FINANCIAL POSITION AND CASH FLOW

FINANCIAL POSITION AND CASH FLOW OF THE POSTE ITALIANE GROUP

In addition to movements in non-current assets and working capital, the reduction in net invested capital at 31 December 2014 reflects:

• a reduction of €513 million in the net balance of deferred tax assets/(liabilities), primarily due to the increase in the fair value reserve for BancoPosta’s investments in securities, which generated an increase in deferred tax liabilities;
• an increase of €168 million in provisions for risks and charges, primarily due to the effect of the expected liabilities for restructuring costs.

Non-current assets break down as follows at 31 December 2013 and 31 December 2014:

Compared with the end of 2013, non-current assets are down €251.5 million, as a result of reductions of €689.5 million and additions totalling €438.0 million.
Reductions regard depreciation, amortisation and impairments, totalling €670.8 million, of which €409.0 million regards property, plant and equipment, €257.4 million intangible assets and €4.4 million depreciation and impairments of investment property, after reversals of impairments. Further reductions in non-current assets regard:

• retirements and sales of €10.9 million, including €7.7 million regarding intangible assets, €2.4 million property, plant and equipment, €0.6 million investment property and €0.2 million non-current assets held for sale;
• Postel SpA sale of shares in Docugest SpA, totalling €4.5 million, to Cedacri Global Service SpA;
• the net impact of changes in the scope of consolidation, totalling €2.3 million, reflecting consolidation on a lineby- line basis, from 1 January 2014, of PatentiViaPoste ScpA and PosteTributi ScpA;
• net adjustments of the value of investments, totalling €1.0 million. An adjustment of €0.6 million refers to the investment in Docugest SpA, the value of which was aligned with the sale price on 4 July 2014.

Additions regard:

• the purchase of property, plant and equipment, totalling €219.6 million, primarily by the Parent Company and attributable to the purchase of new hardware for the technological upgrade and restyling of the Group’s post offices, in addition to non-routine maintenance of properties owned by the Group;
• the investment of €217.5 million in intangible assets, regarding the purchase of new software licences and the development of network platforms¹ by the Parent Company and Group companies;
• purchases of investments, totalling €393 thousand, essentially including (€391 thousand) subscription for the new shares issued by Poste Holding Participações do Brasil Ltda (76% owned by Poste Italiane SpA and 24% owned by PosteMobile SpA). Moreover, following the decision to put the Virtual Mobile Network Operator project in Brazil on hold, on 27 November 2014, Poste Italiane SpA’s Board of Directors decided to put the company into liquidation. A further €2 thousand regards the Parent Company’s acquisition of 20% of Italia Camp Srl.
• purchases of investment property, totalling €0.5 million.

Working capital of breaks down as follows at 31 December 2014 and 31 December 2013:

Working capital at 31 December 2014 amounts to €3,941 million, up €889 million compared with the end of 2013. The increase is essentially due to the following.

• An increase of €657 million in trade receivables and other current receivables and assets. The main components of this balance include receivables due from the State; in particular, €535 million regards recognition of an amount due from the shareholder which, as provided for in art.1, paragraph 281 of the 2015 Stability Law (Law 190 of 23 December 2014), is due to the return of amounts deducted from the Parent Company’s retained earnings on 17 November 2008 and transferred to the MEF, pursuant to the European Commission’s Decision C42/2006 of 16 July 2008 (described in greater detail in section 10.1, “Principal proceedings and relations with e authorities”). In addition, a further €335 million consists of amounts accruing during the year as Universal Service compensation².
• A reduction of €73 million in trade payables and other current liabilities, primarily reflecting normal trends in the payment of suppliers.
• a €148 million increase in the balance of trade receivables and other non-current assets and liabilities, primarily due to tax assets deriving from the prepayment by Poste Vita SpA (for the years 2010-2014) of withholding and substitute tax on capital gains on life insurance policies.

At 31 December 2014, equity amounts to €8,417.9 million (€7,116.3 million at 31 December 2013) and breaks down as follows:

• Share capital €1,306.1 million
• Reserves €3,159.9 million
• Retained earnings €3,951.9 million.

