Message from the Executive Chairman

"The 2022 financial year closed positively, with results exceeding expectations and fully consistent with previous quarters. After 2021, this is one of the best growth rates recorded in more than twenty years by the Hera Group, all the more appreciable in light of the external context in which it was achieved.

Relying on the strength of our consolidated business model and our risk-averse policies, we have once again confirmed our commitment to creating value for the company and for all our stakeholders.

The proposed increase in dividends, coming to 12.5 cents per share and in line with the communications made when presenting the Business Plan to 2026, also goes in this direction.

On the one hand, we have continued to make investments, in order to face the energy crisis and ensure that all our assets remain resilient and performing, thus ensuring that our strategic plans are carried out and the quality of the services managed stays high. On the other, we have pursued the company’s development along external lines, with M&A transactions in the energy and waste management sectors, with the goal of consolidating our position in the reference markets and further improving the competitiveness and efficiency of the solutions we offer to our customers."

Tomaso Tommasi di Vignano
Executive Chairman

Message from the CEO

"The positive results achieved allow us to face the future with confidence, continuing to invest to grow and increase the resilience and digitisation of our infrastructure. Our efficient financial management, along with cash flow generation, allowed us to close the financial year 2022 with a net debt/Ebitda ratio coming to 3.28x, which, excluding the gas storage investments now falling back into line, drops to below 3x, in line with the Group’s historically prudential policy.

Shared-value Ebitda rose to 670 million, 51.8% of total Ebitda, and showed growth outpacing that of overall Ebitda, which proves that we are progressively making our operations more and more sustainable.

2022 was also a record year for investments, which came to over 700 million euro, 62% of which were put in place to pursue carbon neutrality, promote the circular economy, enable resilience and innovate.

A number of innovative initiatives in the area of renewables also moved in this direction: for example, in 2022 we expanded our biomethane production capacity by around 50% with the construction of a second plant, and we were the first in Italy to introduce a hydrogen-natural gas blend into a city’s network intended for households. Partially thanks also to this latter operation, our gas distribution networks have become fully aligned to the European Taxonomy.”

Orazio Iacono
CEO

Summary Report

 

Estimates

	Consensus	Hera's results	Δ %
Ebitda (mln €)	1,284.5	1,295.0	+0.8%
Ebit (mln €)	644.2	627.9	(2.5%)
Net profit post min. (mln €)	332.7	322.2	(3.1%)
Net Financial Position (mln €)	4,264.5	4,249.8	(0.3%)

 

Target Price

		Preview		Post Results
Analyst	Broker	Rating	Target Price (€)	Rating	Target Price (€)
Francesco Sala	Banca Akros	Buy	3.20	Buy	3.20
Davide Candela	Banca Intesa Sanpaolo	Buy	3.40	Buy	3.40
Dario Michi	BNP Paribas Exane	Buy	3.30	Buy	3.30
Roberto Letizia	Equita SIM	Hold	3.30	Hold	3.30
Federico Pezzetti	Intermonte	Neutral	3.00	Neutral	3.00
Emanuele Oggioni	Kepler Cheuvreux	Hold	2.90	Buy	3.00
Javier Suarez	Mediobanca	Outperform	3,60	Outperform	3.60
		Average	3.24	Average	3.26

 

Summary Report

Broker	Analysts' comments on financial results
Banca Akros	"The company’s 2022 results showed resiliency in a challenging energy scenario and against volatile gas and electricity prices.  Recommendation and target confirmed."
Intesa Sanpaolo	"Hera’s FY22 results came in broadly in line with our and Bloomberg consensus expectations, with no major surprises, also due to the company having released preliminary figures during the 2022-26 Business Plan presentation in February. We see deleveraging trend as the main driver for the stock at this time: in this respect, we expect 1Q23E results to show emptied gas inventories to positively affect net debt figures. In view of the lower energy prices, we also expect fewer negative items. For these reasons, we confirm our positive stance on the stock."
BNP Paribas Exane	"Hera has unveiled its Q4 2022 results, which were in line with the preliminary figures unveiled early in February when the company announced its new business plan: EBITDA + 23% YoY, EBIT +36%, net income +315%. The net financial position reached 4.25 bn€, with a net debt/EBITDA ratio of 3.28x (ca. 2.9x if we exclude the impact of the stored gas costs of ca. 504 m€). The 2023 outlook is positive, considering that in the waste sector Hera is due to take advantage of the M&A performed and the normalisation of the energy costs, coupled with the renegotiations of the expiring contracts, should provide the company with a further upside YoY. We maintain our current valuation range of €3.10/€3.50, which is based on a DCF and on a peer-multiple methodology."
Equita Sim	"With preliminary figures already communicated during the presentation of the BP to 2026, Ebitda, Debt and DPS are substantially in line with our expectations. Net profit slightly lower due to higher D&A and financial expenses. We reduce our 2023 Net profit estimates by about -3% to account for higher 2022 D&A and the expected higher financial expenses. We confirm our neutral view."
Intermonte	"Hera released 4Q22 final results that are broadly in line with estimates at most levels as preliminary EBITDA and net debt had already been released at the beginning of February. Hera managed to close FY22 with a solid set of numbers despite the exceptional volatility of the energy market (Chairman Tommasi called 2022 the “most challenging year of his tenure”), which confirms the ability of the group to navigate even the most complex environment. Hera’s valuation looks increasingly appealing (the group is trading at 5.9x 2023E EV/EBITDA, at a slight discount to its peer group and at a 12.1x 2023E P/E or at a slight premium) but we confirm our Neutral recommendation as within the sector we continue to prefer players that are more leveraged to the structurally higher energy prices environment."
Kepler Cheuvreux	"We think the company’s outlook has improved. We see good visibility for 2023, and we are above consensus on net profit and net debt. We refreshed our SOP model, which remained almost unchanged: our target price is slightly up to €3.00 (from €2.90). After the share price weakness, we currently see an upside of c. 20%, which leads us to upgrade our rating from Hold to Buy. Hera is a defensive company after the normalisation of energy price volatility."
Mediobanca	"‘22 numbers showed the resiliency of the business model with Underlying EBITDA growing at +6%, and some increase in the contribution from the supply activity. Reported numbers were impacted by accounting of natural gas inventories, an effect that should be fully reverted by end of 1Q23. We highlight as well that the increase in Net Debt is mainly related to strategic gas purchases, with volumes that are either forward sold or hedged. We update our model to reflect the final ’22 numbers, while maintaining our TP at €3.60/share and rating unchanged. We continue to see Hera exposed to secular trends such as the adoption of circular, green and sustainable models in the waste and water businesses. With the stock trading at c7x EV/EBITDA, we see value and reiterate our Outperform."

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 sustainability factors (concerning the environment, technology and human capital).

Macroeconomy and finance

World and European economy: year-end results

In 2022, the world economy decelerated with respect to the trend of recovery that began in 2021. According to the International Monetary Fund (IMF), global GDP growth stood at 3.4%, as against 6.2% in 2021. The causes of this slowdown lie mainly in the outbreak of the conflict in Ukraine and the ensuing increase in inflation worldwide, driven by energy commodity prices. Furthermore, the lockdowns imposed in China late in the year additionally hindered recovery in the global supply chain.
This slowdown, compared to the previous year, affected all major global economies, with China’s growth falling from 8.4 % in 2021 to 3.0 % in 2022, while the growth rate of the US economy went from 5.9% in 2021 to 2.0% in 2022.

The eurozone was the most heavily affected by the war in Ukraine, due to its proximity to the conflict zone and its dependence on gas supplies coming from Russia. Highly volatile energy commodity prices accentuated the rise in inflation that had already begun in late 2021, bringing inflation in the eurozone to 9.2 % in December 2022. The IMF has observed that growth in the eurozone came to 3.5% in 2022, down from the 5.3% seen in 2021.

World and European economy: projected trends

The IMF’s most recent estimates for the next two years point towards a scenario strongly influenced by current geopolitical conditions. The global economy is expected to increase by 2.9% in 2023, while for 2024 the increase has been projected at 3.1%. Growth in the eurozone is expected to settle at 0.7% in 2023 and 1.6% in 2024, influenced above all by the additional increases in interest rates announced in advance by the ECB.

National data: projected economic trends

The most recent analyses carried out by the Bank of Italy indicate growth in the Italian economy in 2022 among the best in the euro area, at roughly 4% year-on-year, despite the slowdown witnessed in the last three months of the year, mainly caused by the persistence of high energy prices and the slowdown in post-pandemic recovery.
Inflation remained very high in December, standing at 12.3% year-on-year. Energy commodity and food prices remained at historically high figures, even while falling in the latter part of the year.
Although the consumer confidence rate remained lower than prior to the pandemic, it rose in the latter part of the year due in part to an improvement in opinions and expectations concerning the overall economic situation, particularly regarding unemployment.
Industrial production, which had increased in the second and third quarters, declined in the last part of the year due to energy costs, still high, and a fall in demand. The slowdown in production also effected foreign trade, bringing growth in exports to a halt in the last quarter of the year, compared to the strong expansion seen in the first nine months (0.1% compared to the third quarter).

For the upcoming years, the most recent IMF estimates indicate growth at 0.6% in 2023 and 0.9% in 2024. As concerns inflation, the Bank of Italy’s projections set this indicator at 6.5% in 2023 before falling to 2.6% in 2024. These forecasts take into account a macroeconomic framework still strongly influenced by the ongoing war in Ukraine.

Financial markets, monetary policies and interest rates

The global financial context felt the effects of the negative developments following the trade and tariff wars between the US and China, the pandemic and slowdowns along the supply chains, as well as the Russia-Ukraine conflict and the increased pressure on energy resources that caused the major inflationary shock mentioned above. During one of the worst years for financial markets around the world, in 2022 Wall Street experienced its most significant drop since the 2008 financial crisis, with the S&P 500 index plummeting by 19.4%, the Nasdaq falling by 33.10%, and the Dow Jones containing its losses at 8.7%.A similar trend was seen in Europe, where the main stock exchanges lost around 12% year-on-year (including the Milan Stock Exchange, which lost 12.6%); London managed to limit the impact of the crisis with a positive, albeit modest, closure of 0.9%.

The Federal Reserve (Fed) and the Bank of England (BoE) began a process of monetary tightening during the first half of 2022, which continued with further interest rate hikes in the following months as well. The European Central Bank (ECB) also adopted a restrictive policy and announced that it would continue in the early months of 2023 as well; in December, the reference interest rate reached 2.5%. Also note that the ECB, as part of its asset purchase programme to inject liquidity into the system (quantitative easing), confirmed the beginning of quantitative tightening as of March 2023. Securities purchases will thus be reduced by 15 billion euro per month until June, with the pace of reductions during the following months to be defined at a later date. Reinvestments of government bonds will be ‘partial’, respecting the defined proportions for redemptions (by nation and national and supranational issuer). The portion of maturing corporate bonds to be reinvested will be focused only on ‘green’ bonds. In order to avoid risks of malfunctions in the monetary policy transmission mechanism, the flexibility to re-invest maturing bonds under the Pandemic emergency purchase programme (PEPP) will remain unchanged, meaning that this portfolio will be reinvested at least until the end of 2024.

The increase in eurozone interest rates accelerated during the second half of 2022, leading to an upward shift in the interest rate curve on all maturities by more than 300 basis points (bps) on average, year-on-year. The implicit forward rate curve forecasts a further rise for 2023 on short-term rates coming to roughly 3%. On medium- to long-term maturities, no further increases are expected, only slight downward adjustments coming to roughly 10 bps on average.

Over the year, in Europe, fears that a reduction in monetary stimuli could be accompanied by the reappearance of fragmentation in markets, resulting in a sovereign debt crisis, led to an increase in government bond yields. In order to ensure the effective transmission of monetary policy as part of the normalisation process, a new anti-fragmentation instrument, the so-called TPI (Transmission Protection Instrument), was introduced by the ECB. This instrument allows the ECB to make secondary market purchases of securities issued by countries experiencing an unjustified deterioration in financing conditions. The size of the purchases, which are not constrained ex ante, depends on the severity of the risks involved and a list of eligibility criteria to assess whether those countries where the ECB can make purchases under the TPI pursue sound and sustainable fiscal and macroeconomic policies.

Hera spread

On 31 December 2022, the spread between the yield on the ten-year BTP and the yield on the equivalent German bond closed at 212 bps, up 77 bps from 31 December 2021. After reaching a peak of 251 bps in September and experiencing pressure in the last month of the year, 2023 opened with a downward trend coming to roughly 180 bps.

Unlike in the past, in 2022 the spread of bonds issued by Hera followed the upward trend of government bonds, narrowing this spread. During the second half of the year, the recovery in Hera’s spread, i.e. the increase in this spread, confirmed the return of investor confidence in the Group’s creditworthiness. At 31 December, the ten-year spread, in particular, was 82 basis points lower than the BTP-Bund spread having the same duration.

Businesses and regulations

Business trends

During 2022, the high volatility of energy commodity prices, coupled with the threat of possible reductions in the availability of gas, caused a decline in domestic electricity and gas consumption.
In August 2022, European gas prices at the Dutch Title transfer facility (TTF) reached peaks of over 300 euro/MWh, more than ten times the benchmarks seen in 2021.

According to the first estimates processed by the Energy Market Operator (GME), in 2022 gas consumption decreased by 9.5% compared to the previous year, totalling approximately 69 billion cubic metres and returning to the amount seen in 2020. The drop in consumption was spread out over the entire year, but was particularly concentrated in the last four months, during which the recessionary effects of the war in Ukraine were compounded by milder weather. The industrial and civil sectors recorded the most significant drops, down 15.2% and 13.2% respectively, while in the thermoelectric sector the reduction was more moderate (3.1% compared to 2021).

As regards electricity, the data compiled by the national transmission company (Terna) indicates total national consumption at 316.8 TWh for 2022, down 1.0% compared to 2021. Approximately 86% of energy demand was met by domestic production, in line with the previous year.
In 2022, net national production from renewable electricity sources decreased by 13.1% compared to 2021, resulting in a portion of consumption met by renewables coming to 31.1%. In particular, the contribution of hydropower production declined sharply compared to 2021, with a reduction of about 11%, due to the drought conditions seen during the year.  On the other hand, photovoltaic production and wind power production increased by 7% and 2% respectively, compared to the previous year.

With regard to the waste management and water businesses, since data referring to 2022 is not yet available, the most recent values defined by the main national institutes are provided below.
According to the latest calculations of the Institute for Environmental Protection and Research (ISPRA), the annual production of municipal waste in Italy in 2021 amounted to 29.6 million tons, equivalent to an average per capita production of about 500 kg, with values gradually realigning to those seen prior to the pandemic.

On the occasion of World Water Day 2022, ISTAT presented its new report on the statistics of the national water sector, updated to 2020 and focused on provincial capital cities. This report states that operators injected 2.4 billion cubic metres of water into the network (the volumes moved in the networks of the provincial capitals historically represent about 33% of total volumes distributed nationwide), with a reduction of more than 4% compared to the volumes seen in 2018 (the last available historical data). Of these, about 0.9 billion cubic metres, or 36.2% of the total amount injected, would seem to have been dispersed.

Competition

Increasing competition was seen in the activities carried out by Italian utilities, with a particular focus on free market businesses.

In the energy sector, strong commercial pressure persisted, especially in the retail market. This trend was confirmed by the churn rates, which remained very high and continued to rise, in sales of both electricity and gas. In 2021, in electricity sales the switching rate increased by 2.6 percentage points compared to the previous year, while for the gas sales the increase was 1.4 percentage points compared to 2020 (source: ARERA). In recent years, competition among sales companies has expanded to the offer of value-added services, complementing the supply of commodities, so as to compose commercial portfolios in line with customers’ needs, more oriented towards energy saving. Similarly, another factor that has affected competition in the market lies in the increasing use of digital channels by customers, both to choose offers and to interact with their energy and service supplier.

As regards the waste treatment and recovery business, the European context has witnessed for several years now a series of aggregation operations based on the synergies that can be extracted from the different businesses that fall within the scope of utilities, with a growing connection in particular between energy, waste and water. Examples of the most widespread partnerships include the production of biomethane from the organic fraction of municipal solid waste (FORSU) and from sewage sludge, as well as Waste to Material and Waste to Chemical procedures. Within Italy, moreover, for several years the focus of the main market players has gone towards expanding plant equipment, and this will be given further impetus thanks to the resources provided by the National Recovery and Resilience Plan (NRRP).

With regard to regulated businesses, competitive pressure has been introduced into the procedures for awarding service concessions and their subsequent management.
Considering the local areas in which the Group currently provides the water cycle service, the new management of the concession in the province of Rimini began in January 2022, with an expected expiry date coming at the end of 2039.

Turning to legislative and regulatory factors, the most important aspects for the Group in 2022 include:

• various government measures intended to support citizens and businesses in coping with rising energy prices, including measures to curb the effects of price increases on bills;
• the measures adopted by the government to ensure security in supplies and the more widespread use of renewable energy;
• measures to promote competition and a reorganisation of the regulation of local public services of economic importance;
• the following measures adopted by the Regulatory Authority for Energy, Networks and the Environment (Arera):
  • a modification of the methods for determining the economic conditions for supply of the protected gas service as of 1 October 2022, and the regulation of gradual protection for micro-businesses;
  • the conclusion of the consultation of the new regulation for expenditure and service targets (ROSS) in the energy sectors;
  • the confirmation of WACC for energy infrastructure services for 2023, set in continuity with the reference values for 2022;
  • an infra-period update, for the three-year period 2023-2025, of the tariff regulations for gas distribution and metering;
  • a measure to incentivise energy transition experiments along the gas chain;
  • new regulations for gas metering performance, with reference to smart meters;
  • the completion of the regulation of reactive energy input into low-pressure and high-pressure networks;
  • the approval of applications for the recognition of investments in specific 2G metering systems for the Group’s two electricity distributors, and updates in the 2G directives for the three-year period 2023-2025;
  • extraordinary measures taken in the water sector to recognise the cost of electricity;
  • the conclusion, once again in the water sector, of the preliminary proceedings to determine the system of incentives and penalties for technical quality for the two-year period 2018-2019, and the earliest results of the preliminary investigation on contract quality;
  • for the municipal waste management service, the determination of the WACC for the four-year period 2022-2025, and the introduction of contract and technical quality obligations for waste collection;
  • an investigation into changes in the prices and costs of the district heating service, and a consequent report to Parliament and the government on the attribution of tariff regulation powers to the Regulator.

Beginning in the autumn of 2021, the government has introduced a series of measures to support citizens and businesses in coping with rising energy prices, both in the electricity and gas sectors. Following the outbreak of war in Ukraine and various price mitigation initiatives, a number of measures to ensure security of supply and a more rapid development of renewable energy sources also appeared.

Measures to offset price increases in bills

The continuation of the war forced national governments to intervene constantly throughout 2022, updating the measures adopted according to the needs imposed by changes in the scenario. The first need to which the Italian government intended to respond was a mitigation of the impact of energy price increases on customers’ bills. To this end, a number of areas were identified for interventions: a reduction of system charges for both gas and electricity users, which was extended during the year, and a redefinition of social bonuses, with a wider number of beneficiaries and an increase in the amounts paid. In addition, Decree Law No. 115/2022, so-called Aid bis, suspended until 30 April 2023 the effectiveness of contractual clauses that allow a unilateral modification of the price conditions of electricity and gas supplies, if they fall outside the expected contractual notice periods. These measures were subsequently extended to 30 June 2023 by Decree-Law No. 198/2022, the so-called Milleproroghe, converted into Law 14/2023, which also clarified that the same did not apply to contractual clauses that allow suppliers to update contractual economic conditions upon expiry, in line, moreover, with the principles sanctioned by the State Council in the disputes brought by certain operators for the annulment of prescriptive measures adopted by the Antitrust Authority.

At the same time, tax credits for procurement by energy-intensive companies were first introduced and subsequently strengthened, and the way in which the GSE sells the electricity it possesses was regulated (by the so-called Energy Release, under Law Decree 17/2022).

In order to raise the resources required to sustain these measures, additional charges were introduced for those benefitting from the energy price increases. In particular, Decree-Law No. 4/2022 introduced a limit on revenues from electricity generated by certain types of renewable-source plants (including photovoltaic plants exceeding 20 KW), which was further extended by the Budget Law 2023 (Law No. 197/2022) on the basis of European Regulation 2022/1854, also including electricity generated by the combustion of waste. The same Regulation was also responsible for the provision of the solidarity contribution on the share of profits exceeding the average of the previous years, which the Budget Law applies to companies over 75% of whose revenues come from the energy sectors. This measure replaces the content of the “Price Cut” Decree (Decree-Law No. 21 of 21 March 2022), which had introduced, for the year 2022, an extraordinary levy of 25% to be paid by companies operating in the electricity and gas sectors.

Measures to ensure security in supplies and a broader use of renewable energies

In a context that saw an increasing risk of supply disruptions, the Government was called upon to intervene so as to ensure the resilience of the domestic gas system. Decree Law 17/2022, the so-called “Caro Energia”, entrusted the Ministry for the environment and energy security with defining the rules for optimising the gas cycle in national storage, through means including resorting to counter-flow injections during the supply season, to guarantee that the filling level is maintained. In addition, with the aim of containing consumption, with Ministerial Decree 383/2022 of 6 October the Ministry modified the terms of operation of thermal systems fuelled by natural gas, establishing a reduction in both the temperatures and the daily and seasonal duration of the ignition period, and regulating the modalities for filling storage and supply during the winter season.

In addition to these measures, aimed at providing immediate support to the economic system, the national regulatory framework acknowledged and implemented the European strategy that identifies the ecological transition as the main tool for reducing dependence on fossil fuels. For this purpose, the procedures for allocating NRRP resources were published during the year, and for some investments relating to utilities ' areas of responsibility the final awards have already been made. These include measures for developing the electricity and district heating network, as well as some lines relating to circular economy projects. In addition, a number of reforms related to the NRRP itself have been approved, including:

• the publication of the so-called Biomethane Ministerial Decree (Ministerial Decree 340 of 15 September 2022), which regulates the allocation of approximately 1.7 billion euro in incentives for the production of biomethane from agricultural and organic waste;
• the definition of requirements for green hydrogen production plants (Ministerial Decree of 21 September 2022);
• the National Strategy for the Circular Economy, its Chronoprogramme and the National Waste Management Programme, to ensure an effective transition to a circular economy.

Measures to promote competition

On 5 August 2022, the annual Law for the market and competition 2021 was approved, which contains measures for a number of areas of interest, including the awarding of tenders for the gas distribution service and the waste management service. More specifically, as regards the gas sector, among other measures, the possibility was given to local authorities to dispose of their assets through tenders on the basis of the Industrial residual value (VIR) instead of the Regulatory value (RAB). Furthermore, with regard to the reorganisation of the regulation of local public services, the Government received and implemented the delegation with the publication in the Official Gazette of the Unified text for local public services (TUSPL) on 30 December 2022. This legislative decree applies to all services of general economic interest, with the exception of electricity and gas distribution, and calls in particular for the requirement of a qualified justification for not turning to the market in the case of in-house awarding.

Protected gas service

In regulating the economic conditions for the supply of natural gas in the protected service, note that ARERA, in order to ensure greater price stability and adherence to market conditions, introduced a new method for determining the component covering the costs of supply in wholesale markets, moving from a quarterly forward system to a monthly forward system. In particular, as of 1 October 2022, the new reference to be used in determining the CMEM component is set at the monthly average of daily prices at the PSV Day Ahead, published at closure by ARERA.

Last resort and default gas distribution services

In regulating the terms and conditions for providing the last resort and default distribution services , note that Arera also intervened, with Resolution 372/2022/R/gas, with measures to compensate for the unforeseeable and excessive charges due to the extraordinary situation of the wholesale gas market price trend, and in particular:

• replaced, similarly to what was done for the protected service and once again as of 1 October 2022, the reference to the CMEM component with the price of the PSV Day Ahead;
• introduced, on an extraordinary basis, an equalisation mechanism aimed at compensating the procurement costs incurred by operators for incremental volumes for the period 1 October 2021 - 30 September 2022, financed by activating a specific tariff component to be applied within the scope of the services in question.

Gradual protection service in electricity 

With Resolution 586/2022/R/eel, Arera also postponed the date for the activation of the gradual protection electricity service for micro-businesses from 1 January 2023 to 1 April 2023, due to the postponement of the competitive procedures, which lasted until the end of 2022, and the technical need for at least three months after the publication of the results to carry out all the prodromal activities for the transfer of withdrawal points to the new service operators.

