Message from the Executive Chairman

"The Hera Group’s 2020 financial statements prove, once again, our solidity and the effectiveness of our strategies, but also our close relations with local areas and stakeholders.

These results indeed reflect our uninterrupted activities, in spite of the pandemic, supporting the economic fabric in which we operate. Quarter after quarter, we succeeded in meeting the challenges posed by the emergency, reacting quickly to reorganise our work and find solutions to protect our assets on the one hand, and customers on the other.

In a complex context, we defined new projects and signed agreements with outstanding partners, and in the second half of 2020, gaining speed in particular towards the end of the year, we benefitted from the overall recovery seen in economic activities in the areas we serve. These positive results were reflected in all main indicators and are all the more significant in light of the difficulties caused by the health emergency: we thus confirmed our track record of 18 years of growth and further improved our financial solidity, with positive consequences for our public and private shareholders, to whom we have decided to pay, already this year, an increased dividend coming to 11 cents per share. The good cash generation seen in 2020, furthermore, will allow us to fully cover our policy of increased dividends through to 2024."

Tomaso Tommasi di Vignano
Executive Chairman

Message from the CEO

"The growth achieved by the Hera Group was strongly supported by its partnership with Ascopiave, which enabled the Group to expand further in the Triveneto region.

Despite the complex context, we were able to immediately extract a significant part of the expected synergies, thus giving a crucial contribution to the increase in our cash flows in 2020.

The year was also dedicated to further progress in fully integrating sustainability into our business strategies: we are committed to promoting further development in this direction, with projects for circularity, carbon neutrality and technological innovation, respecting European policies and the goals on the UN’s 2030 Agenda.

This also includes a few collaborations recently launched, such as the one with Snam for developing hydrogen. Green gases, in fact, are a particularly interesting frontier for us precisely because we operate in more than one business: by providing our wide range of expertise and our broad infrastructures, we can create innovative examples of carbon neutral circularity between supply chains.”

Stefano Venier
CEO

Summary Report

 

Estimates

	Consensus	Hera's results	Δ %
Ebitda (mln €)	1,121.0	1,123.0	+0.2%
Ebit (mln €)	554.5	551.3	(0.6%)
Net profit post min. (mln €)	307.4	302.7	(1.5%)
Net Financial Position (mln €)	3,248.8	3,227.0	(0.7%)

Target Price

		Preview		Post Results
Analyst	Broker	Rating	Target Price (€)	Rating	Target Price (€)
Emanuele Oggioni	Banca Akros	Buy	4.00	Buy	4.00
Davide Candela	Intesa Sanpaolo	Buy	4.70	Buy	4.70
Roberto Letizia	Equita Sim	Hold	3.50	Hold	3.50
Federico Pezzetti	Intermonte	Outperform	4.20	Outperform	4.20
Claudia Introvigne	Kepler Cheuvreux	Buy	3.60	Buy	3.60
Javier Suarez	Mediobanca	Outperform	4.00	Outperform	4.00
Enrico Bartoli	Stifel	Buy	3.70	Buy	3.70
		Average	3.96	Average	3.96

 

Summary Report

Broker	Analysts' comments on financial results
Banca Akros	"The dividend proposed at the shareholders' meeting is EUR 0.11 per share (+10% YoY), slightly higher than our forecast of EUR 0.105 per share. This will, furthermore, benefit the shareholder remuneration policy in the current business plan, since this new starting point will be applied, thus arriving at a dividend of EUR 0.13 per share by 2024 (vs EUR 0.125 previously targeted). According to the management, this should be considered as a floor, with further potential upside."
Intesa Sanpaolo	"Management is confident in Hera recovering at least half of the EUR 31M of Covid-19 impacts on 2020 reported EBITDA in the current year, whilst further contributions should come from organic growth in the Energy Supply and Waste businesses, and from potential M&A. In this respect, the company is currently assessing a few dossiers and minorities’ buy-outs, that according to management could also be finalised through asset-for-share transactions so as to not burden the net debt. Lastly, management stated that the current (and revised upward) dividend policy should be seen as a floor, with any overperformance in the coming years potentially to be distributed as a dividend, as in 2020. We appreciate the improved dividend policy, powered by a solid cash generation, as well as the continued and solid commitment of Hera on sustainability."
Equita Sim	"Hera showed a good resilience in 2020 with results in line with expectations despite difficult conditions in Q4 and thanks to the contributions of M&A and efficiencies. Considering 2020 results and qualitative indications, we don't make any significant change to our 2021 estimates and we confirm our neutral view."
Intermonte	"DPS at Eu0.11 (+10% YoY) was above the Eu0.105 guidance given at the beginning of the year, a decision that benefited from the excellent cash generation demonstrated, evenin what has been an extraordinarily tough year. Thanks to the dual impact of increased EBITDA and reduced NFP, thenet debt/ EBITDA ratio came to 2.87x, a marked improvement on the 3.02x posted at theend of 2019. Following FY20 results and the dividend proposal, we continue to believe that the group is well placed to benefit from the growth of the Energy supplycustomer base, leadership in the Waste business and a strategy built around the concepts of resilience and environmental and digital transition. The group is trading at 6.6x 2021EEV/EBITDA, a multiple that we consider undemanding, potentially opening the door to a re-rating in the wake of the stock’s 2020 underperformance."
Kepler Cheuvreux	"HERA’s final 2020 data is better than pre-closing, both at operating level, with EBITDA up 3.5% YOY, and at dividend level, with DPS up 10% YOY. The dividend policy has been improved until 2024. We reiterate our positive stance on the stock, in view of its appealing potential upside and solid and diversified business profile."
Mediobanca	"The company has delivered strong CF generation, with the Net Debt to EBITDA below the 3x threshold. We believe this is the consequence of optimization of the billing process, and that should remain as structural, since it is the consequence of technology improvements. Management has indicated that the dividend Policy is a floor. And therefore, since there has been an outperformance, that has been reverted to shareholders. This is what has happened this year, and as a consequence Hera has revised upwards its DPS policy. We included Hera in our list of core holdings, based on the solidity of its business model and exposure to the secular trend of adoption of circular, green & sustainable models."
Stifel	"Hera reported a solid set of 2020 results, confirming once again the single-digit growth trend consistently reported in the past twenty years and the strength of its business model and the cautious approach taken by its management. The company more than offset through organic business development, cost efficiencies and external growth the difficult business environment determined by lockdown measures related to the Covid pandemic. We expect that the company will partially recover those negative impacts in 2021 and that it will continue its usual growth path. Hera represents a low risk growth story almost immune to the impact of Covid 19 and the current economic downturn. Hera's share price has only partially recovered since the sell-off of the market in March 2020. We think that the low-risk growth offered by the company and the high quality of its management are underestimated by the current share price."

Partnership

How to boost innovation

 

A range of partnerships, with one single aim: promoting a circular economy to fight climate change. This requires urgent measures to be taken, to achieve both the SDGs on the UN’s 2030 Agenda and the objectives set by the Paris Agreement and EU Directives.

In order to ensure these targets are reached on time, the Group has established partnerships that perfectly reflect the strategy defined in its Business Plan to 2024. These partnerships increase the Group’s agility in processes and guarantee a faster time-to-market, accelerating the achievement of its results. Moreover, this approach, in addition to reducing the Group’s risk profile, leads to a more sustainable performance over time, with a significant reduction in R&D costs.

At Hera, what makes the difference is the Group’s nature as a multi-utility and its diversified business portfolio, thanks to which intra-business synergies become a competitive advantage. This makes processes become circular as well, since what would be discarded in one business turns into a resource for another, producing a win-win situation that makes our company’s performance unique.

In the fight against climate change, collecting, processing and RECYCLING PLASTICS in a sustainable way is fundamental, considering the enormous quantity produced every day and released into the environment. Hera, the Italian leader in the WASTE TREATMENT SECTOR, has been dedicating a great deal of attention to this issue for years, investing both in Herambiente, to improve sorted waste collection, and its subsidiary Aliplast, to increase the amount of plastic materials recycled. A partnership with PANARIAGROUP now allows the Group to achieve a higher recovery and regeneration of plastic film (in 2020 alone, over 450 tons of CO2 emissions into the atmosphere were avoided), and a recent agreement with NEXTCHEM, a subsidiary of the Maire Tecnimont Group, aims at creating a high-quality recycled polymer production plant. This collaboration will allow the Group to expand even further in the sector of treating and recycling certain hard plastics that cannot be recycled in the standard recycling chain.

However, in HYDROGEN PRODUCTION, being an integrated operator such as Hera brings even more significant advantages. Here, it allows for economically competitive and sustainable production: in water electrolysis, the low-cost green energy (no longer covered by incentives) coming from WTE plants is used to separate water into hydrogen and oxygen. While oxygen is used in the wastewater purification process, part of the water cycle, in which Hera is Italy’s 2^nd largest operator, hydrogen is stored or distributed to end customers through the gas distribution network (in which Hera ranks 3^rd nationally), creating a renewable and environmentally harmless energy cycle. To enhance this process, the Group has recently launched partnerships with SNAM, YARA and SAPIO that will allow concrete solutions to be found in reducing the carbon footprint left by the industrial sector, mobility and individual citizens.

BIODIESEL PRODUCTION, too, finds advantages in a cross-business strategy. In order to further minimize disposal in favour of material and energy recovery, Hera has signed agreements with ENI, ENI Rewind and CAMST. The exhausted household vegetable oils collected by Hera, along with commercial oils from restaurants, will be processed in ENI’s biorefinery to be converted into HVO biofuel, a component that will then be used as a source of fuel for vehicles used by Hera to collect municipal waste. In addition, all organic waste produced by CAMST, a leading company in the Italian restaurant sector that serves close to 130 million meals per year, will be treated at the Group’s plant in Sant’Agata Bolognese to produce biomethane and compost.

This integrated approach is increasingly being applied to all Group projects, and reflects Hera’s commitment towards development and growth, through actions aimed at energy transition, environmental protection and technological evolution.

 

2020: the first year of the Plan has set the groundwork for the future

Projects

Corporate social responsibility and ESG criteria integrated into the projects launched or confirmed by the Group in recent months

 

Companies are increasingly being asked to become aware of their social role, and to act accordingly. The degree to which ESG factors are integrated within its strategy and processes is therefore becoming an indicator of a company’s maturity in the area of social responsibility and sustainability.

The Hera Group, born out of an aggregation of several municipalized companies, has maintained the attention this sort of company typically shows towards local and social wellbeing, and towards protecting the common good while respecting the local area and its resources. In fact, at Hera, alongside projects dedicated to technological innovation, industrial research and economic development, aimed at creating new products, processes or services, initiatives with a strong social impact are conceived and expanded.

This begins with HERA FOR SCHOOLS and the project “THE GREAT MACHINE OF THE WORLD”, created over 15 years ago to encourage respect for the environment, a responsible use of resources and a knowledge of science among the younger generations.

Every year, students from 4 to 18 years of age are invited to practical workshops, team and role-playing games, competitions between classes with environmental objectives, along with guided tours, some of which are virtual, to Hera plants, and events concerning water, energy and waste. What the students discover, in a playful and interactive way, is the value of waste management and treatment, separate waste collection, the scarcity of natural resources such as water and the importance of saving energy, aiming at a circular economy and environmental sustainability. From 2013 to the present, more than 448 thousand students from 20 thousand classes and 6,400 schools in Emilia-Romagna have been involved. 

For secondary schools, there is also “A WELL OF KNOWLEDGE”, a special program dedicated to scientific issues that, every year, proposes a topic around which to develop meetings with scientists and experts, researchers and innovative companies or start-ups, all involving issues related to the environment and technology. Experiential workshops on water, energy and waste are also held, as are debates between classes, designed to get children involved, raise their awareness and give them a leading role in the changing future that awaits them. To date, about 140 thousand students from 5,500 classes and 500 high schools have been involved.

On the topic of inclusive culture, the Group participates in the “INSPIRINGIRLS” project, promoted by VALORE D and aimed at middle school students, to encourage young women to pursue their aspirations, above and beyond gender stereotypes. Since 2017, the ‘role models’ have met with nearly 30,000 young people across the country.

Diversity and inclusion was also the focus of the first edition of “4 WEEKS 4 INCLUSION”, an intercompany program created in 2020, with the involvement of 27 Italian companies, including Hera. Together, they designed, for their employees, a calendar with 67 digital events held during one month, dedicated to topics such as disabilities, intergenerational communication, enhanced contributions coming from women and identity based on gender, ethnicity and religion. More than 300 Hera employees took part in this initiative. 

Through HERACADEMY, the Group’s Corporate University, Hera also offers employees a full programme of training, workshops, experiences in cooperation and exchange of knowledge to develop new skills. Since 2011, 11 workshops have been organized with an average of roughly 200 participants per event.

At the same time, H-FARM, a university orientation initiative aimed at the children of employees who are about to enrol in university, has been held for years in collaboration with the University of Bologna. It is now at its 9^th edition: to date, including the 2020/2021 courses, 434 courses have been co-designed and 284 implemented, involving students across Emilia-Romagna and, to a lesser extent, in the Veneto and Marche regions.

Also intended to support employees and their families, HEXTRA, the Group’s welfare system, renews each year its range of services based on the needs of the company’s workforce. This plan provides a certain amount of welfare, which now stands at €385, equal for all employees, with which each of them can put together their own package, choosing among services, discounts and a range of benefits in training and other fields. Since it was launched in 2016, it has benefited almost all employees, with almost 4 million euros used on average each year.

From the HEXTRA portal, employees can also participate in the HERASOLIDALE project, created in 2014 to promote support among workers for associations involved in solidarity programs. Since 2018, HeraSolidale is aimed at organizations operating nationally and internationally and, in addition to employees, also involves new Hera Comm electricity and gas customers, who can choose to allocate 1 euro, when signing a free market contract, to one of the associations involved. The Group is also committed to donating 1 euro to the project for every new customer acquired by Hera Comm. The fourth edition, which will run until December 2022, has already collected 83 thousand euro, while the three previous editions collected around 570 thousand euro, allocated to 25 non-profit organizations.

And the Group’s commitment to solidarity does not end here. Thanks to collaborations with numerous partners, since 2014 CHANGE THE ENDING has let Hera give new life to 3.6 thousand tons of bulky items and electronic waste in good condition, preventing their disposal. The challenge of this project is in fact to recover objects and give new life to the things and people of a community, helping the environment and those in need.

With FARMACOAMICO, instead, medicine with at least 6 months before its expiry date is collected by Hera and donated to non-profit organizations, who use it in projects to assist the more vulnerable members of the community. From 2013 to 2020, the Hera Group has been able to prevent over 345,000 packages of medicines that can still be used from becoming waste, making it possible to recover and donate essential goods worth almost 4 million euro to local non-profit organizations.

Hera’s partner in this project is Last Minute Market, a social enterprise and spin-off company of the University of Bologna, which promotes reduced waste and environmental sustainability and also collaborates with Hera in the CIBOAMICO project, to recover meals prepared but not consumed in the Group’s canteens. This food is donated to 4 non-profit organizations that, on a daily basis, provide hospitality and assist people in difficulty. In addition to the social benefits (turning excess food into a resource) and environmental benefits (not wasting the water and energy used in preparation), this project also has economic value: since 2012, about 110,000 meals have been recovered, for a total value of over 452 thousand euro.

These are all initiatives in which the Group shows its involvement with local communities, to generate a positive, tangible and measurable environmental and social impact, create value and respond to the question: “What human, environmental and social need is the company, while pursuing its business objectives, able to meet at the same time?”

 

The Group's projects to help reach the SDGs on the UN's 2030 agenda

Commitment and Awards

The importance of our mission in reporting on the goals achieved

 

Hera’s mission defines the course of action adopted by the Group to achieve its strategic objectives: sustainability and creating value, quality and excellence in services, efficiency, innovation and continuous improvement are among the goals Hera sets for itself on a daily basis.

Each year, we make an effort to report on our operations in a transparent manner, cultivating communication with all stakeholders to ensure we can be proud of our business model, knowing that it has achieved its objectives and created value. This type of analysis cannot overlook our new commitments nor the awards we have obtained.

Since sustainability is part of the Group’s DNA, it is natural that a significant part of the goals achieved involve ESG factors, such as becoming part of the DOW JONES SUSTAINABILITY INDEX, WORLD and EUROPE, both managed by S&P Global. In 2020, this firm recognized the Hera Group as the best multi-utility in the world, counting it among 61 Industry Leaders in the respective sectors. This evaluation also led Hera to be included in the 2021 SUSTAINABILITY YEARBOOK, giving it GOLD CLASS status and special mention as an “INDUSTRY MOVER” which, taken together, represent the highest recognition that this authoritative international stock exchange index reserves for the companies it evaluates.

The Group’s ESG PERFORMANCE has also been positively evaluated by FTSE Russell, which in 2020 included Hera stock in the FTSE4GOOD INDEX SERIES, an important series of ethical indices created to encourage investments in companies that meet strict environmental, social and governance criteria. This is an important milestone, because it makes Group even better placed to capitalize on the benefits of responsible business conduct.

In the ENVIRONMENTAL AREA, the Hera Group made further progress in the CDP - CARBON DISCLOSURE PROJECT questionnaire. This organisation manages a system for measuring and disclosing data concerning the environmental impact of companies globally, and provides an excellent point of reference for investors and businesses. Hera obtained top rating (A) for its governance and emissions data, and achieved an overall score of A-.

Hera also stands out for its GOVERNANCE, firmly maintaining first place in the “sustainable finance” category over the past 3 years, and an outstanding ranking in the overall classification of Italian companies devised by the INTEGRATED GOVERNANCE INDEX (IGI). This project, developed by ETicaNews, is aimed at quantitatively assessing how deeply engrained ESG is in a company’s integrated governance model.

As regards SOCIAL FACTORS, the Group stands out for its strong promotion of diversity, inclusion and people development. This is demonstrated by two international awards and one certification: TOP EMPLOYER 2021, awarded by the Dutch Top Employer Institute to Hera for the 12^th consecutive year, thanks to its excellent human resource management and organizational methods, that promote work agility and digitalization within the Group; TOP UTILITY DIVERSITY 2021, awarded by the public utilities think-tank that goes by the same name, for its commitment to policies in favour of diversity, inclusion and social responsibility; and, lastly, POTENTIALPARK 2021, a Swedish research company that sees Hera as “talent friendly” and has rewarded its skills in online and social communication aimed at young graduates seeking employment.

Hera has furthermore been confirmed in both Refinitiv’s 2020 DIVERSITY & INCLUSION INDEX, where it came in 12^th in a global ranking of companies committed to promoting diversity, inclusion and people development, and in the 2021 BLOOMBERG GENDER-EQUALITY INDEX, which gives international recognition to the companies most committed to promoting and creating fair and inclusive workplaces.

This handful of awards for excellence drives us towards further improvement in our performance, because responding to the most urgent priorities and challenges for the planet’s sustainable development is the perspective that guides the Group’s way of doing business, moving towards economic growth capable of creating shared value for local areas and communities.

This is one of the reasons why, in 2020, the Hera Group became part of the ALLIANCE FOR A CIRCULAR ECONOMY, which already unites important companies that symbolise Made in Italy. This Alliance aims at continuously reinforcing improvement in sustainability through daily, demanding actions, to make innovation and sustainability an integral part of business and a strategic choice for competitiveness, including the effort to counter climate change.

 

We are now able to reap the benefits of almost 20 years of commitment, confirming the validity of the Group’s strategy and mission.

Trends and contexts

 

Hera makes ongoing efforts to interpret the signs coming from the contexts in which it operates, in an attempt to obtain an overall view of what lies ahead for the Group and its stakeholders. In order to anticipate future developments, the main drivers of change and their essential interrelations are identified below. In particular, the macro-trends of the Group’s reference contexts are described, as are its main management policies, i.e. its industrial strategy and the related factors of sustainability (concerning the environment, technology and human capital).

Macroeconomy and finance

World economy: trends at year-end

The global economy contracted sharply in 2020, largely owing to the effects of the Covid-19 pandemic on the economic and social fabric. The most recent estimates prepared by the International Monetary Fund (IMF) show a decrease in global wealth coming to 3.5% compared to 2019. Advanced economies accounted for much of this result (-4.9% compared to 2019), while the decline in developing economies was less pronounced (-2.4%). Particularly negative figures appeared in the Eurozone and the United Kingdom, which show reductions in GDP going from -7% to -10%, while the United States showed a -3.4% drop compared to the previous year. Positive figures were instead seen for China, which reported economic growth coming to 2.3% in 2020. The measures aimed at containing the spread of the epidemic over the year, at varying degrees of intensity, interrupted economic activities and obstructed the planning capacity of many players, bringing production and global trade almost to a standstill which was only partially unblocked by the notable recovery recorded over the summer months. This reversal in trends is due to the extraordinary measures adopted by all major world economies, intended to provide stimulus.

European economy: trends at year-end

In the Eurozone, the economic downturn was significant (-7.2% compared to 2019) and especially concentrated in the second and fourth quarters of the year. The drop in GDP was higher in Spain, France and Italy, coming close to -10%, and more contained in Germany (-5.4%).
Household spending plummeted, as a result of the measures taken to contain the virus and an increase in European households’ inclination to save. Exports also suffered, having to deal with limitations on the flow of goods imposed by the restrictive measures introduced, in addition to the drop in demand.
Average inflation for 2020 was negative and settled at -0.3%, weighed down by the drop in energy prices and the weaker prices for services and non-energy industrial goods.

World and European economies: forecast trends

For the upcoming two years, the IMF has projected a general recovery worldwide (+5.5% in 2021 and +4.2% in 2022), still to be confirmed on the basis of the evolving health situation, the global distribution of vaccines and the effectiveness of the extraordinary economic and financial stimuli adopted in Europe. The Eurozone is expected to follow the same path of recovery: more specifically, growth rates coming to 4.2% in 2021 and 3.6% in 2022 are expected, which, however, will not make it possible to recover the amount of GDP seen at the end of 2019 within 2021.

National figures: year-end and forecast trends

Most of the considerations made regarding the Eurozone also apply to the economic situation in Italy: the restrictive measures, in fact, led to a significant reduction in GDP in the second and fourth quarters (by 13.0% and 3.5%, respectively, compared to the previous quarter), while the third quarter –during which the restrictive measures were eased, on the whole – saw a solid recovery (+15.9% compared with the second quarter). This, however, was not enough to prevent national GDP from contracting by around 9% over the entire year.

In 2020, exports fell by 9.7% and household consumption also dropped sharply. The employment rate, thanks to the extraordinary measures adopted by the Government, stood at 58.3% in November 2020, relatively close to the figure seen at the beginning of the year (58.9%): the freeze on redundancies and the extensive use of social welfare programs, in particular, made it possible to temporarily stop the negative impact coming from the external context.

The most recent projections prepared by the IMF estimate that Italy may see recovery coming to 3.0% in 2021 and 3.6% in 2022, provided, however, that the pandemic is effectively contained and that the extraordinary resources allocated at European level are used equally effectively.

Volatility on financial markets

Furthermore, 2020 was marked by uncertainty and volatility on global financial markets. Although the Covid-19 pandemic was undoubtedly the dominant event, the effects of the trade war between the US and China, as well as those related to the US presidential elections, should not be forgotten. In the first quarter of 2020, in particular, market volatility reached levels comparable to those recorded during the 2008 financial crisis, but had already fallen by the second quarter. As regards the main emerging economies, on the other hand, the Chinese stock market reacted more moderately, owing to certain structural characteristics of this financial centre and the robust monetary and fiscal measures adopted by Beijing to support economic activity.

Support provided by Central Banks

Public debt felt the effects of the crisis, which appeared more immediately than in the past, thus exposing countries to the need to deal with the combination of an increase in current spending and a related reduction in tax revenues. The stock of debt in advanced countries averaged over 100% of GDP, a sharp increase over the 74% recorded in 2007.
In order to cope with the economic recession and consequent deflationary spiral, central banks adopted extremely expansive monetary policies, which reduced interest rates to zero or to negative levels through credit easing and quantitative easing measures aimed at providing liquidity to support loans to households and businesses. The growth rate of global liquidity consequently increased from an annual average of 7% to over 26%.
Following the pandemic, in particular, the ECB immediately introduced an extraordinary program for purchasing public and private securities (Pandemic Emergency Purchase Programme, PEPP), aimed at restoring the correct functioning of European securities markets and ensuring the effective transmission of monetary policy impulses. This measure, which will be in effect until the end of the crisis, has eased tensions on secondary markets for government bonds, which showed a rapid reduction in yields compared to the peak at the beginning of March. In this area, the ECB announced that it will continue to provide economic and monetary support, while stressing the importance of coordinated fiscal policies to cope with the contraction of the Eurozone economy, as well as the key role to be played by the Next Generation EU fund, approved by the European Council, which will provide decisive support (750 billion euro for recovery and resilience in European economies) by leveraging the Union’s budget and lending capacity.

Ongoing downward trend in interest rates

These monetary policies led the downward trend in interest rates to continue, concerning long-term maturities as well; the Euro swap interest rate curve, in particular, showed an average reduction of roughly 40 basis points compared to the previous year, reaching negative levels even on maturities up to 15 years, with a forward trend that does not point in an upward direction. The ECB, within a medium-term projection timeline, expects rates to remain at current levels or lower, until inflation outlooks converge sufficiently close to 2%.

National support measures

In this context, the Italian stock market showed similar trends to those seen worldwide. In the first half of 2020, the FTSE MIB indeed fell by 18%, but then slowly recovered following the announcement of significant measures to combat the crisis at European and national level. Furthermore, according to the content of the Bank of Italy’s Financial Stability Report, Italy’s public debt remains sustainable, also in view of the temporary nature of the expansionary budget measures. The national support measures adopted until present, including the expansion of payroll subsidies, a moratorium on loans, a postponement of tax compliance, non-repayable grants and guarantee mechanisms for new financing, are believed to contain situations of economic and financial stress for households and businesses. In March, bond markets began to discount the debt of companies in all sectors of activity, but the monetary policy measures introduced in the meantime met their need for liquidity and helped mitigate the economic consequences of the pandemic. The Italian market for bonds issued by private companies showed a fall in prices, and the increase in yields on Italian government bonds was particularly strong; yields on bonds with a 10-year maturity came close to 2.5%, up compared to the 1.3% recorded at the beginning of the year. The spread between yields on Italian government bonds with a 10-year maturity (BTP) and the German benchmark rose rapidly in mid March, reaching a peak of almost 300 basis points (from an average of around 145 basis points recorded during the previous two months); similar trends were observed with reference to credit default swaps (CDS) on sovereign debt.

