Analysis of income statement items

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 2009. In order to meaningfully compare the results of the two periods, Combined consolidated income statement 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 2009.

Net profit

Net profit obtained in financial year 2010 was €1,106 million, an increase of €374 million, equivalent to 51.1%, compared to financial year 2009. 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)2008 2009 2010 Change Change %
Core business revenue   1,902 2,438 3,475 1,037 42.5
Business segments
Transportation   1,882 1,865 1,929 64 3.4
Regasification   37 36 35 (1) (2.8)
Storage 161 355 194
Distribution 406 1,233 827
- of which construction and upgrade of distribution infrastructures   349 349
Consolidation adjustments   (17) (30) (77) (47)
Other revenues and income   8 30 33 3 10.0
Total revenue   1,910 2,468 3,508 1,040 42.1

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 2010. 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 revenue13 (€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 2008-31 December 200914 (€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 2007-2008 thermal year). 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 service15.

Major transportation revenue by user is analysed as follows.

 (€ million)2008 2009 2010 Change Change %
Eni   1,081 934 742 (192) (20.6)
Enel Trade   254 245 256 11 4.5
Other   603 734 862 128 17.4
Revenue adjustment and penalties   (74) (47) (17) 30 (63.8)
Additional fees to cover higher gas purchase costs   45 34 55 21 61.8
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 1,873 25 1.4

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 revenue (€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)2008 2009 2010 Change Change %
Regulated business revenue   1,887 2,423 3,442 1,019 42.1
Transportation   1,867 1,848 1,873 25 1.4
Regasification   20 21 24 3 14.3
Storage (*) 147 326 179
Distribution 407 1,219 812
- of which construction and upgrade of distribution infrastructures   349 349
Revenue from non-regulated activities   23 45 66 21 46.7
  1,910 2,468 3,508 1,040 42.1

(*) 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).

Operating costs

 (€ million)2008 2009 2010 Change Change %
Business segments
Transportation   388 399 343 (56) (14.0)
Regasification   30 27 24 (3) (11.1)
Storage 38 63 25 65.8
Distribution 147 640 493
- of which construction and upgrade of distribution infrastructures   349 349
Consolidation adjustments   (19) (30) (102) (72)
  399 581 968 387 66.6

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 2010. 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)2008 2009 2010 Change Change %
Regulated business costs   395 567 942 375 66
Controllable fixed costs   209 352 465 113 32.1
Variable costs   135 117 19 (98) (83.8)
Other costs   51 98 458 360
- of which construction and upgrade of distribution infrastructures 349 349
Non-regulated business costs   4 14 26 12 85.7
  399 581 968 387 66.6

Regulated business operating costs

Controllable fixed costs16 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 2009.

The following table shows the workforce in service at 31 December 2010 (6,104 people) by business segment and professional status.

 (number)2008 2009 2010 Change Change %
Business segments
Transportation   2,252 2,254 2,636 382 16.9
Regasification   93 87 70 (17) (19.5)
Storage 301 279 (22) (7.3)
Distribution 3,545 3,119 (426) (12.0)
  2,345 6,187 6,104 (83) (1.3)
Professional status
Executives   65 121 116 (5) (4.1)
Managers   265 493 508 15 3.0
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)

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)2008 2009 2010 Change Change %
Amortisation and depreciation   489 613 668 55 9.0
Business segments
Transportation   485 499 430 (69) (13.8)
Regasification   4 4 4
Storage 35 76 41
Distribution 75 158 83
Impairment losses 10 10
  489 613 678 65 10.6

EBIT

 (€ million)2008 2009 2010 Change Change %
Business segments
Transportation   1,017 974 1,185 211 21.7
Regasification   5 5 7 2 40.0
Storage 92 218 126
Distribution 203 455 252
Elimination of internal profit (*) (3) (3)
  1,022 1,274 1,862 588 46.2

(*) 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 revenue17), 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.

Net financial expense

 (€ million)2008 2009 2010 Change Change %
Financial expense related to net financial debt   276 166 188 22 13.3
- Charges on short- and long-term financial debt   276 166 188 22 13.3
Loses (Gains) on derivative contracts   (27) 66 102 36 54.5
- Fair-value adjustment   2 2 0.0
- Difference in interest accrued in the period   (29) 64 102 38 59.4
Other net financial expense   3 9 18 9 100.0
- Accretion discount   1 11 15 4 36.4
- Other net financial (income) expense   2 (2) 3 5
Financial expense capitalised   (26) (24) (37) (13) 54.2
  226 217 271 54 24.9

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 2009.

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)2008 2009 2010 Change Change %
Equity method valuation effect 21 47 26
Capital gains from sale of equity investments 3 (3) (100.0)
Other expenses (2) 2 (100.0)
22 47 25

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)2008 2009 2010 Change Change %
Current taxes   291 402 616 214 53.2
(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 (%)   33.4 32.2 32.5 0.3
  266 347 532 185 53.3

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%).

(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 2009.
(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.
(16) Refer to the “Glossary” in this report for the definition of controllable fixed costs.
(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.

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