Overview of the main events that occurred up to December 31, 2013

Foreword

As described in detail in previous reports, the Impregilo Group became involved in urban solid waste disposal projects in the province of Naples and other provinces in Campania at the end of the 1990’s through its subsidiaries FIBE and FIBE Campania. Since FIBE Campania S.p.A. was incorporated into FIBE S.p.A. in 2009, in the rest of this chapter, unless otherwise stated, reference is made exclusively to FIBE S.p.A., even with regard to positions and events that affected the company dissolved through the merger.

Major problems that, since the 1999-2000 period, characterized the Company’s activities within the framework of the service contracts and were discussed in detail and reviewed in all of the financial reports published by the Group starting from that period, evolved and became more complex over the years, giving rise to a significant complex of disputes, some of which, as discussed in detail later in this chapter, became particularly important and were in part still ongoing as of the date of this Interim report on operations.

In order to facilitate a quick correlation between the various operational phases of the USW Campania Projects and the main disputes that are still pending and the respective assessments, the extended time horizon over which the events in question developed was divided into the following main phases/periods:

1. The “Contractual” phase: This phase began in the 2000-2001 period with the signing, by the two project companies FIBE and FIBE Campania, of the service contracts for the disposal of urban waste in the provinces of Campania and ended on December 15, 2005 with the cancellation “by power of law” of the abovementioned contracts pursuant to Decree Law No. 245/2005 (converted into Law No. 21 of January 27, 2006);
2. The “Transitional” phase: This phase, which started with the conclusion of the Contractual phase, lasted until the enactment of Decree Law No. 90 of May 23, 2008 and Decree Law No. 107 of June 17, 2008, both converted into Law No. 123 of July 14, 20058, which, inter alia, officially marked the Impregilo Group’s exit from the waste disposal business, transferring to the Provincial Administrations title to the RDF facilities “located in their respective territories” (see Article 6-bis, Section 1), calling for “the involvement of the Armed Forced for the technical and operating management of the abovementioned facilities” (see Article 6-bis, Section 3); and
3. The “Post-transitional phase,” which started at the end of the Transition phase and, being currently still ongoing, is defined more concisely as the “Current” phase.

The "Contractual" phase

From the very start of the Projects, subsequent to the signing of the contracts, there arose significant problems the most important of which included the following

1. failure by the Campania regional administration to activate separate waste collection programs, a development that constituted a prerequisite for the implementation of the project and the service contracts executed by the Companies and the Government Commissioner, which is also one of the causes of some of the most important disputes still pending and concerning the management of the former RDF facilities (now called waste grinding, sorting and packaging facilities, abbreviated as STIR in Italian);
2. inadequate landfill areas made available by the government commissioner;
3. delays in the start of construction of the Acerra and Santa Maria La Fossa waste-to-energy facilities. Work on the Acerra facility, which pursuant to contract was supposed to start at the beginning of 2001, actually got under way only in 2004, thanks to the extraordinary intervention of more than 450 police officers, who cleared the jobsite occupied by demonstrators since January 2003. As for the Santa Maria La Fossa facility, which was supposed to complete the project framework for the provinces of the Campania region different from Naples and the construction of which was supposed to be carried our concurrently with that of Acerra, the Environmental Impact Study (EIS) was delivered only in 2007 and construction was never started.

Concurrently with the rapid deterioration of the operating and financial conditions under which the Company was required to operate, due to the problems described above, the local and central public administrations involved under various titles in the handling of the contract defaulted on their obligations towards FIBE with regard to the amounts contractually owed.

On May 12, 2004, as part of proceedings in which the Directors of the Group companies involved in the project (FIBE, FIBE Campania and FISIA Italimpianti) and top managers of the Commissioner’s office were being investigated, the Naples public prosecutor seized the facilities, with their concurrent release on attachment bond, thereby launching a new dispute of a criminal nature that will be discussed more in detail later in this chapter and is partly still ongoing.

At the end of Contractual phase the Company had incurred a significant exposure at the financial level, due to the fact that it has used its own resources, this expression being understood to include those obtained through bank financing, to complete a substantial portion of the investments for which it was responsible, pursuant to the contracts, and to the failure by local administrations to pay a substantial portion of the fees owed to FIBE.

