Introduction. Disclaimer

Transcription

1 2010 Annual Report

2 Mission Snam Rete Gas is an integrated group at the forefront of the regulated gas sector in Italy and a major player in Europe in terms of its regulatory asset base (RAB). It has unrivalled expertise in the transportation and dispatching of natural gas, the regasification of liquefied natural gas, and the storage and distribution of natural gas. At Snam Rete Gas our aim is to create value that will fulfil our shareholders expectations. This is achieved by providing our customers with services that offer the utmost security and operational reliability, as well as through our commitment to developing infrastructure and creating a flexible gas market in Italy, fostering competition and improving security of supply. Snam Rete Gas pursues a sustainable growth model, built on a thorough assessment of the environmental impact of its activities and the development of new and more efficient technologies. The company relies on the expertise of its staff and their continued development 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 dispatching and and the liquefied natural gas regasification operations 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 2010

4 Introduction Legislative Decree No. 32 of 2 February 2007, Implementation of Directive 2003/51/EC which amends Directives 78/660, 83/349, 86/635 and 91/674/EEC concerning annual accounts and consolidated accounts of certain types of companies, banks and other financial institutions and insurance companies amended Articles 2428 and 2409-ter of the Italian Civil Code concerning the management report and the independent auditors report, respectively; similar revisions were made to Articles 40 (Management Report) and 41 (Audit of Consolidated Financial Statements) of Legislative Decree No. 127/91. In particular, in addition to the revisions introduced by the new text of Article 2428 of the Italian Civil Code, Article 40 of Legislative Decree No. 127/91 specifies that for companies that prepare consolidated financial statements, the management report in the consolidated financial statements and the financial statements of the parent company, may be presented in a single document highlighting, where appropriate, matters which are significant for companies included in the consolidation. Considering the methods used for defining the operating segments in which the Group operates, which, for the most part, are related to the activities performed by Snam Rete Gas S.p.A. (transportation of natural gas), GNL Italia S.p.A. (regasification of LNG), Stogit S.p.A. (storage of natural gas) and Italgas S.p.A. and its subsidiaries/associates (distribution of natural gas), and the results of the parent company as a percentage of consolidated results, the Company took advantage of this opportunity by highlighting, where appropriate, issues that are significant for companies included in the scope of consolidation. Thus, the information provided in the Management Report and in the notes to the financial statements of Snam Rete Gas S.p.A. was amended as necessary. Starting with the 2010 financial statements, the Company has also taken advantage of the option provided by paragraph 3 of Article 123-bis of the Testo Unico della Finanza (TUF), as revised by Legislative Decree No. 173/08, to present the Report on Corporate Governance and Ownership Structure in a separate document on the Company s website indicating in the management report the section of the website where the document is published. In this report, information on corporate governance and ownership structure is limited to the main features of the governance system adopted by the company; a complete report is available on the Snam Rete Gas website: it under the section Governance. Disclaimer The annual report includes forward-looking statements, especially in the Outlook section, relating to: natural gas demand, investment plans, dividend policy, future operating performance and project execution. Such statements are, by their very nature, subject to risk and uncertainty as they depend on the fact that certain events and developments will take place. The actual results can therefore differ from those forecast, as a result of several factors, including: trends in natural gas demand, supply and price, actual operating performance, general macro-economic conditions, the effect of new energy and environmental leg islation, the successful development and implementation of new technologies, changes in stakeholders expectations and other changes in business conditions.

5 Reports and consolidated fi nancial statements Directors Report Letter to Shareholders 4 Corporate officers 6 Summary data The Snam Rete Gas Group 7 Annual Profile 9 Snam Rete Gas and financial markets 13 Business segment operating performance Main factors of the pricing framework 15 Natural gas transportation 17 Liquefied Natural Gas (LNG) regasification 27 Natural gas storage 31 Natural gas distribution 37 Financial review and other information Financial review 42 Income statement 42 Reclassified consolidated balance sheet 49 Reclassified consolidated statement of cash flows 54 Elements of risk and uncertainty 57 Outlook 60 Other information 61 Information on corporate governance and ownership structure 65 Commitment to sustainable development 75 Glossary 83 Consolidated Financial statements Financial statements 88 Basis of presentation and consolidation principles 92 Notes to consolidated financial statements 101 Statement from management 145 Independent auditors report 146 Snam Rete Gas means Snam Rete Gas S.p.A. and the companies within its consolidation scope.

6 Snam Rete Gas Annual Report 2010 / Letter to Shareholders Letter to Shareholders To our Shareholders and Stakeholders, The economic recovery, which began last summer after the most intense period of the economic and financial crisis, continued in 2010, although it remains affected by financial uncertainties and limited prospects for growth in GDP and consumption. In this context, and with a scenario that continues to be uncertain, important results were achieved in 2010 which underscore the strength of the operating and financial performance of Snam Rete Gas. During the year just ended, EBIT and net profit rose 46.2% and 51.1%, respectively, compared to 2009, and 17.0% and 19.3% compared to the corresponding combined figures for 2009 which were generated with the inclusion of Italgas and Stogit in the scope of consolidation for the entire year The strength of the business was also confirmed at the financial level with the generation of 1.8 billion in operating cash flow making it possible to fully finance capital expenditures and create a free cash flow of nearly 400 million. The constant focus on operating efficiency also enabled us to achieve and exceed the announced cost reduction goals and provide us with a significant means of creating value. Cost savings were approximately 64 million in 2010 calculated in real terms on the basis of costs for 2008 and at constant structure. The establishment of tariff criteria for storage activities for the third regulatory period (1 January December 2014), which was completed last August, also provides further stability and visibility with regard to the group s results in the coming years. Snam Rete Gas stock closed the year at a price of 3.73 per share, up 7.8% on This performance was significantly better than that recorded both on the Italian market (FTSE MIB index -13.2%) and in the European utilities sector (Eurostoxx Utilities index -8.8%) which, in a volatile climate, were dampened by market fears as to the sustainability of the debt of some European countries (Greece, Spain, Portugal and Ireland) and by the energy sector, which is characterised by over capacity and weak demand. In this context, the performance of Snam stock was helped by its defensive characteristics, both in terms of visibility and solid financials over the medium to long term. Confirming the ongoing commitment of Snam Rete Gas to sustainable development, in 2010 the stock was confirmed on the Dow Jones Sustainability World indices, the largest and most prestigious world stock index for the assessment of the corporate responsibility of companies, and on the FTSE4Good Index Series sustainability index which groups the best companies in the world that have distinguished themselves in terms of sustainable economic growth. Snam Rete Gas has been on this index since EBIT and net profit for 2010 were 1,862 and 1,106 million and were up 588 (+46.2%) and 374 million (+51.1%) over On the one hand, this increase was due to the greater contribution of the natural gas distribution and storage segments which, for the entire year, benefited from the economic impact of consolidating Italgas and Stogit, against a sixmonth contribution reported in the same period last year from 30 June 2009, the date on which the acquisition of the two companies was completed, and on the other hand, due to the significant improvement in the performance of the transportation business segment (+21.7%). The net cash flow from operating activities (+ 1,775 million) covered a significant portion of the financial obligations of investments (- 1,393 million net of divestments) and of paying dividends (- 776 million, including the dividend balance for 2009 and interim payment for 2010). At 31 December 2010, net financial debt totalled 10,341 million, an increase of 392 million over 31 December At year-end, leverage stood at 63.6%, which was unchanged from year-end 2009, confirming the strength of the financial structure of Snam Rete Gas. The results achieved enable us to propose to the Shareholders Meeting the distribution of a dividend of 0.23 per share (+15.0% over 2009) including 0.09 already distributed as an interim payment in October Based on the major plan for gas transportation, storage and distribution investments totalling 6.4 billion over the four-year period , and the efficiency plan, which is estimated to reach 80 million in 2012 (in real terms related to 2008 costs, and at constant structure), Snam Rete Gas confirms the outlook of an attractive, sustainable return to its shareholders. In the area of sustainable development, we wish to continue focusing our efforts on achieving the highest sustainability index 4

7 Snam Rete Gas Annual Report 2010 / Letter to Shareholders Salvatore Sardo Chairman Carlo Malacarne CEO levels recognised by major ethical rating companies. To this end, Snam Rete Gas recently joined Global Impact, the international initiative launched in July 2000 by the United Nations in support of ten universal principles related to human rights, labour, the environment and the fight against corruption. We would like to bring our stakeholders closer, as their scope has widened through acquisitions, by focusing on discussion and collaboration. We seek more effective cooperation with local areas with which we have worked successfully for several years. We would like to continue to provide the high standards of quality in our business in an environmentally friendly manner with both conviction and passion. To conclude, Snam Rete Gas will mark 2010 as a year with very positive results confirming the strength of our business model known for its limited industrial and financial risk profile, and the validity of the business and strategic reasons that led to the acquisition of Italgas and Stogit, which will contribute to making Snam Rete Gas a key group in the regulated gas sector in Europe. Thanks to the commitment, professionalism and passion of all those who work at Snam Rete Gas, the company is able to confirm its outlook of creating sustainable value for its shareholders over time. 2 March 2011 for the Board of Directors Chairman CEO 5

8 Snam Rete Gas Annual Report 2010 / Corporate officers Corporate officers Standing, from left to right: Massimo Mantovani, Massimo Gatto, Elisabetta Oliveri, Alessandro Bernini, Davide Croff, Francesco Schiavone Panni, Mario Stella Richter, Renato Santini. Seated, from left to right: Roberto Mazzei, Carlo Malacarne, Salvatore Sardo, Roberto Lonzar. BOARD OF DIRECTORS (*) Salvatore Sardo Chairman Carlo Malacarne Chief Executive Officer (1) Alessandro Bernini Director Davide Croff Independent Director Elisabetta Oliveri Independent Director (2) Mario Stella Richter Independent Director (2) Massimo Mantovani Director Renato Santini Independent Director Roberto Lonzar Independent Director (2) CHIEF OPERATING OFFICER Francesco Iovane (3) INTERNAL CONTROL COMMITTEE (**) Roberto Lonzar Chairman Independent Director (2) Mario Stella Richter Independent Director (2) Renato Santini Independent Director COMPENSATION COMMITTEE (**) Davide Croff Chairman Independent Director Alessandro Bernini Director Elisabetta Oliveri Independent Director (2) INDEPENDENT AUDITORS (***) Reconta Ernst & Young S.p.A. BOARD OF STATUTORY AUDITORS (*) Massimo Gatto Chairman (2) Francesco Schiavone Panni Standing auditor Roberto Mazzei Standing auditor Giulio Gamba Alternate auditor Luigi Rinaldi Alternate auditor (2) (*) Appointed by the shareholders on 27 April 2010 and in office until the approval of the financial statements for the year ended 31 December (**) Committees set up on 26 February Members appointed by the board of directors on 30 April (***) Engaged by the shareholders on 27 April 2010 for the period (1) Confirmed by the board of directors on 30 April (2) Appointed from the minority shareholders list. (3) Appointed as Chief Operating Officer by the board of directors on 8 May

9 Snam Rete Gas Annual Report 2010 / The Snam Rete Gas Group The Snam Rete Gas Group Snam Rete Gas is an integrated group at the forefront of the regulated gas sector, and a major player in Europe in terms of its regulatory asset base (RAB) in its sector. It operates in the transportation and dispatch of natural gas, the regasification of liquefied natural gas (LNG) and the distribution and storage of natural gas. These activities are carried out via its integrated infrastructure in Italy. In addition, the Group performs other unregulated activities consisting mainly of technical and business services. 7

10 Snam Rete Gas Annual Report 2010 / The Snam Rete Gas Group Consolidation scope 1 Snam Rete Gas S.p.A. Transportation 100% GNL Italia S.p.A. Regasification 100% Stogit S.p.A. Storage 100% Italgas S.p.A. Distribution 99.69% Napoletanagas S.p.A. Distribution Consolidating company Shareholders % ownership Snam Rete Gas S.p.A. Eni S.p.A. Snam Rete Gas S.p.A. Other shareholders Subsidiaries fully consolidated companies Shareholders % ownership GNL Italia S.p.A. Snam Rete Gas S.p.A Stogit S.p.A. Snam Rete Gas S.p.A Italgas S.p.A. Snam Rete Gas S.p.A Napoletana Gas S.p.A. Italgas S.p.A. Other shareholders (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 equi ty investments of Snam Rete Gas S.p.A. at 31 December 2010 appendix to the consolidated financial statements. 8

11 Snam Rete Gas Annual Report 2010 / Annual Profile Annual Profile Results In 2010 Snam Rete Gas generated a net profit of 1,106 million, up 51.1% on The increase was essentially due to the contribution of natural gas distribution and storage segments, which, for the entire year, benefited from the economic impact of consolidating Italgas and Stogit, against a six-month contribution reported in the previous year from 30 June 2009, the date on which the acquisition of the two companies was completed, and the significant improvement in the performance of the transportation business segment (+21.7%). Net profit related to the corresponding combined amount for the previous year, which was obtained by including Italgas and Stogit for all of 2009 in the scope of consolidation, was up 19.3%. Cash flow (net cash flow from operating activities) totalled 1.8 billion making it possible to fully finance the significant capital expenditures for the period and to create a free cash flow of about 400 million. At 31 December 2010 leverage stood at 63.6%, unchanged from 31 December Dividends Net profit and cash generation made it possible to distribute a dividend, subject to the approval of the Shareholders Meeting, of 0.23 per share, of which 0.09 per share was distributed in October 2010 as an interim payment, and the balance of 0.14 per share will be made payable as of 26 May 2011 (ex-dividend date of 23 May 2011). The payout was 70.3% (92.2% 2 in 2009). (2) The pay-out for 2009 is not representative of the normal level of performance since the contribution of the natural gas distribution and storage businesses to net profit was only for the second half of

12 Snam Rete Gas Annual Report 2010 / Annual Profile Natural gas transportation A total of billion cubic metres of gas was injected into the transportation network, an increase of 6.42 billion cubic metres (+8.3%) on The increase was mainly due to a recovery in natural gas demand in Italy (+6.4% compared with 2009) in all sectors, especially the residential and tertiary (+7.1%), industrial (+7%) and thermoelectric (+4.4%) sectors. Regasification of liquefied natural gas (LNG) A total of 1.98 billion cubic metres of LNG was regasified in 2010, an increase of 0.66 billion cubic metres, or 50%, compared with The increase was due to more plant activity as a result of a recovery in natural gas demand in Italy. Natural gas storage In 2010, billion cubic metres of natural gas were moved through the group s storage system, a decrease of 0.93 billion cubic metres from 2009 (-5.6%). This decrease was attributable essentially to the large withdrawals of gas from storage as a result of the Russian supply crisis in January 2009, which was partly offset by higher volumes injected to refill the space for shippers. The available storage capacity at 31 December 2010 was around 9.2 billion cubic metres, an increase of 3.4% compared with the previous year. Natural gas distribution At 31 December 2010, there were million active meters at end-customer gas redelivery points, an increase of 1.3% on 31 December Investments Investments amounted to 1,540 million ( 1,254 million in 2009) and largely concerned upgrading infrastructure for the transportation, regasification, storage and distribution of natural gas. Key figures To improve the economic and financial review, in addition to convention al IAS/IFRS indicators and financial statements, the directors report also contains 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 state ments illustrate these amounts; see the glossary for a definition of the terms used, where these are not specified. Main income statement data (a) ( million) Core business revenue (b) 1,902 2,438 3,475 Core business revenue net of IFRIC 12 1,902 2,438 3,126 Operating costs (b) Operating costs net of IFRIC EBITDA 1,511 1,887 2,540 EBIT 1,022 1,274 1,862 Net profit (c) ,106 (a) (b) (c) The 2009 income statement data include the impact of consolidating Italgas and Stogit from 30 June 2009, the date the acquisition transaction was completed. In order to provide a meaningful comparison between the 2010 and 2009 results, the section Financial review in this report also contains, in addition to comments on the main items, the consolidated combined income statement obtained by including Italgas and Stogit in the scope of consolidation for the entire year T he items for 2010 include the effects of applying international accounting standard IFRIC 12, Service Concession Arrangements. Applying this interpretation had no effect on the group s results, except for the equal recognition of revenue and costs relating to building and upgrading distribution infrastructures ( 349 million). For more information on the accounting effects of applying this interpretation, see the section on Basis of Presentation and Accounting Consolidation Principles in the notes to the consolidated financial statements. Net profit is attributable to Snam Rete Gas. Main balance sheet data ( million) Investments (a) 1,044 1,254 1,540 Net invested capital at 31 December 9,809 15,652 16,257 Shareholders equity including minority interests at 31 December ,573 5,703 5,916 Group shareholders equity at 31 December 3,573 5,702 5,915 Net financial debt at 31 December 6,236 9,949 10,341 Free Cash Flow (b) 32 (4,489) 382 (a) Investments for 2009 in the natural gas distribution and storage segments, which totalled 321 million, related to the period 1 July December (b) Free cash flow for 2009 reflects the disbursement for the acquisition of Italgas and Stogit. 10

13 Snam Rete Gas Annual Report 2010 / Annual Profile Main share data Number of shares of share capital (millions) 1, , ,570.8 Number of shares outstanding on 31 December (millions) 1, , ,376.6 Average number of shares outstanding during the year (millions) 1, , ,376.2 Year-end official share price (a) ( ) Average official share price for the year (a) ( ) Market capitalisation (b) ( million) 7,009 11,681 12,595 Dividend per share ( per share) Dividends for applicable period (c) ( million) Dividends paid during the period ( million) (a) As required by the Principles and Conventions of Borsa Italiana, the official stock prices of Snam Rete Gas in 2008 were adjusted for the capital increase carried out to finance the acquisition of Italgas and Stogit completed on 30 June (b) The product of the number of shares outstanding (exact number) multiplied by the year-end official stock price. The value for 2008 was calculated on the basis of the historical price ( 3.98 per share) and does not reflect the price adjustment following the increase in share capital. (c) The amount for 2010, representing the balance, was estimated on the basis of the number of shares outstanding on 31 December Key profit and financial indicators EBIT per share (a) (b) ( ) Basic earnings per share (a) (b) ( ) Group shareholders equity per share (b) ( ) Leverage (net financial debt/net invested capital) % Pay-out (Dividends for applicable period/net profit) % ROE (c) % ROI (d) % Dividend yield (Applicable dividend/year-end official share price) (%) (e) % Price/Book value (Average official price per share/group shareholders equity per share) (e) ( ) (a) Profit in the natural gas distribution and storage segments for 2009 was for the period from 1 July 2009 to 31 December (b) Calculated considering the average number of shares outstanding during the year. (c) Return on equity (ROE) was calculated as the ratio of net profit to the average of beginning and ending shareholders equity for the period. (d) Return on investment (ROI) was calculated as the ratio of EBIT to the average of beginning and ending net invested capital for the period. (e) The 2008 stock prices are historical figures and thus do not reflect the price adjustment made following the share capital increase. Key operating figures (a) Change Change % Natural gas transportation (b) Natural gas injected in the gas transportation network (billions of cubic metres) Transportation network (kilometres in use) 31,474 31,531 31, Liquefied Natural Gas (LNG) regasification (b) LNG regasification (billions of cubic metres) Natural gas storage (b) Available storage capacity (billions of cubic metres) (c) Natural gas moved through the storage system (billions of cubic metres) (0.93) (5.6) Natural gas distribution Active meters (millions) Distribution concessions (number) 1,441 1, Distribution network (kilometres) 49,973 50, Employees in service at year end (number) (d) 2,345 6,187 6,104 (83) (1.3) by business segments: - Transportation 2,252 2,254 2, Regasification (17) (19.5) - Storage (22) (7.3) - Distribution 3,545 3,119 (426) (12.0) (a) (b) (c) (d) The changes indicated in the table, as well as those below in this report, must be considered changes from financial year 2009 to Percentage changes are calculated in relation to the data indicated in the related tables. Gas volumes are expressed in standard cubic metres (SCM) with an average higher heating value (HHV) of 38.1 and 39.4 MJ/SCM, respectively for the businesses of natural gas transportation, regasification and storage. Working gas capacity for modulation, mining and balancing services. Fully consolidated companies. 11

14 Snam Rete Gas Annual Report 2010 / Annual Profile Net profit (millions of euros) EBIT (millions of euros) 1,400 2,400 1,200 1,000 1,106 1,800 1, ,200 1,022 1, Leverage (%) Dividend yield (%) December December December December December December

15 Snam Rete Gas Annual Report 2010 / Snam Rete Gas and financial markets Snam Rete Gas and financial markets In 2010 contrasting performance was reported in various European stock markets in a volatile environment. Although certain countries showed signs of growth and a positive future outlook, in others, in particular Greece, Ireland, Portugal and Spain, uncertainties over the ability to pay their government debt weighed heavily. This had inevitable repercussions on stock index movements. In particular, fears over the sovereign debt situation surfaced primarily at the beginning of the year, while in the second half of 2010, several prices moved upward leading to the following annual performance in major European stock exchanges: FTSE 100 of London +9%, DAX of Frankfurt +16.1%, CAC 40 of Paris -3.3%, IBEX of Madrid -17.4%. The Eurostoxx 50 European index remained unchanged from the end of last year. The Italian market also felt the effects of the uncertain climate in international financial markets. The perception of country risk by the financial community prevented domestic indices from entering positive territory. The FTSE MIB, which includes the largest 40 companies in terms of capitalisation which are listed in the Italian market, dropped 13.2%, while the FTSE Italia All-Share index, which includes all listed companies, was down 11.5%. It should be noted that the performance of domestic indices was also affected by their sector composition, characterised by a preponderance of companies in the banking, insurance and utility sectors, which were on a downward trend for the year. Snam Rete Gas stock, which is included in the FTSE MIB Italian index, and also in leading international indices (Stoxx Europe, S&P Europe and MSCI Europe) ended 2010 at an official price of 3.73, up 7.8% over the same figure for the previous year. This performance was achieved in an environment of overall growth for stocks of regulated utility companies, and more specifically, for those companies which, due to a stable and transparent regulatory environment, provide long-term visibility of their results and cash flow. These stocks set themselves apart from the overall European utilities sector, which underperformed the market (-8.8% in the Stoxx Europe 600 Utilities index) due mainly to the so-called overcapacity phenomenon which, together with weak demand for energy, had a negative impact on companies with the greatest exposure to energy prices. In 2010 approximately 2.9 billion shares of Snam Rete Gas were traded on the electronic stock market of Borsa Italiana, with rising daily trades averaging about 11.5 million shares (compared to 10.1 million in 2009). 13

16 Snam Rete Gas Annual Report 2010 / Snam Rete Gas and financial markets Shareholder structure At 31 December 2010, the fully subscribed and paid-up share capital of Snam Rete Gas S.p.A. totalled 3,570,832, and consisted of 3,570,832,994 ordinary shares with a nominal value of 1 (3,570,768,494 shares with the same nominal value at 31 December 2009). The increase of 64,500 over 31 December 2009 was due to the issue of 64,500 shares with a nominal value of 1. These shares were subscribed by managers entitled to participate in the 2003 stock option plans. At year end, based on entries in the Shareholders Register and other information gathered, Eni S.p.A. held 52.54% of share capital, Snam Rete Gas S.p.A. held 5.44% in the form of treasury shares, and the remaining 42.02% was in the hands of other shareholders. Snam Rete Gas on the Stock Market Comparison of prices of Snam Rete Gas, FTSE MIB and Euro Stoxx 600 Utilities (31 December December 2010) Min Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Volume Snam Rete Gas FTSE MIB Eurostoxx 600 Utilities Source: Snam Rete Gas calculations using BLOOMBERG data. Shareholder structure of Snam Rete Gas by type of investor and geographic area 52.54% ENI 12.28% Institutional Investors Continental Europe 9.79% Retail investors 7.36% Institutional Investors North America 4.56% Institutional Investors UK & Ireland 4.14% Institutional Investors Italy 2.29% Institutional Investors Rest of the World 1.60% Bank of Italy 5.44% Treasury Shares Key indices which include Snam Rete Gas stock FTSE MIB Stoxx Europe 600 Stoxx Europe 600 Utilities S&P Europe Sustainability indices DJSI World (as of 2009) FTSE4Good Europe (as of 2002) FTSE4Good Global (as of 2002) ECPI Ethical Europe (as of 2009) ECPI Ethical Global (as of 2009) ECPI Ethical EMU (as of 2009) 14

17 Snam Rete Gas Annual Report 2010 / Main factors of the pricing framework Main factors of the pricing framework The criteria for determining of the tariffs for the regulated natural gas transportation activities, regasification of LNG, distribution and storage of natural gas are established by the Electricity and Gas Authority. Following are the main pricing factors for each of the regulated activities of Snam Rete Gas S.p.A, based on the regulatory framework in force as at 31 December Transportation Regasification Storage Distribution End of regulatory period Calculation of regulatory asset base (RAB) 31 December September 2012 End of second 31 December 2012 regulatory period: 31 December 2010 End of third regulatory period: 31 December 2014 Revalued historical cost Revalued historical cost Revalued historical cost Revalued historical cost Starting 1 January 2011 Parametric method for Revalued historical cost centralised assets Deduction of recognised clean-up costs Return on regulatory asset base (pre-tax WACC) 6.4% (transportation) 6.9% (metering) 7.6% 7.1% 7.6% (distribution) Starting 1 January % (metering) 6.7% New investment incentives 1% for 5 years (on investments in safety) 2% for 7-10 years (on investments for development of capacity) 3% for years (on investments for development of input capacity) 2% for 8 years (on upgrading of existing terminals of less than 30%) 3% for 16 years (on upgrading of existing terminals of more than 30%) 4% for 8 years (on upgrading of existing capacity) 4% for 16 years (on development of new storage fields) 2% for 8 years (on replacement of cast-iron pipes and renovation of odorization systems) Efficiency factor (X FACTOR) 2.1% of operating costs 0.5% of operating costs 2% of operating costs 3.2% of distribution 1.5% of amortisation and operating costs depreciation 3.6% su of metering Starting 1 January 2011 operating costs 0.6% of operating costs In the paragraphs below, the main performance indicators are presented for each business segment 4 in which the Group operates. As indicated in the previous chapters, following Eni s acquisition of Italgas and Stogit which was concluded on 30 June 2009, the results for 2009 include the effects of the consolidation of the newly acquired companies from the third quarter of the year. In order to fully assess the operating performance of the respective activities, the results of the natural gas distribution and storage business segments are analysed in comparison to those for the whole of (3) To ensure that complete information is provided for the natural gas storage business segment, the main pricing factors applicable as of 1 January 2011 which are effective from the third regulatory period (1 January December 2014) are also indicated. The information on the regulatory framework is provided, for each business segment, under the paragraph titled Regulation, which contains the main resolutions of the Electricity and Gas Authority in regard to the determination of the tariffs applied in 2009 and (4) The business segments (transportation of natural gas, regasification of LNG, distribution and storage of natural gas) as presented in the internal reports, were identified by their management and refer to the main activities carried out by Snam Rete Gas S.p.A, GNL Italia S.p.A, Stogit S.p.A, Italgas S.p.A and its subsidiaries, respectively. 15

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19 Snam Rete Gas Annual Report 2010 / Natural gas transportation Natural gas transportation 17

20 Snam Rete Gas Annual Report 2010 / Natural gas transportation The natural gas transportation service Natural gas transportation is an integrated service which involves providing transportation capacity and the actual transportation of the gas delivered to Snam Rete Gas S.p.A. to the entry points of the Italian gas transportation network 2 up to the redelivery points of the regional network, where the gas is redelivered to the users of the service (the Users). The transport capacity which is expressed in standard cubic meters per day represents the maximum volume of gas that each User can inject or withdraw from the system at the aforementioned points each day. Snam Rete Gas S.p.A. provides transportation capacity to the entities that request it and they acquire the right (as Users) to inject and withdraw on any day of the thermal year to and from the entry and exit points of the National Network, the redelivery points along Snam Rete Gas S.p.A. s regional transportation network and the Virtual Exchange Point6, a quantity of gas not to exceed the daily flow provided. The natural gas introduced into the National Network originates from imports and, to a lesser extent, national production. The gas from abroad is injected into the National Network via seven entry points where the network joins up with the import pipelines (Tarvisio, Gorizia, Gries Pass, Mazara del Vallo, Gela) and the LNG regasification terminals (Panigaglia, Cavarzere). Domestically produced gas is introduced into the Network through 51 entry points7 from the production fields or their collection and treatment centres. Gas storage fields are also connected to the transportation network (two virtual entry/exit points towards the storage hubs). The gas leaving the National Network is transported on the Regional Network up to the redelivery points from which the gas is withdrawn by the users. Snam Rete Gas S.p.A. is the leading domestic Italian natural gas transportation and dispatching operator, and owns almost all the transportation infrastructures in Italy, with over 31,600 kilometres in use of high- and medium-pressure gas pipelines (approximately 94% of the entire transportation system). Snam Rete Gas S.p.A. Network Infrastructure as at 31 December 2010 GRIES PASS SAN DONATO MILANESE TARVISIO GORIZIA CAVARZERE PANIGAGLIA National Transportation Network Import Entry Points Regional Transportation Network LNG Regasification Terminal Dispatching Centre Compression Station Maritime Terminal Regional Boundary MAZARA DEL VALLO GELA (5) The list of pipelines comprising the National network and the criteria for defining it are provided in the Decree issued on 22 December 2000 by the Ministry for Industry, Trade and Crafts as currently applicable, pursuant to the provisions of Legislative Decree No. 164 issued on 23 May 2000 (the Letta Decree). (6) A virtual point at which Users can exchange and trade gas injected into the National network on a daily basis. (7) Number of entry points as at 31 December

21 Snam Rete Gas Annual Report 2010 / Natural gas transportation Key performance indicator ( million) Change Change % Core business revenue (*) 1,882 1,865 1, of which, natural gas transportation revenue 1,867 1,848 1, Operating costs (*) (56) (14.0) EBIT 1, , Investments 1, (24) (2.6) - of which with incentives (30) (3.8) - of which without incentives Net invested capital at 31 December 9,736 10,060 10, Volumes of natural gas injected into the gas transportation network (billions of cubic metres) Transportation network (kilometres in use) 31,474 31,531 31, of which national network 8,779 8,871 8, of which regional network 22,695 22,660 22, Employees in service at December 31 (number) 2,252 2,254 2, (*) Before consolidation adjustments. Financial r esults Natural gas transportation revenue amounted to 1,873 million, an increase of 25 million, or 1.4%, compared with The increase was attributable to higher volumes of natural gas transported (+ 20 million) and to recognition by the Electricity and Gas Authority of the additional expenses incurred for the acquisition of fuel gas in the period 1 October December 2009 ( 55 million; + 21 million compared with the contribution of 34 million recorded in the 2009 financial statements as recognition of the additional expenses incurred in the thermal year). These factors were partially absorbed by the application of new tariff criteria in effect from 1 January 2010, due essentially to the payment in kind by the users for the gas used for the transportation service 8. EBIT for 2010 was 1,185 million, up 211 million, or 21.7%, compared with the previous year. The increase was attributable mainly to: (i) lower operating costs (+ 133 million, net of components offset in revenue), owing to the payment in kind of natural gas used in the transportation business and to the net use of provisions for risks and charges in relation to a provision made in 2009 (+ 23 million); (ii) lower amortisation and depreciation (+ 69 million) due mainly to the extension of the useful life of pipelines (from 40 to 50 years), which was considered in the Electricity and Gas Authority s tariff review; and (iii) higher transportation revenue (+ 10 million, net of components offset in costs). Operating review Investments ( million) Change Change % Development (21) (3.0) Investments with 3% incentive Investments with 2% incentive (26) (10.8) Maintenance and other (3) (1.3) Investments with 1% incentive (9) (8.9) Investments with no incentives , (24) (2.6) Investments in 2010 amounted to 902 million, a decrease of 24 million, or -2.6%, compared with the previous year. The investment s were classified in accordance with Resolution ARG/gas 184/09 of the Electricity and Gas Authority, which identified various categories of project with different incentive levels 9. (8) As of the start of the third regulatory period on 1 January 201 0, 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. Applying these criteria entailed, on the one hand, reduced operating costs from lower charges for supplying the gas used to provide service and, on the other, reduced revenue in the amount which had been allocated to cover the operating costs. (9) The investment incentives were the same as for the second regulatory period. 19

22 Snam Rete Gas Annual Report 2010 / Natural gas transportation Eighty-five per cent of these investments are expected to benefit from incentive-based return. The breakdown of investments in 2010 by category will be submitted to the Authority when the tariffs are approved for The main investments with a 3% incentive ( 456 million) were: as part of the connection project for the Offshore LNG Toscana (OLT) regasification terminal at Livorno ( 136 million), the construction of infrastructure to connect with the plant located off the Tuscany coast, primarily offshore; as part of the project to upgrade the import infrastructure in Sicily and Calabria ( 101 million): (i) materials for and construction work on the Montesano station in Campania; (ii) completion works on operating sections and construction of the tunnel section of the Montalbano-Messina pipeline in Sicily; (iii) turbocompressors at the Enna station in Sicily; and (iv) construction work on the Bronte-Montalbano section of the Enna-Montalbano pipeline in Sicily; as part of the new transportation infrastructure project on the Adriatic coast ( 93 million): (i) construction work on the main line and the design of connection points for the Massafra-Biccari pipeline in Puglia and Basilicata; and (ii) design completion and the purchase of private permits for the Sulmona-Foligno-Sestino-Minerbio pipeline in Abruzzo and Emilia-Romagna; as part of the Villesse-Gorizia pipeline project in Friuli-Venezia Giulia ( 40 million), construction work and materials. The main investments with a 2% incentive ( 215 million) were: as part of the project to upgrade the transportation infrastructure in the Po Valley, with an aim to increase national transportation capacity ( 55 million): (i) construction work on the Cremona-Sergnano pipeline in Lombardy; and (ii) design completion and purchase of permits for the Zimella-Cervignano pipeline in Veneto and Lombardy; as part of the Palaia-Collesalvetti pipeline project in Tuscany ( 23 million), infrastructure construction materials. The main investments with a 1% incentive ( 92 million) involved several projects aimed at maintaining adequate safety and quality levels at the stations. Investments without incentive ( 139 million) included 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. Effect of investments with incentive (% of total investments) (%) Investments with 3% incentive Investments with 2% incentive Investments with 1% incentive Investments with no incentive Distribution on the Italian Gas Transportation Network Availability of natural gas (billions of m³) Change Change % From imports From domestic output (0.08) (1.0) Total gas injected in the network Net balance of storage withdrawals/injections (*) (1.12) 0.78 (0.64) (1.42) Total natural gas available (*) The balance between the withdrawal from storage (+) and introduction into storage (-). Withdrawals of natural gas (billions of m³) Change Change % Redelivery to domestic market Exports Snam Rete Gas consumption and emissions Unaccounted-for gas and other changes (*) (0.07) (35.0) Total natural gas withdrawals (*) Includes the change of the network capacity For the definition of Unaccounted For Gas (UFG) please see the paragraph below titled Withdrawals of natural gas. 20

23 Snam Rete Gas Annual Report 2010 / Natural gas transportation Availability of natural gas The availability of natural gas in Italy in 2010 was billion cubic meters, up 5 billion cubic meters (+6.4%) compared to The quantities of gas injected into the National Transportation Network increased by 8.3% to billion cubic meters. The increase in the quantities of gas injected into the National Transportation Network is due mainly to higher imports (+6.50 billion cubic meters or + 9.5%). The domestic production of 8.15 billion cubic meters has remained essentially unchanged compared to 2009 (8.23 billion cubic meters). The positive balance of around 0.6 billion cubic metres of injections into (+) and withdrawals from (-) the storage system also contributed to the increase in volumes injected into the network, compared to the opposite situation in 2009 where withdrawals from storage exceeded injections by around 0.8 billion cubic metres. The analysis of imports by entry point is: Imports by entry poin (billions of m³) Change Change % Entry points Mazara del Vallo Tarvisio (0.43) (1.9) Gela Gries Pass (4.19) (34.9) Cavarzere (LNG) Panigaglia (LNG) Gorizia Year-on-year imports rose by 6.5 billion cubic metres, or 9.5%, to billion cubic metres compared to In addition to the contribution of gas from the LNG terminal injected at the Cavarzere entry point and operational from the third quarter of 2009 (+5.51 billion cubic metres), the higher imports from the entry point at Mazara del Vallo (+4.63 billion cubic metres; +21.4%) were partly offset by less gas injected at the Gries Pass entry point (-4.19 billion cubic metres; -34.9%) following the blockage in Switzerland of the import pipeline linking Italy to northern Europe. Volumes of natural gas injected into the Network per User (billions of m³) Change Change % Eni (4.13) (10.4) Enel Trade Other Natural gas injected into the network by entry point (% the total injected) (%) Mazara del Vallo Tarvisio Gries Pass Cavarzere Gela Other Withdrawals of natural gas The natural gas withdrawn from the National Transportation Network in 2010 (82.68 billion cubic meters) is mainly: (i) for redelivery to users at the network exit points (81.54 billion cubic meters); (ii) exports (0.54 billion cubic meters), mainly to Slovenia; and (iii) consumption by the compression stations and the gas emissions from the network and the Snam Rete Gas S.p.A. plants (0.47 billion cubic meters). In the energy report compiled by Snam Rete Gas S.p.A. the natural difference between the quantity of gas metered at the entrance to the network and the quantity of gas metered at the exit, due to the technical tolerance of the metering devices, is traditionally defined as the Unaccounted For Gas (UFG). With Resolution ARG/gas 192/09, published on 15 December 2009 in application of the new tariff criteria set by Resolution ARG/gas 184/09, the Electricity and Gas Authority defined as from 1 January 2010 the terms for payment in kind by the users of the service to the major transportation company of the gas quantities to cover the un-accounted for gas, due as a percentage of the quantities withdrawn from the transportation network. 21

24 Snam Rete Gas Annual Report 2010 / Natural gas transportation The demand for gas in Italy in 2010 was billion cubic meters, up 4.96 billion cubic meters (+6.4%) compared to 2009, following the recovery of consumption after the recent economic crisis. The increase has affected all sectors, in particular residential and tertiary (+7.1%), industrial (+7.0%) and thermoelectric (+4.4%). Gas demand by sector (% of total gas demand) (%) In thermal year , the development and upgrading work on the transportation infrastructures have made it possible to increase the network s transportation capacity to million cubic meters/day (+0.8% compared to the thermal year) The increase is mainly attributable to the increase in transportation capacity at Gela and Mazara del Vallo, following the deployment of an upgrade on the infrastructures for the imports from North Africa Residential and services Industrial Thermoelectric Other Reconciliation of the quantities withdrawn from the Network and Italian demand (billions of m³) (*) 2010 Change Change % Quantity withdrawn Exports (-) (0.60) (0.48) (0.54) (0.06) 12.5 Gas injected in the regional network of other operators (0.02) (25.0) Other consumption (**) Total demand Italy (*) The demand for gas has been aligned with that published by the Ministry of Economic Development. (**) Includes the consumption of the LNG terminal at Panigaglia, the consumption of the compression stations for storage and the production treatment stations. Demand for gas in Italy (billions of m³) (*) 2010 Change Change % Residential and services Thermoelectric Industrial (**) Other (*) The demand for gas has been aligned with that published by the Ministry of Economic Development. (**) Includes t he consumption of the Industrial, Agricultural and Fishing, Chemical Synthesis and Automotive sectors Transportation capacity (billions of m³/day) Entry points thermal year thermal year thermal year Available capacity Capacity allocated Saturation (%) Available capacity Capacity allocated Saturation (%) Available capacity Capacity allocated Saturation (%) Tarvisio Mazara del Vallo Gries Pass Gela Cavarzere (GNL) Panigaglia (GNL) Gorizia

25 Snam Rete Gas Annual Report 2010 / Natural gas transportation The capacity available on the network has made it possible to address the capacity demand of all Users in thermal year , with an increased capacity of 2.9%. In addition to the aforementioned capacities which concern the entry points interconnected with foreign countries and the LNG terminals, transportation capacity totalling 37 million cubic meters/day is available at the domestic production entry points. Snam Rete Gas S.p.A. put out its long term plan for transportation capacity, which was disclosed to the Ministry of Economic Development on 21 June 2010 and published on the Snam Rete Gas S.p.A. website. The document shows the capacity data on all entry points interconnected with foreign countries and the LNG terminals for the thermal year and subsequent years up to 30 September Gas transportation capacity and saturation Regulation Available capacity (millions of m³/day) Capacity allocated (milions of m³/day) % saturation (Capacity allocated/available capacity) Resolutions no s. 166/05 and 102/08 - Criteria for the determination of tariffs for natural gas transportation and dispatching and Approval of the tariff proposals for natural gas transportation and dispatching prices. With Resolution no. 166/05 Criteria for the determination of tariffs for natural gas transportation and dispatching published on 30 July 2005, the Authority for Electricity and Gas outlined the criteria for defining the natural gas transportation tariffs on the national and regional gas transportation network for the second regulatory period (1 October September 2009). The mechanisms already in effect in the first regulatory period were confirmed for the determination of the price levels and a real return on invested capital was fixed at 6.7% before taxes. Investment incentives were provided for the second regulatory period as well through a return rate increased by 1 to 3 percentage points compared to the rate for capital existing at the end of 2004 (6.7%) for a duration of between 5 and 15 years. Both the rate of return and the duration are differentiated according to the various types of investment. The returns associated with the new investments will be recognized starting from the thermal year following that in which the costs were incurred ( spending ) and are guaranteed regardless of the volumes transported. The updating method for the price cap tariffs is applied only to revenue components that relate to operating costs and the amortisation and depreciation which is updated for inflation and decreased by a productivity coefficient set at 2% for the capacity component and 3.5% for the component related to volumes transported. The revenue component which is correlated with returns is determined on the basis of the annual update of net capital invested as at 31 December 2004 (RAB). The tariff structure which is based on the entry/exit model was confirmed for the second regulatory period as well, except for the fixed fee, which was replaced by a special measuring fee. With Resolution ARG/gas 102/08 - Approval of the tariff proposals for natural gas transportation and dispatching prices, in implementation of the Resolution no. 166/05 issued on 29 July 2005 by the Electricity and Gas Authority, published on 31 July 2008, the Electricity and Gas Authority approved the natural gas transportation tariffs for the thermal year The tariffs are determined on the basis of the base revenues, the additional revenues of 39 million for development investments made during the first regulatory period and additional revenues of 233 million for investments realised in 2005, 2006 and The net capital invested as at 31 December 2007 (RAB) is 12.2 billion. The Authority also confirmed, for thermal year , the introduction of an additional fee for coverage of the higher expenses incurred for the purchase of gas for compression and the network leaks. Resolution ARG/gas 184/09 - Approval of part II Regulation of the tariffs for the natural gas transportation and dispatch service for regulatory period (RTTG), approval of part III - Regulation of tariffs for the gas transportation metering service for regulatory period (RMTG), provisions on the transitory fee for the gas transportation metering service for 2010 and amendments to Attachment A of Resolution no. 11/07. With Resolution ARG/gas 184/09, published on 2 December 2009, the Electricity and Gas Authority issued the criteria for defining natural gas transportation and measuring tariffs on the national and regional gas transportation network for the third regulatory period (1 January December 2013) 10. The Authority also set 33.6 million as the amount to be paid to Snam Rete Gas S.p.A. for additional costs incurred in thermal year for the purchase of fuel gas used to power compression stations. (10) 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 2010 / Natural gas transportation The valuation of the net capital invested (RAB) is based on the revalued historic cost method. The return rate (WACC) of net capital invested is set at a real rate of 6.4% before taxes. The incentives for new investments were confirmed and provide for a higher return compared to the variable base rate (WACC), in relation to the type of investment, from 1% to 3% and for a period from 5 to 15 years. The revenues associated with new investments are paid starting from the second year following that in which the costs were incurred ( spending ) and are guaranteed regardless of the volumes transported. The method for updating the price cap tariffs is applied to revenue relating to operating costs and is equal to approximately 15% of the revenues in question, which are updated for inflation and decreased by an annual recovery coefficient set at 2.1% (3.5% in the previous regulatory period). The revenue components which are related to returns and amortisation and depreciation are determined on the basis of the annual update of net capital invested (RAB). In particular, in the third regulatory period, the amortisation and depreciation is deducted from the price-cap mechanism and calculated on the basis of the useful economic and technical life of the transport infrastructure which is 50 years (40 years in the previous regulatory period). The tariff structure is based on an entry/exit model and was confirmed for the third regulatory period as well, together with the capacity fee for the metering service. Finally, fuel gas is treated as a pass-through cost which is payable in kind by the users and is excluded from the price cap mechanism. Resolution ARG/Gas 192/09 - Amendments to Resolution no. 137/02 of 17 July 2002, for defining criteria on the treatment of non-metered natural gas (gas consumed internally, network leaks, withdrawals/injections into the network and unaccounted-for gas) as part of the balancing service. With Resolution ARG/gas 192/09, published on 15 December 2009, in application of the new tariff criteria established with Resolution ARG/ gas 184/09, the Authority for Electricity and Gas defined the terms for payment in kind by the users of the service to the major transport company, the gas quantities for coverage of the fuel gas, the network leaks and the unaccounted-for gas due as a percentage of the quantities injected and withdrawn from the transportation network. Resolution ARG/gas 198/09 - Approval of the proposals for the natural gas transportation and dispatch service tariffs and the transitory fee for the gas transportation metering service for With Resolution ARG/gas 198/09, published on 23 December 2009, the Authority approved the transportation, dispatch and metering tariffs for The tariffs were determined on the basis of the base revenues of 1,703 million (net of all pass through costs, including fuel gas and network leaks), the additional revenues relating to develop- 24

