Cover: Lorenzo Mattotti, La ricchezza

Transcription

1 Report on the First Half of 2004

2 Cover: Lorenzo Mattotti, La ricchezza

3 Report on the First Half of 2004

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5 contents Report on the first half of 2004 Management report 4 First half 2004 highlights 6 Key economic, financial and operating data 9 Directors and auditors 11 Natural gas transmission and LNG re-gasification system 14 Regulatory framework 19 Operating performance 24 Research and development 26 Economic performance and financial position 34 Corporate governance 48 Other information Consolidated accounts as at 30 June Balance sheet 57 Income statement 58 Cash flows statement 59 Contents and layout criteria 59 Notes on the consolidated accounts Snam Rete Gas S.p.A. statements as at 30 June Balance sheet 85 Income statement 88 Independent auditors report 90 Annex to the notes on the consolidated accounts as at 30 June 2004 This is a translation from the original Italian version. In the event of any differences in meaning, the Italian version shall prevail.

6 Results Main events first half 2004 highlights 4 FIRST HALF 2004 HIGHLIGHTS

7 Consolidated net income: 273 million; operating profit: 500 million; shareholders equity: 5,565 million; net debt: 3,230 million. Capital expenditures: 276 million. Gas sent into the national network: billion cubic metres; volumes of LNG re-gasified: 1.04 billion cubic metres. Share price on 30 June 2004: 3.537; record high: 3.77; share performance in 2004: +4.5% (+26.3% compared with the initial offer price). With ruling 113/04 of 14 July 2004 (published on 15 July 2004), the Italian Electricity and Gas Authority approved revised tariffs for gas transmission on the national and regional network for the gas year. With ruling 114/04 of 14 July 2004 (published on 15 July 2004), the Electricity and Gas Authority approved revised re-gasification tariffs regarding the use of the Panigaglia LNG terminal for the gas year. With ruling 22/04 of 26 February 2004, the Electricity and Gas Authority introduced measures to encourage sales and exchanges of natural gas and transmission capacity and established a timetable for the creation of an organised Gas Exchange in Italy. The Authority has asked Snam Rete Gas to draw up an implementation plan for the new rules that are necessary in order to broaden the scope and increase the flexibility of the trading system on the secondary gas market. On 31 March 2004, Snam Rete Gas submitted its investment programme to the Electricity and Gas Authority for the period A total expenditure of 3.1 billion is forecast (including 2.5 billion to expand and develop the transmission system), the main objective of the programme being to increase available transmission capacity by 20% before the end of The programme includes the start of work to increase the capacity of the pipeline running along the Adriatic shore. The work will link the new LNG terminal, located near Brindisi, to the Po Valley and will make it possible to send approximately 30 million cubic metres/day of gas into the national network. This project, which will go ahead only if the necessary guarantees are obtained regarding future use of the new capacity, would increase the capacity of the transmission system by a further 10%. On 22 July 2004, with ruling 120/04, the Electricity and Gas Authority published the results of the inquiry set in motion with ruling 16/04 of 16 February 2004, ordering GNL Italia to grant access to the re-gasification service to Gas Natural Vendita Italia and starting a formal inquiry in respect of GNL Italia aimed at imposing a pecuniary penalty. GNL Italia has already allocated re-gasification capacity to Gas Natural Vendita Italia for August and September On 7 July 2004, the European Commission - with an opinion and the relevant reasons therefor - officially requested Italy to abolish the environment tax introduced by the Sicilian Regional Authorities. The Italian State must comply within two months of receipt of the opinion, failing which the Commission will pass on the documents to the European Court of Justice to enable a definitive judgement to be made regarding Italy s non-compliance. 5 FIRST HALF 2004 HIGHLIGHTS

8 Key economic and financial data First half ,758 Revenue from ordinary activities Operating costs Depreciation, amortisation and write-downs Operating profit Net financial expenses Net income Capital expenditures ,381 Tangible and intangible assets 9,346 9,405 8,803 Net capital employed 8,762 8,795 5,683 Shareholders equity 5,397 5,565 3,120 Net debt 3,365 3,230 Main events KEY ECONOMIC AND FINANCIAL DATA 6

9 Key operating data First half Natural gas sent into National Network (billion cubic metres) for Eni for others Liquefied natural gas (LNG) re-gasified (billion cubic metres) for Eni for others , Pipeline network (kilometres in operation) 29,795 30,120 29,856 30,203 National Network 7,943 7,993 7,943 8,024 Regional Network 21,852 22,127 21,913 22,179 With a 4 May 2004 value date, the Sicilian Regional Authorities complied with the sentence registered by the Provincial Tax Commission of Palermo on 5 January 2004 and made arrangements to reimburse the first instalment of the tax on owners of gas pipelines that had been paid in April On 2 April 2004, the Authorities lodged an appeal with the Regional Tax Commission of Palermo against the sentence. On 30 July 2004, the Italian parliament approved a bill of law concerning reorganisation of the energy sector. One particularly important provision in the bill concerns the right, in the case of newly constructed capacity, to ask for an exemption from the rules governing third party access rights, for a period of at least 20 years and for at least 80% of the new capacity. This right applies to undertakings that make investments, directly or indirectly, aimed at constructing interconnections to link the national gas transmission networks of EU member states or non-eu states to the Italian National Network or constructing new LNG re-gasification terminals or significantly increasing the capacity of existing infrastructure. In other provisions, regional governments and the central government guarantee competitive conditions on energy markets and the absence of constraints, impediments or expenses that would hinder the free movement of energy within the territory of Italy and the European Union. In July 2004, the Gela-Enna pipeline in Sicily went into operation. The pipeline connects the entry point for gas imports from Libya (at Gela) to the National Network (at Enna). As part of the project to make natural gas available in the Apulia region, work on the San Giovanni Rotondo-Carpino and Ugento-Tricase pipeline sections was completed in June The former section is in operation and the latter will go into service in the next few months. In July 2004, the final 31-km section of the 30" Pontremoli-Parma pipeline went into operation. The pipeline covers a distance of some 70 kilometres and transmits natural gas from the Panigaglia LNG terminal (La Spezia) to the network in northern Italy. The route runs through Tuscany and Emilia Romagna, involving the provinces of Massa Carrara and Parma, and crosses the Apennines near the Cisa Pass. 7 KEY OPERATING DATA

10 4.0 Snam Rete Gas share performance Period: Snam Rete Gas MIB 30 EUROSTOXX Snam Rete Gas s ordinary shares have been listed on the Milan stock exchange since 6 December Since 18 March 2002, the shares have been included in the MIB 30 index. They are also included in important uropean indices (FTSE, S&P Euro and MSCI Euro). In the first half of 2004, the price of Snam Rete Gas shares on the Milan stock exchange rose by 4.5%, from at the end of 2003 to at the end of June Compared with the initial offer price, this corresponds to an increase of 26.3%. In April, the price reached a record high of Dealings on the Milan stock exchange in the first half of 2004 involved more than 1.5 billion Snam Rete Gas shares, with a total trading value of 5.5 billion. Dealings involved an average of approximately 12.2 million shares/day, compared with 7.5 million/day in the first half of The company s market capitalisation as at 30 June 2004 was 6.9 billion, compared with 6.5 billion at the end of SHARE PERFORMANCE 8

11 directors and auditors Board of directors The board of directors, appointed by the shareholders at their 27 April 2004 meeting, is composed of 8 members whose term of office will expire when the financial statements as at 31 December 2006 are adopted. The members of the board of directors are: Position Name In office since Chairman Domenico Dispenza 27 April 2004 Director Giuseppe Airoldi 27 April 2004 Director Carlo Grande 27 April 2004 Director Roberto Jaquinto 27 April 2004 Director Roberto Lonzar 27 April 2004 Director Roberto Lugano 27 April 2004 Director Marco Mangiagalli 27 April 2004 Director Renato Roffi 27 April 2004 Board of statutory auditors The board of statutory auditors, appointed by the shareholders at their 27 April 2004 meeting, will serve a 3-year term of office until the financial statements as at 31 December 2006 are adopted and comprises: Position Name In office since Chairman Riccardo Perotta 27 April 2004 Effective member Sergio Galimberti 27 April 2004 Effective member Pierumberto Spanò 27 April 2004 Alternate member Giulio Gamba 27 April 2004 Alternate member Luigi Rinaldi 27 April 2004 Audit committee The audit committee is composed of Giuseppe Airoldi, Roberto Lonzar and Roberto Lugano. The committee is composed solely of independent directors as provided for in the Corporate Governance Code for Listed Companies. Remuneration committee The remuneration committee is composed of three directors - Giuseppe Airoldi and Roberto Lugano (representing minority shareholders) and Renato Roffi. 9 DIRECTORS AND AUDITORS

12 General managers Position General Manager, Business Development General Manager, Operations Name Paolo Caropreso Carlo Malacarne Independent auditors At the ordinary meeting held on 27 April 2004, the shareholders appointed PricewaterhouseCoopers S.p.A. to audit the company s statutory and consolidated financial statements and half-yearly consolidated accounts for the 2004, 2005 and 2006 financial years. 10 DIRECTORS AND AUDITORS

13 natural gas transmission and LNG re-gasification system Snam Rete Gas is the leading provider of natural gas transmission and dispatching services in Italy and the only provider of liquefied natural gas (LNG) re-gasification services. Snam Rete Gas provides natural gas transmission and dispatching and LNG re-gasification services with an integrated system consisting of the pipeline network, compressor stations, marine terminals, the LNG re-gasification terminal at Panigaglia and the gas dispatching centre. In the past five years, the Snam Rete Gas system has not experienced any significant interruption in the transmission service due to line failures or leakages. Transmission process The transmission of natural gas is an integrated service that enables gas to be transmitted from the entry points of the National Network to the delivery points in the Regional Network 1. The allocation of transmission capacity entitles a shipper, at any time during a given gas year, to send into and take from the system a denominated maximum daily quantity of gas, at the entry and exit points of the National Network and the delivery points inthe Regional Network. International supplies of natural gas are sent into the National Network via four entry points located at the interconnections with the import lines (Tarvisio, Gorizia, Passo Gries and Mazara del Vallo) and via the Panigaglia LNG re-gasification terminal. Domestic gas production is sent into the National Network from production fields or their gathering and processing centres. Gas may also be sent into the network from storage fields. (1) The criteria used to define the National Network are set out in the 22 December 2000 decree issued by the Ministry of Industry pursuant to Legislative Decree 164 of 23 May 2000 ( Letta decree ). 11 NATURAL GAS TRANSMISSION AND LNG RE-GASIFICATION SYSTEM

14 The exit points of the National Network consist of 17 offtake areas (generally coinciding with administrative-regional boundaries) and 3 points of interconnection with international pipelines for export. After leaving the National Network, the gas is transmitted on the Regional Network to the delivery points where shippers take delivery of the gas and where the gas is metered. TRANSMISSION NETWORK REGIONAL CENTRES IMPORTS FROM NORTHERN EUROPE MALBORGHETTO IMPORTS FROM RUSSIA MASERA ISTRANA RIMINI LNG IMPORTS TERRANUOVA B. GALLESE KEY MELIZZANO National Network (in operation) National Network (planned) MONTESANO TARSIA Regional Network LNG re-gasification terminal Dispatching centre Compressor station Marine terminal Regional boundary IMPORTS FROM ALGERIA ENNA MESSINA North-west North North-east Centre-west Centre-east South-west South-east Sicily Transmission and re-gasification system Snam Rete Gas pipeline network The Italian gas transmission system extends for a total of approximately 31,500 kilometres, including 30,203 kilometres owned by Snam Rete Gas. The National Network consists mainly of large-diameter pipes that are used to transmit natural gas from the system s entry points to the points of interconnection with the Regional Network and with storage areas. The National Network also includes some inter-regional pipelines which are necessary to reach important market areas. The rest of the gas pipelines in the transmission system form the Regional Network. This network ensures that supplies of gas reach industrial users, power stations and urban distribution networks in specific areas that are generally delimited on a regional scale. The flow of natural gas in the network is regulated and the interconnection of pipes operating at different pressures is ensured by 25 junctions and some 565 plant sites that include pressure reduction and regulating facilities. Completing Snam Rete Gas s transmission system are: eleven compressor stations with a total power rating of approximately 625 megawatts and four marine terminals, which link the subsea lines to the onshore lines, located at Mazara del Vallo and Messina in Sicily and at Favazzina and Palmi in the province of Reggio Calabria. The following table shows the length of the Snam Rete Gas pipeline network in operation in recent years: 12 NATURAL GAS TRANSMISSION AND LNG RE-GASIFICATION SYSTEM

15 First half National Network 7,588 7,653 7,896 7,943 7,993 8,024 Regional Network 21,412 21,478 21,711 21,852 22,127 22,179 Total29,000 29,131 29,607 29,795 30,120 30,203 Figures are in kilometres and, for 1999 to 2003, refer to 31 December. As at 30 June 2004, the National Network owned by Snam Rete Gas extended for a total length of 8,024 kilometres. The onshore pipelines in this network, which have a maximum diameter of 48", transmit natural gas at a pressure ranging from 24 to 75 bar. The subsea pipelines, which cross the Strait of Messina, have a diameter ranging from 20" to 26" and transmit gas at a pressure of up to 115 bar. The Regional Network consists of pipelines with a smaller diameter than those in the National Network and extends for a total of 22,179 kilometres. In this network, natural gas is transmitted at pressures of between 5 and 24 bar or between 24 and 75 bar. The length of the National Network increased by 31 kilometres in the first half of 2004, following construction of the first section (Gela-Bivio Gigliotto) of the Gela-Enna pipeline. The Regional Network increased by 52 kilometres due mainly to connections to link final customers to the network. Gas dispatching and control The Snam Rete Gas Dispatching Centre, located at San Donato Milanese (Milan), is responsible for the management and remote control of the natural gas transmission network. The Centre receives data from more than 2,000 plants on the Italian network (including more than 1,500 remote-controlled) and from interconnected international networks. The Centre s systems can produce short-term transmission demand forecasts based on historical data and foreseeable weather conditions and can also simulate and optimise gas transmission on the network. ISO certification of the dispatching process was achieved in LNG re-gasification terminal Natural gas is also sent into the transmission system from the LNG terminal at Panigaglia (province of La Spezia). When operating to full capacity, the Panigaglia terminal can regasify and send more than 3.5 billion cubic metres of natural gas per year into the transmission network. The terminal, which covers an area of around 45,000 square metres, receives natural gas in the liquid phase (at a temperature of approximately -160 C) carried by gas tankers and then re-gasifies it. Transmission system management The Snam Rete Gas transmission system is managed by 8 regional operating centres which supervise, control and coordinate the activities of 60 local units ( maintenance centres ) distributed throughout Italy. These centres are responsible for operating, maintaining and monitoring the whole system in accordance with current regulations regarding safety and environmental protection. With the aim of rationalising maintenance activities, Snam Rete Gas has undertaken a series of initiatives involving: (i) the extension of remote control coverage, by increasing by 144, in the first half of 2004, the items of plant and equipment that can be controlled at a distance (line valves, pressure reduction plants, etc.); remote control reduces response time and guarantees a higher level of safety in network management, thus enhancing the reliability of the transmission system; (ii) the rationalisation of local operating structures, enabling the number of maintenance centres to be reduced from 69 to 60 compared with 2003; (iii) the completion at all maintenance centres of the new information system aimed at optimising inspection and maintenance cycles, and (iv) the extension of the use of new remote-monitoring and diagnostics programs for compressor stations that can monitor constantly the efficiency of the system, acquire data for use in maintenance planning and optimise the duration and cost of maintenance jobs. 13 NATURAL GAS TRANSMISSION AND LNG RE-GASIFICATION SYSTEM

16 regulatory framework Italian Electricity and Gas Authority Tax introduced by the Sicilian Regional Authorities on owners of gas pipelines Reorganisation of the energy sector ( Marzano law ) REGULATORY FRAMEWORK Italian Electricity and Gas Authority Ruling 22/04 - Provisions concerning a regulated market for transmission capacity and gas With ruling 22/04 of 26 February 2004, the Electricity and Gas Authority has defined the steps that need to be taken to implement rules for a regulated market for transmission capacity and gas. The actions indicated by the Authority involve four main stages: (i) (ii) (iii) (iv) organising procedures for the sale and exchange of natural gas, compatible with current balancing regulations, with the support of an IT system ( System for exchanges/sales of gas at the virtual trading point ) set up and managed by Snam Rete Gas on the basis of rules already defined in the network code; drawing up one or more standard contracts concerning sales and exchanges of transmission capacity and gas; revising the current balancing system, including setting up a daily balancing market, and establishing appropriate fees on the basis of the daily price determined by the market; introducing a centralised natural gas market, run independently and based on an automatic system that matches supply and demand, with reference prices to enable transactions to be concluded. As part of its activities to draw up an implementation plan for the new rules that are necessary in order to broaden the scope and increase the flexibility of the trading system on the secondary gas market, Snam Rete Gas has submitted the following to the Authority: 14

17 a) proposals regarding changes in the rules for the regulated market for transmission capacity and gas, applicable from the gas year; b) comments and proposals regarding the revision of the balancing system. Transmission tariffs for the gas year With ruling 113/04 of 14 July 2004 (published on 15 July 2004), the Electricity and Gas Authority approved the gas transmission tariffs, as proposed by Snam Rete Gas on 31 March 2004 and subsequently revised on 30 June 2004, for the gas year, which will come into force on 1 October Re-gasification tariffs for the gas year With ruling 114/04 of 14 July 2004 (published on 15 July 2004), the Electricity and Gas Authority approved the tariff proposal regarding the use of the Panigaglia LNG terminal for the gas year, as submitted by GNL Italia S.p.A. on 31 March investment programme On 31 March 2004, Snam Rete Gas submitted its investment programme to the Electricity and Gas Authority for the period A total expenditure of 3.1 billion is forecast (including 2.5 billion to expand and develop the transmission system), the main objective of the programme being to increase available transmission capacity by 20% before the end of The programme includes the start of work to increase the capacity of the pipeline running along the Adriatic shore. The work will link the new LNG terminal, located near Brindisi, to the Po Valley and will make it possible to send approximately 30 million cubic metres/day of gas into the national network. This project, which will go ahead only if the necessary guarantees are obtained regarding future use of the new capacity, would increase the capacity of the transmission system by a further 10%. Reference documents issued by the Electricity and Gas Authority The Electricity and Gas Authority has issued the following reference documents in 2004: Reference document concerning rules governing the natural gas transmission service in cases involving new plants and new import contracts This document, issued on 10 March 2004, is intended to be used in consultations with interested parties, the aim being to integrate and amend the rules governing the transmission service as set out in ruling 137/02 of 17 July 2002, in cases involving the startup and initial testing of new plants by shippers and the start of import contracts. Reference document concerning the allocation of newly available natural gas transmission capacity at the entry points of the National Network that link up with international transmission systems and with LNG re-gasification terminals This document, issued on 15 June 2004, is intended to be used in consultations with interested parties, the aim being to establish a procedure which integrates the rules set out in the network code, as well as the provisions in ruling 137/02 of 17 July 2002, as regards access to newly available natural gas transmission capacity at the entry points that link up with gas import lines and with LNG re-gasification terminals. Reference document concerning the application of capacity-based fees for transmission on regional networks in the case of offtake concentrated in off-peak periods This document, issued on 24 June 2004, is intended to be used in consultations with interested parties, the aim being to integrate and amend the tariff system set out in ruling 120/01 of 30 May 2001 in order to provide for the application of capacity-based fees for transmission on regional networks in the case of offtake concentrated in off-peak periods, having regard to the fact that, at present, peak demand in the Italian system is strictly connected with seasonal central heating requirements. Reference document concerning the regulation of access to re-gasification terminals by users This document, issued on 14 July 2004, is intended to be used in consultations with interested parties, the aim being to establish procedures which guarantee that all users of the LNG re-gasification service have access thereto at non-discriminatory terms and 15 REGULATORY FRAMEWORK

