State Aid – C 11/2007 [Ex N 476/2006 (NN 14/2006)] – Misuse of Rescue Aid and Compatibility of Restructuring Aid to Ottana – Italy

EUROPEAN COMMISSION Brussels, 04-IV-2007 C(2007) 1418 def. PUBLIC VERSION WORKING LANGUAGE This document is made available for information purposes only. Subject: State Aid – C 11/2007 [ex N 476/2006 (NN 14/2006)] – Misuse of rescue aid and compatibility of restructuring aid to Ottana – Italy Sir, (1) The Commission wishes to inform Italy that, having examined the information supplied by your authorities on the aid referred to above, it has decided to initiate the procedure laid down in Article 88 (2) EC Treaty. I. PROCEDURE (2) On 23 February 2006, the Italian authorities notified the Commission a rescue aid to Ottana Energia Srl (Ottana) registered as case NN 14/06, which had been put into effect on 29 December 2005, i.e. before the notification. (3) With notification of 14 July 2006, which was registered on 17 July under N 476/06, the Italian authorities notified the Commission additional information on the measure including a restructuring plan. (4) With letter of 31 August 2006 the Commission requested from Italy additional information on the restructuring plan in case N 476/06, to which no answers where received within the given time line. (5) On 6 December 2006, the Commission with decision C(2006)5829 (hereafter "the rescue decision") indicated that it had no objections against the rescue aid. The decision reads that "the Commission concludes that the aid fulfils the criteria to be considered compatible with the EC Treaty and so far raises no objections against the aid. The Commission can however not accept an extension of the rescue aid beyond the six months period in view of the presentation of a restructuring plan, as such plan does not justify an extension. The Commission therefore requests the Italian authorities to put an end to the (loan) guarantee for the benefit of Ottana within 15 days of the date of receipt of this letter." (6) In a meeting of 18 December 2006 the Commission raised additional questions which however have not been answered by Italy so far. However, Italy provided its reply to the questions of 31 August 2006 by email of 20 December 2006. On 19 January 2007 the Commission was supplied with the minutes of an agreement of 9 January 2007 between Ottana and the Italian authorities concerning future restructuring of the company. (7) With letter of 20 February 2007, the Italian authorities were requested to confirm the non-termination of the guarantee, which they had indicated in the meeting of 18 December 2007. The letter stressed that in such case the Commission would need to open proceedings under Article 88 (2) EC Treaty. With letter of 8 March 2007, Italy confirmed that the loan guarantee had not been terminated. II. DETAILED DESCRIPTION OF THE AID 1. The beneficiary (8) Ottana is a local utility company situated in the province of Nuoro in Sardinia. It is active in electricity generation and provides pressurised steam, water, nitrogen and compressed air. Ottana has a 2% share in the Sardinian electricity market. (9) Ottana has about 115 employees and in rescue decision it was held that it can be considered SME1. Given that it has more than 50 employees it is however not a small enterprise. (10) The power plant was constructed in 1970. In 2001 it was purchased by a subsidiary of an international energy company AES Inc. Despite a wide investment programme it underperformed because a major customer of Ottana, Montefibre Spa closed down in 2003. In 2005 Ottana was bought from AES through the acquisition of shares by the holding company SAE srl. (11) Since 1970 no major modernisation has been carried out in the plant. The plant comprises essentially two identical boilers for the production of superheated high pressure steam and two turbo alternators for the production of electrical energy and of process steam at two different pressure levels. (12) The company claims that the plant control system is in good condition but quite archaic requiring a rather large number of personnel for proper operation 1 In the light of Article 2 (1) in conjunction with Article 4 (3) of the Annex of Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises; OJ 2003 L 124, p.36. 2 and maintenance. It is also stated that various maintenance efforts have been deferred due to lack of funds. (13) The power plant is currently fuelled by low sulphur fuel oil (referred to as BTZ) which constitutes up to 85% of the costs of the company. Therefore it is naturally exposed to changes in oil price and following the surge in oil price in 2005 and 2006 the company lost the ability to cover its costs. Since the site is relatively remote, the fuel is transported by road tanker. (14) The Italian authorities claim that the liquidation of the company would seriously affect the operation of other undertakings located at the Ottana industrial site as it would stop supplying them with electricity and steam. Its bankruptcy might lead to a collapse of the whole Ottana industrial site. This would mean a loss of ca. 800 existing jobs within the site and ca. 200 jobs in co-operating companies. 