27 Snam Rete Gas Annual Report 2010 / Natural gas transportation ment investment incentives realised in the first regulatory period of approximately 28 million and the revenues associated with the system balancing costs of approximately 23 million. The revenues in effect from 2010 will have to take account of the increase volumes transported compared to the base amount of 75.7 billion cubic meters. The portion of the revenues associated with the transportation capacity is guaranteed and is equal to approximately 85% of the base revenues. The RAB as at 31 December 2008 for transportation, dispatching and metering is 12.8 billion. Resolution VIS 8/09 - Closure of the preliminary investigation begun following Authority for Electricity and Gas Resolution VIS 41/08 of 15 April 2008 on the correct application of the provisions concerning unaccounted-for gas in the natural gas transportation networks from 2004 to With Resolution VIS 8/09, published on 5 February 2009, the Authority for Electricity and Gas concluded the preliminary investigation for acquisition of the information relating to Unaccounted for Gas (UFG) within the transportation system during and began a survey on the service and maintenance of a portion of the transportation network s metering installation, which was scheduled to be completed on 30 September 2009 but was extended to 31 March 2010 with Resolution VIS 96/09; the survey was concluded with Resolution VIS 93/10 on 6 September Several irregularities were discovered concerning the management of the metering plants owned by entities other than Snam Rete Gas S.p.A. Resolution ARG/gas 218/10 - Approval of the tariff proposals for natural gas transportation and dispatch, the transitory fee for the gas transportation metering service for 2011 in implementation of the provisions set forth in Resolution ARG/gas 184/09 issued by the Authority for Electricity and Gas on 1 December Based on the criteria described, the Authority approved the transportation, dispatch and metering tariffs for 2011 with Resolution ARG/gas 218/10. The tariffs were determined on the basis of the base revenues which amounted to 1,817 million net of the third party portion (of which 113 million relate to development investment incentives and approximately 36 million to revenues associated with system balancing costs). The actual revenues for 2011 will have to take into consideration the increase in the transported volumes compared to the base value, which is 75.7 billion cubic meters. Furthermore, the amount payable to the company for higher costs incurred for the purchase of fuel gas from 1 October 2008 to 31 December 2009 was set at 54.9 million. The RAB as at 31 December 2009 for transportation, dispatch and metering amounts to 13.1 billion. 25

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29 Snam Rete Gas Annual Report 2010 / Liquefied Natural Gas (LNG) regasification Liquefied Natural Gas (LNG) regasification 27

30 Snam Rete Gas Annual Report 2010 / Liquefied Natural Gas (LNG) regasification The LNG regasification service Natural gas is also injected into the national transportation network from the LNG terminal at Panigaglia (La Spezia), which is owned by GNL Italia. Here, it can regasify 17,500 cubic meters of LNG per day, thus when operating at maximum capacity, the terminal can inject over 3.5 billion cubic meters of natural gas into the transportation network annually. The regasification service includes unloading the LNG from the vessel, operating storage, i.e., the storage time required for vaporising the LNG, regasifying it and injecting it into the national network at the Panigaglia entry point. The regasification service can be either continual for the entire thermal year or work on a spot basis. Ancillary services are also available, such as correcting the heating power of the natural gas to comply with quality requirements for its injection into the transportation network (correction of the Wobbe index). Key performance indicators ( million) Change Change % Core business revenue (*) (**) (1) (2.8) - of which LNG regasification revenue Operating costs (**) (3) (11.1) EBIT Investments (4) (57.1) Volumes of LNG regasified (billions of cubic metres) Tanker loads (number) Employees in service at December 31 (number) (17) (19.5) (*) 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. Financial results LNG Regasification revenue amounted to 24 million in 2010, a yearon-year increase of 3 million, or 14.3%. This rise was due mainly to higher volumes of LNG regasified (+0.66 billion cubic metres; +50%). EBIT totalled 7 million, an increase of 2 million, or 40%, compared with The rise was mainly due to higher revenue from the LNG regasification service. Operating review Quantities of regasified LNG per user (billions of m³) Change Change % Enel Trade Eni Other

31 Snam Rete Gas Annual Report 2010 / Liquefied Natural Gas (LNG) regasification In 2010, the Panigaglia LNG terminal in the province of La Spezia regasified 1.98 billion cubic metres of natural gas (compared with 1.32 billion cubic metres in 2009), unloading 54 methane tankers of various types, including three spot loads (compared with 38 tankers in 2009, including five spot loads). Investments Invest ments in 2010 amounted to 3 million, a decrease of 4 million compared with the previous year. Volumes of regasified LNG and number of tanker loads Adaptation and modernisation of Panigaglia plant The Environmental Impact Assessment (EIA) of the plans to expand and modernise the GNL Italia regasification terminal at Panigaglia was completed successfully on September 9. The decree was signed by the Italian environment and culture ministries. Regulation Resolution ARG/gas 92/08 - Criteria for the determination of the tariffs for the regasification service and amendments to Resolutions no. 166/05 and no. 11/07. With Resolution ARG/gas 92/08, published on 9 July 2008, the Authority for Electricity and Energy defined the tariff criteria for the regasification service applicable for the third regulatory period (1 October September 2012). The mechanisms already in effect in the second regulatory period were confirmed for determining the base revenues, including the real return on net invested capital of 7.6% before taxes. In regard to the tariff structure, the breakdown of revenues into a regasification capacity component and a regasified volumes component was maintained, at a ratio of 90/10 (80/20 in the second regulatory period). The tariffs are updated using the price cap methodology applied only to the component relating to operating costs, with a productivity recovery coefficient of 0.5%. The revenue component relating to the return and amortisation and depreciation is updated on the basis of an annual recalculation of invested capital and additional revenues from the incentives for investments realized in prior regulatory periods. Incentives for new investments involve the payment of a return increased by three percentage points compared to that paid for capital at the end of 2007, for a duration of 16 years. Both the increase in the rate of return and the duration are differentiated depending on the type of investment. Resolution ARG/gas 102/09 - Approval of the tariff proposals for the regasification service for thermal year for GNL Italia S.p.A. and Terminale GNL Adriatico S.r.l., in implementation of Resolution ARG/gas 92/08 issued by the Authority for Electricity and Gas on 7 July With this provision, which was published on 29 July 2009, the Authority for Electricity and Gas approved the tariffs for the regasification service provided by GNL Italia for thermal year , pursuant to Resolution ARG/gas 92/08. The tariffs were set on the basis of the base revenues of 25 million. The net capital invested as at 31 December 2008 (RAB) was equal to million regasified volume (billions of m³) loads (number) Resolution ARG/gas 54/10 - Modification of Article 11 of Resolution no.167/05 issued by the Authority for Electricity and Gas on 1 August 2005 containing provisions in the event of failure to use the regasification capacity. With Resolution ARG/gas 54/10, published on 15 April 2010, the Authority for Electricity and Gas introduced a tolerance of 10% on the complete use of the capacity provided in order to determine any release of capacity commensurate with the flexibility of supply contracts, to achieve greater flexibility in accessing the regasification service. Pursuant to the aforementioned provision, GNL Italia proposed to amend its own regasification code. Resolution ARG/gas 90/10 - Deployment of the process for the establishment of provisions referring to the payment of costs for the restoration of liquefied natural gas regasification terminals. With this provision published on 21 June 2010, the Authority for Electricity and Gas began a procedure for the establishment of provisions aimed at recognising the restoration costs for GNL sites in tariffs. Resolution ARG/gas 108/10 - Approval of the tariff proposals for the regasification service for thermal year for GNL Italia S.p.A. and Terminale GNL Adriatico S.r.l., in implementation of Resolution ARG/gas 92/08 issued by the Authority for Electricity and Gas on 7 July With this provision, wh ich was published on 19 July 2010, the Authority for Electricity and Gas approved the tariffs for the regasification service provided by GNL Italia for thermal year , pursuant to Resolution ARG/gas 92/08. The tariffs were set on the basis of the base revenues of 25.6 million. The actual revenues for thermal year must take into account the regasified volumes. The net capital invested as at 31 December 2009 (RAB) is equal to million

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33 Snam Rete Gas Annual Report 2010 / Natural gas storage Natural gas storage 31

34 Snam Rete Gas Annual Report 2010 / Natural gas storage Natural gas storage servic e The natural gas storage business in Italy is done under a concession regime and it serves to offset the various demands of gas consumption and supply. In fact, procurement has had a basically constant profile throughout the year, while gas demand has been Stogit Storage concessions at 31 December 2010 characterised by high seasonal variability with winter demand significantly higher than summer. Essentially, there are two distinct phases in storage: (i) injection phase, generally concentrated between April and October, consisting of injecting into storage the natural gas deriving from the national transport network; (ii) the extraction phase, usually concentrated between November and March of the following year, when the natural gas is extracted from the deposit, treated, and redelivered to users by the transport network. The storage business is carried out by making use of an integrated whole of infrastructures comprised of deposits, gas treatment plants, compression stations, and the operational dispatching system. Stogit, the Group company which handles natural gas storage business, is now the largest Italian operator and one of the leading European operators in the sector, using eight storage operations fields located in Lombardy (four), Emilia Romagna (three) and Abruzzo (one). By adhering to technical efficiency and economy criteria, the Company makes its storage capacity available using an integrated system that is able to provide the required modulation services in a manner compatible with the available storage capacities. Introduction As indicated previously, the results for 2009 include the economic effects of consolidating Stogit in the second half of 2009, as these were included in the group s consolidated financial statements from 30 June of that year, the date when the acquisition of Stogit from Eni was completed. In order to fully assess operating performance, the results of the natural gas storage business segment are analysed in comparison to those for the whole of Key performance indicators ( million) Change Change % Core business revenue (*) of which, natural gas storage revenue Operating costs (*) (1) (1.6) EBIT Investments (30) (10.6) Net invested capital at 31 December 2,093 2, Concessions (number) of which operational 8 8 Natural gas moved through the storage system (billions of cubic metres) (0.93) (5.6) - of which injected of which withdrawn (1.12) (12.9) Available storage capacity (billions of cubic metres) (**) Employees in service at 31 December (number) (22) (7.3) (*) 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. 32

35 Snam Rete Gas Annual Report 2010 / Natural gas storage Financial results Natural gas storage revenues totalled 349 million, up by 8 million, or 2.3%, compared with This increase was due to tariff changes relating to the return on investments made in the second regulatory period (+ 6 million) and to higher variable payments for movement of natural gas (+ 2 million). Storage revenues refer to modulation storage ( 282 million; +3.3%) and strategic storage ( 67 million; 1.5%). EBIT totalled 218 million in 2010, up by 4 million, or 1.9%, compared with This was due to the increase in storage revenues (+ 8 million) and higher income from the sale of natural gas no longer necessary for plant operation (+ 2 million, net of the costs of gas sold). These factors were partially offset by greater amortisation and depreciation (- 6 million), mainly as a result of revised estimates for abandonment costs. Operating review ( million) Change Change % Development of new fields (77) (34.8) Investments with an incentive of 4% over 16 years (77) (34.8) Capacity upgrades Investments with an incentive of 4% over 8 years Maintenance and other (30) (10.6) Share of investments by incentive (% of total investments) (%) Development of new fields Upgrading of capacity Maintenance and other Investments Investments totalled 252 million in 2010, down by 30 million, or 10.6%, year-on-year. This reduction was due largely to the development activities in progress in the Fiume Treste storage fields drawing to an end. Pursuant to Resolution no. 50/06 of the Electricity and Gas Authority, relating to the second regulatory period (1 April March ), incentivising investments means applying a rate of return that is four percentage points higher than the base rate, over eight years for upgrades of existing capacity and over 16 years for the development of new fields. Pursuant to Resolution ARG/gas 119/10 of the Electricity and Gas Authority, this incentive system will also apply to the third regulatory period (1 January December 2014). Investments with a 4% incentive over 16 years ( 144 million) relate mainly to the development activities in progress in the Fiume Treste storage fields, as well as the Bordolano storage field project to develop the cushion gas injection programme. Investments with a 4% incentive over eight years ( 74 million) mainly concern projects to increase pressure. Around 86% of these investments are expected to benefit from incentive-based returns. The breakdown of investments in 2010 by category will be submitted to the Authority when the tariffs are approved for Natural gas moved through the storage system The volumes of gas moved through the storage system in 2010 totalled billion cubic metres, down 0.93 billion cubic metres, or 5.6%, compared with This decrease was due mainly to the exceptional fall in supplies in January 2009 caused by the Russia- Ukraine crisis of 6-20 January, during which 2.2 billion standard cubic metres were supplied, which was partially offset by increased reconstitution of the capacity for shippers. (11) 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 nat ural gas storage tariffs approved for the thermal year 1 April March 2010 with Resolution ARG/gas 38/09 33

36 Snam Rete Gas Annual Report 2010 / Natural gas storage Total storage capacity as at 31 December 2010 was 14.2 billion cubic metres, a year-on-year increase of 0.3 billion cubic metres, due mainly to development investments made at the Settala concession plants. Regulation Resolution ARG/gas 50/06 Calculation criteria for storage tariffs and modifications and supplements for Resolution 119/05 of the Electricity and Gas Authority of 21 June 2005 and for Resolution 166/05 of the Electricity and Gas Authority of 29 July 2005 and Resolution ARG/gas 38/09 Approval of company payments and calculation of single payments for storage relating to thermal year , implementing Resolution 50/06 of the Electricity and Gas Authority of 3 March With Resolution 50/06 of March 2006, the Electricity and Gas Authority established the calculation criteria for the storage tariffs for the second regulatory period, expiring 31 March 2010, providing for a mixed mechanism of revenue allowed (in terms of capacity) and a price cap (on gas moved commodity), also establishing a single tariff on a national level. With Resolution 38/09, published on 30 March 2009, the Authority approved the storage tariffs for thermal year , established on the basis of the RAB at 31 December 2008 equivalent to 2.8 billion. Resolution ARG/gas 165/09 - Urgent operations for adapting the balancing regimen and regulation of natural gas storage services under Legislative Decree No. 78 of 1 July With this resolution, published on 3 November 2009, the Electricity and Gas Authority, applying Legislative Decree No. 78/09 which provided measures for reducing the cost of energy for businesses by providing for, among other things attributed to the Regulator, the promotion of storage and point services for end industrial and thermoelectric customers, has defined criteria to permit storage companies to offer additional flexible services to users of the transport system on a monthly basis, enabling the company to withhold a share of the revenue deriving from eventual allocations of the services offered. For this purpose Stogit has prepared a proposal for updating its Storage Code, approved by Resolution ARG/gas 178/09, which defines the offering of the so-called Users Balancing Service. Resolution ARG/gas 21/10 - Extension of validity of natural gas storage tariffs. With this resolution, published on 24 February 2010, the Electricity and Gas Authority extended, for the period 1 April December 2010, the validity of the tariff proposals for natural gas storage service approved by Resolution ARG/gas 38/09, extending for that period the revenue guarantee criteria referred to in Article 10 of Resolution 50/06 as well as the equalisation regime referred to in Article 9 of that resolution. Resolution ARG/gas 119/10 - Consolidated act on the regulation of the quality and tariffs for natural gas storage services for the period (TUSG): approval of part II, Regulation of natural gas storage service tariffs for the regulatory period (RTSG), measures on the transitory payment for the gas transportation metering service for Natural gas moved in/out of the storage system (billions of m³) Withdrawal Injection Total With this resolution, published on 5 August 2010, the Electricity and Gas Authority established the calculation criteria for the storage tariffs for the third regulatory period, expiring 31 December 2014, providing for a mixed mechanism of revenue allowed (in terms of capacity) and a price cap (on gas moved commodity), also establishing a single tariff on a national level. Resolution no. ARG/gas 202/10 Approval of the company payments and calculation of single payments for storage service and calculation of the transitory payment for the gas transport measurement metering service for 2011, implementing Resolution ARG/gas 119/10 of the Electricity and Gas Authority of 3 August With this resolution, published on 24 November 2010, the Electricity and Gas Authority approved the storage tariffs and the transitory metering payments for 2011, established on the basis of a RAB at 31 December 2009 equivalent to 3.0 billion. Legislative Decree no. 130/10 New storage capacity programme Legislative Decree no. 130, Legislative Decree bearing measures for greater competition in the natural gas market and the transfer of resulting benefits to end customers, pursuant to Article 30, paragraphs 6 and 7, of Law no. 99 of 23 July 2009, came into force on 19 August Among other things, the Decree obliges entities which inject natural gas into the national network to disclose their wholesale market share on an annual basis. The maximum market share has been set at 40% of the total volume of gas injected, although this can be increased to 55% if an entity commits to building new natural gas storage infrastructures (or upgrading existing ones) in order to free up 4 billion cubic metres of new storage capacity over a five-year period. This commitment can be made by stipulating appropriate agreements with storage subsidiaries. 34

37 Snam Rete Gas Annual Report 2010 / Natural gas storage Consequently, the ultimate parent, Eni, informed Stogit of its intention to build new storage capacity by asking its storage subsidiary to prepare and submit a draft proposal. Stogit carried out this request and the ultimate parent, Eni, then submitted Stogit s proposal to the Ministry of Economic Development with a view to increasing the aforementioned maximum market share. The proposal was approved by the ministry, upon consultation with the Electricity and Gas Authority, by a decree of 31 January Consequently, it is binding for Stogit, in terms of efficiency and timeframe, and must be completed within five years of 1 September More specifically, Stogit must ensure punctual completion of the proposal s infrastructure capacities. This activity will be carried out in compliance with the obligations of functional separation established by Resolution no. 11/07 of the Electricity and Gas Authority. 35

38 36

39 Snam Rete Gas Annual Report 2010 / Natural gas distribution Natural gas distribution 37

40 Snam Rete Gas Annual Report 2010 / Natural gas distribution Natural gas distribution service The natural gas distribution business operates on a concession regime, between Italgas and Companies which are its subsidiaries, through the conferral of this service by local public entities; it consists of the service of gas distribution through local pipeline networks from delivery points at the metering and reduction stations (city gates) to the gas distribution network redelivery points at the end customers (families, businesses, etc.). Gas distribution service is carried out for sales companies authorised to market to end customers by the transportation of the gas through city networks. Italgas undertakes natural gas distribution activities by making use of an integrated system of infrastructures comprised of stations for withdrawing gas from the transport network, pressure reduction plants, local transportation and distribution network, user derivation plants and redelivery points comprised of technical equipment featuring meters at the end customers (families, commercial and tertiary businesses, and small industrial businesses). Italgas is the leading Italian operator in the natural gas distribution business in Italy with 1,448 municipal concessions and more than 50,300 kilometres of medium- and low-pressure transportation network. Introduction As indicated previously, the results for 2009 include the effects of consolidating Italgas in the second half of 2009, as these were included in the group s consolidated financial statements from 30 June of that year, the date when the acquisition of Italgas from Eni was completed. In order to fully assess operating performance, the Italgas and Napoletana Gas Municipal territories under concession at 31 December 2010 results of the distribution business segment are analysed in comparison to those for the whole of 200 Key performance indicators ( million) Change Change % Core business revenue (*) 802 1, of which, natural gas distribution revenue 776 1, Core business revenue net of IFRIC of which, natural gas distribution revenue Operating costs (*) Operating costs net of IFRIC EBIT Investments Net invested capital at 31 December 3,419 3, Gas distribution (millions of cubic metres) 7,537 7, Distribution network (kilometres) 49,973 50, Active meters (millions) Employees in service at 31 December (number) 3,545 3,119 (426) (12.0) (*) From 1 January 2010, items include the effects of applying international accounting standard IFRIC 12, Service Concession Arrangements. Applying this interpretation had no effect on the group s and the segment s results, except for the equal recognition of revenue and costs relating to building and upgrading distribution infrastructures ( 349 million). More information on this interpretation and how it applies to the Snam Rete Gas group can be found in the Basis of presentation and consolidation principles chapter of the Notes to the consolidated financial statements, to which reference is made. Financial results Natural gas distribution revenues totalled 1,197 million, an increase of 421 million (+54.3%) compared with Excluding the effects of applying IFRIC 12, distribution revenues totalled 848 million, up by 72 million (+9.3%) year-on-year. This increase was attributable mainly to the effects of applying the graduality mechanism introduced by Resolution no. 79/09 of 1 June 38

41 Snam Rete Gas Annual Report 2010 / Natural gas distribution 2009 of the Electricity and Gas Authority 12, increased revenues due to the return on investments in the distribution network and meterreading services, which were transferred to distribution companies on 1 July EBIT generated in 2010 totalled 455 million, up by 57 million, or 14.3%, year-on-year. This increase was due mainly to higher revenues from natural gas distribution (+ 72 million, net of IFRIC 12) and more income from technical services performed at redelivery points (+ 9 million). These factors were partially offset by higher amortisation, depreciation and impairment losses (- 22 million) owing to increased amortisation and depreciation (- 12 million) and the impairment losses on certain assets (- 10 million). Operating review Investments ( million) Change Change % Maintenance Extension and upgrade New networks Other investments Investments in 2010 amounted to 386 million, an increase of 52 million, or 15.6%, compared with Maintenance investments ( 209 million) mainly involved renovating sections of pipes, by replacing cast-iron pipes, and continuing the meter-replacement programme. Extension and upgrade investments ( 113 million) involved extending existing networks in response to commitments arising from concession contracts. Investments in new networks ( 27 million) essentially related to infrastructure under construction in southern Italy. Other investments ( 37 million) mainly concerned real-estate and IT investments. In addition to the technical investments described above, in 2010 the group acquired the CNEA business unit for 9 million, essentially consisting of gas distribution infrastructure in seven municipalities in the Lazio region. Gas distribution During 2010, 7,953 million cubic metres of gas were distributed, an increase of 416 million cubic metres, or 5.5%, on 2009, mainly due to the different climatic conditions and the development of the network. Share by investment type (% of total investments) Active meters and volumes of natural gas distributed (%) ,000 8,000 7,000 7,537 7,953 6,000 5,771 5,848 5, ,000 3, Maintenance Network extension and upgrade New networks Other investments volume distributed (millions of m³) active meters (thousands) (12) With this resolution, which amended the tariff criteria in effect under prior Resolution no. 159/08, the Authority introduced a gradual increase in the amortised tariff component for the new regulatory period, which is in addition to that already provided for returns on invested capital. 39

42 Snam Rete Gas Annual Report 2010 / Natural gas distribution At 31 December 2010, the group had concessions for gas distribution services in 1,448 municipalities (compared with 1,441 at 31 December 2009). It had million active meters at gas delivery points to end customers (households, businesses, etc.), compared with million at 31 December Distribution network The group s gas distribution network at 31 December 2010 covered 50,307 km, an increase of 334 km, or 0.7%, compared with 31 December The increase is due to the balance of increases and decreases in the network. The increases are primarily due to: Acquisition of the business unit CNEA Gestioni S.r.l, holder of the gas concessions in 7 municipalities in the provinces of Frosinone and Latina; The awarding of a new tendered concession; Construction of new networks, particularly in Calabria; Extensions of networks to meet commitments deriving from concession contracts. Regulation Resolution ARG/gas 159/08 - Consolidated act on the regulation of the quality and tariffs for natural gas metering and distribution services for the period regulatory period (TUDG): approval of part II, Tariff regulation for natural gas distribution and metering services for the regulatory period (RTDG). Temporary measures for With this resolution, published on 17 November 2008 (and subsequent amendments), the Authority defined the tariff criteria for the distribution and metering services for the third regulatory period, from 1 January 2009 to 31 December In summary, the resolution provides for: Recognition of the capital invested for the site by the adjusted historical cost method and of the capital invested with respect to centralised operations (non-industrial buildings and other fixed assets) by the parametric method; Recognition of the operating costs of distribution operations on a parametric basis and differentiated depending on company size and density of the customers connected to the network; Recognition of the operating costs of metering and sales operations using equal parametric components for all businesses; Assessment, at standard cost, starting in 2010, of all investments on the basis of a price list defined by the Authority (Modern Equivalent Asset Value (MEAV) method, based on the concept of new replacement cost); Calculation by the Authority of the reference tariffs for each business, corresponding to the costs recognised for remunerating net invested capital, amortisation and depreciation, and operating costs; Subdivision of the national territory into six tariff areas and calculation by the Authority of the respective mandatory tariffs that distributors must apply to users of their own networks; Introduction of an equalisation mechanism, managed by the Authority through the Cassa Conguaglio Settore Elettrico (Electricity Equalisation fund), to guarantee equivalence between the revenue obtained by each company by application of the mandatory tariff, which, naturally, does not reflect the specific costs of each company, and the costs recognised for such company, using the reference tariff. Resolution ARG/gas 114/10 - Approval of the gas distribution and metering services tariffs for With this resolution, published on 30 July 2010, the Authority approved the reference tariff for At that time the reference tariffs for the sites managed by Italgas were also approved, and Resolution ARG/gas 197/09 provided for a fact-finding supplement on the public contributions received; the Authority found that there were sufficient explanations provided by the Company to justify the discrepancy between the data reported in the questionnaires given to the Authority and the data reported in the list provided by the Ministry of the Economy. Resolution ARG/gas 115/10 - Approval of the gas distribution and metering services tariffs for With this resolution, published on 30 July 2010, the Authority reapproved the reference tariffs for Resolution ARG/gas 195/10 - Recalculation, due to material errors, of the gas distribution and metering services tariffs for With this resolution, published on 9 November 2010, the Authority recalculated the reference tariffs for 2009, correcting several material errors contained in the preceding Resolution ARG/gas 114/10. The new procedure for calculating the tariffs required sending an enormous amount of data and creating a complex system of algorithms in order to take into account the various types represented in the national scope of gas distribution. Subsequent refinements of the data by the distribution companies and the repeated checking of those data by the Authority made it necessary to issue a new measure in response to material errors found in transmitting information or interpretation errors involving questionnaires sent and the information itself. Resolution ARG/gas 235/10 Updating of mandatory tariffs for 2011 for the providing of natural gas distribution and metering services and tariff options for gas distribution and metering service other than natural gas by channelled networks. Start-up of the procedure for re-exercising the power of tariff regulation pursuant to the orders of the Regional Administrative Court of Lombardy, Sect. III, 11 October 2010, Nos. 6912, 6914, 6915 and Provisions on tariff options for gas distribution and metering service other than natural gas by channelled networks for With this resolution, published on 16 December 2010, the Authority approved the mandatory tariffs for 2011 and initiated a procedure to adopt modifications to the regulation in force on the subject of calculating tariffs for providing natural gas distribution and metering services and other gases in order to comply with the orders of the Regional Administrative Court of Lombardy which partially grant the appeals brought by several operators against the Consolidated Act for the regulation of gas distribution and metering tariffs for the period, approved by Resolution ARG/gas 159/08 and subsequent amendments and modifications. The elimination of several tariff regulation concepts voided by the Regional Administrative Court of Lombardy and the resulting implementation orders has made it necessary for the Authority to reexercise the power of tariff regulation, after consultation with the 40

43 Snam Rete Gas Annual Report 2010 / Natural gas distribution entities involved, to fill the void left by this nullification, taking that established by the administrative court into consideration. In order to comply with the Lombardy Regional Administrative Court orders, the Authority therefore started a procedure to assess the required modifications to the tariff regulation in force and, in the interim while the procedure is carried out, it has suspended calculation of the reference tariffs for In addition, final approval of the reference tariffs for 2009 and 2010 has been postponed pending a further measure to be adopted at the appropriate time for calculating the remaining equalisation amounts for 2010 (or for the second half of 2011). Finally, the resolution provides for a one year postponement, starting in 2012, of the introduction of the MEAV method for assessing the standard costs of investments for tariff purposes, pending definition of the pertinent price list by the Authority. National legislative provisions Provisions on competition and quality of basic services in the natural gas distribution sector On 16 December 2010, the Joint Conference approved the two draft decrees of the Ministry of Economic Development relating to: (i) minimum geographical areas for holding calls for tenders for awarding gas distribution concessions ( Ministerial Decree on Areas ) and (ii) tender and proposal-assessment criteria for awarding concessions for gas distribution ( Ministerial Decree on Tender Criteria ). The draft Ministerial Decree on Minimum Geographical Areas provides for: (a) a minimum of 177 geographical areas for holding calls for tenders and awarding concessions for gas distribution; (b) local authorities from each minimum geographical area to award concessions for gas distribution via a single call for tenders; the call for tenders may be extended to two or more adjoining areas subject to agreement by the local authorities of the areas in question; (c) concessions relating to all plants in the same minimum geographical area, including new distribution plants, to expire 12 years after the date the concession was awarded to the successful tenderer for the first plant in the area. From the date the Ministerial Decree on Areas enters into force, concessions for gas distribution for which a call for tenders has not been published or the deadline for submitting tenders has not passed will be awarded exclusively with reference to the aforementioned minimum geographical areas. However, the outgoing operator will be obligated to continue providing the service until the date the new concession begins. Pursuant to the draft Ministerial Decree on Tender Criteria, the contracting entity will prepare the call for tenders and tender regulations, in compliance with the outlines of and information contained in the standard call for tenders and tender regulations. The contracting entity will prepare the area guidelines with minimum development conditions. The minimum development conditions and the measures set out in the area guidelines must allow the operator to maintain financial stability and must be justified by an analysis of costs and benefits to consumers. The concession will be awarded to the most economically advantageous tender, based on the following criteria: (a) financial terms and conditions; (b) safety and quality criteria; and (c) plant development plans. The draft also sets out, among other things, the criteria for determining the amount to be repaid to outgoing contract- and concessionholders, and stipulates that the industrial value of the part of the plant owned by the outgoing operator be equal to its new-for-old value, less the cost of physical deterioration, including fixed assets under construction, as shown in the accounting records: the amount to be repaid to the outgoing operator can therefore be obtained by deducting advances and subsidies granted by local authorities and other public financial backers from the industrial value, and adding any premiums paid to the local concessionary bodies. In the event of a dispute, the call for tenders will allocate to the plant or section of a plant in question the greater of the following values: (a) the estimate of the local concessionary body; (b) the value of the site s net fixed assets, according to the tariff system. 41

44 Snam Rete Gas Annual Report 2010 / Financial review Financial review Income Statement ( million) Change Change % Core business revenue (*) 1,902 2,438 3,475 1, of which construction and upgrade of distribution infrastructures Other revenues and income Total revenue 1,910 2,468 3,508 1, Operating costs (*) (**) (399) (581) (968) (387) of which construction and upgrade of distribution infrastructures (349) (349) EBITDA 1,511 1,887 2, Depreciation, amortisation and impairment losses (489) (613) (678) (65) 10.6 EBIT 1,022 1,274 1, Net financial expense (226) (217) (271) (54) 24.9 Net income from equity investments Profit before taxes 796 1,079 1, Income taxes (266) (347) (532) (185) 53.3 Net profit (***) , (*) From 1 January 2010, items include the effects of applying international accounting standard IFRIC 12, Service Concession Arrangements. Application of this interpretation has had no impact on the group s results, apart from the recognition of the equivalent amount of revenue and costs relating to the construction and upgrading of distribution infrastructure ( 349 million). More information on this interpretation and how it applies to the Snam Rete Gas group can be found in the Basis of presentation and consolidation principles chapter of the Notes to the consolidated financial statements, to which reference is made. ( **) Operating costs include th e captions Purchases, services and other costs and Personnel expense of the income statement included in the consolidated financial statements. (***) Net profit is attributable to Snam Rete Gas. 42

45 Snam Rete Gas Annual Report 2010 / Financial review Introduction Following the acquisition from Eni of Italgas and Stogit, completed on 30 June 2009, the comparative results from 2009 include the impact of consolidating the two companies as of the third quarter of In order to meaningfully compare the results of the two periods, page 48 also shows, in conjunction with the comment on the main items, the 2009 combined consolidated income statement, obtained by including Italgas and Stogit in the scope of consolidation for all of Net profit Net profit obtained i n financial year 2010 was 1,106 million, an increase of 374 million, equivalent to 51.1%, compared to financial year The increase reflects the higher EBIT (up 588 million), due to the contribution from the natural gas distribution and storage businesses that, for the full year, benefited from economic effects connected with the consolidation of Italgas and Stogit, compared to a six-month contribution made in the preceding financial year, and a significant improvement in the performance of the transportation business segment (+21.7%). These factors were partially offset by an increase in income taxes (- 185 million), due mainly to higher pre-tax profits, and an increase in net financial expense (- 54 million), owing to the impact of consolidating Italgas and Stogit and to a higher average debt as a result of financing the acquisition. Analysis of income statement items Total revenue ( million) Change Change % Core business revenue 1,902 2,438 3,475 1, Business segments Transportation 1,882 1,865 1, Regasification (1) (2.8) Storage Distribution 406 1, of which construction and upgrade of distribution infrastructures Consolidation adjustments (17) (30) (77) (47) Other revenues and income Total revenue 1,910 2,468 3,508 1, Core business revenue obtained in 2010 ( 3,475 million) increased 1,037 million, equivalent to 42.5%, compared to financial year 2009, and increased 688 million, equivalent to 28.2%, net of the effects of applying IFRIC 12 ( 349 million) starting on 1 January This increase is basically due to the greater contribution made by the natural gas distribution and storage business segments as a result of economic effects connected with the consolidation of Italgas and Stogit. Transportation business segment reve nue 13 ( 1,929 million) mainly includes payments for natural gas transportation service ( 1,873 million) and chargebacks to subsidiaries of the costs incurred for providing services carried out centrally by the parent company ( 31 million). The new organisational structure of the Snam Rete Gas Group became operational on 1 April 2010; its review process became necessary because of the Italgas and Stogit acquisitions. The reorganisation strengthened the role of the parent company Snam Rete Gas S.p.A. as an operational holding company by centralising services relating to staff activities (personnel management, organisation, planning, administration, finance and control, commercial and regulatory services, general and real estate services, procurement services, logistics and management, etc.) and some strategic activities in order to manage them more synergistically and thus more efficiently. These activities, as well as the chargeback of related costs for services provided by the ultimate parent to the subsidiaries, are governed by service agreements between the parent company and these companies. The 64 million increase in revenue, or 3.4% compared to 2009, is mainly due to: (i) proceeds deriving from the chargeback to subsidiaries for services provided (+ 31 million); (ii) higher transportation revenue (+ 25 million) resulting from higher volumes of natural gas transported (+ 20 million) and the effect of recognition by the Electricity and Gas Authority of the additional expenses incurred for the acquisition of fuel gas in the period 1 October December ( 55 million; + 21 million compared with the contribution of 34 million recorded in the 2009 financial statements as recognition of the additional expenses incurred in the thermal year). (13) Core business revenue by business segment is reported before consolidation adjustments. (14) This payment, recognised by Resolution ARG/gas 218/10 and recorded on an accruals basis as part of fiscal year 2010 s transportation revenue, arises from Resolution ARG/gas 184/09 by which the Authority established the requirement of postponing until subsequent resolutions the decision to determine additional costs for the period from 1 October 2008 to 31 December

46 Snam Rete Gas Annual Report 2010 / Financial review These factors were partly offset by applying the new tariff criteria in force as of 1 January 2010, basically due to payment in kind by users for the natural gas used for providing transportation service 15. Major transportation revenue by user is analysed as follows. ( million) Change Change % Eni 1, (192) (20.6) Enel Trade Other Revenue adjustment and penalties (74) (47) (17) 30 (63.8) Additional fees to cover higher gas purchase costs Interruptibility fee as per Resolution no. 277/07 (34) (42) (23) 19 (45.2) Regional network transportation fee as per Resolution no. 45/07 - Equalisation (8) (10) (2) 8 (80.0) 1,867 1,848 1, Regasification business segment revenue ( 35 million) refers to the payment for LNG regasification service ( 24 million; 21 million in 2009) done at the Panigaglia (SP) LNG terminal and to the chargebacks of expenses relating to natural gas transportation service provided by Snam Rete Gas S.p.A. ( 11 million; 15 million in 2009). Natural gas storage business segment re venue ( 355 million) refers to payment for storage services ( 349 million, 282 and 67 million of which relate to modulation storage and strategic storage, respectively) and to proceeds obtained from the sale of gas no longer required for providing storage services (+ 5 million). Revenue from the natural gas distribution business segment ( 1,233 million) mainly relates to natural gas distribution ( 1,197 million). Excluding revenue deriving from the construction and upgrading of natural gas distribution infrastructures ( 349 million), recorded pursuant to IFRIC 12, revenue totalled 884 million, 848 of which pertains to natural gas distribution service. Other revenue and income ( 33 million) relates mainly to income from real estate investments ( 6 million), gains from tangible and intangible asset sales ( 4 million), income from commercial dealings ( 3 million) and net revenue from the redemption of Energy Efficiency Certificates ( 2 million). Revenue Regulated and non-regulated activities ( million) Change Change % Regulated business revenue 1,887 2,423 3,442 1, Transportation 1,867 1,848 1, Regasification Storage (*) Distribution 407 1, of which construction and upgrade of distribution infrastructures Revenue from non-regulated activities ,910 2,468 3,508 1, (*) From 1 July 2009, when the effects of consolidating Italgas and Stogit were first recognised, revenue is shown net of the modulation service provided for Snam Rete Gas S.p.A. Regulated business revenue ( 3,442 million, net of consolidation adjustments) relates to transportation ( 1,873 million), regasification ( 24 million), storage ( 326 million) and natural gas distribution ( 1,219 million; 870 million net of IFRIC 12 effects). Revenue from non-regulated activities ( 66 million, net of consolidation adjustments) mainly comprises: (i) technical services ( 15 million); (ii) income from the leasing and maintenance of fibre-optic telecommunications cables ( 10 million); (iii) income from property investments ( 6 million); (iv) income from the sale of gas no longer necessary for storage services ( 5 million); (v) gains from the sale of tangible and intangible assets ( 4 million). (15) Up to the end of the second regulatory period on 31 December 2009, the costs incurred for the acquisition of gas needed to operate the compression stations were included in overall operating costs and therefore updated using the price-cap mechanism. As of 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. Applying these criteria entailed, on the one hand, reduced operating costs from lower charges for supplying the gas used to provide service and, on the other, reduced revenue to allocate to cover the operating costs. 44

47 Snam Rete Gas Annual Report 2010 / Financial review Operating costs ( million) Change Change % Business segments Transportation (56) (14.0) Regasification (3) (11.1) Storage Distribution of which construction and upgrade of distribution infrastructures Consolidation adjustments (19) (30) (102) (72) Operating costs ( 968 million) increased by 387 million, or 66.6%, compared to financial year 2009, owing essentially to the associated effects of consolidating Italgas and Stogit, partially absorbed by the reduction in operating costs in view of payment in kind of the gas used in the transportation business. With respect to the natural gas distribution business segment, the 2010 operating costs include expenses involving the construction and upgrading of infrastructures used for providing the service ( 349 million), recorded in view of the application of IFRIC 12 starting 1 January Net of this effect, operating costs amounted to 619 million, up 38 million or 6.5%. Operating costs in the transportation business segment ( 343 million before consolidation adjustments) declined 56 million owing essentially to the payment in kind by transportation service users of natural gas used to provide the service, partially offset by higher expenses in supplying goods and services for the subsidiaries. Operating costs Regulated and non-regulated activities ( million) Change Change % Regulated business costs Controllable fixed costs Variable costs (98) (83.8) Other costs of which construction and upgrade of distribution infrastructures Non-regulated business costs Regulated business operating costs Controllable fixed costs 16 were 465 million, up 113 million from financial year 2009 as a result of the economic effects of the consolidation of Italgas and Stogit. Variable costs of 19 million fell by 98 million, essentially due to the payment in kind of natural gas used for the transportation business. Other costs, at 458 million, mainly consist of the costs of construction and upgrading of distribution infrastructures ( 349 million) and expenses offset in income primarily relating to connection costs ( 46 million). Net of the effects of IFRIC 12, other costs amounted to 109 million, up 11 million from financial year The following table shows the workforce in service at 31 December 2010 (6,104 people) by business segment and professional status. (number) Change Change % Business segments Transportation 2,252 2,254 2, Regasification (17) (19.5) Storage (22) (7.3) Distribution 3,545 3,119 (426) (12.0) 2,345 6,187 6,104 (83) (1.3) Professional status Executives (5) (4.1) Managers Office workers 1,241 3,320 3,243 (77) (2.3) Manual workers 774 2,253 2,237 (16) (0.7) 2,345 6,187 6,104 (83) (1.3) (16) Refer to the Glossary in this report for the definition of controllable fixed costs. 45

48 Snam Rete Gas Annual Report 2010 / Financial review Depreciation, amortisation and impairment Amortisation, depreciation and impairment ( 678 million) increased by 65 million compared with 2009, owing to higher amortisation and depreciation in the distribution ( 83 million) and storage ( 41 million) business segments and impairment losses on several assets involving the completion of methanisation work in southern Italy. These factors were partly offset by the lower depreciation recorded by the transportation segment ( 69 million) due to the change in the useful life of gas pipelines (from 40 to 50 years), offset in part by the decline in the useful life of the reduction plants (from 40 to 20 years), both revised for tariff purposes by the Electricity and Gas Authority. The company, in light of the mechanisms for recognition of tariff components linked to the new depreciation rules, and the service life of the assets, considered it appropriate to restate their useful life in line with the conventional tariff duration. ( million) Change Change % Amortisation and depreciation Business segments Transportation (69) (13.8) Regasification Storage Distribution Impairment losses EBIT ( million) Change Change % Business segments Transportation 1, , Regasification Storage Distribution Elimination of internal profit (*) (3) (3) 1,022 1,274 1, (*) Profit relates to capital gains from the cross-segment transfer of property, plant and equipment. EBIT for 2010 amounted to 1,862 million, an increase of 588 million, or 46.2%, on the previous year. The increase is attributable to: (i) higher EBIT from the natural gas distribution (+ 252 million) and storage (+ 126 million) business segments, which benefited for the whole of 2010 from the economic impact of consolidating Italgas and Stogit, with a combined contribution of 673 million, against a contribution of 295 million recorded for six months in the same period of the previous year; and (ii) the significant improvement in the performance of the transportation business segment (+ 211 million; +21.7%) and LNG regasification business segments (+ 2 million; +40%). The 211 million increase in the EBIT of the transportation business segment is due mainly to: (i) lower operating costs (+ 133 million, net of components offset in revenue 17 ), owing to the payment in kind of natural gas used for provision of the transportation activity, and to the net use of provisions for risks and charges in relation to a provision made in 2009 (+ 23 million); (ii) lower amortisation and depreciation (+ 69 million) connected mainly to the extension of the useful life of pipelines (from 40 to 50 years); and (iii) higher transportation revenue (+ 10 million, net of components offset in costs). ROI was 11.7% (10.0% in 2009) 18. (17) Includes chargebacks for the provision of services to subsidiaries by the parent company Snam Rete Gas S.p.A. (18) The ROI for 2009 is not representative of the performance achieved because, following the acquisition of Italgas and Stogit, the EBIT includes the effects associated with the consolidation of the companies acquired in the second half of that year. 46

49 Snam Rete Gas Annual Report 2010 / Financial review Net financial expense ( million) Change Change % Financial expense related to net financial debt Charges on short- and long-term financial debt Loses (Gains) on derivative contracts (27) Fair-value adjustment Difference in interest accrued in the period (29) Other net financial expense Accretion discount Other net financial (income) expense 2 (2) 3 5 Financial expense capitalised (26) (24) (37) (13) Net financial expense ( 271 million) was up 54 million compared with 2009, owing mainly to the economic impact of consolidating Italgas and Stogit and the higher average debt following the acquisition of Italgas and Stogit. The average cost of borrowing was 2.9%, in line with Financial expense of 37 million was capitalised in 2010 ( 24 million in 2009). Net income from equity investments The table below illustrates net income from equity investments ( 47 million): ( million) Change Change % Equity method valuation effect Capital gains from sale of equity investments 3 (3) (100.0) Other expenses (2) 2 (100.0) Income from equity investments concerns the portion of net profit for the period of equity-accounted investments in the natural gas distribution sector ( 47 million). The increase of 25 million is mainly due to the increased profits of subsidiaries (+ 26 million), relating in particular to the associates Azienda Energia and Servizi Torino S.p.A. (+ 16 million) and Toscana Energia S.p.A. (+ 9 million). Income taxes ( million) Change Change % Current taxes (Prepaid) deferred taxes Deferred taxes (37) (44) (74) (30) 68.2 Prepaid taxes 12 (11) (10) 1 (9.1) (25) (55) (84) (29) 52.7 Tax rate (%) Income taxes ( 532 million) rose by 185 million year-on-year (53.5%), mainly due to higher pre-tax profit. Income taxes were reduced by 8 million as a result of the so-called Tremonti-ter rules, which grant tax breaks to investments in certain categories of machinery and equipment. The tax rate is 32.5%. The difference between the effective tax rate (32.5%) and the theoretical tax rate (33.0%), at 0.5%, is due essentially to the effects of valuation of equity investments using the equity method (-0.8%) and of the application of the so-called Tremonti-ter rules (-0.5%), partially offset by the increased impact of the IRAP rates, applied in certain regions at higher than the normal rate (+0.5%), and of the taxation of dividends received by Group Companies (+0.3%). 47

