Notes to the Income Statement

In 2010, domestic consumption of electric power and natural gas showed a modest improvement compared with the previous year, but demand was still below pre-crisis levels. At the same time, sales margins narrowed both for electric power and natural gas, due to excess production capacity in both areas. In the case of natural gas, the reduction in sales margins stems from a significant expansion in the supply of natural gas that generated a natural gas “bubble” in the European market. This development produced an increase in competitive pressure and, consequently, a sharp drop in spot prices, which fell to levels substantially lower than the cost of natural gas imported under long-term contracts. In the electric power market, an increase in consumption failed to produce better margins, due to the commissioning of new production capacity that contributed to the continued availability of a significant reserve margin.

Against this background, EBITDA decreased to 1,369 million euros, or 102 million euros less than the 1,471 million euros earned in 2009 (-6.9%). EBITDA include a positive contribution of 173 million euros recognized by the Electric Power Operations in connection with the early termination of CIP 6/92 contracts for the Jesi, Milazzo, Porcari and Porto Viro thermoelectric power plants. As a result, the adjusted EBITDA¹ of the Electric Power Operations increased to 1,130 million euros, up slightly (+4.1%) compared with 2009 (1,086 million euros). When the data are restated without the gain from the early termination of the CIP 6/92 contracts, EBITDA show a decrease of 11.9%, due mainly to a reduction in the margins earned on sales of electric power, offset only in part by the effect of a significant rise in sales volumes, and to the end of the incentivized periods and the expiration of contracts for some CIP 6/92 facilities. At 338 million euros, the adjusted EBITDA of the Hydrocarbons Operations were 30.7% lower than in 2009, when they totaled 488 million euros. A significant development that characterized 2010 was a sharp decrease in natural gas sales margins that reflected the impact of the massive volumes of natural gas available on the spot market, in some cases at more competitive prices than those of long-term procurement contracts. The impact of these negative developments was offset only in part by an increase in sales volumes and a positive performance by the international oil and gas production activities.

The Group’s interest in profit totaled 21 million euros, or 219 million euros less than the 240 million euros reported at December 31, 2009 that was affected, in addition to the trends mentioned above, by the following factors:

• the writedowns for 368 million euros (56 million euros in 2009), of which 150 million euros referred to thermoelectric power plants and 213 million euros of Egyptian concessions due to the negative revision of estimated hydrocarbon reserves and to the foreseeable profitability risks due to the uncertainties and turbulence that currently characterize the reference political, economical and financial context in the country;
• a reduction of 12 million euros in financial expense, due mainly to net foreign exchange gains;
• the reversal in earnings of provisions for risks and charges established in previous years;
• a lower tax burden resulting from the positive impact of the so-called Tremonti-ter tax provision and the nonrecurring benefit arising from the reduction in the rate of the Robin Hood Tax for the 2009 reporting year;
• the net loss from discontinued operations (40 million euros), due to writedowns of non-current assets recognized upon the signing of a term sheet for the disposal of business operations concerning thermoelectric power plants.

¹ Adjusted EBITDA reflects the reclassification of the results of commodity and foreign exchange hedges executed in connection with contracts to import natural gas. Consistent with the policies to manage business risks, the purpose of these hedges is to mitigate the risk of fluctuations in the cost of natural gas earmarked for the production and sale of electric power and for direct gas sales. The gains and losses generated by these transactions, which are recognized by the Hydrocarbons Operations, were reclassified under the Electric Power Operations for the portion of gains and losses attributable to them (+75 million euros in 2010, -141 million euros in 2009). This reclassification is being made, in view of the exceptional impact of fluctuations in commodity prices and foreign exchange parities during the year, to provide an operational presentation of the industrial results.

In order to provide a better understanding of the cumulative results at December 31, 2010, the table below shows the progression of the data quarter by quarter and provides a comparison with the corresponding periods in 2009:

The quarterly breakdown provided above was computed based on balance sheets and income statementsapproved by the Board of Directors. Individual quarterly data are not audited.