– Company Update

Terna Energy S.A.

Renewable Energy / Reuters/Bloomberg: TENr.AT / TENERGY GA

October 16, 2018

Rating Buy Raising expectation and TP Previous Buy

Terna Energy (TE) has posted a stellar performance, being one of the best performing names of the Greek market for 2018. The combination of sector dynamics, company fundamentals and management initiatives, Target Price 8.50 has driven TE’s share price up by 18.0% since our previous Buy recommendation (May 14th) and 36% ytd (EUR)Previous 6.50 (compared to Athex ytd losses of 21.0 %). During 1H18 results, management raised cash distribution guidance, Current Share Price* (EUR) 6.01 *15/10/ 2018

announcing EUR 0.30/sh capital return for Jan’19 (pending EGM approval) and pointing to annual cash distributions of EUR 50m (EUR 0.44/sh) in the coming years. At the same time 2018 is shaping, as we Stock Data highlighted in the beginning of the year (here), to an important period for the Greek RES sector, with maturing Market Cap (EUR m) 682.1 market conditions providing better clarity over the longer term and with the sector attracting significant Free Float 31% investment interest. Amid this environment we review our estimates and valuation on TE and we now raise EV (EUR m) 1,212 our TP to EUR 8.50/sh (vs. EUR 6.50/sh previously) and reiterate our Buy recommendation with a targeted Num. of Shares (m) 113m upside of 46% (including announced capital return). Having said that, we view the recent stock price decline due to the volatility in the domestic and global markets as an excellent opportunity to buy into the company. Performance 1m 3m 12m Absolute (%) -4.1 12.3 43.1 Greek wind market: Liquidity auctions and transactions ASE General -6.9 -17.1 -17.1 Following the introduction of new framework in late 2016, Greek RES sector liquidity has now been safely restored, reducing significantly payment time for RES producers (TE reported receivable reduction of EUR 85m over the last 18 months). With current framework providing stability for the sector remuneration, Greece is now ADV (000’s sh-3m) 169 moving ahead with RES capacity auctions, tendering in total 2.6GW of wind and solar capacity in 2018-20. The Price high-12 m (EUR) 6.54 first auction took place in July attracting participation from global sector names that abstained from the Price low-12m (EUR) 3.92

domestic market during the crisis years. Also in 2018 following the sector and macro de-risking, we saw the first 7.0 transactions in the private market depicting the strong underlying demand for RES assets in Greece. 6.0

Updating capacity expansion plan 5.0 TE at 1H18 had 986MW installed. It is expected that by the end of 2020 following the completion of the under 4.0 development parks (Fluvana II in the US, Evoia and Servouni in Greece) installed capacity will reach 1.263GW. 3.0 Additionally we now account for another ~200MW to be added by the end of 2022 under the Greek auctions 2.0 Oct 17 Dec 17 Feb 18 Apr 18 Jun 18 Aug 18 Oct 18 scheme. In parallel the company is continuing the development of two waste management projects that will add TERNA ENERGY SOCIETE ANONYME COMMERCIAL TECHNICAL COMPANY S.A. another cEUR 11.0m of EBITDA upon full ramp up (2022). The capacity expansion plan is backed by a total capex ATHEX Composite Index (Rebased) of EUR 734m in 2018-22 funded by i) available subsidy/tax equity (in the US); ii) project finance and iii) own cash.

Terna Energy S.A. is active in the production Cash distributions expectations raised of energy from sources Following a strong cash generation in 2017-18, supported also by receivables collection, the company raised by (RES). More specifically Terna Energy 15% y-o-y its cash distributions for 2019. As TE is now exceeding the critical mass of 1.0GW that allows to both constructs and operates wind parks, small hydroelectric plants, photovoltaic parks and fund new investment and reward shareholders, we estimate cash available for distribution (CAFD) to grow by recently has been involved in the waste 11.7% CAGR in 2017-22, with the company’s cash distributions growing by 18.6% CAGR during the same period. disposal facilities area. Its construction division undertakes mainly electromechanical Valuation projects both in house and third party developments. Based on our updated capacity expansion schedule, our valuation (SOP, DCF per project PPA lifetime assuming no repowering) returns a TP of EUR 8.50/sh (vs. EUR 6.50/sh previously) pointing to a total upside of 46% Shareholders: Gek Terna 37.9%, Peristeris (including announced capital return). Terna Energy currently trades at 7.5x on our 2018-19 EV/EBITDA Georgios 22.4%, York Global Finance 9.02%

estimates, compared to EU peers trading at 8.9x-8.7x and US peers trading at 12.0x-10.7x. In respect of cash returns, TE screens at the higher end of its peer universe with 2019-20 dividend yield at 4.4%-5.0%. Note that based on latest relevant private transactions, market implies a 9.5x-10.5x EV/EBITDA multiple and a mid-single Argyrios Gkonis - Analyst digit cash yield. On out TP, the company would trade at 8.6x-8.0x on 2020-21 EV/EBITDA, with a CAFD yield of [email protected] 6.4%-7.9% and a dividend yield of 4.7%-5.6%. +30 210 7424462

EUR m 2016 2017 2018f 2019f 2020f Constantinos Zouzoulas – Head of Revenues 225.6 276.8 290.5 287.1 308.9 Research EBITDA 115.8 147.9 168.9 179.2 197.9 [email protected] Net Income 20.2 37.4 45.1 48.4 60.3 +30 210 7424460 Net Debt 554.5 563.9 543.8 622.2 700.0 P/E (x) 14.7 x 12.3 x 15.1 x 14.0 x 11.3 x

