measures designed to integrate them within the electricity system. We are also seeing the pursuit of energy security by strengthening interconnections, the development of grid storage and power grid resilience and, finally, greater competitiveness in the market, requiring the management of complex trading relations between TSOs and other parties operating within the system.

In this context, the leading European TSOs are redesigning their strategies and increasing investment to meet the requirements of the new system. Their investment plans take into account the varying stages of energy transition in different countries and are strongly impacted by the development of renewables.

Terna's role in the national electricity system is to lead the coming sustainable energy transition, by leveraging our distinctive innovation capabilities, competencies and technologies for the benefit of all stakeholders.

In managing out businesses, Terna pays great attention to the possible economic, social and environmental impacts, and adopts a sustainable approach to business in order to establish, maintain and consolidate relationships with our stakeholders that are based on mutual trust, with a view to creating value for both the Company and our stakeholders. Terna owns its infrastructure and is responsible for drawing up the National Transmission Grid Development Plan (the NTG), the Defence Plan and the Resilience Plan (resolutions 653/15/R/eel and 646/15/R/eel, as amended).

To support this strategy, the Company plans to step up investment in innovation and digital solutions in order to manage the growing complexity of the system. Significant attention will also be paid to the development and insourcing of strategic skills to cope with projects of growing size and complexity.

INTERIM REPORT ON OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2018

The Group's main areas of business are as follows:

Regulated Activities in Italy - Electricity transmission and dispatching in Italy

The Terna Group owns 99.7% of the NTG, which is among the most modern and technologically advanced transmission grids in Europe. We are the largest independent electricity transmission network operator in Europe and one of the world's leading operators, with around 73 thousand kilometres of high and very high-voltage lines.

The Group is responsible for managing the flow of electricity through the grid in avery part of Italy, with the aim of ensuring that there is a constant balance between the quantity of energy injected into the grid and demand, and guaranteeing continuity and accessibility of service for the population as a whole.

We are also responsible for planning, construction and maintenance of the grid. We operate as a TSO in accordance with the regulations defined by the Regulatory Authority for Energy, Networks and the Environment (ARERA) and in implementation of the guidelines established by the Ministry for Economic Development (the MED). We are responsible for the long-term safety, quality and cost-effectiveness of the national electricity system, pursuing its development and integration with the European system and ensuring that all users of the system have equal access.

With reference to Regulated Activities in Italy, the system needs a new investment drive to respond to the developing needs of the system, with a focus on maximising long-term use and sustainability. The role of proactive system operator in defining the grid's structure should also be strengthened by combining Terna's specialist expertise with the experience gained in the most advanced markets.

Strategic guidelines for Regulated Activities in Italy

To strengthen the core business by giving top priority to all the activities that enable Italy to tackle its energy challenges in a safe, efficient and sustainable way.

Non-Regulated Activities - New business opportunities in Italy

In line with the guidelines in our Strategic Plan, the Group is pursuing opportunities beyond its core operations, whilst remaining true to its mission (e.g., energy solutions) and if distinctive and capable of adding significant value, as a platform for innovation and sustainability within the process of the TSO's development.

Non-regulated Activities should be geared towards supporting the energy transition, especially as an energy solutions provider, involving the development of services for companies and taking advantage of value added market opportunities for traditional and renewable energy customers. The telecommunications business will aim to pursue opportunities based around boosting the Group's infrastructure capabilities.

The Tamini Group will continue with its turnaround plan, exploiting its distintive competencies.

Strategic guidelines for Non-regulated Activities

To launch new services to support the energy transition, taking advantage of opportunities beyond our core activities, to be pursued in line with Terna's mission, and if distinctive and/or capable of adding significant value.

International Activities

The Group aims to take advantage of opportunities for international expansion by leveraging our core competencies developed in Italy as a TSO, where such competencies are of significant importance in the host country.

Overseas investment focuses on countries with stable political and regulatory regimes.

In the next three years, our international activities will focus on the execution of existing projects, leveraging the Group's specialist expertise. Among the priority actions, the main focus will be on selecting international growth opportunities with a high technological content (a key aspect for Terna) and involving potential agreements/partnerships, including the management of low-risk assets without the need to tie up large amounts of capital.

Strategic guidelines for International Activities

To leverage the core competencies developed in Italy as a TSO through growth opportunities overseas.

Structure of the Group

The structure of the Terna Group at 30 June 2018 is shown below.

Compared with 31 December 2017, on 15 February 2018, Terna Plus S.r.l. acquired 70% of Avvenia The Energy Innovator Srl. Further details are provided in the section, "Key events in the first half of 2018 and after the reporting period".

Shareholder structure

At the date of preparation of this report, Terna's share capital amounts to €442,198,240, comprising 2,009,992,000 fully paid-up ordinary shares with a par value of €0.22 each.

Based on periodic surveys carried out by the Company, it is estimated that 54.7% of Terna's shares are held by Italian shareholders, with the remaining 45.3% held by overseas institutional investors, primarily from the USA and Europe.

Based on information from the shareholders' register and other data collected, as at July 2018 Terna's shareholder structure breaks down as follows:

SHAREHOLDERS BY CATEGORY

SHAREHOLDERS BY GEOGRAPHICAL AREA AND CATEGORY

Major shareholders1 CDP RETI SpA2 (a company controlled by Cassa Depositi e Prestiti SpA): _____________29.851%

the Investor Relations section of Terna's website (www.terna.it).

LAZARD ASSET MANAGEMENT LLC (as a discretionary asset manager): ____________________________________5.122%

Information on the ownership structure, restrictions on the transfer of shares, securities that grant special rights, and restrictions on voting rights, as well as on shareholder agreements, is provided in the "Report on Corporate Governance and Ownership Structures" for 2017. This is available in

¹ Shareholders who, based on the available information and notifications received from the CONSOB, own interests in Terna SpA that are above the notifiable threshold established by CONSOB Resolution 11971/99.

² On 27 November 2014, a shareholder agreement was entered into by Cassa Depositi e Prestiti SpA (CDP), on the one hand, and State Grid Europe Limited (SGEL) and State Grid International Development Limited (SGID), on the other, in relation to CDP RETI SpA, SNAM SpA and TERNA SpA. This was later amended and supplemented to extend the scope of the agreement to include Italgas SpA.

Œ
	$\blacksquare$ 0.
	$\overline{\phantom{a}}$

Key events

during the first half of 2018 and after the reporting period

Corporate events

On 4 May 2018, the Annual General Meeting of Terna's shareholders approved the financial statements for 2017.
"Grids and Values", the Strategic Plan for the period 2018-2022, was presented to the market and stakeholders on 22 March 2018, following its approval by the Board of Directors.

Business

On 6 July 2018, Terna's new 150kV Electricity Substation at San Salvo (Chieti) entered service, as did connections to the relevant power lines, "Gissi - Montecilfone" and "San Salvo industrial park - Termoli Sinarca", and the connection to the Primary Substation in San Salvo that supplies electricity to the area. The completed project makes the Adriatic coastal area electricity system, which experiences extremely high demand during the summer season, more reliable and secure. The project, in which Terna invested approximately €8 million, involved the installation of connections using low-profile, single-pole pylons instead of the traditional truncated pyramid-type pylons, considerably reducing the footprint. The substation has also been equipped with a modern digital control system, which allows the plant to increase electrical insulation and, consequently, its resilience under particular weather-related and environmental conditions caused by high levels of salinity.
On 2 July 2018, Terna became the first Italian company to receive certification for its Asset Management System, covering its power lines and substations, in accordance with the international ISO 55001:2014 "Asset Management" standard, which sets out the requirements for optimised asset management. The Company has voluntarily complied with the "Asset management - Management systems - Requirements", introduced into Italy in 2015 as UNI ISO 55001:2015, a global standard for the management of corporate assets. The certification guarantees the effectiveness and efficiency of the process of maintaining and replacing the power lines and electricity substations forming part of the national transmission grid throughout their lifecycle and the achievement of high levels of sustainable performance. The new certification adds to the other accreditations already obtained by Terna in previous years. It confirms the Company's commitment to responsibility and the close attention paid to security, transparency, sustainability and efficiency within the Company, which manages over 72 thousand km of highvoltage lines, 871 electricity substations and 781 electricity transformers located throughout Italy, each day employing 350 qualified firms at 200 sites located from north to south, at which it is in the process of carrying out over 100 infrastructure projects.

This certification provides further confirmation of the high level of performance achieved by Terna when measured against ITOMS (International Transmission Operations and Maintenance Study) and ITAMS (International Transmission Asset Management Study).

• In June 2018, various works involved in the modernisation and restructuring of the Benevento electricity network, with the aim of ensuring its environmental sustainability and efficiency, got underway. Work began on colouring 8 electricity pylons in the Contrada San Vitale area green. This example of environmental engineering is being carried out following dialogue between Terna and the local authority and will ensure that the electricity infrastructure fits in better with the surrounding area, combining the benefits of electric power with environmental sustainability. In addition, work on installing new 380/150 kV transformer equipment was The Terna Group | Operating environment | The Group's businesses | Financial review | Risk management | Outlook and Other information | Annexes |

completed, expanding and completing the structure of the Benevento 3 electricity substation that entered service in 2017. In November 2018, Terna expects to begin the demolition of approximately 9 km of 380 kV power line between Benevento II and Foggia, amounting to a total of 27 pylons.

On 15 June 2018, the 132 kV underground cable linking the Sacca Serenella Primary Substation and the Cavallino Primary Substation entered service. This is the first stage of Terna's plan to modernise the grid serving the Venetian lagoon, boosting security and efficiency, and involved the laying of 14 km of cable, including 10 km of submarine cable. The work was carried out using the most sustainable technological solutions available, in keeping with the environmental importance of the location. At the same time as the entry into service of the new connection between the Sacca Serenella Primary Substation and the Cavallino Primary Substation, Terna began work on the second section that will complete the project: the 132 kV "Fusina 2 - Sacca Fisola Primary Substation", an underground cable that will be ready by the end of 2018 and will enable the demolition of 6.5 km of existing power line in the area around the lagoon. Modernisation of the electricity network serving the Venetian lagoon, involving the investment of €55 million, represents a key part of Terna's Strategic Plan for 2018-2022, which envisages the investment of over €300 million in the Veneto region.
On 4 June 2018, Terna submitted additions to the environmental impact study for the Italy-Switzerland Interconnector to the Ministry of the Environment, proposing alternative solutions with regard to location and environmental concerns, thereby supplementing and expanding on the content of the original design. The interconnector will increase interconnection capacity between the two countries, resulting in greater transmission capacity from Switzerland and providing lower cost energy for consumers in the Po Valley and the Milan area. For Italy, this will also mean greater diversification of its energy sources and lower costs.
On 3 May 2018, Terna and RTR, the leading independent operator of photovoltaic plants in Italy with 334 MW of installed capacity throughout the country (134 plants), announced the signature of a multi-year agreement that will extend the two companies' long-standing partnership, which focusing above all on O&M (Operation and Maintenance) activities.
On 27 April 2018, the new 132 kV Electricity Substation serving Ravenna Industrial Park entered service, providing companies located in the park with a more efficient, better quality and more reliable electricity service, bringing economic benefits. Thanks to construction of the new substation and the resulting modernisation of the local electricity system, it was possible to reorganise all the fibre telecommunications networks of adjacent substations.
In early April 2018, Terna began laying the cable on the A32, forming part of the Italy-France interconnector, which will run from Condove (Turin) to Borgone (Turin). At the end of June, work also began near Avigliana (Turin) on continuation of the power line that will pass through the second Frejus tunnel. During this phase, work will take place on 8.5 km of the SP589 highway between the Monte Cuneo and Antica di Francia tunnels. The work will take place day and night for approximately 12 consecutive weeks in the period June-September 2018.
On 8 March 2018, ARERA published Resolution 129/2018, ''Urgent measures relating to output-based incentives for the transmission service. Amendments to the provisions governing the recognition of high-risk projects", which has introduced a series of measures applicable to Terna. Further details are provided in the section, "Regulatory environment".

• On 15 February 2018, Terna - via its subsidiary, Terna Plus - completed the acquisition of a 70% stake in Avvenia The Energy Innovator Srl, a new company to which the principal assets of Avvenia, a leader in the energy efficiency sector and certified as an Energy Service Company (ESCo), have been transferred. This transaction is part of the process of identifying and acting on new commercial opportunities for the provision of energy efficiency services and projects, in order to further strengthen Terna Plus's role as a supplier of comprehensive integrated energy services and expand its range of innovative solutions as an Energy Solutions Provider. This is in line with the strategy set out in the Strategic Plan for the Group's Non-regulated Activities.

Finance

On 16 July 2018, Terna successfully launched a fixed-rate green bond issue amounting to €750 million under its €8 billion Euro Medium Term Notes (EMTN) Programme. The bonds have a term to maturity of 5 years and pay coupon interest of 1%, with a yield of 1.08% (midswap + 80bps). The transaction is part of Terna's financial optimisation strategy designed to support the Group's investment programme and the cost of the new borrowing is below the overall average cost of 1.6% envisaged in the Strategic Plan. The transaction marks the reopening of the corporate bond market after a number of months of inactivity caused by rising yields. This is undoubtedly a positive development, not only for Terna but for the sector as a whole. The issue proved a great success with investors, with the bonds being six times oversubscribed and leading to the issue being increased from €700 million to €750 million when the bonds started trading.
On 30 May 2018, following the decision to place the Baa2 rating assigned to Italian government bonds "under review for a downgrade", Moody's Investors Service (Moody's) decided to take similar action regarding its long-term rating of Terna SpA (Terna). This reflects the Company's perceived link with the sovereign rating. Terna's long-term ratings are currently Baa1. At the same time, Moody's confirmed the Company's short-term rating as P-2.
On 28 March 2018, Fitch Ratings confirmed its long-term issuer default rating (IDR) and Terna SpA's senior unsecured rating as BBB+, one notch above the rating assigned to the Italian state, with a stable outlook. At the same time, the agency also reiterated its short-term IDR of 'F2'. Fitch's assessment confirms the soundness of the Strategic Plan 2018-2022 presented on 22 March 2018, which targets sustainable, consistent growth, allied with a new dividend policy offering attractive returns for shareholders.
On 15 March 2018, the Project Finance agreement worth US\$81 million, signed on 14 July 2017 and to be used to fund construction of a 500-kV transmission line in Uruguay, was awarded the prize for "Latin America Transmission/Distribution deal of the year", organised by IJ Global's Project Finance and Infrastructure Journal (one of the leading infrastructure publications in the world, focusing on the energy market). The journal is owned by Euromoney, recognised as one of the world's most authoritative sources of financial market information.

Sustainability and Innovation

• On 12 July 2018, the new latest generation green transformer, using vegetable oil as insulating fluid, entered service at the Udine West electricity substation after two years of tests. The new machinery, which combines efficiency, security and sustainability, possesses a number of unique technical characteristics: it drastically cuts the risk of fire and reduces the environmental impact, thanks to the use of renewable and almost 100% biodegradable vegetable oil as an insulator in place of mineral oil. Terna, which leads the way in the use of this alternative green technology, plans to install green autotransformers in other electricity substations around Italy as part of its innovation strategy designed to provide the country with an increasingly secure, modern and sustainable electricity grid. The Udine West and Tavazzano (Lodi) substations are the first two electricity substations in Italy to benefit from the new transformer.

On 29 May 2018, the second edition of Next Energy, set up by Terna, the Cariplo Foundation and Cariplo Factory in order to identify new talents in the Italian energy sector, came to an end. Bettery is the name of the project that won the second round of the initiative.
On 25 May 2018, Terna's inclusion in the Euronext index published by the ratings agency, Vigeo Eiris, was confirmed for a seventh consecutive year thanks to its Environmental, Social and Governance performances. The Company continues to be a member of the Euronext Vigeo 120 World index, which includes the 120 best companies in North America, Europe and Asia in terms of ESG (Environmental, Social and Governance) performance, of the Euronext Vigeo 120 Europe index and of the Euronext Vigeo Eurozone index, which include the 120 best European and Eurozone companies, respectively. This type of recognition from Vigeo Eiris is further confirmation of the strength and quality of Terna's commitment to sustainability and its ability to integrate sustainability goals within its business strategy.
On 16 January 2018, Terna and Luiss "Guido Carli" University signed a partnership agreement that aims to exploit high-potential talents through the recruitment and development of human capital. This marks the launch of Terna's training programme, which is intended to bring the business and academic worlds together in order to promote development of the expertise and skills needed in today's labour market and contribute to the country's growth.
In its "Sustainability Yearbook 2018", published in January 2018, RobecoSAM ranked Terna in the Bronze Class.

Security

• On 10 May 2018, Terna and the Italian Police signed an agreement designed to ensure the protection of the information networks and systems that support the Company's operations, and the adoption of effective strategies for preventing and combatting cybercrime. The IT systems and telecommunications networks used by Terna, one of Europe's leading grid operators, play a crucial, strategic role in ensuring that the Company is able to guarantee a service that is of enormous social and economic importance for the entire country.

Macroeconomic environment

Italy's economy showed signs of slowing in early 2018 compared with the positive performance of the previous year, reflecting similar trends in the global economy.

A number of factors have introduced elements of uncertainty regarding economic growth: rising interest rates in the USA and a strengthening of the dollar, having a negative impact on the financial conditions of a number of emerging countries; the start of a trade war; the reoccurrence of geo-political tensions following the US decision to withdraw from the nuclear deal with Iran and the rise in the oil price. The weakening of the economic cycle has had a widespread impact, affecting both emerging and advanced economies. GDP growth between January and March was lower than the figure for the previous quarter in the USA, the UK and in the Eurozone.

In Italy, real GDP growth in the first quarter (up 0.3% on the previous quarter and 1.4% up on the first quarter of 2017) was below the figure for the last quarter of 2017. The performance reflected a decline in investment and the negative contribution from net overseas demand, partly reflecting a strengthening of the effective exchange rate for the euro. Despite remaining at a low level, inflation appears to be returning to trend. Business confidence also declined during the early months of the year. Among manufacturers, confidence has fallen continuously over the last six months, whilst the services sector saw on ongoing decline between February and May, before picking up slightly in June. However, the figure remains below the level recorded last December. Consumer confidence, which has improved with respect to the previous year, is the only indicator to buck this trend. Employment is also up, although most of the jobs being created are temporary in nature. The unemployment rate fell to 10.7% in May, in line with the average for 2012.

Finally, industrial output in the first four months of the year remained at the same level registered in the previous four months, with the figure up 1.3% on the average for 2017. Compared with the previous four-month period, the sectors recording the biggest falls between January and April 2018 were manufacturers of rubber products (down 2.3%) and vehicle manufacturers (down 1.7%). In contrast, the sectors witnessing the biggest increases were mining (up 2.7%) and pharmaceuticals (up 2.5%).

+1.3% AVERAGE GROWTH IN INDUSTRIAL OUTPUT BETWEEN JANUARY AND APRIL 2018 VERSUS THE AVERAGE FOR 2017

ITALIAN GDP AND KEY ECONOMIC INDICATORS IN VOLUME TERMS

Source: Terna based on ISTAT data (chain-weighted data taking 2010 as base year, June 2018 edition).

Market environment

At international level, guidelines for development of the energy sector are provided in the United Nations Sustainable Development Goals (SDGs), which - in keeping with the decisions taken at the 21st Conference of Parties (COP 21) - set out a path for creating an energy system based around renewable sources by 2030. In the meantime, the European Union's Clean Energy Package, which is in the process of being approved, will lead to major changes in the rules and policies applied to the sector, ranging from the electricity markets to the energy efficiency of buildings. In line with these guidelines, the Italian government approved the country's National Energy Strategy ("SEN") at the end of 2017.

Italy's SEN is a key policy document, forming the basis for plans to develop the Italian Energy System of the future and setting a number of objectives, including to improve market competitiveness and to achieve sustainable growth, whilst pursuing security of supply and flexibility in energy systems and infrastructure.

These objectives, starting from the immediate full deregulation of the retail market, will facilitate the alignment of Italian and European energy prices. From now until 2020, this will be achieved through competitive auctions and long-term contracts for large-scale power generation and by promoting self-consumption for smaller power plants. After 2020, the focus will switch to support for renewables based on the concept of market parity.

The sustainable growth targets are backed up by a range of measures. One of the aims is to cut final energy consumption by 1.5% a year through to 2030, compared with earlier trends, translating into a saving of 10 MTEP (million tonnes of oil equivalent) by the end of the period. A further goal is to develop renewables, thereby boosting the share of total consumption generated by renewable energy sources from 17.5% in 2015 to 28% by 2030. The electricity sector has been set even more challenging goals, with the aim of increasing the share of total electricity consumption represented by renewables from 33.5% in 2015 to 55% in 2030. This will increase the quantity of electricity generated from renewables to 184 TWh by 2030, compared with 109 TWh in 20153 . Sustainable growth will also be enabled through the development of new technologies - such as electric vehicles, with up to 5 million vehicles expected to be in circulation by 2030 - and technologies that ought to be used more widely, in view of the efficiency improvements they offer, such as heat pumps. The key element underpinning these measures for the electricity sector is the announced phase-out of coal for power generation by 2025. This form of generation currently amounts to ~8 GW.

The measures designed to promote security of supply for energy, above all electricity, are dependent on opening up of the dispatching services market to electricity demand and generating units, including those from renewable sources that are not already enabled, as well as storage systems, the introduction of the Capacity Market, which is due to be launched in 2018, and on a further upgrade, development and modernisation of Italy's grids in order to facilitate integration with renewable production plants and resolve issues relating to congestion and network constraints linked to voltage stability. There are also plans to increase the capacity of storage systems, above all through the use of pumps, the adoption of systems capable of absorbing/producing reactive

³ This objective could be increased on the basis of the EU target for renewable sources by 2030, set on 19 June of this year. This envisages a binding target of 32% of total consumption.

power, and a further expansion of interconnections with neighbouring countries. Investment in resilience will also play a major role, by helping to increase the network's ability to cope with extreme weather events and electricity market crises and tensions, boosting coordination at European level. This has taken on added importance given the structural changes currently taking place in the electricity systems of many European countries (e.g. Germany, Spain, France and Belgium), primarily linked to progressive decarbonisation and the reduction in coal and nuclear generation capacity.

Electricity demand and production in Italy

Demand for electricity in Italy amounted to 158,622 GWh in the first half of 2018, an increase of 0.8% compared with the same period of 2017.

ELECTRICITY BALANCE IN ITALY (GWH)	1H2018*	1H2017*	CHANGE	% CHANGE
Net production	136,115	140,404	(4,289)	(3.1)
From overseas suppliers (imports)	25,523	21,400	4,123	19.3
Sold to overseas customers (exports)	(1,676)	(3,086)	1,410	(45.7)
For use in pumping**	(1,340)	(1,290)	(50)	3.9
Total demand in Italy	158,622	157,428	1,194	0.8

* Provisional data.

** Electricity used for pumping water, for sole subsequent use in electricity production.

Note: does not include demand for energy for ancillary services related to electricity production.

Monthly demand for electricity in Italy in the first six months of 2018 was higher overall compared with the same period of 2017, with the exception of the months of January and June, when demand was down on the same months of 2017, due primarily to the fact that temperatures were at variance with seasonal averages.

MONTHLY DEMAND FOR ELECTRICITY IN ITALY

In terms of electricity production by type of source, the first half of 2018 saw an increase in the production of hydroelectric and wind power and a reduction in photovoltaic production.

Thermoelectric production was also down on the first half of 2017.

NET ELECTRICITY PRODUCTION BY SOURCE

Net wind production
Net photovoltaic production
Net biomass production
Net geothermal production
Net hydroelectric production
Net thermoelectric production
* Provisional data.

Renewable sources accounted for approximately 37% of total energy demand in the first six months of 2018, up 33% on the figure for the same period of the previous year and reflecting a significant increase in hydroelectric production (up 37%) and a rise in wind power (up 9%).

INTERIM REPORT ON OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2018

Regulatory environment

Regulated revenue, which represents approximately 86% of the Group's total revenue, mostly derives from transmission and dispatching.

Regulated revenue, which represents approximately 86% of the Group's total revenue, mostly derives from transmission and dispatching, subject to regulation by the Regulatory Authority for Energy, Networks and the Environment (ARERA).

In Resolutions 653/2015/R/eel, 654/2015/R/eel and 658/2015/R/eel, ARERA set the tariff regime for electricity transmission, distribution, metering and dispatching services and regulations regarding the quality of the transmission service for the 2016-2023 regulatory period (the fifth regulatory period). This period has been divided into two sub-periods: NPR1 (2016-2019) and NPR2 (2020-2023).

In the first four years, the situation is essentially in line with the past, despite a number of changes and, more generally, a greater emphasis on output-based regulation. Instead, for the second-four-year period, ARERA has adopted a new method of regulation for the transmission service, involving the recognition of costs based on the total expenditure incurred (operating expenses and capital expenditure), also known as the "TOTEX" approach. In consultation document 683/2017/R/eel, ARERA then indicated that there would be a delay in introducing the TOTEX approach in the electricity sector, with its adoption subject to future decisions by the regulator.

At the same time, in Resolution 583/2015/R/com, ARERA announced the procedure for determining and revising the Weighted Average Cost of Capital (WACC) for a period of six years (2016-2021). This applies to infrastructure services in the electricity and gas sectors and is subject to revision, mid-way through the period, in order to adjust the WACC in a predictable and transparent manner in keeping with the economic cycle.

A number of key aspects of regulation in the period NPR1 are described below, with regard to allowed revenue for transmission and dispatching services.

Transmission revenue makes up the most significant portion of regulated revenue and is generated from application of the related transmission charge (TC), billed by Terna to distributors connected to the National Transmission Grid. This charge pays for the transmission services provided by all transmission service operators, including the owners of residual portions of the grid (external to the Terna Group), and is divided into two components: a power component (equal to 90% of revenue, expressed in euro cents/kW/year) and an energy component (10% of revenue, expressed in euro cents/kWh).

The dispatching service charge (DSC) aims to recompense Terna for carrying out the activities relating to the dispatching service and is billed by Terna to users of the dispatching service in proportion to the quantity of energy dispatched.

Allowed costs that combine to determine the TC and DSC components are attributable to three main categories, as summarised below:

THE THREE MAIN TYPES OF ALLOWED COST

Determined on the basis of the Regulated Asset Base (RAB) and the Weighted Average Cost of Capital (WACC). The RAB represents net invested capital for regulatory purposes. It is revalued annually on the basis of data from ISTAT (Italy's Office of National Statistics) on the change in the deflator applied to gross fixed investment and revised on the basis of the performance of investment and disposals. The WACC4 represents the weighted average cost of equity and debt. The methods of determining and revising the WACC are established by the regulator.

Allowed depreciation (calculated on the basis of an asset's useful life for regulatory purposes) is revalued annually based on the change in the deflator applied to gross fixed investment.

Allowed costs are determined by the regulator at the beginning of the regulatory period, based on operating costs recognised during the relevant year (which, in the case of NPR1, was 2014) and increased by any remaining portions of additional efficiencies achieved in the previous two regulatory periods. The resulting amount is revalued annually to take account of inflation and reduced by an efficiency factor designed to ensure that additional efficiencies are, over time, passed back to end users in full.

