Terna — Interim / Quarterly Report 2020

Jul 30, 2020

ENERGY IS OUR RESPONSIBILITY

OUR MISSION

Energy is our responsibility. Responsibility is our energy.

To play a leading role in the coming sustainable energy transition, by leveraging our distinctive innovation capabilities, competencies and technologies for the benefit of all stakeholders.

We are a major operator of grids used to transport energy.

All pictures are property of Terna. www.terna.it We manage the high-voltage transmission of electricity in Italy, ensuring security, quality and cost-effectiveness over time.

Mercurio GP Milan Strategic advisory Creative concept We are working hard on development of the electricity grid, the achievement of ongoing improvements in operational efficiency and integration with the European grid.

Editing www.mercuriogp.eu We guarantee equal access to all grid users.

Password Language Services S.r.l. Rome Translation We are developing Non-regulated Activities and new business opportunities, building on the experience and technical expertise gained in managing complex systems and on our technological excellence.

Terna and the Covid-19 emergency

The first half of 2020 was marked by the health emergency linked to Covid-19, which has had a major impact on markets and on the Italian and global economies.

Terna responded quickly to what has proved to be the most serious health emergency Italy has had to face in the post-war period, whilst ensuring full compliance with the measures introduced by the Cabinet Office. We have been in constant contact with the relevant authorities with the key aim of guaranteeing that everyone had continuous access to electricity.

To ensure the continuity of the country's electricity service, Terna thus responded on a number of fronts at the same time, putting in place the necessary safeguards to guarantee the security of our operations as a Transmission System Operator (TSO) and the related supply chains. This was done whilst also focusing on efforts to ensure the health and safety of our operational personnel and, in general, all the people who work for us.

In agreement with the labour unions, the Company pared back construction work, only proceeding with the operational and maintenance activities strictly necessary to guarantee the continuity of the electricity service. At the same time, we took steps to deploy protective equipment (FFP2 and FFP3 masks, latex gloves and protective clothing) for operational personnel.

Real-time controls were safeguarded by adopting tighter restrictions on access to Control Rooms and Remote Control Centres (e.g. thermal scanners to measure body temperatures) and measures to ensure that sites were thoroughly cleaned between one shift and another and that social distancing rules were adhered to.

The operational capacity of the three local dispatching centres was, therefore, stress tested by simulating critical scenarios based on growing shortfalls in available energy, from a control centre through to two shift lines for each local or national control room.

The lockdown, beginning on 9 March and ending on 3 May, led to an unexpected, but equally important, stress test of the transmission grid.

Above all, the sharp fall in demand for electricity (down 10.2% in March, 17.2% in April and 10.3% in May), accompanied by a rise in the volume of renewable energy produced, resulted in a significant increase in the percentage of overall demand met from renewable sources: in March and April, 47% of total demand was met from renewable energy sources, rising to an all-time record of 51.2% in May.

At the same time, the health of all our personnel and their ability to continue to operate was one of Terna's main priorities. Precautions were adopted in line with the various measures introduced by the government and specific insurance cover for all our personnel was also provided. After an initial extension of smart working to staff with young children, over 65s or those with pre-existing medical conditions, with the imposition of the lockdown all personnel not directly involved in operations were allowed to work from home, thanks to the rapid, large-scale deployment and replacement of portable computers and telecommunications equipment.

To this end, our ICT-Information Communication Technology unit promptly responded by upgrading internet access (e.g. the VPN-Virtual Private Network). This enabled us to maintain the usual levels of productivity and to support an average of 3,400 connections each day, with 2,600 active users at any one time and the generation of 3.5 Terabytes of data traffic per day, principally due to smart working sessions and video and audio meetings.

The second half has begun with the gradual reopening of our offices which, through to the end of August, at the request of team leaders, can operate at up to 40% capacity, with the exception of people with children under 14, who have been granted the option of continuing to work from home until 31 July. A greater proportion of non-operational staff will be able to return to their offices from September, depending on how the pandemic evolves. In any event, the positive experience of widespread smart working has already led the Company to consider its future use even after we have returned to normal.

At the height of the health emergency, Terna also supported the work of the Civil Protection Agency by making two donations of PPE (masks and gloves) and ventilators for intensive care units.

We are proud of the way in which our people have responded to the emergency: Terna's personnel donated approximately 3,000 hours' pay, with management following suit. The money raised was used to provide funding for intensive care units within the National Health Service and, in line with the initiative promoted by the labour unions, the amount donated by personnel was doubled by the Company and passed on to Italy's Civil Protection Agency.

Highlights

NEW BOARD OF DIRECTORS 2020-2022

Elected on 18 May 2020.

CHAIRWOMAN Valentina Bosetti

CHIEF EXECUTIVE OFFICER

Stefano Antonio Donnarumma

DIRECTORS

Alessandra Faella Yunpeng He Valentina Canalini Ernesto Carbone Giuseppe Ferri Gabriella Porcelli

Antonella Baldino Fabio Corsico Marco Giorgino Paola Giannotti Jean-Michel Aubertin

On 15 April 2020, Terna and Snam renewed their partnership set up to coordinate joint initiatives regarding research, development and innovation and explore the potential for convergence between the electricity and gas systems.

• The 150 kV Benevento III-Pontelandolfo power line (+15 km) entered service.
• On 8 April 2020, Terna published the 2020 Development Plan: over €14 billion to be invested over the next 10 years to enable the energy transition and facilitate the full integration of renewable sources for an increasingly decarbonised system.

ACQUISITION OF BRUGG CABLES

On 29 February 2020, Terna completed the acquisition of a 90% interest in Brugg Kabel AG, one of Europe's leading manufacturers of terrestrial cables. The acquired company designs, develops, produces, installs and maintains electric cables for all voltages and accessories for high-voltage non_regolato cables.

EQUIGY

This project, based on blockchain technology, was launched in partnership with Swissgrid and TenneT and aims to facilitate the participation of distributed demand in the electricity grid balancing process. The project, to be launched in Italy, the Netherlands, Germany and Switzerland, will allow small distributed energy resources to provide flexibility to the grid.

• Terna included for the second year in the Bloomberg Gender Equality Index (GEI).
• SAM includes Terna in the "Gold Class" of the "Sustainability Yearbook 2020" as "Industry Leader" in the Electric Utilities sector of the Dow Jones Sustainability Index.

FINANCIAL HIGHLIGHTS

(€m)	H1 2020	H1 2019	Change
Revenue	1,183.1	1,097.8	7.8%
EBITDA	876.0	846.2	3.5%
Profit attributable to owners of the Parent	377.5	366.6	3.0%
Capital expenditure	428.0	396.3	8.0%
	H1 2020	FY 2019
Net debt	8,846.4	8,258.6

STOCK MARKET

Terna's share price

AND FINANCE Share price of €6.118 at 30 June 2020 versus €5.60 per share at 28 June 2019. New all-time high of €6.786 per share registered on 19 February 2020.

Finance

New Green Bond issue, amounting to €500 million. On 17 July 2020, Terna issued a new green bond amounting to €500 million, with a twelve-year term and paying an effective coupon of 0.78%, the lowest ever achieved by an Italian corporate issuer for either green bonds or, in general, for a 10-year issue.

Fitch Moody's, S&P and Scope confirm Terna's rating. The Company's rating is now two notches above the rating assigned to the Italian state for Fitch and one notch above for the remaining agencies.

Renewal of the €8bn "Euro Medium Term Programme" (EMTN).

BUSINESS ENABLERS

379 personnel added in the first half following the acquisition of Brugg Kabel AG.

Terna Innovation Hubs' Digital Twin: a Digital Innovation Hub has been created to give innovation activities a digital slant.

Structure of the Group

The structure of the Terna Group at 30 June 2020 is shown below.

Compared with 31 December 2019:

* On 29 February 2020, Terna, acting through its subsidiary, Terna Energy Solutions S.r.l., completed the acquisition of a 90% interest in Brugg Kabel AG (a Brugg group company). The transaction forms part of the Company's growth strategy for Non-regulated Activities.

^** On 22 May 2020, the Company established SEleNe CC S.A., a joint venture 25%-owned by Terna, with the remaining shares held by three others European TSOs. The company will operate as a Regional Security Coordinator, in accordance with European Regulation 2017/1485, for the TSOs who own shares in it.

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 51.7% of Terna's shares are held by Italian shareholders, with the remaining 48.3% held by overseas institutional investors, primarily from the USA and Europe.

Based on information from the shareholder register and other data collected as at July 2020, Terna's shareholder structure breaks down as follows:

SHAREHOLDERS BY CATEGORY

SHAREHOLDERS BY GEOGRAPHICAL AREA AND CATEGORY

At 30 June 2020, a total of 82,496 ordinary shares have been purchased by the Parent Company (as a cost of €502,497) in implementation of the buyback plan linked to the Performance Share Plan 2020-2023 approved by the Board of Directors on 17 June 2020, which is in the process of being finalised.

Major shareholders1
CDP RETI S.p.A.2 (a company controlled by Cassa Depositi e Prestiti S.p.A.):______29.851%
LAZARD ASSET MANAGEMENT LLC (as a discretionary asset manager): ________5.122%
NORGES BANK: ___________1.643%
INARCASSA: ________1.110%
BANK OF ITALY: ___________1.017%

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 2019. This is available in the Investor Relations section of Terna S.p.A.'s website (www.terna.it).

¹ Shareholders who, based on the available information and notifications received from the CONSOB, own interests in Terna S.p.A. that are above the notifiable threshold established by CONSOB Resolution 11971/99 and Legislative Decree 58/98, as amended. It should be noted that the interests held by the shareholders, Norges Bank, Inarcassa and the Bank of Italy, were notified pursuant to CONSOB resolutions 21326 and 21327 of 9 April 2020, as amended, adopted in accordance with paragraphs 2-bis and 4-bis, respectively, of art. 120 of Legislative Decree 58/98, which have temporarily reduced the notifiable threshold.

² On 27 November 2014, a shareholder agreement was entered into by Cassa Depositi e Prestiti S.p.A. (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 S.p.A., SNAM S.p.A. and TERNA S.p.A.. This was later amended and supplemented to extend the scope of the agreement to include Italgas S.p.A..

The business model

Terna has a central role to play in the current energy transition: within a context of radical change that has seen decarbonisation become a global objective, the electricity grid is the key enabler in this process.

INTRODUCTION

The Terna Group's interim report for the six months ended 30 June 2020 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.

Contents

INTERIM REPORT ON OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2020 15

The new energy environment 17

Macroeconomic environment	18
The energy sector	19
European and international relations	21
Regulatory environment	24

The Company and our strategy	28
Our people	30
Local stakeholders	33
Innovation	35
Risk management	39
Outlook	40

The Group's business 43

Regulated Activities	44
Non-regulated Activities	54
International Activities	60

Performance	63
Financial review for the first half of 2020	64
Terna's shares	75

Annexes	79
Regulatory framework and other information	80
Changes in the dimensions of the NTG 85 Alternative performance
measures (APMs)	87
Reconciliations	88

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT AND FOR THE SIX MONTHS ENDED 30 JUNE 2020 93

INTERIM REPORT ON OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2020

The transition we are going through will radically change the face of the electricity system. According to the international agreements implemented by the National Integrated Plan for Energy and Climate, the share of total energy consumption met by renewables in Italy should reach 30% by 2030. The International Energy Agency (IEA) has calculated that for every euro spent on new power generation, more than one euro will need to be invested in grid infrastructure. As transmission and system operators, located in Italy and at the heart of Europe, we are working to bring about all aspects of this transformation.

Macroeconomic environment	18
The energy sector	19
European and international relations	21
Regulatory environment	24

1 The new energy environment

Macroeconomic environment

The first half of the current year witnessed the progressive spread of the Covid-19 pandemic, with Italy particularly hard hit from the end of February. This led the government to halt all non-essential activity and impose a nationwide lockdown from early March. Similar actions designed to contain the virus were then taken by other countries in and outside Europe. These unprecedented measures have enabled the global community to contain the virus, but have had a devastating effect on the economy, with a widespread impact on industrial production and services and a resulting fall in employment.

Italy began the process of easing restrictions at the beginning of May, but the gradual upturn in output cannot hope to offset the impact of the lockdown in the short term. According to surveys conducted by ISTAT (Italy's Office of National Statistics), between March and April around 40% of the country's firms reported declines in turnover in excess of 50%, whilst industrial output was down almost 36% compared with the previous two months. The liquidity crisis faced by many businesses was also accompanied by a sharp fall in household disposable income, driving down demand.

The energy sector

Electricity demand and production in Italy

Demand for electricity

Demand for electricity in Italy amounted to 143,514 GWh in the first six months of 2020, marking a significant decline (8.9%) compared with the same period of 2019.

ELECTRICITY BALANCE IN ITALY (GWh)*	H1 2020**	H1 2019**	CHANGE	% CHANGE
Net production	130,932	139,448	(8,516)	(6.1%)
From overseas suppliers (imports)	18,814	22,001	(3,187)	(14.5%)
Sold to overseas customers (exports)	(4,879)	(2,592)	(2,287)	88.2%
For use in pumping***	(1,353)	(1,259)	(94)	7.5%
Total demand in Italy	143,514	157,598	(14,084)	(8.9%)

* Does not include demand for energy for ancillary services related to electricity production.

** Provisional data.

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

Monthly demand for electricity in Italy in the first six months of 2020 is down compared with the same period of 2019. Before the Covid-19 emergency hit, in January and February, the reduction compared with the previous year was due to warmer weather and calendar effects (fewer working days in January and the leap-year effect in February).

The sharp fall in the period March-June reflects the halt to manufacturing activity following the Covid-19 health emergency.

MONTHLY DEMAND FOR ELECTRICITY IN ITALY*

* Provisional data.

Meeting demand and energy production

NET ELECTRICITY PRODUCTION BY SOURCE

* Provisional data.

The sharp reduction in demand for electricity obviously also affected production. The first six months of 2020 registered a 6.1% reduction in national production.

In the first half of 2020, approximately 40% of total energy demand was met from renewable energy sources, a significant increase on the same period of 2019.

The increase reflects the sharp decline in demand as a result of the Covid-19 health emergency, which reduced the need for traditional production in order to meet demand.

In terms of the performance of the various sources, there was a decline in wind production (down 6.7%). This was more than offset by increases in hydroelectric production (up 8.2%) and photovoltaic production (up 9.2%). Biomass and geothermal production remained broadly in line.

The new energy environment | The Group's strategy | The Group's business | Performance | Annexes

European and international relations

Terna continued to take advantage of the major opportunities for engagement and dialogue provided by our membership of the principal national and international trade associations, as well as of the leading associations connected with sustainability issues.

European Network of Transmission System Operators for Energy ENTSO-E European Association for Storage of Energy EASE

Renewables Grid Initiative RGI

During the period, Terna continued to engage with the senior managements of European and non-European system operators, with the aim of concluding cooperation agreements, at bilateral and multilateral level, in areas of common interest, particularly with regard to:

• grid development;
• electricity system operations;
• technological innovation.

The launch of the Equigy project in the first half of 2020 is of particular importance. This initiative, based on blockchain technology and developed by Terna in partnership with the system operators, Swissgrid and TenneT, is aimed at facilitating the participation of distributed demand in the electricity grid balancing process. The project, to be launched in Italy, the Netherlands, Germany and Switzerland, will allow distributed energy resources to provide flexibility to the grid, thus supporting Terna in its mission to guarantee an increasingly secure, efficient and sustainable electricity grid, with the ultimate objective of facilitating the energy transition currently underway.

Terna has also continued with its coordination role with senior representatives from European TSOs. These provide opportunities for discussion, the exchange of information and the launch of joint initiatives designed to share best practices, including those linked to Covid-19.

Conseil International des Grands Réseaux Electriques	CIGRE
Reliable and Sustainable Power Grids	GO15
Mediterranean Transmission System Operators	Med-TSO
Renewable Energy Solutions for the Mediterranean & Africa	RES4MED o RES4FRICA
World Energy Council/Comitato operativo Italia	WEC Italia
Harvard Electricity Policy Group	HEPG
Comision de Integration Energetica Regional	CIER

European stakeholders

ENTSO-E
EASE
RGI

International stakeholders

In addition to consolidating its presence in the trade associations it leads, Terna has also joined the Harvard Electricity Policy Group (HEPG), a Harvard University study group that analyses policies relating to the electricity sector from various aspects, with a special focus on the US experience.

Via ELMED Etudes SARL3 , work continued on development of the electricity interconnector project between Italy and Tunisia. In particular, the tender for conducting the survey for the submarine section has been launched. Surveys for the submarine section, the overland section and the environmental and social impact assessment are funded by the two credit facilities granted by the World Bank to the Tunisian Republic in relation to the project to provide technical assistance for the Tunisia - Italy electricity interconnector. ELMED Etudes has also been appointed the implementing agency. On 27 May, the promotors TERNA and STEG applied to the EU's Connecting Europe Facility (CEF) for funding for the Tunisia - Italy electricity interconnector. The CEF was set up to enable the delivery of projects of common interest.

In the first half of 2020, during the Covid-19 emergency, Terna was provided an example of best practice for transmission operators who are members of the various trade associations (including GO15, WEC, etc.), with regard to both measures aimed at combating the spread of the virus among personnel and activities linked to operation of the grid against a backdrop of significant, abrupt changes in the structure of consumption. Terna also played an active role in the international debate on the measures to be adopted by grid operators in order to support the economic recovery post-Covid-19.

Finally, in the first half of 2020, Terna took part in the steering committees set up by the Ministry of Foreign Affairs to examine issues relating to energy, the climate and the environment. In addition to describing the status of electricity interconnections in the Mediterranean area and the electricity transmission operator's commitment to decarbonisation and the economic sustainability, Terna also used the committees to express its views on the opportunities and challenges faced by the national transmission grid as a result of EU (Green Deal) and international (COP26) policies. This included highlighting the positive role played by European funding programmes, above all with regard to the interconnection infrastructure needed to further upgrade the national and European transmission grid.

In June, Terna also took part in the States General of the Economy organized by the Italian government in order to discuss plans for the country's restart and recovery following the Covid-19 emergency.

³ This is the 50/50 Tunisian joint venture between Terna S.p.A. and STEG (Tunisia's vertically integrated, state-owned electrical utility) established in 2009 with the role of conducting studies and providing technical assistance for the Tunisia-Italy electricity interconnector.

KEY OPPORTUNITIES FOR COOPERATION IN 2020

Within the context of the new Italy-Montenegro interconnector, the Balkans represent an area of opportunity for the development of electricity infrastructure, above all with regard to interconnections and energy solutions. To this end, further opportunities for cooperation with CGES (Montenegro's TSO) and the government of Montenegro were examined in the first half of 2020. Eventual initiatives could take place both in Montenegro itself and in the Balkan area in general, based around a certain funding framework, in order to contribute to further development of the area's electricity infrastructure and electricity market.

Within the scope of the agreement between Terna and the transmission operator, Rosseti, covering the exchange of know-how, best practices and cooperation in a number of areas relating to electricity transmission technologies, leading to establishment of the Joint Working Group (JWG), in the first half of 2020, talks between the parties continued with a view to implementing potential pilot projects in areas previously identified as being in each other's interest. The projects regard integrated solutions, advanced procedures and techniques to be used in the de-icing of highvoltage lines and the transfer of operational and technological know-how relating to substation automation.

Terna continues to view the electricity transmission sector in Latin American with interest, with a view to further consolidating our presence in countries such as Brazil, Peru and Uruguay. This includes playing an active role in trade associations, such as CIER, of which Terna is a member. Investment in transmission infrastructure in Latin America is essential in order to be able to meet growing demand for electricity and promote and integrate renewable energy sources. Terna presents itself as a strategic partner, operating on the basis of a sustainable approach and a long-term vision, transferring know-how and creating synergies with local partners.

In relation to the GRIT region, which includes the borders between areas of the internal market within the Italian system and the interconnection with Greece, a Greek-registered limited company was set up in May 2020 to act as Regional Security Coordinator. Named SEleNe CC, ownership of the company is shared equally between TERNA S.p.A., ADMIE (Greece), ESO-EAD (Bulgaria) and Transelectrica (Romania). The company is charged with conducting the regional activities provided for in EU regulations 2017/1485 and 2015/1222 (respectively, the "Guidelines on system operation" and "Guidelines on capacity allocation and congestion management"), as summarized below:

• the calculation of exchange capacity between market zones;
• the regional coordination of operational security and of the available countermeasures;
• the creation of a common grid model;
• the regional coordination of unavailability;
• the assessment of regional adequacy.

Montenegro

Russia

Latin America

SEleNe CC S.A.

Regulatory environment

Terna operates as a natural monopoly and within a market regulated by the Regulatory Authority for Energy, Networks and the Environment (ARERA).

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 fifth regulatory period (sub-period "NPR1", 2016-2019). The regulatory framework for the second four-year period (sub-period "NPR2", 2020-2023) was revised by Resolutions 567/2019/R/eel, 568/2019/R/eel and 574/2019/R/eel.

The framework for NPR2 (2020-2023) is broadly in line with the criteria applied in the period 2016-2019, with the principles for recognising the cost of capital (rate of return) and operating costs (price cap and profit sharing) unchanged with respect to NPR1. The most important change regards readmission of the return on fixed assets in progress, under a mechanism that reflects the related expenditure in tariffs based on rates of return differentiated on the basis of how long ago the expenditure was incurred and for a maximum of four years (beyond four years, the tariff will take into account interest expense incurred whilst work was in progress)4 . The change will enable operators to recover earlier costs.

At the end of NPR2, and on a trial basis in 2023, the regulations provide for adoption of a TOTEX/OUTPUT BASED approach. This recognises costs based on total expenditure incurred (operating and capital expenditure) and shares the resulting benefits for the community.

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, which, with Resolution 639/2018/R/COM, enabled adjustment of the WACC in a predictable and transparent manner in keeping with the economic cycle. The WACC the period 2019-2021 has been set at 5.6%. This is a vital element in guaranteeing an adequate return on capital, a key factor in enabling Terna to complete the substantial investment programme needed to meet the challenges of the energy transition.

⁴ When reviewing transmission tariffs for 2020, ARERA also accepted Terna's request for the partial readmission of the Italy-Montenegro Interconnector project among the list of strategic projects in the regulatory period 2012-2015. This means restoring the return on the related LICs not already included in the tariffs, in relation to the share of public investment (not covered by the interconnectors).

A number of key aspects of regulation in the fifth regulatory period 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 WACC5 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 sub-period, based on operating costs recognised during the relevant year (which, in the case of NPR1, was 2014 and in the case of NPR2 is 2018) and increased by any remaining portions of additional efficiencies achieved in previous 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.

Transmission revenue makes up the most significant portion of regulated revenue

1. To cover the return on capital (RAB)

2. To cover depreciation

3. To cover operating costs

⁵ The real pre-tax regulatory WACC for the transmission service was 5.3% for the period 2016-2018, and is set at 5.6% for the period 2019-2021.

We promote the energy transition and sustainable development by focusing on people and innovation. Every day, we work to build an atmosphere of dialogue and trust in local areas, to which we bring a vital asset for everyone's economic and social lives: electricity. This translates into choices based on respect for the environment and local communities. Our inclination to listen begins within the Company, among our people, in the awareness that the radical transformation the world is experiencing is a shared responsibility. This responsibility is our energy.

The Company and our strategy	28
Our people	30
Local stakeholders	33
Innovation	35
Risk management	39
Outlook	40

2 The Group's strategy

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) and ISO (Independent System Operator), operating under a monopoly arrangement and a government concession.

The energy model on which the planet's development has depended in recent years is no longer sustainable. This is borne out by the exponential increase in global primary energy consumption, the increase in CO2 emissions and the impact on our planet's ecosystem, as demonstrated by the growing attention paid to issues relating to the climate and environment by international institutions. This situation requires a global commitment to a progressive decarbonisation and improved efficiency across all forms of energy. In this context, the electricity sector has a central role to play in achieving the energy system's overall decarbonisation goals, thanks to the intrinsic efficiency of electricity as an energy carrier and the technological maturity of renewable energy sources (RES).

This transformation will not have zero impact on the electricity system, but will face us with a series of challenges that we must meet in order to ensure that the energy transition takes place in a decisive and effective manner, maintaining the current high levels of service quality and, at the same time, avoiding an increase in the cost to society.

The large-scale use of RES has a significant impact on the way in which Terna manages the grid. This is because they are intermittent sources, not as flexible as traditional power plants and sometimes far away from centres of consumption, leading to an increase in grid congestion, especially from south to north.

In addition, the growing frequency of extreme climate events, allied with the structural nature of the Italian transmission grid, puts major demands on the TSO, which is called on to protect and manage the grid in order to guarantee the security of electricity supply.

In response to the changes brought about by this new energy environment, Terna has to focus on five key dimensions of the system: Security, Adequacy, Quality of service, Resilience and Efficiency. In this regard, the Company has confirmed the strategy set out in the Plan for the period 2019-2023, further stepping up infrastructure investment to meet the new requirements of the electricity system, as part of an integrated approach based on sustainability values, community engagement, skills development and the promotion of innovation.

Consequently, the strategic guidelines for the various areas of the Group have been identified:

• Regulated Activities: to give top priority to all the activities that enable Italy to tackle its energy challenges in a safe, efficient and sustainable way by leveraging the specific characteristics of local areas;
• 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 of high added value;
• International Activities: to leverage the core competencies developed in Italy as a TSO through growth opportunities overseas.

The new energy environment | The Group's strategy | The Group's business | Performance | Annexes

A key driver of this strategy will be investment in the innovation and digital solutions needed to manage an increasingly complex, integrated and distributed system. Attention will also be paid to the development and insourcing of the strategic skills required to cope with projects of growing size and complexity.

The guidelines identified for the Group's various strategic business areas have been divided into appropriate priority actions to be carried out over the life of the Plan.

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

Non-regulated Activities will be geared towards supporting the energy transition, with competency-based initiatives focusing on the development of services for corporate customers and on taking advantage of value-added market opportunities for traditional and renewable customers.

Asset-based initiatives will, on the other hand, aim to pursue opportunities based on connectivity and distributed computing linked to the Group's infrastructure.

International Activities will focus on the execution of projects in progress and the management of projects in operation, taking advantage of 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 assets without the need to tie up large amounts of capital.

Maintenance of a strong capital structure through robust cash generation will also help to maintain an attractive dividend policy.

Our people

People are Terna's most important asset, and one of the enabling factors in the Strategic Plan. Each of us brings skills and experience that can help to increase the value of the Company. Trust, passion and responsibility are our values.

Workforce trends at 30 June 2020 are as follows:

THE WORKFORCE	AT 30 JUNE 2020	AT 31 DECEMBER 2019	CHANGE
Senior managers	83	72	11
Middle managers	672	617	55
Office staff	2,540	2,382	158
Blue-collar workers	1,373	1,219	155
Total	4,668	4,290	378

The increase in the Terna Group's workforce at 30 June 2020 primarily reflects the growth of international Non-regulated Activities, involving 379 additions following the acquisition of Brugg Kabel AG.

The Covid-19 emergency

Since the issue of the Cabinet Office Decree of 23 February 2020, Terna has progressively introduced measures to contain and reduce the risk of Covid-19 contagion, including suspension of corporate events and business trips in Italy and abroad, as well as the dissemination of hygiene and health measures to be implemented by all personnel, and the start of periodic sanitisation activities at workplaces, summarised in Terna's anti-contagion security protocol. Classroom training activities were suspended during the period, and replaced with digital online learning, using the Teams app.

The Company has also continued with specific initiatives aimed at sub-dividing the workforce according to location and workplace, in order to ensure that teams were kept apart and reduce the risk of contagion. Likewise, several measures were adopted for the Dispatching control and operations centres. All office and business support staff have also continued to work from home.

For the so-called re-entry phase - from 4 May - a "Safe Together" campaign has been launched, aimed at providing "operating instructions" on behaviours to be adopted in the workplace. This involved placing posters containing behavioural guidance directly in the various workplaces (entrance halls, meeting rooms, lifts, canteens, corridors, break areas, etc.). A special dedicated section has been created on the Company's intranet. Terna has also obtained a specific Covid-19 insurance policy for all our personnel, which includes the payment of compensation in the event of hospitalisation due to infection with Covid-19.

All the initiatives have been launched in close dialogue with the labour unions.

INITIATIVES IN THE FIRST HALF OF 2020

The Zero Accidents project is continuing in 2020, also with specific initiatives linked to suggestions for improvements received from around the country and during the competition held at all the Infrastructure Units in the previous year.

As part of the project, a review of the documents that set out the provisions for the prevention of electrical risk (DPRET) has been launched, and the new rescue procedure for live-line working carried out high above the ground submitted to the Ministry of Labour and Social Policies for approval has been defined.

The new procedure for the management of personal protective equipment (PPE) has been defined, and the new "SMART PPE" working group which involves other Company departments and aims to develop innovative technologies for the use of protective devices, has been set up. The project provides for the use of apps and wearable tags to monitor and ensure social distancing between workers. The trial phase, which started in July with the involvement of 60 people, will be used to test the identified technological solutions.

