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’s risk management structure aims to optimise interest rate risk while pursuing the objectives defined and approved in the financial plan. The Snam Group adopts a centralised organisational model, and based on this model, Snam’s structures ensure that its requirements are covered by accessing financial markets and employing resources in accordance with the approved objectives, whilst ensuring that the risk profile remains within the defined limits.
At 31 December 2013, 64% of financial debt was fixed rate (49% at year-end 2012) and the remaining 36% was floating rate (51% at year-end 2012).
At 31 December 2013, the Snam Group used external financial resources in the form of bilateral and syndicated loans with banks and other financial institutions, in the form of medium- and long-term loans and bank credit lines at interest rates indexed to the reference market rates, in particular the Europe Interbank Offered Rate (Euribor), and bonds, mainly fixed-rate, placed as part of the EMTN programme.
Exchange rate risk
Snam’s exposure to exchange rate risk relates to both transaction risk and translation risk. Transaction risk is generated by the conversion of commercial or financial receivables (payables) into currencies other than the functional currency and is caused by the impact of unfavourable exchange rate fluctuations between the time that the transaction is carried out and the time it is settled (collection/payment). Translation risk relates to fluctuations in the exchange rates of currencies other than the consolidation currency (the euro) which can result in changes to consolidated shareholders’ equity. Snam’s risk management system aims to minimise transaction risk through measures such as the use of derivatives.
As at 31 December 2013, Snam’s foreign currency items consisted essentially of a bond worth ¥10 billion, maturing in 2019, which was worth around €75 million as at the issue date and was fully converted into euro via a cross-currency swap. Snam does not have any cross-currency swaps in place for speculative purposes.
Natural gas price risk
Up to the end of the second regulatory period on 31 December 2009, the transportation costs incurred for the acquisition of gas needed to operate the compression stations were included in overall operating costs and therefore updated using the price-cap mechanism42. As at the start of the third regulatory period (1 January 2010 - 31 December 2013) on 1 January 2010, the Electricity and Gas Authority, enacting the new tariff criteria laid down by Resolution ARG/gas 184/09, defined methods for payment in kind, by service users to the leading transportation company, of gas volumes to cover fuel gas, network losses and unaccounted-for gas (UFG), owed as a percentage of the volumes respectively injected into and withdrawn from the transportation network. As a result of these provisions, which were also confirmed for the fourth regulatory period (2014-2017)43 with Electricity and Gas Authority Resolution 514/2013/R/gas, and in consideration of the mechanism for allocating gas to service users, the change in the price of natural gas to cover fuel gas and network losses no longer represents a risk factor for Snam. Uncertainty remains with regard to potential quantities of UFG in excess of the quantities paid for in kind by service users.
42 Under this mechanism, core revenue components relating to operating costs, amortisation and depreciation are updated with financial statement figures at the start of a regulatory period, while they are updated with inflation and reduced by a productivity coefficient in the subsequent years.
43 For the fourth regulatory period an in-kind payment for a fixed annual amount was introduced to cover unaccounted-for gas (UFG).