Risks and uncertainties facing Terna and the Group

Terna has always paid careful attention to the prevention of risks of all kinds that could affect or limit the company's results. This paragraph aims to provide a clearer, more complete representation of these risks which are summarised along with the uncertainties to which the company is exposed, as indeed known to the market and shareholders, considering their presentation in the financial statements and financial prospectuses published in the past.

Regulatory risk

About 95% of the Group's consolidated revenue comes from annual fees paid for the provision of services regulated by the Italian Energy Authority. With Resolutions 199/11, 204/11 and 197/11 for the regulatory period 2012-2015, the Authority for Electricity and Gas (AEEG) established remuneration for the supply of electricity transmission, distribution and metering services, prices for dispatching and the regulation of the transmission service quality for the fourth regulatory period (2012-2015), in addition to the methods for updating them in subsequent years.

Within the scope of these regulations, there are a number of variables that could impact on the Group's performance, with specific reference to Resolution no. 199/11, where Article 2 provides for the revision of the remuneration rate of net invested capital in connection with the transmission services for the period 01 January 2014 - 31 December 2015.

Volume effect

The revenues of Terna S.p.A. and Terna Rete Italia S.r.l. attributable to the management, operation and development of the National Transmission Grid, and to the management of dispatching activities, are regulated by tariffs set by the AEEG. The unit transmission and dispatching tariffs are applied to the overall volume of energy transmitted and dispatched on the NTG. These volumes depend on factors beyond the control of the Group.

2012 and 2013 saw confirmation of the volume mitigation mechanism introduced by Resolution 188/08, which states that any impact on Company revenues caused by variations in electricity volumes withdrawn from the transmission grid and dispatched, would be limited to +/- 0.5%.

For transmission alone, it is possible that the so called binomial tariff, prefigured by Resolution 199/11, may be introduced from 2014; this mechanism, which would lead to the abolition of the volume mitigation mechanism, should further lessen transmission revenues' exposure to variations in energy transported.

Bonuses and penalties

The three-year incentive mechanism associated with the reduction in quantities procured for services on the Dispatching Services Market was amply commented on in the 2010 Financial Report, to which you are referred.

Evaluations are underway on the possible introduction of a new incentive mechanism.

Resolution No. 197/11 on service quality regulation substantially confirmed the framework of the previous regulatory period, providing for a mechanism of bonuses/penalties which takes into consideration only the Energy Not Delivered indicator. The maximum potential impact for the Terna Group deriving from this incentive mechanism lies within a range of -12/+30 million euros per year.

Resolution 199/11, finally, makes eligibility for investments under category I3, for which an extra remuneration of 2% is envisaged for 12 years, conditional on Terna accepting the incentive system to accelerate implementation of investments and the related bonus/penalty mechanism. The risk for Terna deriving from said acceptance is linked to the potential penalties deriving from delays in the date of entry into operation of I3 investments with respect to the planned date.

Domestic legislative risk

Tax laws

Tax legislation may affect the tax rate and therefore the economic-financial results of the Group. 

Laws on environmental protection

The activities of the Group are affected by the production of environmental legislation at national, European and international level (e.g. electromagnetic fields, landscape, etc.), and also, in the case of international activities, by laws expressed in the legal systems of foreign countries. The Group may incur additional costs due to the implementation of environmental regulations calling for preventive measures or requirements defined on the basis of regulations established by current legislation.

Laws on energy

The activities of the Group may be affected by changes in the rules governing the electricity market, strategic infrastructure (regarding which the adoption of the "Golden Power" decree is expected, under the implementation of Italian Legislative Decree 21/12), the iteration of authorisation of National Transmission Grid works, and the sphere of activities that Terna may perform or that impact on relations between the companies of the Group and other stakeholders (producers, distributors, etc.).

Employment laws

With regard to electromagnetic fields, Directive 2004/40/EC, the application of which has been postponed until 31 October 2013, is undergoing review. In general, more onerous rules governing health and safety in the workplace might have an adverse effect on the economic/financial performance of the Group.    

Operational risks: risks connected with NTG malfunction

The Terna Group's operations are exposed to the risk of unexpected service interruptions caused by external events that are beyond Terna's control, such as accidents, defects or breakdowns involving control systems or other equipment, deteriorating plant performance, natural disasters, terrorist attacks and other extraordinary events of this kind. Repairs to the sections of the NTG owned by the Group and any claims for compensation by third parties as a result of such events could, in principle, give rise to expenses if the Group is found be responsible. Specific insurance cover has been arranged to mitigate the effect of operational risks.

Litigation risk: legal disputes

The Terna Group is involved, as both plaintiff and defendant, in a number of legal proceedings involving contracts, employees, the environment, regulatory matters, and public safety issues arising from normal business operations.

In addition, the Group may be involved in new litigation and/or out-of-court disputes raised by interested/entitled parties of various kinds (by way of example and not exhaustively: suppliers, public entities, etc.).

On this matter please see paragraph E. "Commitments and risks" of the Notes to the Financial Statements of Terna S.p.A. and of the Terna Group.

Market and financial risks

In the conduct of its operations, the Group is exposed to various financial risks: market risk (interest-rate risk and inflation risk), liquidity risk and credit risk.

In accordance with the policies approved by the Board of Directors, the Terna Group has defined responsibilities and operational procedures for the management of financial risk, making specific reference to the tools to be adopted and setting clear operating limits for their use.

Terna's risk management policies seek to identify and analyse the risks the Company is exposed to, establishing appropriate limits and controls and monitoring risks and compliance with such limits. These policies and related systems are reviewed on a regular basis in order to reflect any changes in market conditions and the activities of the Group.

This matter is discussed in more depth in paragraph E. "Commitments and risks" of the Notes to the Financial Statements of Terna S.p.A. and of the Terna Group.

Risks connected with financing needs

Even in current market conditions, the Group expects to maintain sufficient capacity to generate financial resources from its operating activities. The investment plan for the future plan is however expected to result in an increase in existing debt despite the foreseen use of cash currently available. Although the Group has been able to finance its debt through access to capital markets under very favourable conditions, it may in the medium term find itself having to seek additional funding that in possibly less favourable market conditions could lead to an increase in its financial costs.

Risk on non-core business

A significant part of non-core business is connected with opportunities offered on the market of the design, implementation and management of high voltage plants functional to connecting production from renewable sources. Possible changes to the legislative or regulatory framework of reference may, however, make investment in this sector less attractive and, consequently, lead to a drop in market opportunities for Terna's non-core business.