Annual report 2018 Snam Company profile Snam is Europe’s leading gas utility. Founded in 1941 as “Società Nazionale Metanodotti”, it has been building and managing sustainable and technologically advanced infrastructure guaranteeing energy security for over 75 years. Snam operates in Italy and, through subsidiaries, in Albania (AGSCo), Austria (TAG and GCA), France (Terēga), Greece (DESFA) and the United Kingdom (Interconnector UK). It is one of the main shareholders of TAP (Trans Adriatic Pipeline) and is the company most involved in projects for the creation of the Energy Union. First in Europe by transport network size (about 32,600 km in Italy, more than 41,000 with international subsidiaries) and natural gas storage capacity (16.9 billion cubic meters in Italy, more than 20 billion with international subsidiaries), Snam manages the first liquefied natural gas (LNG) plant built in Italy and is a shareholder of Adriatic LNG, the country’s main terminal and one of the most strategic in the Mediterranean, and - via DESFA - the Greek terminal in Revithoussa, with a total pro rata regasification capacity of around 6 billion cubic metres per year. Snam’s business model is based on sustainable growth, transparency, nurturing talent, and development of local areas by constantly listening to and exchanging dialogues with local communities, also thanks to the social initiatives of the Snam Foundation. Through the “Snamtec” project, launched under the scope of the 2018-2022 business plan, Snam has given a great boost to investments for energy transition, focused on technology initiatives, innovation and R&D supporting large national and international networks and green economy businesses, like sustainable mobility, renewable gas, hydrogen and energy efficiency. www.snam.it Annual report 2018 This report has been translated into English from the Italian original solely for the convenience of international readers. Corporate bodies BOARD OF DIRECTORS (*) BOARD OF STATUTORY AUDITORS (*) Chairman Chairman Carlo Malacarne (1) Leo Amato (4) Chief Executive Officer Statutory auditors Marco Alverà (1) Massimo Gatto (5) Directors Maria Luisa Mosconi (4) Sabrina Bruno (2) (3) Alternate auditors Monica De Virgiliis (1) (2) Sonia Ferrero (5) Francesco Gori (2) (3) Maria Gimigliano (4) Yunpeng He (1) Lucia Morselli (1) (2) Elisabetta Oliveri (2) (3) Alessandro Tonetti (1) CONTROL, RISK AND RELATED-PARTY TRANSACTIONS COMMITTEE APPOINTMENTS COMMITTEE Elisabetta Oliveri - Chairman Francesco Gori - Chairman Sabrina Bruno Monica De Virgiliis Lucia Morselli Alessandro Tonetti REMUNERATION COMMITTEE SUSTAINABILITY COMMITTEE (**) Monica De Virgiliis - Chairman Sabrina Bruno - Chairman Elisabetta Oliveri Yunpeng He Alessandro Tonetti Lucia Morselli INDEPENDENT AUDITING FIRM (***) PricewaterhouseCoopers S.p.A. (*) Appointed by the Shareholders’ Meeting on 27 April 2016 and in office until the date of the Shareholders’ Meeting that shall be called in 2019 to approve the financial statements as at 31 December 2018. (**) Instituted by the Board of Directors on 11 May 2016. (***) Engaged by the Shareholders’ Meeting on 24 April 2018 for the period 2018-2026. (1) Candidate directors on the list presented by shareholder CDP Reti S.p.A. (2) Independent directors pursuant to the TUF and the Code of Corporate Governance. (3) Directors that were candidates on a list submitted jointly by Institutional Investors. (4) Candidate standing auditors on the list presented by shareholder CDP Reti S.p.A. (5) Directors that were candidates on a list submitted jointly by Institutional Investors. 2 Annual report 2018 NFS Group structure as at 31 December 2018 The changes in the consolidation area of the Snam Group as at 31 December 2018, as compared with that in place as at 31 December 2017, regarded the entrance into the consolidation scope of the Companies1: (i) Snam International B.V. (GasBridge 2 B.V. until 31 July 2018), following the share swap transaction with Fluxys, completed on 26 April 2018, after which Snam became the sole shareholder of GasBridge 2 B.V. and Fluxys, sole shareholder of GasBridge 1 B.V.; (ii) Asset Company 4 S.r.l, a newly established company held 100% by Snam S.p.A.; (iii) Tep Energy Solution S.r.l., held 82% by Asset Company 4 S.r.l. and operating in the energy efficiency sector as Energy Service Company (ESCO) following the acquisition of 82% of the company’s share capital effective as of 30 May 2018; (iv) IES Biogas, operating in the design, development and management of biogas and biomethane production plants, following the acquisition on 05 July 2018 of 70% of the company’s share capital; (v) Cubogas S.r.l., a newly established company following the acquisition on 25 July 2018, from M.T.M., a company of the Westport Fuel Systems group, of the business unit dedicated to technological solutions for natural gas vehicle refuelling stations; (vi) Enersi Sicilia S.r.l., a company authorised to develop infrastructure to produce biomethane from the organic fraction of municipal solid waste (“OFMSW”) in the province of Caltanissetta, following the acquisition of 100% of the company’s share capital with effect as from 29 November 2018. The aforementioned companies were consolidated, under the “Corporate and other activities”2 sector. 