2010 Annual Report - SnamSnam Rete Gas Annual Report 2010 / Letter to Shareholders levels recognised by major ethical rating companies. To this end, Snam Rete Gas recently joined Global

2010 Annual Report

MissionSnam Rete Gas is an integrated group at the

forefront of the regulated gas sector in Italy and a major

player in Europe in terms of its regulatory asset base (RAB).

It has unrivalled expertise in the transportation and

dispatching of natural gas, the regasification of liquefied

natural gas, and the storage and distribution of natural gas.

At Snam Rete Gas our aim is to create value that will fulfil

our shareholders’ expectations.

This is achieved by providing our customers with services

that offer the utmost security and operational reliability,

as well as through our commitment to developing

infrastructure and creating a flexible gas market in Italy,

fostering competition and improving security of supply.

Snam Rete Gas pursues a sustainable growth model,

built on a thorough assessment of the environmental

impact of its activities and the development of new

and more efficient technologies.

The company relies on the expertise of its staff and their

continued development to successfully achieve these goals.

BACKGROUND

Snam Rete Gas S.p.A. was founded on 15 November 2000. The company became operational on 1 July 2001, inheriting the natural gas transportation and dispatching and and the liquefied natural gas regasification operations from Snam S.p.A. (now Eni S.p.A.).On 30 June 2009, the company bought the entire share capital of Italgas, Italy's leading natural gas distributor, and Stogit, the country's biggest operator in the natural gas storage sector. Snam Rete Gas shares have been listed on the Italian stock market since 6 December 2001.

Annual Report 2010

Disclaimer

The annual report includes forward-looking statements, especially in the “Outlook” section, relating to: natural gas demand, investment plans, divi-dend policy, future operating performance and project execution. Such statements are, by their very nature, subject to risk and uncertainty as they depend on the fact that certain events and developments will take place. The actual results can therefore differ from those forecast, as a result of several factors, including: trends in natural gas demand, supply and price, actual operating performance, general macro-economic conditions, the effect of new energy and environmental leg islation, the successful development and implementation of new technologies, changes in stakeholders’ expectations and other changes in business conditions.

Introduction Legislative Decree No. 32 of 2 February 2007, “Implementation of Directive 2003/51/EC which amends Directives 78/660, 83/349, 86/635 and 91/674/EEC concerning annual accounts and consolidated accounts of certain types of companies, banks and other fi nancial institu-tions and insurance companies” amended Articles 2428 and 2409-ter of the Italian Civil Code concerning the management report and the independent auditors’ report, respectively; similar revisions were made to Articles 40 (Management Report) and 41 (Audit of Consolidated Financial Statements) of Legislative Decree No. 127/91. In particular, in addition to the revisions introduced by the new text of Article 2428 of the Italian Civil Code, Article 40 of Legislative Decree No. 127/91 specifi es that for companies that prepare consolidated fi nancial statements, the management report in the consolidated fi nancial statements and the fi nancial statements of the parent company, “may be presented in a single document highlighting, where appropriate, matters which are signifi cant for companies included in the consolidation.” Considering the methods used for defi ning the operating segments in which the Group operates, which, for the most part, are related to the activities performed by Snam Rete Gas S.p.A. (transportation of natural gas), GNL Italia S.p.A. (regasifi cation of LNG), Stogit S.p.A. (storage of natural gas) and Italgas S.p.A. and its subsidiaries/associates (distribution of natural gas), and the results of the parent company as a percentage of consolidated results, the Company took advantage of this opportunity by highlighting, where appropriate, issues that are sig-nifi cant for companies included in the scope of consolidation. Thus, the information provided in the Management Report and in the notes to the fi nancial statements of Snam Rete Gas S.p.A. was amended as necessary.

Starting with the 2010 fi nancial statements, the Company has also taken advantage of the option provided by paragraph 3 of Article 123-bis of the Testo Unico della Finanza (TUF), as revised by Legislative Decree No. 173/08, to present the Report on Corporate Governance and Own-ership Structure in a separate document on the Company’s website indicating in the management report the section of the website where the document is published. In this report, information on corporate governance and ownership structure is limited to the main features of the governance system adopted by the company; a complete report is available on the Snam Rete Gas website: http://www.snamretegas.it under the section “Governance”.

Snam Rete Gas means Snam Rete Gas S.p.A. and the companies within its consolidation scope.

R eports and consolidated fi nancial statements

Directors’ ReportLetter to Shareholders 4Corporate offi cers 6

Summary dataThe Snam Rete Gas Group 7Annual Profi le 9Snam Rete Gas and fi nancial markets 13

Business segment operating performance Main factors of the pricing framework 15Natural gas transportation 17Liquefi ed Natural Gas (LNG) regasifi cation 27Natural gas storage 31Natural gas distribution 37

Financial review and other informationFinancial review 42

Income statement 42Reclassifi ed consolidated balance sheet 49Reclassifi ed consolidated statement of cash fl ows 54

Elements of risk and uncertainty 57Outlook 60

Other information 61Information on corporate governance and ownership structure 65Commitment to sustainable development 75Glossary 83

Consolidated Financial statements

Financial statements 88Basis of presentation and consolidation principles 92Notes to consolidated fi nancial statements 101

Statement from management 145Independent auditors’ report 146

4

Snam Rete Gas Annual Report 2010 / Letter to Shareholders

Letter to Shareholders

To our Shareholders and Stakeholders,

The economic recovery, which began last summer after the most in-tense period of the economic and fi nancial crisis, continued in 2010, although it remains affected by fi nancial uncertainties and limited prospects for growth in GDP and consumption. In this context, and with a scenario that continues to be uncertain, important results were achieved in 2010 which underscore the strength of the operat-ing and fi nancial performance of Snam Rete Gas. During the year just ended, EBIT and net profi t rose 46.2% and 51.1%, respectively, compared to 2009, and 17.0% and 19.3% compared to the corre-sponding combined fi gures for 2009 which were generated with the inclusion of Italgas and Stogit in the scope of consolidation for the entire year 2009. The strength of the business was also confi rmed at the fi nancial level with the generation of €1.8 billion in operating cash fl ow making it possible to fully fi nance capital expenditures and create a free cash fl ow of nearly €400 million. The constant focus on operating effi ciency also enabled us to achieve and exceed the announced cost reduction goals and provide us with a signifi cant means of creating value. Cost savings were approximately €64 million in 2010 cal-culated in real terms on the basis of costs for 2008 and at constant structure. The establishment of tariff criteria for storage activities for the third regulatory period (1 January 2011 - 31 December 2014), which was completed last August, also pro-vides further stability and visibility with regard to the group’s re-sults in the coming years.Snam Rete Gas stock closed the year at a price of €3.73 per share, up 7.8% on 2009. This performance was signifi cantly bet-ter than that recorded both on the Italian market (FTSE MIB index -13.2%) and in the European utilities sector (Eurostoxx Utilities index -8.8%) which, in a volatile climate, were dampened by mar-ket fears as to the sustainability of the debt of some European countries (Greece, Spain, Portugal and Ireland) and by the energy sector, which is characterised by over capacity and weak demand. In this context, the performance of Snam stock was helped by its defensive characteristics, both in terms of visibility and solid fi -nancials over the medium to long term.Confi rming the ongoing commitment of Snam Rete Gas to sustain-able development, in 2010 the stock was confi rmed on the Dow

Jones Sustainability World indices, the largest and most pres-tigious world stock index for the assessment of the corporate responsibility of companies, and on the FTSE4Good Index Series sustainability index which groups the best companies in the world that have distinguished themselves in terms of sustainable eco-nomic growth. Snam Rete Gas has been on this index since 2002. EBIT and net profi t for 2010 were €1,862 and €1,106 mil-lion and were up €588 (+46.2%) and €374 million (+51.1%) over 2009. On the one hand, this increase was due to the greater contribution of the natural gas distribution and storage segments which, for the entire year, benefi ted from the eco-nomic impact of consolidating Italgas and Stogit, against a six-month contribution reported in the same period last year from 30 June 2009, the date on which the acquisition of the two com-panies was completed, and on the other hand, due to the signifi -cant improvement in the performance of the transportation busi-ness segment (+21.7%).The net cash fl ow from operating activities (+€1,775 million) covered a signifi cant portion of the fi nancial obligations of in-vestments (-€1,393 million net of divestments) and of paying dividends (-€776 million, including the dividend balance for 2009 and interim payment for 2010). At 31 December 2010, net fi nancial debt totalled €10,341 million, an increase of €392 million over 31 December 2009. At year-end, leverage stood at 63.6%, which was unchanged from year-end 2009, confi rming the strength of the fi nancial structure of Snam Rete Gas. The results achieved enable us to propose to the Shareholders’ Meeting the distribution of a dividend of €0.23 per share (+15.0% over 2009) including €0.09 already distributed as an interim payment in October 2010. Based on the major plan for gas trans-portation, storage and distribution investments totalling €6.4 bil-lion over the four-year period 2011-2014, and the effi ciency plan, which is estimated to reach €80 million in 2012 (in real terms related to 2008 costs, and at constant structure), Snam Rete Gas confi rms the outlook of an attractive, sustainable return to its shareholders. In the area of sustainable development, we wish to continue fo-cusing our efforts on achieving the highest sustainability index

5

Snam Rete Gas Annual Report 2010 / Letter to Shareholders

levels recognised by major ethical rating companies. To this end, Snam Rete Gas recently joined Global Impact, the international ini-tiative launched in July 2000 by the United Nations in support of ten universal principles related to human rights, labour, the envi-ronment and the fi ght against corruption. We would like to bring our stakeholders closer, as their scope has widened through ac-quisitions, by focusing on discussion and collaboration. We seek more effective cooperation with local areas with which we have worked successfully for several years. We would like to continue to provide the high standards of quality in our business in an en-

vironmentally friendly manner with both conviction and passion.To conclude, Snam Rete Gas will mark 2010 as a year with very positive results confi rming the strength of our business model known for its limited industrial and fi nancial risk profi le, and the validity of the business and strategic reasons that led to the acqui-sition of Italgas and Stogit, which will contribute to making Snam Rete Gas a key group in the regulated gas sector in Europe. Thanks to the commitment, professionalism and passion of all those who work at Snam Rete Gas, the company is able to confi rm its outlook of creating sustainable value for its shareholders over time.

2 March 2011for the Board of Directors

Chairman CEO

Carlo Malacarne CEO

Salvatore SardoChairman

6

Corporate officers

Snam Rete Gas Annual Report 2010 / Corporate officers

BOARD OF DIRECTORS (*)

Salvatore Sardo ChairmanCarlo Malacarne Chief Executive Offi cer (1) Alessandro Bernini Director Davide Croff Independent Director Elisabetta Oliveri Independent Director (2)

Mario Stella Richter Independent Director (2)

Massimo Mantovani Director Renato Santini Independent DirectorRoberto Lonzar Independent Director (2)

CHIEF OPERATING OFFICERFrancesco Iovane (3)

BOARD OF STATUTORY AUDITORS (*)

Massimo Gatto Chairman (2)

Francesco Schiavone Panni Standing auditor Roberto Mazzei Standing auditor Giulio Gamba Alternate auditorLuigi Rinaldi Alternate auditor (2)

INTERNAL CONTROL COMMITTEE (**)

Roberto Lonzar Chairman – Independent Director (2)

Mario Stella Richter Independent Director (2)

Renato Santini Independent Director

COMPENSATION COMMITTEE (**)

Davide Croff Chairman – Independent Director Alessandro Bernini Director Elisabetta Oliveri Independent Director (2)

INDEPENDENT AUDITORS (***) Reconta Ernst & Young S.p.A.

(*) Appointed by the shareholders on 27 April 2010 and in offi ce until the approval of the fi nan-cial statements for the year ended 31 December 2012.

(**) Committees set up on 26 February 2002. Members appointed by the board of directors on 30 April 2010.

(***) Engaged by the shareholders on 27 April 2010 for the period 2010-2018.

(1) Confi rmed by the board of directors on 30 April 2010.(2) Appointed from the minority shareholders’ list.(3) Appointed as Chief Operating Offi cer by the board of directors on 8 May 2006.

Standing, from left to right:Massimo Mantovani, Massimo Gatto, Elisabetta Oliveri, Alessandro Bernini, Davide Croff, Francesco Schiavone Panni, Mario Stella Richter, Renato Santini. Seated, from left to right: Roberto Mazzei, Carlo Malacarne, Salvatore Sardo, Roberto Lonzar.

Snam Rete Gas Annual Report 2010 / The Snam Rete Gas Group

The Snam Rete Gas Group

7

Snam Rete Gas is an integrated group at the forefront of the regulat-ed gas sector, and a major player in Europe in terms of its regulatory asset base (RAB) in its sector. It operates in the transportation and dispatch of natural gas, the regasifi cation of liquefi ed natural gas

(LNG) and the distribution and storage of natural gas. These activi-ties are carried out via its integrated infrastructure in Italy. In addition, the Group performs other unregulated activities con-sisting mainly of technical and business services.

Snam Rete Gas Annual Report 2010 / The Snam Rete Gas Group

8

Consolidation scope1

Consolidating company Shareholders % ownership

Snam Rete Gas S.p.A.Eni S.p.A.Snam Rete Gas S.p.A.Other shareholders

52.545.44

42.02

Subsidiaries fully consolidated companies Shareholders % ownership

GNL Italia S.p.A. Snam Rete Gas S.p.A. 100.00

Stogit S.p.A. Snam Rete Gas S.p.A. 100.00

Italgas S.p.A. Snam Rete Gas S.p.A. 100.00

Napoletana Gas S.p.A.Italgas S.p.A.Other shareholders

99.690.31

(1) The list of subsidiaries, associates and signifi cant equity investments of Snam Rete Gas S.p.A. can be found in the “Subsidiaries, associates and signifi cant equi ty investments of Snam Rete Gas S.p.A. at 31 December 2010” appendix to the consolidated fi nancial statements.

Italgas S.p.A.Distribution

100%

GNL Italia S.p.A.Regasification

100%Stogit S.p.A.

Storage

100%

Snam Rete Gas S.p.A.

Transportation

Napoletanagas S.p.A.Distribution

99.69%

9

Snam Rete Gas Annual Report 2010 / Annual Profile

Annual Profile

ResultsIn 2010 Snam Rete Gas generated a net profi t of €1,106 million, up 51.1% on 2009. The increase was essentially due to the contri-bution of natural gas distribution and storage segments, which, for the entire year, benefi ted from the economic impact of con-solidating Italgas and Stogit, against a six-month contribution re-ported in the previous year from 30 June 2009, the date on which the acquisition of the two companies was completed, and the signifi cant improvement in the performance of the transportation business segment (+21.7%). Net profi t related to the correspond-ing combined amount for the previous year, which was obtained by including Italgas and Stogit for all of 2009 in the scope of con-solidation, was up 19.3%.

Cash fl ow (net cash fl ow from operating activities) totalled €1.8 billion making it possible to fully fi nance the signifi cant capital ex-penditures for the period and to create a free cash fl ow of about €400 million. At 31 December 2010 leverage stood at 63.6%, un-changed from 31 December 2009.

DividendsNet profi t and cash generation made it possible to distribute a dividend, subject to the approval of the Shareholders’ Meeting, of €0.23 per share, of which €0.09 per share was distributed in Oc-tober 2010 as an interim payment, and the balance of €0.14 per share will be made payable as of 26 May 2011 (ex-dividend date of 23 May 2011). The payout was 70.3% (92.2%2 in 2009).

(2) The pay-out for 2009 is not representative of the normal level of performance since the contribution of the natural gas distribution and storage businesses to net profi t was only for the second half of 2009.


10

Natural gas transportationA total of 83.32 billion cubic metres of gas was injected into the transportation network, an increase of 6.42 billion cubic metres (+8.3%) on 2009. The increase was mainly due to a recovery in natural gas demand in Italy (+6.4% compared with 2009) in all sec-tors, especially the residential and tertiary (+7.1%), industrial (+7%) and thermoelectric (+4.4%) sectors.

Regasifi cation of liquefi ed natural gas (LNG) A total of 1.98 billion cubic metres of LNG was regasifi ed in 2010, an increase of 0.66 billion cubic metres, or 50%, compared with 2009. The increase was due to more plant activity as a result of a recovery in natural gas demand in Italy.

Natural gas storageIn 2010, 15.59 billion cubic metres of natural gas were moved through the group’s storage system, a decrease of 0.93 billion cubic metres from 2009 (-5.6%). This decrease was attributable essen-tially to the large withdrawals of gas from storage as a result of the Russian supply crisis in January 2009, which was partly offset by higher volumes injected to refi ll the space for shippers. The available storage capacity at 31 December 2010 was around

9.2 billion cubic metres, an increase of 3.4% compared with the previous year.

Natural gas distributionAt 31 December 2010, there were 5.848 million active meters at end-customer gas redelivery points, an increase of 1.3% on 31 De-cember 2009.

InvestmentsInvestments amounted to €1,540 million (€1,254 million in 2009) and largely concerned upgrading infrastructure for the transporta-tion, regasifi cation, storage and distribution of natural gas.

Key fi gures To improve the economic and fi nancial review, in addition to convention al IAS/IFRS indicators and fi nancial statements, the di-rectors’ report also contains reclassifi ed fi nancial statements and several alternative performance indicators such as EBITDA, EBIT and net fi nancial debt. The following tables, their explanatory notes and the reclassifi ed fi nancial state ments illustrate these amounts; see the glossary for a defi nition of the terms used, where these are not specifi ed.

Main income statement data (a) (€ million) 2008 2009 2010

Core business revenue (b) 1,902 2,438 3,475

Core business revenue net of IFRIC 12 1,902 2,438 3,126

Operating costs (b) 399 581 968

Operating costs net of IFRIC 12 399 581 619

EBITDA 1,511 1,887 2,540

EBIT 1,022 1,274 1,862

Net profi t (c) 530 732 1,106

(a) The 2009 income statement data include the impact of consolidating Italgas and Stogit from 30 June 2009, the date the acquisition transaction was completed. In order to provide a meaningful comparison between the 2010 and 2009 results, the section “Financial review” in this report also contains, in addition to comments on the main items, the consolidated combined income state-ment obtained by including Italgas and Stogit in the scope of consolidation for the entire year 2009..

(b) T he items for 2010 include the effects of applying international accounting standard IFRIC 12, “Service Concession Arrangements”. Applying this interpretation had no effect on the group’s results, except for the equal recognition of revenue and costs relating to building and upgrading distribution infrastructures (€349 million). For more information on the accounting effects of applying this interpretation, see the section on “Basis of Presentation and Accounting Consolidation Principles” in the notes to the consolidated fi nancial statements.

(c) Net profi t is attributable to Snam Rete Gas.

Main balance sheet data (€ million) 2008 2009 2010

Investments (a) 1,044 1,254 1,540

Net invested capital at 31 December 9,809 15,652 16,257

Shareholders’ equity including minority interests at 31 December 2010 3,573 5,703 5,916

Group shareholders’ equity at 31 December 3,573 5,702 5,915

Net fi nancial debt at 31 December 6,236 9,949 10,341

Free Cash Flow (b) 32 (4,489) 382

(a) Investments for 2009 in the natural gas distribution and storage segments, which totalled €321 million, related to the period 1 July 2009 – 31 December 2009.(b) Free cash fl ow for 2009 refl ects the disbursement for the acquisition of Italgas and Stogit.


11

Main share data 2008 2009 2010

Number of shares of share capital (millions) 1,956.4 3,570.8 3,570.8Number of shares outstanding on 31 December (millions) 1,761.0 3,375.9 3,376.6Average number of shares outstanding during the year (millions) 1,761.0 2,579.3 3,376.2Year-end offi cial share price (a) (€) 3.26 3.46 3.73Average offi cial share price for the year (a) (€) 3.45 3.22 3.59Market capitalisation (b) (€ million) 7,009 11,681 12,595Dividend per share (€ per share) 0.23 0.20 0.23Dividends for applicable period (c) (€ million) 405 675 777Dividends paid during the period (€ million) 387 450 776

(a) As required by the “Principles and Conventions” of Borsa Italiana, the offi cial stock prices of Snam Rete Gas in 2008 were adjusted for the capital increase carried out to fi nance the acquisition of Italgas and Stogit completed on 30 June 2009.

(b) The product of the number of shares outstanding (exact number) multiplied by the year-end offi cial stock price. The value for 2008 was calculated on the basis of the historical price (€3.98 per share) and does not refl ect the price adjustment following the increase in share capital.

(c) The amount for 2010, representing the balance, was estimated on the basis of the number of shares outstanding on 31 December 2010.

Key profi t and fi nancial indicators 2008 2009 2010

EBIT per share (a) (b) (€) 0.58 0.49 0.55

Basic earnings per share (a) (b) (€) 0.30 0.28 0.33

Group shareholders’ equity per share (b) (€) 2.03 2.21 1.75

Leverage (net fi nancial debt/net invested capital) % 63.6 63.6 63.6

Pay-out (Dividends for applicable period/Net profi t) % 76.4 92.2 70.3

ROE (c) % 15.0 15.8 19.0

ROI (d) % 10.6 10.0 11.7

Dividend yield (Applicable dividend/Year-end offi cial share price) (%) (e) % 5.8 5.8 6.2

Price/Book value (Average offi cial price per share/Group shareholders’ equity per share) (e) (€) 2.04 1.46 2.05

(a) Profi t in the natural gas distribution and storage segments for 2009 was for the period from 1 July 2009 to 31 December 2009. (b) Calculated considering the average number of shares outstanding during the year. (c) Return on equity (ROE) was calculated as the ratio of net profi t to the average of beginning and ending shareholders’ equity for the period. (d) Return on investment (ROI) was calculated as the ratio of EBIT to the average of beginning and ending net invested capital for the period. (e) The 2008 stock prices are historical fi gures and thus do not refl ect the price adjustment made following the share capital increase.

Key operating fi gures (a) 2008 2009 2010 Change Change %

Natural gas transportation (b) Natural gas injected in the gas transportation network (billions of cubic metres) 85.64 76.90 83.32 6.42 8.3

Transportation network (kilometres in use) 31,474 31,531 31,680 149 0.5

Liquefi ed Natural Gas (LNG) regasifi cation (b)

LNG regasifi cation (billions of cubic metres) 1.52 1.32 1.98 0.66 50.0

Natural gas storage (b)

Available storage capacity (billions of cubic metres) (c) 8.9 9.2 0.3 3.4

Natural gas moved through the storage system (billions of cubic metres) 16.52 15.59 (0.93) (5.6)

Natural gas distribution

Active meters (millions) 5.771 5.848 0.077 1.3

Distribution concessions (number) 1,441 1,448 7 0.5

Distribution network (kilometres) 49,973 50,307 334 0.7

Employees in service at year end (number) (d) 2,345 6,187 6,104 (83) (1.3)

by business segments:

- Transportation 2,252 2,254 2,636 382 16.9

- Regasifi cation 93 87 70 (17) (19.5)

- Storage 301 279 (22) (7.3)

- Distribution 3,545 3,119 (426) (12.0)

(a) The changes indicated in the table, as well as those below in this report, must be considered changes from fi nancial year 2009 to 2010. Percentage changes are calculated in relation to the data indicated in the related tables.

(b) Gas volumes are expressed in standard cubic metres (SCM) with an average higher heating value (HHV) of 38.1 and 39.4 MJ/SCM, respectively for the businesses of natural gas transportation, regasifi cation and storage.

(c) Working gas capacity for modulation, mining and balancing services. (d) Fully consolidated companies.


12

200

1,200

800

400

1,400

1,000

600

0

31 December2008

31 December2009

31 December2010

1,800

2,400

1,862

2010

1,200

600

1,022

2008

1,274

2009

0

1,106

2010

530

2008

732

2009

Dividend yield (%)

EBIT (millions of euros)Net profit (millions of euros)

Leverage (%)

70

66

62

58

54

50

8

7

6

5

4

63.6 63.6 63.6

31 December2008

31 December2009

31 December2010

5.8 5.86.2

13

Snam Rete Gas Annual Report 2010 / Snam Rete Gas and financial markets

Snam Rete Gas and financial markets

In 2010 contrasting performance was reported in various European stock markets in a volatile environment. Although certain countries showed signs of growth and a positive future outlook, in others, in particular Greece, Ireland, Portugal and Spain, uncertainties over the ability to pay their government debt weighed heavily. This had inevitable repercussions on stock index movements.In particular, fears over the sovereign debt situation surfaced pri-marily at the beginning of the year, while in the second half of 2010, several prices moved upward leading to the following annual per-formance in major European stock exchanges: FTSE 100 of London +9%, DAX of Frankfurt +16.1%, CAC 40 of Paris -3.3%, IBEX of Madrid -17.4%. The Eurostoxx 50 European index remained unchanged from the end of last year.

The Italian market also felt the effects of the uncertain climate in international fi nancial markets. The perception of country risk by the fi nancial community prevented domestic indices from enter-ing positive territory. The FTSE MIB, which includes the largest 40 companies in terms of capitalisation which are listed in the Italian market, dropped 13.2%, while the FTSE Italia All-Share index, which includes all listed companies, was down 11.5%. It should be noted

that the performance of domestic indices was also affected by their sector composition, characterised by a preponderance of compa-nies in the banking, insurance and utility sectors, which were on a downward trend for the year.Snam Rete Gas stock, which is included in the FTSE MIB Italian index, and also in leading international indices (Stoxx Europe, S&P Europe and MSCI Europe) ended 2010 at an offi cial price of €3.73, up 7.8% over the same fi gure for the previous year. This performance was achieved in an environment of overall growth for stocks of “regu-lated utility” companies, and more specifi cally, for those companies which, due to a stable and transparent regulatory environment, pro-vide long-term visibility of their results and cash fl ow. These stocks set themselves apart from the overall European utilities sector, which underperformed the market (-8.8% in the Stoxx Europe 600 Utilities index) due mainly to the so-called overcapacity phenomenon which, together with weak demand for energy, had a negative impact on companies with the greatest exposure to energy prices. In 2010 approximately 2.9 billion shares of Snam Rete Gas were traded on the electronic stock market of Borsa Italiana, with rising daily trades averaging about 11.5 million shares (compared to 10.1 million in 2009).

Snam Rete Gas Annual Report 2010 / Snam Rete Gas and financial markets

14

52.54% ENI

12.28% Institutional Investors Continental Europe

9.79% Retail investors

7.36% Institutional Investors North America

5.44% Treasury Shares

4.56% Institutional Investors UK & Ireland

4.14% Institutional Investors Italy

2.29% Institutional Investors – Rest of the World

1.60% Bank of Italy

Shareholder structureAt 31 December 2010, the fully subscribed and paid-up share capi-tal of Snam Rete Gas S.p.A. totalled €3,570,832,994.00 and con-sisted of 3,570,832,994 ordinary shares with a nominal value of €1 (3,570,768,494 shares with the same nominal value at 31 De-cember 2009). The increase of €64,500 over 31 December 2009 was due to the issue of 64,500 shares with a nominal value of €1.

These shares were subscribed by managers entitled to participate in the 2003 stock option plans.At year end, based on entries in the Shareholders’ Register and other information gathered, Eni S.p.A. held 52.54% of share capital, Snam Rete Gas S.p.A. held 5.44% in the form of treasury shares, and the remaining 42.02% was in the hands of other shareholders.

Snam Rete Gas on the Stock Market

Comparison of prices of Snam Rete Gas, FTSE MIB and Euro Stoxx 600 Utilities (31 December 2009 - 31 December 2010)

Source: Snam Rete Gas calculations using BLOOMBERG data.

Shareholder structure of Snam Rete Gas by type of investor and geographic area

Key indices which include Snam Rete Gas stock Sustainability indices

FTSE MIB Stoxx Europe 600

Stoxx Europe 600 UtilitiesS&P Europe

DJSI World (as of 2009)FTSE4Good Europe (as of 2002)FTSE4Good Global (as of 2002)

ECPI Ethical Europe (as of 2009) ECPI Ethical Global (as of 2009)

ECPI Ethical EMU (as of 2009)

0

10

20

30

40

50

60

70

80

0

20

40

60

80

100

120

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10

Snam Rete Gas FTSE MIB Eurostoxx 600 UtilitiesVolume

Min

15

Snam Rete Gas Annual Report 2010 / Main factors of the pricing framework

Main factors of the pricing framework

The criteria for determining of the tariffs for the regulated natural gas transportation activities, regasifi cation of LNG, distribution and storage of natural gas are established by the Electricity and Gas

(3) To ensure that complete information is provided for the natural gas storage business segment, the main pricing factors applicable as of 1 January 2011 which are effective from the third regulatory period (1 January 2011-31 December 2014) are also indicated. The information on the regulatory framework is provided, for each business segment, under the paragraph titled “Regulation”, which contains the main resolutions of the Electricity and Gas Authority in regard to the determination of the tariffs applied in 2009 and 2010.

(4) The business segments (transportation of natural gas, regasifi cation of LNG, distribution and storage of natural gas) as presented in the internal reports, were identifi ed by their management and refer to the main activities carried out by Snam Rete Gas S.p.A, GNL Italia S.p.A, Stogit S.p.A, Italgas S.p.A and its subsidiaries, respectively.

Authority. Following are the main pricing factors for each of the reg-ulated activities of Snam Rete Gas S.p.A, based on the regulatory framework in force as at 31 December 20103.

End ofregulatory period

Return onregulatory asset

base (pre-tax WACC)

New investmentincentives

Efficiency factor(X FACTOR)

• 31 December 2013 • 30 September 2012 • 31 December 2012• End of secondregulatory period:31 December 2010

• End of thirdregulatory period:31 December 2014

• 6.4% (transportation)• 6.9% (metering)

• 7.6% • 7.6% (distribution)• 8% (metering)

• 7.1%Starting 1 January 2011• 6.7%

• 1% for 5 years (oninvestments in safety)

• 2% for 7-10 years(on investments fordevelopment of capacity)

• 3% for 10-15 years (oninvestments for develop-ment of input capacity)

• 2% for 8 years(on upgrading of existingterminals of lessthan 30%)

• 3% for 16 years(on upgrading of existingterminals of morethan 30%)

• 2% for 8 years(on replacement ofcast-iron pipes andrenovation of odorizationsystems)

• 4% for 8 years(on upgrading of existingcapacity)

• 4% for 16 years(on development of newstorage fields)

• 2.1% of operating costs • 0.5% of operating costs • 3.2% of distributionoperating costs

• 3.6% su of meteringoperating costs

• 2% of operating costs• 1.5% of amortisation and

depreciationStarting 1 January 2011• 0.6% of operating costs

Calculation ofregulatory asset

base (RAB)

• Revalued historical cost • Revalued historical cost • Revalued historical cost• Parametric method for

centralised assets

• Revalued historical costStarting 1 January 2011• Revalued historical cost• Deduction of recognised

clean-up costs

Transportation Regasification Storage Distribution

In the paragraphs below, the main performance indicators are presented for each business segment4 in which the Group oper-ates. As indicated in the previous chapters, following Eni’s acqui-sition of Italgas and Stogit which was concluded on 30 June 2009, the results for 2009 include the effects of the consolidation of the

newly acquired companies from the third quarter of the year. In order to fully assess the operating performance of the respective activities, the results of the natural gas distribution and storage business segments are analysed in comparison to those for the whole of 2009.

16

17

Snam Rete Gas Annual Report 2010 / Natural gas transportation

Natural gas transportation

18


The natural gas tran sportation service Natural gas transportation is an integrated service which involves providing transportation capacity and the actual transportation of the gas delivered to Snam Rete Gas S.p.A. to the entry points of the Italian gas transportation network 2 up to the redelivery points of the regional network, where the gas is redelivered to the users of the service (the Users). The transport capacity which is expressed in standard cubic meters per day represents the maximum volume of gas that each User can inject or withdraw from the system at the aforementioned points each day. Snam Rete Gas S.p.A. provides transportation capacity to the entities that request it and they acquire the right (as Users) to inject and withdraw on any day of the thermal year to and from the entry and exit points of the National Network, the redelivery points along Snam Rete Gas S.p.A.’s regional transportation network and the Virtual Exchange Point6, a quantity of gas not to exceed the daily fl ow provided.The natural gas introduced into the National Network originates

(5) The list of pipelines comprising the National network and the criteria for defi ning it are provided in the Decree issued on 22 December 2000 by the Ministry for Industry, Trade and Crafts as currently applicable, pursuant to the provisions of Legislative Decree No. 164 issued on 23 May 2000 (the Letta Decree).

(6) A virtual point at which Users can exchange and trade gas injected into the National network on a daily basis.(7) Number of entry points as at 31 December 2010.

Snam Rete Gas S.p.A. – Network Infrastructure as at 31 December 2010

GORIZIA

TARVISIOSAN DONATOMILANESEGRIES PASS

PANIGAGLIA

MAZARA DEL VALLO

GELA

CAVARZERE

National Transportation Network

Import Entry Points

Regional Transportation Network

LNG Regasifi cation Terminal

Dispatching Centre

Compression Station

Maritime Terminal

Regional Boundary

from imports and, to a lesser extent, national production. The gas from abroad is injected into the National Network via seven entry points where the network joins up with the import pipelines (Tarvi-sio, Gorizia, Gries Pass, Mazara del Vallo, Gela) and the LNG regasifi -cation terminals (Panigaglia, Cavarzere). Domestically produced gas is introduced into the Network through 51 entry points7 from the production fi elds or their collection and treatment centres. Gas storage fi elds are also connected to the transportation network (two virtual entry/exit points towards the storage hubs). The gas leaving the National Network is transported on the Regional Network up to the redelivery points from which the gas is withdrawn by the users.Snam Rete Gas S.p.A. is the leading domestic Italian natural gas transportation and dispatching operator, and owns almost all the transportation infrastructures in Italy, with over 31,600 kilometres in use of high- and medium-pressure gas pipelines (approximately 94% of the entire transportation system).

19


Financial r esults Natural gas transportation revenue amounted to €1,873 million, an increase of €25 million, or 1.4%, compared with 2009. The increase was attributable to higher volumes of natural gas transported (+€20 million) and to recognition by the Electricity and Gas Authority of the additional expenses incurred for the acquisition of fuel gas in the pe-riod 1 October 2008 - 31 December 2009 (€55 million; +€21 million compared with the contribution of €34 million recorded in the 2009 fi nancial statements as recognition of the additional expenses in-curred in the 2007-2008 thermal year). These factors were partially absorbed by the application of new tariff criteria in effect from 1 Janu-ary 2010, due essentially to the payment in kind by the users for the gas used for the transportation service8.

EBIT for 2010 was €1,185 million, up €211 million, or 21.7%, compared with the previous year. The increase was attribut-able mainly to: (i) lower operating costs (+€133 million, net of components offset in revenue), owing to the payment in kind of natural gas used in the transportation business and to the net use of provisions for risks and charges in relation to a provi-sion made in 2009 (+€23 million); (ii) lower amortisation and depreciation (+€69 million) due mainly to the extension of the useful life of pipelines (from 40 to 50 years), which was con-sidered in the Electricity and Gas Authority’s tariff review; and (iii) higher transportation revenue (+€10 million, net of compo-nents offset in costs).

Key performance indicator (€ million) 2008 2009 2010 Change Change %

Core business revenue (*) 1,882 1,865 1,929 64 3.4

- of which, natural gas transportation revenue 1,867 1,848 1,873 25 1.4

Operating costs (*) 388 399 343 (56) (14.0)

EBIT 1,017 974 1,185 211 21.7

Investments 1,038 926 902 (24) (2.6)

- of which with incentives 916 793 763 (30) (3.8)

- of which without incentives 122 133 139 6 4.5

Net invested capital at 31 December 9,736 10,060 10,404 344 3.4

Volumes of natural gas injected into the gas transportation network (billions of cubic metres) 85.64 76.90 83.32 6.42 8.3

Transportation network (kilometres in use) 31,474 31,531 31,680 149 0.5

- of which national network 8,779 8,871 8,894 23 0.3

- of which regional network 22,695 22,660 22,786 126 0.6

Employees in service at December 31 (number) 2,252 2,254 2,636 382 16.9

(*) Before consolidation adjustments.

(8) As of the start of the third regulatory period on 1 January 201 0, the Electricity and Gas Authority, enacting the new tariff criteria laid down by Resolution ARG/gas 184/09, has defi ned methods for payment in kind, by shippers to transporters, of gas volumes to cover fuel gas, network losses and unaccounted-for gas, owed as a percentage of the volumes respectively injected into and withdrawn from the transportation network. Applying these criteria entailed, on the one hand, reduced operating costs from lower charges for supplying the gas used to provide service and, on the other, reduced revenue in the amount which had been al-located to cover the operating costs.

(9) The investment incentives were the same as for the second regulatory period.

Operating review

Investments (€ million) 2008 2009 2010 Change Change %

Development 813 692 671 (21) (3.0)

Investments with 3% incentive 578 451 456 5 1.1

Investments with 2% incentive 235 241 215 (26) (10.8)

Maintenance and other 225 234 231 (3) (1.3)

Investments with 1% incentive 103 101 92 (9) (8.9)

Investments with no incentives 12 2 133 139 6 4.5

1,038 926 902 (24) (2.6)

Investments in 2010 amounted to €902 million, a decrease of €24 million, or -2.6%, compared with the previous year. The investment s were classified in accordance with Resolu-

tion ARG/gas 184/09 of the Electricity and Gas Authority, which identified various categories of project with different incentive levels9.

20


Eighty-five per cent of these investments are expected to ben-efit from incentive-based return. The breakdown of investments in 2010 by category will be submitted to the Authority when the tariffs are approved for 2012.

The main investments with a 3% incentive (€456 million) were:· as part of the connection project for the Offshore LNG Toscana

(OLT) regasification terminal at Livorno (€136 million), the construction of infrastructure to connect with the plant lo-cated off the Tuscany coast, primarily offshore;

· as part of the project to upgrade the import infrastructure in Sicily and Calabria (€101 million): (i) materials for and con-struction work on the Montesano station in Campania; (ii) completion works on operating sections and construction of the tunnel section of the Montalbano-Messina pipeline in Sic-ily; (iii) turbocompressors at the Enna station in Sicily; and (iv) construction work on the Bronte-Montalbano section of the Enna-Montalbano pipeline in Sicily;

· as part of the new transportation infrastructure project on the Adriatic coast (€93 million): (i) construction work on the main line and the design of connection points for the Massafra-Biccari pipeline in Puglia and Basilicata; and (ii) de-sign completion and the purchase of private permits for the Sulmona-Foligno-Sestino-Minerbio pipeline in Abruzzo and Emilia-Romagna;

· as part of the Villesse-Gorizia pipeline project in Friuli-Venezia Giulia (€40 million), construction work and materials.

The main investments with a 2% incentive (€215 million) were:· as part of the project to upgrade the transportation infra-

structure in the Po Valley, with an aim to increase national transportation capacity (€55 million): (i) construction work on the Cremona-Sergnano pipeline in Lombardy; and (ii) de-sign completion and purchase of permits for the Zimella-Cer-vignano pipeline in Veneto and Lombardy;

· as part of the Palaia-Collesalvetti pipeline project in Tuscany (€23 million), infrastructure construction materials.

The main investments with a 1% incentive (€92 million) in-volved several projects aimed at maintaining adequate safety and quality levels at the stations.Investments without incentive (€139 million) included projects to replace assets and plants, as well as projects relat-ing to the implementation of new IT systems, the development of existing ones and the purchase of other key operating assets.

Distribution on the Italian Gas Transportation Network

Availability of natural gas (billions of m³) 2008 2009 2010 Change Change %

From imports 76.52 68.67 75.17 6.50 9.5

From domestic output 9.12 8.23 8.15 (0.08) (1.0)

Total gas injected in the network 85.64 76.90 83.32 6.42 8.3

Net balance of storage withdrawals/injections (*) (1.12) 0.78 (0.64) (1.42)

Total natural gas available 84.52 77.68 82.68 5.00 6.4

(*) The balance between the withdrawal from storage (+) and introduction into storage (-).

Withdrawals of natural gas (billions of m³) 2008 2009 2010 Change Change %

Redelivery to domestic market 83.34 76.66 81.54 4.88 6.4

Exports 0.60 0.48 0.54 0.06 12.5

Snam Rete Gas consumption and emissions 0.42 0.34 0.47 0.13 38.2

Unaccounted-for gas and other changes (*) 0.16 0.20 0.13 (0.07) (35.0)

Total natural gas withdrawals 84.52 77.68 82.68 5.00 6.4

(*) Includes the change of the network capacity For the defi nition of Unaccounted For Gas (UFG) please see the paragraph below titled “Withdrawals of natural gas.”

(%)

2010

Investments with 2% incentive


2008 2009

Investments with no incentive


5155 49

2423

26

1010 11

1512 14

Effect of investments with incentive (% of total investments)

21


(%)

2008

Tarvisio

Mazara del Vallo

2009 2010

Gela

Cavarzere

Gries Pass

Other

3532 32

3032 33

1313 13

1021 18

32 2

Natural gas injected into the network by entry point (% the total injected)

33

3333

11

1119

2

Imports by entry poin (billions of m³) 2008 2009 2010 Change Change %

Entry points

Mazara del Vallo 24.77 21.66 26.29 4.63 21.4

Tarvisio 24.58 22.92 22.49 (0.43) (1.9)

Gela 9.87 9.17 9.41 0.24 2.6

Gries Pass 15.69 12.02 7.83 (4.19) (34.9)

Cavarzere (LNG) 1.53 7.04 5.51

Panigaglia (LNG) 1.52 1.32 1.98 0.66 50.0

Gorizia 0.09 0.05 0.13 0.08 160.0

76.52 68.67 75.17 6.50 9.5

Year-on-year imports rose by 6.5 billion cubic metres, or 9.5%, to 75.17 billion cubic metres compared to 2009. In addition to the contribution of gas from the LNG terminal injected at the Cavar-zere entry point and operational from the third quarter of 2009 (+5.51 billion cubic metres), the higher imports from the entry

Volumes of natural gas injected into the Network per User (billions of m³) 2008 2009 2010 Change Change %

Eni 51.80 39.58 35.45 (4.13) (10.4)

Enel Trade 9.82 8.65 10.34 1.69 19.5

Other 24.02 28.67 37.53 8.86 30.9

85.64 76.90 83.32 6.42 8.3

Withdrawals of natural gasThe natural gas withdrawn from the National Transportation Net-work in 2010 (82.68 billion cubic meters) is mainly: (i) for redeliv-ery to users at the network exit points (81.54 billion cubic meters); (ii) exports (0.54 billion cubic meters), mainly to Slovenia; and (iii) consumption by the compression stations and the gas emissions from the network and the Snam Rete Gas S.p.A. plants (0.47 billion cubic meters).In the energy report compiled by Snam Rete Gas S.p.A. the natural difference between the quantity of gas metered at the entrance to the network and the quantity of gas metered at the exit, due to the technical tolerance of the metering devices, is traditionally de-fi ned as the Unaccounted For Gas (UFG). With Resolution ARG/gas 192/09, published on 15 December 2009 in application of the new tariff criteria set by Resolution ARG/gas 184/09, the Electricity and Gas Authority defi ned as from 1 January 2010 the terms for pay-ment in kind by the users of the service to the major transportation company of the gas quantities to cover the un-accounted for gas, due as a percentage of the quantities withdrawn from the transpor-tation network.

point at Mazara del Vallo (+4.63 billion cubic metres; +21.4%) were partly offset by less gas injected at the Gries Pass entry point (-4.19 billion cubic metres; -34.9%) following the blockage in Switzerland of the import pipeline linking Italy to northern Europe.

Availability of natural gasThe availability of natural gas in Italy in 2010 was 82.68 billion cubic meters, up 5 billion cubic meters (+6.4%) compared to 2009. The quantities of gas injected into the National Transportation Network increased by 8.3% to 83.32 billion cubic meters. The increase in the quantities of gas injected into the National Transportation Network is due mainly to higher imports (+6.50 billion cubic meters or + 9.5%). The domestic production of 8.15 billion cubic meters has remained essen-

tially unchanged compared to 2009 (8.23 billion cubic meters). The positive balance of around 0.6 billion cubic metres of injections into (+) and withdrawals from (-) the storage system also contrib-uted to the increase in volumes injected into the network, com-pared to the opposite situation in 2009 where withdrawals from storage exceeded injections by around 0.8 billion cubic metres. The analysis of imports by entry point is:

22


The demand for gas in Italy in 2010 was 82.98 billion cubic me-ters, up 4.96 billion cubic meters (+6.4%) compared to 2009, following the recovery of consumption after the recent eco-nomic crisis. The increase has affected all sectors, in particular residential and tertiary (+7.1%), industrial (+7.0%) and thermo-electric (+4.4%).

In thermal year 2010-2011, the development and upgrading work on the transportation infrastructures have made it possi-ble to increase the network’s transportation capacity to 368.4 million cubic meters/day (+0.8% compared to the 2009-2010 thermal year).

The increase is mainly attributable to the increase in transporta-tion capacity at Gela and Mazara del Vallo, following the deploy-ment of an upgrade on the infrastructures for the imports from North Africa.

Reconciliation of the quantities withdrawn from the Network and Italian demand (billions of m³) 2008 2009 (*) 2010 Change Change %

Quantity withdrawn 84.52 77.68 82.68 5.00 6.4

Exports (-) (0.60) (0.48) (0.54) (0.06) 12.5

Gas injected in the regional network of other operators 0.09 0.08 0.06 (0.02) (25.0)

Other consumption (**) 0.87 0.74 0.78 0.04 5.4

Total demand Italy 84.88 78.02 82.98 4.96 6.4

(*) The demand for gas has been aligned with that published by the Ministry of Economic Development.(**) Includes the consumption of the LNG terminal at Panigaglia, the consumption of the compression stations for storage and the production treatment stations.

Demand for gas in Italy (billions of m³) 2008 2009 (*) 2010 Change Change %

Residential and services 30.18 31.60 33.83 2.23 7.1

Thermoelectric 33.90 29.02 30.31 1.29 4.4

Industrial (**) 19.31 16.07 17.19 1.12 7.0

Other 1.49 1.33 1.65 0.32 24.1

84.88 78.02 82.98 4.96 6.4

(*) The demand for gas has been aligned with that published by the Ministry of Economic Development.(**) Includes t he consumption of the Industrial, Agricultural and Fishing, Chemical Synthesis and Automotive sectors

Transportation capacity (billions of m³/day)

Entry points 2008-2009 thermal year 2009-2010 thermal year 2010-2011 thermal year

Avai

labl

e ca

paci

ty

Capa

city

al

loca

ted

Satu

ratio

n (%

)

Avai

labl

e ca

paci

ty

Capa

city

al

loca

ted

Satu

ratio

n (%

)

Avai

labl

e ca

paci

ty

Capa

city

al

loca

ted

Satu

ratio

n (%

)

Tarvisio 106.0 97.8 92.2 119.7 102.8 85.9 119.2 110.3 92.5

Mazara del Vallo 101.8 93.2 91.6 103.6 98.7 95.3 105.0 98.9 94.2

Gries Pass 64.9 60.8 93.7 64.9 59.0 90.9 64.8 55.0 84.9

Gela 30.5 30.5 100.0 33.0 32.9 99.7 35.2 34.3 97.4

Cavarzere (GNL) 26.4 21.0 79.5 26.4 24.6 93.2

Panigaglia (GNL) 13.0 11.4 87.7 13.0 7.2 55.4 13.0 7.2 55.4

Gorizia 4.8 4.8 4.8 0.5 10.4

321.0 293.7 91.5 365.4 321.6 88.0 368.4 330.8 89.8

Gas demand by sector (% of total gas demand)

(%)

Thermoelectric

Residential and services

2008 2009

Other

Industrial

40

37

21

2

2010

41

36

21

2

35

40

23

2

23


The capacity available on the network has made it possible to address the capacity demand of all Users in thermal year 2010-2011, with an increased capacity of 2.9%.In addition to the aforementioned capacities which concern the entry points interconnected with foreign countries and the LNG terminals, transportation capacity totalling 37 million cubic me-ters/day is available at the domestic production entry points.Snam Rete Gas S.p.A. put out its long term plan for transporta-tion capacity, which was disclosed to the Ministry of Economic Development on 21 June 2010 and published on the Snam Rete Gas S.p.A. website. The document shows the capacity data on all entry points interconnected with foreign countries and the LNG terminals for the 2010-2011 thermal year and subsequent years up to 30 September 2020.

Regulation

Resolutions no’s. 166/05 and 102/08 - “Criteria for the determina-tion of tariffs for natural gas transportation and dispatching” and “Approval of the tariff proposals for natural gas transportation and dispatching prices”. With Resolution no. 166/05 “Criteria for the determination of tariffs for natural gas transportation and dispatching” published on 30 July 2005, the Authority for Electricity and Gas outlined the criteria for defi ning the natural gas transportation tariffs on the national and regional gas transportation network for the second regulatory period (1 October 2005 – 30 September 2009). The mechanisms already in effect in the fi rst regulatory period were confi rmed for the determination of the price levels and a real return on invested capital was fi xed at 6.7% before taxes. Investment incentives were

provided for the second regulatory period as well through a return rate increased by 1 to 3 percentage points compared to the rate for capital existing at the end of 2004 (6.7%) for a duration of between 5 and 15 years. Both the rate of return and the duration are differ-entiated according to the various types of investment. The returns associated with the new investments will be recognized starting from the thermal year following that in which the costs were in-curred (“spending”) and are guaranteed regardless of the volumes transported. The updating method for the “price cap” tariffs is applied only to rev-enue components that relate to operating costs and the amortisa-tion and depreciation which is updated for infl ation and decreased by a productivity coeffi cient set at 2% for the capacity component and 3.5% for the component related to volumes transported. The revenue component which is correlated with returns is determined on the basis of the annual update of net capital invested as at 31 December 2004 (RAB).The tariff structure which is based on the entry/exit model was con-fi rmed for the second regulatory period as well, except for the fi xed fee, which was replaced by a special measuring fee.

With Resolution ARG/gas 102/08 - “Approval of the tariff proposals for natural gas transportation and dispatching prices, in implemen-tation of the Resolution no. 166/05 issued on 29 July 2005 by the Electricity and Gas Authority,” published on 31 July 2008, the Elec-tricity and Gas Authority approved the natural gas transportation tariffs for the thermal year 2008-2009. The tariffs are determined on the basis of the base revenues, the additional revenues of €39 million for development investments made during the fi rst regu-latory period and additional revenues of €233 million for invest-ments realised in 2005, 2006 and 2007.The net capital invested as at 31 December 2007 (RAB) is €12.2 billion. The Authority also confi rmed, for thermal year 2008-2009, the introduction of an additional fee for coverage of the higher ex-penses incurred for the purchase of gas for compression and the network leaks.

Resolution ARG/gas 184/09 - “Approval of part II – Regulation of the tariffs for the natural gas transportation and dispatch service for regulatory period 2010-2013 (RTTG), approval of part III - Regula-tion of tariffs for the gas transportation metering service for regu-latory period 2010-2013 (RMTG), provisions on the transitory fee for the gas transportation metering service for 2010 and amend-ments to Attachment A of Resolution no. 11/07.” With Resolution ARG/gas 184/09, published on 2 December 2009, the Electricity and Gas Authority issued the criteria for defi ning nat-ural gas transportation and measuring tariffs on the national and regional gas transportation network for the third regulatory period (1 January 2010 - 31 December 2013)10. The Authority also set €33.6 million as the amount to be paid to Snam Rete Gas S.p.A. for additional costs incurred in thermal year 2007-2008 for the purchase of fuel gas used to power compression stations.

365.4

321.0 321.6

293.7

88.091.5

50

100

150

200

250

300

350

400

450

500

2009-2010

Capacity allocated (milions of m³/day)

Available capacity (millions of m³/day)

2008-2009

% saturation (Capacity allocated/Available capacity)

368.4

331.0

89.8

2010-2011

Gas transportation capacity and saturation

(10) Resolution ARG/gas 135/09 of the Authority, published on 28 September 2009, extended the validity of tariffs approved for the 2008-2009 thermal year to the period 1 October 2009 - 31 December 2009.

24


The valuation of the net capital invested (RAB) is based on the re-valued historic cost method. The return rate (WACC) of net capital invested is set at a real rate of 6.4% before taxes. The incentives for new investments were confi rmed and provide for a higher return compared to the variable base rate (WACC), in rela-tion to the type of investment, from 1% to 3% and for a period from 5 to 15 years. The revenues associated with new investments are paid starting from the second year following that in which the costs were incurred (“spending”) and are guaranteed regardless of the volumes transported. The method for updating the “price cap” tariffs is applied to reve-nue relating to operating costs and is equal to approximately 15% of the revenues in question, which are updated for infl ation and decreased by an annual recovery coeffi cient set at 2.1% (3.5% in the previous regulatory period). The revenue components which are related to returns and amortisation and depreciation are de-termined on the basis of the annual update of net capital invested (RAB). In particular, in the third regulatory period, the amortisation and depreciation is deducted from the price-cap mechanism and calculated on the basis of the useful economic and technical life of the transport infrastructure which is 50 years (40 years in the previous regulatory period). The tariff structure is based on an entry/exit model and was con-fi rmed for the third regulatory period as well, together with the ca-pacity fee for the metering service.

