summary of operations data Regulatory framework 10 The ERG Group. 96

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1 erg raffinerie mediterranee annual report for the year ended 31 december 2007

2 erg raffinerie mediterranee s.p.a. annual report for the year ended 31 december 2007

3 Main Income Statement and financial data, 5 summary of operations data Report on Operations 7 The energy market 9 Regulatory framework 10 Strategy 11 Sales 12 Business sector 13 Investments 20 Risk management 21 Healt, Safety, Environment and Quality 21 Human resources 23 Summary of Financial Statements 25 Board of Directors proposal Statutory Financial Statements 37 Calling of the ERG Raffinerie Mediterranee S.p.A. 38 Ordinary Shareholders Meeting Resolutions of the shareholders meeting 39 Balance Sheet 40 Income Statement 44 Explanatory Notes to accounts 47 Cash Flow Statement 47 Balance Sheet analysis 54 Income Statement analysis 82 Financial result 93 The ERG Group. 96 Scope of consolidation as at 31 December 2007 Report of the Board of Statutory Auditors 98 Auditors Report 103 Financial Statements of associated companies table of contents

4 Board of Directors Aldo Garozzo Chairman Guglielmo Landolfi Managing Director Luca Bettonte Alessandro Garrone Antonio Garzilli Pietro Giordano Board of Statutory Auditors Mario Pacciani Chairman Maria Teresa Canepa Standing Auditor Giuseppe Demicheli Standing Auditor External Auditors Reconta Ernst & Young S.p.A. 4

5 The figures shown below are stated in Euro. In tables where figures are shown in millions, totals may differ from the exact sum of the amounts forming them. (million Euro) Total revenues (1) 7,165 6,241 6,384 EBITDA (2) EBIT (2) Net profit (loss) for the year Cash flow from operations 421 (211) 340 Investments/divestments (118) (183) (190) Changes in shareholders equity (36) Changes in net financial debt 267 (394) 149 Net invested capital Shareholders equity Net financial debt (Net funds available) (90) Financial leverage (3) 5.6% 32.7% (1) net of excise duties and forward dealings on crude oil and products (2) includes non-recurring items relating to insurance indemnities, for 2006, and the repayment of harbour dues referring to previous years, for 2005 (3) the ratio is not applicable for 2005, in view of the positive net financial position Investments (1) million Euro Employees at the end of the year 1,214 1,236 1,219 Processing at the refineries thousand tonnes 16,631 15,528 18,208 Processing at the refineries thousand barrels/day Export of petroleum products thousand tonnes 9,339 7,211 8,542 Domestic market for third parties thousand tonnes 3,882 4,405 5,285 Domestic market for companies within the Group thousand tonnes 3,082 2,845 3,173 Inventory of raw materials & products thousand tonnes 1,803 1,625 1,649 (1) investments in tangible and intangible assets recorded during the period 5 main income statement and financial data, summary of operations data

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7 report on operations

8 Comment on the results for the year Economic and financial results The financial statements expressed in Euro show a net profit of Euro 28.9 million after amortisation, depreciation and write-downs totalling Euro 57.3 million, and taxes of Euro 28 million. An analysis of the year s performance shows the following: an increase in refinery processing from 15.5 to 16.6 million tonnes; an increase in revenues net of forward dealings on crude oil and products from Euro 6,241 million to Euro 7,165 million, due to higher quantities sold and higher sales prices; EBITDA of Euro 118 million (Euro 145 million in 2006) was lower than in the previous year notwithstanding an improvement in the unitary contribution margin. This higher unitary margin stems principally from improved industrial performance in 2007, together with the positive impact of the new refinery configuration and the start-up of new plants, and was partially penalised by the lower profitability associated with sales of feedstock to ISAB Energy. In absolute terms, the reduction in EBITDA was due mainly to the loss of the positive contribution connected with the insurance reimbursement pertaining to 2006 for the incident at the Impianti Nord during a period characterised by a refining scenario with margins above the average for the year; net financial exposure of Euro 37 million, down by approximately Euro 267 million from 2006, as the financial need for recourse to hot money no longer existed. The Company s financial statements have been audited by Reconta Ernst & Young S.p.A. Events during the year On 9 May the Lombardy TAR (Regional Administrative Tribunal) accepted the appeal filed by ISAB Energy against Resolution 249/06, which envisaged new rules for calculation of the CIP 6 tariff component for Avoided Fuel Cost. On 5 October the Autorità per l Energia Elettrica e il Gas (AEEG the Italian Electric and Gas Authority) filed an appeal with the Council of State against the Lombardy TAR judgment accepting the appeal filed by ISAB Energy against Resolution 249/06, which envisaged new rules for calculation of the CIP 6 tariff component for Avoided Fuel Cost, requesting that its effects be suspended. However, on 30 October the Council of State scheduled a hearing for 22 January 2008 to directly discuss the merits of the appeal, as reported in the section on significant events after the end of the financial year. 8

9 The energy market International The 2007 financial year was characterised by a steady increase in the cost of raw material, from just over USD 50/barrel at the beginning of the year to record values close to USD 100/barrel. This increase was caused principally by the OPEC cuts associated with lower production in Nigeria, the persistence of severe geopolitical tensions and major purchases by numerous investment funds on the commodities market. The average price of Brent crude oil consequently reached USD 72.40/barrel, higher than the values recorded during the same period of 2006 (+USD 7.30). According to the International Energy Agency (IEA), average world demand for oil in 2007 reached 85.8 million barrels/day, (+1.0 million barrels/day from the 2006 average), mainly driven by consumption in non-oecd Asian countries. Overall supply was largely stable, at 85.5 million barrels/day (+0.1 million barrels/day compared to 2006): against a strong growth in supply by non-opec countries, OPEC effectively limited its output. In 2007 the refined products market was characterised by higher demand for gasoline (especially in the second quarter) and fuel oil as compared with the same period in 2006, with substantial firmness in the demand for diesel and distillates. Consequently, refining margins (in US dollars) achieved good levels, largely in line with those for Italy During 2007 primary energy consumption in Italy amounted to million TOE (tonnes of oil equivalent), down by 1.4% compared to the previous year. Although consumption rose significantly in the last quarter of 2007, the decrease reported for the entire year stemmed principally from lower energy demand for heating during the first several months of the year due to particularly mild weather. GDP rose by 1.8% in National demand for petroleum products (83.8 million tonnes) decreased by 3.2% over the previous year (86.7 million tonnes). This decrease stemmed principally from lower consumption of gasoline (-6.2%), fuel LPG (-6.7%) and fuel oil (-31%), which was not offset by the increased consumption of automotive diesel (+2.6%), petrochemical feedstock (+2.7%) and jet fuel (+5.8%). Gross domestic consumption of natural gas increased slightly (+0.5%) over The drop in consumption during the first few months of the year, largely due to mild weather, was offset by the increase that occurred at the end of the year. National output continued to decrease compared to the previous year (-11.5%) and imports fell by 4.5%. As far as electricity is concerned, national demand grew by 0.7% over 2006, rising to billion kwh. Gross national output totalled about billion kwh (+0.1%), with a decrease in hydroelectric output (-10.1%). There was a significant growth in wind power (+40.7%), while thermoelectric (+1.3%) and geothermal output (+0.8) also rose. 9

10 Electricity imports from abroad increased by 4.3%, while exports increased by 63.9%. The importexport balance increased by 2.1% compared to Regulatory framework The most significant events affecting the petroleum sector in 2007 were: publication of Law 243/2007, converting Decree Law 180/2007 with amendments, and setting out an extension of deadlines for Integrated Environmental Authorisation (IEA) and transitory provisions. The measure postponed from 30 October to 31 March 2008 the deadline for obtaining the IEA by the plants concerned (energy activities, production and transformation of metal, mineral products industry, chemical industry, waste management and raising of livestock); publication of the 11 September 2007 Decree by the Ministry for Economic Development, in which measures are adopted for limiting the consumption of natural gas; it envisages, inter alia, that the end customers who satisfy the requirements set out in the decree can jointly undertake to limit their consumption through their respective sales businesses, which consequently assume responsibility for the overall result of limiting consumption by these customers and benefit from incentives determined by the AEEG; redefinition of biofuel penetration targets via the obligation for producers of transport diesel and gasoline to place biofuels of agricultural origin on the market in an amount equal to 1% from 2007, 2% from 2008, 3% from 2009 (an objective that was newly introduced by the 2008 Finance Law) and 5.75% from 2010, based on the total fuels sold during the previous year; annulment by the Lombardy TAR in May 2007 of AEEG Resolution 249/06, which had revised the criteria for calculating avoided fuel for the purpose of determining the CIP 6 price of electricity, while leaving the previous calculation methods unchanged. The Avvocatura dello Stato (Attorney-General) then withdrew the interlocutory motion for suspension of the legal effects of the TAR judgment. Finally, the Council of State ruled on the merits of the case at the 22 January 2008 hearing, accepting the appeal filed by the AEEG and restoring the validity of Resolution 249/06; reduction by the European Commission of the CO 2 emissions ceiling in the National Allocation Plan of quotas for (NAP2), from the proposed 209 million tonnes/year to 196 million tonnes/year approved with reservations. It was also established that Italy can use the so-called flexible mechanisms for no more than 15% of the total, as opposed to the expected 25%; the coming into force on 1 January of the 2007 Finance Law (Law 296 of 27 December 2006). The 2007 Finance Law provides, inter alia, for a number of interventions in the energy sector and, in particular: interventions with regard to excise duties, such as attribution of a portion to regional authorities; reduction of excise duty on methane gas; 10

11 publication of Legislative Decree 20 of 8 February 2007, implementing Directive 2004/8/EC on the promotion of cogeneration based on a useful heat demand in the domestic energy market. This law introduces new parameters for recognition of cogeneration; the issuance of two explanatory circulars by the Italian Customs Agency, one concerning the application of Article 22 of Legislative Decree 506/95 on internal refinery consumption dated 29 November, and the other on application of points 11 and 11bis of the table in Legislative Decree 504/95; these circulars provide clarifications with regard to excise duties on mineral oils destined for internal refinery consumption and the generation of electricity; the publication of Legislative Decree 26 of 2 February 2007, in implementation of Directive 2003/96/EC, which reorganises the European Union framework for taxation of energy products and electricity. The new rules will come into effect on 1 June, except for the measures regarding natural gas, which will come into effect on 1 January The measure amends and replaces the consolidated law on excise duties issued by way of Legislative Decree 504 of 26 October 1995; publication of the 2008 Finance Law. This measure contains many interesting innovations, from the reform of renewable energy sources to correction of the 2007 Finance Law on CIP 6 incentives for plants fuelled by renewable and assimilated sources, to the full powers granted to the AEEG on avoided fuel costs, royalties for stocking and class action lawsuits. It also introduced a mobile excise tax on fuels, the centesimo per il clima (climate cent), Mister prezzi (Mr. Prices) and an amendment to the rules governing tenders for gas concessions. Strategy ERG pursues a strategy of creating a diversified multi-energy group, whose principal objective is to create sustainable value over time through growth in profitability and by continuously reducing its dependence on volatile exogenous factors, partly through a balanced management of its portfolio. Over the past few years, the Group has been reorganised and the objective for ERG Raffinerie Mediterranee is to operate in the Coastal Refining sector, its mission being to create value by maximising refining margins. In the Priolo area, the company owns a petroleum hub, which is a Mediterranean leader in terms of both size and complexity, integrated with electric power generation and chemical activities, reflecting ERG s strategy to achieve high-conversion and efficient refining capable of flexibly processing more profitable crudes in order to obtain high value-added products. ERG continues to pursue a plant improvement strategy that will allow it to promptly adjust to changes in world oil demand, which is growing and is more and more oriented towards transportation fuels, diesel in particular. 11

12 Sales Total sales for the Coastal Refining sector amounted to 16.3 million tonnes, of which 57% abroad and the other 43% in the domestic market. The following table shows the breakdown of sales volume by sector and sales channel. (thousand tonnes) Cargo export 9,339 7,211 8,542 Home market supply (1) 6,964 7,250 8,458 TOTAL PETROLEUM PRODUCTS (2) 16,303 14,461 17,000 (1) including sales to: - ERG Petroli, totalling 1,568, 1,235 and 1,501 thousand tonnes, respectively, in the different periods - ISAB Energy, totalling 968, 1,027 and 1,014 thousand tonnes, respectively, in the different periods - ERG Power&Gas, totalling 546, 583, and 658 thousand tonnes, respectively, in the different periods (2) excluding raw materials resales, respectively amounting to 229, 470 and 494 thousand tonnes in the different periods 12

13 Business sector Introduction The Coastal Refining business is carried out by ERG Raffinerie Mediterranee (ERGMed) and includes procurement of crude oils and their processing at the ISAB Refinery in Priolo, as well as the sale of products to the cargo market. Revenues include cargo sales, sales to other ERG Group companies (including the supply of feedstock to ISAB Energy and the supply of products to ERG Petroli and to the thermoelectric power plants, sales to petrochemical companies (the ENI Group and others), as well as services to the industries located within the Priolo industrial district. The ISAB Refinery, whose two production sites, Impianti Nord and Impianti Sud, are interconnected by a system of oil pipelines, is a Mediterranean leader in the petroleum sector in terms of both size and complexity, and is integrated with electrical and chemical activities. Until the beginning of the third quarter of 2007, the two production sites were differentiated according to type of conversion and mix of processed crude oils. More specifically, the Isab Sud plant, equipped with thermal conversion units, produces mainly middle distillates and, because it has a high desulphurisation capacity, is capable of processing mainly medium-heavy crude oils with a high sulphur content. The Isab Nord plant, which is equipped for catalytic conversion and structured to produce greater quantities of light distillates, used medium-heavy and light crude oils in similar quantities. In July, a major programme of more than Euro 300 million in investments launched in 2003 was completed. It will reinforce the sustainability of the ISAB Refinery both economically, through its increased conversion capacity, and environmentally, through the reduction of air pollution and improved quality of gasoline and fuel oils in advance of EU regulations that will come into force in In August transition to the new Refinery structure was completed, reducing refining capacity from 380 thousand to 320 thousand barrels/day, through a reduction in marginal processing. This finalised the productive integration of the Impianti Sud and Impianti Nord plants, which comprise a single refining complex with a vast range of conversion plants (catalytic cracking, thermal cracking, visbreaking, hydrocracking, deasphalting), vacuum distillation and treatment of products. The Nelson complexity index has risen, with this new configuration, from 7.6 to 9.3. This value was determined with the assistance of the firm Shaw Stone & Webster. 13

14 Factors affecting the results of operations The economic results are affected by the price trends of petroleum products, both as regards absolute prices and in terms of their prices compared to crude oil prices, and by fluctuations in the Euro/USD exchange rate. The following table shows, for the periods indicated, the average price of some of the most important market indicators for both raw materials and products (USD/barrel) Brent crude oil price (1) Ural crude oil price (2) Brent - Ural differential (USD/tonne) Brent crude oil price Ural crude oil price Unleaded gasoline - Ural differential (3) Transport diesel - Ural differential (3) Gasoil 0.2% sulphur - Ural differential (3) Fuel oil-ural differential (3) (167) (164) (148) Gasoline - fuel oil differential Gasoil 0.2% sulphur - fuel oil differential Transport diesel - gasoil 0.2% sulphur differential Price ratio gasoil 0.2% sulphur - fuel oil Exchange rate Euro/USD Source: Platt s (1) benchmark light crude oil, on a mean FOB basis (2) benchmark heavy crude oil, on a mean CIF basis (3) on a high FOB Mediterranean basis Crude oil price: the average price for the raw material rose steadily throughout 2007 (up to record values close to USD 100/barrel), due to production caps imposed by OPEC, lower production in Nigeria and, above all, geopolitical tensions and major purchases by many investment funds on the paper market. The average price of Brent crude oil was USD 72.4/barrel, higher than the values reported in the same period of 2006 (+USD 7.3/barrel). Demand: global oil demand averaged 85.8 million barrels/day according to International Energy Agency (IEA) reports, up by 1.0 million barrels/day from the same period in The growth in demand is mainly attributable to non-oecd Asian countries. 14

15 Supply: OPEC continued its policy of capping production, which was aimed more at balancing actual demand (and thus limiting stocks) rather than directly controlling prices. Annual average production was 35.4 million barrels/day (this figure includes condensates and excludes Ecuador, which joined OPEC in December 2007), down by about 0.3 from the 2006 average. There was a growth in the output of non-opec countries, with production of 50.1 million barrels/day, up by about 0.4 million from the 2006 average. Inventories: there was consequently a reduction in global inventory levels (crude oil and petroleum products) during the year, although they remained in line with the average level reported over the past five years. Brent-Ural differential: the Brent-Ural differential averaged approximately USD 2.9/barrel in 2007, down by USD 1.3/barrel from the 2006 average. The reduction stemmed largely from the strong demand for fuel oil and the consequent increase in the intrinsic value of Ural crude with respect to Brent, and from the lower volumes exported by OPEC. Products: especially during the spring, the 2007 financial year was characterised by a significant increase in gasoline prices, resulting from low stocks and protracted maintenance work at numerous United States refineries. The differential between gasoline and fuel oil was thus slightly higher than the average for Price trends for medium and heavy distillates were substantially in line with 2006, while they strengthened for fuel oils. Industry refining margins: industry refining margins in 2007 were largely the same as the values reported in EMC notional refinery margins In 2007 EMC (Energy Market Consultants) expanded the assessment of its published notional margins. In particular, referring to the Mediterranean area, it also introduced quotations with FOB values of products obtained from the yields of Ural and Azeri Light crudes. In order to better represent the profitability of its ISAB refinery, ERG decided to adopt the EMC margin at FOB yields as its new notional benchmark, obtained with a mix of 50% of the two crudes indicated above. Compared with the previous benchmark, the new benchmark: envisages a slate of raw materials with an API grade that is more representative than what is actually processed in the Mediterranean area and by ISAB; measures the yields in finished products with FOB prices, as is typically done for coastal refineries such as ISAB. However, this new benchmark continues to offer the advantage of being based on typical crudes of the Mediterranean spot market, which are also particularly liquid. The EMC notional margin continues to refer to a complex refinery characterised by catalytic conversions dedicated to the production of gasoline (Fluid Catalytic Cracking plant). 15

