Context analysis and business model

CONTEXT ANALYSIS

Acea monitors the scenario of reference – internal and external – intercepting and analysing the factors assuming relevance for the company and which can affect the pursuit of strategic goals.

In particular, the corporate sustainability, normative, regulatory, technological, competitive, market and environmental settings represent different aspects integrated into an overall framework, which outlines the context within which management activities and the outlook of the organisation are to be included. These are supplemented by the context within the Group – in terms of energy and environmental impacts, development of human capital, protection of workers’ health and safety – and management of the supply chain.

THE ENERGY MARKET AND COMPETITORS

The Acea Group is vertically integrated into the electricity supply chain through independent companies that meet the obligation to guarantee neutrality in the management of infrastructure essential for the development of a free energy market, to prevent discrimination in access to commercially sensitive information and to avoid cross-subsidisation between the various segments of the chain.

In the Sales segment, the outlook of most significance is the completion of the liberalisation of retail sales, with the expected abolition in 2020 of the regime of greater protection. An increase in competition between the operators is expected, with a consequent search for distinctive added value elements, to be pursued through investments in technological innovation and digitalisation to the benefit of the customer.

Technological innovation also plays an important role in the development of the Networks-energy distribution and public lighting sector, in favour of further progress in the automation and increasing the efficiency of the processes and for applications in the smart metering and smart grid framework and from a smart city viewpoint. In the latter area, the development of new synergies with other operators and the creation of business opportunities (as has already been done for ultra-wideband) can be foreseen. For public lighting, in addition to the developments related to smart cities, opportunities for operators with specific consolidated know-how also reside in an increase in demand from regions still without the latest generation of energy-saving lighting (LED).

THE INTEGRATED WATER SYSTEM

In the Water sector, the main development driver is the progress being made in the regulation by the ARERA, which rewards the efficiency of operators. Similarly to the electrical sector, in fact, in December 2017 the national Authority resolved on the new regulation for the technical quality of the integrated water service using a reward/penalty mechanism linked to the respect of performance standards (service levels) and also an automatic indemnity system for customers which is added to that already defined in relation to contractual quality. There are therefore development opportunities for the service managers that are closely linked to the capacity to adopt developed technological systems, highly efficient disclosure and organisational models, standardised and repeatable, capable of significantly affecting the improvement of performance levels.

THE WASTE MANAGEMENT MARKET

The current situation of production, disposal and treatment capacity For waste in the traditional operational areas of the Acea Group and in the neighbouring areas shows a high “potential Demand” for waste management (disposal, waste-to-energy, Composting and biogas, sludge and liquid waste treatment). This Is supported by a national regulatory framework that provides Incentives and the regulatory support of European directives on Matter and energy recovery, as well as by the implementation of The European Union’s policy guidelines on the circular economy (closing the loop).

Opportunities for developing the sector are therefore highlighted, Also facilitated by the availability of new technologies (for example in composting) and by possible forms of industrial Integration with other operators.

Finally, the expansion of the potential for disposal/recovery of Sewerage sludge – in the context of value added environmental Services (sludge treatment, compost) – could lead to the completion Of the integration with the Water business, in view of a Complete management in-house of the entire supply chain.

ISTITUTIONAL INVESTORS

In 2018, the Italian Stock Exchange recorded a negative performance (FTSE Italia Mid Cap -19.6%; FTSE MIB -16.2%) “underperforming” the main European stock markets, with the exception of Frankfurt.

International stock markets have been influenced by, among other things, the “trade war” involving the world’s major economies.

It should be noted that in 2018 there was an increase in initiatives implemented by institutional investors to promote sustainable and responsible behaviour in the medium to long term.

In particular, there was a greater focus on integrating ESG (Environmental, Social and Governance) factors into the investment process. We have witnessed more intense participation in company meetings and more in-depth discussions with companies aimed at identifying projects and forms of collaboration having to do with sustainability issues.

All this represents an increased level of engagement, considered one of the most advanced and concrete forms of responsible investment.