Finally, fuel gas is treated as a pass-through cost which is payable in kind by the users and is excluded from the price cap mechanism.

Resolution ARG/Gas 192/09 - “Amendments to Resolution no. 137/02 of 17 July 2002, for defi ning criteria on the treatment of non-metered natural gas (gas consumed internally, network leaks, withdrawals/injections into the network and unaccounted-for gas) as part of the balancing service.”With Resolution ARG/gas 192/09, published on 15 December 2009, in application of the new tariff criteria established with Resolution ARG/gas 184/09, the Authority for Electricity and Gas defi ned the terms for payment in kind by the users of the service to the major transport company, the gas quantities for coverage of the fuel gas, the network leaks and the unaccounted-for gas due as a percentage of the quanti-ties injected and withdrawn from the transportation network.

Resolution ARG/gas 198/09 - “Approval of the proposals for the nat-ural gas transportation and dispatch service tariffs and the transi-tory fee for the gas transportation metering service for 2010.”With Resolution ARG/gas 198/09, published on 23 December 2009, the Authority approved the transportation, dispatch and metering tariffs for 2010. The tariffs were determined on the basis of the base revenues of €1,703 million (net of all pass through costs, including fuel gas and network leaks), the additional revenues relating to develop-

25


ment investment incentives realised in the fi rst regulatory period of approximately €28 million and the revenues associated with the system balancing costs of approximately € 23 million.The revenues in effect from 2010 will have to take account of the in-crease volumes transported compared to the base amount of 75.7 billion cubic meters. The portion of the revenues associated with the transportation ca-pacity is guaranteed and is equal to approximately 85% of the base revenues.The RAB as at 31 December 2008 for transportation, dispatching and metering is €12.8 billion.

Resolution VIS 8/09 - “Closure of the preliminary investigation be-gun following Authority for Electricity and Gas Resolution VIS 41/08 of 15 April 2008 on the correct application of the provisions con-cerning unaccounted-for gas in the natural gas transportation net-works from 2004 to 2006”.With Resolution VIS 8/09, published on 5 February 2009, the Au-thority for Electricity and Gas concluded the preliminary investiga-tion for acquisition of the information relating to Unaccounted for Gas (UFG) within the transportation system during 2004-2006 and began a survey on the service and maintenance of a portion of the transportation network’s metering installation, which was sched-uled to be completed on 30 September 2009 but was extended to 31 March 2010 with Resolution VIS 96/09; the survey was con-

cluded with Resolution VIS 93/10 on 6 September 2010. Several irregularities were discovered concerning the management of the metering plants owned by entities other than Snam Rete Gas S.p.A.

Resolution ARG/gas 218/10 - “Approval of the tariff proposals for natural gas transportation and dispatch, the transitory fee for the gas transportation metering service for 2011 in implementation of the provisions set forth in Resolution ARG/gas 184/09 issued by the Authority for Electricity and Gas on 1 December 2009.”Based on the criteria described, the Authority approved the trans-portation, dispatch and metering tariffs for 2011 with Resolution ARG/gas 218/10. The tariffs were determined on the basis of the base revenues which amounted to €1,817 million net of the third party portion (of which €113 million relate to development investment incentives and approximately €36 million to revenues associated with sys-tem balancing costs).The actual revenues for 2011 will have to take into consideration the increase in the transported volumes compared to the base value, which is 75.7 billion cubic meters.Furthermore, the amount payable to the company for higher costs incurred for the purchase of fuel gas from 1 October 2008 to 31 December 2009 was set at €54.9 million.The RAB as at 31 December 2009 for transportation, dispatch and metering amounts to € 13.1 billion.

26

27

Snam Rete Gas Annual Report 2010 / Liquefied Natural Gas (LNG) regasification

Liquefied Natural Gas (LNG) regasification

28


The LNG regasifi cation serviceNatural gas is also injected into the national transportation network from the LNG terminal at Panigaglia (La Spezia), which is owned by GNL Italia. Here, it can regasify 17,500 cubic meters of LNG per day, thus when operating at maximum capacity, the terminal can inject over 3.5 billion cubic meters of natural gas into the transportation network annually. The regasifi cation service includes unloading the LNG from the vessel, operating storage, i.e., the storage time

required for vaporising the LNG, regasifying it and injecting it into the national network at the Panigaglia entry point. The regasifi ca-tion service can be either continual for the entire thermal year or work on a spot basis. Ancillary services are also available, such as correcting the heating power of the natural gas to comply with qual-ity requirements for its injection into the transportation network (correction of the Wobbe index).

Key performance indicators (€ million) 2008 2009 2010 Change Change %

Core business revenue (*) (**) 37 36 35 (1) (2.8)

- of which LNG regasifi cation revenue 20 21 24 3 14.3

Operating costs (**) 30 27 24 (3) (11.1)

EBIT 5 5 7 2 40.0

Investments 6 7 3 (4) (57.1)

Volumes of LNG regasifi ed (billions of cubic metres) 1.52 1.32 1.98 0.66 50.0

Tanker loads (number) 42 38 54 16 42.1

Employees in service at December 31 (number) 93 87 70 (17) (19.5)

(*) Core business revenue includes the recharging to customers of costs relating to the natural gas transportation service provided by Snam Rete Gas S.p.A. For purposes of the consolidated fi nancial statements, these revenues, together with transportation costs, are charged to GNL Italia S.p.A. to show the scale of the operation.

(**) Before consolidation adjustments.

Financial resultsLNG Regasifi cation revenue amounted to €24 million in 2010, a year-on-year increase of €3 million, or 14.3%. This rise was due mainly to higher volumes of LNG regasifi ed (+0.66 billion cubic metres; +50%).

EBIT totalled €7 million, an increase of €2 million, or 40%, com-pared with 2009. The rise was mainly due to higher revenue from the LNG regasifi cation service.

Operating review

Quantities of regasifi ed LNG per user (billions of m³) 2008 2009 2010 Change Change %

Enel Trade 1.23 1.01 1.28 0.27 26.7

Eni 0.29 0.10 0.22 0.12

Other 0.21 0.48 0.27

1.52 1.32 1.98 0.66 50.0

29


Resolution ARG/gas 54/10 - “Modifi cation of Article 11 of Resolution no.167/05 issued by the Authority for Electricity and Gas on 1 Au-gust 2005 containing provisions in the event of failure to use the regasifi cation capacity.” With Resolution ARG/gas 54/10, published on 15 April 2010, the Authority for Electricity and Gas introduced a tolerance of 10% on the complete use of the capacity provided in order to determine any release of capacity commensurate with the fl exibility of supply contracts, to achieve greater fl exibility in accessing the regasifi ca-tion service. Pursuant to the aforementioned provision, GNL Italia proposed to amend its own regasifi cation code.

Resolution ARG/gas 90/10 - “Deployment of the process for the es-tablishment of provisions referring to the payment of costs for the restoration of liquefi ed natural gas regasifi cation terminals.” With this provision published on 21 June 2010, the Authority for Electricity and Gas began a procedure for the establishment of pro-visions aimed at recognising the restoration costs for GNL sites in tariffs.

Resolution ARG/gas 108/10 - “Approval of the tariff proposals for the regasifi cation service for thermal year 2010-2011 for GNL Italia S.p.A. and Terminale GNL Adriatico S.r.l., in implementation of Reso-lution ARG/gas 92/08 issued by the Authority for Electricity and Gas on 7 July 2008.” With this provision, wh ich was published on 19 July 2010, the Au-thority for Electricity and Gas approved the tariffs for the regasifi -cation service provided by GNL Italia for thermal year 2010-2011, pursuant to Resolution ARG/gas 92/08. The tariffs were set on the basis of the base revenues of €25.6 million. The actual revenues for thermal year 2010-2011 must take into account the regasifi ed volumes. The net capital invested as at 31 December 2009 (RAB) is equal to €109.7 million.

In 2010, the Panigaglia LNG terminal in the province of La Spezia regasifi ed 1.98 billion cubic metres of natural gas (compared with 1.32 billion cubic metres in 2009), unloading 54 methane tankers of various types, including three spot loads (compared with 38 tankers in 2009, including fi ve spot loads).

InvestmentsInvest ments in 2010 amounted to €3 million, a decrease of €4 million compared with the previous year.

Adaptation and modernisation of Panigaglia plant The Environmental Impact Assessment (EIA) of the plans to expand and modernise the GNL Italia regasifi cation terminal at Panigaglia was completed successfully on September 9. The decree was signed by the Italian environment and culture ministries.

Regulation

Resolution ARG/gas 92/08 - “Criteria for the determination of the tariffs for the regasifi cation service and amendments to Resolu-tions no. 166/05 and no. 11/07”.With Resolution ARG/gas 92/08, published on 9 July 2008, the Au-thority for Electricity and Energy defi ned the tariff criteria for the regasifi cation service applicable for the third regulatory period (1 October 2008-30 September 2012).The mechanisms already in effect in the second regulatory period were confi rmed for determining the base revenues, including the real return on net invested capital of 7.6% before taxes. In regard to the tariff structure, the breakdown of revenues into a regasifi ca-tion capacity component and a regasifi ed volumes component was maintained, at a ratio of 90/10 (80/20 in the second regulatory period). The tariffs are updated using the price cap methodology applied only to the component relating to operating costs, with a productiv-ity recovery coeffi cient of 0.5%.The revenue component relating to the return and amortisation and depreciation is updated on the basis of an annual recalculation of invested capital and additional revenues from the incentives for in-vestments realized in prior regulatory periods. Incentives for new investments involve the payment of a return in-creased by three percentage points compared to that paid for capi-tal at the end of 2007, for a duration of 16 years. Both the increase in the rate of return and the duration are differentiated depending on the type of investment.

Resolution ARG/gas 102/09 - “Approval of the tariff proposals for the regasifi cation service for thermal year 2009-2010 for GNL Italia S.p.A. and Terminale GNL Adriatico S.r.l., in implementation of Reso-lution ARG/gas 92/08 issued by the Authority for Electricity and Gas on 7 July 2008.” With this provision, which was published on 29 July 2009, the Au-thority for Electricity and Gas approved the tariffs for the regasifi -cation service provided by GNL Italia for thermal year 2009-2010, pursuant to Resolution ARG/gas 92/08. The tariffs were set on the basis of the base revenues of €25 million. The net capital invested as at 31 December 2008 (RAB) was equal to €105.9 million.

0.5

2.0

1.0

2.5

1.5

loads (number)

2010

regasified volume (billions of m³)

2008 2009

60

40

20

0 0

Volumes of regasified LNG and number of tanker loads

30

31

Snam Rete Gas Annual Report 2010 / Natural gas storage

Natural gas storage

32


Natural gas storage servic e

The natural gas storage business in Italy is done under a conces-sion regime and it serves to offset the various demands of gas consumption and supply. In fact, procurement has had a basically constant profi le throughout the year, while gas demand has been

characterised by high seasonal variability with winter demand sig-nifi cantly higher than summer. Essentially, there are two distinct phases in storage: (i) injection phase, generally concentrated be-tween April and October, consisting of injecting into storage the natural gas deriving from the national transport network; (ii) the extraction phase, usually concentrated between November and March of the following year, when the natural gas is extracted from the deposit, treated, and redelivered to users by the transport network. The storage business is carried out by making use of an integrated whole of infrastructures comprised of deposits, gas treatment plants, compression stations, and the operational dis-patching system.

Stogit, the Group company which handles natural gas storage business, is now the largest Italian operator and one of the lead-ing European operators in the sector, using eight storage opera-tions fi elds located in Lombardy (four), Emilia Romagna (three) and Abruzzo (one). By adhering to technical effi ciency and econ-omy criteria, the Company makes its storage capacity available using an integrated system that is able to provide the required modulation services in a manner compatible with the available storage capacities.

IntroductionAs indicated previously, the results for 2009 include the economic effects of consolidating Stogit in the second half of 2009, as the-se were included in the group’s consolidated fi nancial statements from 30 June of that year, the date when the acquisition of Stogit from Eni was completed. In order to fully assess operating perfor-mance, the results of the natural gas storage business segment are analysed in comparison to those for the whole of 2009.

Key performance indicators (€ million) 2009 2010 Change Change %

Core business revenue (*) 344 355 11 3.2

- of which, natural gas storage revenue 341 349 8 2.3

Operating costs (*) 64 63 (1) (1.6)

EBIT 214 218 4 1.9

Investments 282 252 (30) (10.6)

Net invested capital at 31 December 2,093 2,258 165 7.9

Concessions (number) 10 10

- of which operational 8 8

Natural gas moved through the storage system (billions of cubic metres) 16.52 15.59 (0.93) (5.6)

- of which injected 7.81 8.00 0.19 2.4

- of which withdrawn 8.71 7.59 (1.12) (12.9)

Available storage capacity (billions of cubic metres) (**) 8.9 9.2 0.3 3.4

Employees in service at 31 December (number) 301 279 (22) (7.3)

(*) Before consolidation adjustments.(**) Working gas capacity for modulation, mining and balancing services. The value shown represents the maximum available capacity and may not correspond to the maximum replenishment carried

out.

Stogit – Storage concessions at 31 December 2010

33


Operating review (€ million) 2009 2010 Change Change %

Development of new fi elds 221 144 (77) (34.8)

Investments with an incentive of 4% over 16 years 221 144 (77) (34.8)

Capacity upgrades 36 74 38

Investments with an incentive of 4% over 8 years 36 74 38

Maintenance and other 25 34 9 36.0

282 252 (30) (10.6)

InvestmentsInvestments totalled €252 million in 2010, down by €30 million, or 10.6%, year-on-year. This reduction was due largely to the de-velopment activities in progress in the Fiume Treste storage fi elds drawing to an end.Pursuant to Resolution no. 50/06 of the Electricity and Gas Au-

thority, relating to the second regulatory period (1 April 2006 – 31 March 201011), incentivising investments means applying a rate of return that is four percentage points higher than the base rate, over eight years for upgrades of existing capacity and over 16 years for the development of new fi elds. Pursuant to Resolution ARG/gas 119/10 of the Electricity and Gas Authority, this incentive system will also apply to the third regulatory period (1 January 2011 – 31 December 2014).Investments with a 4% incentive over 16 years (€144 million) re-late mainly to the development activities in progress in the Fiume Treste storage fi elds, as well as the Bordolano storage fi eld project to develop the cushion gas injection programme. Investments with a 4% incentive over eight years (€74 million) mainly concern projects to increase pressure. Around 86% of these investments are expected to benefi t from incentive-based returns. The breakdown of investments in 2010 by category will be submitted to the Authority when the tariffs are ap-proved for 2012.

Natural gas moved through the storage systemThe volumes of gas moved through the storage system in 2010 to-talled 15.59 billion cubic metres, down 0.93 billion cubic metres, or 5.6%, compared with 2009. This decrease was due mainly to the exceptional fall in supplies in January 2009 caused by the Russia-Ukraine crisis of 6-20 January, during which 2.2 billion standard cu-bic metres were supplied, which was partially offset by increased reconstitution of the capacity for shippers.

(11) The Electricity and Gas Authority’s resolution ARG/gas 21/10, published on 24 February 2010, extended for the period 1 April 2010 - 31 December 2010 the validity of nat ural gas storage tariffs approved for the thermal year 1 April 2009 - 31 March 2010 with Resolution ARG/gas 38/09

Financial resultsNatural gas storage revenues totalled €349 million, up by €8 mil-lion, or 2.3%, compared with 2009. This increase was due to tariff changes relating to the return on investments made in the second regulatory period (+€6 million) and to higher variable payments for movement of natural gas (+€2 million). Storage revenues refer to modulation storage (€282 million; +3.3%) and strategic storage (€67 million; 1.5%).

EBIT totalled €218 million in 2010, up by €4 million, or 1.9%, com-pared with 2009. This was due to the increase in storage revenues (+€8 million) and higher income from the sale of natural gas no longer necessary for plant operation (+€2 million, net of the costs of gas sold). These factors were partially offset by greater amorti-sation and depreciation (-€6 million), mainly as a result of revised estimates for abandonment costs.

(%)

Development of new fields

Upgrading of capacity Maintenance and other

2009 2010

78

57

13

29

9 14

Share of investments by incentive (% of total investments)

34


Total storage capacity as at 31 December 2010 was 14.2 billion cu-bic metres, a year-on-year increase of 0.3 billion cubic metres, due mainly to development investments made at the Settala conces-sion plants.

Regulation Resolution ARG/gas 50/06 – “Calculation criteria for storage tariffs and modifi cations and supplements for Resolution 119/05 of the Electricity and Gas Authority of 21 June 2005 and for Resolution 166/05 of the Electricity and Gas Authority of 29 July 2005” and Resolution ARG/gas 38/09 – “Approval of company payments and calculation of single payments for storage relating to thermal year 2009-2010, implementing Resolution 50/06 of the Electricity and Gas Authority of 3 March 2006”. With Resolution 50/06 of March 2006, the Electricity and Gas Au-thority established the calculation criteria for the storage tariffs for the second regulatory period, expiring 31 March 2010, providing for a mixed mechanism of revenue allowed (in terms of capacity) and a price cap (on gas moved – commodity), also establishing a single tariff on a national level. With Resolution 38/09, published on 30 March 2009, the Author-ity approved the storage tariffs for thermal year 2009-2010, estab-lished on the basis of the RAB at 31 December 2008 equivalent to €2.8 billion.

Resolution ARG/gas 165/09 - “Urgent operations for adapting the balancing regimen and regulation of natural gas storage services under Legislative Decree No. 78 of 1 July 2009”. With this resolution, published on 3 November 2009, the Electrici-ty and Gas Authority, applying Legislative Decree No. 78/09 which provided measures for reducing the cost of energy for businesses by providing for, among other things attributed to the Regulator, the promotion of storage and point services for end industrial and thermoelectric customers, has defi ned criteria to permit storage companies to offer additional fl exible services to users of the transport system on a monthly basis, enabling the company to withhold a share of the revenue deriving from eventual alloca-tions of the services offered. For this purpose Stogit has prepared a proposal for updating its Storage Code, approved by Resolution ARG/gas 178/09, which defi nes the offering of the so-called Users Balancing Service.

Resolution ARG/gas 21/10 - “Extension of validity of natural gas storage tariffs”.With this resolution, published on 24 February 2010, the Electric-ity and Gas Authority extended, for the period 1 April 2010 – 31 December 2010, the validity of the tariff proposals for natural gas storage service approved by Resolution ARG/gas 38/09, extending for that period the revenue guarantee criteria referred to in Article 10 of Resolution 50/06 as well as the equalisation regime referred to in Article 9 of that resolution.

Resolution ARG/gas 119/10 - “Consolidated act on the regulation of the quality and tariffs for natural gas storage services for the 2011-2014 period (TUSG): approval of part II, “Regulation of natu-ral gas storage service tariffs for the regulatory period 2011-2014 (RTSG)”, measures on the transitory payment for the gas transpor-tation metering service for 2011”.

With this resolution, published on 5 August 2010, the Electricity and Gas Authority established the calculation criteria for the stor-age tariffs for the third regulatory period, expiring 31 December 2014, providing for a mixed mechanism of revenue allowed (in terms of capacity) and a price cap (on gas moved – commodity), also establishing a single tariff on a national level.

Resolution no. ARG/gas 202/10 “Approval of the company pay-ments and calculation of single payments for storage service and calculation of the transitory payment for the gas transport measurement metering service for 2011, implementing Resolu-tion ARG/gas 119/10 of the Electricity and Gas Authority of 3 Au-gust 2010”.With this resolution, published on 24 November 2010, the Electric-ity and Gas Authority approved the storage tariffs and the transi-tory metering payments for 2011, established on the basis of a RAB at 31 December 2009 equivalent to €3.0 billion.

Legislative Decree no. 130/10 – New storage capacity programme

Legislative Decree no. 130, “Legislative Decree bearing measures for greater competition in the natural gas market and the transfer of resulting benefi ts to end customers, pursuant to Article 30, para-graphs 6 and 7, of Law no. 99 of 23 July 2009”, came into force on 19 August 2010.Among other things, the Decree obliges entities which inject natu-ral gas into the national network to disclose their wholesale market share on an annual basis. The maximum market share has been set at 40% of the total volume of gas injected, although this can be increased to 55% if an entity commits to building new natural gas storage infrastructures (or upgrading existing ones) in order to free up 4 billion cubic metres of new storage capacity over a fi ve-year period. This commitment can be made by stipulating appropriate agreements with storage subsidiaries.

15.59

7.59 7.81

16.52

8.718.00

0

2

4

6

8

10

12

14

16

18

Total

2009

Withdrawal Injection

2010

Natural gas moved in/out of the storage system (billions of m³)

35


Consequently, the ultimate parent, Eni, informed Stogit of its inten-tion to build new storage capacity by asking its storage subsidiary to prepare and submit a draft proposal. Stogit carried out this re-quest and the ultimate parent, Eni, then submitted Stogit’s proposal to the Ministry of Economic Development with a view to increasing the aforementioned maximum market share.The proposal was approved by the ministry, upon consultation with

the Electricity and Gas Authority, by a decree of 31 January 2011. Consequently, it is binding for Stogit, in terms of effi ciency and time-frame, and must be completed within fi ve years of 1 September 2010. More specifi cally, Stogit must ensure punctual completion of the proposal’s infrastructure capacities. This activity will be carried out in compliance with the obligations of functional separation estab-lished by Resolution no. 11/07 of the Electricity and Gas Authority.

36

37

Snam Rete Gas Annual Report 2010 / Natural gas distribution

Natural gas distribution

38


Key performance indicators (€ million) 2009 2010 Change Change %

Core business revenue (*) 802 1,233 431 53.7

- of which, natural gas distribution revenue 776 1,197 421 54.3

Core business revenue net of IFRIC 12 802 884 82 10.2

- of which, natural gas distribution revenue 776 848 72 9.3

Operating costs (*) 291 640 349

Operating costs net of IFRIC 12 291 291

EBIT 398 455 57 14.3

Investments 334 386 52 15.6

Net invested capital at 31 December 3,419 3,519 100 2.9

Gas distribution (millions of cubic metres) 7,537 7,953 416 5.5

Distribution network (kilometres) 49,973 50,307 334 0.7

Active meters (millions) 5.771 5.848 0.077 1.3

Employees in service at 31 December (number) 3,545 3,119 (426) (12.0)

(*) From 1 January 2010, items include the effects of applying international accounting standard IFRIC 12, “Service Concession Arrangements”. Applying this interpretation had no effect on the group’s and the segment’s results, except for the equal recognition of revenue and costs relating to building and upgrading distribution infrastructures (€349 million). More information on this interpreta-tion and how it applies to the Snam Rete Gas group can be found in the “Basis of presentation and consolidation principles” chapter of the Notes to the consolidated fi nancial statements, to which reference is made.

Natural gas distribution serviceThe natural gas distribution business operates on a concession regime, between Italgas and Companies which are its subsidiar-ies, through the conferral of this service by local public entities; it consists of the service of gas distribution through local pipe-line networks from delivery points at the metering and reduction stations (city gates) to the gas distribution network redelivery points at the end customers (families, businesses, etc.). Gas distribution service is carried out for sales companies author-ised to market to end customers by the transportation of the gas through city networks. Italgas undertakes natural gas distribution activities by making use of an integrated system of infrastruc-tures comprised of stations for withdrawing gas from the trans-port network, pressure reduction plants, local transportation and distribution network, user derivation plants and redelivery points comprised of technical equipment featuring meters at the end customers (families, commercial and tertiary businesses, and small industrial businesses).Italgas is the leading Italian operator in the natural gas distribution business in Italy with 1,448 municipal concessions and more than 50,300 kilometres of medium- and low-pressure transportation network.

IntroductionAs indicated previously, the results for 2009 include the effects of consolidating Italgas in the second half of 2009, as these were included in the group’s consolidated fi nancial statements from 30 June of that year, the date when the acquisition of Italgas from Eni was completed. In order to fully assess operating performance, the

results of the distribution business segment are analysed in com-parison to those for the whole of 200

Italgas and Napoletana Gas – Municipal territories under concession at 31 December 2010

Financial resultsNatural gas distribution revenues totalled €1,197 million, an increase of €421 million (+54.3%) compared with 2009. Exclud-ing the effects of applying IFRIC 12, distribution revenues totalled

€848 million, up by €72 million (+9.3%) year-on-year. This in-crease was attributable mainly to the effects of applying the ‘grad-uality’ mechanism introduced by Resolution no. 79/09 of 1 June

39


2009 of the Electricity and Gas Authority12, increased revenues due to the return on investments in the distribution network and meter-reading services, which were transferred to distribution companies on 1 July 2009. EBIT generated in 2010 totalled €455 million, up by €57 million, or 14.3%, year-on-year. This increase was due mainly to higher rev-

enues from natural gas distribution (+€72 million, net of IFRIC 12) and more income from technical services performed at redelivery points (+€9 million). These factors were partially offset by higher amortisation, depreciation and impairment losses (-€22 million) owing to increased amortisation and depreciation (-€12 million) and the impairment losses on certain assets (-€10 million).

Operating review

Investments (€ million) 2009 2010 Change Change %

Maintenance 194 209 15 7.7

Extension and upgrade 92 113 21 22.8

New networks 17 27 10 58.8

Other investments 31 37 6 19.4

334 386 52 15.6

Investments in 2010 amounted to €386 million, an increase of €52 million, or 15.6%, compared with 2009. Maintenance investments (€209 million) mainly involved renovat-ing sections of pipes, by replacing cast-iron pipes, and continuing the meter-replacement programme.Extension and upgrade investments (€113 million) involved ex-tending existing networks in response to commitments arising from concession contracts.Investments in new networks (€27 million) essentially related to infrastructure under construction in southern Italy.Other investments (€37 million) mainly concerned real-estate and

IT investments. In addition to the technical investments described above, in 2010 the group acquired the CNEA business unit for €9 million, essen-tially consisting of gas distribution infrastructure in seven munici-palities in the Lazio region.

Gas distribution During 2010, 7,953 million cubic metres of gas were distributed, an increase of 416 million cubic metres, or 5.5%, on 2009, mainly due to the different climatic conditions and the development of the network.

(12) With this resolution, which amended the tariff criteria in effect under prior Resolution no. 159/08, the Authority introduced a gradual increase in the amortised tariff component for the new regulatory period, which is in addition to that already provided for returns on invested capital.

(%)

Maintenance

Network extension and upgrade

New networks

Other investments

2009 2010

58 54

2829

5 7

9 10

Share by investment type (% of total investments)

4,000

5,000

8,000

6,000

9,000

7,000

3,000

20102009

Active meters and volumes of natural gas distributed

active meters (thousands)

volume distributed (millions of m³)

5,771

7,9537,537

5,848

40


of each company, and the costs recognised for such company, using the reference tariff.

Resolution ARG/gas 114/10 - “Approval of the gas distribution and metering services tariffs for 2009”.With this resolution, published on 30 July 2010, the Authority ap-proved the reference tariff for 2009. At that time the reference tariffs for the sites managed by Italgas were also approved, and Resolution ARG/gas 197/09 provided for a fact-fi nding supplement on the public contributions received; the Authority found that there were suffi cient explanations provided by the Company to justify the discrepancy between the data reported in the questionnaires given to the Authority and the data reported in the list provided by the Ministry of the Economy.

Resolution ARG/gas 115/10 - “Approval of the gas distribution and metering services tariffs for 2010”.With this resolution, published on 30 July 2010, the Authority reap-proved the reference tariffs for 2010.Resolution ARG/gas 195/10 - “Recalculation, due to material errors, of the gas distribution and metering services tariffs for 2009”.With this resolution, published on 9 November 2010, the Authority recalculated the reference tariffs for 2009, correcting several mate-rial errors contained in the preceding Resolution ARG/gas 114/10.The new procedure for calculating the tariffs required sending an enormous amount of data and creating a complex system of algo-rithms in order to take into account the various types represented in the national scope of gas distribution.Subsequent refi nements of the data by the distribution companies and the repeated checking of those data by the Authority made it necessary to issue a new measure in response to material errors found in transmitting information or interpretation errors involving questionnaires sent and the information itself.

Resolution ARG/gas 235/10 – “Updating of mandatory tariffs for 2011 for the providing of natural gas distribution and metering services and tariff options for gas distribution and metering serv-ice other than natural gas by channelled networks. Start-up of the procedure for re-exercising the power of tariff regulation pursuant to the orders of the Regional Administrative Court of Lombardy, Sect. III, 11 October 2010, Nos. 6912, 6914, 6915 and 6916. Provi-sions on tariff options for gas distribution and metering service other than natural gas by channelled networks for 2010”.With this resolution, published on 16 December 2010, the Au-thority approved the mandatory tariffs for 2011 and initiated a procedure to adopt modifications to the regulation in force on the subject of calculating tariffs for providing natural gas distribution and metering services and other gases in order to comply with the orders of the Regional Administrative Court of Lombardy which partially grant the appeals brought by several operators against the Consolidated Act for the regulation of gas distribution and metering tariffs for the 2009-2012 period, ap-proved by Resolution ARG/gas 159/08 and subsequent amend-ments and modifications.The elimination of several tariff regulation concepts voided by the Regional Administrative Court of Lombardy and the resulting im-plementation orders has made it necessary for the Authority to re-exercise the power of tariff regulation, after consultation with the

At 31 December 2010, the group had concessions for gas distribu-tion services in 1,448 municipalities (compared with 1,441 at 31 December 2009). It had 5.848 million active meters at gas delivery points to end customers (households, businesses, etc.), compared with 5.771 million at 31 December 2009.

Distribution networkThe group’s gas distribution network at 31 December 2010 covered 50,307 km, an increase of 334 km, or 0.7%, compared with 31 De-cember 2009. The increase is due to the balance of increases and decreases in the network. The increases are primarily due to:· Acquisition of the business unit CNEA Gestioni S.r.l, holder of the

gas concessions in 7 municipalities in the provinces of Frosi-none and Latina;

· The awarding of a new tendered concession;· Construction of new networks, particularly in Calabria;· Extensions of networks to meet commitments deriving from

concession contracts.

Regulation

Resolution ARG/gas 159/08 - “Consolidated act on the regulation of the quality and tariffs for natural gas metering and distribution services for the 2009-2012 period regulatory period (TUDG): ap-proval of part II, “Tariff regulation for natural gas distribution and metering services for the 2009-2012 regulatory period (RTDG).Temporary measures for 2009”. With this resolution, published on 17 November 2008 (and subse-quent amendments), the Authority defi ned the tariff criteria for the distribution and metering services for the third regulatory period, from 1 January 2009 to 31 December 2012. In summary, the reso-lution provides for:· Recognition of the capital invested for the site by the adjusted

historical cost method and of the capital invested with respect to centralised operations (non-industrial buildings and other fi xed assets) by the parametric method;

· Recognition of the operating costs of distribution operations on a parametric basis and differentiated depending on company size and density of the customers connected to the network;

· Recognition of the operating costs of metering and sales opera-tions using equal parametric components for all businesses;

· Assessment, at standard cost, starting in 2010, of all invest-ments on the basis of a price list defi ned by the Authority (Mod-ern Equivalent Asset Value (MEAV) method, based on the con-cept of new replacement cost);

· Calculation by the Authority of the reference tariffs for each busi-ness, corresponding to the costs recognised for remunerating net invested capital, amortisation and depreciation, and operat-ing costs;

· Subdivision of the national territory into six tariff areas and cal-culation by the Authority of the respective mandatory tariffs that distributors must apply to users of their own networks;

· Introduction of an equalisation mechanism, managed by the Authority through the Cassa Conguaglio Settore Elettrico (Elec-tricity Equalisation fund), to guarantee equivalence between the revenue obtained by each company by application of the man-datory tariff, which, naturally, does not refl ect the specifi c costs

41


entities involved, to fi ll the void left by this nullifi cation, taking that established by the administrative court into consideration.In order to comply with the Lombardy Regional Administrative Court orders, the Authority therefore started a procedure to assess the required modifi cations to the tariff regulation in force and, in the interim while the procedure is carried out, it has suspended cal-culation of the reference tariffs for 2011. In addition, fi nal approval of the reference tariffs for 2009 and 2010 has been postponed pending a further measure to be adopted at the appropriate time for calculating the remaining equalisation amounts for 2010 (or for the second half of 2011).Finally, the resolution provides for a one year postponement, start-ing in 2012, of the introduction of the MEAV method for assessing the standard costs of investments for tariff purposes, pending defi -nition of the pertinent price list by the Authority.

National legislative provisions

Provisions on competition and quality of basic services in the natu-ral gas distribution sectorOn 16 December 2010, the Joint Conference approved the two draft decrees of the Ministry of Economic Development relating to: (i) min-imum geographical areas for holding calls for tenders for awarding gas distribution concessions (“Ministerial Decree on Areas”) and (ii) tender and proposal-assessment criteria for awarding concessions for gas distribution (“Ministerial Decree on Tender Criteria”).The draft Ministerial Decree on Minimum Geographical Areas pro-vides for: (a) a minimum of 177 geographical areas for holding calls for tenders and awarding concessions for gas distribution; (b) local authorities from each minimum geographical area to award con-cessions for gas distribution via a single call for tenders; the call for tenders may be extended to two or more adjoining areas subject to agreement by the local authorities of the areas in question; (c) concessions relating to all plants in the same minimum geographi-cal area, including new distribution plants, to expire 12 years after

the date the concession was awarded to the successful tenderer for the fi rst plant in the area.From the date the Ministerial Decree on Areas enters into force, concessions for gas distribution for which a call for tenders has not been published or the deadline for submitting tenders has not passed will be awarded exclusively with reference to the aforemen-tioned minimum geographical areas. However, the outgoing opera-tor will be obligated to continue providing the service until the date the new concession begins.Pursuant to the draft Ministerial Decree on Tender Criteria, the con-tracting entity will prepare the call for tenders and tender regula-tions, in compliance with the outlines of and information contained in the standard call for tenders and tender regulations. The contract-ing entity will prepare the area guidelines with minimum develop-ment conditions. The minimum development conditions and the measures set out in the area guidelines must allow the operator to maintain fi nancial stability and must be justifi ed by an analysis of costs and benefi ts to consumers. The concession will be awarded to the most economically advantageous tender, based on the fol-lowing criteria: (a) fi nancial terms and conditions; (b) safety and quality criteria; and (c) plant development plans.The draft also sets out, among other things, the criteria for determin-ing the amount to be repaid to outgoing contract- and concession-holders, and stipulates that the industrial value of the part of the plant owned by the outgoing operator be equal to its new-for-old value, less the cost of physical deterioration, including fi xed assets under construction, as shown in the accounting records: the amount to be repaid to the outgoing operator can therefore be obtained by deducting advances and subsidies granted by local authorities and other public fi nancial backers from the industrial value, and adding any premiums paid to the local concessionary bodies. In the event of a dispute, the call for tenders will allocate to the plant or section of a plant in question the greater of the following values: (a) the estimate of the local concessionary body; (b) the value of the site’s net fi xed assets, according to the tariff system.

SRG Relazione sulla gestione 2010 - UK.indd 41SRG Relazione sulla gestione 2010 - UK.indd 41 30/03/11 17:4230/03/11 17:42

42

Income Statement

(€ million) 2008 2009 2010 Change Change %

Core business revenue (*) 1,902 2,438 3,475 1,037 42.5

- of which construction and upgrade of distribution infrastructures 349 349

Other revenues and income 8 30 33 3 10.0

Total revenue 1,910 2,468 3,508 1,040 42.1

Operating costs (*) (**) (399) (581) (968) (387) 66.6

- of which construction and upgrade of distribution infrastructures (349) (349)

EBITDA 1,511 1,887 2,540 653 34.6

Depreciation, amortisation and impairment losses (489) (613) (678) (65) 10.6

EBIT 1,022 1,274 1,862 588 46.2

Net fi nancial expense (226) (217) (271) (54) 24.9

Net income from equity investments 22 47 25

Profi t before taxes 796 1,079 1,638 559 51.8

Income taxes (266) (347) (532) (185) 53.3

Net profi t (***) 530 732 1,106 374 51.1

(*) From 1 January 2010, items include the effects of applying international accounting standard IFRIC 12, “Service Concession Arrangements”. Application of this interpretation has had no impact on the group’s results, apart from the recognition of the equivalent amount of revenue and costs relating to the construction and upgrading of distribution infrastructure (€349 million). More informa-tion on this interpretation and how it applies to the Snam Rete Gas group can be found in the “Basis of presentation and consolidation principles” chapter of the Notes to the consolidated fi nancial statements, to which reference is made.

( **) Operating costs include th e captions “Purchases, services and other costs” and “Personnel expense” of the income statement included in the consolidated fi nancial statements.(***) Net profi t is attributable to Snam Rete Gas.

Snam Rete Gas Annual Report 2010 / Financial review

Financial review


43

IntroductionFollowing the acquisition from Eni of Italgas and Stogit, completed on 30 June 2009, the comparative results from 2009 include the impact of consolidating the two companies as of the third quarter of 2009. In order to meaningfully compare the results of the two pe-riods, page 48 also shows, in conjunction with the comment on the main items, the 2009 combined consolidated income statement, obtained by including Italgas and Stogit in the scope of consolida-tion for all of 2009.

Net profi t Net profi t obtained i n fi nancial year 2010 was €1,106 million, an increase of €374 million, equivalent to 51.1%, compared to fi nan-

cial year 2009. The increase refl ects the higher EBIT (up €588 million), due to the contribution from the natural gas distribu-tion and storage businesses that, for the full year, benefi ted from economic effects connected with the consolidation of Italgas and Stogit, compared to a six-month contribution made in the preced-ing fi nancial year, and a signifi cant improvement in the perform-ance of the transportation business segment (+21.7%). These fac-tors were partially offset by an increase in income taxes (-€185 million), due mainly to higher pre-tax profi ts, and an increase in net fi nancial expense (-€54 million), owing to the impact of consolidating Italgas and Stogit and to a higher average debt as a result of fi nancing the acquisition.

Analysis of income statement items

Total revenue (€ million) 2008 2009 2010 Change Change %

Core business revenue 1,902 2,438 3,475 1,037 42.5

Business segments

Transportation 1,882 1,865 1,929 64 3.4

Regasifi cation 37 36 35 (1) (2.8)

Storage 161 355 194

Distribution 406 1,233 827


Consolidation adjustments (17) (30) (77) (47)

Other revenues and income 8 30 33 3 10.0

Total revenue 1,910 2,468 3,508 1,040 42.1

Core business revenue obtained in 2010 (€3,475 million) in-creased €1,037 million, equivalent to 42.5%, compared to fi nan-cial year 2009, and increased €688 million, equivalent to 28.2%, net of the effects of applying IFRIC 12 (€349 million) starting on 1 January 2010. This increase is basically due to the greater contri-bution made by the natural gas distribution and storage business segments as a result of economic effects connected with the con-solidation of Italgas and Stogit. Transportation business segment reve nue13 (€1,929 million) mainly includes payments for natural gas transportation service (€1,873 million) and chargebacks to subsidiaries of the costs in-curred for providing services carried out centrally by the parent company (€31 million). The new organisational structure of the Snam Rete Gas Group became operational on 1 April 2010; its re-view process became necessary because of the Italgas and Stogit acquisitions. The reorganisation strengthened the role of the parent company Snam Rete Gas S.p.A. as an operational holding company by centralising services relating to staff activities (personnel man-

agement, organisation, planning, administration, fi nance and con-trol, commercial and regulatory services, general and real estate services, procurement services, logistics and management, etc.) and some strategic activities in order to manage them more syner-gistically and thus more effi ciently. These activities, as well as the chargeback of related costs for services provided by the ultimate parent to the subsidiaries, are governed by service agreements be-tween the parent company and these companies. The €64 million increase in revenue, or 3.4% compared to 2009, is mainly due to: (i) proceeds deriving from the chargeback to subsidiaries for services provided (+€31 million); (ii) higher transportation revenue (+€25 million) resulting from higher volumes of natural gas transported (+€20 million) and the effect of recognition by the Electricity and Gas Authority of the additional expenses incurred for the acquisi-tion of fuel gas in the period 1 October 2008-31 December 200914 (€55 million; +€21 million compared with the contribution of €34 million recorded in the 2009 fi nancial statements as recognition of the additional expenses incurred in the 2007-2008 thermal year).

(13) Core business revenue by business segment is reported before consolidation adjustments.(14) This payment, recognised by Resolution ARG/gas 218/10 and recorded on an accruals basis as part of fi scal year 2010’s transportation revenue, arises from

Resolution ARG/gas 184/09 by which the Authority established the requirement of postponing until subsequent resolutions the decision to determine additional costs for the period from 1 October 2008 to 31 December 2009.


44


Eni 1,081 934 742 (192) (20.6)

Enel Trade 254 245 256 11 4.5

Other 603 734 862 128 17.4

Revenue adjustment and penalties (74) (47) (17) 30 (63.8)

Additional fees to cover higher gas purchase costs 45 34 55 21 61.8

Interruptibility fee as per Resolution no. 277/07 (34) (42) (23) 19 (45.2)

Regional network transportation fee as per Resolution no. 45/07 - Equalisation (8) (10) (2) 8 (80.0)

1,867 1,848 1,873 25 1.4

Revenue from the natural gas distribution business segment (€1,233 million) mainly relates to natural gas distribution (€1,197 million). Excluding revenue deriving from the construction and up-grading of natural gas distribution infrastructures (€349 million), recorded pursuant to IFRIC 12, revenue totalled €884 million, 848 of which pertains to natural gas distribution service.Other revenue and income (€33 million) relates mainly to income from real estate investments (€6 million), gains from tangible and intangible asset sales (€4 million), income from commercial deal-ings (€3 million) and net revenue from the redemption of Energy Effi ciency Certifi cates (€2 million).

Regasifi cation business segment revenue (€35 million) refers to the payment for LNG regasifi cation service (€24 million; €21 mil-lion in 2009) done at the Panigaglia (SP) LNG terminal and to the chargebacks of expenses relating to natural gas transportation service provided by Snam Rete Gas S.p.A. (€11 million; €15 million in 2009). Natural gas storage business segment re venue (€355 million) re-fers to payment for storage services (€349 million, €282 and €67 million of which relate to modulation storage and strategic storage, respectively) and to proceeds obtained from the sale of gas no longer required for providing storage services (+€5 million).

Revenue – Regulated and non-regulated activities


Regulated business revenue 1,887 2,423 3,442 1,019 42.1

Transportation 1,867 1,848 1,873 25 1.4

Regasifi cation 20 21 24 3 14.3

Storage (*) 147 326 179

Distribution 407 1,219 812


Revenue from non-regulated activities 23 45 66 21 46.7

1,910 2,468 3,508 1,040 42.1

(*) From 1 July 2009, when the effects of consolidating Italgas and Stogit were fi rst recognised, revenue is shown net of the modulation service provided for Snam Rete Gas S.p.A.

Regulated business revenue (€3,442 million, net of consolidation adjustments) relates to transportation (€1,873 million), regasifi -cation (€24 million), storage (€326 million) and natural gas distri-bution (€1,219 million; €870 million net of IFRIC 12 effects).Revenue from non-regulated activities (€66 million, net of consolidation adjustments) mainly comprises: (i) technical

services (€15 million); (ii) income from the leasing and main-tenance of fibre-optic telecommunications cables (€10 mil-lion); (iii) income from property investments (€6 million); (iv) income from the sale of gas no longer necessary for storage services (€5 million); (v) gains from the sale of tangible and intangible assets (€4 million).

(15) Up to the end of the second regulatory period on 31 December 2009, the costs incurred for the acquisition of gas needed to operate the compression stations were included in overall operating costs and therefore updated using the price-cap mechanism. As of the start of the third regulatory period on 1 January 2010, the Electricity and Gas Authority, enacting the new tariff criteria laid down by Resolution ARG/gas 184/09, has defi ned methods for payment in kind, by shippers to transporters, of gas volumes to cover fuel gas, network losses and unaccounted-for gas, owed as a percentage of the volumes respectively injected into and withdrawn from the transportation network. Applying these criteria entailed, on the one hand, reduced operating costs from lower charges for supplying the gas used to provide service and, on the other, reduced revenue to allocate to cover the operating costs.

These factors were partly offset by applying the new tariff criteria in force as of 1 January 2010, basically due to payment in kind by us-

ers for the natural gas used for providing transportation service15. Major transportation revenue by user is analysed as follows.


45

Operating costs (€968 million) increased by €387 million, or 66.6%, compared to fi nancial year 2009, owing essentially to the associated effects of consolidating Italgas and Stogit, partially ab-sorbed by the reduction in operating costs in view of payment in kind of the gas used in the transportation business. With respect to the natural gas distribution business segment, the 2010 operating costs include expenses involving the construction and upgrading of infrastructures used for providing the service (€349 million),

recorded in view of the application of IFRIC 12 starting 1 January 2010. Net of this effect, operating costs amounted to €619 million, up €38 million or 6.5%. Operating costs in the transportation business segment (€343 mil-lion before consolidation adjustments) declined €56 million owing essentially to the payment in kind by transportation service users of natural gas used to provide the service, partially offset by higher ex-penses in supplying goods and services for the subsidiaries.

Operating costs (€ million) 2008 2009 2010 Change Change %

Business segments

Transportation 388 399 343 (56) (14.0)

Regasifi cation 30 27 24 (3) (11.1)

Storage 38 63 25 65.8

Distribution 147 640 493


Consolidation adjustments (19) (30) (102) (72)

399 581 968 387 66.6

Operating costs – Regulated and non-regulated activities


Regulated business costs 395 567 942 375 66

Controllable fi xed costs 209 352 465 113 32.1

Variable costs 135 117 19 (98) (83.8)

Other costs 51 98 458 360


Non-regulated business costs 4 14 26 12 85.7

399 581 968 387 66.6

Regulated business operating costsControllable fi xed costs16 were €465 million, up €113 million from fi nancial year 2009 as a result of the economic effects of the con-solidation of Italgas and Stogit. Variable costs of €19 million fell by €98 million, essentially due to the payment in kind of natural gas used for the transportation business.Other costs, at €458 million, mainly consist of the costs of construc-

tion and upgrading of distribution infrastructures (€349 million) and expenses offset in income primarily relating to connection costs (€46 million). Net of the effects of IFRIC 12, other costs amounted to €109 million, up €11 million from fi nancial year 2009.The following table shows the workforce in service at 31 December 2010 (6,104 people) by business segment and professional status.

(number) 2008 2009 2010 Change Change %

Business segments

Transportation 2,252 2,254 2,636 382 16.9

Regasifi cation 93 87 70 (17) (19.5)

Storage 301 279 (22) (7.3)

Distribution 3,545 3,119 (426) (12.0)

2,345 6,187 6,104 (83) (1.3)

Professional status

Executives 65 121 116 (5) (4.1)

Managers 265 493 508 15 3.0

Offi ce workers 1,241 3,320 3,243 (77) (2.3)

Manual workers 774 2,253 2,237 (16) (0.7)

2,345 6,187 6,104 (83) (1.3)

(16) Refer to the “Glossary” in this report for the defi nition of controllable fi xed costs.


46

Depreciation, amortisation and impairmentAmortisation, depreciation and impairment (€678 million) increased by €65 million compared with 2009, owing to higher amortisation and depreciation in the distribution (€83 million) and storage (€41 million) business segments and impairment losses on several assets involving the completion of methanisation work in southern Italy. These factors were partly offset by the lower depreciation recorded by the transportation segment (€69 million) due to the change in the useful

life of gas pipelines (from 40 to 50 years), offset in part by the decline in the useful life of the reduction plants (from 40 to 20 years), both re-vised for tariff purposes by the Electricity and Gas Authority. The company, in light of the mechanisms for recognition of tariff components linked to the new depreciation rules, and the service life of the assets, considered it appropriate to restate their useful life in line with the conventional tariff duration.


Amortisation and depreciation 489 613 668 55 9.0

Business segments

Transportation 485 499 430 (69) (13.8)

Regasifi cation 4 4 4

Storage 35 76 41


Impairment losses 10 10

489 613 678 65 10.6

EBIT


Business segments

Transportation 1,017 974 1,185 211 21.7

Regasifi cation 5 5 7 2 40.0

Storage 92 218 126


Elimination of internal profi t (*) (3) (3)

1,022 1,274 1,862 588 46.2

(*) Profi t relates to capital gains from the cross-segment transfer of property, plant and equipment.

EBIT for 2010 amounted to €1,862 million, an increase of €588 million, or 46.2%, on the previous year. The increase is attributable to: (i) higher EBIT from the natural gas distribution (+€252 million) and storage (+€126 million) business segments, which benefi ted for the whole of 2010 from the economic impact of consolidating Italgas and Stogit, with a combined contribution of €673 million, against a contribution of €295 million recorded for six months in the same period of the previous year; and (ii) the signifi cant improvement in the performance of the transportation business segment (+€211 million; +21.7%) and LNG regasifi cation business segments (+€2 million; +40%).

The €211 million increase in the EBIT of the transportation busi-ness segment is due mainly to: (i) lower operating costs (+€133 million, net of components offset in revenue17), owing to the pay-ment in kind of natural gas used for provision of the transportation activity, and to the net use of provisions for risks and charges in relation to a provision made in 2009 (+€23 million); (ii) lower am-ortisation and depreciation (+€69 million) connected mainly to the extension of the useful life of pipelines (from 40 to 50 years); and (iii) higher transportation revenue (+€10 million, net of com-ponents offset in costs). ROI was 11.7% (10.0% in 2009)18.

(17) Includes chargebacks for the provision of services to subsidiaries by the parent company Snam Rete Gas S.p.A.(18) The ROI for 2009 is not representative of the performance achieved because, following the acquisition of Italgas and Stogit, the EBIT includes the effects associ-

ated with the consolidation of the companies acquired in the second half of that year.



47

Net fi nancial expense (€ million) 2008 2009 2010 Change Change %

Financial expense related to net fi nancial debt 276 166 188 22 13.3

- Charges on short- and long-term fi nancial debt 276 166 188 22 13.3

Loses (Gains) on derivative contracts (27) 66 102 36 54.5

- Fair-value adjustment 2 2 0.0

- Difference in interest accrued in the period (29) 64 102 38 59.4

Other net fi nancial expense 3 9 18 9 100.0

- Accretion discount 1 11 15 4 36.4

- Other net fi nancial (income) expense 2 (2) 3 5

Financial expense capitalised (26) (24) (37) (13) 54.2

226 217 271 54 24.9

Financial expense of €37 million was capitalised in 2010 (€24 mil-lion in 2009).

Net income from equity investments The table below illustrates net income from equity investments (€47 million):

Net fi nancial expense (€271 million) was up €54 million com-pared with 2009, owing mainly to the economic impact of consoli-dating Italgas and Stogit and the higher average debt following the acquisition of Italgas and Stogit.

The average cost of borrowing was 2.9%, in line with 2009.


Equity method valuation effect 21 47 26

Capital gains from sale of equity investments 3 (3) (100.0)

Other expenses (2) 2 (100.0)

22 47 25

Income from equity investments concerns the portion of net profi t for the period of equity-accounted investments in the natural gas dis-tribution sector (€47 million). The increase of €25 million is mainly

due to the increased profi ts of subsidiaries (+€26 million), relating in particular to the associates Azienda Energia and Servizi Torino S.p.A. (+€16 million) and Toscana Energia S.p.A. (+€9 million).

Income taxes


Current taxes 291 402 616 214 53.2

(Prepaid) deferred taxes

Deferred taxes (37) (44) (74) (30) 68.2

Prepaid taxes 12 (11) (10) 1 (9.1)

(25) (55) (84) (29) 52.7

Tax rate (%) 33.4 32.2 32.5 0.3

266 347 532 185 53.3

Income taxes (€532 million) rose by €185 million year-on-year (53.5%), mainly due to higher pre-tax profi t. Income taxes were re-duced by €8 million as a result of the so-called Tremonti-ter rules, which grant tax breaks to investments in certain categories of ma-chinery and equipment. The tax rate is 32.5%. The difference between the effective tax rate

(32.5%) and the theoretical tax rate (33.0%), at 0.5%, is due essentially to the effects of valuation of equity investments using the equity meth-od (-0.8%) and of the application of the so-called Tremonti-ter rules (-0.5%), partially offset by the increased impact of the IRAP rates, ap-plied in certain regions at higher than the normal rate (+0.5%), and of the taxation of dividends received by Group Companies (+0.3%).