Hera’s bond spreads were also affected by the pandemic, showing a rapid rise. The ten-year spread, shown in the following graph, in fact reached a maximum of 150 basis points, with an increase of roughly 100 bps compared to the previous year. However, thanks to the Group’s good credit rating, it always remained at levels lower than the Btp-Bund spread with the same duration, while at the same time showing less volatility.
 

Businesses and regulations

Business trends

Among the health emergency’s effects on the national production system, a decline was also seen in electricity consumption. The most recent estimates prepared by the national grid transmission company (Terna) show nationwide energy demand coming to 302.8 TWh in 2020, down 5.3% compared to 2019. Approximately 90% of overall demand was met by domestic production, down 3.8% from the previous year, while the balance with foreign countries settled at 32.2 TWh.
In 2020, renewable sources accounted for 41.7% of total net electricity generation, coming to 114.0 TWh, up 1% compared to 2019. This contribution corresponds to an increase in the amount of final consumption met by renewable sources (up to 38%, more than 2 percentage points higher than the contribution in the previous year): in this sense, a significant contribution was made by photovoltaic production (+9.6% compared to 2019) and, albeit to a lesser extent, by hydroelectric production (+0.7% over 2019). Taken together, these two sources more than offset the overall drop seen in other renewable sources.

A similar trend occurred in natural gas consumption in 2020, with nationwide volumes in 2020 – according to the data provided by the Energy Market Management (GME) – decreasing by 4.4% compared to 2019, with a total of 70.7 billion cubic meters consumed. This trend is mainly due to the weaker demand recorded during the months when the lockdown was in effect. Consumption in the industrial and thermoelectric sectors stood at 24.4 and 13.2 billion cubic meters respectively (-5.7% and -6.1% compared to the previous year). Conversely, the decline in demand coming from the civil sector was slighter, settling at 31.0 billion cubic meters (-2.4% compared to 2019).

As regards the waste sector, the Istituto Superiore per la Protezione e la Ricerca Ambientale (ISPRA) had estimated a national production of municipal waste coming to 30.1 million tons in 2019, with a slight 0.3% drop compared to the previous year, and a national production of special waste amounting to 143 million tons, up +3.3% over the previous year. Special waste came primarily from the construction and waste treatment/redevelopment sectors (which respectively accounted for 42.5% and 26.5%), and 20% was covered by the manufacturing sector.
No data is currently is available regarding the production of municipal and special waste in 2020, but considering its correlation with traditional socio-economic indicators (above all GDP and consumer spending) and the extraordinary effects of the health emergency, a decline in national waste production can in all likelihood be expected.

The most recent ISTAT report containing statistics on the national water sector confirms a total usage coming to approximately 9 billion cubic meters of water, equivalent to 419 litres per day per inhabitant. Almost 85% of this resource is taken from groundwater, roughly 15% from surface water and a minor amount from sea and brackish water. The latest update of the Blue Book shows that about half of the water consumed in Italy is used for agriculture, which is thus confirmed as the most water-intensive economic sector, followed by industry. This clearly indicates the importance of interventions aimed at encouraging reuse of water resources in agriculture and industry.

Competitive context

The strong competitive pressure that has defined for several years now the sectors typically served by utilities, as regards both free market and regulated businesses, was confirmed in 2020 as well.
In the energy market, intense competition among sellers to increase their customer base is confirmed by increasingly high churn rates, as has been noted by the Regulatory Authority for Energy, Networks and the Environment – Arera. In order to respond to the challenges and difficulties caused by the pandemic, many companies have rapidly adopted new digital solutions for customer management and relations, in many cases accelerating certain previously ongoing trends. Sales companies have added value-added services sales to their offer of commodities. Lastly, in the fall of 2020 tenders were held for the assignment of Last Resort services in the gas sector (annually defined Default gas and Last resort gas suppliers) and in the electricity sector (safeguarded services, defined on a two-year basis).

In the area of industrial waste treatment and recovery, the competitive scenario now includes major European players. The market for urban and special urban waste management and treatment is marked by a strong demand, linked above all to the emergency seen in central and southern Italy, capable of producing volumes that attract the attention of international competition. In the industrial waste market, currently existing treatment plants are often involved in acquisition strategies, following a trend that – in leading to a more pronounced industrialization of services – can be expected to benefit larger operators. In the recovery market, the sector is evolving towards a more industrial structure, which is the only way the challenging targets indicated by the EU can be adequately met.

As regards regulated businesses, Hera carries out its activities in the businesses falling under the responsibility of the Regulatory Authority for Energy, Networks and the Environment, which defines the conditions for access to and operating procedures within these businesses, in compliance with obligations concerning transparency.
In 2020, activities continued in tender procedures for the assignment of gas distribution, municipal waste and water cycle services. As far as gas distribution is concerned, the number of tenders actually awarded nationwide is still small (mainly including the Milan 1, Turin 2 and Belluno ATEMs), and almost all the tenders awarded have been subject to appeal. Concerning the areas in which the Group currently provides services, Arera has completed the assessment process for the tender documentation prepared by the granting authorities for the Forlì-Cesena, Modena 1, Rimini and Trieste ATEMs, while the bids submitted for the Udine 2 ATEM are still being assessed. With regard to the municipal waste business, a procedure was completed with the service awarded to the Group in the Ravenna-Cesena area, while the procedures for the Modena and Bologna areas are still open. Finally, in the water cycle, examination is underway for the bids made by competitors participating in the tender for the integrated water service in the province of Rimini, with the exception of the Municipality of Maiolo.

Changes in the regulatory framework

In regulated businesses, the measures approved in 2020 having the most significance for the Hera Group are as follows:

• the legislative and regulatory measures adopted to face the Covid-19 emergency;
• the measures introduced by the 2020 national Budget and adopted by the Regulatory Authority for Energy Networks and Environment (Arera);
• the redefinition of the stages involved in eliminating protected electricity supply, by way of the Ministry of Economic Development’s Decree and Arera’s related resolution on the new service with gradual protection for small businesses.

Faced with a situation of nationwide lockdown, Arera intervened with measures first in favour of end customers in energy and water services, and later in favour of sellers and distributors in energy sectors.

Covid-19 emergency: Measures taken along supply chains

For the period going from 10 March to 3 May 2020, end users benefited from a temporary suspension of the procedures for interrupting supply due to arrears, a form of support that from 4 to 17 May 2020 was reserved solely for household users (resolution 60/2020/R/com and subsequent supplements). In the energy sector, in order to mitigate the effect of the support granted to customers experiencing difficulty, sellers were granted the possibility of partially paying the bills issued by electricity and gas distributors due in the months of April-June (limited to a minimum of 70% and 80% respectively) and thus avoid non-fulfilment procedures introduced by distributors (resolution 116/2020/R/com). Lastly, by way of resolution 248/2020/R/com, Arera established the methods and terms through which sellers must pay the amounts still outstanding to distributors.
With resolution 190/2020/R/eel and in implementing the Relaunch Decree, Arera reduced electricity bills for non-household users connected at low voltage with power greater than 3 KW. In other words, in order to reduce the expense incurred by small businesses, tradespeople, bars, restaurants, laboratories, professionals and other service providers, for the amounts pertaining to the months of May, June and July 2020, the Authority provisionally redefined fees and tariff components per unit. Through the Energy and Environmental Services Fund (CSEA), Arera has already taken steps to compensate distributors for their lower revenues. With resolution 432/2020/R/com, Arera then introduced non-recurring changes regarding output-based regulation of electricity and gas distribution services. For electricity, the changes involve bonus-penalty regulations relating to the duration and number of interruptions, resilience and modernizing obsolete transformers; for the gas sector, the changes involve replacing sections of the network in non-compliant material, reducing the replacement target within 2022 from 40% to 30% and, lastly, postponing requests for waivers. In other words, for both sectors, Arera formalized the applicability of the force majeure clause for commercial quality.
Finally, with resolution 501/2020/R/gas, Arera also intervened in obligations concerning the installation of G4-G6 smart gas meters: achieving an 85% roll-out obligation was postponed to 31 December 2021 for large companies (with more than 200 thousand delivery points) and to 31 December 2022 for medium-sized companies (with between 100 and 200 thousand delivery points).

Covid-19 emergency: measures in the integrated water cycle

As regards the integrated water service, resolution no. 235/2020/R/idr introduced a number of exceptions to current regulations regarding both tariffs and service quality, in order to safeguard operators’ economic and financial balance.
With regard to tariffs, the reduction in recognised financial charges for assets under construction relating to non-strategic works was postponed to 2022, maintaining the coverage rate equal to the one used for strategic works for the tariff years 2020 and 2021. For 2020, specific components were also introduced to cover costs linked to the emergency, including those involving deferrals and payments by instalments granted during the emergency period. Lastly, as part of the efforts made towards higher tariff sustainability, regional authorities may postpone to subsequent years (but not after 2023) the recovery of the portion of charges eligible for 2020 tariff recognition, with the related possibility of a financial advance paid by CSEA.
With reference to service quality regulations, technical and contractual quality objectives will be considered cumulatively over the two-year period 2020-2021.

Covid-19 emergency: waste service measures

As for the other sectors under its responsibility, with resolution 443/2019/R/rif Arera introduced changes and additions to the tariff regulations for the integrated waste service. In particular, to ensure the necessary continuity of waste services, it introduced a series of levers aimed at guaranteeing the social and economic sustainability of the tariff system. The deadline for defining tariffs and the Tari was extended to 30 June 2020 (Decree 18/2020, so-called Cura Italia, converted into Law no. 27 of 24 April 2020), creating, as an exception, the possibility of approving for 2020 – until October 31 – the tariffs or the Tari adopted for 2019. Arera also introduced tariff facilitation measures for non-household end users penalized by the closure of economic activities, reshaping the variable quotas for waste services, as well as other forms of protection for household users undergoing economic hardship (resolution 158/2020/R/rif). With resolution 238/2020/R/rif, in order to guarantee operators’ economic and financial balance, Arera then completed the emergency regulation framework by introducing temporary changes to the waste tariff method, guaranteeing mechanisms covering the economic and financial charges incurred to adopt the measures protecting users. In addition, the possibility was granted to acquire in advance, within 2020 tariffs, payment of the differential charges incurred to deal with the emergency.

Covid-19 emergency: district heating regulations

Once again as a result of the health emergency, regulations for the technical quality of services in the district heating sector (resolution 548/2019/R/tlr), which should have come into effect on 1 July 2020, were postponed to 1 January 2021 (resolution 188/2020/R/tlr).

2020 national budget

The national budget for 2020 (Law 160, 27 December 2019) introduced some significant measures for energy and water services. The cause of exclusion from the two-year statute of limitations for credits resulting from adjustments for consumption dating back more than two years, for example, was removed even in the case of ascertained responsibility of the customer in failure to measure. In regulations for the energy sectors, moreover, Arera subsequently implemented this legal provision with resolution 184/2020/R/com. The situation in the water sector is similar, where this measure was implemented with resolution 186/2020/R/idr, also introducing specific information obligations in favour of end users. Other interventions concern the notice period for suspension of supply due to arrears, which was increased to 40 days from receipt of the notice by the end user. For the energy sectors, the rules governing the indemnification system were strengthened in favour of operators in order to prevent customers from excessively changing provider, and at the same time this provision was implemented by Arera with resolution no. 219/2020/R/com. In turn, resolution 221/2020/R/idr, with which this measure was also applied to the water sector, provided for appropriately monitoring the effects resulting from its adoption, ultimately going towards the interest of operators’ economic and financial balance. Finally, Law no. 160/2019 provided for the introduction of specific penalties in favour of end users in cases of violations relating to the methods of recording consumption, execution of adjustments or billing by sellers or managers.

Elimination of protected electricity customers: methods for assigning and regulating “gradual protection in services” introduced

As regards the market framework for sales to end customers in energy supply chains, the methods for eliminating protected prices are currently prefigured only for the electricity sector. With Decree 162/2019, so-called Milleproroghe, converted with Law 8/2020, the stages for eliminating protection in electricity were redefined, postponing them to January 1, 2021 for small businesses and January 1, 2022 for household customers and micro-businesses.
Arera intervened within this legislative framework: with resolution 491/2020/R/ee, in fact, it defined regulations for the economic and contractual conditions in service supply with gradual protection intended for small businesses that do not have a contract on the free market and, as of 1 January 2021, the procedures for assigning the service itself. The parties providing the service must be defined following competitive procedures (period of definitive assignment) and, considering the time required to complete the procedures necessary to carry out the assignment, this period will be preceded by a transitory period in which the supply is provided by operators providing protected services (period of provisional assignment, running until June 30, 2021). The portions will be awarded by means of a double round auction mechanism, awarding the area to the operator offering the lowest price, within the limits of a minimum floor and a maximum cap on the price offered, established by Arera.
In the provisional assignment phase, the economic conditions of the gradual protection service will be essentially in line with those of the protected service, thus ensuring basic continuity in remuneration for the provisional operators. In the definitive assignment phase, the end customer will be charged a price corresponding to the sum of the following items:

• a variable fee subject to periodic updates for supply;
• specific fees to cover imbalance costs and marketing costs, prudentially defined by the Authority before the competitive procedures are carried out;
• a single price defined nationally on the basis of the results of the award prices that emerged during the tender(which incorporates the remaining cost items).

Operators in the gradual protection service will therefore receive remuneration in line with the price offered during the tender, by means of a specific equalization mechanism with respect to the single price applied to the customer.
The Ministry of Economic Development’s Decree 31 December 2020 sets out the methods for encouraging an informed entry into the free market and those for eliminating regulated prices for small businesses. It furthermore defines that each participant in the tender procedures must be awarded a maximum amount of 35% of the assignable volume over the entire nation. In order to bring the regulations into line with the aforementioned decree, with resolution 14/2021/R/eel the Authority ordered the publication of the regulations for the tender for assigning the service by Acquirente Unico Spa to be temporarily postponed until the end of January 2021.

Reintegration of OGDS charges

With consultation document 445/2020/R/eel, Arera made known its final guidelines regarding the mechanism for recognising any failure to collect the tariff components covering general system charges (OGDS). This initiative is aimed at complying with the rulings of the administrative courts, which have established that sales companies do not have to bear economic charges relating to these charges which, after being paid to the distribution companies, have not been collected from end customers due to the latter’s arrearage.

Measurement quality regulations for district heating

Lastly, Arera has almost completed regulations for the district heating service (TLR), also approving the Integrated district heating measuring text (TIMT) with resolution 478/2020/R/tlr, which will come into effect on 1 January 2022 and will apply to the three-year period 2022-2024. These regulations deal with various issues including meter reading, methods of estimating and reconstructing meter data and quality standards, as well as automatic compensation.

A timeline showing the main regulatory periods and related measures introduced by Arera, pertaining to the Group’s sectors of activity, is provided below.

Lastly, the table below indicates the main tariff references for each regulated sector, based on the regulatory framework in effect in 2020 and expected to remain until the end of the current regulatory periods.

	Natural gas distribution and measurement	Electricity distribution and measurement	Integrated water service	Integrated waste cycle
Regulatory period	2014-2019 4th regulatory period (resolution 573/13) 2020-2025 5th regulatory period (resolution 570/19)	2016-2019 1st sub-period of the 5th regulatory period (resolution 654/15) 2020-2023 2nd 1st sub-period of the 5th regulatory period (resolution 568/19)	2016-2019 2nd regulatory period (resolution 664/15) 2020-2023 3rd regulatory period (resolution 580/19)	2018-2021 1st regulatory period (resolution 443/19) (1)
Regulatory governance	Single level (Arera)	Single level (Arera)	Double level (Ega, Arera)	Double level (Regional authority, Arera)
Invested capital recognised for regulatory purposes (Rab)	Previous cost revised (distribution) Average between standard and actual cost (measurement) Parametric recognition (centralised capital)	Parametric recognition for assets until 2007 Previous cost revised for assets as of 2008	Previous cost revised	Previous cost revised
Regulatory lag for investment recognition	1 year	1 year	2 years	2 years
Return on invested capital (2) (real, pre-tax)	2019 6.3% Distribution 6.8% Measurement 2020-2021 6.3% Distribution and measurement	2019-2021 5.9%	2018-2019 5.31% 2020-2021 5.24% +1% for investments as of 2012, covering the regulatory lag	2020-2021 6,3% +1% for investments as of 2018, covering the regulatory lag
Recognised operating costs	Average value of actual costs by company grouping (by size/density), based on 2011 (for revenues until 2019) and 2018 (for revenues as of 2020) (3) Sharing for efficiencies achieved compared to recognised costs Update with price-cap	Average values of actual sector costs, based on 2014 (for revenues until 2019) and 2018 (for revenues as of 2020) Sharing for efficiencies achieved compared to recognised costs Update with price-cap	Efficiency-applicable costs: actual amounts for the manager in 2011, adj. for inflation Updatable costs: actual values, with 2-year lag Added charges for specific purposes (previsional)	Actual costs for manager with 2-year regulatory lag (as of 2020 tariffs for 2018 costs) Added costs for quality improvement and change in manager’s scope (previsional) Balance for 2018-2019 based on 2017 costs (gradual)
Annual efficiency factor for operating costs	Annual X-factor 2019 Distribution: 1.7% large companies 2.5% medium companies Measurement and commercialisation: 0% As of 2020 Distribution: 3.53% large companies 4.79% medium companies Measurement: 0% Commercialisation: 1.57%	Annual X-factor 2019 Distribution: 1.9% Measurement: 1.3% As of 2020 Distribution: 1.3% Measurement: 0.7%	Efficiency-applicable mechanism based on: sharing manager’s 2016 efficiencies Amount of sharing differentiated according to the discrepancy between actual costs and manager’s efficient cost
Incentive mechanisms		Sharing for net revenues coming from fibre optics transit in electricity grids	Sharing for electricity costs, based on energy saving achieved. Recognition of 75% earnings from activities aimed at environmental and energy sustainability	Sharing for revenues coming from sales of materials and energy (range 0.3-0.6) and Conai incentives
Annual limit on tariff increases			Asymmetric, based on: investment requirements management cost changes in scope Possibility of motion guaranteeing economic and financial balance	Asymmetric, based on the presence of: changes in scope quality improvement (only for 2020) continuity-maintenance of service quality following the Covid-19 emergency Possibility of motion guaranteeing economic and financial balance

^{(1) Resolution 443/19 applies to operators in the integrated waste cycle, including treatment activities (disposal or recovery), only if these activities are included in the operator’s corporate scope. The specific measure to be introduced for tariffary regulation of compensation for plants falling outside this scope has been postponed. This measure will be effective as of the 2020 tariff year, following the application procedure foreseen in the measure itself, without prejudice to the derogations foreseen by Law Decree 18/2020 Cura Italia, commented on in the section with further details.
(2) For the energy and waste sectors, the Wacc methodology is applied, while for the integrated water service the amounts indicated refer to rate of coverage of financial and fiscal charges.
(3) Regarding the significant reduction in the recognition of operating costs introduced by resolution 570/2019 in February 2020, Inrete Distribuzione Energia Spa, the Group’s main distributor, like other operators in the sector, has filed an appeal at the Lombardy-Milan Regional Administrative Court.}

Climate and the environment

Climate and the environment

Regulatory and economic interventions aimed at facing climate change, and the concrete opportunities that derive from taking on the risks linked to it, have become priorities for international and national institutions, as well as those operating in all economic sectors. The Group’s main concerns in pursuing environmental sustainability coincide with: the 17 goals on the 2030 Agenda for Sustainable Development (SDGs); the indications contained in the Paris Agreement to limit global warming to below 2ºC; and the long-term climate strategy “A Clean Planet For All” (adopted by the European Union), intended to achieve total decarbonisation by 2050, through carbon neutrality, and to limit the increase in temperature to below 1.5ºC. The changes called for by the Green Deal and, hence, in the new Circular Economy Action Plan (CEAP), provide further significant indications moving in this direction.
A further lever comes from civil society and consists in the growing number of people who, showing increasing sensitivity to environmental issues and social inclusion, give voice to a rising demand for green & digital interventions, in line with the European Union’s recommendations for economic recovery and resilience.
The funds made available by the Next Generation EU to address the crisis caused by the Covid-19 pandemic can be accessed by member states provided that they submit a plan for recovery and resilience that meets certain eligibility conditions.
The adoption of the Green Deal, i.e. the set of initiatives aimed at tackling climate change and environmental problems in order to achieve carbon neutrality, is in turn subdivided into eleven actions aimed at creating a society that manages resources in a fair and competitive way. These actions include adopting an industrial strategy that implements circular economy principles in all sectors, starting with the most resource-intensive ones, and promoting clean energy, crucial to ensuring the supply of green, economic and safe energy.

The Circular Economy Action Plan: European directives and national implementation

The new circular economy action plan, presented by the Commission in March 2020, outlines a renewed strategic framework to bring together the economic development of the European Union in a circular sense and, in doing so, accelerate the transition and make possible the changes towards which the Green Deal is aimed.
Among the initiatives foreseen by the CEAP, particular significance goes to measures encouraging not only reusable and recyclable products but also a reduction of “over-packaging”, as well as rules for bioplastics.
The new CEAP also calls for developing additional policy measures that indicate minimum recycled plastic content requirements for certain product categories and evaluate the possible introduction of prevention (for packaging waste) and recycling measures (for additional categories of plastic waste).

Waste management policies aimed at reducing the environmental impact of plastic products, on the other hand, apply to stakeholders across the entire value chain, thus including the design, production and consumption phases of these products, in order to achieve The target to be achieved consists in putting at least 10 million tonnes of recycled plastics per year into new products on the EU market by 2025.
Above and beyond the plastics sector, promoting circular economy principles is also encouraged in the wastewater management area.
In order to promote a more sustainable use of water, as well as to alleviate water shortages within the European Union, Regulation (EU) 2020/741 has been adopted, which contains requirements for water reuse, encourages purified wastewater reuse for irrigation in agriculture and defines minimum requirements for the use of reclaimed water.

European regulations have been incorporated into national legislation and substantial changes have been made to the Consolidated Environmental Act, with the aim of improving performance in waste management and increasing circularity. These changes include a new electronic recording for waste traceability, an updated definition of municipal and similar waste based on qualitative rather than quantitative criteria, and an extended producer responsibility, now having minimum administrative, financial and data requirements. These measures are accompanied by the implementation of European recycling and landfill targets for municipal waste, as well as a reform of the landfill admissions system.
The innovations seen in this area will be accompanied by the adoption of a sustainable management system for water resources that combines the need for storage and conservation, efficient consumption and the possibility of reusing wastewater, while at the same time allowing for the regeneration of natural ecosystems. The depletion of water resources is indeed one of the main threats to economic growth, and energy production itself is one of the major causes of freshwater resource consumption.

System integration strategy: decarbonising the energy sector

In order to achieve full decarbonisation of the energy sector by 2050, the European Commission has released its system integration strategy, set out based on six pillars that aim to overcome opposition between individual energy sectors, in order to introduce a virtuous system which is able, as such, to make the different infrastructures communicate with each other.
The strategy adopted aims to develop:

• a circular energy system driven by energy efficiency, according to a rationale built around saving materials;
• the electrification of consumption, through increased generation from renewable sources (Fer EE);
• promoting biofuels (including hydrogen) in sectors that are difficult to electrify (e.g. industry with high gas consumption, or heavy transportation);
• energy markets able to encourage decarbonisation and decentralization of energy production;
• integrating and full exploiting the various existing energy infrastructures (electricity, gas and district heating systems), aimed at avoiding the risk of technological lock-in related to the introduction of new technologies;
• a digital and innovative energy system.

Opportunities in the utilities sector

The inevitable nature of climate change has led the European Commission to reconsider its targets for reducing emissions by 2030, with the hope of achieving full decarbonisation by 2050. These global trends, along with the health emergency and the ensuing economic-social crisis, have also forced local authorities to reconsider their priorities and lines of action. The pandemic has made it all the more urgent to implement initiatives capable of making cities more resilient and, for this very reason, local programs are increasingly consistent with circular economy, sustainable mobility, climate adaptation and digitalization initiatives. This scenario is challenging and offers new opportunities to the utility sector. All types of customers will be called upon to introduce technological improvements capable of reducing their energy needs: household customers, businesses and public administrations.
The initiatives incentivised include promotion and sales of products and services for efficiency in energy consumption, and support for the energy efficiency of buildings.

Environmental, socio-economic and social factors

Stakeholders, financial and otherwise, are showing increasing attention to sustainability issues and, therefore, also to companies’ sustainability ratings. It follows that financing opportunities will be increasingly focused on green products, able to raise money on the capital market at rates that are potentially lower than the alternatives.
When aiming at sharing value between companies and communities, oriented towards a search for solutions that benefit both, the engagement of the community and individuals now plays an increasingly important role. The main megatrends are those shaped around the UN’s 2030 Agenda, alongside theoretical reference points and successful experiences involving approaches based on shared value and new business opportunities.
These new lines of development cannot disregard a full exploitation of data (understood as a true business asset) and a greater attention to cybersecurity, to protect the company and its data. The speed of change makes it essential to define training plans that enable the company’s workforce to manage change (especially digital change) in the best possible way, including – where necessary – training programs that, while provided individually, are able to guarantee the necessary continuity ("self-development").

Technology and human capital

The main trends in ICT consist in artificial intelligence, automation and therefore software, robotic process automation, data collection and management (Internet of things, data governance and data analytics), cloud platforms and, lastly, cybersecurity. These are all enabling elements, capable of accelerating digital technological evolution.

