Report and financial statements of Enel Green Power SpA as of December 31, 2008

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1 Report and financial statements of Enel Green Power SpA as of December 31, 2008

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4 CONTENTS Corporate boards... 1 Report on operations... 3 Introduction... 4 Summary of Regulatory and rate issues... 9 Operating performance Investments Economic and financial performance Research and development Human resources and organization Outlook Other information Proposals to the shareholders meeting Financial statements Income Statement Balance Sheet Statement of Cash Flows Statement of Recognized Income and Expenses Notes to the financial statements Information on the Income Statement Information on the Balance Sheet Corporate governance Reports Report of the Board of Statutory Auditors Report of the External Auditor

5 Corporate boards Board of Directors Board of Statutory Auditors Auditing firm Chairman Francesco Starace Chairman Leonardo Perrone KPMG SpA Directors Andrea Brentan Massimo Cioffi Luigi Ferraris Claudio Machetti Giovanni Mancini Carlo Tamburi Auditors Giuseppe Ascoli Giuseppe Mariani Alternate auditors Giulio Monti Francesco Rocco Report and financial statements of Enel Green Power SpA as of December 31, 2008 Corporate Boards 1 1

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7 Report on operations Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 3

8 INTRODUCTION In 2008, the Enel Group began a process to get more from its renewable-energy activities. This process included the creation of a new Renewable Energy division and a corresponding company, Enel Green Power SpA, a subsidiary of Enel SpA, to house the Group s renewableenergy plants in Italy and its stakes in companies operating in the sector in Italy and abroad. Enel Green Power SpA was incorporated on December 1, 2008, when it received the Electricity generation from renewable sources business unit through a partial spin-off from Group company Enel Produzione SpA. The Company was also allocated Enel Produzione SpA s direct stakes in La Geo S.A. de C.V. (36.2%) and Geotérmica Nicaragüense SA (60%), companies that operate in the renewable-energy sector in Latin America. The aforementioned business unit comprises all wind, geothermal and photovoltaic plants, as well as some of the hydroelectric plants in Italy, representing total installed capacity of around 2.6 GW. With regard to the hydroelectric sector, most of the non-programmable plants, consisting essentially of mini-hydro and large-hydro plants of the run-of-theriver kind, were assigned to the beneficiary. Around 1,500 members of staff are part of the business unit that was spun off. The book value of the shareholders equity spun off is Euro 1,927 million. The spin-off took place at the carrying amounts recorded as at December 1, 2008 in Enel Produzione SpA. 4 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 4

9 The balance sheet of the business unit being spun off is shown below: Millions of euros ASSETS at December 1, 2008 Non-current assets Property, plant and equipment and intangible assets 4,695 Deferred tax assets 31 Equity investments 79 Financial and non-financial non-current assets 2 Total non-current assets 4,807 Current assets Inventories 12 Trade receivables 0 Financial and non-financial current assets 165 Total current assets 177 TOTAL 4,984 Millions of euros SHAREHOLDERS' EQUITY AND LIABILITIES at December 1, 2008 Share capital 600 Other reserves 1,327 TOTAL SHAREHOLDERS' EQUITY 1,927 Non-current liabilities Medium-/long-term loans 205 Post-employment and other employee benefits 41 Provisions for risks and charges 60 Deferred tax liabilities 25 Financial and non-financial non-current liabilities 16 Total non-current liabilities 347 Current liabilities Short-term loans 2,618 Current portions of medium-/long-term loans and short-term loans 31 Financial and non-financial current liabilities 61 Total current liabilities 2,710 TOTAL LIABILITIES 3,057 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 4,984 More information on the breakdown of these items can be found in Information on the Balance Sheet. Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 5 5

10 SUMMARY OF 2008 Performance of the Italian energy market According to the latest official figures (from Terna SpA), electricity consumption in Italy in 2008 came to 337,642 million kwh, down by 0.7% on Despite annual electricity demand falling for the first time since 1981, there was an increase in net national generation (+ 4,241 million kwh, or 1.4%); the reduced consumption caused a significant drop in net imports (-6,717 million kwh, or 14.5%). The following table shows electricity flows in Italy and the contribution of the various sources in the period in question: Millions of kwh % Gross electricity generation 317, ,888 4, % Auxiliary services consumption (12,354) (12,589) 235 (1.9%) Net electricity generation 305, ,299 4, % Net imports 39,566 46,283 (6,717) (14.5%) Used for pumping (7,464) (7,654) 190 (2.5%) Total demand in Italy 337, ,928 (2,286) (0.7%) In 2008, national net generation covered 88.3% of demand, against 86.4% in The remaining 11.7% (13.6% in 2007) of electricity demand was supplied by imports. Of the total national electricity generation, thermal power represented 71.4% (72.3% in 2007) and hydroelectric power 13.3% (11.3% in 2007), while the remaining 3.6% was supplied by geothermal and wind sources (2.9% in 2007). Results of Enel Green Power SpA For definitions of the alternative performance indicators and the respective reconciliations with the financial statements, see the Economic and financial performance paragraph. The net margin from energy sales (gross profit) totaled Euro 122 million, essentially from sales revenues related to the production of energy (sale of energy and green certificates), in the amount of Euro 105 million, and from net income from commodity risk management (Euro 18 million). The gross operating margin was Euro 101 million, from gross profit of Euro 122 million, other revenues of Euro 2 million and operating costs of Euro 23 million, relating mainly to costs for services and personnel costs. Operating income amounted to Euro 76 million, with Euro 25 million of depreciation and amortization relating almost entirely to property, plant and equipment. Net income for 2008 was Euro 41 million, with Euro 9 million of net financial expense and Euro 26 million for the year s income tax allocations. 6 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 6

