Terna — Interim / Quarterly Report 2019

Jul 30, 2019

RESULTS APPROVED AS OF 30 June 2019

• Revenues at € 1,097.8 million (€ 1,062.8 million in 1H18, +3.3%)
• EBITDA at € 846.2 million (€ 814.9 million in 1H18, +3.8%)
• Group net profit for the period at € 366.6 million (€ 360.2 million in 1H18, +1.8%)
• Capital expenditure at € 396.3 million (€ 337.9 million in 1H18, +17.3%)
• Net debt at € 8,293.5 million (€ 7,899.4 million as of 31 December 2018)

Rome, 30 July 2019 – The Chief Executive Officer and General Manager Luigi Ferraris has presented the results of the first half of 2019, which were examined and approved by the Board of Directors of Terna S.p.A. ("Terna") at a meeting today chaired by Catia Bastioli.

"The results of the first half of the year confirm the solidity of the managerial actions undertaken, with profitability and investments accelerating significantly, in support of the decarbonisation process already under way in Italy. Increased profitability, maintaining satisfactory efficiency levels and greater investments allow us to confidently pursue the objectives set forth in our Strategic Plan, which combine growth with the creation of value for our shareholders" said Luigi Ferraris, CEO and General Manager of Terna.

€ million	H1 2019	H1 2018	% change
Revenues	1,097.8	1,062.8*	+3.3%
EBITDA (Gross Operating Profit)	846.2	814.9	+3.8%
EBIT (Operating Profit)	557.5	547.5	+1.8%
Group net profit for the period	366.6	360.2	+1.8%
CAPEX	396.3	337.9	+17.3%

SUMMARY OF THE FIRST HALF 2019 CONSOLIDATED RESULTS

* Reclassified in compliance with the new IFRS.

Euro 1,097.8 million revenues of the first half of 2019, registered an increase of € 35 million (+3.3%) compared to the same period in 2018. This result was mainly attributable to the increase in the revenues of Regulated Activities in Italy which reflects the adjustment of the weighted average cost of capital (WACC) for the period 2019-2021 and an increase in the revenues of International Activities mainly due to the initiatives which came into operation in Brazil.

EBITDA (Gross Operating Profit) of the period stood at € 846.2 million, an increase of € 31.3 million (+3.8%) compared to the € 814.9 million in the first half of 2018.

EBIT (Operating Profit) of the period, after amortisation, depreciation and impairment of € 288.7 million, stood at € 557.5 million, compared to the € 547.5 million of the first six months of 2018 (+1.8%).

Net financial expenses amounted to € 38.8 million, a reduction of € 3.9 million compared to the € 42.7 million of the first half of 2018.

Profit before tax stood at € 518.7 million, up by € 13.9 million compared to the same period of 2018 (+2.8%).

Income tax expense of the period amounted to € 150.3 million, up by € 7.6 million compared to the same period in 2018 (+5.3%). The tax rate stood at 29%, compared to 28.3% of the first half of 2018, which benefited from the recognition of tax-exempt income.

Group net profit for the period was € 366.6 million, up € 6.4 million (+1.8%) compared to the € 360.2 million of the first half of 2018.

The consolidated statement of financial position as of 30 June 2019 showed equity attributable to owners of the Parent of € 3,963.8 million, compared to the € 4,019.2 million as of 31 December 2018.

Net debt amounted to € 8,293.5 million, compared to the € 7,899.4 million as of 31 December 2018.

The Terna Group's total capital expenditure in the first six months of 2019 amounted to € 396.3 million, compared to the € 337.9 million in the same period of the previous year (+17.3%). The main projects in the period included progress on the Italy-France and Italy-Montenegro

interconnections; the works for the electrical interconnection between Capri and Sorrento and the rationalisation of Rome's electricity grid. In addition, during the first half of 2019 Terna completed the dismantling of 193 km of old overhead power lines and finalized 26 km of new invisible underground cable lines.

The Group's employees, at the end of June 2019, totalled 4,328, up by 76 compared to 31 December 2018. This increase is attributable to the skill strengthening policy already highlighted in the 2019-2023 Strategic Plan.

