Risks

Risks concerning third-party assets on deposit, equal to €2,640 million (€3,402 million at 31 December 2012) relate to about 7.6 billion cubic metres of natural gas deposited at the storage sites by customers of the service. This amount was determined by applying the estimated unit repurchase cost of approximately €0.35 per standard cubic metre (€0.42 at 31 December 2012) to the quantities of gas deposited.

Risks concerning compensation and litigation (€397 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

In 2013, Snam established the Enterprise Risk Management (ERM) unit, which reports directly to the Chief Executive Officer and oversees the integrated process of managing corporate risk for all Group companies. The main objectives of ERM are to define a risk assessment model that allows risks to be identified using standardised, Group-wide policies and then prioritised, to provide consolidated measures to mitigate these risks, and to draw up a reporting system.

ERM is part of Snam’s broader internal control and risk management system.

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

• market risk deriving from exposure to fluctuations in interest and exchange rates;
• credit risk deriving from the possibility of counterparty default;
• liquidity risk arising from not having sufficient funds to meet short-term financial commitments;
• rating risk;
• debt covenant and default risk.

The policies and principles adopted by Snam to manage and control the risks arising from financial instruments (interest rate risk, currency risk, credit risk, liquidity risk, rating risk and debt covenant and default risk) are described below. In accordance with IFRS 7, there are also descriptions of the nature and size of the risks resulting from such instruments.

Information on other operating risks (natural gas price fluctuation 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 optimise interest rate risk while pursuing its financial objectives. The Snam Group has adopted a centralised organisational model. In accordance with this model, Snam’s various departments access the financial markets and use funds to cover financial requirements, in compliance with approved objectives, ensuring that the risk profile stays within 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- to 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 of mainly fixed-rate bonds placed as part of the EMTN programme.

Gross financial debt breaks down into fixed-rate and floating-rate debt as follows:

The exposure to interest rate risk at 31 December 2013 is about 36% of the total exposure of the Group (51% at 31 December 2012).

The effects on shareholders’ equity and profit at 31 December 2013, compared with the situation at the end of 2012, are shown below, assuming a hypothetical change of +/-10% in interest rates applied over the course of 2013.

Currency risk

Snam’s exposure to the risk of fluctuations in exchange rates concerns both transaction risk and translation risk. Transaction risk arises from the conversion of commercial or financial receivables/payables into currencies other than the functional currency and results from unfavourable exchange rate fluctuations between the transaction start date and its completion (payment received/made). Translation risk arises from fluctuations in exchange rates of other currencies against the consolidation currency (the euro), which may result in changes to consolidated shareholders’ equity. Snam’s aim is to minimise transaction risk, partly by using derivatives.

As at 31 December 2013, Snam’s foreign-currency items essentially refer to a ¥10 billion bond maturing in 2019 and with an issue-date value of approximately €75 million. The bond has been fully converted into euros by a cross currency swap, with the same notional amount and maturity as the hedged component. This swap is considered to be a cash flow hedge derivative. Snam does not take out currency derivatives for speculative purposes.

The effects on shareholders’ equity and profit at 31 December 2013 are shown below, assuming a change of +/-10% in €/¥ exchange rates actually applied during 2013:

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 the financial balance and results of Snam.

For the risk of non-compliance by the counterparty concerning contracts of a commercial nature, the credit management for credit recovery and any disputes are handled by the business units and the centralised Snam departments.

Snam provides business services to a small number of operators in the gas sector, the largest of which by business volume 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, i.e. in documents which explain the rules regulating the rights and obligations of the parties involved in providing said services and contractual clauses which 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 which guarantee the neutrality of the entity in charge of balancing, an activity carried out from 1 December 2011 by Snam Rete Gas as the major transportation company. In particular, the balancing 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.

Snam may, however, incur liabilities and/or losses from the failure of its clients to comply with payment obligations, partly because of the current economic and financial situation, which makes the collection of receivables more difficult and more important.

Snam’s maximum exposure to credit risk at 31 December 2013 is the book value of the financial assets on its statement of financial position. An analysis of overdue and non-impaired receivables is shown below:

Overdue and non-impaired receivables totalled €721 million (€774 million at 31 December 2012). They include: (i) storage sector receivables (€617 million), relating mainly to the use of strategic gas withdrawn and not replenished in time by users of the service (€609 million); and (ii) transportation sector receivables (€49 million), relating mainly to the natural gas transportation and balancing services. There is no risk of failing to recover receivables from balancing activities and strategic gas use since current regulations include specific mechanisms designed to ensure that the effects of failing to recover said receivables are neutral for the storage company and the Balancing Supervisor.

