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Introduction

Introduction

The Hera Group can show growth in all operating results for the seventh year running, despite the serious global financial crisis. In Italy, production levels fell by about about 25% in 2009, GDP fell by 5.0%,, exports fell by about 20.7% and imports by over 22%; demand fell for energy, waste and to a lesser extent water services, impacting on both open market activities, and services provided through concessions. Despite the significant effects of the crisis on customer demand, Hera's increased profits in 2009 were sustained by the success of its strategies regarding market expansion, plant development, and the increase in external lines and efficiency.

The growth strategy on deregulated markets led to a considerable increase in electricity sales in 2009 (+38% compared to 2008) even disregarding the -6.4% effect of the financial crisis, in line with the average drop in electricity consumption in Emilia Romagna and Tuscany. This result is much improved over the 2008 performance (+17%) and enabled Hera to be included as one of the 10 electricity companies with the greatest rate and speed of growth in the Middle East, Europe and Africa in the Platts classification. The increase in sales in 2009 was achieved through a sales development policy that led to an expansion of the customer base from 287,000 to over 335,000, through cross-selling to existing customers and the gain of a share in new markets that are geographically close to the reference areas.

The Hera Group was able to exploit efficient sales capacity and after sales support, leading to a high rate of customer loyalty that helped cross-selling efforts. Hera was able to make commercially attractive proposals to gain customers in the new markets and areas, benefitting both from lower raw material market prices, and the Group's organisational structure.
Sales were evenly distributed among small to medium sized business customers and domestic customers, maintaining a final customer base with a good range of diversity.

Even in the gas sales market, where Hera is fourth on a national basis, and in a dominant position in the reference areas, sales in 2009 were up compared to 2008 (volumes at +12.4% and 5,000 new customers). These results were significantly influenced by the financial crisis (estimated as about -8% on a national level), but helped on the one hand by more favourable winter weather conditions which favoured consumption in the retail market and on the other, by maintenance of market share, thanks to a high degree of customer loyalty

The industrial waste disposal market, where Hera is the leader in Italy, was also affected by the financial crisis, due to the slowdown in production and industrial activity. This led to a 13.7% reduction of Hera's activity in the first half, leading to a commercial strategy being implemented whereby both the customer base was expanded through both cross-selling, using the extensive, loyal customer base, in addition to expanding the market that is structurally incapable of satisfying internal demand for waste treatment. These policies were already bearing fruit in the second half of the year, allowing the year to be closed with a reduction in volume of 7.3%, implying an improvement of over 6 percentage points on the first half. Total waste volumes treated remained essentially the same thanks to the increase in urban waste volumes (+1.8%); management of waste flows ensured that WTE plant capacities were used to the full, thereby conserving the landfill capacity.

The plant development strategy, aimed at the vertically integrating the activities, was pursued, including by the construction of new plants, applying the expertise gained over the years to the construction and management of waste treatment plants and district heating plants. This strategy led to the starting up of 3 new plants in 2009: a 20 megawatt WTE plant in Modena, one of the biggest waste to energy plants of the

Group, a new treatment plant for organic waste in Cesena for the production of renewable energy, with a capacity of 40,000 tons of waste per year, and finally an 80 megawatt cogeneration plant in Imola.

Even the concession managed activities for the distribution of energy, collection of urban waste and integrated water services contributed to the growth in profit in 2009, mainly due to the tariff adjustments in accordance with the national legally guaranteed returns and the new tariff systems. Specifically, the national authorities agreed certain verification procedures for gas distribution in 2009, and established definitive tariff levels for 2009 and 2010.

The external line development strategy also contributed to the improved results, with the acquisition of gas distribution and district heating networks in the Group reference area (Ferrara, Ravenna and Imola) that had previously been operated on a rented basis by the Group from the common shareholders of Hera. This acquisition led to the strengthening of the competitive position in view of the upcoming call for tenders for the gas distribution concessions. The operation, valued at about Euro 145 million, equal to the value of the networks recognised for regulatory purposes ("RAB"), means a saving on the rental payments which had been increasing, and generated certain extraordinary income related to the release of provisions allocated for the restoration of third party assets.

In addition, the acquisition of 25% of the share capital of Aimag was finalised, a multiutility company operating in the provinces of Modena and Mantua (in the nearby region of Lombardy) pursing the policy of development in bordering territories that are strategically relevant. This operation cost Euro 35 million, bringing the multiples into line with market values (about 6 times EV/EBITDA without including the value of the synergy that will result). Hera's share of the profits, related to the acquisition of Aimag, will be recorded in the current year's financial statements.

A further factor contributing to the growth, was that of increasing efficiency, both in terms of the synergy resulting from merging companies, and in terms of reducing costs of operating activities through corporate restructuring and reorganisation. The reorganisation of the regulated and deregulated energy activities was begun in 2009 (unbundling), of various management centres involving corporate restructuring related to the transformation of the TOCs (7 multi-business operating companies, fully held by the holding company) into organisational units, with the resulting centralisation of the holding functions.

The debt market gave an opportunity to further optimise the Hera's financial structure. The Group issued new bonds for Euro 650 million, and renegotiated the terms of an existing loan of Euro 200 million; in addition, assets were reinforced by the issue of 82.3 million new ordinary shares (8% increase in share capital, with an implied valuation of the shares of Euro 1.75) used to finance the purchase of the gas distribution and district heating networks.

The accounts suffered from the extraordinary effects of the global financial crisis, and also from another significant unexpected, non-recurring cost (Euro 28.3 million) related to the "tax moratorium", resulting from yet another reinterpretation of the regulations by the tax, government and EU authorities, regarding the repayment of tax concessions given to companies in the sector at the end of the 1990s and considered to be a type of "state aid". Thanks to the conservative risk management policy adopted by the Group, the effects of the tax moratorium on Hera were modest compared to the average in the sector. Upon establishment of the Group, an agreement was made providing that the risks related to the tax moratorium of the companies merged into the Group would be borne by the conferring municipal councils. The unexpected negative effect is related to the tax moratorium of the company previously known as Meta of Modena, a company incorporated after the establishment of the Group.



Disregarding the non-recurring effect of the tax moratorium, the improved results produced an adjusted net profit, after the minorities, of about euro 95,3 million for Hera, up 0,5 % compared to 2008.

 
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