18 Guarantees, commitments and risks

Guarantees, commitments and risks, amounting to €4,413 million (€4,605 million at 31 December 2016) comprise:

Guarantees

Guarantees issued in the interest of subsidiaries (€34 million) mainly refer to hold-harmless letters issued in favour of third-parties for participation in tenders and performance bonds.

Guarantees issued in the interest of associates (94 euro million) mainly refer to waivers regarding sureties and other guarantees issued in the favour of Italgas, mainly performance bonds and to participate in tenders and concessions relating to natural gas distribution.

Commitments

At 30 June 2017, commitments with suppliers to purchase property, plant and equipment and provide services relating to investments in property, plant and equipment and intangible assets under construction totalled €1,714 million (€1,853 million at 31 December 2016).

Commitments in associates (€776 million) refer to the total commitment undertaken by Snam S.p.A. with regard to TAP as the shareholder responsible for financing the project according to the level of the shareholding. At 30 June 2017 Snam paid a total of €0.4 billion, including sums recognised during the conclusion of the transaction to purchase the company, of which €0.3 billion refers to the above commitment. It should, however, be pointed out that in the case of finance agreements finalised for the market cost of the project, guarantees on the loans will be defined, with a consequent reduction of the overall amount of the commitment, as well as the repayment methods for the shareholder loans.

Risks

Risks related to third-party assets on deposit, equal to €1,733 million (€1,785 million at 31 December 2016) relate to approximately 6.9 billion cubic metres of natural gas deposited in the storage plants by customers of the service. This amount was determined by valuing the deposited gas quantities at the average stock cost of approximately €0.25 per standard cubic metre (€0.22 at 31 December 2016).

Risks concerning compensation and litigation amounting to €58 million (€65 million at 31 December 2016) relate to possible (but not probable) claims for compensation arising from ongoing litigation, with a low probability that the pertinent economic risk will arise.

FINANCIAL RISK MANAGEMENT

Introduction

The main corporate financial risks identified, monitored and, where specified below, managed by Snam are as follows:

• risk arising from exposure to fluctuations in interest and exchange rates;
• credit risk arising from the possibility of counterparty default;
• liquidity risk arising from not having sufficient funds to meet short-term financial commitments;
• rating risk;
• debt covenant and default risk.

There follows a description of Snam’s policies and principles for the management and control of the risks arising from the financial instruments listed above. In accordance with IFRS 7 – “Financial instruments: additional information”, there are also descriptions of the nature and size of the risks resulting from such instruments.

Information on other risks affecting the Company’s business (natural gas price risk, operational risk and risks specific to the segment in which Snam operates) can be found in the “Elements of risk management and uncertainty” section of the Directors’ Report.

Interest rate risk

Interest rate risk is associated with fluctuations in interest rates affecting the market value of the Company’s financial assets and liabilities and its net financial expense. Snam aims to optimise interest rate risk while pursuing its financial objectives. The Snam Group has adopted a centralised organisational model. In accordance with this model, Snam’s various departments access the financial markets and use funds to cover financial requirements, in compliance with approved objectives, ensuring that the risk profile stays within defined limits. At 30 June 2017, the Snam Group used external financial resources in the form of bonds and bilateral and syndicated loans with banks and other financial institutions, in the form of medium- to long-term loans and bank credit lines at interest rates indexed to the reference market rates, in particular the Europe Interbank Offered Rate (Euribor), and at fixed rates.

The exposure to interest rate risk at 30 June 2017 was approximately 23% of the total exposure of the Group (36% at 31 December 2016). At 30 June 2017 Snam has an Interest Rate Swap (IRS) agreement on a floating-rate bond loan for an amount of €300 million with a due date of 2022. The IRS derivative instrument is used to convert the floating-rate loan into a fixed-rate loan.

