Reclassified statement of financial position

The reclassified statement of financial position combines the assets and liabilities of the compulsory format included in the Annual Report and the Half-Year Report based on how the business operates, usually split into the three basic functions of investment, operations and financing.

Management believes that this format presents useful information for investors as it allows the identification of the sources of financing (equity and third-party funds) and the investment of financial resources in fixed and working capital.

Management uses the reclassified statement of financial position to calculate the key profitability ratios (ROI and ROE).

Fixed capital (€22,464 million) increased by €343 million compared with 31 December 2015, due mainly to the increase in property, plant and equipment (+€199 million), the reduction in net financial debt relating to investing activities (+€120 million) and the increase in financial receivables relating to operations (+€69 million).

The change in property, plant and equipment and in intangible assets can be broken down as follows:

Other changes (+€125 million) relate to: (i) the effects of adjusting the present value of disbursements for the dismantling and restoration of sites (+€153 million), mainly due to a reduction in the expected discounting rates; (ii) grants for the period (-€21 million); and (iii) the change in inventories of pipes and related accessory materials used to construct the plants (-€7 million).

Compulsory inventories

Compulsory inventories (€363 million, unchanged from 31 December 2015) comprise minimum quantities of natural gas that the storage companies are obliged to hold pursuant to Presidential Decree 22 of 31 January 2001. The quantities of natural gas in stock, equal to around 4.5 billion standard cubic metres, are determined annually by the Ministry of Economic Development¹³.

Equity investments

The equity investments item (€1,337 million) includes the valuation of equity investments using the equity method and refers to the companies Trans Austria Gasleitung GmbH - TAG (€458 million), TIGF Holding S.A.S. (€445 million), Toscana Energia S.p.A. (€163 million), Trans Adriatic Pipeline AG - TAP (€154 million)¹⁴ and Gasbridge 1 B.V. and Gasbridge 2 B.V. (€105 million cumulatively).

Financial receivables held for operations

Financial receivables held for operations (€147 million) relate to Snam’s share of the Shareholders’ Loan granted to the subsidiary Trans Adriatic Pipeline AG (TAP). Financial receivables, compared with 31 December 2015¹⁵, increased by €69 million.

Net working capital (€890 million) fell by €283 million compared with 31 December 2015 owing mainly to: (i) the reduction in trade receivables (-€430 million) mainly due to the natural gas transportation sector (-€261 million), following less receivables from the dynamics of additional components compared with the transportation tariff (-€107 million) and the balancing service (-€87 million) and the natural gas distribution sector (-€188 million) as a result of seasonally-adjusted volumes distributed; (ii) the increase in the provision for risks and charges (-€170 million) due essentially to the provision for site dismantling and restoration in the storage (-€101 million) and the transportation sector (-€52 million) as a result of the reduction in expected discount rates.

These factors were partly offset by: (i) the reduction in other liabilities (+€128 million) attributable mainly to the lower payables to the Cassa per i Servizi Energetici e Ambientali - CSEA with regard to additional tariff components in the transportation sector (+€98 million); (ii) the increase in other assets (+€93 million) which essentially refer to the distribution sector for greater receivables from the CSEA related to Energy Efficiency Certificates (+€60 million); (iii) the reduction in trade payables (+€86 million) mainly as a result of the balancing service.

Assets held for sale and directly associated liabilities

Assets held for sale and directly related liabilities relate to a property complex located in Roma Ostiense owned by Italgas (€18 million, net of environmental provisions for charges relating to restoration work on the property), for which negotiations for a sale¹⁶ are ongoing.

Information about the individual shareholders’ equity items and changes therein compared with 31 December 2015 is provided in Note 17 “Shareholders’ equity” in the Notes to the condensed consolidated interim financial statements.