1 For more information, refer to the section “Summary data and information – Main events" of this Report. 2 In compliance with IFRS 8 “Operating segments”, the “Corporate and other activities” sector is not an operating segment, which is defined on the basis of the internal reporting used by the Company’s management for allocating resources to the different segments and for analysing the respective performances. Group structure as at 31 December 2018 3 NFS Group structure as at 31 December 2018 The structure of the Snam Group as at 31 December 20183 is shown below: GASRULE 100% Corporate & other activities SNAM SNAM ASSET SNAM ASSET GNL STOGIT INTERNATIONAL RETE GAS COMPANY 2 4 MOBILITY COMPANY 4 100% 100% 100% 100% 100% 100% 100% Corporate Corporate Corporate Transportation Transportation Regasifi cation Storage & other activities & other activities & other activities May 2018 INFRA- STRUTTURE TRASPORTO TEP ENERGY IES BIOGAS GAS SOLUTION 100% 70% 82% Energy Transportation Biomethane effi ciency July 2018 May 2018 ENERSI PRISMA SICILIA 14.66% 100% Biomethane November 2018 INTERCONNECTOR IZT CUBOGAS UK 23.54% 25% 100% Sustainable Mobility July 2018 Italian investments Overseas investments Scope of consolidation 3 More information can be found in the Appendix “Snam S.p.A. equity investments at 31 December 2018” 2018 new entry to the Notes to the consolidated financial statements. 4 Annual report 2018 ADRIATIC LNG 7.3 ITALGAS 13.5 AS GASINFRA- ALBANIAN TERĒGA STRUKTUR TAG TAP SENFLUGA GAS SERVICE HOLDING BETEILIGUNG GMBH COMPANY 40.5 84.47 20 40 60 25 Frar 2 Dmr 2 AS GASINFRA- TERĒGA STRUKTUR DESFA SAS GMBH 100 100 66 Dmr 2 TERĒGA GCA SA 100 49 Group structure as at 31 December 2018 5 General contents General contents 09 DIRECTORS’ REPORT - INTEGRATED REPORT 200 CONSOLIDATED FINANCIAL STATEMENTS Disclaimer The Annual Report contains forward-looking statements, specifically in the “Outlook” section, relating to changes in demand for natural gas, investment plans, future management performance and the execution of projects. Such statements are, by their very nature, subject to risk and uncertainty as they depend on whether future events and developments take place. The actual results may therefore differ from those forecast as a result of several factors: trends in natural gas demand, supply and price, actual operating performance, general macroeconomic conditions, geopolitical factors such as international conflicts, the effect of new energy and environmental legislation, the successful development and implementation of new technologies, changes in stakeholders' expectations and other changes in business conditions. Snam, the Snam Group or the Group means Snam S.p.A. and the companies within its scope of consolidation. For the glossary, please refer to the website www.snam.it/en/utilities/glossary/. Directors’ report - Integrated Report 8 Annual report 2018 Directors’ report summary 10 READING GUIDE 12 LETTER TO SHAREHOLDERS AND STAKEHOLDERS 15 HIGHLIGHTS 16 SNAM PROFILE 17 Summary 19 Snam and the new brand identity 22 Snam presence in Italy and in international infrastructure system 24 BUSINESS MODEL AND SUSTAINABLE DEVELOPMENT 25 The global energy context: the key role played by Snam in decarbonisation 26 The 2019-2022 Strategic Plan 27 Creating sustainable value: the Snam business model 34 Governance and organisation 37 Management of risks and the control system 46 SNAM IN 2018 – SUMMARY DATA AND INFORMATION 47 Applicable regulatory framework and principal developments 50 Results 54 Main events 58 Operating review 67 Snam and the financial markets 74 BUSINESS SEGMENT OPERATING PERFORMANCE 76 Natural gas transportation 93 Regasification of Liquefied Natural Gas (LNG) 99 Natural gas storage 108 FINANCIAL REVIEW AND OTHER INFORMATION 109 Financial review 130 Snam S.p.A. financial review 140 Other information 144 OTHER OPERATING INFORMATION AND RESULTS 145 Development of human, social and relationship, and intellectual capital 150 Stakeholders and relationship capital 154 Innovation for business development 156 Mitigation of environmental and health and safety effects 162 ELEMENTS OF RISK AND UNCERTAINTY 168 OUTLOOK 170 2018 CONSOLIDATED NON-FINANCIAL STATEMENT - LEGISLATIVE DECREE NO. 254/2016 9 Reading guide The contents of