16 The following table illustrates the refining margins defined above for the periods indicated: Topping + Reforming USD/barrel (2.86) (3.31) (1.55) Cracking Upgrading USD/barrel Combined cycle USD/barrel Euro/barrel (1) (1) average Euro/USD exchange rate used for each period: 1.370, and ERG Coastal Refining unitary contribution margins at replacement cost The unitary contribution margins at replacement cost (1), which are deemed more representative of refining profitability, are reported starting from The contribution margins are lower than the refining margins illustrated in the previous reports (USD 5.19/barrel in 2006 and USD 6.32/barrel in 2005) since they are expressed net of variable production costs (mainly costs for utilities) USD/barrel (2) Euro/barrel (3) Euro/tonne (4) (1) unitary gross margins at replacement cost derive from the difference between current costs and revenues of products sold (2) calculated on total own account and third-party processing (3) average Euro/USD exchange rate used for the different periods: 1.370, and (4) barrel/tonne conversion factor of 7.297, and in the respective periods The unitary contribution margins in Euro/barrel for 2007 are higher than in 2006 notwithstanding the negative impact of appreciation of the Euro against the dollar and the lower profitability of sales of feedstock to ISAB Energy. These sales were penalised in comparison with the previous year by appreciation in the price of fuel oil and the reduction in feedstock price following revision of the avoided fuel cost by the Italian Electricity and Gas Authority. These higher margins resulted both from the following positive effects in 2007: the profitability of the new gasoil desulphurisation plant, the new catalytic cracking loading plant, and the new refinery structure; the general improvement in plant performance; termination of the processing agreement with ENI; 16

17 and a series of negative events that occurred in 2006: bad weather and the electrical blackout that occurred in the first quarter of 2006, which penalised the costs for demurrage and plant performance; less profitable processing due to the costs caused by the incident on 30 April 2006 at the Impianti Nord; the programmed shutdown of the Impianti Sud in the second quarter of 2006, which prevented exploitation of the significant improvement in the scenario during May and June 2006; the electrical blackout that occurred on 17 July The improved unitary margin of ERG from the EMC notional margin calculated as described above is due to a steady increase in the conversion capacity of the ISAB refinery following realisation of the strategic investment plan undertaken in Procurement ERG Raffinerie Mediterranee meets its raw material requirements mainly by purchasing directly from crude-oil producing countries, with which it has established long-term relationships. Structurally, most of its demand is covered by agreements, which although they guarantee supplies, have prices that vary in line with the international market trend. These agreements also normally provide for the option to cancel or reduce the periodical supplies. In 2007 raw materials were procured from the following areas: the Black Sea 39% (43% in 2006), North Africa 27% (23%), Persian Gulf 23% (23%), others 11% (11%), of which 6% West Africa (3%). The reduction in supplies from the Black Sea and the increase in supplies from North Africa (essentially Libya) reflect the higher profitability of the latter crude oils and processing on the Group s own account of Buattifel following termination of the processing contract with ENI. 17

18 Processing The following table shows the breakdown of volumes processed by refinery: (thousand tonnes) Processing Own account processing (1) 16,631 14,126 16,274 Processing on behalf of third parties 1,401 1,934 TOTAL PROCESSING 16,631 15,528 18,208 (1) raw materials and topping-fed semi-finished products The higher level of processing in 2007 reflects the general programmed shutdown of the ISAB Impianti Sud Refinery and the incident at the Impianti Nord in The impact of these events more than offset the lower level of processing resulting from economic choices dictated by the lower profitability of topping crude oil (also carried out with marginal processing in 2006), the lower cost of processing residue (which saturates the capacity of conversion plants, with less topping) and the new Refinery structure, which was completed in August Notwithstanding the higher volumes of residue processing, the API grade in 2007 (32.3) was slightly higher than in 2006 (31.9), mainly on account of increased processing of light crudes from Libya. 18

19 Production The following table shows the breakdown of own account processing by product type: (thousand tonnes) Raw materials Crude oil (1) 14, % 12, % 15, % Residues and semi-finished products 1, % % % Total processing (1) 16, % 14, % 16, % Blending additives Total raw materials (1) 17,173 15,222 17,417 Production LPG % % % Naphtha % % % Gasoline 2, % 2, % 2, % Jet fuel % % % Diesel 7, % 6, % 7, % Vacuum diesel % % % Fuel oil 2, % 2, % 3, % Fuel gas % % % Bitumen (2) % % % Sulphur % % % Other petrochemical products % % % Total production 16, % 14, % 16, % Consumption and losses (1) raw materials and topping-fed semi-finished products (2) asphalt for ISAB Energy s IGCC plant The improvement in light distillate and diesel yields from 2006 reflects the change in configuration completed in August 2007, completion of the plan of investments undertaken in 2003 and the costs resulting from events that took place in The yield of fuel oil in 2007 was also impacted by plant work and was lower than in 2006 despite the lower production of asphalt following the general programmed shutdown of the ISAB Energy IGCC plant. The lower yield of jet fuel stemmed principally from the higher quantity of residue processed. 19

20 Summary of the main results Revenues were higher in 2007 than in 2006 mainly in consequence of higher sale volumes and partly due to higher prices in Euro. EBITDA was lower than in 2006 despite the higher unitary contribution margin, basically associated with the better performance in The reasons for this negative change are connected with the impact of the insurance reimbursement paid for 2006 (and not included in the unitary contribution margin for 2006) following the incident at the Impianti Nord that occurred during a period characterised by higher refining margins compared to the average margins during the year. Investments In 2007, ERG Raffinerie Mediterranee made investments of Euro million (Euro million in 2006), of which Euro 1.7 million for intangible fixed assets (Euro 6.0 million in 2006) and Euro million for tangible fixed assets (Euro million in 2006). The following table shows a breakdown of the investments by type: (million Euro) Development Capacity maintenance Safety and environment Information technology Other TOTAL In July 2007, the plant to provide hydrotreatment of feedstock for the catalytic cracker facility came on stream, completing the major investment programme undertaken in The start-up of this plant, together with integration of the two production sites (Impianti Nord and Impianti Sud) and operation of the new gasoil desulphurisation plant, made it possible to increase the conversion and production of low-sulphur gasoline and diesel (50 and 10 ppm sulphur content) at the ISAB Refinery. Work continued on the projects envisaged in the ISAB Refinery development plan with a view to improving its performance in terms of safety, reliability and profitability. 20

21 Risk management ERG identifies and evaluates all types of risk associated with the Group s activities, adopting appropriate methods of risk management, in order to optimise the management of risks (elimination, reduction, transfer) and safeguard shareholder value. ERG s objective is to minimise the risks observed, which mostly come under the following categories: financial, credit, liquidity and operating risks. Within the scope of the guidelines established in the Group Policy, the phases and principles governing this activity envisage a Risk Management function, to measure and monitor risk exposure levels in keeping with defined objectives. In managing financial risks, the ERG Group uses financial derivatives such as Options, Forwards and Swaps, solely for hedging purposes and without assuming any speculative positions, in accordance with its industrial business philosophy. For greater detail on the derivatives used by ERG Raffinerie Mediterranee, reference is made to the relevant comment in the Explanatory Notes to the Financial Statements. Health, Safety, Environment and Quality Sustainability ERG has commenced activities to define the Group s sustainability commitments taking into account the requests made by relevant stakeholders and the creation of economic value that is sustainable over time in relation to its plan for future investments. This has prompted integration of economic and financial objectives with social and environmental objectives, which are summarised and illustrated in the Group s Sustainability Report. This new communication and, above all, management tool will, particularly in perspective terms, replace and expand on the HSE Report which, for the past eight years, has been one of the principal tools for reporting on the social responsibility of ERG. Safety ERG has launched a multi-year Prevention Project with a view to enhancing awareness and involvement at all organisational levels on the issues of risk prevention and management. The aim of these initiatives is to achieve zero accident level. This programme flanks and complements development of the Health and Safety Management Systems in operation at the Group s industrial sites. Safety management and certification systems The programme for certification of ERG s industrial sites was consolidated during 2007, consistently with the Group HSE Guidelines for the implementation of effective Management Systems designed to minimise impact and optimise prevention activities. 21

22 ERG Raffinerie Mediterranee sites have obtained ISO environmental certification. In addition, the project has been launched for OHSAS certification of occupational health and safety, scheduled for Environmental characterisation and clean-up of industrial sites The matter of sub-soil pollution has continued to be one of the focal points of prevention and mitigation activities, particularly in the Priolo industrial area, which has been declared a site of national interest by the Ministry for the Environment and Territorial and Marine Protection and has been given special attention as regards characterisation and clean-up. These activities are all-important in relation to the construction of new plants and modification of existing assets. Emissions Trading In December 2006 the Italian Government submitted to the European Commission its National Allocation Plan (NAP) for the assignment of CO 2 quotas to individual industrial sites during the period Following assessment by the Commission, it was updated in December 2007 and the Draft assignment decision (Schema di decisione di assegnazione) was drawn up. With respect to what had already been done in the past and in keeping with current investment objectives, ERG Med updated its reporting protocols in line with international best practices. ERG s industrial sites had their 2006 CO 2 emissions certified by an accredited independent organisation, as required by European guidelines. The protocol and the operating procedures are an integral part of the ERG Management System for application of the Emissions Trading Directive. The system also defines responsibilities for compliance with obligations vis-à-vis the authorities, how CO 2 is to be valorised in programming and planning activities, emissions optimisation, and the hedging of risks using quota trading operations and/or financial instruments. In June 2006 ERG decided to participate in the Italian Carbon Fund set up by the Italian Ministry for the Environment in agreement with the World Bank. The Fund s objective is to purchase on the market low-cost credits coming from so-called CDM (Clean Development Mechanism) projects. This is a tool introduced by the Kyoto Protocol to obtain credits, which can be spent as part of the emissions trading system, while financing projects to reduce greenhouse gas emissions in developing countries. 22

23 Health ERG Med has a constant commitment to local communities, and especially to protection of their health and general development of a health-conscious culture. In this respect, the activities relating to the voluntary Health Prevention project in the Priolo area is worthy of special mention. A series of broad spectrum initiatives for the prevention of pathologies occurring in the local area according to Health Ministry and/or World Health Organisation assessments have been carried out. The programme consists of clinical and instrumental diagnosis, information, and health education. In 2007 these activities were extended to the entire Group. Product quality In the field of product quality, the most important activities concerned the increase of capacity to produce fuels with lower environmental impact, particularly in terms of sulphur content (no more than 10 mg/kg). ERG also promotes the development and use of biofuels which, over the next few years, in accordance with the specific European and national programme, are to become a source of energy. ERG Med is evaluating a series of opportunities in this regard, including the realisation of production plants at its own industrial sites. Human resources Organisation As at 31 December 2007, ERG Raffinerie Mediterranee had a total headcount of 1,214 (29 executives, 139 middle management (quadri), 516 clerical staff and 530 blue-collar employees). ERG Raffinerie Mediterranee S.p.A. completed implementation of the 2003 Business Plan with the start-up of CR plants (pre-treatment of FCC feedstock and ancillary plants), permanent shutdown of the CR plants (topping, reformer, visbreaker and sulphur) and placement of CR 26 (vacuum) in stand-by. At the same time, it was possible to reorganise and improve the efficiency of different business units, resulting in over 80 terminations of employees (through consensual termination of the relevant employment relationships, 65 of which as at 31 December 2007) net of turnover. These actions led to a reduction in the average age of employees to 43 and took the percentage of employees with university degrees to over 20%. Upon completion of the strategic investment and plant integration phase, it was necessary to launch a new strategic phase which, while continuing to comply with the most stringent conditions and procedures for protection of safety, health and the environment, will focus on improving the plant reliability, performance and overall efficiency of the Refinery. 23

24 Certain organisational changes were defined for this purpose, with the aim of: reducing hierarchical levels; creating a single control centre for the setting and monitoring of objectives. More specifically, the Refinery Division will report directly to the Managing Director and will assume responsibility in addition to the activities hitherto managed also for the Development and Construction and Personnel Management and Industrial Relations activities. The Planning and Control Division (renamed the Planning, Programming and Control Division) in addition to the activities previously managed will also incorporate Programming activities. Development ERG Raffinerie Mediterranee, during 2007, undertook a human resources development plan to implement the Managerial Development project defined and launched in 2006 in concert with the Holding Company. Intensive training activities were developed with a view to creating a common managerial culture amongst Group companies, actively involving the company s top and middle management. Industrial relations Major labour union agreements were reached in 2007, completing the organisational streamlining agreements stemming from the 2003 Business Plan and the 2005 Supplementary Company Agreement, in the following areas: Fire prevention, Laboratory, Shipments and Blending. 24

25 Summary of Financial Statements Income Statement (thousand Euro) Revenues from ordinary operations (1) 7,143,028 6,117,763 6,331,091 Other revenues and income 21, ,918 52,535 TOTAL REVENUES 7,164,771 6,240,681 6,383,626 Purchase expenses (1) (6,554,619) (5,626,118) (5,750,142) Changes in inventory 90,707 17, ,764 Services and other operating costs (497,596) (403,867) (370,700) Personnel expenses (85,377) (83,031) (80,951) EBITDA (2) 117, , ,598 Amortisation, depreciation and write-downs (57,314) (39,068) (44,528) EBIT 60, , ,070 Net financial income (expenses) (3,750) (8,333) 23,392 Net income (loss) from equity investments PROFIT (LOSS) FROM ORDINARY OPERATIONS 56,881 97, ,462 Net extraordinary income (expenses) PROFIT (LOSS) BEFORE TAXES 56,881 97, ,462 Income taxes (28,013) (7,373) (116,284) NET PROFIT (LOSS) FOR THE YEAR 28,868 90, ,178 (1) net of excise duties and forward dealings on crude oil and products (2) starting from the 2007 financial year, commercial foreign exchange differences are classified under financial income and expenses. The 2006 and 2005 values have been aligned for comparative purposes Revenues from ordinary operations (thousand Euro) Revenues from sales and services 7,185,996 6,162,610 6,354,641 Income from forward dealings on crude oil and products (38,562) (39,342) (16,947) Excise duties (4,405) (5,505) (6,603) TOTAL 7,143,028 6,117,763 6,331,091 Revenues from sales mainly consist of revenues from the sale of petroleum products abroad and in the domestic market via the cargo channel. Revenues from services derive principally from arbitrage 25

26 transactions on crude oil and products and general and auxiliary refining services provided to Polimeri Europa. The income from forward dealings on crude oil and products, amounting to Euro 38.6 million, is shown in the reclassified Income Statement as an adjustment of purchase expenses. Other revenues and income Other revenues and income comprise above all charges to ERG Petroli and third parties for compulsory stocks, the recovery of costs, especially for vetting, and the sale of demineralised water to associated company ERG Power & Gas. Purchase expenses (thousand Euro) Raw, ancillary and consumable materials and goods 6,545,843 5,633,544 5,749,238 Excise duties (4,405) (5,505) (6,603) Forward dealings on crude oil and products 14,250 (77) 11,358 Direct costs of internal production (1,068) (1,845) (3,852) TOTAL 6,554,619 5,626,118 5,750,142 Purchase expenses mainly relate to purchases of crude oil and other semi-finished products and also include transport costs and ancillary charges. Income from forward dealings on crude oil and products is reclassified under this item. The increase in purchase expenses is due to the greater quantities purchased and higher market prices. Changes in inventory (thousand Euro) Changes in inventories of raw materials 16,786 (64,485) 139,279 Changes in inventories of finished products 73,921 81,801 (13,515) TOTAL 90,707 17, ,764 The values of raw materials and finished product inventories were determined by applying the LIFO (Last In - First Out) method with annual reviews. The quantity of raw materials as at 31 December 2007 amounted to 743 thousand tonnes, while finished products totalled 1,061 thousand tonnes. Compared with 2006, there was an increase in raw materials of 5 thousand tonnes and an increase in finished products of 174 thousand tonnes. 26