50 Snam Rete Gas Annual Report 2010 / Financial review Combined consolidated income statement In order to meaningfully compare the results for 2010 and 2009 (the latter of which include the impact of consolidating Italgas and Stogit as of the third quarter), the consolidated data of Snam Rete Gas, GNL Italia, Italgas and Stogit for 2009 were aggregated, including Italgas and Stogit in the scope of consolidation for the whole of 2009; as a result, transactions between Snam Rete Gas and the companies, and between the companies themselves, were eliminated. The following notes therefore refer to changes in the main income statement data of 2010 compared with the combined figures for Combined Consolidated Income Statement Combined ( million) Change Change % Core business revenue (*) 2,438 3,006 3, Core business revenue net of IFRIC 12 2,438 3,006 3, Other revenues and income (11) (25.0) Total revenue 2,468 3,050 3, Operating costs (*) (581) (740) (968) (228) 30.8 Operating costs net of IFRIC 12 (581) (740) (619) 121 (16.4) - of which controllable fixed costs (352) (480) (465) 15 (3.1) EBITDA 1,887 2,310 2, Depreciation, amortisation and impairment losses (613) (719) (678) 41 (5.7) EBIT 1,274 1,591 1, Net financial expense (217) (252) (271) (19) 7.5 Net income from equity investments Profit before taxes 1,079 1,381 1, Income taxes (347) (454) (532) (78) 17.2 Net profit (**) , (*) The items for 2010 include the effects of applying international accounting standard IFRIC 12, Service Concession Arrangements. Applying this interpretation had no effect on the group s results, except for the equal recognition of revenue and costs relating to building and upgrading distribution infrastructures ( 349 million). For more information about the accounting effects caused by applying this interpretation, refer to the chapter Basis of presentation and consolidation principles of the Notes to the consolidated financial statements. (**) Net profit is attributable to Snam Rete Gas. EBIT for 2010 amounted to 1,862 million, an increase of 271 million, or 17%, on the combined figure for the previous year. The improved performance across all business segments was due to: (i) higher core business revenue (+ 120 million, net of IFRIC 12); (ii) lower operating costs (+ 121 million, net of IFRIC 12) as a result of efficiency measures taken, which helped to restrict controllable fixed costs to 465 million, a reduction of 15 million, or 3.1%, on the combined figure for ; (iii) lower depreciation and amortisation (+ 41 million) due to the lower depreciation and amortisation recorded by the transportation business segment (+ 69 million), partially offset by higher depreciation and amortisation in the natural gas distribution and storage business segments (- 28 million overall). These factors were partly offset by a reduction in other revenue and income (- 11 million), owing essentially to lower capital gains from the sale of property, plant and equipment and intangible assets (- 8 million). Below is a breakdown of EBIT by business segment: EBIT Combined ( million) Change Change % Business segments Trasportation , Regasification Storage Distribution Elimination of internal profit (*) (3) (3) 1,274 1,591 1, (*) Profit relates to capital gains from the cross-segment transfer of property, plant and equipment. (19) The reduction was 33 million compared with the combined 2008 controllable fixed costs ( 498 million). 48

51 Snam Rete Gas Annual Report 2010 / Financial review The 271 million increase in EBIT related in particular to the following segments: - Transportation (+ 211 million; +21.7%). The increase was attributable mainly to: (i) lower operating costs (+ 133 million, net of components offset in revenue), owing essentially to the payment in kind of natural gas used for provision of the service and to the net use of provisions for risks and charges in relation to a provision made in 2009 (+ 23 million); (ii) lower amortisation and depreciation (+ 69 million) connected mainly to the extension of the useful life of pipelines (from 40 to 50 years); and (iii) higher transportation revenue (+ 10 million, net of components offset in costs); - Distribution (+ 57 million; +14.3%). This increase was attributable essentially to: (i) higher revenue from the distribution of natural gas (+ 72 million, net of IFRIC 12), owing mainly to applying the graduality mechanism introduced by Resolution no. 79/09 of the Electricity and Gas Authority, higher revenue from the return on investments made in the distribution network, and the meter-reading business, which was transferred to the distribution companies as of 1 July 2009; (ii) higher income from technical services (+ 9 million). These factors were partly offset by higher amortisation, depreciation and impairment losses (- 22 million), owing to increased amortisation and depreciation (- 12 million) and the impairment losses on certain assets (- 10 million). The natural gas storage business segment recorded EBIT of 218 million, broadly in line with the figure for 2009 ( 214 million). Net profit ( 1,106 million) rose by 179 million, or 19.3%, compared with the combined figure for The increase was due essentially to higher EBIT (+ 271 million), which was partly offset by higher income taxes (- 78 million) resulting primarily from higher pre-tax profits and by higher net financial expense (- 19 million) owing mainly to more average debt following the acquisition of Italgas and Stogit. Reclassified consolidated 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 based on how the business management operates, usually split into the three basic functions: investment, operations and financing. Management believes that this format presents useful additional information for investors as it allows identification of the sources of financing (equity and third-party funds) and the application of such funds for fixed and working capital. The reclassified balance sheet format is used by management to calculate the key leverage and profitability (ROI and ROE) ratios. Reclassified Consolidated Balance Sheet (*) ( million) Change Non-current assets 17,077 17, Property, plant and equipment (**) 12,684 13, Compulsory inventories Intangible assets (**) 4,082 4, Equity investments Financial receivables held for operations 2 2 Net payables for investments (397) (549) (152) Net working capital (1,332) (1,331) 1 Provisions for employee benefits (107) (105) 2 Assets held for sale and directly related liabilities NET INVESTED CAPITAL 15,652 16, Shareholders equity (including minority interests) - attributable to Snam Rete Gas 5,702 5, attributable to minority shareholders 1 1 5,703 5, Net financial debt 9,949 10, COVERAGE 15,652 16, (*) Please see paragraph below on the reconciliation of reclassified consolidated balance sheets with the legally-required formats. (**) Includes the reclassification from property, plant and equipment to intangible assets of the net book value of infrastructure used for distribution services of natural gas ( 3,341 million) following the application of IFRIC 12 from 1 January

52 Snam Rete Gas Annual Report 2010 / Financial review Fixed capital ( 17,678 million) rose by 601 million compared with 31 December 2009, due essentially to changes in property, plant and equipment (+ 555 million) and intangible assets (+ 180 million), partially offset by the increase in net payables for investments (- 152 million) deriving mainly from the estimated effects of price adjustments in connection with agreements signed as part of the acquisition of Italgas and Stogit 20. Changes in property, plant and equipment and intangible assets (+ 735 million) are analysed below: Property, plant Intangible Total ( million) and equipment assets Balance at 31 December ,684 4,082 16,766 Investments 1, ,540 Depreciation, amortisation and impairment losses (495) (183) (678) Transfers, eliminations and divestments (9) (13) (22) Other changes (58) (47) (105) Balance at 31 December ,239 4,262 17,501 Investments Business segments ( million) (*) 2010 Transportation 1, Regasification Storage Distribution Elimination of internal profit (**) (3) Investments 1,044 1,254 1,540 (*) Investments made by the natural gas distribution and storage business segments refer to the period between 1 July and 31 December (**) Profit relates to capital gains from the cross-segment transfer of property, plant and equipment. Investments in 2010, totalling 1,540 million (against 1,254 million in 2009), relate to the transportation ( 902 million), regasification ( 3 million), storage ( 252 million) and distribution ( 386 million) business segments 21. Other changes (- 105 million) relate essentially to grants for the period (- 80 million) and the change in surplus pipes purchased for investment purposes and not yet used in production at the plants (- 38 million). These factors were partially offset by the acquisition of the CNEA business unit (+ 9 million). Compulsory inventories Compulsory inventories, at 405 million (same as at 31 December 2009), consist of the minimum quantities of natural gas that the storage companies are obliged to hold pursuant to Presidential Decree no. 22 of 31 January The inventories correspond to approximately 5 billion standard cubic metres of natural gas, and the total quantity is determined annually by the Ministry of Economic Development. Equity investments The heading equity investments ( 319 million) includes the valuation of equity investments using the equity method and refers in particular to the companies Toscana Energia S.p.A. ( 151 million), Azienda Energia e Servizi Torino S.p.A. ( 109 million) and ACAM Gas S.p.A. ( 48 million). (20) For more information, refer to Note 22 to the consolidated financial statements, Guarantees, commitments and risks - Commitments deriving from the acquisition of Italgas and Stogit from Eni. (21) The analysis of the investments made by each business segment is given in the chapter Business segment operating performance of this report. 50

53 Snam Rete Gas Annual Report 2010 / Financial review Net working capital ( million) Change Trade receivables Inventories Tax receivables (3) Other assets (47) Deferred tax liabilities (934) (853) 81 Provisions for risks and charges (*) (576) (629) (53) Trade payables (471) (468) 3 Prepaid income from regulated activities (*) (328) (352) (24) Tax payables (67) (115) (48) Derivatives (78) (74) 4 Other liabilities (193) (174) 19 (1,332) (1,331) 1 (*) In order to make the accounting treatment used consistent with that applied to other regulated activities carried out by the group, payments for balancing and stock replenishment charged off against revenues because they are payable to service users are offset under Prepaid income from regulated activities. Likewise, the corresponding value at 31 December 2009 ( 93 million) was reclassified from Provisions for risks and charges to Prepaid income from regulated activities. For more information about the reasons for the reclassification, refer to Note 17 to the consolidated financial statements, Provisions for risks and charges. Net working capital (- 1,331 million) remained unchanged (from - 1,332 million at 31 December 2009), owing mainly to: (i) higher provisions for risks and charges (- 53 million) 22, related essentially to the distribution (- 19 million) and transportation (- 16 million) business segments and to increased provisions for abandonment (- 14 million), due mainly to revised estimates for the cost of removal and restoration of natural gas storage sites; (ii) higher tax payables (- 48 million), due mainly to the increase in pre-tax profit; (iii) the reduction in other activities (- 47 million), due essentially to the repayment by the Cassa Conguaglio per il Settore Elettrico (Electricity Equalisation Fund) of energy efficiency certificates (- 62 million), which was partially offset by lower VAT payments on account to the ultimate parent, Eni (+ 28 million). These factors were offset by: (i) lower deferred tax liabilities (+ 81 million) owing essentially to the transfer of deferred taxes, relating to amortisation and depreciation carried out purely for tax purposes in previous periods, and to the increase in prepaid taxes; (ii) higher trade receivables (+ 39 million); (iii) an increase in inventories (+ 30 million) attributable mainly to the natural gas used in transportation activities. Assets held for sale and directly related liabilities Assets held for sale and directly related liabilities relate to a r ealestate complex owned by Italgas ( 15 million, net of environmental provisions for charges relating to restoration work on the property) for which negotiations for a sale to Eni are ongoing 23. Statement of comprehensive income ( million) Net profit 732 1,106 Other components of comprehensive income Change in fair value of cash flow hedge derivatives (effective share) (29) 4 Tax effects of the other components of comprehensive income 8 (1) Total other components of comprehensive income, net of tax effect (21) 3 Total comprehensive income 711 1,109. attributable to: - Snam Rete Gas 711 1,109 - Minority shareholders 711 1,109 (22) The analysis of the changes in Provisions for risks and charges is given in Note 17 to the consolidated financial statements. (23) For information about the parties commitments, refer to Note 22 Guarantees, commitments and risks - Commitments deriving from the acquisition of Italgas and Stogit from Eni to the consolidated financial statements. 51

54 Snam Rete Gas Annual Report 2010 / Financial review Shareholders equity ( million) Shareholders equity at 31 December ,703 Increases owing to: - Comprehensive income for Other changes 7 Decreases owing to: - Distribution of balance of 2009 dividend (472) - Distribution of interim 2010 dividend (304) - Other changes (*) (127) (903) Shareholders equity including minority interests at 31 December ,916 attributable to: - Snam Rete Gas Minority shareholders 1 (*) Relates to the estimated effects of price adjustments in connection with agreements signed as part of the acquisition of Italgas and Stogit. For more information, refer to Note 22 to the consolidated financial statements, Guarantees, commitments and risks - Commitments deriving from the acquisition of Italgas and Stogit from Eni. 1,116 5,916 At 31 December 2010, Snam Rete Gas had 194,184,651 treasury shares 24 (compared with 194,886,225 at 31 December 2009), equal to 5.44% of the share capital. Their market value at 31 December 2010 was 724 million 25. Information about the individual equity items and changes therein compared with 31 December 2009 is given in Note 21 to the consolidated financial statements, Shareholders Equity. Connection between the separate net income and net assets of Snam Rete Gas S.p.A. and consolidated net income and net assets ( million) Profit for the period Shareholders equity Financial statements for Snam Rete Gas S.p.A ,068 7,204 Profit for the period of companies included in consolidation scope Difference between book value of equity investments in consolidated companies and shareholders equity reported in financial statements (1,342) (1,282) including net income for the period Consolidation adjustments made for: - Equity-accounted investments (14) 5 - Elimination of internal intra-group profits and other minor adjustments net of tax effects (285) (10) (12) 21 (272) (24) (7) Minority interests 1 1 Consolidated financial statements 732 1,106 5,703 5,916 (24) Information about treasury shares in the portfolio at 31 December 2010 pursuant to Article 40 of Legislative Decree no. 127/91 and Article 2428 of the Italian Civil Code is provided in the chapter Other information - Treasury shares held by the Company and by subsidiaries of this report. (25) Calculated by multiplying the number of treasury shares by the year-end official price of 3.73 per share. 52

55 Snam Rete Gas Annual Report 2010 / Financial review Net financial debt and leverage Leverage measures the level of debt of a company and is calculated as the ratio of net financial debt to net invested capital. It is one of the key indicators of the soundness and efficiency of a company s financial structure. ( million) Change Financial liabilities 9,986 10, Short-term financial liabilities 1,585 1, Current share of long-term financial liabilities 915 1, Long-term financial liabilities 7,486 7,186 (300) Financial receivables and cash and cash equivalents (37) (9) 28 Financial receivables not held for operations (1) (1) Cash and cash equivalents (36) (8) 28 9,949 10, The group s net financial debt totalled 10,341 million at 31 December 2010, an increase of 392 million compared with a year earlier, owing mainly to financial requirements related to: (i) the payment of the dividend balance for 2009 of 0.14 per share, paid from 27 May 2010 (- 472 million), and of the interim dividend for 2010 of 0.09 per share, paid from 21 October 2010 (- 304 million); (ii) net capital expenditure (- 1,393 million). These factors were partially offset by cash flow from operations (+ 1,775 million). Long-term financial liabilities of 7,186 million make up 69% of net financial debt (compared with 75% at 31 December 2009) and have an average duration of slightly over four years (compared with approximately four years at 31 December 2009). The breakdown of debt by type of interest rate at 31 December 2010 is as follows: ( million) % % Change Floating-rate 4, , (2,126) Fixed-rate 5, , ,490 9, , All the financial liabilities are due to Eni 26 and are all in euros. Floating-rate financial liabilities ( 2,144 mill ion) decreased by 2,126 million compared with 31 December 2009, owing to the stipulation of eight interest rate swaps (IRSs) with a duration of around two years, which convert existing floating-rate loans (for a total of 2,185 million) into fixed-rate loans. This was partially offset by an increase in short-term debt. Fixed-rate financial liabilities ( 8,206 million) increased by 2,490 million compared with 31 December This increase was due to the stipulation of the aforementioned eight IRSs ( 2,185 million) and the taking out of three floating-rate loans ( 1,000 million in total, converted into fixed-rate loans by three more IRSs, and was partially offset by the repayment ( 700 million) of a matured loan. On 23 December 2010, an agreement was signed with Eni for a medium-to-long-term loan of 400 million. The loan, which carries a fixed rate of around 2.9%, will be issued on 21 March 2011 and repaid in a single instalment on 20 December It will be used to refinance a 300 million loan due to mature on 20 March At 31 December 2010, Snam Rete Gas had a total of 19 IRSs in place, with a notional value of 6,535 million (compared with 4,050 million at 31 December 2009). Leverage - the ratio of net financial debt to net invested capital - is 63.6% (unchanged from 31 December 2009). There were no breaches of loan agreements at the reporting date. (26) Information about financial debt to the parent company Eni S.p.A. is given in Note 16 to the consolidated financial statements, Long-term financial liabilities and short-term portion of long-term liabilities. 53

56 Snam Rete Gas Annual Report 2010 / Financial review Reclassified consolidated 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 period. 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 Consolidated Statement Of Cash Flows ( million) Net profit ,106 Adjusted by: - Amortisation, depreciation and other non-monetary components Net capital losses on asset sales and eliminations Interest and income taxes Change in working capital due to operating activities 83 (117) 34 Dividends, interest and income taxes collected (paid) (545) (602) (791) Net cash flows from operating activities 1,053 1,164 1,775 Investments (1,097) (1,221) (1,422) Change in consolidation scope and business units (4,478) (137) Divestments Other changes relating to investment activities Free cash flow 32 (4,489) 382 Changes in short- and long-term financial debt 354 1, Equity cash flows (386) 2,995 (774) Net cash flow for the year 0 36 (28) (*) For the reconciliation of the reclassified consolidated statement of cash flows with the legally required format, reference should be made to the paragraph on the reconciliation of the reclassified consolidated financial statements. Change in Net Financial Debt ( million) Free cash flow 32 (4,489) 382 Financial payables and receivables from acquired companies (2,219) Equity cash flows (386) 2,995 (774) Change in net financial debt (354) (3,713) (392) 54

57 Snam Rete Gas Annual Report 2010 / Financial review Reconciliation of the reclassified consolidated financial statements with the legally required formats Reclassified consolidated balance sheet ( million) Reclassified consolidated balance sheet items (Where not expressly stated, the component is taken directly from the legally required format) Reference to notes to consolidated financial statements Partial amount from legally required format Amount from reclassified format Partial amount from legally required format Amount from reclassified format Non-current assets Property, plant and equipment 12,684 13,239 Compulsory inventories Intangible assets 4,082 4,262 Equity investments Financial receivables held for operations (see note 2) 2 2 Net payables for investments, consisting of: (397) (549) - Payables for investments (see note 13) (429) (627) - Receivables for investments/divestments (see note 2) Total non-current assets 17,077 17,678 Net working capital Trade receivables (see note 2) Inventories Tax receivables, consisting of: Current income tax assets 2 - Other current tax assets IRES receivables for national tax consolidation scheme (see note 2) Group VAT credit (see note 2) 1 4 Trade payables (see note 13) (471) (468) Tax payables, consisting of: (67) (115) - Current income tax liabilities (5) (11) - Other current tax liabilities (18) (20) - IRES payables for national tax consolidation scheme (see note 13) (36) (69) - Group VAT payables (see note 13) (8) (15) Deferred tax liabilities (934) (853) Provisions for risks and charges (576) (629) Derivatives (see notes 10, 15, 20) (78) (74) Other assets, consisting of: Other receivables (see note 2) Other current assets (see note 5) Other non-current assets (see note 10) Accruals and deferrals from regulated activities, consisting of: (328) (352) - Accrued income from regulated activities (see notes 5, 10) Prepaid income from regulated activities (see notes 15, 20) (411) (432) Other liabilities, consisting of: (193) (174) - Other payables (see note 13) (162) (143) - Other current liabilities (see note 15) (5) (4) - Other non-current liabilities (see note 20) (26) (27) Total net working capital (1,332) (1,331) Provisions for employee benefits (107) (105) Assets held for sale and directly related liabilities consisting of: Assets held for sale (see note 11) Liabilities directly associated with assets held for sale (see note 11) (11) (10) NET INVESTED CAPITAL 15,652 16,257 Shareholders equity including minority interests 5,703 5,916 Net financial debt Financial liabilities, consisting of: 9,986 10,350 - Long-term financial liabilities 7,486 7,186 - Current share of long-term financial liabilities 915 1,320 - Short-term financial liabilities 1,585 1,844 Financial receivables, cash and cash equivalents, consisting of: (37) (9) - Other financial assets (1) (1) - Cash and cash equivalents (36) (8) Total net financial debt 9,949 10,341 COVERAGE 15,652 16,257 55

58 Snam Rete Gas Annual Report 2010 / Financial review Reclassified consolidated statement of cash flows Items from the reclassified statement of cash flows and reconciliation with the legally required format Partial amount from legally required format Amount from reclassified format Partial amount from legally required format ( million) Amount from reclassified format Net profit 732 1,106 Adjusted by: Amortisation, depreciation and other non-monetary components Amortisation and depreciation Impairment losses 10 - Equity method valuation effect (21) (47) - Change in provisions for employee benefits (1) (1) - Other changes 4 Net capital losses on asset sales and eliminations 6 8 Interest, income taxes and other changes: Interest income (9) (4) - Interest expense Income taxes Changes in working capital due to operating activities: (117) 34 - Inventories 51 (7) - Trade receivables (164) (39) - Trade payables (12) (3) - Change in provisions for risks and charges (*) Other assets and liabilities (*) (22) 65 Dividends, interest and income taxes collected (paid): (602) (791) - Dividends collected 34 - Interest collected Interest paid (204) (258) - Income taxes (paid) received (408) (571) Net cash flows from operating activities 1,164 1,775 Investments (*): (1,221) (1,422) - Property, plant and equipment (1,053) (1,056) - Intangible assets (168) (366) Investments in companies joining the consolidation scope and business units: (4,478) (137) Divestments (*): Property, plant and equipment Intangible assets Equity investments 12 Other changes relating to investment activities: Change in net payables for investments Free cash flow (4,489) 382 Change in financial payables: 1, Taking on long-term financial debt 12,407 1,020 - Repaying of long-term financial debt (10,564) (915) - Increase (decrease) in short-term financial debt (313) 259 Equity cash flows 2,995 (774) Net cash flow for the year 36 (28) (*) As a result of the reclassifications carried out in response to the implementation of international accounting standard IFRIC 12 and the change in the way payments for balancing and stock replenishment are recorded, the related cash flows for 2009 were reclassified respectively from Property, plant and equipment to Intangible assets and from Provisions for risks and charges to Other assets and liabilities. 56

59 Snam Rete Gas Annual Report 2010 / Elements of risk and uncertainty 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 fluctuations in interest rates and the price of natural gas; (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 Fluctu ations 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 interestrate 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 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. Risk of change in the price of natural gas Up to the end of the second regulatory period on 31 December 2009, the costs incurred for the acquisition of gas needed to operate the compression stations were included in overall operating costs and therefore updated using the price-cap mechanism 27. As of 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 provisions and in consideration of the mechanism for allocating gas to shippers, fluctuations in the price of gas volumes to cover fuel gas and network losses no longer represent a risk factor for the Group. Price fluctuation risk remains from excess quantities of unaccounted-for gas withdrawn vis-a-vis the quantities paid for in kind by shippers. 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. Although nearly all of the company s receivables are due from a limited number of customers, with ultimate parent Eni S.p.A representing 49% of trade receivables, there are no risks of credit concentration given their excellent reliability. LIQUIDITY RISK Liquidity risk is the risk that new financial resources may not be available (funding liquidity risk) or the company may be unable to convert assets into cash on the market (asset liquidity risk), meaning that it cannot meet its payment commitments. This may affect profit or loss should the company be obliged to incur extra costs to meet its commitments or, in extreme cases, lead to insolvency and threaten the company s future as a going concern. 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 for the group, minimising the related cost and maintaining a balance between the term and composition of its debt in line with business objectives. (27) On the basis of this mechanism, the relevant income components relating to operating costs and amortisation are updated with the balance sheet data at the start of the period of regulation, while for subsequent years they are updated with inflation and reduced by a productivity coefficient. 57

60 Snam Rete Gas Annual Report 2010 / Elements of risk and uncertainty 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. 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 will not lead to operating and planning difficulties which could affect its business. 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 At 31 December 2010, the Group had a portfolio of more than 1,450 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 will have to issue, in combined form after the Decree on geographical areas comes into effect, calls for tenders for the new gas distribution concessions. As a result of the tender process, Italgas and its subsidiaries/associ- 58

61 Snam Rete Gas Annual Report 2010 / Elements of risk and uncertainty ates 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 balance sheet and income statement, 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, legal doctrine and jurisprudence concerning the interpretation of the gas distribution network regulations contained in the legislative decree have not yet clarified, pending the coming into force of the new sector rules, whether the company that owns the networks is effectively required to transfer such 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 the criteria for quantifying the 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 the non-awarding of 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 its balance sheet and income statement. 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, at the time of the renewal, the concessions are awarded under terms less favourable than the current ones, there may be negative effects on the Group s operations and its balance sheet and income statement. 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 its balance sheet and income statement. 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 situations or they are damaged in any other way by said 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 its balance sheet and income statement. Quantitative information about risks arising from financial instruments as required by IFRS 7 Financial instruments: Notes to the financial statements is provided in Note 22 to the consolidated financial statements, Guarantees, commitments and risks. The elements of risk and uncertainty of Snam Rete Gas S.p.A. are reported in Note 21 to the separate financial statements, Guarantees, commitments and risks. 59

62 Snam Rete Gas Annual Report 2010 / Outlook Outlook Management s priorities are to develop significant new gas infrastructure in Italy in order to improve supply security, flexibility and service quality throughout the gas system, which is necessary to create conditions for developing a gas hub. Gas demand Based on the latest forecasts, domestic gas demand is expected to grow by an average of approximately 2.6% per year for the four years from 2011 to This growth is driven by gas consumption in the thermoelectric sector, which is expected to increase by an annual average of around 5%. Gas consumption is also expected to rise in the residential, services and industrial sectors, though at a slower pace. Investments Snam Rete Gas is going ahead with a significant inve stment plan involving a total of around 6.4 billion (net of expected contributions) in consolidated terms for the years 2011 to The main investment plan guidelines for the company s business areas are as follows: Transportation satisfy requirements linked to medium-long term growth in demand for gas and increase the flexibility and safety of the gas transportation system in Italy; continue to improve the quality of the transportation service. contribute to the development of a European gas hub; Over the period in question the planned investments sh ould allow the company to extend the total length of the transportation network (31,680 km in 2010) by 4% and increase the installed power in the compression stations by around 8% (860 Megawatts in 2010). Regasification Investments in 2011 are expected to be in line with Storage improve the overall safety and flexibility of the system by increasing the storage and delivery point capacity; optimise balancing and promote the liquidity of the gas system in Italy. The projects included in the plan will deliver an increase in storage capacity of about 35% over the period in question (9.2 billion standard cubic metres in 2010) and an increase of around 13% in peak capacity (271 million standard cubic metres in 2010). Distribution selectively manage the portfolio of concessions in order to maximise profitability; continue to improve the level of safety, reliability and quality of the service; continue to encourage the rising number of end users; The planned interventions will allow the company to continue to support the development of the business by increasing the number of customers in 2014 by 8% compared to 2010 (5.9 million customers in 2010). Efficiency The 2010 important cost reduction achievements allow us to confirm our target of approximately 80 million of efficiency savings in 2012, in real terms, on the basis of 2008 s controllable fixed costs and at constant business structure. 60

63 Snam Rete Gas Annual Report 2010 / Other information Other information Treasury shares held by the company and subsidiaries In accordance with the provisions of Article 40, paragraph 2, letter d) of Legislative Decree no. 127/91 and Article 2428, paragraph 3, points 3 and 4 of the Italian Civil Code, the treasury shares held by the company at 31 December 2010 are analysed in the table below: Period Number of shares Average cost ( ) Total cost ( million) Share capital (%) (**) Purchases , ,731, ,006, ,537, Treasury stock allocated/sold to be deducted:. assigned free of charge pursuant to 2005 stock grant plans (39,100). sold pursuant to 2005 stock option plans (69,000). sold pursuant to 2006 stock option plans (1,015,499). sold pursuant to 2007 stock option plans (229,700) Treasury stock held at 31 December 2010 (*) 194,184,651 (*) For a book value of 789 million. (**) The share capital is as at the date of last acquisition in the year. It is also noted that: (i) the subsidiaries of Snam Rete Gas S.p.A do not hold, and have not been authorised by their shareholders to acquire, shares in Snam Rete Gas S.p.A; (ii) Snam Rete Gas S.p.A and its subsidiaries do not hold, and have not been authorised by their shareholders to acquire, shares in their ultimate parent Eni S.p.A. Investments held by the directors and statutory auditors, general managers and key managers. Pursuant to Article 79 of Consob Resolution no of 14 May 1999 and subsequent amendments, the following table sets out the investments in Snam Rete Gas S.p.A. held by its direc- 61

64 Snam Rete Gas Annual Report 2010 / Other information tors, statutory auditors, general managers and other key managers, as well as their spouses who are not legally separated, and children below the age of majority, directly or via subsidiaries, trustees or nominees as per the Shareholder Register, communications received and other information acquired from them. Persons who have held these positions, even for a portion of 2010, are included. The number of shares is given for the directors, statutory auditors and general managers separately and, as a combined figure, for the other key managers. These persons hold the shares. Name and surname Subsidiary/ associate Number of shares held at 31 December 2009 Number of shares purchased Number of shares sold Number of shares held at Board of Directors Alberto Meomartini (a) Snam Rete Gas S.p.A. 4,213 4,213 Carlo Malacarne (b) Snam Rete Gas S.p.A. 123,238 64, ,738 Alessandro Bernini (c) Snam Rete Gas S.p.A. 23,000 23,000 (d) Massimo Mondazzi (a) Snam Rete Gas S.p.A. 1,100 1,100 Board of Statutory Auditors Giulio Gamba (c) Snam Rete Gas S.p.A. 2,101 2,101 Roberto Mazzei (c) Snam Rete Gas S.p.A. 10,000 10,000 (d) Chief Operating Officer Francesco Iovane (e) Snam Rete Gas S.p.A. 95,063 95,063 Other executives with strategic responsibilities (f) Snam Rete Gas S.p.A. 147,366 35, ,366 (g) (a) In office until 27 April (b) Appointed director by the shareholders meeting of 27 April 2006 and as Chief Executive Officer by the board of directors on 8 May Confirmed by the board of directors on 30 April (c) Appointed by the shareholders meeting of 27 April (d) Held entirely by spouse. (e) Appointed as Chief Operating Officer by the board of directors on 8 May (f) Managers who were on the company s management board during the year, excluding directors and the Operations General Manager (six managers). (g) 50,000 shares of which are held by their spouses. The information required under the terms of Article 78 ( Amount of compensation for directors and statutory auditors, general managers and key managers ) of Consob Resolution no of 14 May 1999 (as amended) may be found at Note 29 ( Compensation ) to the financial statement of Snam Rete Gas S.p.A. Incentive plans for managers with Snam Rete Gas shares In order to motivate and ensure the loyalty of managers, encourage them to get involved in implementing business strategies, assuming business risk and increasing value for the shareholders, the company has introduced long-term share-based payments as part of their remuneration. The plans are implemented through the allocation of stock options that either assign shares from new issues or treasury shares bought on the market. Pursuant to Article 2359 of the Italian Civil Code, managers of Snam Rete Gas and its subsidiaries who have the greatest responsibility for results or occupy key positions are eligible for the plans. The stock option plans are described below. Incentive and loyalty plan for the three-year period from 2002 to 2004 In their meeting of 24 April 2002 and in accordance with Article 2443 of the Italian Civil Code, the shareholders authorised the board of directors to increase before 31 July 2004, in one or more instalments, the company s share capital against payment up to a maximum of 2,000,000 (equal to roughly % of the share capital) by issuing a maximum of 2,000,000 ordinary shares with a par value of 1 each and regular rights to dividends, excluding options as per the last paragraph of Article 2441 of the Italian Civil Code and Article 134, paragraphs two and three of Legislative Decree no. 58 of 24 February These shares were offered for subscription to managers of the company and its subsidiaries in the three-year period from 2002 to 2004 as per Article 2359 of the Italian Civil Code. With respect to the plan, the company s board of directors resolved: - on 25 June 2002, to increase the share capital against consideration by a maximum of 608,500 for 2002 by issuing a maximum of 608,500 ordinary shares with a nominal value of 1 to be offered with options to the managers of Snam Rete Gas S.p.A. and its subsidiaries at a price of (the average of the official prices on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. in the month before the date of the resolution); - on 18 June 2003, to increase the share capital against consideration by a maximum of 640,500 for 2003 by issuing a maximum of 640,500 ordinary shares with a nominal value of 1 to be offered with options to the managers of Snam Rete Gas S.p.A. and its subsidiaries at a price of (the average of the official prices on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. in the month before the date of the resolution); 62

65 Snam Rete Gas Annual Report 2010 / Other information - on 28 July 2004, to increase the share capital against consideration by a maximum of 677,000 for 2004 by issuing a maximum of 677,000 ordinary shares with a nominal value of 1 to be offered with options to the managers of Snam Rete Gas S.p.A. and its subsidiaries at a price of 3.53 (the average of the official prices on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. in the month before the date of the resolution). Incentive and loyalty plan for the year 2005 In their meeting of 27 April 2005 the shareholders authorised the repurchase of 800,000 treasury shares as part of the 2005 management incentive and loyalty plan. The transaction was concluded on 28 July On the same date, the board of directors proceeded to assign the rights to the managers identified. A total of 658,000 stock options were assigned, at an exercise price of per share. The options may be exercised three years after assignment ( the vesting period ) over five years for the and 2005 plans. The options are personal, unavailable and non-transferable. Options not exercised by the established expiry date are forfeited and therefore do not give the beneficiary any rights. In the cases of: (i) the mutual termination of the employment of the beneficiary; (ii) loss of control by Snam Rete Gas S.p.A. over the company in which the beneficiary works; (iii) sale to a third party of the company (or business unit) in which the beneficiary works; or (iv) death of the beneficiary, the beneficiary or their heirs maintain the right to exercise the options before 31 December of the year in which the vesting period ends. Should the employee or company unilaterally terminate the employment contract before the three years are up, the options are forfeited. Incentive and loyalty plan for the three year period from 2006 to 2008 In their meeting of 10 November 2005 and in accordance with Article 2357 of the Italian Civil Code, the shareholders authorised the board of directors to repurchase a maximum of 194,737,950 ordinary Snam Rete Gas shares on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A., within 18 months of the date of the resolution, up to a maximum of 800 million 28. On 27 April 2006, the shareholders authorised the board of directors to make available a maximum of 9,000,000 treasury shares (equal to 0.46% of the share capital) for the stock option plans for 2006 to The plan includes assigning three instalments of stock options in 2006, 2007 and Unlike the earlier plans, exercise of the options for the plan is tied to the achievement of performance targets. At the end of each three-year vesting period, the board of directors decides the number of options which can be exercised using a scale of between zero and 100 per cent based on the average Total Shareholders Return (TSR) of the Snam Rete Gas share compared to that of the six main European utilities companies, listed and operating on regulated markets. The options may be exercised three years after their assignment (vesting period) and for a maximum of three years. Options which have not been exercised six years after their grant date are forfeited and do not give the beneficiary any rights. In the cases of: (i) the mutual termination of the employment of the beneficiary; (ii) loss of control by Snam Rete Gas S.p.A. over the company in which the beneficiary works; (iii) sale of the company (or business unit) in which the beneficiary works to a third party; or (iv) death of the beneficiary, the beneficiary or their heirs maintain the right to exercise the option before 31 December of the year in which the vesting period ends in proportion to the period of time between assignment and the occurrence of these events. In the event that the employment contract is terminated unilaterally during the vesting period, the options are forfeited. If this event takes place during the exercise period, the options may be exercised within three months. With respect to the plan, the company s board of directors resolved: - on 26 July 2006, to assign 2,597,500 stock options for 2006 for the purchase of an equal maximum number of Snam Rete Gas treasury shares at an exercise price of per share; - on 24 July 2007, to assign 2,326,500 stock options for 2007 for the purchase of an equal maximum number of Snam Rete Gas treasury shares at an exercise price of per share; - on 29 July 2008, to assign 2,235,000 stock options for 2008 for the purchase of an equal maximum number of Snam Rete Gas treasury shares at an exercise price of per share. The unit price is equal to the average of the official prices on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. in the month preceding the grant date or, if greater, the average cost of the shares in the portfolio on the day before the grant date. On 29 July 2009 the board of directors updated the stock option plan, which was approved by the shareholders on 27 April 2006 and submitted for implementation to the board of directors on the dates 26 July 2006 (Assignment 2006), 24 July 2007 (Assignment 2007) and 29 July 2008 (Assignment 2008). In line with the provisions of the Regulations for implementing the Plan, the change made regards the technical adjustment of the exercise price (equal to 2.905, 3.545, and for the 2006, 2007, and 2008 grants, respectively) and number of options assigned to the recipients of the Plan (336,075, 456,300, and options for the 2006, 2007, and 2008 grants, respectively), whose actual assignation is subject to the achievement of the required performance goals, resulting from the paid share capital increase transaction passed by the shareholders in their extraordinary meeting of 17 March 2009 and concluded on 8 June No new stock option plans were issued during At 31 December 2010, there are a total of 5,949,951 options in circulation, of which 3,407,251 can be exercised. (28) The transaction was completed on 2 May The company repurchased 194,737,950 own shares for a total outlay of 791 million. 63

66 Snam Rete Gas Annual Report 2010 / Other information Transactions with related parties The amounts involved in commercial, financial and other transactions with related parties, a description of the nature of the key transactions, and their effect on the balance sheet, income statement and cash flow statement are given in note 30 to the consolidated financial statements and, with regard to the parent company Snam Rete Gas S.p.A, in note 30 of the annual report. Relationships with the ultimate parent and companies managed and coordinated by it Snam Rete Gas S.p.A. is managed and coordinated by Eni S.p.A. Relationships with Eni S.p.A. and companies managed and coordinated by it are relationships with related parties and are disclosed in note 30 Relationships with related parties of the notes to the consolidated financial statement and the annual report. Performance of subsidiaries For performance information about the sectors in which the company operates wholly or in part through subsidiaries, please refer to the paragraphs Business segment operating performance and Financial Review within this Report. Data protection code (Legislative Decree no 196 of 30 June 2003) As controller for processing personal data for Snam Rete Gas, the Chief Executive Officer states that the Data protection code has been updated pursuant to Legislative Decree no. 196 of 30 June Branch offices As required by Article 2428-quinquies of the Italian Civil Code, it is noted that Snam Rete Gas S.p.A. does not have branch offices. Research and Development Research and development activities carried out by the Snam Rete Gas group are described by business segment in the section Commitment to sustainable development. EU legislation in 2009 European Parliament and Council Directives 2009/72/EC and 2009/73/EC of 13 July 2009 (the Third Energy Package ) introduced new provisions for operators on unbundling electricity transmission systems and natural gas transportation from other activities in the gas sector. Member states are required to adopt these provisions by 3 March The European Union law (Law no. 96/10) which delegates responsibility for adopting the Third Energy Package to the government, in its guidelines for delegation, under Article 17, paragraph 4, letter h, provides for ensuring the effective unbundling of transportation, balancing, distribution and storage services from other activities in the natural gas sector. One of the key elements of the Third Energy Package is the obligation on member states to adopt one of the following models for operating natural gas transportation networks (to ensure that the networks are independent from vertically integrated companies) 29 : - Ownership Unbundling ( OU ), which requires that ownership of TSOs (Transmission System Operators) be separate from vertically integrated companies; - the creation of an Independent System Operator ( ISO ) to operate the network, or a third party whose ownership is separate from the company that owns the asset, which may remain integrated with the production and sale company (the hands and the brains ); - the creation of an Independent Transmission Operator ( ITO ), which is owned by a vertically integrated company but ensures that the network is independent thanks to a special regulatory system. Subsequent events On 3 March 2011 the Council of Ministers approved the draft legislative decree which implements Directive 2009/73/EC. For more information, please refer to the paragraph Adoption of EU Legislation in the next chapter Information on corporate governance and ownership structure. (29) A member state may decide not to select any of the above options (the ITO Plus option), provided it can prove that, as at 3 September 2009, a mechanism (regulatory system) was already in place which ensured greater independence for the transportation system operator from vertically integrated companies than the ITO option (however, the fulfilment of this condition must be verified by the Commission following the certification procedure). 64

67 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure Information on corporate governance and ownership structure Information on Corporate Governance Snam Rete Gas S.p.A. (hereafter also referred to as Snam or the company ) issues shares which are quoted on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. and therefore fulfils all legislative and regulatory obligations related to stock market listing. The overall framework of Snam s corporate governance system is described in the Corporate governance and ownership structure report prepared pursuant to Article 123-bis of Legislative Decree no. 58/1998 (hereafter referred to as the Consolidated Finance Act of TUF ) and approved by the board of directors on 2 March The information reported below, at 31 December 2010 unless otherwise indicated, aims to supply a summary of this report, bearing in mind the minimum content required by the aforesaid law and the recommendations of Borsa Italiana s Code of Corporate Governance, to which Snam Rete Gas S.p.A adheres. The Corporate governance and ownership structure report is published (at the same time as this Director s Report) in the Governance section of the company website: Share Capital and Ownership Structure Share capital and key shareholders The share capital of Snam is composed of registered ordinary shares, which are indivisible and each confer the right to one vote. At 31 December 2010 the capital of Snam totalled 3,570,832,994, represented by 3,570,832,994 ordinary shares each with a par value of 1. Snam shares are quoted on the FTSE MIB index of Borsa Italiana, on the main international indexes (Stoxx Europe, S&P Europe, MSCI Europe), and the two main sustainability indexes, the Dow Jones Sustainability World Index (DJSI World) and the FTSE4Good Index. The board of directors does not currently have authorisations to increase the share capital, pursuant to Article 2443 of the Italian Civil Code. At 31 December 2010 the total number of treasury shares held by the company was 194,184,651, equal to 5.44% of the share capital. The proportion of floating capital was 42.02%. The company does not have any plans to repurchase treasury shares pursuant to Article 2357 et seq. of the Italian Civil Code. 65

68 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure According to the information available and the communications received in accordance with Article 120 of the Consolidated Finance Act and National Commission for Listed Companies and Stock Exchange (Consob) Resolution no /1999 (Consob Issuer Regulation), the shareholders holding more than 2% of Snam s share capital at 31 December 2010 are: Shareholders % of share capital % of share capital Eni S.p.A Snam Pictet Funds (Europe) SA Snam is managed and coordinated by Eni S.p.A and the company is not aware of any agreements among its shareholders, nor have any such agreements been published pursuant to the law. The company has not issued shares which give special controlling rights. The bylaws do not make any restrictions on the transfer of shares or on voting rights. Change Of Control Clause Snam and its subsidiaries (hereafter the Subsidiaries ) 30 are party to significant agreements which may be disclosed without causing significant harm to the company and which would become effective, be modified or lapse in the event of a change of control of Snam by Eni S.p.A. Specifically, these concern: a) agreements for the automatic termination of the contract for short-term loans from Eni S.p.A. (which at 31 December 2010 totalled 1,844 million, including loans from Subsidiaries) and guarantees issued in the interests of Snam and the subsidiaries of Eni S.p.A. or banks against Eni S.p.A. at 31 December 2010, guarantees outstanding totalled 73 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 8,485 million at 31 December 2010); - Interest Rate Swaps (IRS) of 6,535 million. By terminating loan agreements, guarantees and derivatives early, there is the risk that Snam 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 Subsidiaries of Eni S.p.A. for the provision of services and trade union agreements for healthcare and other employee benefits. Should there be a change in control of Snam by Eni S.p.A., other counterparties may need to be found to provide these services and benefits. System and Rules of Corporate Governance Compliance with the Code of Corporate Governance of Borsa Italiana S.p.A. In line with the values enshrined in the Code of Ethics, integrity and transparency are the principles that Snam pursues in formulating an administration and control structure that is suited to its size, complexity and operating structure, in adopting an effective internal control system, and in communicating with shareholders and other stakeholders, particularly by reviewing and updating the information available on its website. Through the decision of the board of directors of 11 December 2006, Snam has confirmed and renewed its compliance with the Code of Corporate Governance for Listed Companies promoted by Borsa Italiana S.p.A, referring to the version published on 14 March 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, people s health and safety, workers rights, equal opportunities, working with the local and national communities in which the company is present, and the interests of all stakeholders. Corporate Governance Structure The corporate governance structure of Snam follows the traditional model, which notwithstanding the tasks to be carried out by shareholders 31 assigns corporate management to the board of directors, supervisory functions to the board of statutory auditors, and auditing of the accounts to the audit firm appointed by the shareholders. The chosen model therefore establishes a clear distinction between the functions of the Chairman and those of the Chief Executive Officer; pursuant to Article 19 of the by-laws, both of them retain representative powers for the company. Please find below a graphic summary of the governance structure of the company: (30) The direct subsidiaries of Snam are: GNL Italia S.p.A., Società Italiana per il Gas S.p.A, - Italgas- Stoccaggi Gas Italia S.p.A-Stogit; and the indirect subsidiaries are: Compagnia Napoletana di Illuminazione e Scaldamento col Gas S.p.A. -Napoletanagas, Rete Gas Roma S.r.l. and Servizi Territori Aree Penisole S.p.A. (31) For further information on the role of the shareholders meeting and the participation of shareholders, please refer to the Corporate Governance section of Snam s website and the document Report on Corporate Governance and Ownership Structure. 66

69 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure Shareholders' Meeting Chairman Salvatore Sardo CEO Carlo Malacarne Directors Alessandro Bernini Davide Croff (2) Roberto Lonzar (1)(2) Massimo Mantovani Elisabetta Oliveri (1)(2) Renato Santini (2) Mario Stella Richter (1)(2) Board of Directors Board of Statutory Auditors Chairman Massimo Gatto (3) Acting Auditors Roberto Mazzei Francesco Schiavone Panni Alternate Auditors Giulio Gamba Luigi RInaldi (3) Secretary of the Board of Directors Marco Reggiani Internal Control Committee Roberto Lonzar - Chairman Renato Santini Mario Stella Richter Compensation Committee Davide Croff - Chairman Alessandro Bernini Elisabetta Oliveri Independent Auditors Reconta Ernst & Young S.p.A. Combined Independent Committee Unbundling Guarantor Marco Reggiani Carlo Malacarne - Chairman Paolo Bacchetta Francesco Iovane Paolo Mosa Gianluigi Polgatti Watch Structure 231 Code of Ethics Guarantor Mario Molteni - Chairman Silvio Bianchi Marco Reggiani Officer in charge of Internal Control Internal Audit Manager Silvio Bianchi Officer in charge of preparing financial reports Antonio Paccioretti General Manager Operations Francesco Iovane (1) Members designated by minority list. (2) Independent Directors (3) Directors designated by minority list 67