Energy infrastructure sectors 

Arera, during 2022, began consultations for the guidelines on the new tariff regulation by expense and service objectives (ROSS) in the energy infrastructure sectors. The objective of this regulation is to efficiently direct resources, eliminating distortions in companies' investment choices. The process leading towards the new method will start with a simplified model, called ROSS-based, which as of 2024 will be applied to electricity distribution operators and as of 2026 to gas distribution companies. Consultation document 655/2022/R/com, published at the end of the year, contained Arera’s final guidelines on the criteria for determining the recognised cost when following the ROSS-based approach: the expense of distributors, total and no longer simply managerial, will be compared annually with a reference expense defined by the regulator , any efficiencies/inefficiencies achieved will be shared with users according to appropriate mechanisms, and the treatment of the capital stock existing at the date of transition to the new methodology will be guaranteed with continuity in the criteria applied. In the first few months of 2023, with the publication of the integrated TI-ROSS text, the new tariff regulation will be formalised (which should essentially constitute a methodological framework with indications of general regulatory principles and criteria), while for the actual completion of the ROSS-based scheme it will instead be necessary to wait for updates in the specific regulations for each infrastructure service .

Arera, in late 2022, with Resolution 654/2022/R/com, established the rates of remuneration for capital in energy infrastructure services for 2023. The changes in the underlying financial parameters, while considerable, were not sufficient to trigger the updating mechanism provided for by the regulation. For 2023, therefore, the values of 2022 WACC were confirmed at 5.6% for the gas distribution and metering service and 5.2% for the electricity distribution and metering service.

Gas distribution and metering regulations

With regard to the tariff regulations for gas distribution and metering (RTDG), in late December 2022 Arera updated its regulations for the second semi-period (2023-2025) of the fifth regulatory period. The main changes for 2023 concern: an update of the standard costs for electronic meters up to class G25, to be applied starting from investments; the introduction of a new parametric recognition method to cover the costs of remote management and concentrators equal to 1.59 euro/redelivery point (PDP), to be updated for inflation for the following years; and a differentiation in the cost recognised for switch readings taken on PDRs equipped with a smart meter compared to PDRs equipped with a traditional meter. As regards the recognition of operating costs, pending the outcome of the appeals against Resolution 570/2019/R/gas, the Authority decided that it was appropriate not to change the productivity recoveries set at the beginning of the regulatory period, but also considered introducing a mechanism for adjusting the allowed revenues to cover operating costs if a reduction in redelivery points emerges. ARERA also resolved to recognise the residual depreciation of G4-G6 smart meters installed from 2012 to 2018 and decommissioned before the end of their useful life.

In order to support the process of energy transition and decarbonisation of the gas sector, with Resolution 404/2022/R/gas and subsequent Decision 9/2022, the Authority prepared a special bonus tariff mechanism aimed at providing incentives for pilot projects optimising the management and innovative use of infrastructures in the natural gas sector. In particular, three specific project areas were defined, the first relating to methods and tools for the optimised management of networks, the second concerning innovative uses of existing infrastructures, including the use of hydrogen and Power-to-Gas in the area of sector coupling, and the third relating to energy efficiency interventions in gas infrastructure management. A total of 35 million euro was earmarked for financing these trial projects (each of which may have a maximum duration of three years), which will be allocated through a selective scoring procedure based on specific assessment indicators.

As regards gas metering, at the end of the first half of 2022, ARERA approved a measure that defines more stringent expected output and performance levels for the service provided by smart gas meters. Indeed, Resolution 269/2022/R/gas establishes new obligations regarding the timing of smart meter commissioning, the frequency of metering data collection, the granularity of the same, and the timing with which the data collected is made available. The measures set out in this resolution also affect various aspects relating to billing and the determination of compensation for customers and sellers. The effective date of almost all the new provisions has been set at 1 April 2023.

Electricity distribution

Concerning regulations for electricity distribution, the reformed reactive energy regulations were completed in 2022. With regard to reactive energy fed into medium- and low-voltage grids, Resolution 232/2022/R/eel established the respective fees as of 1 April 2023. Instead, with regard to the regulation of the flow of reactive energy fed into high-voltage grids and interconnections, the sector had to wait until late 2022 for Resolution 712/2022/R/eel. ARERA decided that, once again as of 1 April 2023, a basic unit fee will be applied to the entire national grid and, only for the most critical areas, an increased fee. Moreover, adopting a gradual approach, under specific conditions (assessed ex post) and which demonstrate a fundamental absence of critical reactive flows, it is expected that the fees may be cancelled and, where necessary, refunded.

Electricity metering

During 2022, with Resolutions 410 and 411/2022/R/eel, ARERA furthermore approved the Requests for admission to the recognition of investments in specifically 2G metering systems (RARI) made by Inrete Distribuzione Energia Spa and AcegasApsAmga Spa. The measures approved the 2G Metering commissioning plans and defined the mandatory performance of second-generation smart metering systems, confirming the reference expenditure forecasts submitted to ARERA by the two distributors.

Regarding the electricity metering service, ARERA, in late 2022, updated the 2G directives for the three-year period 2023-2025 for the recognition of the costs of second-generation smart metering systems. While introducing a few innovative elements with respect to the previous three-year period, the new directives guarantee essential continuity in the cost recognition mechanism for companies involved in a large-scale replacement of 2G electricity meters. The main new features include the introduction of a bonus for distributors who accelerate their meter replacement plan after obtaining public contributions of any kind.

Integrated water service

As regards regulations for the integrated water service, the measures concerning 2022 with the largest impact for the Group involve incentive mechanisms for service quality and, as far as tariffs are concerned, the recognition of electricity costs due to the exceptional context of energy price volatility. On this matter, with Resolution 229/2022/R/idr the Authority established a number of extraordinary measures for water operators. More specifically, the possibility of requesting a financial advance from CSEA for electricity procurement in 2022 was introduced (which was later extended, by Resolution 495/2022, until 30 November 2022) as was the possibility of making an extraordinary request, in agreement with the area Authority in question, for the recognition of the cost pertaining to 2021, provided that it was accompanied by a plan of actions to contain consumption and energy costs.

Concerning the regulation of technical service quality, with Resolution 183/2022/R/idr, ARERA concluded its preliminary investigation, begun with Resolution 46/2020/R/idr, aimed at quantifying incentives (and penalties) relating to performance in 2018 and 2019. With this assessment, ARERA observed a generally positive performance shown by operators, who seem to have acted according to largely satisfactory criteria, with the exception of some cases, in which they were excluded from the mechanism due to violations of regulations. The penalties relating to 2018 and 2019 are to be treated as reserves and used for achieving the established objectives, in accordance with the reference regulations, while the bonus payments relating to the same years were disbursed by CSEA. With Resolution no. 107/2022/R/idr, the second preliminary assessment investigation was opened for the performance of technical quality in 2020 and 2021 and, at the same time, with Resolution no. 69/2022/R/idr, the first preliminary investigation was opened in the area of contract quality concerning the objectives for the two-year period 2020-2021. As a result of the latter preliminary investigation, with Resolution No. 734/2022/R/idr Arera published the methodological note adopted for the quantitative assessment of incentives/penalties, pointing out that, in addition to identifying some of the most serious cases of exclusion from the mechanism and thus from the bonuses, in the event of particular data inconsistencies/incompleteness, in-depth investigations may be requested from the operators concerned, with the possibility of justifying and possibly correcting the data sent, providing adequate supporting documentation.

Integrated waste cycle

With regard to regulations for the municipal waste management service, the measures with the greatest impact for the Group that ARERA finalised in 2022 concern regulations for the remuneration of capital , in order to promote the industrial development of the sector, and the initial elements of quality regulations , aimed at standardising service levels nationwide. More specifically, Resolution 68/2022/R/rif established the WACC for the years 2022-2025 , providing for a remuneration of capital coming to 5.6% for the collection service (to be adjusted when tariffs are set for 2024-2025, since until then it will remain at 6.3%). The WACC for the treatment service was instead set at 6.0%, recognising the higher level of risk associated with this phase of the municipal waste management chain. On the other hand, with reference to quality regulations, note Resolution 15/2022/R/rif, which introduces the first regulation of service quality, introducing a set of contract and technical quality obligations for the collection service, minimum and uniform for all managers, accompanied by quality indicators and the related general standards differentiated by regulatory schemes, identified in relation to the actual initial quality level guaranteed to users by the various managers. Lastly, note Resolution 413/2022/R/rif which, in light of the mandate given to ARERA by the annual Market and Competition Law 2021, initiated a procedure for defining technical and quality standards for carrying out waste disposal and recovery activities, proceeding to verify minimum quality levels and furthermore acquiring information on management costs and any other suitable element for monitoring the actual methods used in carrying out disposal and recovery activities and their impact on the fees applied to end users.

District heating

With reference to regulations for the district heating service (TLR), note that ARERA closed, with Resolution 547/2022/R/com, its investigation on the evolution of the prices and costs of the district heating service, begun with Resolution 80/2022/R/tlr. One factor that appeared, according to the Regulator, is that indexing district heating prices to trends in gas prices, whereas thermal energy is mainly produced by waste-to-energy plants and thermal power plants, seems to have led to a progressive gap between the costs and revenues of this service. This is because the increase in revenues was not followed by a corresponding rise in variable costs, with a consequent significant increase in margins for the remuneration of invested capital. ARERA, with Resolution 568/2022/I/tlr, therefore made a report to the Parliament and the government, essentially proposing the introduction of a cost-reflective regulation of prices for the district heating service, attributing the related powers to ARERA itself.

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

Tariff regulatory periods

 

 

Lastly, the table below indicates the main tariff references for each regulated sector, based on the regulatory framework in effect in 2022 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	2020-2022 First sub-period of the fifth regulatory period (Resolution 570/19) 2023-2025 Second sub-period of the fifth regulatory period (Resolution 737/22)	2016-2019 First sub-period of the fifth regulatory period (Resolution 654/15) 2020-2023 Second sub-period of the fifth regulatory period (Resolution 568/19)	2016-2019 Second regulatory period (Resolution 664/15) 2020-2023 Third regulatory period (Resolution 580/19)	2018-2021 First regulatory period (Resolution 443/19) (1) 2022-2025 Second regulatory period (Resolution 363/21) (2)
Regulatory governance	Single level (ARERA)	Single level (ARERA)	Dual level (Governmental authority Body, ARERA)	Dual level (regional authority, ARERA)
Recognised invested capital for regulatory purposes (RAB)	Previous cost revised (distribution) Weighted average between actual cost and standard cost (measurement) Parametric recognition (centralised capital)	Parametric recognition for assets up to 2007 Previous cost revised for assets since 2008	Previous cost revised	Previous cost revised
Regulatory lag for investment recognition	1 year	1 year	2 years	2 years
Return on investment (3) (real, pre-tax)	2019 6.3% Distribution 6.8% Measure 2020-2021 6.3% Distribution and Measurement 2022-2023 5.6% Distribution and Measurement	2019-2021 5.9% 2022-2023 5.2% Distribution and Measurement	2018-2019 5.31% 2020-2021 5.24% 2022-2023 4.8% +1% for investments since 2012, covering the regulatory lag	2020-2021 6.3% +1% for investments from 2018, covering the regulatory lag 2022-2025 (4) 5.6% Collection (adjusted when tariffs are set for the years 2024-2025, until then 6.3%) 6.0% Treatment
Recognised operating costs	Actual average cost values by company grouping (size/density), based on 2011 (for revenues until 2019) and 2018 (for revenues from 2020) (5) Sharing for efficiencies achieved against recognised costs Upgrade with price-cap	Average actual segment cost values on a 2014 basis (for revenues until 2019) and (2018 for revenues from 2020) Sharing for efficiencies achieved against recognised costs Upgrade with price-cap	Efficient costs: 2011 operator’s actual values inflated Upgradable costs: actual values with 2-year lag Additional charges for specific purposes (provisional nature)	Collection and treatment Actual operator costs with 2-year regulatory lag Additional costs for quality improvement and changes in the manager’s scope (previsional) Additional charges for specific purposes (previsional)
Annual efficiency operating costs	Annual X-factor 2019 Distribution: 1.7% large enterprises 2.5% medium-sized enterprises Measurement and marketing: 0% As of 2020: Distribution: 3.53% large enterprises 4.79% medium-sized enterprises Measurement: 0% Marketing: 1.57%.	Annual X-factor 2019 Distribution: 1.9%. Measurement: 1.3%. As of 2020: Distribution: 1.3%. Measurement: 0.7%.	Efficiency mechanism based on: sharing operator efficiencies 2016 Differentiated sharing level with respect to the distance between actual cost and efficient cost of the operator
Incentive mechanisms		Net revenue sharing from fibre transit in the electricity infrastructure	Sharing of electricity costs based on energy savings achieved; Recognition of 75 per cent of margins from activities aimed at environmental and energy sustainability	Collection Sharing on revenues from the sale of material and energy (range 0.3-0.6) and from Conai fees Treatment Sharing not explicitly recognised by the method, although it can be traced back to the general principles supporting the development of the circular economy
Annual limit on tariff increases			On an asymmetrical basis and depending on: - investment needs - cost-effectiveness of management - changes in scope of operations Mechanism to guarantee financial equilibrium	Collection On an asymmetrical basis and depending on the presence of: -perimeter changes -improved Service quality Treatment Limit to growth less tight since the efficiency factor is not provided for, it is a function of -inflationary growth -environmental impact of plants Collection and treatment Mechanism to guarantee financial balance

(1) Resolution 443/19 is applied to managers in the integrated waste cycle, including treatment activities (for disposal or recovery) only if these activities are included in the operator’s corporate scope. On the other hand, the tariff regulation of the gate fees of the plants is postponed to a dedicated measure.

(2) Resolution 363/2021/R/rif updated the previous regulatory period and introduced tariff regulation for treatment where these are “minimum” plants, i.e. essential for closing the municipal waste cycle.

(3) For the energy and waste sectors, reference is made to the WACC methodology, while for the integrated water service the values refer to the coverage rate of financial and fiscal charges.

(4) For the years 2022-2025, the reference measure for the WACC in the waste sector is Resolution 68/2022/R/ref.

(5) In February 2020, Inrete Distribuzione Energia Spa, the Group’s main distributor, challenged the measure before the Lombardy-Milan Regional Administrative Court (TAR) with regard to the significant reduction in the recognition of operating costs introduced by Resolution No. 570/2019.

Climate and the environment

Climate change

Regulatory and economic interventions aimed at managing climate change, and the concrete opportunities that derive from addressing the risks associated with 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), as well as 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 carbon neutrality by 2050 and to limit the increase in temperature to below 1.5ºC. Further important elements moving in this direction include the change called for by the Green Deal, the European Commission’s plan for a Europe that is more competitive in the fight against climate change and increasingly capable of transforming the economy and society by setting them on a path of sustainable development and, in the wake of this, the circular economy action plan (CEAP). The actions taken by European and national institutions are coordinated and converge towards the goals of a fair, sustainable and inclusive transition. Adopting the Green Deal and related initiatives, aimed at tackling climate and environmental problems in order to achieve carbon neutrality and the transition to a regenerative and circular growth model, is aimed towards an industrial strategy that implements the circular economy in all sectors.

Circular economy action plan 

The Circular Economy Action Plan, presented by the Commission last year, has made it possible to outline a strategic framework for circular economic development in the European Union and, in so doing, is geared towards accelerating the transition and making the change foreseen by the Green Deal possible.
Incentive initiatives, reuse and recyclability in products, reduction of overpackaging and rules for bioplastics have become increasingly important in this respect. Above and beyond the plastics sector, the promotion of the circular economy is also encouraged with respect to water management, both in terms of reuse of purified wastewater for irrigation in agriculture and in terms of minimum requirements for the use of reclaimed water.

Opportunities 

National policies are developing in a European context where priorities are defined and available resources allocated accordingly. In this sense, the National recovery and resilience plan (NRRP), which makes use of the European funds made available by the NextGenerationEU package supplemented by a complementary national fund, guides Italy in the implementation phase of the European Green Deal and, since there is an overall consensus concerning the need to introduce progressively more challenging climate targets, reinforced instruments have been made available to member states with the aim of:

• accelerating the process of ecological and digital transition;
• accelerating the transition to a regenerative and circular growth model;
• providing a tool to help investors in the transition to a low-carbon economy.

In order to manage the energy crisis that began last year, the European Commission introduced in May 2022 a series of measures that can be launched in the short term (REPowerEU), including a common gas purchasing platform, a cap on gas and electricity prices, the diversification of supply and a reduction of gas demand through energy efficiency measures and electrification of consumption.

The drive to decarbonise the European economy has instead been entrusted to long-term measures, in particular the Fit for 55 package, which aims to reduce climate changing emissions by 55% within 2030 by focusing on an increase of renewable energies in the production mix. In terms of energy efficiency, the current 2030 targets, revised upwards to meet this ambitious emission reduction target, will be pursued by giving a leading role to public buildings in the process of making Europe’s building stock more efficient. In terms of renewable energies, whose increased production is crucial to replace fossil fuels and reduce carbon intensity, the electrification of consumption will require considerable investments along the entire supply chain and, as far as regional energy planning is concerned, it is expected that the recovery of waste heat from industrial processes will have significant potential. The development of renewable gases, including hydrogen, by constructing electrolysers powered by renewable energy sources, will also be a priority.

In early 2018, the European Commission published the Sustainable Finance Action Plan, which aimed to respond to three objectives: redirecting capital flows towards sustainable investments in order to achieve sustainable and inclusive growth; managing financial risks arising from climate change, resource depletion, environmental degradation and social issues; and promoting transparency and a long-term vision of economic and financial activities.
The first concrete action took the form of the EU’s own definition of a Taxonomy for sustainable investments, aimed at directing investors’ funds towards sustainable initiatives.

In order to be aligned with this Taxonomy, economic activities must comply with three principles identified by the Regulation:

• contribute positively to at least one of the six environmental objectives set out, including mitigation of climate change, adaptation to climate change, sustainable use and protection of water and marine resources, transition to a circular economy, prevention and reduction of pollution, and protection of biodiversity and ecosystem health;
• not produce negative impacts on the environment;
• respect minimum social guarantees.

Moreover, as of 1 January 2022, companies subject to the directive on non-financial reporting must indicate the amount of their activities that fall under the European Taxonomy.
As regards the Italian context, the six strategic missions of the NRRP are built around the six pillars of intervention set out in the European Regulation for Recovery and Resilience and are accompanied by specific sectoral reforms. Mission 2, “Green revolution and ecological transition”, the largest in terms of resource allocation, addresses the initiatives that most closely concern the Hera Group.

For the water cycle and waste sector, the NRRP aims to modernise networks and plants and reduce the infrastructure gap between the north and south of the country, assigning a central role to the national Plan for the water sector, for providing public funding, and to the national Programme for waste management.

In the energy sector, the NRRP focuses on developing renewable energy sources, modernising electricity grids (to increase their digitalisation and resilience against climatic events) and energy-saving solutions. Other key actions include the integrated development of the hydrogen supply chain, promoting production- and consumption-side projects at the same time and the principle of energy efficiency as the first zero-emission fuel.

Strategy for decarbonisation

All countries that signed the Paris agreement made a commitment to a strategy for reducing climate-changing emissions reaching 2050. The strategy will move towards improving knowledge of climate impacts, intensifying climate risk planning and assessment, accelerating adaptation actions and developing resilience to climate change globally. People are becoming increasingly sensitive to environmental and social inclusion issues and are thus driving the increase in demand for green & digital interventions, in line with EU recommendations on economic recovery and resilience. In order to get various stakeholders and civil society involved in the adoption of sustainable behaviour, the European Commission has created the European Climate Pact. This initiative offers individuals and organisations opportunities to learn about climate change and find solutions, and provides a space for individuals to interact and promote a European climate movement. Organisations can identify their own ambassadors with a focus on gender equality and, in order to support the beginning of concrete actions, the Pact’s platform makes it possible to share experiences, funding opportunities and know-how.

Opportunities in the utility sector 

The inevitability of climate change, which has led the European Commission to anticipate its emission reduction targets to 2030, with the hope of achieving full decarbonisation by 2050, is also forcing local authorities to review priorities and courses of action. Moreover, the pandemic has made it urgent to implement actions to make cities and local programmes more resilient and has increasingly oriented regional policies towards circular economy initiatives, sustainable mobility, carbon neutrality and digitisation. This scenario is increasingly ambitious and offers new opportunities to the utility sector. All types of customers (household, industrial and public administration) will be called upon to introduce technological improvements that can reduce their energy needs.
Promoting and selling products and services for energy efficiency and supporting the energy efficiency of buildings are some of the initiatives being promoted.

Environmental and socio-economic factors

Stakeholders, both financial and non-financial, who are increasingly interested in sustainability issues, are therefore also moving towards green financing, which can raise liquidity on the capital market at rates that are potentially lower than the alternatives.

Following a rationale based on value sharing between companies and communities, oriented towards finding solutions for the benefit of both, the engagement of the community and individuals is becoming increasingly important. The main megatrends are those built on the UN 2030 Agenda, theoretical references and successful experiences of shared value approaches and new business opportunities.

The new lines of development will continue to include the full exploitation of data (seen as a real corporate asset) and a greater focus on cybersecurity, to protect the company and its data. The speed of change makes it essential to define training plans that enable the corporate population to better manage change (first and foremost digital change). This includes training that may be fragmentary but is still able to provide the necessary continuity (self-development).

 

Technology and human capital

Digital technological evolution involves a continuous acceleration of some major ICT trends and, in addition to moving beyond the paradigms found in economic and social contexts with increasing speed, it alters entire market segments and social relationship patterns. The rise of Artificial Intelligence, automation, Robotic Process Automation, data collection and management (Internet of Things, data governance and data analytics), cybersecurity and, finally, cloud-based platforms favours an increase in the amount of data produced and the speed of its availability, generating further opportunities for companies. Utilities are actors capable of promoting a wider use of innovation thanks to their contribution to digitisation and technological development, giving attention to IT security as well. The Internet of Things and digital interaction between people (exemplified by the automation of more standardised customer relations through chatbots) favour a continuous and growing flow of data, which allows not only timely analyses of different situations (real time analytics), but also a more precise definition of decisions and actions to be taken, often with the support of artificial intelligence. In this direction, the EU Commission, adopting the communication “Digital compass for 2030: the European model for the digital decade” has confirmed the path for an ethical digital development in Europe, with clear targets to 2030 benefitting citizens and businesses. The main goals include:

• 80% of the population between 16 and 74 with basic digital skills;
• 20 million specialists in ICT, equally distributed between men and women;
• 75% of businesses using cloud computing, big data and Artificial Intelligence services;
• 90% of small and medium-sized enterprises with a basic level of digital intensity;
• 100% of public digital services available online,
• 80% of citizens using digital identity solutions;
• 100% of households with gigabit connectivity and inhabited areas covered by 5G.

The benefits of digitally-aware development have been defined in Italy by the “Strategy for Technological Innovation and Digitisation”, one of whose main challenges is to accelerate the transition to a digital society, prepared to achieve the above-mentioned European targets. This strategy intends to innovate by safeguarding the economic, environmental and social sustainability and guaranteeing equal opportunities for participation. In 2022, more than 45% of Italian companies adopted forms of remote working, allowing their employees to work from home at least one day a week.

Italy also ranks third in terms of readiness for 5G. Investments in telecommunications, networks, software, automation and other technological infrastructures, which are essential for reaching European targets, must be accompanied by the spread of a culture and training that will enable the new technologies, which in turn are oriented towards a sustainable and circular economy, as well as hinging on digitisation and artificial intelligence. The NRRP intends to direct 22% of the available funds towards a major digital acceleration in the country, as a lever to give a decisive boost to the country’s competitiveness. By virtue of their relationship with the public administration and SMEs, utilities play an important role in supporting digital transformation, in particular through digital services for optimising the yield of production processes, but also through sensors installed for data collection and analysis, without forgetting connected machinery for automatic task performance and predictive maintenance. Examples of this can be found in the various applications in the relevant businesses, such as data-driven energy management solutions, thanks to connected and smart-sensor-equipped systems and devices inside public buildings, or sensors and smart devices distributed throughout the territory, coordinated and integrated by digital platforms that process the generated big data for resource planning and service optimisation. The widespread presence of digital technology affects all aspects of business operations, extending the changes to the point of translating into additional and new value-added services. The increase in infrastructural requirements, which continues to drive the demand for investment in connectivity and remote collaboration tools, for utilities focuses on the need for connectivity and security applied to remote working and also multi-channel interaction with the customer, without forgetting the management and sensitisation of infrastructures across the area served. The digitisation process is also fuelled by incremental investments in Artificial Intelligence and hyper-automation, Internet of Things and Internet of Behaviors (IoB), distributed cloud and 5G. Operation technology (OT) or remote management, which had developed over the past few years as a niche area limited to plant effectiveness and with little attention to cybersecurity aspects, requires companies to increase investments in order to reduce system fragility. In this context, it is essential to continue to deploy all available technological skills and resources to increase the level of protection and attention to cybersecurity risks, in order to counter threats and minimise possible consequences. Customers in all sectors, who are increasingly inclined to interact through digital channels, expect real-time responses and uninterrupted service availability, and therefore the advantage goes to the most proactive suppliers in terms of attention to behaviour and optimisation of consumption, but also, increasingly, additional services such as smart house and e-mobility.