27 Services and other operating costs Service costs relate to the supply of electricity, steam and other utilities by ERG Power & Gas, utilities and supplies, maintenance & repair costs, and, to a lesser extent, insurance, operating expenses from affiliated companies, consulting services and transport costs. The increase from the previous year is mainly connected with the purchase of methane for the Turbogas plant, the increase in costs for the supply of electricity and utilities by affiliated companies, the increase in charges on crude oil arbitrage transactions and higher consumption of catalysts. Other operating costs consist of provisions for cyclical maintenance of plants, other provisions for risks, taxes other than income taxes, software fees and rental expenses. Personnel expenses The increase in personnel expenses is mainly attributable to the higher costs resulting from leaving incentives. Amortisation, depreciation and write-downs During the year, Euro 2.4 million was allocated to the provision for amortisation of intangible fixed assets and Euro 54.6 million to the provision for depreciation of tangible fixed assets, while fixed assets were written down by Euro 0.2 million. Net financial income (expenses) This item includes financial interest income and expenses, as well as the balance of foreign exchange gains and losses (Euro -1.1 million). Extraordinary income (expenses) No extraordinary income or expenses were recorded during the period. Income taxes Income taxes for the year, amounting to Euro 28 million, include negative deferred and advanced taxes totalling Euro 20.5 million. The difference is made up of current taxes, amounting to Euro 7.6 million, and a positive balance of Euro 0.1 million in taxes from prior financial periods. 27

28 Balance Sheet (thousand Euro) 31/12/07 31/12/06 Fixed assets 822, ,092 Net working capital (104,833) 66,687 Staff leaving indemnities (18,601) (21,654) Other assets 120, ,340 Other liabilities (162,659) (97,264) NET INVESTED CAPITAL 657, ,201 Shareholders equity 620, ,153 Medium/long-term financial debt 183, ,000 Net short-term financial debt (available funds) (146,504) 109,049 SHAREHOLDERS EQUITY AND FINANCIAL DEBT 657, ,201 At 31 December 2007 net invested capital totalled Euro million, approximately Euro million less than in the previous financial year, caused principally by higher trade payable exposures and the reduction in other assets due to the proceeds of the insurance reibursement for the 2006 fire. Fixed assets (thousand Euro) 31/12/07 31/12/06 Intangible fixed assets 3,771 6,831 Tangible fixed assets 816, ,305 Equity investments and financial fixed assets 2,797 3,956 TOTAL 822, ,092 Fixed assets comprise intangible, tangible, and financial fixed assets, including investments and divestments carried out during the year, net of amortisation and depreciation. The increase in tangible fixed assets is mainly due to investments carried out for approximately Euro million, net of depreciation for the year amounting to Euro 54.6 million. The decrease in intangible fixed assets is tied principally to amortisation charges for the financial year. Equity investments and financial fixed assets particularly concern the loan granted to ISAB Energy. 28

29 Net working capital (thousand Euro) 31/12/07 31/12/06 Inventory 450, ,201 Trade receivables 235, ,199 Trade payables (790,988) (622,390) Excise duties payable to tax authorities (85) (323) TOTAL (104,833) 66,687 The inventory value increased by approximately Euro 90.7 million from the previous year, mainly due to the higher stocks of finished products. Trade receivables, which primarily comprise receivables for the sale of petroleum products and the provision of services, show a decrease of Euro 93.9 million due to lower sales of petroleum products during the final months of the financial year. Trade payables refer to amounts due for the purchase of raw materials and services. The increase of Euro million is mainly ascribable to major purchases of raw materials during the month of December. Other assets (thousand Euro) 31/12/07 31/12/06 Short-term tax receivables 14,982 12,486 Other short-term receivables 42, ,705 Accrued income and prepaid expenses 33,520 35,827 Medium/long-term tax receivables 29,747 29,323 TOTAL 120, ,340 Tax receivables mainly concern the advance tax credit. The increase over the previous year was due to the IRAP (regional tax) receivable. Other short-term receivables mainly comprise the IRES (corporation tax) credit from the controlling company San Quirico, within the scope of Group tax consolidation. Accrued income and prepaid expenses consist of the unutilised portion of the catalyser refining process in use at the ISAB refineries, considering effective consumption during the year and the value of the precious metals contained in the catalysers. 29

30 Other liabilities (thousand Euro) 31/12/07 31/12/06 Short-term tax payables 27,453 6,100 Other short-term payables 30,624 27,403 Short-term deferred income and accrued expenses 7,683 2,676 Provision for deferred taxes 43,659 24,397 Other provisions for liabilities and charges 42,493 29,898 Medium/long-term deferred income and accrued expenses 10,747 6,791 TOTAL 162,659 97,264 The increase in short-term tax payables is due to the VAT payable on imports. The provision for deferred taxes increased following accruals for the financial year, mainly as a result of fiscal amortisation and depreciation. Net financial debt The following table shows the medium/long-term financial debt: (thousand Euro) 31/12/07 31/12/06 Medium/long-term bank borrowings 20,000 20,000 Medium/long-term Group company financial payables 163, ,000 TOTAL 183, ,000 At 31 December 2007, the Euro 11.4 million decrease in medium/long-term financial debt stemmed from the due date for the first instalment of the EIB loan, to be paid to the controlling company, scheduled for 15 December The breakdown of net short-term financial liquidity shows the following: (thousand Euro) 31/12/07 31/12/06 Short-term bank borrowings 6, ,685 Other short-term financial payables 13,119 6,115 Short-term financial liabilities 19, ,800 Cash and cash equivalents (4,781) (5,220) Other short-term financial receivables (161,662) (140,532) Short-term financial assets (166,442) (145,752) TOTAL (146,504) 109,049 30

31 Short-term bank borrowings decreased by approximately Euro million, insofar as the financial need for recourse to hot money no longer existed. Other financial payables concern the first instalment due in December 2008 and the amount of interest accrued on the medium/long-term loan granted by the Parent Company. Cash and cash equivalents refer to temporary liquidity at year-end. Other short-term financial receivables refer to cash and cash equivalents on the centralised current account within the scope of Group treasury management, and the interest income accruing thereon. Analysis of the change in net financial debt during the period considered shows the following: (thousand Euro) Cash flow from operations Cash flow from current operations 116,267 58, ,043 Changes in operating assets and liabilities 304,666 (268,729) 128,458 TOTAL 420,934 (210,546) 339,501 Cash flow from investments Investments (122,248) (205,597) (197,611) Divestments 4,296 22,248 7,238 TOTAL (117,952) (183,348) (190,373) Cash flow from shareholders equity Dividends paid (36,000) TOTAL (36,000) CHANGES IN NET FINANCIAL DEBT 266,982 (393,894) 149,128 NET FINANCIAL DEBT AT BEGINNING OF THE YEAR 304,048 (89,845) 59,283 CHANGE IN DEBT DURING THE YEAR (266,982) 393,894 (149,128) NET FINANCIAL DEBT (NET AVAILABLE FUNDS) AT YEAR-END 37, ,048 (89,845) Cash flows during 2006 were negatively impacted by extraordinary events. For a detailed analysis of investments made in 2007, reference should be made to the relevant section shown on earlier pages. 31

32 Notes on the operations of principal subsidiaries and associated companies Dynergy S.r.l. The company, established in July 2001 and in which ERG Raffinerie Mediterranee owns a 37.5% interest, is active in technical and commercial consulting services for companies in the petroleum and petrochemical industry. The company s financial year closed on 30 June 2007 with a net profit of Euro 0.2 million. Priolo Servizi S.c.a.r.l. The company, incorporated on 15 December 2006, is owned 37.8% by ERG Raffinerie Mediterranee and 21.5% by ERG Nuove Centrali. It will start operations in 2008 in the sector of auxiliary plant services for companies at the Priolo petrochemical complex. Relations with subsidiary, associated, affiliated companies and other related parties As required by the relevant CONSOB communications, the main transactions between the Company and the businesses forming part of the ERG Group are summarised below. All transactions are regulated at market conditions. The Company charged the Parent Company ERG S.p.A. for the cost of personnel seconded for staff activities, while it received charges for services provided in connection with administrative, personnel organisation, information technology, legal, planning and control and office rental services. The Company sold petroleum products to affiliated company ERG Petroli S.p.A. via the overland and cargo channels. It also charged for services rendered by commercial personnel and those relating to the management of compulsory stocks. Charges received included those related to ancillary product selling costs. The Company sold fuel oil, electricity, steam and demineralised water to affiliated company ERG Power & Gas S.p.A., and provided services relating to the pumping of seawater and compressed air, while it received supplies of steam, electricity and other utilities. Affiliated company ERG Nuove Centrali S.p.A. was charged for services provided and sales of generic spare parts for plants. On the other hand, services were received under the Operation & Maintenance agreement. Affiliated company ISAB Energy S.r.l. was charged for the sale of feedstock, gasoil, steam, other utilities and sundry services. Charges were received from such company for the purchase of minor products such as heat, steam, seawater and other services. 32

33 Affiliated company ISAB Energy Services S.r.l. was provided with seawater pumping and other services. Operation & Maintenance services were received. We lastly report that, for a three-year period starting from 2006, ERG Raffinerie Mediterranee has accepted to participate in the tax consolidation of the parent company San Quirico S.p.A. Revenues Expenses Sales Other Financial Purchases Other Financial (thousand Euro) services income expenses expenses Parent companies ERG S.p.A ,141 10,569 8,892 Affiliated companies ERG Petroli S.p.A. 827,425 9, ERG Nuove Centrali S.p.A. 39 6, ,992 ERG Power & Gas S.p.A. 215,406 14, ,531 ISAB Energy S.r.l. 130,955 1,572 4,005 13,269 ISAB Energy Services S.r.l. 2,584 4,146 Associated companies Dynergy S.r.l Priolo Servizi S.c.a.r.l Receivables Payables (thousand Euro) Trade Other Financial Trade Other Financial Parent companies ERG S.p.A , , ,690 San Quirico S.p.A. 31,352 Affiliated companies ERG Petroli S.p.A. 12, ERG Nuove Centrali S.p.A. 4, ERG Power & Gas S.p.A. 83,360 73,141 ISAB Energy S.r.l. 2,415 2,252 5,495 ISAB Energy Services S.r.l Associated companies Dynergy S.r.l Priolo Servizi S.c.a.r.l

34 Management and coordination activities performed by ERG S.p.A. Our Company is subject to management and coordination by ERG S.p.A. This activity concerns, inter alia: definition of business strategies; indication of strategic guidelines for organisational aspects and personnel policies at a macro level; strategic finance and Group treasury management; management of tax-related issues, especially as regards planning; management of communication policies and institutional relations; management of environmental, health and safety policies; centralised management of information systems; definition of risk management policies; centralised management of corporate obligations; legal support for the most significant transactions (Special Projects); definition of common policies for internal audit and corporate security; definition of guidelines for the preparation of financial statements; management of non-oil purchases. Particular mention should be made of the following decisions taken within the scope of ERG S.p.A. s management and coordination: multi-year supply contract for the Priolo Gargallo site; non-oil contracts; catalyst purchase agreement. Privacy Security Policy Document In 2007 the ERG Group duly updated its Security Policy Document. Treasury shares The Company does not hold any treasury shares. Branch offices ERG Raffinerie Mediterranee S.p.A. has its registered office in Priolo Gargallo (Syracuse) and offices in Genoa. 34

35 Significant events occurring after the end of the financial year On 23 January the Council of State published its decision accepting the arguments put forward by the Italian Electricity and Gas Authority (AEEG) and rejecting the reasoning previously set out in the Lombardy TAR judgment of By way of of this decision, AEEG Resolution 249/2006, which lays down new rules for calculating the CIP 6 Avoided Fuel Cost tariff component, became enforceable again already as from The economic effects of this decision, pertaining to 2007, caused lower revenues on the sales of feedstock (raw material) to associated company ISAB Energy. The ERG Group will consider the actions it may take in future, including through relevant business associations, in order to protect its legitimate interests. Business outlook The business outlook for the principal operating indicators is illustrated as follows: Oil demand: in 2008 oil demand is expected to reach an average of 87.8 million barrels/day (source: IEA). The increase over 2007 should be approximately 2.3%, equivalent to around 2.0 million barrels/day, mainly attributable to the non-oecd area. Oil supply: the output of non-opec countries (excluding Angola and Ecuador, which have joined OPEC) in 2008 should continue to increase, contributing towards meeting the expected growth in global demand. The simultaneous rise expected in OPEC production capacity should permit an increase in reserve capacity. Crude oil price: the expected increase in OPEC and non-opec production capacity should, in a stable geopolitical and financial scenario, permit a steady reduction in the annual average crude oil quotations from the extremely high levels reached at the end of 2007 and beginning of Brent-Ural differential: the Brent-Ural differential should remain substantially in line or slightly above the average for Refining margins: the continued strong demand for light and middle distillates suggests that margins should remain in line with the average recorded in recent financial years. In this context, the contribution for the entire year of investments in the new refinery configuration and postponement until 2009 of the shutdown that was initially scheduled for 2008, following early achievement of the objective to switch to general shutdowns according to a four-year cycle, offer the promise of improved economic performance. 35

36 Shareholders, We close this report by inviting you to: approve the financial statements of your Company for the period ended 31 December 2007, which closes with a net profit of Euro 28,867,766.92; allocate the amount of Euro 842, to the Reserve for foreign exchange gains by using the net profit for the year; distribute profits totalling Euro 100,000, by payment of a dividend of Euro per share, by using the remaining net profit for the year of Euro 28,024,932.58, considering that the Legal reserve has reached one-fifth of Share capital, and by using Retained earnings in the amount of Euro 71,975,067.42; restrict Euro 25,000, of Retained earnings to cover the investments financed by grants payable pursuant to Law 488/92 pending completion of Project , which is scheduled for Genoa, 7 March 2008 On behalf of the Board of Directors The Chairman Aldo Garozzo 36 board of directors proposal

37 erg raffinerie mediterranee s.p.a. annual report for the year ended 31 december 2007 statutory financial statements

38 The ERG Raffinerie Mediterranee S.p.A. Ordinary Shareholders Meeting is convened in Genoa, at Via De Marini 1, on 23 April 2008 at a.m., in first call, and, if necessary, on 24 April 2008, same time and place, in second call, to discuss and resolve on the following Agenda 1. Financial Statements as at 31 December 2007, Directors Report on Operations, Report of the Board of Statutory Auditors and resolutions pertaining thereto. 2. Appointment of the members of the Board of Statutory Auditors; appointment of the Chairman; fixing of their remunerations. The meeting may also be held via teleconference or videoconference pursuant to Article 9 of the Articles of Association. Priolo Gargallo, 9 April 2008 The Chairman of the Board of Directors Aldo Garozzo 38 calling of the erg raffinerie mediterranee s.p.a. ordinary shareholders meeting

39 Extract On 23 April 2008 the Shareholders Meeting held in Genoa unanimously resolved: to approve the Financial Statements for the period ended 31 December 2007, which closes with a net profit of Euro 28,867,766.92, and related annexes, together with the Directors Report on Operations; to allocate the amount of Euro 842, to the Reserve for foreign exchange gains by using the net profit for the year; to distribute profits totalling Euro 100,000, by payment of a dividend of Euro per share, using the remaining net profit of Euro 28,024, bearing in mind that the Legal reserve has reached one fifth of Share capital, and using Retained earnings in the amount of Euro 71,975,067.42; to restrict Euro 25,000, of Retained earnings to cover the investments financed by grants payable pursuant to Law 488/92 pending completion of Project which is scheduled for 2008 to appoint the Board of Statutory Auditors in the persons of: Marcello Valenti, Chairman, Pierdomenico Rundo and Lelio Fornabaio, Standing Auditors. 39 resolutions of the shareholders meeting

40 (Euro) 31/12/ /12/2006 A) Due from shareholders, portion uncalled B) Fixed assets I. Intangible fixed assets 1) Start-up and expansion costs 27,969 2) Research, development and advertising expenses 3) Industrial patents and intellectual property rights 4) Concessions, licences, trademarks and similar rights 5) Goodwill 6) Fixed assets in progress and payments on account 435,221 3,818,217 7) Other 3,335,806 2,985,071 Total 3,771,027 6,831,257 II. Tangible fixed assets 1) Land and buildings 92,761,911 73,917,008 2) Plant and machinery 574,621, ,425,520 3) Industrial and commercial equipment 1,701, ,283 4) Other property, plant and equipment 2,575,349 2,564,598 5) Fixed assets under construction and payments on account 144,502, ,699,464 Total 816,162, III. Financial fixed assets 1) Equity investments in: a) Subsidiary companies b) Associated companies 237, ,030 c) Controlling companies d) Other companies 5,294 5, , ,195 of which within of which within 2) Receivables 12 months 12 months a) Due from subsidiary companies b) Due from associated companies c) Due from affiliated companies 900,869 2,252, ,869 3,153,042 d) Due from controlling companies e) Other receivables 301, ,457 2,553,859 3,809,499 3) Other securities 4) Treasury shares Total 2,797,115 3,955,694 TOTAL FIXED ASSETS (B) 822,730, ,091, balance sheet / assets

41 (Euro) 31/12/ /12/2006 C) Current Assets I. Inventory 1) Raw, ancillary and consumable materials 193,375, ,589,146 2) Work in progress and semi-finished products 3) Work in progress against orders 4) Finished products and goods for resale 257,532, ) Advances Total 450,907, ,200,777 of which beyond of which beyond II. Receivables 12 months 12 months 1) Due from customers 131,764, ,168,186 2) Due from subsidiary companies 3) Due from associated companies 35,771 4) Due from affiliated companies 103,365,037 91,945,743 5) Due from controlling companies 193,181, ,592,787 5 bis) Tax receivables 541,576 5,227,299 1,025,044 5 ter) Deferred tax assets 29,205,619 39,501,466 29,322,547 40,783,146 6) Other receivables 10,849, ,729,964 Total 483,924, ,244,870 III. Current financial assets 1) Equity investments in subsidiary companies 2) Equity investments in associated companies 3) Equity investments in controlling companies 4) Other equity investments 5) Treasury shares 6) Other securities Total IV. Cash and cash equivalents 1) Bank and postal deposits 4,732,319 5,166,414 2) Cheques 3) Cash and notes on hand 48,214 53,711 Total 4,780,533 5,220,125 TOTAL CURRENT ASSETS (C) 939,612,448 1,020,665,772 D) Accrued income and prepaid expenses - Accrued income 714,563 - Prepaid expenses 33,519,544 35,112,163 TOTAL ACCRUED INCOME AND PREPAID EXPENSES 33,519,544 35,826,726 TOTAL ASSETS 1,795,862,531 1,818,584,322 41