In 2020, the Terna-ANIE (National Association of Electricity Companies) technical working groups continued. These are involved in drafting safety procedures at construction sites where overhead and underground cables are installed.

During the first half of 2020, the Terna Skill Mapping project was launched. This introduces a corporate tool for mapping employees' key skills thanks to a Terna Library that tracks and organises our professional assets. The project is also designed to periodically assess the penetration and distribution of these skills via a series of surveys, thus allowing us to increase our skills base by accurately targeting training and development pathways.

The project will also enable definition of the skills required for the new roles that will created in order to best keep pace with developments in the energy transition process.

Health & Safety

Development

Training In the first half of 2020, approximately 62,000 hours of training were provided, relating to the continuation of various training projects, including:

• in the area of online training:
• a) regarding the study of the main operating instructions (line inspections substation checks line maintenance), training in "De-energised working methods" has been redesigned - in digital mode - in order to develop and consolidate knowledge of the conventional methods applicable to work on de-energised lines and substations. 189 courses were held, involving a total of more than 15,352 hours of training and 961 participants;
• b) a Train the Trainers course launched in June 2020 with a digital kick-off and divided into a series of workshops, aimed at developing new skills and experimenting with innovative teaching methods in order to encourage the sharing, development and preservation of knowledge within the Company.
• In the corporate sphere:
• a) renewal of Terna's role as supporting partner for "Valore D", an association that promotes skills development and networking with a special focus on diversity and women's career development. Since January, 13 colleagues have been involved, with a total of 63 hours of training;
• b) as part of management training, in 2020 Terna is once again participating in the "Music and Management" programme in collaboration with the Luiss Business School and the National Academy of Santa Cecilia;
• c) also in collaboration with the Luiss Business School, two courses on Program Management methodologies have been launched, delivered digitally using the "flipped classroom" approach, and involving 45 participants;
• d) once again in 2020, Terna participated in the sixth edition of the "Program for Management Development (PMD)", organised by the IESE Business School-University in Navarra, which is specifically dedicated to the TSO community;
• e) on the language training front, the Company's commitment to developing the language skills of personnel, especially those working on international activities and projects, is continuing and being stepped up in 2020, including the implementation of new digital delivery methods.

Recruitment and selection During the first half of 2020, staff recruitment and selection activities focused on technical and operational roles to complete the generational turnover process launched in previous years, staff roles (maternity leave) and roles for disabled people (in line with the provisions of Law 68/99). The talent attraction strategy has been enhanced by new partnerships with the STEM departments of the leading Italian universities. The aim is to make Terna more attractive for recent graduates in physics, statistics, mathematics and data science.

To consolidate our employer branding strategy, Terna participated in eight talent fairs in the first half, and is set to attend four more events by the end of the year.

In order to foster a virtuous circle of exchange between the corporate and academic worlds and to support the new staff recruitment process, Terna manages relations with schools, universities and employment centres.

Local stakeholders

Engagement with local communities is a key part of our Grid Development Plan. This allows us to create the conditions in which together we can build an increasingly sustainable national grid.

Building good relations with the local communities affected by the Grid Development Plan's infrastructure investments can facilitate meeting implementation deadlines and, consequently, enjoyment of all the related benefits.

To build and maintain high-quality stakeholder relations and forestall the risk of late detection of any critical issues, Terna has developed a number of tools and procedures within its "Stakeholder Engagement Model" designed to engage with and monitor public opinion. With particular reference to local stakeholders, in recent years Terna has stepped up our engagement with local communities to promote an electricity culture, illustrate our strategic decarbonisation objectives, and initiate a transparent relationship with all local stakeholders, opinion makers and influencers, in order to gain awareness of their opinions and needs. Accurate mapping of all local stakeholders in the main areas affected by grid development projects is a prerequisite for understanding their attitude towards Terna and the planned initiatives, and for establishing a constructive dialogue with them.

Stakeholders	SUSTAINABILITY INITIATIVES
Local communities: engagement and consultation	Terna has adopted a voluntary approach designed to foster the prior, systematic involvement of local bodies. Since 2015, this has been extended to include people from the communities directly affected by Terna's plans through public meetings called "Terna incontra". These events focus on listening to local concerns, sharing design ideas and on dialogue.
	New ways of engaging remotely with local stakeholders are the subject of further study in order to ensure an adequate level of dialogue despite of the restrictions imposed as a result of Covid-19.
Environmental organisations: strengthening partnerships	Terna's commitment to the environment and biodiversity has, since 2009, led to the conclusion of partnership agreements with leading environmental organisations, with the aim of arriving at shared solutions designed to boost the environmental sustainability of the National Transmission Grid (NTG).
	In recent years, growing concerns over the impact of climate change, combined with Terna's growing commitment to the current energy transition phase, have extended areas of collaboration, including the integration of renewable sources. At the European level, Terna is one of the nine TSOs, together with eight non-governmental organisations in the environmental sector, that comprise the RGI-Renewables Grid Initiative association, with which the Company is working to improve interactions with local communities and other strategic stakeholders, via the development of tools for the sustainable design of electricity infrastructure projects.
Investors: a growing request for transparency regarding environmental, social and governance aspects	Approaches to climate change and the energy transition have widened calls from numerous institutional investors for major companies to conduct an informed and full assessment of the business risks linked to ESG (environmental, social and governance) issues. Moreover, with the adoption, by European countries, of Directive 2014/95/EU on non-financial disclosures (in Italy with Legislative Decree 254/2016), large companies are now required to publish an annual non-financial statement, which for Terna coincides with the Company's Sustainability Report. 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. Terna has for some time now implemented these recommendations.

Innovation

Innovation and digital transformation are essential in an increasingly complex energy sector. Decisions regarding future development focus on the technology trends most relevant to our business.

The main tools Terna has put in place to develop innovation are: an organised Innovation Plan, and implementation of an Open Innovation process.

INNOVATION PLAN

The Innovation Plan organises the innovation flow in a consistent manner, from the birth of new ideas through to development of the projects emerging from the R&D process.

At the Milan Advanced Analytics laboratory, the first phase of development and training for the predictive modelling of electricity transits on a limited portion of the NTG was completed.

The predictive models, trained using the most modern machine learning techniques, have been developed by 3 start-ups (Orobix, Energy Way and MoxOff), each of which has implemented a prototype software made available to Terna for an initial assessment and testing.

During the first half of 2020, the first three workshops of the "Terna Start Hub" series took place. The aim of these meetings held at the local hubs (in Milan, Turin and Naples), with the aim of disseminating specialist content and presenting best practices and examples of technological applications to teams at Terna's local Transmission Operating Areas.

The initiative was made possible, in spite of the health emergency, by the Terna Innovation Hub Digital Twin, a digital innovation hub set up in the first quarter of 2020 to enable the involvement of people, local stakeholders and other actors from the Innovation Ecosystem.

Innovation Hubs

OPEN INNOVATION

Open Innovation is the approach Terna adopts in developing our innovation initiatives. This approach encourages the opening up of new development fronts within and beyond the Company, through dynamic interaction with universities and research centres and partnerships with peers and large industrial players, as well as access to start-ups and small and medium enterprises.

The main innovation initiatives undertaken in the first half of 2020 are summarised below.

LARGE COMPANIES, INCLUDING IN THE ENERGY AND INFRASTRUCTURE SECTORS

MoU with SNAM On 15 April 2020, Snam and Terna renewed and extended their partnership regarding coordinated research, development and innovation activities, and potential convergence between the electricity and gas systems, by renewing their memorandum of understanding (first signed on 1 March 2019). The two companies intend to carry on working together to identify, define and implement joint initiatives, also sharing their expertise and best practices, with the aim of further strengthening their commitment as key players in the current energy transition.

Specifically, the agreement aimed at exploiting potential synergies between the gas system and the electrical system breaks down into three areas of interest:

• "dual fuel" power plants, in which Snam plans to convert its compression and storage plants to gas-electric power, entailing significant environmental benefits for the national economy in terms of reducing CO2 emissions, and the development of new flexibility resources for the electricity system;
• research and development, in which initiatives relating to so-called "sector coupling" will be developed, with particular reference to flexibility dynamics and integration of the "hydrogen carrier";
• co-innovation, to continue the testing and development of innovative initiatives and technological solutions regarding the sustainability of energy networks, via infrastructure monitoring using drones, satellites and IoT sensors, as well as workers' safety and the environment.

UNIVERSITIES AND RESEARCH CENTRES

On 3 June 2020, Terna signed an agreement with the University of Padua regarding research, development and innovation activities within the Innovation Hub, as well as teaching, training and networking activities. The agreement was signed as part of the "Veneto Region Crosscontamination Lab 2020" initiative promoted by the University of Padua. This multidisciplinary, cross-contamination project involves university students, recent graduates, PhD students, PhDs, professors, experts, professionals and companies via the development - by teams of students - of project challenges proposed by participating companies. The challenge launched by Terna falls within the scope of additive manufacturing and regards the application of 3D printing in business operations.

Partnership with the University of Padua

INTERIM REPORT ON OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2020

The new energy environment | The Group's strategy | The Group's business | Performance | Annexes

START-UPS, SMES AND VENTURE CAPITAL

The fourth edition of Next Energy consisted of three Calls:

• Call for Talent: 10 new graduates were selected, who, from January, had access to a 6-month internship at several of Terna's facilities. The internship went ahead despite the Covid-19 emergency, thanks to available remote working tools;
• Call for Ideas: the end of an ideas development phase that began in March with the support of Cariplo Factory, led to the start-up, Nemesys, being awarded a €50,000 voucher for an acceleration process in June. Nemesys is developing an innovative hydrogen production system. The award was made via a remote workshop;
• Call for Growth: the engagement process launched in March and supported by the Cariplo Factory, which involves five selected start-ups, aimed at defining use cases for subsequent collaborations with Terna, continued.

Terna continues to participate in the Open Italy programme, an ELIS Open Innovation initiative set up to encourage dialogue and collaboration between large companies, Italian start-ups/ SMEs and innovation facilitators such as accelerators and research centres, regarding concrete innovation projects relating to eight areas of innovation. The 2020 edition of Open Italy was launched in December 2019. Terna identified three priority areas of innovation (urban intelligence and smart mobility, cybertech, clean technologies and advanced materials) regarding which the Company has expressed specific business needs. From March 2020, Terna assessed start-ups with a view to launching co-innovation projects.

This new, completely digital initiative is aimed at monitoring the progress of Innovation Hub projects. It includes a series of meetings involving Terna's project managers, innovative companies and the central innovation team to discuss the state of progress of their activities, areas for further attention and next steps. Since March 2020, full sessions have been held regarding projects relating to all Innovation Hubs.

On 29 April 2020, Terna launched the I4G - Innovation For the Grid Call for Innovation, with the support of Digital Magics, a business incubator listed on Borsa Italiana's AIM Italia - in digital mode for the first time - which is aimed at start-ups and innovative SMEs that propose solutions relating to the digitisation and increased resilience of the NTG.

This new Call specifically focuses on seeking solutions to enhance and improve the IoT monitoring network that Terna is installing on various assets in Italy's high-voltage electricity system, and is aimed at identifying advanced analytics algorithms and developing specialist sensors for power lines that can be integrated with its monitoring network to enhance and improve it. At the pitch day on 30 June 2020, the start-up, InSensus Project S.r.l., which proposed a structural heath monitoring system called SuperMicron, was awarded a €15,000 prize and given the opportunity to initiate a co-design phase within Terna's Innovation Hubs.

Next Energy

Open Italy

Innovation Review

Call for Innovation I4G - Innovation For the Grid

OTHER OPEN INNOVATION INITIATIVES IN THE FIRST HALF OF 2020

Intellectual Property Protection	In January 2020, specific activities relating to Intellectual Property Protection were defined within the Open Innovation unit. One of the unit's first objectives is to implement a process of leveraging and protecting intellectual property generated by Terna. Strengthening and raising awareness among Terna's stakeholders of the intellectual property management process is at an evolutionary stage. Ideas and solutions must be protected with the tools available (patents, design, copyright and know-how) in conjunction with Terna's business strategies. A screening phase has also begun for ongoing activities that can already be leveraged accordingly, in terms of intellectual property. In the first half of 2020, this led to the filing of a supplement to the patent application for "compact switching units on pylons", and an application to register a design model for pylons with shelters equipped with honeycomb camouflage.
Technology Transfer and International Innovation Developments	In the first half of 2020, the Technology Transfer and International Innovation Developments unit was set up to manage the application of innovation solutions and to develop collaboration agreements with partners and innovative companies within a cross-technological and international perspective. In terms of application, the start-up ecosystem developed by Open Innovation was used during the Covid-19 emergency to identify companies able to provide or develop smart PPE for social distancing and contact tracing. The trial phase of the selected solutions will start in July.
	At international level, NDAs have been signed with US companies and an MoU with BRUGG eConnect, and opportunities in the eMobility sector have also been explored. A plan to integrate the Group's IoT and sensor technology R&D with the activities carried out by Brugg Cables has been drawn up.

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 exposed not to the usual price- and market-related risks (or is so only to a limited extent with regard to its non-regulated and overseas operations), but to regulatory and legislative risk, as well as the traditional operational risks which have become increasingly critical with the energy transition in progress.

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).

For 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 "Risk management" section in the Annual Report for 2019.

Outlook

The global health emergency caused by the widespread outbreak of Covid-19 had a major impact on markets and on the Italian and global economies in the first part of 2020. This, allied with the current situation, marked by a continually changing backdrop and increased uncertainty linked to the potential development of the infection, means that the outlook for the global economy in the second half of the year remains weak.

Against this backdrop, the Group will continue to be engaged in delivering new grid infrastructure, confirming Terna's leading role for a sustainable energy transition, leveraging innovation, skills and distinctive technologies to the benefit of all stakeholders. Moreover, with a view to supporting initiatives essential to the country's rapid recovery, Terna intends to revise its long-term plan with the aim of, wherever possible, further accelerating infrastructure development.

The Company will continue to step up investment in Regulated Activities and to strengthen the core business. This will involve direct engagement across the country, through listening and dialogue with all the key stakeholders, local communities, authorities and institutions. Following the Covid-19 health emergency, which led to a slowdown in activity, firstly with the suspension of work (in mid-March) and then with the progressive restart (from the end of April), the Group has drawn up an action plan designed to make up for the resulting delays. This will be done by bringing forward the timing of work (speeding up activities and carrying them out in parallel) and by optimising the supplier base and monitoring performance.

The principal electricity infrastructure under construction includes the interconnection with France, as well as the start of work on the new SA.CO.I.3 project (strengthening the link between Sardinia, Corsica and the Italian mainland). In addition, the main projects to increase the exchange capacity between the various areas of the Italian electricity market include the Paternò-Pantano-Priolo power line, and the reorganisation of electricity grids in metropolitan areas, such as Naples and Rome.

In terms of our Non-regulated Activities, Terna will consolidate its competency-based activities, developing high value-added services for corporate customers, including energy efficiency solutions, taking advantage of market opportunities for traditional and renewable customers. Meanwhile, asset-based initiatives will pursue opportunities linked to connectivity and distribuited computing and based on exploiting the Group's infrastructure. The Group also plans to take specific steps to compensate for the suspension of activity in its nonregulated segment, with the aim of mitigating the negative impact of delays caused by the Covid-19 emergency.

The full integration of Brugg Cables within the Terna Group will also continue in the second half of 2020.

In the second half of the year, International Activities will continue to focus on managing and maintaining the power lines that have entered service in Brazil and Uruguay, and on completing projects currently in progress in Peru and Brazil. We do not currently expect our international business to be significantly affected by the Covid-19 emergency.

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.

In spite of the above, the Covid-19 health emergency is not expected to have a significant financial impact on the Terna Group's performance, thanks to the highly regulated nature of our business. Given the current progressive return to normal throughout Italy, the Group's results for 2020 are at this time expected to be in line with previously announced guidance.

With our projects and substantial investment in network infrastructure, we are laying the foundations to promote and support the current energy transition with a fit-for-purpose electricity system that is safe, efficient and makes increasing use of renewables. Thanks to the unique skills of our people, constant dialogue with local communities and the adoption of innovative solutions, we contribute to the growth and development of sustainable projects for the benefit of Italy.

		Regulated Activities
Non-regulated Activities	54
International Activities	60

3 The Group's business

Regulated Activities

The National Transmission Grid

Transmission and dispatching

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 75 thousand kilometres of high and very high-voltage lines. The Group is responsible for managing the flow of electricity through the grid in every 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.

The 2020 Development Plan

Terna's Board of Directors approved the 2020 Development Plan on 31 January 2020. Key aspects of the Plan are set out below:

CAPITAL EXPENDITURE

• To boost overall exchange capacity with other countries
• To expand connectable RES power
• To reduce congestion
• To cut energy losses
• To reduce CO2 emissions as a result of the production mix and lower grid losses
• To decommission obsolete infrastructure

DRIVERS

SYSTEMIC SUSTAINABILITY

• 1. The electricity system's transition to complete decarbonisation requires use of all the tools necessary in order to fully integrate renewable production plants in order to reduce emissions over the long term, guaranteeing the system's security.
• 1. The energy transition process requires specific enabling action tools, including the adoption of new market models. The structure and mix of Europe's generation mix in general and of Italian generation in particular are undergoing a radical transformation, just as transmission lines are being developed in keeping with new European directives regarding Market Design. The adoption of new mechanisms at national level (in particular, the Capacity Market and the reform of the dispatching services market) will have a major impact on development of the electricity system.
• 1. Security of supply ensures the security of the national electricity system and, at the same time, creates an increasingly resilient system, capable of handling critical events external to the system itself.
• 1. The ability to conceive, design and implement following rigorous analysis capable of maximising the environmental and economic benefits is the only possible guarantee of sustainability. In this regard, for the first time and in the interests of transparency, the Development Plan sets measurable sustainability targets, against which we can gauge our performance.

The key project guidelines have been divided into four areas of action, the main aspects of which are:

Principal projects for the National Transmission Grid

The Development Plan envisages capital expenditure of over €4 billion in the period 2020-24, which is in addition to expenditure on the Security Plan, the Electricity Asset Renewal Plan and other investment.

The principal projects envisaged in the Development Plan, including details of those affecting circuit sections of more than 100 km, are set out below.

The new energy environment | The Group's strategy | The Group's business | Performance | Annexes

Interconnections and lines		Km of circuit	Status	Driver
Italy-France Interconnector		190
Sardinia-Corsica-Italy Interconnector		540
HVDC Centre South - Centre North		221
HVDC Italy-Tunisia		200
HVDC Mainland Sicily-Sardinia		882
Reorganisation of metropolitan areas ü		182
Gissi-Foggia		140
Resilience and Status Key
üResilience Plan	Under construction	Awaiting consents		Under design
Key
Decarbonisation	Market efficiency	Security of supply		Systemic sustainability
including:	Several consent procedures were initiated for new works or projects during the first half of 2020,			Consent procedures in progress

• reorganisation of the high voltage power grid in the Bologna area;

• reorganisation of the Teramo and Pescara power grid;
• construction of the power grid between Malcontenta and Fusina;
• reorganisation of the power grid between Catanzaro and Calusia;
• reorganisation of the power grid in the Novara area.

HALF-YEAR REPORT 30 JUNE 2020 | TERNA GROUP 47

Investment in H1 2020 up

+8%

versus H1 2019

The Group's capital expenditure

The Terna Group's total capital expenditure in the first half of 2020 amounts to €428.0 million, compared with the €396.3 million of the same period of the previous year (up 8.0%). This confirms Terna's enduring ability to continue to pursue our objectives in spite of the difficulties linked to the Covid-19 pandemic.

(€m)	H1 2020	H1 2019	CHANGE	% CHANGE
Development Plan	141.2	138.0	3.2	2.3%
Security Plan	69.1	29.4	39.7	135.0%
Projects to renew electricity assets	146.4	135.5	10.9	8.0%
- of which electricity assets (before functional separations)	127.5	117.6	9.9	8.4%
- of which functional separations	18.9	17.9	1.0	5.6%
Other capital expenditure	44.2	39.8	4.4	11.1%
Total Regulated Assets	400.9	342.7	58.2	17.0%
Non-regulated Assets (1)	22.7	47.5	(24.8)	(52.2%)
Capitalised financial expenses	4.4	6.1	(1.7)	(27.9%)
TOTAL CAPITAL EXPENDITURE	428.0	396.3	31.7	8.0%

¹ Non-regulated Assets primarily regard the private Italy-France interconnector, re-routings for third-parties and activities in Peru.

The main regulated assets entering service in the first half of the year include the 150 kv Benevento III-Pontelandolfo power line (an addition of 15.3 km) and the renovation of the 220 kv Alfa Avio-Casalnuovo cable. Non-regulated capital expenditure regards the re-routing work carried out for the "Marco Simone golf club" (an addition of 1.7 km).

MAIN REGULATED WORKS CARRIED OUT DURING THE PERIOD

The construction sites previously suspended due to restrictions connected with the Covid-19 emergency have been progressively re-opened from May.

DEVELOPMENT PLAN - €141.2 million

Piossasco converter station: the civil works have been completed, except for internal finishing touches and the external road network. installation of the converter, the transformers and DC and AC equipment has been completed; cabling and pre-commissioning tests are in progress.

Cable connection: cables have been laid over a 78.3 km section, representing 82% of the connection as a whole:

• former Sitaf section (from the station to the A32 motorway): cable laying has been completed (18 km);
• upper and lower sections (A32 motorway): 32.8 km of cable has been laid out of a total 45.3 km;
• middle section (avoiding the A32 motorway): 21.6 km of cable has been laid out of a total 25.3 km;
• Frejus tunnel: 5.9 km of cable has been laid out of a total 6.6 km.

132 kV Zuel-Somprade cable: excavation and cable laying are in progress. 15.2 km of piping has been laid out of a total of 23.1 km, and the first 1.8 km of cable has been laid.

380 kV Paternò-Pantano power line: the procurement of materials is in progress; preliminary activities relating to removal of unexploded war-time bombs and geological and archaeological surveys have been completed; the executive design has been completed and the related approval process is in progress.

380 kV Paternò-Priolo power line: the procurement of materials and preliminary activities relating to removal of unexploded war-time bombs and geological and archaeological surveys relating to Lot 1 are in progress.

380/220/150 kV Pantano substation: the procurement of materials is in progress; the executive design has been completed and the contract awarded for civil works; removal of unexploded war-time bombs is in progress.

220 kV Castelluccia-Naples Primary Substation cable: 3.1 km of cable has been laid on the 3.6 km section.

220 kV Astroni-Naples Centre cable: 5 km of cable has been laid on the 9.4-km section.

220 kV Castelluccia-San Sebastiano power line: excavation is in progress and 3.7 km of cable has been laid out of 7 km.

Agnosine substation: opening of construction site postponed due to the Covid-19 health emergency. Excavation and earthworks and construction of the perimeter wall are in progress at the site.

Bisaccia-Deliceto power line: Construction of the initial foundations has begun.

Expansion of the Bisaccia electricity substation and the installation of PSTs: High voltage equipment assembly and testing, as well as cabling, is in progress.

150kV Sorrento substation: electromechanical assembly regarding the new 150 kv armoured section and cabling are in progress.

Italy-France Interconnector (€8.7 million)

Reorganisation in Alto Bellunese (€7.9 million)

Paternò-Pantano-Priolo (€7.1 million)

Reorganisation in Naples (€6.9 million)

Agnosine substation and connections (€6.8 million)

Grid upgrades in the Foggia-Benevento area (€5.1 million)

Sorrento Peninsula Interconnector (€2.5 million)

	SECURITY PLAN - €69.1 million
Synchronous compensators (€36.2 million)	The plan to install synchronous compensators in Sardinia and central and southern Italy is being implemented. This will support the regulation of short-circuit voltage and power in areas of the country characterised by a high level of production from renewable sources and a significant reduction in traditional production.
	Selargius and Matera: assembly of the equipment (synchronous compensators and step-up transformers) is nearing completion;
	Garigliano: the civil works are in progress;
	Maida and Foggia: the construction sites have been opened and the site-layout civil works have begun; production of the related supplies is in progress.
Fiber for the Grid (€10.7 million)	This project 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, by increasing and expanding the fibre optic network.
	A further 16 electricity substations on the NTG (making a total of 452 substations) were connected and lit in June 2020.
Brindisi Pignicelle - Brindisi EniPower 380 kV cable (€6.3 million)	Cable laying is in progress (7.3 km of the 12.2 km section have been laid). The consents for the alternative route located in the Syndial area have been issued.
	RENEWAL PLAN - €146.4 million
Renewal of electricity assets (€127.5 million, before functional separations)	The commitment to carry out work on the renewal of electricity assets in order to improve the reliability and resilience of the NTG has been confirmed.
	The renewal of overhead lines and substation equipment continued during the first half of 2020: approximately 1,000 km of conductors and 5 pieces of equipment were replaced, 1 with "green" equipment, insulated using vegetable esters.
Separation of Rete S.r.l.'s substations (€18.8 million)	Work continued on the project involving the separation of Rete S.r.l.'s substations, aimed at progressive integration into the grid of the HV substations acquired from FSI S.p.A
	During the first half of 2020, an additional 2 substations were taken over (making a total of 308 out of the 350 electricity substations acquired in 2015).

Electricity cost trends

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

Dispatching Services Market (DSM)

The net charge for using the DSM was €1,317 million in the first half of 2020 (provisional data), up on the same period of the previous year (€1,012 million).

The sharp rise in DSM costs, primarily recorded during the spring months, is due to a reduction in electricity consumption attributable to the Covid-19 health emergency in general and the restrictions set out in the Prime Ministerial Decree of 8 March 2020, as amended, in particular, which led to an increase in the cost of selection to aid in resolving local technical constraints and ofsafe operation of the System.

145 116 155 185 188 223 157 131 246 305 274 204 Jan Feb Mar Apr May Jun* ■ Monthly DSM charge H1 2019 ■ Monthly DSM charge H1 2020

MONTHLY DSM COSTS (€m)

* Provisional data.

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

The total uplift was €1,369 million in the first half of 2020 (provisional data), up on the same period of the previous year (€1,062 million). This reflects an increase in the cost of using the Dispatching Services Market, partly offset by a reduction in the cost of the virtual interconnector (the Italy-Montenegro interconnector entered service at the end of 2019).

* Provisional data.

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 567/19) and in Terna's Grid Code.

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.

CONTINUITY INDICATORS USED

RENS*

What it measures Energy not supplied following events affecting the relevant grid**.

How it is calculated

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).

* Regulated Energy Not Supplied. ** The "relevant grid" refers to all of the highvoltage and very high-voltage network.

ASA*

What it measures Availability of the service provided by the NTG. How it is calculated

Based on the ratio of the sum of energy not supplied to users connected to the NTG (ENS) and energy fed into the grid.

* Average Service Availability.

* Provisional data.

The "NTG RENS" indicator for the period from January to June 2020 based on preliminary data, amounts to 53 MWh (compared with an annual target of approximately 850 MWh set by ARERA). Indeed, the first half of 2020 saw a limited number of economically insignificant power outages, due to the favourable weather conditions in the early months of the year and Italy's lockdown period, which led to considerable delays in implementing the entire plan for grid shutdowns to enable works to take place on the NTG.

As regards the ASA indicator, availability was 99.99995% in the first half of 2020, compared with 99.99982% in the same period in the previous year. 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.

Existing regulations (set out in Resolution 567/2019/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 these mechanisms are accounted for at year end (including RENS). With regard to costs, which are determined periodically on the basis of events that have occurred, Terna recognised costs of €0.5 million in the first half of 2020 (€2.2 million in the first six months of 2019).

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. The figure for 2019 is provisional awaiting the ARERA Resolution.

Operating results of Regulated Activities

The following table shows a breakdown of the results from the Terna Group's Regulated Activities in the first half of 2020 and 20197 .

			(€m)
	H1 2020	H1 2019	CHANGE
Total regulated revenue	1,025.2	1,004.8	20.4
Tariff revenue	992.7	984.3	8.4
- Transmission revenue	939.1	928.7	10.4
- Dispatching, metering and other revenue	53.6	55.6	(2.0)
Other regulated revenue	24.2	15.5	8.7
Revenue from construction services performed under concession in Italy	8.3	5.0	3.3
Total cost of Regulated Activities	196.5	190.3	6.2
Personnel expenses	114.9	110.3	4.6
External resources	65.9	68.5	(2.6)
Other	7.4	6.5	0.9
Cost of construction services performed under concession in Italy	8.3	5.0	3.3
EBITDA from Regulated Activities	828.7	814.5	14.2

EBITDA from Regulated Activities amounts to €828.7 million, an increase of €14.2 million compared with the first half of the previous year. This primarily reflect the tariff increase provided for by ARERA Resolution 568/19 and recognition in the regulated activities segment of part of the revenue relating to the acquisition of Brugg Cables.