Cloud platforms have made high-performance connectivity available and enabled significant infrastructural economies of scale for exponential technology development, optimising the use of time. The availability of processing power also drives the spread of Artificial Intelligence and Robotic Process Automation applications with integrated Artificial Intelligence (IRPA), which are useful for making the most appropriate decisions on actions to be taken. The identification and formalisation of managerial processes that combine human and automated activities, balancing them according to the value added to the process, is therefore one of the issues to which all organisations will have to pay particular attention, not only in terms of organisational design, but also from the point of view of training and managerial monitoring.

The added value of a resilient workforce

The enhancement of the human component is also fundamental for a balance between technology and people, focusing the organisation of resources on value-added activities, according to a pattern of intelligent integration, which is not limited to mere cost efficiency and purely replacements, but rather fits into the broader horizon of the Just Transition targeted by the European Union. The current historical moment has emphasised the need to address the priorities towards which corporate culture, leadership styles and models must be directed. The strong acceleration of the digital transformation confirms the need for an increasingly sensitive approach to relational aspects. When dealing with the consolidation of remote working, therefore, the ability of companies to develop distinctive and inclusive communities is a critical factor in their success, and its consolidation reduces the risk of the weakening of relational capital resulting from an irrational use of remote working. Repositioning individual priorities towards an all-round concept of individual well-being and the increased search for flexibility, combined with a growing need for work-life integration, are driving companies to seek constant alignment between individual and collective purpose. The digital workplace transformation and the interconnection on a single platform allow people to interact, share information and gain knowledge and skills. Research by the World Economic Forum in the energy and utilities sector, however, shows that 11.8% of workers are at risk of redeployment, with only 51% of them successfully re-employed. The socio-demographic evolution characterised by a lower birth rate and an increasing incidence of migration will also lead to an increase in the co-presence of different generations within organisations and an increasing focus on diversity and inclusion issues. The ongoing technological, energy and environmental transitions, together with the evolution of organisational models and ways of working, have an impact on the evolution of skills and learning models, but also on a concept of leadership based on authenticity, autonomy and transparency, on performance management beyond the boundaries of space and time, and on a greater search for agility and participation in work regulations. The emerging roles on which to focus training investments will depend on skills related to digital transformation, energy transition (with a focus on decarbonisation and renewable energies), the environmental transition (with a focus on circular economy, climate change and green finance) and, last but not least, problem solving and self-management, thus underlining the increased importance of “soft 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 remote collaboration tools has created a change in the way of working and measuring performance, the ability to provide an environment that is also connected in terms of human relations becomes, for this very reason, sought after and valued. The wider presence of performance management skills, through rooted trust, responsibility, motivation and autonomy, is necessary to ensure the achievement of objectives in a context in which the working time factor is becoming less and less important compared to the result, and has proved to be crucial. Employer branding, moreover, will be decisive in attracting and retaining talent; engagement and inclusion, interconnected by the idea that each person must be valued and encouraged to express his or her potential, are fundamental to maximising performance.

In order to generate value for people, it seems increasingly important to move towards structured data governance and to develop sustainable and circular behaviour. Enabling experiences and paths in training and development that are increasingly defined by a rationale of individual and collective responsibility will make it possible to face future scenarios that are changing and not always predictable. Flexible organisational models used to increase agility and resilience, individual empowerment actions, accompanied by a rethinking of working methods, the reinterpretation of space and time, and the well-being of people, are therefore drivers for the valorisation of human capital and as a consequence for increased productivity. In this respect, the creation of fair and inclusive environments is essential for the responsible financial community, and the commitment to promoting policies of inclusion and protecting diversity must increasingly translate into a fight against discrimination in the workplace.

 

 

Strategic approach and management policies

 

Scenario analysis is a methodology for defining useful inputs for strategic plans to increase the effectiveness of the business model over time.
This type of analysis involves a process aimed at testing a strategy’s resilience under different assumptions describing possible future states. For the Hera Group, it is essential to analyse the potential impact, positive or negative, of various economic-financial, business, regulatory, competitive, environmental, technological and human capital scenarios that are different from each other, but equally plausible and internally consistent.
The study of scenarios has also been applied to climate change, in order to understand how physical and transitional climate opportunities and risks may plausibly affect business and its various areas over time.

The reference framework within which the Group’s strategy has been developed in the various areas consists of three areas:

• the environment, in order to respond in a concrete way to the threats linked to climate change, by regenerating resources and strengthening the resilience of the assets managed, favouring the energy transition and aiming at carbon neutrality;
• socio-economic factors, in order to match developments in the Group’s size with the generation of an increasing portion of shared value, to positively affect the well-being and prosperity of stakeholders and the areas served;
• innovation, to drive the evolution of the Group’s activities, thanks to the opportunities offered by the most advanced technologies and digitalisation, with the aim of increasing the efficiency and quality of the services provided, multiplying opportunities for stakeholder engagement and accelerating the spread of behaviours and skills capable of responding to the challenges of a constantly evolving context.

Macroeconomy and finance

The debt structure towards which the Hera Group is oriented responds to its business needs, not only in terms of the duration of loans, but also in terms of interest rate exposure. The Group’s financial strategy, in turn, is aimed at maximising its return profile while maintaining a prudent risk strategy.

Financial planning

The scenario projected in the Plan expects the Group’s financial structure to maintain, in 2026, 20% of variable-rate debt and 80% of fixed-rate debt, within the limits of the financial risk policy. These projections are part of a well-pondered long-term planning of the necessary financial resources, which Hera carries out by analysing and monitoring cash flows, paying attention to maintaining a flexible and efficient debt structure. The average cost of debt, in particular, is constantly monitored, both through financial risk management activities which, in order to limit the risk of interest rate fluctuations, include the use of derivative instruments, and through assessments of liability management operations aimed at seizing favourable market opportunities and maintaining a debt repayment profile that is evenly distributed over time. One challenging objective for the upcoming years, falling under the Plan, within a scenario that includes rising rates and a highly volatile market, is to contain the average cost of debt through liability and financial risk management activities. The Plan confirms the Group’s desire to meet financial requirements through fixed-rate bond issues, including green and/or sustainable bonds, taking advantage of any opportunities for subsidised finance, in order to respond to the Group’s investment needs with further gains in efficiency and thus guarantee the implementation of innovative and sustainable projects in the environmental, water and energy sectors. The funding strategy is reflected by the actions included in the Business plan for projects to reduce greenhouse gas emissions and increase the amount of recycled plastic.

Credit ratings

Most of the Group’s business is concentrated in Italy, and its rating is thus closely linked to the country’s rating, its macroeconomic trends and its political scenario. Hera’s actions and strategies remain oriented towards maintaining and improving adequate ratings; its usual communication with the rating agencies Moody’s and Standard & Poor’s (S&P) has confirmed positive feedback in terms of the solidity and excellent balance of its business portfolio, as well as in terms of excellent operating performance, efficient and proactive risk management and resilient creditworthiness indicators. In 2022, in particular, Moody’s and S&P ratings were confirmed respectively at BAA2, with an outlook going from stable to negative which reflects the worsening of the sovereign rating outlook (since, despite the Group’s business being recognised as sound and sustainable, a company’s rating cannot be 1 notch higher than that of the country in which it operates), and BBB+ with a stable outlook. The rating obtained is among the highest in the multi-utility sector at European level and is higher than the sovereign rating, confirming the path of growth implemented over the years and the results in line with multi-year expectations.

Sustainable financial reporting

Over the period covered by the plan, the ongoing adoption of sustainable financial reporting best practices will support the Group’s green financing and ratings. Hera has already been committed to green funding for some time: it was the first Italian company to issue a green bond in 2014, which was followed by an ESG-linked loan in 2018. In 2019, it adopted a Green Financing Framework (GFF), accompanied by a further green bond issue. An expected further improvement in sustainability ratings, in turn, will make it even easier to access lines dedicated to sustainable financing, characterised by potentially lower costs than traditional credit lines. Consistently with these guidelines, the Group is also in the process of implementing the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) coming from the Financial Stability Board, which foresee the definition of climate scenarios, risks and opportunities related 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 to track the financial performance of the world’s leading companies in terms of sustainability, bears witness to the validity and credibility of the path taken by the Hera Group, opening up further developments. Recognitions of this type, in fact, act above all as a stimulus and allow Hera to identify the areas to be developed for further improvement in its performance and, at the same time, to include among its reference investors those who are engaged in socially responsible investing (SRI), a segment that, as mentioned above, is undergoing considerable and continuous expansion.

Business areas and industrial strategy

The Group’s 2022-2026 Business Plan, approved in February 2023, was drafted with respect to a complex external context, strongly disrupted by the geopolitical and energy crisis. Faced with such a challenging scenario, the Group’s strategy to 2026 confirms the strategic aspects of its previous planning, putting the focus back on its synergic relationship with its reference areas, thanks to significant investments in projects capable of effectively responding to the main macro-trends of the utility sector: ecological transition, innovation, cohesion and social development.

To orient the ecological transition, the Group’s plan focuses on reducing climate-changing emissions, the circular economy and resilience in services, to improve their quality and continuity.

The Hera Group’s strategy is also developed thanks to a solid contribution coming from innovation, by adopting technological solutions that will make it possible to know and monitor customers’ needs and adapting existing services to their requirements, and to optimise the management of the assets, rationalising their maintenance.

Free-market businesses

In the free-market businesses of the energy sector, the Group aims to consolidate its national position through a gradual increase in its customer base, reaching the target of four million energy customers by 2026. This goal will be pursued by strengthening and enhancing the portfolio of value-added services offered, with increasingly advanced solutions to enable and support customers in the path towards the energy transition. Examples of this include offers for monitoring and reducing waste, including the sale of smart thermostats, and those aimed at increasing energy efficiency. The Group’s innovative service package also includes the sale of charging stations for sustainable mobility and the design, sale and installation of photovoltaic systems.
The customer base will also be expanded by taking advantage of the opportunities arising from the termination of the protected electricity service, which is scheduled to come to an end for household customers in January 2024.
Innovation will be a key element in enabling the evolution of the relationship between sellers and customers towards new standards of quality and satisfaction. This will be possible thanks to customised offers that will leverage the data collected by second-generation meters and the introduction of artificial intelligence solutions supporting the various business applications used in customer relations.
In the energy services business, the Group aims to grasp the new energy efficiency opportunities that will emerge in particular in the public administration segment, thanks to the NRRP and national energy saving targets.

With regard to the waste treatment and recovery business, the Group intends to consolidate its leadership by leveraging plant and industrial development, as well as commercial development in the industrial waste and recovery sectors. In the latter area, Hera, acting through its subsidiary Aliplast, will develop new projects both to expand plant capacity in segments already covered, such as the production of recycled PETs for food use and recycled polymers for cosmetics and food, as well as in narrower and more innovative segments. In particular, two new plants will be built, with state-of-the-art technology, also partially financed by the NRRP: work on both a carbon fibre regeneration plant in Imola (BO) and a rigid plastics recovery plant in Modena will begin during the period covered by the Plan.

In terms of commercial development, the Global Waste Management solutions offered to industrial customers will also be strengthened, with customised services covering the entire waste cycle, water resource management and energy services, fully exploiting the synergies between the various businesses covered by the Group. Furthermore, customers will be offered the means with which to improve the circularity of their production and logistics activities, with the aim of reducing waste production or changing its nature towards higher-value types of waste. Lastly, development in the remediation sector is expected to be accelerated by ongoing corporate acquisitions.

Regulated businesses

As regards regulated businesses, our strategy for the coming years will be based on innovation and digitalisation, intended to increase the resilience of the infrastructures managed and to improve operations, benefiting the service offered to the Group’s customers.  
For example, the use of predictive maintenance and functional modelling models will make it possible to classify, plan and better gauge the interventions necessary for the range of networks managed, with benefits both of an economic nature and concerning system resilience.

In gas and electricity distribution, a drive towards innovation will come from installing approximately 410 thousand second-generation (2G) electricity meters, which will allow for a more precise measurement of consumption, and around 300 thousand NexMeter gas smart meters, patented by Hera, having advanced safety functions in the event of leaks or earthquakes, and which can also be used for green gas mixtures.
During the period covered by the Plan, the Group will further evolve its businesses towards decarbonisation, through investments in innovative and circular projects involving renewable gases, from the production phase to their final use, and at supporting the electrification of consumption and an increase in distributed generation. For example, the Power-to-Gas plant is scheduled to become managerial at the Idar purification plant in Bologna Corticella, which will use wastewater and electricity originating from renewable sources to produce biomethane and oxygen.

In the water cycle, work will continue on making networks more resilient to climate change, smarter in terms of automation and remote monitoring of assets, and more efficient in the management of water resources. The district-based programme for the aqueduct will be developed and extended, which allows the condition of the pipelines within portions of the water network (districts) to be constantly controlled, thanks to a precise monitoring system that provides data that can also offer indications on the presence of hidden leaks, as well as remote pressure regulation. Concerning the sustainable management of water resources, various circular economy initiatives have been planned for saving, reusing and recovering water, both at customers' premises and at the Group's assets and sites, including through the effective optimisation of sewage sludge management and recycling materials from water cycle waste with dedicated plants and innovative tools.

In district heating, investments will mainly be focused on projects aimed at developing and optimising existing systems and maximising the use of renewable heat. In this sense, the main efficiency-enhancing project, awarded NRRP funds, consists in the interconnection between two district heating systems in Bologna, the S. Giacomo facility (fed by a cogeneration plant with a gas integration boiler) and the Caab Pilastro system.
Lastly, in the municipal waste business, the Group will confirm its commitment to achieving ambitious recycling targets, by improving the quality of sorted waste collection. On the one hand, new communication campaigns and citizen engagement initiatives will be launched, with a focus on single-use plastics and packaging, as well as actions countering abandonment and degradation. On the other, the planned change for all Emilia-Romagna municipalities to unit pricing systems within the time covered by the Plan will also play an important role. As a further support to the virtuous behaviour of citizens, more than 60,000 smarty bins will be made available, which can be monitored remotely and in real time (by a control room) in order to improve this service and optimise operator interventions.

Key figures for the Group

The industrial strategy described thus far makes it possible to project growth in the Group’s Ebitda at 2026 coming to over 250 million euro, compared to the final figure for 2021, in order to reach the 1,470 million euro at the end of the time covered by the Plan. This development will follow a solid, sustainable and balanced path, fuelled both by internal and external lines, consistent with Hera’s history and its industrial evolution over the years. Investments coming to approximately 4.1 billion euro have been planned over the five years, an amount significantly higher (approximately +53%) than the average seen during the last five years and also higher than the amount set out in the previous plan. These investments will be supported by more than 130 million euro of NRRP funding among the calls for tenders already assigned, which will allow for more rapid interventions for the ecological transition in the areas served, demonstrating that the Group’s strategy is fully in line with national and European policies concerning sustainability. The margins created during the time covered by the Plan will make it possible to respect the significant financial commitment required in terms of investments, also enabling the ratio between net debt and Ebitda to be brought back below 3x, starting from 2025, thus confirming the Group’s solidity.

By 2026, 62% of the Group’s total Ebitda will contribute to creating shared value, fuelled by approximately 2.8 billion euro in investments over the period covered by the Plan (equivalent to 70% of the total amount of investments planned for the five-year period), a target in line with the Group’s 2030 objective of increasing the amount of Shared Value Ebitda to 70%. The Plan to 2026 also confirms the convergence of the path towards the other 2030 targets that Hera is pursuing regarding carbon neutrality and the circular economy, including the ambitious 37% emissions reduction target (compared to 2019, with SBTi validation) and a +150% increase in recycled plastics (compared to 2017).
Utilities are called upon to develop strategies able to effectively orient the challenges and the priorities of the coming years.
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 characterise their evolution, leading towards increased resilience and accelerating the evolution of its corporate culture.

Local areas

Local areas are the focus of the Group’s strategic plan, which can be subdivided into various areas of action:

• Energy Transition, the path to economic growth and sustainability for the green transition;
• Resilience, confirmed and strengthened through the evolution of the enterprise risk management model;
• Regeneration, including a project for the reuse of soil and demolition materials;
• Technology, understood as harnessing the enormous amount of data available and its use in Artificial Intelligence projects, and for the enhancement of cyber security monitoring tools;
• Community, and tools for listening to and communicating with the reference area, considered fundamental for wellbeing, and aimed at consolidating relations with stakeholders and generating the engagement necessary for the success of initiatives;
• Human resources, enhancing the development of the individual and guiding the evolution of the way of working;
• Opportunity, in terms of growth in size, as well as green gas development, an opportunity to exploit synergies between the different businesses managed, including extending laboratories towards the external market by exploiting the experience and know-how acquired.

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

Shared value framework

Hera’s shared value framework, introduced in 2016, has oriented the Group’s strategy towards growth based on responses to the problems of the external context, capable of maximising shared value, both for the company and for the community. Creating shared value is the perspective that integrates an orientation towards sustainability into the very heart of the Group’s strategic approach.

 

The latest revision of this model includes the topics of resilience and adaptation to climate change, drinking water (included within the scope of sustainable management of water resources) and biodiversity. These are issues to which the Group has been committed for years, which complement the other dimensions of Hera’s framework (such as the circular economy and sustainable management of water resources). The Group’s objective is to create shared value through business activities that are strongly integrated into the socio-economic fabric of the communities served, generate operating margins and respond to the drivers of the Global Agenda, i.e. the calls to action for change indicated by policies at a global, European, national and local level. The year 2022 confirmed the validity of the initiatives already launched by the UN Global Agenda to 2030 to respond to the megatrends in place: fragile planet, technological disruption and accelerated urbanisation were considered the most closely linked to Hera’s business, having a direct impact on corporate activities. Hera’s contribution is most significant for seven sustainable development goals on the 2030 Agenda: 6) clean water and sanitation, 7) clean and affordable energy, 9) business, innovation and infrastructure, 11) sustainable cities and communities, 12) responsible consumption and production, 13) combating climate change and 17) partnership for the goals.

The Group’s website ( www.gruppohera.it/gruppo/sostenibilità) and its Sustainability Report (Sustainable Strategy and Shared Value section) offer further details on the actions that the Group intends to promote by contributing in a broad sense to the 17 Goals of the UN 2030 Agenda. Also note that the Group has set itself clear industrial objectives for both 2026 and 2030, to make a significant contribution to achieving carbon neutrality. The main elements include energy efficiency solutions applied both within the Group’s operations and to customers (by valorising multi-business assets), the development of new renewable plants, the sale of green energy to customers and, as mentioned above, a strong commitment to reduce carbon dioxide emissions from the industrial chain, reaching 37% by 2030 (compared to 2019), calculated according to Science Based Target references.
In order to foster a culture linked to these SDGs among the Group’s entire workforce, dedicated training events have been made available on its corporate training platform, concerning the circular economy in particular; the UN agenda is also part of training for all newly hired employees. The main actions include those aimed at promoting energy efficiency, sustainable management of water resources, the selection of suppliers with qualifications in terms of environmental and social sustainability aspects, the development of employment and new skills, and a broader use of innovation and digitalisation. Awareness of the significance of climate change is considered by the Group to be the first necessary step towards incorporating precise responses to the resulting risks and opportunities into its corporate strategy, consequently reflecting the effects of these responses in the drafting its multi-year plans.

Energy transition and Opportunities

Among the initiatives identified to seize the opportunities emerging from an analysis of the climate scenarios hypothesised, the most promising were included in the Business Plan to 2026, which also reflects the mitigation actions identified in response to the risks defined. In particular, the Group’s strategy to implement climate change mitigation mainly consists of:

• choosing renewable electricity to power its own activities and to promote dedicated business solutions for customers; examples include the plans to install photovoltaic systems at Group sites and other suitable areas, and the launch of the first energy community projects;
• increasing the production of energy from renewable sources (in particular geothermal and biomethane, in relation to which, at the Sant’Agata Bolognese plant, performances exceeding expectations continue to be obtained);
• offering solutions to reduce the carbon footprint of customers in all segments (households, condominiums, businesses and public administrations, for example by setting Business Plan targets that aim to involve customers in replacing boilers with a high environmental impact);
• initiatives and projects to reduce the carbon footprint, such as the technological and regulatory feasibility studies to produce green hydrogen through water electrolysis, using the share of renewable energy generated by WTEs, or connecting the two district heating systems in the Bologna area that are currently separate, from which a single, more resilient, efficient and saturated district heating network will emerge (Power-to-gas plant);
• implementing technological innovation projects and initiatives for greater environmental sustainability in the Group's activities, such as optimising the mix with which district heating heat is generated to increase the portion produced from renewable sources, extending the district heating programme for the water network, and extending public lighting with smart, consumption-conscious solutions. Also confirmed during the period covered by the Plan are revamping and automation interventions of some networks and district heating systems, of primary electricity substations, as well as the roboticization of about 1,200 secondary substations (“Apennine resilience plan”, which will address resilience with a view to mitigating the risks identified in the area of electricity distribution).

In order to support the energy transition to which society is called, the Hera Group essentially plans actions aimed at increasing the incidence of energy efficiency among the various user categories, as well as exploiting every possible form of renewable energy.
Actions to reduce energy consumption within the Group's perimeter (-8.6% to 2026 compared to 2013) will therefore continue with renewed impetus.

Regeneration & resilience 

The resilience of networks and plants, recycling, separate waste collection, purification and sewage, and saving water resources guide specific projects in the various sectors. By way of example, the design and execution phases of engineering works show a progressive focus on sustainability issues, reducing the environmental footprint and minimising the use of virgin soil. Building information modelling (BIM) technology, which makes material analysis possible (even during plant demolition), allows for maximum recycling and reuse and extends the circular approach to the end-of-life of the work. The development of plastic recycling, in terms of increasing the recycling capacity of flexible plastics, in addition to building plants for recycling new types of plastics (rigid and carbon fibres) and processing plastics and paper, and an increase in the production of biomethane, foreseen in the period covered by the Plan, are increasingly oriented towards giving new value to the organic portion of solid municipal waste. The rationale underlying circularity also involves the Group’s main purchasing processes: Hera’s strategic approach involves an increasing focus on materials or goods that meet the principles of the circular economy and extends the adoption of minimum environmental criteria (MC) to the definition of product characteristics, not only to components for water connections but also to other standard elements of the networks such as gas and water reducers and sewer lifts. The Group confirms its commitment to widely adopting circular economy solutions with medium- and long-term industrial objectives and projects based on defined deadlines, through technological and behavioural solutions. These solutions are oriented towards improving the volume and quality of sorted waste collection, providing new plant capacity for the treatment, recovery and recycling of special urban waste (including through partnerships in the local area), revamping of sludge treatment plants, the recovery of sand from the integrated water cycle waste for subsequent reuse, and lastly technology, to maximise the reuse of water resources and for advanced plant engineering for purification quality, including through technological upgrading of dewatering systems. Actions to increase the resilience of the Group's activities also include the installation of remote-controlled accessories and sensors in all networks (to ensure remote monitoring and management), the installation of smart meters for each business, and the implementation of programming and modelling tools based on artificial intelligence to anticipate critical events or optimise maintenance

To benefit the wider use of circular models, greater attention will also be paid to the various customer engagement tools, so as to use the different communication/dissemination channels according to the features of the various geographical areas, as well as to improve and expand the tools already in place by paying attention to the different types of customers.

The campaign to raise awareness of environmental challenges will continue to involve schoolchildren (environmental education projects), and will be carried out through the main media at a local level (press tour on environmental issues).

Opportunity

Decarbonisation policies reduce dependence on fossil fuels and therefore contribute to guaranteeing the security of the system. The Group’s plant assets also have further potential to seize opportunities related to the development of new renewable energy vectors, such as hydrogen. The Group intends to become involved in the various phases of this chain, and is launching experimental projects in this direction. In the sustainable hydrogen production phase, a circular solution comes from synergies between the electrolytic process and the water purification process, with multiple circular flows of material between the two activities (oxygen as input for purification and biogas from sewage sludge as material for hydrogen methanation). The Group’s Waste-to-Energy plants will be able to use biogenic electricity (considered renewable) to power electrolysers capable of obtaining hydrogen for industrial customers, mobility or the distribution network. Once again with reference to gas distribution, experiments are underway on the Group’s assets to assess the optimal blending percentage between methane and hydrogen for the operation of cogeneration assets and plants for industrial and household users. Finally, note the project to install the latest generation of “NexMeter” gas meters, suitable for measuring hydrogen/methane mixtures, as described in the paragraphs above.