Resolution 129/2018, published on 8 March 2018, has also introduced a series of significant measures relating to Terna, concerning incentive mechanisms and the recognition of high-risk projects. These include:

incentives for the resolution of congestion between internal zones and on interconnections, by investing up to €150 million in additional transmission capacity in the period 2019-2023;
incentives for development of the grid with the aim of resolving congestion within zones, constraints on the grid affecting voltage regulation and the provision of essential services (the general criteria for quantifying the incentives are based on the expected benefits in terms of potential savings on the DSM as a result of the above projects, whilst definition of the detailed criteria will be dealt with in a later resolution);
the reinstatement of the return on work in progress (calculated by assuming a WACC with a debt-to-equity ratio of four) for highly complex and risky projects with a duration of over 3 years (between obtaining the necessary consents and entry into service) and when expenditure has not already exceeded 50%.

The resolution also puts off measures regarding other incentives relating to the following issues until later resolutions: grants from grid operators and overseas entities; additional measures designed to improve efficiency, promote market integration and security of supply and support the related research activities; the implementation of initiatives aimed at fostering stakeholder capabilities and building awareness among local authorities of the benefits of infrastructure.

⁴ For the period 2016-2018, the real pre-tax WACC for the transmission and dispatching service is set at 5.3%.

To cover the return on capital (RAB)

To cover depreciation

To cover operating costs

Social environment

A favourable social environment is essential to Terna's ability to carry out the investments envisaged within the established time-scale, and to exploit available opportunities in its nonregulated business, whether in Italy or overseas. It translates into the Company's possession of adequate social capital.

Good stakeholder relations, based on reciprocal trust, are essential, as they are directly linked to a firm's ability to be successful and to generate a profit. Good relations with employees, suppliers, customers and local communities have a positive impact on the business via talent attraction, motivation, productivity, the quality of its products/services, long-term partnerships, brand loyalty, goodwill and a social licence to operate.

Terna's "Stakeholder Management Model" has put in place an organically structured set of operational tools and procedures designed to optimise engagement and the periodic monitoring of relations with the Group's various stakeholders, thereby avoiding the risk of delays in becoming aware of potential problems. A specific engagement programme is conducted each year to identify the actions to be taken in order to bring the Group's relations into line with best practices and to ensure that the most influential stakeholders are listened to on a regular basis.

In addition, given the importance of relations with local communities for the purposes of gaining acceptance for investment in new grid infrastructure, Terna organises specific initiatives designed to involve local authorities and the general public.

The key aspects of the social environment in which Terna operates are described below.

KEY ASPECTS OF THE SOCIAL ENVIRONMENT Stakeholder

In order to ensure that the security and efficiency of the electricity service provided by Terna in the general interest are considered important, when set against the aim of protecting a local area, Terna has, since 2002, adopted a voluntary approach designed to foster the prior involvement of local government (regional and local authorities, park authorities, etc.). Since 2015, this has been extended to include people from the communities directly affected by Terna's plans through public meetings called "Terna incontra". In the first half of 2018, four such meetings were held (at Bisaccia, Lacedonia, Deliceto and Avigliana), supplemented by the collection of questionnaires, which showed that adequate information regarding the events had been provided and indicated approval on the part of the members of the public who took part.

Terna's commitment to the environment and biodiversity led, in 2009, to the conclusion of partnership agreements with critical stakeholders, such as leading environmental organisations, with the aim of arriving at shared solutions designed to boost the environmental sustainability of the NTG. Growing concerns over the impact of climate change, and the accompanying focus on energy transition initiatives, has led to further cooperation between Terna and these organisations, which include Legambiente, the WWF and Greenpeace.

Following COP 21 in Paris on climate change and approval of the United Nations Sustainable Development Goals, many stakeholders have begun focusing much more on issues relating to sustainability. One of the effects of this heightened attention has been the creation of national sustainable development strategies, including the one drawn up by the Italian government. It has also led to calls from numerous institutional investors - one being Blackrock - for major companies to conduct an informed and full assessment of the business risks linked to ESG issues and to manage those risks, and to the adoption, by European countries, of Directive 2014/95/EU on non-financial disclosures, requiring large Italian companies to annually publish a non-financial statement. Of particular importance, in terms of transparency and reporting, are the recommendations from the Task Force on Climate-related Financial Disclosures (the so-called Bloomberg Task Force) regarding the publication of information on the implications of climate change for business strategies, in terms of risks and opportunities. This is considered of central importance, with regard to both the best possible allocation of investment and efforts to combat climate change. In Washington at the end of May 2018, Terna presented the components of its Strategic Plan for 2018-2022 relating to sustainability to the US SIF Annual Conference (organised by the Forum for Sustainable and Responsible Investment).

Local communities: engagement and awareness of the purpose of projects

Environmental organisations: protection of the environment and nature conservation

Investors: a growing request for transparency regarding environmental, social and governance aspects

The Group's businesses 03

Operating results of Regulated Activities in Italy

A review of the key results from our Regulated Activities in Italy5 in the first half of 2018 and the first half of 2017 is provided below. Further details are provided in the section, "Financial review for the first half of 2018".

(€m)	1H2018	1H2017	CHANGE
Total Regulated revenue in Italy	979.4	967.5	11.9
Tariff revenue	958.4	950.2	8.2
- Transmission revenue	898.5	894.6	3.9
- Dispatching metering and other revenue	59.9	55.6	4.3
Other regulated revenue	14.7	11.7	3.0
Revenue from construction services performed under concession in Italy	6.3	5.6	0.7
Total Regulated costs in Italy	193.6	189.9	3.7
Personnel expenses	108.1	106.6	1.5
External resources	71.2	65.7	5.5
Other	8.0	12.0	(4.0)
Cost of construction services performed under concession in Italy	6.3	5.6	0.7
Regulated EBITDA in Italy	785.8	777.6	8.2

Regulated EBITDA in Italy amounts to €785.8 million for the first half of 2018, an increase of €8.2 million compared with the first half of 2017. This primarily reflects an increase in tariff revenue.

Regulated revenue in Italy is up €11.9 million, reflecting the following:

an increase in transmission revenue (up €3.9 million), due to an increase in transmission charges linked to a review of the applicable tariff to reflect allowed costs, the greater volume of energy transported and an increase in the portion of the NTG owned by Terna;
an increase in dispatching, metering and other revenue (up €4.3 million), reflecting ARERA's recognition of certain expenses that are currently not covered by the transmission and dispatching charges;
an increase in other revenue (up €3 million), due to higher insurance proceeds (up €2.1 million) to cover damage to the Group's plant.

Regulated costs in Italy are up €3.7 million, primarily due to a combination of the higher cost of external resources (up €5.5 million), reflecting the Group's new grid maintenance plan launched during the first half, partially offset by a reduction in other costs (down €4 million).

11.9 €m

the increase in revenues from Regulated Activities in Italy

⁵ The Terna Group's operating segments are in line with the internal audit system adopted by the Parent Company, in keeping with the Strategic Plan for the period 2018-2022.

Transmission and dispatching

Implementation of development initiatives

A total of 90.5 km of power lines (Bono-Buddusò, Messina Riviera-Villafranca, Ciminna-Casuzze and Cavallino-Sacca Serenella) entered service during the first half of 2018, as did the 132 kV substation serving Ravenna industrial park.

The Terna Group's total capital expenditure in the first half of 2018 amounts to €337.9 million, compared with the €325.7 million of the previous first half (up 3.7%). Investment incentives amounted to €47.2 million, up from the €32.0 million of the first half of the previous year.

THE GROUP'S CAPITAL EXPENDITURE (€m)	1H2018	1H2017	CHANGE	% CHANGE
Incentives for regulated assets*	47.2	32.0	15.2	47.5
Other regulated assets	243.6	271.0	(27.4)	(10.1)
Investment in regulated assets	290.8	303.0	(12.2)	(4.0)
Investment in non-regulated assets	40.7	15.7	25.0	159.2
Capitalised financial expenses	6.4	7.0	(0.6)	(8.6)
TOTAL CAPITAL EXPENDITURE	337.9	325.7	12.2	3.7

* Classification of investments in accordance with ARERA Resolution 579/2017/R/EEL.

Investment in non-regulated assets, amounting to €40.7 million, primarily regards the private part of the Italy-France interconnector (€23.3 million), as described below, and other projects being financed (€13.9 million).

The principal projects involving regulated assets in Italy are described below:

Cable connection

Terrestrial section: work in Montenegro and Italy completed, with 97% of the cables laid;
Submarine section: laying and protection of the entire submarine cable have been completed, as has installation of the conductor and the submarine cables for the conductor.

Converters

Cepagatti: assembly of the alternating current (AC) and direct current (DC) equipment is in progress, as is completion of the civil works and the cladding of buildings;
Kotor: electromechanical assembly is in progress, the foundations and construction of the buildings have been completed.

The Fibre for the Grid project, connecting the substations forming part of the National Transmission Grid (the NTG) and primarily substations, aims to boost the availability of data on the grid in order to make it easier to monitor and manage the security of the electricity system. 1,159 km of fibre was laid and 23 electricity substations in the NTG were connected and lit during the first half of 2018, making a total of 374 substations connected and lit.

Italy-Montenegro Interconnector (€48 million)

Fibre for the Grid (€16 million)

Italy-France Interconnector (€13.6 million)	• Piossasco converter - Assembly of the main buildings is continuing and work on the foundations for the equipment is in progress; - Production of the converters and transformers has been completed; - Production of other equipment is in progress;
	• Cable connection - Section not appertaining to Sitaf (the section from the substation to the motorway): the last section close to the substation and certain connections out of a total of around 18 km have still to be laid; - Upper and lower sections (A32 motorway): 11.5 km of trenches have been excavated (the civil works alone) out of a total of approximately 45 km and 3.9 km of cable has been laid.
	Preparatory work has begun on 4 viaducts on the lower section and 3 viaducts on the upper section; - Middle section (avoiding the A32 motorway): 13.8 km of civil works have been completed and 10.1 km of cable has been laid out of a total of approximately 25 km.
Functional separation (€13.2 million)	The project, launched in 2016 and involving the progressive assumption of responsibility for the high-voltage plant purchased from RFI SpA in December 2015, continued: at 30 June 2018, 7 substations had been taken over (a total of 179 electricity substations since 2016).
Lagoon cables (€12.8 million):	• Sacca Serenella-Cavallino cable: the cable entered service in June; • Fusina 2-Sacca Fisola cable: the detailed design has been completed and submitted to the Ministry. Production of the cables for the submarine and terrestrial sections has been completed and work began on 12 June.
Sorrento Peninsula Interconnector (€12.8 million)	• Cable connection: the contract for the supply and installation of the connection has been awarded, the final marine survey report is awaited following completion of the survey; • Sorrento substation: appraisal of the detailed design has been completed (in accordance with the new code for tenders); the civil tender process has begun. Factory testing of the armoured cable is in progress and production of the reactor has been completed.

In addition, work was also carried out on upgrading north-west power lines (€6.8 million), construction of the Foggia-Benevento II power line (€5.1 million) and on restructuring the Rome metropolitan area (€4.3 million).

Quality of service

Each segment of the electricity system - generation, transmission and distribution - plays a role in ensuring the availability of electricity in Italy, guaranteeing adequate quality standards and keeping the number of outages below pre-set thresholds.

Terna monitors service continuity through various indicators defined by ARERA (Resolution 250/04) and in Terna's Grid Code.

CONTINUITY INDICATORS USED

Indicator	What it measures	How it is calculated
NTG RENS*	Energy not supplied following events affecting the relevant grid**	The sum of the energy not supplied to users connected to the NTG (following events affecting the relevant grid, as defined in the ARERA regulations governing quality of service).
ASA***	Availability of the service provided by the NTG	Based on the ratio of the sum of energy not supplied to users connected to the NTG (ENS) and energy fed into the grid.

* Regulated Energy Not Supplied.

** The "relevant grid" refers to all of the high-voltage and very high-voltage network.

***Average Service Availability.

These continuity indicators are significant for the system, as they monitor the frequency and impact of events that have occurred on the electricity grid as a result of faults or due to external factors, such as weather events. In all cases, the period of observation is three years, a period in which annual targets have not been exceeded, testifying to the high quality of service achieved.

Despite heavy snowfall during the first quarter of the year, the period between January and June 2018 was not marked by events resulting in particular problems with regard to service continuity. The "NTG RENS" indicator for the first half of 2018, based on preliminary data, amounts to approximately 113 MWh (compared with an annual target of approximately 913 MWh set by ARERA).

NTG RENS6

⁶ The target for 2016-2023 has been set as an average of the 2012-2015 NTG RENS indicator, referred to in ARERA Resolution 653/15/R/eel, with a 3.5% improvement in performance required for each year compared with the previous one. Since 2016, the NTG RENS indicator also includes the performance of the grid operated by Terna Rete Italia Srl. The 2017 figure is provisional.

As regards the ASA indicator, the operating performance shows that ASA has remained stable at a high level over the years (the higher the indicator, the better the performance). This indicator shows that the energy not supplied following a fault on the owned grid represents a minimal part of the total quantity of energy supplied to users of the grid. In particular, availability was 99.99974% in 2017, compared with 99.99973% in the previous year.

Existing regulations (set out in Resolution 653/2015/R/eel) envisage a series of mechanisms designed to regulate and encourage improvements in the quality of service provided by Terna. The overall economic effects of the bonus/penalty mechanisms related to quality of service have resulted in costs of €3.7 million for the first half of 2018 (€3.8 million in the first half of 2017).

Electricity cost trends

Cost of procuring resources on the Dispatching Services Market (uplift)

The total uplift was €998 million in the first half of 2018 (provisional data), down on the same period of the previous year (€1,278 million). This reflects a reduction in imbalance costs, partially offset by a slight increase in the cost of using the Dispatching Services Market.

Dispatching Services Market

Terna uses the Dispatching Services Market (DSM) to procure dispatching resources to guarantee the security and adequacy of the electricity system.

The net charge for using the DSM was approximately €878 million in the first half of 2018 (provisional data), slightly up on the same period of the previous year (€863 million).

The rise is due to an increase in the cost of selecting providers in order to resolve local technical constraints, only partially offset by application of the regulations governing the provision of essential services and a decrease in the volume of reserve capacity in January compared with the same period of the previous year, when there was an increase in the cost of selecting providers due to the cold snap in Europe.

MONTHLY MSD COSTS

Operating results of Non-Regulated Activities

A breakdown of the Terna Group's results from its Non-Regulated Activities for the first half of 2018 and the first half of 2017 is shown below7 . Further details are provided in the section, "Financial review for the first half of 2018".

(€m)	1H2018	1H2017	Change
Non-regulated revenue	95.4	77.9	17.5
Services for external customers	34.5	30.4	4.1
- Telecommunications	16.3	16.0	0.3
- O&M	6.6	7.9	(1.3)
- EPC	6.4	3.2	3.2
- Other	5.2	3.3	1.9
Italy-France interconnector	4.8	-	4.8
Tamini	56.1	47.5	8.6
Non-regulated costs	68.2	59.0	9.2
Tamini	55.0	49.2	5.8
Other	13.2	9.8	3.4
Non-Regulated EBITDA	27.2	18.9	8.3

Non-Regulated EBITDA amounts to €27.2 million for the first half of 2018, marking an increase of €8.3 million. This reflects the contribution of the Tamini Group and revenue from the private Italy-France interconnector.

Non-Regulated Revenue is up €17.5 million, primarily due to the following factors:

increased revenue at the Tamini Group (up €8.6 million), primarily due to growth in sales of transformers during the period;
the recognition of revenue relating to the private Italy-France interconnector (up €4.8 million), representing the accrued portion of the revenue attributable to the Group for services provided during construction;
revenue deriving from the acquisition of Avvenia (up €3.1 million).

Non-Regulated costs are up €9.2 million, reflecting an increase in contract work relating to renewables and the Tamini Group (up €5.8 million).

Non-Regulated Activities

⁷ The Terna Group's operating segments are consistent with the internal control system adopted by the Parent Company, in line with the Strategic Plan for the period 2018-2022.

Services for third parties

In the first half of 2018, Terna continued to provide its services to external customers in the areas of ENERGY SOLUTIONS (the development of technical solutions and the supply of innovative services), TELECOMMUNICATIONS (the housing of telecommunications equipment and maintenance services for fibre networks) and O&M (operation and maintenance of high-voltage and very high-voltage infrastructure).

As regards Engineering services, Terna obtained several EPC (Engineering, Procurement and Construction) contracts: this model involves the design, development and implementation of solutions to meet the growing demand for infrastructure and grid connections.

ENERGY SOLUTIONS

Key events during the period include:

i) conclusion of an EPC contract for construction of a user's substation connecting two photovoltaic plants offering grid parity, having a total capacity of 30 MWp, in the province of Viterbo;
ii) completion of the acquisition of 70% of AVVENIA The Energy Innovator on 15 February 2018, following on from the agreement signed in 2017;
iii) finalisation of the term sheet and all aspects relating to the renegotiation of O&M contracts for photovoltaic plants owned by 5 companies in the RTR Capital group.

AVVENIA, a strategic consulting company classified as an Energy Service Company (ESCo) and certified UNI CEI 11352, is a leader in the energy efficiency sector, with one of the highest numbers of efficiency projects completed and operated in Italy, including in the form of EPC (Energy Performance Contract) solutions.

AVVENIA's mission is to rationalise energy consumption by boosting productivity and reducing energy-related costs. AVVENIA's market offering is based on 5 key promises:

i) To increase a company's competitiveness by boosting productivity;
ii) To improve the quality of the product or service provided;
iii) To improve operating conditions;
iv) To reduce problems linked to maintenance or process management;
v) To reduce energy consumption when carrying out a like-for-like task.

Its totally innovative vision is based on an in-depth understanding of a company's dynamics through energy accounting, using measurements of energy vectors, exclusive analysis tools, and mathematical modelling that is continually being reviewed, developed and perfected.

Key events during the period include conclusion of an EPC (Engineering, Procurement & Construction) contract with Acciai Speciali Terni SpA. This regards the supply of a heat recovery plant to produce overheated steam and to preheat demineralised water for use in the factory, using a Heat Recovery Steam Generator (HRSG).

Telecommunications During the first half of 2018, the plan to supply long-distance fibre infrastructure (regional rings) to Open Fiber was extended. With respect to the terms of the contract, envisaging that Open Fiber SpA would purchase a minimum of 2,500 km of network each year, the plan is now to deliver 5,500 km of regional rings in 2018.

A three-year framework agreement was entered into with Infratel in January 2018, regarding the supply of backhaul networks as part of the National Ultra-Broadband Plan. This will enable Terna to take part in the related tenders, amounting to a total of €150 million, though the tenders are not expected to be called before the end of 2018.

Finally, Terna is proceeding with experimental development of projects aimed at exploiting the pylons in its high-voltage network as smart towers and has begun trialling new business models designed to extract value from its assets. During the first half, design work began on the use of pylons for radio transmission (wireless transmission in remote area - Fixed Wireless Access and trials of 5G) and talks were initiated with customers on the first pilot projects. A study of the potential to offer advanced telecommunications services to SMEs in industrial zones was also carried out.

Operation of third-party infrastructure

Contracts to operate third-party infrastructure include the long-term contract to maintain a submarine cable and contracts to maintain third-party users' substations, power lines and substations used in renewable energy production.

Transformers - Tamini Group

Orders for transformers were up 38% in the first half of 2018 compared with the same period of the previous year, whilst the value of the transformers produced in the first half of 2018 is up 24% on the same period of 2017.

The volume and value of plant tested are up at all production plants compared with the same period of the previous year.

Private interconnectors pursuant to Law 99/2009

On 29 March 2018, the Ministry for Economic Development and the Ministry of the Environment and of the Protection of Land and Sea issued the decree partially transferring the consents from Monita Interconnector Srl to Terna SpA, in line with the new scope of the private interconnector. The capacity qualifying for third-party access exemption will thus be reduced in keeping with the new scope, in order to make it easier to finance the private interconnector.

In April, Monita Interconnector Srl submitted a revised application for exemption to the Ministry for Economic Development, reducing the volume to 150 MW from the previous 300 MW. On 14 June 2018, ARERA issued clearance for the exemption amounting to 150 MW.

"Italy-Montenegro Interconnector" project

The Group continued with construction of the private line in the first half of 2018, in implementation of Law 99/09, on behalf of the company, Piemonte Savoia Srl, transferred to a number of energyintensive companies on 4 July 2017.

On the section not appertaining to Sitaf (Società Italiana per il traforo autostradale del Frejus), approximately 17.8 km of civil works had been completed and 16.9 km of cable laid by June 2018. The entire section is expected to be completed by the end of 2018.

At the end of June 2018, approximately 15.3 km of civil works along the A32 motorway had been completed and 3.9 km of cable laid. Around 20 km of civil works and the laying of approximately 18 km of cable are expected to be completed by the end of 2018.

In addition, as regards the Middle section, in June 2018, approximately 10 km of cable had been laid and around 13.9 km of civil works completed. Completion of this section, involving around 24 km of civil works and the laying of 22 km of cable, is expected in 2018.

The foundations for the main buildings for the Piossasco Converter have been completed, whilst installation of the external panels for the main buildings is in progress.

"Italy-France Interconnector" project

On 14 December 2017, Terna and the Austrian TSO, APG, signed a Cooperation Agreement. This agreement envisages that the two TSOs will coordinate their activities through to construction of the infrastructure. The process for obtaining the necessary consents for the Passo Resia - Glorenza cable section is currently underway in Italy. This process is expected to be completed by the end of 2018.

"Italy-Austria Interconnector" project

Operating results of International Activities

A breakdown of the Terna Group's results from its International Activities for the first half of 2018 and the first half of 2017 is shown below8 .

"Revenue from International Activities" directly includes the margin earned on overseas concessions.

(€m)	1H2018	1H2017	Change
International revenue	5.5	0.1	5.4
Cost of support for International Activities	3.6	1.8	1.8
International EBITDA	1.9	(1.7)	3.6

International EBITDA amounts to €1.9 million for the first half of 2018, an increase of €3.6 million compared with the same period of the previous year. €3.4 million of the increase regards the contribution from construction services provided in Brazil, recognised in accordance with IFRIC 12.

Work on carrying out the five projects in progress in South America continued in the first half:

INITIATIVES

The project was completed in February 2018 with delivery of the additional works, in line with expectations.

The process of receiving and obtaining customs clearance for the materials needed to carry out the project took place during the first half of 2018 and is still in progress.

Detailed engineering work, which started in September 2017, is nearing completion, whilst technical oversight of the supply of materials and the related logistics is continuing.

Load testing of the first three types of pylon has been completed, with the fourth test is in progress and the final test is expected to be conducted in August 2018.

Civil works are underway in the Melo and Tacuarembó areas, involving planned increases in the workforce and in equipment, above all to enable construction of the special foundations needed in the areas at risk of flooding.

Work on the overall project is 28% complete.

Chile

(connection of a 90 MW photovoltaic plant and the related works)

Uruguay (500 kV transmission line connecting Melo and Tacuarembó)

⁸ The Terna Group's operating segments are consistent with the internal control system adopted by the Parent Company, in line with the Strategic Plan for the period 2018-2022.

Construction of the lines and substations for the two concessions, Santa Maria Transmissora de Energia (SMTE) in the State of Rio Grande do Sul and Santa Lucia Transmissora de Energia (SLTE) in the State of Mato Grosso, continued in the first half of 2018.

The work being carried out for SMTE is 94% complete, in line with the planned entry into service of the infrastructure by August 2018. Assembly of the electromechanical equipment for the substations has been completed and the first tests have begun prior to entry into service, whilst all the foundations for the lines have been completed and prestressing of the conductors is 75% complete. The works being carried out for SLTE are 68% complete, in line with the planned entry into service of the infrastructure by December 2018.

Construction of the foundations for the substations for SLTE has been completed and prestressing of the conductors for the power liens has begun.

The Operation and Maintenance contract for the Santa Maria Concession has been signed.

The activities involved in obtaining approval for the basic engineering from the Peruvian supervisory authority were completed in the first half of 2018.

The preliminary environmental impact assessment and the Public Participation Plan have been submitted and approved. Following this, the first workshop involving the population was successfully held. Monthly follow-up meetings with Osinergmin are continuing to assess the progress of work on the project.

Work on the detailed engineering is underway and on its approval by the Peruvian regulator (SIGE).

The environmental impact assessment has been approved and the workshops with local communities provided for in the Public Participation Plan are in progress. Environmental monitoring along the power line is also being carried out under the supervision of Senace (Servicio National de Certificacìon Ambiental para las Inversiones Sostenibles).

The pre-operational study, which included an assessment of the equipment needed and the start-up of the first stage of procurement of materials, has been completed.

Brazil

(2 transmission lines and substations in the states of Rio Grande do Sul and Mato Grosso)

Peru

(132 km of new 138 kV lines from Aguaytìa to Pucallpa)

Terna's people and innovation

Our people

Terna's personnel, whose expertise is often of a rare or unique nature in the electricity industry, play a vital role in all areas of the Company's business.

THE WORKFORCE	AT 30 JUNE 2018	AT 31 DECEMBER 2017	CHANGE
Senior managers	70	71	(1)
Middle managers	620	569	51
Office staff	2,131	2,021	110
Blue-collar workers	1,252	1,236	16
TOTAL	4,073	3,897	176

The increase in the Terna Group's workforce in the first half of 2018 reflects 213 new hires and 37 people leaving the Group. In addition to the plan for generational turnover (accounting for 44% of new hires) launched in 2017, the increase reflects the acquisition of Avvenia and the start-up of new initiatives in accordance with the Strategic Plan for 2018-2022.

The Group's new organisational structure

In this context, the Group's new organisational structure, in place from 1 July 2018, aims to support Terna's central role in the integrated electricity system, with the aim of:

optimising and integrating real-time dispatching activities and long-term planning;
optimising the management of tangible assets and maximising operational excellence in their design, construction, operation and maintenance.

With regard to the above purposes, the following two organisational units now report directly to the Chief Executive Officer:

"Strategy, Development and System Operation", which includes system strategy, grid planning, dispatching, regulatory affairs and energy & research insights;
"National Transmission Grid", which includes asset management and plant design, construction, operation and maintenance, as well as procurement and ICT.

The new organisational structure also strengthens the Group's innovation and digital capabilities through the creation of a new department reporting directly to the Chief Executive Officer, called "Innovation and Energy Solutions".

Finally, the "External Relations and Sustainability" function has been expanded in view of the Group's growing role at international and European level in the development of energy strategies.

Key initiatives relating to innovation

Preparations for the second edition of the Next Energy Programme, launched by Terna in 2017 in collaboration with the Cariplo Foundation and Cariplo Factory, got underway in 2018. Compared with the past edition, which sought to identify talent and innovative ideas through the "Call for Talent" and the "Call for Ideas", the latest edition features a further call dubbed the "Call for Growth", aimed at finding mature start-ups able to work immediately with Terna in relation to specific needs. Out of a pool of approximately 80 candidates, 12 likely start-ups were chosen to take part in a pitch day, during which they presented their proposed projects. The jury then selected 5 start-ups to participate in a period of engagement between the chosen start-ups and the relevant departments within Terna. This stage lasted 3 months and was aimed at assessing the potential benefits for business processes of adoption of the innovative solutions chosen. The start-ups proposed projects relating to the monitoring of infrastructure using drones, augmented reality, the measurement of rainfall and temperature and the recovery of dissipated energy. The potential for specific partnership agreements with a number of the start-ups is currently being assessed.

