Italgas Spa · MIL:IG

Italgas Spa — Investor Day (October 2016)

67 slides from Italgas Spa's investor day presentation, Oct 24, 2016

  1. Slide 1: Italgas Capital Markets Day

    Italgas Capital Markets Day 24th October 2016, London Italgas Capital Markets Day / 1

  2. Slide 2: Speakers

    Speakers PAOLO GALLO ANTONIO PACCIORETTI Italgas Capital Markets Day / 2

  3. Slide 3: New Italgas brand

    New Italgas brand Disclaimer in the last page Italgas Capital Markets Day / 3

  4. Slide 4: Key dates for demerger and listing

    Key dates for demerger and listing Last 3 months Before listing Management structure  Execution of demerger Banking financing commitments legal documentations granted to Italgas  Banking financial Shareholder’s and Noteholders’ agreements signed approval Today November Start management roadshow $

  5. Slide 5: Agenda

    Agenda Italgas Market Regulation Operational Strategy Financial Closing at a glance Overview Excellence Structure Remarks Italgas Capital Markets Day / 5

  6. Slide 6: Italgas at a glance

    Italgas at a glance Italgas Capital Markets Day / 6

  7. Slide 7: The leading Italian natural gas distributor…

    The leading Italian natural gas distributor… Italgas is the leading natural gas distribution operator in Italy, with a widespread and geographically diversified network of concessions OPERATING METRICS OF WHICH (TOTAL) AFFILIATES Italgas Reti, NPG, ACAM Gas Affiliates Network length ~65,000 km ~8,00

  8. Slide 8: … with distinctive core competencies

    … with distinctive core competencies Extensive local knowledge Innovation in Constructive our DNA relationship with regulatory bodies More than 180 years history leading natural gas market Unrivalled network Efficient management expertise of multiple projects Italgas Capital Markets Day / 8

  9. Slide 9: Stable shareholder structure & best practice Corporate Governance

    Stable shareholder structure & best practice Corporate Governance SHAREHOLDERS STRUCTURE CORPORATE GOVERNANCE CDP Reti Free & CDP Gas Float SHAREHOLDERS Meeting 13.5% 26% 60.5% Board of Directors: 9 members Board of Independent members: 4 out of 9 Statutory Gender representation: 3 women out of 9 Au

  10. Slide 10: Corporate structure

    Corporate structure CONSOLIDATION AREA NON CONSOLIDATED AFFILIATES Italgas Toscana Energia 100% 48% Italgas Reti Metano 0.85 bn€ S. Angelo Lodigiano 50% Total RAB Acam Gas Napoletanagas 100% 99.69% Umbria Distribuzione 45% Consolidated RAB: € 5.7 bn Pro-quota Equity RAB of affiliates: € 0.2 bn Sourc

  11. Slide 11: Stable economics with strong profitability

    Stable economics with strong profitability REVENUES (€m) EBITDA* (€m) NET INCOME* (€m) 1,098 1,038 1,053 730 722 782 355 346 308 2013 2014 2015 2013 2014 2015 2013 2014 2015 2016 key change: new regulatory WACC (6.1% from 6.9%) * Source: Company reports, adjusted consolidated reported data referring

  12. Slide 12: Operating cash flow exceeds capex expenditure

    Operating cash flow exceeds capex expenditure OPERATING CASH FLOW (€m) CAPEX (€m) NET DEBT (€m) 514 517 415 379 1,772 1,848 353 1,664 278 2013 2014 2015 2013 2014 2015 2013 2014 2015 2016 key change: net debt increase* following demerger Source: Company reports, consolidated reported data Data refer

  13. Slide 13: High quality client base

    High quality client base Others 22% Baa2 BBB 2% Baa3 Baa1  About 200 clients BB+ 2% BBB+ (Sales companies) 66% Baa2 BBB 8% Italgas major clients are investment grade Italgas Capital Markets Day / 13

  14. Slide 14: Italgas investment case

    Italgas investment case Leader in Clear and Operational Value creating Solid Balance natural gas visible excellence strategy Sheet distribution regulation  Uniquely  Predictable  Proven  Further efficiencies  Solid Investment positioned to revenues and capabilities in  Sizeable organic Grade c