Technological evolution

Technological evolution, in its most “disruptive” aspects, produces changing paradigms for economic and social contexts. At an increasing speed, it thus alters entire segments of the market and patterns for social relations. The risk underlying this accelerating trend is a widened gap between players who keep pace with technological evolution and those who, due to resources or skills, are unable to do so in all sectors.
Investments in telecommunications, networks, software and automation as well as other technological infrastructures have become increasingly urgent, and must be accompanied by growth in knowledge and training, which plays an enabling role for new technologies, which in turn are oriented towards a sustainable and circular economy and revolve around digitization and artificial intelligence. Metaphorically, these two directions can be represented by green and blue: green for the environment, to be protected with extensive and pervasive sustainability initiatives, and blue for electronics, which takes on all the nuances of information & communication technology (ICT).
Robotisation and artificial intelligence can enhance the ability of human capital in terms of efficiency and productivity, allowing people to be assigned enterprising and high value-added activities, in which human thought proves to be the best possible resource. This undeniably includes activities that must be undertaken to rethink organizational and methodological scenarios in the light of new technologies, while taking challenging environmental and social objectives into account.

The advance of digital technologies has been accelerated by the pandemic, which has increased the need for connection and security in remote working, making it no longer a negligible right but as a strategic means to achieve flexibility, productivity and work-life balance. All this has increased infrastructural needs, orienting the demand for investment towards connectivity and remote collaboration tools. This has led the boundaries of an organization to be reconceived, no longer reduced to the physical boundaries of a company’s offices or those of its business in a narrow and logical sense. They now extend, rather, to the interrelationships that affect the organization itself in relation to its objectives in sustainable development.
Utilities, in particular, are called upon to seize digital opportunities in terms of procedural efficiency and workforce management, but also with respect to multi-channel interactions with customers, without forgetting the management and “sensitization” of infrastructures across the area served.
The widespread presence of digital technology now concerns all aspects of business operations, extending the changes affecting them to the point of producing new, additional value-added services.

The need for IT security has become more acute with the spread of computerization, and with the pandemic last year saw an exponential increase in attacks and their ensuing risks. Operational technology (OT), or remote management, which in the past had developed as a niche area, limited to plant effectiveness and with little attention to IT security, has had to deal with the lack of training in users and the vulnerability of many components of its technological infrastructures. Another area of utility infrastructures potentially subject to security risks consists in objects connected by sensors, such as smart objects and smart meters, where leniency in communication protocols may lead to illegal intrusions.
In order to respond to the growing demand for IT security, companies can no longer postpone an increase in investments that, by reducing the fragility of systems, are the only possible way to recover ground in the unbalanced situations that gradually developed in the past.

The increase in the amount of data produced and its rapid availability is a source of potential for companies: the internet of things and digital interaction with people (of which the automation of the most standardized customer relations through chatbots is one example) can in fact enable a continuous and rising flow of data, which not only allows various situations to be rapidly diagnosed (real time analytics) but also means that the decisions and actions to be taken can be more precisely profiled, often with the support of artificial intelligence.
Customers in each sector, in turn, are increasingly inclined to interact through digital channels, and therefore expect real-time responses and uninterrupted service availability. Suppliers are expected to be more proactive in terms of attention to behaviour and optimised consumption, and additional services such as smart homes and e-mobility become increasingly rewarding.

As regards the more technological aspects of digitization, cloud platforms are the main enabler and accelerator of the entire ecosystem. The availability of high-performance connectivity has made it possible to achieve significant infrastructural scale economies with an exponential development of technology. Across the world, this has cumulatively given systems the ability to express a processing capacity that until a few years ago was not even conceivable. The rapid spread of cloud technologies and the growth of large companies operating in this sector can be explained by the benefits these infrastructures bring to users. At a low cost, they are indeed able to optimize the use of time, currently one of the most precious resources available.
The increasing emphasis going to “as a service” and “pay for use” IT services, for this very reason, appears an unstoppable process, statistically headed towards becoming the only one that is actually feasible, with the exception – at the most – of extremely specific applications.

This availability of processing power explains and encourages a wider spread of artificial intelligence and robotic process automation applications with integrated artificial intelligence (IRPA), useful for making the most appropriate decisions on the actions to be taken. These innovations will lead to a progressive automation of processes, especially for processes consisting of activities that have finite rules and/or procedures. Identifying and formalizing hybrid operational processes, which combine human and automated activities, balancing them according to the value added to the process, is therefore one of the issues to which all organizations will have to pay particular attention, not only in terms of organizational design, but concerning training and operational monitoring.

The added value of a resilient workforce

Valorising the human component is also fundamental for achieving a balance between technology and people, and thus focusing human efforts on value-added activities, working towards an intelligent integration that is not limited to mere cost efficiency and replacement considerations. Digital workplace transformation and interconnection on a single platform allow us to interact, share information and “earn” knowledge and skills. The technological ability to acquire huge amounts of data makes it even more important to invest in the human ability to read it and make it “speak”, so that it can generate the expected value. At the same time, while the increasingly pervasive adoption of tools for remote collaboration has created changes in our way of working and measuring performance, the ability to offer an environment that is also connected in terms of human relations becomes, precisely for this reason, sought after and appreciated.

The current historical period and the health emergency have emphasized the need for added value provided by a resilient workforce that is urged to continuously develop the skills allowing it to face changing and not always predictable future scenarios. Faced with the need to redesign people organization, including spaces to be adapted according to the indications given by health authorities, the reinforcement of remote working has proven to be crucial. Trends in economic, political, environmental and social systems – along with strong acceleration in digital transformation and the progressive technological literacy of people – also require an increasingly sensitive approach towards relational aspects. Research by the World Economic Forum has shown that future roles will depend on skills related to technology, but also problem solving and self management. Reskilling, active and adaptive lifelong learning, as well as designing training activities themselves, are becoming key to increasing the resilience of organizations. The uncertain external environment places increasing responsibilities on individuals, and it is essential for the link between individual contributions and organizational impact to become increasingly noticeable, giving greater strength to orienting all resources towards a common goal. Individual empowerment, accompanied by a new conception of working methods and people’s wellbeing, is therefore aimed at enhancing the value of people and, in so doing, increasing productivity. In this regard, diversity and inclusion policies also translate into a fight against discrimination on the workplace and, when accompanied by a commitment to the promotion and creation of fair and inclusive environments, are becoming increasingly essential elements for the responsible financial community.

 

Strategic approach and management policies

 

Scenario analysis is a method for defining the input useful for strategic plans, to increase the effectiveness of a business model over time.
This type of analysis provides a process aimed at testing the resilience of the strategy under different hypotheses describing possible future states. For the Hera Group, it is fundamental to analyze the potential impact, positive or negative, of various economic-financial, business, regulatory, competitive, environmental, technological and human capital scenarios that differ from each other, but are equally plausible and internally consistent.
These scenarios were also studied with reference to climate change, in order to understand how physical and transitional climate opportunities and risks may plausibly affect the Group’s business, in its different areas, over time.

The reference framework within which the Group’s strategy has been developed in the various fields brings together three areas:

• the environment, in order to concretely respond to the threats coming from climate change, by regenerating resources and enhancing the resilience of the assets managed, favouring an energy transition and reaching carbon neutrality;
• socio-economic factors, in order to match developments in the Group’s size with an increasing amount of shared value, to have a positive effect on the wellbeing and prosperity of stakeholders and the areas served;
• innovation, to drive changes in the Group’s activities, thanks to the opportunities offered by the most advanced technologies and digitisation, with the goal of increasing the efficiency and quality of the services offered, creating further occasions for stakeholder engagement and accelerating the introduction of behaviour and skills capable of meeting challenges in a continually evolving context.

Macroeconomy and finance

The debt structure towards which the Hera Group is oriented serves its business needs, not only as regards the duration of loans but also exposure to interest rates. Its financial strategy, in turn, is adequate for the risks and aimed at maximising its return profile.

Financial planning

The scenario, which shows negative rates even for long-term maturities, will allow Hera to increase its amount of fixed-rate debt. The Business Plan presented in January 2021, in this sense, shows that the Group’s financial structure will include 83% of fixed-rate debt by 2024, respecting the limits indicated in its financial risk policy. These projections are part of an attentive long-term planning concerning the necessary financial resources, which Hera carries out through by analysing and monitoring cash flows, also paying attention to its debt structure. The average cost of debt, in particular, is constantly made more efficient, both through financial risk management, which includes the use of derivative instruments, and by evaluating liability management operations aimed at grasping favourable market opportunities. In this sense, the Plan expects the Group’s financial requirements to be met by issuing fixed-rate bonds, including green and/or sustainable bonds, along a path that aims at optimising the average cost of debt through a proactive management of the aforementioned operations, in such a way that by 2024 the average rate of debt will reach 2.6%. Moreover, particularly favourable issuance conditions will enable the Group to respond with additionally increased efficiency to its investment needs, above all to ensure the implementation of innovative and sustainable projects in the waste, water and energy sectors.

Credit ratings

The Group’s rating is closely linked to Italy’s rating, along with the latter’s macroeconomic trends and political scenario, since most of its business is concentrated within the country. Despite the economic and financial crisis triggered by the pandemic, however, the actions and strategies implemented by the Group should allow adequate rating levels to be maintained and improved. Furthermore, during the year the Group’s usual communication activity with the rating agencies Moody’s and Standard & Poor’s (S&P) continued and, considering the economic situation, encouraging feedback was provided. Indeed, the Group’s risk profile was assessed positively in terms of the solidity and good balance of its business portfolio, as well as its good operating performance, liquidity risk and resilient creditworthiness indicators. Both agencies maintained a positive opinion of the Group's rating, respectively coming to Baa2 with a stable outlook and BBB/A-2 with a positive outlook. These assessments also benefited from the positive results achieved in 2020 with regard to credit metrics.

Sustainable financial reporting

Over the period covered by the Plan, continually adopting best practices in sustainable financial reporting will support the Group’s green financing and ratings. Hera, already committed to green funding, will continue along a path that began some time ago: it was the first Italian company to issue a green bond, in 2014, which was followed by ESG-linked financing in 2018. After this, in 2019 the Group provided itself with a complete green financing framework, accompanied by a further green bond issue. The expected, additional improvement in its sustainability ratings, in turn, will make it even easier to access lines dedicated to sustainable financing, which are interesting also because they have potentially lower costs than traditional credit lines. Following these guidelines, implementation of the recommendations of the Task Force on Climate-Related Financial Disclosure (TCFD) of the Financial Stability Board is also underway, which call for a definition of climate scenarios, risks and opportunities linked to climate change, as well as processes for managing these risks, and the definition of targets for reducing climate-changing emissions.

In this context, becoming part of the Dow Jones Sustainability Index (DJSI), the first index that covers the financial performance of the world’s leading companies in terms of sustainability, proves the validity and credibility of the path taken by Hera Group, and also opens up further developments. Recognitions such as this, above all act as a stimulus and allow Hera to identify the areas to be developed to further improve its performance and, at the same time, to include in its set of investors those who are engaged in socially responsible investing (SRI), a segment that is undergoing considerable and continuous expansion.

Business areas and industrial strategy

The strategy presented in the Group's latest Business Plan projects a path of fully sustainable economic and industrial growth, in line with the objectives of the UN’s 2030 Agenda and the guidelines of the most recent European policies.
The pursuit of sustainable development requires circular economy principles to be applied not only to the Group’s businesses, but also to its external stakeholders, in order to influence the context in which it operates as well.

Free market businesses

As regards free market businesses, the Group’s strategy calls for its customer base and set of plants to be further developed, with a view to decarbonisation and contribution to a circular economy.

For free market businesses in the energy sector, the goal of 4 million customers by 2024 has been set, a target that will be pursued by enhancing of the customer base in North-Eastern Italy and grasping the opportunities offered by the elimination of protected customers in the electricity market. Commercial development will be driven by offers including new value added services, which will enrich the Group’s sales proposals and provide customers a range of complementary services for energy saving and waste reduction. Some examples include sales and installation of photovoltaic panels, the offer of LED devices and smart thermostats or sales of efficient boilers combined with the supply of energy commodities.
Personalised sales offers will be further improved through the progressive introduction nationwide of new-generation energy meters (2G), which make it possible to monitor the consumption habits of customers and, therefore, define commercial offers that increasingly reward sustainable behaviour (green loyalty).
The offer to apartment building customers, moreover, will be able to integrate the range of energy services proposed, already reinforced by activities in energy requalification for buildings and heating systems, which benefit from the tax measures foreseen by the government.
Finally, the Group intends to renew its commitment to participating in future tenders for last resort markets, with the aim of continuing to act as one of the national reference figures, leveraging the many years of experience it has already gained.

In the waste treatment and recovery free-market business, the Group’s strategy will be directed to developing its current set of plants, essential to continue following the path undertaken by Hera towards circular waste management, in line with international best practices.
In this sense, new solutions for plants are being developed for producing biomethane from the organic portion of solid municipal waste. A new plant, for example, will be built in the Marche region, with the aim of meeting the treatment and recovery needs coming from the geographical area of the mid-Adriatic and central Italy as well.
Specific initiatives are also planned in the plastics recycling sector, in order to increase the use of recycled plastic and respond to the introduction of the Plastic Tax. Aliplast, the Group’s reference company in this area, will in fact continue to increase its treatment capacity, now entering the market for so-called rigid plastics.

 

Regulated businesses

As regards regulated businesses, significant investments will be dedicated to further increasing the resilience, efficiency and business continuity of the Group’s assets and implementing a wide range of sustainable and circular solutions, which will define the management of Hera’s networks in the coming years. Part of the Group’s financial efforts will also be dedicated to its participation in tenders for assigning concessions for regulated services that will affect some network businesses (municipal waste collection, gas distribution and the water cycle) in areas already served by the Group.

In the water cycle, the Group's commitment to finding solutions for reusing and regenerating water resources will continue. The project involving the reuse of water leaving the Idar purification plant for agricultural purposes or to maintain the hydro-geological balance of the local area, already implemented in Bologna, will be extended to other localities. Moreover, the actions taken to contrast water leakage will continue, consolidating an integrated approach that focuses on increasingly advanced technologies and detection methods, but also predictive maintenance of networks. In order to protect the quality of the water resource, new technologies will be used for controlling and removing pollutants: the “Water Fingerprint” project, for example, calls for the creation of a specific water fingerprint, creating a spectrum linked to various substances in the organic field, thanks to which it will be possible to note any situations in which water does not display its regular properties. Also in line with the rationale underlying a circular economy, the Group will work on installing electrolysers at its purification plants, with the aim of producing green hydrogen (or synthesis gas in the power-to-gas configuration), making full use of the existence of "circular" flows of materials between the purification plants and the electrolysers themselves.

For the gas and electricity businesses, over the next few years the Group will renew its focus on digitization of the distribution networks and strengthening them in terms of preventing and mitigating external risks, thus ensuring business continuity. For both businesses, an important plan of meter replacement has been planned: in the electricity sector, second-generation energy meters (2G) will be installed, while in the gas sector the new smart meters – named NexMeters – will be installed, able to interrupt gas flow and to make users’ systems safe if significant earthquakes, gas leaks or smaller latent losses occur.

For the district heating business, an investment plan has been put together aimed at strengthening business continuity in this service, aimed at digitalising assets and further extending the network in key areas, as with the interconnection between two district heating systems in the city of Bologna.

For the municipal waste collection business, the Group’s efforts will focus on improving the quantity and quality of sorted waste and containing the costs of this service. With this aim, projects such as communication campaigns, digital tools and smart bins will support citizens in developing better and more correct waste collection and sorting habits. In order to guarantee the quality and efficiency of this service, new solutions will also be developed, such as the remote control of containers equipped with specific technology.

Group indicators

The strategy adopted will enable the Group to increase its Ebitda by 215 million euros between 2019 and 2024, reaching the 1.3 billion euro mark. This growth will be driven in a balanced way, by both internal and external components. The economic and industrial objectives foreseen will be achieved thanks to a volume of investments estimated at around 3.2 billion euro over the 2020-2024 five-year period, an amount significantly higher than the average of the last five years. These resources will be allocated to the areas served in a way that is consistent with the Group’s current scope and will be concentrated above all in regulated activities, due to their capital intensive nature.
The earnings generated over the period covered by the Plan, along with an attentive financial policy, will enable the Group to manage the volume of investments allocated, while aiming to reduce the net debt/Ebitda ratio to 2.8x by 2024.

Sustainability continues to be an objective fully integrated within the Group’s strategy. In particular, it is expected that by 2024 about half of its Ebitda will come from activities that create shared value, reinforcing Hera’s commitment to the goals set out in the UN’s 2030 Global Agenda, but also to an effective implementation of the most recent European guidelines (Next Generation EU). In addition, the Group has established a set of industrial objectives leading to 2030, in order to design a path of development consistent with the lines of action required by a circular economy and decarbonisation.

The projects included in “Next GenHERAtion Growth”

Hera’s strategy has always been based on a close relationship with the areas served and its own ecosystem. The evolution of this context, in its economic, political, local and technological aspects, affects the Group’s activities across the board and influences the guidelines that will characterize their evolution, leading towards increased resilience and accelerating the evolution of its corporate culture. “Next GenHERAtion Growth”, in particular, offers an overview of the Group’s strategy, and is subdivided into various areas of action:

• a path of economic growth and sustainability for the green transition;
• resilience, confirmed and reinforced through the evolution of its enterprise risk management model;
• increased regeneration, including the project for the reuse of soil and demolition materials;
• the development of hydrogen, an opportunity that goes beyond the energy chain;
• the extension of laboratories towards the external market, exploiting the experience and know-how gained;
• tools for listening to and communicating with the areas served, considered fundamental for wellbeing, aimed at consolidating relationship with stakeholders and generating the engagement necessary for the initiatives to succeed;
• updating the shared value framework, based on developments in the EU taxonomy for sustainable finance;
• valorising the enormous amount of data available and its use in artificial intelligence projects;
• enhancing cybersecurity monitoring tools.

See the following paragraphs for further details about the strategic actions mentioned above, and the attention towards human capital implied by each of them.

Climate and the environment: sustainable development

Framework for shared value

Hera’s framework for shared value, introduced in 2016, has oriented the Group’s strategy towards growth based on responses given to problems coming from the external context, capable of maximizing shared value for both the company and the community. In the 2020 revision of this model, the topics of resilience and adaptation to climate change, drinking water (within the area concerning a sustainable management of the water resource, along with the purification already present) and biodiversity have been included. The Group has been committed working on these issues for years, and they now integrate the other areas into which Hera’s framework is subdivided (such as circular economy and a sustainable management of the water resource). The Group’s objective is to create shared value through business activities that generate operating margins and that respond to the drivers on the global agenda, i.e. the “calls to action” for change indicated by policies at a global, European, national and local level. 2020 confirmed the validity of the initiatives already launched by the UN’s Global Agenda to 2030 to respond to the existing megatrends: “fragile planet”, “technological disruption” and “accelerated urbanization” were considered the most closely related to Hera’s businesses, having a direct impact on the company’s activities. Hera's contribution is very significant in seven sustainable development goals on the 2030 Agenda: 6) clean water and sanitation, 7) clean and accessible energy, 9) business, innovation and infrastructure, 11) sustainable cities and communities, 12) responsible consumption and production, 13) fight against climate change and 17) partnership for the goals.

See the Group’s website (in the Sustainability section) and its Sustainability Report (in the Sustainable Strategy and Shared Value section) for further details on the actions the Group intends to promote by contributing in a broad sense to the 169 targets or 10 Goals on the UN’s 2030 Agenda, mapped during 2017, to which Goal 17 was added (the only one that cuts across the three drivers of shared value). Also note that during 2020 an internal training event was organized, focusing on Goal 12 of the SDGs dedicated to a circular economy, and the UN agenda was included in training for all new employees. The main actions taken include those aimed at promoting energy efficiency, sustainable management of water resources, selection of suppliers with qualifications in terms of environmental and social sustainability issues, development of employment and new skills, and more widespread innovation and digitisation. In order to ensure that the principles of the Green Deal, operationally organised in the circular economy action plan and in Next Generation EU, increasingly become factors of which all the people in the Group are aware, specific training programs will be provided, which will enhance internal skills to develop projects consistent with the SDG framework.

The circular economy in the areas served

The Group’s approach to a circular economy, in addition to guiding specific supply chain projects, has become a paradigm operating across the board, which does not simply concern waste and is capable, as such, of inspiring and guiding wide-ranging projects in which different businesses participate. As an example, in the upcoming years the design and execution phases of engineering works will be increasingly attentive to the issues of sustainability, reducing the environmental footprint and minimising the use of virgin soil. Building information modelling (BIM) technology will allow to conduct material analyses to be carried out and maximise recycling and reuse (so as to extend the circular approach even to the end the work). As part of the revamping project for the Lavezzola water purifier, for example, material analysis has already been carried out using the Bim model of the plant, identifying the materials for which there are opportunities for internal and external recovery and those for which the economic viability of recovery must be assessed. The Business Plan has extended this approach to a range of decommissioning and demolition interventions concerning Hera plants, aiming at obtaining the maximum possible recycling/reuse/recovery. Among the interventions expected in this area, particular relevance goes to the objectives set out in the Plan for developing plastic recycling activities and increasing biomethane production, intended to give new value to the organic portion of urban solid waste. The rationale of circularity will then be applied to the Group's main purchases, with increasing attention paid to materials or goods that comply with the principles of a circular economy, while the adoption of minimum environmental criteria (CAM) with which the characteristics of the various components of water supply connections are defined will also be extended to other standard elements of the networks, such as gas and water reducers and sewer lifts.
With the aim of encouraging the adoption of circular business models in the area served, new initiatives and projects aimed at reusing materials will be launched through collaborations with important partners in the local area. The pilot projects for these initiatives based on sustainability will be regulated within specific multi-year framework agreements.
To work towards a higher presence of circular models, greater attention will also be paid to the various customer engagement tools, using different communication channels according to the features of the various areas served, as well as improving and expanding the existing tools to maximize engagement with different types of customers.
The campaign to raise awareness on environmental challenges will also involve schoolchildren (environmental education projects), including forms of remote learning designed for the health emergency, and will be carried out through the main local media (press tour on environmental issues).

Contribution to energy transition

In order to support the energy transition to which the entire Company is called, the Hera Group has continued to plan interventions aimed at increasing the incidence of energy efficiency among the various categories of users, and internally as well, in addition to making the most of every possible form of renewable energy.
The actions taken to reduce energy consumption within the Group (-7% by 2024 compared to 2013), as well as those involving industrial customers, household customers and public administrations, will therefore continue, even more vigorously. The legislative framework, in fact, offers interesting opportunities in the household sector, easing building renovation interventions considered necessary for a fully effective energy transition. Similarly, the real estate assets of public administrations will also have to progressively upgrade efficiency in energy consumption.

Decarbonising the industrial sector, on the other hand, may also be based on the exploitation of new renewable forms of energy, such as clean hydrogen. In this regard, the Group is studying and testing the opportunities involved in developing the hydrogen chain for the assets of its set of plants.
In this sense, one circular solution involves purification plants: by installing electrolysers at purification sites, it is possible to obtain clean hydrogen (or synthesis methane gas) and feed circular material flows. Purified water becomes feedstock for the electrolysis process, oxygen resulting from electrolysis becomes input for the purification process, biogas from purification sludge becomes input for the clean hydrogen methanation process.
The opportunities linked to hydrogen also concern other Group assets, such as waste-to-energy plants: the electricity produced by combustion of the biogenic portion, considered renewable, can be used to fuel electrolysis plants and obtain green hydrogen, to be used by industrial customers, mobility, or be injected into the distribution network.
Once again following the rationale of fully exploiting renewable opportunities, in the next few years all processes transforming sources of waste, discards or products in the agricultural chain into biomethane, fully compatible with the existing methane networks, will become more important.
The Hera Group will therefore be able to valorise some of the waste and residues of its activities and obtain biomethane, through different technological processes depending on the waste source/feedstock used (e.g. purification sludge, clippings and pruning, organic waste from municipal collection, eluates from organic waste).
By fully exploiting the opportunities offered by biomethane production, the Group will also contribute to gradually decarbonising the gas supply chain, thus working towards creating a motivated and resilient consensus around a sector that is particularly important in our country.

In other words, the Hera Group wishes to grasp the opportunities offered by technological evolution and digitisation in order to achieve innovations, operational improvements, cost efficiencies and synergies related to data management, so as to meet the needs of the area served and its stakeholders, take a leading role in providing services and accompanying cities towards new models of development, overseeing each technological upgrade through the analysis of its impacts and the mitigation of its side effects.

Technology and human capital: innovation

Strategy for “green innovation”

Advances in the chemical and engineering industries are at the forefront of technological development and concern the waste management (plastics first and foremost) or the energy (biogas and biofuels) sectors. This is where the search for concrete solutions may prove to be instrumental adapting to climate change or countering the depletion of natural resources. The Group strategically exploits these advances in order to identify plastic recycling processes that can flank mechanical procedures and make the process effective even for less pure and less valuable types of plastic. The same advances make it possible, for example, to experiment with solutions that use excess renewable electricity (otherwise unusable) to split molecules into hydrogen and oxygen and then convert the result into synthetic methane gas by adding carbon (from CO₂).

Digital strategy

Hera’s strategy for introducing new technology revolves around four areas:

• data governance, i.e. roles, policies, standards and metrics aimed at establishing processes and responsibilities that ensure data quality and security;
• data platform, tools and technologies enabling the realization of data analysis projects;
• data culture, a digital community (made up of 162 members) for sharing and networking methodologies and experiences related to data analysis;
• data factory, i.e. elaborating an organizational structure for grounding data analysis initiatives (model, roles, change management).

This data strategy is designed towards transforming the Group into a data-driven company, where decisions are guided by data, valorised as a corporate asset and subject, as such, to an ethical and responsible reading. The growing importance of data management, indeed, also requires the amount of attention and resources dedicated to data protection to evolve coherently.