Exchange rate risk

Snam’s exposure to exchange rate risk relates to both transaction risk and translation risk. Transaction risk is generated by the conversion of commercial or financial receivables (payables) into currencies other than the functional currency and is caused by the impact of unfavourable exchange rate fluctuations between the time that the transaction is carried out and the time it is settled (collection/payment). Translation risk relates to fluctuations in the exchange rates of currencies other than the consolidation currency (the euro), which can result in changes to consolidated shareholders’ equity. Snam’s risk management system aims to minimise transaction risk through measures such as the use of derivatives. It cannot be ruled out that significant future changes in exchange rates may generate negative effects on Snam Group’s operations, balance sheet and cash flow, irrespective of the policies for hedging the risk resulting from exchange rate fluctuations through the financial instruments on the market put in place by Snam.

As at 30 June 2017, Snam’s foreign-currency items essentially refer to a ¥10 billion bond maturing in 2019 and with an issue-date value of approximately €75 million. The bond has been fully converted into Euros by a cross-currency swap, with the same notional amount and maturity as the hedged component. This swap is considered to be a cash flow hedging derivative. Snam does not have derivative agreements on currencies for speculative purposes.

Credit risk

Credit risk is the Company’s exposure to potential losses arising from counterparties failing to fulfil their obligations. Default or delayed payment of fees may have a negative impact on the economic results and the financial balance of Snam. For the risk of non-compliance by the counterparty concerning contracts of a commercial nature, the credit management for credit recovery and any possible disputes is handled by the business units and the centralised Snam departments. Snam provides its business services to almost 200 operators in the gas segment taking into account that the leading 10 operators account for approximately 70% of the entire market (Eni, Edison and Enel are the top three places ranked in order). The rules for client access to the services offered are established by the Authority and set out in the Network Codes. For each type of service, these documents explain the rules regulating the rights and obligations of the parties involved in the process of selling and providing said services and contain contractual conditions which considerably reduce the risk of non-compliance by the clients. The Codes contain guarantees to be provided to cover the obligations undertaken. In certain cases, if the customer has a credit rating issued by leading international organisations, the issuing of these guarantees can be mitigated. The regulations also contain specific clauses which guarantee the neutrality of the entity in charge of balancing, an activity carried out from 1 December 2011 by Snam Rete Gas as the major transportation company. Specifically, the current balancing rules require Snam, on the basis of criteria of financial merit, to mainly operate in buying and selling on the GME balancing platform to guarantee the necessary resources for the safe and efficient movement of gas from the injection points to the withdrawal points in order to guarantee the constant equilibrium of the network. The above framework also requires Snam to have recourse to the storage resources of functional users to cover the imbalances of the system and related economic regulation.

It cannot be ruled out however, that Snam may incur liabilities and/or losses from the failure of its clients to comply with payment obligations, particularly given the current economic and financial situation, which makes the collection of receivables more complex and critical. Snam’s maximum exposure to credit risk at 30 June 2017 is the book value of the financial assets in its statement of financial position.

Liquidity risk

Liquidity risk is the risk that new financial resources may not be available (funding liquidity risk) or that the Company may be unable to convert assets into cash on the market (asset liquidity risk), meaning that it cannot meet its payment commitments. This may affect profit or loss should the Company be obliged to incur extra costs to meet its commitments or, in extreme cases, lead to insolvency and threaten the Company’s future as a going concern.

Snam’s risk management system aims to establish, under the financial plan, a financial structure that, in line with the business objectives, ensures sufficient liquidity for the Group, minimising the relative opportunity cost and maintaining a balance in terms of the duration and composition of the debt.

As shown in the “Interest rate risk” section, the Company had access to a wide range of funding sources through the credit system and the capital markets (bilateral contracts, pool financing with major domestic and international banks, loan contracts with the EIB and bonds).

Snam’s objective is to maintain a debt structure that is balanced in composition between bonds and bank credit, and the availability of usable committed bank credit lines, in line with its business profile and the regulatory environment in which Snam operates.

At 30 June 2017, Snam had unused committed long-term credit lines worth approximately €3.2 billion. In addition, at the same date Snam had a Euro Medium Term Notes (EMTN) programme for a maximum total value of €10 billion, of which approximately €7.8 billion was used at 30 June 2017³⁸. Based on outstanding bonds as of 30 June 2017, the renewal of the programme allows the issuance, by no later than 30 September 2017, of bond issuances for a maximum amount of €2.2 billion, to be placed with institutional investors operating mainly in Europe.

