Report on the Third Quarter of 2007

Transcription

1 Report on the Third Quarter of 2007

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3 Report on the Third Quarter of 2007 Contents Key figures Basis of presentation Income statement Reclassified balance sheet Reclassified cash flow statement Operating review Other information Outlook Certification rendered by the manager responsible for the preparation of financial reports pursuant to the requirements of paragraph 2, article bis of Legislative Decree no. 58/1998 The quarterly report is not audited

4 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / KEY FIGURES Key figures Key financial figures Change Change % vs vs Core business revenue 1,300 1, Operating costs (41) (14.1) Amortisation, depreciation and impairment losses Ebit Net financial expense Profit (11) (3.2) Investments ,632 9,847 Property, plant and equipment and intangible assets 9,632 9, ,748 8,999 Net invested capital 8,748 8, ,741 3,381 Equity 3,741 3,381 (360) (9.6) 5,007 5,618 Net financial debt 5,007 5, Net cash flows from operating activities (19) (2.2) ( m) Key operating figures Change Change % vs vs Natural gas injected into the Nazional Gas Pipeline Network (billions of cubic metres) (6.67) (10.2) on behalf of Eni (4.82) (11.4) on behalf of other operators (1.85) (7.9) Regasification of liquefied natural gas (LNG) (billions of cubic metres) (0.55) (23.5) on behalf of Eni (0.13) (12.5) on behalf of other operators (0.42) (32.3) 30,784 30,951 Gas Pipeline Network (kilometres in use) 30,784 30, ,427 8,483 National Network 8,427 8, ,357 22,468 Regional Network 22,357 22,

5 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / BASIS OF PRESENTATION Performance of the Snam Rete Gas share (*) Period: 6 December 2001 (**) 15 October 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. (**) Date of the listing of the Snam Rete Gas shares. Basis of presentation The 2007 third quarter report 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 EC Regulation no. 1606/2002 of the European Parliament and European Council of 19 July 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 amend- ments and intergrations). Therefore, the guidelines set out in IAS 34 Interim Financial Reporting have not been adopted. The income statement figures are provided for the first nine months and third quarters of 2007 and 2006, respectively. The balance sheet figures are provided as at 30 September 2007, 30 June 2007 and 31 December The format of the financial statements reflects that of the schedules presented in the directors reports on the half year and annual reports. The third quarter report includes the 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 nine months of 2006 or 31 December

6 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / BASIS OF PRESENTATION Given their materiality, the amounts in the 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 about future gas demand, investment plans and future performance. 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, general macro-economic conditions, 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 THIRD QUARTER OF 2007 / INCOME STATEMENT Income statement INCOME STATEMENT ( m) Change Change % Core business revenue 1,300 1, Other revenue and income 22 2 (20) (90.9) 1 including: non-recurring 20 (20) (100.0) Total revenue 1,322 1,308 (14) (1.1) (86) (72) Operating costs (291) (250) 41 (14.1) (1) including: non-recurring (14) Ebitda 1,031 1, (125) (118) Amortisation, depreciation and impairment losses (352) (356) (4) Ebit (42) (55) Net financial expense (122) (155) (33) Profit before tax (10) (1.8) (66) (70) Income taxes (218) (219) (1) 0.5 including: non-recurring (3) (1) 2 (66.7) Profit (*) (11) (3.2) (*) The profit for the period is wholly attributable to the shareholders of Snam Rete Gas. 5