EV/EBITDA (x) 6.9 x 7.2 x 7.5 x 7.5 x 7.2 x

Div. Yield 3.2% 5.6% 4.4% 5.0% 6.7%

Net Debt/EBITDA (x) 4.8 x 3.9 x 3.2 x 3.5 x 3.5 x

Source: The Company, AXIA Research

AXIA Research Page 1

Terna Energy – Company Update

Greek wind market: Liquidity, auctions and transactions

As we have highlighted in the beginning of the year (here), 2018 turns to be a stepping stone year for the Greek wind market. Driven by the ongoing restructuring of the domestic energy sector, wind market is entering a mature phase having resolved its legacy issues (liquidity) and a mechanism in place to support growth (capacity auctions). As global trends pushing investors towards RES accelerating in the last 3-4 years and driving energy sector restructurings globally, the revamped Greek RES market, a newcomer with significant upside, is gradually reaching investors radar. With Greece’s wind sector capacity scheduled to grow by ~15% CAGR in the coming 3 years, and improving macro providing a positive backdrop, investment interest in the sector is gaining momentum on all fronts: i) public side (TENERGY and ANEMOS are up 17%-36% ytd vs. ASE -21%); ii) private side (sale of wind and solar portfolios of Libra); and iii) greenfield investments (global RES names active again following the July auction).

RES account stabilized and turned to a surplus According to the latest available data from the market operator (LAGIE) in July 2018 the RES account had a surplus of EUR 101.9m. This compares to a deficit of EUR 105m in July 2017, and a deficit of EUR 241.7m at the end of 2016. The sharp swing is attributed to the restructuring of the RES account that took place in October 2016, with the introduction of the suppliers’ fee as well as to the increased inflows from i) CO2 rights auction, due to the rally in CO2 prices and ii) higher wholesale market price (SMP). Actually, in early 2018, Ministry of Energy reduced the suppliers’ fee for the year.

Looking forward, LAGIE projections call for the account surplus at the end of 2018 to stand at EUR 245m and grow to EUR 346m at the end of 2019. According to the framework in place, an amount of EUR 70m out of the year end-2018 surplus is expected to be kept in an escrow account as a safety cushion, while the Ministry of Energy is expected to proceed with a further reduction of the supplier’s fee and potentially of the ETMEAR (fee paid directly by consumers).

Chart 1. RES account (deficit)/surplus (EUR m Chart 2. RES account dynamics (EUR m)

300 200

1,969 100 217 1,807 1,848 194 1,857 0 212 Other 152 394 -100 299 CO2 411 -200 190 189 89 245 RES fee -300 32 -400 ETMEAR 870 -500 889 760 950 Market pool -600 -700 Total RES

compensation

Dec

June June June June

June 486 540 570

March March March March

March 366

December December December December December

September September September September September 2016 2017 2018E 2019E 2013 2014 2015 2016 2017 2018

Source: LAGIE, AXIA Research

This improvement in the RES account liquidity has benefited RES producers, with the industry reporting a significant reduction in payment times and a de-escalation receivables. For Terna Energy specifically in FY2017 receivables declined by almost EUR 40m, while in 1H18 a further decline of EUR 45m has been booked.

RES capacity auctions moving ahead With the country falling behind its (ambitious) targets for RES capacity installations in the context of EU guidelines, the government in the beginning of the year in agreement with EU announced a competitive capacity auction tender framework for new RES installations. The projects are awarded 20-years PPAs, with the price though set through a competitive auction form a starting price set by the regulator. In total, Greece aims to auction 2.6GW of wind and solar capacity in 2018-20.

AXIA Research Page 2

Terna Energy – Company Update

Table 1. Greece’s RES capacity targets Interim target (2014) Target (2020) Current (Jul’18)

Hydro 3,700 4,650 3,403 Small (0-15MW) 300 350 234 Large (>15MW 3,400 4,300 3,169 Solar 1,500 2,200 2,250 Solar-Thermal 120 250

Wind 4,000 7,500 2,740 Biomass 200 350 66 Source: LAGIE, AXIA Research

The first auction took place in July, with 170MW of wind and 106MW of solar capacity being licensed. Looking specifically on wind, projects with total capacity of 300MW participated in this first tender and based on the 75% rule (tendered capacity should be 75% of total offer to ensure competition), 170MW were awarded. Looking on prices, the starting price was set at EUR 90/MWh with the competition driving prices lower and awarded projects securing EUR 68.5-71.9/MWh.

Chart 3. Wind and PV auction starting price and Table 2. Jul’18 auction results for wind capacity results Price Project Company/Project MW Affiliation (EUR/MWh) secured 90.0 Pavlidis Marbles 12.0 69.00 Pavlidis Marble YES 85.0 Enerfarm 2 24.0 70.00 Pavlidis Marble YES 80.0 80.0 75.8 Ventavel 34.0 70.00 NA YES 71.9 Energiaki Arvanikou 44.6 68.18 EDPR YES 71.0 68.5 Rokas 16.0 71.93 Iberdrola YES 63.0 El.Tech.Anemos 28.8 70.00 YES PPC Renewables 11.5 68.50 PPC YES Total 170.9

K-Wind Kithaironas 12.0 79.50 Intrakat NO Aioliki Provata 30.0 72.00 Terna Energy NO Volterra 10.8 74.00 J&P Avax NO Aioloko Parko Kellas 40.0 74.40 Delta Techniki NO Aioloko Parko Aeroraxi 15.0 76.01 NA NO Aioliki Achaditsa 18.0 72.00 Interphoton NO Aioliki Dalamaki 12.0 72.00 Interphoton NO Total 137.8 Solar (<1.0MW) Solar (>1.0MW) Wind (<50MW)

Total auctioned capacity 308.7

Capacity now allocated 5.465 Starting Price (EUR/MWh) Lowest accepted Highest accepted

Source: RAE, AXIA Research

In respect of participation in the tender, we highlight the presence after a very long period of global names with or without prior exposure to the country. These names include EDF and Iberdrola that have installed capacity in Greece, but have not been active for a very long time, while sector leader EDPR participated, signalling its first ever investment in the country.

