**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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## **FORM10-K/A**

 

## **AmendmentNo. 2**

 

**ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

## **For the fiscal year ended December 31, 2004**

 

## **Commission File Number 333-68632**

 

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**MissionEnergy Holding Company**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                     | ** ** | **95-4867576**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation  or organization) | ** ** | (I.R.S. Employer  Identification No.) |
|                                                             | ** ** |                                  |
| **2600  Michelson Drive, Suite 1700Irvine, California**          |       | **92612**                             |
| (Address of principal  executive offices)                        |       | (Zip Code)                            |

 

Registrant’stelephone number, including area code: **(949) 852-3576**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 
| ** **       | **None** | ** **                                   | ** ** | * * | **Not  Applicable** | * * |
|------------------|----------|----------------------------------------------|------------|----------|---------------------|----------|
| (Title of Class) |     | (Name of each  exchange on which registered) |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 
|   |   | * *         | **None** | * * |   |   |
|--------|--------|------------------|----------|----------|--------|--------|
|   |   | (Title of Class) |     |     |

 

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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES ýNO o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K. Yes ý

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).      YES oNO ý

 

Aggregate marketvalue of the registrant’s Common Stock held by non-affiliates of the registrantas of June 30, 2004: $0. Number of shares outstanding of the registrant’sCommon Stock as of March 10, 2005: 1,000 shares (all shares held by anaffiliate of the registrant).

 

 

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**EXPLANATORY NOTE**

 

The annual report on Form10-K/A for the fiscal year ended December 31, 2004 is being filed toinclude in Part IV, Item 15, financial statements with respect to ISABEnergy S.r.l., which were omitted from the annual report on Form 10-K for theyear ended December 31, 2004 filed on March 16, 2005.

 

This Amendment No. 2does not update any other disclosures to reflect developments since theoriginal date of filing.

 

The following item of theoriginal filing is amended by this Amendment No. 2:

 

Item 15. Exhibits andFinancial Statement Schedules

 

Unaffected items have notbeen repeated in this Amendment No. 2.

 

2

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**PART IV**

 

**ITEM 15.**                      EXHIBITS, FINANCIAL STATEMENT SCHEDULES

** **

(a)   (1)   List of Financial Statement

 

None

 

(2)          List of Financial Statement Schedules

 

The following item is filed as a part of this report pursuant to Item15(c) of Form 10-K:

 
|                                                                                 | **Page** |
|--------------------------------------------------------------------------------------|----------|
| Investment  in Unconsolidated Affiliates Financial Statements:                       |     |
| ISAB Energy S.r.l. Financial Statements as of  December 31, 2004, 2003 and 2002 | 4        |

 

(b)   Exhibits

 

The following documents are filed as part of this Form 10-K/A:

 
| **Exhibit No.** | ** ** | **Description**                                                                                        |
|-----------------|------------|--------------------------------------------------------------------------------------------------------|
| 31.1            |       | Certification  of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act. |
| 31.2            |       | Certification  of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act. |
| 32              |       | Statement  Pursuant to 18 U.S.C. Section 1350.                                                         |

 

(c)   Financial StatementSchedules

 

The financial statementswith respect to ISAB Energy S.r.l., which meets the definition of a foreignbusiness as defined in Rule 1-02(1) of Regulation S-X, are being filed in thisreport pursuant to Rule 3-09 of Regulation S-X. These statements are preparedin accordance with generally accepted accounting principles in Italy whichdiffer from generally accepted accounting principles in the United States. SeeNote 10 to the financial statements on page 59.

 

3

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**ISABEnergy S.r.l.**

**Annualreport for the year ended December 31st 2004**

**Directors’Report on Operations**

 

**Board of Directors**

 
| **Jonathan  Gibson**        | ** ** | **Chairman**         |
|-----------------------------|------------|----------------------|
| **Roberto  del Bravo**      | ** ** | **Deputy  Chairman** |
| **Filippo  Bifulco**        | ** ** | **Director**         |
| **Pier  Francesco Pinelli** | ** ** | **Director**         |
| **Makoto  Ichikawa**        | ** ** | **Director**         |

 

**Board ofStatutory Auditors**

 
| **Maria Sarno**      | ** ** | **Chairman**          |
|----------------------|------------|-----------------------|
| **Antonio Ippoliti** | ** ** | **Standing Auditor**  |
| **Mario  Pacciani**  | ** ** | **Standing  Auditor** |

 

**ExternalAuditors**

 

**RecontaErnst & Young S.p.A.**

 

4

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**ISAB Energy Structure**

 

ISAB Energy, of which 51% is held by ERG Power & Gas S.r.l. and 49%by MEC Priolo B.V. - Holland, is owner of the Integrated Gasification CombinedCycle plant in Priolo Gargallo (Syracuse), built near the refinery of ERGRaffinerie Mediterranee (ERG Med).

 

The plant is capable of generating 507 MW guaranteed net power andduring the year generated 4,452 GWh.

** **

**Main economic and financial data**

 

The currency in which the figures of this annual report are expressedis Euro. In the tables where the figures are indicated in millions the totalamounts may differ from the total amounts which they comprise.

 
| ** **                                       | ** ** | **2004**                | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | **(millions of  Euro)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total  revenues**                              | ** ** | **478**                 | ** ** | **423**    | ** ** | **442**    | ** ** |
| **EBITDA**                                       | ** ** | **224**                 | ** ** | **179**    | ** ** | **208**    | ** ** |
| **EBIT**                                         | ** ** | **177**                 | ** ** | **132**    | ** ** | **162**    | ** ** |
| **Profit  or loss from ordinary activities**     | ** ** | **148**                 | ** ** | **93**     | ** ** | **115**    | ** ** |
| **Extraordinary  net income (charges)**          | ** ** | **—**              | ** ** | **—** | ** ** | **—** | ** ** |
| **Net  profit or loss for the financial period** | ** ** | **90**                  | ** ** | **81**     | ** ** | **107**    | ** ** |
|                                             |       |                    |       |       |       |       |       |
| Cash flow from  activities                       |       | 184                     |       | 174        |       | 124        |       |
| Cash flow  related to investments                |       | (8                      | )          | (13        | )          | (12        | )          |
| Cash flow from  capital and reserves             |       | (39                     | )          | (18        | )          | (34        | )          |
| **Net  variation of financial debt**             | ** ** | **137**                 | ** ** | **142**    | ** ** | **79**     | ** ** |
|                                             |       |                    |       |       |       |       |       |
| Total capital  and reserves                      |       | 257                     |       | 206        |       | 144        |       |
| Net financial  debt                              |       | 412                     |       | 550        |       | 692        |       |
| **Net  capital invested**                        | ** ** | **670**                 | ** ** | **756**    | ** ** | **836**    | ** ** |
|                                             |       |                    |       |       |       |       |       |
| **Employees  (units at end of period)**          | ** ** | **11**                  | ** ** | **20**     | ** ** | **19**     | ** ** |
| **Electricity  production in GWh**               | ** ** | **4,452**               | ** ** | **4,000**  | ** ** | **4,197**  | ** ** |

 

5

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**Report onOperations**

 

The construction of the plant was financed through Non-Recourse ProjectFinancing amounting to 971 million Euro.

 

ISAB Energy generates electricity using gas produced from thegasification of heavy residues from the crude oil refining process at the ERGMed refinery nearby. The electricity generated is sold to the National Grid (Gestoredella Rete di Trasmissione Nazionale)) at the CIP 6 tariff. To that regards itshould be noted that in application of the Bersani Decree (Legislative Decreeof 16 March 1999), the Ministry of Industry resolved to transfer all rights andobligations relative to Italian third party purchase of energy from ENEL S.p.A.to the National Grid effective as of January 1 2001.

 

**Commenton the results for the year**

 

The 2004 financial statements – expressed in Euro – show a profit ofEuro 89.7 million (compared to a profit of Euro 80.5 million in 2003) afterdepreciation amounting to Euro 47.6 million (Euro 46.6 million in 2003).

 

Theresults reflect the plant’s high reliability during the year whose utilisationlevel reached 92%.

 

These financial statements have been audited by Reconta Ernst &Young S.p.A..

 

**Eventswhich took place during the financial period**

 

The most significant events which took place in 2004 are outlinedbelow:

 

•                  on 16 December, Edison Mission Energy Ltd. soldits share of Mec Priolo B.V. to IPM Eagle LLP which as a result changes thecontrolling shareholder of the company which holds 49% of ISAB Energy.

 

•                  net generation by year-end reached 4,452 GWhand 92% was obtained from syngas. Compared to the previous year this reflectsthe plant’s increased reliability. Lower down time due to maintenance and minoraccidents allowed electricity generation to increase by over 10% compared tothe previous year;

 

•                  the electricity was sold at a provisional rateof Euro 102.7 per MWh (CIP 6/92 rate)except for a minor amount sold (2.2%) at the surplus tariff. Based on methane pricetrends, which are presumed to rise (2004 over 2003) by +5.9%, the final pricefor 2004 is estimated at Euro 105.2  perMWh (+2.4% compared to the provisional price). In any case, it should be notedthat the final value will be published by the Rate Adjustment Body for theElectricity Sector at the end of April;

 

•                  the National Grid requested the plant not todespatch power for the equivalent of 283.7 hours. It should be noted that theOperator’s yearly limit to exercise this right is equal to 320 hours for atotal of 2,400 hours maximum over the first eight years the plant is inoperation.

 

•                  the plant’s increased efficiency during theyear allowed ISAB Energy to purchase a higher quantity of raw materials thanthe minimum quota therefore there were no Purchaser Shortfall costs;

 

6

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•                  as a result of declarations issued by ourcompany and the adequate documentation provided to the National Grid, based onproduction in 2003 the plant was granted “cogeneration” status for the year2004 pursuant to resolution 42/02 of the Electricity and Gas Authority.Therefore, our company is not compelled to buy green certificates as requiredby the Bersani Decree;

 

•                  concerning insurance claims, on 19 February2004, the last instalment of 1.5 million was paid to the company for accidentswhich occurred after take over.

 

•                  after specific authorisation from the banks andin consideration of the minutes of the meeting of the board of directors heldon 14 June 2004, the general shareholders’ meeting of 19 July 2004 resolved todistribute dividends amounting to Euro 39 million from retained earnings. Euro4.6 million was paid to the group company ISAB Energy Services relative toprice components in accordance with the Operation & Maintenance Agreement.As a result of an amendment to the PCFA, the company adjusted the InsuranceReserve to Euro 22.4 million and made Euro 6.8 million of advance repayments tothe banks of tranches B and C;

 

•                  in March 2004, after defining the MaintenanceProgramme for the current cycle of 2004 — 2007, the Maintenance Reserveamounting to Euro 6.3 million was set up. This provision should guaranteecoverage for any major maintenance costs not covered by regular financialresources;

 

•                  interest accrued up to 31/12/2003 totallingEuro 6.1 million was paid to the financing companies in accordance with the “SubordinatedLoan Agreements”:

 
| 1)  Erg Power & Gas Spa | : | Euro  3.1 million |
|-----------------------------|---|-------------------|
| 2)  Edison Mission Energy   | : | Euro  2.6 million |
| 3)  MEC Priolo B.V.         | : | Euro 0.4 million  |

 

•                  effective December 2004, the interest rate swaprelating to tranche B, already underwritten with Barclay’s Capital was partlyrenewed with the entrance of Banca Intesa, Unicredit and M.C.C.

 

•                  after Edison Mission Energy’s sale of itsholdings in ISAB Energy Srl, Ponama Holdings Limited took over its obligationsunder the Subordinated Loan Agreement effective 16 December 2004 with theassumption of debt amounting to Euro 18.2 million. This transfer required theupdating of several financing agreements in particular the Deed of Undertakingdated 16 December 2004, IPM Eagle LLP undertook obligations as per the SponsorAgreement; with the Deed of Assignment, International Power PLC entered in theO&M Direct Agreement and as a result in the O&M Guarantee. Lastly,Ponama Holdings Limited, International Power PLC and IPM Eagle LLP became NewSubordinated Creditors of the Intercreditor Agreement.

 

•                  on 21 December the board of directors of ERGS.p.A. resolved to take part in the national tax consolidation act for thethree-year period of 2004-2006 as consolidator with most of its subsidiarycompanies including ISAB Energy. This was communicated to the tax authoritieson 27 December.

 

**Relationswith the tax authorities**

 

Inconsideration of the “report on findings” after the audit by the taxauthorities for the year 1999 a risk provision amounting to Euro 0.2 millionwas created as of 31.12.2002 which is still adequate to face any such taxburdens.

 

7

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**Relationswith the banks**

 

Asalready mentioned, in the month of April the insurance policies covering theplants were renewed as provided for by the Project Credit Facility Agreement(PCFA). The on-going crisis in the insurance sector and in particular in theenergy sector, as mentioned, prevented the company from obtaining the coverrequired by the banks.

 

Consequentially,the company and the banks reached an agreement whereby ISAB Energy obtainedexemption from the block on dividends and subordinate debt repayments totallingEuro 50.0 million, agreeing in exchange to maintain Euro 22.4 million in theInsurance Reserve. This provision guarantees the banks against the higher riskof having a higher number of deductible days of business interruption over whatis set forth in the Project Credit Facility Agreement. The company has alsomade a partial advance repayment of debt for a total of Euro 6.8 million whichhas improved prospective cash indices in the financial model. Lastly, the debtamortisation plan was updated in line with prospective cash flow.

 

**ContractManagement**

 

In 2004 there were nosignificant developments in contracts signed by ISAB Energy with the parentcompany ERG Power & Gas for services relative to administration, plantmanagement, sales and programming. All other on-going contracts carried onnormally and the contract with ERG S.p.A. was renewed relative to IT systemslinked to the use of SAP.

 

**IT andtelecommunications systems**

 

Forwhat concerns infrastructure, the local network was upgraded to 1 gigabit/s andsecurity related to Internet access was increased using the best technology andservices available on the market. A project is ready to cover the entire plantwith a WiFi network.

 

TheMIS system was completely upgraded to make it Web enabled and accessible fromany PC connected to the Internet.

 

Abusiness intelligence system was implemented to generate company reports onpurchasing, maintenance and investments.

 

TheGepad and Sigef (ex GeFer) projects were completed thereby improving company investmentprocesses and the planning of extraordinary maintenance shutdowns.

 

Theprogram that enables electronic archiving of both incoming and outgoingdocuments, faxes and emails as well as internal correspondence, had asignificant impact. This way all documents with significant importance to thecompany are available over the Internet.

 

**Managementand coordination**

 

Ourcompany is under the management and coordination of ERG S.p.A.

 

Inparticular, these activities are carried out through the definition of businessstrategies, indication of strategic guidelines relative to overall organisationand policies concerning employees, management of tax issues above-allconcerning planning, management of communications policies, management ofenvironmental issues, health and safety.

 

8

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**Staff**

 

In2004, in line with the process to decentralise specific ERG centrally managedactivities and the consequential transfer of related shareholdings to theoperating companies, 9 employees belonging to Administration, Finance and ITSystems, Sales and Production Planning and Performance, Quality, Environmentand Safety, were transferred from ISAB Energy to the sub holding ERG Power& Gas with a service agreement being signed between the two companies.

 

**Summary financialstatements**

 

**Profit and Loss Account**

 
| ** **                                      | ** ** | **2004**                | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-------------|------------|-------------|------------|
| ** **                                      | ** ** | **(thousands of Euro)** | ** ** | ** **  | ** ** | ** **  | ** ** |
| Revenues                                        |       | 477,035                 |       | 417,487     |       | 420,912     |       |
| Other revenues  and income                      |       | 534                     |       | 5,579       |       | 21,400      |       |
| **Total  revenues**                             | ** ** | **477,569**             | ** ** | **423,066** | ** ** | **442,312** | ** ** |
| Purchase costs                                  |       | (182,502                | )          | (170,620    | )          | (164,117    | )          |
| Inventory  variations                           |       | (927                    | )          | (843        | )          | 1,075       |       |
| Costs for  services and other operational costs |       | (69,188                 | )          | (71,569     | )          | (70,229     | )          |
| Labour costs                                    |       | (803                    | )          | (1,250      | )          | (1,320      | )          |
| **EBITDA**                                      | ** ** | **224,149**             | ** ** | **178,784** | ** ** | **207,721** | ** ** |
| Depreciation                                    |       | (47,566                 | )          | (46,575     | )          | (45,776     | )          |
| **EBIT**                                        | ** ** | **176,583**             | ** ** | **132,209** | ** ** | **161,945** | ** ** |
| Net financial  income (charges)                 |       | (28,719                 | )          | (39,636     | )          | (47,232     | )          |
| Net income  (charges) from equity investments   |       | —                  |       | —      |       | —      |       |
| **Profit  from ordinary activities**            | ** ** | **147,864**             | ** ** | **92,573**  | ** ** | **114,713** | ** ** |
| Net  extraordinary income (charges)             |       | —                  |       | (332        | )          | (391        | )          |
| **Profit  before taxes**                        | ** ** | **147,864**             | ** ** | **92,242**  | ** ** | **114,321** | ** ** |
| Income tax                                      |       | (58,122                 | )          | (11,694     | )          | (7,362      | )          |
| **Net  profit (loss) for the year**             | ** ** | **89,742**              | ** ** | **80,548**  | ** ** | **106,959** | ** ** |

 

**Revenues**

 

Therevenues consist of the sale of electricity to the National Grid amounting toEuro 463 million and approximately Euro14 million from the sale of minorproducts and utilities.

 

**Otherrevenues and income**

 

Otherrevenues and income are from leasing contracts and various revenues forservices to group companies. In 2003 there was an insurance indemnity for Euro4.5 million and in 2002 there was a penalty paid by the Snamprogetti FosterWheeler Energy consortium for a claim of Euro 21 million.

 

9

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**Purchase Costs**

 

PurchaseCosts mainly refer to the supply of feedstock, other fuel oils, oxygen andvanadium.

 

**Costs forservices and other operating costs**

 

Servicesreceived include maintenance, insurance, commercial services and technical andgeneral consulting.

 

**Depreciationand write-downs**

 

Thisitem includes economic-technical depreciation of tangible fixed assetsamounting to Euro 38.7 million and intangible assets amounting to Euro 8.9million.

 

Theaverage plant life has been estimated at 23.4 years from 18 April 2000, whenthe IGCC plant went into production.

 

**Net financial income(charges)**

 

Thefinancial charges in 2004 are mainly relative to interest on the financingtotalling Euro 16.7 million and accessory bank charges and intermediationmargins totalling Euro 4.0 million.

 

Financialincome is relative to cash in the current accounts which earn approximately1.055% interest on average. The difference in rates paid as a result of theSwap contract in 2004 amounts to Euro 7.1 million.

 

**Incometax**

 

CurrentIRES amounts to Euro 41.8 million.

 

CurrentIRAP has been calculated as Euro 6.5 million.

 

10

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**BalanceSheet**

 

Beloware the figures of the balance sheet compared to the figures of the previousfinancial period.

 
| ** **                                        | ** ** | **31.12.04**            | ** ** | **31.12.03** | ** ** | **31.12.02** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **                                        | ** ** | **(thousands of Euro)** | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                              |       |                    |       |         |       |         |       |
| Fixed assets                                      |       | 691,763                 |       | 731,627      |       | 766,565      |       |
| Working capital                                   |       | 23,065                  |       | 15,461       |       | 50,361       |       |
| Employee  severance indemnity                     |       | (105                    | )          | (168         | )          | (161         | )          |
| Other assets                                      |       | 24,307                  |       | 20,835       |       | 37,154       |       |
| Other  liabilities                                |       | (69,461                 | )          | (11,727      | )          | (17,897      | )          |
| **NET  CAPITAL INVESTED**                         | ** ** | **669,570**             | ** ** | **756,029**  | ** ** | **836,022**  | ** ** |
|                                              |       |                    |       |         |       |         |       |
| Shareholders’  funds                         |       | (257,113                | )          | (206,371     | )          | (144,083     | )          |
| Medium-long term  financial debt                  |       | (478,906                | )          | (567,403     | )          | (657,618     | )          |
| Short-term  financial debt                        |       | 66,449                  |       | 17,745       |       | (34,322      | )          |
| **SHAREHOLDERS’  FUNDS AND FINANCIAL DEBTS** | ** ** | **(669,570**            | **)**      | **(756,029** | **)**      | **(836,022** | **)**      |

 

Asat 31 December 2004 net invested capital amounted to approximately Euro 670million with a decrease of about Euro 86 million.

 

Belowis an analysis of the most significant variations between 31 December 2003 and31 December 2004.