8 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / INCOME STATEMENT The Ebit 1 recorded for the first nine months of 2007 amounts to Euro 702 million, up Euro 23 million or 3.4% on the same period of Excluding the effect of non-recurring transactions recognised in the first nine months of and , the Ebit increased by Euro 27 million (4%) mainly due to: (i) the decrease in operating costs (+Euro 14 million, net of the items netted against revenue) mainly due to the reduction in recurring variable costs (+Euro 12 million), principally attributable to the purchase of fuel gas used by the compression stations (Euro 11 million) and the decrease in controllable fixed costs (+Euro 2 million); (ii) the increase in transportation revenue (Euro 11 million, net of the items netted against costs), positively affected by investment incentives (+Euro 59 million) and negatively impacted by lower gas volumes transported (-Euro 43 million) and the updating of transportation tariffs (-Euro 7 million); and (iii) lower accruals to the provisions for risks and charges (+Euro 4 million). These positive factors were partially offset by the higher depreciation and amortisation charges following the roll out of new transportation infrastructures during the period (-Euro 4 million). The profit (Euro 328 million) decreased by Euro 11 million (3.2%) compared to the same period of 2006 due to the higher net financial expense (Euro 33 million), partially offset by the greater Ebit (Euro 23 million). Excluding the effect of the non-recurring transactions, the profit decreased by Euro 9 million, mainly due to the higher net financial expense (-Euro 33 million) and higher income taxes (-Euro 3 million), partially offset by the higher Ebit (+Euro 27 million). Non-recurring significant events and transactions The 2007 Finance Act and related implementing decrees introduced changes to the legislation governing the Italian post-employment benefits ( 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, Employee benefits, this required the redetermination of the provision at 31 December 2006 basically to exclude the effects of salary increases from the actuarial calculation. This curtailment was taken to the income statement as non-recurring income (Euro 2 million). The effects on Ebit and profit (after tax) for the first nine months of 2007 were + Euro 2 million and +Euro 1 million, respectively. The Ebit recorded for the third quarter of 2007 amounts to Euro 231 million, up Euro 24 million or 11.6% on the same period of This increase is mainly due to: (i) the lower operating costs (+Euro 7 million, net of the items netted against revenue), mainly due to the reduction in recurring variable costs for the purchase of fuel gas used by the compression stations (+Euro 4 million) and the smaller controllable fixed costs (+Euro 1 million); (ii) the greater transportation revenue (+Euro 6 million, net of the items netted against costs), positively affected by investment incentives (+Euro 19 million) and negatively affected by the smaller gas volumes transported (-Euro 13 million) and the updating of transportation tariffs (-Euro 2 million); (iii) lower depreciation and amortisation charges (+Euro 7 million) and (iv) smaller accruals to the provisions for risks and charges (+Euro 2 million). The profit (Euro 106 million) increased by Euro 7 million (7.1%) compared to the same period of 2006 due to the higher Ebit (+Euro 24 million), partially offset by the higher net financial expense (-Euro 13 million) and greater income taxes (-Euro 4 million). (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 generates costs and revenue which are netted. (2) Non-recurring transactions in 2006 related to the recognition of (i) income following the favourable outcome of a dispute with third parties (+Euro 19 million); (ii) gains on the sale of property, plant and equipment (Euro 1 million); and (iii) costs of termination benefits to employees (-Euro 14 million) which increased Ebit by Euro 6 million. (3) Information about the non-recurring transactions of the first nine months of 2007 is given in the following paragraph on Non-recurring significant events and transactions. 6

9 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / INCOME STATEMENT Revenue ( m) Change Change % Transportation 1,275 1, Regasification (3) (16.7) Revenue from regulated activities 1,293 1, Revenue from non-regulated activities Total core business revenue 1,300 1, Other revenue and income 22 2 (20) (90.9) ,322 1,308 (14) (1.1) Core business revenue (Euro 1,306 million) increased by Euro 6 million. This increase was due to the greater revenue from the natural gas transportation business (Euro 8 million) following the incentives received for investments made in 2005 (+Euro 59 million), decreased by the smaller volumes of gas transported (-Euro 43 million), mainly due to the mild weather conditions in the first few months of the year and the updating of transportation tariffs (-Euro 7 million). Transportation revenue by shipper is analysed in the following table ( * ) 2007 ( m) 2006 ( * ) 2007 Change Change % Eni Enel Trade Edison (19) (15.0) Plurigas Other (28) (10) Revenue adjustment due to higher/lower booking of capacity and fines (**) (75) (23) 52 (69.3) 9 (15) Integration of transportation revenue for previous thermal years (**) 20 (45) (65) ,275 1, (*) Net of the interruptibility contribution as per Resolution no. 297/05 of the Electricity and Gas Authority. (**) 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 Euro 15 million is generated by the Panigaglia LNG terminal which regasifies liquefied natural gas (LNG). The Euro 3 million decrease in this revenue is mainly due to the lower volumes of regasified gas. The section on Operating Review provides information about volumes of natural gas transported and regasified. Revenue from non-regulated activities (Euro 8 million) mainly relates to the rent and maintenance of optical fibre telecommunications cables. of non-recurring income following the positive outcome of a dispute with third parties in that period. Core business revenue (Euro 420 million) increased by Euro 4 million. This increase is due to greater revenue from the natural gas transportation business (Euro 5 million) mainly following the incentives received for investments made in 2005 (+Euro 19 million), partially offset by smaller volumes transported (-Euro 13 million) and the updating of the transportation tariffs (-Euro 2 million). Other revenue and income Other revenue and income amount to Euro 2 million and mainly relate to the recognition of contractual fines and compensation for damage. The Euro 20 million decrease on the same period of 2006 is due to the recognition Regasification revenue (Euro 3 million) is generated by the Panigaglia LNG terminal which regasifies liquefied natural gas. The section on Operating Review provides information about volumes of natural gas transported and regasified. 7