The next auction is set for December 4th to 6th 2018. According to draft tender terms published in early October by RAE, wind auctioned capacity will be upscaled to 220MW, from 120MW, with the regulator deciding to bring forward 33% of the capacity scheduled for 2019. On our view this depicts increased demand from mature projects. Based on the 75% rule, total offered capacity should reach 380MW n order for the total allowed of 220MW to be auctioned.

Another additional auction for 400MW of wind projects with capacity above 50MW and solar above 20MW was initially scheduled for 2018. We understand that this will be pushed over to 1H19. With the starting price for the auction of this category set to EUR 80/MWh,

Table 3. Scheduled RES capacity auctions in Greece Year Type Capacity Solar 300 2018 Wind 300 Common 400 Solar Remaining 2018 plus 300MW 2019 Wind Remaining 2018 plus 300MW Common Remaining 2018 plus 400MW Solar Remaining 2019 plus 300MW 2020 Wind Remaining 2019 plus 300MW Source: RAE, AXIA Research

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Terna Energy – Company Update

Looking on the pricing range of the first auction, for wind parks, prices settled about 22% lower vs. the starting price compared to a decline vs. starting price of 8.3%-16.3% for solar (<1MW or >1MW). Also the average price for wind was about 24% lower vs. the average realised price of the existing parks in 2017.

Trying to better depict what these prices mean for investors but also the attractiveness of the sector apart from the price someone has to consider: i) Lifetime of PPA, allowing for long term stable and predictable cash flows ii) Licensing cost and implementation risk iii) Actual construction cost and financing cost iv) Site characteristics (load factors) v) Underlying risk assumptions

According to our estimates, at the price levels achieved in the wind auctions, underlying project IRRs were at high single digits, allowing for mid-teens IRRs on a levered basis. We reckon that in the past and under the previous framework, realized equity IRRs were higher. Despite that, and as depicted by the interest in the auctions, investment appetite is strong. This on our view is mainly attributed to the decline of the underlying risks both market specific (RES account) and macro. At the same time, the significant decline in equipment costs (turbine manufacturers are reporting a 35% drop in order prices since 2011) has lowered capex needs, while technological advancement have improved wind efficiency (load factors).

Chart 4b. Average selling price of order intake for Chart 4a. Onshore wind auctions results in EU Gamesa wind turbines (EUR/MW)

1.2

1.1

1

0.9

0.8

0.7

0.6 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 2011 2012 2013 2014 2015 2016 2017 2018

Source: ECOFYS, GAMESA, AXIA Research

First major transaction in the domestic market at very attractive valuation Until recently we there has been very limited M&A activity in the Greek RES sector. Volatile macro situation and unstable market environment made it unattractive for foreign investors to look at the Greek market. Local players that felt comfortable undertaking development risk, preferred greenfield development aiming for higher returns taking advantage of the appetite of the domestic banks for project finance in the RES sector (one of the few sectors that could absorb new credit).

Following the decline of the risk profile on the sector, over the last 12-18 months M&A discussions have picked up pace. We understand that interest around the sale of a 67% stake in the second largest wind company in the country, El.Tech.Anemos in 1H18, by parent group Ellaktor was very high. Yet the transaction did not materialize due to a change in the parent company management and strategy. In late September, Fortress (PE Fund) completed the acquisition of 10 wind parks in Greece controlled by Libra group (Logothetis family) with a total capacity of 186MW. The buyer assumes the total debt of the parks of EUR 278m that was held by , providing also a small cash consideration.

In this context the total value of the deal is at EUR 278m (EV) implying according to press, 9.5x multiple on 2017 EV/EBITDA or 1.49x EV/MW. These levels are compatible with private market valuations that are taking place in the sector globally with transactions of wind capacity realizing ~1.5x EV/MW and ~10.0x EV/EBITDA, while on a cash yield basis (cash available for distribution), realized yields hoover around 5.0%. AXIA Research Page 4

Terna Energy – Company Update

Terna Energy - Capacity expansion update

Terna Energy (TE) at the end of 1H18 reported an installed capacity of 986MW (unchanged ytd). The company has in advanced construction stages another 177MW of wind parks (158MW in US and 19MW in Greece) due to come online in late 2018/early 2019. Based on the company’s updated pipeline portfolio, an additional 100MW in Greece (Evoia special project 60MW plus 40MW) are expected to start construction in 2019 and to be commissioned in 1H2020. Note that all the under construction capacity has long term PPAs with guaranteed FiTs (in Greece) or long term hedged off-take agreements (US). Upon the completion of these projects, TE will reach an installed capacity of 1.267GW (including 4.0MW of waste management projects).

Looking in the near term, we expect TE to be able to licence through the next two RES capacity auctions scheduled for December 2018 and 1H19 additional capacity of 96MW (30MW and 66MW, that is 13% and 16% of the respective scheduled capacity that will be offered in each auction). These MWs should be expected to come online in 2020-21 (in the following section we discuss in greater detail the aspects for the RES capacity auction). We would expect the company to be able to secure a price though the competitive auction of around EUR 70/MWh for both projects. This should bring year end 2021 capacity to 1.332GW.

In the long run, the company has set a target to reach 2.0GW of installed capacity by 2025. The primary region of focus should be Greece, where TE holds additional capacity of about 140MW ready to be constructed (on top of the 96MW that will participate in the upcoming auctions), while the company has another 2.4GW in early licensing stage (production license). Given that Terna Energy is the leader in the domestic market (20% market share in 1H18), and accounting for it’s know how and positioning in the market, we assume another 100MW will be eventually installed, looking at a terminal capacity of 1.432GW at the end of 2022. Note that in respect of wind installed capacity Greece is lagging its target by ~5.0GW.