Following the memorandum of understanding signed with Ensiel (a consortium set up by the main Italian universities operating in the power systems sector), towards the end of 2017 and during the first half of 2018, Terna launched 17 projects involving 7 Italian universities from among those most active in the electricity and energy systems sector. The main areas of interest regard boosting the system's resilience and the flexibility of the grid, the development of innovative models to support design work and the operation and study of innovative electric technologies. Academy

With a view to accelerating the strategic initiatives linked to Terna's new Innovation Plan, steps have been taken to monitor internal needs and to scout for external opportunities, regarding both new technologies and the potential for partnership networks and new methods of financing.

In January, this led to the official launch of the OSMOSE Horizon 2020 project. Overall, the OSMOSE - Optimal System-Mix of Flexibility Solutions for European Electricity project aims to identify and demonstrate the technical feasibility of an "optimal" mix of flexibility solutions to maximise the technical and financial efficiency of the European electricity system, thus guaranteeing its security and reliability.

Terna's role is to lead Working Package 5 (WP5, one of the 4 demonstrators of actual grid situations to be developed in Italy along a 150 kV portion of the NTG between Basilicata and Puglia, and coordinates the following Italian partners: ENSIEL, RSE, COMPENDIA, ABB, IBM, Engineering, Enel Green Power and Edison. WP5 aims to develop a new Energy Management System to be trialled over almost a year of live testing, which will involve the combined, "optimal" use of Dynamic Thermal Rating, Power Flow Control devices, new forecasting techniques and demand side response resources, with the aim of giving the electricity system greater flexibility. Meetings marking the general launch of the project and the first Steering Committee meeting were held on 13-14 February. The first meeting of the WP5, attended by all the Italian partners, was held at Campus Terna in Via della Marcigliana on 19 February in order to draw up a detailed action plan and the related roles.

Description Projects and programmes

Next Energy 2nd edition - "Call for Growth"

Origination and R&D projects

Approximately 110,000 hours of training was provided in the first six months of 2018, primarily focused on technical and operational skills and ensuring compliance with HSE, GDPR and statutory 231 requirements, in addition to the integration of newly hired personnel.

Phantom Stock Plan 2018-2021

On 20 June 2018, the Board of Directors approved the Terms and Conditions of the Phantom Stock Plan for the period 2018-2020, in implementation of the terms approved by the Annual General Meeting ("AGM") held on 4 May 2018.

Among the other agenda items, the AGM of 4 May approved, pursuant to and in accordance with art. 114-bis of the Legislative Decree of 24 February 1998 (the Consolidated Law on Finance), a Long-Term Incentive Plan ("LTIP") called the "Phantom Stock Plan 2018-2021" (the "Incentive Plan"), in accordance with the terms and conditions described in the related Information Circular prepared in compliance with Form 7 of Annex 3 A to the Regulations for Issuers. The Plan had been previously approved, on the recommendation of the Remuneration Committee, by the Board of Directors on 21 March 2018.

The LTIP 2018-2021 provides for the award of a certain number of Phantom Stocks for each three-year cycle, being 2018-2020 and 2019-2021, respectively. The instruments are to be linked to the value of the Company's shares at the end of the vesting period, provided that the performance targets for each cycle have been achieved, thereby systematically linking share price growth with the operating performance.

The Plan beneficiaries are the General Manager, who also holds the position of Chief Executive Officer, and other managers within the Group, including Key Management Personnel, other executives and selected middle managers holding key roles in relation to achievement of the Group's strategic results.

Further details are provided in the Information Circular on TERNA SpA's Phantom Stock Plan and in TERNA SpA's annual Remuneration Report, both published on the Company's website (www.terna.it).

New Genoa office

The new Genoa Infrastructure Unit was opened on 9 April 2018. This innovative building, which uses cutting-edge energy efficiency technology and has been built to the very highest environmental standards, meets the Company's requirements in terms of the quality of the working environment. The investment of around €2 million has resulted in the modernisation and improvement of approximately 13,500 square metres of office space, services and other premises. An 11 kW photovoltaic plant has also been built to power the building's internal and external LED lighting, thereby maximising energy savings. An underground retarding basin with capacity of 500 cubic metres has also been installed. This releases rainwater at a constant, linear rate, limiting the risk of water courses overflowing, in accordance with the Municipality of Genoa's new Urban Plan.

Financial review for the first half of 2018

In order to report on the Terna Group's operating performance and analyse its financial position, this section includes management accounts prepared in line with industry best practice. These reclassified statements contain alternative performance measures (APMs, as defined in the guidance provided by ESMA/2015/1415), which management considers to be useful in assessing the performance of the Group and representative of the business's operating results and financial position.

The criteria used in constructing these indicators are the same as those used in the annual report. Details are provided in the Annex, "Alternative performance measures (APMs)".

Basis of presentation

The measurement and recognition criteria applied in this Half-Year Report are consistent with those adopted in the consolidated financial statements for the year ended 31 December 2017, with the exception of the application of the new accounting standards, IFRS 9 - Financial Instruments and IFRS 15 - Revenue from Contracts with Customers, effective from 1 January 2018. These standards have been applied retrospectively, recognising the immaterial cumulative effect of initial application as an adjustment to the opening balance of retained earnings.

In addition, a number of comparative amounts in the income statement, with particular reference to revenue from construction services performed under concession in Italy (included in Regulated Activities in Italy) and from International Activities, directly include the margin earned on overseas concessions and overseas contract revenue, have been reclassified in order to improve presentation, without changing the comparative result.

The Group's reclassified income statement

The Terna Group's operating results for the first half of 2018, compared with those for the same period of the previous year, and for the second quarter of 2018 and 2017, are summarised in the following reclassified income statement, obtained by reclassifying amounts in the statutory consolidated income statement.

Q2 (€m)
2018	2017	CHANGE	% CHANGE		1H2018	1H2017	CHANGE	% CHANGE
542.5	521.6	20.9	4.0	TOTAL REVENUE	1,080.3	1,045.5	34.8	3.3
491.8	477.4	14.4	3.0	- Regulated revenue in Italy	979.4	967.5	11.9	1.2
				of which Revenue from construction services
3.2	3.2	-	-	performed under concession	6.3	5.6	0.7	12.5
48.3	44.3	4.0	9.0	- Non-Regulated revenue	95.4	77.9	17.5	22.5
2.4	(0.1)	2.5	-	- International revenue*	5.5	0.1	5.4	-
136.9	129.6	7.3	5.6	TOTAL OPERATING COSTS	265.4	250.7	14.7	5.9
63.5	63.0	0.5	0.8	- Personnel expenses	124.4	124.4	-	-
42.5	39.4	3.1	7.9	- Cost of services. leases and rentals	77.0	73.7	3.3	4.5
21.1	16.6	4.5	27.1	- Materials	41.0	31.7	9.3	29.3
6.3	6.6	(0.3)	(4.5)	- Other costs	13.0	11.5	1.5	13.0
0.3	0.8	(0.5)	(62.5)	- Quality of service	3.7	3.8	(0.1)	(2.6)
				- Cost of construction services performed under
3.2	3.2	-	-	concession	6.3	5.6	0.7	12.5
405.6	392.0	13.6	3.5	GROSS OPERATING PROFIT (EBITDA)	814.9	794.8	20.1	2.5
134.9	130.8	4.1	3.1	- Amortisation. depreciation and impairment losses	267.4	260.8	6.6	2.5
270.7	261.2	9.5	3.6	OPERATING PROFIT (EBIT)	547.5	534.0	13.5	2.5
(18.1)	(19.1)	1.0	(5.2)	- Net financial income/(expenses)	(42.7)	(39.6)	(3.1)	7.8
252.6	242.1	10.5	4.3	PROFIT/(LOSS) BEFORE TAX	504.8	494.4	10.4	2.1
74.2	70.2	4.0	5.7	- Income tax expense for the period	142.7	143.9	(1.2)	(0.8)
178.4	171.9	6.5	3.8	PROFIT FOR THE PERIOD	362.1	350.5	11.6	3.3
0.9	(0.1)	1.0	-	- Profit/(Loss) attributable to non-controlling interests	1.9	(0.8)	2.7	-
				PROFIT FOR THE PERIOD ATTRIBUTABLE
177.5	172.0	5.5	3.2	TO OWNERS OF THE PARENT	360.2	351.3	8.9	2.5

* Directly includes the margin earned on overseas concessions.

Gross operating profit (EBITDA) for the first half of 2018 amounts to €814.9 million, up €20.1 million on the €794.8 million of the first half of 2017. This primarily reflects an improvement in Regulated Activities (up €8.2 million) and Non-Regulated Activities (up €8.3 million):

(€m)	1H2018	1H2017	CHANGE
Regulated EBITDA in Italy	785.8	777.6	8.2
Non-Regulated EBITDA	27.2	18.9	8.3
International EBITDA	1.9	(1.7)	3.6
EBITDA	814.9	794.8	20.1

REVENUE

REGULATED ACTIVITIES IN ITALY (€m)	1H2018	1H2017	CHANGE
Regulated revenue	973.1	961.9	11.2
- Tariff revenue	958.4	950.2	8.2
- Other regulated revenue	14.7	11.7	3.0
Revenue from construction services performed under
concession in Italy	6.3	5.6	0.7
TOTAL	979.4	967.5	11.9

Regulated revenue in Italy is up €11.9 million. Transmission, dispatching and metering revenue is up on the same period of the previous year (an increase of €8.2 million), due primarily to an increase in transmission charges, reflecting tariff increases and an increase in the portion of the NTG owned by Terna, as well as ARERA's recognition of certain expenses that are currently not covered by the transmission and dispatching charges. "Other regulated revenue" is up €3 million, essentially due to the higher insurance proceeds (up €2.1 million) recognised in the period.

NON-REGULATED ACTIVITIES (€m)	1H2018	1H2017	CHANGE
Services for third parties	34.5	30.4	4.1
Italy-France Interconnector	4.8	-	4.8
Tamini	56.1	47.5	8.6
TOTAL	95.4	77.9	17.5

The increase in Non-Regulated revenue, totalling €17.5 million, reflects revenue growth at the Tamini Group (€8.6 million) and the recognition of revenue resulting from the acquisition of Avvenia (€3.1 million) and progress of work on the private Italy-France interconnector (€4.8 million).

INTERNATIONAL ACTIVITIES (€m)	1H2018	1H2017	CHANGE
Brazil	3.2	(0.2)	3.4
Uruguay	1.7	(0.1)	1.8
Other	0.6	0.4	0.2
TOTAL	5.5	0.1	5.4

International revenue is up €5.4 million compared with the first half of 2017 and broadly reflects investment in assets held under concession in Brazil (up €3.4 million) and construction of the line in Uruguay (up €1.8 million).

Revenue rose €20.9 million in the second quarter of 2018, compared with the same period of the previous year, primarily due to the above increase in regulated tariffs (€14.4 million).

Non-Regulated revenue is also up (€4 million, including €1.5 million attributable to the Tamini Group and €2.8 million to the Italy-France Interconnector project), as is International revenue (up €2.5 million, including €1.6 million attributable to the Brazilian concessions and €0.7 million to operations in Uruguay).

Operating costs have increased €14.7 million compared with the first half of the previous year, primarily due to higher costs incurred on contract work by the Tamini Group (up €5.8 million) and an increase in service costs linked to the Group's new grid maintenance plan launched in the first half.

Amortisation, depreciation and impairment losses for the period amount to €267.4 million, up €6.6 million on the first half of 2017, primarily due to the entry into service of new plant.

Operating profit (EBIT), after amortisation, depreciation and impairment losses, amounts to €547.5 million, compared with €534.0 million for the first half of 2017 (up 2.5%).

Net financial expenses for the period total €42.7 million and are primarily attributable to the Parent Company (€42 million), marking an increase of €3.1 million compared with the €39.6 million of the first half of 2017. This primarily reflects interest on the increased amount of gross debt and the impact of hedges of the loans granted to the Brazilian subsidiaries.

After net financial expenses, profit before tax amounts to €504.8 million, an increase of €10.4 million compared with the first half of 2017 (up 2.1%).

Income tax expense for the period totals €142.7 million and is down €1.2 million (0.8%) compared with the same period of 2017, essentially reflecting tax-exempt income during the period.

Profit for the period amounts to €362.1 million, up €11.6 million (3.3%) compared with the €350.5 million of the first half of 2017.

Profit for the period attributable to owners of the Parent (after excluding the share attributable to non-controlling interests) amounts to €360.2 million, up €8.9 million (2.5%) compared with the €351.3 million of the first half of 2017.

Cash flow

The above performance, combined with non-cash items and other cash flows from and for operating activities, has resulted in a cash inflow of €555.2 million, enabling the Group to finance a large part of its investing activities (€337.9 million) and the return on equity (€316.4 million, including €292.9 million for payment of the final dividend for 2017). The balance is financed by net debt, which totals €7,895.5 million, marking an increase compared with €7,796.4 million of 2017.

(€m)	CASH FLOW 1H2018	CASH FLOW 1H2017
- Profit for the period	362.1	350.5
- Amortisation, depreciation and impairment losses	267.2	260.8
- Net change in provisions	(28.5)	(21.4)
- Net losses/(gains) on sale of assets	(1.0)	(0.2)
Operating cash flow	599.8	589.7
- Change in net working capital	9.1	16.9
- Other changes in property, plant and equipment and intangible assets	(8.5)	3.6
- Change in investments	(0.3)	(1.9)
- Change in financial assets	(44.9)	(10.9)
Cash flow from operating activities	555.2	597.4
- Total capital expenditure	(337.9)	(325.7)
Free cash flow	217.3	271.7
- Dividends paid to the Parent Company's shareholders	(292.9)	(269.1)
- Cash flow hedge reserve after taxation and other movements in equity attributable to owners of the Parent	(27.8)	3.7
- Other movements in equity attributable to non-controlling interests	4.3	-
Change in net debt	(99.1)	6.3

The Group's reclassified statement of financial position

The Terna Group's financial position at 30 June 2018 and 31 December 2017 is summarised below in the reclassified statement of financial position, obtained by reclassifying amounts in the statutory consolidated statement of financial position.

(€m)	AT 30 JUNE 2018	AT 31 DECEMBER 2017	CHANGE
Total net non-current assets	13,593.5	13,466.4	127.1
- Intangible assets and goodwill	500.5	505.7	(5.2)
- Property, plant and equipment	12,839.9	12,752.8	87.1
- Financial assets*	253.1	207.9	45.2
Total net working capital	(1,496.0)	(1,485.2)	(10.8)
- Net energy-related pass-through payables	(853.5)	(852.7)	(0.8)
- Net energy-related pass-through receivables	312.0	335.1	(23.1)
- Net trade payables	(555.8)	(714.4)	158.6
- Net tax liabilities	(3.2)	105.9	(109.1)
- Other net liabilities	(395.5)	(359.1)	(36.4)
Gross invested capital	12,097.5	11,981.2	116.3
Sundry provisions	(327.3)	(355.8)	28.5
NET INVESTED CAPITAL	11,770.2	11,625.4	144.8
Equity attributable to owners of the Parent	3,842.8	3,803.3	39.5
Equity attributable to non-controlling interests	31.9	25.7	6.2
Net debt	7,895.5	7,796.4	99.1
TOTAL	11,770.2	11,625.4	144.8

* Includes financial assets in Brazil recognised in application of IFRIC12, totalling €110 million, and provision for the Interconnector Guarantee Fund, amounting to €50.1 million at 30 June 2018.

The €127.1 million increase in net non-current assets compared with 31 December 2017 primarily reflects a combination of the following:

an increase of €45.2 million in financial assets, mainly due to construction services performed under concession in Brazil during the period (up €36.5 million) and an increase in the Interconnector Guarantee Fund, set up to fund investment in interconnections by art. 32 of Law 99/09 (up €7.9 million);
total capital expenditure of €337.9 million, as described below;

• amortisation and depreciation during the period, totalling €265.2 million.

The change during the period also reflects the contribution from the acquisition of Avvenia the Energy Innovator Srl (€8.1 million, primarily reflecting the company's order book).

The Group's capital expenditure totalled €337.9 million during the period, an increase of 3.7% compared with the €325.7 million of the same period of 2017.

KEY CAPITAL INVESTMENT IN THE NTG* (€m)

Italy-Montenegro Interconnector		48
Rollout of Fibre Network and Fibre for the Grid Project	16
Italy-France Interconnector	13.6
Functional separation of former RFI Assets	13.2
Cables in the Venetian Lagoon	12.8
Sorrento Peninsula Interconnector	12.8
Upgrade of North-South Power line capacity	6.8
Foggia-Benevento II Power line	5.1
Restructuring of Palermo Metropolitan Area	4.3

* Amounts include nancial expenses.

Net working capital (net current liabilities) of €1,496 million generated cash of €10.8 million during the period compared with 2017. This reflects the combined effect of:

Cash inflows

a reduction of €23.1 million in net energy-related pass-through receivables, primarily reflecting payment by the Fund for Energy and Environmental Services (Cassa per i Servizi Energetici e Ambientali-CSEA) of the RENS bonus for the quality of service provided in 2016 (€25.6 million);
an increase of €0.8 million in net energy-related pass-through payables, reflecting the combined effect of:
an increase in net receivables linked to the cost of procuring resources on the Dispatching Services Market (uplift) and associated items (€194.1 million); the increase reflects both the impact of the uplift resulting from the increased volume of purchases on the DSM in the period November 2017 - January 2018 (€131.2 million) and a reduction in imbalance costs, despite these being partially offset by a slight increase in the cost of using the Dispatching Services Market;

broadly offset by:

increases in net payables due to plants that are essential for the security of the electricity system and in the form of capacity payments, amounting to €116.4 million and €54.1 million, respectively, reflecting items resulting from the performance of capacity allocation after payments made in the first half of 20189 ;
the greater net amount due to CSEA (€24 million) in relation to the interruptibility service;

⁹ During the first half, ARERA ordered payments to the owners of essential plants in resolutions 137, 185, 332-335/2018 and capacity payments in resolution 248/2018.

an increase of €109.1 million in net tax liabilities, mainly reflecting VAT payable (up €56 million, compared with net refundable VAT at the end of 2017, essentially due to increased payments on account made during the previous year as a result of the Ministerial Decree of 27 June 2017). The increase also reflects an increase in net income tax payable for the period, after payments on account during the first half, and settlement of the taxes payable for the previous year (an increase of €51.7 million);
an increase of €36.4 million in other net liabilities, primarily due to increases in payments on account received from the entities financing the Italy-France Interconnector (up €26.3 million) and in the provision for the Interconnector Guarantee Fund set up by Terna SpA following the issue of the 2016 Stability Law (up €9.0 million).

Cash outflows

• a reduction of €158.6 million in net trade receivables, largely due to the greater volume of capital expenditure carried out during the last part of the previous year.

Gross invested capital thus amounts to €12,097.5 million, marking an increase of €116.3 million compared with the end of the previous year.

Sundry provisions are down €28.5 million, primarily due to:

an adjustment to provisions for risks (down €19.4 million), reflecting the use of provisions for early retirement schemes (down €5.2 million), uses for urban and environmental redevelopment schemes (down €4.9 million) and net uses of provisions for mitigation and sharing schemes (down €3.3 million);
provisions for net deferred tax liabilities (down €8.5 million), primarily due to the effect on taxation of amortisation and depreciation and movements in provisions for risks and charges.

Net invested capital of €11,770.2 million is up €144.8 million compared with 31 December 2017 and is financed by equity attributable to owners of the Parent, totalling €3,842.8 million (compared with €3,803.3 million at 31 December 2017), equity attributable to non-controlling interests of €31.9 million (€25.7 million at 31 December 2017) and net debt of €7,895.5 million (up €99.1 million compared with the €7,796.4 million of 31 December 2017).

Debt

Gross debt at 30 June 2018 amounts to approximately €9.0 billion, consisting of €6.5 billion in the form of bond issues and €2.3 billion in bank borrowings. The average term to maturity of debt, which is almost all fixed rate, is approximately 5.6 years.

GROSS DEBT

The Group's net debt at 30 June 2018 amounts to €7,895.5 million, an increase of €99.1 million compared with 31 December 2017.

NET DEBT (BY TERM TO MATURITY) (€m)	AT 30 JUNE 2018	AT 31 DECEMBER 2017	CHANGE
TOTAL MEDIUM/LONG-TERM DEBT	8,220.2	8,682.1	(461.9)
- Bond issues	6,489.6	6,541.9	(52.3)
- Borrowings	1,704.0	2,129.7	(425.7)
- Derivative financial instruments	26.6	10.5	16.1
TOTAL SHORT-TERM DEBT/(FUNDS)	(324.7)	(885.7)	561.0
- Bond issues (current portions)	-	749.9	(749.9)
- Short-term borrowings	25.0	118.0	(93.0)
- Variable rate borrowings (current portions)	623.9	134.4	489.5
- Other current financial liabilities, net	92.3	101.2	(8.9)
- Cash and cash equivalents	(1,065.9)	(1,989.2)	923.3
TOTAL NET DEBT	7,895.5	7,796.4	99.1

NET DEBT (BY TYPE OF INSTRUMENT) (€m)
- Bond issues	6,489.6	7,291.8	(802.2)
- Borrowings	2,327.9	2,264.1	63.8
- Short-term borrowings	25.0	118.0	(93.0)
- Derivative financial instruments	26.6	10.5	16.1
- Other financial liabilities	92.3	101.2	(8.9)
GROSS DEBT	8,961.4	9,785.6	(824.2)
- Cash and cash equivalents	(1,065.9)	(1,989.2)	923.3
TOTAL NET DEBT	7,895.5	7,796.4	99.1

Changes in the Group's net debt are as follows:

a reduction in bond issues (down €802.2 million), resulting from the repayment of bonds issued in 2012, totalling €750.0 million and adjustment of the amortised cost of the instruments (down €52.2 million);
an increase in borrowings (up €63.8 million), primarily due to drawdowns on a new EIB facility of €130 million, after repayments during the period;
an increase in derivate financial instruments (up €16.1 million), primarily due to the movement in market interest rates and in the notional value of the derivatives portfolio;
a decrease in short-term borrowings and other financial liabilities (€101.9 million), primarily due to the Parent Company's repayment of short-term credit facilities and the settlement of interest on borrowings and the related hedges;
a reduction in cash and cash equivalents (€923.3 million). Cash amounts to €1,065.9 million at 30 June 2018, including €650.6 million invested in short-term, readily convertible deposits and €415.3 million deposited in bank current accounts.

Reconciliation of the Group's profit for the period and equity with the corresponding amounts for the Parent Company

The reconciliation of consolidated equity and consolidated profit for the period and the corresponding amounts for the Parent Company is shown below.

(€m)	PROFIT FOR 1H2018	EQUITY AT 30 JUNE 2018
Parent Company's financial statements	333.6	3,698.0
Profit and equity contributed by Group companies:
- Group companies - Regulated Activities in Italy	27.9	81.2
- Group companies - Non-Regulated Activities	(0.2)	79.9
- Group companies - International Activities	0.5	(14.9)
Companies accounted for using the equity method	0.3	30.5
Total consolidated financial statements	362.1	3,874.7
Share attributable to non-controlling interests - Non-Regulated Activities	1.9	31.9
Terna Group's consolidated financial statements	360.2	3,842.8

INTERIM REPORT ON OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2018

Terna's shares

Terna and the financial markets

Terna SpA has been listed on Borsa Italiana's screen-based trading system (Mercato Telematico Azionario) since 23 June 2004. From the date of floatation to the end of June 2018, the share price has risen 172% (a capital gain), providing a Total Shareholder Return (TSR) of 506%, ahead of both the Italian market (FTSE Mib +29%) and the relevant European sector index (DJ Stoxx Utilities), which is up 154%.

After a particularly positive 2017 for all global equity markets, Europe's leading stock markets ended the first half of 2018 down, with the exception of Paris, which was broadly flat at the end of the period (up 0.2%). Milan lost 1%, whilst Frankfurt and London lost 7.4% and 0.7% respectively and Madrid fell 4.2%.

Performance of terna's shares

In this context, Terna's shares closed the first six months of 2018 down 4.38% at €4.632 per share, still outperforming its main peers. The daily average volume traded during the six months amounted to approximately 7.6 million units per day. On 18 June, the final dividend for 2017, amounting to €0.145737 per share, was paid.

PERFORMANCE OF TERNA'S SHARE - Price (01 January 2018 - 30 June 2018)

Source: Bloomberg

LAST 12 MONTHS

Total Shareholder Return on Terna's shares and the FTSE MIB and DJ Stoxx Utilities from the floatation to today

PERFORMANCE OF TERNA'S SHARE – Total Shareholder Return (from the oatation to 30 June 2018) (%)

Source: Bloomberg

WEIGHTING OF TERNA'S SHARES

> on the FTSE MIB10 1.83%
------------------------------

Source: Borsa Italiana. Data at the end of June 2018.

RATINGS

	SHORT-TERM	MEDIUM/LONG-TERM	OUTLOOK
Terna SpA*
Standard & Poor's	A-2	BBB+	Stable
Moody's	Prime-2**	Baa1***	Rating on credit watch
Fitch	F2	BBB+	Stable
Italian state*
Standard & Poor's	A-2	BBB	Stable
Moody's	Prime-2***	Baa2***	Rating on credit watch
Fitch	F2	BBB	Stable

* Data at 30 June 2018.

** Not on watch.

*** Possible downgrade.

¹⁰ % of the total FTSE MIB.

Risk management 05

Risk management

In view of the distinctive and specific nature of the core business, regulated primarily through a government concession arrangement and by the Regulatory Authority for Energy, Networks and the Environment (ARERA, or the Autorità di Regolazione per Energia reti e Ambiente), Terna is not so much exposed to the usual price- and market-related risks (or is so only to a limited extent with regard to its Non-Regulated and International activities), but to regulatory and legislative risk.

Regulatory risk derives from potential changes in the criteria used to determine regulated revenue, particularly following a multi-year review of the regulatory framework. Legislative risk relates to potential changes in Italian and European laws governing matters relating to the environment, energy, tax and social aspects (above all labour and tenders).

Like all types of risk, these aspects are closely monitored by Terna, which has identified the main risks connected to its activities and has put in place specific safeguards, tools and organisational structures with a view to minimising such risks by reducing any impact to within acceptable limits.

RISK MANAGEMENT

A detailed analysis of the methods used and the controls put in place by the Group, and on risk monitoring and management, reference should be made to the section, "Risk management" in the Annual Report for 2017.

Outlook and Other information 06

Outlook

In the second half of 2018, Terna will be engaged in implementing the Strategic Plan for the period 2018-2022, approved by the Board of Directors and presented to the financial community on 22 March 2018.

In particular, the Company will continue to pursue its strategic objectives, stepping up the pace of investment, which will focus on development of the national transmission grid in order to facilitate the integration of renewable sources and improve the security of the system. At the same time, it intends to renew the Group's asset base in order to mitigate the risk of interruptions to supply, boost environmental sustainability and make it easier to carry out maintenance activities through the use of digital grid technologies. Terna intends to increase investment in innovation and digital solutions in order to manage the growing complexity of the system.