KEY EVENTS IN THE FIRST HALF OF 2019 AND AFTER THE REPORTING PERIOD

Business

The new 150 kV underground cable connection, made by Terna, connecting the Piscioli electrical substation in the municipality of Candela (FG) to the Valle electrical substation in the municipality of Ascoli Satriano (FG) came into operation on 3 July 2019. The new line, 11 km long and constructed in just 11 months, is useful for the distribution of the renewable energy produced by the plants present in the area.

Terna's CEO, Luigi Ferraris, and the mayor of Matera, Raffaello De Ruggieri, signed a memorandum of understanding for the rationalisation of the electricity grid in the Municipality on 14 June 2019: 40 pylons will be eliminated in the area of Matera. The rationalisation will also have significant benefits for the local electricity system, making it safer and more efficient, and enabling it to cope with the growing production of renewable energy and the wide-ranging civil and industrial development of the area.

The demolition of the "Fusina 2–Sacca Fisola" overhead power line was completed on 11 June 2019. This allowed to eliminate definitively the electricity pylons from the Venice lagoon.

In May, the provisional set-up of the Belcastro substation, was completed with consequent connection of production from renewable sources. The final set-up of the station is currently being completed.

Finance

Terna successfully launched a fixed-rate bond issue for a total of € 500 million on 18 July 2019. The bond has a duration of 6 years and will pay a coupon of 0.125%, the lowest for an Italian corporate bond with a duration of over 5 years. The effective cost for Terna of such issuance is 0.25%.

Terna S.p.A. renewed its € 8 billion bond issue Euro Medium Term Note (EMTN) Programme, on 11 July. Deutsche Bank and Citigroup were the joint arrangers of the programme, which was given a "BBB+/A-2" rating by S&P, "(P)Baa2 /(P)P-2" by Moody's, "BBB+" by Fitch and "A-/S-1" by Scope.

On 17 May 2019, the rating agency Scope Ratings AG (Scope) assigned to Terna – and to the company's unsecured senior debt – a long-term rating of "A-", with Outlook Stable and a short-term rating of "S-1". This confirms the solidity of Terna's financial and capital structure and recognises the Group's strong commitment to integrating sustainability into the business strategy as a strategic lever for value creation. Terna was the first non-financial corporate to obtain a public rating from Scope.

During the first half of the year, under the Euro Medium Term Note (EMTN) Programme of € 8 billion, Terna launched on 3 April a green bond addressed to institutional investors, for an aggregate amount of 500 million Euro, with a tenor of 7 years; on 10 January, Terna issued a green bond, at fixed rate, as private placement for a total amount of 250 million Euro, with a tenor of 5 years, as already announced to the market in January and April.

Corporate Governance

As already announced to the market on 19 June, the new composition of the "Internal Audit and Risks, Corporate Governance and Sustainability Committee" was approved during the first half of 2019. The role of Chairwoman was entrusted to Paola Giannotti, while Director Gabriella Porcelli and Director Marco Giorgino - elected during the Shareholders' meeting of 8 May 2019 - were appointed as members of the Committee.

With reference to "Related-Party Transactions Committee", the new composition was approved, entrusting the role of Chairwoman to Elena Vasco and appointing Director Marco Giorgino and Director Paola Giannotti as members of the Committee.

The composition of the Appointments Committee (Gabriella Porcelli as Chairwoman and Director Yunpeng HE and Director Fabio Corsico as members) and that of the Remuneration Committee (Fabio Corsico as Chairman and Director Gabriella Porcelli and Director Elena Vasco as members) remain unchanged.

Sustainability and Innovation

On 8 July 2019, Terna and Digital Magics EnergyTech - an incubation programme for digital startups in the energy sector - chose "Smart Track" as winner of the D2O - Digital To Operation Call for Innovation, launched last May, in order to improve efficiency at work, with particular emphasis on the topics of personal safety through the development of new technologies, devices, applications and high value-added services to facilitate "digital transformation".

On 31 May 2019 Terna Energy Solutions and The Mobility House AG signed a memorandum of understanding to assess a possible collaboration or a partnership for commercial opportunities, in the field of intelligent recharging, stationary storage and microgrid solutions.

