Report on the Second Quarter of 2007

Transcription

1 Report on the Second Quarter of 2007

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3 Report on the Second Quarter of 2007 Contents Key figures Basis of presentation Income statement Reclassified balance sheet Reclassified cash flow statement Operating review Other information Outlook The quarterly report is not audited

4 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / KEY FIGURES Key figures Key financial figures ( million) Change Change% vs vs Core business revenue , Operating costs (27) (13.2) Amortisation, depreciation and impaiment losses Ebit (1) (0.2) Net financial expense Profit (18) (7.5) Investments ,588 9,794 Property, plant and equipment and intangible assets 9,588 9, ,815 9,023 Net invested capital 8,815 9, ,788 3,289 Equity 3,788 3,289 (499) (13.2) 5,027 5,734 Net financial debt 5,027 5, Key operating figures Change Change% vs vs Natural gas injected into the National Gas Pipeline Network (4.63) (10.0) (billions of cubic metres) on behalf of Eni (3.32) (11.1) on behalf of other operators (1.31) (7.9) Regasification of liquefied natural gas (LNG) (billions of cubic metres) (0.51) (28.2) on behalf of Eni (0.20) (23.5) on behalf of other operators (0.31) (32.3) 30,757 30,905 Gas Pipeline Network (kilometres in use) 30,757 30, ,396 8,481 National network 8,396 8, ,361 22,424 Regional network 22,361 22,

5 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / BASIS OF PRESENTATION Performance of the Snam Rete Gas share (*) Period: 6 December July Snam Rete Gas S&P/MIB Eurostoxx (*) The share price was adjusted retroactively following distribution of an extraordinary dividend in November 2005, as required by the stock exchange regulations. Basis of presentation The report on the second quarter of 2007 has been prepared using the measurement criteria established by the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and endorsed by the European Commission under the procedure as per article 6 of the EU Regulation no. 1606/2002 of the European Parliament and European Council of 19 July The income statement figures are provided for the first halves and second quarters of 2007 and The balance sheet figures are provided as at 30 June 2007, 31 March 2007 and 31 December The format of the interim financial statements reflects that of the schedules presented in the directors' reports on the half year and annual reports. The content of the quarterly report is in line with that required by annex 3D of the Issuer Regulation (Consob - the Italian Commission for Listed Companies and the Stock Exchange - regulation no of 14 May 1999 and subsequent amendments and integrations). Therefore, the guidelines set out in IAS 34 Interim Financial Reporting have not been adopted. The consolidated second quarter report includes the interim financial statements of Snam Rete Gas S.p.A. and its wholly-owned subsidiary GNL Italia S.p.A.. The consolidation scope has not changed compared to either the first half of 2006 or 31 December

6 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / BASIS OF PRESENTATION Given their materiality, the amounts in the interim consolidated financial statements are expressed in millions of Euros. Disclaimer This report includes forward-looking statements, especially in the section on the group s outlook. Such statements by their very nature are subject to risk and uncertainty as they depend on the fact that certain events and developments will take place. The actual results may differ from those communicated due to different reasons, such as foreseeable trends in demand, offer and natural gas prices, the effect of new energy and environment legislation, the successful development and implementation of new technologies, changes in the stakeholders' expectations and other changes in business conditions. 4

7 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / INCOME STATEMENT Income statement INCOME STATEMENT ( million) Change Change % Core business revenue Other revenue and income 20 1 (19) (95.0) including: non-recurring 19 (19) (100.0) Total revenue (17) (1.9) (96) (81) Operating costs (205) (178) 27 (13.2) (1) 2 including: non-recurring (13) Ebitda (112) (119) Amortisation, depreciation and impairment losses (227) (238) (11) Ebit (1) (0.2) (40) (51) Net financial expense (80) (100) (20) Profit before tax (21) (5.4) (70) (72) Income taxes (152) (149) 3 (2.0) (1) including: non-recurring (3) (1) 2 (66.7) Profit (*) (18) (7.5) (*) The profit for the period is wholly attributable to Snam Rete Gas. 5

