**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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## **FORM 10-K/A**

## **AMENDMENT NO. 1**

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

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

## **For the fiscal year ended December 31,2003**

 

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

 

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| **Mission  Energy 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 1700  Irvine, California**                    |   | **92612** |
| (Address of  principal executive offices)                                    |   | (Zip Code) |
|                                                                         |   |   |
| Registrant’s  telephone number, including area code: **(949) 852-3576** |

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. Yes ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

 

Aggregate market value of the registrant’s CommonStock held by non-affiliates of the registrant as of June 27, 2003: $0.Number of shares outstanding of the registrant’s Common Stock as ofMarch 10, 2004: 1,000 shares (all shares held by an affiliate of theregistrant).

 

 

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**EXPLANATORY NOTE**

** **

This annual report on Form 10-K/A for the fiscalyear ended December 31, 2003 is being filed to include in Part IV, Item15, financial statements with respect to ISAB Energy S.r.l. which were omittedfrom the annual report on Form 10-K for the year ended December 31, 2003filed on March 15, 2004.

 

This Amendment No. 1 does not update any otherdisclosures to reflect developments since the original date of filing.

 

The following item of the original filing isamended by this Amendment No. 1:

 

Item 15. Exhibits, Financial Statement Schedulesand Reports on Form 8-K

 

Unaffected items have not been repeated in thisAmendment No. 1.

 

1

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**PART IV**

** **

**ITEM 15.**                      EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

** **

(a)                      (2)  Listof Financial Statement Schedules

 

Thefollowing item is filed as a part of this report pursuant to Item 15(d) of Form10-K:

 
|   |                                                                                 |   | **Page** |
|--------|--------------------------------------------------------------------------------------|--------|----------|
|   | Investment in Unconsolidated Affiliates  Financial Statements:                       |   |     |
|   | ISAB Energy S.r.l. Financial  Statements as of December 31, 2003, 2002 and 2001 |   | 3        |

 

(d)                     FinancialStatement Schedules

 

Financial statements with respect to ISAB EnergyS.r.l. which meets the definition of a foreign business as defined in Rule1-02(1) of Regulation S-X are being filed in this report pursuant to Rule 3-09of Regulation S-X. These statements are prepared in accordance with generallyaccepted accounting principles in Italy which differ from generally acceptedaccounting principles in the United States. See Note 7 to the financialstatements on page 50.

 

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**ISABEnergy S.r.l.**

**Annual report for the year ended December 31st2003**

**Directors’ Report on Operations**

** **

**Board of Directors**

 
| **Domenico D’Arpizio** |   | Chairman      |
|-----------------------------|--------|---------------|
| **Daniel Melita**           |   | Vice Chairman |
| **Filippo Bifulco**         |   |          |
| **Marco  Ferrando**         |   |          |
| **Jonathan Gibson**         |   |          |

** **

**Board of Statutory Auditors**

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

 

**External Auditors**

 

**Reconta Ernst & Young S.p.A.**

 

3

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**ISAB Energy Structure**

 

ISAB Energy is 51% owned byERG Power and Gas S.r.l. and 49% owned by MEC Priolo B.V. (a wholly-ownedsubsidiary of Edison Mission Energy). It is the proprietor of the Gasificationand Cogeneration plant at Priolo Gargallo (Syracuse, Sicily), located near tothe refinery owned by ERG Raffinerie Mediterranee (ERG Med).

 

The plant has a guaranteed netcapacity of 507 MW and in 2003 net electricity production was 4,000 GWh.

 

**Main economic and financial data**

 

The currency used for thefollowing figures is the Euro; the sum of figures that have been rounded to thenearest million may differ from the actual total displayed.

 
|                                   |   | **2003**            |       | **2002**   |       | **2001**   |       |
|----------------------------------------|--------|---------------------|------------|------------|------------|------------|------------|
|                                   |   | **(million  Euro)** |       |       |       |       |       |
| **Total  revenues**                    |   | **427**             | ** ** | **444**    | ** ** | **396**    | ** ** |
| **EBITDA**                             |   | **179**             | ** ** | **208**    | ** ** | **160**    | ** ** |
| **EBIT**                               |   | **132**             | ** ** | **162**    | ** ** | **115**    | ** ** |
| **Income from  ordinary operations**   |   | **93**              | ** ** | **115**    | ** ** | **62**     | ** ** |
| **Extraordinary  net income (loss)**   |   | **—**          | ** ** | **—** | ** ** | **—** | ** ** |
| **Net income  for the year**           |   | **81**              | ** ** | **107**    | ** ** | **57**     | ** ** |
|                                   |   |                |       |       |       |       |       |
| Cash flow from operations              |   | 174                 |       | 124        |       | 133        |       |
| Investments/divestments                |   | (13                 | )          | (12        | )          | (15        | )          |
| Changes in shareholders’ equity   |   | (18                 | )          | (34        | )          | —     |       |
| **Changes in  net financial debt**     |   | **142**             | ** ** | **79**     | ** ** | **118**    | ** ** |
|                                   |   |                |       |       |       |       |       |
| Total shareholders’ equity        |   | 206                 |       | 144        |       | 71         |       |
| Net financial debt                     |   | 550                 |       | 692        |       | 770        |       |
| **Net invested  capital**              |   | **756**             | ** ** | **836**    | ** ** | **841**    | ** ** |
|                                   |   |                |       |       |       |       |       |
| **Number of  employees at year-end**   |   | **20**              | ** ** | **19**     | ** ** | **22**     | ** ** |
| **Electrical  power generation (GWh)** |   | **4,000**           | ** ** | **4,197**  | ** ** | **3,621**  | ** ** |

 

4

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**Report on Operations**

 

Financing for the constructionof the plant was in the form of non-recourse Project Financing for the sum ofEuro 971 million. ISAB Energy produces electrical power generated by thegasification of heavy residues resulting from crude oil processing at thenearby ERG Med refinery. The electrical power produced is sold to the “Gestoredella Rete di Trasmissione Nazionale”, or “GRTN” (National Grid), at the CIP/6tariff. (The rights and obligations regarding the purchase of energy fromnational third party companies were transferred from ENEL S.p.A. to the GRTN asfrom January 1st 2001, in accordance with the Bersani Decree(legislative decree of March 16th 1999) enforced by theMinistry for Industry).

 

**Comments on the results for the year**

 

**Economic and financial results**

The financial statements for2003 show a profit of Euro 80.5 (compared to Euro 106.9 million in 2002), afterdepreciation and amortisation amounting to Euro 46.6 million (Euro 45.7 millionin 2002).

The year’s result is areflection of the considerable reliability shown by the plant during the courseof the year which, despite a general maintenance shutdown of 24 days, operatedat 88% of its potential.

 

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

 

**Major events during the year**

 

**The major events of 2003were:**

** **

•                  netproduction amounted to 4,000 GWh, 93% of which was produced from the gasificationof refining residues. Compared to the previous year there was an improvement inthe reliability of the plants, even though the amount of electricity producedwas lower than the amount produced in 2002, due to the general maintenanceshutdown;

 

•                  theelectricity was sold at a provisional price of 98.5 €/MWh (CIP 6/92 tariff)except for a small part (1.33%) sold as surplus. On the basis of the trend ofmethane prices, which are expected to rise by 5.7% in 2003 (compared to 2002),the definitive value for 2003 is estimated at 101.6 €/MWh (1.5% more than theprovisional price). It should nevertheless be reminded that the definitivevalue will be published by the “Cassa Conguaglio per il Settore Elettrico” atthe end of April 2003;

 

•                  theGRTN failed to collect an equivalent number of 226.5 hours (the annualexemption allowed to the GRTN is a maximum of 320 hours, for a total of 2,400hours in the first eight years of the plant’s operative life);

 

•                  theplant’s improved efficiency meant that during the year ISAB Energy was able tocollect a larger amount of raw materials compared to the guaranteed minimum andthere were therefore no “Purchaser Shortfall” expenses;

 

•                  Giventhe company’s declaration and the supply of the proper documentation to theGRTN and on the basis of production in 2002, the Antitrust Authority forElectricity and Gas recognised the ISAB Energy plant as being “cogenerative”for the year 2003,

 

5

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according to resolution 42/02. The company is therefore not subject tothe purchase of ‘green certificates’, according to the Bersani Decree;

 

•                  At theend of March 2003 the general maintenance shutdown of the plants began,which lasted the equivalent of 24 days. The work carried out involved minorintervention work to Train 1, a major intervention to Train 2 and to the partsin common. The total cost of the work was Euro 12.1 million Euro, Euro 7.8 ofwhich came from the appropriate provision;

 

•                  DuringApril the company renewed its insurance policies. Even though theinsurance market is still under strain due to considerable losses recorded inthe energy sector and to the general international climate, the company managedto obtain better coverage than the previous year, but which was neverthelessstill not in line with the cover specified in the “Project Credit FacilityAgreement” (PCFA). Furthermore, following specific requests from the banks, thecompany took out an insurance policy to cover damage deriving from acts ofterrorism. The total cost of the policy renewals was in line with those of theprevious year;

 

•                  Duringthe year insurance reimbursements for Euro 5.4 million were quantified,relating to damage subsequent to the taking over of the plants. The finalinstalment regarding these reimbursements, of Euro 1.5 million, was received in2004.

 

•                  InJune, as per contract, the company restored Euro 13.5 million to the financinginstitutions. This amount corresponded to the agreed percentage of the Euro 15million received from the plant construction company, arising from thelitigation settlement of December 31st 2002;

 

•                  Theshareholders’ meeting of September 29th 2003 approved,following a specific authorisation from the Financing Institutions, thedistribution of dividends for Euro 18.3 million, corresponding to the share ofthe profit for 2001 brought forward. Furthermore, amounts owing to shareholderstotalling Euro 25 million, relating to already-approved profit for 2001, werepaid. Subordinated debt amounting to Euro 1.7 million was repaid to theassociated company ISAB Energy Services. The company proceeded, following anamendment of the PCFA, to set up a limited reserve denominated “InsuranceReserve”, of Euro 23.9 million, and to partially extinguish in advance theamount payable to the Banks of Euro 18.9 million, to be recorded amongst the Band C tranches;

 

•                  DuringDecember the company renewed the hedging contracts to cover the risk ofinterest rate changes, by underwriting two “Swap” and two “Cap” contracts for atotal duration of five years, relating to the exposure on tranches B and C andto the periodicity of interest accrual;

 

•                  OnOctober 31st 2003 the stake in the company ISAB Energy wastransferred from ERG Petroli to ERG Power & Gas. The subordinated debtrelating to the surrendering shareholder was subsequently transferred.

 

•                  At theend of the year the company obtained ISO 14001 certification from Det NorskeVeritas for its environmental management system;

 

•                  Followingthe tax assessment notices served by the Revenue Authorities followinginvestigation into the years 1998 and 1999, a risk provision amounting to Euro0.3 million had already been set up at 31.12.2002. Following the outcomeregarding the year 1998, Euro 0.1 million of that amount was used. Theremaining Euro 0.2 million should be sufficient to cover the possible expensefor 1999; the company is awaiting to receive the adjustment notices for thatyear.

 

6

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**Relations with the financing institutions**

 

As previously mentioned, inApril the company renewed the plant’s insurance policies, according to theProject Credit Facility Agreement (PCFA). The lasting crisis situation in theinsurance sector, and in the energy sector in particular, meant that thecompany was not able, as previously stated, to obtain the cover requested bythe banks. A request was therefore made to the company to freeze the payment ofdividends and other subordinated payments, according to the PCFA.

 

During the year an agreementwas reached between the company and the financial institutions, according towhich ISAB Energy was granted a derogation from the freeze on dividends andsubordinated debts for a total of Euro 45.0 million, against the setting-up ofan inaccessible restricted reserve amounting to Euro 23.9 million called“Insurance Reserve”. This reserve has the aim of giving the financinginstitutions a guarantee against the risk arising from the extension of theexemption days within the “business interruption” cover, which is a greaterrisk than the one detailed in the Project Credit Facility Agreement provisions.Furthermore, the company carried out a partial advance payment of the debt fora total of Euro 18.9 million and this led to an improvement of the liquidityindexes laid down in the economic and financial model. Finally, a new planregarding the amortisation of the debt in line with the financial flows of thecompany has been agreed, in line with the new maintenance plan.

 

During 2003, following theagreement reached with the construction consortium Snam Progetti – FosterWheeler Energy, a credit line amounting to Euro 57.3 million, to cover thecompany possibly losing the lawsuit, was cancelled.

 

**Contract management**

 

### **Hot Oil Plant**

###  

On July 16th 2003 an agreement was drawn up with ERG Medto establish the criteria regarding repaying ISAB Energy for the replenishmentof diathermic oil (65 t/h) and the settlement of the previous litigation, withthe company being recognised the amount it had charged to ERG Petroli for theyear 2001. As from the year 2002 the fixed limit of the agreement is thereforevalid, confirming the amount of Euro 0.1 million recorded in the balance sheetsfor 2002. At the end of the year ERG Petroli proceeded with the payment of theabove-mentioned settlement (Euro 0.5 million) and ISAB Energy has consequentlyissued an invoice for the years 2002 and 2003.

 

**Information and Telecommunications Systems**

 

During 2003 investments werecarried out to improve the performance and management of all systems, replacingthe servers with new systems which perform better and are more serviceable. Forthe more critical applications, electronic mail and the I.T. production system,cluster systems have been used, ie two servers which work in parallel andbalance the load and are capable of standing alone, each one is able to replacethe other if there is some kind of failure. The ever greater attention tosecurity has made it necessary to apply a more “restrictive” management policyregarding all personal computers, using the characteristics of the newoperating system Microsoft XP. All the access profiles for SAP of all thesuppliers have also been entirely revised.

 

7

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With a view to furtherintegrating the applications and exchanging information with suppliers variousprojects have been carried out:

 

• thesending of and request for production data via cell-phone SMS messages;

• theplanning and carrying out of all maintenance work by third-party companies viaa SAP interface on the Internet;

• theintegration of the plant supervisory systems with the technical documentation;

• thefirst phase of the integrated management of the procedure regarding theplanning and realisation of new projects (GEPAD system);

• thefirst phase of the integrated management of the extraordinary plant shutdowns(GEFER system).

 

In support of the qualitysystem the following have become completely operative: the system to draw-up,manage and check comprehension of company procedures, the system to msnsge theminutes of all meetings and the system for HSE notifications. As part of thecompany’s aim to reduce all incidents to a minimum, an application for thecompletely automated management of work permits has been created.

