Terna — Investor Presentation 2018

Mar 22, 2018

Milan, March 22nd 2018

Agenda

Sustainability as a key value driver	C. Bastioli	3
Overall macro scenario	L. Ferraris	7
2018 – 2022 Strategic Overview	L. Ferraris	13
FY 2017 results	A. Scornajenchi	28
2018-2022 Group targets	A. Scornajenchi	33
Dividend policy and closing remarks	L. Ferraris	39
Glossary and Annexes		42

Terna and the Sustainable Development Goals – What we do (1/2)

Returning value through SDGs

Terna and the Sustainable Development Goals – What we do (2/2)

Strong commitment on sustainability

Terna Environmental Social and Governance Approach – How we do

Sustainability is driving our business model

Overall Macro Scenario

Overall Macro Scenario Mega trends – System Evolution (1/2)

Ensuring security of supply for a sustainable and efficient energy system

Overall Macro Scenario Mega trends – System Evolution (2/2)

Grids pivotal role confirmed

Acceleration on grid investments is the enabling factor for the energy transition

Overall Macro Scenario

Mega trends – Gross Electricity Generation Mix, 2006 – 2016 (% of GWh)

Fossil fuels Nuclear Renewables Renewables including hydro

Italy has one of the highest renewables share in Europe

Overall Macro Scenario Mega trends – National Energy Strategy

Energy Efficiency

Renewables Development

Decarbonization speed up

Security of Supply

AREAS CORE TARGETS

Reducing final energy consumption by a total of 10 Mtoe by 2030 Reaching 55%* share of renewables in electricity consumption by 2030 Phasing out the use of coal in electricity generation by 2025 Strengthening security of supply and narrowing the energy price gap Furthering sustainable public mobility and eco-friendly fuels

Transmission grid as one of the key enablers of the forthcoming energy system

Mission 2018 – 2022 Strategic overview

Play a leading role for a sustainable energy transition, leveraging innovation, skills and distinctive technologies with the goal of generating value for all stakeholders

2018 – 2022 Strategic Overview Guidelines & Enabling Factors

STRATEGIC

Non Regulated Operations: value added solutions for the integrated TSO

International Operations: exploit core capabilities

Innovation & Digitization: be the front-runner

People: strengthening core competences

Domestic Regulated Operations: focus on Italian Grid reinforcement (1/4)

STRATEGY	ACTIONS
Grid reinforcement	Capex acceleration driven by system needs
Support the framework evolution	Play a proactive role in system design and roll-out (e.g. Capacity Market)
Enhance core competences	Leveraging technological skills and innovation

System is calling for a new investment wave

Domestic Regulated Operations: focus on Italian Grid reinforcement (2/4)

Increasing benefits for the system – reducing overall energy costs

Domestic Regulated Operations: focus on Italian Grid reinforcement (3/4)

Strong focus on security of supply

Domestic Regulated Operations: focus on Italian Grid reinforcement (4/4)

Capex acceleration drives a robust RAB growth

Non Regulated Operations: value added solutions for the integrated TSO (1/2)

STRATEGY	ACTIONS
Energy Solutions Provider	Develop high value-added services
TLC	Pursue new business opportunity based on TLC assets
O&M Services	Catch new business opportunities
Tamini	Turnaround expected on-track

Non Regulated Activities to serve energy transition

Non Regulated Operations: value added solutions for the integrated TSO (2/2)

Robust contribution to P&L

International Operations: exploit core capabilities (1/2)

STRATEGY	ACTIONS
Europe	Playing an active role in TSO governance Executing on system connectivity
LatAm	Delivering existing projects
Exploring front-end technology solutions	Focus on high skill and capital light activities

Limited capital absorption and low risk profile

International Operations: exploit core capabilities (2/2)

PROJECTS IN EXECUTION

TOTAL MAXIMUM CAPEX LEVEL

2018-2022 Cumulated Capex Lower than 300€mn

o/w ∼160 related to projects in execution

EBITDA ~150€mn 2 cumulated in 5 years + ~70mn vs old plan

Ongoing execution

Enabling Factors (1/2)