42 (Euro) 31/12/ /12/2006 A) Shareholders equity I. Share capital 25,000,000 25,000,000 II. Share premium reserve III. Revaluation reserves 52,635,063 52,635,063 IV. Legal reserve 5,000,000 5,000,000 V. Statutory reserves VI. Reserve for treasury shares in portfolio VII. Other reserves 1) extraordinary reserve 1 (2) 2) reserve pursuant to laws on further VAT deduction 1,030,353 1,030,353 3) reserve pursuant to Law 308/82 582, ,990 4) capital contributions 1,381,473 1,381,473 5) reserve for foreign exchange gains 1,379,398 6) tax realignment reserve pursuant to Law 266/05 136,955, ,955,220 VIII. Retained earnings (losses) 368,567, ,942,943 IX. Net profit (loss) for the year 28,867,767 90,245,415 TOTAL SHAREHOLDERS EQUITY (A) 620,020, ,152,853 B) Provisions for liabilities and charges 1) Provision for pensions and similar obligations 2) Income tax provision, including deferred taxes 43,659,385 24,397,270 3) Other provisions 42,492,679 29,897,868 TOTAL PROVISIONS FOR LIABILITIES AND CHARGES (B) 86,152,064 54,295,138 C) Staff leaving indemnities 18,600,606 21,653,826 of which beyond of which beyond D) Payables 12 months 12 months 1) Bonds 2) Convertible bonds 3) Due to shareholders for loans 163,571, ,690, ,000, ,114,878 4) Due to banks 20,000,000 26,819,306 20,000, ,685,095 5) Due to other lenders 6) Advances from customers 901 8,967,710 7) Trade payables 709,587, ,941,878 8) Notes payable 9) Due to subsidiary companies 10) Due to associated companies 43,944 53,904 11) Due to affiliated companies 80,553,761 54,005,679 12) Due to controlling companies 12,783,703 1,388,888 13) Tax payables 27,538,189 6,422,477 14) Due to social security institutions 4,541,640 4,185,555 15) Other payables 14,100,698 14,249,853 TOTAL PAYABLES (D) 1,052,659,426 1,106,015, balance sheet / liabilities

43 (Euro) 31/12/ /12/2006 E) Accrued expenses and deferred income - Accrued expenses 5,924,256 - Deferred income: - other deferred income 12,505,557 9,466,588 12,505,557 9,466,588 TOTAL ACCRUED EXPENSES AND DEFERRED INCOME (E) 18,429,813 9,466,588 TOTAL LIABILITIES 1,175,841,909 1,191,431,469 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 1,795,862,531 1,818,584,322 Memorandum accounts 1) Guarantees given: a) Sureties - on behalf of subsidiary and affiliated companies - on behalf of others 13,021,380 6,675,246 13,021,380 6,675,246 b) Endorsements c) Other unsecured guarantees d) Other secured guarantees 13,021,380 6,675,246 2) Other memorandum accounts: a) Third party assets 202,353, ,475,062 b) Commitments 3,904,585 2,906,806 c) Risks d) Other 95, ,257, ,477,311 TOTAL MEMORANDUM ACCOUNTS 219,279,

44 (Euro) A) Production value 1) Revenues from sales and services 7,185,995,728 6,162,610,082 6,354,641,443 2) Changes in inventories of work in progress, semi-finished and finished products 73,920,680 81,800,627 (13,514,831) 3) Changes in work in progress against orders 4) Increase in fixed assets under construction 1,067,980 1,844,634 3,852,208 5) Other revenues and income 21,743, ,917,746 52,534,719 TOTAL PRODUCTION VALUE (A) 7,282,727,574 6,369,173,089 6,397,513,539 B) Production costs 6) Raw, ancillary and consumable materials and goods (6,545,842,814) (5,633,543,590) (5,749,238,257) 7) Services (512,366,743) (407,529,450) (349,911,011) 8) Leases and rentals (3,260,561) (3,987,463) (4,304,508) 9) Personnel expenses: a) Salaries and wages (56,618,512) (57,200,584) (55,567,092) b) Social security expenses (17,294,624) (17,680,270) (17,304,353) c) Staff leaving indemnities (4,236,833) (4,033,946) (3,894,577) d) Pension and similar expenses e) Other expenses (7,227,374) (4,116,003) (4,184,923) (85,377,343) (83,030,803) (80,950,945) 10) Amortisation, depreciation and write-downs: a) Amortisation of intangible fixed assets (2,437,452) (2,414,452) (1,853,075) b) Depreciation of tangible fixed assets (54,640,273) (36,653,232) (42,675,121) c) Write-downs of other assets (236,145) d) Provision for bad debts (5,000,000) (57,313,870) (39,067,684) (49,528,196) 11) Changes in inventories of raw, ancillary and consumable materials and goods 16,786,222 (64,484,552) 139,278,938 12) Provisions for liabilities and charges (185,000) 13) Sundry provisions (16,974,584) (17,622,222) (24,909,288) 14) Other operating expenses (18,555,103) (13,624,157) (11,916,985) TOTAL PRODUCTION COSTS (B) (7,222,904,796) (6,263,074,921) (6,131,480,252) DIFFERENCE BETWEEN PRODUCTION VALUE AND COSTS 59,822, ,098, ,033, income statement

45 (Euro) C) Financial income and expenses 15) Income from equity investments: - from subsidiary companies - from associated companies 37,500 37,500 - from other companies - tax credit on dividends 37,500 37,500 16) Other financial income: a) From receivables included under fixed assets: - from subsidiary companies - from associated companies - from affiliated companies - from controlling companies - other 10,884 24,933 10,884 24,933 b) From securities included under fixed assets c) From securities included under current assets d) Income other than the above: - from subsidiary companies - from associated companies - from affiliated companies 30,458 15,969 - from controlling companies 6,141,498 5,386,679 3,757,906 - other 9,228,339 27,776,525 15,707,732 15,369,837 33,193,662 19,481,607 15,369,837 33,204,546 19,506,540 17) Interest and other financial expenses paid to: - subsidiary companies - associated companies - affiliated companies (4,656) (55,327) - controlling companies (8,892,304) (6,615,875) (3,207,144) - other (8,426,416) (14,954,014) (4,549,190) (17,318,720) (21,574,545) (7,811,661) 17bis) Foreign exchange gains and losses: - foreign exchange gains 88,603,245 75,087,657 97,598,115 - foreign exchange losses (89,654,782) (95,234,951) (88,864,371) (1,051,537) (20,147,294) 8,733,744 TOTAL FINANCIAL INCOME AND EXPENSES (C) (2,962,920) (8,479,793) 20,428,623 45

46 (Euro) D) Value adjustments to financial assets 18) Revaluations: a) of equity investments 21,332 b) of financial fixed assets c) of securities included under current assets 21,332 19) Write-downs: a) of equity investments b) of financial fixed assets c) of securities included under current assets TOTAL VALUE ADJUSTMENTS TO FINANCIAL ASSETS (D) 21,332 E) Extraordinary income and expenses 20) Extraordinary income - gains on disposals - non-recurring income - sundries ) Extraordinary expenses - losses on disposals - taxes from prior years - non-recurring charges - sundries TOTAL EXTRAORDINARY INCOME AND EXPENSES (E) 1 1 PROFIT (LOSS) BEFORE TAXES 56,881,191 97,618, ,461,909 22) Current, deferred and advanced income taxes for the year (28,013,424) (7,372,961) (116,284,406) NET PROFIT (LOSS) FOR THE YEAR 28,867,767 90,245, ,177,503 46

47 Cash Flow Statement (thousand Euro ) Cash flow from operations (A) - Net profit (loss) for the year 28,868 90, ,178 - Amortisation, depreciation and write-downs 57,314 39,068 44,528 - Change in provisions for liabilities and charges 12,595 1,142 8,641 - Change in deferred tax liabilities 19,262 (43,880) 1,898 - Change in deferred tax assets 1,282 (13,127) (16,833) - Bad debt provision 5,000 - Net change in staff leaving indemnities (3,053) (1,697) (2,257) - Net capital gains and losses (13,568) (111) Cash flow from current operations 116,267 58, ,043 Changes in operating assets and liabilities - Inventory (90,707) (17,316) (125,764) - Trade receivables 93,867 (34,580) (121,731) - Trade payables 168,598 30, ,327 - Excise duties payable to tax authorities (238) Other assets 99,609 (152,883) 10,101 - Other liabilities 33,538 (94,561) 41, ,666 (268,729) 128,458 TOTAL 420,934 (210,546) 339,501 Cash flow from investments (B) - Investments in tangible fixed assets (120,447) (199,562) (196,236) - Investments in intangible fixed assets (1,661) (5,999) (1,336) - Investments in financial fixed assets (141) (35) (39) - Proceeds from disposal of tangible fixed assets 2,315 20,896 5,943 - Proceeds from disposal of intangible fixed assets Proceeds from disposal of financial fixed assets 1,300 1,352 1,295 TOTAL (117,952) (183,348) (190,373) Cash flow from financing activities (C) - New medium/long-term loans 20,000 95,000 - Repayments of medium/long-term loans (24,209) - Increase (decrease) in short-term bank borrowings (241,866) 214,469 25,436 - Increase (decrease) in short-term financial payables/receivables (14,127) 118,195 (249,791) - Increase (decrease) in medium/long-term financial payables/receivables (11,429) - Dividends distributed (36,000) TOTAL (303,421) 352,665 (153,564) NET CASH FLOW FOR THE YEAR (A+B+C) (439) (41,229) (4,436) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 5,220 46,450 50,885 NET CASH FLOW FOR THE YEAR (439) (41,229) (4,436) CASH AND CASH EQUIVALENTS AT YEAR-END 4,781 5,220 46, explanatory notes to accounts

48 The Company ERG Raffinerie Mediterranee operates in the sector of refining and sales of petroleum products in both the Italian and the international markets. The refineries are located in the town of Priolo Gargallo and came into existence as a result of the integration of the ISAB (ERG) and former AGIP (ENI) refineries, referred to respectively as ISAB Sud and ISAB Nord plants. Criteria for the preparation of the financial statements The financial statements at 31 December 2007 have been drawn up in compliance with the prevailing laws regulating their preparation, interpreted and supplemented according to the accounting standards issued by the Italian National Councils of Professional and Certified Public Accountants (Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri) and by the Italian Accounting Committee (Organismo Italiano di Contabilità). The financial statements comprise the Balance Sheet, Income Statement and Explanatory Notes, as well as the Directors Report on Operations. Comparative figures as at 31 December 2006 are given for all Balance Sheet items, while Income Statement data are compared with those of the last two financial years. The figures shown in the Balance Sheet and Income Statement have been rounded to the nearest Euro. Rounding differences have been recorded under extraordinary income and expenses as regards the Income Statement, and under shareholders equity reserves as regards the Balance Sheet. For the sake of clarity all amounts in the Explanatory Notes have been rounded to the nearest thousand Euro; the total amounts, in some tables, may therefore vary slightly from the sum of the figures they comprise. The financial statements as at 31 December 2007 have been audited by Reconta Ernst & Young S.p.A. Accounting policies and valuation criteria We specify below the accounting standards used and the valuation criteria applied in compliance, without any exceptions, with the requirements of Articles 2423 bis and 2426 of the Italian Civil Code. The valuation criteria adopted for the preparation of the financial statements at 31 December 2007 are the same as those used in the previous financial year. Intangible fixed assets Intangible fixed assets are recorded at purchase or production cost and are amortised on a straightline basis, according to their useful life, taking into account their residual possibility of utilisation. The purchase cost includes any directly attributable accessory costs, but excludes related financial charges. They are written-down as necessary when their full recoverability is not anticipated. In particular, the rates are obtained by applying the following criteria: start-up and expansion costs are amortised over a five-year period; 48

49 other intangible fixed assets include software, amortised over three years; improvements to third-party property, for which amortisation is calculated based on the future useful life of the costs incurred or the residual period of utilisation, whichever is shorter; technical feasibility studies, amortised over a five-year period. Tangible fixed assets Tangible fixed assets have been recognised at the values originating from the demerger from ERG Petroli S.p.A. of the ISAB Impianti Sud Refinery and from the transfer by ENI S.p.A. of the business division comprising the ISAB Impianti Nord Refinery, respectively assigned with effect from 1 October After that date the assets have been recognised at purchase or production cost and are stated taking account of revaluations carried out in accordance with the laws on monetary alignment or net of accumulated depreciation and write-downs. The positive revaluation balances have been credited to the item Revaluation reserve under shareholders equity. Revertible assets are depreciated over their estimated useful life or the duration of the concession, whichever period is shorter. Expansion, modernisation and conversion and incremental maintenance costs are capitalised and depreciated in relation to the useful life of the asset to which they refer. Non-incremental maintenance and repair costs are charged to the Income Statement. Capital gains and losses realised on the disposal or transfer of assets form part of the profit or loss for the financial year during which they arise. The depreciation rates applied, which meet the requirement of prudence and follow the depreciation schedule established according to the estimated residual life of each asset, are as listed below: Depreciation rate Percentage of depreciation at 31/12/07 Buildings 5.50% 32.46% Industrial buildings 6.18% 55.12% Light constructions 7.34% 73.71% Office equipment and furniture 12.00% 73.90% Cars 25.00% 54.58% Motor vehicles 20.00% 59.47% Specific plants for highly corrosive processing 7.05% 50.46% Specific plants for slightly corrosive processing 5.94% 53.05% Generic plants 6.58% 53.66% Tanks and piping 9.10% 54.75% Miscellaneous laboratory equipment and incidentals 19.40% 73.85% Electronic machines 20.00% 69.19% 49

50 The depreciation rates reflect the residual useful life of refinery facilities as determined in an independent appraisal carried out in the previous financial year. In order to more clearly represent the estimated residual life of individual components, for the buildings, plant and machinery, and industrial and commercial equipment categories the depreciation rate indicated is a weighted average of the depreciation rates attributed to each component. Financial fixed assets These include equity investments, financial receivables shown under fixed assets and other longterm investment receivables. Equity investments are recognised in the balance sheet at their acquisition or subscription cost or transfer value, written down to reflect impairments, if any. In cases where the book value of some equity investments exceeds the corresponding portion of shareholders equity based on the last approved financial statements, such value is maintained if attributable to the asset components of the investee companies (tangible fixed assets, inventory and/or goodwill). Equipment grants Equipment grants (contributi in conto impianti) are recorded when there is a formal resolution regarding payment and there is no longer anything to prevent the collection of same, and are discounted according to the duration of the investments, with a view to offsetting the economictechnical depreciation of the facilities in question. Inventory Raw materials and petroleum products are valued at the lower of cost, using the LIFO method with annual reviews, and current market value. Stocks of ancillary and consumable materials are valued at the lower of their weighted average cost and current market value. Receivables and payables Receivables are recorded at their estimated realisable value. Payables are recorded at their nominal value. Transactions in foreign currency carried out during the year are converted into Euro at the exchange rate on the day of the transaction and the difference between this value and the amount actually paid or received is charged to the Income Statement item Financial income and expenses, under foreign exchange gains and losses. Foreign exchange differences resulting from the adjustment of foreign exchange receivables and payables to year-end exchange rates, compared with the rate prevailing on the transaction date, are charged to the income statement. 50

51 Cash and cash equivalents These are considered at their nominal value. Accruals and deferrals Accrued income and prepaid expenses, accrued expenses and deferred income are recognised on an accrual basis, according to the period to which they refer, as specified by Article 2424 bis of the Italian Civil Code. Provisions for liabilities and charges Provisions for liabilities and charges are set up to cover specific liabilities that are definite or probable, the amount or date of occurrence of which is unknown at the close of the financial year. Staff leaving indemnities This item represents the liability accrued in favour of all employees, net of advances paid, determined in accordance with the dictates of Article 2120 of the Italian Civil Code and as set forth by current legislation and collective labour contracts in place at year-end. Following the coming into force of the provisions set forth in the 2007 Finance Law and relevant implementing decrees, while the amounts of staff leaving indemnities accrued at 31 December 2006 remain with the firm, the amounts accruing from 1 January 2007, according to the decision taken by the employee, must be allocated either to pension funds or to the treasury fund established at INPS (Italian National Social Security Institute). As regards the amounts paid by the firm to the treasury fund established at INPS, the firm remains obligated to disburse all leaving indemnity benefits to employees, including all advances envisaged by law. The aforesaid disbursements are made subject to right of recoupment out of the contributions owed to the treasury fund or other Entities. Derivative contracts To cover the risk of variations in exchange rates and market prices, the Company enters into derivative contracts to hedge specific transactions or net exposures. The premiums or discounts are charged to the Income Statement for the relevant period based on the duration of the hedge; profits and losses are classified to match the nature of the risk associated with the transaction to which they refer. Forward foreign exchange contracts are recorded in the Income Statement as the difference between the contractual value at the end of the financial year and the value determined at the forward exchange rate. Moreover, as required by Article 2427 bis of the Italian Civil Code, the Explanatory Notes provide specific information regarding the fair value of the derivative instruments and their size and nature. 51

