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.