Regulated Revenue is up €20.4 million, primarily due to the impact on transmission revenue (up €10.4 million) of the increase in invested capital (RAB), partially offset by the negative impact of the volume effect. It also reflects the increase in revenue resulting from the impact on the quality of service mechanism of the definition of certain events occurring in previous years (up €6.4 million), and revenue resulting from the higher value of the net assets acquired following the purchase of the interest in Brugg Cables compared with the consideration paid, determined on a provisional basis (the gain resulting from a bargain purchase, totalling €7 million), after taking into account the increased revenue from insurance proceeds for damages recognised in the first half of 2019 (down €3.9 million).

The cost of Regulated Activities is up €6.2 million, primarily reflecting provisions for staff incentive schemes, partially offset by lower costs for quality of service (down €2.7 million, due to the good performance registered in the first half of 2020).

⁷ Terna Group's sectors of activity are in line with the internal management control system adopted by the Parent Company, in accordance with the 2020-2024 Strategic Plan.

Non-regulated Activities

Energy market solutions

The main areas in which these activities are developed are:

• PRODUCTION OF CABLES AND ACCESSORIES BRUGG CABLES
• ASSET-BASED INITIATIVES
• COMPETENCY-BASED INITIATIVES
• PRIVATE INTERCONNECTORS PURSUANT TO LAW 99/2009
• TRASFORMERS TAMINI GROUP

Acquisition of Brugg Cables

On 29 February 2020, in implementation of the preliminary agreement signed on 20 December 2019, Terna acquired a 90% interest in Brugg Kabel AG (Brugg Group), one of the leading European operators in the terrestrial cable sector, specialising in the design, development, construction, installation and maintenance of electrical cables of all voltages and accessories for high-voltage cables.

The acquisition, which Terna financed with its own funds, was finalised through the subsidiary Terna Energy Solutions S.r.l.. The preliminary amount paid for acquisition of the equity interest is CHF25.8 million.

The acquisition of Brugg Kabel provides Terna with a centre of excellence for research, development and testing in one of the core technologies for the TSO, such as terrestrial cable technology.

In particular, the transaction gives Terna the opportunity to rapidly integrate core competencies, by acquiring a company featuring:

• specialisation in 150 kv cables with standards in line with those Terna requires;
• HV cable production capacity in line with Terna's requirements;
• expertise consolidated over 120 years, which has been widely verified by Terna;
• significant potential synergies with the Group's Non-regulated Activities.

It should be noted that Terna's Development Plan, in line with the objectives of greater sustainability and resilience for the NTG, envisages doubling the number of terrestrial cables over the next 10 years. Consequently, the development of distinctive expertise in the underground cable sector to support cable design and construction activities, as well as O&M, may be a crucial factor in Terna's future.

From an organisational point of view, Samuel Ansorge has been confirmed in the role of COO, while Agostino Scornajenchi has been appointed as Executive Chairman.

The order book amounts to approximately CHF98.6 million (approximately €93 million), a significant increase compared with the same period of 2019 (CHF78.1 million, equal to approximately €73 million). The High Voltage Systems unit made a significant contribution, primarily due to contracts won by the Swiss holding company, Brugg Kabel AG. The remaining orders were obtained by overseas subsidiaries. The Low Medium Voltage unit also made an important contribution.

ASSET-BASED INITIATIVES

Open Fiber: During the first quarter, the customer sent the activation letter for 2020. The delivery plan was also defined, involving the delivery of 3,472 km of optical fibre, with estimated total revenue of €4.5 million.

The suspension of work at a number of sites due to the Covid-19 emergency, and the temporary halt to the supply of ground wires from Prysmian's Spanish factory resulted in the postponement, until the second half of 2020, of delivery of a portion of the fibre scheduled to take place in the first half. The volume of fibre expected to be delivered during the year is still expected to be broadly on track.

The second phase of the Hackathon project is currently being launched with the Polytechnic University of Turin. This involves the prototyping of two solutions based on the Smart Tower platform for dynamic fire risk monitoring, and for monitoring the effects of saline deposition on metal structures and crops.

During the period, a technical round table on environmental monitoring was also launched, in application of the memorandum of understanding between the Sicily Region and Terna. This particularly relates to agriculture and forest monitoring, hydrogeological instability and protection of archaeological areas.

Inspection, design and authorisation activities began in preparation for the installation of FWA solutions in remote areas in connection with the contracts already signed with Open Fiber and Eolo.

Some of the activities were rescheduled in the second half of 2020, as a result of the suspension, due to the Covid-19 emergency, of certain activities in the field.

Fibre

Smart Towers

FWA pylons

COMPETENCY-BASED INITIATIVES

Smart Grids Energy efficiency initiatives forming part of the memorandum of understanding between Terna and FCA regarding the joint trials of sustainable mobility technologies and services, such as Vehicle-to-Grid (V2G).

On 25 March 2020, a contract was signed by the investee, Avvenia, and FCA regarding the identification of possible areas of efficiency recovery, white certificate management and improved sustainability performance, to be partly achieved through the design and installation of monitoring plans.

Energy efficiency initiatives forming part of the memorandum of understanding regarding collaboration between the General Custody of the Sacred Convent of Saint Francis of the Friars Minor Conventual, with the aim of implementing sustainability initiatives meeting shared needs.

As part of the "Fra' Sole" project, which aims to optimise consumption and energy efficiency at the monumental area in Assisi, Avvenia is playing an active role in installation of the DIANA platform. This is key to enabling the conduct of assessments designed to identify any problems and, as a result, potential areas for improvement and to providing quantitative data on the performance of the Convent's electricity consumption and heating needs.

Energy efficiency initiatives forming part of the memorandum of understanding, signed by Terna and Ansaldo Energia on 30 September 2019.

Activities to identify, evaluate and implement joint energy research, development and innovation initiatives are continuing. Avvenia is the Terna Group company that plays an active role regarding energy efficiency issues by providing specific technical support, in the identification of possible areas of efficiency recovery, and in the economic leveraging of services and any ad hoc initiatives.

Giannutri project: After the successful outcome of final testing and the plant's entry into service in February 2020, the plant was handed over to Società Impianti Elettrici S.I.E.. The plant will contribute to meeting demand the island's demand for energy, enabling the island's grid to function and reducing the need for traditional generation to an absolute minimum.

Pantelleria: An agreement between Terna and the Electricity Operator (SMEDE), regarding a contract for the design and support during the application for consents for photovoltaic plants (with capacities of up to 5 MW) and electrochemical storage systems was signed on 27 April 2020. Once the related consents have been obtained, Terna may be commissioned to build the above plants.

High Voltage Metering devices: under the existing framework agreement, in the first half of 2020, RFI issued executive contracts for 37 devices that, once suitably finalised, enabled Terna to begin design work (28 of which formally issued and awaiting approval by RFI) before proceeding to plan their installation. The customer has also made a formal commitment with an attached request to bring forward the procurement of a further 91 devices. Terna has initiated all the necessary steps in the procurement process.

The new energy environment | The Group's strategy | The Group's business | Performance | Annexes

PRIVATE INTERCONNECTORS PURSUANT TO LAW 99/2009

On 28 December 2019, the first module of the 500 kv direct current interconnector between the substations of Villanova (Italy) and Lastva (Montenegro) entered commercial operation. The line has provided interconnection capacity of 600 MW between the two countries, including 200 MW available under the exemption to the private backers pursuant to Law 99/09.

The private portion of the project is owned by Monita Interconnector S.r.l., which the Terna Group sold to private backers on 17 December 2019.

From the date of entry into commercial operation of the asset until the end of the exemption period, Terna will manage routine and special maintenance activities and operate the interconnector for an annual fee to be paid by Monita.

The new direct current interconnection between Piossasco (IT) and Grande Ile (FR) will increase interconnection capacity between Italy and France by 1,200 MW, raising it from approximately the existing 3 GW to over 4 GW.

The Terna Group continued work on construction of the private line, in implementation of Law 99/09 on behalf of Piemonte Savoia S.r.l. (Pi.Sa.), which was transferred to the private backers selected under the same law on 4 July 2017.

With regard to work in progress, out of a total of approximately 95 km of cable for the Italian end of the interconnection, at the end of the first half of 2020, approximately 88 km of civil works had been completed and 77 km of cable laid. In more detail, approximately 37.4 km of civil works had been completed and 30.2 km of cable laid along the upper and lower sections of the A32 motorway operated by SITAF (Società Italiana per il traforo autostradale del Frejus). Around 24.8 km of civil works and approximately 21.6 km of cable had also been completed for the middle section by June 2020. In addition, with regard to the section in the Frejus Tunnel, the civil works had been completed and around 5.9 km of cable laid by June 2020. Finally, on the section not appertaining to Sitaf, the civil works and the laying of cable for the entire section were completed at the end of August 2018.

The main buildings for the Piossasco converter station had been completed by June 2020, as was installation of the principal HV equipment. Installation of equipment for the DC room and valves has also been completed. Finally, production and installation of the converter, converter transformers and key AC and DC equipment has also been completed. Activities to prepare and test the protection system and check the functioning of the converter are in progress.

In order to meet the requirements of the Ministry for Economic of Development, on 15 February 2019, Terna set up the company Pi.Sa. 2 S.r.l. (Pi.Sa. 2) in order to submit, on behalf of the energy-intensive companies, an exemption application for a capacity of 250 MW, with regard to the portion of the second direct current module of the Italy-France interconnection that is within Italian territory, and to build a new interconnector pursuant to Law 99/09. This 250 MW of capacity consists of the remaining 150 MW portion allocated on the French border, and the 100 MW portion initially allocated on the Montenegrin border and transferred to the French border. The exemption application regarding the new interconnector was submitted to the Ministry for Economic Development on 26 July 2019.

The exemption process is still in progress. On February 11, 2020, with Resolution no. 38/2020/R/ EEL, the Energy, Networks and Environment Regulator (ARERA) issued and submitted to the Ministry for Economic Development its approval of an exemption for Pi.Sa.2. In agreement with ARERA, the French regulator, Commission de Régulation de l'Énergie (CRE), also approved the exemption with Resolution no. 2020-027 of 6 February 2020.

Italy - Montenegro

Italy - France

Italy - Austria	The Italy-Austria interconnector (the Reschenpass project) involves construction of a new 220 kv AC interconnection between the Glorenza (Italy) and Nauders (Austria) substations. This will consist of 26 km of underground cable and the necessary upgrade of the domestic grid. The project will increase cross-border interconnection capacity between Italy and Austria by around 300 MW, doubling the currently available capacity.
	On 16 March 2020, the exemption process began with Resia submitting an exemption application to the Ministry for Economic Development. The Ministry for Economic Development subsequently submitted the exemption application to ARERA for its approval, to be issued in agreement with the Austrian regulator E-Control.
	On 16 July 2018, the Terna Group had set up the special purpose vehicle, Resia Interconnector S.r.l., which, on behalf of the private backers, is to prepare and submit a request for exemption from the right of third parties to access capacity of 150 MW, for a period of 10 years.
	On 18 April 2019, Terna received clearance for the laying and operation of the 220 kv cable for the Italian section between the Glorenza substation and Passo Resia, which, together with enlargement of the Glorenza substation and other related works, comprises the Italy-Austria interconnector envisaged pursuant to Law 99/09. As regards the Austrian side, all the consents required to implement the project were granted to the Austrian national grid operator in the second half of 2019.
	In addition, on 1 October 2019, the Ministry for Economic Development issued the decree transferring the consents for the interconnector to Resia.
Italy - Switzerland	The project involves the development of new transmission lines between Italy and Switzerland, with the aim of increasing interconnection capacity between Italy and Switzerland.
Italy - Slovenia	The creation of a direct current line is planned, partly in undersea cable, between the substations of Salgareda (IT) and Bericevo (SL), together with work on upgrading the domestic grids in Italy and in Slovenia. The project is currently awaiting the necessary consents on the Italian side. The expected increase in cross-border capacity of approximately 1 GW will raise the interconnection capacity to more than double the current level.

	TRANSFORMERS - TAMINI GROUP
Order book	Tamini received orders for transformers worth approximately €57.0 million in the first half of 2020, in line with the first half of 2019 and with the targets for 2020. Orders in the Power sector recorded strong growth (up 19%), primarily reflecting increased capital expenditure by European utilities. Service orders in the first six months of the year amount to approximately €5.1 million, down on the first half of 2019. Factory order books are up compared with the end of 2019.
H1 2020 results	Revenue in the first half of 2020 rose compared with the same period of 2019 (up 3%), despite the fact that production at plants slowed in March and April, mainly as a result of Covid-19. In the Power sector, a Phase Shifting Transformer (PST) for northern Europe, 7 power transformers for an Italian utility required to upgrade a power plant, and 7 145 MVA transformers for export to the United States are have been produced or are currently in production, whilst the production of two pieces of equipment, involving the application of smart technology developed by Tamini, is planned.
Vegetable oil transformers	In 2020, in line with the business plan and the growth registered in 2019, Tamini will continue to allocate a significant part of its production to vegetable oil transformers for the power sector. Two 250 MVA vegetable oil transformers were successfully designed, produced and tested at the Legnano plant in the first half of the year. During the year, a further nine green transformers with sizes ranging between 40 MVA and 400 MVA will be produced. Tamini will also produce and test two vegetable oil transformers for industrial use in 2020.

Operating results of Non-regulated Activities

A breakdown of the Terna Group's results from its Non-regulated Activities for the first half of 2020 and the first half of 2019 is shown below8 .

			(€m)
	H1 2020	H1 2019	CHANGE
Revenue from Non-regulated activities	145.6	82.2	63.4
Tamini	46.0	44.8	1.2
Brugg	57.4	-	57.4
Asset-based	15.8	16.8	(1.0)
Competency-based	16.1	15.7	0.4
- High voltage	12.2	10.4	1.8
- Smart grids	3.2	4.8	(1.6)
- Digital services	0.7	0.5	0.2
Private interconnectors	7.5	4.0	3.5
Other	2.8	0.9	1.9
Cost of Non-regulated Activities	105.9	56.0	49.9
EBITDA from Non-regulated Activities	39.7	26.2	13.5

EBITDA from Non-regulated Activities in the first half of 2020 amounts to €39.7 million, up €13.5 million compared with the same period of the previous year, due substantially to revenue resulting from the higher value of the net assets acquired following the purchase of the interest in Brugg Cables compared with the consideration paid, determined on a provisional basis (the gain resulting from a bargain purchase, totalling €14.4 million). The increase in EBITDA also reflects higher revenue from the private interconnector business (Law 99/2009), which is up €2.7 million. These increases were partially offset by the reduced contribution to EBITDA from Tamini (down €3.7 million) as a result of Covid-19.

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 2020-2024.

International Activities

Overseas initiatives of interest to the Terna Group are:

• Concessions: this model envisages the acquisition and operation of transmission systems abroad by taking part in international concession and/or secondary market awards, leveraging the core competencies and experience developed in the international arena;
• Energy solutions: this includes all high value-added non-traditional activities aimed at exporting the experience Terna has in Italy in the fields of energy storage and smart solutions;
• Technical assistance: this involves the provision of consulting and technical assistance services regarding a TSO's core activity, as well as the definition and implementation of regulatory and market frameworks in the local energy context, with a view to exporting and taking advantage of the distinctive expertise acquired in Italy;
• Project Management: Project Management (EPCM) activities enable the Group to leverage its expertise in managing overseas projects and in infrastructure management.

Latin America witnessed a gradual worsening of the situation brought about by Covid-19 during the first half of 2020. At 30 June 2020, a number of countries are still in the throes of a full-blown health emergency.

Progress on projects in Brazil and Peru has been affected by the emergency. In Peru, after suspending work in response to measures introduced by the government, onsite activity is gradually restarting in line with local regulations and the best practices applied by the Terna Group.

INITIATIVES IN PROGRESS IN SOUTH AMERICA

Uruguay	During the first half of 2020, operation of the 213 km Melo-Tacuarembò 500 kv transmission line, which has been in operation since 24 October 2019, continued.
	The line is of major importance for the Uruguayan electricity transmission system, above all as it marks completion of the 500 kv ring and will help to increase the production of electricity from renewable sources.
Brazil	Operation and maintenance of the Santa Maria Transmissora de Energia (SMTE) power line in the State of Rio Grande do Sul and the Santa Lucia Transmissora de Energia (SLTE) power line in the State of Mato Grosso continued in the first half of 2020.
	In addition, the licences required in order to start construction were obtained and engineering work and the acquisition of rights and easements for the SPE Transmissora de Energia Linha Verde II S.A. project continued. This is the first of the two concessions covered by the preliminary agreement with Construtora Quebec signed on 9 April 2019, regarding the construction of a 150 km 500 kv power line.
	Acquisition of the second concession is expected to complete in the third quarter of 2020.
Peru	Work, which began in 2017, on construction of 132 km of new 138 kv lines between Aguaytìa and Pucallpa is continuing.
	Construction activities, which were interrupted by the lockdown imposed by the government in response to the Covid-19 pandemic, are expected to resume in the third quarter of 2020.
	In the meantime, the procurement of transmission line materials has been completed and the project is expected to reach completion in 2021.

Operating results of International Activities

A breakdown of the Terna Group's results from International Activities for the first half of 2020 and the first half of 2019 is shown below9 .

It should be noted that "Revenue from International Activities" directly includes the margin earned on work in progress on overseas concessions. Operating costs and maintenance expenses associated with infrastructure now in operation, together with other operating costs, are classified in the "Cost of International Activities".

			(€m)
	H1 2020	H1 2019	CHANGE
Revenue from International Activities	12.3	10.8	1.5
Cost of International Activities	4.7	5.3	(0.6)
EBITDA from International Activities	7.6	5.5	2.1

EBITDA from International Activities, amounting to €7.6 million for the first half of 2020, is up €2.1 million compared with the same period of the previous year. This primarily reflects the impact of initiatives in Brazil and one-off revenue deriving from penalties applied to suppliers in connection with contract work concluded in October 2019, in connection with work on construction of the "Melo-Tacuarembò" line in Uruguay.

⁹ 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 2020-2024.

As a major transmission and dispatching operator, we invest in skills, technology and innovation to ensure that we are well equipped to plan, develop and maintain the grid (Transmission Operator), and guarantee an electricity service that is balanced, secure and high quality (System Operator). Italy and Terna are at the centre of a system that includes 25 interconnections with neighbouring countries: this gives us a leading role to play in energy integration in Europe and the Mediterranean area. This know-how is, naturally, also applied in our Non-regulated and International activities.

Financial review for
the first half of 2020	64
Terna's shares	75

4 Performance

Financial review for the first half of 2020

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 Interim Report are consistent with those adopted in the consolidated financial statements for the year ended 31 December 2019.

The Group's reclassified income statement

The Terna Group's operating results for the first half of 2020, compared with those for the same period of the previous year, and for the second quarter of 2020 and 2019, are summarised in the following reclassified income statement, obtained by reclassifying amounts in the statutory consolidated income statement.

		Q2						(€m)
2020	2019	CHANGE	% CHANGE		H1 2020	H1 2019	CHANGE	% CHANGE
615.6	560.8	54.8		9.8% TOTAL REVENUE	1,183.1	1,097.8	85.3	7.8%
508.6	504.9	3.7		0.7% - Regulated revenue	1,025.2	1,004.8	20.4	2.0%
4.1	3.0	1.1	36.7%	of which Revenue from construction services performed under concession	8.3	5.0	3.3	66.0%
101.7	49.3	52.4		106.3% - Non-Regulated revenue	145.6	82.2	63.4	77.1%
5.3	6.6	(1.3)		(19.7%) - International revenue	12.3	10.8	1.5	13.9%
173.8	134.8	39.0		28.9% TOTAL OPERATING COSTS	307.1	251.6	55.5	22.1%
76.8	64.4	12.4		19.3% - Personnel expenses	143.4	129.6	13.8	10.6%
39.6	37.7	1.9		5.0% - Cost of services, leases and rentals	76.1	75.0	1.1	1.5%
44.3	22.4	21.9		97.8% - Materials	65.3	29.6	35.7	120.6%
8.8	6.5	2.3		35.4% - Other costs	14.5	10.2	4.3	42.2%
0.2	0.8	(0.6)		(75.0%) - Quality of service	(0.5)	2.2	(2.7)	(122.7%)
4.1	3.0	1.1		36.7% - Cost of construction services performed under concession	8.3	5.0	3.3	66.0%
441.8	426.0	15.8		3.7% GROSS OPERATING PROFIT (EBITDA)	876.0	846.2	29.8	3.5%
150.1	148.3	1.8		1.2% - Amortisation, depreciation and impairment losses	302.3	288.7	13.6	4.7%
291.7	277.7	14.0		5.0% OPERATING PROFIT (EBIT)	573.7	557.5	16.2	2.9%
(19.8)	(22.9)	3.1		(13.5%) - Net financial income/(expenses)	(39.1)	(38.8)	(0.3)	0.8%
271.9	254.8	17.1		6.7% PROFIT/(LOSS) BEFORE TAX	534.6	518.7	15.9	3.1%
78.6	72.4	6.2		8.6% - Income tax expense for the period	155.0	150.3	4.7	3.1%
193.3	182.4	10.9		6.0% PROFIT FOR THE PERIOD	379.6	368.4	11.2	3.0%
2.4	1.8	0.6		33.3% - Profit/(Loss) attributable to non-controlling interests	2.1	1.8	0.3	16.7%
190.9	180.6	10.3	5.7%	PROFIT FOR THE PERIOD ATTRIBUTABLE TO OWNERS OF THE PARENT	377.5	366.6	10.9	3.0%

			(€m)
EBITDA BY SEGMENT	H1 2020	H1 2019	CHANGE
Regulated	828.7	814.5	14.2
Non-regulated	39.7	26.2	13.5
International	7.6	5.5	2.1
EBITDA	876.0	846.2	29.8

Gross operating profit (EBITDA) for the first half amounts to €876 million, up €29.8 million on the €846.2 million of the first half of 2019. This primarily reflects an improvement in EBITDA from Regulated Activities and the recognition of revenue resulting from the higher value of the net assets acquired as a result of the purchase of the interest in Brugg Cables compared with the consideration paid, determined on a provisional basis.

Revenue

			(€m)
REGULATED ACTIVITIES	H1 2020	H1 2019	CHANGE
Tariff revenue	992.7	984.3	8.4
Other regulated revenue	24.2	15.5	8.7
Revenue from construction services performed under concession	8.3	5.0	3.3
TOTAL	1,025.2	1,004.8	20.4

Regulated revenue is up €20.4 million, primarily due to the tariff increase resulting from the increase in RAB, the impact on the quality of service mechanism of the definition of certain events occurring in previous years and the one-off effect of the contribution to regulated revenue resulting from the consolidation of Brugg Cables.

			(€m)
NON-REGULATED ACTIVITIES	H1 2020	H1 2019	CHANGE
Tamini	46.0	44.8	1.2
Brugg	57.4	-	57.4
Services for third parties (Asset-based, Competency-based, other)	34.7	33.4	1.3
Private interconnectors	7.5	4.0	3.5
TOTAL	145.6	82.2	63.4

The increase in Non-Regulated revenue, totalling €63.4 million, primarily reflects revenue the overall contribution resulting from the integration of Brugg Cables and increased revenue from private interconnector projects pursuant to Law 99/2009.

International revenue is up €1.5 million, due primarily to one-off revenue earned above all from penalties applied to suppliers in connection with contract work concluded in October 2019 in Uruguay (up €1.3 million).

Revenue rose €54.8 million in the second quarter of 2020, compared with the same period of the previous year, primarily due to the impact of the integration of Brugg Cable and the other items referred to above. It should be noted that, in the first quarter of 2020, Brugg, acquired on 29 February, was valued at cost.

Costs

Operating costs have increased €55.5 million compared with the first half of the previous year, primarily due to the contribution from Brugg (up €42.4 million), provisions for staff incentive schemes (up €4.6 million) and the performance of the Tamini Group's order book (up €4.9 million), partially offset by lower costs for quality of service (down €2.7 million, reflecting the good performance om the first half of 2020).

In the second quarter of 2020, costs were up on the same period of the previous year (€39 million), due mainly to the impact of the Brugg acquisition and the other items referred to above.

Amortisation, depreciation and impairment losses for the period amount to €302.3 million, an increase of €13.6 million compared with the first half of 2019. This primarily reflects the entry into service of new infrastructure, with particular regard to the Italy-Montenegro interconnector.

Operating profit (EBIT), after amortisation, depreciation and impairment losses, amounts to €573.7 million, compared with the €557.5 million of the first half of 2019 (up 2.9%).

Net financial expenses for the period total €39.1 million and are primarily attributable to the Parent Company (€35.8 million). These expenses are broadly in line with the first half of 2019.

After net financial expenses, profit before tax amounts to €534.6 million, an increase of €15.9 million compared with the same period of 2019 (up 3.1%).

Income tax expense for the period totals €155.0 million and is up €4.7 million (3.1%) compared with the first half of 2019. The tax rate is 29%, in line with the rate for the first half of 2019.

Profit for the period amounts to €379.6 million, up €11.2 million (3.0%) compared with the €368.4 million of the first half of 2019.

Profit for the period attributable to owners of the Parent (after excluding the share attributable to non-controlling interests) amounts to €377.5 million, up €10.9 million (3.0%) compared with the €366.6 million of the first half of 2019.

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 €243.8 million, enabling the Group to finance a part of its investing activities (€428.0 million) and movements in equity (€403.6 million, including €332.3 million in the form of a dividend paid to shareholders), with the remainder financed by net debt, which totals €8,846.4 million, compared with the €8,258.6 million of 2019 (up €587.8 million).

		(€m)
	CASH FLOW H1 2020	CASH FLOW H1 2019
- Profit for the period	379.6	368.4
- Amortisation, depreciation and impairment losses	302.3	288.7
- Net change in provisions	(48.1)	(69.6)
of which contributed by Brugg Cables	11.6	-
- Net losses/(gains) on sale of assets	(3.1)	(1.5)
Operating cash flow	630.7	586.0
- Change in net working capital	(405.5)	(160.0)
of which contributed by Brugg Cables	(45.1)	-
- Other changes in property, plant and equipment and intangible assets	(9.1)	17.1
of which contributed by Brugg Cables	(24.6)	-
- Change in investments	(2.5)	(2.2)
- Change in financial assets	30.2	(16.7)
Cash flow from operating activities	243.8	424.2
- Total capital expenditure	(428.0)	(396.3)
Free cash flow	(184.2)	27.9
- Dividends paid to the Parent Company's shareholders	(332.3)	(310.5)
- Cash flow hedge reserve after taxation and other movements in equity attributable to owners of the Parent	(69.5)	(111.5)
- Other movements in equity attributable to non-controlling interests	(1.8)	-
Change in net debt	(587.8)	(394.1)

CHANGE IN NET DEBT (€m)

The Group's reclassified statement of financial position

The Terna Group's financial position at 30 June 2020 and 31 December 2019 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 2020	AT 31 DECEMBER 2019	CHANGE
Total net non-current assets	15,018.2	14,908.5	109.7
- Intangible assets and goodwill	541.6	542.7	(1.1)
- Property, plant and equipment	14,002.7	13,864.2	138.5
- Financial assets	473.9	501.6	(27.7)
Total net working capital	(1,801.8)	(2,207.8)	406.0
- Net energy-related pass-through payables	(390.4)	(575.8)	185.4
- Net receivables resulting from Regulated Activities	75.4	320.4	(245.0)
- Net trade payables	(471.5)	(899.1)	427.6
- Net tax liabilities	(11.7)	(5.3)	(6.4)
- Other net liabilities	(1,003.6)	(1,048.0)	44.4
Gross invested capital	13,216.4	12,700.7	515.7
Sundry provisions	(162.1)	(210.2)	48.1
NET INVESTED CAPITAL	13,054.3	12,490.5	563.8
Equity attributable to owners of the Parent	4,166.0	4,190.3	(24.3)
Equity attributable to non-controlling interests	41.9	41.6	0.3
Net debt	8,846.4	8,258.6	587.8
TOTAL	13,054.3	12,490.5	563.8

The €109.7 million increase in net non-current assets compared with 31 December 2019 primarily reflects a combination of the following:

• total capital expenditure of €428 million, as described in the paragraph on "Regulated Activities";
• a decrease of €27.7 million in financial assets, broadly due to collection of fees from infrastructure under concession in Brazil (down €37.3 million) and a reduction in the amounts deposited by operators who participate in the capacity market pursuant to Resolution 98/2011/R/eel10, as amended, after definition of each party's committed capacity following the auctions held in November 2019 (down €25 million); partially offset by the purchase, in May 2020, of Italian government bonds ("BTP") with a notional value of €21.2 million, maturing in May 2025 and paying interest at a rate of 1.4% (€21.7 million) and an increase in the Interconnector Guarantee Fund, set up to fund investment in interconnections by art. 32 of Law 99/09 (up €10.4 million);
• amortisation and depreciation during the period, totalling €302.7 million;
• the previously mentioned contribution of assets resulting from the acquisition of Brugg Cables (up €24.6 million);
• other movements during the period, resulting in a decrease of €6.8 million, including grants related to assets (primarily in relation to the re-routing of power lines at the request of third parties); disposals and impairment losses of €5.5 million.