70 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure By-laws In their extraordinary meeting of 27 April 2010, the shareholders approved some amendments to the company by-laws for two reasons. Firstly, the amendments are dictated by the need to bring the structure of the by-laws in line with the changes to the legal and regulatory framework in which the company operates. In this regard, it should be noted that during 2009 the company acquired total control of the companies Italgas S.p.A. and Stogit S.p.A, thereby entering the gas distribution and storage markets as well as gas transportation. As a result, Snam can today be seen as the most significant European organisation operating in the regulated business sector, with a presence (partly through its Subsidiaries) in the transportation, distribution, storage, regasification and gas measurement segments. In the light of everything that has been mentioned above, it seemed worthwhile to set out the scope and contents of the company s various activities in a more coherent way within the by-laws, as well as to clearly and rigorously affirm the company s willingness to exercise correct supervision over the relationship between Snam and its Subsidiaries. Secondly, and for separate reasons partly due to the company s greater significance and visibility following the acquisitions of Italgas S.p.A. and Stogit S.p.A. (as well as to guarantee the utmost transparency in its activities), the company decided to implement some legal provisions introduced by Legislative Decree no. 27 of 27 January 2010, Transposition of Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights, in implementation of the authorisation referred to in Article 31 of Law no. 88 of 7 July 2009, published in the Official Journal of the Italian Republic of 5 March Board of directors Under Article 13 of the by-laws, the board of directors has a variable number of members ranging from five to nine, elected by list vote. Only those shareholders 32 who, severally or jointly, represent at least 2 percent of the share capital, or a different percentage established by Consob in its regulation, shall have the right to submit lists. On 26 January 2011, Consob issued Resolution no , which set this percentage as 1%. In their meeting of 27 April 2010, the shareholders decided that there would be nine directors, and appointed the board of directors 33 and the chairman for three years, until the date of the shareholders meeting called to approve the financial statements for financial year There are nine directors on the board: Salvatore Sardo (Chairman), Carlo Malacarne (Chief Executive Officer), Alessandro Bernini, Davide Croff, Roberto Lonzar, Massimo Mantovani, Elisabetta Oliveri, Renato Santini and Mario Stella Richter (Directors). Directors Salvatore Sardo, Carlo Malacarne, Alessandro Bernini, Davide Croff, Massimo Mantovani and Renato Santini were elected from the lists submitted by Eni S.p.A, while Roberto Lonzar, Elisabetta Oliveri and Mario Stella Richter were elected from the list presented by certain minority shareholders. The board of directors is at the centre of the company s corporate governance system. It has the broadest possible powers for the ordinary and extraordinary management of the company is specifically entitled to carry out all actions it deems useful to realise and reach the company objective, with the sole exclusion of actions reserved by law or by company by-laws, for the shareholders meeting. The board of directors in its 30 April 2010 decision appointed Carlo Malacarne as chief executive officer, thereby entrusting him with all the tasks and powers that are not reserved by law, company bylaws, or by decision of the board of directors itself, for the board of directors or the chairman. The board also assigned the following tasks, powers and authorisations to the chairman, Salvatore Sardo. In addition to the powers assigned to him by law and the company by-laws, the chairman: - is the company s legal representative; deals with institutional bodies and authorities, together with and in conjunction with the chief executive officer; - calls and presides over board meetings and sets their agendas together with the chief executive officer. Guides, oversees and coordinates the work of the board, ensuring its proper functioning and adequate disclosure by directors. Verifies the implementation of board decisions; - in consultation with the Internal Control Committee, assesses and contributes to the CEO s suggestions to the board regarding the appointment, dismissal and remuneration of the of Officer in charge of internal control and the Internal Audit Manager; - assesses and contributes to the CEO s suggestions to the board regarding the appointment of general managers, the Officer in charge of preparing financial reports, and members of the Watch Structure, pursuant to Legislative Decree no. 231 of 8 June During the same meeting, Marco Reggiani, the company s General Counsel Legal and Corporate Affairs, was confirmed as the Secretary of the board of directors and on that same date the board introduced a set of rules to regulate his work in this capacity. In order to smooth their arrival at the business, newly-elected directors and auditors undergo a board induction process. The main aspects of regulated businesses in the gas sector are explained to them in relation to Snam, focusing in particular on the legal and regulatory framework, and the company s corporate governance structure. All candidates must also meet the integrity requirements imposed by current laws. The board periodically evaluates the independence and integrity of the directors as well as any grounds for ineligibility or incompatibility. Pursuant to the terms of the company by-laws - which are more favourable than those provided for by law - if there are no more than seven directors on the board at least one must satisfy the independence criteria established for auditors of listed companies; however, with more than seven directors on the board, at least three must satisfy the independence criteria. (32) Each shareholder may present or be involved in the presentation of only one list, and may vote for one list only. (33) For further information on the personal and professional characteristics of the directors elected, please refer to the Corporate Governance section of the website of Snam S.p.A. 68

71 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure If one of the directors does not fulfil or no longer fulfils the established independence or integrity requirements imposed by law, or if there are grounds for ineligibility or incompatibility, the board will dismiss the director and arrange for him to be replaced, or will ask that the grounds of incompatibility be removed within an established period of time, otherwise he must forfeit the post. Directors independence and integrity as well as the inexistence of grounds for ineligibility and incompatibility is assessed following their appointment and at least once a year by the board of directors, based on information provided by the director himself or made available to the company by other means. In its 9 February 2011 meeting, the board of directors noted that no grounds for director incompatibility or ineligibility existed and that the directors met the integrity requirements for supervisory bodies established by Ministry of Justice Decree no. 162 of 30 March In the same meeting held on 9 February 2011, the board of directors noted that the non-executive directors Davide Croff, Roberto Lonzar, Renato Santini, Elisabetta Oliveri and Mario Stella Richter met the independence requirements imposed by current legislation and the Code of Corporate Governance. The board of statutory auditors also verified that the criteria and the assessment procedures adopted by the board of directors were correctly applied. In accordance with the provisions of the Code of Corporate Governance, the board of directors evaluated the size, composition and workings of the board and its committees in 2010, using for this purpose the services of Egon Zehnder International, an outside specialist. In the light of the results of Egon Zehnder International s evaluation of the board of directors and its committees, the board expressed a very positive opinion on the size, composition and workings of the board itself and its committees. Board of statutory auditors In compliance with the provisions of the law and the company by-laws, Snam s board of statutory auditors is composed of three standing members and two alternate members, who are appointed by the shareholders for three-year terms and may be re-elected at the end of their term in office. Like the board of directors and in line with applicable provisions, the by-laws provide for the auditors to be appointed by list vote, except when directors are replaced during their term in office. On 27 April 2010 the shareholders assembly appointed the following auditors 34 for a period of three years or until the date of the shareholders meeting called to approve the 2012 financial statements: Massimo Gatto (Chairman), Roberto Mazzei and Francesco Schiavone Panni (standing members), and Giulio Gamba and Luigi Rinaldi (alternate members). Roberto Mazzei, Francesco Schiavone Panni and Giulio Gamba were elected from the list presented by Eni S.p.A; Massimo Gatto and Luigi Rinaldi were elected from the list presented by a number of minority shareholders. The statutory auditors are chosen from among those that satisfy the requirements of professionalism and integrity set forth by Min- istry of Justice Decree no. 162 of 30 March For the purposes of this decree, areas of the company s business are strictly defined as commercial law, business management and corporate finance. Likewise, the sector pertaining to its business is the engineering and geological sector. Based on the statements provided, the board of statutory auditors has checked that all the members meet the necessary independence requirements set forth by law as well as those pertaining to directors contained in Article 3 of the Code of Corporate Governance. Independent auditors As required by law, the company s financial statements are audited by independent auditors included in the relevant register and appointed by the shareholders based on a documented proposal issued by the board of statutory auditors. On 27 April 2010, the shareholders assembly approved the proposal to revoke the appointment of PricewaterhouseCoopers S.p.A. as auditors based on an objective and sound reason, in an effort to guarantee effective auditing of the company and avoid any misalignment in this role with respect to the ultimate parent company Eni S.p.A. On the same date, the shareholders assembly appointed Reconta Ernst & Young S.p.A. to audit the company accounts for the period. Relationships between Snam and Subsidiaries On 1 April 2010 corporate restructuring was completed following the acquisitions of Italgas and Stogit, thereby leading to the adoption of a new corporate governance structure at Snam. The aim of this was in part to allow Snam to exercise legitimate management and coordination powers typically enjoyed by parent companies. In line with changes to Snam s operational model, and following the acquisition of business units from GNL Italia S.p.A. (procurement and tenders; personnel and services) and Stogit S.p.A. (legal affairs; administration and financial reporting; sales and business development; growth project management; Health Safety and Environment and quality; internal audit; human resources; IT and procurement), and the temporary allocation of staff from Italgas S.p.A., Snam provides these companies with a series of centralised services on the basis of service agreements entered into with each subsidiary. Fees Snam s remuneration system is in line with the recommendations of the Code of Corporate Governance. The system places particular emphasis on variable incentive instruments based on the achievement of performance targets established in relation to Snam Rete Gas s Strategic Plan for sustainable results and creation of shareholder value over the medium and long term. The remuneration system is supplemented by benefits that include goods and services primarily associated with supplementary social security and healthcare. The remuneration of directors is determined by the shareholders. (34) For further information on the personal and professional characteristics of the statutory auditors elected, please refer to the Corporate Governance section of the Snam S.p.A website. 69

72 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure Remuneration of directors with particular powers (e.g., the chief executive officer), or fees for functions carried out within the board committees, is determined by the board of directors on the basis of proposals submitted by the Compensation Committee on consultation with the Board of Statutory Auditors. The basic compensation criteria for the general manager and managers with strategic responsibilities 35 are approved by the board of directors based on suggestions from the Compensation Committee, upon examination of the guidelines provided by the chief executive officer. The remuneration of directors is made up of a fixed annual component established for the entire duration of the appointment. Nonexecutive directors receive additional fees for sitting on board committees. As of 1 June 2010 the chairman s fees are made up of a gross, annual salary including amounts decided upon by the shareholders in their 27 April 2010 meeting, as established by the board of directors in relation to the powers conferred in the 29 April 2010 meeting. The compensation structure for the chief executive officer for the powers assigned to him comprises a fixed component, a variable annual component linked to the achievement of specific company objectives set for the preceding financial year, and a long-term variable component divided into two separate plans, each based on different business performance conditions measured over three years according to both absolute and relative standards compared to a peer group of six of the largest listed European utilities. The compensation structure for the general manager and managers with strategic responsibilities comprises a fixed component, a variable annual component linked to the achievement of specific company objectives set for the preceding financial year, and as a long-term variable component divided into two separate plans, under the same conditions provided for the chief executive officer. In 2010, the compensation structure ( pay mix ) for the chairman, the chief executive officer, the general manager and other managers with strategic responsibilities was as follows: Other executives Chairman CEO Chief Operating Officer with strategic responsibilities Fixed compensation 100% 40% 48% 51% Variable compensation (result-related) 24% 23% 21% Long-term incentives (result-related) (*) 36% 29% 28% Total 100% 100% 100% 100% (*) Maximisation of long-term incentives (discounted) in predicting target results For more detailed information on the compensation structure, please refer to the section entitled Compensation Structure in the Report on Corporate Governance and Ownership Structure for 2010, available on the company s website at: In accordance with Consob provisions, the notes t financial statements for Snam Rete Gas S.p.A. include the following: (i) the amount of compensation paid to members of administration and control bodies, the chief operating officer and executives with strategic responsibilities; (ii) stock options allocated to members of administration and control bodies, the chief operating officer and executives with strategic responsibilities; (iii) long-term incentives allocated to members of the administration body, the chief operating officer and executives with strategic responsibilities; and (iv) and severance pay paid to directors, if any. The equity investments held in Snam Rete Gas by members of administration and control bodies, the chief operating officer and executives with strategic responsibilities are indicated in the section Other information. DECLARATION BY THE MANAGEMENT BODY REGARDING SATISFACTION OF THE REQUIREMENTS PROVIDED FOR IN ARTICLE 37 OF CONSOB REGULATION No /07 At its meeting of 9 February 2011 the board of directors verified, as had already been done during the course of the previous year, that Snam satisfies the requirements listed in Article 37 paragraph 1 of Consob Regulation no /07 and successive amendments and additions thereto for the admission, on an Italian regulated market, of the shares of subsidiaries subject to management and coordination by another company. This declaration was confirmed by the board of statutory auditors. COMMITTEES ESTABLISHED BY THE BOARD OF DIRECTORS For more efficient performance in its duties, the board of directors has established three committees: the Compensation Committee, the Internal Control Committee and the Combined Independent Committee. 1) The Internal Control Committee, consisting of three independent non-executive directors, as defined by the Corporate Governance Code for Listed Companies, makes proposals and consults the Board on the oversight of the Company s general management conduct. In particular, the Committee performs the following functions: - evaluates in collaboration with the Officer in charge of preparing financial reports and the independent auditors, the proper application and consistency of the accounting principles for the purposes of preparing the consolidated financial statements; (35) Managers with strategic responsibilities are those managers who have the power and the responsibility, both directly and indirectly, for the planning, direction and supervision of Snam. Managers with strategic responsibility at Snam, other than directors and statutory auditors, are the general manager and the managers bound to participate in the management committee on a constant basis. Currently, this applies to the Directors of: Corporate and Legal Affairs; Corporate Systems, Human Resources and Services; Business Development and Commercial; and Planning, Administration, Finance and Control. 70

73 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure - at the request of the Chairman or the Chief Executive Officer of the company, expresses opinions on specific aspects of identifying the principal business risks and the designing, implementing and managing of the internal control system; - examines the work plan prepared by the head of Internal auditing, as well as its periodic reports, at least every six months, on the activities carried out; - performs the other duties entrusted to its by the board of directors; in particular, it expresses an opinion on the transparency rules and substantial and procedural correctness of transactions with related parties and transactions in which a director has an interest either on his/her own behalf or that of third parties. At its meeting of 10 June 2010, the board of directors approved the new Regulations of the Internal Control Committee of Snam Rete Gas proposed by the Internal Control Committee. 2) The Compensation Committee, consisting of three non-executive directors, two of whom are independent makes proposals to the board as follows: - proposals relating to the fixed and variable remuneration of the Chairman and the Chief Executive Officer, including any participation in incentive stock option plans; - examining information reported by the Chief Executive Officer, and proposing: incentive stock option plans; criteria for the remuneration of top management; objectives and evaluation of the results of performance plans, in connection with determining the variable remuneration of executive directors and implementing incentive stock option plans. 3) Resolution ARG/com 57/2010 of the Electricity and Gas Authority, modifying and supplementing Resolution no. 11/07 on the functional separation of regulated activities in the natural gas sector, established that, pursuant to Article 9 of said Resolution 11/2007 ( Consolidated Unbundling Regulation or T.I.U. ), natural gas storage, regasification, transportation, dispatch, distribution and metering activities, inter alia, may be under joint control without being subject to the requirements governing functionally separate businesses. By a resolution dated 27 July 2010, the board of directors established the Combined Independent Committee (the Combined Independent Committee ), pursuant to Article 9 of the Consolidated Unbundling Regulation, as the collegial body responsible for the joint management of natural gas transportation, dispatch, distribution, storage and regasification activities. The Combined Independent Committee consists of the persons who, pro tempore, hold the following posts: - Chief Executive Officer of Snam; - Chief Executive Officer of GNL Italia; - Chief Executive Officer of Italgas; - Chief Executive Officer of Stogit; - General Manager of Snam Operations and conferred all powers on the Combined Independent Committee to perform its functions. The Combined Independent Committee adopted its own operating regulations. The Chief Executive Officer of Snam chairs Combined Independent Committee and represents the organisational structure within the Combined Independent Committee responsible for expressing opinions binding on the board of directors in compliance with and for the purposes cited in Article 11.5 letter c) of the Consolidated Unbundling Regulation for all decisions taken by the said body affecting the business managerial and organisational aspects, and to approve the development plan cited in Paragraph 11.1 letter b) point i) of the Consolidated Unbundling Regulation. The Combined Independent Committee appointed the Guarantor, in the person of Snam s General Counsel Legal and Corporate Affairs, responsible for properly managing commercially sensitive information in the context of natural gas transportation, dispatch, distribution, storage and regasification activities. ADOPTION OF EU LEGISLATION At its meeting of 9 February 2011, the board of directors noted that the member states of the European Union are required to adopt the provisions of Directive 2009/73/EC by 3 March the socalled Third Energy Package - which repeals Directive 2003/55/ EC and introduces new provisions for the separation of natural gas transportation network operators from other gas sector activities. The Directive contains provisions that could affect Snam s corporate governance system. It stipulates that member states which have not already implemented ownership separation must adopt one of the following separation models for natural gas transportation activities by 3 March 2012: i) Ownership Unbundling ( OU ), or ownership separation of the transmission system operator from the vertically integrated business, which may hold only a minority share without voting rights in the gas transportation network and while enjoying only property rights; ii) creation of an Independent System Operator ( ISO ) for the operational management of the network, i.e. a third party not owned by the same company that owns the transportation network, which may remain integrated with the production and sale company, or iii) creation of an Independent Transmission Operator ( ITO ), which, while ownership remains in the hands of the vertically integrated company, ensures network independence through a Regulatory Authority system which binds and controls legal and functional separation far more stringently than the system currently in effect. On 3 March 2011 the Council of Ministers approved the draft legislative decree which implements Directive 2009/73/EC 36. To summarise, a larger transportation company is required to comply with the ITO model. On the other hand, as an alternative to the ITO model, smaller transportation companies are to adopt the ISO model with the option to appoint Snam as manager of their transportation system (based on guidelines of the Electricity and Gas Authority). Five years after the decree goes into ef- (36) The draft decree will then be submitted to the appropriate parliamentary committees and the State-Region Conference to obtain the related opinions. Once a favourable opinion has been obtained, any amended text should be returned to the Council of Ministers for final deliberation, and finally, after being signed by the President of the Republic, it will be published in the Official Gazette. Following publication, it will become law. 71

74 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure fect, the Competition Authority ( AGCM ) will verify the effectiveness of the model adopted 37. Once this is done, the Ministry of Economic Development ( MISE ) will assess the adoption of different models taking into account the experience of European countries of the same size and with the same market structure. A Vertically Integrated Company may opt for ownership unbundling at any time. INTERNAL CONTROL SYSTEM Snam has adopted an internal control system conforming to the prescriptions of the Corporate Governance Code for Listed Companies and in line with the current best practices. The purpose of the control system is to (i) ensure the adequacy of the various business processes in terms of effectiveness, efficiency and economy, (ii) ensure reliability and correctness of accounting records and safeguard corporate assets, and (iii) ensure that operations comply with internal and external rules, directives and corporate guidelines aimed at guaranteeing sound and proper management of the business. Responsibility for the internal control system lies with the board of directors, which, with the assistance of the Internal Control Committee, prepares guidelines for the system and periodically verifies that it is adequate and functioning efficiently, thereby ensuring that the principal business risks are identified and managed appropriately. The Chief Executive Officer is responsible for implementing the guidelines prepared by the board of directors by designing, managing and monitoring the internal control system; in accordance with the proposal put forth in this regard by the Corporate Governance Code, on 11 December 2008 the board of directors appointed the Chief Executive Officer as executive director responsible for overseeing the functionality of the internal control system. On 30 April 2010 the Board, complying with the recommendations of the Code of Corporate Governance, also confirmed the appointment of the head of internal auditing for the company as Officer in charge of Internal Control, reporting to the Chief Executive Officer. In order to ensure the necessary independence, the appointment, dismissal and remuneration of the Officer in charge of Internal Control are approved by the board of directors, which also approves the programme and budget for internal auditing activities. The Officer in charge of internal control regularly reports on his/her activities to the Chief Executive Officer and, every six months (unless circumstances require more frequent reports), to the Internal Control Committee and the Board of Statutory Auditors. Applying the control system is the primary responsibility of the management, as control activities form an integral part of the management processes. Management must therefore foster an environment that encourages controls, and must specifically manage line controls, consisting of all the control activities that individual operating units or individual companies perform over their own processes. The Internal Audit Manager is responsible for verifying the adequacy of the internal control system and ensuring that it provides reasonable guarantees that the organisation is able to pursue its objectives economically and efficiently; to this end, it monitors the effectiveness of the controls applied by proposing suggestions and corrective actions to management to resolve any deficiencies identified. The by-laws also provide for the board of directors to appoint the Officer in charge of preparing financial reports, on the proposal of the Chief Executive Officer, by agreement with the Chairman and based on a favourable opinion from the Board of Statutory Auditors. On 29 October 2007 the board of directors, in compliance with the professionalism requirements established by the by-laws, on the proposal of the Chief Executive Officer, by agreement with the Chairman and based on a favourable opinion from the Board of Statutory Auditors, appointed as Manager of Financial Accounting to prepare the corporate accounting documents Dr Antonio Paccioretti, Director of Planning, Administration, Finance and Control of Snam. The board of directors also verified the adequacy of the powers and resources available to the Manager of Financial Accounting for the performance of his duties. The internal control system is subject, over time, to verification and updating in order to ensure that it is always capable of controlling the principal areas of risk of the company s activities, with respect to the characteristics of its operating sectors and its organisational configuration, and in accordance with any new legislative or regulatory provisions. The main innovations implemented in 2010 form part of an evolutionary process aimed at ongoing improvement of the system s effectiveness and efficiency. The most significant innovations include: a) following the acquisition of Italgas and Stogit and completion of the reorganisation process on 1 April 2010, the Company adopted the Organisation Manual on 30 June to describe the organisational model, business management system and functioning of Snam and its subsidiaries by identifying and describing their characteristic processes; b) on 20 December 2010 the Board of Management approved the architectural integration of Snam s Governance System, setting out (i) Policy and Management System Guidelines, documents containing elements of management and coordination by the parent company Eni S.p.A, in compliance with corporate autonomy and the rules in force, (ii) Procedures, and (iii) Operating instructions. PRINCIPAL CHARACTERISTICS OF THE RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM IN THE FINANCIAL REPORTING PROCESS The financial reporting internal control system is the process aimed at providing reasonable certainty regarding the reliability 38 of the financial reporting and the capacity of the process of preparing financial statements to produce financial reports in accordance with generally accepted accounting principles. Snam has adopted a body of rules that define the standards, methodologies, roles and responsibilities for designing, implementing and maintaining the system of internal controls over time on the (37) With respect to any discriminatory behaviour: access to third parties and investments. (38) Reliability (of reporting): reporting which has the characteristics of correctness and conformity with generally accepted accounting principles and satisfies the requirements of applicable laws and regulations. 72

75 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure corporate reporting of Snam and its subsidiaries, and on the evaluation of its efficacy. The body of procedures for the corporate reporting control system was defined in accordance with the provisions of Article 154-bis of the Testo Unico della Finanza (TUF) and takes into account the prescriptions of the U.S. Sarbanes-Oxley Act of 2002 (SOA), which apply to the ultimate parent Eni S.p.A. in its capacity as an issuer listed on the New York Stock Exchange (NYSE) and which have repercussions for Snam as a significant subsidiary. The corporate reporting control model adopted by Snam is based on the COSO Report ( Internal Control Integrated Framework published by the Committee of Sponsoring Organisations of the Treadway Commission). The defined control model applies not only to Snam, but to its subsidiaries, in accordance with international accounting principles, in view of their significance for the purposes of preparing financial reporting. Snam s subsidiaries are adopting the defined control model as a reference for the design and implementation of their own control systems in order to adapt them to their size and the complexity of the activities carried out. The design, implementation and maintenance of the control system are carried out by means of: risk assessment, identification of controls, evaluation of controls and reporting. Controls are subject to evaluation in order to verify the quality of their design over time and their operational effectiveness; to this end, line monitoring has been entrusted to the management responsible for significant processes/activities, and independent monitoring has been entrusted to the Internal Audit Manager. The results of the monitoring activities form the subject of periodic reporting on the status of the control system, which involves all levels of Snam s organisational structure and its significant subsidiaries, from business operation heads and function heads to administrative directors and Chief Executive Officers. Evaluations of all the controls implemented within Snam and its subsidiaries are brought to the attention of the Manager of Financial Accounting, who, on the basis of this information, prepares a half-yearly report on the adequacy and effective application of the control system, which is shared with the Chief Executive Officer. CODE OF ETHICS On 27 June 2008 the board of directors approved the new Code of Ethics, which incorporates the most modern approaches to matters of ethics and sustainability. The Code comprises the Eni Code of Ethics and a specific addendum which sets out the particular characteristics of Snam as a company listed on the stock market and subject to regulation by the Electricity and Gas Authority. The addendum therefore pays particular attention to relations with Snam s shareholders and with the Market, the Electricity and Gas Authority, Clients, and Local and Regional Governments. The functions of Guarantor of the Code of Ethics were assigned to the Watch Structure, to which the following may be submitted: requests for clarification or interpretation of the principles and contents of the Code; suggestions relating to the application of the Code; reports of breaches of the Code, identified directly or indirectly. Snam employees, without distinction or exception, have the duty to comply and ensure compliance with these principles within the scope of their functions and responsibilities. Under no circumstances can any conduct contrary to these principles be justified by the belief that one is acting in the Company s interests. MODEL 231 Legislative Decree no. 231 of 8 June 2001 introduced the rules on the administrative liability of companies under which they can be held liable, and consequently punished, for offences committed or attempted in the interest or for the benefit of the company by persons who are entrusted with the representation, administration or management of the company or of a financially and functionally autonomous subsidiary thereof, as well as by persons who exert management and control on a de facto basis (so-called top management ) or by persons who are subject to the authority of or control by one of the aforesaid persons (so-called persons subject to the management of others ). The Company is not liable if it has adopted and effectively implemented, before the commission of the offences, appropriate organisation, management and control models to prevent such offences and has set up a body responsible for overseeing the functioning of the models and compliance with them. In this regard, Snam and its subsidiaries have implemented the legal provisions by adopting its own organisation, management and control model commensurate with its particular nature, and by appointing for each of them a Watch Structure responsible for monitoring the implementation and effective application of the Model. During the course of 2010 a multifunctional team Team 231 was set up to identify and develop the necessary activities for updating the 231 model of the company and its subsidiaries by adopting the new legislative provisions introduced to respond to offences of fraud involving money, credit cards, revenue stamps, instruments or distinctive signs, computer crime and unlawful processing of data, offences of organised crime, crimes against industry and commerce, copyright crimes and crimes against the administration of justice. Team 231 is supported by PriceWaterhouseCoopers as an expert consultant on matters of administrative liability and compliance. The Watch Structure of Snam consists of the General Counsel Legal and Corporate Affairs, the Head of Internal auditing and an external member acting as Chairman. During the course of 2010, the Watch Structure met on 11 occasions, with the participation of all members. ANTI-CORRUPTION GUIDELINES Snam has long attributed primary importance to the issue of fighting corruption, most recently with the approval, by the board of directors, of the Anti-Corruption Guidelines aimed at enshrining the internal rules on fighting corruption along with the procedures which govern in detail the so called at-risk activities( Ancillary Anti- Corruption Procedures ) within a systematic reference framework, ensuring maximum compliance by Snam and its personnel with the Code of Ethics, Model 231 and national and international anti-corruption laws. In compliance with international best practices, two measures have been taken: an anti-corruption unit has been set up within Snam s Legal and Corporate Affairs Division, whose task is to provide support on this issue to the business units of Snam and its subsidiaries, and a targeted training initiative has been launched in the form of an e-learning programme. 73

76 Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure At its 10 February 2010 meeting, Snam s board of directors adopted the Anti-Corruption Guidelines (embracing the similar policy introduced by ultimate parent Eni). Within this context, it also modified the organisational setup with the constitution of Snam s Anti-Corruption Legal Support Unit, with the aim of adapting the existing procedures where necessary, encouraging subsidiaries to adopt the new rules and personnel to take part in awareness programmes and training on understanding and complying with the Anti-Corruption rules. The purpose of the Guidelines is to protect and promote Snam s reputation by introducing a specific system of rules designed to ensure that the company complies with the best international standards in the fight against corruption. Within the scope of the Ancillary Anti-Corruption Procedures provided for by the Anti-Corruption Guidelines, during the course of 2010 Snam adopted the procedure Brokerage contracts, the procedure Joint venture contracts - prevention of illegal activities, the procedure Management of Legal and Corporate Practices, the procedure Entertainment expenses, the procedure Reports, anonymous or otherwise, received by Snam Rete Gas and its subsidiaries, the procedure Investigation of possible illegal acts performed by Snam employees, the operating instruction Investigation of possible illegal acts performed by suppliers, and AD circular no. 8 Standard contractual clauses relating to the Company s administrative liability due to administrative offences arising from crime. PROCEDURE TRANSACTIONS IN WHICH DIRECTORS OR AUDITORS HAVE AN INTEREST, AND TRANSACTIONS WITH RELATED PARTIES Through Resolution no of 12 March 2010, amended by Resolution no of 23 June 2010, Consob approved the regulations on related-party transactions carried out, directly or through subsidiaries, by listed companies and by public share issuers with persons with potential conflicts of interest, such as major or controlling shareholders, directors, statutory auditors and other executives, and their close family members. The reform of company law (Article 2391-bis of the Italian Civil Code) gave Consob, in its role as the supervisory and regulatory body for the financial markets, the task of establishing general regulatory principles in order to ensure the transparency and substantial and procedural correctness of transactions with related parties. The measure aims to provide better protection to minority shareholders and other stakeholders by combating any abuses which might arise from related-party transactions with a potential conflict of interest. These include, by way of example, mergers, acquisitions, disposals and reserved capital increases. In short, the regulation provides for: a) a stronger role for independent directors in all the decision-making processes of related-party transactions; b) a system of transparency. By a resolution of 30 November 2010 and following a unanimous favourable opinion from the Internal Control Committee, the board of directors approved the procedure Transactions in which directors or auditors have an interest, and transactions with related parties, which is applicable from 1 January 2011, adopted pursuant to Article 2391 bis of the Italian Civil Code and the Consob Regulation Regulation on transactions with related parties, no of 12 March 2010 and successive amendments and additions thereto. HANDLING OF CORPORATE INFORMATION In compliance with the legislative provisions on Market Abuse, on 27 October 2010 the board of directors approved the Procedure for communication to the market of privileged information and documents concerning Snam Rete Gas and the financial instruments issued by it, the Procedure concerning the identification of relevant persons and the communication of transactions carried out by them, including via nominees, in relation to shares issued by Snam or other financial instruments connected with such shares ( Internal Dealing Procedure ) and the procedure Keeping and updating of the register of persons who have access to privileged information within Snam. 39 In particular, the Internal Dealing Procedure identifies (i) the relevant persons, (ii) the transactions subject to a communication requirement, and (iii) the conduct requirements for such communication. RIGHTS OF SHAREHOLDERS In order to actively involve shareholders in the life of the company, Snam has adopted various measures aimed at encouraging them to take part in the decisions falling to the responsibility of the shareholders meetings, facilitating the exercise of their rights. In particular, during the course of 2010 Snam made the necessary changes to the by-laws following the implementation in Italy of Directive 2007/36/ EC concerning the exercise of certain rights of shareholders of listed companies (the so-called Shareholders Rights Directive) 40. By promptly updating its by-laws and taking measures which the legislation leaves to companies choice, Snam aimed to provide its shareholders with additional tools to encourage them to take part in shareholders meetings and exercise their voting rights (e.g. appointment of the Listed Company s Proxy Holder). During 2010, the website 41 was enhanced and now features the Shareholders Guide, including an interactive version, which aims to provide a summary of useful information which will give all shareholders a more active experience in their Snam investment. (39) These procedures, which replace those adopted by the board of directors on 17 March 2006, are published in the Corporate Governance section of the Company s website at: (40) The Directive was implemented by Legislative Decree no. 27 of 27 January (41) The Shareholders Guide is published in the Investor Relations section of the Company s website at: 74

77 Snam Rete Gas Annual Report 2010 / Commitment to sustainable development Commitment to sustainable development The sustainability model Snam Rete Gas regards sustainability as an integral part of its business model. Sustainability is a guiding principle in the formulation of the company s strategic and operating decisions, and a lever to ensure sustainable growth in the long term, while simultaneously ensuring that the value it generates is shared with all its stakeholders. The Company bases the day-to-day conduct of its activities on the principles set out by international bodies and conventions on the protection of human rights, employment and trade union rights, health, safety and environmental rights, repudiation of forced labour, child labour and any form of discrimination, and on conformity with values and principles concerning fairness, transparency and sustainable development. In order to give greater visibility to this commitment, the Company is a signatory to the Global Compact. This international initiative upholds ten universal principles concerning human rights, employment, the environment and the fight against corruption, and brings together governments, businesses, United Nations agencies, labour organisations and civil as- sociations, with the aim of contributing to the creation of a more inclusive and sustainable global economy. Each year, Snam Rete Gas publishes the Sustainability Report, an important strategic control tool which examines the activities carried out from the point of view of economic efficiency and environmental and social protection, and sets out the performance indicators to which the company publicly commits itself and by which it is publicly judged. To emphasise the importance of sustainable development themes, the board of directors plays a central role in formulating the policies, and approves the Sustainability Report at the same time as it approves the annual financial report. The Company s approach to sustainability aims firstly to identify all the actors with whom it interacts, who might influence or be influenced by the organisation s activities, and secondly to understand the interests of each of those parties and the issues that are important to them, in order to involve them with specific action plans. 75

78 Snam Rete Gas Annual Report 2010 / Commitment to sustainable development The sustainability management model of Snam Rete Gas is integrated into all phases of the business process (Planning, Management, Control, Reporting and Communication). During the course of the year, with the issuing of the new Sustainability Activities Procedure, the model was also extended to the companies acquired in 2009 (Stogit and Italgas). The activities envisaged by the model are coordinated by the Sustainability function, and are carried out in liaison with the various functions of Snam Rete Gas S.p.A. and its subsidiaries. The Sustainability objectives are pursued through specific short- and mediumterm projects and initiatives approved by the top management and included in the company s action plans. The actions taken as a result of the identification of specific Areas for Improvement have enabled the name of Snam Rete Gas to be featured repeatedly in the principal ethical indices such as the Dow Jones Sustainability Index World, the FTSE4Good Europe Index, the FTSE4Good Global Index and the ECPI Ethical Index Euro. The Ethical Codes of the various companies of the Group remain the fundamental tools for guiding people s conduct and for responsibly managing relations with stakeholders. People and organisation The initiatives taken to strengthen the new Group born out of the merger between Snam Rete Gas, Italgas, Stogit and GNL Italia have been aimed at improving the overall efficiency of the system, and have required a significant effort to redesign the corporate and organisational structure with a view to simplification and flexibility, making the most of the best practices of the individual companies. The actions begun in 2010 have been focused mainly on protecting and developing the company s know-how to support its business strategies, on increasing its capacity for relationships and teamwork, and on promoting active involvement and participation by its personnel, constantly raising their awareness and sense of responsibility with respect to the corporate objectives. Employment At 31 December 2010, the Snam Rete Gas group had 6,104 employees in service. The analysis by contractual category and by companies included in the consolidation scope is given in the tables below: Contractual categories Change Executives (5) Managers Office workers 1,241 3,320 3,243 (77) Manual workers 774 2,253 2,237 (16) 2,345 6,187 6,104 (83) Company Change Snam Rete Gas S.p.A 2,252 2,254 2, GNL Italia S.p.A (17) Italgas S.p.A 2,965 2,570 (395) Napoletanagas S.p.A (31) Stogit S.p.A (22) 2,345 6,187 6,104 (83) During the course of 2010, the number of personnel in service fell by a total of 83, from 6,187 at 31 December 2009 to 6,104 at 31 December This reduction was the result of the following employment trends: increase of 55 persons due to hirings coming in from the market (including 16 graduates); reduction of 160 persons following termination of employment; increase of 33 persons due to hirings occurring within the scope of acquisition of the SES (Saipem Energy Services) business unit, carried out as part of the project to internalise the maintenance activities of Stogit; reduction of 11 persons as a result of the movements of managerial jobs between the subsidiaries of Italgas and/or between the companies of Eni S.p.A. The movements of personnel between the various companies of the Snam Rete Gas group, as a result of the implementation of the organisational plan for staff activities, involved 484 persons. The number of personnel hired on permanent contracts represents 96% of the total, while 158 persons are on apprenticeships or starter contracts. 52% of personnel are employed in northern Italy, 23% in central Italy, and 25% in the south and Sicily. Personnel with degrees account for 9.7% of the total, and those with diplomas 50.5%; the average age of employees of the Group is 48 years, and the average length of service is around 23 years. Due to the management policies applied, these values are essentially stable. 76

79 Snam Rete Gas Annual Report 2010 / Commitment to sustainable development Distribution of employees by geographical area (number) Distribution of employees by age group (number) 4,000 3,000 3,153 2,000 1,800 1,600 1,400 1,675 1,784 1,200 2,000 1,401 1,550 1, ,000 0 Northern Italy Central Italy Southern Italy and Sicily < between 25 and between 30 and between 35 and 39 between 40 and 44 between 45 and 49 between 50 and 54 between 55 and > 60 Organisation The principal organisational changes implemented during the course of 2010 were as follows: On 1 April 2010, the reorganisation process following the acquisition of Italgas and Stogit was completed. The parent company Snam Rete Gas S.p.A. strengthened its operational holding role by centralising staff activities and certain operating activities, in order to ensure their management in a synergistic and therefore more efficient manner. These activities, as well as the chargeback of the related costs by the parent company to the subsidiaries, are regulated by service agreements between the parent company and the subsidiaries. On 27 July 2010, the Combined Independent Committee was established pursuant to Article 9 of the Unbundling Code (Annex A of Resolution no. 11/2007 of the Electricity and Gas Authority and successive amendments and additions thereto) as the collegial body/committee pursuant to Article 16.1 of the by-laws, responsible for the joint management of activities of transportation, dispatching, distribution, storage and regasification of natural gas; On 1 December 2010, the SES (Saipem Energy Services) business unit was acquired from Stogit. This unit is devoted to coordinating external maintenance companies in order to optimise the structure of the maintenance costs. Involvement and participation initiatives Encouraging participation, which includes listening to people s needs and their requests for improvement, fosters a positive internal climate and increases their level of satisfaction in the performance of their activities. In 2010, a programme of meetings was trialled with the aim of sharing the corporate objectives and conveying to the personnel how the work carried out by each of them can contribute to the achivement of those objectives. As has been the tradition for some years, all Executives and Managers were involved in update sessions with the top management. In October, the Group s new Energies Intranet site went online. This is a collaboration platform where people experience the organisation through channels of communication within and between companies, creating a horizontal circulation of information and areas for sharing and developing knowledge. Knowledge management is an important objective for the Group, particularly from the point of view of integration: the idea of the new Intranet site is to openly share the distinctive technical expertise of each company, each department and each regional base. In addition to the new Intranet site, other channels of communication were used to involve personnel in the principal initiatives in progress. Training Development and consolidation of the system of professional skills, in tune with trends in the environment in which the business operates, are an integral part of the personnel development process. Training is an essential element for enriching the employment opportunities of personnel and for supporting the processes of organisational integration and change management. In 2010 a total of approximately 149,000 hours of training were delivered (equivalent to 24 hours per employee), with 13,750 participants. The proportion of employees involved in training initiatives was more than 84%, attesting to a continuing and broad commitment, which in 2010 supported in particular the integration processes underway. One of the primary initiatives in this regard is the design and implementation, in collaboration with the Milan Polytechnic, of the course The economic and management logics of regulated markets, which in 2010 was attended by all managers and recently appointed graduates, and which in 2011 will involve all Group company executives. 77

80 Snam Rete Gas Annual Report 2010 / Commitment to sustainable development Facilitating the transfer of specialist know-how between similar functional entities of the different companies, numerous initiatives were implemented to support the organisational actions established by the Energies programme. These included the Stogit maintenance internalisation project and the development of a training course for the investment creation area within Snam Rete Gas. In keeping with previous years, commitment to the consolidation and updating of technical and professional skills was reaffirmed, and linked to the development and consolidation of specialist technical know-how. Specific training programmes were implemented on the new waste traceability control system (SISTRI) and anticorruption. With regard to safety, various training courses continued to be offered on the following topics: Working on electrical equipment, Drive Safe, Specific business risks, The role of the Safety Officer, all contributing to the structuring of the safety training system as part of the OHSAS certification process. Initiatives in favour of employees Snam Rete Gas offers its employees and their families social initiatives to better balance their private and working lives and to improve the quality of the working environment, thus promoting wellbeing among personnel. Over the years, a structured system of opportunities has been developed which includes supplementary health insurance and coverage against occupational and non-occupational accidents over and above the statutory insurance coverage or that provided publically. Employees also have access to supplementary pension funds, company loyalty bonuses, preventive health campaigns, and sporting and recreational initiatives. The Well-Being Programme offers the opportunity to engage in physical activities at selected and approved sports centres in the vicinity of the office blocks, at preferential membership rates. Other agreements have also been reached which offer preferential terms for obtaining personal loans and credit cards, buying used cars, hiring cars, comparing product brands or booking a holiday. In September 2010 the Eni nursery school began operations with a capacity of around 140 children up to the age of 6 years. The nursery school is a centre of excellence in terms of both its teaching and its architecture, with a building rated in energy efficiency class A, and offering important support to the families of San Donato Milanese employees. Industrial relations The relationship with the trade unions was characterised by consultation on certain effects of the Group s integration processes. To this end, discussions were held in a climate of constructive dialogue and agreements were reached at both the local and national level according to the nature of the topics considered, as shown below: commencement of the integration strategy, forming the subject of a general memorandum of understanding signed in February; completion of the processes of disposal/acquisition of determined business units in order to implement the group s organisational plan for Staff activities (March); implementation of the Italgas Work Force Management project, aimed at improving operating efficiency (June); reorganisation of the Stogit Plants maintenance activities (May) and consequent acquisition of the SES (Saipem Energy Services) business unit (November); reorganisation of management activities of the Snam Rete Gas network, with the introduction of partenza da casa [leaving home] as the operating procedure for line control activities (December); unification of Performance-Related Pay structures, defining a new single framework to be applied throughout the Group (December). Health, Safety, Environment and Quality Centralisation of staff functions within Snam Rete Gas S.p.A., implemented in 2010 in order to converge staff skills and share them with all the businesses, also served as the inspiration for the corporate organisation in terms of health, safety, environment and quality. The solution adopted distinguishes between the general tasks assigned to Snam Rete Gas S.p.A. and the specific tasks of coordinating and supporting operating units that have been assigned to the individual subsidiaries. This new corporate organisation began 2010 with the challenge of reorganising health, safety, environment and quality activities group-wide, and thus introduced a new way to tackle the various issues while simultaneously guaranteeing service performance and provision without a continuity solution. During the course of the year, a Health, Safety, Environment and Quality Policy was also issued. This was signed by the CEO of Snam Rete Gas, and serves as the reference document for all subsidiaries. Management systems Group companies have been provided with management systems that comply with international standards like OHSAS (occupational health and safety), ISO (environment) and ISO 9001 (quality) all of which help in tackling and managing HSEQ issues. In 2010, Snam Rete Gas worked to maintain all the certifications awarded for the various corporate entities and to increase the number obtained. In particular, in December 2010, Snam Rete Gas S.p.A. was awarded certification for the Occupational Health and Safety Management System (SGSSL), in conformity with OHSAS 18001:2007, from the company DNV Italia on completion of a two-year process, and Stogit updated its Environmental Management System by integrating it with the safety system pursuant to Legislative Decree no. 238/2005 concerning the implementation of Directive 96/82/EC which governs major-accident hazards involving dangerous substances. The table below details the certifications awarded to the various management systems. 78

81 Snam Rete Gas Annual Report 2010 / Commitment to sustainable development COMPANY ACTIVITIES TYPE Snam Rete Gas Company OHSAS Snam Rete Gas - Compression stations - Gas pipeline networks ISO Snam Rete Gas - Dispatching of natural gas - Natural gas metering service, transportation network, and management of the design and construction of metering apparatus ISO 9001 STOGIT Company ISO STOGIT Natural gas metering and accounting service ISO 9001 GNL Italia Regasification plant ISO ITALGAS and Napoletana Gas Company ISO ISO 9001-OHSAS In applying the corporate management systems associated with HSEQ issues, Snam Rete Gas constantly monitors the implementation and effectiveness of the related systems, which includes periodic auditing. In particular, in 2010 approximately 350 inspections were carried out with regard to health, safety, environment and quality. Health and safety Preventing accidents and working in a safe environment are objectives of primary importance for Snam Rete Gas. In 2010, in addition to the activities provided for by Legislative Decree no. 81/08, major initiatives were launched aimed at achieving better performance and results in the health and safety of employees, which included leveraging potential synergies between the various companies. In particular, specific accident prevention campaigns such as Objective Safety and Communicating safety were launched. The many initiatives implemented in connection with the Objective Safety project also include the Safety Trophy and the Zero Accidents Prize, which are specifically aimed at improving management in occupational health and safety and preventing accidents. To this end, we increased accident awareness activities and training initiatives to make each employee more attentive to the safety of his/her work. Staff training and awareness activities focused primarily on workplace risks, accident causes and associated preventive measures. With regard to safety in connection with contracted labour, special attention was paid to Suppliers qualifications and, subsequently, to evaluating suppliers through special inspections performed in the work execution phase. Suppliers also increased their involvement in issues of safety through specific awareness meetings. Initiatives taken over the last few years have yielded positive results both for the Group and for the individual companies, as demonstrated by the trends in the accident indicators shown below. Employees Snam Rete Gas Group - Working accidents - Index of Frequency * Employees Snam Rete Gas Group - Working accidents - Index of Seriousness** (*) number of accidents not sustained on the way to or from work, with incapacity of at least one day, per million hours worked. (**) number of working days lost in relation to accidents not sustained on the way to or from work, with incapacity of at least one day, per thousand hours worked. 79

