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Risks specific to the sectors in which Snam operates

Risks related to regulatory changes

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 and, more generally, changes to the regulatory framework may have a significant impact on the Group’s operations, results and financial stability.

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. In 2013, with Resolutions 438/2013/R/gas, 514/2013/R/gas and 573/2013/gas, the Electricity and Gas Authority defined the criteria for determining reference tariffs, respectively, for liquefied natural gas regasification, natural gas transportation and natural gas distribution services for the fourth regulatory period47.

In addition to this, Decree-Law 138 of 13 August 2011, which was converted into Law 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 at 2014. It also prohibited companies from passing on the tax rise to customers via tariff increases and mandated the Electricity and Gas Authority 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 2013, Snam, through Italgas, had a portfolio of 1,435 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 areas 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 the municipalities it currently manages, the reimbursement to the outgoing operator.

Risks relating to quantifying repayment to the outgoing operator

With reference to the gas distribution concessions of which Italgas also owns the networks and plants, Decree-Law 145 of 23 December 2013, which was converted with amendments into Law 9 of 21 February 2014 (published in Official Gazette No. 43 of 21 February 2014), stipulates that the amount to be reimbursed to outgoing operators that hold concessions and contracts in place during the transitional period shall be calculated on the basis of the provisions set out in agreements or contracts between the parties and, where this is not possible, the calculation shall no longer be based on the criteria set out under Article 24, a) and b) of Royal Decree 2578 of 15 October 1925, but should use the methods set out in Article 14, paragraph 8 of Legislative Decree 164/00, as subsequently amended. 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.

The Decree of the Minister of Economic Development of 12 November 2011 stipulates that the incoming operator will acquire ownership of the system by paying the outgoing operator the redemption value, with the exception of any parts owned by the local municipality.

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 Electricity and Gas Authority to determine distribution tariffs (RAB).

In the light of the aforementioned legal provisions, it is possible that the amount to be reimbursed may be less than the amount agreed with the local authorities.

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) in November 2021 and the other (Fiume Treste), which was extended for a decade for the first time during 2011, in June 2022. Each Stogit 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 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.

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 Snam transportation network does, or may, come from or travel through countries which present risks arising 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, there may be a risk of the shippers being 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.

The European Community, through Regulation (EU) No. 994/2010 of the European Parliament and of the Council of 20 October 2010 (“Regulation SOS”), established an obligation for each Member State to identify, through predetermined guidelines, measures intended to guarantee the security of its gas supply or to meet demand for gas. In implementation of the aforementioned Regulation, in accordance with the provisions of Legislative Decree 93 of 1 June 2011, (Legislative Decree 93/11), the Ministry of Economic Development shall carry out an assessment of risks every two years on the security of the domestic natural gas system, and define a preventive action plan and an emergency and monitoring plan for the security of natural gas procurement.

Quantitative information about financial risks as required by IFRS 7 “Financial instruments: Notes to the financial statements” is provided in Note 30, “Guarantees, commitments and risks”, of the notes to the consolidated financial statements.

47 Further details can be found in the section “Business segment operating performance – Regulation”.

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