48

Combined consolidated income statement

In order to meaningfully compare the results for 2010 and 2009 (the latter of which include the impact of consolidating Italgas and Stogit as of the third quarter), the consolidated data of Snam Rete Gas, GNL Italia, Italgas and Stogit for 2009 were aggregated, includ-ing Italgas and Stogit in the scope of consolidation for the whole of

2009; as a result, transactions between Snam Rete Gas and the companies, and between the companies themselves, were elimi-nated. The following notes therefore refer to changes in the main income statement data of 2010 compared with the combined fig-ures for 2009.

Combined Consolidated Income Statement

Combined


Core business revenue (*) 2,438 3,006 3,475 469 15.6

Core business revenue net of IFRIC 12 2,438 3,006 3,126 120 4.0

Other revenues and income 30 44 33 (11) (25.0)

Total revenue 2,468 3,050 3,508 458 15.0

Operating costs (*) (581) (740) (968) (228) 30.8

Operating costs net of IFRIC 12 (581) (740) (619) 121 (16.4)

- of which controllable fixed costs (352) (480) (465) 15 (3.1)

EBITDA 1,887 2,310 2,540 230 10.0

Depreciation, amortisation and impairment losses (613) (719) (678) 41 (5.7)

EBIT 1,274 1,591 1,862 271 17.0

Net financial expense (217) (252) (271) (19) 7.5

Net income from equity investments 22 42 47 5 11.9

Profit before taxes 1,079 1,381 1,638 257 18.6

Income taxes (347) (454) (532) (78) 17.2

Net profit (**) 732 927 1,106 179 19.3

(*) The items for 2010 include the effects of applying international accounting standard IFRIC 12, “Service Concession Arrangements”. Applying this interpretation had no effect on the group’s results, except for the equal recognition of revenue and costs relating to building and upgrading distribution infrastructures (€349 million). For more information about the accounting effects caused by applying this interpretation, refer to the chapter “Basis of presentation and consolidation principles” of the Notes to the consolidated financial statements.

(**) Net profit is attributable to Snam Rete Gas.

EBIT for 2010 amounted to €1,862 million, an increase of €271 million, or 17%, on the combined figure for the previous year. The improved performance across all business segments was due to: (i) higher core business revenue (+€120 million, net of IFRIC 12); (ii) lower operating costs (+€121 million, net of IFRIC 12) as a result of efficiency measures taken, which helped to restrict con-trollable fixed costs to €465 million, a reduction of €15 million, or 3.1%, on the combined figure for 200919; (iii) lower depreciation and amortisation (+€41 million) due to the lower depreciation

and amortisation recorded by the transportation business seg-ment (+€69 million), partially offset by higher depreciation and amortisation in the natural gas distribution and storage business segments (-€28 million overall). These factors were partly offset by a reduction in other revenue and income (-€11 million), owing essentially to lower capital gains from the sale of property, plant and equipment and intangible assets (-€8 million). Below is a breakdown of EBIT by business segment:

EBIT Combined


Business segments

Trasportation 974 974 1,185 211 21.7

Regasification 5 5 7 2 40.0

Storage 92 214 218 4 1.9

Distribution 203 398 455 57 14.3

Elimination of internal profit (*) (3) (3)

1,274 1,591 1,862 271 17.0

(*) Profit relates to capital gains from the cross-segment transfer of property, plant and equipment.

(19) The reduction was €33 million compared with the combined 2008 controllable fixed costs (€498 million).


49

The €271 million increase in EBIT related in particular to the follow-ing segments:- Transportation (+€211 million; +21.7%). The increase was attrib-

utable mainly to: (i) lower operating costs (+€133 million, net of components offset in revenue), owing essentially to the pay-ment in kind of natural gas used for provision of the service and to the net use of provisions for risks and charges in relation to a provision made in 2009 (+€23 million); (ii) lower amortisation and depreciation (+€69 million) connected mainly to the exten-sion of the useful life of pipelines (from 40 to 50 years); and (iii) higher transportation revenue (+€10 million, net of components offset in costs);

- Distribution (+€57 million; +14.3%). This increase was attribut-able essentially to: (i) higher revenue from the distribution of natural gas (+€72 million, net of IFRIC 12), owing mainly to ap-plying the ‘graduality’ mechanism introduced by Resolution no. 79/09 of the Electricity and Gas Authority, higher revenue from

the return on investments made in the distribution network, and the meter-reading business, which was transferred to the dis-tribution companies as of 1 July 2009; (ii) higher income from technical services (+€9 million). These factors were partly off-set by higher amortisation, depreciation and impairment losses (-€22 million), owing to increased amortisation and deprecia-tion (-€12 million) and the impairment losses on certain assets (-€10 million).

The natural gas storage business segment recorded EBIT of €218 million, broadly in line with the fi gure for 2009 (€214 million). Net profi t (€1,106 million) rose by €179 million, or 19.3%, com-pared with the combined fi gure for 2009. The increase was due es-sentially to higher EBIT (+€271 million), which was partly offset by higher income taxes (-€78 million) resulting primarily from higher pre-tax profi ts and by higher net fi nancial expense (-€19 million) owing mainly to more average debt following the acquisition of Ital-gas and Stogit.

Reclassified consolidated balance sheet

The reclassifi ed consolidated balance sheet combines the assets and liabilities of the compulsory format included in the annual re-port and the half-year report based on how the business manage-ment operates, usually split into the three basic functions: invest-ment, operations and fi nancing. Management believes that this format presents useful additional

information for investors as it allows identifi cation of the sources of fi nancing (equity and third-party funds) and the application of such funds for fi xed and working capital.The reclassified balance sheet format is used by management to calculate the key leverage and profitability (ROI and ROE) ratios.

Reclassified Consolidated Balance Sheet (*)

(€ million) 31.12.2009 31.12.2010 Change

Non-current assets 17,077 17,678 601

Property, plant and equipment (**) 12,684 13,239 555

Compulsory inventories 405 405

Intangible assets (**) 4,082 4,262 180

Equity investments 301 319 18

Financial receivables held for operations 2 2

Net payables for investments (397) (549) (152)

Net working capital (1,332) (1,331) 1

Provisions for employee benefi ts (107) (105) 2

Assets held for sale and directly related liabilities 14 15 1

NET INVESTED CAPITAL 15,652 16,257 605

Shareholders’ equity (including minority interests)

- attributable to Snam Rete Gas 5,702 5,915 213

- attributable to minority shareholders 1 1

5,703 5,916 213

Net fi nancial debt 9,949 10,341 392

COVERAGE 15,652 16,257 605

(*) Please see paragraph below on the reconciliation of reclassifi ed consolidated balance sheets with the legally-required formats. (**) Includes the reclassifi cation from “property, plant and equipment” to “intangible assets” of the net book value of infrastructure used for distribution services of natural gas (€3,341 million) follow-

ing the application of IFRIC 12 from 1 January 2010.


50

Fixed capital (€17,678 million) rose by €601 million compared with 31 December 2009, due essentially to changes in property, plant and equipment (+€555 million) and intangible assets (+€180 million), partially offset by the increase in net payables for investments (-€152 million) deriving mainly from the esti-

mated effects of price adjustments in connection with agreements signed as part of the acquisition of Italgas and Stogit20.

Changes in property, plant and equipment and intangible assets (+€735 million) are analysed below:

Property, plant Intangible Total (€ million) and equipment assets Balance at 31 December 2009 12,684 4,082 16,766

Investments 1,117 423 1,540

Depreciation, amortisation and impairment losses (495) (183) (678)

Transfers, eliminations and divestments (9) (13) (22)

Other changes (58) (47) (105)

Balance at 31 December 2010 13,239 4,262 17,501

(20) For more information, refer to Note 22 to the consolidated fi nancial statements, “Guarantees, commitments and risks - Commitments deriving from the acquisi-tion of Italgas and Stogit from Eni”.

(21) The analysis of the investments made by each business segment is given in the chapter “Business segment operating performance” of this report.

Investments

(€ million) 2008 2009 (*) 2010

Business segments

Transportation 1,038 926 902

Regasifi cation 6 7 3

Storage 149 252

Distribution 172 386

Elimination of internal profi t (**) (3)

Investments 1,044 1,254 1,540

(*) Investments made by the natural gas distribution and storage business segments refer to the period between 1 July and 31 December 2009. (**) Profi t relates to capital gains from the cross-segment transfer of property, plant and equipment.

storage companies are obliged to hold pursuant to Presidential De-cree no. 22 of 31 January 2001. The inventories correspond to ap-proximately 5 billion standard cubic metres of natural gas, and the total quantity is determined annually by the Ministry of Economic Development.

Equity investments The heading equity investments (€319 million) includes the valu-ation of equity investments using the equity method and refers in particular to the companies Toscana Energia S.p.A. (€151 million), Azienda Energia e Servizi Torino S.p.A. (€109 million) and ACAM Gas S.p.A. (€48 million).

Investments in 2010, totalling €1,540 million (against €1,254 million in 2009), relate to the transportation (€902 million), re-gasifi cation (€3 million), storage (€252 million) and distribution (€386 million) business segments21. Other changes (-€105 million) relate essentially to grants for the period (-€80 million) and the change in surplus pipes purchased for investment purposes and not yet used in production at the plants (-€38 million). These factors were partially offset by the acquisition of the CNEA business unit (+€9 million). Compulsory inventoriesCompulsory inventories, at €405 million (same as at 31 December 2009), consist of the minimum quantities of natural gas that the


51

Net working capital (€ million) 31.12.2009 31.12.2010 Change

Trade receivables 738 777 39

Inventories 411 441 30

Tax receivables 21 18 (3)

Other assets 145 98 (47)

Deferred tax liabilities (934) (853) 81

Provisions for risks and charges (*) (576) (629) (53)

Trade payables (471) (468) 3

Prepaid income from regulated activities (*) (328) (352) (24)

Tax payables (67) (115) (48)

Derivatives (78) (74) 4

Other liabilities (193) (174) 19

(1,332) (1,331) 1

(*) In order to make the accounting treatment used consistent with that applied to other regulated activities carried out by the group, payments for balancing and stock replenishment charged off against revenues because they are payable to service users are offset under “Prepaid income from regulated activities”. Likewise, the corresponding value at 31 December 2009 (€93 million) was reclassifi ed from “Provisions for risks and charges” to “Prepaid income from regulated activities”. For more information about the reasons for the reclassifi cation, refer to Note 17 to the consolidated fi nancial statements, “Provisions for risks and charges”.

Net working capital (-€1,331 million) remained unchanged (from -€1,332 million at 31 December 2009), owing mainly to: (i) higher provisions for risks and charges (-€53 million)22, related essential-ly to the distribution (-€19 million) and transportation (-€16 mil-lion) business segments and to increased provisions for abandon-ment (-€14 million), due mainly to revised estimates for the cost of removal and restoration of natural gas storage sites; (ii) higher tax payables (-€48 million), due mainly to the increase in pre-tax profi t; (iii) the reduction in other activities (-€47 million), due es-sentially to the repayment by the Cassa Conguaglio per il Settore Elettrico (Electricity Equalisation Fund) of energy effi ciency certifi -cates (-€62 million), which was partially offset by lower VAT pay-ments on account to the ultimate parent, Eni (+€28 million). These

factors were offset by: (i) lower deferred tax liabilities (+€81 mil-lion) owing essentially to the transfer of deferred taxes, relating to amortisation and depreciation carried out purely for tax purposes in previous periods, and to the increase in prepaid taxes; (ii) higher trade receivables (+€39 million); (iii) an increase in inventories (+€30 million) attributable mainly to the natural gas used in trans-portation activities.

Assets held for sale and directly related liabilities Assets held for sale and directly related liabilities relate to a r eal-estate complex owned by Italgas (€15 million, net of environmen-tal provisions for charges relating to restoration work on the prop-erty) for which negotiations for a sale to Eni are ongoing23.

(22) The analysis of the changes in “Provisions for risks and charges” is given in Note 17 to the consolidated fi nancial statements.(23) For information about the parties’ commitments, refer to Note 22 “Guarantees, commitments and risks - Commitments deriving from the acquisition of Italgas

and Stogit from Eni” to the consolidated fi nancial statements.

Statement of comprehensive income (€ million) 2009 2010

Net profi t 732 1,106

Other components of comprehensive income

Change in fair value of cash fl ow hedge derivatives (effective share) (29) 4

Tax effects of the other components of comprehensive income 8 (1)

Total other components of comprehensive income, net of tax effect (21) 3

Total comprehensive income 711 1,109

. attributable to:

- Snam Rete Gas 711 1,109

- Minority shareholders

711 1,109


52

At 31 December 2010, Snam Rete Gas had 194,184,651 treasury shares24 (compared with 194,886,225 at 31 December 2009), equal to 5.44% of the share capital. Their market value at 31 Decem-ber 2010 was €724 million25.

Information about the individual equity items and changes therein compared with 31 December 2009 is given in Note 21 to the con-solidated fi nancial statements, “Shareholders’ Equity”.

(24) Information about treasury shares in the portfolio at 31 December 2010 pursuant to Article 40 of Legislative Decree no. 127/91 and Article 2428 of the Italian Civil Code is provided in the chapter “Other information - Treasury shares held by the Company and by subsidiaries” of this report.

(25) Calculated by multiplying the number of treasury shares by the year-end offi cial price of €3.73 per share.

Shareholders’ equity (€ million)

Shareholders’ equity at 31 December 2009 5,703

Increases owing to:

- Comprehensive income for 2010 1.109

- Other changes 7

1,116

Decreases owing to:

- Distribution of balance of 2009 dividend (472)

- Distribution of interim 2010 dividend (304)

- Other changes (*) (127)

(903)

Shareholders’ equity including minority interests at 31 December 2010 5,916

attributable to:

- Snam Rete Gas 5.915

- Minority shareholders 1

5,916

(*) Relates to the estimated effects of price adjustments in connection with agreements signed as part of the acquisition of Italgas and Stogit. For more information, refer to Note 22 to the consolidated fi nancial statements, “Guarantees, commitments and risks - Commitments deriving from the acquisition of Italgas and Stogit from Eni”.

Connection between the separate net income and net assets of Snam Rete Gas S.p.A. and consolidated net income and net assets (€ million) Profi t for the period Shareholders’ equity

2009 2010 31.12.2009 31.12.2010

Financial statements for Snam Rete Gas S.p.A. 530 902 7,068 7,204

Profi t for the period of companies included in consolidation scope 181 476

Difference between book value of equity investments in consolidated companies and shareholders’ equity reported in fi nancial statements including net income for the period

(1,342) (1,282)

Consolidation adjustments made for:

- Equity-accounted investments 21 13 (14) 5

- Elimination of internal intra-group profi ts and other minor adjustments net of tax effects (285) (10) (12)

21 (272) (24) (7)

Minority interests 1 1

Consolidated fi nancial statements 732 1,106 5,703 5,916



53

Net fi nancial debt and leverageLeverage measures the level of debt of a company and is calculated as the ratio of net fi nancial debt to net invested capital. It is one of

the key indicators of the soundness and effi ciency of a company’s fi nancial structure.

(€ million) 31.12.2009 31.12.2010 Change

Financial liabilities 9,986 10,350 364

Short-term fi nancial liabilities 1,585 1,844 259

Current share of long-term fi nancial liabilities 915 1,320 405

Long-term fi nancial liabilities 7,486 7,186 (300)

Financial receivables and cash and cash equivalents (37) (9) 28

Financial receivables not held for operations (1) (1)

Cash and cash equivalents (36) (8) 28

9,949 10,341 392

The group’s net fi nancial debt totalled €10,341 million at 31 Decem-ber 2010, an increase of €392 million compared with a year earlier, owing mainly to fi nancial requirements related to: (i) the payment of the dividend balance for 2009 of €0.14 per share, paid from 27 May 2010 (-€472 million), and of the interim dividend for 2010 of €0.09 per share, paid from 21 October 2010 (-€304 million); (ii) net capital expenditure (-€1,393 million). These factors were partially offset by

cash fl ow from operations (+€1,775 million). Long-term fi nancial liabilities of €7,186 million make up 69% of net fi nancial debt (compared with 75% at 31 December 2009) and have an average duration of slightly over four years (compared with ap-proximately four years at 31 December 2009). The breakdown of debt by type of interest rate at 31 December 2010 is as follows:

(€ million) 31.12.2009 % 31.12.2010 % Change

Floating-rate 4,270 43 2,144 21 (2,126)

Fixed-rate 5,716 57 8,206 79 2,490

9,986 100 10,350 100 364

All the fi nancial liabilities are due to Eni26 and are all in euros. Floating-rate fi nancial liabilities (€2,144 mill ion) decreased by €2,126 million compared with 31 December 2009, owing to the stipulation of eight interest rate swaps (IRSs) with a duration of around two years, which convert existing fl oating-rate loans (for a total of €2,185 million) into fi xed-rate loans. This was partially offset by an increase in short-term debt.Fixed-rate fi nancial liabilities (€8,206 million) increased by €2,490 million compared with 31 December 2009. This increase was due to the stipulation of the aforementioned eight IRSs (€2,185 million) and the taking out of three fl oating-rate loans (€1,000 million in total, converted into fi xed-rate loans by three more IRSs, and was

partially offset by the repayment (€700 million) of a matured loan. On 23 December 2010, an agreement was signed with Eni for a medium-to-long-term loan of €400 million. The loan, which carries a fi xed rate of around 2.9%, will be issued on 21 March 2011 and repaid in a single instalment on 20 December 2013. It will be used to refi nance a €300 million loan due to mature on 20 March 2011.At 31 December 2010, Snam Rete Gas had a total of 19 IRSs in place, with a notional value of €6,535 million (compared with €4,050 million at 31 December 2009). Leverage - the ratio of net fi nancial debt to net invested capital - is 63.6% (unchanged from 31 December 2009).There were no breaches of loan agreements at the reporting date.

(26) Information about fi nancial debt to the parent company Eni S.p.A. is given in Note 16 to the consolidated fi nancial statements, “Long-term fi nancial liabilities and short-term portion of long-term liabilities”.



54

Reclassified consolidated statement of cash flows

The reclassifi ed consolidated statement of cash fl ows set out below summarises the legally required format. It shows the opening and closing cash and cash equivalents and the change in net fi nancial debt during the period. The two statements are reconciled through the “free cash fl ow”, i.e. the cash surplus or defi cit left over after servicing capital expenditure. The free cash fl ow closes either: (i)

with the change in cash and cash equivalents for the period, af-ter adding/deducting all cash fl ows related to fi nancial liabilities/assets (taking out/repayment of loans) and equity (payment of dividends/capital injections); or (ii) with the change in net fi nancial debt for the period, after adding/deducting the debt fl ows related to equity (payment of dividends/capital injections).

Reclassified Consolidated Statement Of Cash Flows

(€ million) 2008 2009 2010

Net profi t 530 732 1,106

Adjusted by:

- Amortisation, depreciation and other non-monetary components 490 595 630

- Net capital losses on asset sales and eliminations 6 6 8

- Interest and income taxes 489 550 788

Change in working capital due to operating activities 83 (117) 34

Dividends, interest and income taxes collected (paid) (545) (602) (791)

Net cash fl ows from operating activities 1,053 1,164 1,775

Investments (1,097) (1,221) (1,422)

Change in consolidation scope and business units (4,478) (137)

Divestments 2 30 14

Other changes relating to investment activities 74 16 152

Free cash fl ow 32 (4,489) 382

Changes in short- and long-term fi nancial debt 354 1,530 364

Equity cash fl ows (386) 2,995 (774)

Net cash fl ow for the year 0 36 (28)

(*) For the reconciliation of the reclassifi ed consolidated statement of cash fl ows with the legally required format, reference should be made to the paragraph on the reconciliation of the reclassifi ed consolidated fi nancial statements.

Change in Net Financial Debt

(€ million) 2008 2009 2010

Free cash fl ow 32 (4,489) 382

Financial payables and receivables from acquired companies (2,219)

Equity cash fl ows (386) 2,995 (774)

Change in net fi nancial debt (354) (3,713) (392)


55

Reconciliation of the reclassified consolidated financial statements with the legally required formats

Reclassifi ed consolidated balance sheet (€ million)

Reclassifi ed consolidated balance sheet items 31.12.2009 31.12.2010

(Where not expressly stated, the component is taken directly from the legally required format)

Reference to notes to consolidated fi nancial statements

Partial amount

from legally required

format

Amount from reclassifi ed

format

Partial amount


format


format

Non-current assets Property, plant and equipment 12,684 13,239Compulsory inventories 405 405Intangible assets 4,082 4,262Equity investments 301 319Financial receivables held for operations (see note 2) 2 2Net payables for investments, consisting of: (397) (549)- Payables for investments (see note 13) (429) (627) - Receivables for investments/divestments (see note 2) 32 78 Total non-current assets 17,077 17,678Net working capital Trade receivables (see note 2) 738 777Inventories 411 441Tax receivables, consisting of: 21 18- Current income tax assets 2 - Other current tax assets 5 4 - IRES receivables for national tax consolidation scheme (see note 2) 13 10 - Group VAT credit (see note 2) 1 4 Trade payables (see note 13) (471) (468)Tax payables, consisting of: (67) (115)- Current income tax liabilities (5) (11) - Other current tax liabilities (18) (20) - IRES payables for national tax consolidation scheme (see note 13) (36) (69) - Group VAT payables (see note 13) (8) (15) Deferred tax liabilities (934) (853)Provisions for risks and charges (576) (629)Derivatives (see notes 10, 15, 20) (78) (74)Other assets, consisting of: 145 98- Other receivables (see note 2) 130 73 - Other current assets (see note 5) 5 8 - Other non-current assets (see note 10) 10 17 Accruals and deferrals from regulated activities, consisting of: (328) (352)- Accrued income from regulated activities (see notes 5, 10) 83 80 - Prepaid income from regulated activities (see notes 15, 20) (411) (432) Other liabilities, consisting of: (193) (174)- Other payables (see note 13) (162) (143) - Other current liabilities (see note 15) (5) (4) - Other non-current liabilities (see note 20) (26) (27) Total net working capital (1,332) (1,331)Provisions for employee benefi ts (107) (105)Assets held for sale and directly related liabilities consisting of: 14 15- Assets held for sale (see note 11) 25 25 - Liabilities directly associated with assets held for sale (see note 11) (11) (10) NET INVESTED CAPITAL 15,652 16,257 Shareholders’ equity including minority interests 5,703 5,916 Net fi nancial debt Financial liabilities, consisting of: 9,986 10,350 - Long-term fi nancial liabilities 7,486 7,186 - Current share of long-term fi nancial liabilities 915 1,320 - Short-term fi nancial liabilities 1,585 1,844 Financial receivables, cash and cash equivalents, consisting of: (37) (9)- Other fi nancial assets (1) (1) - Cash and cash equivalents (36) (8) Total net fi nancial debt 9,949 10,341 COVERAGE 15,652 16,257


56

Reclassifi ed consolidated statement of cash fl ows (€ million)

2009 2010

Items from the reclassifi ed statement of cash fl ows and reconciliation with the legally required format

Partial amount


format


format

Partial amount


format


format


Adjusted by:

Amortisation, depreciation and other non-monetary components 595 630

- Amortisation and depreciation 613 668

- Impairment losses 10

- Equity method valuation effect (21) (47)

- Change in provisions for employee benefi ts (1) (1)

- Other changes 4

Net capital losses on asset sales and eliminations 6 8

Interest, income taxes and other changes: 550 788

- Interest income (9) (4)

- Interest expense 212 260

- Income taxes 347 532

Changes in working capital due to operating activities: (117) 34

- Inventories 51 (7)

- Trade receivables (164) (39)

- Trade payables (12) (3)

- Change in provisions for risks and charges (*) 30 18

- Other assets and liabilities (*) (22) 65

Dividends, interest and income taxes collected (paid): (602) (791)

- Dividends collected 34

- Interest collected 10 4

- Interest paid (204) (258)

- Income taxes (paid) received (408) (571)

Net cash fl ows from operating activities 1,164 1,775

Investments (*): (1,221) (1,422)

- Property, plant and equipment (1,053) (1,056)

- Intangible assets (168) (366)

Investments in companies joining the consolidation scope and business units: (4,478) (137)

Divestments (*): 30 14

- Property, plant and equipment 8 4

- Intangible assets 10 10

- Equity investments 12

Other changes relating to investment activities: 16 152

- Change in net payables for investments 16 152

Free cash fl ow (4,489) 382

Change in fi nancial payables: 1,530 364

- Taking on long-term fi nancial debt 12,407 1,020

- Repaying of long-term fi nancial debt (10,564) (915)

- Increase (decrease) in short-term fi nancial debt (313) 259

Equity cash fl ows 2,995 (774)

Net cash fl ow for the year 36 (28)

(*) As a result of the reclassifi cations carried out in response to the implementation of international accounting standard IFRIC 12 and the change in the way payments for balancing and stock replen-ishment are recorded, the related cash fl ows for 2009 were reclassifi ed respectively from “Property, plant and equipment” to “Intangible assets” and from “Provisions for risks and charges” to “Other assets and liabilities”.

57

Snam Rete Gas Annual Report 2010 / Elements of risk and uncertainty

Elements of risk and uncertainty

IntroductionThe main corporate risks identifi ed, monitored and, where specifi ed below, managed by Snam Rete Gas are as follows:(i) market risk deriving from exposure to fl uctuations in interest

rates and the price of natural gas;(ii) credit risk deriving from the possibility of counterparty default;(iii) liquidity risk deriving from a possible lack of fi nancial resourc-

es required to meet short-term commitments;(iv) operational risk;(v) specifi c risks related to the business segments in which the

group operates.

MARKET RISK

Interest rate fl uctuation riskFluctu ations in interest rates affect the market value of a com-pany’s financial assets and liabilities as well as its net finan-cial expense. The group aims to minimise interest rate risks while pursuing financial structure objectives laid down in its business plans.The interest rates of some of the company’s loans are indexed to benchmark rates, namely the Euro Interbank Offered Rate (Euribor). In order to limit the risk connected with interest rate volatility, Snam Rete Gas uses derivative instruments – nota-bly interest rate swaps (IRS) – to manage the balance between fixed-rate and floating-rate debt. The fair value of such interest-rate derivatives is calculated systematically on the basis of market prices provided by the major info providers. Snam Rete Gas does not have derivative contracts held for trading or specu-lative purposes.As described in the section “Liquidity risk”, Snam Rete Gas cur-rently raises funds solely through its ultimate parent, Eni S.p.A. Should Eni S.p.A. sell its controlling stake in Snam Rete Gas, there is no guarantee that the latter would be able to obtain loans and fi nancing from other sources under the same conditions as those currently in force.

Risk of change in the price of natural gas Up to the end of the second regulatory period on 31 December 2009, the costs incurred for the acquisition of gas needed to op-erate the compression stations were included in overall operating costs and therefore updated using the price-cap mechanism27. As of the start of the third regulatory period on 1 January 2010, the Electricity and Gas Authority, enacting the new tariff criteria laid down by Resolution ARG/gas 184/09, has defi ned methods for payment in kind, by shippers to transporters, of gas volumes to cover fuel gas, network losses and unaccounted-for gas, owed

as a percentage of the volumes respectively injected into and withdrawn from the transportation network. As a result of these provisions and in consideration of the mechanism for allocating gas to shippers, fl uctuations in the price of gas volumes to cover fuel gas and network losses no longer represent a risk factor for the Group. Price fl uctuation risk remains from excess quantities of unaccounted-for gas withdrawn vis-a-vis the quantities paid for in kind by shippers.

CREDIT RISK

Credit risk is the company’s exposure to potential losses arising from counterparties failing to fulfi l their obligations. Default or de-layed payment may have a negative impact on the fi nancial bal-ance and results of Snam Rete Gas. The group provides business services to a small number of opera-tors in the gas sector, the largest of which by revenue is Eni S.p.A. The rules for client access to the services offered are established by the Electricity and Gas Authority and set out in the Network Codes. For each type of service, these documents explain the rules regulating the rights and obligations of the parties involved in pro-viding said services and have contractual conditions which mini-mise the risk of non-compliance by the clients. In particular, the Codes provide for guarantees to partly cover obligations where the client does not possess a credit rating issued by one of the leading international agencies. Although nearly all of the company’s receivables are due from a lim-ited number of customers, with ultimate parent Eni S.p.A represent-ing 49% of trade receivables, there are no risks of credit concentra-tion given their excellent reliability.

LIQUIDITY RISK

Liquidity risk is the risk that new fi nancial resources may not be available (funding liquidity risk) or the company may be unable to convert assets into cash on the market (asset liquidity risk), meaning that it cannot meet its payment commitments. This may affect profi t or loss should the company be obliged to incur extra costs to meet its commitments or, in extreme cases, lead to in-solvency and threaten the company’s future as a going concern. The group’s objective is to have a fi nancial structure (in terms of leverage ratio and ratios of medium-to-long-term debt and fi xed-/fl oating-rate debt to total debt), which ensures an adequate level of liquidity for the group, minimising the related cost and main-taining a balance between the term and composition of its debt in line with business objectives.

(27) On the basis of this mechanism, the relevant income components relating to operating costs and amortisation are updated with the balance sheet data at the start of the period of regulation, while for subsequent years they are updated with infl ation and reduced by a productivity coeffi cient.

58


Snam Rete Gas currently raises funds solely through its ultimate parent, Eni S.p.A. Under the existing agreements, Eni S.p.A. can request the early repayment of loans should it lose its controlling stake in Snam Rete Gas.At present, the group believes that cash fl ows from operations and its current fi nancial and capital structure can reasonably allow ac-cess to a wide range of fi nancing from the capital market and banks at normal market conditions.

OPERATIONAL RISK

Snam Rete Gas is required to comply with many rules and regula-tions for protecting the environment, health and safety at national, regional, local and EU levels. The environmental protection laws generally pertain to verifi cation of and compliance with limits for emitting pollutants into the air, water and the ground, and to cor-rect waste management procedures. Failure to comply with current regulations may result in individual criminal and/or civil sanctions and, in some cases where safety rules are violated, companies may be liable on the basis of a European liability model adopted in Italy through Legislative Decree no. 231/01. Snam Rete Gas may incur signifi cant costs or liability. Recent regulations on health and safety in the workplace have introduced new obligations which will impact operations at Snam Rete Gas. In particular, the regulations highlight the value of or-ganisational models aimed at preventing offences in the event of violation of workplace health and safety laws and, therefore, corpo-rate liability. Snam Rete Gas has a policy for health, safety and the environment, which has been consolidated over the years. These issues are managed through organisational provisions and internal instructions establishing responsibilities and the procedures to be adopted when designing, constructing, operating and disposing of all company assets. These measures ensure compliance with the law and internal regulations governing health, safety and the environment. Under the group’s organisational structure, unit man-agers are also responsible for health, safety and environmental is-sues for their respective activities. Moreover, the systems manag-ing the environment and the health and safety of employees have been developed in line with international best practices, based on an annual cycle of planning, implementation, control, analysis and target-setting. They are developed and maintained in order to focus on risk prevention, with a view to continuous improvement.

Risks connected with failing to meet infrastructure development objectivesThe group’s effective ability to develop its infrastructure is sub-ject to many unforeseeable events linked to operating, economic, regulatory, authoritative and competition factors which are out-side its control. Therefore, Snam Rete Gas is unable to guarantee that the projects to upgrade and extend its network will be started, completed or lead to benefi ts in terms of tariffs. Additionally, the development projects may require greater investments or longer timeframes than those originally planned, affecting the group’s fi -nancial position and results.

Risks deriving from malfunctioning of plants Managing regulated gas activities involves a number of risks of malfunctioning and unforeseeable service disruptions due to

factors which are outside the group’s control such as accidents, breakdowns or malfunctioning of equipment or control systems, the underperformance of plants and extraordinary events such as explosions, fi res, earthquakes, landslides or other similar events beyond the group’s control. These events could also cause signifi -cant damage to persons, property or the environment. Any service interruptions and subsequent compensation obliga-tions could lead to a decrease in revenue and/or an increase in costs. Although the group has taken out specifi c insurance policies to cover some of these risks, the related insurance cover could be insuffi cient to meet all the losses incurred, compensation obliga-tions or cost increases.

Risks deriving from the need to manage a signifi cant fl ow of information to operate regulated services The regulatory framework in which the company operates stipulates that Snam Rete Gas continually gather and prepare a signifi cant fl ow of information from its customers. The information received by Snam Rete Gas includes capacity bookings, details of where gas is com-ing from and going to each day, physical and commercial balancing mechanisms and forecasts about demand and transportation ca-pacity usage. This fl ow of information, managed by extensive use of IT systems, is large and complex. Therefore, Snam Rete Gas cannot guarantee that its management will not lead to operating and plan-ning diffi culties which could affect its business.

Risks deriving from the seasonal nature of the businessThe group’s business is not affected by seasonal factors which would have a signifi cant impact on its annual or interim fi nancial results.

SPECIFIC RISKS RELATED TO THE BUSINESS SEGMENTS IN WHICH THE GROUP OPERATES

Regulation Snam Rete Gas operates in the regulated gas sector. The relevant directives and legal provisions issued by the European Union and the Italian government, and the resolutions of the Electricity and Gas Authority, may have a signifi cant impact on the group’s opera-tions, results and fi nancial stability. Future changes to European Union or Italian legislative policies may have unforeseeable effects on the relevant legislative framework and, therefore, on the group’s operations and results.

Risks connected with the expiry of gas distribution concessions/contracts held by Italgas and its subsidiaries/associates and with the early termination of concessions by concessionary bodies

Risks relating to tenders for new gas distribution concessions At 31 December 2010, the Group had a portfolio of more than 1,450 natural gas distribution concessions spread throughout Italy. Upon legal expiry of the concessions and contracts held by Italgas and its subsidiaries/associates, or in the event that local authorities ter-minate the concession early, said authorities will have to issue, in combined form after the Decree on geographical areas comes into effect, calls for tenders for the new gas distribution concessions. As a result of the tender process, Italgas and its subsidiaries/associ-

59


ates may not secure one or more of the new concessions, or they may win the concessions but with less favourable terms than was previously the case. This may have a negative effect on the group’s operations and its balance sheet and income statement, despite the receipt of compensation if it fails to renew a concession.

Risks relating to the right of local authorities to acquire ownership of the gas distribution networks and to quantifying repayment to the outgoing operatorWith reference to concessions where Italgas and its subsidiaries/associates also own the gas distribution networks, legal doctrine and jurisprudence concerning the interpretation of the gas distribu-tion network regulations contained in the legislative decree have not yet clarifi ed, pending the coming into force of the new sector rules, whether the company that owns the networks is effectively required to transfer such ownership to the local authorities upon expiry of the concessions and/or contracts. Concessionary bodies and operators also have different interpretations on how to apply the criteria for quantifying the compensation owing to the outgo-ing operator and owner of the network pursuant to Article 24, par-agraph 4, a) and b) of Royal Decree no. 2578 of 15 October 1925 (which stipulates that only the “industrial value” of the system be taken into account, not the profi t that the concessionaire stands to lose as a result of the non-awarding of the concession).

Upon expiry of the concessions and/or contracts, there may there-fore be disputes over the amount of compensation owing to Italgas and its subsidiaries/associates; Italgas and its subsidiaries/associ-ates may lose these cases, with subsequent negative effects on the group’s operations and its balance sheet and income statement.

Risks relating to gas storage concession ownershipStogit owns 10 gas storage concessions. One expires on 14 June 2012, eight on 1 January 2017 and one on 6 November 2021. Each concession may be extended by the Ministry of Economic Develop-ment no more than twice for a duration of 10 years at a time, pursu-ant to Article 1, paragraph 61 of Law no. 239/2004. If Stogit is unable to retain ownership of one or more of its concessions or if, at the time of the renewal, the concessions are awarded under terms less favourable than the current ones, there may be negative effects on the Group’s operations and its balance sheet and income statement.

Risk relating to uncertainty about natural gas reservesThere are several uncertainties surrounding estimations of natural gas reserves in the storage fi elds where Stogit oper-

ates, and therefore their future use and necessary investments. The accuracy of these estimations depends on a certain number of factors, assumptions and variables, among which some of the most important are: (a) the quality of geological, techni-cal and economic data and their interpretation and evaluation; (b) projections for future usage and timeframes for the relevant investment; (c) the stability or otherwise of sector laws and regu-lations; (d) the actual results of drilling and general production activity in the fi elds for which Stogit owns a concession which are subsequent to the estimation date and which may cause said esti-mations to be raised or lowered. Factors other than those listed above which may infl uence reserve estimations are beyond Stogit’s control and may therefore vary over time. As a result there may be differences between estimated reserves and those actually available for use, which may have neg-ative effects on the group’s operations and its balance sheet and income statement.

Risks connected with certain socio-political situations in natural gas production and transit countriesA large part of the natural gas which travels through the trans-portation network of Snam Rete Gas does, or may, come from or travel through countries which present risks deriving from certain socio-political situations. Importing and transiting natural gas from or through such countries may present risks such as: higher taxes and excise duties; production, export or transportation limits; en-forced contract renegotiations; nationalisation or renationalisation of assets; changes to national political and governing systems; changes to commercial policies; monetary restrictions; loss or damage owing to the actions of rebel groups. If shippers are unable to access the natural gas available in these countries as a result of the aforementioned situations or they are damaged in any other way by said situations, they may be unable to fulfi l their contrac-tual obligations to Snam Rete Gas or there may be a reduction in volumes of gas transported. Such events may therefore have a negative effect on the group’s operations and its balance sheet and income statement.

Quantitative information about risks arising from fi nancial instru-ments as required by IFRS 7 “Financial instruments: Notes to the fi nancial statements” is provided in Note 22 to the consolidated fi nancial statements, “Guarantees, commitments and risks”. The elements of risk and uncertainty of Snam Rete Gas S.p.A. are reported in Note 21 to the separate fi nancial statements, “Guaran-tees, commitments and risks.”

60

Snam Rete Gas Annual Report 2010 / Outlook

Outlook

Management’s priorities are to develop signifi cant new gas infra-structure in Italy in order to improve supply security, fl exibility and service quality throughout the gas system, which is necessary to create conditions for developing a gas hub.

Gas demand Based on the latest forecasts, domestic gas demand is expected to grow by an average of approximately 2.6% per year for the four years from 2011 to 2014. This growth is driven by gas consumption in the thermoelectric sector, which is expected to increase by an annual average of around 5%.Gas consumption is also expected to rise in the residential, serv-ices and industrial sectors, though at a slower pace.

Investments Snam Rete Gas is going ahead with a signifi cant inve stment plan involving a total of around €6.4 billion (net of expected contribu-tions) in consolidated terms for the years 2011 to 2014. The main investment plan guidelines for the company’s business areas are as follows:

Transportation· satisfy requirements linked to medium-long term growth in de-

mand for gas and increase the fl exibility and safety of the gas transportation system in Italy;

· continue to improve the quality of the transportation service.· contribute to the development of a European gas hub;

Over the period in question the planned investments sh ould allow the company to extend the total length of the transportation net-work (31,680 km in 2010) by 4% and increase the installed power in

the compression stations by around 8% (860 Megawatts in 2010).

Regasifi cationInvestments in 2011 are expected to be in line with 2010.

Storage· improve the overall safety and fl exibility of the system by in-

creasing the storage and delivery point capacity;· optimise balancing and promote the liquidity of the gas system

in Italy.The projects included in the plan will deliver an increase in storage capacity of about 35% over the period in question (9.2 billion stand-ard cubic metres in 2010) and an increase of around 13% in peak capacity (271 million standard cubic metres in 2010).

Distribution· selectively manage the portfolio of concessions in order to max-

imise profi tability;· continue to improve the level of safety, reliability and quality of

the service; · continue to encourage the rising number of end users;The planned interventions will allow the company to continue to support the development of the business by increasing the number of customers in 2014 by 8% compared to 2010 (5.9 million custom-ers in 2010).

EfficiencyThe 2010 important cost reduction achievements allow us to con-fi rm our target of approximately €80 million of effi ciency savings in 2012, in real terms, on the basis of 2008’s controllable fi xed costs and at constant business structure.

61

Snam Rete Gas Annual Report 2010 / Other information

Other information

Treasury shares held by the company and subsidiariesIn accordance with the provisions of Article 40, paragraph 2, letter d) of Legislative Decree no. 127/91 and Article 2428, paragraph 3,

points 3 and 4 of the Italian Civil Code, the treasury shares held by the company at 31 December 2010 are analysed in the table below:

Period

Num

ber o

f sha

res

Aver

age

cost

(€)

Tota

l cos

t (€

mill

ion)

Shar

e ca

pita

l (%

) (**

)

Purchases

2005 800,000 4.399 3 0.04

2006 121,731,297 3.738 455 6.22

2007 73,006,653 4.607 336 3.73

195,537,950 4.061 794 -

Treasury stock allocated/sold to be deducted:

. assigned free of charge pursuant to 2005 stock grant plans (39,100)

. sold pursuant to 2005 stock option plans (69,000)

. sold pursuant to 2006 stock option plans (1,015,499)

. sold pursuant to 2007 stock option plans (229,700)

Treasury stock held at 31 December 2010 (*) 194,184,651

(*) For a book value of €789 million.(**) The share capital is as at the date of last acquisition in the year.

It is also noted that: (i) the subsidiaries of Snam Rete Gas S.p.A do not hold, and have not been authorised by their shareholders to ac-quire, shares in Snam Rete Gas S.p.A; (ii) Snam Rete Gas S.p.A and its subsidiaries do not hold, and have not been authorised by their shareholders to acquire, shares in their ultimate parent Eni S.p.A.

Investments held by the directors and statutory auditors, general managers and key managers. Pursuant to Article 79 of Consob Resolution no. 11971 of 14 May 1999 and subsequent amendments, the following table sets out the investments in Snam Rete Gas S.p.A. held by its direc-

62


tors, statutory auditors, general managers and other key manag-ers, as well as their spouses who are not legally separated, and children below the age of majority, directly or via subsidiaries, trus-tees or nominees as per the Shareholder Register, communications received and other information acquired from them.

Persons who have held these positions, even for a portion of 2010, are included. The number of shares is given for the directors, statutory auditors and general managers separately and, as a combined fi gure, for the other key managers. These persons hold the shares.

Name and surname

Subs

idia

ry/

asso

ciat

e

Num

ber o

f sh

ares

hel

d at

31

Dece

mbe

r 200

9

Num

ber o

f sha

res

purc

hase

d

Num

ber o

f sha

res

sold

Num

ber o

f sha

res

held

at 3

1.12

.201

0

Board of Directors

Alberto Meomartini (a) Snam Rete Gas S.p.A. 4,213 4,213

Carlo Malacarne (b) Snam Rete Gas S.p.A. 123,238 64,500 187,738

Alessandro Bernini (c) Snam Rete Gas S.p.A. 23,000 23,000 (d)

Massimo Mondazzi (a) Snam Rete Gas S.p.A. 1,100 1,100

Board of Statutory Auditors

Giulio Gamba (c) Snam Rete Gas S.p.A. 2,101 2,101

Roberto Mazzei (c) Snam Rete Gas S.p.A. 10,000 10,000 (d)

Chief Operating Offi cer

Francesco Iovane (e) Snam Rete Gas S.p.A. 95,063 95,063

Other executives with strategic responsibilities (f) Snam Rete Gas S.p.A. 147,366 35,000 182,366 (g)

(a) In offi ce until 27 April 2010. (b) Appointed director by the shareholders’ meeting of 27 April 2006 and as Chief Executive Offi cer by the board of directors on 8 May 2006. Confi rmed by the board of directors on 30 April 2010.(c) Appointed by the shareholders’ meeting of 27 April 2010.(d) Held entirely by spouse. (e) Appointed as Chief Operating Offi cer by the board of directors on 8 May 2006. (f) Managers who were on the company’s management board during the year, excluding directors and the Operations General Manager (six managers). (g) 50,000 shares of which are held by their spouses.

The information required under the terms of Article 78 (“Amount of compensation for directors and statutory auditors, general managers and key managers”) of Consob Resolution no. 11971 of 14 May 1999 (as amended) may be found at Note 29 (“Compensa-tion”) to the fi nancial statement of Snam Rete Gas S.p.A.

Incentive plans for managers with Snam Rete Gas sharesIn order to motivate and ensure the loyalty of managers, encour-age them to get involved in implementing business strategies, as-suming business risk and increasing value for the shareholders, the company has introduced long-term share-based payments as part of their remuneration. The plans are implemented through the allocation of stock options that either assign shares from new issues or treasury shares bought on the market.Pursuant to Article 2359 of the Italian Civil Code, managers of Snam Rete Gas and its subsidiaries who have the greatest responsibility for results or occupy key positions are eligible for the plans. The stock option plans are described below.

Incentive and loyalty plan for the three-year period from 2002 to 2004In their meeting of 24 April 2002 and in accordance with Arti-cle 2443 of the Italian Civil Code, the shareholders authorised the board of directors to increase before 31 July 2004, in one or more instalments, the company’s share capital against payment up to a

maximum of €2,000,000 (equal to roughly 0.1023% of the share capital) by issuing a maximum of 2,000,000 ordinary shares with a par value of €1 each and regular rights to dividends, excluding options as per the last paragraph of Article 2441 of the Italian Civil Code and Article 134, paragraphs two and three of Legislative De-cree no. 58 of 24 February 1998. These shares were offered for subscription to managers of the company and its subsidiaries in the three-year period from 2002 to 2004 as per Article 2359 of the Italian Civil Code.With respect to the 2002-2004 plan, the company’s board of direc-tors resolved:- on 25 June 2002, to increase the share capital against considera-

tion by a maximum of €608,500 for 2002 by issuing a maximum of 608,500 ordinary shares with a nominal value of €1 to be of-fered with options to the managers of Snam Rete Gas S.p.A. and its subsidiaries at a price of €2.977 (the average of the offi cial prices on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. in the month before the date of the resolution);

- on 18 June 2003, to increase the share capital against con-sideration by a maximum of €640,500 for 2003 by issuing a maximum of 640,500 ordinary shares with a nominal value of €1 to be offered with options to the managers of Snam Rete Gas S.p.A. and its subsidiaries at a price of €3.246 (the average of the offi cial prices on the Mercato Telematico Azionario man-aged by Borsa Italiana S.p.A. in the month before the date of the resolution);


63

- on 28 July 2004, to increase the share capital against considera-tion by a maximum of €677,000 for 2004 by issuing a maximum of 677,000 ordinary shares with a nominal value of €1 to be of-fered with options to the managers of Snam Rete Gas S.p.A. and its subsidiaries at a price of €3.53 (the average of the offi cial prices on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. in the month before the date of the resolution).

Incentive and loyalty plan for the year 2005In their meeting of 27 April 2005 the shareholders authorised the repurchase of 800,000 treasury shares as part of the 2005 man-agement incentive and loyalty plan. The transaction was concluded on 28 July 2005. On the same date, the board of directors proceeded to assign the rights to the managers identifi ed. A total of 658,000 stock options were assigned, at an exercise price of €4.399 per share.

The options may be exercised three years after assignment (‘the vesting period’) over fi ve years for the 2002-2004 and 2005 plans. The options are personal, unavailable and non-transferable. Op-tions not exercised by the established expiry date are forfeited and therefore do not give the benefi ciary any rights. In the cases of: (i) the mutual termination of the employment of the benefi ciary; (ii) loss of control by Snam Rete Gas S.p.A. over the company in which the benefi ciary works; (iii) sale to a third party of the company (or business unit) in which the benefi ciary works; or (iv) death of the benefi ciary, the benefi ciary or their heirs maintain the right to exercise the options before 31 December of the year in which the vesting period ends. Should the employee or company unilaterally terminate the employment contract before the three years are up, the options are forfeited.

Incentive and loyalty plan for the three year period from 2006 to 2008In their meeting of 10 November 2005 and in accordance with Ar-ticle 2357 of the Italian Civil Code, the shareholders authorised the board of directors to repurchase a maximum of 194,737,950 ordi-nary Snam Rete Gas shares on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A., within 18 months of the date of the resolution, up to a maximum of €800 million28.On 27 April 2006, the shareholders authorised the board of direc-tors to make available a maximum of 9,000,000 treasury shares (equal to 0.46% of the share capital) for the stock option plans for 2006 to 2008.The plan includes assigning three instalments of stock options in 2006, 2007 and 2008. Unlike the earlier plans, exercise of the options for the 2006-2008 plan is tied to the achievement of per-formance targets. At the end of each three-year vesting period, the board of directors decides the number of options which can be ex-ercised using a scale of between zero and 100 per cent based on the average Total Shareholders’ Return (TSR) of the Snam Rete Gas share compared to that of the six main European utilities compa-nies, listed and operating on regulated markets.

The options may be exercised three years after their assignment (vesting period) and for a maximum of three years. Options which have not been exercised six years after their grant date are for-feited and do not give the benefi ciary any rights. In the cases of: (i) the mutual termination of the employment of the benefi ciary; (ii) loss of control by Snam Rete Gas S.p.A. over the company in which the benefi ciary works; (iii) sale of the company (or busi-ness unit) in which the benefi ciary works to a third party; or (iv) death of the benefi ciary, the benefi ciary or their heirs maintain the right to exercise the option before 31 December of the year in which the vesting period ends in proportion to the period of time between assignment and the occurrence of these events. In the event that the employment contract is terminated unilaterally during the vesting period, the options are forfeited. If this event takes place during the exercise period, the options may be exer-cised within three months.

With respect to the 2006-2008 plan, the company’s board of direc-tors resolved:- on 26 July 2006, to assign 2,597,500 stock options for 2006 for

the purchase of an equal maximum number of Snam Rete Gas treasury shares at an exercise price of €3.542 per share;

- on 24 July 2007, to assign 2,326,500 stock options for 2007 for the purchase of an equal maximum number of Snam Rete Gas treasury shares at an exercise price of €4.322 per share;

- on 29 July 2008, to assign 2,235,000 stock options for 2008 for the purchase of an equal maximum number of Snam Rete Gas treasury shares at an exercise price of €4.222 per share.

The unit price is equal to the average of the offi cial prices on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. in the month preceding the grant date or, if greater, the average cost of the shares in the portfolio on the day before the grant date. On 29 July 2009 the board of directors updated the 2006-2008 stock option plan, which was approved by the sharehold-ers on 27 April 2006 and submitted for implementation to the board of directors on the dates 26 July 2006 (Assignment 2006), 24 July 2007 (Assignment 2007) and 29 July 2008 (Assign-ment 2008). In line with the provisions of the Regulations for implementing the Plan, the change made regards the technical adjustment of the exercise price (equal to €2.905, €3.545, and €3.463 for the 2006, 2007, and 2008 grants, respectively) and number of op-tions assigned to the recipients of the Plan (336,075, 456,300, and 491.000 options for the 2006, 2007, and 2008 grants, respective-ly), whose actual assignation is subject to the achievement of the required performance goals, resulting from the paid share capital increase transaction passed by the shareholders in their extraor-dinary meeting of 17 March 2009 and concluded on 8 June 2009.

No new stock option plans were issued during 2010. At 31 Decem-ber 2010, there are a total of 5,949,951 options in circulation, of which 3,407,251 can be exercised.

(28) The transaction was completed on 2 May 2007. The company repurchased 194,737,950 own shares for a total outlay of €791 million.


64

Transactions with related parties The amounts involved in commercial, fi nancial and other transac-tions with related parties, a description of the nature of the key transactions, and their effect on the balance sheet, income state-ment and cash fl ow statement are given in note 30 to the consoli-dated fi nancial statements and, with regard to the parent company Snam Rete Gas S.p.A, in note 30 of the annual report.

Relationships with the ultimate parent and companies managed and coordinated by itSnam Rete Gas S.p.A. is managed and coordinated by Eni S.p.A. Relationships with Eni S.p.A. and companies managed and coordi-nated by it are relationships with related parties and are disclosed in note 30 “Relationships with related parties” of the notes to the consolidated fi nancial statement and the annual report.

Performance of subsidiariesFor performance information about the sectors in which the com-pany operates wholly or in part through subsidiaries, please refer to the paragraphs “Business segment operating performance” and “Financial Review” within this Report.

Data protection code (Legislative Decree no 196 of 30 June 2003)As controller for processing personal data for Snam Rete Gas, the Chief Executive Offi cer states that the Data protection code has been updated pursuant to Legislative Decree no. 196 of 30 June 2003.

Branch offi cesAs required by Article 2428-quinquies of the Italian Civil Code, it is noted that Snam Rete Gas S.p.A. does not have branch offi ces.

Research and Development Research and development activities carried out by the Snam Rete Gas group are described by business segment in the section “Com-mitment to sustainable development”.

EU legislation in 2009European Parliament and Council Directives 2009/72/EC and 2009/73/EC of 13 July 2009 (the “Third Energy Package”) intro-duced new provisions for operators on unbundling electricity trans-mission systems and natural gas transportation from other activi-ties in the gas sector. Member states are required to adopt these provisions by 3 March 2011.