 

**Fixedassets**

 
| ** **               | ** ** | **31.12.04**            | ** ** | **31.12.03** | ** ** | **31.12.02** | ** ** |
|--------------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **               | ** ** | **(thousands of Euro)** | ** ** | ** **   | ** ** | ** **   | ** ** |
|                     |       |                    |       |         |       |         |       |
| Intangible fixed  assets |       | 39,799                  |       | 48,063       |       | 56,331       |       |
| Tangible fixed  assets   |       | 651,959                 |       | 683,555      |       | 710,225      |       |
| Financial  investments   |       | 5                       |       | 9            |       | 9            |       |
| **Total**                | ** ** | **691,763**             | ** ** | **731,627**  | ** ** | **766,565**  | ** ** |

 

**Netoperating capital**

 
| ** **         | ** ** | **12/31/04**            | ** ** | **12/31/03** | ** ** | **12/31/02** | ** ** |
|--------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **         | ** ** | **(Euro in thousands)** | ** ** | ** **   | ** ** | ** **   | ** ** |
| Inventories        |       | 13,811                  |       | 14,698       |       | 15,615       |       |
| Trade  receivables |       | 53,832                  |       | 43,534       |       | 76,528       |       |
| Trade payables     |       | (44,578                 | )          | (42,771      | )          | (41,783      | )          |
| **Total**          | ** ** | **23,065**              | ** ** | **15,461**   | ** ** | **50,361**   | ** ** |

 

11

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Theinventory includes the write-down of spare parts amounting to Euro 0.9 million.

 

Theincrease of trade receivables is mainly due to the increased productionobtained in the last month of the year and to the adjustment on electricitygeneration.

 

Theshort-term trade payables increased due to the higher value of the services andsupplies received.

 

**Otherassets**

 
| ** **                                 | ** ** | **31.12.04**            | ** ** | **31.12.03** | ** ** | **31.12.02** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **                                 | ** ** | **(thousands of Euro)** | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                       |       |                    |       |         |       |         |       |
| Short term tax  receivables                |       | 8,091                   |       | 1,511        |       | 5,950        |       |
| Other short-term  receivables              |       | 3,908                   |       | 4,189        |       | 17,955       |       |
| Short-term  prepayments and accrued income |       | 3,099                   |       | 4,274        |       | 3,989        |       |
| Medium-long term  amounts tax receivables  |       | 4,053                   |       | 5,156        |       | 3,231        |       |
| Other  medium-long term receivables        |       | 5,156                   |       | 5,705        |       | 6,030        |       |
| **Total**                                  | ** ** | **24,307**              | ** ** | **20,835**   | ** ** | **37,154**   | ** ** |

 

Short-termtax receivables mainly increased as a result of the tax on reserves.

 

**Otherliabilities**

 
| ** **                               | ** ** | **31.12.04**            | ** ** | **31.12.03** | ** ** | **31.12.02** | ** ** |
|------------------------------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **                               | ** ** | **(thousands of Euro)** | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                     |       |                    |       |         |       |         |       |
| Short-term tax  payables                 |       | (40,416                 | )          | (2,477       | )          | (2,497       | )          |
| Other short-term  payables               |       | (205                    | )          | (1,294       | )          | (4,790       | )          |
| Short-term  accruals and deferred income |       | (292                    | )          | (369         | )          | (543         | )          |
| Other provisions  for risks and charges  |       | (28,549                 | )          | (7,587       | )          | (10,068      | )          |
| **Total**                                | ** ** | **(69,461**             | **)**      | **(11,727**  | **)**      | **(17,897**  | **)**      |

 

Theitem short-term tax payables includes the expected tax charges IRES/IRAP of theperiod net of amounts paid and tax credits.

 

Other provisionsinclude:

 

•                  the provision for cyclical maintenance whichduring the year registered an allocation of Euro 7.5 million and shows a totalbalance of Euro 14.8 million;

 

•                  the provision for deferred taxes amounting toEuro 13.0 million.

 

**Netfinancial debt**

 

Belowis a table containing figures on medium-long term financial debt for ISABEnergy S.r.l.

 

12

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| ** **                              | ** ** | **31.12.04**            | ** ** | **31.12.03** | ** ** | **31.12.02** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **                              | ** ** | **(thousands of Euro)** | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                    |       |                    |       |         |       |         |       |
| Medium-long term  amounts owed to banks |       | 510,307                 |       | 593,811      |       | 700,142      |       |
| Other  medium-long term amounts owed    |       | 53,017                  |       | 57,654       |       | 81,425       |       |
| Current amount  of loans and financing  |       | (84,418                 | )          | (84,063      | )          | (123,949     | )          |
| **Total**                               | ** ** | **478,906**             | ** ** | **567,403**  | ** ** | **657,618**  | ** ** |

 

Short-termfinancial debt is as follows:

 
| ** **                            | ** ** | **31.12.04**            | ** ** | **31.12.03** | ** ** | **31.12.02** | ** ** |
|---------------------------------------|------------|-------------------------|------------|--------------|------------|--------------|------------|
| ** **                            | ** ** | **(thousands of Euro)** | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                  |       |                    |       |         |       |         |       |
| Short-term  amounts owed to banks     |       | 79,760                  |       | 77,011       |       | 97,598       |       |
| Other short-term  amounts owed        |       | 4,657                   |       | 7,051        |       | 26,351       |       |
| **Short-term  financial liabilities** | ** ** | **84,418**              | ** ** | **84,063**   | ** ** | **123,949**  | ** ** |
|                                  |       |                    |       |         |       |         |       |
| Cash on hand                          |       | (150,867                | )          | (101,761     | )          | (85,101      | )          |
| Other short-term  financial amounts   |       | 0                       |       | (47          | )          | (4,526       | )          |
| **Short  term financial amounts**     | ** ** | **(150,867**            | **)**      | **(101,808** | **)**      | **(89,627**  | **)**      |
|                                  |       |                    |       |         |       |         |       |
| **TOTAL**                             | ** ** | **(66,449**             | **)**      | **(17,745**  | **)**      | **34,322**   | ** ** |

 

13

----

 

Ananalysis of the net financial debt variation during the periods in questionshows the following:

 
| ** **                                        | ** ** | **2004**                | ** ** | **2003**     | ** ** | **2002**    | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|--------------|------------|-------------|------------|
| ** **                                        | ** ** | **(thousands of Euro)** | ** ** | ** **   | ** ** | ** **  | ** ** |
| **CASH  FLOWS FROM OPERATING**                    |       |                    |       |         |       |        |       |
| Cash flows from  current operations               |       | 155,356                 |       | 130,710      |       | 159,391     |       |
| Charges in  assets and liabilities for the period |       | 28,885                  |       | 43,112       |       | (35,284     | )          |
| **Total**                                         | ** ** | **184,241**             | ** ** | **173,822**  | ** ** | **124,107** | ** ** |
|                                              |       |                    |       |         |       |        |       |
| **CASH  FLOW FROM INVESTMENT**                    |       |                    |       |         |       |        |       |
| Investment                                        |       | (8,045                  | )          | (13,378      | )          | (12,059     | )          |
| Disposal                                          |       | 5                       |       | 97           |       | —      |       |
| **Total**                                         | ** ** | **(8,040**              | **)**      | **(13,280**  | **)**      | **(12,059** | **)**      |
|                                              |       |                    |       |         |       |        |       |
| **CASH  FLOW FROM CAPITAL**                       |       |                    |       |         |       |        |       |
| Capital increase                                  |       | —                  |       | —       |       | —      |       |
| Contributions to  capital account                 |       | —                  |       | —       |       | —      |       |
| Dividends  distributed                            |       | (39,000                 | )          | (18,260      | )          | (25,000     | )          |
| Other changes to  assets                          |       | —                  |       | —       |       | (8,534      | )          |
| **Total**                                         | ** ** | **(39,000**             | **)**      | **(18,260**  | **)**      | **(33,534** | **)**      |
|                                              |       |                    |       |         |       |        |       |
| **CHANGE  IN NET FINANCIAL**                      | ** ** | **137,201**             | ** ** | **142,281**  | ** ** | **78,514**  | ** ** |
|                                              |       |                    |       |         |       |        |       |
| **INITIAL  NET FINANCIAL DEBT**                   | ** ** | **549,658**             | ** ** | **691,939**  | ** ** | **770,454** | ** ** |
| **Change  for the period**                        | ** ** | **(137,201**            | **)**      | **(142,281** | **)**      | **(78,514** | **)**      |
| **FINAL  NET FINANCIAL DEBT**                     | ** ** | **412,457**             | ** ** | **549,658**  | ** ** | **691,939** | ** ** |

 

**Equityinvestments in other companies**

 

ISAB Energy S.r.l. doesnot hold shares in its holding companies nor in the group company ISAB EnergyServices S.r.l. It holds a share of 5% of the share capital of Industria AcquaSiracusana S.p.A. a consortium for handling industrial waste water.

 

**Relations with holding companies, group companies and other correlatedparties**

 

ISABEnergy S.r.l. buys the main raw material needed for production from ERG RaffinerieMediterranee. At the same time it sells certain raw materials and auxiliaryservices to the same company. The relation between the two companies alsoincludes some contracts relative to providing industrial and general services,such as:

 

•                  Healthassistance;

•                  Employeeadministration;

•                  Internalpost;

•                  Firefighting services.

 

14

----

 

ISABEnergy also receives other general services from ERG S.p.A. such as publicrelations and IT services and employee performance services from ERG Power& Gas S.p.A..

 

Paymentfor such services is detailed in the explanatory notes.

 

Thecompany also has a service contract in place with ERG Power & Gas and MECPriolo B.V., within the Sponsor Support Agreements.

 

Therelationship that ties ISAB Energy and ISAB Energy Services is regulated by theOperation and Maintenance contract which assigns ISAB Energy Services the roleof plant operator and maintenance provider.

 

For what concernsother relations with correlated parties as defined by CONSOB on 20 February1997, and again on 27 February 1998, there are no current relations in placefalling under such definition involving significant operations.

 

**Significant issues taking place after the end of the financial period**

 

Thereare no particularly significant issues after the end of the financial period.The company continues its positive performance and also in the first quarter of2005 it has reached production results in line with the same period of 2004.

 

Inrelation to the next general shutdown scheduled for May 2005, all the necessaryactivities are being completed such as procuring spare parts and carrying outnecessary services to ensure timeframes are adhered to and activities areconducted with respect to worker safety conditions.

 

Inline with the spin-off process undertaken by the ERG Group, on 1 January 2005,5 more employees from the administration and legal departments of the companywere transferred to ERG Power and Gas. Consequentially the staff amount to 4.At the same time the company implemented service contracts with ERG Power &Gas to cover professional needs.

 

**Expectationson operations**

 

For2005 the company expects similar performance to that of 2004. The companyexpects investments of about Euro 7.8 million, of which Euro 1.6 million isintended for Health, Safety and Environment. During 2005, the packing plant forvanadium concentrate, an activity that is currently outsourced, will becompleted.

 

Ageneral maintenance shutdown is planned for May which is expected to last foran equivalent of about 34 days and which represents the longest shutdown theplant will have experienced since its opening.

 

15

----

 

**Privacy – Programme document onsafety**

 

In2005, the ERG Group updated the “Programme Document on Safety” following thelatest indications provided by the Authority on privacy and the new technicaland organisation provisions introduced by the group IT system. A “Privacy” sitehas also been created on the company Intranet containing procedures, companyforms, information and presentations on IT Privacy and Safety, these latter twoare also used for internal training on the subject.

 

**Proposal from the board ofdirectors**

 

Dearshareholders,

 

Weend the management report by asking that you:

 

• approve your company’s financial statements for the financial periodending 31 December 2004;

 

• resolve on how to allocate the period profits of Euro 89,741,666,bearing in mind that there are certain limits which are set forth above in “Relationswith financial institutions”.

 

Rome,23 March 2005

 

Forthe board of directors

TheChairman

Jonathan Gibson

 

16

----

 

**ISAB Energy S.r.1.**

**Annual report for the yearended December 31st 2004Report of Independent Registered Public Accounting Firm**

 

17

----

 

**Report ofIndependent Registered Public Accounting Firm**

 

To the Shareholders of

Isab Energy S.r.l.

 

We have auditedthe accompanying balance sheets of Isab Energy S.r.l. as of December 31,2004 and 2003, and the related statements of income for each of the three yearsin the period ended December 31, 2004. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board. Those standards require that we plan and performthe audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement. We were not engaged to perform anaudit of the Company’s internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purposes of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Isab Energy S.r.l. as of December31, 2004 and 2003 and the results of its operations for each of the three yearsin the period ended December 31, 2004, in conformity with accounting principlesgenerally accepted in Italy.

 

Accountingprinciples generally accepted in Italy vary in certain significant respectsfrom U.S. generally accepted accounting principles. The application of thelatter would have affected the determination of net income for each of thethree years ended December 31, 2004 and the determination of shareholder’sequity as of December 31, 2004 and 2003 to the extent summarized in Note 10.

 

Reconta Ernst & Young S.p.A.

 

Genoa,Italy

May 18, 2005

 

18

----

 

**ISABEnergy S.r.l.**

**Annualreport for the year ended December 31st 2004**

**Financialstatements**

 

19

----

 
| **Balance Sheet** |  |
|-------------------|--|
|              |
| **Assets**        |

 
| ** **                  | ** ** | ** **                     | ** **                                                         | ** **  | ** ** | **12/31/2004**  | ** **      | ** **  | ** ** | **12/31/2003**  | ** ** |
|-----------------------------|------------|--------------------------------|--------------------------------------------------------------------|-------------|------------|-----------------|-----------------|-------------|------------|-----------------|------------|
| ** **                  | ** ** | ** **                     | ** **                                                         | **(Euro)**  | ** ** | ** **      | ** **      | ** **  | ** ** | ** **      | ** ** |
| **A)**                      |       | **Unpaid  subscribed capital** |                                                               |        | **—** | ** **      |            |        | **—** | ** **      |
|                        |       |                           |                                                               |        |       |            |            |        |       |            |       |
| **B)**                      |       | **Fixed  assets**              |                                                               |        |       |            |            |        |       |            |
|                        |       |                           |                                                               |        |       |            |            |        |       |            |       |
|                        | **I.**     | **Intangible  assets**         |                                                               |        |       |            |            |        |       |            |
|                        |       | 1)                             | Start-up and expansion  costs                                      |        |       | 1,550,473       |            |        |       | 6,783,680       |       |
|                        |       | 2)                             | Research, development and  advertising costs                       |        |       | —          |            |        |       | —          |       |
|                        |       | 3)                             | Patents and right to use  the intellectual

property of others     |        |       | —          |            |        |       | —          |       |
|                        |       | 4)                             | Concessions, licenses,  trademarks and similar rights              |        |       | 4,653,391       |            |        |       | 4,989,853       |       |
|                        |       | 5)                             | Goodwill                                                           |        |       | —          |            |        |       | —          |       |
|                        |       | 6)                             | Pending acquisitions of  Intangible assets and payments on account |        |       | 46,363          |            |        |       | 158,560         |       |
|                        |       | 7)                             | Other                                                              |        |       | 33,548,668      |            |        |       | 36,131,218      |       |
|                        |       | **Total**                      |                                                               |        |       | **39,798,895**  | ** **      |        |       | **48,063,311**  | ** ** |
|                        |       |                           |                                                               |        |       |            |            |        |       |            |       |
|                        | **II.**    | **Tangible  assets**           |                                                               |        |       |            |            |        |       |            |
|                        |       | 1)                             | Land and buildings                                                 |        |       | 15,734,759      |            |        |       | 15,768,242      |       |
|                        |       | 2)                             | Plants and machinery                                               |        |       | 631,374,648     |            |        |       | 661,256,779     |       |
|                        |       | 3)                             | Industrial and commercial  equipment                               |        |       | 184,952         |            |        |       | 202,589         |       |
|                        |       | 4)                             | Other                                                              |        |       | 594,027         |            |        |       | 769,944         |       |
|                        |       | 5)                             | Pending acquisitions of  tangible assets and payments on account   |        |       | 4,070,913       |            |        |       | 5,557,642       |       |
|                        |       | **Total**                      |                                                               |        |       | **651,959,299** | ** **      |        |       | **683,555,196** | ** ** |
|                        |       |                           |                                                               |        |       |            |            |        |       |            |       |
|                        | **III**    | **Financial  assets**          |                                                               |        |       |            |            |        |       |            |
|                        |       | 1)                             | Equity investments in:                                             |        |       |            |            |        |       |            |       |
|                        |       |                           | a) subsidiary companies                                            |        |       | —          |            |        |       | —          |       |
|                        |       |                           | b) affiliated companies                                            |        |       | —          |            |        |       | —          |       |
|                        |       |                           | c) parent companies                                                |        |       | —          |            |        |       | —          |       |
|                        |       |                           | e) other companies                                                 |        |       | 5,165           |            |        |       | 5,165           |       |
|                        |       |                           |                                                               |        |       | 5,165           |            |        |       | 5,165           |       |
|                        |       |                           |                                                               |        |       |            |            |        |       |            |       |
|                        |       |                           |                                                               | within      |       |            |            | within      |       |            |       |
|                        |       | 2)                             | Amounts receivable                                                 | 12  months: |       |            |            | 12  months: |       |            |       |
|                        |       |                           | a) from subsidiary  companies                                      | —      |       | —          |            | —      |       | —          |       |
|                        |       |                           | b) from affiliated  companies                                      | —      |       | —          |            | —      |       | —          |       |
|                        |       |                           | c) from parent companies                                           | —      |       | —          |            | —      |       | —          |       |
|                        |       |                           | d) other receivables                                               | —      |       | —          |            | —      |       | 3,525           |       |
|                        |       |                           |                                                               |        |       | —          |            |        |       | 3,525           |       |
|                        |       |                           |                                                               |        |       |            |            |        |       |            |       |
|                        |       | 3)                             | Other securities                                                   |        |       | —          |            |        |       | —          |       |
|                        |       | 4)                             | Own shares, with indication  of their aggregate nominal value      |        |       | —          |            |        |       | —          |       |
|                        |       | **Total**                      |                                                               |        |       | **5,165**       | ** **      |        |       | **8,690**       | ** ** |
|                        |       |                           |                                                               |        |       |            |            |        |       |            |       |
| **TOTAL  FIXED ASSETS (B)** |       |                           | **691,763,359**                                                    |        |       |            | **731,627,197** |        |
|                        |       |                           |                                                               |        |       |            |            |        |       |            |       |
| **C)**                      |       | **Current  assets**            |                                                               |        |       |            |            |        |       |            |
|                        |       |                           |                                                               |        |       |            |            |        |       |            |       |
|                        | **I.**     | **Inventories**                |                                                               |        |       |            |            |        |       |            |
|                        |       | 1)                             | raw materials, ancillary  materials and consumer goods             |        |       | 13,273,663      |            |        |       | 14,345,821      |       |
|                        |       | 2)                             | work in progress and  semi-finished goods                          |        |       | —          |            |        |       | —          |       |
|                        |       | 3)                             | work in progress on  commission                                    |        |       | —          |            |        |       | —          |       |
|                        |       | 4)                             | finished goods and goods  for sale                                 |        |       | 439,346         |            |        |       | 294,094         |       |
|                        |       | 5)                             | advances                                                           |        |       | 97,773          |            |        |       | 58,416          |       |
|                        |       | **Total**                      |                                                               |        |       | **13,810,782**  |            |        |       | **14,698,331**  |       |
|                             |            |                                |                                                                    |             |            |                 |                 |             |            |                 |            |  |  |  |  |  |

 