Compared with 31 December 2013, equity has increased by €1,301.6 million due to the following changes:

Additions:

• a €1,141.8 million increase in fair value reserves net of tax, as a result of positive and/or negative movements in the value of investments in securities held by BancoPosta RFC and Poste Vita SpA;
• movements in the cash flow hedge reserves, amounting to €66.2 million, net of tax;
• profit for the year of €211.9 million;
• €535 million taken to retained earnings as a result of recognition of the amount due from the shareholder which, as described above, is required to return this sum to the Parent Company following the ruling of the EU Court of 13 September 2013, which has become final. As the payment of the sums under the Decision of 2008 were drawn from the Company’s portion of retained earnings accrued “ideally” from the returns on Poste Italiane SpA’s deposits with the MEF, the MEF’s obligation to return the above amounts has, accordingly, also been recognised in retained earnings, to the extent provided for by the 2015 Stability Law. Retained earnings also include taxation of €25.2 million on the interest component of the amount due from the shareholder.

Reductions:

• €500 million regarding the Parent Company’s payment of dividends to the shareholder;
• €128.1 million resulting from the recognition in equity of net after-tax actuarial gains and losses on employee termination benefits.

LIQUIDITY

Reconciliation with statement of cash flows in financial statements

Cash flows during the year were primarily affected by movements in working capital, due, among other things, to an increase in trade receivables, which include amounts due as Universal Service compensation, and tax assets deriving from the prepayment by Poste Vita SpA of withholding and substitute tax on capital gains on life insurance policies.
Cash generated was also used to finance capital expenditure and investment in financial assets, totalling €347 million.
Cash flow from financing activities, on the other hand, primarily reflects the issue of subordinated bonds by the subsidiary, Poste Vita, totalling €750 million. The bonds were placed in their entirety with institutional investors. A further amount relates to a net increase in funding raised by the Parent Company, after repayments of repurchase agreements.
Cash and cash equivalents, after the distribution of €500 million in dividends to the shareholder, amounts to €747 million (€530 million at the end of 2013).

Net funds at 31 December 2014 amount to €4,741 million (net funds of €3,257 million at the end of 2013), reflecting: the results of the fair value measurement of investments in available-for-sale financial assets (approximately €2,650 million); cash subject to restrictions, as shown in the following table, as attributable to technical provisions for the insurance business or subject to investment restrictions (BancoPosta RFC); net financial assets held by Poste Vita and Banca del Mezzogiorno-MedioCredito Centrale, which are subject to supervisory capital requirements (approximately €1,900 million).

FINANCIAL POSITION AND CASH FLOW OF POSTE ITALIANE SpA

Poste Italiane SpA’s net invested capital amounts to €4,613 million (€4,500 million at 31 December 2013), 100% financed by equity.

In addition to movements in non-current assets and working capital, the increase in net invested capital at 31 December 2014 reflects:

• a reduction of €442 million in the net balance of deferred tax assets/(liabilities), primarily due to the increase in the fair value reserve for BancoPosta’s investments in securities, which generated an increase in deferred tax liabilities;
• an increase of €158 million in provisions for risks and charges, primarily due to the effect of the expected liabilities for restructuring costs.

Non-current assets break down as follows at 31 December 2013 and 31 December 2014:

Compared with the end of 2013, non-current assets are down €32,5 million, as a result of reductions of €608.0 million and additions totalling €575.5 million.
Reductions regard depreciation, amortisation and impairments, totalling €578.6 million, of which €371.3 million regards property, plant and equipment, €202.8 million intangible assets and €4.5 million depreciation and impairments of investment property, after reversals of impairments. Further reductions in non-current assets regard:

• impairments of €25.1 million, reflecting the write-off of the value of Poste Italiane’s investments in Mistral Air Srl and PosteShop SpA (€19.9 million and €4.9 million, respectively) based on the results of the impairment tests conducted and available projections; a further impairment of €0.3 million regards the investment in Poste Holding Participações do Brasil Ltda, following the decision to place the company in liquidation;
• retirements and sales of €4.3 million, including €2.1 million regarding property, plant and equipment, €1.4 million intangible assets, €0.6 million investment property and €0.2 million non-current assets held for sale.