Work on the construction of the Acerra facility started only partially and, in the meantime, multiple civil and administrative lawsuits were filed

These proceedings, described in greater detail later in this chapter, involved a number of different parties. In most cases, they involved the Company (depending on the individual cases, FIBE could be the party to the proceedings together with other Group companies that, under various titles, participated in the contractual activities, such as, for example, Fisia Italimpianti and Impregilo Edilizia e Servizi, later incorporated into Impregilo), which acted in all venues to assert that it acted properly and demand the respect of its rights by the debtors, on the one hand, and the public administrations, which, while the emergency situation continued concurrently with the deterioration of their financial situation, claimed unfairly that it was FIBE who was in default of its contractual obligation, on the other hand.

During the final phases of the Contractual period, this already complex litigation framework was gradually joined by numerous companies and individuals who, under various titles and in some cases in a totally indirect fashion, became involved in the operational activities, as FIBE suppliers or sub-suppliers, and who, as a direct effect of the Public Administration’s failure to perform its obligations toward FIBE, were also facing mounting financial difficulties.

The "Transitional" phase

Decree Law No. 245/2005 (converted into Law No. 21 of January 27, 2006), inter alia, (i) terminated by power of law the service contracts between FIBE S.p.A, FIBE Campania S.p.A. and the Extraordinary Government Commissioner for the Campania Waste Emergency, effective as of December 15, 2005, but “without prejudice to any claims arising from the terminated contracts,” (ii) ordered that the Company continue its activities, in full compliance with the control and coordination function performed by the Extraordinary Commissioner, against its right to claim payment from the Commissioner’s office of expenses and costs incurred in this regard, and (iii) continue with the development of the service landfills and the Acerra facility while the Commissioner identifies, with the utmost urgency and with publicly transparent procedures, a new party to whom the service could be entrusted. This law also required that the Government Commissioner recover the amounts owed to the Company by local administrations for waste disposal fees up to the date when the service contracts were terminated.

This changed regulatory framework, vitiated at the outset by significant problems regarding both the nature of the legal relationships dependent on it and by unrealistic expectations about the possibility of finding a new party to whom service could be entrusted on the same terms that already caused the collapse of the management system during the Contractual phase, marked the beginning of the Transitional period and further complicated FIBE’s activities without enabling it to resolve some of the most pressing critical issues that characterized the previous period. The most significant problems included:

1. insufficient appropriations of financial resources earmarked for the Commissioner’s office, so that it may carry out its control and coordination activities, with regard both to operating expenses and the significant investments that still must be carried out;
2. the unlawful continuation of FIBE’s obligation to continue in its activity due to the failure to find a new party to whom the service could be entrusted (none of the calls for tender held were successful due to the lack of guarantees about the availability of sites for disposing of the waste remaining after the RDF process), even though it was the statute that caused the early termination of the service contracts; and
3. the absence of specific and detailed provisions regarding how the Company could be indemnified for the claims that it put forth due to the early termination of the service contracts.

Consistent with an operational profile based both on compliance with the laws then in effect and the most flexible cooperation with the Commissioner’s office, FIBE nevertheless continued construction of the Acerra facility, without obtaining appropriate funding from the Public Administration, which would be the owner of the facility, thereby further burdening its financial position.

As mentioned earlier in this chapter, the end of this phase coincided with the enactment of Decree Law No. 90 of May 23, 2008 and Decree Law No. 107 of June 17, 2008, both converted into Law No. 123 of July 14, 2008. These statutes, on the one hand, confirmed FIBE’s obligation to complete the Acerra waste-to-energy facility and, on the other hand, officially marked the Impregilo Group’s exit from the waste disposal business, transferring to the Provincial Administrations of the Campania region title to the RDF facilities and the production resources existing at each facility, including the human resources (other than management personnel) employed at the facility with short-term contracts.