 

**Staff**

 

The company staff consists of 20 people, as the company avails itself ofISAB Energy Services for the actual management of the plant, in accordance withthe “Operation & Maintenance” contract signed between the two companies.

 

8

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**FinancialStatements**

 

**Income Statement**

 
|                                           |   | **2003**            |       | **2002**    |       | **2001**    |       |
|------------------------------------------------|--------|---------------------|------------|-------------|------------|-------------|------------|
|                                           |   | **(thousand Euro)** |       |        |       |        |       |
| Revenues  from ordinary operations             |   | 417,791             |       | 421,319     |       | 377,207     |       |
| Other  revenues and income                     |   | 8,118               |       | 22,413      |       | 18,872      |       |
| **Total revenues**                             |   | **425,909**         | ** ** | **443,732** | ** ** | **396,079** | ** ** |
| Purchase  expenses                             |   | (170,884            | )          | (164,249    | )          | (169,230    | )          |
| Changes in  inventories                        |   | (843                | )          | 1,075       |       | 1,485       |       |
| Services and  other operating expenses         |   | (74,148             | )          | (71,521     | )          | (66,775     | )          |
| Personnel  expenses                            |   | (1,250              | )          | (1,316      | )          | (1,204      | )          |
| **EBITDA**                                     |   | **178,784**         | ** ** | **207,721** | ** ** | **160,356** | ** ** |
| Amortisation  and depreciation                 |   | (46,575             | )          | (45,776     | )          | (45,258     | )          |
| **EBIT**                                       |   | **132,209**         | ** ** | **161,945** | ** ** | **115,098** | ** ** |
| Net  financial income (expenses)               |   | (39,636             | )          | (47,232     | )          | (52,826     | )          |
| Net income  (expenses) from equity investments |   | —              |       | —      |       | —      |       |
| **Revenues from ordinary operations**          |   | **92,573**          | ** ** | **114,713** | ** ** | **62,272**  | ** ** |
| Net  extraordinary income (expenses)           |   | (332                | )          | (391        | )          | (161        | )          |
| **Income before taxes**                        |   | **92,242**          | ** ** | **114,321** | ** ** | **62,111**  | ** ** |
| Income taxes                                   |   | (11,694             | )          | (7,362      | )          | (5,152      | )          |
| **Income (loss) for the year**                 |   | **80,548**          | ** ** | **106,959** | ** ** | **56,959**  | ** ** |

 

**Revenues from ordinary operations**

 

These revenues consist of thesale of electrical power to the GRTN (Euro 405 million) and the sale of minorproducts and utilities (around Euro 12 million).

 

**Other revenues and income**

 

The other revenues and incomeinclude the insurance reimbursements for Euro 4,5 million, rents receivable andordinary surpluses. In 2002 this item included Euro 21 million received fromthe plant construction consortium to cover the claim for compensation.

 

**Purchase expenses**

 

Purchase expenses relatemainly to supplies of feedstock, diesel, other fuel oils, oxygen and nitrogen.

 

**Services and other operating expenses**

 

The services received weremaintenance services, insurance, commercial, technical and general services andconsultancy services.

 

9

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**Amortisation and depreciation**

 

This item includes theeconomic and technical amortisation and depreciation of tangible fixed assets(Euro 37 million) and intangible fixed assets (Euro 9 million).

 

The average useful life of theplants was estimated in 23.4 years from April 18th  2000.

 

**Net financial income (expenses)**

 

The financial expensesincurred during 2003 consist mainly of interest payable on the financing ofEuro 21 million and additional bank charges and brokerage margins for Euro 5million.

 

The financial income refers tocurrent account deposits, which earn an average rate of 1.46%. The ratedifferential paid as a result of the Swap contract in existence in 2003 amountsto Euro 13.6 million.

 

**Income taxes**

 

The taxes for 2003 includeIRAP taxation and also IRPEG taxation, given the fact that the 10-year IRPEGexemption the company had been granted expired on October 5th.

 

The assessment of the incomesubject to IRPEG taxation was carried out taking into account that an incomeequivalent to 278 days of exemption was not subject to tax. Current IRPEGtaxation amounts to Euro 2,4 million as a result of the carrying forward ofpast losses, which were put down to a decrease in income. Deferred IRPEG assetson those losses were fully used.

 

Current IRAP taxation wascalculated to be Euro 5,6 million

 

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**Balance Sheet**

 

The following table shows reclassified balance sheet figures for 2003and 2002.

 
|                                             |   | **31.12.03**        |       | **31.12.02** |       |
|--------------------------------------------------|--------|---------------------|------------|--------------|------------|
|                                             |   | **(thousand Euro)** |       |         |       |
| Fixed assets                                     |   | 731,627             |       | 766,565      |       |
| Net working  capital                             |   | 15,461              |       | 50,361       |       |
| Staff  leaving indemnities                       |   | (168                | )          | (161         | )          |
| Other assets                                     |   | 20,835              |       | 37,154       |       |
| Other  liabilities                               |   | (11,727             | )          | (17,897      | )          |
| **NET INVESTED CAPITAL**                         |   | **756,029**         | ** ** | **836,022**  | ** ** |
|                                             |   |                |       |         |       |
| Shareholders’  equity                       |   | 206,371             |       | 144,083      |       |
| Medium/long-term  financial debt                 |   | 567,403             |       | 657,618      |       |
| Short-term  financial debt                       |   | (17,745             | )          | 34,322       |       |
| **SHAREHOLDERS’ EQUITY AND FINANCIAL DEBT** |   | **756,029**         | ** ** | **836,022**  | ** ** |

 

 

At December 31st2003 the net invested capital amounted to approximately Euro 756 million, adecrease of around Euro 80 million.

 

The most significantvariations between the situation at December 31st 2002 andDecember 31st 2003 are analysed below.

 

**Fixed assets**

 
|                                    |   | **31.12.03**        |       | **31.12.02** |       |
|-----------------------------------------|--------|---------------------|------------|--------------|------------|
|                                    |   | **(thousand Euro)** |       |         |       |
| Intangible  fixed assets                |   | 48,063              |       | 56,331       |       |
| Tangible  fixed assets                  |   | 683,555             |       | 710,225      |       |
| Investments  and other financial assets |   | 9                   |       | 9            |       |
| **Total**                               |   | **731,627**         | ** ** | **766,565**  | ** ** |

 

**Net working capital**

 
|               |   | **31.12.03**        |       | **31.12.02** |       |
|--------------------|--------|---------------------|------------|--------------|------------|
|               |   | **(thousand Euro)** |       |         |       |
| Leftovers          |   | 14,698              |       | 15,615       |       |
| Trade  receivables |   | 43,534              |       | 76,528       |       |
| Trade  payables    |   | (42,771             | )          | (41,783      | )          |
| **Total**          |   | **15,461**          | ** ** | **50,361**   | ** ** |

 

The figure regarding leftovers included the write-down of spare partsfor Euro 0.9 million

 

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Short-term tax receivables decreased mainly due to the use of deferredtax assets for Euro 6.0 million. The other short-term receivables highlight theamount due from the plant construction consortium following the settlement oflitigation.

 

Short-term trade payables dropped due to the lower value of theservices and supplies received.

 

**Other assets**

 
|                                                      |   | **31.12.03**        |       | **31.12.02** |       |
|-----------------------------------------------------------|--------|---------------------|------------|--------------|------------|
|                                                      |   | **(thousand Euro)** |       |         |       |
| Short-term  tax receivables                               |   | 1,511               |       | 5,950        |       |
| Other  short-term receivables                             |   | 4,189               |       | 17,955       |       |
| Short-term  pre-paid expenses and accrued income          |   | 4,274               |       | 3,989        |       |
| Receivables  from tax authorities – long/medium-term |   | 5,705               |       | 3,231        |       |
| Other  medium/long-term receivables                       |   | 5,156               |       | 6,030        |       |
| **Total**                                                 |   | **20,835**          | ** ** | **37,154**   | ** ** |

 

**Other liabilities**

 
|                                             |   | **31.12.03**        |   | **31.12.02** |   |
|--------------------------------------------------|--------|---------------------|--------|--------------|--------|
|                                             |   | **(thousand Euro)** |   |         |   |
| Short-term  tax payables                         |   | (2,477              | )      | (2,497       | )      |
| Other  short-term tax payables                   |   | (1,294              | )      | (4,790       | )      |
| Short-term  deferred income and accrued expenses |   | (369                | )      | (543         | )      |
| Other  provisions for risks and charges          |   | (7,587              | )      | (10,068      | )      |
| **Total**                                        |   | **(11,727**         | **)**  | **(17,897**  | **)**  |

 

The other short-term payables fell as a result of the decrease of theamount payable for VAT,  due to ERGS.p.A. The other provisions include the provision for cyclical plantmaintenance, which recorded a use of Euro 7.8 million and a provision for theyear of Euro 5.4 million.

 

**Net financial debt**

 

The table below outlines the medium/long-term financial debt for ISABEnergy S.r.l.

 
|                                   |   | **31.12.03**        |       | **31.12.02** |       |
|----------------------------------------|--------|---------------------|------------|--------------|------------|
|                                   |   | **(thousand Euro)** |       |         |       |
| Medium/long-term  bank borrowings      |   | 593,811             |       | 700,142      |       |
| Other  medium/long-term financial debt |   | 57,654              |       | 81,425       |       |
| Current  portion of loans              |   | (84,063             | )          | (123,949     | )          |
| **Total**                              |   | **567,403**         | ** ** | **657,618**  | ** ** |

 

12

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**Short-term financial debt:**

 
|                                    |   | **31.12.03**        |       | **31.12.02** |       |
|-----------------------------------------|--------|---------------------|------------|--------------|------------|
|                                    |   | **(thousand Euro)** |       |         |       |
| Short-term  bank borrowings             |   | 77,011              |       | 97,598       |       |
| Other  short-term financial debt        |   | 7,051               |       | 26,351       |       |
| **Short-term financial liabilities**    |   | **84,063**          | ** ** | **123,949**  | ** ** |
|                                    |   |                | ** ** |         | ** ** |
| Cash and  cash equivalents              |   | (101,761            | )          | (85,101      | )          |
| Other  short-term financial receivables |   | (47                 | )          | (4,526       | )          |
| **Short-term financial assets**         |   | **(101,807**        | **)**      | **(89,627**  | **)**      |
|                                    |   |                |       |         |       |
| **TOTAL**                               |   | **(17,745**         | **)**      | **34,322**   | ** ** |

 

Set out below is a breakdown of the change in net financial debt forthe last three years:

 
|                                           |   | **2003**            |       | **2002**    |       | **2001**     |       |
|------------------------------------------------|--------|---------------------|------------|-------------|------------|--------------|------------|
|                                           |   | **(thousand Euro)** |       |        |       |         |       |
| **CASH FLOW  FROM OPERATIONS:**                |   |                | ** ** |        | ** ** |         | ** ** |
| Cash flow from operations                      |   | 130,710             |       | 159,391     |       | 104,434      |       |
| Change in operating assets and liabilities     |   | 43,112              |       | (35,284     | )          | 28,252       |       |
| **Total**                                      |   | **173,822**         | ** ** | **124,107** | ** ** | **132,686**  | ** ** |
|                                           |   |                |       |        |       |         |       |
| **CASH FLOW  FROM INVESTMENT ACTIVITIES:**     |   |                | ** ** |        | ** ** |         | ** ** |
| Investments                                    |   | (13,378             | )          | (12,059     | )          | (16,242      | )          |
| Divestments                                    |   | 97                  |       | —      |       | 1,351        |       |
| **Total**                                      |   | **(13,280**         | **)**      | **(12,059** | **)**      | **(14,891**  | **)**      |
|                                           |   |                |       |        |       |         |       |
| **CASH FLOW  FROM SHAREHOLDERS’ EQUITY:** |   |                | ** ** |        | ** ** |         | ** ** |
| Capital increase                               |   | —              |       | —      |       | —       |       |
| Capital subsidies                              |   | —              |       | —      |       | —       |       |
| Dividends paid                                 |   | (18,260             | )          | (25,000     | )          | —       |       |
| Other changes to shareholders’ equity     |   |                |       | (8,534      | )          | —       |       |
| **Total**                                      |   | **(18,260**         | **)**      | **(33,534** | **)**      | **—**   | ** ** |
|                                           |   |                |       |        |       |         |       |
| **CHANGE IN NET  FINANCIAL DEBT**              |   | **142,281**         | ** ** | **78,514**  | ** ** | **117,795**  | ** ** |
|                                           |   |                | ** ** |        | ** ** |         | ** ** |
| **INITIAL NET  FINANCIAL DEBT**                |   | **691,939**         | ** ** | **770,454** | ** ** | **888,250**  | ** ** |
| **CHANGE FOR  THE YEAR**                       |   | **(142,281**        | **)**      | **(78,514** | **)**      | **(117,795** | **)**      |
|                                           |   |                |       |        |       |         |       |
| **FINAL NET  FINANCIAL DEBT**                  |   | **549,658**         | ** ** | **691,939** | ** ** | **770,454**  | ** ** |

 

13

----

 

**Shareholdings in other companies**

 

ISAB Energy S.r.l. does not own shares in the parent companies nor inthe associated company ISAB Energy Services S.r.l.; it holds a share of 5% ofthe share capital of the company Industria Acqua Siracusana S.p.A., aco-operative company managing industrial waste water.

 

**Relationswith parent companies, associated companies and other related parties**

 

ISAB Energy S.r.l. purchasesthe main raw materials necessary for production from ERG RaffinerieMediterranee. At the same time it sells some raw materials and auxiliaryservices to ERG Raffinerie Mediterranee. Relations between the two companies alsoentail several contracts regarding the supply of industrial and generalservices, such as:

 

•                  Healthcare;

•                  Personneladministration;

•                  Internalmail;

•                  Fire-fighting/prevention.

 

ISAB Energy also receivesother general services from ERG S.p.A.:

 

•                  Publicrelations service;

•                  I.T.services.

 

The amounts paid for theseservices are detailed in the Notes to the financial statements.

 

The company also has contractsfor services supplied by Edison Mission Italia and ErgS.p.A. as part of the“Sponsor Support Agreements”.

 

The relationship which linksISAB Energy with ISAB Energy Services is regulated by the Operation andMaintenance contract, which assigns to ISAB Energy Services the role of plantoperation and maintenance.

 

As far as relations withrelated parties are concerned, as defined by the CONSOB recommendation datedFebruary 20th 1997, recalled by the CONSOB recommendation datedFebruary 27th 1998, there are not any relations which comeunder that definition and which have significant operations as their subject.

