Letter to shareholders

The severe economic crisis that hit the western markets over the last three years has left the major industrial groups with very difficult decisions to make.

An uncertain future, a crisis of market confidence and the looming threat of an out-of-control recession has constantly generated complex scenarios which need to be assessed, complicating the job of those with the huge responsibility for making the final decisions.

Acea has come through this delicate phase, and continues to do deal with it on the basis of a principle of great responsibility and by applying the values which have guided it through the water and energy markets for more than a century.

In particular, that responsibility and those values characterise its link with the local area, and make Acea an undisputed leader in terms of Roman development and the flagship of the domestic economy at European level. But this responsibility and those values are also the foundation of a long and illustrious company history, and demand the utmost respect for what Acea has acquired under its trademark – now also modernised graphically – in terms of knowledge, technology, cost-effectiveness and, not least, personal and professional relations.

Solely on the basis of this great sense of responsibility, the 2009 financial statements closed, not without difficulty, with a significant liability. A liability that reflected the necessary prudence regarding provisions. The urgency of closing the tax deferment. Which revealed, in particular, the courageous priority of continuing to carry out investments, in view of their crucial role in times of crisis, for Acea and the areas in which it operates.

2010 was a year in which the difficulty of these choices and the subsequent sacrifice required by shareholders were fully rewarded by extremely satisfying results.

The serious approach adopted towards the 2009 balance sheet has, therefore, enabled Acea to overcome the crisis, and exit it in a stronger and more stable position than when the crisis struck.

The full implementation of investments, combined with essentially stable markets has, in fact, allowed our Group to achieve better than expected economic results. And the importance of the number of products is borne out by the Revenues/Gross Operating Profit ratio, which recorded its best ever performance for Acea this year.

Now we’ll take a look at a summary of the 2010 figures.

Consolidated revenue amounted to 3,600 million Euros, the best result in the company's 102 year history. In fact, the best margins were also recorded in absolute terms; consolidated Gross Operating Profit (ebitda) stood at 667 million Euros compared to 561 million Euros in 2009, as with the Group operating profit (ebit), which amounted to 318 million Euros, or 72% above last year’s figure. Consolidated net profit was also very important, reaching 92.1 million Euros, after an IAS entry relating to some assets held for sale of 36.2 million Euros.

In 2010, Acea spent more than 470 million Euros on investment, in order to guarantee efficiency and development for the region and for users, dedicating (i) more than 200 million Euros to the water segment, in order to permit the forecast tariff development and to consolidate its position as domestic leader, (ii) roughly 110 million Euros to the distribution of electricity, to ensure constant improvement in the quality and continuity of service, (iii) approximately 50 million Euros to the Environment and Energy segment, to develop capacity as regards waste-to-energy, disposal of sludge produced by agricultural activities, biomass and special waste treatment and (iv) around 50 million in the electricity generation segment. In addition, a significant contribution to environmental sustainability came in the form of the allocation of more than 10% of the amounts required by the Investment Plan to the renewable energy sources sector (photovoltaic and cogeneration).

Special attention and effort will again be dedicated to new projects such as Public Lighting, with an ambitious project involving more than 40,000 new lighting points for Roma Capitale (Municipality of Rome) and Smart Grid experimentation, for increasingly greater efficiency in terms of electricity distribution and energy savings. 2010 also saw the termination of the Joint Venture with GDF Suez, which will allow us to increase our presence in the electricity sales sector, without compromising generation, thanks to shrewd hedges.

The above information presents us as a major group. In fact, Acea is currently among the few European companies able to boast the single “A” area rating from 3 rating agencies, which reflects both sound business and its similarly strong financial and equity structure.

The year 2010 also saw the agreement to terminate the energy partnership with GDF Suez. Following said agreement – signed on 31 March – the Acea Group acquired full control of electricity and gas sale activities, and full ownership of the plants transferred in due course under the joint venture. Instead, trading companies and the other electricity generation companies with the associated assets, previously subject to the joint venture, exited the Group perimeter given transferred to the former partner.

The conclusion of this energy partnership with GdF Suez will allow Acea to focus on new growth opportunities. These may include room for gas distribution in the Roma Capitale (Municipality of Rome). In said light, any successful tender bid would allow Acea to own management of the city’s water, electricity and gas networks, and so create significant operating synergies. However, we must await publication of the call for tenders in order to be able to fully assess any potential participation in the bid. In this regard, the recent publication in the Official Journal of the Decree of the Ministry of Economic Development on the “Determination of the regional areas in the natural gas distribution sector”, constitutes one of the main prerequisites, whilst we await another provision which will lay down the rules that local administrations must comply with in awarding the contract for the service.

Moreover, it appears to be necessary to focus, even just briefly, on the referendums called regarding the management of water resources, on which voters will be required to vote next June.

Public consultation will determine the methods for the award and management of local public services of economic importance and the duration of the return on invested capital as regards the criteria for calculation of the tariff for the integrated water service.

As regards the first referendum question – which proposes the full repeal of the contents of article 23-bis of decree-law no. 112 of 2008, as amended by decree-law no. 135 of 2009 (also known as the “Ronchi Decree”) – the risks resulting from a potential repeal are clear. The legislative framework outlined with the “Ronchi” Decree had, in fact, largely resolved the interpretative uncertainty of the previous legislative framework and its repeal would again leave room for extremely detrimental instability for sector operators.

In relation to the second referendum question, a successful repeal – which as regards the constituent elements of the water services tariff would remove that of an adequate return on invested capital – would require a profound rethink of the role of the water services operator, at least regarding the system of financing investments.

The context certainly was and continues to be one of crisis, in which market uncertainties continue to weigh heavily. But our Group has clearly demonstrated that it has not taken a passive stance when faced with its many problems. And the strength of its initiative certainly does not signal the end of the drive in this financial year in terms of achieving a high level of satisfaction. In fact, the results achieved provide the basis for the major new challenges Acea intends to face with steely determination.

The aforementioned resolution of the disputes related to the French partnership and consolidation of the strong economic and financial position now represent the basis for the challenging targets set out in the 2011-2013 industrial plan. In confirming a strategy to strengthen all core sectors, this plan also provides the Acea Group with new ambitious goals.

The main feature of the plan is the definition of organic growth which leverages principally on efficiency. Work to rationalise the organisational and industrial structure targeted at an improvement in the operating efficiency of the Areas and the Parent Company, also with the objective of fully exploiting all assets.

The second founding element of the plan is the repositioning on the downstream market. This is to be achieved through: optimisation of the customer mix; increase in efficiency and effectiveness in energy sales; realisation of the dual-fuel offers; and the development of professional sourcing and trading skills.

If we look at the end of the three-year period, the new plan projects consolidated EBITDA in 2013 at a healthy 865 million Euros – without the contribution from extraordinary transactions and considering the energy perimeter in the absence of the partnership with GDF Suez.

The average annual growth of EBITDA forecast in the three-year period is 11%.

An ambitious plan, but no less solid and credible considering the extraordinary stability demonstrated by the Group in the past year. A robustness which is also recognised at European level, when we consider that Acea is one of the few pre-eminent Italian companies to boast three single A area ratings.

On the other hand, ambition and responsibility have always been distinctive traits of this historic company which now, more than ever, I am proud to represent before shareholders and the country.