Chart 5. Terna Energy total capacity addition schedule (MW)

100 1,459 96 100 158 986 19

2017 2018e 2019f 2020f 2021f 2022f Medium term target

Source: The Company, AXIA Research

Chart 6. Terna Energy wind capacity evolution estimates (MW)

1,432.4 1,332.4 1,236.4 132 1,136.4 132 Other 132 959.4 978.4 132 451.4 451.4 132 738.0 132 451.4 451.4 US 132 293.4 293.4 138 749 849 553 553 653 468 534 Greece

2016 2017 2018e 2019f 2020f 2021f 2022f

Source: The Company, AXIA Research

AXIA Research Page 5

Terna Energy – Company Update

Updating estimates

We update our estimates to incorporate: i) latest trends from 1H18 results; ii) updated capacity installation schedule and new medium term capacity targets; and iii) updated management guidance on cash distributions. While in the short term in general our changes are in the low single digits, the medium to longer term we are looking to double digit hikes vs. previous estimates. In respect of consensus, we now are above for 2018 (+8.5% and +7.0% on 2018E EBITDA and EPS respectively), while we understand we are also above market estimates for the medium to longer term.

Table 4. Terna Energy updated estimates EUR m 2017a 2018E 2019F 2020F 2021F New Old New Old New Old New Old

Installed Capacity (YE MW) 986 1,005 1,005 1,163 1,163 1,263 1,250 1,359 1,250 New-vs-Old 0.0% 0.0% 1.0% 8.7%

Total Revenues 276.8 290.5 263.4 287.1 276 308.9 296 332.7 304 New-vs-Old 10.3% 3.9% 4.3% 9.4%

RES sales 173.4 213.5 228.3 232.6 248 253.9 250 271.7 250 New-vs-Old -6.5% -6.1% 1.7% 8.8%

EBITDA 147.9 168.9 162.2 179.2 175 197.9 192 215.5 196 New-vs-Old 4.2% 2.2% 3.0% 9.8%

Net Income 37.4 45.1 48.5 48.4 50 60.3 62 71.6 67 New-vs-Old -7.1% -3.2% -2.7% 6.5%

Source: AXIA Research

Table 5. AXIA vs. consensus estimates AXIA Consensus AXIA vs. Consensus EUR m 2018e 2019f 2020f 2018e 2019f 2020f 2018e 2019f 2020f Sales 290.5 287.1 308.9 264.0 297.6 317.5 10.0% -3.5% -2.7% EBIDTA 168.9 179.2 197.9 155.7 182.5 198.7 8.5% -1.8% -0.4% Net Income 45.1 48.4 60.3 42.1 53.5 62.8 7.0% -9.4% -4.0% Source: AXIA Research, Capital IQ

Table 6. Terna Energy group revenues and EBIDTA per division EUR m 2015 2016 2017 2018e 2019f 2020f 2021f 2022f Group Sales 187.3 225.6 276.8 290.5 287.1 308.9 332.7 351.0 RES 140.3 151.1 173.4 213.5 232.6 253.9 271.7 280.0 Construction 20.19 30.3 38.7 25.0 20.0 20.0 20.0 20.0 Trading 26.76 31.5 13.6 10.0 10.0 10.0 10.0 10.0 Concessions (e-ticket) 0.0 12.7 51.1 40.0 20.0 20.0 20.0 20.0 Waste Management 0.0 0.0 0.0 2.0 4.5 5.0 11.0 21.0 Group EBITDA 99.3 115.7 148.4 168.9 179.2 197.9 215.5 226.5 RES 97.6 108.9 126.8 160.8 175.8 193.5 207.6 213.6 Construction 1.3 6.4 18.5 5.0 1.0 1.0 1.0 1.0 Trading 0.4 0.4 1.0 0.3 0.4 0.4 0.4 0.4 Concessions (e-ticket) 0.1 0 2.1 2.8 1.0 1.0 1.0 1.0 Waste Management 0.0 0.0 1.0 2.0 5.5 10.5 Group EBITDA margin 53.0% 51.3% 53.6% 58.2% 62.4% 64.1% 64.8% 64.5% Source: AXIA Research, The Company

AXIA Research Page 6

Terna Energy – Company Update

Funding growth and distributing cash

During the 1H18 conference call management reiterated its strategy for rich cash distributions in the coming years (starting the announcement of EUR 0.30/sh capital return for 2018), that will reach up to cEUR 50m (EUR 0.44/sh) annually. At the same time, the strong operating cash flows and access to financing allow the group to facilitate its capacity growth targets, while keeping leverage at healthy levels.

Capex plan: EUR 734m to be invested in 2018-21 Based on the scheduled capacity expansion plan and our forecasts, we estimate that Terna Energy will invest about EUR 734m in total in 2018-21. This will be financed by i) available project cash grants/subsidies; ii) project finance debt; and iii) available cash/equity.

Table 7. Terna Energy investment plan Capacity Project Cost Grant/TEI Project Finance Equity Project Type Commission Date (MW) (EUR m) (EUR m) (EUR m) (EUR m) Fluvana 2 Wind 158 210 125 50 35 1H2019 Servouni Wind 19 20 13 7 2019

Evoia SPA (A+B phase) Wind 100 120 85 35 2019-20

Epirus Waste 1.5 42 20 15 7 2019 Peloponnese Waste 2.4 122 64 43 15 2019 2019 auctions* Wind 96 110 75 35 2020-21

Other wind* Wind 100 110 75 35 2021

Total 476.9 734 209 356 169

*AXIA Research estimates, Source: The Company, AXIA Research

Strong operating cash flows and cash distributions Based on the scheduled capacity expansion plan and our forecasts, we estimate that Terna Energy will grow its operating cash flows from EUR 150.4m in 2017 to EUR 226.5m by 2022 (8.5% CAGR). During the same time we estimate that cash distributions are set to grow by 18.7% CAGR. We note that based on our estimates, TE’s strong FCF generation allows the company to continue investing equity in new projects growing by 100-150MW per year in the long run.