In terms of our Regulated Activities, key electricity infrastructure under construction includes the interconnectors linking Italy with France and Montenegro, which are expected to be completed by the end of 2019. This infrastructure will boost cross-border interconnection capacity and help to drive the progressive integration of Europe's electricity systems. With regard to the main projects designed to boost quality of service, during the second half, work will continue on installing the submarine connections linking Capri with Sorrento and in the Venetian lagoon. In addition, the new 380 kV power line linking Foggia and Benevento will also enter service in its final form. This project is included in the works designed to facilitate the connection of renewable energy sources located primarily in southern Italy, accompanied by a rationalisation of the existing grid. In addition, in order to meet the objectives set out in the Strategic Plan and in line with the provisions of ARERA Resolution 129/2018 on outputbased incentives, preparations are being made in order to access the measures introduced by the resolution.

In terms of our Non-Regulated Activities, the strategy aims to leverage the Group's distinctive competencies to increasingly position it as an Energy Solutions Provider. This will entail boosting our position in the energy efficiency market and embarking on a role as a high value added systems integrator, supporting the development of new technologies and fulfilment of our role as a TSO in the current energy transition. With regard to Avvenia, the process of integrating the company with the Group will continue with the aim of achieving commercial and industrial synergies as early as the second half. With regard to Sustainability, the activities covered by the memorandum of Understanding signed by ANBI (the National Association of Consortia engaged in the Protection of Italy's Landscape and Irrigation Water), Coldiretti and Terna will continue in the second half of the year. The agreement aims to develop a joint action plan designed to ensure the optimal management of irrigation resources, energy efficiency and nature conservancy. In addition, we expect to complete the Giannutri project, the first smart infrastructure to be installed as part of the energy transition for small islands no connected to the national grid. The telecommunications business will focus on providing high value added services, exploiting the opportunities offered by development of the Group's infrastructure.

With regard to International Activities, work on construction of the lines and substations relating to the two Brazilian concessions, Santa Maria Transmissora de Energia (SMTE) and Santa Lucia Transmissora de Energia (SLTE), is expected to be completed by the end of 2018. In addition, work on existing projects in Uruguay and Peru will continue in the second half of the year. The process of scouting for further opportunities in overseas markets will continue. This may take the form of partnerships and will involve the careful selection of projects with a view to ensuring a low risk profile and avoiding the need to tie up large amounts of capital.

Other information

Additional information is presented below in accordance with specific statutory or industry requirements.

Treasury shares

The Parent Company does not directly or indirectly hold any of its own shares or the shares of CDP Reti SpA or Cassa Depositi e Prestiti SpA, nor has it purchased or sold any such shares during the reporting period.

Related party transactions

Given that Terna SpA is subject to the de facto control of Cassa Depositi e Prestiti SpA, a situation ascertained in 2007, related party transactions entered into by Terna during the first six months of 2018 include transactions with the associates and employee pension funds (Fondenel and Fopen), as well as transactions with Cassa Depositi e Prestiti itself, with CDP Reti SpA and with the companies directly or indirectly controlled by the Ministry of the Economy and Finance ("MEF").

Related party transactions in the first six months of 2018 primarily regard services forming part of its ordinary activities and provided under normal market conditions, as described in greater detail in the consolidated financial statements for the year ended 31 December 201711. The Parent Company's Corporate Governance rules ensure that such transactions are conducted in accordance with the rules governing procedural and substantial correctness and on an arm's length basis, and in keeping with the regulations for transparent reporting to the market.

No material transactions12 were carried out in the first six months of 2018, nor were any transactions subject to the reporting requirements applicable in the event of exemptions applied in accordance with the relevant regulations13.

¹¹ Relations with members of the Parent Company's Board of Statutory Auditors, with particular regard to their remuneration, are described in the notes to the item, "Services" in the notes to the consolidated and separate financial statements for the year ended 31 December 2017. In addition, in implementation of CONSOB Resolution 18049 of 23 December 2011, disclosures regarding the remuneration of "members of management and supervisory bodies and general managers", and their shareholdings in the Company and those of the other persons referred to in the above article, are included in the annual Remuneration Report published in accordance with the law.

¹² These are related party transactions classified in compliance with Annex 3 to the "Regulations on related party transactions" (adopted with CONSOB Resolution 17221 of 12 March 2010, as amended by CONSOB Resolution 17389 of 23 June 2010).

¹³ As "transactions falling within the scope of the ordinary activities of the Company or its subsidiaries or associates or of financing activities related thereto, provided that the transactions are conducted on equivalent to market or standard terms and conditions".

Participation in the regulatory simplification process introduced by CONSOB Resolution 18079 of 20 January 2012

Pursuant to art. 3 of CONSOB Resolution 18079 of 20 January 2012, Terna has elected to adopt the simplified regime provided for in articles 70, paragraph 8, and 71, paragraph 1-bis of CONSOB Regulation 11971 of 14 May 1999, as amended (the CONSOB Regulations for Issuers). As a result, Terna exercises the exemption from disclosure requirements provided for in the above Regulations in respect of transactions of a significant nature involving mergers, spin-offs, capital increases involving contributions in kind, acquisitions and disposals.

Legislative and regulatory framework

Summary of the principal measures introduced in 2018

Key legislative developments during the period include the budget law for 2018 (Law 205/17), which contains changes to taxation.

SCOPE CONTENT

Changes to taxation and financial law

Law 205 of 27 December 2017 (the budget law for 2018) has introduced regulations regarding:

Super depreciation - the tax breaks permitting companies to increase depreciation charges for capital assets by 30% have been extended for a further year. To qualify, the assets must be delivered in 2018 or by 30 June 2019, provided that the purchase order has been accepted by 31 December 2018 and a payment on account of 20% has been paid;

Hyper depreciation - tax breaks permitting companies to increase depreciation charges for new high-technology capital assets (so-called Industry 4.0 assets) by 150% and the amortisation of intangible assets by 40% have been extended for a further year To qualify, the assets must be delivered in 2018 or by 31 December 2019, provided that the purchase order has been accepted by 31 December 2018 and a payment on account of 20% has been paid. An amendment approved by the lower house of Parliament has added the following to the list of qualifying intangible assets: software and digital services for immersive, interactive and participatory use, 3D reconstructions, augmented reality, software, platforms and applications for managing and coordinating logistics with a high degree of integration of the services provided and supply chain management systems for the purposes of drop shopping for e-commerce;

Early retirement - during the three-year period 2018-2020, workers may, in agreement with their employer, apply for early retirement up to 7 years before reaching the statutory retirement age;

Contributions holiday for young people - the hiring of young people below the age of 35 in 2018 and below the age of 30 in 2019 on contracts that provide incremental legal protections qualifies, for a period of three years, for exemption from payment of 50% of the contributions payable by the employer. The maximum value of the exemption is €3,000 per year per worker hired. The exemption rises to 100% in the case of students hired within 6 months of obtaining their academic qualification and who have served apprenticeships with the same employer or who have been on a work experience programme equal to at least 30% of the hours covered by the programme;

Permanent employment in the south of Italy: the National Operating Programmes and Complementary Operating Programmes provide for further contributions holidays for young people under the age of 35 hired on permanent contracts in the south of the country in 2018. The incentives also apply to older workers who have not had regular employment for at least 6 months.

Reform of the Code for Tenders

Cabinet Office Decree 76 of 10 May 2018, in implementation of art. 22 of Legislative Decree 50/16 (the Code for Tenders), approved regulations for public consultations on infrastructure with a major impact on communities and local areas. The works subject to public consultation include overhead power lines with voltages equal to or higher than 380 kV and covering distances of over 40 km. The consultation process involves public information, participation and discussion to be completed prior to applying for the related consents.

CONTENT	ARERA RESOLUTION
Restrictive measures as per resolution 342/2016/E/eel - Confirmations and amendments.	3-7,12-20, 34-37, 45-49, 74-76, 106-109, 132-136, 152-154, 183-184, 250-260/2018/E/eel
Determinations regarding the amount designed to cover the cost of thermoelectric plants that are essential for the security of the gas system.	113/2018/R/eel
Urgent measures regarding output-based incentive mechanisms for transmission services. Changes to the rules governing the recognition of incentives for high-risk projects.	129/2018/R/eel
Launch of a survey of the availability of transmission capacity between Italy and Greece partly in view of the start-up of market coupling on the border pursuant to Regulation 2015/1222 (CACM).	158/2018/E/eel
Recognition of the costs incurrent by Terna SpA in 2017 in carrying out the activities involved in managing and developing the unique database of production plants (GAUDÌ).	217/2018/R/eel
Provisions regarding Terna SpA in relation to non-recoverable receivables following the bankruptcy of dispatching service users.	218/2018/R/eel
Changes and additions to the criteria and conditions governing capacity payments.	261/2018/R/eel
Revision of the regulator's opinion 701/2016/I/eel issued to the Ministry for Economic Development, granting an exemption for a portion of the direct current "Italy-Montenegro" interconnector.	338/2018/I/eel
Downward revision of the charge covering the costs of paying for the load interruptibility service and the charge to cover downward revision of the fee covering the not-recoverable costs incurred by the safeguard operators for the default of non-detachable end users with effect from 1 July 2018.	363/2018/R/eel

Changes in the dimensions of the NTG

Below are details of changes in the dimensions of the grid at 30 June 2018, with respect to the situation at 31 December 201714.

DETAILS OF ELECTRICITY SUBSTATIONS OWNED BY THE TERNA GROUP*

	UNIT OF MEASUREMENT	AT 30 JUNE 2018	AT 31 DECEMBER 2017	CHANGE	% CHANGE
380 kV
Substations	no.	164	164	-	-
Power transformed	MVA	114,408	114,008	400	0.35
220 kV
Substations	no.	150	150	-	-
Power transformed	MVA	31,317	31,317	-	-
Lower voltages (≤ 150 kV)
Substations	no.	559	557	2	0.36
Power transformed	MVA	3,890	3,890	-	-
Total
Substations	no.	873	871	2	0.23
Power transformed	MVA	149,615	149,215	400	0.27

* MVA are calculated to three decimal places and rounded to the nearest whole number. Percentages are calculated to five decimal places and rounded to two decimal places.

¹⁴ The change also takes into account technical updates received after publication.

DETAILS OF POWER LINES OWNED BY THE TERNA GROUP*

	UNIT OF MEASUREMENT	AT 30 JUNE 2018	AT 31 DECEMBER 2017	CHANGE	% CHANGE
380 kV
Length of circuits	km	12,413	12,413	-	-
Length of lines	km	11,300	11,300	-	-
220 kV
Length of circuits	km	11,662	11,667	(6)	(0.05)
Length of lines	km	9,332	9,338	(6)	(0.06)
Lower voltages (≤ 150 kV)
Length of circuits	km	48,843	48,801	42	0.09
Length of lines	km	45,734	45,724	10	0.02
Total
Length of circuits	km	72,918	72,881	37	0.05
overhead	km	69,580	69,567	13	0.02
underground cables	km	1,876	1,852	24	1.28
submarine cables	km	1,463	1,463	-	-
Length of lines	km	66,366	66,362	4	0.01
overhead	km	63,028	63,047	(20)	(0.03)
underground cables	km	1,876	1,852	24	1.28
submarine cables	km	1,463	1,463	-	-
Incidence of direct current connections (200 - 380 - 500 kV)
Circuits	km	2,077	2,066
% of total	%	2.85	2.85
Lines	km	1,757	1,746
% of total	%	2.65	2.63

* Km are calculated to three decimal places and rounded to the nearest whole number. Percentages are calculated to five decimal.

	PRINCIPAL CHANGES IN THE SIZE OF THE TERNA GROUP'S INFRASTRUCTURE
Substations	New plant:
	The following substations entered service:
	- switching substation at Ravenna Industrial Park [RA] (3 132 kV bays).
	Existing plant:
	- entry into service of 5 new line bays in the substations of Castelluccia (1 220 kV bay), Benevento III (2 150 kV bays), Vaglio and Butera (1 150 kV bay each);
	- entry into service of 4 new machine and/or power factor correction bays in the substations of Benevento III (1 380 kV bay and 1 150 kV bay), Brindisi South (1 380 kV bay) and Porto Tolle (1 132 kV bay);
	- demolition of 2 132 kV bays in the San Rocco substation.
Transformers	The following transformers entered service:
	- 1 new 380/150 kV autotransformer of 400 MVA in the Benevento III substation.
Power lines	- entry into service of 4 new power lines amounting to a total of 90.5 km of circuit: Ciminna electricity substation - Casuzze electricity substation 150 kV (32.4 km overhead and 2.5 km in cable), Bono - Buddusò 150 kV (29.8 km overhead), Villafranca primary substation - Messina Riviera primary substation 150 kV (8.9 km overhead and 2.7 km in cable), Cavallino - Sacca Serenella 132 kV (14.2 km in cable);
	- entry into service 1 short 132 kV connection (totalling 0.2 km in cable) between adjacent plants;
	- construction of 4 in-out derivations on lines in operation, with an overall increase of the same number of circuits and of 2.0 km of circuit, of which: 1 line and 0.8 km at 150 kV and 3 lines and a reduction of 1.2 km at 132 kV;
	- construction of variants, rigid derivations, re-routings and/or changes to grid distribution with a total reduction of 1 line and 43.4 km of circuit, of which: 5.3 km less at 220 kV, 1 fewer line and 30.9 km less at 150 kV, 7.2 km less at 132 kV;
	- decommissioning and/or demolition of 2 150 kV lines in operation, amounting to 6.2 km of circuit.
	A further increase of 2 lines resulting from the division of 2 132 kV connections into 2 lines, each due to changes in operating requirements.
	With regard to the subsidiary, Rete Srl:
	- the acquisition from RFI of 2 sections of 132 kV line with an overall increase of the same number of circuits and 0.7 km of circuit.

Alternative performance measures (APMs)

In accordance with the guidelines in ESMA/2015/1415, the APMs used in this Half-Year Report are described below.

MEASURE	DESCRIPTION
OPERATING RESULTS
Operating profit/(loss) - EBIT	is an indicator of operating performance, representing "Profit for the period" before "Income tax expense for the period" and "Net financial income/(expenses)".
Gross operating profit/(loss) - EBITDA	is an indicator of operating performance obtained by adding "Amortisation, depreciation and impairment losses" to Operating profit/(loss) (EBIT).
FINANCIAL POSITION
Net working capital	is an indicator of financial position, showing the entity's liquidity position; it is based on the difference between current assets and current liabilities of a non-financial nature, as presented in the statement of financial position.
Gross invested capital	is an indicator of financial position, showing the Group's total assets and is obtained by adding net non-current assets and net working capital.
Net invested capital	is calculated by deducting sundry provisions from gross invested capital.
CASH FLOW
Net debt	is an indicator of the Group's financial structure and is obtained by deducting cash and cash equivalents and financial assets from short- and long term financial liabilities and the related derivative instruments.
Free cash flow	is the cash generated by operating activities and is the difference between cash flow from operating activities and cash flow for investing activities.

Reconciliations

In accordance with the guidelines in ESMA/2015/1415, reconciliations of the reclassified income statement and statement of financial position and of net debt and cash flow of the Terna Group with the related statutory income statement and statement of financial position are shown below.

RECONCILIATION OF THE TERNA GROUP'S RECLASSIFIED INCOME STATEMENT AND STATEMENT OF FINANCIAL POSITION AND NET DEBT

THE GROUP'S RECLASSIFIED INCOME STATEMENT	(€m)	CONSOLIDATED INCOME STATEMENT
Regulated revenue	979.4	"Revenue from sales and services", totalling
Non-Regulated revenue	95.4	€1,104.1 million, "Other operating income", totalling €33.0 million, after the cost of
Revenue from International Activities	5.5	International Activities: "Personnel expenses", totalling €0.3 million, " Raw and consumable materials used", totalling €55.0 million, "Services", totalling €0.6 million, and "Other operating costs" of €0.9 million.
Personnel expenses	124.4	"Personnel expenses" after the cost of construction services performed under concession in Italy in accordance with IFRIC 12 (€2.1 million) and the cost of International Activities (€0.3 million).
Cost of services, leases and rentals	77.0	"Services" after the cost of construction services performed under concession in Italy in accordance with IFRIC 12 (€2.7 million) and the cost of International Activities (€0.6 million).
Materials	41.0	"Raw and consumable materials used" after the cost of construction services performed under concession in Italy in accordance with IFRIC 12 (€1.5 million) and the cost of International Activities (€55.0 million).
Other costs Quality of service	13.0 3.7	Other operating costs after the cost of International Activities (€0.9 million).
Cost of construction services performed under concession	2.1 2.7 1.5	"Personnel expenses". "Services". "Raw and consumable materials used".
Net financial income/(expenses)	(42.7)	Points 1, 2 and 3 of letter C- "Financial income and expenses".

(€m)	CONSOLIDATED STATEMENT OF FINANCIAL POSITION
253.1	"Investment accounted for using the equity method", "Other non-current assets" and "Non current financial assets", excluding the value of accrued fees on available financing (€3.8 million).
(853.5)	"Trade receivables" relating to the value of energy-related pass-through receivables (€863 million) and "Trade payables" relating to the value of energy-related pass-through payables (€1,716.5 million).
312.0	"Trade receivables" relating to the value of receivables resulting from Regulated Activities (€335.5 million) and "Trade payables" relating to the value of payables resulting from Regulated Activities (€23.5 million).
(555.8)	"Trade payables" after the value of energy-related pass-through payables (€1,716.5 million) and payables resulting from Regulated Activities (€23.5 million) and "Trade receivables" after the value of energy-related pass-through receivables (€863 million) and the value of receivables resulting from Regulated Activities (€335.5 million).
(3.2)	"Tax assets", "Other current assets" relating to the value of other tax assets (€31.2 million), "Other current liabilities" relating to the value of other tax liabilities (€19.6 million) and "Tax liabilities".
(395.5)	"Other non-current liabilities", "Other current liabilities" after other tax liabilities (€19.6 million), "Inventories" and "Other current assets" after other tax assets (€31.2 million).
(327.3)	Employee benefits", "Provisions for risks and charges" and "Deferred tax liabilities".
7,895.5	"Long-term borrowings", "Current portion of long-term borrowings", "Non-current financial liabilities", "Short-term borrowings", "Cash and cash equivalents", "Non-current financial assets" relating to the value of accrued fees on available financing (€3.8 million), "Current financial assets" and "Current financial liabilities".

(€m)	CONSOLIDATED STATEMENT OF FINANCIAL POSITION
8,193.6	Corresponds with "Long-term borrowings".
26.6	Corresponds with "Non-current financial liabilities".
623.9	Corresponds with "Current portions of long-term borrowings".
92.3	Corresponds with "Current financial assets", "Current financial liabilities" and "Non-current financial assets" relating to the value of accrued fees on available financing (€3.8 million).

RECONCILIATION OF THE TERNA GROUP'S CASH FLOW

(€m)	CASH FLOW 1H2018	RECONCILIATION FINANCIAL STATEMENTS	CASH FLOW 1H2017	RECONCILIATION FINANCIAL STATEMENTS
- Profit for the period	362.1		350.5
- Amortisation, depreciation and impairment losses	267.2		260.8
- Net change in provisions	(28.5)		(21.4)
Employee benefits		(0.6)		(5.4)
Provisions for risks and charges		(19.4)		(5.5)
Deferred tax liabilities		(8.5)		(10.5)
- Net losses/(gains) on sale of assets15	(1.0)		(0.2)
Operating cash flow	599.8		589.7
- Change in net working capital:	9.1		16.9
Inventories		(1.6)		(5.0)
Trade receivables		(56.4)		(159.3)
Tax assets		15.1		5.5
Other current assets		41.1		(16.5)
Trade payables		(80.0)		55.5
Tax liabilities		36.6		11.0
Other liabilities		54.3		125.7
- Other changes in non-current assets	(53.7)		(9.2)
Intangible assets16		(8.4)		(2.9)
Property, plant and equipment17		(0.1)		7.0
Non-current financial assets		(44.4)		(10.9)
Other non-current assets		(0.5)		(0.5)
Investments accounted for using the equity method		(0.3)		(1.9)
Cash flow from operating activities	555.2		597.4
Investment
- Total investment	(337.9)		(325.7)
Property, plant and equipment17		(326.2)		(315.0)
Intangible assets16		(11.7)		(10.7)
Total cash flow from (for) investing activities	(337.9)		(325.7)
Free cash flow	217.3		271.7
- Cash flow hedge reserve after taxation and	(27.8)		3.7
other movements in equity attributable to
owners of the Parent18
- Other movements in equity attributable to non	4.3		-
controlling interests
- Dividends paid to Parent Company's	(292.9)		(269.1)
shareholders18 Change in net debt	(99.1)		6.3
Change in borrowings	(824.2)		(737.6)
Non-current financial assets		0.5		39.8
Current financial assets		(0.1)		(6.6)
Non-current financial liabilities		16.1		(3.6)
Long-term borrowings		(478.0)		(716.4)
Short-term borrowings		(93.0)		5.4
Current portion of long-term borrowings		(260.4)		(20.4)
Current financial liabilities		(9.3)		(35.8)
Change in cash and cash equivalents	(923.3)		(731.3)

¹⁵ Iincluded in "Other operating income" and "Other operating costs", respectively, in the consolidated financial statements.

16 See note 14 to the financial statements.

17 See note 12 to the financial statements.

18 See the consolidated statement of changes in equity.

Consolidated financial statements	86
Consolidated income statement	86
Consolidated statement of comprehensive income	87
Consolidated statement of financial position	88
Consolidated statement of changes in equity	90
Consolidated statement of cash flows	92
Notes	94
A. Accounting standards and measurement criteria	94
B. Notes to the consolidated income statement	101
C. Operating segments	106
D. Notes to the consolidated statement of financial position	108
E. Commitments and risks	121
F. Business combinations	126
G. Related party transactions	128
H. Significant non-recurring, atypical or unusual events and transactions	130
I. Notes to the statement of cash flows	130
L. Events after 30 June 2018	131
Attestation of the Group's half-year report pursuant to art. 81-ter of CONSOB Regulation 11971 of 14 May 1999, as amended	132
Independent Auditor's review report on the condensed
consolidated interim financial statements at and

for the six months ended 30 June 2018	134

Consolidated financial statements

Consolidated income statement

NOTE	1H2018	1H2017

1	1,104.1	1,024.0
	774.9	793.5
2	33.0	22.9
	1.8	0.3
	1,137.1	1,046.9

3	97.5	33.8
	0.1	-
4	80.3	76.5
	8.8	11.8
5	126.8	126.2
	159.3	155.8
	(32.5)	(29.6)
	1.2	1.3
6	267.4	260.8
7	17.6	15.6
	0.2	0.1
	589.6	512.9
	547.5	534.0

8	2.6	2.0
8	(46.7)	(44.5)
	(1.6)	(1.7)
9	1.4	2.9
	504.8	494.4
10	142.7	143.9
	362.1	350.5
	360.2	351.3
	1.9	(0.8)

11	0.179	0.175
	0.179	0.175

Consolidated statement of comprehensive income

(€m)	NOTE	1H2018	1H2017
PROFIT FOR THE PERIOD		362.1	350.5
Other comprehensive income for the period reclassifiable to profit or loss
- Cash flow hedges after taxation	22	(14.3)	4.7
- Gains/(Losses) from translation of financial statements in currencies other than the euro	22	(8.6)	-
Other comprehensive income for the period not reclassifiable to profit or loss
- Actuarial gains/(losses) on provisions for employee benefits, after taxation	22	0.4	1.0
COMPREHENSIVE INCOME FOR THE PERIOD		339.6	356.2
COMPREHENSIVE INCOME FOR THE PERIOD ATTRIBUTABLE TO:
Owners of the Parent		337.7	357.0
Non-controlling interests		1.9	(0.8)

(€m) NOTE		30 JUNE 2018	31 DECEMBER 2017
A - NON-CURRENT ASSETS
1. Property, plant and equipment	12	12,839.9	12,752.8
of which: related parties		7.4	26.2
2. Goodwill	13	230.1	230.1
3. Intangible assets	14	270.4	275.6
4. Investments accounted for using the equity method	15	78.2	77.9
5. Non-current financial assets	16	164.0	120.1
of which: related parties		0.3	0.3
6. Other non-current assets	17	14.7	14.2
Total non-current assets		13,597.3	13,470.7
B - CURRENT ASSETS
1. Inventories	18	16.4	14.8
2. Trade receivables	19	1,320.6	1,265.9
of which: related parties		402.3	407.1
3. Current financial assets	16	0.3	0.2
4. Cash and cash equivalents	20	1,065.9	1,989.2
of which: related parties		0.1	0.1
5. Income tax assets	21	21.8	36.9
6. Other current assets	17	98.0	139.1
Total current assets		2,523.0	3,446.1
TOTAL ASSETS		16,120.3	16,916.8

Consolidated statement of financial position

(€m)	NOTE	30 JUNE 2018	31 DECEMBER 2017
C - EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
1. Share capital		442,2	442,2
2. Other reserves		806,5	820,4
3. Retained earnings/(accumulated losses)		2.233,9	2.001,7
4. Interim dividend		-	(149,3)
5. Profit for the period		360,2	688,3
Total equity attributable to owners of the Parent	22	3.842,8	3.803,3
D - EQUITY ATTRIBUTABLE TO NON-CONTROLLING INTERESTS	22	31,9	25,7
Total equity attributable to owners of the Parent and non-controlling interests		3.874,7	3.829,0
E - NON-CURRENT LIABILITIES
1. Long-term borrowings	23	8.193,6	8.671,6
of which: related parties		-	500,0
2. Employee benefits	24	80,1	80,7
3. Provisions for risks and charges	25	247,1	266,5
4. Deferred tax liabilities	26	0,1	8,6
5. Non-current financial liabilities	23	26,6	10,5
6. Other non-current liabilities	27	283,7	251,0
Total non-current liabilities		8.831,2	9.288,9
F - CURRENT LIABILITIES
1. Short-term borrowings	23	25,0	118,0
2. Current portion of long-term borrowings	23	623,9	884,3
of which: related parties		500,0	-
3. Trade payables	28	2.417,9	2.497,9
of which: related parties		47,6	46,1
4. Tax expense	28	36,6	-
5. Current financial liabilities	23	96,4	105,7
of which: related parties		0,5	0,5
6. Other current liabilities	28	214,6	193,0
of which: related parties		13,7	5,6
Total current liabilities		3.414,4	3.798,9
TOTAL LIABILITIES AND EQUITY		16.120,3	16.916,8

Consolidated statement of changes in equity

31 DECEMBER 2017 - 30 JUNE 2018

THE GROUP'S SHARE CAPITAL AND RESERVES

(€m)	SHARE CAPITAL	LEGAL RESERVE	SHARE PREMIUM RESERVE	CASH FLOW HEDGE RESERVE

EQUITY AT 31 DECEMBER 2017	442.2	88.4	20.0	(12.7)
Change to opening balances	-	-	-	-
EQUITY AT 1 JANUARY 2018	442.2	88.4	20.0	(12.7)
UTILE NETTO DEL PERIODO
PROFIT FOR THE PERIOD OTHER COMPREHENSIVE INCOME:
- Change in fair value of cash flow hedges, net of tax effect				(14.3)
- Actuarial gains/(losses) on employee benefits, net of tax effect
- Gains/(Losses) from translation of financial statements in currencies other than the euro
Total other comprehensive income	-	-	-	(14.3)
COMPREHENSIVE INCOME TRANSACTIONS WITH SHAREHOLDERS:	-	-	-	(14.3)
- Appropriation of profit for 2017:
Retained earnings	-	-	-	-
Dividends	-	-	-	-
Total transactions with shareholders	-	-	-	-
Contribution of newly acquired companies	-	-	-	-
Other changes	-	-	-	-
EQUITY AT 30 JUNE 2018	442.2	88.4	20.0	(27.0)

