Eni is an international energy company with operations in 70 countries and around 73,000 employees. This month we talk to Marcello Bertolini about the main exposures that Eni has to deal with in global financial markets, as well as Eni’s activity in the carbon markets.

How is your treasury organised?

Financial activity within the Eni Group is managed in a centralised model which is made up of operating centres and shared service centres. The operating centres include the finance department, Eni Coordination Center and Banque Eni, with Eni Coordination Center and Banque Eni based in Brussels. The shared service centres are Sofid and also Banque Eni, since it also performs financial services for decentralised companies within the Group. These centres act as the payment and collection factories for domestic and foreign business respectively.

Eni’s corporate treasury is part of the Corporate Finance Department, which has three operation-related areas: a back office; a banking relationship, warranties and loan office; and finally the treasury. The treasury itself is made up of three desks: position keeping, which deals with data collected and merged through treasury systems and IT; carbon emissions and risk analysis; and treasury dealing, where I work as the chief dealer with three more dealers.

What are your responsibilities?

The treasury dealing desk manages foreign exchange risk and interest rate derivatives for Eni and for all its subsidiaries. We are in charge of borrowing and liquidity management through money market instruments for our Italian-based companies.

To give you an overview of the FX flows we deal with on a yearly basis, Eni is Italy’s largest corporate player with a total of €30 billion in spot deals in 2007 and around €150 billion in derivatives. The centralised treasury obviously does some netting and offsetting before playing in the market.

In addition, we have to take into account the fact that financing operations continue to increase as Eni Group develops. Every year we continue to make new investments, but last year in particular we bought a significant range of assets across the globe from the Gulf of Mexico to Russia.

What are the main exposures that Eni faces in the FX market?

As a modern energy company, the lion’s share of our FX risk comes from US dollars. The greenback (the US dollar) accounts for over 60% of our foreign currency flows. The Norwegian krone and the British pound also rank highly in our list of currency exposures. As a result of Eni’s expansion into Eastern Europe, we also have growing flows in the currencies of new EU members and we have daily flows in Middle Eastern and North African currencies. On average, we deal in at least ten currency pairs every day.

Our costs and revenues are mainly dollar-based and even euro-denominated inflows and outflows are strongly linked to the dollar. Because of this we naturally have to offset the dollar risk and we have to take it into account in order to correctly evaluate our cash flow in terms of inflows and outflows.

How does commodity risk affect your treasury activity?

According to conventional wisdom higher oil prices are expected to bring benefits to an energy company, but it’s not that easy. The impact on the treasury is much more complicated. There’s always a foreign exchange component to bear in mind because fluctuations in exchange rates and prices can often upset potential cash generation, so that must be taken into account in our treasury management strategies.

We have recently established an energy trading desk within the Eni Group, dedicated to taking care of this commodity risk. This desk is responsible for energy derivatives. We work together with this desk to price foreign exchange deals so that we can provide them with an all-in-one package that offsets both the commodity and the currency risk. Another aspect to take into account in terms of cash generation is the effect that margin calls on energy futures have on cash generation. Commodity risk is part of our daily strategic risk, and commodity price movements are quite relevant in determining why we generate or lose cash, so we take it into close account every day.

How do you manage your liquidity?

Liquidity management is part of our daily treasury activity and we take into account two main drivers: market conditions and cash flow forecasts. First of all we analyse market opportunities by looking at the shape of the money market yield curve, at how steep it is and at central banks’ manoeuvres in order to find the most suitable financing opportunities.

At the same time we also have to take into account our cash flow trends through forecasting. Cash flow forecasts are issued by our subsidiaries on a daily basis and by our planning department on a monthly basis. In addition, the energy business has some kind of seasonality, so we are helped by the fact that we have a rough idea of what our cash flows might be, even on a longer term basis.

Once we have arrived at a daily surplus or deficit we then choose how to deal with the market, taking into account our credit facilities, our expected and present cash flows, and of course our market view, as well as our risk policy which is linked to an internal benchmark. Regarding financing, we also have the opportunity to deal with our international financial company, Eni Coordination Center.

How does technological change support treasury activity?

We are very careful when it comes to transaction safety and technological impact on operations. This is why we trade all our foreign exchange deals through Reuters Dealing. Reuters Dealing is a very popular instrument in the banking sector, but it is less common among non-financial companies, although Eni has used this platform for over ten years.

We have chosen to stick with this instrument because we have got a significant number of deals to manage, and we find it the fastest and the safest way to track conversations. It’s like a dedicated chatroom which gives you direct access to banks’ trading rooms and which keeps a record of all the conversations, prices, details and so on, so it’s very easy to track.