The CEO of BlackRock – among the most important investment funds in the world – in the firm’s annual engagement letter notes that “profits and purpose do not at all contradict each other, rather they are inextricably linked to each other. Profits are essential if a company must effectively serve all its stakeholders over time – not just shareholders, but also employees, customers and the community. Purpose guides the culture, creates a framework for a consistent decision-making process and ultimately contributes to sustaining the long-term financial returns for the shareholders of your company”.

SUSTAINABLE DEVELOPMENT

In the field of sustainability, the signals coming from the institutional, national and international settings indicate the growing importance of a multidimensional logic capable of highlighting the interconnection of social, environmental and economic aspects with which to interpret, assess and guide global priorities integrating regulatory, relational, physical and productive systems.

Worthy of note in this area is the Committee of Sponsoring Organisations of the Treadway Commission (COSO), a global point of reference for enterprise risk management models (ERM) that, in collaboration with the World Business Council for Sustainable Development (WBCSD), issued the first Guide to apply ERM methodology to risks related to social, environmental and governance factors.

In 2018, environmental risks were confirmed as the main global concern both in terms of impact and probability, followed by cybersecurity and privacy due to the speed of ongoing technological development. These aspects become even more complex when it comes to considering their interconnections with potential social and geopolitical risks (Global Risk Report).

The commitments made at the UN with the Sustainable Development Goals (Agenda 2030) that were then ratified at a national level represent the framework of reference for a transition towards sustainable life models, in relation to which important institutions perform analyses and define their own pathways. Indeed, this was the orientation chosen by the International Energy Authority, for example, which developed its own World Energy Outlook by combining analyses and assessments based on consumption projections generated by demographic and production dynamics, technological-innovative trends and environmental determinants.

Also of note in the year under review was the award of the Nobel prizes for economics to William Nordhaus and Paul Romer. The Nobel prize was for sustainability, considering the motivation of the Royal Academy for the choice of the two American scientists, who developed studies on the integration of climate change, technological innovation and macroeconomic analysis, dedicating themselves to “some of the fundamental and most urgent challenges of our time: combining the long-term sustainable growth of the global economy with the well-being of the planet’s population”.

The European Union has made two important strategic commitments.

The first defines a roadmap for strengthening the role of finance in creating an economy that achieves environmental and social objectives, the second represents the new long-term climate strategy of the Union, with the aim of making the European continent the first great global economy with zero climate impact by 2050.

Looking towards the Fourth Industrial Revolution, as evidenced by recent research of the World Economic Forum, cities will play a decisive role in triangulating the environment, production systems, technological developments and social and demographic dynamics in a sustainable manner. Urban setting will grow, becoming agile and resilient and basing their evolution on big data and analytics, IT systems and interoperable management systems.

Local public services represent the main infrastructure for future smart cities, and the role of Utilities will be crucial in managing water and energy efficiency and savings, the circular economy, the prevention and reduction of pollution and climate-changing emissions. Lastly, it is worth noting the change made by the 2019 Budget Law in Italian Legislative Decree no. 254/2016, which made non-financial reporting mandatory for companies, adding reporting obligations for environmental, social and sustainable governance (ESG) management methods.

ENVIRONMENTAL AND ENERGY IMPACTS

The natural environment is the scenario where the activities of the Group are performed and is to be preserved with a responsible and efficient use of resources, protecting sources, safeguarding the natural areas where the plants and service networks encroach, mitigating the physical and the external impacts generated in the ecological context of the operating processes.

Consider for example energy generation where the repowering initiatives constantly act to modernise plants also by pursuing the lowest environmental impacts in terms of emissions, or the integrated water service where Acea’s responsible management in resources starts from the provisioning stage, to make it available to people and ends with the commitment to restore the runoff to the receptacle body in the best condition possible.