82 Snam Rete Gas Annual Report 2010 / Commitment to sustainable development During the course of the year, the commitment to protect the health of employees was reaffirmed by focusing on continually monitoring risk factors identified in the corporate processes and implementing suitable prevention and protection measures. Work environment inspections were carried out in order to evaluate adequate and appropriate working and environmental conditions and to identify possible measures for prevention or improvement. A total of 357 environmental inspections were performed in Activities were continued to support specific health protection initiatives, such as cancer prevention and flu vaccination campaigns, bans on smoking in company workplaces, and on the supply of alcohol in company canteens. For personnel exposed to specific risk factors, we put a programme in place to periodically survey health, which includes 3,097 medical examinations carried out by occupational health physicians during the year. Environment Environmental protection is of the utmost importance in all phases of Snam Rete Gas operations, from feasibility studies to the final completion of projects with the aim of optimising technical decisions in an environmentally friendly manner. One of the key environmental aspects of operations is the temporary use of the soil and subsoil during the pipe laying phase. Limiting impact in the area and returning the land to its previous condition after completing pipe laying operations is a strategic goal in the Sustainable Development Policy of Snam Rete Gas. To this end, painstaking environmental cleanup and crop restoration efforts are carried out following the construction of gas pipelines with a particular focus on problems related to biodiversity. During the year, following the laying of new pipelines, environmental cleanup mainly involved regions in the north (Friuli Venezia Giulia, Veneto, Piedmont and Lombardy) and the south (Sicily). To be more specific, cleanup operations were carried out along pipeline sections totalling about 173 km, along with 25 km of reforestation. The goal of replanting and reforestation is not just to restore the forested areas affected by pipeline construction work, but generally to rebuild the landscape on the whole and recover the biological function of planted areas affected by the work, especially in their role as animal habitats with specific biodiversity features. Snam Rete Gas, through its activities, is committed to providing our country with a daily source of energy -- natural gas -- which, owing to its chemical and physical properties and its ability to be used in highly efficient technologies in various sectors (civil, industrial and thermoelectric), is able to provide a significant contribution to reducing atmospheric emissions of greenhouse gases (GHG), particulate matter and sulphur oxides. In addition to using natural gas as the main fuel, Snam Rete Gas attempts to minimise emissions of GHG in its operating activities by employing specific containment programmes such as: the reduction of natural gas emissions (through the recompression of gas in pipelines, the replacement of pneumatic equipment and the replacement of cast-iron pipes in distribution networks); the reduction of power consumption (using specific energy management measures); the use of electricity produced from renewable energy sources (through specific purchase contracts and the installation of photovoltaic panels in building construction). During the year, in order to reduce atmospheric emissions of nitric oxides, the installation of low-emission gas turbines (DLEs) continued in both gas compression stations and storage facilities. In particular, work was completed to transform the turbine (TC2) at the Melizzano gas compression station and turbines (TC2), (TC4) and (TC6) respectively at the Settala, Fiume Trieste and Sergnano storage facilities. With regard to waste management, in 2010 all Group companies joined the SISTRI system (Waste Tracking Control System) introduced by the Ministerial Decree of 17 December The local operating units of all companies were identified which are to join the new system. The introduction of this new regulation required intense training, which will continue into Quality ISO 9001 certification is currently pending for the process to define the transportation capacity of the Snam Rete Gas network. The units in charge of this process use special computer systems in addition to their expertise and codified procedures to define the transportation capacity for all parts of the national and regional network for the subsequent transfer of the network by the business units of Snam Rete Gas to users in accordance with the procedures specified in the Network Code approved by the Electricity and Gas Authority. This project, which was launched in the second half of 2010, calls for obtaining quality certification from an official accredited body by June 2011 in keeping with the capacity definition that Snam Rete Gas will publish for thermal years starting in and beyond, and all procedures related to the processes involved in 2010 have already been issued in accordance with standards dictated by the regulations. Technological innovation and research activities Snam Rete Gas is directly involved in several innovative activities, especially to ensure growing reliability in the management of the transportation of natural gas in Italy. In particular, several innovative technologies (panchromatic and multispectral optical sensors, altimetric laser sensors and hyperspectral scanners) are being developed to monitor the transportation network for external interference and areas of geological instability using aerial surveillance and the digital processing of the signals received. In Europe, Snam Rete Gas is a member of GERG (European Gas Research Group, a group where research and innovation projects can be proposed and shared in synergy with other European entities interested in the same issues with the advantage of sharing costs, experience and results. In 2010 Snam Rete Gas participated in several projects through this group including as project leader. An experiment was concluded to assess the performance of new solutions proposed for the outer coating of buried steel pipelines with an emphasis on comparing them with commonly used products and applying the strictest international testing standards. An assessment was completed of state-of-the-art systems in the European transportation sector to detect natural gas emissions from components of the transportation networks. An experimental study 80

83 Snam Rete Gas Annual Report 2010 / Commitment to sustainable development is about to be completed to assess the ability to weld steel for pipelines using the Friction Stir Welding process, taking into account mechanical performance (with respect to current standards and in comparison to traditional welding processes) and economic implications which could result from this innovative transposition in pipeline applications of this emerging technology in other industrial sectors. An experimental assessment of two systems is underway (acoustical sampling technologies) proposed by the industry for reporting and pinpointing in real time the impact of outside interference on pipelines. Snam Rete Gas is also a member of EPRG (European Pipeline Research Group, whose members are entities which transport gas or manufacture pipelines in Europe. This group manages projects (broken down into three major areas: Design, Material and Corrosion) with an aim to constantly improve the knowledge and management of the integrity of gas pipelines throughout their life cycle (pipe manufacturing, pipeline construction and operation). In particular, an advanced model is being studied to assess the impact on pipe integrity of damage resulting from third party interference with pipelines (for this activity, experience and data are being shared with the PRCI - Pipeline Research Council International). Models are being modified and compared (by validation using experimental data) for predicting the ability of pressurised pipelines subjected to combined external loads to withstand extreme conditions. The correlation between the composition of the mix of natural gas and the effects of its expansion in pipelines of a known durability is being analysed. A recommendation is being prepared to perform non-destructive automated ultrasound controls during the production of pipes. An experimental study is underway concerning the environmental impact on the residual mechanical strength of damaged pipes. Stakeholder relations Stakeholder Engagement The Engagement system at Snam Rete Gas is present at all company levels. The company regularly collaborates with investors, government authorities, institutions and companies with the aim of offering a service which is consistent with local and national needs and growth plans and makes available its expertise to foster the development of activities to ensure ongoing improvements in the reliability of plants and the quality of services offered, while placing a priority on the safety and health of its internal and external workers. In order to understand the characteristics and interests of the various individuals and entities which revolve around the business, at the end of 2010 a stakeholder mapping project was launched in order to take a coordinated approach to identifying categories of individuals whose opinions or decisions, attitudes or actions could objectively foster or hinder the Company s ability to achieve a specific goal based on their level of interest or influence. This survey is considered to be even more necessary now that Italgas and Stogit have become a part of the company s structure. The goal of this project is to identify all the group s Stakeholders and break them down into several relevant categories. In future years, based on the identification of stakeholders and the analysis of their significance, focus groups, surveys and analyses will be developed in order to bring about more specific participatory initiatives consistent with the company s goals. Shareholders and institutional investors Since its listing on the stock market (December 2001), Snam Rete Gas has taken steps to create its corporate identity in an effort to express the goals and spirit of the company s management including financial reporting. Snam Rete Gas is known for the transparency of its relations with investors and the financial community, and provides detailed reports of its goals and results to enable shareholders and the financial market to assess all the ways the Company creates value. Based on assessments expressed by the financial community, Snam Rete Gas is a company with a limited industrial and financial risk profile, operating in a stable and transparent regulated environment, which ensures that results and future cash flows will be properly disclosed. The year 2010 was also characterised by considerable financial communication on the part of the Company s management, which took the form of some thirty road shows in key European, North American and Japanese financial markets with the aim of meeting shareholders and institutional investors. In addition, one-to-one meetings were held with about 160 investors, and about twenty meetings were held with groups of investors. From October 2010, the Outdoor Investor Days event was held, during which there was a meeting between top management and institutional investors, and for the first time with representatives of individual investors. To ensure the broader involvement of the latter group of investors, a meeting was also arranged at the headquarters in San Donato Milanese between the CEO, Chief Operating Officer and representatives of small shareholders. This was followed by a visit to the dispatch centre. This event is consistent with the strategy of placing greater focus on small shareholders so that they are more involved, along with the support of new reporting tools made available on the Company s website. In addition to the new publications introduced in 2009 ( Financial Markets Review and News&Facts ), in 2010 an online Shareholder Guide was published, again targeting mainly individual investors to enable them to actively experience their investment in Snam Rete Gas. The commitment to the issue of sustainability was corroborated by rating agencies which focus on corporate social responsibility resulting in the Company s inclusion in 2010 in leading international ethical indices such as the Dow Jones Sustainability World Index, FTSE4Good, the ECPI Ethical Indices and the Ethibel Investment Register and Sustainability Indexes. In 2010 the Company also participated in several other assessments requested by investment banks, financial intermediaries and international rating agencies to monitor Snam Rete Gas s commitment to social and environmental responsibility. Communities and local areas In keeping with the principles of sustainable growth and its strategic growth plans, Snam Rete Gas arranges social and cultural events. The company is involved in ongoing positive discussions with the local communities where it operates. It cooperates with local and national authorities, participates in the work of several associations and committees and provides its commitment and ex- 81

84 Snam Rete Gas Annual Report 2010 / Commitment to sustainable development pertise to encourage improvements in the area of corporate social responsibility. In 2010 initiatives were implemented through various events involving schools, citizens and environmental associations in several areas where our plants are located. To be more specific, an initiative was launched targeting students in primary and secondary schools called Tutto giù per Terra [Everything Down on the Ground] whose goal was to familiarise students with the group s operations and commitment to sustainability, specifically the virtuous practices of environmental cleanups, which Snam Rete Gas carries out with particular care and dedication. Local representatives of Legambiente also participated in these meetings. They, in turn, described the purposes of the association s activities and its various initiatives in the environmental area. Appropriate communications tools were created to encourage students to get involved and participate. To promote transparency and a dialogue with communities, the Giro in Centrale [Plant Tour] initiative was also broadened by opening several plants to receive visits by citizens, schools and stakeholders in the area. During these guided tours, schools and local residents were able to learn first-hand from technicians about an important industrial entity located in their area. The plants opened to the public were the gas compression stations in Messina and Poggio Renatico (FE) and storage sites in Bordolano (CR) Minerbio (BO) and Sabbioncello (FE). During the year, institutional meetings continued with representatives of local government agencies and local governments with the aim of greater sharing and the participation of local stakeholders in the company s strategic decisions. In this context, we should mention public meetings held with citizens of Cortemaggiore and Besenzone in the province of Piacenza to present and discuss the launch of the Pilot Project that Stogit has planned for the injection and capture of CO 2 at the Cortemaggiore field, and in the area of Porto Venere, the site of the liquefied natural gas regasification plant owned by GNL Italia. Customers and Electricity and Gas Authority Snam Rete Gas has always placed special emphasis on its relationship with customers with the aim of satisfying the diverse needs resulting from the evolving gas market. This is done by monitoring the needs of customers and identifying, and then introducing, tools and procedures which facilitate access to our services. Operating and commercial activities are carried out using increasingly advanced computer systems with applications which can even be migrated to Web systems and enable a high degree of automation in managing various contracts. These systems are implemented from time to time to improve customer communications. In this way, we also comply with Resolutions issued by the Electricity and Gas Authority which regulates our services. The relationship with the Electricity and Gas Authority plays a key role for those operating in the energy business. Over the years, Snam Rete Gas has established a constructive relationship and worked effectively with the Authority by continually maintaining an advisory role and providing substantial information to support changes in the regulatory environment in the natural gas sector. In particular during the consulting phase, it has always made a significant contribution to the preparation of resolutions and provides support in response to all of the Authority s requests for information, including in the form of round table discussions and specific technical meetings. The corporate reorganisation following the acquisition of Italgas and Stogit has made, and will continue to make, this relationship more dynamic. Rather than four separate companies, there is now one large entity, which, due to its size and wealth of knowledge in various sectors, is capable of providing complete, effective and consistent responses to problems which arise with the integration of energy markets in future years. Suppliers The procurement of goods, work and services in the Snam group is carried out by the Supply Chain division using a centralised model for providing services to operating companies. The group has adopted procurement practices based on transparency, impartiality and responsibility in full compliance with free competition, and continues to achieve operating and performance targets over the short and long term. Our activities have always emphasised the respect and protection of human and labour rights, environmental protection and the search for a sustainable development model. It is our wish to share these values with all our counterparties. In this area, we ask suppliers to use Model 231 and comply with the principles of the Code of Ethics of Snam Rete Gas, to adhere to work safety, health and environmental protection regulations and to comply with international standards in the area of labour rights. We have initiated a project to collect and fully analyse assessments on service quality, aspects of health, safety, the environment and quality, and the behaviour of our suppliers. We are finalising the Vendor Rating criteria to expand the percentage of suppliers assessed. If a supplier provides poor service, or if negligence occurs, action is taken in response to the supplier ranging from reporting to the removal of that entity as a supplier. In 2010 the Group s orders included over 1,430 suppliers who were awarded at least one contract with some 1,470 million in total goods and services procured. 82

85 Snam Rete Gas Annual Report 2010 / Glossary Glossary A glossary of financial, commercial and technical terms, as well as units of measurement, is available online at The most common terms are described below. Economic and financial terms Excise duty Indirect tax for immediate payment, applied to the production or consumption of certain industrial goods (including oil products and natural gas). Amortisation and depreciation Process by which the cost of fixed assets is spread over a certain period, usually the useful life of the asset. Non-current assets Balance sheet item which shows long-lasting assets, net of amortisation, depreciation and impairment losses. These are divided into the following categories: Property, plant and equipment, Compulsory inventories, Intangible assets, Equity investments, Financial assets and Other non-current assets. Net working capital Capital which is invested in short-term assets and an indicator of a company s short-term financial position. Calculated using all shortterm, non-financial assets and liabilities. Net invested capital Net investments of an operational nature, being the sum of net working capital and fixed assets. cash flow Liquid assets generated by a company over a certain period of time. Specifically, the difference between current inflows (mainly cash revenue) and current cash outflows (costs in the period that generated cash outflows). Controllable fixed costs Fixed operating costs of regulated activities, being the sum of Total recurring personnel expense and Recurring external operating costs. Operating costs Costs incurred in carrying out a company s core business. These include: purchases, services, energy, consumables, personnel expense and maintenance. Dividend Payment to shareholders, voted for by the shareholders meeting and proposed by the board of directors. Dividend payout Ratio between the dividend and net profit for the period, and equal to the percentage of profits paid out to shareholders in the form of dividends. Net financial debt Indicator of the ability to meet financial obligations. Represented by gross financial debt minus cash and cash equivalents as well as other financial receivables not held for operations. Investments Costs of long-lasting assets where useful life does not expire over one reporting period. Leverage Indicator of financial structure; measures a company s level of debt and is calculated as the percentage ratio of net financial debt to net invested capital. Net financial expense Net cost incurred for using third-party capital. Includes other net expense related to financial operations. Shareholders equity Total resources contributed by shareholders, plus retained profits and minus losses. EBITDA Used by the group in its internal (business plan) and external (to analysts and investors) presentations. Unit of measurement to assess the group s operating performance, as a whole and in the individual business segments, in addition to EBIT. Determined by the difference between revenue and operating costs. Core business revenue Income from selling goods and/or providing services that are integral to the core business, including all recurring economic values linked to a company s typical field of business. Derivatives A financial instrument is called a derivative when its price/yield profile derives from the price/yield parameters of other major instruments known as underlying such as commodities, currencies, interest rates, securities and share indices. EBIT Difference in a given period between sales and services revenues and other revenues and costs. It is therefore the operating result before financial revenues and costs and taxes. Net profit EBIT minus result from financial operations and income taxes. 83

86 Snam Rete Gas Annual Report 2010 / Glossary TRANSPORTATION AND REGASIFICATION Commercial terms Transportation capacity Transportation capacity is the maximum quantity of gas which can be injected into the system (or withdrawn from it) during the course of a gas day, at a specific location, in compliance with the technical and operating restrictions established for each section of pipeline and the maximum supplies of plants located along such pipelines. These capacities are assessed using hydraulic network simulations carried out in appropriate transportation scenarios and in accordance with recognised technical standards. Network code Document governing the rights and obligations of those involved in providing transportation and regasification services. Regulatory period Period of time (usually four years) for which criteria are defined for setting tariffs for transporting and dispatching natural gas and for regasifying liquefied natural gas. For transportation, we are currently in the third regulatory period, which runs from 1 January 2010 to 31 December For regasification, the third regulatory period runs from 1 October 2008 to 30 September Network entry point Each point or a localised group of physical points on the gas transportation network at which gas is delivered to the transporter. REDELIVERY POINT This is the physical network point, or local combination of physical points, at which the Transporter redelivers gas transported to the User, and where such gas is metered. Virtual exchange point (VEP) A virtual point located between the Points of Entry and Points of Exit of the National Transportation Network (RN) where Users and other authorised entities may, on a daily basis, exchange and sell gas injected in the RN. Regasification tariffs Unit prices applied for regasification. These include capacity and commodity tariffs, related to the required regasification capacity and to the volumes of gas actually unloaded from tankers, respectively. Transportation tariffs Unit prices applied for transporting and dispatching natural gas. These include capacity and commodity tariffs, related to the required transportation capacity and to the volumes of gas actually injected into the network, respectively. User The user of the gas system, which, by confirming the capacity granted, acquires transportation capacity for its own use or assignment to others. Technical terms Natural gas Hydrocarbon mixture consisting mainly of methane, and to a lesser degree, ethane, propane and higher hydrocarbons. Natural gas injected in the gas pipeline network must comply with a single quality specification to ensure that the gas in transit is interchangeable. Liquefied natural gas (LNG) Natural gas comprised essentially of methane liquefied by cooling at around -160 C, at atmospheric pressure, to make it suitable for tanker transportation or reservoir storage. In order to be injected into the transportation network, the liquid must be reconverted into a gas at regasification plants and brought to the operating pressure of the pipelines. Natural gas transportation network The aggregate of gas pipelines, line plants, compression stations and infrastructure, which, at the national and regional level, provide the transportation of gas by interconnecting with international transportation networks, production and storage points and redelivery points for the purposes of distribution and use. Regional transportation network This consists of gas pipelines not included in the list in Article 2 of the Ministerial Decree of 22 December 2000, as updated annually, and its main function is to move and distribute gas in demarcated local areas, which are typically regional in scale. National transportation network This consists of the gas pipelines indicated in Article 2 of the Ministerial Decree of 22 December 2000, as updated annually. It is the aggregate of gas pipelines and plants which have been assessed and checked taking into account restrictions imposed by imports, exports, key national production and storage facilities, and is used to transfer significant quantities of gas from these network injection points to major areas of consumption. Several inter-regional gas pipelines as well as smaller pipelines which serve to close network links formed by the above pipelines are also included for the same purpose. The National Transportation Network also includes compression stations and plants connected to the pipelines described above. LNG regasification Industrial process whereby natural gas is converted from a liquid to a gaseous state. 84

87 Snam Rete Gas Annual Report 2010 / Glossary NATURAL GAS STORAGE Commercial terms Thermal year Period of time into which the regulatory period is divided. Starting 1 January 2011, the thermal year will coincide with the calendar year. The last thermal year, which began on 1 April 2009 and ended on 31 December 2010, was extended, for tariff purposes, once by nine months from 1 April 2010 to 31 December Withdrawal phase Period from 1 November to 31 March of the following year. Injection phase Period from 1 April to 31 October of the same year. Regulatory period Period of time (usually four years) for which criteria are defined for setting tariffs for natural gas storage services. We are currently in the third regulatory period, which runs from 1 January 2011 to 31 December Technical terms Modulation storage The goal of modulation storage is to respond to changing hourly, daily and seasonal demands. Mining storage Mining storage is necessary for technical and economic reasons in order to enable optimum cultivation of Italy s natural gas fields. Strategic storage The goal of strategic storage is to provide for a lack of or reduction in supplies from non-eu imports or crises in the gas system. NATURAL GAS DISTRIBUTION Commercial terms Tariff area The tariff area is the area used to determine distribution tariffs and consists of all communities served by the same distribution plant. If several local authorities collectively designate an operator to perform the distribution service, or declare themselves a single tariff area, the tariff area coincides with the group of municipalities served through several distribution plants by one or more operators. Thermal year Period of time into which the regulatory period is divided, currently coinciding with the calendar year. End client Consumer who buys gas for his own use. Network code Document governing the rights and obligations of those involved in providing gas distribution services. Concession Act by which a local authority entrusts to a company the management of a service which falls within the remit of said authority and for which said company assumes the operational risk. Regulatory period Period of time (usually four years) for which criteria are defined for setting tariffs for gas distribution services. We are currently in the third regulatory period, which runs from 1 January 2009 to 31 December Redelivery point This is the point of demarcation between the gas distribution plant and the plant owned or managed by the end customer at which the distribution company redelivers gas transported for supply to the end customer, and at which metering occurs. Gas distribution service Service of transporting natural gas through networks of local pipelines from one or more delivery points to redelivery points, generally at low pressure and in urban areas, for delivery to end clients. Retail Company Company which, by way of a contract giving it access to the networks managed by a distributor, sells the gas. Technical terms Gas distributed Amount of gas delivered to users of the distribution network at the redelivery points. Equalisation Difference between revenues for the period (annual TRL) and those invoiced to retail companies on the basis of volumes distributed. The net position with the Equalisation Fund is established at the end of the thermal year and settled over the course of the year on the basis of advanced payments. TRL (Total Revenue Limit) Total revenues allowed for distribution companies by the regulatory body to cover costs for providing distribution and metering services. 85

88

89 2010 Consolidated financial statements

90 Snam Rete Gas 2010 Consolidated financial statements / Financial statements Balance sheet ( million) Note Total of which with related parties Total of which with related parties ASSETS Current assets Cash and cash equivalents (1) 36 8 Trade and other receivables (2) Inventories (3) Current income tax assets 2 Other current tax assets (4) 5 4 Other current assets (5) ,437 1,468 Non-current assets Property, plant and equipment (6) 12,684 13,239 Compulsory inventories (7) Intangible assets (8) 4,082 4,262 Equity-accounted investments (9) Other financial assets 1 1 Other non-current assets (10) ,507 18,275 Non-current assets held for sale (11) TOTAL ASSETS 18,969 19,768 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Short-term financial liabilities (12) 1,585 1,585 1,844 1,844 Short-term portion of long-term financial liabilities (16) ,320 1,320 Trade and other payables (13) 1, , Current income tax liabilities (14) 5 11 Other current tax liabilities (14) Other current liabilities (*) (15) ,879 4,738 Non-current liabilities Long-term financial liabilities (16) 7,486 7,485 7,186 7,185 Provisions for risks and charges (*) (17) Provisions for employee benefits (18) Deferred tax liabilities (19) Other non-current liabilities (*) (20) ,376 9,104 Liabilities directly associated with assets held for sale (11) TOTAL LIABILITIES 13,266 13,852 SHAREHOLDERS EQUITY (21) Equity attributable to Snam Rete Gas Share capital 3,570 3,570 Reserves 2,395 2,332 Net profit 732 1,106 Treasury shares (792) (789) Interim dividend (203) (304) Total shareholders equity attributable to Snam Rete Gas 5,702 5,915 Capital and reserves attributable to minority interests 1 1 TOTAL SHAREHOLDERS EQUITY 5,703 5,916 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 18,969 19,768 (*) In order to make the accounting treatment used consistent with that applied to other regulated activities carried out by Snam Rete Gas, payments for balancing and stock replenishment charged off against revenues because they are payable to service users are offset under Other liabilities. Likewise, the corresponding value at 31 December 2009 ( 93 million) was reclassified from Provisions for risks and charges to Other liabilities. More information on the reasons for the reclassification can be found in Note 17 Provisions for risks and charges. 88

91 Snam Rete Gas 2010 Consolidated financial statements / Financial statements Income statement ( million) Note Total of which with related parties Total of which with related parties REVENUE (23) Core business revenue 2,438 1,595 3,475 1,994 Other revenues and income Total revenue 2,468 3,508 OPERATING COSTS (24) Purchases, services and other costs (403) (164) (623) (95) Personnel expense (178) (345) Depreciation, amortisation and impairment losses (613) (678) EBIT 1,274 1,862 FINANCIAL INCOME (EXPENSE) (25) Financial income 7 5 Financial expense (158) (142) (174) (151) Derivatives (66) (66) (102) (102) (217) (271) INCOME (EXPENSE) ON EQUITY INVESTMENTS (26) Equity method valuation effect Other income (expense) from equity investments 1 PRE-TAX PROFIT 1,079 1,638 Income taxes (27) (347) (532) Net profit 732 1,106 Attributable to: - Snam Rete Gas 732 1,106 - Minority shareholders Earnings per share - basic ( per share) (28) diluted ( per share) (28) Sta tement of comprehensive income ( million) Note Net profit 732 1,106 Other components of comprehensive income Change in fair value of cash flow hedge derivatives (effective share) (29) 4 Tax effects of the other components of comprehensive income 8 (1) Total other components of comprehensive income, net of tax effect (21) (21) 3 Total comprehensive income for the financial year 711 1,109 Attributable to: - Snam Rete Gas 711 1,109 - Minority shareholders 711 1,109 89

92 Snam Rete Gas 2010 Consolidated financial statements / Financial statements Statement of changes in shareholders equity Equity attributable to Snam Rete Gas ( million) Share capital Consolidation reserve Share premium reserve Legal reserve Shareholders equity at 31 December , (31) (794) (158) 3,573 3,573 Transactions with shareholders: - Increase in share capital 1,614 1,860 (23) 3,451 3,451 - Dividend distribution ( 0.14 per share on top of 2008 interim dividend of 0.09 per share) (405) 158 (247) (247) - Allocation of 2008 residual net profit 125 (125) interim dividend ( 0.06 per share) (203) (203) (203) - Disposal of treasury shares for stock option plans 2 (2) ,614 1,862 (2) 102 (530) 2 (45) 3,003 3,003 Comprehensive income for 2009 (21) Other changes in shareholders equity: - Impact of Italgas and Stogit acquisition (1,586) (1,586) 1 (1,585) - Stock option costs (1,586) 1 (1,585) 1 (1,584) Shareholders equity at 31 December 2009 (Note 21) 3,570 (1,586) 1, (52) (792) (203) 5, ,703 Transactions with shareholders: - Dividend distribution ( 0.14 per share on top of 2009 interim dividend of 0.06 per share) (675) 203 (472) (472) - Allocation of 2009 residual net profit (57) interim dividend ( 0.09 per share) (304) (304) (304) - Disposal of treasury shares for stock option plans 3 (3) (3) 30 (732) 3 (101) (773) (773) Comprehensive income for ,106 1,109 1,109 Other changes in shareholders equity: - Impact of Italgas and Stogit acquisition (127) (127) (127) - Difference between book value of shares sold and exercise price of stock options exercised by executives (1) (1) (1) - Effect of equity-accounted investments (127) 4 (123) (123) Shareholders equity at 31 December 2010 (Note 21) 3,570 (1,713) 1, (49) ,106 (789) (304) 5, ,916 Cash flow hedge reserve Other reserves Retained earnings Net profit Treasury shares Interim dividend Total Capital and reserves attributable to minority interests Total shareholders equity 90

93 Snam Rete Gas 2010 Consolidated financial statements / Financial statements Statement of cash flows ( million) Note Net profit 732 1,106 Adjustments for reconciling profit for the year with cash flows from operating activities: Amortisation and depreciation (24) Impairment losses 10 Equity method valuation effect (26) (21) (47) Net capital losses on asset sales, cancellations and eliminations 6 8 Interest income (9) (4) Interest expense Income taxes (27) Other changes 4 Changes in working capital: - Inventories 51 (7) - Trade receivables (164) (39) - Trade payables (12) (3) - Provisions for risks and charges Other assets and liabilities (15) 65 Working capital cash flows (117) 34 Change in provisions for employee benefits (1) (1) Dividends collected 34 Interest collected 10 4 Interest paid (204) (258) Income taxes paid net of reimbursed tax credits (408) (571) Net cash flows from operating activities 1,164 1,775 - of which with related parties (30) 1,134 1,663 Investments (*): - Property, plant and equipment (1,053) (1,056) - Intangible assets (168) (366) - Change in consolidation scope and business units (4,478) (137) - Change in payables and receivables relating to investments Cash flows from investment activities (5,683) (1,407) Divestments (*): - Property, plant and equipment Intangible assets Equity investments 12 - Change in payables and receivables relating to divestments Cash flows from divestments Net cash flows from investment activities (5,653) (1,393) - of which with related parties (30) (4,596) (220) Taking on long-term financial debt 12,407 1,020 Repaying long-term financial debt (10,564) (915) Increase (decrease) in short-term financial debt (313) 259 1, Net equity capital injections 3,445 2 Dividends paid to Snam Rete Gas shareholders (450) (776) Net cash flows from financing activities 4,525 (410) - of which with related parties (30) 3,209 (66) Net cash flow for the period 36 (28) Cash and cash equivalents at start of period 0 36 Cash and cash equivalents at end of period 36 8 (*) As a result of the reclassifications carried out in response to the implementation of international accounting standard IFRIC 12 (see Changes to accounting criteria ) and of the change in the way payments for balancing and stock replenishment are recorded, the related cash flows for 2009 were reclassified respectively from Property, plant and equipment to Intangible assets and from Provisions for risks and charges to Other assets and liabilities. 91

94 Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles Background information Snam Rete Gas is involved in the transportation, storage and distribution of natural gas and the regasification of liquefied natural gas (LNG). These activities are carried out via its integrated infrastructure in Italy. The parent company Snam Rete Gas S.p.A. is an Italian company listed on the Milan Stock Exchange, with its registered office at Piazza Santa Barbara 7, San Donato Milanese (MI). It is controlled by Eni S.p.A., which holds 52.54% of the share capital. Basis of presentation The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (hereinafter IFRS or international accounting standards ) issued by the International Accounting Standards Board (IASB) and adopted by the European Commission pursuant to Article 6 of EC Regulation no. 1606/2002 of the European Parliament and of the Council of 19 July 2002 and to Article 9 of Legislative Decree no. 38/2005. The consolidated financial statements are prepared using the historical cost method, taking into account value adjustments where necessary, except the items which, according to IFRS, must be measured at fair value, as described in the measurement criteria. The consolidated financial statements include the financial statements of Snam Rete Gas S.p.A. and of the companies over which Snam Rete Gas has the right to exercise direct or indirect control from the date of acquisition until the date when such control is relinquished, determine financial and operational decisions, and obtain the benefits thereof. Subsidiaries excluded from the consolidation scope as they are not significant, companies under joint control, associates and other equity investments are measured as described in Equity investments. Consolidated companies, non-consolidated subsidiaries, companies under joint control, associates and other significant equity investments, reporting for which is covered by Article 126 of Consob Resolution no of 14 May 1999, as subsequently amended, are indicated separately in the annex Significant shareholdings, associates and equity investments of Snam Rete Gas S.p.A. at 31 December 2010, which is an integral part of these notes. The same annex also reports the change in consolidation scope which took place during the year. The financial statements of consolidated companies and the consolidated financial statements are audited by Reconta Ernst & Young S.p.A. The Snam Rete Gas consolidated financial statements as at 31 December 2010 were approved and authorised for publication by the board of directors on 2 March Given their size, amounts in the financial statements and respective notes are expressed in millions of euros. Consolidation principles Equity investments in consolidated companies The assets, liabilities, income and expenses of companies subject to line-by-line consolidation are incorporated fully in the consolidated financial statements; the book value of the equity investments is eliminated against the corresponding portion of shareholders equity. The shareholders equity of these investee companies is determined by attributing to each asset and liability its current value at the date of acquisition of control. If positive, any difference from the acquisition cost is posted to the asset item Goodwill ; if negative, it is posted to the income statement. The shares of equity and profit attributable to minority interests are recorded in the appropriate items of shareholders equity and the income statement. Where total control is not acquired, the share of equity attributable to minority interests is determined based on the share of the current values attributed to assets and liabilities at the date of acquisition of control, net of any goodwill (partial goodwill method). Alternatively, where total control is not acquired, the full amount of goodwill generated by the acquisition is recognised, taking into account the share attributable to minority interests (full goodwill method). In this regard, minority interests are expressed at their total fair value including their attributable share of goodwill. The choice of how to determine goodwill is made based on each individual business combination transaction. Where equity investments are acquired subsequent to the acquisition of control (acquisition of minority interests), any positive difference between the acquisition cost and the corresponding portion of equity acquired is posted to shareholders equity. Similarly, the effects of selling minority interests without losing control are posted to shareholders equity. Business combinations whereby the investing companies are controlled by the same company or companies before and after the transaction, and where such control is not temporary, are classed as transactions under common control. Such transactions are not governed by IFRS 3 or by other IFRS. In the absence of a reference accounting standard, the selection of an accounting standard for such transactions, for which a significant influence on future cash flows cannot be established, is guided by the principle of prudence, which dictates that the principle of continuity be applied to the values of the net assets acquired. The assets are measured at the book values from the financial statements of the companies being acquired predating the transaction or, where available, at the values from the consolidated financial statements of the common parent company. Where the transfer values are higher than such historical values, the surplus is eliminated by reducing the shareholders equity of the acquiring company. All financial statements of consolidated companies close at 31 December. Intragroup transactions Unrealised gains from transactions between consolidated companies are eliminated, as are receivables, payables, income, expenses, guarantees, commitments and risks between consolidated companies. Intragroup losses are not eliminated because they effectively represent impairment of the asset transferred. Measurement criteria The major measurement criteria adopted for preparation of the consolidated financial statements are described below. CURRENT ASSETS Cash and cash equivalents Cash and cash equivalents include cash on hand and immediately available bank deposits as well as cash investments with a term of under three 92

95 Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles months. If denominated in euros, these entries are recorded at nominal value, corresponding to fair value, and if in other currencies, they are recorded at the exchange rate in effect at the end of the period. Trade and other receivables Trade and other receivables are initially measured at fair value, and subsequently at amortised cost1 using the effective interest rate method. If there is objective evidence of impairment indicators, the assets are reduced so as to be equal to the discounted amount of cash flow obtainable in the future. There is objective evidence of impairment when, among other things, there are significant breaches of contract, major financial difficulties or the risk of the counterparty s insolvency. Receivables are reported net of provisions for impairment losses. If, in subsequent periods, the asset s impairment is confirmed, the provision for impairment losses is used to cover charges. If, on the other hand, the reasons for previous impairment losses no longer apply, the value of the assets is restored up to the amount which would have derived from the application of the amortised cost method if the impairment loss had not been carried out. Recording and elimination of financial assets Financial assets are recorded on the balance sheet when the company becomes a party to agreements related to such assets. Financial assets sold are eliminated from balance sheet assets when the right to receive cash flows is transferred together with all risks and benefits associated with ownership. Inventories Inventories, including compulsory inventories recorded under non-current assets in Inventories - Compulsory inventories, are recorded at the lower of purchase or production cost and the net realisation value represented by the amount the company expects to receive from their sale in the normal course of business. The cost configuration used is determined in accordance with the weighted average cost method. The sale and purchase of strategic gas do not involve the effective transfer of risks and benefits associated with ownership, and thus do not result in a change in inventories. Current tax assets (liabilities) Current tax assets (liabilities) are recorded at the amount expected to be recovered (paid) from (to) tax authorities applying current tax rates, or those essentially enacted on the reporting date. Other current and non-current assets Other current assets non-current assets are initially measured at fair value, and subsequently at the amortised cost previously described. NON-CURRENT ASSETS Property, plant and equipment Property, plant and equipment are recognised at cost and recorded at the purchase or production cost including directly allocable ancillary costs needed to make the assets available for use. When a significant period of time is needed to make the asset ready for use, the purchase or production cost includes the financial expense which theoretically would have been saved during the period needed to make the asset ready for use, if the investment had not been made. If there are current obligations to dismantle and remove the assets and restore the sites, the book value includes the estimated (discounted) costs to be incurred at the time the structures are abandoned, recognised as a counter-entry to a specific provision. The accounting treatment for revisions in these cost estimates, the passage of time and the discount rate are indicated in the paragraph Provisions for risks and charges. Property, plant and equipment may not be revalued, even through the application of specific laws. Starting at the time utilisation of the asset begins, or should have begun, property, plant and equipment are regularly depreciated on a straight-line basis over their useful life defined as an estimate of the period the asset will be used by the company. When the tangible asset consists of several major components, each with a different useful life, each component is depreciated separately. The amount to be depreciated is the book value reduced by the projected net sales value at the end of the asset s useful life if this is significant and can be determined reasonably. Land is not depreciated, even if purchased in conjunction with a building; neither are property, plant and equipment held for sale (see paragraph below Noncurrent assets held for sale. Costs for improvements, upgrades and transformations of an incremental nature with respect to the property, plant and equipment are recognised under balance sheet assets. The costs of replacing identifiable components of complex assets are allocated to balance sheet assets and depreciated over their useful life. The remaining book value of the component being replaced is allocated to the income statement. Ordinary maintenance and repair expenses are posted to the income statement in the period when they incurred. When events occur leading to the assumption of an impairment of the property, plant and equipment, their recoverability is tested by comparing the book value with the related recoverable value, which is the fair value adjusted for disposal costs or the usage value, whichever is greater. In the absence of a binding sales agreement, fair value is estimated on the basis of values resulting from an active market, recent transactions or on the basis of the best information available to reflect the amount the company could obtain from the sale of the asset. Value of use is determined by discounting projected cash flows resulting from the use of the asset, and if they are significant and can be reasonably determined, it is adjusted for any disposal costs resulting from its sale at the end of its useful life. Cash flows are determined based on reasonable, documentable assumptions representing the best estimate of future economic conditions which will occur during the remaining useful life of the asset, with a greater emphasis on outside information. Discounting is done at a rate reflecting current market conditions for the time value of money and specific risks of the asset not reflected in the estimated cash flows. The valuation is done for single assets, or for the smallest identifiable aggregate of assets which generates independent incoming cash flow (1) According to the amortised cost method, the book value is adjusted to account for repayments of principal, any impairment losses and the amortisation of the difference between the repayment amount and initial recorded amount. Amortisation is carried out using the effective internal interest rate which represents the rate which would make the present value of projected cash flows and the amount recorded initially equal at the time of the initial recording. 93

96 Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles resulting from ongoing use (so-called cash-generating units). If the reasons for impairment losses carried out no longer apply, the assets are revalued and the adjustment is posted to the income statement as a revaluation (recovery of value). The revaluation is applied to the lower of the recoverable value and book value before any impairment losses previously carried out, and reduced by depreciation provisions which would have been allocated if an impairment loss had not been recorded for the asset. Compulsory inventories are included under non-current assets in the item Inventories - Compulsory inventories. Leasing Assets under finance leases, or under agreements which may not take the specific form of a finance lease, but call for the essential transfer of the benefits and risks of ownership, are recorded at the lower of fair value less fees payable by the lessee or the present value of minimum lease payments, under property, plant and equipment as a counter-entry to the financial debt to the lessor. Assets are depreciated using the criteria and rates used for property, plant and equipment unless the lease term is less than the useful life represented by such rates, and there is no reasonable certainty of the transfer of ownership of the leased asset upon the natural maturity of the agreement. In this case, the depreciation period will be the term of the lease. Intangible assets Intangible assets are those assets without identifiable physical form which are controlled by the company and capable of producing future economic benefits, as well as goodwill when purchased for consideration. The ability to identify these assets rests in the ability to distinguish intangible assets purchased from goodwill. Normally this requirement is satisfied when: (i) the intangible assets are related to a legal or contractual right, or (ii) the asset is separable, i.e. it can be sold, transferred, leased or exchanged independently, or as an integral part of other assets. The company s control consists of the power to utilise future economic benefits deriving from the asset and the ability to limit their access to others. Intangible assets are recorded at cost, which is determined using the criteria indicated for property, plant and equipment. They may not be revalued, even through the application of specific laws. Intangible assets with a finite useful life are regularly amortised over their useful life, meaning the estimate of the period during which the assets will be used by the company. The recoverability of their book value is tested by using the criteria indicated under the paragraph Property, plant and equipment. Goodwill and other intangible assets with an indefinite useful life are not amortised. The recoverability of their book value is tested at least annually, and in any case when events occur leading to an assumption of impairment. Goodwill is tested at the level of the smallest aggregate, on the basis of which the company s management directly or indirectly assesses the return on investments including goodwill. When the book value of the cash-generating unit including its related goodwill is greater than the recoverable value, the difference is subject to an impairment loss which is applied first to goodwill up to its total amount, and any excess of the impairment loss over goodwill is allocated on a pro rata basis to the book value of assets making up the cash-generating unit. Impairment losses cannot be reversed. Technical development costs are allocated to the balance sheet assets when: (i) the cost attributable to the intangible asset can be determined reliably; (ii) there is the intent, availability of financial resources and technical capability to make the asset available for use or sale; and (iii) it can be shown that the asset is capable of producing future economic benefits. Intangible assets also include service concession agreements between the public and private sectors for the development, financing, management and maintenance of infrastructures under concession in which: (i) the grantor controls or regulates the services provided by the operator through the infrastructure and the related price to be applied; (ii) the grantor controls any significant remaining interest in the infrastructure at the end of the concession by owning or holding benefits, or in some other way. Based on the terms of the agreements, the operator holds the right to use the infrastructure, which is controlled by the grantor, for the purposes of providing the public service 2. The value of storage concessions, which is determined as indicated by the Ministry of Production Activities in its decree of 3 November 2005, is allocated to the item Concessions, licences, trademarks and similar rights, and is not amortised. Grants Capital grants are recognised when there is reasonable certainty that the conditions imposed by the granting government agencies for their allocation will be met, and they are recognised as a reduction to the purchase price or production cost of their related assets. Operating grants are recognised in the income statement. Equity investments Investments in subsidiaries not included in the scope of consolidation, in subsidiaries controlled jointly with other shareholders and in associates are accounted for using the equity method. If there is objective evidence of impairment (see also Current assets ), recoverability is tested by comparing the book value with the related recoverable value determined using the criteria indicated in the section on Property, plant and equipment. When there is no significant impact on the balance sheet, financial position and income statement, subsidiaries not included in the scope of consolidation, subsidiaries controlled jointly with other shareholders and associates are accounted for at cost adjusted for impairment. When the reasons for the impairment losses carried out no longer apply, equity investments accounted for at cost are revalued up to the amount of the impairment losses applied with the impact posted to the income statement under Other income (expense) from equity investments. Other equity investments are measured at fair value with allocation of the impact to the shareholders equity reserve for Other components of comprehensive income ; changes in fair value which are recognised (2) When the operator has the unconditional contractual right to receive cash or other financial assets from the grantor or entity identified by the grantor, the consideration received, or to be received, by the operator for infrastructure construction or improvements is recognised as a financial asset. 94