18 conditions. In addition, the document provides suggestions as to the criteria on which subsequent re-gasification codes will have to be based. Inquiry conducted by the Electricity and Gas Authority in respect of GNL Italia S.p.A. in connection with an alleged refusal to grant access to the re-gasification service (rulings 16/04 and 120/04) With ruling 16/04, published on 16 February 2004, the Electricity and Gas Authority started a formal inquiry in respect of GNL Italia S.p.A. in connection with an alleged refusal by this company to grant access to the re-gasificaiton service, on an annual basis, to Gas Natural Vendita Italia S.p.A. In accordance with the provisions of Article 24, paragraph 3 of Legislative Decree 164/00, on 19 November 2003 GNL Italia S.p.A. notified the Electricity and Gas Authority that it had received a request from Gas Natural Vendita Italia S.p.A. to have access to a re-gasification service, on a continuous basis at the Panigaglia LNG terminal, involving approximately 220 million cubic metres of natural gas. GNL Italia acknowledged receipt of this request, advising that re-gasification capacity at the Panigaglia terminal was available solely on a spot basis because all capacity on a continuous basis had been allocated to Eni S.p.A. under the terms of a Re-gasification Contract which had been entered into on 29 January 2002 and which had been verified by the Authority and approved with ruling 38/02. On 22 July 2004, with ruling 120/04, the Authority published the results of its inquiry, ordering GNL Italia to grant access to the re-gasification service to Gas Natural Vendita Italia and starting a formal inquiry in respect of GNL Italia aimed at assessing the possibility of imposing a pecuniary penalty under the provisions of Article 2, paragraph 20, sub-paragraph c) of Law 481/95 regarding the breach of the Authority s ruling 120/01 (Articles 14 and 15) and ruling 38/02. In order to comply with the precepts of ruling 120/04, without prejudice to the right to contest the said ruling, GNL Italia has: obtained permission from Eni to utilise the contractual programme governing unloading operations so that Gas Natural Vendita Italia can have access in August and September, limited to one unloading operation per month; allocated re-gasification capacity to Gas Natural Vendita Italia, under an ad hoc regasification contract with a commitment to carry out two unloading operations in the gas year, in August and September 2004 respectively. In addition, on 27 August 2004, GNL Italia published the terms and conditions governing access to the re-gasification service at the Panigaglia LNG terminal for the gas year and started the process of allocating re-gasification capacity on an annual basis for the gas year. Tax introduced by the sicilian regional authorities on owners of gas pipelines Under Regional Law 2 dated 26 March 2002, the Sicilian Regional Authorities introduced an environment tax on owners of primary pipelines in Sicily (i.e. pipelines operating at a maximum pressure of over 24 bar). The tax was payable from April Snam Rete Gas has taken all necessary steps to protect itself from the effects of the regional law, including lodging an appeal with the Provincial Tax Commission of Palermo and reporting the matter to the European Commission with a view to instigating infringement proceedings against the Italian State. Whilst recognising the tax expense as an operating cost relating to transmission activities, the Italian Electricity and Gas Authority has ruled that its inclusion in tariffs is subject to a definitive decision by the competent authorities as to its legitimacy. In this regard, for the gas year (ruling 146/02) and for the 2003/2004 gas year (ruling 71/03), the 16 REGULATORY FRAMEWORK

19 Authority has published two sets of tariffs: one which excludes the tax and the other which includes it and which will be applied automatically and retroactively in the event of the legitimacy of the tax being recognised. On 10 September 2002, Snam Rete Gas lodged an appeal with the Lombard Regional Administrative Court in order to obtain the immediate application of the tariffs that include the tax. On 20 December 2002, the Court sentenced that in its opinion the Sicilian law introducing the tax is at variance with European Community rules and consequently dismissed the appeal. On the basis of the Court s sentence, Snam Rete Gas suspended payment of the tax starting from the December 2002 instalment. The expense incurred for this tax totals 86.1 million. In January 2003, the Sicilian Regional Authorities lodged an appeal with the Italian Council of State against the Court sentence with regard to the part where it declares, incidentally, that the regional tax is at variance with European Community rules. On 16 December 2003, the European Commission expressed its opinion that the Republic of Italy, because of the introduction of the Sicilian tax, has failed to comply with Community obligations and with the terms of the cooperation agreement between the European Economic Community and the Democratic and Popular Republic of Algeria. According to the Commission, the environment tax infringes Common Customs Tariff to the extent that it alters the equal treatment principle regarding customs duties levied on goods imported from third countries, it risks creating diversions of goods in the framework of relations with these countries and distortions in free circulation or in competition between Member States. The Commission initially invited the Italian government to comment on the matter and, subsequently, on 7 July with an opinion and the relevant reasons therefor - officially requested Italy to abolish the tax. The Italian State must comply within two months of receipt of the opinion, failing which the Commission will pass on the documents to the European Court of Justice to enable a definitive judgement to be made regarding Italy s non-compliance. Moreover, with a sentence registered on 5 January 2004, the Provincial Tax Commission of Palermo ruled that the environment tax introduced by the Sicilian Regional Authorities is illegitimate, because it is at variance with European Community rules, and sustained the appeal lodged by Snam Rete Gas regarding reimbursement of the first instalment paid in April 2002 and amounting to 10.8 million, ordering that the sum be refunded by the Sicilian Regional Authorities. With a 4 May 2004 value date, the Sicilian Regional Authorities complied with the Palermo Provincial Tax Commission s sentence, making arrangements to reimburse the first instalment of the tax, and, on 2 April 2004, the Authorities lodged an appeal with the Regional Tax Commission of Palermo against the sentence. The hearing to discuss the appeal has been fixed for 11 November Snam Rete Gas has already taking the necessary steps to obtain reimbursement of the tax instalments paid after April 2002 ( 75.3 million) in regard to which the Provincial Tax Commission of Palermo will be taking a decision at a hearing fixed for 2 October According to standard procedure following the annual return filed for 2002 by Snam Rete Gas in relation to the tax, on 3 November 2003 the Sicilian Regional Authorities served notice on the company demanding settlement of the December 2002 instalment, with penalties and interest for non-payment, for a total amount of 14.2 million. On 30 December 2003, Snam Rete Gas lodged an appeal with the Provincial Tax Commission of Palermo against the notice served by the Regional Authorities, with a simultaneous application to suspend the tax collection procedure. With a sentence registered on 25 June 2004, the Commission upheld the appeal lodged by Snam Rete Gas and ordered that the notice served by the Sicilian Regional Authorities be cancelled. On 13 September 2004, the Sicilian Regional Authorities lodged an appeal against the sentence. 17 REGULATORY FRAMEWORK

20 Reorganisation of the energy sector ( Marzano law ) On 30 July 2004, the Italian parliament approved a bill of law concerning reorganisation of the energy sector. Particularly important provisions in the bill include the following: 1) the right, in the case of newly constructed capacity, to ask for an exemption from the rules governing third party access rights, for a period of at least 20 years and for at least 80% of the new capacity. This right applies to undertakings that make investments aimed at constructing interconnections to link the national gas transmission networks of EU member states or non-eu states to the Italian National Network or constructing new LNG re-gasification terminals or significantly increasing the capacity of existing infrastructure; 2) provisions aimed at simplifying procedures for the award of grants for projects to make natural gas available in southern Italy; 3) provisions whereby regional governments and the central government guarantee competitive conditions on energy markets in compliance with Community and national rules, the absence of constraints, impediments or expenses that would hinder the free movement of energy within the territory of Italy and the European Union and the absence of any kind of expenses having direct or indirect economic effects lying outside the province of the authorities that forecast the expenses. 18 REGULATORY FRAMEWORK

21 operating performance Gas sent into the National Network: billion cubic metres (39.91 billion in the first half of 2003). Volumes of LNG re-gasified: 1.04 billion cubic metres (1.86 billion in the first half of 2003). Capital expenditures: 276 million ( 184 million in the first half of 2003). Operating costs: 182 million ( 172 million in the first half of 2003). Volumes of gas sent into the National Network (billion m 3 ) First half 2003 Volumes sent into network % change Domestic production (8.8%) Imports % Passo Gries % Tarvisio % 0.21 Gorizia % Mazara del Vallo % 3.46 Panigaglia (LNG imports) (44.1%) Total % (billion m 3 ) First half 2003 Volumes sent into network, by shipper % change Eni (1) % 9.18 Enel % 7.49 Edison % 3.08 Plurigas % 4.88 Others % Total % (1) Input by Eni includes volumes of gas for consumption by Snam Rete Gas 19 OPERATING PERFORMANCE

22 Volumes of gas sent into the national network in the first half of 2004 totalled billion cubic metres, an increase of 1.93 billion cubic metres, or 4.8%, compared with the first half of The increase was determined above all by a higher level of consumption by the electricity generating sector, following the operational start-up of some new combinedcycle power stations, and by industrial demand. The larger volumes of gas sent into the network were able to satisfy both the increase in demand and the increase in volumes sent into storage. The 8.8% reduction in volumes supplied from domestic production was countered by an increasing dependence on supplies of imported natural gas (+7.8%). Volumes re-gasified (billion m 3 ) First half 2003 Volumes re-gasified % change 3.00 Eni (41.1%) 0.46 Others (57.1%) 3.46 Total (44.1%) In the first half of 2004, the LNG terminal at Panigaglia (La Spezia) re-gasified 1.04 billion cubic metres of LNG. A total of 34 unloading operations (67 in the first half of 2003) were carried out from various types of gas tankers, including 4 spot cargoes (13 in the first half of 2003). The substantial decrease in volumes of LNG re-gasified is attributable to the accident at the Sonatrach-owned LNG production plant at Skikda in Algeria. With less Algerian LNG available, both the volumes of LNG re-gasified for Eni and the spot volumes re-gasified for third parties were affected. Investments First half 2003 Capital expenditures % change 361 Expansion and development % 264 comprising National Network % 94 Regional Network % 3 LNG 2 0 (100.0%) 144 Maintenance and other % 505 Total % Capital expenditures in the first half of 2004 totalled 276 million, comprising 201 million for projects aimed at extending or increasing transmission capacity (expansion and development) and 75 million for projects aimed at ensuring the efficiency and safety of facilities in operation, as well as projects to develop information systems. Expansion and development Work on the National Network related mainly to: the project to increase the capacity of the import infrastructure for supplies from North Africa, consisting of the construction of new pipelines which, in some sections, will involve laying a third line (approximately 290 km of 48" pipe in Sicily, Calabria, Molise and Abruzzo), as well as work to increase the capacity of existing compressor stations at Terranuova Bracciolini, Gallese, Melizzano, Montesano, Tarsia, Enna and Messina. Expenditure in the first half of 2004 ( 105 million) involved delivery of materials for and the start of work on the Campochiaro-Sulmona and Palmi-Martirano sections and 20 OPERATING PERFORMANCE

23 the purchase of compressor units for the Messina and Montesano compressor stations; the project to increase the capacity of the import infrastructure for supplies from Russia, consisting of a new 48" pipeline from Tarvisio to Camisano and a 56" pipeline from Camisano to Zimella and work to upgrade the Malborghetto compressor station. Expenditure in the first half of 2004 ( 27 million) mainly involved construction work on the Bordano-Flaibano section, environmental restoration along the Istrana- Camisano section and the purchase of materials for and the start of work on the Tarvisio-Malborghetto section; the Gela-Enna pipeline in Sicily, consisting of 66.5 km of 36" pipe to connect the entry point for gas imports from Libya (at Gela) to the National Network (at Enna). Expenditure in the first half of 2004 ( 8 million) mainly involved construction work. Work on the Regional Network, in addition to numerous connections to link final customers to the network, related to: the project to make natural gas available in the Apulia region, consisting of 172 km of pipelines ranging from 8" to 20" in diameter. Expenditure in the first half of 2004 ( 7 million) mainly involved completing the main work in connection with the San Giovanni Rotondo-Carpino section and work to construct the Ugento-Tricase and Brindisi-Arnesano sections; the project to increase the capacity of the branch line to the Brindisi industrial zone. Expenditure in the first half of 2004 ( 6 million) involved the purchase of materials and the start of construction work; the Giarratano-Solarino pipeline, consisting of 38 km of 24" pipe. Expenditure in the first half of 2004 (approximately 4 million) mainly involved purchasing materials. Maintenance and other Capital expenditures for maintenance relating to both the National and the Regional Network mostly concern work undertaken to ensure that facilities continue to comply with applicable regulations and that the network is adapted as necessary to prevent interference with third party infrastructures. These expenditures include one particularly important project to convert the compressor units at the Tarsia and Terranuova Bracciolini stations to low-emission units ( 12 million). Other capital expenditures mainly concern the implementation of new information systems and the development of existing ones. Operating costs 1 First half % change 88 Variable costs (8.5%) 265 Fixed costs % 11 Allocation to provisions for risks and future expences Total operating costs % (1) The note on operating costs has been approved by the audit committe. 21 OPERATING PERFORMANCE

24 Variable costs First half % change 31 Fuel gas for transmission % 3 Electricity % 10 Transmission losses % 3 Excise duty on gas % 47 Recurring variable costs % 11 Fuel gas for re-gasification 5 3 (40.0%) 30 Amounts charged by third parties 18 7 (61.1%) 41 Costs offset in revenue (56.5%) 88 Total variable costs (8.5%) The increase in recurring variable costs compared with the first half of 2003 concerned the costs for fuel gas to operate compressor stations. The increase of 8 million is due to more gas having been transmitted and longer distances having been involved. The reduction in variable costs offset in revenue is due mainly to: fuel gas used for re-gasification activities, the cost of which is subsequently passed on to the users of the service. The decrease ( 2 million) is a result of reduced activity at the plant; amounts charged by third parties, which concern the transmission service provided by Snam Rete Gas on networks owned by other operators. The reduction ( 11 million) is a result of the application, as from 1 October 2003, of Law 273 of 12 December 2002 which has established that TMPC is not a regulated party as regards the national network. Fixed costs First half % change 113 Cost of personnel % 152 External costs % 265 Total fixed costs % Cost of personnel First half % change 128 Gross labour costs % 11 Services relating to personnel % (26) Capitalised costs (12) (12) 0.0% 113 Total cost of personnel % In the first half of 2004, 44.1% ( 60 million) of the total fixed costs referred to the cost of personnel and related exclusively to regulated activities. In addition to labour costs, the cost of personnel includes services relating to personnel (travelling expenses, canteens, etc. - 6 million) and is shown net of costs capitalised in the period (approximately 12 million) which correspond to the portion of labour costs attributed to investment projects. The increase compared with the first half of 2003 ( 4 million) is due mainly to recent contractual renewals, only partially offset by a reduction in the workforce. As at 30 June 2004, employees numbered 2,464, a reduction of 20 compared with 31 December OPERATING PERFORMANCE

25 Operations 1,993 1,962 1,942 Business development Finance, administration, etc Other Total2,512 2,484 2,464 External costs First half % change 39 Materials, maintenance, modernisation Professional services Other costs Recurring costs relating to ordinary activities (9.1%) 3 Capital losses on write-offs 6 1 Other costs 4 Non-recurring costs Modulation and storage services Costs offset in revenue % 150 Total external costs for regulated activities % 1 Materials, maintenance, modernisation Other costs 2 Total external costs for non-regulated activities % 152 Total external costs % Total external costs in the first half of 2004 amounted to 76 million, an increase of 7 million. Excluding non-recurring costs and costs which have a corresponding offset in revenue, recurring costs relating to ordinary activities fell by 5 million, or 9.1%. The reduction relates to (i) materials and maintenance involving pipelines and compressor stations, (ii) technical services for operating activities and (iii) other sundry costs. Non-recurring costs involving capital losses ( 6 million) refer to the write-off of items of plant at a compressor station. Allocations to provisions for risks and future expenses The allocation of 3 million concerns possible expenses for lawsuits. 23 OPERATING PERFORMANCE

26 research and development In the first half of 2004, Snam Rete Gas continued its research and development activities with the aim of guaranteeing a safe and efficient natural gas transmission system. Snam Rete Gas s efforts were concentrated on studying and assessing new technologies to ensure the safety of gas pipelines in unstable areas and on R&D projects undertaken in collaboration with Eni and international research organisations. A total of 520,000 was invested in research and development in the first half of 2004 ( 610,000 in the first half of 2003) and 17 people were engaged in the activities (16 in 2003). The tests involving optical fibres attached to pipelines in areas susceptible to landslides have enabled stresses to be monitored continuously and the important information obtained about the state of stress of pipelines is useful when planning maintenance work. Data collected during tests regarding the potential benefits of using a satellite to identify unstable areas along the pipeline route are now being assessed. By comparing ground displacement measured with this new technology with historic data measured with instruments in the field, it will be possible to assess its application potential. Activities went ahead in the first half of 2004 to assess the performance of geometric and geometric-inertial pigs used to identify pipeline deformations caused by land movements in unstable areas. With regard to collaboration with international organisations, activities continued in connection with safety aspects of pipelines, line facilities and compressor stations. In particular, the following subjects were tackled: development of software to assess compressor station safety; within the framework of an international group of gas transmission companies, completion of activities aimed at developing models to analyse the frequency of damage to gas pipelines and setting up new data bases regarding incidents involving pipelines and compressor stations; creation of an information tool to assess the safety of pressure reduction and regulating plants in the gas transmission network. 24 RESEARCH AND DEVELOPMENT

27 In conjunction with other Eni Group companies, Snam Rete Gas is also taking part in the HPT (High Pressure Transmission) project. The aim of the project is to identify technical and design requisites for a long-distance, high-pressure, large-diameter onshore gas pipeline in a remote area. Snam Rete Gas s contribution mainly involves finding solutions to problems concerning the materials to be used (metallurgy), welding and external/internal coating, as well as researching new cathodic protection devices. The project is expected to end in the first half of Within the framework of the European Gas Research Group (EGRG), tests were completed to verify the reliability of a system to monitor interference caused by machines operating along the pipeline route. This technology involves the use of a laser signal that is transmitted along an optical fibre in the telecommunications cable installed alongside the pipeline and results have been encouraging in terms of system sensitivity and reliability. As a consequence, Snam Rete Gas has proposed that tests continue, still within the framework of EGRG and with the participation of the same companies that were involved in the first stage of the research project (Advantica, BP, Enagas, Fluxys, Gaz de France, Gastransport Services and Ruhrgas). The objective is to improve the sensitivity of the system, increase the length of the section of pipeline to be monitored and also use the system to back up maintenance activities. 25 RESEARCH AND DEVELOPMENT

28 economic performance and financial position Summary consolidated income statement First half Change 1,758 Revenue from ordinary activities Other revenue and income ,767 Total revenue (364) Operating costs (172) (182) (10) 1,403 Gross operating margin (477) Depreciation, amortisation and write-downs (232) (234) (2) 926 Operating profit (124) Net financial income (expenses) (66) (55) Income before extraordinary items and taxes Net extraordinary income (expenses) 1 (1) (2) 802 Pre-tax income (257) Income taxes (169) (171) (2) 545 Net income for the period Operating profit 1 in the first half of 2004 amounted to 500 million, an increase of 7 million compared with the first half of The increase is attributable mainly to (i) increased transmission revenue ( 21 million) due to investments in new assets that became operational and increased volumes of gas transmitted and (ii) the refund by the Sicilian Regional Authorities of the first instalment of the tax on owners of gas pipelines paid in April 2002 ( 11 million). These positive factors were partially offset by (i) higher costs for the purchase of natural gas used to operate compressor stations ( 9 million), (ii) capital losses due to the write-off of tangible assets ( 6 million), (iii) higher labour costs ( 4 million), (iv) increased allocations for risks relating to possible expenses for lawsuits ( 3 million) and (v) increased depreciation and amortisation ( 2 million). Consolidated net income ( 273 million) increased by 14 million (+5.4%) due to (i) the higher operating profit ( 7 million) and (ii) a reduction in net financial expenses ( 11 million) as a result of the lower level of average debt and lower interest rates, partially offset by an increase in net extraordinary expenses ( 2 million) and in income taxes ( 2 million). (1) Operating profit is analysed by taking into account only the factors that give rise to changes. Offsets of revenue and cost components generated by the application of the tariff regulations in force in the gas sector are analysed in the notes on revenue and operating costs. 26 ECONOMIC PERFORMANCE AND FINANCIAL POSITION