8 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / INCOME STATEMENT The Ebit 1 recorded for the first half of 2007 amounts to 471 million, down 1 million on the same period of Excluding the effect of non-recurring transactions recognised in the first half of and , the ebit increases by 3 million, mainly due to: (i) the increase in transportation revenue ( 5 million, net of the items netted against costs), positively affected by investment incentives (+ 40 million) and negatively impacted by smaller gas volumes transported (- 30 million), and the updating of transportation tariffs (- 5 million); (ii) the decrease in operating costs ( 7 million, net of the items netted against revenue) due to the decrease in recurring variable costs ( 6 million), principally attributable to the purchase of fuel gas used by the compression stations and partly offset by the decrease in controllable fixed costs ( 1 million); and (iii) smaller accruals to the provisions for risks and charges ( 2 million). These positive factors were partly offset by the higher depreciation and amortisation charges following the roll out of new transportation infrastructures during the period ( 11 million). The profit ( 222 million) decreased by 18 million (7.5%) compared to the same period of 2006 due to a decrease in the ebit ( 1 million) and greater net financial expense ( 20 million). The 3 million decrease in income taxes is mainly due to the smaller profit before tax. Excluding the effect of the non-recurring transactions, the profit decreases by 16 million due to the greater net financial expense (- 20 million), the higher ebit (+ 3 million) and smaller income taxes (+ 1 million). Non-recurring significant events and transactions The 2007 Finance Act and related implementing decrees introduced changes to the legislation governing the Italian TFR, ie the benefits to which employees of Italian companies are entitled upon termination of employment for any reason whatsoever, with effect from 1 January Employees may now choose how these benefits are managed. Specifically, accruals made for the benefits after 1 January 2007 may be paid to pension funds or kept with the company (in which case, the company will pay the related contributions to a treasury account held by INPS). The change in law led to the transformation of the nature of the Italian post-employment benefits and they are no longer considered as a defined benefit plan but a defined contribution plan. Under IAS 19, this required the redetermination of the provision at 31 December 2006 to exclude the effects related to the estimate of salary increases from the calculation. This curtailment was taken to the income statement as nonrecurring income ( 2 million). The effects on ebit and profit for the period (after tax) for the first six months of 2007 are + 2 million and + 1 million, respectively. The ebit recorded for the second quarter of 2007 amounts to 227 million, up 4 million or 1.8% on the same period of This increase is mainly due to: (i) the decrease in operating costs ( 9 million, net of the items netted against revenue), due to the smaller variable costs related to the purchase of fuel gas used by the compression stations and smaller fixed personnel expense due to non-recurring transactions ( 3 million); and (ii) smaller accruals to the provisions for risks and charges ( 2 million). These positive factors were partly offset by: (i) smaller transportation revenue ( 3 million, net of the items netted against costs), negatively affected by the smaller gas volumes transported (- 21 million) and positively affected by investment incentives (+ 20 million); and (ii) higher depreciation and amortisation charges ( 7 million) following the roll out of new transportation infrastructures during the period. The profit ( 104 million) decreased by 9 million (8%) compared to the same period of 2006 due to the greater net financial expense ( 11 million) and higher income taxes ( 2 million), partly offset by the increase in the ebit ( 4 million). Revenue ( million) Change Change % Trasportation Regasification (1) (7.7) Revenue from regular activities Revenue from non-regulated activities Total core business revenue Other revenue and income 20 1 (19) (95.0) (17) (1.9) (1) The ebit is analysed by considering only those elements that have led to a change therein as application of the gas sector tariff regulations generate costs and revenue which are netted. (2) Non-recurring transactions related to the recognition of income following the favourable outcome of a dispute with third parties (+ 19 million) and payment of termination benefits to employees (+ 6 million) which increased the ebit by 6 million. (3) Information about the non-recurring transactions of the first half of 2007 is given in the following paragraph on Non-recurring significant events and transactions. 6

9 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / INCOME STATEMENT Core business revenue ( 886 million) increased by 2 million. This increase was due to the greater revenue from the natural gas transportation business ( 3 million) following the incentives received for investments made in 2005 (+ 40 million), decreased by the smaller volumes of gas transported (- 30 million), mainly due to the mild weather conditions and updated transportation tariffs (- 5 million). The higher natural gas transportation revenue was partly offset by the smaller regasification revenue ( 1 million). Transportation revenue by shipper is analysed in the following table ( million) Change Change % Eni (2) (0.3) Enel Trade Edison (13) (14.6) Plurigas Other (32) 3 Revenue adjustments due to higher/lower booking of capacity and fines (*) (47) (13) 34 (72.3) 6 (15) Integration of transportation revenue for previous thermal years (*) 11 (30) (41) (*) Resolution no. 120/01 and subsequent amendments of the Electricity and Gas Authority establishes that part of the turnover excess/deficit compared to the ceiling should be returned to the shippers in the second thermal year following that in which the ceiling is exceeded by adjusting the tariffs. Regasification revenue of 12 million is generated by the Panigaglia (SP) LNG terminal which regasifies liquefied natural gas. The section on Operating review provides information about volumes of natural gas transported and regasified. ( 3 million), principally attributable to smaller volumes of gas transported (- 21 million, mainly due to mild weather conditions, partly offset by the incentives received for investments made in 2005 (+ 20 million). Revenue from non-regulated activities ( 5 million) mainly relates to the rent and maintenance of optical fibre telecommunications cables. Other revenue and income Other revenue and income amount to 1 million and relate to the recognition of income from compensation and contractual fines. The 19 million decrease on the same period of 2006 is due to the recognition of non-recurring income following the positive outcome of a dispute with third parties in that period. Core business revenue ( 426 million) decreased by 4 million. This decrease was mainly due to the smaller revenue from the natural gas transportation business Regasification revenue ( 6 million) relates to fees for the liquefied natural gas regasification service provided at the LNG plant in Panigaglia (SP). The section on Operating review provides information about volumes of natural gas transported and regasified. Revenue from non-regulated activities ( 2 million) mainly relates to the rent and maintenance of optical fibre telecommunications cables. Other revenue and income Other revenue and income of 1 million relate to the recognition of income from compensation and contractual fines. Operating costs The operating costs of 178 million may be broken down as follows: ( million) Change Change % Variable costs (7) (10.0) Fixed costs (18) (13.8) 3 1 Accruals to provisions for risks and charges 5 3 (2) (40.0) (27) (13.2) 7