11 Net invested capital came to Euro 4,874 million, funded by shareholders' equity of Euro 2,009 million and external resources of Euro 2,865 million. Shareholders equity comprised share capital (Euro 600 million), the legal reserve (Euro 120 million), other reserves (Euro 1,248 million) and net income for the period (Euro 41 million). Net financial debt was Euro 2,865 million, comprising essentially the debit position of the intercompany current account held with the ultimate parent (Euro 2,643 million), interest expense on said account (Euro 7 million) and medium-/long-term debt due to third parties (Euro 218 million, including short-term portions). Significant events in 2008 Equity acquisitions Acquisition of Enel Green Power International B.V. Effective January 1, 2009, Enel Green Power SpA acquired the entire share capital of Enel Green Power International BV from Enel Investment Holding B.V. The transfer took place at the end of the reorganization and valorization of the renewableenergy business, which saw the creation of a Dutch-registered sub-holding company, Enel Green Power International B.V., and the transfer to said entity of all equity investments in foreign renewable-energy companies belonging to the Enel Group. The sale price is equal to the current book value of the shareholding acquired, i.e. Euro 1,690,001,206. Acquisition of Enel.si Srl With effect from January 1, 2009, Enel Green Power SpA acquired from Enel SpA the entire share capital of Enel.si Srl, a company that designs, builds, tests and maintains electrical systems for end users and buys, sells and leases materials and equipment. The sale price is equal to the current book value of the shareholding acquired, i.e. Euro 9,220, Acquisition of more shares in La Geo: arbitration Following the spin-off from Enel Produzione SpA, Enel Green Power SpA currently holds a stake of 36.2% in El Salvador-based company La Geo S.A. de C.V. (hereinafter LaGeo ), which manages plants with a total capacity of 200 MW. The remaining 63.8% of LaGeo's share capital is currently held by Inversiones Energéticas Sociedad Anónima de Capital Variable (hereinafter INE ), the state power company owned by the CEL (the independent public services authority that directly held the stake in LaGeo until April 2006). Relations between INE and Enel Green Power SpA are regulated by a shareholders agreement, which was also transferred to Enel Green Power SpA as part of the spin-off. Under the terms of this shareholders agreement, the strategic shareholder (now Enel Green Power SpA) is entitled to finance the new capital Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 7 7

12 investments of LaGeo, with a resulting increase in its stake in the El Salvadoran company and eventual control of said company. More specifically, the Board of Directors of LaGeo approved around USD 105 million of investments between 2004 and 2007, and Enel Produzione SpA expressed on several occasions its willingness to finance these projects, as provided for by the shareholders' agreements. The injection of capital would have given Enel Produzione SpA a majority interest in LaGeo. However, at the Shareholders Meeting of November 5, 2007, the counterparty (INE/CEL) refused to allow the implementation of this contractual entitlement through the corresponding capital increase. In October 2008, Enel Produzione SpA filed for international arbitration in Paris, with a view to reaching an out-of-court settlement. Following the spin-off from Enel Produzione SpA, the arbitration process continues under Enel Green Power SpA. Advertising campaign The Enel Green Power SpA advertising campaign was launched on December 1, 2008, the same date as the Company was incorporated. The press campaign features two people discussing the creation of the Company, highlighting the strength and forward-thinking outlook with a view to becoming the market leader. The core concept of the marketing is Enel Green Power SpA s vision, which finally achieves a long-held dream: generating clean, inexhaustible energy from perennial natural resources. Supporting this campaign are two unique testimonials in the advertisements. The first is by a Don Quixote figure who no longer has windmills to fight, but a row of wind turbines. He acknowledges the progress and the ability to generate inexhaustible energy that is environmentally friendly. The second features a modern-day Icarus who no longer needs to fly so high because he can finally get what he wants on Earth: the Sun s rays captured by a solar panel. 8 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 8

