Risks

Risks related to third-party assets on deposit, equal to €1,785 million (€2,210 million at 31 December 2015) relate to approximately 8.36 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 €0.22 per standard cubic metre (€0.26 at 31 December 2015).

Risks concerning compensation and litigation (€65 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 corporate financial risks identified, monitored and, where specified below, managed by Snam are as follows:

• risk arising from exposure to fluctuations in interest and exchange rates;
• credit risk arising 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 management and uncertainty” section of the Directors’ Report.

Interest rate risk

Interest rate risk is associated with fluctuations in interest rates affecting 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 2016, 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 2016 was approximately 36% of the total exposure of the Group (the same at 31 December 2015). At 31 December 2016 Snam has an Interest Rate Swap (IRS) agreement on a fixed rate bond loan for an amount of €500 million with a due date of 2023. IRS agreements are used to convert fixed rate loans into variable rate loans⁴².

The effects on shareholders’ equity and net profit at 31 December 2016 of a hypothetical change of +/-10% in interest rates applied over the course of the year is less than €1 million. Though the Snam Group has an active risk management policy, the rise in interest rates relating to floating-rate debt not hedged against interest rate risk could have negative effects on Snam Group’s operations, balance sheet and cash flow.

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. It cannot be ruled out that significant future changes in exchange rates may generate negative effects on Snam Group’s operations, balance sheet and cash flow, irrespective of the policies for hedging the risk resulting from exchange rate fluctuations through the financial instruments on the market put in place by Snam.

As at 31 December 2016, 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 have any cross-currency swaps in place for speculative purposes.

The effects on shareholders’ equity and net profit at 31 December 2016 of a hypothetical change of +/-10% in €/¥ exchange rates actually applied over the course of the year is less than €1 million.

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 economic results and the financial balance 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 possible disputes is 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 revenue 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. For each type of service, these documents explain the rules regulating the rights and obligations of the parties involved in providing said services and contain contractual conditions which reduce the risk of non-compliance by the clients. In certain cases, 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, 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 items.

Snam’s maximum exposure to credit risk as at 31 December 2016 is represented by the book value of the financial assets recorded in the consolidated financial statements of the Snam Group as at 31 December 2016. As shown in Note 8 “Trade and other receivables”, overdue and non-impaired receivables as at 31 December 2016 came to €154 million (€251 million at 31 December 2015) and mainly refer to the storage segment (€99 million), principally comprising VAT billed to users for the use of strategic gas unduly withdrawn in 2010 and 2011 and various receivables from Public administrations and the transportation sector (€47 million) essentially involving receivables from Users (€31 million) for penalties and additional tariffs, for which no impairment loss is registered as they are covered through the fee tariff methods.

Approximately 65% of trade receivables (60% as at 31 December 2015) were with extremely reliable clients, including Eni, which represents 21% of total trade receivables (28% as at 31 December 2015).

It cannot be ruled out however, that Snam may incur liabilities and/or losses from the failure of its clients to comply with payment obligations, particularly given the current economic and financial situation, which makes the collection of receivables more complex and critical. Snam’s maximum exposure to credit risk at 31 December 2016 is the book value of the financial assets in its statement of financial position.

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 debt structure that is balanced in 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 Snam operates.

At 31 December 2016, Snam had unused committed long-term credit lines worth approximately €3.2 billion. In addition, at the same date Snam had a Euro Medium Term Notes (EMTN) programme for a maximum total value of €10 billion, of which approximately €7.5 billion was used at 31 December 2016. Based on existing bond loans at 31 December 2016, the renewal of the programme allows for the issue, by 30 September 2017, of bonds worth up to €2.5 billion⁴³, to be placed with institutional investors operating in Europe.

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.

