Natural gas distribution

Results

Total revenue amounted to €516 million, down by €27 million (5.0%) compared with the corresponding period of the previous year. Total revenue, net of components that are offset in costs¹¹, amounted to €512 million, down by €27 million, equal to 5.0% compared with the first half of 2015.

Regulated revenues amounted to €505 million, and related mainly to fees for the natural gas distribution service (€485 million) and to technical services connected to the distribution service (€11 million). Revenue from regulated activities net of components that are offset in costs, amounted to €501 million, down by €27 million, equal to 5.1% compared with the first half of 2015. The reduction is essentially due to the rate adjustment mechanisms and, specifically, to the revision of the invested capital return rate which went from 6.9% in 2015 to 6.1% in 2016 for distribution, and from 7.2% in 2015 to 6.6% in 2016 for metering.

EBIT amounted to €178 million, down by €70 million (28.2%) compared with the corresponding period of the previous year. The reduction is due to lower revenues (-€27 million) and the increase in operating costs (-€33 million, net of components that are offset in revenues), attributable to the greater net provision for risks and charges (-€31 million), as well as greater amortisation and depreciation in the period (-€10 million).

Main events

Separation of Italgas from Snam

On 28 June 2016 the Snam Board of Directors approved the separation of Italgas from Snam to be implemented through a unitary and simultaneous transaction which, includes, among other things, the partial and proportional spin-off of Snam and consequent listing on the Milan Mercato Telematico Azionario (MTA) of a new beneficiary company of the spin-off, with the role of a holding company for the Italgas shareholding (ITG Holding S.p.A.). Through the industrial and corporate reorganisation operation, the entire shareholding currently held by Snam in Italgas, equal to 100% of the share capital of Italgas, will be transferred to the beneficiary company for the purpose of separating the gas distribution operations in Italy. The transaction departs from the idea that operations relating to natural gas distribution have specific characteristics compared with other Snam Group operations in terms of operational organisation, competitive context, regulation and investment requirements. Italgas, as an independent company from a managerial, operational and financial point of view, can concentrate its efforts and expertise on the improved strategy to adopt in taking part in tenders with the goal of significant growth in its reference framework. This will enable it to benefit from the additional economies of scale and greater operational efficiency. Also taking into account an expected public rating of BBB+ - stable outlook from Fitch and a provisional issuer rating of Baa1 - stable outlook from Moody’s, issued on 29 June 2016, it is expected that the company will have a solid credit rating in line with Snam’s current one and direct access to the capital markets, with a more efficient financial structure and competitive costs, taking advantage of the opportunities offered by the current financial market conditions.

Specifically, the transaction involves: (i) the contribution in kind by Snam to ITG Holding of a shareholding equal to 8.23% of the share capital of Italgas in order to allow Snam to own, post-merger, a shareholding of 13.50% in the beneficiary company ITG Holding; (ii) the sale by Snam to ITG Holding of a shareholding equal to 38.87% of the share capital of Italgas, the payment of which will form a vendor loan pertaining to ITG Holding to generate an adequate level of financial debt that takes into account the profile of activity, risk and generation of cash flows; (iii) the partial and proportional spin-off of Snam with the allocation to ITG Holding of the residual shareholding owned by Snam in Italgas, equal to 52.90%, with the consequent allocation to Snam shareholders of the remaining 86.50% of the share capital of ITG Holding.

The effectiveness of the entire transaction is subject, in addition to legal conditions, including, specifically, approval by the Snam Shareholders’ Meeting, to the issuing by the Italian Stock Exchange of authorisation for admission to trading of the ITG Holding shares on the MTA, the issuing by CONSOB of an opinion of equivalence and the approval of the Snam bondholders.

The Board of Directors called the Shareholders’ Meeting, in ordinary and extraordinary session, for 1 August 2016. The conclusion of the entire transaction, subject to the realisation of the above-mentioned conditions, is scheduled for by 31 December 2016.

Revoke of the “judicial control” against Italgas

On 9 July 2015 the Court of Palermo has revoked the measure of the judicial administration against Italgas, as a result of the investigations and the active cooperation carried out by Snam Group.

Italgas has been asked to provide the competent authorities with the information flows requested under art. 34 of Legislative Decree no. 159/2011 (judicial control) on the relevant operations.

Italgas has filed an appeal to the Court of Appeal of Palermo.

On 25 July 2016 the Court of Appeal has revoked the “judicial control” against Italgas, by so declaring ceased the execution of any prescriptions.

Technical investments in the first half of 2016 amounted to €152 million, up €10 million, or 7.0%, compared with the first half of 2015 (€142 million).

Investments in distribution (€87 million) mainly related to development projects (extensions and new networks) and the renovation of old sections of pipeline, including the replacement of cast-iron pipes.

Investments in metering (€51 million) related primarily to expenditure on remote reading.

Other investments (€14 million) mainly concerned investments in IT, property and vehicles.

Operating review

As at 30 June 2016, Snam, through Italgas, managed the gas distribution service in 1,472 municipalities (the same as at 31 December 2015 and at 30 June 2015), of which 1,401 were operational. As at 30 June 2016, the number of active meters located at end-user gas redelivery points (households, businesses, etc.) stood at 6.525 million (6.518 million at 30 June 2015).

As at 30 June 2016, the gas distribution network covered 56,759 km, an increase of 42 km compared with 31 December 2015 (56,717 km).

Regulation

Electricity, Gas and Water System Authority (AEEGSI) resolutions

Resolution 173/2016/R/gas - “Determination of provisional reference tariffs for gas distribution and metering services for 2016, and approval of bi-monthly equalisation amounts, relating to the natural gas distribution service, for 2016”

With this resolution, published on 8 April 2016, the Authority determined the provisional reference tariffs for the gas distribution and metering services for 2016, based on the preliminary balance sheet data for 2015, pursuant to Article 3, paragraph 2, letter a) of resolution 573/2013/R/gas Regulation of Tariffs for Gas Distribution and Metering Services - RTDG.