Terna — Investor Presentation 2015

Dec 30, 2015

5 th Regulatory Period & Acquisition of FS HV Grid

December 30th, 2015

MATTEO DEL FANTE CHIEF EXECUTIVE OFFICER

PIERPAOLO CRISTOFORI CHIEF FINANCIAL OFFICER

LUIGI DE FRANCISCI CHIEF REGULATORY OFFICER

HIGHLIGHTS	3
th 5 REGULATORY PERIOD	5
ACQUISITION OF FS HV GRID	14
LOOKING BEYOND	18
ANNEXES – THE REGULATORY FRAMEWORK	20

Agenda

Highlights – 5 th Regulatory Period

AEEGSI Final Resolutions

583/2015/R/com Allowed WACC 654/2015/R/eel Electricity Transmission 658/2015/R/eel Electricity Dispatching 653/2015/R/eel Quality of Service

Outcome in a nutshell

New Definition of regulatory periods with Totex starting from 2020 WACC at 5.3% for 2016-2018

More selective approach on Investments

• Review of incentives
• Change in Work-in-Progress treatment
• Time-lag shortened
• Change in regulated asset life for HV lines
• New perimeter for allowed opex

Less exposure to consumption volatility than in the 2012-2015 period

Highlights - Acquisition of FS HV Grid

Acquisition of 100% of SELF S.r.l. (re-named Rete S.r.l.) from Ferrovie dello Stato

Deal closed on 23rd of December

Total consideration: 757mn€

No headcount and no debt transferred

5 th Regulatory Period

New Definition of Regulatory Periods

5 th Regulatory Period - WACC

WACC real pre-tax for 2016-2018: 5.3% (vs 6.3% in 2014-2015)

A new approach

• new formula based on a direct reference to real returns
• Floor for Risk-Free rate
• Introduction of an explicit Country Risk Premium

Interim review after 3 years for 2019-2021 WACC

• Rules already defined
• Parameters under review:
• Risk Free rate (and consequently Equity Risk Premium)
• Inflation
• Country Risk Premium
• Tax rate (and tax shield)
• Gearing

Limited volatility and good predictability

5 th Regulatory Period

Selective Approach on Investments - Incentives

Review of incentives¹

	OLD		NEW
I3 category	2.00%	I-NPR1 category	1.00%	12 years duration
I2 category	1.50%	O-NPR1 category	1.00%	confirmed

Projects must respect some conditions to be eligible for I-NPR1 and O-NPR1

• Inclusion in 2017 National development Plan
• Full authorization as of 2015YE
• Completion foreseen by 2019
• 25% of capex contracted at 2015YE (or CBA>1.5 for O-NPR1)

2% incentive for Sorgente-Rizziconi if project into service by June 2016

Gradual introduction of output-based incentives

5 th Regulatory Period

Selective Approach on Investments - Work in Progress (WIP)

Stock WIP at YE-2015

Remunerated at base WACC until 2019 (or entry into service if earlier)

WIP 2016-2019 for incentivized investments (I-NPR1 and O-NPR1) Cap equal to stock WIP at 2015YE, net of Sorgente-Rizziconi Remunerated at base WACC

Other WIP

• Excluded from the RAB
• Financial charges to be capitalized (included in the RAB¹ )

5 th Regulatory Period Time Lag Shortened

1 year reduction

Projects coming into service in year 0 to be recognized in RAB of year 1

D&A recognized in year 2

Compensation for time lag (1%) eliminated but

confirmed on projects that came into service in 2012-2014

5 th Regulatory Period Change in Regulated Asset Life

• Assets in RAB before 2004 excluded
• Life for HV lines extended from 40 to 45 years
• No restatement of historical RAB

Lower allowed D&A Lower reduction of RAB

5 th Regulatory Period New Perimeter for Allowed Opex

Allowed Opex 2016

Baseline calculated on 2014 actual Opex. Change in perimeter:

Excluded: non-mandatory insurance costs

Included: costs for early retirements

100% of social security contributions

70% of incentives

plus 50% of 2014 extra-efficiencies

plus the residual profit sharing of extra-efficiencies of the 3 rd regulatory period

Price Cap for roll-over confirmed

X-factor 1% both for Transmission and Dispatching

5 th Regulatory Period Volume Effect and Quality of Service

VOLUME EFFECT

The new methodology reduces the overall exposure to consumption volatility

QUALITY OF SERVICE

Confirmed premium/penalty mechanism based on reduction of Regulated Energy Not Supplied (KPI)