20

----

 
| ** **                                    | ** ** | ** **                                      | ** **                                                    | ** **          | ** ** | **12/31/2004**  | ** **      | ** ** | ** ** | **12/31/2003**  | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|---------------------------------------------------------------|---------------------|------------|-----------------|-----------------|------------|------------|-----------------|------------|
| ** **                                    | ** ** | ** **                                      | ** **                                                    | **(Euro)**          | ** ** | ** **      | ** **      | ** ** | ** ** | ** **      | ** ** |
|                                          |       | ** **                                      |                                                          |                |       | ** **      |            |       |       | ** **      |       |
|                                          |       | ** **                                      |                                                          | beyond              |       | ** **      |            | beyond     |       | ** **      |       |
|                                          | **II.**    | **Receivables**                                 | 12  months:                                                   |                | ** ** |            | 12  months:     |       | ** ** |            |
|                                          |       | 1)                                              | trade receivables                                             | —              |       | 50,596,842      |            | —     |       | 39,766,025      |       |
|                                          |       | 2)                                              | amounts owed by subsidiary  companies                         | —              |       | —          |            | —     |       | —          |       |
|                                          |       | 3)                                              | amounts owed by affiliated  companies                         | —              |       | —          |            | —     |       | —          |       |
|                                          |       | 4)                                              | amounts owed by associated  companies                         | —              |       | 3,202,275       |            | —     |       | 3,814,525       |       |
|                                          |       | 5)                                              | amounts owed by parent  companies                             | —              |       | 3,393,383       |            | —     |       | —          |       |
|                                          |       | 5bis                                            | )                                                             | tax credits         |       |            | —          |       |       |            | 1,603,187  |   |
|                                          |       | 5ter                                            | )                                                             | deffered tax assets | 4,053,074  |            | 8,783,677       |       | 5,156,328  |            | 5,612,259  |   |
|                                          |       | 6)                                              | other receivables                                             | 5,156,326           |       | 9,063,832       |            | 5,704,797  |       | 9,345,216       |       |
|                                          |       | **Total**                                       |                                                          | ** **          |       | **75,040,009**  |            |       |       | **60,141,212**  |       |
|                                          |       | ** **                                      |                                                          |                |       | ** **      |            |       |       | ** **      |       |
|                                          | **III.**   | **Financial  assets that are not fixed assets** |                                                          |                | ** ** |            |            |       | ** ** |            |
|                                          |       | 1)                                              | shareholding in subsidiary  companies                         |                |       | —          |            |       |       | —          |       |
|                                          |       | 2)                                              | shareholding in affiliated  companies                         |                |       | —          |            |       |       | —          |       |
|                                          |       | 3)                                              | shareholding in parent  companies                             |                |       | —          |            |       |       | —          |       |
|                                          |       | 4)                                              | other shareholdings                                           |                |       | —          |            |       |       | —          |       |
|                                          |       | 5)                                              | own shares, with indication  of their aggregate nominal value |                |       | —          |            |       |       | —          |       |
|                                          |       | 6)                                              | other securities                                              |                |       | —          |            |       |       | —          |       |
|                                          |       | **Total**                                       |                                                          |                |       | **—**      |            |       |       | **—**      |       |
|                                          |       | ** **                                      |                                                          |                |       | ** **      |            |       |       | ** **      |       |
|                                          | **IV.**    | **Cash and  equivalents**                       |                                                          |                | ** ** |            |            |       | ** ** |            |
|                                          |       | 1)                                              | Bank and post-office  deposits                                |                |       | 150,855,553     |            |       |       | 101,756,200     |       |
|                                          |       | 2)                                              | Bank checks                                                   |                |       | —          |            |       |       | —          |       |
|                                          |       | 3)                                              | Cash and valuables on hand                                    |                |       | 11,370          |            |       |       | 4,686           |       |
|                                          |       | **Total**                                       |                                                          |                |       | **150,866,923** |            |       |       | **101,760,886** |       |
|                                          |       | ** **                                      |                                                          |                |       | ** **      |            |       |       | ** **      |       |
| **TOTAL  CURRENT ASSETS (C)**                 |       |                                            | **239,717,714**                                               |                |       |            | **176,600,429** |       |
|                                          |       | ** **                                      |                                                          |                |       | ** **      |            |       |       | ** **      |       |
| **D)**                                        |       | **Accrued  income and prepayments**             |                                                          |                | ** ** |            |            |       | ** ** |            |
|                                          |       | •                                          | Accrued income                                                |                |       | —          |            |       |       | —          |       |
|                                          |       | •                                          | prepayments                                                   |                |       | 3,098,930       |            |       |       | 4,273,861       |       |
| **TOTAL  ACCRUED INCOME AND PREPAYMENTS (D)** |       |                                            | **3,098,930**                                                 |                |       |            | **4,273,861**   |       |
|                                          |       | ** **                                      |                                                          |                |       | ** **      |            |       |       | ** **      |       |
| **TOTAL  ASSETS**                             |       |                                            | **934,580,003**                                               |                |       |            | **912,501,487** |       |

 

21

----

 

**Liabilities**

 
| ** **                                          | ** ** | ** **                                | ** **                                                 | ** **  | ** **  | **12/31/2004** | ** **      | ** **  | ** **  | **12/31/2003** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------|------------------------------------------------------------|-------------|-------------|----------------|-----------------|-------------|-------------|----------------|------------|
| ** **                                          | ** ** | ** **                                | ** **                                                 | **(Euro)**  | ** **  | ** **     | ** **      | ** **  | ** **  | ** **     | ** ** |
| **A)**                                              | ** ** | **Capital  and reserves**                 | ** **                                                 | ** **  | ** **  | ** **     | ** **      | ** **  | ** **  | ** **     |
| ** **                                          | **I.**     | ** **                                | Share capital                                              |        |        | 5,165,000      |            |        |        | 5,165,000      |       |
| ** **                                          | **II.**    | ** **                                | Share premium reserve                                      |        |        | —         |            |        |        | —         |       |
| ** **                                          | **III.**   | ** **                                | Revaluation reserves                                       |        |        | —         |            |        |        | —         |       |
| ** **                                          | **IV.**    | ** **                                | Legal reserve                                              |        |        | 1,033,000      |            |        |        | 1,033,000      |       |
| ** **                                          | **V.**     | ** **                                | Reserve for own shares in  portfolio                       |        |        | —         |            |        |        | —         |       |
| ** **                                          | **VI.**    | ** **                                | Reserve provided in the  by-laws                           |        |        | —         |            |        |        | —         |       |
| ** **                                          | **VII.**   |                                      | Other reserves:                                            |        |        | —         |            |        |        |           |       |
| ** **                                          | **VIII.**  |                                      | Profits (losses) carried  forward                          |        |        | 161,172,925    |            |        |        | 119,624,793    |       |
| ** **                                          | **IX.**    | ** **                                | Profits (losses) for the  financial period                 |        |        | 89,741,666     |            |        |        | 80,548,132     |       |
| **TOTAL  CAPITAL AND RESERVES (A)**                 | ** ** | ** **                                | **257,112,591**                                            | ** **  | ** **  | ** **     | **206,370,925** | ** **  |
|                                                |       |                                      |                                                       |        |        |           |            |        |        |           |       |
| **B)**                                              | ** ** | **Provisions  for risks and charges**     | ** **                                                 | ** **  | ** **  | ** **     | ** **      | ** **  | ** **  | ** **     |
|                                                |       | 1)                                        | Provision for retirement  benefits and similar obligations |        |        | —         |            |        |        | —         |       |
|                                                |       | 2)                                        | Provision for taxes,  including deferred taxes             |        |        | 13,230,770     |            |        |        | 202,944        |       |
|                                                |       | 3)                                        | Other                                                      |        |        | 15,318,047     |            |        |        | 7,384,510      |       |
| **TOTAL  PROVISIONS FOR RISKS AND CHARGES (B)**     | ** ** | ** **                                | **28,548,817**                                             | ** **  | ** **  | ** **     | **7,587,454**   | ** **  |
|                                                |       |                                      |                                                       |        |        |           |            |        |        |           |       |
| **C)**                                              | ** ** | **Employee  severance indemnity**         | ** **                                                 | ** **  | **104,662** | ** **     | ** **      | ** **  | **167,638** | ** **     |
|                                                |       |                                      |                                                       |        |        |           |            |        |        |           |       |
|                                                |       |                                      |                                                       | beyond      |        |           |            | beyond      |        |           |       |
| **D)**                                              | ** ** | **Payables**                              | 12 months:                                                 |        |        |           | 12 months:      |        |        |           |
|                                                |       | 1)                                        | Debenture loans                                            | —      |        | —         |            | —      |        | —         |       |
|                                                |       | 2)                                        | Convertible debenture loans                                | —      |        | —         |            | —      |        | —         |       |
|                                                |       | 3)                                        | Due to shareholders for  financing                         | 44,305,500  |        | 48,062,087     |            | 45,648,090  |        | 51,758,685     |       |
|                                                |       | 4)                                        | Due to banks                                               | 430,546,925 |        | 510,307,046    |            | 516,799,746 |        | 593,811,204    |       |
|                                                |       | 5)                                        | Due to other financing  sources                            | —      |        | —         |            | —      |        | —         |       |
|                                                |       | 6)                                        | Amounts received on account                                | —      |        | —         |            | —      |        | —         |       |
|                                                |       | 7)                                        | Due to suppliers                                           | —      |        | 23,740,004     |            | —      |        | 21,395,127     |       |
|                                                |       | 8)                                        | Debts represented by  negotiable instruments               | —      |        | —         |            | —      |        | —         |       |
|                                                |       | 9)                                        | Due to subsidiary companies                                | —      |        | —         |            | —      |        | —         |       |
|                                                |       | 10)                                       | Due to affiliated companies                                | —      |        | —         |            | —      |        | —         |       |
|                                                |       | 10bis)                                    | Due to associated companies                                | 4,053,912   |        | 25,359,054     |            | 4,954,785   |        | 26,924,982     |       |
|                                                |       | 11)                                       | Due to parent companies                                    | —      |        | 39,830,721     |            |        |        | 1,234,583      |       |
|                                                |       | 12)                                       | Due to the tax authority                                   | —      |        | 1,018,626      |            | —      |        | 2,476,602      |       |
|                                                |       | 13)                                       | Due to social security and  insurance institution          | —      |        | 44,825         |            | —      |        | 79,230         |       |
|                                                |       | 14)                                       | Other debts                                                | —      |        | 159,863        |            | —      |        | 326,503        |       |
| **TOTAL  DEBTS (D)**                                | ** ** | ** **                                | **648,522,226**                                            | ** **  | ** **  | ** **     | **698,006,916** | ** **  |
|                                                |       |                                      |                                                       |        |        |           |            |        |        |           |       |
| **E)**                                              | ** ** | **Accrued  expenses and deferred income** | ** **                                                 | ** **  | ** **  | ** **     | ** **      | ** **  | ** **  | ** **     |
|                                                |       | -                                         | Accrued  expenses                                          |        |        | 291,707        |            |        |        | 368,554        |       |
|                                                |       | -                                         | Deferred  income                                           |        |        | —         |            |        |        | —         |       |
|                                                |       |                                      |                                                       |        |        | —         |            |        |        | —         |       |
| **TOTAL  ACCRUED EXPENSES AND DEFERRED INCOME (E)** | ** ** | ** **                                | **291,707**                                                | ** **  | ** **  | ** **     | **368,554**     | ** **  |
| ** **                                          | ** ** | ** **                                | ** **                                                 | ** **  | ** **  | ** **     | ** **      | ** **  | ** **  | ** **     | ** ** |
| **TOTAL  LIABILITIES**                              | ** ** | ** **                                | **677,467,412**                                            | ** **  | ** **  | ** **     | **706,130,562** | ** **  |
| ** **                                          | ** ** | ** **                                | ** **                                                 | ** **  | ** **  | ** **     | ** **      | ** **  | ** **  | ** **     | ** ** |
| **TOTAL CAPITAL  AND RESERVES AND LIABILITIES**     |       |                                      | **934,580,003**                                            |        |        |           | **912,501,487** |        |

 

22

----

 
| ** **                     | ** ** | ** **                | ** **                        | ** ** | ** ** | **12/31/2004** | ** **    | ** ** | ** ** | **12/31/2003** | ** ** |
|--------------------------------|------------|---------------------------|-----------------------------------|------------|------------|----------------|---------------|------------|------------|----------------|------------|
| ** **                     | ** ** | ** **                | ** **                        | **(Euro)** | ** ** | ** **     | ** **    | ** ** | ** ** | ** **     | ** ** |
| **Memorandum  accounts**       |       |                      |                              |       |       |           |          |       |
|                           | 1.         | Guarantees given:         |                              |       |       |           |          |       |       |           |
|                           |       | a)                        | Suretyships                       |       |       |           |          |       |       |           |       |
|                           |       |                      | in favor of affiliated  companies |       |       | —         |          |       |       | —         |       |
|                           |       |                      | in favor of others                |       |       | —         |          |       |       | —         |       |
|                           |       |                      |                              |       |       | —         |          |       |       | —         |       |
|                           |       |                      |                              |       |       |           |          |       |       |           |       |
|                           |       | b)                        | Endorsements                      |       |       | —         |          |       |       | —         |       |
|                           |       | c)                        | Other personal guarantees         |       |       | —         |          |       |       | —         |       |
|                           |       | d)                        | Other real security               |       |       | —         |          |       |       | —         |       |
|                           |       |                      |                              |       |       |           |          |       |       |           |       |
|                           |       |                      |                              |       |       | —         |          |       |       | —         |       |
|                           |       |                      |                              |       |       |           |          |       |       |           |       |
|                           | 2.         | Other memorandum accounts |                              |       |       |           |          |       |       |           |
|                           |       | a)                        | Guarantees received               |       |       | —         |          |       |       | —         |       |
|                           |       | b)                        | Our commitments                   |       |       | —         |          |       |       | —         |       |
|                           |       | c)                        | Risks                             |       |       | —         |          |       |       | —         |       |
|                           |       | d)                        | Other                             |       |       | 4,198,198      |          |       |       | 3,137,378      |       |
|                           |       |                      |                              |       |       | 4,198,198      |          |       |       | 3,137,378      |       |
|                           |       |                      |                              |       |       |           |          |       |       |           |       |
| **TOTAL  MEMORANDUM ACCOUNTS** |       |                      | **4,198,198**                     |       |       |           | **3,137,378** |       |

 

23

----

 
| **Income Statement** |  |
|----------------------|--|

 
| ** **                         | ** **               | ** **                        | ** **                                                                                       | ** ** | ** **       | **2004**     | ** **       | **2003**     | ** ** | **2002**     | ** ** |
|------------------------------------|--------------------------|-----------------------------------|--------------------------------------------------------------------------------------------------|------------|------------------|--------------|------------------|--------------|------------|--------------|------------|
| ** **                         | ** **               | ** **                        | ** **                                                                                       | **(Euro)** | ** **       | ** **   | ** **       | ** **   | ** ** | ** **   | ** ** |
| **A)**                             | **VALUE OF  PRODUCTION** | ** **                        | ** **                                                                                       | ** ** | ** **       | ** **   | ** **       | ** **   | ** ** |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
|                               |                     | 1)                                | Revenues from sales and  services                                                                |       |             | 477,035,042  |             | 417,487,546  |       | 420,912,077  |       |
|                               |                     | 2)                                | Changes in inventories of  finished goods, semi-finished goods and works in progress             |       |             | 145,252      |             | 181,001      |       | (137,317     | )          |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
|                               |                     | 3)                                | Changes in work in progress  on commission                                                       |       |             | —       |             | —       |       | —       |       |
|                               |                     | 4)                                | Capitalized internal work                                                                        |       |             | 1,629,811    |             | 1,421,152    |       | 823,962      |       |
|                               |                     | 5)                                | Other revenues and incomes:                                                                      |       |             |         |             |         |       |         |       |
|                               |                     |                              | other                                                                                            |       |             | 534,346      |             | 5,579,269    |       | 21,400,135   |       |
|                               |                     |                              | contributions for operating  expenses                                                            |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              |                                                                                             |       |             | 534,346      |             | 5,579,269    |       | 21,400,135   |       |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
| **TOTAL  VALUE OF PRODUCTION (A)** | ** **               | ** **                        | **479,344,451**                                                                                  | ** ** | **424,668,968**  | ** **   | **442,998,857**  | ** **   |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
| **B)**                             | **COST OF  PRODUCTION**  | ** **                        | ** **                                                                                       | ** ** | ** **       | ** **   | ** **       | ** **   | ** ** |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
|                               |                     | 6)                                | For raw materials,  ancillary materials, consumer goods, and goods for sale                      |       |             | (184,131,787 | )                | (172,040,656 | )          | (164,941,851 | )          |
|                               |                     | 7)                                | For services                                                                                     |       |             | (55,435,550  | )                | (59,260,621  | )          | (58,114,760  | )          |
|                               |                     | 8)                                | For leases and rentals                                                                           |       |             | (1,730,325   | )                | (1,595,681   | )          | (1,856,230   | )          |
|                               |                     | 9)                                | For personnel costs:                                                                             |       |             |         |             |         |       |         |       |
|                               |                     |                              | a) wages and salaries                                                                            |       |             | (562,837     | )                | (886,917     | )          | (951,889     | )          |
|                               |                     |                              | b) social security costs                                                                         |       |             | (196,738     | )                | (285,029     | )          | (284,266     | )          |
|                               |                     |                              | c) provision for severance  indemnity                                                            |       |             | (39,871      | )                | (61,972      | )          | (65,045      | )          |
|                               |                     |                              | d) pension costs                                                                                 |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              | e) other costs                                                                                   |       |             | (3,252       | )                | (16,161      | )          | (18,599      | )          |
|                               |                     |                              |                                                                                             |       |             | (802,698     | )                | (1,250,079   | )          | (1,319,799   | )          |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
|                               |                     | 10)                               | Value adjustments                                                                                |       |             |         |             |         |       |         |       |
|                               |                     |                              | a) Amortization of  intangible assets                                                            |       |             | (8,855,502   | )                | (8,740,658   | )          | (8,795,294   | )          |
|                               |                     |                              | b) Depreciation of tangible  assets                                                              |       |             | (38,710,855  | )                | (37,834,415  | )          | (36,980,636  | )          |
|                               |                     |                              | c) Other devaluation of  fixed assets                                                            |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              | d) devaluation of claims included in current assets  and of cash and equivalents                 |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              |                                                                                             |       |             | (47,566,357  | )                | (46,575,073  | )          | (45,775,930  | )          |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
|                               |                     | 11)                               | Changes in inventories of  raw materials, ancillary materials, consumer goods and goods for sale |       |             | (1,072,158   | )                | (1,024,378   | )          | 1,212,427    |       |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
|                               |                     | 12)                               | Provisions for risks                                                                             |       |             | —       |             | —       |       | —       |       |
|                               |                     | 13)                               | Other provisions                                                                                 |       |             | (7,966,174   | )                | (5,478,818   | )          | (6,458,753   | )          |
|                               |                     | 14)                               | Sundry operating charges                                                                         |       |             | (4,056,339   | )                | (5,234,282   | )          | (3,799,371   | )          |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
| **TOTAL  COSTS OF PRODUCTION (B)** | ** **               | ** **                        | **(302,761,388**                                                                                 | **)**      | **(292,459,588** | **)**        | **(281,054,267** | **)**        |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
| **DIFFERENCE  BETWEEN VALUE AND**  | ** **               | ** **                        | ** **                                                                                       | ** ** | ** **       | ** **   | ** **       | ** **   |
| **COST OF  PRODUCTION (A-B)**      | ** **               | ** **                        | **176,583,063**                                                                                  | ** ** | **132,209,380**  | ** **   | **161,944,590**  | ** **   |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
| **C)**                             | ** **               | **FINANCIAL  INCOME AND CHARGES** | ** **                                                                                       | ** ** | ** **       | ** **   | ** **       | ** **   | ** ** | ** **   |
|                               | 15)                      | Income from equity  investments:  |                                                                                             |       |             |         |             |         |       |         |
|                               |                     |                              | from subsidiary companies                                                                        |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              | from affiliated companies                                                                        |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              | from other companies                                                                             |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              | tax credits on dividends                                                                         |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              |                                                                                             |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
|                               | 16)                      | Other financial income:           |                                                                                             |       |             |         |             |         |       |         |
|                               |                     | a)                                | from claims entered as  fixed assets                                                             |       |             |         |             |         |       |         |       |
|                               |                     |                              | from subsidiary companies                                                                        |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              | from affiliated companies                                                                        |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              | from parent companies                                                                            |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              | from other companies                                                                             |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              |                                                                                             |       |             | —       |             | —       |       | —       |       |
|                               |                     | b)                                | from securities entered as  fixed assets other than equity investments                           |       |             | —       |             | —       |       | —       |       |
|                               |                     |                              |                                                                                             |       |             |         |             |         |       |         |       |
|                               |                     | c)                                | from securities entered as  current assets other than equity investments                         |       |             | —       |             | —       |       | —       |       |

 