29 Total revenue First half Change 1,701 Transmission Re-gasification (5) 1,742 Revenue from regulated activities Other revenue from ordinary activities 8 6 (2) 16 Revenue from non-regulated activities 8 6 (2) 1,758 Total revenue from ordinary activities Other revenue and income ,767 Total revenue Revenue from ordinary activities Revenue from ordinary activities in the first half of 2004 ( 897 million) increased by 3 million compared with the first half of 2003 following increased revenue earned from regulated activities (+ 5 million) which was partially offset by a reduction in revenue from non-regulated activities (- 2 million). Revenue from regulated activities ( 891 million) increased by 5 million (+0.6%) compared with the first half of The increase in revenue from transmission services (+ 10 million) was a result of expansion and development investments in new assets that became operational in and increased volumes of gas transmitted, for a total of + 21 million, partially offset by a reduction in amounts invoiced on behalf of other operators for the transmission service on their networks 2 (- 11 million). Excluding revenue components which have a corresponding offset in costs, revenue from transmission services increased by 2.5%. Transmission revenue, by shipper First half ,171 Eni Enel Edison Plurigas Others (9) Revenue adjustments - capacity overbooking and penalties 3 (6) (32) 36 Integration of revenue for gas year ,701 Total Revenue from re-gasification services ( 17 million) fell by 5 million as a result of lower costs passed on to users for gas used for re-gasification activities ( 2 million) and a decrease in volumes of LNG re-gasified ( 3 million) following reduced activity at the Panigaglia terminal due to the accident at the LNG production plant at Skikda in Algeria. (1) Investments in assets that became operational in 2002 generated additional revenue from 1 October 2003 (the start of the gas year). (2) The Italian Electricity and Gas Authority's ruling 120/01 states that if, when performing the transmission service, networks owned by other operators are involved in addition to the Snam Rete Gas network, shippers are charged for the interconnecting service by the principal operator. As from 1 October 2003, however, in accordance with the provisions of Law 273 of 12 December 2002, operators of subsea pipelines importing natural gas from states that are not members of the European Union (e.g. Transmediterranean Pipeline Company - TMPC) are not regulated parties in Italy. (3) Under the Electricity and Gas Authority's ruling 120/01, the portion of revenue exceeding the revenue cap in a given gas year must be refunded to shippers two gas years later by means of an adjustment in tarrifs. Revenue integration in the gas year is related to the portion of revenue in excess of the revenue cap in the gas year. 27 ECONOMIC PERFORMANCE AND FINANCIAL POSITION

30 Revenue from non-regulated activities ( 6 million) relates mainly to the lease and maintenance of optical-fibre cables for telecommunications ( 4 million), technical services performed for third parties ( 1 million) and the dispatching service and other revenue ( 1 million). The decrease compared with the first half of 2003 is due mainly to a reduction in services performed for third parties ( 2 million). Other revenue and income Other revenue and income ( 19 million) increased by 16 million compared with the first half of 2003 mainly due to (i) the refund by the Sicilian Regional Authorities of the first instalment of the tax on owners of gas pipelines paid in April 2002 ( 11 million) 1, (ii) the amount released from provision made against claims by contractors ( 2 million), (iii) compensation from insurance companies ( 2 million) and (iv) contractual penalties imposed on suppliers ( 1 million). Operating costs First half Change 262 Purchases, services and other costs Net labour costs (*) (*) Labour costs exclude services relating to personnel which are included in the item purchases, services and other costs. Operating costs incurred in the first half of 2004 ( 182 million) increased by 10 million compared with the first half of Purchases, services and other costs ( 128 million) increased by 6 million due to: higher costs incurred as a result of an increase in the volumes of natural gas used to operate compressor stations and transmission losses (+ 9 million), capital losses due to the write-off of items of plant at a compressor station whose capacity is being increased (+ 6 million) and increased allocations for possible expenses for lawsuits (+ 3 million), partially offset by a reduction in costs, mainly for materials and maintenance services and for technical services (- 5 million); a reduction in costs that have a corresponding offset in revenue, arising from (i) the absence in the first half of 2004 of costs (- 11 million) incurred for the transmission service on networks owned by other operators (interconnecting service) following the application, as from 1 October 2003, of Law 273 of 12 December 2002 which has established that TMPC is not a regulated party as regards the national network, and (ii) lower costs incurred for the purchase of natural gas used for re-gasification activities (- 2 million), partially offset by an increase in the cost of the modulation and storage service (+ 6 million). Labour costs ( 54 million) increased by 4 million following recent contractual renewals, partially offset by the effects of a reduction in the workforce. (1) The first instalment was refunded in compliance with the sentence registered by the Provincial Tax Commission of Palermo on 5 January ECONOMIC PERFORMANCE AND FINANCIAL POSITION

31 Depreciation, amortisation and write-downs First half Change 419 Depreciation of tangible assets Amortisation of intangible assets Total depreciation and amortisation Write-downs Compared with the first half of 2003, depreciation and amortisation ( 234 million) increased by 2 million due mainly to the operational start-up of new gas pipelines and information systems. Net financial expenses Net financial expenses for the first half of 2004 ( 55 million) fell by 11 million compared with the first half of 2003 due mainly to a lower level of average debt in the period and lower interest rates. Starting from the second quarter of 2004, expenses on project financing relating to the construction of transmission infrastructure are capitalised ( 1 million in the quarter) and this contributed to the reduction in financial expenses. Interest on the company s debt averaged approximately 3.7% (4.1% in the first half of 2003). Net extraordinary expenses Net extraordinary expenses ( 1 million) related to costs incurred for incentives connected with early termination of employment contracts. Income taxes First half Change Current taxes 14 IRPEG/IRES (corporate income tax) (*) (29) 13 IRAP (regional income tax on production activities) 12 8 (4) 48 Substitute tax - revaluation under Law 350/ (33) 182 Deferred taxes Total income taxes (*) From 1 January 2004, the corporate income tax IRPEG has been replaced by IRES. Income taxes ( 171 million) increased by 2 million compared with the first half of The increase arising from a higher level of pre-tax income was partially offset by the reduction in the rate for IRES (corporate income tax) from 34% to 33%. Current taxes ( 25 million) fell by 33 million compared with the first half of 2003 mainly as a result of increased supplementary and accelerated depreciation charged in the period (- 22 million) and the deduction of revenue relating to the gas year, already invoiced and taxed in prior years (- 15 million), net of other changes (+ 4 million). This reduction was almost entirely offset by corresponding variations in deferred and advance payments of income taxes, totalling 35 million. The effective tax rate for pre-tax income in the first half of 2004 was 38.5% compared with 39.5% in the first half of ECONOMIC PERFORMANCE AND FINANCIAL POSITION

32 Summary consolidated balance sheet Change 9,250 Tangible assets 9,292 9, Intangible assets (121) Net payables relating to investing activities (173) (156) 17 9,225 Fixed capital9,208 9, (445) Net working capital (386) (433) (47) (18) Employees severance indemnity (19) (21) (2) 8,762 Net capital employed 8,803 8,795 (8) 5,397 Shareholders equity 5,683 5,565 (118) 3,365 Net debt 3,120 3, ,762 Financing 8,803 8,795 (8) Net capital employed ( 8,795 million) decreased by 8 million compared with 31 December 2003 due mainly to a reduction in working capital which was offset almost entirely by an increase in fixed capital. Fixed capital Tangible assets ( 9,316 million) increased by 24 million reflecting capital expenditures in the period (+ 252 million), depreciation (- 211 million), contributions for network connections and other expenses reimbursed by private companies (- 11 million) and write-offs of assets (- 6 million). Intangible assets ( 89 million) were in line with the 31 December 2003 figure, capital expenditures (+ 24 million) having been offset in full by amortisation charged in the period. Net payables relating to investing activities ( 156 million) decreased by 17 million due mainly to a lower level of capital expenditure in the second quarter of 2004 compared with the last quarter of Net working capital Change 27 Inventories Trade receivables Other current assets (15) (145) Trade payables (86) (63) 23 (20) Tax payables (52) (30) 22 (375) Provision for taxation (422) (577) (155) (47) Provisions for risks and future expenses (44) (44) 0 (40) Deferred income (lease of telecommunications cables) (39) (38) 1 (149) Revenue adjustments (capacity overbooking and penalties) (118) (79) 39 (8) Accrued expenses (interest on loans) (7) (7) 0 (26) Other current liabilities (34) (24) 10 (445) (386) (433) (47) 30 ECONOMIC PERFORMANCE AND FINANCIAL POSITION

33 The variation of 47 million in net working capital compared with 31 December 2003 is attributable primarily to an increase in provision for taxation mainly as a result of supplementary and accelerated depreciation charged in the period (- 155 million), which was only partially offset by (i) a reduction in revenue adjustments for capacity overbooking and penalties (+ 39 million), (ii) an increase in inventories of piping (+ 24 million) and (iii) a reduction in trade payables (+ 23 million) and tax payables (+ 22 million). Employees severance indemnity Employees severance indemnity, totalling 21 million, increased by 2 million compared with 31 December 2003 mainly following the allocations made in the period. Shareholders equity Change 1,955 Share capital 1,955 1,955 2,178 Share premium reserve 2,178 1,810 (368) 391 Legal reserve Reserve for share issue (Art.2349, Italian Civil Code) Retained earnings 614 1, Net income for the period (272) 5,397 5,683 5,565 (118) Shareholders equity ( 5,565 million) decreased by 118 million compared with 31 December 2003 due to payment of the dividend ( 391 million) from the share premium reserve and from retained earnings which was only partially offset by net income for the period ( 273 million). Net debt Change 3,366 Loans 3,121 3, Short-term loans Current portion of long-term loans (15) 2,768 Long-term loans 2,466 2,346 (120) (1) Liquid funds (1) (1) 0 3,365 3,120 3, Net debt totalled 3,230 million, an increase of 110 million compared with 31 December Long-term loans accounted for 73% of the total net debt. The average maturity of long-term loans, including the current portion, was approximately three years and six months (compared with approximately three years as at 31 December 2003). 31 ECONOMIC PERFORMANCE AND FINANCIAL POSITION

34 As at 30 June 2004, loans by type of interest rate were as follows: % % Floating rate 1, , Inflation-linked rate Fixed rate 1, , Total3, , Almost all the loans are denominated in euros and loans from Eni Group companies (primarily Enifin) accounted for 95% of the total. Net debt represents 36.7% of net capital employed (35.4% as at 31 December 2003). Summary consolidated cash flows statement and variation in net debt First half Net income before minority interests Adjusted by: 479 Depreciation, amortisation and other non-monetary items Dividends, interest, extraordinary income/expenses and income taxes ,408 Cash flow provided by operating profit before variation in working capital (33) Variation in working capital relating to operating activities 83 (69) Dividends, interest, extraordinary income/expenses and income taxes received (229) (paid) in the period (129) (110) 1,146 Net cash flow from operating activities (443) Investments in tangible and intangible assets (161) (265) 1 Disinvestments 2 42 Receivables and payables relating to investing activities (10) (17) 746 Free cash flow (433) Variation in loans (189) 110 (313) Cash flow from shareholders equity (313) (391) 0 Net cash flow in the period Free cash flow (313) Cash flow from shareholders equity (313) (391) Effect of exchange differences on net debt and other variations 2 3 Exchange differences on net debt 436 Variation in net debt 191 (110) Investments ( 265 million), net of contributions from third parties, and the distribution of the 2003 dividend ( 391 million) were financed by the cash flow from operating activities ( 563 million) and by the increase in net debt ( 110 million). 32 ECONOMIC PERFORMANCE AND FINANCIAL POSITION

35 Net cash flow provided by operating profit before the variation in working capital ( 742 million) consisted of net income with adjustments for: depreciation, amortisation and other non-monetary items: depreciation and amortisation: 234 million; net capital losses on write-offs of assets: 6 million; other items: 2 million; interest, net extraordinary expenses andincome taxes: income taxes: 171 million (including deferred taxes totalling 146 million); net interest payable and other items: 56 million. The variation in working capital relating to operating activities ( 69 million) is attributable mainly to (i) a reduction in accruals and prepayments ( 43 million) due to their use in connection with the refund to shippers of amounts invoiced in excess of the revenue cap fixed by the Italian Electricity and Gas Authority in the gas year and (ii) an increase in inventories ( 24 million). Dividends, interest, extraordinary expenses and income taxes paid in the period ( 110 million) refer to interest ( 58 million), income taxes ( 50 million) and extraordinary expenses ( 2 million). 33 ECONOMIC PERFORMANCE AND FINANCIAL POSITION

36 corporate governance Snam Rete Gas s governance system is in line with the principles set out in the Corporate Governance Code for Listed Companies (as proposed by the Committee for the corporate governance of listed companies and hereinafter referred to as the Corporate Governance Code ) and with the recommendations issued by CONSOB (the Italian Regulatory Commission for Listed Companies and the Stock Exchange). The board of directors is the pivot of the company s governance system and on 27 July 2001 it resolved to follow the guidelines set out in the Corporate Governance Code and put into effect a consistent organisational system. In particular, an Audit Committee and a Remuneration Committee have been set up. CORPORATE GOVERNANCE Good practice and control structure Governance systems Snam Rete Gas s governance and business administration systems are based on sound management principles with the aim of maximising shareholder value and ensuring total transparency in the company s activities. In fact, the company is convinced that correct behaviour towards all stakeholders (employees, suppliers, commercial and financial partners, communities local to operations) is a vehicle for the creation of shareholder value, especially in the medium to long run. In this context and with a systematic policy, Snam Rete Gas is committed to enhancing the value of its human resources, honouring its commercial and financial commitments, consolidating cooperative relationships with the communities in which it operates and paying due attention to the health and safety of its employees and the environmental compatibility of its activities. Code of practice Snam Rete Gas s board of directors has adopted the Eni Group Code of Practice. This code sets out the rules of conduct and the principles of lawfulness, transparency and correctitude that are to be applied in relations both inside and outside the Eni Group. The purpose of the code is to ensure that activities are performed in compliance with the law, in a climate of fair competition, with honesty, integrity, correctness and in good faith and with due regard for the legitimate interests of customers, employees, shareholders, commercial and financial partners and the communities in which the company operates. All Snam Rete Gas employees, without any distinction or exception, are obliged to comply and ensure compliance with these principles in the fulfilment of their duties and 34

37 responsibilities. Under no circumstances can the conviction of acting for the benefit of the company justify any form of behaviour in contrast with these principles. Code of Practice Committee To ensure implementation of the code of practice, a Code of Practice Committee has been set up, composed of the Manager for General Affairs, the Manager for Personnel and Organisation and the Internal Audit Manager. The Chief Financial Officer has been nominated Guarantor for the Code of Practice. The board of directors is informed periodically about how implementation of the code of practice is proceeding. Snam Rete Gas organisational structure Snam Rete Gas s organisational model is structured along traditional lines. Responsibility for managing the company lies solely with the board of directors, while the board of statutory auditors performs supervisory duties and a firm of independent auditors controls and audits the accounts. Board of directors Role and duties The board of directors is the central body in Snam Rete Gas s governance system. It is responsible for defining the rules of corporate governance, determining company and group strategies and verifying the system of controls necessary to monitor corporate performance. To this end, the board of directors: lays down strategies, after examining programmes and budgets; examines the annual financial statements of controlled companies; defines, applies and updates the rules of corporate governance; controls overall management performance, taking into consideration, in particular, information received from the Chairman and the Audit Committee, and periodically comparing the results achieved with the objectives planned; vests the Chairman with powers and revokes them; the Chairman reports to the board of directors and the board of statutory auditors at least every three months on the exercise of these powers and on the most important transactions entered into by the company and by controlled companies, in terms of economic performance, financial position, assets and liabilities, as well as reporting on any atypical and/or unusual operations and on transactions with related parties. This information must be timely in the event of transactions in which directors could be acting in their own interests or in the interests of third parties or which could be influenced by any party exercising corporate management and coordination activities; adopts resolutions, proposed by the Chairman, regarding acquisitions, sales, hive-offs, transfers of businesses or lines of business, shareholdings and property with a value of more than 2.5 million; verifies the adequacy of the organisationaland administrative structure arranged by the Chairman; determines the remuneration of the Chairman, after examining the Remuneration Committee s proposals; examines the Audit Committee s proposals; examines the Chairman s proposals regarding appointments of members to the board of directors and the board of statutory auditors of controlled companies; decides the action to be taken, normally on the basis of the Chairman s proposals, in the exercise of voting rights at meetings of the shareholders of controlled companies; prepares proposals concerning the resolutions to be put before shareholders meetings. In addition, the Articles of Association vest the board of directors with the power to adopt resolutions regarding proposals concerning: mergers in the cases provided for in Articles 2505 and 2505/bis of the Italian Civil Code, and demergers in the cases where the said articles are applicable; the setting up, transfer and closure of secondary administrative headquarters; the reduction of the share capital in the event of a member withdrawing from the company. 35 CORPORATE GOVERNANCE

38 Appointment, composition and term of office The board of directors is composed of at least five but no more than nine members, as resolved by the shareholders at the meeting convened prior to their appointment. Members of the board of directors hold office for a maximum of three financial years and may be re-elected. Article 16 of the Articles of Association provides for a voting mechanism whereby directors are appointed by means of voting lists which ensure that minority shareholders are represented on the board. Regarding the appointment of members of the board of directors, lists of candidates may be submitted by shareholders who, severally or jointly with other shareholders, represent at least 2% of the share capital carrying voting rights at ordinary general meetings. Each shareholder may submit, or participate with other shareholders in the submission of, one list only and each candidate may enter his/her name in one list only, non-compliance with the latter requirement making the candidate ineligible for election. Controlling companies and companies jointly controlled thereby (controlled companies being those defined in Article 2359, paragraph 1, of the Italian Civil Code) may not submit, nor may they participate in the submission of, other lists. Voting lists must be lodged at the company s head office at least ten days prior to the date of the shareholders meeting on first call and must be published in at least two Italian daily newspapers with a nationwide circulation, including one financial newspaper. Lists must be acccompanied by a curriculum vitae for each candidate. At their 15 February 2002 meeting, the shareholders increased the number of members on the board of directors from five to eight, appointing three new directors nominated by minority shareholders in accordance with the voting mechanism provided for in Article 16 of the Articles of Association. At the present time, the board of directors is composed of eight members whose term of office will expire when the financial statements for the year ended 31 December 2006 are adopted. The board, appointed by the ordinary general meeting held on 27 April 2004, is composed of the Chairman, Domenico Dispenza, and the following directors: Carlo Grande, Roberto Jaquinto, Marco Mangiagalli, Renato Roffi, Giuseppe Airoldi, Roberto Lonzar and Roberto Lugano. The board of directors is composed mainly of non-executive members (inasmuch as they have no operating powers and/or management duties within the company) who are such as to guarantee, given their number and standing, that their judgement can carry weight in board decisions. With the exception of the Chairman, the other seven directors are considered non-executive. The independence of directors is assessed periodically by the board of directors which takes into consideration information provided by the interested parties. Snam Rete Gas has established that when officially accepting a candidature in the future, the candidate will be asked to issue an ad hoc statement that he/she meets the independence requirements. At their 28 July 2004 meeting, the board of directors ascertained that the non-executive directors Giuseppe Airoldi, Roberto Lonzar and Roberto Lugano meet the independence requirements provided for in the Corporate Governance Code. These directors are considered independent because (a) they do not have nor have they recently had, either directly or on behalf of third parties, any economic relations with the company, with companies controlled thereby, with the executive directors or with the shareholder or group of shareholders that controls the company, whose materiality is such as to influence their freedom of judgement; (b) they do not have, directly, indirectly or on behalf of third parties, shareholdings whose size is such as to enable them to exercise control over or a major influence on the company, nor are they a party to specific agreements reached between members for control of the company; (c) they are not close relatives of executive directors of the company or of persons whose circumstances are illustrated in points (a) and (b) hereinbefore. 36 CORPORATE GOVERNANCE