Table 8. Terna Energy cash flow estimates EUR m 2018e 2019f 2020f 2021f 2022f Operating FCF before WC changes 171.6 179.2 197.9 215.5 226.5 WC Change 37.1 0.7 (0.6) (0.3) - Taxes (24.2) (20.6) (25.4) (30.1) (34.1) Interest (48.0) (50.2) (45.4) (41.8) (36.5) FCF (pre-expansion capex) 136.5 109.1 126.4 143.3 155.9 Debt amortization (44.1) (47.5) (50.8) (52.1) (49.3) FCF available to shareholders (CAFD) 92.4 61.5 75.6 91.3 106.5 Cash distributions 30.0 33.9 45.2 53.7 61.1 Cash for investments or additional debt repayment 62.4 27.7 30.4 37.6 45.4 Equity participation in investments 50.0 35.0 35.0 30.0 5.0 Grants/subsidies/Tax Equity 140.0 35.0 30.0

Project Debt (New issues) 78.0 110.0 110.0 75.0

Total Capex 268.0 180.0 175.0 105.0 5.0 FCF (131.5) (70.9) (48.6) 38.3 150.9

FCF yield -19.4% -10.4% -7.2% 5.6% 22.2% FCF yield (pre expansion capex) 20.1% 16.1% 18.6% 21.1% 23.0% CAFD yield 13.6% 9.1% 11.1% 13.4% 15.7% Dividend yield 4.4% 5.0% 6.7% 7.9% 9.0% Net Debt 585.1 663.6 741.4 769.1 694.7 Net Debt/EBITDA (x) 3.5 x 3.7 x 3.7 x 3.6 x 3.1 x Source: AXIA Research

AXIA Research Page 7

Terna Energy – Company Update

Valuation-Raising TP on solid and visible prospects

Our updated valuation exercise (SOP with DCF for RES and waste management) yields a TP of EUR 8.50/sh (vs. EUR 6.50/sh previous). Our TP points to a 40% upside form current levels, while adding the announced capital return for 2019, total upside reaches 46%. Therefore we reiterate our Buy recommendation on the stock. The main reason for our changes relate to higher targeted capacity estimates and underlying financials, while we also assume a lower WACC at 7.1% (vs. 8.0% previously).

Main underlying assumption of our DCF exercise includes the projection of cash flows per park up to the end of the contracted PPA. Only for capacity reaching the end of the PPA in 2019-21 we assume 7-year operation under commercial terms (SMP) as per the recently introduced legislation in Greece for wind parks with PPA expiring in 2019-21 and company’s guidance. We do not assume any terminal value/salvation value/repowering of other capacity at this point.

In respect of repowering, it makes sense to repower sites of the earliest wind farms, which tend to be in locations that have the best wind resource. Existing infrastructure including network connections can also be reused or upgraded at costs lower than for new sites. Turbine manufactures are citing preliminary repowering data showing that repowering can increase wind turbine fleet output by 25% and add 20 years to the life of the turbine. Taking such scheme into account to our valuation exercise would materially increase our NPV estimates. As this is a management strategic decision we do not take this into account until there is more visibility on the matter.

Chart 7a.TE contracted portfolio profile Chart 7b.TE contracted FCF generation (AXIA est)

180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043

Source: The Company, AXIA Research

Terna Energy currently trades at 7.5x on our 2018-19 EV/EBITDA estimates, compared to EU peers trading at 8.9x-8.4x and US peers trading at 12.0x-10.7x. In respect of cash returns, TE screens at the higher end of its peer universe with 2019-20 dividend yield at 5.0%-6.7%. Finally recall that based on latest relevant private transactions, market implies a 9.5x-10.5x EV/EBITDA multiple and a mid-single digit cash yield.

On out TP, the company would trade at 8.6x-8.0x on 2020-21 EV/EBITDA, with a CAFD yield of 6.4%- 7.9% and a dividend yield of 4.7%-5.6%.

AXIA Research Page 8

Terna Energy – Company Update

Table 9. Global wind sector valuation multiples Company Country Mcap P/E (x) EV/EBITDA (x) Div. yield (%) Installed Capacity EV EV/MW (EUR m) FY2018 FY2019 FY2020 FY2018 FY2019 FY2020 FY2018 FY2019 FY2020 (MW) (EUR m) (x) EDP Renováveis, S.A. Spain 7,091.9 32.0 27.5 24.7 9.3 8.7 8.3 0.9% 1.0% 1.1% 11,007 12,542.2 1.14 Greencoat Renewables PLC Ireland 395.2 11.6 11.8 10.5 NA NA NA 5.8% 5.8% 6.0% 299 588.2 1.97 Acciona, S.A. Spain 3,956.9 17.7 15.0 14.5 7.2 7.1 6.9 4.2% 4.4% 4.7% 7,478 8,935.1 1.19 Falck Renewables S.p.A. Italy 509.1 18.3 19.3 16.0 7.1 7.1 6.4 3.3% 3.6% 3.7% 933 1,152.2 1.23 Polenergia SA Poland 221.1 NM 16.3 17.4 10.5 7.7 7.7 NA NA NA 245 366.9 1.50 aventron AG Switzerland 360.6 34.1 32.8 28.8 13.9 13.2 12.5 2.7% 2.8% 3.0% 465 776.8 1.67 Ørsted A/S Denmark 22,871.5 10.4 22.9 19.7 6.6 10.1 9.6 2.4% 2.6% 2.7% 5,108 24,122.5 NM E.Tech.Anemos Greece 147.1 14.3 9.9 5.1 9.3 8.0 5.3 NA NA NA 260 334.2 1.29 Terna Energy Greece 689.2 15.1 14.0 11.3 7.5 7.5 7.2 4.4% 5.0% 6.7% 986 1,219.1 1.24 EU average 19.2 18.8 16.4 8.9 8.7 8.0 3.4% 3.6% 4.0% 1.40