The Terna Group's total capital expenditure during the period, amounting to €428 million, is up 8% compared with the €396.3 million of the same period of 2019.

¹⁰ The regulations regarding the system of remuneration for availability of production capacity was approved by a Ministerial Decree of 28 June 2019. The deposits were paid by the energy-intensive operators after the competition held by Terna on 6 and 28 November 2019. These provide a guarantee for the entire capacity market from 2022, with the aim of ensuring the achievement and maintenance of the adequacy of the national electricity system, in order to structurally fulfil expected electricity consumption and the power reserve margins needed to meet predetermined levels of safety and quality of service.

The following chart shows key capital expenditure on the NTG in the first half of 2020:

KEY CAPITAL EXPENDITUTRE ON THE RTN* (€m)

Synchronous compensators	36.6
Functional separations	18.8
Fibre for the Grid	12.4
Italy-France interconnector	9.6
Reorganisation Upper Bellunese area	7.9
Paternò-Pantano-Priolo	7.1
Rationalisation of Naples grid	6.9
Agnosene substation and connections	6.8
380kV Brindisi Pignicelle-Brindisi cables	6.4
Upgrade of Foggia-Benevento area grid	5.3
Sorrentine peninsula interconnection	2.6

* Amounts include financial expenses.

Net working capital of -€1,801.8 million resulted in a cash outflow of €406.0 million in the period, compared with 31 December 2019. This reflects the combined effect of:

Cash outflows

• a reduction of €427.6 million in net trade payables, largely due to payments made in relation to the greater volume of capital expenditure towards the end of the previous year;
• a decrease in net energy-related pass-through payables of €185.4 million compared with the end of 2019, which, primarily reflecting the combined effect of:
• an increase in net receivables (€410.5 million) linked to an increase in the amount receivable (the uplift) to cover the cost of dispatching services, reflecting a significant rise, from March, in the cost of Dispatching Services Market (DSM) transactions11 (an increase in payables at the end of the first half of approximately €119 million), partially offset by a reduction in the cost linked to the virtual interconnection12 (a reduction in the amount payable at 30 June 2020 of €14.8 million);

partially offset by

• an increase in net payables relating to essential plants for the security of the electricity system - UESS (€99 million) and in capacity payments due (€26.6 million), reflecting items related to capacity provided during the period after payments made in the first half13;
• the reduction in other net liabilities of €44.4 million, primarily due to the contribution from Brugg Cable (€32.1 million, essentially consisting of inventories), the change in guarantee deposits received from operators participating in the above-mentioned capacity market and electricity market operators to guarantee the obligations undertaken regarding dispatching and virtual interconnection contracts (down €25 million and up €6 million, respectively).

¹¹ The reduction in electricity consumption due to the restrictions introduced in response to the Covid-19 health emergency has led to an increase in selections needed to resolve localised technical limitations and ensure the security of the system.

¹² The entry into service of the Italy-Montenegro interconnector at the end of 2019.

¹³ ARERA ordered payments to the owners of essential plants via resolutions 563/2019 and 35-44-108-109-120- 133-146-154/2020 and capacity payments with Resolution 289/2019.

Cash inflows

• a reduction in net receivables resulting from Regulated Activities of €245.0 million, broadly reflecting the collection of receivables in the form of transmission and dispatching service charges factored on a non-recourse basis, originally falling due in July and August (totalling €253.1 million); this movement was partially offset by recognition of amounts due in relation to estimate RENS bonuses for years prior to the first half of 2020 (€10.1 million);
• an increase of €6.4 million in tax liabilities, mainly reflecting the higher amount of income tax payable for the period, after payments on account in the first half and the settlement of tax due for the previous year (up €21.9 million), offset by an increase in net refundable VAT of €14.1 million.

Gross invested capital thus amounts to €13,216.4 million, marking an increase of €515.7 million compared with the previous year.

Sundry provisions are down €48.1 million, primarily due to:

• net provisions for net deferred tax assets (up €34 million), primarily due to the effect on taxation of movements in derivative financial instruments held by the Group, amortisation and depreciation and movements in provisions for risks and charges;
• net uses of provisions for amounts payable to personnel (down €15.5 million) and to cover the cost of service quality (down €3 million).

Net invested capital of €13,054.3 million is up €563.8 million compared with 31 December 2019 and is financed by equity attributable to owners of the Parent, totalling €4,166.0 million (compared with €4,190.3 million at 31 December 2019), equity attributable to non-controlling interests of €41.9 million (€41.6 million at 31 December 2019) and net debt of €8,846.4 million (up €587.8 million compared with the €8,258.6 million of 31 December 2019).

Debt

The Terna Group's financial management is based on an approach that aims to maximise efficiency and achieve and maintain a solid financial structure, whilst adopting a highly prudent stance towards mitigation of the potential financial risks.

The key aspects of the Group's financial policy are diversification of the sources of funding, the balance between short and medium/long-term forms of debt and the proactive management of debt.

Gross debt at 30 June 2020 amounts to approximately €11 billion, consisting of €8 billion in the form of bond issues and €3 billion in bank borrowings. The average term to maturity of debt, which is almost all fixed rate, is approximately 4.5 years.

Sustainable finance Fully in line with Terna's strategy, which aims to combine investment and sustainability to drive growth and value creation, it is Terna's ambition to play a leading role in the sustainable finance market. This strategy has been confirmed in 2020: on 17 July 2020, Terna launched a green bond issue for institutional investors, with a nominal value of €500 million. The issue received a warm welcome from the market, with applications totalling over €2 billion, meaning that the issue was four time oversubscribed. Forming part of the Company's €8,000,000,000 Euro Medium Term Notes (EMTN) Programme, the issue attracted highly quality investors from all over the world. The green bond will have a term of twelve years and will mature on 24 July 2032. The issue was priced at 99.623%, with a spread of 90 basis points with respect to the midswap rate. The bond pays a coupon of 0.75%. The effective coupon will be 0.78%, the lowest ever achieved by an Italian corporate issuer for either green bonds or, in general, for a 10-year issue.

The green bonds issued by Terna in the last two years now amount to €2 billion: in July 2018, Terna successfully launched its first green bond worth €750 million, following, in 2019, by the launch of two further green bonds amounting to €750 million.

The green issues are used to finance or refinance "Eligible Green Projects". These are projects producing environmental benefits that meet certain criteria (the use of the issue proceeds, the process of selecting and assessing projects, management of the issue proceeds and reporting) listed in the "Green Bond Framework", published by Terna in compliance with the "Green Bond Principles 2018" drawn up by the ICMA (International Capital Market Association). Specifically, the net proceeds from the issues will be used to finance:

• projects that aim to increase renewable energy production for example, infrastructure enabling renewable energy plants to be connected to the national grid or that allow for a larger volume of renewable energy to be injected into the grid;
• projects designed to cut carbon emissions by reducing grid losses for example, infrastructure designed to boost the efficiency of the electricity transmission grid;
• projects that aim to reduce soil use and protect biodiversity.

Terna also has access to two ESG-linked Revolving Credit Facilities: these facilities, amounting to €2.65 billion, apply a mechanism based on a series of bonuses and penalties linked to the achievement of specific environmental, social and governance ("ESG") objectives.

Key events relating to finance during the first half of 2020 are described below:

• on 29 June 2020, in implementation of the authority granted by the Annual General Meeting of 18 May 2020 and the subsequent Board of Directors' resolution of 17 June, the Company launched an ESG-linked share buyback programme at a total cost of up to €9.5 million and involving up to a maximum of 1.77 million of the Company's ordinary shares (the "Programme"). This number of shares represents approximately 0.09% of Terna's share capital. Buybacks under the Programme will be carried out by 29 August 2020. The Programme involves a mechanism based on bonuses and penalties linked to the Company's achievement of specific environmental, social and governance objectives. This mechanism will enable the Company to support reforestation projects and the creation of green spaces around Italy, consolidating the key role played by sustainability in driving the creation of value for all our stakeholders. The Programme is also linked to the Performance Share Plan 2020-2023 for the management of Terna and/or its subsidiaries pursuant to art. 2359 of the Italian Civil Code, approved by the Annual General Meeting of 18 May 2020, and/or other share-based incentive plans for Terna's Directors and/or employees and/or those of subsidiaries and/or associates (further information is provided in the paragraph on "Sustainable finance"). At 30 June 2010, the Parent Company has purchased 82,496 ordinary shares at a cost of €502,497;
• on 9 June 2020, Terna renewed its €8,000,000,000 Euro Medium Term Notes (EMTN) Programme. The programme has been assigned ratings of "BBB+/A-2" by S&P, "(P)Baa2 /(P) P-2" by Moody's, "BBB+" by Fitch and "A-/S-1" by Scope.

The Group's net debt at 30 June 2020 amounts to €8,846.4 million, up €587.8 million compared with 31 December 2019.

			(€m)
NET DEBT (BY TERM TO MATURITY)	30 JUNE 2020	31 DECEMBER 2019	CHANGE
Total medium/long-term debt	8,447.5	9,596.1	(1,148.6)
- Bond issues	6,508.6	7,757.3	(1,248.7)
- Borrowings	1,790.6	1,723.4	67.2
- Derivative financial instruments	148.3	115.4	32.9
Total short-term debt/ (funds)	398.9	(1,337.5)	1,736.4
- Bond issues (current portions)	1,280.9	-	1,280.9
- Short-term borrowings	666.6	25.0	641.6
- Borrowings (current portions)	121.6	126.5	(4.9)
- Other current financial liabilities. net	70.3	81.8	(11.5)
- Derivative financial instruments	-	(0.1)	0.1
- Financial assets	(511.4)	(513.3)	1.9
- Cash and cash equivalents	(1,229.1)	(1,057.4)	(171.7)
Total net debt	8,846.4	8,258.6	587.8
NET DEBT (BY TYPE OF INSTRUMENT)
- Bond issues	7,789.5	7,757.3	32.2
- Borrowings	1,912.2	1,849.9	62.3
- Short-term borrowings	666.6	25.0	641.6
- Derivative financial instruments	148.3	115.3	33.0
- Other financial liabilities. net	70.3	81.8	(11.5)
GROSS DEBT	10,586.9	9,829.3	757.6
- Financial assets	(511.4)	(513.3)	1.9
- Cash and cash equivalents	(1,229.1)	(1,057.4)	(171.7)
Total net debt	8,846.4	8,258.6	587.8

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

• an increase in bond issues (up €32.2 million, primarily due to the bond issue carried out by the Brazilian subsidiary Linha Verde II. The change also reflects the adjustment of the amortised cost of all the bonds in issue;
• an increase in borrowings (up €62.3 million), primarily due to the drawdown of the first tranche (€147 million) of the EIB loan of €490 million agreed on 19 November 2019 and the amortisation of existing borrowings;
• an increase in short-term borrowings and other financial liabilities (up €630.1 million) primarily due to the Parent Company's use of short-term credit facilities (up €639.6 million) and the settlement of interest on outstanding borrowings and the related hedges (down €11.5 million);
• an increase in the fair value of derivative financial instruments (up €33.0 million), primarily due to movements in market interest rates;
• a decrease in financial assets (down €1.9 million), primarily due to a change in the price of Italian government securities held in the portfolio;
• an increase in cash and cash equivalents (up €171.7 million). Cash amounts to €1,229.1 million at 30 June 2020, including €915.1 million invested in short-term, readily convertible deposits and €314.0 million held in bank current accounts and in the form of cash in hand.

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 first half of 2020 and the corresponding amounts for the Parent Company is shown below.

		(€m)
	PROFIT FOR H1 2020	EQUITY AT 30 JUNE 2020
Parent Company's financial statements	333.0	3,930.7
Profit and equity contributed by Group companies:
- Group companies - Regulated Activities	41.0	216.0
- Group companies - Non-regulated Activities	1.9	55.7
- Group companies - International Activities	1.5	(31.7)
Companies accounted for using the equity method	2.2	37.2
Total consolidated financial statements	379.6	4,207.9
Share attributable to non-controlling interests - Non-regulated Activities	2.1	41.9
Terna Group's consolidated financial statements	377.5	4,166.0

Terna's shares

Terna S.p.A. 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 2020, the share price has risen 260% (a capital gain), providing a Total Shareholder Return (TSR14) of 770%, ahead of both the Italian market (the FTSE MIB, up 24%) and the relevant European sector index (DJ Stoxx Utilities), which is up 239%.

Europe's leading stock markets registered negative performances during the first half of 2020, due to the health emergency linked to the spread of Covid-19. Milan fell 17.6%, Frankfurt and Paris were down 9.4% and 17.4%, respectively, whilst London was down 18.2% and Madrid 24.3%.

Performance of Terna's shares

In contrast, Terna's shares ended the first half in positive territory (rising 2.8%) at €6.118 per share. The daily average volume traded during the period amounted to approximately 7.0 million. It should be noted that on 19 February 2020, the share price rose to a record high of €6.786. The ex-dividend date for the final dividend for 2019, amounting to 16.53 euro cents per share, was on 22 June.

PERFORMANCE OF TERNA'S SHARES (Price between 1 January and 30 June 2020)

¹⁴ Total Shareholder Return (TSR): total return on an equity investment, calculated as the sum of:

I. capital gain: the change in the share price (difference between the price at the end and at the beginning of the relevant period) as a percentage of the price at the beginning of the period;

II. reinvested dividends: the ratio between dividends per share paid out during the period and the share price at the beginning of the period. Dividends are assumed to have been reinvested in the shares.

TERNA'S SHARES AND THE FTSE MIB (Price between 1 January and 30 June 2020)

Source: Bloomberg

TOTAL SHAREHOLDER RETURN DEL TITOLO TERNA E DEGLI INDICI FTSE MIB E DJ STOXX UTILITIES (From the flotation to the end of June 2020) (%)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Bloomberg

INTERIM REPORT ON OPERATIONS FOR THE SIX MONTHS ENDED 30 JUNE 2020

The new energy environment | The Group's strategy | The Group's business | Performance | Annexes

WEIGHTING OF TERNA'S SHARES	H1 2020	H1 2019
> on the FTSE MIB	2.74%	2.33%

Source: Borsa Italiana

RATINGS

SHORT-TERM	MEDIUM/ LONG-TERM	OUTLOOK
A-2	BBB+	Negative
Prime-2	Baa2	Stable
F2	BBB+	Stable
S-1	A-	Stable
A-2	BBB	Negative
Prime-3	Baa3	Stable
F3	BBB-	Stable
S-2	BBB+	Negative

Terna's rating did not undergo any changes in the first half. Following the presentation of the 2020-2024 Strategic Plan, which envisages investment of €7.3 billion in the Italian electricity grid, the agencies Standard & Poor's, Moody's, Fitch ratings (Fitch) and Scope Rating (Scope) confirmed a long-term issuer default rating (IDR) of "BBB+", "Baa2", "BBB+" and "A-" respectively. All the Company's long-term ratings are one notch above the Italian state, with the exception of Fitch, whose rating is currently two notches above the one assigned to the Italian state. On 10 July, Fitch revised its rating of the Italian state, whilst leaving Terna's rating unchanged.

Among the positive factors impacting the Company's financial soundness are the reliability of the regulatory environment, the Company's robust cash flow generation and its reliability in achieving its objectives.

Regulatory framework and other information	80
Changes in the dimensions of the NTG	85
Alternative performance measures (APMs)	87
Reconciliations	88

5 Annexes

Regulatory framework and other information

Summary of the principal legislative measures

The principal legislative developments during the first half include the Budget Law (Law 160/2019), the tax wedge law decree 5/2020 and measures adopted during the Covid-19 emergency, above all Law Decree 18/20, Law Decree 23/2020 and Law Decree 34/2020.

PRINCIPAL LEGISLATIVE MEASURES IN THE FIRST HALF OF 2020

Budget Law Law 160 of 27 December 2019, containing the "Budget Law for the 2020 financial year and the long-term budget for the three-year period 2020-2022" contains the following measures of interest:

• the obligation, on the re-election of the boards of directors and boards of statutory auditors of listed companies, to ensure that at least two-fifths of the members elected must be of the least represented gender;
• for the 2019 tax year, in place of the previous IRES relief, the restoration of Aiuto per la Crescita Economica tax relief, allowing companies to deduct a notional return on new equity for the purposes of IRES;
• a freeze on the increase in ordinary rates of VAT and a reduction in rates for 2020, and a partial freeze on increases in rates for future years;
• the application, from 2020, of new rules governing local property taxes, which will result in the combination of TASI with IMU;
• the deductibility of 60% of the cost of IMU from income tax (previously 50%) for the 2020 and 2021 tax years, with 100% deductible in the 2022 tax year;
• reform of tax relief on investment in research and development: for the 2020 tax year, investment in research and development, in the ecological transition and in technological innovation 4.0 and in other innovations will qualify for a tax credit to be calculated on the entire amount of admissible expenditure, rather solely on the increase;
• a reform of the so-called Industry 4.0 measures (accelerated and hyper depreciation): in the event of purchases completed in 2020 (or by 30 June 2021, provided that by 31 December 2020 the order has been accepted and a 20% prepayment has been made), of new operating assets, in place of an increased rate of depreciation, companies will qualify for a tax credit. Operating assets with rates of depreciation below 6.5% and motor vehicles are excluded, as are operating assets due to be used at premises located outside Italy. The tax credit, which can only be offset against taxes payable, is determined on the following basis:
• 40% on expenditure of up to €2.5 million and 20% on the portion of expenditure above €2.5 million, up to a maximum for admissible costs of €10 million, for purchases of new innovative operating assets falling within the categories previously qualifying for hyper depreciation (thus, those shown in Annex A to the Budget Law for 2017); - 15% on admissible expenditure of €700 thousand, in the case of intangible assets falling within the categories previously qualifying for hyper depreciation (thus, those shown in Annex B to the Budget Law for 2017);
• 6% on expenditure of up to €2 million, in the case of operating assets not falling within the categories of operating asset previously qualifying for hyper depreciation;
• authorisation for 2022 to spend €3.7 million on work on the re-routing of power lines forming part of the national transmission grid between Cislavo-Dalmine and Bovisio-Cislago, in the municipalities of Barlassina, Cesano Maderno and Seveso.

Law Decree 5 of 5 February 2020, converted into Law 21 of 2 April 2020, containing "Urgent measures to reduce employment taxes", provides for payment, in return for service provided by workers between 1 July and 31 December, of an additional sum of €600 not to be included in taxable income (€100 a month) if the worker's total annual pay does not exceed €28 thousand.

In the case of income above this threshold, the legislation provides for a different method of deduction, based on the following sums:

• €480 (€80 a month), increased by the result of multiplying €120 by the sum corresponding with the ratio of €35 thousand, less total pay, to €7 thousand, if total pay is above €28 thousand but not €35 thousand;
• €480 (€80 a month), multiplied by the ratio of €40 thousand, less total pay, to €5 thousand, if total pay is above €35 thousand but not €40 thousand.

The government has adopted a series of measures designed to combat the health emergency, including:

• the suspension of deadlines for administrative proceedings pending as of 23 February 2020, or beginning after that date, through to 15 May 2020 (Law Decree 18/20 and Law Decree 23/20);
• extension of the validity of documents and certificates expiring between 31 January and 31 July 2020 until the ninetieth day after cessation of the state of emergency, indicated as 31 July 2020 by the Cabinet Office determination of 31 January 2020 (Law Decree 18/20);
• extension of the deadline for calling annual general meetings of shareholders to 180 days, rather than 120 days, from the date of the end of the financial year (Law Decree 18/20);
• the adoption of protocols (signed on 14 March 2020 and amended on 24 April 2020) for safety at work and at operational sites, requiring employers to adopt measures such as the sanitation of premises and the provision of personal protective equipment to employees; the protocol on safety at places of work also recommends the adoption of agile forms of working, where compatible with the work being done;
• the deduction from tax of 60% of the expenses incurred, up to €60 thousand, in order to meet the occupational safety requirements (Law Decree 18/20 and Law Decree 34/20):
• the option, during the health emergency, of introducing agile working, even in the absence of the individual agreements provided for in existing legislation, the right to adopt this form of working for workers with children under the age of 14, the grant of parental leave, on half pay, for 30 days during the emergency and increases in the leave provided for in Law 104/92 during this same period (Law Decree 18/20 and Law Decree 34/20);
• exemption from the obligation to pay the balance of IRAP due for 2019 and the payment on account of IRAP for 2020 for companies with revenue of up to €250 million in 2019 (Law Decree 34/20);
• an increase from €700 thousand to €1 million in the annual limit on credits that may be offset against tax (Law Decree 34/20);
• repeal of the legislation increasing rates of VAT from 2021 (Law Decree 34/20).

Tax wedge measures

Measures to combat the health emergency and to promote recovery (Law Decree 18/20, converted into Law 27/20; law Decree 23/20, converted into Law 40/20, Law Decree 34/20)

Resolutions of the Italian Regulatory Authority for Energy, Networks and the Environment

ARERA resolution	CONTENT
20/2020/R/eel	Approval of the request for an exemption from compliance with the minimum level of capacity (the 70% rule) submitted by Terna S.p.A. with regard to the GRIT region.
21/2020/R/eel	Approval of the rules for the explicit allocation of transmission capacity on a long-term, daily and intra-day basis for cases to which the harmonised rules at European level do not apply.
35/2020/R/eel	Measures regarding the Montemartini plan as an essential production plant for 2016.
36/2020/R/eel	Compliance review of proposed changes to the Code for Transmission, Dispatching and Grid Development and Security for the purposes of implementing measures regarding data exchange, assessment of adequacy and unavailability planning introduced by Regulation (EU) 2017/1485.
37/2020/R/eel	Measures relating to changes to the process of terminating dispatching and transmission agreements and activating supplier of last resort services in the electricity sector.
38/2020/R/eel	Approval of the document "Opinion on the Piemonte Savoia 2 (Pi.Sa.2) exemption application".
66/2020/R/eel	Revision of the measures introduced by the regulator (the Autorità di Regolazione per Energia Reti e Ambiente) regarding electricity production, simple systems for production and consumption, closed distribution systems and settlements.
67/2020/I/eel	Measures regarding the essential 132 kv Rosen production plant for 2017.
70/2020/I/eel	Congestion revenue at borders: report pursuant to article 19, paragraph 5 of Regulation (EU) 2019/943.
87/2020/R/eel	Determinations on the variable cost allowed for A2A Energiefuture S.P.A.'s San Filippo del Mela production plants.
91/2020/R/eel	Compliance review of the updated versions of the agreement between Gestore dei mercati energetici S.p.A. and Terna S.p.A. and the agreement between Gestore dei mercati energetici S.p.A. and the Slovenian-registered company, BSP regional energy exchange LLC.
99/2020/R/eel	Revision of the fee covering the cost of paying for the load interruptibility service.
108/2020/R/eel	Determinations regarding Enel Produzione S.p.A. production plants that are essential for the security of geographical areas served by grids with a third-party connection obligation, not interconnected with the national transmission grid.
109/2020/R/eel	Determinations regarding the Enel Produzione S.p.A.'s Anapo production plant, essential in accordance with Law Decree 91/14, for 2015.
121/2020/R/eel	Transitional assessment of effective imbalances during the Covid-19 health emergency.

CONTENT	ARERA resolution
Balance of the fee to cover the costs of the essential production plant operated by Biopower Sardegna for the period of application of the cost recovery regime for 2016.	146/2020/R/eel
Recognition of the costs incurrent by Terna S.p.A. in 2018 in carrying out the activities involved in managing and developing the unique database of production plants (GAUDÌ).	152/2020/R/eel
Approval of the changes, drawn up by Terna S.p.A., to the regulation governing the pilot project for the participation of mixed virtual power plants in the dispatching services market (DSM), in accordance with ARERA Resolution 300/2017/R/eel.	153/2020/R/eel
Determinations regarding Enel Produzione S.p.A. production plants that are essential for the security of geographical areas served by grids with a third-party connection obligation.	154/2020/R/eel
Determinations on the variable cost allowed for Fiumesanto di EP Produzione's production plants.	169/2020/R/eel
Decision pursuant to Regulation (EU) 347/2013 regarding the allocation of capital expenditure for the project of common interest 3.27, consisting of the interconnector between Sicily and Tunisia.	176/2020/R/eel
Approval of the regulation, drawn up by Terna S.p.A., in accordance with ARERA Resolution 300/2017/R/eel, in relation to the pilot project for provision of the fast reserve service.	200/2020/R/eel
Approval of the procedures in the Load Frequency Control Block operational agreement for Italy in accordance with Regulation (EU) 2017/1485 (SO GL).	202/2020/R/eel
Measures applicable to Terna S.p.A. in relation to receivables that are non-collectible due to the insolvency of dispatching users.	206/2020/R/eel
Confirmation of the transitional assessment of effective imbalances caused by the Covid-19 health emergency.	207/2020/R/eel
Approval of the proposed settlement rules for unintended energy exchanges, energy exchanged in the frequency containment process and due to ramping restrictions, developed in accordance with Regulation (EU) 2017/2195 (the Balancing Regulation).	210/2020/R/eel
Approval of the final costs incurred by Gestore dei Mercati Energetici in 2019 for Single Intra-Day Coupling.	234/2020/R/eel

Other information

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

Treasury shares

In implementation of the programme described in the section, "Debt", the Parent Company has launched the share buyback programme linked to the Performance Share Plan 2020-2023. At 10 July, 447,966 ordinary shares (equal to 0.022% of the share capital) had been purchased, with 82,496 having been purchased at 30 June 2020, as announced in the press releases published on 6 and 13 July 2020.

The Parent Company does not directly or indirectly hold any shares in CDP Reti S.p.A. or Cassa Depositi e Prestiti S.p.A., nor has it purchased or sold any such shares during the first six months of 2020.

Related party transactions

Given that Terna S.p.A. is subject to the de facto control of Cassa Depositi e Prestiti S.p.A., a situation ascertained in 2007, related party transactions entered into by Terna during the first six months of 2020 include transactions with associates and employee pension funds (Fondenel and Fopen), as well as transactions with Cassa Depositi e Prestiti itself, with CDP Reti S.p.A. 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 2020 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 201915.

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 transactions16 were carried out in the first six months of 2019, nor were any transactions subject to the reporting requirements applicable in the event of exemptions applied in accordance with the relevant regulations17.

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.

¹⁵ 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 2019. In addition, in implementation of CONSOB Resolution 18049 of 23 December 2011, which came into effect from 31 December 2011, disclosures regarding the remuneration of "members of management and supervisory bodies and general managers", and their shareholdings in the Company, are included in the annual Remuneration Report published in accordance with the law.

¹⁶ 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).

¹⁷ 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".

Changes to the dimensions of the NTG

Below are details of changes in the dimensions of the infrastructure available for use and in service with respect to the situation at 31 December 2019.

DETAILS OF ELECTRICITY SUBSTATIONS OWNED BY THE TERNA GROUP*

	UNIT OF MEASUREMENT	30 JUNE 2020	31 DECEMBER 2019	CHANGE	% CHANGE
380 kV
Substations	no.	165	165	-	-
Power transformed	MVA	117,504	117,504	-	-
220 kv
Substations	no.	149	149	-	-
Power transformed	MVA	32,044	31,996	48	0.15
Lower voltages (≤150 kV)
Substations	no.	574	574	-	-
Power transformed	MVA	3,924	3,884	40	1.03
Total
Substations	no.	888	888	-	-
Power transformed	MVA	153,472	153,384	88	0.06

* 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.

DETAILS OF POWER LINES OWNED BY THE TERNA GROUP*

	UNIT OF MEASUREMENT	30 JUNE 2020	31 DECEMBER 2019	CHANGE	% CHANGE
380 kv
Length of circuits	km	12,852	12,854	(2)	(0.02)
Length of lines	km	11,671	11,673	(2)	(0.02)
220 kv
Length of circuits	km	11,839	11,845	(7)	(0.06)
Length of lines	km	9,469	9,473	(4)	(0.04)
Lower voltages (≤150 kV)
Length of circuits	km	50,038	49,969	69	0.14
Length of lines	km	46,808	46,761	47	0.10
Total
Length of circuits	km	74,728	74,669	60	0.08
overhead	km	70,869	70,815	54	0.08
underground cables	km	2,097	2,091	5	0.26
submarine cables	km	1,762	1,762	-	-
Length of lines	km	67,947	67,907	40	0.06
overhead	km	64,088	64,053	35	0.05
underground cables	km	2,097	2,091	5	0.26
submarine cables	km	1,762	1,762	-	-
Incidence of direct current connections (200 - 380 - 500 kv)
Circuits	km	2,435	2,435
	% of total %	3.26	3.26
Lines	km	2,115	2,115
	% of total %	3.11	3.11

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

PRINCIPAL CHANGES IN THE SIZE OF THE TERNA GROUP'S INFRASTRUCTURE

Substations

Existing infrastructure:

• commissioning of 7 new line bays for the substations at Santa Valburga (1 220 kv bay), Rome North, Benevento III, Troia 380, Pontelandolfo, Chiaramonte Gulfi and Ragusa (1 150 kV bay each);
• commissioning of 1 new 150 kV machine bay for the Rome North substation;
• commissioning of 1 new 150 kV parallel bay for the Chiaramonte Gulfi substation.