39 The presence of independent directors, both on the board of directors and on the committees set up within the sphere of the board, is an apt element to ensure that the interests of all shareholders are adequately protected. Regarding directorships or statutory auditorships held by the board members in other companies listed in regulated markets, including international markets, in finance, banking or insurance companies or in other large companies, the following information has been obtained: Director Position held Company Domenico Dispenza Managing Director Promgas S.p.A. Director Italgas S.p.A. Director Union Fenosa Gas S.A. Director Gasversorgung Süddeutschland GmbH Director EnBw-Eni GmbH Giuseppe Airoldi Director Finap S.p.A. Director Seal S.p.A. Carlo Grande Director Polimeri Europa S.p.A. Director Snamprogetti S.p.A. Director Syndial S.p.A. Roberto Jaquinto Director Enifin S.p.A. Director Saipem. S.p.A. Director Snamprogetti S.p.A. Director Sofid S.p.A. Director Syndial S.p.A. Roberto Lonzar Chairman Quarzo CL1 S.r.l. Statutory Auditor La Venezia Assicurazione S.p.A. Statutory Auditor Genertel S.p.A. Statutory Auditor Simgenia SIM S.p.A. Statutory Auditor Finanziaria Internazionale Alternative Investment SGR S.p.A. Marco Mangiagalli Chairman Eni Coordination Center S.A. Chairman Enifin S.p.A. Director Albacom S.p.A. Director Energy asset Management Ltd. Director Eni International Bank Ldt. Director Eni International BV Director Oil Investment Corp. Ldt. Director Polimeri Europa S.p.A. Director Saipem. S.p.A. Director Snamprogetti S.p.A. Director Sofid S.p.A. Renato Roffi Director Eni Corporate University S.p.A. Director Polimeri Europa S.p.A. Director Syndial S.p.A. Directors curricula vitae are available on Snam Rete Gas s web site. 37 CORPORATE GOVERNANCE

40 The board of directors has established procedures for summoning its meetings. More specifically, a board meeting is summoned by the Chairman who specifies the items on the agenda giving not less than five days notice prior to the date of the meeting, not less than forty-eight hours notice prior to the time of the meeting in urgent cases and not less than twenty-four hours notice in cases of extreme urgency. In good time before the date of a board meeting, directors and statutory auditors are provided with the documents and other information necessary for them to express an informed opinion regarding the business they are required to discuss and approve. In 2003, the board of directors held nine meetings. These meetings were attended by an average of more than 80% of the directors. Attendance by the independent directors averaged 93%. Ten board meetings are planned for In the first half of 2004, the board of directors held five meetings. These meetings were attended by an average of more than 87.5% of the directors. Attendance by the independent directors averaged 86.7%. Fees to be paid to directors are subject to approval by the shareholders. The remuneration of the Chairman is determined by the board of directors, after examining the Remuneration Committee s proposals and having obtained the board of statutory auditors opinion. As required by CONSOB (the Italian Regulatory Commission for Listed Companies and the Stock Exchange), the directors report prefacing Snam Rete Gas S.p.A. s annual report provides information on (i) the remuneration of directors, statutory auditors and General Managers, (ii) stock grant commitments involving Snam Rete Gas S.p.A. shares to be offered free of charge three years after the date on which the commitments are undertaken and stock options assigned to the Chairman and General Managers and (iii) shares in Snam Rete Gas S.p.A. and its controlled company held by directors, statutory auditors and General Managers. The information in points (i) and (ii) is also included in the notes to the financial statements of Snam Rete Gas S.p.A. On 27 April 2004, the shareholders determined the annual fee due to each of the directors during their term of office ( 25,000), without prejudice to the board of directors right, having obtained the board of statutory auditors opinion, to fix the remuneration for directors who hold special positions on the board. In accordance with the powers vested in the board, the directors have determined the Chairman s remuneration, consisting of a fixed component, which includes the fee determined by the shareholders for his role as director, and a variable component. The variable component of the Chairman s remuneration, as is the case with the variable salary of the General Managers, is linked to the achievement of specific economic-operational objectives (profitability, efficiency and strategic development projects). With regard to performance in 2003, the variable component corresponds to approximately 33% of the Chairman s total remuneration and approximately 27% of the General Managers total salary. In addition to the aforementioned bonus paid when objectives are achieved, the variable component also takes into account a commitment by the company to pay a further cash incentive three years after the date on which the commitment is undertaken. Powers of the Chairman The Chairman, vested by the board of directors with the necessary powers to manage the company s activities, reports at every meeting of the board of directors and the board of statutory auditors with regard to the exercise of these powers. The board of directors is provided with adequate information on the action taken and, in particular, on any atypical or unusual operations effected when exercising these powers. Special attention is paid to transactions with related parties, which are illustrated in the notes to the financial statements. The principal powers vested by the board of directors authorise the Chairman to: enter into, with the most appropriate clauses including arbitration, amend, terminate and assign contracts: for the purchase, sale and exchange of immoveable property, 38 CORPORATE GOVERNANCE

41 excluding businesses and lines of business, for a value of not more than 2,500,000 per contract; for the purchase, sale and exchange of moveable property including moveable property inscribed in public registers as well as government securities and corporate bonds but excluding other financial instruments and businesses and lines of business, and of advertising time and space; for the sale of goods and/or services forming the object of the company s commercial activities; for the rent and lease of real property including periods exceeding nine years but excluding the rent of businesses and lines of business; for the performance of intellectual work; for the performance of manual work; for hiring; for transportation and forwarding; for independent contracting; for insurance as the insured; for brokerage and procurement of business; for mandate; for commission; for agency; for sales concession; for storage; for processing on behalf of third parties; for gratuitous loan for use; for supplies; for sale or return; for publishing and printing; of an agrarian nature; having as their object building leases and emphyteusis; for usufruct, excluding usufruct of businesses and lines of business, for use and habitation; for the purchase, sale, rent, financial lease and hire of hardware and software, as well as computer systems; enter into, with the most appropriate clauses including arbitration, amend and terminate contracts concerning consortia and joint ventures; enter into, with the most appropriate clauses including arbitration, amend and terminate contracts for the acquisition, assignment and licensing of trademarks, patents, industrial, utilitarian and ornamental designs, technical processes, works of the intellect and know-how agreements; compete in bids and offers to tender put out by whosoever, including Ministries, governmental authorities, public agencies and private entities, in Italy and abroad, for independent contracts concerning works and jobs and supplies of goods and services, submit tenders and, in the case of the contracts being awarded, sign the relevant contracts; enter into, as lessee, with the most appropriate clauses including arbitration, amend, terminate and assign financial leasing agreements concerning immoveable property for a value of not more than 2,500,000 per agreement and moveable property including moveable property inscribed in public registers, in Italy and abroad, including the option, on expiry of the agreement, to purchase or return the property or extend the lease thereon; enter into, as assignor, with the most appropriate clauses including arbitration, amend and terminate agreements concerning factoring; effect financial transactions concerning lending and borrowing in general, including backing negotiable instruments, giving real and personal security, issuing letters of comfort; back negotiable instruments issued by companies directly or indirectly controlled by the company; enter into, amend and terminate contracts for medium- and long-term loans granted by banks and financial brokers, arranging all terms, conditions and security, including real security, and consequently permit mortgages and liens as may be required in guarantee of such loans; enter into, amend and extinguish suretyships and give other forms of personal security, as well as letters of comfort, with regard to obligations undertaken or to be undertaken vis-à-vis third parties in general and vis-à-vis banks and financial brokers by companies in whose capital the company has a direct or indirect holding; enter into, amend and extinguish suretyships with banks and financial brokers in guarantee of obligations undertaken or to be undertaken by the company vis-à-vis third parties and instrumental for the performance of the specific activity of the company; permit mortgages, liens, pledges and other real encumbrances; in particular permit subrogations, reductions, cancellations, postponements and any other registration of charges on company property. Register mortgages, accept liens, pledges and other real encumbrances; permit in particular subrogations, reductions, cancellations, postponements and any other registration of charges on property of third parties in general; constitute, amend and extinguish positive and negative easements and servitudes. 39 CORPORATE GOVERNANCE

42 Board committees In order to perform its duties effectively, the board of directors has set up two internal committees: a Remuneration Committee and an Audit Committee. Directors do not receive any additional fees as members of these committees. The Corporate Governance Code makes reference to a Nomination Committee. No such committee has been set up because directors are appointed in general meeting on the basis of lists submitted by shareholders who nominate candidates and verify that they have the requisites concerning respectability and professionalism in accordance with the law and the Articles of Association. Remuneration Committee The Remuneration Committee, set up on 26 February 2002, is composed of three directors - Giuseppe Airoldi and Roberto Lugano (representing minority shareholders) and Renato Roffi. Following the appointment of the new board of directors on 27 April 2004, Roberto Lugano has replaced Giuseppe Colaiacovo. The Remuneration Committee is responsible for submitting proposals to the board of directors regarding the annual remuneration of the Chairman and for studying criteria concerning the remuneration of the company s top management. Fees to be paid to directors are subject to approval by the shareholders, whereas the remuneration of the Chairman is determined by the board of directors. In the first half of 2004, the committee held three meetings (on 18 March, 23 April and 30 June) to discuss issues relating to (i) the results achieved under the 2003 corporate Performance Plan, (ii) the definition of the 2004 Performance Plan and the identification of corporate indicators to be used in order to assess management performance and (iii) the company s salary system for all executives. Discussions regarding the latter involved the annual variable incentive plan linked to the achievement of corporate and individual objectives, as well as the long-term incentive plans consisting of stock grants and stock options for executives who are most directly responsible for corporate results in strategic and economic terms. Audit Committee Snam Rete Gas s Audit Committee, set up on 26 February 2002, is composed solely of independent non-executive directors - Giuseppe Airoldi, Roberto Lugano and Roberto Lonzar. The latter has replaced Giuseppe Colaiacovo as from 4 May 2004 following the appointment of the new board of directors at the shareholders meeting held on 27 April On 24 February 2003, the committee drew up rules for its activities. These rules take into account the recommendations of the Corporate Governance Code, as revised in July 2002, and govern the committee s duties which are to: assist the board of directors in the performance of tasks to: (i) define guidelines for the internal control/audit system; (ii) periodically verify the system s adequacy and correct implementation; (iii) ascertain that the main business risks are identified and adequately addressed; examine, when requested by the Chairman and/or the Chief Financial Officer, any significant deficiencies in the planning or execution of internal audits which may hinder the company s ability to record, process and disclose financial information; assess, with the Chief Financial Officer, the adequacy of the accounting principles adopted and the extent to which they can be used on a comparative basis in the preparation of the consolidated financial statements; examine with the independent auditors: (i)the accounting principles that are critical for the purposes of providing a true and fair view of the company s financial position and results of operations; (ii) the alternative forms of accounting treatment provided for in the accounting principles and analysed with management, highlighting the consequences of using these forms of treatment and the relevant additional information, as well as the forms of accounting treatment preferred by the independent auditors; (iii) the contents of all important written information exchanged between the independent auditors and management; (iv) the issues relating to the consolidated financial statements and the statutory financial statements of companies belonging to the group. For this purpose, the committee holds meetings with the chairman or other 40 CORPORATE GOVERNANCE

43 members of Snam Rete Gas s board of statutory auditors, with partners of the independent auditing firm appointed to audit the financial statements and with the company s management; similarly, in the case of group companies, the committee holds meetings with top administrative managers, as well as with the respective chairmen or other members of the board of statutory auditors and partners of the independent auditing firm; assess the work programme prepared by the Internal Audit Manager who reports to the committee on the work performed, at least every three months; assess the facts that emerge from: internal audit reports, communications from the board of statutory auditors and/or individual members thereof, reports and management letters from the independent auditors, the annual report from the Guarantor for the Code of Practice and investigations and examinations performed by third parties; examine, when requested by the Chairman and/or the Chief Financial Officer, any cases of fraud, whatever the sum, which have involved management and/or employees with material roles in the internal control/audit system; assess the proposals submitted by auditing firms applying for an audit assignment, as well as assessing the work programme prepared for the audits and the activities subsequently performed by the auditing firms, also with regard to the independence of the opinions given thereby; verify the independence of the auditing firm; assess requests submitted by managers in charge of business units to utilise the firm appointed to audit the company s financial statements for the performance of other services and submit proposals to the board of directors in this regard; approve procedures prepared by the Internal Audit Manager for receiving and dealing with notifications, including anonymous reports, relating to problems involving the accounts and the internal control/audit system; perform any other duties that may be assigned by the board of directors, especially in connection with relations with the independent auditors; report to the board of directors on its activities and on the adequacy of the internal control/audit system at least every six months, when the half-yearly report and accounts are submitted for approval. At meetings of the Audit Committee, the quorum is reached when at least a majority of the members in office is present and resolutions are adopted by a majority vote of those present. The chairman of the board of statutory auditors, or a member of the said board nominated by the chairman, takes part in the proceedings of the Audit Committee. The Chairman of the company may attend the committee meetings. The Internal Audit Manager assists the Audit Committee, prepares minutes of the meetings and carries out the tasks assigned by the committee in order to perform his/her duties. In the first half of 2004, the Audit Committee held four meetings (on 16 February, 23 February, 9 March and 17 June). At these meetings, attended by at least one member of the board of statutory auditors, the committee (i) assessed the results of the procedures adopted in relation to the appointment of an independent auditing firm for the 2004, 2005 and 2006 financial years, (ii) examined the report on the activities performed by the Internal Audit unit and the results of the audit reports, (iii) analysed the Internal Audit unit s organisational structure and work programme for 2004, (iv) analysed issues relating to the annual statutory and consolidated financial statements as at 31 Decmeber 2003 with the Chief Financial Officer and with managers from the auditing firm Deloitte & Touche, (v) analysed the Organisation, Management and Control Model prepared in accordance with Legislative Decree 231/01 and the activities connected with its implementation and (vi) analysed the transactions with related parties and the trend in the company s operating costs. Board of statutory auditors In accordance with Article 149 of Legislative Decree 58/98, the board of statutory auditors monitors (i) compliance with the law and Articles of Association, (ii) observance of correct business principles, (iii) the adequacy of the company s organisational structure with regard to those aspects that lie within its province, (iv) the adequacy of the company s 41 CORPORATE GOVERNANCE

44 internal control/audit system and administration/accounting system, as well as the reliability of the latter as regards providing a fair view of operational items, and (v) the adequacy of instructions issued by the company to its controlled company pursuant to Article 114, paragraph 2 of the aforementioned Legislative Decree. The board of statutory auditors is composed of three effective members and two alternate members. Under the provisions of Article 22 of the Articles of Association, the members of the board of statutory auditors are appointed by the shareholders on the basis of a votinglist mechanism which ensures that minority shareholders appoint one effective member and one alternate member. The terms and procedures for submitting voting lists and curricula vitae are the same as those established for the board of directors. Lists are divided into two sections: the first concerns candidates for the office of effective member; the second concerns candidates for the office of alternate member. At least the first candidate listed in each section must be an official auditor (registered in the roll of revisori contabili) and must have been a practising official auditor for a period of not less than three years. Chairmanship of the board of statutory auditors falls to the first candidate on the list that obtains the most votes. Statutory auditors who, for any reason whatever, are not appointed according to the aforesaid procedure, are appointed by the shareholders in general meeting which adopts the relevant resolution with the majority provided by law. Members of the board of statutory auditors may be re-elected. The board of statutory auditors, appointed at the shareholders meeting held on 27 April 2004, is composed of the chairman, Riccardo Perotta, the effective members Sergio Galimberti and Pierumberto Spanò and the alternate members Giulio Gamba and Luigi Rinaldi. Their term of office lasts for three financial years (until the 2006 financial statements are adopted). Statutory auditors are chosen on the basis of requisites concerning respectability and professionalism indicated in Decree 162 issued by the Ministry of Justice on 30 March For the purposes of this decree, disciplines strictly relevant to corporate activities are: commercial law, business economics, corporate finance. For the same purposes, the sector strictly relevant to corporate activities is the engineering sector. At their 27 April 2004 meeting, the shareholders determined that during the board of statutory auditors term of office the annual fee due to the chairman thereof will be 37,500 and the annual fee due to each of the effective members will be 25,000. No person who is already an effective statutory auditor or a member of the board of supervision or a member of the management committee in five (or more) companies listed in regulated markets may be a statutory auditor of the company and, if elected, he/she loses the right to hold office. In the limit consisting of five (or more) companies, the controlling company and companies controlled thereby are not taken into account. The board of statutory auditors held six meetings in 2003, attended by an average of 83% of the members. At least one member of the board of statutory auditors attended all the meetings held by the Audit Committee. In the first half of 2004, the board of statutory auditors held four meetings, attended by 100% of the members. At least one member of the board of statutory auditors attended all the meetings held by the Audit Committee. Share capital and shareholdings Snam Rete Gas S.p.A. s fully paid-up capital as at 30 June 2004 totalled 1,955,000,000 and consists of 1,955,000,000 ordinary shares, each with a nominal value of 1. Shares are indivisible and each share entitles the holder to cast one vote. Shareholders may exercise their rights in accordance with current legislation and within the limits established thereby. On 5 August 2004, Snam Rete Gas increased its share capital to implement the stock option plan. A total of 310,500 Snam Rete Gas S.p.A. shares were issued, each with nominal value of 1, for a total of 310,500. Following this operation, Snam Rete Gas S.p.A. s share capital now amounts to 1,955,310,500. Snam Rete Gas is a company controlled and coordinated by Eni S.p.A. which holds 50.06% of the share capital. The remaining percentage is owned by shareholders both in and outside Italy. 42 CORPORATE GOVERNANCE

45 On the basis of available information and communications received pursuant to Regulation 11971/99 issued by CONSOB (the Italian Regulatory Commission for Listed Companies and the Stock Exchange), as at 31 December 2003 other shareholders owning more than 2% of Snam Rete Gas S.p.A. s capital were Assicurazioni Generali (2.04%) and Banca D Italia (2.01%). On the basis of communications from banks that were responsible for paying the 2003 dividend and other communications provided for in current legislation, shareholdings, by geographic area, as at 30 June 2004, are as follows: Italy 70.76% USA and Canada 7.61% UK and Eire 10.98% Other EU member states 9.86% Rest of the world 0.79% Under Article 7 of the Articles of Association, until the end of the regulatory period governing natural gas transmission and dispatching tariffs and immediately following the period ending on 30 September 2005 (i.e. until 30 September 2009), the exercise of certain voting rights is subject to the written consent of the company s board of directors. More specifically, this proviso relates to the voting right pertaining to shares which represent more than 15% of the capital formed with shares carrying voting rights at shareholders general meetings and which were acquired, after the company was listed on the stock exchange, by a government or a public administrative body or a party controlled directly or indirectly thereby, or by a party which - directly or indirectly through controlled or associated companies - is engaged in natural gas import and/or export activities in Italy or a controlling party thereof. When calculating the aforementioned percentage, rights pertaining to the total number of shares held by a given party and the group to which it belongs, as well as related associated and controlled companies, are taken into account. Also included are rights pertaining to shares held through trust companies and/or third parties. Acquisition of shares in quantities that cause the 15% threshold to be exceeded must be notified in writing to the company in order to obtain the board of directors consent. Consent is given not later than sixty days from receipt by the company of the aforementioned notification, is communicated in writing to the shareholder and is irrevocable. Consent may be withheld only if the company s interests so require. In the absence of consent or prior to the expiry of the sixty-day period or in the absence of notification by the shareholder, the voting right pertaining to shares exceeding 15% of the capital cannot be exercised. Shareholders meetings By law, general meetings are the forum for contacts between the company s management and its shareholders. At these meetings, members may request information about items on the agenda and about operating performance in general. Information is provided with due regard to rules governing disclosure of price-sensitive information. Ordinary general meetings transact the business set out in Article 2364 of the Italian Civil Code, whereas the business to be transacted at extraordinary general meetings is set out in Article 2365 of the Civil Code, in addition to the transaction of business required by other provisions of law. Under Article 15 of the Articles of Association, an ordinary general meeting authorises the board of directors to adopt resolutions concerning the sale, contribution, lease, usufruct, 43 CORPORATE GOVERNANCE