97 Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles in shareholders equity are posted to the income statement at the time of write-down or sale. When equity investments are not listed in a regulated market, and fair value cannot be reliably determined, such investments are accounted for at cost adjusted for impairment; impairment cannot be reversed. 3 The risk resulting from any losses exceeding shareholders equity is recognised in a special provision to the extent the parent company is committed to fulfilling its legal or implied obligations to the subsidiary/associate, or, in any event, to covering its losses. Non-current assets held for sale Non-current assets (or assets related to disposal groups) whose book value will be recovered mainly through their sale rather than ongoing use are classified as held for sale. Non-current assets held for sale (or assets related to disposal groups) and directly related liabilities are recognised in the balance sheet separately from the company s other assets and liabilities. Non-current assets held for sale are not depreciated, and are accounted for at the lower of book value and the related fair value reduced by any sales costs. Any difference between the book value and fair value reduced by sales costs is posted to the income statement as an impairment loss; any subsequent recoveries in value are recognised up to the amount of the previously recognised impairment losses, including those recognised prior to the asset being classified as held for sale. FINANCIAL LIABILITIES, TRADE AND OTHER PAYABLES, OTHER LIABILITIES Financial liabilities, trade and other payables and other liabilities are initially recorded at fair value increased by any transaction-related costs; they are subsequently recognised at amortised cost using the effective interest rate for discounting. Recording and elimination of financial liabilities Financial liabilities are recorded under balance sheet liabilities at the time the company becomes a party to agreements related to such liabilities. Financial liabilities sold are eliminated from balance sheet liabilities when the right to disburse cash flows is transferred together with all risks and benefits associated with ownership. PROVISIONS FOR RISKS AND CHARGES Provisions for risks and charges concern costs and charges of a certain nature which are certain or likely to be incurred, but whose amount or date of occurrence cannot be determined at the end of the year. Provisions are recognised when: (i) the existence of a current legal or implied obligation deriving from a past event is likely; (ii) it is likely that the fulfilment of the obligation will involve a cost; and (iii) the amount of the obligation can be reliably determined. Provisions are recorded at a value representing the best estimate of the amount that the company would reasonably pay to fulfil the obligation or to transfer it to third parties at the end of the reporting period. Provisions related to contracts with valuable consideration are recorded at the lower of the cost necessary to fulfil the obligation, less the expected economic benefits deriving from the contract, and the cost to terminate the contract. When the financial impact of time is significant, and the payment dates of the obligations can be reliably estimated, the provision is discounted; the increase in the provision due to the passing of time is posted to the income statement under Financial income (expense). When the liability is related to property, plant and equipment (e.g. site dismantlement and restoration), the provision is recognised as a counter-entry to the related asset; posting to the income statement is accomplished through amortisation. The costs that the company expects to incur to initiate restructuring programmes are recorded in the period in which the programme is formally defined, and the parties concerned have a valid expectation that the restructuring will take place. Provisions are periodically updated to reflect changes in cost estimates, selling periods and the discount rate; revisions in provision estimates are allocated to the same item of the income statement where the provision was previously reported or, when the liability is related to property, plant and equipment (e.g. site dismantlement and restoration), as a counter-entry to the related asset. The notes to the financial statements describe contingent liabilities represented by: (i) possible (but not probable) obligations resulting from past events, the existence of which will be confirmed only if one or more future uncertain events occur which are partially or fully outside the company s control; and (ii) current obligations resulting from past events, the amount of which cannot be reliably estimated, or the fulfilment of which is not likely to involve costs. EMPLOYEE BENEFITS Post-employment benefits are defined according to schemes, even if not formalised, which depending on their attributes are divided into defined-contribution schemes and defined-benefit schemes. In the defined-contribution schemes the obligation of the firm is determined according to the contributions due, limited to the payment of contributions to the state, or to a portfolio or a legally distinct entity (so-called fund). The liability related to defined-benefit schemes, net of any assets servicing the plan, is determined according to actuarial assumptions and is recognised for the year in accordance with the employment period necessary to obtain the benefits; the liability is measured by independent actuaries. The actuarial profits and losses relating to the defined-benefit schemes derived from variations in the actuarial assumptions used or from modifications to the plan conditions are recognised pro rata in the income statement, for the remaining average working life of the employees participating in the scheme, if the net value measured at the end of the previous financial year is more than 10% of the value of the liabilities relating to the scheme or 10% of the fair value of the assets servicing it, whichever is greater ( corridor method ). Obligations relating to long-term benefits are determined using actuarial assumptions; the effects resulting from the modification of actuarial assumptions or from a modification of the benefit specifications are recognised entirely in the income statement. (3) An impairment loss recognised in an interim period cannot be reversed even if, on the basis of conditions in a subsequent interim period, the impairment loss would have been lower or not recognized. 95

98 Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles TREASURY SHARES Treasury shares are recognised at cost and recorded as a reduction of shareholders equity. The economic effects resulting from any subsequent sales are recognised in shareholders equity. REVENUES AND COSTS Revenues from sales and services are recognised when there is an effective transfer of typical significant risks and advantages of ownership or when the service is completed. In relation to the activities performed by Snam Rete Gas, the time of revenue recognition coincides with the provision of the service and when the loss risks are transferred to the purchaser. Revenue provisions in relation to services partly provided are recognised as a matured amount, provided it is possible to reasonably determine the stage of completion and that there are no serious uncertainties surrounding the amount and the existence of the revenue and related costs; otherwise they are recognised within the limits of the recoverable costs incurred. Property, plant and equipment, unlike assets used under concession, transferred from clients (or constructed using the liquidity transferred from clients) and used for their connection to a network for the administration of a supply are recognised at fair value as the counter-entry to revenues in the income statement. When the agreement includes the provision of multiple services (e.g. connection and supply of goods) it is verified according to the service provided against the client s transferred asset, and the revenue is recognised at the time of the connection or the shorter between the duration of the supply and the useful life of the asset. Revenues are recorded net of returns, discounts, rebates and premiums, as well as directly related taxes. Exchanges between goods or services of a similar nature and value do not determine the recognition of revenues and costs as they are not representative of sales transactions. Costs are recognised when they relate to goods and services sold or consumed during the year or through systematic distribution when the profit in future years cannot be identified. Costs relating to emission allowances, determined on the basis of the average of existing prices on the main European stock exchanges at the close of the financial year, are recognised limited to the CO² emissions quota in excess of the assigned allowances; the costs related to the purchase of emission allowances are capitalised and recognised under intangible assets net of any negative outstanding balance between emissions released and assigned quotas. Income relating to emission allowances is recognised at the time of the transfer. In the case of transfer, where present, the emission allowances purchased are considered as having been sold first. Monetary credits assigned to replace the free emission quota allocation are recognised as a counter-entry to Other income in the income statement. Fees related to operating leases are attributed to the income statement throughout the duration of the contract. Costs for purchasing new information or discoveries, researching alternative products or processes, new techniques or models, designing and constructing prototypes, or costs incurred during other scientific research or technological development activities which do not satisfy the conditions for recognition in balance sheet assets are considered as current costs and attributed to the income statement for the year in which they were incurred. Costs incurred during share capital increases are recorded as a reduction of shareholders equity, net of the related tax effect. STOCK OPTIONS Personnel expenses include, consistent with the substantial nature of the remuneration that they comprise, stock options assigned to executives. The cost is determined with reference to the fair value of the option assigned to the executive at the time of making the commitment and is not subject to any subsequent adjustment; the portion due for the year is determined pro rata temporis over the period to which the incentive refers (the so-called vesting period) 4. The fair value is represented by the value of the option determined by applying appropriate valuation techniques which take account of the conditions of exercise of the option, the current share value, the expected volatility and the risk-free interest rate, and is recorded with offsetting in the item Other reserves. FOREIGN-EXCHANGE DIFFERENCES The assets and liabilities included in the balance sheet are represented in the currency of the main economic environment in which the company operates. The consolidated data are represented in euros, which is the working currency of the company and the group. Revenues and costs relating to transactions in currencies other than the working currency are recognised at the exchange rate in effect on the day when the transaction was carried out. Monetary assets and liabilities in currencies other than the working currency are converted into euros by applying the exchange rate in effect on the reporting date, with attribution of the impact to the income statement. Non-monetary assets and liabilities in currencies other than the working currency and valued at cost are recognised at the initially recorded exchange rate; when the measurement is made at fair value or recoverable or realisable value, the exchange rate used is the one in effect on the date of determination of the value. DIVIDENDS RECEIVED Dividends are recognised at the date of the resolution passed by the shareholders meeting, unless it is not reasonably certain that the shares will be sold before the ex-dividend date. DISTRIBUTION OF DIVIDENDS The distribution of dividends to the company s shareholders entails the recording of a payable in the financial statements for the period in which the distribution was approved by the company s shareholders or, in the case of interim dividends, by the board of directors. INCOME TAXES Current income taxes are calculated by estimating the taxable income. In particular, with regard to corporate income tax (IRES), since 2004 the company, jointly with Eni S.p.A., has exercised the option offered by the national tax consolidation scheme, which allows IRES to be determined on a taxable base corresponding to the algebraic sum of the positive (4) The period between the date of making the commitment and the date on which the option may be exercised. 96

99 Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles and negative taxable amounts of the individual companies included in the consolidation scope. The economic relations, as well as the reciprocal responsibilities and obligations, between Eni S.p.A. and the other group companies entering the consolidation scope are defined in the Regulations on participation in the national tax consolidation scheme by companies of the Eni group, under which: (i) subsidiaries with positive taxable income transfer to Eni the financial resources corresponding to the additional tax payable by Eni due to their participation in the national tax consolidation scheme; and (ii) those with negative taxable income receive a payment equal to the relevant tax saving made by Eni S.p.A. if and insofar as they have profitability prospects which would have made it possible, in the absence of the national tax consolidation scheme, to recognise deferred tax assets. Consequently, the relevant tax, net of payments made on account and withholdings applied, is recognised under the item Trade and other payables / Trade and other receivables. Regional production tax (IRAP), net of payments made on account, is recognised under the item Current income tax liabilities / Current income tax assets. Deferred and prepaid income taxes are calculated on the timing differences between the values of the assets and liabilities entered in the balance sheet and the corresponding values recognised for tax purposes. The recording of deferred tax assets is made when their recovery is regarded as probable. Deferred tax assets and deferred tax liabilities are classified under noncurrent assets and liabilities and are offset at individual company level if they refer to taxes which can be offset. The balance of the offsetting, if it results in an asset, is recognised under the item Deferred tax assets ; if it results in a liability, it is recognised under the item Deferred tax liabilities. When the results of the operations are recorded directly under shareholders equity, the current taxes, deferred tax assets and deferred tax liabilities are also attributed to shareholders equity. DERIVATIVES Derivatives are assets and liabilities recognised at fair value. Derivatives are classified as hedging instruments when the relationship between the derivative and the hedged item is formally documented and the effectiveness of the hedge, verified periodically, is high. When hedging derivatives hedge the risk of changes in the fair value of the hedged instruments ( fair value hedge ; e.g. hedge of the risk of fluctuations in the fair value of fixed-rate assets/liabilities), the derivatives are recognised at fair value with attribution of the effects on the income statement; by the same token, the hedged instruments are adjusted to reflect the changes in fair value associated with the hedged risk. When derivatives hedge the risk of changes in cash flows from the hedged instruments ( cash flow hedge ; e.g. hedge of changes in cash flows from assets/liabilities due to fluctuations in interest rates), the changes in the fair value of the derivatives are initially recognised in shareholders equity and subsequently attributed to the income statement in the same way as the economic effects produced by the hedged operation. Satisfaction of the requirements defined by IAS 39 for hedge accounting is verified periodically. Changes in the fair value of derivatives which do not satisfy the requirements to be classed as hedging instruments are recognised in the income statement. SEGMENT INFORMATION The information about business segments has been prepared in accordance with the provisions of IFRS 8 Operating segments, which requires the information to be presented in a manner consistent with the procedures adopted by the company s management when taking operational decisions. Consequently, the identification of the operating segments and the information presented are defined on the basis of the internal reporting used by the company s management for allocating resources to the different segments and for analysing the respective performances. An operating segment is defined by IFRS 8 as a component of an entity: (i) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity); (ii) whose operating results are regularly reviewed by the entity s most senior decision makers for purposes of making decisions about resources to be allocated to the segment and assessing its performance; and (iii) for which separate financial information is available. The declared operating segments are as follows: (i) natural gas transportation; (ii) liquefied natural gas (LNG) regasification; (iii) natural gas distribution; and (iv) natural gas storage. They relate to activities carried out predominantly by Snam Rete Gas, GNL Italia, Italgas and Stogit, respectively. Financial statements 5 The items on the balance sheet are classified as current and noncurrent, while those on the income statement are classified according to their nature. The statement of changes in shareholders equity adopted reconciles the opening and closing balances for each item of shareholders equity. The statement of cash flows is prepared using the indirect method, adjusting the profit for the period from non-monetary components. It is considered that these statements adequately represent the group s situation with regard to its balance sheet, income statement and financial position. (5) The financial statements are the same as those adopted in the 2009 annual report, except for the statement of cash flows, for which, in order to provide more comparable information with that of other listed companies, an alteration has been made to the elements that include Net cash flow from operating activities. In particular, the main changes have involved: (i) the elimination of the items Cash flows from operating activities before changes in working capital and Cash flows from operating activities ; (ii) the introduction of the item Equity method valuation effect ; (iii) the inclusion in the item Changes in working capital of net impairment losses (reversals of impairment losses) for inventories, trade receivables and the change in fair value of derivatives previously included in the item Net impairment losses (reversals of impairment losses) ; (iv) the inclusion of changes in provisions for risks and charges in the item Changes in working capital ; and (v) the representation of the change in provisions for employee benefits after Cash flows from working capital. Information about financial instruments in accordance with the classification provided for by IFRS is given in Note 22 Guarantees, commitments and risks - Management of corporate risks - Other information about financial instruments. 97

100 Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles Change in accounting criteria The provisions of IFRIC 12 Service Concession Arrangements (hereinafter IFRIC 12 ) came into force in These set out the recognition and measurement criteria to be adopted for arrangements between the public and private sectors for the development, financing, management and maintenance of infrastructures under concessions. In view of the agreements in place within Snam Rete Gas, the application of IFRIC 12 entails the classification of concession infrastructures under intangible assets; in the balance sheet at 31 December 2009 presented for comparison purposes, the net book value of concession infrastructures in accordance with IFRIC 12 ( 3,341 million) has been reclassified from Property, plant and equipment to Intangible assets. The asset depreciation process relating to service concession arrangements has remained unchanged and continues to operate on the basis of the expected arrangements for obtaining the future economic benefits deriving from the use and residual value of the infrastructure, as envisaged by the reference legislative framework. Additionally, with prospective effect as of 1 January 2010, and in accordance with the tariff review conducted by the Electricity and Gas Authority for the natural gas transportation business, the useful life of the following has been changed: pipelines (from 40 to 50 years); reduction plants (from 40 to 20 years). The useful life thus defined does not exceed the technical life of the assets. This change impacted net profit by 54 million as a result of less depreciation (net of tax effect). Use of estimates The application of generally accepted accounting principles for the preparation of financial statements and interim reports involves management making accounting estimates based on complex and/or subjective judgements, estimates based on past experience and assumptions regarded as reasonable and realistic on the basis of the information known at the time of the estimate. The use of these accounting estimates has an influence on the book value of the assets and liabilities and on the information about potential assets and liabilities at the reporting date, as well as the amount of revenues and costs in the reference period. The actual results may differ from the estimated results owing to the uncertainty that characterises the assumptions and the conditions on which the estimates are based. Details are given below about the critical accounting estimates involved in the process of preparing the financial statements and interim reports, since they involve a high degree of recourse to subjective judgements, assumptions and estimations regarding matters that are by nature uncertain. Any change in the conditions forming the basis of the judgements, assumptions and estimations used could have a significant impact on subsequent results. Duration and residual value of assets under concession The natural gas distribution business is carried out under concession, with the provision of the service being contracted by local public authorities. With regard to the duration of the concessions, Legislative Decree no. 164/00 (the Letta Decree ) established that all contracts must be put out to tender before the expiry of the so-called transitional period (for Snam Rete Gas, by 31 December 2012) and that the new duration of the concessions may not exceed 12 years. Upon expiry of the concessions, the outgoing operator, in view of the transfer of its distribution networks, excluding any assets transferable free of charge, is paid a sum of compensation defined on the basis of the criteria used for making the industrial estimate. With regard to the estimates made by the directors in determining the amortisation criterion, the net book value of the assets on expiry of the concession must not exceed the aforesaid industrial value. Impairment losses Property, plant and equipment and intangible assets are impaired when events or changes in circumstances give cause to believe that the book value is not recoverable. The events which may give rise to an impairment of assets include changes in business plans, changes in market prices or reduced use of plants. The decision on whether to apply an impairment and the quantification of any such impairment depend on the assessments of management concerning complex and highly uncertain factors, such as future price trends, the impact of inflation and technological improvements on production costs, production profiles, and conditions of supply and demand on a global or regional scale. The impairment is determined by comparing the book value with the related recoverable value, represented by the greater of the fair value, net of disposal costs, and the usage value, determined by discounting the expected cash flows deriving from the use of the asset. The expected cash flows are quantified in light of the information available at the time of the estimate, on the basis of subjective judgements regarding future trends in variables - such as prices, costs, the rate of growth of demand, production profiles - and are updated using a rate that takes account of the risk inherent in the asset concerned. Goodwill and other intangible assets with an indefinite useful life are not subject to amortisation; the recoverability of their book value is verified at least once a year and in any case whenever any event occurs which might involve impairment. With reference to goodwill, the verification is carried out at the level of the smallest aggregate (cashgenerating unit) to which the goodwill can be reasonably and consistently attributed; this unit represents the basis on which management assesses, directly or indirectly, the return on investment. When the book value of the cash-generating unit, including the goodwill attributed to it, exceeds the recoverable value, the difference is subject to impairment, which is attributed by priority to the goodwill up to its amount; any surplus in the impairment with respect to the goodwill is attributed pro rata to the book value of the assets which constitute the cash-generating unit. Site dismantlement and restoration Snam Rete Gas incurs significant liabilities associated with obligations of removal and dismantlement of plants or parts of plants. Estimating future dismantlement and restoration costs is a complex process and requires the assessment and judgement of the company s management in placing a value on the liabilities which will be incurred many years in the future for complying with dismantlement and restoration obligations, which often cannot be completely defined by laws, administrative regulations or contractual clauses. In addition, these obligations are affected by constant changes in technology and in dismantlement and restoration costs, as well as the constant growth of political and public awareness regarding matters of health and protection of the environment. 98

101 Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles The criticality of estimates of dismantlement and restoration costs also depends on the accounting method used for these costs, whose current value is initially capitalised, along with the cost of the asset to which they relate, offset against the provision for risks and charges. Subsequently, the value of the provision for risks and charges is increased to reflect the passing of time and any changes in the estimation as a result of changes in expected cash flows, the timing of their realisation and the discount rates applied. The determination of the discount rate to be used both in the initial valuation of the cost and in subsequent valuations is the result of a complex process which involves subjective judgements on the part of the company s management. Business combinations The reporting of business combination transactions involves the attribution, to the assets and liabilities of the acquired company, of the difference between the acquisition cost and the net book value. For the majority of assets and liabilities, the attribution of the difference is carried out by recognising the assets and liabilities at their fair value. The unattributed portion, if positive, is recognised as goodwill; if negative, it is attributed to the income statement. In the attribution process, Snam Rete Gas draws on the available information and, for the most significant business combinations, on external valuations. Environmental liabilities Snam Rete Gas is subject, in relation to its activities, to numerous laws and regulations on the protection of the environment at European, national, regional and local level, including the laws which implement international conventions and protocols relating to the activities carried out. With reference to this legislation, when it is probable that the existence and amount of a large liability can be reliably estimated, provisions are made for the associated costs. While the company does not currently believe that there will be any particularly significant negative effects on its financial statements due to non-compliance with environmental legislation, including taking account of the interventions already made, the possibility can nevertheless not be ruled out that Snam Rete Gas might incur substantial additional costs or responsibilities, since with the current state of knowledge it is impossible to foresee the effects of future developments, in view of factors such as: (i) the possibility of contaminations emerging; (ii) the possible effects arising from the application of new laws and regulations on the protection of the environment; (iii) the effects of any technological innovations for environmental cleansing; and (iv) the possibility of disputes and the difficulty of determining the possible consequences, including in relation to the liability of other parties and to possible compensation payments. Employee benefits Defined-benefit plans are valued on the basis of uncertain events and actuarial assumptions which include, among other things, the discount rates, the expected returns on the assets servicing the plans, the level of future remuneration, the retirement age and future trends in the healthcare expenses covered. The principal assumptions used for the quantification of post-employment benefits are determined as follows: (i) the discount and inflation rates representing the base rates at which the obligation to employees might actually be fulfilled are based on the rates which mature on highquality bonds (government bonds) and on inflation expectations; (ii) the level of future remuneration is determined on the basis of elements such as inflation expectations, productivity, career advancement and seniority; (iii) the future cost of healthcare services is determined on the basis of elements such as present and past trends in healthcare costs, including assumptions regarding the inflationary growth of costs, and changes in the health of the participating employees; (iv) the demographic assumptions reflect the best estimates of trends in variables such as mortality, turnover, invalidity and others in relation to the population of the participating employees; (v) the return on the assets servicing the plans is determined on the basis of the weighted average of the expected future yields, differentiated by class of investment (fixed income, equity, money market). The differences between the actual and expected costs and between the actual and expected returns on the assets servicing the plans are verified in the normal manner and are defined as actuarial profits or losses. The actuarial profits and losses are recognised pro rata in the income statement for the remaining average working life of the employees who take part in the plan, if and insofar as their net value not recognised at the end of the previous period exceeds the greater of 10% of the current value of the liabilities relating to the plan and 10% of the fair value of the assets servicing the plan (the so-called corridor method ). Actuarial assumptions are also used for determining obligations relating to long-term benefits; to this end, the effects arising from changes to the actuarial assumptions or the characteristics of the benefit are recognised entirely on the income statement. Provisions In addition to recognising environmental liabilities and obligations to remove property, plant and equipment and restore sites, Snam Rete Gas makes provisions relating mainly to employee benefits and legal and tax disputes. The estimation of the provisions for these purposes is the result of a complex process involving subjective judgements on the part of the company s management. Recently issued IFRS Accounting standards and interpretations issued by the IASB/IFRIC and approved by the European Commission Regulati on no. 632/2010 issued by the European Commission on 19 July 2010 approved the new version of IAS 24 Related Party Disclosures, which: (i) supplements the definition of related parties providing for new cases; (ii) for transactions carried out between companies related to the same government (government-related entities), allows for limiting quantitative disclosures to significant transactions. The provisions of the new version of IAS 24 are effective as of financial years starting on or after 1 January Regulation no. 662/2010 issued by the European Commission on 23 July 2010 approved IFRIC 19 Extinguishing financial liabilities with equity instruments (hereinafter IFRIC 19 ), which defines the accounting treatment to be adopted where a financial liability is settled through the issue of equity instruments (i.e. debt-for-equity swap). In particular, equity instruments issued to extinguish a liability in whole or in part are measured at fair value or, when not reliably determinable, at the fair value of the liability extinguished. The difference between the book value of the financial liability extinguished and the fair value of the equity instruments issued is recognised on the income statement. The provisions of IFRIC 19 are effective as of financial years beginning on or after 1 July 2010 (2011 financial statements for Snam Rete Gas). 99

102 Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles Accounting standards and interpretations issued by the IASB/IFRIC and not yet approved by the European Commission On 12 November 2009, the IASB issued IFRS 9 Financial Instruments which amends the criteria for recognising and measuring financial assets and their respective classification on financial statements. In particular, the new provisions stipulate, among other things, a model for classifying and measuring financial assets based exclusively on the following categories: (i) assets measured at amortised cost; (ii) assets measured at fair value. The new provisions also provide that equity investments other than those in subsidiaries, jointly controlled entities or associates must be measured at fair value and posted to the income statement. In the event that such equity investments are not held for trading purposes, changes in fair value may be recognised on the statement of comprehensive income, maintaining on the income statement solely the effects associated with dividend distributions; the amounts recognised on the statement of comprehensive income are not posted to the income statement upon disposal of the equity investment. On 28 October 2010, the IASB supplemented the provisions of IFRS 9 by including criteria for recognising and measuring financial liabilities. In particular, the new provisions require, among other things, that if a financial liability is measured at fair value and posted to the income statement, the changes in fair value associated with changes in the issuer s credit risk (i.e. own credit risk) are to be recognised in the statement of comprehensive income; this component is to be posted on the income statement to ensure symmetrical representation with other financial statement items associated with the liability, avoiding an accounting mismatch. The provisions of IFRS 9 are effective as of financial years beginning on or after 1 January On 7 October 2010, the IASB issued the Amendment to IFRS 7 Disclosures Transfers of financial assets, which provides for the addition of disclosure on financial instruments, with reference to transfers of financial assets, in order to describe the risks to which a company remains exposed in relation to the assets transferred. The new provisions require, among other things, additional disclosure in the event that a company makes significant transfers of financial assets near the end of the financial year. The new provisions are effective as of financial years beginning on or after 1 July 2011 (2012 financial statements for Snam Rete Gas). On 6 May 2010, the IASB issued the document Improvements to IFRSs containing changes of an essentially technical and editorial nature to the existing international accounting standards and interpretations. The provisions of the document are effective as of the 2011 financial year. At present, Snam Rete Gas is analysing the standards and interpretations mentioned and is assessing whether their adoption will have a significant impact on the financial statements. 100

103 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Notes to the consolidated financial statements Current assets 1 Cash a nd cash equivalents Cash and cash equivalents of 8 million ( 36 million at 31 December 2009) concern current account deposits at the ultimate parent, Eni. They are not subject to any usage restrictions. 2 Trade and other receivables Trade and other receivables of 944 million ( 916 million at 31 December 2009) comprise: ( million) Trade receivables Receivables from investment/divestment activities Financial receivables: - Held for operations 2 2 Other receivables These are reported net of the provision for impairment losses of 36 million ( 33 million at 31 December 2009). The activity in the provision for impairment losses on receivables during the year is shown below. ( million) Trade receivables 29 7 (3) 33 Receivables from investment/divestment activities 4 (1) 3 Balance at 1 January 2010 Provisions Utilisations Other changes Balance at (1) (3) 36 The provision for the period of 7 million refers to the natural gas distribution business segment. The other changes (- 3 million) concern the write-off of some trade receivables ascertained as bad debts and the respective provision for impairment losses in the distribution segment. Trade receivables of 777 million ( 738 million at 31 December 2009) relate to the natural gas transportation ( 404 million), distribution ( 304 million), regasification ( 14 million) and storage ( 55 million) business segments. Receivables from investment/divestment activities of 78 million ( 32 million at 31 December 2009) relate to: (i) receivables with the ultimate parent, Eni, for the price adjustment mechanisms in the purchase agreements for Italgas and Stogit ( 47 million) 6 ; (ii) government grants and private contributions, recognised with investment activities ( 21 million); and (iii) receivables from disposals of property, plant and equipment ( 10 million). The other receivables of 87 million ( 144 million at 31 December 2009) comprise: ( million) IRES receivables for national tax consolidation scheme Group VAT credit 1 4 Other receivables: - Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund) Advances to suppliers VAT advance Other The corporate tax (IRES) receivables for the national tax consolidation scheme ( 10 million) concern receivables with the ultimate parent, Eni, relating to the IRES refund request for 10% of the regional production tax (IRAP) for the 2004, 2005, 2006 and 2007 tax years (pursuant to Article 6 of Legislative Decree no. 185 of 28 November 2008, enacted by Law no. 2 of 28 January 2009). (6) Information on the price adjustment mechanisms and the developments occurring during the year can be found in Note 22 Guarantees, commitments and risks Commitments deriving from the agreement to purchase Italgas and Stogit from Eni. 101

104 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Receivables with the Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund) of 44 million were mainly for: (i) the inclusion of storage segment capacity revenues ( 24 million); (ii) additional tariff components in the distribution segment ( 12 million); and (iii) receivables for energy efficiency certificates 7 ( 8 million). The residual item Other, in the amount of 12 million, essentially comprises local tax receivables with government bodies ( 3 million) and receivables with personnel ( 2 million). The fair value measurement of trade and other receivables has no material impact considering the short period of time from when the receivable arises and its due date. All receivables are in euros. Receivables from related parties are described in Note 30 Related-party transactions. Information on credit risk can be found in Note 22 Guarantees, commitments and risks Credit risk. 3 Inventories Inventories of 441 million ( 411 million at 31 December 2009) are analysed in the following table: Change ( million) Gross amount Impairment losses Net amount Gross amount Impairment losses Net amount Raw materials, consumables and supplies 68 (6) (6) Finished products and merchandise (2) Ongoing contract work 1 1 (1) 417 (6) (6) Inventories of raw materials, consumables and supplies ( 95 million) comprise: (i) spare parts for gas pipeline networks ( 34 million), distribution networks ( 18 million) and storage facilities ( 5 million); and (ii) natural gas used in transportation and regasification ( 38 million). The inventories of finished products and merchandise ( 346 million) refer to the natural gas present in the storage system (4,274 million standard cubic metres compared with 4,299 million cubic metres at 31 December 2009) and do not include compulsory inventories 8, recognised under non-current assets on the balance sheet. Inventories are stated net of the provision for impairment losses of 6 million (unchanged from 31 December 2009), set up to account for slow-moving materials. The 30 million increase in inventories compared with 31 December 2009 derives mainly from the natural gas used to operate the transportation business ( 24 million). For this purpose, it is noted that since 1 January 2010, the new tariff criteria for the transportation business, applicable for the third regulatory period (1 January December 2013) has required payment in kind by users of the transportation service of quantities of gas to cover fuel gas, network losses and unaccounted-for gas, owed in percentages of the quantities respectively injected into and withdrawn from the transportation network. Inventories are not collateralised. Inventories do not secure liabilities, nor are they recognised at net realisation value. 4 Other current tax assets Other current ta x assets, amounting to 4 million ( 5 million at 31 December 2009) essentially comprise VAT receivables ( 2 million) for companies not belonging to Eni-group VAT. Note 27 Income taxes provides information about taxes for the year. 5 Other current assets Other current assets of 71 million ( 67 million at 31 December 2009) comprise: ( million) Accrued income from regulated activities Other current assets: - Prepayments (7) 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 excess certificates triggers repayment by the Cassa Conguaglio del Settore Elettrico (Electricity Equalisation Fund) on the basis of dedicated funds built up through distribution tariff increases. (8) The compulsory inventories are described in Note 7 Inventories Compulsory inventories. 102

105 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Accrued income from regulated activities of 63 million relates to the current portion of assets booked against the recognition by the Electricity and Gas Authority of additional expenses borne during the second regulatory period (1 October December 2009) for the purchase of fuel gas used in the transportation business 9. Prepayments of 8 million mainly refer to lease expenses ( 3 million) and insurance premiums ( 3 million). Non-current assets 6 Property, plant and equipment Property, plant and equipment of 13,239 million ( 12,684 million at 31 December 2009) comprise: ( million) Net beginning value Investments Amortisation and depreciation Change in scope of consolidation Disposals Other changes Reclassification per IFRIC 12 (*) Net ending value Gross ending value Provisions for amortisation, depreciation and impairment losses (**) Land (2) (10) Buildings (10) 245 (2) 5 (37) Plant and equipment 9, (535) 3,588 (13) 878 (2,911) 10,408 14,498 4,090 Industrial and commercial equipment (26) 295 (6) 7 (299) Other assets 17 1 (8) Fixed assets under construction and advance payments 906 1, (1) (843) (84) 1,672 1,672 10,549 1,218 (579) 4,811 (24) 50 (3,341) 12,684 17,169 4,485 (*) The net book value of infrastructures under concession used for natural gas distribution at 31 December 2009 ( 3,341 million) was reclassified from Property, plant and equipment to Intangible assets pursuant to IFRIC 12, in effect from 1 January (**) Of which 7 million in the provision for impairment losses. ( million) Net beginning value Investments Amortisation and depreciation Disposals Other changes Net ending value Gross ending value Provisions for amortisation, depreciation and impairment losses (*) Land Buildings (12) (3) Plant and equipment 10, (461) (5) ,501 15,044 4,543 Industrial and commercial equipment (16) Other assets 14 1 (6) Fixed assets under construction and advance payments 1,672 1,062 (1) (601) 2,132 2,132 12,684 1,117 (495) (9) (58) 13,239 18,197 4,958 (*) Of which 7 million in the provision for impairment losses. Property, plant and equipment ( 13,239 million) comprise transportation infrastructure ( 11,328 million), natural gas storage ( 1,595 million), distribution ( 227 million) and regasification ( 89 million). Investments of 1,117 million 10 ( 1,218 million at 31 December 2009) refer to the natural gas transportation ( 859 million), storage ( 239 million), and distribution ( 16 million) business segments, as well as to LNG regasification ( 3 million). The financial expenses capitalised during the year amounted to 37 million ( 24 million in 2009). The interest rate used for the capitalisation of financial expenses ranged from 2.63% to 3.1% (3.03% in (9) The recognition of such assets follows Resolutions VIS 8/09, ARG/gas 184/09 and ARG/gas 218/10, whereby the Electricity and Gas Authority recognised the additional expenses borne by the Company respectively in the and thermal years ( 45 million overall), the thermal year ( 34 million) and the period from 1 October December 2009 ( 55 million). Pursuant to Article 6 of Resolution ARG/gas 184/09, the recognition of the additional costs is subject to equalisation with the users through tariff adjustment: (i) as of 1 January 2010 for additional costs borne in the , and thermal years; (ii) as of 1 January 2011 for the additional costs borne by the Company during the period from 1 October December (10) The investments for the period are broken down by business segment in the Business segment operating performance section of the Directors report. 103

106 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements 2009). Depreciation ( 495 million) refers to economic and technical depreciation determined on the basis of the useful life of the assets or their remaining possible use by the company. The main annual depreciation rates adopted are included in the following ranges: Annual rate (%) Buildings - Buildings or more as a function of remaining life Plant and machinery - Transportation - Pipelines 2 or more as a function of remaining life - Plants 5 or more as a function of remaining life - Gas reduction and regulation plants 5 or more as a function of remaining life Plant and machinery - Storage - Pipes 2-2,5 - Treatment and compression stations 4-5 or more as a function of remaining life - Storage tanks 1,66 Plant and machinery - Regasification - LNG plants 4 or more as a function of remaining life Other property, plant and equipment 2,5-12,5 Metering devices 5 or more as a function of remaining life Industrial and commercial equipment 4-35 Other assets The depreciation rates adopted were changed from the previous year as a result of the revision for tariff purposes by the Electricity and Gas Authority of the useful life of some assets in the transportation business segment. Specifically, the Authority updated the useful life: (i) of pipelines (from 40 years to 50 years); and (ii) natural gas reduction and regulation plants (from 40 to 20 years). The company, in light of the mechanisms for recognising tariff components linked to depreciation and to the technical life of assets, considered it appropriate to restate the useful life of these assets in line with the conventional tariff duration 11. Disposals of 9 million primarily concern sections of pipelines and some components of compression stations ( 5 million overall). Other changes (- 58 million) relate essentially to: (i) the change in inventories of piping and the respective accessory materials acquired for investment activities and not yet used in plant construction (- 38 million); and (ii) grants for the period (- 23 million). Government grants for capital expenditure and grants from other parties reducing the net value of property, plant and equipment amount respectively to 76 million ( 79 million at 31 December 2009) and 211 million ( 191 million at 31 December 2009) 12. At 31 December 2010, uncollected government grants amount to 5 million (unchanged from 31 December 2009). It is noted that following the implementation of IFRIC 12 as of 1 January 2010, government grants and grants from other parties relating to the natural gas distribution service reduced intangible assets; accordingly, the corresponding amounts for 2009 were reclassified ( 377 million and 316 million, respectively). The amount for plant and machinery includes 158 million of site dismantlement and restoration costs recognised mainly against natural gas storage site drainage and replenishment expenses ( 156 million). Summarised below are changes occurring in provisions for depreciation and impairment losses during the year: ( million) Provisions for amortisation, depreciation and impairment losses Increases Other changes Buildings (3) 201 Plant and equipment 4, (8) 4,543 Industrial and commercial equipment (10) 141 Other assets 68 6 (1) 73 4, (22) 4,958 Contractual commitments for the purchase of property, plant and equipment, and for the provision of goods and services related to their construction, are disclosed in Note 22 Guarantees, commitments and risks. (11) The effects on earnings from such changes are shown in the Basis of presentation and consolidation principles Change of accounting criteria section. (12) It is to be noted that, as of 1 January 2010, as a result of the European Commission s approval of the provisions of IFRIC 18 Transfers of assets from customers, contributions for connecting to the transportation network are no longer recognised as reducing the value of the asset, but are recognised as revenue at the time of connection to the network. By express requirement of IFRIC 18, the provisions of this interpretation are not applied in the event that the asset transferred (including the liquid assets that the company is committed to using to construct the infrastructure necessary for connection to the network) by the customer represents an activity regulated by the provisions of IFRIC

107 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Property, plant and equipment by business segment Property, plant and equipment are broken down by business segment as follows: ( million) Gross property, plant and equipment Business segments - Transportation 14,613 15,400 - Regasification Storage 1,962 2,203 - Distribution Total 17,169 18,197 Provisions for amortisation, depreciation and impairment losses - Transportation (3,673) (4,072) - Regasification (30) (35) - Storage (539) (608) - Distribution (243) (243) Total (4,485) (4,958) Net property, plant and equipment - Transportation 10,940 11,328 - Regasification Storage 1,423 1,595 - Distribution ,684 13,239 7 Inventories - Compulsory inventories Inventories Compulsory inventories, amounting to 405 million ( 405 million at 31 December 2009), are made up of minimum quantities of natural gas that the storage companies are obligated to hold pursuant to Presidential Decree no. 22 of 31 January The inventories correspond to approximately 5 billion standard cubic metres of natural gas, the overall measurement of which is determined annually by the minister for economic development. 8 Intangible assets Intangible assets of 4,262 million ( 4,082 million at 31 December 2009) comprise: ( million) Net beginning value Investments Amortisation and depreciation Change in scope of consolidation Other changes Reclassification per IFRIC 12 (*) Net ending value Gross ending value Provisions for amortisation, depreciation and impairment losses Finite useful-life intangible assets - Service concession agreements 3,341 3,341 5,856 2,515 - Development costs 1 (2) Industrial patent rights and rights to use intellectual property 23 1 (30) Concessions, licences, trademarks and similar rights 1 (2) Other intangible assets Fixed assets in process and advance payments (38) (34) 691 3,341 4,073 7,223 3,150 Indefinite useful-life intangible assets - Goodwill (34) 700 3,341 4,082 7,232 3,150 (*) The reclassification ( 3,341 million) from Property, plant and equipment to Intangible assets with a finite useful life concerns the net book value at 31 December 2009 of the infrastructure under concession used for the natural gas distribution service and it was carried out owing to the implementation as of 1 January 2010 of IFRIC

108 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements ( million) Net beginning value Investments Amortisation and depreciation Impairment losses Disposals Other changes Net ending value Gross ending value Provisions for amortisation, depreciation and impairment losses (*) Finite useful-life intangible assets - Service concession agreements 3, (128) (10) (13) (48) 3,491 6,099 2,608 - Development costs 4 (4) Industrial patent rights and rights to use intellectual property delle opere dell ingegno 55 4 (38) Concessions, licences, trademarks and similar rights 663 (3) Other intangible assets Fixed assets in process and advance payments (52) , (173) (10) (13) (47) 4,253 7,539 3,286 Indefinite useful-life intangible assets - Goodwill , (173) (10) (13) (47) 4,262 7,548 3,286 (*) Of which 10 million in the provision for impairment losses. Intangible assets with a finite useful life ( 4,253 million) mainly concern: (i) assets recognised following the application of IFRIC relating to the natural gas distribution business segment ( 3,491 million); and (ii) concessions for the natural gas storage business ( 655 million). In particular, the provisions of IFRIC 12 are applicable for Snam Rete Gas to agreements under which the operator is committed to providing the public natural gas distribution service at the tariff established by the Electricity and Gas Authority using the natural gas distribution system which, although owned by the company, can be taken over by the licensing authority at the end of the concession by paying an amount (calculated based on the industrial estimate ) which takes into account the industrial value of the infrastructure. In view of the tariff structure of concession services and in the absence of a benchmark, it is not possible for a margin to be reliably established for the infrastructure construction/upgrading operations and so investments are recognised as contract work in progress on a commensurate basis with the costs incurred. The asset amortisation process relating to service concession arrangements has remained unchanged and continues to operate on the basis of the expected arrangements for obtaining the future economic benefits deriving from the use and residual value of the infrastructure, as envisaged by the reference legislative framework. Industrial patent rights and intellectual property rights of 72 million ( 55 million at 31 December 2009) mainly concern information systems and applications in support of operating activities. Concessions, licences, trademarks and similar rights ( 662 million) refer mainly to concessions for the natural gas storage business ( 655 million). Intangible assets with an indefinite useful life consist only of the goodwill recognised following the acquisition by Italgas of 100% of the shares of Siciliana Gas ( 9 million). For purposes of determining the recoverable value, the goodwill was allocated to the cash-generating unit comprised by the activity carried out in a series of municipalities aggregated at a regional level. The recoverable value of the cash-generating unit was estimated by equity/income type valuations with reference to the value of the asset recognised for tariff purposes (RAB - regulated asset base), as well as to additional income components deriving mainly from the natural gas distribution service, and it is greater than the book value of the cash-generating unit. Investments in intangible assets of 423 million ( 36 million at 31 December 2009) refer mainly to: (i) the construction and upgrading of natural gas distribution infrastructure ( 349 million); and (ii) investment projects in progress ( 66 million). Impairment losses ( 10 million) were made on some assets in the natural gas distribution business segment. In particular, the write-down refers to the completion of methane conversion works in the south of Italy and it was defined at the estimate of the expenses to be borne to ready plants for normal use. At 31 December 2010, uncollected government grants amount to 3 million (unchanged from 31 December 2009). Other changes (- 47 million) relate essentially to: (i) grants for the period (- 57 million); and (ii) the acquisition of the CNEA business unit in the natural gas distribution segment (+ 9 million). (13) For the purposes of applying IFRIC 12, in consideration of the existing agreements for Snam Rete Gas, the accounting model adopted is the intangible asset model, used in concession arrangements where the concessionaire builds and operates the infrastructure for the provision of the public service and where the consideration which it receives for the service rendered is uncertain or where the concessionaire bears the demand risk. 106

109 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Government grants for capital expenditure and grants from other parties reducing the net value of intangible assets amounted respectively to 374 million ( 377 million at 31 December 2009) and 355 million ( 316 million at 31 December 2009) and essentially concern the natural gas distribution segment. It is to be noted that, following the implementation on 1 January 2010 of the provisions of IFRIC 12, government grants and grants from other parties relating to the natural gas distribution service reduce the intangible assets item; accordingly, the corresponding amounts for 2009 have been reclassified from property, plant and equipment. The main amortisation rates adopted on an annual basis are the following: Annual rate (%) Facilities used in service concession arrangements - Gas distribution network 2 - Gas diversion plants 2 - Distribution metering devices or more as a function of remaining life Intangible assets - Industrial patent rights and rights to use intellectual property Other intangible assets 20 or as a function of contract term Existing contractual commitments for the purchase of intangible assets, and of services related to their development, are disclosed in Note 22 Guarantees, commitments and risks. Intangible assets by business segment Intangible assets are broken down by business segment as shown below: ( million) Gross intangible assets Business segments - Transportation Regasification Storage Distribution 6,117 6,380 Total 7,232 7,548 Provisions for amortisation, depreciation and impairment losses - Transportation (309) (335) - Regasification (1) (1) - Storage (108) (113) - Distribution (2,732) (2,837) Total (3,150) (3,286) Net intangible assets - Transportation Regasification - Storage Distribution 3,385 3,543 4,082 4,262 The market value of fixed assets, including compulsory inventories and intangible assets, is estimated at 21.5 billion and was defined in keeping with the estimate of the value recognised for such assets for purposes of compensation by the Electricity and Gas Authority. 107

110 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements 9 Equity-accounted investments Equity-accounted investments of 319 million ( 301 million at 31 December 2009) refer to equity investments in the distribution business segment and are broken down as follows: Equity-accounted investments ( million) Beginning value Change in scope of consolidation Capital gains from measurement using the equity method Ending value Investments in jointly controlled entities Investments in associates Investments in subsidiaries ( million) Beginning value Capital gains from measurement using the equity method Decrease owing to dividends Other changes Ending value Investments in jointly controlled entities (32) Investments in associates 51 3 (2) 52 Investments in subsidiaries (34) Capital gains from measurement by the equity method of 47 million mainly refer to the companies A.E.S. S.p.A. ( 27 million) and Toscana Energia S.p.A. ( 16 million). The net value of equity-accounted investments concerns the following companies: ( million) Net amount Shareholder % ownership Net amount Shareholder % ownership Jointly controlled entities: - Toscana Energia S.p.A % % - Azienda Energia e Servizi Torino S.p.A % % - Metano Borgomanero S.p.A 2 50% 2 50% - Metano S.Angelo Lodigiano S.p.A 1 50% 1 50% - Metano Casalpusterlengo S.p.A 1 50% 1 50% - Metano Arcore S.p.A 1 50% 1 50% - Umbria Distribuzione Gas S.p.A 1 45% 1 45% Total jointly owned entities Associates: - ACAM Gas S.p.A 47 49% 48 49% - Acqua Campania S.p.A % % Total associates Subsidiares - Servizi Territori Aree e Penisole S.p.A 1 70% 1 70% Total subsidiaries

111 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Equity investments in subsidiaries, jointly controlled entities and associates can be found in the annex Significant shareholdings, associates and equity investments of Snam Rete Gas S.p.A. at 31 December 2010, which is an integral part of these notes. Other information on equity investments The amounts from the most recent financial statements available for jointly controlled entities and associates, proportionately to the percentage of ownership, are as follows: ( million) Jointly controlled entities Associates Jointly controlled entities Associates Total assets Total liabilities Net revenue EBIT Profit for the period Other non-current assets Other non-current assets of 49 million ( 34 million at 31 December 2009) break down as follows: ( million) Accrued income from regulated activities Derivatives: - Fair value of derivatives 3 15 Other non-current assets: - Prepayments Security deposits Other assets Accrued income from regulated activities of 17 million relates to the non-current portion of assets booked against the recognition by the Electricity and Gas Authority of additional expenses borne during the second regulatory period (1 October December 2009) for the purchase of fuel gas used in the transportation business 14. Information on the fair value of derivatives at 31 December 2010 is summarised below ( million) Assets Liabilities Assets Liabilities Interest rate swap - cash flow hedge 3 (76) 15 (83) Less: - Non-current share (3) 16 (15) 31 Current share (60) (52) The fair value of hedging derivatives and their classification as an asset/liability over 12 months (non-current) or an asset/liability within 12 months (current) have been determined using generally accepted financial measurement models and market parameters at the end of the year. (14) For further information, see Note 5 Other current assets. 109