13 REGULATORY AND RATE ISSUES The energy and climate package On December 17, 2008, the European Parliament approved the final text of the energy and climate package containing measures relating to Europe s energy policy for combating climate change. The measures, known as the package, set a target of reducing greenhouse gas emissions by 20% by 2020, compared with the levels in 1990, and ensuring that renewable energy sources can cover 20% of end-user demand by The major themes of the package include: > a revised emission-trading system: - the definition of emission caps at a European level, thereby eliminating national allocation programs; - the introduction of an auction for quota allocation (with special dispensation for highefficiency cogeneration, sectors particularly exposed to international competition and countries with interconnection problems and dependence on individual fossil fuels); - the limitation of access to Clean Development Mechanism credits; > defined renewable-energy targets for each Member State: - the delegation to Member States to set sector-based targets; - the introduction of co-operation between Member States and trading of Guarantees of Origin in the broadest sense; - the limited possibility of virtual trading with non-eu countries. Legislative Decree no. 185/08 On November 29, 2008, Legislative Decree no. 185/08, referred to as the Anti-Crisis decree, was enacted. It introduced new provisions governing the wholesale electricity market and end-user tariffs. Article 3 of the decree establishes that the Authority for Electricity and Gas shall adopt measures aimed at aligning electricity and natural gas prices with the current reduction in the price of crude oil. It also gives the Authority for Electricity and Gas the power to encourage competition in areas where there are market anomalies. Article 3 also contains guidelines on the possible introduction of a new system for defining exchange prices based on generators receiving the price offered by each plant rather than the price set by the marginal plant, as envisaged by the current system. It also provides for the introduction of measures aimed at reorganizing the Ancillary Services Market (MSD) with a view to containing end-user costs. The law converting this Anti-Crisis decree was published in Gazzetta Ufficiale no. 22 of January 28, Futures markets The physically settled electricity forward market (MTE, managed by GME) and the electricity futures market (IDEX, managed by Borsa Italiana) were launched on November 3, Ancillary Services Market (MSD) Through Resolution no. 308/07, the Authority for Electricity and Gas approved Terna SpA s proposal on new competition procedures for stipulating futures contracts on the MSD for In February and March 2008, Terna SpA concluded contracts pertaining to the second quarter of that year. Pursuant to Resolution no. 165/06, the Authority for Electricity and Gas has set up a working group, including institutional representatives and market operators, to Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 9 9

14 set out a comprehensive reform of the MSD from 2009 with a view to containing ancillary service costs for end users. This reform got under way in the shape of Legislative Decree no. 185/08 of November 29, CIP 6 expense, revision of Avoided Fuel Cost (AFC) On January 22, 2008, the Council of State upheld the appeal from the Authority for Electricity and Gas restoring the effectiveness of Resolution no. 249/06, under which the Authority introduced a new way of updating the Avoided Fuel Cost (AFC) paid to CIP 6 plants. The review involved significant reductions in the amount paid to CIP 6 plants and, following appeals from several operators, it was canceled by the Regional Administrative Court. Through Resolution no. 154/08 of October 21, 2008, the Authority re-confirmed the AFC updating method as per Resolution no. 249/06, introducing a reference price linked to supplies for thermal usage. On December 19, 2008, the Authority for Electricity and Gas published a consultation document on procedures for determining the amount on account of the AFC for 2009 and subsequent years. The Authority believes it is necessary to regulate the procedures for defining the AFC on account, considering the effective cost structure in the natural gas market, pursuant to Law no. 244/07. Emissions trading The European system of emissions trading (Emissions Trading Scheme ETS) has a significant, albeit indirect, impact on the renewable-energy business. The compliance costs incurred by producers of electricity from fossil fuels are reflected directly in the wholesale price. Where there is an allocation deficit with respect to emissions, the price of electricity can rise significantly, which obviously benefits production that does not involve the compulsory surrender of CO2 allowances, primarily renewable-energy production. With regard to the National Allocation Plan, in accordance with authorization from the European Commission, the national committee for the management and implementation of the emissions trading directive issued Resolution no. 20/08 on November 27 to carry out the allocation of the CO2 allowances. The Resolution was published in Gazzetta Ufficiale no. 291 of December 13. The overall allowance came to Mton of CO2 per year, of which Mton was allocated to the thermal power sector, excluding the reserve for new market entrants. Overall, there was a significant reduction compared with previous allocations. The final decision, however, provided for the use of CER/ERU credits (arising from flexible Clean Development Mechanisms (CDMs) and Joint Implementations (JIs) that enable the booking of reductions of CO2 emissions resulting from projects carried out abroad with a view to meeting the requirements of the Kyoto Protocol), in a different manner for operators from different sectors. Specifically, the thermal power sector has a higher limit (19.3%) than the average required by the EC (14.99%). Supporting the production of electricity from renewable sources The 2008 Finance Act raised the target for the production and import of electricity from renewable sources by 0.75 percentage points annually between 2008 and This meant the respective targets for 2008 and 2009 were 3.8% and 4.55% of the conventional electricity produced and imported in the previous year. On March 5, 2008, GSE informed operators of the reference price of green certificates for 2008: Euro /MWh (net of 10 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 10

