July 2021

01 Cover story 02 Financial strategy 03 Italgas share 04 Sustainability

01. Nearly 8 billion euro of investments to grow and repurpose the network

Data di pubblicazione: July 25, 2021

On 15 June, Italgas announced its 2021-27 Strategic Plan outlining an ambitious growth path, under the assumption of a 20bp lower allowed return from 2022.
Italgas believes that its networks will play a key role in enabling the achievement of the EU targets for energy transition and decarbonization. The Company also believes it can make an important contribution to the country’s economic recovery after the pandemic.
The heart of the investment plan is in the 5.2 billion euro dedicated to the existing networks, of which 1.4 billion euro for digitization. The objective is to enhance and at the same time evolve the existing infrastructure, so that it can become increasingly digitized, flexible and smart. Only by acquiring these characteristics can the gas network be a driving force in the energy transition.
Gas networks will thus be able to transport renewable gases: green hydrogen, synthetic methane and biomethane – the latter already being available today and expected to grow strongly over the next ten years.
Italgas is also ready to invest in growth through M&A, to have an even greater impact on the evolution of the gas system. Therefore, it plans to devote over 2 billion euro to participation in gas tenders and the subsequent development of the infrastructure in the territories it will be awarded.

The 2021-27 Strategic Plan is based on five strategic pillars:

Digital transformation and technological innovation, as prerequisites for Italgas to actively contribute to the energy transition
Repurposing and upgrade of infrastructure to allow for the distribution of renewable gases as well as the network extension, including through M&A and gas tenders
New growth opportunities in the businesses of energy efficiency, water and IT services, to leverage existing competences
Insourcing of core competences, with additional focus on people reskilling and upskilling activities, in line with the digital transformation of assets
Solid and efficient financial structure, so as to be able to seize growth opportunities, creating value while ensuring adequate remuneration for shareholders.

Sustainability criteria are integrated in the actions set out in the Plan: on the Environment area, with clear targets in terms of emissions and energy efficiency; on the Social area, with the gaining of new skills and the enhancement of resources that are essential to execute the transformation of Italgas.

7.9 billion euros to be invested in seven years – a larger commitment (+5.2%) than in the previous Plan
According to the Plan, in 2021-27, Italgas will invest a total of 7.9 billion euro: 0.4 billion euro more than envisaged in the 2020-26 Plan presented in October 2020. The increase in the cumulative amount of investments is essentially due to the greater investments planned for digitization, which will allow the gas network to operate not only more efficiently, but also in a smart way, accommodating new gas.

This ambitious growth plan is also based on the assumption of a regulatory review with limited impact on WACC (-20bp). As indicated at the time of the release of first-half 2021
results, with the ongoing WACC regulatory review expected to close in December, the Company will assess whether to partially revise the investment plan on the back of the WACC review outcome to ensure the financial stability that has always characterized it.

Digitization is a key element in gaining efficiency…
Italgas expects to fully achieve the efficiency targets set by the Regulator in Resolution 570 also leveraging on the management of digitized assets.

To give an idea, benefits of around 250 million euro in total are expected from digitization, compared to a scenario without digitization. This value is an increase of 40 million euro compared to the previous plan. These benefits can be captured through lower operating costs, greater efficiency on investments and additional revenue opportunities that a fully digitized network will make possible.

More specifically, within the 250 million euro of efficiencies:

Approximately 190 million euro will have an impact on the Income Statement, as a result of lower operating costs referable to the ICT cloud, savings on maintenance and regulatory benefits related to improved network loss detection using the Picarro technology.
The remaining 60 million euro are savings on CapEx, both in terms of optimization of network maintenance interventions, and on the ICT front, due to the adoption of the cloud and the reduced need to develop new software.

…and to transform the operation of the network
With these assumptions, Italgas investment program is also fully aligned with European targets for decarbonization and development of renewable gases such as biomethane, synthetic methane and green hydrogen.

Investing to grow

The combined investments dedicated to organic growth, M&A and scope tenders will fuel an increase in the the Regulatory Asset Base, the RAB, which is estimated at an average rate of 6.3% per year over the Plan period, to reach 11.9 billion euro in 2027. Even excluding the expected contribution from gas tenders, the average growth rate would remain high, in the order of 4.2%, allowing the RAB to reach 10.3 billion euros at the end of the Plan.

Italgas market share in Italy would therefore increase from 35% to around 45%, through an increase in redelivery points, which would rise from 7.6 million in 2020 to 9.9 million in 2027, following an average growth rate of 3.9%. Even excluding the contribution of tenders, the total redelivery points are expected to reach the level of 8.2 million at the end of the Plan.

According to the Strategic Plan 2021-27 the 5.9 billion in organic investmentsare broken down as follows

1.4 billion will be focused on the digital transformation of networks and processes, with an increase of 300 million compared to the previous Plan, to enable networks to transport renewable gases such as biomethane. Among the various projects, the replacement and upgrade of more than 7,000 pressure regulation systems is planned, as well as the massive installation of remote-controlled sensors and sectioning valves, allowing the network to be managed remotely.
3.1 billion in total will be dedicated to repurposing, upgrading and developing existing infrastructure. Of this total 3.1 billion.
2.1 billion euro will be focused on projects for the extension in the territories not yet reached and the completion of the conversion to natural gas of the LPG networks, as well as those dedicated to making predictive maintenance possible (through interventions based on data collected in real time through integrated sensors on 73,000 km of network, resulting in raising the quality of service and reducing fugitive emissions)
Around 1 billion euro will be allocated to the construction of new infrastructure in the ATEMs that Italgas has already been awarded: Belluno, Valle d’Aosta, Turin 1 and Turin 2
0.3 billion will be dedicated, in Sardinia, to the completion of the construction of “native digital” networks and the conversion to natural gas of networks that are currently powered by LPG and propane air
0.4 billion in centralized activities, such as ICT and Real Estate.

Outside the core perimeter of gas distribution, according to the Strategic Plan 2021-27 ,the following are also planned:

0.4 billion in the additional perimeter in gas distribution, for M&A and related operational investments; a figure that could be reduced to 0.3 billion in the event of a scenario in which the gas tenders process takes shape
0.2 billion to consolidate growth in sectors such as water, Energy Efficiency and retail customer services.

More than 2 billion euro to be invested in external growth, through participation in tenders, according to the Strategic Plan 2021-27.
Italgas intends to seize the opportunity of the next area tenders to grow in size, with positive effects on the quality of service in the new territories that will enter the Group’s perimeter and, more generally, for the entire Italian gas system, considering the benefits of the digitization that characterizes the management of the business by Italgas and, on the other hand, the limited investment capacity of the many small operators that currently manage gas distribution on a local basis.
Of the more than 2 billion euro of investment that Italgas intends to focus on gas tenders, around 1.4 billion euro will involve the acquisition of networks through the tenders won, whilst the remainder will be represented by investment in maintenance, upgrades and extension of the networks acquired, so as to bring the new sections of the network into line with the Group’s high operating standards.
Investments in external growth are also expected to generate benefits in terms of lower distribution costs, through greater economies of scale and optimization of the Italgas Group’s geographical presence.