For Hera, the need to guarantee quality and continuity in essential services in such a changing context, subject to increased climate risks, represents a cost, but at the same time an opportunity. The necessary increase in investments to improve the resilience of its assets puts the Group, thanks to its solidity and financial capacity, in an advantageous position compared to smaller competitors, who could face greater difficulties in dealing with such a volume of investments.
In addition, internal reinforcement, accompanied by growth through external lines and tenders, allows the Group to seize opportunities for development in the most effective way. In this regard, further consolidations in the waste management and energy businesses are envisaged in period covered by the Plan, which will allow for synergies in activities complementary to those of the Group. This involves an expansion of the Group’s range of services while, as regards the energy markets, Hera Comm, which has already been awarded two lots for the protected electricity service, is awaiting the tenders scheduled for 2023 for the 2023-2024 and 2024-2025 thermal years for the last resort gas and default gas markets. Further tenders in the regulated markets are possible in the period cover by the Plan. Many of the Group’s projects fall within the financing scope of the NRRP and are related to the circular economy. Their objectives include the improvement and mechanisation of the urban waste collection network, and the construction, modernisation and expansion of treatment plants for waste sorting, sewage sludge, leather and textile waste.
Several tenders concerning the Group are expected to be issued in the coming months.
In other words, the Group aims to make the most of the opportunities offered by technological evolution and digitalisation to extract innovations, managerial improvements, cost efficiencies and synergies related to data management, in order to meet the needs of the local area and stakeholders, to take a leading role in the provision of services and to accompany cities towards new development models, overseeing each technological upgrade by analysing its impacts and mitigating its side effects.

Technology and human capital: innovation

A strategy moving towards green innovation

Advances in the chemical and engineering industries are at the forefront of technological development in production processes, and concern the waste management (first and foremost plastics) and 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 CO ₂).

Digital strategy

Hera has adopted a Group strategy to exploit all available information and to be able to guarantee the quality and exchange of data flows. The principles that have guided the implementation of the strategy are those of an organisational approach to data architecture, which is articulated in the organisation of information by “domains”, development according to a product strategy, on a self-service technology platform and with the adoption of a federated governance model.
The Group’s data strategy model and related guidelines are included in training courses dedicated to individual business units, with the aim of spreading the strategic plan at all levels. In order to increase the ability to intercept anomalous events, the data sources used with the convergence between the management environment (applications) and the industrial environment (Group plants) must be continuously extended. Vulnerability assessment activities on both environments, aimed at preventing attacks on systems and plants, are fundamental; to this end, the model envisages distributed actions and responsibilities, and it will be further strengthened in the period covered by the Plan, through projects aimed at increasing monitoring capacity and the evolution of prevention tools.

The utility sector is fragmented and characterised by strong technological gaps, the resolution of which is necessary to comply with the new European directives. In order to consolidate its role in the Italian utility sector, Hera intends to leverage the specialisations built up over time, through the implementation of new analytical methods and the development of automation and process digitisation projects. The main pillars for developing the digitisation of the Group’s activities include:

• more sensors in the field of operation and thus greater control capacity, through the enhancement of remote monitoring, the installation of smart meters in the various businesses and the expansion of predictive maintenance systems;
• digital customers, both in terms of making personalised offers to customers through the management of 2G meters, and through artificial intelligence applied to sales channels and customer interaction;
• data strategy, aimed at exploiting all available information and ensuring the quality and exchange of data flows, i.e. creating the first data products;
• reporting on digital transformation initiatives according to the corporate digital responsibility (CDR) framework.

Further developments in digitalisation include the definition of a specific training plan to strengthen employees’ skills in innovation and sustainability, the continuation of data analytics projects and artificial intelligence to support the circular economy and energy transition, as will be explained below in the strategies for human capital development.

Digital transformation processes will cover various business areas, in order to make the most of the opportunities offered by new technologies. In the sales business (energy and gas), for example, customer acquisition activities will be supported by advanced digital marketing tools; the technological infrastructures of the billing processes will be renewed to optimise the “meter to cash” process; and, to enhance customer centricity, a new customer relationship management platform will be implemented. The ”more control” offer was also introduced, through which customers equipped with second-generation electricity meters will be able to monitor their energy consumption hour by hour via app, and will be able to see the next day's cheapest energy hours. In distribution (water, gas and electricity networks) and collection (waste) businesses, the implementation of advanced functionalities aimed at improving the effectiveness of the service is planned, such as predictive maintenance, the sharing of managerial progress with municipalities through the development of a dual system, or the implementation of virtual control for containers, in order to optimise their maintenance.

Technology

Data strategy is increasingly designed in such a way as to transform the Group into a data-driven company, where decisions guided by data, valued as a corporate asset and subject to an ethical and conscious reading, highlight the growing importance of data management and resources dedicated to its protection.

In 2022, international geopolitical events related to the Russia-Ukraine conflict led the national cybersecurity agency to raise the cybersecurity alert level, which forced Hera to increase the monitoring carried out by the Group’s Security Operation Centre (SOC). Cyber security initiatives have continued and will be renewed in terms of technologies, processes and people. In the area of technologies, interventions are aimed at improving the security of mobile devices (smartphones and tablets) and controlling access to cloud services. For the security of smartphones and tablets, a solution was implemented for real-time monitoring (centralised at the Group SOC) of 80 per cent of the company’s devices. For the protection of access to cloud services, a cloud access security broker solution is planned, and event monitoring is centralised at the SOC. The group's cybersecurity monitoring service has also been enhanced with additional dedicated tool consoles; moreover, following the installation of probes in the industrial environment, visibility on the various operating contexts, particularly water and electricity, has increased. The evolution of the regulatory system also continued in 2022, with the revision and publication of the Security by Design procedure in each project, accompanied by the publication of mandatory training videos.
In order to ensure the security monitoring of systems, vulnerability assessment and penetration testing activities are constantly implemented, particularly of Group services exposed on the Internet.
With regard to people, who represent the human factor in the chain of cyber-attacks, awareness activities continue to be planned through a dedicated online training platform, extended to the entire corporate population, as well as monthly adaptive ethical phishing exercises. In addition, in the area of cyber security for industrial plants, an ad hoc training course was set up and a technical document was defined on cyber security controls in the area of operation technology to support the design of new plants.

The evolution of technology and digitalisation, calling for continuous development of employee skills and the consequent training needs, confirms the Group’s strategic decision to introduce cloud-based platforms to increase individual productivity and as the main tools for collaboration, since cooperation between man and technology requires continuous evolution in the way we work. With this in mind, process automation projects (virtual factories and digital labs) encourage a wider awareness of technological integration, focusing on initiatives to apply artificial intelligence and enhance the community, through digital workplace tools.

The Group intends to use data to generate value for people and for its business; the gradual digitalisation of human resources management processes, as well as the creation of a reference architecture to integrate systems and data available by using a prescriptive analytics approach, confirm this intention.

Community and human resources

In the context of the current transitions, the human resources development guidelines are constantly updated in order to address the priorities within the Next GeneHERAtion Growth model, and guide corporate policies. After observing the external context, the Group has confirmed investments with the following strategic objectives:

• people development;
• people engagement;
• increasingly agile and flexible approach to organisational and operational models and the evolution of regulatory tools;
• evolution of skills to support the current energy, environmental and digital transition by seeking possible integrations between the different dimensions considered;
• technologies, to enhance the contribution of each individual through the conscious development of technological innovation, following a human-centred rationale.

In order to encourage ethical values and behaviour that can represent a distinctive model for the Group, a result-oriented culture is increasingly fostered, as well as relations between individuals and widespread leadership. The Group's programmes on culture and an agile approach to improving performance, through deeply rooted trust, responsibility, autonomy and work ethics, are guided by the continuous development of a work by objectives culture. As part of the Group’s strategy, it is fundamental to make everyone perceive how their work and their sense of belonging are correlated to the company’s overall results and performance and, consistently with this, the development of a talent attraction strategy guided by the company’s purpose is fundamental. In order to enable everyone to express their potential and accelerate the organisation’s growth, favouring harmony between work and private life and guaranteeing an ethical approach to work, welfare initiatives dedicated to individual physical, psychological and financial wellbeing will continue, in line with the priorities identified by continuously listening to people and with the aim of enhancing their wellbeing. As regards digital transition, the “HER@futura” programme will be followed up on, as mentioned among the previous development pillars for digitalisation, by introducing increasingly innovative and customised initiatives to develop digital culture, processes and skills, increasing the level of digital proficiency at all levels of the organisation and integrating aspects of corporate digital responsibility in the execution of projects and business processes.
In order to consolidate awareness of the Digital Workplace, the dissemination of the use of Microsoft 365 tools among the entire corporate population, segmented by target audience, and the implementation of new projects for the digitisation and automation of business processes will continue to be promoted. With the aim of consolidating the transfer and wider spread of technological knowledge within the Group, specific initiatives aimed at further stimulating the application of new technologies and methodologies will also continue through partnerships with universities, suppliers, start-ups and innovative training centres.

Therefore, moving towards a virtuous integration between people and technology remains central. The objective is to make each person a protagonist along the path of process automation and virtualisation, enhancing the skills of individuals to improve the daily work experience of the workforce.

In order to go beyond the concept of equality and achieve true equity in treatment, thus recognising individual specificities, the Group will continue to evolve its performance management, with the aim of making dialogue between team leader and team member increasingly effective, orienting it towards accountability regarding measurable objectives and greater delegation and autonomy in the organisation of work-related activities. This result management-oriented path will be further consolidated through a series of initiatives. The Group, also in this regard, is continuing its path of progressive digitalisation, which enables it to encourage experiences, training, development and career paths in an increasingly self-determined manner, confirming a rationale based on individual and collective empowerment and guided by the company’s purpose. Human resources management and development processes are designed to preserve the skills and distinctive values built up over time and, at the same time, to develop individual talents, regardless of gender and age, seeking innovation in all aspects that can generate added and sustainable value over time. In order to develop people’s unique characteristics, targeted policies and programmes are foreseen to enhance inclusiveness and diversity, oriented at fostering a culture of innovation and continuous improvement. In this sense, structured and frequent engagement initiatives will be implemented in synergy with the biennial surveys on human resources satisfaction, and diversity monitoring methodologies will continue to be implemented as a tool for awareness and sensitisation and a development of the Group’s gender equality reporting model.
The expression of diverse individual potential constantly guides diversity & inclusion initiatives. Hera’s strategy hinges on the continuous development of an inclusive culture of diversity, understood as an engine for generating change, in which employees can benefit from a positive balance between development actions assigned to them by the manager and development actions in which the initiative instead starts from themselves. It is no coincidence that, in addition to retaining the figure of the Diversity Manager (introduced in 2011), Hera, a signatory of the “Utilitalia Pact - Diversity makes the difference”, promotes inclusive policies at all levels of the organisation, progressively refines measures to reconcile work-life time and adopts a merit management system that is not only transparent, but also and above all neutral with respect to gender, age and cultural diversity, with the adoption of systems aimed at monitoring progress and internal and external awareness policies. Artificial intelligence and digital tools are also now well established to analyse data emerging from listening initiatives that allow for in-depth analysis of employees’ level of satisfaction on issues related to the working environment and corporate values, and translate them into corrective actions in each employee’s reference department, but also through internal mobility between various departments.
The Group’s strategy also contributes to the creation of value by accelerating the process of re-designing training activities from a blended learning point of view, the continuous evolution of professional academy progressions, the increasingly widespread use of a HerAcademy learning centre as a reference point for internal and external knowledge sharing, without forgetting other projects to further improve the level of employee engagement.

Consistently with its corporate path, the Group has planned multidisciplinary initiatives to develop projects consistent with the SDG framework, with particular reference to the circular economy, and to work in an ecosystem perspective with the various stakeholders, so as to converge towards common goals in terms of green economy. The broader adoption of a green culture and an approach oriented towards sustainability and circularity is a central element of the strategic plan and presupposes a path of cultural change that, since the previous year, has been supported by various project initiatives, processes of continuous updating of know-how and the expansion of the offer of specialised higher education, linked to the Group’s core activities, to seize market opportunities and encourage the route towards the energy and environmental transition. Over the period covered by the Plan, the awareness-raising and skills-building processes already launched concerning the impacts related to Fit for 55, TCFD, EU Taxonomy and the continuous regulatory changes at European and national level will continue. The data of the “ecoHERA” assessment, carried out in 2022, will also be used to consolidate the indicators that measure and verify the level of proficiency achieved in both the energy transition and environmental transition fields, and to build the programme of transversal and vertical initiatives for strengthening the skills of the corporate population.
The objective of achieving results in terms of green economy in relation to the reduction of the Group’s carbon footprint, by way of example, is shared through the enhancement of the contribution of remote working, through the enrichment of the green offer within the corporate welfare tools, and by raising awareness on green issues already at the time of hiring.
This integrated vision of technological evolution and employee experience, accompanied by the application of organisational network analysis, artificial intelligence and business intelligence tools, aims to foster the optimisation of organisational processes, human capital development and individual decision-making capabilities. The evolution of competences and roles according to the needs of the business, through a strategic dialogue between the areas of business and the function of human resources, enables a shared understanding of the meaning of the business challenges addressed by the business plan, but also a sense of the risks and opportunities.

 

Risk factors: actors, methodology and areas of management

 

Risk governance

 

The Hera Group’s organizational structure is designed to uphold management effectiveness and profitability across the entire value chain while at the same time managing any risk exposure arising from its businesses.
Hera’s corporate governance system enables strategies to be handled uniformly and consistently. The Risks Committee is the principal policy-making, monitoring and reporting organ for risk management strategies. Additionally, under article seven 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 2022, 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 between:

• the role of risk management, entrusted to the risk owners in charge of the various 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, 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 Executive Chairman and the CEO supervise, each within their area of responsibility, the internal control and risk management functions. The Vice Chairman oversees coordination between the Risks Committee and the Controls and Risks Committee, maintaining an independent status.

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 Group’s 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, which defines acceptable risk levels consistently with a given risk management strategy, through the identification of:
  • key risk scales;
  • risk metrics;
  • the limitations associated with key risks;
  • 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 8 February 2023, the seventh Enterprise Risk Management report on the 2023-2026 Business Plan was presented to the Board of Directors.
Over the course of 2022, the ERM analysis made further methodological improvements and refinements, while at the same time not revealing any critical risks, either in terms of reputation or operating-financial impact.

The area of significant risks includes two additional ones with respect to those identified last year, concerning the possibility of a deterioration in net financial position due to the scenario of extreme commodity price volatility, or due to possible criticalities in the market for sales of receivables involved in energy efficiency initiatives. In the same area, the risk of a reputational impact deriving from possible proceedings undertaken by supervisory/regulatory/investigation bodies was confirmed, generated by the degrees of discretion on the start of verification/investigation procedures, in the presence of non-univocal interpretative guidelines (despite the Group’s conduct always complying with the law), as was an operating-financial risk, deriving from high-intensity seismic events relating to networks. The risk arising from the possibility of fires at waste treatment and recovery plants, while confirmed, has a negligible impact in terms of consequences on the Group’s results and none whatsoever for the environment and business continuity. However, due to the growing social awareness on the issue, such events can lead to significant reputational consequences due to the perceived risk. The difficult economic situation, partially due to the Russia-Ukraine conflict, reverberating in various forms on the activities and priorities of all economic operators, could also affect the full compliance of actions taken by companies that are engaged, on behalf of Hera, in interventions on the networks managed by the Group through external tenders. Hera is committed, however, to containing this risk by confirming its approach to extensively monitoring the health of the value chains affected by its businesses. 

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 a constantly increasing regard to climate change and sustainable development. Paragraph 1.01, “Contexts and trends, 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, introduce optimisation measures (including technological and efficiency improvements) within current structures and develop strategic planning that offers coherent responses, Hera carries out the specific analysis, measurement, monitoring and management activities described below.

Operating and financial area

Identifying 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.

Managing commodity price risk

In order to standardise the approach to risk taken by 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 these processes to achieve an effective management of procurement and hedging concerning the energy market, with a clear focus on the skills involved. The Group’s approach provides for a single interface for the management of risk deriving from the energy 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.

Identifying risks associated with the debt market

The operating and financial area, in addition to being characterised by fluctuating energy and commodity prices, may show different scenarios as a result of changes in interest rates, exchange rates, the credit spread and as an effect of possible liquidity crises. These fluctuations may have an impact on 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 it may only be able to do so on unfavourable economic terms, due to an inability to liquidate assets on the market, or due to a changed risk perception. Among the factors determining this perceived risk, the creditworthiness assigned to Hera by rating agencies plays a key role, as it influences the possibility of accessing sources of funding and the 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 (i.e. the assignment of a rating lower than BBB) defined on a portion of debt equal to approximately 150 million euro. 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, or terminating the publication of the rating.  

Managing risks associated with the debt market

Hera’s financial management is centralised in the Administration, Finance and Control Central 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 40% of the Group’s financial debt is long-term (more than five years) and 59% of this is represented by bonds with repayment at maturity. See note 26 to the consolidated financial statements, “Non-current and current financial liabilities”, for further details in terms of worst case scenarios.
Moreover, the Group’s activities and strategies are particularly focused on ensuring that the highest rating level is maintained, as appears in its BBB+ rating with a stable outlook, confirmed by S&P, and the Baa2 rating confirmed by Moody’s, even with a worsened outlook, from stable to negative, due to the worsening of the outlook of the sovereign rating).

Sensitivity analysis

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 2022, the Group’s exposure to the risk of interest rate fluctuations was 22%, while the remaining 78% of debt is at a fixed rate. 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 an unchanged debt structure, would increase financial expenses by an average of approximately ten million euro per year.

Identifying risks from counterparties

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

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.
In 2022, the 24-month unpaid ratio of the Group’s main sales companies amounted to 0.71%.

Regulatory and business area

Identifying competition and economic risks

Within the final reference market, which is mainly limited to Italy, the economic and geopolitical context, the rising volatility in the prices of energy and other raw materials, as well as the difficulties connected to global logistics chains, all contribute to putting pressure on sales margins which, added to the increased competition on the free market, may impact the Group's profitability. The increased difficulty in forecasting volumes to cover the needs of the sales portfolio, continuously changing, may furthermore require Hera to purchase or sell additional energy on potentially unfavourable terms.
A potential reduction in waste production, deriving not only from the economic context and European and national regulatory frameworks and 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 waste management business related to the management of its set of plants are concentrated in the Herambiente Group.

Managing competition and economic risks

The Group has maintained elevated flexibility in energy commodity procurement sources while at the same time developing hedging activities to minimize exposure to operating risks from electricity generation, thus ensuring ongoing alignment with the market and maximising natural hedging.
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 have enabled the Group to achieve its strategic objectives. The implementation of a circularity strategy – through the polymeric material recycling process carried out by Aliplast Spa – and the development of recycling lines for other types of plastics make it possible to seize the opportunities offered by the evolution of European regulations.
Free-market businesses have gained increasing importance in the Group’s portfolio, contributing significantly to its operating performance but also exposing it to growing competition. The Group responds to the challenge of competition by continuously innovating its sales offers and introducing new products in a timely manner, increasing its presence and customer base on the free market, and aiming to ensure 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 operating and financial indicators.
In particular, a 1% reduction in GDP compared with the business plan’s scenario would lead to an average annual drop in Ebitda of approximately 3 million euro.
A 1% reduction in the inflation rate compared with the business plan’s scenario would lead to an average annual drop in Ebitda coming to approximately 7 million euro. A 1€/MWh increase in the price of gas and an ensuing rise coming to 2€/MWh in the price of electricity on the wholesale market compared to the indications set out in the business plan would lead to an average annual drop in Ebitda coming to roughly 0.8 million euro.

Identifying regulatory risks

Hera carries out part of its activities in a regulated market, and its operations are therefore influenced by the regulatory measures taken by the sector authorities and the government (in particular concerning tariffs and market structure), government incentives for renewable energies, the concessions granted by local authorities (for regulated activities relating to waste collection services, gas distribution, integrated water service and public lighting) and national authorities (for 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 waste management sectors.

Periodic updates of the legislative and regulatory framework, both at national and European levels, may significantly impact the sectors in which Hera operates, influencing its profitability as a consequence.
Regulatory risks impact network businesses (water cycle, gas and electricity distribution and district heating) and the municipal waste collection 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, the integrated water service, waste collection and street sweeping scheduled for the time covered by the Plan determine the risk of losing some of the areas currently managed, especially in contexts with a significant presence of competition, only partially offset by compensation for the portion of invested capital not yet depreciated.
Lastly, there is a risk arising from the regulatory uncertainty surrounding the end of protected services, in terms of the implementation timeframe.

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, the integrated water service and waste collection and street sweeping services.

Identifying strategic risks

Strategic risks, associated with long-term planning, financial sustainability, 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.
Achieving 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 its Business plan against a variety of adverse risk scenarios, which supports an integrated risk projection from an enterprise-wide viewpoint. Thanks to this model, it is possible to perform scenario analyses, stress testing and what-if analyses 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-catastrophe, climatic, technological and human capital areas

Seismic, atmospheric and other climatic events may affect the Group’s performance. Hera intends to continue valorising its resources and to ensure that they are preserved and developed, so as to continue to enjoy their benefits in the future. The physical and transitional risks linked to climate change, as well as accidents in the Group’s plant equipment, may generate potential environmental damage, and therefore the operating and strategic implementation of best practices in risk management and the opportunities deriving from climate change, i.e. the gradual updating of current reporting tools, increasingly reflect TCFD recommendations. Risks arising from cybercrime, which Hera also assesses in terms of their impact on service continuity, are also being given increasing attention. Since accidents may pose a risk to people’s rights and freedoms, i.e. if they cause physical, material or immaterial damage, the Group’s policies regarding the parameters and acceptability thresholds are published on its web portal.
The risk management approach is organised according to the specific areas in which environmental, technological and human capital risks occur.

Identifying environmental-catastrophe risks

Hera, while aware of the need to preserve natural resources, uses them to provide essential services to its customers. The Group’s activities, in turn, have an environmental, water and carbon footprint, and adopting mitigation and adjustment measures to reduce environmental-catastrophe risks is therefore fundamental. In keeping with the ambitious goal to reduce current levels of greenhouse gas emissions compared to their current level, as set out by international organisations, the physical and transitional climate change risk scenarios relevant to the Group’s activities have been identified. For further details, please refer to the next section, “Identifying climate change risks”.
As regards the environmental standards with which Hera must comply in carrying out its businesses, the Group’s activities are subject to various rules and regulations, including rules relating to CO ₂ emissions, emissions of other substances produced by combustion, water discharge and the handling of hazardous and solid waste. Non-compliance with CO ₂ limits contributes to climate change, 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, which affects these natural resources by their very nature, in order to meet water demand.
In addition, note the 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-catastrophe risks

Investments aimed at preventing and reducing the 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 in the area of 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 mitigating environmental risks by complying with the energy efficiency objectives set by national legislation 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 exclusively 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 seawater safety plan, currently underway which, in addition to maintaining the quality of marine resources, increases the resilience of the stormwater drainage infrastructure in the event of extreme events. For further details on specific initiatives, please refer to the section “Mitigating climate change” in the Hera Group’s 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 further details, see the “Transition to a circular economy” section in the Sustainability Report.
Strengthening the resilience of the Group’s water supply and distribution system in a medium to long-term outlook continues. Furthermore, the reduction of the water footprint is pursued through the water management system, which aims to promote a 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 energy 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 scenario set out in the Business plan, leads to an average annual drop in Ebitda of approximately 16 million euro.

Identifying climate change risks

The physical and transitional risks from climate change scenarios pertinent to the Group’s activities have been classified according to their potential consequences on business, and submitted to further impact and mitigation assessments in relation to their criticality (some examples include 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 ambitious climate scenario, envisages a future evolution characterised by strong decarbonisation processes in order to keep the temperature increase below 2°C: this scenario has been used in identifying transition risks. The physical 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): this scenario has been used in identifying physical risks. Based on these scenarios, eight physical risks and eight transition risks were identified, associated with related business impacts. Each risk and opportunity was associated with a timeline, a priority level (defined as the combination of the probability that the context in which Hera operates will change and the impact of the risk/opportunity on the business) and consequent management methods, in the case of the risks identified, and business initiatives, in the case of the opportunities identified.

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

*These are the most significant risks currently being addressed, as described in section 2.04, “Climate Change Mitigation”, of the Sustainability Report.