Under the financial plan, Snam’s risk management system aims to establish a financial structure that, in line with the business objectives, ensures sufficient liquidity for the Group, minimising the relative opportunity cost and maintaining a balance in terms of the duration and composition of the debt.

Rating risk

With reference to rating risk, Snam›s long term rating is equal to: (i) Baa1, confirmed on 19 December 2016 by Moody’s Investors Services Ltd (“Moody’s”), downgrading the outlook from stable to negative following the same action taken on the rating of the Italian Republic (which was downgraded from Baa2 with a stable outlook to Baa2 with a negative outlook) which took place on 7 December 2016; (ii) BBB with a stable outlook, confirmed on 29 November 2016 by Standard & Poor’s Rating Services (“S&P”); (iii) BBB+ with a stable outlook, confirmed on 29 July 2016 by Fitch Ratings (“Fitch”). Snam’s long-term rating by Moody’s, Standard & Poor’s and Fitch is a notch higher than that of Italian sovereign debt. Based on the methodology adopted by Moody›s and S&P, the downgrade of one notch from the current rating of the Republic of Italy would lead to a corresponding reduction of Snam’s current rating.

Any downgrades in the rating assigned to the Snam Group, could limit the possibility of accessing the capital markets and increase the cost of raising funds and/or refinancing existing debt, with negative effects on Snam Group’s operations, results, balance sheet and cash flow.

Risk of default and debt covenants

Default risk is the possibility that when certain circumstances occur, the lender may enact contractual protections that may result in the early repayment of the loan, thus generating a potential liquidity risk.

As at 30 June 2017, Snam has unsecured bilateral and syndicated loan agreements in place with banks and other financial institutions. Some of these agreements include, inter alia, compliance with typical international practice commitments, some of which are subject to specific threshold values, ,such as, for example: (i) negative pledge commitments pursuant to which Snam and its subsidiaries are subject to limitations concerning the pledging of real property rights or other restrictions on all or part of the respective assets, shares or merchandise; (ii) pari passu and change-of-control clauses; and (iii) limitations on certain extraordinary transactions that the Company and its subsidiaries may carry out; (iv) limits on the debt of subsidiaries.

The bonds issued by Snam as at 30 June 2017 provide for compliance with covenants that reflect international market practices regarding, inter alia, negative pledge and pari passu clauses.

Failure to meet these covenants, and the occurrence of other events, for example cross-default events, may result in Snam’s failure to comply and could trigger the early repayment of the relative loan. Exclusively for the EIB loans, the lender has the option to request additional guarantees if Snam’s credit rating is lower than BBB (Standard & Poor’s/Fitch Ratings Limited) or Baa2 (Moody’s) for at least two of the three ratings agencies.

The occurrence of one or more of the aforementioned scenarios could have negative effects on Snam Group’s operations, results, balance sheet and cash flow, creating additional costs and/or liquidity problems. There are no covenants among these commitments that involve compliance with ratios of an economic and/or financial nature.

Market value of financial instruments

Below is the classification of financial assets and liabilities measured at fair value in the statement of financial position in accordance with the fair value hierarchy defined on the basis of the significance of the inputs used in the measurement process. More specifically, in accordance with the characteristics of the inputs used for measurement, the fair value hierarchy comprises the following levels:

1. level 1: prices quoted (and not amended) on active markets for the same financial assets or liabilities;
2. level 2: measurements made on the basis of inputs differing from the quoted prices referred to in the previous point, which, for the assets/liabilities submitted for measurement, are directly (prices) or indirectly (price derivatives) observable;
3. level 3: inputs not based on observable market data.

With regard to the above, the classification of the assets and liabilities measured at fair value on the statement of financial position according to the fair value hierarchy concerned derivative financial instruments at 30 June 2017 classified at level 2 and recognised in Note 8 under “Other current and non-current liabilities” (€1 million).