24

----

 
| ** **                                                           | ** ** | ** **                                                   | ** **                                                             | ** ** | ** **      | **2004**    | ** **      | **2003**    | ** ** | **2002**    | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------------------------------------------------------------------|------------|-----------------|-------------|-----------------|-------------|------------|-------------|------------|
| ** **                                                           | ** ** | ** **                                                   | ** **                                                             | **(Euro)** | ** **      | ** **  | ** **      | ** **  | ** ** | ** **  | ** ** |
|                                                                 |       | d)                                                           | other income not included  in the above                                |       |            |        |            |        |       |        |       |
|                                                                 |       |                                                         | from subsidiary companies                                              |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         | from affiliated companies                                              |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         | from parent companies                                                  |       |            | —      |            | —      |       | 52,306      |       |
|                                                                 |       |                                                         | from associated companies                                              |       |            | 3,056       |            | 176,710     |       | 25,969      |       |
|                                                                 |       |                                                         | other companies                                                        |       |            | 1,489,859   |            | 2,003,713   |       | 2,431,860   |       |
|                                                                 |       |                                                         |                                                                   |       |            | 1,492,915   |            | 2,180,423   |       | 2,510,135   |       |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
|                                                                 |       |                                                         |                                                                   |       |            | 1,492,915   |            | 2,180,423   |       | 2,510,135   |       |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
|                                                                 | 17)        | Interest and other  financial charges:                       |                                                                   |       |            |        |            |        |       |        |
|                                                                 |       |                                                         | subsidiary companies                                                   |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         | affiliated companies                                                   |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         | parent companies                                                       |       |            | (1,231,148  | )               | (1,654,727  | )          | (2,803,600  | )          |
|                                                                 |       |                                                         | associated companies                                                   |       |            | (545        | )               | (105,005    | )          | (114,739    | )          |
|                                                                 |       |                                                         | other companies                                                        |       |            | (28,978,346 | )               | (40,330,245 | )          | (46,818,969 | )          |
|                                                                 |       |                                                         |                                                                   |       |            | (30,210,039 | )               | (42,089,977 | )          | (49,737,308 | )          |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
|                                                                 | 17bis)     |                                                         | Profits and losses on  foreign currency exchanges                      |       |            | (2,342      | )               | 273,453     |       | (4,650      | )          |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
| **TOTAL  FINANCIAL INCOME AND CHARGES (C)**                          | ** ** | ** **                                                   | **(28,719,466**                                                        | **)**      | **(39,636,101** | **)**       | **(47,231,823** | **)**       |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
| **D)**                                                               | ** ** | **VALUE  ADJUSTMENT OF FINANCIAL ASSETS**                    | ** **                                                             | ** ** | ** **      | ** **  | ** **      | ** **  | ** ** | ** **  |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
|                                                                 | 18)        | Revaluation                                                  |                                                                   |       |            |        |            |        |       |        |
|                                                                 |       | a)                                                           | of equity investments                                                  |       |            | —      |            | —      |       | —      |       |
|                                                                 |       | b)                                                           | of fixed financial assets  other than equity investments               |       |            | —      |            | —      |       | —      |       |
|                                                                 |       | c)                                                           | of securities entered as  current assets other than equity investments |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         |                                                                   |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       | —      |       |
|                                                                 | 19)        | Devaluation                                                  |                                                                   |       |            |        |            |        |       | —      |
|                                                                 |       | a)                                                           | of equity investments                                                  |       |            | —      |            | —      |       | —      |       |
|                                                                 |       | b)                                                           | of fixed financial assets  other than equity investments               |       |            | —      |            | —      |       | —      |       |
|                                                                 |       | c)                                                           | of securities entered as  current assets other than equity investments |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         |                                                                   |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       | —      |       |
| **TOTAL  VALUE ADJUSTMENT OF FINANCIAL ASSETS (D)**                  | ** ** | ** **                                                   | **—**                                                             | ** ** | —          | ** **  | **—**      | ** **  |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
| **E)  EXTRAORDINARY INCOME AND CHARGES**                             | ** ** | ** **                                                   | ** **                                                             | ** ** | ** **      | ** **  | ** **      | ** **  |
|                                                                 | 20)        | Extraordinary income                                         |                                                                   |       |            |        |            |        |       |        |
|                                                                 |       |                                                         | gains on disposal of assets                                            |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         | contingent assets                                                      |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         | other                                                                  |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         |                                                                   |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
|                                                                 | 21)        | Extraordinary charges                                        |                                                                   |       |            |        |            |        |       |        |
|                                                                 |       |                                                         | losses on disposal of assets                                           |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         | income taxes pertaining to  previous years                             |       |            | —      |            | (331,600    | )          | (305,286    | )          |
|                                                                 |       |                                                         | contingent liabilities                                                 |       |            | —      |            | —      |       | —      |       |
|                                                                 |       |                                                         | other                                                                  |       |            | —      |            | —      |       | (85,992     | )          |
|                                                                 |       |                                                         |                                                                   |       |            | —      |            | (331,600    | )          | (391,278    | )          |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
| **TOTAL  EXTRAORDINARY INCOME AND CHARGES (E)**                      | ** ** | ** **                                                   | —                                                                 | ** ** | **(331,600**    | **)**       | **(391,278**    | **)**       |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
| **PROFITS  (LOSSES) BEFORE INCOME TAXES (A-B±C±D±E)** | ** ** | ** **                                                   | **147,863,597**                                                        | ** ** | **92,241,679**  | ** **  | **114,321,489** | ** **  |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
| ** **                                                           | **22)**    | **Current,  deferred and advance income taxes for the year** |                                                                   |       | (58,121,930     | )           | (11,693,547     | )           | (7,362,343 | )           |
|                                                                 |       |                                                         |                                                                   |       |            |        |            |        |       |        |       |
| **23) PROFITS  (LOSSES) FOR THE FINANCIAL PERIOD**                   | ** ** | ** **                                                   | **89,741,666**                                                         | ** ** | **80,548,132**  | ** **  | **106,959,146** | ** **  |

 

25

----

 

**ISAB EnergyS.r.l.**

**Annualreport for the year ended December 31st 2004**

**Notes tothe financial statements**

 

26

----

 

**1.   The Company**

 

ISABEnergy is owner of the IGCC - Integrated Gasification Combined Cycle plant,located in the city of Priolo Gargallo, designed to generate electricity usingprocessing residuals from the refinery.

 

**2.   Criteria for the preparation of thefinancial statements**

 

Thepolicies used in drafting the annual report for the financial period ending 31 December 2004are in compliance with the law and accounting principles issued by the NationalCouncil of Professional Accountants and Bookkeepers.

 

Theannual report is composed of the Balance Sheets, the Profit and Loss Accountand the Explanatory Notes and is presented together with the Management Reportdrafted by the board of directors. It includes provisions on financialstatements introduced by the Reform on Company Law contained in LegislativeDecree 6 of 17 January 2003 and later amendments.

 

Allitems in the balance sheet are presented with figures from the 2003 balancesheet for comparison while the data contained in the profit and loss accountare compared to that from the last two financial periods.

 

Commentson the most significant variations are contained in the section “Commenton economic-financial results” found in the Management Report.

 

TheBalance Sheet and Profit and Loss Account express rounded values in Euro. Thedifference compared to the precise value in cents is found in the Profit andLoss Account under income and extraordinary charges.

 

Foradditional clarity and consistency with past statements, all amounts in theexplanatory notes are rounded to thousands of Euro. As a consequence, incertain prospectuses the totals may slightly differ from the totals of amountsthey are comprised of.

 

The2004 financial statements were audited by Reconta Ernst & Young S.p.A..

 

**3.   Accounting principles and evaluationcriteria**

 

Hereinafter,we specify the accounting principles used and evaluation criteria applied incompliance, in all cases, with provisions set forth in art. 2423, 2423 bis and2426 of the Civil Code.

 

Theevaluation criteria used to draft the 2004 annual report are in compliance withthose used in previous financial periods.

 

Itshould be noted that starting from 1 January, regular contingent assets andliabilities relative to the differences in evaluations made in previous yearsare shown in the profit and loss account by type instead of under “otherrevenues and income” and “other operating charges”. The impact of each listing,if significant, is commented on in the description of each item in the profitand loss account.

 

**3.1   Intangible fixed assets**

 

Intangiblefixed assets are calculated at their purchase or production price includingdirect financial charges incurred at completion date and they are adjusted at aconstant rate in relation to their lifecycle and in relation to the possibilityof being reused.

Indetail, the rates are obtained by applying the following criteria:

 

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•                  formation and expansion expenses areamortised over five years;

•                  the licenses for industrial processes inrelation to the contract term stipulated with the licensor;

•                  software licenses lasting for three years;

•                  contribution to ENEL for installing powerlines to connect the IGCC plant for the amount of time established;

•                  expenses and charges related to projectfinancing for the duration of the financing obtained from banks.

 

**3.2   Tangible fixed assets**

 

Tangiblefixed assets are calculated at their purchase or production price and they areshown net of provisions for value adjustments.

 

Thevalues shown have not been revaluated.

 

Thecost of assets includes financial charges incurred during construction.

 

Expensesfor expansion, modernisation and transformation and expenses for increasedmaintenance are capitalised and amortised in relation to the life cycle of theasset in question.

 

Expensesfor constant maintenance and repairs are entered in the profit and loss accountof the financial period when the event takes place.

 

Thevalue adjustment rates applied are as follows in relation to the type of assetand they follow the principles of prudence and are in accordance with theadjustment plan already established and in line with the estimated residualpossibility to use each asset:

 
| ** **                      | ** ** | **%**   | ** ** | **Level of adjustment as  of 31.12.04** | ** ** |
|---------------------------------|------------|---------|------------|-----------------------------------------|------------|
|                            |       |    |       |                                    |       |
| Industrial  buildings           |       | 3-4     |       | 17                                      | %          |
| Light  buildings                |       | 10      |       | 43                                      | %          |
| Systems in  the IGCC plant      |       | 3.3-8.2 |       | 21                                      | %          |
| Industrial  equipment           |       | 10      |       | 40                                      | %          |
| Office  furniture and equipment |       | 12      |       | 56                                      | %          |
| Various  equipment              |       | 10      |       | 50                                      | %          |
| Electronic  machinery           |       | 20      |       | 69                                      | %          |
| Motor  vehicles                 |       | 25      |       | 100                                     | %          |

 

Inrelation to the IGCC plant, the rates above are in reference to the evaluationsfrom an independent assessment of each technical unit in the plant.

 

**3.3   Investments**

 

Investmentsare listed in the balance sheet at their acquisition cost or reduced forlasting loss in value.

 

**3.4   Inventories**

 

Stocksof raw materials are valued using the LIFO method (Last In – First Out)calculated yearly or based on the current market value, whichever is lower.

 

Finishedproducts are valued based on current market value.

 

28

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Stocksof subsidiary materials and consumables are valued at their average calculatedprice or current market value, whichever is lower.

 

**3.5   Creditors and debtors**

 

Creditorsand debtors are entered in the balance sheet at their rated value. For debtorsthe value is reduced to the presumed payment value by allocating to a specificprovision.

 

Debtorsand creditors in other currencies are converted into Euro at the exchange rateof the date of the operation and the difference between the value and theamount actually paid or received is entered in the profit and loss accountunder financial charges and income.

 

Thedifferences in exchange rates, originating from the transfer of creditors anddebtors in the currency at the exchange rate of the end of the period comparedto that calculated on the date of the operation are entered in the profit andloss account.

 

**3.6   Current and deferred income taxes**

 

Currenttaxes are accrued based on the forecast tax charges for the period also takinginto account the effects deriving from following the “tax consolidation”instituted by the Unified Tax Act on income.

 

Furthermore,in relation to the relevant item, deferred taxes are accrued based on thetemporary differences which arise between statutory results and relativetaxable income or losses declared.

 

Prepaidtaxes entered into the balance sheet are subject to the reasonable certaintythat they can be returned also within the “tax consolidation”. Accrued deferredtaxes are not calculated for doubtful debtors. These deferred taxes arecalculated based on the average tax rates expected in the periods in which thetaxable temporary differences are paid.

 

**3.7   Accruals and payables**

 

Prepayments/accrualsand accrued/differed income are entered in relation to the relevant term inaccordance with provisions set forth in art. 2424 B of the Civil Code.

 

**3.8   Provisions for risks and charges**

 

Provisionsfor risks and charges are allocated to face determined liabilities, whethercertain or probable, where their amount or date is unknown by year end.

 

**3.9   Maintenance cycles**

 

Provisionsfor extraordinary periodical maintenance are made *pro rata temporis* for each financial period based on anestimate of expenses to be made and the multi-year programme of regularmaintenance for the IGCC plant.

 

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**3.10Employee severance indemnity**

 

Theitem represents the accrued liability for all employees calculated based onlegislation in force and labour contracts in place at year end.

 

**3.11Memorandum accounts**

 

Memorandum accounts arecalculated at the value of their confirmation or receipt and the potentialvalue of calculated.

 

In relation to accountingpolicy 22 drafted by the National Council of Professional Accountants andBookkeepers, the guarantees issued against written amounts due in the balancesheet should not be entered as a memorandum account but should be listed in theexplanatory notes where necessary under the comments relative to the section onamounts due.

 

**3.12 ****Operationswithin the group and****related parties transactions**

 

Duringthe financial period the company carried on sales, services and financialrelations with the parent company and with associated companies within thegroup. These relations were governed by contracts and at market conditions withthe exception of a financing agreement at zero interest to be reimbursed overten years which expires in the year 2010.

 

Thefigures in the Balance Sheet reflect the year-end situation and the Profit andLoss Account shows figures following the evolution of company control duringthe financial period.

 

Themost significant figures concern:

 

•                  theadministration of feedstock which is the raw material used by the IGCC plant inrelation to the Feedstock Supply Agreement dated 20 June 1996. Thismaterial comes from the ISAB refinery processing residuals, South Plant, ownedby the associated company ERG Raffinerie Mediterranee S.p.A.;

•                  mutualsupply of minor products between the company and ERG Raffinerie Mediterranee inview of the Minor Products Agreement dated 5 April 1996. As an example andlimited to such it is referred to products such as diesel fuel, gas, fuel oil,steam and heat;

•                  financingwithin the Project financing operation named “sub-debt” based on agreementsmade between financing banks and sponsors;

•                  servicesprovided by the associated company ISAB Energy Services S.r.l., under theOperation & Maintenance contract dated 5 April 1996 for operating andmaintaining the IGCC plant;

•                  support tocompany staff for sales, planning and performance, secretarial work,administration and finance provided by ERG Power & Gas based on theProvision of Service Agreement dated 22 December 2003.

 

Lastly,also a part of the services for the company, there are those provided by ERGS.p.A. for assistance relative to legal, company, tax and administrationcouncil and public relations and IT services; by ERG Raffinerie Mediterraneefor employee administration, organisation and human resources management,health assistance and fire fighting services.

 

Servicesprovided by ISAB Energy are directly concerned with legal activities and ITsupport, namely hosting the Expert Advanced System, ISAB Energy Services andleasing office space to the latter company and to ERG Power & GAS.

 

Thevalue of operations within the group is detailed below.

 

30

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Relationswith other associated entities concern financing subject to that obtained withthe Project Financing operation and a service contract with financinginstitutions, legal offices and insurance companies handled by the parentcompany and minor shareholder MEC Priolo B.V. – Holland. Since 17 December 2004the company has been held by a partnership between International Power -England and Mitsui & Co. – Japan, whereas up until 16 December 2004the company was entirely owned by the American group Edison Mission Energy.

 

**3.13Financial expenses**

 

Interestcharges and financial charges incurred from financing obtained from the parentcompany and later from financing received through the Project Financing untilthe date the plant went into production (April 18, 2000) were capitalisedunder the various items of assets.

 

Interestcharges and financial charges after that date were included to form the finaleconomic result.

 

**3.14****Profit and loss account**

 

Revenuesand expenses are shown in the profit and loss account according to the relevantterm.

 

**3.15****Extraordinary income and charges**

 

Thisitem shows the effects of changes in accounting policies from extraordinaryevents irrelevant to company operations and taxes relative to previous periodsderiving from a dispute with the tax administration.

 

**4.   Adjustmentof the Balance Sheets and Income Statements for the previous periods**

 

Asmentioned above, the balance sheet and financial statements as of 31 December 2004include new regulations on financial statements introduced by reforms onCompany Law pursuant to Legislative Decree 6 of 2003 and amended by LegislativeDecree 37 of 2004.

 

Inorder to standardise accounting policies for the 2004 balance sheet andfinancial statements from 2003 and 2002, the following was implemented:

 

•                  reclassificationof receivables due from the tax authority displayed for such period in Item(C)(II)(6) “Receivables from other debtors” to the newly-formed Item(C)(II)5-bis) “Tax credits”;

•                  reclassificationof advance taxes displayed for such periods in (C)(II)(6) “Receivables fromother debtors” to the newly-formed Item (C)(II)5-ter) “Deffered tax assets”;

•                  reclassificationof payables due to shareholders of a financial nature in Item (D)(12) “Payablesto parent companies” and Item (D)(5) “Payables to other financing sources” tothe newly-formed formed Item (D)(3) “Payables for shareholders for financing”;

 

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•                  reclassificationof profits on foreign currency exchanges included in Item (C)(16)(d) “Otherfinancial income” to the newly-formed Item (C)(17-bis) “Profits and losses onforeign currency exchanges”;

•                  Reclassificationof the losses on foreign currency exchanges included in Item (C) (17)“Interests and other financial charges” to the newly-formed Item (C) (17-bis)“Profits and losses on foreign currency exchanges”.

 

**5.   Management and coordination**

 

Thecompany is under the management and coordination of the parent company ERGS.p.A., registered offices in Milan, Via N. Piccinni 2.

 

Significantdata from the last annual report for ERG S.p.A. is attached.

 

**6.   Project financing**

 

Belowis a general overview of the loans, guarantees and relations deriving from theproject financing closed in 1996 with the signing of the project financingcontract and subjected to further changes on 15 September 2000 during therefinancing operations:

 

•                  taking outa grade 1 mortgage in favour of San Paolo IMI S.p.A. as guarantee for thepayment of amounts and loans deriving from the Project Financing contract. Themortgage is on the land where the I.G.C.C. is located in Priolo Gargallo;

•                  a speciallien in favour of San Paolo IMI S.p.A. as guarantee for the payment of amountsand loans deriving from the Project Financing contract. The lien is on thesystems, machinery, equipment, raw materials, semi-finished products, finishedproducts, stocks and credit derived from the sale of such goods;

•                  assignmentof all financial rights in relation to amounts received when applying penaltiespursuant to or in relation to project contracts – as detailed in the AssignmentAct – in favour of San Paolo IMI S.p.A. The assignment is as a guarantee forall the debts undertaken pursuant to or in relation to the Project FinancingContract;

•                  assignmentto San Paolo IMI S.p.A. of all insurance claims payable or received in relationto insurance required by the Project Financing Contract (with the exception ofindemnities relative to employee accidents or payment for damages to thirdparties).

 

Theduration of the debts after refinancing has been extended from eight tofourteen years from the payment of the first instalment which was paid on 15 December 2000and so until 15 December 2014.

 

In2004, a lower tied amount was renegotiated with the financing banks for theInsurance reserve account for business interruption for an amount of Euro22,437 thousand. The tied current account is held at Citibank of Milan. Thisamount held until 15 April 2005 is tied to the expiry date of the currentinsurance policy.

 

Furthermore,incoming and outgoing financial operations of the company are monitored andunder the constant supervision of the financing banks.

 

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**7.   Balance Sheet Analysis**

 

**Assets**

 

**FixedAssets (Euro 691,763 thousand)**

 

**7.1   Intangible fixed assets**

 
| ** **                              | ** ** | **Formation and   expansion   expenses** | ** ** | **Concessions,  licenses and   trademarks** | ** ** | **Intangible   assets in   progress and   payments on   account** | ** ** | **Other intangible   assets** | ** ** | **Total**  | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------|------------|------------|------------|
|                                    |       |                                     |       |                                        |       |                                                              |       |                          |       |       |       |
| **Past  expenses**                      |       | 26,166                                   |       | 9,491                                       |       | 159                                                               |       | 45,761                        |       | 81,576     |       |
| Value  adjustments                      |       | (19,382                                  | )          | (4,501                                      | )          | -                                                                 |       | (9,630                        | )          | (33,513    | )          |
| **Balance  as of 31.12.03**             | ** ** | **6,784**                                | ** ** | **4,990**                                   | ** ** | **159**                                                           | ** ** | **36,131**                    | ** ** | **48,063** | ** ** |
|                                    |       |                                     |       |                                        |       |                                                              |       |                          |       |       |       |
| **Period  movements:**                  |       |                                     |       |                                        |       |                                                              |       |                          |       |       |       |
| Acquisitions                            |       | —                                   |       | —                                      |       | 591                                                               |       | —                        |       | 591        |       |
| Capitalisations/accounting  adjustments |       | —                                   |       | —                                      |       | —                                                            |       | —                        |       | —     |       |
| Accounting  adjustments                 |       | —                                   |       | 703                                         |       | (703                                                              | )          | —                        |       | —     |       |
| Transfers  and dismissals               |       | —                                   |       | —                                      |       | —                                                            |       | —                        |       | —     |       |
| Value  adjustments                      |       | (5,233                                   | )          | (1,040                                      | )          | —                                                            |       | (2,583                        | )          | (8,856     | )          |
| Devaluation                             |       | —                                   |       | —                                      |       | —                                                            |       | —                        |       | —     |       |
|                                    |       |                                     |       |                                        |       |                                                              |       |                          |       |       |       |
| **Past  expenses**                      |       | 26,166                                   |       | 10,194                                      |       | 46                                                                |       | 45,761                        |       | 82,167     |       |
| Value adjustments                       |       | (24,616                                  | )          | (5,541                                      | )          | —                                                            |       | (12,212                       | )          | (42,368    | )          |
| **Balance  as of 31.12.04**             | ** ** | **1,550**                                | ** ** | **4,653**                                   | ** ** | **46**                                                            | ** ** | **33,549**                    | ** ** | **39,799** | ** ** |

 

Formationand expansion expenses consist of Euro 1 thousand for formation expenses andEuro 1,549 thousand for start-up expenses viewed as returnable and directlyattributed to starting up operations. They contain financial charges amountingto Euro 113 thousand and consist of:

 

•                  Euro 1,160thousand for services carried out by the associated company ISAB EnergyServices S.r.l., on our behalf and in our interest for training, organisationand specific training for qualified personnel who today is employed at the IGCCplant;

•                  Euro 390thousand for technical and legal consulting and services needed to draft anddevelop the project.

 

Theabove figures are net of value adjustments applied which amount respectively toEuro 8 thousand and Euro 24,608 thousand.

 

Concessions,licenses, trademarks and similar rights consist of Euro 4,082 thousand for thelicense to use the Texaco gasification process in addition to financial chargesamounting to Euro 781 thousand. The depreciations applied are equal to Euro2,848 thousand.

 

Additionally,the item includes software licenses purchased totalling Euro 572 thousand netof the value adjustment of Euro 2,692 thousand. The addition of Euro 703thousand is for the technical documentation management system, development ofthe Archimede 

 

33

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intranetand for upgrading SAP software and the Production and Management InformationSystem.

 

Theintangible assets in progress for Euro 46 thousand consist of Euro 25 thousandfor consolidating SAP software and 21 thousand for a feasibility study on asystem to recover vanadium.

 

Otherintangible assets include financial charges amounting to Euro 5,097 thousandand the amount paid to ENEL to connect the IGCC plant to the 380 and 150 Kwpower lines for a total of Euro 19,807 thousand as well as expenses amountingto Euro 13,742 thousand for legal and financial services and technical supportto implement the Project Financing operation. The above figures are shown aftervalue adjustments amounting respectively to Euro 6,175 thousand and Euro 6,037thousand.