46 encumbrance or any other form of disposal, including disposal within the framework of joint ventures, of the company s business or lines of business which are of strategic importance and which pertain to activities connected with natural gas transmission and dispatching, it being understood that, pursuant to the provisions of Article 2364, point 5, of the Italian Civil Code, the directors are responsible for the action taken. Resolutions concerning these matters are adopted at an ordinary general meeting, on both the first and the second date called for the meeting, when approved by shareholders representing at least three-quarters of the capital represented at the meeting. Regarding other matters lying within its province, resolutions are adopted by an ordinary general meeting with the majorities established by law. Resolutions put before an extraordinary general meeting, on the first, second and third dates called, are adopted when approved by shareholders representing at least threequarters of the capital represented at the meeting. In accordance with the Corporate Governance Code, a set of rules ensures the proper conduct of proceedings at shareholders meetings, guaranteeing the right of every member attending to express his/her opinion regarding the business in hand. One general meeting was held in 2003, in April when the 2002 financial statements were adopted. In the first half of 2004, one general meeting was held in April. At this meeting, ordinary resolutions concerned the adoption of the 2003 financial statements, the appointment of a new board of directors and board of statutory auditors, the appointment of independent auditors and amendments to the rules governing proceedings at general meetings (to conform to the new provisions set out in the Articles of Association), whereas extraordinary resolutions concerned amendments to the Articles of Association (to conform to Legislative Decree 6 of 17 January 2003). Investor relations and treatment of information Snam Rete Gas s communications policy is aimed at creating an ongoing dialogue with institutional investors, shareholders and the market and ensuring the systematic dissemination of exhaustive and timely information about corporate activities. The only limiting factor consists of any need there may be to protect the confidential nature of certain information. In line with this policy, information is provided to investors, the market and the media by means of press releases, periodic meetings are held with institutional investors, the financial community and the press and a wide range of documents is published and constantly updated on Snam Rete Gas s web site. Relations with institutional investors, financial analysts and the media are handled by the manager in charge of the Investor Relations unit. Information may be accessed on the Snam Rete Gas web site and may also be requested by ([email protected]). Relations with shareholders are handled by the Company Secretary. Information may be accessed on the Snam Rete Gas web site and may also be requested by ([email protected]). Snam Rete Gas is convinced that the market appreciates a transparent and correct approach to communication and great importance is attached to the way in which information on the company and the group is disclosed externally, especially as far as price-sensitive information is concerned. In this context, on 19 December 2002 the board of directors approved an external communications procedure for providing the market with documents and other information regarding group activities. This procedure follows the recommendations set out in the "Guide for information disclosure" issued in June 2002 by Forum ref. on corporate communications, with specific provisions for external communications involving corporate information and documents. Special emphasis is placed on the disclosure of price-sensitive information and on the approach to be adopted by company representatives in their contacts with the press, with financial analysts and institutional investors and with the mass media in general. 44 CORPORATE GOVERNANCE

47 Internal Audit unit An Internal Audit unit was set up on 3 August The unit reports directly to the Chairman, thus ensuring the degree of independence and authority necessary for the controls it is required to carry out. The Internal Audit unit operates in accordance with best national and international practice. The aim of its activities is to analyse the internal control/audit system, identify potentially weak areas and suggest improvements. The unit performs its activities on the basis of an annual audit programme agreed with the Audit Committee and top management. In addition to reporting to top management, the unit periodically refers the results of its controls to the Audit Committee and the board of statutory auditors. Other action to reinforce the corporate governance system Snam Rete Gas took other action in 2002, 2003 and the first half of 2004 to ensure total transparency with regard to the company s management, also in the light of the July 2002 revision of the Corporate Governance Code which introduced more stringent terms of reference for governance systems in listed comanies. This action included the following: Internal dealing code - At its 19 December 2002 meeting, in compliance with the provisions set out in the Regulations for stock markets organised and run by Borsa Italia S.p.A., as amended by CONSOB s Regulation of 9 July 2002, the board of directors approved a code concerning dealings in financial instruments issued by Snam Rete Gas S.p.A. ( internal dealing code ). This code, which came into effect on 1 January 2003, sets out provisions governing disclosure obligations and limitations with regard to transactions involving financial instruments issued by Snam Rete Gas S.p.A. or its controlled companies, excluding nonconvertible bonds, and entered into by key managers, namely: the Chairman, directors and effective statutory auditors of Snam Rete Gas S.p.A, as well as the General Managers and the functional Managers directly responsible thereto and to the Chairman, the Managers in charge of Administration, Budget/Control and Finance, and the Company Secretary. Key managers are also obliged to disclose transactions entered into by their spouses when not legally separated or by infant children, or entered into on their behalf by third parties, trust companies or companies controlled by them. These transactions are taken into account when calculating the value of dealings attributable to the manager concerned. Under the code, the value of dealings in each calendar quarter which, if exceeded, involves compulsory disclosure to CONSOB at the end of the quarter is limited to 35,000, compared with the 50,000 limit fixed in the stock exchange regulations. Furthermore, the value of dealings in the same period which, if exceeded, involves compulsory disclosure immediately is limited to 175,000, compared with the 250,000 limit fixed in the stock exchange regulations. Lastly, the code forbids the said key managers to deal in financial instruments issued by Snam Rete Gas S.p.A. during the fifteen working days that precede board meetings called to examine mandatory periodic financial statements and/or the draft annual financial statements, as well as on the day when the board of directors resolves upon the dividend proposal to be put to the shareholders. Transactions to be taken into account in order to determine if the above thresholds have been exceeded include the following: the exercise of option rights under stock option schemes; the sale of shares acquired under stock option and stock grant schemes. Related party transactions - At its 24 February 2003 meeting, the board of directors approved "Rules of conduct in the matter of transactions with related parties" which set out the criteria to be adopted when entering into transactions with related parties (Article 1, paragraph 1 of the Corporate Governance Code), as well as the procedures and deadlines for notifying the board of directors about these transactions. According to the definition in point d) of CONSOB s communication of 30 September 2002 ( persons who have been vested with powers and responsibilities with regard to the exercise of duties relating to the administraiton, management and control 45 CORPORATE GOVERNANCE

48 of the issuing company ), the following are also deemed to be related parties and are identified as such in the rules: directors, effective statutory auditors, General Managers and managers responsible for business units reporting directly to the Chairman. Transactions between Snam Rete Gas and related parties are subject to prior approval by the board of directors: (i) if they are atypical and/or unusual and if the sum involved is more than 5 million; (ii) if they relate to acquisitions, sales, hive-offs, transfers of shareholdings or of businesses or lines of business; (iii) if they relate to property with a value of more than 2.5 million; (iv) if the related party is one of the persons specified in point d) of the CONSOB communication, including close relatives of and companies controlled by the said party and if the sum involved is more than 0.5 million ( 0.25 million in the case of an atypical or unusual operation). Other transactions subject to prior approval by the board of directors are those between controlled companies and related parties of Snam Rete Gas which could constitute potentially particularly important operations and in connection with which, according to CONSOB regulations, it is necessary to provide the public with information. In addition, the rules identify transactions which are entered into by Snam Rete Gas and by its controlled companies with Eni and its controlled companies and about which the board of directors and the board of statutory auditors must be informed every three months, as well as establishing maximum limits according to the nature of the transaction and the related party concerned and specifying the type of information required. Organisation, Management and Control Model prepared in accordance with Legislative Decree 231/01 At its 23 April 2004 meeting, the board of directors approved the "Organisation, Management and Control Model" prepared in accordance with Legislative Decree 231 of 8 June 2001 which introduced rules governing the administrative liability of companies. Under these rules a company may be held liable, and consequently incur penalties, with regard to certain offences committed or attempted in the interests or to the advantage of the company by its directors or employees. Liability of the company is excluded if it has adopted and effectively implemented, prior to the offences having been committed, suitable "organisation, management and control models" that can prevent the offences and if it has set up a dedicated body to supervise the operation and observance of the models. In this regard, in March 2003, Snam Rete Gas made a start on a Risk Assessment - Administrative Liability project, the aim being to identify and analyse potential corporate risk areas, define standards for controlling sensitive activities, assess the adequacy of existing control systems, identify situations of non-conformity by means of comparative analysis and propose a plan of remedial action. These activities were carried out with a view to preparing the Model. When preparing the Model, reference was made to the following: Legislative Decreee 231/01, Article 6 of which indicates the features that the Model needs to have if it is to qualify as an exempting factor in terms of a company s liability; guidelines issued by Confindustria (General Confederation of Italian Industry) which clarify the items covered by the decree and provide references with regard to methods and contents; recommendations provided by the controlling company Eni which, in line with the indications given by Assonime (Association of Italian limited companies) and Confindustria, acts as policy-maker and coordinator at Group level. 46 CORPORATE GOVERNANCE

49 As far as the composition of the supervising body is concerned, the company has opted for a Supervisory Board with two in-house members. In line with the action taken by Snam Rete Gas S.p.A., the board of directors of the controlled company GNL Italia S.p.A. has also approved an "Organisation, Management and Control Model" (on 22 June 2004) and has nominated a Supervisory Board. 47 CORPORATE GOVERNANCE

50 other information Executive incentive plans involving Snam Rete Gas shares In order to develop a system to incentivise group executives who are most directly responsible for corporate results in strategic and economic terms, in 2002 Snam Rete Gas introduced an incentive and loyalty-building plan for the 3-year period Acting on the powers granted by the shareholders at their 24 April 2002 meeting, on 25 June 2002 Snam Rete Gas s board of directors established the details for this plan which consists of stock grants and stock options. Linked to the achievement of predetermined corporate targets and to the positive performance of the shares on the stock market, the plan reflects the extent to which management is involved in business risks and its contribution to growth in shareholder value, whilst taking into account the consolidation over time of the professional role played by executives in the management of Snam Rete Gas s activities. Stock grants At their 24 April 2002 meeting and pursuant to Article 2443 of the Italian Civil Code, the shareholders vested the board of directors with the power to effect a free increase in the share capital of the company before 24 April 2007 in order to implement the executive incentive plan. The increase, up to a maximum amount of 400,000 (corresponding to approximately % of the share capital), will be achieved by utilising the Reserve for share issue (Article 2349 of the Italian Civil Code) in order to issue a maximum of 400,000 shares, each with a nominal value of 1. The shares will be awarded free of charge to executives employed by the company and by its controlled 48 OTHER INFORMATION

51 companies, as defined in Article 2359 of the Civil Code. The stock grant scheme provides for the conditional grant of three tranches of ordinary shares in 2002, 2003 and 2004, subscription for which and the relevant capital increase will take place after three years, i.e. in 2005, 2006 and 2007 respectively, on the basis of a corporate performance indicator consisting of the company s TSR (total shareholder return) measured against the TSR of a comparator group of Italian and European companies in the utilities sector. TSR is calculated on the basis of the so-called "official price" in Italy, or comparable price elsewhere, of the shares of each company quoted on the last day of dealing of the reference year by the main stock exchange where the shares are listed. The return is the ratio between the annual variation in the share price, increased by any dividend paid, and the official price, or comparable price, quoted by the main stock exchange on the last day of dealing of the year prior to the reference year. The free shares will be awarded to the executives following ad hoc resolutions, regarding the increase in share capital and the relevant award of shares, to be adopted by the board of directors before the end of the month following completion of the third year from the date on which the company undertook to conditionally grant the shares. To operate the plan, Snam Rete Gas s board of directors: on 25 June 2002, established that the maximum number of shares that may be conditionally granted to the Chairman and selected executives in 2002 is 121,700. The directors also approved the "Regulations governing the 2002 stock grant scheme regarding Snam Rete Gas S.p.A. ordinary shares, pursuant to Article 2349 of the Civil Code". The number of free shares to be offered after three years from the conditional grant will be determined on the basis of the company s TSR in the period ; on 18 June 2003, established that the maximum number of shares that may be conditionally granted to the Chairman and selected executives in 2003 is 128,100. The number of free shares to be offered after three years from the conditional grant will be determined on the basis of the company s TSR in the period ; on 28 July 2004, established that the maximum number of shares that may be conditionally granted to the Chairman and selected executives in 2004 is 135,400. The number of free shares to be offered after three years from the conditional grant will be determined on the basis of the company s TSR in the period The right to a stock grant is irrevocable but lapses in the event of cessation of employment determined unilaterally by the assignee prior to the date on which the board of directors, following the expiry of the 3-year period, verifies that conditions for the grant have materialised. In the event of cessation of employment by mutual consent or in the event of the death of the assignee, within 45 days therefrom an amount will be paid in proportion to the period of time that has elapsed between the date of notification that conditions for the grant have materialised and the date of the event. The tax treatment of stock grants is as follows: at the time of issue, the value of the shares constitutes income from subordinate employment and is subject to income tax and social security contributions. The taxable value is determined on the basis of the arithmetic mean of the official prices quoted for Snam Rete Gas shares on the Milan stock exchange during the thirty days preceding the share issue date. Any capital gain realised on the subsequent sale of the shares is subject to substitute tax at the reduced rate of 12.5%. Stock options At their 24 April 2002 meeting and pursuant to Article 2443 of the Italian Civil Code, the shareholders vested the board of directors with the power to effect a paid increase in the share capital of the company, in one or more tranches, before 31 July The increase, up to a maximum amount of 2,000,000 (corrresponding to approximately % of the share capital) will be achieved by issuing a maximum of 2,000,000 ordinary dividend-bearing shares, each with a nominal value of 1, with the exclusion of the pre-emption right in accordance with the last paragraph of Article 2441 of the Civil Code and the second and third paragraphs of Article 134 of Legislative Decree 58 of 24 February The shares will be 49 OTHER INFORMATION

52 offered to executives employed by Snam Rete Gas S.p.A. and by its controlled companies (as defined in Article 2359 of the Civil Code) in the period To operate the plan, Snam Rete Gas s board of directors resolved: on 25 June 2002, to effect a paid increase in the share capital, for 2002, for a maximum amount of 608,500, by issuing a maximum of 608,500 ordinary shares, each with a nominal value of 1, to be offered to executives ("the assignees") employed by Snam Rete Gas S.p.A. and by its controlled companies at a price of per share, corresponding to the arithmetic mean of the official prices quoted on the Milan stock exchange run by Borsa Italiana S.p.A. during the thirty days preceding the date of the board resolution; on 18 June 2003, to effect a paid increase in the share capital, for 2003, for a maximum amount of 640,500, by issuing a maximum of 640,500 ordinary shares, each with a nominal value of 1, to be offered to executives ( the assignees ) employed by Snam Rete Gas S.p.A. and by its controlled companies at a price of per share, corresponding to the arithmetic mean of the official prices quoted on the Milan stock exchange run by Borsa Italiana S.p.A. during the thirty days preceding the date of the board resolution; on 28 July 2004, to effect a paid increase in the share capital, for 2004, for a maximum amount of 677,000, by issuing a maximum of 677,000 ordinary shares, each with a nominal value of 1, to be offered to executives ( the assignees ) employed by Snam Rete Gas S.p.A. and by its controlled companies at a price of 3.53 per share, corresponding to the arithmetic mean of the official prices quoted on the Milan Stock Exchange run by Borsa Italiana S.p.A. during the thirty days preceding the date of the board resolution. The option to subscribe may be exercised after three years from the offer date and for a subsequent period of five years. Options are personal, entailed and non-transferable. Options that are not exercised by the established deadline will lapse and consequently the assignee has no rights attaching to the options. In the event of cessation of employment by mutual consent prior to the expiry of the 3- year period, the assignee retains the right to exercise options within six months of the date of the event. In the event of the death of the assignee prior to the expiry of the 3-year period, heirs retain the right to exercise options within six months of the date of the event. In the event of cessation of employment determined unilaterally, either by the company or by the assignee, prior to the expiry of the 3-year period, the options are extinguished. In the event of the employing company losing its status as a controlled company of Snam Rete Gas, or in the event of the business or line of business in which the assignee is employed being sold, prior to the expiry of the 3-year period, the assignee retains the right to exercise options within six months of the date of the event. Assignees of options may take advantage of advances granted by the Eni Group finance company in order to pay up the subscribed shares provided that, concurrently, the assignees sign an irrevocable mandate authorising the said company to sell the subscribed shares. The tax treatment of stock options is as follows: for IRPEF (personal income tax) purposes, the tax system set out in Article 48, paragraph 2, sub-paragraph g-bis) of Presidential Decree 917/1986 applies to the stock option scheme. Accordingly, the difference between the market value of the shares at the time the option is exercised and the original option price is not taxable. Any capital gain realised on the subsequent sale of the shares is subject to substitute tax at the reduced rate of 12.5%. OTHER INFORMATION Sale of Snam Rete Gas shares by Eni On 29 March 2004, Eni S.p.A. sold 177,000,000 Snam Rete Gas S.p.A. ordinary shares (approximately 9.05% of the share capital) to a financial broker. These shares have now been placed with Italian and non-italian institutional investors. Following this sale, Eni s holding in Snam Rete Gas has been reduced to 50.07%. 50

53 Increase in share capital to implement the stock option plan Acting on the power granted by the shareholders at their 24 April 2002 meeting to increase the capital of the company up to a maximum of 2,000,000 shares, Snam Rete Gas S.p.A. s board of directors has resolved to increase the capital by issuing ordinary shares to be offered to Snam Rete Gas Group executives who are most directly responsile for corporate results in strategic and economic terms. The following capital increases have been resolved upon by the board of directors: on 25 June ,500; on 18 June ,500; on 28 July ,000. In partial compliance with the resolutions already adopted, on 5 August 2004 a total of 310,500 Snam Rete Gas S.p.A. shares were issued, each with a nominal value of 1, for a total of 310,500. Following this operation, Snam Rete Gas S.p.A. s share capital now totals 1,955,310,500. Related party transactions Snam Rete Gas S.p.A. is controlled by Eni S.p.A. Transactions entered into by Snam Rete Gas S.p.A. and its controlled company, GNL Italia S.p.A., with related parties mainly concern the exchange of goods, the supply of services and the provision and use of financial resources and they take place with the controlling company Eni S.p.A. and with other companies controlled by and associated with Eni S.p.A., as well as with Enel S.p.A., the State-controlled electricity concern, and its controlled companies. All transactions form part of the company s ordinary business and take place on the basis of market conditions, i.e. at the conditions that would be applied between two independent parties, or criteria that ensure recovery of specific costs incurred and a minimum margin for recovery of general costs and return on capital employed. All the transactions entered into have taken place in the interests of Snam Rete Gas and GNL Italia. Figures concerning the trade and other transactions and the financial transactions entered into with related parties and a description of the most important type of transactions are provided in the notes on the consolidated accounts. Own shares held by the company and by controlled companies With reference to the provisions of Article 40, paragraph 2, sub-paragraph d) of Legislative Decree 127/91, it is hereby confirmed that Snam Rete Gas S.p.A. and its controlled company GNL Italia S.p.A. do not hold, nor have they been authorised by their respective shareholders to purchase, any Snam Rete Gas S.p.A. shares. Main events since the end of the first half of 2004 The main events since the end of the first half of 2004 have been illustrated in the preceding sections of this report. 51 OTHER INFORMATION

