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The tenth financial statements published since the establishment of Hera Group show growth and performance in 2011 that are unusual set against the background of the difficult economic context and compared with other operators in the industry.

The financial crisis which began in 2008 culminated in 2011 in a sovereign debt crisis in several nearby European countries, which experienced times of political instability and, in the case of Greece, “controlled default”. These systemic crises had serious repercussions on the economic situation through the banking system’s tightening of lending to businesses and consumers. In Italy this slowing down of the economy had profound effects leading up to the first signs of recession which appeared at the end of 2011. The 2011 seasonally adjusted GDP figures for Italy stood at +0.5% compared with +1.2% for 2010 (with negative figures in the last two quarters of the year) with forecasts of negative growth rates for the current year. Industrial production levels in Italy have decreased to 5.0% in 2011 (compared with +5.5% in 2010), exports have slowed down (+11.4% compared with +15.7% in 2010), with a similar situation for imports (+8.9% compared with +22.6% in 2010). This situation has affected demand for energy services, which recorded a decrease in demand for gas of -6.3% (compared with +4.8% in 2010), which was also influenced by the warmer weather during the year, and a slowing down in the demand for electricity (+0.6% compared with +1.8% in 2010).

In spite of this difficult context, Hera continued to consistently pursue its strategies which led to sustained improvements in results in almost all business areas without interruption since 2002.

In 2011, the liberalised markets strategy allowed considerable growth in sales in the Electricity sector, with volumes increasing by almost 30% (going from 7.7 TWh in the previous year to 10.0 TWh) for the third consecutive year, with volumes doubling over three years. This increase was supported by an expansion of the customer base, which went from 383 thousand to almost 500 thousand, reaching a figure ten times higher than the one at the outset in 2002. Hera Group was able to leverage efficient sales and after-sales services, which resulted in a high degree of loyalty from existing customers and promoted effective cross-selling actions. At year end 2010, the Group was awarded the contract for supplying electricity in 2011-2013 to service protection customers in the regions of Lombardy, Tuscany, Lazio, Molise, Abruzzo and Puglia, gaining new shares of the market in the process. The expansion of the Group’s electricity-related activities produced growth in sector EBITDA in 2011 that was approximately 7 times the result in 2002.

In the Gas market too, the Group’s sales volumes increased in 2011 by 14% (3.3 compared with 2.9 billion cubic metres in 2010), offsetting the effects of the warmer weather conditions through an increase in trading activity (1.3 compared with 0.7 billion cubic metres in 2010) and a slight growth in the customer base which went above 1.1 million households (+4%). Profitability in the Gas sector increased thanks to procurement strategies, which allowed greater margins benefiting from market conditions.

Volumes in the urban and industrial waste treatment market decreased in the second part of the year as a result of the production system and consumption crisis. Thanks to its strong market position, the Group managed to partly mitigate the effects of the negative performance of the market by gaining new customers which meant that the year ended with a fall in volumes of 2.6%. Measures aimed at improving the efficiency of the waste management system continued throughout the year: separated waste collection accounted for a share of more than 50% of urban waste (previously 47.8% in 2010) and the increase in waste-to-energy treatment grew by 15.3% (going from 800 to 923 thousand tonnes); the contribution of the new Faenza biomass thermal power plant (a joint venture with Caviro and consolidated pro-rata in the accounts at 50%) is also of note. The measures taken led to an essentially stable result compared with 2010 in EBITDA, confirming the unbroken growth trend recorded in all the financial statements since 2002.

The plant development strategy, aimed at consolidating free market activities, continued with electricity production initiated at the new Rimini waste-to-energy plant and the above-mentioned Faenza plant. Expertise gained over the years, both in the construction of plants and the management of WTE, has led to the Group being awarded the contract, at the end of the year, for the construction and management of a WTE plant in the province of Florence, in partnership with local operator Quadrifoglio.

Energy distribution, urban waste collection and water services activities managed under licence, which represent 52% of the Group’s EBITDA, contributed to the improved results in 2011, which were also helped by investments made and by adjustments to the tariffs paid by the Authorities. Specifically for gas distribution, the domestic Authority defined an income level based on a more consistent value of capital invested, while for water services and urban waste collection services the tariffs set were in line with existing agreements with local Authorities. The efficiency measures undertaken in 2011 continued to make a contribution to the improvement in annual results, reaffirming the growth path that the Group has been on since its establishment.

The 2011 results also benefited from the development strategy for external lines which, at the end of the year, led to the consolidation by incorporation of Sadori Gas (a sales company). This transaction made it possible to strengthen the Group’s market position in Le Marche.

Operations for the year produced a positive free cash flow after hedging of investments and M&A operations, which led to a net financial debt which was lower than the third quarter of 2011, almost entirely hedged by shareholder equity (debt-to-equity ratio of 1:1) and with a ratio of approximately 3:1 compared with EBITDA. The soundness of the financial structure is even more impressive, taking into consideration the extended average debt maturity (around 9 years) and the amount of available and committed credit lines (approximately €280 million).

The financial statements for the year show growth in operating results, even allowing for the conservative policy of reserves and increased depreciation and amortisation of investments incurred as part of the plant development. Net profit after minority interests, recorded growth in a homogenous comparison with the figures for 2010 (both years being freed by the positive non-recurring effects of higher redemption transactions not fiscally recognised).

The 2011 accounts are a sound confirmation of the expectations set out in the five-year plan announced to the financial markets in November and confirm the validity of the strategic choices taken in recent years. In the light of the soundness of the Groups’ economic and financial indicators, the Board of Directors has decided to propose a dividend of €0.09 per share to the Shareholders’ Meeting, in line with the previous year and continuing the policy that the Group has pursued since its establishment.