Even though an important result had been achieved, the Company’s situation still presented an absolutely critical picture both operationally and financially. The main elements of this picture included:

1. a growing financial imbalance attributable to the imposed obligation to continue building the Acerra facility, with regard to which a specific procedural or contractual process for the final destination of the facility had not been defined;
2. the final end of FIBE’s management of all facilities and equipment operated up to that point by the Company in the performance of its activities as mere implementer, on behalf of the Commissioner’s office, of waste disposal activities, but without any determination as to the reimbursement of the costs it incurred to build those facilities;
3. the elimination, pursuant to law, of all public administrative entities that coordinated the activity during the Transitional period, without providing any concrete means for the reimbursement of the huge financial resources that, in the process of implementing disposal activities in the name and on behalf of the Administration, FIBE was required to advance (with the financial support of the Group as in previous periods) and with regard to which, once again, no specific debtor had been identified and no specific procedures for payment by the public administration had been defined.

The already significant pressure that the situation described above exerted both on FIBE and the Group was magnified by criminal proceedings that included, on the one hand, a series of precautionary measures (i.e., attachments of equivalent amounts) requested by the investigating judges and initially granted by the Court of Naples, but later dismissed at the highest level by the Court of Cassation, and, on the other hand, the start of criminal proceedings targeting both Company Directors and officers of the public administration and legal entities related to the abovementioned parties for alleged liability pursuant to Law No. 231.

The "Post-transitional" or "Current" phase

The start of this phase was characterized by two new scenarios concerning (i) the completion of the Acerra waste-to-energy facility and the development of related events; and (ii) the start of a new litigation phase between the Company and the public administration concerning the operation of the facilities, storage sites and equipment to which the public administration had full and exclusive title pursuant to the abovementioned Law No. 123/2008.

Insofar as the Acerra facility is concerned, a new operator was identified in December 2008 during the procedure to allocate management of the waste-to-energy facility under construction, namely a leading Italian company which currently owns other major waste disposal and energy recovery facilities. At the same time, FIBE, as required by the provisions of the abovementioned Law No. 123/2008, continued the technical activities needed to complete the facility and proceed with the testing. A final test of the Acerra facility was performed during the first two months of 2010 and the respective certificate, confirming the successful outcome of the procedure, was issued on July 16, 2010. A development worth mentioning in this regard is the enactment of Decree Law No. 195/2009, converted with amendments into Law No. 26 of February 26, 2010, which includes some provisions that are summarized below:

1. the value of the Acerra waste-to-energy facility was determined to be 355 million euros. Transfer of title to facility by the Impregilo Group to the Campania Regional Administration (or the Prime Minister’s Office – Civil Protection Department or a private entity) was scheduled for December 31, 2011, in accordance with a new Prime Minister Decree, provided the necessary financial resources were appropriated. Until then, the former service provider was supposed to receive monthly lease payments of 2.5 million euros for a period of up to 15 years. The payments for the 12 months before the transfer of title would be deducted from the consideration payable for the transfer of title, together with the amounts advanced to the former service provider, pursuant to Article 12 of Decree Law No. 90/2008, as advances for work in progress when the plant was being built;
2. Also with regard to the Acerra facility, (i) the final deadline for testing was set at February 28, 2010; (ii) until title was transferred it could not be sold, pledged or otherwise encumbered, nor could other registrations or prejudicial acts be made with regard to the facility; and (iii) additional and substantial burdens were placed on the former service provider for a series of guarantees of a different and significantly more onerous nature compared with current best practices in the engineering and facility construction sector. Moreover, the new service provider was allowed to begin operating the facility already in 2010, despite the guarantees provided and the fact the FIBE still owned the facility.

As for the development of disputes concerning the operation of the facilities and storage sites, the initial period of the Post-transitional phase was characterized by progress in two key areas of litigation at the administrative level including, more specifically:

1. the area concerning the final determination of the role performed by FIBE vis-à-vis the public administration after the cancellation of the service contracts; and
2. the area concerning the identification of the party who, subsequent to the enactment of Law No. 123/2008, was supposed to take over and operate all facilities, storage sites and equipment built by FIBE during the Contractual phase for the purpose of performing its activities.

With regard to defining the role performed by FIBE during the Transitional phase, Decision No. 7280 handed down by the Regional Administrative Court of Latium in July 2008, which became final  not having been appealed, provides, in the section explaining the decision’s rationale, an accurate reconstruction of the roles and responsibilities attributable, respectively, to the former service providers after December 15, 2005—at that point “mere implementers” of the Commissioner’s instructions—and to the government’s Delegated Commissioner, solely responsible for the waste disposal service and the coordination activities, and required to identify the optimum solutions for the disposal of waste.

