Disclaimer This annual report includes forward-looking statements, especially in the Outlook section, relating to: natural gas demand, investment

Transcription

1 2009 Annual Report

2 Mission Snam Rete Gas is an integrated group responsible for the regulated gas sector in Italy and is a European leader in terms of regulatory asset base. It transports, dispatches, distributes and stores natural gas, and regasifies liquefied natural gas, all with a great level of expertise. Snam Rete Gas aims to create value which will meet the expectations of its shareholders. It does this by ensuring maximum safety and reliability when performing a service for its customers, and by developing the infrastructure and flexibility of Italy s gas network in support of making the supply system safer and more competitive. Snam Rete Gas pursues a sustainable model of growth based on a careful assessment of environmental impact and on the development of new and more efficient technologies. The company counts on the expertise and continual improvement of its staff to successfully achieve these goals. BACKGROUND Snam Rete Gas S.p.A was founded on 15 November The company became operational on 1 July 2001, inheriting the natural gas transportation and dispatch and the liquefied natural gas regasification businesses from Snam S.p.A (now Eni S.p.A). On 30 June 2009, the company bought the entire share capital of Italgas, Italy s leading natural gas distributor, and Stogit, the country s biggest operator in the natural gas storage sector. Snam Rete Gas shares have been listed on the Italian stock market since 6 December 2001.

3 Annual Report 2009

4 Disclaimer This annual report includes forward-looking statements, especially in the Outlook section, relating to: natural gas demand, investment plans, dividends, future operating performance and project execution. Such statements are, by their very nature, subject to risk and uncertainty as they depend on certain events and developments taking place. The actual results can therefore differ from those forecast, as a result of several factors, including: foreseeable trends in the demand, offer and price of natural gas, actual operating performance, general macro-economic conditions, the effect of new energy and environmental legislation, the successful development and implementation of new technologies, changes in stakeholders expectations and other changes in business conditions.

5 Snam Rete Gas reports and consolidated Directors report financial statements 4 The Snam Rete Gas group 6 Review of the year 10 Snam Rete Gas and the financial markets 12 Letter to the shareholders Operating review 16 Natural gas transportation 24 Liquefied Natural Gas (LNG) regasification 25 Natural gas distribution 29 Natural gas storage Financial review 33 Income statement 39 Balance sheet and statement of cash flows 46 Elements of risk and uncertainty 50 Outlook 51 Other information 52 Report on corporate governance and ownership structure 78 Commitment to sustainable development 87 Glossary Consolidated financial statements 92 Financial statements 97 Basis of presentation and accounting principles 110 Notes to the consolidated financial statements 157 Statement from management 158 Independent auditors' report Snam Rete Gas is understood to mean Snam Rete Gas S.p.A and the companies in its consolidation scope.

6 SNAM RETE GAS ANNUAL REPORT 2009 / THE SNAM RETE GAS GROUP The Snam Rete Gas group On 30 June 2009, the company bought from Eni the entire share capital of Italgas S.p.A, Italy s leading natural gas distributor, and Stogit S.p.A, the country s biggest operator in the natural gas storage sector. As a result of this acquisition, Snam Rete Gas is an integrated group responsible for the regulated gas sector and is a European leader in said sector in terms of regulatory asset base. Ultimate parent Snam Rete Gas S.p.A transports and dispatches natural gas, GNL Italia S.p.A regasifies liquefied natural gas (LNG) and Italgas S.p.A and Stogit S.p.A respectively distribute and store natural gas. On a smaller scale, the group also carries out non-regulated activities, consisting essentially of technical and commercial services as well as the sale of water. 4

7 SNAM RETE GAS ANNUAL REPORT 2009 / THE SNAM RETE GAS GROUP Consolidation scope 1 The consolidation scope of the Snam Rete Gas group at 31 December 2009 is shown below. Transport SNAM RETE GAS S.p.A Regasification Storage GNL ITALIA S.p.A STOGIT S.p.A 100% 100% Distribution ITALGAS S.p.A 100% NAPOLETANA GAS S.p.A 99.69% ( 1 ) The list of subsidiaries, associates and significant equity investments of Snam Rete Gas S.p.A can be found in the Subsidiaries, associates and significant equity investments of Snam Rete Gas S.p.A at 31 December 2009 appendix to the notes to the financial statements. 5

8 SNAM RETE GAS ANNUAL REPORT 2009 / REVIEW OF THE YEAR Review of the year Results In 2009, Snam Rete Gas registered a net profit of 732 million, an increase of 38.1% on the previous financial year. The increase was attributable mainly to performance in the natural gas distribution and storage business segments after the consolidation of Italgas and Stogit, the effects of which were recorded from the transaction completion date of 30 June EBIT in the transportation business was down slightly on 2008 (-4.2%), despite a substantial fall in gas demand (-8%) and the subsequent reduction in transported gas volumes (-10.2%). Dividend The profit and cash generated allow for the distribution, subject to approval from the shareholders meeting, of a dividend of 0.20 per share, 0.06 per share of which was distributed as an interim dividend in October This is in line with the attractive and sustainable dividend policy of Snam Rete Gas. The remaining 0.14 per share will be paid out from 27 May 2010 (ex-dividend date of 24 May 2010). The payout is 92.21% 2 (76.42% in 2008). Natural gas transportation The volume of gas injected into the transportation network was billion cubic metres, a reduction of 8.74 billion cubic metres compared with 2008 (-10.2%). This fall was due mainly to lower natural gas demand in Italy, particular- ly from the thermoelectric (-15.5%) and industrial (-14.6%) sectors. Natural gas distribution The volumes of gas carried by the group s distribution network in 2009 were 7,537 million cubic metres, an increase of 106 million cubic metres, or 1.4%, compared with 2008, due essentially to weather conditions and network development. Natural gas storage In 2009, billion cubic metres of natural gas were moved through the group s storage system, an increase of 4.95 billion cubic metres, or 42.8%, compared with The increase was due mainly to greater withdrawals of gas from storage (+65.3%). The available storage capacity at 31 December 2009 was around 8.9 billion cubic metres, an increase of 3.5% compared with a year earlier. Investments Investments ( 1,254 million) related mainly to developing and maintaining the natural gas transportation and regasification infrastructures ( 933 million). Investments relating to the natural gas distribution and storage business segments, and made as from the acquisition completion date, were 172 million and 149 million respectively. ( 2 ) The payout for 2009 is not representative of the normal performance level in that, as described previously, the contribution to consolidated net profit from the natural gas distribution and storage business segments relates to the second half of the year. 6

9 SNAM RETE GAS ANNUAL REPORT 2009 / REVIEW OF THE YEAR Major events Acquisition of Italgas and Stogit from Eni On 30 June 2009, the acquisition from Eni of the entire share capital of Italgas S.p.A and Stogit S.p.A was completed with payment by Snam Rete Gas of 4,509 million 3, including 2,922 million for Italgas and 1,587 million for Stogit. The acquisition was financed by a capital increase through issuing new shares, offered under option to Snam Rete Gas shareholders, for 3,474 million, including a share premium 4, and by taking out new loans from the ultimate parent Eni S.p.A for the remainder. As a result of this transaction, Snam Rete Gas is a market leader in Europe with more than 31,000 km of transportation network, eight operating storage sites, 19 compression stations, around 50,000 km of distribution network and a regasification terminal. Electricity and Gas Authority On 2 December 2009, the Electricity and Gas Authority published resolution ARG/gas 184/09, establishing the criteria for setting natural gas transportation, dispatch and metering revenues and tariffs for the third regulatory period, which began on 1 January 2010 and which will run until 31 December It also set at 33.6 million the amount owing to Snam Rete Gas for additional costs incurred by the company during the thermal year for purchasing fuel gas used to supply the compressor stations 6. This payment was recorded in the 2009 financial year, under transportation revenue. ( 3 ) The payment for both acquisitions is subject to future modifications, the scale of which was not considered when setting the price upon completion of the transaction given the difficulty in obtaining an objective outlook on the basis of available information. Information relating to the price adjustment mechanisms of the acquisitions can be found in note 23 Guarantees, commitments and risks of the notes to the consolidated financial statements. ( 4 ) Includes collecting via auction options unexercised during the option offer period. ( 5 ) Information on the regulatory framework of each business segment can be found in the Operating review section of this report. ( 6 ) The same resolution also established that the additional costs incurred by the company in the period from 1 October 2008 to 31 December 2009 will be determined by the Authority in due course. 7

10 SNAM RETE GAS ANNUAL REPORT 2009 / REVIEW OF THE YEAR For purposes of allowing a better assessment of economic and financial performance, in addition to the conventional IAS/IFRS indicators and financial statements, the directors report also features reclassified financial statements and several alternative performance indicators such as EBITDA, EBIT and net financial debt. The following tables, their explanatory notes and the reclassified financial statements show how these amounts were determined; see the glossary for a definition of the terms used, if not directly specified. Key financial figures (a) ( millions) Core business revenue 1,790 1,902 2,438 Operating costs EBIT 1,022 1,022 1,274 Net profit (b) Investments 728 1,044 1,254 Net invested capital at 31 December 9,389 9,809 15,652 Equity including minority interests at 31 December 3,507 3,573 5,703 Group net equity at 31 December 3,507 3,573 5,702 Net financial debt at 31 December 5,882 6,236 9,949 Free Cash Flow (4,489) Number of shares (milions) 1, , ,570.8 Number of shares outstandig at 31 December (milions) 1, , ,375.9 Average number of shares outstanding during the year (c) (milions) 1, , ,579.3 Official price per share at year-end (d) ( ) Average official price per share during the year (d) ( ) Stock market capitalisation (e) 7,660 7,009 11,681 Dividend for the year (f) Dividend paid out during the year (a) The results for 2009 include the associated effects of consolidating Italgas and Stogit as from 30 June 2009, the completion date of the transaction. Consequently, the income statement includes the effects of consolidating the companies acquired in the second half of At the transaction completion date, the assets and liabilities of Italgas and Stogit, included in the consolidated financial statements of Snam Rete Gas using the predecessor values method, were recognised at the carrying amounts in the respective balance sheets. (b) Net profit is attributable to Snam Rete Gas. (c) As required by IAS 33 Earnings per share, the ordinary shares issued as part of the cost of a business combination have been included in the weighted average number of shares from the date of acquisition of control (30 June 2009). (d) According to the Principles and Conventions of Borsa Italiana, an appropriate adjustment coefficient must be applied to the historical price series after extraordinary transactions (capital increases, share splits, groupings, mergers, payment of extraordinary dividends) in order to restore the continuity and comparability of share prices. The official Snam Rete Gas share prices for 2007 and 2008 have therefore been adjusted. (e) Number of shares outstanding multiplied by the official year-end price per share. The figures for 2007 and 2008 were calculated on the basis of historical prices ( 4.35 and 3.98 respectively at the end of each year) and do not take into account the price adjustment following the capital increase. (f) The amount for 2009, relating to the balance, was estimated on the basis of the number of shares outstanding at 31 December Key profit and financial indicators EBIT per share (a) ( ) Simple earnings per share (a) ( ) Group equity per share (a) ( ) Attributable dividend ( per share) Leverage (Net financial debt/net invested capital) % Payout (Attributable dividends per year/net profit) (b) % Price/book value (Average official price per share/group equity per share) ( ) ROE (c) % ROI (d) % Dividend yield (Attributable dividend/official year-end price per share) (%) (e) % (a) Calculated considering the average number of shares outstanding at 31 December. (b) The contribution to consolidated net profit from the natural gas distribution and storage business segments relates to the second half of the year. The 2009 dividend balance is estimated. (c) The Return On Equity (ROE) was calculated as the ratio of net profit to the average of the equity at the beginning and end of the year. (d) The Return On Investment (ROI) was calculated as the ratio of EBIT to the average of the net invested capital at the beginning and end of the year. (e) The official figures for the end of 2007 and 2008 ( 4.35 and 3.98 respectively) are historical prices and therefore do not take into account the price adjustment following the capital increase. 8

11 SNAM RETE GAS ANNUAL REPORT 2009 / REVIEW OF THE YEAR Key operating figures (a) Change % change Natural gas transportation (b) Natural gas injected into the gas transportation network (billions of cubic metres) (8.74) (10.2) Transportation network (km in use) 31,081 31,474 31, Liquefied Natural Gas (LNG) regasification (b) LNG regasified (billions of cubic metres) (0.20) (13.2) Natural gas distribution (b) Gas distributed (millions of cubic metres) 7,431 7, Concessions for gas distribution (number) 1,438 1, Distribution network (km) 49,410 49, Natural gas storage (b) Available storage capacity (billions of cubic metres) (c) Natural gas moved through the storage system (billions of cubic metres) Customers (number) Employees in service at year-end (number) (d) 2,357 6,380 6,187 (193) (3.0) of whom business segment: - Transportation 2,270 2,252 2, Regasification (6) (6.5) - Distribution 3,732 3,545 (187) (5.0) - Storage (2) (0.7) (a) For comparison purposes, operating data for the acquired companies have also been shown for The changes shown in this table, and in subsequent tables in this report, are those from 2008 to The percentage changes were determined on the basis of data shown in the relevant tables. (b) Gas volumes are expressed in standard cubic metres (SCM) with an average higher heating value (HHV) of 38.1, 38.9 and 39.4 MJ/SCM respectively for the businesses of transportation and regasification, distribution and storage of natural gas. (c) Working gas capacity for modulation, mining and balancing services. (d) Fully consolidated companies. The number of employees in service in the natural gas distribution business segment in 2008 includes 66 employees of Acqua Campania S.p.A, a company which left the consolidation scope in Net profit EBIT 800 ( m) 732 1,400 ( m) 1,200 1, ,000 1,022 1, Leverage 70 (%) December December December

12 SNAM RETE GAS ANNUAL REPORT 2009 / SNAM RETE GAS AND THE FINANCIAL MARKETS Snam Rete Gas and the financial markets Share prices on all the major global stock markets broadly increased over the course of 2009, compared to the low figures at the start of the year. The annual performances of the major European stock markets at the end of the year were as follows: Dow Jones Stoxx %, FTSE 100 in London +22.1%, DAX in Frankfurt +23.9% and CAC 40 in Paris +22.3%. The equity markets benefited from the anti-crisis measures implemented jointly by governments and central banks, which improved the financial climate and led to greater confidence in the recovery of global growth. The Italian stock market recovered in line with the other European exchanges: the FTSEMIB index, which comprises the 40 largest companies on the Italian stock exchange by market capitalisation, grew by 19.5%, while the FTSE Italia All-Share index, which includes all listed companies, rose by 19.2%. Macro-economic data for Italy also hint at an improved growth outlook. Snam Rete Gas shares, which are on the FTSEMIB as well as major international indices (Dow Jones Euro Stoxx, S&P Euro and MSCI Euro), ended 2009 at the official price of 3.46, an increase of 6.1% compared with a year earlier, adjusted to take into account the capital increase. In a year in which the European utilities sector underperformed the market (Dow Jones Stoxx 600 Utilities +1%), both because of low energy demand and investors interest in sectors which were more exposed to the economic recovery, such a performance shows not only investors appreciation for the soundness and visibility of the company s results but also the market s favourable reaction to the acquisition of Italgas and Stogit in the first half of the year and to the strategic growth objectives of the new corporate entity. Roughly 2.6 billion Snam Rete Gas shares were traded on the Italian stock exchange during 2009 with daily trades up on the back of the capital increase and averaging around 10.1 million shares (compared with 7.3 million in 2008). 10

13 SNAM RETE GAS ANNUAL REPORT 2009 / SNAM RETE GAS AND THE FINANCIAL MARKETS Shareholder structure At 31 December 2009, the fully subscribed and paid-up share capital of Snam Rete Gas S.p.A was equal to 3,570,768, and consisted of 3,570,768,494 ordinary shares with a nominal value of 1 (1,956,445,600 shares with the same nominal value at 31 December 2008). The increase of 1,614,322, compared with 31 December 2008 is due to: (i) the issue of 1,614,292,394 shares with a nominal value of 1 as a result of the capital increase approved by the board of directors on 23 March 2009 after said board was mandated by the extraordinary shareholders meeting of 17 March 2009 to increase the paid share capital of Snam Rete Gas S.p.A, through splitting shares, by a maximum of 3.5 billion, including a premium, by issuing shares each with a nominal value of 1 and with regular dividend rights, to be offered under option to shareholders proportionately to the number of shares already held; (ii) the issue of 30,500 shares subscribed by managers who signed up to the 2004 stock option plans. At the end of the year, according to the shareholder register and other information, Eni S.p.A held 52.54% of the share capital, Snam Rete Gas S.p.A held 5.46% in treasury shares and the remaining 42% was held by other shareholders. Snam Rete Gas on the Stock Market Snam Rete Gas share performance on the Milan stock exchange (31 December December 2009) Mln Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Source: Drawn up by Snam Rete Gas based on Bloomberg data. Snam Rete Gas FTSE MIB DJ Utility Volumes Snam Rete Gas shareholder structure by type of investor and geographical area 52.54% ENI 12.78% Continental European Institutional Investors (*) 8.51% Retail Investors 6.96% North American Institutional Investors 5.46% Treasury shares 5.12% UK and Irish Institutional Investors 4.82% Italian Institutional Investors 1.97% Banca d'italia 1.84% Other Institutional Investors (*) 2.9% held by PICTET FUNDS (Europe) SA 11

14 SNAM RETE GAS ANNUAL REPORT 2009 / LETTER TO THE SHAREHOLDERS Alberto Meomartini Carlo Malacarne Letter to the shareholders Dear shareholders and stakeholders, In 2009, we saw the most acute phase of the global financial crisis, but also the first signs of recovery in the final part of the year. Against this background and in an uncertain climate, Snam Rete Gas has proven its business model characterised by a limited industrial and financial risk profile to be solid and has managed to seize market opportunities by acquiring from Eni Italgas and Stogit, leading operators in the respective businesses of natural gas distribution and storage in Italy. All stakeholders of the gas system stand to benefit because the acquisition will lead to a synergistic, and therefore more efficient, management of this system. At the same time, it will possible to diversify regulatory risk: the transportation, distribution, regasification and storage businesses are subject to different regulations with different time horizons. By subscribing 99.75% of the shares not taken up under option by Snam Rete Gas shareholders during the capital increase to finance the acquisition, the market showed its appreciation of the business and strategic motives behind the transaction, which aims to sustain the growth of the company as it becomes a unique European market leader in the regulated gas sector. Snam Rete Gas shares ended the year quoted at 3.46 per share (+6.1% compared with the adjusted price for 2008), outperforming the European utilities sector index (Dow Jones Stoxx 600 Utilities +1%). The other main indices, which fell sharply in 2008, generated returns in the region of +19.5% (FTSEMIB) and +24.1% (Dow Jones Euro Stoxx 50). In 2009, Snam Rete Gas also listed on the Dow Jones Sustainability World Index (DJSI World), the first and most prestigious global share index which assesses the social responsibility of companies. Only companies with excellent business management based on sustainability criteria make it onto the list. This listing is testament to the company s constant and growing commitment to sustainable development, which we pursue on a daily basis thanks to the expertise of our staff and their continual improvement. Snam Rete Gas will continue to invest by preserving its business model and pursuing its objective of creating value for shareholders, the community and all stakeholders, in total respect of its environment and surroundings. The results for financial year 2009 include the associated effects of consolidating Italgas and Stogit, which were recorded from the transaction completion date of 30 June 2009 and are therefore included in the results for the second half of the year. EBIT of 1,274 million was up by 252 million, or 24.7%, compared with financial year 2008, owing to the contribution from the natural gas distribution ( 203 million) and storage ( 92 million) business segments after consolidating Italgas and Stogit. This was partly offset by reduced EBIT from the transportation business (- 43 million), which was only slightly lower (-4.2%) than in 2008 despite a significant fall in gas demand (-8%) and the subsequent drop in volumes of natural gas transported (-10.2%). The regasification business recorded EBIT of 5 million, in line with the figure for Net profit of 732 million was up 202 million, or 38.1%, compared with financial year This was because of higher EBIT (+ 252 million), income from equity invest- 12

15 SNAM RETE GAS ANNUAL REPORT 2009 / LETTER TO THE SHAREHOLDERS ments (+ 22 million), relating primarily to the shares of results for the period of subsidiaries and affiliates valued using the equity method, and lower net financial charges (+ 9 million) owing essentially to a significant reduction in market interest rates. These factors were partially offset by an increase in income taxes (- 81 million) brought about by higher pre-tax profit. The major positive cash flows of the year came from operations (+ 1,164 million) and from the net cash flow of equity (+ 3,443 million) owing to the part-financing of the acquisition of Italgas and Stogit through the capital increase. These flows only partly covered the financial requirements connected with the acquisition of the two companies (- 4,474 million, net of acquired cash and cash equivalents), investments (- 1,179 million) and dividends (- 450 million), resulting in an increase in net financial debt at 31 December 2009 of 3,713 million, including 2,219 million of debt of the companies acquired at 30 June Leverage was 63.6% at year-end, unchanged from The results achieved allow for the distribution, subject to approval from the shareholders meeting, of a dividend of 0.20 per share, 0.06 per share of which was distributed as an interim dividend in October This is in line with the attractive and sustainable dividend policy of Snam Rete Gas in the context of a growing business. We will continue to focus on efficiency in 2010, particularly regarding operational synergies arising from the integration of Italgas and Stogit, which will provide estimated cost savings of around 40 million in 2010, calculated in real terms on the basis of costs for 2008 and at constant structure. The integration of Italgas and Stogit also enables Snam Rete Gas to confirm a solid and significant investment plan aimed at developing the gas system in Italy and sustaining and increasing the group s growth opportunities in the medium and long term. Snam Rete Gas knows that continually improving corporate performance with regard to sustainable development is key to success. It will therefore continue its commitment to improving the reliability and capacity of strategic services for the country that ensure sustainable economic development, in total respect of the environment and social climate in which the group operates. As part of this development policy, Snam Rete Gas s activities and corporate systems are based on good governance principles in order to maximise value for shareholders and ensure complete transparency in business management. 10 March 2010 On behalf of the board of directors Chairman CEO 13

16 SNAM RETE GAS ANNUAL REPORT 2009 / LETTER TO THE SHAREHOLDERS BOARD OF DIRECTORS (*) BOARD OF STATUTORY AUDITORS (*) Chairman Alberto Meomartini Chairman Pierumberto Spanò (1) CEO Carlo Malacarne Amministratori Giuseppe Airoldi (1) Independent director Davide Croff Independent director Massimo Mantovani Director Massimo Mondazzi Director Roberto Lonzar (1) Independent director Roberto Lugano (1) Independent director Renato Santini Independent director Standing auditor Roberto Mazzei Riccardo Perotta Alternate auditor Giulio Gamba Luigi Rinaldi (1) AUDIT COMMITTEE (**) COMPENSATION COMMITTEE (**) Roberto Lugano Chairman - Independent director Giuseppe Airoldi Chairman - Independent director Roberto Lonzar Independent director Davide Croff Independent director Renato Santini Independent director Massimo Mondazzi Director GENERAL MANAGER Francesco Iovane (2) INDEPENDENT AUDITORS (***) PricewaterhouseCoopers S.p.A (*) Appointed by the shareholders on 26 April 2007 and in office until approval of the financial statements of 31 December (**) Committees set up on 26 February Members appointed by the board of directors on 8 May (***) Mandate awarded by shareholders on 27 April 2004 for the three-year period and extended by shareholders on 26 April 2007 for the period ( 1 ) Appointed from the minority shareholders list. ( 2 ) Appointed Operations General Manager by the board of directors on 8 May

17 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Operating review Introduction The criteria for setting tariffs for the transportation, distribution and storage of natural gas, as well as for the regasification of LNG, are established by the Electricity and Gas Authority. The table below shows the major pricing elements for each of the regulated activities carried out by Snam Rete Gas, on the basis of the regulatory framework as at 31 December , ( 7 ) It should be noted that new regulatory criteria for the natural gas transportation business segment came into force on 1 January 2010 for the third regulatory period (1 January December 2013). For more information on the regulatory framework for each business segment, see the relevant Regulation section. 15

18 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Calculation of net invested capital recognised for regulatory purpose (RAB) Re-valued historical cost Re-valued historical cost Re-valued historical cost Parametric method for centralised revenues Re-valued historical cost Remuneration of net investment capital recognised for regulatory purposes (WACC pre-tax) 6.7% 7.6% 7.6% (distribution) 8% (metering) 7.1% INCENTIVES of new investments 1% for 5 years (on investments in security) 2% for 7/10 years (on investments in capacity development) 3% for 10/15 years (on investments in entry capacity development) 2% for 8 years (on upgrading existing terminals less than 30%) 3% for 16 years (on upgrading existing terminals more than 30%) 2% for 8 years (on subsitutions of cast-iron pipes and renewal of odorisation systems) 4% for 8 years (on upgrading existing capacities) 4% for 16 years (on development of new storage sites) Efficiency factor (X FACTOR) 2% on operating costs 2% on ammortisation and depreciation 3,5% on commodity components 0.5% on operating costs 3.2% on distribution operating costs 3.6% on metering operating costs 2% on operating costs 1.5% on ammortisation and depreciation The following sections show the key performance indicators for each business segment 8. As indicated previously, the associated effects of consolidating Italgas and Stogit are recorded from 30 June 2009, the completion date of the transaction. For purposes of fully assessing operating performance in each business segment, the operating performance of the natural gas distribution and storage business segments is analysed with reference to the entire 2009 financial year. Comparative information is shown for Natural gas transportation The service of transporting natural gas Natural gas transportation is an integrated service that consists of moving gas from the national network entry points 9 to the regional network redelivery points, where the gas is delivered to users of the service. Snam Rete Gas allocates transportation capacity to companies upon their request. As shippers, these companies have the right to inject and withdraw, at any time during the thermal year, at the entry and exit points of the national network, the redelivery points of the regional network and the virtual trading point 10, respectively, a quantity of gas not greater than the daily capacity allocated. The gas injected into the national network comes from imports and, to a lesser extent, national production. Natural gas from abroad is injected into the national network at seven entry points where the network joins up with the import pipelines (Tarvisio, Gorizia, Gries Pass, Mazara del Vallo and Gela) and the LNG regasification terminals ( 8 ) The business segments (natural gas transportation, LNG regasification, natural gas distribution and storage) are identified, in line with internal reporting, by management, and refer to the respective primary activities of Snam Rete Gas, GNL Italia, Italgas and its subsidiaries and Stogit. ( 9 ) The criteria for defining the national network are set out in the Decree of the Industry, Trade and Craftwork Ministry of 22 December 2000, as required by Legislative Decree no. 164 of 23 May 2000 (the Letta Decree). ( 10 ) Virtual point where shippers can trade gas injected into the national network on a daily basis. 16

