Risk management

Fluctuations in interest rates affect the market value of Italgas’ financial assets and liabilities and its net financial expense. The Group has adopted a centralised organisational model. In accordance with this model, Italgas' 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 the defined limits.

As at 31 December 2020, 13.5% of the financial debt was floating rate and 86.5% fixed rate.

As at the same date the group used external financial resources in the following forms:

• bond issues subscribed by institutional investors;
• syndicated loans with banks and other financial institutions, in the form of medium-to-long-term loans;
• bank credit lines at interest rates indexed to benchmark market rates, in particular the Europe Interbank Offered Rate (Euribor).

Therefore, an increase in interest rates, not implemented - in full or in part - in the regulatory WACC, could have negative effects on the assets and on the economic and financial situation of the Italgas Group.

At full performance, Italgas aims to maintain a debt ratio between a fixed rate and variable rate to minimise the risk of rising interest rates.

Credit risk is the exposure to potential losses arising from counterparties failing to fulfil their obligations. Failure to pay or late payment of the fees due may negatively affect Italgas' financial results and financial situation.

The rules for customer access to the gas distribution service are established by ARERA and set out in the Network Codes, documents that establish, for each type of service, the rules regulating the rights and obligations of the parties involved in the process of providing services themselves and contain contractual conditions that reduce the risk of default by customers, such as the provision of bank or insurance guarantees on first request.

As at 31 December 2020 there were no significant credit risks. Note however that, on average, 95% of trade receivables relating to gas distribution are settled at maturity and over 99% within the following 4 days, confirming the primary reliability of customers. Receivables from various assets represent a non-significant portion for the Company.
However, it cannot be excluded that Italgas may incur liabilities and / or losses deriving from the non-fulfillment of its customers' payment obligations

The liquidity risk represents the risk that, due to the inability to find new funds (funding liquidity risk) or to liquidate activities on the market (asset liquidity risk), the company is not able to meet its payment commitments, affecting the economic result in the event that the company is forced to sustain additional costs to meet its commitments or, in an extreme case, a situation of insolvency that puts the company's business at risk.

As at 31 December 2020, Italgas has signed loan agreements related to undrawn credit lines (amounting to € 500 million) which may be used to address possible liquidity needs, where necessary, if the actual borrowing requirement is higher than estimated.
At the same date, the Company can rely on an adequate level of cash held in current accounts and fixed-term deposits with leading banks.
Finally, in addition to funding from the banking system, Italgas has in place the EMTN Programme which at 31 December 2020 allows the issue of new bonds for a nominal amount of €2.65 billion to be placed with institutional investors.

Italgas aims, in financial terms, at establishing a financial structure that, in line with its business objectives, ensures an adequate level in terms of the duration and composition of the debt. The achievement of this financial structure will take place through the monitoring of certain key parameters, such as the ratio between debt and the RAB, the ratio between short-term and medium-/long-term debt, the ratio between fixed rate and floating rate debt and the ratio between bank credit granted and bank credit used.

With regard to Italgas' long-term debt, on 3 December 2020 the rating agencies Moody’s and Fitch confirmed the rating assigned to Italgas S.p.A. as level Baa2 with stable outlook and BBB+ with stable outlook, respectively.

Based on the methodologies adopted by the rating agencies, a downgrade of one notch in the Italian Republic's current rating could trigger a downward adjustment in Italgas' current rating.

As at 31 December 2020, there were no financial covenants and/or collateral in the loan agreements, except for the EIB loan taken out by Toscana Energia, for a nominal €90 million, which requires compliance with certain financial covenants.
Some of these contracts provide for compliance with the following types of contractual clauses: (i) negative pledge undertakings, pursuant to which Italgas and its subsidiaries are subject to limitations regarding the creation of real rights of guarantee or other restrictions concerning all or part of the respective assets, shares or goods; (ii) pari passu and change of control clauses; (iii) limitations on some extraordinary transactions that the company and its subsidiaries may carry out (as at 31 December 2020, these commitments appear to have been respected).
Bonds issued under the Euro Medium Term Notes Programme require compliance with covenants that reflect international market practices regarding, inter alia, negative pledge and pari passu clauses.

Failure to comply with the commitments established for these loans - in some cases only when this non-compliance is not remedied within a set time period - and the occurrence of other events, such as cross-default events, some of which are subject to specific threshold values, may result in Italgas’ failure to comply and could trigger the early repayment of the relative loan. With reference to the EIB, the relative contracts contain a clause whereby, in the event of a significant reduction in EBITDA resulting from the loss of concessions, there is a disclosure obligation to the EIB and a subsequent consultation period, after which the early repayment of the loan may be required.

Managing regulated gas activities involves a number of risks of malfunctioning and unforeseeable distribution service disruptions from unintended events, such as accidents, breakdowns or malfunctioning of equipment or control systems, the underperformance of plants, and extraordinary events such as explosions, fires, earthquakes, landslides or other similar events beyond Italgas’ control. These related events could cause a decrease in revenue and involve substantial damage to persons, property or the environment. Although Italgas has taken out specific insurance policies in line with best practices to cover some of these risks, the related insurance coverage could be insufficient to meet all the losses incurred, the compensation obligations or cost increases.

The activity of Italgas is subject to the Italian and European Union law on environmental protection.

Italgas conducts its business in compliance with the laws and regulations concerning the environment and safety. Given this, the possibility of the Group incurring significant costs or liability cannot be entirely ruled out. It is, in fact, difficult to foresee the economic and financial repercussions of any previous environmental damage, also in view of the possible effect of new laws or regulations that may be introduced for environmental protection, the impact of any new technologies for environmental clean-ups, possible litigation that arises and the difficulty in determining the possible consequences, also with respect to other parties’ liability.