10 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / INCOME STATEMENT Variable costs ( million) Change Change % Fuel gas (7) (14.9) 4 5 Network losses Electricity 3 2 (1) (33.3) 1 1 Gas excise duty Recurring variable costs (6) (10.2) 5 4 Charges made by third parties (1) (9.1) 5 4 Variable costs netted against revenue (1) (9.1) (7) (10.0) The decrease in recurring variable costs ( 6 million) is mainly due to the smaller cost of fuel gas used by the compression stations ( 7 million) following the smaller quantities of gas used, partly offset by the higher unit cost. Variable costs netted against revenue of 10 million relate to costs for the recharging of the transportation service on their networks by third party operators. With the start of the thermal year, on 1 October 2006, four operators interconnected to the transportation network (the same number as in the thermal year). The 9 million decrease in recurring variable costs is due to to the smaller cost of fuel gas used by the compression stations. Variable costs netted against revenue of 4 million relate to costs for the recharging of the transportation service on their networks by third party operators. Fixed costs ( million) Change Change % Personnel expense (16) (22.2) External costs (2) (3.4) (18) (13.8) Personnel expense ( million) Change Change % Gross personnel expense Personnel-related services (9) (10) Capitalisations (14) (16) (2) Total recurring personnel expense (1) (1.7) 1 Termination benefits 13 (13) (100.0) (2) Other (2) (2) 1 (2) Other personnel expense 13 (2) (15) Total personnel expense for regulated activities (16) (22.2) (16) (22.2) Personnel expense ( 56 million) made up 50% of the total fixed costs. The 16 million decrease on the first half of 2006 is mainly due to the recognition of nonrecurring items in that period (termination benefits of 13 million) and in the first half of 2007 (income related to the changes in the treatment of post-employment benefits introduced by the 2007 Finance Act - 2 million). Greater information on this is given in the paragraph on Non-recurring significant events and transactions. Recurring personnel expense ( 58 million) comprises personnel-related services of 6 million (canteen, travel expense reimbursement, etc.) and is shown net of capitalisations of 16 million, being the part of the personnel expense absorbed by investments. 8

11 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / INCOME STATEMENT Recurring personnel expense ( 27 million) decreased by 2 million mainly due to the reduction in gross personnel expense ( 1 million) and greater capitalisations ( 1 million). The number of employees at 30 June 2007 is analysed in the following table. Workforce 30 June December June 2007 Managers Junior managers Employees 1,291 1,269 1,252 Workers ,443 2,403 2,354 External costs ( million) Change Change % 8 9 Materials, maintenance, upgrades IT services Telecommunications Professional services Lease and rental Insurance Other costs Recurring operating costs Modulation and storage services Costs netted against revenue (2) (15.4) Total external costs of regulated activities (2) (3.5) 1 1 Materials, maintenance, upgrades 1 1 Other costs 1 1 Total external costs of non-regulated activities (2) (3.4) External costs ( 56 million) show an 2 million decrease due to the smaller costs netted against revenue following the revision of modulation service tariffs. Recurring operating costs ( 44 million) are unchanged with respect to the first half of The higher gas pipeline maintenance costs incurred in the first six months of 2007 ( 1 million) were offset by the decrease in IT costs, obtained thanks to the rationalisation of the Application Management Systems. In the second quarter of 2007, recurring operating costs of 24 million increased by 2 million due to the higher gas pipeline maintenance costs and other external services. Accruals to the provisions for risks and charges Accruals to the provisions for risks and charges ( 3 million) were made to cover possible charges arising from disputes. Amortisation, depreciation and impairment losses ( million) Change Change % Depreciation Amortisation (2) (14.3)

12 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / INCOME STATEMENT The 13 million increase in depreciation charges is principally due to the roll out of new transportation infrastructures. The 8 million increase in depreciation charges is due to the same factors described above for the half year. Net financial expense Net financial expense incurred in the first half of 2007 ( 100 million) increased by 20 million on the same period of 2006 due to the higher interest expense related to the increase in the average borrowing and the greater cost of such borrowing, partly offset by the positive contribution of cash flow hedges ( 19 million). Financial expense of 7 million was capitalised in the period compared to 6 million in the first half of The average borrowing cost was approximately 4.0% (3.62% in the same period of 2006). Income taxes ( million) Change Change % Current taxes Ires (9) (5.6) Irap (7) (3.7) (21) (13) Deferred tax income (35) (31) 4 (11.4) (3) (2.0) Income taxes ( 149 million) decreased by 3 million compared to the same period of 2006, mainly due to the smaller profit before taxes. Net deferred tax income of 31 million mainly arises from: (i) greater revenue compared to the ceiling established by the Electricity and Gas Authority and the use of deferred tax liabilities related to recognition of the smaller turnover for the thermal year in the tariffs; (ii) the fines charged to shippers that exceeded the allocated capacity and (iii) smaller fiscal depreciation, compared to ordinary depreciation, of assets used in the regulated activities. The 4 million decrease in deferred tax income is mainly due to smaller accruals to the provisions for risks and charges. The tax rate is 40.2% compared to 38.8% in the same period of The 1.4% increase is mainly due to smaller deductible costs (principally for cars) and settlement of taxes related to the previous year. 10