 

**Eventssubsequent to the close of the year**

 

The TAR (regionaladministrative court) of Lombardy upheld the appeal presented by ISAB Energyregarding the charges incurred for the carriage of the electrical powerproduced, overturning the note of the Autorità dell’Energia Elettrica e del Gas(Electricity and Gas Board), which stated which producers were held to thepayment of charges. As a result of this decision, the Income Statement wascorrected for a total of Euro 2.0 million, of which Euro 1.0 was for thecancelling of carriage service charges for the year 2003 and Euro 1.0 millionwas a contingent asset arising from the charges incurred in 2002.

 

14

----

 

In February the companyreceived the remaining Euro 1.5 million relating to insurance reimbursements.

 

**Operations expectations**

 

The company expects itsperformance In 2004 to be similar to that of the last few years. It isestimated that investments totalling Euro 6.4 million will be made, Euro 2.3million of which will be for Health, Safety and Environment. During 2004 theplant for the packing of vanadium concentrate (currently outsourced) will becompleted.

 

A maintenance shutdown isplanned for October, it should last approximately 13 days.

 

During 2004 the transfer of 3executives and 7 employees from ISAB Energy to the parent company ERG Power& Gas is expected to take place. ISAB Energy will receive from ERG Power& Gas the following services: Management Control, Plant and CommercialManagement and Production Planning.

 

**Privacy – the programmaticdocument on security**

 

TheERG group had already issued on April 30th 2000 the“Programmatic document on security “, as required by the Privacy code.

 

Theobligation to update this document will come into force on July 1st2004.

 

OurGroup is currently finishing this update, and it will be completed at thelatest before the end of the June 2004.

 

**Board of Directors’ Proposal**

 

Shareholders,

We close this report by inviting you to:

•                  approve the financial statements of your company as at December 31st2003;

•                  to allocate the net income for the year of Euro 80,548,132.00

takinginto account the limitations previously mentioned in the paragraph “Relationswith the Financing Institutions” contained in the present report.

 

Roma,March 27th 2004

 

Onbehalf of the Board of Directors

 

TheChairman

 

DomenicoD’Arpizio

 

15

----

 

**Independent Auditor’s Report**

 

To the Shareholders ofIsab EnergyS.r.l.

 

We have audited the accompanying balance sheets of Isab Energy S.r.l.as of December 31, 2003 and 2002, and the related statements of income foreach of the three years in the period ended December 31, 2003.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements.  An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Isab Energy S.r.l.at December 31, 2003 and 2002 and the results of its operations for eachof the three years in the period ended December 31, 2003, in conformitywith accounting principles generally accepted in Italy.

 

Accounting principles generally accepted in Italy vary in certainsignificant respects from accounting principles generally accepted in theUnited States of America.  Theapplication of the latter would have affected the determination of net incomefor each of the three years ended December 31, 2003 and the determinationof shareholder’s equity as of December 31, 2003 and 2002 to the extentsummarized in Note 7.

 

 

Reconta Ernst & Young S.p.A.

 

 

Genoa, Italy

May 5, 2004

 

16

----

 

**ISAB Energy S.r.l.**

**Annual report for the year ended December 31st2003**

**Financial statements**

 

** **
| **ISAB ENERGY S.r.l.  -  Financial Statement**Amount  expressed in Thousands of Euro |  |
|-------------------------------------------------------------------------------------------|--|

 

**BALANCE SHEET**

 

**ASSETS**

 
|                   |   |                          |                                                              | **31.12.03** |                   |       |        | **31.12.02** |                   |
|------------------------|--------|-------------------------------|-------------------------------------------------------------------|--------------|------------------------|------------|-------------|--------------|------------------------|
|                   |   |                          |                                                              |         |                   |       |        |         |                   |
| **A)**                 |   | **Subscribed capital unpaid** |                                                              |         |                   | —     |        |         |                   | — |   |
|                   |   |                          |                                                              |         |                   |       |        |         |                   |   |   |   |
| **B)**                 |   | **Fixed assets**              |                                                              |         |                   |       |        |         |                   |   |   |
|                   |   |                          |                                                              |         |                   |       |        |         |                   |   |   |   |
| **I.**                 |   | **Intangible assets**         |                                                              |         |                   |       |        |         |                   |   |   |
|                   |   | 1)                            | Start up and expansion expenses                                   |         |                   |       | 6,784       |         |                   |   | 12,017 |   |
|                   |   | 2)                            | Costs of research, development and advertising                    |         |                   |       | —      |         |                   |   | — |   |
|                   |   | 3)                            | Patents and right to use patents of others                        |         |                   |       | —      |         |                   |   | — |   |
|                   |   | 4)                            | Concessions, licenses, trade marks and similar rights             |         |                   |       | 4,990       |         |                   |   | 5,490 |   |
|                   |   | 5)                            | Goodwill                                                          |         |                   |       | —      |         |                   |   | — |   |
|                   |   | 6)                            | Intangible assets in progress and payments on account             |         |                   |       | 159         |         |                   |   | 111 |   |
|                   |   | 7)                            | Other                                                             |         |                   |       | 36,131      |         |                   |   | 38,714 |   |
|                   |   | **Total**                     |                                                              |         |                   | ** ** | **48,063**  |         |                   |   | **56,331** |   |
|                   |   |                          |                                                              |         |                   |       |        |         |                   |   |   |   |
| **II.**                |   | **Tangible assets**           |                                                              |         |                   |       |        |         |                   |   |   |
|                   |   | 1)                            | Land and buildings                                                |         |                   |       | 15,768      |         |                   |   | 16,266 |   |
|                   |   | 2)                            | Plants and machinery                                              |         |                   |       | 661,257     |         |                   |   | 684,552 |   |
|                   |   | 3)                            | Other fixture, tools and equipment                                |         |                   |       | 202         |         |                   |   | 196 |   |
|                   |   | 4)                            | Other                                                             |         |                   |       | 770         |         |                   |   | 843 |   |
|                   |   | 5)                            | Tangible assets in course of construction and payments on account |         |                   |       | 5,558       |         |                   |   | 8,370 |   |
|                   |   | **Total**                     |                                                              |         |                   | ** ** | **683,555** |         |                   |   | **710,225** |   |
|                   |   |                          |                                                              |         |                   |       |        |         |                   |   |   |   |
| **III.**               |   | **Investments**               |                                                              |         |                   |       |        |         |                   |   |   |
|                   |   | 1)                            | Equity investments in                                             |         |                   |       |        |         |                   |   |   |   |
|                   |   |                          | a)  subsidiary companies                                          |         |                   |       | —      |         |                   |   | — |   |
|                   |   |                          | b)  associated company                                            |         |                   |       | —      |         |                   |   | — |   |
|                   |   |                          | c) parent  companies                                              |         |                   |       | —      |         |                   |   | — |   |
|                   |   |                          | e) other  entities                                                |         |                   |       | 5           |         |                   |   | 5 |   |
|                   |   |                          |                                                              |         |                   |       | 5           |         |                   |   | 5 |   |
|                   |   |                          |                                                              |         | **Beyond  12 months:** |       |        |         | **Beyond  12 months:** |   |   |   |
|                   |   |                          |                                                              |         |                   |       |        |         |                   |   |   |   |
|                   |   | 2)                            | Loans                                                             |         |                   |       |        |         |                   |   |   |   |
|                   |   |                          | a)  subsidiary companies                                          |         | —                 |       | —      |         | —                 |   | — |   |
|                   |   |                          | b)  associated company                                            |         | —                 |       | —      |         | —                 |   | — |   |
|                   |   |                          | c) parent  companies                                              |         | —                 |       | —      |         | —                 |   | — |   |
|                   |   |                          | e) other  entities                                                |         | —                 |       | 4           |         | —                 |   | 4 |   |
|                   |   |                          |                                                              |         |                   |       | 4           |         |                   |   | 4 |   |
|                   |   |                          |                                                              |         |                   |       |        |         |                   |   |   |   |
|                   |   | 3)                            | Other investments                                                 |         |                   |       |        |         |                   |   |   |   |
|                   |   | 4)                            | Own shares, with indication of their aggregate nominal value      |         |                   |       |        |         |                   |   |   |   |
|                   |   | **Total**                     |                                                              |         |                   | ** ** | **9**       |         |                   |   | **9** |   |
|                   |   |                          |                                                              |         |                   |       |        |         |                   |   |   |   |
| **Total fixed assets** |   |                          | ** **                                                        | **731,627**  |                   |       |        | **766,565**  |                   |

 

17

----

 

 

**BALANCESHEET**

 

**ASSETS**

 
|                                     |   |                                   |                                                         | **31.12.03** |                   |       |        | **31.12.02** |                   |
|------------------------------------------|--------|----------------------------------------|--------------------------------------------------------------|--------------|------------------------|------------|-------------|--------------|------------------------|
|                                     |   |                                   |                                                         |         |                   |       |        |         |                   |
| **C)**                                   |   | **Current assets**                     |                                                         |         |                   |       |        |         |                   |   |   |
|                                     |   |                                   |                                                         |         |                   |       |        |         |                   |   |   |   |
| **I.**                                   |   | **Stocks**                             |                                                         |         |                   |       |        |         |                   |   |   |
|                                     |   | 1)                                     | Raw materials and consumables                                |         |                   |       | 14,346      |         |                   |   | 15,370 |   |
|                                     |   | 2)                                     | work in progress and components                              |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | 3)                                     | contract in progress                                         |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | 4)                                     | finished goods and goods for resale                          |         |                   |       | 294         |         |                   |   | 113 |   |
|                                     |   | 5)                                     | payments on account                                          |         |                   |       | 58          |         |                   |   | 132 |   |
|                                     |   | **Total**                              |                                                         |         |                   | ** ** | **14,698**  |         |                   |   | **15,615** |   |
|                                     |   |                                   |                                                         |         |                   |       |        |         |                   |   |   |   |
|                                     |   |                                   |                                                         |         | **Beyond  12 months:** |       |        |         | **Beyond  12 months:** |   |   |   |
| **II.**                                  |   | **Debtors**                            |                                                         |         |                   |       |        |         |                   |   |   |
|                                     |   | 1)                                     | trade debtors                                                |         | —                 |       | 39,766      |         | —                 |   | 66,084 |   |
|                                     |   | 2)                                     | amounts owed by subsidiary companies                         |         | —                 |       | —      |         | —                 |   | — |   |
|                                     |   | 3)                                     | amounts owed by associated companies                         |         | —                 |       | —      |         | —                 |   | — |   |
|                                     |   | 4)                                     | amounts owed by parent companies                             |         | —                 |       | —      |         | —                 |   | 8,284 |   |
|                                     |   | 4bis)                                  | amounts owed by other associated companies                   |         | —                 |       | 3,814       |         | —                 |   | 6,686 |   |
|                                     |   | 5)                                     | others debtors                                               |         | 10,861                 |       | 16,561      |         | 9,261                  |   | 33,165 |   |
|                                     |   | **Total**                              |                                                         |         |                   | ** ** | **60,141**  |         |                   |   | **114,219** |   |
|                                     |   |                                   |                                                         |         |                   |       |        |         |                   |   |   |   |
| **III.**                                 |   | **Investment which are not permanent** |                                                         |         |                   |       |        |         |                   |   |   |
|                                     |   | 1)                                     | subsidiary companies                                         |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | 2)                                     | associate companies                                          |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | 3)                                     | parent companies                                             |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | 4)                                     | other companies                                              |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | 5)                                     | own shares, with indication of their aggregate nominal value |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | 6)                                     | other investments                                            |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | **Total**                              |                                                         |         |                   |       | —      |         |                   |   | — |   |
|                                     |   |                                   |                                                         |         |                   |       |        |         |                   |   |   |   |
| **IV.**                                  |   | **Cash at bank and in hand**           |                                                         |         |                   |       |        |         |                   |   |   |
|                                     |   | 1)                                     | Banks and postal current account                             |         |                   |       | 101,756     |         |                   |   | 85,099 |   |
|                                     |   | 2)                                     | Bank cheques                                                 |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | 3)                                     | Cash on hand                                                 |         |                   |       | 5           |         |                   |   | 2 |   |
|                                     |   | **Total**                              |                                                         |         |                   |       | **101,761** |         |                   |   | **85,101** |   |
|                                     |   |                                   |                                                         |         |                   |       |        |         |                   |   |   |   |
| **Total currents assetsC)**              |   |                                   |                                                         | **176,600**  |                   |       |        | **214,936**  |                   |
|                                     |   |                                   |                                                         |         |                   |       |        |         |                   |   |   |   |
| **D)**                                   |   | **Prepayments and accrued income**     |                                                         |         |                   |       |        |         |                   |   |   |
|                                     |   | •                                 | accrued income                                               |         |                   |       | —      |         |                   |   | — |   |
|                                     |   | •                                 | prepayments                                                  |         |                   |       | 4,274       |         |                   |   | 3,989 |   |
| **Total prepayments and accrued income** |   |                                   |                                                         | **4,274**    |                   |       |        | **3,989**    |                   |
|                                     |   |                                   |                                                         |         |                   |       |        |         |                   |   |   |   |
| **Total Assets**                         |   |                                   |                                                         | **912,502**  |                   |       |        | **985,490**  |                   |

 

18

----

 

 

**BALANCE SHEET**

 

