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2011 half ‐ year financial statements as at 30 june Hera Group ‐ Directors' Report as at 30 June 2011 0 Introduction Mission Administrative and control bodies Group structure Summary data Strategic approach Business sectors Share performance 1 Directors' Report 1.01 Introduction 001 1.02 Corporate events 003 1.03 Group performance as at 30 June 2011: 1.03.01 Results and investments 004 1.03.02 Regulatory framework and regulated revenues 012 1.03.03 Analysis by business segment 022 1.04 Commercial policy and customer care 032 1.04.01 Customer satisfaction 034 1.05 Trading and procurement policy 035 1.06 Financial policy and rating 037 1.07 Research and development 039 1.08 Human resources and organisation 042 1.09 Information systems 047 1.10 Quality, safety and environment 049 1.11 Significant events after the end of the half‐year and outlook 052 2 Consolidated Financial Statements as at 30 june 2.01 Consolidated financial statements 2.01.01 Income statement 053 2.01.02 Aggregate income statement 054 2.01.03 Balance sheet 055 2.01.04 Cash flow statement 057 2.01.05 Statement of changes in shareholders' equity 058 2.02 Financial statements ‐ Resolution 15519 of 2006 – Related parties 2.02.01 Income statement 059 2.02.02 Balance sheet 060 2.02.03 Cash flow statement 061 2.03 Explanatory notes 2.03.01 Consolidated explanatory notes 062 2.03.02 Explanatory notes on related parties 128 2.04 Net financial indebtedness 2.04.01 Consolidated net financial indebtedness 133 2.04.02 Net financial indebtedness ‐ Resolution 15519 of 2006 134 2.05 Equity investments: list of consolidated companies 135 2.07 Statement pursuant to Article 154‐bis of Legislative Decree no. 58/98 137 2.08 Independent auditing firm 138 Introduction Introduction Hera's Mission "Hera's goal is to be the best multi‐utility in Italy for its customers, workforce and shareholders. It aims to achieve this through further development of an original corporate model capable of innovation and of forging strong links with the areas in which it operates by respecting the local environment". For Hera, being the best means inspiring the pride and trust of: customers, who receive, thanks to Hera's responsiveness to their needs, quality services that satisfy their expectations; the women and men who work at Hera, whose skills, engagement and passion are the foundation of the company's success; shareholders, confident that the economic value of the company will continue to be generated, in full respect for the principles of social responsibility; the areas in which Hera operates, where economic, social and environmental health represent the promise of a sustainable future; and suppliers, key elements in the value chain and partners for growth". Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction Administrative and control bodies Board of Directors Chairman Tomaso Tommasi di Vignano Vice-Chairman Giorgio Razzoli Chief Executive Officer Maurizio Chiarini Director Mara Bernardini Director Filippo Brandolini Director Marco Cammelli Director Luigi Castagna Director Pier Giuseppe Dolcini Director Valeriano Fantini Director Enrico Giovannetti Director Fabio Giuliani Director Luca Mandrioli Director Nicodemo Montanari Director Mauro Roda Director Roberto Sacchetti Director Rossella Saoncella Director Bruno Tani Director Giancarlo Tonelli Board of Statutory Auditors Chairman Sergio Santi Standing Auditor Antonio Venturini Standing Auditor Elis Dall'Olio Internal Control Committee Chairman Giorgio Razzoli Member Fabio Giuliani Member Luca Mandrioli Member Rossella Saoncella Remuneration Committee Chairman Giorgio Razzoli Member Marco Cammelli Member Nicodemo Montanari Member Bruno Tani Executive Committee Chairman Tomaso Tommasi di Vignano Vice-Chairman Giorgio Razzoli Member Maurizio Chiarini Ethics Committee Chairman Giorgio Razzoli Member Filippo Bocchi Member Mario Viviani Independent auditing firm PricewaterhouseCoopers Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction Group structure DEVELOPMENT AND MARKET GENERAL MANAGEMENT MARCHE MULTISERVIZI HERA Energie Rinnovabili SET S.p.A. 39% ACANTHO S.p.A 79.94% S.p.A. HERA COMM S.r.l. 100% HERA TRADING S.r.l. 100% S.p.A. 100% 40.64% stake held by Trading stake held by HERA stake held by COMM S.r.l S.r.l. Energie Rinnovabili S.p.A. MODENA NETWORK S.p.A. HERA COMM MEDITERRANEA GALSI S.p.A. Calenia Energia S.p.A. 15% HERA LUCE S.r.l. 89.58% Ghirlandina Solare S.r.l. 33% 14% S.r.l. 50.01% 10.40% stake held by HERA stake held by COMM S.r.l. Trading S.r.l. ENERGIA ITALIANA S.p.A. ADRIATICA ACQUE S.r.l. FlameEnergy Trading GmbH AIMAG S.p.A. 25% 11% 22.32% 50% stake held by HERA COMM S.r.l. TAMARETE ENERGIA S.r.l. MEDEA S.p.A. 100% SGR SERVIZI S.p.A. 29.61% 32% stake held by HERA COMM S.r.l. Hera Comm Marche S.r.l. SEI S.p.A. 20% 60% stake held by HERA COMM S.r.l. ERIS S.C.A.R.L. 51% stake held by HERA COMM S.r.l. HERA ENERGIE S.r.l 51% stake held by HERA COMM S.r.l. SINERGIA S.r.l. 59% stake held by HERA COMM S.r.l. Estense Global Service S.C.A.R.L. 23% stake held by HERA COMM S.r.l. SO.SEL. S.p.A. 26% Disposal of the equity investments is also scheduled: Modena Formazione S.r.l., Democenter ‐ SIPE Scarl and Oikothen S.C.A.R.L. The merger by incorporation of Sadori Gas S.r.l. in Hera Comm Marche S.r.l. took effect from 1 July 2011. Companies in liquidation: Acef S.r.l., Italcic S.C.A.R.L. and Dyna Green S.r.l. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction GENERAL OPERATIONS MANAGEMENT HERA SERVIZI FUNERARI S.r.l. HERASOCREM S.r.l. 51% 100% HERA SERVIZI CIMITERIALI S.r.l. 100% SERVICES AND INFORMATION SYSTEMS CENTRAL DEPARTMENT FAMULA ON-LINE S.p.A. UNIFLOTTE S.r.l. SERVICE IMOLA S.r.l. 40% 100% 97% HERAMBIENTE S.p.A. 75% REFRI S.r.l. FEA S.r.l. AKRON S.p.A. NUOVA GEOVIS S.p.A. 51% 20% 51% 57.50% GAL.A S.p.A. *SOTRIS S.p.A. ASA S.C.p.A. Consorzio Akhea 60% 70% 51% 51% * in addition to the Hera S.p.A. 5% ROMAGNA ENOMONDO S.r.l. 50% FERONIA S.r.l. 40% COMPOST S.r.l. 60% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction Summary data Revenues (m€) Ebitda (m€) CAGR +16.1% CAGR +14.5% 2.146 1.983 344 1.807 314 1.752 258 271 1.179 1.345 210 211 882 133 155 696 1H2004 1H2005 1H2006 1H2007 1H2008 1H2009 1H2010 1H2011 1H2004 1H2005 1H2006 1H2007 1H2008 1H2009 1H2010 1H2011 Ebit (m€) Net Profit post minorities (m€) CAGR +13.3% CAGR +9.9% 199 71 175 63 143 144 55 122 41 47 114 41 37 83 95 1H2004 1H2005 1H2006 1H2007 1H2008 1H2009 1H2010 1H2011 1H2005 1H2006 1H2007 1H2008 1H2009 1H2010 1H2011 Net Financial Position (m€) DPS (cent €) CAGR +25.4% CAGR +7.9% 1.971 1.971 9,0 1.788 8,0 8,0 8,0 8,0 1.480 7,0 1.323 5,7 973 747 404 1H2004 1H2005 1H2006 1H2007 1H2008 1H2009 1 0 H201 H201 1 1 2004 2005 2006 2007 2008 2009 2010 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction Strategic approach Hera's strategy is focused on the creation of value through a multi‐stakeholder approach and is aimed at achieving growth through all lines of development, both internal and external, benefiting from both economies of scale and synergies from mergers with multi‐utility companies operating in the reference sectors. For Hera, the multi‐business portfolio is a distinctive feature that management has focused on since its establishment, because it guarantees strategic advantages that stem from the single management of related activities. Synergies of cost and revenue are one of the most visible advantages; in actual fact it has been possible through the individual management of the water, gas distribution, district heating and electricity networks to achieve synergies in maintenance activities, remote‐control operations, and customer management. The composition of Hera's core activities portfolio demonstrates a firm commitment to limiting the legal/regulatory, operational and financial risk profile. This is achieved by having a balance between regulated and free‐market activities, which gives the economic‐ financial results a low volatility profile and a good long‐term outlook. Hera pursues efficiency strategies which leverage an innovative organisational model based on centralising several general functions and maintaining a strong local presence in the areas served. In 2010, the multi‐business companies operating in the regions were transformed into organisational units as part of a further cost‐cutting measure, while maintaining a local presence to safeguard the customer base. The development of free competition markets has always been one of the Group's key strategies, even in times of economic‐financial crisis. Great emphasis has been placed on cross‐selling policies of services to the customer base in the activities portfolio. The development of quotas in the free markets of energy and the treatment of special waste is supported by the plant‐capacity development strategy, which has reached its final stage; during the last 12 months two WTE plants and one CCGT cogeneration plant came into operation. The free competition market for the treatment of waste in Italy continues to highlight serious shortcomings in infrastructures compared with the average in other European countries. In some regions of Italy this situation has led to a real "waste emergency". As a result, government authorities have taken measures to unleash the construction of new plants in Italy, setting the stage for an important development in the industry. In view of these prospects, Hera intends to expand its presence in the domestic market, using its leadership position for leverage and the exclusive know‐how from the construction, in recent years, of a large number of plants that have transformed the Emilia‐ Romagna region into one of the most technologically advanced areas in the country, with an impressive number of infrastructures. In the area of regulated activities the goal has been to pursue the expansion of the reference area by increasing the ownership of assets through the purchase of gas and district heating networks managed by the Group and belonging to third parties in order to further streamline ownership structures, investments, management and maintenance costs. The strategy in regulated activities areas is to renew licences that are expiring, bid for tenders in the reference areas and expand into several adjacent areas for some network services. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction Hera also takes advantage of opportunities for developing external lines, both through multi‐business combinations in nearby areas and through companies integrated upstream in the liberalised activities chain. The multi‐business development line concentrates on businesses operating in areas adjacent to the reference area, which allows the development of improved economies of scale for the management of efficiency processes in the short‐to‐medium term. These expansion criteria led Hera to purchase 25% of Aimag's share capital in 2009, with a view to carrying out a full merger in the future. The strategic goal of the mono‐business operations is to strengthen both waste treatment activities, taking advantage of the favourable market conditions, and energy sector activities, to develop sales through a balanced integration policy upstream of electricity generation. Hera formalises its strategic goals in an industrial plan that is updated annually; the last update was in September 2010 (in a five‐year plan going up to 2014) and it highlights strategies for further growth in the markets, for both liberalised activities and the upstream chain. The plan also confirms the attention that has been focused on synergies of cost and revenues, the development of new plants for generating electricity from renewable sources and the expansion of the plant base. The plan establishes the growth targets which, in the main, rely on factors that have already been established through the development of internal growth lines (new plants which have been launched recently or are in advanced stages of construction, future rates already agreed for regulated activities, company streamlining operations that have already been implemented). Future growth involves the creation of a fund designed to cover the planned investment programme (gradually being reduced compared with its scope in recent years thanks to the completion of an ambitious plant development plan), a flow of increasing dividends and the preservation of the current sound financial structure. Hera's strategy is also aimed at sustainable business development though a multi‐stakeholder approach. On 29 April 2011, the Shareholders' Meeting approved the 2010 Sustainability Report, which, for the seventh consecutive year, highlights the increase in added value, confirming the soundness of the Group's sustainable approach in managing activities. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction Business Sectors Hera maintains a balanced development between regulated activities (integrated water service, collection and disposal of urban waste, distribution of methane gas and electricity, district heating) and liberalised activities (sale of methane gas and electricity, disposal of special waste and public‐lighting services) in terms of contribution to EBITDA. The effectiveness and the low risk profile, associated with this balanced multi‐business approach, are particularly obvious if one notes the continued and uninterrupted growth in consolidated EBITDA over the years, even in a period of economic crisis like the one currently affecting all Western countries. Hera is the leading national operator in the waste management sector by quantity of waste collected and treated: the activities of collecting urban waste are regulated by licences which will expire in 2012 in all reference areas (seven provinces in Emilia‐Romagna and several areas in northern Le Marche), whilst waste disposal is a free‐market business with no regional restrictions. Rates in 2008‐2012 have, on the whole, already been agreed with local authorities. The Group's plant equipment, which has been expanded over the last seven years, boasts 80 plants, including seven latest‐generation waste‐to‐energy (WTE) plants, is capable of covering the entire range of possible waste treatments, and is a feature of the Group's excellence on a domestic scale. Hera is also one of the key Italian players for the production of electricity from waste and is the only company which, in recent years, has managed to build and activate five new WTE plants in Italy, bringing its installed capacity to more than 100 megawatts and approximately 1 million tonnes per year. Herambiente is the special‐purpose company created to facilitate overseeing the market for waste treatment and disposal and for exploiting the exclusive know‐ how that has been accumulated in the construction/management of these plants. In light of the insufficient infrastructures in the waste treatment sector in Italy, which culminated in the waste emergency, firstly in Campania and then in Sicily, invitations to tender were put out for the construction of new WTE plants in several Italian regions. Herambiente is already active in bidding for some of these to increase its share in a rapidly developing domestic market. Hera Group is the second‐biggest operator in Italy in the management of the complete water cycle, from the collection and purification of waste water to the distribution of drinking water. Hera is the only operator to carry out this service in seven provinces in Emilia‐Romagna and in the north of Le Marche, on the basis of long‐term concessions (on average until 2022). The rates for the 2008‐2012 period have already been agreed through contracts signed with the local authorities. Increased efficiency in the management of more than 26,000 kilometres of water networks, economies of scale in purchasing, and the adjustment of 2008‐2012 rates to comply with regulations are the main drivers of growth, together with the contribution coming from the growth of external lines. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction Hera covers virtually the entire reference area in the gas sector, is the most important "local" business and is ranked fourth in Italy in terms of volumes sold. With approximately 1.1 million customers, Hera sells more than 2.9 billion m³ of gas per year. The Group protects its market share through the supply of gas directly from overseas sources, thanks to its ability to transport it directly via the TAG gas pipeline. This annual capacity will be increased by a further 1 billion m³ per year with the Galsi pipeline between Italy and Algeria. The procurement of raw materials takes place mainly through annual contracts (unlike the majority of operators in the sector, which use long‐term contracts with take‐or‐pay clauses) and through spot markets, making it possible to take advantage when the prices of raw materials fall. Since its establishment, Hera has pursued a "dual fuel" commercial strategy which allows the electricity market to be developed at sustained growth rates through cross‐selling activities to existing customers and expansion into new markets. Hera is among the top 10 domestic operators in this sector. In 2011, growth continued at a pace which was sustained thanks to the awarding of tenders for services which made it possible to expand the customer base by more than 100 thousand units starting in the first semester of the year. Commercial development has been accompanied by the simultaneous development of the availability of energy, by the establishment of joint ventures for purchasing shares in high‐yield combined‐cycle plants, the development of plants for generating energy from renewable or assimilated sources and the launch of next‐generation cogeneration plants. This strategy has been conducted guaranteeing cover for only part of electricity sales, leaving space to benefit from current commodity market conditions. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction Share performance The FTSE Italia All‐Share Index was broadly unchanged at the end of June 2011, down by 0.1% on the end of 2010. The Italian local utilities index fell by 3.3%, while Hera's share price dropped by 6.0% to end the first half of 2011 on €1.464. Performance of Hera share in the first half of 2011 Hera FTSE All shares Local Utilities -6.0% -0.1% -3.3% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 1.464€ -8% -10% -12% 30/12/2010 13/01/2011 26/01/2011 08/02/2011 21/02/2011 04/03/2011 17/03/2011 30/03/2011 12/04/2011 27/04/2011 10/05/2011 23/05/2011 03/06/2011 16/06/2011 29/06/2011 The share price rose over the first five months of the period, boosted by strong annual results (published at the end of March) and first‐quarter results (published in mid‐May) that showed respective net profit increases of 65% and 40%, as well as by a unit dividend payment of €0.09 (up by 12.5%) on 9 June 2011. In June, in the wake of the national referendum and the sovereign‐debt crisis, Hera shares fell by €0.27. The share price, which at the end of the period returned to the levels of December 2010, reflects a market capitalisation of 0.88 times shareholders' equity as at 30 June 2011. Hera's shares are covered by analysts at 12 independent firms, of which six are foreign. These firms are: Banca Akros, Banca IMI, Banca Leonardo, Centrobanca, Cheuvreux, Deutsche Bank, Equita, Intermonte, Kepler, Mediobanca and UniCredit. Exane began its coverage of Hera shares in July 2011 with an 'outperform' recommendation. The Hera stock has a consensus target price of €1.95 and has been chosen on several occasions among the best investment picks by analysts at various firms, including UniCredit, Equita, Centrobanca, Banca IMI and Banca Leonardo. It currently has nine 'buy/outperform' recommendations. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Introduction The Group's financial position is assessed by the world's two biggest credit rating agencies: Moody's has updated Hera's long‐term debt rating to A3 with a stable outlook, while on 23 June 2010 Standard & Poor's adjusted Hera's long‐term debt rating from A‐ with a negative outlook to BBB+ with a stable outlook and confirmed its short‐term debt rating of A‐2. Following the mergers by incorporation, the share capital consists of 1,115,013,754 ordinary shares, each with a nominal value of €1. Hera's ownership is unique in Italy. Its shareholder structure consists of more than 190 local public institutions, which have a combined stake of around 62% (of which 51% is bound by a shareholders' pact), more than 400 Italian and foreign institutional investors and over 21,000 private shareholders. Municipalities of Romagna Provinces 26.0% Free float 30.0% Municipalities of Modena Province 12.8% Bank foundations agreement 9.1% Municipalities of Ferrara Province Municipalities of Bologna Province 3.3% 18.8% Since 2006, Hera has conducted a share buyback programme with a maximum of 15 million shares, up to a total amount of €60 million. This programme aims to finance any opportunities to buy small companies and to rectify any unusual movement in the Group's share price compared with its major domestic competitors. The shareholders' meeting of 29 April 2011 renewed the share buyback programme for a further 18 months, up to a total amount of €60 million. Hera held 5.9 million treasury shares in its portfolio as at 30 June 2011. The Group's corporate website (www.gruppohera.it) is undoubtedly its primary means of communication with the financial market. Hera came second in Hallvarsson & Halvarsson's Webranking 2010, just behind the leading company. This makes www.gruppohera.it one of the best corporate sites among the major large‐cap Italian companies. During the first six months of 2011, and particularly upon presentation to the financial community of the 2010 annual results, dialogue with Italian and foreign investors continued in the form of more contacts, roadshows and meetings (around 200 contacts and meetings in 2011, in line with the first half of the previous year) in response to the difficult market conditions. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 Directors' report 1 Directors' Report 1.01 Introduction Despite the macroeconomic climate in Italy, which continues to be hampered by the prolonged global economic crisis that has caused sharp falls across all Western stock markets, the Hera Group recorded growth in all its results – including net profit – in the first half of 2011. The Hera Group's results were boosted by contributions from new plants and installations, the usual organic‐growth factors, both in regulated and deregulated activities, and extraordinary financial transactions. The contribution from new plants and installations represented only part of their actual capacity: the waste‐to‐ energy plant at Rimini started out in 2010 with waste disposal and then began to generate electricity midway through the first quarter of 2011. The contribution of the Enomondo (joint venture with an industrial partner) biomass thermoelectric plant was consolidated into the Group's financial results from the start of the year. This plant allows Hera to process and dispose of waste with efficiency and environmental standards above the European average. It also ensured another solid contribution to operating results, despite a drop in urban‐waste volumes owing to less household consumption as a result of the economic crisis. The improved natural‐gas supply contract for the 2010‐2011 thermal year enabled Hera to capitalise on excess supply in the commodities market. This contributed significantly to the improved results in the period, despite lower sales volumes as a result of the mild winter. These results highlight the positive contribution of ongoing strategies to maintain a diverse and flexible structure of procurement sources. The strategy of expanding in the electricity market, which was able to rely on a solid commercial structure, effective cross‐selling and efficient customer support continued to support electricity sector sales growth in the first half of 2011, confirming the strength of the Group's presence in open markets. The results were also boosted by the allocation of mandates for default‐provider services (2011‐2013 period) in some Italian regions, helping the Group to reach a customer base of more than 453,000 (up 18.6% on the start of 2011). Upstream development in electricity production to partially cover sales also enabled the Group to capitalise on the good supply conditions offered by the procurement market and to mitigate the impact of lower margins from producing electricity from traditional sources. Despite the tough macroeconomic climate, characterised by ongoing weak growth in GDP and manufacturing, there was a slight increase (0.9% in terms of volume) in the industrial‐waste disposal business. Business from energy distribution, urban‐waste collection and integrated water service concessions also played a part in the improved first‐half results, owing mainly to price adjustments in accordance with returns guaranteed by national laws and by the new tariff systems. Lastly, there was also progress in external development through the acquisition of gas sales company Sadori Gas, which has 34,000 customers in Le Marche and Abruzzo and will contribute to the Group's results from the second half of the year, and the expansion of Marche Multiservizi's environmental activities. EBIT increased from the same period in the previous year owing to the contribution from all the Group's strategic business segments (Environment, Energy and Networks), which was reflected in the Group's net profit (+14%). Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 1 1 Directors' Report As at 30 June 2011, the Group's net financial position was broadly unchanged compared with a year earlier at around €1.97 billion. The debt‐to‐EBITDA and debt‐to‐equity ratios improved. The positive cash flow in the first half of 2011 was also testament to the Group's financial stability, more than offsetting investments of over €138 million. First‐half operations confirmed the competitive strength of the company in open‐market businesses and provided further evidence of the growth trend outlined in the business plan across all Hera's activities. Moreover, the Group's financial flexibility has laid the foundations for pursuing further growth opportunities that are not part of the business plan. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 2 1 Directors' Report 1.02 Corporate events The Group continued to rationalized its corporate structure in the first half of 2011. This involved liquidating two companies, removing three companies from the Companies Register, making one new equity investment, increasing equity investments in two companies and two merger/transformation transactions. In 2010, the corporate streamlining involved selling/liquidating two subsidiaries, making four equity investments, three mergers by incorporation and two company transformations. The main M&A transactions were as follows: Enomondo S.r.l. On 16 February 2011, Herambiente S.p.A. acquired from Caviro Società Cooperativa Agricola an additional 10% of the share capital of waste‐to‐energy company Enomondo S.r.l., taking its stake to 50%. Acantho S.p.A. On 7 March 2011, Hera S.p.A. completed the acquisition from Infracom Italia S.p.A. 17.50% of the share capital of telecoms company Acantho S.p.A., taking its stake from 62.436% al 79.936%. Herasocrem S.r.l. On 12 April 2011, the extraordinary shareholders' meeting of cremation and funeral‐services company Herasocrem S.p.A. voted to transform the company from a company limited by shares (S.p.A.) to a limited‐liability company (S.r.l.), and to reduce the share capital to €100,000, with effect from 13 July 2011. Sadori Gas S.r.l. On 27 April 2011, Hera Comm S.r.l. acquired from Walter Sadori S.r.l. 50% of the share capital of Sadori Gas S.r.l., a company that sells gas in the Marche region. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 3 1 Directors' Report 1.03 Group performance as at 30 June 2011: Consolidated summary results of the Hera Group: (€ million) 30‐Jun‐10 % weight 30‐Jun‐11 % weight % change Revenues 1,807.0 1,983.2 +9.8% EBITDA 313.5 17.4% 344.0 17.3% +9.7% Operating margin (EBIT) 174.8 9.7% 199.4 10.1% +14.1% Net income 69.2 3.8% 83.2 4.2% +20.2% 1.03.01 Results and investments In the first half of 2011, as in the first quarter, the Hera Group continued to record economic growth compared with the same period in 2010; all the main business areas recorded increases and all economic indicators signalled a positive trend. Unlike the economic results, some quantitative indicators fell, with lower volumes of gas and heat sold and distributed as a result of higher average temperatures compared with the first six months of 2010, and lower volumes of urban waste collected and disposed of. Conversely, higher volumes of electricity were sold, particularly due to the allocation of a default‐provider service mandate for customers in the Lombardy, Tuscany, Lazio, Abruzzo, Molise and Puglia regions for the 2011‐2013 period. Other events also occurred in the first six months of 2011, mainly affecting the waste management segment: • Since February 2011, HERAmbiente has consolidated its stake in Enomondo to 50%, a company that manages a 13 MWe biomass plant in a joint venture with Caviro Distillerie S.r.l. • Since the second half of 2010, the Marche Multiservizi Group has consolidated its stake in Naturambiente, which manages landfill operations for the Municipality of Cagli (PU). As seen from the financial statements at 31 December 2010, the Consolidated Income Statement applies the interpretation of the IFRIC 12 accounting principle "Service Concession Arrangements", which has changed the way in which transactions are accounted for by businesses operating in industries regulated by specific concessions. At an accounting level, the impact of the application of this principle, whilst not changing the results, has meant that investments in assets under concession (network services) are reported in the income statement. Therefore, the income statement shows an increase in other operating income of €61.1 million for the first half of 2011 and €65.5 million for 2010, lower capitalised costs of €16.3 million in 2011 and €15.7 million in 2010, and increased operating costs for services, materials and other operating costs of €44.8 million in 2011 and €49.8 million in 2010. In addition, the accounts for the first half of 2010 have been reclassified to give a better representation of the plants and other works of companies within the Group; specifically, the costs of services and capitalised costs have been increased by the same amount. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 4 1 Directors' Report The table below gives the economic results for the first half of 2010 and 2011: Income statement 30‐Jun‐10 % weight 30‐Jun‐11 % weight Change % change (€ million) Revenues 1,807.0 100.0% 1,983.2 100.0% +176.2 +9.8% Other operating income 101.8 5.6% 87.7 4.4% ‐14.1 ‐13.9% Raw materials (1,036.4) ‐57.4% (1,122.0) ‐56.6% +85.6 +8.3% Cost of services (405.6) ‐22.4% (422.1) ‐21.3% +16.5 +4.1% Other operating costs (18.8) ‐1.0% (17.5) ‐0.9% ‐1.3 ‐6.9% Personnel costs (184.6) ‐10.2% (189.7) ‐9.6% +5.1 +2.8% Capitalised costs 50.3 2.8% 24.4 1.2% ‐25.9 ‐51.5% EBITDA 313.5 17.4% 344.0 17.3% +30.5 +9.7% Depreciation, amortisation and (138.7) ‐7.7% (144.6) ‐7.3% +5.9 +4.3% provisions EBIT 174.8 9.7% 199.4 10.1% +24.6 +14.1% Financial operations (54.8) ‐3.0% (53.5) ‐2.7% ‐1.3 ‐2.4% Pre‐tax profit 120.1 6.6% 145.9 7.4% +25.8 +21.5% Taxes (50.9) ‐2.8% (62.8) ‐3.2% +11.9 +23.4% Net profit for the period 69.2 3.8% 83.2 4.2% +14.0 +20.2% * Figures to 30 June 2010 have been reclassified as described in the "Financial statements" paragraph of the notes to the balance sheet EBITDA rose from €313.5 million in 2010 to €344.0 million in 2011 (+9.7%), while EBIT rose from €174.8 million to €199.4 million (+14.1%), pre‐tax profit increased by 21.5% from €120.1 million to €145.9 million, and net profit jumped from €69.2 million in 2010 to €83.2 million in the first six months of 2011 (+20.2%). Revenues at 30 June 2011 increased by €176.2 million (+9.8%), from €1,807.0 million at 30 June 2010 to €1,983.2 million at 30 June 2011. The main reasons for this are: (i) higher volumes of electricity sold (+29.8%) and distributed, (ii) increased revenues from gas distribution and sales, and (iii) increased revenues in the waste management segment, especially due to increased revenues from electricity generation. The increase in the cost of raw materials and other materials, equal to €85.6 million compared with the previous year, is attributable to the higher volumes of electricity sold and the increase in the price of gas. Other operating costs (service costs rose by €16.5 million and other operating expenses fell by €1.3 million) saw a net increase of €15.2 million (+3.6%). The increase in personnel costs, which went from €184.6 million in the first half of 2010 to €189.7 million in 2011 (+2.8%), is mainly related to changes in contract dynamics. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 5 1 Directors' Report The decrease in capitalised costs, which went from €50.3 million to €24.4 million, is mainly linked to the decrease in work on plants and other works by Group companies. The Group's consolidated EBITDA for the first half of 2011 rose from €313.5 million at 30 June 2010 to €344.0 million (+9.7%). This was due to the performance of all the main business segments of the Group. The solid performance of the electricity area, which rose from 10.1% to 12.3% of the total result, and the increased margin on municipal waste services, are particularly noteworthy. Depreciation, amortisation and provisions increased by 4.3%, from €138.7 million in the first six months of 2010 to €144.6 million for the same period in 2011. This increase is mainly due to (i) increased provisions made for the provision for bad debts and the provision for risks, and (ii) the entry into operation of the new plants that offset the effect of the reduction in depreciation rates, before publishing the 2010 annual financial report. The first six months of 2011 showed an operating profit of €199.4 million, up 14.1% compared with the first half of 2010. The financial management result at 30 June 2011 stood at €53.5 million, compared with €54.8 million at 30 June 2010. owing to the lower cost of €0.9 million linked to the dynamics between interest expense and interest income and to higher profits from associates (approximately €0.4 million). In light of the above, pre‐tax profit rose from €120.1 million for the first half of 2010 to €145.9 million for the first half of 2011, an increase of 21.5%, or €25.8 million. Taxes rose from €50.9 million in the first half of 2010 to €62.8 million in the first half of 2011. The final tax rate was 43%. The increase compared with the tax rate in the first half of 2010 (42.4%) is due to the 0.30% increase in the rate of business tax (IRAP) following the recent austerity measures introduced by the Italian government (applicable to the parent company, Hera S.p.A.) and to the absence of benefits linked to Decree‐Law 78/2009, which had been included in the calculation of tax at 30 June 2010. Taxes as at June 30, 2011 do not take into account IRES increase, the so called Robin tax (4 percentage points) as per Italian legislative decree of 13 August 2011. For more information see also section 1.10 Directors Report: "Significant events after the end of the half‐year and outlook". Net profit as at 30 June 2011 was €83.2 million, up 20.2% compared with the €69.2 million recorded for the same period in 2010. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 6 1 Directors' Report Analysis of the Group's capital structure The following table shows the performance of the Group's net invested capital and its sources of financing for the year ended 31 December 2010 and for the half year ended 30 June 2011: Invested capital and sources of financing (€ million) 31‐Dec‐10 % weight 30‐Jun‐11 % weight Change % change Net fixed assets 4,142.3 111.0% 4,207.6 110.2% 65.3 +1.6% Working capital (29.1) ‐0.8% 1.3 0.0% 30.4 ‐104.3% (Provisions) (382.8) ‐10.3% (391.8) ‐10.3% (9.0) +2.4% Net invested capital 3,730.4 100.0% 3,817.1 100.0% 86.7 +2.3% Shareholders' equity 1,870.2 50.1% 1,846.0 48.4% (24.2) ‐1.3% Long‐term financial debt 2,292.1 61.4% 2,279.7 59.7% (12.4) ‐0.5% Short‐term net financial position (431.9) ‐11.6% (308.6) ‐8.1% 123.3 ‐28.5% Net financial position 1,860.2 49.9% 1,971.1 51.6% 110.9 +6.0% Total sources of financing 3,730.4 100.0% 3,817.1 100.0% 86.7 +2.3% Net invested capital increased by 2.3%, from €3,730.4 million to €3,817.1 million in the first half of 2011. The rise was due to the investment programme, details of which can be found in the relevant section. Net fixed assets at 30 June 2011 amounted to €4,207.6 million, an increase of 1.6% on the end of December 2010 (€4,142.3 million). Provisions at 30 June 2011 amounted to €391.8 million, an increase of 2.4% on the end of December 2010 (€382.8 million). The €30.4 million increase in working capital compared with December 2010 was due mainly to greater volumes as a result of winning new electricity customers following the allocation of the default‐provider service mandates for Tuscany, Lazio, Abruzzo, Molise, Puglia and Lombardy. Inventories increased by around €20 million. Shareholders' equity dropped from €1,870.2 million to €1,846.0 million owing to dividend payments of €118.0 million. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 7 1 Directors' Report Analysis of the Group's net financial position The breakdown and changes in net financial debt are analysed in the following table: millions of euro 30‐Jun‐11 % weight 31‐Dec‐10 % % Change weight change a Cash and cash equivalents 356.3 538.2 b Other current loans 51.2 44.3 Bank overdrafts ‐23.4 ‐58.4 Current portion of bank debt ‐63.2 ‐71.1 Other current financial liabilities ‐8.9 ‐16.6 Finance lease payables due within 12 months ‐3.4 ‐4.6 c Current financial debt ‐98.9 ‐150.7 d=a+b+c Net current financial debt 308.6 ‐0.2 431.8 ‐0.2 ‐123.2 ‐0.3 e Non‐current loans 10.8 10.3 Non‐current bank debt ‐292.0 ‐345.8 Bonds issued ‐1,768.1 ‐1,787.3 Other non‐current financial liabilities ‐222.9 ‐160.4 Finance lease payables due after 12 months ‐7.5 ‐8.8 f Non‐current financial debt ‐2,290.5 ‐2,302.3 g=e+f Net non‐current financial debt ‐2,279.7 1.2 ‐2,292.0 1.2 12.3 ‐0.0 h=d+g Net financial debt ‐1,971.1 1.0 ‐1,860.2 1.0 ‐110.9 0.1 The Group's net financial position went from €1,860.2 million as at 31 December 2010 to €1,971.1 million as at 30 June 2011, an increase of €110.9 million due to the distribution of a €118 million dividend in June. The debt continues to consist mainly of medium‐/long‐term borrowing. Hera S.p.A. enjoys a long‐term rating of A3 from Moody's and BBB+ from Standard & Poor's, both with a stable outlook. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 8 1 Directors' Report Hera Group Investments The Group's tangible and intangible investments totalled €133.0 million, compared to €169.1 million in the same period of the previous year. During the same period, financial investments of €5.8 million were made in Sadori, a company involved in the sale of gas in the Marche region. The table below lists investments before disposals, for the reference period, by business sector: Total investment (€ million) 30‐Jun‐10 30‐Jun‐11 Change % change Gas 21.6 20.6 ‐1.0 ‐4.6% Electricity 24.0 13.0 ‐11.0 ‐45.8% Integrated water cycle 44.3 43.7 ‐0.6 ‐1.4% Waste management 53.9 29.3 ‐24.6 ‐45.6% Other services 3.8 6.7 +2.9 +76.3% Head office 21.6 19.8 ‐1.8 ‐8.3% Total operating investments 169.1 133.0 ‐36.1 ‐21.3% Total financial investments 1.0 5.8 +4.8 +480.0% Total 170.2 138.8 ‐31.4 ‐18.4% The investments for 2010 were reclassified so that they gave a better representation of the implementation of plants and other works for companies operating within the Group. Investments in the Gas service were lower on the whole than in the same period of the previous year. Operations in the GAS service in the reference area refer to network extensions, improvements and upgrading of networks and distribution systems. In District Heating the service includes network extension works in the areas around Bologna (€1.3 million), Imola (€2.5 million), Forlì Cesena (€2.2 million), Ferrara (€0.3 million) and Modena (€0.3 million), while Forlì plant was also completed. Investments in Heat Management are directed at structural operations on thermal plants operated by Group companies. Gas 30‐Jun‐10 30‐Jun‐11 Change % change (€ million) Hera S.p.A. network 11.3 12.9 +1.6 +14.2% Marche/Sardinia networks 0.7 1.0 +0.3 +42.9% District heating/heat management 9.5 6.6 ‐2.9 ‐30.5% Other 0.1 0.1 +0.0 +0.0% Total Gas 21.6 20.6 ‐1.0 ‐4.6% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 9 1 Directors' Report Investments in the Electricity service were mainly aimed at the extension of the service, extraordinary maintenance on distribution networks and plants around Modena and Imola, and network support services. Regional investment was down compared with the same period of the previous year due to the completion of the new photovoltaic plant at the Bologna freight terminal and the final phase of the commitment for the wholesale replacement of existing meters with smart meters, in order to comply with the substitution plans authorised by the AEEG (€1.6 million for the current year). Investments in electricity and heat production plants (CCGT) refer to the completion of the Imola CHP plant, while cogeneration activities relate to creating new plants for companies in the area. Electricity 30‐Jun‐10 30‐Jun‐11 Change % change (€ million) Regional 16.2 8.7 ‐7.5 ‐46.3% Imola CCGT 4.7 3.2 ‐1.5 ‐31.9% Cogeneration 3.1 1.0 ‐2.1 ‐67.7% Total electricity 24.0 13.0 ‐11.0 ‐45.8% As far as the Integrated Water Cycle is concerned, the results are essentially in line with the same period in the previous year. The investments mainly regard the extension, improvement and upgrading of networks and plants, in addition to regulatory compliance, particularly for purification and sewerage systems. Integrated Water Cycle 30‐Jun‐10 30‐Jun‐11 Change % change (€ million) Mains supply 22.9 21.3 ‐1.6 ‐7.0% Treatment 9.4 11.2 +1.8 +19.1% Sewerage 12.0 11.2 ‐0.8 ‐6.7% Total Integrated Water Cycle 44.3 43.7 ‐0.6 ‐1.4% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 10 1 Directors' Report The Waste Management area recorded reduction compared with the previous year in maintenance and expansion activities for existing plants in the area. For investments in waste to energy (WTE), operations mainly relate to the construction of the Rimini plant, as both the Ferrara and Forlì waste‐to‐energy plants are now finished and operational. Waste Management 30‐Jun‐10 30‐Jun‐11 Change % change (€ million) Existing plants 20.0 17.0 ‐3.0 ‐15.0% New plants WTE Modena 13.9 0.7 ‐13.2 ‐95.0% WTE Forlì 0.7 0.0 ‐0.7 ‐100.0% WTE Rimini 19.3 11.5 ‐7.8 ‐40.4% Total Waste Management 53.9 29.3 ‐24.6 ‐45.6% In Other Services, in telecommunications, IRU linked to the exit of Infracom (€1.3 million) was acquired, with a corresponding disposal of assets purchased in previous years (€2.8 million). Public Lighting recorded a fall in investment compared with 2010 and the "Other" item includes investments in cemetery services. Other Services 30‐Jun‐10 30‐Jun‐11 Change % change (€ million) Telecommunications 2.5 5.9 +3.4 +136.0% Public lighting and signage 0.9 0.4 ‐0.5 ‐55.6% Other 0.4 0.4 +0.0 +0.0% Total Other Services 3.8 6.7 +2.9 +76.3% Investments at head office decreased overall compared with the previous year due to the decline in property transactions. Other investments include work on the completion of laboratories and remote‐monitoring units. Head Office 30‐Jun‐10 30‐Jun‐11 Change % change (€ million) Property investment 12.6 10.5 ‐2.1 ‐16.7% Information systems 5.2 6.1 +0.9 +17.3% Fleet 2.2 2.0 ‐0.2 ‐9.1% Other investments 1.6 1.2 ‐0.4 ‐25.0% Total Head Office 21.6 19.8 ‐1.8 ‐8.3% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 11 1 Directors' Report 1.03.02 Regulatory framework and regulated revenues 1. Regulations A referendum on economically significant local public services was held on 12‐13 June 2011, which was in favour of repealing two regulations concerning the Group's activities. The repeal came into effect with the issuance of Presidential Decrees 113 and 116 of 18 July 2011. The withdrawal of Article 23‐bis of Law 133 of 6 August 2008, as amended by article 15 of Decree 135 of 25 September 2009 (the 'Ronchi' decree, converted by Law 166 of 20 November 2009) eliminates a regulatory framework governing the entire services sector. The main effects of this include cancellation of the transitional arrangement for management concessions (in the Group's case, water services and urban waste management), which stipulated, for listed companies, that concessions would last until the expiry date set out in the original service agreements, provided that the publicly held share capital of the concessionaires was gradually reduced. The elimination of the transitional arrangement, and therefore of the restrictive condition, means that concessions are valid until their natural expiry. The second rule repealed by the referendum is included in article 154, paragraph 1, of Legislative Decree 152 of 3 April 2006, and relates to the requisite 'adequacy of the return on invested capital', a component of the integrated water service tariff. This partial repeal does not affect the EU principles of: full recovery of costs in the tariff; 'the polluter pays' (i.e. taking environmental effects into account when using a resource); and ensuring balanced economic and financial management. Any measure designed to undermine these principles cannot be regarded as legitimate; moreover, stable tariff profiles established under valid contractual relationships or related resolutions (tariff agreements with local water boards) may not be challenged. Furthermore, the applicable tariff method (the 'standardised method', pursuant to Ministerial Decree 1.08.1996) will remain in force until it is amended, in accordance with article 170 of Legislative Decree 152 of 3 April 2006. The next review of the standardised method will be one of the tasks assigned to the new Independent National Regulatory Agency for Integrated Water Services (Agenzia nazionale indipendente di regolazione del servizio idrico integrato), set up under Law 106 of 12 July 2011, converting Decree‐Law 70 of 13 May 2011 relating to the "European Semester – first urgent provisions for the economy". The new regulatory authority has inherited the functions of the former National Supervisory Commission for Water Resources (Commissione Nazionale di Vigilanza sulla Risorse Idriche), with broader economic regulatory powers (e.g. approval of tariffs drawn up by the competent local authorities), which limits discretionary local powers where these exist. Most significantly, the authority's board is appointed according to the model for independent authorities established by Law 481/95: i.e., its members must be approved by the competent parliamentary committees by a two‐thirds majority. The new body's independent status suggests that reforms which have until now been blocked might be fast‐tracked, and it may represent a development opportunity for the sector. In energy services, the adoption into national law of the EU's Third Energy Package, via Legislative Decree 93 of 1 June 2011, has brought in major changes designed to guarantee secure energy supplies, greater competition and consumer protection and to stimulate the creation of a single European market, in which the recently established Agency for Cooperation of Energy Regulators (ACER) has also played a role. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 12 1 Directors' Report The provisions of the decree include: • with regard to competition, regulations governing the complete operational separation of gas transmission businesses. EU regulations stipulate that Member States in which the transportation/transmission system belongs to a vertically integrated business must choose between ownership and operational models when selecting a method to guarantee the transporter's independence. Italy has opted for the second alternative: in other words, the largest transport business will have to split up its operations, creating an independent system operator. Other unbundling measures that should be highlighted include the prohibition on confusion between the distributor's brand and communication policies, selling on the free market and selling on the regulated market within vertically integrated businesses. In this regard, the Italian electricity and gas authority (AEEG) has been mandated to issue suitable measures, after consultation with operators; • with regard to gas distribution tenders, article 24, paragraph 4 of the Legislative Decree stipulates that from the date of its publication in the Official Gazette, distribution concessions may only be allocated through regional tender processes defined in number 177 of the Mse‐Regional Affairs decree in force since 1 April 2011, thus putting an end to doubts about the interpretation of rules allowing municipalities to hold individual tenders, while waiting for the introduction of actual regional tender processes. Other key aspects are: (i) a provision (amending Legislative Decree 164/2000) to reimburse the outgoing operator at a price (i.e. in the periods following the first round of the regional tender processes), based on the value of the net fixed assets at the distribution and metering service sites, calculated using the methods stipulated by the applicable tariff regulation; and (ii) a provision to allow the AEEG, exclusively during the first period in which the concessions allocated by region are exercised, to recognise in the tariff of the incoming operator the depreciation of the difference between the value of the repayment to the outgoing operator and the value of the net fixed assets at the sites, as calculated according to the applicable tariff regulation; • regulations for increased consumer protection in both the gas and the electricity markets. With regard to gas, the definition of 'vulnerable' customers has been established, to include residential customers, uses relating to public service activities for social care purposes, and household and non‐household customers consuming less than 50 thousand cubic metres per annum. With regard to electricity, the scope of the protection scheme has been defined as follows: household customers and low‐voltage businesses with fewer than 50 employees and annual turnover of less than €10 million, who do not choose a supplier on the free market, provided, in addition, that monitoring of market performance and the existence of "effective competition conditions" is carried out (by the Ministry of Economic Development) at least every two years. Finally, the AEEG must take steps to ensure that the switching period does not exceed three weeks and that customers have access to their own consumption data and transparent information about tariffs and economic conditions; • new rules regarding penalties. Specifically, similar to the procedures of the Italian antitrust authority (Autorità garante della concorrenza e del mercato), the operator is now permitted to submit binding long term commitments, subject to validation by the AEEG, within 30 days of the launch of enforcement proceedings, which provides an opportunity to terminate the proceedings. This also applies in the event of breaches of rulings relating to EU areas of regulation. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 13 1 Directors' Report With regard to incentives for renewable energy sources, Legislative Decree 28/2011 has been issued, implementing Directive 2009/28/EC, with the aim of supporting the development of renewable energy sources to achieve the target set by the 2020 National Action Plan (NAP), completely redefining and reorganising previous incentive schemes which were suffering from too many successive layers of legislation due to the need for continual adjustment to find a balance between development, being too burdensome, competition and the market. The Decree specifically defines the criteria and methods for the support mechanisms (note the gradual withdrawal of the incentive mechanism based on Green Certificates), postponing most of the economic issues until the publication of specific implementing decrees, expected by the end of 2011. The decree provides for a TRANSITIONAL bridging period with current legislation for plants entering into operation before 31/12/2012. Subsequently all plants will be subject to the new regulations. Specifically in terms of solar power, note that the 'Fourth Energy Account', a ministerial decree approved on 5 May 2011, has been issued, which sets out the incentive model in force from 1 June 2011. This is 'emergency' legislation in response to the solar power boom prompted by the generous incentive system established by the Third Energy Account, the 'salva‐Alcoa' decree and, in particular, the simultaneous plunge in the cost of solar power modules. Without this measure, the cost of sustaining the sector would have become untenable (Gestore dei Mercati Energetici S.p.A. estimates that installed solar power will exceed 8,000 MW in 2011). The law provides for a steady and substantial reduction in the incentive tariff, with total spending caps for large plants imposed between 2011 and 2012, to be rolled out to other plants in 2013‐2016. The target is to reach national installed power of 23 gigawatts by 2016, favouring small‐ to medium‐sized plants and measures aimed at own consumption. Finally, the State‐Regions Conference is examining a measure to determine the municipalities to be included in the 177 regions for gas distribution tender processes, established by the Ministerial Decree of 19 January 2011 – 'Determination of Regional Areas in the Natural Gas Distribution Sector' – published in the Official Gazette on 1 April this year. Meanwhile, the Council of State is still examining the Regulation for Competition Policy, which represents the final regulatory foundation stone for future regional tender processes, since the Employment Protection Decree has also already been published (Official Gazette 4/05/2011). 2. Regulations The following regulatory developments took place in the gas sector in the period under review: • with Resolution ARG/gas 45/11, the authority defined rules governing the evaluation of the economic merits of natural gas, introducing market mechanisms to increase the flexibility and liquidity of the natural gas offering. The new mechanism provides for the creation of a central platform (organised by Gestore dei Mercati Energetici S.p.A.) to enable the acquisition, based on criteria of economic merit (i.e. the best offer), of the resources required to balance its own positions and ensure the constant equilibrium of the network, in order to make the system more secure. Specifically, on the platform operators will offer the ability to reduce or increase the gas injected into or taken from stocks, and the company responsible for balancing, Snam Rete Gas, will acquire the resources required to ensure constant network equilibrium. Implementation of these rules was deferred by Resolution ARG/gas 81/11 until the first day of the following December; • Resolution ARG/gas 64/11 launched the procedure to draw up measures for gas distribution and metering service quality for the regulatory period 2013‐2016. Issuance of the relative consultation document is pending. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 14 1 Directors' Report • with Resolution ARG/gas 71/11, the AEEG has reformulated the scope of persons benefitting from protection service for the supply of gas at regulated prices, establishing that, as well as residential end‐customers covered by the original measure, schools, hospitals and other social service organisations carrying out activities of general and social interest in an approved way, as well as small and medium‐sized enterprises consuming no more than 50,000 smc per annum, may continue to use the service; • also with regard to the protection service, a procedure has been implemented, by Resolution ARG/gas 77/11, to reform the relative economic conditions of supply, particularly the CCI component (a fixed component covering international transmission costs and wholesale margins), from 1 October 2012. This is partly in view of possible changes in the market due to the next implementation of the assessment of economic merit, as well as measures already in force designed to increase flexibility and competition, pursuant to Legislative Decree 130/10. Issuance of the relative consultation document is pending. • the consultation launched by the AEEG by Consultation Document 28/11 to define the switching process in a coherent manner, simplifying the procedures for operators and recognising, also in the gas sector, the key element in the switching procedure: the 'Point of Delivery ‐ Owner of the Point' relationship. Changes affecting the electricity sector can be summarised as follows: • in Consultation Document 24/11, the AEEG has proposed the introduction of a mechanism to reimburse non‐ recoverable expenses sustained by operators while safeguarding electricity provision to end‐customers whose supply cannot be cut off because of their specific circumstances, as well as defining methods of recovery and management of the relative receivable; • Consultation Document 29/11 was subsequently published as part of the procedure launched by Resolution ARG/elt 6/11, aimed at setting up tariff measures for electricity transmission, distribution and metering services and economic conditions for the provision of connection services, for the regulatory period 2012‐ 2015. With this consultation document, the AEEG has not only set out general aims but has also proposed preliminary guidelines for calculating recognised costs for electricity transmission, distribution and metering services. For the calculation of the recognised cost, with particular reference to operating costs, the AEEG – in line with the previous regulatory period – proposes a parametric method, providing for the uniform distribution of the largest efficiency gains compared with the revenue cap set for the previous regulatory period (profit sharing); for recognition of the cost of depreciation, the AEEG plans to use a valuation that is partly simplified/parametric and partly detailed (i.e. calculated on effective investments 'by business'). Finally, the Regulator plans to adopt the historical cost valuation method as the general valuation criterion for invested capital; however, this valuation must be carried out using a mixed approach: a simplified/parametric valuation for the portion of capital relating to assets classified up to 2007 (in the first hypothesis) and a detailed valuation, based on effective investments declared to the AEEG by each business, for assets realised and put into operation in the subsequent years; for distribution, this method – according to the intentions of the AEEG – should lead to identification of invested capital 'by business'. With regard to investment incentives, the AEEG identifies two types of measure (smart‐grids and electric vehicles) and announces a subsequent, specific consultation. Subsequent consultation documents will address, in detail, the question of incentive mechanisms to promote investment, rules governing economic conditions for connection services, equalisation mechanisms, determining tariffs and caps and the regulation of system charges; Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 15 1 Directors' Report Finally, the following measures apply across both sectors: • the consultation launched by the AEEG by Consultation Document 10/11, in view of the forthcoming implementation of a monitoring system for the retail electricity and gas markets; • the consultation (Consultation Document 4/11) which the AEEG plans to use to supplement the rules governing substitution of one seller with another with an open delivery point (switching) and with a simultaneous change in the end‐customer (i.e. a change in contract); • Resolution ARG/com 92/11, by which the AEEG, following a long and complex consultation during the first half of 2011, suspended its provision for the publication of the comparative performance of electricity and gas sellers, in response to written complaints, and simultaneously launched a new consultation phase with operators, expected to end by 31 March 2012. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 16 1 Directors' Report Regulated revenues from gas metering and distribution 2011 is the third year of the current regulatory period (2009‐2012) for gas metering and distribution tariffs, which is governed by the RTDG regulation introduced under AEEG Resolution arg/gas no. 159/08 of November 2008. The tariff system outlined by the RTDG ensures that each operator can generate permitted revenues determined by the AEEG on the basis of recognised costs, expressed in the reference tariffs, and of the number of redelivery points served, separating business revenues from the volumes distributed. This can be done using tariff equalisation mechanisms that allow operators to use the Electricity Equalisation Fund to settle differences between their own permitted revenues and the revenues generated by invoicing sales companies. These latter revenues arise from the compulsory tariffs determined by the AEEG on the basis of macro‐regional size. The AEEG approved both the compulsory tariffs and the reference tariffs for 2009 and 2010, but only the compulsory tariffs have currently been approved for 2011, while the reference tariffs based on the permitted revenues of each operator have not even been provisionally defined. Following rulings by the Lombardy Regional Administrative Court in October 2010 which partially annulled the RTDG, the AEEG passed Resolution arg/gas no. 235/10 of December 2010 to formally begin a process aimed at evaluating possible resulting changes to tariff regulations, which should lead to regulatory powers being re‐exercised and the RTDG being subsequently revised, even if only partially. Pending such revision, the AEEG has suspended reference tariff approvals for 2011 and declared the previous approvals for 2009 and 2010 to be provisional. It should be stressed that, as well as relating to a first‐instance ruling against which the AEEG has already lodged an appeal with the Council of State, the partial annulment of the RTDG affects specific regulations for which any changes being considered by the AEEG would likely have a broadly neutral, if not positive, effect on Hera compared with previously approved tariffs. For these reasons, Hera S.p.A.'s gas metering and distribution revenues for the first half of 2011 are the result of appropriate estimates of 2011 reference tariffs based on regulatory continuity in relation to previous years' tariff approvals. More specifically, tariffs for the first half of 2011 were estimated taking into account the principle of graduality in recognising capital costs, which was introduced by the AEEG with a view to spreading over the four‐year regulatory period the convergence from the values under the previous methodology towards those defined by the RTDG. As a secondary factor in terms of economic impact, the tariff adjustment in 2011 also takes into account changes in net invested capital which took place in 2009 and updates to operating costs recognised according to the standard price‐cap rule, applying an annual productivity recovery rate of 3.2% for Hera. Under the system described above, Hera S.p.A.'s gas metering and distribution revenues for the first half of 2011 amounted to €84.8 million, with 1,256 million cubic metres distributed at a unit price of €0.0675. The revenue amount reported takes into account an appropriate estimate of the effects of tariff equalisation. Gas metering and distribution – Regulated revenues 30/06/2010 30/06/2011 % change Hera S.p.A. ‐ Revenues (€ million) 82.5 84.8 3% ‐ Volume (m3 million) 1,371 1,256 ‐8% ‐ Unit revenues (€ cent/m3) 6.02 6.75 12% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 17 1 Directors' Report Despite an 8% reduction in volumes distributed (from 1,371 million m3 to 1,256 million m3), revenues rose from €82.5 million to €84.8 million – an increase of around 3% on the first half of 2010. The €2.3 million rise resulted from the expected increase in the 2011 revenue cap compared with 2010, caused primarily by the release of the third graduality quota for converging capital costs towards expected 2012 levels. Introducing Marche Multiservizi S.p.A. into the Hera Group's consolidation scope as at 30 June 2011, consolidated Group revenues from gas metering and distribution amounted to €93.1 million, with 1,352 million cubic metres distributed at a unit price of €0.0689. Gas metering and distribution – Regulated revenues 30/06/2010 30/06/2011 % change Hera CONSOLIDATED ‐ Revenues (€ million) 90.7 93.1 3% 3 ‐ Volume (m million) 1,475 1,352 ‐8% ‐ Unit revenues (€ cent/m3) 6.15 6.89 12% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 18 1 Directors' Report Regulated revenues from electricity metering and distribution During the first half of 2011, the regulatory framework surrounding the mechanisms for determining electricity metering and distribution tariffs, as outlined by the Consolidated Tariffs Act (AEEG Resolution no. 348/07), remained broadly unchanged from the end of 2010. Essentially, the tariff regulation is based partly on the AEEG's determination of tariffs by unique user type at a national level and partly on the definition of appropriate cost and revenue equalisation mechanisms. AEEG Resolution arg/elt no. 228/10 updated fees for electricity transmission, distribution and metering for 2011. The regulated revenues for the first half of 2011 are based on these fees and are therefore founded on solid tariff conditions. The period was also marked by the AEEG's use of Resolutions arg/elt no. 74/11 and no. 97/11 to define the revenue equalisation amount for low‐voltage metering for 2009 and to revise the previously approved amount for 2008. Under the system described above, electricity metering, distribution and transmission revenues for the six months to 30 June 2011 amounted to €24.2 million, an increase of €2.5 million on the same period a year earlier (€21.7 million). This last figure absorbed all tariff equalisations pertaining to previous years, amounting to €1.4 million. Net of this effect, revenues increased by €1.1 million (+4.9%) owing essentially to a 5.1% rise (from 1,078 million kWh to 1,133 million kWh) in volumes distributed. Resolution arg/elt no. 228/10 approved tariff levels for 2011 that were broadly unchanged from 2010. Electricity transmission, metering and distribution – Regulated 30/06/201 30/06/201 % change revenues 0 1 vs. 30/6/10 Hera S.p.A. ‐ Revenues (€ million) 21.7 24.2 11.5% ‐ Volume (kWh million) 1,078 1,133 5.1% ‐ Unit revenues (€ cent/kWh) 2.01 2.14 6.50% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 19 1 Directors' Report Water cycle: tariff framework Effects of the referendum result, regarding the repeal of the section "adequacy of the return on invested capital", in article 154, paragraph 1 of Legislative Decree 152/2006. The referendum result led to the repeal of paragraph 1 of article 154 of Legislative Decree 152/2006; we can therefore assume that the current tariff method will be revised, as envisaged in paragraph 2 of the same article. The recent conversion into law of Decree Law 70 of 13 May 2011, which established the National Agency for Water Regulation and Supervision (Agenzia nazionale per la regolazione e la vigilanza in materia di acqua), tasks the agency with preparing a tariff method for water services and defining its cost components. Until this date, pursuant to article 170, paragraph 3 of the aforementioned Legislative Decree 152/2006, operators had to apply tariffs approved pursuant to the current reference legislation, i.e. the standardised method set out in the Ministerial Decree of 1 August 1996. The definition of a new tariff method for water services is to be welcomed as an opportunity for certain reforms that have never been implemented, in compliance with the EU‐imposed principle of full cost coverage, in accordance with the 'polluter pays' principle. The economic agreements signed with the relevant environmental authorities (AATOs), based on existing agreements, relate to the period 2008‐2012 for all the regions governed by these authorities (ATOs) with the exception of Modena, for which tariffs have already been agreed until 2014. In light of what stated above, the Group assumes that the situation can lead, in a not near future and in a widest temporal horizon compared to present tariff agreements, to a business models and operations variation which will be affecting all the business sector and which should be surveyed during the next fiscal years A comparison with data for financial year 2010 shows an increase of 2.7% in unit revenue, mainly reflecting the application of the tariff agreements established by the regions. Meanwhile, volumes for the first six months of 2011 were in line with the previous year. Hera Group consolidated: Water Cycle ‐ tariff revenues 30/6/11 30/6/11 % change Tariff revenues (€/mn) 199.0 204.2 2.6% 3 Volumes (m /mn) 120.7 120.7 ‐0.1% 3 Average unit revenue (€cent/m ) 164.8 169.2 2.7% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 20 1 Directors' Report Urban hygiene: tariff framework At June 2011, urban waste management services were provided in 181 municipalities, 51% of which (92 municipalities) used the tariff system pursuant to Presidential Decree 158/99, serving a population representing 66% of the region served; 49% of the municipalities are still using the solid urban waste tax (TARSU) system. A detailed comparison of homogenous data from the consolidated Hera Group gives the following results. Hera Group consolidated: Urban Cleanliness ‐ tariff 2010 2011 % change revenues (TIA + TARSU) Tariff revenues (€/mn) 197.6 206.1 4.3% Residents served* (000) 2,733 2,779 1.7% Average unit revenue (€/resident) 72.3 74.2 2.6% *number of residents served at 01/01/ The total increase in regulated revenues for urban hygiene services to municipalities under concession (4.3%) mainly reflects the average tariff increase of about 3.5%, which also recovers the inflationary increase in costs. The remainder of the difference is attributable to the inclusion of new municipalities within the scope of operations of the Marche Multiservizi Group and to additional services requested by the municipalities. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 21 1 Directors' Report 1.03.03 Analysis by business segment A breakdown of the operating results achieved in the business segments in which the Group operates is given below: (i) the Gas sector, which includes methane gas and LPG distribution and sales services, district heating and heat management; (ii) the Electricity sector, which includes electricity production, distribution and sales services; (iii) the Integrated Water Cycle sector, which includes mains water, wastewater and sewage services; (iv) the Waste Management sector, which includes waste collection, treatment and disposal services; and (v) the Other Services sector, which includes public lighting, telecommunications and other minor services. In light of the above, the composition and development of revenues and EBITDA over the years is shown in the graphs below: Breakdown of the business portfolio REVENUES 30 June 2010 30 June 2011 Waste Other Waste Management Ambiente services Altri servizi Management Other 17.3% 2.5% 17.3% 2.5% 17.1% services 2.2% Water Water Acqua 12.6% 13.7% 13.7% Gas Gas 34.1% Gas 34.1% 33.8% EE Electricity Electricity 34.3% 32.5% 32.5% EBITDA 30 June 2010 30 June 2011 Other Waste Waste Other Management Services Management services 31.0% 2.5% 30.6% 2.4% Gas Gas 34.9% 35.1% Water Water 19.6% 21.5% Electricity Electricity 12.3% 10.1% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 22 1 Directors' Report The following sections present the operating results by business segment. The income statements by business segment include structural costs, including inter‐divisional transactions valued at current market prices. The analysis by business segment takes into consideration the value of the increased revenues and increased costs, with no impact on EBIDTA, relating to the application of IFRIC 12, as explained in the Group's Consolidated Income Statement. The business sectors affected by the application of the above principle are: methane gas distribution services, electricity distribution services, only for Imola area, all integrated water cycle services and public lighting services. The accounting reclassification for 2010, which increases the costs of services and capitalised costs by the same amount, is also taken into consideration. This reclassification, which has an impact on all business segments, was necessary in order to provide a better representation of the creation of plants and other works by companies operating within the Group. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 23 1 Directors' Report Analysis of the Gas segment As at 30 June 2011, the Gas segment posted growth compared with the same period in the previous year, with a slight increase in the percentage contribution to the Group's EBITDA: (€ million) 30‐Jun‐10 30‐Jun‐11 Change % change Area EBITDA 109.3 120.6 +11.3 +10.3% Group EBITDA 313.5 344.0 30.5 +9.7% Percentage weighting 34.9% 35.1% +0.2 p.p. The following table contains the main quantitative indicators in the segment: Quantitative data 30‐Jun‐10 30‐Jun‐11 Change % change Gas volumes distributed (millions of m³) 1,475.6 1,351.7 ‐123.9 ‐8.4% Gas volumes sold (millions of m³) 1,680.2 1,688.5 +8.3 +0.5% ‐ of which trading volumes 368.6 503.0 +134.4 +36.5% Heat volumes supplied (GWht) 313.9 296.1 ‐17.8 ‐5.7% The volumes of gas distributed, based on the same number of concessions managed, went from 1,475.6 million m³ in 2010 to 1,351.7 million m³ in 2011, a fall of 8.4%. This fall was sharper than the fall in demand for natural gas recorded domestically, which was equal to 7.9%, mainly due to the weather, since average temperatures were higher than in the same period of the previous year. The volumes of gas sold, on the other hand, went from 1,680.2 million m³ in the first half of 2010 to 1,688.5 million m³ in 2011, an increase of 0.5% compared with the first half of 2010 as a result of the increase in volumes traded, in spite of the aforementioned effect of the weather. The volumes of heat supplied went from 313.9 GWht in 2010 to 296.1 GWht in the first six months of 2011, with a 5.7% decrease, which was also connected to the higher average temperatures recorded in the first half of 2011, resulting in lower heat consumption. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 24 1 Directors' Report A summary of the economic results for the segment is given below: Income Statement 30‐Jun‐10 % weight 30‐Jun‐11 % weight Change % change (€ million) Revenues 686.7 731.5 +44.8 +6.5% Operating costs (562.2) ‐81.9% (581.1) ‐79.4% +18.9 +3.4% Personnel costs (33.6) ‐4.9% (36.8) ‐5.0% +3.2 +9.5% Capitalised costs 18.4 2.7% 7.0 1.0% ‐11.4 ‐62.0% EBITDA 109.3 15.9% 120.6 16.5% +11.3 +10.3% Revenues increased by 6.5%, going from €686.7 million in the first half of 2010 to €731.5 million in 2011, as a result of the increased revenues from sales, in spite of the lower volumes sold, linked to the increase in the cost of raw materials, greater volumes traded and higher revenues from distribution. Operating costs increased by 3.4% due to the increase in the cost of natural gas. EBITDA for the Gas segment increased by €11.3 million, going from €109.3 million to €120.6 million, with the EBITA margin increasing from 15.9% in the first six months of 2010 to 16.5% in 2011. This result is attributable to the increased gas sales margins resulting from favourable contracts for purchasing raw materials and increased revenues from gas distribution. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 25 1 Directors' Report Analysis of the Electricity Segment activities At the end of the first half of 2011, the Electricity segment recorded growth compared with the same period in 2010, including in terms of the contribution to the Group's overall EBITDA margin, which went from 10.1% to 12.3%, as shown in the table below: (€ million) 30‐Jun‐10 30‐Jun‐11 Change % change Area EBITDA 31.8 42.2 +10.4 +32.9% Group EBITDA 313.5 344.0 +30.5 +9.7% Percentage weighting 10.1% 12.3% +2.2 p.p. EBITDA went from €31.8 million as at 30 June 2010 to €42.2 million as at 30 June 2011, an increase of 32.9%. The quantitative figures for the segment, which do not include trading activities, are given in the table below: Quantitative data 30‐Jun‐10 30‐Jun‐11 Change % change Volumes sold (Gw/h) 3,710.6 4,815.0 +1,104.4 +29.8% Volumes distributed (Gw/h) 1,077.8 1,132.9 +55.1 +5.1% The increase in volumes distributed, equal to +5.1%, shows a recovery in consumption, which was higher in the Imola and Modena area than both the average for the reference area of Emilia‐Romagna and Tuscany (+0.9%) and the national average (+1.1%), by virtue mainly of the flows in the Modena area. The 29.8% increase in volumes sold was caused thanks to both the good performance of sales activities and the acquisition of new default‐provider service customers, with a total of more than 102 thousand new supply points, net of churn rate. The sales company was assigned the task of managing electricity‐supply default‐provider service customers in Lombardy, Tuscany, Lazio, Abruzzo, Molise and Puglia for the 2011‐2013 period. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 26 1 Directors' Report An analysis of the main segment results is given below: Income Statement 30‐Jun‐10 % weight 30‐Jun‐11 % weight Change % change (€ million) Revenues 652.7 741.5 +88.8 +13.6% Operating costs (616.7) ‐94.5% (691.5) ‐93.3% +74.8 +12.1% Personnel costs (12.1) ‐1.9% (14.0) ‐1.9% +1.9 +15.7% Capitalised costs 7.9 1.2% 6.2 0.8% ‐1.7 ‐21.4% EBITDA 31.8 4.9% 42.2 5.7% +10.4 +32.9% Revenues went from €652.7 million in the first half of 2010 to €741.5 million in 2011, with an increase of 13.6% due to higher sales volumes and greater revenues from distribution. The increase in sales volumes had an impact on the increase in operating costs for the purchase of raw materials. The EBITDA margin therefore increased from 4.9% in the first six months of 2010 to 5.7% in 2011 as a result of the aforementioned mix. At the end of the first six months of 2011, EBITDA went from €31.8 million in 2010 to €42.2 million, an increase of 32.9%, thanks to the contribution from the increased sales volumes and the revenues from distribution. Lastly, the activities launched in renewable sources and industrial cogeneration made a contribution to the overall result. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 27 1 Directors' Report Analysis of the Integrated Water Cycle activities The Integrated Water Cycle segment, as at 30 June 2011, was in line with the same period in the previous year: (€ million) 30‐Jun‐10 30‐Jun‐11 Change % change Area EBITDA 67.5 67.5 +0.0 +0.0% Group EBITDA 313.5 344.0 +30.5 +9.7% Percentage weighting 21.5% 19.6% ‐1.9 p.p. An analysis of the operating results for the segment is given below: Income Statement(€ million) 30‐Jun‐10 % weight 30‐Jun‐11 % weight Change % change Revenues 274.9 273.3 ‐1.6 ‐0.6% Operating costs (162.0) ‐59.0% (156.1) ‐57.1% ‐5.9 ‐3.6% Personnel costs (52.5) ‐19.1% (52.9) ‐19.4% +0.4 +0.8% Capitalised costs 7.2 2.6% 3.3 1.2% ‐3.9 ‐54.1% EBITDA 67.5 24.6% 67.5 24.7% +0.0 +0.0% Revenues, equal to €273.3 million, fell by 0.6% compared with the first half of 2010, due to the combined effect of (i) increased revenues from administration for the services requested, (ii) the reclassifying of business segments in accordance with IFRIC 12, and (iii) lower revenues for work done by contractors, with corresponding lower operating costs. The 3.6% decrease in operating costs is linked to the constant attention paid to operational efficiency and to the reduction in work done by contractors. The following table shows the main quantitative indicators in the segment. Quantitative data 30‐Jun‐10 30‐Jun‐11 Change % change Volumes sold (millions of m³) Mains water 120.7 120.7 +0.0 +0.0% Sewerage 105.5 104.1 ‐1.4 ‐1.3% Purification 105.8 104.2 ‐1.6 ‐1.5% The volumes of water supplied were in line with the first six months of 2010, while sewerage and purification decreased in the Pesaro‐Urbino area due to the expiry on 1 January 2011 of AATO resolution no. 14 of 13 September 2010. EBITDA stood at €67.5 million in both the first half of 2010 and the first half of 2011. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 28 1 Directors' Report Analysis of the Waste Management Segment activities The Waste Management Segment shows an increase in EBITDA compared with the first half of 2010 by 8.3%, as seen in the table below: (€ million) 30‐Jun‐10 30‐Jun‐11 Change % change Area EBITDA 97.1 105.2 +8.1 +8.3% Group EBITDA 313.5 344.0 +30.5 +9.7% Percentage weighting 31.0% 30.6% ‐0.4 p.p. Hera Group operates in an integrated way in the complete waste cycle, with 80 urban waste and special waste treatment and disposal plants. Compared with the first six months of the previous year, the Group consolidated its stake in Enomondo S.r.l., which has a new 120 thousand tonne biomass plant and a composting plant, to 50%. Moreover, in the second half of 2010, the scope of activities was extended through the consolidation of Naturambiente S.r.l., which operates in the urban hygiene and waste disposal sectors of the Marche Multiservizi Group. An analysis of the operating results achieved in the Waste Management segment is shown below: Income Statement 30‐Jun‐10 % weight 30‐Jun‐11 % weight Change % change (€ million) Revenues 347.3 370.4 +23.1 +6.7% Operating costs (189.3) ‐54.5% (195.4) ‐52.8% +6.1 +3.2% Personnel costs (76.3) ‐22.0% (76.4) ‐20.6% +0.1 +0.1% Capitalised costs 15.4 4.4% 6.7 1.8% ‐8.7 ‐56.4% EBITDA 97.1 28.0% 105.2 28.4% +8.1 +8.3% Revenues as at 30 June 2011 show an increase of 6.7% compared with the same period in the previous year, going from €347.3 million to €370.4 million thanks to greater revenues from electricity production and, to a lesser extent, increased revenues from urban hygiene through rate adjustments to cover the increase in services requested. Separated waste collection accounted for 49.6% of the total volumes collected at the end of the first half of 2011, compared with 47.0% for the same period in 2010, an increase of 2.6 percentage points. The percentage represented by separated waste collection for the whole of 2010 was not yet affected by the modification to Regional Government Decree 1620‐01 which excludes the non‐reusable fractions of multi‐material collections from the calculation of separated waste collection. Based on a standardised comparison of the figures, the percentage represented by separated collection would increase in the first six months of 2011 by 2.9 percentage points. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 29 1 Directors' Report Below is a breakdown of the volumes sold and treated by the Group in the first half of 2011 compared with the same period in 2010: Quantitative Data (thousands of tonnes) 30‐Jun‐10 % weight 30‐Jun‐11 % weight Change % change Urban waste 930.8 31.6% 904.1 33.2% ‐26.7 ‐2.9% Market waste 810.1 27.5% 817.1 30.0% +7.0 +0.9% Commercialised waste 1,740.8 59.1% 1,721.2 63.2% ‐19.6 ‐1.1% Plant by‐products 1,206.0 40.9% 1,000.9 36.8% ‐205.1 ‐17.0% Waste treated by type 2,946.9 100.0% 2,722.1 100.0% ‐224.8 ‐7.6% Landfills 722.5 24.5% 632.5 23.2% ‐90.0 ‐12.5% Waste‐to‐energy plants 405.1 13.7% 489.6 18.0% +84.5 +20.9% Selection plants 156.2 5.3% 151.2 5.6% ‐5.0 ‐3.2% Composting plants 232.5 7.9% 284.1 10.4% +51.6 +22.2% Stabilisation and physicochemical 674.5 22.9% 479.8 17.6% ‐194.7 ‐28.9% treatment plants Other 756.0 25.7% 685.0 25.2% ‐71.0 ‐9.4% Waste treated by plant 2,946.9 100.0% 2,722.1 100.0% ‐224.8 ‐7.6% The breakdown of the quantitative data shows a fall of 1.1% in commercialised waste, due, in the main, to the decrease in urban waste (‐2.9%), which was offset by an increase in market waste (+0.9%). The increase in market waste was made possible by the increased disposal capacity and more intensive marketing activities in the reference areas. The decrease in by‐products from plants, on the other hand, should be related to the different weather conditions, especially the lower rainfall compared with the first six months of 2010, which resulted in lower leachate generation. The development of disposal flows recorded should also be stressed, since, as a result of the availability of new WTE plants and the further development of separated recovery and collection activities, it saw a significant growth in volumes destined for WTE plants and composting plants, against a decrease in the use of landfills. EBITDA in the Waste Management segment increased by €8.1 million compared with the previous year, going from €97.1 million for the first half of 2010 to €105.2 million in 2011, an increase of 8.3%, tanks to all the activities of the integrate cycle. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 30 1 Directors' Report Analysis of the Other Services Segment activities As at 30 June 2011, the results for the Other Services Segment showed a slight increase compared with the same period in the previous year, with EBITDA rising from €7.8 million to €8.4 million in the same period in 2011 (+7.3%), as shown in the table below: (€ million) 30‐Jun‐10 30‐Jun‐11 Change % change Area EBITDA 7.8 8.4 +0.6 +7.3% Group EBITDA 313.5 344.0 +30.5 +9.7% Percentage weighting 2.5% 2.4% ‐0.1 p.p. The table below summarises the main economic indicators for the segment: Income Statement 30‐Jun‐10 % weight 30‐Jun‐11 % weight Change % change (€ million) Revenues 49.3 48.1 ‐1.2 ‐2.4% Operating costs (32.7) ‐66.3% (31.4) ‐65.3% ‐1.3 ‐4.0% Personnel costs (10.1) ‐20.5% (9.5) ‐19.7% ‐0.6 ‐5.9% Capitalised costs 1.4 2.7% 1.2 2.6% ‐0.2 ‐14.8% EBITDA 7.8 15.9% 8.4 17.5% +0.6 +7.3% The telecommunications business recorded growth compared with the first six months of 2010, while the public lighting service essentially stayed the same. The main operating indicators, which are listed in the table below, highlight an increase in lighting points thanks to the recent acquisition of the services in the town of San Donato Milanese, which offset the loss of several minor municipalities: Quantitative data 30‐Jun‐10 30‐Jun‐11 Change Change % Public lighting Lighting points (thousands) 331.5 336.1 +4.6 +1.4% Municipalities served 61.0 59.0 ‐2.0 ‐3.3% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 31 1 Directors' Report 1.04 Commercial policy and customer care As far as accessibility of channels is concerned, in spite of the constant increase in flows, the level of performance confirms the overall trend of improvement for branches where the effectiveness of the actions implemented for improving processes has led to a considerable improvement in quality. family call centres: 92.6% of calls answered, compared with 94.1% for the first half of 2010, with an average queue time (AQT*) of 94.6 seconds, compared with 72.6 seconds for the first half of 2010. company call centres: 93.3% of calls answered, compared with 95% for the first half of 2010, with an average queue time (AQT*) increasing from 51 seconds for the first half of 2010 to 71.4 seconds due to more customers using interactive voice response systems; If the increase in average waiting times is attributable to an increased number of calls on both toll free numbers (40,000 additional calls in the half‐year), it should be noted that 23,000 additional calls were answered in the half‐year period compared with 2010. The opening hours of the family call centre were extended from 18.00 to 20.00, Monday to Friday, to improve accessibility and customer service. family branches: average waiting times were reduced further to 11.59 minutes, compared with 16 minutes for June 2010, in spite of the 7% increase in flows; company branches: average waiting times for companies were almost halved compared with June 2010, decreasing from 6.35 minutes to 3.45 minutes. The results achieved are the result of continuous improvement activities focusing along two lines: organisational management aimed at optimising the organisation of activities and processes at several major branches, plus the optimisation of management, including flow‐prediction management; the other, educational, aspect is aimed at the continuous development of people and is also supported by an improvement in work methods thanks to new knowledge‐management instruments. The above indicators also showed signs of improvement as perceived by customers contacting the call centre and branches. The satisfaction of customers contacting the family call centres and branches, measured on a monthly basis during the year, also showed an improvement compared with the excellent results achieved previously, confirming the excellent scores for company call centres in 2010, specifically: family call centres: from an average of 73 for the first half of 2010 to 76 for the first half of 2011 (score on a scale from 1 to 100) company call centres: an average score at June 2011 of 69 for the first half of the year already reached in the first half of 2010 branches: went from 74 for the first half of 2010 to 77 for the first half of 2011 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 32 1 Directors' Report The client base in the regulated water market shows a slight increase compared with June 2010, confirming the inertial growth for this service. The EHT (Environmental Hygiene Tariff) increase was higher than the inertial growth rate (+3.78%) following the shift to the EHT of several municipalities in the reference area. The number of consumers supplied for the liberalised electricity market confirms significant growth (+28.87%) due to both the continuous development of commercial activities and the acquisition of new customers following the awarding of the Service Protection contract in the regions of Tuscany, Lazio, Abruzzo, Molise, Puglia and Lombardy. The number of supply points served in the gas market, on the other hand, fell slightly as a result of the effect of the competition that counterbalances the free‐market acquisitions in the areas of commercial expansion. Change in supply Change in supply 29/06/2007 29/06/2006 points (no.) points (%) Gas 1,067 1,070 3 ‐0.26% Electricity 453 352 102 28.87% Water 1,179 1,175 3 0.27% EHT 991 955 36 3.78% Figures expressed in thousands Volumes of electricity and gas supplied in the first half of 2011 can be summarised as follows: Electricity (Hera Comm & Hera Comm Mediterranea): went from 3,784 GWh in the first half of 2010 to 5,191 GWh in the first half of 2011, an increase of 37.18%, which reflects the dynamics of the customer‐base development. Gas (Hera Comm & Hera Comm Marche): went from 1,312 million m3 in the first half of 2010 to 1,186 million m3 in the first half of 2011, a fall of 9.60% due mainly to the milder winter compared with the first months of 2010, affecting industrial customers, business customers and small businesses combined. In line with Group policies, Hera is continuing to encourage its customers to receive electronic bills and to register and use the Her@ ON‐LINE channel. Confirming satisfaction with this service, the number of customers registered with Her@ ON‐LINE increased by 34%, going from just under 85,000 in June 2010 to 114,000 in June 2011, a customer‐base penetration of 7%. Customers who opted for electronic bills increased by 51%, going from approximately 18,000 in June 2010 to over 27,000 in June 2011, a customer‐base penetration of 2.1%. Notes: * AQT: In line with AEEG regulations, AQT measures the average time between the beginning of the call until the operator answers or the customer rings off, for calls in which the customer chooses to speak with the operator. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 33 1 Directors' Report 1.04.01 Customer satisfaction A strategic perspective of the last 5 years Since its establishment in 2002, the Group has enjoyed a sound customer base, dedicated to the quality of primary services and loyal after many years of services being managed by municipal companies which then became part of Hera. The strategic and commercial challenge has therefore been to preserve the intangible asset of the customer base following company mergers under the new "Hera" brand in all local areas of the reference market. The quality of its multi‐utility offering and after‐sales service has always been an area to which the Group has paid special attention. Over the years the Group has constantly monitored the sentiments of its customers through a process of listening and continuous interaction. Hera has invested heavily in improving the quality of its offering, by reducing service interruption times through an emergency service system that is both rapid and efficient, through improved consumption measurement and meter reading systems and through more frequent analysis of the quality of water resources and environmental impact assessment. The quality of its services and customer care has always been of particular strategic importance to the Group and has allowed it to make significant improvements to the service on offer. This has been specifically borne out in the financial statements over the last three years by such improvements as reduced waiting times at customer help desks, improved telephone helpline services, the increase in the number of customer requests that were resolved more quickly and, lastly, the constantly improving website facilities. The results of these activities are monitored annually by market research into both retail customers and business customers. Over the last three years, this research has revealed a constant increase in the degree of satisfaction regarding service and after‐sales service, until a high approval rating has been achieved (an average score of 7/10), with a reduction in the number of cases where satisfaction is deemed to be "poor" and a greater number of customers being satisfied, with levels increasing year on year. These results have to a large extent been confirmed by the sample surveys conducted monthly by the Group. Following the period of physical disruption due to the installation of new "single bill" invoicing systems, customer satisfaction trends recorded have become positive once again. This unified billing system, together with the improvement and reorganisation of after‐sales service performance, has led to a rapid recovery in good customer satisfaction levels. Added to this is the improvement in the image of the Company, which is often perceived as reliable, transparent, attentive to its customers, innovative and sustainable. The degree of customer satisfaction has therefore often equalled or exceeded the level recorded prior to the mergers. Market research also shows that an increased degree of satisfaction brings with it a greater perception of "convenience", a propensity to "cross‐selling" and positive "word of mouth" recommendations to other potential customers. This evidence supports Hera's multi‐utility strategy, especially for upstream energy activities, which are the precursors of a really competitive offering. These factors are at the root of the commercial success that the Group has continued to achieve over the last five years. Expansion in the various markets has produced a significant, constant growth in customer numbers. In this regard the figures relating to the electricity sector, where growth rates are in double digits, are particularly significant. Excellent customer loyalty in the gas industry has also allowed Hera to consolidate its dominant position in the reference area markets. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 34 1 Directors' Report 1.05 Trading and procurement policy As far as the gas sector is concerned, the first half of the year has seen a fall in consumption of more than 4% compared with the same period in the previous year. The relative recovery in consumption recorded in the industrial sector was more than offset by the reduction recorded in the service and domestic sectors, which were affected by the mild weather conditions and the reduction in use in the thermo‐electric sector. As usual, the first months of the year were dedicated, on the one hand, to the management of the contract portfolio with the aim of balancing and optimising the Group's short‐term position and, on the other hand, to finalising new contracts for the 2011‐2012 thermal year. As far as shipping activities conducted by Hera Trading are concerned, the daily adjustment of the position prevented impacts on logistic and storage costs. The necessary short‐term adjustments were made through purchase or sales adjustments at the Virtual Exchange Point (VEP) in Baumgarten using the reserved Trans Austria Gasleigtung GmbH (TAG) transport capacity and at Net Connect Germany using the transport capacity contracted to Transitgas. These transactions generally took place at favourable market conditions and made it possible to achieve results that were slightly better than those forecast. The purchase of gas intended for regulation and measurement stations was finalised in two stages in March and April, at market conditions which, even ex‐post, were among the best to be found on the market. In April, it was possible to purchase storage capacities for a year at particularly favourable conditions, from two industrial counterparties under the scope of allocations made pursuant to Legislative Decree no. 130 of 13 August 2010. During the 2nd quarter flat procurement amounts were finally defined for the purpose of balancing the portfolio for direct supplies from Hera Trading to regulation and measurement stations and for off‐network development by Hera Comm for the 2011‐2012 thermal year. As regards the electricity market, the first six months of 2011 featured a slight recovery in consumption compared with the same period in the previous year (+1.6%). In spite of the increase in demand, the spark spread of thermal power plants (CCGT) decreased further, as a result of the considerable over capacity, getting close to zero. The increase in the price recorded on the Italian stock exchange (national standard price ‐ NSP) was not sufficient to offset the strengthening of commodities prices which determine the price of gas. The negativity of the market scenario was countered, as far as Hera was concerned, by operating on the Dispatching Service Market (DSM). The Teverola and Sparanise plants achieved particularly satisfying results. The situation of the COGEN plant remains more complex, as it is very much constrained by district‐heating restrictions, meaning it cannot take advantage of market opportunities linked to the flexibility of operations. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 35 1 Directors' Report As far as trading in the electricity sector and environmental certificates are concerned, the results for the half‐year were basically in line with the budget, in spite of the sharp fall in European Union Allowances (EUAs) in the second half of June. Activity in the electricity sector during the half‐year also took the form of management/optimisation of Hera Comm's purchase portfolio through transactions carried out on the Stock Exchange and on over‐the‐counter (OTC) platforms. As regards management of commodity and exchange risk, operations during the first half of 2011 were particularly effective. They have now been consolidated in both the gas and electricity sectors through a concentrated risk portfolio which provides for destructuring formulas and for netting of positions and hedging of volumes. Hera Trading activated this instrument at the beginning of 2007 to manage hedging activities. It is proving essential for adequate and dynamic operations in both the wholesale and retail markets. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 36 1 Directors' Report 1.06 Financial policy and rating The aim of the Group's financial operations is to maintain an adequate balance, now and in future, between investments and the utilisation of capital on the one hand, and sources of funding on the other, in terms of both the repayment schedule and the type of rate. The policies and principles for management and control of the risks inherent in the Group's financial operations, such as liquidity risk, interest rate risk and exchange rate risk, are described below. Liquidity risk – Credit rating The Group's aim is to have a level of liquidity which allows it to meet its contractual commitments both under normal business conditions and during a crisis, by maintaining available lines of credit and liquidity and proceeding with the timely negotiation of loans approaching maturity, optimising the cost of funding according to current and future market conditions. As part of its short‐term financial debt at 30 June 2011, of €98.9 million, the Group has €356 million in cash, €280 million in unused committed lines of credit and ample space on its uncommitted lines of credit (more than €1,200 million), giving it sufficient liquidity to cover any financial commitments for the next two years at least. The lines of credit and related financial assets are not concentrated with any one lender, but are distributed equally among leading Italian and international banks, with utilisation much lower than the total amount available. At 30 June 2011, long‐term debt accounted for over 95% of the Group's total financial debt. The average term is more than nine years, and 75% of the debt is repayable after five years. The projected nominal flow based on the annual repayment dates over the next five years and the portion after five years is shown below. As far as Put Bond/Loan are concerned maximum financing duration was estimated therefore, Put Options won't have same deadlines as per related contracts. Second half of Nominal debt (€ million) 31/12/2012 31/12/2013 31/12/2014 31/12/2015 Over 5 years Total 2011 Bonds 0 0 0 0 0 1,25 1,25 Convertible bonds 0 0 140 0 0 0 140 Put bond/loan 0 0 0 0 0 540 540 Bank debt/other payables 28 36 33 31 202 76 406 Gross financial debt 28 36 173 31 202 1,866 2,336 There are no financial covenants on the debt except for the restriction on a single corporate rating falling below "Investment Grade" level (BBB‐). Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 37 1 Directors' Report Interest rate risk The Group is exposed to fluctuations in interest rates (Euribor) concerning the portion of financial expense relative to debt. The structure of fixed‐ and variable‐rate debt with and without the impact of hedging derivatives is shown below. Gross financial debt * 30/06/2011 31/12/2010 without % with without % with (€ million) with derivatives with derivatives derivatives derivatives derivatives derivatives Fixed rate 1,842.6 1,574.4 67% 1,819.8 1,665.5 69% Variable rate 516.04.00 784.06.00 33% 588.05.00 742.08.00 31% Total 2,359.0 2,359.0 100% 2,408.3 2,408.3 100% (*) Nominal flow which includes overdrafts The portion of debt exposed to the risk of interest rate fluctuations is around 33%. The remaining 67% is fixed‐rate debt. Moreover underlying derivatives are matched to the underlying debt. The Group's hedging policy does not allow the use of instruments for speculative purposes and is aimed at optimising the choice between fixed and variable rates as part of a prudential approach towards the risk of interest rate fluctuations. The interest rate risk is essentially managed with a view to stabilising financial flows in order to protect margins and guarantee cash flow from operations. In 2011, despite the significant proportion of long‐term debt (around 95%), the Group has managed to maintain the cost of debt at an overall average of around 4.3%. Exchange rate risk not related to commodity risk The Group adopts a prudential approach towards exposure to currency risk, in which all currency positions are netted or hedged using derivative instruments (cross‐currency swaps). The Group currently has a currency bond of JPY 20 billion, fully hedged with a cross‐currency swap. Rating Hera S.p.A. has a long‐term rating of "A3, outlook stable" from Moody's and "BBB+, outlook stable" from Standard & Poor's. These ratings were revised by the ratings agencies in July and June 2010 respectively. The Group's primary objective in defining its plans is to implement strategies aimed at maintaining/improving its high ratings. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 38 1 Directors' Report 1.07 Research and development The Group's research activities in the first half of 2011 chiefly consisted of the technological development of renewable sources, the development of environmental monitoring and control technologies, energy efficiency and optimisation of network management. The main research projects were: Energy Laboratory. The area intended for laboratory construction has been prepared and planning documents together with additions necessary to outsource the work have been completed. The Energy Laboratory will be used to assess various technologies, from those already on the market to those still in the prototype phase, thanks to the advanced data‐measurement and ‐acquisition network. The research will be managed in collaboration with the University of Bologna. Emerging Pollutants Project. The term "Emerging Pollutants" (EP) means various biologically active substances of anthropic origin such as personal‐care products, medicines, psychoactive substances associated with drug addiction and their metabolites. Of these, endocrine interference agents form a special crossover category. The presence of these substances in water is considered to be one of the most important environmental problems of the last decade. In 2007, Hera launched a research project aimed at identifying the major EPs in water systems (with particular reference to natural water destined for purification), developing analytical methods for determining their quantities, conducting surveys on the presence of these substances in the water systems involved, and evaluating the removal effectiveness of current treatment systems (purification and depuration). Partnerships have been formed with the Istituto Superiore di Sanità, the Istituto Mario Negri and the study group on "Interferenti endocrini e acque destinate al consumo umano" ("Endocrine interference agents and water intended for human consumption, or "EDinwater") sponsored by the Fondazione Amga. In 2010, the set of parameters to be monitored was defined, and a control plan put into effect. In 2011, a joint initiative began with the Politecnico di Milano to identify the best treatment technologies. Automatic leak detection. This project consists of looking at innovative systems for automatic leak detection, to be used in conjunction with the remote‐metering system. A test site was set up in 2007, and tests in different environmental conditions were carried out. The initial test results were extremely interesting. In 2008, investigation techniques were refined with the creation of an automatic field acquisition system, the development of a statistical‐ analysis tool based on the MatLab® platform and the creation of a leak‐simulation tool. The tool was ready in 2009, when it was rolled out to customers together with the acquisition tools completed the previous year. The mass of data collected has been used to enable the Group to better characterise the phenomenon. In 2010, a tool was designed and produced to facilitate data acquisition at different connection points and in various operating conditions. In 2011, acquisition began at real connection points with various versions of the new tool. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 39 1 Directors' Report Bio‐Hydro. The project proposes to develop an organic agro‐zootechnical waste‐disposal cycle consisting of hydrogen fermentation of at least one type of agro‐zootechnical waste and methane co‐digestion of the residue from this process with other agro‐zootechnical waste and/or the organic portion of solid urban waste. The project is in association with Herambiente and the Faculty of Engineering at the University of Bologna and is jointly funded by the Ministry of Agricultural, Food and Forestry Policy. In 2010, work began on the characterisation of agro‐zootechnical waste and various waste matrices were acquired, suitable for the hydrogen bio‐conversion process and anaerobic co‐ digestion of the waste with hydrogen fermentation. In parallel, the University is developing bio‐production tests and prototype reactor design. Automatic plant management. This project, produced in association with ENEA, involves the development of a system for automatic management of the main operating parameters of water‐treatment plants. The system must maintain the process conditions of a given plant at maximum efficiency, depending on the composition of the waste water (depuration plants) or untreated water (potability treatment plants). In 2008, work began at the Calderara di Reno ‐ Bologna depuration plant, chosen as a test site. In 2009, analysis and control instruments were installed at the site and field‐data acquisition began. The data acquired in 2010 confirm what we knew about SBR systems and reveal new characteristics in terms of the quantities monitored, helping to differentiate between standard operation or malfunctions at the plant. In general, the theoretical application of automatic plant control has been demonstrated. In 2011, the second phase of the project began, involving the construction of prototype software to be used as a decision‐making tool. Modelling water‐treatment plants. This project involves the development of mathematical models intended for the hydraulic and process simulation of depuration plants. The aim is to acquire the instruments and know‐how necessary to begin coordinating the mathematical modelling of integrated water‐treatment plants. The project is in association with ENEA. In 2009, the preliminary work was carried out to produce a model of the sample site and to select calculation software from those commercially available. In 2010, at the end of the evaluation phase, software licences were acquired. The first half of 2011 saw the start of modelling activities within the Group, although the project is still in the pilot phase. Increase in intellectual property. This activity, which began in 2010, is continuing with the scouting and protection of new patentable ideas and enhancements to existing patents. Energy recovery from water‐treatment plants. In 2010, the possibility of energy recovery from water‐treatment plants was investigated, with a study of the technologies involved. An initial feasibility study was developed to recover energy from the Bologna depuration plant using a high‐performance hydraulic screw developed by the Loccioni Group. In 2011, two other studies were in the development phase: the first concerns energy recovery from the mains water supply using in‐pipe‐turbine (IPT) or pump‐as‐turbine (PAT) systems; the second project involves heat recovery from mains water using low‐enthalpy heat‐pump systems. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 40 1 Directors' Report Characterisation and analysis of polyethylene pipes. Polyethylene pipes used for the mains water supply have a higher burst rate than pipelines made from other materials. To examine the causes of this in more detail, a project is under way to perform a critical analysis of burst pipes, to increase know‐how about PE pipes, to provide basic criteria with which to classify the various types of burst pipe, to identify the principal causes and to design improvement plans. The project has been developed in collaboration with LyondellBasell, one of the world's leading manufacturers of polyolefins, and with the Plastics Testing Laboratory at the Department of Chemistry, Materials and Chemical Engineering at the Politecnico di Milano. In 2010, samples were collected along sections of pipeline which had burst and a visual analysis carried out of the samples taken. In 2011, laboratory tests began for precise fault characterisation, the results of which will be used to define action and improvement plans. Study of water meters and "antifreeze" technologies. In 2011, following extensive market research, experiments began at the R&D laboratory to test the strength and reliability of various types of meter and "antifreeze" technologies. A freeze test was carried out on a system connected to four meters, recreating the real‐life situation of meters which are exposed to very low temperatures (<‐10 °C) for long periods of time and which, when they burst, must be immediately replaced. The study also includes the mathematical modelling of the phenomenon. The idea is to provide useful elements for a possible update of the supply specifications for those meters that are subject to these meteorological conditions, depending on the location and type of installation. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 41 1 Directors' Report 1.08 Human resources and organisation 1.08 Human resources and organisation Company organisation and Group structure Organisational chart Board of Directors Management Internal Remuneration - Control Mgmt.. Committee Committee Chairman Chief Executive Officer Vice-Chairman T. Tommasi di Vignano M. Chiarini G. Razzoli Management Committee Corporate Social Investor Relations Internal Auditing Responsibility J. K. Hansen C. Poli F. Bocchi Procurement & Admin., Finance External Relations G. Gagliano Contracts G. C. Randi & Control G. C. Randi L. Moroni Information Services Legal & Personnel and Quality, Safety à and Systems Corporate Affairs Organisation & Environment M. Guerrini M. Fabbri G. Campri E. Dottori Independent Operators General Mgmt Exec. Comm. General Mgmt Develop. & Market e Operations S. Venier R. Barilli HERAmbiente Operating Sectors Devel. and Bus. Devel. e C. Galli Department Large Plants Strategic Planning S. Molè Engineering A. Protasoni Sector C. Botti Gas Distribution Water Cycle Elec. Distribution District Heating Waste Mgmt. Gas sector sector E.E. sector sector sector a.i. F. Sami F. Sami C. Morandi F. Ferraresi a.i. S. Molè Business Unit Business Unit Business Unit Business Unit Business Unit Business Unit Business Unit Hera Hera Hera SOT LOC SOT LOC LOC SOT LOC SOT LOC SOT LOC SOT Trading Comm Acantho Luce SOT LOC P. Musolesi C. Fabbri R. Vancini W. Sirri Bologna A. Bruschi Ferrara O. Sirri Forlì-Cesena F. Fogacci Imola-Faenza S. Zucchelli Modena R. Gasparetto Ravenna T. Mazzoni Rimini E. Minarelli Human resources At 30 June 2011, the Hera Group had 6,530 employees (consolidated companies), with the following breakdown by role: managers (128), middle managers (339), employees (3,356), and workers (2,707). This workforce was the result of the following changes: new recruits (+97*), leavers (‐59), change in scope (+1**). The new hires in question were made essentially with a view to changing the employee mix by adding more qualified staff. There was an overall increase in the number of graduates compared with 2010, from 1,033 at 31 December 2010 (16% of all permanent employees) to 1,074 at 30 June 2011 (16.4% of all permanent employees). (*) includes 11 employees added to Hera Luce (in relation to the tender process in the Bologna area) who left the group with effect from 1 July 2011 (**) Enomondo Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 42 1 Directors' Report Organisation The Hera model stands out from its peers in the multi‐utility sector for its successful business and operational integration founded on a single holding company, which: • through Central Departments of structuring, support and control, ensures an integrated view of the Group and encourages synergies; • through General Management Departments and Central Business Sectors, directs and coordinates the different businesses. The Hera operational model combines the business sector perspective with the operating unit/company perspective to enable: ‐ a sharper focus on development and streamlining objectives; ‐ an optimisation/concentration of assets, skills and specialist roles that can ensure a unified perspective; ‐ a 'balanced' structure with regard to regulatory constraints on some activities (e.g. energy unbundling); ‐ the retention of operational control in the region. The Group's organisational chart therefore displays the following features: ‐ The following central departments report to the Chairman: Legal and Corporate Affairs; Information Services and Systems; External Relations and Investor Relations. The Development and Market Management Department and Herambiente S.p.A. also report to the Chairman. ‐ The following central departments report to the CEO: Procurement and Contracts; Administration, Finance and Control; Personnel and Organisation; Quality, Safety and Environment; Corporate Social Responsibility. The CEO also oversees the Operations General Management Department, within which the Operating Sectors Department was created in 2010. The following departments report to this new department: Gas Distribution Sector; Electricity Distribution Sector; Waste Management Sector; Water Cycle Sector; and District Heating Sector. The seven Local Business Units and the Large Plants Engineering Department also report to the Operations General Management. ‐ The Vice‐Chairman oversees the Internal Auditing Department There have been several organisational changes (effective from 1 July 2011) within the Development and Market General Management Department, particularly at Hera Comm, relating to marketing and indirect sales processes. These are aimed at ensuring a sharper focus on analysing profit for commercial development, on identifying opportunities in the market and on helping business units to reach their sales targets. The process‐analysis and ‐optimisation programme continued at Herambiente S.p.A., involving application of the Lean Organisation method. With reference to the Central Departments and their respective governance and support processes, efforts continue in an attempt to find the best balance between process governance and internal client orientation and to make process integration more efficient. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 43 1 Directors' Report The project to update information systems following the transformation of the Local Operating Companies into Business Units (the DESOT Project) has been completed. The process‐analysis and ‐optimisation programme continued at the Administration, Finance and Control Central Department through application of the Lean Organisation method, pertaining in particular to certain administrative‐ accounting and credit‐management processes. In addition, it is important to note that Credit Management and Finance teams have been reorganized with a view to further strengthening organisational control of these areas across the Group. Also Quality, Safety and Environment Department structure (pertaining in particular to QSE Coordination and Protection‐ and Prevention‐Service Coordination), has been reorganized in order to consolidate the organisational changes and the centralisation process beginning in late 2009. The process‐analysis and optimisation programme continued at the Operations General Management Department, involving application of the Lean Organisation method. Lastly, the centralisation of fluid remote control was completed on schedule. Industrial relations During the first half of 2011, the Group continued to honour the commitments made when the Supplementary Collective Labour Agreement was signed on 24th March 2010). The Technical Committee provided for by the Supplementary Collective Labour Agreement drew up and debated systems for harmonising the statutory pay and indemnities of the HERA Group, with a particular focus on transfers, meals and geographical mobility. Group‐wide and regional negotiations with union representatives led to an agreement in April on the current tax‐ break rules within the Hera Group and enabled the Group to define new rules on the canteen service for all companies in the Ferrara area. Also in April, the Group reached an agreement with the trade unions in the Bologna area on the repercussions of relocating some business units currently situated in Bologna to the site at Granarolo (to the Granarolo site). In May, the Parties agreed upon a final calculation of the Group's performance bonuses for 2010 and identified the Group's performance‐bonus targets for 2011. In June, at the same time as Hera Luce S.r.l. activities were interrupted. in Bologna, an agreement was reached with the trade unions in the Bologna area on the redundancy (Law no. 223/91) of Hera Luce S.r.l. employees. The affected workers agreed to be placed on the redundancy scheme. Pursuant to the Supplementary Collective Labour Agreement, the Group's training programme for 2011 was presented and an agreement was reached on funded training for Hera S.p.A., Herambiente S.p.A., Hera Comm S.r.l., Uniflotte S.p.A. and Famula On‐Line S.p.A. During the first six months of 2011, the Group also worked with the Federations on renewing the national collective labour agreements for the gas and water, electricity and waste‐management services sectors. With regard to the latter, Hera's intervention led to a specific clause on protecting outsourcing to social cooperatives being inserted in the Federambiente agreement. The clause stipulates that 5% (this can be increased to as much as 15% within a particular company) of the economic volume (total revenues generated through internal resources) of street‐ sweeping, waste‐collection and ‐transportation (excluding the transfer business), cesspit‐emptying and skip‐cleaning activities be exempt from the waste‐management services national collective labour agreements through the definition of social‐inclusion projects. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 44 1 Directors' Report Training and development In relation to the new leadership model, internally run training workshops were held for all managers and middle managers. A seminar took place on the first of the four key elements of the model and team‐management training began for managers and middle managers. In addition, there were individual coaching courses and team‐building and communication training exercises as part of the institutional and managerial training programmes. As part of the Work Force Management project, the trainers' training and sequential end‐user training was completed in the pilot business units of Bologna and Imola/Faenza. The trainers' training was completed in all the other business units, and the end‐user sequential training is undergoing completion. Trainers were provided with both methodological training aimed at supplying teaching methods and learning management, with particular attention to motivational issues and aspects of cultural change related to the technological‐innovation model introduced by the WFM system, and classroom technical training aimed at acquiring working knowledge of the system. This technical training comprises a basic module, aimed at ensuring uniform knowledge of the system and its operating processes, and specialist modules, aimed at acquiring the individual functions required to manage event intervention, works and management and maintenance. The WFM Project Forum was set up at the end of 2010 to provide effective support for change management, share and make transparent useful information for users involved in the change process, facilitate the initiation and maintenance of relations between expert users, encourage remote teamwork and enable any problems in the management of the training process to be overcome. Initially, only the key users and trainers of the Bologna and Imola Faenza pilot business units were trained up; the key users and trainers from the other business units were trained up at a later stage. As at the end of the first half of 2011, the Forum had 3,260 views, 227 messages and 98 discussions. Training activities that are mandatory by law (fire‐fighting, first aid, etc.) have continued in 2011. One of the most successful initiatives has been the emergencies training. A total of 110 employees took part, including protection‐ and prevention‐service managers and employees, site managers, emergency‐team managers and coordinators of multi‐ site emergencies. In the area of environmental services, operational training on the new waste‐traceability system – SISTRI – continued and was completed in May. This was provided in the form of sequential internal training: internal facilitators were identified within each area and trained to impart to their local colleagues practical and operational knowledge regarding the entry into force of the new system. Around 250 people took part in this training. Staying with environmental services, a seminar on "Changes to Part IV of the Environmental Code", hosted by Dr. Paola Ficco and organised jointly by Hera S.p.A. and Herambiente, was staged in Rimini on May 19‐20. More than 200 people took part in the event over the two days, including managers and specialists from the environment and networks sectors. In 2011, the intense training activity and professional refresher courses continued for both technical and operating staff, together with specific activities aimed at maintaining and enhancing the operating skills required for activities that are deemed to be critical from the point of view of service quality, safety and potential environmental impacts. An internal‐services satisfaction survey was conducted on a significant sample of the workforce in order to get a better understanding of satisfaction levels regarding facility management, internal catering, help‐desk services and information‐ system maintenance. The survey identified some areas for improvement and enabled the Group to draw up corrective actions to be implemented in the coming months. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 45 1 Directors' Report There were around 19,895 participants in training activities, and 89% of Group employees were involved in at least one training activity. Net of costs for the staff being trained and for the internal facilitators, investment for 2011 is forecast at €654,700. The figures highlight the Hera Group's significant commitment, in terms of both money and other resources, to continually developing and maximising the potential of its employees. Training area Professional and specialist training 29,052 Quality, safety and environment 22,295 Institutional and managerial training 18,184 IT 20,985 Total 90,516 The Graduate Programme, which began in 2004, continued in 2011. It aims to recruit young graduates with excellent professional potential. The workforce currently contains 116 employees who have joined the Group since 2004. In 2011, 60 young graduates were assessed for selection. Fifteen will be hired over the course of the year and will take part in the introductory training programme, which includes a basic management course. A Potential‐Development Programme has been running since 2008, with the aim of maximising the potential of the Group's existing young employees. The Programme includes all members of the 2004, 2005 and 2006 Graduate Programmes, as well as other young employees with similar qualities and qualifications. In total, since February 2008, 95 employees have undergone a motivational and career‐orientation interview before attending two Assessment Development Centre days, during which their professional‐development potential was assessed. The most suitable individual professional‐development programmes were drawn up based on the results. These programmes are frequently reviewed. A second assessment phase has been planned for members of the 2007, 2008 and 2009 Graduate Programmes, as well as other young employees with similar qualities and qualifications. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 46 1 Directors' Report 1.09 Information systems During 2011, the Hera Group's information systems followed the path mapped out by the business plan, operating in accordance with the following guidelines: satisfying business requirements effectively, consolidating the operating efficiency of the Hera Group's companies and business units and adapting promptly to sector norms. The information systems' contribution to the Hera Group's business in the first half of 2011 is shown by the following key indicators: • more than 8 million bills issued, of which over 115,000 were sent electronically – a significant increase on 2010 • more than 2,300 online tenders managed • around 60,000 emergency calls handled • more than 4.6 million active contracts for five services (electricity, gas, district heating, water, waste management) • around 65,000 km of distribution network managed • 1.9 million service requests, managed through four channels o call centres o branches o mail o internet There have also been significant accomplishments, such as: • the completion of the project to update the systems to the reorganisation of the Local Operating Companies (the LOC reverse spin‐off project), having achieved the objective of minimising the impact on normal system activity • the start‐up in all areas of the new information system to support network management and maintenance activities (Work Force Management). The new system is already fully implemented, as demonstrated by the following figures recorded in four months when the system was in operation (since March in two areas and since May for the remaining areas): o More than 33,000 emergency orders processed o Around 4,000 quotes o Around 160,000 tasks created in the new works organisation and management system (Front End, Emergencies, Management and Maintenance) Important work continues to updating the information systems in relation to regulatory obligations on separating the distribution and sales processes (software unbundling) and the administrative and accounting processes (accounting unbundling) for companies operating in the electricity and gas sectors (Resolution 11/07 et seq.). Among the most important initiatives this year is the start of the project to review applications supporting metering‐ management processes. This project aims to a more efficient process and streamline applications. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 47 1 Directors' Report The information systems' "Quality Management System" has been launched. It has the following aims: • Standardise processes and make operations uniform • Increase the quality of activities carried out • Obtain ISO 9001 certification As well as the above projects, the other main projects initiated in the first half of the year (more than 60) were classified into the following types: Improve the efficiency of operating processes and support the Hera Group's new business requirements: • Steps to optimise existing systems aimed at improving sales processes • Implementation of a tool for automating customer‐service processes (Mashup) • Migration and management of contracts acquired in the default‐provider market • Switch of seven new municipalities to the TIA waste‐management tariff • Revision of the invoice‐printing model and update to new specifications • Implementation of the investment‐control and ‐management process • Identification of a solution for the centralised management of employee data and employee‐management processes • Extension of the Group's document‐management system to Protocol management Update to sector regulatory requirements (the major ones are listed here): • Update to Resolution 219‐10 on the functioning of the Simplified Indemnification System • Update to Resolution 67‐10 on tariff regulation for temporary connections to medium‐ and high‐voltage electricity‐distribution networks • Update to Resolution 125‐10 on active connections • Update to Resolution 156‐07 on changes to metering frequency • Update to EC Regulation 254/09 on IFRIC 12: Service Concession Arrangements. • Update to Resolution 104‐10 on managing customer compensation for non‐communication • Integration of SISTRI (waste‐traceability control system) • Update to the regulation on the traceability of financial flows relating to works, supplies and services tender contracts • Tariff update for water and gas services Reduce technological risk and improve security levels: • Start of technological renewal project • Update to changes required by security and privacy managers • Oracle 11 upgrade for SAP The information systems also ensured continuity of their own service, minimising the impact of new projects and fulfilling ordinary maintenance and system‐development requests in accordance with agreed priorities. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 48 1 Directors' Report 1.10 Quality, safety and environment In the first half of 2011, the Quality, Safety and Environment Department (DCQSA) underwent major restructuring. The key phases were as follows: - the creation of a regulatory framework for Quality, Safety and Environment (QSE); - the identification and appointment of a health and safety coordinator; - the creation of a single Health and Safety Department providing support to the Local Operating Company business units in Imola‐Faenza, Ravenna, Forlì‐Cesena and Rimini, classed as the "Romagna" region; ‐ the restructuring of QSE coordination through the definition of areas of specialisation, mainly to foster better synergies within the technical aspects of the sector. With the definition and publication of the guidelines entitled "Hera Group Quality, Safety and Environment Policy and Management System" (issued on 21 March 2011), the importance of the coordination carried out by the DCQSA within the Group has been further strengthened, clarifying its role in subsidiary and investee companies. In the first half of 2011, two major non‐conformities were resolved on schedule (by February 2011). These concerned the third part of the scope, in the water‐cycle certification process, recorded by the certification body (DNV) at the LOC business units in Bologna and Imola‐Faenza. Certification was subsequently awarded with satisfactory results, integrated for the first time across the three certification models (Quality, Safety, Environment) in line with the planned objective, for all entities and central divisions and for all local operating companies (LOC). The exceptions were the Ravenna and Modena LOC, which, due to the parallel implementation of the new WFM information system, requested a revision of the timetable for water‐cycle certification, to be concluded in September. As planned, the major review of environmental assessment and legislative compliance was completed, which began last year with the integrated water cycle. During this period, the revision of environmental aspects for the Environmental Services, Gas, Electricity and District Heating sectors was also completed. During the same period, the specific risk‐assessment criteria and methodology were finalised for health and safety in the workplace, as required by Legislative Decree no. 81/08 (as subsequently amended), leading to the publication of specific operating procedures. Once again, with a view to improving and standardising the management of key QSE aspects and improving their efficiency, some critical processes have been coordinated by DCQSA: the "management review" process, which has seen both the LOC (level III review) and Business Sectors (level II review) involved in the analysis of defined and shared inputs aimed at generating, in a virtuous, closed circle, outputs used in the preparation of the final management review (level I review); internal audit activities, which this year have sought to optimise and capitalise on the Group's QSE expertise and to align approaches and audit methodologies in order to maximise audit efficiency and streamline the resulting outputs. The key stages of this project consisted, in line with the restructuring of QSE coordination, of a clear assignment of areas of responsibility, the definition of common audit criteria as a guide to planning and management of audits by the entire Group, and a combined analysis of the results for each sector. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 49 1 Directors' Report During the first half, the targets set by the Quality, Safety and Environment Department were achieved with satisfactory results. The service carried out by the DCQSA is aimed at all Group business units, particularly involving the Local Operating Company business units, which have made a huge effort and commitment to work towards achieving the ambitious objective of certifying our integrated Quality, Safety and Environment management system. Some of the most notable results include reaching the impressive milestone represented by the certification of the environmental management system and validation of the environmental declaration for the purposes of EMAS registration of the Casalegno di Imola cogeneration plant, a large 80 MW plant providing district heating for the city of Imola, which in 2010 had not yet completed the final registration process with the Ecoaudit‐Ecolabel committee. Again this year the audit results were excellent, with no recommendations and with a new certificate of conformity issued for the environmental declaration updated for 2010. In May 2011, the EMAS registration process was finally completed and the number IT‐001333 was assigned. In early 2011, the health and safety issues raised included the following: the preparation, with the help of medical coordinator Dr Sante Tabanelli, of draft company regulations on the consumption of alcohol. This was presented to all employee safety representatives at a special meeting; the completion of training on health and safety in the workplace aimed at senior management, much of which was based on a cascade approach intended for managers and workers; the introduction of computerised management for occupational medicine and the gathering of information for the risk‐assessment document and accident‐data management. Following the training course on incident and near‐miss investigation techniques, a licence has been obtained to use the procedure covered in the course, known as the Systematic Cause Analysis Technique (SCAT). This tool has been refined and customised for Hera and was rolled out in 2010 after undergoing tests and inspections. An additional effort will be needed to ensure that all business segments are using it methodically and consistently. In conjunction with the Group Purchasing and Procurement Department, a specific audit cycle has been completed aimed at verifying the level of implementation of the principal company procedures for supplier and supply control, activities which are increasingly important for the Hera Group in view of the size of the investments made and the impact of supplier performance on QSE issues. As every year, in preparation for 2011 Emissions Trading certification, a series of actions have been carried out concerning 2010 data. These include: ‐ performance of internal audits, ‐ organisation of a task force on this subject to analyse common issues and harmonise behaviour. In early 2011 certification was obtained for all 11 plants assessed, in recognition of the compliance and comprehensiveness of the data and management of the system certified. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 50 1 Directors' Report These are in addition to the normal activities that the DCQSA plans and carries out to maintain the Group's integrated management system. Of those carried out since the start of 2011, the DCQSA has notably been involved in: • conducting QSE coherence checks for procedures and instructions drawn up by the various business units; • updating the system documentation, QSE manual, system procedure, risk‐assessment documents and environmental analyses; • supporting Facility Management in its inspection of regional centres within the various LOC and structuring major projects to address certain non‐conformities which have emerged in terms of environmental aspects and supplier control. In 2011, the launch of the project "Un Anno per la Sicurezza nel Gruppo HERA" ("A Year of Safety at the Hera Group") was decide to foster a health‐and‐safety culture and to improve conduct in the workplace. A steering committee has been set up, composed of the chairman of Hera S.p.A., the vice‐chairman of Hera S.p.A., the CEO of Hera S.p.A., the chairman of Herambiente, the DCQSA, the DCPO, the DCSR and the DGO. The project consists of 15 schemes, some of which encompass the entire Group and some of which are pilot schemes managed at a local level. Project status is monitored and coordinated by a group which draws up the guidelines for each individual project and verifies their overall development, periodically reporting back to the steering committee on progress. The coordination group is composed of: ‐ three employers' representatives (Hera S.p.A. LOC business unit, Hera S.p.A. Central Bodies‐DCSSI, Herambiente), ‐ DCQSA – DCSR – DCPO – DCRE – DSO, ‐ the health and safety coordinator and QSE coordinator, ‐ an employee health and safety representative. Within the coordination group there is a scientific committee consisting of three external specialists in the fields of employment and health and safety in various areas (legal, economic, psychosocial). In terms of data protection, during the first half of 2011 the data‐protection management system was further enhanced and consolidated with the units concerned. The system covers various organisational ambits, primarily focusing on those aimed at: governing and guaranteeing compliance of internal and outsourced activities; intervening to prevent unlawful conduct; maximising the re‐ engineering and streamlining of privacy‐oriented processes. In this context, numerous activities have been carried out, such as: • the first uniform survey of company databases, documented in the 2011 Safety Programming Document, • a procedure aimed at managing company data‐protection obligations (awaiting publication), • cross‐functional activities for specific data‐protection managers/Group companies; • fundamentals identified for data‐protection management and adaptation of critical processes (administration of Group information systems, employer audits, video surveillance), • process under way to assign responsibility for data protection to suppliers, • "passive nominations" procedure with assignment of responsibility for data protection by third parties, • data‐protection assessments initiated within the Group based on the key business ambits (Hera Comm/FoL), • distribution of letters of appointment for employees/contractors, • regulatory support/consultancy given to Group business units. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 51 1 Directors' Report 1.11 Significant events after the end of the half‐year and outlook Hera Comm Marche S.r.l. / Sadori Gas S.r.l. The merger by incorporation of Sadori Gas S.r.l. into Hera Comm Marche S.r.l., in which Hera Comm has a 60% stake and Marche Multiservizi S.p.A. controls the remaining 40%, was completed with effect from 1 July 2011. As a result of this transaction, the share capital of Hera Comm Marche S.r.l. increased from €1,458,332 to €1,977,332. Hera Comm S.r.l. now holds 57.38% of the share capital of Hera Comm Marche S.r.l., with Marche Multiservizi S.p.A. controlling 29.50% and Walter Sadori S.r.l. the remaining 13.12%. Decree Law 138 of 13 August 2011 Decree Law 138 (additional urgent measures for financial stability and growth) was published in the Gazzetta Ufficiale on 13 August 2011. As well as extending the scope of application of the so‐called Robin Hood Tax (companies with revenues of more than €10 million which are involved in the production, transmission and dispatch, distribution or sale of electricity, or in the transportation or distribution of natural gas, are now included), Article 7 of said Decree Law imposed a rise of 4 percentage points (from 6.5% to 10.5%) in the relative IRES surtax for 2011, 2012 and 2013. Having carefully considered how the Decree Law affects the various Group companies, and pending its actual conversion into law, Hera S.p.A. has estimated that the application of the aforementioned rate increase during preparation of this half year report would result in a lower net profit at Group level, equal to around €2 million. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 52 Consolidated financial statements 2 Consolidated financial statements 2.01 Consolidated financial statements 2.01.01 Income statement 30/6/2011 30/6/2010 thousands of Euro notes (6 months) (6 months) reclassified Revenues 4 1.983.185 1.806.961 Other operating income 5 87.701 101.758 Use of raw materials and consumables 6 ‐1.122.021 ‐1.036.447 Service costs 7 ‐422.065 ‐405.637 Personnel costs 8 ‐189.662 ‐184.581 Amortisation, depreciation and provisions 9 ‐144.589 ‐138.663 Other operating costs 10 ‐17.536 ‐18.821 Capitalised costs 11 24.357 50.279 Operating profit 199.370 174.849 Portion of profits (losses) pertaining to associated companies 12 4.723 4.337 Financial income 13 33.795 55.336 Financial charges 13 ‐91.972 ‐114.448 Total financial operations ‐53.454 ‐54.775 Pre‐tax profit 145.916 120.074 Taxes for the period 14 ‐62.759 ‐50.911 Net profit for the period 83.157 69.163 Attributable to: 0 Shareholders of Parent Company 71.398 62.573 Minority shareholders 11.759 6.590 Earnings per share 14.1 base 0,064 0,056 diluted 0,061 0,056 * Figures as at 30 June 2010 were reclassified as described in the explanatory notes in the section "Financial statements". Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 53 2 Consolidated financial statements 2.01.02 Aggregate income statement thousands of Euro 30/06/11 30/06/10 Net profit/(loss) for the period 83.157 69.163 Change in cash flow hedge reserve 7.524 255 Tax effects of other components of comprehensive income ‐2.113 ‐270 Share of "other components of income" attributable to investments valued at 315 ‐455 equity Total profit/(loss) for the period 88.883 68.693 Attributable to: Shareholders of Parent Company 76.394 62.481 Minority shareholders 12.489 6.212 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 54 2 Consolidated financial statements 2.01.03 Balance sheet thousands of Euro notes 30‐Jun‐11 31‐Dec‐10 ASSETS Non‐current assets Tangible fixed assets 15 1.870.945 1.840.232 Intangible fixed assets 16 1.746.247 1.728.498 Goodwill 17 377.744 377.579 Equity investments 18 138.151 135.344 Financial assets 19 10.915 10.912 Deferred tax assets 20 89.877 84.290 Financial instruments – derivatives 21 26.629 40.071 Total non‐current assets 4.260.508 4.216.926 Current assets Inventories 22 72.606 53.880 Trade receivables 23 1.114.174 1.134.496 Contract work in progress 24 18.365 17.228 Financial assets 25 41.541 46.084 Financial instruments – derivatives 21 21.608 12.796 Other current assets 26 219.212 181.607 Cash and cash equivalents 27 356.264 538.226 Total current assets 1.843.770 1.984.317 TOTAL ASSETS 6.104.278 6.201.243 cont.d Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 55 2 Consolidated financial statements thousands of Euro note 30‐giu‐2011 31‐dic‐2010 SHAREHOLDERS' EQUITY AND LIABILITIES Share capital and reserves 28 Share capital 1.115.014 1.115.014 ‐Reserve for treasury shares at par value ‐5.938 ‐5.940 Reserves 537.339 514.662 ‐Reserve for treasury shares exceeding par value ‐3.195 ‐3.105 Reserves for derivative instruments valued at fair value ‐7.726 ‐12.407 Retained earnings (losses) 2.061 2.061 Profit (loss) for the period 71.398 117.218 Group shareholders' equity 1.708.953 1.727.503 Minority interest 137.045 142.720 Total shareholders' equity 1.845.998 1.870.223 Non‐current liabilities Loans ‐ maturing beyond the next year 29 2.299.451 2.313.722 Employee leaving indemnity and other benefits 30 94.094 95.643 Provisions for risks and charges 31 219.675 210.968 Deferred tax liabilities 32 77.992 76.143 Financial leasing payables – maturing beyond the next year 33 7.499 8.882 Financial instruments – derivatives 21 25.685 44.082 Total non‐current liabilities 2.724.396 2.749.440 Current liabilities Banks and other borrowings ‐ maturing within the next year 29 97.764 147.837 Financial leasing payables – maturing within the next year 33 3.457 4.599 Trade payables 34 894.273 1.061.003 Income tax liabilities 35 240.817 124.502 Other current liabilities 36 281.782 230.050 Financial instruments – derivatives 21 15.791 13.589 Total current liabilities 1.533.884 1.581.580 TOTAL LIABILITIES 4.258.280 4.331.020 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6.104.278 6.201.243 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 56 2 Consolidated financial statements 2.01.04 Cash flow statement thousands of Euro 30‐Jun‐11 30‐Jun‐10 Operations Cash flow Net profit attributable to Group and minority shareholders 83.157 69.163 Depreciation and write‐downs of tangible fixed assets 61.237 59.567 Amortisation and write‐downs of intangible fixed assets 50.816 53.453 Total cash flow 195.210 182.183 Profit (loss) of equity‐accounted investments (2.344) (2.464) (Gains) Losses on disposal of fixed assets 330 (1.711) Changes in prepaid and deferred taxes (3.735) (12.846) Employee leaving indemnities and other benefits: Provisions/ (uses) (1.549) (2.131) Provisions for risks and charges: Provisions/ (uses) 7.972 4.928 Total cash flow before changes in net working capital 195.884 167.959 Working Capital Change in trade receivables 19.544 83.861 Change in inventories (19.863) (11.858) Change in other current assets (37.604) (8.506) Change in trade payables (166.392) (205.897) Change in tax liabilities 116.067 151.419 Change in other current liabilities 51.702 15.469 Change in financial instruments ‐ derivatives (6.843) (16.665) Change in working capital (43.389) 7.823 Change in financial instruments ‐ non‐current derivatives 689 (40.063) Liquidity generated by operations 153.184 a) 135.719 a) Investment activities Disinvestment/(investment) in tangible fixed assets, net of net investments/disinvestments (63.590) (85.036) Disinvestment/(investment) in intangible fixed assets, net of net investments/disinvestments (67.667) (64.062) Goodwill 0 0 Equity investments net of disinvestments (7.114) (3.028) (Increase)/decrease in other investments 2.490 (11.582) Change in financial instruments ‐ derivatives Liquidity generated/(absorbed) by investment activities (135.881) b) (163.708) b) Financing activities Medium/long‐term loans (24.463) 15.315 Change in shareholders' equity (627) 613 Change in equity interests 0 0 Change in short‐term bank indebtedness (53.892) 10.403 Dividends paid out (118.026) (96.814) Change in financial leasing payables (2.525) (2.252) Liquidity generated/(absorbed) by financing activities (199.533) c) (72.735) c) (182.230) (100.724) (a+b+c) (a+b+c) Change in net financial position Cash and cash equivalents at the beginning of the period 538.226 350.332 Contribution of cash from business combinations 268 1.055 Cash and cash equivalents at the end of the period 356.264 250.663 (182.230) (100.724) (*) Pursuant to Consob resolution no. 15519 of 27 July 2006, the effects of transactions with related parties on the Cash Flow Statement are disclosed in the special cash flow statement format shown in the following pages and are further described in paragraph 2.02.03 of these consolidated half‐year financial statements. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 57 2 Consolidated financial statements 2.01.05 Statement of changes in shareholders' equity Reserves for Share Profit for Shareholders' Reserves derivative instruments Minority interest Total capital the period equity valued at fair value Balance as at 31 December 2009 1.112.121 472.428 -12.995 71.052 1.642.606 58.125 1.700.731 Profit for the period 62.573 62.573 6.590 69.163 Other components of comprehensive income as at 30 June 2010: change in the fair value of derivatives for the period 363 363 -378 -15 change in the fair value of derivatives for the period -455 -455 -455 for companies measured at equity Total comprehensive income for the period -455 363 62.573 62.481 6.212 68.693 change in treasury shares in portfolio -560 -304 -864 -864 change in scope of consolidation -870 -870 870 0 other movements 8.380 -6.346 2.034 -103 1.931 Allocation of 2009 profit: - dividends paid out -39.410 -49.524 -88.934 -7.880 -96.814 - allocation to retained earnings 18.640 -18.640 0 0 - allocation to other reserves 2.888 -2.888 0 0 Balance as at 30 June 2010 1.111.561 461.297 -18.978 62.573 1.616.453 57.224 1.673.677 Reserves for Share Profit for Shareholders' Reserves derivative instruments Minority interest Total Capital the period equity valued at fair value Balance as at 31 December 2010 1.109.074 513.618 -12.407 117.218 1.727.503 142.720 1.870.223 Profit for the period 71.398 71.398 11.759 83.157 Other components of comprehensive income as at 30 June 2011: change in the fair value of derivatives for the period 4.681 4.681 730 5.411 change in the fair value of derivatives for the period 315 315 315 for companies measured at equity Total comprehensive income for the period 315 4.681 71.398 76.394 12.489 88.883 Change in treasury shares in portfolio 2 -90 -88 -88 reclassification of convertible bond equity component 4.894 4.894 4.894 change in scope of consolidation 26 26 26 other movements 103 103 -17 86 Allocation of 2010 profit: - dividends paid out -99.879 -99.879 -18.147 -118.026 - allocation to other reserves 17.339 -17.339 0 0 Balance as at 30 June 2011 1.109.076 536.205 -7.726 71.398 1.708.953 137.045 1.845.998 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 58 2 Consolidated financial statements 2.02 Financial statements ‐ Resolution 15519 of 2006 – Related parties 2.02.01 Income statement 1st half of which Related Parties 1st half 2010 of which Related Parties thousands of Euro Notes 2011 A B C D Total % restated A B C D Total % Income Statement Revenues 4 1.983.185 0 13.713 43.509 2.440 59.662 3,0 1.806.961 62 10.632 42.624 3.388 56.706 3,1 Other operating income 5 87.701 3 93 79 25 200 0,2 101.758 5 43 28 165 241 0,2 Use of raw materials and consumables (net of changes to raw materials inventories and stocks) 6 ‐1.122.021 0 ‐23.849 0 ‐16.744 ‐40.593 3,6 ‐1.036.447 ‐3.053 ‐3.053 0,3 Costs for services 7 ‐422.065 ‐10 ‐4.707 ‐2.603 ‐18.543 ‐25.863 6,1 ‐405.637 ‐2.963 ‐4.157 ‐4.071 ‐16.418 ‐27.609 6,8 Personnel costs 8 ‐189.662 ‐1.755 ‐1.755 0,9 ‐184.581 ‐1.412 ‐1.412 0,8 Amortisation, depreciation and allocations 9 ‐144.589 ‐138.663 Other operating costs 10 ‐17.536 0 ‐45 ‐1.360 ‐553 ‐1.958 11,2 ‐18.821 ‐121 ‐857 ‐459 ‐1.437 7,6 Capitalised costs 11 24.357 50.279 Operating profit 199.370 ‐7 ‐14.795 39.625 ‐35.130 ‐10.307 174.849 ‐6.070 6.518 37.724 ‐14.736 23.436 Portion of profits (losses) pertaining to associated companies 12 4.723 4.723 4.723 100,0 4.337 4.337 4.337 100,0 Financial income 13 33.795 615 89 704 2,1 55.336 316 18 334 0,6 Financial charges 13 ‐91.972 0 0,0 ‐114.448 0 0,0 Total financial operations ‐53.454 0 5.338 0 89 5.427 ‐54.775 0 4.653 0 18 4.671 Pre‐tax profit 145.916 ‐7 ‐9.457 39.625 ‐35.041 ‐4.880 120.074 ‐6.070 11.171 37.724 ‐14.718 28.107 Taxes for the period 14 ‐62.759 ‐50.911 Net profit for the period 83.157 ‐7 ‐9.457 39.625 ‐35.041 ‐4.880 69.163 ‐6.070 11.171 37.724 ‐14.718 28.107 Attributable to: Shareholders of Parent Company 71.398 62.573 Minority shareholders 11.759 6.590 Earnings per share 14.1 base 0,064 0,056 diluted 0,061 0,056 Key of headings of related parties columns: A Non‐consolidated subsidiary companies B Jointly controlled associated companies C Related companies with significant influence D Other related parties Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 59 2 Consolidated financial statements 2.02.02 Balance sheet of which Related Parties of which Related Parties thousands of Euro Notes 30/06/11 A B C D Total % 31/12/2010 A B C D Total % ASSETS Non‐current assets Tangible fixed assets 15 1.870.945 1.840.232 Intangible fixed assets 16 1.746.247 1.728.498 Goodwill and consolidation difference 17 377.744 377.579 Equity investments and securities 18 138.151 5.801 98.943 0 33.080 137.824 99,8 135.344 100 101.851 33.093 135.044 99,8 Financial assets 19 10.915 0 10.493 0 0 10.493 96,1 10.912 10.028 10.028 91,9 Deferred tax assets 20 89.877 84.290 Financial instruments ‐ derivatives 21 26.629 40.071 4.260.508 5.801 109.436 0 33.080 148.317 4.216.926 100 111.879 0 33.093 145.072 Current assets Inventories 22 72.606 53.880 Trade receivables 23 1.114.174 37 24.053 10.814 14.699 49.603 4,5 1.134.496 73 19.840 20.104 13.989 54.006 4,8 Contract work in progress 24 18.365 17.228 Financial assets 25 41.541 29.195 404 29.599 71,3 46.084 29.313 29.313 63,6 Financial instruments ‐ derivatives 21 21.608 12.796 Other current assets 26 219.212 2.471 382 19.045 21.898 10,0 181.607 0 209 362 16.887 17.458 9,6 Cash and cash equivalents 27 356.264 538.226 1.843.770 37 55.719 11.196 34.148 101.100 1.984.317 73 49.362 20.466 30.876 100.777 TOTAL ASSETS 6.104.278 5.838 165.155 11.196 67.228 249.417 6.201.243 173 161.241 20.466 63.969 245.849 of which Related Parties of which Related Parties thousands of Euro Notes 30/06/11 A B C D Total % 31/12/2010 A B C D Total % SHAREHOLDERS' EQUITY AND LIABILITIES Share capital and reserves 28 Share capital 1.115.014 1.115.014 ‐Reserve for own shares at par value ‐5.938 ‐5.940 Reserves 537.339 514.662 ‐Reserve for own shares exceeding par ‐3.195 ‐3.105 value Reserves for derivative instruments ‐7.726 ‐12.407 valued at fair value Retained earnings (losses) 2.061 2.061 Profit (loss) for the period 71.398 117.218 Group shareholders' equity 1.708.953 1.727.503 Minority interest 137.045 142.720 Total shareholders' equity 1.845.998 1.870.223 Non‐current liabilities Loans ‐ maturing beyond the next year 29 2.299.451 2.313.722 Employee leaving indemnity and other 30 94.094 95.643 benefits Provisions for risks and charges 31 219.675 210.968 Deferred tax liabilities 32 77.992 76.143 Financial leasing payables – maturing 33 7.499 8.882 beyond the next year Financial instruments ‐ derivatives 21 25.685 44.082 2.724.396 2.749.440 Current liabilities Banks and other borrowings ‐ maturing 29 97.764 147.837 within the next year Financial leasing payables – maturing 33 3.457 4.599 beyond the next year Trade payables 34 894.273 56 18.088 8.393 24.645 51.182 5,7 1.061.003 128 15.010 5.570 23.152 43.860 4,1 Income tax liabilities 35 240.817 124.502 Other current liabilities 36 281.782 103 ‐22 703 784 0,3 230.050 0 98 ‐31 863 930 0,4 Financial instruments ‐ derivatives 21 15.791 13.589 1.533.884 56 18.191 8.371 25.348 51.966 1.581.580 128 15.108 5.539 24.015 44.790 Total liabilities 4.258.280 56 18.191 8.371 25.348 51.966 4.331.020 128 15.108 5.539 24.015 44.790 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6.104.278 56 18.191 8.371 25.348 51.966 6.201.243 128 15.108 5.539 24.015 44.790 Key of headings of related parties columns: A Non‐consolidated subsidiary companies B Jointly controlled associated companies C Related companies with significant influence D Other related parties Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 60 2 Consolidated financial statements 2.02.03 Cash flow statement thousands of Euro 30 June 2011 of which related parties Operations Cash flow Net profit pertaining to Group and minority shareholders 83.157 Depreciation and write downs of tangible fixed assets 61.237 Amortisation and writedowns of intangible assets 50.816 Total cash flow 195.210 Profit (loss) of equity investments measured at equity (2.344) (Gains) Losses on disposal of fixed assets 330 Changes in prepaid and deferred taxation (3.735) Employee leaving indemnities and other benefits: Provisions / (uses) (1.549) Provisions for risks and charges: Provisions / (uses) 7.972 Total cash flow before changes in net working capital 195.884 Working Capital Change in trade receivables 19.544 4.403 Change in inventories (19.863) Change in other current assets (37.604) (4.440) Change in trade payables (166.392) 7.321 Change in tax liabilities 116.067 Change in other current liabilities 51.702 (146) Change in financial instruments ‐ derivatives (6.843) Change in working capital (43.389) Change in financial instruments ‐ non‐current derivatives 689 Liquidity generated by operations 153.184 a) Investment activities Disinvestment/(investment) in tangible fixed assets, net of net investments/disinvestments (63.590) Disinvestment/(investment) in intangible fixed assets, net of net investments/disinvestments (67.667) Goodwill 0 Investments in equity investments net of disinvestments (7.114) (7.114) (Increase)/decrease in other investments 2.490 (2.801) Change in financial instruments ‐ derivatives Liquidity generated/(absorbed) by investment activities (135.881) b) Financing activities Medium/long‐term loans (24.463) Change in shareholders' equity accounts (627) Change in shareholding 0 Change in short‐term bank indebtedness (53.892) Dividends paid out (118.026) (26.285) Change in financial leasing payables (2.525) Liquidity generated/(absorbed) by financing activities (199.533) c) (182.230) (a+b+c) Change in net financial position Cash and cash equivalents at the beginning of the period 538.226 Contribution of cash from business combinations 268 Cash and cash equivalents at the end of the period 356.264 (182.230) Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 61 2 Consolidated financial statements 2.03 Explanatory notes 2.03.01 Consolidated explanatory notes Accounting principles and valuation criteria These abbreviated consolidated half‐year financial statements as at 30 June 2011 have been prepared in application of Regulation (EC) No. 1606/2002 of 19 July 2002 in observance of the IAS/IFRS International Accounting Standards (hereinafter the IFRS) approved by the European Commission, supplemented by the relevant interpretations (Standing Interpretations Committee – SIC and International Financial Reporting Interpretations Committee – IFRIC) issued by the International Accounting Standards Board (IASB), as well as the provisions enacted in implementing article 9 of Italian Legislative Decree no. 38/2005. The same accounting criteria applied to the consolidated financial statements as at 31 December 2010 were adopted in the drawing up of these abbreviated consolidated half‐year financial statements, prepared according to IAS 34 – Interim Financial Statements. For a more thorough description, please refer to the financial statements as at 31 December 2010, except for information given in section "Accounting principles, amendments and interpretations applicable as from 1 January 2011". The figures in these abbreviated consolidated half‐year financial statements are comparable with those of the previous period. In particular please note that the amounts reported in the statement of income at 30 June 2010 have been reclassified to reflect the representation of the works executed between companies operating within the Group to build systems and other works. The relevant schedules and notes give a detailed account of what is stated above. In the event of additional reclassifications, the notes commenting on the individual items provide all necessary information. Use of estimates. Aarrangement of the abbreviated consolidated half‐year financial statements and related notes requires the use of estimates and valuations by the directors, with regard to the figures in the financial statements, based on historical data and on the forecasts of specific events that are reasonably likely to occur on the basis of currently available information. These estimates, by definition, are an approximation of the final figures. Information is provided below on the main areas characterised by valuations and assumptions and, specifically, on their nature and the basis on which they have been formulated, with indication of the reference book values. Allocations to provisions for risks. These provisions were made by adopting the same procedures as previous periods and hence by referring to the updated reports of the legal counsel and the consultants following the disputes, as well as on the basis of developments in the related proceedings. Specifically, in the paragraph relating to provisions for risks, the assumptions used to estimate the provision for risks in INPS (Social Security) disputes are specified. Revenues recognition. Revenues for the sale of electricity, gas and water are recognised and accounted for at supply and include the allocation for services rendered between the date of the last reading and the end of the reporting period. This allocation is based on estimates of the customer's daily consumption, based on the historic profile, adjusted to reflect weather conditions or other factors which might affect consumption under evaluation. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 62 2 Consolidated financial statements It should also be noted that these valuation procedures, especially those relating to the more complex valuations, such as the determination of any impairment losses on non‐current assets, are generally only made definitely at the time the annual financial statements are prepared, except when there are indications of impairment requiring an immediate valuation of any impairment losses. Income taxes are recognised based on the best estimate of the weighted average tax rate expected for the entire year, taking into account the 0.30% increase in the IRAP (Regional Business Tax), tax rate recently introduced by the "Tremonti fiscal measures". In comparing individual items in the statement of financial position and the income statement, changes in the scope of consolidation as indicated in the relevant section should be taken into account. Financial Statements The formats used are the same as those applied for the consolidated financial statements as at 31 December 2010. A decremental format has been used for the income statement, with individual items analysed by type. We believe that this type of disclosure, which is also used by our major competitors, is in line with international practice and the best representation of company results. The statement of financial position makes the distinction between current and non‐current assets and liabilities. The cash flow statement has been prepared using the indirect method, as allowed by IAS 7. Moreover, referring to Consob resolution no. 15519 of 27 July 2006 on financial statements, specific supplementary formats of income statement, statement of financial position and cash flow statement have been included which highlight the most significant transactions with related parties, in order not to alter the overall clarity of the financial statements. The statement of comprehensive income is presented in a separate document, as allowed by IAS 1 revised Scope of consolidation These abbreviated consolidated half‐year financial statements include the financial statements of the Parent Company, Hera SpA, and its subsidiaries. Control is obtained when the Parent Company has the power to determine the financial and operational policies of a company, in such a way as to obtain benefits from that company's business activities. Small‐scale subsidiaries, and those in which the exercise of voting rights is subject to substantial and long‐term restrictions are excluded from line‐by‐line consolidation and valued at cost. Non‐current equity investments in large‐scale associated companies are valued at equity. Those of an insignificant size are instead carried at cost. Non‐consolidated subsidiaries and associated companies accounted for at equity are reported in note no. 18 Companies held exclusively for subsequent sale were excluded from consolidation and valued at the lower of cost or fair value, net of sales costs. These investments are recorded as separate items. Equity investments in joint ventures, in which the Hera Group exercises joint control with other companies, are consolidated using the proportional method whereby assets, liabilities, revenues and costs are recognised on a line‐ by‐line basis pro rata to the Group's investment. Changes to the scope of consolidation in the first half of 2011, compared with the consolidated financial statements as at 31 December 2010 are shown below. Subsidiary companies Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 63 2 Consolidated financial statements Consolidated companies No longer consolidated companies Notes SIS Società Intercomunale di Servizi Spa Resolution to wind‐up the company On 27 June 2011 the shareholders' meeting resolved to wind up the company SIS Società Intercomunale di Servizi Spa, an investee of Marche Multiservizi, placing it into liquidation. Following this transaction, the company is measured at cost. Jointly controlled companies Consolidated companies No longer consolidated companies Notes Enomondo Srl Proportionally consolidated On 16 February 2011, Herambiente Spa purchased a further 10% of the share capital of Enomondo Srl from Caviro Società Cooperativa Agricola, thus increasing its equity investment in Enomondo Srl to 50%. The changes to the Articles of Association that occurred as a result of this acquisition have led to joint control by shareholders and consolidation using the proportional method. Until 31 December 2010, the company was accounted for using the equity method. Associated companies New companies measured at equity Companies no longer measured at equity Notes Enomondo Srl Proportionally consolidated Dyna Green Srl Under liquidation as from 20.04.2011 On 20 April 2011 the shareholders' meeting of the company Dyne Green resolved to wind up the company. A list of the companies included in the scope of consolidation is provided at the end of these notes. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 64 2 Consolidated financial statements Seasonal effects on business Within the Group, the Water and Energy sectors are particularly affected by seasonality considering consumption peaks, respectively, in the summer and winter seasons. However, from an overall standpoint, taking into account the group business portfolio, half year results are not particularly affected by the above mentioned effect. Conversely, equity figures, as described in the following notes, highlight a decrease in trade payables at end of June, above all with respect to the timing of raw materials supply. Significant events after the end of the period and business outlook Information regarding the company's activity and significant events occurred after the end of the period are included in a special section of this half‐year report (paragraph 1.11). Other information Please note that during the first half of 2011 there were no atypical or unusual transactions, as defined in Consob communication no. 6064293 of 28 July 2006. These abbreviated consolidated half‐year financial statements, included in the half‐year financial report as at 30 June 2011, shall be submitted for the Board of Directors' approval on 25 August 2011. Accounting standards, amendments and interpretations applicable as from 1 January 2011 Starting from 1 January 2011, the following accounting standards and interpretations shall be compulsory as they have already concluded the EU endorsement process: Amendments to IAS 32 ‐ Financial instruments: Presentation (Regulation 1293/2009). These changes specifically refer to the classification of rights issues (warrants, options). Amendment to IFRS 1 ‐ Limited exemption from comparative IFRS 7 disclosures for first‐time adopters (Regulation 574/2010). IAS 24 revised ‐ Related Party Disclosures (Regulation 632/2010). The amendments simplify the definition of "related party", at the same time eliminating some inconsistencies and exempting public institutions from some related‐party transaction disclosure requirements. Amendment to IFRIC 14 ‐ Prepayments of a Minimum Funding Requirement (Regulation 633/2010). The aim of the amendments to IFRIC 14 is to remove an unintended consequence of IFRIC 14 in cases where an entity subject to a minimum funding requirement makes an early payment of contributions where under certain circumstances the entity making such a prepayment would be required to recognise an expense. In the case where a defined benefit plan is subject to a minimum funding requirement the amendment to IFRIC 14 prescribes to treat this prepayment, like any other prepayment, as an asset. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 65 2 Consolidated financial statements IFRIC 19 ‐ Extinguishing Financial Liabilities with Equity Instruments (Regulation 662/2010). The aim of this interpretation is to provide guidance on how a debtor should account for its equity instruments issued in full or partial settlement of a financial liability following renegotiation of the terms of the liability. On 6 May 2010, the International Accounting Standards Board (IASB) published "Improvements to the International Financial Reporting Standards," subsequently adopted by the European Union under Regulation 149/2011. These Improvements mainly involve amendments to the existing International Accounting Standards: • Ifrs 3 Improvement ‐ Business Combinations ‐ this amendment clarifies that non‐controlling interests which do not entitle their holders to a proportionate share of the acquiree's net assets shall be measured at fair value or as required by the applicable accounting standards. The issue of share based payments which are replaced as part of a business combination is also further clarified, with specific guidance for their accounting treatment. • Ifrs 7 Improvement ‐ Financial Instruments: additional disclosure: the amendment provides clarifications on the interaction between qualitative and quantitative disclosures with regard to the risks inherent in financial instruments. Furthermore the requirement for disclosure of past due financial assets that have been renegotiated or impaired has been eliminated. • Ias 1 Improvement ‐ Presentation of Financial Statements: the amendment requires that a reconciliation of the changes in the individual components of equity be presented in the notes or in the financial statements. • Ias 34 Improvement ‐ Interim Financial Reporting: this amendment contains clarifications about additional disclosures required for the preparation of the interim financial statements. It is believed that the adoption of said amendments will not significantly affect the financial statements of the Group. During the first half of 2011 no accounting principles or interpretations issued by Iasb or Ifric were approved, whose application would be mandatory for the purposes of preparing the financial statements for the financial year commencing after 31 December 2011. Accounting standards which are being adopted by the European Union The following amendments to IFRSs (already approved by the IASB) and the following interpretations and amendments are in the process of being endorsed by the competent bodies of the European Union: IFRS 9 – Financial Instruments, published by the IASB on 12 November 2009 and subsequently amended on 28 October 2010. With effect from 1 January 2013, this standard is the first part of a process taking place in phases for the replacement of IAS 39 and introduces new criteria for the classification of financial assets and liabilities and for the derecognition of financial assets. Amendments to IFRS 7 – Financial instruments: Disclosures Amendments to IAS 12 – Income taxes recoverability of a revalued non‐depreciable asset Amendments to IFRS 1 – First‐time Adoption of International Financial Reporting Standards. Accounting standards, amendments and interpretations not yet endorsed by the European Union • IFRS 10 ‐ "Consolidated Financial Statements", published by the IASB on 12 May 2011 and applicable as from 1 January 2013. • IFRS 11 ‐ "Joint arrangements", published by the IASB on 12 May 2011 and applicable as from 1 January 2013. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 66 2 Consolidated financial statements • IFRS 12 ‐ "Disclosure of interests in other entities", issued by the IASB on 12 May 2011 and applicable as from 1 January 2013. • IFRS 13 ‐ "Fair Value Measurement", issued by the IASB on 12 May 2011 and applicable as from 1 January 2013. • IFRS 27 revised ‐ "Separate financial statements", issued by the IASB on 12 May 2011 and applicable as from 1 January 2013. • IFRS 28 revised ‐ "Investments in associates and joint ventures", issued by the IASB on 12 May 2011 and applicable as from 1 January 2013. • IAS 1 ‐ "Presentation of Financial Statements"; this amendment, applicable with effect from 1 January 2012, concerns the presentation of data contained in the statement of comprehensive income. • IAS 19 ‐ "Employee benefits", applicable as from 1 January 2013. Summary of reclassifications The following are the effects on the income statement at 30 June 2010 resulting from the representation of the works executed between companies operating within the Group to build systems and other works. These reclassifications will be analysed in more detail in the notes that follow. Reclassification Change in 1° half 1° half Inventories of Income statement 2010 2010 WTE work in progress Published Restated reclassification semi‐finished and finished products Revenues 1,805,478 1,806,961 1,483 Change in inventories of work in progress, semi‐finished and finished products 12,020 0 ‐10,537 ‐1,483 Service costs ‐387,930 ‐405,637 ‐17,707 Capitalised costs 22,035 50,279 28,244 Operating income 1,451,603 1,451,603 0 0 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 67 2 Consolidated financial statements 4 Revenues 1° half 2011 1° half 2010 Changes Revenues from sales and services 1,981,915 1,805,478 176,437 Change in contract work in progress 1,155 1,600 ‐445 Changes in inventories of work in progress, semi‐finished and finished products 115 ‐117 232 Total 1,983,185 1,806,961 176,224 For an analysis of sales trends by business sector, please see the Directors' Report and the note providing information by business area. The following table shows the reclassification of the item "Change in Contract work in progress" for the first half of 2010, compared to published figures, as already analysed in the first paragraph. 1° half 2010 Amount 1° half 2010 reclassified published restated Change in contract work in progress 12,137 ‐10,537 1,600 Total 12,137 ‐10,537 1,600 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 68 2 Consolidated financial statements 5 Other operating income 1° half 2011 1° half 2010 Changes Long term construction contracts 61,094 65,458 ‐4,364 Operating grants and grants for separate collection 7,007 6,975 32 White certificates 6,812 5,100 1,712 Use and reassessment of provisions 2,553 11,384 ‐8,831 Portion of capital grants 1,941 1,829 112 Costs reimbursed 1,547 1,484 63 Grey certificates 1,179 2,525 ‐1,346 Sale of materials and stocks to third parties 719 468 251 Insurance reimbursements 553 432 121 Leases 677 712 ‐35 Gains on disposal of assets 195 2,486 ‐2,291 Other revenues 3,424 2,905 519 Total 87,701 101,758 ‐14,056 The most substantial changes with respect to the same period of the previous year are described below. "Long‐term construction contracts" include revenues generated by the construction or improvement of infrastructure held under concession in compliance with accounting standard IFRIC 12; for further details thereof the reader should refer to the notes to the consolidated financial statements as at 31 December 2010. In line with the previous period, "Operating grants and grants for separate waste collection" are mainly made up of grants made to the Parent company for volumes of packaging (cardboard, iron, plastic and glass) deriving from separate waste collection and sold to the Consortia of the Conai chain and for the collection of electric and electronic equipment transferred to the Raee, the Coordination Centre for the collection of waste from electrical and electronic equipment. "White certificates" and "grey certificates" show respectively the revenues obtained from the Electricity sector equalisation fund after achievement of energy targets, with regard to white certificates, and from the Ministry for the Environment with regard to grey certificates mainly pertaining to the cogeneration plant in Casalegno. Specifically, with regard to this plant, Law Decree no. 72 of 20 May 2010, later converted into Law no. 111 of 19 July 2010, clearly established that plants that do not receive free allocation of permits are entitled to monetary repayment. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 69 2 Consolidated financial statements "Use and re‐assessment of provisions" mainly include uses of provisions concerning labour, waste disposal, leachate and resource hour costs associated with the Group landfills. In the first half of 2010 this item included mainly the use of the provision for doubtful debts for Euro 8,000 thousand. "Reimbursement of costs" consists primarily of repayments by companies or entities in connection with seconded personnel and recovery of costs from customers. "Gains on disposal of assets" consist mainly of the sale of vehicles, containers and miscellaneous equipment. The value for the first half of 2010 includes capital gains from the sale of the property in Via Ranzani ‐ Bologna. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 70 2 Consolidated financial statements 6 Use of raw materials and consumables 1° half 2011 1° half 2010 Changes Electricity ready for sale 588,147 533,979 54,168 Methane ready for sale and LPG net of change in stock 485,274 451,336 33,938 Maintenance materials: handling and spare parts net of change 25,190 23,855 1,335 in stock Water 17,097 16,562 535 Electricity for industrial use 10,842 8,917 1,925 Chemical products 7,006 7,064 ‐58 Fuels and lubricants 6,869 6,129 740 Fuels for heat generation 2,959 1,297 1,662 Methane for industrial use 2,738 5,904 ‐3,166 Consumables and sundry 6,159 2,085 4,074 Income and charges from certificates measurement ‐16,403 ‐7,905 ‐8,498 Income and charges from derivatives ‐13,857 ‐12,776 ‐1,081 Total 1,122,021 1,036,447 85,574 For an analysis of sales trends by business sector, please see the Directors' Report and the note providing information by business area. With regard to item "income and charges on derivatives", reference is made to note 21 in the statement of financial position. The item "Electricity ready for sale" also includes the costs of green, grey and white certificates amounting to Euro 23,937 thousand (Euro 13,582 thousand at 30 June 2010), and specifically: • white certificates, Euro 9,376 thousand (Euro 2,955 thousand as at 30 June 2010); • grey certificates, Euro 10,163 thousand (Euro 6,048 thousand as at 30 June 2010); • green certificates, Euro 4,398 thousand (Euro 4,579 thousand as at 30 June 2010); "Income and charges from certificates measurement " result from the measurement at fair value of certificates: • green certificates, Euro 13,091 thousand (Euro 3,484 thousand as at 30 June 2010) • grey certificates, Euro 3,312 thousand (Euro 4,421 thousand as at 30 June 2010) Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 71 2 Consolidated financial statements 7 Costs for services 1° half 2011 1° half 2010 Changes Charges for works and maintenance 113,049 142,427 ‐29,378 Energy transport and storage 96,943 63,921 33,022 Waste transportation, disposal and collection services 83,755 81,967 1,788 Fees paid to local authorities 34,396 35,142 ‐746 Legal, tax and organisation professional services 10,806 9,591 1,215 Rents and leases payable 10,795 8,445 2,350 IT and data processing services 8,725 7,147 1,578 Postal and telephone costs 7,806 7,796 10 Insurance costs 6,615 6,400 215 Technical services 6,331 6.063 268 Recruitment, training and other staff costs 6,067 5,317 750 Published notices, classified, advertising and litigation 4,561 3,137 1,424 Bank fees and other charges 3,800 3,730 70 Remuneration to Directors, Statutory Auditors and local committees 2,757 2,544 213 Cleaning and security costs 2,596 2,643 ‐47 Meter readings 2,259 2,657 ‐398 Laboratory analyses 2,190 1,671 519 Fees payable 2,042 1,903 139 Industrial utilities (water, methane, heat and electricity) 949 1,071 ‐122 Trasportation 761 619 142 Other service costs 14,862 11,446 3.416 Total 422,065 405,637 16,428 The most substantial changes by comparison with the previous year are described below. "Charges for works and maintenance". This item includes costs relating to the construction or improvement of infrastructures held under concession reflecting compliance with Ifric 12 interpretation. In this regard, please refer to the notes to the financial statements as at 31 December 2010. The decrease from the previous year is mainly due to a reduction in investments which are further commented on in the Directors' report. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 72 2 Consolidated financial statements "Energy transport and storage": the increase is mainly attributable to higher volumes of electricity sold on third party grids. "Waste transportation, disposal and collection services": the increase can be attributed to additional waste management services provided to some Municipalities. This increase in costs was followed by an increase in revenues which were included in the tariff (TIA). "Fees paid to local authorities": the decrease is mainly due to the following items: • lower fees paid to two municipalities in the Bologna area following the expiry of the relevant concession agreements, for Euro 1,332 thousand; these agreements were not renewed; • additional one‐off fees paid to the company Unica Reti for Euro 375 thousand; • higher fees paid to Con.Ami for the gas lease agreement with the Municipality of Medicina, for Euro 225 thousand; this agreement was signed on 1 July 2010 following the repurchase of the grids sold in 2009. "Rents and leases payable": the increase is mainly due to a renegotiation of the agreement for public lighting service and heat management with the municipality of Pesaro. This increase in costs was followed by an increase in revenues from sales and services. "IT and data processing services": the increase is primarily due to higher costs for IT services for Euro 832 thousand and telecommunications (TLC) services for Euro 845 thousand. "Published notices, classified, advertising and litigation": the increase is attributable to significant promotional activities carried out in the 1st half of 2011, ("World Water Day" and separate waste collection kits "Hera knocks on your door"). "Other service costs": the increase is primarily attributable to a significant strengthening of commercial activities for the sale of energy services. The following table shows the reclassification of the item "Charges for works and maintenance" for the first half of 2010, compared to data previously published, as already analysed in the first paragraph: 1° half 2010 Amount 1° half 2010 reclassified published restated Charges for works and maintenance 124,720 17,707 142,427 Total 124,720 17,707 142,427 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 73 2 Consolidated financial statements 8 Personnel costs 1° half 2011 1° half 2010 Changes Wages and salaries 133,754 128,453 5,301 Social security contributions 44,389 44,782 ‐393 Employee leaving indemnity and other benefits 9,093 654 8,439 Other costs 2,426 10,692 ‐8,266 Total 189,662 184,581 5,081 The increase in labour costs compared to the first half of 2010 is mainly due to changes in contractual dynamics. The average number of employees in the period in question, analysed by category, is as follows: 1° half 2011 1° half 2010 Changes Managers 128 126 2 Middle Managers 339 328 11 Employees 3,346 3,249 97 Workers 2,707 2,809 ‐102 Average number 6,520 6,512 8 The total, average, per capita cost of labour in the first half of 2011 was Euro 29 thousand, a 2.6% increase over the same period in the previous year. As at 30 June 2011, the effective number of employees was 6,530 units. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 74 2 Consolidated financial statements 9 Amortisation, depreciation and provisions 1° half 2011 1° half 2010 Changes Depreciation of tangible fixed assets and amortisation of 112,053 113,020 ‐967 intangible fixed assets Provisions for doubtful debt 19,697 14,633 5,064 Provisions for risks and charges 12,839 11,010 1,829 Total 144,589 138,663 5,926 For further information on the items, please see comments on "tangible fixed assets", "intangible assets", "trade receivables" and "provisions for risks and charges" of the statement of financial position. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 75 2 Consolidated financial statements 10 Other operating costs 1° half 2011 1° half 2010 Changes Special landfill levy 5,328 5,818 ‐490 Taxation other than income taxes 4,426 2,346 2,080 Membership fees and other fees 1,475 3,484 ‐2,009 State rentals 1,422 2,614 ‐1,192 Losses on disposal of assets 525 775 ‐250 Other minor charges 4,360 3,784 576 Total 17,536 18,821 ‐1,285 "Taxes other than income taxes" show an increase over the previous period mainly due to: • payment of local property tax (ICI) for the incinerator of Ravenna and Rimini, for Euro 157 thousand; • occupancy fees for public spaces and areas in relation to previous periods paid to the Municipality of Casalecchio di Reno, for Euro 412 thousand; The change in item "Membership fees and other fees" compared to the previous period, mainly relates to the method adopted in the first half of 2010 by a Group subsidiary to account for gas distribution system charges (UG1, UG2 components, etc.). In this regard, it should be noted that these charges were also posted as revenues and therefore had no impact on the Group; in the 1st half of 2011 these system components were accounted for through items of the statement of financial position. The table below shows the reclassification of items "State license fees" and "Taxes other than income taxes" of the 1 half of 2010, compared to published figures, with regard to costs for "occupancy fees for public spaces and areas," more appropriately classified as "taxes other than income taxes": 1° half 2010 Amount 1° half 2010 published reclassified restated State rentals 2,614 ‐1,113 1,501 Taxation other than income taxes 2,346 1,113 3,459 Total 4,960 0 4,960 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 76 2 Consolidated financial statements 11 Capitalised costs 1° half 2011 1° half 2010 Changes Increases in fixed assets for internal works 24,357 50,279 ‐25,922 Total 24,357 50,279 ‐25,922 Increases for internal works in the first half of 2011 mainly include directly chargeable labour capitalised on works carried out, and directly chargeable financial charges and other charges, such as outbound inventory movements and motor car hours. Financial charges were calculated by applying a 3.81% interest rate. The decrease from the previous period was due to a reduction in investments as well as a reduction in the works for the WTE construction for a Group company. The following table shows the reclassification of the item "Capitalised costs" for the first half of 2010, compared to previously published data, as already analysed in the first paragraph: 1° half 2010 Amount 1° half 2010 published reclassified restated Increases in fixed assets for internal works 22,035 28,244 50,279 Total 22,035 28,244 50,279 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 77 2 Consolidated financial statements 12 Portion of profits (losses) pertaining to associated companies 1° half 2011 1° half 2010 Changes Profits 5,009 6,173 ‐1,164 Losses ‐286 ‐1,836 1,550 Total 4,723 4,337 386 The portions of "profits (losses) pertaining to associated companies" include the effects generated from measurement using the equity method. The decrease in the item "Profits" is mainly ascribable to the lower results of the associated company Set Spa compared to the previous year, which were recorded pro‐quota. With regard to the item "Losses", the decrease is due to the extraordinary losses recorded by the associate Oikothen Scarl in the 1st half of 2010 which were recognised pro‐quota. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 78 2 Consolidated financial statements 13 Financial income and charges 1° half 2011 1° half 2010 Changes Income from measurement at fair value of financial liabilities 14,026 6,191 7,835 Interest rate and foreign exchange derivatives 13,898 46,631 ‐32,733 Banks 3,198 257 2,941 Customers 1,740 1,803 ‐63 Capital gains on equity investments and dividends from other companies 38 0 38 Other financial income 897 454 443 Total financial income 33,797 55,336 ‐21,539 1° half 2011 1° half 2010 Changes Bond loans 42,588 37,713 4,875 Interest rate and foreign exchange derivatives 30,681 15,043 15,638 Charges from measurement at fair value of financial liabilities 0 43,942 ‐43,942 Discounting of provisions and financial leases 7,379 7,188 191 Mortgages 5,420 5,471 ‐51 Bank current account overdrafts 1,441 1,317 124 Capital losses and write‐downs of equity investment 230 0 230 Other financial charges 4,233 3,774 459 Total financial charges 91,972 114,448 ‐22,476 The change in financial operations is described, overall, in the Directors' Report. For the items "Income and charges from the measurement at fair value of financial liabilities" and " Exchange rates and interest rates derivatives", please see note 21 of the statement of financial position. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 79 2 Consolidated financial statements The financial charges regarding "Bond loans" comprise: • Euro 36,718 thousand in financial charges actually paid (Euro 28,461 thousand paid in the first half of 2010); • Euro 5,870 thousand for charges resulting from the application of the amortised cost measurement (Euro 9,252 thousand in the first half of 2010). With regard to the method used, please note that in the recalculation, the maximum duration for the loans was assumed, and, therefore, it was assumed that the put options would not be exercised at the contractually agreed due dates throughout the duration of the loans. The increase, compared to the previous year, is mainly due to the issue of a new convertible bonds for a nominal amount of Euro 140 million, effective from November 2010. "Dividends and profits from trading," for Euro 38 thousand, relate to dividends received during the 1st half of 2011 from the company Ricicla Srl. "Capital losses and write‐downs of equity investments", consist of capital losses recorded following the completion of the liquidation of the companies Ingenia Srl and Consorzio Energia Servizi Bologna Srl, respectively, for Euro 64 thousand and 5 thousand and the write‐down of the investment in the Company Intercomunale Servizi Spa placed under liquidation on 27 June 2011, for Euro 161 thousand. As for the item "Other financial charges", it mainly includes the charges borne for the sale of receivables without recourse (Euro 3,641 thousand). Item "Discounting of provisions and financial leases" is broken down as follows: 1° half 2011 1° half 2010 Changes Restoration of third party assets 3,479 3,362 117 Landfill post‐closure provision 2,824 2,813 11 Employee leaving indemnity and other benefits 831 675 156 Finance leases 245 338 ‐93 Total 7,379 7,188 191 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 80 2 Consolidated financial statements 14 Income taxes 1° half 2011 1° half 2010 Changes Current, deferred and prepaid taxes 62,759 50,911 11,848 Total 62,759 50,911 11,848 The impact of income taxes on pre‐tax profit is 43%, compared to 42.4% in the first half of 2010. The increase is attributable to the 0.30% increase in the IRAP (Regional business tax) tax rate, as provided for by Law Decree no. 38/2011, (applicable to the Parent company Hera SpA) and the lack of tax benefits associated with the "Tremonti Ter" fiscal measures, already included in the tax calculation at 30 June 2010. As for the Robin Tax, and in particular the increase of 4 percentage points provided for by Law Decree no. 138 of 13 August 2011, please refer to the chapter on subsequent events included in the Directors' Report. Information on the "tax moratorium" In accordance with Law Decree no. 10 of 15 February 2007, subsequently converted into Law no. 46 of 6 April 2007, governing the terms for reimbursement of government aid declared illegitimate by the Ruling of the European Commission no. 2003/193 dated 5 June 2002, on 6 April 2007 Hera Spa , with respect to the position regarding the former Seabo Spa, was served the notices/orders issued by the Inland Revenue office responsible for the area, demanding the payment of a total amount of Euro 22,313 thousand for the tax periods 1997‐1999 involved in the recovery. The appeals submitted to the Provincial Tax Commission were rejected by means of rulings of 19 April 2008, except for the appeal relating to the 2007 tax period. In this case, the Commission accepted the deduction of tax withheld and of the tax credit carried over from previous years for Euro 3,738 thousand; therefore, in June 2008 payment was made totalling Euro 17,400 thousand. Subsequently, on 11 September 2008, the Inland Revenue office sent an additional payment request for interest related to the suspension period, paid in December 2008, for Euro 660 thousand. On 3 October 2008, appeals were filed against the above‐mentioned rulings, which were dismissed, by means of rulings filed on 29 January 2010, by the Regional Tax Commission of Emilia Romagna, which, amending the rulings of first instance, rejected the deduction of tax withheld and of the tax credit carried forward from the before 2007 periods; therefore, on 27 October 2010 additional Euro 7,455 thousand were paid in this regard. The petitions to the Supreme Court were presented on 29 April 2010. Please also note that, under the terms of the agreements made between shareholders (and specifically reported in the IPO prospectus) at the time of the business combination giving rise to the creation of Hera Spa, local authorities undertook "to compensate Hera Spa for any cost, loss or damage sustained by Hera Spa in relation to mandatory regulatory measures revoking tax benefits enjoyed by the company and the companies taking part in the combination". Therefore, with regard to the recovery no costs have been accounted for, and on 30 June 2011, the remaining outstanding receivables relating to all payments made by Hera spa for the position concerning the former Seabo Spa, amounted to Euro 1,449 thousand as at the date of this half‐year report. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 81 2 Consolidated financial statements Law Decree no. 185/2008 and Law Decree no. 135/2009 Art. 24 of Law Decree no. 185 of 29 November 2008, converted with amendments into Law no. 2 of 28 January 2009 contains provisions "in order to totally implement" the afore‐mentioned decision of the commission of 5 June 2002. With regard to this provision, on 30 April 2009 the Regional Department of Emilia Romagna notified three assessment notices relating to the former Meta position for the 1997, 1998 and 1999 tax years, for which on 8 May 2009 the company paid Euro 4,823 thousand. On 7 July 2009, the company lodged appeals against the assessment notices at the Bologna provincial tax commission; at the hearing on 14 February 2011, following the unification with other tax assessments proceedings, pending before another section of the same Commission, which will be commented on hereunder, all proceedings were adjourned to a later date. Article 24 of Law Decree no. 185 of 29 November 2008, was then amended by Article 19 of Law Decree no. 135 of 25 September 2009, which added paragraph 1 to article 24 above. On 2 October 2009, the Emilia Romagna Regional Department sent two further assessment notices for the former company Meta Spa, regarding the 1998 and 1999 tax periods, as a "supplement" to notices already sent on 30 April 2009, in order to cancel two deductions made and previously accepted according to the opinion, shared by the Attorney General, expressed on 28 April 2009 by the Presidency of the Council of Ministers on profits, which were reissued into the public circuit as a result of the distribution to public bodies shareholders, and the further portion of profits made in the electricity segment. The amounts requested totalled Euro 22,751 thousand. On the same date, the Emilia Romagna Regional Department sent four assessment notices for the former company Seabo Spa, regarding the 1997‐1999 tax periods, in order to adopt the remarks already expressed in the report of 17 October 2005. These remarks could not be taken into account when the notices and injunctions were issued on 6 April 2007, as, at that time, Art. 1 of Law Decree no. 10 of 15 February 2007 granted the Inland Revenue Office powers of "simple settlement" of the tax returns submitted by the taxpayer. The amounts requested in this regard for the former Seabo totalled Euro 759 thousand. The total amounts requested as a result of the proceeding provided for by Art. 19 of Law Decree no. 135/2009, amounted therefore to Euro 23,510 thousand, and were paid on 20 October 2009. On 27 November 2009, the Company filed appeals to the Bologna provincial tax commission to obtain the cancellation of all assessment notices of 2 October 2009, regarding the positions of both former Seabo and former Meta; the public hearings thereof were held respectively on 26 January 2011 and 14 February 2011 and all proceedings were adjourned to a later date. Except for the still‐outstanding disputes, aimed at recovering the amounts already paid, the entire "tax moratorium" situation is to be considered concluded, as no future disbursements are expected which may have a financial impact on the Group's accounts Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 82 2 Consolidated financial statements Report on the assessment notices issued in 2010 Seven notices were issued to Hera Spa and Hera Comm on 19 November and 22 December 2010 in their capacity as beneficiary companies of the total spin‐off of the company Hera Ferrara Srl effective as at 31 December 2009. Said notices for first and second assessment levels concerning IRES and IRAP followed the tax audit on the Ferrara local operating company for the 2005, 2006 and 2007 tax years, that came to an end on 16 September 2010 with the report of the Ferrara Tax Police Squad. The irregularities found basically concerned a mere error that took place in the 2005 financial year in intercompany costs accounting between Hera Ferrara Srl and Hera Spa, which caused a double recording of the same cost amounting to about Euro 200 thousand. Nevertheless, after said error of double recording of the same cost was discovered in the following financial year 2006, it was corrected by recording an extraordinary income of the same amount, duly subject to taxation. It ensued that in force of the consolidated taxation system, the effect of the double deduction of the cost during the 2005 tax year was eliminated by the recording, and subsequent taxation, of the cost as extraordinary income. On 13 January 2011 the company proposed tax assessment settlements to the Emilia Romagna Regional Department, Large Taxpayers Office, pursuant to art. 6, paragraph 2, of Legislative Decree no. 218 of 1997, with a positive outcome for the company which had to pay the penalties alone reduced to one quarter. Three assessment notices for IRES, IRAP and VAT concerning the 2005 tax period were issued to Hera Spa on 29 December 2010 following the tax audit on the 2005 tax year that was completed with the report dated 1 October 2010 drawn up by the Financial Police, Bologna Tax Police Squad. The report concerns an irregularity on inter‐ company services (the so called management expenses and concerning the use of the trademark) provided by Hera S.p.a. in its capacity as parent company of the Hera group, to the local operating subsidiary of Forlì‐Cesena, Hera Forlì‐ Cesena Srl. Although it found the cost split criteria initially established by the intercompany contracts legitimate, the Tax Authority questioned the subsequent reduction of the recharge percentages of the management expenses, generally called management fees, following a subsequent agreement that the parties entered into which adjusted the criteria initially envisaged. In the opinion of the Tax Authorities, said adjustment reducing fees due for the services provided by the holding company entailed a tax avoidance by Hera Spa since the lesser recharge for management fees to Sot of Forlì‐Cesena resulted in said costs remaining charged to Hera Spa, which would have therefore "illegitimately deducted" them when calculating its IRES and IRAP tax base in the absence of the relevance principle. Likewise, failure to charge the fee for using the "Hera Group" trademark would have brought about a lower revenue for Hera S.p.a. compared to what was originally envisaged in the inter‐company agreement; therefore, according to the Revenue Agency, also in this case, IRES, IRAP and VAT tax avoidance allegedly occurred. In February 2011, the company proposed a tax settlement to the Emilia Romagna Regional Department, Large Taxpayers Office, pursuant to art. 6, paragraph 2, of Legislative Decree no. 218 of 1997, which had a negative outcome for the company. Therefore, on 20 May 2011, the related appeals to the Supreme Court were submitted. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 83 2 Consolidated financial statements The Company decided it did not have to set aside any amount to the risk provision in relation to the assessment notices in question as it considered the alleged violations charged against the Company as groundless. This is also due to the circumstance that the companies involved adhered to the Group taxation system for the period in question pursuant to articles 117 et seq. of the Italian Income Tax Code, according to which the tax actually due to the Tax Authorities is calculated in the consolidated income tax return on the basis of the algebraic sum of the taxable incomes of the individual companies adhering to the system. It is therefore believed none of the individual companies can be charged for tax avoidance. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 84 2 Consolidated financial statements 14.1 Earnings per share Year 2011 Year 2010 ° 1° half 1 half Group income (loss) of the period (Euro thousand): 71,398 62,573 Weighted average number of shares outstanding for the purposes of calculating earnings (loss) per share: ‐ basic 1,109,771,408 1,111,896,904 ‐ diluted 1,186,107,286 1,111,896,904 Earnings (loss) per share (in Euro) ‐ basic 0.064 0.056 ‐ diluted 0.061 0.056 The base earnings per share is calculated on the economic result attributable to holders of ordinary shares of the parent company. The diluted earnings per share takes into account the issue of the convertible bond per Note 29. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 85 2 Consolidated financial statements 15 Tangible assets 30‐Jun‐11 31‐Dec‐10 Changes Land and buildings 372,611 368,693 3,918 Generic and specific plant and machinery 1,144,502 1,145,330 ‐828 Other moveable assets 112,163 114,631 ‐2,468 Work in progress and advance payments 241,669 211,578 30,091 Total 1,870,945 1,840,232 30,713 Tangible assets are stated net of their accumulated depreciation and are broken down below with details of the changes during the year: Total Land and Plants and Other Work in progress tangible fixed buildings machinery moveable and advance assets payments assets Purchase cost Balance as at 31 12 2010 438,972 1,754.,232 351,161 211,578 2,755,943 Increases 807 8,447 7,111 47,609 63,974 Disinvestments ‐ ( 1,366) ( 3,940) ( 71) ‐ 5,377 Changes in scope of consolidation 6,835 21,009 698 ‐ 28,542 Other changes 1,137 8,024 2,514 ( 17,447) ‐ 5,772 Balance as at 30 06 2011 447,751 1,790,346 357,544 241,669 2,837,310 Accumulated depreciation Balance as at 31 12 2010 70,279 608,902 236,530 ‐ 915,711 Depreciation for the year 4,726 43,358 13,177 61,261 Disinvestments ‐ ( 764) ( 3,754) ‐ 4,518 Changes in scope of consolidation 108 304 175 587 Other changes 27 ‐ 5,956 ‐ 747 ‐ 6,676 Balance as at 30 06 2011 75,140 645,844 245,381 ‐ 966,365 Net value Balance as at 31 12 2010 368,693 1,145,330 114,631 211,578 1,840,232 Balance as at 30 06 2011 372,611 1,144,502 112,163 241,669 1,870,945 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 86 2 Consolidated financial statements The breakdown and main changes within each category are commented on below. "Land and buildings", totalling Euro 372,611 thousand, consist of Euro 286,922 thousand in buildings and Euro 85,689 thousand in land. With regard to the latter, they are mainly company‐owned properties on which the majority of the sites and production plants of the Group stand. The increases comprise the extraordinary maintenance works carried out at the company headquarters in Bologna on Viale Berti Pichat and the construction of the walls of some drop‐off points. "Plants and machinery", totalling Euro 1,144,502 thousand (of which specific plant Euro 499,630 thousand, major specific plants Euro 540,204 and generic plants Euro 104,668 thousand), mainly consist of the distribution networks and plants regarding the businesses not falling under the concession system. They are mainly: district heating, electricity in the Modena area, waste disposal, waste treatment, purification and composting, material recovery and chemical‐physical treatment, anaerobic digesters, and special waste treatment plants. The increase in the period reflects mainly the extension of the district heating and co‐generation networks in some areas of Bologna, Forlì and Cesena, the construction and standardisation of the drop‐off points, as well as expansion works on operating landfills. The decreases also include the disposal of electricity meters. "Other moveable assets", equal to Euro 112,163 thousand (of which equipment Euro 73,068 thousand, electronic machines Euro 7,871 thousand, furniture Euro 4,417 thousand, motor vehicles Euro 25,975 thousand and motor cars Euro 832 thousand) include the equipment, waste disposal bins, furniture, electronic machines, motor vehicles and motor cars, including the public works vehicles at the plants for handling and compacting the waste. Of the increases of the year, most noteworthy are the purchases of electronic machines as a result of the "E‐gate" activities concerning the separate waste collection in the Rimini area (waste disposal bins and electronic keys to be more precise) and other equipment, whereas disposals mostly regarded waste disposal bins and motor cars, primarily referring to the waste management sector. "Work in progress and advance payments", equal to Euro 241,669 thousand, mainly consist of the costs borne for developing district heating and electricity distribution in the Modena area, extraordinary maintenance work on structural properties and waste‐to‐energy plants still not completed as at 30 June 2011 (the 4th WTE line in Rimini, revamping of the 3rd WTE line in Modena). Other significant interventions under execution regard the new "Disidrat" sludge treatment plant in Ravenna, the expansion of the anaerobic digester in Spilamberto di Modena, the construction of the CIC waste recovery system in Modena, the upgrade of the sewage plant at the Ravenna west site, the upgrade of the sludge desiccation system at the Rimini waste‐to‐energy plant and the upgrade of the waste storage pit at the Ravenna CDR. The amounts indicated under "Change in consolidation area" derive from the acquisition of joint control in the company Enomondo Srl and its consequent proportional consolidation. In particular, the value entered under "Plants and machinery" refers mainly to the Group's share of the biomass thermoelectric plant owned by the joint venture. Please see the report on operations, Paragraph 1.03.01, for an analysis of investments in the period. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 87 2 Consolidated financial statements 16 Intangible assets 30‐Jun‐11 31‐Dec‐10 Changes Industrial patent rights and know‐how 30,043 30,385 ‐342 Licenses, trademarks and similar rights 59,106 80,777 ‐21,671 Public services under concession 1,425,726 1,416,811 8,915 Work in progress and advance payments for public services under concession 173,170 139,614 33,556 Work in progress and advance payments 33,151 33,828 ‐677 Others 25,051 27,083 ‐2,032 Total 1,746,247 1,728,498 17,749 The composition and changes in intangible assets are as follows: Intangible assets Industrial Concessions, Public services in progress and advances Investments in Total intangible patent licenses, trademarks Others under concession on public services progress and assets rights and similar rights under concession advances Acquisition cost Balance as at 31 12 2010 165,669 238,716 1,849,943 139,614 33,828 71,462 2,499,232 Increases 1,510 99 11,428 49,639 5,383 2,433 70,492 Disinvestments ‐ ‐ 0 ‐ ‐ (4,570) (4,570) Changes in scope of consolidation ‐ ‐ 898 ‐ ‐ ‐ 898 Other changes 6,062 (31,571) 46,813 (16,083) (6,060) 646 (193) Balance as at 30 06 2011 173,241 207,244 1,909,082 173,170 33,151 69,971 2,565,859 Accumulated amortisation Balance as at 31 12 2010 135,284 157,939 433,132 ‐ ‐ 44,379 770,734 Depreciation for the year 7,914 5,911 34,631 ‐ ‐ 2,361 50,817 Disinvestments ‐ ‐ ‐ ‐ ‐ 1,793 ‐ 1,793 Changes in scope of consolidation ‐ ‐ ‐ ‐ ‐ ‐ Other changes ‐ ‐ 15,712 15,593 ‐ ‐ ‐ 27 ‐ 146 Balance as at 30 06 2011 143,198 148,138 483,356 ‐ ‐ 44,920 819,612 Net value Balance as at 31 12 2010 30,385 80,777 1,416,811 139,614 33,828 27,083 1,728,498 Balance as at 30 06 2011 30,043 59,106 1,425,726 173,170 33,151 25,051 1,746,247 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 88 2 Consolidated financial statements The breakdown and main changes within each category are commented on below. "Industrial patents rights and know‐how", totalling Euro 30,043 thousand, mainly relates to costs incurred for the purchase and implementation of SAP R/3 ECC6 IT systems and related applications. These costs are amortised over five years. "Licences, trademarks and similar rights", amounting to Euro 59,106 thousand, mainly includes the value of the concessions held by the Parent Company Hera Spa in relation to the gas, water and purification plants. The decrease in this item is due to the transfer from "Licences, trademarks and similar rights" to "Public services under concession" of assets related to the purification services in the Municipalities of Bologna and Pianora as well as assets related to the gas service in the Municipality of Sasso Marconi, as provided under the related contracts on reaching the expiry dates of said concessions. "Public services under concession", equal to Euro 1,425,726 thousand, made up of the assets relating to the gas, water, purification, sewerage, and public lighting businesses throughout the entire territory managed by Hera, and the electricity distribution business in the Imola area only. The assets mainly relate to distribution grids and networks and plants. This item also includes costs for improvement to third party assets, receivables due from the asset‐owning companies, as well as reclassifications of amounts in the item "Licences, trademarks and similar rights" following the expiry of the concession (the details of the municipalities and services is that provided above). The increase for "change in consolidation area", amounting to Euro 898 thousand, is due to the transfer of the natural gas distribution service in the municipalities of Fiumalbo, Pievepelago and Riolunato by the CIMAF Consortium. "Work in progress and advance payments for public services under concession", amounting to Euro 173,170 thousand refer to the same assets discussed above, which had not yet been completed at 30 June 2011. "Work in progress and advance payments", equal to Euro 33,151 thousand, essentially comprise still incomplete IT projects. "Other", equal to Euro 25,051 thousand comprising mostly sundry long‐term charges, expenses incurred for mapping, the Geographical Information System (GIS), use of networks and infrastructures for the passage and laying of optical fibre telecommunication networks. These also include the costs incurred for applications for AIA (Integrated Environmental Authorization) certification of the WTE plants and landfills. The decreases relate to indefeasible rights of use (IRU) of optical fibre networks. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 89 2 Consolidated financial statements 17 Goodwill 30‐Jun‐11 31‐Dec‐10 Changes Goodwill 320,956 320,791 165 Goodwill from consolidation procedure 56,788 56,788 0 Total 377,744 377,579 165 The main values are as follows: • residual goodwill from the 2002 integration resulting in the creation of Hera Spa, Euro 81,258 thousand; • goodwill relating to the integration of Agea SpA in 2004, for Euro 41,659 thousand. Said goodwill represents the additional value of the purchase cost compared to the fair values of the Group's portion of assets and liabilities recorded. In particular, with regard to the fair value of Hera Spa shares issued following the increase in capital for the merger by incorporation of Agea spa, in accordance with IFRS 3 the share value was calculated as at the effective date control was taken of Agea Spa (1 January 2004); • goodwill and goodwill from consolidation procedure, related to the integration operation of the Meta Group, Euro 117,686 thousand. This goodwill, entered in assets and initially measured at cost, represents the additional value of the purchase cost compared to the fair value of the assets and liabilities recognised for the Group. Specifically, with regard to the fair value of Hera Spa shares issued following the increase in capital from the merger by incorporation of Meta Spa, this value was calculated as at the end of 2005, accepted as the effective date that control was taken of Meta Spa; • goodwill relating to the merger of Geat Distribuzione Gas Spa into Hera Spa. This goodwill of Euro 11,670 thousand represents the excess purchase cost over and above the fair value of assets and liabilities recognised for the Group as at 1 January 2006 (the date at which effective control was taken by Hera Spa); • goodwill relating to the merger of Sat Spa. This goodwill, equal to Euro 54,883 thousand, represents the additional value of the purchase cost compared to the fair value of the assets and liabilities recognised for the Group. Specifically, with regard to the fair value of the Hera Spa shares issued following the increase in capital from the merger by incorporation of Sat Spa, this value was determined referring to 1 January 2008, date at which the transaction was actually concluded. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 90 2 Consolidated financial statements The increase over the previous year is mainly due to the aforementioned transfer of the gas distribution service by the Cimaf Consortium. The main "goodwill from consolidation procedure" arises from the following companies consolidated on a line by line basis: • Marche Multiservizi Spa, Euro 20,790 thousand; • Hera Comm Marche Srl, Euro 4,565 thousand; • Medea Spa, Euro 3,069 thousand; • Asa Spa, Euro 2,789 thousand; • Hera Luce Srl, Euro 2,328 thousand; • Gastecnica Galliera Srl, Euro 2,140 thousand; • Nuova Geovis Spa, Euro 1,775 thousand. The remaining goodwill and goodwill from consolidation procedure items refer to minor transactions. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 91 2 Consolidated financial statements 18 Equity investments 30‐Jun‐11 31‐Dec‐10 Changes Non‐consolidated subsidiaries Calor Più Italia Scrl 6 6 0 Consorzio Energia Servizi Bologna 0 5 ‐5 Consorzio Frullo 4 4 0 Hera Servizi Cimiteriali Srl 20 20 0 Ingenia Srl 0 63 ‐63 Sadori Gas Srl 5,729 0 5,729 Solhar Alfonsine Srl 5 0 5 Solhar Bentivoglio Srl 5 0 5 Solhar Faenza Srl 5 0 5 Solhar Ferrara Srl 5 0 5 Solhar Modena Srl 5 0 5 Solhar Piangipane Srl 5 0 5 Solhar Ravenna Srl 5 0 5 Solhar Rimini Srl 5 0 5 Total 5,799 98 5,701 Associated companies Aimag Spa 37,334 35,992 1,342 Dyna Green Srl 0 35 ‐35 Enomondo Srl 0 5,592 ‐5,592 Feronia Srl 800 826 ‐26 Ghirlandina Solare Srl 51 20 31 Modena Network Spa 1,162 1,207 ‐45 Refri Srl 2,413 2,422 ‐9 Set Spa 35,940 34,972 968 Sgr Servizi Spa 15,884 15,232 652 Sei Spa 702 702 0 So.Sel Spa 467 475 ‐8 Tamarete Energia Srl 3,727 3,890 ‐163 Other minor equity investments 465 487 ‐22 Total 98,945 101,852 ‐2,907 Other companies Calenia Energia Spa 9,073 9,073 0 Energia Italiana Spa 13,233 13,233 0 Galsi Spa 10,524 10,524 0 Other minor companies 577 564 13 Total 33,407 33,394 13 Total equity investments 138,151 135,344 2,807 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 92 2 Consolidated financial statements Equity investments in non‐consolidated subsidiary companies The changes relative to 31 December 2010 pertain to: • Sadori gas Srl; on 27 April 2011 the Group acquired 50% of the share capital of this company, which operates in the natural gas sale business in the provinces of Pesaro‐Urbino, Ancona and L'Aquila. The equity investment, measured at cost, was merged by takeover into Hera Comm Marche Srl, with effect on 1 July 2011; • The Consorzio Energia Servizi Bologna and Ingenia Srl, a company undergoing liquidation, were deleted by the cognisant offices of the register of companies respectively on 24 June 2011 and 29 June 2011; • the companies Solhar Alfonsine Srl, Solhar Bentivoglio Srl, Solhar Faenza Srl, Solhar Ferrara Srl, Solhar Modena Srl, Solhar Piangipane Srl, Solhar Ravenna Srl and Solhar Rimini Srl, incorporated on 31 January 2011, which carry out integrated design and construction, development, operation and maintenance of plants for the production of renewable energy in Italy and abroad. These companies are measured at cost, because they are not yet operational. In any case, the income statement and balance sheet entries are not significant relative to the Group's consolidated figures. Equity investments in associated companies The main differences compared to 31 December 2010 relate to: • Enomondo Srl, company valued at equity as at 31 December 2010, which is now consolidated with the proportional method. Please refer to the comment on the transaction illustrated in the "Consolidation area" paragraph of these notes; • Set Spa, Aimag Spa, and Sgr Servizi Spa – the changes reflect the acknowledgement of the pertaining portion of final profit/loss of the respective companies; • Dyne Green Srl ‐ on 20 April 2011 the Shareholders' Meeting voted to wind‐up the company. The company, valued at equity until 31 December 2010, was deconsolidated and measured at cost. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 93 2 Consolidated financial statements 19 Financial assets 30‐Jun‐11 31‐Dec‐10 Changes Loan receivables from associated and other companies 10,494 10,029 465 Receivables for mortgages to be collected and advanced commissions 112 574 ‐462 Fixed income securities 309 309 0 Total 10,915 10,912 3 "Loan receivables from associated and other companies", comprises non‐interest bearing loans or loans regulated at market rates, granted to the following companies: 30‐Jun‐11 31‐Dec‐10 Changes Set Spa 5,964 5,964 0 Sei Spa 3,268 2,828 440 Oikothen Scarl 277 277 0 Modena Network Spa 960 960 0 Dyna Green Srl 25 0 25 Total 10,494 10,029 465 In the 1st half of 2011, the following loans were disbursed: • Sei Spa – two additional disbursements on 12 January 2011 and 26 June 2011, respectively of Euro 140 thousand and Euro 300 thousand; • Dyna Green, Euro 25 thousand as non‐interest bearing loan from shareholders. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 94 2 Consolidated financial statements 20 Deferred tax assets 30‐Jun‐11 31‐Dec‐10 Changes Prepaid taxes 77,685 69,473 8,212 Receivables for substitute tax 4,617 4,888 ‐271 IAS/IFRS prepaid taxes 7,575 9,929 ‐2,354 Total 89,877 84,290 5,587 Prepaid taxes are generated from the temporary differences between balance sheet profit and taxable income, mainly on the taxed provision for doubtful receivables, taxed provisions for risks and charges, and statutory amortisation greater than amortisation subject to tax. "Receivables for substitute tax" relate to the tax paid for the sheltering of the 2002 goodwill, which is an advance payment of current taxes. As for IAS/IFRS prepaid taxes, their breakdown and comparison with the previous year are shown hereunder. 30‐Jun‐11 31‐Dec‐10 Changes IAS 39 Derivatives 5,197 7,323 ‐2,126 IAS 37 Restoration of third party assets and landfill post‐closure 1,257 1,373 ‐116 IAS 19 Employee leaving indemnity and other employee benefits 949 972 ‐23 IAS 16 Fixed Assets 107 138 ‐31 IAS 38 Intangible Assets 38 100 ‐62 IAS 17 Financial Leases 18 13 5 IAS 32 Spin‐off costs 9 10 ‐1 Total 7,575 9,929 ‐2,354 For better understanding, the following table shows the reclassification to "deferred tax assets" as at 31 December 2010, to highlight the "Receivable for substitute tax". 31 Dec. 2010 published Amount reclassified 31 Dec. 2010 restated Deferred tax assets 74,361 ‐4,888 69,473 Receivables for substitute tax 0 4,888 4,888 Total 74,361 0 74,361 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 95 2 Consolidated financial statements 21 Financial instruments – derivatives Hedged 30‐giu‐11 31‐dic‐10 Non‐current Assets / Liabilities Fair value underlying Notional Fair Value Fair Value Notional Fair Value Fair Value € / 000 hierarchy amount amount of Assets of Liabilities of Assetsof Liabilities Derivatives on exchange rates ‐ Interest rate Swap 2 Loans 2.6 mln 1 14.2 mln 169 ‐ Interest rate Swap 2 Loans 881.3 mln 25,128 913.2 mln 42,817 ‐ Interest rate Option 2 Loans 10.3 mln 557 18.8 mln 1,265 Derivatives on exchange rates (financial transactions) ‐ Cross Currency Swap 2 Loans 20 bil JPY 26,628 20 bil JPY 39,902 Total 26,629 25,685 40,071 44,082 30‐Jun‐11 31‐Dec‐10 Non‐current Assets / Fair value Hedged Fair Value Fair Value Fair Value Fair Value Liabilities € / 000 hierarchy underlying Not. amount Not. amount of Assets of Liabilities of Assets of Liabilities Derivatives on exchange rates ‐ Interest rate Swap 2 Loans 11.6 mln 60 11.5 mln 27 ‐ Interest rate Swap 2 Loans 12.8 mln 74 13.8 mln 71 ‐ Interest rate Option 2 Loans 6.4 mln 262 Derivatives on commodities ‐ Swap 2 Crude oil 1,101,400 Bbl 5,267 516,650 Bbl 1,607 ‐ Swap 2 Commodities 71,700 Ton 3,503 59,900 Ton 2,959 Electricity ‐ Swap 3,955,182 MWh 11,978 3,037,342 MWh 7,916 2 Formula Fuel ‐ Swap 66,000 MWh 358 22,080 MWh 118 2 Formula ‐ Swap 2 Crude oil 162,300 Bbl 367 512,300 Bbl 389 ‐ Swap 2 Commodity 34,900 Ton 831 13,200 Ton 765 Electricity ‐ Swap 3,572,308 MWh 10,851 3,349,812 MWh 10,747 2 Formula Fuels ‐ Swap 43,920 MWh 70 2 Formula Derivatives on exchange rates (commercial transactions) Exchange ‐ Swap 33.5 mln USD 442 6.0 mln USD 170 2 Rate Exchange ‐ Swap 2 77 mln USD 3,336 50.5 mln USD 1,617 Rate Total 21,608 15,791 12,797 13,589 Derivative financial instruments classified under non‐current assets amount to Euro 26,629 thousand, (Euro 40,071 thousand as at 31 December 2010); Euro 1 thousand refer to interest rate derivatives and Euro 26,628 thousand refer to foreign exchange derivatives relating to loans. Derivative financial instruments classified under non‐current liabilities amount to Euro 25,685 thousand, (Euro 44,082 thousand as at 31 December 2010), and all refer to interest rate derivatives. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 96 2 Consolidated financial statements With regard to interest rate derivatives as at 30 June 2011, the Group net exposure is negative by Euro 25,684 thousand, compared with a negative exposure of Euro 43,913 thousand as at 31 December 2010. The significantly positive change in fair value relative the previous year is due to the combination of several factors: − realisation of cash flows, at the contractual maturity dates, associated to derivatives with negative fair value at 31 December 2010; − reduction of the reference notional of the derivatives subscribed to hedge loans with an extant repayment plan; − rise in the rate curve, with reference to the hedges of financial liabilities at floating rate, especially at medium term maturity dates. Conversely, the fair value of the derivatives subscribed to hedge the exchange rate and the fair value of the loans denominated in foreign currency as at 30 June 2011 is positive by Euro 26,628 thousand, compared with a positive value, equal to Euro 39,902 thousand, as at 31 December 2010. The marked change in fair value is mainly due to the strengthening of the Euro compared to the Japanese Yen and, to a significantly lesser extent, to trends in the rate curve. The financial instruments recorded under current assets and liabilities represent the derivative contracts expected to be realised within the following year. Derivative financial instruments classified under current assets amount to Euro 21,608 (Euro 12,797 thousand as at 31 December 2010); of these, Euro 60 thousand refer to derivatives on exchange rates, Euro 21,106 thousand to derivatives on commodities and Euro 442 thousand to derivatives on exchange rates relating to commercial transactions. Derivative financial instruments classified under current liabilities amount to Euro 15,791 (Euro 13,589 thousand as at 31 December 2010); of these, Euro 336 thousand refer to derivatives on exchange rates, Euro 12,119 thousand to derivatives on commodities and Euro 3,336 thousand to derivatives on exchange rates relating to commercial transactions. At 30 June 2011, the net fair value of derivatives on commodities and of derivatives on exchange rates, for commercial operations, is positive and amounts to Euro 6,093 thousand, compared to a negative fair value of Euro 748 thousand as at 31 December 2010. The increase in the fair value during the period is due, in substantially equivalent parts, to increases in the prices of crude oil and electricity, on positions already existing at the end of the previous year, which are still open at 30 June 2011. The fair value of financial instruments, both on interest rates and foreign exchange rates, derives from market prices; if there are no market prices, the net present value of future cash flows is used, using parameters observable on the market as references. The fair value of the commodity derivatives is calculated using input directly observable on the market. All derivative contracts entered by the Group are with leading institutional counterparties. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 97 2 Consolidated financial statements Interest rate and foreign exchange derivative instruments held as at 30 June 2011, subscribed in order to hedge loans, can be classed into the following two categories (figures in thousands of Euro): Hedging derivatives on 30‐Jun‐11 31‐Dec‐10 interest / exchange rates Underlying Notional Fair Value Fair Value Notional Fair Value Fair Value financial transactions) assets amount Income Expenses of Assets of Liabilities amount of Assets of Liabilities ‐ Cash Flow Hedge Loans 387.8 mln 0 15,348 40 5,946 410.7 mln 0 23,086 ‐ Fair Value Hedge Loans 649.8 mln 26,628 10,299 13,363 24,265 649.8 mln 39,902 20,308 ‐ Non Hedge Accounting Loans 37.2 mln 61 374 495 470 60.8 mln 196 759 Total 26,689 26,021 13,898 30,681 40,098 44,153 Interest rate derivatives identified as cash flow hedges show a residual notional amount of Euro 387.8 million (Euro 410.7 million as at 31 December 2010), against floating rate mortgage loans of the same amount. Income and charges in hedge accounting associated with interest rate derivatives predominantly refer to cash flow effects, or to the recording of shares of future flows, which shall have a financial impact in the following period. As at 30 June 2011 the breakdown of net charges relating to derivatives classified as cash flow hedges, amounting to Euro 5,906 thousand, is as follows: Cash Flow Hedge 30‐Jun‐11 30‐Jun‐10 €/000 Income / (Charges)) Income / (Charges) ‐ Realised Cash Flow ‐6,121 ‐10,879 ‐ Accrued Interest 238 ‐51 ‐ Ineffective portion ‐23 ‐194 Total ‐5,906 ‐11,124 The marked reduction in financial charges relative to the same period of the previous year (see Note 13 "Financial income and charges") is mainly due to the trend (in the context of hedges entered into) in interest rates. In 2011, the growing trend of the Euribor reference rates continued, generating a positive effect within the context of the fixed rate hedges entered into. An additional factor that contributed, albeit marginally, to the decrease in net cash flows paid is represented by the progressive reduction in the notional amount of some derivatives associated to loans being repaid. The degree of ineffectiveness of this class of interest rate derivative led to the recording of net charges totalling Euro 23 thousand in the income statement. All the hedging relationships between the aforementioned derivatives contracts and the related underlying liabilities are qualified as "Cash Flow Hedges" and involved the recording in the Group shareholders' equity of a specific negative reserve, amounting to Euro 7,726 thousand, net of the related tax effect. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 98 2 Consolidated financial statements Interest rate and foreign exchange derivatives identified as fair value hedges, show a residual notional amount of Euro 649.8 million (unchanged relative to 31 December 2010), against loans of the same amount. In the case of loans denominated in foreign currency, the notional amount of the derivative expressed in Euro is the translation to the original exchange rate hedged. Specifically, the financial liabilities hedged comprise a bond loan in Japanese yen with a residual notional amount of JPY 20 billion and a ten‐year fixed rate bond of Euro 500 million. These derivatives led to the recognition of financial income for Euro 13,363 thousand and financial charges for Euro 24,265 thousand Euro; simultaneously, a fair value assessment of the underlying loans was performed, recording financial income for Euro 14,026 thousand. As at 30 June 2011 the breakdown of income and charges relating to derivatives classified as fair value hedges and the related underlying liabilities measured at fair value was as follows: Fair Value Hedge 30‐Jun‐11 30‐Jun‐10 €/000 Income Charges Total Income Charges Total ‐ Valuation of derivatives 0 ‐14,026 ‐14,026 37,605 ‐1,310 36,295 ‐ Accrued Interest 10,762 0 10,762 6,337 0 6,337 ‐ Realised Cash Flow 2,601 ‐10,239 ‐7,638 2,352 ‐2,327 25 ‐ Ineffective portion 0 0 0 0 0 0 Total effect of deriv. on income statement 13,363 ‐24,265 ‐10,902 46,294 ‐3,637 42,657 Underlyings 30‐Jun‐11 30‐Jun‐10 €/000 Income Charges Total Income Charges Total Valuation of underlyings 14,026 14,026 6,191 ‐43,942 ‐37,751 Total 14,026 0 14,026 6,191 ‐43,942 ‐37,751 The reduction in net financial income associated with this type of hedge, relative to the same period of the previous year, reflects the changes in fair value of the financial instruments discussed above, specifically with reference to the rise in the rates curve and to the change in the fair value of derivatives on exchange rates, in addition to the recorded negative cash flows. The remaining interest rate derivatives not in the hedge accounting have a notional residual value of Euro 37.3 million (Euro 60.8 million as at 31 December 2010); some of these contracts are the result of mirroring transactions carried out in previous years as part of a restructuring of the derivatives portfolio. The remaining contracts which, under the criteria prescribed by the international accounting standards, cannot be accounted for under hedge accounting, were however put in place for hedging purposes only. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 99 2 Consolidated financial statements As for incorporated derivatives, reference is made to note 30. Commodity derivative instruments held as at 30 June 2011 can be classed into the following categories (figures in thousands of Euro): Commodity / foreign exchange 30‐Jun‐11 31‐Dec‐10 30‐Jun‐10 derivatives (commercial Underlying Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value transactions) of Liabilities Income Charges Income Charges of Assets of Assets of Liabilities of Asset of Liabilities Electricity ‐ Cash Flow Hedge formulas 0 0 0 0 0 0 2,649 0 1,518 879 Transactions on ‐ Non Hedge Accounting 21,548 15,455 26,432 12,575 12,770 13,518 36,235 26,653 56,818 44,682 Commodities Total 21,548 15,455 26,432 12,575 12,770 13,518 38,884 26,653 58,336 45,561 Commodity derivatives recorded under hedge accounting were all closed as at 31 December 2010 and now new ones were entered into in the first half of 2011. The commodity derivatives not recorded under hedge accounting also include contracts put in place substantially for hedging purposes, but which, on the basis of the strict requirements set forth by international accounting standards, cannot be formally classified under hedge accounting. In any event, these contracts generate income and charges referring to higher/lower purchase prices of raw materials and, as such, are recognised as operating costs. On the whole, in the first half of 2011, the commodity derivatives generated Euro 26,432 thousand in income and Euro 12,575 thousand in charges, for a net gain to the income statement of Euro 13,857 thousand, compared to a net gain of Euro 12,775 thousand as at 31 December 2010. The change in the net effect on the income statement is a direct result of the change in their fair values, the reasons for which are illustrated above. Interest rate risk and currency risk on financing transactions The Group's financial requirements are met also by turning to outside resources in the form of debt. The cost of the various forms of borrowing can be affected by market interest rate fluctuations, with a consequent impact on the amount of the net financial charges. Equally, interest rate fluctuations also influence the market value of financial liabilities. In the case of loans denominated in foreign currency, the cost may also be affected by exchange rate fluctuations with an additional effect on net financial charges. To mitigate interest rate volatility risk and, at the same time, guarantee the correct balance between fixed rate indebtedness and variable rate indebtedness, the Group has stipulated derivatives on interest rates (Cash Flow Hedges and Fair Value Hedges) against part of its financial liabilities. At the same time, to mitigate exchange rate volatility risk, the Group has stipulated foreign exchange derivatives (Fair Value Hedges) to fully hedge loans in foreign currency. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 100 2 Consolidated financial statements Market risk and currency risk on commercial transactions In relation to the wholesale activities carried out by the subsidiary Hera Trading Srl, the Group must handle the risks associated with the misalignment between the index‐linking formulas relating to the purchase of gas and electricity and the index‐linking formulas linked to the sale of said commodities, including therein fixed price contracts stipulated, as well as any exchange rate risk in the event that the commodity purchase/sale agreements are concluded in currencies other than the Euro (mainly the US dollar). With reference to those risks, the Group objective is to lessen the risk of fluctuation in the forecast budget margins. The instruments used for handling price risk, both with regards to the price of the goods and the related Euro/Dollar exchange rate, are carried out through swap agreements, aimed at pre‐establishing the effects on the sales margins irrespective of the changes in the aforementioned market conditions. Though these transactions are substantially put in place for hedging purposes, in order to realise all possible synergies and decrease operating costs, they are concretely implemented by de‐structuring the indices included in the underlying contracts and re‐aggregating them by individual type and net external exposure. As a result, in most cases, the direct correlation of the hedging transactions with the related underlying assets is lost, thereby making these transactions non‐compliant with the requirements of IAS 39 for hedge accounting. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 101 2 Consolidated financial statements 22 Inventories 30‐Jun‐11 31‐Dec‐10 Changes Raw materials and inventories 65,486 47,918 17,568 Semi‐finished products 201 46 155 Finished products 678 744 ‐66 Advance payments 6,241 5,172 1,069 Total 72,606 53,880 18,726 Inventories, stated net of an obsolescence provision amounting to Euro 628 thousand, (euro 564 thousand as at 31 December 2010), mainly comprise gas stocks, spare parts and equipment used to maintain and operate the plants. The change, compared with 31 December 2010, is attributable to higher stocks of gas destined to the domestic market with the beginning of the heating season. "Advance payments", amounting to Euro 6,241 thousand, relates to advance payments on gas supply. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 102 2 Consolidated financial statements 23 Trade receivables 30‐Jun‐11 31‐Dec‐10 Changes Trade receivables 717,022 611,348 105,674 Trade receivables for invoices to be issued 374,498 504,074 ‐129,576 Receivables from associated companies 22,654 19,074 3,580 Total 1,114,174 1,134,496 ‐20,322 Trade receivables as at 30 June 2011 amounted to Euro 1,114,174 thousand (Euro 1,134,496 thousand as at 31 December 2010) and comprise estimated consumption, for the portion pertaining to the period, relating to bills and invoices which will be issued after 30 June 2011. The balances are stated net of the provisions for doubtful receivables amounting to Euro 91,146 thousand (Euro 77,294 thousand as at 31 December 2010) which is considered to be fair and prudent in relation to the estimated realisable value of said receivables. The changes occurring in the provision during the year are provided below: Change in Uses and other 31‐Dec‐10 Allocations 30‐Jun‐11 scope of consolidation movements Provisions for doubtful receivables 77,294 ‐ 19,697 ‐5,845 91,146 The recording of the provision is made on the basis of analytical valuations in relation to specific receivables, supplemented by measurements made based on historic analyses of the receivables regarding the general body of the customers (in relation to the aging of the receivables, the type of recovery action undertaken and the status of the debtor), as described in the following paragraph "credit risk". The table below shows the reclassification from "Trade receivables for invoices to be issued" of 31 December 2010, relative to the published reports, to "Receivables from associated companies" for better comparison of the figure: 31 Dec. 2010 published Amount reclassified 31 Dec. 2010 restated Trade receivables for invoices to be issued 504,365 ‐291 504,074 Receivables from associated companies 18,783 291 19,074 Total 523,148 0 523,148 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 103 2 Consolidated financial statements Credit risk The book value of the trade receivables shown in the financial statements is the maximum theoretical exposure to credit risk for the Group as at 30 June 2011. Even if not standardised, there is a procedure for providing credit to customers that provides for individual evaluations to be made. These operations make it possible to reduce the concentration and exposure to credit risk posed by both business and private customers. Analyses are periodically made of the credit standings still open so as to single out any critical issues. Should individual positions turn out to be entirely or partially uncollectible, an adequate write‐down is provided. With regard to the receivables that do not undergo individual write‐downs, allocations are made to the provision for doubtful receivables, on the basis of historic analysis (in relation to the aging of the receivables, the type of recovery action undertaken and the status of the creditor). Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 104 2 Consolidated financial statements 24 Contract work in progress 30‐Jun‐11 31‐Dec‐10 Changes Contract work in progress 18,365 17,228 1,137 Total 18,365 17,228 1,137 Contract work in progress as at 30 June 2011 relates to long‐term orders for plant works. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 105 2 Consolidated financial statements 25 Financial assets 30‐Jun‐11 31‐Dec‐10 Changes Receivables for mortgages to be collected 741 1,098 ‐357 Financial receivables from associated companies 27,104 29,313 ‐2,209 Portfolio securities and financial policies 7,221 7,221 0 Receivables for loans given to others 6,475 8,452 ‐1,977 Total 41,541 46,084 ‐4,543 The composition and main changes with respect to 31 December 2010 are commented on below. Item "Financial receivables from associated companies" comprises interest‐bearing loans granted by the Parent Company to the following companies: 30‐Jun‐11 31‐Dec‐10 Changes Tamarete Energia Srl 25,074 23,736 1,338 Enomondo Srl 0 4,100 ‐4,100 Modena Network Spa 900 900 0 Ghirlandina Solare Srl 797 396 401 Other minor receivables 333 181 152 Total 27,104 29,313 ‐2,361 The following should be noted: • the additional loans granted in the 1st half of 2011 to the companies Tamarete Energia Srl, Ghirlandina Solare Srl and Set Spa are included under "Other minor receivables"; • the decrease in the loan granted to Enomondo Srl, due to the consolidation of the investee company with the proportional method (the remaining 50% of the loan is included under "Receivables for loans given to others"). Item "Portfolio securities and financial policies" mainly includes bonds issued by Banca di Credito Cooperativo, amounting to Euro 4,150 thousand, and investment policies with banks, amounting to Euro 3,069 thousand. "Receivables for loans given to others". In particular, the following is noted: • the closure of a credit position vis‐à‐vis customers for Euro 7,931 thousand; • the loan granted to the third party shareholder Unieco, Euro 3,000 thousand; • the reclassification from "Financial receivables from associated companies" of the loan granted to Enomondo Srl, Euro 2,050 thousand; • an increase in "Other minor receivables" of Euro 903 thousand. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 106 2 Consolidated financial statements 26 Other current assets 30‐Jun‐11 31‐Dec‐10 Changes Energy efficiency bonds and emissions trading 91,534 67,744 23,790 Security deposits 27,077 23,924 3,153 Deferred costs for employees 9,594 0 9,594 Equalisation Fund for the Electricity Sector 8,188 21,693 ‐13,505 Advances for direct taxes 6,665 3,813 2,852 Sundry tax receivables 6,511 7,316 ‐805 Contributions 5,609 5,694 ‐85 Advance to suppliers/employees 4,423 3,707 716 Receivables due from asset companies 4,211 4,880 ‐669 VAT, excise and surtaxes 3,477 2,300 1,177 Costs advanced for leasing and rentals 3,347 3,905 ‐558 Receivables for dividends 1,452 0 1,452 Receivables from municipalities for tax moratorium 1,449 2,029 ‐580 Insurance costs 1,417 5,494 ‐4,077 Receivables from social security institutions 290 677 ‐387 Other receivables 43,968 28,431 15,537 Total 219,212 181,607 37,605 The breakdown and changes in the main items are described compared with 31 December 2010. "Energy efficiency bonds and emissions trading", include: • green certificates, Euro 52,059 thousand (Euro 39,058 thousand as at 31 December 2010); • white certificates, Euro 22,290 thousand (Euro 15,478 thousand as at 31 December 2010); • grey certificates, Euro 17,185 thousand (Euro 13,208 thousand as at 31 December 2010). As regards green certificates, the Group accounted for the green certificates regarding the WTE of Ferrara, for a total amount accrued for the years 2008, 2009 and 2010 and 2011 equal to Euro 21,331 thousand, based on the provisions of Art. 1, paragraphs 1117 and 1118 of Law no. 296/2006 (2007 Finance act). On 10 March 2011, GSE (Energy Services Operator) gave official communication that the conditions were satisfied for obtaining 100% of said certificates. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 107 2 Consolidated financial statements In this table, the Administration recognises the incentives in favour of electricity power plants from renewable sources and sources assimilated to renewable sources, without making any distinction between organic and inorganic portion of waste, safeguarding the established right of plants, such as the one located in Ferrara, which, on the date of entry into effect of the finance act (1 January 2007), was compliant with all its terms, and in particular: a) signature of the special agreement with GSE b) almost completed plant and c) necessary authorisations. "Security deposits", comprising: • the deposit made to Acosea Impianti Srl for Euro 12,000 thousand, paying interest at market rates; • other minor deposits in favour of public institutions and companies, Euro 3,716 thousand (Euro 3,881 thousand as at 31 December 2010); • deposits in favour of the Property Valuation Office, Euro 2,101 thousand (Euro 2,099 thousand as at 31 December 2010) to guarantee the payment of revenue tax collected from customers; • deposit in favour of the GME, Euro 8,649 thousand, to guarantee the purchase of green certificates on the exchange (Euro 363 thousand as at 31 December 2010) • deposit in favour of CASC Capacity Allocation Service Company EU SA, Euro 611 thousand, to guarantee the purchase of transport capacity on the Luxembourg electrical energy grid (payment made in the 1st half of 2011). During the 1st half of 2011, the security deposit of Euro 5,944 thousand, allocated in December 2010 in favour of the GSE, was collected. "Deferred costs for employees", amounting to Euro 9,594 thousand, relate to the fourteenth pay period salary accrued as at 30 June 2011. "Equalisation Fund for the Electricity sector", amounting to Euro 8,188 thousand (Euro 21,693 thousand as at 31 December 2010). The decrease from the previous year pertains to the amount collected during the 1st half of 2011, in relation to the gas equalisation and to the Ug2 system component as well as to a timing offset in the timelines for invoicing to customers with respect to amounts charged by third party distributors. In this regard, please see Note 35 "Tax payables" under "Other tax payables". "Advances for direct taxes", relating to the advances paid for IRES and IRAP in 2010 with respect to the debt accrued. "Sundry tax receivables" mainly comprise tax credits on district heating. The decrease compared to the 31 December 2010 is mainly due to the offsetting of the 2010 tax credit. An authentic interpretation of art. 1, paragraph 53 of Law no. 244 of 24 December 2007, provided by Decree Law no. 5 of 10 February 2009, specifies that the annual limit of Euro 250,000 "does not apply to tax credits by way of reimbursement of advance contributions in the form of a discount on the sales price of a good or service". "Contributions", comprising mainly receivables for grants disbursed by various Agencies, but yet to be collected. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 108 2 Consolidated financial statements "VAT, excise and additional taxes" consist of VAT credits, for Euro 1,503 thousand, and of excise and regional surtaxes of Euro 1,974 thousand. The change, compared with 31 December 2010, is due to an increase of Euro 1,907 thousand in receivables for excise and additional regional taxes (Euro 67 thousand as at 31 December 2010) and a decrease of Euro 730 thousand in receivables for value added tax (Euro 2,233 thousand as at 31 December 2010). These changes are to be related to changes shown in liabilities, in the item "Tax liabilities" ‐ Note 35. To understand these changes, particularly with regards to excise duties and additional components, note must be taken of the procedures that regulate financial relations with the Tax Authorities. In particular, advance payments during the year were calculated according to quantities of gas and electricity billed in the previous year. Using these methods, credit/debit positions can be generated with differences that can even be significant between one period and another. In particular, the increased volumes of gas and electricity invoiced in 2011 over 2010 brought about a considerable increase in the debt position. "Receivables for dividends" refer to the receivable for 2010 dividends, not yet collected from the associated companies Service Imola Srl and Aimag Spa, respectively for Euro 100 and Euro 1,352 thousand. With regard to "Receivables from municipalities for tax moratorium", reference is made to Note 14. "Insurance costs", the coverage of insurance policies and warranty bonds refers to the period from 30 June 2010 to 30 June 2011 with payments in September of each year and consequent deferred charge at 31 December. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 109 2 Consolidated financial statements 27 Cash and cash equivalents As at 30 June 2011, cash and cash equivalents totalled Euro 356,264 thousand (Euro 538,226 thousand as at 31 December 2010) and include cash, cash equivalents, and bank cheques and drafts held in centralised and decentralised accounts for a total of Euro 150 thousand. They also include bank and financial institution deposits available for current transactions and post office accounts totalling Euro 356,114 thousand. To get a better grasp of the financial trends in 2010, please refer to the cash flow statement and the comments shown in Paragraph 1.06 of the report on operations. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 110 2 Consolidated financial statements 28 Share capital and reserves The statement of changes in shareholders' equity is shown in section 2.01.05 of these abbreviated half‐year consolidated financial statements. Share capital The share capital at 30 June 2011 was 1,115,013,754 Euro units, fully paid‐up, and represented by 1,115,013,754 ordinary shares with a nominal value of Euro 1 each. Reserves for treasury shares The "Reserve for treasury shares" has a negative value of Euro 5,938 thousand; it reflects the number of treasury shares in the portfolio as at 30 June 2011 and is considered a reduction of share capital. Items "Reserve for gains/losses on sale of treasury shares" and "Reserve for treasury shares exceeding par value" are recorded among the shareholders' equity reserves. for Euro 320 thousand and for a negative value of Euro 3,515 thousand, respectively. These reserves, established in compliance with the accounting standards of reference, reflect the treasury shares transactions carried out as at 30 June 2011. The change during the year generated gains amounting to Euro 367 thousand. Reserves The item "Reserves", equal to Euro 537,339 thousand, includes the following reserves: "legal" for Euro 31,751 thousand, "extraordinary" for Euro 31,096 thousand, "revaluation" for Euro 4,356 thousand, "share premium reserve" for Euro 15,269 thousand, "capital account payments" for Euro 5,400 thousand, "retained earnings" for Euro 35,581 thousand, "share swap surplus" for Euro 42,408 thousand, "IFRS 3 reserve" for Euro 227,008 thousand, deriving from the integrations of Agea Spa, Meta Spa, Geat Distribuzione Gas Spa, Sat Spa, Agea Reti Srl, Con.Ami Spa and Area Assets Spa; "IAS/IFRS reserve" for EUR 143,473 thousand, generated after adoption of international accounting standards; "reserve for dividends received on treasury shares" for Euro 997 thousand. Cash Flow‐Hedge Reserve As at 30 June 2011, this reserve had a negative balance of Euro 7,726 thousand following changes determined by fair value valuation of reference derivatives. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 111 2 Consolidated financial statements 29 Payables to banks and medium/long‐ and short‐term loans At 30 June 2011, medium/long‐term financing stood at Euro 2,299,451 thousand (Euro 2,313,722 thousand as at 31 December 2010), mainly represented by mortgage loans and financing for Euro 500,994 thousand and bond loans for Euro 1,798,457 thousand. Medium/long‐term amounts due to banks also include loans subscribed by the subsidiary Fea Srl for a total of Euro 53,900 thousand. These loans are guaranteed by mortgages and special privileges for the banking pool underwriting the loan. Repayment, with final maturity on 30 June 2019, shall be in 6‐monthly instalments, as established in the contract. The table below shows the bonds and loans as at 30 June 2011, stated at their residual nominal value (millions of €), with an indication of the portion expiring within and after 5 years: Type Residual amount at 30/06/2011 Portion due within the yr Portion due within 5 yrs Portion due after 5 yr Bond 1,250 0 500 750 Convertible bond 140 0 140 0 Puttable Bond/Loan 540 0 0 540 Amortizing 166 41 88 37 Amortising backed by collateral security 60 6 28 26 Bullet 180 0 180 0 Total 2,336 47 937 1,352 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 112 2 Consolidated financial statements The main terms and conditions of the puttable bonds and loans are shown below: Puttable bonds and Duration (yrs) Maturity Nominal value Coupon loans Convertible bond Luxembourg Stock Exchange 3 01/10/13 140 Fixed, annual Eurobond Luxembourg Stock Exchange 10 15/02/16 500 Fixed, annual Eurobond Luxembourg Stock Exchange 10 03/12/19 500 Fixed, annual Bond (ex put bond) 13 17/11/20 100 Fixed, half‐yearly For the first 3 years, 3 month Euribor minus 45 Put Loan Put exercisable every 2 yrs from 2010 13 22/11/20 70 cents. For the following 10 yrs, a fixed 4.41% rate plus the 2 year credit spread. For the first 3 years, 3 month Euribor minus 46 Put Loan Put exercisable every 2 yrs from 2010 13 06/12/20 70 cents. For the following 10 yrs, a fixed 4.44% rate plus the 2 year credit spread. Bond Cross Currency Swap 150 €mln 15 05/08/24 20000 JPY Fixed, half‐yearly For the first 3 years, a fixed rate of 4.20%. For Put Bond (partly paid) Put exercisable every 5 years from 2011 23 10/10/31 200 the following 20 years, a fixed rate of 4.65% plus the 5 year credit spread. Until 2012, 3 month Euribor minus 45 cents. From 2012 to 2016, a fixed rate of 3.15% Put Bond Put exercisable every 2 years from 27 08/08/34 200 plus the 2 year credit spread. From 2016 2012 to maturity, a fixed rate of 4.85% plus the 2 year credit spread. The loans in place as at said date do not provide for financial debt covenants, apart from the corporate rating limit by only one Rating Agency that is lower than "Investment Grade" level (BBB‐). As at 30 June 2011, short term loans totalled Euro 97,764 thousand (Euro 147,837 thousand as at 31 December 2010) and include payables to banks and other lenders. Liquidity risk Liquidity risk consists of the impossibility to cope with the financial obligations taken on due to a lack of internal resources or an inability to find external resources at acceptable costs. Liquidity risk is mitigated by adopting policies and procedures that maximise the efficiency of management of financial resources. For the most part, this is done with the centralised management of incoming and outgoing flows (centralised treasury service); in the perspective assessment of the liquidity conditions; in obtaining adequate lines of credit; and preserving an adequate amount of liquidity. Current cash, cash equivalents, and credit facilities, in addition to the resources generated by the operating and financing activities, are deemed more than sufficient to meet future financial needs. In particular, as at 30 June 2011, there are unused credit lines totalling more than Euro 964 million. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 113 2 Consolidated financial statements 30 Employee leaving indemnity and other employee benefits This includes provision for employee leaving indemnities and other contractual benefits, net of advances paid out and payments made to the social security institutions pursuant to current regulations. The calculation is made using actuarial methods and updating future liabilities at the date of the balance sheet. These liabilities comprise the matured receivables of the employee at the presumed date of leaving the company. The item "Gas discount" represents annual indemnities provided to employees hired on the basis of a Federgasacqua employment contract prior to January 1980, which may be transferred to their heirs. "Premungas" is a supplementary pension fund for employees hired on the basis of a Federgasacqua contract prior to January 1980. This fund was closed with effect from January 1997, and changes quarterly to settle payments made to eligible retirees. In both cases, recalculations have been made using the same actuarial methods implemented for the employee leaving indemnities. The item "tariff reduction provision" was provided to cover the charges deriving from the acknowledgement to retired staff of the electricity business unit of tariff concessions for electricity consumption. The table below shows the changes in the above provisions during the year. Provisions Uses and other Changes in the scope 31‐Dec‐10 30‐Jun‐11 movements of consolidation Provisions financial charges Employee leaving indemnity prov. 87,657 259 738 ‐2,551 86,103 Tariff reduction provision 3,340 234 43 ‐199 3,418 Premugas provision 2,384 192 29 ‐219 2,386 Gas discount 2,262 49 22 ‐146 2,187 Total 95,643 734 832 ‐3,115 0 94,094 The item "Uses and other movements" mainly includes the amounts paid to employees. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 114 2 Consolidated financial statements 31 Provisions for risks and charges Provisions Uses and Changes in the 31‐Dec‐10 other scope of 30‐Jun‐11 Provisions Financial charges movements consolidation Provision for restoration of third party assets 81,332 3,683 3,479 ‐225 ‐ 88,269 Landfill closure and post‐closure costs provision 95,028 1,974 2,824 ‐4,214 ‐ 95,612 Provision for staff disputes and legal costs 20,711 3,215 ‐ ‐2,384 ‐ 21,542 Other provisions for risks and charges 13,897 4,059 ‐ ‐3,704 ‐ 14,252 Total 210,968 12,931 6,303 ‐ 10,527 ‐ 219,675 The provision for the restoration of third party assets, equal to Euro 88.269 thousand, includes the provisions made in relation to the legal and contractual restrictions encumbering the Hera Spa and Group companies in their capacity as leaseholders of the distribution networks owned by the asset companies. The allocations are made on the basis of amortisation rates provided for the assets in question in order to compensate the lessor companies for the wear and tear of the assets used for business activities. In observance of the matters laid down by IAS 37, the provision reflects the current value of these outlays which will be determined in future periods (as a rule on expiry of the agreements entered into with the area agencies, as far as the water service is concerned, and on expiry of the transitory period anticipated by current legislation as far as gas distribution is concerned). The increases in the provision comprise the sum total of the provisions for the year, including those discounted back, and the financial charges which reflect the element deriving from the discounting back of the flows on an accruals basis. The landfill closure and post‐closure costs provision, equal to Euro 95,612 thousand, represents the amount set aside to cover the costs which will have to be incurred for the management of the closure and post‐closure period pertaining to the landfills currently in use. The future outlays, calculated for each landfill by means of a specific appraisal, have been discounted back in compliance with the provisions of IAS 37. The increases in the provision comprise the financial component inferred from the discounting back procedure, while the uses represent the effective outlays which came about during the year. "Uses and other movements" decreased by Euro 4,214 thousand, as follows: • "uses" for Euro 4,950 thousand, of which Euro 2,372 thousand booked as a contra entry to "other revenues" (please refer to Note 5 of the income statement), • "other movements", relating to a Euro 736 thousand increase in the provision due to the change in the closure and post‐closure costs estimated during the updating of the appraisals of certain landfills; Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 115 2 Consolidated financial statements The provision for staff disputes and legal costs amounting to Euro 21,542 thousand reflects the assessments of the outcome of lawsuits and disputes brought by employees. The provision also includes Euro 9,788 thousand relating to ongoing litigation with INPS over the payment of contributions on social security benefits (CIG, CIGS, mobility) and on the reduction of contribution rates for family allowances (CUAF) and for the maternity contribution with regard to employees governed by the electricity sector collective labour agreement in the Modena area. In relation to the contributions on CIG, CIGS and mobility, the Hera Group deems that said contribution is not due, not only based on legal rules but also on the fundamental consideration that these social shock absorbers are effectively unusable since the Group runs essential services, which must be constantly insured. By contrast, INPS believes that the transformation into a joint‐stock company and the transfer to private parties of even just a portion of the share capital, support the belief that the contributory obligation is enforceable. With its message no. 18089 of 10 July 2007, INPS ordered that, according to the principles stated in circular no. 63/2005, the contribution obligation for CIG, CIGS and mobility was to go into effect on the very date the circular was issued, i.e. May 2005. This is in compliance with the Council of State opinion expressed (opinion no. 65 of 8 February 2006 referring to Enel Spa) regarding the non‐retroactivity of the contribution obligations referred to in the circular. Actually, despite the fact that the literal tone of the message seems to undoubtedly regard the industrial companies of the public institutions (former municipal enterprises) as well, INPS ‐ in latching on to circular 63/2005 – maintained that the message takes on its area of application, thereby referring only to Enel Spa, and asserts this in court. On 5 February 2008, the Ministry of Labour intervened with a message addressed to the INPS General Management. It stated that the conclusions the Council of State reached regarding the non‐retroactivity prior to May 2005 of the contribution obligation for CIG, CIGS and Mobility by necessity are general and unequivocal in order to protect the unavoidable principle of "par condicio" amongst market operators. Therefore, they also apply to the industrial companies of the public institutions (which the Hera Group also is part of). The Group's claim that it was not obliged to pay CIG and CIGS contributions was accepted in 2004 by order of the Court of Genoa, but was later overturned by the Court of Appeal in November 2005. In December 2006 the Ravenna Labour Court upheld two petitions for Hera Ravenna Srl and Hera Spa and declared the contributions for involuntary unemployment, CIG, CIGS and mobility to be not due, unlike what INPS claimed. This ruling was also overturned on appeal, but at the current state of play, the grounds are still not known. Hera will appeal the ruling before the Supreme Court. Following a declaratory action brought in 2000 by Amir Spa, Hera Spa submitted an appeal to the Supreme Court, which was concluded with ruling 14847/09 rejecting the appeal for CIG contributions, and referring the case to the court of appeal for Mobility contribution. The Supreme Court may therefore review the position, with effects also on first instance proceedings. At the very least, it should confirm the waiver of contributions to the redundancy fund (CIG) prior to May 2005, according to the specific opinion of the Council of State. In addition, it should also be noted that INPS shall not file any new claims regarding CIG, CIGS, or Mobility following the new classification in the Service sector, from 2010, of nearly all the Group companies (the contribution in question shall only apply to the Industrial sector). Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 116 2 Consolidated financial statements Regarding the contribution for family allowances (Cuaf) and the maternity contribution, this type of litigation only concerns INPDAP personnel regulated by the electricity sector collective labour agreement, and is based on the interpretation of Article 41 of Law no. 488/1999 (2000 Finance Act). In particular, this contribution relates to the area of Modena only, as it results from the former Meta Spa. Following consultation at the time with the Modena INPS Positions Management Office, the former Meta Spa applied reduced rates starting in 2001, at the same time it requested reimbursement of the greater contributions it had paid in, but which were not due, regarding financial year 2000 (this reimbursement was actually made between 2001 and 2002). As of November 2003, however, INPS served notices requesting payment of the contributions at the full rate, completely amending the interpretative position previously adopted, deeming that the reduction of the CUAF and maternity rates owed by the electricity sector was not applicable to workers enrolled with INPDAP. Meanwhile, this reduction was applied without objection in the case of Enel Spa Group companies. With regard to contributions for family allowances (CUAF) and maternity, the differential that service companies have had to pay for personnel registered with INPDAP until 31 December 2008 was equal to a total of 4.29% more than what has to be paid for INPS personnel. As of 1 January 2009, the maternity rates have become equal; however, a 3.72% difference in the CUAF rage continues to exist. This higher rate penalises the "former municipal enterprises" severely by comparison with other market operators. On several occasions, Confservizi has brought this lack of contribution harmonisation, which is a consequence of Law no. 335/1995, to the attention of the Ministry of Labour, which in turn consulted the Council of State. The Council deemed a special legislative initiative necessary (Circular no. 88 of 31 May 2004), which rules out the possibility of an administrative solution. Confservizi's efforts to push through this legislative initiative have been unsuccessful to date. Finally, a note on the evolution of the regulatory framework for unemployment and sickness contributions. Art. 20 of Law Decree no. 112/2008 has forfeited any past INPS claims relating to Unemployment and Sickness contribution. The portion of contributions contained in these filings for such purposes is no longer considered a risk. In addition, there may be no new INPS claims as all Hera Group companies have regularly paid the Sickness contribution since 2005 and the Unemployment contribution since 2009. In view of the information reported above, an allocation of Euro 9,788 thousand was made to the aforementioned provision, which takes into account the liabilities deriving from the forms received so far and currently suspended, amounting to approximately Euro 22,2 million. This amount refers to the contributions contained in the forms and referring to CIG, CIGS Mobility, CUAF and Maternity, excluding however the portion referring to Unemployment and Sickness contributions for the above reasons. This fund, determined on the basis of a prudential criterion, is deemed to be appropriate, in view of both the likely development of the litigation and the opinions of the appointed legal advisors. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 117 2 Consolidated financial statements The other provisions for risks and charges, amounting to Euro 14,252 thousand, comprise allocations made against sundry risks. The main items are summarised below: • Euro 2,518 thousand for the "MIS quota, charges for electrical service continuity and equal distribution"; Euro 2,167 thousand in spending on restoration of goods reverting freely, relating to the water supply system of the river Rosola, held under concession and other provisions for risks of very modest amounts connected with environmental problems; Euro 835 thousand relates to the provision made in relation to customer compensation for water service leaks; Euro 428 thousand, relating to the "Valle Savio fund", established to cover the costs of the works for the community adjacent to the Busca landfill, in the municipality of Cesena, as required by the concession contract; Euro 1,472 thousand provision for the cost of disposal of waste stored at Group plants; Euro 1,392 thousand in allocations for future expenses relating to the landfill; Euro 2,212 thousand relates to the possible effects of Italian Authority for Electricity and Natural Gas resolution no. 89/08 (ec79/07), which creates an obligation on the part of companies selling gas, of a financial payout to final customers under OTB (base tariff option) for the period referred to in the first half of 2006. The residual amount, as at 30 June 2011, corresponds to the most prudential scenario in relation to the amount which may be paid to final customers. No changes have occurred in this amount during the six‐ month period. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 118 2 Consolidated financial statements 32 Deferred tax liabilities 30‐Jun‐11 31‐Dec‐10 Changes Deferred tax liabilities 3,734 6,022 ‐2,288 Other IAS/IFRS deferred tax liabilities 74,258 70,121 4,137 Total 77,992 76,143 1,849 Deferred tax liabilities are generated by temporary differences between the balance sheet profit and taxable income. Deferred tax payables generated by IAS/IFRS effects are reported separately and shown below. 30‐Jun‐11 31‐Dec‐10 Changes Ias 38 Intangible Assets 73 47 26 Ias 37 Third party asset restoration and landfill 22,444 23,461 ‐1,017 post‐closure Ias 16 Fixed assets 37,400 36,551 849 Ias 17 Financial leases 4,005 4,024 ‐19 Ias 19 Employee leaving indemnity and other benefits 5,546 5,441 105 Ias 39 Derivatives 4,790 597 4,193 Total 74,258 70,121 4,137 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 119 2 Consolidated financial statements 33 Financial leasing payables 30‐Jun‐11 31‐Dec‐10 Changes Financial leasing payables 10,956 13,481 ‐2,525 Total 10,956 13,481 ‐2,525 This item represents the recording of payables arising from the accounting of leasing transactions using the financial method. The decrease from the previous year is due to the payment of lease fees accrued during the period. The balance as at 30 June 2011 is shown below, broken down between the short‐term and long‐term portions. residual amount short‐term portion long‐term portion Financial leasing payables 10,956 3,457 7,499 Total 10,956 3,457 7,499 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 120 2 Consolidated financial statements 34 Trade payables 30‐Jun‐11 31‐Dec‐10 Changes Payables to suppliers for invoices to be received 469,769 508,603 ‐38,834 Payables to suppliers 398,239 527,667 ‐129,428 Payables for advances received 16,958 14,477 2,481 Payables to associated companies 9,251 10,128 ‐877 Payables to non‐consolidated subsidiaries 56 128 ‐72 Total 894,273 1,061,003 ‐166,730 Payables to suppliers, entirely commercial in nature and inclusive of sums set aside for invoices due, came in at Euro 868,008 at 30 June 2011, compared with Euro 1,036,270 thousand as at 31 December 2010. The decline was mainly due to fluctuations caused by seasonal factors in purchases of raw materials. "Payables for advances received" relate to advances received in relation to tender contracts for environmental reclamation and gas supply. The key amounts owed to associated companies, again for commercial reasons, are itemised below: 30‐Jun‐11 31‐Dec‐10 Changes Set Spa 3,618 5,591 ‐1,973 So.Sel Spa 1,834 2,096 ‐262 Estense Global Service Soc. Cons. a r.l. 1,316 540 776 Modena Network Spa 1,289 799 490 Service Imola Srl 1,102 995 107 Aimag Spa 66 89 ‐23 Adriatica Acque Srl 28 20 8 SGR Spa ‐2 ‐2 0 Total 9,251 10,128 ‐877 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 121 2 Consolidated financial statements The table below shows the reclassification carried out on "Payables to suppliers for invoices to be received" as of 31 December 2010, compared to the figures reported under "Payables to associated companies" and "Payables to non‐ consolidated subsidiaries" for the sake of better comparison: 31 Dec. 2010 Amount 31 Dec. 2010 published reclassified restated Payables to suppliers for invoices to be received 513,683 ‐5,080 508,603 Payables to associated companies 5,095 5,033 10,128 Payables to non‐consolidated subsidiaries 81 47 128 Total 518,859 0 518,859 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 122 2 Consolidated financial statements 35 Tax liabilities 30‐Jun‐11 31‐Dec‐10 Changes Income tax due 79,259 13,682 65,577 Excise and additional tax charges 64,266 44,013 20,253 Value Added Tax 46,366 11,075 35,291 Substitute tax 25,605 25,434 171 Withholding taxes to employees 9,233 10,340 ‐1,107 Sewage fees 573 570 3 Other tax liabilities 15,515 19,388 ‐3,873 Total 240,817 124,502 116,314 The most significant changes that have occurred since last year are noted below: As regards "Income tax due", the increase compared to 31 December 2010 is attributable to the setting aside of IRES and IRAP taxes on the income generated during the period. "Excise and additional tax charges" and "Value Added Tax" increased considerably compared to 31 December 2010. For an explanation please see Note 26 of the assets under "Other current assets", and particularly the mechanism that governs the financial relations with the tax authority. "Substitute tax": the payable refers to the tax sheltering carried out in 2010 through payment of a substitute tax calculated on the higher values recorded as a result of extraordinary transactions, pursuant to Article 176, paragraph 2‐ter of the Consolidation Act on Income Taxes. The increase over the previous period is due to the pro‐rata consolidation of Enomondo Srl, which company has sheltered the higher values recorded for plant transferred from Caviro Società Cooperativa Agricola). Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 123 2 Consolidated financial statements 36 Other current liabilities 30 June 11 31 Dec 10 Changes Security deposits 71,288 61,652 9,636 Contributions for plant 62,802 64,130 ‐1,328 Personnel 29,471 26,442 3,029 Electrical Services Compensation Fund 28,550 5,587 22,963 Payables to social security and welfare institutions 27,226 22,215 5,011 Payables to shareholders for dividends 9,618 5,894 3,724 Contract work for studies/design/consulting 4,416 4,804 ‐388 Payables due to municipalities for environmental disruption 3,564 5,572 ‐2,008 and establishment of securities Insurance and deductibles 2,890 2,911 ‐21 Energy efficiency bonds and emission trading 2,539 3,143 ‐604 Customers 1,676 1,354 322 Directors, Statutory Auditors and Committees for the Territory 219 180 39 Other liabilities 37,523 26,166 11,357 Total 281,782 230,050 51,732 Comments are provided below on the most significant items and the associated changes as at 31 December 2010: "Security deposits" reflect the sums paid by customers for gas, electricity, and water administration agreements. The increase compared to 31 December 2010 is almost entirely attributable to the acquisition of new customers. "Capital grants" refer to investments in the water supply and environment sector. This item will decrease in future periods in proportion to the amount of depreciation calculated on the assets referred. The item "Personnel" relates to holidays accrued but not yet taken as at 30 June 2011, productivity bonus and accrued salaries recorded. "Electrical Services Compensation Fund (CCSE)". The significant increase from 31 December 2010 is mainly attributable to gas system components accrued during the half‐year period to be paid to CCSE. "Payables to social security and welfare institutions" relate to contributions due to these institutions for the month of June. The increase from 31 December 2010 is predominantly due to the portions of wages accrued but not yet paid. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 124 2 Consolidated financial statements "Payables to shareholders for dividends" refer to the Parent Company Hera Spa (Euro 1,288 thousand) and to the subsidiary Fea Srl (Euro 8,330 thousand). "Energy efficiency bonds and emission trading" as of 30 June 2011 refers entirely to grey certificates (Euro 3,053 thousand for grey certificates and Euro 90 thousand for green certificates as at 31 December 2010). This record reflects the obligation to return the certificates to the competent authorities in accordance with applicable regulations. It should be noted that the requirement to return the grey certificates has been fulfilled for 2010. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 125 2 Consolidated financial statements IFRS 8 Income Statement ‐ June 2011 Water Other Consolidated Gas Electricity Environment Structure Total Cycle Services Fin. Statements Direct revenues 715.6 716.4 269.9 318.2 36.7 14.0 2,070.9 2,070.9 Intra‐cycle revenues 16.3 25.1 3.5 33.4 11.4 4.2 93.9 Total direct revenues 731.9 741.5 273.4 351.6 48.2 18.2 2,164.8 2,070.9 Indirect revenues 3.2 1.3 2.0 11.6 0.2 ‐18.2 0,0 Total revenues 735.0 742.8 275.4 363.2 48.3 0.0 2,164.8 2,070.9 EBITDA 120.6 42.2 67.5 105.2 8.4 0.0 344.0 344.0 Direct Deprec., Amort. and Prov. 24.4 17.1 31.9 46.6 8.2 16.5 144.6 144.6 indirect Deprec., Amort. and Prov. 4.0 2.3 4.7 4.9 0.6 ‐16.5 0.0 Total Deprec., Amort. and Prov. 28.3 19.4 36.6 51.5 8.8 0.0 144.6 144.6 EBIT 92.3 22.9 30.9 53 ‐0.3 0.0 199.4 199.4 Income Statement ‐ June 2010 Water Other Consolidated Gas Electricity Environment Structure Total Cycle Services Fin. Statements Direct revenues 652.1 623.0 266.5 301.8 37.5 27.9 1,908.7 1,908.7 Intra‐cycle revenues 27.1 26.9 3.7 2.9 11.2 5.2 102.1 Total direct revenues 67.2 649.9 270.1 329.7 48.7 33.2 2,010.8 1,908.7 Indirect revenues 10.9 3.8 7.0 10.6 0.8 ‐33.2 0.0 Total revenues 690.1 653.8 277.1 340.3 49.5 0.0 2,010.8 1,908.7 EBITDA 109.3 31.8 67.5 97.1 7.8 0.0 313.5 313.5 Direct Deprec., Amort. and Prov. 29.8 12.3 29.6 43.6 8.6 14.7 138.7 138.7 indirect Deprec., Amort. and Prov. 3.6 2.1 4.2 4.3 0.5 ‐14.7 0.0 Total Deprec., Amort. and Prov. 33.4 14.4 33.8 47.9 9.2 0.0 138.7 138.7 EBIT 75.9 17.4 33.7 49.2 ‐1.3 0.0 174.9 174.9 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 126 2 Consolidated financial statements Balance Sheet – June 2011 Net Net Net fixed assets Shareholders' Consolidated Working Reserves financial Equity Fin. Statements Capital position Total Assets 1,434.0 4,223.0 0.0 0.0 447.3 6,104.3 Financial assets and cash and cash equivalents 447.3 447.3 Tax assets 25.4 89.9 115.3 Non‐allocated Group assets 323.2 323.2 Business Sector Assets 1,408.6 3,809.9 0.0 0.00 0.0 5,218.5 ‐ of which: GAS 458.6 905.3 1,363.9 Electricity 439.5 530.7 970.1 Water Cycle 193.3 1.093.66 1,286.9 Environment 272.8 1.147.1 1,419.9 Other services 44.5 133.2 177.7 Total Liabilities 1,432.7 15.4 391.8 1,846.0 2.418.5 6,104.3 Financial liabilities and loans 2,418.5 2,418.5 Tax liabilities 241.1 78.0 319.1 Non‐allocated Group liabilities 15.4 1.9 1,846.0 1,863.2 Business sector liabilities 1,191.5 0.0 311.9 0.0 0.0 1,503.44 ‐ of which: GAS 310.4 76.2 386.6 Electricity 330.8 15.9 346.7 Water Cycle 193.3 65.2 258.5 Environment 311.2 148.1 459.3 Other services 45.9 6.4 52.3 Total 1.3 4.207,6 ‐391.8 ‐1,846.0 ‐1,971.1 0,0 Balance Sheet ‐ December 2010 Net Net Net fixed assets Shareholders' Consolidated Working Reserves Financial Equity Fin. Statements Capital Position Total Assets 1,400.0 4,186.4 0.0 0.0 614.8 6,201.2 Financial assets and cash and cash equivalents 614.8 614.8 Tax assets 30.7 84.3 115.0 Non‐allocated Group assets 338.4 338.4 Total Liabilities 1,369.3 3,763.7 0.0 0.0 0.0 5,133.0 ‐ of which: GAS 447.9 895.6 1,343.5 Electricity 428.6 526.7 955.2 Water cycle 196.1 1,075.1 1,271.2 Environment 247.6 1,129.5 1,377.0 Other services 49.1 137.0 186.0 Total Liabilities 1,429.1 44.1 382.8 1,870.2 2,475.0 6,201.2 Financial liabilities and loans 2,475.0 2,475.0 Tax liabilities 124.5 76.1 200.6 Non‐allocated Group liabilities 44.1 1.8 1,870.2 1,916.2 Business sector liabilities 1,304.6 0.0 304.8 0.0 0.0 1,609.4 ‐of which: GAS 422.0 72.1 494.2 Electricity 356.0 14.9 370.9 Water cycle 192.9 63.5 256.4 Environment 290.0 147.6 437.6 Other services 43.7 6.6 50.3 Total ‐29.1 4.142.3 ‐382.8 ‐1,870.2 ‐1,860.2 0.0 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 127 2 Consolidated financial statements 2.03.02 Explanatory notes for related parties Management of the services The Hera Group, through Parent Company Hera Spa, holds concessions of local public services of economic interest (distribution of natural gas via local gas pipelines, integrated water service and waste management services, including sweeping, collection, transport and waste recovery and disposal) in a large amount of its territory of competence and in almost all of the shareholder municipalities (provinces of Modena, Bologna, Ferrara, Forlì‐Cesena, Ravenna and Rimini). The electricity distribution service has been carried out in the Imola district, in the municipality of Modena and in the municipalities of the province of Modena acquired from the previous operator (Enel Distribuzione). Other utilities (district heating systems, heat management and public lighting) are provided under market conditions, i.e. through special agreements with local authorities. Through special agreements with local authorities, Hera Spa is responsible for the waste treatment and disposal service, excluded from the regulatory activity carried out by the environmental authorities (AATO), but subject to control by the Regional Authority for water services and urban waste management. The AATO are responsible, under regional and national legislation governing the sector, for controlling and regulating tariffs for integrated water and urban cleaning services, which were formerly managed by the concession‐granting municipal authorities. However, these authorities are represented at meetings of the AATO. In observance of the provisions of said regional law and related national legislation (specifically article 113 of the Consolidated Local Authority Act and the sector regulations regarding appointing services on an exclusive basis), the Hera Group entered into special agreements with the AATOs, which establish the coming into effect of the technical and tariff planning. Energy sector The duration of licenses for the distribution of natural gas via local gas pipelines, initially set for periods ranging between ten and thirty years by the original agreements stipulated with the municipalities, was revised by Italian decree no. 164/2000 (Letta Decree, implementing Directive 98/30/EC) and by subsequent reforms of the energy market quoted in the part "Regulations" of the Directors' Report. Hera Spa has longer residual terms than those set out for managing entities that have promoted partial privatisations and mergers. The duration of distribution concessions is unchanged with respect to that foreseen in the company's stock exchange listing. The agreements associated with the distribution licenses regarding the distribution of natural gas or other similar gases for heating, domestic, handicraft and industry uses, and for other general uses. The gas distribution tariffs are set in accordance with the regulations in force and with the deliberations adopted from time to time by the Italian Authority for Electrical Energy and Natural Gas. The territory in which Hera carries out the gas distribution services consists of "tariff areas" in which a distribution tariff is uniformly applied to the various categories of customers. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 128 2 Consolidated financial statements In relation to the electricity area, the contracts (with thirty‐year duration and renewable pursuant to the legislation in force) relate to the distribution of energy, including management of the distribution network, operation of the plants, carrying out of ordinary and extraordinary maintenance and planning and identification of the development interventions. A suspension or expiry of the concession may be ordered by the authority regulating the sector if the concession holder is found to be inadequate or to be in breach of regulations in force, in such a way as to prejudice provision of the electricity distribution service in a serious and far‐reaching manner. The concession holder is obliged to apply to consumers the tariffs set by regulations in force and resolutions adopted by the Italian Authority for Electricity and Natural Gas. The regulatory tariffs in force at the time of the approval of the Abbreviated Consolidated Half‐Year Financial Statements to which this report is attached are resolution no. 348/2007 and subsequent amendments and additions. ("Supplementary text of measures for the supply of transmission, distribution and measurement of electrical energy for the regulatory period 2008‐2011 and of measures for economic conditions governing the supply of connection services"), which replaced the previous system of tariff options with a single national distribution tariff. Water sector Hera manages the integrated water supply service under agreements with the AATOs of varying duration (usually twenty years), for aqueduct, sewage and purification services. The management of the aqueduct service includes the public services of collection, purifying, distribution and sale of drinking water for civil and industrial use; the sewage and purification services include the management of the networks and sewage and purification plants. The Agreements also provide for execution of new network design and construction activities and the building of new plants to be used in managing the service. The management of the service is assigned exclusively to Hera for the municipal territory involving the obligation of the Municipality not to grant to third parties usage of the subsoil of its property and of the state aqueducts without the prior consent of the company. The agreements also regulate other aspects of the relationship, such as forms of service management and reciprocal obligations for the parties, mainly regarding charges for ordinary and extraordinary maintenance works on the networks and plant necessary for the provision of the services. The agreements are accompanied by technical and economic disciplinary measures regulating the service, the compulsory quality and operating standards and the tariff framework. The tariffs, fixed annually (on the basis of economic agreements covering periods of several years) in accordance with law, are set by the AATOs. The local authorities awarding the concession give the manager the right to use the network and plant for the provision of integrated water supplies (and this may be free of charge). In the majority of the cases concerning the areas managed by Hera, the local authorities have conferred the ownership of networks and plants to special asset companies. At the end of the concession, Hera is obliged to return the goods used to provide the service to the asset companies, or to the local authorities. Any works carried out to upgrade or expand the networks must be compensated at the end of concession with the payment of the residual value of the assets in question. Hera's relations with users are regulated by sector laws and by the provisions set out by the regional councils and environmental agencies. The duties of the operator towards service quality and resources and the users' rights are illustrated in the specific Service Charters proposed by the operator and approved by the Agencies. As for the results of the referendums held on 12 and 13 June 2011 reference is made to the paragraph on the Director's Report of 1.03.02 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 129 2 Consolidated financial statements Waste management sector Hera performs the service of municipal waste management. The purpose of agreements with the AATOs is the exclusive management of municipal waste services (waste collection, waste transport, road cleaning and waste recovery and disposal, etc.). The agreements regulate aspects of the relationship such as the methods of managing the services as well as reciprocal obligations between the parties. The agreements are accompanied by technical and economic disciplinary measures regulating, in detail, the technical component of services provided and quality standards. The amount payable to the operator for the services performed is defined annually (on the basis of multiannual economic agreements) in accordance with Italian Presidential Decree No. 158/1999, where the tariff is instituted. For the running of waste treatment plants, the Hera Group must obtain authorisations from the authorities of the Italian provinces. Management of the networks, plants and equipment The infrastructure required for the provision of services whose management has been assigned to Hera, including local gas pipelines and aqueduct and sewage systems, are partly owned by Hera and partly owned by third parties (municipalities or asset companies owned by local authorities). In particular, the asset companies are the owners of assets instrumental in the management of services following the direct contribution of assets by the Municipalities (generally Hera shareholders) or following the assignment to the same of "assets" constituting business units which took place, in almost all cases, at the time of business combinations involving companies in the Emilia‐Romagna region with Seabo Spa (then Hera Spa). In the case of assets owned by Local Entities and asset companies, relations between the service operator and the owners are governed by service assignment agreements or business unit lease contracts, and on a residual basis, industry legislation. As regards the economic aspect, business unit lease contracts fix the amount due from the operator to the owners for the use of networks and plants. On the basis of these contracts Hera must carry out, at its own expense, ordinary and extraordinary maintenance as well as the expansion of the networks, as provided for in the investment plans agreed with the asset companies and, where relevant, by the area plans defined by the AATOs. Upon expiry of the lease contracts, provision is made for the return of the business units to the owner in return for the payment to the operator of the corresponding compensation/equalisation, as a general rule, at the Net book value or Residual industrial value of the associated assets. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 130 2 Consolidated financial statements Group A. Related parties, non‐consolidated subsidiary companies: Calorpiù Italia scarl in liquidation Hera Servizi Cimiteriali Srl Consorzio Frullo in liquidation Sadori gas Srl Solhar Alfonsine Srl Solhar Bentivoglio Srl Solhar Faenza Srl Solhar Ferrara Srl Solhar Modena Srl Solhar Piangipane Srl Solhar Ravenna Srl Solhar Rimini Srl Group B. Related parties, associated and jointly‐controlled companies: Italcic Srl Modena Network Spa Aimag Spa Natura Srl Tamarete Energia Srl Adriatica Acque Srl Estense Global Service Soc.Cons.a r.l. So.Sel Spa Oikothen Scrl Service Imola Srl Set Spa Refri Srl Sgr Servizi Spa Dyna Green Srl Feronia Srl Sei Spa Ghirlandina Solare Srl VNG Verbundnetz Gas AktnGesellschaft* C.a.v.i.r.o. soc.coop.agr.* Group C. Related parties with significant influence: Municipality of Bologna Municipality of Modena Group D. Other related parties: Aspes Spa Megas Net Spa Acosea Reti Calenia Energia Spa Wimaxer Spa Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 131 2 Consolidated financial statements Sassuolo Gestioni Patrimoniali Srl Con.Ami Formigine Patrimonio Srl Romagna Acque Spa Serramazzoni Patrimonio Srl Unica Reti ‐ Assets Maranello Patrimonio Srl Azimut ‐ Assets Fiorano Gestioni Patrimoniali Srl Amir ‐ Assets Area ‐ Assets Team ‐ Assets Sis ‐ Assets Energia Italiana Spa Galsi Spa Ambiente Arancione Cooperatief U.A. * The figures in the statements represent 50% of the amount the Hera Group companies declared with respect to the consolidated joint‐control companies FlamEnergy Trading Gmbh and Enomondo Srl. Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 132 2 Consolidated financial statements 2.04 Net financial indebtedness 2.04.01 Consolidated net financial indebtedness (millions of Euro) 30‐Jun‐11 31‐Dec‐10 a Cash and cash equivalents 356,3 538,2 b Other current financial receivables 51,2 44,3 Current bank indebtedness ‐23,4 ‐58,4 Current portion of bank indebtedness ‐63,2 ‐71,1 Other current loans ‐8,9 ‐16,6 Financial leasing payables – maturing within the next ‐3,4 ‐4,6 year c Current financial indebtedness ‐98,9 ‐150,7 d=a+b+c Net current financial indebtedness 308,6 431,8 e Non‐current financial receivables 10,8 10,3 Non‐current bank indebtedness ‐292,0 ‐345,8 Bonds issued ‐1.768,1 ‐1.787,3 Other non‐current loans ‐222,9 ‐160,4 Financial leasing payables – maturing beyond the next ‐7,5 ‐8,8 year f Non‐current financial indebtedness ‐2.290,5 ‐2.302,3 g=e+f Net non‐current financial indebtedness ‐2.279,7 ‐2.292,0 h=d+g Net Financial Indebtedness ‐1.971,1 ‐1.860,2 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 133 2 Consolidated financial statements 2.04.02 Net financial indebtedness Resolution 15519 of 2006 of which related of which related 30‐Jun‐11 31‐Dec‐10 (millions of €) parties parties A B C D A B C D a Cash and cash equivalents 356,3 538,2 b Other current financial receivables 51,2 44,3 of which related parties 28,6 12,0 29,3 Current bank indebtedness ‐23,4 ‐58,4 Current portion of bank indebtedness ‐63,2 ‐71,1 Other current financial loans ‐8,9 ‐16,6 Financial leasing payables – maturing within ‐3,4 ‐4,6 the next year c Current financial indebtedness ‐98,9 ‐150,7 d=a+b+c Net current financial indebtedness 308,6 28,6 12,0 431,8 29,3 e Non‐current financial receivables 10,8 10,3 of which related parties 10,5 10,0 Non‐current bank indebtedness ‐292,0 ‐345,8 Bonds issued ‐1.768,1 ‐1.787,3 Other non‐current financial loans ‐222,9 ‐160,4 Financial leasing payables – maturing beyond ‐7,5 ‐8,8 the next year f Non‐current financial indebtedness ‐2.290,5 ‐2.302,3 g=e+f Net non‐current financial indebtedness ‐2.279,7 10,5 ‐2.292,0 10,0 of which related parties h=d+g Net Financial Indebtedness ‐1.971,1 ‐1.860,2 of which related parties 39,1 12,0 39,3 Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 134 2 Consolidated financial statements 2.05 Equity investments: list of consolidated companies Subsidiaries Name Registered office Share capital Percentage held Total interest direct indirect Parent Company: Hera Spa Bologna 1.115.013.754 Acantho Spa Imola (Bo) 22.500.000 79,94% 79,94% Acque Srl Pesaro 102.700 40,64% 40,64% Akron Spa Imola (Bo) 1.152.940 43,13% 43,13% ASA Scpa Castelmaggiore (Bo) 1.820.000 38,25% 38,25% Consorzio Akhea Fondo Consortile Bologna 200.000 59,38% 59,38% Eris Scrl Ravenna 300.000 51,00% 51,00% Famula On‐line Spa Bologna 4.364.030 100,00% 100,00% Frullo Energia Ambiente Srl Bologna 17.139.100 38,25% 38,25% Gal.A. Spa Bologna 300.000 45,00% 45,00% HeraAmbiente Spa Bologna 271.148.000 75,00% 75,00% Hera Comm Srl Imola (Bo) 53.136.987 100,00% 100,00% Hera Comm Marche Srl Urbino (Pu) 1.458.332 76,26% 76,26% Hera Comm Mediterranea Srl Carinaro (Ce) 250.000 50,01% 50,01% Hera Energie Srl Bologna 926.000 51,00% 51,00% Hera Energie Rinnovabili Spa Bologna 1.832.000 100,00% 100,00% Hera Luce Srl San Mauro Pascoli (Fc) 1.000.000 89,58% 89,58% Hera Servizi Funerari Srl Bologna 10.000 100,00% 100,00% Herasocrem Srl Bologna 1.480.500 51,00% 51,00% Hera Trading Srl Imola (Bo) 22.600.000 100,00% 100,00% Marche Multiservizi Spa Pesaro 13.450.012 40,64% 40,64% Medea Spa Sassari 4.500.000 100,00% 100,00% MMS Ecologica Srl Pesaro 95.000 40,64% 40,64% Naturambiente Srl Pesaro 50.000 40,64% 40,64% Nuova Geovis Spa Sant'Agata Bolognese (Bo) 2.205.000 38,25% 38,25% Romagna Compost Srl Cesena (Fc) 3.560.002 45,00% 45,00% Sinergia Srl Forlì (Ce) 579.600 59,00% 59,00% Sotris Spa Ravenna 2.340.000 5,00% 52,50% 57,50% Uniflotte Srl Bologna 2.254.177 97,00% 97,00% Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 135 2 Consolidated financial statements Jointly controlled companies Name Registered office Share capital Percentage held Total interest direct indirect Enomondo Srl Faenza (Ra) 14.000.000 37,50% 37,50% FlameEnergy Trading Gmbh Vienna 3.000.000 50,00% 50,00% Associated companies Name Registered office Share capital Percentage held Total interest direct indirect Adriatica Acque Srl Rimini 89.033 25,44% 25,44% Aimag Spa* Mirandola (Mo) * 78.027.681 25,00% 25,00% Estense Global Service Soc.Cons.arl Ferrara 10.000 23,00% 23,00% Feronia Srl Finale Emilia (Mo) 2.430.000 30,00% 30,00% Ghirlandina Solare Srl Concordia Sulla Secchia (Mo) 60.000 33,00% 33,00% Modena Network Spa Modena 3.000.000 14,00% 23,98% 37,98% Oikothen Scarl Siracusa 1.101.730 46,10% 46,10% Refri Srl Reggio Emilia 6.800.000 15,00% 15,00% Service Imola Srl Borgo Tossignano (Bo) 10.000 40,00% 40,00% Set Spa Milano 120.000 39,00% 39,00% So.Sel Spa Modena 240.240 26,00% 26,00% Sgr Servizi Spa Rimini 5.982.262 29,61% 29,61% Tamarete Energia Srl Ortona (Ch) 3.600.000 32,00% 32,00% *the share capital is composed of € 67,577,681 of ordinary shares and € 10,450,000 of related shares Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 136 2 Consolidated financial statements 2.07 Statement pursuant to Article 154‐bis of Legislative Decree no. 58/98 1 ‐ The undersigned Mr Maurizio Chiarini in his capacity as Managing Director, and Mr Luca Moroni in his capacity as Manager in Charge of the preparation of the corporate accounting documents of Hera Spa, certify, also in consideration of the provisions of article 154‐bis, paragraphs 3 and 4, of the legislative decree no. 58 dated 24 February 1998: the adequacy with reference to the nature of the company and the actual application of the administrative and accounting procedures for preparing the abbreviated half‐year financial statements during the first half‐year of 2011. 2 – We further declare that: 2.1 ‐ the abbreviated half‐year financial statements: a. were prepared in compliance with the applicable International Accounting Principles recognised by the European Community pursuant to Regulation 1606/2002 (EC) of the European Parliament and the Council of 19 July 2002; b. are consistent with the data contained in the accounting books and entries; c. provide a truthful and accurate representation of the balance sheet and income statement of the issuer and of all its consolidated companies. 2.2 ‐ The interim report on operations comprises a reliable analysis of the significant events that took place in the first six months of the year and their impact on the abbreviated half‐year financial statements, and describes the main risks and uncertainties in the remaining six months of the year. The interim report on operations also includes a reliable analysis of the information on the significant transactions with related parties. Bologna, 25 August 2011 Managing Director Manager in charge of preparing the corporate accounting statements Maurizio Chiarini Luca Moroni Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 137 2 Consolidated financial statements 2.08 Independent auditing firm Hera Group – Directors' Report as at 30 June 2011– Board of Directors approval 25 August 2011 138 HERA S.p.A. Holding Energia Risorse Ambiente Sede legale: Viale Carlo Berti Pichat 2/4 40127 Bologna tel. 051.287.111 fax 051.287.525 www.gruppohera.it C.F./Partita IVA Registro Imprese BO 04245520376 Capitale Sociale int. vers. € 1.115.013.754
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