52 Memorandum accounts Sureties given are recorded at their commitment value. The commitments that do not refer to ordinary operations are recorded based on the contracts entered into with suppliers and customers. Forward deals on crude oil and petroleum products are only recorded in cases where the commitment to exchange the difference between forward purchase prices and spot sale prices is negative. The amount to be recorded is determined based on the closing value of the contract if it is known or can be reasonably estimated; if the result cannot be estimated the forward repurchase risk is recorded at the year-end market value. Third-party goods and materials held for processing and on consignment are recorded at their yearend market value. Risks on assigned receivables are recorded at nominal value. With reference to the requirements set forth by accounting principle no. 22, the unsecured or secured guarantees issued by third parties in favour of the Company, as well as those issued by third parties against the Company s payables are not shown in the memorandum accounts but are indicated in the Explanatory Notes, where appropriate, in the comments concerning the respective balance sheet items. Income Statement Revenues and expenses are recognised in the Income Statement on an accrual basis. Transactions with the Parent Company and the subsidiary, associated and affiliated companies of the ERG Group are carried out at normal market conditions. Dividends Dividends are recorded on an accrual basis, namely from the time when they become payable, following the resolution adopted by the Shareholders Meeting of the investee company to distribute profits or the reserves, where appropriate. Extraordinary income and expenses This item consists exclusively of the effects of extraordinary events not in any way related to the Company s ordinary operations and the effects resulting from changes in the application of accounting principles. Current and deferred tax liabilities and assets Current taxes are accrued on the basis of an estimate of the tax liability for the financial year, while also considering the effects of participation in tax consolidation with the parent compay San Quirico S.p.A. Furthermore, deferred tax liabilities and assets are accrued according to the principle of 52

53 period allocation, for the temporary differences between the statutory results and related taxable income. Following the coming into force of the 2008 Finance Law, which reduced the IRES (corporation tax) and IRAP (regional tax) rates to 27.5% and 3.9%, respectively, from 1 January 2008, the Company has recalculated the balances for deferred tax liabilities and assets, the effects of which have been reported in the Income Statement under Income taxes. The recognition of deferred tax assets in the Balance Sheet is subject to the reasonable certainty of their future recovery; deferred tax liabilities are not recorded if there is little likelihood of the relative charge arising. Such taxes are calculated based on the average tax rates expected for the periods in which the taxable temporary differences will reverse. Management and coordination The Company is subject to the management and coordination activity exercised by the Parent Company ERG S.p.A., with registered office at via Nicola Piccinni 2, Milan (Italy). A summary of the main data from the latest financial statements of ERG S.p.A. is attached. Transactions with Group companies and related parties For information on transactions with Group companies and related parties, reference is made to the relevant chapter in the Report on Operations. 53

54 Fixed assets (Euro 822,731 thousand) Intangible fixed assets Other intangible fixed assets Start-up and Fixed assets in Software Other intangible Total expansion progress and purchases fixed costs payments on account assets Historical cost 190 3,818 10, ,205 Amortisation (162) (7,775) (437) (8,375) BALANCE AT 31/12/ ,818 2, ,831 Movements during the financial year: Acquisitions 1,661 1,661 Capitalisation (2,760) 1, Reclassifications (1,603) (1,603) Disposals and divestments (681) (681) Amortisation (28) (2,263) (147) (2,437) Write-downs Historical cost ,517 1,441 14,583 Amortisation (190) (10,038) (584) (10,812) BALANCE AT 31/12/ , ,771 Start-up and expansion costs have been fully amortised and refer to the costs incurred for incorporation of the company and subsequent capital increases. Fixed assets in progress and payments on account principally comprise the development of software. The item Software purchases refers to SAP upgrades and implementation of the new Refining Information System (SIRaff), which supports supply chain activities, as well as the costs incurred to upgrade Refinery software. Other intangible fixed assets mainly concern leasehold improvements. 54 balance sheet analysis / assets

55 Tangible fixed assets Land and Plant and Industrial Other Fixed assets Total buildings machinery and property, under commercial plant construction equipment and and payments equipment on account Historical cost 124, ,267 4,787 6, ,699 1,159,642 Revaluations 33, , , , ,759 5,286 6, ,699 1,420,929 Economic-technical depreciation (83,563) (577,334) (4,588) (4,139) (669,684) Write-downs BALANCE AT 31/12/06 73, , , , ,305 Movements during the financial year: Acquisitions 120, ,447 Capitalisation 24, ,589 1, (299,931) Disposals and divestments (2,315) (2,315) Economic-technical depreciation (5,309) (48,182) (218) (931) (54,640) Reclassifications 1,603 1,603 Write-downs (25) (211) (236) Historical cost 148, ,856 6,008 7, ,502 1,279,375 Revaluations 33, , , ,659 1,200,348 6,507 7, ,502 1,540,661 Economic-technical depreciation (88,872) (625,516) (4,806) (5,070) (724,264) Write-downs (25) (211) (236) BALANCE AT 31/12/07 92, ,622 1,701 2, , ,162 Reclassifications, disposals and divestments, where they exist, are stated net of their respective depreciation provisions and take account of revaluations and write-downs, if any. The item includes the amount of the Impianti Sud wharf, to be reverted to the Region of Sicily in 2020, which as at 31 December 2007 had a residual value of Euro 7,616 thousand. Fixed assets under construction decreased by Euro 299,931 thousand as a result of allocations to fixed assets during the year and increased by Euro 120,447 thousand due to investments made during the same period. For an analysis of investments carried out in 2007, reference is made to the Investments chapter of the Report on Operations. In December 2006 the company obtained a medium/long-term loan backed by a mortgage 55

56 amounting to Euro 36,000 thousand; the property encumbered by the said mortgage concerned the group of assets forming the water system (Fiumara Grande dam, Mulinello dam, feed canal, Ogliastro reservoir and related buildings). Monetary revaluations With reference to the provisions set forth in Article 10 of Law 72 of 19 March 1983, the following schedule shows the various monetary revaluations carried out and their residual values: Land and Plant and Industrial Other Fixed assets Total buildings machinery and property, under commercial plant construction equipment and and payments equipment on account Amnesty pursuant to Law 823/ Visentini pursuant to Law 576/1975 1,103 3, ,606 Visentini pursuant to Law 72/ ,555 81, ,360 Monetary pursuant to Law 413/1991 7,602 7,602 Revaluation pursuant to Law 342/ , ,552 TOTAL 33, , ,287 We also report that, pursuant to Law 266/2005, the tax value of fixed assets present at 31 December 2004 and still existing at 31 December 2005 were realigned to reflect the correspondingly higher statutory value, in the amount of Euro 155,631 thousand. This realignment did not have any impact on the value of the fixed assets recognised in the balance sheet. Financial fixed assets Equity investments Subsidiary Associated Other Financial Treasury Total companies companies companies receivables shares BALANCE AT 31/12/ ,809 3,956 Movements during the financial year: Acquisitions/capital increases Payments/interest Disposals and divestments Restitutions and utilisation (1,300) (1,300) Revaluations Write-downs/utilisation of provision to cover losses BALANCE AT 31/12/ ,554 2,797 56

57 Equity investments The following table shows the changes that occurred during the year: Changes 31/12/07 31/12/06 Increases Decreases Associated companies Dynergy S.r.l Priolo Servizi S.c.a.r.l Total Other companies IAS - Industria Acqua Siracusana S.p.A. 5 5 Total 5 5 TOTAL The value of the Priolo Servizi S.c.a.r.l. shareholding increased as a result of a capital contribution, and the equity investment in Dynergy increased solely due to revaluation. Set out below is the list of equity investments with the data required by Article 2427, point 5, of the Italian Civil Code. Registered Share % Shareholders Profit Our Balance Office capital equity (loss) portion of Sheet shareholders value at equity 31/12/07 Associated companies Dynergy S.r.l. (1) Genoa % Priolo Servizi S.c.a.r.l. (2) Melilli (SR) % n.a. n.a. n.a. 79 TOTAL 238 Other companies IAS - Industria Acqua Siracusana S.p.A. (3) Syracuse % TOTAL 5 (1) latest financial statements approved as at 30/06/07 (2) the company, incorporated in 2006, was not yet operational; the first financial statements will be approved as at 31/12/07. (3) latest approved financial statements as at 31/12/06 57

58 The equity investment in associated company Dynergy was revalued by Euro 21 thousand, since the circumstances that caused it to be written down in 2003 no longer existed. Financial receivables The receivables recorded under fixed assets comprise the following: Receivables due from affiliated companies 31/12/07 31/12/06 ISAB Energy S.r.l. 2,252 3,153 Other receivables Guarantee deposits Advance payment of IRPEF (personal income tax) on staff leaving indemnities pursuant to Law 140/ TOTAL 2,554 3,809 Financial receivables mainly concern the zero rate loan granted in prior years in favour of ISAB Energy S.r.l. The repayment plan provides for half-yearly instalments of Euro 450 thousand. During the year, the Company received the two instalments pertaining to the 2007 financial period. Other financial receivables include the receivable for advance payment of IRPEF on staff leaving indemnities pursuant to Law 140/1997, as well as sundry guarantee deposits paid. 58

59 Current assets (Euro 939,612 thousand) Inventory Year-end inventories comprise the following categories: 31/12/07 31/12/06 Raw materials 169, ,310 Ancillary and consumable materials 24,080 19,279 Finished products and goods for resale 257, ,612 TOTAL 450, ,201 The increase in raw materials inventory is due to the greater amounts of crude oil in stock, for about 5 thousand tonnes. The increase in finished products inventory is due mainly to the higher quantities in stock (1,061 as opposed to 887 thousand tonnes at 31 December 2006) of gasoline, heating oil and transport diesel. If the value of the inventories had been determined at year-end replacement costs, it would have been some Euro 429,164 thousand higher (Euro 160,899 thousand as at 31 December 2006), split between Euro 193,164 thousand for raw materials and Euro 236,000 for finished products. The increase of Euro 268,265 thousand in the LIFO Reserve from 31 December 2006 stems from the combined effect of the rise in crude oil and product prices at the end of the period and the higher inventory quantities. Ancillary and consumable materials totalling Euro 24,080 thousand relate to the materials and spare parts inventory measured at weighted average cost. Receivables Receivables are summarised as follows: 31/12/07 31/12/06 Receivables due from customers 131, ,168 Receivables due from subsidiary companies Receivables due from associated companies 36 Receivables due from affiliated companies 103,365 91,946 Receivables due from controlling companies 193, ,593 Tax receivables 5,227 1,025 Deferred tax assets 39,501 40,783 Other receivables 10, ,730 TOTAL 483, ,245 59

60 Foreign-currency receivables as at 31 December 2007, amounting to a total of Euro 99,341 thousand, were valued using year-end exchange rates. The sum arising from the difference between the value of receivables at the transaction date compared to the value determined at the end of the year is charged to the Income Statement. This alignment led to net negative foreign exchange differences of Euro 594 thousand (positive for Euro 65 thousand as at 31 December 2006). Receivables due from customers 31/12/07 31/12/06 Trade receivables 131, ,168 Provision for bad debts TOTAL 131, ,168 This item consists of trade receivables relating to the supply of petroleum products and services at market rates due within 12 months. Customer receivables outstanding as at 31 December 2007 were backed by sureties amounting to Euro 1,950 thousand. The breakdown of customer receivables by geographical area is given below: Italy Other EU Europe Other Total countries other than EU countries Trade receivables 112, , ,764 Receivables due from associated companies 31/12/07 31/12/06 Trade receivables Dynergy S.r.l. 1 Priolo Servizi S.c.a.r.l. 35 TOTAL 36 These include the trade receivables due from associated companies Dynergy and Priolo Servizi, in which the Company has equity interests of, respectively, 37.5% and 37.8%. 60

61 Receivables due from affiliated companies 31/12/07 31/12/06 Trade receivables ERG Nuove Centrali S.p.A. 4,753 2,653 ERG Petroli S.p.A. 12,031 41,982 ERG Power & Gas S.p.A. 83,360 14,025 ISAB Energy S.r.l. 2,415 32,085 ISAB Energy Services S.r.l ,200 TOTAL 103,365 91,946 This item consists of trade receivables due from investee companies of ERG S.p.A. or its subsidiaries for the supply of petroleum products and services at market rates, due within 12 months. Receivables due from controlling companies 31/12/07 31/12/06 Trade receivables Financial receivables 161, ,532 Sundry receivables 31,352 32,976 TOTAL 193, ,593 Trade receivables due from ERG S.p.A. and payable within 12 months primarily relate to the services performed by seconded personnel during the last quarter. Financial receivables refer to the liquidity present on the financial current account managed within the scope of the Group treasury, inclusive of interest income accrued as at year-end, calculated at normal market conditions. Sundry receivables refer to the IRES (corporation tax) receivable within the scope of tax consolidation with the parent company San Quirico S.p.A. amounting to Euro 31,352 thousand. The receivables are collectible within the following year. Tax receivables (Euro 5,227 thousand) Tax receivables (Euro 1,025 thousand at 31 December 2006) due entirely from the Tax Authorities refer to the estimated IRAP credit for the period of Euro 5,018 thousand and the VAT receivable for company cars, in the amount of Euro 210 thousand. The portion of IRAP receivable that is due after 12 months amounts to Euro 542 thousand. 61

62 Deferred tax assets (Euro 39,501 thousand) Deferred tax assets concern the tax effect on temporary differences deductible in future financial periods. They are made up as follows: 31/12/07 31/12/06 Amount Tax Amount Tax of temporary effect of temporary effect differences differences Provision for cyclical maintenance 26,750 8,400 17,306 6,446 Provision for demurrage liabilities 3,760 1,181 5,859 2,183 Other provisions 11,983 3,763 6,733 2,508 Maintenance 41,467 13,021 53,463 19,915 Higher tax-driven depreciation 33,937 10,656 18,231 6,791 Other changes 8,314 2,482 8,597 2,940 TOTAL 39,501 40,783 The rate used to calculate deferred tax assets is equal to the nominal IRES (corporation tax) rate (27.5%) increased, where applicable, by the IRAP (regional tax) rate (3.9%). The tax impact on temporary differences has thus been adjusted to account for the reduction in tax rates starting from the 2008 financial year and has been recognised under Income taxes. Other receivables 31/12/07 31/12/06 Advances to suppliers Receivables from forward dealings on crude oil and products 9,956 8,888 Insurance indemnities for claims ,519 Sundry receivables TOTAL 10, ,730 The increase in receivables for forward dealings on crude oil and products was due above all to positive differentials on refining-margin hedging contracts and to premiums earned on contracts concluded in November. The decrease in receivables due in respect of insurance reimbursements reflects the sums received during the year in connection with the incident that occurred on 30 April The increase in sundry receivables concerns the growth in receivables due from employees. 62

63 Cash and cash equivalents 31/12/07 31/12/06 Bank and postal deposits 4,732 5,166 Cheques Cash and notes on hand TOTALE 4,781 5,220 The item Bank and postal deposits refers exclusively to temporary liquidity at year-end. Accrued income and prepaid expenses 31/12/07 31/12/06 Accrued income 715 Prepaid expenses: Insurance Materials at plants 31,980 33,989 Other ,520 35,112 TOTAL 33,520 35,827 The item Materials at plants refers to the catalysers in use at the ISAB Refineries as regards the portion as yet unused in the refining process, having taken into account the effective consumption during the year; this item also includes the value of precious metals contained in the catalysers, amounting to Euro 7,804 thousand. Other prepayments include the costs pertaining to the next financial year for the lease of software licenses and fees for engineering assistance for refining processes. 63

64 The following table shows the items recorded under assets, broken down according to maturity: Receivables included under financial fixed assets: within within beyond Total 12 months 5 years 5 years - due from affiliated companies 901 1,351 2,252 - due from others Receivables included under current assets: - due from customers 131, ,764 - due from associated companies due from affiliated companies 103, ,365 - due from controlling companies 193, ,181 - tax payables 4, ,227 - deferred tax assets 10,296 29,206 39,501 - due from others 10,849 10,849 Accrued income and prepaid expenses: - accrued income - prepaid expenses 8,699 14,125 10,695 33,520 TOTAL 463,777 45,526 10, ,998 64

65 Shareholders equity (Euro 620,021 thousand) Share capital (Euro 25,000 thousand)) The share capital consists of 2,500,000 shares with a nominal value of Euro each and is 100% owned by ERG S.p.A. It should be noted that a portion of share capital amounting to Euro 20,363 thousand comprises the monetary revaluation reserve pursuant to Law 72/1983 as a result of bonus increases in April 2004 (Euro 2,725 thousand) and in 1988 from the spin-off of Erg Petroli S.p.A. (Euro 18,875 thousand), net of the portion transferred with the spin-off to ERG Nuove Centrali S.p.A. on 1 January 2004 (Euro 1,237 thousand). Revaluation reserves 31/12/07 31/12/06 Monetary revaluation reserve pursuant to Law 72/ ,665 16,665 Monetary revaluation reserve pursuant to Law 413/ Revaluation reserve pursuant to Law 342/ ,126 35,126 TOTAL 52,635 52,635 The revaluation reserves were transferred by ERG Petroli S.p.A. at the time of the spin-off on 1 October 2002, in proportion to its shareholders equity as at 30 September In the 2004 financial year, the reserves decreased by Euro 2,725 thousand due to the bonus issue carried out on 28 April 2004, and by Euro 5,263 thousand transferred to ERG Nuove Centrali S.p.A. with the spin-off on 1 January 2004, in proportion to shareholders equity as at 31 December Legal reserve 31/12/07 31/12/06 Legal reserve 5,000 5,000 There was no change in the legal reserve compared to the previous financial period. 65 balance sheet analysis / liabilities