**LIABILITIES**

 
|                                               |                                 |                                                 |       | **31.12.03**           |       |       |       | **31.12.02**           |       |
|----------------------------------------------------|--------------------------------------|------------------------------------------------------|------------|------------------------|------------|------------|------------|------------------------|------------|
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |
| **A)**                                             | **Capital and reserves**             | ** **                                           |       | ** **             |       | ** ** |       | ** **             |       | ** ** |
| I.                                                 |                                 | Share capital                                        |       |                   |       | 5,165      |       |                   |       | 5,165 |   |
| II.                                                |                                 | Share premium                                        |       |                   |       | —     |       |                   |       | — |   |
| III.                                               |                                 | Revaluation reserves                                 |       |                   |       | —     |       |                   |       | — |   |
| IV.                                                |                                 | Legal reserves                                       |       |                   |       | 1,033      |       |                   |       | 1,033 |   |
| V.                                                 |                                 | Reserve for own shares                               |       |                   |       | —     |       |                   |       | — |   |
| VI.                                                |                                 | Reserve provided by the article of  association |       |                   |       | —     |       |                   |       | — |   |
| VII.                                               |                                 | Other reserves                                       |       |                   |       |       |       |                   |       |   |   |
|                                               | 1)                                   | Additional paid in capital                           |       |                   |       | —     |       |                   |       | — |   |
| VIII.                                              |                                 | Profit (Loss) brought forward                        |       |                   |       | 119,625    |       |                   |       | 30,926 |   |
| IX.                                                |                                 | Profit (Loss) for the financial period               |       |                   |       |       |       |                   |       |   |   |
|                                               | 1)                                   | Coverage losses                                      |       |                   |       |       |       |                   |       |   |   |
|                                               | 2)                                   | Profit (Loss) for the financial period               |       |                   |       | 80,548     |       |                   |       | 106,959 |   |
| **TOTAL CAPITAL AND RESERVES**                     | ** **                           |                                                 | ** ** | **206,371**            | ** ** |       | ** ** | **144,083**            | ** ** |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |   |   |
| **B)**                                             | **Provisions for risks and charges** | ** **                                           |       | ** **             |       | ** ** |       | ** **             |       | ** ** |
|                                               | 1)                                   | Provision  for pension and similar obbligation       |       |                   |       | —     |       |                   |       | — |   |
|                                               | 2)                                   | Provision  for taxation                              |       |                   |       | 203        |       |                   |       | 305 |   |
|                                               | 3)                                   | Other  provision                                     |       |                   |       | 7,384      |       |                   |       | 9,763 |   |
| **TOTAL PROVISION FOR  RISKS AND CHARGES**         | ** **                           |                                                 | ** ** | **7,587**              | ** ** |       | ** ** | **10,068**             | ** ** |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |   |   |
| **C)**                                             | **Employee severance indemnity**     | ** **                                           |       | ** **             | **168**    | ** ** |       | ** **             | **161**    | ** ** |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |   |   |
|                                               |                                 |                                                 | ** ** | **Beyond  12 months:** | ** ** |       | ** ** | **Beyond  12 months:** | ** ** |   | ** ** |
| **D)**                                             | **Creditors**                        |                                                 |       |                   |       |       |       |                   |       |   |
|                                               | 1)                                   | Debenture  loans                                     |       | —                 |       | —     |       | —                 |       | — |   |
|                                               | 2)                                   | Convertible  debenture loans                         |       | —                 |       | —     |       | —                 |       | — |   |
|                                               | 3)                                   | Amounts own  to banks                                |       | 516,800                |       | 593,811    |       | 602,544                |       | 700,142 |   |
|                                               | 4)                                   | Amounts own  to other finansor                       |       | 22,367                 |       | 25,361     |       | —                 |       | — |   |
|                                               | 5)                                   | Advanced  received                                   |       | —                 |       | —     |       | —                 |       | — |   |
|                                               | 6)                                   | Amounts owed  to suppliers                           |       | —                 |       | 21,395     |       | —                 |       | 24,429 |   |
|                                               | 7)                                   | Debts  represented by bill of exchange               |       | —                 |       | —     |       | —                 |       | — |   |
|                                               | 8)                                   | Amounts owed  to subsidiary companies                |       | —                 |       | —     |       | —                 |       | — |   |
|                                               | 9)                                   | Amounts owed  to associated companies                |       | —                 |       | —     |       | —                 |       | — |   |
|                                               | 10)                                  | Amounts owed  to parent companies                    |       | 23,281                 |       | 27,632     |       | 49,218                 |       | 78,767 |   |
|                                               | 10bis                                | Amounts owed  to other associated companies          |       | 4,955                  |       | 26,925     |       | 5,856                  |       | 24,400 |   |
|                                               | 11)                                  | Amounts owed  to tax administration                  |       | —                 |       | 2,477      |       | —                 |       | 2,497 |   |
|                                               | 12)                                  | Amounts owed  to social security institutions        |       | —                 |       | 79         |       | —                 |       | 83 |   |
|                                               | 13)                                  | Other  creditors                                     |       | —                 |       | 327        |       | —                 |       | 317 |   |
| **Total Creditors**                                | ** **                           |                                                 | ** ** | **698,007**            | ** ** |       | ** ** | **830,635**            | ** ** |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |   |   |
| **E)**                                             | **Accruals and deferred income**     | ** **                                           |       | ** **             |       | ** ** |       | ** **             |       | ** ** |
|                                               | •  accrued income          |                                                 |       |                   | 369        |       |       |                   | 543        |   |
|                                               | •  prepayments             |                                                 |       |                   | —     |       |       |                   | —     |   |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |   |   |
| **Total accruals and deferred income**             | ** **                           |                                                 | ** ** | **369**                | ** ** |       | ** ** | **543**                | ** ** |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |   |   |
| **Total liabilities**                              | ** **                           |                                                 | ** ** | **706,131**            | ** ** |       | ** ** | **841,407**            | ** ** |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |   |   |
| **Total liabilities, capital and deferred income** | ** **                           |                                                 | ** ** | **912,502**            | ** ** |       | ** ** | **985,490**            | ** ** |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |   |   |
| **  Memorandum accounts**                |                                 |                                                 |       |                   |       |       |       |                   |       |
| Other  personal guarantees                         |                                 |                                                 |       |                   |       |       |       |                   |       |
| •  In favour of related parties          |                                 |                                                 |       | —                 |       |       |       | —                 |       |
| •  In favour of third parties            |                                 |                                                 |       | —                 |       |       |       | —                 |       |
|                                               |                                 |                                                 |       | —                 |       |       |       | —                 |       |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |
| Other  memorandum accounts                         |                                 |                                                 |       |                   |       |       |       |                   |       |
|                                               |                                 |                                                 |       | —                 |       |       |       | —                 |       |
| •  Others                                |                                 |                                                 |       | 3,137                  |       |       |       | 3,651                  |       |
|                                               |                                 |                                                 |       | 3,137                  |       |       |       | 3,651                  |       |
|                                               |                                 |                                                 |       |                   |       |       |       |                   |       |
| **Total memorandum accounts**                      |                                 |                                                 |       | 3,137                  |       |       |       | 3,651                  |       |
|                                                    |                                      |                                                      |            |                        |            |            |            |                        |            |  |  |  |

 

19

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**ISABENERGY S.r.l. - Financial Statement**

**Amountexpressed in Thousands of Euro**

 

**INCOMESTATEMENTS**

 
|                          |                    | **2003**                                                       |       | **2002**    |       | **2001**    |       |
|-------------------------------|-------------------------|----------------------------------------------------------------|------------|-------------|------------|-------------|------------|
|                          |                    |                                                           |       |        |       |        |       |
| **A)**                        | **VALUE OF PRODUCTION** |                                                           |       |        |       |        |       |   |
|                          |                    |                                                           |       |        |       |        |       |
|                          | 1)                      | Net turnover  from sales and services                          |       | 417,791     |       | 421,319     |       | 377,207 |   |
|                          | 2)                      | variation in  stocks of finished goods and in work in progress |       | 181         |       | (137        | )          | 65 |   |
|                          | 3)                      | Variance in  contracts in progress                             |       | —      |       | —      |       | — |   |
|                          | 4)                      | work  performed for own purposes and capitalized               |       | 1,421       |       | 824         |       | 37 |   |
|                          | 5)                      | Other  revenues and income                                     |       |        |       |        |       |   |   |
|                          |                    | other                                                          |       | 8,118       |       | 22,413      |       | 18,872 |   |
|                          |                    | contributions  received                                        |       | —      |       | —      |       | — |   |
|                          |                    |                                                           | 8,118      |        | 22,413     |        | 18,872     |   |
|                          |                    |                                                           |       |        |       |        |       |   |
| **TOTAL VALUE OF PRODUCTION** | ** **              | **427,512**                                                    | ** ** | **444,419** | ** ** | **396,181** | ** ** |
|                               |                         |                                                                |            |             |            |             |            |  |  |  |

 
| **B)**                                                    | **COST OF PRODUCTION** |                                                                   |       |         |       |         |       |     |
|-----------------------------------------------------------|------------------------|------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|----------|
|                                                      |                   |                                                                   |       |         |       |         |       |     |
|                                                      | 6)                     | For raw  materials, consumable and goods for sale                      |       | (172,305     | )          | (165,073     | )          | (169,267 | ) |
|                                                      | 7)                     | For services                                                           |       | (60,413      | )          | (58,123      | )          | (59,349  | ) |
|                                                      | 8)                     | For use of  assets owned by other                                      |       | (1,594       | )          | (1,964       | )          | (989     | ) |
|                                                      | 9)                     | For staff costs                                                        |       |         |       |         |       |     |   |
|                                                      |                   | a) wages and salaries                                                  |       | (887         | )          | (952         | )          | (906     | ) |
|                                                      |                   | b) social security costs                                               |       | (285         | )          | (281         | )          | (242     | ) |
|                                                      |                   | c) provision for severance indemnity                                   |       | (62          | )          | (65          | )          | (55      | ) |
|                                                      |                   | d) pension costs                                                       |       | —       |       | —       |       | —   |   |
|                                                      |                   | e) other costs relating to staff                                       |       | (16          | )          | (19          | )          | (1       | ) |
|                                                      |                   |                                                                   |       | (1,250       | )          | (1,316       | )          | (1,204   | ) |
|                                                      |                   |                                                                   |       |         |       |         |       |     |   |
|                                                      | 10)                    | Value  adjustments                                                     |       |         |       |         |       |     |   |
|                                                      |                   | a) Amortization of intangible assets                                   |       | (8,741       | )          | (8,795       | )          | (9,011   | ) |
|                                                      |                   | b) Amortization of tangible assets                                     |       | (37,834      | )          | (36,981      | )          | (36,247  | ) |
|                                                      |                   | c) Reduction in value of fixed assets                                  |       | —       |       | —       |       | —   |   |
|                                                      |                   | d) Allowance for doubtful debtors included  in current assets          |       | —       |       | —       |       | —   |   |
|                                                      |                   |                                                                   |       | (46,575      | )          | (45,776      | )          | (45,258  | ) |
|                                                      |                   |                                                                   |       |         |       |         |       |     |   |
|                                                      | 11)                    | Variation in stocks of raw materials,  consumables and good for resale |       | (1,024       | )          | 1,212        |       | 1,420    |   |
|                                                      | 12)                    | Amounts  provided for risks provisions                                 |       | —       |       | —       |       |     |   |
|                                                      | 13)                    | Other  accruals                                                        |       | (5,479       | )          | (6,459       | )          | (1,931   | ) |
|                                                      | 14)                    | Other  operating charges                                               |       | (6,661       | )          | (4,975       | )          | (4,506   | ) |
|                                                      |                   |                                                                   |       |         |       |         |       |     |   |
| **TOTAL COSTS OF PRODUCTION**                             |                   | **(295,302**                                                           | **)**      | **(282,474** | **)**      | **(281,084** | **)**      |
|                                                      |                   |                                                                   |       |         |       |         |       |     |   |
| **DIFFERENCE BETWEEN VALUE AND COST OF PRODUCTION (A-B)** | ** **             | **132,209**                                                            | ** ** | **161,945**  | ** ** | **115,097**  | ** ** |
|                                                           |                        |                                                                        |            |              |            |              |            |          |  |  |  |

 

20

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| **C)**                                 | **FINANCIAL INCOME AND CHARGES** |                            |                                                     |    |    |    |    |    |
|----------------------------------------|----------------------------------|---------------------------------|----------------------------------------------------------|---------|---------|---------|---------|---------|
|                                   | 15)                              | Income from  equity investments |                                                     |    |    |    |    |    |   |
|                                   |                             |                            | subsidiary companies                                     |    | —  |    | —  |    | — |   |
|                                   |                             |                            | associated companies                                     |    | —  |    | —  |    | — |   |
|                                   |                             |                            | other companies                                          |    | —  |    | —  |    | — |   |
|                                   |                             |                            | other                                                    |    | —  |    | —  |    | — |   |
|                                   |                             |                            |                                                     |    | —  |    | —  |    | — |   |
|                                   | 16)                              | Other  financial income         |                                                     |    |    |    |    |    |   |
|                                   |                             | a)                              | from loans  forming part of fixed assets                 |    |    |    |    |    |   |   |
|                                   |                             |                            | subsidiary companies                                     |    | —  |    | —  |    | — |   |
|                                   |                             |                            | associated companies                                     |    | —  |    | —  |    | — |   |
|                                   |                             |                            | parent companies                                         |    | —  |    | —  |    | — |   |
|                                   |                             |                            | other companies                                          |    | —  |    | —  |    | — |   |
|                                   |                             |                            |                                                     |    | —  |    | —  |    | — |   |
|                                   |                             | b)                              | from other  permanent investments other than equity ones |    | —  |    | —  |    | — |   |
|                                   |                             |                            |                                                     |    |    |    |    |    |   |   |
|                                   |                             | c)                              | from other  investments which are not permanent          |    | —  |    | —  |    | — |   |
|                                   |                             |                            |                                                     |    |    |    |    |    |   |   |
|                                   |                             | d)                              | other income  not included above                         |    |    |    |    |    |   |   |
|                                   |                             |                            | subsidiary companies                                     |    |    |    | —  |    | — |   |
|                                   |                             |                            | associated companies                                     |    |    |    | —  |    | — |   |
|                                   |                             |                            | parent companies                                         |    |    |    | 52      |    | 237 |   |
|                                   |                             |                            | other associated companies                               |    | 177     |    | 26      |    | — |   |
|                                   |                             |                            | other companies                                          |    | 2,292   |    | 2,487   |    | 2,837 |   |
|                                   |                             |                            |                                                     |    | 2,468   |    | 2,566   |    | 3,074 |   |
|                                   |                             |                            |                                                     |    |    |    |    |    |   |   |
|                                   | 17)                              | Interest  payable               |                                                     |    |    |    |    |    |   |
|                                   |                             |                            | subsidiary companies                                     |    | —  |    | —  |    | — |   |
|                                   |                             |                            | associated companies                                     |    |    |    | —  |    | — |   |
|                                   |                             |                            | parent companies                                         |    | (1,655  | )       | (2,804  | )       | (3,455 | ) |
|                                   |                             |                            | other associated companies                               |    | (105    | )       | (115    | )       | (45 | ) |
|                                   |                             |                            | other companies                                          |    | (40,345 | )       | (46,879 | )       | (52,400 | ) |
|                                   |                             |                            |                                                     | (42,104 | )       | (49,797 | )       | (55,900 | ) |
|                                   |                             |                            |                                                     |    |    |    |    |    |   |
| **TOTAL FINANCIAL INCOME AND CHARGES** |                             | (39,636                         | )                                                        | (47,232 | )       | (52,825 | )       |

 
| **D)**                                  | **VALUE ADJUSTMENT OF INVESTMENT** |        |                                       |   |   |   |   |   |
|-----------------------------------------|------------------------------------|-------------|--------------------------------------------|--------|--------|--------|--------|--------|
|                                    |                               |        |                                       |   |   |   |   |   |   |
|                                    | 18)                                | Revaluation |                                       | — |   | — |   | — |   |
|                                    |                               | a)          | of equity  investments                     |   | — |   | — |   | — |   |
|                                    |                               | b)          | of other  permanent investments not equity |   | — |   | — |   | — |   |
|                                    |                               | c)          | of non  permanent investments not equity   |   | — |   | — |   | — |   |
|                                    |                               |        |                                       |   |   | — |   | — |   |
|                                    | 19)                                | Devaluation |                                       |   |   |   |   |   |   |
|                                    |                               | a)          | of equity  investments                     |   |   |   | — |   | — |   |
|                                    |                               | b)          | of other  permanent investments not equity |   | — |   | — |   | — |   |
|                                    |                               | c)          | of non  permanent investments not equity   |   | — |   | — |   | — |   |
|                                    |                               |        |                                       | — |   | — |   | — |   |
|                                    |                               |        |                                       |   |   |   |   |   |   |
| **TOTALVALUE ADJUSTMENT OF INVESTMENT** |                               |        |                                       | — |   | — |   |