The European Union law (Law no. 96/10) which delegates respon-sibility for adopting the Third Energy Package to the government, in its guidelines for delegation, under Article 17, paragraph 4, letter h, provides for “ensuring the effective unbundling of transportation, balancing, distribution and storage services from other activities in the natural gas sector”.One of the key elements of the Third Energy Package is the obliga-tion on member states to adopt one of the following models for operating natural gas transportation networks (to ensure that the networks are independent from vertically integrated companies) 29:- Ownership Unbundling (“OU”), which requires that ownership of

TSOs (Transmission System Operators) be separate from verti-cally integrated companies;

- the creation of an Independent System Operator (“ISO”) to operate the network, or a third party whose ownership is separate from the company that owns the asset, which may remain integrated with the production and sale company (the “hands” and the “brains”);

- the creation of an Independent Transmission Operator (“ITO”), which is owned by a vertically integrated company but ensures that the network is independent thanks to a special regulatory system.

Subsequent events On 3 March 2011 the Council of Ministers approved the draft leg-islative decree which implements Directive 2009/73/EC. For more information, please refer to the paragraph “Adoption of EU Legisla-tion” in the next chapter “Information on corporate governance and ownership structure”.

(29) A member state may decide not to select any of the above options (the “ITO Plus” option), provided it can prove that, as at 3 September 2009, a mechanism (regulatory system) was already in place which ensured greater independence for the transportation system operator from vertically integrated companies than the ITO option (however, the fulfi lment of this condition must be verifi ed by the Commission following the certifi cation procedure).

65

Snam Rete Gas Annual Report 2010 / Information on corporate governance and ownership structure

Information on corporate governance and ownership structure

Information on Corporate Governance

Snam Rete Gas S.p.A. (hereafter also referred to as “Snam” or the “company”) issues shares which are quoted on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A. and there-fore fulfi ls all legislative and regulatory obligations related to stock market listing.The overall framework of Snam’s corporate governance system is described in the “Corporate governance and ownership structure report” prepared pursuant to Article 123-bis of Legislative Decree no. 58/1998 (hereafter referred to as the “Consolidated Finance Act” of “TUF”) and approved by the board of directors on 2 March 2011. The information reported below, at 31 December 2010 unless oth-erwise indicated, aims to supply a summary of this report, bearing in mind the minimum content required by the aforesaid law and the recommendations of Borsa Italiana’s Code of Corporate Govern-ance, to which Snam Rete Gas S.p.A adheres.The Corporate governance and ownership structure report is pub-lished (at the same time as this Director’s Report) in the “Govern-ance” section of the company website: http://www.snamretegas.it

Share Capital and Ownership Structure

Share capital and key shareholdersThe share capital of Snam is composed of registered ordinary shares, which are indivisible and each confer the right to one vote. At 31 December 2010 the capital of Snam totalled €3,570,832,994, represented by 3,570,832,994 ordinary shares each with a par value of €1. Snam shares are quoted on the FTSE MIB index of Borsa Italiana, on the main international indexes (Stoxx Europe, S&P Europe, MSCI Europe), and the two main sustainability indexes, the Dow Jones Sustainability World Index (DJSI World) and the FTSE4Good Index. The board of directors does not currently have authorisations to increase the share capital, pursuant to Article 2443 of the Italian Civil Code. At 31 December 2010 the total number of treasury shares held by the company was 194,184,651, equal to 5.44% of the share capital. The proportion of fl oating capital was 42.02%. The company does not have any plans to repurchase treasury shares pursuant to Article 2357 et seq. of the Italian Civil Code.

66


According to the information available and the communications re-ceived in accordance with Article 120 of the Consolidated Finance Act and National Commission for Listed Companies and Stock Ex-

change (Consob) Resolution no. 11971/1999 (Consob Issuer Reg-ulation), the shareholders holding more than 2% of Snam’s share capital at 31 December 2010 are:

Shareholders % of share capital 31.12.2009 % of share capital 31.12.2010

Eni S.p.A. 52.54 52.54

SnamPictet Funds (Europe) SA

5.462.90

5.44------

Snam is managed and coordinated by Eni S.p.A and the company is not aware of any agreements among its shareholders, nor have any such agreements been published pursuant to the law. The company has not issued shares which give special controlling rights. The by-laws do not make any restrictions on the transfer of shares or on voting rights.

Change Of Control ClauseSnam and its subsidiaries (hereafter the “Subsidiaries”)30 are party to signifi cant agreements which may be disclosed without caus-ing signifi cant harm to the company and which would become ef-fective, be modifi ed or lapse in the event of a change of control of Snam by Eni S.p.A.Specifi cally, these concern:a) agreements for the automatic termination of the contract for

short-term loans from Eni S.p.A. (which at 31 December 2010 totalled €1,844 million, including loans from Subsidiaries) and guarantees issued in the interests of Snam and the subsidiaries of Eni S.p.A. or banks against Eni S.p.A. at 31 December 2010, guarantees outstanding totalled €73 million.

b) agreements whereby the counterparty can terminate the con-tract early:- Medium to long-term credit facilities with Eni S.p.A. (these

amounted to €8,485 million at 31 December 2010);- Interest Rate Swaps (IRS) of €6,535 million.

By terminating loan agreements, guarantees and derivatives early, there is the risk that Snam and its Subsidiaries could be unable to secure fi nancing from other sources under the same conditions.Moreover, the early termination of fi xed-rate loans and interest rate swaps takes place at fair value, which may differ from their carrying amount at the termination date.Snam Rete Gas S.p.A. and its subsidiaries also have agreements with other Subsidiaries of Eni S.p.A. for the provision of services and trade union agreements for healthcare and other employee benefi ts. Should there be a change in control of Snam by Eni S.p.A., other counterparties may need to be found to provide these services and benefi ts.

System and Rules of Corporate Governance

Compliance with the Code of Corporate Governance of Borsa Italiana S.p.A. In line with the values enshrined in the Code of Ethics, integrity and transparency are the principles that Snam pursues in formu-lating an administration and control structure that is suited to its size, complexity and operating structure, in adopting an effective internal control system, and in communicating with shareholders and other stakeholders, particularly by reviewing and updating the information available on its website. Through the decision of the board of directors of 11 Decem-ber 2006, Snam has confi rmed and renewed its compliance with the Code of Corporate Governance for Listed Companies promot-ed by Borsa Italiana S.p.A, referring to the version published on 14 March 2006.The aim of the corporate governance system is to create value for shareholders, bearing in mind the company’s social importance, particularly with regard to protecting the environment, people’s health and safety, workers’ rights, equal opportunities, working with the local and national communities in which the company is present, and the interests of all stakeholders.

Corporate Governance Structure The corporate governance structure of Snam follows the tradi-tional model, which – notwithstanding the tasks to be carried out by shareholders31 – assigns corporate management to the board of directors, supervisory functions to the board of statu-tory auditors, and auditing of the accounts to the audit firm ap-pointed by the shareholders. The chosen model therefore estab-lishes a clear distinction between the functions of the Chairman and those of the Chief Executive Officer; pursuant to Article 19 of the by-laws, both of them retain representative powers for the company.Please fi nd below a graphic summary of the governance structure of the company:

(30) The direct subsidiaries of Snam are: GNL Italia S.p.A., Società Italiana per il Gas S.p.A, - Italgas- Stoccaggi Gas Italia S.p.A-Stogit; and the indirect subsidiaries are: Compagnia Napoletana di Illuminazione e Scaldamento col Gas S.p.A. -Napoletanagas, Rete Gas Roma S.r.l. and Servizi Territori Aree Penisole S.p.A.

(31) For further information on the role of the shareholders’ meeting and the participation of shareholders, please refer to the Corporate Governance section of Snam’s website and the document “Report on Corporate Governance and Ownership Structure”.


67

Independent Auditors

Ernst & Young S.p.A.

Board of Directors

Board of Statutory Auditors

ChairmanSalvatore Sardo

CEOCarlo Malacarne

Directors

ChairmanMassimo Gatto (3)

Acting AuditorsRoberto MazzeiFrancesco Schiavone Panni

Alternate AuditorsGiulio GambaLuigi RInaldi (3)

(1) Members designated by minority list.(2) Independent Directors(3) Directors designated by minority list

Reconta

Secretary of the Boardof Directors

Marco Reggiani

Internal Control Committee

CompensationCommittee

Combined IndependentCommittee

Watch Structure 231Code of Ethics Guarantor

Officer in charge of Internal Control

Internal Audit Manager

Officer in charge of preparing financial reports

Roberto Lonzar - ChairmanRenato SantiniMario Stella Richter

General Manager Operations

Davide Croff - ChairmanAlessandro BerniniElisabetta Oliveri

Mario Molteni - ChairmanSilvio BianchiMarco Reggiani

Silvio Bianchi

Antonio Paccioretti

Francesco Iovane

Unbundling GuarantorMarco Reggiani

Carlo Malacarne - Chairman

Shareholders' Meeting

Davide Croff (2)

Renato Santini (2)

Massimo Mantovani

Alessandro Bernini

Roberto Lonzar (1)(2)

Elisabetta Oliveri (1)(2)

Mario Stella Richter (1)(2)

Paolo Mosa

Paolo Bacchetta

Gianluigi Polgatti

Francesco Iovane


68

The board of directors is at the centre of the company’s corporate governance system. It has the broadest possible powers for the ordinary and extraordinary management of the company is specifi -cally entitled to carry out all actions it deems useful to realise and reach the company objective, with the sole exclusion of actions re-served by law or by company by-laws, for the shareholders’ meet-ing.The board of directors in its 30 April 2010 decision appointed Carlo Malacarne as chief executive offi cer, thereby entrusting him with all the tasks and powers that are not reserved by law, company by-laws, or by decision of the board of directors itself, for the board of directors or the chairman.The board also assigned the following tasks, powers and authori-sations to the chairman, Salvatore Sardo. In addition to the powers assigned to him by law and the company by-laws, the chairman:- is the company’s legal representative; deals with institutional

bodies and authorities, together with and in conjunction with the chief executive offi cer;

- calls and presides over board meetings and sets their agendas together with the chief executive offi cer. Guides, oversees and coordinates the work of the board, ensuring its proper function-ing and adequate disclosure by directors. Verifi es the implemen-tation of board decisions;

- in consultation with the Internal Control Committee, assesses and contributes to the CEO’s suggestions to the board regarding the appointment, dismissal and remuneration of the of Offi cer in charge of internal control and the Internal Audit Manager;

- assesses and contributes to the CEO’s suggestions to the board regarding the appointment of general managers, the Offi cer in charge of preparing fi nancial reports, and members of the Watch Structure, pursuant to Legislative Decree no. 231 of 8 June 2001.

During the same meeting, Marco Reggiani, the company’s General Counsel Legal and Corporate Affairs, was confi rmed as the Secre-tary of the board of directors and on that same date the board intro-duced a set of rules to regulate his work in this capacity.In order to smooth their arrival at the business, newly-elected di-rectors and auditors undergo a ‘board induction’ process. The main aspects of regulated businesses in the gas sector are explained to them in relation to Snam, focusing in particular on the legal and regulatory framework, and the company’s corporate governance structure. All candidates must also meet the integrity requirements imposed by current laws. The board periodically evaluates the independence and integrity of the directors as well as any grounds for ineligibility or incompat-ibility.Pursuant to the terms of the company by-laws - which are more favourable than those provided for by law - if there are no more than seven directors on the board at least one must satisfy the in-dependence criteria established for auditors of listed companies; however, with more than seven directors on the board, at least three must satisfy the independence criteria.

By-laws In their extraordinary meeting of 27 April 2010, the shareholders approved some amendments to the company by-laws for two rea-sons. Firstly, the amendments are dictated by the need to bring the structure of the by-laws in line with the changes to the legal and regulatory framework in which the company operates. In this regard, it should be noted that during 2009 the company ac-quired total control of the companies Italgas S.p.A. and Stogit S.p.A, thereby entering the gas distribution and storage markets as well as gas transportation. As a result, Snam can today be seen as the most signifi cant European organisation operating in the regulated business sector, with a presence (partly through its Subsidiaries) in the transportation, distribution, storage, regasifi cation and gas measurement segments. In the light of everything that has been mentioned above, it seemed worthwhile to set out the scope and contents of the company’s var-ious activities in a more coherent way within the by-laws, as well as to clearly and rigorously affi rm the company’s willingness to exer-cise correct supervision over the relationship between Snam and its Subsidiaries.Secondly, and for separate reasons partly due to the company’s greater signifi cance and visibility following the acquisitions of Italgas S.p.A. and Stogit S.p.A. (as well as to guarantee the utmost transparency in its activities), the company decided to implement some legal provisions introduced by Legislative Decree no. 27 of 27 January 2010, “Transposition of Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights, in implementation of the authorisation referred to in Article 31 of Law no. 88 of 7 July 2009”, published in the Offi cial Journal of the Italian Republic of 5 March 2010.

Board of directorsUnder Article 13 of the by-laws, the board of directors has a vari-able number of members ranging from fi ve to nine, elected by list vote. Only those shareholders32 who, severally or jointly, represent at least 2 percent of the share capital, or a different percentage es-tablished by Consob in its regulation, shall have the right to submit lists. On 26 January 2011, Consob issued Resolution no. 17633, which set this percentage as 1%. In their meeting of 27 April 2010, the shareholders decided that there would be nine directors, and appointed the board of directors33 and the chairman for three years, until the date of the shareholders’ meeting called to approve the fi -nancial statements for fi nancial year 2012. There are nine directors on the board: Salvatore Sardo (Chairman), Carlo Malacarne (Chief Executive Offi cer), Alessandro Bernini, Da-vide Croff, Roberto Lonzar, Massimo Mantovani, Elisabetta Oliveri, Renato Santini and Mario Stella Richter (Directors). Directors Salvatore Sardo, Carlo Malacarne, Alessandro Bernini, Davide Croff, Massimo Mantovani and Renato Santini were elected from the lists submitted by Eni S.p.A, while Roberto Lonzar, Elisa-betta Oliveri and Mario Stella Richter were elected from the list pre-sented by certain minority shareholders.

(32) Each shareholder may present or be involved in the presentation of only one list, and may vote for one list only. (33) For further information on the personal and professional characteristics of the directors elected, please refer to the Corporate Governance section of the website

of Snam S.p.A.


69

istry of Justice Decree no. 162 of 30 March 2000. For the purposes of this decree, areas of the company’s business are strictly defi ned as commercial law, business management and corporate fi nance. Likewise, the sector pertaining to its business is the engineering and geological sector.Based on the statements provided, the board of statutory auditors has checked that all the members meet the necessary independ-ence requirements set forth by law as well as those pertaining to directors contained in Article 3 of the Code of Corporate Govern-ance.

Independent auditors As required by law, the company’s fi nancial statements are audited by independent auditors included in the relevant register and ap-pointed by the shareholders based on a documented proposal is-sued by the board of statutory auditors. On 27 April 2010, the shareholders’ assembly approved the pro-posal to revoke the appointment of PricewaterhouseCoopers S.p.A. as auditors based on an “objective” and sound reason, in an effort to guarantee effective auditing of the company and avoid any mis-alignment in this role with respect to the ultimate parent company Eni S.p.A.On the same date, the shareholders’ assembly appointed Reconta Ernst & Young S.p.A. to audit the company accounts for the 2010 - 2018 period.

Relationships between Snam and Subsidiaries On 1 April 2010 corporate restructuring was completed following the acquisitions of Italgas and Stogit, thereby leading to the adop-tion of a new corporate governance structure at Snam. The aim of this was in part to allow Snam to exercise legitimate management and coordination powers typically enjoyed by parent companies.In line with changes to Snam’s operational model, and following the acquisition of business units from GNL Italia S.p.A. (procurement and tenders; personnel and services) and Stogit S.p.A. (legal affairs; administration and fi nancial reporting; sales and business develop-ment; growth project management; Health Safety and Environment and quality; internal audit; human resources; IT and procurement), and the temporary allocation of staff from Italgas S.p.A., Snam pro-vides these companies with a series of centralised services on the basis of service agreements entered into with each subsidiary.

FeesSnam’s remuneration system is in line with the recommendations of the Code of Corporate Governance. The system places particular emphasis on variable incentive instruments based on the achieve-ment of performance targets established in relation to Snam Rete Gas’s Strategic Plan for sustainable results and creation of share-holder value over the medium and long term. The remuneration system is supplemented by benefi ts that include goods and serv-ices primarily associated with supplementary social security and healthcare.The remuneration of directors is determined by the shareholders.

If one of the directors does not fulfi l or no longer fulfi ls the estab-lished independence or integrity requirements imposed by law, or if there are grounds for ineligibility or incompatibility, the board will dismiss the director and arrange for him to be replaced, or will ask that the grounds of incompatibility be removed within an estab-lished period of time, otherwise he must forfeit the post.Directors’ independence and integrity as well as the inexistence of grounds for ineligibility and incompatibility is assessed following their appointment and at least once a year by the board of direc-tors, based on information provided by the director himself or made available to the company by other means. In its 9 February 2011 meeting, the board of directors noted that no grounds for director incompatibility or ineligibility existed and that the directors met the integrity requirements for supervisory bodies established by Min-istry of Justice Decree no. 162 of 30 March 2000.In the same meeting held on 9 February 2011, the board of direc-tors noted that the non-executive directors Davide Croff, Roberto Lonzar, Renato Santini, Elisabetta Oliveri and Mario Stella Richter met the independence requirements imposed by current legisla-tion and the Code of Corporate Governance. The board of statutory auditors also verifi ed that the criteria and the assessment proce-dures adopted by the board of directors were correctly applied. In accordance with the provisions of the Code of Corporate Govern-ance, the board of directors evaluated the size, composition and workings of the board and its committees in 2010, using for this purpose the services of Egon Zehnder International, an outside spe-cialist.In the light of the results of Egon Zehnder International’s evaluation of the board of directors and its committees, the board expressed a very positive opinion on the size, composition and workings of the board itself and its committees.

Board of statutory auditorsIn compliance with the provisions of the law and the company by-laws, Snam’s board of statutory auditors is composed of three standing members and two alternate members, who are appointed by the shareholders for three-year terms and may be re-elected at the end of their term in offi ce. Like the board of directors and in line with applicable provisions, the by-laws provide for the auditors to be appointed by list vote, except when directors are replaced dur-ing their term in offi ce. On 27 April 2010 the shareholders’ assembly appointed the fol-lowing auditors34 for a period of three years or until the date of the shareholders’ meeting called to approve the 2012 fi nancial state-ments: Massimo Gatto (Chairman), Roberto Mazzei and Francesco Schiavone Panni (standing members), and Giulio Gamba and Luigi Rinaldi (alternate members). Roberto Mazzei, Francesco Schiavone Panni and Giulio Gamba were elected from the list presented by Eni S.p.A; Massimo Gatto and Luigi Rinaldi were elected from the list presented by a number of minority shareholders. The statutory auditors are chosen from among those that satisfy the requirements of professionalism and integrity set forth by Min-

(34) For further information on the personal and professional characteristics of the statutory auditors elected, please refer to the Corporate Governance section of the Snam S.p.A website.


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The compensation structure for the chief executive offi cer for the powers assigned to him comprises a fi xed component, a variable annual component linked to the achievement of specifi c company objectives set for the preceding fi nancial year, and a long-term variable component divided into two separate plans, each based on different business performance conditions measured over three years according to both absolute and relative standards compared to a peer group of six of the largest listed European utilities. The compensation structure for the general manager and manag-ers with strategic responsibilities comprises a fi xed component, a variable annual component linked to the achievement of specifi c company objectives set for the preceding fi nancial year, and as a long-term variable component divided into two separate plans, un-der the same conditions provided for the chief executive offi cer.In 2010, the compensation structure (“pay mix”) for the chairman, the chief executive offi cer, the general manager and other manag-ers with strategic responsibilities was as follows:

Remuneration of directors with particular powers (e.g., the chief executive offi cer), or fees for functions carried out within the board committees, is determined by the board of directors on the basis of proposals submitted by the Compensation Committee on con-sultation with the Board of Statutory Auditors. The basic compensa-tion criteria for the general manager and managers with strategic responsibilities35 are approved by the board of directors based on suggestions from the Compensation Committee, upon examination of the guidelines provided by the chief executive offi cer.The remuneration of directors is made up of a fi xed annual compo-nent established for the entire duration of the appointment. Non-executive directors receive additional fees for sitting on board com-mittees.As of 1 June 2010 the chairman’s fees are made up of a gross, an-nual salary including amounts decided upon by the shareholders in their 27 April 2010 meeting, as established by the board of directors in relation to the powers conferred in the 29 April 2010 meeting.

(35) Managers with strategic responsibilities are those managers who have the power and the responsibility, both directly and indirectly, for the planning, direction and supervision of Snam. Managers with strategic responsibility at Snam, other than directors and statutory auditors, are the general manager and the manag-ers bound to participate in the management committee on a constant basis. Currently, this applies to the Directors of: Corporate and Legal Affairs; Corporate Systems, Human Resources and Services; Business Development and Commercial; and Planning, Administration, Finance and Control.

Chairman CEOChief Operating

Offi cer

Other executives with strategic

responsibilities

Fixed compensation 100% 40% 48% 51%

Variable compensation (result-related) 24% 23% 21%

Long-term incentives (result-related) (*) 36% 29% 28%

Total 100% 100% 100% 100%

(*) Maximisation of long-term incentives (discounted) in predicting target results

For more detailed information on the compensation structure, please refer to the section entitled “Compensation Structure” in the Report on Corporate Governance and Ownership Structure for 2010, available on the company’s website at: http://www.snamretegas.it.

In accordance with Consob provisions, the notes t fi nancial state-ments for Snam Rete Gas S.p.A. include the following: (i) the amount of compensation paid to members of administration and control bodies, the chief operating offi cer and executives with stra-tegic responsibilities; (ii) stock options allocated to members of administration and control bodies, the chief operating offi cer and executives with strategic responsibilities; (iii) long-term incentives allocated to members of the administration body, the chief operat-ing offi cer and executives with strategic responsibilities; and (iv) and severance pay paid to directors, if any. The equity investments held in Snam Rete Gas by members of administration and control bodies, the chief operating offi cer and executives with strategic re-sponsibilities are indicated in the section “Other information”.

DECLARATION BY THE MANAGEMENT BODY REGARDING SATISFACTION OF THE REQUIREMENTS PROVIDED FOR IN ARTICLE 37 OF CONSOB REGULATION No. 16191/07At its meeting of 9 February 2011 the board of directors verifi ed, as

had already been done during the course of the previous year, that Snam satisfi es the requirements listed in Article 37 paragraph 1 of Consob Regulation no. 16191/07 and successive amendments and additions thereto for the admission, on an Italian regulated market, of the shares of subsidiaries subject to management and coordi-nation by another company. This declaration was confi rmed by the board of statutory auditors.

COMMITTEES ESTABLISHED BY THE BOARD OF DIRECTORSFor more effi cient performance in its duties, the board of directors has established three committees: the Compensation Committee, the Internal Control Committee and the Combined Independent Committee. 1) The Internal Control Committee, consisting of three independ-

ent non-executive directors, as defi ned by the Corporate Govern-ance Code for Listed Companies, makes proposals and consults the Board on the oversight of the Company’s general manage-ment conduct. In particular, the Committee performs the follow-ing functions: - evaluates in collaboration with the Offi cer in charge of preparing

fi nancial reports and the independent auditors, the proper appli-cation and consistency of the accounting principles for the pur-poses of preparing the consolidated fi nancial statements;


71

and conferred all powers on the Combined Independent Commit-tee to perform its functions. The Combined Independent Commit-tee adopted its own operating regulations.

The Chief Executive Offi cer of Snam chairs Combined Independ-ent Committee and represents the organisational structure within the Combined Independent Committee responsible for expressing opinions binding on the board of directors in compliance with and for the purposes cited in Article 11.5 letter c) of the Consolidated Unbundling Regulation for all decisions taken by the said body af-fecting the business’ managerial and organisational aspects, and to approve the development plan cited in Paragraph 11.1 letter b) point i) of the Consolidated Unbundling Regulation.The Combined Independent Committee appointed the Guarantor, in the person of Snam’s General Counsel Legal and Corporate Affairs, responsible for properly managing commercially sensitive informa-tion in the context of natural gas transportation, dispatch, distribu-tion, storage and regasifi cation activities.

ADOPTION OF EU LEGISLATIONAt its meeting of 9 February 2011, the board of directors noted that the member states of the European Union are required to adopt the provisions of Directive 2009/73/EC by 3 March 2011 - the so-called “Third Energy Package” - which repeals Directive 2003/55/EC and introduces new provisions for the separation of natural gas transportation network operators from other gas sector activities. The Directive contains provisions that could affect Snam’s corpo-rate governance system. It stipulates that member states which have not already implemented ownership separation must adopt one of the following separation models for natural gas transporta-tion activities by 3 March 2012: i) Ownership Unbundling (“OU”), or ownership separation of the transmission system operator from the vertically integrated business, which may hold only a minority share without voting rights in the gas transportation network and while enjoying only property rights; ii) creation of an Independent System Operator (“ISO”) for the operational management of the net-work, i.e. a third party not owned by the same company that owns the transportation network, which may remain integrated with the production and sale company, or iii) creation of an Independent Transmission Operator (“ITO”), which, while ownership remains in the hands of the vertically integrated company, ensures network independence through a Regulatory Authority system which binds and controls legal and functional separation far more stringently than the system currently in effect. On 3 March 2011 the Council of Ministers approved the draft legislative decree which implements Directive 2009/73/EC36. To summarise, a larger transportation company is required to comply with the ITO model. On the other hand, as an alternative to the ITO model, smaller transportation companies are to adopt the ISO model with the option to appoint Snam as manager of their transportation system (based on guidelines of the Electric-ity and Gas Authority). Five years after the decree goes into ef-

- at the request of the Chairman or the Chief Executive Offi cer of the company, expresses opinions on specifi c aspects of iden-tifying the principal business risks and the designing, imple-menting and managing of the internal control system;

- examines the work plan prepared by the head of Internal audit-ing, as well as its periodic reports, at least every six months, on the activities carried out;

- performs the other duties entrusted to its by the board of directors; in particular, it expresses an opinion on the trans-parency rules and substantial and procedural correctness of transactions with related parties and transactions in which a director has an interest either on his/her own behalf or that of third parties.

At its meeting of 10 June 2010, the board of directors approved the new “Regulations of the Internal Control Committee of Snam Rete Gas” proposed by the Internal Control Committee.

2) The Compensation Committee, consisting of three non-execu-tive directors, two of whom are independent makes proposals to the board as follows: - proposals relating to the fi xed and variable remuneration of the

Chairman and the Chief Executive Offi cer, including any partici-pation in incentive stock option plans;

- examining information reported by the Chief Executive Offi cer, and proposing: • incentive stock option plans;• criteria for the remuneration of top management;• objectives and evaluation of the results of performance

plans, in connection with determining the variable remu-neration of executive directors and implementing incentive stock option plans.

3) Resolution ARG/com 57/2010 of the Electricity and Gas Author-ity, modifying and supplementing Resolution no. 11/07 on the functional separation of regulated activities in the natural gas sector, established that, pursuant to Article 9 of said Resolution 11/2007 (“Consolidated Unbundling Regulation” or “T.I.U.”), natu-ral gas storage, regasifi cation, transportation, dispatch, distribu-tion and metering activities, inter alia, may be under joint control without being subject to the requirements governing function-ally separate businesses.

By a resolution dated 27 July 2010, the board of directors estab-lished the Combined Independent Committee (the “Combined Independent Committee”), pursuant to Article 9 of the Consoli-dated Unbundling Regulation, as the collegial body responsible for the joint management of natural gas transportation, dispatch, distribution, storage and regasifi cation activities. The Combined Independent Committee consists of the persons who, pro tem-pore, hold the following posts:- Chief Executive Offi cer of Snam;- Chief Executive Offi cer of GNL Italia;- Chief Executive Offi cer of Italgas;- Chief Executive Offi cer of Stogit; - General Manager of Snam Operations

(36) The draft decree will then be submitted to the appropriate parliamentary committees and the State-Region Conference to obtain the related opinions. Once a favourable opinion has been obtained, any amended text should be returned to the Council of Ministers for fi nal deliberation, and fi nally, after being signed by the President of the Republic, it will be published in the Offi cial Gazette. Following publication, it will become law.


72

it monitors the effectiveness of the controls applied by proposing suggestions and corrective actions to management to resolve any defi ciencies identifi ed.

The by-laws also provide for the board of directors to appoint the Offi cer in charge of preparing fi nancial reports, on the proposal of the Chief Executive Offi cer, by agreement with the Chairman and based on a favourable opinion from the Board of Statutory Auditors.

On 29 October 2007 the board of directors, in compliance with the professionalism requirements established by the by-laws, on the proposal of the Chief Executive Offi cer, by agreement with the Chairman and based on a favourable opinion from the Board of Statutory Auditors, appointed as Manager of Financial Accounting to prepare the corporate accounting documents Dr Antonio Pac-cioretti, Director of Planning, Administration, Finance and Control of Snam. The board of directors also verifi ed the adequacy of the pow-ers and resources available to the Manager of Financial Accounting for the performance of his duties.

The internal control system is subject, over time, to verifi cation and updating in order to ensure that it is always capable of controlling the principal areas of risk of the company’s activities, with respect to the characteristics of its operating sectors and its organisational confi guration, and in accordance with any new legislative or regula-tory provisions. The main innovations implemented in 2010 form part of an evolutionary process aimed at “ongoing improvement” of the system’s effectiveness and effi ciency. The most signifi cant innovations include:a) following the acquisition of Italgas and Stogit and completion of

the reorganisation process on 1 April 2010, the Company adopt-ed the Organisation Manual on 30 June to describe the organi-sational model, business management system and functioning of Snam and its subsidiaries by identifying and describing their characteristic processes;

b) on 20 December 2010 the Board of Management approved the ar-chitectural integration of Snam’s Governance System, setting out (i) Policy and Management System Guidelines, documents con-taining elements of management and coordination by the parent company Eni S.p.A, in compliance with corporate autonomy and the rules in force, (ii) Procedures, and (iii) Operating instructions.

PRINCIPAL CHARACTERISTICS OF THE RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM IN THE FINANCIAL REPORTING PROCESSThe fi nancial reporting internal control system is the process aimed at providing reasonable certainty regarding the reliability38 of the fi nancial reporting and the capacity of the process of preparing fi -nancial statements to produce fi nancial reports in accordance with generally accepted accounting principles.Snam has adopted a body of rules that defi ne the standards, meth-odologies, roles and responsibilities for designing, implementing and maintaining the system of internal controls over time on the

fect, the Competition Authority (“AGCM”) will verify the effective-ness of the model adopted37. Once this is done, the Ministry of Economic Development (“MISE”) will assess the adoption of dif-ferent models taking into account the experience of European countries of the same size and with the same market structure. A Vertically Integrated Company may opt for ownership unbun-dling at any time.

INTERNAL CONTROL SYSTEMSnam has adopted an internal control system conforming to the prescriptions of the Corporate Governance Code for Listed Compa-nies and in line with the current best practices. The purpose of the control system is to (i) ensure the adequacy of the various business processes in terms of effectiveness, effi ciency and economy, (ii) en-sure reliability and correctness of accounting records and safeguard corporate assets, and (iii) ensure that operations comply with inter-nal and external rules, directives and corporate guidelines aimed at guaranteeing sound and proper management of the business. Responsibility for the internal control system lies with the board of directors, which, with the assistance of the Internal Control Com-mittee, prepares guidelines for the system and periodically verifi es that it is adequate and functioning effi ciently, thereby ensuring that the principal business risks are identifi ed and managed ap-propriately.The Chief Executive Offi cer is responsible for implementing the guidelines prepared by the board of directors by designing, man-aging and monitoring the internal control system; in accordance with the proposal put forth in this regard by the Corporate Govern-ance Code, on 11 December 2008 the board of directors appointed the Chief Executive Offi cer as executive director responsible for overseeing the functionality of the internal control system.On 30 April 2010 the Board, complying with the recommendations of the Code of Corporate Governance, also confi rmed the appoint-ment of the head of internal auditing for the company as Offi cer in charge of Internal Control, reporting to the Chief Executive Offi cer. In order to ensure the necessary independence, the appointment, dismissal and remuneration of the Offi cer in charge of Internal Con-trol are approved by the board of directors, which also approves the programme and budget for internal auditing activities. The Offi cer in charge of internal control regularly reports on his/her activities to the Chief Executive Offi cer and, every six months (un-less circumstances require more frequent reports), to the Internal Control Committee and the Board of Statutory Auditors.Applying the control system is the primary responsibility of the management, as control activities form an integral part of the management processes. Management must therefore foster an environment that encourages controls, and must specifi cally manage “line controls”, consisting of all the control activities that individual operating units or individual companies perform over their own processes. The Internal Audit Manager is responsible for verifying the adequacy of the internal control system and ensuring that it provides reasonable guarantees that the organisation is able to pursue its objectives economically and effi ciently; to this end,

(37) With respect to any discriminatory behaviour: access to third parties and investments.(38) Reliability (of reporting): reporting which has the characteristics of correctness and conformity with generally accepted accounting principles and satisfi es the

requirements of applicable laws and regulations.


73

scope of their functions and responsibilities. Under no circum-stances can any conduct contrary to these principles be justifi ed by the belief that one is acting in the Company’s interests.

MODEL 231 Legislative Decree no. 231 of 8 June 2001 introduced the rules on the administrative liability of companies under which they can be held liable, and consequently punished, for offences committed or attempted in the interest or for the benefi t of the company by persons who are entrusted with the representation, administra-tion or management of the company or of a fi nancially and func-tionally autonomous subsidiary thereof, as well as by persons who exert management and control on a de facto basis (so-called “top management”) or by persons who are subject to the authority of or control by one of the aforesaid persons (so-called “persons sub-ject to the management of others”). The Company is not liable if it has adopted and effectively implemented, before the commission of the offences, appropriate organisation, management and control models to prevent such offences and has set up a body responsible for overseeing the functioning of the models and compliance with them.In this regard, Snam and its subsidiaries have implemented the le-gal provisions by adopting its own organisation, management and control model commensurate with its particular nature, and by ap-pointing for each of them a Watch Structure responsible for moni-toring the implementation and effective application of the Model. During the course of 2010 a multifunctional team – “Team 231” – was set up to identify and develop the necessary activities for updating the 231 model of the company and its subsidiaries by adopting the new legislative provisions introduced to respond to offences of fraud involving money, credit cards, revenue stamps, instruments or distinctive signs, computer crime and unlawful processing of data, offences of organised crime, crimes against industry and commerce, copyright crimes and crimes against the administration of justice. Team 231 is supported by PriceWater-houseCoopers as an expert consultant on matters of administra-tive liability and compliance.The Watch Structure of Snam consists of the General Counsel Legal and Corporate Affairs, the Head of Internal auditing and an external member acting as Chairman.During the course of 2010, the Watch Structure met on 11 occa-sions, with the participation of all members.

ANTI-CORRUPTION GUIDELINESSnam has long attributed primary importance to the issue of fi ght-ing corruption, most recently with the approval, by the board of di-rectors, of the Anti-Corruption Guidelines aimed at enshrining the internal rules on fi ghting corruption – along with the procedures which govern in detail the so called at-risk activities(“Ancillary Anti-Corruption Procedures”) – within a systematic reference frame-work, ensuring maximum compliance by Snam and its personnel with the Code of Ethics, Model 231 and national and international anti-corruption laws. In compliance with international best prac-tices, two measures have been taken: an anti-corruption unit has been set up within Snam’s Legal and Corporate Affairs Division, whose task is to provide support on this issue to the business units of Snam and its subsidiaries, and a targeted training initiative has been launched in the form of an e-learning programme.

corporate reporting of Snam and its subsidiaries, and on the evalu-ation of its effi cacy.The body of procedures for the corporate reporting control system was defi ned in accordance with the provisions of Article 154-bis of the Testo Unico della Finanza (TUF) and takes into account the prescriptions of the U.S. Sarbanes-Oxley Act of 2002 (SOA), which apply to the ultimate parent Eni S.p.A. in its capacity as an issuer listed on the New York Stock Exchange (NYSE) and which have re-percussions for Snam as a signifi cant subsidiary.The corporate reporting control model adopted by Snam is based on the COSO Report (“Internal Control – Integrated Framework” pub-lished by the Committee of Sponsoring Organisations of the Tread-way Commission).The defi ned control model applies not only to Snam, but to its sub-sidiaries, in accordance with international accounting principles, in view of their signifi cance for the purposes of preparing fi nancial re-porting. Snam’s subsidiaries are adopting the defi ned control model as a reference for the design and implementation of their own con-trol systems in order to adapt them to their size and the complexity of the activities carried out.The design, implementation and maintenance of the control system are carried out by means of: risk assessment, identifi cation of con-trols, evaluation of controls and reporting.Controls are subject to evaluation in order to verify the quality of their design over time and their operational effectiveness; to this end, line monitoring has been entrusted to the management re-sponsible for signifi cant processes/activities, and independent monitoring has been entrusted to the Internal Audit Manager.The results of the monitoring activities form the subject of periodic reporting on the status of the control system, which involves all lev-els of Snam’s organisational structure and its signifi cant subsidiar-ies, from business operation heads and function heads to adminis-trative directors and Chief Executive Offi cers.Evaluations of all the controls implemented within Snam and its subsidiaries are brought to the attention of the Manager of Finan-cial Accounting, who, on the basis of this information, prepares a half-yearly report on the adequacy and effective application of the control system, which is shared with the Chief Executive Offi cer.

CODE OF ETHICSOn 27 June 2008 the board of directors approved the new Code of Ethics, which incorporates the most modern approaches to matters of ethics and sustainability.The Code comprises the Eni Code of Ethics and a specifi c “adden-dum” which sets out the particular characteristics of Snam as a company listed on the stock market and subject to regulation by the Electricity and Gas Authority. The “addendum” therefore pays particular attention to relations with Snam’s shareholders and with the Market, the Electricity and Gas Authority, Clients, and Local and Regional Governments.The functions of Guarantor of the Code of Ethics were assigned to the Watch Structure, to which the following may be submitted: · requests for clarifi cation or interpretation of the principles and

contents of the Code; · suggestions relating to the application of the Code; · reports of breaches of the Code, identifi ed directly or indirectly.Snam employees, without distinction or exception, have the duty to comply and ensure compliance with these principles within the


74

In short, the regulation provides for:a) a stronger role for independent directors in all the decision-mak-

ing processes of related-party transactions; b) a system of transparency. By a resolution of 30 November 2010 and following a unanimous favourable opinion from the Internal Control Committee, the board of directors approved the procedure “Transactions in which direc-tors or auditors have an interest, and transactions with related par-ties”, which is applicable from 1 January 2011, adopted pursuant to Article 2391 bis of the Italian Civil Code and the Consob Regulation “Regulation on transactions with related parties”, no. 17221 of 12 March 2010 and successive amendments and additions thereto.

HANDLING OF CORPORATE INFORMATIONIn compliance with the legislative provisions on Market Abuse, on 27 October 2010 the board of directors approved the “Procedure for communication to the market of privileged information and docu-ments concerning Snam Rete Gas and the fi nancial instruments is-sued by it”, the “Procedure concerning the identifi cation of relevant persons and the communication of transactions carried out by them, including via nominees, in relation to shares issued by Snam or other fi nancial instruments connected with such shares” (“Inter-nal Dealing Procedure”) and the procedure “Keeping and updating of the register of persons who have access to privileged informa-tion within Snam”.39 In particular, the Internal Dealing Procedure identifi es (i) the relevant persons, (ii) the transactions subject to a communication requirement, and (iii) the conduct requirements for such communication.

RIGHTS OF SHAREHOLDERSIn order to actively involve shareholders in the life of the company, Snam has adopted various measures aimed at encouraging them to take part in the decisions falling to the responsibility of the share-holders’ meetings, facilitating the exercise of their rights. In particular, during the course of 2010 Snam made the necessary changes to the by-laws following the implementation in Italy of Directive 2007/36/EC concerning the exercise of certain rights of shareholders of listed companies (the so-called Shareholders’ Rights Directive)40. By promptly updating its by-laws and taking measures which the legislation leaves to companies’ choice, Snam aimed to provide its shareholders with additional tools to encourage them to take part in shareholders’ meetings and exercise their voting rights (e.g. ap-pointment of the Listed Company’s Proxy Holder).During 2010, the website41 was enhanced and now features the “Shareholders’ Guide”, including an interactive version, which aims to provide a summary of useful information which will give all shareholders a more active experience in their Snam investment.

At its 10 February 2010 meeting, Snam’s board of directors ad-opted the “Anti-Corruption Guidelines” (embracing the similar policy introduced by ultimate parent Eni). Within this context, it also modified the organisational setup with the constitution of Snam’s Anti-Corruption Legal Support Unit, with the aim of adapting the existing procedures where necessary, encourag-ing subsidiaries to adopt the new rules and personnel to take part in awareness programmes and training on understanding and complying with the Anti-Corruption rules. The purpose of the Guidelines is to protect and promote Snam’s reputation by intro-ducing a specific system of rules designed to ensure that the company complies with the best international standards in the fight against corruption. Within the scope of the Ancillary Anti-Corruption Procedures pro-vided for by the Anti-Corruption Guidelines, during the course of 2010 Snam adopted the procedure “Brokerage contracts”, the pro-cedure “Joint venture contracts - prevention of illegal activities”, the procedure “Management of Legal and Corporate Practices”, the procedure “Entertainment expenses”, the procedure “Reports, anonymous or otherwise, received by Snam Rete Gas and its sub-sidiaries”, the procedure “Investigation of possible illegal acts performed by Snam employees”, the operating instruction “Inves-tigation of possible illegal acts performed by suppliers”, and AD cir-cular no. 8 “Standard contractual clauses relating to the Company’s administrative liability due to administrative offences arising from crime”.

PROCEDURE “TRANSACTIONS IN WHICH DIRECTORS OR AUDITORS HAVE AN INTEREST, AND TRANSACTIONS WITH RELATED PARTIES”Through Resolution no. 17221 of 12 March 2010, amended by Reso-lution no. 17389 of 23 June 2010, Consob approved the regulations on related-party transactions carried out, directly or through sub-sidiaries, by listed companies and by public share issuers with persons with potential confl icts of interest, such as major or con-trolling shareholders, directors, statutory auditors and other execu-tives, and their close family members. The reform of company law (Article 2391-bis of the Italian Civil Code) gave Consob, in its role as the supervisory and regulatory body for the fi nancial markets, the task of establishing general regulatory principles in order to “ensure the transparency and substantial and procedural correctness of transactions with related parties”. The measure aims to provide better protection to minority share-holders and other stakeholders by combating any abuses which might arise from related-party transactions with a potential con-fl ict of interest. These include, by way of example, mergers, acqui-sitions, disposals and reserved capital increases.

(39) These procedures, which replace those adopted by the board of directors on 17 March 2006, are published in the Corporate Governance section of the Company’s website at: http://www.snamretegas.it

(40) The Directive was implemented by Legislative Decree no. 27 of 27 January 2010.(41) The Shareholders’ Guide is published in the Investor Relations section of the Company’s website at: http://www.snamretegas.it

75

sociations, with the aim of contributing to the creation of a more inclusive and sustainable global economy. Each year, Snam Rete Gas publishes the Sustainability Report, an important strategic control tool which examines the activities car-ried out from the point of view of economic effi ciency and environ-mental and social protection, and sets out the performance indica-tors to which the company publicly commits itself and by which it is publicly judged.To emphasise the importance of sustainable development themes, the board of directors plays a central role in formulating the poli-cies, and approves the Sustainability Report at the same time as it approves the annual fi nancial report.The Company’s approach to sustainability aims fi rstly to identify all the actors with whom it interacts, who might infl uence or be infl u-enced by the organisation’s activities, and secondly to understand the interests of each of those parties and the issues that are im-portant to them, in order to involve them with specifi c action plans.

The sustainability modelSnam Rete Gas regards sustainability as an integral part of its busi-ness model. Sustainability is a guiding principle in the formulation of the company’s strategic and operating decisions, and a lever to en-sure sustainable growth in the long term, while simultaneously en-suring that the value it generates is shared with all its stakeholders. The Company bases the day-to-day conduct of its activities on the principles set out by international bodies and conventions on the protection of human rights, employment and trade union rights, health, safety and environmental rights, repudiation of forced la-bour, child labour and any form of discrimination, and on confor-mity with values and principles concerning fairness, transparency and sustainable development. In order to give greater visibility to this commitment, the Company is a signatory to the “Global Com-pact”. This international initiative upholds ten universal principles concerning human rights, employment, the environment and the fi ght against corruption, and brings together governments, busi-nesses, United Nations agencies, labour organisations and civil as-

Snam Rete Gas Annual Report 2010 / Commitment to sustainable development

Commitment to sustainable development

76


The sustainability management model of Snam Rete Gas is integrat-ed into all phases of the business process (Planning, Management, Control, Reporting and Communication).During the course of the year, with the issuing of the new “Sustain-ability Activities” Procedure, the model was also extended to the companies acquired in 2009 (Stogit and Italgas).The activities envisaged by the model are coordinated by the Sus-tainability function, and are carried out in liaison with the various functions of Snam Rete Gas S.p.A. and its subsidiaries. The Sustain-ability objectives are pursued through specifi c short- and medium-term projects and initiatives approved by the top management and included in the company’s action plans.The actions taken as a result of the identifi cation of specifi c Areas for Improvement have enabled the name of Snam Rete Gas to be featured repeatedly in the principal ethical indices such as the Dow Jones Sustainability Index World, the FTSE4Good Europe Index, the FTSE4Good Global Index and the ECPI Ethical Index Euro.The Ethical Codes of the various companies of the Group remain the fundamental tools for guiding people’s conduct and for responsibly managing relations with stakeholders.

During the course of 2010, the number of personnel in service fell by a total of 83, from 6,187 at 31 December 2009 to 6,104 at 31 December 2010. This reduction was the result of the following em-ployment trends:· increase of 55 persons due to hirings coming in from the market

(including 16 graduates);· reduction of 160 persons following termination of employment;· increase of 33 persons due to hirings occurring within the scope

of acquisition of the SES (Saipem Energy Services) business unit, carried out as part of the project to internalise the mainte-nance activities of Stogit;

· reduction of 11 persons as a result of the movements of manage-rial jobs between the subsidiaries of Italgas and/or between the

companies of Eni S.p.A.The movements of personnel between the various companies of the Snam Rete Gas group, as a result of the implementation of the organisational plan for staff activities, involved 484 persons.The number of personnel hired on permanent contracts represents 96% of the total, while 158 persons are on apprenticeships or start-er contracts. 52% of personnel are employed in northern Italy, 23% in central Italy, and 25% in the south and Sicily.Personnel with degrees account for 9.7% of the total, and those with diplomas 50.5%; the average age of employees of the Group is 48 years, and the average length of service is around 23 years. Due to the management policies applied, these values are essentially stable.

People and organisationThe initiatives taken to strengthen the new Group born out of the merger between Snam Rete Gas, Italgas, Stogit and GNL Italia have been aimed at improving the overall effi ciency of the system, and have required a signifi cant effort to redesign the corporate and organisational structure with a view to simplifi cation and fl exibil-ity, making the most of the best practices of the individual com-panies.The actions begun in 2010 have been focused mainly on protecting and developing the company’s know-how to support its business strategies, on increasing its capacity for relationships and team-work, and on promoting active involvement and participation by its personnel, constantly raising their awareness and sense of respon-sibility with respect to the corporate objectives.

Employment At 31 December 2010, the Snam Rete Gas group had 6,104 employ-ees in service. The analysis by contractual category and by com-panies included in the consolidation scope is given in the tables below:

Contractual categories 2008 2009 2010 Change

Executives 65 121 116 (5)

Managers 265 493 508 15

Offi ce workers 1,241 3,320 3,243 (77)

Manual workers 774 2,253 2,237 (16)

2,345 6,187 6,104 (83)

Company 2008 2009 2010 Change

Snam Rete Gas S.p.A 2,252 2,254 2,636 382

GNL Italia S.p.A 93 87 70 (17)

Italgas S.p.A 2,965 2,570 (395)

Napoletanagas S.p.A 580 549 (31)

Stogit S.p.A 301 279 (22)

2,345 6,187 6,104 (83)

77


Organisation The principal organisational changes implemented during the course of 2010 were as follows:· On 1 April 2010, the reorganisation process following the acqui-

sition of Italgas and Stogit was completed. The parent company Snam Rete Gas S.p.A. strengthened its operational holding role by centralising staff activities and certain operating activities, in order to ensure their management in a synergistic and therefore more effi cient manner. These activities, as well as the charge-back of the related costs by the parent company to the subsidi-aries, are regulated by service agreements between the parent company and the subsidiaries.

· On 27 July 2010, the Combined Independent Committee was es-tablished pursuant to Article 9 of the Unbundling Code (Annex A of Resolution no. 11/2007 of the Electricity and Gas Authority and successive amendments and additions thereto) as the collegial body/committee pursuant to Article 16.1 of the by-laws, respon-sible for the joint management of activities of transportation, dis-patching, distribution, storage and regasifi cation of natural gas;

· On 1 December 2010, the SES (Saipem Energy Services) busi-ness unit was acquired from Stogit. This unit is devoted to coor-dinating external maintenance companies in order to optimise the structure of the maintenance costs.

Involvement and participation initiatives Encouraging participation, which includes listening to people’s needs and their requests for improvement, fosters a positive inter-nal climate and increases their level of satisfaction in the perfor-mance of their activities.In 2010, a programme of meetings was trialled with the aim of shar-ing the corporate objectives and conveying to the personnel how the work carried out by each of them can contribute to the achive-ment of those objectives.

As has been the tradition for some years, all Executives and Man-agers were involved in update sessions with the top management. In October, the Group’s new “Energies” Intranet site went online. This is a collaboration platform where people experience the organi-sation through channels of communication within and between companies, creating a horizontal circulation of information and areas for sharing and developing knowledge. Knowledge manage-ment is an important objective for the Group, particularly from the point of view of integration: the idea of the new Intranet site is to openly share the distinctive technical expertise of each company, each department and each regional base. In addition to the new Intranet site, other channels of communication were used to involve personnel in the principal initiatives in progress.

TrainingDevelopment and consolidation of the system of professional skills, in tune with trends in the environment in which the business oper-ates, are an integral part of the personnel development process.Training is an essential element for enriching the employment op-portunities of personnel and for supporting the processes of organ-isational integration and change management.In 2010 a total of approximately 149,000 hours of training were delivered (equivalent to 24 hours per employee), with 13,750 par-ticipants.The proportion of employees involved in training initiatives was more than 84%, attesting to a continuing and broad commitment, which in 2010 supported in particular the integration processes underway.One of the primary initiatives in this regard is the design and im-plementation, in collaboration with the Milan Polytechnic, of the course “The economic and management logics of regulated mar-kets”, which in 2010 was attended by all managers and recently appointed graduates, and which in 2011 will involve all Group com-pany executives.

Distribution of employees by geographical area (number)

Northern Italy Central Italy

1,401

Southern Italy and Sicily

1,550

3,153

1,000

2,000

4,000

3,000

0

Distribution of employees by age group (number)

0

200

600

1,000

1,400

1,800

2,000

< 25

betw

een

25 a

nd 2

9

betw

een

30 a

nd 3

4

betw

een

35 a

nd 3

9

betw

een

40 a

nd 4

4

betw

een

45 a

nd 4

9

betw

een

50 a

nd 5

4

betw

een

55 a

nd 5

9

> 60

400

800

1,200

1,600

1,675 1,784

940

73

893

282

165189103

78


Facilitating the transfer of specialist know-how between similar functional entities of the different companies, numerous initia-tives were implemented to support the organisational actions es-tablished by the “Energies” programme. These included the Stogit maintenance internalisation project and the development of a train-ing course for the investment creation area within Snam Rete Gas.In keeping with previous years, commitment to the consolidation and updating of technical and professional skills was reaffi rmed, and linked to the development and consolidation of specialist tech-nical know-how. Specifi c training programmes were implemented on the new waste traceability control system (SISTRI) and anti-corruption. With regard to safety, various training courses continued to be of-fered on the following topics: “Working on electrical equipment”, “Drive Safe”, “Specifi c business risks”, “The role of the Safety Offi -cer”, all contributing to the structuring of the safety training sys-tem as part of the OHSAS 18001 certifi cation process. Initiatives in favour of employeesSnam Rete Gas offers its employees and their families social initia-tives to better balance their private and working lives and to im-prove the quality of the working environment, thus promoting well-being among personnel.Over the years, a structured system of opportunities has been developed which includes supplementary health insurance and coverage against occupational and non-occupational accidents over and above the statutory insurance coverage or that provided publically. Employees also have access to supplementary pension funds, company loyalty bonuses, preventive health campaigns, and sporting and recreational initiatives.The “Well-Being Programme” offers the opportunity to engage in physical activities at selected and approved sports centres in the vicinity of the offi ce blocks, at preferential membership rates.Other agreements have also been reached which offer preferen-tial terms for obtaining personal loans and credit cards, buying used cars, hiring cars, comparing product brands or booking a holiday.In September 2010 the Eni nursery school began operations with a capacity of around 140 children up to the age of 6 years. The nurs-ery school is a centre of excellence in terms of both its teaching and its architecture, with a building rated in energy effi ciency class A, and offering important support to the families of San Donato Mila-nese employees.