The Group’s organisational model has renewed its management of cyber risks, increasing the number of participants; in particular, it has defined a paradigm for relations between the company’s various businesses and employees involved in cybersecurity, favouring increased controls for accesses in virtual private network mode (VPN) as well as planning future changes in automatic controls.
Hera’s model is focused on three main aspects:

• increased awareness among Group employees regarding cybersecurity, achieved by introducing, through dedicated platforms, awareness policies and ethical phishing campaigns;
• the transition from a reactive way of managing cybersecurity incidents to a model that is as predictive as possible, significantly increasing the area monitored and extending this service to aspects of operation technology;
• identifying and adopting targeted and constantly evolving technological solutions, such as the new Web application firewall platform (WAF), advanced tools for the protection of workstations (EDR - Endpoint Detection & Response) and servers (ATP - Advanced Threat Protection) and functions aimed at making the management of digital identities and related IT access increasingly secure, such as multi-factor authentication, conditional access and identity protection.

These activities reduce overall risk, significantly increase the company’s awareness of cybersecurity and the related risks and give the Group a “posture” with respect to possible attacks, that gives it higher speed in acting and reacting.

As regards the details of cyber risk management, see paragraph 1.02.03 “Risk areas: identification and management of risk factors”.

Towards “blue innovation”

The evolution of technology and digitisation also calls for continuous development in employee skills and the related training programs. This latter aspect proved to be strategic during the pandemic, with a compulsory large-scale use of alternative work and communication tools, which enabled activities to be carried out remotely. To respect growing need for remote working (already introduced for hundreds of employees), opportunities in technological evolution and digitisation have been accompanied by devices provided to the entire company workforce and in-depth training.
The strategic decision to introduce cloud-based platforms, to increase individual productivity and act as the main tools for collaboration, proved to be timely and fruitful, efficiently achieving all the challenging objectives suddenly introduced by the health emergency. In order to accelerate the digital transformation, at any rate, cooperation between humans and technology requires continuous evolution in our way of working and in both physical and virtual spaces, making it possible to reduce contributions with less added value. The evolving relationship between people and technology within the Group will therefore continue to be addressed with process automation projects, favouring broader knowledge of technological integration, virtual factories and digital labs focused on initiatives for applying artificial intelligence and strengthening the community of those who introduce change, using the tools of the digital workplace. Digital tools open up new development opportunities in businesses: operating processes, if rendered more fluid and digital, provide the prerequisites for new solutions based on artificial intelligence, and can furthermore assess and measure the benefits expected from these solutions themselves. The Group intends to use data to generate value for people and for its business; some examples include the progressive digitisation of human resource processes, or again the creation of the reference architecture for integrating the systems and data available in “prescriptive analytics”.
During the year, the Group created a new data analytics and intelligent automation structure, designed to collect data and support its analysis. This was done in order to guide Hera’s data strategy, and to increase experience and knowledge by way of workshops and partnerships with external companies, observatories and universities on artificial intelligence issues.

Human capital at Hera

The extension of remote working to more than 4 thousand employees, now a consolidated working method for Group employees, was accompanied by a series of measures aimed at health, safety and responsibility towards themselves and others, or intended to enhance and enrich services for employees. In order to deal effectively with the current context, in which many workers are experimenting with new ways of working, the Group’s strategy has recognised that it is increasingly important to make everyone feel that their work and their sense of belonging are related to the company’s results and overall performance. The Group continues to pursue a strategy of human capital development that aims to generate value over time: for individuals and for the entire organization. In order to encourage continuous improvement and the propensity to innovate, Hera has activated listening initiatives, for example, that lead to an in-depth analysis of the degree of employee satisfaction on issues related to the working environment and company values. The data that came to light, once analysed through means including digital tools and artificial intelligence, can be translated into corrective actions for the department of single employees or through internal mobility between several departments. The Group’s strategy also contributes to creating value by accelerating processes for re-designing training activities, turning to the perspective of blended learning, consolidating the implementation of professional academies, creating a HerAcademy learning centre as a reference point for knowledge sharing inside and outside the Group, not to mention other projects intended to further improve the degree of employee engagement. All this takes place within a harmonious relationship between people and machines, in order to make the automation and digitalization process involving all company employees fully operational. The various training initiatives are therefore integrated within reskilling paths aimed at enhancing the employability of resources acting in situations characterized by a significant amount of automation and high technological intensity.

The Hera Group is also committed to the continuous development of specific training programs to ensure that the principles of the Green Deal, Circular Economy Action Plan and Green Recovery Fund become part of the values shared by all Group employees and, in a necessarily long-term way of thinking, those who will join them. The objective of achieving results in terms of Green Economy and reducing the Group’s carbon footprint, only to mention one example, can be reached by increasing the contribution coming from remote working, or by reinforcing the Green portion of Hera’s corporate welfare offer, or again by raising awareness of green issues even during recruitment.

From a more general point of view, a consolidated use of strategic workforce planning adapts changing skills and roles to the company’s needs, through a strategic dialogue between the lines of business and human resources. This makes it possible to analyse the most significant ongoing trends, share the meaning of the challenges that will arise over the period covered by the Business Plan, and also gain a sense of the risks and related opportunities. The objective is to translate all human resource processes into a coherent plan of action, which then proves to be capable of identifying the best solutions in directing its own implementation and thus covers the gaps in terms of quality, quantity, timing and location of the workforce, as well as facing the risks potentially introduced by adoption these very solutions.
Human resource management and development processes are designed to conserve the skills and distinctive values built up over time, while also developing individual talents, regardless of gender and age, seeking innovation in all aspects that can generate an added value that is sustainable over time. Hera’s strategy is based on continuously developing an inclusive culture of diversity, understood as a driving force for change. In this context, employees can benefit from a positive balance between the development actions assigned to them by the manager and those in which the initiative, instead, comes from themselves. It is no coincidence that, in addition to retaining the figure of the Diversity Manager (introduced in 2011), Hera, that signed the “Utilitalia Agreement – Diversity makes the difference”, promotes inclusive policies at all levels of its organization. In addition to this, it progressively refines measures for achieving life-work balance, and adopts a merit management which is not only transparent but above all neutral with respect to gender, age and cultural differences, by adopting systems aimed at monitoring the progress achieved and at the same time introducing internal and external awareness-raising policies.

After identifying the factors leading to success for utilities of the future, goals concerning industrial growth, circularity and risks are translated into an equal number of coherent company policies.

 

Risk factors: actors, methodology and areas of management

 

Risk governance

The Hera Group’s organizational structure is designed to manage any risk exposure arising from its businesses and simultaneously to uphold management effectiveness and profitability across the entire value chain.
Hera’s corporate governance system enables organisational strategies to be handled uniformly and consistently. The Risks Committee is the principal policy-making, monitoring and reporting organ for risk management. Additionally, under Article 7 of the Self-Governance Code, the Controls and Risks Committee oversees the internal auditing system, the efficiency of corporate operations, the reliability of financial reporting and compliance with laws and regulations, as well as the protection of company assets. In order to maximise the consistency of the management strategy, these bodies meet periodically. During 2020, the Risks Committee met four times and the Controls and Risks Committee met seven times.

The Group has adopted a three-tier risk defence strategy, appropriately distinguishing:

• the role of risk management, entrusted to the risk owners in charge of the different organizational sections;
• the role of risk guidance and control, entrusted to the Risks Committee, which relies on risk specialists who carry out second-level controls, i.e. who are responsible for defining, applying and updating risk analysis methodologies and carrying out control activities for the areas under their responsibility (review challenge and control);
• the role of assessing the effectiveness of risk management processes and the internal control and risk management system, entrusted to the Internal Auditing department.

The Risks Committee sets the general risk management guidelines, maps and monitors corporate risks, ensures that risk policies are set forth and outlines the information protocols targeted to the Controls and Risks Committee, to the Internal Auditing management and the Statutory Auditors.

The Board of Directors approves the risk policies and measurement parameters, guides and assesses the adequacy of the internal control and risk management system; The Controls and Risks Committee supports the Board of Directors in defining internal control and risk management guidelines.

The President and CEO supervise, within their ambits, the internal control and risk management functionality; The Vice President oversees coordination between the Risks Committee and the Controls and Risks Committee.

The risk governance structure is outlined here below:

Management methodology

Hera has introduced the Enterprise Risk Management (ERM) process to provide the Board of Directors with useful elements for assessing the nature of corporate risks and defining the risk profile, particularly in the medium to long term. The definition of the risk profile is made explicit by the Board of Directors itself through the approval of the Group risk management policy and the risk limits established therein.

The risk management framework is formulated through three key elements:

• the risk model, which identifies the types of existing and emerging risks to which the Group is potentially exposed, and is subject to periodic review;
• the Group’s risk propensity defining acceptable risk levels consistently with a given risk management strategy, through the identification of:
  • key risk scales;
  • risk metrics;
  • their associated limitations;
  • monitoring, escalation and updating processes to ensure that corrective actions are identified and implemented.
• risk management activities, which ensure effective monitoring and management of the risk universe to which the Group is potentially exposed. The activities are broken down into:
  • ongoing risk management, also by means of sectoral management entrusted to dedicated risk specialists/risk owners;
  • enterprise risk management, aimed at analysing the evolution of the Group's overall risk profile, to support informed risk-taking and the identification of strategic objectives.

On 13 January 2021, the sixth Enterprise Risk Management report on the 2021-2024 Business Plan was presented to the Board of Directors.
Over the course of 2020, the ERM analysis made further methodological improvements and refinements:

• backtesting of the previous year ERM analysis was carried out to assess that actually incurred impacts were consistent with estimated impacts, particularly with regard to the Covid pandemic;
• the Group’s resilience analysis, carried out in previous years in relation to risks that may jeopardise the continuity of core activities, made it possible to plan further mitigation actions in the 2021-2024 business plan;
• the relevant risk scenarios for the Group were re-mapped, based on the risk structure identified by the World Economic Forum (WEF) in its customary annual analysis, aimed at identifying the degree of relevance of WEF top risks in the context of Hera;
• the identification of climate change (physical and transitional) risk scenarios relevant to the Group's activities was carried out, to begin assessing the impacts and business development opportunities for certain relevant risk factors in keeping with the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD).

The 2020 ERM analysis did not reveal any critical risks, either in terms of reputation or operating-financial impact.
Areas of significant risk include reputational impact deriving from possible proceedings by supervisory/regulator/investigation bodies, generated by the degrees of discretion on the opening of audit/investigation procedures in cases of non-univocal interpretative guidelines (even when the Hera Group's conduct complied with legal provisions), as well as the economic-financial impact deriving from high-intensity seismic events relating to networks. The risk deriving from potential fires at waste treatment and recovery plants is confirmed; however, the related impact in terms of consequences on Group results is assessed as insignificant, while consequences for the environment and operational continuity have zero impact. However, due to growing social awareness on the issue, such events may lead to significant reputational consequences because of perceived risk. It should also be noted that the risk deriving from the critical materials of the gas networks present last year has been eliminated, while the context affected by the Covid-19 emergency, i.e. the economic-financial weakening of individual entities and consequent greater exposure to non-virtuous conduct on which the company’s monitoring has limited effectiveness, leads to less reliability on the part of the entities to whom part of the works are subcontracted.

Risk areas: identifying and managing risk factors

The existing and emerging risks which Hera faces belong to different types: risks deriving from the evolution of the macroeconomic and financial, business (regulatory and competitive), technological, environmental and human capital contexts, including with regard to climate change and sustainable development. Paragraph 1.01 “Trends and contexts, strategic approach and Group management policies” provides a detailed analysis of the factors constituting some of the fundamental prerequisites for identifying these risks.
In order to mitigate exposure to these risks, Hera carries out the specific analysis, measurement, monitoring and management activities described below.

RISK TREATMENT AND MANAGEMENT

 

 

Operating-financial area

Price volatility

Identification of commodity price risk
The Group operates in an integrated manner in the supply and sale of electricity and gas at different stages of the value chain. Hera is therefore exposed to risks arising from the volatility of energy markets, which are only partially mitigated by an integrated assessment of these markets and associated management strategies.
Energy market risks are centralised in the Central Market Department, which is responsible for the purchase and sale of electricity and gas.

Unified procurement and hedging management

Commodity price risk management
In order to standardise the approach to risk of the various corporate structures involved and with the aim of optimising the use of the market for hedging operations, the Group has adopted specific policies aimed at setting guidelines and operating procedures for the energy risk control and management process. Hera structured the processes to achieve effective management of procurement and hedging concerning the energy market, with a clear-cut focus on the skills involved. The Group’s approach provides for a single interface for the management of risk to market: Hera Trading. A unified risk management approach in compliance with the assigned policies provides advantages in terms of achieving higher levels of coverage, cost optimization by resorting less to the market, and greater flexibility in structuring procurement and supplying customers.

Liquidity and credit rating

Identifying risks associated with the debt market
The economic and financial environment, in addition to fluctuating energy and commodity prices, shows changes in interest rates, exchange rates, credit spreads and possible liquidity crises. Such fluctuations may affect Group results, future growth and strategic investments (e.g. due to high refinancing costs).
The Group might not be able to meet its payment obligations due to an inability to raise new funds or to do so only on unfavourable economic terms, or an inability to liquidate assets on the market or due to a changed risk perception on the part of the market. Among the factors determining this perceived risk, the creditworthiness assigned to Hera by the rating agencies plays a key role, as it influences the possibility of accessing funding sources and related economic conditions. The Group’s debt structure is not subject to financial covenants on debt balances, with the exception of the corporate rating limit defined on a portion of debt equal to approximately 150 million euro (i.e. in the assignment of a rating lower than BBB). On the other hand, with respect to the remaining outstanding debt, mandatory early repayment is provided for only in the event of a significant change of control over the Group, in the event that a concession is revoked (concession event), or assets are sold (sale of assets event), resulting in downgrading the Group to non-investment grade or lower, rather than the termination of the publication of the rating.

Responding to financial needs

Managing risks associated with the debt market
Hera’s financial management is centralised in the Central Administration, Finance and Control Department, which aims to maintain an adequate balance between the maturities of assets and liabilities, matching investments to consistent sources of financing in terms of duration and repayment methods while taking into account the need to refinance the current debt structure. In order to meet its medium- and long-term commitments, Hera’s strategy involves diversified financing sources and a balanced maturity profile, constantly monitoring rating indicators and the availability of long-term credit lines. This strategy is considered effective in minimising liquidity risk even in the event of particularly critical scenarios. Approximately 87% of the Group’s financial debt is long-term (more than five years) and 80% of this is represented by bonds with repayment at maturity.
Moreover, the Group’s activities and strategies are particularly focused on ensuring that the highest rating level (one notch above the sovereign rating) is maintained.
Financial risk control and management processes are based on a careful monitoring of the Group’s financial indicators, as well as a permanent presence on the benchmark markets, to minimise the impact of interest rate and spread volatility so as to ensure efficient debt servicing. The Group also uses derivative financial instruments to reduce its exposure to interest and exchange rate fluctuations. At 31 December 2020, the Group’s exposure to the risk of interest rate fluctuations was 10.4%, while the remaining 89.6% of debt is at a fixed rate.

Sensitivity analysis

A 1% increase in the benchmark interest rate with respect to the business plan scenario, based on the assumption of a coupon rate shift and the Group’s debt structure in the plan, would increase financial expenses by an average of approximately €7 million per year.

Identifying risks from counterparties
Hera operates with counterparties that might fail to fulfil their obligations, failing to comply with both economic terms and any contract provisions (delivery of goods or services). Additionally, credit risk affects the group across all of the various areas in which the company operates: the sale of energy commodities and services, waste treatment activities and telecommunication services.

Origination process

Managing risks from counterparties
Hera employs a structured origination process, formalised in specific credit risk management procedures; this process allows the Group to adequately select its counterparties through credit checks and requests for guarantees, where applicable. In addition, its positions in relation to the counterparties are regularly monitored while articulated, proactive actions are planned, including external risk relocation through credit transfer, where appropriate. Expected losses are constantly estimated and monitored; the Group employs measures of default probability, exposure at default and loss given default developed on the basis of its own historical series, customer payment behaviour and current credit processes. In order to test the soundness of the models, both internal and external information is used that may serve as a benchmark for the evolution of the macroeconomic environment. Please refer to paragraph 1.08 “Covid-19 emergency management” for further details on additional assessment activities regarding the model for forecasting the expected loss from customer receivables.
In the 2020 financial year, the 24-month unpaid ratio of the Group’s main sales companies amounted to 0.87%.

Regulatory and business area

Decline in consumption

Identifying competition and economic risks
Hera operates mainly in Italy, where an uncertain economic environment persists and energy consumption and waste disposal volumes are stagnant, in part as a result of the epidemic. The decrease in energy demand is putting pressure on sales margins which, combined with increased competition on the free market, may impact the Group’s profitability. Additionally, changes in end customers’ energy consumption levels may require Hera to buy or sell extra energy on unfavourable terms.

Environment business

The potential reduction in waste production, deriving not only from the economic context and European and national regulatory frameworks but also from new trends in customer behaviour, together with the unavailability of treatment and recovery infrastructures, may have a negative impact on the Group’s ability to pursue its objectives. The risks of the environment business related to the management of its set of plants are centralised under the Herambiente Group.

High flexibility in procurement

Managing competition and economic risks
The Group has maintained elevated flexibility in energy procurement sources while at the same time developing hedging activities to minimize exposure to operating risks from electric generation, partly thanks to the lack of long-term gas supply contracting (“Take or Pay” provisions), thus ensuring ongoing alignment with the market and maximising natural hedging.

Plant equipment and recycling opportunities

In waste management and treatment activities, the Group’s diversified plant equipment features technologies that are cutting-edge and high-performance in terms of environmental impact, which to date has enabled the Group to achieve its strategic objectives. The implementation of a circularity strategy – through the inclusion of polymeric materials in the recycling process carried out by Aliplast – and the development of recycling lines for other types of plastics make it possible to seize the opportunities offered by the evolution of European legislation.
Over the years, free-market businesses have gained increasing importance in the Group’s portfolio, contributing significantly to its economic performance but also exposing it to growing competition. The Group responds to the challenge of competition by continuously innovating its commercial offering and introducing these new products in a timely manner, increasing its presence and customer base on the free market, and ensuring the fulfilment of expectations in terms of service range and quality.

Sensitivity analysis

Risk analyses deriving from changes in the economic context (GDP and inflation) and energy market conditions (gas and electricity prices) make it possible to quantify the sensitivity of the Group’s EBITDA to changes in primary economic and financial indicators.
In particular, a 1% reduction in GDP compared with the business plan scenario would lead to an average annual drop in EBITDA of approximately 3 million euro.
A 1% reduction in inflation rate compared with the business plan scenario would lead to an average annual drop in EBITDA of approximately 12 million euro. The reduction of the electricity price in the wholesale market by 1 €/MWh compared with the business plan scenario would lead to an average annual drop in EBITDA of approximately 0.5 million euro.
Finally, the reduction of the gas price by 1 €c/smc compared with the business plan scenario would lead to an average annual drop in EBITDA of approximately 0.2 million euro.

The evolution of the legislative and regulatory framework

Identifying regulatory risks
Hera carries out part of its activities in a regulated market, therefore its operations are influenced by the regulatory measures taken by the sector authorities and legislator (in particular concerning tariffs and market structure), government incentives for renewable energies, the concessions granted by local authorities (in the case of regulated activities relating to waste collection services, gas distribution, integrated water service and public lighting) and national authorities (in the case of electricity distribution), as well as by the impacts expected from changes in the market structure and its liberalisation, and from the evolution of supply and demand in the energy and environment sectors.

Periodic updates of the legislative and regulatory framework, both at national and European levels, may significantly impact on the sectors in which Hera operates, influencing its profitability.
Regulatory risks impact network businesses (water, gas and electricity distribution) and the urban hygiene business and result in the introduction or modification of economic, organizational and IT requirements to be met by Hera, and on potential market structure changes caused by them.
The tenders for gas distribution, integrated water service, waste collection and sweeping scheduled in the plan determine the risk of losing some of the areas currently managed, especially when there are significant competitive contexts. However, it should be noted that, in the event of a loss of management areas, the Group is compensated for the portion of invested capital not yet depreciated.
Lastly, there is a risk arising from the regulatory uncertainty surrounding the end of the protected category market, both in terms of the way in which the transition to the free market will take place and the safeguard mechanisms envisaged for customers, and in terms of implementation timeframe.

The proactive approach to regulatory frameworks

Managing regulatory risks
The Group’s organisational structure liaises with national and local authorities and carries out extensive consultation with institutional stakeholders, actively taking part in working groups established by authorities and adopting a transparent, co-operative, proactive approach towards possible regulatory instability.
The Group operates by making the most of its technical skills and management efficiency. Indeed, Hera’s focus on service quality, cost efficiency and innovation is a competitive strength in tenders for gas distribution, integrated water service and collection and sweeping services.

Identifying strategic risks
Strategic risks associated with long-term planning, financial sustainability, the involvement in strategic initiatives and appropriate investment decisions affect the soundness of results for the various supply chains and business units. Moreover, the Group’s ability to achieve its strategic objectives may be compromised if the necessary licences, authorisations and permits to carry out its activities are not maintained or obtained.
Achievement of the planned results is therefore conditioned by the different endogenous and exogenous risks that are simulated, measured and controlled as appropriate.

Managing strategic risks
Hera has developed a well-planned strategic risk analysis model designed to gauge the soundness of a business plan against a variety of adverse risk scenarios, which supports an integrated risk projection from an enterprise-wide viewpoint. The system performs scenario analysis, stress testing and what-if analysis of plan forecasts through an effective analysis of risk factors and related variables, and enables an adequate assessment of the risk level of the various business sectors.
Hera constantly monitors the authorisation processes and proactively participates in the working tables for obtaining permits, licences and authorisations, to avoid the possibility of jeopardising the regular performance of its activities.

Environmental-catastrophy, climatic, technological and human capital areas

Seismic, atmospheric and other climatic events may affect the resources deployed and consequently the Group’s performance. Hera seeks to enhance these resources by ensuring that they are preserved and developed so as to continue to enjoy their benefits in the future. In this context, the environmental risks resulting from climate change are particularly important, as well as accidents to the Group’s plant equipment which in turn may generate potential environmental damage. In this respect, in 2020 the Group developed a detailed analysis of the TCFD recommendations which led on one hand to implementing, at the operational and strategic level, best practices for managing risks and opportunities related to climate change, and on the other hand allowed the Group to gradually align its current reporting instruments with recommendations. Risks arising from cybercrime, which Hera also assesses in terms of their impact on service continuity, are also becoming increasingly significant. It also becomes imperative to determine whether accidents may pose a risk to people’s rights and freedoms, i.e. whether they may cause physical, material or immaterial damage, based on the parameters and acceptability thresholds defined by Group policies (published on the company’s web portal).

The risk management approach is organised according to the specific areas in which environmental, technological and human capital risks occur.

Environmental footprint and essential customer services

Identifying environmental-catastrophy risks
Hera uses natural resources to provide essential services to customers. As its activities have an environmental, water and carbon footprint, the Group is aware of the need to preserve natural resources by adopting mitigation and adjustment measures to reduce these risks. In keeping with the ambitious goal to reduce current levels of greenhouse gas emissions as set out by international organisations, the following physical and transitional climate change risk scenarios have been identified as relevant to its activities. For further details, please refer to the next section “Identifying climate change risks”.
In terms of the environmental standards that Hera must comply with in carrying out its business, the Group’s activities are subject to various rules and regulations, including rules relating to CO₂ emissions, emissions of other substances produced by combustion, water discharge and the handling of hazardous and solid waste. Non-compliance with CO₂ limits contributes to environmental changes, while non-compliance with legal limits on other environmental aspects leads to worsened environmental conditions and exposes the Group to fines.
Scarcity of water resources, or possible contamination of water reserves, may affect the regular water supply and cause service interruptions or significant environmental, economic and social damage, worsening the water stress on natural resources in order to meet water demand.
In addition, there are risks stemming from the impact on the Group of weather variability in relation to the electricity and gas demand deriving from the various scenarios. The most significantly affected areas pertain to the Central Market Department, which is exposed in terms of electricity, gas and heat sales and to the variable demand resulting from different weather scenarios.

Managing environmental-catastrophic risks
Generally, pro-active investments aiming at a lower frequency of harmful events and measures to curb their severity play a key role.
The Group’s commitment to reducing carbon dioxide production began with reporting on its own performance and commitments to climate change, and continues with projects to promote energy production from renewable sources, reduce energy consumption, and provide customers with opportunities to cut greenhouse gas emissions. The Group is committed to contributing to reducing environmental risks by complying with the energy efficiency objectives set by the legislator and the United Nations, continuing to improve its production facilities and encouraging virtuous and responsible forms of consumption on the part of its customers. The Group uses electricity from renewable sources to operate its production sites. In relation to the consequences of extreme events, which are expected to occur with increasing frequency as a possible consequence of climate change, Hera has taken steps to adopt important measures, such as, for example, the Rimini bathing safety plan currently underway which, in addition to maintaining the quality of marine resources, increases the resilience of the stormwater drainage infrastructure in the face of extreme events. For further details on the specific initiatives, please refer to the section “Reducing greenhouse gas emissions” in the Hera Group Sustainability Report.
Hera has adopted an environmental control system that is effective both in terms of the governance of environmental certification processes and related audits, and in terms of the operational management of controls and surveys. The Group succeeds in tackling environmental hazards by constantly monitoring potential pollution factors and ensuring transparency in surveys, as well as through substantial investments in technological plants that ensure consistently better air and water quality than required by legal limits. For more details, see the sections on “Protection of air, soil and biodiversity” and “Sustainable water management” in the Sustainability Report. Moreover, in line with its circular economy strategy, Hera has already invested (and continues to do so in the medium-to-long term) in sorting, recovery and composting plants, increasing the amount of waste treated while at the same time reducing the use of landfills, thus anticipating the requirements of European and national regulations. For more details, see the “Transition to a circular economy” section in the Sustainability Report.
The strengthening of the resilience of the Group’s water supply and distribution system initiated in 2019 in a medium to long-term outlook is still ongoing. Furthermore, the reduction of the water footprint is pursued through the water management system, which aims to promote sustainable management of this resource both inside the Group (by preventing network leaks, reducing diffuse consumption, recovering rainwater for irrigating green areas and washing vehicles) and externally (by monitoring domestic consumption and offering advice and solutions to optimise it, providing support with technological solutions for water-demanding customers, and providing support for the construction of treatment plants to reuse/recover water). The implementation of water safety plans in the integrated water service also ensures an approach to water quality management based on risk assessment and management, and thus on prevention and control.
Regarding weather-variable risks, the Group relies on advanced demand forecasting tools that ensure an optimal use of the available sources. It also relies on adequate flexibility in the supply sources of energy commodities, ensuring their availability at market rates. A 1°C increase in the average winter temperature compared with the business plan scenario leads to an average annual drop in EBITDA of approximately 13 million euro.