Transformers

1 new 150/20 kV 40 MVA transformer for the Rome North substation entered service and the following further changes took place:

• replacement of 1 220/60 kV 75 MVA transformer with another 100 MVA transformer at the Vicenza Monteviale substation;
• replacement of 1 220/20 kV 40 MVA transformer with another 63 MVA transformer at the Conegliano substation.

Power lines

• construction of the new 150 kV Benevento III Pontelandolfo line (15.3 km of overhead line);
• commissioning of the Chiaramonte Gulfi Ragusa 1 line (22.5 km of overhead line), previously combined with another line in operation;
• sale to third parties of the Cardano Bolzano Steelworks line, so-called Cons. HV Colle 60 kV (5.5 km of overhead line);
• construction of variants, rigid derivations, re-routings and/or changes to grid distribution adding a total of 1 line and 2.5 km of circuit, including: the addition of 1 line with 0.2 km at 220 kV and 2.3 km at 150 kV;
• demolition and/or retirement of 3 lines amounting to 8.1 km of circuit: Sarmato La Spezia at 220 kV (limited to the overhead section between Sarmato and pylon 256, equal to 3.0 km), Casalnuovo - Casoria 2 at 220 V (limited to the overseas section between pylon 18/5A and pylon 21/A1, equal to 4.1 km) and Sesto Fiorentino - Pontassieve at 132 kv (limited to the overhead section between Sesto Fiorentino and pylon 59, equal to 1.1 km).

Alternative performance measures (APMs)

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

INDICATOR	DESCRIPTION
OPERATING RESULTS
Operating profit/(loss) - EBIT	This 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	This is an indicator of operating performance obtained by adding "Amortisation, depreciation and impairment losses" to "Operating profit/(loss) (EBIT)".
TAX RATE	This is the amount of tax paid as a proportion of pre-tax profit and is based on the ratio of "Income tax expense" to "Profit/(Loss) before tax".
FINANCIAL POSITION
Net working capital	This 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	This 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	This is calculated by deducting "Sundry provisions" from "Gross invested capital".
CASH FLOW
Net debt	This 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	This 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	1,025.2	"Revenue from sales and services", totalling €1,162.1 million,
Non-Regulated revenue	145.6	"Other revenue and income", totalling €33.6 million, after the cost of International Activities, " Raw and consumable materials
Revenue from International Activities	12.3	used", totalling €12.4 million and "Services", totalling €0.2 million
Personnel expenses	143.4	"Personnel expenses" after the cost of construction services performed under concession in Italy in accordance with IFRIC 12 (€2.7 million)
Cost of services, leases and rentals	76.1	"Services" after the cost of construction services performed under concession in Italy in accordance with IFRIC 12 (€4.2 million) and the cost of International Activities (€0.2 million)
Materials	65.3	"Raw and consumable materials used" after the cost of construction services performed under concession in Italy in accordance with IFRIC 12 (€1.4 million) and the cost of International Activities (€12.4 million)
Other costs	14.5
Quality of service	(0.5)	"Other operating costs"
Cost of construction	2.7	"Personnel expenses"
services performed under	4.2	"Services"
concession	1.4	"Raw and consumable materials used"
Net financial income/ (expenses)	(39.1)	Points 1, 2 and 3 of letter C - "Financial income and expenses"

THE GROUP'S RECLASSIFIED STATEMENT OF FINANCIAL POSITION	€M	CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Financial assets	473.9	"Investment accounted for using the equity method", "Other non-current assets" and "Non-current financial assets", after the value of fair value hedges (€85.5 million)
Net energy-related pass-through payables	(390.4)	"Trade receivables" relating to the value of energy-related pass-through receivables (€1,148.2 million) and "Trade payables" relating to the value of energy-related pass through payables (€1,538.6 million)
Net receivables resulting from Regulated Activities	75.4	"Trade receivables" relating to the value of receivables resulting from Regulated Activities (€112.0 million) and "Trade payables" relating to the value of payables resulting from Regulated Activities (€36.6 million)
Net trade payables	(471.5)	"Trade payables" after the value of energy-related pass through payables (€1,538.6 million) and payables resulting from Regulated Activities (€36.6 million) and "Trade receivables" after the value of energy-related pass-through receivables (€1,148.2 million) and the value of receivables resulting from Regulated Activities (€112.0 million)
Net tax liabilities	(11.7)	"Tax assets", "Other current assets" relating to the value of other tax assets (€36.5 million), "Other current liabilities" relating to the value of other tax liabilities (€19.7 million) and "Tax liabilities"
Other liabilities, net	(1,003.6)	"Other non-current liabilities", "Other current liabilities" after other tax liabilities (€19.7 million), "Inventories" and "Other current assets" after other tax assets (€36.5 million)
Sundry provisions	(162.1)	"Employee benefits", "Provisions for risks and charges" and "Deferred tax assets"
Net debt	8,846.4	"Long-term borrowings", "Current portion of long-term borrowings", "Non-current financial liabilities", "Short term borrowings", "Cash and cash equivalents", "Current financial assets" and "Current financial liabilities" and "Non-current financial assets" relating to the value of fair value hedges (€85.5 million)

THE GROUP'S ANALYSIS OF NET DEBT	€M	CONSOLIDATED STATEMENT OF FINANCIAL POSITION
"Bond issues" and "Borrowings"	9,701.7	Corresponds with "Long-term borrowings" and "Current portions of long-term borrowings"
"Derivative financial instruments" - medium- and long-term	148.3	Corresponds with "Non-current financial liabilities" and "Non-current financial assets" relating to the value of fair value hedges (€85.5 million)
Other financial liabilities, net	70.3	Corresponds with "Current financial assets" relating to the value of accrued financial income (€15.4 million) and "Current financial liabilities"
Financial assets	(511.4)	Corresponds with "Current financial assets" relating to the value of government securities (€511.4 million)

RECONCILIATION OF THE TERNA GROUP'S CASH FLOW

				(€m)
	CASH FLOW H1 2020	RECONCILIATION WITH FINANCIAL STATEMENTS	CASH FLOW H1 2019	RECONCILIATION WITH FINANCIAL STATEMENTS
- Profit for the period	379.6		368.4
- Amortisation, depreciation and impairment losses	302.3		288.7
- Net change in provisions	(48.1)		(69.6)
Employee benefits		0.1		5.7
Provisions for risks and charges		(14.2)		(30.8)
Deferred tax assets		(34.0)		(44.5)
Deferred tax liabilities		-		-
- Net losses/(gains) on sale of assets(1)	(3.1)		(1.5)
Operating cash flow	630.7		586.0
- Change in net working capital:	(405.5)		(160.0)
Inventories		(25.5)		(7.7)
Trade receivables		(170.0)		(415.7)
Income tax assets		(2.5)		-
Other current assets		(28.8)		15.3
Trade payables		(197.5)		(16.5)
Income tax liabilities		24.4		160.9
Other liabilities		(5.6)		103.7
- Other changes in non-current assets	18.6		(1.8)
Intangible assets(2)		-		0.2
Property. plant and equipment(3)		(9.1)		16.9
Non-current financial assets		30.2		(16.6)
Other non-current assets		-		(0.1)
Investments accounted for using the equity method		(2.5)		(2.2)
Cash flow from operating activities	243.8		424.2
Capital expenditure
- Total Capital expenditure	(428.0)		(396.3)
Property. plant and equipment(3)		(398.7)		(380.1)
Intangible assets(2)		(29.3)		(16.2)
Total cash flow from (for) investing activities	(428.0)		(396.3)
Free cash flow	(184.2)		27.9
- Cash flow hedge reserve after taxation and other movements in equity attributable to owners of the Parent(4)	(69.5)		(111.5)
- Other movements in equity attributable to non-controlling interests	(1.8)		-
- Dividends paid to Parent Company's shareholders(4)	(332.3)		(310.5)
Change in net debt	(587.8)		(394.1)
- Change in borrowings	759.5		274.4
Non-current financial assets		(40.5)		(51.2)
Current financial assets		(7.5)		(100.1)
Non-current financial liabilities		73.4		137.7
Long-term borrowings		(1,181.5)		777.9
Short-term borrowings		641.6		(3.0)
Current portion of long-term borrowings		1,276.0		(503.5)
Current financial liabilities		(2.0)		16.6
- Change in cash and cash equivalents	171.7		(119.7)

(1) Included in "Other revenue and income" and "Other operating costs", respectively, in the consolidated financial statements.

(2) See note 14 to the financial statements.

(3) See note 12 to the financial statements. (4) See the consolidated statement of changes in equity.

90 TERNA GROUP | HALF-YEAR REPORT 30 JUNE 2020

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AT AND FOR THE SIX MONTHS ENDED 30 JUNE 2020

Contents

Consolidated financial statements	96
Consolidated income statement	96
Consolidated statement of comprehensive income	97
Consolidated statement of financial position	98
Consolidated statement of changes in equity	100
Consolidated statement of cash flows	102
Notes	104
A. Accounting standards and measurement criteria	104
B. Notes to the consolidated income statement	113
C. Operating segments	118
D. Notes to the consolidated statement of financial position	120
E. Commitments and risks	135
F. Business combinations	141
G. Related party transactions	143
H. Significant non-recurring, atypical or unusual events and transactions	145
I. Notes to the statement of cash flows	145
L. Events after 30 June 2020	146
Attestation of the Group's half-year report pursuant to 81-ter of CONSOB Regulation 11971
of 14 May 1999, as amended	148
Independent Auditor's review report on the condensed consolidated
interim financial statements at and for the six months
ended 30 June 2020	150

Consolidated financial statements

Consolidated income statement

			(€m)
	NOTE	H1 2020	H1 2019
A - REVENUE
1. Revenue from sales and services	1	1,162.1	1,109.0
of which related parties		835.7	814.1
2. Other revenue and income	2	33.6	14.5
of which related parties		2.4	9.0
Total revenue		1,195.7	1,123.5
B - OPERATING COSTS
1. Raw and consumable materials used	3	79.1	55.5
of which related parties		0.1	0.1
2. Services	4	80.5	77.3
of which related parties		4.4	6.6
3. Personnel expenses	5	146.1	132.0
- gross personnel expenses		183.1	169.0
- capitalised personnel expenses		(37.0)	(37.0)
of which related parties		1.4	1.4
4. Amortisation, depreciation and impairment losses	6	302.3	288.7
5. Other operating costs	7	14.0	12.5
of which related parties		0.1	0.1
Total costs		622.0	566.0
A-B OPERATING PROFIT/(LOSS)		573.7	557.5
C - FINANCIAL INCOME/(EXPENSES)
1. Financial income	8	7.7	4.4
2. Financial expenses	8	(49.0)	(45.4)
of which related parties		(0.3)	(0.3)
3. Share of profit/(loss) of investees accounted for using the equity method	9	2.2	2.2
D - PROFIT/(LOSS) BEFORE TAX		534.6	518.7
E - INCOME TAX EXPENSE	10	155.0	150.3
F - PROFIT FOR THE PERIOD		379.6	368.4
Profit attributable to owners of the Parent		377.5	366.6
Profit attributable to non-controlling interests		2.1	1.8
Earnings per share	11
Basic earnings per share		0.188	0.182
Diluted earnings per share		0.188	0.182

Consolidated statement of comprehensive income

			(€m)
	NOTE	H1 2020	H1 2019
PROFIT FOR THE PERIOD		379.6	368.4
Other comprehensive income for the period reclassifiable to profit or loss
- Cash flow hedges	23	(67.0)	(111.2)
- Financial assets at fair value through other comprehensive income	23	(0.1)	0.6
- Gains/(Losses) from translation of financial statements in currencies other than the euro	23	(16.9)	1.1
- Cost of hedges	23	13.6	1.9
Other comprehensive income for the period not reclassifiable to profit or loss
- Actuarial gains/(losses) on provisions for employee benefits	23	-	(3.8)
COMPREHENSIVE INCOME FOR THE PERIOD		309.2	257.0
COMPREHENSIVE INCOME FOR THE PERIOD ATTRIBUTABLE TO:
Owners of the Parent		307.1	255.2
Non-controlling interests		2.1	1.8

			(€m)
	NOTE	30 JUNE 2020	31 DECEMBER 2019
A - NON-CURRENT ASSETS
1. Property, plant and equipment	12	14,002.7	13,864.2
of which related parties		14.2	45.3
2. Goodwill	13	230.1	230.1
3. Intangible assets	14	311.5	312.6
4. Deferred tax assets	15	98.0	64.0
5. Investments accounted for using the equity method	16	81.9	79.4
6. Non-current financial assets	17	461.6	451.3
7. Other non-current assets	18	15.9	15.9
Total non-current assets		15,201.7	15,017.5
B - CURRENT ASSETS
1. Inventories	19	76.4	50.9
2. Trade receivables	20	1,461.2	1,290.7
of which related parties		52.8	423.2
3. Current financial assets	17	526.8	519.3
4. Cash and cash equivalents	21	1,229.1	1,057.4
of which related parties		0.1	0.1
5. Income tax assets	22	7.7	5.2
6. Other current assets	18	91.5	62.7
Total current assets		3,392.7	2,986.2
TOTAL ASSETS		1,594.4	18,003.7

Consolidated statement of financial position

(continues)

(continues)		(€m)
NOTE	30 JUNE 2020	31 DECEMBER 2019
C - EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
1. Share capital	442.2	442.2
2. Other reserves	627.7	681.7
3. Retained earnings/(accumulated losses)	2,718.6	2,478.3
4. Interim dividend	-	(169.2)
5. Profit for the period	377.5	757.3
Total equity attributable to owners of the Parent 23	4,166.0	4,190.3
D - EQUITY ATTRIBUTABLE TO NON-CONTROLLING INTERESTS 23	41.9	41.6
Total equity attributable to owners of the Parent and non-controlling interests	4,207.9	4,231.9
E - NON-CURRENT LIABILITIES
1. Long-term borrowings 24	8,299.2	9,480.7
2. Employee benefits 25	64.0	63.9
3. Provisions for risks and charges 26	196.1	210.3
4. Non-current financial liabilities 24	233.8	160.4
5. Other non-current liabilities 27	829.0	834.9
Total non-current liabilities	9,622.1	10,750.2
F - CURRENT LIABILITIES
1. Short-term borrowings 24	666.6	25.0
2. Current portion of long-term borrowings 24	1,402.5	126.5
3. Trade payables 28	2,247.7	2,445.2
of which related parties	53.1	85.5
4. Income tax liabilities 28	36.2	11.8
5. Current financial liabilities 24	85.7	87.7
6. Other current liabilities 28	325.7	325.4
of which related parties	22.8	20.9
Total current liabilities	4,764.4	3,021.6
TOTAL LIABILITIES AND EQUITY	18,594.4	18,003.7

Consolidated statement of changes in equity

31 DECEMBER 2019 - 30 JUNE 2020 (€m)

THE GROUP'S SHARE CAPITAL AND RESERVES

	SHARE CAPITAL	LEGAL RESERVE	SHARE PREMIUM RESERVE	CASH FLOW HEDGE RESERVE
EQUITY AT 31 DECEMBER 2019	442.2	88.4	20.0	(151.9)
PROFIT FOR THE PERIOD	-	-	-	-
OTHER COMPREHENSIVE INCOME:
- Change in fair value of cash flow hedges	-	-	-	(67.0)
- Actuarial gains/(losses) on employee benefits	-	-	-	-
- Gains/(Losses) from translation of financial statements in currencies other than the euro	-	-	-	-
- Financial assets at fair value through other comprehensive income	-	-	-	-
- Cost of hedges	-	-	-	13.6
Total other comprehensive income	-	-	-	(53.4)
COMPREHENSIVE INCOME	-	-	-	(53.4)
TRANSACTIONS WITH SHAREHOLDERS:
- Appropriation of profit for 2019:
Retained earnings	-	-	-	-
Dividends	-	-	-	-
- Purchase of treasury shares	-	-	-	-
Total transactions with shareholders	-	-	-	-
Contribution from newly acquired companies	-	-	-	-
Other changes	-	-	-	-
Total other changes	-	-	-	-
EQUITY AT 30 JUNE 2020	442.2	88.4	20.0	(205.3)

31 DECEMBER 2018 - 30 JUNE 2019 (€m) THE GROUP'S SHARE CAPITAL AND RESERVES

	SHARE CAPITAL	LEGAL RESERVE	SHARE PREMIUM	CASH FLOW HEDGE
			RESERVE	RESERVE
EQUITY AT 31 DECEMBER 2018	442.2	88.4	20.0	(46.6)
PROFIT FOR THE PERIOD	-	-	-	-
OTHER COMPREHENSIVE INCOME:
- Change in fair value of cash flow hedges	-	-	-	(111.2)
- Actuarial gains/(losses) on employee benefits	-	-	-	-
- Gains/(Losses) from translation of financial statements in currencies other than the euro	-	-	-	-
- Financial assets at fair value through other comprehensive income	-	-	-	-
- Cost of hedges	-	-	-	1.9
Total other comprehensive income	-	-	-	(109.3)
COMPREHENSIVE INCOME	-	-	-	(109.3)
TRANSACTIONS WITH SHAREHOLDERS:
- Appropriation of profit for 2018:
Retained earnings	-	-	-	-
Dividends	-	-	-	-
Total transactions with shareholders	-	-	-	-
Other changes	-	-	-	-
Total other changes	-	-	-	-
EQUITY AT 30 JUNE 2019	442.2	88.4	20.0	(155.9)

31 DECEMBER 2019 - 30 JUNE 2020 (€m)

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/ (ACCUMULATED LOSSES)	OTHER RESERVES	TREASURY SHARES
4,231.9	41.6	4,190.3	757.3	(169.2)	2.478.3	725.2	-
379.6	2.1	377.5	377.5	-	-	-	-
(67.0)	-	(67.0)	-	-	-	-	-
	-	-	-	-	-	-	-
(16.9)	-	(16.9)	-	-	(16.9)	-	-
(0.1)	-	(0.1)	-	-	-	(0.1)	-
13.6	-	13.6	-	-	-	-	-
(70.4)	-	(70.4)	-	-	(16.9)	(0.1)	-
309.2	2.1	307.1	377.5	-	(16.9)	(0.1)	-
(336.8)	- (4.5)	- (332.3)	(255.8) (501.5)	- 169.2	255.8 -	- -	- -
(0.5)	-	(0.5)	-	-	-	-	(0.5)
(337.3)	(4.5)	(332.8)	(757.3)	169.2	255.8	-	(0.5)
	2.7	-	-	-	-	-	-
	-	1.4	-	-	1.4	-	-
	2.7	1.4	-	-	1.4	-	-
	41.9	4,166.0	377.5	-	2,718.6	725.1	(0.5)

31 DECEMBER 2018 - 30 JUNE 2019 (€m)

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/ (ACCUMULATED LOSSES)	OTHER RESERVES	TREASURY SHARES
4,054.2	35.0	4,019.2	706.6	(158.2)	2,240.1	726.7	-
368.4	1.8	366.6	366.6	-	-	-	-
(111.2)	-	(111.2)	-	-	-	-	-
(3.8)	-	(3.8)	-	-	-	(3.8)	-
1.1	-	1.1	-	-	1.1	-	-
0.6	-	0.6	-	-	-	0.6	-
1.9	-	1.9	-	-	-	-	-
(111.4)	-	(111.4)	-	-	1.1	(3.2)	-
257.0	1.8	255.2	366.6	-	1.1	(3.2)	-
-	-	-	(237.9)	-	237.9	-	-
(310.5)	-	(310.5)	(468.7)	158.2	-	-	-
(310.5)	-	(310.5)	(706.6)	158.2	237.9	-	-
(0.1)	-	(0.1)	-	-	(0.1)	-	-
(0.1)	-	(0.1)	-	-	(0.1)	-	-
4,000.6	36.8	3,963.8	366.6	-	2,479.0	723.5	-

Consolidated statement of cash flows

		(€m)
	H1 2020	H1 2019
PROFIT FOR THE PERIOD	379.6	368.4
ADJUSTED BY:
Amortisation, depreciation and impairment losses /(reversals of impairment losses) on non current property, plant and equipment and intangible assets*	298.8	282.0
Accruals to provisions (including provisions for employee benefits) and impairment losses	12.7	7.3
(Gains)/Losses on sale of property, plant and equipment	(3.1)	(1.5)
Financial (income)/expense	40.5	39.3
Income tax expense	155.0	150.3
CASH FLOW FROM OPERATING ACTIVITIES BEFORE CHANGES IN NET WORKING CAPITAL	883.5	845.8
Increase/(decrease) in provisions (including provisions for employee benefits and taxation)	(34.9)	(36.4)
(Increase)/decrease in inventories	(25.5)	(7.7)
(Increase)/decrease in trade receivables and other current assets	(205.3)	(400.4)
Increase/(decrease) in trade payables and other current liabilities	(240.9)	19.4
Increase/(decrease) in other non-current liabilities	(3.4)	75.8
(Increase)/decrease in other non-current assets	51.2	(18.1)
Interest income, dividends and other financial income received	8.7	10.6
Interest expense and other financial expenses paid	(98.8)	(106.6)
Income tax paid	(143.3)	-
CASH FLOW FROM OPERATING ACTIVITIES [A]	191.3	382.4
- of which related parties	339.9	(24.7)
Investments in non-current property, plant and equipment after grants received	(385.6)	(365.1)
Revenue from sale of non-current property, plant and equipment and intangible assets and other movements	6.7	2.3
Capitalised financial expenses	4.4	6.1
Investments in non-current intangible assets after grants received	(29.3)	(16.2)
Recognition of intangible assets and property, plant and equipment from new acquisitions	(24.6)	-
(Increase)/decrease in investments in associates	(2.5)	(2.2)
CASH FLOW FOR INVESTING ACTIVITIES [B]	(430.9)	(375.1)
- of which related parties	31.1	35.8
Increase/(decrease) in reserves	(0.5)	-
Dividends paid	(330.0)	(308.4)
Movements in short- and medium/long-term financial liabilities (including short-term portion)**	760.3	280.9
Movements in long-. medium- and short-term financial investments	(21.2)	(99.5)
Recognition of non-controlling interests in equity of newly acquired companies	2.7	-
CASH FLOW FROM FINANCING ACTIVITIES [C]	411.3	(127.0)
INCREASE/(DECREASE) IN CASH AND EQUIVALENTS [A+B+C]	171.7	(119.7)
Cash and cash equivalents at beginning of period	1,057.4	1,328.9
Cash and cash equivalents at end of period	1,229.1	1,209.2

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

** After derivatives and impact of fair value adjustments, including cash movements in right-of-use assets.

Notes

A. Accounting policies and measurement criteria

Introduction

Terna S.p.A.'s (also known as "Parent Company") 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 2020 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.

The consolidated financial statements at and for the year ended 31 December 2019 are available for inspection on request at Terna S.p.A.'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 2020 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 2019, except with regard to the new accounting standards and amendments effective from 1 January 2020.

In particular, the Group's condensed consolidated interim financial statements for the first half of 2020, 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 2019.

These condensed consolidated interim financial statements contain selected disclosures, whilst the statements are consistent with those included in the annual financial statements.

Where significant, specific details of the contribution of the subsidiary Brugg Cables, acquired on 29 February 2020, have been provided.

Use of estimates

Preparation of condensed consolidated interim financial statements at and for the six months ended 30 June 2020 required 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.

Based on the Group's performance and the impact of the Covid-19 pandemic, as revealed by the specific assessments conducted, there are no circumstances requiring an in-depth assessment of the validity of application of the going concern basis.

This assessment was conducted in view of the provisions of IAS 1, which requires an entity's Company's management, in the event of uncertainties, including the current pandemic, to assess the potential impact on the entity's ability to continue as a going concern. As more fully described in the sections, "Outlook" and "Terna and the Covid-19 emergency", the Group took immediate steps to ensure the continuity of the country's electricity service, putting in place the necessary safeguards to guarantee the security of our operations as a Transmission System Operator (TSO) and the related supply chains. This was done whilst also focusing on efforts to ensure the health and safety of operational personnel and, in general, all the people who work for the Group. In addition, despite the fact that the spread of the health emergency caused by Covid-19 led to slowdown in activity, the Group has drawn up an action plan designed to make up for any delays, confirming the strategies and targets previously announced to the market.

Assessment of the impact of the Covid-19 pandemic on the presentation and measurement of items in the condensed consolidated interim financial statements

The results of the assessment of the impact of the Covid-19 pandemic on individual items in the condensed consolidated interim financial statements are described below.

Non-financial assets and investments

Assessment of the impact of the outbreak of the pandemic has not resulted in the need to write down the value of the property, plant and equipment owned by the Group or of intangible assets with finite useful lives.

With regard to the recoverable amount of property, plant and equipment and intangible assets with finite useful lives forming part of the RAB (regulated asset base), it should be noted that the assessment of estimated future cash flows generated by these assets has shown that the slowdown in operating activities, and the macroeconomic effects of the outbreak of the pandemic, have not given rise to impacts constituting triggering events requiring the Group to test for impairment. The same conclusions also apply to the recoverable amount of investments accounted for using the equity method, relating to companies for which the impact of the pandemic has been marginally contained.

Intangible assets with indefinite useful lives (Goodwill)

Measurement of the recoverable amount of the goodwill allocated to the Group's "Transmission" CGU was based on the fair value less costs of disposal. This was determined taking into account Terna's share price, appropriately adjusted for the estimated fair value of assets and liabilities not attributable to the CGU that includes transmission activities. Following an assessment of Terna's share price performance which, in contrast to the declines recorded by Europe's leading stock exchanges in the first half of 2020, registered a positive performance (+2.8%), and in view of the highly regulated nature of the business, where cash inflows are only marginally linked to the quantity of energy transported, no evidence of impairment, requiring determination of the recoverable amount of goodwill, was identified.

The same conclusion also applies to the value of goodwill allocated to the CGU relating to the "Production and commercialisation of transformers", where cash flows have only marginally been affected by the negative impact of the pandemic.

Loan agreements and leases

The loan agreements and leases to which the Terna Group is party have not, to date, been subject to contractual amendments concerning either repayments to be made or the related deadlines as a result of the Covid-19 pandemic. The sole exception regards the Brazilian companies, Santa Maria and Santa Lucia, where financing is provided by the BNDES development bank. These companies are participating in a programme devised by the BNDES itself in response to the Covid-19 crisis, which grants borrowers a 6-month repayment holiday from May 2020. The principal and interest accruing during this period will be capitalised to the outstanding debt and distributed over future instalments without modifying the loan tenor. The transaction will further improve the two operators' liquidity and boost their financial leverage.

Financial instruments

The negative effects of the pandemic have not, despite the generally poor macroeconomic environment, had a major impact on the Group's financial instruments.

The Group's trade receivables fall within the hold to collect business model, primarily fall due within 12 months and do not include a significant financial component. The current pandemic has, therefore, had any impact, including with regard to the identified business model for financial instruments, not resulting in any changes to the chosen classification.

In addition, fair value measurement of the financial assets and liabilities held by the Group has not undergone changes in terms of an increase in the related risks (market, liquidity and credit). Similarly, movements in the underlying assumptions have not altered the sensitivity analyses linked to their measurement.

In terms of recoverable amount, it should be noted that the outbreak of the pandemic has not led to any deterioration in the receivables due from the Group's main counterparties (dispatching customers for injections or for withdrawals and distributors), considered solvent by the market, and therefore with a high credit standing.

As described in greater detail in the section on credit risk in the Half-Year Report for 2020, management of this risk is also driven by the provisions of ARERA Resolution 111/06, which 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. The assessment conducted has, moreover, not provided evidence of the need to modify the model used following an evaluation of the impact of the pandemic.

With regard, on the other hand, to the Group's ability to obtain financing, no particular issues linked to the pandemic have been identified, considering that the Group has sufficient liquidity to meet its obligations falling due in the next 12 months and beyond.

As described in the section, "Default risk and debt covenants", long-term borrowings do not contain covenants linked to financial ratios, but rather consisting of "negative pledge" and "pari passu" provisions and other standard provisions applied to investment grade companies. With regard to this aspect, Fitch, Moody's, S&P and Scope have confirmed Terna's rating. The Company's rating is now two notches above Italy's sovereign rating for Fitch and one notch above for the remaining agencies.