The 3rd edition of Next Energy, the programme promoted by Terna, Cariplo Foundation and Cariplo Factory to support young graduates and promote the emergence of innovative projects and startups focusing on issues related to the development of the energy system, was held on 31 May 2019. The project which won this edition was "Windcity".

Security

A collaboration agreement was signed by Terna and the Ministry of Defence to promote study and research in the field of energy security on 17 June. The agreement will facilitate the implementation of pilot projects in order to increase Italian national energy resilience, energy efficiency of military sites and reduce expenditure on energy procurement.

International Activities

Terna, through its subsidiary Santa Lucia Transmissora de Energia, completed the work on the construction and commissioning of the high-voltage "Jauru-Cuiabá 2" power line and its two

electrical substations in the state of Mato Grosso in central Brazil on 13 May 2019. The new line with a 500 kV voltage and a total of 355 km in length - allows the integration into the national transmission grid of energy produced by the renewable plants present in the centre of the country.

BUSINESS OUTLOOK

In the second half of 2019, Terna will be implementing the 2019-2023 Strategic Plan approved by the Board of Directors and presented to the financial community on 21 March 2019.

In particular, the company will continue to pursue its strategic objectives, sharply accelerating investment activities, focusing on the development of the national transmission grid to facilitate the integration of renewable sources and improve the security of the system while also accelerating the renewal of the Group's assets in order to reduce service-outage risks, increase environmental sustainability and support maintenance through the use of grid digitalisation technologies.

Terna will therefore continue to strengthen investments in innovation and digital solutions. This innovation process will entail the opening of Innovation Hubs - innovation development platforms which the Company plans to launch in the forthcoming months in other Italian cities after the inauguration of the first Hub in Turin. Through the interaction and sharing with external organisations such as universities, research centres, start-ups and businesses, the Innovation Hub will become a think tank for the creation, development and practical testing of new ideas in the energy field.

In addition, the company's commitment will continue to involve territorial stakeholders and observe the principles of integrity, responsibility and transparency, on which Terna's business management has always been based, in order to minimize environmental impact and observe ESGs. In this regard, Terna will be present in the main Italian squares within the Villages organised by Coldiretti, the largest farmers' association, to talk about its work and projects and involve citizens actively in "participatory planning".

With reference to Regulated Activities in Italy, among the key electricity infrastructure projects currently underway, the interconnections with Montenegro and France - due to enter into service respectively in 2019 and 2020 - are particularly important.

Regarding the main projects, aimed at increasing the quality of the service, the undersea connection between Capri and Sorrento and the Sorrento and Brennero substations are expected to come into operation in the second half of the year.

Regarding the work on rationalising the electricity grids in the main metropolitan areas, which will mainly involve the renewal of the current infrastructures with new technologically more advanced connections in line with the best standards in terms of environmental sustainability, important connections in the cities of Florence, Genoa and Milan are expected to come into operation in the second half of the year. In addition, the Group will be involved in the process of reviewing the tariffs and quality of the electricity transmission service for the NPR2 semi-period (2020-2023) through specific consultations provided for by ARERA.

With reference to Non-Regulated Activities, as in the previous years, the Group will support the energy transition thanks to the development of innovative services. Specifically, Terna will consolidate its role as Energy Solution Provider, providing services with high added value for businesses and seizing market opportunities. Also in the TLC sector, opportunities will be pursued in the field of connectivity based on making the best use of the company's dark-fibre infrastructures.

Regarding International Activities, in the second half of the year, the Group's activities will be focused on managing and maintaining the Brazilian lines that came into operation between the end of 2018 and the first half of 2019 (Santa Maria Transmissora de Energia and Santa Lucia Transmissora de Energia) and on implementing the current projects in Uruguay and Peru, which are expected to be completed respectively in 2019 and 2020.

The Group, finally, will continue to scout possible international opportunities, which may also be developed through partnerships, selected through careful evaluation processes in order to guarantee a low risk profile and a limited absorption of capital.

