Risks

Risks related to third-party assets on deposit, equal to €3,402 million (€2,300 million at 31 December 2011) relate to about 8.2 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 €0.42 per standard cubic metre to the quantities of gas deposited (€0.34 per standard cubic metre at 31 December 2011).

Litigation risks (€382 million) relate to possible (but not probable) expenses arising from ongoing litigation, with a low probability that the pertinent economic risk will arise.

MANAGING FINANCIAL RISKS

Introduction

The management and control of financial risks is based on guidelines issued centrally by Snam and received by the subsidiaries, with the aim of standardising and coordinating group policy in the area of financial risks. In 2012, in line with the new ownership structure, Snam adopted a model for financial risk management and control (with particular reference to interest rate risk and liquidity risk). Specifically, the model provides for the definition and monitoring of several indicators for each risk. If the thresholds set are exceeded, this is promptly indicated, and corrective measures to contain risks are activated, when this is necessary or deemed to be expedient.

The main financial risks identified, monitored and, where specified below, managed by Snam are as follows:

a) market risk deriving from exposure to fluctuations in interest rates and the price of natural gas;

b) credit risk deriving from the possibility of counterparty default;

c) 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 the company’s financial assets and liabilities and its net financial expense. Snam aims to minimise interest rate risk while pursuing its financial structure objectives. Under its centralised finance model, Snam’s structures combine the Group’s requirements and manage the resulting positions, in line with the objectives set out in the Financial Plan, ensuring that the risk profile is kept within defined limits.

In 2012, within the general framework governed by the Prime Ministerial Decree which set out procedures and terms for the ownership unbundling of Snam from eni, Snam completed the substantial debt refinancing programme designed to achieve full financial independence²⁷. As a result of this refinancing, which entailed the closing of all existing financial agreements with eni, including interest rate swaps (IRSs) hedging interest rate risk and the subsequent access to the capital market for the fixed-rate bond issue, at 31 December 2012 the proportion of floating rate financial debt was 51% (23% at year-end 2011) and the proportion of fixed-rate debt was 49% (77% at year-end 2011).

At 31 December 2012, the Snam Group used external financial resources in the form of bilateral and syndicated financing agreements with banks and other financial institutions, in the form of medium-to-long-term financial debt and bank credit lines at interest rates pegged to the market benchmark rates, specifically the Europe Interbank Offered Rate (Euribor) and fixed-rate bond loans placed with institutional investors operating in Europe.

The breakdown of fixed-rate debt and floating-rate debt within gross financial debt is as follows:

Exposure to interest rate risk at 31 December 2012 was around 51% of the Group’s total exposure (23% at 31 December 2011). At 31 December 2012, Snam held no financial derivatives.

The effects on shareholders’ equity and profit at 31 December 2012, compared with the situation a year earlier, are shown below, assuming a hypothetical change of +/-10% in interest rates applied over the course of 2012.

As a result of the major debt refinancing programme carried out in 2012, which changed the breakdown between fixed-rate and floating-rate debt at 31 December 2012 considerably by comparison with the previous year, the effects on results for the period deriving from an assumed average interest-rate fluctuation on the benchmark market (Euribor) in 2012 of +/-10%, applied to all floating-rate financial debt at 31 December 2012, are largely equivalent to the effects due to the average debt exposure in 2012 shown in the table.

CREDIT RISK

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

With regard to the risk of counterparty non-compliance in commercial contracts, the receivable is managed by the heads of the business units and central functions for activities connected to recovering receivables and any litigation management.

Snam provides business services to a small number of operators in the gas sector, the largest of which by business volumes 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 there are documents which explain the rules regulating the rights and obligations of the parties involved in providing said services and contractual clauses that minimise the risk of non-compliance by the clients. In particular, the Codes require guarantees to be provided to partly cover obligations where the client does not possess a credit rating issued by one of the leading international agencies. The regulations also contain specific clauses to ensure the neutrality of the supervisor of the balancing business, which has been performed by Snam Rete Gas since 1 December 2011 as a major transportation company. This role gives Snam Rete Gas an obligation to acquire, according to criteria of financial merit, the resources necessary to guarantee the safe and efficient movement of gas from entry points to withdrawal points, in order to maintain a constant balance in the network, procure the necessary storage resources for covering imbalances for individual users and adjust the relevant income statement entries.

However, it is possible that Snam will incur liabilities and/or losses arising from the non-fulfilment of payment obligations by its own customers, also given the current financial and economic climate, which renders the collection of receivables more complex and difficult.

Snam’s maximum exposure to credit risk at 31 December 2012 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 €774 million (€563 million at 31 December 2011). These include: (i) €618 million relating to the storage segment, which mainly refers to the use of strategic gas withdrawn and not replenished by users of the storage service; and (ii) €83 million relating to the transportation segment, mainly referring to the balancing service and the natural gas transportation service. Regarding receivables deriving from the balancing business and the use of strategic gas, note that there are no risks connected to their recovery by virtue of the current regulatory system, which provides specific mechanisms designed to ensure the neutrality of both the storage company and the Balancing Supervisor in respect of effects arising from failure to collect these receivables.

For more information on balancing and the use of strategic gas, see Note 7 “Trade and other receivables”.

At 31 December 2012 there were no significant credit risks. However, it should be noted that around 38% of trade receivables (47% at 31 December 2011) were with extremely reliable clients, including eni S.p.A., which represents 22% of total trade receivables (29% at 31 December 2011).

LIQUIDITY RISK

Liquidity risk is the risk that new financial resources may not be available (funding liquidity risk) or that 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 aims to establish a financial structure under the Financial Plan (in terms of ratios of debt/RAB, short-term debt/medium-long-term debt, fixed-rate debt/floating-rate debt and bank credit agreed/bank credit used) that, in line with the business objectives, ensures an adequate level of liquidity for the Group, minimising the relative opportunity cost and maintaining balance in terms of the duration and composition of the debt.

As indicated in the “Interest rate risk” section, within the general framework governed by the Prime Ministerial Decree, which set out procedures and terms for the ownership unbundling of Snam from eni, the Company has used the credit system and the capital markets to access a broad range of financing sources (bond loans, pool financing with leading national and international banks, bilateral contracts and financing agreements with CDP, the majority shareholder)²⁸, despite the instability of the financial markets and the crisis in the interbank system.

The current structure of Snam’s debt, which is broadly based on bank debt, is aimed at gradually achieving a debt structure consisting largely of bonds, in line with the Company’s business profile and the regulatory framework in which it operates.

At balance-sheet date, Snam had uncommitted unused lines of short-term credit for €0.4 billion, as well as committed unused lines of long-term credit for €3.2 billion. Snam has established a European Medium Term Notes (EMTN) programme, enabling it to call on the capital market for up to €8 billion, €6 billion of which was already placed at 31 December 2012.

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. Financial assets and liabilities therefore 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 short- and long-term financial liabilities and their respective fair value.

The market value of the bond loans is calculated using the official quotes at year-end.

Financial liabilities to banks are all floating-rate, with the corresponding market value regarded as equal to the nominal repayment 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.

At 31 December 2012, Snam held no financial assets or liabilities measured at fair value.