With regard to financial statement items measured at fair value, none of the borrowings and the related hedges accounted for under hedge accounting have, given their nature, been significantly impacted in view of the existing hedging relationship and the strength of counterparties. Moreover, the pandemic has not led to changes in the relate hedging relationships or in the underlyings, consisting of both past and future transactions.

Revenue recognition

The Group has assessed the potential impact of the Covid-19 pandemic on movements in the income generated by its activities. Given that the most significant portion of the Group's income consists of revenue from Regulated Activities, and in view of the basis on which revenue is determined, management has not identified a need to modify the value of revenue accounted for by the Group.

Employee benefits

Assessment of the impact of the current pandemic has not led to a revision of the assumptions underlying the measurement of employee benefits compared with those used in the previous year.

Deferred tax assets

Following the assessment of the effects of the Covid-19 pandemic, it was not necessary to revise earlier assessments of the recoverability of deferred tax assets.

Scope of consolidation

Subsidiaries

NAME	REGISTERED OFFICE	CURRENCY	SHARE CAPITAL	% INTEREST	METHOD OF CONSOLIDATION
	SUBSIDIARIES CONTROILLED DIRECTLY BY TERNA S.P.A.
Terna Rete Italia S.p.A.	Rome	Euro	300,000	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	208,000,000	100%	Line-by-line
Business	Authorisation, construction and operation of the transmission infrastructure forming the Italy Montenegro interconnector on Montenegrin territory.
Terna Plus S.r.l.	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 storage and pumping and/or storage systems.
Terna Interconnector S.r.l.	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.
Rete S.r.l.	Rome	Euro	387,267,082	100%	Line-by-line
Business	Design, construction, management, development, operation and maintenance of high-voltage power lines.
Difebal S.A.	Montevideo (Uruguay)	Uruguayan peso	140,000	100%	Line-by-line
Business	Design, construction and maintenance of electricity infrastructure in Uruguay.
Terna Energy Solutions S.r.l.	Rome	Euro	2,000,000	100%	Line-by-line
Business	Design, construction, management, development, operation and maintenance of distributed energy storage systems, pumping and/or storage systems, plant, equipment and infrastructure, including grids; 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.
Resia Interconnector S.r.l.	Rome	Euro	10,000	100%	Line-by-line
Business	Design, construction, management, development, operation and maintenance, including on behalf of third parties, of power lines and grid infrastructure and other infrastructure connected to such grids, plant and equipment for use in electricity transmission operations and in similar, related and connected sectors. It has been established to meet the obligations of the energy-intensive companies selected in accordance with Law 99/09 for the purposes of construction of the interconnection with Austria.
PI.SA. 2 S.r.l.	Rome	Euro	10,000	100%	Line-by-line
Business	Design, construction, management, development, operation and maintenance, including on behalf of third parties, of power lines and grid infrastructure and other infrastructure connected to such grids, plant and equipment for use in electricity transmission operations and in similar, related and connected sectors. It has been established to meet the obligations of the energy-intensive companies selected in accordance with Law 99/09 for the purposes of construction of the Italy-France Interconnector.

* 5% held by Terna Rete Italia S.p.A. and 30% by Transenergia S.r.l..

NAME	REGISTERED OFFICE	CURRENCY	SHARE CAPITAL	% INTEREST	METHOD OF CONSOLIDATION
	SUBSIDIARIES CONTROLLED THROUGH TERNA PLUS S.r.l.
Terna Chile S.p.A.	Santiago (Chile)	Chilean peso	2,030,800,000	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 S.A.	Rio de Janeiro (Brazil)	Real	42,474,716	99.99%*	Line-by-line
Business	Provision of public electricity transmission services, including construction, operation and maintenance of transmission infrastructure or any other activity necessary in order to fulfil the above purpose.
SPE Santa Lucia Transmissora de Energia S.A.	Rio de Janeiro (Brazil)	Real	153,714,431	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 S.A.C.	Lima (Peru)	Sales	77,043,000	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.
Terna 4 Chacas S.A.C.	Lima (Peru)	Sales	1,000	99.99%*	Line-by-line
Business	Responsible for construction of a new 16 km power line in Peru.
SPE Transmissora de Energia Linha Verde II S.A.	Belo Horizonte (Brazil)	Real	53,729,548	75%**	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.

* 0.01% Terna Chile S.p.A..

** 25% Quebec Holding Eireli.

NAME	REGISTERED OFFICE	CURRENCY	SHARE CAPITAL	% INTEREST	METHOD OF CONSOLIDATION
	SUBSIDIARIES CONTROLLED THROUGH TERNA ENERGY SOLUTIONS S.r.l.
Tamini Trasformatori S.r.l. Legnano (MI)		Euro	4,285,714	70%*	Line-by-line
Business	Construction, repair and trading in electrical equipment.
Rete Verde 17 S.r.l.	Rome	Euro	10,000	100%	Line-by-line
Business	Implementation and development of renewable energy projects.
Rete Verde 18 S.r.l.	Rome	Euro	10,000	100%	Line-by-line
Business	Implementation and development of renewable energy projects.
Rete Verde 19 S.r.l.	Rome	Euro	10,000	100%	Line-by-line
Business	Implementation and development of renewable energy projects.
Rete Verde 20 S.r.l.	Rome	Euro	10,000	100%	Line-by-line
Business	Implementation and development of renewable energy projects.
Avvenia The Energy Innovator S.r.l.	Rome	Euro	10,000	70%**	Line-by-line
Provision of energy efficiency and/or energy consulting and/or process engineering services to companies and public and private entities; the application of technology to increase energy end Business use efficiency; the design, construction, development and maintenance of plant, equipment and infrastructure for networks and other uses.
Brugg Kabel AG	Brugg (Switzerland)	Swiss franc	30,000,000	90%***	Line-by-line
Business	Commercialisation of terrestrial cables for use in electricity transmission.

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

** 30% Avvenia S.r.l..

*** 10% BRUGG GROUP AG.

(continued)

(continued)

NAME	REGISTERED OFFICE	CURRENCY	SHARE CAPITAL	% INTEREST	METHOD OF CONSOLIDATION
	SUBSIDIARIES CONTROLLED THROUGH TAMINI TRASFORMATORI S.r.l.
Tamini Transformers USA LLC	Sewickley - Pennsylvania	US dollar	52,089	100%	Line-by-line
Business	Commercialisation of industrial-grade and high-power electricity transformers
Tamini Transformatori India Private Limited	Maharashtra (India)	Indian rupee	13,175,000	100%	Line-by-line
Business	Commercialisation of industrial-grade and high-power electricity transformers.
Consorzio Tamini - CERB	Bulgaria	Lev	-	78.48%*	Line-by-line
Business	Commercialisation of industrial-grade and high-power electricity transformers.
	SUBSIDIARIES CONTROLLED THROUGH BRUGG KABEL AG
Brugg Cables Middle East DMCC	Dubai (Arab Emirates)	Dirham	100,000	100%	Line-by-line
Business	Commercialisation of terrestrial cables for use in electricity transmission.
Brugg Kabel GmbH	Schwieberdingen (Germany)	Euro	103,000	100%	Line-by-line
Business	Commercialisation of terrestrial cables for use in electricity transmission.
Brugg Cables Italia S.r.l.	Milan	Euro	10,000	100%	Line-by-line
Business	Commercialisation of terrestrial cables for use in electricity transmission.
Brugg Cables (Shanghai) Co. Ltd	Shanghai	US dollar	1,600,000	100%	Line-by-line
Business	Commercialisation of terrestrial cables for use in electricity transmission.
Brugg Cables (India) Pvt. Ltd	Haryana (India)	Indian rupee	48,000,000	99.74%**	Line-by-line
Business	Commercialisation of terrestrial cables for use in electricity transmission.
	SUBSIDIARIES CONTROLLED THROUGH BRUGG CABLES (SHANGHAI) CO. LTD
Brugg Cables (Suzhou) Co. Ltd	Suzhou (China)	Renminbi	3,200,000	100%	Line-by-line
Business	Commercialisation of terrestrial cables for use in electricity transmission.

* 21.52% CERB.

** 0.26% Brugg Kabel GmbH.

Compared with 31 December 2019:

• on 29 February 2020, Terna, acting through its subsidiary, Terna Energy Solutions S.r.l., completed the acquisition of a 90% interest in Brugg Kabel AG (a Brugg Group company). The transaction forms part of the Company's growth strategy for Non-regulated Activities;
• on 22 May 2020, the Company established SEleNe CC S.A., a joint venture 25%-owned by Terna, with the remaining shares held by three other European TSOs. The company will operate as a Regional Security Coordinator, in accordance with European Regulation 2017/1485, for the TSOs who own shares in it.

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.

The list of associates and joint ventures of Terna Group is state below:

NAME	REGISTERED OFFICE	CURRENCY	SHARE CAPITAL*	PROFIT FOR THE PERIOD*	% INTEREST	METHOD OF CONSOLIDATION	CARRYING AMOUNT AT 30 JUNE 2020 (€m)
ASSOCIATES
CESI S.p.A.	Milan	Euro	8,550,000	8,277,695	42.698%	Equity method	54.3
Business	Experimental research and provision of services related to electro-technology.
	CORESO S.A. Brussels (Belgium)	Euro	1,000,000	430,400	15.84%	Equity method	0.6
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 Europe.
CGES A.D.	Podgorica (Montenegro)		Euro 155,108,283	4,182,134	22.0889%	Equity method	26.7
Business	Provision of transmission and dispatching services in Montenegro.
JOINT VENTURES
ELMED	Etudes S.a.r.l. Tunis (Tunisia)	Tunisian dinar	2,700,000	(1,065,873)	50%	Equity method	0.2
Business	Conduct of studies regarding the connection of the Tunisian and Italian electricity systems.
SEleNe CC S.A.	Salonika (Greece)	Euro	200,000	-	25%	Equity Method	0.1
A technical centre owned by a number of transmission system operators, and acting as a joint technical Business coordinator for the TSOs, with the aim of improving and upgrading security and coordination of the electricity system in South-eastern Europe.

* Figures taken from the latest approved financial statements at the date of preparation of this document.

New accounting standards

The accounting standards used in the preparation of the condensed consolidated interim financial statements are consistent with those used in the preparation of the consolidated financial statements at and for the year ended 31 December 2019, with the exception of the adoption of new standards and amendments that came into effect from 1 January 2020. The Group has not elected for early adoption of any new standard, interpretation or amendment issued but yet to come into effect.

A number of amendments and interpretations are applicable for the first time in 2020, but they have not had an impact on the Group's condensed consolidated interim financial statements.

Accounting standards and amendments effective from 1 January 2020

Amendments to IFRS 3 - Definition of a Business

The amendments to IFRS 3 clarifies that to be considered a business, a set of activities and assets must include at least one input and one substantive process that together significantly contribute to creating an output. In addition, the amendments have clarified that a business may exist without including all the inputs and processes needed to create an output. These changes have not had any impact on the Group's condensed consolidated interim financial statements, including with regard to existing business combinations, but could have an impact in future years.

Amendments to IAS 1 and IAS 8 - Definition of material

The amendments provide a new definition of material, establishing that "information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity".

Materiality depends on the nature or magnitude of the information, or both. An entity must assess whether information (either individually or in combination with other information) is material in the context of its financial statements taken as a whole.

Information is obscured if it is communicated in a way that would have a similar effect on the primary users of the financial statements to omitting or misstating that information.

These changes have not had any impact on the Group's condensed consolidated interim financial statements and we do not expect them to have any impact in future years.

Conceptual Framework for Financial Reporting issued on 29 March 2018

Il Conceptual Framework is not a standard and will not change or override any existing standards. The aim of the Conceptual Framework is to support the IASB in developing standards, helping preparers to develop consistent accounting standards when no standard specifically applies to a transaction or other event and assisting all parties in understanding and interpreting standards.

The revised version of the Conceptual Framework includes certain new concepts, provides updated definitions and revised recognition criteria for assets and liabilities and clarifies a number of important concepts.

These changes have not had any impact on the Group's condensed consolidated interim financial statements.

B. Notes to the consolidated income statement

Revenue

1. REVENUE FROM SALES AND SERVICES - €1,162.1 MILLION

			(€m)
	H1 2020	H1 2019	CHANGE
Transmission charges billed to grid users	939.2	928.7	10.5
Back-billing of transmission charges for previous years	(0.1)	-	(0.1)
Other energy-related revenue and from services performed under concession	85.0	74.3	10.7
Quality of service bonuses/(penalties)	10.1	3.7	6.4
Other sales and services	127.9	102.3	25.6
TOTAL	1,162.1	1,109.0	53.1

Transmission charges billed to grid users

The charges for use of the NTG regard the revenue attributable to the Parent Company (€869.5 million) and the subsidiaries, Rete S.r.l. (€64.3 million) and Terna Crna Gora d.o.o (€5.3 million), as owners and operators of the grid. The latter company began operating at the end of 2019.

The increase of €10.4 million compared with the first half of 2019 is primarily due to the tariff increase provided for by ARERA Resolution 568/19, reflecting the increase in RAB, and the revision of allowed depreciation, partially offset by the negative impact of the volume effect (down €11 million) and recognition, in the first half of 2019, of additional payments for energy-intensive and output-based storage systems (down €5.5 million).

Other energy-related revenue and from services performed under concession

			(€m)
OTHER ENERGY-RELATED REVENUE AND FROM SERVICES PERFORMED UNDER CONCESSION	H1 2020	H1 2019	CHANGE
Dispatching, metering and other revenue	53.6	55.6	(2.0)
Revenue from services performed under concession (IFRIC 12)	31.4	18.7	12.7
- of which in Italy	8.3	5.0	3.3
- of which overseas	23.1	13.7	9.4
TOTAL OTHER ENERGY-RELATED REVENUE AND FROM SERVICES PERFORMED UNDER CONCESSION	85.0	74.3	10.7

This item regards dispatching and metering revenue (relating to €52.6 million for the dispatching component, €0.1 million for the metering component and other energy-related revenue of €0.9 million) and revenue from infrastructure construction and upgrade services performed under concession, recognised in application of IFRIC 12 (€31.4 million). This includes revenue from activities in South America (€20.6 million in Brazil and €2.5 million in Peru).

The increase in "Other energy-related revenue and from services performed under concession" compared with the first half of 2019, totalling €10.7 million, is linked to greater investment in assets held under concession in Brazil (up €8.5 million), essentially in relation to the line under construction acquired towards the end of 2019, and in Italy (up €3.3 million), after the effect of the reduction in allowed costs as part of the revision of tariffs relating to the fees for dispatching and metering and other energy-related revenue (down €2.0 million).

Quality of service bonuses/(penalties)

This item, totalling €10.1 million, regards the RENS incentive mechanism introduced by Resolution 653/2015/r/eel, calculated on a pro rata basis taking into account the estimated overall results expected in the 2016-2020 regulatory period. The increase of €6.4 million in the first half reflects the definition of certain events occurring in previous years.

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)
	H1 2020	H1 2019	CHANGE
Power Exchange-related revenue items	2,033.3	2,074.1	(40.8)
Over-the-counter revenue items	699.4	716.9	(17.5)
TOTAL PASS-THROUGH REVENUE	2,732.7	2,791.0	(58.3)
Power Exchange-related cost items	2,033.3	2,074.1	(40.8)
Over-the-counter cost items	699.4	716.9	(17.5)
TOTAL PASS-THROUGH EXPENSES	2,732.7	2,791.0	(58.3)

Other sales and services

The item, "Other sales and services", amounting to €127.9 million, is up €25.6 million compared with the first half of 2019. This is due primarily to the increase in revenue resulting from the contribution from Brugg Cables from the acquisition date (up €41.7 million, essentially relating to contract work for third parties) and increased revenue from private interconnector projects pursuant to Law 99/2009 (up €2.7 million, including an increase of €3.2 million relating to the Italy-Montenegro interconnector). These increases were partially offset by the €22.2 million reduction in revenue reflecting the completion of work on construction of the "Melo-Tacuarembò" line in Uruguay in October 2019.

2. OTHER REVENUE AND INCOME - €33.6 MILLION

			(€m)
	H1 2020	H1 2019	CHANGE
Sundry grants	4.0	4.7	(0.7)
Gains on sale of components of plant	3.3	1.7	1.6
Sales to third parties	1.9	2.3	(0.4)
Rental income	1.1	-	1.1
Insurance proceeds as compensation for damages	0.3	4.3	(4.0)
Bargain purchase	21.4	-	21.4
Other revenues	1.6	1.5	0.1
TOTAL	33.6	14.5	19.1

This item, totalling €33.6 million, is up €19.1 million compared with the first half of the previous year. The increase primarily reflects revenue resulting from the higher value of the net assets acquired following the purchase of the interest in Brugg Cables compared with the consideration paid (the gain resulting from a bargain purchase), determined on a provisional basis (up €21.4 million) and an increase in gains on the sale of components of plant (up €1.6 million, including €1.8 million in gains earned by Terna Rete Italia S.p.A. from the sale of a property). These increases were primarily offset by the impact of the higher value of insurance proceeds for damages recognised in the first half of 2019 (down €4.0 million).

Operating costs

3. RAW AND CONSUMABLE MATERIALS USED - €79.1 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 production of transformers by the Tamini Group, in manufacturing the cables accessories produced by the Brugg Group and in the Group's activities in South America.

The increase of €23.6 million compared with the same period of the previous year primarily reflects the cost of materials incurred by Brugg Cables, acquired at the beginning of 2020 (up €25.2 million), increased costs relating to the development of operations in South America, recognised in application of IFRIC 12 (up €9.5 million, linked mainly to the activities of the company, Linha Verde II, and increased activity in Peru, after a reduction in the cost of activities in Brazil following the entry into service of the two lines completed between the end of 2018 and early 2019) and increased costs at Terna Rete Italia S.p.A. relating to contract work carried out for RFI and the purchase of materials needed to respond to the Covid-19 emergency (totalling €3.1 million). These increases were partially offset by reduced costs incurred on construction of the line in Uruguay after it entered service in October 2019 (down €22.0 million). The Tamini Group's business also registered an increase in costs (up €7.7 million).

4. SERVICES - €80.5 MILLION

			(€m)
	H1 2020	H1 2019	CHANGE
Maintenance and sundry services	35.6	39.2	(3.6)
Tender costs for plant	17.9	17.7	0.2
Insurance	7.0	6.3	0.7
IT services	6.1	4.2	1.9
Lease expense	4.3	5.0	(0.7)
Remote transmission and telecommunications	4.0	4.9	(0.9)
Cost of services at Brugg Cables	5.6	-	5.6
TOTAL	80.5	77.3	3.2

This item, totalling €80.5 million, is up €3.2 million compared with the first half of 2019 (€77.3 million). This primarily reflects the contribution from Brugg Cables (up €5.6 million), increased costs linked to the construction and development of infrastructure under concession, recognised in application of IFRIC 12 (up €2.2 million, including an increase of €1.8 million in IT services). These increases were partially offset by a reduction in travel expenses and in the cost of training as a result of the Covid-19 pandemic (down €2.8 million and €0.5 million, respectively) and by reduced costs incurred by Tamini and Avvenia (totalling €1.4 million) due to a slowdown in activity.

5. PERSONNEL EXPENSES - €146.1 MILLION

			(€m)
	H1 2020	H1 2019	CHANGE
Salaries, wages and other short-term benefits	173.0	158.2	14.8
Directors' remuneration	0.8	1.0	(0.2)
Termination benefits (TFR) energy discounts and other employee benefits	9.5	9.4	0.1
Early retirement incentives	(0.2)	0.4	(0.6)
Gross personnel expenses	183.1	169.0	14.1
Capitalised personnel expenses	(37.0)	(37.0)	-
TOTAL	146.1	132.0	14.1

Personnel expenses in the first half of 2020, totalling €146.1 million, are up €14.1 million on the same period of the previous year (€132.0 million). This is primarily linked to the increase in the workforce following the acquisition of Brugg Cables (up €10.1 million) and provisions for staff incentive schemes (up €4.6 million).

		AVERAGE WORKFORCE
Units	H1 2020	H1 2019	CHANGE
Senior managers	79	76	3
Middle managers	665	635	30
Office staff	2,469	2,322	147
Blue-collar workers	1,321	1,251	70
TOTAL	4,534	4,284	250

The following table shows the Group's average workforce by category for the first half of 2020 and 2019.

The above net increase in the average workforce in the first six months of the year, compared with the same period of 2019, amounts to 250 units and essentially reflects the impact of the acquisition of Brugg Cables.

6. AMORTISATION, DEPRECIATION AND IMPAIRMENT LOSSES - €302.3 MILLION

			(€m)
	H1 2020	H1 2019	CHANGE
Amortisation of intangible assets	30.4	28.1	2.3
- of which rights on infrastructure	11.8	11.2	0.6
Depreciation of property, plant and equipment	272.3	260.5	11.8
Impairment losses on property, plant and equipment	0.1	0.2	(0.1)
Impairment losses on trade receivables	(0.5)	(0.1)	(0.4)
TOTAL	302.3	288.7	13.6

This item, totalling €302.3 million (including €3.2 million recognised in application of the new IFRS 16), is up €13.6 million on the first half of 2019. This is primarily due to the entry into service of infrastructure operated by the Parent Company (up €9.5 million) and by Terna Crna Gora d.o.o. (up €2.5 million, reflecting the entry into service of the Italy-Montenegro interconnector).

7. OTHER OPERATING COSTS - €14.0 MILLION

			(€m)
	H1 2020	H1 2019	CHANGE
Indirect taxes and local taxes and levies	5.2	2.7	2.5
Quality of service costs	(0.5)	2.2	(2.7)
Adjustment of provisions for litigation and disputes	1.1	(0.7)	1.8
Losses on sales/disposal of plant	0.2	0.2	-
Other	8.0	8.1	(0.1)
TOTAL	14.0	12.5	1.5

This item, totalling €14.0 million, is up €1.5 million on the same period of the previous year, primarily due to the adjustment, in the first half of 2019, of provisions made in relation to Land Registry Circular 6/2012 (€4 million), the adjustment made to provisions for litigation and disputes (an increase of €1.8 million). These increases were partially offset by a reduction in quality of service costs (down €2.7 million due to the good performance in the first half of 2020).

8. FINANCIAL INCOME/(EXPENSES) - (€41.3) MILLION

			(€m)
	H1 2020	H1 2019	CHANGE
FINANCIAL EXPENSES
Financial expenses on the loan from Cassa Depositi e Prestiti	-	(0.3)	0.3
Interest expense on medium/long-term borrowings and related hedges	(48.9)	(47.6)	(1.3)
Adjustments to bonds in issue and the related hedges	(3.1)	(0.6)	(2.5)
Discounting of termination benefits (TFR) and operating leases	-	(0.8)	0.8
Capitalised financial expenses	4.4	6.1	(1.7)
Translation differences	(0.8)	(1.7)	0.9
Other financial expenses	(0.6)	(0.5)	(0.1)
Total expenses	(49.0)	(45.4)	(3.6)
FINANCIAL INCOME
Discounting of receivables, termination benefits (TFR) and operating leases	2.6	-	2.6
Interest income and other financial income	5.1	4.4	0.7
Total income	7.7	4.4	3.3
TOTAL	(41.3)	(41.0)	(0.3)

Net financial expenses of €41.3 million are broadly in line with the figure for the first six months of 2019. Essentially attributable to the Parent Company (€35.8 million), the balance reflects €49.0 million in financial expenses and €7.7 million in financial income.

9. SHARE OF PROFIT/(LOSS) OF INVESTEES ACCOUNTED FOR USING THE EQUITY METHOD - €2.2 MILLION

This item, totalling €2.2 million, reflects the impact on profit or loss of the adjustment of the Group's share of equity in the associate, CESI S.p.A., at 30 June 2020 and is line with the first half of 2019.

10. INCOME TAX EXPENSE - €155.0 MILLION

Income tax expense for the period amounts to €155.0 million and is up €4.7 million on the first half of 2019. The tax rate for the period is 29.0%, in line with the figure for the first half of 2019. A breakdown of income tax expense for the period is shown below:

			(€m)
	H1 2020	H1 2019	CHANGE
Current tax expense:
- IRES (corporate income tax)	141.1	133.5	7.6
- IRAP (regional tax on productive activities)	26.9	28.1	(1.2)
Total current tax expense	168.0	161.6	6.4
Temporary differences:
- deferred tax assets	5.9	6.0	(0.1)
- deferred tax liabilities	(15.2)	(16.2)	1.0
Total deferred tax (income)/expense	(9.3)	(10.2)	0.9
Adjustments to taxes for previous years	(3.7)	(1.1)	(2.6)
TOTAL	155.0	150.3	4.7

Current tax expense of €168.0 million is up €6.4 million on the first half of 2019, broadly due to the increase in pre-tax profit.

Net deferred tax income of €9.3 million is down €0.9 million, reflecting the impact on taxation of depreciation and amortisation and the movement in provisions for risks and charges and employee benefits in the first half.

Adjustments to taxes for previous years, amounting to a reduction of €3.7 million, reflect contingent assets resulting from recognition of the effective amount payable when filing annual tax returns. This item is up €2.6 million compared with the first half of 2019.

11. EARNINGS PER SHARE

Earnings per share, which also corresponds to diluted earnings per share, amounts to €0.188 (based on a numerator totalling €377.5 million and a denominator equal to 2,009,909.5 thousand).

C. Operating segments

In line with the Business Plan 2020-2024, and in compliance with IFRS 8, the Terna Group's identified operating segments are described below:

• Regulated
• 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, consisting of the development of technical solutions and the supply of innovative services, including EPC (Engineering, Procurement and Construction) services, operation and maintenance of high-voltage and very high-voltage infrastructure, and the supply of energy efficiency services, broadly attributable to the subsidiary, Avvenia The Energy Innovator S.r.l.. This segment also includes Connectivity (support and housing services for fibre networks and IRU contracts for fibre networks). 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 segment also includes the operations of the Tamini Group, relating essentially to the construction and commercialisation of electrical equipment, above all power transformers, and the Brugg Group, which operates in the terrestrial cable sector, specialising in the design, development, construction, installation and maintenance of electrical cables of all voltages and accessories for highvoltage cables. This latter company was acquired in February 2020.

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 subsidiary, Terna Plus S.r.l., and the two Brazilian companies, SPE Santa Lucia Trasmissora de Energia S.A. and SPE Santa Maria Trasmissora de Energia S.A., the Peruvian company, Terna Peru S.A.C., the Uruguayan company, Difebal S.A., the Chilean company, Terna Chile S.p.A., the Brazilian company, SPE Transmissora de Energia Linha Verde II S.A. acquired in November 2019, and the Peruvian company, Terna 4 Chacas S.A.C., established in August 2019.

				(€m)
	H1 2020	H1 2019	CHANGE	% CHANGE
REGULATED REVENUE	1,025.2	1,004.8	20.4	2.0%
NON-REGULATED REVENUE	145.6	82.2	63.4	77.1%
INTERNATIONAL REVENUE*	12.3	10.8	1.5	13.9%
Cost of to International Activities	12.6	25.7	(13.1)	(51.0%)
TOTAL REVENUE	1,195.7	1,123.5	72.2	6.4%
GROSS OPERATING PROFIT (EBITDA)**	876.0	846.2	29.8	3.5%
of which Regulated EBITDA***	828.7	814.5	14.2	1.7%
of which Non-regulated EBITDA	39.7	26.2	13.5	51.5%
of which International EBITDA	7.6	5.5	2.1	38.2%
Reconciliation of segment result with Group's pre-tax result
GROSS OPERATING PROFIT (EBITDA)	876.0	846.2
Amortisation. depreciation and impairment losses	302.3	288.7
OPERATING PROFIT/(LOSS) (EBIT)	573.7	557.5
Financial income/(expenses)	(41.3)	(41.0)
Share of profit/(loss) of investees accounted for using the equity method	2.2	2.2
Profit/(Loss) before tax	534.6	518.7

* 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 2020 amounts to €1,195.7 million, an increase of €72.2 million (6.4%) on the first half of 2019.

Gross operating profit (EBITDA) of €876.0 million is up €29.8 million (3.5%) on the €846.2 million of the first half of 2019.

EBITDA from Regulated Activities amounts to €828.7 million, an increase of €14.2 million compared with the first half of the previous year. This primarily reflects the tariff increase provided for by ARERA Resolution 568/19 and recognition in the regulated activities segment of part of the revenue relating to the acquisition of Brugg Cables.

EBITDA from Non-regulated Activities in the first half of 2020 amounts to €39.7 million, up €13.5 million due substantially to revenue resulting from the higher value of the net assets acquired following the purchase of the interest in Brugg Cables compared with the consideration paid, determined on a provisional basis (the gain resulting from a bargain purchase, totalling €14.4 million). The increase in EBITDA also reflects higher revenue from the private interconnector business (Law 99/2009), which is up €2.7 million. These increases were partially offset by the reduced contribution to EBITDA from Tamini (down €3.7 million) as a result of Covid-19.