 

21

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| **E)**                               | **EXTRAORDINARY  INCOME AND CHARGES**                       |                             |       |        |        |       |       |       |
|--------------------------------------|-------------------------------------------------------------|----------------------------------|------------|-------------|-------------|------------|------------|------------|
|                                 | 20)                                                         | Income                           |       |        |        |       |       |       |   |
|                                 |                                                        | from disposal of assets          |       | —      |        | —     |       | 34         |   |
|                                 |                                                        | extraordinary income             |       | —      |        | —     |       | 0          |   |
|                                 |                                                        | other                            |       | —      |        | —     |       | —     |   |
|                                 |                                                        |                             |       | —      |        | —     |       | 34         |   |
|                                 | 21)                                                         | Charges                          |       |        |        |       |       |       |   |
|                                 |                                                        | from disposal of assets          |       | —      |        | —     |       | (195       | ) |
|                                 |                                                        | incomes taxes from previous year |       | (332        | )           | (305       | )          | —     |   |
|                                 |                                                        | contingent liabilities           |       | —      |        | —     |       | (0         | ) |
|                                 |                                                        | other                            |       | —      |        | (86        | )          | —     |   |
|                                 |                                                        |                             |       | (332        | )           | (391       | )          | (195       | ) |
|                                 |                                                        |                             |       |        |        |       |       |       |   |
| **TOTAL EXTRAORDINARY INCOME TAXES** |                                                        | **(332**                         | **)**      | **(391**    | **)**       | **(161**   | **)**      |
|                                 |                                                        |                             |       | —      |        |       |       |       |   |
| **Profit before income taxes**       |                                                        | **92,242**                       | ** ** | **114,321** | ** **  | **62,111** | ** ** |
|                                 |                                                        |                             |       | —      |        |       |       |       |   |
|                                 | **22)**                                                     | **Income taxes**                 |       | (11,694     | )           | (7,362     | )          | (5,152     | ) |
|                                 |                                                        |                             |       |        |        |       |       |       |   |
| **23)**                              | **    Profit for the financial period** |                             | **80,548** | ** **  | **106,959** | ** ** | **56,959** | ** ** |

 

22

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**ISAB Energy S.r.l.****Annual report for the yearended December 31st 2003****Notes to the financialstatements**

 

**1. The company**

Isab Energy is the owner of the industrial gasification andcogeneration complex denominated “IGCC - Integrated Gasification Combined Cycle”,situated in Priolo Gargallo (Sicily), designed for the production of electricalpower from refining residues.

 

**2. Criteria for the preparation of the financialstatements**

The financial statements atDecember 31st 2003 have been prepared in compliance with the lawswhich govern their preparation, interpreted and integrated using the accountingprinciples issued by the “Consigli Nazionali dei Dottori Commercialisti e deiRagionieri”.

The financial statementsinclude the Balance Sheets, Income Statement and the Notes to the financialstatements and are accompanied by the Directors’ Report on Operations.

Every item on the BalanceSheets is compared to the corresponding financial statement figures for 2002,while in the Income Statements the figures for both 2001 and 2002 are provided.

Comments on the most importantchanges can be found in the paragraph “Comments on the economic and financialresults “ contained in the Report on Operations.

The Balance Sheets and theIncome Statement show figures that have been rounded to the nearest Euro; thedifference between those figures and the precise figure to the cent is recordedin the Income Statement amongst the extraordinary items.

For the sake of clarity thefigures in the Notes to the financial statements have been rounded to thenearest thousand Euro, in line with past practices; as a result some of thetotal amounts may vary slightly from the sum of their components.

The Financial Statements atDecember 31st 2003 have been audited by Reconta Ernst & YoungS.p.A..

 

**3. Accounting policies and evaluation criteria**

The accounting policies andevaluation criteria adopted are set out below. They conform entirely toarticles 2423 bis and 2426 of the Italian Civil Code

The evaluation criteriaadopted for the drawing up of the financial statements at December 31st2003 are the same as those adopted the previous year.

 

**3.1 Intangible fixed assets**

Intangible fixed assets arerecorded at their purchase price or production cost comprehensive of relatedfinancial expenses, incurred at the date of completion, and are amortised on astraight line basis, according to their useful life, also considering theirresidual value.

Morespecifically,****thefigures result from the application of the following criteria**:**

•                  plant andimprovement expenses are amortised in five years;

•                  theindustrial process licenses in relation to the contractual duration agreed withthe licensee;

•                  licensedsoftware in three years;

•                  thecontribution to ENEL for the period of use of the power lines connected to theIGCC plant, indicated in the contract of the sale of electricity;

 

23

----

 

•                  theexpenses linked to the project financing for the duration of the financingobtained from the banks.

 

**3.2 Tangible fixed assets**

Tangible fixed assets arerecorded at purchase or production price and are displayed net of amortisationand depreciation provisions.

The figures shown have notundergone any revaluation.

The cost of assets includesthe financial expenses incurred during the period of construction.

Improvement, modernisation,transformation and maintenance costs are capital in nature and are thuscapitalised and depreciated in relation to the useful life of the asset theyrelate to.

**Non-capital maintenance and repair costs areexpensed in the periods in which they are incurred.**

The depreciation rates,determined on a prudent basis, which are the same as those used in prior yearsand follow a depreciation schedule which takes account of the estimatedresidual value of each asset, are listed below according to the type of assetin question:

 
|                            |   | **%**   |   | **Degree of  depreciation at  31.12.03** |   |
|---------------------------------|--------|---------|--------|------------------------------------------|--------|
| Industrial  buildings           |   | 3-4     |   | 14                                       | %      |
| Light  buildings                |   | 10      |   | 34                                       | %      |
| IGCC complex  buildings         |   | 3.5-7.5 |   | 17                                       | %      |
| Industrial  equipment           |   | 10      |   | 32                                       | %      |
| Office  equipment and furniture |   | 12      |   | 49                                       | %      |
| Sundry and  minor equipment     |   | 10      |   | 42                                       | %      |
| Electronic  equipment           |   | 20      |   | 60                                       | %      |
| Vehicles                        |   | 25      |   | 100                                      | %      |

 

With regard to the IGCC plant,the rates shown refer exclusively to the values arising from an independentsurvey on the single technical units of the plant; the depreciation calculatedduring the year is included within the minimum tax-deductible limits.

 

**3.3 Equity investments**

Shareholdings are recorded attheir purchase price or subscription price and adjusted if there has been apermanent loss of value.

 

**3.4 Inventories**

Raw materials are accountedfor at the lower of cost, using the LIFO (Last In – First Out) method on anannual basis, and the current market value.

Finished products areaccounted for on the basis of the current market value.

Inventories of ancillary andconsumer goods are accounted for at the lower of their weighted average costand the current market value.

 

**3.5 Receivables and Payables**

**Receivables and payables are recorded attheir nominal value. The value of receivables has been written down to theestimated collection value through the creation of a specific provision.**

Transactions in foreign currency during the year are converted intoEuro at the exchange rate on the day of the transaction and the differencebetween this value and the amount

 

24

----

 

actually paid or received is recorded in the income statement underfinancial income and expenses.

**The foreign exchange differences, resultingfrom the conversion of foreign exchange receivables and payables at theyear-end, compared to the date of the operation, are charged to the incomestatement.**

 

**3.6 Current and deferred income taxes**

The current income taxes havebeen accrued to cover estimated tax charges.

Deferred tax liabilities andassets are accrued to reflect the timing differences between statutory accountsand tax accounts or tax losses carried forward.

The deferred tax assets (oradvance taxes) are included in the statements only if there is a reasonable chanceof recovering them; deferred taxes are not accounted for should there only be asmall chance that the relative debt will actually arise. These taxes have beencalculated on the basis of estimated average tax rates expected for the periodsin which the taxable timing differences will be concentrated.

 

**3.7 Accruals and payables**

Accrued income and liabilitiesand deferred income and expenses are accounted for on an accrual basis, withreference to the provisions of article 2424 bis of the Italian Civil Code.

 

**3.8 Provisions for risks and charges**

The provisions for risks andcharges cover specific, definite or possible liabilities, but whose amount ordate of payment is not certain at the end of the year.

 

**3.9 Maintenance cycles**

The provision for the extraordinaryperiodical maintenance is carried out pro rata temporis for each financial yearon the basis of the estimate of costs to be sustained and the pluriennialmaintenance cycle programmes of the IGCC plant.

 

**3.10 Provision for staff leaving indemnities**

This item represents all theliabilities to personnel, calculated according to current legislation andcollective labour contracts in force at the close of the year.

 

**3.11 Memorandum accounts**

Memorandum accounts are accounted for at the value of the commitmenttaken or received and the potential value of the risk objectively estimated.

In relation to the accounting principle number 22 drawn up by the“Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri”, theguarantees issued against the payables recorded in the balance sheet are notrecorded amongst the memorandum accounts but are shown in the Notes to thefinancial statements, where necessary, in the comments to the relevant payableitems.

 

**3.12 Inter-group operations**

Following the change of thecompany statute on April 8th 2003 the control of the company wentfrom being a joint control between stakeholders to being controlled by ERGPetroli

 

25

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SpA. Subsequently, on November1st 2003, following the transfer of the energy sector of the Groupto ERG Power & Gas S.r.l., the control of the company went to the lattercompany.

In the balance sheet thefigures reflect the situation in force at the end of the year, whereas thefigures for the income statement reflect the evolution of company controlthough the year. The company’s commercial relations, and service-linked andfinancial relations with its former parent companies and with the new parentcompany, as well as with companies belonging to the same Groups, are regulatedby contracts fixed at market conditions, with the exception of a loan, which ispaid back at zero rate in 10 years and matures in 2010.

The most significantinter-group operations are:

•                  the supplies of “feedstock”, the rawmaterial for the IGCC plant, in relation to the  “Feedstock Supply Agreement” of June 20th 1996. Thismaterial comes from the processing residues from the ISAB Impianti Sudrefinery, owned by the associated company ERG Raffinerie Mediterranee S.r.l.;

•                  the reciprocal supplies of minorproducts between the company and ERG Raffinerie Mediterranee, by virtue of the“Minor Products Agreement” of April 5th 1996. By way of examplethese supplies include, but are not limited to, supplies of diesel, gas, fueloil, steam and heat;

•                  the allotment of two loans linked tothe Project financing operation and denominated “sub-debt”, on the basis of theagreements drawn up between the financing banks and the sponsors ERG and EdisonMission;

•                  the services carried out by theassociated company ISAB Energy Services S.r.l., under the “Operation &Maintenance” contract of April 5th 1996, concerning the running andmaintenance of the IGCC plant.

The company belongs to the same groups of the shareholders ERG Power& Gas and MEC Priolo.

Finally, again as far as theservices received are concerned, there are the services carried out by ERGS.p.A. with regard to legal, corporate, tax and administrative assistance,public relations and IT services; by ERG Raffinerie Mediterranee for personneladministration, organisation and management of human resources, healthcareassistance and fire-prevention/fighting services.

The services supplied by thecompany relate to the management of processing contracts and programmes onbehalf of ERG Raffinerie Mediterranee, and the execution of legal assistanceactivities and the lease of offices to ISAB Energy Services.

The figures regardinginter-group operations are detailed further on in these Notes.

 

**3.13 Financial expenses**

The interest payable and the financial expenses incurred by thefinancing obtained from the parent company and subsequently by the financingreceived from the Project financing, up until the date the plant startedoperations (April 18th 2000), have been capitalised amongst thevarious asset items.

The interest payable andfinancial expenses subsequent to that date contributed to the formation of theeconomic result.

 

**3.14 Income Statement**

Income and expenses areaccounted for in the income statement on an accrual basis.

 

**3.15 Extraordinary income and expenses**

This item consists exclusivelyof the effects resulting from changes in the application of accountingprinciples, from extraordinary events not in any way connected to ordinaryoperations and the taxes pertaining to previous years, arising from litigationunderway with the tax authorities.

 

26

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**3.16 Project financing**

Supplied below is a generaloutline of the guarantees and relations arising from the Project financingoperation which was concluded in 1996 with the signing of the Contract ofProject Credit, which was subjected to its last change on September 15thas a conclusion to the re-financing operation:

•                  the setting up of a first mortgagein favour of San Paolo IMI S.p.A. as a security for the payment of amounts andthe satisfying of all obligations laid down in the Contract of Project Credit.The mortgage relates to the land and entire I.G.C.C. plant at Priolo Gargallo;

•                  the setting up of a special lien infavour of San Paolo IMI S.p.A. as a security for the payment of amounts and thesatisfying of all obligations resulting from the Contract of Project Credit.The lien relates to plants, machinery, capital goods, raw materials, goods inprogress, finished products, warehouse reserves and receivables resulting fromthe sale of the above goods;

•                  the transfer of all rights of afinancial nature and sums received or to be received in relation to thoserights according to or in relation to the Project Contracts – as detailed inthe introduction to the deed of assignment – in favour of San Paolo IMI S.p.A.The transfer is a security for all the obligations assumed according to or inrelation to the Contract of Project Credit;

•                  the transfer to San Paolo IMI S.p.A.of all the insurance reimbursements to be paid or received in relation to theinsurance as laid down in the Contract of Project Credit (with the exception ofthe reimbursements pertaining to the accidents of employees or the compensationof third-party civil liability damages).