10 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / INCOME STATEMENT Revenue from non-regulated activities (Euro 3 million) mainly relates to the rent and maintenance of optical fibre telecommunications cables. Other revenue and income Other revenue and income of Euro 1 million mainly relate to the recognition of compensation for damage and contractual fines. Operating costs The operating costs of Euro 250 million may be broken down as follows: ( m) Change Change % Variable costs (13) (14.0) Fixed costs (24) (12.4) (2) Accruals to (utilisation of) provisions for risks and charges 5 1 (4) (80.0) (41) (14.1) Variable costs ( m) Change Change % 11 7 Fuel gas (11) (19.0) 6 4 Network losses Electricity 4 3 (1) (25.0) Gas exercise duty Recurring variable costs (12) (15.6) 5 5 Charges made by third parties (1) (6.3) 5 5 Variable costs netted against revenue (1) (6.3) (13) (14.0) The decrease in recurring variable costs (Euro 12 million) is mainly due to the lower cost of fuel gas used by the compression stations (Euro 11 million) following the lower quantities of gas used, partially offset by the higher unit cost. Variable costs netted against revenue of Euro 15 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 Euro 6 million decrease in recurring variable costs is mainly due to the lower cost of fuel gas used by the compression stations (Euro 4 million). Fixed costs ( m) Change Change % Personnel expense (14) (13.7) External costs (10) (11.0) (24) (12.4) 8

11 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / INCOME STATEMENT Personnel expense ( m) Var. Var. % Gross personnel expense Personnel-related services (8) (8) Capitalisations (22) (24) (2) Total recurring personnel expense Termination benefits 15 1 (14) (93.3) Other (2) (2) 2 1 Other personnel expense 15 (1) (16) Total personnel expense for regulated activities (14) (13.9) 1 1 Gross personnel expense Total personnel expense for non-regulated activities (14) (13.7) Personnel expense (Euro 88 million) made up 52% of the total fixed costs. The Euro 14 million decrease on the same period of 2006 is mainly due to the smaller termination benefits. Income of Euro 2 million was recognised in the period tied to the changes in the treatment of post-employment benefits introduced by the 2007 Finance Act. (Information on this is given in the paragraph on Non-recurring significant events and transactions ). Recurring personnel expense (Euro 88 million) comprises personnel-related services of Euro 8 million (canteen, travel expense reimbursement, etc.) and is shown net of capitalisations of Euro 24 million, being the part of the personnel expense absorbed by investments. Recurring personnel expense increased by Euro 3 million mainly due to the rise in gross personnel expense tied to salary trends. The number of employees at 30 September 2007 and previous period-end dates is analysed in the following table Workforce 30 September 31 December 30 June 30 September Managers Junior managers Employees 1,277 1,269 1,252 1,245 Workers ,419 2,403 2,354 2,346 The group hired 43 people during the nine months while 100 employees left. External costs ( m) Change Change % 9 7 Materials and maintenance (1) (4.8) 3 3 IT services 10 9 (1) (10.0) 3 2 Telecommunications 9 8 (1) (11.1) 4 2 Technical and professional services 10 8 (2) (20.0) 3 3 Rent, lease and payments Insurance Other costs Recurring operating costs (4) (5.9) 3 Capital losses on eliminations 3 (3) (100.0) 3 Other external costs 3 (3) (100.0) 6 5 Modulation and storage services (3) (15.8) 6 5 Costs netted against revenue (3) (15.8) Total external costs of regulated activities (10) (11.1) Materials and maintenance 1 1 Total external costs of non-regulated activities (10) (11.0) 9