19 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW (Panigaglia and Cavarzere). Domestically produced gas is injected into the 67 entry points 11 located at the production fields or their collection and treatment centres. The storage facilities are also connected to the transportation network (two virtual entry/exit points for the storage hubs). Gas leaving the national network is transported on the regional network to the redelivery points, from where it is withdrawn by the shippers. Snam Rete Gas is Italy s leading domestic transporter and dispatcher of natural gas, with more than 31,500 km of high- and medium-pressure pipelines (around 94% of the entire transportation infrastructure). Snam Rete Gas - Network infrastructure ( 11 ) Number of entry points at 31 December

20 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Key performance indicators ( millions) Change % change Core business revenue (*) 1,769 1,882 1,865 (17) (0.9) Operating costs (*) EBIT 1,015 1, (43) (4.2) Net profit Investments 725 1, (112) (10.8) - of which with incentives (123) (13.4) - of which without incentives Net invested capital at 31 December 9,312 9,736 10, Volumes of natural gas injected into the gas transportation network (billions of cubic metres) (8.74) (10.2) Transportation network (km in use) 31,081 31,474 31, of which national network 8,548 8,779 8, of which regional network 22,533 22,695 22,660 (35) (0.2) Employees in service at 31 December (number) 2,270 2,252 2, (*) Before consolidation adjustments Results EBIT for 2009 was 974 million, down only slightly (-4.2%) on 2008 despite a substantial fall in gas demand (-8%) and the subsequent reduction in transported gas volumes (-10.2%). The weaker performance of the segment was due essentially to lower transportation revenue, higher operating costs, relating for the most part to greater provisions for risks and charges, and an increase in amortisation and depreciation after the introduction of new transportation infrastructure. Operating review Investments in 2009 amounted to 926 million, a decrease of 112 million, or 10.8%, compared with Investments ( millions) Change % change Development (121) (14.9) Investments with incentive of 3% (127) (22.0) Investments with incentive of 2% Maintenance and others Investments with incentive of 1% (2) (1.9) Investments without incentive , (112) (10.8) Investments are classified in accordance with resolution ARG/gas no. 184/09 of the Electricity and Gas Authority, which identified various project categories each with a different incentive level 12. It is foreseen that 86% of investments benefit from incentive-based remuneration. The breakdown of investments in 2009 by category will be submitted to the Authority when the tariffs are approved for The main investments with a 3% incentive were: - as part of the project for the new transportation infrastructure along the Adriatic side ( 158 million), the purchase of materials to construct the Massafra-Biccari pipeline in Puglia and Basilicata; - as part of the project to upgrade the import infrastructure in Sicily and Calabria ( 128 million): (i) construction of the Montalbano-Messina and Enna- Montalbano pipelines in Sicily, and the Rende-Tarsia pipeline in Calabria; (ii) completion works on the Mazara-Menfi and Tarsia-Morano pipelines in Sicily and Calabria respectively; (iii) first instalments relating to supply of the turbo compressor at the Montesano station; ( 12 ) The investment incentives are the same as for the second regulatory period. 18

21 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW - as part of the project to improve the import infrastructure from the North East ( 49 million): (i) installation of the new 24-MW turbo compressor to upgrade the Malborghetto station in Friuli Venezia Giulia; (ii) construction of the Tarvisio-Malborghetto pipeline and assembly of the gas cooler at the Istrana station; - as part of the project to upgrade the transportation infrastructure in the Po Valley with an aim to increase import capacity ( 31 million): (i) detailed design and materials for constructing the Poggio Renatico- Cremona pipeline in Emilia Romagna and Lombardy; (ii) spare parts and finishing works on the Poggio Renatico station; Breakdown of investments by incentive (% of total investments) (%) Investments with 3% incentive Investments with 2% incentive Investments with 1% incentive Investments with no incentives The main investments with a 2% incentive were: - as part of the project to upgrade the transportation infrastructure in the Po Valley with an aim to increase national transportation capacity ( 49 million): (i) materials for constructing the Cremona-Sergnano pipeline in Lombardy; (ii) design of the Zimella-Cervignano pipeline in Veneto and Lombardy; - upgrading the pipeline network in South Piedmont ( 22 million), including construction of the Cherasco- Cuneo and Oviglio-Ponti pipelines and completion works on the Mortara-Alessandria and Alessandria- Oviglio pipelines. The main investments with a 1% incentive involved several projects aimed at maintaining adequate safety and quality levels at the stations. With a 14 million expense in 2009, the project to replace the TC units at the Messina station was particularly significant, with design activities and the first instalments relating to the supply of turbo compressors. The investments without incentive include projects to replace assets and plants, as well as projects relating to the implementation of new IT systems, the development of existing ones and the purchase of other key operating assets. Status of national gas transportation network Natural gas availability The availability of natural gas in Italy in 2009 was billion cubic metres, down by 6.84 billion cubic metres, or 8.1%, compared with Natural gas availability (billions of m 3 ) Change % change From imports (7.85) (10.3) From national production (0.89) (9.8) Total gas injected into the network (8.74) (10.2) Net storage withdrawals (injections) (*) 1.25 (1.12) Total natural gas availability (6.84) (8.1) (*) The balance between withdrawals from (-) and injections into (+) storage. Natural gas withdrawals (billions of m 3 ) Change % change Redelivery to the domestic market (6.68) (8.0) Exports (0.12) (20.0) Snam Rete Gas consumption and emissions (0.08) (19.0) Unaccounted-for gas and other changes (*) Total natural gas withdrawals (6.84) (8.1) (*) Includes the line pack variation. A definition of Unaccounted-for gas can be found in the forthcoming paragraph Natural gas withdrawals. 19

22 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW The volumes of gas injected into the transportation network fell by 10.2% to billion cubic metres. The reduction in volumes injected into the gas transportation network was due to lower imports (-7.85 billion cubic metres or -10.3%), and lower national production (-0.89 billion cubic metres or -9.8%). The negative balance of around 0.8 billion cubic metres between gas withdrawals from (-) and injections into (+) the storage system also contributed to the lower volumes injected into the network. The situation was reversed in 2008, when injections into the storage system were 1.12 billion cubic metres greater than withdrawals. The following is an analysis of imports by entry point: Imports by entry point (billions of m 3 ) Change % change Entry point Tarvisio (1.66) (6.8) Mazara del Vallo (3.11) (12.6) Passo Gries (3.67) (23.4) Gela (0.70) (7.1) Cavarzere (GNL) Panigaglia (GNL) (0.20) (13.2) Gorizia (0.04) (44.4) (7.85) (10.3) Compared with 2008, imports were down 10.3%. Notably, there were smaller imports at the Gries Pass (-23.4%), Mazara del Vallo (-12.6%) and Tarvisio (-6.8%), the latter affected by the relationship crisis between Russia and Ukraine which meant imports were blocked in January Natural gas injected into the network by entry point (% of total injected) (%) 3 2 Mazara del Vallo 2007 Tarvisio and Gorizia Passo Gries Gela Panigaglia Cavarzere The reduction in natural gas volumes injected into the network in 2009 (-10.2%) was due mainly to Eni (-23.5%) e Enel Trade (-11.9%). Natural gas withdrawals The natural gas withdrawn from the transportation network in 2009 (77.68 billion cubic metres) was destined mainly for: (i) redelivery to shippers at the network exit points (76.66 billion cubic metres); (ii) exports (0.48 billion cubic metres), primarily to Slovenia; (iii) use by the compressor stations and emissions from Snam Rete Gas s network and plants (0.34 billion cubic metres). The difference between the volume of gas measured at its injection into the network and the volume measured at the exit points (mainly caused by the technical tolerance of the measuring instruments) is generally defined as unaccounted-for gas in the energy report drawn up by Snam Rete Gas. Volumes of natural gas injected into the network by shipper (billions of m 3 ) Change % change Eni (12.17) (23.5) Enel Trade (1.17) (11.9) Others (8.74) (10.2) 20

23 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Until 2009, the Authority attributed unaccounted-for gas to the shippers 13. Gas demand by sector (% of total gas demand) (%) The demand for natural gas in Italy in 2009 was billion cubic metres, down by 6.75 billion cubic metres, or 8%, compared with 2008 owing to the effects of the economic crisis. The reduction was concentrated mainly in the thermoelectric (-15.5%) and industrial (-14.6%) sectors, although this was partly offset by higher demand from the residential and tertiary sector (+4.9%) owing primarily to weather conditions. The measures taken to develop and upgrade the transportation infrastructures have led to an increase in the network s transportation capacity to million cubic metres per day (+13.8%) at the beginning of the thermal year Thermoelectric Residential and services Industrial Other Reconciliation between volumes withdrawn from the network and domestic demand (*) 2009 Change % change (billions of m 3 ) Volumes withdrawn (6.84) (8.1) Exports (-) (0.48) (0.60) (0.48) 0.12 (20.0) Gas injected into the regional network of other operators (0.01) (11.1) Other uses (**) (0.02) (2.3) Total demand in Italy (6.75) (8.0) (*) Gas demand was aligned with the data published by the Ministry of Economic Development. (**) Includes use by the Panigaglia LNG terminal, compression stations for storage and production treatment facilities. Domestic gas demand (billions of m 3 ) (*) 2009 Change % change Residential and tertiary Thermoelectric (5.24) (15.5) Industrial (**) (2.82) (14.6) Other (0.16) (10.7) (*) Gas demand was aligned with the data published by the Ministry of Economic Development. (**) Includes consumption by the industrial, agricultural and fishery, chemical synthesis and automotive sectors (6.75) (8.0) Transportation capacity Thermal year Thermal year Thermal year (milions of m 3 /day) Available Allocated Satura- Available Allocated Satura- Available Allocated Satura- Entry point capacity capacity tion (%) capacity capacity tion (%) capacity capacity tion (%) Tarvisio Mazara del Vallo Passo Gries Gela Cavarzere (GNL) Panigaglia (GNL) Gorizia ( 13 ) In accordance with the new tariff criteria for the third regulatory period established by resolution ARG/gas 184/09, from 1 January 2010 the Electricity and Gas Authority's resolution ARG/gas 192/09 laid down new methods for recognising costs relating to unaccounted-for gas and gas needed for the functioning of compressor stations. This information can be found in the forthcoming Regulation section. 21

24 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW The rise is due mainly to new transportation capacity available at the entry point connection with the Cavarzere LNG terminal, and to the increase in transportation capacity at Tarvisio, Gela and Mazara del Vallo following the implementation of upgrades to import infrastructures from Russia and North Africa. The network s available capacity meant that it was able to meet all the shippers capacity requests for the thermal year , with a rise in allocated capacity of 9.5%. Furthermore, transportation capacity of 35.2 million cubic metres per day is available at the entry points connected with domestic production, in addition to that mentioned above at the entry points connecting with imports and the LNG terminals. Snam Rete Gas has prepared a long-term schedule of its available transportation capacity, which was communicated to the Economic Development Ministry on 16 June 2009 and published on the Snam Rete Gas website. This document shows capacity data for all the entry points connected with imports and LNG terminals for the thermal year and subsequent years through to 30 September Gas transportation capacity and saturation Available capacity (milions of m 3 /day) Allocated capacity (milions of m 3 /day) Saturation (%) Allocated capacity/available capacity the national and regional networks for the second regulatory period (1 October September 2009). The mechanisms in place during the first regulatory period were confirmed for determining tariff levels. Moreover, an invested capital remuneration rate was fixed at 6.7% in real terms before tax. Investments were again incentivised for the second regulatory period by payment of a remuneration rate increased by 1-3 percentage points compared with that paid on existing capital at the end of 2004 (6.7%) and for a duration of between five and 15 years. The increase in the remuneration rate and the duration differ depending on the type of investment. Revenue tied to new investments is recognised from the thermal year after that in which the costs were incurred and are ensured regardless of the volumes transported. The method applied to update the tariffs (price capping) is applied only to revenue components related to operating costs and amortisation and depreciation which are adjusted for inflation and decreased by a productivity coefficient, set at 2% for the component related to capacity and at 3.5% for that related to volumes transported. The revenue component related to remuneration is determined after the annual adjustment of net invested capital at 31 December 2004 (RAB). Based on the entry/exit model, the tariff structure has been confirmed for the second regulatory period, except for the fixed fee, which is replaced by a special measuring fee. The Electricity and Gas Authority approved the natural gas transportation tariffs for the thermal year with its resolution ARG/gas 102/08 Approval of tariff proposals for natural gas transportation and dispatch fees, enacting the Authority s resolution no. 166/05 of 29 July 2005, published on 31 July The tariffs were determined on the basis of updated core revenues, additional revenue of 39 million relating to development investments made in the first regulatory period and additional revenue of 233 million relating to investments made in 2005, 2006 and Net invested capital (RAB) at 31 December 2007 was 12.2 billion. The Authority also approved the introduction of an additional fee for the thermal year to cover the extra costs for fuel gas for compression and network losses. Regulation Resolution nos. 166/05 and 102/08 Criteria for determining the tariffs for transporting and dispatching natural gas and Approval of tariff proposals for natural gas transportation and dispatch fees. With resolution no. 166/05 Criteria for determining the tariffs for transporting and dispatching natural gas, published on 30 July 2005, the Electricity and Gas Authority set the criteria for defining natural gas transportation tariffs on Resolution ARG/gas 184/09 - Approval of part II Regulation of tariffs for transporting and dispatching natural gas for the regulatory period (RTTG), approval of part III Regulation of tariffs for natural gas transportation metering for the regulatory period (RMTG), measures on temporary fees for gas transportation metering for 2010 and modifications to Appendix A of resolution no. 11/07. With its resolution ARG/gas 184/09, published on 2 December 2009, the Electricity and Gas Authority defined the criteria for setting natural gas transportation and 22

25 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW metering tariffs on the national and regional networks for the third regulatory period (1 January 2010 to 31 December 2013) 14. The Authority also decided that 33.6 million should be paid to Snam Rete Gas for additional costs incurred during the thermal year for purchasing fuel gas used to supply compressor stations. The evaluation of net invested capital (RAB) is carried out using the revalued historical cost method. The remuneration rate (WACC) of the net invested capital was fixed at 6.4% in real terms before tax. Incentives for new investments were confirmed, with a greater remuneration compared with the floating base rate (WACC), depending on the type of investment, from 1-3 percentage points and for a period of five to 15 years. The amortisation and depreciation of the transportation infrastructure (pipelines) is calculated on the basis of a useful life of 50 years and is removed from the price-cap mechanism. Operating costs recognised are determined on the basis of the actual operating costs incurred in 2008 increased by 50% of the higher productivity revenue generated in the second regulatory period. Fuel gas is recognised as pass-through and excluded from the price-cap mechanism. The share of revenue related to the volumes of gas actually transported is determined on the basis of recognised operating costs and is equal to around 15% of core revenue. Resolution ARG/gas 192/09 - Changes to resolution no. 137/02 of 17 July 2002 for defining the criteria for dealing with non-metered natural gas (self-consumed gas, network losses, line pack and unaccounted-for gas) as part of the balancing service. With its resolution ARG/gas 192/09, published on 15 December 2009, the Electricity and Gas Authority, enacting the new tariff criteria laid down by resolution ARG/gas 184/09, defined methods for payment in kind, by shippers to transporters, of gas volumes to cover fuel gas, network losses and unaccounted-for gas, owed as a percentage of the volumes respectively injected into and withdrawn from the transportation network. Resolution ARG/gas 198/09 - Approval of tariff proposals for natural gas transportation and dispatch fees and temporary gas transportation metering fees for On the basis of the criteria described, the Authority approved transportation, dispatch and metering tariffs for 2010 with its resolution ARG/gas 198/09. The tariffs were determined on the basis of recognised core revenue of 1,703 million (net of all pass-through costs, including fuel gas and network losses), additional revenue of around 28 million relating to incentives for development investments made during the first regulatory period and revenue of around 23 million associated with system balancing costs. Revenues for 2010 will take into account the growth in transported volumes compared with the benchmark value, taken as 75.7 billion cubic metres. The share of revenues associated with transportation capacity is guaranteed and is equal to around 85% of core revenue. RAB at 31 December 2008 for the transportation, dispatch and metering business was 12.8 billion. Resolution VIS 8/09 Closure of the preliminary investigation begun with the Electricity and Gas Authority's resolution VIS 41/08 of 15 April 2008 into the correct application of forecasts about unaccounted-for gas in the natural gas transportation network in the period With its resolution VIS 8/09, published on 5 February 2009, the Electricity and Gas Authority concluded its preliminary investigation to acquire information on unaccounted-for gas in the transportation system between 2004 and 2006, and began a fact-finding investigation on the levels of service and maintenance at several of the transportation network s metering stations. The inquiry was scheduled to close on 30 September 2009, but resolution VIS 96/09 extended it until 31 March ( 14 ) Resolution ARG/gas 135/09 of the Authority, published on 28 September 2009, extended the validity of tariffs approved for the thermal year to the period 1 October December

26 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Liquefied Natural Gas (LNG) regasification The service of regasifying LNG Natural gas injected into the transportation network also comes from the Panigaglia (La Spezia) LNG terminal, owned by the group company GNL Italia, which is able to regasify 17,500 cubic metres of LNG a day. This means that it injects more than 3.5 billion cubic metres of natural gas a year into the transportation network, at maximum operating conditions. The regasification service includes unloading the LNG from the tankers, storing it for the period necessary for vaporisation, regasifying it and injecting it into the gas transportation network at the entry point in Panigaglia. The service can be either continuous for the entire thermal year or provided on a spot basis. Auxiliary services, such as correcting the calorific power of natural gas to comply with the quality requirements for its injection into the transportation network (correcting the Wobbe index), are also available. Key performance indicators ( millions) Change % change Core business revenue(*) (**) (1) (2.7) Operating costs (**) (3) (10.0) EBIT Net profit Investments Volumes of LNG regasified (billions of cubic metres) (0.20) (13.2) Tankers loads (number) (4) (9.5) Employees in service at 31 December 2009 (number) (6) (6.5) (*) Core business revenue includes the recharging to customers of costs relating to the natural gas transportation service provided by Snam Rete Gas S.p.A, For purposes of the consolidated financial statements, these revenues, together with transportation costs, are charged to GNL Italia S.p.A to show the scale of the operation. (**) Before consolidation adjustments Results EBIT for 2009 was unchanged from 2008, at 5 million. Operating review In 2009, the Panigaglia (SP) LNG terminal regasified 1.32 billion cubic metres of natural gas (compared with 1.52 billion cubic metres in 2008), unloading 38 tankers - of which five were on a spot basis (compared with 42 loads in the previous year - of which one was on a spot basis). Volumes of LNG regasified and number of tanker loads Regulation Resolution ARG/gas 92/08 Criteria for defining tariffs for the regasification service and amendments to resolution nos. 166/05 and 11/07. The Electricity and Gas Authority defined the tariff criteria for the regasification service for the third regulatory period (1 October 2008 to 30 September 2012) in this resolu LNG regasified volumes (billions of m 3 ) Tanker loads (number) Quantities of LNG regasified by shipper (billions of m³) Change % change Enel Trade (0.22) (17.9) Eni (0.19) (65.5) Others (0.20) (13.2) 24

27 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW tion published on 9 July It substantially confirmed the mechanisms in place during the second period for determining the core revenue, including the net invested capital remuneration rate of 7.6% in real terms before tax. With respect to the tariff structure, the breakdown of revenue between a regasification capacity component and a regasified volumes component was maintained, but the ratio was changed from 80/20 in the second regulatory period to 90/10. Tariffs are updated with a price-cap methodology applied only to the operating costs component, with a productivity recovery coefficient of 0.5%. The revenue component related to remuneration and amortisation and depreciation is updated using an annual recalculation of invested capital and additional revenue arising from incentives received for investments made in previous regulatory periods. New investments were incentivised by payment of a remuneration rate between one and three percentage points higher than that on existing capital at the end of 2007 and for a duration of up to 16 years. The increase in the remuneration rate and the duration differ depending on the type of investment. Natural gas distribution The service of distributing natural gas The natural gas distribution business operates on a local authority concession basis, through Italgas and its subsidiaries and associates, and involves distributing gas through local pipelines from delivery points at the city gates to the end customers (households, businesses etc.) via redelivery points on the distribution network. By transporting gas through municipal networks, the distribution service is performed on behalf of retail companies authorised to sell to end customers. Italgas distributes natural gas using an integrated infrastructure comprising units for withdrawing gas from the transportation network, pressure reduction stations, local transportation and distribution networks, gas service pipes and redelivery points consisting of technical equipment featuring meters at the end customer (households, commercial and tertiary businesses, and small industrial companies). Italgas is the leading domestic distributor of natural gas in Italy, with 1,441 municipal concessions and a high-and medium-pressure transportation network of around 50,000 km. Resolution ARG/gas 102/09 Approval of tariff proposals for the regasification service in the thermal year for GNL Italia S.p.A and Terminale GNL Adriatico S.r.l, enacting the Electricity and Gas Authority s resolution ARG/gas 92/08 of 7 July The Electricity and Gas Authority approved the tariffs for the thermal year for the regasification service offered by GNL Italia, as required by resolution ARG/gas 92/08, with this resolution published on 29 July Tariffs were determined on the basis of core revenue of 24.6 million. Net invested capital (RAB) at 31 December 2008 was million. Italgas - Municipal concessions Resolution ARG/gas 147/09 - Approval of a proposed amendment to the regasification code prepared by Gnl Italia S.p.A for managing the regasification service following the temporary and partial unavailability of regasification capacity at the Panigaglia terminal. With its resolution ARG/gas 147/09, published on 19 October 2009, the Electricity and Gas Authority approved an update to the Regasification Code relating to operational aspects of the terminal concerning the reduction in regasification capacity for the thermal years and following the necessary shutdown of one of the vaporisers at the plant for technical checks. 25

28 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Introduction As indicated previously, the associated effects of consolidating Italgas are recorded from 30 June 2009, the completion date of the transaction. For purposes of fully assessing operating performance, the operating performance of the distribution business segment is analysed with reference to the entire 2009 financial year. Comparative information is shown for Key performance indicators 15 ( millions) 2008 Of which Acqua 2009 Change % change Campania Core business revenue Operating costs (62) (17.6) EBIT Net profit Investments Net invested capital at 31 December 3,237 (20) 3, Gas distributed (millions of cubic metres) 7,431 7, Distribution network (km) 49,410 49, Active meters (number) 5,676,105 5,770,672 94, Customers - Retail companies (number) Employees in service at 31 December (number) 3, ,545 (187) (5.0) Results Core business revenue was 802 million, an increase of 87 million, or 12.2%, compared with The increase was due to higher natural gas distribution revenues as a result of new tariff calculation methods and a different way of recognising revenues for the thermal year, applicable as of the third regulatory period (1 January December 2012) 16. Natural gas distribution revenues in 2009 amounted to 776 million, an increase of 87 million, or 12.6%, compared with financial year EBIT in 2009 was 398 million, an increase of 80 million, or 25.2%, compared with The improved operating performance was due to higher core business revenue (+ 87 million) and lower operating costs (+ 10 million), attributable primarily to smaller personnel expense. These effects were partly offset by a reduction in other revenue (- 10 million), owing essentially to lower net income from energy efficiency certificates 17 and higher amortisation and depreciation (- 7 million). ( 15 ) For purposes of a like-for-like comparison, the forthcoming financial review does not take into account the 2008 results of Acqua Campania S.p.A, a company no longer fully consolidated as of It should be noted, however, that following the valuation of Italgas's equity investment in Acqua Campania S.p.A using the equity method, net profit and equity attributable to Snam Rete Gas are unchanged. Furthermore, the figures for 2008 have been reclassified in the same way as those for 2009, showing: (i) operating costs net of expenses for the acquisition of energy efficiency certificates ( 21 million), recorded as a decrease in relative income; (ii) distribution revenues net of tariff-related expenses ( 17 million), recorded in 2008 under operating costs. ( 16 ) With its resolution no. 159/08, the Electricity and Gas Authority introduced a new way of determining gas distribution tariff, applicable from 1 January 2009 and for the entire four years of the regulatory period (i.e. until 2012). The main variation is the method used to determine revenue owed to gas distributors for their services. Before the above resolution was introduced, this revenue was determined using the tariffs set by the Authority for the volumes actually distributed in the period under review. Now, however, total revenue for each year of the regulatory period is a pre-set amount decided when the tariff requests are approved, called the Total Revenue Limit (TRL), being the maximum remuneration recognised by the Authority for each operator to cover its costs. Any positive or negative differences between the TRL and the revenue arising from the amounts invoiced for the volumes actually distributed to the retail companies are settled using an equalisation mechanism with receivables and payables due from and to the Electricity Equalisation Fund. ( 17 ) Legislative Decree no. 164 of 23 May 2000 stipulates that natural gas distribution firms set consumption reduction and energy savings targets to be met through raising energy efficiency, and that they are awarded energy efficiency certificates (established by the ministerial decrees of 20 July 2004) depending on the results achieved. The energy efficiency targets can be met either by implementing energy efficiency policies or by purchasing certificates from other parties. Once the energy efficiency target is met, cancelling the certificates triggers repayment by the Electricity Equalisation Fund on the basis of dedicated funds built up through distribution tariff increases. 26