Disputes and other measures

Snam is involved in civil, administrative and criminal cases and legal actions related to its normal business activities. According to the information currently available and considering the existing risks, Snam believes that these proceedings and actions will not have material adverse effects on its consolidated financial statements. The following is a summary of the most important proceedings for which significant changes to the situation reported in the 2016 Annual Report occurred, including the new proceedings and closed proceedings.

Criminal cases

Snam Rete Gas S.p.A. – Pineto incident

The public prosecutor at the Court of Teramo opened an investigation in relation to the incident that took place on 6 March 2015 near the town of Pineto (Teramo) involving a gas leak on a section of piping. The causes of the gas leak and fire are currently being investigated. The infrastructure was quickly made safe, stopping the gas leak and facilitating the fire-fighting operations.

The public prosecutor arranged the removal of the names of several senior positions, believing that in the light of the investigations carried out, the liability of several senior Snam Rete Gas mangers could be excluded. The notice of conclusion of preliminary investigations was served on 2 February 2017. The accused offences were deemed criminal negligence causing wide-scale disaster and wildfire caused by arson and on 9 May 2017 a preliminary hearing was set for 20 September 2017.

Positions within the employer model are still involved – Employer, Safety Manager, Safety Officer – and also technical positions.

Electricity, Gas and Water Authority (AEEGSI)

Snam Rete Gas S.p.A. – Resolution 9/2014/S/gas – “Launch of punitive proceedings against Snam Rete Gas S.p.A. for non-compliance with Resolution 292/2013/R/gas”.

By means of Resolution 9/2014/S/gas, published on 27 January 2014, the Authority provided for the launch of punitive proceedings against Snam Rete Gas S.p.A. for non-compliance with Resolution 292/2013/R/gas. The proceedings aim to ascertain whether or not delays exist in provisions relating to the enactment of amendments to the Network Code established by Resolution 292/2013/R/gas, with regard to settlement or determination of the relative physical and financial items of the balancing of the gas system. On 11 July 2016 the Authority announced the findings of the preliminary investigation. The Company requested the assignment of a deadline to prepare its defence, and a hearing before the Board. The hearing took place on 11 April 2017 with the Company’s brief being filed at the same time. The final decision is awaited.

Snam Rete Gas – Regulation criteria for natural gas transportation and dispatching tariffs for the 2010-2013 period

By means of Ruling 2888/2015, the CoS rejected the appeal filed by the Authority for review of the judgment of the Regional Administrative Court in Milan No 995/2013, which had annulled the provisions contained in Resolutions ARG/gas/184/09, 192/09, 198/09 and 218/10 regarding natural gas transportation and dispatching tariffs for the 2010-2013 period relating, specifically, to the commodity/capacity distribution, the reform of the entry/exit model and gas intended for consumption by central compressor stations (self-consumption).

By means of Resolution 428/2015/C/gas, the Authority decided to file an appeal for the aforementioned ruling to be overturned on the grounds of factual error, an appeal that will be discussed in the hearing of 29 March 2018. At the same time, the Authority – as a result of the proceedings brought by Resolution 430/2015/R/gas – complied with the aforementioned rulings under Resolution 550/2016/R/gas, with which the Authority, having reformed the discipline of self-consumption, justifiably confirmed the pricing criteria for the rest, partly in light of the consultations carried out. Given the confirmatory nature of the afore-mentioned resolution, the original applicant filed an appeal for compliance with the afore-mentioned rulings and the declaration of nullity of Resolution 550/2016/R/gas. Through ruling 494/2017, the Milan Regional Administrative Court partially heard the appeal with specific reference to the issue of the commodity/capacity distribution, believing that with Resolution 550/2016/R/Gas, there has been an inaccurate and partial compliance with ruling 995/2013 and that, therefore, the Authority must carry out an additional assessment as to the effects of the decisions made.

Ruling 494/2017 was challenged by the plaintiff as well as on cross-appeal by the AEEGSI. The appeals will be discussed before the Council of State in the hearing on 30 November 2017.

