Main events

Separation of Italgas Reti S.p.A. from Snam S.p.A.

On 7 November 2016, with the initial listing of Italgas S.p.A. (formerly ITG Holding S.p.A.) on the Electronic Stock Market organised and managed by Borsa Italiana S.p.A., the transaction for the separation of Italgas Reti S.p.A. (formerly Italgas S.p.A.) from Snam S.p.A. entered into effect.

The transaction had mainly a business purpose, aimed at separating Snam Group gas distribution operations in Italy, which have their own specificity in relation to other Snam Group operations in terms of operational organisation, competitive environment, regulation and investment requirements from gas transportation and dispatching, regasification and storage activities in Italy and abroad.

On 2 November 2016, the following were executed concurrently and in their entirety pursuant to the transaction, which led to the transfer to Italgas S.p.A of Snam S.p.A.’s 100% equity investment in Italgas Reti S.p.A.:

• the legal instrument for the partial and proportional spin-off through the allocation to Italgas S.p.A. of 52.90% of the equity investment that Snam S.p.A. held in Italgas Reti S.p.A., along with the allocation to Snam S.p.A. shareholders of 86.50% of the Italgas S.p.A. share capital. As a result of the Italgas S.p.A. Spin-off, one Italgas S.p.A. share was issued and allocated to Snam S.p.A. shareholders for every five Snam S.p.A. shares that they held;
• the legal instrument for Snam S.p.A.’s in-kind contribution to Italgas S.p.A. of an 8.23% equity investment in the share capital of Italgas Reti S.p.A.in exchange for the allocation to Snam S.p.A. of 108,957,843 newly issued Italgas S.p.A. shares, to enable Snam S.p.A. to hold, after the spin-off, a 13.5% equity investment in Italgas S.p.A.;
• the agreement for Snam S.p.A.’s sale to Italgas S.p.A. of 98,054,833 Italgas Reti S.p.A. shares representing 38.87% of the share capital, for a consideration of €1,503 million, in exchange for assuming debt in the same amount owed by Italgas S.p.A, in order to generate a suitable level of financial debt.

The spin-off instrument was recorded with the Companies Register on 3 November 2016 pursuant to the Borsa Italiana’s issuance of the order to list Italgas S.p.A. shares on the Electronic Stock Market, which was issued on 2 November 2016, and Consob’s issuance of the equivalence assessment, pursuant to Article 57, paragraph 1, letter d) of the Issuers’ Regulation, regarding the Spin-off Prospectus, which was issued on 3 November 2016.

As is provided by the aforementioned spin-off instrument, the spin-off entered into effect as of the initial trading date, namely 7 November 2016.

With the listing of Italgas S.p.A., 7 November 2016 was the effective date of the shareholder agreement signed on 20 October 2016 between Snam S.p.A., CDP Reti S.p.A. and CDP Gas S.r.l., which covered all the shares each held in Italgas S.p.A. The shareholder agreement constitutes a stock block and voting syndicate, with an entitlement by Snam S.p.A. to withdraw early in the event that, if Snam S.p.A. should dissent from the vote of syndicated shares in regard to any matters reserved for Extraordinary Shareholders’ Meetings, Snam S.p.A. should sell its equity investment in Italgas S.p.A. within the following 12 months (Accelerated Exit). The shareholder agreement also provides that CDP Reti S.p.A., CDP Gas S.r.l. and Snam S.p.A. are to submit a joint list for the appointment of the Italgas S.p.A. Board of Directors, in order to ensure that Snam S.p.A. nominates one candidate. Transfers of Snam S.p.A.’s equity investment in Italgas S.p.A. (including in the event of an Accelerated Exit) are subject not only to advance approval by CDP Reti S.p.A., but also to the subrogation of a third party. In addition, Snam S.p.A. may not increase its equity investment. The agreement has a three-year term that is renewable barring notice of termination; in the event that Snam S.p.A. does not renew, CDP Reti S.p.A. shall have an option to purchase at fair market value Snam S.p.A.’s equity investment in Italgas S.p.A.

Business developments

Gas Connect Austria GmbH

On 15 December 2016 Snam, in a consortium with Allianz, completed the purchase from OMV, Austria’s leading oil and gas company, of 49% of Gas Connect Austria GmbH (GCA).