Physical and transition risks and their effects on business

Identifying climate change risks
The physical and transition risks from climate change scenarios pertinent to its activities have been classified according to their potential consequences on business, and were submitted to further impact and mitigation assessments in relation to their criticality (some examples are extreme weather phenomena such as floods and droughts as well as health and economic risks).
Climate scenario analysis is a methodology to test the resilience of business plans under different assumed future developments. Hera selected two of the most relevant scenarios out of the nine that were considered as starting points. In particular, the IEA ETP 2DS transition scenario by the International Energy Agency, chosen as an optimistic climate scenario, envisages a future evolution characterised by strong decarbonisation processes in order to keep the temperature increase below 2°C. The IPCC RCP 8.5 scenario, chosen as a pessimistic scenario, instead envisages a ‘business-as-usual’ trend and consequent sharp temperature rise ( approximately 4°C). Based on this latter scenario, eight physical risks and eight transition risks were identified, associated with related business impacts.

• Physical hazards are generated by heat waves, abnormal winter temperature changes, flooding and floods resulting in landslides and mudslides, extreme weather phenomena, rising temperatures, rising sea levels, changes in the timing of annual and average rainfall, and the drying out of soils. The risk associated with the decrease in gas consumption and district heating for residential use as a result of the increase in temperature was also assessed as significant in the long term.
• Transition risks are generated by the electrification of energy consumption and the development of renewable energy sources, the introduction of measures requiring structural and non-structural efficiency upgrades, limits on the production of greenhouse gas emissions, the increase in the cost of raw materials and greenhouse gas emissions, the stigmatisation of the sector in which the company operates and limited access to the capital market, the absence and/or obsolescence of the highly specialised skills required by the market to develop new technologies or replace existing products, legal disputes and the obsolescence of existing plants and the associated need to introduce new, more sustainable solutions/technologies.

For the physical and transition risks assessed as having a higher priority level, a further in-depth analysis is underway to estimate their economic and financial impacts.

Managing climate change risks
Hera has launched a series of initiatives to mitigate the effects of climate change, aimed at reducing its carbon footprint.

• To offset risks arising from climate change, the Group has adopted multiple measures. Just a few examples include reducing internal energy consumption through investments in energy efficiency and expanding renewable energy production with specific actions and investments, such as the biodigester in Sant’Agata Bolognese and initiatives aimed at creating electrolysis plants for the production of green hydrogen, selling electricity to customers with offset emissions and offering photovoltaic generation systems, providing energy efficiency services to retail and institutional customers, and the drive to reuse raw materials through polymer recovery and regeneration activities with a consequent reduction in CO₂ emissions.
• On the adaptation front, Hera initiated actions to consolidate the resilience of its infrastructure to climate change, increasing its ability to adapt to adverse physical conditions. In this regard, the optimised Rimini bathing safety plan will ensure that the integrated water service infrastructures have an improved capacity to cope with extreme rainfall events in the area. Additional project hypotheses are being developed for the integration and partial replacement of water sources, as well as for the construction of interconnections between them, in order to cope with emergency conditions by 2030 (including the project to draw water from the Emilia-Romagna canal). Hera has also made agreements and investments to reuse purified wastewater, reducing the pressure on primary water resources and thus water stress at the local level, an element that will be exacerbated by climate change in the coming decades.

Exceptional events and service provision rules

Identifying operational and ICT security risks
Despite careful planning and insurance protection, the negative externalities generated by exceptional events may jeopardise business continuity and increase the financial requirements for restoring normal operations. The provision of public utilities therefore requires both preventive activities and actions to counter interruptions, delays or poor service levels. Technological risks include the operational security of distribution networks (fluids and electricity), the logical security of information, the security of communication networks and information systems, and the reliability of remote control systems. The main threats to premise systems (hosted in corporate data centres) or in the cloud include identity theft, phishing aimed at taking control of a personal computer and then attacking central systems, and attacks on exposed services such as public websites.
The security of the information used, produced and processed by the company depends on the way it is managed and the human and technological resources involved. The loss of confidentiality, integrity and availability of corporate information, both business-critical information and personal information (i.e. any data relating to natural persons, as more fully defined by the privacy code Legislative Decree 196/03) may result in serious financial losses with consequent damage to market image. To identify and assess this risk, the Group has adopted a methodology based on the international Magerit framework, assessing the three security parameters of availability, integrity and confidentiality.

Physical security and monitoring of plan sites

Managing operational and ICT security risks
Centralised network monitoring systems (remote control of fluids and the electricity network) ensure continuous real-time monitoring and supervision and, in some areas, remote management, making it possible to promptly report potential critical factors to the technical structures in charge of emergency response and, where possible, to intervene directly to resolve the potential critical situation. These systems have been used in a variety of situations, allowing the service to be restored within an appropriate timeframe and ensuring adequate resilience of the services offered.

Attention to information confidentiality

The Group constantly monitors the level of IT security risk, runs tests to continually assess the level of penetrability of its systems and network security, and carries out training campaigns to raise awareness among all users.
In 2020, actions continued to be taken to ensure the integrity and availability of Hera systems; the main initiatives, which are subject to constant technological updating, are aimed at increasing ICT security to protect infrastructure, devices and personal identities and are carried out by introducing the best technologies on the market and the use of continuous monitoring and control services (24 hours a day, 365 days a year). Actions to enhance IT security control, implemented through the role of owner of the quality, safety and environment process (in charge of regulatory compliance and risk analysis) and the owner of the ICT security process (in charge of operational strategy, defining ICT security procedures and requirements and intervention and risk mitigation plans) continued during the year. Analysis of data traffic on the internal network also provides additional protection. Optimisation of the intrusion detection system goes beyond merely signalling intrusion attempts by automatically blocking them. Activities to detect vulnerabilities in systems or applications that may be exploited by an attacker were also intensified.
A Threat Intelligence service has been set up that monitors the main bulletins provided by the various private and public bodies and, through a direct relationship with the national Computer Security Incident Response Team (CSIRT), allows the status of these bulletins to be monitored. Given that the management of corporate information and information systems influences the Hera Group’s reputation, the executive management has set up an information security management process in accordance with the lines set out in the ISO/IEC 27001:2005 standard, which involves the participation and support of all Group employees. During 2020, the Group did not receive any complaints from its customers concerning privacy issues or data loss.

Individual health and safety and social risks

Identifying people’s safety and development risks
People and their behaviour are the common denominator in the areas of climate, environment, technology and human capital, they can increasingly influence the effectiveness of corporate strategies. The protection of people thus remains a key element that must be reflected in workplace safety and at the level of social protection. Hazard identification and risk assessment are based on analysing the roles, work activities, processes, workplaces, equipment, vehicles, plants and substances used. The Group is continually focusing on the emerging needs and requirements of different categories of employees.

Training, prevention and protection

Managing people’s safety and development risks
In order to ensure worker health and safety and mitigate on-the-job injury risk, the Group is constantly committed to measures promoting better monitoring as well as to the enhancement of safety protection and prevention practices aimed at reducing the frequency and severity of accidents. The teaching methods chosen for worker training will no longer be solely technical or normative, but will be geared towards developing self-awareness in the perception of risk and in adopting safe and aware behaviour. Focusing on these aspects is an essential element of operations in order to maintain a steady decrease in the number of injuries, the injury frequency index, the severity index and the number of absence days due to injury. In this respect, the Group has been granted important awards on occupational health and safety such as ISO 9001 (quality management system), ISO 14001 (environmental management system) and Ohsas 45001. The process of hazard identification and risk assessment and control is carried out in a preventive and proactive (rather than reactive) manner in order to identify appropriate risk reduction and control measures.
People’s ongoing commitment and the integration of safety into processes and training are the cornerstones of the Group’s safety culture. This strategic element of risk management is based on the premise that everyone is responsible for their own health and safety, as well as that of the people they interact with. This principle has been included in the procedure for managing the process of identifying hazards and assessing risks to the health and safety of workers and the related links available on Hera's Corporate Information Portal. In particular, this procedure provides that each employee promptly report and halt any risky situation or unsafe behaviour.
With reference to social wellbeing, Hera has created a welfare system based on a focus on people aimed at fostering a positive working environment. This system includes monetary and quality-of-life related actions, such as services for family, education, work-life balance, wellbeing, leisure and health.

 

Operating results and investments

 

Growth reflects strategy

The Hera Group’s results for 2020 were guided by its strategy, balanced between regulated and free market activities, with a focus on sustainability and circular economy. The main drivers were both internal growth, thanks to commercial development and organisational simplification, and the opportunities offered by the market, through the development of external growth and participation in public tenders related to the activities carried out.

The partnership with Ascopiave Spa and internal growth were principally responsible for the results achieved by Hera Group in 2020. These actions allowed the effects related to the Covid-19 emergency to be limited. The Group’s multi-business industrial strategy, which balances regulated and free-market activities, continues to be a significant strong point that demonstrates its resilience even in a very difficult period such as the one we are currently going through.

The companies that became part of the Group’s scope of operations thanks to the transaction with Ascopiave Spa, not consolidated in the income statement for the previous financial year, and the consequent transfer of the gas distribution branch in some areas of the Veneto and Friuli regions, are considered as changes in the scope of operations in the remainder of this report. For further information on other corporate transactions, see paragraph 1.03.01.

Constant and increasing growth

The following table shows operating results at 31 December 2020 and 2019:

Income statement (mn€)	Dec 20	% inc.	Dec 19	% inc.	Abs. change	% change
Revenues	7,079.0		6,912.8		166.2	+2.4%
Other operating revenues	467.8	6.6%	530.8	7.7%	(63.0)	(11.9)%
Raw and other materials	(3,410.6)	(48.2)%	(3,458.2)	(50.0)%	(47.6)	(1.4)%
Service costs	(2,424.9)	(34.3)%	(2,318.2)	(33.5)%	106.7	+4.6%
Other operating expenses	(58.9)	(0.8)%	(59.3)	(0.9)%	(0.4)	(0.7)%
Personnel costs	(572.7)	(8.1)%	(560.4)	(8.1)%	12.3	+2.2%
Capitalised costs	43.3	0.6%	37.6	0.5%	5.7	+15.1%
Ebitda	1,123.0	15.9%	1,085.1	15.7%	37.9	+3.5%
Amortization, depreciation and provisions	(571.7)	(8.1)%	(542.6)	(7.8)%	29.1	+5.4%
Ebit	551.3	7.8%	542.5	7.8%	8.8	+1.6%
Financial operations	(116.7)	(1.6)%	(100.0)	(1.4)%	16.7	+16.7%
Pre-tax result	434.6	6.1%	442.5	6.4%	(7.9)	(1.8)%
Taxes	(111.8)	(1.6)%	(125.4)	(1.8)%	(13.6)	(10.8)%
Net result	322.8	4.6%	317.1	4.6%	5.7	+1.8%
Result from special items	‐	0.0%	84.9	1.2%	(84.9)	+100.0%
Net profit for the period	322.8	4.6%	402.0	5.8%	(79.2)	(19.7)%
Attributable to:
Parent company shareholders	302.7	4.3%	385.7	5.6%	(83.0)	(21.5)%
Non-controlling interests	20.1	0.3%	16.3	0.2%	3.8	23.3%

 

Revenues increase thanks to changes in the scope of operations

REVENUES (BN€)

Revenues were up 166.2 million euro, or 2.4%, compared to the same period in 2019. With regard to activities in the energy sectors, note the change in the scope of consolidation, which brought a 548 million euro increase, growth in the heat management business, thanks to activities related to insulation incentives and energy efficiency works, which contributed approximately 50 million euro, and the drop in revenues related to services in trading, production and sales of electricity, gas and district heating coming to approximately 275 million euro, due to lower commodity prices and lower volumes, partially linked to the ongoing health emergency; in addition, a reduction was seen in revenues from off-grid transmission and system charges coming to approximately 148 million euro, with an equal effect on costs.
Revenues from the water cycle for third-party contracts fell by approximately 13 million euro and revenues from water supply were down, due to the reduction in adjusted costs, by approximately 11 million euro.
Revenues from the waste management area were also down, due to lower energy production revenues and a reduction in the amount of waste treated, coming to approximately 19 million euro.
Finally, roughly 35 million euro in revenues from the sale of materials recovered through sorted waste collection were reclassified from other operating revenues to revenues.
For further details, see the analyses of each business area.

Other operating revenues decreased by 63.0 million euro, or 11.9%, compared to the previous year. This performance is mainly due to the different accounting of revenues for the sale of recovered materials, as mentioned above, coming to 35 million euro, lower energy efficiency grants amounting to roughly 12 million euro, of which 9 million euro due to branches leaving the scope of consolidation, a decrease in revenues from concession activities amounting to approximately 7 million euro, the loss of energy incentives on one plant coming to 4.3 million euro and lower refunds and grants in 2019.

Costs for raw materials in line with trends in revenues

Costs for raw and other materials decreased by 47.6 million euro compared to 2019, down 1.4%. This decrease is due to lower costs for the price of raw materials and lower volumes of electricity and gas sold, despite the effect of changes in the scope of operations, which increased costs by approximately 280 million euro. Also down were costs for purchasing plastic materials, water as a raw material for supply and electricity for plant operations.

Other operating costs rose by 106.3 million euro overall (higher service costs coming to 106.7 million euro and lower operating expenses totalling 0.4 million euro). Net of changes in the scope of operations, coming to roughly 197 million euro, these include higher costs for ICT expenses due to the Group’s ongoing digitisation and innovation process, amounting to approximately 11 million euros, higher gas storage costs coming to approximately 23 million euro, higher costs linked to heat management activities amounting to 42 million euro and higher waste collection and treatment costs coming to roughly 6.3 million euro. The higher costs mentioned above were partially offset by lower costs for works on behalf of third parties, amounting to roughly 12.0 million euro, lower costs for incremental improvements to assets under concession totalling approximately 11 million euro and lower costs for off-network transmission and system charges coming to roughly 148 million euro.
Finally, related to the ongoing health emergency, higher costs were seen for sanitization, cleaning and the purchase of PPE, offset by lower costs for canteens and utilities in the Group’s buildings, due to the increase in remote working.

+1.3% personnel costs

Personnel costs rose by 12.3 million euro or 2.2%. This increase was linked to changes in the scope of operations coming to 10.3 million euro and increases in remuneration foreseen by the National labour contract, but was limited thanks to the benefit brought by the large-scale plan of holiday leave introduced by the Group during the health emergency and the lower average presence.

Capitalised costs rose by 5.7 million euro, owing to a higher amount of work invested in Group assets and between companies.

EBITDA (MN€)

Ebitda rose by 37.9 million euro, or 3.5%. This increase in Ebitda is due to the performance of the energy areas, which grew by a total of 42.5 million euro, primarily owing to the entry of companies in the EstEnergy Group. The other services area grew by 1.2 million euro, while the water cycle area increased by 0.5 million euros. Finally, the waste management area was down by 6.2 million euro. 2020 was impacted across all business areas by the Covid-19 health emergency, which led to an overall reduction in margins of approximately 31.4 million euro.

For further details, see the analyses of each single business area.

Higher amortisation for changes in the scope of operations

Amortisation, depreciation and provisions increased by 29.1 million euro. Higher amortisation coming to 16.7 million euro was mainly due to changes in the scope of operations, owing to amortisation for customer lists recorded following the transaction involving the acquisition Ascopiave sales companies, and the delta price for waste disposed of in landfills, partially offset by the revision carried out during the previous year of technical-economic useful lifetimes of assets in the integrated water cycle area, carried out in collaboration with a company working in asset valuation; following this revision, amortisation rates for the integrated water cycle were essentially in line with the ones set by Arera for the 2020 – 2023 tariff period. Excluding changes in the scope of operations, allocations to the doubtful debt provision increased slightly, by 0.6 million euro, while considering the entire Group the increase came to 29 million euro.

EBIT (mn€)

Ebit rose by 8.8 million euro or 1.6%. The increase coming from growth in Ebitda was offset by higher amortisation linked to customer list recording, as mentioned above.

Financial operations +16.7%

The result of financial operations showed net charges rising by 16.7 million euro, or 16.7%, compared to 31 December 2019. The increase is mainly due to the higher notional charges related to the Put option held by Ascopiave Spa for the 48% shareholding in EstEnergy (19.4 million euro) and the loan recorded following the sale of 3% in HeraComm (3.2 million euro).
A positive impact came from lower charges ensuing from efficiencies in the financial structure, amounting to approximately 7.1 million euro, and non-recurring income coming to 8.8 million euro (of which 3.4 million euro deriving from dividends and subsidiary trading and 2.3 million euro in interest income related to the refund granted by the tax authorities in July 2020), which more than offset the increase in notional charges for discounting landfill post-mortem costs and lower profits from joint ventures, due to lower results owing to the Covid-19 health crisis.

Pre-tax results fell by 7.9 million euro, or 1.8%, for the reasons described above.

Tax rate falls

Taxes for the period fell by 13.6 million euro or 10.8%. The tax rate came to 25.7% and thus showed considerable improvement compared to the 28.3% seen one year earlier. This particularly positive result was due, as in previous years, to the benefits grasped in terms of large and extremely large amortisations, in addition to the tax credit introduced by the national budget for 2020 as regards the significant investments constantly made by the Group in pursuing a technological, digital and environmental transformation. The 2020 tax rate also benefited from the redemption, pursuant to Law Decree no. 185/2008 (converted into Law no. 2/2009), of some higher amounts originating from an equal number of acquisition transactions. For further details on this matter, see note 12, commenting on taxes, in paragraph 2.02.05 “Commentary notes on the financial statement formats”.

+1.8% Net result

The net result rose by 1.8%, corresponding to 5.7 million euro.

The 2019 statements include a result from special items with an overall value coming to 84.9 million euro. Detailed descriptions of its content are provided at the beginning of paragraph 1.04 “Overview of operating and financial trends and definition of alternative performance measures”.

Net profit therefore dropped by 19.7% or 79.2 million euro, owing to the presence of special items in 2019.
 

NET PROFIT POST MINORITIES (MN€)

Profits pertaining to the Group dropped by 83.0 million euro, owing to the special items recorded in 2019, which came to 84.9 million euro. Adjusted net profits post minorities for 2019 therefore came to 300.8 million euro, and 2020 showed 1.9 million euro or 0.6% increase.

Net investments at 528.5 million euro

In 2020, the Group's investments amounted to 528.5 million euro, including 46.8 million euro related to the purchase of financial investments, which mainly refer to a 4.9% shareholding in Ascopiave Spa.
Capital grants amounted to 24.8 million euro, of which 13.6 million euro in FoNI investments, as provided for by the tariff method for the integrated water service. Net operating investments amounted to 481.7 million euro, down 27.3 million euro compared to the previous year.

TOTAL NET OPERATING INVESTMENTS (mn€)

The following table provides a breakdown by business area, with separate mention of capital grants:

Total investments (mn€)	Dec 20	Dec 19	Abs. change	% change
Gas area	135.3	138.3	(3.0)	(2.2)%
Electricity area	47.7	43.4	4.3	+9.9%
Integrated water cycle area	166.2	175.8	(9.6)	(5.5)%
Waste management area	68.3	81.8	(13.5)	(16.5)%
Other services area	11.1	16.0	(4.9)	(30.6)%
Headquarters	77.9	78.2	(0.3)	(0.4)%
Total gross operating investments	506.4	533.5	(27.1)	(5.1)%
Capital grants	24.8	24.5	0.3	+1.2%
of which FoNI (New Investments Fund)	13.6	13.4	0.2	+1.5%
Total net operating investments	481.7	509.0	(27.3)	(5.4)%
Financial investments	46.9	0.2	46.7	+100.0%
Total net investments	528.5	509.2	19.3	+3.8%

Including capital grants, the Group’s operating investments came to 506.4 million euro, down 27.1 million euro compared to the previous year, and mainly involved interventions on plants, networks and infrastructures, in addition to regulatory upgrading involving above all gas distribution, with a large-scale metre substitution, and the purification and sewerage areas.

Remarks on investments in each single area are included in the analysis by business area.
At Group headquarters, investments concerned interventions on corporate buildings, IT systems and the vehicle fleet, as well as laboratories and remote control structures. Overall, investments in structures decreased by 0.3 million euro compared to the previous year, with a reduction in the vehicle fleet and increased interventions on the Group’s IT systems.

Financial structure and adjusted net debt

 

What follows in an analysis of trends in the Group’s net invested capital and sources of financing at 31 December 2020.

Invested capital and sources of financing (mn€)	Dec 20	% inc.	Dec 19	% inc.	Abs. change	% change
Net non-current assets	6,983.6	+109.4%	6,846.3	+108.9%	137.3	+2.0%
Net working capital	53.6	+0.8%	87.0	+1.4%	(33.4)	(38.4)%
(Provisions)	(654.9)	(10.2)%	(649.1)	(10.3)%	(5.8)	(0.9)%
Net invested capital	6,382.3	+100.0%	6,284.2	+100.0%	98.1	+1.6%
Equity	(3,155.3)	+49.4%	(3,010.0)	+47.9%	(145.3)	(4.8)%
Long-term borrowings	(3,617.1)	+56.7%	(3,383.4)	+53.8%	(233.7)	(6.9)%
Net current financial debt	390.1	(6.1)%	109.2	(1.7)%	280.9	+257.2%
Net debt	(3,227.0)	+50.6%	(3,274.2)	+52.1%	47.2	+1.4%
Total sources of financing	(6,382.3)	(100.0)%	(6,284.2)	+100.0%	(98.1)	(1.6)%

Group solidity increases

The higher amount of net invested capital (NIC) compared to 31 December 2019 is related to an increase in net non-current assets, mainly due to investments made during 2020. In particular, note the acquisition of a 4.9% shareholding in Ascopiave Spa, which reinforced the partnership launched in December 2019, and Hera Comm Spa’s acquisition of 90% of the company Wolmann Spa, involved in creating solar panels.

NET INVESTED CAPITAL (BN€)

53.6 million euro net working capital

The decrease in net working capital seen in 2020 is mainly due to the good performance of trade receivables, thanks to a continuous and careful control of credit management processes. The impact of the health emergency was not significant; for further details, see paragraph 1.08 “Covid-19 emergency management”.

654.9 million euro provisions

The change in provisions compared with the previous year is a consequence of period-specific provisions and post-mortem landfill provision adjustments and reinstatements of third-party assets, which offset expenses for usage. For details on changes in provisions, see the information contained in paragraph 2.02.05 “Commentary notes to the financial statements”.

3.2 billion euro equity

Equity reinforced the Group’s solidity thanks to the positive net result achieved by management in 2020, coming to 322.8 million euro, partially offset by the impact coming from dividend payment, movement in treasury shares and a drop in minority interests.

Return on net invested capital (ROI) settled at 8.6% in 2020, as compared to adjusted ROI for 2019, which came to 9.4%, adjusted for the operating and financial impact of the Ascopiave transaction.

ROI (%)

  * adjusted for non-recurring entries
** adjusted for non-recurring entries and the Ascopiave transaction

Return on equity (ROE) stood at 10.2%, essentially in line with the figure seen in 2019.

ROE (%)

* adjusted for non-recurring entries and the Ascopiave transaction

An analysis of adjusted net financial debt is shown in the following table:

mn€		31 Dec 20	31 Dec 19	31 Dec 19 adjusted
a	Cash and cash equivalents	987.1	364.0	345.9
b	Other current financial receivables	32.8	70.1	53.7
	Current bank debt	(188.6)	(111.5)	(111.5)
	Current part of bank borrowings	(307.1)	(63.1)	(63.1)
	Other current financial liabilities	(114.0)	(130.9)	(130.9)
	Current lease payments	(20.1)	(19.4)	(18.3)
c	Current financial debt	(629.8)	(324.9)	(323.8)
d=a+b+c	Net current financial debt	390.1	109.2	75.8
	Non-current bank debt and bonds issued	(3,047.3)	(2,815.1)	(2,815.1)
	Other non-current financial liabilities (excluding put option)	(27.7)	(20.2)	(13.2)
	Non-current lease payments	(73.5)	(76.1)	(73.6)
e	Non-current financial debt	(3,148.5)	(2,911.4)	(2,901.9)
f=d+e	Net financial position	(2,758.4)	(2,802.2)	(2,826.1)
g	Non-current financial receivables	140.8	135.3	135.3
h=f+g	Net financial debt (excluding put option)	(2,617.6)	(2,666.9)	(2,690.8)
	Nominal amount - fair value put option	(456.4)	(450.6)
	Net financial debt with adjusted put option (Net debt adj put option)	(3,074.0)	(3,117.5)	(2,690.8)
	Portion of future dividends - fair value put option	(153.0)	(156.7)
	Net financial debt (Net debt)	(3,227.0)	(3,274.2)	(2,690.8)

 

The overall amount of adjusted net financial debt came to 3,227.0 million euro, 47.2 million euro decrease compared to the previous year. The adjusted figures referring to 31 December 2019 reflect the adjustments made during 2019 to guarantee a better comparison as regards the Ascopiave partnership transaction. For further details on this matter, see the consolidated financial statements at 31 December 2019.

