The 2008-2012 Strategic Plan

The Terna Group’s strategic vision is outlined in the 2008-2012 Strategic Plan, which was presented to investors and financial analysts on January 31, 2008. The Plan sets safety and reliabilityThe fulfilment of two conditions:• availability: capability to respond, statically and in every moment, to the customers’ global demand for power and electrical energy at the connection points, taking into account planned and forced going off-line of the components of the electricity system; • security: capability torespond to sudden disturbances such as short-circuits or forced loss of components of the electricity system. Thus, this aspect specifically considers transition effects which are not covered by the first criterion. objectives for the electricity service and lays down a significant investment plan for the developmentWorks on the electricity grid which lead to the adjustment or upgrading of the transport, transformation,connection and interconnection capacity, or an increase in operating flexibility of the grid, or the removal ofgrid elements. and expansion of activities both in Italy and abroad.

Business Unit Italy

Development of the National TransmissionElectricity transport and transformation activities along the interconnected high- and very high-voltage grid forthe purposes of delivery to customers, distributors, and recipients of self-produced energy. Grid
During the five-year period, over 3.1 billion euro will be invested, with a 400 million growth with respect to what had been announced last year.
Grid development capex represents 80% of the total and increased from 2.2 billion euro, that were announced last year, to 2.5 billion euro.
The new feed-in tariff system established by the Authority for Electricity and Gas is based on rewarding with different levels of extra remuneration those development investments that are most necessary for resolving grid congestion and critical situations in electricity transmission, as well as strengthening interconnection. 60% of the total of development investments falls within the type for which an extra 3% remuneration has been established, while the remaining 40% belongs to the 2% incentive type (see box on “The new tariff system” on page 25).
The most important infrastructural works will include:

  • Submarine cable between Sardinia and mainland Italy (SA.PE.I.);
  • Santa Barbara - Casellina line (Tuscany)
  • Grid upgrading in Valcamonica and Valtellina (Lombardy)
  • Foggia - Benevento line (Puglia/Campania)
  • Sorgente - Rizziconi connection (Sicily/Calabria)
  • Grid upgrading between Venice and Padova (Veneto)
  • Grid upgrading in the Province of Lodi (Lombardy)
  • Grid upgrading in South Val d’Ossola
  • Start-up of the Udine Ovest - Okroglo line (Italy - Slovenia)
  • Strengthening the Italy - France interconnection
  • Start-up of the connection with the Balkan countries, through a submarine cable in the Adriatic sea.

Operating Efficiency

The new cost reduction target regarding only the Business Unit Italy, includes a reduction of approximately 50 million euro from the 2006 pro forma level to 2010. This will result in an annual reduction of 4% in real terms.
Operating efficiency is pursued principally through the optimization of insourcing policies and reducing outsourcing, following activity already under way in 2007. Expanding the grid will also determine a significant improvement of the efficiency parameters; in particular, the unit cost per transported MWh will decrease by 21%, from 1.18 euro in 2006 to 0.93 euro in 2012. Taking into account also the gradual revenue increase, the gross operating margin is expected to increase from 71% to 75% at the end of the period included in the Plan.
The growth of the RAB (Regulatory Asset Base) and the yearly update of amortizations will significantly change over time the impact of the components that determine single tariffs. Terna estimates that on the basis of the 2008 preliminary indications, the components will be divided as follows: recognized costs 33%, amortizations 26% and remuneration of invested capital 41%. It is expected that the changes introduced by the recent tariff review will allow revenues to increase significantly over time also through the development of the single components which for 2012 are estimated as follows: recognized costs 26%, amortizations 29% and remuneration of invested capital 45%.

Quality and Safety of the Grid

For the Defence Plan, over 150 million euro will be spent for this period (+50% compared to the previous Plan).
With the recent resolutions, the Regulatory Authority introduced new indicators that regard the quality of both transmission and dispatchingThe activity aimed at issuing provisions for the coordinated use and operation of production plants, thenational transmission grid, the grids connected to the same, and ancillary services of the electricity system. services. For transmission, the quality provided by Terna will be measured according to two annual indicators; Non Supplied Electricity at the national level and the Number of Outages per User per territorial operating area.
For dispatching, the Authority for Electricity and Gas introduced measurement tools for the quality of Terna’s forecasting performance. In particular, the difference between forecasts and actual daily electricity demand will be measured, as well as the forecasting capacity from wind power plants (see box on “The new tariff system” on page 25).

Non-regulated Activities

In addition to operating and maintaining the electricity gridA group of plants, lines and stations for transferring electrical energy and supplying the necessary ancillary services., Terna also intends to strengthen the offer of its engineering services by working on new connection lines as well as upgrading and improving its systems. In this field, the most significant element is represented by the development of new capacity, particularly from renewable sources. The need for connecting new productionGeneration of electrical energy, in any way. units to the transmission grid has increased the demand for specialized services, expanding the market segment where Terna will have a competitive edge thanks to its technical-engineering know-how.

Foreign Growth

The Terna Group will continue to pursue foreign growth opportunities in its business sector with a particular focus on strategic initiatives in areas representing the natural extension of its present activities, the most important being the Balkans and North Africa. All of South-East Europe represents an area of interest for new interconnection projects and direct investments.

Business Unit Brazil

In 2007, Terna Participações completed the acquisition of 4 companies: Gtesa, Patesa, ETAU and ETEO and won, together with two other Brazilian companies, the bid for building a new 200 km line. Once all the transactions have been completed, Terna Participações’ kilometres of electricity lines will grow by 38% and its revenues by 22%.
The acquisition expenditures will bring the Brazilian companies’ net financial position to a peak of over 1.3 billion Reais (approximately 490 million euro). The operating cashflow generated by the activities will allow to rapidly reduce the debt which by the end of 2012 is expected to be lower than the present levels, nearly 600 million di Reais (approximately 226 million euro).
For the future, Terna Participações will be involved in the integration process of the acquired companies with the main objective of obtaining cost efficiency; furthermore, it will continue to explore the growth opportunities in the country and in other selected Latin American countries, both through new bids and foreign growth opportunities.

Capital structure

Cash absorption linked to investments and dividends gradually brought the gearing of Italian regulated activities from 32% to 47%, thus improving the capital structure efficiency. The Group’s net financial position during the period covered by the Plan rose from 2.7 to 4.5 billion euro, with an expected increase of 1.8 billion euro.
The effects of the Finance Act will allow reducing the effective tax rate from 40% to 35-36%, starting in 2008; moreover, they will allow adjusting the deferred tax fund as of December 31, 2007 with an improvement equal to approximately 60 million euro.

Dividend Policy

Terna confirms its dividend policy that determines very attractive yields for investors and also represents one of the highest in the sector. In confirming this policy which is divided in interim dividends and final dividends, the management expects a minimum annual dividend growth, based on results obtained and expectations for the Industrial Plan, of at least 4% compared to the previous 3% always compared to 2005 as the year of comparison.

Highlight:Italy, an electricity hub for the mediterranean

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