Analysis of consolidated income statement items

Total revenue

(€ millions)200720082009Change% change
Core business revenue 1,790 1,902 2,438 536 28.2
Business segments
Transportation 1,769 1,882 1,865 (17) (0.9)
Regasification 43 37 36 (1) (2.7)
Distribution 406 406
Storage 161 161
Consolidation adjustments (22) (17) (30) (13) 76.5
Other income 78 8 30 22
Total revenue 1,868 1,910 2,468 558 29.2

Core business revenue (€2,438 million) increased by €536 million, or 28.2%, compared with 2008 as a result of consolidating Italgas and Stogit.

Revenues from the transportation business segment (€1,865 million, net of consolidation adjustments) fell by €17 million mainly because of lower transportation revenue (-€19 million), owing to a reduction in the volume of natural gas carried (-€53 million) and updated tariffs (-€18 million), the effects of which were partially offset by the contribution of investments made in 2007 (+€57 million).

Transportation revenues18 in financial year 2009 (€1,848 million) include recognition by the Electricity and Gas Authority of higher costs incurred in buying fuel gas in the thermal year 2007-200819 (€34 million; €11 million less than the grant relating to the thermal years 2005-2006 and 2006-2007 and recorded in the financial statements for 2008.

Transportation revenue by shipper is analysed in the following table.

(€ millions)200720082009Change% change
Eni 1,165 1,081 934 (147) (13.6)
Enel Trade 234 254 245 (9) (3.5)
Others 511 603 734 131 21.7
Fines and revenue adjustment (101) (74) (47) 27 (36.5)
Additional payment to cover higher gas purchasing costs 45 34 (11) (24.4)
Disruption fee pursuant to resolution nos. 297/05 and 277/07 (50) (34) (42) (8) 23.5
Regional network transportation fee pursuant to resolution no. 45/07 - Equalisation (2) (8) (10) (2) 25.0
1,757 1,867 1,848 (19) (1.0)

Revenue from the regasification business (€36 million) refers to payment for the regasification of liquefied natural gas (LNG) at the Panigaglia (SP) LNG terminal. Revenues from the natural gas distribution business segment (€406 million), and relating to the period 1 July - 31 December 2009, relate primarily to payments for the natural gas distribution service (€394 million). These were defined on the basis of the Electricity and Gas Authority’s resolution no. 159/08, which stipulated their constant spread over a period of months on the basis of a pre-established amount set when the tariffs are approved – known as the Total Revenue Limit (TRL) – and no longer tied to the seasonal nature of volumes distributed.

Revenues from the natural gas storage business segment (€161 million, net of consolidation adjustments), and relating to the period 1 July - 31 December 2009, refer primarily to payment for storage services (€158 million, of which €124 million and €34 million respectively refers to modulation and strategic storage).

Revenue - Regulated and non-regulated activities

(€ millions)200720082009Change% change
Revenue from regulated activities 1,778 1,887 2,423 536 28.4
Transportation 1,757 1,867 1,848 (19) (1.0)
Regasification 21 20 21 1 5.0
Distribution 407 407
Storage (*) 147 147
Revenue from non-regulated activities 90 23 45 22 95.7
1,868 1,910 2,468 558 29.2

(*) Net of revenue for the modulation service provided to Snam Rete Gas S.p.A.

Revenue from regulated activities (€2,423 million, net of consolidation adjustments) relates to transportation (€1,848 million), regasification (€21 million), distribution (€407 million) and storage (€147 million) of natural gas.

Revenue from non-regulated activities (€45 million, net of consolidation adjustments) relates mainly to technical services (€17 million), income from renting and maintaining fiber-optic cables (€9 million) and capital gains on tangible asset sales (€7 million).

Other revenue

Other revenue (€30 million) relates mainly to capital gains on tangible asset sales (€7 million), net revenues from redemption of energy efficiency certificates (€4 million) and income from real estate investments (€3 million).