Snam Rete Gas – Regulation criteria for natural gas transportation and dispatching tariffs for the 2014-2017 period

Under ruling 3735/2015 the State Council confirmed ruling 1729/2014 of the Milan Regional Administrative Court regarding the partial annulment of the resolutions of the AEEGSI [Italian Regulatory Authority for Electricity, Gas and Water] no. 514/2013/R/gas, and of the subsequent Resolutions 603/2013/R/gas and 641/2013/R/com, due to the lack of any provision in the relevant rules for a decreasing-scale mechanism for the benefit of end users with high levels of gas consumption.

By means of Resolution 429/2015/R/gas, the Authority launched a procedure, which should have been completed by 31 December 2015, to comply with the afore-mentioned ruling. This procedure is still pending, and thus the Group is still waiting for the final ruling. In the meantime, the original appellants submitted an application for compliance with the aforementioned ruling before the competent judicial authority. Through non-definitive ruling 883/2017 the Milan Regional Administrative Court accepted the appeal ordering the Authority to conclude the proceedings launched through resolution 429/2015/R/gas within a term of sixty days. In order to verify fulfilment of the provisions of the non-definitive ruling, the plaintiffs waived their right of appeal at the hearing of 13 July 2017. The judge reserved the right to declare the lack of interest in an appeal.

Snam Rete Gas S.p.A. – Cerved Rating Agency S.p.A. and Cerved Group S.p.A.

In February 2015, the Cerved Group and Cerved Rating Agency requested, firstly before the Lombardy – Milan administrative regional court, the annulment of AEEGSI Resolution 207/2014/R/gas, because the part in which Cerved is excluded from parties accredited to issue credit ratings guaranteeing the payment of bonds from the transfer and the provision of the gas transportation and balancing service is unlawful.

Through the ruling filed in April 2016, the Lombardy regional administrative court only partly accepted the appeal submitted by Cerved, believing Cerved’s applications with regard to the request to annul the AEEGSI’s resolution to have a foundation and therefore the Snam Rete Gas Network Code, in the part in which Cerved does not number among the parties entitled to issue credit ratings for the purpose of the Network Code. However, the demand to confirm Cerved’s right to be admitted to the list of parties accredited for issue credit ratings for the purpose of the Network Code was rejected, as was the claim for compensation for damages.

As a result of the ruling, Snam Rete Gas and the AEEGSI, each as far as their area of responsibility is concerned, should evaluate the claim of the plaintiff once again. Moreover, the Council of State was notified of the appeal which is pending. The hearing took place on 9 February following which, through ruling 1266/2017 of 21 March 2017, the Council of State accepted the above-mentioned appeals and annulled the previous ruling of the Regional Administrative Court. As a result of the ruling of the Council of State, Cerved’s original request was rejected.

Stogit S.p.A. – Consorzio Gas Tera and Consorzio Gas Tera PMI

Through the appeal announced on 15 June 2016, the Gas Tera Consortium and the Gas Tera PMI Consortium challenged Resolution 180/2016/R/gas on “Determinations following the Lombardy administrative regional court ruling no. 1124/2015”, through which the Authority asked Stogit to notify investors pursuant to Legislative Decree 130/2010 of the amounts that were paid through Resolution 144/2014/R/gas by the Authority to the parties to whom the investors had sold the storage capacities for A.T. 2013/2014. The sums were paid by the then Cassa Conguaglio Settore Elettrico (CCSE) to Stogit in December 2014 and then promptly repaid to those with rights according to the above Resolution. According to the reconstruction of the plaintiffs, Stogit paid an apparent creditor, by virtue of Resolution 144/2014/R/gas, who in the meantime was challenged, but not suspended in the trial which concluded with ruling no. 1124/2015 which established that it is the sellers and not the assignees who have the right to collect these sums.

The plaintiffs asked for a declaration of invalidity or, alternatively, the annulment of the challenged Resolution, asking to know whether the burden of recovering the payable with regard to third parties where the sum due to the plaintiffs was incorrectly paid was incumbent upon them. The hearing took place on 31 January 2017 following which the Milan Regional Administrative Court declared the appeal inadmissible through ruling 688/2017 of 22 March 2017. The Regional Administrative Court having discovered that, contrary to what the plaintiff claimed, the resolution is not harmful where it orders Stogit to communicate the readings requested by the AEEGSI.