13 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / RECLASSIFIED BALANCE SHEET Reclassified balance sheet RECLASSIFIED BALANCE SHEET (*) ( million) Change 9,680 Property, plant and equipment 9,715 9, Intangible assets (112) Net payables for investments (236) (148) 88 9,615 Non-current assets 9,527 9, (629) Net working capital (539) (594) (55) (35) Provisions for employee benefits (34) (29) 5 8,951 NET INVESTED CAPITAL 8,954 9, ,583 Equity 3,699 3,289 (410) 5,368 Net financial debt 5,255 5, ,951 COVERAGE 8,954 9, (*) The reclassified balance sheet figures can easily be reconciled with the mandatory balance sheet using the same criteria adopted in the 2006 Annual Report. Net invested capital ( 9,023 million) increased by 69 million compared to 31 December 2006, mainly due to the increase in non-current assets (+ 119 million) and decrease in net working capital (- 55 million). The 5 million decrease in the provision for employee benefits mainly relates to the changes in the treatment of postemployment benefits introduced by the 2007 Finance Act. Greater information on this is given in the paragraph on Non-recurring significant events and transactions. 11

14 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / RECLASSIFIED BALANCE SHEET Non-current assets Changes in property, plant and equipment and intangible assets (+ 31 million) are analysed below: Property, plant Intangible ( million) and equipment assets Balance at 31 December , ,763 Investments Amortisation, depreciation and impairment losses (226) (12) (238) Other changes (21) (21) Closing balance at 30 June , ,794 Other changes ( 21 million) mainly relate to the grants received from state and private bodies. The total amount, recognised as a decrease in the cost of property, plant and equipment, is 82 million and 143 million respectively. Net payables for investments ( 148 million) decreased by 88 million mainly due to payment of amounts due for purchases of pipes, in the last few months of Net working capital ( million) Change 386 Trade receivables (63) 51 Fair value of derivative financial instruments Inventories Other assets (13) (687) Net deferred tax liabilities (703) (690) 13 (105) Trade payables (141) (139) 2 (89) Accrued and deferred income (59) (100) (41) (71) Provisions for risks and charges (69) (73) (4) (116) Tax liabilities (*) (22) (41) (19) (32) Deferred income for rent of telecommunications cables (32) (31) 1 (79) Other liabilities (*) (65) (57) 8 (629) (539) (594) (55) (*) The IRES payable due to the parent Eni S.p.A. has been reclassified from "Other liabilities" to "Tax liabilites" at 31 december 2006 and 31 march 2007 ( 16 million and 97 million, respectively) given that the company has joined Eni's national tax consolidation scheme. The change in net working capital of 55 million compared to 31 December 2006 is mainly due to: (i) smaller trade payables (- 63 million) related to the smaller receivables for transportation services due to the smaller volumes of gas transported, and collection of the last instalment of a receivable due from third parties following the positive outcome of the related dispute; (ii) greater accrued and deferred income (- 41 million) due to adjustment of revenue to the revenue ceiling established by the Electricity and Gas Authority; and (iii) greater tax payables (- 19 million). These negative factors were partly offset by: (i) the gain in fair value of derivative financial instruments (+ 56 million); and (ii) the decrease in deferred tax liabilities (+ 13 million). Inventories ( 80 million) mainly consist of pipes and frequently changed spare parts for the gas pipelines and LNG terminal ( 42 million) and natural gas in stock ( 38 million). The 5 million increase over 31 December 2006 is principally due to changes in pipes and spare parts in stock ( 4 million). Net for deferred tax liabilities ( 690 million) mainly relates to fiscally-driven accelerated depreciation charged in previous years, net of deferred tax assets recognised on adjustments and accruals, the tax deductibility of which is deferred to when the cost will effectively be incurred, and to the greater revenue achieved compared to the ceiling fixed by the Electricity and Gas Authority. The accrued and deferred income ( 100 million) mainly relates to the greater revenue compared to the established ceiling and fines charged to shippers that exceeded their capacity allowances. The Electricity and Gas Authority's resolution no. 120/01 and subsequent amendments provide that the excess turnover and fines are returned to the ship- 12