 

The duration of theobligations after the re-financing operation was extended from eight tofourteen years from the payment of the first instalment, which occurred onDecember 15th 2000, and therefore until December 15th2014.

Furthermore, the company’sfinancial management of incoming and outgoing cash flow is monitored and itoperates invariably under constant observation by the financing banks.

 

27

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**4 Balance Sheet Analysis**

 

**Assets**

 

**Fixed assets (Euro 731,627 thousand)**

 

**4.1 Intangible fixed assets**

 
|                              |   | **Start-up  &expansion  expenses** |       | **Licenses  and trade  -marks** |       | **Assets  under  construction and  advances** |       | **Other  intangible  fixed  assets** |       | **Total**  |       |
|-----------------------------------|--------|----------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|------------|------------|
| **Historical cost**               |   | 26,166                                 |       | 9,066                           |       | 111                                           |       | 45,761                               |       | 81,103     |       |
| Amortisation                      |   | (14,149                                | )          | (3,576                          | )          | —                                        |       | (7,047                               | )          | (24,772    | )          |
| **Balance at 31.12.02**           |   | **12,017**                             | ** ** | **5,490**                       | ** ** | **111**                                       | ** ** | **38,714**                           | ** ** | **56,331** | ** ** |
|                              |   |                                   |       |                            |       |                                          |       |                                 |       |       |       |
| **Movements during the periods:** |   |                                   |       |                            |       |                                          |       |                                 |       |       |       |
| Aqcuisitions                      |   | —                                 |       | —                          |       | 473                                           |       | —                               |       | 473        |       |
| Capitalisation/reclassification   |   | —                                 |       | —                          |       | —                                        |       | —                               |       | —     |       |
| Reclassification                  |   | —                                 |       | 425                             |       | (425                                          | )          | —                               |       | —     |       |
| Disposals and                     |   | —                                 |       | —                          |       | —                                        |       | —                               |       | —     |       |
| Amortisation                      |   | (5,233                                 | )          | (925                            | )          | —                                        |       | (2,583                               | )          | (8,741     | )          |
| Write-down                        |   | —                                 |       | —                          |       | —                                        |       | —                               |       | —     |       |
|                              |   |                                   |       |                            |       |                                          |       |                                 |       |       |       |
| **Historical cost**               |   | 26,166                                 |       | 9,491                           |       | 159                                           |       | 45,761                               |       | 81,576     |       |
| Amortisation                      |   | (19,382                                | )          | (4,501                          | )          | —                                        |       | (9,630                               | )          | (33,513    | )          |
| **Balance at 31.12.03**           |   | **6,784**                              | ** ** | **4,990**                       | ** ** | **159**                                       | ** ** | **36,131**                           | ** ** | **48,063** | ** ** |

 

The start-up and expansionexpenses include Euro 3,000 for the cost of forming the company and Euro 6,781thousand for start-up expenses, valued as recoupable and directly attributed tothe start-up of operations. They include financial expenses amounting to Euro492 thousand and consist of:

•                  Euro 5,073 thousand, from theservices carried out by the associated company ISAB Energy Services S.r.l., onour behalf and in our interest, aimed at the training and organisation of hequalified personnel, which is today involved in the running and management ofthe IGCC plant;

•                  Euro 1,708 thousand, from thetechnical and legal advice and services necessary to develop the project.

The above figures are net ofamortisation amounting to Euro 6 thousand and Euro 19,376 thousand,respectively.

 

The licenses and trademarksand similar rights include Euro 4,651 thousand pertaining to the cost of thelicenses to use the “Texaco” gasification processes and the “Lurgi” sulphurrecovery processes, increased by financial expenses of Euro 883 thousand. Theamortisation applied amounts to Euro 2,279 thousand.

Furthermore, the item includeslicensed software bought for Euro 339 thousand, net of amortisation of Euro2,222 thousand; the increase of Euro 425 thousand relates to the updating ofSAP and “Production and Management Information System” software.

 

The assets under constructionamounting to Euro 159 thousand relate to the development of software (Euro 138thousand) and the feasibility study for a vanadium recovery plant (Euro 21thousand).

 

28

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The other intangible fixedassets, which include financial expenses for Euro 5,491 thousand, as well asthe contribution paid to Enel for the connection of the I.G.C.C. plant to thepower lines of 380 and 150 Kv. for a total of Euro 21,106 thousand, also showthe costs of the legal, financial and technical services sustained for theimplementation of the Project financing operation (Euro 15,025 thousand). Theseamounts are shown after amortisation amounting to Euro 4,876 thousand and Euro4,754 thousand respectively.

 

**4.2 Tangible fixed assets**

 
|                            |   | **Land and  buildings** |       | **Plant and  machinery** |       | **Industrial  and comm.  equipment** |       | **Other  assets** |       | **Fixed  assets under  construction  and advances** |       | **Total**   |       |
|---------------------------------|--------|-------------------------|------------|--------------------------|------------|--------------------------------------|------------|-------------------|------------|-----------------------------------------------------|------------|-------------|------------|
| **Historical cost**             |   | 17,988                  |       | 780,208                  |       | 260                                  |       | 1,707             |       | 8,370                                               |       | 808,532     |       |
| Revaluations                    |   | —                  |       | —                   |       | —                               |       | —            |       | —                                              |       | —      |       |
|                            |   | **17,988**              |       | **780,208**              | ** ** | **260**                              | ** ** | **1,707**         | ** ** | **8,370**                                           | ** ** | **808,532** | ** ** |
|                            |   |                    |       |                     |       |                                 |       |              |       |                                                |       |        |       |
| Economic/technical amortisation |   | (1,722                  | )          | (95,656                  | )          | (64                                  | )          | (865              | )          | —                                              |       | (98,307     | )          |
| Excess/advance amortisation     |   | —                  |       | —                   |       | —                               |       | —            |       | —                                              |       | —      |       |
| Write-down                      |   | —                  |       | —                   |       | —                               |       | —            |       | —                                              |       | —      |       |
| **Balance at 31.12.02**         |   | **16,266**              | ** ** | **684,552**              | ** ** | **196**                              | ** ** | **843**           | ** ** | **8,370**                                           | ** ** | **710,225** | ** ** |
|                            |   |                    |       |                     |       |                                 |       |              |       |                                                |       |        |       |
| **Movements during the year:**  |   |                    |       |                     |       |                                 |       |              |       |                                                |       |        |       |
| Acquisitions                    |   | —                  |       | —                   |       | —                               |       | —            |       | 12,905                                              |       | 12,905      |       |
| Capitalisation/reclassification |   | 135                     |       | 15,219                   |       | 36                                   |       | 327               |       | (15,717                                             | )          | —      |       |
| Disposals and                   |   | —                  |       | (1,657                   | )          | —                               |       | (83               | )          | —                                              |       | (1,740      | )          |
| Economic/technical amortisation |   | (632                    | )          | (36,857                  | )          | (30                                  | )          | (316              | )          | —                                              |       | (37,834     | )          |
| Excess amortisation             |   | —                  |       | —                   |       | —                               |       | —            |       | —                                              |       | —      |       |
| Write-down                      |   | —                  |       | —                   |       | —                               |       | —            |       | —                                              |       | —      |       |
|                            |   |                    |       |                     |       |                                 |       |              |       |                                                |       |        |       |
| **Historical cost**             |   | 18,122                  |       | 793,427                  |       | 296                                  |       | 1,788             |       | 5,558                                               |       | 819,190     |       |
| Revaluations                    |   | —                  |       | —                   |       | —                               |       | —            |       | —                                              |       | —      |       |
|                            |   | **18,122**              |       | **793,427**              | ** ** | **296**                              | ** ** | **1,788**         | ** ** | **5,558**                                           | ** ** | **819,190** | ** ** |
|                            |   |                    |       |                     |       |                                 |       |              |       |                                                |       |        |       |
| Economic/technical amortisation |   | (2,354                  | )          | (132,170                 | )          | (94                                  | )          | (1,018            | )          | —                                              |       | (135,635    | )          |
| Excess amortisation             |   | —                  |       | —                   |       | —                               |       | —            |       | —                                              |       | —      |       |
| Write-down                      |   | —                  |       | —                   |       | —                               |       | —            |       | —                                              |       | —      |       |
| **Balance at 31.12.03**         |   | **15,768**              | ** ** | **661,257**              | ** ** | **203**                              | ** ** | **770**           | ** ** | **5,558**                                           | ** ** | **683,555** | ** ** |

 

The tangible fixed assetsinclude the financial expenses incurred during the construction that remainedcapitalised to the individual assets. The figure at December 31st2003 was Euro 95,193 thousand, Euro 1,232 thousand of which belonged to theitem land and buildings and Euro 93,961 thousand to the item plant andmachinery.

 

The item land and buildingsincludes Euro 2,219 thousand pertaining to the amount which is not depreciatedin the area where the I.G.C.C. works are located; the base of the plants andbuildings which has been analytically attributed to each single asset.

All of the buildings destinedfor industrial use, for Euro 13,110 thousand, include the set of buildings madeup of the entrance and porter’s lodge, the offices, the canteen, the warehouse,the control room, the laboratory, the cabins and roads, parking lots and theother respective infrastructures.

The item includes Euro 439thousand relating to light constructions.

The depreciation for Euro2,354 thousand relates to buildings for Euro 2,127 thousand and to lightconstructions for Euro 227 thousand.

 

29

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The capitalisation amountingto Euro 135 thousand mainly relates to the completion of the illumination ofthe company site.

 

The item plant and machineryrefers to the I.G.C.C. integrated gasification and cogeneration plant. The sumof Euro 793,427 thousand refers to the plants which are part of the electricalpower plant for Euro 729,775 thousand, the transformer substations for Euro57,714 thousand and Euro 5,937 thousand for the auxiliary treatment andpurification stations.

The depreciation amounting toEuro 132,170 thousand was applied with exclusive reference to the economic andtechnical life valued in a weighted average residual time of more than 20 yearsand is within the tax-deductible limits.

New capitalisation within theyear relates to the transformer substations (Euro 526 thousand), treatment andpurification stations (Euro 19 thousand) and the electrical power plant (Euro14,674 thousand), for which the most significant investments concerned theelimination of construction defects and the application of new metallurgicaldevelopments (Euro 5,785 thousand), the construction of a new tank for the 3200technical unit (Euro 3,123 thousand), alterations to the burners and nozzles ofthe turbogas (Euro 2,148 thousand), improvements to the fluxing package of the3100 technical unit (Euro 810 thousand), the optimisation of the productioncapacity of the combined cycle and diagnostic and control systems (Euro 1,558thousand).

 

The other assets, net of therelevant depreciation provisions, consist of: Euro 225 thousand for officefurniture and equipment; Euro 486 thousand for electronic equipment; Euro 59thousand for sundry and minor equipment.

 

The item “fixed assets underconstruction and advances” refers to investments not yet concluded (Euro 5,119thousand), and advances to suppliers (Euro 439 thousand).

 

**4.3 Financial fixedassets**

** **
|                            |   | **Equity  Investments**   |       |                      |       |                 |       |
|---------------------------------|--------|---------------------------|------------|---------------------------|------------|----------------------|------------|
|                            |   | **Subsidiary  companies** |       | **Associated  companies** |       | **Other  companies** |       | **Financial  Receivables** |   | **Total** |   |
| **Historical cost**             |   | —                    |       | —                    |       | 5                    |       | 4 |   | 9 |   |
| Write-down                      |   | —                    |       | —                    |       | —               |       | — |   | — |   |
| **Balance at 31.12.02**         |   | **—**                | ** ** | **—**                | ** ** | **5**                | ** ** | **4** | ** ** | **9** | ** ** |
|                            |   |                      |       |                      |       |                 |       |   |   |   |   |
| **Movements during the year:**  |   |                      |       |                      |       |                 |       |   |   |   |   |
| Acquisitions                    |   | —                    |       | —                    |       | —               |       | — |   | — |   |
| Disbursements                   |   | —                    |       | —                    |       | —               |       | — |   | — |   |
| Disposals and divestments       |   | —                    |       | —                    |       | —               |       | — |   | — |   |
| Repayments                      |   | —                    |       | —                    |       | —               |       | — |   | — |   |
| Write-down/provision for losses |   | —                    |       | —                    |       | —               |       | — |   | — |   |
|                            |   |                      |       |                      |       |                 |       |   |   |   |   |
| Historical cost                 |   | —                    |       | —                    |       | 5                    |       | 4 |   | 9 |   |
| Write-down                      |   | —                    |       | —                    |       | —               |       | — |   | — |   |
| **Balance at 31.12.03**         |   | **—**                | ** ** | **—**                | ** ** | **5**                | ** ** | **4** | ** ** | **9** | ** ** |

 

The value of equity investments in other companies relates to thepurchase cost at the nominal value of 100 shares, equal to 5% of the sharecapital, of the company Industria Acqua Siracusana S.p.A., with registeredheadquarters in Syracuse. The net shareholders’ equity of the affiliatedcompany at December 31st 2002 was Euro 108 thousand.

 

The financial receivables refer to guarantee deposits.

 

30

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**Current Assets (Euro 176,600 thousand)**

 

**4.4 Inventories**

 
|                               |   | **31.12.03** |   | **31.12.02** |   |
|------------------------------------|--------|--------------|--------|--------------|--------|
| Raw materials                      |   | 3,432        |   | 3,417        |   |
| Ancillary and consumable materials |   | 10,914       |   | 11,953       |   |
| Finished products and goods        |   | 294          |   | 113          |   |
| Advances                           |   | 58           |   | 132          |   |
| **TOTAL**                          |   | **14,698**   |   | **15,615**   |   |

 

Inventories of raw materialsare more or less in line with the values of the amounts in stock at the end ofthe previous year.

The inventories of ancillaryand consumable goods were written down for Euro 850 thousand, in order toprudently account for the spare parts which are no longer considered suitablefor the current technical situation of the IGCC complex.

Product inventories increasedas a result of the higher quantities of sulphur in stock at the end of theyear.

The advances refer toreceivables for advances to suppliers on purchase orders for spare parts andconsumable goods, which are due to be delivered in the first few months of thefollowing year.