31 DECEMBER 2016 - 30 JUNE 2017 THE GROUP'S SHARE CAPITAL AND RESERVES

(€m)	SHARE CAPITAL	LEGAL RESERVE	SHARE PREMIUM RESERVE	CASH FLOW HEDGE RESERVE

EQUITY AT 31 DECEMBER 2016	442.2	88.4	20.0	(18.2)
PROFIT FOR THE PERIOD
OTHER COMPREHENSIVE INCOME:
- Change in fair value of cash flow hedges, net of tax effect				4.7
- Actuarial gains/(losses) on employee benefits, net of tax effect
Total other comprehensive income	-	-	-	4.7
COMPREHENSIVE INCOME TRANSACTIONS WITH SHAREHOLDERS:	-	-	-	4.7
- Appropriation of profit for 2016:
Retained earnings
Dividends
Total transactions with shareholders	-	-	-	-
Other changes
EQUITY AT 30 JUNE 2017	442.2	88.4	20.0	(13.5)

EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT AND NON-CONTROLLING INTERESTS	EQUITY ATTRIBUTABLE TO NON CONTROLLING INTERESTS	EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT	PROFIT FOR THE PERIOD	INTERIM DIVIDEND	RETAINED EARNINGS/ (ACCUM-ULATED LOSSES)	OTHER RESERVES
3,829.0	25.7	3,803.3	688.3	(149.3)	2,001.7	724.7
(3.7)	-	(3.7)	-	-	(3.7)	-
3,825.3	25.7	3,799.6	688.3	(149.3)	1,998.0	724.7
362.1	1.9	360.2	360.2

(14.3)	-	(14.3)	-	-	-	-
0.4	-	0.4	-	-	-	0.4
(8.6)		(8.6)			(8.6)
(22.5)	-	(22.5)	-	-	(8.6)	0.4
339.6	1.9	337.7	360.2	-	(8.6)	0.4
-	-	-	(246.1)	-	246.1	-
(292.9)	-	(292.9)	(442.2)	149.3	-	-
(292.9)	-	(292.9)	(688.3)	149.3	246.1	-
4.3	4.3	-	-	-	-	-
(1.6)	-	(1.6)	-	-	(1.6)	-
3,874.7	31.9	3,842.8	360.2	-	2,233.9	725.1

EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT AND NON-CONTROLLING INTERESTS	EQUITY ATTRIBUTABLE TO NON CONTROLLING INTERESTS	EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT	PROFIT FOR THE PERIOD	INTERIM DIVIDEND	RETAINED EARNINGS/ (ACCUM-ULATED LOSSES)	OTHER RESERVES
3,555.2	19.8	3,535.4	633.1	(144.9)	1,789.7	725.1
350.5	(0.8)	351.3	351.3

4.7		4.7

1.0		1.0				1.0
5.7	-	5.7	-	-	-	1.0
356.2	(0.8)	357.0	351.3	-	-	1.0

		-	(219.1)		219.1
(269.1)		(269.1)	(414.0)	144.9
(269.1)	-	(269.1)	(633.1)	144.9	219.1	-
(2.0)		(2.0)			(1.9)	(0.1)
3,640.3	19.0	3,621.3	351.3	-	2,006.9	726.0

Consolidated statement of cash flows

(€m)	1H2018	1H2017
PROFIT FOR THE PERIOD	362.1	350.5
ADJUSTED BY:
Amortisation, depreciation and impairment losses /(reversals of impairment losses) on non-current property, plant and equipment and intangible assets*	262.2	258.3
Accruals to provisions (including provisions for employee benefits) and impairment losses	14.5	13.1
(Gains)/Losses on sale of property, plant and equipment	(1.0)	(0.2)
Financial (income)/expense	43.1	42.3
Income tax expense	142.7	143.9
CASH FLOW FROM OPERATING ACTIVITIES BEFORE CHANGES IN NET WORKING CAPITAL	823.6	807.9
Increase/(decrease) in provisions (including provisions for employee benefits and taxation)	(31.3)	(23.2)
(Increase)/decrease in inventories	(1.6)	(5.0)
(Increase)/decrease in trade receivables and other current assets	(18.5)	(172.1)
Increase/(decrease) in trade payables and other current liabilities	(65.7)	169.2
Increase/(decrease) in other non-current liabilities	35.3	12.6
(Increase)/decrease in other non-current assets	(44.4)	0.1
Interest income and other financial income received	1.3	23.1
Interest expense and other financial expenses paid	(109.1)	(136.1)
Income tax paid	(103.6)	(142.9)
CASH FLOW FROM OPERATING ACTIVITIES [A]	486.0	533.6
- of which: related parties	14.4	(31.2)
Investments in non-current property, plant and equipment after grants received	(324.3)	(307.9)
Revenue from sale of non-current property, plant and equipment and intangible assets and other movements	2.0	(0.1)
Capitalised financial expenses	6.4	7.0
Investments in non-current intangible assets after grants received	(11.7)	(10.7)
Recognition of intangible assets and property, plant and equipment due to new acquisitions	(8.1)	(2.2)
(Increase)/decrease in investments in associates	(0.3)	(1.9)
CASH FLOW FOR INVESTING ACTIVITIES [B]	(336.0)	(315.8)
- of which: related parties	18.8	29.5
Increase/(decrease) in accumulated earnings and losses	(5.5)	-
Dividends paid	(292.9)	(269.1)
Movements in short- and medium/long-term financial liabilities (including short-term portion)	(779.2)	(680.0)
Recognition of equity attributable to non-controlling interest due to new acquisitions	4.3	-
CASH FLOW FROM FINANCING ACTIVITIES [C]	(1,073.3)	(949.1)
INCREASE/(DECREASE) IN CASH AND EQUIVALENTS [A+B+C]	(923.3)	(731.3)
Cash and cash equivalents at beginning of period	1,989.2	1,135.7
Cash and cash equivalents at end of period	1,065.9	404.4

* After grants related to assets recognised in the income statement for the period.

Notes

A. Accounting standards and measurement criteria

Introduction

Terna SpA's registered office is at Viale Egidio Galbani 70, Rome, Italy. The condensed consolidated interim financial statements at and for the six months ended 30 June 2018 include the Company's financial statements and those of its subsidiaries (the "Group"), in addition to the Group's interests in associates and joint ventures. The subsidiaries included within the scope of consolidation are listed below.

Publication of these condensed consolidated interim financial statements at and for the six months ended 30 June 2018 was authorised by the Directors on 25 July 2018.

The consolidated financial statements at and for the year ended 31 December 2017 are available for inspection on request at Terna SpA's registered office at Viale Egidio Galbani 70, Rome, or on the Company's website at www.terna.it.

Compliance with IAS/IFRS and basis of presentation

The condensed consolidated interim financial statements at and for the six months ended 30 June 2018 have been prepared in accordance with International Financial Reporting Standards (IFRS), International Accounting Standards (IAS) and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and the Standing Interpretations Committee (SIC), as endorsed by the European Commission ("EU-IFRS") at the above date and used in the consolidated financial statements at and for the year ended 31 December 2017.

In particular, the Group's condensed consolidated interim financial statements for the first half of 2018, prepared in compliance with IAS 34, do not include all the information required in the annual financial statements and should be read in conjunction with the consolidated financial statements at and for the year ended 31 December 2017. These condensed consolidated interim financial statements contain selected disclosures, whilst the statements are consistent with those included in the annual financial statements.

It should also be noted that, for the purposes of comparison, certain amounts in the financial statements have been reclassified, without, however, altering amounts in equity at 31 December 2017 or those in the income statement for the first half of 2017.

Use of estimates

Preparation of condensed consolidated interim financial statements at and for the six months ended 30 June 2018 requires management to use estimates and assumptions that affect the carrying amounts of assets and liabilities and the related disclosures, in addition to contingent assets and liabilities at the reporting date. These estimates and the associated assumptions are based on previous experience and various factors that are believed to be reasonable under the circumstances. The resulting estimates form the basis for making the judgements about the carrying amounts of assets and liabilities that are not readily apparent from other objective sources. Actual results may differ from these estimates.

It should also be noted that certain measurement processes, above all those of a complex nature relating to the estimate of potential impairments of non-current assets, are generally only fully carried out during preparation of the annual financial statements, when all the necessary information is available, unless events or changes in circumstances indicate that there may be an impairment requiring the immediate measurement of a loss. In a similar manner, the actuarial valuations necessary in order to quantify employee benefits are normally carried out at the time of preparation of the annual financial statements.

The estimates and underlying assumptions are reviewed periodically and the effects of any changes are recognised in the income statement if the changes relate solely to that period. In the case that the revision affects both the period in which the revision takes place and future periods, the change is recognised from the reporting period in which the estimate is reviewed and in future periods.

Impact of entry into effect of new accounting standards, IFRS 9 and IFRS 15, from 1.01.2018

From 1 January 2018, the Terna Group has applied the new standards, IFRS 15 and IFRS 9, for the first time. First-time adoption using the retrospective approach has involved the restatement of certain amounts in the statement of financial position at 1 January 2018, given that the Terna Group has opted for the simplified approach permitted by the standards for first-time adopters.

IFRS 15 - Revenue from Contracts with Customers

On 29 October 2016, the European Commission endorsed the new IFRS 15 on revenue recognition. The new standard introduced a five-step revenue recognition model. The steps are as follows: 1) identification of the contract; 2) identification of the performance obligations in the contract; 3) determination of the transaction price; 4) allocation of the transaction price; 5) recognition of revenue when the performance obligation is satisfied. Under the standard, the obligation is satisfied when control over the goods or services underlying the performance obligation is transferred to the customer. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset.

The purpose of the new standard is to provide a consistent, overall framework for revenue recognition, applicable to all contracts with customers (with the exception of leases, insurance contracts and financial instruments). The new standard will replace all existing revenue recognition requirements under IFRS. Specifically, it will replace the following standards:

IAS 11 Construction Contracts and related interpretations;
IAS 18 Revenue;
IFRIC 13 Customer Loyalty Programmes;
IFRIC 15 Agreements for the Construction of Real Estate;
IFRIC 18 Transfers of Assets from Customers;
SIC 31 Revenue Barter Transactions Involving Advertising Services.

In addition, on 31 October 2016, the European Commission endorsed guidance to clarify certain practical aspects brought to the fore during discussion of the TRG (Transition Resource Group for Revenue Recognition) regarding the application of IFRS 15: identifying performance obligations, principal versus agent considerations and application guidance on licensing. The new standard was effective from 1 January 2018, with early and retrospective application permitted.

The Terna Group has applied the new standard from 1 January 2018, using the modified retrospective approach, accounting for the cumulative effect of adoption of IFRS 15 from the date of first-time adoption, electing not to apply the standard to completed contracts. Adoption of the new standard has had nonmaterial quantitative effects for the Group, limited to minor aspects of its Regulated Activities (revenue from connections to the NTG) and certain contracts related to Non-Regulated Activities (consolidated revenue generated by the Tamini Group). The effects on the accounts of application of the new standard have resulted in a negative impact on Non-Regulated contract revenue, generating an overall after-tax reduction in the Group's equity at 1 January 2018 of approximately €1.4 million.

IFRS 9 - Financial Instruments

On 22 November 2016, the European Commission approved IFRS 9 - Financial Instruments, in its final version of 24 July 2014, which starts the complex and detailed process of replacing IAS 39, divided into the following phases: classification and measurement, derecognition, impairment and hedge accounting. The new standard was effective from 1 January 2018, with early application permitted. The main changes introduced by the new standard include, among other things, unified classification guidance for all types of financial instruments, including the requirements for recognition and measurement, impairment, derecognition and hedge accounting. Financial assets will therefore be classified as a whole and not subject to complex separation rules. The new classification criterion for financial instruments is based on the business model adopted by the Company to manage financial assets with reference to the collection of cash flows and to the characteristics of the contractual cash flows of the financial assets. As regards impairment, the model provided for in IAS 39 based on the criterion of incurred loss, which postponed the recognition of losses on receivables to the moment of occurrence of the trigger event, has been replaced, as it was considered a weakness. The new IFRS 9 provides for a model based on a prospective view, which requires the immediate recognition of losses on receivables expected over the life of the financial instrument, as a trigger event no longer needs to occur before the recognition of losses on receivables. The new standard has also completed the stage of the Hedge accounting project, except for the rules on macro hedge accounting, which will be published at a later date. It provides, among the other changes, for a substantial revision of hedge accounting so as to better reflect risk management activities in the financial statements.

The Terna Group has applied the new standard retrospectively from 1 January 2018 with regard to classification and measurement, derecognition and impairment, with presentation of the cumulative effects of first-time adoption at the transition date in equity. Adoption of the new standard has had non-material quantitative effects for the Group, limited essentially to the impairment of trade receivables, bank deposits and financial guarantees. Analysis of the impact was applied to impaired financial assets held by the Group. In application of the simplified approach permitted by the standard, based on the recognition of losses on receivables expected over the life of the financial instrument, receivables classified in stage 2 (with particular regard to trade receivables representing the largest part of the Group's receivables) have been grouped according to due date. The Group then applied the impairment model based on a collective assessment of expected losses. In conducting the assessment, the Group used a matrix to calculate the expected loss, based on information regarding historical losses for similar instruments, adjusted to take into account forward-looking elements. The effects on the accounts of application of the new standard have resulted in a negative impact on trade receivables, reducing their value by approximately €1.6 million, and on bank deposits, which have been reduced by approximately €1.5 million. This generated an overall after-tax reduction in the Group's equity at 1 January 2018 of approximately €2.3 million. With regard to hedge accounting, application was prospective from the date of first-time adoption. At that date, existing hedging relationships were not modified and the new accounting rules, with specific regard to the time value of options and the forward elements of forward contracts, did not result in any differences.

The following table shows changes in the consolidated statement of financial position at 1 January 2018 as a result of application of the two standards, IFRS 15 and IFRS 9.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(€m)	31 DECEMBER 2017	IMPACT OF IFRS 9	IMPACT OF IFRS 15	1 JANUARY 2018
A - NON-CURRENT ASSETS
1. Property, plant and equipment	12,752.8			12,752.8
2. Goodwill	230.1			230.1
3. Intangible assets	275.6			275.6
4. Investments accounted for using the equity method	77.9			77.9
5. Non-current financial assets	120.1			120.1
6. Other non-current assets	14.2			14.2
Total non-current assets	13,470.7	-	-	13,470.7
B - CURRENT ASSETS
1. Inventories	14.8			14.8
2. Trade receivables	1,265.9	(1.6)	(2.0)	1,262.3
3. Current financial assets	0.2			0.2
4. Cash and cash equivalents	1,989.2	(1.5)		1,987.7
5. Income tax assets	36.9			36.9
6. Other current assets	139.1			139.1
Total current assets	3,446.1	(3.1)	(2.0)	3,441.0
TOTAL ASSETS	16,916.8	(3.1)	(2.0)	16,911.7

C - EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
1. Share capital	442.2			442.2
2. Other reserves	820.4			820.4
3. Reserves				-
4. Retained earnings/(accumulated losses)	2,001.7	(2.3)	(1.4)	1,998.0
5. Interim dividend	(149.3)			(149.3)
6. Profit for the period	688.3			688.3
Total equity attributable to owners of the Parent	3,803.3	(2.3)	(1.4)	3,799.6
D - EQUITY ATTRIBUTABLE TO NON-CONTROLLING INTERESTS	25.7			25.7
Total equity attributable to owners of the Parent and non-controlling interests	3,829.0	(2.3)	(1.4)	3,825.3
E - NON-CURRENT LIABILITIES
1. Long-term borrowings	8,671.6			8,671.6
2. Employee benefits	80.7			80.7
3. Provisions for risks and charges	266.5	0.1		266.6
4. Deferred tax liabilities	8.6	(0.9)	(0.6)	7.1
5. Non-current financial liabilities	10.5			10.5
6. Other non-current liabilities	251.0			251.0
Total non-current liabilities	9,288.9	(0.8)	(0.6)	9,287.5
F - CURRENT LIABILITIES
1. Short-term borrowings	118.0			118.0
2. Current portion of long-term borrowings	884.3			884.3
3. Trade payables	2,497.9			2,497.9
4. Tax expense	-			-
5. Current financial liabilities	105.7			105.7
6. Other current liabilities	193.0			193.0
Total current liabilities	3,798.9	-	-	3,798.9
TOTAL LIABILITIES AND EQUITYITY	16,916.8	(3.1)	(2.0)	16,911.7

Scope of consolidation Subsidiaries

NAME	REGISTERED OFFICE	CURRENCY	SHARE CAPITAL	% INTEREST	METHOD OF CONSOLIDATION
	SUBSIDIARIES CONTROLLED DIRECTLY BY TERNA SpA
Terna Rete Italia SpA	Rome	Euro	120,000	100%	Line-by-line
Business	Design, construction, management, development, operation and maintenance of power lines and grid infrastructure and other grid-related infrastructure, plant and equipment used in the above electricity transmission and dispatching activities and in similar, related and connected sectors.
Terna Crna Gora d.o.o.	Podgorica (Montenegro)	Euro	114,000,000	100%	Line-by-line
Business	Authorisation, construction and operation of the transmission infrastructure forming the Italy Montenegro interconnector on Montenegrin territory.
Terna Plus Srl	Rome	Euro	16,050,000	100%	Line-by-line
Business	Design, construction, management, development, operation and maintenance of plant, equipment and infrastructure for grids and systems, including distributed energy storage and pumping and/or storage systems.
Terna Interconnector Srl	Rome	Euro	10,000	65%*	Line-by-line
Business	Responsible for construction and operation of the private section of the Italy-France interconnector and civil works on the public section.
Monita Interconnector Srl	Rome	Euro	10,000	95%**	Line-by-line
Business	Responsible for construction and operation of the private section of the Italy-Montenegro interconnector.
Rete Srl	Rome	Euro	387,267,082	100%	Line-by-line
Business	Design, construction, management, development, operation and maintenance of high-voltage power lines.
Difebal SA	Montevideo (Uruguay)	Uruguayan peso	140,000	100%	Line-by-line
Business	Design, construction and maintenance of electricity infrastructure in Uruguay.

* 5% held by Terna Rete Italia SpA and 30% by Transenergia Srl.

** 5% held by Terna Rete Italia SpA.

NAME	REGISTERED OFFICE	CURRENCY	SHARE CAPITAL	% INTEREST	METHOD OF CONSOLIDATION
	SUBSIDIARIES CONTROLLED THROUGH TERNA PLUS SRL
Tamini Trasformatori Srl	Melegnano (MI)	Euro	4,285,714	70%*	Line-by-line
Business	Construction, repair and trading in electrical equipment.
Terna Chile SpA	Santiago (Chile)	Chilean peso	1,000,000	100%	Line-by-line
Business	Design, construction, administration, development, operation and maintenance of any type of electricity system, plant, equipment and infrastructure, including interconnectors; provision of all types of product and service, construction, electrical and civil engineering work; research, consultancy and assistance in matters relating to the core business; any other activity capable of improving the use and development of plant, resources and expertise.
SPE Santa Maria Transmissora de Energia SA	Sao Paulo (Brazil)	Real	82,474,716	99.99%**	Line-by-line
Business	Provision of public electricity transmission services, including construction, operation and maintenance of electricity transmission infrastructure or any other activity necessary in order to fulfil the above purpose.
SPE Santa Lucia Transmissora de Energia SA	Sao Paulo (Brazil)	Real	246,714,431	99.99%**	Line-by-line
Business	Provision of public electricity transmission services, including construction, operation and maintenance of electricity transmission infrastructure or any other activity necessary in order to fulfil the above purpose.
Terna Peru SAC	Lima (Peru)	Sales	16,501,000	99.99%**	Line-by-line
Business	Design, construction, administration, development, operation and maintenance of any type of electricity system, plant, equipment and infrastructure, including interconnectors; provision of all types of product and service, construction, electrical and civil engineering work; research, consultancy and assistance in matters relating to the core business; any other activity capable of improving the use and development of plant, resources and expertise.
Rete Verde 17 Srl	Rome	Euro	10,000	100%	Line-by-line
Business	Implementation and development of renewable energy projects.
Rete Verde 18 Srl	Rome	Euro	10,000	100%	Line-by-line
Business	Implementation and development of renewable energy projects.
Rete Verde 19 Srl	Rome	Euro	10,000	100%	Line-by-line
Business	Implementation and development of renewable energy projects.
Rete Verde 20 Srl	Rome	Euro	10,000	100%	Line-by-line
Business	Implementation and development of renewable energy projects.
Avvenia The Energy Innovator Srl	Albano Laziale (RM)	Euro	10,000	70%	Line-by-line
Business	Provision of energy efficiency, energy consulting and process engineering services to companies and public and private entities; the application of technology to increase energy end-use efficiency; the design, construction, development and maintenance of plant, equipment and infrastructure for network and other uses.

SUBSIDIARIES CONTROLLED THROUGH TAMINI TRASFORMATORI SRL

Tamini Transformers USA LLC	Oakbrook (Chicago - Illinois)	US dollar	52,089	100%	Line-by-line
Business	Commercialisation of industrial-grade and high-power electricity transformers.
Tes Transformer Electro Service Asia Private Limited	Maharashtra (India)	Indian rupee	15,000,000	100%	Line-by-line
Business	Commercialisation of industrial-grade and high-power electricity transformers.

* 30% Holdco TES (controlled by the Xenon Private Equity V fund, Riccardo Reboldi and Giorgio Gussago).

** 0.01% Terna Chile SpA.

Compared with 31 December 2017, on 15 February 2018, Terna Plus Srl acquired 70% of Avvenia The Energy Innovator Srl.

Associates

Associates are investees over which the Terna Group exercises significant influence and that are neither subsidiaries or joint ventures. In assessing whether or not Terna has significant influence, potential voting rights that are exercisable or convertible are also taken into account.

These investments are initially recognised at cost and subsequently measured using the equity method. The profits or losses attributable to the Group are recognised in the consolidated financial statements when significant influence begins and until that influence ceases.

In the event that the loss attributable to the Group exceeds the carrying amount of the equity interest, the latter is written off and any excess is recognised in a specific provision, if the Parent Company is required to meet the legal or constructive obligations of the investee or, in any case, to cover its losses.

Joint ventures

Investments in joint ventures, in which the Group exercises joint control with other entities, are recognised initially at cost and subsequently measured using the equity method. The profits or losses attributable to the Group are recognised in the consolidated financial statements when significant influence begins and until that influence ceases.

In assessing the existence of joint control, it is ascertained whether the parties are bound by a contractual agreement and whether this agreement attributes to the parties the joint control of the agreement itself. Joint control exists when an entity has control over an arrangement on a contractual basis, and only when decisions relating to the relevant activities require the unanimous consent of all parties that jointly control the arrangement.

NAME	REGISTERED OFFICE	CURRENCY	SHARE CAPITAL	% INTEREST	METHOD OF CONSOLIDATION	CARRYING AMOUNT AT 30 JUNE 2018 €M
ASSOCIATES
Cesi SpA	Milan	Euro	8,550,000	42.698%	Equity method	47.9
Business	Experimental research and provision of services related to electro-technology.
Coreso SA	Brussels (Belgium)	Euro	1,000,000	15.84%	Equity method	0.3
Business	Technical centre owned by several electricity transmission operators, responsible for coordinating joint operations of TSOs, in order to improve and upgrade the security and coordination of the electricity system in central and western European.
CGES A.D.	Podgorica (Montenegro)		Euro 155,108,283	22.0889%	Equity method	30.0
Business	Provision of transmission and dispatching services in Montenegro.
JOINT VENTURES
ELMED Etudes Sarl	Tunis (Tunisia)	Tunisian dinar	2,700,000	50%	Equity method	0.0
Business	Conduct of preparatory studies for construction of the infrastructure required to connect the Italian and Tunisian electricity systems.

B. Notes to the consolidated income statement

Revenue

1. REVENUE FROM SALES AND SERVICES: €1,104.1 MILLION

(€m)	1H2018	1H2017	CHANGE
Transmission charges billed to grid users	898.5	894.6	3.9
Other energy-related revenue and from services performed under concession	115.4	61.2	54.2
Other sales and services	90.2	68.2	22.0
TOTAL	1,104.1	1,024.0	80.1

Transmission charges billed to grid users

The charges for use of the NTG regard the revenue attributable to the Parent Company (€832.8 million) and the subsidiary, Rete Srl (€65.7 million) as owners and operators of the grid.

The increase compared with the first half of 2017 is €80.1 million is primarily due to an increase in transmission charges linked to a review of the applicable tariff, an increase in the portion of the NTG owned by Terna, and ARERA's recognition of certain expenses that are currently not covered by the transmission and dispatching charges.

OTHER ENERGY-RELATED REVENUE AND FROM SERVICES PERFORMED UNDER CONCESSION (€m)	1H2018	1H2017	CHANGE
Dispatching, metering and other revenue	59.9	55.6	4.3
Revenue from services performed under concession (IFRIC 12)	55.5	5.6	49.9
- of which in Italy	6.3	5.6	0.7
- of which overseas	49.2	-	49.2
TOTAL OTHER ENERGY-RELATED REVENUE AND FROM SERVICES PERFORMED UNDER CONCESSION	115.4	61.2	54.2

This item regards dispatching and metering revenue (€55.1 million for the dispatching component, €0.1 million for the metering component and other energy-related revenue of €4.7 million) and revenue from infrastructure construction and upgrade services performed under concession, recognised in application of IFRIC 12 (€55.5 million). This includes revenue from activities in South America (€48.8 million in Brazil and €0.4 million in Peru).

The increase in "Other energy-related revenue and from services performed under concession" compared with the first half of 2017, amounting to €54.2 million, reflects new investment in assets held under concession in South America.

Other energy-related items – pass-through revenue/expenses

This item regards "pass-through" revenue and expenses (the balance of which amounts to zero) attributable solely to the Parent Company. These items result from daily purchases and sales of electricity from electricity market operators. Measurements for each point of injection and withdrawal are taken and the differences, with respect to energy market schedules, are calculated. These differences, known as imbalances, are then measured using algorithms established by the regulatory framework. The net charge resulting from calculation of the imbalances and the purchases and sales, carried out by the Parent Company Terna on the DSM, is billed on a pro rata basis to each end consumer via a specific uplift payment. This item also reflects the portion of the transmission charge that the Parent Company passes on to other grid owners not included in the scope of consolidation.

The components of these transactions are shown in greater detail below.

