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ITEN

Main risks

With reference to Snam activities in Italy, the main risks managed by the Company are detailed below:

Is closely linked to the regulation of 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.

Concerns the failure to comply, in full or in part, with the European, national, regional and local rules and regulations with which Snam must comply in relation to the activities it carries out. The violation 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).

With regard to the risk of fraud and corruption, Snam believes it is of vital importance to ensure a climate of fairness and transparency in corporate operations and repudiates corruption in all its forms in the widest context of its commitment to abiding by ethical principles. Snam’s top management is strongly committed to pursuing an anti-corruption policy, trying to identify possible areas of vulnerability and eliminating them, strengthening its controls and constantly working to increase employees’ awareness of how to identify and prevent corruption in various business situations. Snam has been working since 2014 in partnership with Transparency International Italia and joined the Business Integrity Forum (BIF) and, in 2016, became the first Italian company to join the "Global Corporate Supporter Partnership".

Is closely connected to the impacts that changes in the macroeconomic situation could have on the capacity of the Group to access the debt and capital markets, or to refinance the existing debt to meet its liquidity requirements, creating an increase in the cost of the Snam Group’s debt with consequent negative effects on its operations, results, balance sheet and cash flow.

There are also risks associated with political, social and economic instability in natural gas supplier countries(high inflation, volatile exchange rates, inadequate legislation on insolvency and creditor protection, social tensions,increases in taxes and excises etc).

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) 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 are those linked to retaining gas storage concessions.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.

With reference to the risk connected with changes in the price of natural gas, however, pursuant to the regulatory framework currently in force, changes in the price of natural gas to cover Fuel Gas and network leakages do not represent a significant risk factor for Snam, since all gas for its core activities is provided by Shippers in kind. However, in relation to transportation activities, the Authority has defined 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. 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.

With reference to the risk connected with demand for gas, based on the tariff system currently applied by the Authority to natural gas transportation activities, Snam’s revenue, via Snam Rete Gas, is partly correlated to volumes transported. The Authority, however, introduced a mechanism to guarantee the portion of revenues correlated to volumes transported: under this mechanism, approximately 99.5% of total revenue from transportation activities is guaranteed. Based on the tariff system currently applied by the Authority to natural gas storage activities, Snam’s revenue correlates to infrastructure usage. However, the Authority has introduced a mechanism to guarantee reference revenue that allows companies to cover a significant portion of revenues recorded: for 2015 and 2016 the minimum guaranteed level of revenue recorded was approximately 97%.

The purpose of the process to identify emerging risks is to be able to look into the impacts and put in place the necessary strategies and mitigation measures with a view to both prevention and control. Some of the emerging risks identified by Snam are in the area of cybersecurity: Snam carries out its activities through a complex technological architecture relying on an integrated model of processes and solutions capable of promoting the efficient management of the gas system for the entire country. The development of the business and recourse to innovative solutions capable of continuous improvement, however, requires increasing attention to be focused on aspects of cybersecurity. For this reason Snam has developed its own cybersecurity strategy based on a framework defined in accordance with standard principles on the subject and focusing constant attention on Italian and European regulatory developments. Alongside this and in accordance with technological developments, preventative and reactive solutions aimed at protecting the Company from the cyber threats and malware are assessed and, where deemed appropriate, implemented (also with information sharing with national and European institutions and peers). A great deal of attention is also paid to increasing awareness and specialist training of personnel, in order to facilitate the identification of weak signals and raising consciousness about risks of a cyber nature.

The risks connected with the emissions market fall within the scope of the European Union Directives on the sale of permits relating to carbon dioxide emissions and the rules on controlling emissions of certain atmospheric pollutants. Compliance with greenhouse gas regulations in the future may require Snam to adjust its facilities, and to control or limit its emissions or undertake other actions that could increase the costs of complying with the regulations in force, and therefore have negative effects on the Snam Group’s operations, results, balance sheet and cash flow.

Arising, in particular, from exposure to interest rate fluctuations, medium- and long term debt rating downgrades, and bad debts.

Snam, leveraging on its sound financial structure, has a little exposure to interest rates’ fluctuations. As at 30 June 2017, fixed/variable rate debt mix is equal to 77/23%. The effects on net profit of a hypothetical change of +/-10% in interest rates is less than €1 million.

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updated
11 August 2017 - 11:39 CEST