12 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / INCOME STATEMENT External costs (Euro 81 million) showed a Euro 10 million decrease or -11.0% on the same period of Recurring operating costs (Euro 64 million) decreased by Euro 4 million, mainly due to the reduction in costs for pipeline maintenance (Euro 1 million), technical and professional services, principally in conjunction with pipeline inspections (Euro 1 million) and for IT (Euro 1 million) and telecommunications (Euro 1 million) following rationalisation of the Application Management Systems and annual updating of the contractual tariffs. Capital losses on eliminations (Euro 3 million) decreased as did costs netted against revenue following the updating of the modulation service tariffs (Euro 3 million). In the third quarter of 2007, recurring operating costs decreased by Euro 4 million, principally due to the smaller costs of pipeline maintenance (Euro 2 million) and technical and professional services (Euro 2 million), mainly tied to pipeline inspections. Accruals to the provisions for risks and charges Accruals to the provisions for risks and charges (Euro 1 million) were made to cover possible charges arising from disputes. Amortisation, depreciation and impairment losses ( m) Change Change % Depreciation Amortisation (4) (18.2) The Euro 8 million increase in depreciation charges is principally due to the roll out of new transportation infrastructures. The Euro 4 million decrease in amortisation is mainly attributable to the smaller amortisation of the costs of purchasing and developing internally technical-administrative software. Net financial expense Net financial expense incurred in the first nine months of 2007 (Euro 155 million) increased by Euro 33 million on the same period of 2006 due to the higher interest expense related to the increase in the average borrowing and the greater average cost of such borrowing, partially offset by the positive contribution of cash flow hedges. Financial expense of Euro 12 million was capitalised in the period compared to Euro 10 million in the first nine months of The average borrowing cost was approximately 4.0% (3.7% in the same period of 2006). Income taxes ( m) Change Change % Current taxes Ires (4) (1.8) Irap (1) (0.4) (13) (15) Net deferred tax income (48) (46) 2 (4.2) Income taxes increased by Euro 1 million compared to the same period of The increase was due to the Euro 1 million decrease in current taxes, mainly due to the smaller tax charge for the period following the smaller profit before taxes, partially offset by the prior year tax adjustment and the decrease in net deferred tax income (Euro 2 million), mainly due to lower accruals to the provisions for risks and charges. Net deferred tax income 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 fiscally-driven depreciation, compared to ordinary depreciation, of assets used in the regulated activities. The tax rate is 40% compared to 39.1% in the same period of

13 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / RECLASSIFIED BALANCE SHEET Reclassified balance sheet RECLASSIFIED BALANCE SHEET (*) ( m) Change 9,745 Property, plant and equipment 9,715 9, Intangible assets (148) Net payables for investments (236) (156) 80 9,646 Non-current assets 9,527 9, (594) Net working capital (539) (661) (122) (29) Provisions for employee benefits (34) (31) 3 9,023 Net invested capital 8,954 8, ,289 Equity 3,699 3,381 (318) 5,734 Net financial debt 5,255 5, ,023 Coverage 8,954 8, (*) The key reclassified balance sheet figures can easily be reconciled with the mandatory balance sheet using the same criteria adopted in the 2006 Annual Report (see page 47). The reclassified balance sheet combines the assets and liabilities of the legally-required balance sheet format including in the annual and half year reports in accordance with their use, split into the three basic functions: investment, operations, financing. Company management holds that this format presents information useful for investors as it allows identification of the sources of financing (equity and third party funds) and the application of such financing for non-current assets and working capital. 11