EBITDA from International Activities, amounting to €7.6 million for the first half of 2020, is up €2.1 million compared with the same period of the previous year. This primarily reflects the impact of initiatives in Brazil and one-off revenue deriving from penalties applied to suppliers in connection with contract work concluded in October 2019, in connection with work on construction of the "Melo-Tacuarembò" line in Uruguay.

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 2020 and 31 December 2019.

		(€m)
	30 JUNE 2020	31 DECEMBER 2019
Net non-current assets* of which investments in associates and joint ventures	15,018.2 81.9	14,908.5 79.4
Net working capital**	(1,801.8)	(2,207.8)
Gross invested capital***	13,216.4	12,700.7

* 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 the value of fair value hedges (€85.5 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

(€m)

Assets

12. PROPERTY, PLANT AND EQUIPMENT - €14,002.7 MILLION

LAND	BUILDINGS	PLANT AND EQUIPMENT	INDUSTRIAL AND COMMERCIAL EQUIPMENT	OTHER ASSETS	ASSETS UNDER CONST. AND PREPAYMENTS	TOTAL
209.8	2,065.7	18,414.8	117.4	169.5	1,764.0	22,741.2
0.6	5.8	2.1	2.3	0.7	387.2	398.7
0.6	5.7	-	-	0.2	-	6.5
-	-	1.8	-	-	-	1.8
0.1	5.9	99.2	2.3	2.1	(109.6)	-
-	10.7	1.5	72.6	22.9	0.1	107.8
-	-	-	-	16.5	-	16.5
-	-	-	-	(0.3)	-	(0.3)
(2.0)	(2.0)	(30.4)	-	(1.5)	(0.1)	(36.0)
(2.0)	(0.2)	-	-	(0.1)	-	(2.3)
-	-	(1.3)	-	-	-	(1.3)
-	0.1	(6.8)	0.6	(1.9)	1.2	(6.8)
208.5	2,086.2	18,480.4	195.2	191.5	2,042.8	23,204.6
(1.0)	(623.8)	(8,028.0)	(91.7)	(132.5)	-	(8,877.0)
(0.3)	(26.9)	(235.3)	(3.0)	(6.8)	-	(272.3)
(0.3)	(1.8)	-	-	(1.1)	-	(3.2)
-	-	(1.9)	-	-	-	(1.9)
-	(4.3)	(1.0)	(71.9)	(6.0)	-	(83.2)
-	-	-	-	0.1	-	0.1
0.7	1.4	27.0	-	1.4	-	30.5
0.7	0.1	-	-	0.1	-	0.9
-	-	0.3	-	-	-	0.3
-	-	0.2	(0.2)	-	-	-
(0.6)	(653.6)	(8,237.1)	(166.8)	(143.8)	-	(9,201.9)
207.9	1,432.6	10,243.3	28.4	47.7	2,042.8	14,002.7
6.2	21.7	-	-	17.9	-	45.8
-	0.6	26.4	-	1.5	-	28.5
208.8	1,441.9	10,386.8	25.7	37.0	1,764.0	13,864.2
7.2	17.9	-	-	2.3	-	27.4
-	0.6	27.5	-	1.5	-	29.6
(0.9)	(9.3)	(143.5)	2.7	10.7	278.8	138.5

The category, "Plant and equipment" at 30 June 2020 includes the electricity transmission grid and transformer substations in Italy.

"Property, plant and equipment" is up €138.5 million compared with the previous year, primarily reflecting movements during the period as a result of:

• investment of €398.7 million during the period (including €6.5 million relating to right-of-use assets recognised in application of the accounting standard IFRS 16), of which €378.8 million invested in the Group's regulated assets and €19.9 million in non-regulated assets, primarily with regard to the private Italy-France interconnector and re-routings carried for third parties;

• depreciation for the period, amounting to €272.3 million;
• the contribution resulting from the acquisition of Brugg Cables on 29 February 2020, amounting to €24.6 million (including €16.5 million relating to right-of-use assets recognised in application of the accounting standard IFRS 16);
• other movements during the period, resulting in a reduction of €6.8 million, including grants relating to assets (primarily relating to re-routings for third parties); disposals and impairments have resulted in a reduction of €5.5 million.

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

	(€m)
Investment
- Power lines	191.5
- Transformer substations	165.7
- Storage systems	0.2
- Other	41.3
Total investment in property, plant and equipment	398.7
Depreciation for the period	(272.3)
Other movements	(6.8)
Disposals and impairments	(5.5)
Translation differences	(0.2)
TOTAL	138.5

The following information regards work on the principal projects falling within the scope of Regulated Activities during the period: progress on construction of the various overseas interconnections, consisting of the power lines linking Italy and France (€9.6 million), progress with the "Functional separation" project (€18.8 million), extension of the fibre network as part of the "Fiber for the Grid" project (€12.4 million), reorganization of the Upper Bellunese cable (€7.9 million), construction of the Paternò-Pantano-Priolo power line (€7.1 million) and the Brindisi Pignicelle - Brindisi EniPower line (€6.4 million), construction of the Agnosine substation and connections (€6.8 million) and of the Sorrento Peninsula interconnector (€2.6 million), reorganisation of the grid serving the city of Naples (€6.9 million) and the grid upgrade in the Foggia-Benevento area (€5.3 million).

13. GOODWILL - €230.1 MILLION

Goodwill regards the Parent Company's acquisition of Terna Rete Italia S.r.l., 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 S.r.l., 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.

In view of the strictly regulated nature of goodwill and non-financial assets in general, the Group believes that the impact of Covid-19 does not represent evidence of impairment and, for this reason, the Company has not deemed it necessary to conduct impairment tests at 30 June 2020.

14. INTANGIBLE ASSETS - €311.5 MILLION

					(€m)
	INFRASTRUCTURE RIGHTS	CONCESSIONS	OTHER ASSETS	ASSETS UNDER DEVELOPMENT AND PREPAYMENTS	TOTAL
Cost	462.8	135.4	441.5	54.2	1,093.9
Accumulated amortisation	(352.7)	(79.3)	(349.3)	-	(781.3)
BALANCE AT 31 DECEMBER 2019	110.1	56.1	92.2	54.2	312.6
Investment	0.8	-	0.3	28.2	29.3
Assets entering service	3.3	-	8.2	(11.5)	-
Amortisation for the period	(11.8)	(2.8)	(15.8)	-	(30.4)
Other movements	-	-	(0.1)	0.1	-
BALANCE AT 30 JUNE 2020	102.4	53.3	84.8	71.0	311.5
Cost	467.0	135.4	447.7	71.0	1,121.1
Accumulated amortisation	(364.6)	(82.1)	(362.9)	-	(809.6)
BALANCE AT 30 JUNE 2020	102.4	53.3	84.8	71.0	311.5
Change	(7.7)	(2.8)	(7.4)	16.8	(1.1)

Intangible assets amount to €311.5 million (€312.6 million at 31 December 2019). The change compared with the previous year (a reduction of €1.1 million) is broadly due to the net effect of investment (up €29.3 million, including €8.5 million for infrastructure rights) and amortisation (down €30.4 million).

Investment in intangible assets during the period (€29.3 million, including €26.5 million attributable to the Parent Company and mainly relating to Regulated Activities) included expenditure on the development of software applications for the Remote Management System for Dispatching (€5 million), the Power Exchange (€1.9 million), the Metering System (€1.5 million) and for protection of the electricity system (€1.1 million), as well as software applications and generic licences (€16.9 million).

15. DEFERRED TAX ASSETS - €98.0 MILLION

	31 DECEMBER 2019	EFFECTS RECOGNISED IN PROFIT OR LOSS AND OTHER MOVEMENTS	EFFECTS RECOGNISED IN COMPREHENSIVE INCOME	30 JUNE 2020	CHANGE
Deferred tax assets	146.0	(2.1)	16.9	160.8	14.8
Deferred tax liabilities	(82.0)	19.2	-	(62.8)	19.2
NET DEFERRED TAX ASSETS	64.0	17.1	16.9	98.0	34.0

(€m)

The balance of this item, amounting to €98.0 million, includes the net impact of movements in the Group's deferred tax assets and liabilities.

Deferred tax assets (€160.8 million) are up €14.8 million compared with 31 December 2019 (€146.0 million), reflecting the following movements:

• net provisions that did not impact profit or loss, totalling €16.9 million, primarily reflecting the tax effect of movements in cash flow hedges;
• net uses of provisions for risks and charges (€5.5 million);
• use of the accrued portion recognised in relation to tax relief on the goodwill resulting from the merger of other companies owning portions of the NTG, acquired and then merged with and into the Group in previous years (€1.5 million);
• provisions recognised by the subsidiary Rete S.r.l., for the non-deductible portion of book depreciation recognised by the subsidiary (€1.5 million).

Deferred tax liabilities (€62.8 million) are down €19.2 million, essentially due to the Parent Company's use of previous provisions for accelerated depreciation.

16. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD - €81.9 MILLION

This item, amounting to €81.9 million, regards the Parent Company's investments in the associate CESI S.p.A. (€54.3 million), the associate CORESO S.A. (€0.6 million), the associated CGES - CrnoGorski Elektroprenosni Sistem AD (€26.7 million) and in the joint ventures, ELMED Etudes S.a.r.l. and SEleNE CC S.A., established on 22 May 2020 and 25%-owned by Terna, with the remaining shares held by three other European TSOs (€0.2 million and €0.1 million, respectively).

The increase of €2.5 million compared with the previous year is due essentially to the adjustment of the Group's share of equity in the associate, CESI S.p.A., at 30 June 2020 (up €2.1 million) and the Terna's share of the rights issue carried out by the joint venture, ELMED Etudes S.a.r.l. (up €0.2 million).

17. FINANCIAL ASSETS

				(€m)
	MEASUREMENT	30 JUNE 2020	31 DECEMBER 2019	CHANGE
Financial assets under concession	amortised cost	143.1	180.4	(37.3)
Deposit in the Interconnector Guarantee Fund	amortised cost	211.2	225.8	(14.6)
Fair value hedges	FVTPL	85.5	45.0	40.5
Other non-current financial assets	FVTOCI	21.7	-	21.7
Other investments	FVTOCI	0.1	0.1	-
NON-CURRENT FINANCIAL ASSETS		461.6	451.3	10.3
Government securities	FVTOCI	511.4	513.3	(1.9)
Cash flow hedges	fair value	-	0.1	(0.1)
Deferred assets on fair value hedges	fair value	13.4	4.2	9.2
Other current financial assets		2.0	1.7	0.3
CURRENT FINANCIAL ASSETS		526.8	519.3	7.5

"Non-current financial assets" are up €10.3 million compared with the previous year, reflecting the following:

• an increase of €40.5 million in fair value hedges following movements in market interest rates;
• the recognition of €21.7 million in relation to Italian government bonds ("BTP") acquired in May 2020, with a notional value of €21.2 million, maturing in May 2025 and paying interest at a rate of 1.4%;
• the decrease in investment during the period in infrastructure under concession in Brazil, recognised in application of IFRIC 12 (down €37.3 million), essentially reflecting the collection of fees due on infrastructure operated under concession in Brazil following its entry into service;
• a reduction in the amounts deposited by operators who participate in the capacity market pursuant to Resolution 98/2011/R/eel18, as amended, after definition of each party's committed capacity following the auctions held in November 2019 (down €25 million), offset by an increase in the Interconnector Guarantee Fund, set up to fund investment in interconnections by art. 32 of Law 99/09 (up €10.4 million).

"Current financial assets" are up €7.5 million, essentially due to deferred assets on fair value hedges.

18. OTHER ASSETS

			(€m)
	30 JUNE 2020	31 DECEMBER 2019	CHANGE
Loans and advances to employees	9.8	9.8	-
Deposits with third parties	6.1	6.1	-
OTHER NON-CURRENT ASSETS	15.9	15.9	-
Other tax credits	36.5	23.2	13.3
Prepayments of operating expenses and accrued operating income	20.2	10.3	9.9
Prepayments to suppliers	18.1	10.2	7.9
Amounts due from partners selected for Interconnector projects	3.7	3.7	-
Amounts due from others	13.0	15.3	(2.3)
OTHER CURRENT ASSETS	91.5	62.7	28.8

"Other non-current assets" amount to €15.9 million and are in line with the previous year.

¹⁸ The regulations regarding the system of remuneration for availability of production capacity was approved by a Ministerial Decree of 28 June 2019. The deposits were paid by the energy-intensive operators after the competition held by Terna on 6 and 28 November 2019. These provide a guarantee for the entire capacity market from 2022, with the aim of ensuring the achievement and maintenance of the adequacy of the national electricity system, in order to structurally fulfil expected electricity consumption and the power reserve margins needed to meet predetermined levels of safety and quality of service.

"Other current assets", totalling €91.5 million, are up €28.8 million compared with 31 December 2019, primarily reflecting:

• other tax credits (up €3.3 million), reflecting the VAT on credit;
• an increase in prepayments to suppliers (up €7.9 million), broadly attributable to the subsidiary, Brugg Cables (up €5.9 million) and work being carried out in South America (up €1.6 million);
• an increase in in expenses already paid for but accruing after 30 June 2020 (up €9.9 million), including approximately €7.0 million attributable to personnel;
• amounts due from others (down €2.3 million), broadly due to the Parent Company's collection of insurance proceeds recognised at 31 December 2019 (down €1.9 million).

19. INVENTORIES - €76.4 MILLION

This item, amounting to €76.4 million, is up €25.5 million compared with the previous year, primarily due to materials to be used in contract work by the subsidiary, Brugg Cables (up €26.9 million).

20. TRADE RECEIVABLES - €1,461.2 MILLION

			(€m)
	30 JUNE 2020	31 DECEMBER 2019	CHANGE
Energy-related receivables	1,187.3	788.8	398.5
Transmission charges receivable	72.9	314.6	(241.7)
Other trade receivables	201.0	187.3	13.7
TOTAL	1,461.2	1,290.7	170.5

Trade receivables amount to €1,461.2 million at 30 June 2020 and are accounted for less any losses on items deemed not to be recoverable and recognised in the allowance for doubtful accounts (€25.2 million for energy-related receivables and €18.6 million for other items in 2020, compared with €25.2 million for energy-related receivables and €17.8 million for other items in 2019). The carrying amount shown broadly approximates to fair value.

Energy-related/regulated receivables - €1,187.3 million

This item includes so-called "pass-through items" relating to the Parent Company's activities in accordance with Resolution 111/06 (€1,148.2 million) and receivables due from the users of dispatching services forming part of Regulated Activities (€16.6 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 (€22.4 million).

The balance is up €398.5 million overall compared with the end of 2019, essentially due to energy-related pass-through receivables (€389.9 million). This increase, after the impact of the factoring of receivables agreed at the end of June 2020 (resulting an increase in cash inflows of €143.9 million), is largely due to the uplift receivable (€508.1 million), reflecting a significant rise, from March, in the cost of Dispatching Services Market (DSM) transactions19 (with the related receivables declining €52.9 million). The above movement also reflects an increase in amounts due from operators for imbalances (€75 million).

¹⁹ The reduction in electricity consumption due to the restrictions introduced in response to the Covid-19 health emergency has led to an increase in selections needed to resolve localised technical limitations and ensure the security of the system.

Transmission charges receivable - €72.9 million

Transmission charges receivable, amounting to €72.9 million, represent the amount due to the Parent Company and other grid owners from electricity distributors for use of the National Transmission Grid. The amount receivable is down €241.7 million compared with 31 December 2019, broadly reflecting the impact of factoring transactions that took place in June, which resulted in the collection of receivables, at 30 June 2020, originally falling due in July and August (€248.5 million).

Other trade receivables - €201.0 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 fiber networks, as well as in relation to the contract work carried out by the Tamini Group and the new subsidiary, Brugg Cables.

This item is up €13.7 million compared with the previous year, broadly due to the recognition of amounts attributable to the new subsidiary, Brugg Cables (up €39.1 million), offset by a reduction in receivables attributable to the Parent Company and the subsidiary, Terna Rete Italia S.p.A. (down approximately €19 million).

The following table shows receivables resulting from contract work in progress (€103.8 million), being carried out by the Group under multi-year contracts with third parties:

						(€m)
	PREPAYMENTS	VALUE OF CONTRACT	BALANCE AT 30 JUNE 2020	PREPAYMENTS	VALUE OF CONTRACT	BALANCE AT 31 DECEMBER 2019
Receivables resulting from contract work in progress	(6.0)	109.8	103.8	(1.8)	136.0	134.2

The Group's receivables resulting from contract work in progress are down €30.4 million compared with the previous year, broadly due to a reduction in work at the Tamini Group (down €30.6 million).

21. CASH AND CASH EQUIVALENTS - €1,229.1 MILLION

Cash amounts to €1,229.1 million at 30 June 2020, including €915.1 million invested in short-term, readily convertible deposits and €314.0 million deposited in bank current accounts and cash in hand.

22. INCOME TAX ASSETS - €7.7 MILLION

Income tax assets, amounting to €7.7 million, are up €2.5 million compared with the previous year, due to the emergence of IRES and IRAP tax credits when settling income tax payable for the previous year and payments on account for 2020.

Equity and liabilities

23. EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT AND NON-CONTROLLING INTERESTS

Equity attributable to owners of the Parent - €4,166.0 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 - €539.8 million

The other reserves have decreased by €53.5 million compared with the previous year, primarily as a result of other comprehensive income. This mainly reflects fair value adjustments to the cash flow hedges relating to the variable rate borrowings of the Parent Company and the subsidiary, Difebal (down €53.4 million, after taking into account the related tax assets of €16.9 million).

Retained earnings and accumulated losses - €2,718.6 million

The increase in "Retained earnings and accumulated losses", amounting to €240.3 million, primarily regards the remaining portion of the Group's profit for 2019, following the Parent Company's payment of the dividend for 2019 (totalling €501.5 million).

Treasury shares - (€0.5) million

In the first six months of 2020, the Parent Company launched a buyback programme linked to the Performance Share Plan 2020-2023, in implementation of the authority granted by the Annual General Meeting of 18 May 2020 and the subsequent Board of Directors' resolution of 17 June 2020. At 30 June 2020, the Company has purchased, through the independent broker appointed for this purpose, a total of 82,496 treasury shares at a cost of €0.5 million, reducing other reserves by this amount.

Payment of the final dividend

The Annual General Meeting of shareholders held on 18 May 2020 approved payment of a dividend for full-year 2019 of €0,2495 per share, and the payment - before any withholdings required by law - of a final dividend of €0,1653 per share, to be added to the interim dividend of €0,0842 already paid on 20 November 2019. The final dividend was payable from 24 June 2020, with an ex-dividend date for coupon 32 of 22 June 2020.

Equity attributable to non-controlling shareholders - €41.9 million

Equity attributable to non-controlling interests, relating to the non-controlling shareholders of the Tamini Group, Terna Interconnector S.r.l., Avvenia The Energy Innovator S.r.l., SPE Transmissora de Energia Linha Verde II S.A. and Brugg Cables (consolidated for the first time during the first half), amounts to €41.9 million, an increase of €0.3 million compared with 31 December 2019. This essentially reflects the contribution from the subsidiary, Brugg Cables (up €2.7 million), the payment of dividends by the subsidiary, Terna Interconnector S.r.l. (down €4.5 million) and profit for the period attributable to noncontrolling shareholders (up €2.1 million).

24. BORROWINGS AND FINANCIAL LIABILITIES

			(€m)
	30 JUNE 2020	31 DECEMBER 2019	CHANGE
Bond issues	6,508.6	7,757.3	(1,248.7)
Bank borrowings	1,790.6	1,723.4	67.2
LONG-TERM BORROWINGS	8,299.2	9,480.7	(1,181.5)
Cash flow hedges	233.8	160.4	73.4
NON-CURRENT FINANCIAL LIABILITIES	233.8	160.4	73.4
SHORT-TERM BORROWINGS	666.6	25.0	641.6
Bond issues	1,280.9	-	1,280.9
Bank borrowings	121.6	126.5	(4.9)
CURRENT PORTION OF LONG-TERM BORROWINGS	1,402.5	126.5	1,276.0
CURRENT FINANCIAL LIABILITIES	85.7	87.7	(2.0)
TOTAL	10,687.8	9,880.3	807.5

Borrowings and financial liabilities are up €807.5 million compared with the previous year to €10,687.8 million.

The increase in bond issues (up €32.2 million) is primarily due to the issue of bonds by the Brazilian subsidiary, Linha Verde II. The change also reflects the adjustment of the amortised cost of all the bonds in issue.

The latest official prices at 30 June 2020 and 31 December 2019 for the bonds listed on the Luxembourg Stock Exchange are detailed below:

		(€m)
	ISIN	PRICE AT 30 JUNE 2020	PRICE AT 31 DECEMBER 2019
Bond maturing 2019:	XS0436320278	n/a*	n/a*
Bond maturing 2021:	XS0605214336	103.21	105.93
Bond maturing 2022:	XS1178105851	100.90	101.90
Bond maturing 2023:	XS0328430003	123.45**	128.94**
Bond maturing 2023:	XS1858912915	102.16	103.11
Bond maturing 2024:	XS0203712939	119.81	122.79
Bond maturing 2025:	XS2033351995	99.04	98.86
Bond maturing 2026:	XS1371569978	103.19	107.08
Bond maturing 2026:	XS1980270810	103.19	103.18
Bond maturing 2027:	XS1652866002	106.32	105.83
Bond maturing 2028:	XS1503131713	103.45	102.87

* Not applicable

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

Compared with the previous year, bank borrowings have increased by €62.3 million, primarily due to the drawdown of the first tranche (€147 million) of the EIB loan of €490 million agreed on 19 November 2019 and the amortisation of existing borrowings.

Long-term borrowings

										(€m)
		31 DECEMBER 2019		REPAYMENTS	DRAW	OTHER	CHANGE	30 JUNE 2020
	NOMINAL DEBT	CARRYING AMOUNT	FAIR VALUE	AND CAPITALISATIONS	DOWNS		IN CARRYING AMOUNT	NOMINAL DEBT	CARRYING AMOUNT	FAIR VALUE
Bond maturing 2021	1,250.0	1,302.7	1,324.1	-	-	(21.8)	(21.8)	1,250.0	1,280.9	1,290.1
Bond maturing 2022	1,000.0	998.3	1,019.0	-	-	0.4	0.4	1,000.0	998.7	1,009.0
IL bond	579.0	659.1	746.5	(10.3)	-	-	(10.3)	579.6	648.8	715.5
Bond maturing 2023	1,000.0	995.0	1,031.1	-	-	0.7	0.7	1,000.0	995.7	1,021.6
Bond maturing 2024	800.0	952.1	982.3	-	-	(15.4)	(15.4)	800.0	936.7	958.5
Bond maturing 2025	500.0	494.7	494.3	-	-	0.5	0.5	500.0	495.2	495.2
Private Placement 2026	80.0	79.1	85.7	-	-	-	-	80.0	79.1	82.5
Bond maturing 2026	500.0	497.8	515.9	-	-	0.1	0.1	500.0	497.9	515.9
Bond maturing 2027	1,000.0	1,013.6	1,058.3	-	-	20.6	20.6	1,000.0	1,034.2	1,063.2
Bond maturing 2028	750.0	764.9	771.5	-	-	23.8	23.8	750.0	788.7	775.9
Linha Verde II bond	-	-	-	-	39.8	(6.2)	33.6	33.6	33.6	33.6
Total bonds issues	7,459.0	7,757.3	8,028.7	(10.3)	39.8	2.7	32.2	7,493.2	7,789.5	7,961.0
Borrowings	1,831.2	1,849.9	1,878.3	(57.8)	147.0	(26.9)	62.3	1,892.6	1,912.2	1,912.2
of which leases	-	24.5	-	(2.3)	-	2.2	(0.1)	-	24.4	-
Total borrowings	1,831.2	1,849.9	1,878.3	(57.8)	147.0	(26.9)	62.3	1,892.6	1,912.2	1,912.2
Total debt	9,290.2	9,607.2	9,907.0	(68.1)	186.8	(24.2)	94.5	9,385.8	9,701.7	9,873.2

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

At 30 June 2020, the Terna Group's has access to additional financing of €2,650.0 million, represented by two revolving credit facilities entered into in September 2018 and April 2019. In addition, the Group has uncommitted bank credit lines totalling approximately €618 million and approximately €348 million in loans agreed but not yet disbursed.

In addition, as provided for in IFRS 7, the table shows the fair value of borrowings and bond issues. In the case of bond issues, this is market value based on prices at the reporting date, whilst variable rate loans are measured by discounting expected cash flows based on the market interest rate curve at the reporting date.

The following table shows an analysis of bond issues and other borrowings by maturity, showing the related short-term portions.

(€m)

		MATURITY 31 DECEMBER 2019*	30 JUNE 2020*	PORTION FALLING DUE WITHIN 12 MONTHS	PORTION FALLING DUE AFTER 12 MONTHS	2021	2022	2023	2024	2025	AFTER	AVERAGE INTEREST RATE AT 30 JUNE 2020	AVERAGE NET INTEREST RATE OF HEDGES AT 30 JUNE 2020
	2021	1,302.7	1,280.9	1,280.9	-	-	-	-	-	-	-	4.75%	1.21%
	2022	998.3	998.7	-	998.7	-	998.7	-	-	-	-	0.88%	0.96%
	2023	659.1	648.8	-	648.8	-	-	648.8	-	-	-	2.73%	0.75%
	2023	995.0	995.7	-	995.7	-	-	995.7	-	-	-	1.00%	1.15%
Bonds	2024	952.1	936.7	-	936.7	-	-	-	936.7	-	-	4.90%	0.87%
	2025	494.7	495.2	-	495.2	-	-	-	-	495.2	-	0.13%	0.32%
	2026	79.1	79.1	-	79.1	-	-	-	-	-	79.1	1.60%	1.80%
	2026	497.8	497.9	-	497.9	-	-	-	-	-	497.9	1.00%	1.29%
	2027	1,013.6	1,034.2	-	1,034.2	-	-	-	-		- 1,034.2	1.38%	1.09%
	2028	764.9	788.7	-	788.7	-	-	-	-	-	788.7	1.00%	0.65%
EIB		368.6	515.6	-	515.6	4.6	20.5	20.5	28.6	28.6	412.8	1.44%	1.44%
Difebal borrowing		38.2	38.3	1.6	36.7	1.7	1.7	2.0	2.2	2.3	26.8	4.88%	4.88%
Total fixed rate		8,164.1	8,309.8	1,282.5	7,027.3		6.3 1,020.9 1,667.0		967.5		526.1 2,839.5
EIB	2030	1,291.1	1,230.8	111.8	1,119.0 112.1		112.7	113.9	115.3	115.3	549.7	0.13%	0.90%
Brazilian companies' borrowings	2042	102.0	111.9	2.2	109.7	1.1	2.0	2.9	3.1	3.3	97.3	7.52%	7.52%
Difebal borrowing	2034	30.7	29.2	1.5	27.7	1.6	1.7	2.0	2.1	2.3	18.0	4.93%	4.93%
Total variable rate		1,423.8	1,371.9	115.5	1,256.4 114.8		116.4	118.8	120.5	120.9	665.0
TOTAL		9,587.9	9,681.7	1,398.0			8,283.7 121.1 1,137.3 1,785.8 1,088.0				647.0 3,504.5

* The balance does not include deferred fees of €5.0 million at 30 June 2020 and €5.7 million at 31 December 2019.

				(€m)
	31 DECEMBER 2019	30 JUNE 2020	PORTION FALLING DUE WITHIN 12 MONTHS	PORTION FALLING DUE AFTER 12 MONTHS
Finance leases	0.5	0.6	0.2	0.4
Operating leases	24.5	24.4	4.3	20.1
TOTAL	25.0	25.0	4.5	20.5

In the first six months of 2020, payments on operating leases recognised in application of IFRS 16 amounted to €2.3 million.

The total value of the Terna Group's borrowings at 30 June 2020 is €9,681.7 million (€1,398.0 million falling due within 12 months and €8,283.7 million falling due after 12 months).

Non-current financial liabilities - €233.8 million

		(€m)
30 JUNE 2020	31 DECEMBER 2019	CHANGE
233.8	160.4	73.4
233.8	160.4	73.4

"Non-current financial liabilities", amounting to €233.8 million, reflect the fair value of cash flow hedges at 30 June 2020.

Fair value was measured by discounting the expected cash flows using the market yield curve at the reporting date. The increase of €73.4 million compared with 31 December 2019 reflects the change in the market interest rate curve.

Short-term borrowings - €666.6 million

"Short-term borrowings" are up €641.6 million compared with the previous year, primarily reflecting the drawdown of short-term lines of credit by the Parent Company (up €639.6 million).

Current financial liabilities - €85.7 million

Current financial liabilities at 30 June 2020 include the value of net interest expense accrued on financial instruments and not yet paid. This item is down €2.0 compared with the previous year.