(€m)	1H2018	1H2017	CHANGE
Power Exchange-related revenue items	2,010.8	2,157.7	(146.9)
Over-the-counter revenue items	647.4	599.8	47.6
TOTAL PASS-THROUGH REVENUE	2,658.2	2,757.5	(99.3)
Power Exchange-related cost items	2,010.8	2,157.7	(146.9)
Over-the-counter cost items	647.4	599.8	47.6
TOTAL PASS-THROUGH EXPENSES	2,658.2	2,757.5	(99.3)

Other sales and services

The item, "Other sales and services", amounting to €90.2 million, is up €22.0 million compared with the first half of 2017. This is primarily due to the impact of increased sales of transformers by the Tamini Group in the first half (up €8.3 million) and revenue from construction of the power line in Uruguay (up €11.8 million). The increase also reflects an increase in services for third parties (up €3.2 million), essentially due to new contracts obtained by Terna Plus for the construction of electricity substations for photovoltaic plants, partially offset by a downturn in revenue linked to the Parent Company's operation and maintenance of HV and VHV power lines (down €1.3 million).

2. OTHER REVENUE AND INCOME: €33.0 MILLION

(€m)	1H2018	1H2017	CHANGE
Rental income	11.8	10.9	0.9
Insurance proceeds as compensation for damages	5.4	3.3	2.1
Sundry grants	3.3	2.5	0.8
Contingent assets	3.0	2.6	0.4
Sales to third parties	2.6	2.5	0.1
Gains on sale of components of plant	1.8	0.4	1.4
Other revenues	5.1	0.7	4.4
TOTAL	33.0	22.9	10.1

This item, amounting to €33 million, is up €10.1 million on the figure for the first half of the previous year (€22.9 million), primarily linked to a combination of the following:

an increase in insurance proceeds as compensation for damages in the first half (up €2.1 million);
increased gains on the sale of components of plant (up €1.5 million), relating above all to the so-called "Copper Plan" consisting of the progressive replacement, and sale to third parties, of a number of copper conductors present on power lines with new aluminium conductors;
an increase in other revenues (up €4.4 million), broadly due to the recognition of revenue resulting from the acquisition of Avvenia (€3.1 million), the accounting for which is as yet provisional;

There were also increases in sundry grants and rental income, amounting to €1.7 million.

Operating costs

3. RAW AND CONSUMABLE MATERIALS USED: €97.5 MILLION

This item includes the value of the various materials and equipment used in the ordinary operation and maintenance of the plant belonging to the Group and third parties, and the materials consumed in the performance of contract work by the Tamini Group and in South America.

The increase of €63.7 million compared with the same period of the previous year primarily reflects an increase in costs relating to the development of operations in South America, recognised in application of IFRIC 12 (up €44.6 million, above all with reference to Brazil) and increased activity in Uruguay, partially offset by the impact of completion of the contract in Chile (up €9.4 million).

There was also an increase in costs relating to performance of contracts by the Tamini Group (up €8.8 million).

4. SERVICES: €80.3 MILLION

(€m)	1H2018	1H2017	CHANGE
Maintenance and sundry services	35.3	33.4	1.9
Tender costs for plant	22.7	22.9	(0.2)
Remote transmission and telecommunications	6.0	5.5	0.5
Lease expense	5.8	5.4	0.4
IT services	5.4	5.2	0.2
Insurance	5.1	4.1	1.0
TOTAL	80.3	76.5	3.8

This item, amounting to €80.3 million, is up €3.8 million on the figure for the first half of 2017 (€76.5 million). This reflects an increase in service costs linked to the Group's new grid maintenance plan launched by Terna Rete Italia SpA.

5. PERSONNEL EXPENSES: €126.8 MILLION

(€m)	1H2018	1H2017	CHANGE
Salaries, wages and other short-term benefits	149.1	149.0	0.1
Directors' remuneration	1.1	1.2	(0.1)
Termination benefits (TFR), energy discounts and other employee benefits	9.1	4.5	4.6
Early retirement incentives	-	1.1	(1.1)
Gross personnel expenses	159.3	155.8	3.5
Capitalised personnel expenses	(32.5)	(29.6)	(2.9)
TOTAL	126.8	126.2	0.6

Personnel expenses for the first half of 2018 amount to €126.8 million and are broadly stable (up €0.6 million) compared with the figure for the first half of the previous year (€126.2 million).

The following table shows the Group's average workforce by category for the first half of 2018 and 2017.

		AVERAGE WORKFORCE
	1H2018	1H2017	CHANGE
Senior managers	73	73	-
Middle managers	615	568	47
Administrative personnel	2,067	1,998	69
Operating personnel	1,246	1,254	(8)
TOTAL	4,001	3,893	108

The net increase in the average workforce in the first half, compared with the same period of 2017, amounts to 108.

6. AMORTISATION, DEPRECIATION AND IMPAIRMENT LOSSES: €267.4 MILLION

(€m)	1H2018	1H2017	CHANGE
Amortisation of intangible assets	25.3	25.1	0.2
- of which rights on infrastructure	11.7	12.5	(0.8)
Depreciation of property, plant and equipment	239.9	228.1	11.8
Impairment losses on property, plant and equipment	0.3	7.6	(7.3)
Impairment losses on current assets	1.9	-	1.9
TOTAL	267.4	260.8	6.6

This item, amounting to €267.4 million, is up on the first half of 2017 (€6.6 million, including a reduction of €4.6 million at the Parent Company and €1.1 million at the subsidiary, Rete Srl), primarily due to the entry into service of new plant.

7. OTHER OPERATING COSTS: €17.6 MILLION

(€m)	1H2018	1H2017	CHANGE
Quality of service costs	3.7	3.8	(0.1)
Net contingent liabilities	4.2	1.1	3.1
Indirect taxes and local taxes and levies	1.6	5.9	(4.3)
Provisions for litigation and disputes	-	0.7	(0.7)
Losses on sales/disposal of plant	0.8	0.2	0.6
Other	7.3	3.9	3.4
TOTAL	17.6	15.6	2.0

This item, amounting to €17.6 million, is up €2.0 million compared with the same period of the previous year, primarily due to the increased costs incurred by the Tamini Group during the period.

8. NET FINANCIAL INCOME/(EXPENSES): (€44.1) MILLION

(€m)	1H2018	1H2017	CHANGE
FINANCIAL EXPENSES
Financial expenses paid to Cassa Depositi e Prestiti	(1.6)	(1.7)	0.1
Interest expense on medium/long-term borrowings and related hedges	(49.7)	(49.1)	(0.6)
Discounting of termination benefits (TFR), other provisions for employee benefits and provisions for risks and charges	(0.4)	(0.5)	0.1
Capitalised financial expenses	6.4	7.0	(0.6)
Translation losses	(1.0)	(0.2)	(0.8)
Other financial expenses	(0.4)	-	(0.4)
Total expenses	(46.7)	(44.5)	(2.2)
FINANCIAL INCOME
Interest income and other financial income	2.6	1.2	1.4
Restructuring of bond issues and related hedges	-	0.8	(0.8)
Total income	2.6	2.0	0.6
TOTAL	(44.1)	(42.5)	(1.6)

Net financial expenses of €44.1 million are essentially attributable to the Parent Company (€43.4 million) and reflect €46.7 million in financial expenses and €2.6 million in financial income. The increase in net financial expenses compared with the first half of 2017, amounting to €1.6 million, primarily reflects the following:

an increase in financial expenses on medium/long-term borrowings and the related hedges (€0.6 million), primarily due to the greater amount of debt in the first half of 2018 compared with the same period of 2017;
a reduction in capitalised financial expenses (down €0.6 million), due to the lower cost of debt in the first half of 2018 compared with the same period of 2017;
an increase in translation losses (€0.8 million), primarily due to the impact of the transactions entered into to hedge the loans disbursed to the Brazilian subsidiaries;
an increase in interest income and other financial income (€1.4 million), primarily reflecting the liquidity invested in Brazil;
a reduction in fair value gains on bond issues and the related hedges (€0.8 million) following a restructuring of the derivatives portfolio in 2017.

9. SHARE OF PROFIT/(LOSS) OF INVESTEES ACCOUNTED FOR USING THE EQUITY METHOD: €1.4 MILLION

This item, amounting to €1.4 million, reflects the impact on profit or loss of the adjustment of the Group's share of equity in the associate, CESI SpA, at 30 June 2018 and is down €1.5 million compared with the first half of 2017.

10. INCOME TAX EXPENSE: €142.7 MILLION

Income tax expense for the period amounts to €142.7 million, a reduction of €1.2 million compared with the first half of 2017. This primarily reflects the recognition of income not liable to taxation during the period.

The tax rate for the period is thus 28.3%, compared with 29.1% for the first half of 2017.

A breakdown of income tax expense for the period is shown below:

(€m)	1H2018	1H2017	CHANGE
Income tax for the period
Current tax expense:
- IRES (corporate income tax)	131.1	131.3	(0.2)
- IRAP (regional tax on productive activities)	27.8	25.8	2.0
Total current tax expense	158.9	157.1	1.8
Temporary differences:
- deferred tax assets	9.9	3.3	6.6
- deferred tax liabilities	(14.7)	(15.6)	0.9
Total net deferred tax	(4.8)	(12.3)	7.5
Adjustments of taxes for previous years	(11.4)	(0.9)	(10.5)
TOTAL	142.7	143.9	(1.2)

Current tax expense of €158.9 million is up €1.8 million compared with the figure for the first half of 2017, broadly reflecting the improvement in pre-tax profit.

Net deferred tax of €4.8 million is down €7.5 million, primarily reflecting the reversal of the effect on taxation of amortisation and depreciation and movements in provisions for risks and charges.

Adjustments to taxes for previous years, amounting to €11.4 million, reflect contingent assets resulting from recognition of the effective amount payable when filing annual tax returns. This item is down €10.5 million compared with the first half of 2017.

11. EARNINGS PER SHARE

Earnings per share, which also corresponds to diluted earnings per share, amounts to €0.179 (based on profit for the period attributable to owners of the Parent, totalling €360.2 million, divided by the number of shares outstanding, totalling 2,009,992.0 thousand.

C. Operating segments

In line with the Business Plan 2018-2022, and in compliance with IFRS 8, the Terna Group's identified operating segments are described below:

Regulated in Italy
Non-Regulated
International

The Regulated segment includes the development, operation and maintenance of the National Transmission Grid, in addition to dispatching and metering, and the activities involved in the construction of storage systems. These activities have been included in one operating segment, as they are all regulated by ARERA and have similar characteristics, in terms of the remuneration model and the method for setting the related tariffs.

The Non-regulated segment includes deregulated activities and specific business initiatives, above all relating to the provision of services to third parties in the areas of Energy Solutions (the development of technical solutions and the supply of innovative services), Telecommunications (the housing of telecommunications equipment and maintenance services for fibre networks) and O&M (operation and maintenance of highvoltage and very high-voltage infrastructure). This segment also includes the activities carried out in relation to the private interconnectors launched by Law 99/2009, legislation that assigned Terna responsibility for selecting undertakings (the "selected undertakings"), on the basis of public tenders, willing to finance specific interconnectors in exchange for the benefits resulting from a decree granting a third-party access exemption with regard to the transmission capacity provided by the new infrastructure. The "Non-regulated Activities" segment also includes the operations of the Tamini Group, relating essentially to the construction and commercialisation of electrical equipment, above all power transformers.

On the other hand, the International segment includes the results deriving from opportunities for international expansion, which the Group aims to exploit by leveraging its core competencies developed in Italy as a TSO, where such competencies are of significant importance in its home country. Overseas investment focuses on countries with stable political and regulatory regimes and a need to develop their electricity infrastructure. This segment includes the results of the two Brazilian companies, SPE Santa Lucia Trasmissora de Energia SA and SPE Santa Maria Trasmissora de Energia SA, the Peruvian company Terna Peru SAC, the Uruguayan company Difebal SA and the Chilean company Terna Chile SpA.

(€m)	1H2018	1H2017	CHANGE	% CHANGE
REGULATED REVENUE IN ITALY	979.4	967.5	11.9	1.2
NON-REGULATED REVENUE	95.4	77.9	17.5	22.5
INTERNATIONAL REVENUE*	5.5	0.1	5.4	-
TOTAL REVENUE	1,080.3	1,045.5	34.8	3.3
GROSS OPERATING PROFIT (EBITDA)**	814.9	794.8	20.1	2.5
of which Regulated EBITDA in Italy***	785.8	777.6	8.2	1.1
of which Non-Regulated EBITDA	27.2	18.9	8.3	43.9
of which International EBITDA	1.9	(1.7)	3.6	-
Reconciliation of segment result with Group's pre-tax result
GROSS OPERATING PROFIT (EBITDA)	814.9	794.8
Amortisation. depreciation and impairment losses	267.4	260.8
OPERATING PROFIT/(LOSS) (EBIT)	547.5	534.0
Financial income/(expenses)	(44.1)	(42.5)
Share of profit/(loss) of investees accounted for using the equity method	1.4	2.9
Profit/(Loss) before tax	504.8	494.4

* Directly includes the margin earned on overseas concessions.

** Gross operating profit - EBITDA is an indicator of operating performance, obtained by adding "Amortisation, depreciation and impairment losses" to "Operating profit/(loss) (EBIT)".

*** EBITDA including indirect costs.

The Group's revenue for the first half of 2018 amounts to €1,080.3 million, marking an increase of €34.8 million (3.3%) compared with the first half of 2017.

Gross operating profit (EBITDA) of €814.9 million is up €20.1 million (2.5%) on the €794.8 million of the first half of 2017.

Regulated EBITDA in Italy amounts to €785.8 million for the first half of 2018, an increase of €8.2 million compared with the first half of 2017, primarily due to the increase in tariff revenue.

Non-Regulated EBITDA amounts to €27.2 million for the first half of 2018, an increase of €8.3 million. This reflects the contribution of the Tamini Group and revenue from the private Italy-France interconnector.

International EBITDA of €1.9 million for the first half of 2018 is up €3.6 million compared with the same period of the previous year. €3.4 million of the increase regards the contribution from construction services provided in Brazil, recognised in accordance with IFRIC 12.

Information on the financial position periodically reported to senior management is not provided directly on the basis of each individual segment, but based on the measurement and presentation of gross invested capital as a whole, given that the contributions from the Non-Regulated and International segments are not material. The following table shows this indicator at 30 June 2018 and 31 December 2017.

(€m)	30 JUNE 2018	31 DECEMBER 2017
Net non-current assets*	13,593.5	13,466.4
of which investments in associates and joint ventures	78.2	77.9
Net working capital**	(1,496.0)	(1,485.2)
Gross invested capital***	12,097.5	11,981.2

* Net non-current assets include the value of "property, plant and equipment", "Goodwill", "Intangible assets", "Investments accounted for using the equity method", "Other non-.current assets" and "Non-current financial assets", excluding accrued fees on available financing (€3.8 million).

** Net working capital is the difference between total current assets less cash and the item, "Current financial assets", and total current liabilities, less the short-term portion of long-term borrowings and the items, "Short-term borrowings" and "Current financial liabilities", and the item, "Other non-current liabilities".

*** Gross invested capital is the sum of net non-current assets and net working capital.

D. Notes to the consolidated statement of financial position

Assets

12. PROPERTY, PLANT AND EQUIPMENT: €12,839.9 MILLION

(€m)	LAND	BUILDINGS	PLANT AND EQUIPMENT	INDUSTRIAL AND COMMERCIAL EQUIPMENT	OTHER ASSETS	ASSETS UNDER CONST. AND PRE PAYMENTS	TOTAL
COST AT 1 JANUARY 2018	192,4	1,844.7	16,830.9	100.0	145.3	1,615.3	20,728.6
Investments	-		0.2	1.0	0.9	324.1	326.2
Assets entering service	3.3	11.2	131.2		2.7	(148.4)	-
Contribution of newly acquired companies	-	-	0.1	-	-	-	0.1
Other additions	-	-	1.5	-	-	(1.5)	-
Disposals and impairments	(0.8)	-	(10.8)	-	(0.1)	(0.2)	(11.9)
Other movements	(0.1)	(0.7)	(1.0)	-	0.2	3.2	1.6
Reclassifications	-	1.6	0.2	0.1	(0.1)	(1.8)	-
COST AT 30 JUNE 2018	194.8	1,856.8	16,952.3	101.1	148.9	1,790.7	21,044.6
ACCUMULATED DEPRECIATION AND IMPAIRMENTS AT 1 JANUARY 2018	-	(525.9)	(7,258.6)	(81,5)	(109,8)	-	(7.975,8)
Depreciation for the period	-	(22.4)	(209,5)	(2,4)	(5,6)	-	(239,9)
Disposals	-	-	10,4	0,1	0,1	-	10,6
Other movements	-	-	0,4	-	-	-	0,4
ACCUMULATED DEPRECIATION AND IMPAIRMENTS AT 30 JUNE 2018	-	(548.3)	(7,457.3)	(83,8)	(115,3)	-	(8,204.7)
Carrying amount
AT 30 JUNE 2018	194.8	1,308.5	9,495.0	17.3	33.6	1,790.7	12,839.9
AT 31 DECEMBER 2017	192.4	1,318.8	9,572.3	18.5	35.5	1,615.3	12,752.8
CHANGE	2.4	(10.3)	(77.3)	(1.2)	(1.9)	175.4	87.1

The category, "Plant and equipment" at 30 June 2018 includes the electricity transmission grid and transformer substations in Italy.

"Property, plant and equipment" is up €87.1 million compared with the previous year, reflecting ordinary movements during the period as a result of:

investment of €326.2 million, including €286.2 million invested in regulated assets and €40.0 million in non-regulated assets, primarily with regard to the private "Italy-France" Interconnector and other projects being financed;
depreciation for the period, amounting to €239.9 million;
disposals, impairments and other movements resulting in an increase of €0.8 million.

A summary of movements in property, plant and equipment during the period is shown below.

	(€m)
Investment
- Power lines	211.8
- Transformer substations	105.0
- Storage systems	0.2
- Other	9.2
Total investment in property, plant and equipment	326.2
Contribution of newly acquired companies	0.1
Depreciation for the period	(239.9)
Other movements	2.0
Disposals and impairments	(1.3)
TOTAL	87.1

The following information regards work on the principal projects during the period: progress on construction of the various overseas interconnections, consisting of the power lines linking Italy and Montenegro (€48 million) and Italy and France (€13.6 million), extension of the fibre network as part of the "Fibre for the Grid" project (€16 million, including €1.4 million by the subsidiary Rete Srl), continuation of the "Functional separation" project (€13.2 million), the laying of cables in the Venetian lagoon (€12.8 million), construction of the Sorrento Peninsula interconnector (€12.8 million), the upgrade of north-south power lines (€6.8 million), construction of the Foggia-Benevento II power line (€5.1 million) and restructuring in the Rome metropolitan area (€4.3 million).

13. GOODWILL: €230.1 MILLION

Goodwill regards the acquisition of Terna Rete Italia Srl, accounted for in the financial statements at a carrying amount of €101.6 million, the acquisition of RTL, with a carrying amount of €88.6 million, the acquisition of Rete Srl, with a carrying amount of €26.3 million, and the acquisition of TES - Transformer Electro Services within the Tamini Group, with a carrying amount of €13.6 million.

There are no changes in this item compared with the previous year.

14. INTANGIBLE ASSETS: €270.4 MILLION

(€m)	INFRASTRUCTURE RIGHTS	CONCESSIONS	OTHER ASSETS	ASSETS UNDER DEVELOPMENT AND PREPAYMENTS	TOTAL
Cost	412.1	135.4	271.9	34.6	854.0
Accumulated amortisation	(308.2)	(68.1)	(202.1)	-	(578.4)
BALANCE AT 31 DECEMBER 2017	103.9	67.3	69.8	34.6	275.6
Investments	0.4	-	0.2	11.1	11.7
Assets entering service	3.1	-	8.7	(11.8)	-
Contribution of newly acquired companies	-	-	8.0	-	8.0
Amortisation for the period	(11.7)	(2.8)	(10.8)	-	(25.3)
Other movements and reclassifications	-	-	0.4	-	0.4
BALANCE AT 30 JUNE 2018	95.7	64.5	76.3	33.9	270.4
Cost	415.6	135.4	288.7	33.9	873.6
Accumulated amortisation	(319.9)	(70.9)	(212.4)	-	(603.2)
BALANCE AT 30 JUNE 2018	95.7	64.5	76.3	33.9	270.4
CHANGE	(8.2)	(2.8)	6.5	(0.7)	(5.2)

Intangible assets amount to €270.4 million (€275.6 million at 31 December 2017). This item includes:

• the infrastructure used in provision of the dispatching service and in activities in Peru, carried out under concession and accounted for in accordance with "IFRIC 12 - Service Concession Arrangements". The carrying amount, at 30 June 2018, is €95.7 million. The carrying amount of infrastructure under construction, included in the category "Assets under development and prepayments", is €23.5 million (at 31 December 2017, €103.9 million and €20.3 million, respectively);

• the concession for electricity transmission and dispatching activities in Italy (with a carrying amount of €64.5 million at 30 June 2018); this 25-year concession was recognised in 2005, initially at fair value and subsequently at cost.

Other intangible assets primarily include software applications produced internally or purchased as part of systems development programmes. Investment in these assets during the period, primarily attributable to the Parent Company (€4.7 million), essentially regard internal development programmes.

The reduction compared with the previous year (€5.2 million) broadly reflects the net effect of amortisation (€25.3 million) and investment (€11.7 million, including €6.7 million in infrastructure rights) and the contribution resulting from the acquisition of Avvenia the Energy Innovator Srl (€8.0 million, primarily reflecting the company's order book).

Investment in intangible assets during the period (€11.7 million, including €11 million invested in the Parent Company's Regulated Activities) included expenditure on the development of software applications for the Remote Management System for Dispatching (€2.4 million), the Power Exchange (€1.3 million), the Metering System (€0.4 million) and for protection of the electricity system (€0.2 million), as well as software applications and generic licences (€4.5 million).

15. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD: €78.2 MILLION

This item, amounting to €78.2 million, is slightly up compared with the previous year (an increase of €0.3 million), reflecting the adjustment of the Group's share of equity in the associate, CESI SpA, at 30 June 2018, after deducting the dividend to be received from this company.

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
Fees on available financing	3.8	4.3	(0.5)
Other investments	0.1	0.1	-
Assets under concession - IFRIC 12 financial asset model	110.0	73.5	36.5
Deposit in the Interconnector Guarantee Fund	50.1	42.2	7.9
NON-CURRENT FINANCIAL ASSETS	164.0	120.1	43.9
Other current financial assets	0.3	0.2	0.1
CURRENT FINANCIAL ASSETS	0.3	0.2	0.1

16. FINANCIAL ASSETS

"Non-current financial assets" are up €43.9 million compared with the previous year, reflecting increased investment during the period in infrastructure operated under concession in Brazil, recognised in application of IFRIC 12 (up €36.5 million) and an increase in the Interconnector Guarantee Fund, set up to fund investment in interconnections by art. 32 of Law 99/09 (up €7.9 million).

"Current financial assets" of €0.3 million are broadly in line with the figure for the previous year (€0.2 million).

17. OTHER ASSETS

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
Loans and advances to employees	9.5	9.3	0.2
Deposits with third parties	5.2	4.9	0.3
OTHER NON-CURRENT ASSETS	14.7	14.2	0.5
Other tax credits	31.2	76.8	(45.6)
Amounts due from associates	1.1	-	1.1
Prepayments to suppliers	27.3	35.1	(7.8)
Prepayments of operating expenses and accrued operating income	27.0	18.5	8.5
Other current assets - Interconnector Guarantee Fund	2.1	4.1	(2.0)
Amounts due from others	9.3	4.6	4.7
OTHER CURRENT ASSETS	98.0	139.1	(41.1)

"Other non-current assets" amount to €14.7 million, broadly in line with the previous year (up €0.4 million) and primarily regard loans and advances disbursed to employees.

"Other current assets" of €98.0 million are down €41.1 million compared with 31 December 2017, primarily due to:

other tax credits (down €45.6 million), primarily reflecting VAT payable by the Group (down €45.5 million) as opposed to the refundable VAT recognised at the end of 2017, due above all to increased payments on account made during the previous year as a result of the Ministerial Decree of 27 June 2017;
a reduction in prepayments (down €7.8 million), broadly linked to the progress of work in South America;
expenses already paid for but accruing after 30 June 2018, which are up €8.5 million, including €6.2 million paid to personnel and €1.1 million in insurance premiums;
amounts due from others (up €4.7 million), broadly reflecting the subscription for shares in Avvenia the Energy Innovator Srl (€1.3 million) to be settled and higher insurance proceeds (€2.5 million) collected in early July 2018.

18. INVENTORIES: €16.4 MILLION

This item, amounting to €16.4 million, is up €1.6 million compared with the previous year, primarily linked to an increase in contract work at the Tamini Group.

19. TRADE RECEIVABLES: €1,320.6 MILLION

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
Energy-related receivables	889.5	772.8	116.7
Transmission charges receivable	309.1	312.2	(3.1)
Other trade receivables	122.0	180.9	(58.9)
TOTAL	1,320.6	1,265.9	54.7

Trade receivables amount to €1,320.6 million at 30 June 2018 and are accounted for less any losses on items deemed not to be recoverable and recognised in the allowance for doubtful accounts (€26.0 million for energy-related receivables and €19.5 million for other items). The carrying amount shown broadly approximates to fair value.

Energy-related/regulated receivables: €889.5 million

This item includes so-called "pass-through items" relating to the Parent Company's activities in accordance with Resolution 111/06 (€863 million) and receivables due from dispatching end users resulting from regulated activities (€19.1 million). It also includes the amount due from the Fund for Energy and Environmental Services (Cassa per i Servizi Energetici e Ambientali - CSEA), based on the RENS performance for the period (€7.4 million).

The balance is up €116.7 million overall compared with the end of 2017. This is due to due to energy-related pass-through receivables, primarily as the result of an increase in the net amount due (up €131.2 million) in the form of the uplift for procuring resources on the DSM. This mainly reflects the impact on this form of income of increased purchases on the DSM in the period November 2017 - January 2018. The change also reflects reduced amounts due from CSEA in relation to the interruptibility service.

Transmission charges receivable: €309.1 million

Transmission charges receivable, amounting to €309.1 million, represent the amount payable to the Parent Company and other owners of the national transmission grid by electricity distributors. This receivable is down €3.1 million compared with 31 December 2017, primarily due to the mechanism for recovering one-off payments recognised in 2017 for the early effect of the tariff adjustment linked to investment.

Other trade receivables: €122.0 million

Other trade receivables primarily regard amounts receivable from customers of the Non-Regulated business. These amounts derive from the provision of specialist services to third parties, primarily in relation to plant engineering services, the operation and maintenance of high-voltage and very high-voltage infrastructure, and the housing of telecommunications equipment and maintenance services for fibre networks.

This item is down €58.9 million compared with the previous year, primarily in relation to the amount due from Piemonte Savoia Srl, recognised at the end of 2017, for construction work following the achievement of contract milestones (€49.3 million), which was collected in January 2018. The reduction also reflects a decrease of €11.8 million in receivables recognised by the Tamini Group.

The following table shows receivables resulting from contract work in progress (€85.4 million), being carried out by the Group under multi-year contracts with third parties:

(€m)	PREPAYMENTS	VALUE OF CONTRACT	BALANCE AT 30 JUNE 2018	PREPAYMENTS	VALUE OF CONTRACT	BALANCE AT 31 DECEMBER 2017
Receivables resulting from contract work in progress	(23.5)	108.9	85.4	(23.6)	60.5	36.9

The Group's receivables resulting from contract work in progress are up €48.5 million on the previous year, primarily reflecting an increase in contract work at the Tamini Group (up €36.9 million) and the contract in Uruguay (up €13.1 million).