14 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / RECLASSIFIED BALANCE SHEET The reclassified balance sheet format is used by management to calculate the principal financial ratios. Net invested capital (Euro 8,999 million) increased by Euro 45 million compared to 31 December 2006, mainly due to the increase in non-current assets (+Euro 164 million), partially offset by the decrease in net working capital (-Euro 122 million). Non-current assets Changes in property, plant and equipment and intangible assets (+ Euro 84 million) are analysed below: Property, plant Intangible ( m) and equipment assets Opening balance at 31 December , ,763 Investments Amortisation, depreciation and impairment losses (338) (18) (356) Other changes (28) (28) Closing balance at 30 September , ,847 Other changes (Euro 28 million) mainly relate to the grants received from state and private bodies. Such grants are recognised as a decrease in the cost of property, plant and equipment and total Euro 82 million and Euro 149 million respectively. Net payables for investments (Euro 156 million) decreased by Euro 80 million mainly due to payment of amounts due for purchases of pipes in the last few months of Net working capital ( m) Change 347 Trade receivables (60) 80 Inventories Fair value of derivative financial instruments Other assets (13) (690) Net deferred tax liabilities (703) (668) 35 (139) Trade payables (141) (136) 5 (41) Tax liabilities (*) (22) (126) (104) (100) Accrued and deferred income (59) (124) (65) (73) Provisions for risks and charges (69) (70) (1) (31) Deferred income for rent of telecommunications cables (32) (31) 1 (57) Other liabilities (*) (65) (57) 8 (594) (539) (661) (122) (*) The IRES payable due to the parent Eni S.p.A. has been reclassified from Other liabilities to Tax liabilities at 31 December 2006 (Euro 16 million) given that the company has joined Eni s national tax consolidation scheme. The change in net working capital of Euro 122 million compared to 31 December 2006 is mainly due to: (i) greater tax liabilities (-Euro 104 million) given that the payable for the period is reduced only by the advance paid in June; (ii) greater accrued and deferred income (-Euro 65 million) due to adjustment of revenue to the revenue ceiling established by the Electricity and Gas Authority; and (iii) smaller trade receivables (-Euro 60 million) related to the smaller amounts invoiced following the smaller quantities of gas transported in the last two months of the quarter compared to the last two months of 2006 and collection of the last instalment of a receivable due from third parties following the positive outcome of the related dispute. These negative factors were partially offset by: (i) the gain in fair value of derivative financial instruments (+Euro 36 million); (ii) the increase in inventories (+Euro 36 million); and (iii) the decrease in the net deferred tax liabilities (+Euro 35 million). Inventories (Euro 111 million) mainly consist of pipes and frequently changed spare parts for the gas pipelines and LNG terminal (Euro 61 million) and natural gas in stock (Euro 50 million). The Euro 36 million increase over 31 December 2006 is principally due to changes in pipes and spare parts in stock (Euro 23 million) and natural gas in storage (Euro 13 million). The net deferred tax liabilities (Euro 668 million) mainly relates to deferred tax liabilities for 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. 12

15 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / RECLASSIFIED BALANCE SHEET The accrued and deferred income (Euro 124 million) mainly relates to the greater revenue invoiced 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 shippers in the second thermal year following that in which the excess turnover was achieved by decreasing the tariffs. The provisions for risks and charges (Euro 70 million) mainly comprise: (i) legal disputes (Euro 41 million); (ii) the provision for site dismantlement and restoration for the forecast plant dismantlement charges in line with present legal and constructive obligations (Euro 20 million); and (iii) charges expected to be incurred for the employee termination benefits (Euro 7 million). Other liabilities (Euro 57 million) mainly relate to the payable to the Cassa Conguaglio per il Settore Elettrico (Electricity Equalisation Fund) 4 (Euro 22 million), amounts due to personnel (Euro 19 million) and the VAT payable for the period due to the parent Eni S.p.A. (Euro 11 million) as the company is part of Eni group s consolidated VAT scheme. Provisions for employment benefits Provisions for employment benefits of Euro 31 million relate to: (i) post-employment benefits (Euro 24 million); (ii) the supplementary healthcare fund for Eni group managers (FISDE), which includes the estimated charges for the contributions to be paid to this fund for managers and retired managers (Euro 1 million); and (iii) other provisions for employee benefits (Euro 6 million), especially an estimate of the deferred monetary incentives assigned to managers (Euro 4 million) and the provision for seniority bonuses, which includes an estimate of the bonus to be paid to employees upon 25 years of service (Euro 2 million). Equity ( m) Change 1,956 Share capital 1,956 1, Legal reserve Reserve for repurchase of treasury shares 345 (345) 115 Share premium reserve Other reserves Retained earnings Profit (120).less (794) Treasury shares (458) (794) (336) 3,289 3,699 3,381 (318) Equity (Euro 3,381 million) decreased by Euro 318 million over 31 December 2006 due to: (i) distribution of the ordinary dividend (-Euro 334 million); (ii) repurchase of treasury shares (-Euro 336 million 5 ); (iii) recognition of the profit for the period (+Euro 328 million); (iv) gains in fair value of derivative financial instruments (+Euro 23 million, net of deferred tax liabilities); and (v) other changes of less than Euro 1 million related to the management incentivation plans involving Snam Rete Gas shares. On 25 October 2007, the company paid the 2007 interim dividend of Euro 0.08 per share to all shares outstanding at the ex dividend date (22 October 2007) for a total of Euro 141 million. 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 (Euro 336 million spent in 2007). The unused amount of the reserve was reclassified to the share premium reserve (Euro 9 million). Other reserves This caption (Euro 876 million) principally comprises: (i) the reserve set up to cover the cost of the 195,468,950 treasury shares in portfolio (Euro 794 million); and (ii) the hedging reserve (+Euro 81 million). (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. (5) The cost relates to the period from 1 January 2007 to 2 May 2007, when the buy back plan was completed. 13

