Risks

Risks related to third-party assets on deposit, equal to €2,613 million (€2,640 million at 31 December 2013) relate to approximately 8.1 billion cubic metres of natural gas deposited in the storage plants by customers of the service. This amount was determined by valuing the deposited gas quantities at the average stock cost of approximately €0.32 per standard cubic metre (€0.35 at 31 December 2013).

Risks concerning compensation and litigation (€314 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

Snam has established the Enterprise Risk Management (ERM) unit, which reports directly to the CEO, to oversee 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.

The ERM unit operates as part of the wider internal control and risk management system of Snam.

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.

There follows a description of Snam’s policies and principles for the management and control of the risks arising from the financial instruments listed above. In accordance with IFRS 7 – “Financial instruments: additional information”, there are also descriptions of the nature and size of the risks resulting from such instruments.

Information on other risks affecting the company’s business (natural gas price risk, operational risk and risks specific to the segment in which Snam operates) 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.

Gross financial debt at 31 December 2014 and 31 December 2013 breaks down into fixed-rate and floating-rate debt as follows:

At 31 December 2014, the Snam Group used external financial resources in the form of bonds and 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 at fixed rates.

The exposure to interest rate risk at 31 December 2014 was approximately 31% of the total exposure of the group (36% at 31 December 2013).

At 31 December 2014 Snam had an existing interest rate swap (IRS) contract relating to a fixed-rate bond in the amount of €500 million maturing in 2023. The IRS contract is used to convert the fixed-rate loan into a floating-rate loan.

The effects on shareholders’ equity and net profit at 31 December 2014, compared with the situation at the end of 2013, are shown below, assuming a hypothetical change of +/−10% in interest rates applied over the course of the year:

Currency 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 financial derivatives.

As at 31 December 2014, 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 hedging derivative. Snam does not take out currency derivatives for speculative purposes.

The effects on shareholders’ equity and net profit at 31 December 2014 are shown below, assuming a hypothetical change of +/−10% in €/¥ exchange rates actually applied during the course of the year:

The exchange rate change has no effect on the profit for the period since the effects of such a change are offset by the effects of the hedging derivative.

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 position 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 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 in certain cases 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.

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 2014 is the book value of the financial assets in its statement of financial position.

As shown in Note 8 – “Trade and other receivables”, overdue and non-impaired receivables at 31 December 2014 amounted to €254 million (€721 million at 31 December 2013) and related chiefly to the storage segment (€127 million), mainly in relation to VAT invoiced to users for the use of strategic gas wrongfully withdrawn in 2010 and 2011, and to the transportation segment (€70 million), mainly in relation to the balancing service⁴⁷.

There were no material credit risks at 31 December 2014. It should be noted, however, that around 46% of trade receivables (40% at 31 December 2013) were with extremely reliable clients, including eni S.p.A., which represents 25% of total trade receivables (22% at 31 December 2013).

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 that, in line with the business objectives, ensures sufficient liquidity for the group, minimising the relative opportunity cost and maintaining a balance in terms of the duration and composition of the debt.

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

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

At 31 December 2014, Snam had unused committed long-term credit lines worth €3.9 billion. Snam also has a Euro Medium Term Notes (EMTN) programme for a maximum total value of €12 billion, which was used for approximately €10.44 billion at 31 December 2014. At the end of 2014, the programme permits the issue, by 30 June 2015, of additional bonds worth up to €1.55 billion⁴⁸, to be placed with institutional investors operating mainly in Europe, in accordance with the terms and conditions of the Programme.

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 9 December 2014, rating agency Standard & Poor’s downgraded Snam’s long-term credit rating by one notch, from BBB+ to BBB, with a stable outlook. This followed a one-notch downgrade of Italy’s national sovereign debt rating on 5 December 2014 from BBB to BBB-, with a stable outlook.

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

Debt covenant and default risk

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

As at 31 December 2014, 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:

• negative pledge commitments pursuant to which Snam and the group subsidiaries are subject to limitations in terms of pledging real property rights or other restrictions on all or part of the respective assets, shares or merchandise;
• pari passu and change-of-control clauses;
• limitations on certain extraordinary transactions that the Company and its subsidiaries can carry out.

The bonds issued by Snam at 31 December 2014 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.

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.

Exclusively for the EIB loans, the creditor has the option to request additional guarantees if Snam’s rating is downgraded to BBB- (Standard & Poor’s) or Baa3 (Moody’s).

With regard to the preventative measure of judicial administration, of which the subsidiary Italgas was notified by the Court of Palermo on 11 July 2014, the developments between the date of the measure and the date of this Report, as well as the actions taken by the Company, do not constitute grounds to activate the aforementioned contractual protections. For further information, see Note 24 – “Guarantees, commitments and risks – disputes and other measures” in the paragraph “Judicial administration of subsidiary Italgas – Court of Palermo”.

Future payments for financial liabilities, trade and other payables

The table below shows the contractual repayment plan 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 – “Financial instruments: recognition and measurement”, 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 broken down as follows:

The table below provides a comparison between the book value of financial assets and liabilities and their respective fair value.

The book value of trade and other receivables is close to the related fair value measurement, given the short period of time between when the receivable arises and its due date.

The market value of financial liabilities includes bonds, whose value is estimated on the basis of the market listings at 31 December 2014, and financial liabilities to banks, all at floating rate, whose corresponding market value is taken as the nominal repayment value.

Market value of financial instruments

Below is the classification of financial assets and liabilities measured at fair value in 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 in the statement of financial position according to the fair value hierarchy concerned derivative financial instruments at 31 December 2014 classified at level 2 and entered under Note 11 – “Other current and non-current assets” (€6 million) and Note 18 – “Other current and non-current liabilities” (€9 million).