15 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / RECLASSIFIED BALANCE SHEET pers in the second thermal year following that in which the excess turnover was achieved by decreasing the tariffs. The provisions for risks and charges ( 73 million) mainly comprise: (i) legal disputes ( 43 million); (ii) the provision for site dismantlement and restoration for the forecast plant dismantlement charges in line with present legal and constructive obligations ( 20 million); and (iii) charges expected to be incurred for the employee termination benefits ( 8 million). Other liabilities ( 57 million) mainly relate to the VAT payable for the period due to the parent ( 18 million) as the company is part of the Eni group's consolidated VAT scheme, amounts due to personnel ( 17 million) and the payable to the Cassa Conguaglio per il Settore Elettrico (Electricity Equalisation Fund) 4 ( 16 million). Provisions for employment benefits These provisions of 29 million related to: (i) post-employment benefits ( 23 million); (ii) the supplementary health care fund for Eni group managers (FISDE), which comprises the estimate of the cost for the company related to the contributions to be paid to this fund for managers and retired managers ( 1 million); (iii) other provisions for employee benefits ( 5 million), especially the provision for seniority bonuses that includes an estimate of the benefits to be paid (in kind) to employees upon 25 years of service and an estimate of the deferred monetary incentives assigned to managers. The 5 million decrease is mainly due to the change in the treatment of post-employment benefits introduced by the 2007 Finance Act. Greater information on this is given in the paragraph on significant Non-recurring events and transactions. Equity ( million) Change 1,956 Share capital 1,956 1, Legal reserve Reserve for repurchase of treasury shares 345 (345) 106 Share premium reserve Other reserves Retained earnings Profit (226).less (700) Treasury shares (458) (794) (336) 3,583 3,699 3,289 (410) Equity ( 3,289 million) decreased by 410 million over 31 December 2006 due to: (i) distribution of the ordinary dividend (- 334 million); (ii) repurchase of treasury shares during the six months (- 336 million); (iii) recognition of the profit for the period (+ 222 million); (iv) gains in the fair value of derivative financial instruments (+ 37 million, net of deferred tax liabilities); and (iv) other changes of less than 1 million related to the management incentivation plans involving Snam Rete Gas shares. Reserve for the repurchase of treasury shares The nil balance of this reserve is due to completion of the buy back plan, approved by the shareholders in their meeting of 10 November 2005, on 2 May 2007 ( 336 million spent in the six months). The unused amount of the reserve was reclassified to the share premium reserve ( 9 million). Other reserves This caption ( 890 million) principally comprises: (i) the reserve set up to cover the cost of the 195,468,950 treasury shares in portfolio ( 794 million); and (ii) the hedging reserve (+ 95 million). Treasury shares At 30 June 2007, Snam Rete Gas held 195,468,950 treasury shares (equal to approximately 10% of share capital) for a total amount of 794 million, equal to an average purchase price of 4.06 per share including: - 731,000 shares for 3 million (net of 69,000 shares assigned during the period following exercise of the options, following the concensual decision to terminate employment, by managers benefiting from the 2005 stock option plan), were repurchased as resolved by the (4) Resolution no. 297/05, published by the Electricity and Gas Authority on 29 December 2005, set up a "fund for the promotion of the interruptibility of the gas system" with the Cassa Conguaglio per il Settore Elettrico. The measure was introduced to assist the reduction in gas consumption and promote the use of the interruptibility clause for gas supplies system for industrial customers. The fund was increased by the 3.7% rise in transportation tariffs. Amounts collected by the company are transferred in full to the fund. 13

16 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / RECLASSIFIED BALANCE SHEET shareholders on 27 April 2005 to cover the 2005 management incentivation plan; - the other 194,737,950 shares ( 791 million) were repurchased as resolved by the shareholders in their meeting of 10 November The shareholders authorised the board of directors on 27 April 2006 to earmark a maximum of nine million treasury shares for the management incentivation and loyalty plans for the three years from 2006 to At 30 June 2007, the market value of treasury shares was approximately 852 million. Net financial debt ( million) Change 5,369 Financial liabilities 5,256 5, ,194 Short-term financial liabilities 870 1, Current portion of long-term financial liabilities (164) 3,307 Long-term financial liabilities 3,857 4, (1) Cash and cash equivalents (1) (1) 5,368 5,255 5, Net financial debt amounted to 5,734 million, an increase of 479 million on 31 December 2006 mainly due to the greater long-term debt ( 245 million) and increase in short-term debt ( 234 million, including the current portion of long-term debt). The 245 million increase in long-term financial liabilities is mainly due to the balance of new loans received during the period (+ 1,000 million) and repayments (- 400 million) as well as to the reclassification of the current portion of long-term liabilities (+ 355 million). At 30 June 2007, Snam Rete Gas had six interest rate swaps, whereby the floating rate loans are converted into fixed rate loans (five contracts with a nominal amount of 2,350 million) and a loan with interest rates linked to inflation (one contract with a nominal amount of 500 million). Long-term financial liabilities of 4,102 million made up 72% of net financial debt. The average term of the long-term financing, including the current portion, is roughly four and a half years (like at 31 December 2006). A breakdown of the liabilities by type of interest rate at 30 June 2007 is as follows: ( million) % % Floating rate 2, , Inflation-linked rate Fixed rate 2, , , , Nearly all the financial liabilities are due to Eni S.p.A. 5 and they are entirely in Euros. The increase in fixed rate financial payables ( 497 million) is mainly due to the obtaining of a new variable rate 500 million loan from the parent Eni S.p.A., converted into a fixed rate loan via an interest rate swap, and two fixed rate loans ( 300 million and 200 million, respectively), partly absorbed by repayments during the six months. The leverage ratio, ie, the ratio of net financial debt to net invested capital, is 63.5% (31 December 2006: 58.7%). (5) Enifin S.p.A., former financial company of Eni Group, was merged into Eni S.p.A. with effect from 1 January