  15. Slide 15: Market Overview

    Market Overview Italgas Capital Markets Day / 15

  16. Slide 16: Natural gas distribution operator

    Natural gas distribution operator DISTRIBUTION VALUE CHAIN TRANSMISSION ACTIVITY DISTRIBUTION ACTIVITY Pressure reduction station Distribution network Redelivery points Sales companies (shippers) FINAL CONSUMERS SERVICE RESIDENTIAL INDUSTRY RETAIL Italgas Capital Markets Day / 16

  17. Slide 17: Leader in the European natural gas distribution market

    Leader in the European natural gas distribution market RANKING BY REDELIVERY POINTS MARKET SHARE IN ITALY BY REDELIVERY POINTS (# redelivery points, thousands, YE 2015) (market share, YE 2015) 1 GrDF 30.3% 3.6% 11,000 Italgas* 33.9% 2i ReteGas 17.5% 2 National Grid 10,900 Hera 7.4% A2A 5.6% 3 Italga

  18. Slide 18: European natural gas distribution market

    European natural gas distribution market Norway: Sweden:  State owned DSO  #1 DSO Vattenfall: State owned 3  #2 DSO E.On Sweden: multi-utility Finland: Denmark & Benelux: 1  Top 2 DSO owned by financial  DSO controlled by local municipalities investors (Caruna, Eleniea) 720 Germany UK 88 31 All

  19. Slide 19: Market evolution

    Market evolution STREAMLINING OF ITALIAN OPERATORS SCALE IS KEY IN THE ONGOING CONSOLIDATION PROCESS Number of operators Number of operators (YE2015) Volumes distributed (FY2015) 730 Very large Small Very small 4% 10% 1% Large 10% Medium Very small 26% Medium 7% Very large 9% 59% 430 Large 23% Small

  20. Slide 20: Italgas network

    Italgas network Redelivery points by region (thousand units) AO 378 VE1 TO 4 TO 2 TO 1 408 1,141 Other regions CN 2  Strong geographical presence: 7 districts 421 589 & 50 operating centers 165  Concessions concentrated in contiguous Regions with areas drive clear efficiency advantages RM 2 >50% m

  21. Slide 21: Regulation

    Regulation Italgas Capital Markets Day / 21

  22. Slide 22: Current regulatory period

    Current regulatory period  Regulatory Authority (AEGGSI) in Italy: 2014 2015 2016 2017 2018 2019 2020 2021 2022  Defines the criteria for revenue calculations and evaluates tariff proposals IV Regulatory Period  Guarantees third-party access to (parameter set: beta, xfactor, reference opex) infra

  23. Slide 23: Revenues composition

    Revenues composition FY 2015 Distribution allowed revenues 94% 1,027m€  >98% of revenues are + regulated Other regulated services in gas distribution* 4% 44m€  Performance sustained by + additional regulated revenue streams Other non-core revenues (low risk profile)** 2% 27m€ * Activation, suspens

  24. Slide 24: The regulatory framework: revenues calculation

    The regulatory framework: revenues calculation YEARLY REVENUES FROM INVESTED CAPITAL YEARLY REVENUES FROM ANCILLARY (YEAR T) ASSETS** (YEAR T) RAB 2015: 5.4bn€* RAB 2015: 0.3bn€* Weight on revenues RAB (RAB of year t-2 + capex year t-1) (2015) x Number of redelivery points ~40% Rate of return (netwo

  25. Slide 25: The regulatory framework: RAB calculation

    The regulatory framework: RAB calculation RAB CALCULATION (YEAR T) Excluding ancillaries assets RAB at the beginning of the year + Maintenance & Development capex + Inflation – Depreciation, Disposals and Subsidies = RAB at the end of the year* * Includes a parametric calculation of the working capi

  26. Slide 26: Operating costs: price cap methodology

    Operating costs: price cap methodology REFERENCE OPEX CALCULATION REFERENCE OPEX UPDATE DURING THE Updated at the beginning of each regulatory period REGULATORY PERIOD by the Regulator Reference Opex Year 1  Parametric value (€/redelivery point) depending on company size and client density = calcul

  27. Slide 27: Main elements of the regulatory framework

    Main elements of the regulatory framework BENEFITS OVERVIEW  RAB based allowed returns  Parametric approach used  Re-valued historical cost RAB methodology Incentives by the regulator in setting:  Parametric method for central to assets efficiency  The allowed opex  Capex for metering  6.1% (

