Terna — Investor Presentation 2020

Mar 10, 2020

2020-2024 STRATEGIC PLAN

March 10th, 2020

Agenda

Main Achievements 2017-2019	3
Energy Scenario	8
Strategy	18
Focus on FY 2019	28
2020 – 2024 Group Financial Targets	34
Dividend Policy and Closing Remarks	37
Annexes	40

Main Achievements 2017-2019

Main Achievements 2017-2019

Terna's evolution in the Energy Transition

Increasing central role in the system

Main Achievements 2017-2019

Focus on Key Figures

Increasing benefits for the system and shareholders

Main Achievements 2017-2019

Focus on Value Creation

Rewarding shareholders remuneration

Main Achievements 2017-2019

Focus on Realized Infrastructures

• >1,000 meetings made in 2017-2019 o/w 316 in 2017, 350 in 2018 and 469 in 2019
• More than doubled meetings in 2019 vs 2016
• Direct dialogue with local communities
• Explanation of the planned projects
• Sharing of solutions

Projects execution based on open dialogue with local communities

Energy Scenario

Global Electricity Demand trend

Other energy sources

Increasing central role of electricity vector

Source: World Energy Outlook 2019 (IEA)

Note: total final energy consumption incorporates total final consumption by end-use sectors but excludes non-energy use. Electricity demand equals total generation minus own use and transmission and distribution losses

Electricity System evolution Energy Scenario

Higher complexity is shifting the approach from watt to byte

Energy Scenario

Electricity System's Management (1/5) – 4 Main challenges

RES intermittency RES geographical distribution ▪ Increasing grid congestions Extreme weather events ▪ Increasing risk of local disruptions CHALLENGES IMPACTS RES technical characteristics ▪ Reduction of system inertia

• Reduction of adequacy margins
• Increasing periods of over-generation
• Increasing steepness of residual load evening ramp
• Growing system operation challenges due to growing Distributed Generation
• Reduction of resources providing frequency and voltage regulation

Increasing TSO pivotal role

Energy Scenario

Electricity System's Management (2/5) – RES Intermittency

CONSUMPTION CURVES AND RESIDUAL LOAD⁴

Increasing need of storage capacity

• 1. 2019 provisional data
• 2. Targets on demand covered by RES
• 3. MiSE provisional data
• 4. Residual load = Demand minus renewable production

Energy Scenario

Electricity System's Management (3/5) – RES geographical distribution

Increasing need of grid meshing

Increasing investments to enhance grid stability

Increasing investments in grid resiliency

Energy Scenario

Key enablers of the Energy Transition

Transmission grid 1 development	▪ Strengthening of North-South backbone ▪ Grid reinforcements in the South of Italy and in the Islands ▪ Developing foreign interconnections ▪ Investing in voltage regulation and to increase system inertia
Long-term 2 price signals	▪ Capacity Market ▪ Power Purchase Agreements and auctions for RES ▪ Long-term contracts through competitive procurement of storage
3 Market evolution	▪ Participation of new flexible resources in ancillary services market ▪ Evolution of the structure of the ancillary services market
Innovation 4 and digitization	▪ Digitization of the grid and data management ▪ Industrial IoT, Energy Systems and Advanced Materials ▪ Sector Coupling

A set of coordinated, coherent and simultaneous actions will be mandatory

Our Mission TSO's Key Pillars

Terna's leading role for a sustainable energy transition

Strategic Guidelines

Domestic Regulated	Reinforcing domestic core activities leveraging technologies
Non Regulated	Developing new services to support energy transition
International	Leveraging core competences

Enabling Factors

People

Developing innovation leadership

Enhance competences to build an agile and innovative workplace

Strategy

Domestic Regulated (1/3): focus on 2020 National Development Plan

• Cost Benefit Analysis fully compliant
• Ensuring long-term growth

Main focus:

• Islands and internal back-bone reinforcements
• Resiliency and quality of service increase
• Interconnection development

Increasing long-term investment plan driven by growing system needs

Strategy

Domestic Regulated (2/3): reinforcing domestic core activities

Wide range of projects to lock-in capex program

1. Net of EU contributions 2. Calendar RAB including WIP Note: RAB inflation at 1.0% on average during plan period *Excluding Interconnectors WIP