54 Outlook The outlook for 2004 with regard to the key variables affecting Snam Rete Gas s operations is as follows: Volumes of gas sent into the national network are expected to increase compared with 2003, mainly due to increased consumption by the electricity generating sector. Volumes of re-gasified LNG are expected to decrease following the accident at the LNG production plant at Skikda in Algeria. A reduced availability of Algerian LNG can cause a reduction in quantities consigned by Eni (the only long-term user of the Panigaglia terminal) and can limit the number of spot cargoes due to a shortage of LNG on the market. Capital expenditures aimed at expansion and development are expected to increase compared with 2003, primarily due to the start of construction work in the framework of projects to increase the capacity of infrastructure for gas imports from North Africa. 52 OTHER INFORMATION

55 Snam Rete Gas consolidated accounts as at 30 June 2004

56 consolidated balance sheet ASSETS Subscribed capital unpaid 0 0 Fixed assets Intangible assets: (Note 1) 16 Formation and expansion expenses Research and development costs Know-how Assets in course of construction and payments on account Other intangible assets Total Tangible assets (Note 2) 232 Land and buildings ,670 Plant and machinery 8,667 8,521 8 Industrial and commercial equipment Other tangible assets Assets in course of construction and payments on account ,250 Total 9,292 9,316 9,346 Total fixed assets 9,381 9,405 Current assets Inventories (Note 3) 27 Raw materials, sundry materials and consumables Total Receivables (Note 4) - Customers 110. due within 12 months Controlling company 219. due within 12 months Tax authorities. due within 12 months 17 - Others 3. due within 12 months due after 12 months Total Liquid funds (Note 5) 1 Eni Group finance companies Total Total current assets Accrued income and prepayments (Note 6) ,721 Total assets 9,813 9, CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 BALANCE SHEET

57 LIABILITIES Shareholders equity (Note 7) 1,955 Capital 1,955 1,955 2,178 Share premium reserve 2,178 1, Legal reserve Other reserves Retained earnings 614 1, Net income for the period ,397 Total 5,683 5,565 Provisions for liabilities and charges (Note 8) 375 For taxation Other provisions Total Employees severance indemnity (Note 9) Payables (Note 10) - Payables to members for financing received. due within 12 months 7. due after 12 months Payables to banks 119. due within 12 months due after 12 months Payables to other financial institutions 473. due within 12 months ,582. due after 12 months 2,334 2,255 3,055 2,880 3,046 - Deposits 5. due within 12 months Payables to suppliers 227. due within 12 months Payables to controlling company 35. due within 12 months due after 12 months Tax payables 20. due within 12 months Payables to health and social security institutions 7. due within 12 months Other payables 18. due within 12 months ,672 Total 3,462 3, Accrued expenses and deferred income (Note 11) ,721 Total liabilities 9,813 9, CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 BALANCE SHEET

58 GUARANTEES AND OTHER MEMORANDUM ACCOUNTS Guarantees (Note 12) 13 Personal guarantees given in own interests Secured guarantees given in the interests of others Total guarantees Other memorandum accounts (Note 13) Commitments 850 Financial derivatives hedging interest rates Total other memorandum accounts CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 BALANCE SHEET

59 consolidated income statement 2003 First half 2003 First half 2004 Operating revenue and income (Note 14) 1,758 Revenue from sales and services Variations in contract work in progress 173 Capitalised in-house work Other revenue and income ,941 Total 956 1,001 Operating costs and expenses (Note 15) (187) Raw materials, sundry materials and consumables (64) (122) (190) Services (88) (85) (14) Enjoyment of third party assets (7) (6) Labour (90) - Salaries and wages (45) (46) (30) - Health and social security contributions (14) (14) (6) - Severance indemnity (3) (3) (1) - Other costs (1) (127) (62) (64) Depreciation, amortisation and write-downs (57) - Amortisation of intangible assets (22) (23) (419) - Depreciation of tangible assets (210) (211) (1) - Other write-downs of assets (477) (232) (234) 3 Variations in inventories of raw materials, sundry materials and consumables (4) 24 (11) Allocations for risks (3) (12) Sundry operating expenses (6) (11) (1,015) Total (463) (501) 926 Difference between operating revenue/income and costs/expenses Financial income and expenses (Note 16) Financial income 1 - Controlling company Others Interest and other financial expenses (3) - Payable to controlling company (1) (1) (126) - Payable to others (67) (55) (129) (68) (56) (124) Total (66) (55) Extraordinary income and expenses (Note 17) Income Expenses... (1)... Total extraordinary items 1 (1) 802 Pre-tax result (257) Income taxes for the period (Note 18) (169) (171) 545 Net income for the period CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 INCOME STATEMENT

60 CONSOLIDATED CASH FLOWS STATEMENT 2003 First half 2003 First half Income for the period Depreciation and amortisation Write-downs (write-ups) (3) Variations in provisions for liabilities and charges (3) 2 Variation in employees severance indemnity Losses on write-offs, eliminations and extinctions 1 6 (2) Interest receivable (1) 129 Interest payable Extraordinary expenses (income) (1) Income taxes ,408 Operating profit before variation in working capital Variations: (3) - Inventories 4 (24) 42 - Trade and other receivables 55 (3) (8) - Accrued income and prepayments (6) (5) (42) - Trade and other payables 25 1 (22) - Accrued expenses and deferred income 5 (38) 1,375 Cash flow provided by operating profit Interest received 1 (145) Interest paid (74) (59) (13) Extraordinary income (expenses) received (paid) (9) (2) (71) Income taxes paid (46) (50) 1,146 Net cash flow from operating activities Investments: (40) - Intangible assets (12) (24) (403) - Tangible assets (149) (241) 42 - Variation in payables and receivables relating to investing activities (10) (17) (401) Cash flow from investments (171) (282) Disinvestments: 1 - Tangible assets 2 1 Cash flow from disinvestments 2 0 (400) Net cash flow from investing activities (169) (282) 350 New long-term loans raised (794) Repayment of long-term loans (478) (255) 11 Increase (decrease) in short-term loans (62) 245 (313) Dividends paid (313) (391) (746) Net cash flow from financing activities (502) (281) 0 Net cash flow in the period Liquid funds at start of period Liquid funds at end of period CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 CASH FLOWS STATEMENT

61 Contents and layout criteria The report for the first half of 2004 has been prepared in accordance with the criteria established by the Italian Regulatory Commission for Listed Companies and the Stock Exchange (CONSOB) in Regulation of 14 May 1999 and subsequent amendments. For each item in the balance sheet and income statement, the relevant figures from the consolidated financial statements for 2003 (aggregated, where appropriate, for the purpose of the formats used herein) and the consolidated accounts as at 30 June 2003 are shown. In the notes on the balance sheet, comparison is made with the situation as at 31 December 2003, whereas in the notes on the income statement comparison is made with the first half of Comments on the reasons for the most significant changes are provided in the Economic performance and financial position section of the management report. The consolidated accounts include the financial statements of Snam Rete Gas S.p.A. and of the controlled company GNL Italia S.p.A. with regard to which Snam Rete Gas commands 100% of the votes exercisable at general meetings. The criteria used to determine the basis of consolidation are the same as last year. The consolidated accounts as at 30 June 2004 have been prepared in accordance with the same consolidation and accounting principles used for the consolidated financial statements as at 31 December 2003 and illustrated in the 2003 annual report to which reference is made. Unless otherwise indicated, figures are in millions of euros. PricewaterhouseCoopers S.p.A. has carried out a limited audit of the consolidated accounts as at 30 June A limited audit has a significantly narrower scope than a full audit performed according to statutory auditing standards. With reference to Snam Rete Gas S.p.A. in its capacity as controlling company, only the balance sheet and income statement are included with this report, pursuant to Article 81, paragraph 2, sub-paragraph b) of the CONSOB ruling mentioned above. Notes on the consolidated accounts 1 Intangible assets Accumulated Net value Other Net value amortisation at Additions Amortisation changes at at Formation and expansion expenses 14 (4) Research and development costs Know-how 46 (17) Assets in course of construction and payments on account (1) 37 Other intangible assets 14 (2) (23) (1) Formation and expansion expenses comprise the costs incurred for the share offer and the company s listing on the stock exchange. Research and development costs refer to the remote-controlled underwater pipeline repair system developed in-house. Know-how refers mainly to software and application systems to support operating activities and includes: the SAP R/3 integrated system - 14 million; the information system aimed at integrating data bases and managing all technical data relating to transmission infrastructure - 5 million; new customer management system software which makes it possible to integrate the commercial, operating and financial processesin the order-to-cash cycle - 4 million. 59 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

62 Assets in course of construction refer mainly to projects concerning software and application systems to support operating activities. Other intangible assets refer to sundry costs of long-term benefit which it was considered appropriate to record under intangible assets in order to match them with revenue. Amortisation of intangible assets totals 23 million and takes place over the following periods: Formation and expansion expenses Research and development costs Know-how Other intangible assets 5 years 5 years 3 years 5 years or depending on the duration of the contract 2 Tangible assets Accumulated depreciation Net value Depreciation Other Net value and write-downs at Additions and write-downs changes at at Land and buildings 246 (3) Plant and machinery 8,667 1 (202) 55 8,521 1,216 Industrial and commercial equipment 8 (1) 7 10 Other tangible assets 33 3 (5) Assets in course of construction and payments on account (73) 513 9, (211) (17) 9,316 1,270 Tangible assets are stated net of capital investment grants from public authorities and contributions received from/expenses reimbursed by private companies totalling 140 million, including 11 million received in the first half of Land and buildings mainly comprise: buildings for offices, workshops, warehouses and depots used by the company s operating units; plant sites along the pipelines and other land occupied by compressor stations, the LNG terminal at Panigaglia (La Spezia) and the Dispatching Centre at San Donato Milanese (Milan). A secured guarantee for a nominal value of less than 1 million is registered on a piece of land purchased in prior years. This was issued to guarantee the payment of INVIM (property-increment tax) by the seller of the land in question (Article 28 of Presidential Decree 643/72). Plant and machinery consist of all the infrastructure dedicated to natural gas transmission and mainly comprise: pipelines, line valves, pressure reduction and regulating stations and assorted plant and equipment necessary to operate the network, for a total of 8,145 million; booster units (compressors and turbines) in stations that compress the gas so that it can be pumped through the pipelines, for a total of 317 million; plant at the Panigaglia LNG terminal, for a total of 54 million; other plant, for a total of 5 million. Industrial and commercial equipment comprises equipment and other assets necessary to maintain and manage plant operating conditions. 60 CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

63 Other tangible assets mainly comprise computer hardware and office furniture and machines at business units and at the San Donato Milanese Dispatching Centre. Assets in course of construction and payments on account refer to ongoing investment projects and mainly concern construction of new sections of pipeline and work to increase compressor station capacity. Additions to tangible assets totalled 252 million and mainly involved investments in the National Network connected with projects to increase the capacity of the import system for gas from North Africa and Russia. The decrease of 17 million in the item other changes is a result of capital capital investment grants and contributions from private companies received in the period ( 11 million) and the write-off of items of plant at a compressor station whose capacity is being increased and of pipeline sections ( 6 million). Depreciation of tangible assets totals 211 million and is calculated on the basis of their residual useful life using the following rates: Ordinary rate Land and buildings - land 0 % - buildings 2 % Plant and machinery - gas pipelines 2.5 % - compressor stations 5 % - workshop machines 12.5 % - plant at the LNG terminal 4 % Industrial and commercial equipment - motor vehicles % - equipment 10 % Other tangible assets - office furniture 12 % - office machines 20 % Accumulated depreciation totals 1,270 million and represents 12.6% of the carrying value of tangible assets: Carrying Accumulated Percentage of total assets value depreciation at at Land and buildings % 8.65 % Plant and machinery 9,737 1, % % Industrial and commercial equipment % % Other tangible assets % % 10,073 1, % % 61 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

64 3 Inventories The value of inventories and the changes in the period are shown in the following table: Gross Provision for Net Gross Provision for Net value write-downs value value write-downs value Change Raw materials, sundry materials and consumables: - sundry materials (transmission network) 36 (4) (4) sundry materials (LNG terminal) 2 (1) 1 2 (1) natural gas (5) (5) Sundry materials refer mainly to materials (piping) and spare parts used on a regular basis in connection with the pipeline network and the LNG terminal. Natural gas consists of gas used for re-gasification processes and stored in tanks at the Panigaglia LNG terminal. The 24 million increase in inventories compared with 31 December 2003 is due mainly to the purchase of piping. 4 Receivables Receivables, by type and maturity, are analysed in the following table: Net value at Net value at Due Due Due Due within after within after 12 months 12 months Total12 months 12 months Total Trade receivables - customers controlling company other Eni Group companies Sundry receivables - tax authorities others Trade receivables, totalling 342 million, relate mainly to revenue from transmission and re-gasification services in May and June CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

65 Sundry receivables amount to 25 million, a reduction of 19 million compared with 31 December 2003 mainly due to utilisation of the tax credit relating to advance payments made in In the financial statements as at 31 December 2003, tax receivables ( 37 million) were included in the item sundry receivables - others Due within Due after Due within Due after 12 months 12 months Total12 months 12 months Total Tax credits: - Corporate income tax VAT Tax receivables Caution money Advances to suppliers Other receivables Receivables from others Liquid funds Liquid funds totalling 1 million ( 1 million as at 31 December 2003) refer to amounts deposited with Eni Group finance companies. 6 Accrued income and prepayments Accrued income and prepayments totalling 20 million consist almost entirely of the portion of revenue falling short of the revenue cap fixed by the Italian Electricity and Gas Authority for the gas year and for the first nine months of the gas year 1. There is no accrued income nor are there any prepayments involving a period of more than five years. 7 Shareholders equity Patrimonio netto Change Capital 1,955 1,955 Share premium reserve 2,178 1,810 (368) Legal reserve Reserve for share issue Available reserve Retained earnings 614 1, Net income for the period (272) Total shareholders equity 5,683 5,565 (118) (1) Under the Italian Electricity and Gas Authority s ruling 120/01, the portion of revenue falling short (in excess) of the revenue cap in a given gas year must be charged (refunded) to shippers two gas years later by means of an adjustment in tariffs. 63 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

66 Changes in shareholders equity since 2001 are shown in the following table: Share Reserve premium Legal for share Available Retained Net Capitalreserve reserve issue reserve earnings income Total Formation Capital increase Capital increase by contribution 1,502 2,255 3,757 Capital increase for share offer and listing ,260 Net income Total as at 31 December ,955 3, ,203 Reclassification from share premium reserve (391) 391 Distribution from share premium reserve (dividend) (183) (183) Appropriation of 2001 net income (183) Net income Total as at 31 December ,955 2, ,451 Distribution from share premium reserve (dividend) (313) (313) Appropriation of 2002 net income 431 (431) Assignment of stock grants/options 0.1 Net income Total as at 31 December ,955 2, ,683 Distribution of dividend (368) (23) (391) Appropriation of 2003 net income 522 (522) Net income for the period Total as at 30 June ,955 1, , ,565 Capital As at 30 June 2004, Snam Rete Gas S.p.A. s share capital, fully subscribed and paid up, consisted of 1,955,000,000 ordinary shares, each with a nominal value of 1. In the framework of the incentive and loyalty-building plan for group executives and acting on the powers granted by the shareholders at their 24 April 2002 meeting, the board of directors resolved: on 25 June 2002, to effect a paid increase in the share capital, for 2002, for a maximum amount of 608,500, by issuing a maximum of 608,500 ordinary shares, each with a nominal value of 1, to be offered to executives employed by Snam Rete Gas S.p.A. and by its controlled companies at a price of per share, corresponding to the arithmetic mean of the official prices quoted on the Milan stock exchange run by Borsa Italiana S.p.A. during the thirty days preceding the date of the board resolution; on 18 June 2003, to effect a paid increase in the share capital, for 2003, for a maximum amount of 640,500, by issuing a maximum of 640,500 ordinary shares, each with a nominal value of 1, to be offered to executives employed by Snam Rete Gas S.p.A. and by its controlled companies at a price of per share, corresponding to the arithmetic mean of the official prices quoted on the Milan stock exchange run by Borsa Italiana S.p.A. during the thirty days preceding the date of the board resolution; on 28 July 2004, to effect a paid increase in the share capital, for 2004, for a maximum amount of 677,000, by issuing a maximum of 677,000 ordinary shares, each with a nominal value of 1, to be offered to executives employed by Snam Rete Gas S.p.A. and by its controlled companies at a price of 3.53 per share, corresponding to the arithmetic mean of the official prices quoted on the Milan stock exchange run by Borsa Italiana S.p.A. during the thirty days preceding the date of the board resolution. The increase in capital will take place when the option to subscribe is exercised. Share premium reserve Compared with 31 December 2003, there was a reduction in the share premium reserve of 368 million following the distribution of the dividend, as resolved by the shareholders at their 27 April 2004 meeting. Under the provisions of Article 2431 of the Civil Code, the entire share premium reserve is available for distribution. 64 CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

67 Legal reserve The legal reserve totals 391 million. In accordance with the resolution adopted by the shareholders at their 24 April 2002 meeting, this has been formed by appropriating 5% ( 271,190) of the net income for 2001 and transferring 390,728,210 from the share premium reserve, in order to bring the legal reserve up to one-fifth of the share capital as required by Article 2430 of the Civil Code. According to the same article, the legal reserve cannot be distributed by way of a dividend. Reserve for share issue The reserve for share issue has been formed, in the purview of Article 2349 of the Italian Civil Code, to enable shares to be issued in order to operate the stock grant scheme under the executive incentive plan approved by the shareholders at their 24 April 2002 meeting. Available reserve This reserve relates to the fair value of the stock grants and stock options assigned to executives in the 2003 financial year. Reconciliation between Snam Rete Gas S.p.A. net income and shareholders equity and consolidated net income and shareholders equity for the first half of 2004 Shareholders equitynet income Other Shareholders equity at for the period changes at As per Snam Rete Gas S.p.A. financial statements 4,858 1,085 (391) 5,552 Equity and net income in excess of carrying value of consolidated shareholdings 13 8 (7) 14 Consolidation adjustments - Supplementary depreciation 1,556 (1,556) - Capital investment grants (17) 13 (4) - Deferred taxes (578) Reduction in provision for deferred taxes (Revaluation - Law 350/03) 96 (96) - Substitute tax (Revaluation - Law 350/03) (48) 48 - Cancellation of revaluation reserve (Law 350/03) (204) Leasing agreements Allocations to (releases from) provision for doubtful accounts 5 (5) - Intragroup income 0 (7) 7 5, (391) 5,565 8 Provisions for liabilities and charges Allocations Releases Other changes Provision for taxation - Current income taxes Deferred income taxes (81) Advance payments of income taxes (196) (23) (109) Other provisons for risks and future expenses - Contractual risks 8 (3) 5 - Disputes Others (3) Provision for taxation totals 577 million and comprises (i) deferred income taxes ( 677 million) deriving mainly from supplementary and accelerated depreciation charged in order to obtain tax benefits, (ii) advance payments of income taxes ( 109 million) calculated on adjustments and allocations which are deductible when the liability is actually incurred and (iii) the allocation for current income taxes ( 9 million). 65 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

68 There was a reduction of 87 million in advance payments of income taxes mainly following the offset of tax liabilities (deferred taxes) and assets (advance payments) following the application of Legislative Decree 6/2003 ("Vietti law"). As at 30 June 2004, tax positions for prior years had yet to be settled IRPEG* IRAP* TotalIRES* IRAP* Totale Deferred income taxes Supplementary/accelerated depreciation Leasing agreements Excess provision for doubtful accounts Integration of transmission revenue Advance payments of income taxes Revaluation (Law 350/03) Transmission revenue adjustments Capital investment grants and contractual contributions Non-deductible depreciation and write-downs Allocations to provision (*) IRPEG = corporate income tax; IRAP = regional income tax on production activities; IRES = corporate income tax that has replaced IRPEG from 1 January Other provisions for risks and future expenses total 44 million and mainly comprise: contractual risks: additional expenses that the company believes it will have to incur in connection with contracts, following claims by contractors due to changes while work was in progress and/or non-observance of contractual conditions; disputes: expenses that the company believes it will have to incur in connection with ongoing lawsuits. The amounts are calculated on the basis of a realistic estimate of the expense to be incurred. 9 Employees severance indemnity Provision for employees severance indemnity as at 30 June 2004 Opening balance 19 Allocations: Allocation for the period 3 Releases: Payments to supplementary pension funds (1) Closing balance 21 Provision for employees severance indemnity increased by 2 million mainly due to allocations made in the period. 66 CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

