Letter to the Shareholders and Stakeholders

Carlo Malacarne
Chairman

Marco Alverà
CEO

To our Shareholders and Stakeholders,

In 2016 we achieved significant objectives on various fronts, most important of all the business objective of separating Snam from the natural gas distribution business in Italy, which was achieved through a complex transaction divided into various joint, coherent and concurrent steps that resulted in the transfer of Snam S.p.A.’s entire equity investment in Italgas Reti S.p.A. (formerly Italgas S.p.A.) to Italgas S.p.A. (formerly ITG Holding S.p.A.). The transaction, which was one of the most significant transactions in 2016, entered into effect on 7 November 2016, the date of the initial listing of Italgas S.p.A. on the Electronic Stock Market organised and managed by Borsa Italiana S.p.A., which represented the company’s return to the stock exchange 13 years after its delisting in 2003. As a result of this transaction, two different groups were created, each focused on its own business, with objectives that are clearly identified and perceptible by the market, and a financial and operating structure that is ideal for best exploiting and realising their respective opportunities for strategic growth and expansion. First of all, for Snam, seizing new opportunities for growth in Europe in its core business, and secondly, for Italgas, strengthening its leadership in the Italian market with a view to upcoming tender processes for the awarding of contracts for natural gas distribution in Italy.

As a result of the transaction, and specifically the transaction for a partial and proportional spin-off of Snam S.p.A. with the assignment to Italgas S.p.A of 52.90% of the equity investment that Snam S.p.A. held in Italgas Reti S.p.A., each Snam S.p.A. shareholder came to hold, instead of Snam stock, two different stocks, which represent the various business areas in which Snam and Italgas, both leaders, operate: specifically, Snam in natural gas transportation and dispatching, regasification and storage, and Italgas in the natural gas distribution business. The presence of Snam S.p.A. in the shareholder structure of Italgas S.p.A., with a 13.5% stake in the share capital, at the same time represents both a symbol of continuity for Italgas and strategic capital available to Snam.

Due also to the additional financial flexibility resulting from the transaction, in October 2016 and with complete success we concluded a buyback on the market of bonds with a total nominal value of €2.75 billion, with an average coupon of approximately 3.3% and a remaining maturity of approximately 3 years. The total outlay was approximately €3.1 billion, financed in part by two bond issues with a total value of €1.75 billion, with an average coupon of 0.6% and an average maturity of approximately 8 years, and the remaining portion was financed by drawing down on available credit lines. This transaction shall enable Snam to continue along the path of optimisation of its debt structure in terms of reducing the cost of capital, extending average debt maturity and reducing refinancing risk. In addition, with the objective of optimising the debt structure and in support of the overall returns for shareholders, beginning on 7 November we initiated a new share buyback plan, which as of the end of 2016 led to the buyback of 28,777,930 Snam shares on the market, representing 0.82% of the share capital, with a total outlay of approximately €103 million.

With a view to strengthening its strategic positioning in Austria, on 15 December 2016 Snam, in a consortium with Allianz, completed the acquisition from OMV, Austria’s leading oil and gas company, of 49% of Gas Connect Austria GmbH (GCA). This transaction represents for Snam an opportunity for a unique investment in a gas transportation network of primary importance, and an infrastructure essential to supplying gas to the Austrian market, where Snam holds an 84.47% controlling stake jointly with GCA in the TAG (Trans Austria Gasleitung) gas pipeline, the principal backbone of the country’s gas infrastructure. The acquisition was completed using a jointly controlled special purpose vehicle, in which Allianz and Snam respectively hold 60% and 40% stakes, with a total outlay by Snam of €135 million, in exchange for an indirect 19.6% stake in GCA’s share capital.

We ended 2016 with solid financial results that were in line with our expectations. Net cash flow from operating activities¹ was €1,627 million, notwithstanding the revision of the net rate of return on invested capital for regulatory purposes (WACC) and the expenditures sustained for financial expenses connected to the liability management transaction. Net financial debt at the end of 2016, due also to revenue in the amount of €3,207 million from the transaction to separate Italgas from Snam, was reduced by €2,723 million, and was posted in the amount of €11,056 million.

Adjusted EBIT² totalled €1,336 million, a 9.8% reduction from the same figure in 2015. The reduction mainly reflects the impact on revenue from the revision of the WACC and a greater amount of amortisation, depreciation and impairment losses. Adjusted net profit of €826 million from continuing operations was a 4.3% decrease from the previous financial year. The Group adjusted net profit was €1,016 million, which includes the contribution from discontinued operations.

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.

In 2016 we also achieved positive results in terms of occupational safety due to our operating model based on the adoption of a standard of excellence, strict control of industrial processes and the sustainability of our value creation model. In 2016 the accident frequency rate for employees and contractors was 0.75, a 15.7% reduction from 2015 for the same consolidation area, while the accident severity rate for employees and contractors was 0.05, a 16.7% reduction from 2015 for the same consolidation area.

As confirmation of our continuous effort to enhance sustainability as an integral part of the business growth model, in October 2016 Snam was admitted to the exclusive CDP (Carbon Disclosure Project) “A list”, the index that represents an important benchmark to guide investors to enterprises with greater awareness of climate change issues, in which Snam has had a presence since 2012. Furthermore, in September 2016 Snam’s stock was confirmed for the eighth straight year, by RobecoSAM on the Dow Jones Sustainability World Index, the most important stock market index in the world for the assessment of social responsibility.

Also in regard to the issue of sustainability, in the field of sustainable mobility and initiatives to promote sustainable mobility, with the objective of promoting companies’ use of alternative and environmentally compatible fuels, Snam signed agreements aimed at promoting natural gas as an automotive fuel. Snam, as a European leader in the construction and management of infrastructure in the natural gas market, shall make available its established experience in the sector to promote the expansion of facilities for supplying methane for automotive purposes.

Lastly, in connection with the transaction to separate Snam from the natural gas distribution business, we have acquired a new organisational structure. With this new structure, which became operational as of 1 November 2016, and which was designed as an instrument to support the strategic plan, business activities were reorganised into three business units: growth and development, Italian assets and foreign activities.

Looking at the future, which is projected to be equally rich in challenges, over the next 5 years we will invest approximately €5.0 billion of which €4.7 billion for projects in Italy.

Strengthening and enhancing Italy’s position within the European gas system shall enable us to further improve, enhance and develop our network, including for the benefit of consumers, thereby putting Snam in a position to seize any possible opportunities for investment with attractive returns.

The quality of the assets, the strength and soundness of the financial position, and the stability of cash flows shall enable us to support investments so as to continue our path of growth and expansion and reward our shareholders with a dividend that is projected to increase over the period of the plan. The additional financial flexibility created by the transaction to separate Italgas from Snam may be applied to further investments, in keeping with a rigorous financial discipline that has always set us apart.

On the basis of the results achieved and the Company’s prospects, we intend to recommend to the Shareholders’ Meeting the distribution of a dividend of €0.21 per share.

6 March 2017
for the Board of Directors

The Chairman

The CEO