Natural gas distribution

The service of distributing natural gas

The natural gas distribution business operates on a local authority concession basis, through Italgas and its subsidiaries and associates, and involves distributing gas through local pipelines from delivery points at the city gates to the end customers (households, businesses etc.) via redelivery points on the distribution network. By transporting gas through municipal networks, the distribution service is performed on behalf of retail companies authorised to sell to end customers. Italgas distributes natural gas using an integrated infrastructure comprising units for withdrawing gas from the transportation network, pressure reduction stations, local transportation and distribution networks, gas service pipes and redelivery points consisting of technical equipment featuring meters at the end customer (households, commercial and tertiary businesses, and small industrial companies).

Italgas is the leading domestic distributor of natural gas in Italy, with 1,441 municipal concessions and a high-and medium-pressure transportation network of around 50,000 km.

Italgas - Municipal concessions


Introduction

As indicated previously, the associated effects of consolidating Italgas are recorded from 30 June 2009, the completion date of the transaction.

For purposes of fully assessing operating performance, the operating performance of the distribution business segment is analysed with reference to the entire 2009 financial year. Comparative information is shown for 2008.

Key performance indicators15
(€ millions)
2008Of which Acqua
Campania
2009Change% change
Core business revenue 764 49 802 38 5.0
Operating costs 353 52 291 (62) (17.6)
EBIT 323 5 398 75 23.2
Net profit 228 275 47 20.6
Investments 288 334 46 16.0
Net invested capital at 31 December 3,237 (20) 3,419 182 5.6
Gas distributed (millions of cubic metres) 7,431 7,537 106 1.4
Distribution network (km) 49,410 49,973 563 1.1
Active meters (number) 5,676,105 5,770,672 94,567 1.7
Customers - Retail companies (number) 132 166 34 25.8
Employees in service at 31 December (number) 3,732 66 3,545 (187) (5.0)

Results

Core business revenue was €802 million, an increase of €87 million, or 12.2%, compared with 2008. The increase was due to higher natural gas distribution revenues as a result of new tariff calculation methods and a different way of recognising revenues for the thermal year, applicable as of the third regulatory period (1 January 2009 - 31 December 2012)16. Natural gas distribution revenues in 2009 amounted to €776 million, an increase of €87 million, or 12.6%, compared with financial year 2008.

EBIT in 2009 was €398 million, an increase of €80 million, or 25.2%, compared with 2008. The improved operating performance was due to higher core business revenue (+€87 million) and lower operating costs (+€10 million), attributable primarily to smaller personnel expense. These effects were partly offset by a reduction in other revenue (-€10 million), owing essentially to lower net income from energy efficiency certificates17 and higher amortisation and depreciation (-€7 million).

Net profit (€275 million) increased by €47 million, or +20.6%, compared with 2008, due largely to the combined effect of the following: (i) the aforementioned increase in EBIT (+€80 million); (ii) higher income from equity investments (+€13 million) relating mainly to shares of the results for the period of subsidiaries and affiliates valued using the equity method; (iii) lower net financial expense
(+€11 million) on the back of reduced market interest rates; (iv) higher income taxes (-€57 million) as a result of more pre-tax profit.

Operating review

Investments (before grants) came to €334 million, an increase of €46 million, or 16%, on the figure of €288 million for 2008.

Investments
(€ millions)
20082009Change% change
Network maintenance 138 194 56 40.6
Network extensions and upgrades 103 92 (11) (10.7)
New networks 6 17 11
Other investments 41 31 (10) (24.4)
288 334 46 16.0

Network maintenance investments (€194 million) mainly involved renovating sections of obsolete pipes by replacing cast-iron pipes, especially in Rome’s municipal network, and stepping up the meter replacement programme.

Network extension and upgrade investments (€92 million) mainly involved extending existing networks in response to commitments arising from concession contracts and building new infrastructures, particularly in Calabria.

Other investments (€31 million) related mainly to property and IT investments.

Gas distribution

The volume of gas distributed in 2009 was 7,537 million cubic metres, an increase of 106 million cubic metres, or 1.4%, compared with 2008, due essentially to weather conditions and network development.