69 10 Payables Payables total 3,502 million, an increase of 40 million compared with 31 December Payables, by type and maturity, are analysed in the following table: Value at Value at Portion Portion Due within Due after due after Due within Due after due after 12 months 12 months Total5 years 12 months 12 months Total5 years Change Loans Short-term - Banks Other financial institutions Long-term - Banks Other financial institutions 42 2,334 2, ,255 2, Controlling company ,466 3, ,346 3, Deposits Third parties - Sundry transactions Trade payables Suppliers Controlling company Other Eni Group companies (23) Tax payables Income taxes Excise duty on gas for internal consumption 1 1 Value added tax Taxes withheld at source (22) Sundry payables Investing activities - Suppliers Controlling company - Other Eni Group companies Others (17) Health and social security institutions (1) Other payables (7) 996 2,466 3, ,156 2,346 3, Short-term loans payable as at 30 June 2004 total 750 million and are all denominated in euros. The average interest rate on short-term loans in the first half of 2004 was 2.1% (2.8% in the first half of 2003). 67 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

70 Long-term loans payable as at 30 June 2004, including the current portion falling due in 12 months, total 2,481 million and are shown below with the relevant years of maturity: Long-term maturity Maturity Value at Maturing on 30 June 30 June 30 June 30 June date of loan After Total Banks Eni S.p.A Eni Group companies , , ,255 2, , ,346 There was a reduction of 135 million in long-term loans compared with 31 December Bank loans consist of loans used to construct or increase the capacity of sections of pipeline and the transmission system in general. Loans totalling 149 million are subject to unsecured guarantees. Loans from Eni S.p.A. relate to financing for the construction of specific gas pipelines. Loans from Eni Group companies comprise financing received from Enifin S.p.A. ( 2,290 million) and loans under leasing agreements with Serleasing relating to buildings and plant ( 6 million). Long-term loans, including the current portion, are analysed below by currency and average interest rate: Value at Average Value at Average interest rate interest rate Euro 2, % 2, % US dollar % % Other currencies 2 8.2% 2 8.2% 2, % 2, % Loans in foreign currency include an amount equivalent to 3 million relating to financing which has been granted by the European Investment Bank to encourage economic development and in connection with which exchange gains and losses are partially borne by the Italian government. As at 30 June 2004, loans by type of interest rate were as follows: % % Floating rate Inflation-linked rate Fixed rate Loans Loans at floating interest rates include a loan of 120 million raised in April 2004 to finance projects concerning construction of transmission infrastructure. The loan at an inflation-linked rate refers to a loan at a floating interest rate converted to a rate linked to inflation by means of an interest rate swap. Deposits Deposits total 4 million ( 4 million as at 31 December 2003) and refer to advance payments for services performed on behalf of third parties. 68 CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

71 Trade payables Trade payables total 63 million ( 86 million as at 31 December 2003). Trade payables concerning suppliers mainly relate to costs for materials and services connected with gas pipeline maintenance and for services of an operational nature. Trade payables concerning the controlling company and other Eni Group companies relate mainly to modulation services for network balancing, IT services and general services. Tax payables total 30 million and are analysed below: Substitute tax on revaluation (Law 350/03) 48 IRPEG (corporate income tax) 1 Value added tax 26 Excise duty on gas for internal consumption 1 Taxes withheld at source Sundry payables relating to investing activities total 156 million ( 173 million as at 31 December 2003) and relate to costs for materials and services connected with the construction of gas pipelines. Payables to health and social security institutions total 7 million. Other payables are summarised in the following table: Relations with employees - production bonus holiday entitlements not used other emoluments due incentives for early termination of employment contracts 2 Other Accrued expenses and deferred income Accrued expenses Interest payable on loans from Eni and Enifin 6 7 Interest payable on loans from banks 2 1 Other accrued expenses Deferred income Transmission revenue adjustments Multiannual income Accrued expenses fell by 3 million mainly as a result of a decrease in interest payable on loans due to the reduced level of debt and interest running from different dates compared with NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

72 Deferred income fell by 38 million mainly due to the portion of revenue adjustments recognised in the gas year and used to integrate revenue relating to the gas year, partially offset by the revenue adjustment for capacity overbooking penalties in the gas year. Deferred income totals 132 million and relates to: revenue adjustments for amounts invoiced in excess of the revenue cap fixed by the Italian Electricity and Gas Authority and penalties for capacity overbooking which, under the Authority s ruling 120/01, must be refunded to shippers two gas years after the gas year to which the revenuerefers; multiannual income connected with the advance payment made by Albacom S.p.A. for the lease of optical-fibre cables under an agreement which will last 30 years from 22 December 1997 and may be terminated at the end of the 25th year at Albacom s request. The portion of deferred income involving a period of more than five years totals 28 million and relates to the Albacom agreement. 12 Guarantees Personal guarantees total 13 million ( 13 million in 2003) and refer to letters of indemnity in favour of Enifin S.p.A. regarding guarantees issued by them in the interests of Snam Rete Gas, mainly in the form of performance bonds. The actual commitment is much the same as the nominal value. Secured guarantees for third party debts, amounting to less than 1 million, refer to a lien granted in favour of the Ministry of Finance to guarantee payment of INVIM (property-increment tax) by the seller of a piece of land purchased by the company (Article 28 of Presidential Decree 643/72). 13 Other memorandum accounts Commitments Financial derivatives hedging interest rates Financial derivatives Snam Rate Gas is utilising two interest rate swaps as at 30 June 2004 in order to reduce market risks associated with fluctuations in interest rates. Snam Rete Gas does not hold financial derivatives for trading purposes. Notional amounts and credit exposures of derivatives The notional amount of a financial derivative is the contractual amount used as a reference for the exchange of differentials. This amount is expressed in terms of currency quantities. The notional amounts of financial derivatives do not represent the amounts exchanged by the parties and, therefore, are not a measure of the company s credit exposure which is limited to the positive fair value of the contracts at the end of the financial period. The amounts exchanged are calculated on the basis of the notional amounts and the terms of the derivatives (interest rate swaps). Although Snam Rete Gas is exposed to a credit risk in the event of non-performance by the counterparties involved in the contracts, this eventuality is considered unlikely given the sound financial standing of the institutions concerned. Interest rate risk management As at 30 June 2004, Snam Rete Gas is utilising two interest rate swaps for a total notional amount of 850 million. These contracts provide for the exchange with the counterparty, at specific dates, of: a floating rate with an inflation-linked floating rate; under this contract (entered into in 2002, effective from 1 October 2002 and for a notional amount of 500 million), Snam Rete Gas pays to the counterparty a basic fixed interest rate (of 2.73%) increased by the rate of inflation used to calculate revenue adjustments and receives a floating rate; a floating rate with a fixed rate based on the notional amount ( 350 million); under this contract, Snam Rete Gas pays a fixed interest rate to the counterparty and receives a floating rate. 70 CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

73 Risks and disputes In the course of its business, Snam Rete Gas is exposed to risks and disputes, the most important being the following: Tax introduced by the Sicilian Regional Authorities on owners of gas pipelines Under Regional Law 2 dated 26 March 2002, the Sicilian Regional Authorities introduced an environment tax on owners of primary pipelines in Sicily (i.e. pipelines operating at a maximum pressure of over 24 bar). The tax was payable from April Snam Rete Gas has taken all necessary steps to protect itself from the effects of the regional law, including lodging an appeal with the Provincial Tax Commission of Palermo and reporting the matter to the European Commission with a view to instigating infringement proceedings against the Italian State. Whilst recognising the tax expense as an operating cost relating to transmission activities, the Italian Electricity and Gas Authority has ruled that its inclusion in tariffs is subject to a definitive decision by the competent authorities as to its legitimacy. In this regard, for the gas year (ruling 146/02) and for the gas year (ruling 71/03), the Authority has published two sets of tariffs: one which excludes the tax and the other which includes it and which will be applied automatically and retroactively in the event of the legitimacy of the tax being recognised. On 10 September 2002, Snam Rete Gas lodged an appeal with the Lombard Regional Administrative Court in order to obtain the immediate application of the tariffs that include the tax. On 20 December 2002, the Court sentenced that in its opinion the Sicilian law introducing the tax is at variance with European Community rules and consequently dismissed the appeal. On the basis of the Court s sentence, Snam Rete Gas suspended payment of the tax starting from the December 2002 instalment. The expense incurred for this tax totals 86.1 million. In January 2003, the Sicilian Regional Authorities lodged an appeal with the Italian Council of State against the Court sentence with regard to the part where it declares, incidentally, that the regional tax is at variance with European Community rules. On 16 December 2003, the European Commission expressed its opinion that the Republic of Italy, because of the introduction of the Sicilian tax, has failed to comply with Community obligations and with the terms of the cooperation agreement between the European Economic Community and the Democratic and Popular Republic of Algeria. According to the Commission, the enviromment tax infringes Common Customs Tariff to the extent that it alters the equal treatment principle regarding customs duties levied on goods imported from third countries, it risks creating diversions of goods in the framework of relations with these countries and distortions in free circulation or in competition between Member States. The Commission initially invited the Italian government to comment on the matter and, subsequently, on 7 July with an opinion and the relevant reasons therefor - officially requested Italy to abolish the tax. The Italian State must comply within two months of receipt of the opinion, failing which the Commission will pass on the documents to the European Court of Justice to enable a definitive judgement to be made regarding Italy s non-compliance. Moreover, with a sentence registered on 5 January 2004, the Provincial Tax Commission of Palermo ruled that the environment tax introduced by the Sicilian Regional Authorities is illegitimate, because it is at variance with European Community rules, and sustained the appeal lodged by Snam Rete Gas regarding reimbursement of the first instalment paid in April 2002 and amounting to 10.8 million, ordering that the sum be refunded by the Sicilian Regional Authorities. With a 4 May 2004 value date, the Sicilian Regional Authorities complied with the Palermo Provincial Tax Commission s sentence, making arrangements to reimburse the first instalment of the tax and, on 2 April 2004, the Authorities lodged an appeal with the Regional Tax Commission of Palermo against the sentence. The hearing to discuss the appeal has been fixed for 11 November Snam Rete Gas has already taken the necessary steps to obtain reimbursement of the tax instalments paid after April 2002 ( 75.3 million) in regard to which the Provincial Tax Commission of Palermo will be taking a decision at a hearing fixed for 2 October According to standard procedure following the annual return filed for 2002 by Snam Rete Gas in relation to the tax, on 3 November 2003 the Sicilian Regional Authorities served notice on the company demanding settlement of the December 2002 instalment, with penalties and interest for non-payment, for a total amount of 14.2 million. On 30 December 2003, Snam Rete Gas lodged an appeal with the Provincial Tax Commission of Palermo against the notice served by the Regional Authorities, with a simultaneous application to suspend the tax collection procedure. With a sentence registered on 25 June 2004, the Commission upheld the appeal lodged by Snam Rete Gas and ordered that the notice served by the Sicilian Regional Authorities be cancelled. On 13 September 2004, the Sicilian Regional Authorities lodged an appeal against the sentence. 71 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

74 Snam Rete Gas has recognised the first instalment refunded by the Sicilian Regional Authorities on 4 May 2004 in the income statement. In accordance with the prudence principle, the company has not made any entry in the income statement concerning recovery of the other costs incurred, in view of the uncertainty as to how the various stages of the legal proceedings are likely to evolve and how long it will take for a final judgement to be passed. Snam Rete Gas has made no allocation to risk provisions for the unpaid instalments and the relevant penalties for nonpayment because, in the light of the considerations illustrated above and on the basis of the fiscal advice and legal opinions obtained, the company maintains that (i) the risk of having to pay the December 2002 and subsequent instalments can be deemed to be remote and (ii) that conditions of objective uncertainty prevail, as provided for in tax laws, regarding the scope and the sphere of application of the regional law, and that these are such as to justify the inapplicability of penalties for non-payment, both with regard to the company and to parties acting on its behalf, in the event of the tax being considered legitimate by the competent judicial authorities. The penalties provided for in the event of non-payment would amount to 30% of the sum due and not paid, plus interest calculated at the official rate. In any case, the tax expense will not have a negative effect on Snam Rete Gas. In fact, if the tax were to be considered illegitimate by those authorities that have yet to pass judgement, the company would be entitled to a refund of the sums paid; in the case of legitimacy being proven, the Authority s rulings 146/02 and 71/03 already provide for the automatic and retroactive inclusion of the tax in tariffs. Inquiry conducted by the Italian Electricity and Gas Authority in respect of GNL Italia S.p.A. in connection with an alleged refusal to grant access to the re-gasification service (rulings 16/04 and 120/04) With ruling 16/04, published on 16 February 2004, the Italian Electricity and Gas Authority started a formal inquiry in respect of GNL Italia S.p.A. in connection with an alleged refusal by this company to grant access to the re-gasification service, on an annual basis, to Gas Natural Vendita Italia S.p.A. In accordance with the provisions of Article 24, paragraph 3 of Legislative Decree 164/00, on 19 November 2003 GNL Italia S.p.A. notified the Electricity and Gas Authority that it had received a request from Gas Natural Vendita Italia S.p.A. to have access to a re-gasification service, on a continuous basis at the Panigaglia LNG terminal, involving approximately 220 million cubic metres of natural gas. GNL Italia acknowledged receipt of this request, advising that re-gasification capacity at the Panigaglia terminal was available solely on a spot basis because all capacity on a continuous basis had been allocated to Eni S.p.A. under the terms of a Re-gasification Contract which had been entered into on 29 January 2002 and which had been verified by the Authority and approved with ruling 38/02. On 22 July 2004, with ruling 120/04, the Authority published the results of its inquiry, ordering GNL Italia to grant access to the re-gasification service to Gas Natural Vendita Italia and starting a formal inquiry in respect of GNL Italia aimed at accessing the possibility of imposing a pecuniary penalty under the provisions of Article 2, paragraph 20, sub-paragraph c) of Law 481/95 regarding the breach of the Authority s ruling 120/01 (Articles 14 and 15) and ruling 38/02. In order to comply with the precepts of ruling 120/04, without prejudice to the right to contest the said ruling, GNL Italia has: obtained permission from Eni to utilise the contractual programme governing unloading operations so that Gas Natural Vendita Italia can have access in August and September, limited to one unloading operation per month; allocated re-gasification capacity to Gas Natural Vendita Italia, under an ad hoc re-gasification contract with a commitment to carry out two unloading operations in the gas year, in August and September 2004 respectively. In addition, on 27 August 2004, GNL Italia published the terms and conditions governing access to the re-gasification service at the Panigaglia LNG terminal for the gas year and started the process of allocating re-gasification capacity on an annual basis for the gas year. Unrecorded commitments and risks The following risks and commitments are not shown in the balance sheet nor are they included in the memorandum accounts: commitment to redeliver to Gas Natural Vendita Italia S.p.A., Enel S.p.A. and Eni S.p.A., respectively, 613,901, 180,999 and 67,686 gigajoules of natural gas stored at the Panigaglia LNG terminal pending re-gasification; commitments undertaken vis-à-vis suppliers to purchase tangible assets and have services performed in connection with investments in tangible and intangible assets in course of construction; commitment vis-à-vis Eni, undertaken when the transmission and re-gasification business was transferred on 1 July 2001, to employ, on their return to full-time service, 21 people currently on leave of absence and on the payroll of Eni S.p.A.; environmental risks, costs and liabilities connected with the company s operating activities; in fact, even taking into account measures adopted to comply with environmental regulations, the work already carried out and the insurance policies entered into to cover environmental risks, the possibility of the company incurring costs or liabilities, which might also be substantial, cannot be categorically excluded. The repercussions of environmental damage are, in fact, difficult to forecast, also bearing in mind the possible effects of new laws and regulations for environmental protection, the impact of technological innovations for environmental rehabilitation, the possibility of disputes and the difficulty of determining the eventual consequences (also with regard to the responsibility of other parties) and the possible compensation. 72 CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

75 14 Operating revenue and income Revenue and income totals 1,001 million and is analysed below: First half % Revenue from sales and services Capitalised in-house work Other revenue and income , Revenue from sales and services Revenue from sales and services, divided by activity, is analysed below: First half % Transmission Re-gasification Regulated revenue Lease of telecommunications cables Other revenue from ordinary activities Non-regulated revenue Regulated revenue Revenue from transmission services in the first half of 2004 is adjusted 1 to reflect (i) the portion in excess of the revenue cap fixed by the Electricity and Gas Authority for the gas year (+ 73 million), (ii) penalties for capacity overuse in the gas year 2 (- 33 million) and (iii) the portion of revenue falling short of the revenue cap fixed for the gas year (+ 1 million) due to shippers having booked less capacity than that forecast when the tariffs were determined. Transmission revenue also includes costs passed on to shippers ( 7 million) for the transmission service on networks owned by third party operators (interconnecting service) 3. First half Eni Enel Edison Plurigas Others Revenue adjustments - capacity overbooking and penalties 1 (6) (32) Integration of revenue for gas year (1) Under the Italian Electricity and Gas Authority's ruling 120/01, the portion of revenue exceeding the revenue cap in a given gas year must be refunded to shippers two gas years later by means of an adjustment in tarrifs. Revenue integration in the gas year is related to the portion of revenue in excess of the revenue cap in the gas year. (2) A gas year begins on 1 October and ends on 30 September the following year. The effects on the income statement refer to months in the calendar year in question. (3) The Electricity and Gas Authority s ruling 120/01 states that if, when performing the transmission service, networks owned by other operators are involved in addition to the Snam Rete Gas network, shippers are charged for the interconnecting service by the principal operator. As from 1 October 2003, however, in accordance with the provisions of Law 273 of 12 December 2002, operators of subsea pipelines importing natural gas from states that are not members of the European Union (e.g. Transmediterranean Pipeline Company - TMPC) are not regulated parties in Italy. 73 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

76 Revenue from re-gasification services ( 17 million) fell by 5 million compared with the first half of 2003 as a result of a decrease in volumes of LNG re-gasified ( 3 million) and a decrease in purchases of gas used for re-gasification activities ( 2 million) following reduced activity at the Panigaglia terminal due to the accident at the LNG production plant at Skikda in Algeria which reduced the availability of LNG on the market. Non-regulated revenue Revenue from non-regulated activities mainly comprises: the lease and maintenance of optical-fibre telecommunications cables used by Albacom ( 4 million); services performed for third parties, in particular the design, construction and maintenance of gas pipelines and ancillary plant ( 1 million); dispatching services and other revenue ( 1 million). All revenue from sales and services is earned in Italy. Capitalised in-house work Capitalised in-house work totals 85 million and refers mainly to labour costs and materials requisitions. First half 2003 First half 2004 Costs for services Costs for services and other costs Labour Totaland other costs Labour Total Intangible assets in course of construction Tangible assets in course of construction The increase compared with the first half of 2003 is due mainly to the higher level of investments in the first half of Other revenue and income Other revenue and income amounting to 19 million is analysed below: First half Compensation for damages 2 Contractual penalties 1 Costs passed on 1 Release of surplus provision for risks 1 3 Tax refund by Sicilian Regional Authorities (first instalment April 2002) 11 Contingent assets 2 2 Total as per statutory income statement 4 19 Less: - reimbursements of labour costs (1) Total as per reclassified income statement 3 19 The refund by the Sicilian Regional Authorities of the first instalment of the tax on owners of gas pipelines paid in April 2002 ( 11 million) was effected in compliance with the sentence registered by the Provincial Tax Commission of Palermo on 5 January The release of surplus provision for risks ( 3 million) concerned allocations that had been made in previous years against claims by contractors. 74 CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