Industrial relationsThe relationship with the trade unions was characterised by consul-tation on certain effects of the Group’s integration processes.To this end, discussions were held in a climate of constructive dia-logue and agreements were reached at both the local and national level according to the nature of the topics considered, as shown below:· commencement of the integration strategy, forming the subject

of a general memorandum of understanding signed in February;

· completion of the processes of disposal/acquisition of deter-mined business units in order to implement the group’s organi-sational plan for Staff activities (March);

· implementation of the Italgas Work Force Management project, aimed at improving operating effi ciency (June);

· reorganisation of the Stogit Plants maintenance activities (May) and consequent acquisition of the SES (Saipem Energy Services) business unit (November);

· reorganisation of management activities of the Snam Rete Gas net-work, with the introduction of “partenza da casa” [leaving home] as the operating procedure for line control activities (December);

· unifi cation of “Performance-Related Pay” structures, defi ning a new single framework to be applied throughout the Group (De-cember).

Health, Safety, Environment and Quality

Centralisation of staff functions within Snam Rete Gas S.p.A., imple-mented in 2010 in order to converge staff skills and share them with all the businesses, also served as the inspiration for the corporate organisation in terms of health, safety, environment and quality. The solution adopted distinguishes between the general tasks as-signed to Snam Rete Gas S.p.A. and the specifi c tasks of coordinat-ing and supporting operating units that have been assigned to the individual subsidiaries.This new corporate organisation began 2010 with the challenge of reorganising health, safety, environment and quality activities group-wide, and thus introduced a new way to tackle the various is-sues while simultaneously guaranteeing service performance and provision without a continuity solution.During the course of the year, a Health, Safety, Environment and Quality Policy was also issued. This was signed by the CEO of Snam Rete Gas, and serves as the reference document for all subsidiaries.

Management systems Group companies have been provided with management systems that comply with international standards like OHSAS 18001 (occu-pational health and safety), ISO 14001 (environment) and ISO 9001 (quality) all of which help in tackling and managing HSEQ issues. In 2010, Snam Rete Gas worked to maintain all the certifi cations awarded for the various corporate entities and to increase the num-ber obtained. In particular, in December 2010, Snam Rete Gas S.p.A. was awarded certifi cation for the Occupational Health and Safety Management System (SGSSL), in conformity with OHSAS 18001:2007, from the company DNV Italia on completion of a two-year process, and Stogit updated its Environmental Management System by integrating it with the safety system pursuant to Legislative Decree no. 238/2005 concerning the implementation of Directive 96/82/EC which governs major-accident hazards involving dangerous substances.The table below details the certifi cations awarded to the various management systems.

79


COMPANY ACTIVITIES TYPE

Snam Rete Gas Company OHSAS 18001

Snam Rete Gas- Compression stations - Gas pipeline networks

ISO 14001

Snam Rete Gas- Dispatching of natural gas - Natural gas metering service, transportation network, and management of the design

and construction of metering apparatusISO 9001

STOGIT Company ISO 14001

STOGIT Natural gas metering and accounting service ISO 9001

GNL Italia Regasifi cation plant ISO 14001

ITALGAS and Napoletana Gas Company ISO 14001-ISO 9001-OHSAS 18001

In applying the corporate management systems associated with HSEQ issues, Snam Rete Gas constantly monitors the implementa-tion and effectiveness of the related systems, which includes peri-odic auditing. In particular, in 2010 approximately 350 inspections were carried out with regard to health, safety, environment and quality.

Health and safetyPreventing accidents and working in a safe environment are objec-tives of primary importance for Snam Rete Gas.In 2010, in addition to the activities provided for by Legislative De-cree no. 81/08, major initiatives were launched aimed at achieving better performance and results in the health and safety of employ-ees, which included leveraging potential synergies between the various companies.In particular, specifi c accident prevention campaigns such as “Ob-jective Safety” and “Communicating safety” were launched. The

many initiatives implemented in connection with the “Objective Safety” project also include the “Safety Trophy” and the “Zero Ac-cidents Prize”, which are specifi cally aimed at improving manage-ment in occupational health and safety and preventing accidents.To this end, we increased accident awareness activities and train-ing initiatives to make each employee more attentive to the safety of his/her work.Staff training and awareness activities focused primarily on work-place risks, accident causes and associated preventive measures. With regard to safety in connection with contracted labour, special attention was paid to Suppliers’ qualifi cations and, subsequently, to evaluating suppliers through special inspections performed in the work execution phase. Suppliers also increased their involvement in issues of safety through specifi c awareness meetings.Initiatives taken over the last few years have yielded positive re-sults both for the Group and for the individual companies, as dem-onstrated by the trends in the accident indicators shown below.

(**) number of working days lost in relation to accidents not sustained on the way to or from work, with incapacity of at least one day, per thousand hours worked.

2009 2010

0.20

Employees Snam Rete Gas Group - Working accidents - Index of Seriousness**

0.15

0.10

0.05

(*) number of accidents not sustained on the way to or from work, with incapacity of at least one day, per million hours worked.

2009 2010

5

Employees Snam Rete Gas Group - Working accidents - Index of Frequency *

4

3

2

1

80

During the course of the year, the commitment to protect the health of employees was reaffi rmed by focusing on continually monitoring risk factors identifi ed in the corporate processes and implementing suitable prevention and protection measures. Work environment inspections were carried out in order to evaluate adequate and appropriate working and environmental conditions and to identify possible measures for prevention or improvement. A total of 357 environmental inspections were performed in 2010. Activities were continued to support specifi c health protection ini-tiatives, such as cancer prevention and fl u vaccination campaigns, bans on smoking in company workplaces, and on the supply of al-cohol in company canteens.For personnel exposed to specifi c risk factors, we put a programme in place to periodically survey health, which includes 3,097 medi-cal examinations carried out by occupational health physicians during the year.

EnvironmentEnvironmental protection is of the utmost importance in all phases of Snam Rete Gas operations, from feasibility studies to the fi nal completion of projects with the aim of optimising technical deci-sions in an environmentally friendly manner.One of the key environmental aspects of operations is the tempo-rary use of the soil and subsoil during the pipe laying phase. Limit-ing impact in the area and returning the land to its previous condi-tion after completing pipe laying operations is a strategic goal in the Sustainable Development Policy of Snam Rete Gas. To this end, painstaking environmental cleanup and crop restoration efforts are carried out following the construction of gas pipelines with a par-ticular focus on problems related to biodiversity.During the year, following the laying of new pipelines, environmen-tal cleanup mainly involved regions in the north (Friuli Venezia Giulia, Veneto, Piedmont and Lombardy) and the south (Sicily). To be more specifi c, cleanup operations were carried out along pipeline sections totalling about 173 km, along with 25 km of re-forestation. The goal of replanting and reforestation is not just to restore the forested areas affected by pipeline construction work, but generally to rebuild the landscape on the whole and recover the biological function of planted areas affected by the work, especially in their role as animal habitats with specifi c biodiversity features.Snam Rete Gas, through its activities, is committed to providing our country with a daily source of energy -- natural gas -- which, ow-ing to its chemical and physical properties and its ability to be used in highly effi cient technologies in various sectors (civil, industrial and thermoelectric), is able to provide a signifi cant contribution to reducing atmospheric emissions of greenhouse gases (GHG), par-ticulate matter and sulphur oxides.In addition to using natural gas as the main fuel, Snam Rete Gas at-tempts to minimise emissions of GHG in its operating activities by employing specifi c containment programmes such as: · the reduction of natural gas emissions (through the recompres-

sion of gas in pipelines, the replacement of pneumatic equipment and the replacement of cast-iron pipes in distribution networks);

· the reduction of power consumption (using specifi c energy man-agement measures);

· the use of electricity produced from renewable energy sources (through specifi c purchase contracts and the installation of pho-tovoltaic panels in building construction).


During the year, in order to reduce atmospheric emissions of nitric oxides, the installation of low-emission gas turbines (DLEs) con-tinued in both gas compression stations and storage facilities. In particular, work was completed to transform the turbine (TC2) at the Melizzano gas compression station and turbines (TC2), (TC4) and (TC6) respectively at the Settala, Fiume Trieste and Sergnano storage facilities.With regard to waste management, in 2010 all Group companies joined the SISTRI system (Waste Tracking Control System) intro-duced by the Ministerial Decree of 17 December 2009. The local operating units of all companies were identifi ed which are to join the new system. The introduction of this new regulation required intense training, which will continue into 2011.

QualityISO 9001 certifi cation is currently pending for the process to defi ne the transportation capacity of the Snam Rete Gas network. The units in charge of this process use special computer systems in addition to their expertise and codifi ed procedures to defi ne the transportation capacity for all parts of the national and regional network for the subsequent transfer of the network by the busi-ness units of Snam Rete Gas to users in accordance with the pro-cedures specifi ed in the Network Code approved by the Electricity and Gas Authority.This project, which was launched in the second half of 2010, calls for obtaining quality certifi cation from an offi cial accredited body by June 2011 in keeping with the capacity defi nition that Snam Rete Gas will publish for thermal years starting in 2011-2012 and beyond, and all procedures related to the processes involved in 2010 have already been issued in accordance with standards dic-tated by the regulations.

Technological innovation and research activities

Snam Rete Gas is directly involved in several innovative activities, especially to ensure growing reliability in the management of the transportation of natural gas in Italy. In particular, several innova-tive technologies (panchromatic and multispectral optical sensors, altimetric laser sensors and hyperspectral scanners) are being developed to monitor the transportation network for external inter-ference and areas of geological instability using aerial surveillance and the digital processing of the signals received.In Europe, Snam Rete Gas is a member of GERG (European Gas Re-search Group, www.gerg.info), a group where research and innova-tion projects can be proposed and shared in synergy with other Eu-ropean entities interested in the same issues with the advantage of sharing costs, experience and results. In 2010 Snam Rete Gas participated in several projects through this group including as project leader. An experiment was concluded to assess the performance of new solutions proposed for the outer coating of buried steel pipelines with an emphasis on comparing them with commonly used prod-ucts and applying the strictest international testing standards. An assessment was completed of state-of-the-art systems in the Eu-ropean transportation sector to detect natural gas emissions from components of the transportation networks. An experimental study

81


is about to be completed to assess the ability to weld steel for pipe-lines using the “Friction Stir Welding” process, taking into account mechanical performance (with respect to current standards and in comparison to traditional welding processes) and economic im-plications which could result from this innovative transposition in pipeline applications of this emerging technology in other industrial sectors. An experimental assessment of two systems is underway (acoustical sampling technologies) proposed by the industry for reporting and pinpointing in real time the impact of outside inter-ference on pipelines. Snam Rete Gas is also a member of EPRG (European Pipeline Re-search Group, www.eprg.net), whose members are entities which transport gas or manufacture pipelines in Europe. This group man-ages projects (broken down into three major areas: Design, Material and Corrosion) with an aim to constantly improve the knowledge and management of the integrity of gas pipelines throughout their life cycle (pipe manufacturing, pipeline construction and opera-tion). In particular, an advanced model is being studied to assess the impact on pipe integrity of damage resulting from third party interference with pipelines (for this activity, experience and data are being shared with the PRCI - Pipeline Research Council Inter-national). Models are being modifi ed and compared (by validation using experimental data) for predicting the ability of pressurised pipelines subjected to combined external loads to withstand ex-treme conditions. The correlation between the composition of the mix of natural gas and the effects of its expansion in pipelines of a known durability is being analysed. A recommendation is being pre-pared to perform non-destructive automated ultrasound controls during the production of pipes. An experimental study is underway concerning the environmental impact on the residual mechanical strength of damaged pipes.

Stakeholder relations

Stakeholder EngagementThe Engagement system at Snam Rete Gas is present at all com-pany levels. The company regularly collaborates with investors, government authorities, institutions and companies with the aim of offering a service which is consistent with local and national needs and growth plans and makes available its expertise to foster the development of activities to ensure ongoing improvements in the reliability of plants and the quality of services offered, while plac-ing a priority on the safety and health of its internal and external workers.In order to understand the characteristics and interests of the vari-ous individuals and entities which revolve around the business, at the end of 2010 a “stakeholder mapping” project was launched in order to take a coordinated approach to identifying categories of individuals whose opinions or decisions, attitudes or actions could objectively foster or hinder the Company’s ability to achieve a spe-cifi c goal based on their level of interest or infl uence. This survey is considered to be even more necessary now that Italgas and Stogit have become a part of the company’s structure.The goal of this project is to identify all the group’s Stakeholders and break them down into several relevant categories. In future years, based on the identifi cation of stakeholders and the analysis of their signifi cance, focus groups, surveys and analyses will be developed

in order to bring about more specifi c participatory initiatives con-sistent with the company’s goals.

Shareholders and institutional investors Since its listing on the stock market (December 2001), Snam Rete Gas has taken steps to create its “corporate” identity in an effort to express the goals and spirit of the company’s management includ-ing fi nancial reporting.Snam Rete Gas is known for the transparency of its relations with investors and the fi nancial community, and provides detailed re-ports of its goals and results to enable shareholders and the fi nan-cial market to assess all the ways the Company creates value.Based on assessments expressed by the fi nancial community, Snam Rete Gas is a company with a limited industrial and fi nancial risk profi le, operating in a stable and transparent regulated envi-ronment, which ensures that results and future cash fl ows will be properly disclosed.The year 2010 was also characterised by considerable fi nancial communication on the part of the Company’s management, which took the form of some thirty road shows in key European, North American and Japanese fi nancial markets with the aim of meeting shareholders and institutional investors. In addition, one-to-one meetings were held with about 160 investors, and about twenty meetings were held with groups of investors.From 12-13 October 2010, the Outdoor Investor Days event was held, during which there was a meeting between top management and institutional investors, and for the fi rst time with representa-tives of individual investors. To ensure the broader involvement of the latter group of investors, a meeting was also arranged at the headquarters in San Donato Milanese between the CEO, Chief Op-erating Offi cer and representatives of small shareholders. This was followed by a visit to the dispatch centre. This event is consistent with the strategy of placing greater focus on small shareholders so that they are more involved, along with the support of new reporting tools made available on the Compa-ny’s website. In addition to the new publications introduced in 2009 (“Financial Markets Review and “News&Facts”), in 2010 an online “Shareholder Guide” was published, again targeting mainly individu-al investors to enable them to actively experience their investment in Snam Rete Gas. The commitment to the issue of sustainability was corroborated by rating agencies which focus on corporate social responsibility re-sulting in the Company’s inclusion in 2010 in leading international ethical indices such as the Dow Jones Sustainability World Index, FTSE4Good, the ECPI Ethical Indices and the Ethibel Investment Register and Sustainability Indexes. In 2010 the Company also participated in several other assess-ments requested by investment banks, fi nancial intermediaries and international rating agencies to monitor Snam Rete Gas’s com-mitment to social and environmental responsibility.

Communities and local areasIn keeping with the principles of sustainable growth and its stra-tegic growth plans, Snam Rete Gas arranges social and cultural events. The company is involved in ongoing positive discussions with the local communities where it operates. It cooperates with local and national authorities, participates in the work of several associations and committees and provides its commitment and ex-

82


pertise to encourage improvements in the area of corporate social responsibility. In 2010 initiatives were implemented through various events in-volving schools, citizens and environmental associations in several areas where our plants are located.To be more specifi c, an initiative was launched targeting students in primary and secondary schools called “Tutto giù per Terra” [Every-thing Down on the Ground] whose goal was to familiarise students with the group’s operations and commitment to sustainability, spe-cifi cally the virtuous practices of environmental cleanups, which Snam Rete Gas carries out with particular care and dedication. Local representatives of Legambiente also participated in these meetings. They, in turn, described the purposes of the association’s activities and its various initiatives in the environmental area. Ap-propriate communications tools were created to encourage stu-dents to get involved and participate.To promote transparency and a dialogue with communities, the “Giro in Centrale” [Plant Tour] initiative was also broadened by opening several plants to receive visits by citizens, schools and stakeholders in the area. During these guided tours, schools and local residents were able to learn fi rst-hand from technicians about an important industrial entity located in their area. The plants opened to the public were the gas compression stations in Messi-na and Poggio Renatico (FE) and storage sites in Bordolano (CR) Minerbio (BO) and Sabbioncello (FE).During the year, institutional meetings continued with representa-tives of local government agencies and local governments with the aim of greater sharing and the participation of local stakeholders in the company’s strategic decisions. In this context, we should mention public meetings held with citizens of Cortemaggiore and Besenzone in the province of Piacenza to present and discuss the launch of the Pilot Project that Stogit has planned for the injection and capture of CO

2 at the Cortemaggiore fi eld, and in the area of Por-

to Venere, the site of the liquefi ed natural gas regasifi cation plant owned by GNL Italia.

Customers and Electricity and Gas AuthoritySnam Rete Gas has always placed special emphasis on its relation-ship with customers with the aim of satisfying the diverse needs resulting from the evolving gas market. This is done by monitoring the needs of customers and identifying, and then introducing, tools and procedures which facilitate access to our services.Operating and commercial activities are carried out using increas-ingly advanced computer systems with applications which can even be migrated to Web systems and enable a high degree of au-tomation in managing various contracts. These systems are imple-mented from time to time to improve customer communications. In

this way, we also comply with Resolutions issued by the Electricity and Gas Authority which regulates our services. The relationship with the Electricity and Gas Authority plays a key role for those operating in the energy business. Over the years, Snam Rete Gas has established a constructive relationship and worked effectively with the Authority by continually maintaining an advisory role and providing substantial information to support changes in the regulatory environment in the natural gas sector. In particular during the consulting phase, it has always made a sig-nifi cant contribution to the preparation of resolutions and provides support in response to all of the Authority’s requests for informa-tion, including in the form of round table discussions and specifi c technical meetings.The corporate reorganisation following the acquisition of Italgas and Stogit has made, and will continue to make, this relationship more dynamic. Rather than four separate companies, there is now one large entity, which, due to its size and wealth of knowledge in vari-ous sectors, is capable of providing complete, effective and con-sistent responses to problems which arise with the integration of energy markets in future years.

SuppliersThe procurement of goods, work and services in the Snam group is carried out by the Supply Chain division using a centralised model for providing services to operating companies.The group has adopted procurement practices based on transpar-ency, impartiality and responsibility in full compliance with free competition, and continues to achieve operating and performance targets over the short and long term. Our activities have always emphasised the respect and protec-tion of human and labour rights, environmental protection and the search for a sustainable development model. It is our wish to share these values with all our counterparties. In this area, we ask suppliers to use Model 231 and comply with the principles of the Code of Ethics of Snam Rete Gas, to adhere to work safety, health and environmental protection regulations and to comply with international standards in the area of labour rights.We have initiated a project to collect and fully analyse assessments on service quality, aspects of health, safety, the environment and quality, and the behaviour of our suppliers. We are fi nalising the Vendor Rating criteria to expand the percentage of suppliers as-sessed. If a supplier provides poor service, or if negligence occurs, action is taken in response to the supplier ranging from reporting to the removal of that entity as a supplier. In 2010 the Group’s orders included over 1,430 suppliers who were awarded at least one contract with some €1,470 million in total goods and services procured.

83

Snam Rete Gas Annual Report 2010 / Glossary

GlossaryA glossary of fi nancial, commercial and technical terms, as well as units of measurement, is available online at www.snamretegas.it. The most common terms are described below.

Economic and financial terms

Excise dutyIndirect tax for immediate payment, applied to the production or consumption of certain industrial goods (including oil products and natural gas).

Amortisation and depreciationProcess by which the cost of fi xed assets is spread over a certain period, usually the useful life of the asset.

Non-current assetsBalance sheet item which shows long-lasting assets, net of amorti-sation, depreciation and impairment losses. These are divided into the following categories: “Property, plant and equipment”, “Com-pulsory inventories”, “Intangible assets”, “Equity investments”, “Financial assets” and “Other non-current assets”.

Net working capitalCapital which is invested in short-term assets and an indicator of a company’s short-term fi nancial position. Calculated using all short-term, non-fi nancial assets and liabilities.

Net invested capitalNet investments of an operational nature, being the sum of net working capital and fi xed assets.

cash fl owLiquid assets generated by a company over a certain period of time. Specifi cally, the difference between current infl ows (mainly cash revenue) and current cash outfl ows (costs in the period that gener-ated cash outfl ows).

Controllable fi xed costsFixed operating costs of regulated activities, being the sum of “To-tal recurring personnel expense” and “Recurring external operating costs”.

Operating costsCosts incurred in carrying out a company’s core business. These include: purchases, services, energy, consumables, personnel ex-pense and maintenance.

DividendPayment to shareholders, voted for by the shareholders’ meeting and proposed by the board of directors.

Dividend payoutRatio between the dividend and net profi t for the period, and equal to the percentage of profi ts paid out to shareholders in the form of dividends.

Net fi nancial debtIndicator of the ability to meet fi nancial obligations. Represented by gross fi nancial debt minus cash and cash equivalents as well as other fi nancial receivables not held for operations.

InvestmentsCosts of long-lasting assets where useful life does not expire over one reporting period.

LeverageIndicator of fi nancial structure; measures a company’s level of debt and is calculated as the percentage ratio of net fi nancial debt to net invested capital.

Net fi nancial expenseNet cost incurred for using third-party capital. Includes other net expense related to fi nancial operations.

Shareholders’ equity Total resources contributed by shareholders, plus retained profi ts and minus losses.

EBITDAUsed by the group in its internal (business plan) and external (to analysts and investors) presentations. Unit of measurement to as-sess the group’s operating performance, as a whole and in the in-dividual business segments, in addition to EBIT. Determined by the difference between revenue and operating costs.

Core business revenueIncome from selling goods and/or providing services that are inte-gral to the core business, including all recurring economic values linked to a company’s typical fi eld of business.

Derivatives A fi nancial instrument is called a derivative when its price/yield pro-fi le derives from the price/yield parameters of other major instru-ments – known as “underlying” – such as commodities, currencies, interest rates, securities and share indices.

EBITDifference in a given period between sales and services revenues and other revenues and costs. It is therefore the operating result before fi nancial revenues and costs and taxes.

Net profi tEBIT minus result from fi nancial operations and income taxes.

84


TRANSPORTATIONAND REGASIFICATION

Commercial terms

Transportation capacity Transportation capacity is the maximum quantity of gas which can be injected into the system (or withdrawn from it) during the course of a gas day, at a specifi c location, in compliance with the technical and operating restrictions established for each section of pipeline and the maximum supplies of plants located along such pipelines. These capacities are assessed using hydraulic network simula-tions carried out in appropriate transportation scenarios and in ac-cordance with recognised technical standards.

Network codeDocument governing the rights and obligations of those involved in providing transportation and regasifi cation services.

Regulatory periodPeriod of time (usually four years) for which criteria are defi ned for setting tariffs for transporting and dispatching natural gas and for regasifying liquefi ed natural gas. For transportation, we are cur-rently in the third regulatory period, which runs from 1 January 2010 to 31 December 2013. For regasifi cation, the third regulatory period runs from 1 October 2008 to 30 September 2012.

Network entry pointEach point or a localised group of physical points on the gas trans-portation network at which gas is delivered to the transporter.

REDELIVERY POINT This is the physical network point, or local combination of physical points, at which the Transporter redelivers gas transported to the User, and where such gas is metered.

Virtual exchange point (VEP)A virtual point located between the Points of Entry and Points of Exit of the National Transportation Network (RN) where Users and other authorised entities may, on a daily basis, exchange and sell gas in-jected in the RN.

Regasifi cation tariffsUnit prices applied for regasifi cation. These include capacity and commodity tariffs, related to the required regasifi cation capacity and to the volumes of gas actually unloaded from tankers, respectively.

Transportation tariffs Unit prices applied for transporting and dispatching natural gas. These include capacity and commodity tariffs, related to the re-quired transportation capacity and to the volumes of gas actually injected into the network, respectively.

UserThe user of the gas system, which, by confi rming the capacity granted, acquires transportation capacity for its own use or assign-ment to others.

Technical terms

Natural gasHydrocarbon mixture consisting mainly of methane, and to a lesser degree, ethane, propane and higher hydrocarbons. Natural gas in-jected in the gas pipeline network must comply with a single quality specifi cation to ensure that the gas in transit is interchangeable.

Liquefi ed natural gas (LNG)Natural gas comprised essentially of methane liquefi ed by cooling at around -160°C, at atmospheric pressure, to make it suitable for tanker transportation or reservoir storage. In order to be injected into the transportation network, the liquid must be reconverted into a gas at regasifi cation plants and brought to the operating pressure of the pipelines.

Natural gas transportation networkThe aggregate of gas pipelines, line plants, compression stations and infrastructure, which, at the national and regional level, pro-vide the transportation of gas by interconnecting with international transportation networks, production and storage points and rede-livery points for the purposes of distribution and use.

Regional transportation network This consists of gas pipelines not included in the list in Article 2 of the Ministerial Decree of 22 December 2000, as updated annually, and its main function is to move and distribute gas in demarcated local areas, which are typically regional in scale.

National transportation networkThis consists of the gas pipelines indicated in Article 2 of the Min-isterial Decree of 22 December 2000, as updated annually. It is the aggregate of gas pipelines and plants which have been assessed and checked taking into account restrictions imposed by imports, exports, key national production and storage facilities, and is used to transfer signifi cant quantities of gas from these network injec-tion points to major areas of consumption. Several inter-regional gas pipelines as well as smaller pipelines which serve to close net-work links formed by the above pipelines are also included for the same purpose. The National Transportation Network also includes compression stations and plants connected to the pipelines de-scribed above.

LNG regasifi cationIndustrial process whereby natural gas is converted from a liquid to a gaseous state.

85


NATURAL GAS STORAGE

Commercial terms

Thermal year Period of time into which the regulatory period is divided. Starting 1 January 2011, the thermal year will coincide with the calendar year. The last thermal year, which began on 1 April 2009 and ended on 31 December 2010, was extended, for tariff purposes, once by nine months from 1 April 2010 to 31 December 2010.

Withdrawal phase Period from 1 November to 31 March of the following year.

Injection phase Period from 1 April to 31 October of the same year.

Regulatory periodPeriod of time (usually four years) for which criteria are defi ned for setting tariffs for natural gas storage services. We are currently in the third regulatory period, which runs from 1 January 2011 to 31 December 2014.

Technical terms

Modulation storageThe goal of modulation storage is to respond to changing hourly, daily and seasonal demands.

Mining storage Mining storage is necessary for technical and economic reasons in order to enable optimum cultivation of Italy’s natural gas fi elds.

Strategic storageThe goal of strategic storage is to provide for a lack of or reduction in supplies from non-EU imports or crises in the gas system.

NATURAL GAS DISTRIBUTION

Commercial terms

Tariff areaThe tariff area is the area used to determine distribution tariffs and consists of all communities served by the same distribution plant. If several local authorities collectively designate an operator to perform the distribution service, or declare themselves a single tariff area, the tariff area coincides with the group of municipalities served through several distribution plants by one or more operators.

Thermal yearPeriod of time into which the regulatory period is divided, currently coinciding with the calendar year.

End clientConsumer who buys gas for his own use.

Network codeDocument governing the rights and obligations of those involved in providing gas distribution services.

ConcessionAct by which a local authority entrusts to a company the manage-ment of a service which falls within the remit of said authority and for which said company assumes the operational risk.

Regulatory periodPeriod of time (usually four years) for which criteria are defi ned for setting tariffs for gas distribution services. We are currently in the third regulatory period, which runs from 1 January 2009 to 31 De-cember 2012.

Redelivery point This is the point of demarcation between the gas distribution plant and the plant owned or managed by the end customer at which the distribution company redelivers gas transported for supply to the end customer, and at which metering occurs.

Gas distribution serviceService of transporting natural gas through networks of local pipe-lines from one or more delivery points to redelivery points, gener-ally at low pressure and in urban areas, for delivery to end clients.

Retail CompanyCompany which, by way of a contract giving it access to the net-works managed by a distributor, sells the gas.

Technical terms

Gas distributedAmount of gas delivered to users of the distribution network at the redelivery points.

EqualisationDifference between revenues for the period (annual TRL) and those invoiced to retail companies on the basis of volumes distributed. The net position with the Equalisation Fund is established at the end of the thermal year and settled over the course of the year on the basis of advanced payments.

TRL (Total Revenue Limit)Total revenues allowed for distribution companies by the regula-tory body to cover costs for providing distribution and metering services.

2010Consolidated fi nancial statements

88

Snam Rete Gas 2010 Consolidated financial statements / Financial statements

Balance sheet 31.12.2009 31.12.2010

(€ million) Note Total

of which with related

parties Total


parties

ASSETS

Current assets

Cash and cash equivalents (1) 36 8

Trade and other receivables (2) 916 496 944 553

Inventories (3) 411 441

Current income tax assets 2

Other current tax assets (4) 5 4

Other current assets (5) 67 1 71 2

1,437 1,468

Non-current assets

Property, plant and equipment (6) 12,684 13,239

Compulsory inventories (7) 405 405

Intangible assets (8) 4,082 4,262

Equity-accounted investments (9) 301 319

Other fi nancial assets 1 1

Other non-current assets (10) 34 3 49 16

17,507 18,275

Non-current assets held for sale (11) 25 25

TOTAL ASSETS 18,969 19,768

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Short-term fi nancial liabilities (12) 1,585 1,585 1,844 1,844

Short-term portion of long-term fi nancial liabilities (16) 915 914 1,320 1,320

Trade and other payables (13) 1,106 308 1,322 537

Current income tax liabilities (14) 5 11

Other current tax liabilities (14) 18 20

Other current liabilities (*) (15) 250 66 221 58

3,879 4,738

Non-current liabilities

Long-term fi nancial liabilities (16) 7,486 7,485 7,186 7,185

Provisions for risks and charges (*) (17) 576 629

Provisions for employee benefi ts (18) 107 105

Deferred tax liabilities (19) 934 853

Other non-current liabilities (*) (20) 273 16 331 31

9,376 9,104

Liabilities directly associated with assets held for sale (11) 11 10

TOTAL LIABILITIES 13,266 13,852

SHAREHOLDERS’ EQUITY (21)

Equity attributable to Snam Rete Gas

Share capital 3,570 3,570

Reserves 2,395 2,332


Treasury shares (792) (789)

Interim dividend (203) (304)

Total shareholders’ equity attributable to Snam Rete Gas 5,702 5,915

Capital and reserves attributable to minority interests 1 1

TOTAL SHAREHOLDERS’ EQUITY 5,703 5,916

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 18,969 19,768

(*) In order to make the accounting treatment used consistent with that applied to other regulated activities carried out by Snam Rete Gas, payments for balancing and stock replenishment charged off against revenues because they are payable to service users are offset under “Other liabilities”. Likewise, the corresponding value at 31 December 2009 (€93 million) was reclassifi ed from “Provisions for risks and charges” to “Other liabilities”. More information on the reasons for the reclassifi cation can be found in Note 17 “Provisions for risks and charges”.

89


Income statement 2009 2010

(€ million) Note Total


parties Total


parties

REVENUE (23)

Core business revenue 2,438 1,595 3,475 1,994

Other revenues and income 30 6 33 18

Total revenue 2,468 3,508

OPERATING COSTS (24)

Purchases, services and other costs (403) (164) (623) (95)

Personnel expense (178) (345)

Depreciation, amortisation and impairment losses (613) (678)

EBIT 1,274 1,862

FINANCIAL INCOME (EXPENSE) (25)

Financial income 7 5

Financial expense (158) (142) (174) (151)

Derivatives (66) (66) (102) (102)

(217) (271)

INCOME (EXPENSE) ON EQUITY INVESTMENTS (26) 22 47

Equity method valuation effect 21 47

Other income (expense) from equity investments 1

PRE-TAX PROFIT 1,079 1,638

Income taxes (27) (347) (532)


Attributable to:



Earnings per share

- basic (€ per share) (28) 0.28 0.33

- diluted (€ per share) (28) 0.28 0.33

Sta tement of comprehensive income(€ million) Note 2009 2010


Other components of comprehensive income

Change in fair value of cash fl ow hedge derivatives (effective share) (29) 4

Tax effects of the other components of comprehensive income 8 (1)

Total other components of comprehensive income, net of tax effect (21) (21) 3

Total comprehensive income for the fi nancial year 711 1,109

Attributable to:



711 1,109

90


Statement of changes in shareholders’ equity

(€ million)


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erve

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Reta

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ear

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s

Net p

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Trea

sury

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res

Inte

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ivid

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Tota

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nd re

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attr

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Tota

l sha

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lder

s’ e

quity

Shareholders’ equity at 31 December 2008 1,956 116 391 (31) 795 768 530 (794) (158) 3,573 3,573

Transactions with shareholders:

- Increase in share capital 1,614 1,860 (23) 3,451 3,451

- Dividend distribution (€0.14 per share on top of 2008 interim dividend of €0.09 per share)

(405) 158 (247) (247)

- Allocation of 2008 residual net profi t 125 (125)

- 2009 interim dividend (€0.06 per share) (203) (203) (203)

- Disposal of treasury shares for stock option plans 2 (2) 2 2 2

1,614 1,862 (2) 102 (530) 2 (45) 3,003 3,003

Comprehensive income for 2009 (21) 732 711 711

Other changes in shareholders’ equity:

- Impact of Italgas and Stogit acquisition (1,586) (1,586) 1 (1,585)

- Stock option costs 1 1 1

(1,586) 1 (1,585) 1 (1,584)

Shareholders’ equity at 31 December 2009 (Note 21) 3,570 (1,586) 1,978 391 (52) 794 870 732 (792) (203) 5,702 1 5,703

Transactions with shareholders:

- Dividend distribution (€0.14 per share on top of 2009 interim dividend of €0.06 per share)

(675) 203 (472) (472)

- Allocation of 2009 residual net profi t 27 30 (57)

- 2010 interim dividend (€0.09 per share) (304) (304) (304)

- Disposal of treasury shares for stock option plans 3 (3) 3 3 3

3 27 (3) 30 (732) 3 (101) (773) (773)

Comprehensive income for 2010 3 1,106 1,109 1,109

Other changes in shareholders’ equity:

- Impact of Italgas and Stogit acquisition (127) (127) (127)

- Difference between book value of shares sold and exercise price of stock options exercised by executives

(1) (1) (1)

- Effect of equity-accounted investments 5 5 5

(127) 4 (123) (123)

Shareholders’ equity at 31 December 2010 (Note 21) 3,570 (1,713) 1,981 418 (49) 791 904 1,106 (789) (304) 5,915 1 5,916

91


Statement of cash flows

(€ million) Note 2009 2010


Adjustments for reconciling profi t for the year with cash fl ows from operating activities:

Amortisation and depreciation (24) 613 668

Impairment losses 10

Equity method valuation effect (26) (21) (47)

Net capital losses on asset sales, cancellations and eliminations 6 8

Interest income (9) (4)

Interest expense 212 260

Income taxes (27) 347 532

Other changes 4

Changes in working capital:

- Inventories 51 (7)

- Trade receivables (164) (39)

- Trade payables (12) (3)

- Provisions for risks and charges 23 18

- Other assets and liabilities (15) 65

Working capital cash fl ows (117) 34

Change in provisions for employee benefi ts (1) (1)

Dividends collected 34

Interest collected 10 4

Interest paid (204) (258)

Income taxes paid net of reimbursed tax credits (408) (571)


- of which with related parties (30) 1,134 1,663

Investments (*):

- Property, plant and equipment (1,053) (1,056)

- Intangible assets (168) (366)

- Change in consolidation scope and business units (4,478) (137)

- Change in payables and receivables relating to investments 16 152

Cash fl ows from investment activities (5,683) (1,407)

Divestments (*):

- Property, plant and equipment 8 4

- Intangible assets 10 10


- Change in payables and receivables relating to divestments

Cash fl ows from divestments 30 14

Net cash fl ows from investment activities (5,653) (1,393)

- of which with related parties (30) (4,596) (220)

Taking on long-term fi nancial debt 12,407 1,020

Repaying long-term fi nancial debt (10,564) (915)

Increase (decrease) in short-term fi nancial debt (313) 259

1,530 364

Net equity capital injections 3,445 2

Dividends paid to Snam Rete Gas shareholders (450) (776)

Net cash fl ows from fi nancing activities 4,525 (410)

- of which with related parties (30) 3,209 (66)

Net cash fl ow for the period 36 (28)

Cash and cash equivalents at start of period 0 36

Cash and cash equivalents at end of period 36 8

(*) As a result of the reclassifi cations carried out in response to the implementation of international accounting standard IFRIC 12 (see “Changes to accounting criteria”) and of the change in the way payments for balancing and stock replenishment are recorded, the related cash fl ows for 2009 were reclassifi ed respectively from “Property, plant and equipment” to “Intangible assets” and from “Provisions for risks and charges” to “Other assets and liabilities”.

92

Snam Rete Gas 2010 Consolidated financial statements / Basis of presentation and consolidation principles

Background information

Snam Rete Gas is involved in the transportation, storage and distribution of natural gas and the regasifi cation of liquefi ed natural gas (LNG). These activities are carried out via its integrated infrastructure in Italy.The parent company Snam Rete Gas S.p.A. is an Italian company listed on the Milan Stock Exchange, with its registered offi ce at Piazza Santa Bar-bara 7, San Donato Milanese (MI). It is controlled by Eni S.p.A., which holds 52.54% of the share capital.

Basis of presentation

The consolidated fi nancial statements are prepared in accordance with International Financial Reporting Standards (hereinafter “IFRS” or “inter-national accounting standards”) issued by the International Accounting Standards Board (IASB) and adopted by the European Commission pursu-ant to Article 6 of EC Regulation no. 1606/2002 of the European Parlia-ment and of the Council of 19 July 2002 and to Article 9 of Legislative Decree no. 38/2005.The consolidated fi nancial statements are prepared using the historical cost method, taking into account value adjustments where necessary, except the items which, according to IFRS, must be measured at fair value, as described in the measurement criteria.The consolidated fi nancial statements include the fi nancial statements of Snam Rete Gas S.p.A. and of the companies over which Snam Rete Gas has the right to exercise direct or indirect control from the date of acquisi-tion until the date when such control is relinquished, determine fi nancial and operational decisions, and obtain the benefi ts thereof. Subsidiaries excluded from the consolidation scope as they are not sig-nifi cant, companies under joint control, associates and other equity in-vestments are measured as described in “Equity investments”. Consolidated companies, non-consolidated subsidiaries, companies un-der joint control, associates and other signifi cant equity investments, re-porting for which is covered by Article 126 of Consob Resolution no. 11971 of 14 May 1999, as subsequently amended, are indicated separately in the annex “Signifi cant shareholdings, associates and equity investments of Snam Rete Gas S.p.A. at 31 December 2010”, which is an integral part of these notes. The same annex also reports the change in consolidation scope which took place during the year. The fi nancial statements of consolidated companies and the consolidated fi nancial statements are audited by Reconta Ernst & Young S.p.A.The Snam Rete Gas consolidated fi nancial statements as at 31 December 2010 were approved and authorised for publication by the board of direc-tors on 2 March 2011. Given their size, amounts in the fi nancial statements and respective notes are expressed in millions of euros.

Consolidation principles

Equity investments in consolidated companiesThe assets, liabilities, income and expenses of companies subject to line-by-line consolidation are incorporated fully in the consolidated fi nan-cial statements; the book value of the equity investments is eliminated against the corresponding portion of shareholders’ equity. The shareholders’ equity of these investee companies is determined by attributing to each asset and liability its current value at the date of ac-

quisition of control. If positive, any difference from the acquisition cost is posted to the asset item “Goodwill”; if negative, it is posted to the income statement.

The shares of equity and profi t attributable to minority interests are re-corded in the appropriate items of shareholders’ equity and the income statement. Where total control is not acquired, the share of equity attrib-utable to minority interests is determined based on the share of the cur-rent values attributed to assets and liabilities at the date of acquisition of control, net of any goodwill (partial goodwill method). Alternatively, where total control is not acquired, the full amount of goodwill generated by the acquisition is recognised, taking into account the share attribut-able to minority interests (full goodwill method). In this regard, minority interests are expressed at their total fair value including their attributable share of goodwill. The choice of how to determine goodwill is made based on each individual business combination transaction.Where equity investments are acquired subsequent to the acquisition of control (acquisition of minority interests), any positive difference between the acquisition cost and the corresponding portion of equity acquired is posted to shareholders’ equity. Similarly, the effects of sell-ing minority interests without losing control are posted to shareholders’ equity. Business combinations whereby the investing companies are controlled by the same company or companies before and after the transaction, and where such control is not temporary, are classed as transactions under common control. Such transactions are not governed by IFRS 3 or by other IFRS. In the ab-sence of a reference accounting standard, the selection of an accounting standard for such transactions, for which a signifi cant infl uence on future cash fl ows cannot be established, is guided by the principle of prudence, which dictates that the principle of continuity be applied to the values of the net assets acquired. The assets are measured at the book values from the fi nancial statements of the companies being acquired predating the transaction or, where available, at the values from the consolidated fi nancial statements of the common parent company. Where the transfer values are higher than such historical values, the surplus is eliminated by reducing the shareholders’ equity of the acquiring company.

All fi nancial statements of consolidated companies close at 31 December.

Intragroup transactionsUnrealised gains from transactions between consolidated companies are eliminated, as are receivables, payables, income, expenses, guarantees, commitments and risks between consolidated companies. Intragroup losses are not eliminated because they effectively represent impairment of the asset transferred.

Measurement criteria

The major measurement criteria adopted for preparation of the consoli-dated fi nancial statements are described below.

CURRENT ASSETS

Cash and cash equivalentsCash and cash equivalents include cash on hand and immediately avail-able bank deposits as well as cash investments with a term of under three

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months. If denominated in euros, these entries are recorded at nominal value, corresponding to fair value, and if in other currencies, they are re-corded at the exchange rate in effect at the end of the period.

Trade and other receivablesTrade and other receivables are initially measured at fair value, and sub-sequently at amortised cost1 using the effective interest rate method. If there is objective evidence of impairment indicators, the assets are reduced so as to be equal to the discounted amount of cash fl ow ob-tainable in the future. There is objective evidence of impairment when, among other things, there are signifi cant breaches of contract, major fi nancial diffi culties or the risk of the counterparty’s insolvency. Re-ceivables are reported net of provisions for impairment losses. If, in subsequent periods, the asset’s impairment is confi rmed, the provision for impairment losses is used to cover charges. If, on the other hand, the reasons for previous impairment losses no longer apply, the value of the assets is restored up to the amount which would have derived from the application of the amortised cost method if the impairment loss had not been carried out.

Recording and elimination of fi nancial assets Financial assets are recorded on the balance sheet when the company becomes a party to agreements related to such assets. Financial assets sold are eliminated from balance sheet assets when the right to receive cash fl ows is transferred together with all risks and benefi ts associated with ownership.

InventoriesInventories, including compulsory inventories recorded under non-cur-rent assets in “Inventories - Compulsory inventories”, are recorded at the lower of purchase or production cost and the net realisation value repre-sented by the amount the company expects to receive from their sale in the normal course of business. The cost confi guration used is determined in accordance with the weighted average cost method. The sale and pur-chase of strategic gas do not involve the effective transfer of risks and benefi ts associated with ownership, and thus do not result in a change in inventories.

Current tax assets (liabilities)Current tax assets (liabilities) are recorded at the amount expected to be recovered (paid) from (to) tax authorities applying current tax rates, or those essentially enacted on the reporting date.

Other current and non-current assetsOther current assets non-current assets are initially measured at fair value, and subsequently at the amortised cost previously described.

NON-CURRENT ASSETS

Property, plant and equipmentProperty, plant and equipment are recognised at cost and recorded at the purchase or production cost including directly allocable ancillary costs

needed to make the assets available for use. When a signifi cant period of time is needed to make the asset ready for use, the purchase or produc-tion cost includes the fi nancial expense which theoretically would have been saved during the period needed to make the asset ready for use, if the investment had not been made. If there are current obligations to dismantle and remove the assets and restore the sites, the book value includes the estimated (discounted) costs to be incurred at the time the structures are abandoned, recognised as a counter-entry to a specifi c provision. The accounting treatment for revisions in these cost estimates, the passage of time and the discount rate are indicated in the paragraph “Provisions for risks and charges”. Property, plant and equipment may not be revalued, even through the ap-plication of specifi c laws. Starting at the time utilisation of the asset begins, or should have begun, property, plant and equipment are regularly depreciated on a straight-line basis over their useful life defi ned as an estimate of the period the asset will be used by the company. When the tangible asset consists of several major components, each with a different useful life, each component is depreciated separately. The amount to be depreciated is the book value reduced by the projected net sales value at the end of the asset’s useful life if this is signifi cant and can be determined reasonably. Land is not depreciated, even if purchased in conjunction with a building; neither are property, plant and equipment held for sale (see paragraph below “Non-current assets held for sale”.Costs for improvements, upgrades and transformations of an incremental nature with respect to the property, plant and equipment are recognised under balance sheet assets.The costs of replacing identifi able components of complex assets are allocated to balance sheet assets and depreciated over their useful life. The remaining book value of the component being replaced is allocated to the income statement. Ordinary maintenance and repair expenses are posted to the income statement in the period when they incurred.When events occur leading to the assumption of an impairment of the property, plant and equipment, their recoverability is tested by compar-ing the book value with the related recoverable value, which is the fair value adjusted for disposal costs or the usage value, whichever is greater.In the absence of a binding sales agreement, fair value is estimated on the basis of values resulting from an active market, recent transactions or on the basis of the best information available to refl ect the amount the company could obtain from the sale of the asset.Value of use is determined by discounting projected cash fl ows result-ing from the use of the asset, and if they are signifi cant and can be rea-sonably determined, it is adjusted for any disposal costs resulting from its sale at the end of its useful life. Cash fl ows are determined based on reasonable, documentable assumptions representing the best estimate of future economic conditions which will occur during the remaining useful life of the asset, with a greater emphasis on outside information. Discounting is done at a rate refl ecting current market conditions for the time value of money and specifi c risks of the asset not refl ected in the estimated cash fl ows.The valuation is done for single assets, or for the smallest identifi able aggregate of assets which generates independent incoming cash fl ow

(1) According to the amortised cost method, the book value is adjusted to account for repayments of principal, any impairment losses and the amortisation of the difference between the repayment amount and initial recorded amount. Amortisation is carried out using the effective internal interest rate which represents the rate which would make the present value of projected cash fl ows and the amount recorded initially equal at the time of the initial recording.

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resulting from ongoing use (so-called cash-generating units). If the rea-sons for impairment losses carried out no longer apply, the assets are revalued and the adjustment is posted to the income statement as a revaluation (recovery of value). The revaluation is applied to the lower of the recoverable value and book value before any impairment losses previously carried out, and reduced by depreciation provisions which would have been allocated if an impairment loss had not been recorded for the asset. Compulsory inventories are included under non-current assets in the item “Inventories - Compulsory inventories.”

LeasingAssets under fi nance leases, or under agreements which may not take the specifi c form of a fi nance lease, but call for the essential transfer of the benefi ts and risks of ownership, are recorded at the lower of fair value less fees payable by the lessee or the present value of minimum lease payments, under property, plant and equipment as a counter-en-try to the fi nancial debt to the lessor. Assets are depreciated using the criteria and rates used for property, plant and equipment unless the lease term is less than the useful life represented by such rates, and there is no reasonable certainty of the transfer of ownership of the leased asset upon the natural maturity of the agreement. In this case, the depreciation period will be the term of the lease.

Intangible assets Intangible assets are those assets without identifi able physical form which are controlled by the company and capable of producing future economic benefi ts, as well as goodwill when purchased for considera-tion. The ability to identify these assets rests in the ability to distin-guish intangible assets purchased from goodwill. Normally this require-ment is satisfi ed when: (i) the intangible assets are related to a legal or contractual right, or (ii) the asset is separable, i.e. it can be sold, transferred, leased or exchanged independently, or as an integral part of other assets. The company’s control consists of the power to utilise future economic benefi ts deriving from the asset and the ability to limit their access to others.Intangible assets are recorded at cost, which is determined using the criteria indicated for property, plant and equipment. They may not be revalued, even through the application of specifi c laws.Intangible assets with a fi nite useful life are regularly amortised over their useful life, meaning the estimate of the period during which the as-sets will be used by the company. The recoverability of their book value is tested by using the criteria indicated under the paragraph “Property, plant and equipment.”Goodwill and other intangible assets with an indefi nite useful life are not amortised. The recoverability of their book value is tested at least annually, and in any case when events occur leading to an assumption of impairment. Goodwill is tested at the level of the smallest aggregate, on the basis of which the company’s management directly or indirectly assesses the return on investments including goodwill. When the book value of the cash-generating unit including its related goodwill is great-er than the recoverable value, the difference is subject to an impair-

ment loss which is applied fi rst to goodwill up to its total amount, and any excess of the impairment loss over goodwill is allocated on a pro rata basis to the book value of assets making up the cash-generating unit. Impairment losses cannot be reversed. Technical development costs are allocated to the balance sheet assets when: (i) the cost attributable to the intangible asset can be deter-mined reliably; (ii) there is the intent, availability of fi nancial resources and technical capability to make the asset available for use or sale; and (iii) it can be shown that the asset is capable of producing future eco-nomic benefi ts.Intangible assets also include service concession agreements between the public and private sectors for the development, fi nancing, manage-ment and maintenance of infrastructures under concession in which: (i) the grantor controls or regulates the services provided by the opera-tor through the infrastructure and the related price to be applied; (ii) the grantor controls any signifi cant remaining interest in the infrastructure at the end of the concession by owning or holding benefi ts, or in some other way.Based on the terms of the agreements, the operator holds the right to use the infrastructure, which is controlled by the grantor, for the pur-poses of providing the public service2.The value of storage concessions, which is determined as indicated by the Ministry of Production Activities in its decree of 3 November 2005, is allocated to the item “Concessions, licences, trademarks and similar rights”, and is not amortised.

GrantsCapital grants are recognised when there is reasonable certainty that the conditions imposed by the granting government agencies for their allocation will be met, and they are recognised as a reduction to the pur-chase price or production cost of their related assets. Operating grants are recognised in the income statement.

Equity investmentsInvestments in subsidiaries not included in the scope of consolidation, in subsidiaries controlled jointly with other shareholders and in asso-ciates are accounted for using the equity method. If there is objective evidence of impairment (see also “Current assets”), recoverability is tested by comparing the book value with the related recoverable val-ue determined using the criteria indicated in the section on “Property, plant and equipment”.When there is no significant impact on the balance sheet, financial position and income statement, subsidiaries not included in the scope of consolidation, subsidiaries controlled jointly with other sharehold-ers and associates are accounted for at cost adjusted for impairment. When the reasons for the impairment losses carried out no longer ap-ply, equity investments accounted for at cost are revalued up to the amount of the impairment losses applied with the impact posted to the income statement under “Other income (expense) from equity in-vestments”.Other equity investments are measured at fair value with allocation of the impact to the shareholders’ equity reserve for “Other components of comprehensive income”; changes in fair value which are recognised

(2) When the operator has the unconditional contractual right to receive cash or other fi nancial assets from the grantor or entity identifi ed by the grantor, the consideration received, or to be received, by the operator for infrastructure construction or improvements is recognised as a fi nancial asset.

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in shareholders’ equity are posted to the income statement at the time of write-down or sale. When equity investments are not listed in a regu-lated market, and fair value cannot be reliably determined, such invest-ments are accounted for at cost adjusted for impairment; impairment cannot be reversed.3

The risk resulting from any losses exceeding shareholders’ equity is rec-ognised in a special provision to the extent the parent company is com-mitted to fulfi lling its legal or implied obligations to the subsidiary/associ-ate, or, in any event, to covering its losses.

Non-current assets held for saleNon-current assets (or assets related to disposal groups) whose book value will be recovered mainly through their sale rather than ongoing use are classifi ed as held for sale. Non-current assets held for sale (or assets related to disposal groups) and directly related liabilities are recognised in the balance sheet separately from the company’s other assets and liabilities. Non-current assets held for sale are not depreciated, and are accounted for at the lower of book value and the related fair value reduced by any sales costs.Any difference between the book value and fair value reduced by sales costs is posted to the income statement as an impairment loss; any subsequent recoveries in value are recognised up to the amount of the previously recognised impairment losses, including those recognised prior to the asset being classifi ed as held for sale.

FINANCIAL LIABILITIES, TRADE AND OTHER PAYABLES, OTHER LIABILITIES Financial liabilities, trade and other payables and other liabilities are ini-tially recorded at fair value increased by any transaction-related costs; they are subsequently recognised at amortised cost using the effective interest rate for discounting.