29 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Net profit ( 275 million) increased by 47 million, or +20.6%, compared with 2008, due largely to the combined effect of the following: (i) the aforementioned increase in EBIT (+ 80 million); (ii) higher income from equity investments (+ 13 million) relating mainly to shares of the results for the period of subsidiaries and affiliates valued using the equity method; (iii) lower net financial expense (+ 11 million) on the back of reduced market interest rates; (iv) higher income taxes (- 57 million) as a result of more pre-tax profit. Operating review Investments (before grants) came to 334 million, an increase of 46 million, or 16%, on the figure of 288 million for Investments ( millions) Change % change Network maintenance Network extensions and upgrades (11) (10.7) New networks Other investments (10) (24.4) Network maintenance investments ( 194 million) mainly involved renovating sections of obsolete pipes by replacing cast-iron pipes, especially in Rome s municipal network, and stepping up the meter replacement programme. Network extension and upgrade investments ( 92 million) mainly involved extending existing networks in response to commitments arising from concession contracts and building new infrastructures, particularly in Calabria. Other investments ( 31 million) related mainly to property and IT investments. Gas distribution The volume of gas distributed in 2009 was 7,537 million cubic metres, an increase of 106 million cubic metres, or 1.4%, compared with 2008, due essentially to weather conditions and network development. At 31 December 2009, the group had concessions for gas distribution services in 1,441 municipalities (compared with 1,438 at 31 December 2008) with 5,770,672 active meters at gas delivery points to end customers (households, businesses, etc.), compared with 5,676,105 at 31 December Breakdown by type of investment (% of total investments) (%) 2 5 Natural gas distributed 8,000 (millions of m 3 ) ,600 7, ,200 7,431 6, ,400 6, Network maintenance Network extensions and upgrades Other investments New networks 27

30 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Distribution network The group s gas distribution network at 31 December 2009 spanned 49,973 km and consisted of different pipes for different pressures: - main supply pipes (greater than 12 bar); - medium-pressure pipes (up to 5 bar); - low-pressure pipes (up to 0.04 bar). The 563 km increase from 31 December 2008 is due to the balance of increases and decreases in the network. The increases are primarily due to: - acquisition of the tendered gas distribution concession in the Cerro Maggiore municipality; - acquisition of the business unit which distributes gas in the Settimo Torinese and Brandizzo municipalities; - partial acquisition of the business unit which distributes gas in the municipalities of Alimena, Bompietro and Blufi in Palermo and Sperlinga (network to be constructed) and the village of Villadoro in Nicosia, Enna; - construction of new networks; - extension of networks to meet commitments deriving from concession contracts; - service access requests from end customers (households, businesses, etc.). depending on the size of the company and the density of the network s clientele; - The recognition of operating costs for the metering and sales businesses using the same parametric components for all companies; - From 2010, the valuation at standard cost of all investments on the basis of a pricing structure drawn up by the Authority (Modern Equivalent Asset Value (MEAV) methodology, based on the concept of new replacement cost); - The determination, by the Authority, of reference tariffs for each company, corresponding to recognised costs for remuneration of net invested capital, amortisation and depreciation, and operating costs; - The subdivision of the national territory into six tariff zones and determination, by the Authority, of the related compulsory tariffs that distributors must charge users of their networks; - The introduction of an equalisation mechanism, managed by the Authority through the Electricity Equalisation Fund, in order to ensure the equality of revenues generated by each company through the compulsory tariff, which obviously does not reflect the specific costs of each company and the costs recognised to the same company through the reference tariff. The decreases are attributable mainly to the sale of gas networks in the Bussolengo, Liscate, Castiglione delle Stiviere and Capriolo municipalities to other operators following discontinuation of distribution services. Customers At 31 December 2009, the group transported the gas of 138 retail companies in its distribution networks, compared with 109 companies at 31 December Regulation Resolution ARG/gas no. 159/08 - Single text for regulating the quality and tariffs of gas distribution and metering services for the regulatory period (TUDG): approval of part II "Tariff regulation for gas distribution and metering services for the regulatory period (RTDG). Temporary measures for With this resolution, published on 17 November 2008 (and subsequently amended), the Authority defined tariff criteria for distribution and metering services for the third regulatory period, which runs from 1 January 2009 to 31 December In short, the resolution provides for: - The recognition of locally invested capital using the revalued historical cost method and of centrally invested capital (non-industrial buildings and other fixed assets) using the parametric method; - The recognition of operating costs for the distribution business on a parametric basis and differentiated Resolution ARG/gas 79/09 - Approval of tariffs for gas distribution and metering services for 2009 and start of a fact-finding investigation aimed at checking the data sent by companies to determine the reference tariffs. With this resolution, published on 30 June 2009 and on the basis of tariff criteria laid down by resolution 159/08, the Electricity and Gas Authority approved compulsory tariffs for the distribution, metering and sale of natural gas for the period 1 July December The approval of reference tariffs for natural gas distribution and metering for each distribution company was established by subsequent resolution ARG/gas 197/09. It was stipulated that the distribution tariffs approved for the thermal year , and applied provisionally during the first half of 2009, would be applied definitively without recourse to equalisation. The Authority simultaneously began a fact-finding investigation into the historical cost values of investments and government grants passed on by various operators (including Italgas for purposes of determining the reference tariff for 2009). The inquiry ended in December Resolution VIS 169/09 - Closure of the fact-finding investigation begun under the Electricity and Gas Authority s resolution ARG/gas 79/09 of 30 June 2009 on data transmitted by distributors of natural gas and other gases pursuant to article 7 of the RTDG under the Electricity and Gas Authority s resolution ARG/gas 159/08 of 6 November

31 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW This resolution, published on 23 December 2009, ended the fact-finding investigation begun in June 2009 on the back of resolution 79/09. The Authority asked Italgas to provide more details on government grants relating to a small number (103) of localities. Resolution ARG/gas no. 197/09 - Approval of gas distribution and metering tariffs for Modifications to part II of the single text for regulating the quality and tariffs of gas distribution and metering services for the regulatory period (TUDG): Other gas distribution tariff measures. With its resolution 197/09, published on 23 December 2009, the Authority approved the reference tariff for 2009 for all Italgas localities, except those subject to resolution VIS 169/09, for which the Authority determined a provisional reference tariff subject to further checks stipulated by said resolution. March, and where natural gas is withdrawn from the field, treated and delivered to users via the transportation network. The storage business uses an integrated infrastructure comprising gas fields, gas treatment centres, compressor stations and the operational dispatch system. Stogit, the group company that carries out natural gas storage activities, is currently the largest Italian operator and one of the main European players in the sector, with eight operational storage sites spread over Lombardy (four), Emilia Romagna (three) and Abruzzo (one). According to economic and technical efficiency criteria, the company makes available the storage capacities at its disposal by using an integrated system which can satisfy modulation service demands, in accordance with available storage capacity. Stogit - Presence Resolution ARG/gas no. 206/09 - Update of 2010 tariffs for distributing and metering natural gas and other gases and other tariff measures for natural gas distribution and metering services. Modifications to the RTDG. Correction of errors relating to the Electricity and Gas Authority's resolution ARG/gas 197/09 of 21 December With this resolution, published on 29 December 2009, the Electricity and Gas Authority updated the reference tariff for 2010 on the basis of values approved under resolution ARG/gas 197/09 (for Italgas, the localities for which the Authority stipulated further investigation for 2009 were not included). In addition, owing to the delay in defining the price structure for valuing investments at standard cost, the application of the MEAV method for their recognition has been deferred. Natural gas storage The service of storing natural gas The natural gas storage business in Italy operates on a concession basis and fulfils the various requirements between the supply and consumption of gas. Supply is actually fairly constant throughout the year, while demand is hugely seasonal, being much greater in the winter than in the summer. The storage business is broadly split into two phases: (i) injection generally concentrated between April and October, and consisting of the injection into storage of natural gas from the transportation network; (ii) withdrawal usually concentrated between November and the following Introduction As indicated previously, the associated effects of consolidating Stogit are recorded from 30 June 2009, the completion date of the transaction. For purposes of fully assessing operating performance, the operating performance of the storage business segment is analysed with reference to the entire 2009 financial year. Comparative information is shown for

32 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Key performance indicators ( millions) Change % change Core business revenue (*) Operating costs (4) (5.9) EBIT Net profit Investments Net invested capital at 31 December 1,874 2, Concessions (number) of which operational 8 8 Natural gas moved through the storage system (billions of cubic metres) of which injected of which withdrawn Available storage capacity (billions of cubic metres) (**) Customers (number) Employees in service at 31 December (number) (2) (0.7) (*) Before consolidation adjustments (**) Working gas capacity for modulation, mining and balancing services. The value shown represents the maximum available capacity and may not correspond to the maximum replenishment carried out. Results Core business revenue ( 344 million) increased by 40 million, or 13.2%, compared with This rise was due mainly to higher storage revenues (+12.2%) connected with the remuneration of new capital expenditure. Storage revenue for the 2009 financial year was 341 million, of which 273 million and 68 million respectively related to modulation and strategic storage ( 304 million in 2008, of which 241 million and 63 million respectively related to modulation and strategic storage). EBIT in 2009 was 214 million, an increase of 42 million, or 24.4%, compared with The improved operating performance was due mainly to higher core business revenue (+ 40 million). Net profit ( 121 million) increased by 38 million, or 45.8%, compared with financial year 2008, owing to higher EBIT (+ 42 million) and smaller net financial expense (+ 13 million) because of lower market interest rates, the effects of which were partly offset by higher income taxes (- 17 million) as a result of more pre-tax profit. Operating review Investments in 2009 amounted to 282 million, an increase of 16 million, or 6.0%, compared with Pursuant to resolution no. 50/06 of the Electricity and Gas Authority, relating to the second regulatory period (1 April March 2010), incentivising investments means applying a rate of return that is four percentage points higher than the base rate, over eight years for upgrading existing capacity and over 16 years for structural investments. The key investments with an incentive of 4% over 16 years involved the development of new levels for the Fiume Treste concession, entailing the predicted first increase in capacity of 150 million standard cubic metres (SCM), made available for the thermal year , compared with a Investments ( millions) Change % change Developments of existing sites Investments with an incentive of 4% over 16 years Capacity upgrades (75) (67.6) Investments with an incentive of 4% over 8 years (75) (67.6) Maintenance and other

33 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW Investment breakdown by incentive (% of total investments) (%) Natural gas moved through the storage system (billions of cubic metres) Withdrawals Injections Total Development of existing sites Capacity upgrades Maintenance and others predicted total final volume of 1,100 million SCM. The major investments with an incentive of 4% over eight years involved increasing pressure at existing fields and building new gas wells to maximise delivery services. Natural gas moved through the storage system Volumes of gas moved through the storage system in 2009 amounted to billion cubic metres, an increase of 4.95 billion cubic metres, or 42.8%, compared with This increase is attributable to: - significant gas withdrawals relating to the Russian supply crisis in January 2009 and further withdrawals as a result of changing gas market prices; - subsequent greater injections to restore the volumes withdrawn and gradually replenish the additional capacity made available for the thermal year The final replenishment of capacity was not total (around 95%). - considerable withdrawals beginning in October and becoming even greater in December. The total storage capacity at year-end was 13.9 billion cubic metres, an increase of 1.5% compared with Customers At 31 December 2009, the group provided natural gas storage and modulation services to 56 companies (compared with 48 at 31 December 2008), including 54 companies not belonging to the Eni group. Regulation Resolution ARG/gas 50/06 - Criteria for determining storage tariffs and modifications and additions to the Electricity and Gas Authority s resolutions 119/05 of 21 June 2005 and 166/05 of 29 July 2005 and resolution ARG/gas 38/09 Approval of corporate fees and determination of unique fees for the storage business for the thermal year , enacting the Electricity and Gas Authority s resolution 50/06 of 3 March With its deliberation 50/06 of March 2006, the Electricity and Gas Authority established criteria for determining storage tariffs for the second regulatory period, which runs until 31 March 2010, by providing for a mixed mechanism of allocated revenue (in terms of capacity) and a price cap (on the commodity itself). A single national tariff was established. With resolution 38/09, published on 30 March 2009, the Authority approved storage tariffs for the thermal year , established on the basis of an RAB equal to 2.8 billion at 31 December Resolution ARG/gas 165/09 - Urgent measures to improve the balancing service and natural gas storage service regulations pursuant to legislative decree no. 78 of 1 July With this resolution, published on 3 November 2009 and enacting Legislative Decree no. 78/09 which laid down measures for reducing the cost of energy for businesses, among other things by enabling the regulator to promote front-line and storage services to industrial and thermoelectric end customers, the Electricity and Gas Authority 31

34 SNAM RETE GAS ANNUAL REPORT 2009 / OPERATING REVIEW defined criteria enabling storage providers to offer users of the transportation system on a monthly basis more flexible services, giving the opportunity for the provider to retain a share of the revenues from any service offers taken up. To this end, Stogit has proposed an update to its own storage code, approved by resolution ARG/gas 178/09, which defines the so-called User Balancing Service. 32

35 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Financial review INCOME STATEMENT ( millions) Change % change Core business revenue 1,790 1,902 2, Other income of which non-recurring 71 Total revenue 1,868 1,910 2, Operating costs (*) (357) (399) (581) (182) of which non-recurring 5 EBITDA 1,511 1,511 1, Amortisation, depreciation and impairment (489) (489) (613) (124) 25.4 EBIT 1,022 1,022 1, Adjusted EBIT (**) 946 1,022 1, Net financial expense (200) (226) (217) 9 (4.0) - of which non-recurring 10 Net income from equity investments Pre-tax profit , Income taxes (228) (266) (347) (81) of which non-recurring and other special items 66 Net profit (***) Adjusted net profit (***) (*) Operating costs comprise the items "Purchases, services and other costs" and "Personnel expense" from the consolidated financial statements. (**) To reconcile EBIT and net profit for 2007 with the corresponding adjusted values, see page 37 of the directors report in the consolidated financial statements for (***) Net profit is attributable to Snam Rete Gas. 33

36 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Net profit Net profit for 2009 amounted to 732 million, an increase of 202 million, or 38.1%, compared with The rise is attributable to: (i) higher EBIT (+ 252 million) because of the associated effects of consolidating the acquired companies; (ii) income from equity investments (+ 22 million), relating mainly to shares of the results for the period of subsidiaries and affiliates valued using the equity method; (iii) lower net financial expense (+ 9 million) due mainly to a significant reduction in market interest rates. These positive factors were partially offset by an increase in income taxes (- 81 million) brought about by higher pre-tax profit (+ 283 million). Analysis of consolidated income statement items Total revenue ( millions) Change % change Core business revenue 1,790 1,902 2, Business segments Transportation 1,769 1,882 1,865 (17) (0.9) Regasification (1) (2.7) Distribution Storage Consolidation adjustments (22) (17) (30) (13) 76.5 Other income Total revenue 1,868 1,910 2, Core business revenue ( 2,438 million) increased by 536 million, or 28.2%, compared with 2008 as a result of consolidating Italgas and Stogit. Revenues from the transportation business segment ( 1,865 million, net of consolidation adjustments) fell by 17 million mainly because of lower transportation revenue (- 19 million), owing to a reduction in the volume of natural gas carried (- 53 million) and updated tariffs (- 18 million), the effects of which were partially offset by the contribution of investments made in 2007 (+ 57 million). Transportation revenues in financial year 2009 ( 1,848 million) include recognition by the Electricity and Gas Authority of higher costs incurred in buying fuel gas in the thermal year ( 34 million; 11 million less than the grant relating to the thermal years and and recorded in the financial statements for Transportation revenue by shipper is analysed in the following table. ( millions) Change % change Eni 1,165 1, (147) (13.6) Enel Trade (9) (3.5) Others Fines and revenue adjustment (101) (74) (47) 27 (36.5) Additional payment to cover higher gas purchasing costs (11) (24.4) Disruption fee pursuant to resolution nos. 297/05 and 277/07 (50) (34) (42) (8) 23.5 Regional network transportation fee pursuant to resolution no. 45/07 - Equalisation (2) (8) (10) (2) ,757 1,867 1,848 (19) (1.0) ( 18 ) The Electricity and Gas Authority s resolution ARG/gas 135/09, published on 28 September 2009, extended for the period 1 October December 2009 the validity of gas transportation and dispatch tariffs approved for the thermal year 1 October September ( 19 ) This payment follows resolution VIS 8/09, published on 5 February 2009, with which the Authority recognised to the company the higher expense for the thermal years and ( 45 million in total), deferring to subsequent rulings the determination of the payment for the thermal years and With resolution ARG/gas 184/09, the Authority stipulated that the additional costs incurred by the company in the period 1 October December 2009 shall be defined in a subsequent ruling. 34

37 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Revenue from the regasification business ( 36 million) refers to payment for the regasification of liquefied natural gas (LNG) at the Panigaglia (SP) LNG terminal. Revenues from the natural gas distribution business segment ( 406 million), and relating to the period 1 July - 31 December 2009, relate primarily to payments for the natural gas distribution service ( 394 million). These were defined on the basis of the Electricity and Gas Authority s resolution no. 159/08, which stipulated their constant spread over a period of months on the basis of a pre-established amount set when the tariffs are approved known as the Total Revenue Limit (TRL) and no longer tied to the seasonal nature of volumes distributed. Revenues from the natural gas storage business segment ( 161 million, net of consolidation adjustments), and relating to the period 1 July - 31 December 2009, refer primarily to payment for storage services ( 158 million, of which 124 million and 34 million respectively refers to modulation and strategic storage). Revenue - Regulated and non-regulated activities ( millions) Change % change Revenue from regulated activities 1,778 1,887 2, Transportation 1,757 1,867 1,848 (19) (1.0) Regasification Distribution Storage (*) Revenue from non-regulated activities ,868 1,910 2, (*) Net of revenue for the modulation service provided to Snam Rete Gas S.p.A. Revenue from regulated activities ( 2,423 million, net of consolidation adjustments) relates to transportation ( 1,848 million), regasification ( 21 million), distribution ( 407 million) and storage ( 147 million) of natural gas. Revenue from non-regulated activities ( 45 million, net of consolidation adjustments) relates mainly to technical services ( 17 million), income from renting and maintaining fibre-optic cables ( 9 million) and capital gains on tangible asset sales ( 7 million). Other revenue Other revenue ( 30 million) relates mainly to capital gains on tangible asset sales ( 7 million), net revenues from redemption of energy efficiency certificates ( 4 million) and income from real estate investments ( 3 million). Operating costs ( millions) Change % change Business segments Transportation Regasification (3) (10.0) Distribution Storage Consolidation adjustments (25) (19) (30) (11) Operating costs ( 581 million) increased by 182 million, or 45.6%, compared with 2008, owing essentially to the associated effects of consolidating Italgas and Stogit. ( 20 ) Information on the regulatory framework for the natural gas distribution business can be found in the section Operating review Natural gas distribution - Regulation. 35

38 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Operating costs in the transportation business segment ( 399 million, net of consolidation adjustments) increased by 11 million mainly because of higher provisions to risks and charges (+ 20 million) and higher fixed costs (+ 4 million), owing in particular to greater expense for termination benefits. These factors were partly offset by a reduction in variable costs (- 13 million) on the back of lower fuel gas acquisition expense, owing mainly to a reduction in consumed gas volumes (- 16 million), partly offset by increased costs for the recharging by third-party operators of the transportation service on their networks (so-called interconnection; + 5 million). Operating costs Regulated and non-regulated activities ( millions) Change % change Costs of regulated activities Controllable fixed costs Variable costs (18) (13.3) Other costs Costs of non-regulated activities Operating costs of regulated activities Controllable fixed costs 21 ( 352 million) comprise recurring personnel expense ( 182 million) and external costs ( 170 million). The following tables analyse the workforce in service at 31 December 2009 (6,187 people) by business segment and professional status. (number) Change % change Business segments Transportation 2,270 2,252 2, Regasification (6) (6.5) Distribution 3,545 3,545 Storage ,357 2,345 6,187 3,842 (number) Change % change Professional status Executives Managers Office workers 1,250 1,241 3,320 2,079 Manual workers ,253 1,479 2,357 2,345 6,187 3,842 The variable costs ( 117 million) refer essentially to the costs of fuel gas used to supply compressor stations and gas emissions from the network and the plants ( 110 million in total). Other costs ( 98 million) relate primarily to charges that are offset in revenue (essentially interconnection charges and costs for the modulation service provided by Stogit in the first half of the year), to net provisions for risks and charges, and to concession costs. ( 21 ) For a definition of controllable fixed costs, see the Glossary in this report. 36

39 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Amortisation, depreciation and impairment losses ( millions) Change % change Amortisation and depreciation Business segments Transportation Regasification Distribution Storage Impairment Amortisation, depreciation and impairment losses ( 613 million) increased by 124 million compared with 2008, owing to amortisation and depreciation in the natural gas distribution ( 75 million) and storage ( 35 million) business segments. The increase in amortisation and depreciation in the transportation business segment (+ 14 million), owing to the introduction of new infrastructures, also contributed to the rise. EBIT ( millions) Change % change Business segments Transportation 1,015 1, (43) (4.2) Regasification Distribution Storage ,022 1,022 1, EBIT in 2009 amounted to 1,274 million, an increase of 252 million, or 24.7%, compared with 2008 owing essentially to the change in consolidation scope, with the natural gas distribution and storage business segments contributing 203 million and 92 million respectively. EBIT 22 in the transportation business fell by 43 million, or 4.2%, compared with 2008 mainly because of: (i) lower transportation revenue (- 25 million, net of components that are offset in costs); (ii) greater amortisation and depreciation (- 14 million) owing to the introduction of new transportation infrastructures; (iii) higher operating costs (- 6 million, net of components that are offset in revenue) following greater provisions for risks and charges (- 19 million) and an increase in fixed costs (- 4 million), the effects of which were partially offset by reduced variable costs for fuel gas used to supply compressor stations and gas emissions from the network and the plants (+ 16 million), against smaller quantities of gas used. The return on invested capital (ROI) was 10% (10.6% in 2008) 23. ( 22 ) EBIT is analysed by considering only those elements that have led to a change therein, as application of the gas sector tariff regulations generates cost and revenue items which offset each other. ( 23 ) The ROI for financial year 2009 is not representative of performance insofar as, following the acquisitions, EBIT includes the associated effects of consolidating the acquired companies in the second half of the year. 37

40 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Net financial expense ( millions) Change % change Financial expense related to net financial debt (240) (276) (166) 110 (39.9) - Charges on short- and long-term financial debt (240) (276) (166) 110 (39.9) (Expense) Income from derivative contracts (66) (93) - Fair-value adjustment (1) (2) (2) - Difference in interest accrued in the period (64) (93) Other financial (expense) income 8 (3) (9) (6) - Accretion discount (1) (1) (11) (10) - Other net financial income (expense) 9 (2) 2 4 Financial expense capitalised (2) (7.7) (200) (226) (217) 9 (4.0) Net financial expense ( 217 million) fell by 9 million compared with 2008 following a significant reduction in market interest rates, the effects of which were partly offset by higher average net financial debt owing primarily to the consolidation of Italgas and Stogit, charged to the income statement from 1 July 2009, and to the financing of the acquisition. The average borrowing cost was approximately 2.9% 24 (4.2% in 2008). In the 2009 financial year, 24 million of financial charges were capitalised (this figure was 26 million in 2008). The reduction of 2 million is attributable to lower market interest rates. Income (Expense) from equity investments The table below shows an analysis of net income from equity investments ( 22 million): ( millions) 2009 Valuation effect with the equity method 21 Capital gains from sale of equity investments 3 Other expenses (2) 22 Net income from equity investments refers to: (i) the share of net results for the period of subsidiaries and associates valued using the equity method ( 21 million) in the natural gas distribution business segment; (ii) the capital gain ( 3 million) from the sale to Eni S.p.A of the stake held by Italgas (17.77%) in Toscana Energia Clienti S.p.A. Income taxes ( millions) Change % change Current taxes (Advanced) deferred taxes Deferred taxes (41) (37) (44) (7) 18.9 Advanced taxes (30) 12 (11) (23) Use of deferred-tax fund (98) (169) (25) (55) (30) Tax rate (%) (1.2) ( 24 ) The acquired companies average cost of borrowing was calculated with reference to the second half of the year. 38

41 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Income taxes ( 347 million) increased by 81 million, or 30.5%, compared with This was due mainly to higher pre-tax profit (+ 283 million) following the change in consolidation scope. The tax rate was 32.2%, compared with 33.4% in financial year Reclassified balance sheet The reclassified consolidated balance sheet combines the assets and liabilities of the compulsory format included in the annual report and the half-year report in accordance with their function, usually split into the three basic functions: investment, operations and financing. Management believes this format is useful for investors as it allows identification of the sources of financing (own and third-party funds) and the application of such funds for fixed and working capital. The reclassified consolidated balance sheet format is used by management to calculate the key leverage and profitability (ROI and ROE) ratios. RECLASSIFIED BALANCE SHEET (*) ( millions) Change Fixed capital 10,302 17,077 6,775 Property, plant and equipment 10,549 16,025 5,476 Compulsory inventories Intangible assets Equity investments Financial receivables held for operations 2 2 Net payables for investments (286) (397) (111) Net working capital (464) (1,332) (868) Provisions for employee benefits (29) (107) (78) Assets held for sale and directly related liabilities NET INVESTED CAPITAL 9,809 15,652 5,843 Equity (including minority interests) - attributable to Snam Rete Gas 3,573 5,702 2,129 - attributable to minority shareholders 1 1 3,573 5,703 2,130 Net financial debt 6,236 9,949 3,713 COVERAGE 9,809 15,652 5,843 (*) Reference should be made to the paragraph on the reconciliation of the reclassified consolidated balance sheet with the legally required consolidated balance sheet. Fixed capital ( 17,077 million) increased by 6,775 million compared with 31 December 2008, due essentially to the change in consolidation scope on 30 June 2009 (+ 6,110 million). Changes in property, plant and equipment and intangible assets (+ 6,178 million) are analysed below: ( millions) Property, plant Intangible Total and equipment assets Balance at 31 December , ,588 Investments 1, ,254 Change in consolidation scope 4, ,511 Amortisation, depreciation and impairment (579) (34) (613) Transfers, eliminations and divestments (24) (24) Other changes Balance at 31 December , ,766 39