66 Other reserves 31/12/07 31/12/06 Reserve pursuant to Law 130/1983, Art. 15 1,030 1,030 Reserve pursuant to Law 308/ Reserve pursuant to Law 488/1992 1,381 1,381 Tax realignment reserve pursuant to Law 266/ , ,955 Reserve for foreign exchange gains 1,379 TOTAL 139, ,329 The Reserve pursuant to Article 15 of Law 130/1983 comprises VAT recovered on investments in depreciable assets. The Reserve pursuant to Law 308/1982 represents capital contributions destined for energy-saving investments at the ISAB Refinery. The Reserve pursuant to Law 488/1992 represents capital contributions received prior to 31 December 1997, for relief relating to investments at the ISAB Refinery in support of productive activities in depressed areas, net of tax charges on 50% of such contributions. The aforementioned reserves arose from the ERG Petroli S.p.A. spin-off on 1 October The Tax realignment reserve was set up following the realignment carried out pursuant to Law 266/2005. The amount of the reserve is equal to the realignment amount net of the relative substitute tax paid. The item shows the Balance Sheet differences of rounding to the nearest euro. 66

67 Changes in shareholders equity The following schedule shows the changes occurred in the components of shareholders equity during the last three financial periods: Share Share Revaluation Legal Other Retained Net profit Total capital premium reserves reserve reserves earnings (loss) for shareholreserve (losses) the period ders equity BALANCE AT 31/12/04 25,000 89,488 52,635 4,455 4,681 25, , ,730 Allocation of 2004 profit ,543 (164,558) Other changes (1,686) 1,686 Profit for the year , ,178 BALANCE AT 31/12/05 25,000 89,488 52,635 5,000 3, , , ,908 Allocation of 2005 profit ,268 (170,178) Tax realignment (89,488) 136,955 (47,467) Profit for the year ,245 90,245 BALANCE AT 31/12/06 25,000 52,635 5, , ,943 90, ,153 Allocation of 2006 profit 90,245 (90,245) Dividends paid out (36,000) (36,000) Other changes (1,379) 1,379 Profit for the year ,868 28,868 BALANCE AT 31/12/07 25,000-52,635 5, , ,568 28, ,021 67

68 The following table lists the items forming shareholders equity, with indication of each component s potential utilisation as well as any tax-related restrictions. Nature/description Amount Potential Available Portion utilisation portion subject to tax suspension Share capital 25,000 20,363 Revaluation reserves 52,635 A B C 52,635 52,635 Legal reserve 5,000 B Other reserves 139,950 A B C 139, ,950 Retained earnings 368,568 A B C 368,568 Profit (loss) for year 28,868 A B C 28,868 TOTAL 620, , ,948 Non-distributable amount (843) Residual distributable amount 589,178 Legend A - for share capital increase B - to cover losses C - for distribution to shareholders The non-distributable amount concerns the foreign exchange gains arising from the alignment of receivables and payables in foreign currency at the exchange rate prevailing on 31 December 2007, net of the related tax effect. It should be noted that a portion of retained earnings amounting to Euro 172,533 thousand and a portion of the Tax realignment reserve amounting to Euro 47,467 thousand are committed, under Law 488/1992, to cover Project , for a total amount of Euro 220,000 thousand. This restriction will be increased to Euro 245,000 thousand upon approval of these financial statements by using retained earnings. Following the reversal of tax-driven adjustments (fiscal depollution ) and the off-balance sheet deductions made pursuant to Article 109, paragraph 4 b) of the Consolidated Income Tax Law, in case of distribution of the profit for the year and/or reserves, the amount of shareholders equity reserves and retained earnings must not fall below the total amount remaining of the negative components deducted off-balance sheet, which, net of the tax effect, amounts to approximately Euro 84,182 thousand. Whenever this occurs, the amount of reserves and/or profit for the year distributed beyond the allowable tax threshold will be included as part of the Company s taxable income. 68

69 Provisions for liabilities and charges Provision for income tax, including deferred tax liabilities Changes 31/12/07 31/12/06 Increases Decreases - deferred tax liabilities 43,659 24,397 21,337 (2,075) 43,659 24,397 21,337 (2,075) Other provisions - cyclical plant maintenance 26,750 17,306 9,774 (330) - demurrage charges 3,760 5,859 1,950 (4,050) - others 11,983 6,733 5,250 42,493 29,898 16,975 (4,380) TOTAL 86,152 54,295 38,312 (6,455) The provision for deferred tax liabilities is set aside on the basis of temporary differences taxable in future years, arising from the comparison between the Balance Sheet values of assets and liabilities and those deductible for tax purposes. The significant increase in deferred tax liabilities is mainly attributable to the increase in excess and accelerated amortisation and depreciation. The following table shows a breakdown of the principal taxable temporary differences and their related tax effect: 31/12/07 31/12/06 Amount Tax Amount Tax of temporary effect of temporary effect differences differences Amortisation and depreciation 119,659 37,573 48,554 18,086 Bad debt provision 2, , Other changes 18,003 5,292 15,992 5,773 TOTAL 43,659 24,397 The rate used to calculate deferred tax liabilities is equal to the nominal IRES (corporation tax) rate (27.5%), increased, where envisaged, by the IRAP (regional tax) rate (3.9%). The provision for cyclical plant maintenance refers to the portions of cost already accrued at the financial year-end to be incurred for the next cyclical maintenance shutdowns, which are scheduled to take place in the first quarter of 2009 for Impianti Nord and in the second quarter of 2011 for Impianti Sud. The increase is essentially connected with the provision set aside for

70 The provision for demurrage charges reflects the possible demurrage due as at 31 December 2007, but not yet formally requested by suppliers. Other provisions mainly relate to prior years charges, ancillary freight charges, transaction charges, liabilities associated with legal disputes, and tax liabilities. Staff leaving indemnities Changes 31/12/07 31/12/06 Increases Decreases Staff leaving indemnities 18,601 21,654 4,237 (7,290) This item refers to the staff leaving indemnities accrued up to the date of exercise of the option set forth by the 2007 Finance Law and relevant implementing decrees, revalued according to applicable provisions.the decrease from the previous year is mainly due to employees leaving and the effect of workforce turnover. Payables Payables are summarised as follows: 31/12/07 31/12/06 Due to shareholders for loans 176, ,115 Due to banks 26, ,685 Advances from customers 1 8,968 Trade payables 709, ,942 Due to subsidiary companies Due to associated companies Due to affiliated companies 80,554 54,006 Due to controlling companies 12,784 1,389 Tax payables 27,538 6,422 Due to social security institutions 4,542 4,186 Other payables 14,101 14,250 TOTAL 1,052,659 1,106,016 Foreign-currency receivables as at 31 December 2007, amounting to Euro 595,974 thousand, were valued using year-end exchange rates. The foreign exchange differences resulting from adjustment at year-end exchange rates with respect to those prevailing on the date of the transaction, which were charged to the Income Statement, gave rise to a net positive foreign exchange difference of Euro 7,681 thousand (negative for Euro 586 thousand as at 31 December 2006). 70

71 Amounts due to shareholders for loans (Euro 176,690 thousand) This refers to a medium/long-term loan from Parent Company ERG S.p.A. (Euro 181,115 thousand as at 31 December 2006) disbursed in three tranches (Euro 80 million on 15 December 2004, Euro 45 million on 15 June 2005, and Euro 50 million on 15 December 2005) for a total amount of Euro 175 million. Repayment will take place in single annual instalments starting on 15 December 2008 and continuing until 15 December The principal bears interest linked to the EIB 3-month rate plus 80 basis points. Interest accrued in 2007 and not yet paid amounted to Euro 1,690 thousand. This will be paid in In connection with this loan, an Interest Rate Collar agreement was entered into with Merrill Lynch, due to expire on 15 December 2010, for notional values of Euro 80 million, which fix the effective interest rate for the period from 16 December 2005 to 15 December 2007 at between a minimum of 2.50% and a maximum of 4.20%, and from 16 December 2007 to 15 December 2010 at between a minimum of 3.75% to a maximum of 4.60%. The Interest Rate Swap transaction agreed in 2003 with Banca Nazionale del Lavoro in respect of bank loans repaid in advance was maintained to cover the aforesaid loan for an original notional value of Euro 27 million. The transaction expired on 31 December 2007, with an effective interest rate of 3.10%. Amounts due to banks Amounts due to banks comprise the following: 31/12/07 31/12/06 Short-term bank borrowings Short-term bank borrowings in Euro 6, ,685 Short-term bank borrowings in foreign currency 6, ,685 Mortgages and loans Mortgages and loans in Euro 20,000 20,000 TOTAL 26, ,685 At 31 December 2007, short-term credit-line exposure showed a marked decrease from the figure reported at 31 December 2006, when the company was using hot money in the amount of Euro 241,000 thousand. In 2007 the weighted average interest rate on short-term borrowing was 4.52% (3.25% as at 31 December 2006). In order to maintain a foreign currency balance, forward currency purchase transactions were put in place for the amount of USD 618,400 thousand, corresponding to a countervalue of Euro 71

72 425,974 thousand, maturing in January The difference between the year-end contractual value and the value based on the forward exchange rate gave rise to a net negative exchange rate difference of Euro 5,924 thousand. In December 2006, a medium/long-term loan was agreed with the credit institution Mediocreval S.p.A. for Euro 20,000 thousand, backed by a mortgage of Euro 36,000 thousand. The mortgaged property is represented by the group of assets forming the industrial water system as described earlier. The interest rate applied is 6-month EURIBOR plus 69.5 basis points. The repayment plan envisages 24 semi-annual instalments in arrears starting 30 June Four semi-annual pre-amortisation instalments are also envisaged, for payment of interest only. Euro 945 thousand was paid in interest during The amortisation period envisages repayment of Euro 7,102 thousand for principal within the next five years, while the portion beyond such period amounts to Euro 12,898 thousand. The loan is due to expire on 31 December Advances from customers (Euro 1 thousand) This item (Euro 8,868 thousand at 31 December 2006) is represented by advances from customers for compulsory stockpiles, with regard to services to be provided in the following financial year. Trade payables (Euro 709,587 thousand) Trade payables (Euro 566,942 thousand as at 31 December 2006) are the result of commercial transactions and are payable during the following period. Investment project suppliers issued sureties to the Company for approximately Euro 13,890 thousand to guarantee the timely delivery and smooth operation of the plants constructed. Payables for crude oil purchases as at the end of the year are covered by bank guarantees for Euro 363,980 thousand issued to suppliers. This amount also includes those issued by the Parent Company ERG S.p.A. amounting to Euro 156,919 thousand. The breakdown of trade payables by geographical area is given below. Italy Other EU Europe Other Total countries other than EU countries Trade payables 125, , , , ,587 72

73 Due to associated companies 31/12/07 31/12/06 Dynergy S.r.l Priolo Servizi S.c.a.r.l. 4 TOTAL These comprise trade payables in favour of Dynergy S.r.l. and Priolo Servizi S.c.a.r.l. due within the following financial year. Amounts due to affiliated companies 31/12/07 31/12/06 ERG Nuove Centrali S.p.A ,967 ERG Petroli S.p.A ,496 ERG Power & Gas S.p.A. 73,141 15,895 ISAB Energy S.r.l. 5,495 2,424 ISAB Energy Services S.r.l ,224 TOTAL 80,554 54,006 Amounts payable to affiliated companies are due within the following financial year and concern commercial relationships. The increase from the previous financial year depends primarily on steam and electricity supplied by ERG Power & Gas S.p.A. in December. Amounts due to controlling companies (Euro 12,784 thousand) Payables due to ERG S.p.A. (Euro 1,389 at 31 December 2006) concern transfer of the VAT payable for December 2007 in the amount of Euro 11,981 thousand within the scope of the Group VAT procedure, and Euro 803 thousand for services received. Tax payables 31/12/07 31/12/06 VAT due to customs 23,346 3,716 Withholding taxes 2,435 2,383 Excise duties payable Other tax payables 1,673 1 TOTAL 27,538 6,422 73

74 Tax payables increased mainly on account of VAT payable to Customs due to the higher volumes of crude oil cleared at Customs during the last few days of December. Amounts due to social security institutions (Euro 4,542 thousand) The amount stated (Euro 4,186 thousand as at 31 December 2006) refers to the sum payable for social security and national insurance contributions for the month of December, as well as the provision for social security charges on the amounts accrued in favour of employees for unused holiday and leave entitlement, production bonuses and overtime not yet paid. Other payables 31/12/07 31/12/06 Due to employees 9,590 6,550 Guarantee deposits 1 1 Other sundry payables 4,510 7,698 TOTAL 14,101 14,250 Payables due to employees refer to sums accrued for the period and not yet paid in respect of unused holiday entitlements and time off in lieu, productivity bonuses, incentives to leave and bonuses linked to the creation of value. Other sundry payables consist principally of refunds to customers and payables for hedging transactions on crude oil purchases and product sales. Accrued expenses and deferred income 31/12/07 31/12/06 Accrued expenses: Other accrued expenses 5,924 5,924 Deferred income: Rents received 1 1 Equipment grants 12,264 7,757 Other 241 1,709 12,506 9,467 TOTAL 18,430 9,467 Other accrued expenses relate to the net foreign exchange losses calculated on forward foreign currency purchase contracts due to mature in the next financial year. Deferred income relating to equipment grants represents the residual portion of grants received, which 74

75 will be recorded in future years under other revenues in relation and proportionally to the economictechnical depreciation of assets. Other deferred income refers to the fixed portion of steam available to ISAB Energy s.r.l. pertaining to the following financial year. The classification by due date of the items shown under liabilities is given below: Payables: within within beyond Total 12 months 5 years 5 years - due to shareholders for loans 13, ,000 63, ,690 - due to banks 6,819 7,102 12,898 26,819 - due to other lenders - advances from customers trade payables 709, ,587 - due to associated companies due to affiliated companies 80,554 80,554 - due to controlling companies 12,784 12,784 - tax payables 27,538 27,538 - due to social security institutions 4,542 4,542 - other payables 14,101 14,101 Accrued expenses and deferred income: - accrued expenses 5,924 5,924 - deferred income 1,759 10,747 12,506 TOTAL 876, ,849 76,470 1,071,089 75

76 Memorandum accounts (Euro 219,279 thousand) Sureties given (Euro 13,021 thousand) Sureties in favour of others (Euro 6,675 thousand as at 31 December 2006) refer to guarantees issued by banks on our behalf in favour of public entities. Third party assets (Euro 202,353 thousand) Third party assets (Euro 184,475 thousand at 31 December 2006) consist mainly of crude oil and goods on deposit, owned by associated company ERG Petroli S.p.A. (Euro 153,619 thousand) and by Polimeri Europa S.p.A. (Euro 39,308 thousand). Commitments (Euro 3,905 thousand) 31/12/07 31/12/06 Forward dealings 2, Other minor commitments 1,056 2,392 TOTAL 3,905 2,907 The commitment relating to forward dealings on crude oil and products to hedge the risk of price fluctuations, underway as at 31 December 2007, concerns the net result of such transactions upon conclusion of the contract. Other minor commitments concern those undertaken to acquire hardware, software, and IT consultancy services. 76

77 Risk disclosure pursuant to Article bis of the Italian Civil Code Risk hedging The following are the main risks identified and actively managed by the ERG Group: credit risk: the possibility of default by a counterparty or potential deterioration of the credit worthiness assigned; market risk: deriving from exposure to fluctuations in exchange rates, mainly between the Euro and US dollar, and interest rates, as well as changes in prices of the products sold and raw materials purchased (commodity price volatility risk); liquidity risk: the risk of available financial resources being insufficient to maintain payment commitments; operating risk: the risk of potential losses deriving from accidents, malfunctioning, plant breakdowns and exogenous events, with damage to persons and the environment, as well as the inadequacy or improper functioning of procedures, human resources and internal management systems. Market risk The financial risk includes exchange rate risk, interest rate risk and commodity price risk. Management of these risks is regulated by the guidelines indicated in the Group Risk Management Policy and internal procedures of the operational finance function. Exchange rate risk Exchange rate risk arises from variations in the exchange rates of the various foreign currencies with respect to the Euro that impact on the economic results of the business. The net flows in currencies other than Euro, the reference currency, generated by the business constitute an exposure to exchange rate risk. Interest rate risk Interest rate risk identifies an unexpected change in the future interest-rate trend that could determine higher costs for the business. Commodity risk The goods price risk is inherent in unexpected changes in the price of raw materials, the various supplies of goods and services and the prices for finished products and services offered for sale on the market. Credit risk Exposure to credit risk, inherent in the possibility of counterparty insolvency (default) and deterioration in the creditworthiness of a counterparty, is managed through appropriate analysis and assessment of each individual counterparty, by assigning to each of them an internal credit rating (Internal Rating Based). Assignment of the rating class provides an estimate of the probability of default by the counterparty and for every level a degree of trustworthiness is indicated, which is carefully monitored and must never be exceeded. 77

