Main events

Acquisitions in the core business

DESFA

On 20 December 2018, the European consortium made up of Snam (60%), Enagás (20%) and Fluxys (20%) completed, through the new company Senfluga Energy Infrastructure Holding, the acquisition by the Greek privatisation company HRADF and Hellenic Petroleum of a 66% stake in DESFA, the national operator in the natural gas infrastructure sector, for an equivalent value of 535 million euro. The Consortium has acquired a non-recourse loan with a duration of over 10 years, corresponding to around 65% of the enterprise value.

DESFA has and manages, in a regulated system, a high pressure transmission network of approximately 1,500 km, as well as a regasification terminal in Revithoussa. Greece, an important crossways for the diversification of procurement and the opening of new natural gas routes in Europe, has further potential development as a hub for south-east Europe.

Thanks to the support offered by Snam, Enagás and Fluxys, the three European infrastructural companies most involved in the development of the Energy Union, DESFA may fully optimise its strategic position in the Mediterranean. The consortium will also be promoting innovation in the natural gas sector in Greece, fostering the introduction of renewable gases like biomethane so as to create a sustainable energy system and actively contribute towards the reduction of greenhouse gases and polluting emissions in the country.

Acquisitions in new businesses

TEP Energy Solution (TEP) - Energy efficiency

On 30 May 2018, after obtaining antitrust clearance, through the subsidiary Asset Company 4 S.r.l., a controlling stake of 82% of the capital was acquired in TEP Energy Solution (TEP) for a total value of approximately 21 million euro. There is a contractual price adjustment mechanism in place, based on the results of FYs 2018-2020 and crossover put and call options on the interests of minority shareholders, maturing in 2020.

TEP is one of Italy’s most important companies in the energy efficiency sector, as an Energy Service Company (ESCO) with more than 200 leading national and international businesses as clients and 950 thousand energy efficiency certificates.

The acquisition of TEP comes under the scope of Snam’s strategic plans aimed at fostering decarbonisation and a better use of energy in the territories in which it operates. The aim is to speed up the TEP growth process, with the support of the company’s management team, facilitating the transfer of energy efficiency competences and technologies from major industry to small and medium enterprises and local entities.

IES Biogas and ENERSI Sicilia - Biomethane

On 05 July 2018, Snam acquired, for a value of approximately 4 million euro, 70% of IES Biogas, one of the most important Italian businesses involved in the design, development and management of biogas and biomethane production plants with a market share in excess of 10%. Contractual put and call options are envisaged on minority shareholders’ interests, maturing in 2022.

With 2017 turnover exceeding 20 million euro, IES Biogas has to date developed more than 200 plants throughout national territory. In recent years, the company has also developed projects outside Italy.

On 29 November 2018, Snam also completed the acquisition, for a value of around 2 million euro, of 100% of Enersi Sicilia S.r.l., a company authorised to develop infrastructure to produce biomethane from the organic fraction of municipal solid waste (“OFMSW”) in the province of Caltanissetta.

This acquisition will allow Snam to create its first biomethane plant which will be capable of handling 36,000 tonnes of municipal waste per year, providing the bordering municipalities with a totally renewable solution to the problem of disposal.

The plant will be set up leveraging the managerial expertise and know-how of the subsidiary IES Biogas which will oversee its development and construction.

Said acquisitions have been carried out through the subsidiary Snam4Mobility, the company through which Snam is developing the compressed natural gas (CNG) and liquefied natural gas (LNG) engine refuelling infrastructures. The growing interest shown by the market in respect of methane and biomethane sustainable mobility shows the great potential of alternative uses of gas.

Biomethane is a source of renewable energy that derives from the biogas purification process obtained from the optimisation of the products and by-products of the agricultural and agricultural-industrial chain and the organic fraction of municipal waste. Biomethane can be released into the natural gas transmission infrastructure.

The acquisition is a first step for Snam into renewable energy, in support of its role in the energy transition.