42 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Investments in 2009 amounted to 1,254 million, of which 172 million and 149 million respectively related to the natural gas distribution and storage business segments 25. The change in consolidation scope of 5,511 million comprises the carrying amount at 30 June 2009 of property, plant and equipment and intangible assets from the acquisition of Italgas and Stogit - equal to 3,566 million and 1,945 million respectively. Other changes (+ 50 million) relate essentially to: (i) the transfer, from the item Inventories, of gas for use in the transportation network (+ 59 million) 26 ; (ii) the transfer from the warehouse of goods (essentially pipes and their accessories) destined for investment activities and not yet used for constructing plants (+ 34 million, net of goods used for investment activities); (iii) the revision of estimates for the abandonment and restoration of sites (+ 21 million). These factors were partly offset by grants for the period (- 67 million). Net working capital ( millions) Change Trade receivables Inventories Tax receivables (*) Other assets (*) Deferred tax liabilities (487) (934) (447) Provisions for risks and charges (52) (669) (617) Trade payables (161) (471) (310) Accrued and deferred income from regulated business revenue (190) (235) (45) Derivative instruments (39) (78) (39) Tax payables (48) (67) (19) Other liabilities (*) (63) (193) (130) (464) (1,332) (868) (*) Tax receivables of 2 million have been reclassified from Other assets (at 31 December 2008) to Tax receivables. Net working capital (- 1,332 million) decreased by 868 million compared with 31 December 2008, mainly as a result of the change in consolidation scope on 30 June 2009, which led to the recognition of net liabilities of 948 million, and of operating changes in the period (+ 80 million) 27. These changes are due mainly to: (i) higher trade receivables (+ 160 million), relating essentially to the natural gas distribution segment; (ii) smaller deferred tax liabilities (+ 71 million), particularly following the return of deferred taxes relating to amortisation and depreciation carried out - purely for tax purposes - in previous financial years; (iii) the increase in other assets (+ 39 million) owing mainly to higher receivables from the Electricity Equalisation Fund for the redemption of energy efficiency certificates in the distribution business segment, as well as a higher December VAT advance to ultimate parent Eni S.p.A. These positive changes were partly offset by: (i) higher provisions for risks and charges (- 74 million), owing particularly to the fund for dismantling and restoring sites in the storage business segment, as well as to the recognition of provisions for environmental funds and disputes; (ii) a reduction in the fair value of derivative instruments (- 39 million) as a result of lower market interest rates. The reduction of inventories (- 84 million), owing mainly to the factors shown in the previous item Property, plant and equipment, also contributed to lower net working capital. ( 25 ) Investments made by the acquired companies refer to the period 1 July-31 December Investments made by these companies before the acquisition completion date are included in the item Change in consolidation scope. ( 26 ) Gas used for the functioning of a pipeline is divided into the Initial Line Pack (IL), which is the quantity of gas injected into the network when a pipeline comes into service (this is not economically recoverable), and the Operating Line Pack, which is the difference between the total quantity of gas used for the functioning of the pipeline and the IL. ( 27 ) Changes for the distribution and storage business segments relate to the second half of the year. 40

43 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Assets held for sale and directly related liabilities Assets held for sale and directly related liabilities relate to a real-estate complex owned by Italgas ( 14 million, net of environmental provisions for charges relating to restoration work on the property) 28. Statement of comprehensive income ( millions) Net profit Other components of comprehensive income Change in fair value of cash flow hedge derivatives (effective share) (108) (29) Tax effect of the other components of comprehensive income 30 8 Total other components of comprehensive income, net of tax effect (78) (21) Total comprehensive income attributable to: - Snam Rete Gas Minority shareholders Equity ( millions) Equity at 31 December ,573 Increases owing to: - Share capital increase (*) 3,474 - Comprehensive income for Other changes 3 Decreases owing to: - Difference between acquisition cost of equity investments and book equity of Italgas e Stogit (**) (1,585) - Additional expense for the share capital increase (***) (23) - Distribution of balance of 2008 dividend (247) - Distribution of interim 2009 dividend (203) Equity including minority interests at 31 December ,703 attributable to: - Snam Rete Gas 5,702 - Minority shareholders 1 4,188 (2,058) (*) Includes the share premium of 1,860 million, of which 3 million relates to collecting unexercised options. (**) Includes the price adjustment effect ( 1 million), recognised following the agreements signed during the acquisition of Stogit. For more information, see note 23 Commitments, risks and guarantees Commitments arising from the acquisition of Italgas and Stogit from Eni of the notes to the consolidated financial statements. (***) Net of the tax effect. 5,703 At 31 December 2009, Snam Rete Gas had 194,886,225 treasury shares 29 (compared with 195,429,850 at 31 December 2008), equal to 5.46% of the share capital. Their market value at 31 December 2009 was 674 million 30. Note 21 Equity to the consolidated financial statements gives information about the individual equity items and changes therein compared with 31 December ( 28 ) Note 23 Guarantees, commitments and risks - Commitments arising from the acquisition of Italgas and Stogit from Eni of the notes to the consolidated financial statements provides information on the parties commitments. ( 29 ) Treasury stock transactions carried out in financial year 2009 are shown in the section Other information Stock option plans of the directors report. ( 30 ) Calculated by multiplying the number of treasury shares by the year-end official price of 3.46 per share. 41

44 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Reconciliation of the profit for the year and equity of Snam Rete Gas S.p.A with their consolidated equivalents ( millions) Profit for the year Equity Separate financial statements for Snam Rete Gas S.p.A ,557 7,068 Profit for the year of companies included in the consolidation scope Excess equity in separate financial statements, including profit or loss for the year, compared with the carrying amount of equity investments in consolidated companies 16 (1,387) Consolidation adjustments for: - Valuation of equity investments using equity method Minority interests 1 Consolidated financial statements ,573 5,703 Net financial debt and leverage Leverage shows a company s degree of indebtedness and is the ratio of net financial debt to net invested capital. It is one of the key ratios used to gauge the soundness and efficiency of a company s financial position. ( millions) Change Financial liabilities 6,237 9,986 3,749 Short-term financial liabilities 1,023 1, Current share of long-term financial liabilities Long-term financial liabilities 5,200 7,486 2,286 Financial receivables and cash and cash equivalents (1) (37) (36) Financial receivables not held for operations (1) (1) Cash and cash equivalents (36) (36) 6,236 9,949 3,713 Net financial debt amounted to 9,949 million, an increase of 3,713 million compared with 31 December 2008, due to financial requirements relating to: (i) investments in the newly consolidated companies (- 6,693 million, including 4,474 million of outlays 31, net of cash acquired, and financial liabilities of 2,219 million acquired on the transaction completion date: 1,151 million and 1,068 million for Italgas and Stogit respectively); (ii) net investments for the period (- 1,179 million); (iii) settlement of the 2008 dividend of 0.14 per share, paid from 21 May 2009 (- 247 million) and of the interim 2009 dividend of 0.06 per share, paid from 22 October 2009 (- 203 million). These factors were partly offset by: (i) net cash flows of equity related to the share capital increase (+ 3,443 million, including the share premium and net of outlays to cover additional transaction costs); (ii) cash inflows from operating activities (+ 1,164 million). Long-term financial liabilities of 7,486 million make up 75% of financial debt (83% at 31 December 2008). The average duration of the long-term loans is approximately four years (it was just over four years at 31 December 2008). A breakdown of the liabilities by type of interest rate at 31 December 2009 is as follows: ( millions) % % Change Floating rate 2, , ,746 Fixed rate 3, , ,003 6, , ,749 All the financial liabilities are due to Eni and they are all in euros. ( 31 ) Equal to the acquisition price determined when the transaction was completed ( 4,512 million), net of acquired cash and cash equivalents ( 38 million). 42

45 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW The floating-rate financial liabilities ( 4,270 million) increased by 1,746 million compared with 31 December 2008, owing primarily to the change in consolidation scope on 30 June 2009 ( 1,461 million) and to taking out two new loans with ultimate parent Eni S.p.A ( 600 million in total, of which 300 million is supplied by the European Investment Bank). At 31 December 2009, floating-rate financial liabilities from acquired companies amounted to 1,090 million. Fixed-rate financial liabilities ( 5,716 million) increased by 2,003 million, due mainly to taking out three new floatingrate loans with ultimate parent Eni S.p.A (a total of 1,250 million), converted into fixed-rate loans by interest rate swaps, and to consolidating debts from the acquired companies on completion of the transaction ( 758 million). At 31 December 2009, fixed-rate financial liabilities from acquired companies amounted to 1,310 million. Fixed-rate financial liabilities include floating-rate loans converted into fixed-rate loans by interest rate swaps for a total notional amount of 4,050 million. Information on financial debt owing to ultimate parent Eni S.p.A can be found in note 16 to the consolidated financial statements. Leverage - the ratio of net financial debt to net invested capital - was 63.6% (unchanged from 31 December 2008). There are no financial liabilities subject to covenants. There were no breaches of loan agreements at the reporting date. Reclassified statement of cash flows The reclassified consolidated statement of cash flows set out below summarises the legally required format. It shows the opening and closing cash and cash equivalents and the change in net financial debt during the year. The two statements are reconciled through the free cash flow, i.e. 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 dividends/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 dividends/capital injections). RECLASSIFIED STATEMENT OF CASH FLOWS ( millions) Net profit Adjusted by: - Amortisation, depreciation and other non-monetary components Interest, income taxes and other changes Cash flow from operating activities before changes in working capital 1,508 1,508 1,906 Change to working capital due to operating activities 2 90 (140) Interest and income taxes received (paid) (576) (545) (602) Net cash flow from operating activities 934 1,053 1,164 Investments in property, plant and equipment and intangible assets (727) (1,097) (1,225) Change in consolidation scope (4,474) Divestments Net payables for investments (24) Free cash flow (4,489) Change in financial liabilities ,530 Equity cash flow (811) (386) 2,995 Net cash flow for the year (*) Reference should be made to the paragraph on the reconciliation of the reclassified consolidated balance sheet with the legally required consolidated balance sheet. CHANGE IN NET FINANCIAL DEBT ( millions) Free cash flow (4,489) Financial payables and receivables of acquired companies (2,219) Equity cash flow (811) (386) 2,995 Change in net financial debt (627) (354) (3,713) 43

46 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW RECONCILIATION OF THE RECLASSIFIED FINANCIAL STATEMENTS WITH THE LEGALLY REQUIRED FORMATS Reclassified consolidated balance sheet ( millions) Reclassified consolidated balance sheet items (Where not expressly stated, the component is taken directly Notes to the Partial amount Amount from Partial amount Amount from from the legally required format) consolidated financial from legally reclassified from legally reclassified statements required format format required format format Fixed capital Property, plant and equipment 10,549 16,025 Compulsory inventories 405 Intangible assets Equity investments 301 Financial receivables held for operations (see note 2) 2 Net payables for investments, consisting of: (286) (397) - Payables for investments (see note 13) (298) (429) - Receivables for investments/divestments (see note 2) Total fixed capital 10,302 17,077 Net working capital Trade receivables (see note 2) Inventories Tax receivables, consisting of: Current income tax assets Other current tax assets (*) IRES receivables for national consolidated tax scheme (see note 2) Group VAT receivables (see note 2) 1 Trade payables (see note 13) (161) (471) Tax payables, consisting of: (48) (67) - Current income tax liabilities (1) (5) - Other current tax liabilities (4) (18) - IRES payables for national consolidated tax scheme (see note 13) (3) (36) - Group VAT payables (see note 13) (40) (8) Deferred tax liabilities (487) (934) Provisions for risks and charges (52) (669) Derivative instruments (vedi note 5,10,15,20) (39) (78) Other assets, consisting of: Other receivables (see note 2) Other current assets (see note 5) Other non-current assets (see note 10) 3 10 Accruals from regulated activities, consisting of: (190) (235) - Accruals for regulated activities (vedi note 5,10) Deferred and accrued income from regulated activities (vedi note 15,20) (235) (318) Other liabilities, consisting of: (63) (193) - Other payables (see note 13) (34) (162) - Other current liabilities (see note 15) (2) (5) - Other non-current liabilities (see note 20) (27) (26) Total net working capital (464) (1,332) Provisions for employee benefits (29) (107) Assets held for sale and directly related liabilities, consisting of: 14 - Assets held for sale (see note 11) 25 - Liabilities directly related to assets held for sale (see note 11) (11) NET INVESTED CAPITAL 9,809 15,652 Equity including minority interests 3,573 5,703 Net financial debt Financial liabilities, consisting of: 6,237 9,986 - Long-term financial liabilities 5,200 7,486 - Current share of long-term financial liabilities Short-term financial liabilities 1,023 1,585 Financial receivables and cash and cash equivalents, consisting of: (1) (37) - Other financial assets (1) (1) - Cash and cash equivalents (36) Total net financial debt 6,236 9,949 COVERAGE 9,809 15,652 (*) Other current tax assets at 31 December 2008 have been reclassified to Tax receivables ( 2 million). 44

47 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Reclassified statement of cash flows ( millions) Reclassified items and reconciliation with items from the legally required format Partial amount Amount from Partial amount Amount from from legally reclassified from legally reclassified required format format required format format Net profit Adjusted by: Amortisation, depreciation and other non-monetary components Amortisation and depreciation Net impairment losses (reversal of impairment losses) 1 (22) - Change in provisions for risks and charges (8) 26 - Change in provisions for employee benefits (1) - Net expense for divestments and eliminations 6 6 Interest, income taxes and other changes: Interest assets (32) (9) - Interest liabilities Income taxes Other changes 1 2 Cash flows from operating activities before changes in working capital 1,508 1,906 Changes in working capital due to operating activities: 90 (140) - Inventories (33) 54 - Trade and other receivables 61 (202) - Other assets (43) (35) - Trade and other payables 31 (10) - Other liabilities Cash flows from operating activities 1,598 1,766 Interest and income taxes collected (paid): (545) (602) - Interest collected Interest paid (252) (204) - Income taxes (paid) received (336) (408) Net cash flows from operating activities 1,053 1,164 Investments (1,097) (5,699) - Property, plant and equipment (1,071) (1,189) - Intangible assets (26) (36) - Change in consolidation scope (4,474) Divestments: Property, plant and equipment Equity investments 12 Net payables for investments Free cash flow 32 (4,489) Change in financial payables: 354 1,530 - Taking on long-term financial liabilities 3,564 12,407 - Repayment of long-term financial liabilities (2,865) (10,564) - Increase (decrease) in short-term financial liabilities (345) (313) Equity cash flows (386) 2,995 Net cash flows for the year

48 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW ELEMENTS OF RISK AND UNCERTAINTY Introduction The main corporate risks identified, monitored and, where specified below, managed by Snam Rete Gas are as follows: (i) market risk deriving from exposure to interest rate fluctuations and natural gas purchase price volatility; (ii) credit risk deriving from the possibility of counterparty default; (iii) liquidity risk deriving from a possible lack of financial resources required to meet short-term commitments; (iv) operational risk; (v) specific risks related to the business segments in which the group operates. MARKET RISK Interest rate fluctuation risk Fluctuations in interest rates affect the market value of a company s financial assets and liabilities as well as its net financial expense. The group aims to minimise interest rate risks while pursuing financial structure objectives laid down in its business plans. The interest rates of some of the company s loans are indexed to benchmark rates, namely the Euro Interbank Offered Rate (Euribor). In order to limit the risk connected with interest rate volatility, Snam Rete Gas uses derivative instruments notably interest rate swaps (IRS) to manage the balance between fixed-rate and floating-rate debt. The fair value of such interest-rate derivatives is calculated systematically on the basis of market prices provided by the major info providers. Snam Rete Gas does not have derivative contracts held for trading or speculative purposes. As described in the section on Liquidity risk, Snam Rete Gas currently raises funds solely through its ultimate parent, Eni S.p.A. Should Eni S.p.A sell its controlling stake in Snam Rete Gas, there is no guarantee that the latter would be able to obtain loans and financing from other sources under the same conditions as those currently in force. Natural gas purchase price fluctuation risk Transportation business costs incurred for the acquisition of gas needed to supply the compressor stations were included, until the end of the second regulatory period on 31 December 2009, in general operating costs, and were therefore updated using the price-cap mechanism 32. As from the start of the third regulatory period on 1 January 2010, the Electricity and Gas Authority, enacting the new tariff criteria laid down by resolution ARG/gas 184/09, has defined methods for payment in kind, by shippers to transporters, of gas volumes to cover fuel gas, network losses and unaccounted-for gas, owed as a percentage of the volumes respectively injected into and withdrawn from the transportation network. As a result of these measures and taking into account the mechanism for allocating gas to shippers, changes to the purchase price of natural gas are no longer a risk for the group. CREDIT RISK Credit risk is the company s exposure to potential losses arising from counterparties failing to fulfil their obligations. Default or delayed payment may have a negative impact on the financial balance and results of Snam Rete Gas. The group provides business services to a small number of operators in the gas sector, the largest of which by revenue is Eni S.p.A. The rules for client access to the services offered are established by the Electricity and Gas Authority and set out in the Network Codes. For each type of service, these documents explain the rules regulating the rights and obligations of the parties involved in providing said services and have contractual conditions which minimise the risk of non-compliance by the clients. In particular, the Codes provide for guarantees to partly cover obligations where the client does not possess a credit rating issued by one of the leading international agencies. Snam Rete Gas did not have significant cases of counterparty non-compliance. Although nearly all of the company s receivables are due from a limited number of customers, with ultimate parent Eni S.p.A representing 50% of trade receivables, there are no risks of credit concentration given their excellent reliability. LIQUIDITY RISK Liquidity risk derives from the risk that financial resources may not be available (funding liquidity risk) or the group may be unable to convert assets into cash on the market (asset liquidity risk), meaning that it cannot meet its pay- ( 32 ) Under this mechanism, core revenue components relating to operating costs, amortisation and depreciation are updated with financial statement figures at the start of a regulatory period, while they are updated with inflation and reduced by a productivity coefficient in the subsequent years. 46

49 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW ment commitments. This may affect profit or loss should the company be obliged to incur extra costs to meet its commitments or, in extreme cases, lead to insolvency and threaten the company s future as a going concern. The group s objective is to have a financial structure (in terms of leverage ratio and ratios of medium-to-long-term debt and fixed-/floating-rate debt to total debt), which ensures an adequate level of liquidity, minimising the related cost and maintaining a balance between the term and composition of its debt in line with business objectives. Snam Rete Gas currently raises funds solely through its ultimate parent, Eni S.p.A. Under the existing agreements, Eni S.p.A can request the early repayment of loans should it lose its controlling stake in Snam Rete Gas. At present, the group believes that cash flows from operations and its current financial and capital structure can reasonably allow access to a wide range of financing from the capital market and banks at normal market conditions. OPERATIONAL RISK Snam Rete Gas is required to comply with many rules and regulations for protecting the environment, health and safety at national, regional, local and EU levels. The environmental protection laws generally pertain to verification of and compliance with limits for emitting pollutants into the air, water and the ground, and to correct waste management procedures. Failure to comply with current regulations may result in individual criminal and/or civil sanctions and, in some cases where safety rules are violated, companies may be liable on the basis of a European liability model adopted in Italy through Legislative Decree no. 231/01. It must also be noted that Snam Rete Gas may incur significant costs or liability. Recent regulations on health and safety in the workplace have introduced new obligations which will impact operations at Snam Rete Gas. In particular, the regulations highlight the value of organisational models aimed at preventing offences in the event of violation of workplace health and safety laws and, therefore, corporate liability. Snam Rete Gas has a policy for health, safety and the environment, which has been consolidated over the years. These issues are managed through organisational provisions and internal instructions establishing responsibilities and the procedures to be adopted when designing, constructing, operating and disposing of all company assets. These measures ensure compliance with the law and internal regulations governing health, safety and the environment. Under the group s organisational structure, unit managers are also responsible for health, safety and environmental issues for their respective activities. Moreover, the systems managing the environment and the health and safety of employees have been developed in line with international best practices, based on an annual cycle of planning, implementation, control, analysis and target-setting. They are developed and maintained in order to focus on risk prevention, with a view to continuous improvement. Risks connected with failing to meet infrastructure development objectives The group s effective ability to develop its infrastructure is subject to many unforeseeable events linked to operating, economic, regulatory, authoritative and competition factors which are outside its control. Therefore, Snam Rete Gas is unable to guarantee that the projects to upgrade and extend its network will be started, completed or lead to benefits in terms of tariffs. Additionally, the development projects may require greater investments or longer timeframes than those originally planned, affecting the group s financial position and results. Risks deriving from malfunctioning of plants Managing regulated gas activities involves a number of risks of malfunctioning and unforeseeable service disruptions due to factors which are outside the group s control such as accidents, breakdowns or malfunctioning of equipment or control systems, the underperformance of plants and extraordinary events such as explosions, fires, earthquakes, landslides or other similar events beyond the group s control. These events could also cause significant damage to persons, property or the environment. Any service interruptions and subsequent compensation obligations could lead to a decrease in revenue and/or an increase in costs. Although the group has taken out specific insurance policies to cover some of these risks, the related insurance cover could be insufficient to meet all the losses incurred, compensation obligations or cost increases. Risks deriving from the need to manage a significant flow of information to operate regulated services The regulatory framework in which the company operates stipulates that Snam Rete Gas continually gather and prepare a significant flow of information from its customers. The information received by Snam Rete Gas includes capacity bookings, details of where gas is coming from and going to each day, physical and commercial balancing mechanisms and forecasts about demand and transportation capacity usage. This flow of information, managed by extensive use of IT systems, is large and complex. Therefore, Snam Rete Gas cannot guarantee that its management does not lead to operating and planning difficulties which could affect its business. 47

50 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Risks deriving from the seasonal nature of the business The group s business is not affected by seasonal factors which would have a significant impact on its annual or interim financial results. SPECIFIC RISKS RELATED TO THE BUSINESS SEGMENTS IN WHICH THE GROUP OPERATES Regulation Snam Rete Gas operates in the regulated gas sector. The relevant directives and legal provisions issued by the European Union and the Italian government, and the resolutions of the Electricity and Gas Authority, may have a significant impact on the group s operations, results and financial stability. Future changes to European Union or Italian legislative policies may have unforeseeable effects on the relevant legislative framework and, therefore, on the group s operations and results. Risks connected with the expiry of gas distribution concessions/contracts held by Italgas and its subsidiaries/associates and with the early termination of concessions by concessionary bodies Risks relating to tenders for new gas distribution concessions As at 31 December 2009, the group has a portfolio of more than 1,400 natural gas distribution concessions spread throughout Italy. Upon legal expiry of the concessions and contracts held by Italgas and its subsidiaries/associates, or in the event that local authorities terminate the concession early, said authorities must call for tenders for the new gas distribution concessions. As a result of the tender process, Italgas and its subsidiaries/associates may not secure one or more of the new concessions, or they may win the concessions but with less favourable terms than was previously the case. This may have a negative effect on the group s operations and its financial and capital position, despite the receipt of compensation if it fails to renew a concession. Risks relating to the right of local authorities to acquire ownership of the gas distribution networks and to quantifying repayment to the outgoing operator With reference to concessions where Italgas and its subsidiaries/associates also own the gas distribution networks, under interpretation of the regulations on gas distribution networks in the Legislative Decree, the legal system has not clarified whether the company which owns the networks is effectively required to transfer said ownership to the local authorities upon expiry of the concessions and/or contracts. Concessionary bodies and operators also have different interpretations on how to apply criteria for quantifying compensation owing to the outgoing operator and owner of the network pursuant to article 24, paragraph 4, a) and b) of Royal Decree no of 15 October 1925 (which stipulates that only the industrial value of the system be taken into account, not the profit that the concessionaire stands to lose as a result of failing to renew the concession). Upon expiry of the concessions and/or contracts, there may therefore be disputes over the amount of compensation owing to Italgas and its subsidiaries/associates; Italgas and its subsidiaries/associates may lose these cases, with subsequent negative effects on the group's operations and financial and capital situations. Risks relating to gas storage concession ownership Stogit owns 10 gas storage concessions. One expires on 14 June 2012, eight on 1 January 2017 and one on 6 November Each concession may be extended by the Ministry of Economic Development no more than twice for a duration of 10 years at a time, pursuant to article 1, paragraph 61 of Law no. 239/2004. If Stogit is unable to retain ownership of one or more of its concessions, or if it renews the concessions but with less favourable terms than was previously the case, there may be negative effects on the group's operations and financial and capital situation. Risk relating to uncertainty about natural gas reserves There are several uncertainties surrounding estimations of natural gas reserves in the storage fields where Stogit operates, and therefore their future use and necessary investments. The accuracy of these estimations depends on a certain number of factors, assumptions and variables, among which some of the most important are: (a) the quality of geological, technical and economic data and their interpretation and evaluation; (b) projections for future usage and timeframes for the relevant investment; (c) the stability or otherwise of sector laws and regulations; (d) the actual results of drilling and general production activity in the fields for which Stogit owns a concession which are subsequent to the estimation date and which may cause said estimations to be raised or lowered. Factors other than those listed above which may influence reserve estimations are beyond Stogit s control and may therefore vary over time. As a result there may be differences between estimated reserves and those actually available for use, which may have negative effects on the group s operations and financial and capital situation. 48

51 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW Risks connected with certain socio-political situations in natural gas production and transit countries A large part of the natural gas which travels through the transportation network of Snam Rete Gas does, or may, come from or travel through countries which present risks deriving from certain socio-political situations. Importing and transiting natural gas from or through such countries may present risks such as: higher taxes and excise duties; production, export or transportation limits; enforced contract renegotiations; nationalisation or renationalisation of assets; changes to national political and governing systems; changes to commercial policies; monetary restrictions; loss or damage owing to the actions of rebel groups. If shippers are unable to access the natural gas available in these countries as a result of the aforementioned or similar situations, they may be unable to fulfil their contractual obligations to Snam Rete Gas or there may be a reduction in volumes of gas transported. Such events may therefore have a negative effect on the group s operations and financial and capital situation. Quantitative information on the risks deriving from financial instruments pursuant to IFRS 7 Financial Instruments: Disclosures can be found in note 23 Commitments, guarantees and risks to the consolidated financial statements. 49

52 SNAM RETE GAS ANNUAL REPORT 2009 / FINANCIAL REVIEW OUTLOOK Gas demand Based on the most recent estimates, domestic natural gas demand is expected to grow by an annual average of more than 2% in the four years from 2010 to The predicted growth is due to consumption in the thermoelectric sector, which is expected to increase annually by an average of more than 5%. Smaller increases are predicted in residential, tertiary and industrial consumption. Investments The integration of Italgas and Stogit enables Snam Rete Gas to confirm a solid and significant investment plan, equal to around 6.4 billion (net of expected grants) at consolidated level in the four years between , aimed at developing the gas system in Italy and sustaining and increasing the group s growth opportunities in the medium and long term. The main features of the investment plan, by business segment, are as follows: TRANSPORTATION AND REGASIFICATION - satisfy the requirements linked to evolving gas demand in the medium and long term, and make the Italian transportation system safer and more flexible; - continue to improve transportation service quality; - promote the development of a European gas hub. The measures planned should allow the company, in the period in question, to increase the length of the transportation network by around 4% (31,531 km in 2009) and to increase the installed power at its compressor stations by around 20% compared with 2009 (857 MW in 2009). DISTRIBUTION - optimise the concessions portfolio to maximise profit; - continue to improve gas distribution service quality. The planned measures will enable the company to continue to support the growth of the business, with an estimated light growth of around 8% in user numbers in 2013 compared with 2009 (5.8 million in 2009). STORAGE - improve the overall safety and flexibility of the storage system by increasing modulation service capacity and managing point capacity; - optimise balancing and promote the liquidity of the gas system in Italy. It is predicted that the planned projects will, in the period in question, increase modulation capacity by around 35% (8.9 billion standard cubic metres in 2009) and point capacity by around 13% (270 million standard cubic metres in 2009). Efficiency The integration of Stogit and Italgas will give the company the chance to generate cost synergies of around 40 million in 2010, (calculated, in real terms, on the basis of costs for 2008 and at constant business structure). 50