  28. Slide 28: Historical concession legislation

    Historical concession legislation BEFORE GAS GAS MARKET TEMPORARY MINISTERIAL MARKET LIBERALIZATION PERIOD DECREE 226/2011 LIBERALIZATION (Letta decree 2000)  Vertically integrated  Mandatory corporate  Ordinary  New ATEM and companies (sales and separation between management of calendar defined

  29. Slide 29: New concession tenders

    New concession tenders Form 6,800 municipalities to 177 The 177 tenders to take place larger ATEM concession areas over the next 4 -5years. Most of Consolidation Timing Opportunity to increase the the ‘old-regime’ concessions have operating efficiency for the benefit expired of all the stakeholders

  30. Slide 30: Tender Calendar

    Tender Calendar ESTIMATED NUMBER OF TENDER PER YEAR OF PUBLICATION 120 90 60 30 0 2016 2017 2018 2019 2020 'Milleproroghe' Decree Italgas expectations Italgas Capital Markets Day / 30

  31. Slide 31: Requirements for industrial operators to participate in the tender

    Requirements for industrial operators to participate in the tender  Average historical revenues > 50% of ATEM yearly revenues FINANCIAL OR CRITERIA  Banks financial guarantees for > 50% of ATEM yearly revenues + financial investment to repay the outgoing operator  Experience in managing natural g

  32. Slide 32: Legal tender criteria for awarding concessions

    Legal tender criteria for awarding concessions MAX. POINTS CRITERIA DETAILS AWARDED  Network inspection  Promptness of intervention Security & Quality 27  Level of natural gas odourisation  Quality parameters individually defined by the contracting authority  Network management efficiency Devel

  33. Slide 33: Operational excellence

    Operational excellence Italgas Capital Markets Day / 33

  34. Slide 34: Operational track-record

    Operational track-record COMMERCIAL KPI (working days, 2015) OPERATIONAL COMPLEXITY (2015 data) 30  23,000 km of network inspected 15  8,000 measurements of the level of odorization 10 10 7.7 8.1 3.2 5.6  77,000 Emergency calls Activation of Small works Small works Complex work supply execution b

  35. Slide 35: Distinctive competencies in capex execution

    Distinctive competencies in capex execution €M 450 >1500 yearly small projects managed (worth ~90% of the total capex), mainly related to substitutions and connections: 300  Average size: ~200k€  Average duration: < 1 year 150 ~50 on-going projects for networks extension  Average size: ~3 m€ 0 20

  36. Slide 36: Italgas leads market profitability

    Italgas leads market profitability MARKET SHARE/MARGIN CORRELATION (top 5 players) 80 % 2015 EBITDA Margin 60 % player player player player 40 % 0% 10% 20% 30% Market Share Italgas benefits from its operational practices and economies of scale Source: companies reports and Italgas elaboration Italga

  37. Slide 37: Strategy

    Strategy Italgas Capital Markets Day / 37

  38. Slide 38: Strategy for value creation

    Strategy for value creation  Uniquely positioned to drive further efficiencies 1 Efficiencies leveraging on our competitive cost base  Clear strategy to implement financial efficiencies Organic capex 2 plan  Capital deployed at RAB value  Concession tenders opportunity to reach ~40% Market marke

  39. Slide 39: Main areas of efficiency (opex and capex)

    1 Main areas of efficiency (opex and capex) Workforce and operations  Increasing productivity through the improvement of working practices  Leveraging on «make or buy» mix  Optimizing metering management (traditional and smart) Opportunity to further ICT outperform  Exploiting all economies of s

  40. Slide 40: Efficiency actions: some examples

    1 Efficiency actions: some examples Increase workers Improving New tender for Reducing telecoms Upgrade procurement productivity through the: infrastructural facility contracts cost associated to strategy related to:  Re-definition of the and telecom smart meter reading  Smart meters supply standa

  41. Slide 41: Significant organic investment plan 2016-2020

    2 Significant organic investment plan 2016-2020 Smart metering 2.0 bn€ CAPEX (>35% of 2015 RAB)  Large size (>G6): ~40,000 meters in the 2016-2019 period (over the plan period, capital deployed at RAB value)  Mass market (G4-G6): ~4.7m of meters installed in the 2016-19 period, 50% smart meters in

