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Acea Investor Presentation 2017

Nov 28, 2017

4350_iss_2017-11-28_168d5f0c-b63d-466d-9f4e-6153c2138302.pdf

Investor Presentation

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AceaBusiness Plan2018-2022

Borsa Italiana Milan, 28 November 2017

Agenda

THE ACEA GROUP TODAYA market LEADING multiutility

MARKET SCENARIO AND TRENDS ACEA Group SEGMENT TRENDS expected in the coming years in the Group's core businesses

  • • Strong regulatory and government drive to ensure
  • greater industrial development
  • new investment to cut gap in infrastructure and plant and boost network resilience
  • • Consolidation in the industrybacked by leading players

WATER

  • Key elements of the National Energy Plan 2017
  • • Decarbonisation by driving electrification and the development of an increasingly "distributed"model
  • • Increase in energy security to guarantee network flexibility, adequacy and resilience
  • • Technology and innovation to enable the "new downstream", making customers more active and aware (e.g. Demand Response)

  • •Full deregulation of the market and industry consolidation

  • • Circular Economy ("Closing the Loop") in order to recycle and recover materials

  • • New plant (greenfield and brownfield) to make up the infrastructure gap, above all in the treatment of organic waste (e.g. biodigesters)

STRATEGY AND CONSOLIDATED TARGETSThe Group's new strategic PILLARS

STRATEGY AND CONSOLIDATED TARGETS

EBITDA growth based on solid business rationale

Growth of Power and Gas customer base

•

•

•

plants

End of CIP6 incentives

•

Development of overseas services

Expansion of existing

Development of new plants and M&A

Reduction in cost to

•

•

Tariff increases linked to investment

•

•

serve

Reduction in penalties for network losses

• Rewards for Commercial Quality

*G
uid
an
ce		 20
17

STRATEGY AND CONSOLIDATED TARGETSMore than €3bn of INVESTMENT

STRATEGY AND CONSOLIDATED TARGETSOver €400m to be invested in INNOVATION

ACEA Group's Sustainability Plan 2018-2022with targets associated with investment of approx. €1.3bn

United Nations Sustainable Development Goals (SDGs)

ACEA GroupSTRATEGY AND CONSOLIDATED TARGETSGrowing DIVIDENDS, Pay-out above 50%, €0.7bn payable over the plan

Growing Dividends Pay-out above 50%€0.7bnpayable over the plan

STRATEGY AND CONSOLIDATED TARGETSFinancial strategy aims to cut cost of debt and increase Maturity terms

ACEA GroupWATERINFRASTRUCTURE DRIVE and efficiency improvements

Key initiatives included in Plan

  • • Extraordinary plan to upgrade network, reduce leaks and manage water emergency
  • • Rationalisation of small treatment plants and development/expansion of large plants
  • •Rollout of smart meters

15 pp cut in Water loss

WATER ACEA Group EBITDA UP 36% and INVESTMENT of €1.6bn

ENERGYINFRASTRUCTUREKey Targets for the Segment

ACEA Group ENERGY INFRASTRUCTUREBecoming an advanced DSO to increase network resilience and enable new services

Key initiatives included in Plan

  • • LV network upgrade to:
  • Increase network resilience
  • Increase capacity to enable electrification (customers up from 3KW to 6KW)
  • • Rollout of smart grid for city of Rome to enable new services
  • Laying of fibre
  • New 2G meters

To boost resilience and drive electrification

1m 2GSmart Meters

ACEA Group ENERGY INFRASTRUCTUREEBITDA UP 20% AND INVESTMENT OF €1.1BN

COMMERCIAL AND TRADINGMARKETING DRIVE and leading role in CONSOLIDATION within the sector

Key initiatives included in Plan

  • • Marketing drive through Digital and Cross Selling channels to play a leading role in consolidation (following the phase-out of the enhanced protection market)
  • • Performance improvement throughout the Customer Journey (Customer Care, Billing,..) and optimisation of the cost structure (Costs to Serve)
  • • Improved customer quality and debt collection capabilities

33%growth inNumber of Customers

ACEA Group COMMERCIAL AND TRADINGEBITDA to double by 2022 through increase in customer base and performance improvements

2018 2019 2020 2021 2022

• Completion of development of Free Market Systems

Note: goals proposed by the European Commission, revised upwards by the Europoean Parliament (15 Mar 2017)

ENVIRONMENT

ENVIRONMENTExpiry of CIP6 offset by new initiatives and selective acquisitions

  • • 200 ktons of additional capacity for existing composting plants
  • • 250 ktons on developing new initiatives in composting and materials sorting
  • • 220 ktons linked to acquisition of plants with impact on earnings post-2020