 

**4.5 Receivables**

 
|                                  |   | **31.12.03** |   | **31.12.02** |   |
|---------------------------------------|--------|--------------|--------|--------------|--------|
| Trade receivables                     |   | 39,766       |   | 66,084       |   |
| Receivables from parent companies     |   | —       |   | 8,284        |   |
|                                  |   |         |   |         |   |
| Receivables from associated companies |   | 3,815        |   | 6,686        |   |
| Other receivables                     |   | 16,561       |   | 33,165       |   |
| **TOTAL**                             |   | **60,141**   |   | **114,219**  |   |

 

The exposure is almost half(47%) the figure for 2002; comments concerning each type of credit are detailedbelow:

 

Trade receivables

 
|                                               |   | **31.12.03** |       | **31.12.02** |       |
|----------------------------------------------------|--------|--------------|------------|--------------|------------|
| Receivables due from the sale of electrical  power |   | 39,216       |       | 65,698       |       |
| Sundry trade receivables                           |   | 550          |       | 386          |       |
| **TOTAL**                                          |   | **39,766**   | ** ** | **66,084**   | ** ** |

 

The receivables refer mainlyto the sale of electricity in the month of December 2003, increased by theannual adjustment on the regulatory tariff estimated at Euro 12,235 thousand.In 2002, the figures included both the receivables for sales of electricity inDecember and November, in so far as the payment was collected in January 2003.

The receivables for the saleof electrical power, inclusive of the adjustment, were collected in February2004.

 

**Receivables from parent companies**

 
|                   |   | **31.12.03** |       | **31.12.02** |       |
|------------------------|--------|--------------|------------|--------------|------------|
| **Trade receivables:** |   |         |       |         |       |
| ERG Petroli S.p.A.     |   | —       |       | 8,284        |       |
| **TOTAL**              |   | **—**   | ** ** | **8,284**    | ** ** |

 

31

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Receivables from parentcompanies have been set at zero in so far as the trade relations pertaining tothe period are today held with the ERG Raffinerie Mediterranee, which became anassociated company following changes in company control at the end of 2002.

 

**Receivables from associated companies**

 
|                               |   | **31.12.03** |       | **31.12.02** |       |
|------------------------------------|--------|--------------|------------|--------------|------------|
| **Trade receivables:**             |   |         |       |         |       |
| ERG Raffinerie Mediterranee S.r.l. |   | 3,078        |       | 2,053        |       |
| ERG Petroli S.p.A.                 |   | 620          |       | —       |       |
| ISAB Energy Services S.r.l.        |   | 69           |       | 107          |       |
|                               |   | **3,768**    |       | **2,160**    | ** ** |
| **Financial receivables:**         |   |         |       |         |       |
| ERG Petroli S.p.A.                 |   | 47           |       | —       |       |
| ISAB Energy Services S.r.l.        |   | —       |       | 4,526        |       |
| **TOTAL**                          |   | **3,815**    | ** ** | **6,686**    | ** ** |

 

Receivables from ERGRaffinerie Mediterranee refer to the sale of minor products in the fourthquarter of 2003, receivables from ERG Petroli refer to trade relations ofprevious years, for which payment has been collected in the first few days ofJanuary 2004. Financial receivables refer to interest charges due to latepayment.

Receivables from ISAB EnergyServices fell mainly due to the repayment of the loan granted in 2002; thetrade receivables shown relate to charges for general service expenses.

 

**Other receivables**

 
|                                          |   | **31.12.03** |   | **31.12.02** |   |
|-----------------------------------------------|--------|--------------|--------|--------------|--------|
| Receivables due from tax authorities          |   | 1,603        |   | —       |   |
| Receivables for advance taxes                 |   | 5,612        |   | 9,180        |   |
| Receivables for damage compensation           |   | 6,030        |   | 21,030       |   |
| Receivables for insurance reimbursements      |   | 1,479        |   | 2,421        |   |
| Receivables from employees                    |   | 10           |   | 11           |   |
| Receivables from suppliers and other  debtors |   | 1,826        |   | 523          |   |
| **TOTAL**                                     |   | **16,561**   |   | **33,165**   |   |

 

**Receivablesdue from tax authorities amounting to Euro 1,603 million relate to IRAPfollowing compensation for advances paid during the year, with the tax for theyear estimated at Euro 5,646 million Euro.**

Thereceivables for advance taxes can be divided into IRPEG-related receivables(Euro 2,346 thousand) and IRAP-related receivables (Euro 3,267 thousand).

IRPEGis almost entirely made up of the taxation on provisions for risks and charges.

TheIRAP taxation refers to the timing differences generated during the variousyears (Euro 297 thousand) and the advance tax on the capitalised financialexpenses up until the moment the IGCC plant became operational and which willabsorbed in the next year in relation and proportion to the amortisationapplied (Euro 2,970 thousand).

The recording of advance taxeswas carried out in compliance with the accounting principle number 25 issued bythe “Consigli nazionali dei dottori commercialisti e dei ragionieri”.

 

The compensation recognised to the company following the settlement ofthe litigation with the Snamprogetti Foster Wheeler Energy Consortium onDecember 30th 2002 and recorded last year for Euro 21,030 million,has bee collected in February 2003 for Euro 15 milion, accordingly to theagreements. The remaining amount of Euro 6,030 thousand will be collectedthrough Texaco Development on the basis of a non-recourse transfer of the

 

32

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receivables of the above-mentioned Consortium from Texaco Development,for the royalties due by ISAB Energy to Texaco accordingly to the licensecontract regarding the use of the gasification process. The expiry of said contractis in 2012.

 

The receivables for insurance reimbursements for Euro 1,479 thousandrepresent the share that was collected during the month of February from theother co-insurers, against the damage occurred on 14.03.2001 (amounting to Euro2,958 thousand); the portion insured by RAS has been already liquidated.

 

The other receivables relate mainly to the receivable due following therectification of the amounts paid for the carriage of electrical energyproduced during 2002 e 2003 (Euro 1,609 thousand). The rectification aroseafter the “Regional Administrative Court” of Lombardy upheld the appealpresented by our company against the measures taken by the “Autorità perl’Energia Elettrica ed il Gas” (Electricity and Gas Authority), carried out bythe Gestore della Rete di Trasmissione Nazionale S.p.A., which obliged thecompany to pay such amounts for the carriage of electricity.

 

The receivables collectable beyond twelve months relate mainly to IRPEGand IRAP taxation and the receivable from Texaco Development.

 

**4.6 Cash andcash equivalents**

 
|                                   |   | **31.12.03** |   | **31.12.02** |   |
|----------------------------------------|--------|--------------|--------|--------------|--------|
| **Bank and postal deposits:**          |   |         |   |         |   |
|  • ordinary current accounts |   | 76           |   | 42           |   |
|  • Project Financing         |   | 101,680      |   | 85,057       |   |
|                                   |   | 101,756      |   | 85,099       |   |
|                                   |   |         |   |         |   |
| **Cash on hand**                       |   | 5            |   | 2            |   |
| **TOTAL**                              |   | **101,761**  |   | **85,101**   |   |

 

Theitem is generated by the existing availability at the end of the year of cashin hand and in current bank accounts, after the regular management of thetreasury according to contractual agreements drawn up with the financing banks.

Thebalance of bank accounts consists mainly of the deposits in the accounts at theCitibank in Milan (the project financing account bank), through which all thecapital income and expenditure moving the company transit, according to therules and limitations imposed by the Project Financing credit contract.

In2003 a new, restricted preferential account was opened for Euro 23,959 thousandcalled “Insurance reserve account”, destined as a guarantee for the lack ofinsurance cover following the variation in the policy regarding the exemptiondays for “business interruption”. The duration of the restriction issubordinate to the renewal of the current insurance policy, which expires onApril 15th 2004.

 

**4.7 Accruedincome and pre-paid expenses**

 

**Pre-paidexpenses**

 
|                             |   | **31.12.03** |   | **31.12.02** |   |
|----------------------------------|--------|--------------|--------|--------------|--------|
| Premiums for sureties            |   | 42           |   | 178          |   |
| Insurance                        |   | 3,879        |   | 3,420        |   |
| Fees for services and other fees |   | 353          |   | 390          |   |
| **TOTAL**                        |   | **4,274**    |   | **3,989**    |   |

 

33

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The premiums for suretiesrefer to amounts paid to the banks as securities issued for the VAT credit forthe year 1999.

The prepaid expenses regardinginsurance relate to premiums on policies to cover property and civilresponsibility risks, which expire after the year in question.

The other deferrals arosemainly from the service fee for Euro 220 thousand advanced to the associatedcompany ERG Raffinerie Mediterranee, the payments for diagnostic activities tothe turbines for Euro 52 thousand and the agency fees for Euro 33 thousand,paid to Barclays Bank, the Project financing agent bank.

 

The economic competence of thedeferrals will be shown in the next financial year 2004.

 

The following table shows thereceivables, accrued income, and pre-paid expenses broken down by maturity:

 
|                                              |   | **within  12 months** |       | **within  5 years** |       | **beyond  5 years** |       | **Total**  |       |
|---------------------------------------------------|--------|-----------------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| **Receivables included as financial assets**      |   |                  |       |                |       |                |       |       |       |
|  • from                                 |   | —                |       | 4                   |       | —              |       | 4          |       |
| **Receivables included as current assets**        |   |                  |       |                |       |                |       |       |       |
|  • advances to suppliers  (inventories) |   | 58                    |       | —              |       | —              |       | 58         |       |
|  • from customers                       |   | 39,766                |       | —              |       | —              |       | 39,766     |       |
|  • from parent companies                |   | —                |       | —              |       | —              |       | —     |       |
|  • from associated companies            |   | 3,815                 |       | —              |       | —              |       | 3,815      |       |
|  • from others                          |   | 6,114                 |       | 8,020               |       | 2,426               |       | 16,561     |       |
|                                              |   | **49,753**            |       | **8,020**           | ** ** | **2,426**           | ** ** | **60,200** | ** ** |
| **Accrued income and prepaid expenses**           |   |                  |       |                |       |                |       |       |       |
|  • prepaid expenses                     |   | 4,274                 |       | —              |       | —              |       | 4,274      |       |
| **TOTAL**                                         |   | **54,027**            | ** ** | **8,023**           | ** ** | **2,426**           | ** ** | **64,477** | ** ** |

 

**Liabilities**

 

**4.8 Shareholders’ Equity**

 

**Share capital**

 

The fully paid-up sharecapital is as follows:

 
|                              |   | **Share of  capital** |   | **%**   |   |
|-----------------------------------|--------|-----------------------|--------|---------|--------|
| ERG Power & Gas S.r.l. - Roma |   | 2,634,150             |   | 51      |   |
| MEC Priolo BV - Olanda            |   | 2,530,850             |   | 49      |   |
| **TOTAL**                         |   | **5,165,000**         |   | **100** |   |

 

**The shares owned by the company ERG Power & Gas were transferred tothat company on November 1st 2003 by the ex parent company ERGPetroli S.p.A., as part of a reorganisation of the energy sector within the ERGGroup.**

** **

**Legal reserve (Euro 1,033 thousand)**

 

**The legal reserve corresponds to one fifth of the share capital.**

 

34

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**Income (Loss) carried forward (Euro 119,625 thousand)**

 

**The item refers to the share carried forward of the income for 2001 and2002:**

** **
|                            |   | **31.12.03** |       | **31.12.02** |       |
|---------------------------------|--------|--------------|------------|--------------|------------|
| Income for 2001 carried forward |   | 12,666       |       | 30,926       |       |
| Income for 2002 carried forward |   | 106,959      |       | —       |       |
| **TOTAL**                       |   | **119,625**  | ** ** | **30,926**   | ** ** |

 

**Changes in Shareholders’ Equity**

 
|                                                                        |   | **Share Capital** |       | **Share  Premium  reserve** |       | **Legal  Reserve** |       | **Other  reserve** |       | **Retained  earnings  (loss)** |       | **Income  (Loss) for  the year** |       | **Total  Shareholders  Equity** |       |
|-----------------------------------------------------------------------------|--------|-------------------|------------|-----------------------------|------------|--------------------|------------|--------------------|------------|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Balance at 31.12.2001**                                                   |   | **5,165**         | ** ** |                        | ** ** |               |       | **15,493**         | ** ** | **(6,960**                     | **)**      | **56,959**                       | ** ** | **70,657**                      | ** ** |
| Cover of losses for 1999 and 2000                                           |   |              |       |                        |       |               |       | (6,960             | )          | 6,960                          |       |                             |       | —                          |       |
|                                                                        |   |              |       |                        |       |               |       |               |       |                           |       |                             |       |                            |       |
| Appropriation of residual reserve in  capital account to financial payables |   |              |       |                        |       |               |       | (8,533             | )          |                           |       |                             |       | (8,533                          | )          |
|                                                                        |   |              |       |                        |       |               |       |               |       |                           |       |                             |       |                            |       |
| Appropriation of income for 2001                                            |   |              |       |                        |       | 1,033              |       |               |       | 30,926                         |       | (31,959                          | )          | —                          |       |
|                                                                        |   |              |       |                        |       |               |       |               |       |                           |       |                             |       |                            |       |
| Distribution of income for 2001                                             |   |              |       |                        |       |               |       |               |       |                           |       | (25,000                          | )          | (25,000                         | )          |
|                                                                        |   |              |       |                        |       |               |       |               |       |                           |       |                             |       |                            |       |
| Result for 2002                                                             |   |              |       |                        |       |               |       |               |       |                           |       | 106,959                          |       | 106,959                         |       |
|                                                                        |   |              |       |                        |       |               |       |               |       |                           |       |                             |       |                            |       |
| **Balance at 31.12.2002**                                                   |   | **5,165**         | ** ** | **—**                  | ** ** | **1,033**          | ** ** | **—**         | ** ** | **30,926**                     | ** ** | **106,959**                      | ** ** | **144,083**                     | ** ** |
| Appropriation of income for 2002                                            |   |              |       |                        |       |               |       |               |       | 106,959                        |       | (106,959                         | )          | —                          |       |
|                                                                        |   |              |       |                        |       |               |       |               |       |                           |       |                             |       |                            |       |
| Appropriation of income for 2001                                            |   |              |       |                        |       |               |       |               |       | (18,260                        | )          |                             |       | (18,260                         | )          |
|                                                                        |   |              |       |                        |       |               |       |               |       |                           |       |                             |       |                            |       |
| Result for 2003                                                             |   |              |       |                        |       |               |       |               |       |                           |       | 80,548                           |       | 80,548                          |       |
| **Balance at 31.12.2003**                                                   |   | **5,165**         | ** ** | **—**                  | ** ** | **1,033**          | ** ** | **—**         | ** ** | **119,625**                    | ** ** | **80,548**                       | ** ** | **206,371**                     | ** ** |

 

**4.9 Provisions for risks and charges**

 
|                                    |   |         |       |         |       | **Changes**   |       |
|-----------------------------------------|--------|--------------|------------|--------------|------------|---------------|------------|
|                                    |   | **31.12.03** |       | **31.12.02** |       | **Increases** |       | **Decreases** |   |
| Provision for back taxes                |   | 203          |       | 305          |       | —        |       | (102 | ) |
| Provision for maintenance cycles        |   | 7,352        |       | 9,716        |       | 5,446         |       | (7,810 | ) |
| Provision for finished product expenses |   | 33           |       | 47           |       | 33            |       | (47 | ) |
| **TOTAL**                               |   | **7,587**    | ** ** | **10,068**   | ** ** | **5,479**     | ** ** | **(7,959** | **)** |

 

35

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The provision for back taxeswas set aside as a contingency for the possibly higher tax charges for theyears 1998 and 1999, after the presentation of notices of assessment andrectification for direct taxes and VAT. The provision was used as part of thesettlement for the year 1998 following the assessment ruling and the remainingamount will be set aside to cover any tax settlement for the year 1999.