In order to speed up data processing and deal confirmation we are implementing a new front-to-back system which is hopefully going to allow most places in the financial department – including the risk management department and the trade department – to work on the same platform. All the cash flows will be recorded in the administration department and everybody will be able to find out what stage each operation has reached at any point in time. Another goal is to produce and customise real-time reporting for the management, so of course the main goal of this particular technological change is to provide details in terms of tracking our cash flows, but it should also give us the opportunity to produce tailor-made records in real-time.

The introduction of this front-to-back system started over a year ago with the proof-of-contest testing and a quite detailed selection process that we had to go through. We came up with a list of potential providers and we invited them to show how their systems managed a set of real cases, ranging from pricing derivatives to customising reports and to deal processing. The system has now been implemented, but customisation is still taking place so we probably won’t be able to have access to all the modules of this new system until the end of spring or summer this year.

What is Eni’s sustainability policy?

Eni is highly committed to sustainability and, being a global company, we are implementing several projects in developing countries where we currently operate. All these projects are aimed at improving local populations’ living standards. In our view sustainability has a very wide sphere of influence, such as governance, environmental protection, customer satisfaction, human resources and local development, because it is a process which affects everyday business through a code of practice. Eni adopted its own code of practice as early as 1994 and this code has set milestones for principles of fairness, efficiency and transparency.

Eni is carrying on many efforts to improve its sustainable performance and in 2007 Eni’s first sustainability report was published in order to improve our disclosure on sustainability issues. Thanks to these efforts Eni has recently been enclosed in sustainability indexes; for example, the Dow Jones Sustainability Index and the FTSE4Good index. Consequently even the treasury has daily involvement in this particular aspect of the corporate policy.

Our company is one of the main players in Europe in greenhouse gas reduction schemes. In terms of the number of plants involved, we are the leading company in Italy with around 60 of our plants participating in schemes. The National Assignment Plan has granted Eni 10% of the total number of allowances allocated across Italy, which roughly equates to 25m tonnes of CO2 in 2008. This is the second largest allocation in the country.

How is treasury directly involved in the sustainability policy?

Actual implementation of sustainability agreements (such as the Kyoto Protocol) within Eni and its emissions trading organisation allows Eni’s treasury to become involved in the process. At the corporate level we’ve got the Health, Safety and Environment department, which defines a balanced sustainability plan for each plant and co-ordinates report activity. The treasury implements the final plan, either through transactions within Eni Group or through the trading of excess or deficit allowances in the market, after having offset intra-group positions.

In practice it is the carbon emissions and risk analysis desk within the treasury that is responsible for administering the group portfolio and supporting a compliant process. This means, for example, managing the national register activity and physically delivering the quota, and all the similar forms of compliance that are involved. The carbon emissions and risk analysis team mandate the treasury dealers to trade a certain number of allowances in the market over a given time period, so on the treasury dealing desk we try to find the best timing and the best prices within the corporate market.

In order to optimise results, prices are compared with an internal weekly benchmark because we can now extend traditional dealing practices – the ones that are used and that have been used for a long time in foreign exchange and derivatives – to a market which is still in its infancy, but which promises to grow quite rapidly. This is probably the most effective way we have come up with of dealing with sustainability in the treasury: having a dedicated carbon emissions and risk analysis desk which takes care of analysing the market and complying with branches and subsidiaries, but which also works alongside the trading and is involved in negotiations.

How do you think emissions trading will affect the relationship between treasury and the business as a whole?

I think that the use of financial instruments – like swaps or futures – in carbon trading necessarily opens up new opportunities for treasurers because the treasury has the expertise to hedge positions, to take into account both risk and potential advantages from these instruments.

However, the benefit can be mutual because treasury professionals can become more and more involved in understanding the business as a whole. I think that the idea of the treasurer who lives in his ivory tower is very old-fashioned and doesn’t reflect the way business is really carried out, and of course this joint venture between treasurers and the underlying business does give us one more opportunity to get rid of this stereotype.

We have to understand how certain projects can be used in the emissions market. For example, Eni has got a gas flare reduction activity, which we’re carrying out in certain African countries in which we are operating and we also have an activity underway involving carbon storage and sequestration.

When you are involved and committed to a project in a developing country this project can count towards credits that you can then use in the emissions market, so this is an alternative way to gain emissions credits. These credits can be cashed-in in the emissions market and their values can be put towards the purchase of financial instruments. This is another way to bring the treasury closer to the overall business and I expect it to become a more important issue over the course of the next year, because it can help to connect the treasury with project finance-related activities.