Recording and elimination of fi nancial liabilities Financial liabilities are recorded under balance sheet liabilities at the time the company becomes a party to agreements related to such li-abilities. Financial liabilities sold are eliminated from balance sheet li-abilities when the right to disburse cash fl ows is transferred together with all risks and benefi ts associated with ownership.

PROVISIONS FOR RISKS AND CHARGESProvisions for risks and charges concern costs and charges of a certain nature which are certain or likely to be incurred, but whose amount or date of occurrence cannot be determined at the end of the year. Provisions are recognised when: (i) the existence of a current legal or implied obligation deriving from a past event is likely; (ii) it is likely that the fulfilment of the obligation will involve a cost; and (iii) the amount of the obligation can be reliably determined. Provisions are recorded at a value representing the best estimate of the amount that the company would reasonably pay to fulfil the obligation or to transfer it to third parties at the end of the reporting period. Provi-sions related to contracts with valuable consideration are recorded at the lower of the cost necessary to fulfil the obligation, less the ex-

pected economic benefits deriving from the contract, and the cost to terminate the contract. When the fi nancial impact of time is signifi cant, and the payment dates of the obligations can be reliably estimated, the provision is discounted; the increase in the provision due to the passing of time is posted to the income statement under “Financial income (expense)”.When the liability is related to property, plant and equipment (e.g. site dismantlement and restoration), the provision is recognised as a coun-ter-entry to the related asset; posting to the income statement is ac-complished through amortisation.The costs that the company expects to incur to initiate restructuring programmes are recorded in the period in which the programme is for-mally defi ned, and the parties concerned have a valid expectation that the restructuring will take place.Provisions are periodically updated to refl ect changes in cost esti-mates, selling periods and the discount rate; revisions in provision es-timates are allocated to the same item of the income statement where the provision was previously reported or, when the liability is related to property, plant and equipment (e.g. site dismantlement and restora-tion), as a counter-entry to the related asset.The notes to the fi nancial statements describe contingent liabilities represented by: (i) possible (but not probable) obligations resulting from past events, the existence of which will be confi rmed only if one or more future uncertain events occur which are partially or fully outside the company’s control; and (ii) current obligations resulting from past events, the amount of which cannot be reliably estimated, or the fulfi l-ment of which is not likely to involve costs.

EMPLOYEE BENEFITS Post-employment benefi ts are defi ned according to schemes, even if not formalised, which depending on their attributes are divided into “defi ned-contribution schemes” and “defi ned-benefi t schemes”. In the defi ned-contribution schemes the obligation of the fi rm is determined according to the contributions due, limited to the payment of contribu-tions to the state, or to a portfolio or a legally distinct entity (so-called fund).The liability related to defi ned-benefi t schemes, net of any assets serv-icing the plan, is determined according to actuarial assumptions and is recognised for the year in accordance with the employment period necessary to obtain the benefi ts; the liability is measured by independ-ent actuaries.The actuarial profi ts and losses relating to the defi ned-benefi t schemes derived from variations in the actuarial assumptions used or from modi-fi cations to the plan conditions are recognised pro rata in the income statement, for the remaining average working life of the employees par-ticipating in the scheme, if the net value measured at the end of the previous fi nancial year is more than 10% of the value of the liabilities relating to the scheme or 10% of the fair value of the assets servicing it, whichever is greater (“corridor method”).Obligations relating to long-term benefi ts are determined using actuari-al assumptions; the effects resulting from the modifi cation of actuarial assumptions or from a modifi cation of the benefi t specifi cations are recognised entirely in the income statement.

(3) An impairment loss recognised in an interim period cannot be reversed even if, on the basis of conditions in a subsequent interim period, the impairment loss would have been lower or not recognized.

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TREASURY SHARESTreasury shares are recognised at cost and recorded as a reduction of shareholders’ equity. The economic effects resulting from any subse-quent sales are recognised in shareholders’ equity.

REVENUES AND COSTSRevenues from sales and services are recognised when there is an ef-fective transfer of typical signifi cant risks and advantages of ownership or when the service is completed. In relation to the activities performed by Snam Rete Gas, the time of rev-enue recognition coincides with the provision of the service and when the loss risks are transferred to the purchaser.Revenue provisions in relation to services partly provided are recog-nised as a matured amount, provided it is possible to reasonably de-termine the stage of completion and that there are no serious uncer-tainties surrounding the amount and the existence of the revenue and related costs; otherwise they are recognised within the limits of the recoverable costs incurred.Property, plant and equipment, unlike assets used under concession, transferred from clients (or constructed using the liquidity transferred from clients) and used for their connection to a network for the admin-istration of a supply are recognised at fair value as the counter-entry to revenues in the income statement. When the agreement includes the provision of multiple services (e.g. connection and supply of goods) it is verifi ed according to the service provided against the client’s trans-ferred asset, and the revenue is recognised at the time of the connec-tion or the shorter between the duration of the supply and the useful life of the asset.Revenues are recorded net of returns, discounts, rebates and premi-ums, as well as directly related taxes. Exchanges between goods or services of a similar nature and value do not determine the recognition of revenues and costs as they are not representative of sales transactions.Costs are recognised when they relate to goods and services sold or consumed during the year or through systematic distribution when the profi t in future years cannot be identifi ed.Costs relating to emission allowances, determined on the basis of the average of existing prices on the main European stock exchanges at the close of the fi nancial year, are recognised limited to the CO² emissions quota in excess of the assigned allowances; the costs related to the purchase of emission allowances are capitalised and recognised un-der intangible assets net of any negative outstanding balance between emissions released and assigned quotas. Income relating to emission allowances is recognised at the time of the transfer. In the case of transfer, where present, the emission allowances purchased are con-sidered as having been sold fi rst. Monetary credits assigned to replace the free emission quota allocation are recognised as a counter-entry to “Other income” in the income statement. Fees related to operating leases are attributed to the income statement throughout the duration of the contract. Costs for purchasing new information or discoveries, researching al-ternative products or processes, new techniques or models, designing and constructing prototypes, or costs incurred during other scientifi c research or technological development activities which do not satisfy

the conditions for recognition in balance sheet assets are considered as current costs and attributed to the income statement for the year in which they were incurred.Costs incurred during share capital increases are recorded as a reduc-tion of shareholders’ equity, net of the related tax effect.

STOCK OPTIONS Personnel expenses include, consistent with the substantial nature of the remuneration that they comprise, stock options assigned to execu-tives. The cost is determined with reference to the fair value of the op-tion assigned to the executive at the time of making the commitment and is not subject to any subsequent adjustment; the portion due for the year is determined pro rata temporis over the period to which the incentive refers (the so-called vesting period)4. The fair value is repre-sented by the value of the option determined by applying appropriate valuation techniques which take account of the conditions of exercise of the option, the current share value, the expected volatility and the risk-free interest rate, and is recorded with offsetting in the item “Other reserves”.

FOREIGN-EXCHANGE DIFFERENCESThe assets and liabilities included in the balance sheet are represented in the currency of the main economic environment in which the com-pany operates. The consolidated data are represented in euros, which is the working currency of the company and the group. Revenues and costs relating to transactions in currencies other than the working currency are recognised at the exchange rate in effect on the day when the transaction was carried out.Monetary assets and liabilities in currencies other than the working currency are converted into euros by applying the exchange rate in ef-fect on the reporting date, with attribution of the impact to the income statement. Non-monetary assets and liabilities in currencies other than the working currency and valued at cost are recognised at the initially recorded exchange rate; when the measurement is made at fair value or recoverable or realisable value, the exchange rate used is the one in effect on the date of determination of the value.

DIVIDENDS RECEIVEDDividends are recognised at the date of the resolution passed by the shareholders’ meeting, unless it is not reasonably certain that the shares will be sold before the ex-dividend date.

DISTRIBUTION OF DIVIDENDSThe distribution of dividends to the company’s shareholders entails the recording of a payable in the fi nancial statements for the period in which the distribution was approved by the company’s shareholders or, in the case of interim dividends, by the board of directors.

INCOME TAXESCurrent income taxes are calculated by estimating the taxable income. In particular, with regard to corporate income tax (IRES), since 2004 the company, jointly with Eni S.p.A., has exercised the option offered by the national tax consolidation scheme, which allows IRES to be determined on a taxable base corresponding to the algebraic sum of the positive

(4) The period between the date of making the commitment and the date on which the option may be exercised.

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and negative taxable amounts of the individual companies included in the consolidation scope. The economic relations, as well as the reciprocal responsibilities and obligations, between Eni S.p.A. and the other group companies enter-ing the consolidation scope are defined in the “Regulations on partici-pation in the national tax consolidation scheme by companies of the Eni group”, under which: (i) subsidiaries with positive taxable income transfer to Eni the financial resources corresponding to the additional tax payable by Eni due to their participation in the national tax consoli-dation scheme; and (ii) those with negative taxable income receive a payment equal to the relevant tax saving made by Eni S.p.A. if and insofar as they have profitability prospects which would have made it possible, in the absence of the national tax consolidation scheme, to recognise deferred tax assets. Consequently, the relevant tax, net of payments made on account and withholdings applied, is recognised under the item “Trade and other payables”/”Trade and other receiva-bles”.Regional production tax (IRAP), net of payments made on account, is recognised under the item “Current income tax liabilities”/”Current in-come tax assets”.Deferred and prepaid income taxes are calculated on the timing differ-ences between the values of the assets and liabilities entered in the balance sheet and the corresponding values recognised for tax purpos-es. The recording of deferred tax assets is made when their recovery is regarded as probable. Deferred tax assets and deferred tax liabilities are classifi ed under non-current assets and liabilities and are offset at individual company level if they refer to taxes which can be offset. The balance of the offsetting, if it results in an asset, is recognised under the item “Deferred tax as-sets”; if it results in a liability, it is recognised under the item “Deferred tax liabilities”. When the results of the operations are recorded directly under share-holders’ equity, the current taxes, deferred tax assets and deferred tax liabilities are also attributed to shareholders’ equity.

DERIVATIVESDerivatives are assets and liabilities recognised at fair value. Deriva-tives are classifi ed as hedging instruments when the relationship be-tween the derivative and the hedged item is formally documented and the effectiveness of the hedge, verifi ed periodically, is high. When hedg-ing derivatives hedge the risk of changes in the fair value of the hedged instruments (“fair value hedge”; e.g. hedge of the risk of fl uctuations in the fair value of fi xed-rate assets/liabilities), the derivatives are recognised at fair value with attribution of the effects on the income statement; by the same token, the hedged instruments are adjusted to refl ect the changes in fair value associated with the hedged risk. When derivatives hedge the risk of changes in cash fl ows from the hedged instruments (“cash fl ow hedge”; e.g. hedge of changes in cash

fl ows from assets/liabilities due to fl uctuations in interest rates), the changes in the fair value of the derivatives are initially recognised in shareholders’ equity and subsequently attributed to the income state-ment in the same way as the economic effects produced by the hedged operation. Satisfaction of the requirements defi ned by IAS 39 for hedge accounting is verifi ed periodically. Changes in the fair value of derivatives which do not satisfy the require-ments to be classed as hedging instruments are recognised in the in-come statement.

SEGMENT INFORMATIONThe information about business segments has been prepared in ac-cordance with the provisions of IFRS 8 “Operating segments”, which requires the information to be presented in a manner consistent with the procedures adopted by the company’s management when taking operational decisions. Consequently, the identifi cation of the operating segments and the information presented are defi ned on the basis of the internal reporting used by the company’s management for allocat-ing resources to the different segments and for analysing the respec-tive performances. An operating segment is defi ned by IFRS 8 as a component of an entity: (i) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to trans-actions with other components of the same entity); (ii) whose operating results are regularly reviewed by the entity’s most senior decision mak-ers for purposes of making decisions about resources to be allocated to the segment and assessing its performance; and (iii) for which sepa-rate fi nancial information is available.The declared operating segments are as follows: (i) natural gas trans-portation; (ii) liquefi ed natural gas (LNG) regasifi cation; (iii) natural gas distribution; and (iv) natural gas storage. They relate to activities car-ried out predominantly by Snam Rete Gas, GNL Italia, Italgas and Stogit, respectively.

Financial statements5

The items on the balance sheet are classifi ed as “current” and “non-current”, while those on the income statement are classifi ed according to their nature. The statement of changes in shareholders’ equity adopted reconciles the opening and closing balances for each item of shareholders’ equity.The statement of cash fl ows is prepared using the “indirect” method, adjusting the profi t for the period from non-monetary components.It is considered that these statements adequately represent the group’s situation with regard to its balance sheet, income statement and fi nan-cial position.

(5) The fi nancial statements are the same as those adopted in the 2009 annual report, except for the statement of cash fl ows, for which, in order to provide more comparable informa-tion with that of other listed companies, an alteration has been made to the elements that include “Net cash fl ow from operating activities”. In particular, the main changes have involved: (i) the elimination of the items “Cash fl ows from operating activities before changes in working capital” and “Cash fl ows from operating activities”; (ii) the introduction of the item “Equity method valuation effect”; (iii) the inclusion in the item “Changes in working capital” of net impairment losses (reversals of impairment losses) for inventories, trade receivables and the change in fair value of derivatives previously included in the item “Net impairment losses (reversals of impairment losses)”; (iv) the inclusion of changes in provisions for risks and charges in the item “Changes in working capital”; and (v) the representation of the change in provisions for employee benefi ts after “Cash fl ows from working capital”. Information about fi nancial instruments in accordance with the classifi cation provided for by IFRS is given in Note 22 “Guarantees, commitments and risks - Management of corporate risks - Other information about fi nancial instruments”.

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Change in accounting criteria

The provisions of IFRIC 12 “Service Concession Arrangements” (herein-after “IFRIC 12”) came into force in 2010. These set out the recognition and measurement criteria to be adopted for arrangements between the public and private sectors for the development, fi nancing, management and maintenance of infrastructures under concessions. In view of the agreements in place within Snam Rete Gas, the application of IFRIC 12 entails the classifi cation of concession infrastructures under intangible assets; in the balance sheet at 31 December 2009 presented for com-parison purposes, the net book value of concession infrastructures in accordance with IFRIC 12 (€3,341 million) has been reclassifi ed from “Property, plant and equipment” to “Intangible assets”. The asset depreciation process relating to service concession arrange-ments has remained unchanged and continues to operate on the basis of the expected arrangements for obtaining the future economic ben-efi ts deriving from the use and residual value of the infrastructure, as envisaged by the reference legislative framework.Additionally, with prospective effect as of 1 January 2010, and in ac-cordance with the tariff review conducted by the Electricity and Gas Au-thority for the natural gas transportation business, the useful life of the following has been changed: · pipelines (from 40 to 50 years); · reduction plants (from 40 to 20 years).The useful life thus defi ned does not exceed the technical life of the as-sets. This change impacted net profi t by €54 million as a result of less depre-ciation (net of tax effect).

Use of estimates

The application of generally accepted accounting principles for the prep-aration of fi nancial statements and interim reports involves manage-ment making accounting estimates based on complex and/or subjec-tive judgements, estimates based on past experience and assumptions regarded as reasonable and realistic on the basis of the information known at the time of the estimate. The use of these accounting estimates has an infl uence on the book value of the assets and liabilities and on the information about potential assets and liabilities at the reporting date, as well as the amount of rev-enues and costs in the reference period. The actual results may differ from the estimated results owing to the uncertainty that characterises the assumptions and the conditions on which the estimates are based. Details are given below about the critical accounting estimates in-volved in the process of preparing the fi nancial statements and inter-im reports, since they involve a high degree of recourse to subjective judgements, assumptions and estimations regarding matters that are by nature uncertain. Any change in the conditions forming the basis of the judgements, assumptions and estimations used could have a sig-nifi cant impact on subsequent results.

Duration and residual value of assets under concessionThe natural gas distribution business is carried out under concession, with the provision of the service being contracted by local public author-ities. With regard to the duration of the concessions, Legislative Decree no. 164/00 (the “Letta Decree”) established that all contracts must be put out to tender before the expiry of the so-called “transitional period”

(for Snam Rete Gas, by 31 December 2012) and that the new duration of the concessions may not exceed 12 years. Upon expiry of the conces-sions, the outgoing operator, in view of the transfer of its distribution networks, excluding any assets transferable free of charge, is paid a sum of compensation defi ned on the basis of the criteria used for mak-ing the industrial estimate.With regard to the estimates made by the directors in determining the amortisation criterion, the net book value of the assets on expiry of the concession must not exceed the aforesaid industrial value.

Impairment lossesProperty, plant and equipment and intangible assets are impaired when events or changes in circumstances give cause to believe that the book value is not recoverable. The events which may give rise to an impair-ment of assets include changes in business plans, changes in market prices or reduced use of plants. The decision on whether to apply an impairment and the quantifi cation of any such impairment depend on the assessments of management concerning complex and highly un-certain factors, such as future price trends, the impact of infl ation and technological improvements on production costs, production profi les, and conditions of supply and demand on a global or regional scale. The impairment is determined by comparing the book value with the re-lated recoverable value, represented by the greater of the fair value, net of disposal costs, and the usage value, determined by discounting the expected cash fl ows deriving from the use of the asset. The expected cash fl ows are quantifi ed in light of the information available at the time of the estimate, on the basis of subjective judgements regarding future trends in variables - such as prices, costs, the rate of growth of demand, production profi les - and are updated using a rate that takes account of the risk inherent in the asset concerned. Goodwill and other intangible assets with an indefinite useful life are not subject to amortisation; the recoverability of their book value is verified at least once a year and in any case whenever any event oc-curs which might involve impairment. With reference to goodwill, the verification is carried out at the level of the smallest aggregate (cash-generating unit) to which the goodwill can be reasonably and consist-ently attributed; this unit represents the basis on which management assesses, directly or indirectly, the return on investment. When the book value of the cash-generating unit, including the goodwill attrib-uted to it, exceeds the recoverable value, the difference is subject to impairment, which is attributed by priority to the goodwill up to its amount; any surplus in the impairment with respect to the goodwill is attributed pro rata to the book value of the assets which constitute the cash-generating unit.

Site dismantlement and restorationSnam Rete Gas incurs signifi cant liabilities associated with obligations of removal and dismantlement of plants or parts of plants. Estimating future dismantlement and restoration costs is a complex process and requires the assessment and judgement of the company’s manage-ment in placing a value on the liabilities which will be incurred many years in the future for complying with dismantlement and restoration obligations, which often cannot be completely defi ned by laws, admin-istrative regulations or contractual clauses. In addition, these obliga-tions are affected by constant changes in technology and in dismantle-ment and restoration costs, as well as the constant growth of political and public awareness regarding matters of health and protection of the environment.

99


The criticality of estimates of dismantlement and restoration costs also depends on the accounting method used for these costs, whose current value is initially capitalised, along with the cost of the asset to which they relate, offset against the provision for risks and charges. Subse-quently, the value of the provision for risks and charges is increased to refl ect the passing of time and any changes in the estimation as a result of changes in expected cash fl ows, the timing of their realisation and the discount rates applied. The determination of the discount rate to be used both in the initial valuation of the cost and in subsequent valuations is the result of a complex process which involves subjective judgements on the part of the company’s management.

Business combinations The reporting of business combination transactions involves the at-tribution, to the assets and liabilities of the acquired company, of the difference between the acquisition cost and the net book value. For the majority of assets and liabilities, the attribution of the difference is car-ried out by recognising the assets and liabilities at their fair value. The unattributed portion, if positive, is recognised as goodwill; if negative, it is attributed to the income statement. In the attribution process, Snam Rete Gas draws on the available information and, for the most signifi -cant business combinations, on external valuations.

Environmental liabilitiesSnam Rete Gas is subject, in relation to its activities, to numerous laws and regulations on the protection of the environment at European, na-tional, regional and local level, including the laws which implement in-ternational conventions and protocols relating to the activities carried out. With reference to this legislation, when it is probable that the ex-istence and amount of a large liability can be reliably estimated, provi-sions are made for the associated costs.While the company does not currently believe that there will be any particularly signifi cant negative effects on its fi nancial statements due to non-compliance with environmental legislation, including taking account of the interventions already made, the possibility can never-theless not be ruled out that Snam Rete Gas might incur substantial additional costs or responsibilities, since with the current state of knowledge it is impossible to foresee the effects of future develop-ments, in view of factors such as: (i) the possibility of contaminations emerging; (ii) the possible effects arising from the application of new laws and regulations on the protection of the environment; (iii) the ef-fects of any technological innovations for environmental cleansing; and (iv) the possibility of disputes and the diffi culty of determining the pos-sible consequences, including in relation to the liability of other parties and to possible compensation payments.

Employee benefi tsDefi ned-benefi t plans are valued on the basis of uncertain events and actuarial assumptions which include, among other things, the discount rates, the expected returns on the assets servicing the plans, the level of future remuneration, the retirement age and future trends in the healthcare expenses covered.The principal assumptions used for the quantifi cation of post-employ-ment benefi ts are determined as follows: (i) the discount and infl ation rates representing the base rates at which the obligation to employees might actually be fulfi lled are based on the rates which mature on high-quality bonds (government bonds) and on infl ation expectations; (ii) the level of future remuneration is determined on the basis of elements

such as infl ation expectations, productivity, career advancement and seniority; (iii) the future cost of healthcare services is determined on the basis of elements such as present and past trends in healthcare costs, including assumptions regarding the infl ationary growth of costs, and changes in the health of the participating employees; (iv) the demographic assumptions refl ect the best estimates of trends in variables such as mortality, turnover, invalidity and others in relation to the population of the participating employees; (v) the return on the assets servicing the plans is determined on the basis of the weighted average of the expected future yields, differentiated by class of invest-ment (fi xed income, equity, money market). The differences between the actual and expected costs and between the actual and expected returns on the assets servicing the plans are verifi ed in the normal manner and are defi ned as actuarial profi ts or losses. The actuarial profi ts and losses are recognised pro rata in the income statement for the remaining average working life of the employ-ees who take part in the plan, if and insofar as their net value not rec-ognised at the end of the previous period exceeds the greater of 10% of the current value of the liabilities relating to the plan and 10% of the fair value of the assets servicing the plan (the so-called “corridor method”).Actuarial assumptions are also used for determining obligations relat-ing to long-term benefi ts; to this end, the effects arising from changes to the actuarial assumptions or the characteristics of the benefi t are recognised entirely on the income statement.

Provisions In addition to recognising environmental liabilities and obligations to re-move property, plant and equipment and restore sites, Snam Rete Gas makes provisions relating mainly to employee benefi ts and legal and tax disputes. The estimation of the provisions for these purposes is the result of a complex process involving subjective judgements on the part of the company’s management.

Recently issued IFRS

Accounting standards and interpretations issued by the IASB/IFRIC and approved by the European CommissionRegulati on no. 632/2010 issued by the European Commission on 19 July 2010 approved the new version of IAS 24 “Related Party Disclo-sures”, which: (i) supplements the defi nition of related parties provid-ing for new cases; (ii) for transactions carried out between companies related to the same government (government-related entities), allows for limiting quantitative disclosures to signifi cant transactions. The pro-visions of the new version of IAS 24 are effective as of fi nancial years starting on or after 1 January 2011.Regulation no. 662/2010 issued by the European Commission on 23 July 2010 approved IFRIC 19 “Extinguishing fi nancial liabilities with equity instruments” (hereinafter “IFRIC 19”), which defi nes the ac-counting treatment to be adopted where a fi nancial liability is settled through the issue of equity instruments (i.e. debt-for-equity swap). In particular, equity instruments issued to extinguish a liability in whole or in part are measured at fair value or, when not reliably determinable, at the fair value of the liability extinguished. The difference between the book value of the fi nancial liability extinguished and the fair value of the equity instruments issued is recognised on the income statement. The provisions of IFRIC 19 are effective as of fi nancial years beginning on or after 1 July 2010 (2011 fi nancial statements for Snam Rete Gas).

100


Accounting standards and interpretations issued by the IASB/IFRIC and not yet approved by the European CommissionOn 12 November 2009, the IASB issued IFRS 9 “Financial Instruments” which amends the criteria for recognising and measuring fi nancial as-sets and their respective classifi cation on fi nancial statements. In par-ticular, the new provisions stipulate, among other things, a model for classifying and measuring fi nancial assets based exclusively on the following categories: (i) assets measured at amortised cost; (ii) assets measured at fair value. The new provisions also provide that equity in-vestments other than those in subsidiaries, jointly controlled entities or associates must be measured at fair value and posted to the income statement. In the event that such equity investments are not held for trading purposes, changes in fair value may be recognised on the state-ment of comprehensive income, maintaining on the income statement solely the effects associated with dividend distributions; the amounts recognised on the statement of comprehensive income are not posted to the income statement upon disposal of the equity investment. On 28 October 2010, the IASB supplemented the provisions of IFRS 9 by including criteria for recognising and measuring fi nancial liabilities. In particular, the new provisions require, among other things, that if a fi nancial liability is measured at fair value and posted to the income statement, the changes in fair value associated with changes in the is-

suer’s credit risk (i.e. own credit risk) are to be recognised in the state-ment of comprehensive income; this component is to be posted on the income statement to ensure symmetrical representation with other fi nancial statement items associated with the liability, avoiding an ac-counting mismatch. The provisions of IFRS 9 are effective as of fi nancial years beginning on or after 1 January 2013.On 7 October 2010, the IASB issued the Amendment to IFRS 7 “Disclosures – Transfers of fi nancial assets”, which provides for the addition of disclo-sure on fi nancial instruments, with reference to transfers of fi nancial as-sets, in order to describe the risks to which a company remains exposed in relation to the assets transferred. The new provisions require, among other things, additional disclosure in the event that a company makes signifi cant transfers of fi nancial assets near the end of the fi nancial year. The new provisions are effective as of fi nancial years beginning on or af-ter 1 July 2011 (2012 fi nancial statements for Snam Rete Gas).On 6 May 2010, the IASB issued the document “Improvements to IFRSs” containing changes of an essentially technical and editorial nature to the existing international accounting standards and interpretations. The provisions of the document are effective as of the 2011 fi nancial year.At present, Snam Rete Gas is analysing the standards and interpreta-tions mentioned and is assessing whether their adoption will have a signifi cant impact on the fi nancial statements.

101

Snam Rete Gas 2010 Consolidated financial statements / Notes to the consolidated financial statements

Notes to the consolidated financial statements

Current assets

1 Cash a nd cash equivalentsCash and cash equivalents of €8 million (€36 million at 31 December 2009) concern current account deposits at the ultimate parent, Eni. They are not subject to any usage restrictions.

2 Trade and other receivablesTrade and other receivables of €944 million (€916 million at 31 December 2009) comprise:

(€ million) 31.12.2009 31.12.2010

Trade receivables 738 777

Receivables from investment/divestment activities 32 78

Financial receivables:

- Held for operations 2 2

Other receivables 144 87

916 944

These are reported net of the provision for impairment losses of €36 million (€33 million at 31 December 2009). The activity in the provision for impair-ment losses on receivables during the year is shown below.

(€ million) Bala

nce

at

1 Ja

nuar

y 20

10

Prov

isio

ns

Utili

satio

ns

Othe

r cha

nges

Bala

nce

at

31.1

2.20

10

Trade receivables 29 7 (3) 33

Receivables from investment/divestment activities 4 (1) 3

33 7 (1) (3) 36

The provision for the period of €7 million refers to the natural gas distribution business segment. The other changes (-€3 million) concern the write-off of some trade receivables ascertained as bad debts and the respective provision for impairment losses in the distribution segment.Trade receivables of €777 million (€738 million at 31 December 2009) relate to the natural gas transportation (€404 million), distribution (€304 mil-lion), regasifi cation (€14 million) and storage (€55 million) business segments. Receivables from investment/divestment activities of €78 million (€32 million at 31 December 2009) relate to: (i) receivables with the ultimate parent, Eni, for the price adjustment mechanisms in the purchase agreements for Italgas and Stogit (€47 million)6; (ii) government grants and private contribu-tions, recognised with investment activities (€21 million); and (iii) receivables from disposals of property, plant and equipment (€10 million). The other receivables of €87 million (€144 million at 31 December 2009) comprise:

(€ million) 31.12.2009 31.12.2010

IRES receivables for national tax consolidation scheme 13 10

Group VAT credit 1 4

Other receivables:

- Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund) 71 44

- Advances to suppliers 9 10

- VAT advance 36 7

- Other 14 12

130 73

144 87

The corporate tax (IRES) receivables for the national tax consolidation scheme (€10 million) concern receivables with the ultimate parent, Eni, relating to the IRES refund request for 10% of the regional production tax (IRAP) for the 2004, 2005, 2006 and 2007 tax years (pursuant to Article 6 of Legislative Decree no. 185 of 28 November 2008, enacted by Law no. 2 of 28 January 2009).

(6) Information on the price adjustment mechanisms and the developments occurring during the year can be found in Note 22 “Guarantees, commitments and risks – Commit-ments deriving from the agreement to purchase Italgas and Stogit from Eni”.

102


Receivables with the Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund) of €44 million were mainly for: (i) the inclusion of storage seg-ment capacity revenues (€24 million); (ii) additional tariff components in the distribution segment (€12 million); and (iii) receivables for energy ef-fi ciency certifi cates7 (€8 million). The residual item “Other”, in the amount of €12 million, essentially comprises local tax receivables with government bodies (€3 million) and receivables with personnel (€2 million).The fair value measurement of trade and other receivables has no material impact considering the short period of time from when the receivable arises and its due date.All receivables are in euros. Receivables from related parties are described in Note 30 “Related-party transactions”. Information on credit risk can be found in Note 22 “Guarantees, commitments and risks – Credit risk”.

3 InventoriesInventories of €441 million (€411 million at 31 December 2009) are analysed in the following table:

31.12.2009 31.12.2010 Change

(€ million)Gross

amountImpairment

lossesNet

amountGross

amountImpairment

lossesNet

amount

Raw materials, consumables and supplies 68 (6) 62 101 (6) 95 33

Finished products and merchandise 348 348 346 346 (2)

Ongoing contract work 1 1 (1)

417 (6) 411 447 (6) 441 30

Inventories of raw materials, consumables and supplies (€95 million) comprise: (i) spare parts for gas pipeline networks (€34 million), distribution networks (€18 million) and storage facilities (€5 million); and (ii) natural gas used in transportation and regasifi cation (€38 million). The inventories of fi nished products and merchandise (€346 million) refer to the natural gas present in the storage system (4,274 million standard cubic metres compared with 4,299 million cubic metres at 31 December 2009) and do not include compulsory inventories8, recognised under non-current assets on the balance sheet.Inventories are stated net of the provision for impairment losses of €6 million (unchanged from 31 December 2009), set up to account for slow-moving materials.The €30 million increase in inventories compared with 31 December 2009 derives mainly from the natural gas used to operate the transportation busi-ness (€24 million). For this purpose, it is noted that since 1 January 2010, the new tariff criteria for the transportation business, applicable for the third regulatory period (1 January 2010 – 31 December 2013) has required payment in kind by users of the transportation service of quantities of gas to cover fuel gas, network losses and unaccounted-for gas, owed in percentages of the quantities respectively injected into and withdrawn from the transportation network. Inventories are not collateralised. Inventories do not secure liabilities, nor are they recognised at net realisation value.

4 Other current tax assetsOther current ta x assets, amounting to €4 million (€5 million at 31 December 2009) essentially comprise VAT receivables (€2 million) for companies not belonging to Eni-group VAT. Note 27 “Income taxes” provides information about taxes for the year.

5 Other current assetsOther current assets of €71 million (€67 million at 31 December 2009) comprise:

(€ million) 31.12.2009 31.12.2010

Accrued income from regulated activities 62 63

62 63

Other current assets:

- Prepayments 5 8

5 8

67 71

(7) Legislative Decree no. 164 of 23 May 2000 stipulates that natural gas distribution fi rms set consumption reduction and energy savings targets to be met through raising energy effi ciency, and that they are awarded energy effi ciency certifi cates (established by the Ministerial Decrees of 20 July 2004) depending on the results achieved. The energy effi ciency targets can be met either by implementing energy effi ciency policies or by purchasing certifi cates from other parties. Once the energy effi ciency target is met, can-celling the excess certifi cates triggers repayment by the Cassa Conguaglio del Settore Elettrico (Electricity Equalisation Fund) on the basis of dedicated funds built up through distribution tariff increases.

(8) The compulsory inventories are described in Note 7 “Inventories – Compulsory inventories”.

103


Accrued income from regulated activities of €63 million relates to the current portion of assets booked against the recognition by the Electricity and Gas Authority of additional expenses borne during the second regulatory period (1 October 2005 – 31 December 2009) for the purchase of fuel gas used in the transportation business9. Prepayments of €8 million mainly refer to lease expenses (€3 million) and insurance premiums (€3 million).

Non-current assets

6 Property, plant and equipmentProperty, plant and equipment of €13,239 million (€12,684 million at 31 December 2009) comprise:

(€ million)

31.12.2009 Ne

t beg

inni

ng v

alue

Inve

stm

ents

Amor

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ion

and

depr

ecia

tion

Chan

ge in

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f co

nsol

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ion

Disp

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s

Othe

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nges

Recl

assi

fi cat

ion

per

IFRI

C 12

(*)

Net e

ndin

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lue

Gros

s en

ding

val

ue

Prov

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ns fo

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ortis

atio

n,

depr

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tion

and

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(**)

Land 99 9 39 (2) (10) 135 135

Buildings 171 20 (10) 245 (2) 5 (37) 392 584 192

Plant and equipment 9,336 65 (535) 3,588 (13) 878 (2,911) 10,408 14,498 4,090

Industrial and commercial equipment 20 72 (26) 295 (6) 7 (299) 63 198 135

Other assets 17 1 (8) 1 3 14 82 68

Fixed assets under construction and advance payments 906 1,051 643 (1) (843) (84) 1,672 1,672

10,549 1,218 (579) 4,811 (24) 50 (3,341) 12,684 17,169 4,485

(*) The net book value of infrastructures under concession used for natural gas distribution at 31 December 2009 (€3,341 million) was reclassifi ed from “Property, plant and equipment” to “Intangible assets” pursuant to IFRIC 12, in effect from 1 January 2010.

(**) Of which €7 million in the provision for impairment losses.

(€ million)

31.12.2010

Net b

egin

ning

val

ue

Inve

stm

ents

Amor

tisat

ion

and

depr

ecia

tion

Disp

osal

s

Othe

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nges

Net e

ndin

g va

lue

Gros

s en

ding

val

ue

Prov

isio

ns fo

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ortis

atio

n,

depr

ecia

tion

and

impa

irmen

t los

ses

(*)

Land 135 1 1 137 137

Buildings 392 8 (12) (3) 7 392 593 201

Plant and equipment 10,408 28 (461) (5) 531 10,501 15,044 4,543

Industrial and commercial equipment 63 17 (16) 1 65 206 141

Other assets 14 1 (6) 3 12 85 73

Fixed assets under construction and advance payments 1,672 1,062 (1) (601) 2,132 2,132

12,684 1,117 (495) (9) (58) 13,239 18,197 4,958

(*) Of which €7 million in the provision for impairment losses.

Property, plant and equipment (€13,239 million) comprise transportation infrastructure (€11,328 million), natural gas storage (€1,595 million), dis-tribution (€227 million) and regasifi cation (€89 million). Investments of €1,117 million10 (€1,218 million at 31 December 2009) refer to the natural gas transportation (€859 million), storage (€239 million), and distribution (€16 million) business segments, as well as to LNG regasifi cation (€3 million). The fi nancial expenses capitalised during the year amounted to €37 million (€24 million in 2009). The interest rate used for the capitalisation of fi nancial expenses ranged from 2.63% to 3.1% (3.03% in

(9) The recognition of such assets follows Resolutions VIS 8/09, ARG/gas 184/09 and ARG/gas 218/10, whereby the Electricity and Gas Authority recognised the additional expenses borne by the Company respectively in the 2005-2006 and 2006-2007 thermal years (€45 million overall), the 2007-2008 thermal year (€34 million) and the period from 1 October 2008 – 31 December 2009 (€55 million). Pursuant to Article 6 of Resolution ARG/gas 184/09, the recognition of the additional costs is subject to equalisation with the users through tariff adjustment: (i) as of 1 January 2010 for additional costs borne in the 2005-2006, 2006-2007 and 2007-2008 thermal years; (ii) as of 1 January 2011 for the additional costs borne by the Company during the period from 1 October 2008 – 31 December 2009.

(10) The investments for the period are broken down by business segment in the “Business segment operating performance” section of the Directors’ report.

104


2009). Depreciation (€495 million) refers to economic and technical depreciation determined on the basis of the useful life of the assets or their remaining possible use by the company. The main annual depreciation rates adopted are included in the following ranges:

Annual rate (%)

Buildings

- Buildings 2 - 2.5 or more as a function of remaining life

Plant and machinery - Transportation

- Pipelines 2 or more as a function of remaining life

- Plants 5 or more as a function of remaining life

- Gas reduction and regulation plants 5 or more as a function of remaining life

Plant and machinery - Storage

- Pipes 2 - 2,5

- Treatment and compression stations 4 - 5 or more as a function of remaining life

- Storage tanks 1,66

Plant and machinery - Regasifi cation

- LNG plants 4 or more as a function of remaining life

Other property, plant and equipment 2,5 - 12,5

Metering devices 5 or more as a function of remaining life

Industrial and commercial equipment 4 - 35

Other assets 10 - 25

The depreciation rates adopted were changed from the previous year as a result of the revision for tariff purposes by the Electricity and Gas Authority of the useful life of some assets in the transportation business segment. Specifi cally, the Authority updated the useful life: (i) of pipelines (from 40 years to 50 years); and (ii) natural gas reduction and regulation plants (from 40 to 20 years). The company, in light of the mechanisms for recognising tariff components linked to depreciation and to the technical life of assets, considered it appropriate to restate the useful life of these assets in line with the conventional tariff duration11.Disposa ls of €9 million primarily concern sections of pipelines and some components of compression stations (€5 million overall).Other cha nges (-€58 million) relate essentially to: (i) the change in inventories of piping and the respective accessory materials acquired for investment activities and not yet used in plant construction (-€38 million); and (ii) grants for the period (-€23 million).Government grants for capital expenditure and grants from other parties reducing the net value of property, plant and equipment amount respectively to €76 million (€79 million at 31 December 2009) and €211 million (€191 million at 31 December 2009)12. At 31 December 2010, uncollected govern-ment grants amount to €5 million (unchanged from 31 December 2009). It is noted that following the implementation of IFRIC 12 as of 1 January 2010, government grants and grants from other parties relating to the natural gas distribution service reduced intangible assets; accordingly, the correspond-ing amounts for 2009 were reclassifi ed (€377 million and €316 million, respectively). The amount for plant and machinery includes €158 million of site dismantlement and restoration costs recognised mainly against natural gas storage site drainage and replenishment expenses (€156 million).Summarised below are changes occurring in provisions for depreciation and impairment losses during the year:

(€ million)

Provisions for amortisation, depreciation and impairment losses

31.

12.2

009

Incr

ease

s

Othe

r cha

nges

31.1

2.20

10

Buildings 192 12 (3) 201

Plant and equipment 4,090 461 (8) 4,543

Industrial and commercial equipment 135 16 (10) 141

Other assets 68 6 (1) 73

4,485 495 (22) 4,958

Contractual commitments for the purchase of property, plant and equipment, and for the provision of goods and services related to their construction, are disclosed in Note 22 “Guarantees, commitments and risks”.

(11) The effects on earnings from such changes are shown in the “Basis of presentation and consolidation principles – Change of accounting criteria” section.(12) It is to be noted that, as of 1 January 2010, as a result of the European Commission’s approval of the provisions of IFRIC 18 “Transfers of assets from customers,” contributions for

connecting to the transportation network are no longer recognised as reducing the value of the asset, but are recognised as revenue at the time of connection to the network. By ex-press requirement of IFRIC 18, the provisions of this interpretation are not applied in the event that the asset transferred (including the liquid assets that the company is committed to using to construct the infrastructure necessary for connection to the network) by the customer represents an activity regulated by the provisions of IFRIC 12.

105


Property, plant and equipment by business segmentProperty, plant and equipment are broken down by business segment as follows:

(€ million) 31.12.2009 31.12.2010

Gross property, plant and equipment

Business segments

- Transportation 14,613 15,400

- Regasifi cation 119 124

- Storage 1,962 2,203

- Distribution 475 470

Total 17,169 18,197


- Transportation (3,673) (4,072)

- Regasifi cation (30) (35)

- Storage (539) (608)

- Distribution (243) (243)

Total (4,485) (4,958)

Net property, plant and equipment

- Transportation 10,940 11,328


- Storage 1,423 1,595

- Distribution 232 227

12,684 13,239

7 Inventories - Compulsory inventoriesInventories – Compulsory inventories, amounting to €405 million (€405 million at 31 December 2009), are made up of minimum quantities of natural gas that the storage companies are obligated to hold pursuant to Presidential Decree no. 22 of 31 January 2001. The inventories correspond to approxi-mately 5 billion standard cubic metres of natural gas, the overall measurement of which is determined annually by the minister for economic develop-ment.

8 Intangible assetsIntangible assets of €4,262 million (€4,082 million at 31 December 2009) comprise:

(€ million)

31.12.2009

Net b

egin

ning

val

ue

Inve

stm

ents

Amor

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ion

and

depr

ecia

tion

Chan

ge in

sco

pe o

f co

nsol

idat

ion

Othe

r cha

nges

Recl

assi

fi cat

ion

per

IFRI

C 12

(*)

Net e

ndin

g va

lue

Gros

s en

ding

val

ue

Prov

isio

ns fo

r am

ortis

atio

n,

depr

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tion

and

impa

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t los

ses

Finite useful-life intangible assets

- Service concession agreements 3,341 3,341 5,856 2,515

- Development costs 1 (2) 1 17 17

- Industrial patent rights and rights to use intellectual property 23 1 (30) 24 37 55 492 437

- Concessions, licences, trademarks and similar rights 1 (2) 664 663 820 157

- Other intangible assets 24 24

- Fixed assets in process and advance payments 16 33 3 (38) 14 14

39 36 (34) 691 3,341 4,073 7,223 3,150

Indefi nite useful-life intangible assets

- Goodwill 9 9 9

39 36 (34) 700 3,341 4,082 7,232 3,150

(*) The reclassifi cation (€3,341 million) from “Property, plant and equipment” to “Intangible assets with a fi nite useful life” concerns the net book value at 31 December 2009 of the infrastructure under concession used for the natural gas distribution service and it was carried out owing to the implementation as of 1 January 2010 of IFRIC 12.

106


(€ million)

31.12.2010 Net b

egin

ning

val

ue

Inve

stm

ents

Amor

tisat

ion

and

depr

ecia

tion

Impa

irmen

t los

ses

Disp

osal

s

Othe

r cha

nges

Net e

ndin

g va

lue

Gros

s en

ding

val

ue

Prov

isio

ns fo

r am

ortis

atio

n,

depr

ecia

tion

and

impa

irmen

t los

ses

(*)

Finite useful-life intangible assets

- Service concession agreements 3,341 349 (128) (10) (13) (48) 3,491 6,099 2,608

- Development costs 4 (4) 20 20

- Industrial patent rights and rights to use intellectual property delle opere dell’ingegno

55 4 (38) 51 72 548 476

- Concessions, licences, trademarks and similar rights 663 (3) 2 662 820 158

- Other intangible assets 24 24

- Fixed assets in process and advance payments 14 66 (52) 28 28

4,073 423 (173) (10) (13) (47) 4,253 7,539 3,286

Indefi nite useful-life intangible assets

- Goodwill 9 9 9

4,082 423 (173) (10) (13) (47) 4,262 7,548 3,286

(*) Of which €10 million in the provision for impairment losses.

Intangible assets with a fi nite useful life (€4,253 million) mainly concern: (i) assets recognised following the application of IFRIC 12 13 relating to the natural gas distribution business segment (€3,491 million); and (ii) concessions for the natural gas storage business (€655 million).In particular, the provisions of IFRIC 12 are applicable for Snam Rete Gas to agreements under which the operator is committed to providing the public natural gas distribution service at the tariff established by the Electricity and Gas Authority using the natural gas distribution system which, although owned by the company, can be taken over by the licensing authority at the end of the concession by paying an amount (calculated based on the “indus-trial estimate”) which takes into account the industrial value of the infrastructure. In view of the tariff structure of concession services and in the absence of a benchmark, it is not possible for a margin to be reliably established for the infrastructure construction/upgrading operations and so investments are recognised as contract work in progress on a commensurate basis with the costs incurred. The asset amortisation process relating to service concession arrangements has remained unchanged and continues to operate on the basis of the expected arrangements for obtaining the future economic benefi ts deriving from the use and residual value of the infrastructure, as envis-aged by the reference legislative framework.Industrial patent rights and intellectual property rights of €72 million (€55 million at 31 December 2009) mainly concern information systems and ap-plications in support of operating activities.Concessions, licences, trademarks and similar rights (€662 million) refer mainly to concessions for the natural gas storage business (€655 million).Intangible assets with an indefi nite useful life consist only of the goodwill recognised following the acquisition by Italgas of 100% of the shares of Siciliana Gas (€9 million). For purposes of determining the recoverable value, the goodwill was allocated to the cash-generating unit comprised by the activity carried out in a se-ries of municipalities aggregated at a regional level. The recoverable value of the cash-generating unit was estimated by equity/income type valuations with reference to the value of the asset recognised for tariff purposes (RAB - regulated asset base), as well as to additional income components deriving mainly from the natural gas distribution service, and it is greater than the book value of the cash-generating unit.Investments in intangible assets of €423 million (€36 million at 31 December 2009) refer mainly to: (i) the construction and upgrading of natural gas distribution infrastructure (€349 million); and (ii) investment projects in progress (€66 million). Impairment losses (€10 million) were made on some assets in the natural gas distribution business segment. In particular, the write-down refers to the completion of methane conversion works in the south of Italy and it was defi ned at the estimate of the expenses to be borne to ready plants for normal use. At 31 December 2010, uncollected government grants amount to €3 million (unchanged from 31 December 2009).Other changes (-€47 million) relate essentially to: (i) grants for the period (-€57 million); and (ii) the acquisition of the CNEA business unit in the natural gas distribution segment (+€9 million).

(13) For the purposes of applying IFRIC 12, in consideration of the existing agreements for Snam Rete Gas, the accounting model adopted is the intangible asset model, used in con-cession arrangements where the concessionaire builds and operates the infrastructure for the provision of the public service and where the consideration which it receives for the service rendered is uncertain or where the concessionaire bears the demand risk.

107


Government grants for capital expenditure and grants from other parties reducing the net value of intangible assets amounted respectively to €374 mil-lion (€377 million at 31 December 2009) and €355 million (€316 million at 31 December 2009) and essentially concern the natural gas distribution segment. It is to be noted that, following the implementation on 1 January 2010 of the provisions of IFRIC 12, government grants and grants from other parties relating to the natural gas distribution service reduce the intangible assets item; accordingly, the corresponding amounts for 2009 have been reclassifi ed from property, plant and equipment.

The main amortisation rates adopted on an annual basis are the following:

Annual rate (%)

Facilities used in service concession arrangements

- Gas distribution network 2

- Gas diversion plants 2

- Distribution metering devices 5 - 7.5 or more as a function of remaining life

Intangible assets

- Industrial patent rights and rights to use intellectual property 20-33

- Other intangible assets 20 or as a function of contract term

Existing contractual commitments for the purchase of intangible assets, and of services related to their development, are disclosed in Note 22 “Guaran-tees, commitments and risks”.

Intangible assets by business segmentIntangible assets are broken down by business segment as shown below:

(€ million) 31.12.2009 31.12.2010

Gross intangible assets

Business segments

- Transportation 348 389


- Storage 766 778

- Distribution 6,117 6,380

Total 7,232 7,548


- Transportation (309) (335)

- Regasifi cation (1) (1)

- Storage (108) (113)

- Distribution (2,732) (2,837)

Total (3,150) (3,286)

Net intangible assets

- Transportation 39 54

- Regasifi cation

- Storage 658 665

- Distribution 3,385 3,543

4,082 4,262

The market value of fi xed assets, including compulsory inventories and intangible assets, is estimated at €21.5 billion and was defi ned in keeping with the estimate of the value recognised for such assets for purposes of compensation by the Electricity and Gas Authority.

108


9 Equity-accounted investmentsEquity-accounted investments of €319 million (€301 million at 31 December 2009) refer to equity investments in the distribution business segment and are broken down as follows:

Equity-accounted investments (€ million)

31.12.2009

Begi

nnin

g va

lue

Chan

ge in

sco

pe o

f co

nsol

idat

ion

Capi

tal g

ains

from

m

easu

rem

ent u

sing

th

e eq

uity

met

hod

Endi

ng v

alue

Investments in jointly controlled entities 230 19 249

Investments in associates 49 2 51

Investments in subsidiaries 1 1

280 21 301

(€ million)

31.12.2010

Begi

nnin

g va

lue

Capi

tal g

ains

from

m

easu

rem

ent u

sing

th

e eq

uity

met

hod

Decr

ease

ow

ing

to

divi

dend

s

Othe

r cha

nges

Endi

ng v

alue

Investments in jointly controlled entities 249 44 (32) 5 266

Investments in associates 51 3 (2) 52

Investments in subsidiaries 1 1

301 47 (34) 5 319

Capital gains from measurement by the equity method of €47 million mainly refer to the companies A.E.S. S.p.A. (€27 million) and Toscana Energia S.p.A. (€16 million).

The net value of equity-accounted investments concerns the following companies:

31.12.2009 31.12.2010

(€ million) Net amountShareholder % ownership Net amount

Shareholder % ownership

Jointly controlled entities:

- Toscana Energia S.p.A 138 49.38% 151 48.13%

- Azienda Energia e Servizi Torino S.p.A 105 49% 109 49%

- Metano Borgomanero S.p.A 2 50% 2 50%

- Metano S.Angelo Lodigiano S.p.A 1 50% 1 50%

- Metano Casalpusterlengo S.p.A 1 50% 1 50%

- Metano Arcore S.p.A 1 50% 1 50%

- Umbria Distribuzione Gas S.p.A 1 45% 1 45%

Total jointly owned entities 249 266

Associates:

- ACAM Gas S.p.A 47 49% 48 49%

- Acqua Campania S.p.A. 4 35.20% 4 35.20%

Total associates 51 52

Subsidiares

- Servizi Territori Aree e Penisole S.p.A 1 70% 1 70%

Total subsidiaries 1 1

301 319

109


Equity investments in subsidiaries, jointly controlled entities and associates can be found in the annex “Signifi cant shareholdings, associates and equity investments of Snam Rete Gas S.p.A. at 31 December 2010”, which is an integral part of these notes.

Other information on equity investmentsThe amounts from the most recent fi nancial statements available for jointly controlled entities and associates, proportionately to the percentage of own-ership, are as follows:

31.12.2009 31.12.2010

(€ million)

Jointly controlled

entities Associates

Jointly controlled

entities Associates

Total assets 552 249 589 264

Total liabilities 253 195 275 209

Net revenue 109 27 123 29

EBIT 53 5 64 6

Profi t for the period 35 3 41 4

10 Other non-current assetsOther non-current assets of €49 million (€34 million at 31 December 2009) break down as follows:

(€ million) 31.12.2009 31.12.2010

Accrued income from regulated activities 21 17

Derivatives:

- Fair value of derivatives 3 15

Other non-current assets:

- Prepayments 2 8

- Security deposits 6 6

- Other assets 2 3

10 17

34 49

Accrued income from regulated activities of €17 million relates to the non-current portion of assets booked against the recognition by the Electricity and Gas Authority of additional expenses borne during the second regulatory period (1 October 2005 – 31 December 2009) for the purchase of fuel gas used in the transportation business14. Information on the fair value of derivatives at 31 December 2010 is summarised below.

31.12.2009 31.12.2010

(€ million) Assets Liabilities Assets Liabilities

Interest rate swap - cash fl ow hedge 3 (76) 15 (83)

Less:

- Non-current share (3) 16 (15) 31

Current share (60) (52)

The fair value of hedging derivatives and their classifi cation as an asset/liability over 12 months (non-current) or an asset/liability within 12 months (cur-rent) have been determined using generally accepted fi nancial measurement models and market parameters at the end of the year.

(14) For further information, see Note 5 “Other current assets”.

110


At 31 December 2010, Snam Rete Gas had 19 cash fl ow hedge derivatives in place (nine cash fl ow hedge derivatives at 31 December 2009). The charac-teristics of these contracts, as well as their market value, are shown below.