Strategy

Domestic Regulated (3/3): reinforcing domestic core activities

Strong focus on resiliency, digitization and sustainability

Strategy

Non Regulated: developing new services to support energy transition

Double-digit increase in EBITDA contribution vs old Plan

International (1/2): leveraging core competences Strategy

PROJECTS IN OPERATION

Brazil: Santa Maria

• 230 kV, 158 km
• Commissioned in October 2018
• 30-year concession

Brazil: Santa Lucia

• 500 kV, 355 km
• Commissioned in April 2019
• 30-year concession

Uruguay: Melo-Tacuarembo

• 500 kV, 214 km
  • Commissioned in October 2019
  • 30-year concession

Relevant projects delivered

Strategy

International (2/2): leveraging core competences

EXECUTION WELL ON TRACK

Peru: Aguaytia-Pucallpa

• 138 kV, 132 km
• Commissioning expected in 4Q 2020
• 30-year concession

Brazil: Quebec¹

• 500 kV, 350 km
• Commissioning expected by 1Q 2023
• 2 30-year concessions

STRATEGY

POTENTIAL NEW PROJECTS

2020-2024 Cumulated Capex Lower than 150€mn

EBITDA cumulated in 5 years² ~200€mn - Double-digit growth vs old Plan

• 1. Signing made on April 12th, 2019. Closing for one of the two lines finalized on November 11th, 2019
• 2. Including financial income from Uruguay project

Innovation & Digitization Strategy

INNOVATION

Guidance 2020 and 2024 Strategy

Solid growth during the Plan period

Focus on FY 2019 Key Numbers

Growth of all P&L lines and capex acceleration delivered

Revenues Focus on FY 2019

Higher contribution from all business lines Insourcing attività di O&M Rete FS

EBITDA Focus on FY 2019

EBITDA increase driven by all activities Insourcing attività di O&M Rete FS

From EBITDA to Net Income Focus on FY 2019

€mn

Robust 7% Group Net Income increase

Cash Flow & Net Debt Evolution Focus on FY 2019

Strong Operating cash flow generation

Note: figures may not add up due to rounding

1. Including Other Fixed Assets Changes

2. Including Cash Flow Hedge accruals and other

2020 – 2024 Group Financial Targets

Financial Efficiency and Financial Structure

• Average Cost of Net Debt 2020-2024 @ 1.4%
• Gross Debt as of YE 2019 @ 81% Fix rate
• Net Debt / RAB¹<60% over the Plan
• Average duration as of YE 2019 of 5 years

Robust financial structure

P&L 2020 – 2024 Group Financial Targets

EPS CAGR 5% vs >3% in old Plan

Dividend Policy and Closing Remarks

Dividend Policy

€ cents

Enhancing shareholders value

Closing Remarks

In line with EU Green Deal and National decarbonization strategy

Regulatory Visibility Strategic Annexes

WIP recognition and higher regulatory visibility

1. According to ARERA Final Resolution (n. 568/2019)

Operational Efficiency Strategic Annexes

Continuous effort in efficiency levels

People Strategy

Strategic Annexes

Terna's Sustainable Management Approach

		2019		2020-2024
Pillars	KPIs	Targets	Results	Targets
▪	Employees with performance valuation (%)	70%	75%	85% at 2020
Human ▪	Employees with digital competences (n.)	450	882	1,000 at 2021
Resources ▪	Health & Safety training for operative employees (%)	50%	87%	100% at 2020
▪	Safety Index	≤1	1.17	≤1 Plan period
Local and ▪ central stakeholders	Local Stakeholders: sentiment	+15% (vs 2018)	+17.9% (vs 2018)	≥ 2019 level
Integrity, ▪	Suppliers with ISO 14001 and OHSAS 18001	91%	94%	100% at 2020
responsibility, transparency ▪	certifications (%) Green Capex (% of cumulated capex)	Over 20% 2019-2023	Well on track	~30%
▪	Incidence of SF6 leakages (%)	0.47%	0.40%	0.45% from 2020
Environment ▪	Km of new underground and undersea lines (% on total new lines)	~60% 2019-2023	Well on track

EBITDA Evolution Strategic Annexes

Strategic Annexes

2020 Total Grid Fee update*

Strategic Annexes

Global Energy Trends – Power Sector Investments up until 2040

Increasing capex on infrastructures

Financial Annexes (1/5)

FY 2019 results - Consolidated Income Statement¹

€ mn	FY19	FY18	Δmn	Δ %
Total Revenue	2,295	2,197	98	4.5%
Regulated Activities	2,055	1,990	65	3.3%
Transmission	1,860	1,789	71	4.0%
Dispatching	113	143	-30	-21.1%
2 Other	54	32	22	70.2%
IFRIC12	28	26	2	8.2%
Non Regulated Activities	212	195	17	8.6%
International Activities	28	13	16	127.2%
Total Costs	554	546	8	1.4%
Regulated Activities	398	403	-6	-1.4%
Labour Costs	213	203	10	4.8%
External Costs	151	156	-5	-3.2%
2 Other	6	19	-13	-66.8%
IFRIC12	28	26	2	8.2%
Non Regulated Activities	142	134	7	5.4%
International Activities	15	9	6	65.2%
EBITDA	1,741	1,651	91	5.5%
D&A	586	554	32	5.8%
EBIT	1,155	1,097	59	5.3%
Net Financial Charges	78	89	-11	12.5%
Pre Tax Profit	1,077	1,008	70	6.9%
Taxes	313	296	17	5.9%
Tax Rate (%)	29.1%	29.4%	-0.3 pp
Total Net Income	764	712	52	7.3%
Minority Interest	7	5	2	32.0%
Group Net Income	757	707	51	7.2%

