Adjusted income statement

The following table includes the adjustments made at the level of the individual entries of the financial statement introduced for the purpose of obtaining synthetic measures of the results (Adjusted Operating Profit and Net Adjusted Profit) which allow a better evaluation of the performance of the continuing operations and a greater comparability of the data.

Reconciliation of EBIT and the reported net profit with adjusted EBIT and adjusted net profit

Snam’s management assesses Group performance on the basis of adjusted EBIT and adjusted net profit, which exclude special items from EBIT and net profit respectively.

The income components are classified under special items, if significant, when: (i) they result from non-recurring events or transactions or from transactions or events which do not occur frequently in the ordinary course of business; or (ii) they result from events or transactions which are not representative of the normal course of business.

The tax rate applied to the items excluded from the calculation of adjusted net profit is determined on the basis of the nature of each revenue item subject to exclusion. Adjusted EBIT and adjusted net profit are not provided for by either IFRS or other standard setters. Management considers that these performance metrics allow for analysis of the business trends, making it easier to compare results.

The profit components of the continuing operations for the fiscal year 2016, classified as special items²³ involved: (i) the finance charges deriving from the reacquisition of bonds on the market made in the realm of liability management operations (329 million euro; 233 million euro net the relative tax effect) put into effect by Snam in the month of October 2016. The total dimension of the operation of the reacquisition of the bonds for a par value equal in total to 2.75 billion euro was also defined in consideration of the cash coming from the separation of Italgas (approximately 3.2 billion euro, net approximately 0.4 billion euro from BEI loans relating to Italgas projects which were the object of recalculation); (ii) the financial revenue relating to the credits in existence towards the Italgas Group (119 million euro; 78 million euro net the relative tax effect), the object of reimbursement to Snam as a result of the separation operation.

In addition, as already illustrated in the introduction, the measures of the adjusted result, in addition to excluding the aforementioned special items, also move the elisions originating from transactions from continuing operations towards discontinued operations.

The following table represents the operating profit and the net adjusted profit and the reconciliation with the respective results reported.

The Net Adjusted Profit from Continuing Operations totals 826 million euro, a 37 million euro reduction (-4.3%) in respect to the fiscal year 2015. The reduction is due to the lower adjusted operating profit (-145 million euro, equal to 9.8%), which the lower revenues have cut into (94 million euro, net the components that have a counterpart in costs) which are greatly affected in the WACC review for the fiscal year 2016, and the higher depreciation and devaluation (-75 million euro; equal to 13.0%). These effects were absorbed in part by lower net finance charges (+69 million euro; equal to 20.8%), thanks to the reduction of the average cost of the debt, as well as the reduction of income taxes (+ 29 million euro; equal to 7.4%) due to lower profits before taxes.

The pro-forma adjusted net income of the continuing operations, obtained by applying Snam’s share, amounting to 13.5%, to the estimated net income of Italgas Group for the whole of 2016, adjusted by excluding the effects resulting from the adjustment to market value of the existing financial debts towards Snam Group and eliminating the effects of non-recurring items from the valuation of foreign subsidiaries, amounts to €845 million.

The net adjusted profit of the Group totals 1,016 million euro, a 193 million euro reduction, equal to 16.0% in respect to the fiscal year 2015. The reduction may be attributed to continuing operations (-37 million euro; -4.3%) as a result of the phenomena analysed in the previous section, and discontinued operations (-156 million euro; -45.1%). In reference to discontinued operations, the net adjusted profit (190 million euro, in reference to the period from January 1, 2016 to November 6, 2016; 346 million euro in the fiscal year 2015), in addition to a different incidence of the profit components, which feels the influence of the lesser revenue regulated, essentially due to the mechanisms of tariff updates and, in particular, to the revision of the remuneration rate of the capital invested, which moves from 6.9% in 2015 to 6.1% in 2016 for distribution and from 7.2% in 2015 to 6.6% in 2016 for measurement.

Analysis of the entries on the adjusted financial statement

Regulated and non-regulated revenue

Regulated Revenue (2,444 million euro) declined by 58 million euro in respect to the fiscal year 2015 (-2.3%). The regulated revenue, net the components that have a counterpart in costs, total 2,299 million euro, a decrease of 85 million euro, equal to 3.6%, and relate to transport (1,855 million euro), storage (426 million euro) and re-gasification (18 million euro). The reduction essentially reflects the revision of the WACC²⁴, for the year 2016, in the transport sector (-134 million euro), whose remuneration rate moves from 6.3% in 2015 to 5.4% in 2016. This effect was in part absorbed by the higher regulated revenue recorded in the storage sector (+48 million euro), which benefits from an improvement in the WACC for 2016, in respect to the figure established for 2015 (+20 million euro), the first year of the fourth regulation period, in addition to the effective entry, at the end of 2015, of the first facilities of the Bordolano site²⁵.

Non-regulated revenue (116 million euro, net elisions from consolidation) decreased by 9 million euro in respect to the fiscal year 2015, equal to 7.2%, principally as a result of fewer transfers of natural gas which are no longer functional to operating activities (-24 million euro), compensated in part by greater re-charges of the services provided by Snam S.p.A. to the companies in the Italgas Group over the course of 2016 (+8 million euro, in reference to the period 1 January – 31 December 2016) and to foreign affiliates (+6 million euro).