Italgas is engaged in the remediation of sites contaminated essentially due to manufactured gas production performed in the past, removal and disposal of waste (mainly for demolition of obsolete plant facilities) and disposal of materials containing asbestos.

To cover the liabilities estimated in relation to the formalities required by the law in effect, a special fund has been set up since 2001 amounting to 108 million euros (updated on 31 December 2020).

At the end of 2010, Italgas launched a plan to replace traditional meters with smart meters, which until mid-2014 involved meters of class G6 and higher, followed by those of inferior class (mass market).

During the first phase of replacement, the new remote-read meters represented a technology that was still developing. The constructive characteristics established by the Authority meant that manufacturers were required to design and manufacture a product dedicated solely to the Italian market, to a timescale consistent with obligations set by ARERA. Also note that the technical reference regulations prepared by the CIG (Comitato Italiano Gas, the UNI-affiliated regulatory authority) have only been available since 2015.

Italgas began installing these devices in line with the calendar defined by ARERA. Consequently there is the risk that malfunction levels occur that are higher than the historic performances recorded for traditional meters and which generate higher maintenance costs for the company.

Italian Legislative Decree 164/00 concerning the liberalisation of the gas market, provides under Article 16.4 that distributors of natural gas for civil use are to pursue energy savings for the end users and the development of renewable energy; to this end, distributors are assigned the so-called Energy Efficiency Certificates, the annulment of which triggers a refund from the Energy and Environmental Services Fund on the basis of funds constituted through the RE (Energy Saving) components in the distribution fees.

To set the national savings amount per year to be pursued through the mechanism of the "white certificates", the Authority determines its specific energy saving targets for electricity and natural gas distributors.

There is a potential risk of economic loss due to any negative difference between the mean purchase value of the certificates and the recognised tariff-based fee and the failure to achieve the targets set.

The gas distribution activity that the Italgas Group performs operates by virtue of concessions issued by individual municipalities. As at 31 December 2020, Italgas managed 1,887 natural gas distribution concessions throughout Italy.

Inter-ministerial Decree 226/11 ruled that the gas distribution service can only be performed on the basis of tendering procedures exclusively by ATEM, mainly provincial in dimension.

Under the tender processes launched, Italgas may not be awarded concessions in the planned areas, or may be awarded said concessions under conditions that are less favourable than the current conditions, with a possible negative impact on its operating results, financial position and cash flows. However, it must be noted that, in the event of failure to be awarded the concessions with regard to municipalities previously managed, Italgas would be entitled to the reimbursement amount provided to the outgoing operator (see next section).

It should also be noted that, in the context of procedures for the tenders initiated, Italgas may be awarded concessions in ATEM previously managed entirely or partially by other operators; therefore, it cannot be ruled out that such awards could lead, at least initially, to higher operating expenses for the Group than their standard operations.

Given the complexity of the regulations governing the expiration of the concessions held by Italgas, this could give rise to judicial and/or arbitral disputes between concession holders, with possible negative effects on the assets and on the balance sheet, the economic and financial situation of the Italgas Group.

With reference to the gas distribution concessions for which Italgas also owns the networks and facilities, Italian Legislative Decree 164/00, as subsequently supplemented and amended, provides that the reimbursement amount paid to the outgoing service operators and owners of existing assignments and concessions is calculated in accordance with the provisions in the agreements or contracts, provided that they were concluded before the date of the regulation entering into force pursuant to Ministerial Decree 226 dated 12 November 2011 (i.e., before 11 February 2012). Further, and, to the extent not attributable to the will of the parties, as well as for aspects not governed by those agreements or contracts, based on the Guidelines on the criteria and procedures for assessing the reimbursement value, subsequently prepared by the Ministry of Economic Development with the document dated 7 April 2014 and approved by Ministerial Decree dated 22 May 2014.

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.

Ministerial Decree 226/11 on the tender process criteria and bid evaluation states that the incoming operator acquires ownership of the plant with the payment of the reimbursement to the outgoing operator, with the exception of any portions of the plant that are municipally owned.

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 the new legal framework, it cannot be ruled out that the reimbursement value of the concessions, which are assigned a third-party beneficiary upon conclusion of the tenders, would be less than the value of the RAB. This could lead to negative effects on the assets and the balance sheet, and the economic and financial situation of Italgas.

The concessions envisage concessionaire commitments, including investments. It cannot be excluded that, also due to delays in obtaining authorisations and permits, these investments are implemented beyond the planned deadlines, with the risk that the company incurs costs.

Italgas carries out its activities in a gas sector subject to regulation. The relevant directives and legal provisions issued by the European Union and the Italian government and the resolutions of ARERA and, more generally, changes to the regulatory framework, may have a significant impact on the operating activities, the economic results and the financial equilibrium of the Group.

Considering the specific nature of its business and the context in which Italgas operates, developments in the regulatory context with regard to criteria for determining the reference tariffs are particularly significant.

Future changes to European Union policies or at the national level, which may have unforeseeable effects on the relevant legislative framework and, therefore, on Italgas’ operating activities and results, cannot be ruled out.

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 with which Italgas must comply in relation to the activities it performs. The violation of such rules and regulations may result in criminal, civil and/or administrative penalties, as well as damage to the balance sheet, financial position and/or reputation.

As regards specific cases, among other things, the infringement of regulations regarding the protection of workers’ health and safety and of the environment, and the infringement of anti-corruption rules, may also result in (possibly significant) penalties for the Company, based on the administrative liability of entities (Italian Legislative Decree 231/01.