112 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements At 31 December 2010, Snam Rete Gas had 19 cash flow hedge derivatives in place (nine cash flow hedge derivatives at 31 December 2009). The characteristics of these contracts, as well as their market value, are shown below. Type of contract Start of contract (date) End of contract (date) Duration (years) Notional amount ( million) Interest rate swap Euribor fixed rate (14) Interest rate swap Euribor fixed rate (18) (26) Interest rate swap Euribor fixed rate (23) (16) Interest rate swap Euribor fixed rate (9) (2) Interest rate swap Euribor fixed rate (10) (24) Interest rate swap Euribor fixed rate (4) (3) Interest rate swap Euribor fixed rate (3) (3) Interest rate swap Euribor fixed rate 2 (5) Interest rate swap Euribor fixed rate 1 (3) Interest rate swap Euribor fixed rate 6 Interest rate swap Euribor fixed rate 2 Interest rate swap Euribor fixed rate (,,,) Interest rate swap Euribor fixed rate 2 Interest rate swap Euribor fixed rate (,,,) Interest rate swap Euribor fixed rate (1) Interest rate swap Euribor fixed rate (,,,) Interest rate swap Euribor fixed rate (1) Interest rate swap Euribor fixed rate (,,,) Interest rate swap Euribor fixed rate (,,,) Interest rate swap Euribor fixed rate (,,,) Sale rate Purchase rate Market value ( million) 4,050 6,535 (78) (74) The fair value of interest-rate derivatives is measured systematically on the basis of market prices provided by the major info providers. For these contracts, the company agrees with the counterparty to exchange on fixed dates the difference between the floating rate and fixed rate calculated using the reference nominal value. In 2010, 11 derivative contracts were entered into for an overall notional amount of 3,185 million, including: (i) eight contracts for a notional amount of 2,185 million intended for converting existing floating-rate loans into fixed-rate ones; and (ii) three contracts for a notional amount of 1,000 million intended for converting new variable-rate loans into fixed-rate ones. Changes in fair value posted as increase in shareholders equity in 2010, net of the related tax effect, amount to 3 million (- 21 million at 31 December 2009). The table below shows the swaps in place by type, the weighted average interest rate and the maturity of the transactions. The variable average rates are based on rates at year end; they are subject to changes which may significantly affect future financial flows. A comparison between the average rates bought and sold is not indicative of the result of the derivative contracts put in place; this result is determined taking into account the underlying transaction Purchase fixed rate/sell floating rate - Nominal value ( million) 4,050 6,535 - Weighted average rate purchased (%) Weighted average rate sold (%) Weighted average maturity (years) Non-current assets held for sale and directly related liabilities Non-current asset s held for sale of 25 million (unchanged from 31 December 2009) concern property owned by Italgas, for which sales negotiations are under way with Eni following the commitments arising from the Italgas purchase agreement 15. Liabilities directly related to non-current assets held for sale of 10 million ( 11 million at 31 December 2009) include environmental provisions for expenses involved in the property s restoration. (15) For information on commitments made by the parties, see Note 22 Guarantees, commitments and risks - Commitments deriving from the agreement to purchase Italgas and Stogit from Eni. 110

113 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Current liabilities 12 Short-term financial liabilities Short term financial liabilities of 1,844 million ( 1,585 million at 31 December 2009) are denominated entirely in euros and relate to lines of credit with Eni S.p.A. Short-term financial liabilities comprise only floating-rate loans. The weighted average interest rate on short-term financial debt was 0.75% (0.90% 16 at 31 December 2009). The market value of short-term financial liabilities is the same as their book value. At 31 December 2010, there were no breaches of loan agreements. 13 Trade and other payables Trade and other payables of 1,322 million ( 1,106 million at 31 December 2009) comprise: ( million) Trade payables Payables for investments Other payables ,106 1,322 Trade payables of 468 million ( 471 million at 31 December 2009) mainly refer to the natural gas transportation ( 159 million), distribution ( 163 million) and storage ( 141 million) business segments. Payables for investment activities of 627 million ( 429 million at 31 December 2009) refer essentially to the natural gas transportation ( 496 million), distribution ( 75 million) and natural gas storage ( 55 million) business segments. The 198 million increase was mainly due to the payment to Eni ( 174 million) of the estimated effects of price adjustments in connection with agreements signed as part of the acquisition of Italgas and Stogit 17. Other payables of 227 million ( 206 million at 31 December 2009) break down as follows: ( million) IRES payables for national tax consolidation scheme Group VAT payables 8 15 Other payables: - Payables to employees Payables to pension and social security institutions Payables to the Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund) Payables to the government Payments on account and advances Other Payables to the Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund) ( 25 million) mainly concerned fees related to distribution activities ( 23 million) due largely to the ancillary tariff components laid down by Resolution ARG/gas no. 159/08 (energy savings, quality of gas services, equalisation imbalances and disadvantaged customers). Payables to the government ( 16 million) primarily involve payables to municipalities for concession fees for the distribution business. The fair value measurement of trade and other payables has no material impact given the short period of time from when the payable arises and its due date. Note 30 Related-party transactions contains information about payables due to related parties. 14 Current income tax liabilities and other current taxes liabilities Current income tax liabilities of 11 million ( 5 million at 31 December 2009) mainly concerned IRAP payables ( 10 million). Liabilities for other current taxes of 20 million ( 18 million at 31 December 2009) mainly referred to IRPEF (personal income tax) withholdings for employees ( 11 million) and VAT payables ( 6 million) related to companies not belonging to Eni-group VAT. (16) The interest rate of the companies acquired was calculated for the second half of the year. (17) For more information, see Note 22 Guarantees, commitments and risks - Commitments deriving from the agreement to purchase Italgas and Stogit from Eni. 111

114 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements 15 Other current liabilities Other current liabilities of 221 million ( 250 million at 31 December 2009) comprise: ( million) (*) Prepaid income from regulated activities (*) Derivatives: - Fair value of derivatives Accrued interest differentials on derivatives Other current liabilities: - Deferred and prepaid revenue and income (*) The balance at 31 December 2009 includes the reclassification ( 63 million) from Provisions for risks and charges of payments for balancing and stock replenishment to be allocated to service users. For further information, see Note 17 Provisions for risks and charges. Prepaid income from regulated activities of 159 million relates to: (i) the transportation business segment ( 96 million) and concerns the short-term portion of revenues invoiced in excess of the restriction established by the Electricity and Gas Authority, and penalties charged to users who exceeded the committed capacity; this amount is to be returned through tariff adjustments pursuant to Resolution no. 166/05; and (ii) the natural gas storage business segment ( 63 million) and concerns payments for balancing and stock replenishment, which are to be returned to service users based on the provisions of Resolution no. 50/06 of the Electricity and Gas Authority. See Note 10 Other non-current assets for information on the fair value of derivatives. Non-current liabilities 16 Long-term financial liabilities and short-term portions of long-term liabilities Based on the table used in the Directors report, net financial debt can be broken down as follows: ( million) Current Non current Total Current Non current Total Financial liabilities 9,986 10,350 Short-term financial liabilities 1,585 1,585 1,844 1,844 Long-term financial liabilities 915 7,486 8,401 1,320 7,186 8,506 Financial receivables and cash and cash equivalents (37) (9) Financial receivables not held for operations (1) (1) (1) (1) Cash and cash equivalents (36) (36) (8) (8) 2,464 7,485 9,949 3,156 7,185 10,341 Long-term financial liabilities Long-term financial liabilities, including the short-term portions, of 8,506 million ( 8,401 million at 31 December 2009) comprise: ( million) Short-term portion Parents 914 7,485 8,399 1,320 7,185 8,505 Other financial backers Long-term portion Total Short-term portion Long-term portion 915 7,486 8,401 1,320 7,186 8,506 Total 112

115 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The breakdown of financial liabilities with parents, including the short-term portions, ( 8,505 million) is as follows: ( million) Lender Currency Amount Fixed rate (F) Floating rate (V) Type of repayment Disbursement date Maturity date Residual duration (years/months) Long-term loan Eni (a) 500 F On maturity m Eni (a) 300 F On maturity m Eni (a) 500 F On maturity y 11m Eni (Line of credit) (a) 1,500 F Revolving (b) y 11m Eni (a) 185 F On maturity a Eni (a) 500 F On maturity y 3m Eni (Line of credit) (a) 200 F Revolving (b) y 4m Eni 200 F On maturity y 5m Eni 300 F On maturity y 6m Eni 200 F On maturity y 7m Eni 350 F On maturity y 11m Eni (a) 300 F On maturity m Eni 400 F On maturity y 11m Eni 200 F On maturity m Eni (a) 700 F On maturity y 1m Eni (a) 350 F On maturity y 11m Eni (a) 200 F On maturity y 11m Eni (a) 300 F On maturity y 1m Eni (a) 500 F On maturity y 7m Eni (a) 300 F On maturity y 7m Eni (a) 200 F On maturity y 9m Total fixed rate 8,185 Eni (c) 300 V Amortised (d) a Total floating rate 300 Total long-term loans 8,485 Accrued expenses 20 8,505 (a) (b) (c) (d) Floating-rate loans converted by interest rate swaps into fixed-rate loans. Revolving credit lines are those which provide for the reconstitution of the credit limit in line with repayments. Borrowed from the European Investment Bank (EIB). Loan to be repaid in equal instalments with a grace period. The revolving credit lines have been fully used at 31 December 2010 (identical to 31 December 2009). There were no breaches of loan agreements at the reporting date. Snam Rete Gas has entered into a 300 million loan agreement with Eni funded by the European Investment Bank (EIB), which is based on Eni maintaining a minimum rating. This indicator has been met; Snam Rete Gas believes failing to meet this covenant would have a limited impact. Long-term financial liabilities ( 7,186 million) are indicated below with their respective maturities: At 31 December Long-term maturity Total ( million) Maturity Over long Parents ,505 1,320 1, ,500 1,200 2,150 7,185 Other financial backers ,506 1,320 1, ,501 1,200 2,150 7,186 Long-term financial liabilities, including the short-term portions, are broken down below with an indication of the related average rate for the period. All financial liabilities are denominated in euros. ( million) Amount at Average rate Amount at Average rate 8, % 8, % 8, % 8, % 113

116 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The breakdown of long-term financial liabilities by type of interest rate is as follows: ( million) Amount % Amount % At fixed rate 5, , At floating rate 2, , , Floating-rate financial liabilities ( 300 million) decreased by 2,385 million compared with 31 December 2009, owing to the stipulation of eight interest rate swaps (IRSs) with a duration of around two years, which convert existing floating-rate loans (for a total of 2,185 million) into fixed-rate loans. The decrease was also due to the repayment of a maturing loan ( 200 million). Fixed-rate financial liabilities ( 8,206 million) increased by 2,490 million compared with 31 December This increase was due to the stipulation of the aforementioned eight IRSs ( 2,185 million) and the taking out of three floating-rate loans ( 1,000 million in total), which were converted into fixed-rate loans by three more IRSs, and was partially offset by the repayment ( 700 million) of a matured loan. For the sake of full disclosure, on 23 December 2010 a 400 million loan agreement was signed with Eni with a disbursement date of 21 March The loan is at a fixed rate of about 2.9% with a bullet repayment on 20 December Its purpose is to refinance a 300 million loan maturing on 20 March The market value of long-term financial liabilities, including the short-term portions, is 8,646 million and was obtained by discounting future cash flows using a discount rate of between 0.8% and 2.9% (between 0.5% and 3.4% at 31 December 2009). Below are details on net financial debt showing related-party transactions ( million) Current Non current Total Current Non current Total A. Cash and cash equivalents B. Securities not held for operations C. Cash (A+B) D. Financial receivables not held for operations E. Short-term financial liabilities to banks F. Long-term financial liabilities to banks G. Bonds H. Short-term financial liabilities to related parties 1,585 1,585 1,844 1,844 I. Long-term financial liabilities to related parties 914 7,485 8,399 1,320 7,185 8,505 L. Other short-term financial liabilities M. Other long-term financial liabilities N. Gross financial debt (E+F+G+H+I+L+M) 2,500 7,486 9,986 3,164 7,186 10,350 O. Net financial debt (N-C-D) 2,464 7,485 9,949 3,156 7,185 10, Provisions for risks and charges Provisions for risks and charges of 629 million ( 576 million at 31 December 2009) are illustrated in the table below: ( million) Beginning balance Provisions Increases due to passing of time Utilisations for charges Provision for site dismantlement and restoration Provision for future CCSE expenses (93) Provision for litigation (1) (2) Provision for environmental expense 2 (5) Other provisions 5 8 (2) for excess Change in scope of consolidation (8) (2) 543 (93) Reclassification (*) Other changes (*) See the note below on reopening balances at 1 January

117 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements ( million) Beginning balance Provisions Increases due to passing of time Utilisations for charges Provision for site dismantlement and restoration (2) Provision for litigation (1) (19) 69 Provision for environmental expense 59 8 (7) 60 Other provisions (3) (2) (13) (21) for excess Other changes The opening balance ( 576 million) includes the reclassification to Other liabilities of payments for balancing and stock replenishment ( 93 million). The procedures and timing for returning such payments are set forth in Resolution no. 50/06 of the Electricity and Gas Authority. To be specific, these payments, which were removed from the income statement since they are to be allocated to service users, were previously posted as a counter-entry to provisions for risks and charges pending the decision of the Electricity and Gas Authority as to the amount to be allocated to cover additional revenues recognised to cover new investments, with any excess to be paid to the Cassa Conguaglio del Settore Elettrico (Electricity Equalisation Fund). At the time of the Authority s decision, these payments will be treated as additional revenues recognised to cover new investments, and any excess will be treated as a payable to the Cassa Conguaglio del Settore Elettrico resulting in the transfer/reclassification of the amount previously removed. Accordingly, in order to harmonise the accounting treatment to that used for other regulated activities carried out by Snam Rete Gas, at 31 December 2009 the amount of payments reported as a counter-entry to provisions for risks and charges ( 93 million) has been reclassified from Provisions for risks and charges to Other liabilities, and the current portion ( 63 million) is clearly separated from the non-current portion ( 30 million). The provision for site dismantlement and restoration ( 430 million) was recognised primarily due to expenses which are expected to be borne for the removal of natural gas storage facilities and for site restoration ( 419 million). The provision for litigation ( 69 million) included costs which the company has estimated it will incur for existing lawsuits. The provision for environmental expen se ( 60 million) mainly included costs for environmental soil reclamation, which is required under Law no. 471/1999 and subsequent amendments, as well as other work, primarily for the disposal of solid waste, related to the distribution business. Other provisions ( 70 million) relate essentially to: (i) costs ( 29 million) recorded to offset the item covering changes in inventories resulting from the difference between estimated quantities of unaccounted-for gas (UFG), 18 which is to be recorded in 2011, and the amounts to be paid in kind by users as required by the Authority to cover the quantities of UFG for the same year; (ii) costs for termination benefits ( 15 million) for the planned termination of staff based on union agreements; (iii) costs for incentive plans, contribution rebates and staff-related premiums ( 11 million); and (iv) costs for tax disputes related to direct and indirect taxes ( 6 million). 18 Provisions for employee benefits Provisions for employee benefits of 105 million ( 107 million at 31 December 2009) can be broken down as follows: ( million) Employee severance pay Supplemental Healthcare Provision for Company Executives of Eni (FISDE) 5 6 Other provisions for employee benefits The provision for employee severance pay of 81 million is governed by Article 2120 of the Italian Civil Code and represents the estimated liability determined on the basis of actuarial procedures for the amount to be paid to employees at the time the employment relationship is terminated. The principal amount of the benefit is equal to the sum of portions of the allocation calculated on compensation items paid during the employment relationship and revalued until the time such relationship is terminated. The amount of the allocation made to the provision for employee severance (hereinafter TFR ) used for the purposes of the liability and cost is reduced by any portion paid to pension funds. The supplemental healthcare provision for company executives of Eni (FISDE) of 6 million includes the estimate of costs related to contributions to be paid to the supplemental healthcare provision benefiting current and retired executives. The amount of the liability and the cost of care related to the supplemental healthcare provision for company executives of Eni are determined with reference to the contribution that the company pays to retired executives. (18) Since 1 January 2010, the new tariff criteria for the transportation business, applicable for the third regulatory period (1 January December 2013) have required payment in kind by users of the transportation service of quantities of gas to cover fuel gas, network losses and unaccounted-for gas. These payments were due as a percentage of the quantities injected into and withdrawn from the transportation network. In particular, Resolution no. 184/09 of the Electricity and Gas Authority has the following provisions: (i) for fuel gas and network losses, the introduction of an equalisation mechanism for discrepancies between amounts allocated by users and actual consumption; (ii) for Unaccounted-For Gas (UFG), to assign its ownership to the larger transportation company. 115

118 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Other employee benefit provisions of 18 million mainly concern long-term benefits connected with deferred cash incentive plans, long-term cash incentive plans and seniority plans. Deferred cash incentive plans are allocated to executives who have met pre-established goals, and include an estimate of variable compensation related to company performance. This compensation will be paid out in relation to results achieved in the three-year period concerned after three years starting with the annual allocation. Long-term cash incentive plans, which were allocated starting in 2010, provide for a variable cash benefit in relation to company performance paid out at the end of the vesting period provided the employee works in the three years following the allocation. Seniority bonuses are benefits paid upon reaching a minimum service period at the company, and are paid in kind. Employee benefit provisions, which are determined by applying actuarial methods, can be broken down as follows 19 : ( million) TFR FISDE Other Total TFR FISDE Other Total Present value of liabilities at beginning of year Change in scope of consolidation Current cost Interest cost Actuarial gains/losses Benefits paid (3) (4) (7) (6) (6) (12) Present value of liabilities at end of year Unrecorded actuarial gains/losses (1) (1) (4) (4) Cost related to unrecorded past work performed (1) (1) (2) Net liabilities in provisions for employee benefits Costs related to employee benefit liabilities, which are recorded in the income statement ( 27 million), are broken down as follows: ( million) TFR FISDE Other Total TFR FISDE Other Total Current cost Interest cost The main actuarial assumptions used to determine liabilities at the end of the year and in the estimate of costs expected for the next year are indicated below: % TFR FISDE Other 2009 Discount rates Inflation rate Discount rates Inflation rate Demographic tables prepared by the General State Accounting Department (RG48) were used for the actuarial assumptions. With respect to FISDE, the impact of a 1% change in the actuarial assumptions for costs related to medical care is not significant. 19 Deferred tax liabilities Deferred tax liabilities of 853 million ( 934 million at 31 December 2009) are stated net of offsettable deferred tax assets of 463 million ( 454 million at 31 December 2009). There are no deferred tax assets which cannot be offset. ( million) Provisions Utilisations Other changes Deferred tax liabilities 1,388 3 (77) 2 1,316 Deferred tax assets (454) (51) 41 1 (463) 934 (48) (36) (19) The table also provides a reconciliation of liabilities recorded for employee benefit provisions. 116

119 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Deferred tax assets and liabilities are determined using the respective IRES and IRAP tax rates of 27.5% and 3.9% (unchanged from 31 December 2009). Deferred tax liabilities of 853 million are broken down as follows by type of tax: ( million) IRES IRAP Total IRES IRAP Total Deferred taxes 1, ,388 1, ,316 Prepaid taxes (405) (49) (454) (415) (48) (463) Deferred and prepaid taxes are broken down below based on the nature of the most significant timing differences that resulted in the net deferred tax liabilities: ( million) Deferred tax liabilities: - Excess and accelerated amortisation and depreciation 985 (51) (1) Revaluation of Italgas property, plant and equipment 240 (9) Site dismantlement and restoration 53 (10) (2) 41 - Capitalisation of financial expense 15 (1) 14 - Deferred tax on capital gains 5 3 (4) 4 - Excess loan impairment losses Derivative valuation Finance leases Other 83 (2) ,388 3 (77) 2 1,316 Deferred tax assets: - Cash and contractual grants (134) 3 (131) - Site dismantlement and restoration (117) (4) 2 (119) - Provisions for risks and charges and other non-deductible provisions (89) (22) 10 (101) - Revenue adjustments (35) (13) 4 (44) - Non-deductible amortisation and depreciation (20) (2) (22) - Derivative valuation (35) 22 (13) - Employee benefits (5) (1) (6) - Other (19) (11) 2 1 (27) (454) (51) 41 1 (463) Net deferred tax liabilities 934 (48) (36) Provisions Utilisations Other changes Deferred tax assets and liabilities are considered to be long term. Other changes ( 3 million) mainly relate to deferred taxes set aside on the change in fair value of hedging derivatives ( 1 million, net of prepaid taxes). Note 27 Income taxes provides information about taxes for the year. 117

120 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements 20 Other non-current liabilities Other non-current liabilities of 331 million ( 273 million at 31 December 2009) comprise: ( million) (*) Prepaid income from regulated activities (*) Derivatives: - Fair value of derivatives Other non-current liabilities: - Deferred and prepaid revenue and income Deferred connection fees 3 - Security deposits 1 - Other liabilities (*) The balance at 31 December 2009 includes the reclassification ( 30 million) from Provisions for risks and charges of payments for balancing and stock replenishment. For further information, see Note 17, Provisions for risks and charges. Prepaid income from regulated activities ( 273 million) relates to: (i) the non-current portion of transportation revenues invoiced in excess of the restriction established by the Regulator and penalties charged to service users that exceeded the committed capacity ( 177 million); this amount is to be adjusted based on the provisions of Resolution no. 166/05 of the Electricity and Gas Authority; and (ii) the non-current portion of payments for balancing and stock replenishment ( 96 million) to be returned to service users based on the provisions of Resolution no. 50/06 of the Electricity and Gas Authority. Deferred and prepaid revenue and income ( 23 million) refer to the non-current portion of the prepaid fee for the concession to use fibre-optic cables given to a telecommunications operator ( 22 million). For information about derivatives, see Note 10 Other non-current assets. 21 Shareholders equity Shareholders equity of 5,916 million at 31 December 2010 breaks down as follows: ( million) Equity attributable to Snam Rete Gas Share capital 3,570 3,570 Legal reserve Share premium reserve 1,978 1,981 Consolidation reserve (1,586) (1,713) Cash flow hedge reserve (52) (49) Other reserves Retained earnings Net profit 732 1,106 less: - Treasury shares (792) (789) - Interim dividend (203) (304) 5,702 5,915 Capital and reserves attributable to minority interests Napoletana Gas 1 1 5,703 5,916 Share capital At 31 December 2010, the fully subscribed and paid-up share capital of Snam Rete Gas S.p.A. consists of 3,570,832,994 ordinary shares with a nominal value of 1 (3,570,768,494 shares at 31 December 2009). The increase of 64,500 shares from 31 December 2009 was due to the exercise, by eligible executives, of the same number of stock options in relation to the 2003 plan. On the same date there were commitments to allocate 503,500 shares for stock option plans, which are to be implemented through an increase in share capital. Legal reserve The legal reserve at 31 December 2010 totalled 418 million ( 391 million at 31 December 2009), the increase of 27 million resulting from the allocation of 5% of 2009 profit of the parent company Snam Rete Gas S.p.A, in accordance with Article 2430 of the Italian Civil Code. 118

121 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Share premium reserve The share premium reserve at 31 December 2010 totalled 1,981 million ( 1,978 at 31 December 2009). The change of 3 million is due to the exercise of options by eligible directors. Consolidation reserve The negative consolidation reserve ( 1,713 million compared with 1,586 million at 31 December 2009) includes the value derived from the difference between the acquisition cost of the Italgas and Stogit holdings ( 4,640 million, including the additional transaction expenses and price adjustment following the agreements reached at transaction closing) and the relative shareholders equity attributable to the group on the transaction completion date ( 2,004 million and 923 million, respectively, for Italgas and Stogit). The 127 million increase over 31 December 2009 was due to the recognition of the estimated impact of the price adjustment reflecting agreements signed when the purchase contracts were signed for Italgas and Stogit 20. Cash flow hedge reserve ( million) Amount Reserve at (52) Transfer to income statement 74 Other changes (71) Reserve at 31 December 2010 (49) The cash flow hedge reserve (- 49 million) includes the measurement, net of the related tax effect, of the fair value of cash flow hedge derivatives relating to interest rate swap agreements used by the company to convert floating-rate loans into fixed-rate loans. Other reserves Other reserves of 791 million ( 794 million at 31 December 2009) mainly include the reserve established for the cost of 194,184,651 treasury shares held ( 789 million). Retained earnings Retained earnings totalled 904 million ( 870 million at 31 December 2009) and rose by 34 million mainly due to the allocation of 2009 residual profit ( 30 million). Treasury shares The treasury shares held at 31 December 2010 are analysed in the following table: Period Number of shares Average cost ( ) Total cost ( million) Share capital (%) (**) Purchases , ,731, ,006, ,537, Treasury stock allocated/sold to be deducted: - assigned free of charge pursuant to 2005 stock grant plans (39,100) - sold pursuant to 2005 stock option plans (69,000) - sold pursuant to 2006 stock option plans (1,015,499) - sold pursuant to 2007 stock option plans (229,700) Treasury stock held at 31 December 2010 (*) 194,184,651 (*) For a book value of 789 million. (**) The share capital is as at the date of last acquisition in the year. At 31 December 2010, treasury shares held totalled 194,184,651, equal to 5.44% of the share capital. At 31 December 2010, there were commitments to grant 5,446,451 treasury shares for stock option plans. At that date the market value of the shares totalled approximately 724 million 21. (20) For more information, see Note 22 Guarantees, commitments and risks - Commitments deriving from the agreement to purchase Italgas and Stogit from Eni. (21) Calculated by multiplying the number of treasury shares by the official share price at 31 December 2010 ( 3.73 per share). 119

122 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Interim dividend The interim dividend of 304 million reflects the interim dividend for 2010 of 0.09 per share resolved by the board of directors in its meeting of 27 July 2010 in accordance with Article 2433-bis, paragraph 5 of the Italian Civil Code. The interim dividend was made available for payment from 21 October 2010 with an ex-dividend date set at 18 October Dividends The shareholders of Snam Rete Gas S.p.A. authorised an ordinary dividend of 0.14 per share at their ordinary meeting of 27 April 2010 to complete the 2009 interim dividend of 0.06 per share. The remaining dividend ( 472 million) was paid from 27 May 2010, with an ex-dividend date of 24 May In its meeting of 2 March 2011, the board of directors proposed to the Shareholders Meeting convened for 13 and 14 April 2011, on first and second call respectively, the distribution of an ordinary dividend of 0.23 per share. The dividend balance of 0.14 per share will be made payable as of 26 May 2011, with an ex-dividend date of 23 May Guarantees, commitments and risks Guarantees, commitments and risks of 3,676 million ( 2,428 million at 31 December 2009) comprise: ( million) Other personal guarantees Commitments and risks Total Other personal guarantees Commitments and risks Total Other personal guarantees given on its own behalf: - Parent companies Commitments Commitments for the purchase of goods and services 1,168 1,168 1,732 1,732 Other Risks: - Third-party assets on deposit 1,191 1,191 1,877 1,877 - Litigation ,378 2, ,614 3,676 Guarantees Other personal guarantees of 62 million ( 50 million at 31 December 2009) essentially relate to hold harmless letters issued to Eni S.p.A. for sureties issued on behalf of Snam Rete Gas, mainly performance bonds and security for participating in contract job bidding. Commitments At 31 December 2010, commitments with suppliers to purchase property, plant and equipment and provide services relating to investments in property, plant and equipment and intangible assets under construction totalled 1,732 million. Risks Risks related to third-par ty assets on deposit, equalling 1,877 million ( 1,191 million at 31 December 2009) relate to about 6.3 billion cubic metres of natural gas deposited in the storage plants by customers of the service. This amount was determined by applying the estimated unit repurchase cost of approximately 0.29 per standard cubic metre to the quantities of gas deposited. Risks related to compensation and litigation ( 4 million) relate to possible (but not probable) claims for compensation arising from ongoing litigation, with a low probability that the pertinent economic risk will arise. Commitments arising from the agreement to purchase Italgas and Stogit from Eni The price determined for the acquisition of Italgas and Stogit is subject to adjustment mechanisms meant to take effect even after the date of execution. The following describes the adjustment mechanisms based on the commitments made on upon completion of the acquisition transaction and the developments arising during

123 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Acquisition of Italgas The acquisition price for Italgas will be adjusted upwards by an amount equal to the difference between the provisional aggregate value estimated for the RAB (Regulatory Asset Base) at 31 December 2007, for Italgas, and for several subsidiaries of Italgas, determined overall at 4,560 million, as represented by Eni in the Italgas purchase and sale agreement, and the RAB value for Italgas and for those same subsidiaries of Italgas at that same date of 31 December 2007 as approved by the Electricity and Gas Authority. That price will also be adapted for the purpose of payment to Eni of a portion of the gains from the sale of real properties owned by Italgas no longer functioning among its operating assets. Acquisition of Stogit The acquisition price for Stogit may be adapted to reflect the value, differing from the current one, which may be recognised by the Electricity and Gas Authority for the tariff period 1 April March 2018 for quantities of natural gas owned by Stogit at the date of transfer of the shares and included among the assets which constitute the RAB (Regulatory Asset Base). The purchase and sale agreement also provides for hedging mechanisms aimed at keeping within Eni the risks and/or benefits that may derive from: - An eventual valuation of the gas owned by Stogit at the time of the transfer of the shares which differs from the valuation currently recognised by the Electricity and Gas Authority in the event of an even partial transfer thereof when given quantities may no longer be instrumental to the regulated concessions and thus become available for sale; - A transfer of storage capacity that may eventually become freely available on a negotiated basis and no longer a regulated basis, or else from a transfer of concessions including those pertaining to Stogit at the time of the transfer of the shares which may eventually be dedicated predominantly to storage business no longer subject to regulation. For both of the companies acquired, the purchase agreement also provided for price adjustment mechanisms deriving from possible compensation for damages, losses, liabilities or contingent liabilities realised by the acquirer or by the companies acquired resulting from changes in relation to the declarations or guarantees issued by the seller. In view of these commitments, the following were recognised in 2010: In favour of Eni (payable for Snam Rete Gas): (i) the amount of 145 million, equal to the difference between the provisional aggregate value estimated for the RAB (Regulatory Asset Base) of Italgas and of several Italgas subsidiaries at 31 December 2007 and the aggregate RAB value defined by the Electricity and Gas Authority for that date; (ii) the amount of 27 million, as the share of the added value of natural gas as recognised by the Authority and included in the RAB compared with the value used as reference in the Stogit transfer agreement; and (iii) the amount of 2 million, as the share of the capital gain from the transfer of 25 million cubic metres of natural gas no longer necessary for the functioning of the storage system; In favour of Snam Rete Gas (receivable for Snam Rete Gas with Eni), the amount of 47 million, mainly relating to the estimate of liabilities on matters already existing prior to the date when the contract was completed. These effects have been recognised as an adjustment to the acquisition cost of the respective equity investments, thus resulting in an increase of 127 million in the negative consolidation reserve in the consolidated financial statements. Rome metropolitan area and Romana gas business unit As a result of the transfer by French company Suez S.A. (now GdF-Suez S.A. following a merger) of its Belgian subsidiary Distrigaz, the ultimate parent Eni, on the basis of preliminary understandings with Italgas, agreed to transfer to Suez, together with other assets in the gas and electricity sectors, the distribution business of Italgas in the metropolitan area of Rome. The subject matter of the transfer was the business unit involving gas distribution in the municipalities of Rome, Fiumicino, Ciampino, Marino, Grottaferrata, Rocca di Papa and Frascati, including the distribution networks (about 5,300 km long) and the pertinent plants, about 1.3 million redelivery points (covering about 28% of the users served) and about 800 employees. The contract provided that the transaction would be completed by Italgas granting that business unit to the Rete Gas Roma S.r.l. (a company created specifically on 26 November 2008 with share capital fully held by Italgas) subject to obtaining consent from the Municipality of Rome for the transfer of the concession by the 30 June 2009 deadline, which the buyer was able to extend up to 31 August By Executive Decision no of 25 June 2009, the Municipality of Rome gave its consent to the transfer of the concession agreement relating to the distribution of gas within the territory of the municipality to the aforementioned company, Rete Gas Roma, acknowledging the intention of Italgas to transfer all of the share capital of the latter to GdF-Suez. By communication dated 6 July 2009, the Mayor of Rome then specified that said Executive Decision constituted the sole suitable means of expressing the legitimate and valid consent of the municipal authority for the transfer transaction and that the Municipal Council would be informed of said transaction. However, on 13 July 2009 GdF-Suez informed Italgas that it did not believe that the conditions for the transfer of the gas distribution business in the metropolitan area of Rome had been fulfilled by the agreed deadlines and that it therefore renounced proceeding to completion of the acquisition as set forth in the contract entered into between the parties on 30 October The contents of the contract are being evaluated, reserving the possibility of bringing the appropriate actions so as to best protect our interests. 121

124 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Corporate risk management 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 fluctuations in interest rates and in the price of natural gas; (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) risks specific to the business segments. This paragraph describes the main policies and principles of Snam Rete Gas in managing and controlling the risks deriving from financial instruments (interest rate risk, credit risk and liquidity risk). In accordance with disclosure pursuant to IFRS 7, there are also descriptions of the nature and size of the risks resulting from such instruments. Information on the other risks that characterise the business (natural gas price fluctuations risk, operational risk and risks specific to the business segments) can be found in the Directors report, under Elements of risk and uncertainty. MARKET RISK Interest rate 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 interest rates of some of Snam Rete Gas s loans are indexed to benchmark rates, namely the Euro Interbank Offered Rate (Euribor). The policy for hedging interest rate risk is to limit the interest rate volatility risk while pursuing financial structure objectives laid down in the business plans. For that purpose, Snam Rete Gas uses derivative instruments notably interest rate swaps (IRS) to manage the balance between fixed-rate and floating-rate debt. The hedge transactions are qualified under IAS 39 Cash Flow Hedge. Snam Rete Gas does not have derivative contracts held for trading or speculative purposes. 22 The gross financial debt, including the effects of hedging transactions, is broken down by fixed and floating rate in the following table ( million) Amount % Amount % At fixed rate 5, , At floating rate 4, , , , The exposure to interest rate risk at 31 December 2010 equals about 21% of the total exposure of the group (43% at 31 December 2009). The reduction in interest rate risk compared with the previous financial year derives from hedging activities carried out during the year, enabling the achievement of the financial structure targets defined in the business plans. (22) The characteristics of the derivative contracts are described in Note 10 Other non-current assets. 122

125 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The effects on shareholders equity and profit at 31 December 2010 are shown below, assuming a change of +/-10% in interest rates actually applied during 2010, compared with those of Net income for the period Shareholders equity ( million) +10% -10% +10% -10% Floating rate loans Effect of change in interest rate (3) 3 Floating rate loans converted to fixed-rate loans using IRS Effect of change in interest rate on fair value of hedging derivatives pursuant to IAS 39 - effective share (*) 31 (32) Effect on income before taxes (3) 3 31 (32) Tax effect 1 (1) (9) 9 (2) 2 22 (23) Net income for the period Shareholders equity ( million) +10% -10% +10% -10% Floating rate loans Effect of change in interest rate (1) 1 Floating rate loans converted to fixed-rate loans using IRS Effect of change in interest rate on fair value of hedging derivatives pursuant to IAS 39 - effective share (*) 38 (42) Effect on income before taxes (1) 1 38 (42) Tax effect (10) 12 (1) 1 28 (30) (*) Changes in the interest rate do not affect the income statement. Therefore, changes in the fair value of derivatives arising from the decline in the interest rate affect only shareholders equity. Snam Rete Gas 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. 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 stability and results of Snam Rete Gas. Snam Rete Gas s exposure to credit risk is connected with the natural gas transportation, regasification, storage and distribution services provided by the companies. In particular, Snam Rete Gas 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 customer 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 that govern the rights and obligations of the parties involved in providing said services and have contractual conditions which minimise the risk of non-compliance by customers. In particular, the codes provide for suitable guarantees to partly cover obligations where the customer does not possess a credit rating issued by one of the leading international agencies. The maximum exposure of Snam Rete Gas to credit risk at 31 December 2010 is represented by the book value of the financial assets recognised in the financial statements. Below is a breakdown of receivables overdue but not impaired ( million) Trade receivables Other receivables Total Trade receivables Other receivables Total Unexpired receivables that have not been written down Written down receivables net of provision Expired receivables that have not been written down: - from 0 to 3 months from 3 to 6 months from 6 to 12 months over 12 months Total expired receivables that have not been written down

126 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Receivables overdue but not impaired, totalling 90 million ( 53 million at 31 December 2009) refer to receivables from counterparties with high reliability and therefore, as of today, it is reasonable not to deem their collection critical. The criteria used to verify the presence of impairments are indicated in the description of the valuation criteria. No material credit risks arose. At 31 December 2010, roughly 76% of trade receivables (72% at 31 December 2009) are due from highly-rated key customers, including the ultimate parent, Eni S.p.A., which represents approximately 48% of total trade receivables (50% at 31 December 2009). LIQUIDITY RISK Liquidity risk is the risk that new financial resources may not be available (funding liquidity risk) or the company may be unable to convert assets into cash on the market (asset liquidity risk), meaning that it cannot meet its payment commitments. This may affect profit or loss should the company be obliged to incur extra costs to meet its commitments or, in extreme cases, lead to insolvency and threaten the company s future as a going concern. The objective of Snam Rete Gas is to have a financial structure (in terms of leverage ratio and ratios of medium-to-long-term debt and total debt) which ensures an adequate level of liquidity for the group, in line with business objectives, by minimising the related cost and maintaining a balance in terms of duration and composition of its debt. 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 company 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. Financial liabilities, not d iscounted to present value, including the short-term portions and accrued interest, 23 may be broken down by maturity date as follows: ( million) (*) Over Total Financial debt (**) 3,434 1,819 1,369 1,687 1,335 2,440 12,084 Trade and other payables 1,238 1,238 4,672 1,819 1,369 1,687 1,335 2,440 13,322 (*) This includes a fixed-rate loan ( 400 million) agreed with Eni on 23 December 2010 with a disbursement date of 21 March The loan has a fixed rate of about 2.9% with bullet repayment on 20 December 2013, and it refinances a 300 million loan due to mature on 20 March (**) For floating-rate financial payables converted into fixed-rate financial payables by the use of cash flow hedge derivative instruments, the cash flow includes the effect of the these transactions. Other information on financial instruments With reference to the classifications provided for in IAS 39, it is specified that Snam Rete Gas does not have financial assets held to maturity, available for sale or held for trading. As a result, the financial assets and liabilities, except the hedging derivatives, all fall within the classification of financial instruments measured at amortised cost. The book value of financial instruments and their relative effects on results and on equity may be analysed as follows: Income (expense) Carrying value Income statement Shareholders equity (*) ( million) Financial instruments measured at fair value Hedging derivatives Effective share of hedge pursuant to IAS 39 (73) (68) (64) (102) (21) 3 Ineffective share of hedge pursuant to IAS 39 (2) Receivables, payables and other assets/liabilities measured at amortised cost Trade and other receivables (6) Trade and other payables (1,062) (1,238) Financial debt (9,986) (10,350) (142) (151) (*) Net of the tax effect. The following presents a comparison between the book value of long-term financial liabilities and the respective market value. This information is not reported for other financial assets/liabilities because the book value is almost equivalent to the market value. 31-Dec Dec-10 ( million) Book value Market value Book value Market value Financial debt 8,401 8,561 8,506 8,646 (23) With respect to cash flows of accrued interest, maximum use of the credit lines ( 1,700 million) have been assumed up to expiry of the lines (2014). 124

127 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The market value of the long-term financial liabilities, including the short-term portions, was determined using the discount rates defined on the basis of market interest rates at 31 December 2010, between 0.8% and 2.9%. The classification of assets and liabilities measured at fair value in the balance sheet, according to the fair value hierarchy 24 considering the significance of the inputs used in the measurement process, relates to level 2 derivative financial instruments posted among Other non-current assets, Other current liabilities, and Other non-current liabilities. Litigation Snam Rete Gas is involved in civil, administrative and criminal proceedings and legal actions related to its normal business activities. According to the information currently available and considering the existing risks, Snam Rete Gas believes that these proceedings and actions will not have material adverse effects on its consolidated financial statements. The following is a summary of the most significant proceedings; unless indicated otherwise, no allocation has been made for the litigation described below because the company believes it improbable that these proceedings will have an unfavourable outcome or because the amount of the allocation cannot be reliably estimated. Criminal cases Italgas S.p.A. Judiciary investigations into gas metering In May 2007 Italgas received notice of a local search and seizure proceeding within the framework of Case no /06 RGNR brought by the public prosecutor of the Milan district court. The document was also served upon the chairman of the company. The charge alleged unlawful conduct starting in 2003 relating to the use of gas metering equipment, the payment of excise duties, the billing of customers and relations with the supervisory authority. Among other things, the charges relate to offences established in Legislative Decree no. 231 of 8 June 2001, which provides for administrative liability of a company for crimes committed by its employees in the interest or to the advantage of the company itself. On 3 February 2009 the public prosecutor of Milan gave notice of a request to extend the period for preliminary investigations into Italgas to 7 October In December 2010 a notice of conclusion of preliminary investigations was received relating only to the specific matter of using Venturi-type metering equipment installed in various Milan municipalities, at the connection stations between the national natural gas transportation networks and the local natural gas distribution networks. The company is cooperating with the appropriate authorities in this investigation. Snam Rete Gas - Judiciary investigations into gas metering The public prosecutor at the Milan district court has commenced a criminal case on the issue of gas metering and the legitimacy and reliability of what are referred to as the Venturi meters. This has involved several companies in the gas sector. Snam Rete Gas and some of its managers are also involved in the case and the Mazara del Vallo metering system has been placed under precautionary seizure; the company is under investigation pursuant to Articles 24 and 25-ter of Legislative Decree no. 231/2001. In this regard, the company wishes to state that: the reliability of the Venturi metering system, and more specifically the facility at Mazara del Vallo, the entry point into Italy for the Algerian gas importation pipeline, which was designed and set up with Venturi-type meters at the beginning of the 1980s and subsequently extended in 1994, has been confirmed by some of the most authoritative Italian and international metrology institutions; the Mazara del Vallo metering facility was authorised by the Italian finance ministry both when the imports started and during the subsequent upgrading stage; Venturi metering systems are currently used throughout the world. In Europe, they can be found in Great Britain, Germany, France, Austria and Norway; in Italy the process of approving this type of metering instrument has been in progress for more than a decade, with a positive outcome of the technical procedure in place since December The urgent need to finalise this process has been reiterated by Snam Rete Gas to the former Ministry of Industry, now the Ministry of Economic Development. The company is cooperating with the relevant authorities and is confident about the reliability of the metering system used at the Mazara del Vallo station. It has full confidence in the judiciary and trusts that the outcome of the investigations will confirm the propriety of its conduct. In November 2009, notice of conclusion of preliminary investigations was received, within the context of the aforementioned broader criminal case relating to the gas metering system, concerning a matter pertaining particularly to tax issues deemed of a criminal nature. Some managers and department heads (including some no longer employed by the company) are under investigation with regard to various matters. The period under investigation is a time span that, in total, covers the years from 2003 to 2007, relating primarily to annual natural gas consumption reports and to assessment and/or payment of excise duties on natural gas, as well as to possible obstruction of supervisory duties. (24) The changes to IFRS 7, issued by the IASB in March 2009 and approved in November 2009, require the distinction of measurements at fair value on the basis of a three-level classification (fair value hierarchy) defined by considering the significance of the inputs used in the measurement process. In particular, this standard provides for the following levels: (i) Level 1: measurements made on the basis of quoted prices (and not subject to change) on active markets for the same financial assets or liabilities; (ii) Level 2: measurements made on the basis of inputs differing from the quoted prices referred to in the previous point, which, for the assets/liabilities sub mitted for measurement, are indirectly observable; and (iii) Level 3: inputs not based on observable market prices. 125

