Italgas — Management Reports 2018

Jun 13, 2018

Italgas Strategic Plan 2018 - 2024

13th June 2018, Milan

PAOLO GALLO

ANTONIO PACCIORETTI

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Strategy Shareholder Remuneration & Closing Remarks

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Overall macro scenario

Natural Gas plays a key role in Decarbonisation

Paris agreement COP21

Agreed by all UNFCCC Parties in December 2015

(159 countries covering 90% of global GHG emissions)

Due to enter in force in 2020

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COAL DECOMISSION & SUBSTITUTION WITH ADVANCED CCGT

Natural Gas with 2.3 tons of CO2 emitted per toe has a carbon dioxide emission rate 41% lower than that of coal

Facilitate the implementation of an effective and economically sustainable path towards decarbonization

RENEWABLE GAS (BIOMETHANE)

Sustainable Mobility

Italgas is the first company in Italy to own a fully methane vehicle fleet The new fleet will enable costs reduction and limit environmental impact

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Power to Gas

Allows transformation of surplus supplies of electricity from wind and solar sources into synthesized gas

Renewable Gas enabling circular economy in energy sector

BIOMETHANE offers a valuable option for the recovery of by-products

Combined with the already existing gas transport and distribution infrastructure, biomethane can make a decisive contribution to the development of a circular economy.

In Europe, it is estimated that renewable gas (hydrogen and biomethane), can reach an annual production higher than 120 billion cubic meters resulting in savings of around 140 billion euros* .

* Source: Gas4Climate Consortium, composed of Snam, Enagás, Fluxys, Gasunie, GRTgaz, Open Grid Europe and TIGF.

Italian gas demand outlook

Natural gas: a key role in the long term energy scenario

The National Energy Strategy (SEN)

Sustainable growth

• ↑ RES
• ↑ energy efficiency and review of TEE system
• Acceleration of decarbonisation
• Public financing to sustain clean energy R&D

Country competitiveness

• ↓ gas price gap with EU
• ↓ electricity price gap with EU
• Completion of energy markets liberalization

Supply flexibility & security

• Supply diversification
• Network upgrade
• LNG infrastructure development
• Sardinia methanization and SECA pilot project

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SEN on Sardinia methanization

Project rationale

~€1.4 bn total investment to develop infrastructure

• Low pollutant source enabling regional energy transition
• Reduction of GHG in maritime transportation, where Med Sea is included in SECA
• Replacement of coal phase out by 2025 – 2030 and support to bio-methane development
• Development of favourable industrial and work environment

Main infrastructure projects

• SSLNG regasification plants for gas supply (~€400mln)
• Transportation network and connection to SSLNG sites and distribution grid (~€1bn)
• CCGT for electricity production

Natural gas is key for Sardinia energy transition

Leader in a fragmented market ...

Current market share in Italy

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…by re-delivery points …by gas volume distributed …by network

Source: ARERA 2017 * Includes Gas Natural assets

... with consolidation gathering pace

ATEMs' process set to transform the industry

Source: ARERA 2017

Tenders Calendar

Underpinned by a stable regulatory environment

3 year updates of CAPM parameters

		Metering
Regulatory WACC	6.1%	6.6%

Parameters subject to potential changes

In the period 2018 – 2024 we expect WACC to remain at current level

Scenario

Shareholder Remuneration & Closing Remarks

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Sustainability: moving from strategy to action

UN Sustainable Developments Goals

The 17 Sustainable Development Goals (SDGs) are contained in the 2030 Agenda for Sustainable Development.

They represent the United Nation's global plan of action for the undermining of poverty, the protection of the planet and the guaranteeing of prosperity for all.

Italgas Sustainability Plan 2018-2023

Italgas sustainability strategy is driven by nine of these SDG's.

The Sustainability Plan contains actions to both assure Italgas sustainability and contribute to UN goals achievement.