Bank guarantees given to third parties in the interest of Group companies at 30 June 2018 amount to €188.7 million, which breaks down as follows: €47.7 million in the interests of Terna SpA, €39.2 million in the interests of Terna Interconnector Srl, €34.5 million in the interests of Terna Rete Italia SpA, €6 million in the interests of Terna Plus Srl, €6.4 million in the interests of Difebal SA, €3.3 million in the interests of Rete Srl, €51.6 million in the interests of Tamini Trasformatori Srl.

20. CASH AND CASH EQUIVALENTS: €1,065.9 MILLION

Cash amounts to €1,065.9 million at 30 June 2018, including €650.6 million invested in short-term, readily convertible deposits and €415.3 million deposited in bank current accounts.

21. INCOME TAX ASSETS: €21.8 MILLION

Income tax assets, amounting to €21.8 million, are down €15.1 million compared with the previous year. This essentially reflects the assets recognised at the end of 2017 as a result of payments on account during the year and a decrease in accrued income tax payable, primarily due to the reduction in the IRES tax rate from 27.5% to 24% (a reduction of €12.3 million), with respect to the amount payable to the tax authorities at 30 June 2018 and recognised in "Tax liabilities". The decrease also reflects the reduction in the IRES credit that was partially used when computing tax expense for 2017.

Equity and liabilities

22. EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT: €3,842.8 MILLION

Share capital: €442.2 million

The Parent Company's share capital consists of 2,009,992,000 ordinary shares with a par value of €0.22 per share.

Legal reserve: €88.4 million

The legal reserve accounts for 20% of the Parent Company's share capital.

Other reserves: €718.1 million

The other reserves are down €13.9 million compared with the previous year, primarily as a result of other comprehensive income. This reflects:

fair value adjustments to the Parent Company's cash flow hedges (down €14.3 million, taking into account the related tax asset of €4.6 million);
the recognition of actuarial gains and losses on provisions for employee benefits (a gain of €0.4 million, taking into account the related tax liability of €0.1 million).

Retained earnings and accumulated losses: €2,233.9 million

The increase in "Retained earnings and accumulated losses", amounting to €232.2 million, primarily regards the remaining portion of the Group's profit for 2017.

Payment of the final dividend

The Annual General Meeting of shareholders held on 4 May 2018 approved payment of a dividend for fullyear 2017 of €0.22 per share, and the payment - before any withholdings required by law - of a final dividend of €0.145737 per share, amounting to a total of €292.9 million, after taking into account the interim dividend already paid. The final dividend was payable from 20 June 2018, with an ex dividend date for coupon 28 of 18 June 2018.

Equity Attributable To Non-Controlling Interests: €31.9 million

Equity attributable to non-controlling interests, relating to the non-controlling shareholders of the Tamini Group, Terna Interconnector Srl and Avvenia The Energy Innovator Srl, amounts to €31.9 million, an increase of €6.2 million compared with 31 December 2017 (€25.7 million). The increase is due to the acquisition of Avvenia (€4.3 million), the profit reported by Terna Interconnector Srl (€2.2 million) and the loss reported by the Tamini Group in the first half (€0.3 million).

23. BORROWINGS AND FINANCIAL LIABILITIES

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
Bond issues	6,489.6	6,541.9	(52.3)
Bank borrowings	1,704.0	2,129.7	(425.7)
LONG-TERM BORROWINGS	8,193.6	8,671.6	(478.0)
Derivati CFH	26.6	10.5	16.1
NON-CURRENT FINANCIAL LIABILITIES	26.6	10.5	16.1
SHORT-TERM BORROWINGS	25.0	118.0	(93.0)
Bond issues	-	749.9	(749.9)
Bank borrowings	623.9	134.4	489.5
CURRENT PORTION OF LONG-TERM BORROWINGS	623,9	884,3	(260.4)
TOTAL	8,869.1	9,684.4	(815.3)

Borrowings and financial liabilities have decreased by €815.3 million compared with the previous year to €8,869.1 million.

The reduction in bond issues (down €802.2 million) reflects the repayment of bonds issued on 16 October 2012, totalling €750 million, and the adjustment to these instruments to reflect their amortised cost, resulting in a reduction of €52.2 million.

The latest official prices at 30 June 2018 and 31 December 2017 for the bonds listed on the Luxembourg Stock Exchange are detailed below:

(€)	PRICE AT 30 JUNE 2018	PRICE AT 31 DECEMBER 2017
bond maturity 2024:	124.19	128.98
bond maturity 2023:	135.63*	135.46
bond maturity 2019:	106.08	108.74
bond maturity 2026:	101.94	102.85
bond maturity 2021:	112.15	114.80
bond maturity 2022:	101.09	102.50
bond maturity 2028:	91.77	96.16
bond maturity 2027:	96.48	100.51
bond maturity 2018:	-	100.38

* Source: BNP Paribas, in the absence of up-to-date prices sourced from Reuters and Bloomberg.

Compared to the previous year, bank borrowings have increased by €63.8 million, due primarily to:

• the drawdown of a new EIB loan, totalling €130 million;

• repayments falling due made to the EIB and lease payments totalling €66.2 million.

Long-term borrowings

(€m)	MATURITY	AT 31 DECEMBER 2017	AT 30 JUNE 2018	PORTION FALLING DUE WITHIN 12 MONTHS	PORTION FALLING DUE AFTER 12 MONTHS	2019	2020	2021	2022		2023 BEYOND	AVERAGE INTEREST RATE AT 30 JUNE 2018	AVERAGE NET INTEREST RATE ON HEDGES AT 30 JUNE 2018
Bonds
IL bonds
PP bonds	2019	638,7	627.8	-	627.8	627.8	-	-	-	-	-	4.88%	1.15%
PP bonds	2026	78,8	78.9	-	78.9	-	-	-	-	-	78.9	1.60%	1.80%
1250 bonds	2021	1,388,7	1,367.5	-	1,367.5	-		- 1,367.5	-	-	-	4.75%	1.20%
1000 bonds	2022	996.8	997.2	-	997.2	-	-	-	997.2	-	-	0.88%	0.95%
750 bonds	2018	749.9	-	-	-	-	-	-	-	-	-	2.88%	2.99%
750 bonds	2028	740.1	740.5	-	740.5	-	-	-	-	-	740.5	1.00%	1.19%
1000 bonds	2027	992.5	992.9	-	992.9	-	-	-	-	-	992.9	1.38%	1.46%
EIB	2039	238.6	368.5	-	368.5	-	-	-	7.2	7.2	354.1	1.45%	1.45%
Total fixed rate		7,530.4	6,858.1	-	6,858.1	627.8		- 1,367.5 1,004.4			693.7 3,164.7
EIB	2030	1,488.3	1,422.2	121,9	1,300.3	111.3	116.1	116.7	126.0	126.0	826.1	0.25%	0.83%
CDP	2019	500.0	500.0	500,0	-	500.0	-	-	-	-	-	1.01%	1.14%
Difebal financing	2034	32.6	33.8	-	33.8	-	-	-	-	-	33.8	5.47%	5.76%
Leases	2019-2021-2022	4.6	3.4	2,0	1.4	1.9	0,3	0,1	0.1	-	1,0	0.94%	0.94%
Total variable rate		2,025.5	1,959.4	623,9	1,335.5	613.2	116.4	116.8	126.1	126.0	860.9
TOTAL		9,555.9	8,817.5	623,9	8,193.6 1,241.0			116.4 1,484.3 1,130.5			819.7 4,025.6

At 30 June 2018, the Terna Group's borrowings amount to €8,817.5 million (€623.9 million maturing within 12 months and €8,193.6 million maturing after 12 months), of which €4,025.6 million maturing after five years.

(€m)		AT 31 DECEMBER 2017		REPAYMENTS	DRAW	CHANGE	CHANGE		AT 30 JUNE 2018
	NOMINAL DEBT	CARRYING AMOUNT	FAIR VALUE	AND CAPITALISATIONS	DOWNS	IN FAIR VALUE 31 DEC 2017/30 JUNE 2018	IN CARRYING AMOUNT	NOMINAL DEBT	CARRYING AMOUNT	FAIR VALUE
Bonds maturing 2024	800.0	1,013.4	1,031.8	-	-	(15.1)	(15.1)	800.0	998.3	993.5
IL bonds	570.5	692.9	677.3	-	-	(6.4)	(6.4)	575.0	686.5	678.2
Private Placement 2019	600.0	638.7	652.4	-	-	(10.9)	(10.9)	600.0	627.8	636.5
Private Placement 2026	80.0	78.8	82.3	-	-	0.1	0.1	80.0	78.9	81.6
Bonds maturing 2021	1,250.0	1,388.7	1,435.0	-	-	(21.2)	(21.2)	1,250.0	1,367.5	1,401.8
Bonds maturing 2022	1,000.0	996.8	1,025.0	-	-	0.4	0.4	1,000.0	997.2	1,010.9
Bonds maturing 2018	750.0	749.9	752.8	(750.0)	-	0.1	(749.9)	-	-	-
Bonds maturing 2028	750.0	740.1	721.2	-	-	0.4	0.4	750.0	740.5	688.3
Bonds maturing 2027	1,000.0	992.5	1,005.2	-	-	0.4	0.4	1,000.0	992.9	964.8
Total bond issues	6,800.5	7,291.8	7,383.0	(750.0)	-	(52.2)	(802.2)	6,055.0	6,489.6	6,455.6
Borrowings	2,265.5	2,264.1	2,270.4	(66.2)	130.0	-	63.8	2,329.1	2,327.9	2,343.4
Total borrowings	2,265.5	2,264.1	2,270.4	(66.2)	130.0	-	63.8	2,329.1	2,327.9	2,343.4
Total debt	9,066.0	9,555.9	9,653.4	(816.2)	130.0	(52.2)	(738.4)	8,384.1	8,817.5	8,799.0

The table below shows movements in long-term debt during the period, including also the nominal amount:

At 30 June 2018, the Group has access to additional financing of €2,050.0 million, represented by three revolving credit facilities entered into in December 2014, December 2015 and July 2016. In addition, the Group has uncommitted bank lines of credit totalling approximately €708 million and approximately €46 million in loans agreed but not yet disbursed.

In addition, as provided for in IFRS 7, the table shows the fair value of financial liabilities. In the case of bond issues, this is market value based on prices at the reporting date, whilst variable rate loans are shown substantially at the nominal amount to be repaid.

Non-current financial liabilities

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
Cash flow hedges	26.6	10.5	16.1
TOTAL	26.6	10.5	16.1

Non-current financial liabilities, amounting to €26.6 million at 30 June 2018, reflect the fair value of cash flow hedges.

Fair value was measured by discounting the expected cash flows using the market yield curve at the reporting date. The increase of €16.1 million, compared with 31 December 2017, is due to the movement in market interest rates and the change in the notional value of the derivatives portfolio.

Short-term borrowings: €25.0 million

Short-term borrowings are down €93million compared with the previous year, reflecting the repayment of credit lines used primarily by the Parent Company.

Current financial liabilities

At 30 June 2018, current financial liabilities include the value of net interest expense accrued on financial instruments and not yet paid. This item is down €9.3 million compared with the previous year.

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
DEFERRED LIABILITIES ON:
Hedging derivatives	1.8	1.8	-
Bond issues	92.5	101.9	(9.4)
Borrowings	2.1	2.0	0.1
TOTAL	96.4	105.7	(9.3)

Net debt

Pursuant to the CONSOB Communication of 28 July 2006 and in compliance with Recommendation ESMA no. 319 of 2013, the Group's net debt is as follows:

(€m)	30 JUNE 2018
A. Cash	415.3
B. Term deposits	650.6
C. Cash and cash equivalents (A) + (B)	1,065.9
D. Current portion of non-current borrowings	623.9
of which: related parties	500.0
E. Short-term borrowings	25.0
F. Other net financial liabilities	92.3
of which: related parties	0.3
G. Current debt (D+E+F)	741.2
H. Current net debt (G) - (C)	(324.7)
I. Bank borrowings	1,704.0
J. Bond issues	6,489.6
K. Derivative financial instruments held in portfolio	26.6
L. Non-current net debt (I) + (J) + (K)	8,220.2
M. Net debt (H) + (L)	7,895.5

24. EMPLOYEE BENEFITS: €80.1 MILLION

(€m)	31 DECEMBER 2017	PROVISIONS	INTEREST COST	USES AND OTHER MOVEMENTS	ACTUARIAL GAINS/ (LOSSES)	30 JUNE 2018
Benefits during the period of employment
Loyalty bonuses	4.6	0.1	-	(0.1)	-	4.6
Total	4.6	0.1	-	(0.1)	-	4.6
Termination benefits
Deferred compensation
benefits (TFR)	46.4	-	0.2	(0.6)	(0.3)	45.7
Additional months' pay	7.1	0.1	-	(0.1)	0.4	7.5
Payment in lieu of notice	0.3	-	-	-	-	0.3
Total	53.8	0.1	0.2	(0.7)	0.1	53.5
Post-employment benefits
Energy discounts	13.0	0.2	0.1	(0.1)	(0.4)	12.8
ASEM health cover	9.3	0.1	0.1	(0.1)	(0.2)	9.2
Total	22.3	0.3	0.2	(0.2)	(0.6)	22.0
TOTAL	80.7	0.5	0.4	(1.0)	(0.5)	80.1

This item, amounting to €80.1 million at 30 June 2018, is slightly down compared with the previous year (a reduction of €0.6 million). This primarily regards a reduction of €0.7 million in deferred compensation benefits (TFR). The main actuarial assumptions used in estimating the liability for employee benefits are broadly in line with those used in the financial statements for 2017.

25. PROVISIONS FOR RISK AND CHARGES: €247.1 MILLION

(€m)	PROVISIONS FOR LITIGATION AND DISPUTES	PROVISIONS FOR SUNDRY RISKS AND CHARGES	PROVISIONS FOR EARLY RETIREMENT INCENTIVES	TOTAL
Amount at 31 December 2017	23.9	179.6	63.0	266.5
New provisions	-	12.6	-	12.6
Uses and other movements	-	(26.8)	(5.2)	(32.0)
Amount at 30 June 2018	23.9	165.4	57.8	247.1

Provisions for litigation and disputes: €23.9 million

These provisions, totalling €23.9 million, in line with the previous year, have been set aside to cover outstanding liabilities that, at the end of the period, could result from court judgements and out-of-court settlements regarding the activities of Group companies, have been assessed partly on the basis of recommendations from internal and external legal advisors.

Provisions for sundry risks and charges: €165.4 million

These provisions are down €14.2 million compared with the previous year, reflecting:

provisions for management incentive plans, totalling €6.1 million;
uses for urban and environmental redevelopment schemes (€4.9 million);
adjustment of the provisions for taxation and contributions (€12.1 million);
a net reduction of €3.3 million in provisions linked to regulation of the quality of the electricity service (the mitigation and sharing mechanism introduced by AEEGSI Resolution 653/2015/R/eel) which, after provisions for estimated penalties linked to outages during the period, reflects payments to distribution companies and releases following final determination of the penalties for previous years.

Provisions for early retirement incentives: €57.8 million

Provisions for early retirement incentives reflect the estimated extraordinary expenses to be incurred in relation to the cost of the scheme for the current year, linked to the early retirement of Group employees who have reached pensionable age. This item has declined €5.2 million as a result of payments made during the period.

26. DEFERRED TAX LIABILITIES: €0.1 MILLION

(€m)	31 DECEMBER 2017	EFFECTS RECOGNISED IN PROFIT OR LOSS AND OTHER MOVEMENTS	EFFECTS RECOGNISED IN COMPREHENSIVE INCOME	30 JUNE 2018	CHANGE
Deferred tax liabilities	119.3	(12.4)	-	106.9	(12.4)
Deferred tax assets	(110.7)	10.4	(6.5)	(106.8)	3.9
NET DEFERRED TAX LIABILITIES	8.6	(2.0)	(6.5)	0.1	(8.5)

The balance of this item, amounting to €0.1 million, includes the net impact of movements in the Group's deferred tax liabilities and deferred tax assets.

Deferred tax liabilities (€106.9 million) are down €12.4 million, essentially attributable to the Parent Company, Terna, following the use of prior provisions for accelerated depreciation.

Deferred tax assets (€106.8 million) are down on the figure for 31 December 2017 (€110.7million), having undergone the following movements:

net provisions not having an effect on profit or loss, totalling €6.5 million, reflecting the tax effect of movements in cash flow hedges, employee benefits and the impact of the application of new international accounting standards;
net uses of provisions for risks and charges (€8.8 million);
the use of deferred tax assets recognised in relation to tax relief on the goodwill resulting from the merger of RTL and Telat with and into the Parent Company (€2.8 million);
provisions recognised by the subsidiary Rete Srl, for the non-deductible portion of book depreciation recognised by the subsidiary, but not tax-deductible (€1.2 million).

27. OTHER NON-CURRENT LIABILITIES: €283.7 MILLION

This item, amounting to €283.7 million at 30 June 2018, regards accrued grants related to assets receivable by the Parent Company (€93.5 million), in addition to payments on account received from the entities financing the Italy-France Interconnector (€137.8 million).

This item also includes the Interconnector Guarantee Fund set up by Terna SpA following the issue of the 2016 Stability Law (€52.4 million), in order to fund investment in interconnections by art. 32 of Law 99/09. The increase in this item compared with the previous year, amounting to €32.7 million, essentially reflects the recognition of payments on account received from the entities financing the Italy-France Interconnector (€26.3 million) and an increase in the Interconnector Guarantee Fund (€9.0 million).

28. CURRENT LIABILITIES

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
Short-term borrowings*	25.0	118.0	(93.0)
Current portion of long-term borrowings*	623.9	884.3	(260.4)
Trade payables	2,417.9	2,497.9	(80.0)
Tax liabilities	36.6	-	36.6
Current financial liabilities*	96.4	105.7	(9.3)
Other current liabilities	214.6	193.0	21.6
TOTAL	3,414.4	3,798.9	(384,5)

* Information on these items is provided in note 23, "Borrowings and financial liabilities".

TRADE PAYABLES: €2,417.9 MILLION

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
Suppliers:
- Energy-related payables	1,740.0	1,602.6	137.4
- Non-energy-related payables	668,6	874,4	(205,8)
Amounts due to associates	4,7	14,9	(10,2)
Payables resulting from contract work in progress	4.6	6.0	(1.4)
TOTAL	2,417.9	2,497.9	(80.0)

Suppliers

Energy-related/regulated payables: €1,740.0 million

The increase of €137.4 million in this item compared with the end of 2017 essentially reflects energy-related pass-through payables, which are up €118 million primarily due to:

an increase in payables due to plants that are essential for the security of the electricity system (up €128 million) and in the form of capacity payments (€52.4 million), broadly resulting from items collected after payments approved by the Authority in the first half; offset by
a reduction in payables due to items deriving from the execution of dispatching contracts for purchases and sales for the purpose of injecting and withdrawing electricity, linked primarily to imbalances (down €106.6 million) after increased costs incurred in the DSM (up €54.4 million).

• a reduction in payables linked to charges for the use of transmission capacity (€24.3 million), partially offset by increased payables relating to the interruptibility service (€9.2 million).

The change also reflects the payable (€22.2 million) resulting from the difference between the amount collected from CSEA for the RENS bonus for 2016 and the related receivable recognised in the financial statements, calculated on a pro-rata basis taking into account the estimated overall results expected for the regulatory period 2016-2019.

Non-energy-related payables

The exposure to suppliers regards invoices received and to be received for contract work, services and purchases of materials and equipment.

The balance at 30 June 2018 (€668.6 million) is down €205.8 million compared with 31 December 2017, largely due to increased capital expenditure during the latter part of the previous year. The reduction in payables attributable to the Tamini Group is €6.3 million.

Amounts due to associates

This item, amounting to €4.7 million, is down €10.2 million on the previous year and regards amounts payable to the associate CESI SpA, for services provided primarily to the subsidiary, Terna Rete Italia SpA (€3.6 million), relating to electro technical studies and research.

Payables resulting from contract work in progress

Payables resulting from contract work in progress, amounting to €4.6 million at 30 June 2018, are down €1.4 million on the figure for 31 December 2017 (€6.0 million), essentially due to a reduction in amounts payable on contract work at the Tamini Group.

This item breaks down as follows.

(€m)	PREPAYMENTS	VALUE OF CONTRACT	BALANCE AT 30 JUNE 2018	PREPAYMENTS	VALUE OF CONTRACT	BALANCE AT 31 DECEMBER 2017
Payables resulting from contract work in progress	(17.8)	13.2	(4.6)	(19.0)	13.0	(6.0)

The carrying amount of trade payables broadly approximates to fair value.

The commitments assumed by the Group towards suppliers amount to approximately €3,564.7 million and regard purchase commitments linked to the normal "operating cycle" projected for the period 2018-2022.

Tax liabilities: €36.6 million

This item, amounting to €36.6 million, regards the Group's tax liability for the period, after payments on account during the first half and the payment of tax for 2017. The balance at 31 December 2017 was zero.

OTHER CURRENT LIABILITIES: €214.6 MILLION

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
Prepayments	33.5	22.3	11.2
Other tax liabilities	19.7	7.8	11.9
Social security payables	25.2	24.2	1.0
Amounts due to personnel	50.6	47.0	3.6
Other amounts due to third parties	85.6	91.7	(6.1)
TOTAL	214.6	193.0	21.6

Prepayments

This item (€33.5 million) regards grants related to assets collected by the Group (€28.7 million attributable to the Parent Company, €2.8 million to Rete Srl and €2 million to Terna Rete Italia SpA) to fund the construction of non-current assets in progress at 30 June 2018.

Compared to the balance at 31 December 2017 (€22.3 million), this item is up €11.2 million. This essentially reflects new prepayments received from third parties (€12.8 million, above all grants from RFI SpA for construction of a re-routed line), after grants accounted for directly as a reduction in the carrying amount of the assets (€1.9 million).

Other tax liabilities

Other tax liabilities, amounting to €19.7 million, are up €11.9 million compared with the previous year, primarily due to recognition, in 2018, of VAT payable by the companies participating in the Group VAT arrangement1 (up €10.5 thousand), and an increase in withholding tax payable on salaries and deferred compensation (TFR) paid to employees (€1.4 million).

Social security payables

Social security payables, essentially relating to contributions payable to INPS (the National Institute of Social Security) by the Parent Company and the subsidiary Terna Rete Italia SpA, amount to €25.2 million. This is slightly up on the previous year (€24.2 million). This item also included the amount payable to the Fondo Previdenza Elettrici - F.P.E. (the Electricity Industry Pension Fund), amounting to €3.6 million.

Amounts due to personnel

Amounts due to personnel, amounting to €50.6 million, essentially regard the Parent Company and the subsidiary, Terna Rete Italia SpA. They primarily relate to:

incentives payable during the year (€26.0 million);
amounts due to employees in the form of accrued and unused annual leave and bank holiday entitlements and thirteenth month salaries (€19.1 million).

This item is up €3.6 million, primarily due to an increase in incentives for personnel recognised during the first half (up €2.3 million) and amounts payable for accrued and unused annual leave and bank holiday entitlements (up €1.8 million).

Other payables due to third parties

Other payables due to third parties, amounting to €85.6 million, primarily regard guarantee deposits (€60.9 million) received from electricity market operators to guarantee their contractual obligations under dispatching and virtual interconnection contracts. This item also includes accrued expenses and deferred income (€9.7 million, primarily attributable to the Group's Non-Regulated business). This item is down €6.1 million due to a reduction in guarantee deposits (down €10.3 million), only partially offset by the amount payable to shareholders in the form of dividends (up €2.4 million).

E. Commitments and risks

Risk management

The Group's financial risk

In the course of its operations, the Terna Group is exposed to different financial risks: market risk (interest rate risk, exchange rate risk and inflation risk), liquidity risk and credit risk.

The Group's risk management policies seek to identify and analyse the risks that Group companies are exposed to, establishing appropriate limits and controls and monitoring the risks and compliance with such limits. These policies and the related systems are reviewed on a regular basis, in order to take account of any changes in market conditions or in the Group's operations.

As a part of the financial risk management policies approved by the Board of Directors, Terna has established the responsibilities and operating procedures for financial risk management, specifically as concerns the instruments to be used and the precise operating limits to apply in managing them.

The Terna Group's exposure to the aforementioned risks is substantially represented by the exposure of the Parent Company. This section provides information on the Terna Group's exposure to each of the above risks, the objectives, policies and processes applied in managing these risks and the methods used in their assessment, including further quantitative disclosures of the Parent Company's exposures at 30 June 2018. The fair value of financial instruments is determined in accordance with the fair value hierarchy envisaged under IFRS 7 (Level 2), by means of appropriate valuation techniques for each category of financial instrument, using market data at the end of the period and discounting projected cash flows on the basis of the market yield curve at the reporting date.

The financial assets and liabilities relating to Terna's outstanding derivative instruments during the period consist of cash flow hedges, hedging the risk of changes in cash flows associated with long-term variable rate borrowings.

The related reasons are described in the section, "The Group's financial risk", in the Notes to the Terna Group's Annual Report for 2017.

Updated information, at the date of this report, is provided below on interest rate, exchange rate, credit and liquidity risks; information on market and inflation risks is provided in the section, "Risk management", in the Notes to the Annual Report for 2017.

Sensitivity to interest rate risk

The following table reports the amounts recognised through profit or loss and in other comprehensive income for positions that are sensitive to changes in interest rates, in addition to the theoretical value of the positions following a positive or negative shift in the yield curve and the differential impact of such changes recognised through profit or loss and in other comprehensive income. A hypothetical 10% movement in interest rates with respect to market interest rates at 30 June 2018 was assumed:

(€m)	OCI
	CURRENT RATES +10%	CURRENT AMOUNTS	CURRENT RATES -10%
30 June 2018
Positions sensitive to changes in interest rates (CFHs)	(20.7)	(34.2)	(47.7)
Hypothetical change	13.5	-	(13.5)
31 December 2017
Positions sensitive to changes in interest rates (CFHs)	(12.3)	(12.8)	(13.3)
Hypothetical change	0.5	-	(0.5)

Credit risk

Credit risk is the risk a customer or one of the counterparties to a transaction in financial instruments could cause a financial loss by failing to discharge an obligation. It is mainly generated by the Group's trade receivables and financial investments.

The credit risk originated by open positions on transactions in derivatives is considered to be marginal since the counterparties, in compliance with the financial risk management policies adopted, are leading international banks with high ratings.

Terna provides its services essentially to counterparties considered solvent by the market, and therefore with a high credit standing, and does not have high concentrations of credit risk.

Credit risk management is driven by the provisions of ARERA Resolution 111/06, which, in art. 49, introduced instruments designed to limit the risks related to the insolvency of dispatching customers, both on a preventive basis and in the event of an actual insolvency. In particular, the Resolution establishes three instruments to safeguard the electricity market: a guarantee system (bank guarantees provided by individual dispatching customers, based on their turnover); the option of terminating dispatching contracts (in the event of insolvency or failure to replace enforced guarantees); and, finally, the possibility of recovering uncollected debts, after having taken all other possible collection actions, through a specific fee to be fixed by ARERA.