The net cash flow from operating activities (€1,200 million) allowed us to fully cover the financial requirements associated with net investments for the period (€692 million) and to generate a free cash flow of €508 million. The net financial debt, after the payment to shareholders of the 2015 dividend of €875 million, increased by €367 million compared with 31 December 2015. Including non-cash items, net financial debt increased by €398 million to a level of €14,177 million.

Financial and bond debts at 30 June 2016, amounting to €14,198 million (€13,796 million at 31 December 2015), comprised the following:

Financial and bond debts are denominated in euros¹⁷ and refer mainly to bond loans (€9,639 million, 67.9%) and bank loans (€4,535 million, or 31.9%, including €1,617 million provided by the European Investment Bank - EIB).

The increase in financial and bond debts compared with 31 December 2015, equal to €402 million, is mainly attributable to the increase in bank loans (+€585 million) by virtue of the greater net usage of uncommitted banking lines of credit (+€350 million) and committed lines (+€245 million), belonging, specifically, to the syndicated loan. These effects were partly offset by the reduction in debenture loans (-€172 million) basically following the repayment of a bond, due in January 2016, of a nominal value of €150 million.

Long-term financial debt (€10,334 million) represents around 73% of gross financial debt (around 80% at 31 December 2015). Fixed-rate financial debts amounted to around 62% of gross financial debt (around 64% at 31 December 2015).

Cash and cash equivalents (€21 million) mainly refer to the bank deposits of Gasrule Insurance DAC for the Group’s insurance activities (€19 million).

At 30 June 2016, Snam had unused committed long-term credit lines worth €3.7 billion.

Covenants

As at 30 June 2016, Snam had unsecured bilateral and syndicated loan agreements in place with banks and other financial institutions. Some of these agreements call for, among other things, compliance with covenants typical of international practices such as: (i) negative pledge commitments pursuant to which Snam and its subsidiaries are subject to limitations concerning the pledging of real property rights or other restrictions on all or part of the respective assets, shares or merchandise; (ii) pari passu and change-of-control clauses; and (iii) limitations on certain extraordinary transactions that the Company and its subsidiaries may carry out. At 30 June 2016, the bank loans subject to these restrictive clauses amounted to approximately €2.9 billion. The bonds issued by Snam as at 30 June 2016 as part of the Euro Medium Term Notes programme call for compliance with covenants that reflect international market practices regarding, inter alia, negative pledge and pari passu clauses.

Failure to meet these covenants, and the occurrence of other events, for example cross-default events, some of which are subject to specific materiality thresholds, may result in Snam’s failure to comply and could trigger the early repayment of the relative loan. Exclusively for the EIB loans, the lender has the option to request additional guarantees if Snam’s credit rating is downgraded to BBB- (Standard & Poor’s/Fitch Ratings Limited) or Baa3 (Moody’s) for at least two of the three ratings agencies.

Specifically with regard to the covenants related to the separation of Italgas from Snam (the Transaction), note the following: (i) with regard to the bank loans at 30 June 2016, Snam obtained the required consent from financial institutions to finalise the Transaction, which was subject, among other things, to the completion of the Transaction; (ii) with regard to the bonds issued as a part of the Euro Medium Term Notes Programme, as dictated by the agreement, Snam will request the approval of bondholders to allow it to sell a substantial portion of its industrial business as a result of the Transaction; (iii) with specific regard to the loans funded by the European Investment Bank, EIB has issued its consent for the completion of the Transaction subject to certain termination conditions such as, in particular, EIB’s receipt of the spin-off document in a form and substance satisfactory to EIB, and Snam’s updated business plan, and any other transaction-related documentation available to creditors indicating that Snam’s credit risk and overall industrial operations are not negatively affected by the transaction. With regard to the two loans issued by EIB to Snam to fund Italgas projects, EIB has stated it is willing to agree to the assumption with release for Snam subject to certain conditions being met (including the approval of EIB’s decision-making bodies in this regard).

Taking account of what is described in this paragraph, it should be noted that as at 30 June 2016, there were not events not in compliance with the aforementioned obligations and contractual covenants.