More information on balancing activities and strategic gas use can be found in Note 30, “Guarantees, commitments and risks”.

There were no material credit risks at 31 December 2013. It should be noted, however, that around 40% of trade receivables (38% at 31 December 2012) were with extremely reliable clients, including Eni S.p.A., which represents 22% of total trade receivables (22% at 31 December 2012).

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’s risk management system aims to establish, under the financial plan, a financial structure which ensures an adequate level of liquidity for the group, minimising the related cost and maintaining a balance between the term and composition of its debt in line with business objectives.

As shown in the section “Interest rate risk”, when implementing the debt refinancing programme, the Company had access to a wide range of funding sources through the credit system and the capital markets (bonds, bilateral contracts, pool financing with major domestic and international banks and loan agreements with the European Investment Bank (EIB)).

Snam’s objective is to gradually achieve a balanced debt structure, in terms of composition between bonds and bank credit and the availability of usable committed bank credit lines, in line with its business profile and the regulatory environment in which it operates.

At 31 December 2013, Snam had unused committed long-term credit lines worth around €5.2 billion²⁸. As at the same date, on top of the recourse to the banking system, the Euro Medium Term Notes (EMTN) programme provides for the issue of up to €1.3 billion of additional bonds by 30 June 2014, to be placed with institutional investors.

Rating risk

Moody’s confirmed a Baa1 rating for Snam’s long-term debt on 18 February 2014, raising the outlook from ‘negative’ to ‘stable’. This follows a similar revision of the outlook for Italian sovereign debt on 14 February.

On 11 July 2013, Standard & Poor’s downgraded Snam’s long-term debt rating by one notch, from A- to BBB+.

This followed a one-notch downgrade of Italy’s sovereign debt rating on 9 July 2013 (from BBB+ to BBB with a negative outlook).

Snam’s long-term rating is a notch higher than that of Italian sovereign debt. Based on the methodology adopted by the rating agencies, the downgrade by a notch of the current rating of the Italian Republic would trigger a downward adjustment of Snam’s current rating by at least a notch.

Debt covenant and default risk

The risk of default consists of the possibility that the loan agreements contain provisions that provide the lender with the ability to activate contractual protections that could result in the early repayment of the loan upon the occurrence of specific events, thereby generating a potential liquidity risk.

At 31 December 2013, Snam has entered into unsecured bilateral and syndicated loan agreements with banks and other financial institutions. Some of these contracts provide, inter alia, for the following: (i) a financial covenant based on which the Company ensures that the relation between the net financial debt and the RAB will not exceed a contractually defined level; (ii) negative pledge commitments pursuant to which Snam and its subsidiaries are limited in the creation of real property rights or other restrictions on all or part of the respective assets, shares or merchandise; (iii) pari passu and change of control clauses; and (iv) limitations on the extraordinary transactions that the Company and its subsidiaries can carry out.

The bonds issued by Snam on 31 December 2013 as part of the Euro Medium Term Notes programme provide for compliance with covenants that reflect international market practices regarding, inter alia, negative pledge and pari passu clauses, but which do not encompass financial covenants.

Failure to meet these covenants, and the occurrence of other events, some of which are subject to specific thresholds, such as cross-default events, may result in Snam’s failure to comply and could trigger the early repayment of the relative loan.

All the checks carried out during 2013 on the financial covenants provided for under the contracts in place confirmed that said covenants had been complied with.

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. As a result, the financial assets and liabilities all fall within the classification of financial instruments measured at amortised cost.

The book value of financial instruments and their relative effects on results and on equity may be analysed as follows:

Below is a comparison between the book value and the fair value of short- and long-term financial liabilities.

The market value of bonds was determined using the official prices at the end of the year.

Financial liabilities to banks are all at floating rate, with the corresponding market value taken as the nominal repayment value.

Market value of financial instruments

Below is the classification of financial assets and liabilities measured at fair value on the statement of financial position 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 statement of financial position according to the fair value hierarchy concerned derivative financial instruments at 31 December 2013 classified at level 2 and recognised under “Other non-current liabilities” (€6 million).