78 Liquidity risk Liquidity risk is the risk that financial resources may not be sufficient to cover all maturing obligations. The ERG Group, via cash flow generation and diversification of its financing sources by setting up credit lines, currently ensures access to financing sources on the market sufficient to meet its planned financial requirements. Operating risk Operating risks, which include risks arising from the company s responsibility for criminal offences (pursuant to Legislative Decree 231/01), are identified, monitored and measured through the Operating Risk Management process. Pursuit of the objectives thus identified makes it possible to: ensure operational continuity and functioning of the production chain through adoption of the best international standards for the evaluation and management of industrial risks by carrying out Risk Assessments and Business Impact Analyses and through the implementation of a Business Continuity Plan; protect tangible and intangible assets, values and professional and intellectual know-how in order to maximise value creation for shareholders through business growth. Special interest is dedicated to environmental risk management by developing each business unit in full compliance with existing laws and regulations. ERG is constantly committed to ensuring that the operations of the various corporate entities are carried out with due respect for the health and safety of employees and third parties, as well as the environment. Risk management The ERG Group attributes great importance to the monitoring of risks and to control systems, as conditions for ensuring efficient management of the risks undertaken. Consistently with this objective, an advanced risk management system has been adopted that guarantees identification, measurement and control at a centralised level for the entire Group of exposures to individidual risks, in accordance with existing policies. The risk management function ensures compliance with the assigned limits and, via its own analyses, provides appropriate support for strategic decisions both to individual subsidiaries and to the Risk Committee and Top Management at the Parent Company. As regards exposure to the risk relating to criminal offences pursuant to Legislative Decree 231/01, the Group s companies have adopted Organisation, Management and Control Models. These identify analytically the corporate activities in connection with which crimes under the aforesaid legislation could be committed. Specific operational protocols have been prepared to schedule the development and implementation of the Entity s decisions regarding the crimes to be prevented. 78

79 The Company has also appointed a Supervisory Committee, whose task is to periodically monitor the mapping of the areas at risk of crimes and carry out systematic checks to ascertain regular compliance with the operational protocols envisaged in the Models. Derivative instruments used The main types of derivative instruments used to manage financial risks, solely for hedging purposes, are: Forward contracts: these provide for the exchange between two parties of a specific asset at a future date and at a price set at the time when the contract is made; Swap: a contract that represents an exchange between two parties of a payments flow (also called cash flows) at certain dates. The payments may be expressed in the same currency or in different currencies, and their amount is determined in relation to an underlying asset. The underlying asset may be of various types and significantly impacts the characteristics of the contract which, in practice, may assume various forms. The derivative instruments arranged by the company and directed at meeting the exposure to financial risks existing at 31 December 2007 were as follows: Forward instruments used to manage exchange rate risks on purchases and sales expected in the reference periods. This refers to agreements to buy or sell an underlying currency at a certain future date, for a certain price. In forward contracts one of the parties assumes a long position and undertakes to buy the underlying asset at a certain pre-established price. Conversely, the other party assumes a short position, undertaking to sell the same asset on the same date for the same price; Swap instruments used to manage commodity volatility risks on purchases and sales expected in the reference periods. This refers to contracts signed with international specialised companies operating in the commodities sector and with major national and international banks. The swaps are private agreements between two companies for the exchange, on set dates, of future payment flows. Market value of derivative instruments The company uses various valuation models to determine the market value of derivative instruments. Specifically, the company receives the mark to market values measured by the reference market and, via valuation tools and models, verifies, where possible, the fairness of same. The tools normally used are: Forward: market value at the time of recognition; Swap: market value at the time of recognition. 79

80 Summary of derivative instruments used The following table shows ERG Raffinerie Mediterranee S.p.A. s derivative financial instruments in place as at 31 December These have not been recorded for accounting purposes: Type Risk Reference Fair value hedged notional value at 31/12/07 A Crack spread margins Commodity tonnes 160, economic risk B Crude oil price risk swaps Commodity barrels 2,025, transaction risk C Product price risk swaps Commodity tonnes 127,000 (992) transaction risk D Interest Rate Collars Interest thousand 80, economic Euro risk Total derivative instruments 535 A. Crack spread margins These are transactions to hedge the price volatility risk relating to future purchases of raw materials and the future sale of finished products, carried out for the months of December 2007 and January The fair value of these transactions at 31 December 2007 was Euro 0.7 million, almost entirely recognised in the cash flow hedge reserve. B. Crude oil price risk swap These are swap transactions to cover the risk of price fluctuations on raw materials purchases. They are contracts whereby the parties undertake to pay or receive, at an agreed maturity, the difference between the spot and forward prices for the quantity of crude oil in question (notional principal). The settlement between parties only concerns the price differentials and does not entail any exchange of goods, whilst the existence of the underlying asset is guaranteed. At 31 December 2007, a negative fair value of approximately Euro 0.5 million (Euro +0.2 million at 31 December 2006) was recognised in the Income Statement. C. Product price risk swap These are swap transactions to cover the risk of price fluctuations on product sales. They are contracts whereby the parties undertake to pay or receive, at an agreed maturity, the difference between the spot and forward prices for the quantity of products in question (notional principal). Settlement 80

81 between the parties only concerns the price differential and does not entail any exchange of goods, whilst the existence of the underlying asset is guaranteed. At 31 December 2007 a negative fair value of about Euro 0.9 million (Euro -1.3 million at 31 December 2006) was recognised in the Income Statement. D. Interest Rate Collars In respect of loans outstanding as at 31 December 2007, Interest Rate Collar transactions have been executed, in which the instrument sets lower and upper limits with respect to the interest rate of the variable-rate loan. These transactions, which expire on 15 December 2010, establish different interest rate ranges for periods of time specified in the contract. As at 31 December, the positive fair value recorded amounted to approximately Euro 0.3 million. Litigation ERG Raffinerie Mediterranee is a party in civil and administrative proceedings and legal actions relating to the normal course of business. Based on the information available to date and considering the risk provisions made, ERG Raffinerie Mediterranee nevertheless believes that such proceedings and actions will not have any significant adverse effects on its financial statements. We specifically report that in 2007 ERG Raffinerie Mediterranee was served with several payment demands by the Syracuse Customs Agency. These payment demands disputed the Company s claimed exemption from payment of harbour dues for the loading and unloading of freight at the Santa Panagia bay terminal in Syracuse during the years from 2001 to On the basis of assessments carried out with the support of external legal counsel, ERG considers these charges to be unlawful and/or unconstitutional and has therefore not allocated any provisions for the years up to and including With regard to 2007, and considering the interpretative rules set out in the 2007 Finance Law, the applicable harbour dues have been prudently set aside, while the company is nevertheless confident that it can demonstrate the legitimacy of its position to the Revenue Authorities. 81

82 Production value (Euro 7,282,728 thousand) Revenues from sales and services Sales Sales to domestic market 1,866,396 1,943,921 2,061,124 Group companies 1,173,825 1,074, ,562 Exports 4,042,190 2,981,260 3,178,147 Utilities 4,187 5,772 Excise duties 4,405 5,505 6,603 Services 7,086,816 6,009,318 6,214,208 Internal consumption for ENI processing 19,773 24,544 Fees for ENI processing 50,853 56,475 Storage fees Income from forward dealings on crude oil and products 38,562 39,342 16,947 Other services provided 60,393 43,103 42,249 99, , ,433 TOTAL 7,185,996 6,162,610 6,354,641 Sales revenues are essentially made up of petroleum product sales. Approximately 57% (50% as at 31 December 2006) of sales (in terms of both quantities and value) are generated in the international market via the cargo channel. Revenues from services include proceeds from crude oil and product arbitrage transactions amounting to Euro 38,562 thousand (Euro 39,342 thousand at 31 December 2006) generated by the difference between the forward purchase prices and the spot sale prices of crude oil and petroleum products, realised within the scope of commercial transactions that do not entail physical transfers. It should be remembered that these transactions, undertaken with premier international counterparties, are arranged to reduce the risk caused by price fluctuations in the presence of: temporary increases in stocks above scheduled levels; significant differences between the time of purchasing the raw materials and the time when they are actually processed. They also include charges to Polimeri Europa for logistics, product handling and stocking, firefighting and other general and auxiliary services for a total of Euro 33,409 thousand (Euro 17,101 thousand at 31 December 2006), and to a lesser extent for services provided to associated companies. 82 income statement analysis

83 Overall, the reduction in revenues from services rendered is due to expiration of the Bu-Attifel processing agreement and related chargebacks for internal consumption. The following table shows the geographical breakdown of revenues from sales and services: Italy Other EU Europe Other Total countries other than EU countries Revenues from sales and services 3,105, ,954 2,476, ,278 7,185,996 The breakdown of sales to Group companies, including excise duties and utilities, is shown below: Sales to affiliated companies ERG Nuove Centrali S.p.A ERG Petroli S.p.A. 827, , ,504 ERG Power & Gas S.p.A. 215, , ,009 ISAB Energy S.r.l. 130, , ,182 TOTAL 1,173,825 1,078, ,729 The breakdown of revenues for services to Group companies is shown below: Services provided to affiliated companies ERG Nuove Centrali S.p.A. 5,466 6,277 4,949 ERG Petroli S.p.A. 4,675 4,707 4,795 ERG Power & Gas S.p.A. 12,193 9,985 9,362 ISAB Energy S.r.l. 1,451 1,437 1,391 ISAB Energy Services S.r.l. 2,433 2,787 2,518 TOTAL 26,218 25,194 23,015 For an analysis of revenues relating to ordinary operations, reference is made to the comments included in the Report on Operations. Changes in product inventory (Euro 73,921 thousand) The value of the finished product inventory was determined using the LIFO method, with annual reviews. The increase in value of the finished product inventory was due to the additional 174 thousand tonnes in stock compared to 31 December

84 Increase in fixed assets under construction (Euro 1,068 thousand) The item reflects the value of materials taken from stock and capitalised as industrial investments (Euro 1,845 thousand as at 31 December 2006). Other revenues and income Operating subsidies and equipment grants 1, Rental income Charges for penalties, demurrage, shipping losses, sales expenses Expense recovery 4,362 2,467 1,475 Ordinary capital gains from disposals , Insurance indemnities ,633 1,375 Charges to Group companies 8,107 10,027 7,814 Port tax reimbursement 33,068 Other 6,061 9,254 6,749 TOTAL 21, ,918 52,535 Other revenues and income include charges to ERG Petroli for compulsory stockpiling (Euro 4,727 thousand), to ERG Power & Gas for demineralised water recovery and other minor services (Euro 1,925 thousand), to ERG Nuove Centrali S.p.A. for secondment of personnel and sale of spare parts (Euro 705 thousand), to ERG S.p.A. for secondment of personnel and other minor charges (Euro 467 thousand). Operating subsidies and equipment grants refer to the portion accrued in relation and proportionally to the economic-technical depreciation of assets. Production costs (Euro 7,222,905 thousand) Costs for raw, ancillary and consumable materials and goods Raw materials and goods 6,197,984 5,070,458 5,164,149 Ancillary and consumable materials 343, , ,806 Excise duties 4,223 4,965 6,283 TOTAL 6,545,843 5,633,544 5,749,238 Purchase costs for crude oil and products include ancillary expenses, transport costs, insurance, commissions, inspections and customs charges. The amount indicated is inclusive of related excise duties. 84

85 The following table shows the geographical breakdown of costs for raw, ancillary and consumable materials and goods: Italy Other EU Europe Other Total countries other than EU countries Costs for raw, ancillary and consumable materials and goods 414,459 1,552,012 1,619,733 2,959,639 6,545,843 Costs for services Commercial costs 845 1,557 1,792 Transportation 7,409 9,129 15,107 Maintenance and repairs 72,880 73,921 60,023 Technical, legal and other consulting services 15,851 13,689 10,914 Directors fees ,438 Statutory auditors fees Utilities and supplies 289, , ,767 Insurance 18,252 13,314 11,394 Bank charges 3,159 3,023 2,755 Advertising, propaganda and promotion Expenses from forward dealings on crude oil and products 53,561 39,082 25,342 Other services 49,886 57,384 47,015 TOTAL 512, , ,911 Transportation costs mainly concern demurrage on FOB sales by sea and transportation for sales of sulphur. The item Maintenance and repairs concerns the costs incurred during the financial year for refinery maintenance services net of utilisation of the relevant provision (Euro 330 thousand). The costs for utilities and supplies include those incurred for industrial consumption of electricity, methane gas, nitrogen and steam, in addition to normal general costs for utilities. The increase from the previous period is mainly due to the purchase of methane from third parties, electricity, steam and other utilities from ERG Power & Gas and, to a lesser extent, greater consumption of catalysts. Costs for forward dealings on crude oil and products are generated by the difference between forward purchase prices and spot sale prices of crude oil and petroleum products within the scope of commercial transactions that do not give rise to physical transfers of goods. Other services include charges for processing fees from Polimeri Europa, services received from associated companies ISAB Energy Services S.r.l. and ERG Nuove Centrali S.p.A. in connection with 85

86 the Operation & Maintenance contract, charges for hydrogen plant utilisation fees from Air Liquide Italia s.r.l., as well as travel and lodging, cafeteria and other personnel expenses. In accordance with Article 149-duodecies of the Issuers Regulation, we report that Costs for services also include Euro 523 thousand for fees paid to the audit firm Ernst & Young S.p.A. and to the companies belonging to its network, of which Euro 252 thousand for auditing services and Euro 270 thousand for sundry services, including services for the issuance of environmental certificates, environmental assistance and risk management. The following table shows a breakdown of the costs for services received from Group companies: Associated companies Dynergy S.r.l Priolo Servizi S.c.a.r.l. 43 TOTAL Affiliated companies ERG Nuove Centrali S.p.A. 2,992 4,536 2,940 ERG Petroli S.p.A ,504 2,248 ERG Power & Gas S.p.A. 183, , ,521 ISAB Energy S.r.l. 13,269 12,773 10,455 ISAB Energy Services S.r.l. 4,146 2,169 2,404 TOTAL 204, , ,568 Controlling companies ERG S.p.A. 10,569 9,585 8,300 TOTAL 10,569 9,585 8,300 Costs for services from controlling companies primarily concern the services provided by the Parent Company s centralised staff functions and seconded personnel, as well as the charge-back of costs relating to the Genoa offices. On the other hand, services from affiliated companies mainly consisted of services provided by ERG Power & Gas S.p.A. and ISAB Energy S.r.l. for the supply of utilities. Leases and rentals Rental expenses and fees 2,169 2,595 2,969 Long-term hire and leasing 1,092 1,393 1,336 TOTAL 3,261 3,987 4,305 86

87 The item Rental expenses and fees mainly comprises amounts paid for office rental and for software hire fees. Personnel expenses Salaries and wages 56,619 57,201 55,567 Social security expenses 17,295 17,680 17,304 Staff leaving indemnities 4,237 4,034 3,895 Other expenses 7,227 4,116 4,185 TOTAL 85,377 83,031 80,951 The following table shows the breakdown of the Company s personnel by category (average headcount during the period): Executives Middle management Clerical staff Blue-collar employees TOTAL 1,224 1,240 1,206 At 31 December 2007, the total employee headcount numbered 1,214 Amortisation, depreciation and write-downs Amortisation of intangible fixed assets 2,437 2,414 1,853 Depreciation of tangible fixed assets 54,640 36,653 42,675 Other write-downs of fixed assets 236 Provision for bad debts 5,000 TOTAL 57,314 39,068 49,528 The increase in amortisation, depreciation and write-downs from 31 December 2006 stems principally from the entry into operation of new plant and machinery. 87

88 Changes in inventories of raw, ancillary, consumable materials and goods (Euro -16,786 thousand) The inventory values of raw materials were calculated using the LIFO method with annual reviews, while the consumables inventory was measured by applying the weighted average cost. As regards raw materials, there was a increase of 5 thousand tonnes in the quantities in stock compared to 31 December Other provisions Cyclical refinery maintenance 9,774 12,760 17,404 Sundry provisions 7,200 4,862 7,505 TOTAL 16,975 17,622 24,909 This item mainly consisted of the year s portion of expenses for the next general shutdown for cyclical plant maintenance. The item Sundry provisions concerns the estimate of costs to be incurred for a proposed settlement, as well as demurrage charges accrued during the financial year. Other operating expenses State treasury and port taxes 4,906 2,739 3,211 Municipal property tax (ICI) 4,970 3,588 3,420 Other taxes and dues 2,556 2,444 1,153 Subscriptions ,541 Ordinary losses on disposals Ordinary non-recurring expenses Sundry operating expenses 4,515 2,374 2,586 TOTAL 18,555 13,624 11,917 Other operating expenses mainly consist of municipal property tax, state treasury and port taxes, charges for settlement agreements and subscriptions. The increase in municipal property tax reflects the operational start-up of new plants, while the increase in port taxes stems from the provisions set out in the 2007 Finance Law. Finally, the increase in sundry operating expenses principally concerns penalties from customers amounting to Euro 2,338 thousand (Euro 808 thousand at 31 December 2006) and charges of Euro 1,057 thousand for settlement agreements (Euro 34 thousand at 31 December 2006). 88