In order to assess potential impacts on the Group’s assets deriving from extreme phenomena related to climate change, a flood risk analysis was completed in 2022, with a medium/long-term time projection. The results show that the average annual loss referred to timelines reaching 2030 and 2050, in accordance with the PCP 8.5 scenario, increases by 0.2 million euro and 0.5 million euro, respectively, compared to current conditions.

Note that physical risks are distributed over both the medium and long term, with a higher number of occurrences in 2031-2050, consistent with the principle that climate change impacts will become more evident in the long term.
Transition risks are mainly concentrated in the medium term, and are distributed across all categories of the TCFD classification. Each risk has also been associated with one or more management methods: 21 management methods were identified for physical risks and 13 for transition risks; some of the resulting actions have already been integrated into the investments made, as well as being reflected in the Business plan. For further details, please refer to the section “Hera’s climate strategy” in the Sustainability Report. The investments and the mitigation and adaptation actions planned to date, moving in the direction of the energy transition towards carbon neutrality and the environmental transition towards the circular economy, as well as for technological evolution, in line with European strategies and the objectives of the UN 2030 Agenda, are now fully part of the Group’s way of operating and are often implemented in advance compared to the estimated timeframe, in light of the Group’s positive results.
The ongoing Russia-Ukraine conflict is leading to an increasing European effort to diversify energy supply sources and the transition process. For an evaluation of the potential effects in terms of impairment tests, specifically in relation to gas consumption, see note 25 of the consolidated financial statements in paragraph 2.02, “Commentary notes”.

Managing climate change risks

Hera has launched a series of initiatives to mitigate the effects of climate change, and at the same time reduce its own carbon footprint. Risk assessment activities continue, with the appropriate level of detail, especially with regard to transition risks and their modelling. Following the results of the first phase of analysis, a series of mitigation and adaptation activities have been identified, with no risks determined that – as regards their valuation over the time covered by the Business plan – may cause a need to make write-downs on the Group’s assets.

Type	The Group’s main initiatives/actions
Mitigation activity	reduction in internal energy needs through efficiency investments; specific investments for the growing role of renewable energy production, such as those planned in plants for biomethane production and initiatives to build electrolysis plants for producing green hydrogen;  sales of renewable electricity and gas with compensated emissions to customers; offers of photovoltaic generation systems;  offers of energy efficiency services to retail and institutional customers; acceleration towards the reuse of raw materials through polymer recovery and regeneration activities with consequent reduction of CO 2 emissions.
Adaptation activity	consolidation of the resilience of Group infrastructure to climate change, increasing its capacity to adapt to adverse physical conditions. In this regard, the Rimini seawater protection plan will ensure a better response capacity of the integrated water service infrastructures to extreme precipitation events in the area; development of project hypotheses for the integration and partial replacement of water sources, as well as the construction of interconnections between them, in order to deal with emergency conditions by 2030; interventions for the districtisation of water networks and monitoring leakage; agreements and investments for the reuse of purified wastewater, reducing pressure on primary water resources and thus water stress on the area served, which will be accentuated by climate change in the coming decades.

 

As mentioned in paragraph 1.01.02, “Strategic approach and management policies - Climate and the environment: sustainable development”, Hera implements a risk management policy aimed at achieving carbon neutrality. The main contributions include energy efficiency solutions through the valorisation of multi-business assets, applied both within the Group and to customers, the development of new renewable plants, the sale of green energy to customers and a strong commitment to reduce carbon dioxide emissions from the industrial chain by 37% within 2030 (compared to 2019), calculated according to the Science Based Target method.

Identifying managerial and ICT security risks

Despite careful planning and insurance protection, 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 managerial 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 on-premise systems (hosted in company 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, whether business-critical information or personal information (i.e. any data relating to natural persons, as more fully defined by the European regulation GDPR and the privacy code of Legislative Decree 196/03) may result in serious financial losses with consequent damage to market image. A business impact analysis has been carried out on all ICT systems used by the Group, and a security risk analysis is carried out annually to identify and assess risk, using a methodology based on a framework that considers three areas of security: availability, integrity and confidentiality.

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.
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.
During 2022, work continued on measures aimed at ensuring the confidentiality, integrity and availability of Hera’s systems. The main initiatives, a consolidated part of the Group’s strategy and its method of action, are described in paragraph 1.01, “Contexts and trends, strategic approach and Group management policies”. By way of example, in the context of industrial plants, coordination of cybersecurity improvement initiatives has been boosted, aimed at a single monitoring model for cybersecurity covering both IT (Information Technology) and OT (Operation Technology) areas. In order to block any vulnerabilities in systems or applications that could be exploited by an attacker, vulnerability assessment activities have also been intensified, extending them to industrial plants.

Identifying people’s safety and development risks

People and their behaviour 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. The Group therefore continually focuses on the emerging needs and requirements of all employees.
Hera’s structured process for identifying hazards and the related risk assessment informs its analysis of roles, work activities, processes, workplaces, equipment, vehicles, plants and substances used. With reference to the specific nature of its business and its local presence, the Group has also established criteria for identifying risk scenarios due to the spread of the Covid-19 virus from an Enterprise Risk Management viewpoint.
The risk mitigation measures adopted and the effectiveness of their implementation are periodically monitored and reviewed. In this regard, a specific checklist has been developed for periodic monitoring by the heads of the various organisational units.
With the aim of identifying, measuring and monitoring the risks that threaten the Group’s assets and the continuity with which it provides essential services, a risk assessment model has been implemented for the physical security of these assets. This model aims to prevent and mitigate threats and impacts caused by events (malicious, culpable or accidental) such as fire, theft and acts of sabotage/vandalism.

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 are no longer solely technical or normative, but geared towards developing self-awareness in the perception of risk and in adopting safe and aware behaviour.
The prevention and protection measures put in place by the Group aim to minimize the probability of an adverse event occurring, and lower the severity of the consequences following the event. It is of fundamental importance for Hera to develop workers’ awareness of the risks associated with their work, and the company increasingly uses training courses that encourage people to gain greater awareness, modifying their own behaviour in terms of risk perception and becoming a virtuous example for other workers. Focusing on these aspects is an essential element of operations, in order to maintain a steady decrease in the number of injuries, the accident frequency rate, the severity rate and the number of days of absence due to injury. In this respect, the Group has obtained important certifications for occupational health and safety, such as ISO 9001 (quality management system), ISO 14001 (environmental management system) and ISO 45001 (health and safety on the workplace). 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.

The ongoing commitment shown by people 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 with whom they interact. 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. This procedure provides that each employee promptly report and halt any risky situation or unsafe behaviour. In addition, in 2022, the heads of the organisational units completed and managed about 5,000 checklists, instrumental in monitoring the measures adopted and the possible need for specific procedures for managing workers.

In order to maintain a high level of efficiency in carrying out its activities and guarantee the highest level of safety in the workplace and compliance with environmental standards, and reduce risks related to the continuity of services, Hera has drawn up a technical-management project that:

• guarantees a uniform minimum level of security throughout the Group, through the application of homogeneous, standardised and modular countermeasures;
• applies advanced technological solutions in compliance with regulations, standards and good practices;
• centrally manages contracts (infrastructures, maintenance and services) guaranteeing correct standardisation and optimisation of intervention costs.

For example, to better manage events, the Group’s synergies, skills and resources have been made use of by centralising the alarm reception point in a control room with a view of all alarms/alerts concerning assets, and also by managing the global contractor’s networks and systems (for installation and maintenance of systems, and activation of surveillance services). Lastly, with reference to social wellbeing, and with the aim of fostering a positive working environment, Hera has created a welfare system based on attention to people. This system includes interventions which are monetary or linked to the quality of life, such as services relating to the family, education, work-life balance, wellbeing, leisure and health.

 

Operating results and investments

 

Efficiency in the services offered and growth in industrial margins

For the Hera Group, the year 2022 closed with improvement in operating results and investments compared to the previous year, with consolidated adjusted Ebitda coming to 1,295.0 million euro, up 6.2%, adjusted Ebit up 3.4%, and adjusted net profit up 0.8%. As regards investments as well, significant growth was seen, coming to 20.8%, reflecting the Group’s ongoing focus on the resilience of assets under management.
These results are particularly important, since they must be set against the backdrop of a particularly complex external scenario, characterised by continuous volatility on the energy market and a highly unstable international geopolitical situation. The management policies adopted by the Group, and its solid and resilient business model, proved to be effective in responding to these complexities, and even in this difficult moment guaranteed that the quality and continuity of the services provided remained high and continued to create value for its stakeholders.

As regards this latter aspect, note that the Hera Group, in order to support its customers during this particular situation, developed and implemented a few specific initiatives, from the possibility given to customers of requesting monthly billing for consumption and payment by instalments, to tools for monitoring consumption, and advice on saving energy and money. In addition, a specific training plan for operators was activated to offer qualified support on consumption analysis and efficiency.

The initiatives to support customers, the value generated for stakeholders and the proven ability to positively face the challenges of 2022, which showed an unprecedented complexity, find their foundations in the Group’s consolidated multi-business industrial model, balanced between regulated and free-market activities.

Despite the complicated scenario, the Hera Group has continued to grasp opportunities to expand its scope of operations through a number of acquisitions. In particular, in the waste management area, note the acquisition by Marche Multiservizi Spa of Macero Maceratese Srl, a company specialised in the recovery and treatment of waste, and the acquisition by Aliplast Spa of Alibardi Fiorenzo Srl, a company specialised in the collection and production of plastic material. The energy areas, instead, benefited from the acquisition of Con Energia Spa by Hera Comm Spa.

The following table shows operating results at 31 December 2022 and 2021:

 

Income statement (mn€)	Dec 22	% Inc.	Dec 21 (redetermined)	% Inc.	Abs. change	% change
Revenues	20,082.0	0.0%	10,555.3	0.0%	9,526.7	90.3%
Other operating revenues	548.2	2.7%	400.1	3.8%	148.1	37.0%
Raw and other materials**	(16,635.9)	(82.8)%	(6,672.9)	(63.2)%	9,963.0	149.3%
Service costs	(2,105.8)	(10.5)%	(2,464.6)	(23.3)%	(358.8)	(14.6)%
Other operating expenses	(74.9)	(0.4)%	(66.5)	(0.6)%	8.4	12.6%
Personnel costs	(601.1)	(3.0)%	(592.8)	(5.6)%	8.3	1.4%
Capitalised costs	82.5	0.4%	60.8	0.6%	21.7	35.7%
Ebitda*	1,295.0	6.4%	1,219.4	11.6%	75.6	6.2%
Amortization, depreciation and provisions	(667.1)	(3.3)%	(612.1)	(5.8)%	55.0	9.0%
Ebit*	627.9	3.1%	607.3	5.8%	20.6	3.4%
Financial operations	(125.0)	(0.6)%	(119.8)	(1.1)%	5.2	4.3%
Pre-tax result*	502.9	2.5%	487.5	4.6%	15.4	3.2%
Taxes	(130,6)	(0.7)%	(130.6)	(1.2)%	‐	0.0%
Net result*	372.3	1.9%	356.9	3.4%	15.4	4.3%
Result from special items	‐	0.0%	12.6	0.1%	(12.6)	100.0%
Net profit for the period*	372.3	1.9%	369.5	3.5%	2.8	0.8%
Attributable to:
Parent company shareholders*	322.2	1.6%	330.3	3.1%	(8.1)	(2.5)%
Minority shareholders	50.1	0.2%	39.2	0.4%	10.9	27.8%

* Adjusted results, as described in paragraph 1.02
** Managerial values to reflect the different managerial value of gas storage.

REVENUES 
(bn/euro)

Revenues at December 2022 were up by 9,526.7 million euro compared to 2021, almost exclusively as an effect of the significant increase in the price of electricity and gas seen in 2022. Indeed, the energy sectors showed significant growth, coming to 8,842 million euro, or 93% of the overall change. In addition, growth was seen in turnover for energy services, related to energy efficiency in residential buildings (insulation bonus and 110% super-bonus) and an increase in activities for value-added services for customers. As a whole, these effects contributed with roughly 290 million euro.
Lastly, revenues from the waste management sector contributed with 160 million euro, mainly due to energy production, acquisitions on the industry market and increased prices in the markets.

For further details, see the analyses of the individual business areas in paragraph 1.07.

Other operating revenues in December 2022 increased by 148.1 million euro compared to 2021. Note the higher revenues from energy efficiency certificates amounting to 60 million euro, as described in more detail in the Gas area in paragraph 1.07.01, and higher revenues from contracts on assets under concession coming to 56 million euro.

Costs of raw materials related to trends in revenues

The cost of raw and other materials increased by 9,963.0 million euro compared to December 2021. This increase was related to a rise in energy commodity prices, as seen under revenues. Lastly, note the increase in the purchasing price of raw materials in the recovery market and the higher purchasing costs for energy efficiency certificates, as mentioned above.

Other operating expenses decreased by a total of 350.4 million euro (with lower service costs coming to 358.8 million euro and higher operating expenses at 8.4 million euro). Overall, lower costs amounted to 739 million euro mainly related to system charges, as a result of the legislative measures indicated in paragraph 1.07.01 and paragraph 1.07.02, concerning higher costs for gas transport and storage. The decrease in costs indicated above was partially offset by higher costs in energy services for energy efficiency and value-added services, amounting to approximately 242 million euro. Higher costs were also seen for waste collection and treatment, totalling roughly 90 million euro, mainly due to higher supplier prices, corporate acquisitions and increased activities related to developing new sorted waste collection projects. Lastly, note the higher costs for orders on goods under concession and for third-party works, coming to roughly 63 million euro.

+1.4% increase in the cost of personnel

Personnel costs increased by 1.4% compared to 2021, for the equivalent of 8.3 million euro. This increase was related to salary increases under the national collective labour agreement and changes in the scope of consolidation due to the corporate acquisitions, as mentioned above. These effects were partially contained by a lower average presence recorded in the period.

Capitalised costs increased by 21.7 million euro, due to higher works invested in assets owned by the Group.

EBITDA*
(mn/euro)

Adjusted Ebitda rose by 75.6 million euro compared to 2021, up by 6.2%. This trend was due to good performances in the waste management area, which increased by 46.3 million euro, and the overall contribution coming from the energy areas, totalling 28.8 million euro.

For further details, see the analyses of the individual business areas.

Depreciation, amortisation and provisions at 31 December 2022 increased by 9.0% compared to the previous year, settling at 667.1 million euro. Higher depreciation and amortisation were mainly due to new investments, an increase in commissions in sales companies for commercial campaigns, and changes in the scope of operations resulting from the consolidation of companies with gas sales and waste management activities. Allocations to the provision for bad debts also increased overall, mainly due to the protected and gradual protected service markets.

EBIT*
(mn/euro)

Adjusted Ebit amounted to 627.9 million euro, up 3.4%. The increase resulting from growth in Ebitda* was partially reduced by higher depreciation and amortisation, as described above.

Financial operations increase

The result from financial operations at 31 December 2022 came to 125.0 million euro, up 5.2 million euro, or 4.3%, compared to 31 December 2021. This change is mainly due to an increase in net financial debt, which occurred in late 2022, due to an increase in the amount of net working capital related to gas storage and the trend in energy commodity prices compared to 2021 (the impact of this was partially mitigated by lower IAS 37 charges).

Adjusted results before taxes increased by 15.4 million euro, or 3.2%, The growth in the net operating margin was added to the impact of financial operations, as described above.

Tax rate at 26.0%

Taxes for 2022, as shown in the operations statement, amounted to 130.6 million euro (the same amount as in the previous year): the tax rate for adjusted results came to 26%, as against 26.8% in 2021. In this comparison, note that in both years the benefits deriving from the redemption of certain “higher values” originating from an equal number of acquisition transactions were included. During 2022, note the benefits that the government provided, through numerous regulatory provisions, as a measure to support the expenses incurred for the purchase of electricity and gas (in this regard and for further details, see the note commenting on taxes in paragraph 2.02.03 of the Consolidated financial statements).

+4.3% Net result*

The adjusted net result increased by 4.3%, or 15.4 million euro. Growth in the adjusted pre-tax result remained stable due to the absence of changes in taxes.

In 2021, a special item result was present with a total value of 12.6 million euro. For a detailed description of its content, see the beginning of section 1.04, “Overview of operating and financial trends and definition of APMs”.

+0.8% Net profit*

The adjusted net profit thus increased by 2.8 million euro (+0.8%), due to the sum of all the events described above.

Net investments rise to 688,7 million euro

In 2022, the Group’s net investments amounted to 688.7 million euro, up 118.4 million euro compared to the previous year. This includes financial investments coming to 3.2 million euro, due to Marche Multiservizi Spa’s equity investment in Aurora Srl, a company currently inoperative, involved in the waste treatment sector. Financial investments decreased by 7.8 million euro compared to the previous year, which included an equity investment in SEA - Servizi Ecologici Ambientali Srl.
Capital grants amounted to 23.9 million euro, of which 17.4 million euro involving FoNI investments, as foreseen by the tariff method for the integrated water service. Net operating investments amounted to 685.5 million euro, up 126.3 million euro compared to the previous year.

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

 

Total investments (mn€)	Dec 22	Dec 21	Abs. change	% change
Gas area	156.7	141.3	15.4	+10.9%
Electricity area	78.3	55.3	23.0	+41.6%
Integrated water cycle area	208.0	194,6	13.4	+6.9%
Waste management area	149.2	98.2	51.0	+51.9%
Other services area	15.3	14.6	0.7	+4.8%
Headquarters	102.1	84.8	17.3	+20.4%
Total gross operating investments	709.5	588.7	120.8	+20.5%
Capital grants	23.9	29.4	(5.5)	(18.7)%
of which FoNi (New Investments Fund)	17.4	16.8	0.6	+3.6%
Total net operating investments	685.5	559.2	126.3	+22.6%
Financial investments	3.2	11.0	(7.8)	(70.9)%
Total net investments	688.7	570.3	118.4	+20.8%

 

TOTAL NET OPERATING INVESTMENTS
(mn/euro)

 

Including capital grants, the Group's operating investments amounted to 709.5 million euro, up 120.8 million euro on the previous year, and mainly related to works on plants, networks and infrastructures. In addition, regulatory upgrading was done, especially in the gas distribution sector for the large-scale metre replacement, and in the purification and sewage sector.
Comments on investments in the individual areas are provided 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 increased by 17.3 million euro compared to the previous year, mainly due to work on corporate buildings and the vehicle fleet.

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 2022.

 

Invested capital and sources of financing (mn€)	Dec 22	% Inc.	Dec 21 (redetermined)	% Inc.	Abs. change	% change
Net non-current assets*	7,522.3	+94.5%	7,308.3	+109.4%	214.0	+2.9%
Net working capital*	1,096.0	+13.8%	2.4	+0.0%	1,093.6	+45,566.7%
(Provisions)	(657.6)	(8.3)%	(633.4)	(9.5)%	(24.2)	(3.8)%
Net invested capital*	7,960.7	+100.0%	6,677.3	+100.0%	1283.4	+19.2%
Equity*	(3,710.9)	+46.6%	(3,416.0)	+51.2%	(294.9)	(8.6)%
Long-term borrowings	(5,598.5)	+70.3%	(3,633.1)	+54.4%	(1,965.4)	(54.1)%
Net current financial debt	1,348.7	(16.9)%	371.8	(5.6)%	976.9	+262.7%
Net debt	(4,249.8)	+53.4%	(3,261.3)	+48.8%	(988.5)	(30.3)%
Total sources of financing*	(7,960.7)	(100.0)%	(6,677.3)	+100.0%	(1,283.4)	(19.2)%

* adjusted results, as indicated in the section on Alternative performance measures (APMs)

1,096.0 million euro net working capital

Net working capital* amounted to 1,096.0 million euro at the end of 2022, up from 2.4 million euro seen at the end of 2021. This change was affected by the fair value of commodity derivatives, which increased by 180.4 million euro compared to the previous year, with a corresponding impact on equity for hedging contracts recognised as cash flow hedges and, to a lesser extent, on the income statement for the year for trading derivatives. The changes in net working capital that led to a corresponding increase in net financial debt were mainly due to:

• the higher value of gas storages, both in terms of prices and volumes, which at 31 December 2022 amounted to 503.7 million euro, as well as to the value of withdrawals made in December, with a value coming to over 200 million euro, which while transmitted have not yet been fully translated into the resulting cash flows from sales to end customers;
• a change in the VAT position coming to 89.9 million euro (at 31 December 2022 this figure resulted in a credit of 17.1 million euro while at December 2021 it was a debit of 72.9 million euro).

As far as the value of trade receivables is concerned, there are no critical issues on the performance on collections, which are, on some market segments, better than the previous year thanks to the continuous and careful control of credit management processes including during the acquisition of contracts (origination management).

657.6 million euro provisions

In 2022, provisions amounted to 657.6 million euro, up from 633.4 million euro at the end of the previous year. This result is mainly the consequence of provisions for the period and adjustments to the post-mortem provisions for landfills and restoration of third-party assets, which more than offset releases for utilisation.

3.7 billion euro equity*

Equity* rose from 3,416.0 million euro in 2021 to 3,710.9 million euro in 2022. This equity strengthens the Group’s solidity, thanks to the positive net result for 2022 operations, amounting to 372.3 million euro and the effect of cash flow hedge reserves, offset by the impact of dividend payments.

Adjusted return on net invested capital (ROI*) stood at 7.9% in 2022, down from the 2021 ROI, which came to 9.1%, due to an increase in net invested capital (NIC) that was greater than the increase in operating income (Ebit).

 

ROI*
(%)

* adjusted for non-recurring entries and the Ascopiave transaction

The results of management led to an Adjusted return on equity (ROE*) coming to 10.0%, down from the amount seen in 2021. This drop was related to an increase in equity (mainly due to the value of cash flow hedge reserves) greater than the increase in operating profit.

 

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 22	31 Dec 21
A	Cash	1,942.4	885.6
B	Cash equivalents	‐
C	Other current financial assets	77.7	29.3
D	Liquidity (A+B+C)	2,020.1	914.9
E	Current financial debt	(563.0)	(443.6)
F	Current portion of non-current financial debt	(108.4)	(99.5)
G	Current financial indebtedness (E+F)	(671.4)	(543.1)
H	Net current financial indebtedness (G+D)	1,348.7	371.8
I	Non-current financial debt	(1,997.0)	(461.0)
J	Debt instruments	(3,197.3)	(2,702.0)
K	Non-current trade and other payables	‐	‐
L	Non-current financial indebtedness (I+J+K)	(5,194.3)	(3,163.0)
M	Total financial indebtedness (H+L)	(3,845.6)	(2,791.2)
	Non-current financial receivables	151.8	142.7
	Net financial debt (excluding put option)	(3,693.8)	(2,648.5)
	Nominal amount - fair value put option	(475.9)	(474.2)
	Net financial debt with adjusted put option	(4,169.7)	(3,122.7)
	Portion of future dividends - fair value put option	(80.1)	(138.6)
	Net financial debt (Net debt)	(4,249.8)	(3,261.3)

 

The total amount of net financial debt came to 4,249.8 million euro, with an increase of roughly 988.5 million euro compared to the previous year. This change was mainly due to the cash absorption caused by the variation in net working capital, as mentioned above.

With a view to rebalancing net working capital, considering the tensions affecting commodity prices, during the year the Group routinely carried out rescheduling transactions on trade payables, through reverse factors or letters of credit, amounting to 506.3 million euro overall. At the end of the year, the amount of outstanding transactions, exclusively through letters of credit, amounted to 192 million euro. By means of these transactions, the Group optimised its payment terms, while keeping the same amount recorded under trade payables, since they are part of its typical working capital management. In fact, note that the Group has trade payables, with different payment terms, based on the contractual agreements defined with the individual counterparties of the various businesses in which it operates, ranging from 7 days to 60 days from the date of invoice issuance.

The financial structure shows current debt at 671.4 million euro, of which 316.6 million euro is due to banks, referring to drawdowns on current account lines amounting to roughly 257.4 million euro and passive interest on loans coming to 59.2 million euro.
The current portion of debt to other lenders amounted to 246.4 million euro, of which 145.1 million euro for the daily fair value adjustment of commodity derivatives exchanged on the EEX platform.
As regards the current portion of non-current financial debt, which came to 108.4 million euro, 87.1 million euro was related to the portion of medium-term bank loans due within one year (of which 22.0 million euro is linked to a private placement with a ten-year term maturing in 2023) and 21.3 million euro to current payables related to leasing contracts.

Non-current financial debt increased by approximately 2,031.3 million euro compared to December 2021, mainly due to the placement in May 2022 of a 500 million euro green bond maturing in seven years, and the disbursement of 1,625 million euro in new bank loans as of August 2022. These latter lines were activated to support the gas storage business and to address the potential liquidity risk due to energy price volatility.