Cubogas - Compressed natural gas (CNG)

On 25 July 2018, through the newly-established company Cubogas S.r.l., a 100% subsidiary of Snam4Mobility, after the meeting of several conditions precedent including the completion of the union procedures, the business unit was acquired as operating in the design, development and production of technological solutions for natural gas vehicle refuelling stations of M.T.M., a company of the Westport Fuel Systems Group.

The transaction has a value of 12.6 million euro, including price adjustments applied during closing.

The acquisition, which includes the Cubogas brand, will allow Snam to insource and fully consolidate the value created throughout the chain, taking a leadership position in the development of “turnkey” solutions for natural gas sustainable mobility. Snam will operate in such a way as to further develop the strengths of Cubogas, such as the brand value, customer focus and service level.

The use of compressed natural gas (CNG) in the transport sector is one of the best technologies available to eliminate polluting emissions, to the benefit of air quality in cities.

New business opportunities

Snam and BHGE: agreement to develop micro-liquefaction plants for sustainable mobility

On 28 May 2018, Snam and Baker Hughes, a GE company (NYSE: BHGE) signed a Head of Agreement for the development of micro-liquefaction infrastructures to boost sustainable mobility in heavy goods transport by road and to promote the launch of shipping in Italy.

Snam and BHGE are evaluating the possibility of developing four micro-liquefaction plants throughout national territory. The total annual production of the four plants will come to approximately 140,000 tonnes of liquefied natural gas (LNG) or bio-LNG (liquid biomethane, obtained from the organic fraction of municipal waste or agricultural and agricultural-industrial biomass) and will strengthen the Italian production of zero CO₂ emissions renewable gas for the transport sector.

The potential investment expected for the four plants, if the study should be successful, is around 50-80 million euro in the next few years. The agreement also envisages the opportunity of developing further micro-liquefaction infrastructures in Italy and abroad.

Agricultural biomethane - Memorandum of Understanding: Coldiretti, Bonifiche Ferraresi, A2A, Snam and Gestore dei servizi energetici (GSE)

On 19 June 2018, a memorandum of understanding was stipulated by Coldiretti, Bonifiche Ferraresi, A2A, Snam and Gestore dei servizi energetici (GSE), with the involvement of agricultural and industrial businesses, the Italian councils and, more generally, all players involved in the production of biomethane and the related use in the transport sector. The ultimate aim is to aggregate the chain players, so as to speed up the energy transition in transport, allowing all operators to access the services offered by the various subjects operating in biomethane and agriculture. Snam intends to promote the development and dissemination of processes and technologies for biomethane production in Italy and support the circular economy, as well as making its compressed and liquefied natural gas distribution plants and transmission network available for sustainable mobility.

Sustainable Mobility

In the more extensive scenario of initiatives for the promotion of sustainable mobility, Snam:

• on 31 July 2018, stipulated a framework agreement with the api Group for the creation, within IP-branded fuel sales outlets, of around 200 new natural gas and biomethane refuelling stations throughout the country. The agreement is part of the undertaking made by the two companies to promote sustainable mobility and aims to extend the natural gas distribution network for vehicles in Italy. Based on the agreement, Snam and the api Group will jointly identify the IP-branded fuel refuelling stations of the ordinary and motorway networks where the plants supplying methane for vehicles (CNG, compressed natural gas) will be installed. LNG (liquefied methane) distributors for heavy goods vehicles are also being studied;
• following on from the framework agreement signed in May 2017, by means of the subsidiary Snam4Mobility, on 3 August 2018, stipulated with Eni the second implementation contract on the development of 20 methane refuelling stations in Italy (which follow on from the 14 contracted in 2017). The contract concerns the design, development and maintenance by Snam of 20 new CNG plants within the national Eni distributor network. The investment for these activities is expected to be approximately 10 million euro. As at 31 December 2018, a total of 50 agreements had been contracted with Eni and other operators for refuelling stations (34 with Eni in 2017 and 2018), of which 6 stations have already been developed;
• also signed, on 26 November 2018, a strategic agreement with SEAT for the promotion of the use of natural gas (CNG - compressed natural gas) and renewable gas (biomethane) for sustainable mobility, as well as research and development projects in this area. According to the agreement signed, Snam and SEAT will be exploring business development opportunities and initiatives involving resellers, commercial clients and drivers, to promote the system of natural gas refuelling stations and the identification of new technological projects.