16 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / RECLASSIFIED BALANCE SHEET Treasury shares At 30 September 2007, Snam Rete Gas held 195,468,950 treasury shares (equal to approximately 10% of share capital) for a total amount of Euro 794 million, equal to an average purchase price of Euro 4.06 per share including: 731,000 shares for Euro 3 million (net of 69,000 shares assigned during the first half after exercise of the options, following the consensual decision to terminate employ ment by managers benefitting from the 2005 stock option plan) were repurchased as resolved by the shareholders on 27 April 2005 to cover the 2005 management incentivation plan; the other 194,737,950 shares (Euro 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 September 2007, the market value of treasury shares was approximately Euro 853 million 6. Net financial debt and leverage The leverage ratio shows a company s degree of indebtedness and is the net financial debt to net invested capital ratio. It is one of the key ratios used to gauge the soundness and efficiency of a company s financial position. Net financial debt and leverage ( m) Change 5,735 Financial liabilities 5,256 5, ,268 Short-term financial liabilities 870 1, Current portion of long-term financial liabilities (506) 4,102 Long-term financial liabilities 3,857 4, (1) Cash and cash equivalents (1) (1) 5,734 5,255 5, Net financial debt amounted to Euro 5,618 million, an increase of Euro 363 million on 31 December The positive cash flows from operating activities (Euro 827 million) were used to cover: (i) net capital expenditure outlays (Euro 520 million); (ii) the repurchase of treasury shares (Euro 336 million); and (iii) payment of the ordinary 2006 dividend (Euro 334 million). Resort to external funds amounted to Euro 363 million. At 30 September 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 Euro 2,350 million) and a loan with interest rates linked to inflation (one contract with a nominal amount of Euro 500 million). Long-term financial liabilities of Euro 4,152 million made up 74% of net financial debt. The average term of the long-term financing, including the current portion, is roughly four years (four and a half years at 31 December 2006). A breakdown of the liabilities by type of interest rate at 30 September 2007 is as follows: ( m) % % Floating rate 2, , Inflation-linked rate Fixed rate 2, , , , Nearly all the financial liabilities are due to Eni S.p.A. 7 and they are entirely in Euros. The leverage ratio, ie the ratio of net financial debt to net invested capital, is 62.4% (58.7% at 31 December 2006). Net financial debt decreased by Euro 116 million compared to 30 June (6) The value is calculated considering the official closing price of the quarter. (7) 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 THIRD 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 THIRD QUARTER OF 2007 / RECLASSIFIED CASH FLOW STATEMENT RECLASSIFIED CASH FLOW STATEMENT ( m) Profit Adjusted by: Amortisation, depreciation and other non-monetary components Interest and income taxes Cash flow from operating activities before changes in working capital 1,056 1, Change in working capital due to operating activities (257) Interest and income taxes paid (293) (312) 548 Net cash flows from operating activities (269) Investments in property, plant and equipment and intangible assets (374) (440) Disinvestments 3 (88) Net payables related to investing activities (47) (80) 191 Free cash flow Change in financial payables (670) Cash flows of equity (616) (670) 0 Net cash flows for the period Free cash flow (670) Cash flows of equity (616) (670) (479) Change in net financial debt (188) (363) 16

19 SNAM RETE GAS REPORT ON THE THIRD 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 (1.36) (15.6) Imports (5.31) (9.3) Tarvisio (Russia) (0.52) (3.1) Mazara del Vallo (Algeria) (2.22) (11.9) Gries Pass (North Europe) (3.10) (23.3) Gela (Libya) Panigaglia (LNG imports) (0.55) (23.5) Gorizia (Russia) (0.04) (19.0) (6.67) (10.2) 17