			(€m)
	30 JUNE 2020	31 DECEMBER 2019	CHANGE
DEFERRED LIABILITIES ON:
Hedging derivatives	2.6	2.6	-
Bond issues	81.5	83.6	(2.1)
Borrowings	1.6	1.5	0.1
TOTAL	85.7	87.7	(2.0)

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, after deducting non-current financial assets represented by the value of derivatives hedging bond issues, is as follows:

(€m)

	30 JUNE 2020
A. Cash	314.0
B. Term deposits	915.1
C. Cash and cash equivalents (A) + (B)	1,229.1
D. Current portion of non-current borrowings	1,402.5
E. Short-term borrowings	666.6
F. Other net financial liabilities	70.3
G. Derivative financial instruments held in portfolio	-
H. Current financial assets	511.4
I. Current debt (D+E+F+G+H)	1,628.0
J. Current net debt (I) - (C)	398.9
K. Non-current borrowings	1,790.6
L. Bond issues	6,508.6
M. Derivative financial instruments held in portfolio	148.3
N. Non-current net debt (K) + (L) + (M)	8,447.5
O. Net debt (J) + (N)	8,846.4

25. EMPLOYEE BENEFITS - €64.0 MILLION

						(€m)
	31 DECEMBER 2019	PROVISIONS	INTEREST COST	USES AND OTHER MOVEMENTS	ACTUARIAL GAINS/ (LOSSES)	30 JUNE 2020
Benefits during the period of employment
Loyalty bonuses	4.3	0.2	-	(0.1)	-	4.4
Total	4.3	0.2	-	(0.1)	-	4.4
Termination benefits
Deferred compensation benefits (TFR)	39.0	-	0.1	(0.4)	-	38.7
Energy discounts	3.7	-	-	-	-	3.7
Additional months' pay	6.2	0.1	-	(0.1)	-	6.2
Payment in lieu of notice and other similar	0.1	-	-	-	-	0.1
Total	49.0	0.1	0.1	(0.5)	-	48.7
Post-employment benefits
ASEM health plan	10.6	0.3	-	(0.1)	0.1	10.9
Total	10.6	0.3	-	(0.1)	0.1	10.9
TOTAL	63.9	0.6	0.1	(0.7)	0.1	64.0

This item, amounting to €64.0 million at 30 June 2020, is broadly in line with the previous year (up €0.1 million). The main actuarial assumptions used in estimating the liability for employee benefits are broadly in line with those used in the financial statements for 2019.

26. PROVISIONS FOR RISK AND CHARGES - €196.1 MILLION

				(€m)
	PROVISIONS FOR LITIGATION AND DISPUTES	PROVISIONS FOR SUNDRY RISKS AND CHARGES	PROVISIONS FOR EARLY RETIREMENT INCENTIVES	TOTAL
Amount at 31 December 2019	19.6	147.4	43.3	210.3
Contribution from newly acquired company	-	11.6	-	11.6
Provisions	2.4	10.0	-	12.4
Uses and other movements	(1.4)	(30.3)	(6.5)	(38.2)
Amount at 30 June 2020	20.6	138.7	36.8	196.1

Provisions for litigation and disputes - €20.6 million

These provisions, amounting to €20.6 million, have been set aside to cover outstanding liabilities that, at 30 June 2020, 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. The provisions rose by €1.0 million during the period.

Provisions for sundry risks and charges - €138.7 million

These provisions are down by a net €8.7 million compared with the previous year, reflecting:

• a net reduction of €3 million in provisions linked to regulation of the quality of the electricity service (the mitigation and sharing mechanism introduced by ARERA 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 due to previous years;
• net uses for staff incentive plans, totalling €9.0 million;
• net uses for urban and environmental redevelopment schemes (€3.4 million);
• the balance of provisions contributed by the newly acquired company at 30 June 2020 (€8.6 million).

Provisions for early retirement incentives - €36.8 million

Provisions for early retirement incentives reflects the estimated extraordinary expenses to be incurred in relation to the cost of the scheme for the year, linked to the early retirement of Group employees who have reached pensionable age. This item has decreased by €6.5 million, reflecting payments during the period.

27. OTHER NON-CURRENT LIABILITIES - €829.0 MILLION

This item, amounting to €829.0 million at 30 June 2020, regards accrued grants related to assets receivable by the Parent Company (€82.3 million), in addition to payments on account received in relation to construction of the private Italy-Montenegro and Italy-France Interconnectors (totalling €532.0 million).

This item also includes the guarantee deposits received from operators participating in the capacity market in accordance with Resolution 98/2011/R/eel (€117.6 million), in addition to the Interconnector Guarantee Fund set up by Terna S.p.A. following the issue of the 2016 Stability Law (€97.2 million), in order to fund investment in interconnections by art. 32 of Law 99/09.

The decrease in this item compared with the previous year, amounting to €5.9 million, essentially reflects the reduction in guarantee deposits received from operators participating in the capacity market in accordance with Resolution 98/2011/R/eel (down €25 million), partially offset by an increase in the Interconnector Guarantee Fund (up €10.1 million) and an increase in payments on account received in relation to construction of the private Italy-Montenegro and Italy-France Interconnectors (up by a total of €11.6 million).

28. CURRENT LIABILITIES

	30 JUNE 2020	31 DECEMBER 2019	CHANGE
Short-term borrowings*	666.6	25.0	641.6
Current portion of long-term borrowings*	1,402.5	126.5	1,276.0
Trade payables	2,247.7	2,445.2	(197.5)
Tax liabilities	36.2	11.8	24.4
Current financial liabilities*	85.7	87.7	(2.0)
Other current liabilities	325.7	325.4	0.3
TOTAL	4,764.4	3,021.6	1,742.8

(€m)

* Information on these items is provided in note 24, "Borrowings and financial liabilities.

TRADE PAYABLES - €2,247.7 MILLION

			(€m)
	30 JUNE 2020	31 DECEMBER 2019	CHANGE
Suppliers:
- Energy-related payables	1,575.2	1,358.8	216.4
- Non-energy-related payables	641.2	1,054.9	(413.7)
Amounts due to associates	4.3	8.6	(4.3)
Payables resulting from contract work in progress	27.0	22.9	4.1
TOTAL	2,247.7	2,445.2	(197.5)

Suppliers

Energy-related/regulated payables

The increase of €216.4 million in this item compared with the end of 2019 essentially reflects energy-related pass-through payables (€204.4 million), the movement in which is primarily due to:

• an increase in net payables relating to essential plants for the security of the electricity system UESS (€80.3 million) reflecting items related to capacity provided during the period after payments ordered by ARERA in 202020;
• an increase in payables linked to DSM transactions and services (€66.1 million), and to imbalances (€61.3 million).

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 2020 (€641.2 million) is down €413.7 million compared with 31 December 2019, largely due to increased capital expenditure towards the end of the previous year (primarily at the subsidiary, Terna Rete Italia S.p.A. -€390.1 million).

Amounts due to associates

This item, amounting to €4.3 million, is down €4.3 million on the previous year and regards amounts payable to the associate, CESI S.p.A., for services provided primarily to the subsidiary, Terna Rete Italia S.p.A. (down €3.4 million), relating to electrotechnical studies and research.

²⁰ ARERA ordered payments to the owners of essential plants via resolutions 563/2019 and 35-44-108-109-120-133-146- 154/2020.

Payables resulting from contract work in progress

Payables resulting from contract work in progress, amounting to €27.0 million at 30 June 2020, are up €4.1 million compared with 31 December 2019 (€22.9 million).

This item breaks down as follows.

						(€m)
	PREPAY MENTS	VALUE OF CONTRACT	BALANCE AT 30 JUNE 2020	PREPAY MENTS	VALUE OF CONTRACT	BALANCE AT 31 DECEMBER 2019
Payables resulting from contract work in progress	(42.7)	15.7	(27.0)	(40.5)	17.6	(22.9)

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

The commitments assumed by the Group towards suppliers amount to approximately €2,293.2 million and regard purchase commitments linked to the normal "operating cycle" projected for the period 2020-2024.

TAX LIABILITIES - €36.2 MILLION

This item amounts to €36.2 million at 30 June 2020, compared with a balance of €11.8 million at the end of the previous year (up €24.4 million). This reflects an increase in tax payable for the period after payments on account paid during the first half (mainly due to the increase in pre-tax profit) and the settlement of taxes for the previous year.

OTHER CURRENT LIABILITIES - €325.7 MILLION

			(€m)
	30 JUNE 2020	31 DECEMBER 2019	CHANGE
Prepayments	64.2	66.9	(2.7)
Other tax liabilities	19.7	21.9	(2.2)
Social security payables	26.3	25.5	0.8
Amounts due to personnel	54.0	51.2	2.8
Other amounts due to third parties	161.5	159.9	1.6
TOTAL	325.7	325.4	0.3

Prepayments

This item (€64.2 million) regards grants related to assets collected by the Group (€61.9 million attributable to the Parent Company, €0.2 million to Rete S.r.l. and €2.0 million to Terna Rete Italia S.p.A.) to fund the construction of non-current assets in progress at 30 June 2020.

Compared with the figure at 31 December 2019 (€66.9 million), the reduction of €2.7 million essentially reflects the net impact of grants deducted directly from the carrying amount of the related assets, totalling €6.6 million, and new prepayments received from third parties.

Other tax liabilities

Other tax liabilities, amounting to €19.7 million, are down €2.2 million compared with the previous year. This primarily reflects VAT payable by the Group (down €0.8 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 S.p.A., amount to €26.3 million. The figure is broadly in line with the previous year. This item also includes the amount payable to the Fondo Previdenza Elettrici - F.P.E. (the Electricity Industry Pension Fund), amounting to €2.9 million.

Amounts due to personnel

Amounts due to personnel, amounting to €54.0 million, essentially regard the Parent Company and the subsidiary Terna Rete Italia S.p.A.. They primarily relate to:

• incentives payable in the subsequent year (€28.6 million);
• amounts due to employees in the form of accrued and unused annual leave and bank holiday entitlements (€14.6 million).

This item is up €2.8 million, primarily due to an increase in amounts due to employees in the form of accrued and unused annual leave and bank holiday entitlements (up €2.3 million).

Other payables due to third parties

Other payables due to third parties, amounting to €161.5 million, primarily regard guarantee deposits (€112.8 million) received from electricity market operators to guarantee their contractual obligations under dispatching and virtual interconnection contracts. This item also includes deferred income (€17.3 million, primarily attributable to the Group's Non-regulated Activities).

This item is up by a total of €1.6 million, essentially due to increases in guarantee deposits received during the period (up €5.5 million), in deferred income (up €5.5 million) and in the amount payable to shareholders in the form of dividends (up €3.7 million). These increases were partially offset by the payment, to RFI, of the refund received from the tax authority in 2019 (down €13.4 million) linked to the acquisition of Rete S.r.l. (in December 2015).

E. Commitments and risks

Risk management

The Group's financial risks

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 2020.

Internal audit and risk management activities relating to the preparation of the half-year report for 2020 have taken into account the potential impact of Covid-19 and the meaningfulness of such impact on the individual types of risk based on the Company's operations. These activities did not identify the need for specific action.

The fair value of financial instruments is determined in accordance with the fair value hierarchy envisaged under IFRS 7 (Level 2), by 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;
• fair value hedges, hedging the risk of a change in the fair value of financial liabilities linked to movements in interest rates (fixed-rate bond issues).

The related reasons are described in the section, "The Group's financial risks", in the Notes to the Terna Group's Annual Report for 2019.

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 2019.

Sensitivity to interest rate risk

The following table reports the amounts recognised through "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 2020 was assumed:

						(€m)
		PROFIT OR LOSS		COMPREHENSIVE INCOME
	CURRENT RATES +10%	CURRENT AMOUNTS	CURRENT RATES -10%	CURRENT RATES +10%	CURRENT AMOUNTS	CURRENT RATES -10%
30 June 2020
Positions sensitive to changes in interest rates (FVHs, bond issues, CFHs)	(10.1)	(2.8)	4.5	(67.4)	(73.7)	(79.4)
Hypothetical change	(7.3)	-	7.3	6.0	-	(6.0)
31 December 2019
Positions sensitive to changes in interest rates (FVHs, bond issues, CFHs)	2.4	5.4	8.4	(98.8)	(101.2)	(103.7)
Hypothetical change	(3.0)	-	3.0	2.4	-	(2.4)

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 the regulator, ARERA.

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

		(€m)
30 JUNE 2020	31 DECEMBER 2019	CHANGE
1,229.1	1,057.4	171.7
85.5	45.0	40.5
1,461.2	1,290.7	170.5
2,775.8	2,393.1	382.7

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

GEOGRAPHICAL DISTRIBUTION

		(€m)
	30 JUNE 2020	31 DECEMBER 2019
Italy Euro-area countries	1,284.9 18.0	1,146.7 27.6
Other countries	158.3	116.4
TOTAL	1,461.2	1,290.7

TYPE OF CUSTOMER

		(€m)
	30 JUNE 2020	31 DECEMBER 2019
Distributors	71.8	313.5
CSEA	30.6	88.9
Dispatching customers for injections	127.8	169.9
Dispatching customers for withdrawals (not distributors)	1,016.8	517.8
Parties which have signed virtual import contracts and virtual import services (interconnectors and shippers)	12.6	12.8
Sundry receivables	201.6	187.8
TOTAL	1,461.2	1,290.7

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

				(€m)
	30 JUNE 2020		31 DECEMBER 2019
	IMPAIRMENT	GROSS	IMPAIRMENT	GROSS
Current	(0.5)	1,331.5	(0.7)	1,149.6
0-30 days past due	-	6.3	-	13.5
31-120 days past due	(0.1)	5.5	(0.1)	9.6
Over 120 days past due	(43.2)	161.7	(42.1)	160.9
TOTAL	(43.8)	1,505.0	(42.9)	1,333.6

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

		(€m)
	30 JUNE 2020	31 DECEMBER 2019
Balance at 1 January	(42.9)	(44.1)
Release of provisions	(0.8)	2.3
Impairments for the period	(0.1)	(1.1)
Balance	(43.8)	(42.9)

		(€m)
	30 JUNE 2020	31 DECEMBER 2019
Dispatching - injections	228.1	236.1
Dispatching - withdrawals	1,115.7	1,109.4
Transmission charges due from distributors	318.9	313.7
Virtual imports	120.8	104.3
Balance	1,783.5	1,763.5

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

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 special 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 Parent Company is a party may contain provisions authorising counterparties to call in such loans immediately upon the occurrence of certain events, thereby generating liquidity risk.

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

• the Company's bond issues, which consist of an €800 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 two revolving lines of credit of €1,150 million and €1,500 million ("bank debt");
• a series of loans to the Company from the European Investment Bank (EIB), amounting to a total of €1,655.2 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 nonsubordinated 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 cross- default, 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.

Bank guarantees

Banks have issued guarantees to third parties on behalf of Group companies which, at 30 June 2020, amount to €313.5 million. This amount breaks down as follows: €97.6 million on behalf of Terna S.p.A., €59.8 million on behalf of Terna Rete Italia S.p.A., €39.2 million on behalf of Terna Interconnector S.r.l., €32.4 million on behalf of Santa Lucia S.A., €17 million on behalf of Santa Maria S.A., €4.7 million on behalf of Difebal S.A., €3.4 million on behalf of Rete S.r.l., €2.7 million on behalf of Terna Perù S.A.C., €0.7 million on behalf of Terna Energy Solutions S.r.l., €0.3 million on behalf of Avvenia The Energy Innovator S.r.l., €0.1 million on behalf of Terna Cile S.p.A. and €55.6 million on behalf of Tamini Trasformatori S.r.l..

Litigation

The main commitments and risks not disclosed in the statement of financial position at 30 June 2020, relating to the Parent Company, Terna, its subsidiary, Terna Rete Italia S.p.A. 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 S.p.A., 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 S.p.A.. 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 S.p.A. (to date unforeseeable and therefore not included in "Provisions for litigation and sundry risks"), both as the entity appointed by Terna S.p.A. to build the related infrastructure and as the entity responsible for its operation. In particular, charges may arise for Terna Rete Italia S.p.A. connected with changes to the infrastructure involved in such disputes and its temporary unavailability. However, after examination of the disputes in question by Terna S.p.A. and external counsel appointed by the Company, it appears that the possibility of any negative outcomes is remote.

A legal action is pending with regard to the new 380 kv "Udine West - Redipuglia" power line and the related works, which entered service two years ago. If the legal challenges brought by local councils and/ or private parties were to be successful, and the related consents cancelled, this could have an impact on operation of the infrastructure.

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 accruals are made to the provisions for risks and charges.

F. Business combinations

Acquisition of BRUGG CABLES

In implementation of the preliminary agreement signed on 20 December 2019, on 29 February 2020, Terna, acting through its subsidiary, Terna Energy Solutions S.r.l., completed the acquisition of a 90% interest in Brugg Kabel AG (Brugg Group), one of the leading European operators in the terrestrial cable sector, specialising in the design, development, construction, installation and maintenance of electrical cables of all voltages and accessories for high-voltage cables.

The acquisition of Brugg Kabel provides Terna with a centre of excellence for research, development and testing in one of the core technologies for the TSO, such as terrestrial cable technology.

In particular, the transaction gives Terna the opportunity to rapidly integrate core competencies, by acquiring a company featuring:

• specialisation in 150 kv cables with standards in line with those Terna requires;
• HV cable production capacity in line with Terna's requirements;
• expertise consolidated over 120 years, which has been widely verified by Terna;
• significant potential synergies with the Group's Non-regulated Activities.

It should be noted that Terna's Development Plan, in line with the objectives of greater sustainability and resilience for the NTG, envisages doubling the number of terrestrial cables over the next 10 years. Consequently, the development of distinctive expertise in the underground cable sector to support cable design and construction activities, as well as O&M, may be a crucial factor in Terna's future. The acquired company's workforce at 30 June 2020 totals 379.

The acquisition, which Terna financed with its own funds, was finalised through the subsidiary, Terna Energy Solutions S.r.l.. The preliminary amount paid for acquisition of the 90% interest is CHF25.8 million. The deal's terms and conditions include a Purchase Price Adjustment, which is currently being determined with the counterparty, and payment of a further instalment of CHF0.5 million within two years of the acquisition date.

The following table summarises the consideration paid in order to acquire Brugg Cables and the value of the assets acquired and liabilities assumed, as recognized at the acquisition date:

VALUE OF THE ASSETS ACQUIRED AND LIABILITIES ASSUMED AT 29 FEBRUARY 2020	(€000)
	PROVISIONAL FAIR VALUE
ASSETS
Non-current assets
Property, plant and equipment	24,676.8
Non-current financial assets	9.5
Total non-current assets	24,686.3
Current assets
Trade receivables	46,386.8
Inventories	24,952.0
Other assets	5.271
Cash	21,848.5
Total current assets	98,458.6
TOTAL ASSETS	123,144.9
EQUITY AND LIABILITIES
Non-current liabilities
Provisions for risks and charges	11,616.7
Non-current financial liabilities	31,279.5
Total non-current liabilities	42,896.2
Current liabilities
Trade payables	27,898.1
Tax liabilities	49.9
Other liabilities	3,498.2
Total current liabilities	31,446.2
TOTAL EQUITY AND LIABILITIES	74,342.4
NET ASSETS ACQUIRED	48,802.5
Net assets contributed	48,802.5
CONSIDERATION AND SHARE ATTRIBUTABLE TO NON-CONTROLLING INTERESTS AT FAIR VALUE	27,095.8

The expected consideration was below the value of net assets at the acquisition date, resulting in a gain on a bargain purchase.

The transaction has been accounted for on a provisional basis, as provided for in IFRS 3, and final recognition of the fair value of the assets acquired and liabilities assumed will be completed within 12 months of the acquisition date. Determination of the fair value of the assets and liabilities is in progress and no adjustments have been made to carrying amounts at 30 June 2020.

Bearing in mind the significance of the acquisition, it was decided to temporarily recognise the carrying amounts of the assets and liabilities already recognised in Brugg's financial statements, following appropriate adjustments to align them and make them consistent with the accounting policies and measurement criteria applied in preparation of the condensed consolidated interim financial statements. This entailed recognition of the entire difference with respect to the cost of the acquisition (€21.4 million).

This accounting treatment was deemed to be the clearest and most representative for users of the condensed consolidated interim financial statements, bearing in mind that it was broadly impossible to reliably determine, even on a provisional basis, the fair value of the assets acquired and liabilities assumed that would have resulted in a consistent provisional presentation of the impact of the acquisition.

Line-by-line consolidation of the business combination from the acquisition date has resulted in the recognition of revenue and profit attributable to owners of the Parent in the Terna Group's condensed consolidated interim financial statements, amounting to €64.4 million and €18.6 million, respectively.

The share of equity attributable to non-controlling interests was determined on the basis of the fair value of the remaining interests held by such shareholders.

G. Related party transactions

Given that Terna S.p.A. is subject to the de facto control of Cassa Depositi e Prestiti S.p.A., a situation ascertained in 2007, related party transactions entered into by Terna during the year include transactions with the associates (CESI S.p.A., CORESO S.A. and CGES) and employee pension funds (Fondenel and Fopen), as well as transactions with Cassa Depositi e Prestiti itself, with CDP Reti S.p.A. 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 2020 broadly regard the provision of services in the course of ordinary activities and conducted on an arm's length basis.

The nature of sales to and purchases from related parties by the Terna Group is shown below, followed by details of the revenue and costs resulting from such transactions during the year and the related assets and liabilities outstanding at 30 June 2020.

RELATED PARTY	REVENUE-GENERATING TRANSACTIONS	COST-GENERATING TRANSACTIONS
Parent
Cassa Depositi e Prestiti S.p.A.		Credit facilities.
Associates
CESI S.p.A.	Rental income on laboratories and other similar facilities for specific uses, dividends.	Technical studies and consultancy, research, design and experimentation.
CORESO S.A.		Technical coordination service for the TSO.
Other related parties
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.
Ferrovie Group	Dispatching charge, movement of power lines.	Right-of-way fees.
ENI Group	Dispatching charge.	Contributions for NTG connections, sundry services.
ANAS S.p.A.	Movement /re-routing of power lines.	Right-of-way fees.
Open Fiber S.p.A.	IRU agreements for fibre.	Provision of services for the rental of fibre.
Fondenel and Fopen		Pension contributions payable by the Terna Group.
Other related parties of the MEF	Sundry services
Ansaldo Energia S.p.A.	Infrastructure maintenance.

REVENUE AND COSTS (€m)

	REVENUE COMPONENTS	COST COMPONENTS
	TRANSMISSION CHARGE AND OTHER REVENUE FROM REGULATED ACTIVITIES	NON-ENERGY-RELATED ITEMS
Associates:
CESI S.p.A.	-	0.1	0.2
CORESO S.A.	-	-	1.4
Total associates	-	0.1	1.6
Other related parties:
GSE Group	7.8	0.5	-
Enel Group	816.9	4.3	0.4
ENI Group	3.5	0.5	0.2
Ferrovie Group	0.8	0.6	2.6
Snam Rete Gas S.p.A.	-	0.1	-
Open Fiber S.p.A.	-	2.7	-
Other related parties of MEF	-	0.3	0.1
Total other related parties	829.0	9.0	3.3
Pension funds:
Fondenel	-	-	0.3
Fopen	-	-	1.1
Total pension funds	-	-	1.4
TOTAL	829.0	9.1	6.3

ASSETS AND LIABILITIES (€m)

	PROPERTY, PLANT AND EQUIPMENT	RECEIVABLES AND OTHER ASSETS	PAYABLES AND OTHER LIABILITIES	CASH	GUARANTEES*
	CAPITALISED COSTS	OTHER	OTHER
De facto parent:
Cassa Depositi e Prestiti S.p.A.	-	0.2	0.1	-	-
Total de facto parent	-	0.2	0.1	-	-
Associates:
CESI S.p.A.	2.0	-	4.1	-	-
CORESO S.A.	-	-	0.2	-	-
Total associates	2.0	-	4.3	-	-
Other related parties:
GSE Group	0.2	2.4	-	-	-
Enel Group	5.0	42.4	27.2	-	595.5
ENI Group	-	1.2	1.0	-	42.6
Ferrovie Group	0.1	0.7	22.8	-	24.5
ANAS S.p.A.	0.9	0.1	5.5	-	-
Fintecna S.p.A.	-	0.1	-	-	-
Ansaldo Energia S.p.A.	5.8	0.3	7.0	-	0.7
Open Fiber S.p.A.	-	5.3	6.2	-	-
Other related parties of MEF	0.2	0.1	0.1	0.1	-
Total other related parties	12.2	52.6	69.8	0.1	663.3
Pension funds:
Fopen	-	-	1.7	-	-
Total pension funds	-	-	1.7		-
TOTAL	14.2	52.8	75.9	0.1	663.3

* 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 2020, other than those referred to previously.

I. Notes to the statement of cash flows

Cash flow from continuing operations during the period amounts to €191.3 million, with approximately €883.5 million in operating cash flow and an outflow of approximately -€692.2 million generated by changes in net working capital.

The cash outflow for investing activities totals €430.9 million, and above all regards €385.6 million relating to investment in property, plant and equipment (after grants), €29.3 million invested in intangible assets and €24.6 million representing the contribution resulting from the acquisition of Brugg Cables on 29 February 2020.

The net cash outflow for shareholder transactions amounts to €327.8 million, essentially reflecting payment of the final dividend for 2019.

As a result, net cash used in investing activities and to provide a return on equity during the period amounted to €758.7 million, part covered by cash flow from continuing operations of €191.3 million. The remaining amount was covered by net debt, which rose €587.8 million during the period compared with the previous year.

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

				(€m)
	31 DECEMBER 2019	CASH FLOW FROM FINANCING ACTIVITIES	CHANGE IN FV AND OTHER	30 JUNE 2020
- Long-term borrowings (including current portion)	9,607.2	118.7	(24.2)	9,701.7
- Short-term borrowings	25.0	641.6	-	666.6
- Non-current and current financial assets - Government securities	(513.3)	(21.2)	1.4	(533.1)
NET CHANGE DERIVING FROM FINANCING ACTIVITIES	9,118.9	739.1	(22.8)	9,835.2

L. Events after 30 June 2020

Regulated Activities

On 1 July 2020, the process of applying for consents for the reorganisation of the electricity grid between Catanzaro and Calusia began. This project, which will cost approximately €25 million, aims to renew existing power lines and remove them from residential areas, provide greater grid resilience and enhance quality and security of service provided to businesses and households. In addition, the reorganisation will enable the secure exchange of renewable energy produced in the area. The work will also have major benefits for the environment as, following the construction of 50 km of power line, it will be possible to demolish approximately 83 km of old lines and thus vacate 166 hectares of land. Work on the reorganisation of the grid will involve the towns of Catanzaro, Soveria Simeri, Simeri Crichi, Zagarise, Sellia Marina, Belcastro, Andali, Cerva, Petronà, Sersale Cropani, Mesoraca, Cotronei, Petilia Policastro and Caccuri.

On 15 July 2020, the process of applying for consents for the putting a part of the existing 132 kv Mercallo - Cameri power line underground and the resulting demolition of the overhead line. The project, which will see Terna invest approximately €38 million, implements the Memorandum of Understanding linked to construction of the Trino - Lacchiarella power line, and, following completion of a new cable connection of approximately 22 km in length between Cameri and Borgo Ticino, will result in the demolition of an overhead section of approximately 21 km. A further 3 km of the 220 kV Magenta - Pallanzeno line, located in the town of Borgo Ticino, will also be dismantled. In total, over 100 electricity pylons will be removed.

On 17 July 2020, Terna and the Municipality of Foiano signed an agreement for the implementation of public utility works. To compensate for the impact on the local area of new work that Terna plans to carry out in and around the town of Foiano, the sum of €650,000 will be made available to the Municipality to fund the upgrade and repair of roads and footpaths; the maintenance, redevelopment and improvement of municipal buildings; the restoration and repair of sports facilities, the renovation of cemeteries and the clean-up of the local river network and the related safety improvements.

Finance

In connection with the authority to buy back the Company's shares granted by the Annual General Meeting of 18 May 2020, Terna announces that, at 10 July 2020, 447,966 ordinary shares (equal to 0.022% of the share capital) had been purchased in the market between 29 June 2020 and 10 July 2020, at a total cost of €2,765,015.45. The transaction follows the launch of a share buyback programme linked to the Performance Share Plan 2020-2023 approved by the above Annual General Meeting.

On 17 July 2020, Terna launched a green bond issue for institutional investors, with a nominal value of €500 million. The green bond will have a term of twelve years and will mature on 24 July 2032. The issue was priced at 99.623%, with a spread of 90 basis points with respect to the midswap rate. The bond pays a coupon of 0.75%. The effective coupon will be 0.78%, the lowest ever achieved for an Italian corporate green bond issue.

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, Stefano Antonio Donnarumma, 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 2020.

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, 29 July 2020

Chief Executive Officer Stefano Antonio Donnarumma

(original signed)

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 2020

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