The following table summarises the exposure to such risk at the end of the first half:

(€m)	30 JUNE 2018	31 DECEMBER 2017	CHANGE
Cash and cash equivalents	1,065.9	1,989.2	(923.3)
Trade receivables	1,320.6	1,265.9	54.7
TOTAL	2,386.5	3,255.1	(868.6)

The following tables provide qualitative information on trade receivables that are not past due and have not been impaired:

GEOGRAPHICAL DISTRIBUTION

(€m)	30 JUNE 2018	31 DECEMBER 2017
Italy	1,219.6	1,166.9
Euro-area countries	54.0	75.5
Other countries	47.0	23.5
TOTAL	1,320.6	1,265.9

TYPE OF CUSTOMER

(€m)	30 JUNE 2018	31 DECEMBER 2017
Distributors	307.9	311.2
CSEA	9.3	95.3
Dispatching customers for injections	142.3	195.9
Dispatching customers for withdrawals (not distributors)	719.4	465.3
Parties which have signed virtual import contracts and virtual import services (interconnectors and shippers)	13.3	13.2
Sundry receivables	128.4	185.0
TOTAL	1,320.6	1,265.9

The following table breaks down customer receivables by due date, reporting any potential impairment:

(€m)	30 JUNE 2018		31 DECEMBER 2017
	IMPAIRMENT	GROSS	IMPAIRMENT	GROSS
Current	(0,3)	1,153.5	-	1,159.3
0-30 days past due	(0,1)	24.9	-	43.8
31-120 days past due	(0,4)	69.9	-	17.8
Over 120 days past due	(44,7)	117.8	(44.1)	89.1
TOTAL	(45.5)	1,366.1	(44.1)	1,310.0

Movements in the allowance for doubtful accounts in the course of the period were as follows:

(€m)	30 JUNE 2018	31 DECEMBER 2017
Balance at 1 January	(44.1)	(43.6)
Release of provisions	1.9	0.9
Impairments for the period	(3.3)	(1.4)
BALANCE	(45.5)	(44.1)

The value of guarantees received from eligible electricity market operators is illustrated below:

(€m)	30 JUNE 2018	31 DECEMBER 2017
Dispatching - injections	232.8	236.6
Dispatching - withdrawals	1,153.9	1,185.2
Transmission charges due from distributors	304.9	30.4
Virtual imports	72.6	81.1
BALANCE	1,764.2	1,805.3

In addition, Non-regulated Activities are exposed to "counterparty risk", in particular in relation to the entities with which sales contracts are entered into, in consideration of the credibility and solvency of the parties in question and the impact that their possible insolvency could have on the financial strength of the business. Counterparty risk is mitigated by implementing specific procedures to assess counterparties.

Default risk and debt covenants

This risk is associated with the possibility that the loan agreements or bond terms and conditions to which the Group is a party may contain provisions that, if certain events occur, authorise counterparties to call in such loans immediately, thereby generating liquidity risk.

Certain long-term loans obtained by the Parent Company Terna SpA contain covenants that are typical of international practice. The principal covenants relate to:

the Company's bond issues, which consist of an €800.0 million issue in 2004 and seven issues as part of its EMTN Programme (the "€ 8,000,000,000 Medium Term Notes Programme");
bank borrowings, consisting of a loan from Cassa Depositi e Prestiti (CDP) of €500.0 million that draws on EIB funds and three revolving credit facilities of €750.0, €800.0 and €500.0 million ("bank borrowings");
a series of loans to the Company from the European Investment Bank (EIB), amounting to a total of €1,790.9 million.

The main covenants relating to the bond issues and the EMTN Programme involve clauses regarding i) "negative pledges", on the basis of which the Issuer or its Relevant Subsidiaries undertake not to create or maintain mortgages, pledges or other encumbrances on their assets or revenue, to guarantee listed bonds (with the exception of certain "permitted guarantees"); ii) "pari passu", on the basis of which the securities constitute a direct, unconditional and unsecured obligation by the Issuer, ranking equally among them and with at least the same level of seniority as other present and future unsecured and non- subordinated borrowings of the Issuer; iii) "event of default", on the basis of which if certain predetermined events occur (e.g., failure to make a repayment, the liquidation of the Issuer, the breach of contractual obligations, a crossdefault, etc.) a situation of default is established and the loan is immediately called in.

The main covenants relating to bank borrowings involve clauses related to i) negative pledges, on the basis of which the Issuer or the Relevant Subsidiaries undertake not to create or maintain guarantees on their assets to secure borrowings, with the exception of "permitted guarantees"; ii) "pari passu" on the basis of which the Borrower's payment obligations in relation to the loan agreements in question are not subordinated to any obligation related to other unsecured and non-subordinated creditors, without prejudice to privileges under the law; iii) "event of default", on the basis of which if certain predetermined events occur (e.g. failure to make a repayment, serious inaccuracies in documents and/or declarations, insolvency, business discontinuation, substantially prejudicial effects, the breach of contractual obligations, including pari passu conditions, a cross-default, etc.) a situation of default is established and the loan is immediately called in; iv) accelerated repayment should the rating fall below investment grade (BBB-) for the majority of rating agencies or should the Company cease to be rated by at least one agency.

The main covenants related to the EIB loans involve clauses related to i) negative pledges, on the basis of which the Company cannot create encumbrances, with the exception of encumbrances granted in relation to borrowings below given amounts and under contractually specified circumstances; ii) the provision to the Bank, at its request, of new guarantees should ratings below BBB+/Baa1 be assigned by two ratings agencies out of three, or in the event that all of the agencies cease to publish ratings; iii) "pari passu", on the basis of which the Company ensures that payment obligations rank equally with those related to all other unsecured, non-subordinated creditors; iv) cases of contract termination/application of the call provision/withdrawal (e.g. failure to make a repayment, serious inaccuracies in documents and/or declarations, insolvency, events that have a negative impact on financial commitments made by the Company, extraordinary administration, liquidation, substantial prejudicial changes, the breach of contractual commitments, etc.); v) accelerated loan payment following the occurrence of given events (e.g. change of control over the Company, loss of the concession, extraordinary corporate events, etc.). To date, no covenant has been breached.

Litigation

The main commitments and risks not disclosed in the statement of financial position at 30 June 2018, relating to the Parent Company Terna, its subsidiary Terna Rete Italia SpA and the Tamini Group companies, are described below. There are no significant commitments or risks for the other subsidiaries at that date.

Environmental and urban planning litigation

Part of environmental litigation deriving from the construction and operation of Terna's power plants, consists of legal actions taken against the alleged negative effects of electric and magnetic fields generated by power lines. In general, this litigation necessarily involves the Parent Company, which owns the infrastructure in question. Moreover, it cannot be ruled out that the parties concerned may also initiate legal proceedings against the subsidiary Terna Rete Italia SpA, as the electromagnetism generated by power lines relates not only to ownership of the plant, but also to its operation and the quantity and quality of electricity it transports.

Regarding this matter, it should be noted that the issue of the Cabinet Office Decree of 8 July 2003 – which specifically set the values of the three parameters (exposure limits, safety thresholds and quality targets) provided for in Framework Law 36 of 22 February 2001, which electricity infrastructure must comply with – led to a significant reduction in any such litigation. Other environmental and urban planning disputes, which do not relate to electromagnetic fields, are also pending with regard to Terna SpA. These disputes are connected with the operation of certain Terna-owned plant, which in the event of an unfavourable outcome could also generate immediate effects for Terna Rete Italia SpA (to date unforeseeable and therefore not included in "Provisions for litigation and sundry risks"), both as the entity appointed by Terna SpA to build the related infrastructure and as the entity responsible for its operation. In particular, charges may arise for Terna Rete Italia SpA connected with changes to the infrastructure involved in such disputes and its temporary unavailability. However, after examination of the disputes in question by Terna SpA and external counsel appointed by the Company, it appears that the possibility of any negative outcomes is remote.

Litigation regarding the legitimacy of construction permits and plant operations

Another aspect of litigation connected with the plant owned by the Parent Company derives from legal actions brought before the competent administrative courts, aimed at obtaining the annulment of decisions granting consent for the construction and operation of infrastructure.

Litigation relating to activities carried out under concession

As the operator of transmission and dispatching activities since 1 November 2005, the Parent Company has been a party in a number of court cases, most of which have contested determinations adopted by ARERA (Italy's Regulatory Authority for Energy, Networks and the Environment), and/or the Ministry for Economic Development, and/or Terna, in relation to these activities. In cases in which the plaintiffs have, in addition to inherent defects in the contested determinations, alleged violation of the regulations laid down by the aforementioned authorities, or in cases in which the determination has had an impact on Terna, the Company has also taken action to defend its interests through the legal system. Within the scope of such litigation - even though some cases have been concluded, at first and/or second instance, with the annulment of ARERA's resolutions and, when applicable, of the consequent determinations adopted by Terna - any negative outcomes for the Company itself may be deemed unlikely, as these disputes normally relate to pass-through items.

Litigation regarding supply contracts

This litigation only refers to Tamini Group companies and relates to supply contracts entered into between Tamini Group companies and its customers, regarding the supply of transformers and/or the related components.

It also concerns certain claims for damages brought against companies, regarding alleged damage caused by machinery and/or components supplied by them.

With regard to these judgements, it is impossible to exclude, in absolute terms, any unfavourable outcomes. Where such outcomes are deemed likely, specific provision is made to the provisions for risks and charges.

F. Business combinations

Acquisition of Avvenia The Energy Innovator Srl

Rischi di mercato e finanziari del Gruppo

On 15 February 2018, Terna - via its subsidiary, Terna Plus - completed the acquisition of a 70% stake in Avvenia The Energy Innovator Srl, a new company to which the principal assets of Avvenia, a leader in the energy efficiency sector and certified as an Energy Service Company (ESCo), have been transferred.

Avvenia is an Energy Service Company ("ESCo"), established in 2001 in Albano Laziale. The company occupies a leading position in the energy efficiency market, thanks to the high degree of specialisation and the wide range of sectors in which it has acquired contracts and in which its customers operate. The company's main aim is to improve the way its customers use energy and operate, using a network of professionals (engineers and architects) with proven experience in the sector to help its customers achieve operating and energy efficiencies. The company currently has 12 employees and 5 external consultants.

This transaction is part of the process of identifying and acting on new commercial opportunities for the provision of energy efficiency services and projects, in order to further strengthen Terna Plus's role as a supplier of comprehensive integrated energy services and expand its range of innovative solutions as an Energy Solutions Provider. This is in line with the strategy set out in the Strategic Plan for the Group's Non-regulated Activities.

The company has been acquired by Terna for a consideration of €7 million, 80% of which has been paid at the reporting date, whilst the remaining 20% will be payable by Terna based on the new company's financial statements for the year ended 31 December 2018, subject to an earnout based on its post-acquisition performance.

The sale agreement includes a call option on the remaining 30% of the new company's shares, exercisable within 24 months of the date of transfer of the initial stake.

The following table summarises the consideration paid to acquire Avvenia The Energy Innovator Srl and shows amounts for assets acquired and liabilities assumed, as recognised at the acquisition date:

ASSETS ACQUIRED AND LIABILITIES ASSUMED AT 15 FEBRUARY 2018

(€000)	FAIR VALUE
ASSETS
Non-current assets
Property, plant and equipment	9.5
Intangible assets	8,042,6
Total non-current assets	8,139.1
Current assets
Trade receivables	1,912.3
Other assets	1,525.4
Cash and cash equivalents	7,135.3
Total current assets	10,573.0
TOTAL ASSETS	18,712.1
LIABILITIES
Non-current liabilities
Employee benefits	75.7
Deferred tax liabilities	2,289.3
Total non-current liabilities	2,365.0
Current liabilities
Trade payables	5.0
Current tax liabilities	1,839.1
Other liabilities	71.2
Total current liabilities	1,915.3
TOTAL LIABILITIES	4,280.3
NET ASSETS ACQUIRED	14,431.8
Equity attributable to non-controlling interests	4,329.5
CONSIDERATION	7,000.0

Computation of the value of the assets acquired and the liabilities assumed at the reporting date is provisional, in compliance with the provisions of IFRS 3 - Business Combinations.

The expected consideration is lower than the value of net assets at the acquisition date after deducting equity attributable to non-controlling interests, resulting in a bargain purchase and a gain of €3.1 million.

G. Related party transactions

Given that Terna SpA is subject to the de facto control of Cassa Depositi e Prestiti SpA, a situation ascertained in 2007, related party transactions entered into by Terna during the period include transactions with the associates (Cesi SpA, CGES A.D. and Coreso SA) and employee pension funds (Fondenel and Fopen), as well as transactions with Cassa Depositi e Prestiti itself, with CDP Reti SpA and with the companies directly or indirectly controlled by the Ministry of the Economy and Finance ("MEF"). Given that Terna Group companies and the companies directly or indirectly controlled by the Ministry of the Economy and Finance meet the definition for classification as "government-related entities", in accordance with IAS 24 - Related Party Disclosures, the Group has elected to adopt the partial exemption - permitted by the standard - from the disclosure requirements in respect of other companies controlled, influenced or jointly controlled by the same government entity. The remainder of this section provides qualitative and quantitative disclosures on transactions with government-related entities having a significant impact on the Group's results. Amounts relating to pass-through items are not included in these disclosures.

Related party transactions in the first half of 2018 broadly regard the provision of services in the course of ordinary activities and conducted on an arm's length basis.

RELATED PARTY	REVENUE-GENERATING TRANSACTIONS	COST-GENERATING TRANSACTIONS
Cassa Depositi e Prestiti SpA		Credit facilities.
Cesi SpA	Rental income on laboratories and other similar facilities for specific uses, dividends.	Technical studies and consultancy, research, design and experimentation.
CORESO SA		Technical coordination service for the TSO.
GSE Group	Metering charge, dispatching charge.	Rental of spaces and workstations.
Enel Group	Transmission charge and aggregation of meter readings, dispatching charge, leases and rentals, power line maintenance, movement /re-routing of power lines, housing of fibre cable and maintenance of communications carried over proprietary power lines.	Recovery of energy discount, building services, MV power to new substations, specialist services for connection to Terna's control and protection systems.
Open fiber SpA	A licence to use the fibre backbone network for a period of 20 years.
Ferrovie Group	Dispatching charge, movement of power lines.	Right-of-way fees.
ENI Group	Dispatching charge.	Contributions for NTG connections, sundry services.
Poste Italiane		Sundry services.
ANAS SpA	Movement /re-routing of power lines.	Right-of-way fees.
Fondenel and Fopen		Pension contributions payable by the Terna Group.
Other related parties of the MEF	Maintenance work.	Contributions for NTG connections.

The nature of sales to and purchases from related parties by the Terna Group is shown below.

REVENUE AND COSTS

(€m)	REVENUE COMPONENTS
	TRANSMISSION CHARGE AND OTHER REVENUE FROM REGULATED ACTIVITIES	NON-ENERGY-RELATED ITEMS
De facto parent
Cassa Depositi e Prestiti SpA	-	-	1.6
Total de facto parent	-	-	1.6
Associates:
Cesi SpA	-	-	0.3
CORESO SA	-	-	0.8
Total associates	-	-	1.1
Other related parties:
GSE Group	9.7	-	-
Enel Group	758.6	1.8	1.3
ENI Group	3.3	0.3	0.2
Ferrovie Group	1.2	0.3	6.3
Anas SpA	-	-	0.1
Open Fiber SpA	-	1.3	-
Other related parties of MEF		0.2	0.1
Total other related parties	772.8	3.9	8.0
Pensions funds:
Fondenel	-	-	0.2
Fopen	-	-	1.1
Total pension funds	-	-	1.3
TOTAL	772.8	3.9	12.0

ASSETS AND LIABILITIES

(€m)	PROPERTY, PLANT AND EQUIPMENT	RECEIVABLES AND PAYABLES AND OTHER ASSETS OTHER LIABILITIES				CASH	GUARANTEES*
	CAPITALISED COSTS	OTHER	FINANCIAL	OTHER	FINANCIAL
De facto parent
Cassa Depositi e Prestiti SpA	-	-	0.3	-	500.5	-	-
Total de facto parent	-	-	0.3	-	500.5	-	-
Associates:
Cesi SpA	1.8	-	-	4.7	-	-	1.2
Total associates	1.8	-	-	4.7	-	-	1.2
Other related parties:
GSE Group	-	2.8	-	-	-	-	-
Enel Group	3.5	391.1	-	26.0	-	-	593.0
ENI Group	-	2.2	-	0.9	-	-	57.2
Ferrovie Group	0.1	0.5	-	26.3	-	-	24.2
ANAS SpA	1.8	0.1	-	1.8	-	-	-
Open Fiber SpA	-	5.5	-	-	-	-	-
Other related parties of MEF	0.2	0.1	-	-	-	0.1	-
Total other related parties	5.6	402.3	-	55.0	-	0.1	674.4
Pensions funds:
Fopen	-	-	-	1.6	-	-	-
Total pension funds	-	-	-	1.6	-	-	-
TOTAL	7.4	402.3	0.3	61.3	500.5	0.1	675.6

* Guarantees regard surety bonds received from contractors.

H. Significant non-recurring, atypical or unusual events and transactions

No significant non-recurring, atypical or unusual events or transactions, involving either third or related parties, took place in the first half of 2018.

I. Notes to the statement of cash flows

Cash flow from continuing operations in the first half of 2018 amounts to €486.0 million, with approximately €823.6 million in operating cash flow and approximately €337.6 million generated by changes in net working capital.

The cash outflow for investing activities totals €336.0 million. This above all regards €324.3 million relating to investment in property, plant and equipment, €11.7 million relating to investment in intangible assets, €6.4 million in capitalised financial expenses, and the contribution from the acquisition of Avvenia The Energy Innovator Srl, totalling €8.1 million.

The net cash outflow for shareholder transactions amounts to €294.1 million, reflecting payment of the final dividend for 2017 (€292.9 million) and the contribution to equity attributable to non-controlling interest resulting from the acquisition of Avvenia (up €4.3 million).

As a result, net cash used in investing activities and to provide a return on equity during the period amounted to €630.1 million, partly covered by cash flow from continuing operations (€486.0 million) and in part through the use of cash. Cash amounting to €750 million was used during the period to reduce net debt through the repayment of bonds issued in 2012, partially offset by the new EIB loan agreed during the period (€130 million).

The following table shows the reconciliation of liabilities deriving from financing activities in the statement of cash flows:

(€m)	31 DECEMBER 2017	CASH FLOW FROM FINANCING	CHANGE IN FV AND OTHER	30 JUNE 2018
		ACTIVITIES
- Long-term borrowings
(including current portion)	9,555.9	(686.2)	(52.2)	8,817.5
- Short-term borrowings	118.0	(93.0)	-	25.0
Total liabilities from financing activities	9,673.9	(779.2)	(52.2)	8,842.5

L. Events after 30 June 2018

Business

On 6 July 2018, Terna's new 150 kV Electricity Substation at San Salvo (Chieti) entered service, as did connections to the relevant power lines, "Gissi – Montecilfone" and "San Salvo industrial park - Termoli Sinarca", and the connection to the Primary Substation in San Salvo that supplies electricity to the area. The completed project makes the Adriatic coastal area electricity system, which experiences extremely high demand during the summer season, more reliable and secure. The project, in which Terna invested approximately €8 million, involved the installation of connections using low-profile, single-pole pylons instead of the traditional truncated pyramid-type pylons, considerably reducing the footprint. The substation has also been equipped with a modern digital control system, which allows the plant to increase electrical insulation and, consequently, its resilience under particular weather-related and environmental conditions caused by high levels of salinity.
On 2 July 2018, Terna became the first Italian company to receive certification for its Asset Management System, covering its power lines and substations, in accordance with the international ISO 55001:2014 "Asset Management" standard, which sets out the requirements for optimised asset management. The Company has voluntarily complied with the "Asset management - Management systems - Requirements", introduced into Italy in 2015 as UNI ISO 55001:2015, a global standard for the management of corporate assets. The certification guarantees the effectiveness and efficiency of the process of maintaining and replacing the power lines and electricity substations forming part of the national transmission grid throughout their lifecycle and the achievement of high levels of sustainable performance. The new certification adds to the other accreditations already obtained by Terna in previous years. It confirms the Company's commitment to responsibility and the close attention paid to security, transparency, sustainability and efficiency within the Company, which manages over 72 thousand km of high-voltage lines, 871 electricity substations and 781 electricity transformers located throughout Italy, each day employing 350 qualified firms at 200 sites located from north to south, at which it is in the process of carrying out over 100 infrastructure projects.

Finance

• On 16 July 2018, Terna successfully launched a fixed-rate green bond issue amounting to €750 million under its €8 billion Euro Medium Term Notes (EMTN) Programme. The bonds have a term to maturity of 5 years and pay coupon interest of 1%, with a yield of 1.08% (mid-swap + 80bps). The transaction is part of Terna's financial optimisation strategy designed to support the Group's investment programme and the cost of the new borrowing is below the overall average cost of 1.6% envisaged in the Strategic Plan. The transaction marks the reopening of the corporate bond market after a number of months of inactivity caused by rising yields. This is undoubtedly a positive development, not only for Terna but for the sector as a whole. The issue proved a great success with investors, with the bonds being six times oversubscribed and leading to the issue being increased from €700 million to €750 million when the bonds started trading.

Sustainability and Innovation

Attestation

of the Group's half-year report pursuant to 81-ter of CONSOB Regulation 11971 of 14 May 1999, as amended

"Half-year attestation"

The undersigned, Luigi Ferraris, as Chief Executive Officer, and Agostino Scornajenchi, as Manager responsible for Terna SpA's financial reporting, having also taken account of the provisions of art.154-bis, paragraphs 3 and 4 of Legislative Decree 58 of 24 February 1998, attest to:

the adequacy with regard to the nature of the Company, and
the effective application of the administrative and accounting procedures adopted in preparation of the condensed consolidated interim financial statements during the six months ended 30 June 2018.

In this regard, no material aspects have emerged.

We also attest that the condensed consolidated interim financial statements:

a. have been prepared in compliance with the International Financial Reporting Standards endorsed by the European Union through EC Regulation 1606/2002, issued by the European Parliament and by the Council on 19 July 2002;
b. are consistent with the underlying accounting books and records;
c. provide a true and fair view of the financial position and results of operations of the issuer and the companies included in the scope of consolidation.

The interim report on operations includes a reliable analysis of key events during the first six months of the year and of their impact on the condensed consolidated interim financial statements, as well as a description of the main risks and uncertainties to which the issuer is exposed in the remaining six months of the year.

The interim report on operations also includes a reliable analysis of related party disclosures.

Rome, 25 July 2018

Chief Executive Officer Luigi Ferraris

Manager responsible for financial reporting Agostino Scornajenchi

(original signed)

Independent Auditor's

review report on the condensed consolidated interim financial statements at and for the six months ended 30 June 2018

REVIEW REPORT ON CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

To the shareholders of Terna SpA

Foreword

We have reviewed the accompanying condensed consolidated interim financial statements of Terna SpA and its subsidiaries (Terna Group) as of 30 June 2018, comprising the income statement, the statement of comprehensive income, the statement of financial position, the statements of changes in shareholders' equity, the statement of cash flows and related notes. The directors of Terna SpA are responsible for the preparation of the condensed consolidated interim financial statements in accordance with international accounting standard 34 applicable to interim financial reporting (IAS 34) as adopted by the European Union. Our responsibility is to express a conclusion on these condensed consolidated interim financial statements based on our review.

Scope of review

We conducted our work in accordance with the criteria for a review recommended by Consob in Resolution No. 10867 of 31 July 1997. A review of condensed consolidated interim financial statements consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than a fullscope audit conducted in accordance with International Standards on Auditing (ISA Italia) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion on the condensed consolidated interim financial statements.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed consolidated interim financial statements of Terna Group as of 30 June 2018 have not been prepared, in all material respects, in accordance with international accounting standard 34 applicable to interim financial reporting (IAS 34), as adopted by the European Union.

Rome, 30 July 2018

PricewaterhouseCoopers SpA

Signed by

Luca Bonvino (Partner)

This report is an English translation of the original report, which was issued in Italian. This report has been prepared solely for the convenience of international readers.

Terna is a member of LifeGate's Zero Impact® project. Carbon dioxide emissions generated by this publication are offset and used to create and safeguard forests in Italy and developing countries.

www.impattozero.it

All pictures are property of Terna.

www.terna.it

Mercurio GP Milan

Strategic advisory Creative concept Graphic design Layout Editing

www.mercuriogp.eu

Password Language Services Srl Rome

Translation

Varigrafica Alto Lazio S.r.l. Nepi (VT) Printing

AI assistant

Terna — Interim / Quarterly Report 2018

4300_ir_2018-07-30_df8dc9cc-0d1e-42cf-a472-525d2ab5214c.pdf

INTRODUCTION

Contents

Highlights 1H2018

CORPORATE EVENTS

Strategic Plan 2018-2022 GRIDS AND VALUES

Annual Report 2017

FINANCIAL HIGHLIGHTS

SHARE PERFORMANCE AND SHAREHOLDER RETURN

OPERATIONAL HIGHLIGHTS BY AREA OF BUSINESS

CROSS-BUSINESS ENABLERS

PERFORMANCE DURING THE PERIOD

The Company and our strategy

Regulated Activities in Italy - Electricity transmission and dispatching in Italy

Strategic guidelines for Regulated Activities in Italy

Non-Regulated Activities - New business opportunities in Italy

Strategic guidelines for Non-regulated Activities

International Activities

Strategic guidelines for International Activities

Structure of the Group

Shareholder structure

SHAREHOLDERS BY CATEGORY

SHAREHOLDERS BY GEOGRAPHICAL AREA AND CATEGORY

LAZARD ASSET MANAGEMENT LLC (as a discretionary asset manager): ____________________________________5.122%

Key events

during the first half of 2018 and after the reporting period

Corporate events

Business

Finance

Sustainability and Innovation

Security

Macroeconomic environment

ITALIAN GDP AND KEY ECONOMIC INDICATORS IN VOLUME TERMS

Market environment

Electricity demand and production in Italy

MONTHLY DEMAND FOR ELECTRICITY IN ITALY

NET ELECTRICITY PRODUCTION BY SOURCE

INTERIM REPORT ON OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2018

Regulatory environment

THE THREE MAIN TYPES OF ALLOWED COST

Social environment

KEY ASPECTS OF THE SOCIAL ENVIRONMENT Stakeholder

Operating results of Regulated Activities in Italy

11.9 €m

Transmission and dispatching

Implementation of development initiatives

Cable connection

Converters

Quality of service

CONTINUITY INDICATORS USED

NTG RENS6

Electricity cost trends

Cost of procuring resources on the Dispatching Services Market (uplift)

Dispatching Services Market

MONTHLY MSD COSTS

Operating results of Non-Regulated Activities

Services for third parties

ENERGY SOLUTIONS

Operation of third-party infrastructure

Transformers - Tamini Group

Private interconnectors pursuant to Law 99/2009

Operating results of International Activities

INITIATIVES

Terna's people and innovation

Our people

The Group's new organisational structure

Key initiatives relating to innovation

Description Projects and programmes

Phantom Stock Plan 2018-2021

New Genoa office

Financial review for the first half of 2018

Basis of presentation

The Group's reclassified income statement

REVENUE

Cash flow

The Group's reclassified statement of financial position

KEY CAPITAL INVESTMENT IN THE NTG* (€m)

Cash inflows

Terna Interim / Quarterly Report 2018