53 SNAM RETE GAS ANNUAL REPORT 2009 / OTHER INFORMATION Other information Incentive plans for managers with Snam Rete Gas shares Information on share-based incentive plans for managers can be found in the directors' report of the separate financial statements of Snam Rete Gas S.p.A. Related-party transactions Transactions undertaken by Snam Rete Gas with related parties mainly involve the exchange of goods, provision of services and provision and utilisation of financial resources with ultimate parent Eni S.p.A. and other subsidiaries/associates of Eni S.p.A, as well as with Enel S.p.A, a state-controlled company, and its subsidiaries/associates. All the transactions are part of the company s ordinary business activities, generally settled at market conditions, i.e. the conditions which would be applied by two independent parties, and performed in the interests of the Snam Rete Gas group companies. The amounts involved in commercial, financial and other transactions with related parties and a description of the nature of the key transactions, as well as their impact on the company s capital situation, financial results and cash flows, are disclosed in note 31 to the consolidated financial statements. Research and development Snam Rete Gas s research and development activities, focusing mainly on new technologies for the safety and efficiency of the natural gas transportation and distribution network, are described in the Commitment to sustainable development section. Subsequent events Electricity and Gas Authority The Electricity and Gas Authority s resolution ARG/gas 21/10, published on 24 February 2010, extended for the period 1 April December 2010 the validity of natural gas storage tariffs approved for the thermal year 1 April March 2010 with resolution ARG/gas 38/09. 51

54 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE Report on corporate governance and ownership structure Governance Structure Since its inception, Snam Rete Gas S.p.A. has had a corporate governance system which is in line with international best practice; in other words, a set of rules which govern and inform the company s management and control. It defines how roles and rights are allocated to company personnel by assigning duties, responsibilities and decisionmaking powers. It also ensures compliance with the relevant legislation, codes of conduct, internal procedures and regulations. The aim of the corporate governance system is to create value for shareholders, bearing in mind the company s social importance, particularly with regard to protecting the environment, staff health and safety, workers rights, equal opportunities, working with the local and national community in which the company is present, and the interests of all stakeholders. The corporate governance system is based on the guidelines set out in the Code of Conduct for Listed Companies proposed by the Committee for Corporate Governance of Listed Companies, following the recommendations made by Consob (the National Commission for Listed Companies and the Stock Exchange), as well as international best practice. The company s board of directors had already complied with the aforesaid guidelines with its resolution of 27 July 2001 and subsequently adopted the amendments and additions made to the Code in July It adopted the 52

55 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE new Code published on 14 March 2006 with its resolution of 11 December In 2007, Snam Rete Gas beat other major listed and unlisted Italian companies to win the Oscar for Best Corporate Governance in the awards sponsored by Italian PR body FERPI. The prize was awarded for its ongoing commitment over the years to align its corporate governance system with international best practice. In accordance with current legislation, information on the corporate governance system of Snam Rete Gas S.p.A. can be found below. Company Organisation The company has a traditional organisational structure, consisting of: - a board of directors which runs the company; - a board of statutory auditors, which: (i) monitors compliance with the laws and deed of incorporation, in addition to the principles of good business administration; and (ii) verifies the adequacy of the organisational structure, internal audit procedures and administrative/accounting system; - shareholders which meet in ordinary or extraordinary meetings to discuss, inter alia: (i) the appointment or dismissal of members of the board of directors and the board of statutory auditors and their responsibilities and compensation; (ii) the approval of the financial statements and allocation of earnings; (iii) the repurchase and sale of treasury shares; (iv) changes to the articles of association; and (v) the issue of convertible bonds. Independent auditors are engaged to audit the company s financial statements. They must be registered with Consob and are specifically appointed by the shareholders on the basis of a reasoned proposal from the board of statutory auditors. Information about the ownership structure 33 STRUCTURE OF THE SHARE CAPITAL At 31 December 2009, the company s share capital was as follows: Number Percentage of the Share class of shares share capital (%) Listing market Rights and obligations Ordinary shares 3,570,768, Italian regulated market Shares are indivisible and each share carries the right to one vote. Shareholders may exercise the rights attendant on share ownership within the bounds of current legislation. The company has not issued other financial instruments which entitle the holder to subscribe for newly issued shares. Information about share-based incentive plans (stock option plans, stock grant plans, etc.), which involve (bonus) increases in the share capital can be found in the report on operations of Snam Rete Gas S.p.A. and in doc- uments prepared in accordance with article 84-bis of the Issuer Regulations published by Consob and available on the company s website ( RESTRICTIONS ON THE TRANSFER OF SHARES AND VOTING RIGHTS The articles of association make no stipulation in this respect. ( 33 ) Information about the ownership structure is given in accordance with Art. 123 bis, paragraphs 1 and 2, of the Testo Unico della Finanza, or Italian Financial Services Act (Legislative Decree no. 58/98). For information on: - the appointment and substitution of directors, see the section in this report on the appointment, composition and term of office of the Board of directors; - amendments to the articles of association, see the section in this report on the role and functions of the Board of directors and shareholders meeting and the rights of shareholders; - the key characteristics of risk management and audit systems in relation to the financial reporting process (consolidated and non-consolidated), see the section on the risk management and audit system in relation to the financial reporting process; - the mechanism for exercising voting rights in any employee share ownership scheme and the rules of procedure of the shareholders meeting, its powers, the rights of shareholders and how these are exercised, see the section in this report on shareholders meetings and the rights of shareholders; - the composition and functioning of the various boards and their committees, see the section in this report on the Board of directors, its committees and other supervisory bodies. 53

56 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE MAJOR SHAREHOLDINGS According to the information available and the notification received in accordance with Consob resolution no /99, the following shareholders held more than 2% of the company s share capital at 31 December 2009: Percentage of share capital (%) Shareholders Eni S.p.A Snam Rete Gas S.p.A. (*) Pictet Funds (Europe) SA (*) The company held 194,886,225 treasury shares at 31 December 2009 (195,429,850 shares at 31 December 2008). GEOGRAPHICAL DISTRIBUTION OF SHAREHOLDERS Based on the notification required by law and the information available to the company, the distribution of the shareholding structure by geographical region is as follows: Region Percentage of share capital (%) Italy Continental Europe UK and Ireland 5.12 USA and Canada 6.96 Rest of the world SHARES WITH SPECIAL RIGHTS The company has not issued any shares with special rights. SHAREHOLDER AGREEMENTS The company is not aware of any shareholder agreement, nor has any such agreement been made public pursuant to the law. CHANGE OF CONTROL CLAUSES Snam Rete Gas S.p.A. and its subsidiaries are party to significant agreements which may be disclosed without causing harm to the company and which take effect, are amended or lapse in the event of a change in control of Snam Rete Gas S.p.A by Eni S.p.A. Specifically, these concern: a) agreements requiring the automatic termination of the contract, particularly short-term loans from Eni S.p.A (which at 31 December 2009 totalled around 1,585 million, including loans from subsidiaries) and guarantees issued in the interests of Snam Rete Gas S.p.A and the subsidiaries of Eni S.p.A or banks against Eni S.p.A: at 31 December 2009, guarantees outstanding totalled approximately 88 million. b) agreements whereby the counterparty can terminate the contract early: - medium to long-term credit facilities with Eni S.p.A (these amounted to 8,035 million at 31 December 2009); - interest rate swaps (IRS) of 4,050 million. By terminating loan agreements, guarantees and derivatives early, there is the risk that Snam Rete Gas S.p.A and its subsidiaries could be unable to secure financing from other sources under the same conditions. Moreover, the early termination of fixed-rate loans and interest rate swaps takes place at fair value, which may differ from their carrying amount at the termination date. Snam Rete Gas S.p.A and its subsidiaries also have agreements with other Eni S.p.A. companies for the provision of services and trade union agreements for healthcare and other employee benefits. Should there be a change in control of Snam Rete Gas S.p.A by Eni S.p.A., other counterparties may need to be found to provide these services and benefits. AUTHORISATION TO INCREASE THE SHARE CAPITAL AND REPURCHASE TREASURY SHARES The board of directors does not currently have authority to increase the share capital pursuant to article 2443 of the Italian Civil Code. According to the Articles of Association, the company can issue bonus shares (including special shares) in accordance with article 2349 of the Italian Civil Code. The company does not have any plans to repurchase treasury shares pursuant to article 2357 et seq. of the Italian Civil Code. COMPENSATION FOR DIRECTORS IN THE EVENT OF THEIR RESIGNATION, REDUNDANCY OR DISMISSAL FOLLOWING A TAKEOVER BID The company does not have any specific procedure for this. MANAGEMENT AND COORDINATION Snam Rete Gas S.p.A. is managed and coordinated by Eni S.p.A. Statement by the concerning the existence of the conditions referred to in article 37 of Consob resolution no /07 Article 37.1 of Consob resolution no /07 (Regulation on markets) states that, with respect to the conditions which prevent the listing of shares of subsidiaries managed and coordinated by another company: The shares of subsidiaries managed and coordinated by another company cannot be traded on a regulated market in Italy when such companies: a) have not complied with the disclosure requirements of article 2497-bis of the Italian Civil Code; b) cannot independently negotiate terms with customers and suppliers; c) have a centralised treasury arrangement with the company which 54

57 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE manages them or with another group company and such arrangement is not in their interests. The board of directors issues a reasoned statement to the effect that any such arrangement is in its interests and this is verified by the supervisory body; d) do not have enough independent directors to ensure that they have a significant influence over board decisions. In order to confirm that there are enough independent directors, the general criteria published by stock exchange management companies are considered, taking into account the best practice established by the code of conduct drawn up by such management companies or by industry associations. Item no. 13 of article of the rules for markets organised and managed by Borsa Italiana S.p.A. expressly states that: Companies shall provide the market with a statement by the board of directors concerning the existence (or otherwise) of the conditions referred to in article 37 of Consob resolution no /07 in the report on operations when their annual financial statements are approved. On 10 February 2010, as in previous years, the board of directors confirmed that Snam Rete Gas S.p.A met the requirements set out in article 37.1 of Consob resolution no /07 for the listing of shares of subsidiaries managed and coordinated by another company on an Italian regulated market as it: a) has complied with the disclosure requirements of article 2497-bis of the Italian Civil Code; b) negotiates terms with its customers and suppliers independently; c) has a centralised treasury arrangement with its ultimate parent Eni S.p.A. which is in its interests; d) the board of directors has nine members, five of whom meet the independence requirements laid down for statutory auditors by article 148 paragraph 3 of Legislative Decree no. 58 of 24 February 1998 and article 3 of the Code of Conduct. The board of directors also certified that the centralised treasury arrangement with the parent Eni S.p.A. are in the company's interests, as all treasury and finance transactions are agreed independently by Snam Rete Gas and take place at arm s length. This representation was confirmed by the board of statutory auditors. Code of Ethics At its meeting of 1 December 2001, the board of directors of Snam Rete Gas S.p.A adopted the Code of Conduct of Eni S.p.A., considering it important to adopt the set of values that the company recognises, accepts and endorses and the obligations it assumes towards its stakeholders. A Code of Conduct watchdog and committee were also set up to oversee the implementation of the Code. On 27 June 2008, the board of directors approved the new Code of Ethics which incorporates the latest guidelines on corporate ethics and sustainability. It also appointed the supervisory body as watchdog. The Code requires all activities to be performed in accordance with the law in a context of fair competition, honesty, integrity, correctness and good faith, respecting the legitimate interests of customers, employees, shareholders, commercial and financial partners and the communities in which the company operates. All Snam Rete Gas S.p.A. employees, regardless of position and without exception, are required to comply with and see to it that others comply with these standards as part of their duties and responsibilities. Acting in the interests of the company in no way justifies conduct which deviates from such standards. In 2009, the supervisory body met 12 times with all members present. As well as examining reports of alleged violations of the Code, it assessed and implemented new measures to ensure maximum circulation and awareness of the new Code of Ethics, both within and outside the company. The committee reports every six months to the board of directors on the status of its Code of Ethics. The board of directors ROLE AND FUNCTIONS The board of directors is the central player in the company s corporate governance system. In addition to those responsibilities that cannot be delegated by law, it: a) sets strategies and objectives, including sustainability policies, after consulting the CEO, and reviews and approves the company s strategic, business and financial plans as well as its strategic agreements; b) reviews and approves the company and group budget; c) examines the annual financial statements of subsidiaries; d) reviews and approves the quarterly and half-yearly interim reports of the company and the consolidated interim reports required under current legislation, and reviews and approves the sustainability report; e) defines the corporate governance system and rules. In particular, after consulting the internal audit committee, it adopts rules to ensure the transparency and substantial and procedural correctness of transactions with related parties and transactions involving a director, either directly or through a nominee, as well as a procedure to manage and disclose company information, especially privileged information; f) sets up internal committees which advise and assist the board of directors, appointing members, establishing their duties and ratifying the rules of procedure; g) receives information every six months from these internal committees; h) monitors the company s performance, particularly by taking into consideration information received from the chairman, CEO and audit committee, paying particular 55

58 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE attention to any conflicts of interest and periodically comparing actual and forecast figures (from the financial statements and interim reports); i) grants and revokes proxies to the chairman and CEO, setting a limit on such proxies and deciding how they may be exercised. It establishes their remuneration for the proxies after consulting the relevant committee and board of statutory auditors. It may issue instructions to the relevant bodies and suggest transactions covered by the proxies. The chairman and CEO report to the board of directors and to the board of statutory auditors at least once a quarter on their activities and the key transactions performed by the company and its subsidiaries which affect the company s financial position, cash flow and results of operations. They also report on atypical and/or unusual transactions and related party transactions. Information is made available promptly when the directors have a direct interest in the transaction, when third parties are involved or when the transaction could be affected by the company which manages and coordinates Snam Rete Gas; j) on the recommendation of the CEO, it adopts decisions concerning: - acquisitions, disposals, sales and contributions of companies or business units (including rent and usufruct), investments and properties worth more than 2.5 million; - contracts for the sale of goods and/or services used for commercial and administration purposes by the company for amounts greater than 1 billion and/or for a term of more than 15 years; - contracts for the purchase and sale and exchange of chattels, including those listed in public registers, contracts for the purchase of advertising space and time, rental agreements and leases, contracts for intellectual property services, service agreements, charter agreements, transport and delivery contracts, tenders, insurance contracts as the insured party, brokerage and representation agreements, mandates, commission agreements, agency agreements, sales concessions, storage agreements, subcontracts, agreements relating to use on a free-loan basis, publishing and printing contracts, usufruct, user and residential agreements, purchase and sale contracts, hire, leases and rental agreements for hardware and software and computer systems for amounts greater than 50 million and/or for a term of more than 15 years; - as the lessee in property finance leases for amounts greater than 2.5 million and/or for a term of more than 15 years and chattels, including those listed in public registers in Italy and elsewhere, for amounts greater than 50 million and/or for a term of more than 15 years; - granting of loans to non-eni group companies; - sureties and other forms of personal guarantee, in addition to letters of patronage, in relation to commitments assumed or to be assumed by companies in which the company directly or indirectly holds an investment of more than 30 million and in any event if the amount is not proportional to the investment held therein; - sureties given to guarantee commitments assumed or to be assumed by the company with third parties, for more than 30 million; k) appoints and dismisses the general managers after consulting the CEO and chairman, granting them the related powers; l) appoints and dismisses the chief financial officer after consulting the CEO and chairman and obtaining approval from the board of statutory auditors, granting him the necessary powers and resources; m)appoints and dismisses the internal auditor after consulting the CEO and audit committee, setting his compensation in line with the company s compensation policy; n) ensures that an investor relations manager has been appointed; o) defines the criteria for compensation of senior executives after reviewing the proposals made by the relevant committee, implements compensation plans based on shares or securities approved by shareholders; p) defines the basic guidelines of the organisational, administrative and accounting structure of the company and its subsidiaries, and assesses the adequacy of the organisational, administrative and accounting structure as drawn up by the CEO, particularly with regard to how conflicts of interest are handled; q) after examining proposals made by the audit committee, it sets the guidelines for the audit system so as to ensure the identification, measurement, management and monitoring of the key risks of the company and its subsidiaries, and performs an annual review of the adequacy, efficiency and effectiveness of the audit system under the supervision of the CEO; r) adopts decisions concerning the exercise of voting rights at meetings of shareholders of its subsidiaries and the appointment of members of subsidiaries internal bodies, based on the CEO s proposals; s) draws up draft resolutions to be submitted to shareholders at meetings; t) reviews and deliberates on other issues that executive directors wish to draw to the attention of the board to, when such issues are of particular importance and sensitivity. 56

59 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE The articles of association also give the board of directors the authority to adopt decisions on proposals concerning: - mergers in the cases referred to in articles 2505 and 2505-bis of the Italian Civil Code, in addition to demergers in the cases envisaged by the same articles; - the opening, modification and closure of branch offices; - the reduction in share capital when a shareholder retires; - compliance between the articles of association and statutory provisions; - the transfer of the registered office within Italy. The board of directors, at the meeting of 23 March 2009, also resolved to grant the Independent Operator 34 the following powers: - to represent the functionally separate business in dealings with third parties; - to draw up a proposal for an annual and long-term development plan for the key transmission, dispatching and regasification infrastructure; - to manage staff assigned to the functionally separate business; - to authorise spending commitments for decisions relating to unscheduled work in connection with the functionally separate business in view of the objective requirements and degree of urgency; - to decide how commercially sensitive information is handled and accessed; - to appoint proxies to exercise the aforementioned powers. The board of directors has since resolved to integrate its own powers in order to approve the following, subject to the mandatory opinion of the CEO, as the organisational structure of the Independent Operator: - the annual and long-term development plan for transmission, dispatching and regasification infrastructure; - the definition of the organisational structure for the functionally separate business; - the purchasing procedures for goods and services by Eni S.p.A. companies to ensure that there are no restrictions on such purchases; - arrangements for the handling of commercially sensitive information and access to this; - related party transactions in accordance with the legislative provisions applicable to the company. At its meeting of 10 March 2010, the board of directors verified the adequacy of the organisational, administrative and accounting structure of Snam Rete Gas S.p.A., as well as of Italgas S.p.A and Stogit S.p.A, two strategically important subsidiaries. During 2009, the board of directors reviewed the size, composition and functioning of the board itself and its committees in accordance with the provisions of the Code of Conduct. It also engaged the services of Egon Zehnder International, an independent consultant specialising in this area. The review process essentially consisted of: - individual discussion with each director based on a questionnaire; - analysis of the points raised and comments made and the drafting of a report for the board; - board discussion of the key results and subsequent follow-up. The results of the Egon Zehnder International survey led to the following assessment. In our opinion, based on the assessment carried out, the board of Snam Rete Gas has proven standards of excellence. It is ideally placed to exemplify best practice in terms of corporate governance: - as a company with solid results; - with a regulated business suited to corporate governance of the highest standard; - as part of a rich and coherent group of independents under solid management. The board of directors, at its meeting of 23 March 2009, confirmed the results published by Egon Zehnder International, expressing praise for the size, composition and operation of the board and its committees. APPOINTMENT, COMPOSITION AND TERM OF OFFICE The number of members of the board of directors varies from five to nine, as decided by shareholders at the meeting which appoints them. Members of the board of directors remain in office for a maximum of three financial years and may be re-appointed. Article 16 of the articles of association establishes a voting list mechanism for the appointment of directors in order to ensure that minority shareholders are represented on the board. According to the articles of association, lists may be presented by shareholders who, either individually or together with other shareholders, represent at least 2% of the shares with voting rights at ordinary meetings (or ( 34 ) Appointed in accordance with guidelines issued by the Italian energy regulator (AEEG) on functional separation as per the Unbundling Act referred to in resolution no. 11/2007, as subsequently amended. 57

60 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE such other percentage as may be defined or required by the relevant statutory provisions and regulations). On 27 January 2010, Consob issued resolution no which established this percentage as 1%. By law and under Consob regulations, shareholders may only present and vote on one list, whether individually or in a group. Candidates may only appear on one list; failure to comply will result in the candidate being disqualified. Lists are presented by shareholders and filed at the company s registered office at least fifteen days before the date of the first call of the meeting. They are also published in accordance with the law and Consob regulations on the election of members of boards of directors and statutory auditors. The lists specify the candidates who meet the independence requirements for statutory auditors of listed companies. The lists for the appointment of directors, together with the relevant information about their background and an indication of those who meet the independence requirements defined in the articles of association, in addition to the names of the shareholders who presented the lists and their percentage holding in the company, are made public in a timely fashion and in any case within the statutory time limit at the company s registered office and Borsa Italiana S.p.A., and are published on the company s website ( The list procedure is only necessary when the entire board of directors is being replaced. The articles of association state that when there is no longer a majority in office, the entire board is considered to have retired, and a meeting of the shareholders is called as soon as possible in order to appoint a new board. When the number of board members is less than seven, at least one director or at least three directors if there are more than seven board members must meet the independence requirements for statutory auditors of listed companies. The voting list mechanism is structured in such a way that the number of independent directors required by the articles of association is appointed. Directors are elected as follows: a) seven tenths of the directors are taken from the list with the majority of shareholders votes in the order in which they appear in the list; this is rounded down to the nearest whole number if necessary; b) the remaining directors are taken from other lists, which may not be linked in any way, even indirectly, to the shareholders who presented or voted for the list that won the most votes. Therefore, the votes obtained by these lists are divided by one, two or three depending on the number of directors to be elected. The ratios thus obtained are assigned to the candidates on each list, based on the order shown in the list. The scores awarded to candidates on the various lists are entered in a single list, ranking these scores in decreasing order. Candidates with the highest scores are elected. If more than one candidate obtains the same score, the candidate from the list that has not elected any director or that has elected the smallest number of directors is elected. If none of these lists has elected a director or they have all elected the same number of directors, the candidate whose list has obtained the greatest number of votes is elected. If lists have the same number of votes and scores, the entire meeting will vote again and the candidate who receives the simple majority of the votes will be elected; c) if, following the application of the aforesaid procedure, the minimum number of independent directors required by the articles of association is not appointed, a vote score is calculated for each candidate on the various lists using the system described in subpara- 58

61 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE graph b); candidates with the highest score not yet taken from the lists as per subparagraphs a) and b) and who meet the independent requirements will be elected to ensure that there are a sufficient number of independent directors as required by the articles of association. These will replace non-independent directors who have a lower score. If there are not enough candidates to ensure that there are a sufficient number of independent directors, the shareholders will vote, by statutory majority, to replace those candidates who do not meet the independence criteria; d) the shareholders will vote by statutory majority to appoint directors who for any reason have not been appointed in accordance with the aforementioned procedure to ensure that the composition of the board of directors is legal and consistent with the articles of association. All candidates must also meet the reputation requirements set by the current legislation. The board regularly assesses the independence and reputation of directors and checks that there are no grounds for ineligibility or incompatibility. Should one of these requirements no longer be met or if there are grounds for ineligibility or incompatibility, the board will declare that the director is no longer fit for office and arrange to replace him. It may also ask the director in question to take steps to eliminate the cause of the incompatibility within a set time and if this is not complied with, the director must retire from office. The board of directors appointed by the ordinary meeting on 26 April 2007 currently has nine members: Alberto Meomartini (chairman, re-elected by shareholders), Carlo Malacarne (CEO), and Giuseppe Airoldi, Davide Croff, Roberto Lonzar, Roberto Lugano, Massimo Mantovani, Massimo Mondazzi and Renato Santini (directors). Alberto Meomartini, Carlo Malacarne, Davide Croff, Massimo Mantovani, Massimo Mondazzi and Renato Santini were appointed from the list presented by the shareholder Eni S.p.A. The list specifically stated that Davide Croff and Renato Santini should meet the independence requirements set by the articles of association. Giuseppe Airoldi, Roberto Lonzar and Roberto Lugano were appointed from the list presented by the shareholder ARCA SGR S.p.A. The board of directors will stand down at the shareholders meeting which approves the financial statements at 31 December At its meeting of 8 May 2007, the board conferred the necessary powers on the chairman who, in addition to the activities envisaged in the applicable laws and articles of association, shall oversee the internal audit. They also re-elected Carlo Malacarne as CEO, granting him the powers to manage the company, except for those that by law cannot be delegated and those reserved for the board. On 8 May 2006, the board named Francesco Iovane as chief operating officer, giving him the necessary operational authority. Pursuant to article 23 of the articles of association, the chairman and CEO are the legal representatives of the company. The directors and statutory auditors must disclose to the other directors and to the board of statutory auditors any interests they may have in a specific company transaction either directly or on behalf of third parties. The profile of each director can be found on the company s website. Except for the chairman and CEO, all board members are non-executive directors, and some are independent as well, in order to ensure that they can influence board decisions in terms of their number and authority. The presence of independent directors both 59