Cash and cash equivalents increased from 885.6 million euro in 2021 to 1,942.4 million euro at 31 December 2022.

At 31 December 2022, 59.4% of medium/long-term debt consisted of bonds with repayment at maturity. The total debt has an average residual maturity of about five years. 39.4% of debt matures after five years. 

 

NET FINANCIAL DEBT
(bn/euro)

Cash flow from operations was absorbed by the increase in net working capital, mainly influenced by the cash absorbed due to gas storage and the other trends mentioned above, as well as by the significant investments made during the period. In addition, cash absorption was due to the payment of dividends and the purchase of shareholdings, among which above all the acquisition of 100% of Con Energia Spa, specialised in gas and electricity sales to end customers, and the purchase by Marche Multiservizi Spa of 70% of the share capital of Macero Maceratese Srl, specialised in waste recovery and disposal.

 

CASH FLOW
(mn/euro)

The 2022 Net debt/Ebitda* ratio rose to 3.28, compared to 2.67 in 2021. This indicator was strongly influenced by the cash absorbed due to gas storage, coming to 503.7 million euro. This ratio would come to 2.89, excluding the effect of changes in gas storage.

 

NET DEBT/EBITDA*
(X)

* adjusted for non-recurring entries and the Ascopiave transaction

 

The FFO*/Net debt ratio settled at 21.4%, confirming the Group’s financial solidity and its ability to meet its financial obligations. This indicator was also strongly affected by the high value of storage (Ffo/Net debt 23.9% excluding gas storage).

FFO*/NET DEBT
(%)

* adjusted for non-recurring entries and the Ascopiave transaction

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 once again this year by its 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 acts as a separate report compared to 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 2022 Sustainability Report.

During 2022, further progress was made in CSV areas and as regards sustainability, both in terms of results and recognitions obtained and new projects launched. Note, first and foremost, the process of updating the Code of Ethics, begun in June and completed in December, which led to the approval of its sixth edition by Hera Spa’s Board of Directors during the meeting held on 8 February 2023. This updating process was the most participative seen since the introduction of the Code, involving management, all employees, with a specific initiative dedicated to younger workers, and trade unions. The “corporate purpose” introduced into Hera Spa’s Articles of Association in 2021 characterises the new edition of the Code, which incorporates a commitment to a just ecological and digital transition, attention to the more vulnerable customers, promotion of work and personal well-being and the importance of communication and listening, even in critical moments.
Hera stock was included in 2022, for the third consecutive year, in the Dow Jones Sustainability Index, World and Europe, with a score that confirms the Group as the best company in the “Multi and Water Utilities” sector, and the Group achieved a top ranking internationally, for the second consecutive year, in the ESG Evaluation carried out by S&P Global Ratings.

Creating shared value: CSV Ebitda rises to 670.3 million euro (51.8% of total Ebitda); CSV investments come to 510.0 million euro (62.3% of total investments)

The 2022 Sustainability Report consolidates its representation of content focused on creating shared value. The achievements made and the targets set for the future are accompanied by a summary of the scenario related to the three drivers for creating shared value:

1. Energy - pursuing carbon neutrality,
2. the Environment - regenerating resources and closing the circle,
3. Local areas (and Businesses) - enabling resilience and innovating, to which an equal number of chapters are dedicated, representing the most significant part of the report.

One of the strengths of the Group’s reporting is its quantification of shared value Ebitda (CSV Ebitda), i.e. the portion of Ebitda that derives from business activities capable of meeting the objectives on the Global Agenda, which refers to calls to action for sustainable growth (relevant to the Group’s activities) summarised in the three drivers mentioned above.
In 2022, CSV Ebitda came to 670.3 million euro, corresponding to 51.8% of the Group’s total Ebitda. 2022 CSV Ebitda showed a 17% increase compared to the amount seen in 2021. 2022 CSV Ebitda was thus in line with the path set out by the 2022-2026 Business Plan, which was designed so that approximately 62% of 2026 Ebitda will come from business activities that meet the priorities on the Global Agenda. The Group’s contribution to creating shared value also comes from the investments made in the three CSV drivers, which in 2022 amounted to 510.0 million euro, roughly 62% of total investments, including corporate acquisitions.
The Group’s quantification of shared-value Ebitda and investments for 2022 was audited for the fourth consecutive year by an auditing firm, in order to confirm these distinctive aspects of the Group’s reporting to all stakeholders.

Pursuing carbon neutrality: -6.9% in energy consumption; 27.1% of contracts with energy efficiency services; -11.7% greenhouse gas emissions

Hera pursues the carbon neutrality of its own activities and those of its customers by promoting energy efficiency and projects in the area of the energy transition.
With regard to energy efficiency, note that:

• the initiatives included in the ISO 50001 energy improvement plans and already implemented by the end of 2022 have made it possible to reduce energy consumption by more than 19 thousand tons of oil equivalent (corresponding to the annual consumption of more than 13 thousand households), equivalent to 6.9% of 2013 consumption, on the path towards the target set for 2026;
• at the end of 2022, gas and electricity contracts with energy efficiency solutions amounted to 27.1% of total contracts and showed further growth compared to the previous year; initiatives to promote energy efficiency among residential customers include the Consumption Log, a free report to raise customer awareness of energy savings, based on the principles of behavioural economics, in addition to the numerous offers with energy efficiency solutions that were further enhanced in 2022.

With regard to the energy transition and renewable energies, Hera continued to promote its carbon-neutral commercial offer in 2022, achieving at the end of the year:

• an amount of electricity from renewable sources sold on the free market coming to 41.1% of total electricity sold, not far from the 2026 target, set at 44%;
• an amount of methane gas with compensation for CO ₂ emissions sold on the free market coming to 14.2%, rapidly increasing compared to the 2026 target set at 21%.

In 2022, the Group continued to promote the Hera Photovoltaic offer launched in 2021, which provides for a “turnkey” installation of photovoltaic panels. During this same year, approximately 1,300 panels were sold for a total capacity coming to roughly 7 MW.

Within the Group, note:

• further progression in the green profile of Hera’s own electricity consumption, which as of 2022 is covered by 100% renewable energy;
• the production of 7.7 million cubic metres of biomethane and a new plant, operative as of December 2022 in Spilamberto (Modena), whose annual production is expected to come to 3.7 million cubic metres;
• ongoing work on initiatives for the development of hydrogen and photovoltaics, including the continuation, with positive results, of the first national trials for hydrogen injection into the gas network for household use in Modena; the conclusion of the final design of a power-to-gas plant in Bologna, closely integrated with the wastewater treatment process; the start of construction of the first of a series of photovoltaic plants that will be built within the Group’s sites and which, added to those built at external sites, will bring the Group’s own installed photovoltaic power to over 90 MW by 2026;
• over 50 million euro obtained in NRRP contributions for developing district heating in Bologna, Ferrara and Forlì, through which the efficiency of the current energy sources used (waste-to-energy plants in the case of Bologna and Forlì, geothermal energy in Ferrara) will be improved, with significant benefits in terms of reducing carbon dioxide emissions.

Lastly, based on the third report drafted according to the Science Based Targets initiative methodology, as mentioned above, the Group’s greenhouse gas emissions (scopes 1+2+3 from downstream electricity and gas sales) saw an 11.7% reduction in 2022 (excluding the transitory increase in volumes sold in last resort gas services), compared to the 2019 base year, which is within the path for the 2030 target validated by SBTi. More specifically, 2022 saw reductions in scopes 1+2 (market-based) emissions and carbon intensity of electricity sales (scope 3, upstream) coming to 17.5% and 21.0% respectively.

Regenerating resources and closing the circle: sorted waste at 67.8%; +17.5% of packaging recycled; 7.3% purified wastewater reused; -20.5% in water consumption

Hera regenerates resources and closes the circle through initiatives and projects in three areas: (i) transition towards a circular economy, (ii) sustainable management of water resources, (iii) protection of air, soil and biodiversity.
With regard to the transition to a circular economy, 2022 saw sorted waste collection come to 67.8%, up 2.5 percentage points compared to 2021 (Italian 2021 average: 64%) and use of landfills for the disposal of urban waste at 2.3% (European 2021 average: 23%). In this respect, Hera is almost 20 years ahead of the EU target for the circular economy and ranks among the most virtuous European countries. In October 2022, Hera published the thirteenth edition of its “Tracking Waste” report, verified by DNV, thus providing citizens with a guarantee of the effective recovery of separate waste collection, which came to 91%. This report contains indications as to how the area served by Hera positions with respect to the recycling targets set by the EU as part of the circular economy package: the overall recycling rate, where Hera with 57% has already achieved the target set for 2025, and the packaging recycling rate, where the Group with 68% is close to the target set for 2030.

Once again as regards the circular economy, 2022 saw:

• an 80.6% material and energy recovery rate in Herambiente Spa’s sorting plants, stable compared to the previous year;
• a further improvement in the circularity profile of Hasi Srl and its subsidiaries, demonstrated by an increase in the portion of managed waste sent for material and energy recovery, which went from 43.1% in 2021 to 48.6% in 2022;
• the quantity of plastics recycled by Aliplast coming to approximately 79.2 thousand tonnes, slightly down compared to 2021 due to increased energy costs and lesser demand for recycled PET and the ensuing shift of some large companies towards the use of virgin plastics. The figure for 2022 is however 33% higher than in 2017, the baseline of the commitments made in the New Plastics Economy Global Commitment, promoted by the Ellen MacArthur Foundation.

Regarding the sustainable management of water resources, the initiatives to preserve them were significant, such as the internal water management project, which led to a 20.5% reduction in consumption in 2022 (compared to the 2017 baseline), agreements with local authorities to make 7.3% of the water coming out of purification plants reusable, and the Consumption Log, mentioned above, which was distributed to about 35% of domestic water service customers.
As far as air protection is concerned, positive results were confirmed in relation to the environmental performance of the Group’s WTE plants, which in 2022 as well recorded very low atmospheric emissions, on average 86% lower than legal limits, and the Imola cogeneration plant, whose average PM10 concentrations were 99% lower than the limits. Finally, with regard to soil protection, note that from 2018 to 2022, the construction of infrastructures involved soil reuse coming to 78%.

Enabling resilience and innovating: 102.8 million euro invested in innovation and digitisation; 2.3 billion euro in economic value distributed to local areas; local suppliers account for 64.5% of the total

Significant results were achieved by the Group in 2022 in the CSV areas related to economic growth and employment in the areas served, social inclusion, innovation and digitalisation. Equally important were the initiatives aimed at ensuring the resilience of its operations and therefore of the areas served.
The total added value distributed to local areas amounted to 2,324 million euro, or 76% of the total economic value. The amount distributed to local suppliers came to 64.5% of the total, reaching 881 million (+9% compared to the previous year), while the induced employment is estimated at over 9 thousand people; these figures confirm the Group’s primary role in promoting growth in the local area. With regard to induced employment, the employment of disadvantaged people (amounting to 899) as a result of supplies and partnerships with social cooperatives is estimated at 82.3 million euro in 2022. Once again concerning social inclusion, note the measures put in place by Hera and improving on those defined by ARERA to support customers facing hardship in coping with rising energy prices: the number of bills paid by instalments increased by 36% compared to 2021 and the memoranda of understanding in place with the 135 municipalities served made it possible to prevent suspension of supplies to customers assisted by social services in 58% of cases. All the measures and advice for dealing with the energy crisis have been summarised in SOStegno Energia, an online guide that supplements the existing SOStegno Hera guide summarising the tools available to customers facing financial difficulty.
In the area of innovation, investments amounting to 102.8 million euro were related to initiatives in two areas: ecological transition and digital transformation. With regard to digital transformation, the 2022 Sustainability Report confirms reporting for 20 projects, as introduced for the first time in the 2020 Annual Report, concerning objectives, results and impacts based on the framework of Corporate digital responsibility, defined as the set of practices and behaviours that help an organisation use data and digital technologies in an ethical and responsible manner, from a social, environmental, economic and technological point of view.
In 2022, the effort to develop digital channels for customer relations continued, with customers registered for online services rising to 29.4% and those who requested electronic billing coming to 34.5%. The Group’s engagement in this area, combined with its focus on local communities, continued in 2022 with the fourth edition of the campaign to promote electronic billing and customers’ digital behaviour, called Digi e Lode, through which the Group from 2017 to 2022 donated 565 thousand euro for the digitalisation of 226 schools.
As regards climate change resilience, the Group made investments coming to approximately 62.1 million euro in 2022. In this area, note:

• the continued work on upgrading the electricity distribution grid in the Modena Apennines: the amount of network upgraded at the end of 2022 rose to 38 kilometers, equivalent to 57% of the overall resilience plan defined;
• a 14% increase in remote-controlled plants, which went from 7.9 thousand in 2021 to 9 thousand in 2022;
• the planning and construction, in the aqueduct, of numerous interventions in the Triveneto and Emilia Romagna regions to mitigate drought risk, including aqueduct interconnections, optimization of catchment and intake pipes, and new wells and reservoirs; these interventions came in addition to development of predictive algorithms and the use of innovative technologies to support leakage detection; the district-based network for effective leakage monitoring increased from 48% in 2021 to 51% in 2022.

The results achieved in terms of creating shared value came alongside those in the following areas, which complete the Group’s sustainability profile and are reported in the “Alongside the protagonists of change” section of the Sustainability Report.
Thanks to awareness-raising programmes and the adoption of ISO 45001 certification, which covers 88% of the Group’s workers, the accident frequency rate remained more or less stable (10.5 in 2022) and was 48% lower than the sector average, reported by Utilitalia. A further drop was seen in the frequency rate for manual labourers, which came to 21.8 in 2022 (vs 22.9 in 2021 and 30.5 in 2020). In 2022, workers received more than 6.6 million euro through the Hextra welfare system, to which 99% of employees adhered. The amount of training remains high: in 2022, there were 30.8 average hours of training per capita, in line with 2021, and the role of sustainability objectives in the balanced scorecard system linked to the incentive system involving management remained significant: in 2022, 37% of the variable remuneration of Group executives and middle managers was linked to sustainability target projects, with 24% of sustainability target projects geared towards creating shared value.

In 2022, an overall increase was seen in call centre contacts (+25%, over 1.7 million more calls), which had an impact on waiting times. This was mainly due to the turbulence that occurred in the energy markets in the second half of the year and the resulting impact on bills, which prompted customers to contact the company for clarification and support. There was therefore an increase in the average conversation time required to provide adequate advice to customers, especially concerning payment by instalment options, social bonuses and energy saving opportunities. The average waiting time at call centres for residential customers thus increased from 32 seconds in 2021 to 93 in 2022. The corporate segment also saw an increase in calls to call centres in 2022 (+34%), which affected the average waiting time, which stood at 112 seconds. In 2022, Hera Group help desks handled inflows that increased by 17%, due to both the reasons described above and a return to face-to-face contacts compared to previous years. As a result, average waiting times increased slightly, going from 6 minutes in 2021 to 9 minutes in 2022.
The survey conducted in 2022 on the quality of services provided by the Group (approximately 9,950 interviews conducted with household customers) recorded a customer satisfaction rate coming to 72/100, down one point from the previous year, but still above 70/100, corresponding to high satisfaction.

When selecting suppliers in 2022, the Group used the most economically advantageous bid method for 95% of public tenders and 68% of overall tenders (in terms of value). Considering overall tenders, the average score reserved for social and environmental factors came to 39/100. The “circular procurement” project also continued in 2022, with the application of the appropriate guidelines and the identification of technical criteria providing an advantage in tenders: eco-efficiency, dematerialisation, renewability and recyclability. As in previous years, in 2022 circularity criteria were included in over 82% of tenders carried out with the most economically advantageous bid method, with an average score of 13.2. Supplier monitoring focused on social responsibility towards workers also continued in 2022, as did monitoring of accidents, which involved 83% (in terms of commissioned value) of suppliers of services and works.

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

The recommendations of the Task Force on Climate-related financial disclosures (TCFD) came after its establishment as a result of the 2015 Paris Agreement, in which the member states of the United Nations committed to keeping the global average temperature increase below 2°C compared to pre-industrial levels and if possible limiting the increase to 1.5°C by the end of the 21 ^st century. During the same year, the G20 Financial Stability Board created the TCFD, with the aim of facilitating transparency on the financial opportunities and risks associated with climate change. In 2017, the TCFD published the reporting recommendations mentioned above, which are now an international benchmark for climate change disclosure by companies. The TCFD’s recommendations are applicable to organisations across all sectors and are categorised according to four areas: governance, strategy, risk management and metrics & targets.

The Group began its path towards alignment with the TCFD’s recommendations in 2020, and this ongoing process has been defined according to three main steps:

• establishing of a dedicated cross-departmental working group;
• carrying out an in-depth analysis of the gaps in the reporting system and the way in which the Hera Group deals with climate opportunities and risks with respect to the recommendations;
• defining a work plan to gradually increase the degree of alignment with the TCFD’s recommendations, the results of which can be seen in this consolidated report and in the 2022 Sustainability Report, which can be consulted for an exhaustive illustration of the four thematic reporting areas (see the dedicated section “Hera for the climate”).

The European taxonomy of environmentally sustainable activities

The EU Taxonomy is a unique EU-wide classification system introduced with Regulation 2020/852, which establishes a list of environmentally sustainable economic activities. This is a classification tool provided for in the Action plan on sustainable finance, aimed at supporting the EU in increasing sustainable investments and implementing the Green Deal.

Following the recommendations of Delegated Regulation 2021/2178, which introduces disclosure requirements for information linked to the taxonomy in NFS, a multi-step process was developed in 2021 to analyse the Taxonomy’s applicability along the entire value chain, taking into account all of the Group’s consolidated companies. This process was focused exclusively on climate change mitigation and adaptation targets, for which Delegated Regulation 2021/2139 set out a list of activities that contribute substantially to these objectives, and a list of technical screening criteria that these activities must meet in order to be classified as environmentally sustainable. It thus became possible to go beyond the disclosure requirements established for the 2021 NFS and to quantify and report on the economic KPIs (turnover, opex and capex) of the activities managed by the Hera Group that are eligible for the taxonomy, i.e. activities included in the list envisaged in Regulation 2139, as well as those aligned with the taxonomy, i.e. activities that meet the technical screening criteria, as regards the mitigation target. In addition, the economic KPIs were supplemented with Ebitda coming from activities aligned with the taxonomy (which therefore accompanies and complements CSV Ebitda), and the amount of investments in those activities has been introduced in the Business Plan.

In 2022, this process continued by refining and updating the analysis of the technical screening criteria, by preparing the reporting in greater detail required for the current year and with an in-depth study of the complementary delegated act 2022/1214, which introduced certain nuclear and fossil gas energy production activities in the list of eligible economic activities, by defining the technical screening criteria for their alignment.

Once again with reference to the EU Taxonomy, note that in May 2022 Hera issued its third green bond, with a total amount of 500 million euro repayable over seven years, aimed at financing or refinancing numerous investments selected on the basis of the Group’s Green Financing Framework, which was aligned with the principles underlying the Taxonomy in 2022.

Please refer to the sustainability report for an exhaustive discussion of the topics.

Analysis by business area

 

A multi-business strategy

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.

EBITDA* DECEMBER 2022

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 adjusted 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.

The value of adjusted Ebitda, broken down by strategic business areas, reflects the adjustment to the valuation of gas storage described in the introduction to paragraph 1.04. For a detailed identification of the effects of this adjustment, the values of Adjusted Ebitda and Ebitda are provided below:

 

 

	Dec 22		Dec 21 (redetermined)
(mn€)	Ebitda*	Ebitda	Ebitda*	Ebitda
Gas Area	585.1	491.1	483.2	487.6
Electricity Area	71.6	71.6	144.7	144.7
Integrated water cycle Area	261.9	261.9	262.4	262.4
Waste management Area	338.0	338.0	291.7	291.7
Other services Area	38.4	38.4	37.4	37.4
Total	1,295.0	1,200.9	1,219.4	1,223.9

* refers to the adjusted results as mentioned in chapter 1.04

 

Gas

Ebitda rises

Significant growth was seen in 2022 compared to 2021, both in terms of volumes sold and end customers, thanks to the opportunities provided in the Energy Services segment by energy efficiency incentives, the 110% super-bonus and insulation bonus, the corporate acquisition of Con Energia Spa and the awarding of tenders related to the markets of last resort and Consip. In particular, Hera Comm Spa was awarded the following lots nationwide:

• six of the nine lots of the last resort gas service (for customers involved in public services or without a supplier) for the period from 1 October 2021 - 30 September 2023 in: Valle d’Aosta, Piedmont, Liguria, Trentino A.A., Veneto, Friuli-Venezia Giulia, Emilia-Romagna, Tuscany, Umbria, Marche, Lazio and Campania. In the previous tender, Hera Comm was awarded eight out of nine lots.
• all nine lots of the default gas distribution service (for customers in arrears), for the period 1 October 2021 - 30 September 2023 in: Valle d'Aosta, Piedmont, Liguria, Lombardy, Trentino A.A., Veneto, Friuli-Venezia Giulia, Emilia-Romagna, Tuscany, Umbria, Marche, Abruzzo, Molise, Basilicata, Puglia, Lazio, Campania, Sicily and Calabria. In the previous tender, Hera Comm was awarded five out of nine lots.
• two of the 12 lots of the Consip GAS14 tender for supplying natural gas to public administrations in 2022, both in Lombardy.

 

EBITDA* GAS AREA 2022

EBITDA* GAS AREA 2021

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

(mn€)	Dec 22	Dec 21 (redetermined)	Abs. change	% change
Area Ebitda*	585.1	483.2	101.9	+21.1%
Group Ebitda*	1,295.0	1,219.4	75.6	+6.2%
Percentage weight	45.2%	39.6%	+5.6 p.p.

* refers to the adjusted results as mentioned in chapter 1.04

CUSTOMERS
(k)

The number of gas customers increased by 21.4 thousand, or 1.0%, compared to the previous year. This growth can be seen mainly in the markets of last resort where the customer base, as a result of the tenders for the 2021-2023 period, increased by 59.8 thousand. Traditional markets are down by -38.3 thousand, despite the positive contribution made by the entrance of Con Energia into the Group’s scope of operations.

VOLUMES SOLD
(mn/m ³)

Total volumes of gas sold decreased by 3,120.5 million m ³, or 19.2%, due to reduced trading (-3,251.1 million m ³), limited by the high prices seen during most of 2022. Volumes sold to end customers increased by 130.6 million m ³, or 3.8%, as compared to the same period of the previous year. This growth was due to last resort markets, coming to 296.6 million m ³, or +157.5% (8.6% of total volumes sold), thanks to the positive outcome of the new tenders mentioned above, partially contained by traditional markets, coming to 166.0 million m ³, or -5.1% (-4.8% of total volumes sold). The latter were affected by both a less favorable climate, with average temperatures higher than the previous year, and lesser consumption, mainly involving the measures taken by the industrial sector and changing habits in the household sector, as a result of the high cost of energy commodities.

 

The following table summarises operating results for the gas area:

Income statement (mn€)	Dec 22	% inc.	Dec 21 (redetermined)	% inc.	Abs. change	% change
Revenues	13,483.6		5,969.0		7,514.6	+125.9%
Operating costs	(12,780.4)	(94.8)%	(5,377.5)	(90.1)%	7,402.9	+137.7%
Personnel costs	(134.4)	(1.0)%	(126.9)	(2.1)%	7.5	+5.9%
Capitalised costs	16.4	+0.1%	18.6	0.3%	(2.2)	(11.8)%
Ebitda *	585.1	4.3%	483.2	8.1%	101.9	+21.1%

* refers to the adjusted results as mentioned in chapter 1.04

REVENUES
(mn/€)

Revenues increased by 7,514.6  million euro, nearly triple those of the previous year. The reasons mainly lie in the increased price of the raw material gas, which began rising in October 2021. This trend generated higher revenues in trading coming to 4,973 million euro and in sales coming to 2,388 million euro. The CMEM tariff component, which in the protected market represents trends in the cost of raw materials, more than tripled on average compared to the previous year.

Higher revenues were related to the increase in volumes sold in the amount of 58 million euro, due to the new lots won in the tenders mentioned above, the change in the scope of Con Energia Spa in the amount of 26 million euro, and the Energy Services business area in the amount of 273 million euro, thanks to activities related to energy efficiency, insulation incentives and the 110% super-bonus.

In addition, increased revenues from activities in Bulgaria came to 38 million euro.

Also note the higher revenues from energy efficiency certificates amounting to 60 million euro compared with the previous year, limited by a decrease in the number of energy efficiency certificates as per obligations for 2020 and 2021 specified by the 21 May 2021 Ministerial Decree.

