Letter to shareholders

Salvatore Sardo
Chairman
Carlo Malacarne
CEO

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 2009. 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 2011 - 31 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 2009. 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 2002.

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 2009. 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 six-month 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 2009. 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 2010. Based on the major plan for gas transportation, storage and distribution investments totalling €6.4 billion over the four-year period 2011-2014, 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 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

Salvatore Sardo's signature
Chairman

Carlo Malacarne's signature
CEO