15 VAT), which is the difference between the reference price of Euro 180/MWh set during the first application and the average sale price of electricity in 2007, defined by the Authority for Electricity and Gas through implementation of article 13, paragraph 3 of Legislative Decree no. 387/03. Pursuant to article 7 of the same decree, on April 11, 2008, the Minister for Economic Development, in co-operation with the Minister for the Environment, the Regions and the Sea, issued the decree entitled Criteria and methods for encouraging the generation of solar power through thermodynamic cycles. This decree provides for the application of a fixed incentive rate on top of the price of the energy generated that decreases as the portion of non-solar power increases. Within predefined limits, it also allows the cumulation of the additional incentive rate and the public capital grants or interest subsidies. Enel Green Power SpA could use the new measure for the hybrid plant to be built at Priolo (Siracusa) using an innovative solar technology developed by Enea, integrated with one of the two units at the existing combined-cycle station, which will process the steam produced by the solar power system. On December 17, 2008, the Minister for the Environment and the Minister for Economic Development issued the decree implementing the reforms to the green certificate system in the 2008 Finance Act. The main changes regard the extension of on-the-spot trading to plants with a capacity of up to 200 kw (the previous limit was 20 kw), the notification of monthly (rather than annual) output for the purposes of issuing Guarantees of Origin, the requirement to register quantities and prices for green certificates traded on the free market, the guaranteed withdrawal (for ) by GSE of green certificates produced until 2010 at the average market price in the three years prior to that in which the request for withdrawal is submitted and the modification of the coefficient (0.9 rather than 1) for the recognition of green certificates for refurbishments and upgrades. Connection rules With Resolution ARG/elt no. 99/08, and with effect from January 1, 2009, the Authority for Electricity and Gas introduced new rules for connections of production plants to the electrical grids by unifying in a single text and streamlining the previous rules from Resolution no. 281/05 (for medium-, high- and ultra-high-voltage connections) and from Resolution no. 89/07 (for low-voltage connections). The new rules establish connection procedures with tighter deadlines and harsher indemnities both for providing quotes and completing works, as well as fixed fees for medium-voltage and low-voltage connections. Through a specific measure (Resolution ARG/elt no. 123/08), the Authority also established rules for resolving disputes between producers and network operators that arise either during installation of the connections or during provision of the connection service. Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 11 11

16 OPERATING PERFORMANCE Energy generation facilities Enel Green Power SpA has 337 energy generation facilities, with a total installed capacity of 2,547 MW, broken down as follows: - 1,510 MW of hydroelectric power MW of geothermal power MW of wind power - 4 MW of solar photovoltaic power Hydroelectric Hydroelectric technology is now very mature because hydroelectric potential is almost completely utilized. In this context, Enel Green Power SpA aims, on the one hand, to increase the efficiency of existing technologies and, on the other, to develop run-of-the-river hydro technology, which, despite having a limited unit capacity, could provide a significant overall contribution towards meeting the demand for electricity. The growing need to protect the environment means the development of more mini-hydro plants, which are built and run in such a way as to restrict environmental impact. Enel Green Power SpA currently operates 277 hydroelectric plants in Italy (with a total capacity of 1,510 MW), and has a strong professional commitment to ensuring safety and maintenance at its water works. As at December 31, 2008, Enel Green Power SpA had 43 functioning hydroelectric plants classified as IAFR plants by GSE due to their construction, reactivation, upgrading and/or redevelopment and therefore admitted to the green certificate incentive scheme pursuant to article 11 of Legislative Decree no. 79/99, as subsequently amended. There are also two plants that benefit from the CIP/6 incentives. Geothermal Geothermal energy, now being used for the first time for industrial purposes, has become a feature of the Italian energy industry and, more specifically, of Enel Green Power SpA. Enel Green Power SpA manages 31 geothermal plants in Val di Cecina and Amiata (Tuscany), with more than 40 district heating systems, geothermal heat for 25 hectares of greenhouses and annual electricity production of over 5 billion kwh, equal to the average consumption of around two million Italian families. As at December 31, 2008, Enel Green Power SpA had 12 functioning plants classified as IAFR plants by GSE due to their construction, reactivation, upgrading and/or redevelopment and therefore admitted to the green certificate incentive scheme pursuant to article 11 of Legislative Decree no. 79/99, as subsequently amended. There are also four plants that benefit from the CIP/6 incentives. 12 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 12

17 Wind Wind power is the energy source that has grown the most in Italy over the last decade, and it is expected to continue to grow by around 25% a year. Enel Green Power SpA currently manages 25 wind plants, with a total capacity of 362 MW. Enel Green Power SpA aims to develop new wind technologies while protecting the country s landscape, guaranteeing the utmost care in both ensuring that its wind farms blend harmoniously into the surrounding environment and exploiting opportunities for development in the communities in which the facilities are located. All the Group's operational wind farms are classified by GSE (the Electricity Services Operator) as IAFR facilities (certified for Green Certificates), in accordance with article 11 of the Bersani Decree (Legislative Decree no. 79/99), as amended. Solar - Photovoltaic The ongoing global warming phenomenon provides a powerful incentive to develop the potential of solar energy, and photovoltaic power in particular, all over the world. According to the EPIA (European Photovoltaic Industry Association), the global photovoltaic sector has grown by an average of 35% in the last 10 years. Of the 2007 installed capacity of 9,162 MW, 2,392 MW were realized in the last year alone. Installed capacity is expected to rise to more than 21,600 MW in Enel Green Power SpA manages four photovoltaic plants, including the Serre Persano plant in Salerno, which has a capacity of 3.3 MW. Enel Green Power SpA also pays a great deal of attention to technological innovation and experimentation with thermodynamic solar power. Through its Archimedes Project, the Company aims to build a 5-MW solar power plant from parabolic reflectors in Priolo Gargallo (Sicily). Also in Sicily, the Company is currently conducting experiments on concentrated solar technology at the Enel research center in Catania. Electricity delivered to the network Electricity output in December 2008 can be broken down by source as follows: Millions of kwh Dec. 31, 2008 Hydroelectric 540 Geothermal 419 Wind 56 Total 1,015 The energy delivered to the network amounted to 1,015 million kwh. The energy withdrawn from the network (to supply pumping stations and to operate auxiliary services) amounted to 18 million kwh. Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 13 13