77 15 Operating costs and expenses Purchases, services and other costs Purchases, services and other costs total 203 million and comprise: First half Raw materials, sundry materials and consumables Services Enjoyment of third party assets 7 6 Variation in inventories of raw materials, sundry materials and consumables 4 (24) Allocations for risks 3 Sundry operating expenses 6 11 Total as per statutory income statement Less: - personnel seconded to company (1) (2) - capitalised in-house work (46) (73) Total as per reclassified income statement Costs incurred for raw materials, sundry materials and consumables total 122 million and are analysed in the following table: First half Natural gas used to operate compressor and booster stations and ancillary costs Other costs and sundry materials The increase relating to natural gas used to operate compressor stations is attributable mainly to more gas having been transmitted and longer distances having been involved. The increase in other costs and sundry materials is due to increased purchases of piping for the warehouse. Costs incurred for services total 85 million and comprise: First half Modulation and storage services Construction, design and works supervision 1 Maintenance 10 9 Technical, legal, administrative and professional services 8 7 Information services and software 8 7 Electricity, heating, water, etc. 4 3 Insurance 3 3 Telecommunications services 8 8 Services relating to personnel 6 6 External communication 1 1 Transmission capacity - interconnecting service 18 7 Other services Transmission capacity refers to the transmission service provided by Edison T&S on its networks (interconnecting service). Services relating to personnel ( 6 million) mainly concern travelling expenses, canteens and training. Other services concern security and caretaking services and other services constituting operating costs. 75 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

78 Costs concerning enjoyment of third party assets total 6 million and comprise: First half Hiring and rentals 5 4 Leasing and licences Hiring and rentals total 4 million and relate mainly to the rental of property. Sundry operating expenses total 11 million and comprise: First half Excise duty on gas for internal consumption 2 2 Indirect taxes 2 2 Capital losses on sales and write-offs of intangible and tangible assets 1 6 Other expenses The increase of 5 million compared with the first half of 2003 is attributable mainly to capital losses on the write-off of items of plant at a compressor station whose capacity is being increased. Labour costs Labour costs total 64 million and comprise wages and salaries paid to employees, allocations for employees severance indemnity, holiday entitlements not used and health and social security contributions, in accordance with labour contracts and current legislation. First half Salaries and wages Health and social security contributions Severance indemnity 3 3 Other costs 1 Total as per statutory income statement Temporary personnel and personnel seconded to the company Company personnel seconded to other companies (1) - Capitalised in-house work (12) (12) Total as per reclassified income statement Depreciation, amortisation and write-downs Depreciation, amortisation and write-downs amount to 234 million and comprise: First half Amortisation of intangible assets Depreciation of tangible assets These items are illustrated in more detail in Notes 1 and CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

79 16 Financial income and expenses Net financial expenses amount to 55 million and comprise the following: Financial income Financial income totals 1 million and relates to interest on trade receivables. First half Interest on trade receivables: - controlling company 1 Exchange gains Interest and other financial expenses These total 56 million and comprise: First half Interest and other financial expenses: - payable to controlling company payable to others: interest on payables to banks 6 3 interest and other financial expenses payable to Eni Group companies expenses on interest rate swaps 8 10 Other expenses Extraordinary income and expenses First half Incentives for early terminations of employment contracts 1 1 Release from provision for early terminations to meet costs (1) Release of surplus provision for early terminations (1) (1) 1 Extraordinary expenses, totalling 1 million, relate to incentives for early terminations of employment contracts. 18 Income taxes for the period Income taxes for the period are analysed in the following table: First half 2003 First half 2004 IRPEG* IRAP* TotalIRES* IRAP* Total Current taxes Deferred taxes (advance payments) 1 - deferred tax (assets) liabilities (6) (1) (7) deferred tax liabilities on consolidation adjustments (*) IRPEG = corporate income tax; IRAP = regional income tax on production activities; IRES = corporate income tax that replaces IRPEG from 1 January (1) The increase in deferred taxes deriving from the statutory financial statements and the corresponding reduction in deferred taxes on consolidation adjustments is a result of the application, as from 1 January 2004, of Legislative Decree 6/2003 which has eliminated fiscal adjustments made for tax purposes and affecting the statutory financial statements and, as a consequence, has also eliminated the relevant deferred taxes arising from consolidation operations. 77 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

80 Income taxes ( 171 million) increased by 2 million compared with the first half of The increase arising from a higher level of pre-tax income was partially offset by the reduciton in the rate for IRES (corporate income tax) from 34% to 33%. Current taxes ( 25 million) fell by 33 million compared with the first half of 2003 mainly as a result of increased supplementary and accelerated depreciation charged in the period (- 22 million) and the deduction of revenue relating to the gas year, already invoiced and taxed in prior years (- 15 million), net of other changes (+ 4 million). The reduction in current taxes is almost totally offset by corrresponding variations in deferred and advance payments of income taxes, totalling 35 million. Deferred tax assets/liabilities arise as a result of the changes in temporary differences that took place in the period between carrying values in the balance sheet and tax bases and are shown in the following table: First half 2003 First half 2004 Temporary Deferred tax Temporary Deferred tax differences (assets) differences (assets) IRPEG IRAP liabilities IRES IRAP liabilities Allocation to provisions 3 3 (1) Releases from provisions (5) (1) 2 (3) (3) 1 Non-deductible depreciation of fixed assets (4) 8 8 (3) Contributions subject to advanced taxation 8 8 (4) (6) Supplementary/accelerated depreciaiton (374) (374) 139 Revenue adjustments 2 2 (1) (42) (42) 16 Other adjustments (1) Tax (assets) liabilities arising from differences between carrying values in statutory financial statements and taxable income values (7) (393) (392) 146 As illustrated in the table below, the effective tax rate for pre-tax income in the period was 38.5% (39.5% in the first half of 2003), in line with the statutory tax rate calculated by applying a rate of 33% (IRES) to pre-tax income and 4.25% (IRAP) on adjusted net operating revenue and income, as provided for in Italian tax laws. First half Pre-tax income [A] Difference between operating revenue/income and costs/expenses Total labour costs Adjusted difference between operating revenue/income and costs/expenses [B] Statutory taxes - IRPEG/IRES [A*34%/33%] Statutory taxes- IRAP [B*4.25%] Total statutory taxes [C] Statutory tax rate [C/A*100] % Income taxes [D] Effective tax rate [D/A*100] % CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

81 19 Market value of financial instruments Snam Rete Gas uses various types of financial instruments and these mainly concern recognised assets and liabilities. Receivables due after 12 months and stated under current assets: the market value of trade and other receivables due after 12 months is estimated on the basis of the discounted cash flow method. Loans payable after 12 months: the market value of loans payable after 12 months, including the current portions, is estimated on the basis of the discounted cash flow method Carrying Market Carrying Market value value value value Receivables due after 12 months and stated under current assets Loans payable after 12 months and related current portions 2,616 2,662 2,481 2,520 Trade and other payables due and loans payable within 12 months: the market value is not shown because it is estimated to be more or less equivalent to the relevant carrying value, given the short period that elapses between the date of the original transaction and the date when payment is due. Receivables due within 12 months and stated under current assets: the market value of trade and other receivables due and loans receivable within 12 months is not shown because it is estimated to be more or less equivalent to the relevant carrying value. Financial derivatives: the fair value of financial derivatives generally reflects the estimated amount that Snam Rete Gas ought to pay or receive in order to terminate the contracts on the settling date including, therefore, unrealised gains or losses. To estimate the fair value of the derivatives, dealers quotes or appropriate pricing models have been used. The carrying value indicated against the fair value represents the interest differentials accrued and not paid at the end of the financial period. As a consequence, the carrying value and the fair value are not comparable Carrying Fair Carrying Fair value value value value Financial derivatives hedging interest rates: - assets 1 - liabilities 0 (39) 0 (31) 20 Earnings per share Basic EPS (earnings per share) is and is calculated by dividing net income by the weighted-average number of shares outstanding during the first half of Related party transactions In accordance with the instructions issued by the Italian Regulatory Commission for Listed Companies and the Stock Exchange (CONSOB) in communications of 20 February 1997, of 27 February 1998, of 6 April 2001 and of 30 September 2002, the main transactions entered into with related parties are illustrated below. Transactions entered into by Snam Rete Gas with related parties mainly concern the exchange of goods, the supply of services and the provision and use of financial resources and they take place with the controlling company Eni S.p.A. and with other companies controlled by and associated with Eni S.p.A., as well as with Enel S.p.A., the State-controlled electricity concern, and its controlled companies. All transactions form part of the company s ordinary business and take place on the basis of market conditions, i.e. at the conditions that would be applied between two independent parties, or criteria that ensure recovery of specific costs incurred and a minimum margin for recovery of general costs and return on capital employed. 79 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

82 All the transactions entered into have taken place in the interests of Snam Rete Gas. Figures concerning trade and other transactions and financial transactions entered into with related parties are given below: TRADE AND OTHER TRANSACTIONS 30 June 2004 First half 2004 Costs Revenue Receivables Payables Guarantees Commitments Goods Services Other Goods Services Other Controlling company Eni S.p.A Companies controlled by Eni S.p.A Eni Corporate University S.p.A. 1 1 EniData S.p.A. 6 9 Enifin S.p.A. 13 EniPower Trading S.p.A. 2 EniTecnologie S.p.A. 1 Gasplus Italiana S.p.A. 1 Padana Assicurazioni S.p.A. 3 2 Serleasing S.p.A Sieco S.p.A. 4 4 Snamprogetti S.p.A Sofid S.p.A. 2 4 Stoccaggi Gas Italia S.p.A. 1 (5) 19 1 Companies associated with Eni S.p.A. Albacom S.p.A Serfactoring S.p.A. 43 Total State-owned or state-controlled companies Enel S.p.A Enel Trade S.p.A Grand total Transactions with the controlling company Eni S.p.A. mainly concern the regulated natural gas transmission service provided by Snam Rete Gas and the supply of goods (natural gas) by Eni Gas & Power Division. The main transactions with companies controlled by Eni concern: Stoccaggi Gas Italia S.p.A. - Snam Rete Gas makes use of this company s natural gas modulation and storage service, an activity that is subject to regulation by the Italian Electricity and Gas Authority; Sieco S.p.A. for services connected with the management and maintenance of property and related plants and installations, transport services, healthcare services, services for the centralised management of corporate records and other services of a general nature; EniData S.p.A. for the supply of IT services. EniData provides services for the development of information systems and application management services for most of the management information systems in use; EniPower Trading S.p.A. for the purchase of electricity; Snamprogetti S.p.A. for project engineering and works supervision services regarding the construction of infrastructure for natural gas transmission; Sofid S.p.A. which handles Snam Rete Gas s accounting and administrative services; Padana Assicurazioni S.p.A. - Snam Rete Gas holds risks insurance policies with this company covering damages to property, employees and third parties; Serleasing S.p.A. with which Snam Rete Gas has entered into leasingagreements regarding motor cars; Eni Corporate University S.p.A. for personnel training and selection services. The main transactions with companies associated with Eni concern: Albacom S.p.A. which provides telecommunications services (telephony and data transmission) and to which Snam Rete Gas has leased optical-fibre cables that run along the gas pipelines. The agreement with Albacom will last for 30 years from its effective date of 22 December 1997 and may be terminated at the end of the 25th year at Albacom s request. Under this 80 CONSOLIDATED ACCOUNTS AT 30 JUNE 2004 NOTES

83 agreement, Albacom has a right to use 6 pairs of optical fibres in the cable system, for a total of 2,469 kilometres, in order to provide telecommunications services; Serfactoring S.p.A. which handles factoring operations arranged by Snam Rete Gas suppliers. Transactions with state-controlled companies mainly concern Enel S.p.A. and its controlled companies and they relate to the natural gas transmission service provided by Snam Rete Gas. FINANCIAL TRANSACTIONS 30 June 2004 First half 2004 Loans Loans FinancialFinancial receivable payable Guarantees Commitments expenses income Eni S.p.A Companies controlled by Eni S.p.A. Enifin S.p.A Serleasing S.p.A Financial transactions with the controlling company Eni S.p.A. concern the provision of loans granted in prior years by financial institutions (European Investment Bank), through Eni S.p.A.. The other financial transactions with companies controlled by Eni concern: Enifin S.p.A. which performs financial activities on behalf of Eni Group companies and with which there is an agreement whereby Enifin provides Snam Rete Gas with financial backing and invests its liquid assets, as well as hedging exchange and interest rates using financial derivatives; Serleasing S.p.A. with which Snam Rete Gas has entered into leasing agreements regarding buildings used as maintenance centres. 81 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

84

85 Snam Rete Gas S.p.A. statements as at 30 June 2004

86 balance sheet ASSETS Subscribed capital unpaid Fixed assets 96 Intangible assets ,055 Tangible assets 8,036 9, Financial assets ,194 Total fixed assets 8,168 9,499 Current assets: 25 Inventories Receivables Liquid funds Total current assets Accrued income and prepayments ,667 Total assets 8,638 9,935 LIABILITIES Shareholders equity 1,955 Capital 1,955 1,955 2,178 Share premium reserve 2,178 1,810 Revaluation reserve Legal reserve Other reserves - Reserve for accelerated depreciation Other reserves 1 53 Retained earnings Net income for the period 81 1,085 4,647 Total shareholders equity 4,858 5, Provisions for liabilities and charges Employees severance indemnity ,631 Payables 3,423 3, Accrued expenses and deferred income ,667 Total liabilities 8,638 9,935 GUARANTEES AND OTHER MEMORANDUM ACCOUNTS Guarantees 13 Personal guarantees Total guarantees Other memorandum accounts S.P.A. FINANCIAL STATEMENTS AT 30 JUNE 2004 BALANCE SHEET

87 income statement 2003 First half 2003 First half 2004 Operating revenue and income 1,717 Revenue from sales and services Variations in contract work in progress 173 Capitalised in-house work Other revenue and income ,919 Total Operating costs and expenses (177) Raw materials, sundry materials and consumables (59) (119) (185) Services (86) (83) (16) Enjoyment of third party assets (7) (7) (123) Labour (60) (62) Depreciation, amortisation and write-downs (1,133) - Depreciation and amortisation (538) (234) (1) - Other write-downs 3 Variations in inventories of raw materials, sundry materials and consumables (4) 23 (11) Allocations for risks (3) (12) - Sundry operating expenses (6) (11) (1,655) Total (760) (496) 264 Difference between operating revenue/income and costs/expenses Financial income and expenses 6 Income from shareholdings Other financial income 1 1 (128) Interest and other financial expenses (68) (56) 2 Exchange gains 1... (118) Total (60) (48) Extraordinary income and expenses... Income 1 1, Expenses... (494) Total extraordinary items Pre-tax result 118 1,253 (65) Income taxes for the period (48) (168) 81 Net income 70 1, S.P.A. FINANCIAL STATEMENTS AT 30 JUNE 2004 INCOME STATEMENT

88 Notes on Snam Rete Gas S.p.A. statemenst Legislative Decree 6 of 17 January 2003 ( Vietti law ), concerning the reform of company law has introduced changes in accounting principles and layout criteria for financial statements, starting from The effects on the income statement and balance sheet for the first half of 2004 deriving from the application of Legislative Decree 6/2003 are as follows: Changes in the contents and layout criteria According with the above mentioned decree, and starting from 2004, companies will not be allowed to recognise in their financial statements adjustments in value and allocations made for tax purposes only, in accordance with tax laws (here in after referred to as fiscal adjustments ). All such fiscal adjustments recognised prior to the effective date of the new rule must be eliminated. CONSOB (Italian Regulatory Commission for Listed Companies and the Stock Exchange), Banca d Italia and Organismo Italiano di Contabilità (Italian Accounting Board) have recommended that the 2004 income statement recognises separately, under extraordinary items, the effects of the elimination of all fiscal adjustments made up to 31 December Accordingly, the effects on Snam Rete Gas s 2004 income statement are an increase in extraordinary income, due to the elimination of fiscal adjustments, of 1,303 million (supplementary depreciation and provision for doubtful accounts) and an increase in extraordinary expenses of 12 million (capital investment grants) and 481 million (deferred taxes). The impacts on the 2004 balance sheet are as follows: Increase in assets: - Fixed assets tangibile (write-off of supplementary depreciation) 1,298 - Write-off of provision for doubtful accounts 5 A 1,303 Increase of liabilities: - Capital investment grants (fiscal depreciation) 12 - Deferred taxes 481 B 493 Increase of shareholder s equity: - Net income C= A-B 810 Assets and liabilities in foreign currency Assets and liabilities in foreign currency, excluding fixed assets, are stated at exchange rates at 30 June 2004 and exchange differences are charged to the income statement. Prior to the effective date of the new rule, the payables and receivables were translated at historical rates and a specific provision was made for fluctuations in exchange rates; as a consequence, net exchange gains were not recognised. The adjustment of payables and receivables in currencies other than the euro to bring them into line with 30 June 2004 exchange rate has determined an increase in financial expenses of 0.4 million. (1) In fact, Article 109, paragraph 4, sub-paragraph b) of the Consolidation Act on Income Taxes has established that depreciation of tangible assets, amortisation of intangible assets, other adjustments in value and allocations which are not recognised in the income statement are deductible for tax purposes if their total value and the carrying values and tax bases of the assets and those of the provisions are shown in the appropriate section of the annual tax return. S.P.A. FINANCIAL STATEMENTS AT 30 JUNE NOTES

89 Changes in income statement layout A new item Exchange gains and losses has been introduced in the income statement. Consequently, exchange gains and losses included, at 31 December 2003 and 30 June 2003, in the items Other financial income and Interest and other financial expenses have been reclassified under the new item Exchange gains and losses as follows: (milioni di ) 2003 First half 2003 Other financial income 3 1 Interest and other financial expenses (1) Exchange gains 2 1 Moreover, item Income taxes has been changed in Income taxes: current, deferred and advanced payments. 87 NOTES CONSOLIDATED ACCOUNTS AT 30 JUNE 2004

90 independent auditors report 88 REPORT ON FIRST HALF INDEPENDENT AUDITORS REPORT

91 89 REPORT ON FIRST HALF INDEPENDENT AUDITORS REPORT

92 annex to the notes on the consolidated accounts as at 30 June 2004 In accordance with the provisions of Articles 38 and 39 of Legislative Decree 127/91 and Article 126 of Regulation issued on 14 May 1999 by the Italian Regulatory Commission for Listed Companies and the Stock Exchange (CONSOB), as amended by Regulation of 6 April 2000, a list follows of the companies controlled by Snam Rete Gas S.p.A. (pursuant to Article 2359 of the Italian Civil Code) as at 30 June Holding company Name of company Registered office Currency CapitalMembers Snam Rete Gas Consolidation/ group consolidated valuation % share of equity method Snam Rete Gas S.p.A. San Donato Euro 1,955,310,500 Eni S.p.A % Milanese Other members 49.94% Controlled company Name of company Registered office Currency CapitalMembers Snam Rete Gas Consolidation/ group consolidated valuation % share of equity method GNL Italia S.p.A. San Donato Euro 17,300,000 Snam Rete Gas S.p.A Line-by-Line Milanese consolidation 90 REPORT ON FIRST HALF ANNEX TO NOTES TO ON THE CONSOLIDATED ACCOUNTS

93

94 Limited Company Registered office in San Donato Milanese (Milan) Piazza Santa Barbara, 7 Fully paid-up capital: 1,955,310,500 Tax code and Milan Company Register No R.E.A. (Economic-Admin. Roll) No VAT No Company controlled and coordinated by Eni S.p.A. Publishing Coordination Snam Rete Gas - Corporate Image Coordination Graphics Orecchio Acerbo Pre-printing 46xy Printing Grafiche Mariano S.p.A. Printed on Simbol Matt ecological paper September 2004

95

96 Piazza Santa Barbara, San Donato Milanese - Milano - Tel