Tax disputes

Stoccaggi gas Italia S.p.A. – Registration tax

On 30 November 2012, the Milan branch of Italy’s Revenue Agency served the Company with notice of a tax assessment for the value adjustment of the transfer by Saipem Energy Services S.p.A. to Stogit of its plant operating maintenance business unit. The assessed transfer value was higher than the declared value owing to a higher goodwill calculation, resulting in an additional figure of approximately €88 thousand in registration tax, plus fines and interest.

Pursuant to Article 12 of Legislative Decree No. 218/1997, the Company responded to this order by submitting a tax settlement proposal with a view to establishing whether the grounds exist to definitively resolve the matter. This proposal was not accepted.

The Company has therefore submitted a joint appeal with Saipem S.p.A. to the Milan provincial tax commission, opposing the Milan branch of the Revenue Agency.

On 18 September 2014, the appeal was processed by the Milan provincial tax commission, which issued a ruling upholding the appeal on 2 October 2014.

On 19 March 2015, the Revenue Agency (Provincial Office II – Milan) brought an appeal before the regional tax commission and the Company, in consortium with Saipem S.p.A., appeared before the court.

On 17 March 2016 there was a hearing to discuss the appeal at the regional tax commission. On 7 March 2017 the Lombardy Regional Tax Commission filed and announced the ruling, which confirms the positive outcome obtained in the judgment of the first instance.

As the deadlines have not yet passed for the ruling to become a final judgment, the Company has left the allocation to the risk provision made in 2012 unchanged.

Stoccaggi gas Italia S.p.A. – Payment notice for registration tax

On 4 March 2015, the Revenue Agency issued Stogit S.p.A. with a payment notice requesting payment of the total sum of approximately €2.7 million in tax, relating mainly to registration tax for legal deeds.

The Company brought an appeal before the provincial tax commission of Milan, requesting that the tax be re-determined.

By means of the internal review provision No 55/2015, the Revenue Agency, in accepting the request, corrected the contested notice from €2.7 million to €0.4 million, in addition to service fees, which the company paid on 4 May 2015.

The hearing at the Milan Provincial Tax Commission for dealing with the dispute was held on 9 February 2017 with the consequent declaration of discontinuance of the matter in issue and the extinguishment of the judgment.

GNL Italia S.p.A. – Local duties

The allocation to the risk provision refers to the notice of investigation from the Municipality of Portovenere on 11 April 2017, which confirmed the TA.RI. for 2016 relating to “industrial activities with warehouses” for approximately €74 thousand, with regard to the Panigaglia plant. The Company challenged the provision appealing to the La Spezia Provincial Tax Commission.

The risk provision also includes the amounts confirmed by the Municipality of Portovenere in 2016 with regard to the Panigaglia plant, by way of TARSU for 2012 and TARES for 2013 (approximately €180 thousand), as well as TARI notices for 2015 (approximately €63 thousand). The hearing to deal with the dispute for the 2015 TARI notices was held on 24 February 2017 with the Company’s appeal accepted.

Also note that, a similar notice of investigation, issued by the Municipality of Portovenere in 2015 for 2014 TARSU (approximately €58 thousand) was annulled by the La Spezia Provincial Tax Commission through the ruling of 5 May 2016.

The Company maintained the allocations to the provision made in 2015 and 2016 since the proceedings are still pending.

Stogit S.p.A. – Notices of investigation for property tax (IMU) on areas that can be built on – Municipality of Bordolano

On 8 June 2017 the Municipality of Bordolano presented Stogit S.p.A. with 2 notices of investigation for property tax (IMU) for the years 2012 and 2013. The notices, challenging the higher tax due, in addition to the penalties for non-declaration and legal interests, with regard to the minimum values established through the special resolution of the Municipality in 2016, involve areas which can be built on subject to change of use, for which the Company made the property tax (IMU) payments considering them to be agricultural land, thereby taking a lower taxable base for the calculation of the IMU. With reference to 2016, with regard to areas currently the subject of investigation, the Company arranged the payment of the IMU due taking into account the new urban use and adapting it to the minimum values established by the Municipality.