17 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / RECLASSIFIED CASH FLOW STATEMENT Reclassified cash flow statement The reclassified cash flow statement set out below summarises the legally-required format. This reclassified cash flow statement shows the opening and closing cash and cash equivalents and the change in net financial debt during the period. The two statements are reconciled through the free cash flow, ie the cash surplus or deficit left over after servicing capital expenditure. The free cash flow closes either: (i) with the change in cash and cash equivalents for the period, after adding/deducting all cash flows related to financial liabilities/assets (taking out/repayment of loans) and equity (payment of dividend/capital injections); or (ii) with the change in net financial debt for the period, after adding/deducting the debt flows related to equity (payment of dividend/capital injections), to the changes in the opening and closing balances related to changes in exchange rates. 15

18 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / RECLASSIFIED CASH FLOW STATEMENT RECLASSIFIED CASH FLOW STATEMENT ( million) Profit Adjusted by: Amortisation, depreciation and other non-monetary components Interest and income taxes Cash flow from oprating activities before changes in working capital Change in working capital due to operating activities (47) Interest and income taxes paid (246) (257) 334 Net cash flows from operating activities (82) Investments in property, plant and equipment and intangible assets (204) (269) Disinvestments 3 (124) Net payables related to investing activities (64) (88) 128 Free cash flow Change in financial payables (241) Cash flows of equity (483) (670) 0 Net cash flows for the period Free cash flow (241) Cash flows of equity (483) (670) (113) Change in the net financial debt (208) (479) The net cash flows from operating activities ( 548 million) covered part of the payments for the repurchase of treasury shares during the six months ( 336 million), payment of the ordinary 2006 dividend ( 334 million) and net investments ( 357 million), with the remainder covered by debt ( 479 million). 16

19 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / OPERATING REVIEW Operating review Transportation and regasification of natural gas Quantities of natural gas injected into the national gas network Volumes injected (billions of m 3 ) Change Change % National production (0.80) (13.9) Imports (3.83) (9.4) Mazara del Vallo (Algeria) (1.12) (8.5) Tarvisio (Russia) (0.87) (6.8) Gries Pass (North Europa) (2.23) (24.1) Gela (Libya) Gorizia (Russia) (0.02) (15.4) Panigaglia (LNG imports) (0.51) (28.2) (4.63) (10.0) 17

20 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / OPERATING REVIEW Volumes of gas injected into the national gas network in the first half of 2007 amounted to billion cubic metres, a decrease of 4.63 billion cubic metres or 10.0% on the same period of The decrease was mainly due to smaller consumption by the residential sector following milder weather conditions, partly offset by the increase in demand by the thermoelectric sector. Smaller volumes of gas injected into the storages. With respect to supply sources, national production decreased (0.80 billion cubic metres) and there were smaller imports from North Europe, Algeria and Russia (2.23 billion cubic metres, 1.12 billion cubic metres and 0.89 billion cubic metres, respectively). Volumes of gas injected into the national gas network in the second quarter of 2007 amounted to billion cubic metres, a decrease of 3.28 billion cubic metres or 15.2% on the same period of The decrease was mainly due to the smaller volumes of gas injected into the storages. Volumes injected by shipper Volumes injected by shipper (billions of m 3 ) Change Change % Eni (3.3) (11.1) Enel Trade (0.8) Edison (1.0) (22.2) Plurigas (0.2) (9.7) Other (0.1) (1.2) (4.6) (10.0) Quantities of regasified gas Regasified volumes (billions of m 3 ) Change % Eni (23.5) Enel Trade (21.7) Gas natural 0.02 (100.0) 0.01 Other 0.11 (100.0) (28.2) The Panigaglia (SP) LNG terminal regasified 1.30 billion cubic metres of natural gas in the first six months of 2007 compared to 1.81 billion cubic metres in the same period of Different sized tankers unloaded 43 loads compared to 56 in the first half of The Panigaglia (SP) LNG terminal regasified 0.61 billion cubic metres of natural gas in the second three months of 2007 compared to 0.87 billion cubic metres in the same period of Different sized tankers unloaded 20 loads compared to 25 in the second quarter of Investments Investments ( million) Change Change % Development Investments with 3% incentive Investments with 2% incentive Maintenance and other Investments with 1% incentive Investments with no incentives

