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Methods of managing the main risks

The main types of risks identified by Snam, as described below, are as follows:

  • regulatory risk and legal and non-compliance risk;
  • operating risks;
  • specific risks associated in particular with market risk and competition in various sectors in which the Group operates;
  • financial and liquidity risks, arising from exposure to interest rate fluctuations, medium- and long-term debt rating downgrades, and bad debts.

Regulatory risk, for Snam, is closely linked to the regulation of its activities in the gas sector. The relevant directives and legal provisions issued by the European Union and the Italian government and the resolutions of the Authority and, more generally, changes to the regulatory framework may have a significant impact on the Company’s operating activities, financial position and results. Considering the specific nature of its business and the context in which Snam operates, changes to the regulatory context with regard to criteria for determining reference tariffs are particularly significant.

Legal and non-compliance risk concerns the failure to comply, in full or in part, with rules and regulations at the European, national, regional and local levels to which Snam is subject in relation to the activities it performs. The infringement of such rules and regulations may result in criminal, civil and/or administrative sanctions, as well as damage to the Company’s balance sheet, financial position and/or reputation. As regards specific cases, the infringement of regulations on the protection of workers’ health and safety and of the environment, and the infringement of anti-corruption rules, inter alia, may also result in (possibly significant) sanctions on the Company based on the administrative responsibility of entities (Legislative Decree 231 of 8 June 2001).

Operating risks consist mainly of the malfunctioning and unforeseen interruption of the service determined by accidental events, including accidents, breakdowns or malfunctions of equipment or control systems, reduced output of plants, and extraordinary events such as explosions, fires, earthquakes, landslides or other similar events outside of Snam’s control. Such events could result in a reduction in revenue and could also cause significant damage to people, with potential compensation obligations. Although Snam has taken out specific insurance policies to cover some of these risks, the related insurance cover could be insufficient to meet all the losses incurred, compensation obligations or cost increases.

There is also the concrete possibility that Snam could incur delays in the progress of infrastructure construction programmes as a result of several unknowns linked to operating, economic, regulatory, authorisation and competition factors, regardless of its intentions. Snam is therefore unable to guarantee that the projects to upgrade and extend its network will be started, be completed or lead to the expected benefits in terms of tariffs. Additionally, the development projects may require greater investments or longer timeframes than those originally planned, affecting Snam’s financial position and results.

The most significant of the market and competition risks associated with the individual sectors in which Snam operates are those linked to the expiry and renewal of distribution concessions and retaining storage concessions. In accordance with the provisions of the legislation applicable to Italgas’s concessions, tenders for new gas distribution concessions will no longer be issued by each municipality, but exclusively by the minimum geographical areas (ATEMs). As the tender process unfolds, Italgas may not be awarded concessions in the planned areas, or it may be awarded them on less favourable terms than is currently the case. This could have a negative impact on 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, calculated pursuant to Ministerial Decree 226 of 12 November 201119. As a result of this regulation, there may be cases in which the value of the reimbursement may be lower than the value of the RAB.

With regard to storage activities, 8 of the 10 concessions held by Snam via Stogit (Alfonsine, Brugherio, Cortemaggiore, Minerbio, Ripalta, Sabbioncello, Sergnano and Settala) are due to expire in December 2016 and may be extended by the Ministry of Economic Development no more than twice, for a duration of 10 years each, one (Fiume Treste) will expire in June 2022 and underwent a first 10-year extension in 2011, and one (Bordolano) will expire in November 2031 and may be extended for another 10 years20. 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.

Market risks mainly concern the risk associated with changes in the price of natural gas. Specifically, in relation to transportation activities, the Authority has defined, starting with the third regulatory period (2010-2013), procedures for payment in kind, by users of the service to the leading transportation company, of quantities of gas to cover unaccounted-for gas (UFG), due as a percentage of the quantities respectively injected into and withdrawn from the transportation network. Specifically, the Authority defines the permitted level of gas not accounted for based on a fixed amount for the entire regulatory period, with a view to encouraging the leading transportation company to deliver further efficiency improvements. The aforementioned procedures were confirmed by the Authority for the fourth regulatory period, by means of Resolution 514/2013/R/gas. In view of the aforementioned mechanism for the payment in kind of UFG, there is still uncertainty about the quantities of UFG withdrawn over and above the quantities paid in kind by the users of the service. Pursuant to the regulatory framework in force, the change in the price of natural gas covering fuel gas and network losses is not a significant risk factor for Snam.

Financial risks are described in Note 24, “Guarantees, commitments and risks – financial risk management”, of the Notes to the consolidated financial statements.

The table below shows the mitigation and monitoring measures implemented for each type of risk.