Innergex Renewable Energy Inc. Canada 1,053.0 NM 45.1 49.7 14.2 12.1 12.3 5.7% 5.8% 6.0% 1,725 3,748.6 2.17 TerraForm Power, Inc. United States 1,986.5 NM 25.5 20.0 15.5 12.7 11.7 6.9% 7.4% 7.8% 3,640 7,600.5 2.09 Pattern Energy Group Inc. United States 1,557.2 NM 91.6 25.1 12.4 11.4 9.8 9.3% 9.4% 9.6% 2,736 4,286.1 1.57 NextEra Energy Partners, LP United States 2,170.6 14.9 21.9 17.0 7.9 7.0 6.1 3.8% 4.3% 5.0% 4,612 6,603.2 1.43 TransAlta Renewables Inc. Canada 1,848.9 11.6 12.1 13.6 9.1 8.6 8.5 8.9% 9.0% 9.2% 2,407 2,536.2 1.05 Boralex Inc. Canada 990.4 71.7 33.3 26.6 11.8 9.6 9.2 3.8% 4.0% 4.3% 1,456 3,089.6 2.12 Brookfield Renewable Partners L.P. Bermuda 7,891.6 NA NA NA 13.2 13.8 13.6 NA NA NA 16,308 23,709.4 1.45 NA average 32.7 38.2 25.3 12.0 10.7 10.2 6.4% 6.6% 7.0% 1.70

China Longyuan Power Group CorporationChina Limited 5,263.3 8.7 7.8 7.0 7.3 6.8 6.4 2.0% 2.3% 2.5% 15,930.2 Huaneng Renewables Corporation LimitedChina 2,497.4 5.4 4.9 4.5 6.9 6.5 6.0 2.4% 2.7% 3.0% 9,038.1 China Datang Corporation RenewableChina Power Co., Limited771.2 4.8 4.1 3.6 8.3 7.6 7.0 3.6% 4.3% 5.0% 7,505.3 China Everbright Greentech Limited Hong Kong 1,339.5 8.8 6.9 5.6 6.6 5.0 4.1 2.3% 3.0% 3.8% 1,592.7 Energy Development Corporation Philippines 2,128.0 14.5 11.8 10.7 9.1 8.3 8.0 2.4% 2.9% 3.2% 2,919.8 RENOVA, Inc. Japan 612.5 NA 80.5 52.2 MA 18.2 11.7 NA NA NA 933.7 China-Asia average 8.5 19.3 13.9 7.7 8.7 7.2 2.5% 3.1% 3.5%

Source: Capital IQ, AXIA Research

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Terna Energy – Company Update 1H18 Results Review

Terna Energy released a strong set of 1H18 results with net profits soaring by 78% to EUR 18.3m (in line with our estimates) on the back of increased capacity. Following strong operating FCF generation (EUR 102.9m in 1H18, +76.9% y-o-y) management announced a capital return of EUR 0.30/sh (4.7% yield) to be paid in Jan’19.

Current installed capacity in 1H18 stood at 986MW compared to 786MW in 1H17, following the commissioning of new wind parks in US (150MW in Dec’17) and Greece (50MW in 1H18). At the same time wind conditions improved, with load factor in 1H18 standing at 32.2% compared to 27.4% in 1H17. Following this revenues from RES sales for 1H18 increased by 32.4% y-o-y to EUR 104.3m (2Q18 RES sales +48.2% y-o-y). Total revenues in 1H18 stood at EUR 138.4m (-0.9% y-o-y) on the back of lower revenues from construction activity (-50.4% y-o-y) and concessions (-41.4% y-o-y).

Following the strong top line performance, EBITDA from RES in 1H18 increased by 33.0% y-o-y to EUR 75.3m (2Q18 EBITDA +49.3% y-o-y), with the respective margin standing at 72.2% (vs. 71.8% in 1H17). Total EBITDA stood at EUR 81.8m (+20.1% y-o-y) affected also by a 56.1% drop in construction EBITDA (stood at EUR 4.7m vs. EUR 10.7m in 1H17).

Below the EBITDA line we note the lower depreciation expenses following a review on average wind assets lifetime, while financial expenses increased on the back of higher gross debt levels.

In respect of cash flow, gross operating cash flow in 1H18 amounted to EUR 83.5m (+22.4% y-o-y), while WC improved due to reduced collections time in the Greek RES market, with net operating cash flow at EUR 102.9m vs. EUR 58.1m in 1H17. Group capex in 1H18 amounted to EUR 17m, but is expected to significantly accelerate in 2H18 as the company is developing new capacity. Note that in 1H18 the company returned EUR 18.4m of unused grants (another EUR 6.2m due to be returned).

Following the strong cash generation, net debt declined to EUR 482m vs. EUR 563.8m in Dec’17 (cash available at EUR 247m), yet it is expected to increase in 2H18 on the back of increased capex and tax and dividend payments.

Table 10: Terna Energy 1H18 results highlights EUR m 2Q17 2Q18 y-o-y 1H17 1H18 y-o-y 1H18 AXIA Group Sales 84.1 66.7 -20.7% 139.6 138.4 -0.9%

RES sales 32.8 48.6 48.2% 78.8 104.3 32.4%

Group EBITDA 32.8 36.2 10.4% 68.1 81.8 20.1% 82.0 RES EBITDA 22.5 33.6 49.3% 56.6 75.3 33.0%

RES EBITDA margin 68.6% 69.1% 71.8% 72.2%

Net Income -4.0 6.8 nm 10.3 18.3 78.2% 18.5 Installed capacity (MW) 786 986

Load factor 27.4% 32.2%

Source: The Company, AXIA Research

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Terna Energy – Company Update