21 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / OPERATING REVIEW Investments of 290 million were made during the period, up 66 million on the same period of Development investments The key projects, which have a 3% incentive compared to the basic remuneration, related to: - as part of the project to upgrade the infrastructures for imports from North Africa, the purchase of materials for the Mazara-Menfi and Montalbano-Messina pipelines in Sicily and the Martirano-Rende pipeline in Calabria. Total capital expenditure for the six months were 68 million. - construction of the Poggio Renatico plant in Ferrara for a cost of 19 million for the period. The project entails the installation of a 25 MW turbocompressor and two 12 MW turbocompressors to be rolled out before the end of as part of the project to upgrade the infrastructures for importing gas from Russia, completion of the 56 inch pipe (42 km) section of the Camisano-Zimella pipeline, rolled out in the last quarter of Costs incurred in the six months totalled 9 million. Investments with a 2% incentive relate to many projects, the most significant of which are for the upgrading of the Albino-Cazzano Sant'Andrea pipeline in Lombardy. The costs incurred during the six months ( 7 million) relate to the final consignment of all the materials and continuation of the construction work. Maintenance and other investments relate to many projects aimed at upgrading pipeline sectors and maintaining adequate safety and quality levels at plants. They include projects for the development of IT systems and purchase of operating assets. The project for the technological modernisation of the Tarsia plant (Calabria) and Gallese plant (Lazio), for an outlay of 5 million is of key importance. 19

22 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / OTHER INFORMATION Other information Judiciary investigations The Public Prosecutor at the Milan Court has commenced a penal case about the issue of gas measuring and the legitimacy and reliability of the Venturi meter measuring systems. This has involved several companies active in the gas sector. Snam Rete Gas and certain of its managers have been cited and the Mazara del Vallo measuring system has been placed under precautionary seizure. The following should be noted: The reliability of the Venturi meter measuring system, especially the system at Mazara del Vallo at the entry point from the Algerian network, which was designed and set up using the Venturi meter system at the beginning of the eighties and subsequently extended in 1994, has been confirmed by some of the most recognised Italian and international metrology institutions; The Mazara del Vallo measuring unit was authorised to operate by the Finance Ministry upon its start-up and during its upgrading stage; Venturi meter measuring units are currently used throughout the world, including the UK, Germany, France, Austria and Norway in Europe; The approval of this type of measuring instrument commenced in Italy over more than ten years ago with the positive outcome of the technical procedure in December The need to finalise this process has been communicated by Snam Rete Gas to the Ministry for Industry, now the Ministry for Economic Development. The company is collaborating with the relevant authorities 20

23 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / OTHER INFORMATION and is confident about the reliability of the measuring system used at the Mazara del Vallo plant. It has full trust in the judiciary and is confident that the outcome of its investigations will confirm its proper operations. Other litigation Eni S.p.A. has involved Snam Rete Gas S.p.A. in civil hearings against end customers for the recovery of amounts for the improper withdrawal of gas by them, asserting that Snam Rete Gas did not behave in compliance with the Network Code. Snam Rete Gas believes that it has always acted correctly and in full compliance with the terms of the transportation contract, the Network Code, related application procedures and, generally, the legal and technical conduct rules. It has consulted an independent legal advisor who confirms the non-probability that the claim will be accepted. The company states that any action taken against it would be ungrounded. Tax charged by the Sicilian Regional Authorities on title to gas pipelines The European Court of Justice issued its ruling on case C- 173/05 on 21 June 2007 accepting the conclusions of the Attorney General and recognising the illegality of Regional law no. 2 of 26 March This law set up an environment tax on the title of principal pipelines with a maximum operating pressure of more than 24 bar, located in Sicily. This ruling found the law to be unlawful as it is contrary to the cooperation agreement signed by the EU and the People s Democratic Republic of Algeria whereby certain products (including natural gas) from the latter country are not subject to customs duties or similar taxes. The following should be noted with respect to developments in this litigation: a) the company appeared in court on 17 April 2006 for one of the eight instalments of the tax for 2002 and for which the Sicilian Regional Authorities had filed an appeal with the Supreme Court on 7 April 2006 against the Sicilian Regional Commission's ruling of 4 March 2004 which recognised the illegitimacy of the tax; b) the Palermo Regional Tax Commission filed rulings on two separate occasions (17 January 2007 and 28 May 2007) for the other seven instalments. It rejected the appeal made by the Sicilian Regional Authorities and found the tax to be illegitimate. Panigaglia (SP) regasification terminal GNL Italia S.p.A. has sent the relevant ministries (for the Environment and for Cultural Assets) an application for the environment compatibility of upgrading its LNG terminal at Panigaglia, commencing the related authorisation process. The project involves increasing the capacity of the tanks and upgrading of the dock although it does not require new areas to be built on or changes to be made to the surroundings. The planned work would be carried out within the existing site. Resolutions of the Electricity and Gas Authority - Transportation and dispatchment activities - Regasification activities Transportation and dispatchment activities Resolution 21/07 Urgent measures for access to natural gas transportation services in relation to the Economic Development Minister's decree of 29 September Resolution no. 21/07, published on 9 February 2007 by the Electricity and Gas Authority, introduced the possibility to access transportation capacity by the back-up wholesale supplier for the supplies as per the notes of the Economic Development Minister, Energy and Mineral Resources Unit of 7 February 2007 (nos. 2441, 2442 and 2433) under the methods set out by the regulations governing transfers of transportation capacity. Resolution 45/07 - Changes and integrations to resolution no. 166/05 dated 29 July 2005 issued by the Electricity and Gas Authority on the interim capacity fee and methods of allocating revenue among regional transportation companies. Resolution no. 45/07 of the Electricity and Gas Authority, published on 27 February 2007, changed the tariffs for the gas transportation service as per resolution no. 166/05, establishing from the thermal year : introduction of interim capacity fees, only for entry points interconnected with foreign networks, based on the length of the service and seasonality and considering that revenue arising from application of such fees would be considered when calculating the corrective factor; application of regulations about how to allocate revenue among transportation companies for the single regional transportation fee at national level, as per article 11 of resolution no. 166/05, using the Cassa Conguaglio per il Settore Elettrico (Electricity Equalisation Fund) to apply the equalisation system. 21