 

**7.2****              ****Tangible fixed assets**

 
| ** **                              | ** ** | **Land and   buildings** | ** ** | **Plants and   machinery** | ** ** | **Other   fixtures   and   fittings,  tools and   equipment** | ** ** | **Other   goods** | ** ** | **Tangible   assets in   course of   construction   and   payments on   account** | ** ** | **Total**   | ** ** |
|-----------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------------------------------------|------------|-------------------|------------|-----------------------------------------------------------------------------------|------------|-------------|------------|
| **Past  expenses**                      |       | 18,122                   |       | 793,427                    |       | 296                                                           |       | 1,788             |       | 5,558                                                                             |       | 819,190     |       |
| Value  adjustments                      |       | —                   |       | —                     |       | —                                                        |       | —            |       | —                                                                            |       | —      |       |
| ** **                              | ** ** | **18,122**               | ** ** | **793,427**                | ** ** | **296**                                                       | ** ** | **1,788**         | ** ** | **5,558**                                                                         | ** ** | **819,190** | ** ** |
|                                    |       |                     |       |                       |       |                                                          |       |              |       |                                                                              |       |        |       |
| Financial/technical  adjustments        |       | (2,354                   | )          | (132,170                   | )          | (94                                                           | )          | (1,018            | )          | —                                                                            |       | (135,635    | )          |
| Devaluation                             |       | —                   |       | —                     |       | —                                                        |       | —            |       | —                                                                            |       | —      |       |
| **Balance  as of 31.12.03**             | ** ** | **15,768**               | ** ** | **661,257**                | ** ** | **203**                                                       | ** ** | **770**           | ** ** | **5,558**                                                                         | ** ** | **683,555** | ** ** |
|                                    |       |                     |       |                       |       |                                                          |       |              |       |                                                                              |       |        |       |
| **Period  movements:**                  |       |                     |       |                       |       |                                                          |       |              |       |                                                                              |       |        |       |
| Acquisitions                            |       | —                   |       | —                     |       | —                                                        |       | —            |       | 7,454                                                                             |       | 7,454       |       |
| Capitalisations/accounting  adjustments |       | 625                      |       | 8,193                      |       | 13                                                            |       | 109               |       | (8,940                                                                            | )          | —      |       |
| Transfers  and dismissals               |       | —                   |       | (322                       | )          | —                                                        |       | (17               | )          | —                                                                            |       | (339        | )          |
| Financial/technical  value adjustments  |       | (659                     | )          | (37,753                    | )          | (31                                                           | )          | (268              | )          | —                                                                            |       | (38,711     | )          |
| Devaluation                             |       | —                   |       | —                     |       | —                                                        |       | —            |       | —                                                                            |       | —      |       |
|                                    |       |                     |       |                       |       |                                                          |       |              |       |                                                                              |       |        |       |
| **Past  expenses**                      |       | 18,748                   |       | 801,199                    |       | 309                                                           |       | 1,713             |       | 4,071                                                                             |       | 826,040     |       |
| Value  adjustments                      |       | —                   |       | —                     |       | —                                                        |       | —            |       | —                                                                            |       | —      |       |
| ** **                              | ** ** | **18,748**               | ** ** | **801,199**                | ** ** | **309**                                                       | ** ** | **1,713**         | ** ** | **4,071**                                                                         | ** ** | **826,040** | ** ** |
|                                    |       |                     |       |                       |       |                                                          |       |              |       |                                                                              |       |        |       |
| Financial/technical  value adjustments  |       | (3,013                   | )          | (169,824                   | )          | (125                                                          | )          | (1,119            | )          | —                                                                            |       | (174,081    | )          |
| Devaluation                             |       | —                   |       | —                     |       | —                                                        |       | —            |       | —                                                                            |       | —      |       |
| **Balance  as of 31.12.04**             | ** ** | **15,735**               | ** ** | **631,375**                | ** ** | **185**                                                       | ** ** | **594**           | ** ** | **4,071**                                                                         | ** ** | **651,959** | ** ** |

 

Tangiblefixed assets consist of financial charges incurred during construction andcapitalised for each asset. This amount as of 31 December 2004 totals Euro89,235 thousand of which Euro 1,181 thousand under the item land and buildingsand Euro 88,054 thousand under systems and machinery.

 

34

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Theitem land and buildings includes Euro 2,219 thousand of the amount which is notadjusted of the entire area where the IGCC plant is located while the land ofthe systems and buildings is accounted according to each asset it belongs to.

 

Allthe buildings are for industrial purposes and amount to Euro 13,121 thousand.They include the group of buildings making up the entrance and reception,offices, cafeteria, warehouse, control room, laboratory, sheds, streets,parking areas and other infrastructures. The item includes Euro 395 thousandfor light buildings. The value adjustment of Euro 3,013 thousand is dividedinto Euro 2,717 thousand for buildings and Euro 296 thousand for lightbuildings.

 

Capitalisationfor Euro 625 thousand is mainly for upgrading the LAN, improving the warehousefire fighting system and routes and building parking areas and installingstreet signs and signals.

 

Plantsand machinery include the IGCC - Integrated Gasification Combined Cycle plant.

 

Theamount of Euro 801,199 thousand consists of Euro 736,629 thousand for systemsin the power plant, Euro 58,633 thousand for the substations and Euro 5,937thousand for auxiliary systems for processing and treatment.

 

Avalue adjustment of Euro 169,824 thousand was applied in reference to theestimated technical-economic lifecycle for an average of over 19 years. The“component approach” was used for the estimate in reference to the maincomponents of each technical unit.

 

Thenew capitalisations of the period are Euro 69 thousand for the substation andEuro 8,124 thousand for the power plant. The most significant investmentsinclude Euro 2,578 thousand for eliminating construction defects and installingnew steel components, Euro 2,410 thousand for strategic spare parts, 1,575thousand Euro for improving the safety and protection system and Euro 765thousand for installing washing and measuring systems and for improving instruments.

 

Othergoods, net of the relative value adjustment provision, are Euro 208 thousandfor office furniture and equipment, Euro 333 thousand for electronic machines,Euro 53 thousand for various equipment and consumables.

 

Inthe item tangible assets in course of construction and payments on accountincludes Euro 3,980 thousand for investments in progress and Euro 91 thousandfor payments on account.

 

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**7.3****                               Financialfixed assets**

 
| ** **                               | ** ** | **Equity investments**     | ** ** | ** **                 | ** ** | ** **            | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **Subsidiary   companies** | ** ** | **Associated   companies** | ** ** | **Other   companies** | ** ** | **Loans** | ** ** | **Total** | ** ** |
|                                     |       |                       |       |                       |       |                  |       |   |   |   |   |
| **Past  expenses**                       |       | —                     |       | —                     |       | 5                     |       | 4 |   | 9 |   |
| Devaluation                              |       | —                     |       | —                     |       | —                |       | — |   | — |   |
| **Balance  as of 31.12.03**              | ** ** | **—**                 | ** ** | **—**                 | ** ** | **5**                 | ** ** | **4** | ** ** | **9** | ** ** |
|                                     |       |                       |       |                       |       |                  |       |   |   |   |   |
| **Period  movements:**                   |       |                       |       |                       |       |                  |       |   |   |   |   |
| Acquisitions                             |       | —                     |       | —                     |       | —                |       | — | ** ** | **—** | ** ** |
| Payments                                 |       | —                     |       | —                     |       | —                |       | — | ** ** | **—** | ** ** |
| Transfers  and dismissals                |       | —                     |       | —                     |       | —                |       | (4 | **)** | **(4** | **)** |
| Returns                                  |       | —                     |       | —                     |       | —                |       | — | ** ** | **—** | ** ** |
| Devaluation/use  of provision for losses |       | —                     |       | —                     |       | —                |       | — | ** ** | **—** | ** ** |
|                                     |       |                       |       |                       |       |                  |       |   |   |   |   |
| Past  expenses                           |       | —                     |       | —                     |       | 5                     |       | — | ** ** | **5** | ** ** |
| Devaluation                              |       | —                     |       | —                     |       | —                |       | — |   | — |   |
| **Balance  as of 31.12.04**              | ** ** | **—**                 | ** ** | **—**                 | ** ** | **5**                 | ** ** | **—** | ** ** | **5** | ** ** |

 

Thevalue of equity investments in other companies refers to the cost ofacquisition at the nominal value for 100 shares equal to 5% of the sharecapital of the company Industria Acqua Siracusana S.p.A., registered offices inSyracuse. The net worth of the holding amounted to Euro 108 thousand as of 31 December 2003.

 

**CurrentAssets (Euro 239,718 thousand)**

 

**7.4****              ****Inventories**

 
| ** **                   | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|------------------------------|------------|--------------|------------|--------------|------------|
| Raw materials                |       | 3,615        |       | 3,432        |       |
| Consumables                  |       | 9,659        |       | 10,914       |       |
| Finished  products and goods |       | 439          |       | 294          |       |
| Payments on  account         |       | 98           |       | 58           |       |
| **TOTAL**                    | ** ** | **13,811**   | ** ** | **14,698**   | ** ** |

 

Thestock of raw materials rose mainly due to the higher amount of diesel fuel instock at the end of the period. Overall stocks of raw materials amount to25,669 tons compared to 25,291 tons the previous period. The LIFO reserveamounted to Euro 2,578 thousand as of 31 December 2004.

 

Thedecrease in consumables is due to operational spare parts which were consideredas strategic following an in-depth study and so they were entered under theitem plants. Euro 850 thousand for devaluation booked in 2003 remainedunchanged as the estimate is still adequate to face any value losses whilewaiting to define the use of spare parts that might not be suitable for theIGCC plant.

 

Theincrease in finished products is due to a rise in the vanadium market. Sulphurproducts have dropped slightly due to lower quantities in stock.

 

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Paymentson account are amounts paid to suppliers for purchasing spare parts andconsumables that are to be delivered during the initial months of the followingfinancial period.

 

**7.5****              ****Receivables**

 
| ** **                            | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|---------------------------------------|------------|--------------|------------|--------------|------------|
| Trade  debtors                        |       | 50,597       |       | 39,766       |       |
| Amounts owed  by associated companies |       | 3,202        |       | 3,815        |       |
| Amounts owed  by parent companies     |       | 3,393        |       | —       |       |
| Amounts owed  by tax administration   |       | —       |       | 1,603        |       |
| Advance  taxes                        |       | 8,784        |       | 5,612        |       |
| Other  debtors                        |       | 9,064        |       | 9,345        |       |
| **TOTAL**                             | ** ** | **75,040**   | ** ** | **60,141**   | ** ** |

 

Detailson debtor figures are provided below:

 

**TradeReceivables**

 
| ** **                                      | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-------------------------------------------------|------------|--------------|------------|--------------|------------|
| Amounts  receivable for the sale of electricity |       | 48,998       |       | 39,216       |       |
| Other  receivables for sales                    |       | 1,598        |       | 550          |       |
| **TOTAL**                                       | ** ** | **50,597**   | ** ** | **39,766**   | ** ** |

 

Theseamounts are for the sale of electricity during the month of December 2004and include the final rate adjustment for the entire financial period estimatedat Euro 10,895 thousand. The increase is mainly due to a rise in production inthe last month of the year compared to December 2003. The amount inquestion was paid in February 2005. The rate adjustment will be officiallyannounced by the Rate Adjustment Body for the electricity sector in April 2005.

 

Otherreceivables for sales concern the sale of sulphur and vanadium.

 

**Receivablesfrom associated companies**

 
| ** **                          | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-------------------------------------|------------|--------------|------------|--------------|------------|
| **Trade  receivables:**             |       |         |       |         |       |
| ERG  Raffinerie Mediterranee S.r.l. |       | 3,151        |       | 3,078        |       |
| ERG Petroli  S.p.A.                 |       | —       |       | 620          |       |
| ISAB Energy  Services S.r.l.        |       | 51           |       | 69           |       |
| ** **                          | ** ** | **3,202**    | ** ** | **3,768**    | ** ** |
| **Financial  receivables:**         |       |         |       |         |       |
| ERG Petroli  S.p.A.                 |       | —       |       | 47           |       |
| **TOTAL**                           | ** ** | **3,202**    | ** ** | **3,815**    | ** ** |

 

Amountsowed by ERG Raffinerie Mediterranee are for the sale of minor products mainlyduring the last quarter of 2004. Amounts owed by ISAB Energy Services are forleasing office space and amounts for recuperating expenses for generalservices.

 

37

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**Receivablesfrom parent companies**

 
| ** **                  | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-----------------------------|------------|--------------|------------|--------------|------------|
| **Trade  receivables:**     |       |         |       |         |       |
| ERG Power  & Gas S.p.A. |       | 33           |       | —       |       |
|                        |       |         |       |         |       |
| **Other  receivables:**     |       |         |       |         |       |
| ERG S.p.A.                  |       | 3,360        |       | —       |       |
|                        |       |         |       |         |       |
| **TOTAL**                   | ** ** | **3,393**    | ** ** | **—**   | ** ** |

 

Amountsowed by ERG Power & Gas are for leasing office space and amounts forrecuperating expenses for general services.

 

Otheramounts are relative to the payment of VAT for the month of December 2004transferred to ERG S.p.A. for the group central account.

 

**Taxreceivables**

 
| ** **                          | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-------------------------------------|------------|--------------|------------|--------------|------------|
|                                |       |         |       |         |       |
| Receivables  due from Tax Authority |       |         |       | 1,603        |       |
| **TOTAL**                           | ** ** | **—**   | ** ** | **1,603**    | ** ** |

 

Amounts owed by taxadministration are for the use of an IRAP 2003 credit as partial cover for taxpayments in 2004.

 

**Deferredtax asset**

 
| ** **     | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|----------------|------------|--------------|------------|--------------|------------|
| IRES  deferred |       | 5,302        |       | 2,346        |       |
| IRAP  deferred |       | 3,482        |       | 3,267        |       |
| **TOTAL**      | ** ** | **8,784**    | ** ** | **5,612**    | ** ** |

 

Amounts for advance taxesare almost entirely for taxes on provisions for risk and charges.

 

Limited to IRAP in additionto that calculated on the temporary difference between various financialperiods, Euro 2,808 thousand in advance taxes on financial charges is insuspension and capitalised until the IGCC plant entered into production and itwill be paid over the next financial periods together with adjustment amounts.

 

38

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Below is an outline of temporary differences and advance taxes:

 
| ** **                                     | ** ** | ** **  | ** ** | **31.12.04**  | ** ** | ** **      | ** ** | **31.12.03** | ** ** |
|------------------------------------------------|------------|-------------|------------|---------------|------------|-----------------|------------|--------------|------------|
| ** **                                     | ** ** | **Taxable** | ** ** | **IRES  33%** | ** ** | **IRAP  4.25%** | ** ** | **Taxable**  | ** ** | **IRES  33%** | ** ** | **IRAP  4.25%** | ** ** |
|                                           |       |        |       |          |       |            |       |         |       |   |   |   |   |
| Reserve for  maintenance                       |       | 14,768      |       | 4,873         |       | 628             |       | 7,352        |       | 2,426 |   | 312 |   |
| Other  reserves                                |       | 550         |       | 182           |       | 23              |       | 37           |       | 12 |   | 2 |   |
| Capitalised  financial charges                 |       | 66,060      |       | —        |       | 2,808           |       | 69,889       |       | — |   | 2,970 |   |
| Other IRAP temporary  differences              |       | 548         |       | —        |       | 23              |       | 601          |       | — |   | 26 |   |
| Other IRES  temporary differences              |       | 748         |       | 247           |       | —          |       | 740          |       | 244 |   | — |   |
|                                           |       |        |       |          |       |            |       |         |       |   |   |   |   |
| Charges for  electricity transmission services |       | —      |       | —        |       | —          |       | (1,020       | )          | (337 | ) | (43 | ) |
| **TOTAL**                                      | ** ** | ** **  | ** ** | **5,302**     | ** ** | **3,482**       | ** ** | ** **   | ** ** | **2,346** | ** ** | **3,267** | ** ** |

 

**Other**

**Receivables**

 
| ** **                                      | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-------------------------------------------------|------------|--------------|------------|--------------|------------|
| Receivable  for damage compensation             |       | 6,030        |       | 6,030        |       |
| Receivables  for insurance reimbursements       |       | —       |       | 1,479        |       |
| Receivables  from employees                     |       | 1            |       | 10           |       |
| Receivables  from suppliers and other creditors |       | 3,033        |       | 1,826        |       |
| **TOTAL**                                       | ** ** | **9,064**    | ** ** | **9,345**    | ** ** |

 

The amount of Euro 6,030thousand remained unchanged after the partial payment of Euro 15 million waspaid in February 2003 for indemnity granted to the company concerning thedispute with Consorzio Snamprogetti Foster Wheeler Energy in 30 December 2002and accounted for in the 2002 balance sheets for Euro 21,030 thousand. Thisamount is amount is regulated by a pro soluto transfer of credit that theabove-mentioned Consortium had from Texaco Development and can be compensatedwith the yearly amounts owed as royalties to use the Texaco gasificationprocess. The term in which the amounts can be compensated is by the end of thelicense contract with Texaco set for the year 2012.

 

Other receivables amountingto Euro 3,033 thousand include Euro 2,879 thousand for fees paid fortransmitting electricity generated in 2002, 2003 and 2004. These fees wereapplied by the National Transmission Grid Operator after provisions issued bythe Authority on Electricity and Gas, however they were ruled against by theAdministrative Court of Lombardy on a petition for recourse.

 

Amounts realisable beyondtwelve months regard payments for damage claims from the Consortium which canbe compensated with the accumulation of royalties on the gasification process.

 

39

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**7.6****                              ****Cash and equivalents**

 
| ** **                             | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|----------------------------------------|------------|--------------|------------|--------------|------------|
| **Bank and  postal current accounts:** |       |         |       |         |       |
| - regular  current accounts            |       | 77           |       | 76           |       |
| - Project  Financing account           |       | 150,778      |       | 101,680      |       |
|                                   |       | 150,856      |       | 101,756      |       |
|                                   |       |         |       |         |       |
| **Cash on  hand**                      |       | 11           |       | 5            |       |
| **TOTAL**                              | ** ** | **150,867**  | ** ** | **101,761**  | ** ** |

 

This item includes cash athand at year end and in current accounts after careful administration of cashgoverned by agreements made with financing banks.

 

The balance in the bank accountsare mainly in accounts held at Citibank Milan (the project financing bankaccount) where all incoming and outgoing capital is moved according to therules set forth in the project financing contract.

 

It should be noted that thetied account “Insurance reserve account”, which acts as a guarantee for anyloss of insurance cover due to variations in the business interruption limit,was reduced from Euro 23,959 thousand to Euro 22,657 thousand. The duration ofthe tie is subject to the renewal of the current insurance policy which expireson 15 April 2005.

 

**7.7   Accrued income and prepayments**

 

**Prepayments**

 
| ** **              | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-------------------------|------------|--------------|------------|--------------|------------|
| Surety  premiums        |       | —       |       | 42           |       |
| Insurance               |       | 2,877        |       | 3,879        |       |
| Service fees  and other |       | 222          |       | 353          |       |
| **TOTAL**               | ** ** | **3,099**    | ** ** | **4,274**    | ** ** |

 

Accruedincome for insurance is relative to policy premiums to cover for property risksand civil liability. They expire at the end of the period in question.

 

Otheraccrued income is mainly for fees for steam services provided to ERG RaffinerieMediterranee amounting to Euro****224 thousand.

 

Theaccrued income is attributed to the 2005 financial period.

 

40

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Belowis an outline of items in assets accounted by due date:

 
| ** **                              | ** ** | **Within   12 months** | ** ** | **within   5 years** | ** ** | **beyond   5 years** | ** ** | **Total**  | ** ** |
|-----------------------------------------|------------|------------------------|------------|----------------------|------------|----------------------|------------|------------|------------|
| **Debtors  in tangible fixed assets**   |       |                   |       |                 |       |                 |       |       |       |
| - payments  on account                  |       | 91                     |       | —               |       | —               |       | 91         |       |
| **Debtors  in current assets**          |       |                   |       |                 |       |                 |       |       |       |
| - payments  on account (stocks)         |       | 98                     |       | —               |       | —               |       | 98         |       |
| - trade  debtors                        |       | 50,597                 |       | —               |       | —               |       | 50,597     |       |
| - amounts  owed by associated companies |       | 3,202                  |       | —               |       | —               |       | 3,202      |       |
| - amounts  owed by parent companies     |       | 3,393                  |       | —               |       | —               |       | 3,393      |       |
| - advance  taxes                        |       | 4,731                  |       | 1,950                |       | 2,103                |       | 8,784      |       |
| - other  debtors                        |       | 3,908                  |       | 4,261                |       | 895                  |       | 9,064      |       |
| ** **                              | ** ** | **65,928**             | ** ** | **6,211**            | ** ** | **2,999**            | ** ** | **75,138** | ** ** |
| **Prepayments  and accrued income**     |       |                   |       |                 |       |                 |       |       |       |
| - accrued  payment                      |       | 3,099                  |       | —               |       | —               |       | 3,099      |       |
| **TOTAL**                               | ** ** | **69,118**             | ** ** | **6,211**            | ** ** | **2,999**            | ** ** | **78,328** | ** ** |

 

**Liabilities**

 

**7.8   Shareholders’ equity**

 

**ShareCapital**

 

Theamount, fully paid up, is subscribed as follows:

 
| ** **                         | ** ** | **Share of capital** | ** ** | **%**   | ** ** |
|------------------------------------|------------|----------------------|------------|---------|------------|
| ERG Power  & Gas S.p.A. - Rome |       | 2,634,150            |       | 51      |       |
| MEC Priolo  BV - Netherlands       |       | 2,530,850            |       | 49      |       |
| **TOTAL**                          | ** ** | **5,165,000**        | ** ** | **100** | ** ** |

 

**Legalreserve (Euro 1,033 thousand)**

 

Thelegal reserve was formed in 2002 after the allocation of 2001 year-end profitsand corresponds to one fifth of the share capital.