Detailed financials

Income Statement 2014 2015 2016 2017 2018f 2019f 2020f 2021f Revenues 158.3 198.6 225.6 276.8 290.5 287.1 308.9 332.7 (-)COGS (67.3) (84.2) (98.5) (116.6) (106.0) (92.4) (95.5) (101.6) Gross Profit 90.9 114.4 127.1 160.2 184.4 194.7 213.4 231.0 Other Expenses (10.9) (15.1) (11.3) (16.3) (15.5) (15.5) (15.5) (15.5) EBITDA 80.1 99.3 115.8 143.9 168.9 179.2 197.9 215.5 EBITDA margin 50.6% 50.0% 51.3% 52.0% 58.2% 62.4% 64.1% 64.8% adj. EBITDA 84.4 99.3 115.8 147.9 168.9 179.2 197.9 215.5 Depreciation 32.3 37.9 42.5 38.2 49.6 57.9 64.7 70.1 EBIT 43.5 60.2 72.8 105.7 119.3 121.2 133.2 145.4 Other Net Financials (31.3) (32.2) (39.4) (47.2) (48.0) (50.2) (45.4) (41.8) Interest Expense EBT 12.2 27.9 35.8 57.4 71.3 71.0 87.7 103.6 Income Tax (6.3) (12.9) (14.9) (19.9) (24.2) (20.6) (25.4) (30.1) EAT 5.8 14.9 20.9 37.5 47.1 50.4 62.3 73.6 Minorities (0.3) (0.4) (0.7) (0.0) (2.0) (2.0) (2.0) (2.0) Net Income 5.6 14.5 20.2 37.4 45.1 48.4 60.3 71.6 EPS 0.1 0.1 0.2 0.4 0.4 0.4 0.5 0.6 Declared Dividend (Total) 0.0 9.6 9.5 26.0 30.0 33.9 45.2 53.7 DPS 0.0 0.09 0.09 0.25 0.27 0.30 0.40 0.48 Balance Sheet 2014 2015 2016 2017 2018f 2019f 2020f 2021f Total Fixed assest 838 890 998 1,146 1,358 1,474 1,578 1,608 Investments 8 9 17 32 32 32 32 32 Other 16 21 28 31 31 31 31 31 Total non-current assets 861 920 1,045 1,211 1,423 1,539 1,643 1,673 Inventories 2 3 4 4 4 4 4 4 Receivables 108 147 224 186 145 144 145 145 Other - 9 ------Cash and equivalent 169 144 164 201 231 215 196 191 Total current assets 279 303 392 392 380 363 345 341 Total Assets 1,140 1,222 1,438 1,603 1,803 1,902 1,988 2,013 Share Capital 262 252 252 247 247 247 247 247 Other 27 34 40 44 84 84 84 84 Retained earnings 46 56 56 79 98 113 128 146 Minority rights 3 5 6 9 11 13 15 17 Total Equity 338 347 355 379 440 456 473 493 Interest bearing Bonds and loans 325 394 567 670 706 761 813 833 Other non-current liabilities 325 307 236 321 430 450 460 442 Total non-current liabilities 650 700 803 991 1,135 1,210 1,273 1,275 Trade and other payables 22 26 49 39 35 35 35 35 Short term borrowings 67 51 5 14 14 14 14 14 Current portion of debt 31 41 95 98 96 104 111 114 Other current liabilities 32 56 129 82 83 83 83 83 Total current liabilities 152 175 279 233 228 235 242 245 Total Equity and Liabilities 1,140 1,222 1,438 1,603 1,803 1,902 1,988 2,013 Cash Flow 2014 2015 2016 2017 2018f 2019f 2020f 2021f EBT 12.2 27.9 35.8 57.4 71.3 71.0 87.7 103.6 Non-Cash Adjustments 62.6 73.5 80.0 93.0 100.3 108.2 110.1 111.9 WC Changes (8.4) (33.0) (78.6) 17.8 37.1 0.7 (0.6) (0.3) Income tax paid (7.1) (7.7) (9.4) (16.3) (24.2) (20.6) (25.4) (30.1) Net Cash from operating activities 66.3 60.6 27.8 151.8 184.5 159.3 171.9 185.1 Capex (58.1) (85.9) (145.5) (229.2) (268.9) (180.9) (175.9) (105.9) Other investing 53.5 (8.9) 10.7 (62.0) 1.4 47.0 37.0 9.0 Change in debt 31.3 55.8 173.9 245.0 152.0 49.7 47.1 11.4 Net Interest paid (23.8) (37.1) (34.5) (47.1) (54.0) (57.2) (53.4) (50.8) Dividends Paid - (0.3) (8.7) (10.6) (26.0) (33.9) (45.2) (53.7) Other (17.9) (11.2) (5.0) (7.3) 40.0 - - - Net increase/(decrease) in cash and equivalent 51.2 (27.7) 20.3 37.3 29.0 (16.0) (18.6) (4.8) Year start cash 124.6 168.8 143.6 164.4 201.7 230.7 214.7 196.1 End year cash 175.8 143.6 163.9 201.7 230.7 214.7 196.1 191.3 Source: Terna Energy, AXIA Research

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Terna Energy – Company Update

Per share data 2014 2015 2016 2017 2018f 2019f 2020f 2021f EPS 0.05 0.14 0.19 0.36 0.40 0.43 0.53 0.63 BVPS 3.10 3.25 3.37 3.62 3.89 4.04 4.19 4.37 DPS - 0.09 0.09 0.25 0.27 0.30 0.40 0.48

Valuation ratios 2014 2015 2016 2017 2018f 2019f 2020f 2021f P/E 36.9 x 18.1 x 14.7 x 12.3 x 15.1 x 14.0 x 11.3 x 9.5 x EV/EBITDA 5.7 x 6.1 x 6.9 x 7.2 x 7.5 x 7.5 x 7.2 x 6.7 x EV/EBIT 10.6 x 10.1 x 11.0 x 9.9 x 10.6 x 11.1 x 10.7 x 10.0 x EV/Sales 2.9 x 3.0 x 3.5 x 3.8 x 4.4 x 4.7 x 4.6 x 4.4 x P/BV 0.6 x 0.8 x 0.8 x 1.2 x 1.5 x 1.5 x 1.4 x 1.4 x Div. yield 0.0% 3.7% 3.2% 5.6% 4.4% 5.0% 6.7% 7.9% FCF yield % 7.6% -23.3% -58.7% 0.4% 4.7% -12.0% -8.3% 5.5% ROCE 3.8% 4.5% 5.0% 6.3% 6.0% 6.0% 6.2% 6.5% ROE 1.6% 4.2% 5.7% 10.2% 11.0% 10.8% 13.0% 14.8% ROIC 13.7% 15.8% 19.6% 27.3% 27.6% 26.2% 25.2% 25.4%