  42. Slide 42: Organic RAB evolution not considering tender process

    2 Organic RAB evolution not considering tender process CONSOLIDATED RAB(1) 2015-2020 IMPROVING RAB REMUNERATION MIX €m RAB 2015 RAB 2020 CAGR 2015-20 >1% 5% 5% 11% 15% 5.7 84% 80% 2015E Capex Grants (2) Allowed Inflation 2020E  Network  Network depreciations  Metering  Metering  Other  Other R

  43. Slide 43: Legal tender criteria for awarding concessions

    3 Legal tender criteria for awarding concessions MAX. POINTS CRITERIA AWARDED ITALGAS COMPETITIVE ADVANTAGES  The large, incumbent operators are expected to have a Security & Quality 27 competitive advantage on the qualitative and operational factors Development of the 45  The incumbent operators

  44. Slide 44: Italgas tender selection

    3 Italgas tender selection Criteria Strengths Weight of Italgas’ Redelivery Italgas presence Flexibility in Conservative win-rate target Points (RDPs) on total RPDs in in the ATEM tender selection considered in the plan the relevant ATEM Cost base lower than peers. Type of Market share of major oper

  45. Slide 45: Italgas position in the new ATEMs

    3 Italgas position in the new ATEMs Italgas owns 6.5 m redelivery Italgas is present in 113 ATEMs Italgas current market share in points (out of 177) each ATEM 8% market share ~40 ATEMs >50% 17% N. of Redelivery 25%<market ~30 ATEMs points share <50% 75% market share ~45 ATEMs <25% Leader (redeliver

  46. Slide 46: Tenders clusters

    3 Tenders clusters ~6 m redelivery points ~5 m redelivery points Current in ~40 ATEM in ~50 ATEM number of (85% Italgas market share (25% Italgas market share 9.0 m redelivery points redelivery on average) on average) points of Italgas is 6.5m very attractive medium low to zero tenders attractive te

  47. Slide 47: Tender process

    3 Tender process Tender Tender Award Start Published offer activities Pre-tenders Bid Tender Systems acquisition Concession period fulfilments preparation evaluation process 6 months 3 - 6 months 6 - 18 months 12 years 1 – 2 years Italgas Capital Markets Day / 47

  48. Slide 48: New tender opportunities

    3 New tender opportunities 2016 TO COMPLETION OF CONCESSION RENEWALS REDELIVERY POINTS AND RAB GROWTH OPPORTUNITIES CAPITAL DEPLOYMENT FOR THE NEW TENDERS Close to 40% market share Redelivery >8 m Financial investment in new Points* 6.5 m 1.3 tenders 2015 (proforma) Concessions bn€ (net of redemptio

  49. Slide 49: New tenders for natural gas distribution concessions

    3 New tenders for natural gas distribution concessions ITALGAS STRONG NEW TENDERS POSITION ADVANTAGES Rationalization of Sustainable organic Italgas well concessions portfolio business positioned Drive efficiencies Solid balance sheet for new tenders Further economies of Reliable cash flow opportuni

  50. Slide 50: Financial structure

    Financial structure Italgas Capital Markets Day / 50

  51. Slide 51: Key drivers of financial strategy

    Key drivers of financial strategy  Strong visible and resilient cash flow generation to cover both organic capex and dividend Cash flow  Significant investment opportunities driven by the tender process calendar  Firm commitment to solid investment grade rating (expected BBB+ by Fitch, provisiona

  52. Slide 52: Key credit metrics

    Key credit metrics RESILIENT CASH FLOW GENERATION AND STRONG CREDIT METRICS Net Debt/RAB* FFO/ND 80% 16.0% Solid investment grade area 70% 12.0% 60% Solid investment grade area 50% 8.0% 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020  Business growth supported by financial flexibility  Sound and

  53. Slide 53: Expected debt structure after demerger

    Expected debt structure after demerger €bn, consolidated figures 4.3 0.4 ~ 10Y 1.1 3-5Y  Conservative buffer consistent with 0.5 1-3Y an adequate liquidity profile 3.5 3.7  Flexible structure to manage cash 2.3 flow swings up to 2Y  5-years plan pre-funded Net Debt 2015 pro- Net Debt 2016E forma