2. The rescue aid (15) The rescue measure provided for the granting of a guarantee for a loan by the Ministry for Economic Development amounts to € 5 million.2 The guarantee was supposed to be terminated 15 working days after notification of the rescue decision i.e. the latest on 8 January 2007. 3. The restructuring plan (16) The restructuring plan of the company aims at keeping the current human resources and existing infrastructures. It identifies as a main reason for failure its dependence on fuel oil and the inability to pass on price increases in fuel oil via the electricity price. Indeed, the Sardinian Electricity reserve is made up of coal power plants which have lower costs. Therefore, Ottana aims at reducing direct costs, particularly those connected to fuel and related transport charges. The company prepared a conversion plan for the power plant. (17) In fact, the Italian authorities provided the Commission with a perspective of the future development of the company which indicates three potential restructuring steps. Step one would be the re-powering of one boiler of the power plant to use of liquid coal ("carbone fluido") while the other continues to run on fuel oil. However, apparently this project has in the meantime been abandoned as no more funds are envisaged for this in the latest plan. (18) Step two would be the conversion of the second generator from fuel oil to vegetable oil. In this way a reduction of the emissions is envisaged which can be utilised to acquire and sell "green certificates". This seems indispensable for the success of the plan so as to set off the higher prices of bio-fuels compared to fossil fuels, which can at least for the time being not be equalised by excise tax rebates as no authorisation to this respect has been obtained. The 2 For more details see decision C(2006)5829, published on the Commission's website at: http://ec.europa.eu/comm/competition/state_aid/register/ii/by_case_nr_nn2006_000.html#14. 3 technical restructuring envisages installing new equipment in the power plant to enable electricity generation from vegetable oil. Investment costs are estimated to be €49 million. (19) Step three would be to use natural gas transmitted in the future via the so- called GALSI pipeline connecting Algeria with Italy via Sardinia (the completion of which is expected not before 2009). As the construction schedule has not been decided upon, this step is hypothetical and shall in any event only be implemented once implementation of step two proves to be not viable economically. (20) Upon submission of its plan for approval to the Sardinia region and trade unions, the company had concluded an agreement with the region. It provides a commitment from the region to issue the necessary authorisations for "step two" as soon as possible. (21) Moreover, the plan envisages also a reduction of fixed costs through employment restructuring aiming at a reduction of 45 jobs. It is envisaged to take advantage of an "early retirement" scheme. However no details are provided. (22) The restructuring plan identifies a cash flow deficit after financing of € 44.6 million which shall by financed mainly by long term loans (€32 million), as well as by short term loans (€6 million) and equity (€6.6 million). The later shall apparently be financed by contributions of the majority shareholder and through the entrance of new shareholders. The financial structure will have a debt/equity ratio of 85/15. No further details have been indicated in the plan. (23) Moreover, the plan indicates that the only aid to be provided should be a prolongation of a rescue loan of € 5 million which would be paid back over 12 years from cash flow generated by the new plan. No detail on any other support measures provided by the state was given. As mentioned above, the agreement with the region stipulates only that the region needs to issue the necessary permits. (24) No information has been provided on the future development of the markets where the company will be active. Also the financial projections provided do not give a best/worse case scenario. They assume however that the company will record a profit after tax of around € 5 million as of 2008 (until 2020) whereby sales are envisaged to be around € 15 million on electricity and € 27.5 million on green certificates. No details have been provided how the sale of green certificates is projected other than that it is based on 176000 tonnes of CO2 emissions avoided per year.

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