Growth rates 2014 2015 2016 2017 2018f 2019f 2020f 2021f Revenues 13.4% 25.5% 13.6% 22.7% 4.9% -1.2% 7.6% 7.7% EBITDA 14.5% 24.1% 16.6% 24.2% 17.4% 6.1% 10.4% 8.9% EBIT 23.3% 38.3% 21.1% 45.1% 12.9% 1.6% 9.9% 9.2% EBT 23.0% 128.9% 28.5% 60.2% 24.3% -0.4% 23.6% 18.1% Net Income 35.4% 161.7% 38.7% 85.7% 20.4% 7.4% 24.6% 18.7%

Profitability ratios 2014 2015 2016 2017 2018f 2019f 2020f 2021f Gross margin 57.5% 57.6% 56.4% 57.9% 63.5% 67.8% 69.1% 69.4% EBITDA margin 50.6% 50.0% 51.3% 52.0% 58.2% 62.4% 64.1% 64.8% EBIT margin 27.5% 30.3% 32.3% 38.2% 41.1% 42.2% 43.1% 43.7% Net Income margin 3.5% 7.3% 8.9% 13.5% 15.5% 16.9% 19.5% 21.5%

Leverage Ratios 2014 2015 2016 2017 2018f 2019f 2020f 2021f LT Debt / Total Capitaliztion 173.7% 165.6% 223.8% 166.4% 118.1% 127.3% 136.0% 139.4% Total Debt / Total Capitalization 206.6% 185.2% 225.6% 169.4% 120.1% 129.3% 138.0% 141.4% Net Debt/EBITDA 3.18 x 3.45 x 4.79 x 3.92 x 3.22 x 3.47 x 3.54 x 3.38 x EBITDA/Interest Expense 2.55 x 3.09 x 2.94 x 3.05 x 3.52 x 3.57 x 4.35 x 5.15 x FFO / Total Debt 8.9% 10.8% 9.4% 9.7% 11.6% 12.1% 13.3% 14.7% Gearnig (Total debt / Debt+Equity) 55.6% 58.4% 65.3% 67.4% 65.0% 65.8% 66.4% 66.1% Net Debt / Equity 75.3% 98.8% 141.7% 153.3% 133.0% 145.4% 156.6% 155.9%

Coverage Ratios 2014 2015 2016 2017 2018f 2019f 2020f 2021f FFO Interest Coverage ((FFO + Int.) / Int.) 2.21 x 2.63 x 2.59 x 2.60 x 2.97 x 3.12 x 3.75 x 4.39 x Pretax Interest Coverage (EBIT / Int.) 1.39 x 1.87 x 1.85 x 2.24 x 2.49 x 2.41 x 2.93 x 3.48 x Source: Terna Energy, AXIA Research

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Terna Energy – Company Update

Disclosures

General information This research report was prepared by AXIA Ventures Group Limited, a company incorporated under the laws of Cyprus (referred to herein, together with its subsidiary companies and affiliates, collectively, as “AXIA”) which is authorised and regulated by the Cyprus Securities and Exchange Commission (authorisation number 086/07). AXIA is authorized to provide investment services in the United Kingdom, Cyprus, Greece and in Portugal pursuant to its permissions under the Markets in Financial Instruments Directive and may also provide similar services in other countries, inside or outside of the European Union, subject to the applicable provisions. AXIA Ventures Group Limited is not a registered broker-dealer in the United States (U.S.), and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. In the U.S., this research report is intended solely for persons who meet the definition of “major U.S. institutional investors” in Rule 15a-6 under the U.S. Securities and Exchange Act, as amended, or persons listed under Rule 15a-6(4)) and is meant to be disseminated only through “Axia Capital Markets LLC”, a wholly owned subsidiary of AXIA Ventures Group Limited and associated US registered broker-dealer in accordance with Rule 15a-6 of the US Securities and Exchange Act.

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Key Definitions AXIA Research 12-month rating* Buy The stock to generate total return** of and above 10% within the next 12-months The stock to generate total return**between -10% and 10% within the next 12- Neutral months Sell The stock to generate total return** of and below -10% within the next 12 months Under Review Stock’s target price or rating is subject to possible change Applicable Laws / Regulation and AXIA Ventures Group Limited policies might Restricted restrict certain types of communication and investment recommendations Not Rated There is no rating for the company by AXIA Ventures Group Limited * Exceptions to the bands may be granted by the Investment Review Committee of AXIA taking into account specific characteristics of the Subject Company **Total return: % price appreciation equals percentage change in share price from current price to projected target price plus projected dividend yield.

Rating history for Terna Energy S.A. Date Rating Share Price (EUR) Target Price (EUR) 11/03/2014 Buy 4.58 6.00 24/03/2015 Buy 2.27 4.00 19/04/2016 Buy 2.71 3.70 08/05/2017 Buy 3.18 4.50 19/10/2017 Buy 4.20 5.40 14/05/2018 Buy 5.09 6.50 16/10/2018 Buy 6.01 8.50

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Terna Energy – Company Update

AXIA Ventures Group Limited Rating Distribution as of today Of which Investment Coverage Universe Count Percent Count Percent Banking Relationships Buy 17 78% 3 3 14% Neutral 2 9% Sell Restricted Not Rated Under Review 3 14%

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Terna Energy – Company Update

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Terna Energy – Company Update

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