The assessment, including penalties, interest and notification costs comes to a total of approximately €370 thousand, an amount subject to the application of reduced penalties in the case of compliance with the provisions notified.

The deadline for submitting an appeal before the competent Provincial Tax Commission is 7 September 2017. The Company has made an allocation to the provision for risks and charges.

Recovering receivables from certain users of the transportation and balancing system

The balancing service ensures that the network is safe and that costs are correctly allocated between the market operators. Balancing has both a physical and a commercial purpose. The physical balancing of the system consists of the set of operations through which the Dispatching department of Snam Rete Gas controls flow parameters (capacity and pressure) in real time in order to ensure that gas can move safely and efficiently from injection points to withdrawal points at all times. Commercial balancing consists of the activities required to correctly schedule, account for and allocate the transported gas, as well as the fee system that encourages users to maintain a balance between the volumes they inject into and withdraw from the network.

Pursuant to the current balancing regime, which was introduced by Resolution ARG/gas 45/11 and came into effect on 1 December 2011, in its role as Balancing Supervisor, Snam Rete Gas must ensure that it procures the quantities of gas required to balance the system and offered on the market by users through a dedicated platform of the Energy Market Operator, and, accordingly, it must financially settle the imbalances of individual users by buying and selling gas on the basis of a benchmark unit price (the “principle of economic merit”). The Company must also ensure that it recovers sums owed for the settlement of imbalances from any defaulting users.

a) Unpaid receivables relating to the period from 1 December 2011 to 23 October 2012

The initial regulation laid down by the Authority with Resolution ARG/gas 155/11 stated that users had to provide specific guarantees to cover their exposure and, where Snam Rete Gas had performed its duties diligently and had not been able to recover the costs related to provision of the service, these costs would have been recovered through a special fee determined by the Authority. This Resolution, with reference to the income statement items pertaining to the balancing system, stipulated that the Balancing Supervisor would receive from the Electricity Equalisation Fund (as of 1 January 2016, the Energy and Environmental Services Fund, CSEA) the value of receivables unpaid by the end of the month following the month in which notification was given³⁹.

Through its subsequent Resolution 351/2012/R/gas⁴⁰, the Authority ordered, with effect from 1 October 2012, the application of the variable unit fee CV^BL to cover uncollected receivables, and the payment of the expenses to be recovered in monthly instalments of up to €6 million over a minimum of 36 months.

Through Resolution 282/2012/R/gas, as subsequently amended by Resolution 444/2012/R/gas, the Authority opened an exploratory investigation into balancing service provision methods for the period 1 December 2011 – 23 October 2012⁴¹. The investigation was closed by Resolution 144/2013/E/gas of 5 April 2013. On the same date, the Authority: (i) adopted Resolution 145/2013/R/gas, through which it opened proceedings to determine the share of costs arising from uncollected receivables owing to the gas balancing supervisor for the period 1 December 2011 – 23 October 2012; and (ii) opened six proceedings aimed at establishing whether there have been violations regarding the natural gas balancing service⁴².

With regard to the preliminary investigation discussed in point (i) above, the proceedings were closed by means of Resolution 608/2015/R/gas, with which the Authority decided not to pay a share of the uncollected receivables in relation to specific cases analysed in the preliminary investigation, in any case subject to Snam Rete Gas’s right to withhold the receivables relating to the income statement entries on balancing, possibly already recuperated. The Company challenged resolution 608/2015/R/gas, before the Milan Regional Administrative Court which partly accepted the appeal submitted by the Company.

During the above-mentioned investigation period, Snam Rete Gas, having terminated the transportation contracts of the six users involved in the aforementioned proceedings since they either defaulted on payments or failed to comply with the balancing obligations set forth in the industry regulations and the Network Code, initiated steps to recover the receivables relating to income statement items arising from commercial balancing operations entrusted to Snam Rete Gas in its capacity as Balancing Supervisor, and also relating to the transportation service.