20 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / OPERATING REVIEW Volumes of gas injected into the national gas network in the first nine months of 2007 amounted to billion cubic metres, a decrease of 6.67 billion cubic metres or 10.2% on the same period of The decrease was mainly due to smaller consumption by the residential sector following mild weather conditions in the first few months of the year, partly offset by the increase in demand by the thermoelectric sector. Smaller volumes were injected into storages. With respect to supply sources, national production decreased (1.36 billion cubic metres) and there were smaller imports from North Europe, Algeria and Russia (3.10 billion cubic metres, 2.22 billion cubic metres and 0.56 billion cubic metres, respectively). Volumes of gas injected into the national gas network in the third quarter of 2007 amounted to billion cubic metres, a decrease of 2.04 billion cubic metres or 10.7% on the same period of The decrease was mainly due to the smaller volumes injected into the storages. Volumes injected by shipper Volumes injected by shipper (billions of m 3 ) Change Change % Eni (4.8) (11.4) Enel Trade (0.5) (6.1) Edison (1.8) (27.2) Plurigas (1.6) Other (6.7) (10.2) Quantities of regasified gas Regasified volumes (billions of m 3 ) Change Change % Eni (0.13) (12.5) Enel Trade (0.29) (24.8) Other 0.13 (0.13) (100.0) (0.55) (23.5) The Panigaglia (SP) LNG terminal regasified 1.79 billion cubic metres of natural gas in the first nine months of 2007 compared to 2.34 billion cubic metres in the same period of Different sized tankers unloaded 57 loads compared to 71 in the first nine months of The Panigaglia (SP) LNG terminal regasified 0.49 billion cubic metres of natural gas in the third quarter of 2007 compared to 0.53 billion cubic metres in the same period of Different sized tankers unloaded 14 loads compared to 15 in the same quarter of

21 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / OPERATING REVIEW Investments Investments ( m) Change Change % Development Investments with 3% incentive Investments with 2% incentive Maintenance and other Investments with 1% incentive (1) (1.6) Investments with no incentives Investments of Euro 468 million were made during the period, up Euro 68 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 and commencement of activities for the Mazara-Melfi and Montalbano-Messina pipelines in Sicily, the Martirano-Rende pipeline in Calabria and the Enna plant. Total capital expenditure for the nine months was Euro 119 million; construction of the Poggio Renatico plant in Ferrara for a cost of Euro 29 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 Investments with a 2% incentive relate to many projects, the most significant of which is for the upgrading of the Mortara-Alessandria pipeline. The costs incurred during the nine months (Euro 13 million) relate to the consignment of the materials and 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 Euro 8 million in the nine months, is of key importance. Investments made in the third quarter amounted to Euro 178 million, Euro 130 million of which for the development of the transportation infrastructures. 19

22 SNAM RETE GAS REPORT ON THE THIRD 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 based on 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 20

23 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / OTHER INFORMATION 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 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. Given the current status of the proceeding and based on an independent legal expert s advice, Snam Rete Gas deems it is not possible to foresee whether the proceeding will have an effect on it and what such effect could be. 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. The 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. Following this ruling, the Sicilian Regional Assembly cancelled the law setting up this tax with article 4 of Regional law no. 15 of 21 August 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 2005 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. The latter Authorities were informed of these rulings on 22 August Snam Rete Gas has not changed the accounting treatment described in the 2006 Annual Report. Resolutions of the Electricity and Gas Authority - Transportation and dispatchment activities - Regasification activities Transportation and dispatchment activities Resolution no. 11/07 - Requirements for accounting/ administrative unbundling for companies active in the electrical energy and gas sectors, as amended and integrated by resolution no. 253/07 Resolutions nos. 11/07 and 253/07, published on 24 January 2007 and 4 October 2007, respectively, by the Electricity and Gas Authority, group the new unbundling rules for the electrical energy and gas sectors in one document which substitutes the previous measures about accounting and administration unbundling. Specifically, the resolutions makes explicit reference to the EU Directive no. 55/2003/CE which has not yet been formally implemented by the Italian government. Such Directive introduces the unbundling obligation with effect from 30 June 2008 for companies that provide more than one type of service in the gas sector and also to those companies already subject to regulation. Resolution no. 17/07 - Definition of standard withdrawal profiles and gas use categories as per article 7 of the Electricity and Gas Authority s resolution no. 138/04 of 29 July 2004, also for the purpose of the gas balancing reform Resolution no. 17/07 of the Electricity and Gas Authority, published on 7 February 2007, defines the standard withdrawal profiles linked to gas use categories for end customers connected to distribution networks as part of the reform of the current balancing system and to set up a daily balancing market. These profiles are valid for the thermal year Accordingly, the shippers shall change 21

24 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / OTHER INFORMATION their IT procedures for collection of functional data about the allocation of gas volumes at the redelivery points interconnected with the distribution system. Resolution 21/07 Urgent measures for access to natural gas transportation services in relation to the Economic Development Minister s decree of 29 September 2006 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. This possibility is contrary to the regulations set out in the Network Codes for transportation activities and is valid from 1 November 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. 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 trading market as per letter b), paragraph 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. 22