Type of contract Star

t of

cont

ract

(d

ate)

End

of c

ontr

act

(dat

e)

Dura

tion

(yea

rs)

Notio

nal

amou

nt

(€ m

illio

n)

Sale

rate

Purc

hase

rate

Mar

ket v

alue

(€

mill

ion)

31.12.2009 31.12.2010 31.12.2009 31.12.2010

Interest rate swap 24.11.2005 24.11.2010 5 700 Euribor fi xed rate (14)

Interest rate swap 24.11.2005 24.11.2015 10 500 500 Euribor fi xed rate (18) (26)






Interest rate swap 2.12.2009 2.12.2013 4 350 350 Euribor fi xed rate 2 (5)

Interest rate swap 2.12.2009 2.12.2015 6 200 200 Euribor fi xed rate 1 (3)

Interest rate swap 30.07.2010 31.07.2017 7 500 Euribor fi xed rate 6


Interest rate swap 15.09.2010 15.12.2012 2 185 Euribor fi xed rate (,,,)









4,050 6,535 (78) (74)

The fair value of interest-rate derivatives is measured systematically on the basis of market prices provided by the major info providers. For these contracts, the company agrees with the counterparty to exchange on fi xed dates the difference between the fl oating rate and fi xed rate cal-culated using the reference nominal value. In 2010, 11 derivative contracts were entered into for an overall notional amount of €3,185 million, including: (i) eight contracts for a notional amount of €2,185 million intended for converting existing fl oating-rate loans into fi xed-rate ones; and (ii) three contracts for a notional amount of €1,000 million intended for converting new variable-rate loans into fi xed-rate ones.Changes in fair value posted as increase in shareholders’ equity in 2010, net of the related tax effect, amount to €3 million (-€21 million at 31 December 2009). The table below shows the swaps in place by type, the weighted average interest rate and the maturity of the transactions. The variable average rates are based on rates at year end; they are subject to changes which may signifi cantly affect future fi nancial fl ows. A comparison between the average rates bought and sold is not indicative of the result of the derivative contracts put in place; this result is determined taking into account the underlying transaction.

2009 2010

Purchase fi xed rate/Sell fl oating rate - Nominal value (€ million) 4,050 6,535

- Weighted average rate purchased (%) 3.07 2.40

- Weighted average rate sold (%) 0.71 1.01

- Weighted average maturity (years) 3.33 2.93

11 Non-current assets held for sale and directly related liabilitiesNon-current asset s held for sale of €25 million (unchanged from 31 December 2009) concern property owned by Italgas, for which sales negotiations are under way with Eni following the commitments arising from the Italgas purchase agreement15.Liabilities directly related to non-current assets held for sale of €10 million (€11 million at 31 December 2009) include environmental provisions for expenses involved in the property’s restoration.

(15) For information on commitments made by the parties, see Note 22 “Guarantees, commitments and risks - Commitments deriving from the agreement to purchase Italgas and Stogit from Eni”.

111


Current liabilities 12 Short-term fi nancial liabilitiesShort term fi nancial liabilities of €1,844 million (€1,585 million at 31 December 2009) are denominated entirely in euros and relate to lines of credit with Eni S.p.A. Short-term fi nancial liabilities comprise only fl oating-rate loans. The weighted average interest rate on short-term fi nancial debt was 0.75% (0.90%16 at 31 December 2009). The market value of short-term fi nancial liabilities is the same as their book value. At 31 December 2010, there were no breaches of loan agreements.

13 Trade and other payablesTrade and other payables of €1,322 million (€1,106 million at 31 December 2009) comprise:

(€ million) 31.12.2009 31.12.2010

Trade payables 471 468

Payables for investments 429 627

Other payables 206 227

1,106 1,322

Trade payables of €468 million (€471 million at 31 December 2009) mainly refer to the natural gas transportation (€159 million), distribution (€163 million) and storage (€141 million) business segments. Payables for investment activities of €627 million (€429 million at 31 December 2009) refer essentially to the natural gas transportation (€496 mil-lion), distribution (€75 million) and natural gas storage (€55 million) business segments. The €198 million increase was mainly due to the payment to Eni (€174 million) of the estimated effects of price adjustments in connection with agreements signed as part of the acquisition of Italgas and Stogit17. Other payables of €227 million (€206 million at 31 December 2009) break down as follows:

(€ million) 31.12.2009 31.12.2010

IRES payables for national tax consolidation scheme 36 69

Group VAT payables 8 15

Other payables:

- Payables to employees 45 43

- Payables to pension and social security institutions 25 27

- Payables to the Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund) 44 25

- Payables to the government 18 16

- Payments on account and advances 17 15

- Other 13 17

162 143

206 227

Payables to the Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund) (€25 million) mainly concerned fees related to distribution activities (€23 million) due largely to the ancillary tariff components laid down by Resolution ARG/gas no. 159/08 (energy savings, quality of gas services, equali-sation imbalances and disadvantaged customers). Payables to the government (€16 million) primarily involve payables to municipalities for concession fees for the distribution business.The fair value measurement of trade and other payables has no material impact given the short period of time from when the payable arises and its due date. Note 30 “Related-party transactions” contains information about payables due to related parties.

14 Current income tax liabilities and other current taxes liabilitiesCurrent income tax liabilities of €11 million (€5 million at 31 December 2009) mainly concerned IRAP payables (€10 million).Liabilities for other current taxes of €20 million (€18 million at 31 December 2009) mainly referred to IRPEF (personal income tax) withholdings for employees (€11 million) and VAT payables (€6 million) related to companies not belonging to Eni-group VAT.

(16) The interest rate of the companies acquired was calculated for the second half of the year. (17) For more information, see Note 22 “Guarantees, commitments and risks - Commitments deriving from the agreement to purchase Italgas and Stogit from Eni”.

112


15 Other current liabilitiesOther current liabilities of €221 million (€250 million at 31 December 2009) comprise:

(€ million) 31.12.2009 (*) 31.12.2010

Prepaid income from regulated activities (*) 180 159

Derivatives:


- Accrued interest differentials on derivatives 5 6

65 58

Other current liabilities:

- Deferred and prepaid revenue and income 5 4

250 221

(*) The balance at 31 December 2009 includes the reclassifi cation (€63 million) from “Provisions for risks and charges” of payments for balancing and stock replenishment to be allocated to service users”. For further information, see Note 17 “Provisions for risks and charges”.

Prepaid income from regulated activities of €159 million relates to: (i) the transportation business segment (€96 million) and concerns the short-term portion of revenues invoiced in excess of the restriction established by the Electricity and Gas Authority, and penalties charged to users who exceeded the committed capacity; this amount is to be returned through tariff adjustments pursuant to Resolution no. 166/05; and (ii) the natural gas storage business segment (€63 million) and concerns payments for balancing and stock replenishment, which are to be returned to service users based on the provisions of Resolution no. 50/06 of the Electricity and Gas Authority.See Note 10 “Other non-current assets” for information on the fair value of derivatives.

Non-current liabilities 16 Long-term fi nancial liabilities and short-term portions of long-term liabilitiesBased on the table used in the Directors’ report, net fi nancial debt can be broken down as follows:

31.12.2009 31.12.2010

(€ million) Curr

ent

Non

curr

ent

Tota

l

Curr

ent

Non

curr

ent

Tota

l

Financial liabilities 9,986 10,350

Short-term fi nancial liabilities 1,585 1,585 1,844 1,844

Long-term fi nancial liabilities 915 7,486 8,401 1,320 7,186 8,506

Financial receivables and cash and cash equivalents (37) (9)

Financial receivables not held for operations (1) (1) (1) (1)

Cash and cash equivalents (36) (36) (8) (8)

2,464 7,485 9,949 3,156 7,185 10,341

Long-term fi nancial liabilitiesLong-term fi nancial liabilities, including the short-term portions, of €8,506 million (€8,401 million at 31 December 2009) comprise:

31.12.2009 31.12.2010

(€ million) Shor

t-te

rm

port

ion

Long

-ter

m

port

ion

Tota

l

Shor

t-te

rm

port

ion

Long

-ter

m

port

ion

Tota

l

Parents 914 7,485 8,399 1,320 7,185 8,505

Other fi nancial backers 1 1 2 1 1

915 7,486 8,401 1,320 7,186 8,506

113


The breakdown of fi nancial liabilities with parents, including the short-term portions, (€8,505 million) is as follows:

(€ million)

Lender Currency Amount

Fixed rate (F) Floating rate (V)

Type of repayment

Disbursement date

Maturity date

Residual duration

(years/months)

Long-term loan

Eni (a) € 500 F On maturity 27.05.2002 30.09.2011 9m


Eni (a) € 500 F On maturity 24.11.2005 24.11.2015 4y 11m

Eni (Line of credit) (a) € 1,500 F Revolving (b) 24.11.2005 17.11.2014 3y 11m

Eni (a) € 185 F On maturity 15.12.2005 15.12.2012 2a


Eni (Line of credit) (a) € 200 F Revolving (b) 09.05.2007 09.05.2012 1y 4m

Eni € 200 F On maturity 11.06.2007 11.06.2012 1y 5m






Eni € 200 F On maturity 18.12.2008 16.09.2011 9m








Total fi xed rate 8,185

Eni (c) € 300 V Amortised (d) 30.12.2009 15.12.2029 19a

Total fl oating rate 300

Total long-term loans 8,485

Accrued expenses 20

8,505

(a) Floating-rate loans converted by interest rate swaps into fi xed-rate loans.(b) Revolving credit lines are those which provide for the reconstitution of the credit limit in line with repayments. (c) Borrowed from the European Investment Bank (EIB). (d) Loan to be repaid in equal instalments with a grace period.

The revolving credit lines have been fully used at 31 December 2010 (identical to 31 December 2009). There were no breaches of loan agreements at the reporting date.Snam Rete Gas has entered into a €300 million loan agreement with Eni funded by the European Investment Bank (EIB), which is based on Eni maintain-ing a minimum rating. This indicator has been met; Snam Rete Gas believes failing to meet this covenant would have a limited impact.

Long-term fi nancial liabilities (€7,186 million) are indicated below with their respective maturities:

At 31 December Long-term maturity Total

(€ million) Maturity 2010 2011 2012 2013 2014 2015 Over long

Parents 2029 8,505 1,320 1,585 750 1,500 1,200 2,150 7,185

Other fi nancial backers 2014 1 1 1

8,506 1,320 1,585 750 1,501 1,200 2,150 7,186

Long-term fi nancial liabilities, including the short-term portions, are broken down below with an indication of the related average rate for the period. All fi nancial liabilities are denominated in euros.

(€ million)Amount at

31.12.2009 Average rateAmount at

31.12.2010 Average rate

8,401 3.5% 8,506 3.2%

8,401 3.5% 8,506 3.2%

114


The breakdown of long-term fi nancial liabilities by type of interest rate is as follows:

31.12.2009 31.12.2010

(€ million) Amount % Amount %

At fi xed rate 5,716 68 8,206 96

At fl oating rate 2,685 32 300 4

8,401 100 8,506 100

Floating-rate fi nancial liabilities (€300 million) decreased by €2,385 million compared with 31 December 2009, owing to the stipulation of eight interest rate swaps (IRSs) with a duration of around two years, which convert existing fl oating-rate loans (for a total of €2,185 million) into fi xed-rate loans. The decrease was also due to the repayment of a maturing loan (€200 million).Fixed-rate fi nancial liabilities (€8,206 million) increased by €2,490 million compared with 31 December 2009. This increase was due to the stipulation of the aforementioned eight IRSs (€2,185 million) and the taking out of three fl oating-rate loans (€1,000 million in total), which were converted into fi xed-rate loans by three more IRSs, and was partially offset by the repayment (€700 million) of a matured loan. For the sake of full disclosure, on 23 December 2010 a €400 million loan agreement was signed with Eni with a disbursement date of 21 March 2011. The loan is at a fi xed rate of about 2.9% with a bullet repayment on 20 December 2013. Its purpose is to refi nance a €300 million loan maturing on 20 March 2011.The market value of long-term fi nancial liabilities, including the short-term portions, is €8,646 million and was obtained by discounting future cash fl ows using a discount rate of between 0.8% and 2.9% (between 0.5% and 3.4% at 31 December 2009).Below are details on net fi nancial debt showing related-party transactions.

31.12.2009 31.12.2010

(€ million) Current Non current Total Current Non current Total

A. Cash and cash equivalents 36 36 8 8

B. Securities not held for operations

C. Cash (A+B) 36 36 8 8

D. Financial receivables not held for operations 1 1 1 1

E. Short-term fi nancial liabilities to banks

F. Long-term fi nancial liabilities to banks

G. Bonds

H. Short-term fi nancial liabilities to related parties 1,585 1,585 1,844 1,844

I. Long-term fi nancial liabilities to related parties 914 7,485 8,399 1,320 7,185 8,505

L. Other short-term fi nancial liabilities

M. Other long-term fi nancial liabilities 1 1 2 1 1

N. Gross fi nancial debt (E+F+G+H+I+L+M) 2,500 7,486 9,986 3,164 7,186 10,350

O. Net fi nancial debt (N-C-D) 2,464 7,485 9,949 3,156 7,185 10,341 17 Provisions for risks and chargesProvisions for risks and charges of €629 million (€576 million at 31 December 2009) are illustrated in the table below:

(€ million)

Begi

nnin

g ba

lanc

e

Prov

isio

ns

Incr

ease

s du

e to

pas

sing

of t

ime

Utilisations

Chan

ge in

sco

pe

of c

onso

lidat

ion

Recl

assi

fi cat

ion

(*)

Othe

r cha

nges

31.1

2.20

09

for charges

for excess31.12.2009

Provision for site dismantlement and restoration 12 9 374 21 416

Provision for future CCSE expenses 27 66 (93)

Provision for litigation 35 16 (1) (2) 25 73

Provision for environmental expense 2 (5) 61 1 59

Other provisions 5 8 (2) 17 28

52 51 11 (8) (2) 543 (93) 22 576

(*) See the note below on reopening balances at 1 January 2010.

115


(€ million)

Begi

nnin

g ba

lanc

e

Prov

isio

ns

Incr

ease

s du

e to

pa

ssin

g of

tim

e

Utilisations

Othe

r cha

nges

31.1

2.20

10

for charges

for excess31.12.2010

Provision for site dismantlement and restoration 416 15 (2) 1 430

Provision for litigation 73 16 (1) (19) 69

Provision for environmental expense 59 8 (7) 60

Other provisions 28 18 (3) (2) 29 70

576 42 15 (13) (21) 30 629

The opening balance (€576 million) includes the reclassifi cation to “Other liabilities” of payments for balancing and stock replenishment (€93 million). The procedures and timing for returning such payments are set forth in Resolution no. 50/06 of the Electricity and Gas Authority. To be specifi c, these payments, which were removed from the income statement since they are to be allocated to service users, were previously posted as a counter-entry to provisions for risks and charges pending the decision of the Electricity and Gas Authority as to the amount to be allocated to cover additional revenues recognised to cover new investments, with any excess to be paid to the Cassa Conguaglio del Settore Elettrico (Electricity Equalisation Fund). At the time of the Authority’s decision, these payments will be treated as additional revenues recognised to cover new investments, and any excess will be treated as a payable to the Cassa Conguaglio del Settore Elettrico resulting in the transfer/reclassifi cation of the amount previously removed. Accordingly, in order to harmonise the accounting treatment to that used for other regulated activities carried out by Snam Rete Gas, at 31 December 2009 the amount of payments reported as a counter-entry to provisions for risks and charges (€93 million) has been reclassifi ed from “Provisions for risks and charges” to “Other liabilities,” and the current portion (€63 million) is clearly separated from the non-current portion (€30 million). The provision for site dismantlement and restoration (€430 million) was recognised primarily due to expenses which are expected to be borne for the removal of natural gas storage facilities and for site restoration (€419 million). The provision for litigation (€69 million) included costs which the company has estimated it will incur for existing lawsuits. The provision for environmental expen se (€60 million) mainly included costs for environmental soil reclamation, which is required under Law no. 471/1999 and subsequent amendments, as well as other work, primarily for the disposal of solid waste, related to the distribution business. Other provisions (€70 million) relate essentially to: (i) costs (€29 million) recorded to offset the item covering changes in inventories resulting from the difference between estimated quantities of unaccounted-for gas (UFG),18 which is to be recorded in 2011, and the amounts to be paid in kind by users as required by the Authority to cover the quantities of UFG for the same year; (ii) costs for termination benefi ts (€15 million) for the planned termination of staff based on union agreements; (iii) costs for incentive plans, contribution rebates and staff-related premiums (€11 million); and (iv) costs for tax disputes related to direct and indirect taxes (€6 million).

18 Provisions for employee benefi tsProvisions for employee benefi ts of €105 million (€107 million at 31 December 2009) can be broken down as follows:

(€ million) 31.12.2009 31.12.2010

Employee severance pay 83 81

Supplemental Healthcare Provision for Company Executives of Eni (FISDE) 5 6

Other provisions for employee benefi ts 19 18

107 105

The provision for employee severance pay of €81 million is governed by Article 2120 of the Italian Civil Code and represents the estimated liability deter-mined on the basis of actuarial procedures for the amount to be paid to employees at the time the employment relationship is terminated. The principal amount of the benefi t is equal to the sum of portions of the allocation calculated on compensation items paid during the employment relationship and revalued until the time such relationship is terminated. The amount of the allocation made to the provision for employee severance (hereinafter “TFR”) used for the purposes of the liability and cost is reduced by any portion paid to pension funds.The supplemental healthcare provision for company executives of Eni (FISDE) of €6 million includes the estimate of costs related to contributions to be paid to the supplemental healthcare provision benefi ting current and retired executives. The amount of the liability and the cost of care related to the supplemental healthcare provision for company executives of Eni are determined with reference to the contribution that the company pays to retired executives.

(18) Since 1 January 2010, the new tariff criteria for the transportation business, applicable for the third regulatory period (1 January 2010 – 31 December 2013) have required payment in kind by users of the transportation service of quantities of gas to cover fuel gas, network losses and unaccounted-for gas. These payments were due as a percen-tage of the quantities injected into and withdrawn from the transportation network. In particular, Resolution no. 184/09 of the Electricity and Gas Authority has the following provisions: (i) for fuel gas and network losses, the introduction of an equalisation mechanism for discrepancies between amounts allocated by users and actual consumption; (ii) for Unaccounted-For Gas (UFG), to assign its ownership to the larger transportation company.

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Other employee benefi t provisions of €18 million mainly concern long-term benefi ts connected with deferred cash incentive plans, long-term cash incen-tive plans and seniority plans. Deferred cash incentive plans are allocated to executives who have met pre-established goals, and include an estimate of variable compensation related to company performance. This compensation will be paid out in relation to results achieved in the three-year period concerned after three years starting with the annual allocation. Long-term cash incentive plans, which were allocated starting in 2010, provide for a variable cash benefi t in relation to com-pany performance paid out at the end of the vesting period provided the employee works in the three years following the allocation. Seniority bonuses are benefi ts paid upon reaching a minimum service period at the company, and are paid in kind. Employee benefi t provisions, which are determined by applying actuarial methods, can be broken down as follows19:

31.12.2009 31.12.2010

(€ million) TFR FISDE Other Total TFR FISDE Other Total

Present value of liabilities at beginning of year 21 1 7 29 85 6 19 110

Change in scope of consolidation 61 5 12

Current cost 3 3 4 4

Interest cost 3 1 4 4 1 5

Actuarial gains/losses 3 3 2 2

Benefi ts paid (3) (4) (7) (6) (6) (12)

Present value of liabilities at end of year 85 6 19 110 85 6 18 109

Unrecorded actuarial gains/losses (1) (1) (4) (4)

Cost related to unrecorded past work performed (1) (1) (2)

Net liabilities in provisions for employee benefi ts 83 5 19 107 81 6 18 105

Costs related to employee benefi t liabilities, which are recorded in the income statement (€27 million), are broken down as follows:

2009 2010

(€ million) TFR FISDE Other Total TFR FISDE Other Total

Current cost 10 3 13 18 4 22

Interest cost 3 1 4 4 1 5

13 4 17 22 5 27

The main actuarial assumptions used to determine liabilities at the end of the year and in the estimate of costs expected for the next year are indicated below:

% TFR FISDE Other

2009

Discount rates 5 5 5 - 5.2

Infl ation rate 2 2 2

2010

Discount rates 4.75 4.75 2 - 4.75

Infl ation rate 2 2 2

Demographic tables prepared by the General State Accounting Department (RG48) were used for the actuarial assumptions. With respect to FISDE, the impact of a 1% change in the actuarial assumptions for costs related to medical care is not signifi cant.

19 Deferred tax liabilitiesDeferred tax liabilities of €853 million (€934 million at 31 December 2009) are stated net of offsettable deferred tax assets of €463 million (€454 mil-lion at 31 December 2009). There are no deferred tax assets which cannot be offset.

(€ million) 31.12.2009 Provisions Utilisations Other

changes 31.12.2010

Deferred tax liabilities 1,388 3 (77) 2 1,316

Deferred tax assets (454) (51) 41 1 (463)

934 (48) (36) 3 853

(19) The table also provides a reconciliation of liabilities recorded for employee benefi t provisions.

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Deferred tax assets and liabilities are determined using the respective IRES and IRAP tax rates of 27.5% and 3.9% (unchanged from 31 December 2009).Deferred tax liabilities of €853 million are broken down as follows by type of tax:

31.12.2009 31.12.2010

(€ million) IRES IRAP Total IRES IRAP Total

Deferred taxes 1,248 140 1,388 1,201 115 1,316

Prepaid taxes (405) (49) (454) (415) (48) (463)

843 91 934 786 67 853

Deferred and prepaid taxes are broken down below based on the nature of the most signifi cant timing differences that resulted in the net deferred tax liabilities:

(€ million) 31.1

2.20

09

Prov

isio

ns

Utili

satio

ns

Othe

r ch

ange

s

31.1

2.20

10

Deferred tax liabilities:

- Excess and accelerated amortisation and depreciation 985 (51) (1) 933

- Revaluation of Italgas property, plant and equipment 240 (9) 231

- Site dismantlement and restoration 53 (10) (2) 41

- Capitalisation of fi nancial expense 15 (1) 14

- Deferred tax on capital gains 5 3 (4) 4

- Excess loan impairment losses 4 4

- Derivative valuation 1 3 4

- Finance leases 2 2

- Other 83 (2) 2 83

1,388 3 (77) 2 1,316

Deferred tax assets:

- Cash and contractual grants (134) 3 (131)

- Site dismantlement and restoration (117) (4) 2 (119)

- Provisions for risks and charges and other non-deductible provisions (89) (22) 10 (101)

- Revenue adjustments (35) (13) 4 (44)

- Non-deductible amortisation and depreciation (20) (2) (22)

- Derivative valuation (35) 22 (13)

- Employee benefi ts (5) (1) (6)

- Other (19) (11) 2 1 (27)

(454) (51) 41 1 (463)

Net deferred tax liabilities 934 (48) (36) 3 853

Deferred tax assets and liabilities are considered to be long term.Other changes (€3 million) mainly relate to deferred taxes set aside on the change in fair value of hedging derivatives (€1 million, net of prepaid taxes).Note 27 “Income taxes” provides information about taxes for the year.

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20 Other non-current liabilitiesOther non-current liabilities of €331 million (€273 million at 31 December 2009) comprise:

(€ million) 31.12.2009 (*) 31.12.2010

Prepaid income from regulated activities (*) 231 273

Derivatives:


16 31

Other non-current liabilities:

- Deferred and prepaid revenue and income 25 23

- Deferred connection fees 3

- Security deposits 1

- Other liabilities 1

26 27

273 331

(*) The balance at 31 December 2009 includes the reclassifi cation (€30 million) from “Provisions for risks and charges” of payments for balancing and stock replenishment. For further information, see Note 17, “Provisions for risks and charges.”

Prepaid income from regulated activities (€273 million) relates to: (i) the non-current portion of transportation revenues invoiced in excess of the restriction established by the Regulator and penalties charged to service users that exceeded the committed capacity (€177 million); this amount is to be adjusted based on the provisions of Resolution no. 166/05 of the Electricity and Gas Authority; and (ii) the non-current portion of payments for balancing and stock replenishment (€96 million) to be returned to service users based on the provisions of Resolution no. 50/06 of the Electricity and Gas Authority. Deferred and prepaid revenue and income (€23 million) refer to the non-current portion of the prepaid fee for the concession to use fi bre-optic cables given to a telecommunications operator (€22 million). For information about derivatives, see Note 10 “Other non-current assets”.

21 Shareholders’ equity Shareholders’ equity of €5,916 million at 31 December 2010 breaks down as follows:

(€ million) 31.12.2009 31.12.2010


Share capital 3,570 3,570

Legal reserve 391 418

Share premium reserve 1,978 1,981

Consolidation reserve (1,586) (1,713)

Cash fl ow hedge reserve (52) (49)

Other reserves 794 791

Retained earnings 870 904


less:

- Treasury shares (792) (789)

- Interim dividend (203) (304)

5,702 5,915

Capital and reserves attributable to minority interests

Napoletana Gas 1 1

5,703 5,916

Share capitalAt 31 December 2010, the fully subscribed and paid-up share capital of Snam Rete Gas S.p.A. consists of 3,570,832,994 ordinary shares with a nominal value of €1 (3,570,768,494 shares at 31 December 2009). The increase of 64,500 shares from 31 December 2009 was due to the exercise, by eligible executives, of the same number of stock options in relation to the 2003 plan. On the same date there were commitments to allocate 503,500 shares for stock option plans, which are to be implemented through an increase in share capital.

Legal reserveThe legal reserve at 31 December 2010 totalled €418 million (€391 million at 31 December 2009), the increase of €27 million resulting from the alloca-tion of 5% of 2009 profi t of the parent company Snam Rete Gas S.p.A, in accordance with Article 2430 of the Italian Civil Code.

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Share premium reserveThe share premium reserve at 31 December 2010 totalled €1,981 million (€1,978 at 31 December 2009). The change of €3 million is due to the exercise of options by eligible directors.

Consolidation reserveThe negative consolidation reserve (€1,713 million compared with €1,586 million at 31 December 2009) includes the value derived from the difference between the acquisition cost of the Italgas and Stogit holdings (€4,640 million, including the additional transaction expenses and price adjustment fol-lowing the agreements reached at transaction closing) and the relative shareholders’ equity attributable to the group on the transaction completion date (€2,004 million and €923 million, respectively, for Italgas and Stogit). The €127 million increase over 31 December 2009 was due to the recognition of the estimated impact of the price adjustment refl ecting agreements signed when the purchase contracts were signed for Italgas and Stogit20.

Cash fl ow hedge reserve

(€ million) Amount

Reserve at 31.12.2009 (52)

Transfer to income statement 74

Other changes (71)

Reserve at 31 December 2010 (49)

The cash fl ow hedge reserve (-€49 million) includes the measurement, net of the related tax effect, of the fair value of cash fl ow hedge derivatives relat-ing to interest rate swap agreements used by the company to convert fl oating-rate loans into fi xed-rate loans.

Other reserves Other reserves of €791 million (€794 million at 31 December 2009) mainly include the reserve established for the cost of 194,184,651 treasury shares held (€789 million).

Retained earningsRetained earnings totalled €904 million (€870 million at 31 December 2009) and rose by €34 million mainly due to the allocation of 2009 residual profi t (€30 million).

Treasury sharesThe treasury shares held at 31 December 2010 are analysed in the following table:

PeriodNumber of

sharesAverage

cost (€)Total cost

(€ million)Share capital

(%) (**)

Purchases

2005 800,000 4.399 3 0.04

2006 121,731,297 3.738 455 6.22

2007 73,006,653 4.607 336 3.73

195,537,950 4.061 794

Treasury stock allocated/sold to be deducted:

- assigned free of charge pursuant to 2005 stock grant plans (39,100)

- sold pursuant to 2005 stock option plans (69,000)

- sold pursuant to 2006 stock option plans (1,015,499)

- sold pursuant to 2007 stock option plans (229,700)

Treasury stock held at 31 December 2010 (*) 194,184,651

(*) For a book value of €789 million.(**) The share capital is as at the date of last acquisition in the year.

At 31 December 2010, treasury shares held totalled 194,184,651, equal to 5.44% of the share capital. At 31 December 2010, there were commitments to grant 5,446,451 treasury shares for stock option plans. At that date the market value of the shares totalled approximately €724 million21.

(20) For more information, see Note 22 “Guarantees, commitments and risks - Commitments deriving from the agreement to purchase Italgas and Stogit from Eni”. (21) Calculated by multiplying the number of treasury shares by the offi cial share price at 31 December 2010 (€3.73 per share).

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Interim dividend The interim dividend of €304 million refl ects the interim dividend for 2010 of €0.09 per share resolved by the board of directors in its meeting of 27 July 2010 in accordance with Article 2433-bis, paragraph 5 of the Italian Civil Code. The interim dividend was made available for payment from 21 October 2010 with an ex-dividend date set at 18 October 2010.

DividendsThe shareholders of Snam Rete Gas S.p.A. authorised an ordinary dividend of €0.14 per share at their ordinary meeting of 27 April 2010 to complete the 2009 interim dividend of €0.06 per share. The remaining dividend (€ 472 million) was paid from 27 May 2010, with an ex-dividend date of 24 May 2010. In its meeting of 2 March 2011, the board of directors proposed to the Shareholders’ Meeting convened for 13 and 14 April 2011, on fi rst and second call respectively, the distribution of an ordinary dividend of €0.23 per share. The dividend balance of €0.14 per share will be made payable as of 26 May 2011, with an ex-dividend date of 23 May 2011.

22 Guarantees, commitments and risksGuarantees, commitments and risks of €3,676 million (€2,428 million at 31 December 2009) comprise:

31.12.2009 31.12.2010

(€ million)

Other personal

guaranteesCommitments

and risks Total

Other personal

guaranteesCommitments

and risks Total

Other personal guarantees given on its own behalf:

- Parent companies 50 50 62 62

Commitments

Commitments for the purchase of goods and services 1,168 1,168 1,732 1,732

Other 1 1 1 1

Risks:

- Third-party assets on deposit 1,191 1,191 1,877 1,877

- Litigation 18 18 4 4

50 2,378 2,428 62 3,614 3,676

GuaranteesOther personal guarantees of €62 million (€50 million at 31 December 2009) essentially relate to hold harmless letters issued to Eni S.p.A. for sureties issued on behalf of Snam Rete Gas, mainly performance bonds and security for participating in contract job bidding.

Commitments At 31 December 2010, commitments with suppliers to purchase property, plant and equipment and provide services relating to investments in property, plant and equipment and intangible assets under construction totalled €1,732 million.

RisksRisks related to third-par ty assets on deposit, equalling €1,877 million (€1,191 million at 31 December 2009) relate to about 6.3 billion cubic metres of natural gas deposited in the storage plants by customers of the service. This amount was determined by applying the estimated unit repurchase cost of approximately €0.29 per standard cubic metre to the quantities of gas deposited. Risks related to compensation and litigation (€4 million) relate to possible (but not probable) claims for compensation arising from ongoing litigation, with a low probability that the pertinent economic risk will arise.

Commitments arising from the agreement to purchase Italgas and Stogit from EniThe price determined for the acquisition of Italgas and Stogit is subject to adjustment mechanisms meant to take effect even after the date of execution. The following describes the adjustment mechanisms based on the commitments made on upon completion of the acquisition transaction and the devel-opments arising during 2010.

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Acquisition of Italgas The acquisition price for Italgas will be adjusted upwards by an amount equal to the difference between the provisional aggregate value estimated for the RAB (Regulatory Asset Base) at 31 December 2007, for Italgas, and for several subsidiaries of Italgas, determined overall at €4,560 million, as repre-sented by Eni in the Italgas purchase and sale agreement, and the RAB value for Italgas and for those same subsidiaries of Italgas at that same date of 31 December 2007 as approved by the Electricity and Gas Authority. That price will also be adapted for the purpose of payment to Eni of a portion of the gains from the sale of real properties owned by Italgas no longer functioning among its operating assets.

Acquisition of StogitThe acquisition price for Stogit may be adapted to refl ect the value, differing from the current one, which may be recognised by the Electricity and Gas Authority for the tariff period 1 April 2014 – 31 March 2018 for quantities of natural gas owned by Stogit at the date of transfer of the shares and included among the assets which constitute the RAB (Regulatory Asset Base).The purchase and sale agreement also provides for hedging mechanisms aimed at keeping within Eni the risks and/or benefi ts that may derive from:- An eventual valuation of the gas owned by Stogit at the time of the transfer of the shares which differs from the valuation currently recognised by

the Electricity and Gas Authority in the event of an even partial transfer thereof when given quantities may no longer be instrumental to the regulated concessions and thus become available for sale;

- A transfer of storage capacity that may eventually become freely available on a negotiated basis and no longer a regulated basis, or else from a transfer of concessions including those pertaining to Stogit at the time of the transfer of the shares which may eventually be dedicated predominantly to stor-age business no longer subject to regulation.

For both of the companies acquired, the purchase agreement also provided for price adjustment mechanisms deriving from possible compensation for damages, losses, liabilities or contingent liabilities realised by the acquirer or by the companies acquired resulting from changes in relation to the decla-rations or guarantees issued by the seller. In view of these commitments, the following were recognised in 2010: · In favour of Eni (payable for Snam Rete Gas): (i) the amount of €145 million, equal to the difference between the provisional aggregate value esti-

mated for the RAB (Regulatory Asset Base) of Italgas and of several Italgas subsidiaries at 31 December 2007 and the aggregate RAB value defi ned by the Electricity and Gas Authority for that date; (ii) the amount of €27 million, as the share of the added value of natural gas as recognised by the Authority and included in the RAB compared with the value used as reference in the Stogit transfer agreement; and (iii) the amount of €2 million, as the share of the capital gain from the transfer of 25 million cubic metres of natural gas no longer necessary for the functioning of the storage system;

· In favour of Snam Rete Gas (receivable for Snam Rete Gas with Eni), the amount of €47 million, mainly relating to the estimate of liabilities on matters already existing prior to the date when the contract was completed.

These effects have been recognised as an adjustment to the acquisition cost of the respective equity investments, thus resulting in an increase of €127 million in the negative consolidation reserve in the consolidated fi nancial statements.

Rome metropolitan area and “Romana gas” business unitAs a result of the transfer by French company Suez S.A. (now GdF-Suez S.A. following a merger) of its Belgian subsidiary Distrigaz, the ultimate parent Eni, on the basis of preliminary understandings with Italgas, agreed to transfer to Suez, together with other assets in the gas and electricity sectors, the distribution business of Italgas in the metropolitan area of Rome.The subject matter of the transfer was the business unit involving gas distribution in the municipalities of Rome, Fiumicino, Ciampino, Marino, Grottafer-rata, Rocca di Papa and Frascati, including the distribution networks (about 5,300 km long) and the pertinent plants, about 1.3 million redelivery points (covering about 28% of the users served) and about 800 employees. The contract provided that the transaction would be completed by Italgas granting that business unit to the Rete Gas Roma S.r.l. (a company created specifi cally on 26 November 2008 with share capital fully held by Italgas) subject to obtaining consent from the Municipality of Rome for the transfer of the concession by the 30 June 2009 deadline, which the buyer was able to extend up to 31 August 2009.By Executive Decision no. 1231 of 25 June 2009, the Municipality of Rome gave its consent to the transfer of the concession agreement relating to the distribution of gas within the territory of the municipality to the aforementioned company, Rete Gas Roma, acknowledging the intention of Italgas to transfer all of the share capital of the latter to GdF-Suez.By communication dated 6 July 2009, the Mayor of Rome then specifi ed that said Executive Decision constituted the sole suitable means of expressing the legitimate and valid consent of the municipal authority for the transfer transaction and that the Municipal Council would be informed of said transac-tion. However, on 13 July 2009 GdF-Suez informed Italgas that it did not believe that the conditions for the transfer of the gas distribution business in the metropolitan area of Rome had been fulfi lled by the agreed deadlines and that it therefore renounced proceeding to completion of the acquisition as set forth in the contract entered into between the parties on 30 October 2008. The contents of the contract are being evaluated, reserving the possibility of bringing the appropriate actions so as to best protect our interests.

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Corporate risk management

IntroductionThe main corporate risks identifi ed, monitored and, where specifi ed below, managed by Snam Rete Gas are as follows:(i) market risk deriving from exposure to fl uctuations in interest rates and in the price of natural gas;(ii) credit risk deriving from the possibility of counterparty default;(iii) liquidity risk deriving from a possible lack of fi nancial resources required to meet short-term commitments;(iv) operational risk;(v) risks specifi c to the business segments.This paragraph describes the main policies and principles of Snam Rete Gas in managing and controlling the risks deriving from fi nancial instruments (interest rate risk, credit risk and liquidity risk). In accordance with disclosure pursuant to IFRS 7, there are also descriptions of the nature and size of the risks resulting from such instruments. Information on the other risks that characterise the business (natural gas price fl uctuations risk, operational risk and risks specifi c to the business seg-ments) can be found in the Directors’ report, under “Elements of risk and uncertainty.”

MARKET RISK

Interest rate riskFluctuations in interest rates affect the market value of a company’s fi nancial assets and liabilities as well as its net fi nancial expense. The interest rates of some of Snam Rete Gas’s loans are indexed to benchmark rates, namely the Euro Interbank Offered Rate (Euribor). The policy for hedging interest rate risk is to limit the interest rate volatility risk while pursuing fi nancial structure objectives laid down in the business plans. For that purpose, Snam Rete Gas uses derivative instruments – notably interest rate swaps (IRS) – to manage the balance between fi xed-rate and fl oating-rate debt. The hedge transactions are qualifi ed under IAS 39 “Cash Flow Hedge”. Snam Rete Gas does not have derivative contracts held for trading or specula-tive purposes.22 The gross fi nancial debt, including the effects of hedging transactions, is broken down by fi xed and fl oating rate in the following table.

31.12.2009 31.12.2010

(€ million) Amount % Amount %

At fi xed rate 5,716 57 8,206 79

At fl oating rate 4,270 43 2,144 21

9,986 100 10,350 100

The exposure to interest rate risk at 31 December 2010 equals about 21% of the total exposure of the group (43% at 31 December 2009). The reduction in interest rate risk compared with the previous fi nancial year derives from hedging activities carried out during the year, enabling the achievement of the fi nancial structure targets defi ned in the business plans.

(22) The characteristics of the derivative contracts are described in Note 10 “Other non-current assets”.

123


The effects on shareholders’ equity and profi t at 31 December 2010 are shown below, assuming a change of +/-10% in interest rates actually applied during 2010, compared with those of 2009.

Net income for the period Shareholders’ equity

2009 31.12.2009

(€ million) +10% -10% +10% -10%

Floating rate loans

Effect of change in interest rate (3) 3

Floating rate loans converted to fi xed-rate loans using IRS

Effect of change in interest rate on fair value of hedging derivatives pursuant to IAS 39 - effective share (*) 31 (32)

Effect on income before taxes (3) 3 31 (32)

Tax effect 1 (1) (9) 9

(2) 2 22 (23)

Net income for the period Shareholders’ equity

2010 31.12.2010

(€ million) +10% -10% +10% -10%

Floating rate loans

Effect of change in interest rate (1) 1

Floating rate loans converted to fi xed-rate loans using IRS

Effect of change in interest rate on fair value of hedging derivatives pursuant to IAS 39 - effective share (*) 38 (42)

Effect on income before taxes (1) 1 38 (42)

Tax effect (10) 12

(1) 1 28 (30)

(*) Changes in the interest rate do not affect the income statement. Therefore, changes in the fair value of derivatives arising from the decline in the interest rate affect only shareholders’ equity.

Snam Rete Gas raises funds solely through its ultimate parent, Eni S.p.A. Should Eni S.p.A. sell its controlling stake in Snam Rete Gas, there is no guarantee that the latter would be able to obtain loans and fi nancing from other sources under the same conditions as those currently in force.

CREDIT RISK Credit risk is the company’s exposure to potential losses arising from counterparties failing to fulfi l their obligations. Default or delayed payment may have a negative impact on the fi nancial stability and results of Snam Rete Gas. Snam Rete Gas’s exposure to credit risk is connected with the natural gas transportation, regasifi cation, storage and distribution services provided by the companies. In particular, Snam Rete Gas provides business services to a small number of operators in the gas sector, the largest of which by revenue is Eni S.p.A. The rules for customer access to the services offered are established by the Electricity and Gas Authority and set out in the network codes. For each type of service, these documents explain the rules that govern the rights and obligations of the parties involved in providing said services and have contractual conditions which minimise the risk of non-compliance by customers. In particular, the codes provide for suitable guarantees to partly cover obligations where the customer does not possess a credit rating issued by one of the leading international agencies. The maximum exposure of Snam Rete Gas to credit risk at 31 December 2010 is represented by the book value of the fi nancial assets recognised in the fi nancial statements. Below is a breakdown of receivables overdue but not impaired.

31.12.2009 31.12.2010

(€ million)Trade

receivablesOther

receivables TotalTrade

receivablesOther

receivables Total

Unexpired receivables that have not been written down 695 140 835 685 128 813

Written down receivables net of provision 9 17 26 23 16 39

Expired receivables that have not been written down:

- from 0 to 3 months 18 5 23 31 3 34

- from 3 to 6 months 1 1 2 11 2 13

- from 6 to 12 months 4 1 5 13 1 14

- over 12 months 11 12 23 14 15 29

Total expired receivables that have not been written down 34 19 53 69 21 90

738 176 914 777 165 942

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Receivables overdue but not impaired, totalling €90 million (€53 million at 31 December 2009) refer to receivables from counterparties with high reli-ability and therefore, as of today, it is reasonable not to deem their collection critical. The criteria used to verify the presence of impairments are indicated in the description of the valuation criteria.No material credit risks arose. At 31 December 2010, roughly 76% of trade receivables (72% at 31 December 2009) are due from highly-rated key custom-ers, including the ultimate parent, Eni S.p.A., which represents approximately 48% of total trade receivables (50% at 31 December 2009).

LIQUIDITY RISKLiquidity risk is the risk that new fi nancial resources may not be available (funding liquidity risk) or the company may be unable to convert assets into cash on the market (asset liquidity risk), meaning that it cannot meet its payment commitments. This may affect profi t or loss should the company be obliged to incur extra costs to meet its commitments or, in extreme cases, lead to insolvency and threaten the company’s future as a going concern. The objective of Snam Rete Gas is to have a fi nancial structure (in terms of leverage ratio and ratios of medium-to-long-term debt and total debt) which ensures an adequate level of liquidity for the group, in line with business objectives, by minimising the related cost and maintaining a balance in terms of duration and composition of its debt. Snam Rete Gas currently raises funds solely through its ultimate parent, Eni S.p.A. Under the existing agreements, Eni S.p.A. can request the early repay-ment of loans should it lose its controlling stake in Snam Rete Gas.At present, the company believes that cash fl ows from operations and its current fi nancial and capital structure can reasonably allow access to a wide range of fi nancing from the capital market and banks at normal market conditions.Financial liabilities, not d iscounted to present value, including the short-term portions and accrued interest,23 may be broken down by maturity date as follows:

(€ million) 2011 2012 2013 (*) 2014 2015 Over Total

Financial debt (**) 3,434 1,819 1,369 1,687 1,335 2,440 12,084

Trade and other payables 1,238 1,238

4,672 1,819 1,369 1,687 1,335 2,440 13,322

(*) This includes a fi xed-rate loan (€400 million) agreed with Eni on 23 December 2010 with a disbursement date of 21 March 2011. The loan has a fi xed rate of about 2.9% with bullet repayment on 20 December 2013, and it refi nances a €300 million loan due to mature on 20 March 2011.

(**) For fl oating-rate fi nancial payables converted into fi xed-rate fi nancial payables by the use of cash fl ow hedge derivative instruments, the cash fl ow includes the effect of the these transactions.

Other information on fi nancial instrumentsWith reference to the classifi cations provided for in IAS 39, it is specifi ed that Snam Rete Gas does not have fi nancial assets held to maturity, available for sale or held for trading. As a result, the fi nancial assets and liabilities, except the hedging derivatives, all fall within the classifi cation of fi nancial instru-ments measured at amortised cost. The book value of fi nancial instruments and their relative effects on results and on equity may be analysed as follows:

Income (expense)

Carrying value Income statement Shareholders’ equity (*)

(€ million) 2009 2010 2009 2010 2009 2010

Financial instruments measured at fair value

Hedging derivatives

Effective share of hedge pursuant to IAS 39 (73) (68) (64) (102) (21) 3

Ineffective share of hedge pursuant to IAS 39 (2)

Receivables, payables and other assets/liabilities measured at amortised cost

Trade and other receivables 872 929 2 (6)

Trade and other payables (1,062) (1,238)

Financial debt (9,986) (10,350) (142) (151)

(*) Net of the tax effect.

The following presents a comparison between the book value of long-term fi nancial liabilities and the respective market value. This information is not reported for other fi nancial assets/liabilities because the book value is almost equivalent to the market value.

31-Dec-09 31-Dec-10

(€ million) Book value Market value Book value Market value

Financial debt 8,401 8,561 8,506 8,646

(23) With respect to cash fl ows of accrued interest, maximum use of the credit lines (€1,700 million) have been assumed up to expiry of the lines (2014).

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The market value of the long-term fi nancial liabilities, including the short-term portions, was determined using the discount rates defi ned on the basis of market interest rates at 31 December 2010, between 0.8% and 2.9%. The classifi cation of assets and liabilities measured at fair value in the balance sheet, according to the fair value hierarchy24 considering the signifi cance of the inputs used in the measurement process, relates to level 2 derivative fi nancial instruments posted among “Other non-current assets”, “Other cur-rent liabilities”, and “Other non-current liabilities”.

LitigationSnam Rete Gas is involved in civil, administrative and criminal proceedings and legal actions related to its normal business activities. According to the information currently available and considering the existing risks, Snam Rete Gas believes that these proceedings and actions will not have material adverse effects on its consolidated fi nancial statements. The following is a summary of the most signifi cant proceedings; unless indicated otherwise, no allocation has been made for the litigation described below because the company believes it improbable that these proceedings will have an unfavourable outcome or because the amount of the allocation cannot be reliably estimated.

Criminal cases

Italgas S.p.A. – Judiciary investigations into gas meteringIn May 2007 Italgas received notice of a local search and seizure proceeding within the framework of Case no. 11183/06 RGNR brought by the public prosecutor of the Milan district court. The document was also served upon the chairman of the company. The charge alleged unlawful conduct starting in 2003 relating to the use of gas metering equipment, the payment of excise duties, the billing of customers and relations with the supervisory authority. Among other things, the charges relate to offences established in Legislative Decree no. 231 of 8 June 2001, which provides for administrative liability of a company for crimes committed by its employees in the interest or to the advantage of the company itself.On 3 February 2009 the public prosecutor of Milan gave notice of a request to extend the period for preliminary investigations into Italgas to 7 October 2009. In December 2010 a notice of conclusion of preliminary investigations was received relating only to the specifi c matter of using Venturi-type metering equipment installed in various Milan municipalities, at the connection stations between the national natural gas transportation networks and the local natural gas distribution networks. The company is cooperating with the appropriate authorities in this investigation.

Snam Rete Gas - Judiciary investigations into gas meteringThe public prosecutor at the Milan district court has commenced a criminal case on the issue of gas metering and the legitimacy and reliability of what are referred to as the Venturi meters. This has involved several companies in the gas sector.Snam Rete Gas and some of its managers are also involved in the case and the Mazara del Vallo metering system has been placed under precautionary seizure; the company is under investigation pursuant to Articles 24 and 25-ter of Legislative Decree no. 231/2001. In this regard, the company wishes to state that:· the reliability of the Venturi metering system, and more specifi cally the facility at Mazara del Vallo, the entry point into Italy for the Algerian gas importa-

tion pipeline, which was designed and set up with Venturi-type meters at the beginning of the 1980s and subsequently extended in 1994, has been confi rmed by some of the most authoritative Italian and international metrology institutions;

· the Mazara del Vallo metering facility was authorised by the Italian fi nance ministry both when the imports started and during the subsequent upgrad-ing stage;

· Venturi metering systems are currently used throughout the world. In Europe, they can be found in Great Britain, Germany, France, Austria and Norway;· in Italy the process of approving this type of metering instrument has been in progress for more than a decade, with a positive outcome of the techni-

cal procedure in place since December 1999. The urgent need to fi nalise this process has been reiterated by Snam Rete Gas to the former Ministry of Industry, now the Ministry of Economic Development.

The company is cooperating with the relevant authorities and is confi dent about the reliability of the metering system used at the Mazara del Vallo station. It has full confi dence in the judiciary and trusts that the outcome of the investigations will confi rm the propriety of its conduct.In November 2009, notice of conclusion of preliminary investigations was received, within the context of the aforementioned broader criminal case relat-ing to the gas metering system, concerning a matter pertaining particularly to tax issues deemed of a criminal nature. Some managers and department heads (including some no longer employed by the company) are under investigation with regard to various matters.The period under investigation is a time span that, in total, covers the years from 2003 to 2007, relating primarily to annual natural gas consumption reports and to assessment and/or payment of excise duties on natural gas, as well as to possible obstruction of supervisory duties.

(24) The changes to IFRS 7, issued by the IASB in March 2009 and approved in November 2009, require the distinction of measurements at fair value on the basis of a three-level classifi cation (fair value hierarchy) defi ned by considering the signifi cance of the inputs used in the measurement process. In particular, this standard provides for the following levels: (i) Level 1: measurements made on the basis of quoted prices (and not subject to change) on active markets for the same fi nancial assets or liabilities; (ii) Level 2: measurements made on the basis of inputs differing from the quoted prices referred to in the previous point, which, for the assets/liabilities sub mitted for measurement, are indirectly observable; and (iii) Level 3: inputs not based on observable market prices.

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The preliminary hearing for the request made by the public prosecutor to bring the matter to the courts has been set for 12 May 2011, noting possible continuation of hearings on 24 and 26 May 2011. With the help of independent external experts, the administrative, tax and European legislation aspects have been examined more closely. Snam Rete Gas is reassured by the opinions of the experts and maintains that the allegations made are unfounded. The company therefore considers itself unlikely to suffer a subsequent negative economic impact.

Civil and administrative cases

Snam Rete Gas - Recovery of amounts for improper withdrawals of gasEni S.p.A. has involved Snam Rete Gas S.p.A. in civil proceedings against end customers for the recovery of amounts for improper withdrawals of gas by said end customers, asserting that they did not behave in compliance with the role attributed to them by the network code. Eni S.p.A. has also challenged Resolution no. 268/05 of the Electricity and Gas Authority, which introduced into the provisions of the Snam Rete Gas network code the mandatory presence of a representative of the end customer in order to be able to carry out the so-called “dumping” of pipes at the redelivery points under safe conditions.Snam Rete Gas believes that it has always acted correctly and in full compliance with the terms of the transportation agreement, the network code, re-lated application procedures and, in general, the legal and technical rules of conduct. Having consulted an independent legal expert, who claims that the compensation claim is unlikely to be upheld, Snam Rete Gas remains convinced that any criticism of its conduct is unfounded.

Tax cases

GNL Italia S.p.A. - Local property tax (ICI)Following the change in classifi cation and the reassessment of real estate income performed by the La Spezia territorial agency, with reference to the Panigaglia real estate complex, the Municipality of Porto Venere has notifi ed GNL Italia S.p.A. of ICI tax assessments for the years 2001 to 2009. The company has submitted appeals against the action brought by the territorial agency as well as against the above-mentioned assessments. The La Spezia provincial tax commission:· by Ruling no. 136/7/08 of 24 November 2008, held in favour of the territorial agency with respect to the classifi cation of the real estate complex and to

the allocation of the pertinent real estate income; · by Ruling no. 83/7/2009 of 9 March 2009, upheld the case made by GNL Italia, recognising that the ICI tax was not due for the years 2001 to 2006;· by Ruling no. 16/3/10 of 27 November 2009, confi rmed the ICI tax payables for 2007 but acknowledged that the administrative penalties were not due.

The company has made an allocation to the provision for risks relating to this litigation, pending fi nal pronouncements.

Competition Authority

Italgas - Investigation of the gas distribution and sales sector in ItalyOn 6 May 2009, the competition authority notifi ed Italgas of the start of an investigation with the aim of determining the possible existence of an abuse of dominant position in violation of Article 82 of the EU Treaty. The investigation, which also involves other companies in the gas sector, arose from an allega-tion by an operator, also active in the gas sales sector, concerning supposed obstructive and dilatory conduct by Italgas in carrying out the operational and commercial switching procedures to enable the transition of customers from one sales company to another. In order to determine the precise context of the content of the allegation from the operator, on 26 May 2009 Italgas accessed the case documents. On 6 August 2009 Italgas presented commitments in accordance with Article 14-ter of Law no. 287/90 for the purpose of eliminating the supposed wrongful conduct.By a resolution dated 8 September 2010, in acceptance of the commitments made, the Authority decided to close proceedings against the companies under investigation without determining an infringement pursuant to Article 14-ter, paragraph 1, of Law no. 287/90.