Specifically, the competent judicial authorities issued 11 provisional executive orders, of which six related to receivables arising from the balancing service and five to receivables arising from the transportation service⁴³.Having received these orders, Snam Rete Gas initiated the necessary executive proceedings, which resulted in the recovery of negligible amounts of the overall debt of the users, partly because of the bankruptcy procedures under way at all of these users.

In particular, at present:

• four Users were declared bankrupt. With regard to all four Users, Snam Rete Gas obtained measures for admission to the list of creditors for the receivable owed, plus interest; Under the scope of one of the above-mentioned procedures, a bankruptcy composition agreement proposal, approved by the majority of creditors, was filed;
• two Users applied for composition procedures. For the first user, the judicial authority issued a provision of composition with creditors⁴⁴. With regard to the second, the proceedings pursuant to Article 173 L.F. have just concluded with the application to dismiss rejected and the user filed a new arrangement proposal which has yet to be put to a vote by the creditors⁴⁵.

b) Unpaid receivables after 23 October 2012

Two additional transportation contracts were terminated in 2013. In relation to one user, the Court of Milan issued a provisional executive injunction ordering the user to pay Snam Rete Gas a total of around €14 million, plus interest and expenses, in relation to the balancing service. The executive procedures initiated resulted in the recovery of around €500 thousand. The user appealed against the injunction, submitting a counterclaim requesting compensation for alleged damage suffered. Moreover, recently, the ruling was declared lapsed with the consequent consolidation of the securities purchased by Snam RG.

Two provisional executive injunctions were issued in relation to a second user. The first concerned the balancing service, for a sum of around €700 thousand, while the other related to the transportation service, for approximately €4.5 million. As a result, proceedings were launched to implement the injunctions, in response to which the user appealed but did not bring a counterclaim. For this reason, the user was recently declared bankrupt⁴⁶.

In 2014, another transportation contract was terminated in relation to a user that had failed to pay outstanding balancing service invoices in the amount of around €75 thousand and transportation service invoices worth approximately €180 thousand. As a result, Snam Rete Gas initiated debt recovery measures, having recently obtained two provisional executive injunctions. For this reason, the user was declared bankrupt⁴⁷.

Lastly, two provisional executive injunctions were recently issued with regard to a user that had failed to pay outstanding balancing service invoices in the amount of around €95 thousand and transportation service invoices worth approximately €860 thousand.

Snam Rete Gas, as stated in the provisional executive injunctions issued by the Court, has engaged in proper conduct and complied with the provisions of the transportation contract, the Network Code and, more generally, the applicable legislation.

Lastly, note that on 12 February 2016 the public prosecutor at the Court of Milan arranged the urgent preventive seizure, during the preliminary investigations, of the moveable and fixed assets belonging to companies and parties attributable in various guises to the above-mentioned five users and in May 2017 it closed the investigation challenging the conspiracy aimed at committing aggravated fraud to the detriment of Snam Rete Gas.

This criminal proceeding resulted in the formal complaint report (and subsequent supplementary reports) filed by Snam Rete Gas, as the offended party, in October 2012 for the crimes of falsehood and aggravated fraud. At present, the Company is still the offended party of the crime.

Other commitments and risks

The other unevaluated commitments and risks are:

Commitments arising from the contract for the acquisition of Stogit from Eni

The price determined for the acquisition of Stogit is subject to adjustment mechanisms based on commitments made when the transaction was completed, which were also intended to apply after the date of execution.

Acquisition of Stogit

On 30 June 2017, the residual commitments resulting from the above agreements involve hedging mechanisms to keep the risks and/or benefits that may derive from the following pertaining to Eni: (i) the possible exploitation of the gas owned by Stogit at the time of the transfer of the shares other than that recognised by the Authority for Electricity, Gas and the Water System (the AEEGSI) in the case of its sale, or partial sale, if certain quantities were to become no longer instrumental to the regulated concessions and therefore available for sale; (ii) the possible sale of the storage capacity which should be freely available on a negotiable basis rather than a regulated basis, or the transfer of concessions held by Stogit at the time of the share transfer that may become dedicated to mainly storage activities which are no longer regulated.