OPERATING COSTS

Operating Costs by Sector of Activity

Operating costs – Regulated and non-regulated activities

Operating costs of regulated activities

The operating costs for regulated activities total 456 million euro, a 7 million euro reduction, equal to 1.5% in respect to 2015.

The fixed controllable costs (271 million euro) represented by the total of the cost of personnel and external costs of a recurrent nature, record a slight increase of 3 million euro, equal to 1.1% in respect to the fiscal year 2015 (268 million euro).

The variable costs (9 million euro), a 4 million euro reduction in respect to 2015, principally refer to removals from the warehouse for gas transfers made in the realm of the balancing service.

The other costs (31 million euro) essentially concern capital losses from the radiation of assets, principally relating to the natural gas transport sector (20 million euro), and costs for incentives given to employees²⁶ (6 million euro). The 33 million euro reduction was essentially due to lower outlays to the credit devaluation fund as a result of devaluations made in 2015 (32 million euro), on credits in the natural gas transport sector for partial recognition on the part of the Authorities, for credits not cashed in deriving from balancing activities relating to the period from 1 December 2011 – 23 October, 2012²⁷.

The operating costs for regulated activities, net components that have a counterpart in revenue, total 311 million euro, a 34 million euro decrease, equal to 9.9% in respect to the fiscal year 2015.

Operating costs of non-regulated activities

The operating costs for non-regulated activities total 117 million euro, a 10 million euro increase, equal to 9.3%, in respect to the fiscal year 2015, principally as a result of: (i) the higher costs incurred for re-charging the services provided by Snam S.p.A. – to the companies in the Italgas Group over the course of 2016 (+6 million euro, in reference to the period 1 January – 31 December 2016, and to foreign affiliates (+6 million euro); (ii) the charges directly attributable to Snam’s separation operations of the distribution business, among which consulting costs, review costs, legal costs, rating agency costs (+13 million euro; 7 million euro net the share recharged to Italgas). These effects were compensated in part by the lower removals of natural gas which are no longer functional to the operating activities (-23 million euro).

SERVICE PERSONNEL – CONTINUING OPERATIONS

The number of employees at 31 December 2016 (2,883 people) is broken down below by professional status:

Depreciation and Devaluation (651 million euro) increased by 75 million euro, equal to 13.0%, in respect to the fiscal year 2015. The increase was principally due to higher depreciation (+43 million euro; +7.5%) recorded in all sectors of activities, essentially as a result of the effective date of new infrastructure and higher devaluation (32 million euro) relating to the transport and re-gasification sectors.

ADJUSTED EBIT

Below is a breakdown of adjusted EBIT by business segment:

The adjusted operating profit²⁸ totals 1336 million euro, a 145 million euro reduction, equal to 9.8% in respect to the fiscal year 2015. The reduction is principally attributable to the transport sector (-144 million euro; -12.4%) with the effect of the WACC reduction, which moves from 6.3% of 2015 to 5.4% in 2016 (-134 million euro). This effect was compensated in part by the positive performance recorded by the storage sector (+127 million euro; +8.5%) which benefits from an improvement of the WACC for 2016 in respect to the one established for 2015, the first year of the fourth regulation period and the effective date, at the end of 2015, of the first facility of the Bordolano site (+41 million euro in total). There was also an effect on the reduction of the adjusted operating profit from higher depreciation and devaluation (-75 million euro; equal to 13.0%) principally referring to the transport sector (-50 million euro) and the storage sector (-16 million euro).

Net Finance Charges (263 million euro) record a 69 million euro reduction, equal to 20.8%, in respect to the fiscal year 2015. The reduction is due to lower finance charges correlated to the net financial debt (-63 million euro; -18.3%) principally connected to the lower average cost of the debt, also thanks to optimization interventions in the group’s financial structure put into effect by Snam.

The finance charges capitalized in the fiscal year 2016 total 23 million euro, a 6 million euro reduction in respect to the fiscal year 2015.

The net revenue on shares (116 million euro) concern the shares in the net results for the period of companies evaluated with the net worth method, in particular the companies Trans Austria Gasleitung FmbH – RAG (+90 million euro; + 17 million euro in respect to 2015), TIGF Holding S.A.S. (+50 million euro; +27 million euro in respect to 2015) as well as the share in the negative results for the period of Gasbridge 1 B.V. and Gasbridge 2 B.V. (-10 million euro in total; -20 million euro in respect in 2015).

In reference to the shares in Gasbridge 1 B.V. and Gasbridge 2 B.V., the evaluation fees with the net worth method include the effects of the devaluation of shares in interconnector (UK) Ltd held by the latter (21 million euro).

The income taxes total 363 million euro, a 29 million euro reduction, equal to 7.4%, in respect to the fiscal year 2015. The reduction is mainly due to: (i) to lower profits before taxes; (ii) to the increase in EGA benefits – Economic Growth Assistance arranged for companies that strengthen their own net worth structure – introduced by Decree Law no. 201 of December 6, 2011, converted by Law no. 214 of December 22, 2014 and subsequent inclusions and modifications.