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 AEEGSI and, more generally, changes to the regulatory framework, may have a significant impact on Snam’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. To this end, it should be noted that, with Resolutions 438/2013/R/gas, 514/2013/R/gas and 573/2013/gas, the AEEGSI defined the criteria for determining reference tariffs for liquefied natural gas regasification, natural gas transportation and natural gas distribution services, respectively, for the fourth regulatory period (1 January 2014 – 31 December 2017). In 2014, with Resolution 531/2014/R/gas, the AEEGSI defined the criteria for determining reference tariffs for the natural gas storage service fourth regulatory period (1 January 2015 – 31 December 2018).

In addition to this, Decree Law No. 138 of 13 August 2011, which was converted into Law No.148 of 14 September 2011, extended the application of additional corporation tax 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. It also prohibited the passing on by companies of the tax rise to customers via tariff increases and mandated the Authority to enforce this rule. The Constitutional Court declared the additional corporation tax to be unconstitutional in Ruling 10/2015 of 9 February 2015. As laid down by the ruling, the tax was unconstitutional with effect from 12 February 2015.

Future changes to European Union or Italian legislative policies, which may have unforeseeable effects on the relevant legislative framework and, therefore, on Snam’s operating activities 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

As at 31 December 2014, Snam, through Italgas, managed 1,437 natural gas distribution concessions throughout Italy. In accordance with the provisions of the legislation applicable to Snam’s concessions, tenders for new gas distribution concessions will no longer be issued by each municipality but exclusively by the minimum geographical areas known as ATEMs. 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 operating activities, results, balance sheet and cash flow, notwithstanding, should the Company not be awarded concessions for the municipalities that it currently manages, the reimbursement to the outgoing operator.

Risks relating to quantifying repayment to the outgoing operator

With regard to the gas distribution concessions where Italgas also owns the networks and plants, Legislative Decree No. 164/00, as subsequently supplemented and amended on several occasions, provides that the amount reimbursed to the outgoing service operators in possession of the ongoing contracts and concessions be calculated based on what has been established in the agreements or contracts, provided that these were entered into before the date on which the regulation pursuant to Ministerial Decree No. 226 of 12 November 2011 came into effect (i.e. before 11 February 2012), and, for the portion that cannot be inferred from the will of the parties, as well as the aspects not governed by the aforementioned agreements or contracts, based on the guidelines on the operating criteria and methods for measuring the repayment amount, which were subsequently made available by the Ministry of Economic Development in a document dated 7 April 2014 and approved by a Ministerial Decree of 22 May 2014⁶⁹.

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.

Where there is a disagreement between the local authority and the outgoing operator with regard to the reimbursement amount, the public notice contains a reference amount to be used for the purpose of the tender. This reference amount is the estimate of the contracting local authority or the RAB, whichever is greater.

Decree n. 226 of the Minister of Economic Development of 12 November 2011 on tender and offer evaluation criteria stipulates that the incoming operator will acquire ownership of the system by paying the outgoing operator the reimbursement amount, 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 Authority to determine distribution tariffs (RAB).

In light of new legal provisions, it remains possible that the reimbursement amount will be less than the RAB.

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) will expire in December 2016, one (Bordolano) will expire in November 2031 and the other (Treste river), which was extended for a decade for the first time during 2011, will expire in June 2022. Each Stogit concession issued before Legislative Decree 164/2000 came into force 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. Pursuant to Article 34, paragraph 18 of Decree Law. 179/2012, converted by Law 221/2012, each Stogit concession issued after Legislative Decree 164/2000 came into force (Bordolano) has a duration of 30 years and can be extended by 10 years. 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 if 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 operating activities, 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 n.93 of 1 June 2011, (Legislative Decree 93/11), the Ministry of Economic Development shall carry out a risk assessment every two years on the security of the domestic natural gas system, and define a preventative action plan and an emergency and monitoring plan for the security of natural gas supplies.

Quantitative information about risks arising from financial instruments as required by IFRS 7 – “Financial instruments: Notes to the financial statements” is provided in Note 24 – “Guarantees, commitments and risks” of the Notes to the consolidated financial statements.