Italgas Sustainability Plan underpins company strategy

We are driven by: We want to:

1. COMMITTMENT TO SUSTAINABILITY

Involvement, accountability and communication

2. PUTTING PEOPLE FIRST

Prepare our people to success in emerging industrial challenges

3. STRONG LOCAL PRESENCE

Pursue an active role in the social innovation process of cities and communities

4. VALUE FOR MARKET AND CLIENTS

Reshaping contents and communication with users

5. ENERGY EFFICIENCY AND ENVIRONMENT

The key role of gas in decarbonization process of society

• 1. Increase Italgas visibility on sustainability issues
• 1. Develop the culture of sustainability
• 1. Strengthen key process
• 1. Protect and enhance know-how
• 1. Strengthen corporate welfare
• 1. Promote women occupation in the company
• 1. Improve safety at work
• 1. Improve relations and involvement with territories
• 1. Invest in communities through measurable social innovation
• 1. Harmonize process with sales companies 11. Improve end customers' relation
• 1. Improve efficiency and reduce our carbon footprint
• 1. Develop the gas advocacy
• 1. Enable circular economy process

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Strategic pillars

1. Network development

Development, Maintenance and Upgrade

2. M&A and market opportunities

Anticipation of growth and improve portfolio quality and value

3. Technical innovation & digitization

Technical innovation and digitization of assets, processes and workforce

4. Operational efficiencies

Continuous efficiency actions

5. Gas tenders

Highly qualified to reach 40% market share

6. Solid and efficient financial structure

Outstanding cost of debt and financial flexibility to support growth €

7. Shareholder returns

Robust and sustainable shareholder returns

Investment Plan without Tenders

Strategic priorities – Organic growth

~4.0 Bn€ Capex 2018-2024

RAB evolution without Tenders

A significant capex plan and selected M&A driving a robust RAB growth

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* Continuity of regulatory treatment assumed for grants cumulated at 2017 year end; average deflator in the plan period assumed at 1.4%

1. Network capex

1. Replacement and upgrade

• Grey cast iron pipelines with hemp & lead joints (by 2019)
• Grey cast iron pipelines with mechanical joints (by 2025)
• Part of fully depreciated pipelines
• Unprotected steel pipes
• Replacement related to emergency interventions
• Replacement of risers and plants

2. LPG network conversion

• 3. Network extension & new connections
• 4. Energy efficiency
• 5. Sustainability

• 6. Tenders already awarded

• Development of services to meet demand for new connections

• Turboexpander and cogen plants
• Reduction of energy consumption and GHG emissions
• Capex related to commitments of tenders

1. Metering and digitization capex

Smart meters rollout (G4-G6)

• Outperformance of ARERA targets for mass market meters' replacements (set by Res. 554/15 at 50% by 2018)
• Completion of mass market meters replacements by H1 2020

1. Asset digitization

• Gas network
• Water network (smart meters and sensors)

2. Digital Factory

Multiple parallel digital rooms producing continuous innovative output

Pursue Market opportunities to strengthen market positioning, portfolio quality and support growth 2. Pursue opportunities to strengthen market position, portfolio quality and growth

Acquisition of third party assets, appealing in size or/and geographical positioning

Affiliates consolidation

Full consolidation of affiliates

SARDINIA

Sardinia and contribution to the methanization of the Region

Develop Energy efficiency business

2. Already completed bolt-on acquisitions fueling RAB growth

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* Of which Seaside ~ € 9mn and ~ € 4mn for Medea retail

** Includes Net Assets value of LPG networks under construction

2. M&A opportunities

Opportunities are currently under evaluation to acquire additional 180k RdP by the end of 2019

Completed in 2017 and 1H 2018

Sardinia – Italgas gaining a strategic role 2. Sardinia – a strategic role

2. Energy Efficiency

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3. The digital transformation program

Transformation steps

• Industrial IoT
• Advanced Analytics / Big Data

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Process (staff&ops) digitization

• Advanced Analytics / Machine Learning
• Bots / Digital Assistants

• Blockchain

• Mixed Reality

• Wearables
• Bots / Digital Assistants

IT Architecture evolution to Cloud-based model 1

Digital Factory

3. Digitization of assets – Smart Meters

• By 2020 all the active and accessible meters will be renewed2
• After 2020 is assumed a progressive recovery of non accessible meters (in addition to new installations)

(1) % replacements are referred to the entire meters in place, including not accessible and not active. (2) Based on the assumption that regulation will evolve towards a suitable tariff contribution for meters' replacement.