128 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The preliminary hearing for the request made by the public prosecutor to bring the matter to the courts has been set for 12 May 2011, noting possible continuation of hearings on 24 and 26 May With the help of independent external experts, the administrative, tax and European legislation aspects have been examined more closely. Snam Rete Gas is reassured by the opinions of the experts and maintains that the allegations made are unfounded. The company therefore considers itself unlikely to suffer a subsequent negative economic impact. Civil and administrative cases Snam Rete Gas - Recovery of amounts for improper withdrawals of gas Eni S.p.A. has involved Snam Rete Gas S.p.A. in civil proceedings against end customers for the recovery of amounts for improper withdrawals of gas by said end customers, asserting that they did not behave in compliance with the role attributed to them by the network code. Eni S.p.A. has also challenged Resolution no. 268/05 of the Electricity and Gas Authority, which introduced into the provisions of the Snam Rete Gas network code the mandatory presence of a representative of the end customer in order to be able to carry out the so-called dumping of pipes at the redelivery points under safe conditions. Snam Rete Gas believes that it has always acted correctly and in full compliance with the terms of the transportation agreement, the network code, related application procedures and, in general, the legal and technical rules of conduct. Having consulted an independent legal expert, who claims that the compensation claim is unlikely to be upheld, Snam Rete Gas remains convinced that any criticism of its conduct is unfounded. Tax cases GNL Italia S.p.A. - Local property tax (ICI) Following the change in classification and the reassessment of real estate income performed by the La Spezia territorial agency, with reference to the Panigaglia real estate complex, the Municipality of Porto Venere has notified GNL Italia S.p.A. of ICI tax assessments for the years 2001 to The company has submitted appeals against the action brought by the territorial agency as well as against the above-mentioned assessments. The La Spezia provincial tax commission: by Ruling no. 136/7/08 of 24 November 2008, held in favour of the territorial agency with respect to the classification of the real estate complex and to the allocation of the pertinent real estate income; by Ruling no. 83/7/2009 of 9 March 2009, upheld the case made by GNL Italia, recognising that the ICI tax was not due for the years 2001 to 2006; by Ruling no. 16/3/10 of 27 November 2009, confirmed the ICI tax payables for 2007 but acknowledged that the administrative penalties were not due. The company has made an allocation to the provision for risks relating to this litigation, pending final pronouncements. Competition Authority Italgas - Investigation of the gas distribution and sales sector in Italy On 6 May 2009, the competition authority notified Italgas of the start of an investigation with the aim of determining the possible existence of an abuse of dominant position in violation of Article 82 of the EU Treaty. The investigation, which also involves other companies in the gas sector, arose from an allegation by an operator, also active in the gas sales sector, concerning supposed obstructive and dilatory conduct by Italgas in carrying out the operational and commercial switching procedures to enable the transition of customers from one sales company to another. In order to determine the precise context of the content of the allegation from the operator, on 26 May 2009 Italgas accessed the case documents. On 6 August 2009 Italgas presented commitments in accordance with Article 14-ter of Law no. 287/90 for the purpose of eliminating the supposed wrongful conduct. By a resolution dated 8 September 2010, in acceptance of the commitments made, the Authority decided to close proceedings against the companies under investigation without determining an infringement pursuant to Article 14-ter, paragraph 1, of Law no. 287/90. Italgas - Investigation of the gas distribution sector in Italy The competition authority, in its session of 13 October 2010, started an investigation to determine whether Italgas had abused its dominant position, obstructing the Municipalities of Rome and Todi in their preparing of calls for tenders for the contracting of gas distribution services. The decision was taken in light of indications sent to the regulator by two local entities accusing the company, as gas distribution service concessionaire, of having delayed or refused to give the necessary information to the authorities to prepare calls for tenders for contracting the service, the concession to Italgas having expired in December The investigation should be completed by 15 December As the proceedings stand currently, considering the documentation available and the applicable regulatory framework, no evidence has emerged to show a violation of such rules by the company, nor any which would make it possible to estimate the amount of any sanction. 126

129 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Electricity and Gas Authority Snam Rete Gas - Investigation into violation of the regulation on availability of natural gas higher heating value measurements As a result of Formal Investigation VIS 85/09, the Electricity and Gas Authority (hereinafter the AEEG), by Resolution VIS 12/11, issued a fine of 580,000 against Snam Rete Gas (hereinafter Snam) for violating the rules imposed on gas transportation companies with respect to the proper measurement and use of natural gas higher heating values (hereinafter HHV). That parameter is needed to determine the actual energy provided to operators on the market or individual sellers. Specifically, the AEEG saw fit to penalise temporary interruption, in limited cases, of the mechanical and chemical reading of the HHV, even though Snam had replaced readings with manual samplings. The AEEG also found that the violation did not involve any billing infraction and, when determining the amount of the fine, it took into consideration the corrective actions taken by Snam in order to improve the measurement service and to avoid similar negative reflections on its operations in the future. In conjunction with payment of the fine, subject to an appeal, Snam has urged the competent court to review the measure in protection of its corporate interests. Italgas - Investigation into gas distribution service quality violations On 18 September 2009, the Electricity and Gas Authority, by Resolution VIS 92/09, started a formal investigation for the issuance of an administrative fine for violations of gas distribution service quality. With respect to these proceedings, it is necessary to note that: (i) they derived from a report by the Electricity and Gas Authority on absolution of the obligation, imposed on distributors which operate cast-iron pipe networks with fittings of hemp and lead (not yet reconditioned), to replace, recondition or decommission them by 31 December 2008, to a minimum extent of 30%; and (ii) this investigation, proceeding within the Electricity and Gas Authority, has the purpose of determining whether there is violation of Article 2, paragraph1 and Article 11, paragraph 7 of the Authority s consolidated act of measures on the quality of gas distribution, metering and sale services (Resolution no. 168/2004) and of issuing an administrative fine under Article 2, paragraph 20, letter c) of Law no. 481/95 (fines of not less than 25, and not more than 154, ). Environmental regulations The risks related to the impact of the activities of Snam Rete Gas on the environment, on health and on safety are described in the Operating risk paragraph of the Directors report. In particular, with respect to environmental risk, while Snam Rete Gas believes that it operates in substantial compliance with the laws and regulations and considering the adjustments to environmental regulations and actions already taken, it cannot be ruled out that Snam Rete Gas may incur costs or liabilities, which could even be significant. It is difficult to foresee the repercussions of any environmental damage, partially due to new laws or regulations that may be introduced for environmental protection, the impact of any new technologies for environmental clean-ups, possible litigation and difficulty in determining the possible consequences, also with respect to other parties liability and any possible insurance compensation. Emissions trading The European Emissions Trading Scheme (ETS) has been in operation since 1 January In that regard, on 27 November 2008 the Italian national ETS commission (Minambiente Mse) issued Resolution no. 20/2008 setting forth the allocation of emissions allowances to existing facilities for the five-year period For that period, emissions allowances have been allocated to Snam Rete Gas equivalent to about 5 million tonnes of carbon dioxide (including the forecasts for new facilities). In 2010, the carbon dioxide emissions from the facilities of the group were slightly lower than the emissions allowances allocated. Compared with the 0.97 million tonnes of carbon dioxide emitted into the atmosphere, about 1 million had been allocated in emissions allowances, including allowances for new facilities (with a surplus of about 0.03 million tonnes). Other commitments and risks The other commitments and risks are: Commitment to Eni S.p.A. to redeliver 869,690 gigajoules (GJ) of natural gas stored at the Panigaglia regasification facility awaiting regasification; Commitment to Italtrading S.p.A. to purchase 228,600 GJ of natural gas in the period from 1 January 2011 to 31 December 2011; Commitment made to Eni S.p.A. in connection with the contribution of the natural gas transportation, dispatching and regasification activities (1 July 2001), to employ one person currently on unpaid leave when that person returns. 127

130 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Introduction As amply demonstrated in the Directors report, following the acquisition from Eni S.p.A. of Italgas and Stogit, completed on 30 June 2009, the compared 2009 results include the effects of consolidating the acquired companies in the second half of the year. Consequently, the comparison between the income statement items for 2009 and 2010 is not fully significant Revenue The key items making up revenue are described below. The reasons for the most significant changes can be found in the Financial review section of the Directors report. ( million) Core business revenue 2,438 3,475 Other revenues and income ,468 3,508 Core business revenue ( 3,475 million) is shown net of the following items: ( million) Additional payments to distribution service (*) Variable interruptibility fee as per Resolution no. 277/07 (**) Regional network capacity fee as per Resolution no. 45/07 - Equalisation (*) The distribution tariffs comprise: (i) an additional component to the distribution tariff (UG2) intended to contain the cost of the service for low-consumption end users, pursuant to Resolution ARG/gas no. 64/09; and (ii) an additional component to the distribution tariff to cover the mandatory insurance for civil end users of the gas distribution service, pursuant to Resolution ARG/gas no. 152/03. These fees are passed on in full to the Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund). (**) The Electricity and Gas Authority, by Reso lution no. 277/07, published on 31 October 2007, provided for the establishment, as of 1 January 2008, of a variable unit transportation fee as an increase to the variable unit fee as per Resolution no. 166/05. The amounts collected by Snam Rete Gas are passed on in full to the Cassa Conguaglio Settore Elettrico. The same Authority, by Resolution ARG/gas 200/09 Measures on helping to contain the consumption of natural gas pursuant to the decrees of the Ministry for Economic Development of 11 September 2007 and 17 December 2009, published on 23 December 2009, provided for the application of this fee until 30 September Core business revenue is analysed by business segment in Note 29 Information by business segment. The revenue of Snam Rete Gas is generated exclusively in Italy. Other revenues and income Other revenues and income ( 33 million) break down as follows: ( million) Income from property investments 3 6 Capital gains from disposal of property, plant, equipment and intangible assets 7 4 Plant safety inspections 4 4 Contractual penalties and other income from commercial relationships 2 3 Income from sale of energy efficiency certificates (TEE) (*) 4 2 Insurance payout 1 2 Other income (*) Revenues from the sale of energy efficiency certificates are shown net of the acquisition costs of the certificates. (25) In order to allow a significant comparison between the results for 2010 and those for 2009, the Financial review section of the Directors s report provides, along with notes on the individual items, the 2009 combined consolidated income statement, obtained by including Italgas and Stogit within the consolidation scope for the whole of

131 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Revenues from regulated and non-regulated activities The analysis of revenues from regulated activities ( 3,442 million) and non-regulated activities ( 66 million) is shown below: ( million) Natural gas transportation 1,848 1,873 Liquefied Natural Gas (LNG) regasification Natural gas distribution (*) 407 1,219 Natural gas storage Revenue from regulated activities 2,423 3,442 Revenue from non-regulated activities ,468 3,508 (*) From 1 January 2010, revenues include the effects of applying international accounting standard IFRIC 12 Service Concession Arrangements. The application of this interpretation had no effect on the consolidated results, except for the equal recognition of revenue and costs relating to the construction and upgrading of natural gas distribution infrastructures ( 349 million). More information about the provisions of this interpretation and how they apply to Snam Rete Gas can be found in the Basis of presentation and consolidation principles section of these Notes. Revenue from regulated activities Natural gas transportation Revenue from regulated activities ( 1,873 million) relates to fees for transportation activities and mainly concerns Eni S.p.A. ( 742 million) and Enel Trade S.p.A. ( 256 million). The revenue comprises: (i) recognition by the Electricity and Gas Authority of the additional expenses incurred for the purchase of fuel gas during the period from 1 October 2008 to 31 December ( 55 million); (ii) the recharging to users of the costs of connecting the company s network with that of other operators ( 46 million) 27. Following the application of the new tariff criteria laid down by the Electricity and Gas Authority in Resolution ARG/gas 184/09, from 1 January 2010 the revenue does not include the portion recognised by the Regulator to cover the operating costs of the fuel gas used for transportation activities, subject to payment in kind by service users. The payment in kind of natural gas entailed, on one hand, reduced operating costs from lower charges for supplying the gas and, on the other, reduced revenue for the portion allocated to cover the operating costs. During the course of 2010, Snam Rete Gas provided transportation services to 82 companies (70 companies in 2009). Natural gas distribution Revenue from regulated activities ( million) relates essentially to: (i) fees for natural gas distribution services ( 848 million) and mainly concerns Eni S.p.A. ( 756 million) and Enel Energia S.p.A. ( 40 million); (ii) revenue deriving from the construction and upgrading of distribution infrastructures ( 349 million), recognised in application of international accounting standard IFRIC 12; and (iii) technical services provided at redelivery points ( 17 million). During the course of 2010, Snam Rete Gas used its networks to distribute the gas of 169 commercial companies (138 companies at 31 December 2009). Natural gas storage Revenue from regulated activities ( 326 million) relates to fees for modulation ( 259 million) and strategic ( 67 million) storage, and mainly concerns Eni S.p.A. ( 98 million) and Enel Trade S.p.A. ( 51 million). During the course of 2010, Snam Rete Gas provided natural gas storage services to 60 companies (56 companies at 31 December 2009). Liquefied Natural Gas (LNG) regasification Revenue from regulated activities ( 24 million) relates to fees for liquefied natural gas (LNG) regasification, carried out at the Panigaglia (SP) LNG terminal, and mainly concerns Enel Trade S.p.A. ( 14 million) and Eni S.p.A. ( 8 million). Revenue from non-regulated activities Revenue from non-regulated activities ( 66 million) mainly concerns: (i) technical services ( 15 million); (ii) the leasing and maintenance of fibreoptic telecommunications cables ( 10 million) awarded under concession to a telecommunications operator; (iii) income from property investments ( 6 million); (iv) income from the sale of gas no longer required for the provision of storage services ( 5 million); and (v) capital gains on disposals of property, plant and equipment and intangible assets ( 4 million). (26) The additional cost incurred for the acquisition of fuel gas was determined by the Electricity and Gas Authority in Resolution ARG/gas 218/10, published on 3 December (27) Where the provision of the transportation service involves the networks of multiple operators, Resolution no. 166/05 of the Electricity and Gas Authority, as subsequently amended, provides for the principal operator to invoice the users for the service, transferring to the other operators of the transportation networks the portion attributable to them. 129

132 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements 24 Operating costs The key items making up operating costs are described below. The reasons for the most significant changes can be found in the Financial review section of the Directors report. ( million) Purchases, services and other costs Personnel expense Purchases, services and other costs Purchases, services and other costs ( 623 million) break down as follows: ( million) Internal consumption of natural gas from the regasification system (*) 6 9 Payments against strategic gas sales (**) Purchases, services and other costs are shown net of the following items: ( million) Costs incurred for raw materials, consumables, supplies and goods Service costs Costs for the use of third party assets Change in raw materials, consumables, supplies and goods Net accrual to provisions for risks and charges 17 6 Other expenses Less: Raw materials, consumables, supplies and goods: Increase on internal work capitalised in non-current assets - purchases (251) (120) (251) (120) Services: Increase on internal work capitalised in non-current assets - services (29) (27) (29) (27) (*) Internal consumption of natural gas from the regasification system relates to natural gas used for regasification which is purchased and subsequently recharged to the service user. (**) The sale and purchase of strategic gas does not involve the effective transfer of risks and benefits associated with the availability of the asset. As such, the transaction has no effect on the income statement. Costs incurred for raw materials, consumables, supplies and goods ( 156 million, gross of increases on internal work) mainly concern the acquisition of piping and include the costs relating to the construction and upgrading of distribution infrastructures ( 44 million). In 2010, due to the effects of applying the new tariff criteria for natural gas transportation activities, in force for the third regulatory period (1 January December 2013), the item does not include the costs arising from the acquisition of natural gas essential to the conduct of the activity, which is paid in kind by users as of 1 January

133 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The increase on internal work ( 120 million) relates mainly to the withdrawal of warehouse goods for investment activities. Costs for services amount to 455 million and comprise the following: ( million) Construction, planning and coordination of work Maintenance Purchase of transportation capacity (interconnection) Technical, legal, administrative and professional services IT (information technology) services Personnel-related services Utilities Telecommunications services Insurance Modulation and storage services (*) 11 Other services less: Income on internal work capitalised in non-current assets - services (29) (27) (29) (27) (*) For 2009, the cost of modulation services provided by Stogit S.p.A. relates to services rendered during the first half of the year, since the economic relationship was consolidated from 30 June 2009, the date of completion of the acquisition. Costs for services ( 455 million) include costs relating to the construction and upgrading of distribution infrastructures ( 201 million), recorded due to the implementation of IFRIC 12. The costs of construction, planning and coordinating work ( 183 million) relate mainly to the construction and improvement of concession infrastructures for natural gas distribution activities. Maintenance services ( 46 million) relate mainly to plant maintenance services. The purchase of transportation capacity ( 46 million) relates to the transportation service provided by other operators on their networks (interconnection). Personnel-related services ( 27 million) relate mainly to reimbursements of travel expenses, food and training costs. Other services ( 51 million) relate mainly to security and caretaker services, cleaning services, marketing services and aerial pipeline monitoring services. Development costs which do not satisfy the conditions for recognition under assets in the balance sheet amount to less than 1 million. Costs for the use of third-party assets ( 54 million) break down as follows: ( million) Fees, patents and licences Lease and rental payments Costs for the use of third-party assets ( 54 million) include costs relating to the construction and upgrading of distribution infrastructures ( 6 million) recorded due to the implementation of IFRIC 12. Fees, patents and licences ( 38 million) mainly concern the operation of natural gas distribution concessions and easement concessions related to pipeline construction and maintenance. Leasings and rentals ( 16 million) mainly relate to charges for operating leases of properties for use as offices. Future minimum payments due for non-cancellable operating leases break down as follows: ( million) Payable within year 3 1 from 2 to 5 years 6 2 over 5 years The negative change in raw materials, consumables, supplies and goods ( 30 million) is mainly due to the use of the materials used in transportation activities. 131

134 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Net appropriations to provisions for risks and charges ( 6 million, net of uses for surplus) mainly concern provisions for environmental expense. Information about provisions for risks and charges can be found in Note 17 Provisions for risks and charges. Other expenses ( 42 million) break down as follows: ( million) Capital losses from disposal of property, plant, equipment and intangible assets Indirect taxes and duties 7 11 Provision for receivable impairment 6 Methane gas consumption tax 3 4 Other expenses 8 9 Personnel expenses Personnel expenses of 345 million break down as follows: ( million) Wages and salaries Social security contributions (pensions and healthcare assistance) Defined contribution plan costs Other employee benefits 4 5 Other expenses less: Increase on internal work capitalised in non-current assets - personnel expense (94) (52) Personnel expenses ( 345 million) include costs relating to the construction and upgrading of distribution infrastructures ( 98 million), recorded from 1 January 2010 following the application of IFRIC 12. Defined-contribution plan costs ( 22 million) relate to the portion of severance pay earmarked for pension funds or for the Istituto Nazionale Previdenza Sociale (INPS) [National Social Security Institute] due to the modifications introduced by the 2007 Budget. Other employee benefits ( 5 million) relate mainly to deferred cash incentive plans allocated to executives who have achieved pre-established targets, and to long-term incentive plans, which will be paid out at the end of the vesting period. These benefits are analysed in Note 18 Provisions for employee benefits. Other expenses ( 21 million) mainly relate to costs for termination benefits and additional charges (social security contributions and severance pay) associated with the cash incentives. The increase on internal work ( 52 million) represents the part of personnel expenses absorbed by investment activities. The average number of payroll employees included in the consolidation scope, broken down by status, is as follows: Professional status Executives Managers Office workers 3,388 3,279 Manual workers 2,306 2,226 The average number of employees is calculated on the basis of the monthly number of employees for each category. 6,307 6,127 Incentive plans for executives with Snam Rete Gas shares At 31 December 2010 there were 5,949,951 options existing for the acquisition of 5,949,951 Snam Rete Gas ordinary shares with a nominal value of 1. The options relate to the 2003 allocation of 143,000 shares with a strike price of 3.246, the 2004 allocation of 360,500 shares with a strike price of 3.53, the 2005 allocation of 538,000 shares with a strike price of 4.399, the 2006 allocation of 856,551 shares with a strike price of 2.905, the 2007 allocation of 1,509,200 shares with a strike price of 3.545, and the 2008 allocation of 2,542,700 shares with a strike price of No new stock option plans were issued in

135 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The evolution of the stock option plans at 31 December 2010 is as follows: No. of shares Average strike price ( ) Market price ( ) (a) No. of shares Average strike price ( ) Options existing at 1 January 7,722, ,510, New options assigned (b) 1,283, Options exercised during the period (574,125) (766,074) Options expired during the period (c) (920,950) (794,675) Options existing at period end 7,510, ,949, of which exercisable 2,434, ,407, Market price ( ) (a) (a) The market price for the options assigned, exercised or expired in the year matches the weighted average for the number of shares, their market value (average official price on the electronic stock exchange in the previous month: (i) the date of the board of directors allocation resolution; (ii) the date of issue into the beneficiary s securities account for the issue/transfer of shares; (iii) the unilateral termination date of employment for expired options; and (iv) the date when the board of directors determines the TSR positioning at the end of the vesting period). The market price for options existing at the start and end of the year is exact at year end. (b) Figures relate to the new options assigned during 2009 following the modification of the stock option plan, approved by the board of directors on 29 July (c) Figures include options expired due to the TSR positioning at the end of the vesting period and options expired due to termination of employment. The breakdown of options by year of allocation is as follows: Years of assignment Options assigned Options expired Options exercised Existing options at 31 December ,500 (21,000) (587,500) ,500 (497,500) 143, ,000 (30,000) (286,500) 360, ,000 (51,000) (69,000) 538, ,933,575 (1,061,525) (1,015,499) 856, ,782,800 (1,043,900) (229,700) 1,509, ,726,000 (183,300) 2,542,700 11,026,375 (2,390,725) (2,685,699) 5,949,951 More information about the incentive plans for executives with Snam Rete Gas shares can be found in the Other information section of the Directors report. At 31 December 2010, the average residual life of the options is 0.5 years for the 2003 plan, 1.6 years for the 2004 plan, 2.6 years for the 2005 plan, 1.6 years for the 2006 plan, 2.6 years for the 2007 plan and 3.6 years for the 2008 plan. The unit fair value of the options allocated in 2003, 2004 and 2005 was , and per share, respectively. Following the modifications made to the stock option plan, approved by the board of directors on 29 July 2009, the unit fair value of the options allocated in 2006, 2007 and 2008 is , and per share, respectively. The assumptions used for determining the fair value of the options are given below: Risk free interest rate (%) Duration (years) (years) Implicit volatility (%) Expected dividends (%) Remuneration due to key management personnel The remuneration due to persons with powers and responsibilities for the planning, management and control of the company, i.e. executive and nonexecutive directors, general managers and managers with strategic responsibility (so-called key management personnel), amounts to 6 million ( 5 million in 2009) and breaks down as follows: ( million) Short-term benefits (salaries and wages) 4 4 Post-employment benefits 1 Other long-term benefits 1 Employment termination pay

136 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Remuneration due to directors and statutory auditors The remuneration due to directors amounts to 2.3 million and 2.6 million respectively for 2009 and The remuneration due to the statutory auditors amounts to 0.1 million and 0.2 million respectively for 2009 and The remuneration includes emoluments and any other sums relating to pay, pensions and healthcare assistance due for the performance of duties as a director or statutory auditor in Snam Rete Gas S.p.A. and in other companies included in the consolidation scope, which have entailed a cost for Snam Rete Gas. Amortisation, depreciation and impairment losses Amortisation, depreciation and impairment losses amount to 678 million and break down as follows: ( million) 2009 (*) 2010 Amortisation and depreciation Property, plant and equipment Intangible assets Impairment losses 10 Intangible assets (*) Following the implementation of IFRIC 12, as illustrated earlier, the net book value at 31 December 2009 of concession infrastructures used for distribution services was reclassified from Property, plant and equipment to Intangible assets. Consequently, the relevant amortisation and depreciation for 2009 has also been stated on the basis of the new classification. Depreciation of property, plant and equipment ( 495 million) relates to activities of natural gas transportation ( 404 million), storage ( 71 million), distribution ( 16 million) and regasification ( 4 million). From 1 January 2010, the useful life of certain types of assets in the transportation segment were updated. In particular, the revision concerned pipelines and reduction plants, whose useful lives were changed from 40 to 50 years and from 40 to 20 years, respectively, following the Electricity and Gas Authority s tariff review. The company, in light of the mechanisms for recognising tariff components linked to the new depreciation rules, and the service life of assets, considered it appropriate to restate the useful life of these assets in line with the conventional tariff duration. Amortisation of intangible assets ( 173 million) relates to natural gas distribution ( 142 million) 28, transportation ( 26 million) and storage ( 5 million) activities. Impairment losses ( 10 million) relate to certain assets in the natural gas distribution segment. A more thorough analysis of depreciation, amortisation and impairment losses can be found in Note 6 Property, plant and equipment and Note 8 Intangible assets. 25 Financial expenses (income) Financial expenses (income) amount to 271 million, broken down as follows: ( million) Financial income (7) (5) Financial expense Derivatives The net value of financial income and expenses ( 169 million) breaks down as follows: ( million) Expense related to net financial debt Interest and other fees paid to banks and other financial backers Other financial (income) expense Accretion discount (*) Other financial expense Other financial income (7) (5) Financial expense capitalised (24) (37) (*) This item refers to the increase in provisions for risks and charges, which are shown at discounted value under non-current liabilities on the balance sheet. (28) With the implementation from 1 January 2010 of IFRIC 12, amortisation of natural gas concession distribution infrastructures is stated under intangible assets. 134

137 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Expenses associated with net financial debt ( 188 million) relate to interest on loans received from the ultimate parent, Eni S.p.A. Other financial expenses (income) of 18 million relate mainly to the accretion discount and to interest income and expenses maturing on accruals and deferrals from regulated business. Financial expenses capitalised ( 37 million) relate to the part of financial expense absorbed by investment activities. The interest rate used for the capitalisation of financial expenses is between 2.63% and 3.1% (3.03% in 2009). Derivatives Net expenses (income) on derivatives amount to 102 million and break down as follows: ( million) Gains on derivative contracts: - Interest accrued during the period (2) Losses on derivative contracts: - Interest accrued during the period Fair value adjustment All derivative contracts existing at 31 December 2010 were entered into with the ultimate parent, Eni S.p.A., and relate to interest rate agreements. Information about the characteristics of these contracts is provided in Note 10 Other non-current assets. The average cost of borrowing, including the effects produced by derivative contracts, stands at 2.9%, in line with Income (expense) from equity investments Income (expense) from equity investments ( 47 million) is analysed below. ( million) Capital gains from equity method valuation Other income (expense) from equity investments: - Capital gain from sale 3 - Capital losses from measurement at cost (2) Analysis of capital gains from measurement by the equity method ( 47 million) can be found in Note 9 Equity investments. 27 Income taxes Income taxes, amounting to 532 million, break down as follows: ( million) Current taxes: - IRES IRAP Deferred and prepaid taxes: - Deferred (44) (74) - Prepaid (11) (10) (55) (84) Income taxes, at 532 million, are up by 185 million compared with the previous year, mainly due to the higher pre-tax profit. Income taxes were reduced by 8 million as a result of the so-called Tremonti-ter rules, which grant tax breaks to investments in certain categories of key assets. 135

138 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The table below shows the impact of prepaid and deferred taxes on the income statement, as well as the associated details of the timing differences produced during the course of the year Temp. differences Taxes Temp. differences Taxes (Prepaid) (Prepaid) ( million) IRES IRAP Deferred IRES IRAP Deferred Prepaid taxes - Provisions for risks and charges and other non-deductible provisions (20) (22) - Non-deductible amortisation and depreciation 17 (16) (4) 33 (10) (9) - Site dismantlement and restoration 9 9 (2) (4) - Provision for employee benefits 2 (1) 2 (1) - Revenue adjustments (5) (5) 2 (8) (8) 3 - Utilisation of provisions (21) (17) 6 (32) (27) 10 - Cash and contractual grants (21) (21) 6 (71) (71) 22 - Other (4) (4) (9) 41 8 (11) 38 (21) (10) Deferred taxes - Excess and accelerated amortisation and depreciation (85) (433) (40) (104) (568) (51) - Site dismantlement and restoration (34) (34) (10) - Revaluation of Italgas property, plant and equipment (15) (15) (5) (30) (30) (9) - Capitalisation of financial expense (1) (1) (1) (1) (1) (1) - Deferred tax on capital gains 10 (2) 3 (1) (1) (1) - Other (11) (8) (3) (8) (8) (2) (96) (453) (44) (178) (642) (74) (55) (84) The impact of taxes for the year on the pre-tax profit (tax rate) was 32.5% (32.2% in 2009), against the theoretical tax rate of 33% (33.2% in 2009). The analysis of the difference between the theoretical and actual tax rates is as follows: ( million) Amount Rate Tax Amount Rate Tax Profit before taxes 1, % 297 1, % 450 EBIT 1,274 1,862 Personnel expense Capitalisations Adjusted EBIT (*) 1, % 61 2, % 90 Theoretical rate (**) 33.2% % 540 Effect of increases (decreases) over theoretical rate: - Equity method valuation effect - Tremonti-Ter tax benefit (0.6%) (6) (0.8%) (13) - IRES reimbursement for 10% IRAP deduction in previous years (0.5%) (8) - IRES deduction for 10% IRAP - Adjustment of IRAP rates (0.9%) (10) - Taxes on dividends (0.2%) (3) - Other changes 0.4% 4 0.5% 8 Effective tax rate 0.3% 5 - Altre variazioni 0.1% 1 0.2% 3 Aliquota effettiva 32.2% % 532 (*) The EBIT (from IAS formats) is adjusted by the following amounts: personnel expenses and capitalisations relating to personnel expenses and to financial expenses. (**) The theoretical rate is determined by comparing the IRES and IRAP taxes with the pre-tax profit. 28 Earnings per share Basic earnings per share are determined by dividing net profit by the weighted average number of outstanding Snam Rete Gas shares during the year, excluding treasury shares. Diluted earnings per share are determined by dividing net profit by the weighted average number of outstanding shares during the year, excluding treasury shares, increased by the number of shares which could potentially be issued following the allocation or transfer of treasury shares for the stock option plans. 136

139 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The weighted average number of outstanding shares used to calculate the diluted earnings per share is 2,579,506,264 and 3,376,590,852 for 2009 and 2010, respectively. A reconciliation of the weighted average number of outstanding shares used to determine the basic and diluted earnings per share is set out below: Weighted average number of outstanding shares used to calculate basic earnings per share 2,579,280,194 3,376,205,870 Number of potential shares following stock option plans 226, ,982 Weighted average number of outstanding shares used to calculate diluted earnings per share 2,579,506,264 3,376,590,852 Net profit attributable to Snam Rete Gas ( million) 732 1,106 Basic earnings per share ( per share) Diluted earnings per share ( per share) Information by business segment The business segments in which Snam Rete Gas operates have been identified on the basis of the criteria adopted for the preparation of operational reporting by senior management in taking business decisions. The segments identifed are as follows: (i) natural gas transportation; (ii) LNG regasification; (iii) natural gas distribution; and (iv) natural gas storage. They relate to the activities carried out, predominantly, by Snam Rete Gas, GNL Italia, Italgas and Stogit, respectively. ( million) 2009 Net core business revenue (a) 1, ,468 less: inter-segment revenue (1) (14) (15) (30) Revenue from third parties 1, ,438 Other revenues and income Operating costs (398) (147) (24) (12) (581) Depreciation, amortisation and impairment losses (499) (75) (35) (4) (613) EBIT ,274 Equity method valuation effect Directly attributable current assets ,437 Directly attributable non-current assets 11,005 3,925 2, ,507 Of which: Equity-accounted investments Directly attributable current liabilities 2, ,816 Directly attributable non-current liabilities 6,559 1,499 1, ,439 Capital expenditure , Net core business revenue (a) 1,929 1, ,552 less: inter-segment revenue (41) (2) (23) (11) (77) Revenue from third parties 1,888 1, ,475 Other revenues and income (3) 33 Operating costs (279) (636) (40) (13) (968) Depreciation, amortisation and impairment losses (430) (168) (76) (4) (678) EBIT 1, (3) 1,862 Equity method valuation effect Directly attributable current assets ,468 Directly attributable non-current assets 11,421 4,097 2, ,275 Of which: Equity-accounted investments Directly attributable current liabilities 3, ,738 Directly attributable non-current liabilities 6,244 1,481 1, ,104 Capital expenditure (3) 1,540 Transportation and dispatch Distribution Storage Regasification Elimination of internal profit Total (a) Before elimination of intra-segment dealings. Revenue is generated by applying regulated tariffs or market conditions. The company s revenue is generated entirely in Italy; costs are incurred almost entirely in Italy. 137

140 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements 30 Related-party transactions Snam Rete Gas S.p.A. is a subsidiary of Eni S.p.A., which holds 52.54% of its shares. The related-party transactions c onducted by Snam Rete Gas and by the companies included in the consolidation scope mainly involve the exchange of goods, the provision of services, the provision and utilisation of financial resources and the hedging of interest rate risk with the ultimate parent Eni S.p.A. and its subsidiaries and associates, as well as with associates and entities under common control, and with Enel S.p.A., a state-controlled company, and its subsidiaries. All the transactions are part of ordinary business activities and are generally settled at market conditions, i.e. the conditions which would be applied for two independent parties, and are performed in the interests of Snam Rete Gas group companies. In accordance with the disclosure requirements established by Consob Regulation no of 12 March 2010, it is stated that in the period from 1 December December 2010 the following related-party transactions were conducted which benefited from the exclusion provided for by Article 13, paragraph 3, letter c) of the aforesaid Regulation, inasmuch as they fall within the scope of the normal conduct of business operations and the associated financial activities. Natural gas supply contract between Eni S.p.A. and Stogit S.p.A. On 20 December 2010, approval was given to the signature of a contract between subsidiary Stogit S.p.A. and the ultimate parent, Eni S.p.A., concerning the supply by Eni to Stogit of a total quantity of 691 million cubic metres of natural gas for 2011 and The value of the contract, based on the projected prices of energy products for the aforesaid years, can be estimated at around 190 million. The contract was awarded following the conclusion of a European tender (No. 2010/S ). Article 3 of the Procedure includes, among the Equivalent to Market or Standard conditions, the conditions determined subsequent to competitive and transparent procedures governed by general company rules or by rules consistent with legal procedures for the acquisition of goods and services. Loan agreement between Eni S.p.A. and Snam Rete Gas S.p.A. On 23 December 2010, an agreement was signed between Snam and the ultimate parent, Eni S.p.A, concerning a loan from Eni of 400 million to be disbursed on 21 March 2011 and maturing on 20 December The interest rate, fixed for the entire duration of the agreement, is approximately 2.9% p.a. The loan is granted at market conditions, including with specific reference to the provisions of Article 25 of Annex A to Resolution no. 11/07 of the Electricity and Gas Authority. Article 3 of the Procedure includes, among the Equivalent to Market or Standard conditions, the conditions applied in compliance with the provisions of Article 25 of Annex A to Resolution no. 11/07 of the Electricity and Gas Authority, as subsequently amended (Unbundling Regulation). The following table details for 2009 and 2010 the amounts of the trade, financial and other transactions with related parties and the nature of those with more significance. 138

141 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Commercial and other transactions ( million) 31 December Receivables Payables Guarantees Costs (a) Revenue (b) Name Goods Services Other Goods Services Other Parent - Eni S.p.A , ,299 5 Eni subsidiaries - Eni Adfin S.p.A (c) Eni Hellas S.p.A 3 - Eni Insurance Ltd Enicorporate University S.p.A EniServizi S.p.A Saipem Energy Services S.p.A Saipem S.p.A Serfactoring S.p.A 14 - Stoccaggi Gas Italia S.p.A (d) 11 - Other (e) Eni s jointly controlled entities and associates - Transmediterranean Pipeline Co. Ltd Jointly controlled entities and associates - A.E.S. S.p.A Toscana Energia S.p.A Other (e) State-owned or controlled companies - Enel group Other (e) Total ,594 6 (a) Include costs for goods and services to be used in investing activities. (b) Before tariff components which are offset among costs. (c) On 19 November 2009, the shareholders meeting of Sofid S.p.A. resolved to change its trading name to Eni Adfin S.p.A. (Eni Administration and Financial Services S.p.A.), with effect from 1 December (d) The economic effects of the consolidation of Stogit apply from 1 July The costs incurred by the group with respect to Stogit during the first half of 2009 have therefore been omitted from the intra-group transactions. (e) Individually less than 1 million. 139

142 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Commercial and other transactions ( million) 31 December Receivables Payables Guarantees Costs (a) Revenue (b) Name Goods Services Other Goods Services Other Parent - Eni S.p.A , , Eni subsidiaries - Eni Adfin S.p.A Eni Hellas S.p.A 3 - Eni Insurance Ltd Enicorporate University S.p.A EniServizi S.p.A Saipem Energy Services S.p.A Saipem S.p.A Serfactoring S.p.A 21 - Syndial S.p.A 1 - Other (c) Eni s jointly controlled entities and associates - Transitgas AG 1 - Transmediterranean Pipeline Co. Ltd Other (c) (,,) (,,) (,,) (,,) 2 (,,) (,,) (,,) 1 1 Jointly controlled entities and associates - A.E.S. S.p.A Servizi Territori Aree Penisole SpA 1 - Toscana Energia S.p.A Other (c) State-owned or controlled companies - Anas group Enel group Ferrovie dello Stato group Other (c) Total , (a) (b) (c) Includes costs for goods and services to be used in investing activities. Before tariff components which are offset among costs. Individually less than 1 million. 140

143 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Ultimate parent Commercial transactions The most important active commercia l transactions with the ultimate parent, Eni S.p.A., concern the provision of regulated gas services relating to transportation, regasification, distribution and storage, on the basis of tariffs established by the Electricity and Gas Authority. The principal passive commercial transactions concern mainly the supply of electricity used for business activities and of natural gas involved in the creation of storage infrastructures. These transactions are governed by contracts entered into at normal market conditions. Snam Rete Gas also has transactions in existence connected with contracts for the provision of consultancy and technical/operational support services relating to storage fields. These transactions are governed by service agreements on the basis of the costs incurred. In addition, with effect from 1 January 2010, a new contract was signed between Snam Rete Gas S.p.A. and Eni S.p.A. which governs the receipt and management of a number of services provided by the centralised functions of Eni S.p.A. to Snam Rete Gas S.p.A. and its subsidiaries 29. In particular, the services provided relate to the following areas: (i) human resources; (ii) corporate affairs and governance; (iii) health, safety and environment; (iv) ICT; and (v) institutional relations and communication. These transactions are governed on the basis of the costs actually incurred for the provision of the related services. Other transactions As established by the contract for the purchase of Italgas and Stogit from Eni, signed on 30 June 2009, the price determined for the acquisition of the two companies is subject to adjustment mechanisms to be applied even after the date of execution of the contract. In particular, on 31 December 2010 certain operations provided for by these mechanisms were carried out, which led to the recognition of a price adjustment, charged to Snam Rete Gas, for a net amount of 127 million, this figure being the result of an upward adjustment of 174 million and a downward adjustment of 47 million with respect to the price established when the transaction was concluded 30. This adjustment, pursuant to Consob Resolution no of 12 March 2010, as subsequently amended, represents an increase in related-party transactions compared with the Annual Report for the previous year. Finally, there are transactions with Eni within the context of the national tax consolidation scheme, which is subscribed to by all companies in the consolidation scope of the Snam Rete Gas group, and of the VAT consolidation scheme. These transactions are governed by appropriate legally binding contracts. Subsidiaries of Eni The key transactions with Eni s subsidiaries relate to: - Saipem S.p.A, for design and project supervision services in relation to the construction of natural gas transportation infrastructures, governed by contracts entered into at normal market conditions; - Saipem Energy Services S.p.A. for natural gas storage facility maintenance services, governed on the basis of the costs incurred. To this end, it is noted that with effect from 1 December 2010 the business unit Impianti stoccaggio STIT was sold by Saipem Energy Services S.p.A. to Stoccaggi Gas Italia S.p.A.; - Serfactoring S.p.A. for factoring transactions performed by Snam Rete Gas suppliers. Snam Rete Gas also has commercial transactions with special-purpose entities which provide services to Eni group companies, including: (i) EniServizi S.p.A., which provides real estate management services such as maintenance of buildings, fixtures and associated plants, transportation services, sanitary services, catering, caretaking, supply of non-strategic assets and centralised management of the company s archives; and (ii) Eni Adfin S.p.A. (formerly Sofid S.p.A.), which provides administrative services. These transactions are governed on the basis of the costs incurred for the provision of the related services. Entities under common control and associates Transactions with entities under common control and associates relate to the provision of IT services governed by contracts entered into at normal market conditions. State-owned or controlled companies Transactions with state-owned or controlled companies relate mainly to the Enel Group and concern natural gas transportation, regasification, distribution and storage services. These transactions are governed on the basis of tariffs established by the Electricity and Gas Authority. (29) Previously, Eni managed the provision of the services by entering into contracts with the individual companies. (30) More information about the price adjustment mechanisms applied during the course of 2010 can be found in Note 22 Guarantees, commitments and risks Commitments deriving from the agreement to purchase Italgas and Stogit from Eni. 141

144 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements Financial transactions ( million) Name Parent Other assets (a) Payables Other liabilities (a) Expense (b) (c) Income (d) - Eni S.p.A. 3 9, , (a) (b) (c) (d) Relates to assets and liabilities deriving from the measurement of derivatives. Includes financial expense for investments. Includes 68 million relating to expenses on derivatives. Relating to derivatives. Financial transactions ( million) Name Parent Other assets (a) Payables Other liabilities (a) Expense (b) (c) - Eni S.p.A , , Income (a) (b) (c) Relates to assets and liabilities deriving from the measurement of derivatives. Includes financial expense for investments. Includes 102 million related t o expenses on derivatives. Ultimate parent Transactions with the ultimate parent, Eni S.p.A., relate to the coverage of financial requirements, utilisation of liquidity and interest rate risk hedging, through the use of derivative contracts, qualified pursuant to IAS 39 as cash flow hedge derivatives. These transactions are governed by contracts entered into at normal market conditions. For transactions with directors, auditors and key managers, please refer to the information set out in the paragraph relating to compensation in Note 24 Operating costs. Effect of transactions or positions with related parties on the balance sheet, income statement and statement of cash flows The effect of transactions or positions with related parties on the balance sheet is summarised in the following table ( million) Total Related parties Share (%) Total Related parties Share (%) Trade and other receivables Other current assets Other non-current assets Short-term financial liabilities 1,585 1, ,844 1, Long-term financial liabilities 8,401 8, ,506 8, Trade and other payables 1, , Other current liabilities (*) Other non-current liabilities (**) (*) The balance at 31 December 2009 includes the reclassification ( 63 million) from the item Provisions for risks and charges of fees for balancing and stock replenishment payable to service users. For more information, please refer to Note 17 Provisions for risks and charges. (**) The balance at 31 December 2009 includes the reclassification ( 30 million) from the item Provisions for risks and charges of payments for balancing and stock replenishment. For more information, please refer to Note 17 Provisions for risks and charges. 142

145 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements The effect of transactions or positions with related parties on the income statement is summarised in the following table ( million) Total Related parties Share (%) Total Related parties Share (%) Core business revenue 2,438 1, ,475 1, Other revenues and income Purchases, services and other costs Financial expense Expense from derivatives Transactions with related parties are generally governed on the basis of market conditions, i.e. the conditions which would be applied between two independent parties. The principal cash flows with related parties are shown in the following table. ( million) Revenue and income 1,601 2,012 Cost and expense (164) (95) Change in trade and other receivables (70) (13) Change in trade and other payables (34) (17) Dividends collected 34 Interest collected 4 Interest paid (203) (258) Net cash flows from operating activities 1,134 1,663 Investments: - Property, plant and equipment and intangible assets (151) (248) - Companies entering the consolidation scope (4,474) (127) - Change in payables and receivables relating to investments Cash flows from investment activities (4,608) (220) Divestments: - Equity investments 12 Cash flows from divestments 12 Net cash flows from investment activities (4,596) (220) Taking on long-term financial debt 12,406 1,020 Repaying long-term financial debt (10,564) (914) Increase (decrease) in short-term financial debt (312) 259 Capital increases 1,929 Dividends paid (250) (431) Net cash flows from financing activities 3,209 (66) Total cash flows with related parties (253) 1,377 The effect of cash flows with related parties is shown in the following table: ( million) Total Related parties Share % Total Related parties Share % Cash flows from operating activities 1,164 1, ,775 1, Cash flows from investment activities (5,653) (4,596) 81.3 (1,393) (220) 15.8 Cash flows from financing activities 4,525 3, (410) (66)

146 Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements 31 Significant non-recurring events and transactions During the course of 2010, there were no economic effects deriving from significant non-recurring transactions. 32 Positions or transactions deriving from atypical and/or unusual transactions No positions or transactions deriving from atypical and/or unusual transactions are reported. 33 Publication of the financial statements The financial statements were authorised for publication by the board of directors of Snam Rete Gas at its meeting of 2 March The board of directors authorised the Chairman and the Chief Executive Officer to make any changes which might be necessary or appropriate for finalising the format of the document in the period between 2 March 2011 and the date of approval by the Shareholders Meeting. 34 Subsequent events Information on subsequent events occurred after the balance sheet date can be found in the Other information section of the Directors report. 144

147 Certification of the consolidated financial statements pursuant to Article 154-bis, paragraph 5 of Legislative Decree no. 58/98 (Testo Unico della Finanza) 1. The undersigned Carlo Malacarne and Antonio Paccioretti, as CEO and manager in charge of accounting records at Snam Rete Gas S.p.A., certify, taking into account Article 154-bis, paragraphs 3 and 4 of Legislative Decree no. 58 of 24 February 1998: the adequacy, considering the group s characteristics, and effective implementation of the administrative and accounting procedures for the preparation of the consolidated financial statements during the course of The administrative and accounting procedures for the preparation of the consolidated financial statements at 31 December 2010 were defined and their adequacy was assessed using the rules and methods in line with the Internal Control Integrated Framework model issued by the Committee of Sponsoring Organisations of the Treadway Commission, which represents a benchmark framework for the internal control system generally accepted at international level. In this regard, it is pointed out that, following the centralisation of staff services and some Italgas, Stogit and GNL Italia operating activities within Snam Rete Gas with effect from 1 April 2010, the administrative and accounting procedures of the companies of the Snam Rete Gas group have been adapted to the new organisational structure. 3. It is also certified that: 3.1 The consolidated financial statements at 31 December 2010: a) were prepared in accordance with the applicable international accounting standards recognised in the European Community pursuant to EC Regulation no. 1606/2002 of the European Parliament and of the Council of 19 July 2002; b) are consistent with the accounting records and ledgers; c) are suitable to provide a true and fair view of the financial position, results of operations and changes in cash flows of the issuer and of the companies included in the consolidation scope; 3.2 The Directors report includes a reliable analysis of the operating performance and results, as well as the situation of the issuer and of all the companies included in the consolidation scope, together with a description of the principal risks and uncertainties to which they are exposed. 2 March 2011 /Signature/Carlo Malacarne Carlo Malacarne Chief Executive Officer /Signature/Antonio Paccioretti Antonio Paccioretti Director of Planning, Administration, Finance and Control 145

148 Independent auditors report 146