Group performance and financial position

A reclassified consolidated income statement for the Terna Group for 2007 and 2008 is shown below.

Revenues for 2008, in the amount of €1,395.2 million (€1,195.8 million for the Parent and €199.4 million for the Brazilian subsidiaries), increased by €47.0 million (+3.5% over the €1,348.2 million of 2007).

The increase in revenues essentially reflects the net impact of the following:

• ▪the €29.3 million increase in grid transmission fees as a result of the following factors:
  
  • lower revenues from energy transport in Italy (down €0.3 million) due primarily to the following:
  • • a €28.9 million decline in revenues due essentially to the reduction in volumes and changes in rates;
    • an increase in revenues of about €3.5 million resulting from the increase in ownership of the national grid following the acquisition (and merger into RTL) of the company RTT in June 2007;
    • greater grid transmission fees related to the defence plan (€4.8 million);
    • a €20.3 million increase in grid transmission fee adjustments due essentially to the release of the provision for a technical dispute that was successfully closed in 2008 (€14.0 million) and the negative adjustment payments in 2007 (€5.2 million) towards other network owners;

• an increase in revenues by the Brazilian companies in the amount of about €29.6 million attributable essentially to the acquisition of the subsidiary ETEO (€16.1 million), the contribution of the GTESA and PATESA concessions, which were acquired and merged into the subsidiary TSN at the end of the previous year (€5.8 million), and the annual concession fee adjustment, including the offset of higher PIS/Confins taxes (the taxes finance a pension and welfare fund);

• other energy items (up €5.1 million) related essentially to the dispatching services fee (DIS component), which reflects both the effects of Resolution no. 351/07 regarding the new rate component for dispatching (up €10.1 million) as well as additional incentive revenues due to efficiency gains from improvements in forecasting national electricity demand and forecasting energy generated by wind facilities (€5.0 million). This increase was partially offset by the MIS component for metering, which declined by €9.9 million due primarily to the new mechanism for determining the rate component introduced by Resolution no. 348/07;

• other revenues from sales and services were up €5.7 million, due primarily to the increase in income from Engineering, Procure and Construct (EPC) services provided by Terna Serviços to the joint venture Brasnorte (up €4.5 million), as well as to unregulated activities carried out by the Parent;

• other revenues and income (up €6.9 million), attributable primarily to:

• a €4.1 million gain realised on the disposal of the Ferrara electrical station by the subsidiary RTL (merged into the Parent at the end of the year) subject to removal of the station from the NTG;
• the partial release of the provision for bad debts accrued in previous years following the approval of the composition agreement with a dispatching customer (€3.6 million).

Operating expenses came to €400.5 million (€345.4 million for the Parent and €55.1 million for the foreign subsidiaries), increasing by €30.1 million (+8.1%) over 2007. This overall change in operating expenses, with €11.2 million attributable to the Parent and €18.9 million to the foreign subsidiaries, is primarily due to the following factors:

• "Personnel expenses" rose by €16.7 million over 2007 as the net effect of the following:

• greater personnel expenses (€25.0 million) due mainly to the increase in unit labour costs for the Parent and to the average number of employees for the Group (€16.3 million, €4.4 million of which attributable to the Brazilian subsidiaries), as well as to the effect of the curtailment of termination benefits in 2007 in accordance with legislation introduced the previous year (€8.7 million);
• an increase in capitalised personnel expenses due to the increase in capital expenditure during the year (-€8.3 million);

• "Services and use of third-party assets" amounted to €131.3 million, a decrease of €3.9 million or 2.9% on 2007, due essentially to generalised savings implemented by the Parent (down €6.6 million), which were partially offset by costs for services for the Brazilian firm ETEO (up €2.4 million), which was not consolidated until the year under review;

• "Materials" increased by €6.8 million, due to greater consumption recognised (+€13.6 million compared with December 31, 2007), partly capitalised by the Parent (+€6.8 million on the previous year), related mainly to the following:

• materials and equipment and other provisions (+€2.0 million) for ordinary operations and maintenance of plant;
• costs incurred by Terna Serviços as part of the aforementioned EPC services (+€4.4 million);

• "Other costs" rose by €10.5 million, attributable to the Brazilian subsidiaries (€7.0 million), which, as mentioned in the section regarding revenues, were affected in 2008 by the increase in PIS/Cofins taxes over 2007, as well as to the Parent (€3.5 million) due primarily to greater losses on the disposal of plant parts.