24 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / OTHER INFORMATION Resolution no. 56/07 - Commencement of the procedure for definition of the methods for compliance of gas volume supply obligations on the regulated capacity and gas trading market (virtual trading points) and development of this market. The Electricity and Gas Authority commenced a procedure with this resolution published on 8 March 2007 for the definition of measures on how to trade imported gas on the regulated capacity and gas market as per letter b), point 2, article 6 of the Decree of 28 April 2006, paragraph 8, article 8 of resolution no. 168/06 and Decree law no. 7 of 31 January 2007, also by possibly integrating the rules of such market and transportation network codes. Resolution no. 75/07 - Changes and integrations to the general measures of the Electricity and Gas Authority about natural gas quality levels issued in resolution no. 185/05 of 6 September This document, published on 28 March 2007, changed and integrated the measures introduced by resolution no. 185/05. Specifically, it provided for adoption of a standard method to identify and change the Standard Withdrawal Areas for all transportation companies to be applicable from 1 October 2007 and revised certain obligations for the transportation companies about gas quality and availability of related measurement values. Resolution no. 124/07 - Preliminary investigation into the application of the tariff adjustment rate established by the Electricity and Gas Authority with its resolution no. 237/00 of 28 December 2000 and the volume correction rate as per resolution no. 138/04 of 29 July 2004 by the natural gas transportation, distribution and sales companies. With resolution no. 124/07, published on 1 June 2007, the Electricity and Gas Authority commenced a preliminary investigation into the application within Italy of the tariff adjustment rate by the natural gas transportation, distribution and sales companies set by it in its resolution no. 237/00 of 28 December 2000 and the volume correction rate as per resolution no. 138/04 of 29 July Its aim is to acquire information and data useful to design the necessary actions. Resolution no. 163/07 Urgent measures for the supply of gas at the national network entry points interconnected with the foreign networks and integrations to resolution no. 137/02 dated 17 July 2002 of the Electricity and Gas Authority. The Electricity and Gas Authority integrated the access regulations set out in resolution no. 137/02 and network codes with its resolution no. 163/07, published on 4 July 2007, for transportation activities. It introduced the possibility of granting transportation capacity for periods of less than a thermal year at the entry points interconnected with foreign networks. Regasification activities Resolution no. 115/07 - Approval of the storage code of GNL Italia S.p.A., pursuant to paragraph 5, article 24 of Legislative decree no. 164 of 23 May The Electricity and Gas Authority approved the Regasification Code presented by GNL Italia pursuant to point 5, article 24 of Legislation decree no. 164 of 23 May 2000 with resolution no. 15/07 published on 22 May The Code will be valid from 1 October 2007 except for the parts related to capacity allocation and service programming which will become applicable from 30 May 2007, only for that necessary to manage such processes for the thermal years after 1 October Resolution no. 182/07 Approval of the regasification tariffs. With its resolution no. 182/07 Approval of regasification service tariffs for the thermal year 2007/2008 for GNL Italia S.p.A., implementing resolution no. 178/05 of the Electricity and Gas Authority dated 4 August 2005 and amendments to the measures of the Regasification Code, published on 18 July 2007, the Electricity and Gas Authority approved the regasification tariffs proposed by GNL Italia for the Panigaglia terminal for the thermal year 1 October 2007 to 30 September The tariffs are determined considering the revised reference revenue. Net invested capital (RAB) at 31 December 2006 was approximately 100 million. 22

25 SNAM RETE GAS REPORT ON THE SECOND QUARTER OF 2007 / OUTLOOK Outlook Gas demand in Italy The most recent estimates for natural gas demand trends in the Italian market confirm an annual average growth rate of above 2% in the four years from 2007 to 2010, driven by the thermoelectric sector. This is despite the fact that demand has been negatively affected by the mild weather effect on residential consumption in Investments The projects necessary to promote market growth and ensure greater flexibility in the natural gas transportation system in Italy will continue in 2007 through to Capital expenditure planned for the four years are approximately 4.2 billion, of which roughly 0.7 billion in Efficiency Snam Rete Gas continues to pursue its operating efficiency objective in 2007, mainly by reorganising its activities located throughout the country and making better use of its available technological resources. 23