• KPI target more challenging: annual rate improvement set at 3.5% (vs current 2%)
• Application only if mismatch between actual and target > +/- 5% confirmed

Estimated Potential Maximum Annual Impacts on Revenues - 12€mn / + 30€mn confirmed

5 th Regulatory Period 2016 Total Grid Fee excluding FS HV Grid¹

1. AEEGSI Resolutions and Terna's preliminary estimates.

2. Excluding effect of exposure to volumes

Acquisition of FS HV Grid Transaction Overview

Acquisition of 100% of SELF S.r.l. (re-named Rete S.r.l.) from Ferrovie dello Stato (FS)

Acquisition in line with Terna's strategy and risk profile

Acquisition of FS HV Grid Perimeter

Perfect mix of solid Reg. and highly visible Non Reg. activities

Acquisition of FS HV Grid

AEEGSI Resolution 517/2015 (excluding assets already in NTG)

• WACC in line with Terna
• Extra-remuneration 1.5% for 12yrs on 149€mn RAB
• Existing assets residual life 29 years
• 2016: allowed opex (42€mn )
• From 2017:
• full remuneration (RAB remuneration + Opex + D&A)
• X-Factor for allowed opex
  • first 2 years 1.6%
  • following 9 years 4.8%

Stable and visible revenue stream

RAB

REVENUES

Acquisition of FS HV Grid Strategic Rationale

Scaling up

SELF integration will allow a 13% increase of Terna's HV lines

National Transmission Grid consolidation

Maximize benefits for the electricity system

Strategic Fit

Existing low-risk profile preserved

Established regulatory framework

TLC contract in line with existing Non Regulated Activities

EPS accretion starting from 2017

Looking Beyond

2015: a year full of events

Focused on value creation

Regulatory review

Acquisition of FS's HV grid

Opex discipline

Ready for new Strategic Plan

Focus on attractive and sustainable shareholder returns

THANK YOU. QUESTIONS?

MATTEO DEL FANTE CHIEF EXECUTIVE OFFICER

PIERPAOLO CRISTOFORI CHIEF FINANCIAL OFFICER

LUIGI DE FRANCISCI CHIEF REGULATORY OFFICER

Annexes – The Regulatory Framework

The Regulatory Framework Transmission Grid Fee Structure 1/2 (*)

RAB Remuneration + Allowed Opex + Allowed Depreciation

RAB REMUNERATION

2016 Tariff RAB based on re-evaluated historical cost

Parametric values before 2004 + Actual values from 2004 to 2014 + pre-closing values for 2015

GRID FEE

• Deflator 2014-2015 0.2%
• Stock WIP at 31 Dec 2015
• Adjustments for funds, allowed net working capital, grants, etc.

1 2 3

RAB annual roll-over for NPR1 (2016-2019)

• Adjustment for Deflator and Net Investments
• Adjustment for actual values VS pre-closing values
• Adjustment for WIP according to pre-set rules

WACC

1

• 2016-2018: 5.3% ; interim review for WACC2019-2021
• ∆WACC: Reduction in current incentives (+100 bps for 12 years) and specific eligibility conditions
• Regulatory Lag Remuneration: 100 bps on investments in operation 2012-2014

The Regulatory Framework Transmission Grid Fee Structure 2/2 (*)

ALLOWED OPEX

2016 Opex

• 2014 reference year
• CPIJun14-May15 : -0.11%; Profit sharing: 50/50

Annual roll-over for NPR1 (2016-2019)

• Adjustment for Inflation and X-factor (1% both for Transmission and Dispatching)
• Faster claw-back of 4th regulatory period extra-efficiencies

3

2

ALLOWED DEPRECIATION

2016 Depreciation and annual roll-over

• Coherent with 2016 RAB calculation and annual adjustment
• Calculation on Regulated Asset Life (extended for HV Lines)

The Regulatory Framework WACC 2016-2018

2016-2018
0.50%
1.00%
0.35
6.00%
5.50%
27.50%
44.44%
0.50%
1.50%
34.4%
5.3%

Formula description available in the AEEGSI resolution 583/2015/R/com

Disclaimer

ALL COMMENTS AND CALCULATIONS ARE TERNA'S PRELIMINARY ESTIMATES, SUBJECT TO CONFIRMATION BY AEEGSI. FULL INFORMATION AVAILABLE IN THE AEEGSI RESOLUTIONS 583/2015/R/com, 654/2015/R/eel ,658/2015/R/eel, 653/2015/R/eel .

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