18 Energy sales Energy sales can be broken down by category of client as follows: Millions of kwh Dec. 31, 2008 Sales on the Power Exchange: 937 GME SpA (MGP [day-ahead market] and MA [adjustment market]) 911 Terna SpA (MSD [ancillary services market] - unbalancing) 26 Subsidized energy sales: 78 CIP 6 Electricity Services Operator (ESO)/GRTN Spa 51 Legislative Decree 387/03 Law 239/04 27 Total 1,015 In December 2008, Enel Green Power SpA sold 1,015 million kwh, mainly on the Power Exchange (911 million kwh). Incentive-based electricity sales to GSE totaled 78 GWh. In addition, the Company produced 152 GWh from IAFR-qualified plants, entitling it to approximately 152,000 green certificates. The revenues from green certificates were Euro 15 million, of which Euro 8 million derived from geothermal plants, Euro 2 million from hydroelectric plants and Euro 5 million from other sources. 14 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 14

19 INVESTMENTS Investments in plants Investments in energy generation facilities are detailed in the following table: Millions of euros Dec. 31, 2008 Production plants: Wind 49 Geothermal 26 Hydroelectric 3 Total 78 Wind-farm investments related essentially to the construction of the Monte Stangone, Serra Tre Confini and Contrada S.Agata facilities, and to the expansion of the Sa Turrina Manna site, as well as to advance payments for Wind Turbine Generation System (WTGS) supplies from REpower Systems AG for projects in the approval phase. Geothermal investments concerned mainly the continued renovation of the Lagoni Rossi station and the reactivation of the Sasso station (Euro 18 million overall), as well as the mining and engineering activities as part of the Steam Recovery program (Euro 3 million). Investments in hydroelectric plants were also made with a view to safety and protecting the environment. Project investments Portoscuso Energia Srl Enel Green Power SpA (formerly Enel Produzione SpA) acquired 100% of Portoscuso Energia Srl for Euro 1.3 million. The Company is developing a project to build a wind farm in Sardinia, on a site next to the industrial area of Portoscuso (Cagliari). The wind farm will have MW turbines, giving it a total capacity of 92 MW. De.di Srl As part of the development of projects to generate electricity from renewable sources, the Company has begun the process of acquiring 100% of De.di Srl, which is headquartered in Capua (Caserta). It owns two wind power projects under development in the province of Caserta: the Pontelatone wind farm, which is located in the municipalities of Pontelatone and Camigliano and has a capacity of 40 MW, and the Monte Verna wind farm, which is located in the municipalities of Giano Vetusto, Monte Verna and Castel di Sasso and has a capacity of 18 MW. De.di has developed the designs and submitted requests for the necessary authorizations to build the two wind farms (Pontelatone and Monte Verna). It has also signed agreements with the municipalities involved and has bought exclusive leasehold rights to the municipal land that will be affected by the Pontelatone wind farm. Having received the necessary authorizations for both projects during local authority planning conferences, De.di is Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 15 15

20 currently waiting for the Campania region to issue the Single Authorization to build the wind farms pursuant to article 12 of Legislative Decree no. 387/2003. The Pontelatone wind farm is expected to enter service in 2010, while the Monte Verna wind farm should become operational in The overall cost for the transfer of the entire share capital of De.di is Euro 13.6 million. To date, Euro 1 million has been paid on account. 16 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 16

21 ECONOMIC AND FINANCIAL PERFORMANCE Definition of performance indicators In order to present the results of Enel Green Power SpA and analyze its equity and financial structure, Enel has prepared separate reclassified statements that differ from those envisaged under the IFRS-EU accounting principles adopted by the Company and presented in these financial statements. These reclassified statements contain different performance indicators from those obtained directly from the financial statements, which management feels are useful in monitoring performance and representative of the economic and financial performance of the Company's business. In accordance with Recommendation no. CESR/05-178b, published on November 3, 2005, the criteria used to calculate these indicators are described below: Gross profit: an initial indicator of the operating performance of the core business that indicates the capacity of revenues from ordinary operations to cover costs alone, the variability of which is closely linked to the quantity of electricity produced and sold. It is calculated by algebraically adding together the following: Revenues from sales and services ; Net income (charges) from commodity risk management, net of any income and expense for forward points, which are recognized under Financial income (expense). variable costs borne to obtain the quantities sold, i.e.: o costs of raw materials and consumables relating to costs for electricity purchases for the production of electricity; o ancillary costs of energy sales and expenses for access to the transmission grid, recognized under Costs for services. Gross operating margin: an operating performance indicator, calculated as Operating income plus Depreciation, amortization and impairment losses. Net non-current assets: defined as the difference between Non-current assets and Noncurrent liabilities, with the exception of: Deferred tax assets ; Loans to employees, included in the item Non-current financial assets ; Long-term loans ; Post-employment and other employee benefits ; Provisions for future risks and charges ; Deferred tax liabilities. Net current assets: defined as the difference between Current assets and Current liabilities, with the exception of: Financial receivables due from subsidiaries and Current portion of loans to employees, included in the item Current financial assets ; Cash and cash equivalents ; Short-term loans ; Current portion of long-term loans ; Current portion of long-term funds and short-term funds ; Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 17 17