The Group’s financial structure shows current debt coming to 629.8 million euro, of which 307.1 million euro are related to the current portion of debt, which includes 249.9 million euro linked to the bond maturing on 4 October 2021, as well as 58.8 million euro related to the portion of medium-term bank loans reaching maturity within the year. The portion of current debt owed to other financial institutions amounts to 114.0 million euro, while the 188.6 million euro due to banks includes 49.6 million euro in interest payable on loans and approximately 139 million euro in current lines of credit.
The current portion of operating leases amounts to 20.1 million euro, while the non-current portion comes to 73.5 million euro, both essentially in line with the amount recorded in 2019.
The amount relating to “non-current bank debt and bonds issued” increased compared to the previous year, due to the issuance of a 500 million euro bond maturing in ten years, as described in paragraph 1.3 “Main events occurred”. This increase was offset by the restatement of the bond maturing in 2021, amounting to 249.9 million euro, under current debt, as mentioned above.
As a result of the bond issuance, carried out to take advantage of the favourable market scenario, cash and cash equivalents increased from 364.0 million euro in 2019 to 987.1 million euro at 31 December 2020.

At 31 December 2020, 80.3% of medium- and long-term debt was consisted in bonds with repayment at maturity, 79% of which was listed on European markets. Total debt showed an average time to maturity of over six years, with 63.8% maturing after over five years.

NET FINANCIAL DEBT (BN€)

Net financial debt fell by 47.2 million euro, going from 3,274.2 million euro in 2019 to 3,227.0 million euro in 2020.

CASH FLOW (MLN/EURO)

The Group’s characteristic management generated positive operating cash flows coming to 343.1 million euro, which entirely financed dividend payments and shareholding acquisitions, in particular 4.9% of Ascopiave Spa and 90% of Wolmann Spa, by Hera Spa and Hera Comm Spa respectively.

NETDEBT/EBITDA (X)

* adjusted for non-recurring entries and the Ascopiave transaction

The Net debt/Ebitda ratio for 2020 increased slightly, coming to 2.87, as compared to the 2.48 del 2019 ratio as adjusted to account for operating and financial impact of the Ascopiave transaction. The figure financial adjustment linked to the Ascopiave transaction, which on the contrary had been carried out on the figure for 2019, in order to ensure that it was comparable with the previous year. As of the current year, the fair value of the put options granted to monitory shareholders is therefore included in the amount of “Net debt”.

FFO/NETDEBT (%)

* adjusted for non-recurring entries
** adjusted for non-recurring entries and the Ascopiave transaction

The Funds from operations (FFO)/Net debt ratio settled at 25.2%, confirming the Group’s financial solidity and its ability to meet its financial obligations, thanks to the positive trend in operating cash flow.

Sustainability results

 

The Group’s commitment to reporting to stakeholders as to the results achieved in the areas of creating shared value (CSV) and sustainability was confirmed again this year by the Sustainability Report, available at bs.gruppohera.it and on the Group’s website in the sustainability section.
The Sustainability Report contains the Hera Group’s consolidated non-financial statement prepared pursuant to legislative decree 254/16 and constitutes a separate report from this directors’ report, as provided for in Article 5, paragraph 3, letter b) of legislative decree 254/16. The Sustainability Report also includes indicators and information relating to the environment, personnel and research and development activities.
What follows is a summary of the main results reported in the 2020 Sustainability Report.

Further progress was made during 2020 in aspects of CSV and in the area of sustainability, concerning both the results achieved and the new projects launched, as well as measurement and reporting outside the company. With regard to the latter aspects, several elements enhanced the Group’s corporate social responsibility and accountability profile:

• Hera stock was included in the Dow Jones Sustainability Index, World and Europe, with a ranking that sees the Group defined as “Industry leader” among the approximately 3,500 companies with the largest capitalization in the world evaluated;
• reporting was brought even more in line with the recommendations of the Task force on climate-related financial disclosure (TCFD), through additional information on the actions taken to mitigate and adapt to climate change with regard to governance, scenario analysis, risk and opportunity management methods and the related measurement indicators;
• greenhouse gas emission reduction targets (and the first correlated year-end reporting) were defined, in line with the criteria of the “Science Based Target initiative” (with particular regard to the “well below 2°C” paradigm, aimed at limiting the increase in the average temperature of the earth to considerably less than 2°C), with a decrease in emissions coming to over 15% by 2024 and roughly 33% by 2030, in both cases compared to 2019, taking into account both the Group’s emissions (Scope 1 and 2) and those of customers (Scope 3, relating to electricity and downstream methane gas sales);
• disclosure for the new areas was broadened, defined on the basis of the material analyses such as, for example, resilience and adaptation to climate change and health emergency management for Covid 19, which characterized almost all of 2020 and is still ongoing.

Creating shared value: CSV Ebitda rises to 420.0 million euro (37.4% of total Ebitda); CSV investments come to 297.4 million euro (55.5% of total investments)

The 2020 Sustainability Report consolidates the innovative content representation introduced in 2017, focused on creating shared value thanks to the Group’s strategic approach, inspired by the indications offered by Porter and Kramer. The results achieved and the objectives set for the future are flanked by a summary of the scenario concerning the three drivers for creating shared value, defined in 2016 and updated in 2020 based on an analysis of European, national and local policies, megatrends and communications. The three drivers for creating shared value are: (i) Energy – pursuing carbon neutrality, (ii) Environment – regenerating resources and closing the circle, (iii) Local areas (and Enterprise) – enabling resilience and innovating. One chapter is dedicated to each of them in the 2020 report as well, forming the most significant part of this report.
One of the strong points of the Group’s CSV reporting is its quantification of CSV Ebitda, i.e., the portion of Ebitda that derives from business activities that respond to the goals on the “Global Agenda”, i.e., the calls to action for sustainable growth (linked to the Group's activities) indicated by 98 policies at the global, European, national and local levels, analyzed since 2016 and summarized in the three drivers mentioned above.
In 2020, CSV Ebitda came to 420.0 million euro, corresponding to 37.4% of the Group’s total Ebitda. CSV Ebitda recorded an increase of 7.2% in 2020 compared to the amount seen in 2019, in line with the newly defined calculation criteria and the new CSV drivers. 2020 CSV Ebitda was thus in line with the path set out in the 2021-2024 Business Plan, designed so that approximately 50% of total 2024 Ebitda comes from business activities that meet the priorities of the “Global Agenda”. The Group’s contribution to creating shared value also involves making investments in the three CSV drivers, which in 2020 amounted to 297.4 million euro, about 55% of the total.
This quantification of shared value Ebitda and investments for 2020 has been submitted, for the second consecutive year, to verification by an auditing company, in order to confirm the value of these distinctive aspects of the Group's reporting to all stakeholders.
The Hera Group’s commitment to aspects of CSV is also proven by its active participation in numerous national and international networks, such as the Ellen MacArthur Foundation, the association of companies most committed globally to the transition towards a circular economy. In particular, mention should go to the Group’s participation in the New Plastics Economy Global Commitment, where it specified explicit objectives to increase the collection and recycling of plastic through to 2025, and to the second report drafted in 2020 concerning the objectives stated, which show positive results in plastic collected, sorted and recycled.

Pursuing carbon neutrality: -6.2% in energy consumption; 20% of contracts with energy efficiency services; -22% in carbon intensity

Hera pursues carbon neutrality in its own activities and those of its customers, by promoting energy efficiency and projects aimed at the energy transition and renewable energies.

With regard to energy efficiency, note that:

• the initiatives defined by Hera Spa, Inrete Distribuzione Energia Spa, AcegasApsAmga Spa and Marche Multiservizi Spa, falling under Iso 50001 (included in the energy improvement plan) and already implemented at the end of 2020, allowed energy consumption to be reduced by 13,745 TOE, equivalent to 6.2% of 2013 consumption, far exceeding the target of 5%;
• at the end of 2020, gas and electricity contracts with energy efficiency solutions accounted for 20% of total contracts; this figure comes to 27% over the same scope of operations as 2019, i.e. excluding the sales companies that came into the Group’s consolidated scope thanks to the “Ascopiave transaction”; initiatives aimed at promoting energy efficiency among residential customers include commercial offers such as Hera Led, Hera Thermo, Hera ContaWatt and Hera Caldaia, as well as the “Consumption Log”, a free report intended to raise awareness among customers on energy savings, based on the principles of behavioural economics.

With regard to the energy transition and renewable energies, Hera continued to promote the Hera Zero Footprint offer in 2020 as well, alongside other commercial offers based on carbon neutrality, achieving at the end of the year:

• an increased amount of electricity from renewable sources sold compared to 2019, coming to 32.2% of total electricity sold (excluding the amount sold under the safeguarded plan);
• an amount of methane gas with CO₂ emissions compensation coming to 4.4% of the total volume of gas sold, as compared to 0.8% in 2019 (excluding volumes sold to wholesalers, in the default service and in last resort supply).

For the third consecutive year, Hera continued to guarantee 100% electricity from renewable sources to all its residential customers on the free market.
Within the company itself, in 2020 Hera achieved production of biomethane from the organic portion of waste coming to 7.8 million m3 (+20% compared to 2019), 83% of its own electricity consumption covered by renewable sources, and a 22% reduction in the carbon intensity index for energy production compared to the 2013 baseline.
Lastly, based on the first report carried out according to the Science Based Target Initiative method referred to above, the Group’s greenhouse gas emissions saw a 5.4% reduction in 2020 compared to 2019.

Regenerating resources and closing the circle: sorted waste at 65.3%; 72% of packaging recycled; -12% in water consumption

Hera regenerates resources and “closes the circle” through initiatives and projects falling into three areas: (i) transition towards a circular economy, (ii) sustainable water resource management, (iii) air, soil and biodiversity protection.
With regard to the transition to a circular economy, 2020 saw a further increase in sorted waste collection, which reached 65.3% (national 2019 average: 61.3%) and a very limited use of landfills for municipal waste disposal, coming to 3.4% (national 2019 average: 23%). In this respect, Hera is almost 20 years ahead of the EU target for a circular economy and ranks at the same level as the most virtuous European countries. Last November, Hera published the eleventh edition of its Tracking Waste report, verified by DNV-GL, thus providing citizens with a guarantee as to the actual recovery of all sorted waste collected, which comes to 92%. This report contains a ranking of the area served by Hera s regards the recycling targets defined by the EU, as part of its circular economy package. In the overall recycling rate, with 56% Hera is already over the target of 55% set for 2025, and in the packaging recycling rate, with 72% the Group has already reached the target set for 2030.
Once again concerning a circular economy, 2020 saw the material and energy recovery rate in Herambiente Spa’s selection plants come to 81%, and quantity of plastic recycled by the Aliplast Group come to approximately 69 thousand tons which. Even considering the 5% drop compared to 2019 owing to the health emergency, this is still 16% higher than 2017, the baseline of the commitments made in the aforementioned New Plastics Economy Global Commitment.
As regards sustainable water resource management, Hera’s commitment in the sewage-purification sector continued in 2020 with a multi-year plan to bring municipal agglomerates into compliance with regulations: at the end of 2020, 97.6% of these agglomerates were adequate in terms of population equivalent (as against 96.5% in 2019). Initiatives to preserve water as a resource important were also important, such as the Group’s internal water management project, which led to a 12% reduction in consumption in 2020 (compared to the 2017 baseline), agreements with local authorities that make 5% of the water leaving purification plants reusable, and the aforementioned Consumption Log that is now distributed to roughly 20% of household customers of the water service.
With regard to air protection, positive results were confirmed in the environmental performance of the Group’s waste-to-energy plants, which in 2020 as well recorded very low levels of atmospheric emissions, on average 86% lower than the legal limits, and the Imola cogeneration plant with average PM10 concentrations 99% lower than the limits. Lastly, as far as soil protection is concerned, it should be noted that in 2020 the projects carried out by HeraTech involved the soil reuse coming to 87% of total soil.

Enabling resilience and innovating: 86 million euro invested in innovation and digitisation; 2.1 billion euro in economic value distributed to local areas; local suppliers account for 65% of the total

Significant results were achieved by the Group in 2020 in areas of CSV related to developing the economy and employment in local areas, innovation and digitisation. Equally important initiatives and projects were aimed at ensuring resilience in its operating activities and therefore in the local areas served.
The overall economic value distributed to local areas amounted to 2,118 million euro, or 75% of total economic value. The amount distributed to local suppliers came to 65% of the total, reaching 740 million (+6% compared to the previous year), while indirectly generated employment is estimated at around 8,800 people; these figures confirm the leading role played by the Group in developing local areas. As regards indirectly generated employment, the 864 jobs provided for disadvantaged people should be noted, linked to supplies from social cooperatives coming to 67.1 million euro in 2020.
Investments in the area of innovation amounted to approximately 86 million euro and were related to projects in three areas: energy transition, circular economy and digital transformation. With regard to digital transformation, the 2020 Sustainability Report introduced, for 24 projects, an innovative reporting on objectives, results and impacts, based on the framework of Corporate digital responsibility, defined as the set of practices and behaviours that help an organization use data and digital technologies in an ethical and responsible manner, from a social, environmental, economic and technological point of view. In addition to digital transformation projects aimed at further optimizing operating processes to the benefit of quality, safety and continuity in services, as well as work quality and internal efficiency, further efforts were made in 2020 to develop digital channels for customer relations. At the end of 2020, the Acquologo and Rifiutologo apps reached about 622 thousand downloads and over 61 thousand photos were sent by from citizens (+2% compared to 2019), whereas the My Hera app, dedicated to residential customers, saw more than 415 thousand downloads. Digitisation in customer relations is also marked by a steady increase in practices managed through web channels: in 2020, customers taking advantage of online services rose to 28.7%, while those who requested e-billing reached 34.3%. The Group’s commitment in this area, along with the attention given to local communities, led in 2020 to launching of the fourth edition of the campaign to promote e-billing and digital behaviour in customers, called Digi e Lode, allocating an additional 125 thousand euro in economic prizes for the digitisation of local schools.
Once again regarding digitisation, the experience gained by the Group since 2017 made it possible to resiliently manage the emergency seen in 2020. From mid-2020, the number of workers permanently involved in the remote working project came to roughly 4 thousand, equivalent to 77% of total permanent employees, only excluding blue-collar workers.

The results achieved in terms of shared value generated are rounded off by those relating to the following areas, which complete the Group’s social responsibility and sustainability profile.

• Thanks to awareness raising programs and the adoption of Iso 45001 certification, which covers 86% of Group workers, in 2020 the accident frequency index showed a further decrease, reaching 12.6 (as against 14.1 in 2019). In 2020, the Hextra welfare system was used by workers for a total amount coming to over than 4.5 million euro, and 99.2% of workers took part in it. Training remains high, thanks to elements including the redesign of initiatives in digital mode: in 2020, 26 hours of training were provided per capita, of which over half remotely. The role of sustainability objectives in the balanced scorecard system, linked to the incentive system involving all management, further increased: in 2020, 35% (34% in 2019) of the variable remuneration of the Group’s executives and middle managers was linked to sustainability projects, and the weight of sustainability projects oriented towards creating shared value amounted to 23% (as against 20% in 2019).
• In 2020, a year marked by the health emergency, the quality of customer contact channels remained high: the average waiting time at the call centre settled at 33 seconds for residential customers (as against 27 in 2019), and remained at 25 seconds for business customers, even though these contacts increased by 24% and 6% respectively compared to the previous year. Average waiting time at help desks was further reduced from 9.4 minutes in 2019 to 5.4 minutes, for reasons including a 37% fall in contacts. The survey carried out in 2020 on the quality of services provided by the Group (over 9,200 interviews carried out with residential customers) showed a high customer satisfaction rate (73/100), unchanged with respect to the previous year.
• In 2020, in selecting its suppliers, the Group used the most economically advantageous offer method for 86% of public tenders and 64% of overall contracts (in terms of value). In both cases, the average score going towards social and environmental aspects came to over 40/100. Monitoring suppliers based on social responsibility towards workers continued in 2020, as did controls of accidents in the main suppliers (those involved accounted for 79% of the value of service supplies and the most relevant works in terms of occupational safety). The “circular purchases” project also continued in 2020, defining specific guidelines on this topic and identifying the technical criteria used to increase scores during tenders: eco-efficiency, dematerialization, renewability and recyclability. In 2020, the average score reserved for circularity criteria in the overall tenders awarded with the economically most advantageous offer came to 8/100 (as against 2/100 in 2019).
• Lastly, activities in communicating with local communities continued in 2020, with the introduction of HeraLABs in Modena and Forlì-Cesena, partially made possible by holding some meetings by videoconference. HeraLAB is the tool Hera offers to the areas served in order to activate a structured channel for listening and communication with local communities. Each LAB is made up of 12 representatives of local stakeholders, appointed by Hera’s Board of Directors. Activities in the Modena and Forlì-Cesena LABs will continue in 2021, and the initiatives co-designed with the Rimini and Bologna LABs will be carried out over the two-year period 2021-22.

Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)

During 2020, a path was developed to come into line with the recommendations provided by the Task Force on Climate-related Financial Disclosures (TCFD), involving the entire corporate organization, across the board. The Task Force came into being as a result of the 2015 Paris Agreement, by which the member states of the United Nations committed to keeping the increase in average global temperature below 2°C compared to pre-industrial levels, possibly limiting the increase to 1.5°C by the end of the 21st century. During the same year, the G20 Financial Stability Board (FSB) established the TCFD, with the aim of introducing greater transparency on the financial opportunities and risks associated with climate change. In 2017, the TCFD published the reporting recommendations mentioned above, which have now become an international benchmark for climate change disclosure by companies. The TCFD’s recommendations are applicable to organizations in all sectors and are classified into four areas: governance, strategy, risk management and metrics & targets.

The path initiated by the Group took shape according to three main steps:

• the establishment of a dedicated cross-functional working group;
• an in-depth analysis of gaps in the reporting system and the ways in which Hera Group manages climate opportunities and risks with respect to the recommendations;
• the definition of a working plan to increase the Group’s alignment with the TCFD’s recommendations. The first results of this had already appeared in the 2019 Sustainability Report and the specific Value to Energy report published in 2020, and were further strengthened in this Consolidated Financial Report and the 2020 Sustainability Report, which can be consulted for a comprehensive illustration of the four reporting areas, by topic.

Analysis by business area

 

An analysis of the operating results achieved in the Group’s business areas is provided below, including: the gas area, which covers services in natural gas distribution and sales, district heating and heat management; the electricity area, which covers services in generation, distribution and sales; the integrated water cycle area, which covers aqueduct, purification and sewerage services; the waste management area, which covers services in waste collection, treatment and recovery; the other services area, which covers services in public lighting and telecommunications, as well as other minor services.

The contribution to Ebitda coming from the Group’s various business areas shows a balanced mix, resilient and in line with a multi-business strategy

EBITDA DECEMBER 2020

 

The Group’s income statements include corporate headquarter costs and account for intercompany transactions at arm’s length.

The following analyses of each single business area take into account all increased revenues and costs, having no impact on Ebitda, related to the application of Ifric 12. The business areas affected by this accounting standard are: natural gas distribution services, electricity distribution services, all integrated water cycle services and public lighting services.

Gas

Ebitda rises

Growth was seen in 2020 over the previous year, in terms of both Ebitda and volumes sold. This result was mainly achieved thanks to commercial development linked to the Ascopiave Group partnership transaction, which saw the Hera Group acquire the companies belonging to the EstEnergy Group and AmgasBlu Srl in exchange for a distribution branch in the Veneto region (concerning the Padua1, Padua2, Udine3 and Pordenone Atems) and was able to offset the negative effects of the Covid-19 pandemic. Lastly, in tenders for the period going from 1 October 2020 to 30 September 2021, Hera Comm Spa was awarded:

• eight of the nine portions of the last resort gas service (for customers providing public services or those without a supplier): Valle d'Aosta, Piedmont, Liguria, Lombardy, Trentino Alto Adige, Veneto, Friuli-Venezia-Giulia, Emilia-Romagna, Tuscany, Umbria, Marche, Abruzzo, Molise, Basilicata, Puglia, Lazio e Campania. In the previous tender, Hera Comm had been awarded four portions out of nine;
• five of the nine portions of the default gas distribution service (for customers in arrears): Valle d'Aosta, Piedmont, Liguria, Lombardy, Friuli-Venezia-Giulia, Emilia-Romagna, Tuscany, Umbria, Marche, Abruzzo, Molise, Basilicata e Puglia. In the previous tender, Hera Comm had been awarded two portions out of nine.

GAS AREA EBITDA 2020

GAS AREA EBITDA 2019

+3.5% increase in Ebitda

The following table shows the changes occurred in terms of Ebitda:

(mn€)	Dec 20	Dec 19	Abs. change	% change
Area Ebitda	374.4	341.6	32.8	+9.6%
Group Ebitda	1,123.0	1,085.1	37.9	+3.5%
Percentage weight	33.3%	31.5%	+1.8 p.p.

CUSTOMERS (mgl)

The number of gas customers rose by 26.8 thousand, up 1.3% over the previous year. The new portions awarded through tenders accounted for 62 thousand new customers, which more than offset the drop in the free market customer base, coming to roughly 35 thousand customers.

VOLUMES SOLD (mn m³)

 

The overall volume of gas sold increased by 3,395.4 million m³ or 34.5%. Trading volumes showed growth coming to 2,600.7 million m³ or 34.5% due to higher foreign trading. Volumes sold to end customers rose by 34.5% or 794.8 million m³ compared to 2019, thanks to the contribution coming from the EstEnergy Group companies and AmgasBlu Srl, which amounted to 812.6 million m³. This growth was partially offset by a 17.9 million m³ drop in traditional and last resort markets, mainly due to the mild winter, with average temperatures 3% higher than in 2019, and the negative effects of the Covid-19 emergency.

The following table summarises operating results for the gas area:

Income statement (mn€)	Dec 20	% inc.	Dec 19	% inc.	Abs. change	% change
Revenues	3,361.3		2,971.9		389.4	+13.1%
Operating costs	(2,883.4)	(85.8)%	(2,529.2)	(85.1)%	354.2	+14.0%
Personnel costs	(116.5)	(3.5)%	(114.1)	(3.8)%	2.4	+2.1%
Capitalised costs	13.0	+0.4%	13.0	0.4%	‐	+0.0%
Ebitda	374.4	11.1%	341.6	11.5%	32.8	+9.6%

REVENUES (mn€)

Revenues showed growth coming to 389.4 million euro, up 13.1% over the previous year. The reasons for this mainly lie in higher revenues due to the acquisition of the companies belonging to the EstEnergy Group and AmgasBlu Srl, coming to 450.3 million euro, a higher amount of trading amounting to roughly 20.0 million euro and higher revenues from the heat management business involving incentives for insulation coming to roughly 45 million euro.

This growth was limited by lower revenues caused by the lower price of gas as a raw material, coming to roughly 73.6 million euro, in line with the annual average trend of the Cmem tariff component, which fell by 34% compared to 2019, and the lower volumes of gas sold and district heating, coming to roughly 23 million euro, due to the negative effects involving temperatures and the Covid-19 emergency, as mentioned above.

Energy efficiency certificates fell by roughly 10.0 million euro, as did regulated revenues for distribution, coming to 23.9 million euro, on account of the PD1, PD2, UD3 and PN ATEMs, transferred to Ascopiave.
Excluding changes in the scope of operations, regulated revenues rose by 0.7 million euro. From a regulatory point of view, indeed, note that 2020 was the first year of the 5th regulatory period (approved with resolution 570/2019/R/Gas), which calls for a significant reduction in recognition for operating costs, in addition to a reduction in Wacc for measurement (brought in line with the one for distribution), which were however more than offset by updates in the RAB for new investments, sums owed pertaining to previous periods and other minor regulatory effects.

The increased revenues were proportionally reflected by growth in operating costs, which rose by 354.2 million euro overall. This trend is mainly due to changes in the scope of operations, as mentioned above, higher activities in heat management and in trading.
 

EBITDA (MN€)

 

Ebitda rose by 32.8 million euro or 9.6%, thanks to the entry of the companies belonging to the EstEnergy Group and AmgasBlu Srl and the heat management business for insulation incentives, which offset the lower volumes of gas sold and lower earnings in district heating, due to the mild temperatures and the negative effects of the Covid-19 emergency; the latter were responsible for a 15.7 million euro reduction in Ebitda

NET INVESTMENTS GAS  (mn€)

In 2020, net investments in the gas area amounted to 134.1 million euro, down 4.2 million euro compared to the previous year. In gas distribution, an overall reduction coming to 3.2 million euro was seen, mainly due to lower investments in the AcegasApsAmga Spa gas distribution branch concerning the Padua 1, Padua 2, Udine 3 and Pordenone ATEMs, transferred as of 31 December 2019 as part of the Ascopiave transaction, and lower interventions in the areas served by Marche Multiservizi Spa. Investments by Inrete Distribuzione Energia Spa increased, mainly due to higher interventions for the large-scale meter substitution (resolution 554). In gas sales, investments coming to 9.0 million euro were linked to acquiring new customers, up 0.7 million euro over the previous year. Investments fell by 0.6 million euro in district heating and heat management services, with a reduction in Hera Spa’s district heating and an increase in the activities of the companies Hera Servizi Energia Srl and AcegasApsAmga Servizi Energetici Spa. Requests for new connections were lower than in the previous year in gas distribution, mainly due to the transfer of the AcegasApsAmga Spa branch and in district heating.

Details of operating investments in the gas area are as follows:

Gas (mn€)	Dec 20	Dec 19	Abs. change	% change
Networks and plants	99.9	103.1	(3.2)	(3.1)%
Acquisition gas customers	9.0	8.3	0.7	+8.4%
DH/heat management	26.3	26.9	(0.6)	(2.2)%
Total gas gross	135.3	138.3	(3.0)	(2.2)%
Capital grants	1.2	0.0	1.2	+100.0%
Total gas net	134.1	138.3	(4.2)	(3.0)%

RAB (bn€)

Electricity

At the end of 2020, Ebitda for the electricity area rose compared to the previous year, thanks to the Ascopiave Group partnership and the acquisition of companies belonging to the EstEnergy Group and AmgasBlu Srl and earnings coming from electricity generation, despite the negative effects caused by the Covid-19 pandemic.
 