The purchase was completed through a jointly controlled special purpose vehicle in which Allianz and Snam hold 60% and 40% stakes, respectively, which was backed by a pool of international credit institutions under non-recourse loans in the maximum amount of €310 million. Based on the terms of the transaction, the total consideration paid by the consortium to OMV was €601 million (including €147 million for proportional repayment of the current Shareholder Loan, with the signing, at the closing of the transaction, of a new Shareholder Loan with GCA). The total outlay for Snam was €135 million, in exchange for an indirect stake of 19.6% in GCA.

GCA operates a transportation network of 564 km and a distribution network of 322 km in Austria and is in charge of marketing and supplying transportation capacity at border points and the transportation capacity required by domestic natural gas demand. The transaction is, for Snam, an opportunity to reinforce its strategic position in Austria.

Initiatives for the development of sustainable mobility

Within the broader scenario of the development of sustainable mobility, on 5 October 2016 Snam, FCA and IVECO signed a Memorandum of Understanding for the purpose of promoting the use of natural gas (CNG – Compressed Natural Gas) as an automotive fuel.

On 6 December 2016, Snam also signed with the API Group a letter of intent to increase the number of methane supply stations in Italy.

Optimisation of the Group’s financial structure

Renewal of the Euro Medium Term Notes (EMTN) programme to issue bonds

On 27 September 2016 the Snam Board of Directors decided upon the annual renewal of the EMTN programme initiated in 2012, thereby reducing the maximum total value for bond issues from €12 to €10 billion, also in consideration of the changes in indebtedness resulting from the separation of Italgas Reti S.p.A. from Snam S.p.A. Based on outstanding bonds as of 31 December 2016, the renewal of the programme allows the issuance, by no later than 30 September 2017, of bond issuances for a maximum amount of €2.5 billion⁶, to be placed with institutional investors operating mainly in Europe. The total nominal value of issued bonds in circulation in each instance may not exceed the maximum limit of €10 billion.

The EMTN programme represents an effective instrument to raise funding on the market in a flexible manner and at competitive costs, in a way consistent with Group requirements in terms of changes in the financial structure.

Bond buyback

In October 2016, Snam successfully completed 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.

The overall size of the transaction was also determined in consideration of the cash in, equal to approximately €3.2 billion, resulting from the Italgas separation transaction.

The two issuances were at a fixed rate, respectively in a nominal amount of €1.25 billion, an annual coupon of 0.875% and a 10-year maturity, and in a nominal amount of €0.5 billion, an annual coupon of 0% and a four-year maturity. The impact of this transaction on the 2016 income statement, which was basically equal to the cost resulting from the higher amount repaid to bondholders to buy back bonds on the market in relation to the amortised cost basis of said bonds, amounts to €329 million (€233 million net of the relative tax effect).

By means of this transaction, Snam continued the process to optimise its debt structure, which was undertaken with the objective of continuous improvement in the cost of capital, extending the average term of debt and reducing the refinancing risk.

Share buyback programme

7 November 2016, the effective date of the Snam spin-off, was the start date for the share buyback programme decided by the Shareholders’ Meeting on 1 August 2016.

Between the commencement of the share buyback programme and 31 December 2016, Snam purchased 28,777,930 own shares, representing 0.82% of the share capital, for a total of approximately €103 million with an average price of €3.583 per share.

As of 7 March 2017, the mandate awarded by Snam to a primary level intermediary for the implementation of the share buyback programme was amended by extending, inter alia, the maximum term for making the purchases by 3 months. The intermediary shall carry out the share purchase transactions based on independent decisions, always in accordance with the authorisation to purchase treasury shares resolved by the Shareholders’ Meeting of 1 August 2016 and the applicable regulations.

Any purchases shall be made on the MTA in accordance with Article 144-bis, paragraph 1, section b) of Consob Regulation 11971/1999 and with other applicable provisions, in order to ensure compliance with the fair treatment of shareholders pursuant to Article 132 of the TUF, as well as according to the operating procedures established in the organisation and management regulations of Borsa Italiana S.p.A.

The main events relating directly to the operating segments are described in the “Business segment operating performance” section of this Report.