At 31 December 2009, the group had concessions for gas distribution services in 1,441 municipalities (compared with 1,438 at 31 December 2008) with 5,770,672 active meters at gas delivery points to end customers (households, businesses, etc.), compared with 5,676,105 at 31 December 2008.

Breakdown by type of investment (% of total investments): Network maintenance for 2008 is 48%, for 2009 is 58%; Network extensions and upgrades for 2008 is 36%, for 2009 is 28%; Other investments for 2008 are 14%, for 2009 are 9%; New networks for 2008 is 2%, for 2009 is 5%.Natural gas distributed (in millions of cubic metres) for 2008 is 7,431 and for 2009 is 7,537.


Distribution network

The group’s gas distribution network at 31 December 2009 spanned 49,973 km and consisted of different pipes for different pressures:

  • main supply pipes (greater than 12 bar);
  • medium-pressure pipes (up to 5 bar);
  • low-pressure pipes (up to 0.04 bar).

The 563 km increase from 31 December 2008 is due to the balance of increases and decreases in the network. The increases are primarily due to:

  • acquisition of the tendered gas distribution concession in the Cerro Maggiore municipality;
  • acquisition of the business unit which distributes gas in the Settimo Torinese and Brandizzo municipalities;.
  • partial acquisition of the business unit which distributes gas in the municipalities of Alimena, Bompietro and Blufi in Palermo and Sperlinga (network to be constructed) and the village of Villadoro in Nicosia, Enna;
  • construction of new networks;
  • extension of networks to meet commitments deriving from concession contracts;
  • service access requests from end customers (households, businesses, etc.).

The decreases are attributable mainly to the sale of gas networks in the Bussolengo, Liscate, Castiglione delle Stiviere and Capriolo municipalities to other operators following discontinuation of distribution services.

Customers

At 31 December 2009, the group transported the gas of 138 retail companies in its distribution networks, compared with 109 companies at 31 December 2008.

Regulation

Resolution ARG/gas no. 159/08 - “Single text for regulating the quality and tariffs of gas distribution and metering services for the regulatory period 2009-2012 (TUDG): approval of part II "Tariff regulation for gas distribution and metering services for the regulatory period 2009-2012 (RTDG). Temporary measures for 2009”.

With this resolution, published on 17 November 2008 (and subsequently amended), the Authority defined tariff criteria for distribution and metering services for the third regulatory period, which runs from 1 January 2009 to 31 December 2012. In short, the resolution provides for:

  • The recognition of locally invested capital using the revalued historical cost method and of centrally invested capital (non-industrial buildings and other fixed assets) using the parametric method;
  • The recognition of operating costs for the distribution business on a parametric basis and differentiated depending on the size of the company and the density of the network’s clientele;
  • The recognition of operating costs for the metering and sales businesses using the same parametric components for all companies;
  • From 2010, the valuation at standard cost of all investments on the basis of a pricing structure drawn up by the Authority (Modern Equivalent Asset Value (MEAV) methodology, based on the concept of new replacement cost);
  • The determination, by the Authority, of reference tariffs for each company, corresponding to recognised costs for remuneration of net invested capital, amortisation and depreciation, and operating costs;
  • The subdivision of the national territory into six tariff zones and determination, by the Authority, of the related compulsory tariffs that distributors must charge users of their networks;
  • The introduction of an equalisation mechanism, managed by the Authority through the Electricity Equalisation Fund, in order to ensure the equality of revenues generated by each company through the compulsory tariff, which obviously does not reflect the specific costs of each company and the costs recognised to the same company through the reference tariff.

Resolution ARG/gas 79/09 - “Approval of tariffs for gas distribution and metering services for 2009 and start of a fact-finding investigation aimed at checking the data sent by companies to determine the reference tariffs”.

With this resolution, published on 30 June 2009 and on the basis of tariff criteria laid down by resolution 159/08, the Electricity and Gas Authority approved compulsory tariffs for the distribution, metering and sale of natural gas for the period 1 July 2009 - 31 December 2009. The approval of reference tariffs for natural gas distribution and metering for each distribution company was established by subsequent resolution ARG/gas 197/09.