STRATEGY		ACTIONS
D N N A	Transmission Operator Activities	Predictive assets maintenance through centralized data management
O N TI O A Z	System Operator Activities	Advanced Analytics (i.e. flexibility management and DER* dispatching)
TI TI A V GI O	Enhance open innovation approach	Innovation sharing process to turn ideas into new strategic initiatives
DI N N I	Overall Group processes	Workforce, processes and IT management
E	Partnerships with academic institutions	Strengthening technological skills and high level competences
L P O	Enhancement of existing competences	Empowering project planning, execution, and control activities
E P	New skills development	Digital and Innovation

Leveraging digitization and people to manage increasing system complexity

2018 – 2022 Strategic Overview Enabling Factors (2/2)

MAIN PROJECTS

Innovation & Digitization are key tools for SO activities

EBITDA Evolution 2018 – 2022 Strategic Overview

∼20%

Revenues growth supported by strong capex acceleration. Focus on project execution

Guidance 2018 and 2022 2018 – 2022 Strategic Overview

€bn	FY 2017	FY 2018	FY 2022	2022 vs 2017
	Actual	Guidance	Guidance	∆%
1 Revenues	~ 2.16	~ 2.20	~ 2.55	+ 18%
EBITDA	~ 1.60	~ 1.61	~ 1.90	+ 18%
Capex2	~ 1.0	~ 1.1	~ 5.7 Cumulated 2018-2022
EPS €cents	~ 34	~ 34	~ 38	+ 12%

Ensuring a sustainable growth during the plan period

FY 2017 results Key Numbers

€mn	FY 2017	FY 2016	Δ FY 16 vs
Revenues	2,2481	2,103	+7%
EBITDA	1,604	1,545	+4%
Group Net Income2	688	633	+9%
Total Group Capex	1,034	854	+21%
		FY 2017	FY 2016
	Net Debt3	7,796	7,976

Growth in all P&L lines

• 1. Including IFRIC 12 effect related to international activities construction 2. Attributable to Terna
• 3. FY 2016 restated (17€mn related to Interconnector guarantee provision)

EBITDA FY 2017 results

NON REGULATED ACTIVITIES

Solid EBITDA driven by domestic regulated activities Insourcing attività di O&M Rete FS

From EBITDA to Net Income FY 2017 results

€mn

+9% growth YoY at net income level

FY 2017 results Cash Flow & Net Debt Evolution

Positive cash flow generation covers dividend and capex

Assumptions: Regulation 2018-2022 Group targets

Regulated	2018 Total Grid Fee*  @ 1.92€bn
	 WACC at 5.1% starting from 2019
	 Output based principles and guidelines factored in
	 RAB inflation at 0.9% on average during plan period

Assumptions: Accounting and Finance 2018-2022 Group targets

Accounting	 Figures not affected by international projects IFRIC effects  Interconnector EBITDA contribution spread over exemption period
Debt management	10 years average interest rate swap @ 1.6%

P&L 2018-2022 Group targets

EPS CAGR 2018-2022 ∼3%

Efficiency 2018-2022 Group targets

Maintaining high efficiency level in grid management

*Equivalent assets = Number of equivalent bays at Electric Stations + Length in equivalent km of Lines / 5.8

Cash Flow & Net Debt 2018-2022 Group targets

CUMULATED 2018-2022

• Net Debt / RAB <60% over the Plan²
• Average Cost of Net Debt 2018-2022 @ 1.6% back end loaded
• Gross Debt as of YE 2017 @ 100% Fix rate

Rock-solid financial structure notwithstanding capex acceleration and enhanced shareholders remuneration

Dividend Policy and Closing Remarks

Dividend Policy and Closing Remarks Dividend Policy

€ cents

Dividend Policy and Closing Remarks

Closing Remarks – our five pillars

Domestic Regulated Operations	Focus on Italian grid reinforcement
Non Regulated Operations	Supporting the energy transition
International Operations	Exploit core capabilities with limited capital absorption and low risk profile
Financial structure	Rock-solid structure with strong ratios
Dividends	Predictable and accretive policy

Ensuring yield and growth with a low risk investment profile

Glossary and Annexes

Glossary (1/2)

BOOT: Build Own Operate Transfer

BOT: Build Operate Transfer

CAGR: Compound Annual Growth Rate

Capacity Market: mechanism introduced by the Government to ensure that electricity supply continues to meet demand as more volatile and unpredictable renewable generation plants come on stream; The objective of the Capacity Market is to achieve long-term security of supply