 

41

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**Profits (Losses) carried forward (Euro 161,173thousand)**

 

The item increased for 2003 profits brought forward for Euro 80,548thousand and decreased in July 2004 for Euro 39,000 thousand as an effectof previous profits being distributed to shareholders.

 
| ** **                       | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|----------------------------------|------------|--------------|------------|--------------|------------|
| 2001 profit  brought forward     |       | 12,666       |       | 12,666       |       |
| 2002 profit  brought forward     |       | 106,959      |       | 106,959      |       |
| 2003 profit  brought forward     |       | 80,548       |       | —       |       |
| Distribution of  previous profit |       | (39,000      | )          | —       |       |
| **TOTAL**                        | ** ** | **161,173**  | ** ** | **119,625**  | ** ** |

 

**Changes in Capital and Reserves**

 
| ** **                                    | ** ** | **Share  capital** | ** ** | **Share  premium  account** | ** ** | **Legal  reserve** | ** ** | **Other  reserves** | ** ** | **Profit (loss)  brought  forward** | ** ** | **Profits  (loss) for  the  financial  period** | ** ** | **Total  capital  and  reserves** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------|------------|---------------------|------------|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|
| **Balance  as of 31.12.2001**                 | ** ** | **5,165**          | ** ** | **—**                  | ** ** | **—**         | ** ** | **15,493**          | ** ** | **(6,960**                          | **)**      | **56,959**                                      | ** ** | **70,657**                        | ** ** |
|                                          |       |               |       |                        |       |               |       |                |       |                                |       |                                            |       |                              |       |
| Cover for loss  1999 and 2000                 |       | —             |       | —                      |       | —             |       | (6,960              | )          | 6,960                               |       | —                                          |       | —                            |       |
| Destination of  residual reserve in           |       |               |       |                        |       |               |       |                |       |                                |       |                                            |       |                              |       |
|                                          |       |               |       |                        |       |               |       |                |       |                                |       |                                            |       |                              |       |
| Financial debt  account                       |       | —             |       | —                      |       | —             |       | (8,533              | )          | —                              |       | —                                          |       | (8,533                            | )          |
|                                          |       |               |       |                        |       |               |       |                |       |                                |       |                                            |       |                              |       |
| Destination of  2001 profit                   |       | —             |       | —                      |       | 1,033              |       | —              |       | 30,926                              |       | (31,959                                         | )          | —                            |       |
| Distribution of  2001 profit                  |       | —             |       | —                      |       | —             |       | —              |       | —                              |       | (25,000                                         | )          | (25,000                           | )          |
| Profit or loss  for the 2002 financial period |       | —             |       | —                      |       | —             |       | —              |       | —                              |       | 106,959                                         |       | 106,959                           |       |
| **Balance  as of 31.12.2002**                 | ** ** | **5,165**          | ** ** | **—**                  | ** ** | **1,033**          | ** ** | **—**          | ** ** | **30,926**                          | ** ** | **106,959**                                     | ** ** | **144,083**                       | ** ** |
|                                          |       |               |       |                        |       |               |       |                |       |                                |       |                                            |       |                              |       |
| Destination of  2002 profit                   |       | —             |       | —                      |       | —             |       |                |       | 106,959                             |       | (106,959                                        | )          | —                            |       |
| Distribution of  2002 profit                  |       | —             |       | —                      |       | —             |       |                |       | (18,260                             | )          | —                                          |       | (18,260                           | )          |
| Profit or loss  for the 2003 financial period |       | —             |       | —                      |       | —             |       | —              |       | —                              |       | 80,548                                          |       | 80,548                            |       |
| **Balance  as of 31.12.2003**                 | ** ** | **5,165**          | ** ** | **—**                  | ** ** | **1,033**          | ** ** | **—**          | ** ** | **119,625**                         | ** ** | **80,548**                                      | ** ** | **206,371**                       | ** ** |
|                                          |       |               |       |                        |       |               |       |                |       |                                |       |                                            |       |                              |       |
| Destination of  2003 profit                   |       | —             |       | —                      |       | —             |       | —              |       | 80,548                              |       | (80,548                                         | )          | —                            |       |
| Distribution of  previous profit              |       | —             |       | —                      |       | —             |       | —              |       | (39,000                             | )          | —                                          |       | (39,000                           | )          |
| Profit or loss  for the 2004 financial period |       | —             |       | —                      |       | —             |       | —              |       | —                              |       | 89,742                                          |       | 89,742                            |       |
| **Balance  as of 31.12.2004**                 | ** ** | **5,165**          | ** ** | **—**                  | ** ** | **1,033**          | ** ** | **—**          | ** ** | **161,173**                         | ** ** | **89,742**                                      | ** ** | **257,113**                       | ** ** |

 

42

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The following table shows theitems in the capital and reserves with indications on their use anddistribution possibilities as well as any legal ties.

 
| **Type/description**                       | ** ** | **Amount**  | ** ** | **Possible  use** | ** ** | **Amount  available** | ** ** | **Amount in  tax  suspension** | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------------|------------|-----------------------|------------|--------------------------------|------------|
| Share capital                              |       | 5,165       |       | —            |       |                  |       | —                         |       |
|                                       |       |        |       |              |       |                  |       |                           |       |
| Legal reserve                              |       | 1,033       |       | B                 |       | —                |       | —                         |       |
| Profit (loss)  brought forward             |       | 161,173     |       | A B C             |       | 161,173               |       | —                         |       |
| Profits (loss)  for the financial period   |       | 89,742      |       | A B C             |       | 89,742                |       | —                         |       |
| **Total**                                  | ** ** | **257,113** | ** ** | ** **        | ** ** | **250,915**           | ** ** | **—**                     | ** ** |
| Amount not  available [art. 2426, 5) C.C.] |       |        |       |              |       | (1,550                | )          | —                         |       |
| **Amount  which can be distributed**       | ** ** | ** **  | ** ** | ** **        | ** ** | **249,364**           | ** ** | **—**                     | ** ** |

 

Legend: A – toincrease share capital; B – to cover loss; C – for distribution to shareholders

 

Within the agreements made with financing banks, the amounts availablefor distribution to shareholders are subject to their approval after checkingthe conditions required by the project financing contract, which require thatcertain financial indexes are reached and that there are not certain “default”situations.

 

Dueto the elimination of fiscal interferences and the tax deduction made directlyon the tax return accordingly to the art. 109/4 b) of TUIR, if profits and/or reserves aredistributed, the amount of the reserves and profits brought forward should notfall below the total remaining amount of negative unaccountable items deductedwhich after deferred taxes is estimated at Euro 21,946 thousand. If thishappens, the amount of distributed reserves and/or profits that reaches thisminimum level will be included as taxable income for the company.

 

**7.9   Provisionfor risks and charges**

 
| ** **                       | ** ** | ** **   | ** ** | ** **   | ** ** | **Variations** | ** ** |
|----------------------------------|------------|--------------|------------|--------------|------------|----------------|------------|
| ** **                       | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** | **Increases**  | ** ** | **Decreases** | ** ** |
| Provision for  deferred taxation |       | 13,028       |       | —       |       | 13,028         |       | — |   |
| Provision for  past taxation     |       | 203          |       | 203          |       | —         |       | — |   |
| Provision for  maintenance       |       | 14,768       |       | 7,352        |       | 7,416          |       | — |   |
| Other provisions                 |       | 550          |       | 33           |       | 550            |       | (33 | ) |
| **TOTAL**                        | ** ** | **28,549**   | ** ** | **7,587**    | ** ** | **20,994**     | ** ** | **(33** | **)** |

 

The provision for deferred taxation consists of Euro 11,541 for IRES and1,486 thousand Euro for IRAP. The allocation is to cover tax amortisation thatis not included in the profit and loss account and that is indicated in thecompany income tax declaration.

 

The provision for past taxation was formed in 2002 to face theincreasing tax burden of the 1998 and 1999 after being notified of an audit andadjustment for tax withholdings and VAT. The provision was used for the 1998amount after the audit. The remaining amount remains allocated while the 1999income tax is being defined.

 

43

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The“Cyclical maintenance fund” was adjusted with the figures applicable to theperiod for the cost of the plant shutdown for the performance of extraordinarymaintenance, scheduled in the first half of 2005 for some of technical units,and in the year 2006 for the remainder.

 

Themaintenance plan approved by the associated company, ISAB Energy Services,provides for shutdowns on a four-year cycle for each plant train, and on atwo-year cycle for general parts.

 

The other provisions are relative to potential risks for returningcertain privileged terms obtained in the past from ISAB Energy Services whichmay be transferred to ISAB Energy under the Operation & Maintenancecontract. Its use during the year regards the allocation in 2003 of charges onfinished products incurred in the beginning months of the financial period.

 

**7.10  Employee severance indemnities**

 
| ** **                    | ** ** | ** **   | ** ** | ** **   | ** ** | **Variations** | ** ** |
|-------------------------------|------------|--------------|------------|--------------|------------|----------------|------------|
| ** **                    | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** | **Increases**  | ** ** | **Decreases** | ** ** |
| Employee  severance indemnity |       | 105          |       | 168          |       | 19             |       | (82 | ) |

 

This item, net of integrated social security amounts transferred toPrevindai and Fondenergia, covers employee severance indemnity accrued as of 31December 2004 in compliance with employment contracts and legislation inforce at year end.

 

The decreases concern advances and employee transfers to the parentcompany ERG Power & Gas.

 

**7.11  Payables**

 
| ** **                                    | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-----------------------------------------------|------------|--------------|------------|--------------|------------|
| Amounts owed to  shareholders for financing   |       | 48,062       |       | 51,758       |       |
| Amounts owed to  banks                        |       | 510,307      |       | 593,811      |       |
| Amounts owed to  suppliers                    |       | 23,740       |       | 21,395       |       |
| Amounts owed to  associated companies         |       | 25,359       |       | 26,925       |       |
| Amounts owed to  parent companies             |       | 39,831       |       | 1,236        |       |
| Amounts owed to  tax administration           |       | 1,019        |       | 2,477        |       |
| Amounts owed to  social security institutions |       | 45           |       | 79           |       |
| Other creditors                               |       | 160          |       | 327          |       |
| **TOTAL**                                     | ** ** | **648,522**  | ** ** | **698,007**  | ** ** |

 

Overall creditors decreased by Euro 49,485 thousand, as an effect ofreimbursements for financial debts amounting to Euro 88,141 thousand, increasedamounts for tax administration and sales amounting to respectively 37,051 andEuro 1,809 thousand and a decrease in other creditors amounting to Euro 203thousand.

 

44

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Creditors are detailed below:

 

**Payables due to shareholders for financing**

 
| ** **                       | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|----------------------------------|------------|--------------|------------|--------------|------------|
| **Major  shareholder:**          |       |         |       |         |       |
| ERG  Power & Gas S.p.A. |       |         |       |         |       |
|                             |       | 24,512       |       | 26,397       |       |
| **Minor  shareholders:**         |       |         |       |         |       |
| MEC Priolo B.V.  (Holland)       |       | 4,403        |       | 4,605        |       |
| Edison Mission  Energy (USA)     |       | —       |       | 20,756       |       |
| Ponama Holdings  Limited (Malta) |       | 19,148       |       | —       |       |
| ** **                       | ** ** | **23,550**   | ** ** | **25,361**   | ** ** |
| ** **                       | ** ** | ** **   | ** ** | ** **   | ** ** |
| **TOTAL**                        | ** ** | **48,062**   | ** ** | **51,758**   | ** ** |

 

Project financing sub-debts represent amounts the company owes toshareholders. Each share corresponds to the value of the share of the company.In 2003, these amounts were listed under amounts owed to parent companies forthe major shareholder and owed to other financers for the minor shareholders.

 

Interest is accrued based on the cost of money in the project financingplan plus three percentage points payable quarterly in 34 equal instalmentsstarting from when the conditions set forth by the financing banks were inplace which up until 2003 were tied to the dispute with Consorzio SnamprogettiFoster Wheeler Energy.

 

In 2004, the financial institutions authorised a partial payment for apreviously defined amount which amounts to the interest accumulated as of 31 December 2003totalling Euro 6,110 thousand.

 

On behalf of the minor shareholder MEC Priolo B.V., the underwriter of ashare of the financing is a parent company of the same. The financing providedto Edison Mission Energy at the end of 2003 was transferred on 17 December 2004to Ponama Holdings Limited, which holds 100% of MEC Priolo, after theacquisition of the entire international electricity generation unit by apartnership between International Power – England and Mitsui & Co. –Japan. This financing amounts to Euro 18,186 thousand and is accounting withinterest accumulated in 2004 totalling Euro 962 thousand while interestscapitalised as of 31 December 2003 amount to Euro 2,570 thousand were paidin July 2004 to the former parent company Edison Mission Energy.

 

The remaining amount of the financing totalling Euro 4,403 thousand isfor the shareholder MEC Priolo B.V. and it includes Euro 221 thousand foraccumulated interests.

 

There was a decrease compared to the previous year due to the payment ofinterests totalling Euro 424 thousand.

 

The financial debt to ERG Power & Gas is also composed of theproject financing sub-debt and amounts to Euro 23,281 thousand and Euro 1,231thousand for interests accumulated during the period.

 

This amounts is net of paid interests capitalised at the end of 2003amounting to Euro 3,116 thousand.

 

45

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In reference to realisable amounts, it is estimated that from the nextfinancial period capital should begin to be paid back in respect and inreference of the instalments set by the amortisation plan.

 

The terms set forth in the project financing project are to be met inorder to pay these sub-debts as described in the section on profitdistribution.

 

**Payables due to banks**

 
| ** **                                      | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-------------------------------------------------|------------|--------------|------------|--------------|------------|
| **Loans  and financing:**                       |       |         |       |         |       |
| Project  financing San Paolo IMI S.p.A. account |       | 510,307      |       | 593,811      |       |
|                                            |       |         |       |         |       |
| **TOTAL**                                       | ** ** | **510,307**  | ** ** | **593,811**  | ** ** |

 

Amounts owed to banks are relative to financing the company receivedwith the project financing operation together with special liens and mortgageon property as described above.

 

Thefinancing agreed upon with the company through the “Project Credit FacilityAgreement” dated April 5, 1996 was re-negotiated on September 15,2000 with a “Refinancing” transaction whose main purpose was the extension ofthe expiry date to December 15, 2014.

 

The “non-recourse” financing is paid back in 29 instalments startingfrom 15 December 2000 at a variable interest rate based on the Euribor atsix months on instalment B and on the BEI at three months on instalment C.

 

As of 31 December 2004, against this debt and in correlation witheach instalment there is an interest rate swap plan amounting to Euro 387,596thousand which allows the above interest rates to consolidate from variable tofixed at 3.78% annually. Each operation is due on 15 June 2006, the fixedrate of 3.78% remains unchanged for the entire length of the contact and thevalue decreases proportionately with the payment of each instalment.

 

Starting from 15 June 2006, an interest rate cap will be providedby two contracts expiring on 15 December 2008 which limit the rates to3.78% annually.

 

In 2004, debt went down by Euro 83,430 thousand due to the payment of 2amortisation instalments amounting to Euro 76,568 thousand and a voluntaryadvance payment of Euro 6,862 thousand. As an effect Euro 46,447 thousand lessresulted in instalment B and Euro 36,983 thousand in instalment C.

 

The remaining capital of the two instalments and interests accumulated notpaid as of 31 December 2004 amount to the following:

 
| ** **                  | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-----------------------------|------------|--------------|------------|--------------|------------|
| Instalment “B”    |       | 283,595      |       | 330,042      |       |
| Instalment “C”    |       | 225,801      |       | 262,784      |       |
| Interest paid on  financing |       | 911          |       | 986          |       |
| **TOTAL**                   | ** ** | **510,307**  | ** ** | **593,811**  | ** ** |

 

46

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According to commitments undertaken as of year end the yearly repayment schedule isestimated as follows:

 
| 2005       |       | 79,760      | ** ** |
|------------|------------|-------------|------------|
| 2006       |       | 90,877      |       |
| 2007       |       | 93,498      |       |
| 2008       |       | 76,896      |       |
| 2009       |       | 23,994      |       |
| after 2009 |       | 145,282     |       |
| **TOTAL**  | ** ** | **510,307** | ** ** |

 

**Payables due to suppliers**

 
| ** **          | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|---------------------|------------|--------------|------------|--------------|------------|
| Italian  suppliers  |       | 20,667       |       | 19,793       |       |
| E.U. suppliers      |       | 1,229        |       | 401          |       |
| Non-E.U.  suppliers |       | 1,845        |       | 1,201        |       |
| **TOTAL**           | ** ** | **23,740**   | ** ** | **21,395**   | ** ** |

 

Amounts owed to suppliers have increased by Euro 2,345 thousand comparedto 2003 and they consist of Euro 11,330 thousand for invoices received and Euro12,410 thousand for invoices not yet received.

 

**Payables due to associated companies**

 
| ** **                          | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-------------------------------------|------------|--------------|------------|--------------|------------|
| **Trade  payables**                 |       |         |       |         |       |
| ERG Raffinerie  Mediterranee S.r.l. |       | 10,914       |       | 11,266       |       |
| ISAB Energy  Services S.r.l.        |       | 9,428        |       | 9,571        |       |
| ERG Petroli  S.p.A.                 |       | 62           |       | 191          |       |
| ** **                          | ** ** | **20,404**   | ** ** | **21,029**   | ** ** |
| **Financial  payables:**            |       |         |       |         |       |
| ERG Raffinerie  Mediterranee S.r.l. |       | 4,955        |       | 5,856        |       |
| ISAB Energy  Services S.r.l.        |       | —       |       | 41           |       |
| ** **                          | ** ** | **4,955**    | ** ** | **5,896**    | ** ** |
| ** **                          | ** ** | ** **   | ** ** | ** **   | ** ** |
| **TOTAL**                           | ** ** | **25,359**   | ** ** | **26,925**   | ** ** |

 

Amounts owed to ERG Raffinerie Mediterranee mainly concern exchanges ofraw materials and services in December 2004 as well as price adjustmentsfor these goods over the entire financial period. Among the loans is a debtamounting to Euro 4,955 thousand under the “Loan Agreement” dated 5 April 1996,which is pay back at zero interest in equal quarterly instalments ending on 1 April 2010.

 

The amount owed to ISAB Energy Services is for services received basedon the “Operation & Maintenance” contract mentioned above.

 

The amount owed to ERG Petroli is for the supply of lubricant oil.

 

47

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Debts payable after the following financial period concernnon-remunerated loans.

 

**Payablesdue to parent companies**

 
| ** **                       | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|----------------------------------|------------|--------------|------------|--------------|------------|
| **Trade  payable:**              |       |         |       |         |       |
| ERG S.p.A.                       |       | 319          |       | 347          |       |
| ERG  Power & Gas S.p.A. |       | 114          |       | —       |       |
| ** **                       | ** ** | **433**      | ** ** | **347**      | ** ** |
| **Other  payables:**             |       |         |       |         |       |
| ERG S.p.A.                       |       | 39,397       |       | 888          |       |
|                             |       |         |       |         |       |
| **TOTAL**                        | ** ** | **39,831**   | ** ** | **1,236**    | ** ** |

 

The“Trade payables due to ERG S.p.A.” refer to the performance of I.T. servicesand fees to directors.

 

The“Other payables” relate to the estimated IRES taxation for the period that thecompany will be required to transfer as a result of the adoption of the “consolidatedtaxes” system, net of advance taxes paid and tax credits recovered. The 2003figure only includes the VAT owed for the month of December that wastransferred to the parent company for the consolidated account.

 

**Payables due to tax authorities**

 
| ** **                                 | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|--------------------------------------------|------------|--------------|------------|--------------|------------|
| Income tax for  the financial period       |       | 881          |       | 2,322        |       |
| Inland revenue  withholdings               |       | 24           |       | 33           |       |
| Other amounts  owned to tax administration |       | 113          |       | 121          |       |
| **TOTAL**                                  | ** ** | **1,019**    | ** ** | **2,477**    | ** ** |

 

The item amounting to Euro 1,019 thousand consists of IRAP net ofadvance payments during the year, withholdings on income for employees andself-employed workers and fees to discharge waste and emissions.

 

**Payables due to social securityand national insurance institutions (Euro 45 thousand)**

 

These amounts (equal to Euro 79 thousand as of 31 December 2003)refer to Euro 32 thousand due to various institutions for withholdings forsocial security, pension and insurance for the month of December 2004 andEuro 13 thousand in charges for employee vacation time and holidays not used,production bonuses and overtime not yet paid.