EBITDA reached €994.7 million, equal to 71.3% of consolidated revenues, rising by €16.9 million over the €977.8 million of 2007 (+1.7%). The Brazilian subsidiaries contributed €144.3 million.

Amortisation and depreciation for the year rose by €25.3 million over 2007 (+9.9%). Specifically, the increase includes about €18.4 million for the Parent related essentially to the start of operations of new plants and some €6.9 million for the Brazilian subsidiaries, including the amortisation of the concession acquired with ETEO (€3.2 million).

EBIT amounted to €714.3 million, a decrease of 1.2% (€8.4 million) from 2007.

Net financial expense for the year came to €179.9 million (€121.7 million of which related to the Parent and €58.2 million to the Brazilian subsidiaries).

The increase in net financial expense, in the amount of €65.0 million, is essentially attributable to:

• the Parent in the amount of €32.8 million, due essentially to the net effect of:

• an increase in financial expense related to medium- and long-term debt and related hedges (€47.2 million);
• net financial charges (€5.1 million) for the fair value adjustment of bonds and related hedges;
• an increase in financial income on short-term investments (€12.5 million);
• an increase in capitalised costs on non-current assets (€5.6 million) in application of IAS 23R, as discussed above;

• the Brazilian firms in the amount of €32.2 million, due essentially to:

• greater foreign exchange losses (€18.0 million) related mainly to the foreign-currency loan of the subsidiary TSN due to the weakening of the real against the dollar;
• greater interest expense on short-term loans to Terna Participações (€16.7 million);
• the effect of the recognition in 2007 of interest on equity paid to minority shareholders of Terna Participações (€3.8 million).

Income taxes for the year totalled €193.0 million, €174.6 million for the Parent (-€26.0 million for net deferred taxes) and €18.4 million for the Brazilian subsidiaries (-€17.1 million of which for net deferred taxes).

The effective tax rate came to 36.2% (net of adjustments to taxes related to previous years). Income taxes for 2007 had amounted to €173.6 million, for an effective tax rate of 29.2% (net of adjustments to taxes related to previous years).

This increase is due primarily to the recognition in the previous year of the effects of the adjustment of the net deferred taxes of the Parent to the tax rates introduced in the 2008 Finance Act, which reduced taxes by a total of €68.2 million.

Profit for the year came to €341.4 million, down 21.4% from the €434.2 million of the previous year. Profit for the year attributable to the shareholders of the Parent, net of the portion attributable to minority interests in the amount of €13.9 million, came to €327.5 million (-21.1% from 2007). When considering normalised performance for 2007 net of the adjustment of deferred taxes for the change in tax rates introduced by the 2008 Finance Act, the decline comes to 6.7% for profit for the year and 5.6% for that attributable to the shareholders of the Parent.

In the consolidated income statement:

(1) this figure is included in "Revenues from sales and services";

(2) including "Capitalised internal work" in the amount of €52.9 million under "Personnel expenses" and €13.4 million under "Materials";

(3) corresponds to "Other operating expenses" and "Amortisation, depreciation and impairment losses" for the impairment of trade receivables (€1.8 million);

(4) corresponds to "Amortisation, depreciation and impairment losses" net of the impairment of trade receivables (€1.8 million);

(5) corresponds to the balance of the items described under points 1, 2 and 3 of "C-Financial income/expense".