ACEA Group STRATEGIC OPPORTUNITIESPotential STRATEGIC INITIATIVES that could be implemented in the FIRST THREE YEARS OF PLAN

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ACEA Group STRATEGIC OPPORTUNITIESPotential UPSIDE in 2020 of between €100m and €300m

Acea Group Business Plan 2018-2022

Organic growth6% CAGR for EBITDA from 2017 to 2022

€3bn in CAPEX focusing on INFRASTRUCTURE

Performance IMPROVEMENT to drive growth with like-forlike workforce and maximise efficiencies, guaranteeing quality and reliability

Growing DIVIDENDS with a Pay-out >50%DPS

Keeping the Group's DEBT under control, with NET DEBT/EBITDA decreasing to 2.8x in 2022

UPSIDE of up to 30% for EBITDA linked to initiatives already included among Strategic Opportunities

APPENDIX

Acea Group Presentation

Main assumptionsSTRATEGY AND CONSOLIDATED TARGETS

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CAPITOLO9M 2017 Results

9M 2017 financial highlights

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* The adjusted results do not include :

• for 2017, the negative impact – amounting to approx. €28m before tax – resulting from:

the sentence restoring ownership of a property that houses a car park for company vehicles (€9.5m)

the reduction in the amount due to Areti from GALA (€12.8m)

the reduction in the amount due from ATAC (€6.0m)

• for 2016, the positive impact (€76.5m before tax) of elimination of the regulatory lag

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33

EBITDA and key quantitative data9M 2017 financial highlights

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* This is primarily a question of non-routine maintenance and the upgrade, modernisation and expansion of the water and sewerage network and treatment plants, including initiatives designed to ease water supply pressures

EBITDA and Key quantitative data9M 2017 financial highlights

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InfrastructureEBITDA main drivers

Energy

ACEA Group

EBITDA and Key quantitative data9M 2017 financial highlights

Recognition, in Q2 2016, of additional revenue of approximately €10m linked to impact of the contract, entered into in March 2016, for the commercialisation of smart meters.

Sales activity: margin decrease

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(
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s		 1,
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1
4

* EBITDA for 9M 2017 is down by approx. 6% compared with 9M 2016 which does not include revenue linked to impact of contract for the commercialisation of smart meters

ACEA Group

EBITDA and Key quantitative data9M 2017 financial highlights

  • Greater quantity of electricity sold by the San Vittore plant
  • Aprilia composting plant fully operational.
  • Change in scope of consolidation (Acque Industriali and Iseco)
(
)
€
m		 9
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1
7		 9
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1
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%
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+		 d
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7
%		 l
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d
(
G
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W
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r
u		 2
6
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0
8
9
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1
7		 9
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1		 C
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A
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y		 3
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3		 2
3
6		 1
1
7
+

EBITDA and Key quantitative data9M 2017 financial highlights

Line-by-line consolidation Aguas de San Pedro: +€9.2m

employees

Engineeringand Services

TWS EBITDA main drivers

Revenue growth due to increased turnover

  • Transfer of Facility Management services from Acea
  • Line-by-line consolidation of
(
)
€
m		 9
M
1
7		 9
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1
6		 %
h
c
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€
)
m		 9
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1
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%
+
C
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8		 -3
%
7.
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+		 b
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1
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7
1		 1
4
6
+

Cash flow

C
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L		 (
€
W
A
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A
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9
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(
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ACEA Group

* Before impairment losses on receivables

(
€
)
m		 3
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1
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(
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* Adjusted net debt for 2017 does not include the overall impact, amounting to €59m, of the reduction in amounts due from GALA and ATAC or the impact of split payment.

ACEA Group

CAPITOLO1H 2017 Results

H1 2017 financial highlights

(
€
)
m		 2
0
6
H
1
1		 2
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H
1
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h
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C
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x		 2
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8		 2
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1
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+

* The adjusted results do not include:

for H1 2017, the negative impact resulting from:

•restored ownership of a property that houses a car park for company vehicles (€9.5m);

•the provision for the reduction in the amount due to Areti from GALA (€9.5m).

for H1 2016, the positive impact (amounting to €63.3m before tax) of elimination of the regulatory lag.

