Operating Performance of the Group in 2008

In 2008, there was a sharp reversal from the trends that shaped the global economy in the past. Over a few short months, the economy swung sharply from the expansionary phase that it enjoyed for a number of years to a phase of severe recession, triggered by the subprime mortgage crisis and magnified by the serious difficulties experienced by some of the main banking institutions in the United States and Europe.

In Italy, for the first time since the crisis of 1981, the demand for energy reversed its positive trend in the fourth quarter of 2008, with a negative impact on the performance of the energy industry for the full year. From October to December, demand for electric power decreased by 5% on average, with consumption in the industrial sector plummeting by as much as 15%. As a result, the decrease for the full year was 1% for demand with adjusted for seasonal factors and 9% for industrial demand.

During the year, raw material prices were characterized by unprecedented fluctuations: in a few short weeks, the price of oil swung from an all-time high in July to a low that had not been seen since 2004. In this environment, Edison’s performance was positive overall, confirming the good results achieved in 2007 and improving them at the operating level. The net profit was however impacted by the fiscal measures introduced in 2008.

Sales Revenues

The electric power operations increased sales revenues by 28.1% to 8,689 million euros, compared with 6,783 million euros in 2007. Production volumes decreased by about 6%, mainly as a result of a lower output by CIP 6/92 power plants (-27.4%) attributable primarily to the disposal of some power plants in April 2008 and the expiration of some contracts. On the other hand, production by facilities that serve the deregulated market was up by about 5%. Unit sales of electric power totaled 67,453 GWh, or 5.8% more than in 2007, reflecting a substantial rise in sales to customers in the wholesale and trading markets. In 2008, the sales revenues reported by the hydrocarbons operations also improved (+29.4%), rising to 5,093 million euros, up from 3,937 million euros in 2007. Unit sales of natural gas totaled 13,808 million cubic meters, substantially in line with 2007. More specifically, demand from industrial and residential users was up 5.3%, while unit sales to thermoelectric power plants decreased by the same percentage (-5.3%).

EBITDA

Edison’s EBITDA grew to 1,643 million euros in 2008, for a gain of 2.4% compared with the 1,605 million euros earned the previous year. Restated using a comparable scope of consolidation and eliminating the impact of nonrecurring items, which in 2008 had an overall impact of 176 million euros, EBITDA show an increase compared with 2007. More specifically, the electric power operations reported EBITDA of 1,326 million euros (7.1% more than the 1,238 million euros earned in 2007), despite the absence of the EBITDA contribution provided the previous year by the seven CIP 6/92 power plants that, as mentioned above, were sold in 2008. The EBITDA improvement is the result of higher margins earned in the deregulated market, both for the volumes and the higher margins achieved, thanks to an increase in hydroelectric production compared with 2007, and reflects the gain generated by the sale of a 60% interest in Hydros. These positive factors more than offset the impact of a reduction in the profitability of CIP 6/92 power plants attributable both to the expiration of some contracts and to a contraction of the unit margins earned on electric power generated by these facilities caused by a formula for the compensation of the fuel cost component that does not allow a full recovery of the costs incurred.

The hydrocarbons operations reported EBITDA of 405 million euros, or 5.2% less than the 427 million euros earned in 2007, when, however, EBITDA were boosted by such nonrecurring extraordinary items as the reversal of provisions recognized in connection with Resolution No. 248/04 (about 56 million euros) and Resolution No. 284/06 (about 20 million euros). The impact of this negative comparison was offset only in part by the benefit generated by renegotiating a long-term supply contract concerning purchases of natural gas from Russia and by the higher margins earned by the exploration and production activities, which benefited from the higher level of oil prices, compared with 2007, the sharp drop of the last quarter notwithstanding. Had it not been for the nonrecurring factors described above, EBITDA would have been in line with in 2007.

As a result of changes in the tax laws introduced by Law No. 133/2008 (the so-called Robin Hood Tax) and Decree Law No. 185/08 (the so-called Anti-Crisis Decree), which had a negative impact of 135 million euros, the net profit decreased to 346 million euros, down from 497 million euros in 2007

(-30.4%). Moreover, a nonrecurring tax benefit made possible by the reversal of deferred-tax liabilities booked to recognize the reduction in tax rates introduced by the 2008 Budget Law lowered the tax liability by about 135 million euros in 2007. Absent these changes in taxation, the net profit would have been higher than in 2007. Indebtedness and Debt/Equity Ratio At December 31, 2008, net borrowings totaled 2,920 million euros, up from 2,687 million euros at the end of 2007.

The investments of the period (644 million euros), the net borrowings (decreased compared with December 31, 2007), the investments in participations (of which 139 million euros for the purchase of 5% of Edipower and 81 million euros in LNG Adriatic Terminal), the dividends payments (281 million euros) and the payment of taxes were partially compensated by operational cash flows and by the proceeds from the sale of the thermoelectric plants in CIP6, of 51% of Dolomiti Edison Energy Srl and of 60% of Hydros. The Group’s debt/equity ratio, 0.36 at December 31, 2008, was again among the best in the energy industry.

Key Events of 2008

In September, the offshore regasification terminal arrived at its home off the coast of Rovigo. When fully operational, it will be used to import 8 billion cubic maters of natural gas a year from Qatar, 6.4 billion cubic meters of which will be available to the Group.

Also in 2008, under a supply contract with Sonatrach that became operational in 2008, an additional 2 billion cubic meters of natural gas began to flow through the expanded capacity of the Transmed-TTPC pipeline. In addition, Edison’s hydrocarbons operations were awarded the concession for the Abu Qir field in Egypt at a cost of US$1.4 billion. The activities planned for Abu Qir over the next three years should enable Edison to produce 15% of its natural gas needs from its own reserves.

EBIT, Profit Before Taxes and Net Profit

The increase in depreciation caused by the commissioning of new generating capacity in the second half of 2007 and the net depreciation of industrial assets for about 58 million euro, cause EBIT to decrease to 861 million euros, or 3.9% less than the 896 million euros earned in 2007. However, the profit before taxes totaled 730 million euros, for a gain of 6.3% compared with 687 million euros in 2007. This improvement reflects the positive impact of significantly lower borrowing costs, made possible by a reduction in average indebtedness, offset in part by net additions to provisions for risks, mainly in connection with tax risks related to assets sold in previous years.