Reclassified statement of financial position

The reclassified balance sheet 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 additional information for investors as it allows identification of the sources of financing (equity and third-party funds) and the application of such funds for fixed and working capital.

Fixed capital (18,856 million euro) was down by 19 million euro on 31 December 2017. The reduction is mainly due to the lesser long-term financial receivables (-362 million euro) mainly in view of the repayment, by TAP, of the shareholders’ loan, to a large extent absorbed by the increase in tangible and intangible fixed assets (+177 million euro) and the increase in equity investments (+159 million euro), mainly due to the purchase of DESFA.

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

The technical investments of 2018 of the continuing operations total 882 million euro²⁵ (1,034 million euro in 2017) and principally refer to the sectors of transmission (764 million euro) and storage (99 million euro).

The change in the consolidation area (+31 million euro) refers to the assets recorded in view of acquisitions of 82% of the capital of TEP Energy Solution (24 million euro) and 70% of the share capital of IES Biogas (4 million euro)²⁶.

Other changes (-32 million euro) relate essentially to: (i) contributions on works for interference with third parties (so-called recalls; -22 million euro); (ii) the change in inventory of piping and related accessory materials used in plant construction (-11 million euro); and (iii) the effects of adjusting the current value of expenditure relating to the charges for storage site dismantling and restoration (-8 million euro)²⁷.

Compulsory inventories

The fixed warehouse stock – compulsory inventories – equal to 363 million euro (equal as at 31 December 2017), comprise a minimum degree of natural gas that the storage company is required to withhold in accordance with Italian Presidential Decree no. 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 Development²⁸.

Equity investments

The equity investments item (1,750 million euro) included: (i) the valuation of equity investments using the equity method and referred mainly to Trans Austria Gasleitung GmbH - TAG (509 million euro), Terēga Holding S.A.S. (466 million euro), Trans Adriatic Pipeline AG – TAP (258 million euro), Italgas S.p.A. (180 million euro), AS Gasinfrastruktur Beteiligung GmbH (124 million euro), and Senfluga (117 million euro); (ii) the fair value measurement of the minority stake held in the company Terminale GNL Adriatico S.r.l. (40 million euro).

Long-term financial receivables

Long-term financial receivables (11 million euro) show a reduction of 362 million euro. The reduction is mainly due to the repayment by TAP, through a true-up mechanism, of the shareholders’ loan (519 million euro, in view of the 373 million euro relative to outstanding receivables as at 31 December 2017 and 156 million euro relative to receivables accrued in 2018), following the completion, on the banking market, of the project financing for the gas pipeline development project²⁹.

Net working capital (1,259 million euro) was down by 180 million euro on 31 December 2017. The reduction is mainly due to: (i) the increase in accruals and deferrals from regulated activities (-131 million euro) mainly due to penalties and greater volumes billed to users of the transmission service, with respect to the restriction of revenues established by the Regulatory Authority; (ii) the performance of commercial operations (-112 million euro), which recorded lesser receivables for 27 million euro, mainly following the lesser volumes of gas traded under the scope of balancing and greater trade payables (-85 million euro), primarily due to the transmission sector gas settlement, introduced by the Regulatory Authority by resolutions 670/2017/R/gas and 782/2017/R/gas³⁰. These effects were partially offset by the rise in other net assets (+46 million euro, net of other liabilities), mainly due to the greater receivables of the transmission segment towards the CSEA in reference to the gas settlement.

Net financial debt was 11,548 million euro as at 31 December 2018, compared with 11,550 million euro as at 31 December 2017.

The net cash flow from operations (1,826 million euro) allowed us to entirely finance net investments (1,036 million euro, including equity investments of 176 million euro). This flow and the collection deriving from the repayment by TAP of the shareholders’ loan (519 million euro; 371 million euro, net of the portions disbursed by Snam during the year), have made it possible to generate free cash flow of 1,161 million euro. Net financial debt, after the payment to shareholders of the 2017 dividend (731 million euro, of which 294 million euro by way of interim dividend and 437 million euro for the balance) and the cash flow deriving from the purchase of treasury shares (426 million euro), shows a reduction of 2 million euro compared with 31 December 2017, including non-monetary components relating to net financial debt (2 million euro).

Financial debts and bonds as at 31 December 2018 of 13,420 million euro (12,619 million euro as at 31 December 2017) are as follows:

Financial and bond debts are denominated in euros ³¹ and refer mainly to bond loans (8,446 million euro, or 62.9%) and bank loans (4,749 million euro, or 35.4%, including 1,448 million euro provided by the European Investment Bank - EIB).

The bonds decreased by 226 million euro (8,446 million euro) compared to 31 December 2017. The reduction is mainly due to: (i) the repayment of a fixed-rate bond loan maturing on 19 March 2018, for a nominal amount of 851 million euro; (ii) the repayment of a fixed-rate bond maturing on 10 September 2018, for a nominal amount of 70 million euro; (iii) the repurchase on the market of fixed-rate bonds for a total nominal value of 538 million euro with an average coupon of 2.6% and a residual duration of approximately 3.7 years. These effects were partially offset by the issue of: (i) a variable-rate bond³², on 22 January 2018, for a nominal value of 350 million euro; (ii) a fixed-rate bond, on 11 September 2018, for a nominal value of 600 million euro; (iii) a fixed-rate equity linked bond, on 27 November 2018, for a nominal value of 300 million euro.

Funding for bank loans (4,749 million euro) increased by 818 million euro mainly following the underwriting of three bank term loans for a total nominal value of 700 million euro, and of a greater net use of uncommitted credit facilities for a value of approximately 393 million euro. This effect is partially offset by the early repayment of a bank term loan for a nominal value of 250 million euro.

Long-term financial liabilities (9.787 million euros) made up approximately 73% of gross financial debt (around 81% as at 31 December 2017). Fixed-rate financial debts amounted to around 78% of gross financial debt.

The Euro Commercial Papers (225 million euro) regard unsecured short-term securities issued on the money market and placed with institutional investors.

Cash and cash equivalents (1,872 million euro) refer mainly to a short-term use of liquid funds, maturing within three months, with the counterparty being a bank of high credit standing (1,000 million euro), an on-call bank deposit (810 million euro) and cash held at the company Gasrule Insurance DAC (17 million euro) and Snam International BV (14 million euro).

As at 31 December 2018, Snam had unused committed long-term credit facilities worth 3.2 billion euro. In terms of sustainable finance, November 2018 saw the completion of the transformation of these pooled credit facilities into a sustainable loan with 19 national and international banks of primary standing, with a bonus/malus mechanism on the margins paid connected with the achievement of specific ESG (Environment, Social and Governance) KPIs: this is the third largest sustainable loan stipulated in the world and the absolute largest by a gas utility company.

Information on financial covenants can be found in Note 17 “Short-term financial liabilities, long-term financial liabilities and short-term portions of long-term liabilities” of the Notes to the consolidated financial statements.