EBITDA ELECTRICITY AREA 2020

EBITDA ELECTRICITY AREA 2019

 

The following table shows the changes occurred in terms of Ebitda:

(mn€)	Dec 20	Dec 19	Abs. change	% change
Area Ebitda	188.2	178.5	9.7	+5.5%
Group Ebitda	1,123.0	1,085.1	37.9	+3.5%
Percentage weight	16.8%	16.4%	+0.4 p.p.

CUSTOMERS (k)

The number of electricity customers increased by 3.5% (44.8 thousand customers) compared to 2019. This growth came about on the free market, coming to 5.4%, owing to the reinforced marketing initiatives introduced, and succeeded in offsetting the drop in protected customers, while safeguarded customers remained in line with the previous year.

VOLUMES SOLD (GWH)

Results for volumes of electricity sold were essentially in line with the previous year. This trend is mainly due to a fall in safeguarded volumes coming to 440.3 GWh, equivalent to 3.4% of total volumes sold, mainly due to the Covid-19 emergency, and in traditional markets, amounting to 205.9 GWh or 1.6%, entirely offset by the corporate acquisitions mentioned above, which contributed with 636.7 GWh, equivalent to 5.0%.

The following table summarises operating results for the area:

Income statement (mn€)	Dec 20	% inc.	Dec 19	% inc.	Abs. change	% change
Revenues	2,315.9		2,590.4		(274.5)	(10.6)%
Operating costs	(2,090.3)	(90.3)%	(2,376.1)	(91.7)%	(285.8)	(12.0)%
Personnel costs	(48.7)	(2.1)%	(45.0)	(1.7)%	3.7	8.2%
Capitalised costs	11.3	0.5%	9.1	0.4%	2.2	24.2%
Ebitda	188.2	8.1%	178.5	6.9%	9.7	5.5%

REVENUES (MN€)

 

Revenues decreased by 234.3 million euro, or 12.1%, compared to 2020. The main reasons for this include lower revenues from trading coming to 85 million euro, the lower price of raw materials coming to roughly 60 million euro and lower revenues from generation amounting to roughly 33.0 million euro. All these effects are partly linked to the average annual trend in the PUN, which fell by 24% compared to the previous year.
Moreover, the negative effects of the Covid-19 emergency confirmed the reduction in volumes sold, as mentioned above, which generated lower revenues coming to approximately 56 million euro and lower revenues from off-grid transmission and system charges amounting to 154 million euro, with an equal effect on costs. This decrease was only partly offset by higher revenues coming from the acquisition of the companies belonging to the EstEnergy Group and AmgasBlu Srl, coming to approximately 116 million euros.

Regulated revenues increased by 1.5 million euro compared to 2019. This increase was made possible by changes in tariffs related to Capex updates, the recognition of prior accruals and other minor regulatory effects. These positive effects were only partially offset by the lower operating costs recognized in the 2020-2023 regulatory semi-period defined by resolution 568/2019.
Lastly, contributions for energy efficiency certificates were down by approximately 3.0 million, as mentioned in the previous chapters.

The decrease in revenues was proportionally reflected in operating costs, which showed a decrease coming to 285.8 million euro. This trend is mainly due to the lower price of raw materials and lower volumes, despite the growth due to changes in the scope of operations.

 

EBITDA (MN€)

Ebitda for the year rose by 9.7 million euro or 5.5%, due to higher earnings coming from the entry of the companies belonging to the EstEnergy Group and AmgasBlu Srl and electricity generation activities in the dispatching service market, which offset the lower volumes and earnings due to the Covid-19 emergency, with an overall impact in lower earnings coming to 8.4 million euro.

In the electricity area, 2020 investments came to 47.7 million euro, up 4.3 million euro compared to the previous year.
The interventions carried out mainly involved non-recurring maintenance on plants and distribution networks in the Modena, Imola, Trieste and Gorizia areas.
Compared to the previous year, a 3.5 million euro increase was seen in electricity distribution, and a 0.9 million euro increase in energy sales, for activities linked to acquiring new customers. Requests for new connections also increased compared to the previous year.
 

NET INVESTMENTS ELECTRICITY (MN€)

Operating investments in the electricity area were as follows:

Electricity (mn€)	Dec 20	Dec 19	Abs. change	% change
Networks and plants	31.4	27.9	3.5	+12.5%
Acquisition electricity customers	16.4	15.5	0.9	+5.8%
Total electricity gross	47.7	43.4	4.3	+9.9%
Capital grants	‐	‐	‐	+0.0%
Total electricity net	47.7	43.4	4.3	+9.9%

 

RAB (BN€)

Integrated water cycle

Slight growth in results for 2020

In 2020, the integrated water cycle area showed slight growth in results compared to the previous year, with an increase in Ebitda coming to 0.2%. As regards regulations, note that 2020 is the first year in which the tariff method defined by the Authority for the third regulatory period (Mti-3), 2020-2023 (resolution 580/2019), is applied. A revenue (VRG) is assigned to each operator, defined on the basis of operating costs and capital costs according to the investments made, with a view to increasing efficiency in costs, in addition to measures intended to promote and valorise interventions for sustainability and resilience.
 

EBITDA WATER CYCLE AREA 2020

EBITDA WATER CYCLE AREA 2019

The following table shows the changes occurred in terms of Ebitda:

(mn€)	Dec 20	Dec 19	Abs. change	% change
Area Ebitda	265.8	265.3	0.5	+0.2%
Group Ebitda	1,123.0	1,085.1	37.9	+3.5%
Percentage weight	23.7%	24.5%	(0.8) p.p.

CUSTOMERS (K)

The number of customers rose compared to the previous year by 3.0 thousand or 0.2%, confirming the moderate trend towards internal growth seen in the Group’s reference areas, mainly in the Emilia-Romagna region managed by Hera Spa.

285.9 million m³: quantity managed in the aqueduct

QUANTITY MANAGED 2020 (mn m3)

QUANTITY MANAGED 2019 (mn m3)

The volumes supplied through the aqueduct settled at 285.9 million m³ and showed a slight decrease coming to 1.2% compared to 2019, corresponding to 3.5 million m³. In December 2020, the quantity managed relating to sewerage came to 240.8 million m3, down 2.3% compared to the previous year, while purification stood at 236.7 million m³, with a slight decrease coming to 1.8% compared to 2019. The volumes supplied, following the Authority’s resolution 580/2019, are an indicator of the activity of the areas in which the Group operates and are subject to equalisation, owing to legislation that call for a regulated revenue to be recognised independently from volumes distributed.

ELECTRICITY CONSUMED (GWh)

Electricity consumed in plants dropped by 14.4 GWh. This decrease is mainly linked to the lower volumes supplied in 2020, as described above.

An overview of operating results for the water area is provided in the table below:

Income statement (mn€)	Dec 20	% inc.	Dec 19	% inc.	Abs. change	% change
Revenues	883.6		911.9		(28.3)	(3.1)%
Operating costs	(439.8)	(49.8)%	(471.8)	(51.7)%	(32.0)	(6.8)%
Personnel costs	(183.7)	(20.8)%	(179.9)	(19.7)%	3.8	+2.1%
Capitalised costs	5.8	0.7%	5.2	0.6%	0.6	+11.6%
Ebitda	265.8	30.1%	265.3	29.1%	0.5	+0.2%

REVENUES (mn€)

Of this decrease in revenues, 17.0 million euro overall was due to lower revenues for subcontracts and works on behalf of third parties carried out in 2020. Also note the lower other revenues, coming to approximately 0.9 million euro, mainly related to contributions received to cover extraordinary costs for the 2017 water emergency, recognized in 2019. Revenues from supply showed a decrease coming to 11.1 million euro, mainly due to the reduction in the equalization costs for electricity and water as a raw material, partially offset by the tariff adjustment in the new method, Mti-3.

The reduction in operating costs in December 2020 is mainly due to lower costs related to the lesser works, described above under revenues, for a total of 17.0 million euro. Furthermore, lower costs were seen for water as a raw material and electricity, coming to approximately 13.5 million euro, while the remainder consisted in lower operating costs for network and plant management, coming to roughly 1.4 million euro.

 EBITDA (mn€)

Ebitda grew slightly, by 0.2%. The negative effects on business caused by the Covid-19 emergency led on the whole to a 1.6 million euro drop in Ebitda, consisting in lower new connections, customer requests and subcontracted works, offset by the efficiency initiatives introduced by the Group.

In 2020, net investments in the integrated water cycle area amounted to 143.3 million euro, down 8.2 million euro compared to the previous year. Including the capital grants received, the investments made amounted to 166.2 million euro, down 9.6 million euro.
These investments mainly refer to extensions, reclamation and network and plant upgrading, as well as regulatory adjustments, especially in the purification and sewerage sectors.
Investment amounted to 98.8 million euro in the aqueduct, 39.1 million euro in sewerage and 28.2 million euro in purification treatment.

NET INVESTMENTS WATER CYCLE (mn€)

Among the main interventions, note: in the aqueduct, increased reclamation activities on networks and connections, partially linked to Arera resolution 917/2017 on regulating technical quality in the integrated water service; upgrading and renewal for abductors in two municipalities in the Bologna area; earthquake-proof upgrading and redevelopment of hanging tank areas; in sewerage, the progress on the important works for the seawater protection plan in Rimini continued, although in 2020 a lower impact of the interventions pertaining to Hera is expected than in the previous year. Maintenance interventions continued in sewerage network upgrading for other areas served, as did works for drain upgrading pursuant to Dgr 201/2016; in purification, note the upgrading on the Lido di Classe and Lugo purifiers, creating the rain line, and revamping the Ferrara purifier.
Requests for new water and sewer connections were up compared to the previous year.
Capital grants amounted to 22.9 million euro, including 13.6 million euro linked to the tariff component of the tariff method for the New Investment Fund (FoNI), and were down 1.3 million euro compared to the previous year.

Details of operating investments in the integrated water cycle area are as follows:

Integrated water cycle (mn€)	Dec 20	Dec 19	Abs. change	% change
Aqueduct	98.8	99.7	(0.9)	(0.9)%
Purification	28.2	27.7	0.5	+1.8%
Sewerage	39.1	48.3	(9.2)	(19.0)%
Total integrated water cycle gross	166.2	175.8	(9.6)	(5.5)%
Capital grants	22.9	24.2	(1.3)	(5.4)%
of which FoNI (New Investments Fund)	13.6	13.4	0.2	+1.5%
Total integrated water cycle net	143.3	151.5	(8.2)	(5.4)%

RAB, which defines the value of the assets recognised by the Authority as regards return on invested capital, increased compared to 2019

RAB (bn€)

Waste management

Ebitda drops

In 2020, the waste management area accounted for 23.0% of the Hera Group’s Ebitda, with its own Ebitda falling compared to 2019, since 2020 felt the negative effects of the Covid-19 epidemic. The ensuing and necessary restrictive measures concerning people, and the closure of most commercial and industrial activities during the lockdown, led to a decrease in waste production and, with regard to the plastic waste recovery and recycling market, a drop in demand for recycled plastic materials as well as a fall in the prices of recycled products. In this extraordinary context, the Hera Group was able to react promptly and make its professionalism available to the communities in the areas served, and to its customers, to overcome the emergency together. The size and variety of its customer portfolio, along with the finalisation of commercial partnerships, allowed all waste treatment plants to operate at full capacity. The protection of environmental resources was confirmed as a priority objective in 2020, as was the maximization of their reuse; this is demonstrated by the particular attention dedicated to increasing sorted waste collection, which was up by almost one percentage point compared to December 2019.

EBITDA WASTE MANAGEMENT AREA 2020

EBITDA WASTE MANAGEMENT AREA 2019

The following table shows the changes occurred in terms of Ebitda:

(mn€)	Dec 20	Dec 19	Abs. change	% change
Area Ebitda	258.0	264.2	(6.2)	(2.3)%
Group Ebitda	1,123.0	1,085.1	37.9	+3.5%
Percentage weight	23.0%	24.3%	(1.3) p.p.

Volumes marketed and treated by the Group in 2020 are as follows:

Quantity (k tons)	Dec 20	Dec 19	Abs. change	% change
Municipal waste	2,219.1	2,347.8	(128.7)	(5.5)%
Market waste	2,187.6	2,211.1	(23.5)	(1.1)%
Waste commercialised	4,406.7	4,558.9	(152.2)	(3.3)%
Plant by-products	2,203.2	2,616.2	(413.0)	(15.8)%
Waste treated by type	6,609.9	7,175.1	(565.2)	(7.9)%

An analysis of this data shows a drop in waste commercialised, due to decreases in both municipal waste and market waste. As regards municipal waste, 2020 saw a drop coming to 5.5%, with sorted and sandy shore quantities falling in particular, along with unsorted waste.

Market volumes showed a slight decrease compared with the previous year, due to the lower activity caused by the Covid-19 health emergency.

Lastly, plant by-products fell compared to the previous year, due to both lower quantities processed and lower rainfall.

SORTED WASTE (%)

Further progress was made in sorted municipal waste, which increased by 0.7 percentage points compared to the previous year. At December 2020, sorted waste rose by 0.7 p.p. in Emilia-Romagna, in the Triveneto region growth settled at 0.7 p.p., while in the Marche region growth came to 0.9 p.p.

The Hera Group operates in the entire waste cycle, with 93 plants used for municipal and special waste treatment and plastic material regeneration. The most important of these include: nine waste-to-energy plants, 12 composters/digesters and 14 selecting plants.
The care and attention given to the set of plants was a distinctive element of the Group's desire for excellence in 2020 as well: two new revamping projects for existing plants intended to produce biomethane were defined and the second cycle began in modernising three of the Group’s waste-to-energy plants.

 

WASTE TREATED BY TYPE OF PLANT 2020

WASTE TREATED BY TYPE OF PLANT 2019

Quantity (k tons)	Dec 20	Dec 19	Abs. change	% change
Landfills	677.4	663.5	13.9	+2.1%
WTE	1,275.4	1,259.9	15.5	+1.2%
Selecting plants and other	530.7	572.8	(42.1)	(7.3)%
Composting and stabilisation plants	509.4	506.1	3.3	+0.7%
Inertisation and chemical-physical plants	1,208.4	1,600.2	(391.8)	(24.5)%
Other plants	2,408.7	2,572.7	(164.0)	(6.4)%
Waste treated by plant	6,609.9	7,175.1	(565.2)	(7.9)%

Waste treatment showed an overall decrease coming to 7.9% compared to December 2019. In this regard, note the higher quantities in landfills due to the full activity of the Loria and Serravalle Pistoiese landfills. In the set of the waste-to-energy plants, the trend was mainly due to a different scheduling of plant shutdowns and planned maintenance compared to the same period in 2019, along with an increase in waste delivered. The decreased quantities in sorting plants is due to the lower quantities processed, mainly in the Rimini and Bologna plants. In composting and stabilization plants, volumes remained essentially the same. The lower quantities in inertisation and chemical-physical plants sector are mainly due to a reduction in leachate from landfills, due to the lower rainfall, and the reduced activity related to the health emergency. Finally, the decrease in the other plants sector was mainly due to a reduction in by-products, mainly wastewater, treated in third-party plants.

Ebitda falls

The table below summarises the area’s operating results:

Income statement (mn€)	Dec 20	% inc.	Dec 19	% inc.	Abs. change	% change
Revenues	1,190.3		1,190.5		(0.2)	(0.0)%
Operating costs	(740.2)	(62.2)%	(733.5)	(61.6)%	6.7	+0.9%
Personnel costs	(203.6)	(17.1)%	(201.2)	(16.9)%	2.4	+1.2%
Capitalised costs	11.4	1.0%	8.4	0.7%	3.0	+35.6%
Ebitda	258.0	21.7%	264.2	22.2%	(6.2)	(2.3)%

REVENUES (mn€)

Revenues were essentially in line with the previous year. Revenues from electricity production were lower as a result of both the loss of energy incentives for one plant and a drop in market and thermal energy prices, despite higher production in WTE. Also note the lower contribution from Aliplast Spa, resulting from both a decrease in products sold and the incentives received the previous year as an energy-intensive company. Finally, note the the decrease in reclamation and the drop in volumes treated, despite the higher revenues linked to increasing commercial activities and trading. These negative effects were only partly offset by the positive trend in the prices of special waste and higher revenues from increased sorted waste in the municipal waste collection service.

Operating costs in December 2020 rose by 0.9%. Higher costs were seen for increasing commercial activities and treating by-products and, as regards municipal waste, higher costs were linked to the developing new sorted waste collection projects. This growth was offset by the lower costs of scheduled maintenance on the Group’s plants, lower costs related to the lower volumes treated and a reduction in reclamation activities. In addition, a decrease was seen in the purchasing costs on the PET incurred by Aliplast Spa, related to the trend revenues mentioned above.

 

EBITDA (mn€)

 

The decrease in Ebitda is due to lower revenues from electricity generation, only partly offset by higher prices for special waste treatment. The overall impact of the Covid-19 epidemic, consisting in lower volumes treated, lower earnings from plastic recovery, despite the containment actions implemented by the Group during the national lockdown, amounted to a 4.4 million euro drop in Ebitda.

Net investment in the waste management area regarded maintenance and upgrading in waste treatment plants and amounted to 67.6 million euro, down 13.9 million euro compared to the previous year.
The composting/digesters sector showed a 3.6 million euro drop, due to the significant interventions carried out the previous year on the composting plant in Sant’Agata Bolognese for the construction of the biomethane plant that became fully operational in 2019, as well as other interventions including upgrading the mechanical biological treatment plant in Tre Monti.
Investments in landfills fell by 6.3 million euro, due to the interventions carried out in 2019 on Cordenons, the tenth sector of the Ravenna landfill and the plants belonging to Marche Multiservizi Spa, only partially offset by the works started in 2020 on the Il Pago plant.
Investments in the WTE sector were in line with the previous year and concerned non-recurring maintenance on the main plants in this area.
Investments in the industrial waste plants sector increased by 2.1 million euro compared to the previous year and mainly concerned revamping on the F3 plant in Ravenna and work on the Tapo plant (organic production water treatment), once again in Ravenna.
The ecological areas and collection equipment sector saw investments fall by 2.6 million euro compared to the previous year, mainly in the areas served by AcegasApsAmga Spa, while the 3.0 million euro drop in the selection and recovery plants sector was mainly due to the higher investments made in the previous year by Aliplast Group and the completion in 2019 of the mobile soil washing plant in Chioggia.

NET INVESTMENTS WASTE MANAGEMENT (mn€)

 

Details of operating investments in the waste management area are as follows:

Waste management (mn€)	Dec 20	Dec 19	Abs. change	% change
Composters/digesters	4.7	8.3	(3.6)	(43.4)%
Landfills	10.8	17.1	(6.3)	(36.8)%
WTE	14.0	14.0	‐	+0.0%
RS plants	6.6	4.5	2.1	+46.7%
Ecological areas and collection equipment	14.4	17.0	(2.6)	(15.3)%
Transshipment, selecting and other plants	17.9	20.9	(3.0)	(14.4)%
Total waste management gross	68.3	81.8	(13.5)	(16.5)%
Capital grants	0.7	0.3	0.4	+133.3%
Total waste management net	67.6	81.5	(13.9)	(17.1)%

 

Other services

Ebitda rises

The other services area covers all minor businesses managed by the Group, including public lighting, in which the Hera Group’s efforts go towards planning, constructing and maintaining lighting structures, leading to safety across the areas served through avant-garde technologies and constant attention towards the circular economy and sustainability, telecommunications, in which the Group offers connectivity for private customers and companies, telephone and Data Centre services through its own digital company, and lastly cemetery services. In 2020, results in this area were up by 3.4%, corresponding to 1.2 million euro.

 

OTHER SERVICES EBITDA 2020

OTHER SERVICES EBITDA 2019

The changes occurred in terms of Ebitda are as follows:

(mn€)	Dec 20	Dec 19	Abs. change	% change
Area Ebitda	36.7	35.5	+1.2	+3.4%
Group Ebitda	1,123.0	1,085.1	+37.9	+3.5%
Percentage weight	3.3%	3.3%	‐

571.3 thousand lighting points

The following table shows the area’s main indicators as regards public lighting services:

Quantity	Dec 20	Dec 19	Abs. change	% change
Public lighting
Lighting points (k)	571.3	548.7	+22.6	+4.1%
of which LED	35.1%	27.5%	+7.6	+0.0%
Municipalities served	188.0	181.0	+7.0	+3.9%

During 2020, the Hera Group acquired approximately 24.3 thousand lighting points in 10 new municipalities. The most significant acquisitions were: roughly 8.3 thousand lighting points in Lombardy, roughly 9.1 thousand lighting points Friuli-Venezia Giulia, roughly 1.1 thousand lighting points Sardinia and roughly 3.4 thousand lighting points in regions of central Italy. Lastly, more lighting points were managed in municipalities already served coming to roughly 2.4 thousand lighting points. The increases seen during the year fully offset the loss of approximately 1.7 thousand lighting points and 3 municipalities managed in Friuli-Venezia Giulia.

The percentage of lighting points using LED bulbs also rose, settling at 35.1%, up 7.6 percentage points. This performance highlights the Group’s constant focus on an increasingly efficient and sustainable management of public lighting.

Among the quantitative indicators of the other services area, also note the 4,300 km of proprietary ultra-wideband fibre-optic network owned by Hera Group through its digital company Acantho Spa. This network serves the main cities in Emilia-Romagna, Padua and Trieste, offering businesses and private customers high-performance connectivity with outstanding reliability, system and data security and service continuity.

The area’s operating results are provided in the table below:

Income statement (mn€)	Dec 20	% inc.	Dec 19	% inc.	Abs. change	% change
Revenues	147.1		148.1		(1.0)	(0.7)%
Operating costs	(92.0)	(62.5)%	(94.3)	(63.7)%	(2.3)	(2.4)%
Personnel costs	(20.3)	(13.8)%	(20.2)	(13.7)%	0.1	+0.5%
Capitalised costs	1.8	1.2%	2.0	1.4%	(0.2)	(10.0)%
Ebitda	36.7	24.9%	35.5	24.0%	1.2	+3.4%

REVENUES (mn€)

The slight fall in revenues is mainly due to public lighting and largely involves the changed price of electricity in management fees (with a pass-through effect on costs) and balances for sums dating to the previous year, partially offset by recovery in the works carried out by Hera Luce. This decrease was only partially offset by higher revenues in the telecommunications business, due to increased requests for IT security services, connectivity, IT support and smart devices, partially due to an increase in remote working in client companies.

The contained operating costs were primarily due to the changed price of electricity, as mentioned above, only partly offset by increased progress on public lighting works.
 

EBITDA (mn€)

The growth in Ebitda was due to higher earnings in telecommunications services, which fully offset the lower contribution from lighting and the negative effects of the Covid-19 pandemic, which led to a decrease in earnings coming to 1.3 million euro.

In 2020, investments in the other services area totalled 11.1 million euro, down 4.9 million euro compared to the previous year.
In telecommunications, 8.1 million euro were invested in the network and in TLC and IDC (Internet data centre) services, down 2.0 million euro compared to the previous year. In the public lighting service, investments totalling 3.0 million euro involved maintenance, upgrading and modernization works on lighting systems in the areas served, falling compared to the previous year, mainly due to the different accounting of public lighting contracts under IFRIC 12.

 

NET INVESTMENTS OTHER SERVICES (mn€)

Details of operating investments in the other services area are as follows:

Other services (mn€)	Dec 20	Dec 19	Abs. change	% change
TLC	8.1	10.1	(2.0)	(19.8)%
Public lighting and traffic lights	3.0	5.9	(2.9)	(49.2)%
Total other services gross	11.1	16.0	(4.9)	(30.6)%
Capital grants	‐	‐	‐	+0.0%
Total other services net	11.1	16.0	(4.9)	(30.6)%

 

Covid-19 emergency management

 

For more than a year now, owing to the Coronavirus pandemic that struck the entire planet, new challenges have arisen for people, institutions and companies. These new demands primarily involve protecting people’s health, but also the economy due to the effect on production, as well as social issues due to the sudden change in people’s lives and habits.

At the very beginning of the health emergency, the Group adopted a structured and organic crisis management model, counting on its resilience in every strategic area and proactively committing itself to constantly updating its operational plans according to the evolving situation. This was done to ensure compliance with all measures aimed at service and safety, provide continuous information to company personnel and stakeholders, and implement all containment initiatives intended to reduce the economic and financial impact. Regarding this latter aspect, management provided itself with weekly reports that, by way of specific indicators, made it possible to monitor business performance in relation to the impact of the pandemic on the socio-economic fabric in which the Group operates. In these reports, the focus went on the one hand to quantitative business data (consumption recorded, volumes managed, services provided) that, with their fluctuations, offered the best indication of economic trends in the industrial sector, and on the other to data relating to customer management, to better understand the financial factors related to liquidity risk. This continuous monitoring enabled management to promptly take the necessary corrective actions to mitigate or offset the negative effects deriving from the crisis. The Group was also able to seize a number of opportunities from the crisis, especially in terms of a digital transformation in services and processes, while at the same time managing the consequent emerging risks, especially in the area of IT security.

For each key area impacted by the crisis, the actions taken by the Group to deal with the health emergency and adapt to the new context in which its operating processes must be carried out are outlined below.