62 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE on the board of directors and on related internal committees also ensures adequate protection of shareholders interests. The independence and reputation of directors and the absence of any grounds for their ineligibility and incompatibility are assessed after they have been appointed and at least once a year by the board of directors, based on information provided both by themselves and available to the company by other means. At its meeting of 10 February 2010, the board of directors noted that there were no grounds for incompatibility or ineligibility of directors and found that members of the board of directors, the chief operating officer and the chief financial officer satisfied the integrity criteria for members of supervisory bodies laid down by the Ministry of Justice in its Decree no. 162 of 30 March (see the forthcoming Chief financial officer section). The same meeting also noted that the non-executive directors Giuseppe Airoldi, Davide Croff, Roberto Lonzar, Roberto Lugano and Renato Santini satisfied the independence requirements set by current legislation and the Code of Conduct. The board of statutory auditors has confirmed that the criteria and procedures adopted by the board of directors to evaluate the independence of its own members have been applied correctly. These directors are considered to be independent since, pursuant to article 3 of the Code of Conduct: i) they do not control the company, either directly or indirectly, even via subsidiaries, trustees or nominees, and are not able to exercise significant influence over the company, nor have they entered into a shareholder agreement whereby one or more parties has control or significant influence over the company; ii) they do not hold, nor did they hold in the previous three years, key positions with the company or in one of its strategically important subsidiaries or in joint ventures with the company or a company or body that, together with others via a shareholder agreement, controls the company or is able to exercise significant influence over same; iii) directly or indirectly (e.g. via a subsidiary or company in which they hold a key position or as partners in a professional firm or consultancy), they do not have, and did not have in the previous year, a significant commercial, financial or professional relationship: with the company, one of its subsidiaries or any of their officers; with a party that, even together with others as a party to a shareholder agreement, controls the company, or in the case of companies and bodies, with their officers; and are not, and were not in the previous three years, employees of one of said companies; iv) do not receive and have not received in the previous three years, from the company or from one of its subsidiaries or parents, significant additional remuneration other than the fixed fees for non-executive directors of the company, including participation in performance-related incentives and share-based schemes; v) have not been directors of the company for more than nine of the last 12 years; vi) do not hold executive directorships in another company in which an executive director of this company also holds a directorship; vii)are not shareholders or directors of a company or body belonging to the independent audit group engaged to audit the company s financial statements; viii) are not close family members of a person in one of the situations described above. Moreover, in accordance with article 147-ter of Legislative Decree no. 58 of 24 February 1998, the directors meet the independence requirements established for statutory auditors by article of the same decree. The independent directors will assess the expediency of calling meetings only of independent directors. The board of directors has issued the following guidelines on multiple appointments: a) an executive director may not hold: i) the position of executive director in another listed company, whether Italian or foreign, or in a financial, banking or insurance company or a company with equity of more than 1 billion, or ii) the position of non-executive director or statutory auditor (or member of another supervisory body) in more than three of such companies; b) a non-executive director, even if independent, other than the post held with the company, should not hold: i) the position of executive director in more than two listed companies, whether Italian or foreign, or in a financial, banking or insurance company or a company with equity of more than 1 billion, or the position of non-executive director or statutory auditor (or member of another supervisory body) in more than five of such companies, or ii) a non-executive director or statutory auditor (or member of another supervisory body) in more than eight of such companies. If these limits are exceeded, directors shall immediately inform the board, which shall assess the situation from the company s point of view and require the director in question to abide by its decision. For directorships or auditorships held by directors in other companies listed on Italian or foreign regulated markets, or in financial companies, banks, insurance companies or companies with equity of more than 1 billion, the following was noted: 60

63 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE Director Appointments held Company Davide Croff Chairman of the board of directors Permasteelisa S.p.A. Roberto Lonzar Regular auditor La Venezia Assicurazioni S.p.A. Regular auditor TBS Group S.p.A. Chairman of the board of statutory auditors Genertel S.p.A. Chairman of the board of statutory auditors Simgenia SIM S.p.A. Director Finanziara Internazionale Alternative Investment SGR S.p.A. Member of the supervisory board Generali Investment S.p.A. Roberto Lugano Director Aeffe S.p.A. Renato Santini Director PBF S.r.l. Regular auditor Marazzi Group S.p.A. Regular auditor Perennius Capital Partners SGR At its meeting of 10 February 2010, the board of directors verified that the number of directorships or auditorships held by the directors in the above companies was compatible with the effective performance of their duties as directors of Snam Rete Gas S.p.A. It also established the procedures for calling meetings. Board meetings are called by the chairman, who discloses the business on the agenda in a notice sent at least five days before the date on which the meeting is scheduled to take place, or at least 48 hours before urgent meetings and at least 24 hours before extremely urgent meetings. The directors and statutory auditors must be sent the documents and information necessary for them to be able to make informed decisions about the matters presented for their approval at meetings with adequate notice. The board of directors met 11 times during On average 82.83% of directors attended, with around 90.91% on average of independent directors present. COMPENSATION SYSTEM The Snam Rete Gas S.p.A compensation system aims to reinforce company values, skills and behaviour so as to be coherent with its culture and strategy. This takes place through the recognition of an individual s responsibilities, results, professional contribution and development potential with reference to benchmark pay markets. In the context of the general Snam Rete Gas S.p.A remuneration policy, particular importance is attached to systems of variable incentives connected with reaching financial targets, developing business and operations in terms of sustained results and creating value for shareholders in the medium to long term, in keeping with Snam Rete Gas S.p.A s strategic plan. These systems are in place for the chairman, CEO, general manager, managers with strategic responsibilities 35 and more junior managers, so as to better sustain long-term company performance. The compensation system also features benefits by way of goods and services, relating mainly to pensions and healthcare, aimed at meeting the requirements of individual beneficiaries and their families. Directors salaries are deliberated by the shareholders in their meetings; remuneration for the chairman and the CEO is determined by the board of directors on the suggestion of the compensation committee, after hearing the opinion of the board of statutory auditors. On 26 April 2007, the shareholders' meeting approved a gross annual salary of 30,000 for each director and approved 500 gross for attending each committee meeting. Remuneration of the chairman, who no longer has an employment relationship with the company, consists of a fixed portion and a variable component tied to attainment of company objectives. The remuneration of the CEO, the general manager and other key managers consists of a fixed part, a variable part and a long-term incentive. The fixed pay of the chairman and the CEO is based on their mandated duties, while that of the general manager and other key managers is calculated considering their positions and responsibilities, with reference to market remuneration rates for similar positions in major national and international companies. The remuneration is adjusted annually to reflect merit (consistent individual performance) or promotion (more senior role/greater responsibilities). The variable part is paid annually in cash and is tied to attainment of specific company (financial, operating and strategic) and individual (for each business unit or function) objectives set for the previous year. The variable component for the chairman and the CEO is linked to company objectives. The variable part paid in 2009 was calculated with reference to ( 35 ) Managers who, together with the managing director and CEO, make up the company s management board. 61

64 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE the Snam Rete Gas S.p.A s 2008 objectives, approved by the board of directors on the suggestion of the compensation committee and defined on the basis of the strategic plan and annual budget considering investments (50% weighting), operating efficiency (20% weighting), cash flows from operating activities (20% weighting) and sustainability (10% weighting), a parameter calculated giving equal weighting to monitoring and reducing gas emissions and to reducing the number of accidents. The company results, measured on a like-for-like basis, have been verified by the compensation committee and approved by the board of directors. They gave rise to a variable remuneration of 125% of the base level, within a range of the minimum (85%) and the maximum (130%) of the allowed amount. In order to further support management motivation and loyalty and to establish a closer connection between objectives, performance and incentives, a system of longterm incentives has been used. On 23 March 2009, the board of directors approved the use of a deferred cash incentive plan as the sole incentive instrument for 2009, on the suggestion of the compensation committee and taking into account the economic climate. The deferred cash incentive allocated in 2009 will be paid after three years depending on attainment of annual EBITDA (actual vs. budget on a like-for-like basis) objectives defined for the three-year period Upon completion of the three years in question, the result of the long-term incentive plan will be verified by the compensation committee and approved by the board of directors. Share-based, long-term incentive plans have also been introduced to the managers pay structure. These are carried out by allocating either new shares or treasury shares bought on the market. The vesting period of the long-term incentive plan begun in 2006 ended in On the basis of performance for , the Snam Rete Gas S.p.A board of directors meeting of 11 March 2009 determined that: i) with reference to the deferred cash incentive plan and Snam Rete Gas S.p.A EBITDA performance, a multiplier of 143% be applied to the amount promised in 2006; ii) with reference to the stock option plan and Snam Rete Gas S.p.A TSR performance, a percentage of 65% be applied for determining exercisable options under the stock option plan assigned in In 2009, considering received fixed and variable remuneration and the allocated long-term incentive, the compensation structure was as follows: Chairman CEO General Other key (*) manager managers Fixed part 53% 47% 55% 58% Variable part (tied to results) 47% 29% 25% 23% Long-term incentives (tied to results) (**) 24% 20% 19% Total 100% 100% 100% 100% (*) The chairman has had a consultancy contract with the company since 1 January 2008 under which he receives a fixed fee and a variable component, tied to attainment of company objectives. (**) Measurement of the deferred cash incentive obtainable upon reaching target results. Following the paid share capital increase, approved by the extraordinary shareholders meeting of 17 March 2009 and completed on 8 June 2009, on 29 July 2009 the board of directors, upon a proposal from the compensation committee, voted for a technical adjustment of the strike price and number of options allocated to subscribers of the stock option plan, relative to the allocations. Information concerning the technical adjustment operation can be found in the directors report of Snam Rete Gas S.p.A s separate financial statements, under the section Remuneration and other information. In accordance with Consob provisions, the report indicates: (i) salaries paid to members of the boards of directors and statutory auditors, to the general manager and to managers with strategic responsibilities; (ii) participation in stock option plans by members of the board of directors, the general manager and managers with strategic responsibilities; (iii) equity investments held in Snam Rete Gas S.p.A by members of the boards of directors and statutory auditors, by the general manager and by managers with strategic responsibilities. The information in points (i) and (ii) is also disclosed in the notes to the separate financial statements of Snam Rete Gas S.p.A. Corporate, operational and organisational separation of gas transporters and dispatchers that are part of groups of vertically integrated undertakings Directive 2003/55/EC of 26 June 2003 revised the rules for separation and transparency of accounts and 62

65 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE imposed the corporate, operational and organisational separation of transportation, storage, LNG and gas distribution operators that are part of groups of vertically integrated undertakings. The Electricity and Gas Authority introduced specific operational unbundling obligations in Italy with its consolidated text attached to resolution no. 11/07 of 18 January 2007 and subsequent amendments, in order to enact the European directive s guidelines. The operational unbundling set out in the consolidated text entailed the allocation of independent decisionmaking and organisational powers to each of the natural gas transportation, dispatch, regasification, storage and distribution businesses, separating them in an administrative sense from the other gas businesses. Accordingly, the unbundled activities are managed by an independent operator, a function set up within the company that performs these activities (the unbundled company ). The members of the independent operator function (i.e. all the unbundled company s directors) were to be independent from the interests of the vertically integrated undertaking (i.e. employees of the unbundled company or independent third parties). Resolution no. 253/07 of 4 October 2007 introduced article 11.5 of the consolidated text whereby it was possible that not all the directors of the unbundled company were part of the independent operator, as long as: - the unbundled company s bylaws include the purpose of encouraging competition, efficiency and sufficient quality when providing a service; - the directors of the unbundled company who do not meet the independence requirements set out by the Authority in its resolutions do not have operational or decision-making powers for sales transactions; - a specific organisational structure (CEO or executive committee) exists as part of the unbundled company s independent operator, which expresses binding opinions for all the board of directors decisions about management and organisational aspects of the unbundled operating business and about approving the business plan. On 27 June 2008, after receiving a formal communication from the ultimate parent Eni S.p.A, the board of directors at Snam Rete Gas S.p.A resolved to create an independent operator function as per article 11 of the consolidated text attached to the Electricity and Gas Authority s resolution no. 11/07 with the favourable opinion of the board of statutory auditors and pursuant to article 2497-ter of the Italian Civil Code. This is a monocratic position held by the CEO with an organisational structure as set out in article 11.5.c) of the consolidated text. This resolution was based on the evaluation that it would not substantially change the company s corporate governance structure, considering also its position as a listed company, the many interests that such status entails and the legislation with which it has to comply. In their extraordinary meeting held on 31 July 2008, the shareholders approved the following changes to the company s bylaws in order to comply with resolution nos. 11/07 and 253/07 of the Electricity and Gas Authority and set up an independent operator within the company: - Article 2 - inclusion in its company purpose of encouraging competition, efficiency and sufficient quality when providing a service, as required by article of resolution no. 11/07of the Electricity and Gas Authority; - Article 19 - the board of directors may set up committees, pursuant to article 2381 of the Italian Civil Code, determining the number of the members and powers thereof; also in order to propose bylaw clauses that allow for different future assessments of the independent operator s activities and structure. The Authority published resolution no. ARG/COM/132/08 on 26 September This contained Guidelines for the preparation of a compliance programme as per Appendix A of resolution no. 11/07 on unbundling (the Guidelines ). On the basis of said Guidelines, the independent operator has to plan and update its operational unbundling programme in accordance with the established preparation and implementation timeframe, varying from six months to a year from the date of publication, depending on the adjustments required to ensure compliance. According to the resolutions of the Authority, among the essential duties of the independent operator is preparing annual and long-term business plans for the infrastructures it manages. On 27 March 2009, the Snam Rete Gas S.p.A board of directors agreed to include the operations general manager in the independent operator function, giving the latter the powers necessary to implement the Guidelines published by the Authority with resolution no. 132/08. This measure was, however, cancelled following appeals from many operators in the sector. The independent operator is also a monocratic body at the company s subsidiaries and associates. In GNL Italia S.p.A, this position has been given to the chairman and CEO, whilst in Italgas S.p.A and Stogit S.p.A the position is held by the CEO. 63

66 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE There were developments in EU regulations on electricity and gas in 2009, involving the European Council adopting the so-called Third Energy Package. This is a set of rules comprising two directives and three regulations which are currently being translated into national legislation in Italy. Treatment of company information REPORT BY THE CHAIRMAN AND THE CEO AS PER ARTICLE 19 OF THE BYLAWS As per article 19 of the bylaws, the chairman and the CEO report to the boards of directors and statutory auditors at least quarterly on the general performance, outlook and key financial and capital operations performed by the company and its subsidiaries/associates. They focus on transactions in which they have a direct or a third-party interest or which are influenced by any party performing management and coordination activities. Special attention is paid to related-party transactions, which are disclosed in the notes to the financial statements. PROCEDURE FOR THE COMMUNICATION TO MARKET OF PRIVILEGED INFORMATION AND DOCUMENTS ABOUT, AND FINANCIAL INSTRUMENTS ISSUED BY, SNAM RETE GAS S.P.A The board of directors approved the Procedure for the communication to market of privileged information and documents about, and financial instruments issued by, Snam Rete Gas S.p.A in its meeting of 17 March 2006 in accordance with Legislative Decree no. 58 of 24 February 1998 and Consob resolution no /99 on publishing privileged information. The procedure also takes into account the Guidelines for market disclosure prepared by the REF forum on company reporting, which sets out the standards for proper market disclosure, and the Code of Conduct for Listed Companies. This procedure has been in place since 1 April 2006 and is tied to the Procedure for identifying important persons and communicating transactions performed by them, even through a third party, involving shares issued by Snam Rete Gas S.p.A. or other related financial instruments ( Internal Dealing Procedure ) and the procedure for Keeping and updating the list of persons with access to privileged information in Snam Rete Gas S.p.A It defines the terms and conditions related to: - communication of privileged information by Snam Rete Gas S.p.A to the market; - communication of information that non-issuing subsidiaries and associates provide to Snam Rete Gas S.p.A in order to comply with regulations on the issues covered by the procedure. Specifically, the procedure regulates: - information to be disclosed to the market, highlighting and analysing the requirements of materiality, clarity, similarity, consistency and timeliness; - relationships between Snam Rete Gas S.p.A, the ultimate parent and subsidiaries; - meetings with market operators, interviews and statements given to mass media; - procedures for distributing press releases; - procedures for distributing information using multimedia information tools (Internet, , CD ROM, broadcasting) and advertising; - delays or opposition to circulating news. The procedure is available on the company s website ( Board of directors committees To carry out its duties effectively, the board of directors has created two internal committees - the compensation committee and the audit committee - and it has approved the relative regulations. No nominations committee was set up, as provided for by the Code of Conduct for Listed Companies, because the appointment of directors is carried out during shareholders meetings on the basis of lists presented by the shareholders, who pre-emptively select candidates and verify that they meet the regulatory and statutory requirements. COMPENSATION COMMITTEE The compensation committee is composed of three non-executive directors: Giuseppe Airoldi, Davide Croff and Massimo Mondazzi, of whom the first two are independent. Mr Airoldi chairs the committee. The compensation committee is charged with submitting to the board of directors a proposal for the annual compensation of the chairman and the CEO, and with examining the compensation criteria for senior management. Directors' salaries are decided by shareholders, while the remuneration of the chairman and the CEO is determined by the board of directors. Committee meetings are valid if at least two members are present, and decisions require an absolute majority of those present. The head of corporate systems, human resources and services performs the role of secretary and takes minutes of the meetings. At least twice a year, on the occasions of the half-year and annual financial statements, the committee provides the board of directors with a progress report. The committee met five times in 2009 (on 12 February, 11 March, 23 March, 7 July and 29 July 29) with an average 64

67 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE participation of about 90%. It discussed: (i) achievement of 2008 company objectives; (ii) achievement of 2008 EBITDA and determination of the multiplier to apply to the deferred cash incentive announced in 2006; (iii) recognition of TSR positioning for 2008 relevant to allocations for the stock option plan, the average positioning for and subsequent determination of the exercise percentage relative to the 2006 allocation; (iv) annual cash incentive proposal, connected to the results obtained in 2008, for the chairman and the CEO; (v) analysis of long-term incentive systems and identification of guidelines for 2009; (vi) definition of 2009 company objectives: performance plan and EBITDA indicator; (vii) definition of guidelines and criteria for remuneration policy for junior management regarding merit changes relative to roles and responsibilities; (viii) allocation criteria and guidelines for long-term managerial incentives for 2009; (ix) proposal for technical adjustment of the stock option plan following the share capital increase; (x) long-term managerial incentives 2009 implementation: deferred cash incentive plan; (xi) proposal for revision of the fixed compensation for the CEO considering the role and responsibility of this function, and for implementation of long-term incentives. AUDIT COMMITTEE The audit committee is composed exclusively of independent non-executive directors: Roberto Lugano (chairman), Roberto Lonzar and Renato Santini. In accordance with the Code of Conduct for Listed Companies, the board of directors has ascertained that all members of the audit committee have adequate experience in accounting and financial matters. In accordance with the regulations, the committee: - assists the board of directors in defining guidelines for the internal control system so that the main risks may be correctly identified and adequately measured, managed and monitored for purposes of fit and proper business management; - examines the work plan and regular progress reports prepared by the head of the Internal Audit unit; 65

68 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE - verifies the correct application of accounting principles and their consistency when preparing the consolidated financial statements, with the assistance of the manager in charge of financial reporting and the independent auditors; - assesses the recommendations made by the independent auditors, their audit plan and related findings set out in their audit reports and any recommendations made in their management letter; - examines the transparency and substantial and procedural correctness of related-party transactions; - reports at least twice a year to the board of directors on its activities and the fitness of the internal control system. Committee meetings are valid when the majority of standing members is present, and decisions require an absolute majority of those present. The chairman of the board of statutory auditors or a designated standing auditor participates in these meetings; upon invitation by the committee, non-members may also participate as well as the company chairman and the CEO. In its meeting of 20 March 2007, after consulting the audit committee, the board of directors appointed the internal audit unit manager as head of internal control and set remuneration for the post in line with company policy. The internal audit manager acts as committee secretary, takes minutes of the meetings and assists it in carrying out its functions. During 2009, the internal audit committee met nine times (on 12 February, 5 March, 22 April, 7 July, 29 July, 29 September, 27 October, 3 December and 21 December). Attendance by its members was 100%; at least one member of the board of statutory auditors was present each time. During said meetings, the committee: (i) analysed the organisational structure of the Internal Audit unit and the work programme for 2009; (ii) examined the audit reports and the effects of the quarterly follow-up of audit issues; (iii) examined periodical progress reports on the Internal Audit unit in 2009 and quarterly reports on notifications received by Snam Rete Gas S.p.A and its subsidiaries/associates; (iv) analysed issues relating to the separate and consolidated financial statements at 31 December 2008 with the head of planning, administration, finance and control and with the independent auditors; (v) analysed related-party transactions; (vi) analysed the half-year reports of the manager appointed pursuant to Law no. 262/2005 on the fitness of internal controls over company reporting and compliance with accounting procedures; (vii) met with the supervisory body constituted pursuant to Legislative Decree 231/2001; (viii) examined the planning process for investing in the development of the pipeline network with the business development and commercial director; (ix) monitored adjudication for the task of auditing the Eni group for the period In its meeting of 10 February 2010, the committee examined the annual report of the head of internal control for During the meetings of 29 July 2009 and 10 March 2010, the committee reported to the board of directors on its activities in the first and second half of 2009 respectively. The board of directors, in the meeting of 10 March 2010 and as specified by the Code of Conduct, evaluated the fitness of the internal control system on the basis of reports from the audit committee. Board of statutory auditors and the independent auditors BOARD OF STATUTORY AUDITORS Pursuant to article 149 of Legislative Decree no. 58/1998, the board of statutory auditors monitors compliance with the law and deed of incorporation, compliance with the principles of correct administration, the fitness of the company s organisational structure to carry out its duties and the fitness of the internal control and accounting systems, as well as the correct implementation of the corporate governance rules set out in the codes of conduct drawn up by stock market operators or trade associations and to which the company declares adherence via market disclosure. It also monitors the reliability of operational representation and the adequacy of the instructions given by the company to its subsidiaries and associates in accordance with article of the aforesaid Decree. In order to align its duties with those of the audit committee, the following roles were transferred to the board of statutory auditors in 2005: - examination of all instances of fraud involving management or employees with key roles in the internal control system, upon notification by the chairman or the head of planning, administration, finance and control; - examination of notifications about accounting, internal control or audit problems. Each statutory auditor may call meetings of the board of directors while two statutory auditors are needed to call a meeting of the shareholders. The board of statutory auditors consists of three standing members and two alternate members. Article 22 of the bylaws requires that they be appointed by the shareholders using voting lists in order to ensure that the minority shareholders can appoint the chairman and an alternate member. The same article establishes that the legal requirements and the regulations issued by Consob about the election of members of administration and control bodies are to be 66

69 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE complied with for the lodging, presentation and publication of these lists. Each shareholder may present, individually or in a grouping, and vote for just one list, in accordance with the methods set out in the aforesaid laws and regulations. Shareholders with voting rights at the time the lists are presented may present lists if they, individually or in a grouping with other shareholders, represent at least 2% of the shares with voting rights at ordinary meetings (or another percentage set or allowed by the relevant laws and regulations). In relation to this, Consob s resolution no of 27 January 2010 set this figure at 1%. Each candidate may feature only on one list, otherwise they are ineligible. The lists consist of two sections: the first sets out the candidates for standing statutory auditor positions while the second gives the names of candidates for the alternate statutory auditors. At least the first name on each section should be a certified auditor and have worked as an auditor for clients that are legally required to have their financial statements audited for not less than three years. Statutory auditors can be reappointed. The lists, together with information about the candidates and the identity of the shareholders presenting them and the percentage of their equity investment, are made available to the public at the company s registered offices and Borsa Italiana S.p.A, and are posted on the company s website ( within the timeframe set by current legislation. The list procedure is necessary only if the entire board of statutory auditors is being replaced. The board of statutory auditors, appointed by the shareholders on 26 April 2007, comprises the chairman, Pierumberto Spanò, standing statutory auditors Riccardo Perotta and Roberto Mazzei, and alternate statutory auditors Giulio Gamba and Luigi Rinaldi. They have a three-year term of office (until approval of the 2009 financial statements). The standing statutory auditors Roberto Mazzei and Riccardo Perotta and the alternate statutory auditor Giulio Gamba were appointed from the list presented by Eni S.p.A.. The chairman Pierumberto Spanò and the alternate statutory auditor Luigi Rinaldi were appointed on the suggestion of ARCA SGR S.p.A.. The statutory auditors have the professional and reputational requirements set by the Ministry of Justice in its Decree no. 162 of 30 March For the purposes of this decree, the subjects strictly related to the company s business are: commercial law, business management and corporate finance. Similarly, the sector pertaining to its business is the engineering sector. In their ordinary meeting of 26 April 2007, the shareholders established the respective annual remuneration for their terms of office as 45,000 for the chairman and 30,000 for the standing statutory auditors. They also set the attendance fee for each meeting of the board of 67

70 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE directors committees at 500. The statutory auditors may also act as directors or statutory auditors in other companies within the limits of Consob regulations. Based on the statements provided to it, the board of statutory auditors has checked that all its members meet the necessary independence requirements as per article 3 of the Code of Conduct and the law. The statutory auditors curricula vitae are available on the company s website. The board of statutory auditors met 13 times during 2009; on average, attendance was 82%. One member usually participated in the meetings of the audit committee. Based on the communications received, details of the positions held by the statutory auditors as director or statutory auditor in other companies listed on Italian regulated markets, and the total number of such positions held in any other companies, are given below. Statutory auditor Position held in listed companies Company Total no. of positions held Pierumberto Spanò Chairman of the board of statutory auditors Astaldi S.p.A 16 Riccardo Perotta Regular auditor Fiat S.p.A 10 Regular auditor Mediolanum S.p.A Roberto Mazzei Director Viaggi del Ventaglio S.p.A 16 INDEPENDENT AUDITORS As required by law, the company s financial statements are audited by independent auditors included in the register held by Consob. They are appointed by the shareholders on the basis of a documented proposal by the board of statutory auditors. In their meeting of 26 April 2007, the shareholders extended the audit mandate of PricewaterhouseCoopers S.p.A, which expired on that date, until Shareholders meetings and their rights Shareholder meetings are privileged corporate meetings between the company s management and its shareholders. Article 11 of the bylaws, as established by article 126-bis of the Consolidated Finance Act, states that shareholders who, either individually or as a grouping, represent at least one fortieth of the share capital, can, within five days of publication of the meeting convocation notice, request additional matters to be placed on the agenda. This is not allowed for those matters about which the shareholders pass resolutions, as established by law, on proposals made by directors or based on a project or report prepared by them. Additions allowed by the board of directors are made public at least ten days before the date set for the shareholders meeting in a notice published as established by the bylaws. The shareholders may request information about both matters on the agenda and the company s general performance during their meetings. This information is provided in compliance with the regulations governing price-sensitive information. At ordinary meetings, shareholders exercise the powers assigned by article 2364 of the Italian Civil Code, while at extraordinary meetings they exercise the powers provided for by article 2365 of the Italian Civil Code as well as those provided for by other laws. Under article 15 of the bylaws, at ordinary meetings, shareholders pass resolutions about sale, transfer, rent, usufruct and all other acts of disposal, also as part of joint ventures, or subject to company limits or strategic business units relevant to the gas transportation and dispatch businesses, without prejudice, as per article of the Italian Civil Code, to the liability of the directors for actions taken. Resolutions on these matters are adopted, also at second convocation, with the favourable vote of at least three quarters of the share capital represented at the meeting. For other matters, ordinary meetings pass resolutions by majority vote in accordance with the relevant legislation. Extraordinary meetings resolve, at first, second and third convocation, matters with the favourable vote of at least three quarters of the share capital represented at the meeting. As provided for in the Code of Conduct, shareholders meetings are governed by a regulation which requires their ordered and proper running and guarantees the right of each shareholder to express their opinion on the matters on the agenda. The regulation is available on the company s website at Those wishing to speak in the meetings are required to notify this at least two working days before the first convocation of such meeting through an authorised financial intermediary. The said shareholder may withdraw this notification through the intermediary, thus forfeiting their right to speak. To facilitate shareholders participation, company bylaws oblige it to provide to associations of shareholders that meet the relevant legal requirements adequate spaces for communication and gathering of proxies for shareholders that are employed by the company and its subsidiaries/associates, according to the terms and means agreed with their legal representatives. In 2009, shareholders meetings were held twice, on 17 68