25 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / OTHER INFORMATION Resolution no. 75/07 - Changes and integrations to the general measures of the Electricity and Gas Authority about natural gas quality levels set out in resolution no. 185/05 of 6 September 2005 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. Resolution no. 203/07 - Approval of the proposed changes to the network codes for the transportation business of Snam Rete Gas S.p.A. and Società Gasdotti Italia S.p.A. pursuant to resolutions nos. 168/06 and 17/07 of 31 July 2006 and 2 February 2007, respectively Resolution no. 203/07, published on 6 August 2007 by the Electricity and Gas Authority, approved the changes to the network code governing access to the transportation service, drawn up by Snam Rete Gas to comply with the measures of the previous resolution no. 168/06 and the Economic Development Minister s decree of 28 April 2006 related to the new regasification terminals for which an exemption has been issued. The updated network code includes the amendments to the regulations governing allocation of transportation capacity at the interconnection points with the distribution system as per the previous resolution no. 17/07 of the Electricity and Gas Authority. Resolution no. 205/07 - Approval of natural gas transportation and dispatching tariffs Resolution no. 205/07 Approval of tariff proposals for natural gas transportation and dispatching fees, implementing resolution no. 166/05 of 29 July 2005 issued by the Electricity and Gas Authority, published on 2 August 2007, approved the natural gas transportation tariffs for the thermal year The tariffs have been determined on the basis of the updated reference revenue, the additional revenue (Euro 50 million) related to development investments in the first regulatory period and the additional revenue (Euro 157 million) related to investments carried out in 2005 and Net invested capital at 31 December 2006 (RAB - regulatory asset base) has been set at Euro 11.5 billion. The Electricity and Gas Authority also approved introduction of an additional tariff consideration for the thermal year to cover the greater costs incurred to purchase gas for compression purposes and network losses. This consideration will be defined by the Authority and published once the procedure commenced with resolution no. 234/05 has been completed. Snam Rete Gas is authorised to include conditions in its transportation contracts for the application of price adjustments following definition of the above consideration. Resolution no. 227/07 - Completion of the preliminary investigation commenced with resolution no. 124/07 of the Electricity and Gas Authority of 1 June 2007 With resolution no. 227/07, published on 20 September 2007, the Electricity and Gas Authority completed the preliminary investigation (commenced in June with resolution no. 124/07) into the application within Italy of the tariff adjustment rate by the natural gas transportation, distribution and sales companies set by it and the volume correction rate. The results of the investigation (set out in a report attached to the resolution), subject to secrecy of investigations and therefore not published, have been sent to the public prosecutor at the Ordinary Milan Court as per the judiciary s specific request. Resolution no 245/07- Integrations to the measures governing the regulated capacity and gas trading market for the thermal year The Electricity and Gas Authority approved the conditions 23

26 SNAM RETE GAS REPORT ON THE THIRD QUARTER OF 2007 / OTHER INFORMATION for trading natural gas at the virtual trading points for the thermal year , drawn up by Snam Rete Gas, with this resolution published on 3 October The new conditions include the registration of redeliveries of LNG regasified by the regasification company to its customers at the virtual trading point, as required by GNL Italia s regasification code, approved with resolution no. 115/07. Together with the conditions for the virtual trading point, the Authority also approved amendments to the network code proposed by Snam Rete Gas to include the new virtual trading point system functions in the shippers balancing equations. 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 2000 The Electricity and Gas Authority approved the Regasification Code presented by GNL Italia pursuant to paragraph 5, article 24 of Legislative 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 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 Euro 100 million. Resolution no. 222/07 - Commencement of procedures for the preparation of measures covering regasification service tariffs for the third regulatory period Resolution no. 222/07, published on 28 September 2007 by the Electricity and Gas Authority, started the procedure for the definition of the regasification service tariff criteria for the third regulatory period, as per paragraph 2, article 23 of Legislative decree no. 164/00. The new resolution will be complete and detailed in order to encourage the construction and use of new terminals in line with the guidelines set out in the previous tariff resolution no. 178/05. 24

27 SNAM RETE GAS REPORT ON THE THIRD 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 in the first nine months of 2007 has been negatively affected by the mild weather effect on residential consumption in early 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 is approximately Euro 4.2 billion, of which more than Euro 700 million 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. 25