ALTERNATIVE PERFORMANCE MEASURES

In this release, some "Alternative Performance Measures" (EBITDA, Tax Rate and Net Debt) are used, which are not provided for in the IAS/IFRS accounting standards; their meaning and contents are explained below pursuant to the ESMA/2015/1415 guideline published on 3 December 2015:

• EBITDA (Gross Operating Margin): this is a measure of operating performance; it is calculated as "Net profit for the year" before "Income taxes for the year", "Financial income/(expense)" and "Amortisation, depreciation and impairment losses";

• Tax rate: this expresses the proportion of tax with respect to the profit/(loss) and derives from the ratio between "Income taxes for the year" and "Profit/(loss) before taxes";

• Net Financial Debt: this is an indicator of the funding structure; it is determined as the result of short-term loans ("Short-term loans", "Current portion of long-term loans" and "Current financial liabilities") and long-term loans ("Long-term loans") and the related derivative instruments ("Noncurrent financial liabilities") net of "Cash and cash equivalents", "Current financial assets" and "Non-current financial assets" for the value of hedging derivatives on bonds. It should be noted that, deducted "Non-current financial assets", the net financial debt of the Terna Group is in compliance with the provisions of ESMA Recommendation no. 319 of 2013 regarding the definition of the net financial position.

Today, at 5 pm, a meeting will be held to illustrate the results of the first half of 2019 to financial analysts and investors. The support material for the event will be made available on the Company's website (www.terna.it), in the Investors section, at the beginning of the meeting. The presentation will also be made available, via the "eMarket SDIR" circuit, on the website of Borsa Italiana S.p.A. (www.borsaitaliana.it) and of the authorised storage service (). Journalists will have the opportunity to follow the meeting without any right to speak. It will also be possible to follow the presentation by connecting to the audio webcast on the Company website (www.terna.it): following the live coverage, the file will be available in the Investors section.

The Financial Reporting Manager, Agostino Scornajenchi, pursuant to paragraph 2 of Art. 154-bis of the Consolidated Law on Finance, declares that the accounting information included in this press release corresponds to the evidence in the documents, books and accounting records.

The Half-Year Report at 30 June 2019, with the certification required by Article 154 bis, paragraph 5 of Italian Legislative Decree 58/98 (CLF) and the report by the audit company, will be filed and available to the public, by the deadline set out by law, at the Company's registered office, published on the Company's website (www.terna.it) and on the website of the authorized storage service (), and filed with the stock exchange management company Borsa Italiana S.p.A. (www.borsaitaliana.it). Disclosure regarding filing will be issued.

The reclassified Income Statement, Statement of Financial Position and Statement of Cash Flows of the Terna Group are attached. These represent the classification of the results used by management for a more efficient evaluation of the Terna Group's economic and financial performance.

It should be noted that, pursuant to Communication No. DME/9081707 of 16 September 2009, the reclassified statements are those included in the Interim Report on Operations at 30 June 2019, included in the Half-Year report of the Terna Group at 30 June 2019, for which the Independent Auditing Company, in compliance with Article 14 of Italian Legislative Decree No. 39 dated 27 January 2010 will verify consistency with the Condensed Consolidated Interim Financial Statements.