71 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE March 2009 and on 24 April 2009, in extraordinary and ordinary meetings respectively. In their ordinary meeting, the shareholders resolved to approve the 2008 financial statements, the allocation of the profit for the year and the distribution of a dividend. In their extraordinary meeting, following the board of directors ruling of 12 February 2009 and in compliance with article 2443 of the Italian Civil Code, the shareholders resolved to give the board of directors the power to increase, by 31 December 2010 at the latest, the company s share capital against payment and consideration, by splitting shares, in one or more instalments, by a maximum of 3,500,000, including any share premium. This will take place through the issue of ordinary shares with a nominal value of 1 each and regular rights to dividends, to be offered, pursuant to article of the Italian Civil Code, to entitled shareholders. The board of directors will have the widest powers to set, in line with the limits already mentioned, the methods, terms and conditions of the operation, including the share subscription price, the share premium, the number of newly issued shares and the related option ratio. It was also given the power to make adjustments according to relevant regulations. This operation was completed on 8 June Other control bodies INTERNAL CONTROL SYSTEM Snam Rete Gas S.p.A adopted an internal control system several years ago which conforms to guidelines in the Code of Conduct for Listed Companies and to benchmark best practices. The system s scope is to (i) check the adequacy of the different internal processes for efficiency, effectiveness and cost effectiveness; (ii) ensure the reliability and correctness of the accounting entries and protect the company s assets; and (iii) ensure compliance of the operating procedures with internal and external regulations and company guidelines in order to guarantee a healthy and proper management system. The board of directors is responsible for the internal control system with the assistance of the audit committee. It sets the guidelines and periodically checks its adequacy and proper operation to ensure that the key business risks are identified and properly managed. The CEO checks that the guidelines drawn up by the board of directors are implemented by designing, managing and monitoring the internal controls. As required by the Code of Conduct for Listed Companies, the board of directors appointed the CEO as the executive director in charge of supervising the working of the internal control system in its meeting of 11 December The audit manager reports to the chairman in order to ensure independence from the operating activities subject to audit. He reports regularly to the chairman and CEO as well as to the audit committee and board of statutory auditors once every six months (unless circumstances require additional meetings). Management has primary responsibility for applying the internal controls as the control procedures form an integral part of its management duties. Therefore, management must ensure that the environment favours such controls and must perform the line controls, i.e. the controls performed by an individual operating unit or group company over its processes. The internal audit unit is in charge of checking the adequacy of the internal control system and that it can reasonably ensure that the company can attain its objectives cost-effectively and efficiently. Accordingly, the unit monitors the effectiveness of the controls in place, making recommendations and suggestions about remedial action to be taken to resolve weaknesses. ORGANISATION, MANAGEMENT AND CONTROL MODEL PURSUANT TO LEGISLATIVE DECREE NO. 231/01 - ADMINISTRATIVE LIABILITY This Legislative Decree of 8 June 2001 introduced the concept of administrative liability for companies whereby they can be held liable, and therefore penalised, for certain crimes committed or attempted in the interests of or to the advantage of the company by senior management and those subject to their direction or supervision. The company s liability is excluded if it has adopted and properly implemented organisation, management and control models, before the crimes were committed, that are suitable to prevent such crimes and has set up a supervisory body to oversee the model s operation and compliance with the requirements of the Decree. In this regard, all Snam Rete Gas S.p.A group companies have conformed with law by adopting their own tailormade organisation, management and control model and setting up a supervisory body charged with monitoring the implementation and effective application of the model. The following is a summary of the measures implemented by each company. The board of directors of Snam Rete Gas S.p.A approved the organisation, management and control model pursuant to Legislative Decree no. 231/2001 in its meeting of 23 April 2004 and appointed a supervisory body. The model was revised on 22 February 2008 to reflect changes in the related legislation. On 29 July 2008, the board of directors modified the composition of the supervisory body to include an independent component as its chairman. On 12 February 2009, the model was again updated to reflect regulatory changes. 69

72 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE During 2009, the supervisory body made sure that the model continued to function, particularly with regard to improving corporate procedures and carrying out specific control programmes. There was also a training event for all senior managers, executives and business unit heads, dealing with all types of offence pursuant to Legislative Decree 231/2001 and with a particular focus on those introduced recently. With reference to subsidiaries and associates, the model is implemented regularly, with particular focus on control activities and staff training. The board of directors of Italgas S.p.A approved the organisation, management and control model pursuant to Legislative Decree no. 231/2001 in its meeting of 15 September 2004 and appointed a supervisory body. On 13 February 2008, the model was updated to reflect regulatory changes. On 12 March 2009, it was updated structurally and to reflect regulatory changes. As a result of this change, and in accordance with new measures laid down by the model for appointing the supervisory body, the composition of said body has been altered by the addition of a new internal member. The subsidiary Napoletanagas S.p.A approved its organisation, management and control model on 17 January 2005 and set up a supervisory body. The model was updated in 2009 to reflect a new structure and legislatory changes. The board of directors of Stoccaggi Gas Italia S.p.A approved its organisation, management and control model on 24 February 2005 and appointed a supervisory body. The model was updated on 10 March 2009 both in terms of document structure and regulatory changes. The composition of the supervisory body was also modified in 2009, switching from a monocratic to a collegial structure. With reference to Stogit S.p.A, the model is implemented regularly, with particular focus on control activities and staff training. GNL Italia S.p.A approved its organisation, management and control model on 22 June 2004 and appointed a supervisory body. An updated model was approved on 9 April The subsidiary regularly implements the model, with particular focus on control activities and staff training. INTERNAL CONTROLS AND RISK MANAGEMENT SYS- TEM AS REGARDS THE FINANCIAL REPORTING PROCESS The system of internal controls over financial reporting is the process meant to provide reasonable certainty as to the reliability 36 of the financial reporting itself and as to the capacity of the process of preparing the financial statements to produce financial reporting in accordance with generally accepted accounting standards. Snam Rete Gas S.p.A. has a regulations body, Internal Controls Over Financial Reporting, which defines the rules, methods, roles and responsibilities for designing, implementing and maintaining, over time, the system of internal controls over the corporate reporting of the Snam Rete Gas S.p.A. group as well as for evaluating its effectiveness. The body of procedural rules for the corporate reporting control system was defined in compliance with the provisions of article 154-bis of the Testo Unico della Finanza and takes into account the requirements provided for in the Sarbanes-Oxley Act of 2002 (SOA), to which the ultimate parent Eni Sp.A. is subject as an issuer listed on the New York Stock Exchange (NYSE) and which reflect upon Snam Rete Gas S.p.A. as relevant subsidiary. The model for corporate reporting internal control adopted by Snam Rete Gas S.p.A is based on the COSO Report ( Internal Control Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission). In addition to Snam Rete Gas S.p.A., the defined control model has been applied, since obtaining control, at the companies directly and indirectly controlled by it according to international accounting standards in view of their significance for the purposes of preparing financial reporting. The companies controlled by Snam Rete Gas S.p.A. are adopting the defined control model as reference for designing and implementing their own control systems so as to adapt it to their dimensions and to the complexity of the activities carried out. Main features of the internal controls and risk management system as regards the financial reporting process The control system was defined by following two essential principles, that is, the dissemination of controls to all levels of the organisational structure consistent with the operational responsibilities conferred and the sustainability of the controls over time so that their execution would prove to be integrated and compatible with operational demands. The design, implementation and maintenance of the control system are provided using: a process of risk ( 36 ) Reliability (of information): Information which has the characteristics of accuracy and conformity with the generally accepted accounting standards, and meets the requirements of the applicable laws and regulations. 70

73 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE assessment, identification of controls, evaluation of controls and information flows (reporting) The risk assessment process, conducted using the topdown approach, has the aim of identifying the organisational entities, the processes and the specific activities capable of generating risks of unintentional errors or of fraud which could have significant effects on the financial statements. In particular, identification of the organisational entities which are involved within the scope of the control system (relevant companies) is done on the basis of the contribution by the various entities to given values in the consolidated financial statements (total assets, total financial debt, net revenues, pre-tax income) both in relation to considerations concerning significance per specific risk and process. Within the scope of relevant companies for the control system, identification is then made of the significant processes based on an analysis of quantitative factors (processes which contribute to making up the items in the financial statements by amounts greater than a given percentage of the pre-tax profits) as well as qualitative factors (for example: complexity of the accounting treatment of the account; novelty or significant changes in business conditions). In view of the relevant activities and processes, risks are identified, that is, potential events that, if occurring, could compromise achievement of the control objectives inherent to financial reporting (for example, financial statement assertions). The risks thus identified are assessed in terms of potential impact and probability of occurrence based on quantitative and qualitative parameters and assuming an absence of controls (so-called inherent assessment). Particularly with reference to risks of fraud 37, Snam Rete Gas S.p.A conducts a dedicated risk assessment based on a specific method in relation to Antifraud Programmes and Controls. The appropriate control activities are defined in view of the companies, processes and relative risks deemed relevant. The structure of the control system provides controls at the entity level, operating interdepartmentally in relation to the entity in reference (group/single company) as well as controls at the process level. Controls at the entity level are organised into a defined checklist based on the model adopted in the COSO Report according to five components: control environment, risk assessment, control activities, information systems and communication flows and monitoring activities. In particular, among the controls of the control environment component, there are activities involving definition of the timing for preparing and disseminating economic and financial results; among the controls of the control activities component there is the presence of organisational structures and a body of rules adapted to achieve the objectives involved in financial reporting (for example, such controls provide for review activities and updating, performed by specialised company department posts, on the rules relating to financial statements and accounting); among the controls of the information systems and communication flows component are activities relating to the information system for handling the consolidation process. Controls at the process level are subdivided as follows: specific controls, signifying the entirety of the manual or automated activities aimed at preventing, identifying and correcting errors or irregularities occurring in the course of operational activities; pervasive controls, signifying structural elements of the control system meant to define a general context to promote proper execution and control of operational activities (for example, the segregation of incompatible duties and general controls over their information systems). The specific controls are identified in appropriate procedures that define both the execution of business processes as well as the so-called key controls that, if absent or lacking operability, generate a risk of error or fraud of significance to the financial statements that cannot be intercepted by other controls. The controls both at the entity and process levels are subject to evaluation (monitoring) to check, over time, the soundness of the design and actual operability; for this purpose, ongoing monitoring activities have been provided for, conferred to the management in charge of the relevant processes or activities, along with independent monitoring activities (separate evaluations) conferred to Internal Audit, which operates according to a pre-established plan announced by the manager in charge of the preparation of the corporate accounting documents (Manager in Charge of Financial Reporting) for the purpose of defining the scope and objectives of his involvement by using agreed audit procedures. The monitoring activities enable identification of eventual deficiencies in the control system, which are subject to evaluation in terms of probability and impact on the financial reporting and, based on their significance, are characterised ( 37 ) Fraud: Within the scope of the Control System, any intentional act or omission which results in a misleading statement in the reporting. 71

74 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE in ascending order of importance as deficiencies, significant points of weakness and material deficiencies. The results of the activities of monitoring are subjected to periodic flows of information (reporting) as to the status of the control system, provided in part by the use of information technology tools aimed at ensuring that the information on the adequacy of the design and the operability of the controls can be tracked. Based on this reporting, the Manager in Charge of Financial Reporting drafts a half-yearly report on the effectiveness of the control system, which, shared with the CEO, is submitted to the board of directors, upon prior report to the Internal Control Committee and to the Board of Statutory Auditors, on the occasion of approval of the draft annual report and half-yearly financial report so as to enable the mentioned supervisory functions to be carried out, along with evaluations of the internal control system performed within its own scope of responsibility. The activities of the Manager in Charge of Financial Reporting are supported within the Snam Rete Gas group by various individuals whose duties and responsibilities are defined in the framework rules referred to earlier. In particular, the control activities involve all levels of the organisational structure of Snam Rete Gas and the relevant subsidiaries, such as those in charge of business operations and department managers, up to administrative managers and CEOs. In this organisational context, for the purposes of the internal control system, the figure of the risk owner, who performs the ongoing monitoring which assesses the design and operability of the specific and pervasive controls while feeding the information flow of reporting on the monitoring activity, assumes particular significance. MANAGER OF FINANCIAL REPORTING The Bylaws establish that the board of directors, upon proposal of the eldest CEO, in agreement with the chairman, and upon the prior favourable opinion of the Board of Statutory Auditors, appoints the Manager of Financial Reporting, to prepare the corporate accounting documents, from among individuals with the required professional characteristics. The Manager of Financial Reporting must be selected from among individuals who have performed the following for at least three years: a) administration or control duties or management with a company listed on Italian or other EU member regulated stock exchanges or stock exchanges of other OECD countries which have share capital of no less than 2 million, or b) activities of legal control of accounts at the companies indicated in paragraph a), or c) professional duties or university lecturing on financial or accountancy subjects; or d) management duties with state-owned or private bodies active in the financial, accounting or supervisory sectors. The board of directors checks that the Manager of Financial Reporting has adequate powers and means to perform his duties and to ensure that the administrative and accounting procedures are effectively complied with. In its meeting of 29 October 2007 and in compliance with the professional requirements set by the bylaws, the board of directors appointed Dr. Antonio Paccioretti, Manager of Planning, Administration, Finance and Control of Snam Rete Gas S.p.A., as Manager of Financial Reporting, as proposed by the CEO, in agreement with the chairman and upon the prior favourable opinion of the Board of Statutory Auditors. The board of directors also checked the adequacy of the powers and means given to the Manager of Financial Reporting so that his/her duties can be carried out. MARKET ABUSE PROCEDURE Procedure for the identification of relevant persons and communication of transactions performed by them, also via nominees, involving shares issued by Snam Rete Gas or other related financial instruments ( Internal Dealing Procedure ) On 17 March 2006, the board of directors approved the Procedure for the identification of relevant persons and communication of transactions performed by them, also via nominees, involving shares issued by Snam Rete Gas or other related financial instruments ( Internal Dealing Procedure ) in accordance with article 114 paragraph 7 of Legislative Decree no. 58 of 24 February 1998 and Consob Regulation no /99 of 14 May 1999 (the Issuer Regulation). This procedure has been in force since 1 April 2006 and is tied to the Procedure for the communication of privileged information and documents about Snam Rete Gas and financial instruments issued by it to the market and the Procedure for the Keeping and updating of the list of persons who have access to privileged information in Snam Rete Gas S.p.A. It sets out the regulations governing the information obligation and limitations about transactions involving shares issued by Snam Rete Gas S.p.A. and other related financial instruments, performed on their own behalf, by relevant persons, i.e., the chairman, CEO, directors, Chairman of the Board of Statutory Auditors and stand- 72

75 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE ing statutory auditors of Snam Rete Gas S.p.A., the Operations General Manager and managers having the duty to participate in Management Board meetings. According to current regulatory requirements, the definition of relevant persons also includes persons who hold shares equal to at least 10% of the share capital and all other parties that control the listed issuer. These persons are also obliged to communicate transactions performed by: spouses, unless legally separated, children, also those of the spouse for whom they provide, and, if living with them for more than a year, parents, relatives and relatives-in-law of the relevant persons (people with close family ties to the relevant person); legal entities controlled directly or indirectly by a relevant person or one of the persons closely related to the relevant person; partnerships, the economic interests of which are substantially the same as those of a relevant person or of a person closely related to such person; trusts set up for the benefit of a relevant person or of a person closely related to such person. The procedure requires that communication be made to the market and Consob within five trading days from that on which, in each calendar year, the total amount of the transactions that, in absolute terms (sum of amounts paid and collected), is equal to or exceeds 5,000. Lastly, The Code forbids relevant persons from performing transactions on financial instruments issued by Snam Rete Gas S.p.A. during the fifteen days before board meetings held to examine the mandatory financial reports, to resolve on interim dividends, the preliminary figures, and to resolve on the dividend proposal made to the Shareholders Meeting. Among the transactions considered for the purpose of determining whether the limits indicated above are exceeded are transfers of shares acquired as part of stock option and stock grant plans. The Procedure is available on the company s website ( Procedure for the Keeping and updating of the list of persons who have access to privileged information in Snam Rete Gas In its meeting of 17 March 2006, the board of directors, as required by article 115-bis of Legislative Decree no. 58 of 24 February 1998 and Consob Regulation no (Issuer Regulation), drew up a list of the persons who have access to privileged information in Snam Rete Gas S.p.A. and approved the procedure for the Keeping and updating of the list of persons who have access to privileged information in Snam Rete Gas S.p.A. This procedure has been in place since 1 April 2006 and is tied to that related to the Procedure for the communication of privileged information and documents about Snam Rete Gas S.p.A. and financial instruments issued by it to the market and the Procedure for the identification of relevant persons and communication of transactions performed by them, also via nominees, involving the shares issued by Snam Rete Gas S.p.A. or other related financial instruments ( Internal Dealing Procedure ). The list is split into two sections: - the first gives the name of the person or company that, based on their work, professional activities or duties, has access to privileged information on a regular basis (Section A) identified as follows: chairman, CEO, Directors, Chairman of the Board of Statutory Auditors and standing statutory auditors of Snam Rete Gas S.p.A., Operations General Manager and units reporting directly to the chairman, CEO, Operations General Manager, the independent auditors of Snam Rete Gas S.p.A. and consultants that provide their professional services on a consultancy or contract basis with a contract of more than one year and have access to privileged information; - the second gives the name of the person or company that, based on their work, professional activities or duties, has access to information occasionally (Section B) identified as follows: Snam Rete Gas S.p.A. employees who, depending on their specific duties, have occasional access to information, and consultants that provide their services on a consultancy or contract basis with a contract of less than one year and have access to information. The persons are grouped into two subsections in each section depending on whether they are employees or consultants. There is just one list and it is kept by the Business Systems, Human Resources and Services Unit of Snam Rete Gas S.p.A. which sets the criteria and methods to be applied to keep, manage and look for information in the list in order to facilitate access to, management, consulting, extrapolation and printing of the list. The head of Business Systems, Human Resources and Services identifies the person to be in charge of keeping and updating the list. This person keeps the list updated without delay, making amendments on the day the related communication is received as per the rules issued by Snam Rete Gas S.p.A. on the protection of personal data. The list includes the following information about each person: a registration number, registration date, personal data, company to which he belongs, reason for inclusion in the list, date of sending communication to the person about his inclusion, date of amendment of information already included in the list, date of sending communication of amendment of information included in the list, date on 73

76 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE which the person is removed from the list, reason for the removal and date of communication of such removal. This information is kept for five years unless the circumstances which lead to its inclusion/amendment are no longer present. The procedure is available on the company s website ( Relationships with Shareholders and Investors Snam Rete Gas S.p.A. has adopted a communication policy aimed at ensuring ongoing interaction with its institutional investors, socially responsible investors, shareholders and the market, and the widespread circulation of exhaustive, timely information about its business. The only limit is that of the confidentiality of certain information. Accordingly, information disclosed to the investors, the market and media is made available in press releases, periodic meetings with the institutional investors, the financial community and the press as well as a wealth of documentation available and regularly updated on the website of Snam Rete Gas S.p.A. ( Information relating to the reports, key events/ transactions and procedures issued by the Snam Rete Gas S.p.A. on corporate governance is made available to the public on a timely basis on the website as well. The company s press releases, documentation used during meetings with financial analysts, notices to the shareholders and information and documentation about the matters on the agenda of shareholders meetings, including the related minutes, are available on the website. Documentation is also sent free of charge to those who request it using the form available on the website. Relations with news agencies are maintained by the Institutional Relations and Communications department. Information of interest to them is available on the website of Snam Rete Gas S.p.A. Relationships with the institutional investors and financial analysts are maintained by the Investor Relations Unit. Information of interest to them is available on the Snam Rete Gas S.p.A. website and can also be requested by ing investor.relations@snamretegas.it. The company Secretary maintains relationships with the shareholders. Information of interest to them is available on the Snam Rete Gas S.p.A. website and can also be requested by ing segreteria.societaria@snamretegas.it. During 2009 the pages on investor relations in the Snam Rete Gas S.p.A. website were enhanced by the online publication of the Financial Market s Review, which offers monthly analysis of financial markets and the performance of the utility industry of Snam Rete Gas S.p.A. shares, and of the shares of its competitors on the stock market. Starting in December this is augmented by News&Facts, a quarterly publication meant especially for individual investors. Transactions with Related Parties Transactions undertaken by Snam Rete Gas S.p.A. with related parties, as defined by IAS 24, mainly involve the exchange of assets, provision of services and provision and utilisation of financial resources with Eni S.p.A. (the ultimate parent) and other subsidiaries and associates of Eni S.p.A. as well as with Enel, a state-controlled company, and its subsidiaries. All these transactions are part of its ordinary business activities, generally take place at market conditions, i.e., those conditions which would be applied between two independent parties, and are performed in the interests of Snam Rete Gas S.p.A., Italgas S.p.A, Stogit S.p.A and GNL Italia S.p.A. The amounts involved in commercial, financial and other transactions with related parties and a description of the nature of the key transactions are given in the notes to the financial statements. The board of directors approved the Code of Conduct for transactions with related parties in its meeting of 24 February 2003 (posted on the Snam Rete Gas S.p.A. website). This sets out the criteria to be adhered to when undertaking transactions with related parties as well as the terms and conditions to be used to communicate information about them to the Board. The board of directors reviews transactions between Snam Rete Gas S.p.A. and related parties if: - they are atypical and/or unusual and the amount involved exceeds 5 million; - they relate to acquisitions, disposals, sales or contributions of investments, companies or business units; - they relate to property worth more than 2.5 million; - the related party is one of those listed in letters d), e) and f) of paragraph 9 of IAS 24 and the amount in question exceeds 0.5 million ( 0.25 million if the transaction is atypical or unusual). The board of directors also reviews its subsidiaries transactions with parties related to Snam Rete Gas S.p.A. that could potentially be particularly significant and for which information is to be disclosed to the market in line with Consob requirements. The standards also identify the transactions performed by Snam Rete Gas S.p.A. and its subsidiaries with Eni S.p.A., and also its subsidiaries that are subject to quarterly reporting to the board of directors and Board of Statutory Auditors and fix the quantitative threshold depending on the nature of the transaction and of the related party as well as the information to be communicated. The directors, statutory auditors, general managers and managers holding key positions communicate the eventu- 74

77 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE al execution of transactions carried out with Snam Rete Gas S.p.A. and/or its subsidiary every quarter, also via nominees or by parties attributable to them according to the provisions of IAS 24. These standards are available on the Company s website ( Modification of this procedure is provided for to meet the general guidelines of Consob pursuant to article 2391-bis of the Italian Civil Code as they are issued. Possible Changes to the Corporate Governance Structure After Year End No significant changes have taken place since the end of financial year The following shows the tables mentioned in the document Guide to writing the corporate governance report issued in March 2004 by Assonime and Emittenti Titoli S.p.A. 75

78 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE Annex 1 Structure of the board of directors and of the Committees of Snam Rete Gas S.p.A. Internal Control Compensation Possible Nominating Possible Executive Board of Directors Committee Committee Committee Committee Non- Number of Members Executive executive Independent **** other posts (**) *** **** *** **** *** **** *** **** Chairman Alberto Meomartini x Managing Director Carlo Malacarne x Directors Giuseppe Airoldi (*) x x 100 x 100 Roberto Lonzar (*) x x 95 6 x 100 None None Roberto Lugano (*) x x 68 1 x 100 Massimo Mantovani x 41 Davide Croff x x 91 1 x 100 Massimo Mondazzi x 50 x 60 Renato Santini x x x 100 Number of meetings during financial year Quorum required for submittal of lists for appointment to the Board of Directors: 1% (See Consob Decision No of 27 January 2010) The Nominating Committee provided for by the Code of Conduct was not created because the appointment of the Directors is made in a Shareholders' Meeting on the basis of lists submitted by the shareholders, who carry out the preliminary selection of candidates. (*) An asterisk indicates whether the director has been appointed upon proposal by the minority shareholders. (**) This column shows the number of positions held by the person involved as director or statutory auditor in other companies listed on Italian or foreign regulated markets or in financial companies, banks, insurance companies or companies with shareholders equity of more than 1 billion. With respect to the directors currently in office, the duties indicated were assigned by the board of directors meeting held on 10 February (***) An X in these columns shows the committees to which each director belongs. (****) These columns indicate the attendance percentage of directors at meetings of the board of directors and of the committees created within it. Annex 2 - Board of Statutory Auditors of Snam Rete Gas S.p.A. Members Attendance percentage at meetings of the Board of Directors Attendance percentage at meetings of the Board of Statutory Auditors Number of other posts (**) Chairman Pierumberto Spanò (*) Standing statutory auditors Roberto Mazzei Riccardo Perotta Number of meetings held during financial year 2009: 13 Quorum required for submittal of lists for appointment to the Board of Statutory Auditors: 1% of the share capital (See Consob Decision No of 27 January 2010) (*) An asterisk indicates whether the statutory auditor has been appointed upon proposal by the minority shareholders. (**) This column shows the number of positions held by the person involved as director or statutory auditor in other companies listed on Italian regulated markets. 76