Collaboration opportunities in China

Signed on:

• 28 August 2018, with State Grid International Development (SGID), a 100% subsidiary of State Grid Corporation of China, a Memorandum of Understanding (MOU) to assess a series of possible collaboration opportunities in China and internationally, in particular in connection with uses of new technologies to reduce CO₂ emissions. The initiatives being examined include: (i) the development of biogas and biomethane plants to produce electricity from renewable sources in the rural areas of China; (ii) any partnership opportunities in research and development involving renewable gas, sustainable mobility and joint electricity-gas projects. A first service contract was also signed with Petrochina Pipeline Company for the training of around 80 resources of the Chinese company;
• 25 October 2018, an MOU with Beijing Gas, China’s most important distributor and supplier of natural gas, with a network of 22 thousand kilometres and more than 6 million customers in the area of Beijing. The understanding envisages the evaluation of possible collaborations in China, in particular in biomethane and the storage of natural gas.

Sardinia Newco

Snam and Società Gasdotti Italia (SGI) have finalised an agreement for the possible joint development of the transmission infrastructure in Sardinia, after obtaining the authorisations necessary following the procedure in progress with the competent national and regional authorities.

On 30 October 2018, the Directorate-General for Competition of the European Commission issued its antitrust clearance (authorisation) for the establishment by Snam and Società Gasdotti Italiani-SGI of a newco for the development of the gas transmission infrastructure in Sardinia.

Snam Global Solution - Joint venture with Albanian Gas Service Company (Albgaz)

Established in November 2018, a joint venture for the supply of operation and maintenance (O&M) services on the Albanian section of the TAP gas pipeline. The joint venture is owned 75% by Albgaz and 25% by Snam.

The agreement is part of the activities started by Snam’s Global Solutions business unit to enhance and make Snam’s consolidated experience in the market development and creation and management of gas infrastructure in Italy and Europe available to other operators at global level.

Financing

New share buy-back plan and cancellation of treasury shares without reducing the share capital

On 24 April 2018, Snam’s Shareholders’ Meeting authorised, after revoking the part that had not been executed of the resolution to authorise the purchase of treasury shares passed by the Shareholders’ Meeting on 11 April 2017, the purchase of treasury shares on one or more occasions, for the maximum duration of 18 months starting from the date of the meeting resolution. The maximum outlay authorised is 500 million euro and in any case up to a maximum of 134,564,883 shares, without exceeding 6.50% of the share capital subscribed and freed-up (regarding the treasury shares already held by the Company). The shareholders’ meeting resolution sets out the terms and conditions of the price for the purchase of treasury shares to be made under the authorisation conferred. The Shareholders’ Meeting has also authorised the disposal, in one or more tranches, without any time limits and even before having completed the purchases, of all or part of the Company’s treasury shares purchased under the shareholders’ meeting resolution, and also of the treasury shares already held.

In an extraordinary session, the same Shareholders’ Meeting, again held on the same date, approved the cancellation of 31,599,715 treasury shares with no nominal value, without reducing the share capital, and the consequent amendment of Art. 5.1 of the Company’s Articles of Association. The shares were cancelled on 07 May 2018 following the deposit with Companies House of the amended Articles of Association. By virtue of this operation, the share capital consists of 3,469,038,579 shares with no nominal value, with a total value of 2,736 million euro.

In execution of that resolved, the new buy-back programme was launched on 18 June 2018.

In 2018, a total of 113,881,762 Snam shares were purchased, equal to 3.28% of the share capital, for a cost of 426 million euro (56,010,436 shares, equal to 1.60% of the share capital, for a cost of 210 million euro in 2017). Purchases were made of 36,606,724 shares as part of the share buy-back programme resolved by Snam’s Shareholders’ Meeting held on 11 April 2017 and of 77,275,038 shares as part of the new share buy-back programme.

