Risks

Risks related to third-party assets on deposit, equal to €2,300 million (€1,877 million at 31 December 2010) relate to about 6.7 billion cubic metres of natural gas deposited in the storage plants by customers of the service. This amount was determined by applying the estimated unit repurchase cost of approximately €0.34 per standard cubic metre to the quantities of gas deposited.

Risks related to compensation and litigation (€6 million) relate to possible (but not probable) claims for compensation arising from ongoing litigation, with a low probability that the pertinent economic risk will arise.

FINANCIAL RISK MANAGEMENT

Introduction

The main financial risks identified, monitored and, to the extent described below, managed by Snam are as follows:

(i) market risk deriving from exposure to fluctuations in interest rates and the price of natural gas;
(ii) credit risk deriving from the possibility of counterparty default;
(iii) liquidity risk deriving from a possible lack of financial resources required to meet short-term commitments.

This section describes the policies and principles used by Snam to manage and control risks deriving from financial instruments (interest rate risk, credit risk and liquidity risk). The nature and scale of these risks are also described, in accordance with disclosure rules pursuant to IFRS 7.

Information on other risks affecting the company’s business (natural gas price risk, operational risk and segment-specific risks) can be found in the “Elements of risk and uncertainty” section of the Directors’ Report.

MARKET RISK

Interest rate risk

Fluctuations in interest rates affect the market value of a company’s financial assets and liabilities as well as its net financial expense.

The interest rates of some of the Snam’s loans are indexed to benchmark rates, namely the Euro Interbank Offered Rate (Euribor). Interest rate risk is hedged by limiting the risk associated with interest rate volatility, in accordance with the financial structure objectives established in the company’s business plans. To this end, Snam uses derivative financial instruments, namely interest rate swaps (IRSs) to control the balance between fixed- and floating-rate debt. Hedging operations are qualified pursuant to IAS 39 “Cash Flow Hedge”. Snam holds no derivative contracts for trading purposes and no interest rate derivatives for speculative purposes³².

The table below shows the breakdown of gross financial debt by fixed- and floating-rate debt, including the effects of hedging.

Exposure to interest rate risk at 31 December 2011 was around 23% of the group’s total exposure (21% at 31 December 2010). The hedging activities conducted during the year enabled Snam to achieve the financial structure objectives established in the company’s business plans.

The effects on shareholders’ equity and profit at 31 December 2011, compared with the situation a year earlier, are shown below, assuming a hypothetical change of +/-10% in interest rates applied over the course of 2011.

Snam is funded entirely through its ultimate parent, Eni S.p.A.. Should Eni S.p.A. sell its controlling stake in Snam, there is no guarantee that the latter would be able to obtain loans and financing from other sources under the same conditions as those currently in force.

CREDIT RISK

Credit risk is the company’s exposure to potential losses arising from counterparties failing to fulfil their obligations. Default or delayed payment may have a negative impact on the financial balance and results of Snam.

Snam’s exposure to credit risk is associated with the natural gas transportation, regasification, distribution and storage services provided by its companies. More specifically, Snam provides business services to a small number of operators in the gas sector, the largest of which by revenue is Eni S.p.A.. The rules for client access to the services offered are established by the Electricity and Gas Authority and set out in the Network Codes. For each type of service, these documents explain the rules regulating the rights and obligations of the parties involved in providing said services and have contractual conditions which minimise the risk of non-compliance by the clients. In particular, the Codes provide for guarantees to partly cover obligations where the client does not possess a credit rating issued by one of the leading international agencies.

Snam’s maximum exposure to credit risk at 31 December 2011 is the book value of the financial assets on its balance sheet. An analysis of overdue and non-impaired receivables is shown below:

Overdue and non-impaired receivables totalled €563 million (€90 million at 31 December 2010). The receivables include €461 million relating to the use of strategic gas withdrawn and not replenished by users under the terms of the Storage Code. When these receivables are collected, they will be paid to the Electricity Equalisation Fund in accordance with the regulations in force. There is no credit risk in this instance because current regulations stipulate a neutral position for the storage company in terms of the effects arising from the use of strategic gas³³.