Service continuity and stakeholder relations

In order to guarantee continuity in essential services for citizens, in compliance with safety, reliability and efficiency criteria, programs for network and plant operations and maintenance were reviewed. Only those that could not be postponed were carried out, and those that were not essential, according to the limitations provided by emergency regulations, were delayed. Physical contacts were limited to activities essential for service continuity and those for which the physical presence of personnel is concretely necessary. In accordance with government regulations, help desks were closed during the most critical periods of the emergency. During these periods, however, the Group always ensured service continuity for customers, via pre-existing phone and digital channels, which were reinforced. When help desks were reopened, adequate prevention and protection measures were put in place for workers and users.
Based on agreements with Municipal Administrations, targeted street sanitation interventions were carried out and dedicated services for collecting waste produced by Covid-19 positive or quarantined citizens were introduced. In the case of door-to-door collection, the possibility to request additional service was provided. For people in isolation, following the indications of the municipalities served, a household collection service was introduced with specialized suppliers.
The Group was also involved in an experimental project launched by the National Health Institute to detect the presence of Covid-19 in municipal sewage, in order to search for and measure the concentration of the virus in the samples collected, and thus monitor and give indications as to the spread of the epidemic. The Group also collaborated actively with Utilitalia, to provide the Civil Protection and the Ministry of Health with the data necessary to quantify the amount of vaccine to be dedicated to all employees of Italian multi-utilities who provide essential public services.

In order to prevent critical issues from arising along the supply chain, a number of essential categories for the Group’s activities were identified and monitoring indicators were introduced. Suppliers working with the Group were required to adopt the same safety measures for their employees as those already identified by Hera. Criteria for accessing sites continued to be demanding, limited to situations of necessary. In order to support small and medium-sized companies having credits for supplies or services, and allow these companies to have an additional source of financing, the Group continued to be willing to pay receivables owed by it, providing all support necessary to complete the related factoring operations. Moreover, as of the second half of 2020, the Group granted advance payment for the amounts contracted to suppliers who were awarded tenders.

Customers were encouraged to use digital channels, for meter readings as well. Arera adopted specific regulatory measures to protect electricity, gas and integrated water service users (for further details see the section “Businesses and regulations” in paragraph 1.01 “Contexts and trends”). The Group had in any case decided to act in advance, granting instalment payments to all customers receiving unemployment benefits or income support measures, and owners of businesses closed due to national or local regulations. Nevertheless, the delayed payments granted did not have a negative impact on the Group’s liquidity, thanks to credit management and a considerable improvement in the time required to collect receivables when due.

Health and safety

In implementation of the national protocol signed by the social partners and the government, a regulatory document was developed containing a set of prevention and protection measures adopted to counter the spread of the virus. This document was subject to various evaluations by the competent authorities (Local health authorities/Labour inspectorate), who confirmed the validity of its contents, and was then presented to and signed by the national trade unions on 15 May 2020. This protocol is continuously updated based on changes in the pandemic, in order to keep it always consistent with the development of the national regulatory framework and the evolution of prevention and protection measures.
As regards the specific nature of its business and its local presence, the Group established criteria for identifying risk scenarios caused by the spread of the Covid-19 virus, from an Enterprise Risk Management point of view. These criteria, along with the measures defined in the Group’s protocol, were used to update the risk assessment document. The choice of having a single Group model for assessing of risks and defining prevention and protection measures made it possible to follow an integrated and synergic approach. After the protocol was drawn up, the measures adopted and their implementation were indeed periodically monitored. In this regard, a specific checklist was developed allowing the heads of the various organizational units to periodically monitor the situation. As of the date on which this report was prepared, roughly 5 thousand checklists have been completed and managed.
Respecting the indications provided by health authorities, and in order to safeguard and protect employees, a specific procedure was defined for managing workers with specific fragilities, i.e. those with current or previous illnesses that make them susceptible to particularly serious consequences in the event of infection. This procedure was developed in a collaboration with medical authorities and in full respect of privacy. In order to immediately interrupt any chains of transmission of the virus on the workplace, rapid tests were carried out to identify any asymptomatic positive carriers. 42 accredited laboratories were identified in the areas where the Group operates and could be activated if necessary, with the active collaboration of the appropriate doctors. The measures introduced by the Group since the onset of the pandemic proved to be effective in limiting the spread of the virus among employees, as shown by the fact that the incidence rate (number of cases per thousand people) in the Hera Group was about 15% lower than the amount found among the overall population of Northern Italy.
Additional cleaning and sanitization of company premises (compared to regular standards) was carried out using disinfectants, and the frequency of these activities was increased. All staff on external service were constantly provided with the personal protection equipment needed to deal with the health emergency (e.g. respiratory protection masks, disinfectant gels, disposable gloves and overalls). Disinfectant gel dispensers were introduced in company offices, at entrances and near communal areas, and a supply of surgical masks was given to each employee. In company cafeterias and other shared areas, behavioural norms were defined that provided for staggered entries and a specific logistics for space management that allowed for an appropriate distancing between people.
Additionally, methods for carrying out on-field services were defined, introducing health safety standards for workers, including reduced travelling (including the extension of the “vehicle at home” program for maintenance workers) and the elimination of the use of locker rooms or, where this was not possible, revised work shifts to reduce overlap between operating units.
Lastly, Hera introduced a Covid-19 insurance policy for all employees infected by the virus, with all costs covered by the company. This policy provides, as additional benefits, a package of guarantees and services and, in particular, provides hospitalization indemnity, recovery indemnity and post-hospitalization assistance.

Work organization and technology

The intensive use of alternative work and communication tools made necessary by the pandemic raised a major challenge for the Group, which immediately set itself the objective of enabling thousands of its employees to continue working remotely, in order to ensure service continuity, but also to allow them to more easily manage their private lives. Making the most of the experience previously gained in remote working for hundreds of its employees, the Group was able to extend this program by effectively addressing its significant technical and organizational impact, in compliance with IT security requirements and without interrupting work activities. More specifically, remote working was confirmed as a structural element of the company’s work organization, and training was aimed at further encouraging an agile corporate culture, based on flexibility, delegation skills, activity planning and remote collaboration. This strategic approach made it possible to additionally extend remote working, understood as the possibility of working from one’s own home or, more generally, in a place other than the assigned headquarters, for two days a week, in a structural way.

In order to ensure the security of information systems, controls on virtual private network (VPN) access were increased and more in-depth automated controls are constantly being introduced. However, the increased use of remote working tools also heightened the risk of exposure to cyberattacks. From an organizational point of view, the Group decided to provide itself with central structures, dedicated in particular to analysing and measuring risks and managing IT security for all company areas. In its approach to cyber-threat management, Hera focused on three main aspects:

• increasing the level of awareness among company employees regarding cybersecurity;
• moving from a reactive model for incident management to one that is as predictive as possible;
• identifying and adopting targeted technological solutions, able to ensure continuous evolution.

Awareness-raising policies were introduced through the use of dedicated platforms, and ethical phishing campaigns were made systematic, correlating the results of these campaigns to specific training proposals.
From a technological point of view, advanced tools were introduced to protect workstations and servers, as were functions aimed at making digital identity and IT access management increasingly secure. Protection was strengthened through by analysing data traffic on the internal network and, thanks to an optimization of the intrusion detection system, a method of merely reporting possible intrusion attempts was replaced by automatic blockage when certain conditions occur. Vulnerability assessment activities were intensified in order to intercept any vulnerability found in systems or applications that could be exploited by an attacker. Moreover, a threat intelligence service was introduced which, by following the main bulletins and through a direct relationship with the national Computer Security Incident Response Team, allows the state of the systems to be monitored with respect to particularly serious vulnerabilities that require rapid remediation.

Lastly, the pandemic led to a drastic reduction in business trips, with internal events also cancelled and, as a result, an exponential increase in remote meetings and virtual training rooms. Since Hera had already started a process of digitalization of processes some time ago, thanks to its adoption of the digital workplace, the Group’s IT architecture was already adequate and able to support the increased use of digital collaboration tools.

See the section “Technology and human capital: innovation” in paragraph 1.01.02, “Strategic approach and management policies”, for further details on the strategy adopted by the Group regarding cybersecurity, as well as paragraph 1.02.03 “Areas of risk: identification and management of risk factors” for an analysis of the related risks and management methods.

Potential impact on business, the financial situation and operating performance

The Group, much like the entire utilities sector, did not directly suffer from the interruption of activities due to the lockdown and subsequent restrictions. It did, however, have to cope with the fall in consumption resulting from the crisis. This reduction did not lead to a decrease in the Group’s overall results, which continue to show growth, even though they were partially affected by the pandemic. Therefore, there are no critical issues regarding the Group’s corporate continuity.
The sector that suffered most significantly was the commodities area, where a reduction was seen in demand for electricity and gas, especially from industrial customers, primarily due to the restrictions caused by the lockdown and the slow progress of economic recovery, as a result of further measures taken by the national and regional governments. The reduction in consumption primarily concerned Northern Italy, due to its industrial and productive fabric, characterized by intensive energy use. Alongside the reduction in demand, a decrease was also seen in electricity and gas prices. It should be noted that this reduction in prices was not caused solely by the economic impact of the restrictive measures, which accentuated a downtrend linked to the entry of new players and a changed mix of sources of generation, which caused a reduction in the PUN coming to around 24% compared to the previous year. As regards gas, the reduced price is well shown by the average annual trend for the CMEM tariff component, which decreased by 34% compared to 2019. For a more detailed analysis of these economic effects, see paragraphs 1.07.01 “Gas” and 1.07.02 “Electricity”.
In the waste management sector, a reduction occurred in volumes of both municipal and special waste, as a result of the standstill in many production and commercial activities. Additionally, the slowdown in the construction sector led to a drop in new connections and customer services. These trends are described in paragraphs 1.07.03 “Integrated water cycle” and 1.07.04 “Waste management”.
Faced with this crisis situation, the breakdown of the Group’s business portfolio, marked by balance between free-market and regulated activities, is an initial factor that allowed the economic impact to be contained, since regulated activities were not affected in the short term by market phenomena related to the pandemic. The high level of resilience that characterizes the Group, not only in terms of infrastructures but also from an operational and organizational point of view, allowed it to maintain a positive trend of growth, containing the operating and financial impacts of the crisis. The year-end figures show, considering all business areas as a whole, a reduction in earnings caused by the Covid-19 health emergency coming to approximately 31.4 million euro (see paragraph 1.04.01 “Operating results and investments”).
From a financial point of view, bearing in mind the positive trend in cash generation, the first part of the year saw an increase in requests for payment by instalments, which resumed in the last quarter when the second wave of the epidemic arrived. However, this trend was more than offset by an improved performance in collecting receivables because, thanks to an optimization of the credit origination and monitoring process, the Group was able to maintain the percentage of receivables collected at the same level as the previous year.
As regards the prospective management of financial requirements and the related cost, note that as of 31 December 2020 the Group has cash and cash equivalents coming to approximately 987.1 million euro, which can be freely used, committed lines of credit amounting to 650 million euro and uncommitted lines of credit totalling 537 million euro (as indicated in note 27 “Non-current and current financial liabilities” in paragraph 2.02.05 “Commentary notes to the financial statement formats”). Furthermore, in December 2020 the Group issued a new 500 million euro 10-year bond at a very low nominal rate, coming to 0.25%, which amply demonstrates Hera’s ability to obtain resources on financial markets at sustainable costs. The Group’s current financial situation, supported by careful management applied to all phases of the credit process and prospects for future performance in all businesses, enables the Group to maintain, even during the ongoing pandemic, the financial planning outlined in the 2021 budget. The projected investments have therefore been confirmed, as a necessary driving force for development especially in network activities, as have dividend payments, the latter increasing compared to the previous year, as already foreseen by the 2021-2024 Business Plan.

Considerations as to financial reporting

What follows are the considerations made and the analyses carried out based on factors including the updated planning information resulting from the Business Plan to 2024, approved by the BoD on 13 January 2021.

• Impairment test - due to its evolution and the ensuing pervasive effects on the economic environment in which the Group operates, Covid-19 represents a trigger event as regards impairment for the assets recorded in the financial statements. Owing to the uncertainty of the current context, the Group has considered two sensitivity scenarios, in order to measure its exposure to the risk of non-recoverable balance sheet items subject to impairment testing (as described in further detail in Note 32 of paragraph 2.02.05 “Commentary notes to the financial statement formats”). In the first scenario, the reduction in earnings seen in 2020 for all businesses in which the Group operates was projected for the next two years, hence reducing the cash flows used in valuations for 2021 and 2022 and expecting full recovery in earnings starting from 2023. This scenario would not entail any effect in terms of reducing the value of the assets below their recoverable value. For the second hypothesis, a worst-case scenario, a sensitivity analysis was carried out for the earnings of each individual business, aimed at identifying the percentage decrease that would essentially determine a correspondence between the book value of the individual CGUs and their recoverable value. As a result, only a reduction in Ebitda coming to over 12% concerning all years covered by the business plan (and therefore without assuming any recovery after the drop in 2020), would lead to an equivalence between the carrying amount and the recoverable value of the assets, moreover only concerning some CGUs;
• Valuation of derivative instruments – the impact of the health emergency on financial and raw material markets caused a reduction in the fair value of these instruments, and thus had an ensuing impact on equity and the balance sheets. As regards derivative financial instruments on commodities designated in hedge accounting, future transactions are currently still considered highly probable. Note 20 of paragraph 2.02.05 “Commentary notes to the financial statement formats” contains a sensitivity analysis, in the event of a shock to the underlying variables;
• Estimate of losses on receivables – the Hera Group uses probability measures for default, exposure at default and loss given default, to estimate annual provisions in the income statement and thus determine the allowance for doubtful accounts. These measures were developed on the basis of the available historical series, estimated according to the payment behaviour of customers and current credit processes, and thus calculated the expected lifetime loss, as defined by IFRS 9. During 2020, analyses were carried out in order to verify the resilience of the valuation models, considering both internal and external information that could act as a benchmark for the evolving macroeconomic context. Additional verifications concerning the forecast model for expected loss included:
  • an enrichment of the customer base of corporate clients, using Covid-impact information supplied by an external provider, aimed at identifying the impact of the pandemic on the counterparty’s specific risk, with reference going to the sector of products. Using this information, the Group was able to quantify turnover exposure and the related unpaid items exposure;
  • the use of specific tools to go into even further detail concerning the financial situation of customers, by analysing balance sheets and additional specific scores with a view to Covid-19 risk. Through these tools, a few highly concentrated clusters of credit portfolios were subjected to monitoring, in order to obtain specific daily assessments of the corresponding risks;
  • close monitoring of the corporate customer base, through daily updating in the rating supplied by a service provider, which made it possible to identify situations showing a deterioration in risk, immediately communicated to the specific management channels;
  • a focus on trends in new insolvency proceedings and bankruptcies;
  • the results of stress tests carried out on three forecast scenarios (baseline, medium and worst) regarding the Group's unpaid receivables showed that the allowance for doubtful accounts recorded is adequate.

Events occurred after year-end

The Group’s constant monitoring of quantitative indicators, as described above, indicates a situation still undergoing a crisis, which is however less acute than the one seen in the first months of 2020. The pandemic is not currently expected to have an effect on the Group’s business model in all its operating sectors over the medium-long term, nor therefore on its ability to generate profit or its financial performance. The Group’s operating and financial targets for 2021 have therefore been confirmed, since the Group does not believe that current conditions require it to revise its growth forecasts.

Income statement

 

mn/€	notes	2020	2019
Revenues	1	7,079.0	6,912.8
Other operating revenues	2	467.8	530.8
Raw materials and stocks	3	(3,410.6)	(3,458.2)
Service costs	4	(2,424.9)	(2,318.2)
Personnel costs	5	(572.7)	(560.4)
Other operating costs	6	(58.9)	(59.3)
Capitalised costs	7	43.3	37.6
Amortisation, depreciation and provisions	8	(571.7)	(542.6)
Operating revenues		551.3	542.5
Share of profits (losses) pertaining to joint ventures and associated companies	9	8.2	13.4
Financial income	10	73.4	108.2
Financial expenses	10	(198.3)	(247.6)
Financial operations		(116.7)	(126.0)
Other non-operating revenues (expenses)	11	‐	111.6
Earnings before taxes		434.6	528.1
Taxes	12	(111.8)	(126.1)
Net profit for the period		322.8	402.0
Attributable to:
parent company shareholders		302.7	385.7
minority shareholders		20.1	16.3
Earnings per share
Basic	13	0.206	0.262
Diluted	13	0.206	0.262

Pursuant to Consob Resolution no. 15519 of 27 July 2006, the effects of relationships with related parties are accounted for in the appropriate income statement outlined in paragraph 2.04.01 of this consolidated financial statement.

Statement of comprehensive income

 

mn/€	notes	2020	2019
Profit (loss) for the period		322.8	402.0
Items reclassifiable to the income statement
Fair value of derivatives, change for the period	21	60.8	(76.8)
Tax effect related to reclassifiable items		(17.5)	22.4
Items not reclassifiable to the income statement
Actuarial income (losses) post-employment benefits	28	(1.9)	(5.6)
Equity investments valued at fair value	18	(3.5)	‐
Tax effect related to not reclassifiable items		0.4	1.4
Total comprehensive profit (loss) for the period		361.1	343.4
Attributable to:
parent company shareholders		341.7	327.3
minority shareholders		19.4	16.1

Statement of financial position

 

Assets

mn/€	notes	31 Dec 20	31 Dec 19
ASSETS
Non-current assets
Property, plant and equipment	14.32	1,926.5	1,992.7
Rights of use	15.32	95.9	96.9
Intangible assets	16.32	3,924.4	3,780.2
Goodwill	17.32	812.8	812.9
Equity investments	18.32	187.9	143.5
Non-current financial assets	19.36	140.8	135.3
Deferred tax assets	20	156.6	174.8
Derivative financial instruments	21	14.4	41.1
Total non-current assets		7,259.3	7,177.4
Current assets
Inventories	22	171.7	176.5
Trade receivables	23.36	1,971.6	2,065.3
Current financial assets	19.36	32.8	70.1
Current tax assets	24.36	11.7	42.1
Other current assets	25.36	487.5	395.7
Derivative financial instruments	21	113.1	72.2
Cash and cash equivalents	19.34	987.1	364.0
Total current assets		3,775.5	3,185.9
Assets held for sale		‐	‐
TOTAL ASSETS		11,034.8	10,363.3

 

Pursuant to Consob Resolution no. 15519 of 27 July 2006, the effects of relationships with related parties are accounted for in the appropriate statement of financial position outlined in paragraph 2.04.02 of this consolidated financial statement.

Shareholders’ equity and liabilities

mn/€	notes	31 Dec 20	31 Dec 19
shareholders’ equity and liabilities
Share capital and reserves
Share capital	26	1,460.0	1,474.8
Reserves	26	1,198.1	948.0
Profit (loss) for the year		302.7	385.7
Group net equity		2,960.8	2,808.5
Non-controlling interests	26	194.5	201.5
Total net equity		3,155.3	3,010.0
Non-current liabilities
Non-current financial liabilities	27.36	3,678.7	3,456.3
Non-current lease liabilities	15.36	73.5	76.1
Post-employment and other benefits	28	116.7	127.3
Provisions for risks and charges	29	538.2	521.8
Deferred tax liabilities	20	120.5	154.5
Derivative financial instruments	21	20.1	27.4
Total non-current liabilities		4,547.7	4,363.4
Current liabilities
Current financial liabilities	27.36	616.9	305.5
Current lease liabilities	15.36	20.1	19.4
Trade payables	30.36	1,497.5	1,391.8
Current tax liabilities	24.36	25.4	86.9
Other current liabilities	31.36	1,056.2	1,047.9
Derivative financial instruments	21	115.7	138.4
Total current liabilities		3,331.8	2,989.9
TOTAL LIABILITIES		7,879.5	7,353.3
TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES		11,034.8	10,363.3

 

Pursuant to Consob Resolution no. 15519 of 27 July 2006, the effects of relationships with related parties are accounted for in the appropriate statement of financial position outlined in paragraph 2.04.02 of this consolidated financial statement.

Cash flow statement

 

mn/€	notes	31 Dec 20	31 Dec 19
Earnings before taxes		434.6	528.1
Adjustments to reconcile net profit to the cashflow from operating activities
Amortisation and impairment of assets		457.1	433.7
Allocation to provisions		114.6	108.9
Effects from valuation using the equity method		(8.2)	(13.4)
Other non-operating revenues			(111.6)
Financial (income) expenses		124.9	139.4
(Capital gains) losses and other non-monetary elements		(6.7)	7.0
Change in provision for risks and charges		(30.2)	(28.5)
Change in provision for employee benefits		(13.5)	(12.2)
Total cash flow before changes in net working capital		1,072.6	1,051.4
(Increase) decrease in inventories		(3.8)	(17.9)
(Increase) decrease in trade receivables		4.8	(162.5)
Increase (decrease) in trade payables		101.9	(65.0)
Increase/decrease in other current assets/liabilities		(65.1)	103.6
Changes in working capital		37.8	(141.8)
Dividends collected		10.1	13.3
Interest income and other financial income collected		37.4	44.9
Interest expenses and other financial charges paid		(81.9)	(115.0)
Taxes paid	33	(184.6)	(123.1)
Cash flow from operating activities (a)		891.4	729.7
Investments in property, plant and equipment		(140.6)	(164.2)
Investments in intangible assets		(365.8)	(369.0)
Investments in companies and business units net of cash and cash equivalents	34	(1.8)	(185.4)
Other equity investments	34	(46.8)	(10.3)
Sale price of property, plant and equipment and intangible assets		3.6	4.7
Divestment of equity investments and contingent considerations	34	2.0	168.2
(Increase) decrease in other investment activities		30.8	(31.1)
Cash flow from (for) investing activities (b)		(518.6)	(587.1)
New issue of long-term binds	35	512.6	315.0
Repayments of non-current financial liabilities	35	(2.0)	(100.7)
Repayments and other net changes in financial payables	35	(18.9)	(377.0)
Lease payments	35	(22.1)	(19.0)
Acquisition of interests in consolidated companies	35	(1.2)	(2.2)
Dividends paid out to Hera shareholders and non-controlling interests		(163.3)	(161.5)
Changes in treasury share		(54.8)	31.3
Cash flow from (for) financing activities (c)		250.3	(314.1)
Increase (decrease) in cash and cash equivalents (a+b+c)		623.1	(171.5)
Cash and cash equivalents at the beginning of the period		364.0	535.5
Cash and cash equivalents at the end of the period		987.1	364.0

 

Pursuant to Consob Resolution no. 15519 of 27 July 2006, the effects of relationships with related parties are accounted for in the appropriate cash flow statement outlined in paragraph 2.04.03 of this consolidated financial statement.

Statement of changes in net equity

 

mn/€	Share capital	Reserves	Reserves - derivatives valued at fair value	Reserves - actuarial income/(losses) post-employment benefits	Reserves - equity investments valued at fair value	Profit for the period	Net equity	Non-controlling interests	Total
Balance at 31 Dec 18	1,465.3	926.8	16.5	(29.8)		281.9	2,660.7	186.0	2,846.7
Adoption of IFRS 16		(3.4)					(19.3)	(0.6)	(19.9)
Balance as at 1 Jan 2019	1,465.3	923.4	16.5	(29.8)	‐	281.9	2,657.3	185.4	2,842.7
Profit for the period						385.7	385.7	16.3	402.0
Other components of comprehensive income:
fair value of derivatives, change for the period			(54.4)				(54.4)		(54.4)
actuarial income (losses) post-employment benefits				(4.0)			(4.0)	(0.2)	(4.2)
Overall profit for the period	‐	‐	(54.4)	(4.0)	‐	385.7	327.3	16.1	343.4
changes in treasury shares	9.5	22.6					32.1	(0.8)	31.3
changes in equity investments		(0.7)					(0.7)	(1.5)	(2.2)
changes in the scope of consolidation		(58.4)					(58.4)	13.7	(44.7)
Allocation of revenues:
dividends paid out						(149.1)	(149.1)	(11.4)	(160.5)
allocation to reserves		132.8				(132.8)	‐		‐
Balance at 31 Dec 19	1,474.8	1,019.7	(37.9)	(33.8)	‐	385.7	2,808.5	201.5	3,010.0
Balance at 1 Jan 20	1,474.8	1,019.7	(37.9)	(33.8)	‐	385.7	2,808.5	201.5	3,010.0
Profit for the period						302.7	302.7	20.1	322.8
Other components of comprehensive income:
fair value of derivatives, change for the period			43.8				43.8	(0.5)	43.3
actuarial income (losses) post-employment benefits				(1.3)			(1.3)	(0.2)	(1.5)
fair value of derivatives, change for the period					(3.5)		(3.5)		(3.5)
Overall profit for the period	‐	‐	43.8	(1.3)	(3.5)	302.7	341.7	19.4	361.1
changes in treasury shares	(14.8)	(29.9)					(44.7)		(44.7)
changes in equity investments							‐	(11.3)	(11.3)
other movements		2.4					2.4	0.9	3.3
Allocation of revenues:
dividends paid out						(147.1)	(147.1)	(16.0)	(163.1)
allocation to reserves		238.6				(238.6)	‐		‐
Balance at 31 Dec 20	1,460.0	1,230.8	5.9	(35.1)	(3.5)	302.7	2,960.8	194.5	3,155.3

Net financial indebtedness

 

		31 Dec 20	31 Dec 19
A	Cash and cash equivalents	987.1	364.0
B	Other current financial receivables	32.8	70.1
	Current bank payables	(188.6)	(111.5)
	Current portion of bank indebtedness	(307.1)	(63.1)
	Other current financial payables	(114.0)	(130.9)
	Current lease liabilities	(20.1)	(19.4)
C	Current financial indebtedness	(629.8)	(324.9)
d=a+b+c	Current net financial indebtedness	390.1	109.2
	Non-current financing and bonds issued	(3,101.8)	(2,869.1)
	Other non-current financial payables	(582.6)	(573.5)
	Non-current lease liabilities	(73.5)	(76.1)
E	Non-current financial indebtedness	(3,757.9)	(3,518.7)
f=d+e	Net financial position - CONSOB Communication no. 15519/2006	(3,367.8)	(3,409.5)
G	Non-current financial receivables	140.8	135.3
h=f+g	Net financial indebtedness	(3,227.0)	(3,274.2)