 

**Other payables**

 
| ** **                 | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|----------------------------|------------|--------------|------------|--------------|------------|
| Amounts owed to  employees |       | 45           |       | 212          |       |
| Other amounts  owed        |       | 115          |       | 115          |       |
| **TOTAL**                  | ** ** | **160**      | ** ** | **327**      | ** ** |

 

48

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Amounts owed to employees are for unused vacation time, paid holidays,overtime and production bonuses.

 

Other amounts owed refer to expenses from 2001 not yet paid to theAuthority on Electricity and Gas.

 

**7.12  Accrued expenses and deferred income**

 
| ** **                                    | ** ** | **31.12.04** | ** ** | **31.12.03** | ** ** |
|-----------------------------------------------|------------|--------------|------------|--------------|------------|
| **Accruals:**                                 |       |         |       |         |       |
| Additional  monthly salaries and withholdings |       | —       |       | 33           |       |
| Accruals on swap  operations (IRS)            |       | 292          |       | 336          |       |
| **TOTAL**                                     | ** ** | **292**      | ** ** | **369**      | ** ** |

 

Theaccruals include the differences in interest rate swap operations in 2004obtained from project financing.

 

Below is an outline of duedates accounted under liabilities:

 
| ** **                              | ** ** | **within 12  months** | ** ** | **within  5 years** | ** ** | **beyond  5 years** | ** ** | **Total**   | ** ** |
|-----------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|-------------|------------|
| **Creditors**                           |       |                  |       |                |       |                |       |        |       |
| - owed to  shareholders for financing   |       | 3,757                 |       | 10,741              |       | 33,565              |       | 48,062      |       |
| - owed to banks                         |       | 79,760                |       | 285,265             |       | 145,282             |       | 510,307     |       |
| - owed to  suppliers                    |       | 23,740                |       | —              |       | —              |       | 23,740      |       |
| - owed to  associated companies         |       | 21,305                |       | 3,603               |       | 450                 |       | 25,359      |       |
| - owed to parent  companies             |       | 39,831                |       | —              |       | —              |       | 39,831      |       |
| - owed to tax  administration           |       | 1,019                 |       | —              |       | —              |       | 1,019       |       |
| - owed to social  security institutions |       | 45                    |       | —              |       | —              |       | 45          |       |
| - other  creditors                      |       | 160                   |       | —              |       | —              |       | 160         |       |
| ** **                              | ** ** | **169,616**           | ** ** | **299,609**         | ** ** | **179,297**         | ** ** | **648,522** | ** ** |
| **Accruals  and deferred income**       |       |                  |       |                |       |                |       |        |       |
| - accruals                              |       | 292                   |       | —              |       | —              |       | 292         |       |
|                                    |       |                  |       |                |       |                |       |        |       |
| **TOTAL**                               | ** ** | **169,908**           | ** ** | **299,609**         | ** ** | **179,297**         | ** ** | **648,814** | ** ** |

 

**7.13   Memorandumaccounts (Euro 4,198 thousand)**

 

The memorandum accounts mainly refer to raw materials in stock at ERGRaffinerie Mediterranee – South Plant, amounting to Euro 4,198 thousand (Euro3,137 thousand as of 31 December 2003).

 

The aforementioned project financing agreement should be referred to fordetails on ties on cash flow produced by the company and commitments undertakenthrough the interest rate swap operation activate to cover interest rates onproject financing debt.

 

49

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**8.   Income Statement Analysis**

 

**8.1   Valueof Production (Euro 479,344 thousand)**

 

**Revenues from sales and services**

 
| ** **                                       | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|--------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Sales  and services to clients:**              |       |        |       |        |       |        |       |
| - Electricity                                    |       | 462,509     |       | 404,703     |       | 408,922     |       |
| - Other services  and sales                      |       | 4,717       |       | 3,081       |       | 2,436       |       |
| ** **                                       | ** ** | **467,227** | ** ** | **407,785** | ** ** | **411,358** | ** ** |
| **Sales  and services to parent companies:**     |       |        |       |        |       |        |       |
| - Heat                                           |       | —      |       | —      |       | 4,886       |       |
| - Steam                                          |       | —      |       | —      |       | 1,066       |       |
| - Oil                                            |       | —      |       | —      |       | 176         |       |
| - Other services  and sales                      |       | —      |       | —      |       | 909         |       |
| ** **                                       | ** ** | **—**  | ** ** | **—**  | ** ** | **7,038**   | ** ** |
| **Sales  and services to associated companies:** |       |        |       |        |       |        |       |
| - Heat                                           |       | 7,074       |       | 6,671       |       | 1,966       |       |
| - Steam                                          |       | 1,669       |       | 1,345       |       | 302         |       |
| - Oil                                            |       | 29          |       | 628         |       | —      |       |
| - Other                                          |       | 1,037       |       | 1,058       |       | 248         |       |
| ** **                                       | ** ** | **9,808**   | ** ** | **9,703**   | ** ** | **2,516**   | ** ** |
|                                             |       |        |       |        |       |        |       |
| **TOTAL**                                        | ** ** | **477,035** | ** ** | **417,488** | ** ** | **420,912** | ** ** |

 

Revenues are mainly from the sale of electricity at CIP/6 ratesincluding the rate adjustment for 2004 estimated at Euro 10,895 thousand.

 

Net sales reached 4,452 thousand MWh (4,000 thousand MWh in 2003).

 

Sales and services include other revenues for sales of sulphur andvanadium.

 

Revenues from associated companies refer to ERG Raffinerie Mediterraneefor providing steam, air, water and other minor products.

 

**Changesin inventories of finished goods, semi-finished goods and works inprogress  (Euro 145 thousand)**

 

Thechanges (Euro 181 thousand as of December 31, 2003) are related to theincreased value of inventories of concentrated vanadium in the amount of Euro181 thousand, offset by the decreased value of sulphur in the amount of Euro 36thousand.

 

**Capitalized internal work**

 
| ** **                          | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002** | ** ** |
|-------------------------------------|------------|-----------|------------|-----------|------------|----------|------------|
| Materials taken  from the warehouse |       | 1,630     |       | 1,421     |       | 824      |       |
| **TOTAL**                           | ** ** | **1,630** | ** ** | **1,421** | ** ** | **824**  | ** ** |

 

50

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This item refers to the value of spare parts taken from inventory andcapitalised at an investment increment.

 

**Other income and revenues**

 
| ** **                                 | ** ** | **2004** | ** ** | **2003**  | ** ** | **2002**   | ** ** |
|--------------------------------------------|------------|----------|------------|-----------|------------|------------|------------|
| Insurance  reimbursements                  |       | —   |       | 4,529     |       | 5          |       |
| Penalties and  compensation from suppliers |       | 14       |       | 38        |       | 21,066     |       |
| Sundry revenue  and income                 |       | 521      |       | 1,012     |       | 329        |       |
| **TOTAL**                                  | ** ** | **534**  | ** ** | **5,579** | ** ** | **21,400** | ** ** |

 

There were not any insuranceindemnities. The other income mainly refers to:

•                  hosting services, leasing out a portion of the small office building andtelephone services for the associated company ISAB Energy Services amounting toEuro 340 thousand;

•                  various services provided to the associated company ERG RaffinerieMediterranee amounting to Euro 20 thousand;

•                  leasingspace in the office building, for Euro 29 thousand, charges for personnelattached to headquarters for Euro 113 thousand, from the parent company ERGPower & Gas.

 

**8.2   Costs of production (Euro 302,761 thousand)**

 

**Costs forraw materials, ancillary materials, consumer goods and goods for sale**

 
| ** **                      | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|---------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Raw materials  and goods        |       | 178,076     |       | 160,529     |       | 155,262     |       |
| Materials and  spare parts      |       | 5,980       |       | 11,426      |       | 9,585       |       |
| Sundry materials  and purchases |       | 75          |       | 85          |       | 96          |       |
| **TOTAL**                       | ** ** | **184,132** | ** ** | **172,041** | ** ** | **164,942** | ** ** |

 

The goods purchased refer to oxygen and nitrogen amounting to Euro52,898 thousand, electricity for Euro 13,567 thousand, methane gas for 5,138thousand and raw materials provided by the associated company ERG RaffinerieMediterranee for Euro 106,473 thousand.

 

Relations with the company in the group mainly concern the supply ofdiesel fuel amounting to Euro 11,204 thousand, feedstock amounting to Euro80,001 thousand, combustible oil for Euro 4,919 thousand, LCO, virgin diesel,GPL and steam amounting to Euro 10,349 thousand.

 

Theother purchases relate to spare parts for use in maintenance for Euro 2,628thousand, ancillary materials and consumer goods for Euro 3,352 thousand, andsundry goods (fuel for vehicles, stationary, printed materials, forms, smalloffice equipment, etc.) for Euro 75 thousand.

 

Ancillary materials include purchases of lubricating oil for Euro 274thousand supplied by the associated company ERG Petroli.

 

51

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**Costs for services**

 
| ** **                                      | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Commercial  services and transportation         |       | 3,166      |       | 3,310      |       | 6,271      |       |
| Maintenance and  operational assistance         |       | 10,992     |       | 13,153     |       | 12,014     |       |
| Technical, legal  and other advice and services |       | 3,381      |       | 3,294      |       | 4,488      |       |
| Insurance                                       |       | 11,009     |       | 12,608     |       | 9,732      |       |
| Personnel costs                                 |       | 122        |       | 152        |       | 192        |       |
| Services from  parent companies                 |       | 1,374      |       | 1,005      |       | 4,767      |       |
| Services from  associated companies             |       | 22,999     |       | 23,535     |       | 18,659     |       |
| Other services                                  |       | 2,394      |       | 2,205      |       | 1,992      |       |
| **TOTAL**                                       | ** ** | **55,436** | ** ** | **59,261** | ** ** | **58,115** | ** ** |

 

Costs for services decreased by Euro 3,825 thousand compared to theprevious year.

 

Industrial services for operating and maintaining the plants decreasedby Euro 4,182 thousand. Administration and general services increased by Euro675 thousand and sales services decreased by Euro 318 thousand. It should benoted that figures for 2002 include the cost for steam amounting to Euro 3,362 millionlisted under acquisition of raw materials in the following financial periods.

 

Services provided to parent companies refer to Euro 343 thousand forcompany services provided by ERG Power & Gas: such as systemsmanagement, administration and finance, sales, planning and control. Andservices were provided by ERG S.p.A. for staff activities amounting to Euro 157 thousand, IT services amountingto Euro 473 thousand, public relations amounting to Euro 96 thousand and Euro305 thousand for fees paid to board members and management employed by theparent company.

 

The associated companies provided services for operating and maintainingthe IGCC plant amounting to Euro 21,706 thousand, provided by ISAB EnergyServices S.r.l., and fire fighting services, health assistance, marketing andhuman resources management provided by ERG Raffinerie Mediterranee amounting toEuro 1,292 thousand.

 

Pursuant to art. 2427 no. 16 of the civil code, the following amountsare shown that were paid to board members and statutory auditors:

 
| Directors |   | 192 | ** ** |
|-----------|--------|-----|------------|
| Auditors  |   | 35  |       |

 

**Leases and rentals**

 
| ** **               | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|--------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Rents paid               |       | 353       |       | 304       |       | 247       |       |
| Long-term  hires/leasing |       | 414       |       | 368       |       | 244       |       |
| Royalties                |       | 963       |       | 923       |       | 1,366     |       |
| **TOTAL**                | ** ** | **1,730** | ** ** | **1,596** | ** ** | **1,856** | ** ** |

 

Costs for uses of assets refer to rent payable to store raw materialspaid to the associated company ERG Raffinerie Mediterranee amounting to Euro216 thousand, for car rentals amounting to Euro 36 thousand, office equipmentamounting to Euro 53

 

52

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thousand,computer and equipment leasing amounting to Euro 218 thousand and various rentsand fees amounting to Euro 244 thousand.

 

The royalties, amounting to Euro 915 thousand, refer to the use of theTexaco Development-USA gasification process and the “solvent reclaimer” of MPRService Inc.-USA amounting to Euro 48 thousand.

 

**Personnel costs**

 
| ** **                     | ** ** | **2004** | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|--------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
| Wages and  salaries            |       | 563      |       | 887       |       | 952       |       |
| Social security  contributions |       | 197      |       | 285       |       | 284       |       |
| Severance  indemnities         |       | 40       |       | 62        |       | 65        |       |
| Other costs                    |       | 3        |       | 16        |       | 19        |       |
| **TOTAL**                      | ** ** | **803**  | ** ** | **1,250** | ** ** | **1,320** | ** ** |

 

ISAB Energy Services operates the IGCC plant for the company. Thereforethe cost for staff is only for administration and not for operations.

 

Below is the average number ofemployees broken down into categories:

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Managers   |       | —   |       | 3        |       | 4        |       |
| Executives |       | 4        |       | 4        |       | 4        |       |
| Employees  |       | 7        |       | 13       |       | 11       |       |
| **TOTAL**  | ** ** | **11**   | ** ** | **20**   | ** ** | **19**   | ** ** |

 

Thereduction from twenty employees in 31 December 2003 to the current levelof 11 as of 31 December 2004 is due to the reorganisation carried out inline with the business of Gruppo ERG. 3 executives and 6 clerks weretransferred to the sub-holding ERG Power & Gas.

 

**Amortization and depreciation**

 
| ** **                               | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Amortisation of  intangible fixed assets |       | 8,856      |       | 8,741      |       | 8,795      |       |
| Depreciation of  tangible fixed assets   |       | 38,711     |       | 37,834     |       | 36,981     |       |
| **TOTAL**                                | ** ** | **47,566** | ** ** | **46,575** | ** ** | **45,776** | ** ** |

 

Amortisationof intangible assets increased for investments made on company software.

 

Depreciationof tangible assets increased for capitalisations and assets brought forward andthe application of the component approach on IGCC technical units. Thiscriteria provides for a distinct evaluation of the life cycle of the maincomponents of each plant unit.

 

53

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**Changesin inventories of raw materials, ancillary materials, consumable materials andgoods for sale**

 
| ** **                           | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**   | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Change in raw  materials             |       | (182      | )          | (15       | )          | 285        |       |
| Change in  materials and spare parts |       | 1,255     |       | 190       |       | (1,497     | )          |
| Depreciation for  spare parts        |       | —    |       | 850       |       | —     |       |
| **TOTAL**                            | ** ** | **1,072** | ** ** | **1,024** | ** ** | **(1,212** | **)**      |

 

The stock of raw materials rose due to higher amounts kept in stockamounting to approximately 378 tons.

 

The amount of consumables went down mainly due to fewer spare parts deptin stock.

 

**Other provisions (Euro 7,966 thousand)**

 

The item other provisions (in 2003: Euro 5,479 thousand; in 2002: Euro6,459 thousand) mainly consists of costs for maintenance for plant stand-stilltimes and includes social costs to recuperate withholding benefits on employeesof ISAB Energy Services.

 

**Other operating costs**

 
| ** **                          | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Duties and taxes  for the year      |       | 3,658     |       | 3,501     |       | 3,501     |       |
| Entertainment  and public relations |       | 60        |       | 51        |       | 159       |       |
| Losses on  disposal of assets       |       | 339       |       | 1,682     |       | 139       |       |
| **TOTAL**                           | ** ** | **4,056** | ** ** | **5,234** | ** ** | **3,799** | ** ** |

 

The taxes in question refer to I.C.I. paid to the city of PrioloGargallo amounting to Euro 3,242 thousand, taxes for waste management,emissions, additional tax on electricity and other charges.

 

The capital loss is relative to the ordinary transfer of assets andelectronic machines (personal computers) sold as obsolete.

 

**8.3  Financial income and charges (Euro 28,719 thousand)**

 

Other financial income:

 
| ** **                                      | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Bank interest  receivables                      |       | 1,403     |       | 1,901     |       | 2,300     |       |
| Interest receivables  from parent companies     |       | —    |       | —    |       | 52        |       |
| Interest  receivables from associated companies |       | 3         |       | 177       |       | 26        |       |
| Sundry financial  income                        |       | 86        |       | 102       |       | 132       |       |
| **TOTAL**                                       | ** ** | **1,493** | ** ** | **2,180** | ** ** | **2,510** | ** ** |

 

Interest due from banks mainly from the current accounts held at CitibankMilan. Interest from associated companies is due from ERG RaffinerieMediterranee for sales. Other income is for interest due from clients aspenalty fees.

 

54

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**Interestsand other financial charges**

 
| ** **                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Interest payable  on bank financing            |       | 16,685     |       | 21,338     |       | 30,971     |       |
| Financial  expenses payable on bank financing  |       | 4,025      |       | 4,598      |       | 5,780      |       |
| Payables due to  swap differentials            |       | 7,081      |       | 13,428     |       | 9,461      |       |
| Interest payable  on other financing           |       | 2,414      |       | 2,540      |       | 2,804      |       |
| Sundry interest  payable and financial charges |       | 5          |       | 186        |       | 722        |       |
| **TOTAL**                                      | ** ** | **30,210** | ** ** | **42,090** | ** ** | **49,737** | ** ** |

 

Total charges for the year on financing obtained from the projectfinancing operation was reduced by Euro 11,573 thousand compared to theprevious year mainly due to the lower debt because of instalment payments.

 

Interest owed for other financing refers to amounts owed to shareholderstotalling Euro 2,414 thousand and divided into Euro 1,231 thousand owed to themajor shareholder ERG Power & Gas and Euro 1,183 thousand for theminor shareholder MEC Priolo B.V., and its parent company Ponama HoldingsLimited.

 

**Profits and losses on foreign currency exchanges**

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Profits on  foreign currency exchanges |       | 17       |       | 288      |       | 56       |       |
| Losses on  foreign currency exchanges  |       | (20      | )          | (14      | )          | (60      | )          |
| **TOTAL**                              | ** ** | **(2**   | **)**      | **273**  | ** ** | **(5**   | **)**      |

 

Theexchange differences arise from the ordinary management of payments madeprimarily to suppliers.

 

Generallyin such transaction, the company uses the Euro as the base currency, except forcertain transactions outside of the European Union that were recorded in theaccounting assessment item at the end of 2004.

 

Therefore,there was no need to perform a spot exchange adjustment at the end of the year.

 

Changesin the exchange rate had no significant impact following the end of thefinancial year.

 

55

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**8.4  Extraordinary income and charges**

 
| ** **                          | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Extraordinary  income**           |       |       |       |       |       |       |       |
| Gain on disposal  of assets         |       |       |       |       |       |       |       |
| ** **                          | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Extraordinary  charges**          |       |       |       |       |       |       |       |
| Taxes pertaining  to previous years |       | —     |       | 332        |       | 391        |       |
| Loss on disposal  of assets         |       | —     |       | —     |       | —     |       |
| ** **                          | ** ** | **—** | ** ** | **332**    | ** ** | **391**    | ** ** |
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **TOTAL**                           | ** ** | **—** | ** ** | **(332**   | **)**      | **(391**   | **)**      |

 

There were no extraordinary components for this item in 2004.

 

**8.5   Incometax**

 
| ** **             | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**  | ** ** |
|------------------------|------------|------------|------------|------------|------------|-----------|------------|
| Current IRES           |       | 41,795     |       | 2,440      |       | —    |       |
| Current IRAP           |       | 6,471      |       | 5,675      |       | 7,290     |       |
| Deferred net  taxation |       | 9,856      |       | 3,568      |       | 72        |       |
| **TOTAL**              | ** ** | **58,122** | ** ** | **11,683** | ** ** | **7,362** | ** ** |

 

Theprovision forincome taxes were calculated based on foreseeable taxable income inconsideration of current tax legislation and in relation to the taxconsolidation act.

 

The considerable increase in tax charges was caused by the fact that the2004 financial period corresponds to the first period of being completelysubject to IRES. Indeed, it should be noted that from 5 October 2003,after being exempt for ten years, company income has been taxable.

 

Advance taxes refer to IRES for Euro 2,956 thousand and IRAP for Euro215 thousand. Their calculation is mainly based on transfers of provisions forrisks and charges which generated advance IRES and IRAP amounting respectivelyto Euro 2,617 thousand and Euro 337 thousand.

 

Limited to IRAP, Euro 163 thousand was paid as a return on taxes paid oncharges capitalised during construction of the IGCC plant.

 

The deferred taxes are from value adjustments not listed in the profitand loss account and will be calculated according to current legislation andindicated in the income declaration. The amounts allocated refer to IRES forEuro 11,541 thousand and IRAP for Euro 1,486 thousand.