Finally, the environmental services linked to waste management cannot be overlooked, where the commitment to the ecosystem regards both operating processes, just think about the environmental efficiencies brought in the innovative project of the EcobeltR WA belts in the waste to energy plant of San Vittore del Lazio, or the transformation of waste with a view to circular economy, as occurs with sludge treatment for water purification.

In keeping with the desire to operate while respecting and protecting the surrounding environment, Acea has already implemented a series of initiatives aimed at better managing the aspects of its activities that have a general impact on the environment and specifically on energy, also thanks to the use of advanced systems and technologies.

• management systems: the widespread adoption of environmental and energy management systems is a concrete response on the importance of environmental dynamics for Acea and a managerial tool for continuous improvement in performance.
• mobility management: a focus on the environmental impacts of corporate activities also concerns the effects produced by the movements of employees. In this context, the Acea Group has undertaken initiatives to reduce employee travel and to encourage less polluting means of transport.
• carbon disclosure project (CDP): Acea publishes its initiatives, for over ten years communicating them to the international CDP organisation, which produces various annual online reports aimed at informing analysts and lenders about the levels achieved by companies in managing risks and opportunities related to the topic of climate change.
• green purchases: Acea has set itself the goal of increasingly developing Green Procurement for the relevant product categories included in the PAN (National Action Plan for Green Procurement).
• environmental conduct of the supply chain: Acea has committed to assessing its suppliers on an annual basis with regard to the environmental performance of the products/ services supplied, and to inform/train contractors and subcontractors regarding the environment.

Acea has included actions to combat climate change in its 2018-2022 Sustainability Plan, which includes both mitigation and adaptation actions and monitors the matter and related EU and international developments (the COP - Conference of the parties and European legislation). Environmental issues related to the array of services provided by the Group are included in the Organisation and Management Model pursuant to Italian Legislative Decree no. 231/01.

LEGISLATION IN THE RELEVANT MARKETS AT A LOCAL, NATIONAL AND SUPRA-NATIONAL LEVEL

The legal context of pertinence to Acea is wide-ranging and articulated according to the specificity of the operating segments — water, energy and environment — and the variety of the frameworks within which the legal and regulatory disciplines intervene which affect the business operations, from administrative authorisation profiles to those protecting the market and competition. Added to such aspects is the peculiarity of the nature of listed companies, with the related legal impacts, for example in terms of regulating communications to the market.

The legal scenario is therefore analysed from a multidisciplinary viewpoint, applying a 360° overview and continuous interpretative analysis, in order to detect developments of particular significance, identifying and assessing risks and opportunities in terms of strategy and operating management.

The new Code of Public Contracts, which has radically transformed the rules and operations of public contracts, is surely one of the most important issues. This Code was the subject of corrective action by means of Legislative Decree no. 56/2017, and a further reform is currently being examined. Among the articles that will be subject to modification are: art. 31 “Role and functions of the person responsible for the procedure in contracts and concessions”; art. 80 “Reasons for exclusion”; art. 105 “Subcontracting” and art. 177 “Assignment of concessionaires”.

The legal application aimed at protecting consumer interests becomes increasingly more important, especially with regard to relations with commercial operators and at privacy level. With regard to the latter, 2018 saw the entry into force of Regulation EU 2016/679 on the protection of personal data and Legislative Decree no. 101/2018 containing the provisions for the adaptation of national legislation to those envisaged in the aforementioned regulation.

The industrial nature of the services managed bestows significance upon the focus on legal and administrative profiles related to both authorising procedures for the construction, renewal and management of plants, with obvious effects on the capacity to guarantee the continuous operation of the company managed, and on the recognition of incentives for energy plants (energy efficiency certificates, ex green certificates and other incentives recognised by the legal system). In this regard, we draw attention to the Ministerial Decree of 10 May 2018 concerning, among other things, the determination of national quantitative energy savings targets to be pursued by companies distributing electricity and gas for the years from 2017 to 2020, issued to address the deep crisis in which the market for TEEs finds itself due to the significant imbalance between supply and demand. With regard to environmental legislation, we point out Decree Law 109/2018 (the so-called “Genoa Decree”), converted by Law 130/2018, which introduced a “buffer” provision aimed at regulating the management of sewage sludge pending an organic revision of the sector’s regulations.