At the same time, the abovementioned decision noted that all statutory obligations imposed on the former service providers had already ended on December 31, 2007 and pointed out the fact that the various orders issued by the Commissioner asking FIBE to continue performing its activities until Law No. 125/2008  went into effect, orders that were promptly challenged by the Company, were unlawful because they were in conflict with previous statutes governing the conditions and limits of the specific emergency program.

On the other hand, with regard to the dispute concerning the ownership and operation of the facilities and storage sites, the litigation phase, which began during the period immediately after Law No. 123/2008 went into effect, ended with Council of State Decision No. 290/2010, which definitively confirmed the dismissal of the claims put forth by the administration in December 2008 for the purpose of returning the sites to FIBE, thereby releasing FIBE from any obligation to manage the sites which, according to the administration, were not suitable for its activities.

Consequently, as the end of 2010 was approaching, the overall situation of the USW Campania Projects had become quite complex, due mainly to the following situations:

1. an economic and financial position that, at the consolidated Group level shows net receivables and damage claims for very large amounts attributable mainly to the following groups of assets:
1. construction of the Acerra facility, which, in addition to being one of the world’s largest and most modern waste-to-energy and energy recovery facilities, was then already fully functioning and productive, but the company that built it had not received any compensation;
2. reimbursement of the unamortized costs of the former RDF facilities, which, according to the service contracts cancelled by force of law at the end of 2005, the public administration was supposed to defray but it still had not paid as of that date;
3. net receivables resulting from the financial shortfall gradually accumulated both during the Contractual phase and the Transitional phase due, on the one hand, to non-payment by the debtor administrations and, on the other hand, to the impossibility to use this non-payment to justify withholding payments to FIBE’s suppliers and sub-suppliers, causing FIBE to incur an even larger exposure to stop actions filed by these parties, including in the bankruptcy area;
2. the lingering criminal proceedings in which, despite the fact that the merit proceedings were already in progress, the Group was still the target of precautionary measures requested by the inquiring magistrates, with all of the operational and reputational consequences that this entailed;
3. the presence of protracted civil and administrative litigation which, despite the fundamentally important decisions described earlier in this Report, still does not allow the definition of a specific timing by which the legitimate claims put forth by the Company under various titles could be satisfied.

However, starting at the end of 2010, some important developments occurred with regard to the issues mentioned above. More specifically:

1. the dispute concerning the legitimate compensation owed to FIBE for the construction of the Acerra waste-to-energy facility essentially came to a conclusion at the end of 2011 and the collection of the consideration for the abovementioned facility, amounting to 355 million euros, was completed in 2012;
2. the criminal proceedings launched in 2004, with included the adoption of precautionary measures that resulted in the attachment of very substantial financial resources of the Group in 2007, formally ended in the first half of 2012, with a final ruling that the abovementioned attachments were not applicable, while, in November 2013, the Court of Naples handed down a decisions by which it found all defendants not guilty on all charges and in the most ample manner. The detailed decision of acquittal (265 pages long) was filed on February 1, 2014, with the deadline for appealing it by the Public Prosecutor expiring on March 21, 2014;
3. the dispute concerning the legitimate claims put forth by FIBE for reimbursement of the costs incurred to build the former RDF facilities and not yet amortized as of the date when the service contracts were cancelled (December 15, 2005) also came to a conclusion with a decision handed down in March 2013, by which the Court of Cassation denied the motion filed by the public administration against the adverse decision handed down by the Council of State in 2012. While some enforcement actions filed by FIBE to obtain full payment from the defeated administration are still pending, a total of 240 million euros was collected in 2013, including about 204 million euros for unamortized costs at December 2005 and 35 million euros in related statutory interest.

Lastly, at the end of 2013, the financial position of the Group regarding the USW Campania Projects was concentrated mainly in the components of working capital, consisting of the net receivables held by FIBE in connection with the Contractual and Transitional phases.

The balance of this chapter, consistent with the practice followed in previous periodic financial reports of the Group, provides a description of the main dispute currently outstanding, with the aim of completing the complex operating environment that still characterizes the Groups’ activities concerning the USW Campania Projects. With regard to these issues, having noted the significant positive developments summarized above, it is important to point out that the overall situation is still particularly complex.