(
)
€
m		 3
0
J
2
0
1
6
n
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(
)
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1
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(
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7
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5		 1
0.
2
%
+		 6.
7
%
+

** Adjusted net debt for 2017 does not include the impact of the reduced amount due from GALA.

ACEA Group

CAPITOLO2016 Results

2016 financial highlights

(
€
)
m		 2
0
1
5		 2
0
6
*
1		 C
h
%
a
n
g
e
l
i
d
d
C
t
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9
1
7
3		 8
2,
3
2.
4		 -2
9
%
E
B
I
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3
2.
0		 8
**
9
6
3		 2
2.
4
%
+
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8
6
5		 5
2
5
9		 3
6.
1
%
+
f
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/
(
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p
r
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s		 8
1
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5		 0.
%
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+
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2
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5
4.
5
+
f
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(
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p
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r		 0
1
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5		 2
6
2.
3		 9.
9
%
4
+
i
i
d
d
h
(
€
)
D
v
e
n
p
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r
s
a
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e		 0
5
0		 0
6
2		 2
4
0
%
+
C
a
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x		 4
2
8
9		 5
3
0
7		 2
3
7
%
+

*Positive impact for accounting for Resolution 654/2015 and negative impact of repurchase of portion of bonds in issue

**€785m adjusted for accounting for Resolution 654/2015

(
)
€
m		 3
1
D
2
0
1
5
e
c
(
)
a		 3
0
S
2
0
1
6
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(
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1
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1
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(
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8
)
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6
0
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8
2
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8		 3,
8
8
8
4		 2
8.
6
7		 6
0
4

CAPITOLORegulatory framework- Water Electricity distribution

-

REGULATORY PERIOD: 2016-2019 (4 YEARS)

AEEGSI Resolution: 664/2015 Water Tariff Regime for the second regulatory period (2016-2019).

The applicable regulations are broadly based on a matrix chart with 6 different quadrants relating to: the ratio of required capex to the value of existing infrastructure; eventual changes in the operator's objectives or operations (consolidation, significant improvements in service quality); the value of the operator's opex per inhabitant served compared with the estimated average opex for the sector as a whole in 2014.

Key points in the Resolution are set out below:

  • The duration of the regulatory period has been set at four years, with biennial revision of the RAB and of endogenous opex*. The cost of debt and tax expense may be reviewed every two years in the event of "significant changes".
  • Allowed revenues are based on full cost recovery subject to efficiency and capped in terms of tariff growth.
  • Fixed annual maximum tariff increases, ranging from 5.5% to 9%, different for each of the 6 quadrants assigned at Local Authority Level (the EGAor Concession Authority).
  • Application of a tariff multiplier has been confirmed.
  • A system of quality performance rewards and penalties has been introduced. The reward component is excluded from any tariff caps.
  • The "sharing" mechanism has been confirmed, based on a matrix that penalises the least efficient operators.
  • The mechanism for allowing for a portion of late payment costs has been defined (80% of the costs effectively incurred by operators), taking into account the varying impact of this problem throughout the country (North: 2.1% of turnover; Central: 3.8% of turnover; South: 7.1% of turnover) and providing incentives for the adoption of efficient credit management solutions.
  • The "ψ" parameter, on which determination of the component intended to pre-finance the cost of new investment (FNI), may be selected within a range of 0.4-0.8.
  • The distinction between upgradeable opex** and endogenous opex* has been retained. Costs linked to the integration of operations and/or significant improvements in service quality are also allowed for.
  • The cost of debt has been set at 2.8%(compared with 2% for the electricity sector).
  • The ERP (Equity Risk Premium) is 4%(compared with 5.5% for the electricity sector).
  • The real RF (Risk Free) rate is 0.5%, determined on the basis of yields on 10-year euro area government bonds with ratings of at least "AA" (in line with the electricity sector).
  • The WRP (Water Risk Premium) is 1.5%(compared with a CRP – Country Risk Premium – of 1% used in the electricity sector).
  • The 1% time-lag for capex has been confirmed.

Based on the provisions in the Resolution, the overall return for the Water sector is equal to 5.34%(compared with 6.1% for the regulatory period 2014-2015 and 6.4% for the period 2012-2013), with an additional 1% extra

return for investments made from 2014.

* Endogenous opex, set equal to the corresponding tariff component for the year 2014 (eligible under the MTI) properly inflated annually

** Upgradeable opex, related to specific exogenous costs updated every year

INTRODUCTION OF A COMPONENT LINKED TO QUALITY FACTOR

AEEGSI Resolution 655/2015 deals with the regulation of the contractual quality of integrated water services: the minimum quality standards established by the regulator came into effect from 1 July 2016, becoming fully effective from 1 January 2017.

Resolution 655/2015 has established country-wide minimum contractual quality standards. In the case of standards defined as specific, the operator is required to pay automatic compensation to end users should the standards not be met.

Art. 2 of Resolution 655/2015 grants concession authorities the option of encouraging the achievement of quality standards higher than the minimum standards applied nationally. This may be done at the proposal of the Operator.

Art. 32 of Annex A to Resolution 664/2015 grants concession authorities the option, should the operator achieve higher quality standards than those set by Resolution 655/2015, of awarding the operator a bonus with regard to contractual quality (for which a cap has been established).