89 Financial income and expenses (Euro -2,963 thousand) Income from equity investments (Euro 38 thousand) This item relates to dividends received from affiliated company Dynergy S.r.l. Other financial income (Euro 15,370 thousand) Income from receivables included under fixed assets: From others Interest from state treasury on IRPEF advanced on staff leaving indemnities pursuant to Law 140/ TOTAL Financial income other than the above From affiliated companies From controlling companies Financial interest income 6,141 5,387 3,758 6,141 5,387 3,758 Other Interest on bank accounts 3,394 3,054 2,807 Financial income on margin hedging contract Sundry proceeds 5,085 24,009 12,901 9,228 27,777 15,708 TOTAL 15,370 33,194 19,482 Interest income from controlling companies relates to the financial current account operated within the scope of the Group treasury management. Sundry proceeds consist principally of discounts received on forward foreign currency purchases amounting to Euro 4,380 thousand. 89

90 Interest and other financial expenses Subsidiary companies - Affiliated companies 5 55 Controlling companies 8,892 6,616 3,207 Others Bank interest expenses 6,363 6, Interest on medium/long-term loans Interest paid to others Forward purchase of foreign currency Negative differentials on swap (IRS) transactions Financial charges on margin hedging transactions 766 7,533 2,964 8,426 14,954 4,549 TOTAL 17,319 21,575 7,812 This item includes interest expenses on the medium/long-term loan received from controlling company ERG S.p.A., which increased compared to the previous year as a result of the rise in interest rate, as well as interest paid to banks on both short-term borrowings and on medium/long-term loans. Foreign exchange gains and losses Foreign exchange gains Positive exchange rate differences 88,603 75,088 97,598 Total 88,603 75,088 97,598 Foreign exchange losses Negative exchange rate differences (89,655) (95,235) (88,864) Total (89,655) (95,235) (88,864) TOTAL (1,052) (20,147) 8,734 Trade-related foreign exchange gains amounted to Euro 83,608 thousand (Euro 72,523 thousand in 2006) whilst those of a financial nature amounted to Euro 4,995 thousand (Euro 2,565 thousand in 2006). 90

91 Trade-related foreign exchange losses amounted to Euro 59,397 thousand (Euro 51,205 thousand in 2006) whilst those of a financial nature amounted to Euro 30,258 thousand (Euro 44,030 thousand in 2006). Value adjustments to financial assets (Euro 21 thousand) At 31 December 2007 the equity investment in associated company Dynergy S.r.l. was revalued since the conditions leading to its write-down in 2003 had ceased to exist. Extraordinary income and expenses The item shows the difference recognised in the Income Statement of rounding to the nearest Euro. Income taxes for the year Current income taxes 7,586 44, ,106 Taxes from prior years (117) (51) (21) Deferred tax assets 1,283 (12,923) (15,693) Deferred tax liabilities 19,262 (42,943) 892 Substitute tax 18,676 TOTAL 28,013 7, ,284 The provision for the year s income taxes was calculated taking into account expected taxable income. Deferred tax liabilities, originating from temporary differences between statutory results and the relevant taxable income, in 2007 reflect the impact of recalculation of the tax rates as laid down by the 2008 Finance Law, with a net positive impact of Euro 808 thousand. 91

92 Reconciliation between reported and theoretical tax charges IRES (Corporation tax) Profit before taxes 56,881 Theoretical IRES taxation at 33% 18,771 Impact of permanent tax adjustments 3,597 Delta tax rate on temporary differences (789) Current and deferred IRES 21,579 IRAP (Regional tax) Difference between production value and costs 59,823 Costs not relevant for IRAP purposes 85,613 Total taxable income 145,436 Theoretical IRAP taxation at 5.25% 7,635 Impact of permanent tax adjustments (1,064) Delta tax rate on temporary differences (19) Current and deferred IRAP 6,552 Total IRES and IRAP in financial statements 28,131 Taxes from previous years (117) Total taxes in financial statements 28,013 92

93 The Financial Statements for the period ended 31 December 2007 show a profit of Euro 28,868 thousand, after allocation of Euro 57,314 thousand for amortisation, depreciation and write-downs and provision for taxation amounting to Euro 28,013 thousand. Genoa, 7 March 2008 On behalf of the Board of Directors The Chairman Aldo Garozzo 93 financial result

94 Main figures from the latest financial statements of ERG S.p.A., the company exercising management and coordination activities for ERG Raffinerie Mediterranee S.p.A. Main figures of the Parent Company ERG S.p.A. Balance Sheet (thousand Euro) 31/12/ /12/2005 Intangible assets 4,265 3,865 Goodwill Property, plant and machinery 7,245 7,701 Equity investments and other financial assets 617, ,076 Other non-current assets 4,043 2,474 Non-current assets 633, ,117 Trade receivables 3,005 4,269 Other receivables and current assets 49,707 69,523 Current financial assets 158, ,938 Cash and cash equivalents Current assets 210, ,735 TOTAL ASSETS 844, ,852 Shareholders equity 98, ,690 Staff leaving indemnities 3,948 3,874 Non-current financial liabilities 451, ,000 Other non-current liabilities Non-current liabilities 455, ,249 Trade payables 9,136 3,541 Current financial liabilities 245, ,372 Other current liabilities 34,955 60,999 Current liabilities 289, ,913 TOTAL LIABILITIES 844, ,852 94

95 Income Statement (thousand Euro) 31/12/ /12/2005 Net income from equity investments 86,973 50,455 Other operating income 26,837 24,363 Other operating costs (56,247) (48,509) Financial income 11,922 6,255 Financial expenses (22,384) (11,600) PROFIT (LOSS) BEFORE TAXES 47,100 20,965 Income taxes 15,028 13,384 NET PROFIT (LOSS) FOR THE PERIOD 62,129 34,349 95

96 Scope of consolidation as at 31 December 2007 ERG S.p.A. 100% ERG Raffinerie Mediterranee S.p.A. 100% ERG Petroli S.p.A. 37.5% Dynergy S.r.l % Raffineria di Roma S.p.A. Gestioni Europa S.p.A. 100% Natalizia Petroli S.r.l. 49% 95% 25.86% Sarpom S.p.A. Gestioni Europa Due S.p.A. Nelsa S.r.l. 26% 65% SIGEA S.p.A. 1% ERG Petróleos S.A. 99% Europam S.r.l. 24.3% 99% 25% De.Co. S.c.ar.l. 1% ERG Gestión Ibérica S.L. Lampogas Lombarda S.r.l. 46.5% ERG Petroli (Suisse) S.A % Lampogas Nord S.r.l. 46.5% Med Oil S.r.l. 50% Lampogas Pavese S.r.l. 46.5% Lampogas Piemontese S.r.l. 46.5% Centro Petroli Impianti S.r.l. 34% Elyo Italia S.r.l. 40% Enerpetroli S.r.l. 44.4% = companies consolidated on line-by-line basis = companies carried at equity 96

97 100% 68.38% ERG Power & Gas S.p.A. Enertad S.p.A. 100% ERG Nuove Centrali S.p.A. 100% EOS Windenergy S.r.l. I-Faber S.p.A. 23% 51% ISAB Energy S.r.l. EOS 1 Troia S.r.l. 100% Primopremio S.r.l. in liquid. 100% 51% ISAB Energy Services S.r.l. EOS 2 Nurra S.r.l. 100% 50% ERG CESA Eolica S.p.A. EOS 3 Troia S.r.l. 100% 50% Ionio Gas S.r.l. EOS 4 Faeto S.r.l. 100% 20% Roma Energia S.r.l. EOS 5 Tursi Colobraro S.r.l. 100% 90% ISEA S.r.l. EOS 6 Joppolo S.r.l. 100% 27.01% Espansione S.r.l. EOS 7 Ginestra S.r.l. 100% 100% 100% Ecopower S.r.l. WWEH 2 S.r.l. 100% EnerFrance S.a.s. 100% Energie Pulite 2000 S.r.l. Parc Eolien de Lihus S.a.s. 100% 100% 51% 51% DSI Servizi Industriali S.r.l. SODAI Italia S.p.A. Eolo S.r.l. 97 Parc Eolien de Hetomesnil S.a.s. Parc Eolien de la Bruyère S.a.s. Parc Eolien du Carreau S.a.s. Parc Eolien les Mardeaux S.a.s. 100% 100% 100% 100% the erg group

98 To the ERG Raffinerie Mediterranee S.p.A. Shareholders Meeting During the period ended 31 December 2007 we carried out the supervisory activity assigned to the Board of Statutory Auditors, pursuant to Article 2403 of the Italian Civil Code and Article 165 of Legislative Decree 58/98, in accordance with the Principles of Conduct for the Boards of Statutory Auditors in subsidiaries of companies with shares listed on regulated markets, as set by the Consigli Nazionali dei Dottori Commercialisti e dei Ragioneri (Italian National Councils of Professional and Certified Public Accountants), also taking account of the specific provisions applicable. Our supervisory activity was carried out by way of: interventions to verify compliance with the law and the articles of association; participation in the meetings of Corporate Bodies; acquisition of information pertaining to the controls and supervision exercised by the Auditing Firm; gathering of information during meetings, informal or otherwise, with the Persons in charge of the various corporate functions. In drawing up this report we have also taken into consideration, insofar as applicable to the case in hand, communications no dated 6 April 2001, no dated 4 April 2003 and no dated 7 April 2006, whereby CONSOB called the attention of the Boards of Statutory Auditors of companies with shares listed on the stock exchange to the content of their reports to the shareholders meetings. Regarding the activities performed during the 2007 financial period: We convened the Board of Statutory Auditors on 6 occasions and attended the meetings of the Shareholders (2) and the Board of Directors (7), monitoring compliance with the statutory, legislative and regulatory provisions that govern the functioning of the Corporate Bodies. We obtained from the Directors, on at least a quarterly basis, information on the Company s general business activity, in the various sectors in which it operated, and on the most significant transactions from an economic, financial and equity-related perspective, ascertaining that the actions decided and set up were compliant with the Law and the Articles of Association, and that they were not manifestly imprudent or risky, in potential conflict of interest or in contrast with the resolutions adopted by the Shareholders Meeting or such as to compromise the integrity of the company s assets. We checked the legitimacy of the managerial decisions taken by the Board of Directors and the economic adequacy of same, excluding assessment of the merits as regards the appropriateness and advantages thereof. We monitored the adequacy of the internal control system, organised at Group level and 98 report of the board of statutory auditors

99 constantly revised within both the parent company and the subsidiaries. The Chairman of the Board of Statutory Auditors, in his capacity as standing auditor of the parent company, took part in the meetings of the ERG S.p.A. Internal Control Committee and informed the other auditors during the periodic meetings of any issues discussed pertaining to the company, including, in particular, the findings of the activity performed by the Audit Function. The Board of Statutory Auditors duly noted and agreed with the positive evaluation on the part of ERG S.p.A. s Internal Control Committee regarding the adequacy of the overall internal control system. The company s organisational structure is deemed to be sufficient; it was consequently possible to acquire cognisance and monitor the observance of principles of proper administration; more specifically, we verified compliance with the Guidelines and Procedures existing at Group level. We took cognisance of the risk management policy guidelines, and reviewed the documentation relating to the Exchange rate and price risk management project, noting that the consequent transactions are carried out in order to minimise commodity price risks and financial (exchange rate and interest rate) risks without assuming any speculative approach. The Report on operations and the Explanatory Notes set out information on the financial instruments as required under Articles 2427 bis and 2428, paragraph 2, no. 6 bis of the Italian Civil Code. We monitored the process of revising the Organisation and Management Model, agreeing with the proposals made by ERG S.p.A. s Internal Control Committee, acknowledged in the decision taken by the Board of Directors; the Supervisory Committee has been assigned appropriate powers and financial resources to correctly perform its institutional tasks. We have not received any report of violations of the Model from the Supervisory Committee, the latter being required to promptly inform the Board of Statutory Auditors. The administrative-accounting system, insofar as we have established and verified, also during prior financial periods, by obtaining information from the Head of the corporate function, reviewing company documents, and analysing the results of the work performed by the Auditing Firm, is capable of correctly representing management events. We verified the timely supply to the parent company of both the data necessary for the preparation of the Financial Statements and the information required to fulfil disclosure obligations as per Articles 114 and 115 of Legislative Decree 58/98. We periodically received information on the Group s activity with regard to health, safety, environment and quality, noting the attention dedicated to the relative issues; we particularly took cognisance of the prevention and mitigation activities, during the course of our annual visit to the Priolo industrial site. During the course of the supervisory activity described above: We did not note any transactions which, due to their nature or size, appeared atypical or might be defined as unusual, either with third parties or with group companies or related parties. 99

100 We noted, as in previous years, that routine transactions were carried out with group companies or with related parties, verifying the existence and observance of suitable practices designed to ensure that the transactions in question are duly documented, are settled at normal market conditions and correspond to the company s interest. These transactions are adequately described by the directors in the Financial Statements and in the Report on Operations, to which reference is made; as regards in particular the infra-group service contracts, we agreed with the cost chargeback criteria adopted. No complaints were received from shareholders pursuant to Article 2408 of the Italian Civil Code. We encountered no omissions or reprehensible facts or irregularities that needed to be reported to the competent bodies or mentioned in this Report. We issued the opinions required by law. We also report that: The company is subject to the activity of management and coordination exercised by the parent company ERG S.p.A.: such activity, in addition to the definition of business strategies, also concerns the indication of strategic guidelines relating to organisational aspects and staff policies, the management of strategic finance and group treasury, the management of fiscal issues above all from a planning perspective, the management of communications policies and policies relating to environment, health and safety and IT systems. The disclosure obligations set forth by Article 2497 bis of the Italian Civil Code have been fulfilled; more particularly, the report on operations points out the decisions taken within the scope of the management and coordination activity exercised by ERG S.p.A. The company participates in domestic Tax Consolidation with the company S.Quirico S.p.A. as consolidator, pursuant to Articles 117 et seq. of the Consolidated Income Tax Law. The Security Policy Document has been updated in view of the technical and organisational changes made to the Group's information system. The Financial Statements have been audited by Reconta Ernst & Young, already engaged by the parent company ERG S.p.A. to audit its own statutory Financial Statements and the Consolidated Financial Statements. In the course of the financial period regular relations were maintained with the Auditing Firm, both by way of formal meetings also attended by the Company s administrative heads, and through informal contacts between individual members of the Board and the External Auditor s representatives, for a reciprocal exchange of relevant data and information. We have always encountered maximum cooperation, also with regard to the preparation of the statutory financial statements, and no significant facts or aspects have emerged that are worthy of mention. No other engagements were conferred upon the auditing firm Reconta Ernst & Young. 100

101 Assignments were conferred upon Ernst & Young Financial Business Advisors S.p.A, a company belonging to the auditing firm s network, for a total amount of Euro 270,208, in connection with services related to safety and environment, including OHSAS certification, the design of the environmental management system and the risk assessment document. Regarding in particular the surveillance of the statutory financial statements, examination of which has been assigned to the auditing firm Reconta Ernst & Young, we certify that: the legal provisions concerning the formation and layout of the financial statements and the report on operations were adhered to; the financial statement formats used and the accounting principles, as described in the Explanatory notes, are legally compliant and adequate in relation to the company s business; as for the previous financial period, the company has drawn up the financial statements with a view to filing same with the Register of Companies pursuant to Italian accounting principles, also preparing the periodic reports required to convey the economic-financial situation for the drafting of ERG S.p.A. s interim accounts and consolidated financial statements according to international accounting standards (IAS/IFRS); as specifically required by Article 2426, point 5, of the Italian Civil Code, we acknowledge that the item Start-up and expansion costs, included in the previous financial statements, has been fully amortised. the financial statements correspond to the facts and information that have come to the knowledge of the Board of Statutory Auditors during the exercise of its supervisory duties and powers of audit and inspection; we have noted that the audit activity carried out by Ernst & Young Financial Business Advisors S.p.A. in order to prepare for listed company ERG S.p.A. a model for the correct performance of tasks assigned to the Manager responsible for drawing up the financial reports, according to the requirements set forth by Law 262/05, has confirmed the adequacy of the administrative and accounting procedures existing within the company, as regards the preparation of the statutory financial statements; the report on operations meets the requirements set forth by Article 2428 of the Italian Civil Code and is consistent with the balance sheet data and results; it provides full information regarding the market and the reference regulatory framework, and the company s activity, in the various business areas, also through its subsidiaries; the Explanatory Notes adequately describe the changes in the components of Shareholders Equity, indicating each item s potential utilisation and distributability, as well as the tax-related restrictions, if any; regarding the provisions set forth by Article 10 of Law 72 of 19 March 1983, indication is given of the various monetary revaluations carried out and their residual amount; 101

102 The Auditing Firm, in its Report issued on 26 March pursuant to Articles 156 and 165 of Legislative Decree 58 of 24/2/1998, expresses the opinion that the Financial Statements conform to the rules governing the preparation of same, and are therefore drawn up clearly and give a true and fair view of the company s equity-related and financial situation and economic results. The Board of Statutory Auditors, for the part concerning them, having duly noted the results of the statutory financial statements for the period ended 31 December 2007 and the Report of the auditing firm on such financial statements, has no objection to make regarding the approval of the financial statements and the proposals formulated by the Directors in their Report on operations. Lastly, we remind you that, since the three-year period has elapsed, the mandate conferred upon us has now expired; whilst thanking you for the confidence placed in us, we invite you to appoint your Company s new supervisory body. Genoa, 4 April 2008 The Board of Statutory Auditors Mario Pacciani Maria Teresa Canepa Giuseppe Demicheli 102

103 103