Also worth mentioning is the postponement by one year – from July 2019 to July 2020 – of the interruption of the “protected market” regime in the energy sector pursuant to Legislative Decree no. 91 of 25 July 2018, converted, with amendments, following the approval of Law no. 108 of 21 September 2018. Lastly, with regard to compliance with antitrust laws, an area in which there has been general and growing attention due in part to the evolution of the competitive environment in the markets the Acea Group operates in, the Antitrust Authority adopted the “Antitrust Compliance Guidelines” on 25 September 2018.

THE REGULATORY AUTHORITIES

In the water sector, from a regulatory point of view, 2018 reaped the benefits of the important measures introduced at the end of 2017, with reference to the resolution on the tariff structure (665/2017/R/idr) and the two end-of-year resolutions on Technical Quality and on the methods for updating tariffs for the twoyear period 2018-2019 (917/2017/R/idr and 918/2017/R/idr).

During the year, ARERA presented a hypothesis of protection regime both for operators, with the containment of arrears in the integrated water service and for the end user, introducing measures in cases of suspension and deactivation of the supply.

Also with regard to water bonuses, ARERA has issued a measure, resolution 227/2018/R/idr, regarding the application procedures for the regulation of information flows, data exchange and operating procedures for the disbursement of the social water bonus, to allow its disbursement to users who request it as from 1 July 2018.

In the electric power area, the following issues were discussed in greater detail in 2018:

• resilience of electricity grids, with resolution 31/2018/R/eel, obligations were introduced to prepare resilience plans for all distribution companies;
• general system charges, esolution 50/2018/R/eel defines the mechanism for reintegrating general system charges paid but not collected by distribution companies. On this issue, by means of resolution 626/2018/R/eel ARERA deferred for one year the elimination of the residual progressivity from the amounts covering the general charges applied to households.

On the subject of energy efficiency certificates, with the interministerial decree of 10 May 2018 the MISE introduced corrective measures to stabilise the price of White Certificates and, following this decree, ARERA intervened on the definition of the tariff contribution to cover the costs incurred by electricity and natural gas distributors subject to obligations under the mechanism of energy efficiency certificates. Still on the subject of guidance and orientation by primary legislation, the publication of the new RES Decree (renewable energy sources) is expected.

Moreover, the 2018 Budget Law assigned the Authority the functions of regulating and controlling the waste cycle, including differentiated, urban and similar waste, to be exercised “with the same powers and within the framework of the principles, purposes and powers – including those of a sanctioning nature – established by Law 481 of 14 November 1995” and already exercised in the other areas of responsibility.

With regard to this prescription, ARERA has initiated procedures for the adoption of measures concerning the quality of service and tariff regulation, which did not give rise to further regulatory impacts during the year.

DEVELOPMENT AND TECHNOLOGICAL INNOVATION

Technology represents an area that is both dynamic and critical for Acea. The intense activity of research and development by the producers of technological services and the pervasive application of these technologies in the areas of Acea’s operations led in 2018 to a substantial refocusing on the topic of Innovation. The Innovation, Technology & Solutions department, which reports directly to the CEO, was set up with an Organisational Unit dedicated to Innovation that has the task of ensuring an Innovation model for the Group through the adoption of processes and Open Innovation approaches that involve internal and external stakeholders, assigning the new activities to the three pillars of the business plan: Infrastructure, People, Client. In 2018, innovation initiatives were launched for each of the three pillars, with positive effects on the infrastructure, employees and customers.

In addition, from an Open Innovation perspective, partnerships have been established with Open Fiber for the evolution of networks and the development of innovative services for the city of Rome, and with Huawei for the definition of projects of high technological value to provide advanced and innovative services in Smart and Safe City area.

