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Financial Results 9M 2023
Stories
Ever more, Hera at the heart of the water infrastructure development in Italy
With 1 additional billion, Hera will continue to carry out investments to ensure that Water is supplied, purified and distributed to meet the evolving demand
Water is the most important resource on Earth. An essential resource to avoid social, political, and economic crisis. However, due to Climate Change, it is destined to become increasingly scarce while its demand is increasing, driven by continued population growth, further industrialisation, and more intensive use in agriculture. Such a structural deficit of supply over demand creates investment opportunities that the national Regulators tend to promote.
In Italy, Hera boasts a strong position in the integrated water cycle, being the second largest operator and the first in terms of service quality. A status that the Group has built with 2.5 billion euro of investments over the last 20 years, following that orientation towards environmental sustainability and circularity that has inspired its strategic and operational choices since inception.
The critical mass reached allows the Group to operate with an industrial approach while managing the different activities in the water business, by exploiting economies of scale, and developing projects that use innovative technology. Therefore, Hera is a player with a crucial role in a country, like Italy, which has quite an outdated infrastructure with poor operational performance, even just looking at the size of network leakages.
With the aim to further consolidate its leadership in a still fragmented industry, in its Business Plan to 2026, Hera plans to invest approximately 1 billion euro in the water cycle – a strategic choice that also financial markets highly appreciate, as proven by the significant number of funds focused on ‘water investing’ already present in Hera’s institutional shareholder register.
Specialist investors appreciate the value of the integrated water cycle in Hera’s multiutility portfolio
A component with great value in Hera’s multiutility portfolio is in the infrastructure and know-how that the Group has developed over time in the integrated water cycle business.
This value is widely recognised by the financial markets. The Company boasts the presence of many Water-investing funds and ETFs – a wide range of specialised investment vehicles. In an article of November 2021, Morningstar indicated that around 65 funds focused on water investing were active globally, with assets under management of 35 billion USD. These numbers are steadily expanding, given the strong interest of asset owners in investments that have a positive impact on the Environment by managing the effects of Climate Change.
Hera’s shares represent a valuable investment
opportunity for asset managers wishing
to ride the “water scarcity” megatrend.
A leadership based on the excellence in service, which rewards Hera in terms of economic return
With 35,000 km of networks and 3.6 million people served in 230 Italian Municipalities, Hera boasts a strong position, being the second-largest operator in the sector in Italy and the first in terms of service excellence, as also recognised by the Italian Authority that regulates the sector.
In 2022, Arera published a ranking of Italy’s local areas, based on the technical quality surveyed over the 2018-2019 two-year period, where the quality level of each area was defined on the basis of an articulated set of indicators: size of network leakages, number of interruptions in service supply, quality of water distributed, adequacy of the sewerage system, effectiveness of purification and sludge treatment systems. This document shows that the territories managed by Hera ranked high in both years of observation – more precisely from second to fifth place in 2018 and from first to fourth place in 2019.
As often happens, Hera’s
excellent sustainability behaviour
contributes to generate positive returns
also from a financial point of view.
Based on the results of the analysis conducted by the Regulator for the 2018-2019 period, in its 2022 Annual Report, Hera could post about 18 million euro in premiums due to the quality of service provided.
The Group’s continuous search for new operational efficiencies also translates into performance levels that remain at the highest levels over time. With the recent Resolutions no. 476 and 477/2023/R/Idr, Arera has confirmed the quality of services provided by Hera also for the years 2020-2021, with premiums in line with those of 2022 to be recognised in the fourth quarter of fiscal-year 2023.
Hera’s successful results in the water sector come from significant investment plans as well as from an industrial approach to the management of service
A look at the facts suggests that these results are the outcome of far-sighted choices made in the past, executed with consistency and commitment since foundation.
A first factor can be detected in the size of the investments made: in the last twenty years Hera invested in the water business a total of 2.5 billion euro – a value 30% higher than the Italian average per inhabitant served.
The continuity of major investment plans
is another essential element
to succeed in this business.
Therefore, Hera’s commitment is destined to grow significantly in the near future. In its Business Plan to 2026, Hera has allocated about 1 billion euro of investments to the water cycle, thus increasing to 85 euro the per-capita annual investment per-inhabitant, compared to the Italian average of 56 euro.
A further success factor lies in the industrial approach to the management of service. Indeed, the Italian market remains highly fragmented, with the presence of about 200 specialised operators and some municipalities still managing those services in house. A player with the size of Hera, with 3.6 million citizens served, can leverage its critical mass to exploit economies of scale and develop innovative projects.
Hera was, for instance, the first utility in Italy to identify hidden leaks in water networks by using satellites and cosmic rays. One of the Group’s early achievements was also the pioneering use of predictive analytics: supported by the Artificial Intelligence, Hera has long succeeded in identifying the points on its 35,000 km of network that present the greatest risk of breakage, so optimally planning the needed interventions.
This industrial and technological approach
to business management translated
in an excellent performance,
as proved by operational metrics.
In 2022 Hera recorded a level of linear leakages per kilometre of network of 9.5 cubic meters, compared to the Italian average of about 17.
The condition of the water system in Italy requires radical interventions within a very tight timeframe, with a clear space for operators, such as Hera, capable of investing and offering quality in service
Network leakage is not the only critical aspect of the water cycle system. Italy is currently subject to four EU infringement procedures because it lacks an adequate level of wastewater treatment and purification plants in areas with about 6 million inhabitants, i.e., about 10 percent of the country’s population.
In contrast, no infringement procedure is under way in the areas served by Hera, where almost all the inhabitants served are connected to a sewerage and purification network. Major investments made in this area include interventions for the Rimini Optimised Bathing Safeguard Plan and the innovative Servola sewage plant, which has significantly improved the environmental sustainability of Trieste.
Hera is also an operator already seriously committed to the reuse of water resources: in 2022, 7.3% of the water leaving the Group’s purification plants was reused, mainly in the agricultural sector.
Due to the agreements about to be signed in the territory, Hera also plans to reach a water recycling rate of 13 percent in 2026 and 18 percent in 2030.
The need to fight Climate Change, moreover, is presenting the sector with new challenges, including diversifying supply sources, reusing water resources, and making the networks more resilient in case of extreme events, as happened this year in Hera’s reference territories.
The Italian Regulator, in its latest consultation document (442/2023/R/idr), which serves as a preliminary to the tariff method for the new regulatory period in force from 1st January 2024, emphasised that urgent measures adoption is needed to contrast the risks of the effects of climate change. With this in mind, Arera intends to encourage new projects that improve the supply – such as, for example, water storage systems or seawater desalination plants – as well as measures for the reuse of purified wastewater and for the appropriate management of rainwater.
Hera has long set these goals for itself,
investing with conviction
in its water cycle infrastructure.
During the flood that hit a substantial portion of the territories served by Hera in May 2023, the Group has proven remarkable resilience, having ensured continuity of service and having recorded only marginal damage to its assets.
Therefore, with a strong leadership position and an industrial management approach in the water business, Hera has laid solid foundations to play a key role in a development phase that will have a positive impact on the sustainability of the Group’s results and, at the same time, on the resilience of the territories served.