79 SNAM RETE GAS ANNUAL REPORT 2009 / REPORT ON CORPORATE GOVERNANCE AND OWNERSHIP STRUCTURE System of delegations and transactions with related parties Has the Board of Directors effected delegations, defining their: a) limits X b) methods of exercise and X c) reporting frequency? X Has the Board of Directors reserved examinations and approval of transactions of particular economic, capital and financial signifiance (include transactions with related parties)? X Has the Board of Directors defined guidelines and criteria for identifying significant transactions? X Have the guidelines and criteria referred to above been described in the report? X Has the Board of Directors defined appropriate procedures for examining and approving transactions with related parties? X Procedures for approval of transactions with related parties X Procedures of the most recent appointment of directors and statutory auditors Was the filing for candidacy for office as a director done at least ten days in advance? X Were the candidacies for office as director accompanied by exhaustive information? X Were the candidacies for office as director accompanied by indication of suitability for qualification as independent? X Was the filing for candidacy for office as statutory auditor done at least ten days in advance? X Were the candidacies for office as statutory auditor accompanied by exhaustive information? X Shareholders' Meetings Has the Company approved rules for Shareholders' Meetings? X Are the rules attached to the report (or is it indicated where they can be found or downloaded)? X Internal control Has the company appointed the manager for internal control? X Is the manager independent from those in charge of operational X areas in terms of the hierarchy? Organisational unit of the internal control manager Investor Relations Has the company appointed someone in charge of investors? Organisational unit and reference data for the person in charge of Investor Relations Annex 3 Other Guidelines of the Code of Conduct YES NO Summary of reasons for possible deviations from recommendations in the code "Internal Audit" department X Institutional Investor Relations: Investor Relations Piazza Santa Barbara, San Donato Mil.se (MI) tel. 02/ investor.relations@snamretegas.it Individual shareholder relations: Corporate Secretary Piazza Santa Barbara, San Donato Mil.se (MI) tel. 02/ segreteria.societaria@snamretegas.it 77

80 SNAM RETE GAS ANNUAL REPORT 2009 / COMMITMENT TO SUSTAINABLE DEVELOPMENT Commitment to sustainable development Introduction 2009 was characterised for Snam Rete Gas by the start up of a process which will lead to important organisational transformations following the full integration of the companies Italgas and Stogit into the group. This has represented and still represents a real area of challenge where the progress of the Snam Rete Gas group in corporate social responsibility and in the development of an innovated and integrated managerial logic will be measured. Along these lines, July saw the start up of the Energy Programme, a project involving about 300 people from the four companies (Snam Rete Gas, Stogit, Italgas and GNL Italia) who will work together up to March 2010 on studying, analysing and comparing processes and performance of the four businesses and in order to give new life to the new management model for operational processes. This programme is also the start of the process of extending the sustainability model adopted to the new companies acquired. In September 2009, Snam Rete Gas was awarded listing in the Dow Jones Sustainability World Index (DJSI World), the 78

81 SNAM RETE GAS ANNUAL REPORT 2009 / COMMITMENT TO SUSTAINABLE DEVELOPMENT first and most prestigious stock index worldwide for evaluating the social responsibility of companies, which accepts only companies with management excellence in their own business according to sustainability criteria. The Dow Jones Sustainability Index, created in 1999 with the aim of tracking the financial performance of shares distinguished by their excellent results in economic, social and environmental terms, selects about 300 companies from a total of about 2,500 candidates with capitalisation qualification. In December 2009 Snam Rete Gas also entered to participate in ECPI Ethical Index Global and received confirmation of inclusion in two other indexes, ECPI Ethical Index Euro and ECPI Ethical Index EMU, in which the Company had already appeared. Confirmation is also provided by all of the indexes for which Snam Rete Gas was selected in previous years, among them, in particular, the FTSE4Good index (for the eighth consecutive year). The Company conducts its day-to-day business on the basis of the principles set out by international institutions and conventions covering the protection of human rights, labour rights and trade unionism, health, safety, the environment, abolition of forced and compulsory labour, child labour and all forms of discrimination, as well as compliance with the values and principles of correct behaviour, transparency and sustainable development. To make this commitment more visible, in October 2009 Snam Rete Gas joined the Global Compact. This international initiative maintains ten universal principles that pertain to human rights, the right to work, environmental rights and to the fight against corruption, and it has brought governments, companies, agencies of the United Nations, labour organisations, and associations together with the aim of contributing to the creation of a more inclusive and sustainable global economy. The Sustainability Report that the company publishes annually has proven to be an important tool of strategic control that examines the activities carried out, evaluating them according to the logics of economic efficiency, environmental protection and social welfare, communicating key indicators to which the company is committed and by which it publicly assesses itself. The report sets out the strategic objectives that Snam Rete Gas has identified in terms of sustainability, in line with its established sustainable development policies. To stress the importance of the topics involved in sustainable development, the board of directors has a central role in the definition of the policies and approval of the Sustainability Report in conjunction with approval of the annual financial report. HUMAN RESOURCES AND ORGANISATION The management and development model of Snam Rete Gas is based on fundamental assumptions recognised within the group. These assumptions are focused on appreciating people, helping them develop in terms of performance, potential and motivation and developing and strengthening the skills in conjunction with clearly defining their objectives and responsibilities and acknowledging their merits. The system for analysing performance and evaluating potential and individual skills, and the activities of involvement and participation through training and communication, strengthen the wealth shared in connection with the principles, values, expertise and conduct of those active in the organisation. Workforce With the integration of Italgas and Stogit, the workforce in service within the Snam Rete Gas group at 31 December 2009 was 6,187 people. The analysis per contractual category and per company included within the scope of consolidation is indicated in the following tables: Contractual categories Change Managers Junior managers Office workers 1,250 1,241 3,320 2,079 Labourers ,253 1,479 2,357 2,345 6,187 3,842 Company Change Snam Rete Gas S.p.A 2,270 2,252 2,254 2 GNL Italia S.p.A (6) Italgas S.p.A 2,965 2,965 Napoletanagas S.p.A Stogit S.p.A ,357 2,345 6,187 3,842 79

82 SNAM RETE GAS ANNUAL REPORT 2009 / COMMITMENT TO SUSTAINABLE DEVELOPMENT The personnel hired for unlimited duration is 96% of the total, while 145 people have an apprenticeship or trial contract. 51% of human resources are assigned to Northern Italy, 22% to Central and 27% to Southern Italy and Sicily. The newcomers of 2009, 168 people, were mostly university graduates (18%) and high school graduates (55%). At year end, university graduates accounted for 9.5% of the total while the high school graduates made up 50.3%. The average age of the workforce of the group is 47 years and the average seniority of service is about 22 years. Distribution of Personnel by Geographic Region (number) Distribution of Personnel by Age Category (number) 3,500 2,000 3,000 2,500 3,157 1,800 1,600 1,400 2,000 1,500 1,366 1,664 1,200 1, , North Central South and Sicily < 25 between 25 and 29 between 30 and 34 between 35 and 39 between 40 and 44 between 45 and 49 between 50 and 54 between 55 and 59 > 60 Organisation In 2009 the main occurrence impacting the organisation was the start, in the second half of the year, of the programme for integrating the structures and processes of the Snam Rete Gas group as a result of the acquisition of Italgas and Stogit (Energies Programme). This programme, which will produce results starting in 2010, has the objective, in relation to the business organisation, of achieving optimum governance in the processes of direction and control and revision of the operational structure of the group by centralising staff functions and work activities shared by the companies as well as identifying and realising opportunities for improving the processes of business operations. Governance of the programme, which has directly involved about 300 people, is performed by an articulated structure that includes: (i) a Steering Committee, with participation by the CEOs of the group s companies; (ii) a Programme Manager; (iii) 5 people in charge of the design areas; (iv) 26 people in charge of the Operational Worksites. Involvement and Participation Initiatives The process of integrating Snam Rete Gas, GNL Italia, Italgas and Stogit is certainly the activity that characterised 2009 in terms of resources involved and organisational efforts. Within the scope of the Energies project, new channels and tools of communications were tried for disseminating information in a clear, transparent and timely manner: a shared mix of videonews, hardcopy newsletters and intranet platforms enabled everyone in the business to be informed about the process in progress, with the ability to recognise the Energies logo as a shared message of aggregation, the first step for building a shared culture. The entire population of managers was repeatedly involved in briefings with the top management with the aim of understanding and sharing information on company acquisitions carried out during Plans were also made for training and communications to promote understanding and sharing on the part of management in the strategic design and guidelines of the business, along with the resulting reorientation of managerial conduct and roles. Besides the initiatives connected with the energies programme, the communications activities strengthened during the course of the recent years were continued: The constant updating and improvement of the functionality of the website of the business, also with a view to the shared platform of the group, the execution of communications initiatives connected with company projects and events and the advancement, within the scope of Italgas and Stogit, of the Cascade project to promote knowledge of the business strategies and explain the links between business objectives and organisational structures. 80

83 SNAM RETE GAS ANNUAL REPORT 2009 / COMMITMENT TO SUSTAINABLE DEVELOPMENT Training With respect to training activities, besides the development of a culture and organisational conduct geared toward the new reference model connected with the company acquisitions process, the main guidelines have been expansion of the skills of the technical personnel and support and assistance for the introduction of new and more sophisticated information technology systems to enable constant improvement of the integrated management activities for the processes. Continuing from preceding years, intense effort has been applied to strengthen and update the technical and professional skills connected with the development of specialised know-how, representing about 50% of the training hours provided. In compliance with the rules in force, specific training programmes have been activated on the Organisation and Control Model (Legislative Decree No. 231/01 Administrative Liability) and on sensitive subjects such as health, safety and the environment, where 27% of the total training hours has been focused. In 2009 a total of about 154,000 training hours have been provided (equal to about 25 hours per employee), with about 15,500 enrolments. The workforce of the business involved in training initiatives has been more than 76%. Italgas and Stogit and the resulting reorganisation, have proceeded constructively. The discussions between the parties have also developed on topics such as the Unitary Union Representative Body (RSU) settlement and safety, as well as on working hours and on the effects of the organisational changes implemented during the year. Incentivation and Remuneration Systems As well as its merit policy, based on roles and responsibilities, in recent years the company has strengthened a variable incentivation system for managers and junior managers tied to assessment of their performances (results). This involves the completion of specific individual objective forms based on the company s general objectives. Assessment of performances in 2009 involved 100% of managers and roughly 65% of junior managers, chosen on the basis of their operating and management responsibilities. The annual incentivation policy is closely tied to attainment of results and managers contributions to them. Managers have also been provided a long-term incentive and loyalty system consisting of a deferred cash incentive plan tied to business growth and operating efficiency 38. HEALTH, SAFETY, THE ENVIRONMENT AND QUALITY Initiatives Focused on Employees The Snam Rete Gas group promotes social initiatives for its employees and their families and earmarks funds and structures for them. The company has developed an articulated system of opportunities over the years consisting of additional health coverage, insurance against accidents at work and outside the workplace (complementary to mandatory insurance coverage or coverage provided by governmental structures). The employees also have supplementary pension funds, loyalty bonuses and preventive medical assistance, in addition to sports and recreational events. Direct involvement has continued in activities connected with a project, also involving the ultimate parent Eni, to implement an internal welfare system in order to improve the quality of life of the employees by facilitating the satisfaction of work commitments alongside personal and family ones. Among them stands out the initiative started in 2009 to implement an internal day-care centre and nursery school. Relations with the Trade Unions Relations with the Trade Unions, characterised by the start of discussions on topics connected with the acquisition of Introduction In line with the principles set out in its health, safety and environment policies, the companies of the Snam Rete Gas group are actively involved in reducing the environmental impact of its activities, completing the objective of maximising the value of the business, ensuring protection against disaster and the health and safety of the employees and third parties. The Snam Rete Gas group is working to develop and circulate its HSE (Health, Safety and Environment) culture, with a view to proactively adapting both to the regulatory framework, which is constantly evolving and becoming ever more stringent, as well as to the growing demands of sustainability. The systems for managing the environment and the health and safety of workers are essential tools for activating the Health, Safety and Environment Policies of each company, as well as for meeting the improvement objectives established. Particular attention has been paid to the development and dissemination of worker safety management systems so as to maintain the existing certifications and expand certification to all of the companies in the group. ( 38 ) Information on the incentivation plans is provided in the section Remuneration and Other Information in the management report of Snam Rete Gas S.p.A. for the financial year. 81

84 SNAM RETE GAS ANNUAL REPORT 2009 / COMMITMENT TO SUSTAINABLE DEVELOPMENT Health and Safety The main goal that the Snam Rete Gas companies have set for themselves is to reduce the employee accident rate. For that purpose, activities were strengthened to make people aware of accident issues, along with training initiatives to increase the attention that each employee pays to safety in his own work. The activities of personnel training and awareness have mainly involved occupational hazards, causes of accidents and the pertinent prevention measures. In particular, courses on safety, first aid and fire prevention continue to be provided. With positive results, Stogit and Italgas have adopted the HSE Trophy and the Italgas Safety Trophy to improve the process of awareness and involvement on these subjects for all of the personnel. In 2009 the Communicating Safety bi-annual information project was started, aimed at disseminating a culture of safety on the job. With respect to safety in subcontracting, particular attention has been paid to the qualification of suppliers and subsequently their evaluation by means of specific inspections checks carried out in the execution phase of the work. The involvement of suppliers in the matter of safety has also been strengthened with specific meetings on awareness. Compliance of the Health and Safety Management Systems of the laboratories with the OHSAS standard is in progress, with a view to extending this certification to all of the group companies. Environmental Responsibility Environmental protection is an issue of prime importance in all phases of the activities of the group s companies, from feasibility studies through the final completion of the work, in order to optimise the technical decisions in terms of full respect for the environment. One of the main environmental issues involved in the activities of the Snam Rete Gas group is the use of soil and the subsoil in the pipe installation phase. Limiting the impact on the environment and returning the land to its original condition at the end of the operations of pipe-laying are strategic objectives of the Snam Rete Gas Sustainable Development Policy. To that end, thorough environmental clean-up operations are carried out along with remedies for cultivation after gas pipelines are laid, with particular attention to the issues connected with biodiversity. In 2009 guidelines were presented on the safeguarding and sustainable use of biodiversity in the projecting and execution of gas pipelines, identifying in a structured manner the work and activities by which Snam Rete Gas has already contributed to reconstituting the ecological value of areas where it has done work. Furthermore, during 2009, besides reapplying the current environmental certificates, the Environmental Management System for the new Snam Rete Gas power station at Poggio Renatico obtained the ISO environmental certification. Climate Change and Emissions Attending to climate change plays an important role in the choice of activities in the environmental field; the main efforts within the scope of environmental protection have particularly related to containing energy consumption and emissions into the atmosphere. For this purpose, a series of energy management activities has been implemented to proceed with actions for rationalising, containing and optimising energy consumption. The main initiatives have been carried out, in particular, by Italgas and Snam Rete Gas, which have installed photovoltaic plants to produce electrical energy both at buildings as well as at installations. Particular attention has been paid to the issues of energy efficiency in remodelling and constructing new buildings. On 3 June 2009 the Genoa Station photovoltaic plant became operational and was connected to the electricity grid. The new station in Genoa has an A energy classification and meets the energy efficiency criteria provided for the new buildings of Snam Rete Gas. Furthermore, in 2009 the project of disseminating the Even Distribution of Gas Volumes at Reduction Facilities System continued, involving 10 Italgas facilities. This system enables greater efficiency to be achieved in processes, in both operational as well as economic terms, with a reduction of consumption. In 2008 the second activation period started for the Kyoto Protocol (relating to ), providing targets for the reduction of carbon dioxide (CO 2 ) emissions. These obligations will increase substantially in the post-kyoto period (starting 2013). In this context, the initiatives and programmes for reducing energy consumption and the resulting reduction in carbon dioxide emissions from facilities covered by the emissions regulations (Emission Trading) are becoming ever more important for the Snam Rete Gas group. The Snam Rete Gas group currently has 20 facilities subject to the Emission Trading regulations. They include 12 Snam Rete Gas facilities (11 gas compression stations and the Mazara del Vallo Terminal), the liquefied natural gas regasification facility of GNL Italia, and 7 of the 8 natural gas storage stations of Stogit. In 2009 carbon dioxide emissions proved to be lower than the quotas allocated for all of the group companies. Results in terms of CO 2 emissions are directly related to the use of the fuels necessary for the activities of compression and storage of natural gas, so every activity carried out to 82

85 SNAM RETE GAS ANNUAL REPORT 2009 / COMMITMENT TO SUSTAINABLE DEVELOPMENT contain energy consumption has positive repercussions on reducing CO 2 emissions as well. During 2009 multi-annual projects proceeded for adapting machinery and facilities to achieve higher efficiency with the resulting reduction in energy consumption and thus in CO 2 emissions. In particular, activities have proceeded in the installation of new turbines or the adaptation of existing turbines using technologies and equipment with low emissions at Snam Rete Gas and Stogit stations. Quality In 2009, ISO 9001:2008 certification was obtained for the process: Performance of the service of measuring natural gas injected and withdrawn at the Snam Rete Gas transportation network within Italy. Management of the design and construction of natural gas measuring facilities. During 2009 the quality management system for the activities of dispatching natural gas within the national Snam Rete Gas network, already certified under ISO 9001:2000 since 2003, was certified by Det Norske Veritas (DNV) under the new ISO 9001:2008 standard. At the end of 2009 the Measurement Laboratory (Italgas) obtained SIT (Sistema di Taratura in Italia) accreditation for the Volume figure. These certifications are added to the certifications and accreditations already existing and confirmed in 2009: - Certification of the Italgas HSE Integrated Management System under the ISO 9001:2008 standard; - Certification of Stogit under the UNI EN ISO 9001:2000 standard for the activities of Projecting and performing the service of measuring and accounting for natural gas ; - SIT (Sistema di Taratura in Italia) accreditation awarded to the Snam Rete Gas Laboratory and Development, the first natural gas mixture calibration station in Italy to obtain this accreditation. The laboratory has also been accredited since 2007 by SINAL (Sistema Nazionale per l Accreditamento dei Laboratori) with respect to analysis of piped gas fume emissions; - The Snam Rete Gas Materials Analysis Laboratory, accredited by SINAL since 2007 for mechanical testing and materials spectrometric analyses; - SINAL accreditation for the Technology Laboratories of Asti (Italgas), relating to fuel gas and thermoplastic joint analysis. TECHNOLOGICAL INNOVATION AND RESEARCH During 2009 Snam Rete Gas developed its commitment to identifying new technologies for the safety and efficiency of its transportation network in two major European areas. As part of GERG, Groupe Européen de Recherches Gazières ( Snam Rete Gas, still chairing the Transmission & Storage Programme Committee during 2009, coordinated the designing of new projects relating to: - pipeline control and monitoring; - checking and assessing pipeline section integrity; - technology transfers from other business segments to gas transportation processes. Furthermore, also within GERG, a project was completed in coordination with Italgas in the segment of natural gas odorisation. The project had participation from the major European gas distribution companies as well as numerous producers of odorised substances. The results of this project were presented to the Technical Committee (TC 193) of the ISO so that they could be taken into consideration for inclusion in the ISO standards compilation. As part of EPRG European Pipeline Research Group ( Snam Rete Gas has participated in research projects aimed at improving the integrity and safety of gas transportation pipelines, with particular attention to structural, metallurgical and corrosion aspects. Furthermore, within the scope of the development and upgrading of natural gas transportation network management systems, during 2009 it continued the activities of benchmarking, with the aim of identifying and comparing, with other European gas transportation companies, the key, shared technical and economic indicators (KPI Key Performance Indicator). With reference to distribution activities, during 2009 experimentation was done in the field, with good results, on a new-generation portable laser pointer, of limited weight and easy handling, for locating gas leaks from above-ground facilities or piping. The pointer has ATEX certification (in accordance with European Union Directive 94/9/EC) for operability in potentially hazardous environments. This pointer, besides displaying the typical advantages of laser technology (high selectivity in encountering methane, ability to work even in inclement weather conditions, etc), enables remote determination of the presence of methane even in potentially explosive areas without exposing the personnel involved to risk. The company is presently evaluating the operational use of this device. Furthermore, Italgas, in response to resolution no. 155/08 of the Electricity and Gas Authority, has started up the Remote Gas Meters Reading project to test the remote reading technologies for meters now commercially available for use at home. After a first phase of market surveys, nine different solutions have been selected, eight of which use radio frequency communications and one uses GSM/GPRS technology. During 2009 about 4,000 devices were installed in the field and are still in the testing phase. Furthermore, the project for updating the technology for high-calibre ultrasound meters for installation at calibration and measurement facilities (REMI) has been continued and a testing campaign has been started, concerning household meters, on an ultrasound meter produced in Japan. 83

86 SNAM RETE GAS ANNUAL REPORT 2009 / COMMITMENT TO SUSTAINABLE DEVELOPMENT RELATIONSHIPS WITH STAKEHOLDERS Shareholders and Institutional Investors Since its stock exchange listing in December 2001, Snam Rete Gas has acted in such a way as to create its own corporate identity expressing its objectives and management spirit, also in the form of disclosures to the market. Snam Rete Gas is characterised by its transparent relationships with investors and the financial community by means of clear communications of its objectives and its results so that investors and the financial markets can have a full understanding of all its value drivers. The Company s commitment has been recognised by its inclusion in the prestigious Dow Jones Sustainability World Index and in the ECPI Ethical Index Global, as well as with reconfirmation on the ethics indexes FTSE4Good, ECPI Ethical Index Euro, ECPI Ethical Index EMU and Ethibel Investment Register and Sustainability indices. In 2009, with a very intense financial communications strategy, the company held almost twenty road shows, with the aim of meeting institutional investors and shareholders in the major financial markets in Europe and North America. In total, the management met roughly 100 investors in special one-on-one meetings, approximately twenty of which were held at the company s head office in San Donato Milanese, and added to this there were about twenty meetings with multiple investors (group meetings). As well, segment conferences (Utilities Conference) represented further occasions for meetings. In particular, the execution of extraordinary transactions in 2009 such as the acquisition of Stogit and Italgas and the capital increase completed for financing those acquisitions, in part, led the management of the company to be involved in ad hoc meetings both with the banks belonging to the placement pool as well as with investors, with the purpose of delineating the strategic consistency of the acquisition transaction as well as strengthening and expanding the shareholding base of the company within the context of the operation for increasing capital. Upon the occasion of the publication of the business results (annual, half-yearly and quarterly results), the company organises conference calls in which an average of fifty people participate, including the twenty-six analysts who publish research on the share. Immediately after approval by the internal bodies, the company makes the documentation of the annual, half-yearly, interim and quarterly management reports available both in Italian and English. During the year, management took part in round table meetings, seminars and conferences on the topics of the utilities segment, stock markets and corporate governance. Special presentations are prepared for each event and they are then made available in a specific section of the Snam Rete Gas website. The Investor Relations pages of the website ( are constantly updated and developed to provide immediate, complete information. Among the innovations introduced, is the online publication of the Financial Market s Review, which offers a monthly analysis of financial markets and the performance of the utility industry, of Snam Rete Gas stock, and of the stock of its competitors. Starting in December this is augmented by News&Facts, a quarterly publication meant especially for individual investors. Particular attention has also been paid to the issue of sustainability, with further expansion and rationalisation in the area devoted to the categories of socially responsible investors, of information and of the links that an ethical investor or a company ethics rating analyst may need to 84

87 SNAM RETE GAS ANNUAL REPORT 2009 / COMMITMENT TO SUSTAINABLE DEVELOPMENT evaluate the Company. It is noted that, as part of the work done, in addition to the stock market performance of the international indexes, the main sustainability indexes in which the company participates have also been added: Dow Jones Sustainability World Index, FTSE4Good Europe Index and FTSE4Good Global Index. Relationships with the Territory and Communities In line with its sustainable development policies and its strategic development plans, Snam Rete Gas carries out social and cultural activities. It interacts constructively and continuously with the communities in which it operates. It works with the local and national authorities and is a member of many associations and committees. It is committed to providing its expertise to ensure improvements in the area of corporate social responsibility. With this in mind, the activities involving meetings and discussions with the communities in the territories where it operates have been continued. Of note are the public meetings with the inhabitants of Cortemaggiore and Besenzone in the Province of Piacenza to present and discuss the start-up of the pilot project that Stogit has planned for the injection and sequestration of CO 2 in the Cortemaggiore deposit. Furthermore, the traditional meetings (Open Days) have been continued so that inhabitants, local institutions and the press can be informed, with the help of specialised technicians, on the activities of Snam Rete Gas industrial facilities. In particular, Open Days have been on the subjects of the Messina compression station and the storage facilities of Minerbio, Fiume Treste and Settala. During the year, institutional meetings continued with representatives of local authorities and governmental administrations present within the territory of Porto Venere, where the liquefied natural gas regasification facility owned by GNL Italia S.p.A. is located. The discussions were aimed at seeking ever greater sharing and participation from local stakeholders in the company s strategic decision to upgrade the facility in Panigaglia. GNL Italia also contributed to the presentation of a series of events and celebrations organised by the Porto Venere Regional Natural Park and by the Commune of Porto Venere during Since 2002, Snam Rete Gas has supported the Legambiente initiative, Clean up the World, the largest international voluntary environmental campaign, sponsored by the UNEP, the United Nations environmental programme, by the Environment and Land and Sea Protection Ministry and by the Education Ministry. Snam Rete Gas and Culture Snam Rete Gas, as a corporate member, supports the activities of the Poldi Pezzoli museum, one of the most appreciated cultural institutions in Milan and in Italy. This membership is in line with the Company s commitment to the protection of works of art and cultural diffusion. Italgas has continued its activities in support of cultural, scientific and social initiatives and associations. In particular, in 2009 the moving and reopening of the Italgas museum took place, inaugurated on 15 May 2009, also starting up the project of systematising and computerising the documentary assets in the archive. The Italian Countryside project has continued, for enhancing areas crossed by gas pipeline networks and their communities. This is a project of artistic and cultural value assigned to three important photographers who, by using their imaginations, have portrayed the frontiers of methane gas importation. In 2009 the initiative reached its third edition. After Sicily, the landing stage for gas from North Africa, and Val 85