Financial Annexes (2/5)

FY 2019 results - P&L Quarterly Analysis

€ mn	1Q19	1 1Q18	Δ	2Q19	1 2Q18	Δ	3Q19	1 3Q18	Δ	4Q19	1 4Q18	Δ
Total Revenue	537	523	14	561	540	21	568	542	26	630	592	38
Regulated Activities	500	488	12	505	492	13	513	501	12	537	509	28
Transmission	464	451	13	464	447	17	466	450	16	465	441	25
Dispatching	28	29	0	27	31	-4	29	43	-14	28	40	-12
2 Other	5	5	1	10	10	0	12	3	9	27	15	12
IFRIC12	2	3	-1	3	3	0	6	6	0	17	14	3
3 Non Regulated Act.	33	32	1	49	46	4	48	40	8	81	77	5
4 International Activities	4	3	1	7	2	4	6	1	6	11	7	5
Total Costs	117	114	3	135	134	1	136	127	9	167	172	-5
Regulated Activities	95	95	0	96	99	-3	94	94	0	113	115	-3
Labour Costs	57	54	4	53	55	-2	50	48	2	53	48	6
External Costs	34	34	0	35	37	-2	35	34	1	47	50	-3
2 Other	1	4	-3	5	4	1	4	6	-3	-4	4	-9
IFRIC12	2	3	-1	3	3	0	6	6	0	17	14	3
3 Non Regulated Act.	21	17	3	35	33	2	38	31	8	47	53	-6
International Activities	2	2	0	4	2	2	3	2	1	7	3	4
EBITDA	420	409	11	426	406	20	432	415	17	463	421	42
D&A	140	133	8	148	135	13	148	133	15	150	154	-4
EBIT	280	277	3	278	271	7	285	283	2	313	267	46
Net Financial Charges	16	25	-9	23	18	5	22	24	-2	17	22	-5
Pre Tax Profit	264	252	12	255	253	2	262	258	4	296	245	52
Taxes	78	69	9	72	74	-2	76	76	1	87	78	9
Tax Rate (%)	29.5%	27.2%	2.3%	28.4%	29.4%	-1.0%	29.0%	29.3%	-0.2%	29.4%	31.9%	-2.5%
Total Net Income	186	184	2	182	178	4	186	183	3	209	167	43
Minority Interest	0	1	-1	2	1	1	0	2	-1	5	2	3
Group Net Income	186	183	3	181	178	3	186	181	5	205	165	40

1. Unaudited Managerial Accounting

2. Including Quality of Service

3. FY 2018 restated in accordance with IFRS15

4. Construction margin, including IFRIC 12

Financial Annexes (3/5)

FY 2019 results - Consolidated Balance Sheet

€ mn	Dic. 31,2019	Dec. 31,2018	Δmn
PP&E	13,864	13,244	620
Intangible Asset	543	519	23
Financial Inv. and Other	502	320	182
Total Fixed Assets	14,908	14,084	825
Net WC	-2,208	-1,822	-385
Funds	-210	-308	97
Net Capital Invested	12,490	11,954	537
Financed by:
Consolidated Net Debt	8,259	7,899	359
Total Shareholder's Equity	4,232	4,054	178
Total	12,490	11,954	537
D/E Ratio	2.0	1.9
D/D+E Ratio	0.7	0.7
Number of Shares (mn)	2,010	2,010

Financial Annexes (4/5)

FY 2019 results - Consolidated Cash Flow

€ mn	FY19	FY18
Total Net Income	764	712
1 D&A	573	551
Net Change in Funds	-97	-48
Operating Cash Flow	1,240	1,214
2 Δ Working Capital & Other	251	261
Cash Flow from Operating Activities	1,491	1,474
Capital Expenditures	-1,264	-1,091
Free Cash Flow to Equity	227	383
3 Dividends & Equity	-586	-486
Change in Net Cash (Debt)	-359	-103

Financial Annexes (5/5)

FY 2019 results - Capex

	FY19	FY18	Δ mn	Δ %
€ mn 1
Incentivized Investment Other Reguleted	50 1,097	56 933	-6 165	-11% 18%
Regulated Capex	1,148	989	159	16%
2 Other	117	103	14	14%
Total Group Capex	1,264	1,091	173	16%

Disclaimer

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Notes

Notes

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