It was stipulated that the distribution tariffs approved for the thermal year 2007-2008, and applied provisionally during the first half of 2009, would be applied definitively without recourse to equalisation.

The Authority simultaneously began a fact-finding investigation into the historical cost values of investments and government grants passed on by various operators (including Italgas for purposes of determining the reference tariff for 2009). The inquiry ended in December 2009.

Resolution VIS 169/09 - “Closure of the fact-finding investigation begun under the Electricity and Gas Authority’s resolution ARG/gas 79/09 of 30 June 2009 on data transmitted by distributors of natural gas and other gases pursuant to article 7 of the RTDG under the Electricity and Gas Authority’s resolution ARG/gas 159/08 of 6 November 2008”.

This resolution, published on 23 December 2009, ended the fact-finding investigation begun in June 2009 on the back of resolution 79/09. The Authority asked Italgas to provide more details on government grants relating to a small number (103) of localities.

Resolution ARG/gas no. 197/09 - “Approval of gas distribution and metering tariffs for 2009. Modifications to part II of the single text for regulating the quality and tariffs of gas distribution and metering services for the regulatory period 2009-2012 (TUDG): Other gas distribution tariff measures”.

With its resolution 197/09, published on 23 December 2009, the Authority approved the reference tariff for 2009 for all Italgas localities, except those subject to resolution VIS 169/09, for which the Authority determined a provisional reference tariff subject to further checks stipulated by said resolution.

Resolution ARG/gas no. 206/09 - “Update of 2010 tariffs for distributing and metering natural gas and other gases and other tariff measures for natural gas distribution and metering services. Modifications to the RTDG. Correction of errors relating to the Electricity and Gas Authority's resolution ARG/gas 197/09 of 21 December 2009”.

With this resolution, published on 29 December 2009, the Electricity and Gas Authority updated the reference tariff for 2010 on the basis of values approved under resolution ARG/gas 197/09 (for Italgas, the localities for which the Authority stipulated further investigation for 2009 were not included). In addition, owing to the delay in defining the price structure for valuing investments at standard cost, the application of the MEAV method for their recognition has been deferred.

(15) For purposes of a like-for-like comparison, the forthcoming financial review does not take into account the 2008 results of Acqua Campania S.p.A, a company no longer fully consolidated as of 2009. It should be noted, however, that following the valuation of Italgas's equity investment in Acqua Campania S.p.A using the equity method, net profit and equity attributable to Snam Rete Gas are unchanged. Furthermore, the figures for 2008 have been reclassified in the same way as those for 2009, showing: (i) operating costs net of expenses for the acquisition of energy efficiency certificates (€21 million), recorded as a decrease in relative income; (ii) distribution revenues net of tariff-related expenses (€17 million), recorded in 2008 under operating costs.
(16) With its resolution no. 159/08, the Electricity and Gas Authority introduced a new way of determining gas distribution tariff, applicable from 1 January 2009 and for the entire four years of the regulatory period (i.e. until 2012). The main variation is the method used to determine revenue owed to gas distributors for their services. Before the above resolution was introduced, this revenue was determined using the tariffs set by the Authority for the volumes actually distributed in the period under review. Now, however, total revenue for each year of the regulatory period is a pre-set amount decided when the tariff requests are approved, called the Total Revenue Limit (TRL), being the maximum remuneration recognised by the Authority for each operator to cover its costs. Any positive or negative differences between the TRL and the revenue arising from the amounts invoiced for the volumes actually distributed to the retail companies are settled using an equalisation mechanism with receivables and payables due from and to the Electricity Equalisation Fund.
(17) Legislative Decree no. 164 of 23 May 2000 stipulates that natural gas distribution firms set consumption reduction and energy savings targets to be met through raising energy efficiency, and that they are awarded energy efficiency certificates (established by the ministerial decrees of 20 July 2004) depending on the results achieved. The energy efficiency targets can be met either by implementing energy efficiency policies or by purchasing certificates from other parties. Once the energy efficiency target is met, cancelling the certificates triggers repayment by the Electricity Equalisation Fund on the basis of dedicated funds built up through distribution tariff increases.