  54. Slide 54: Cost based on current market conditions

    Cost based on current market conditions (€bn) Average spread 4.3 on Euribor 0.4 ~ 10Y ca. 0.7% 1.1 3-5Y ca. 0.5%*  Ready to repay the bridge to bond 0.5 1-3Y ca. 0.3% relying on favourable debt capital markets in the current low rate scenario 2.3 up to 2Y ca. 0.3%  Fix/Floating breakdown: 2/3 afte

  55. Slide 55: Self financing of investments and shareholders remuneration

    Self financing of investments and shareholders remuneration, flexibility for the growth  Operating cash flow covers Organic dividend distributions and Capex organic capex over business OCF plan  Financial flexibility allows to Dividends participate in market opportunities and enhance shareholder r

  56. Slide 56: Closing Remarks

    Closing Remarks Italgas Capital Markets Day / 56

  57. Slide 57: 2016 Guidance and mid term evolution

    2016 Guidance and mid term evolution 2016 PRO-FORMA CONSOLIDATED RESULTS MID-TERM >1.0 Revenues  Expected to grow in line with capital deployment following organic capex, new tender process Bn€ and market opportunities ̴ 65% Ebitda margin  Opportunities for further cost reduction >6% EBIT/RAB  Ro

  58. Slide 58: Value drivers for profitable and sustainable mid-term growth

    Value drivers for profitable and sustainable mid-term growth Leader in gas distribution Solid balance Operational Organic capex with proven sheet secures Clear and excellence and at RAB value capabilities in fully funded plan visible best practice and market managing gas and financial regulation eff

  59. Slide 59: Annexes

    Annexes Italgas Capital Markets Day / 59

  60. Slide 60: Corporate structure

    Corporate structure CONSOLIDATION PERIMETER Italgas  50.1k km1 of distribution network  7.0 bcm1 distributed  5.7m1 final users Italgas Reti  1,3101 concessions Acam Gas Napoletanagas Toscana Energia 100% 99.69% 48% (not consolidated)  Gas distribution in La Spezia area  Operates in Campania (

  61. Slide 61: Toscana Energia

    Toscana Energia Italgas Reti Toscana Energia: 48% a strategic industrial partnership  Governance agreement grants the right to Italgas to appoint the CEO 2015 key data  104 concessions in Tuscany  Consolidated with equity method c. 125 c. 40 157 790 432  Contributing >7% to Italgas 2015 m€ m€ m€

  62. Slide 62: Operating Costs: 2016 reference opex

    Operating Costs: 2016 reference opex AVERAGE SECTOR COSTS BY SIZE AND DENSITY (2016) Napoletana Gas Italgas Euro/PdR Client density  Reference costs per redelivery point t (dis) opex,t DISTRIBUTION High Medium Low  Covering the distribution costs Large 34,06 37,91 40,28 Company ACAM Size Medium 38

  63. Slide 63: WACC is calculated using the CAPM method

    WACC is calculated using the CAPM method Decree 583/2015/R/COM 0.5% floor offers protection WACC – Distribution WACC – Metering against further real interest rate fall Real risk free rate 0.5% 0.5% Country risk premium 1.0% 1.0% Beta unlevered 0.44 0.50 Beta levered 0.63 0.72 Market risk premium 5.5

  64. Slide 64: Italgas consolidated income statement

    Italgas consolidated income statement Consolidated income statement (€m) 2013 2014 2015 Revenues (*) 1,038 1,053 1,098 - of which regulated (*) 1,008 1,026 1,071 EBITDA 719 722 742 EBITDA adjusted 730 722 782 Amortisation/depreciation (214) (245) (273) EBIT 505 477 469 EBIT adjusted 516 477 509 Net

  65. Slide 65: Italgas consolidated balance sheet

    Italgas consolidated income statement Consolidated income statement (€m) 31.12.2013 31.12.2014 31.12. 2015 Fixed capital 4.385 4.650 4.761 Net working capital (306) (211) (90) Net Invested Capital 4.019 4.368 4.572 Net Debt (1.664) (1.772) (1.848) Shareholder equity 2,355 2,596 2,724 The data for 20

  66. Slide 66: Disclaimer

    Disclaimer This presentation (the “Presentation”) is for information purposes only. The contents of this Presentation may not be copied, distributed, published or reproduced in whole or in part. The document is to be used by the intended recipients only and the document may not be forwarded to a thi

  67. Slide 67: Italgas Capital Markets Day

    Italgas Capital Markets Day 24th October 2016, London Italgas Capital Markets Day / 67

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