Type

Description

Mitigation and monitoring measures implemented

Reference in the directors’ report or other corporate documents

Regulatory risk

Definition and updating of a regulatory framework in Italy and countries of interest that presents penalising parameters

  • Maintenance of ongoing constructive dialogue with the regulator that can contribute to the definition of a clear, transparent and stable framework in order to incentivise the sustainable development of the gas system


Legal and non-compliance risk

Significant change in regulations and/or case law

  • Ongoing regulatory oversight through the monitoring of changes in laws and rulings, analysis of changes, and the dissemination of information and further details to business and commercial departments

 

Non-alignment of corporate governance and/or the internal control and risk system with regulations and/or best practices

  • Periodic revision of employer model
  • Updating of Model 231 and the Code of Ethics
  • Analysis of updates to the latest version (July 2015) of the Borsa Italiana Code of Corporate Governance and to corporate governance best practices
  • Anti-corruption monitoring
  • Monitoring of updates to corporate antitrust and anti-corruption policies



The Company’s responsibility for offences committed by management or third parties

Operating risks

Delay to the progress of programmes involving the construction of large transportation and storage infrastructure

  • Application of the strictest national and international environmental and safety standards during planning, with particular attention to safeguarding the natural value of the area and biodiversity
  • Communication policy on the planned work, with a view to sharing projects with the local community and stakeholders from the outset
  • Use of innovative construction technologies with low environmental impacts (e.g. trenchless technologies, use of turbo gas with low atmospheric emissions)
  • Strict, structured system for selecting contractors and monitoring their performance



Breakage of or damage to pipes/plants, including as a result of exogenous events. Interruption of the service due to malfunctioning of plants or operating systems

  • Application of management systems and procedures that take into account the specific nature of Snam’s activities
  • Recovery plan system and business continuity management in line with international best practices
  • Communication initiatives aimed at providing information about the presence of infrastructure and behaviours to avoid/implement by third parties so as not to damage it
  • Technologically advanced tools for monitoring/controlling the status of infrastructure/plants and the areas affected
  • Ongoing, systematic maintenance and monitoring measures


Operating risks (supply chain)

Maintaining an adequate reputational profile for suppliers and subcontractors

  • Introduction of additional measures to prevent corruption and criminal infiltration:

    • Ethics and Integrity Pact signed by suppliers/subcontractors
    • Reputational checks on suppliers and subcontractors


Market and competition risk

Number of tenders awarded to ITG differs from the plan

  • Definition of an ATEM prioritisation model and preparation of IT and organisational tools to produce competitive offers in the time frames provided for

 

Failure to share with concessionawarding bodies regarding the value of the end-of-concession reimbursement

  • Adoption of tools for valuing assets in line with the guidelines issued by the Ministry of Economic Development

 

Retaining gas storage concessions

  • Development of storage carried out in line with the most up-to-date technical and economic criteria and best practices in science and technology so as not to damage the deposit, not to cause harm to third parties or the environment and to guarantee the optimisation of capacity in compliance with the security of the national gas system

 

Financial/liquidity risks

Medium- and long-term debt rating downgrade

  • Constant monitoring of rating indicators and availability of long-term credit lines

Changes in the interest rate

  • Monitoring cash-flow-at-risk using an asset and liability management (ALM) model


Bad debts

  • Scoring system for evaluation and segmentation of customers (creditworthiness), and systematic management of requests upon specific maturities
  • Evaluation of the authenticity and validity of guarantees
  • Reporting of any issues with the regulatory system that may lead to opportunistic/fraudulent behaviour by operators

 

 

 

 

 

Legend

Summary data and information

Snam and the financial markets

Business segment operating performance

Other operating information and results

Report on corporate governance and ownership structure

Report on social responsibility

19 Ministerial Decree 226 of 12 November 2011, on tender process criteria and offer evaluation, states that the incoming operator acquires ownership of the plant with the payment of the reimbursement to the outgoing operator, with the exception of any portions of the plant that are already municipally owned or which become municipally owned as a result of any free donations. Eventually, i.e. 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 Authority to determine distribution tariffs (RAB). The value of the reimbursement to the outgoing operator, for concessions and contracts awarded that were drawn up prior to the date of entry into force of the regulation set out in Ministerial Decree 226 of 12 November 2011, and to the extent that it cannot be obtained from the parties’ will, is calculated based on the guidelines on criteria and operational procedures for the valuation of the reimbursement, as subsequently drawn up by the Ministry of Economic Development with a document of 7 April 2014 and approved with the Ministerial Decree of 22 May 2014. In any case, private contributions relating to local assets, as valued according to the current tariff regulation methodology, shall be subtracted from the amount to be reimbursed.

20 The Stogit concessions issued prior to the entry into force of Legislative Decree 164/2000 may be extended by the Ministry of Economic Development no more than twice, for a duration of 10 years each, pursuant to Article 1, paragraph 61 of Law 239/2004. Pursuant to Article 34, paragraph 18 of Decree-Law 179/2012, converted by Law 221/2012, the duration of the single Stogit concession issued after the entry into force of Legislative Decree 164/2000 (Bordolano) is 30 years, with the possibility of extension for another 10 years.

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