22 Interest expense on the intercompany current account, included in Current financial liabilities. Net invested capital: calculated as the algebraic sum of Net non-current assets and Net current assets, post-employment and other employee benefits and provisions for future risks and charges (including short-term portion), Deferred tax liabilities and Deferred tax assets. Net financial debt: a financial structure indicator, determined by Long-term loans, the current portion of such loans, Short-term loans and interest expense accrued on the intercompany current account, included in Current financial liabilities, less Cash and cash equivalents and Current financial assets and Non-current financial assets not previously considered in other balance sheet indicators. 18 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 18

23 Performance The table below summarizes the economic performance in 2008: Millions of euros 2008 Revenues from energy sales and transmission 90 Revenues from green certificate sales 15 Costs related to energy sales (1) Net income/(expense) from commodity risk management 18 Gross profit 122 Other revenues 2 Raw materials and consumables (2) Services (14) Personnel (3) Other operating expenses (4) Gross operating margin 101 Depreciation, amortization and impairment losses (25) Operating income 76 Net financial income/(expense) (9) Income before taxes 67 Income taxes (26) Net income for the period 41 Gross profit Gross profit of Euro 122 million includes Euro 105 million from production-related revenues (sale of energy and green certificates) and Euro 18 million of net income (expense) from commodity risk management on realized and unrealized trading derivatives. Gross profit can be broken down as follows: Millions of euros 2008 Revenues from energy sales 89 Revenues from green certificate sales 15 Revenues from energy transportation 1 Costs related to energy sales (1) Income (expense) on trading derivatives (realized) 11 Income (expense) on trading derivatives (unrealized) 7 Gross profit 122 As described in Operating Performance, the Company sold 937 GWh to GME in December 2008, generating revenue of Euro 80 million (including income from unbalancing), and 78 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 19 19

24 GWh to GSE (CIP 6 energy and energy produced by small plants), generating Euro 10 million. The generation of energy eligible for green certificates amounted to 152 GWh, and the revenues from green certificates were valued on the basis of the GSE withdrawal price for certificates produced for 2008, Euro 98/MWh, which in turn was calculated in accordance with the methods introduced by the Decree of December 18, 2008 (weighted average of the trading price between 2006 and 2008). These revenues were attributable to geothermal production in the amount of Euro 8 million, hydroelectric production in the amount of Euro 2 million and other sources in the amount of Euro 5 million. Gross operating margin The gross operating margin was Euro 101 million, from gross profit of Euro 122 million, other revenues of Euro 2 million and operating costs of Euro 23 million. Costs for raw materials and personnel costs are both shown net of Euro 1 million of capitalized costs. Costs for services relate to services provided by the ultimate parent and by other Group companies in the amount of Euro 8 million, services provided by third parties (mainly connected with the plants) in the amount of Euro 3 million, and rates and additional fees to third parties for the use of the plants (leases and rentals of third-party assets) in the amount of Euro 3 million. Personnel costs benefited from the release to profit or loss of Euro 4 million of the earlyretirement provisions transferred to the Company as part of the spin-off. This amount was deemed surplus when the provisions were recalculated as at December 31, Other operating costs relate to net provisions for risks and charges (Euro 2 million) and contributions, taxes and duties (Euro 2 million). Net provisions in the period refer to the updating of some funds transferred to the Company as part of the spin-off. Operating income Operating income amounted to Euro 76 million, with Euro 25 million of depreciation and amortization relating almost entirely to property, plant and equipment. Net financial expense Net financial expense relates to interest accrued on short-term debt (Euro 7 million) and on medium-/long-term debt (Euro 1 million), as well as to the discounting of items relating to personnel costs and other minor items. On the basis of existing contracts, short-term debt due to the ultimate parent, which was transferred to the Company as part of the spin-off, accrues interest at a rate equal to monthly Euribor plus a spread of 0.125% (3.211% in December 2008). Income taxes Income taxes of Euro 26 million related to current taxes of Euro 22 million (including Euro 3 million of additional IRES) and to the combined effect of Euro 4 million of net deferred taxes. The effective tax rate for the period is 39.3%. 20 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 20