3. Benefits of Smart Meters

Gas DSO manages the meter and collects data on gas consumption

The Sale Company invoices gas consumption to final customers

Benefits for the system

DSO

• 1. Technological upgrade of Smart Meters and information system
• 1. Remote control of meter operation and consumption level
• 1. Improved metering performances and remote reading of inaccessible meters
• 1. Possible remote closure of supply
• 1. Customers' claims reduction
• 1. Optimized planning of grid interventions thanks to improved awareness of consumptions

Sale company

• 1. More reliable gas invoicing and reduction of customers' claims
• 1. Simplification of the process to switch gas supplier
• 1. Commercial offers targeted on customers' consumption
• 1. Improved protection from credit risk (remote closure of supply)

Customer

• 1. Invoicing based on effective gas consumption
• 1. Improved energy efficiency thanks to higher awareness of self consumption
• 1. Real time information on consumption
• 1. Integration with innovative services
• 1. Reduction of reasons for claims
• 1. Simplification of the process to switch gas supplier or contract holder

3. Digitization of assets – Gas distribution grid

Smart meters, pressure and flow monitoring, digitalized GRF, valves and sensors to digitalize the gas grid

3. Digitization of assets – Gas distribution grid

Digitization extended to the entire gas grid

3. Digital program deployment

Transition to cloud is the first digitization step Digital Factory is set up from 4Q 2018

3. Digital program deployment

3. The Digital Factory

4. Operational Efficiency

Workforce

• Organization of workforce to realign with standard requirements
• Improvement of skills mix

Operational process

• Increasing productivity through best practices
• Leveraging on «make or buy» mix
• Optimizing vehicle fleet

Asset management

• Optimization of smart meters supply and installation cost
• New contractual strategy for network maintenance and expansion

ICT

• Innovation technology
• Public Cloud strategy
• Network digitization

Smart meters

• Reducing telecoms cost associated to reading activity
• Technology innovation
• Network digitization

Facility

Utilities cost reduction

Corporate reorganization

• Group Distribution activities integrated in Italgas Reti
• Affiliates ownership concentrated in Italgas

…. and …. Continuous Improvement Program "on line"

Already exploited in 2017

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Leveraging "Make or Buy Mix" 4. Leveraging "Make or Buy Mix"

Improve efficiency and quality of service

4. On going restructuring

Consolidated perimeter – structure as of 31/5/2018 Consolidated perimeter – future structure

Fully consolidation method

Equity method

1. Integration of distribution activities into Italgas Reti Merging of Napoletanagas, Acam Gas and Enerco. Corporate simplification once networks enter operations

2. Affiliates

Transfer of affiliates' ownership from ITG Reti to ITG SpA

3. Water and energy efficiency

Dedicated entities for activities in the water and energy efficiency sectors

To improve efficiency and business value

4. Vehicle fleet optimization

Particulate* (PM10, PM2,…) -98% vs 2017

Fuel Cost* -50% vs 2017

CO2 emission* teq -20% vs 2017

Italgas is the first company in Italy to own a fully methane vehicle fleet

* Assuming 100% CNG vehicle fleet

4. Procurement strategy

Network Initiatives

• New contractual strategy on network maintenance works and network extensions
• Leak detection supply optimization

Smart Metering

• Optimization on smart meter installation costs
• Smart meter supply with full guarantee

Warehouse ICT Initiatives

Warehouse and logistic optimization cost

• Telco optimization cost
• IT device (PC /Ipad) optmization cost by introducing lease contract

Enhanced cost control and quality improvement

4. Distribution activities: Opex

5. Criteria to select target ATEMs

ATEM profitability

Italgas market share

Italgas PdR over ATEM PdR

Operator fragmentation

Number of DSOs operating in the ATEM

Operator type

Main competitors' market share (national and regional level) and type

Geographical contiguity

Italgas presence in neighboring ATEMs

5. Tenders clusters

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5. Tenders: an additional growth opportunity for profitable growth