There are no significant credit risks. It should be noted that, at 31 December 2011, around 47% of trade receivables (76% at 31 December 2010) were with extremely reliable clients, including the ultimate parent Eni S.p.A., which represents 29% of total trade receivables (48% at 31 December 2010).

LIQUIDITY RISK

Liquidity risk is the risk that new financial resources may not be available (funding liquidity risk) or the company may be unable to convert assets into cash on the market (asset liquidity risk), meaning that it cannot meet its payment commitments. This may affect profit or loss should the company be obliged to incur extra costs to meet its commitments or, in extreme cases, lead to insolvency and threaten the company’s future as a going concern. Snam’s objective is to have a financial structure (in terms of leverage ratio and ratio of medium-to-long-term debt to total debt), which ensures an adequate level of liquidity for the group, minimising the related opportunity cost and maintaining a balance in terms of the duration and composition of its debt in line with business objectives.

Snam is currently financed entirely by its ultimate parent, Eni S.p.A..

Decree Law No. 1 of 20 January 2012 was published on the Gazzetta Ufficiale of 24 January 2012, authorising “Urgent arrangements for competition, development of infrastructures and competitiveness”. Specifically, Article 15 “Arrangements on the subject of ownership unbundling” established that the Prime-Ministerial Decree pursuant to Article 1, paragraph 905 of Law No. 296 of 27 December 2006 relating to the implementation of ownership unbundling between Eni and Snam, will be issued within six months of the above-mentioned Decree Law coming into force.

In the case of a change of control at Snam by Eni S.p.A., existing agreements between the companies give Eni S.p.A. the right to extinguish the credit lines granted early. At present, Snam believes that cash flows from operations and its current financial and capital structure can reasonably allow access to a wide range of financing from the capital market and banks. However, there are no guarantees that Snam would be capable of obtaining loans and financing from other sources under the same conditions as current ones.

Future payments for financial liabilities, trade and other payables

The table below shows the amounts of payments contractually owed for financial payables, including interest payments and the timing of expenditure related to trade and other payables.

Other information on financial instruments

In relation to the categories mentioned in IAS 39, Snam has no financial assets held to maturity, available for sale or held for trading. With the exception of hedging derivatives, therefore, financial assets and liabilities all come under the category of financial instruments measured at amortised cost.

The book value of financial instruments and the relative effects on results and the balance sheet can be seen below:

Below is a comparison between the book value of long-term financial liabilities and their respective fair value. This information is not reported for other financial assets/liabilities because the book value is almost equivalent to the fair value.

The market value was determined on the basis of the current value of future cash flows, using discount rates between 1.0% and 1.9% (0.8% and 2.9% at 31 December 2010). This information is not reported for other financial assets/liabilities because the book value is almost equivalent to the market value.

Market value of financial instruments

Below is the classification of financial assets and liabilities measured at fair value on the balance sheet in accordance with the fair value hierarchy defined on the basis of the significance of the inputs used in the measurement process. More specifically, in accordance with the characteristics of the inputs used for measurement, the fair value hierarchy comprises the following levels:

a) level 1: prices quoted (and not amended) on active markets for the same financial assets or liabilities;

b) level 2: measurements made on the basis of inputs differing from the quoted prices referred to in the previous point, which, for the assets/liabilities submitted for measurement, are directly (prices) or indirectly (price derivatives) observable;

c) level 3: inputs not based on observable market data.

With regard to the above, the classification of the financial assets and liabilities measured at fair value on the balance sheet according to the fair value hierarchy concerned derivative financial instruments at 31 December 2011 classified at level 2 and entered under “Other current liabilities” (€75 million) and “Other non-current liabilities” (€188 million).