Edison

TO THE SHAREHOLDERS

Dear Shareholders:
In 2009, the world’s largest economies were hit by a recession of unprecedented magnitude. International trade contracted by more than 12%, and GDP shrunk dramatically in Italy (-4.8%) and in all major economies (USA -2.6%, E.U. -4.0%, Japan -5.5%), with the exception of China and India, where, however, growth rates slowed.

In Italy, the scenario was characterized by a slump in demand for energy products: minus 6.7% for electric power, minus 8.1% for natural gas. As demand was contracting at such a dramatic pace, supply expanded significantly both in the electric power sector, with the startup of new coal-fired and combined-cycle power plants, and in the natural gas area, due to capacity expansion of pipelines from Algeria and Russia and the commissioning of the Rovigo terminal. The combined impact of lower demand and a larger supply had obvious repercussions on energy prices, already penalized by wide swings in the commodities markets. During the second half of 2008, the highly volatile price of crude oil fluctuated between a high of 146 U.S. dollars per barrel and a low of 36 dollars per barrel, settling at the average level of 63 dollar per barrel in 2009, for a decrease of 36% compared with the average for 2008. The average price of electric power traded on the Power Exchange also decreased, falling by about 27% compared with 2008.

By taking effective actions in response to this highly turbulent scenario, Edison was able to report 2009 results that are in line with those of the previous year, based on a constant scope of consolidation and comparable non-recurring effects. Such a positive performance, achieved in an extremely challenging economic environment, was made possible by the effective use of multiple tools to: increase sales to end customers, improve the procurement mix of natural gas, optimize the use of production facilities, expand trading activities, and generate better than expected results from the Operating Excellence Program. In the deregulated market, the Group reported higher sales volumes both in the electric power sector (+25%) and the natural gas sector (+12.4%), reaching a combined total of 600,000 customers. The commissioning of the Rovigo terminal represents a decisive step forward in Edison’s progress toward full supply independence, while at the same time significantly improving the average cost of natural gas in the Group’s supply portfolio. Imports of natural gas increased by 37%, reflecting the impact of new deliveries from Algeria and Qatar. In the electric power area, Edison effectively counteracted the impact of a sharp contraction in the spark spread with important economic returns generated by drastically curtailing its exposure on the Power Exchange, while at the same time increasing trading activity and expanding in the wholesale and forward markets. Lastly, the outstanding results of the Operating Excellence Program, which surpassed the program’s objectives, not only helped contain operating costs, holding them essentially at the same level as in 2008, but also improved performance in all industrial areas.

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