Italgas - Investigation of the gas distribution sector in ItalyThe competition authority, in its session of 13 October 2010, started an investigation to determine whether Italgas had abused its dominant position, obstructing the Municipalities of Rome and Todi in their preparing of calls for tenders for the contracting of gas distribution services. The decision was taken in light of indications sent to the regulator by two local entities accusing the company, as gas distribution service concessionaire, of having delayed or refused to give the necessary information to the authorities to prepare calls for tenders for contracting the service, the concession to Italgas having expired in December 2009. The investigation should be completed by 15 December 2011.As the proceedings stand currently, considering the documentation available and the applicable regulatory framework, no evidence has emerged to show a violation of such rules by the company, nor any which would make it possible to estimate the amount of any sanction.

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Electricity and Gas Authority

Snam Rete Gas - Investigation into violation of the regulation on availability of natural gas higher heating value measurements As a result of Formal Investigation VIS 85/09, the Electricity and Gas Authority (hereinafter the AEEG), by Resolution VIS 12/11, issued a fi ne of €580,000 against Snam Rete Gas (hereinafter Snam) for violating the rules imposed on gas transportation companies with respect to the proper measurement and use of natural gas higher heating values (hereinafter HHV). That parameter is needed to determine the actual energy provided to operators on the market or individual sellers. Specifi cally, the AEEG saw fi t to penalise temporary interruption, in limited cases, of the mechanical and chemical reading of the HHV, even though Snam had replaced readings with manual samplings. The AEEG also found that the violation did not involve any billing infraction and, when determining the amount of the fi ne, it took into consideration the corrective actions taken by Snam in order to improve the measurement service and to avoid similar nega-tive refl ections on its operations in the future. In conjunction with payment of the fi ne, subject to an appeal, Snam has urged the competent court to review the measure in protection of its corporate interests.

Italgas - Investigation into gas distribution service quality violationsOn 18 September 2009, the Electricity and Gas Authority, by Resolution VIS 92/09, started a formal investigation for the issuance of an administrative fi ne for violations of gas distribution service quality.With respect to these proceedings, it is necessary to note that: (i) they derived from a report by the Electricity and Gas Authority on absolution of the obligation, imposed on distributors which operate cast-iron pipe networks with fi ttings of hemp and lead (not yet reconditioned), to replace, recondition or decommission them by 31 December 2008, to a minimum extent of 30%; and (ii) this investigation, proceeding within the Electricity and Gas Author-ity, has the purpose of determining whether there is violation of Article 2, paragraph1 and Article 11, paragraph 7 of the Authority’s consolidated act of measures on the quality of gas distribution, metering and sale services (Resolution no. 168/2004) and of issuing an administrative fi ne under Article 2, paragraph 20, letter c) of Law no. 481/95 (fi nes of not less than €25,822.00 and not more than €154,937.069).

Environmental regulations The risks related to the impact of the activities of Snam Rete Gas on the environment, on health and on safety are described in the “Operating risk” para-graph of the Directors’ report. In particular, with respect to environmental risk, while Snam Rete Gas believes that it operates in substantial compliance with the laws and regulations and considering the adjustments to environmental regulations and actions already taken, it cannot be ruled out that Snam Rete Gas may incur costs or liabilities, which could even be signifi cant. It is diffi cult to foresee the repercussions of any environmental damage, partially due to new laws or regulations that may be introduced for environ-mental protection, the impact of any new technologies for environmental clean-ups, possible litigation and diffi culty in determining the possible conse-quences, also with respect to other parties’ liability and any possible insurance compensation.

Emissions trading The European Emissions Trading Scheme (ETS) has been in operation since 1 January 2005. In that regard, on 27 November 2008 the Italian national ETS commission (Minambiente – Mse) issued Resolution no. 20/2008 setting forth the allocation of emissions allowances to existing facilities for the fi ve-year period 2008-2012. For that period, emissions allowances have been allocated to Snam Rete Gas equivalent to about 5 million tonnes of carbon dioxide (including the forecasts for new facilities).In 2010, the carbon dioxide emissions from the facilities of the group were slightly lower than the emissions allowances allocated. Compared with the 0.97 million tonnes of carbon dioxide emitted into the atmosphere, about 1 million had been allocated in emissions allowances, including allowances for new facilities (with a surplus of about 0.03 million tonnes).

Other commitments and risks The other commitments and risks are:· Commitment to Eni S.p.A. to redeliver 869,690 gigajoules (GJ) of natural gas stored at the Panigaglia regasifi cation facility awaiting regasifi cation;· Commitment to Italtrading S.p.A. to purchase 228,600 GJ of natural gas in the period from 1 January 2011 to 31 December 2011; · Commitment made to Eni S.p.A. in connection with the contribution of the natural gas transportation, dispatching and regasifi cation activities (1 July

2001), to employ one person currently on unpaid leave when that person returns.

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IntroductionAs amply demonstrated in the Directors’ report, following the acquisition from Eni S.p.A. of Italgas and Stogit, completed on 30 June 2009, the compared 2009 results include the effects of consolidating the acquired companies in the second half of the year. Consequently, the comparison between the income statement items for 2009 and 2010 is not fully signifi cant25.

23 RevenueThe key items making up revenue are described below. The reasons for the most signifi cant changes can be found in the “Financial review” section of the Directors’ report.

(€ million) 2009 2010

Core business revenue 2,438 3,475

Other revenues and income 30 33

2,468 3,508

Core business revenue (€3,475 million) is shown net of the following items:

(€ million) 2009 2010

Additional payments to distribution service (*) 96 207

Variable interruptibility fee as per Resolution no. 277/07 (**) 42 23

Regional network capacity fee as per Resolution no. 45/07 - Equalisation 10 2

148 232

(*) The distribution tariffs comprise: (i) an additional component to the distribution tariff (UG2) intended to contain the cost of the service for “low-consumption” end users, pursuant to Resolution ARG/gas no. 64/09; and (ii) an additional component to the distribution tariff to cover the mandatory insurance for civil end users of the gas distribution service, pursuant to Resolution ARG/gas no. 152/03. These fees are passed on in full to the Cassa Conguaglio Settore Elettrico (Electricity Equalisation Fund).

(**) The Electricity and Gas Authority, by Reso lution no. 277/07, published on 31 October 2007, provided for the establishment, as of 1 January 2008, of a variable unit transportation fee as an increase to the variable unit fee as per Resolution no. 166/05. The amounts collected by Snam Rete Gas are passed on in full to the Cassa Conguaglio Settore Elettrico. The same Authority, by Resolution ARG/gas 200/09 “Measures on helping to contain the consumption of natural gas pursuant to the decrees of the Ministry for Economic Development of 11 September 2007 and 17 December 2009”, published on 23 December 2009, provided for the application of this fee until 30 September 2010.

Core business revenue is analysed by business segment in Note 29 “Information by business segment”. The revenue of Snam Rete Gas is generated exclusively in Italy.

Other revenues and incomeOther revenues and income (€33 million) break down as follows:

(€ million) 2009 2010

Income from property investments 3 6

Capital gains from disposal of property, plant, equipment and intangible assets 7 4

Plant safety inspections 4 4

Contractual penalties and other income from commercial relationships 2 3

Income from sale of energy effi ciency certifi cates (TEE) (*) 4 2

Insurance payout 1 2

Other income 9 12

30 33

(*) Revenues from the sale of energy effi ciency certifi cates are shown net of the acquisition costs of the certifi cates.

(25) In order to allow a signifi cant comparison between the results for 2010 and those for 2009, the “Financial review” section of the Directors’s report provides, along with notes on the individual items, the “2009 combined consolidated income statement”, obtained by including Italgas and Stogit within the consolidation scope for the whole of 2009.

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Revenues from regulated and non-regulated activitiesThe analysis of revenues from regulated activities (€3,442 million) and non-regulated activities (€66 million) is shown below:

(€ million) 2009 2010

Natural gas transportation 1,848 1,873

Liquefi ed Natural Gas (LNG) regasifi cation 21 24

Natural gas distribution (*) 407 1,219

Natural gas storage 147 326

Revenue from regulated activities 2,423 3,442

Revenue from non-regulated activities 45 66

2,468 3,508

(*) From 1 January 2010, revenues include the effects of applying international accounting standard IFRIC 12 “Service Concession Arrangements”. The application of this interpretation had no effect on the consolidated results, except for the equal recognition of revenue and costs relating to the construction and upgrading of natural gas distribution infrastructures (€349 million). More information about the provisions of this interpre-tation and how they apply to Snam Rete Gas can be found in the “Basis of presentation and consolidation principles” section of these Notes.

Revenue from regulated activities

Natural gas transportationRevenue from regulated activities (€1,873 million) relates to fees for transportation activities and mainly concerns Eni S.p.A. (€742 million) and Enel Trade S.p.A. (€256 million). The revenue comprises: (i) recognition by the Electricity and Gas Authority of the additional expenses incurred for the purchase of fuel gas during the period from 1 October 2008 to 31 December 200926 (€55 million); (ii) the recharging to users of the costs of connecting the company’s network with that of other operators (€46 million)27. Following the application of the new tariff criteria laid down by the Electricity and Gas Authority in Resolution ARG/gas 184/09, from 1 January 2010 the revenue does not include the portion recognised by the Regulator to cover the operating costs of the fuel gas used for transportation activities, subject to payment in kind by service users.The payment in kind of natural gas entailed, on one hand, reduced operating costs from lower charges for supplying the gas and, on the other, reduced revenue for the portion allocated to cover the operating costs. During the course of 2010, Snam Rete Gas provided transportation services to 82 companies (70 companies in 2009).

Natural gas distributionRevenue from regulated activities (€1.219 million) relates essentially to: (i) fees for natural gas distribution services (€848 million) and mainly con-cerns Eni S.p.A. (€756 million) and Enel Energia S.p.A. (€40 million); (ii) revenue deriving from the construction and upgrading of distribution infrastruc-tures (€349 million), recognised in application of international accounting standard IFRIC 12; and (iii) technical services provided at redelivery points (€17 million). During the course of 2010, Snam Rete Gas used its networks to distribute the gas of 169 commercial companies (138 companies at 31 December 2009).

Natural gas storageRevenue from regulated activities (€326 million) relates to fees for modulation (€259 million) and strategic (€67 million) storage, and mainly concerns Eni S.p.A. (€98 million) and Enel Trade S.p.A. (€51 million).During the course of 2010, Snam Rete Gas provided natural gas storage services to 60 companies (56 companies at 31 December 2009).

Liquefi ed Natural Gas (LNG) regasifi cationRevenue from regulated activities (€24 million) relates to fees for liquefi ed natural gas (LNG) regasifi cation, carried out at the Panigaglia (SP) LNG termi-nal, and mainly concerns Enel Trade S.p.A. (€14 million) and Eni S.p.A. (€8 million).

Revenue from non-regulated activitiesRevenue from non-regulated activities (€66 million) mainly concerns: (i) technical services (€15 million); (ii) the leasing and maintenance of fi bre-optic telecommunications cables (€10 million) awarded under concession to a telecommunications operator; (iii) income from property investments (€6 million); (iv) income from the sale of gas no longer required for the provision of storage services (€5 million); and (v) capital gains on disposals of property, plant and equipment and intangible assets (€4 million).

(26) The additional cost incurred for the acquisition of fuel gas was determined by the Electricity and Gas Authority in Resolution ARG/gas 218/10, published on 3 December 2010. (27) Where the provision of the transportation service involves the networks of multiple operators, Resolution no. 166/05 of the Electricity and Gas Authority, as subsequently amen-

ded, provides for the principal operator to invoice the users for the service, transferring to the other operators of the transportation networks the portion attributable to them.

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24 Operating costsThe key items making up operating costs are described below. The reasons for the most signifi cant changes can be found in the “Financial review” section of the Directors’ report.

(€ million) 2009 2010

Purchases, services and other costs 403 623

Personnel expense 178 345

581 968

Purchases, services and other costsPurchases, services and other costs (€623 million) break down as follows:

(€ million) 2009 2010

Internal consumption of natural gas from the regasifi cation system (*) 6 9

Payments against strategic gas sales (**) 2 1

8 10

Purchases, services and other costs are shown net of the following items:

(€ million) 2009 2010

Costs incurred for raw materials, consumables, supplies and goods 360 156

Service costs 228 482

Costs for the use of third party assets 28 54

Change in raw materials, consumables, supplies and goods 16 30

Net accrual to provisions for risks and charges 17 6

Other expenses 34 42

683 770

Less:

Raw materials, consumables, supplies and goods:

Increase on internal work capitalised in non-current assets - purchases (251) (120)

(251) (120)

Services:

Increase on internal work capitalised in non-current assets - services (29) (27)

(29) (27)

403 623

(*) Internal consumption of natural gas from the regasifi cation system relates to natural gas used for regasifi cation which is purchased and subsequently recharged to the service user.(**) The sale and purchase of strategic gas does not involve the effective transfer of risks and benefi ts associated with the availability of the asset. As such, the transaction has no effect on the income statement.

Costs incurred for raw materials, consumables, supplies and goods (€156 million, gross of increases on internal work) mainly concern the acquisition of piping and include the costs relating to the construction and upgrading of distribution infrastructures (€44 million). In 2010, due to the effects of applying the new tariff criteria for natural gas transportation activities, in force for the third regulatory period (1 January 2010 - 31 December 2013), the item does not include the costs arising from the acquisition of natural gas essential to the conduct of the activity, which is paid in kind by users as of 1 January 2010.

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The increase on internal work (€120 million) relates mainly to the withdrawal of warehouse goods for investment activities. Costs for services amount to €455 million and comprise the following:

(€ million) 2009 2010

Construction, planning and coordination of work 15 183

Maintenance 36 46

Purchase of transportation capacity (interconnection) 31 46

Technical, legal, administrative and professional services 25 42

IT (information technology) services 20 32

Personnel-related services 19 27

Utilities 14 21

Telecommunications services 13 17

Insurance 13 17

Modulation and storage services (*) 11

Other services 31 51

228 482

less:

Income on internal work capitalised in non-current assets - services (29) (27)

(29) (27)

199 455

(*) For 2009, the cost of modulation services provided by Stogit S.p.A. relates to services rendered during the fi rst half of the year, since the economic relationship was consolidated from 30 June 2009, the date of comple-tion of the acquisition.

Costs for services (€455 million) include costs relating to the construction and upgrading of distribution infrastructures (€201 million), recorded due to the implementation of IFRIC 12.The costs of construction, planning and coordinating work (€183 million) relate mainly to the construction and improvement of concession infrastruc-tures for natural gas distribution activities.Maintenance services (€46 million) relate mainly to plant maintenance services. The purchase of transportation capacity (€46 million) relates to the transportation service provided by other operators on their networks (interconnec-tion).Personnel-related services (€27 million) relate mainly to reimbursements of travel expenses, food and training costs.Other services (€51 million) relate mainly to security and caretaker services, cleaning services, marketing services and aerial pipeline monitoring services.Development costs which do not satisfy the conditions for recognition under assets in the balance sheet amount to less than €1 million.

Costs for the use of third-party assets (€54 million) break down as follows:

(€ million) 2009 2010

Fees, patents and licences 20 38

Lease and rental payments 8 16

28 54

Costs for the use of third-party assets (€54 million) include costs relating to the construction and upgrading of distribution infrastructures (€6 million) recorded due to the implementation of IFRIC 12.Fees, patents and licences (€38 million) mainly concern the operation of natural gas distribution concessions and easement concessions related to pipeline construction and maintenance.Leasings and rentals (€16 million) mainly relate to charges for operating leases of properties for use as offi ces. Future minimum payments due for non-cancellable operating leases break down as follows:

(€ million)

Payable within 2009 2010

1 year 3 1

from 2 to 5 years 6 2

over 5 years 1

10 3

The negative change in raw materials, consumables, supplies and goods (€30 million) is mainly due to the use of the materials used in transportation activities.

132


Net appropriations to provisions for risks and charges (€6 million, net of uses for surplus) mainly concern provisions for environmental expense. Infor-mation about provisions for risks and charges can be found in Note 17 “Provisions for risks and charges”. Other expenses (€42 million) break down as follows:

(€ million) 2009 2010

Capital losses from disposal of property, plant, equipment and intangible assets 16 12

Indirect taxes and duties 7 11

Provision for receivable impairment 6

Methane gas consumption tax 3 4

Other expenses 8 9

34 42

Personnel expensesPersonnel expenses of €345 million break down as follows:

(€ million) 2009 2010

Wages and salaries 184 266

Social security contributions (pensions and healthcare assistance) 58 83

Defi ned contribution plan costs 13 22

Other employee benefi ts 4 5

Other expenses 13 21

less:

Increase on internal work capitalised in non-current assets - personnel expense (94) (52)

178 345

Personnel expenses (€345 million) include costs relating to the construction and upgrading of distribution infrastructures (€98 million), recorded from 1 January 2010 following the application of IFRIC 12.Defi ned-contribution plan costs (€22 million) relate to the portion of severance pay earmarked for pension funds or for the Istituto Nazionale Previdenza Sociale (INPS) [National Social Security Institute] due to the modifi cations introduced by the 2007 Budget. Other employee benefi ts (€5 million) relate mainly to deferred cash incentive plans allocated to executives who have achieved pre-established targets, and to long-term incentive plans, which will be paid out at the end of the vesting period. These benefi ts are analysed in Note 18 “Provisions for employee benefi ts”.Other expenses (€21 million) mainly relate to costs for termination benefi ts and additional charges (social security contributions and severance pay) associated with the cash incentives.The increase on internal work (€52 million) represents the part of personnel expenses absorbed by investment activities.

The average number of payroll employees included in the consolidation scope, broken down by status, is as follows:

Professional status 31.12.2009 31.12.2010

Executives 121 120

Managers 492 502

Offi ce workers 3,388 3,279

Manual workers 2,306 2,226

6,307 6,127

The average number of employees is calculated on the basis of the monthly number of employees for each category.

Incentive plans for executives with Snam Rete Gas sharesAt 31 December 2010 there were 5,949,951 options existing for the acquisition of 5,949,951 Snam Rete Gas ordinary shares with a nominal value of €1. The options relate to the 2003 allocation of 143,000 shares with a strike price of €3.246, the 2004 allocation of 360,500 shares with a strike price of €3.53, the 2005 allocation of 538,000 shares with a strike price of €4.399, the 2006 allocation of 856,551 shares with a strike price of €2.905, the 2007 allocation of 1,509,200 shares with a strike price of €3.545, and the 2008 allocation of 2,542,700 shares with a strike price of €3.463. No new stock option plans were issued in 2010.

133


The evolution of the stock option plans at 31 December 2010 is as follows:

2009 2010

No. o

f sha

res

Aver

age

strik

e pr

ice

(€)

Mar

ket

pric

e (€

) (a)

No. o

f sha

res

Aver

age

strik

e pr

ice

(€)

Mar

ket

pric

e (€

) (a)

Options existing at 1 January 7,722,400 4.00 3.98 7,510,700 3.46 3.46

New options assigned (b) 1,283,375 3.35 3.12

Options exercised during the period (574,125) 2.94 3.36 (766,074) 3.13 3.61

Options expired during the period (c) (920,950) 3.03 3.18 (794,675) 3.54 3.47

Options existing at period end 7,510,700 3.46 3.46 5,949,951 3.49 3.73

of which exercisable 2,434,425 3.36 3,407,251 3.50

(a) The market price for the options assigned, exercised or expired in the year matches the weighted average for the number of shares, their market value (average offi cial price on the electronic stock exchange in the previ-ous month: (i) the date of the board of directors’ allocation resolution; (ii) the date of issue into the benefi ciary’s securities account for the issue/transfer of shares; (iii) the unilateral termination date of employment for expired options; and (iv) the date when the board of directors determines the TSR positioning at the end of the vesting period). The market price for options existing at the start and end of the year is exact at year end.

(b) Figures relate to the new options assigned during 2009 following the modifi cation of the 2006-2008 stock option plan, approved by the board of directors on 29 July 2009. (c) Figures include options expired due to the TSR positioning at the end of the vesting period and options expired due to termination of employment.

The breakdown of options by year of allocation is as follows:

Years of assignment Options assigned Options expired Options exercisedExisting options at 31 December 2010

2002 608,500 (21,000) (587,500)

2003 640,500 (497,500) 143,000

2004 677,000 (30,000) (286,500) 360,500

2005 658,000 (51,000) (69,000) 538,000

2006 2,933,575 (1,061,525) (1,015,499) 856,551

2007 2,782,800 (1,043,900) (229,700) 1,509,200

2008 2,726,000 (183,300) 2,542,700

11,026,375 (2,390,725) (2,685,699) 5,949,951

More information about the incentive plans for executives with Snam Rete Gas shares can be found in the “Other information” section of the Directors’ report.At 31 December 2010, the average residual life of the options is 0.5 years for the 2003 plan, 1.6 years for the 2004 plan, 2.6 years for the 2005 plan, 1.6 years for the 2006 plan, 2.6 years for the 2007 plan and 3.6 years for the 2008 plan.The unit fair value of the options allocated in 2003, 2004 and 2005 was €0.4206, €0.174 and €0.382 per share, respectively. Following the modifi ca-tions made to the 2006-2008 stock option plan, approved by the board of directors on 29 July 2009, the unit fair value of the options allocated in 2006, 2007 and 2008 is €0.3973, €0.2127 and €0.2535 per share, respectively. The assumptions used for determining the fair value of the options are given below:

2003 2004 2005 2006 2007 2008

Risk free interest rate (%) 3.54 4.20 3.15 2.16 2.52 2.78

Duration (years) (years) 8 8 8 6 6 6

Implicit volatility (%) 20.02 11.27 14.88 20.94 20.94 20.94

Expected dividends (%) 4.80 5.64 4.55 5.72 5.65 5.54

Remuneration due to key management personnelThe remuneration due to persons with powers and responsibilities for the planning, management and control of the company, i.e. executive and non-executive directors, general managers and managers with strategic responsibility (so-called key management personnel), amounts to €6 million (€5 million in 2009) and breaks down as follows:

(€ million) 2009 2010

Short-term benefi ts (salaries and wages) 4 4

Post-employment benefi ts 1

Other long-term benefi ts 1

Employment termination pay 1

5 6

134


Remuneration due to directors and statutory auditorsThe remuneration due to directors amounts to €2.3 million and €2.6 million respectively for 2009 and 2010. The remuneration due to the statutory audi-tors amounts to €0.1 million and €0.2 million respectively for 2009 and 2010. The remuneration includes emoluments and any other sums relating to pay, pensions and healthcare assistance due for the performance of duties as a director or statutory auditor in Snam Rete Gas S.p.A. and in other companies included in the consolidation scope, which have entailed a cost for Snam Rete Gas.

Amortisation, depreciation and impairment losses Amortisation, depreciation and impairment losses amount to €678 million and break down as follows:

(€ million) 2009 (*) 2010

Amortisation and depreciation 613 668

Property, plant and equipment 516 495

Intangible assets 97 173

Impairment losses 10

Intangible assets 10

613 678

(*) Following the implementation of IFRIC 12, as illustrated earlier, the net book value at 31 December 2009 of concession infrastructures used for distribution services was reclassifi ed from “Property, plant and equipment” to “Intangible assets”. Consequently, the relevant amortisation and depreciation for 2009 has also been stated on the basis of the new classifi cation.

Depreciation of property, plant and equipment (€495 million) relates to activities of natural gas transportation (€404 million), storage (€71 million), distribution (€16 million) and regasifi cation (€4 million).From 1 January 2010, the useful life of certain types of assets in the transportation segment were updated. In particular, the revision concerned pipe-lines and reduction plants, whose useful lives were changed from 40 to 50 years and from 40 to 20 years, respectively, following the Electricity and Gas Authority’s tariff review. The company, in light of the mechanisms for recognising tariff components linked to the new depreciation rules, and the service life of assets, considered it appropriate to restate the useful life of these assets in line with the conventional tariff duration. Amortisation of intangible assets (€173 million) relates to natural gas distribution (€142 million)28, transportation (€26 million) and storage (€5 mil-lion) activities. Impairment losses (€10 million) relate to certain assets in the natural gas distribution segment. A more thorough analysis of depreciation, amortisation and impairment losses can be found in Note 6 “Property, plant and equipment” and Note 8 “In-tangible assets”.

25 Financial expenses (income) Financial expenses (income) amount to €271 million, broken down as follows:

(€ million) 2009 2010

Financial income (7) (5)

Financial expense 158 174

151 169

Derivatives 66 102

217 271

The net value of fi nancial income and expenses (€169 million) breaks down as follows:

(€ million) 2009 2010

Expense related to net fi nancial debt 166 188

- Interest and other fees paid to banks and other fi nancial backers 166 188

Other fi nancial (income) expense 9 18

- Accretion discount (*) 11 15

- Other fi nancial expense 5 8

- Other fi nancial income (7) (5)

Financial expense capitalised (24) (37)

151 169

(*) This item refers to the increase in provisions for risks and charges, which are shown at discounted value under non-current liabilities on the balance sheet.

(28) With the implementation from 1 January 2010 of IFRIC 12, amortisation of natural gas concession distribution infrastructures is stated under intangible assets.

135


Expenses associated with net fi nancial debt (€188 million) relate to interest on loans received from the ultimate parent, Eni S.p.A. Other fi nancial expenses (income) of €18 million relate mainly to the accretion discount and to interest income and expenses maturing on accruals and deferrals from regulated business. Financial expenses capitalised (€37 million) relate to the part of fi nancial expense absorbed by investment activities. The interest rate used for the capitalisation of fi nancial expenses is between 2.63% and 3.1% (3.03% in 2009).

DerivativesNet expenses (income) on derivatives amount to €102 million and break down as follows:

(€ million) 2009 2010

Gains on derivative contracts:

- Interest accrued during the period (2)

Losses on derivative contracts:

- Interest accrued during the period 66 102

- Fair value adjustment 2

66 102

All derivative contracts existing at 31 December 2010 were entered into with the ultimate parent, Eni S.p.A., and relate to interest rate agreements. Infor-mation about the characteristics of these contracts is provided in Note 10 “Other non-current assets”. The average cost of borrowing, including the effects produced by derivative contracts, stands at 2.9%, in line with 2009.

26 Income (expense) from equity investmentsIncome (expense) from equity investments (€47 million) is analysed below.

(€ million) 2009 2010

Capital gains from equity method valuation 21 47

Other income (expense) from equity investments:

- Capital gain from sale 3

- Capital losses from measurement at cost (2)

22 47

Analysis of capital gains from measurement by the equity method (€47 million) can be found in Note 9 “Equity investments”.

27 Income taxesIncome taxes, amounting to €532 million, break down as follows:

(€ million) 2009 2010

Current taxes:

- IRES 321 494

- IRAP 81 122

402 616

Deferred and prepaid taxes:

- Deferred (44) (74)

- Prepaid (11) (10)

(55) (84)

347 532

Income taxes, at €532 million, are up by €185 million compared with the previous year, mainly due to the higher pre-tax profi t. Income taxes were re-duced by €8 million as a result of the so-called Tremonti-ter rules, which grant tax breaks to investments in certain categories of key assets.

136


The table below shows the impact of prepaid and deferred taxes on the income statement, as well as the associated details of the timing differences produced during the course of the year.

2009 2010

Temp. differences Taxes Temp. differences Taxes

(€ million) IRES IRAP(Prepaid) Deferred IRES IRAP

(Prepaid) Deferred

Prepaid taxes

- Provisions for risks and charges and other non-deductible provisions 64 62 (20) 70 56 (22)

- Non-deductible amortisation and depreciation 17 (16) (4) 33 (10) (9)

- Site dismantlement and restoration 9 9 (2) 13 13 (4)

- Provision for employee benefi ts 2 (1) 2 (1)

- Revenue adjustments (5) (5) 2 (8) (8) 3

- Utilisation of provisions (21) (17) 6 (32) (27) 10

- Cash and contractual grants (21) (21) 6 (71) (71) 22

- Other (4) (4) 2 31 26 (9)

41 8 (11) 38 (21) (10)

Deferred taxes

- Excess and accelerated amortisation and depreciation (85) (433) (40) (104) (568) (51)

- Site dismantlement and restoration 6 6 2 (34) (34) (10)

- Revaluation of Italgas property, plant and equipment (15) (15) (5) (30) (30) (9)

- Capitalisation of fi nancial expense (1) (1) (1) (1) (1) (1)

- Deferred tax on capital gains 10 (2) 3 (1) (1) (1)

- Other (11) (8) (3) (8) (8) (2)

(96) (453) (44) (178) (642) (74)

(55) (84)

The impact of taxes for the year on the pre-tax profi t (tax rate) was 32.5% (32.2% in 2009), against the theoretical tax rate of 33% (33.2% in 2009). The analysis of the difference between the theoretical and actual tax rates is as follows:

2009 2010

(€ million) Amount Rate Tax Amount Rate Tax

Profi t before taxes 1,079 27.50% 297 1,638 27.50% 450

EBIT 1,274 1,862

Personnel expense 178 345

Capitalisations 118 89

Adjusted EBIT (*) 1,570 3.90% 61 2,296 3.90% 90

Theoretical rate (**) 33.2% 358 33.0% 540

Effect of increases (decreases) over theoretical rate:

- Equity method valuation effect

- Tremonti-Ter tax benefi t (0.6%) (6) (0.8%) (13)

- IRES reimbursement for 10% IRAP deduction in previous years (0.5%) (8)

- IRES deduction for 10% IRAP

- Adjustment of IRAP rates (0.9%) (10)

- Taxes on dividends (0.2%) (3)

- Other changes 0.4% 4 0.5% 8

Effective tax rate 0.3% 5

- Altre variazioni 0.1% 1 0.2% 3

Aliquota effettiva 32.2% 347 32.5% 532

(*) The EBIT (from IAS formats) is adjusted by the following amounts: personnel expenses and capitalisations relating to personnel expenses and to fi nancial expenses.(**) The theoretical rate is determined by comparing the IRES and IRAP taxes with the pre-tax profi t.

28 Earnings per shareBasic earnings per share are determined by dividing net profi t by the weighted average number of outstanding Snam Rete Gas shares during the year, excluding treasury shares. Diluted earnings per share are determined by dividing net profi t by the weighted average number of outstanding shares during the year, excluding treasury shares, increased by the number of shares which could potentially be issued following the allocation or transfer of treasury shares for the stock option plans.

137


The weighted average number of outstanding shares used to calculate the diluted earnings per share is 2,579,506,264 and 3,376,590,852 for 2009 and 2010, respectively. A reconciliation of the weighted average number of outstanding shares used to determine the basic and diluted earnings per share is set out below:

2009 2010

Weighted average number of outstanding shares used to calculate basic earnings per share 2,579,280,194 3,376,205,870

Number of potential shares following stock option plans 226,070 384,982

Weighted average number of outstanding shares used to calculate diluted earnings per share 2,579,506,264 3,376,590,852

Net profit attributable to Snam Rete Gas (€ million) 732 1,106

Basic earnings per share (€ per share) 0.28 0.33

Diluted earnings per share (€ per share) 0.28 0.33

29 Information by business segmentThe business segments in which Snam Rete Gas operates have been identified on the basis of the criteria adopted for the preparation of operational re-porting by senior management in taking business decisions. The segments identifed are as follows: (i) natural gas transportation; (ii) LNG regasification; (iii) natural gas distribution; and (iv) natural gas storage. They relate to the activities carried out, predominantly, by Snam Rete Gas, GNL Italia, Italgas and Stogit, respectively.

Tran

spor

tatio

n an

d di

spat

ch

Dist

ribut

ion

Stor

age

Rega

sific

atio

n

Elim

inat

ion

of in

tern

al p

rofit

Tota

l

(€ million)

2009

Net core business revenue (a) 1,865 406 161 36 2,468

less: inter-segment revenue (1) (14) (15) (30)

Revenue from third parties 1,864 406 147 21 2,438

Other revenues and income 7 19 4 30

Operating costs (398) (147) (24) (12) (581)

Depreciation, amortisation and impairment losses (499) (75) (35) (4) (613)

EBIT 974 203 92 5 1,274


Directly attributable current assets 544 476 397 20 1,437

Directly attributable non-current assets 11,005 3,925 2,488 89 17,507

Of which:

Equity-accounted investments 301 301

Directly attributable current liabilities 2,475 762 551 28 3,816

Directly attributable non-current liabilities 6,559 1,499 1,364 17 9,439

Capital expenditure 926 172 149 7 1,254

2010

Net core business revenue (a) 1,929 1,233 355 35 3,552

less: inter-segment revenue (41) (2) (23) (11) (77)

Revenue from third parties 1,888 1,231 332 24 3,475

Other revenues and income 6 28 2 (3) 33

Operating costs (279) (636) (40) (13) (968)

Depreciation, amortisation and impairment losses (430) (168) (76) (4) (678)

EBIT 1,185 455 218 7 (3) 1,862


Directly attributable current assets 621 394 436 17 1,468

Directly attributable non-current assets 11,421 4,097 2,667 90 18,275

Of which:

Equity-accounted investments 319 319

Directly attributable current liabilities 3,291 730 695 22 4,738

Directly attributable non-current liabilities 6,244 1,481 1,362 17 9,104

Capital expenditure 902 386 252 3 (3) 1,540

(a) Before elimination of intra-segment dealings.

Revenue is generated by applying regulated tariffs or market conditions. The company’s revenue is generated entirely in Italy; costs are incurred almost entirely in Italy.

138


30 Related-party transactionsSnam Rete Gas S.p.A. is a subsidiary of Eni S.p.A., which holds 52.54% of its shares.The related-party transactions c onducted by Snam Rete Gas and by the companies included in the consolidation scope mainly involve the exchange of goods, the provision of services, the provision and utilisation of fi nancial resources and the hedging of interest rate risk with the ultimate parent Eni S.p.A. and its subsidiaries and associates, as well as with associates and entities under common control, and with Enel S.p.A., a state-controlled company, and its subsidiaries.All the transactions are part of ordinary business activities and are generally settled at market conditions, i.e. the conditions which would be applied for two independent parties, and are performed in the interests of Snam Rete Gas group companies. In accordance with the disclosure requirements established by Consob Regulation no. 17221 of 12 March 2010, it is stated that in the period from 1 De-cember 2010 - 31 December 2010 the following related-party transactions were conducted which benefi ted from the exclusion provided for by Article 13, paragraph 3, letter c) of the aforesaid Regulation, inasmuch as they fall within the scope of the normal conduct of business operations and the associated fi nancial activities.

Natural gas supply contract between Eni S.p.A. and Stogit S.p.A.On 20 December 2010, approval was given to the signature of a contract between subsidiary Stogit S.p.A. and the ultimate parent, Eni S.p.A., concerning the supply by Eni to Stogit of a total quantity of 691 million cubic metres of natural gas for 2011 and 2012. The value of the contract, based on the pro-jected prices of energy products for the aforesaid years, can be estimated at around €190 million.The contract was awarded following the conclusion of a European tender (No. 2010/S 197-301241). Article 3 of the Procedure includes, among the “Equiva-lent to Market or Standard conditions”, the “conditions determined subsequent to competitive and transparent procedures governed by general com-pany rules or by rules consistent with legal procedures for the acquisition of goods and services”.

Loan agreement between Eni S.p.A. and Snam Rete Gas S.p.A.On 23 December 2010, an agreement was signed between Snam and the ultimate parent, Eni S.p.A, concerning a loan from Eni of €400 million to be disbursed on 21 March 2011 and maturing on 20 December 2013. The interest rate, fi xed for the entire duration of the agreement, is approximately 2.9% p.a. The loan is granted at market conditions, including with specifi c reference to the provisions of Article 25 of Annex A to Resolution no. 11/07 of the Electricity and Gas Authority. Article 3 of the Procedure includes, among the “Equivalent to Market or Standard conditions”, the “conditions applied in compliance with the provisions of Article 25 of Annex A to Resolution no. 11/07 of the Electricity and Gas Authority, as subsequently amended (Unbundling Regulation)”.

The following table details for 2009 and 2010 the amounts of the trade, fi nancial and other transactions with related parties and the nature of those with more signifi cance.

139


Commercial and other transactions

(€ million)

31 December 2009 2009

Receivables Payables Guarantees Costs (a) Revenue (b)

Name Goods Services Other Goods Services Other

Parent

- Eni S.p.A. 423 145 50 92 31 2 1,299 5

423 145 50 92 31 2 1,299 5

Eni subsidiaries

- Eni Adfi n S.p.A (c) 21 24 9

- Eni Hellas S.p.A 3

- Eni Insurance Ltd 1 5 1

- Enicorporate University S.p.A 1 2

- EniServizi S.p.A 6 12 1 12 1

- Saipem Energy Services S.p.A 25 2 20

- Saipem S.p.A 62 71

- Serfactoring S.p.A 14

- Stoccaggi Gas Italia S.p.A (d) 11

- Other (e) 2 2 3 1

11 138 27 133 2 1

Eni’s jointly controlled entities and associates

- Transmediterranean Pipeline Co. Ltd 1 1 2

1 1 2

Jointly controlled entities and associates

- A.E.S. S.p.A 1 3

- Toscana Energia S.p.A 7 1

- Other (e) 2

10 3 1

State-owned or controlled companies

- Enel group 47 16 1 292

- Other (e) 4 6 3

51 22 1 3 292

Total 496 308 50 119 165 7 1 1,594 6

(a) Include costs for goods and services to be used in investing activities. (b) Before tariff components which are offset among costs.(c) On 19 November 2009, the shareholders’ meeting of Sofi d S.p.A. resolved to change its trading name to Eni Adfi n S.p.A. (Eni Administration and Financial Services S.p.A.), with effect from 1 December 2009. (d) The economic effects of the consolidation of Stogit apply from 1 July 2009. The costs incurred by the group with respect to Stogit during the fi rst half of 2009 have therefore been omitted from the intra-group transac-

tions.(e) Individually less than €1 million.

140


Commercial and other transactions

(€ million)

31 December 2010 2010

Receivables Payables Guarantees Costs (a) Revenue (b)

Name Goods Services Other Goods Services Other

Parent

- Eni S.p.A. 451 355 52 33 42 2 1,623 14

451 355 52 33 42 2 1,623 14

Eni subsidiaries

- Eni Adfi n S.p.A 5 6 13 1

- Eni Hellas S.p.A 3

- Eni Insurance Ltd 2 8

- Enicorporate University S.p.A 1 2

- EniServizi S.p.A 4 13 1 19 1 1

- Saipem Energy Services S.p.A 12 2 23

- Saipem S.p.A 98 154

- Serfactoring S.p.A 21

- Syndial S.p.A 1

- Other (c) 2 2 1 2 1

14 156 3 220 1 2 3

Eni’s jointly controlled entities and associates

- Transitgas AG 1

- Transmediterranean Pipeline Co. Ltd 2 1

- Other (c) (,,) (,,) (,,) (,,)

2 (,,) (,,) (,,) 1 1

Jointly controlled entities and associates

- A.E.S. S.p.A 1 3

- Servizi Territori Aree Penisole SpA 1

- Toscana Energia S.p.A 4 2

- Other (c) 2 1 1

8 3 1 3

State-owned or controlled companies

- Anas group 2 5 1

- Enel group 73 16 2 361

- Ferrovie dello Stato group 2 1 2

- Other (c) 1 2 1 1

78 23 3 2 363 1

Total 553 537 52 36 265 5 2 1,992 18

(a) Includes costs for goods and services to be used in investing activities. (b) Before tariff components which are offset among costs.(c) Individually less than €1 million.

141


Ultimate parent

Commercial transactions The most important active commercia l transactions with the ultimate parent, Eni S.p.A., concern the provision of regulated gas services relating to trans-portation, regasifi cation, distribution and storage, on the basis of tariffs established by the Electricity and Gas Authority. The principal passive commercial transactions concern mainly the supply of electricity used for business activities and of natural gas involved in the creation of storage infrastructures. These transactions are governed by contracts entered into at normal market conditions. Snam Rete Gas also has transactions in existence connected with contracts for the provision of consultancy and technical/operational support services relating to storage fi elds. These transactions are governed by service agreements on the basis of the costs incurred. In addition, with effect from 1 January 2010, a new contract was signed between Snam Rete Gas S.p.A. and Eni S.p.A. which governs the receipt and management of a number of services provided by the centralised functions of Eni S.p.A. to Snam Rete Gas S.p.A. and its subsidiaries29. In particular, the services provided relate to the following areas: (i) human resources; (ii) corporate affairs and governance; (iii) health, safety and environment; (iv) ICT; and (v) institutional relations and communication. These transactions are governed on the basis of the costs actually incurred for the provision of the related services.

Other transactions As established by the contract for the purchase of Italgas and Stogit from Eni, signed on 30 June 2009, the price determined for the acquisition of the two companies is subject to adjustment mechanisms to be applied even after the date of execution of the contract.In particular, on 31 December 2010 certain operations provided for by these mechanisms were carried out, which led to the recognition of a price adjust-ment, charged to Snam Rete Gas, for a net amount of €127 million, this fi gure being the result of an upward adjustment of €174 million and a downward adjustment of €47 million with respect to the price established when the transaction was concluded30. This adjustment, pursuant to Consob Resolution no. 17221 of 12 March 2010, as subsequently amended, represents an increase in related-party transactions compared with the Annual Report for the previous year. Finally, there are transactions with Eni within the context of the national tax consolidation scheme, which is subscribed to by all companies in the consoli-dation scope of the Snam Rete Gas group, and of the VAT consolidation scheme. These transactions are governed by appropriate legally binding contracts.

Subsidiaries of Eni The key transactions with Eni’s subsidiaries relate to:- Saipem S.p.A, for design and project supervision services in relation to the construction of natural gas transportation infrastructures, governed by

contracts entered into at normal market conditions;- Saipem Energy Services S.p.A. for natural gas storage facility maintenance services, governed on the basis of the costs incurred. To this end, it is noted

that with effect from 1 December 2010 the business unit “Impianti stoccaggio – STIT” was sold by Saipem Energy Services S.p.A. to Stoccaggi Gas Italia S.p.A.;

- Serfactoring S.p.A. for factoring transactions performed by Snam Rete Gas suppliers.Snam Rete Gas also has commercial transactions with special-purpose entities which provide services to Eni group companies, including: (i) EniServizi S.p.A., which provides real estate management services such as maintenance of buildings, fi xtures and associated plants, transportation services, sani-tary services, catering, caretaking, supply of non-strategic assets and centralised management of the company’s archives; and (ii) Eni Adfi n S.p.A. (for-merly Sofi d S.p.A.), which provides administrative services. These transactions are governed on the basis of the costs incurred for the provision of the related services.

Entities under common control and associates Transactions with entities under common control and associates relate to the provision of IT services governed by contracts entered into at normal mar-ket conditions.

State-owned or controlled companies Transactions with state-owned or controlled companies relate mainly to the Enel Group and concern natural gas transportation, regasifi cation, distribu-tion and storage services. These transactions are governed on the basis of tariffs established by the Electricity and Gas Authority.

(29) Previously, Eni managed the provision of the services by entering into contracts with the individual companies. (30) More information about the price adjustment mechanisms applied during the course of 2010 can be found in Note 22 “Guarantees, commitments and risks – Commitments

deriving from the agreement to purchase Italgas and Stogit from Eni”.

142


Financial transactions

(€ million) 31.12.2009 2009

Name Othe

r ass

ets

(a)

Paya

bles

Othe

r lia

bilit

ies

(a)

Expe

nse

(b) (

c)

Inco

me

(d)

Parent

- Eni S.p.A. 3 9,984 81 234 2

3 9,984 81 234 2

(a) Relates to assets and liabilities deriving from the measurement of derivatives.(b) Includes fi nancial expense for investments. (c) Includes €68 million relating to expenses on derivatives.(d) Relating to derivatives.

Financial transactions

(€ million) 31.12.2010 2010

Name Othe

r ass

ets

(a)

Paya

bles

Othe

r lia

bilit

ies

(a)

Expe

nse

(b) (

c)

Inco

me

Parent

- Eni S.p.A. 15 10,349 89 290

15 10,349 89 290

(a) Relates to assets and liabilities deriving from the measurement of derivatives.(b) Includes fi nancial expense for investments. (c) Includes €102 million related t o expenses on derivatives.

Ultimate parentTransactions with the ultimate parent, Eni S.p.A., relate to the coverage of fi nancial requirements, utilisation of liquidity and interest rate risk hedging, through the use of derivative contracts, qualifi ed pursuant to IAS 39 as cash fl ow hedge derivatives. These transactions are governed by contracts en-tered into at normal market conditions.For transactions with directors, auditors and key managers, please refer to the information set out in the paragraph relating to compensation in Note 24 “Operating costs”.

Effect of transactions or positions with related parties on the balance sheet, income statement and statement of cash fl owsThe effect of transactions or positions with related parties on the balance sheet is summarised in the following table.

31.12.2009 31.12.2010

(€ million) Total Related parties Share (%) Total

Related parties Share (%)

Trade and other receivables 916 496 54.1 944 553 58.6

Other current assets 67 1 1.5 71 2 2.8

Other non-current assets 34 3 8.8 49 16 32.7

Short-term fi nancial liabilities 1,585 1,585 100.0 1,844 1,844 100.0

Long-term fi nancial liabilities 8,401 8,399 100.0 8,506 8,505 100.0

Trade and other payables 1,106 308 27.8 1,322 537 40.6

Other current liabilities (*) 250 66 26.4 221 58 26.2

Other non-current liabilities (**) 273 16 5.9 331 31 9.4

(*) The balance at 31 December 2009 includes the reclassifi cation (€63 million) from the item “Provisions for risks and charges” of fees for balancing and stock replenishment payable to service users. For more informa-tion, please refer to Note 17 “Provisions for risks and charges”.

(**) The balance at 31 December 2009 includes the reclassifi cation (€30 million) from the item “Provisions for risks and charges” of payments for balancing and stock replenishment. For more information, please refer to Note 17 “Provisions for risks and charges”.

143


The effect of transactions or positions with related parties on the income statement is summarised in the following table.

2009 2010

(€ million) TotalRelated parties Share (%) Total

Related parties Share (%)

Core business revenue 2,438 1,595 65.4 3,475 1,994 57.4

Other revenues and income 30 6 20.0 33 18 54.5

Purchases, services and other costs 403 164 40.7 623 95 15.2

Financial expense 158 142 89.9 174 151 86.8

Expense from derivatives 66 66 100.0 102 102 100.0

Transactions with related parties are generally governed on the basis of market conditions, i.e. the conditions which would be applied between two inde-pendent parties. The principal cash fl ows with related parties are shown in the following table.

(€ million) 2009 2010

Revenue and income 1,601 2,012

Cost and expense (164) (95)

Change in trade and other receivables (70) (13)

Change in trade and other payables (34) (17)

Dividends collected 34

Interest collected 4

Interest paid (203) (258)


Investments:

- Property, plant and equipment and intangible assets (151) (248)

- Companies entering the consolidation scope (4,474) (127)

- Change in payables and receivables relating to investments 17 155

Cash fl ows from investment activities (4,608) (220)

Divestments:


Cash fl ows from divestments 12

Net cash fl ows from investment activities (4,596) (220)

Taking on long-term fi nancial debt 12,406 1,020

Repaying long-term fi nancial debt (10,564) (914)

Increase (decrease) in short-term fi nancial debt (312) 259

Capital increases 1,929

Dividends paid (250) (431)

Net cash fl ows from fi nancing activities 3,209 (66)

Total cash fl ows with related parties (253) 1,377

The effect of cash fl ows with related parties is shown in the following table:

31.12.2009 31.12.2010

(€ million) TotalRelated parties Share % Total

Related parties Share %

Cash fl ows from operating activities 1,164 1,134 97.4 1,775 1,663 93.7

Cash fl ows from investment activities (5,653) (4,596) 81.3 (1,393) (220) 15.8

Cash fl ows from fi nancing activities 4,525 3,209 70.9 (410) (66) 16.1

144


31 Signifi cant non-recurring events and transactionsDuring the course of 2010, there were no economic effects deriving from signifi cant non-recurring transactions.

32 Positions or transactions deriving from atypical and/or unusual transactionsNo positions or transactions deriving from atypical and/or unusual transactions are reported.

33 Publication of the fi nancial statements The fi nancial statements were authorised for publication by the board of directors of Snam Rete Gas at its meeting of 2 March 2011. The board of directors authorised the Chairman and the Chief Executive Offi cer to make any changes which might be necessary or appropriate for fi nalising the format of the document in the period between 2 March 2011 and the date of approval by the Shareholders’ Meeting.

34 Subsequent events Information on subsequent events occurred after the balance sheet date can be found in the “Other information” section of the Directors’ report.

145

Certification of the consolidated financial statements pursuant to Article 154-bis, paragraph 5 of Legislative Decree no. 58/98 (Testo Unico della Finanza)

1. The undersigned Carlo Malacarne and Antonio Paccioretti, as CEO and manager in charge of accounting records at Snam Rete Gas S.p.A., certify, taking into account Article 154-bis, paragraphs 3 and 4 of Legislative Decree no. 58 of 24 February 1998:• the adequacy, considering the group’s characteristics, and • effective implementation

of the administrative and accounting procedures for the preparation of the consolidated fi nancial statements during the course of 2010.

2. The administrative and accounting procedures for the preparation of the consolidated fi nancial statements at 31 December 2010 were defi ned and their adequacy was assessed using the rules and methods in line with the Internal Control Integrated Framework model issued by the Committee of Sponsoring Organisations of the Treadway Commission, which represents a benchmark framework for the internal control system generally accepted at international level.

In this regard, it is pointed out that, following the centralisation of staff services and some Italgas, Stogit and GNL Italia operating activities within Snam Rete Gas with effect from 1 April 2010, the administrative and accounting procedures of the companies of the Snam Rete Gas group have been adapted to the new organisational structure.

3. It is also certifi ed that:3.1 The consolidated fi nancial statements at 31 December 2010:

a) were prepared in accordance with the applicable international accounting standards recognised in the European Community pursuant to EC Regulation no. 1606/2002 of the European Parliament and of the Council of 19 July 2002;

b) are consistent with the accounting records and ledgers;c) are suitable to provide a true and fair view of the fi nancial position, results of operations and changes in cash fl ows of the issuer and of the

companies included in the consolidation scope;3.2 The Directors’ report includes a reliable analysis of the operating performance and results, as well as the situation of the issuer and of all the

companies included in the consolidation scope, together with a description of the principal risks and uncertainties to which they are exposed.

2 March 2011

/Signature/Carlo Malacarne /Signature/Antonio Paccioretti ___________________ ____________ ____________________________________

Carlo Malacarne Antonio Paccioretti Chief Executive Offi cer Director of Planning, Administration, Finance and Control

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Independent auditors’ report

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www.snamretegas.it

2010 Annual Report

MissionSnam Rete Gas is an integrated group at the

forefront of the regulated gas sector in Italy and a major

player in Europe in terms of its regulatory asset base (RAB).

It has unrivalled expertise in the transportation and

dispatching of natural gas, the regasification of liquefied

natural gas, and the storage and distribution of natural gas.

At Snam Rete Gas our aim is to create value that will fulfil

our shareholders’ expectations.

This is achieved by providing our customers with services

that offer the utmost security and operational reliability,

as well as through our commitment to developing

infrastructure and creating a flexible gas market in Italy,

fostering competition and improving security of supply.

Snam Rete Gas pursues a sustainable growth model,

built on a thorough assessment of the environmental

impact of its activities and the development of new

and more efficient technologies.

The company relies on the expertise of its staff and their

continued development to successfully achieve these goals.

BACKGROUND

Snam Rete Gas S.p.A. was founded on 15 November 2000.

The company became operational on 1 July 2001, inheriting the natural gas

transportation and dispatching and and the liquefied natural gas regasification

operations from Snam S.p.A. (now Eni S.p.A.).

On 30 June 2009, the company bought the entire share capital of Italgas,

Italy's leading natural gas distributor, and Stogit, the country's biggest operator

in the natural gas storage sector. Snam Rete Gas shares have been listed

on the Italian stock market since 6 December 2001.

Full paid-up capital 3,570,978,994.00

Tax code and Milan Company Register No 13271390158

R.E.A. (Economic-Admin. Roll) No 1633443

VAT No 13271390158

Company controlled and coordinated by Eni S.p.A.

Graphics

Inarea e Opera

Pre-printing

Opera

Printing

AG Media s.r.l.

Printed on ecological paper:

Fedrigoni Symbol Tatami White (cover)

Fedrigoni Symbol Freelife Satin (inside)

Fedrigoni Arcoset (inside)

April 2011

Piazza Santa Barbara, 720097 San Donato Milanese - MilanTel +39.025201

www.snamretegas.it

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Documents

2010 Annual Report - SnamSnam Rete Gas Annual Report 2010 / Letter to Shareholders levels recognised by major ethical rating companies. To this end, Snam Rete Gas recently joined Global