 

56

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**Reconciliation between financial statements andtheoretical tax charges**

 

**IRES**

 
| **Profit before taxes**                             | ** ** | **147,864** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|------------|------------|
| **Theoretical  IRES taxation (33%)**                | ** ** |        | ** ** | **48,795** | ** ** |
| Taxable timing  differences-subsequent years        |       | (34,974     | )          |       |       |
| Deductible  timing differences-subsequent years     |       | 8,252       |       |       |       |
| Transfer of  timing differences from previous years |       | 674         |       |       |       |
| Permanent  differences                              |       | 4,836       |       |       |       |
| **IRES  taxable incame**                            | ** ** | **126,651** | ** ** | ** ** | ** ** |
| **Balance  sheet IRES**                             | ** ** |        | ** ** | **41,795** | ** ** |

 

**IRAP**

 
| Difference between production value and costs                   | ** ** | 176,583     | ** ** |       | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|------------|------------|
| Costs and  revenues not relevant for IRAP tax purposes          |       | 803         |       |       |       |
| Reclassified  costs and revenues relevant for IRAP tax purposes |       | —      |       |       |       |
| **IRAP  theoretical taxable base**                              | ** ** | **177,386** | ** ** | ** ** | ** ** |
| **Theoretical  taxable base (4.25%)**                           | ** ** |        | ** ** | **7,539**  | ** ** |
| Taxable timing  differences-subsequent years                    |       | (34,974     | )          |       |       |
| Deductible  timing differences-subsequent years                 |       | 8,096       |       |       |       |
| Transfer of  timining differences from previous years           |       | 833         |       |       |       |
| Permanent  differences                                          |       | 912         |       |       |       |
|                                                            |       |        |       |       |       |
| **IRAP  taxable incame**                                        | ** ** | **152,253** | ** ** | ** ** | ** ** |
| **Balance  sheet IRAP**                                         | ** ** |        | ** ** | **6,471**  | ** ** |

 

**8.6  Financial results**

 

The financial statements as of December 31, 2004 show a profit ofEuro 89,742 thousand.

 

57

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**9.   CashFlow Statements**

 
| **(Thousands of euro)**                                | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES (A)**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net profit  (loss) for the period                      |       | 89,742     |       | 80,548     |       | 106,959    |       |
| Amortization                                           |       | 47,566     |       | 46,575     |       | 45,776     |       |
| Losses / (gains)  on asset disposals                   |       | 338        |       | 1,643      |       | 139        |       |
| Changes in  assets and liabilities:                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Inventories                                            |       | 888        |       | 67         |       | (980       | )          |
| Trading account  receivables                           |       | (10,252    | )          | 32,994     |       | (23,639    | )          |
| Other short term  assets                               |       | 9,509      |       | 16,320     |       | (5,932     | )          |
| Trading account  payables                              |       | 1,807      |       | 989        |       | (7,779     | )          |
| Accruals and  provisions                               |       | 7,871      |       | (1,624     | )          | 6,358      |       |
| Other short term  liabilities                          |       | 36,773     |       | (3,690     | )          | 3,203      |       |
| Net cash  provided (used in) operating activities      |       | 184,242    |       | 173,822    |       | 124,107    |       |
|                                                   |       |       |       |       |       |       |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES (B)**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments in  fixed assets                           |       | (591       | )          | (473       | )          | (268       | )          |
| Investments in  intangible assets                      |       | (7,454     | )          | (12,905    | )          | (11,791    | )          |
| Disposals of  fixed assets                             |       | 5          |       | 98         |       | —     |       |
| Net cash used in  investing activities                 |       | (8,040     | )          | (13,280    | )          | (12,059    | )          |
|                                                   |       |       |       |       |       |       |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES (C)**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Increase  (decrease) in mid-long term debt             |       | (88,496    | )          | (71,955    | )          | (60,040    | )          |
| Increase  (decrease) in short term debt                |       | 402        |       | (53,667    | )          | 8,306      |       |
| Dividends                                              |       | (39,000    | )          | (18,260    | )          | (33,534    | )          |
| Net cash  provided from (used in) financing activities |       | (127,094   | )          | (143,882   | )          | (85,267    | )          |
|                                                   |       |       |       |       |       |       |       |
| **INCREASE  / (DECREASE) IN CASH (A+B+C)**             | ** ** | **49,106** | ** ** | **16,660** | ** ** | **26,781** | ** ** |
|                                                   |       |       |       |       |       |       |       |
| CASH, BEGINNING  OF YEAR                               |       | 101,761    |       | 85,101     |       | 58,321     |       |
| INCREASE IN CASH  (A+B+C)                              |       | 49,106     |       | 16,660     |       | 26,781     |       |
| CASH, END OF  YEAR                                     |       | 150,867    |       | 101,761    |       | 85,101     |       |

 

58

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**10.****                 Reconciliationto Generally Accepted Accounting Principles in the United States**

 

*(Amounts in Thousands of Euro, unless otherwise indicated)*

 

The Company’s accounting policies for financialreporting in accordance with Italian GAAP differ in certain respects fromaccounting principles generally accepted in the United States (“US GAAP”).Significant differences, which have an effect on Net Income / (Loss) andShareholders’ Equity, are described below:

 

**(a)  Levelisation of incentivecomponent -** The selling tariffs of electricity are established annually by theItalian Authority for Energy in accordance to an Italian Law, referred to asCIP/6, applicable to Italian companies that generate electricity throughrenewable sources; this includes, for the first eight years of operations, anincentive premium. The incentive is currently being received by the Company aspart of its annual billing to GTRN; for purposes of Italian GAAP revenuerecognition, the amount of the incentive is billed annually and recognized inthe Profit and Loss Statement.

 

Under US GAAP, EITF 91-6, Revenue Recognition ofLong-Term Power Sales Contracts (“EITF 91-6”), provides the framework forrevenue recognition on these types of arrangements.  Within EITF 91-6, the Company’s contractfalls under the “type 1” contract, that is, a contract where the utility isobligated to take or pay for all power made available by the independent powerproducer for the term of the contract. The price per KwH is specified and could either increase or decreaseduring the contract term. EITF 91-6 states that revenue recognition for thesetypes of contracts should be at the lower of i) amounts billable under thecontract and ii) an amount equal to the KwH made available during the periodmultiplied by the estimated average revenue per KwH over the term of thecontract. The determination of the lesser amount should be made annually basedon the cumulative amounts that would have been recognized had each method beenapplied consistently since the commencement of the contract.

 

Therefore, for US GAAP purposes, such incentive shouldbe recognized in income over the life of the fifteen-year power sales contract.Therefore, a portion of the CIP/6 incentive billed in each of the first eightyears of the plant operation is being deferred to the following years.

 

The estimated amount to be deferred at December 31,2004 reflects the 2004 reforecast of the production for the years from 2005 to2015 and excludes the inflation effect on the incentive rate.

 

**(b)  Capitalization ofrefinancing costs –** In 2000, the project-financing contract wasre-negotiated in order to extend its length; according to Italian GAAP, thecost of this re-negotiation was charged to the 2000 statement of operations.

 

The accounting under US GAAP for this situation ishighlighted in EITF 96-19, Debtor’s Accounting for a Modification or Exchangeof Debt Instruments (“EITF 96-19”). According to EITF 96-19, an exchange of debt is considered significantif, from the debtor’s perspective, an exchange of debt instruments between or amodification of a debt instrument by a debtor and a creditor in a non troubleddebt situation is deemed to have been accomplished with debt instruments thatare substantially different if the present value of the cash flows under theterms of the new debt instrument is at least 10 percent different from thepresent value of the remaining cash flows under the terms of the originalinstrument. The restructuring of the debt arrangement and the resultant netpresent value of the cash flows was not more than the 10% required by EITF 96-19,therefore, the exchange was not considered substantially different.  Such costs have been capitalized andamortized over the life of the project-financing contract.

 

59

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**(c) Reversal of cyclicalmaintenance fund** - The plant consists of two separate lines, whichneed to be shut down every four years for cyclical maintenance.  According to Italian GAAP, the budgeted costsfor the cyclical maintenance are distributed over the scheduled cycle periodthrough the accrual of a cyclical maintenance provision. Actual costs arecharged against the reserve as incurred. According to US GAAP, all maintenance costs are entirely charged to thestatement of operations when incurred or, to the extent necessary, capitalized.

 

**(d) Derivatives -**The only derivative products in use by Isab are interest rate swaps and ratecap contracts, which are used to lock-in a targeted level of interest rates onthe Company’s long-term debt. For Italian GAAP purposes, the changes in thefair value of the hedges are not recognized. For US GAAP purposes, it is necessary to designate derivative financialinstruments at the time of their inception in order to qualify for hedgeaccounting.  The Company had certainderivatives that had qualified for hedge accounting treatment; such contracts,initiated in previous years, expired during 2003. The fair values of theseexpired hedges were included in Shareholders’ Equity. All contracts initiatedin December 2003 did not qualify for hedge accounting and their fair value(total net amount of € 4.5 million) was recognized in the 2003 profit and lossaccount; the change in their fair value as of December 31, 2004 (total netamount of € 1.3 million loss) has been recognized in the 2004 profit and lossaccount.

 

**(e) Settlement agreement** - A claim waspending between Isab and the plant construction consortium for costs related todelayed start up of the plant and additional construction costs related tochange orders.

 

On February 17, 2003, the syndicate banks gavetheir consent to the settlement agreement reached with the consortium, theagreement was signed on December 30, 2002. By way of indemnity andconsiderations for the reached agreements, the Consortium agreed to pay a totalamount of Euro 21,030 thousand, mainly including reimbursement of profit lostdue to delivery delays of the plant, a portion of which (Euro 15,000 thousand)was to be in cash within February 2003 and an additional Euro 6,030thousand in assignment of receivables of the consortium from Isab for royalties.

 

In accordance with Italian Law, the effectiveness ofthe settlement was retroactive to the signature date and the settlement wastreated as income in the year ended December 31, 2002. For US GAAPpurposes, the settlement has been recognized in 2003 as it was contingent onfuture events, in particular the consent of the banks. Under US GAAP, theliquidated damages, including indemnification of loss of profit recoverablefrom the construction consortium, are recorded as a reduction of plant basis,while the assignment of the receivables will be recognized in the years itoccurs.

 

**(f) Accounting for start-upcosts –**Under Italian GAAP, the Company has capitalized and deferred various costs,mainly start-up and other ancillary costs such as training that are to beexpensed as incurred under US GAAP. In addition, other costs related to theConstruction phase are being amortized over five years for Italian GAAPpurposes, whereas for U.S. GAAP these costs are part of the plant asset and aretherefore being amortized over the expected life of the plant.

 

**(g) Recognition of insurance reimbursement -** The Company incurredcertain reimbursable damages in 2001, for which insurance claims were filed.According to Italian GAAP, these claims are recognized when reasonablyestimable on the basis of

 

60

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supporting documentation.  For US GAAP purposes, these amounts are notrecognized until they are realizable. As at December 31, 2003 and 2004 nodifferences in recognition of receivables from insurance companies exist and,therefore, the US GAAP differences related to previous years have reversed.

 

**(h) Accounting for income taxes -** In the accompanyingreconciliation the effects of the recognition of deferred income taxes relateonly to the US GAAP adjustments that give rise to temporary differences betweenthe reporting basis for Italian GAAP and the reporting basis for US GAAP; nosignificant differences exist between the method of accounting for deferredincome taxes applied by Isab under Italian GAAP and US GAAP. The Italianstatutory taxation is based on a national tax (IRPEG - 36% in 2002 and previousyears, 34% in 2003;) and on a Regional Tax on Productive Activities (IRAP –4.25%). The temporary differences, which will reverse in 2004 and following,considers the effect of the Italian tax reform enacted in 2003 effective from January 1,2004 which replaces IRPEG with IRES – 33%; the effects of the change in taxrate is included in the 2003 profit and loss account. The taxable basis for thecomputation of IRAP is essentially operating income, calculated on the basis ofthe legal Italian statements, plus labor costs and interest expenses. Inaddition, the company was in a ten-year exemption from IRPEG, which expired in October 2003;the 2003 income was therefore taxable at the average IRPEG rate ofapproximately 8.5%, which corresponds to the application of the full tax rate(34%) on a pro-rata basis for one-quarter of 2003.

 

The following table summarizes the significantadjustments to the net loss and quotaholders’ equity which would be required if  US  GAAP had been  applied  instead of Italian accounting principles.

 

*(Amountsin Thousands of Euro)*

 
| ** **   | ** **   | ** **                              | ** ** | ** **     | ** ** | ** **     | ** ** | ** **  | ** ** | **Increase / Decrease** | ** ** |
|--------------|--------------|-----------------------------------------|------------|----------------|------------|----------------|------------|-------------|------------|-------------------------|------------|
| ** **   | ** **   | ** **                              | ** ** | **NET EQUITY** | ** ** | **NET RESULT** | ** ** |
| *** *** | *** *** | ** **                              | ** ** | **2004**       | ** ** | **2003**       | ** ** | **2002**    | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | *** *** |
|         |         |                                    |       |           |       |           |       |        |       |                    |       |   |   |   |   |
| ** **   | ** **   | **Amounts as per Italian GAAP**         | ** ** | **257,113**    | ** ** | **206,371**    | ** ** | **144,083** | ** ** | **89,742**              | ** ** | **80,548** | ** ** | **106,959** | ** ** |
|         |         |                                    |       |           |       |           |       |        |       |                    |       |   |   |   |   |
| **a**        |         | Levelisation of Incentive Component     |       | (245,444       | )          | (186,342       | )          | (130,553    | )          | (59,103                 | )          | (55,788 | ) | (54,493 | ) |
| **b**        |         | Capitalization refinancing costs        |       | 4,206          |       | 4,626          |       | 5,047       |       | (421                    | )          | (421 | ) | (421 | ) |
| **c**        |         | Reversal cyclical maintenance fund      |       | 14,767         |       | 7,352          |       | 9,716       |       | 7,415                   |       | (2,364 | ) | 6,412 |   |
| **d**        |         | Derivatives                             |       | (5,940         | )          | (4,596         | )          | (12,078     | )          | (1,344                  | )          | 1,387 |   | 877 |   |
| **e**        |         | Settlement agreement                    |       | (17,744        | )          | (19,409        | )          | (21,030     | )          | 1,665                   |       | 1,621 |   | (21,030 | ) |
| **f**        |         | Accounting for start up costs           |       | 9,969          |       | 5,339          |       | 710         |       | 4,630                   |       | 4,630 |   | 4,146 |   |
| **g**        |         | Recognition of insurance reimbursements |       | 0              |       | 0              |       | (895        | )          | 0                       |       | 895 |   | 3,082 |   |
| **h**        |         | Accounting for income taxes             |       | 89,469         |       | 71,903         |       | 56,162      |       | 17,566                  |       | 16,548 |   | 25,765 |   |
|         |         |                                    |       |           |       |           |       |        |       |                    |       |   |   |   |   |
| ** **   | ** **   | **Amounts  in accordance with US GAAP** | ** ** | **106,396**    | ** ** | **85,246**     | ** ** | **51,162**  | ** ** | **60,150**              | ** ** | **47,056** |   | **71,297** |   |

 

61

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Shareholders’ equity consisted of the following:

 
| ** **                                | ** ** | **Capital stock** | ** ** | **Additional  paid in capital** | ** ** | **Retainedearnings** | ** ** | **Total**   | ** ** |
|-------------------------------------------|------------|-------------------|------------|---------------------------------|------------|----------------------|------------|-------------|------------|
| ** **                                | ** ** | ** **        | ** ** | ** **                      | ** ** | ** **           | ** ** | ** **  | ** ** |
| **Balance  as of December 31, 2001** | ** ** | **5,165**         | ** ** | **24,302**                      | ** ** | **(17,163**          | **)**      | **12,304**  | ** ** |
| Dividends  payable as a note              |       | —            |       | —                          |       | (8,533               | )          | (8,533      | )          |
| Dividends                                 |       | —            |       | —                          |       | (25,000              | )          | (25,000     | )          |
| Fair value of  hedging derivatives        |       | —            |       | —                          |       | 1,094                |       | 1,094       |       |
| 2002 result                               |       | —            |       | —                          |       | 71,297               |       | 71,297      |       |
| **Balance  as of December 31, 2002** | ** ** | **5,165**         | ** ** | **24,302**                      | ** ** | **21,695**           | ** ** | **51,162**  | ** ** |
|                                      |       |              |       |                            |       |                 |       |        |       |
| Dividends                                 |       | —            |       | —                          |       | (18,260              | )          | (18,260     | )          |
| Fair value of  hedging derivatives        |       | —            |       | —                          |       | 5,288                |       | 5,288       |       |
| 2003 result                               |       | —            |       | —                          |       | 47,056               |       | 47,056      |       |
| **Balance  as of December 31, 2003** | ** ** | **5,165**         | ** ** | **24,302**                      | ** ** | **55,779**           | ** ** | **85,246**  | ** ** |
|                                      |       |              |       |                            |       |                 |       |        |       |
| Dividends                                 |       | —            |       | —                          |       | (39,000              | )          | (39,000     | )          |
| 2004 result                               |       | —            |       | —                          |       | 60,150               |       | 60,150      |       |
| **Balance  as of December 31, 2004** | ** ** | **5,165**         | ** ** | **24,302**                      | ** ** | **76,929**           | ** ** | **106,396** | ** ** |

 

The coverage of losses under Italian GAAP utilizingpaid-in capital has been reclassified under “Additional paid-in capital”, forthe purpose of US GAAP.

 

Furthermore, the reimbursement of paid in capital (Euro8,533 thousand), classified in the Italian accounts as increase of subordinateddebt from Shareholders is classified in the above table as dividends.

 

Italian law requires that 5% of a company’s net income beretained as a legal reserve, until such reserve equals 20% of the sharecapital. This reserve, amounting to Euro 1,033 thousand at December 31,2004, is not available for distribution.

 

 

Rome, March 23, 2004

 

On behalf of the Board of Directors

The Chairman

Jonathan GIBSON

 

62

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**“Attachment”**

 

Followingis a table containing essential information from the latest financialstatements of ERG S.p.A., the company that exercises management andcoordination over ISAB Energy S.r.l.

 

Forthe sake of completeness, it should be noted that ERG S.p.A. also draws up theconsolidated financial statements of the ERG Group.

 

**BALANCE SHEET**

 
| ** **                                     | ** ** | **12.31.03** | ** ** |
|------------------------------------------------|------------|--------------|------------|
| **Assets**                                     | ** ** | ** **   | ** ** |
| ** **                                     | ** ** | ** **   | ** ** |
| A) Unpaid  subscribed capital                  |       | —       |       |
| B) Fixed assets                                |       | 263,289      |       |
| C) Current  assets                             |       | 163,104      |       |
| D) Accrued  income and prepayments             |       | 1,017        |       |
| **Total  assets**                              | ** ** | **427,409**  | ** ** |
| ** **                                     | ** ** | ** **   | ** ** |
| **Liabilities**                                |       |         |       |
| ** **                                     |       |         |       |
| A) Capital and  reserves                       |       |         |       |
| - Share capital                                |       | 16,178       |       |
| - Reserves                                     |       | 199,656      |       |
| - Profits  (losses) for the financial period   |       | 1,749        |       |
|                                           |       | 217,583      |       |
| B) Provisions  for risks and charges           |       | 1,636        |       |
| C) Employee  severance indemnity               |       | 5,066        |       |
| D) Payables                                    |       | 202,572      |       |
| E) Accrued  expenses and deferred income       |       | 551          |       |
| ** **                                     | ** ** | ** **   | ** ** |
| **Total  liabilities**                         | ** ** | **427,409**  | ** ** |
|                                           |       |         |       |
| **INCOME  STATEMENT**                          |       |         |       |
| ** **                                     |       |         |       |
| A) Value of  Production                        |       | 26,987       |       |
| B) Costs of  Production                        |       | (48,996      | )          |
| C) Income and  financial charges               |       | 28,089       |       |
| D) Value  adjustment of financial assets       |       | (6,584       | )          |
| E) Extraordinary  income and charges           |       | 473          |       |
| Income taxes for  the period                   |       | 1,779        |       |
| **Profits  (losses) for the financial period** | ** ** | **1,749**    | ** ** |

 

63

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this Amendment No. 2 on Form 10-K/Ato its annual report on Form 10-K for the year ended December 31,2004 to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| ** ** | **MISSION ENERGY HOLDING COMPANY** |
|------------|------------------------------------|
| ** ** | (REGISTRANT)                       |
| ** ** | ** **                         |   |
| ** ** | ** **                         |   |
|       | By:                                |   /s/ W.  James Scilacci |
|       |                               | W.  James Scilacci |
|       |                               | *Senior Vice President and Chief Financial  Officer* |
|       |                               |   |
|       | Date:                              |   June  15, 2005 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**          | ** ** | **Title**                                       | ** ** | **Date**           |
|------------------------|------------|-------------------------------------------------|------------|--------------------|
| ** **             | ** ** | ** **                                      | ** ** | ** **         |
| /s/ Thomas R. McDaniel |       |                                            |       |               |
| Thomas R. McDaniel     |       | Director, President and Chief Executive Officer |       | June 15, 2005 |
|                   |       | (Principal Executive Officer)                   |       |               |
|                   |       |                                            |       |               |
| /s/ Mark C. Clarke     |       |                                            |       |               |
| Mark C. Clarke         |       | Vice President and Controller                   |       | June 15, 2005 |
|                   |       | (Controller or Principal Accounting Officer)    |       |               |
|                   |       |                                            |       |               |
| /s/ John E. Bryson     |       |                                            |       |               |
| John E. Bryson         |       | Director and Chairman of the Board              |       | June 15, 2005 |
|                   |       |                                            |       |               |
| /s/ Bryant C. Danner   |       |                                            |       |               |
| Bryant C. Danner       |       | Director                                        |       | June 15, 2005 |

 

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