Capex: Capital Expenditure

Capital Allocation: A process of how businesses allocate their financial resources to different processes, people, projects and division

CBA: Cost Benefit Analysis

COP 21: XXI Conference of the Parties, referring United Nations Framework Convention on Climate Change

D&A: Depreciation & Amortization

• DER: Distributed Energy Resources
• DSO: Distribution System Operator
• E&C: Engineering & Construction
• EBIT: Earning Before Interest and Tax
• EBITDA: Earning Before Interest, Tax, Depreciation and Amortization
• EPS: Earnings Per Share

Equity share: A share that gives the person who owns it the right to receive part of a company's profits and to vote at shareholder meetings

Equivalent assets: Number of equivalent bays at Electric Stations + Length in equivalent km of Lines / 5.8

Glossary (2/2)

EU: European Union

Fixed rate: Interest rate that remains at a set level for a specified period of time

Floating rate: Interest rate that is reset at specified periods of time based on a pre-determined parameter

FY: Full Year

Headcount: Total number of people employed in a specific organization

ICT: Information and communication Technology

IFRIC: International Financial Reporting Interpretations Committee

IRS: Interest rate swap - a financial derivative instrument in which two parties agree to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate (or vice versa) or from one floating rate to another

ISTAT: The National Institute for Statistics (Istat) is the main supplier of official statistical information in Italy

Net Debt: cash and cash equivalents minus short term and long term financial liabilities

Payout ratio: Dividends paid to shareholders relative to net income

RAB: Regulated Asset Base RHV Grid: Railways High Voltage Grid

SEN: National Energy Strategy (Strategia Energetica Nazionale) Synchronous Compensator: electrical device used in power transmission systems for voltage control within rated values, used to increase system voltage control and security of supply

SO: System Operator

TLC: Telecommunication

TSO: Transmission System Operator

UN SDG: United Nations Sustainable Development Goals

WACC: Weighted Average Cost of Capital

WC: Working Capital

WIP: Work in Progress

YoY: Year on year

Strategic Annexes Main Projects

2018-2022 Grid evolution

• 1,250km of Lines

Financial KPIs Strategic Annexes

• Financial structure will remain solid RCF/NET DEBT within the plan
• Main Financial KPIs on a sustainable level, well below the main rating agency thresholds

RATING

Rating		M/L Term	Outlook
	Terna	Sovereign	Terna	Sovereign
S&P	BBB+	BBB	Stable	Stable
Moody's	Baa1	Baa2	Negative	Negative
Fitch	BBB+	BBB	Stable	Stable

Strategic Annexes

2018 Total Grid Fee update*

Financial Annexes (1/6)

FY 2017 results - Consolidated Income Statement¹

€ mn	FY17	FY16	Δmn	Δ %
Total Revenue	2,248	2,103	145	6.9%
Regulated Activities	1,967	1,917	51	2.6%
Transmission	1,804	1,735	69	4.0%
Dispatching	112	111	1	0.5%
2 Other	23	34	-11	-31.2%
IFRIC12	21	21	0	-0.5%
Non Regulated Activities	189	182	7	3.7%
3 International Activities	92	4	87	100.0%
Total Costs	644	559	86	15.3%
Regulated Activities	426	421	4	1.0%
Labour Costs	218	227	-9	-3.8%
External Costs	155	154	1	0.7%
2 Other	32	20	12	61.9%
IFRIC12	21	21	0	-0.5%
Non Regulated Activities	127	131	-5	-3.5%
3 International Activities	92	6	86	100.0%
EBITDA	1,604	1,545	59	3.8%
D&A	527	509	18	3.5%
EBIT	1,077	1,036	41	4.0%
Net Financial Charges	89	103	-14	-13.5%
Pre Tax Profit	989	933	55	5.9%
Taxes	294	305	-11	-3.6%
Tax Rate (%)	29.8%	32.7%	-2.9%
Total Net Income	694	628	66	10.6%
Minority Interest	6	-5	11	-213.5%
Group Net Income	688	633	55	8.7%

3. Of which about 81€mln at revenues level and about 78€mln at costs level of IFRIC 12

Financial Annexes (2/6)