25 Analysis of Enel's financial position The reclassified balance sheet of the Company at December 31, 2008 is shown below compared with the pro forma reclassified balance sheet at December 1, The notes on the changes to the items relate to the deviation from that initial position. Millions of euros At Dec. 31, 2008 Pro forma at Dec. 1, 2008 Dec. 31, 2008 Dec. 1, 2008 Net non-current assets: 4,846 4, Property, plant and equipment 4,746 4, Intangible assets Equity investments Non-current financial assets Non-current assets Non-current financial liabilities (12) (10) 2 Other non-current liabilities (20) (6) (14) Net current assets: Inventories Trade receivables Current financial assets Net tax receivables/(payables) (28) (5) 23 Other current assets Trade payables (76) 0 76 Current financial liabilities (7) (24) (17) Other current liabilities (41) (33) 8 Gross invested capital 4,998 4, Miscellaneous provisions: (124) (99) 25 Post-employment and other employee benefits (40) (41) (1) Provisions for risks and charges (including current portion) (61) (64) (3) Net deferred tax assets/(liabilities) (23) 6 (29) Net invested capital 4,874 4, Shareholders' equity 2,009 1, Net financial debt (2,865) (2,846) 19 Net non-current assets Net non-current assets rose by Euro 87 million compared with December 1, 2008 owing to an increase of: Euro 52 million in property, plant and equipment, arising from net investments of Euro 78 million against depreciation of Euro 26 million; Euro 51 million in non-current financial assets, owing essentially to the recognition of receivables due from Enel Trade SpA for the positive fair value of CFH derivatives maturing beyond the next financial year. Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 21 21

26 Net current assets Net current assets were Euro 152 million at December 31, 2008 and Euro 113 million at December 1, 2008, owing mainly to respective current financial assets of Euro 127 million and Euro 114 million relating to the positive fair value of derivatives maturing in Changes compared with the figures at December 1, 2008 are negligible for the other items because trade receivables and payables were not transferred to Enel Green Power SpA during the spin-off. Notes on the other main items of net current assets are as follows: trade receivables refer to invoices yet to be issued for the sale of energy (to GSE, Terna SpA and Enel Produzione SpA) and green certificates; tax payables refer essentially to Euro 27 million of estimated income taxes for 2008 (IRES, IRAP and additional IRES) and Euro 2 million of withheld personal income tax (IRPEF); other current assets refer to Euro 24 million of receivables due from public bodies for grants yet to be collected, Euro 13 million of receivables due from associate La Geo S.A. de C.V. and Euro 7 million of portions of costs deferred to future years; trade payables refer to Euro 66 million of payables due to third parties and Euro 9 million of payables due to the ultimate parent, Enel SpA, and to other Group companies; other current liabilities refer to Euro 14 million of urban-planning contributions to local authorities where the Company s power stations are located, relating to urban planning and other miscellaneous works in the area, Euro 12 million of payables to personnel, Euro 10 million of rates (government rates, water diversion, etc.) and Euro 5 million of other minor items. Miscellaneous provisions: Miscellaneous provisions can be broken down as follows: Millions of euros at Dec. 31, 2008 Pro forma at Dec. 1, 2008 Dec. 31, 2008 Dec. 1, 2008 Post-employment and other employee benefits (40) (41) (1) Provisions for risks and charges (including current portion) (61) (64) (3) Net deferred tax assets/(liabilities): (23) 6 (29) Deferred tax assets (1) Deferred tax liabilities (53) (25) 28 TOTAL (124) (99) 25 Miscellaneous provisions rose by Euro 25 million compared with December 1, 2008 owing mainly to the change in net deferred tax assets/(liabilities), which went from Euro 6 million of assets at December 1, 2008 to Euro 23 million of liabilities at December 31, 2008 (as a result of the change in taxes on derivatives) and to the general stability of provisions for personnel and provisions for risks and charges. Provisions for risks and charges (of which Euro 23 million relate to the short term) refer to estimated charges that may arise from various risks, including, primarily, litigation (Euro Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 22

27 million), local property tax disputes over the land valuation of plants (Euro 8 million), miscellaneous risks relating to the management and dismantling of plants (Euro 19 million), contributions to be paid to municipal authorities where geothermal plants are located under an agreement currently being finalized (Euro 6 million) and incentives to be paid to personnel in the event of consensual early termination of employment (Euro 2 million). Net invested capital Net invested capital came to Euro 4,874 million, funded by shareholders' equity of Euro 2,009 million and financial debt of Euro 2,865 million. Analysis of the financial structure Financial debt is broken down as follows: Millions of euros at Dec. 31, 2008 Pro forma at Dec. 1, 2008 Dec. 31, 2008 Dec. 1, 2008 Financial liabilities: (2,868) (2,850) 18 Short-term loans (2,643) (2,618) 25 Medium-/long-term loans (including current portion) (218) (232) (14) Interest expense on intercompany current account (7) 0 7 Financial assets: 3 4 (1) Financial receivables due from Group companies 2 3 (1) Loans to employees Net financial debt (2,865) (2,846) 19 Financial liabilities refer mainly to Euro 2,643 million of short-term debt with the ultimate parent, Euro 218 million for the European Investment Bank loan that was transferred as part of the spin-off and Euro 7 million of interest expense on the intercompany current account held with Enel SpA. Cash flows Millions of euros Cash and cash equivalents at December 1, 2008 (2,618) Cash flows from operating activities (a) 66 Cash flows from investing/disinvesting activities (b) (78) Cash flows from financing activities (c) (14) Cash and cash equivalents at December 31, 2008 (2,644) Cash flows from operating activities were Euro 66 million. Self-financing of Euro 104 million was only partly offset by the change of Euro 38 million in net current assets. Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 23 23