Additions regard:

• capital expenditure of €332.2 million, of which, as described in the section “Capital expenditure and financial investments”, 58% relates to investment in ICT (Information & Communication Technology), 32% to the modernisation and renovation of buildings and 10% to postal logistics. In more detail, additions during the year primarily regard: €180.6 million invested in property, plant and equipment, relating to the purchase of new hardware for the technological upgrade and restyling of post offices, in addition to non-routine maintenance of properties owned by the Company; €151.6 million invested in intangible assets, reflecting the purchase of new software licences and the development of software for network platforms;
• acquisitions of investments, totalling €242.8 million, which breaks down as follows: €232 million relating to the subscription for new shares issued by Banca del Mezzogiorno-MedioCredito Centrale SpA; €9.9 million in capital injections for Mistral Air Srl to cover losses incurred to 30 June 2014 and establish an extraordinary reserve; €0.8 million relating to the subscription for the new shares issued by Poste Holding Participações do Brasil Ltda; €70 thousand regarding the subscription for shares representing 58.12% of the consortium fund of Consorzio PosteMotori ScpA; and €2 thousand regarding the acquisition of 20% of Italia Camp Srl.
• purchases of investment property, totalling €0.5 million.

Working capital of breaks down as follows at 31 December 2014 and 31 December 2013:

Working capital at 31 December 2014 amounts to €2,926 million, up €878 million compared with the end of 2013. The increase is essentially due to the following:

• an increase of €689 million in trade receivables and other current receivables and assets. As previously noted in the section on the Group’s financial position, the main components of this balance essentially include receivables due from the State;
• a reduction of €289 million in trade payables and other current liabilities, reflecting normal trends in the payment of suppliers, and a reduction in the amount payable by the Parent Company to its subsidiaries after offsetting, in its role as consolidating entity for the tax consolidation arrangement², payments on account made by the subsidiaries, withholdings paid and taxes paid overseas.

At 31 December 2014, equity amounts to €6,504.9 million and breaks down as follows:

• Share capital €1,306.1 million
• Reserves €2,933.9 million
• Retained earnings €2,264.9 million.

Compared with 31 December 2013, equity has increased by €1,074.7 million due to the following changes:

Additions:

• a €1,065.8 million increase in fair value reserves net of tax, as a result of positive and/or negative movements in the value of investments in securities held by BancoPosta RFC;
• movements in the cash flow hedge reserves, amounting to €66.2 million, net of tax;
• profit for the year of €56.9 million;
• €535 million taken to retained earnings, as previously noted in the section on the Group’s financial position, as a result of recognition of the amount due from the shareholder, the MEF, as provided for in art.1, paragraph 281 of the 2015 Stability Law. Retained earnings also include taxation of €25.2 million on the interest component of the amount due from the shareholder.

Reductions:

• €500 million regarding the Parent Company’s payment of dividends to the shareholder;
• €123.9 million resulting from the recognition in equity of net after-tax actuarial gains and losses on employee termination benefits.

LIQUIDITY

Reconciliation with statement of cash flows in financials tatements

As noted previously with regard to the Group, cash flows during the year were primarily affected by significant movements in working capital, due to an increase in trade receivables, which, among other things, include amounts due as Universal Service compensation.
Cash generated was also used to finance capital expenditure of €332 million, to provide fresh capital to fund the business development plans of the subsidiary, Banca del Mezzogiorno-MedioCredito Centrale SpA, totalling €232 million, and to subscribe Contingent Convertible Notes, totalling €75 million, issued by Midco SpA, which holds 51% of Alitalia SAI. Financing activities also include amounts deposited by subsidiaries in intercompany current accounts.
Cash and cash equivalents, after the distribution of €500 million in dividends to the shareholder, amounts to €287 million (€220 million at the end of 2013).

Net funds at 31 December 2014 amount to €1,892 million (net funds of €930 million at the end of 2013), reflecting the results of measurement on the fair value reserve for investments in available-for-sale financial assets held by BancoPosta RFC (approximately €2,307 million).

⁽¹⁾ Intangible assets consist of costs directly associated with the development of separable and identifiable software products that will provide future economic benefits for a period of more than one year. No research and development costs, other than those just described, are capitalised.
⁽²⁾ Poste Italiane SpA has adopted a tax consolidation arrangement, which it has elected to apply in accordance with the related law together with the subsidiaries, Poste Vita SpA, SDA Express Courier SpA and Mistral Air Srl. Following adoption of the tax consolidation arrangement, the Parent Company’s tax expense is determined at consolidated level on the basis of the tax expense or tax losses for the period for each company included in the consolidation, taking account of any withholding tax paid or payments on account.