The incentive mechanisms, for the improvement of the contractual and technical quality of the service, introduce two different mechanisms of rewards/penalties.

  1. The first one involves a reward for performance improvements compared to the minimum standards defined by the national Authority.

This mechanism is defined with the local Authority and the maximum amount of the bonus is a function of the operator's efficiency in comparison to the national average.

In fact the bonus is higher, the more the operator is efficient compared with the national average operating cost per customer served, set by the national Authority at €109 per customer. The reward is not subject to the tariff increase cap.

  1. The second mechanism, which is valid throughout the entire Country, is supplied by a specific tariff component, mandatory for all operators, to be allocated to a specific fund for quality. On first being introduced, this mechanism promotes and rewards best practices and improved contractual quality levels with respect to the standards defined in the resolution on contractual quality (655/2015/R/idr).

Not included in Business Plan targets

Electricity distribution regulatory framework

REGULATION PERIOD: 2016-2023 (8 YEARS)

AEEGSI Resolutions: 654/2015 Tariff general frawork

583/2015 WACC

646/2015 Quality of service and output based regulation

The Regulator has extended the duration of the regulatory period to eight years, dividing it into two sub-periods, each lasting four years. In the second sub-period (2020-2023), a Totex-based approach will be introduced.

Key points in the Resolutions are set out below:

  • •No exposure to energy volumes: tariff not linked to change in unit volumes consumption
  • •Allowed opex calculated on 2014 costs.
  • •Gradual approach to the extension of asset life: life for MV and LV lines built after 2007 extended from 30 to 35 years.
  • • Price cap: 1.9% (distribution), 1% (metering). The potential achieved extra–efficiencies in the 3rd and 4th regulatory periods are to be shared 50-50 with the consumer by 2019.
  • •Greater selectivity applied to capex, with particular attention paid to service quality.
  • •Year t-1 capex included in year t RAB (time-lag reduction from 2 to 1 year).
  • • Confirmation of the determination of net working capital with reference to parameters based on net fixed assets, applying a lower percentagethan the one applied in previous regulatory periods.
  • •Quality of service: stable incentive mechanisms on frequency and duration of interruptions.

ELECTRICITY DISTRIBUTION

WACC Electricity distribution: 5.6%(compared with the previous 6.4%)

WACC regulatory period: 6 years (2016-2021). The WACC is fixed for three years (2016-2018), in 2019 WACC mid term review already defined for all main parameters

ELECTRICITY TRANSMISSION

WACC Electricity transmission: 5.3%(compared with the previous 6.3%)

GAS GRIDS

WACC Gas transmission: 5.4%(compared with the previous 6.3%);

WACC Gas distribution: 6.1%(compared with the previous 6.9%);

WACC Storage: 6.5%(compared with the previous 6.0%).

The WACC is fixed for two years (2016-2017) for the transmission service and for three years (2016-2018) for gas distribution and storage

Disclaimer

THIS PRESENTATION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT REFLECT THE COMPANY'S MANAGEMENT'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL AND OPERATIONAL PERFORMANCE OF THE COMPANY AND ITS SUBSIDIARIES.

THESE FORWARD-LOOKING STATEMENTS ARE BASED ON ACEA S.P.A.'S CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS. BECAUSE THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES, ACTUAL FUTURE RESULTS OR PERFORMANCE MAY MATERIALLY DIFFER FROM THOSE EXPRESSED THEREIN OR IMPLIED THEREBY DUE TO ANY NUMBER OF DIFFERENT FACTORS, MANY OF WHICH ARE BEYOND THE ABILITY OF ACEA S.P.A. TO CONTROL OR ESTIMATE PRECISELY, INCLUDING CHANGES IN THE REGULATORY FRAMEWORK, FUTURE MARKET DEVELOPMENTS, FLUCTUATIONS IN THE PRICE AND AVAILABILITY OF FUEL AND OTHER RISKS.

YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH ARE MADE ONLY AS OF THE DATE OF THIS PRESENTATION. ACEA S.P.A. DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS PRESENTATION.

THIS PRESENTATION DOES NOT CONSTITUTE A RECOMMENDATION REGARDING THE SECURITIES OF THE COMPANY.

***

PURSUANT TO ART. 154-BIS, PAR. 2, OF THE LEGISLATIVE DECREE N. 58 OF FEBRUARY 24, 1998, THE EXECUTIVE IN CHARGE OF PREPARING THE CORPORATE ACCOUNTING DOCUMENTS AT ACEA, GIUSEPPE GOLA - CFO OF THE COMPANY - DECLARES THAT THE ACCOUNTING INFORMATION CONTAINED HEREIN CORRESPOND TO DOCUMENT RESULTS, BOOKS AND ACCOUNTING RECORDS.

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