Snam operates in the regulated gas sector. The relevant directives and legal provisions issued by the European Union and the Italian government, and the resolutions of the Electricity and Gas Authority, may have a significant impact on operations, results and financial stability. More specifically, Decree Law no. 138 of 13 August 2011, which was converted into Law no. 148 of 14 September 2011, extended the application of additional IRES to the natural gas transportation and distribution business segments, with a tax rise of 10.5% for 2011-2013 and 6.5% as of 2014. Companies are not permitted to pass on the tax rise to customers via a tariff increase, and the Electricity and Gas Authority has been mandated to enforce this rule. Future changes to European Union or Italian legislative policies, which may have unforeseeable effects on the relevant legislative framework and, therefore, on Snam’s operations and results, cannot be ruled out.
Risks associated with the end of gas distribution concessions held by Italgas and its subsidiaries and associates
Risks relating to tenders for new gas distribution concessions
At 31 December 2011, Snam, through Italgas, had a portfolio of approximately 1,450 natural gas distribution concessions spread throughout Italy. On the basis of current regulations applicable to Snam’s concessions, new gas distribution contracts will be awarded not by individual municipality but exclusively by zones determined by the Ministerial Decrees of 19 January 2011 and 18 October 2011, and also according to the timeframes indicated in Annex 1 of the Ministerial Decree on bid evaluation and auction criteria, issued on 12 November 2011.
As the tender process unfolds, Snam may not be awarded one or more of the new concessions, or it may be awarded them on less favourable terms than is currently the case. This could have a negative impact on Snam’s operations, results, balance sheet and cash flow, notwithstanding, should the company not be awarded concessions for municipalities it currently manages, the reimbursement to the outgoing operator.
Risks relating to the possible request from municipalities to acquire ownership of the gas distribution networks and to quantifying reimbursement to the outgoing operator
With regard to the gas distribution concessions where Snam, through Italgas, also owns the networks and plants, regulatory changes in the sector determine the legal rules of ownership and the elements required to calculate the amount to be reimbursed to the outgoing operator, both in the first period, i.e. at the end of the transition period referred to in Article 15 of Legislative Decree no. 164/100 as subsequently amended, and in subsequent periods.
More specifically, the above-mentioned Decree on bid evaluation and auction criteria stipulates that:
- in the first period, the amount to be reimbursed to existing concession and contract holders shall be calculated on the basis of what has been agreed, or, where this is not possible, on the basis of criteria established in Royal Decree no. 2578 of 15 October 1925 (the “industrial value” criterion);
- in the event of a dispute on the amount to be reimbursed to the outgoing operator, the call for tenders reports and the winning operator pays, upon transfer of ownership of the plants, the higher of the estimate by the awarding local authorities and the value of the local net fixed assets, net of government grants for capital expenditure and private contributions relating to local assets, recognised by the tariff system of the Electricity and Gas Authority (RAB). Once the dispute has been resolved, any difference will be settled between the winning operator and the outgoing operator;
- the incoming operator will acquire ownership of the plant by paying the outgoing operator the reimbursement amount, with the exception of any parts owned by the local municipality;
- in subsequent periods, the reimbursement to the outgoing operator shall be the value of local net fixed assets, net of government grants for capital expenditure and private contributions relating to local assets, calculated on the basis of criteria used by the Electricity and Gas Authority to determine distribution tariffs (RAB).
There is a risk that resolving the dispute with the local authorities on how to determine the reimbursement will lead to the amount being less than was indicated during the tender process and was actually paid to Snam, which could have a negative impact on the company’s results, balance sheet and cash flow.
Risks relating to gas storage concession ownership
Through Stogit, Snam holds ten gas storage concessions. Of these, eight (Alfonsine, Brugherio, Cortemaggiore, Minerbio, Ripalta, Sabbioncello, Sergnano and Settala) expire in December 2016, one (Bordolano) expires in November 2021 and the other (Fiume Treste), which was extended for a decade for the first time during 2011, expires in June 2022. Each concession may be extended by the Ministry of Economic Development no more than twice for a duration of ten years at a time, pursuant to Article 1, paragraph 61 of Law no. 239/2004. If Snam is unable to retain ownership of one or more of its concessions or if, at the time of the renewal, the concessions are awarded under terms less favourable than the current ones, there may be negative effects on the company’s operations, results, balance sheet and cash flow.
Risk relating to uncertainty about natural gas reserves
There are several uncertainties surrounding estimations of natural gas reserves in the storage fields where Snam operates via its subsidiaries, and therefore their future use and necessary investments. The accuracy of these estimations depends on a certain number of factors, assumptions and variables, among which some of the most important are: (a) the quality of geological, technical and economic data and their interpretation and evaluation; (b) projections for future usage and timeframes for the relevant investment; (c) the stability or otherwise of sector laws and regulations; (d) the actual results of drilling and general production activity in the fields for which Snam owns a concession which are subsequent to the estimation date and which may cause said estimations to be raised or lowered.
Factors other than those listed above which may influence reserve estimations are beyond Snam’s control and may therefore vary over time. As a result, there may be differences between estimated reserves and those actually available for use, which may have negative effects on operations, results, the balance sheet and cash flow.
Risks connected with certain socio-political situations in natural gas production and transit countries
A large part of the natural gas which travels through the transportation network of Snam does, or may, come from or travel through countries which present risks deriving from certain socio-political situations. Importing and transiting natural gas from or through such countries may present risks such as: higher taxes and excise duties; production, export or transportation limits; enforced contract renegotiations; nationalisation or renationalisation of assets; changes to national political and governing systems; changes to commercial policies; monetary restrictions; and loss or damage owing to the actions of rebel groups. If shippers are unable to access the natural gas available in these countries as a result of the aforementioned or similar situations or they are damaged in any other way by said situations, they may be unable to fulfil their contractual obligations to Snam or there may be a reduction in volumes of gas transported. Such events may therefore have a negative effect on operations, results, the balance sheet and cash flow.
Quantitative information about risks arising from financial instruments as required by IFRS 7 “Financial instruments: Notes to the financial statements” is provided in Note 28 to the consolidated financial statements, “”.