This growth was contained by lower revenues mainly related to system charges, with an equal effect on costs, amounting to 414 million euro, as a result of Resolutions 635/2021/R/com, 35/2022/R/eel, 141/2022/R/com, 295/2022/R/com. As of 2021, the government has progressively reinforced the extraordinary measures to contain the effects of raw material price increases, with significant impacts on general system charges, which have progressively decreased since the fourth quarter of 2021.

Regulated revenues were substantially in line with the previous year. From a regulatory point of view, through Resolution 614/2021/R/com, published in late 2021, ARERA adjusted the criteria for determining and updating the rate of return on invested capital (WACC) by reducing it from 6.3% in 2021 to 5.6% in 2022. This reduction was offset by increased investments and their remuneration as part of tariffs and higher premium revenues obtained thanks to security recoveries (Resolution 383/2022/R/gas).

This increase in revenues was proportionally reflected by growth in operating expenses, which increased by 7,402.9 million euro overall. This trend was mainly due to the increase in raw material gas prices mentioned above, including the higher costs for energy efficiency certificates, and increased activity in the area of Energy Services.

EBITDA*
(mn/€)

* refers to the adjusted results as mentioned in chapter 1.04

Adjusted Ebitda increased by 101.9 million euro, or 21.1%, mainly due to higher sales and brokerage activities, with a contribution amounting to approximately 80.3 million euro, mainly due to the enlargement of the scope of areas served as a result of last resort markets, as mentioned above. The remaining growth was related to incentivized energy efficiency activities and district heating.

 

NET INVESTMENTS GAS
(mn/€)

Net investments in the gas area amounted to 156.0 million euro in 2022, up 15.4 million euro compared to the previous year. In gas distribution, the overall increase came to 12.3 million euro, mainly due to non-recurring maintenance on networks and plants, which was up compared to the previous year, even considering the lower effect of the large-scale meter replacement pursuant to Resolution 554/15, relating to the commissioning of smart gas meters. In gas sales, investments coming to 13.3 million euro were recorded for activities related to the acquisition of new customers, up by 3.1 million euro compared to the previous year. Investments were largely in line with the previous year in district heating and heat management services, with a decrease in district heating by Hera Spa that offsets the increase in energy services in the activities of the companies Hera Servizi Energia Srl and AcegasApsAmga Servizi Energetici Spa. Requests for new connections were also up compared to the previous year.

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

Gas (mn€)	Dec 22	Dec 21	Abs. change	% change
Networks and plants	116.2	103.9	12.3	+11.8%
Acquisition gas customers	13.3	10.2	3.1	+30.4%
DH/heat management	27.2	27.1	0.1	+0.4%
Total gas gross	156.7	141.3	15.4	+10.9%
Capital grants	0.7	0.7	‐	+0.0%
Total gas net	156.0	140.6	15.4	+11.0%

The Regulatory asset base (RAB) for assets owned in the gas area, which defines the value of the assets recognised by the Authority as regards return on invested capital, increased compared to 2021.

RAB
(bn/€)

Electricity

At the end of 2022, the result was lower than in 2021, mainly due to the different conditions of energy markets, related to the exceptional context of rising raw material prices, which affected procurement activities, and a lower contribution from production due to reduced use of the dispatching services market. However, there is evidence of solid business development, which is confirmed by the growth in customers, mainly in the free market, and the number of sign-ups for innovative offerings (related to electric mobility, photovoltaics, heating and air conditioning) and value-added services. In addition, Hera Comm Spa was awarded the following lots nationwide:

• four of the eighteen lots of the Consip GAS19 tender for supplying electricity to public administrations in 2022, in the Provinces of Rome, Campania, Calabria and Sicily. In the previous tender, Hera Comm was not awarded any lots.
• three of the nine lots of the gradual protection service for supplying electricity to public administrations for the period from 1 July 2021 to 30 June 2024, in Campania, Marche, Umbria, Abruzzo, Molise, Basilicata, Calabria, Sicily and Sardinia.
• one of the nine lots of the safeguarded market for the years 2021 and 2022 in Campania, Abruzzo and Umbria, compared to seven lots in the previous two years.

EBITDA ELECTRICITY AREA 2022

EBITDA ELECTRICITY AREA 2021

 

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

(mn€)	Dec 22	Dec 21   (redetermined)	Abs. change	% change
Area Ebitda	71.6	144.7	(73.1)	(50.5)%
Group Ebitda*	1,295.0	1,219.4	75.6	6.2%
Percentage weight	5.5%	11.9%	(6.4) pp

* refers to the adjusted results as mentioned in chapter 1.04

CUSTOMERS
(k)

 

The number of electricity customers increased by 3.4% (up 48.0 thousand) compared to the same period in 2021. This growth occurred mainly on the free market (+4.6%, amounting to +4.1% of the total) due to the reinforced commercial action implemented in the amount of approximately 58.1 thousand customers. The safeguard market was also up by 2,900 (+16.2%, or +0.2% of the total) compared to the same period of the previous year. These effects largely succeeded in offsetting the decline, coming to approximately 13 thousand customers (-12.1%, or -0.9% of the total), that occurred in the safeguarded market.

There was a significant increase in sales of value-added services, with around 95.9 thousand customers requesting these services, with a 29% increase compared to the previous year, demonstrating the increasing loyalty of the customer base.

 

VOLUMES SOLD
(GWh)

Volumes of electricity sold increased by 482.3 GWh, or 4.1%, compared to the same period of the previous year. This trend was caused by the increase in volumes sold in the traditional markets in the amount of 340.2 GWh (2.9% of the total), from 11,042.8 GWh in 2021 to 11,383.0 GWh in 2022, mainly driven by the free market, which was partially offset by a slight decrease in the safeguarded market. There was an increase of 142.1 GWh or 1.2% in the safeguarded market as compared to the total.

The following table summarises operating results for the electricity area:

Income statement (mn€)	Dec 22	% inc.	Dec 21	% inc.	Abs. change	% change
Revenues	5,042.7		3,024.6		2,018.1	66.7%
Operating costs	(4,950.9)	(98.2)%	(2,846.8)	(94.1)%	2,104.1	73.9%
Personnel costs	(44.0)	(0.9)%	(47.0)	(1.6)%	(3.0)	(6.4)%
Capitalised costs	23.7	0.5%	13.8	0.5%	9.9	71.6%
Ebitda	71.6	1.4%	144.7	4.8%	(73.1)	(50.5)%

REVENUES
(mn/€)

 

Revenues increased by 2,018.1 million euro, approximately double those of the previous year. This trend is mainly related to the higher price of the raw material amounting to approximately 2,292 million euro, resulting from the growth of the average value of SNP (single national price) seen in 2022.

In addition, higher power generation revenues came to 108 million euro and higher revenues for value-added services for customers totalled 30 million euro.

Lastly, higher volumes sold and trading activities registered a growth of 79 million euro.

This growth was contained by lower revenues mainly related to system charges, with an equal effect on to costs, coming to 503 million euro, following Resolutions 635/2021/R/com, 35/2022/R/eel, 141/2022/R/com, 295/2022/R/com and 462/2022/R/com. Starting in 2021, the government progressively reinforced its extraordinary measures to contain the effects of raw material price increases, with significant impacts on general system charges, which progressively decreased since the third quarter of 2021.

Adjusted revenues were substantially in line with the previous year. From a regulatory point of view, through Resolution 614/2021/R/com, published in late 2021, ARERA adjusted the criteria for determining and updating the rate of return on invested capital (WACC), reducing it from 5.9% in 2021 to 5.2% in 2022. This reduction was wholly offset by increased investments and their remuneration in tariffs.

The increase in revenue was reflected more than proportionally by operating costs, which rose by 2,104.1 million euro. This trend is mainly due to the increase in raw material prices that impacts on the sales and production activities mentioned above.

 

EBITDA
(mn/€)

Ebitda declined by 73.1 million euro compared to 2021, or 50.5%, mainly due to lower margins on sales activities amounting to 67.1 million euro, related to complex modulation activities, in a year which saw particular increases and volatility in raw material prices. This is compounded by a 15.8 million euro decline in the generation business, mainly due to fewer requests in the dispatching services market. Value-added services activities are up in the amount of 8.4 million euro.
In the electricity area, 2022 investments amounted to 78.3 million euro, up 23.0 million euro compared to the previous year.

The interventions carried out mainly concerned non-recurring maintenance on distribution plants and networks in the Modena, Imola, Trieste and Gorizia areas.

Compared to the previous year, a 18.0 million euro increase was seen in electricity distribution, mainly due to more extraordinary maintenance and strengthening of networks and plants and ongoing large-scale meter replacement activities, as well as measures to improve the resilience of the network. In energy sales, investments coming to 5.0 million euro were recorded for activities related to the acquisition of new customers. Requests for new connections increased slightly compared to the previous year.

 

NET INVESTMENTS ELECTRICITY
(mn/€)

Operating investments in the electricity area were as follows:

Electricity (mn€)	Dec 22	Dec 21	Abs. change	% change
Networks and plants	54.1	36.1	18.0	+49.9%
Acquisition electricity customers	24.2	19.2	5.0	+26.0%
Total electricity gross	78.3	55.3	23.0	+41.6%
Capital grants	‐	‐	‐	+0.0%
Total electricity net	78.3	55.3	23.0	+41.6%

 

RAB, which defines the value of the assets recognised by the Authority as regards return on invested capital, increased compared to 2021.

RAB
(bn/€)

Integrated water cycle

Results largely unchanged in 2022

In 2022, results for the integrated water cycle area were largely in line with the previous year, with Ebitda coming to 261.9 million euro. The result is particularly positive because it shows that the Hera Group was able to offset the reduction in WACC with the Technical bonuses awarded for the excellence of the service provided to citizens.

On this matter, note that during 2022, the regulatory authority ARERA published via Resolution 183/2022/R/idr the results related to the incentive mechanism in the regulation of Technical Quality established by Resolution 917/2017 for the years 2018 and 2019. Each of the water service operators was analysed and ranked with respect to the following 6 macro-indicators: water leakage, service interruptions, quality of water delivered, adequacy of sewage system, quality of purified water, and sludge disposal. With reference to the level of Technical Quality excellence that identifies and rewards the top three positions nationwide considering all the macro-indicators mentioned above, Hera Group was awarded the second and third rankings for the year 2018, and in 2019 it was awarded the first, second and third rankings in the overall ranking of Italian utilities, proof of the very high quality standards adopted by the Group in managing the service it provides.

As regards regulations, note that 2022 was the third year in which the tariff method defined by the Authority for the third regulatory period (Mti-3), 2020-2023 (resolution 580/2019), was 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. Finally, following ARERA’s Resolution 639/2021/R/idr, note the reduction in remuneration of invested capital (WACC) from 5.24% to 4.8%.

Finally, with regard to concessions, note that ATERSIR, as an outcome of the specific tender, definitively awarded Hera the integrated water service in the Province of Rimini, excluding the Municipality of Maiolo, for the years 2022-2039. The Hera Group, already the outgoing operator in the 24 municipalities, will maintain ownership of the service for the next 18 years, and will manage it under the principles of sustainability and innovation.

EBITDA WATER CYCLE 2022

EBITDA WATER CYCLE 2021

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

(mn€)	Dec 22	Dec 21   (redetermined)	Abs. change	% change
Area Ebitda	261.9	262.4	(0.5)	(0.2)%
Group Ebitda*	1,295.0	1,219.4	75.6	+6.2%
Percentage weight	20.2%	21.5%	(1.3) pp

* refers to the adjusted results as mentioned in chapter 1.04

CUSTOMERS
(k)

The number of water customers increased by 5.3 thousand over 2021, or 0.4%, confirming the moderate trend of internal growth in the Group’s reference areas. The Emilia-Romagna area managed by Hera Spa accounted for 76% of this growth, while the area served by AcegasApsAmga Spa accounted for 13% and the remainder involved the area served by the Marche Multiservizi Spa Group.

The main indicators for the area are as follows:

289.3 million m ³: amount managed in the aqueduct 

The main indicators for the area are as follows:

AMOUNT MANAGED 2022 (mn/m 3)

AMOUNT MANAGED 2021 (mn/m 3)

 

The volumes supplied through the aqueduct, which amounted to 289.3 million m3, decreased by 0.8% compared to December 2021, amounting to 2.2 million m3. In December 2022, the quantities managed relating to sewerage amounted to 238.1 million m3, down 0.2% compared to the previous year, while purification volumes amounted to 237.6 million m3, an increase of 1.1% compared to 2021. 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 provides for a regulated revenue, recognised independently from volumes distributed.

ELECTRICITY CONSUMED
(GWh)

Electricity consumed in plants decreased by 6.9 GWh. This decrease is related mainly to the Group's commitment to increasingly efficient and prudent management of energy resources, carried out by implementing innovative measures in plants.

The following table summarises operating results for the water cycle area:

Income statement (mn€)	Dec 22	% inc.	Dec 21	% inc.	Abs. change	% change
Revenues	1,052.6		964.7		87.9	+9.1%
Operating costs	(611.9)	(58.1)%	(521.3)	(54.0)%	90.6	+17.4%
Personnel costs	(185.6)	(17.6)%	(185.9)	(19.3)%	(0.3)	(0.2)%
Capitalised costs	6.7	0.6%	4.9	0.5%	1.8	+36.9%
Ebitda	261.9	24.9%	262.4	27.2%	(0.5)	(0.2)%

REVENUES
(mn/€)

The growth in revenues was related, for a total amount of 59.0 million euro, to higher regulated revenues. This increase is due in the amount of 12.6 million euro to the excellent performance the Group achieved in terms of Technical Quality in managing the Integrated Water Service. The remainder of the growth in tariff revenues is due to equalizable tariff components, particularly electricity, and is contained by the reduction in the return on capital employed (WACC) and the continuous and progressive increase in inflation.
Lastly, note the approximately 28.1 million euro of higher revenues for contracts and works on behalf of third parties carried out up to December 2022.

The increase in operating costs as of December 2022 was mainly impacted by the current energy scenario, with energy commodity prices rising sharply as compared to the previous year, and rising prices for all major supplies of materials and services. The above-mentioned effects resulted in higher costs for a total of 62.8 million euro. The last point to note is the higher costs related to the completed works described above, under revenues, for a total of 28.1 million euro.

 

EBITDA
 (mn/€)

Ebitda was broadly in line with the previous year, declining slightly by 0.2% or 0.5 million euro. Higher procurement costs for energy components and an increase in network and plant operating costs due in part to higher prices for material and service suppliers were nearly offset by recognition of the Hera Group’s commitment to the highest possible standards of technical quality.
In 2022, net investments in the integrated water cycle area amounted to 188.1 million euro, up 19.1 million euro compared to the previous year. Including the capital grants received, investments totalled 208.0 million euro, up 13.4 million euro.

These investments mainly involved extensions, reclamations and improvements to networks and plants, as well as regulatory upgrading, especially in the water and sewerage area.

Investments amounted to 126.8 million euro in the aqueduct, 45.5 million euro in sewerage and 35.6 million euro in purification.

NET INVESTMENTS WATER CYCLE
(mn/€)

The main interventions included: in the aqueduct, continued remediation work on networks and connections related to ARERA Resolution 917/2017 on the regulation of the technical quality of the integrated water service, including the early implementation of specific renewal and upgrade measures aimed at countering the risks of water shortages related to the particular drought conditions that are becoming increasingly frequent, such as the construction of hydraulic connections capable of expanding the interconnections of water systems. Major maintenance continued on the intake works for the Setta stream serving the Sasso Marconi drinking water treatment plant, along with work to reduce interference between the water network and the suburban railway line in the municipality of Ferrara, as well as the upgrading of water networks in other areas served and the large-scale replacement of meters. In sewerage, in addition to continuing to implement the Rimini seawater safety plan (PSB), maintenance work was carried out to upgrade the sewerage network in other areas served along with work to update drains to comply with Regional Decree no. 201/2016. In purification, worthy of note were the upgrades to the Lido di Classe purification plant, the revamping of the anaerobic digestion system at the Gramicia purification plant in Ferrara, the installation of centrifuges at the Savignano purification plant, and the work carried out on the San Giovanni in Persiceto purification plant. Requests for new water and sewerage connections increased slightly compared to the previous year. Capital grants, amounting to 19.8 million euro, are down by 5.8 million euro and include 17.4 million euro deriving from the tariff component of the tariff method for the New Investments Fund (FoNI).

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

Integrated water cycle (mn€)	Dec 22	Dec 21	Abs. change	% change
Aqueduct	126.8	113.5	13.3	+11.7%
Purification	35.6	36.1	(0.5)	(1.4)%
Sewerage	45.5	45.0	0.5	+1.1%
Total integrated water cycle gross	208.0	194.6	13.4	+6.9%
Capital grants	19.8	25.6	(5.8)	(22.7)%
of which FoNI (New Investments Fund)	17.4	16.8	0.6	+3.6%
Total integrated water cycle net	188.1	169.0	19.1	+11.3%

RAB, which defines the value of the assets recognised by the Authority as regards return on invested capital, increased compared to 2021.

 

RAB
(bn/€)

Waste management

Ebitda rises

In 2022, the waste management area accounted for 26.1% of the Hera Group’s overall Ebitda, with this area’s Ebitda up by 46.3 million euro compared to the previous year. In 2022, therefore, the Group continued to ensure a significant level of growth, facilitated by geographic expansion and sound management and business policies, despite the current challenging economic and geopolitical environment. In Italy, in fact, the progressive and persistent increase in inflation, energy costs and difficulties in sourcing raw materials led to a slowdown in production in many manufacturing sectors during 2022, with repercussions in the production of waste as well.

In the markets covered by the Group, Herambiente’s leadership was consolidated in particular in the industry market with the signing at the end of 2022 of an agreement to acquire, in 2023, 60% of the company A.C.R. di Reggiani Albertino Spa, one of the largest Italian companies operating in the field of reclamation, industrial waste treatment, the decommissioning of industrial plants, and civil works related to the oil and gas sector.

All the main circular economy initiatives, from material recovery to renewable energy production, also continued during 2022. As part of the Ministry for the Environment and Energy Security’s “Lighthouse” series of circular economy projects, the Group was also awarded PNRR grants to build platforms catering to material recovery. In particular, two of these projects are absolutely innovative at the European level, not only technologically but also by virtue of the strategic relevance of the materials involved: namely, the carbon fibre regeneration plant that will be built in Imola (BO) and the rigid plastics recovery plant that will be located in Modena.

Protecting environmental resources has been confirmed as a priority objective in 2022, along with maximizing their reuse; this is also demonstrated by the special attention the Groups has devoted to developing sorted waste collection. Thanks to the Group's substantial commitment to this area in all the areas it manages, sorted waste collection increased by more than two percentage points as compared to 2021 figures.

EBITDA WASTE MANAGEMENT AREA 2022

EBITDA WASTE MANAGEMENT AREA 2021

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

(mn€)	Dec 22	Dec 21   (redetermined)	Abs. change	% change
Area Ebitda	338.0	291.7	46.3	+15.9%
Group Ebitda*	1,295.0	1,219.4	75.6	+6.2%
Percentage weight	26.1%	23.9%	+2.2 p.p.

* refers to the adjusted results as mentioned in chapter 1.04

Volumes marketed and treated by the Group in 2022 are as follows:

Quantity (k tons)	Dec 22	Dec 21	Abs. change	% change
Municipal waste	2,207.1	2,241.8	(34.7)	(1.5)%
Market waste	2,554.2	2,334.3	219.9	+9.4%
Waste commercialised	4,761.2	4,576.1	185.1	+4.0%
Plant by-products	2,161.7	2,200.5	(38.8)	(1.8)%
Waste treated by type	6,922.9	6,776.6	146.3	+2.2%

An analysis of this data shows a rise in waste commercialised, due mainly to an increase in market waste. As regards municipal waste, 2021 saw a decrease of 1.5% compared to the previous year.

Market volumes increased compared to 2021 by 9.4%, due to the consolidation of previously existing commercial relations, growth in the customer portfolio and recent corporate acquisitions.

Finally, the figures for plant by-products decreased by 1.8% from the previous year due mainly to lower levels of rainfall.

 

SORTED WASTE
(%)

 

As previously mentioned, municipal sorted waste collection stood at 67.8%, up +2.5 percentage points from the previous year, thanks to the development of projects in the areas managed by the Group.

The Hera Group operates in the entire waste cycle, with 100 plants for treating municipal and special waste and regenerating plastic materials.  The main plants include: 9 waste-to-energy plants, 13 composting/digestion plants and 17 selecting plants.
The close attention paid to the set of plants has always been a distinctive element of the Group’s propensity for excellence: operations are indeed ongoing to provide plants with the best available technologies.

 

WASTE TREATED BY TYPE OF PLANT 2022

WASTE TREATED BY TYPE OF PLANT 2021

 

Quantity (k tons)	Dec 22	Dec 21	Abs. change	% change
Landfills	648.5	636.4	12.1	+1.9%
WTE	1,180.2	1,205.2	(25.0)	(2.1)%
Selecting plants and other	603.8	550.8	53.0	+9.6%
Composting and stabilisation plants	490.4	498.1	(7.7)	(1.5)%
Inertisation and chemical-physical plants	1,405.1	1,322.4	82.7	+6.3%
Other plants	2,594.9	2,563.8	31.1	+1.2%
Waste treated by plant	6,922.9	6,776.7	146.2	+2.2%
Plastic recycled by Aliplast Spa	81.0	80.9	0.1	+0.1%

Waste treatment showed an overall growth of 1.2% compared to 2021. Analysing the individual sectors, an increase was seen in the quantity disposed of in landfills whereas, with regard to waste-to-energy plants, the downward trend is due mainly to the revamping of the Ravenna F3 plant and Trieste plant. The increased quantity in sorting plants was due to the greater quantities treated in all plants, thanks to the rise in sorted waste collection. In the composting and stabilization plants, volumes are decreasing mainly due to lower quantities at the Ostellato plant, which was shut down for reconversion to stabilization, while in the inertisation and chemical-physical plants chain, the increased quantities were mainly due to higher volumes treated at the recently acquired plants. Lastly, note the increase in the other plants sector.

The table below summarises the area’s operating results:

Income statement (mn€)	Dec 22	% inc.	Dec 21	% inc.	Abs. change	% change
Revenues	1,578.8		1,328.4		250.4	+18.8%
Operating costs	(1,058.0)	(67.0)%	(846.5)	(63.7)%	211.5	+25.0%
Personnel costs	(215.8)	(13.7)%	(211.8)	(15.9)%	4.0	+1.9%
Capitalised costs	33.0	2.1%	21.7	1.6%	11.3	+52.2%
Ebitda	338.0	21.4%	291.7	22.0%	46.3	+15.9%

REVENUES
(mn/€)

 

Revenues increased by 18.8% compared to the previous year. Revenues from energy production were up by +68.0 million euro, mainly due to the increase in market prices, despite a 25.0 thousand ton reduction in volumes in waste treated in WTEs. A higher contribution also came from Aliplast Spa, up +56.5 million euro compared to 2021, or +35%, as a result of the increase in prices in all areas due to the elevated value of virgin polymer and high market demand. The price increase has positively affected the Industry market and material valorisation revenues in the amount of approximately 6.7 million euro, particularly for paper, cardboard and plastic.
The 32.4 million euro increase in revenues related to recent acquisitions in the Industry market is also of note.

Operating costs for 2022 grew by 25.0%. In the treatment market, there was an increase in the costs of purchasing raw materials as well as consumables (especially chemicals) and for changes in the scope of operations compared to the previous year. There are also higher transportation and treatment costs for by-product management due to higher supplier prices. In the recovery market, an increase was seen in the purchasing costs for raw materials sustained by Aliplast Spa, related to the trend in revenues mentioned above. As far as municipal waste collection is concerned, the increased activities were related to developing new sorted waste collection projects.

 

EBITDA
(mn/€)

The rise in Ebitda was mainly due to increased revenues in energy management, coming to approximately 30 million euro, expansion in the industrial waste market accounting for approximately 4 million euro, and new acquisitions, in the amount of approximately 3 million euro. Also contributing positively has been an increase in the prices of treated waste, partly offset by increases in the purchase prices of consumables as well as treatment and transportation costs.

Net investments in the waste management area were related to maintenance and upgrading on waste treatment plants and amounted to 148.4 million euro, up 51.9 million euro compared to the previous year. Including the capital grants received, the investments made amounted to 149.2 million euro, up 51 million euro.

The composting/digester plants sector showed an increase of 12.3 million euro, mainly due to Biorg Srl starting work to construct a plant producing biomethane.
Investments in landfills increased by 9.0 million euro, due to work carried out on the Ravenna plant and Cordenons landfills, as well as Marche Multisiervizi Spa's building of the Cà Asprete plant.