Redelivery points(1)

Market Share (1)

(1) Excluding affiliates and considering active redelivery points

(2) Net of redemption value of asset transferred to other operators in the tender process and assuming RV=RAB

* Continuity of regulatory treatment assumed for grants cumulated at 2017 year end; average deflator in the plan period assumed at 1.4%

6. Main pillars of financial strategy to support…

A solid and efficient financial structure

 Generate strong and resilient cash flow to cover organic capex and dividends	FFO/RAB ~ 10%*
 Preserve a solid investment grade rating	Baa1 Moody's & BBB+ Fitch
 Maintain a safe liquidity profile in the medium term	> €1 bn undrawn committed credit lines
 Outstanding cost of debt over the plan period	From current 1.1% to 1.4% at the end of the plan period
 Current fixed rate debt portion to protect financial outperformance in the medium term	~ 88% fixed rate
 Limited refinancing risk	No refinancing needs until 2022

6. ...self financing of organic growth, M&A and shareholder remuneration… leaving flexibility for tender opportunities

Cumulative amounts for the full business plan*

• Operating cash flow covers capex – including M&A – and dividends
• Financial flexibility allows to capture tenders' opportunities and/or enhance shareholder remuneration

* Measurement of the chart for Illustrative purpose

Resilient cash flow generation and strong credit metrics

6. Key credit metrics

• M&A and Sardinia anticipate capital deployment in the first part of the plan period
• Well balanced capex profile to optimize cash-flow
• Adequate financial structure even in a growing scenario

* Consolidated RAB including LPG assets and Equity RAB of affiliates

• Robust and resilient cash flow generation
• Sound credit profile well positioned in a solid investment grade area

6. A solid, efficient and resilient debt structure

Italgas Net Debt Structure

As of March 31st, 2018

4.8 € bn

Limited refinancing risks thanks to maturities profile

Total Committed Credit Facilities and Bonds

79% 21% 3.7 € bn

Institutional Lenders Financing (EIB)

Bond

Fixed Floating ratio

2018 Guidance and expected plan evolution

* Includes M&A and Net Assets value of LPG network

* * Calculated as ND/RAB including affiliates at equity RAB

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Multiple-levers to deliver value through 2024

€ 4Bn Investment Plan (Capex and M&A) to support significant RAB growth

Digital Factory, network digitization to consolidate market leadership

Tenders as an additional capital deployment opportunity

Underpinned by solid balance sheet with superior cost of capital

Robust and sustainable shareholder remuneration with significant upside

Disclaimer

Italgas's Manager, Giovanni Mercante, in his position as manager responsible for the preparation of financial reports, certifies pursuant to paragraph 2, article 154-bis of the Legislative Decree n. 58/1998, that data and information disclosures herewith set forth correspond to the company's evidence and accounting books and entries.

This presentation contains forward-looking statements regarding future events and the future results of Italgas that are based on current expectations, estimates, forecasts, and projections about the industries in which Italgas operates and the beliefs and assumptions of the management of Italgas.

In particular, among other statements, certain statements with regard to management objectives, trends in results of operations, margins, costs, return on equity, risk management are forward-looking in nature.

Words such as 'expects', 'anticipates', 'targets', 'goals', 'projects', 'intends', 'plans', 'believes', 'seeks', 'estimates', variations of such words, and similar expressions are intended to identify such forward-looking statements.

These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict because they relate to events and depend on circumstances that will occur in the future.

Therefore, Italgas's actual results may differ materially and adversely from those expressed or implied in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, economic conditions globally, political, economic and regulatory developments in Italy and internationally.

Any forward-looking statements made by or on behalf of Italgas speak only as of the date they are made. Italgas does not undertake to update forwardlooking statements to reflect any changes in Italgas's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

The reader should, however, consult any further disclosures Italgas may make in documents it files with the Italian Securities and Exchange Commission and with the Italian Stock Exchange.

Italgas Strategic Plan 2018 - 2024

13th June 2018, Milan