Foreword

The 2010 Annual Report for the Terna Group has been prepared in accordance with art. 154-ter of Legislative Decree no.58/98 as introduced by Legislative Decree no. 195 of 6 November 2007 (the “Transparency Decree”). In implementation of the provision of Italian Legislative Decree no. 38 of 28 February 2005 and EEC Regulation no. 1606/2002, the Terna Group prepares the consolidated financial statements as at and for the year ended 31 December 2010 in compliance with the international financial reporting standards (IFRS) issued by the International Accounting Standards Board and endorsed by the European Commission (hereinafter “IFRS-EU”). The 2010 Annual Report has been prepared on a historic cost basis, modified where necessary for certain financial instruments, as well as on a going concern basis.

Scope of consolidation

As of the end of the financial year, the Group was organised as follows:

Scope of consolidation

 

The change in the scope of consolidation since 31 December 2009, relates to:

Continuing operations:

  • on 18 May 2010, the subsidiary SunTergrid S.p.A. formed Rete Solare S.r.l. (“RTS S.r.l.”) with a quota capital of € 10,000. The business objects of RTS are to design, install, manage, develop and maintain grids and other infrastructure connected to such grids, as well as plant and equipment for the transmission and dispatching services of electricity, and for other segments of the energy sector and similar, related or connected sectors, together with plant for the generation of electricity from renewable or other sources, for self consumption or for sale.

It is also specified that on 5 August 2010, through the subsidiary TELAT S.r.l., the Terna Group acquired the entire share capital of “Rete di Trasmissione Brescia S.r.l.” (ex Reti Trasmissione Energia Elettrica ASM S.r.l. - “Retrasm”) from A2A S.p.A. The company was incorporated during the year by the subsidiary TELAT.

With reference to associates, we note the following:

  • the acquisition by Terna on 26 November 2010 of a 22.485% share in CORESO S.A., a service company incorporated under the laws of Belgium, with registered office in Brussels, with an ownership structure that includes operators of France (RTE), Belgium (Elia) and Great Britain (National Grid) - each of which with a share equal to that held by Terna - and the German operator (50Hertz Transmission) with approximately 10%. CORESO prepares daily forecasts and analyses in real time of energy flows in Central-Western Europe, identifying possible critical issues and duly informing the TSOs concerned in a timely manner.
  • On 20 December 2010, following the acquisition of a further 9% share in the share capital of the associate CESI S.p.A., Terna increased its interest from 30.906% to 39.906%.

Discontinued operations and assets held for sale:

  • to the acquisition on 25 October 2010, by RTR of the shares representing a total of 98.5%(3) of the share capital of Valmontone Energia S.r.l. from Troiani & Ciarrocchi S.r.l. and C.I.EL. S.p.A. It is also specified that on 22 July 2010, through Rete Rinnovabile S.r.l. (RTR), the Terna Group acquired the entire share capital of Reno Solar S.r.l. (“Reno Solar”) from Tre S.p.A. Tozzi Renewable Energy.

The company was incorporated during the year by the subsidiary RTR.

 

Basis of presentation

The criteria for reporting and measurement applied in this annual report comply with that used in the Consolidated financial statements as at and for the year ended 31 December 2009, with the exception of the application of IFRIC 12 - Service concession agreements, which came into effect on 1 January 2010. The Parent’s analysis of the adoption of this interpretation identified that it applies solely to Terna’s concession for the provision of dispatching services; accordingly, the property, plant and equipment and intangible assets associated with the dispatching activities identified pursuant to IFRIC 12 have been reclassified to the “Infrastructure rights” caption of intangible assets. In addition, the costs and revenue associated with the investment in dispatching activities have been reclassified as construction costs and revenue. Revenue recognised during the construction phase is limited to the amount of the internal and external construction costs incurred, considering that the fair value of the construction services is equivalent to the construction cost recognised to third-party contractors plus the internal cost of the technical personnel employed on such construction activities. By contrast, tariff revenue continues to be recognised in accordance with IAS 18 and borrowing costs continue to be capitalised pursuant to IAS 23R. The amortisation process of assets, in relation to the concession service agreements, has remained unchanged and continues to be applied considering the methods forecast for obtaining future economic benefits deriving from the use and residual value of the infrastructure, as established by the reference regulatory framework.
Following the application of the interpretation in question, with reference to the comparative balances of 2009, the balance referring to property, plant and equipment infrastructures relative to concession arrangements ex IFRIC 12 (carrying amount of € 85.4 million) was reclassified from the caption “Property, plant and equipment” to “Intangible assets” and the balances capitalised in relation to construction and upgrading of infrastructure, which have been recognised to the extent of the related costs, were reclassified as construction revenue and costs (€ 29.5 million) without any effects on the results of the Group. The EBITDA margin of 2009 has therefore been changed, going from 73.7% to 72.2%.

With reference to the interpretation IFRIC 18 - Transfer of assets from customers, endorsed by the European Commission on 27 November 2009 and applied as from 1 January 2010 in relation to the booking of connection agreements, it is specified that the equity, financial and economic position of 31 December 2010, the Terna Group was not significantly affected.

We should note that following the signing of the sales agreement for the subsidiary RTR, as has been explained in depth in the paragraph entitled “Significant events”, to which we would refer you, the balances in relation to the operations of the companies RTR and Valmontone Energia have been reclassified in accordance with that established by accounting standard IFRS 5 - Non-current assets held for sale and discontinued operations. It is also specified that on the basis of the content of the preliminary sales agreement in question, the transaction falls under the scope of agreements for the realisation of assets, for which the technical specifications and development terms for PV plants agreed with the Buyer prove to be key elements in negotiation, and can therefore be traced to the type of construction contracts regulated by IAS 11. It therefore follows that the transaction was booked on the consolidated financial statements of the Terna Group, noting the margin accrued as of 31 December 2010 on the progress made in the development of photovoltaic plants to be transferred to the Buyer, on the basis of the relevant sales price.