FY 2017 results - P&L Quarterly Analysis

€ mn	1Q16	1Q17	Δ	2Q16	2Q17	Δ	3Q16	3Q17	Δ	4Q16	4Q17	Δ
Total Revenue	517	523.9	7	523	523.0	0	512	581.4	70	552	619.8	68
Regulated Activities	474	490	16	475	477	2	474	490	16	493	510	16
Transmission	431	451	20	440	444	4	435	453	18	429	457	28
Dispatching	28	29	1	27	27	0	29	29	0	28	27	0
1 Other	12	8	-4	4	4	-1	7	4	-3	10	7	-3
IFRIC12	3	2	0	4	3	-1	3	4	1	11	11	0
Non Regulated Act.	41	34	-7	47	44	-3	37	35	-3	57	77	20
International Activities	2	0	-2	0	1	1	0	56	56	2	34	32
Total Costs	123	122	-1	142	133	-9	109	165	56	184	224	40
Regulated Activities	86	93	7	102	97	-5	87	82	-4	146	154	8
Labour Costs	45	53	8	49	54	4	44	46	3	88	65	-23
External Costs	35	31	-4	37	35	-2	34	30	-4	47	59	12
1 Other	3	7	4	12	5	-6	5	1	-4	-1	19	19
IFRIC12	3	2	0	4	3	-1	3	4	1	11	11	0
Non Regulated Act.	34	28	-6	38	33	-6	25	30	5	34	35	1
International Activities	2	1	-2	1	2	1	1	57	57	2	32	29
EBITDA	394	402	7	380	390	10	402	415	13	368	397	28
D&A	131	130	-1	136	131	-5	136	129	-7	106	136	31
EBIT	263	271	8	244	259	15	266	286	20	263	260	-2
Net Financial Charges	19	21	1	17	19	2	24	29	5	42	21	-22
Pre Tax Profit	244	251	7	227	240	13	242	257	16	221	240	19
Taxes	83	74	-10	67	70	3	78	78	0	77	73	-4
Tax Rate (%)	34.2%	29.3%	-4.8%	29.7%	29.2%	-0.4%	32.1%	30.2%	-1.9%	35.0%	30.3%	-4.6%
Total Net Income	161	177	17	160	170	10	164	180	15	143	167	24
Minority Interest	-1	-1	0	-1	0	1	0	-1	-1	-3	8	11
Group Net Income	162	179	17	163	172	9	162	178	15	146	160	13
Total Group Capex	158	100	-58	189	226	37	183	219	36	324	489	165
Net Debt (end of period)		7,687 7,445			8,172 7,942			7,801 7,363			7,796 7,976

Financial Annexes (3/6)

FY 2017 results - Consolidated Balance Sheet

€ mn	1 Dec. 31,2016	Dec. 31,2017	Δmn
PP&E	12,369	12,753	384
Intangible Asset	516	506	-10
Financial Inv. and Other	107	208	101
Total Fixed Assets	12,991	13,466	475
Net WC	-1,075	-1,485	-410
Funds	-385	-356	29
Net Capital Invested	11,532	11,625	94
Financed by:
Consolidated Net Debt	7,976	7,796	-180
Total Shareholder's Equity	3,555	3,829	274
Total	11,532	11,625	94
D/E Ratio	2.2	2.0
D/D+E Ratio	0.7	0.7
Number of Shares ('000)	2,010	2,010

Financial Annexes (4/6)

FY 2017 results - Consolidated Cash Flow

€ mn	4 FY16	FY17	Δ mn
Total Net Income	628	694	66
1 D&A	499	524	25
Net Change in Funds	11	-29	-40
Operating Cash Flow	1,138	1,190	52
2 Δ Working Capital & Other	161	444	283
Cash Flow from Operating Activities	1,299	1,634	335
Capital Expenditures	-854	-1,034	-180
Free Cash Flow to Equity	445	600	155
3 Dividends & Equity	-419	-420	-2
Change in Net Cash (Debt)	26	180	154

Financial Annexes (5/6)

FY 2017 results - Capex

€mn
Category (€mn)	FY16	FY17	Δ 17 vs 16	Δ %
1 Incentivized Investments	73	120	47
				65%
2 Other Regulated	726	838	112	15%
Regulated Capex	798	958	159	20%
2 Other	56	3 76	20	36%
Total Group Capex	854	1,034	180	21%

Financial Annexes (6/6)

Demand Evolution

Disclaimer

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Notes

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