Operating costs

(€ millions)200720082009Change% change
Business segments
Transportation 347 388 399 11 2.8
Regasification 35 30 27 (3) (10.0)
Distribution 147 147
Storage 38 38
Consolidation adjustments (25) (19) (30) (11) 57.9
357 399 581 182 45.6

Operating costs (€581 million) increased by €182 million, or 45.6%, compared with 2008, owing essentially to the associated effects of consolidating Italgas and Stogit.

Operating costs in the transportation business segment (€399 million, net of consolidation adjustments) increased by €11 million mainly because of higher provisions to risks and charges (+€20 million) and higher fixed costs (+€4 million), owing in particular to greater expense for termination benefits. These factors were partly offset by a reduction in variable costs (-€13 million) on the back of lower fuel gas acquisition expense, owing mainly to a reduction in consumed gas volumes (-€16 million), partly offset by increased costs for the recharging by third-party operators of the transportation service on their networks (so-called interconnection; +€5 million).

Operating costs – Regulated and non-regulated activities

(€ millions)200720082009Change% change
Costs of regulated activities 355 395 567 172 44
Controllable fixed costs 207 209 352 143 68.4
Variable costs 102 135 117 (18) (13.3)
Other costs 46 51 98 47 92.2
Costs of non-regulated activities 2 4 14 10
357 399 581 182 45.6

Operating costs of regulated activities

Controllable fixed costs21 (€352 million) comprise recurring personnel expense (€182 million) and external costs (€170 million). The following tables analyse the workforce in service at 31 December 2009 (6,187 people) by business segment and professional status.

(number)200720082009Change% change
Business segments
Transportation 2,270 2,252 2,254 2 0.1
Regasification 87 93 87 (6) (6.5)
Distribution 3,545 3,545
Storage 301 301
2,357 2,345 6,187 3,842

(number)200720082009Change% change
Professional status
Executives 62 65 121 56 86.2
Managers 255 265 493 228 86.0
Office workers 1,250 1,241 3,320 2,079
Manual workers 790 774 2,253 1,479
2,357 2,345 6,187 3,842

The variable costs (€117 million) refer essentially to the costs of fuel gas used to supply compressor stations and gas emissions from the network and the plants (€110 million in total). Other costs (€98 million) relate primarily to charges that are offset in revenue (essentially interconnection charges and costs for the modulation service provided by Stogit in the first half of the year), to net provisions for risks and charges, and to concession costs.

Amortisation, depreciation and impairment losses

(€ millions)200720082009Change% change
Amortisation and depreciation 489 489 613 124 25.4
Business segments
Transportation 485 485 499 14 2.9
Regasification 4 4 4
Distribution 75 75
Storage 35 35
Impairment
489 489 613 124 25.4

Amortisation, depreciation and impairment losses (€613 million) increased by €124 million compared with 2008, owing to amortisation and depreciation in the natural gas distribution (€75 million) and storage (€35 million) business segments. The increase in amortisation and depreciation in the transportation business segment (+€14 million), owing to the introduction of new infrastructures, also contributed to the rise.

EBIT

(€ millions)200720082009Change% change
Business segments
Transportation 1,015 1,017 974 (43) (4.2)
Regasification 7 5 5
Distribution 203 203
Storage 92 92
1,022 1,022 1,274 252 24.7

EBIT in 2009 amounted to €1,274 million, an increase of €252 million, or 24.7%, compared with 2008 owing essentially to the change in consolidation scope, with the natural gas distribution and storage business segments contributing €203 million and €92 million respectively. EBIT22 in the transportation business fell by €43 million, or 4.2%, compared with 2008 mainly because of: (i) lower transportation revenue (-€25 million, net of components that are offset in costs); (ii) greater amortisation and depreciation (-€14 million) owing to the introduction of new transportation infrastructures; (iii) higher operating costs (-€6 million, net of components that are offset in revenue) following greater provisions for risks and charges (-€19 million) and an increase in fixed costs (-€4 million), the effects of which were partially offset by reduced variable costs for fuel gas used to supply compressor stations and gas emissions from the network and the plants (+€16 million), against smaller quantities of gas used.