As at 31 December 2018, Snam had a total of 168,197,663 treasury shares, equivalent to 4.85% of its share capital.

Renewal of the EMTN Programme and authorisation of a Euro Commercial Paper programme

On 02 October 2018, the Board of Directors of Snam S.p.A. resolved to renew the Euro Medium Term Note (EMTN) programme launched in 2012, for a maximum value of 10 billion euro.

As a result, the Board has decided to issue one or more additional bonds to be executed by 02 October 2019, for a maximum amount of 1.74 billion euro, increased by the amount corresponding to the bonds repaid during the same period, to be placed with institutional investors, mainly operating in Europe. The total nominal value of issued bonds in circulation in each instance may not exceed the maximum limit of 10 billion euro. The securities issued may be listed on one or more regulated markets.

The EMTN Programme represents an effective tool to obtain significant financial resources from the market in a rapid and flexible way, at competitive costs, coherent with the expected evolution of the target financial structure of the company. As at 31 December 2018, bonds for approximately 8.0 billion euro have been issued under the EMTN Programme⁴.

The Board of Directors has also resolved to approve a Euro Commercial Paper programme (the “ECP Programme”) for the issue of one or more Euro Commercial Papers within 2 years of 02 October 2018, for a total maximum equivalent value of 1 billion euro, increased by the amount corresponding to the Euro Commercial Papers redeemed each time during the same period, to be placed with institutional investors, as per the terms and conditions of the ECP Programme. The total nominal value of the Euro Commercial Papers issued under the ECP Programme may not exceed the maximum limit of 1 billion euro. As at 31 December 2018, the ECP Programme is used for a total nominal value of 225 million euro.

The ECP Programme enables Snam to diversify the short-term financial instruments with a view to ever greater flexibility in the process of optimising the treasury.

Bond buyback

On 10 December 2018, Snam successfully completed a buyback on the market of its own bonds with a total nominal value of about 538 million euro, with an average coupon of approximately 2.6% and a remaining maturity of approximately 3.7 years.

The effects of this transaction on the 2018 income statement (47 million euro, 35 million euro gross of the tax effect) are essentially represented by the charges deriving from the difference between the outlay deriving from the repurchase of the bonds on the market and the amortised cost valuation of the bonds themselves.

Through this operation, Snam continues to optimise its debt structure and continuously improve the cost of capital, in line with its objectives. The year just ended is the last of four liability management years that, from 2015 to date, have helped reduce Snam’s cost of debt from 2.4% in 2016 to 1.5% in 2018.

Other

GasBridges share swap

On 26 April 2018, Snam S.p.A. and Fluxys Europe B.V. completed the share swap transaction through which Fluxys Europe transferred to Snam the shares held in GasBridge 2 B.V., equal to 50% of the share capital and, at the same time, Snam transferred to Fluxys Europe, the shares held in GasBridge 1 B.V., equal to 50% of the share capital. Upon completion of the share swap, Snam held the entire capital of GasBridge 2 B.V. and Fluxys owned the entire capital of GasBridge 1 B.V. On 31 July 2018, Gasbridge 2 B.V. was renamed Snam International B.V.

Exit incentive agreement - ISOPENSIONE

On 26 September 2018, Snam stipulated an implementing agreement with some of the most representative trade unions, covering tools for the management of employment policies.

Under this agreement, which follows on from the preliminary agreement signed by the parties on 26 July 2017, measures were agreed in relation to the instrument for early retirement for employees, regulated by Art. 4, paragraphs 1-7 of Italian Law no. 92/2012 (the “Fornero Law”).

The agreement intends to create, by 31 October 2019, the conditions for the companies of the Snam Group that favour the early exit of beneficiary employees in order to achieve a generational turnover.

After verification of pension requirements by INPS, a total of 110 resources are involved.

As far as the application of this implementing agreement is concerned, Snam has committed to pay the beneficiary employees, in addition to the amounts set out in the agreement, a further amount as an incentive to take voluntary redundancy.

In relation to the aforementioned agreement, the income statement recorded expenses of 15 million euro for cost of labour, including the costs for early retirement incentives granted to employees taking part.