Letter to Shareholders

Board of management (photo)

To our Shareholders and Stakeholders,

Against the difficult economic scenario which characterised the past year and the extreme market volatility, in 2011 we achieved significant operating and financial results. Over the year the operating profit and pre-tax profit saw growth of 5.2% and 3.5% respectively compared with 2010.

The constant focus on operating efficiency also enabled us to achieve the cost reduction goals announced for 2012 one year early, providing us with a significant means of creating value. The cost savings achieved were approximately €80 million, calculated in real terms based on fixed controllable costs of 2008 and like-for-like operations.

The Snam share price closed 2011 at an official price of €3.39, down 9.1% from the €3.73 recorded at the end of the previous year. Affecting the annual trend of the share price was the general downturn in the financial markets in Italy and Europe, and in particular the extension of the ‘Robin Hood Tax’ to companies regulated by the national energy sector. During the year, the stock did however outperform the Italian market (FTSE MIB -25.2%) and the European utilities sector (Stoxx Europe 600 Utilities -16.6%), confirming the interest in companies with solid business fundamentals and long-term visibility of results and cash flows, in spite of increasing country risk and elevated volatility.

Salvatore Sardo (photo)

Salvatore Sardo

Carlo Malacarne (photo)

Carlo Malacarne

In 2011 the stock, as well as having been confirmed among the primary sustainability indices, came to form part of the Stoxx Global ESG Leaders Indices, a new group of indices based on a transparent performance selection process, according to sustainability, of 1,800 businesses listed worldwide. All of this is testimony to Snam’s continuing commitment to achieving a sustainable growth that protects its working environment and fosters clear dialogue with all stakeholders.

At the Shareholders’ Meeting for the approval of the 2011 financial statements, Snam intends to confirm its adoption of the Code of Corporate Governance of Listed Companies promoted by Borsa Italiana S.p.A., as updated in December 2011.

December 2011 also saw the completion of the new corporate configuration, in effect from 1 January 2012. The new structure places Snam S.p.A. at the head of the group, which holds 100% of the share capital of the four operating companies (Snam Rete Gas S.p.A., GNL Italia S.p.A., Stogit S.p.A. and Italgas S.p.A.) which are responsible for the management and development of transportation, regasification, storage and distribution of natural gas respectively. It forms a fundamental step, which ratifies the adjustment to the EU provisions in the ‘Third Energy Package’ via the implementation of the ITO (Independent Transmission Operator) model, which provides for the operational and decision-making separation of the transporter from the vertically integrated business (i.e. Eni).

EBIT for the year 2011 amounted to €1,958 million, an increase of €96 million (5.2%), compared to 2010, mainly due to higher revenue from investment and to operating cost control. The increase reflects the improved performance recorded by the natural gas distribution (+22.9%) and storage (+17.0%) business segments. EBIT for the transportation segment recorded a decrease of 4.1% compared to the previous year, mainly due to the lower volumes of natural gas transported (-6.0%), and to the entry, in 2010, of additional transportation revenue resulting from the recognition by the Electricity and Gas Authority of the additional expenses incurred for the acquisition of fuel gas from 1 October 2008 to 31 December 2009.

Net profit for 2011 of €790 million, down €316 million (28.6%) compared to 2010, was strongly penalised by the government’s fiscal measures for restoring public finances and in particular, the extension of the application of additional IRES (‘Robin Hood Tax’) to companies operating in the natural gas transportation and distribution sectors. This was established in 2008 for companies producing or marketing energy products or electricity.

The application of the Robin Hood Tax more than absorbed the improvement of operating performance. The negative effect on the consolidated income statement from the greater level of income tax was €344 million, of which €188 million of greater taxation is associated with the one-off adjustment of deferred taxes as at 31 December 2010. Excluding this adjustment, the adjusted net profit amounted to €978 million, a fall of €128 million (11.6%) compared with 2010.

The positive net cash flow from operations of €1.5 billion almost entirely covered the outflows associated with capital expenditure (€1.6 billion, net of disposals). The increase in net financial debt, following the payment of dividends to shareholders (€0.8 billion, which includes the balance for 2010 and the interim dividend for 2011) amounted to €0.9 billion. Net financial debt as at 31 December 2011 amounts to €11.2 billion.

The results achieved allowed us to propose to the Shareholders’ Meeting a dividend of €0.24 per share (+4.3% compared to 2010), of which an interim payment of €0.10 was made in October 2011.

For the four-year period 2012-2015, we have confirmed our growth strategy with a €6.7 billion significant investment plan in the transportation, storage and distribution of gas, which will allow us to realise investments to increase the security and flexibility of the system, diversify supply sources and satisfy requirements related to the development of gas demand over the medium- and long-term. In this way Snam aspires to be a key player in the development of the more integrated European gas network, creating the conditions for the transport of gas from the south to Northern Europe, and reinforcing its competitive positioning through a strategy of development in Europe, including partnerships with other operators who own gas infrastructure, in line with the provisions of the Third Energy Package.

To summarise, in 2011 Snam achieved robust financial and operating results. The increase of EBIT (+5.2%), pre-tax profit (+3.5%) and the low cost of debt (3.1%) confirm the strength of our business model, which features a limited level of industrial and financial risk. The reduction in net income (-28.6%; -11.6% when adjusted) is entirely related to the increase in the tax charges after the introduction of the Robin Hood Tax. We maintain our continual attention to operating efficiency, strict financial discipline and maintaining a strong capital structure. We remain focused on investing in profitable growth and remunerating our shareholders by confirming our investment plan and stated dividend policy.

The significant results achieved, as well as those we wish to pursue, are based on a wealth of skills, implementation capabilities and human and financial resources, which for many years have allowed us to develop infrastructures for the market and the country as a whole. We wish to continue to pursue sustainable growth, with conviction and passion, through the excellent professional skills of the people who work daily towards development with care for the environment and responsibility towards the territory and its communities.

12 March 2012
for the Board of Directors

The Chairman

Salvatore Sardo, Chairman (signature)


Carlo Malacarne, CEO (signature)
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