Reclassified income statement

First half of 2016 – Reconciliation of the reported income statement with the adjusted pro-forma one

The separation of the natural gas distribution business from Snam took effect on 7 November 2016. Therefore, the economic results for the first half of 2017 refer exclusively to the natural gas transportation, regasification and storage businesses as well as corporate activities. In accordance with the terms of IFRS 5 accounting principle “Non-current assets held for sale and discontinued operations”, the economic results in the natural gas distribution segment referring to the period 1 January-30 June 2016 have been represented as “discontinued operations” and, for this reason, expressed separately in a single line in the income statement. In this regard, however, it should be considered that the separate recording of the discontinued operations according to the criteria of IFRS 5 refers only to the relations with third parties leaving the elision of the infra-group relations. In this way, this causes a distortion in the separation of the values between continuing and discontinued operations which, at the economic level, causes a penalty to one or the other which becomes more significant as the infra-group economic relations of the discontinued segments increase.

In order to remove the distortions resulting from the application of IFRS 5, the adjusted result measurements were obtained by restoring the eliminations resulting from inter-company transactions to discontinued operations at the level of each individual income statement item in the continuing operations results. In addition, in order to allow a better evaluation of the performance of continuing operations and greater compatibility of the results, as well as restore inter-company transactions to discontinued operations in the continuing operations, the non-GAAP measurements were also represented from the adjusted pro-forma net profit which, assuming the ownership of the Snam’s significant equity investment in Italgas from 1 January 2016 includes the contribution of the distribution segment applying the investment share of 13.5% to the net profit for the period of the Italgas Group. Management considers that these performance metrics allow for analysis of the business trends, making it easier to compare results. The table below illustrates the reconciliation of the reported income statement for the first half of 2016 with the adjusted pro-forma income statement for the same period.

Net profit

Net profit for the first half of 2017 totalled €504 million, up by €77 million (18.0%) compared with the adjusted pro-forma net profit for the first half of 2016. This increase was due to: (i) the higher EBIT (+€25 million; +3.6%); (ii) lower net financial expense (+€32 million; 21.8%) which benefited from a reduction in the average cost of debt, also following the benefits resulting from the improvement measures implemented in 2016 and 2017, specifically the liability management operation completed in October 2016 and the funding operations implemented in the first half of the year and the reduction in average debt for the period; (iii) the higher income from equity investments valued using the shareholders’ equity method (+€18 million; +25.7%); (iv) the reduction in income tax (+€2 million).

Analysis of income statement items

Regulated and non-regulated revenue

Regulated revenue (€1,219 million, net of consolidation elimination) rose by €24 million compared with the first half of 2016 (+2.0%). Revenue from regulated activities, net of components offset in costs, stood at €1,165 million and relate to transportation (€939 million), storage (€216 million) and regasification (€10 million). The increase of €22 million (1.9%) compared with the first half of 2016 is mainly due to the higher revenues recorded by the transportation segment (+€21 million or 2.3%).

Non-regulated revenues (€49 million, net of consolidation elimination) are essentially in line with the first half of 2016 (€48 million) and mainly involve revenues for services rendered to the Italgas Group (€30 million), technical-specialist services to unconsolidated foreign companies (€4 million) and income from the rental and maintenance of fibre optic telecommunication cables (€6 million).

Operating costs – Regulated and non-regulated activities

Operating costs of regulated activities

Controllable fixed costs (€125 million, net of components which are offset in revenues), which comprise the sum of personnel expenses and recurring external costs, rose by €1 million, or 0.8%, compared with the first half of 2016 (€124 million). The increase is essentially due to higher labour costs (+€3 million) partly offset by lower external costs (-€3 million).

Variable costs stood at €5 million, net of items which are offset in revenues, down €2 million compared with the first half of 2016.

Other costs (€8 million net of items which are offset in revenues) recorded a fall of €7 million (46.7%) due in the main to the lower capital losses from asset radiation (-€5 million).

Operating costs of non-regulated activities

Non-regulated operating costs totalled €41 million, down compared with the corresponding period in 2016 (-€10 million; -19.6%).

Operating costs, net of components that are offset in revenues, amounted to €179 million, down by €18 million, equal to 9.1% compared with the first half of 2016.

The number of employees as at 30 June 2017 (2,926 people) is analysed below by professional status:

Amortisation and depreciation (€321 million) increased by €16 million, 5.2%, compared with the first half of 2016, mainly following the increased amortisation and depreciation (+€14 million), recorded in all business segments. The increase is essentially due to the entry into service of new infrastructures in the period 1 July 2016-30 June 2017.

EBIT for the first half of 2017 totalled €714 million, up by €25 million (3.6%) compared with the adjusted pro-forma EBIT for the first half of 2016. The increase is due to higher revenues (+€23 million; +1.9%), attributable mainly to the transportation segment (+€19 million; +2.1%), and the reduction in operating costs (+€18 million; 9.1%), the effects of which were partly offset by the increase in amortisation, depreciation and write-downs for the period (-€16 million; 5.2%), essentially due to the amortisation and depreciation resulting from new infrastructures coming into service. Specifically, the reduction in operating costs is mainly due to: (i) the absence of the expenses related to the separation of Italgas from Snam (+€6 million); (ii) lower capital losses from the radiation of assets (+€5 million); (iii) the impacts of the efficiency plan (+€5 million).

Net financial expense amounted to €115 million, down by €32 million (21.8%) compared with the first half of 2016. The reduction is mainly due to lower finance charges related to the net financial debt (-€32 million or -21.2%) following the reduction in the average cost of debt, also after the benefits resulting from the improvement measures implemented in 2016 and in 2017, specifically the liability management operation completed in October 2016 and the funding transactions carried out in the first quarter of the year, as well as the lower average debt for the period.

Net income from equity investments (€88 million) concerns the share of net profit for the period of companies valued using the equity method (+€18 million), mainly with reference to Trans Austria Gasleitung GmbH – TAG (€43 million; +€6 million), TIGF Holding S.A.S. (€19 million; +€3 million) and AS Gasinfrastruktur Beteiligung GmbH (€5 million; +€5 million).

Income tax for the first half of 2017 (€183 million) decreased by €2 million, or 1.1%, compared with the corresponding period of the previous year. The effects of the higher pre-tax profit were more than offset by the reduction, from 1 January 2017, of IRES from 27.5% to 24.0%¹⁷.

The tax rate was 26.6% (30.2% in the first half of 2016).