The WTE sector showed a 5.4 million euro increase, due to revamping on line two of the Trieste plant, as well as non-recurring maintenance carried out on the Bologna and Rimini plants, while the 11.1 million euro increase in the industrial waste plants sector is related to revamping activities at the F3 plant in Ravenna.

Investments in the collection area and equipment sector increased by 2.5 million euro compared to the previous year and included the construction of underground waste collection areas, while the 10.5 million euro increase seen in the sorting and recovery plants sector was due to higher investments for the work on the new PE regenerator and replacement of the PELD regenerator belonging to Aliplast Spa, as well as the start of the Vallortigara company's construction of the new Marano Vicentino plant.

NET INVESTMENTS WASTE MANAGEMENT
(mn/€)

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

Waste management (mn€)	Dec 22	Dec 21	Abs. change	% change
Composters/digesters	19.8	7.5	12.3	+164.0%
Landfills	17.3	8.3	9.0	+108.4%
WTE	30.0	24.6	5.4	+22.0%
RS plants	28.4	17.3	11.1	+64.2%
Collection areas and equipment	19.1	16.6	2.5	+15.1%
Transshipment, selecting and other plants	34.5	24.0	10.5	+43.8%
Total waste management gross	149.2	98.2	51.0	+51.9%
Capital grants	0.8	1.7	(0.9)	(52.9)%
Total waste management net	148.4	96.5	51.9	+53.8%

 

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, contributing 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. At December 2022, results in this area stood at 38.4 million euro, up 1 million euro over the previous year.

OTHER SERVICES EBITDA 2022

OTHER SERVICES EBITDA 2021

The changes occurred in terms of Ebitda are as follows:

(mn€)	Dec 22	Dec 21   (redetermined)	Abs. change	% change
Area Ebitda	38.4	37.4	1.0	+2.7%
Group Ebitda*	1,295.0	1,219.4	75.6	+6.2%
Percentage weight	3.0%	3.1%	(0.1) pp

* refers to the adjusted results as mentioned in chapter 1.04

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

Quantity	Dec 22	Dec 21	Abs. change	% change
Public lighting
Lighting points (k)	614.3	563.2	+51.1	+9.1%
of which LED	40.7%	35.2%	+5.5	+0.0%
Municipalities served	197.0	184.0	+13.0	+7.1%

In 2022, the Hera Group acquired approximately 65.4 thousand lighting points in 30 new municipalities. The most significant acquisitions were approximately 9.2 thousand lighting points in Lombardy, approximately 16.1 thousand in Tuscany, approximately 14.0 thousand in Umbria, and approximately 12.0 thousand in other regions of central Italy. Finally, acquisitions were made in the Triveneto area amounting to approximately 12.2 thousand lighting points and in Sardinia amounting to approximately 1.2 thousand. The year’s increases fully offset the loss of about 14.3 thousand lighting points and 17 municipalities, mainly in the Triveneto area and Emilia Romagna.

The percentage of lighting points using LED lamps is also growing, standing at 40.7%, up 5.5 percentage points. This trend highlights the Group's continued focus on the increasingly efficient and sustainable management of public lighting.

Quantitative indicators in the other services area also include the 4,520 km of proprietary ultra-wideband fibre optic network that the Hera Group owns through its digital company, Acantho Spa. This network serves the main cities in Emilia-Romagna, Padua and Trieste, and provides companies and individuals with high-performance connectivity, high reliability and maximum security for systems, data and service continuity.

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

Income statement (mn€)	Dec 22	% inc.	Dec 21	% inc.	Abs. change	% change
Revenues	196.2		170.8		25.4	+14.9%
Operating costs	(139.2)	(71.0)%	(114.1)	(66.8)%	25.1	+22.0%
Personnel costs	(21.3)	(10.9)%	(21.2)	(12.4)%	0.1	+0.5%
Capitalised costs	2.7	1.4%	1.9	1.1%	0.8	+42.9%
Ebitda	38.4	19.6%	37.4	21.9%	1.0	+2.7%

REVENUES
(mn/€)

 

The growth in revenues was mainly due to public lighting, where there was an increase of 22.5 million euro, primarily as a result of energy adjustments on public lighting fees. Other contributions to this area’s growth came from telecommunications, which accounted for a total of 2.3 million euro due to increased activities in telephone and connectivity services.

The growth in operating costs is mainly due to the public lighting business and is affected by the significant rise in energy carrier prices, as well as the increased costs of materials and services required for energy upgrading.

 

EBITDA
 (mn/€)

Ebitda for the other services business increased by 2.7% overall, or 1 million euro, thanks to the telecommunications business, despite the lower contribution made by public lighting due to the increase in the price of the raw materials and services used in carrying out energy upgrades in the related plants.

Net investments in the other services business for 2022 amounted to 15.3 million euro, up 2.0 million euro compared to the previous year. Including the capital grants received, the investments made rose by 0.7 million euro.

In telecommunications, 9.1 million euro in investments were made in network and TLC services, up 0.5 million euro compared to the previous year. In public lighting, investments were related to maintenance, upgrading and modernisation for lighting systems in the areas managed and amounted to 6.2 million euro, up 0.3 million euro compared to the previous year.

 

NET INVESTMENTS OTHER SERVICES
(mn/€)

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

Other services (mn€)	Dec 22	Dec 21	Abs. change	% change
TLC	9.1	8.6	0.5	+5.8%
Public lighting and traffic lights	6.2	5.9	0.3	+5.1%
Total other services gross	15.3	14.6	0.7	+4.8%
Capital grants	‐	1.3	(1.3)	(100.0)%
Total other services net	15.3	13.3	2.0	+15.0%

 

Income statement

 

mn €	notes	2022	2021
Revenues	1	20,082.0	10,555.3
Other operating revenues	2	548.2	400.1
Raw materials and materials	3	(16,730.0)	(6,668.5)
Service costs	4	(2,105.8)	(2,464.6)
Personnel costs	5	(601.1)	(592.8)
Other operating costs	6	(74.9)	(66.5)
Capitalised costs	7	82.5	60.8
Amortisation, provisions and depreciation	8	(667.1)	(612.1)
Operating revenues		533.8	611.7
Share of profits (losses) pertaining to joint ventures and associated companies	9	10.0	13.2
Financial income	10	82.2	82.3
Financial expenses	11	(217.2)	(300.3)
Financial management		(125.0)	(204.8)
Earnings before taxes		408.8	406.9
Taxes	12	(103.5)	(34.2)
Net profit for the period		305.3	372.7
Attributable to:
parent company shareholders		255.2	333.5
minority shareholders		50.1	39.2
Earnings per share
basic	17	0.175	0.228
diluted	17	0.175	0.228

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 2.03.01 of this consolidated financial statement.

Statement of comprehensive income

 

mn €	notes	2022	2021
Net profit (loss) for the period		305.3	372.7
Items reclassifiable to the income statement
Fair value of derivatives, change for the period	29	229.1	124.7
Tax effect related to reclassifiable items		(65.9)	(35.3)
Items not reclassifiable to the income statement
Actuarial income (losses) employee and post-employment benefits	30	3.1	1.6
Shareholdings valued at fair value	26	(12.1)	(2.1)
Tax effect related to not reclassifiable items		(0.7)	(0.2)
other components of business comprehensive income valued at net equity
Total comprehensive profit (loss) for the period		458.8	461.4
Attributable to:
parent company shareholders		406.7	420.5
minority shareholders		52.1	40.9

Statement of financial position

 

Assets

mn €	notes	31 Dec 22	31 Dec 21
ASSETS
Non-current assets
Tangible assets	21, 25	1,984.4	1,941.0
Rights of use	22, 25	84.2	101.6
Intangible assets	23, 25	4,417.4	4,126.7
Goodwill	24, 25	848.1	842.9
Shareholdings	26, 27	190.3	198.5
Non-current financial assets	18	151.8	142.7
Deferred tax assets	14	240.4	229.4
Derivative instruments	29	1.0	6.9
Total non-current assets		7,917.6	7,589.7
Current assets
Inventories	32	995.1	368.0
Trade receivables	33	3,875.0	2,918.0
Current financial assets	18	77.7	29.3
Current tax assets	13	46.0	21.2
Other current assets	35	642.5	422.3
Derivative instruments	29	1,622.2	1,797.4
Cash and cash equivalents	18	1,942.4	885.6
Total current assets		9,200.9	6,441.8
TOTAL ASSETS		17,118.5	14,031.5

 

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 2.03.02 of this consolidated financial statement.

Net equity and liabilities

mn €	notes	31 Dec 22	31 Dec 21
NET EQUITY AND LIABILITIES
Share capital and reserves
Share capital	15	1,450.3	1,459.6
Reserves	15	1,692.9	1,407.1
Profit (loss) for the period	15	255.2	333.5
Group net equity		3,398.4	3,200.2
Non-controlling interests	16	246.3	216.6
Total net equity		3,644.7	3,416.8
Non-current liabilities
Non-current financial liabilities	19	5,689.9	3,716.0
Non-current lease liabilities	22	55.1	53.2
Post-employment and other benefits	30	92.0	105.4
Provisions for risks and charges	31	565.6	528.0
Deferred tax liabilities	14	215.7	132.1
Derivative instruments	29	6.3	13.5
Total non-current liabilities		6,624.6	4,548.2
Current liabilities
Current financial liabilities	19	650.1	499.7
Current lease liabilities	22	21.3	43.4
Trade payables	34	3,093.1	2,356.6
Current tax liabilities	13	17.1	27.9
Other current liabilities	36	1,720.0	1,435.6
Derivative instruments	29	1,347.6	1,703.3
Total current liabilities		6,849.2	6,066.5
TOTAL LIABILITIES		13,473.8	10,614.7
TOTAL NET EQUITY AND LIABILITIES		17,118.5	14,031.5

 

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 2.03.02 of this consolidated financial statement.

Cash flow statement

 

mn €	notes	31 Dec 22	31 Dec 21
Earnings before taxes		408.8	406.9
Adjustments to reconcile net profit to the cashflow from operating activities
Amortisation and impairment of assets	8	478.6	469.9
Allocation to provisions	8	188.5	142.2
Effects from valuation using the net equity method	9	(10.0)	(13.2)
Financial (income) expenses	10	135.0	218.0
(Capital gains) losses and other non-monetary elements		41.6	25.5
Change in provision for risks and charges	31	(27.8)	(31.2)
Change in provision for employee and post-employment benefits	30	(12.7)	(12.6)
Total cash flow before changes in net working capital		1,202.0	1,205.5
(Increase) decrease in inventories	37	(627.4)	(196.7)
(Increase) decrease in trade receivables	37	(1,280.7)	(893.8)
Increase (decrease) in trade payables	37	727.8	858.5
Increase/decrease in other current assets/liabilities	37	252.7	279.8
Changes in working capital		(927.6)	47.8
Dividends collected	37	13.4	12.0
Interest income and other financial income collected	37	41.8	32.6
Interest expenses, net charges on derivatives and other paid financial charges	37	(128.0)	(96.2)
Taxes paid	37	(165.9)	(156.3)
Cash flow from operating activities (a)		35.7	1,045.4
Investments in tangible assets	21	(225.6)	(171.9)
Investments in intangible assets	23	(483.9)	(416.8)
Investments in subsidiary companies and business units net of cash holdings	28	(50.1)	(64.1)
Other equity investments	28	(3.2)	(11.0)
Sale price of tangible and intangible assets	28	3.3	2.5
Divestments of shareholdings and contingent consideration	28	‐	0.2
(Increase) decrease in other investment activities	28	1.1	(1.5)
Cash flow from (for) investing activities (b)		(758.4)	(662.6)
New issue of long-term bonds	20	2,127.0	525.1
Repayments of non-current financial liabilities	20	‐	(519.8)
Repayments and other net changes in financial liabilities	20	(47.3)	(252.9)
Repayments of leasing liabilities	20	(43.4)	(22.5)
Acquisition of Interests in consolidated companies	20	(10.6)	(21.0)
Dividends paid out to Hera shareholders and non-controlling interests	20	(219.5)	(193.0)
Changes in treasury shares	15	(26.7)	(0.2)
Cash flow from (for) financing activities (c)		1,779.5	(484.3)
Increase (decrease) in cash holdings (a+b+c)		1,056.8	(101.5)
Cash and cash equivalents at the beginning of the period	18	885.6	987.1
Cash and cash equivalents at the end of the period	18	1,942.4	885.6

 

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 2.03.03 of this consolidated financial statement.

Statement of changes in net equity

 

mn €	Share capital	Reserves	Reserves derivatives valued at fairvalue	Reserves actuarial income (losses) employee and post-employment benefits	Reserves shares valued at fair value	Profit for the period	Net equity	Non-controlling interests	Total
Balance at 1 Jan 21	1,460.0	1,230.8	5.9	(35.1)	(3.5)	302.7	2,960.8	194.5	3,155.3
Profit for the period						333.5	333.5	39.2	372.7
Other components of comprehensive income:
fair value of derivatives, change for the period			87.7				87.7	1.7	89.4
Actuarial income (losses) employee and post-employment benefits				1.4			1.4		1.4
fair value shareholdings, change for the period					(2.1)		(2.1)		(2.1)
Overall profit for the period	‐	‐	87.7	1.4	(2.1)	333.5	420.5	40.9	461.4
change in treasury shares	(0.4)	0.2					(0.2)		(0.2)
change in equity investments		(19.8)					(19.8)	(1.2)	(21.0)
other movements							‐		‐
Allocation of revenues:
dividends paid out						(161.1)	(161.1)	(17.6)	(178.7)
allocation to reserves		141.6				(141.6)	‐		‐
Balance at 31 Dec 21	1,459.6	1,352.8	93.6	(33.7)	(5.6)	333.5	3,200.2	216.6	3,416.8
Balance at 1 Jan 22	1,459.6	1,352.8	93.6	(33.7)	(5.6)	333.5	3,200.2	216.6	3,416.8
Profit for the period						255.2	255.2	50.1	305.3
Other components of comprehensive income:
fair value of derivatives, change for the period			161.7				161.7	1.5	163.2
Actuarial income (losses) employee and post-employment benefits				1.9			1.9	0.5	2.4
fair value shareholdings, change for the period					(12.1)		(12.1)		(12.1)
Overall profit for the period	‐	‐	161.7	1.9	(12.1)	255.2	406.7	52.1	458.8
change in treasury shares	(9.3)	(17.4)					(26.7)		(26.7)
change in equity investments		(8.6)	1.2				(7.4)	(3.2)	(10.6)
other movements		0.2	0.1				0.3	(0.1)	0.2
Allocation of revenues:
dividends paid out						(174.7)	(174.7)	(19.1)	(193.8)
allocation to reserves		158.8				(158.8)	‐		‐
Balance at 31 Dec 22	1,450.3	1,485.8	256.6	(31.8)	(17.7)	255.2	3,398.4	246.3	3,644.7

Net financial indebtedness

 

		notes	31 Dec 22	31 Dec 21
A	Cash holdings	18	1,942.4	885.6
B	Cash equivalents	18	‐	‐
C	Other current financial assets	18	77.7	29.3
D	Liquidity (A+B+C)		2,020.1	914.9
E	Current financial debt	19	(563.0)	(443.6)
F	Current part of non-current financial debt	19, 22	(108.4)	(99.5)
G	Current financial debt (E+F)		(671.4)	(543.1)
H	Current net financial debt (G+D)		1,348.7	371.8
I	Non-current financial debt	19, 22, 29	(2,553.0)	(1,073.8)
J	Debt instruments	19	(3,197.3)	(2,702.0)
K	Commercial and other non-current payables		‐	‐
L	Non-current financial debt (I+J+K)		(5,750.3)	(3,775.8)
M	Total financial debt (H+L) ESMA guidelines 32 – 382 - 1138		(4,401.6)	(3,404.0)
	Non-current financial receivables	18	151.8	142.7
	Net financial debt		(4,249.8)	(3,261.3)

Drivers

The Plan strategy to 2026 has been designed to respond to the sector’s most significant challenges, with outstanding projects in all geographical areas in which the Group operates. The new BP fully confirm the  o perating-financial policies and  renew the  commitment towards development and growth, with interventions focused on the circular economy, energy transition, environmental protection, technological evolution and social cohesion. The new Business Plan revolves around three strategic focal points: environment, socio-economic factors and innovation, having development and growth as a transversal objective for all dimensions.  

These three strategic dimensions are closely interconnected as they contribute to addressing the environmental and sustainable challenges of our time. In summary, they represent a set of principles and practices aimed at promoting sustainable development and creating a better future for present and future generations.

Green transition

 

In order to  contribute to carbon neutrality, the Plan defines a set of initiatives to 2026 that will allow us to remain in line with the 2030 roadmap: a  37% reduction in emissions both for the Group and its supply chain (SBTi method). The Plan also envisages the development of district heating, the increase of renewable gas production and the expansion of the electricity grid, which is necessary to support the electrification of consumptions.

This will include the installation of photovoltaic systems at sites owned by the company and by domestic and industrial customers, as well as the production of biomethane and hydrogen, with the development of unique projects on the national scene, such as the power-to-gas plant combined with the integrated water cycle.
The initiatives of energy efficiency reserved for industrial customers, condominiums, and public administration, as well as other solutions already in place, will also contribute to the green transition, allowing our Group to reduce 10% of energy consumption by 2030, compared to 2013.

CIRCULAR ECONOMY

 

To continue to be a national reference point in  promoting and adopting circular economy solutions, the Plan provides for  reduced consumption of natural resources of all kinds (water, raw materials, energy) and material recovery, applied to our activities and to be extended across the served areas.
Indeed, the Plan envisages doubling the amount of recycled plastic by 2026, also thanks to the development of innovative plants for the recycling of rigid plastics and carbon fibers, which will be partially financed through resources from PNRR.

Leveraging on the country's largest and most diversified plant park, further strengthened by recent acquisitions, services offered to companies by Herambiente Servizi Industriali will be enhanced, in order to making production processes more circular and sustainable, increasing both material recovery and proper waste disposal.

The launch of smart collection systems and new technological systems for accurate measurement of waste disposal will also contribute to achieving a packaging recycling rate of 73% already by 2026 (well ahead of European targets) and reaching a differentiated collection percentage of 77%.

INNOVATION

 

Our strategy to 2026 uses  innovation as a lever  to pursue  economic,  environmental and social goals. Our networks and plants infrastructures will make the most of opportunities coming from remote management, remote control and automation, to provide the area served with greater resilience to increasingly frequent climate phenomena, with the possibility of accurate and immediate interventions, to contribute to the mitigation of risks in the services provided, with a consequent reduction of waste and environmental emissions.

Innovation will also be a key lever in evolving the relationship with our customers, offering new standards of quality and satisfaction, increasing customer loyalty through individualised offers that will make the most of data collected by second-generation meters, and through the introduction of artificial intelligence solutions to support the business applications used in customer relations.  

Investments 

The Plan to 2026 foresees total investments coming to over 4.1 billion euro, with an average of roughly 825 million euro per year ,  a significant rise of 60% compared to the average seen over the last five years.

The allocation of investments combines actions to increase the  assets resilience (about  EUR 2.13bn) with  organic development opportunities (about  EUR 1.49bn), the  new PNRR-related projects (about  EUR 130m) and M&A activities (about  EUR 370m) .

 

 

Of these total investments,  60% will go to regulated businesses and the remaining  40% to free market businesses.  40% of the total are earmarked for infrastructure resilience and 98% are planned on projects aimed at mitigating climate change and aligned with the European taxonomy. All this without neglecting the  evolution of technologies, across all managed businesses, which will see approximately 1.3 billion euro in investments, or 32 % of the overall capex plan.

Looking at the  investment plan breakdown by strategic area, the 4.1 billion euro will be allocated as follows:

• 2.2 billion euro to Networks, for plant base maintenance and network development. Roughly half of these resources will be allocated to the integrated water cycle with many circular economy initiatives for saving, reusing and recovering water in order to optimize the sewage sludge management and the material recycling from the water cycle waste with dedicated infrastructures and innovative tools. 42% will instead be invested in gas and electricity distribution with several digitalization and automation projects aiming more timely interventions on managed systems through the use of predictive maintenance models and functional modelling;
• 1.2 billion euro to Waste, to enhance the Global Waste Management service and plastic recycling activities. Three quarters of the total will be allocated in waste treatment and recovery, aimed at strengthening the Groups’ set of plants. Another important portion will be dedicated to commercial development in waste sector, driven by larger national and international customers who increasingly demand advanced solutions in terms of circularity and waste recovery;
• 0.6 billion euro to Energy, to develop value-added services and build renewable energy production plants. The Group's presence in the renewable energy business will be strengthened with initiatives that will lead to an increase in installed photovoltaic capacity not only owned by the company, but also at customers' premises, including through new models of distributed power generation, such as Energy Communities;
• 0.1 billion euro to Other Services, to promote the TLC network evolution, to maximize the use of renewable heat sources,  the renewal of Data Centers, to ensure the security and usability of data also in the context of AI, and for  digital transformation initiatives, in line with the Corporate Digital Responsibility framework. Efforts will also be made to bring the city's public lighting network into compliance and improve its efficiency, while promoting its circularity through the development of innovative and smart solutions that are attentive to energy consumption.

In terms of sustainability, about  70% of total investments are allocated to projects that create value not only for shareholders but  generate shared value for all stakeholders and will support the growth of shared-value EBITDA, bringing it to 62% of the Group EBITDA by 2026. These shared-value investments will meet the  objectives set by the UN Global Agenda 2030, while as far as the  European Taxonomy is concerned,  about 98% of the capital allocated to eligible assets is aligned  with the technical criteria defined by the European Regulation.

Target

The Plan to 2026 defines the specific objectives the Group aims to achieve in order to create economic and social value in a sustainable manner and ensure the long-term success of the company.

EBITDA

 

The Business Plan confirms and strengthens our growth, estimating the overall EBITDA at EUR 1,470 million by 2026, up by 246 million compared to 2021, and with an average annual growth of around 50 million, net of some discontinuities in the period.

 

 

The "shared value" EBITDA margin in 2026 will be 62% of the total Group EBITDA, equivalent to approximately 910 million,  and is expected to reach 70% by 2030. This will be achieved through a strategy that generates tangible benefits for the areas and communities served, in parallel with the company's development.

Together with stakeholders, a growth path for both the Group and its surrounding ecosystem will be established, fully enhancing the prosperity of the community and the territory in the medium and long term.

Green and Energy transition 

 

The projects set out in the new Plan to 2026 will make it possible to pursue a growth trend, consistent with the  green transition targets to be reached by 2030.

The targets are measured against industrial  indicators that summarize two areas, carbon neutrality and the circular economy, in such a way that for each one it is possible to verify whether the targets for 2026 are consistent with the progress required to achieve the objectives for 2030.

The main goals in these two areas include:

reducing CO2 emissions by 37% within 2030(compared to 2019) concerning both the Group’s own emissions (Scope 1 and 2) and those of customers (Scope 3) increasing the amount of renewable electricity soldcompared to total electricity sold, reaching the  target of 50% by 2030 reducing the Group’s energy consumption by 10% by 2030(compared to 2013 consumption) increasing the amount of  biomethane produced from OFMSW, with the aim of  reaching 30 million m3/year by 2030

 

increasing the amount of plastic recycled (and sold) by Aliplast, with a  volume growth target coming to +102% in 2026 and +150% in 2030, compared to 2017 figures as regards the proportion of  recycled packaging, in the areas served by the Group, the  target of 70% set by the EU for 2030was already achieved in 2017. The Group’s  goal for 2030 is more challenging, and expects to meet and exceed the  target of 80% recycled packaging increasing  reuse of wastewater from 1% in 2018  to 18% of total wastewater by 2030 reducing internal water consumption by 25% within 2030, compared to 2017 consumption

 

Dividend 

 

As a further confirmation of the constant attention to  generating value for shareholders, the Group plans to distribute dividends that will continue to increase both in the long term and in the current year. In fact, along with the approval of the 2022 Financial Statements, the Board of Directors has also approved a  dividend of 12.5 €cents per share, up compared to 2021. In addition, a progressive increase in the dividend is expected in the long term,  reaching 15 €cents per share in 2026, a 25% boost over the last one paid.

EPS will grow on average by over 3% per year.

Financial solidity 

 

Thanks to a  sound balance sheet, a careful management of working capital, and the adoption of risk management practices, the Group has a financial solidity that will allow it to achieve its strategic objectives and  generate positive operating cash flow. Cumulatively over the next five years, operating cash flow is expected to reach 4.5 billion euro, which will fully self-finance all investments.

Operating cash flows are expected to continue growing, supporting investments, dividends, and expansion through M&A while preserving financial solidity with a  Debt/Ebitda ratio of 2.8x by 2026, thus leaving room for other investment projects not included in the Plan.

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