The return on invested capital (ROI) was 10% (10.6% in 2008)23.

Net financial expense

(€ millions)200720082009Change% change
Financial expense related to net financial debt (240) (276) (166) 110 (39.9)
- Charges on short- and long-term financial debt (240) (276) (166) 110 (39.9)
(Expense) Income from derivative contracts 14 27 (66) (93)
- Fair-value adjustment (1) (2) (2)
- Difference in interest accrued in the period 15 29 (64) (93)
Other financial (expense) income 8 (3) (9) (6)
- Accretion discount (1) (1) (11) (10)
- Other net financial income (expense) 9 (2) 2 4
Financial expense capitalised 18 26 24 (2) (7.7)
(200) (226) (217) 9 (4.0)

Net financial expense (€217 million) fell by €9 million compared with 2008 following a significant reduction in market interest rates, the effects of which were partly offset by higher average net financial debt owing primarily to the consolidation of Italgas and Stogit, charged to the income statement from 1 July 2009, and to the financing of the acquisition.

The average borrowing cost was approximately 2.9%24 (4.2% in 2008).

In the 2009 financial year, €24 million of financial charges were capitalised (this figure was €26 million in 2008). The reduction of €2 million is attributable to lower market interest rates. (24) The acquired companies’ average cost of borrowing was calculated with reference to the second half of the year.

Income (Expense) from equity investments

The table below shows an analysis of net income from equity investments (€22 million):

(€ millions)2009
Valuation effect with the equity method 21
Capital gains from sale of equity investments 3
Other expenses (2)
(22)

Net income from equity investments refers to: (i) the share of net results for the period of subsidiaries and associates valued using the equity method (€21 million) in the natural gas distribution business segment; (ii) the capital gain (€3 million) from the sale to Eni S.p.A of the stake held by Italgas (17.77%) in Toscana Energia Clienti S.p.A.

Income taxes

(€ millions)200720082009Change% change
Current taxes 397 291 402 111 38.1
(Advanced) deferred taxes
Deferred taxes (41) (37) (44) (7) 18.9
Advanced taxes (30) 12 (11) (23)
Use of deferred-tax fund (98)
(169) (25) (55) (30)
Tax rate (%) 27.7 33.4 32.2 (1.2)
228 266 347 81 30.5

Income taxes (€347 million) increased by €81 million, or 30.5%, compared with 2008. This was due mainly to higher pre-tax profit (+€283 million) following the change in consolidation scope. The tax rate was 32.2%, compared with 33.4% in financial year 2008.

(18) The Electricity and Gas Authority’s resolution ARG/gas 135/09, published on 28 September 2009, extended for the period 1 October 2009 – 31 December 2009 the validity of gas transportation and dispatch tariffs approved for the thermal year 1 October 2008 – 30 September 2009.
(19) This payment follows resolution VIS 8/09, published on 5 February 2009, with which the Authority recognised to the company the higher expense for the thermal years 2005-2006 and 2006-2007 (€45 million in total), deferring to subsequent rulings the determination of the payment for the thermal years 2007-2008 and 2008-2009. With resolution ARG/gas 184/09, the Authority stipulated that the additional costs incurred by the company in the period
1 October 2008 – 31 December 2009 shall be defined in a subsequent ruling.
(20) Information on the regulatory framework for the natural gas distribution business can be found in the section “Operating review – Natural gas distribution - Regulation”.
(21) For a definition of controllable fixed costs, see the “Glossary” in this report.
(22) EBIT is analysed by considering only those elements that have led to a change therein, as application of the gas sector tariff regulations generates cost and revenue items which offset each other.
(23) The ROI for financial year 2009 is not representative of performance insofar as, following the acquisitions, EBIT includes the associated effects of consolidating the acquired companies in the second half of the year.
(24) The acquired companies’ average cost of borrowing was calculated with reference to the second half of the year.