Rating risk

With reference to rating risk, Snam’s long term rating is equal to: (i) Baa1, confirmed on 19 December 2016 by Moody’s Investors Services Ltd (“Moody’s”), downgrading the outlook from stable to negative following the same action taken on the rating of the Italian Republic (which was downgraded from Baa2 with a stable outlook to Baa2 with a negative outlook) which took place of 7 December 2016; (ii) BBB with a stable outlook, confirmed on 29 November 2016 by Standard & Poor’s Rating Services (“S&P”); (iii) BBB+ with a stable outlook, confirmed on 29 July 2016 by Fitch Ratings (“Fitch”). Snam’s long-term rating by Moody’s and Standard & Poor’s is a notch higher than that of Italian sovereign debt. Based on the methodology adopted by these rating agencies, the downgrade of one notch from the current rating of the Republic of Italy would lead to a corresponding reduction of Snam’s current rating.

The current credit ratings of the ratings’ agencies include the separation of Italgas from Snam.

In this regard note that, following the announcement to the market of the operation of separating Italgas from Snam, on 29 June 2016 Fitch Ratings confirmed the rating of BBB+ with a stable outlook, Moody’s confirmed the rating of Baa1, with a stable outlook and S&P confirmed the rating of BBB with a stable outlook. The main elements that caused the confirmation of the rating are: (i) the improvement of the credit metrics immediately following the transaction; (iii) Snam’s confirmed focus on the regulated business in Italy, considered as stable and favourable with the minimum exposure of the results to the volatility of volumes of gas transported and (iii) the resilience of the financial metrics in stress tests featuring a reduction of the regulatory return.

Any downgrades in the rating assigned to the Snam Group, could limit the possibility of accessing the capital markets and increase the cost of raising funds and/or refinancing existing debt, with negative effects on Snam Group’s operations, results, balance sheet and cash flow.

Debt covenant and default risk

Default risk is the possibility that when certain circumstances occur, the lender may enact contractual protections that may result in the early repayment of the loan, thus generating a potential liquidity risk.

As at 31 December 2016, Snam has unsecured bilateral and syndicated loan agreements in place with banks and other financial institutions. Some of these agreements include, inter alia, compliance with typical international practice commitments, some of which are subject to specific threshold values, such as, for example: (i) negative pledge commitments pursuant to which Snam and its subsidiaries are subject to limitations concerning the pledging of real property rights or other restrictions on all or part of the respective assets, shares or merchandise; (ii) pari passu and change-of-control clauses; and (iii) limitations on certain extraordinary transactions that the Company and its subsidiaries may carry out; (iv) limits on the debt of subsidiaries.

The bonds issued by Snam at 31 December 2016 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, for example 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 lender has the option to request additional guarantees if Snam’s credit rating is lower than BBB (Standard & Poor’s/Fitch Ratings Limited) or Baa2 (Moody’s) for at least two of the three ratings agencies.

The occurrence of one or more of the aforementioned scenarios could have negative effects on Snam Group’s operations, results, balance sheet and cash flow, creating additional costs and/or liquidity problems. There are no covenants among these commitments that involve compliance with ratios of an economic and/or financial nature.

With specific reference to the covenants in the context of the transaction of separating Italgas Reti from Snam, note that, at the date of this document, the consent issued by the financial institutions and the EIB has become effective and, in relation to the bond loans, issued under the scope of the Euro Medium Term Notes programme, Snam has obtained approval from the bondholders. In addition, the assumption of Snam’s debt relating to two loans provided by the EIB and intended to financial Italgas projects has been finalised.

Future payments for financial liabilities, trade and other payables

The table below shows the repayment plan contractually established in relation to the financial payables, including interest payments:

For information on the payment terms for trade and other payables, please see Note 16 of the consolidated financial statement.

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 the relative effects on results and the balance sheet can be seen below.

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:

1. level 1: prices quoted (and not amended) on active markets for the same financial assets or liabilities;
2. 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;
3. level 3: inputs not based on observable market data.

With regard to the above, the classification of the 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 2016 classified at level 2 and recognised in Note 11 under “Other current and non-current liabilities” (€24 million).