DEVELOPMENT OF HUMAN CAPITAL

To cope with the increasingly rapid changes of our time and transform them into opportunities for development, Acea has decided to focus on the evolution of its corporate culture.

The new Leadership model, values and behaviours guide and contribute to defining an organisational setting that seeks to promote a constant development of human capital, recognised as a fundamental asset for remaining competitive in a changing economic and social context.

Entrepreneurship, teamwork and action are the three pillars upon which the Group’s initiatives are built to achieve the goals of the 2018-2022 strategic plan and the sustainability plan.

Among these, the goal of enhancing people for the growth of the Group is broken down and carried out through three areas of activity:

• professional growth, training and development of skills, through a process that, starting from hiring, uses training and a performance assessment system to align behaviour with the Leadership model and the values of the Acea Group in a constant development of human capital;
• involvement of people in the Group’s identity, through specific initiatives designed to promote employer branding, making Acea increasingly attractive for new talent;
• inclusion and organisational well-being, with the launch of initiatives aimed at making work increasingly “smart” and boosting motivation, potential and satisfaction of personnel, as well as the well-being of employees, recognising the strategic value of Diversity, Health and the Safety of workers

SUSTAINABLE MANAGEMENT OF THE SUPPLY CHAIN

Aware of the positive contribution that sustainable supply chain management can offer to protecting the environment, Acea is committed to defining purchasing methods that include intrinsic characteristics of the products and aspects of the process that limit environmental impact and foster initiatives aimed at minimising waste, reusing resources and protecting the social aspects involved in the procurement of goods, services and works defined and used to meet its needs.

Indeed, for several years Acea has been using the Minimum Environmental Criteria, in its calls for tenders including even rewarding aspects that are not mandatory but often decisive in ensuring the maximum achievement of the objectives set. Furthermore, it engages in the education of its own resources so that the purchasing choices tend toward goods or services with sustainable characteristics, thus stimulating the development of a specific sensitivity towards these aspects, with the aim of having them always present in supplier selection processes.

HEALTH AND SAFETY IN THE WORKPLACE

2018 marks the tenth anniversary of the “Consolidated Law on Safety and Health in the Workplace”, published on 9 April 2008, and, while over the past ten years numerous actions have been taken to prevent accidents, the current INAIL data in Italy unfortunately show an increase in the number of accident reports.

Acea carries out constant awareness campaigns on the subject, with the aim of profoundly affecting the widespread dissemination of a culture of safety involving all its employees.

It has also implemented an advanced risk assessment model, not to mention control and mitigation measures. Acea has also launched a number of initiatives to raise awareness of and involvement in the issues discussed above with its contractors and sub-contractors, key business partners throughout the entire value chain.

To this end, an intense audit activity carried out at construction sites also contributes, such inspections being an effective tool for verifying the application of safety regulations and procedures with respect to maintenance contracts for networks and plants.

THE BUSINESS MODEL

CHART NO. 3 - ACEA'S BUSINESS MODEL

CHART NO. 4 - ACEA SPA ORGANISATION CHART AS AT 31.12.2018

* The structure is hierarchically answerable to the Chairman of the Board of Directors (Member of the Executive Committee by righ t).

The Acea Group is mainly active in 4 supply chains: the integrated water service; the production and distribution of electricity (including public lighting); the sale of energy and gas; the valorisation of waste. Acea operates in such segments through industrial Companies located in central Italy (particularly on the Tyrrhenian ridge) that it has equity investments and in which it plays the role of industrial entity of reference.

WATER SUPPLY CHAIN: INTEGRATED WATER SERVICE

The water supply chain begins with the resource capture phase: the water required by the network serving the communities is drawn from streams and water tables in the territory. The quality of the water resource is tested and guaranteed by Acea, throughout its journey, in observance of the normative standards envisaged for end uses. Thereafter the wastewater and treatment phase is activated to recycle and return the resource to the environment in the best possible conditions for its natural cycle to resume.

ENERGY SUPPLY CHAIN: PRODUCTION AND DISTRIBUTION INFRASTRUCTURE