The Terna Group's reclassified income statement

Q2						(€m)
2019	2018	Change	% change		H1 2019	H1 2018	Change	% change
560.8	539.7*	21.1	3.9%	TOTAL REVENUE	1,097.8	1,062.8*	35.0	3.3%
504.9	491.8	13.1	2.7%	- Regulated revenue in Italy	1,004.8	979.4	25.4	2.6%
3.0	3.2	(0.2)	(6.3%)	of which Revenue from construction services performed under concession	5.0	6.3	(1.3)	(20.6%)
49.3	45.5*	3.8	8.4%	- Non-Regulated revenue	82.2	77.9*	4.3	5.5%
6.6	2.4	4.2	-	- International revenue	10.8	5.5	5.3	96.4%
134.8	134.1*	0.7	0.5%	TOTAL OPERATING COSTS	251.6	247.9*	3.7	1.5%
64.4	63.5	0.9	1.4%	- Personnel expenses	129.6	124.4	5.2	4.2%
37.7	42.5	(4.8)	(11.3%)	- Cost of services, leases and rentals	75.0	77.0	(2.0)	(2.6%)
22.4	18.3*	4.1	22.4%	- Materials	29.6	23.5*	6.1	26.0%
6.5	6.3	0.2	3.2%	- Other costs	10.2	13.0	(2.8)	(21.5%)
0.8	0.3	0.5	-	- Quality of service	2.2	3.7	(1.5)	(40.5%)
3.0	3.2	(0.2)	(6.2%)	- Cost of construction services performed under concession	5.0	6.3	(1.3)	(20.6%)
426.0	405.6	20.4	5.0%	GROSS OPERATING PROFIT (EBITDA)	846.2	814.9	31.3	3.8%
148.3	134.9	13.4	9.9%	- Amortisation, depreciation and impairment losses	288.7	267.4	21.3	8.0%
277.7	270.7	7.0	2.6%	OPERATING PROFIT (EBIT)	557.5	547.5	10.0	1.8%
(22.9)	(18.1)	(4.8)	26.5%	- Net financial income/(expenses)	(38.8)	(42.7)	3.9	(9.1%)
254.8	252.6	2.2	0.9%	PROFIT/(LOSS) BEFORE TAX	518.7	504.8	13.9	2.8%
72.4	74.2	(1.8)	(2.4%)	- Income tax expense for the period	150.3	142.7	7.6	5.3%
182.4	178.4	4.0	2.2%	PROFIT FOR THE PERIOD	368.4	362.1	6.3	1.7%
1.8	0.9	0.9	100.0%	- Profit/(Loss) attributable to non-controlling interests	1.8	1.9	(0.1)	(5.3%)
180.6	177.5	3.1	1.7%	PROFIT FOR THE PERIOD ATTRIBUTABLE TO OWNERS OF THE PARENT	366.6	360.2	6.4	1.8%

* Reclassified following the entry into effect of new international accounting standards. No impact at EBITDA level.

The Terna Group's reclassified statement of financial position

			(€m)
	at 30 June 2019	at 31 December 2018	Change
Total net non-current assets	14,194.4	14,083.6	110.8
- Intangible assets and goodwill	507.3	519.4	(12.1)
- Property, plant and equipment	13,348.3	13,244.3	104.0
- Financial assets	338.8	319.9	18.9
Total net working capital	(1,662.4)	(1,822.5)	160.1
- Net energy-related pass-through payables	(706.4)	(777.6)	71.2
- Net receivables resulting from Regulated Activities	326.4	313.9	12.5
- Net trade payables	(560.3)	(908.9)*	348.6
- Net tax liabilities	(149.4)	50.9	(200.3)
- Other net liabilities	(572.7)	(500.8)*	(71.9)
Gross invested capital	12,532.0	12,261.1	270.9
Sundry provisions	(237.9)	(307.5)	69.6
NET INVESTED CAPITAL	12,294.1	11,953.6	340.5
Equity attributable to owners of the Parent	3,963.8	4,019.2	(55.4)
Equity attributable to non-controlling interests	36.8	35.0	1.8
Net debt	8,293.5	7,899.4	394.1
TOTAL	12,294.1	11,953.6	340.5

* Reclassified to improve comparability. No impact at net working capital or equity level.

The Terna Group's cash flow

		(€m)
	Cash flow H1 2019	Cash flow H1 2018
- Profit for the year	368.4	362.1
- Amortisation, depreciation and impairment losses	288.7	267.2
- Net change in provisions	(69.6)	(28.5)
- Net losses/(gains) on sale of assets	(1.5)	(1.0)
Operating cash flow	586.0	599.8
- Change in net working capital	(160.0)	9.1
- Other changes in property, plant and equipment and intangible assets	17.1	(8.5)
- Change in investments	(2.2)	(0.3)
- Change in financial assets	(16.7)	(44.9)
Cash flow from operating activities	424.2	555.2
- Total capital expenditure	(396.3)	(337.9)
Free cash flow	27.9	217.3
- Dividends paid to the Parent Company's shareholders	(310.5)	(292.9)
- Cash flow hedge reserve after taxation and other movements in equity attributable to owners of the Parent	(111.5)	(27.8)
- Other movements in equity attributable to non-controlling interests	-	4.3
Change in net debt	(394.1)	(99.1)