28 Investing/disinvesting activities used Euro 78 million of cash, owing essentially to investments in wind farms and geothermal plants. Financing activities used Euro 14 million of cash, owing essentially to repayment of the installment due on the European Investment Bank loan. The combined effect of the various cash flows caused a reduction of Euro 26 million in initial cash. Final cash of Euro -2,644 million consisted essentially of the debit balance on the intercompany current account with the ultimate parent for the provision of treasury services. 24 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 24

29 RESEARCH AND DEVELOPMENT Enel Green Power SpA, which was created to develop and manage the Group s renewableenergy activities, conducts research on several aspects of electricity generation in order to make the renewable-energy plants more competitive and improve their impact on the environment. These research projects include: Innovative photovoltaic power This project involves assessing the possibility of large-scale application of innovative photovoltaic systems and developing new technologies with high conversion yields and relatively low energy production costs. A new test laboratory is being built in Catania, where the first modules for testing have already been installed, and operational planning is under way for the innovative photovoltaic system demonstration plant. Innovative geothermal power This project is about developing innovative geothermal technologies, including the construction of a new waste treatment system that is currently being designed and the improvement of technologies for exploiting resources at low temperatures. Partnerships are in place with the Politecnico di Milano technical university and the Massachusetts Institute of Technology (MIT) to optimize conversion cycles, and feasibility studies are under way for hybrid plants with the combined use of lowtemperature geothermal energy and solar energy. Energy storage for optimized management of renewable-energy generation systems This project aims to characterize and test energy storage systems to optimize the integration of the renewable energy produced with the grid. Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 25 25

30 HUMAN RESOURCES AND ORGANIZATION Organization The Company was incorporated with the aim of developing and managing the Group s renewable-energy activities. It is fully responsible for the technical and financial performance of the operational entities it manages, ensuring their integration with the Group in accordance with Enel s strategies, operating guidelines and codes of conduct. The Company therefore works independently of the Group on the main business areas (e.g. operations, strategic procurement, business development, sales), while at the same time benefiting from synergies with the Group. The organizational model is structured in geographical Business Areas on the basis of critical mass and the location of assets held or to be built. The Areas include the assets and pipeline of renewable-energy projects already present in the Generation and Energy Management Division, the countries of the International and Iberia and Latin America divisions and Enel.si from the Market Division. The organizational model also provides for identifying centers of excellence. The geothermal production unit is the first global center of excellence for best practice and key performance indicators. The development projects are implemented by dedicated local teams working under Area Managers and monitored centrally by the Company, which is also responsible for planning activities in order to ensure the right level of conformity in design choices, to consolidate technical expertise and to support procurement procedures for large orders. The macrostructure is completed by the positions needed to ensure that the new Company has the required operational independence, notwithstanding the competence of central corporate departments with regard to instruction, control and co-ordination, with the aim of getting the most from Group synergies and optimizing service management to support core business. The organizational structure of the Renewable Energy Division currently consists of the following Areas and central departments: Areas: Europe Area, North America Area, Central and South America Area, Italy Area (Operations), Italy Area (Development) and Eufer; Central departments: Business Development, Engineering, Procurement, Legal Affairs, Administration, Finance and Control, Audit, and Personnel and Organization. All other functions are performed by the ultimate parent and by Enel Servizi Srl on the basis of specific agreements. 26 Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 26

31 Size and movement of the workforce As a result of the spin-off, 1,501 employees were transferred to Enel Green Power SpA. The breakdown of staff movements in December is as follows: Number at Dec. 1, 2008 New hires Terminations Number at Dec. 31, 2008 Top management Middle management (2) 99 Office staff (5) 675 Laborers (11) 697 Total 1,501 1 (18) 1,484 Eighty-two employees from other Group companies are expected to join the Company from January 1, Labor relations In July 2008, discussions began with trade unions on the creation of the new Company. In November, an agreement was reached on the consequences for employees involved in the transfer from Enel Produzione SpA to the new company, Enel Green Power SpA, of the Electricity generation from renewable sources business unit. The agreement was broadly welcomed by the different trade unions, with whom discussions were challenging but constructive. Discussions also continued on the organizational structure of the new Division, both in relation to the assets of the unit being transferred and to the other corporate activities and structures. Process mapping As part of the Operational Excellence programs, in December 2008 the Company launched the Process Mapping project to represent the operational model of the new company. The project arose from the need to encourage, in light of the recent incorporation and significant international presence, the definition of macro processes, the alignment of roles and responsibilities and the finalization of existing operating models and interdepartmental boundaries, and especially to align and integrate best practice in Italy and abroad with additional programs of this nature. The map covers all value-creation processes at the Renewable Energy Division. It currently directly involves around 40 people from the Operational Excellence team responsible for modeling and the process owners, managers of the mapping function and people from other specific areas such as ICT, Audit, Personnel and Organization. The map currently covers around 70 reference macro processes, and it is constantly being updated as new processes are developed. Report and financial statements of Enel Green Power SpA as of December 31, 2008 Report on operations 27 27