 

After the extraordinarymaintenance work carried out to the plants, Euro 7,810 thousand of theprovision was used to partially cover the maintenance expenses incurred. Theprovision for Euro 5,446 thousand reflects the competent share for the year,determined according to the four-yearly maintenance cycle plan for each trainof the plants and the two-yearly plan for the parts in common.

 

The expenses provision forfinished products has been wholly used within the limits of the provision setup in 2002.

The amount of Euro 33 thousandat the end of the year relates to the provision regarding the expenses whichwill be incurred on the quantities of vanadium concentrate in stock at December31st 2003.

 

**4.10 Staff leaving indemnities**

 

This fund fully covers theleaving indemnities of all the employees up to December 31st 2003 incompliance with current legal and contractual requirements, which take intoaccount the voluntary pension contributions transferred to Previndai and Fondenergia.

The decrease is largely due toemployee resignations.

 

**4.11 Payables**

 
|                                |   | **31.12.03** |       | **31.12.02** |       |
|-------------------------------------|--------|--------------|------------|--------------|------------|
| Bank borrowings                     |   | 593,811      |       | 700,142      |       |
| Other borrowings                    |   | 25,361       |       | —       |       |
| Trade payables                      |   | 21,395       |       | 24,429       |       |
| Payables to parent companies        |   | 27,632       |       | 78,767       |       |
| Payables to associated companies    |   | 26,925       |       | 24,400       |       |
| Due to tax authorities              |   | 2,477        |       | 2,497        |       |
| Due to social security institutions |   | 79           |       | 83           |       |
| Other payables                      |   | 327          |       | 317          |       |
| **TOTAL**                           |   | **698,007**  | ** ** | **830,635**  | ** ** |

 

Payables decreased by Euro132,628 thousand, divided into Euro 130,101 thousand for financial payables andEuro 2,527 thousand regarding outstanding debts and other payables.

 

**Bank borrowings**

 
|                                   |   | **31.12.03** |   | **31.12.02** |   |
|----------------------------------------|--------|--------------|--------|--------------|--------|
| **Loans and financing:**               |   |         |   |         |   |
| Project financing San Paolo IMI S.p.A. |   | 593,811      |   | 700,142      |   |
|                                   |   |         |   |         |   |
| **TOTAL**                              |   | **593,811**  |   | **700,142**  |   |

 

The bank borrowings relate tofinancing obtained via the Project financing operation, which was accompaniedby special liens and a mortgage on the land, as previously mentioned in theintroduction to this document.

 

36

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The financing agreed with thecompany via the “Project Credit Facility Agreement” contract,  dated April 5th 1996, wasre-negotiated on September 15th 2000 with a “Refinancing” operationwhose main outcome was the extension of the expiry terms to December 15th2014.

The financing is of the “nonrecourse” type, is to be repaid in 29 instalments (the first was on December 15th2000), at variable rates linked to the Euribor at six months on tranche “B” andto the European Investment Bank (“EIB”) at three months on tranche “C”.

At December 31st2003, given the current debt and in relation to the single tranches, twohedging operations on the interest rate (Interest Rate Swap) were in existence,for total notional values equal to Euro 445 million, fixing the previouslyvariable interest rates at a yearly 3.78%. Both operations expire on June 15th2006, the fixed interest rated of 3.78% remains unvaried for the duration ofthe contract and the notional value will decrease in proportion to the paymentof the interest rates on the debt.

As from June 15th2006 the coverage of the interest rate risk will occur via two contracts withan expiry date of December 15th 2008 (Interest Rate Cap), which fixa maximum annual rate of 3.78%.

During 2003 the debt wasreduced through 4 payments for Euro 87,110 thousand and 2 voluntary advancepayments amounting to Euro 18,850 thousand. This led to a decrease in debt ofEuro 54,968 thousand on tranche “B” and Euro 50,992 thousand on tranche “C”.

The residual capital of thevarious tranches is displayed below and includes the interest payable accruedand not yet paid at December 31st 2003:

 
|                          |   | **31.12.03** |       | **31.12.02** |       |
|-------------------------------|--------|--------------|------------|--------------|------------|
| Tranche “B”         |   | 330,042      |       | 384,264      |       |
| Tranche “C”         |   | 262,784      |       | 314,522      |       |
| Interest payable on financing |   | 986          |       | 1,356        |       |
| **TOTAL**                     |   | **593,811**  | ** ** | **700,142**  | ** ** |

 

According to year-endcommitments, the expiry dates for repayment per year are estimated thus:

 
| 2004        |   | 77,011      |       |
|-------------|--------|-------------|------------|
| 2005        |   | 80,391      |       |
| 2006        |   | 90,877      |       |
| 2007        |   | 93,498      |       |
| 2008        |   | 76,896      |       |
| beyond 2009 |   | 175,137     |       |
| **TOTAL**   |   | **593,811** | ** ** |

 

**Payables due to other financiers**

 
|                        |   | **31.12.03** |       | **31.12.02** |       |
|-----------------------------|--------|--------------|------------|--------------|------------|
| Edison Mission Energy (USA) |   | 20,756       |       | —       |       |
| MEC Priolo B.V. (Holland)   |   | 4,605        |       | —       |       |
| **TOTAL**                   |   | **25,361**   | ** ** | **—**   | ** ** |

 

The above item was createdfollowing the change to the company statute on April 8th 2003, whenthe control of the company was transferred to the ERG Group.

The value of financing at theend of the year was Euro 25,361 thousand and is comparable to the value shownin the reports for 2002 for payables due to parent companies (Euro 24,166thousand).

 

The financial payables due toEdison Mission Energy represent the subordinated loan (sub-debt) and theProject financing loan, which was raised in the interest of the parent companyMEC Priolo B.V. for Euro 18,186 thousand. The figure shown in the balance sheetincludes accrued interest for Euro 2,570 thousand.

 

37

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The repayment plan and theconditions of the disbursement of the subordinated loan provide for the accrualof interest equal to the cost of money of the Project financing debt increasedby three percentage points and 34 six-monthly instalments of the same amount,starting from the moment in which the conditions of collectability agreed withthe financing banks occur, which up until 2003 were linked to the settlement ofthe litigation underway with the Snamprogetti Foster Wheeler Energy Consortium.

 

The financing for Euro 4,181thousand from MEC Priolo B.V. also consists of the subordinated loan (sub-debt)and Project financing loan. It is recorded in the balance sheet inclusive ofaccrued interest payable for Euro 424 thousand and the conditions ofcollectability and repayment are the same as for the above-mentioned clausesregarding Edison Mission Energy.

 

It is expected that theinterest accrued will be paid during 2004, whereas the payment of theinstalments should begin in 2005.

 

**Payables due to suppliers**

 
|                   |   | **31.12.03** |   | **31.12.02** |   |
|------------------------|--------|--------------|--------|--------------|--------|
| Italian suppliers      |   | 19,793       |   | 19,976       |   |
| E.U. suppliers         |   | 401          |   | 1,001        |   |
| Suppliers outside E.U. |   | 1,201        |   | 3,451        |   |
| **TOTAL**              |   | **21,395**   |   | **24,429**   |   |

 

The payables due to supplierswere lower than in****2003 mainly because of the fewer servicesreceived from suppliers outside Italy.

 

**Payables due to parent companies**

 
|                        |   | **31.12.03** |   | **31.12.02** |       |
|-----------------------------|--------|--------------|--------|--------------|------------|
| **Trade payables:**         |   |         |   |         |       |
| ERG S.p.A.                  |   | 347          |   | 87           |       |
| ERG Petroli S.p.A.          |   | —       |   | 74           |       |
|                        |   | **347**      |   | **161**      | ** ** |
| **Financial payables:**     |   |         |   |         |       |
| ERG Power & Gas S.r.l.  |   | 26,397       |   | —       |       |
| ERG Petroli S.p.A.          |   | —       |   | 37,851       |       |
| Edison Mission Energy (USA) |   | —       |   | 19,744       |       |
| MEC Priolo B.V. (Holland)   |   | —       |   | 16,623       |       |
|                        |   | **26,397**   |   | **74,218**   | ** ** |
| **Other payables:**         |   |         |   |         |       |
| ERG S.p.A.                  |   | 888          |   | 4,389        |       |
|                        |   |         |   |         |       |
| **TOTAL**                   |   | **27,632**   |   | **78,767**   |       |

 

The trade payables due to ERGS.p.A. relate to services received and directors’ fees, while the otherpayables relate to the payment of VAT for the month of December 2003,transferred to the Group’s centralised account.

 

The financial payables due toERG Power & Gas S.r.l. refer to the subordinated loan (sub-debt) and theProject financing loan amounting to Euro 23,281 thousand, as well as theinterest accrued for Euro 3,116 thousand. This financing was recorded at31.12.2002 for Euro 25,101 thousand, due to ERG Petroli S.p.A., which as fromNovember 2003 was transferred to the new parent company ERG Power & Gas.

 

38

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The conditions ofcollectability and repayment are the same as those of the debts due to thecompanies of the Edison Mission Group.

 

When comparing the figureswith those of 2002, the financial payables due to parent companies were reducedboth as a result of the payment of Euro 25,000 thousand from the income of theyear 2001 and of the payment of Euro 24,116 million for the appropriaterecording of the subordinated loans amongst the payables due to otherfinanciers.

 

**Payables due to associated companies**

 
|                               |   | **31.12.03** |       | **31.12.02** |       |
|------------------------------------|--------|--------------|------------|--------------|------------|
| **Trade payables:**                |   |         | ** ** |         | ** ** |
| ERG Raffinerie Mediterranee S.r.l. |   | 11,266       |       | 6,308        |       |
| ISAB Energy Services S.r.l.        |   | 9,571        |       | 10,780       |       |
| ERG Petroli S.p.A.                 |   | 191          |       | 0            |       |
| Mission Energy Italia S.r.l.       |   | —       |       | 20           |       |
| Edison Mission Energy Ltd. (UK)    |   | —       |       | 85           |       |
|                               |   | **21,029**   |       | **17,193**   | ** ** |
| **Financial payables:**            |   |         |       |         |       |
| ERG Raffinerie Mediterranee S.r.l. |   | 5,856        |       | 7,207        |       |
| ISAB Energy Services S.r.l.        |   | 41           |       | —       |       |
|                               |   | **5,896**    |       | **7,207**    |       |
|                               |   |         |       |         |       |
| **TOTAL**                          |   | **26,925**   |       | **24,400**   |       |

 

The payables due to ERG Raffinerie Mediterranee mainly relate to tradepayables for supplies of raw materials and services in December 2003 and thefinancing subordinate to the “Loan agreement” of April 5th 1996 for Euro 5,896 thousand. This debt, withoutaccrued interest, is repaid at six-monthly rates of the same amount and expireson April 1st 2010.

 

As far as ISAB Energy Services S.r.l. is concerned, the figure shownrelates to services received on the basis of the previously mentioned“Operation & Maintenance” contract and to interest on extended payments.

 

Payables due to ERG Petroli consist of the supply of lubricant oil andthe charge for directors’ fees.

 

Trade payables due to the companies Mission Energy Italia S.r.l. andEdison Mission Energy Limited are not shown here because they have been includedin the payables towards Suppliers.

 

**Due to tax authorities**

 
|                                  |   | **31.12.03** |   | **31.12.02** |   |
|---------------------------------------|--------|--------------|--------|--------------|--------|
| Income tax for the year               |   | 2,322        |   | 2,300        |   |
| Due to tax authorities for deductions |   | 33           |   | 73           |   |
| Other tax payables                    |   | 121          |   | 123          |   |
| **TOTAL**                             |   | **2,477**    |   | **2,497**    |   |

 

The item is due for Euro 2,315thousand to IRPEG taxation for the current year, as well as the deductions fromthe income of employees and independent workers and the tax on waste disposal.

 

39

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The ten-year exemption fromIRPEG taxation expired on October 5th 2003 and the relative share ofthe tax burden was determined from that date.

The income tax for the year2002 for Euro 2,300 thousand relates to IRAP taxation, for which in the year inquestion there was a clear situation of credit, recorded amongst the assets.

The other tax payables consistof Euro 91 thousand for the tax on waste disposal and Euro 30 thousand forother taxes.

 

**Due to SocialSecurity Institutions (Euro 79 thousand)**

 

This item (Euro 83 thousand atDecember 31st 2002) includes Euro 48 thousand due to the variousinstitutions for social security and national insurance contributions relatingto salaries and wages for the months of December 2003 and the allocation ofEuro 31 thousand for contributions due from the pay accrued by employees onholidays and paid days off not taken, productivity premiums and overtime notyet paid.

 

**Other payables**

 
|                      |   | **31.12.03** |   | **31.12.02** |   |
|---------------------------|--------|--------------|--------|--------------|--------|
| Payables due to employees |   | 212          |   | 202          |   |
| Other sundry payables     |   | 115          |   | 115          |   |
| **TOTAL**                 |   | **327**      |   | **317**      |   |

 

**“**Payables due to employees” refers to sums not yet paid and includesholidays and paid days off not yet taken, overtime and productivity premiums.

The item “other sundrypayables” relates to expense contributions for 2001 due to the AntitrustAuthority for Electricity and Gas.

 

**4.12 Accruedexpenses and deferred income**

 
|                                          |   | **31.12.03** |   | **31.12.02** |   |
|-----------------------------------------------|--------|--------------|--------|--------------|--------|
| **Accrued expenses:**                         |   |         |   |         |   |
| Additional salary expenses and  contributions |   | 33           |   | 33           |   |
| Expenses from swap operations (IRS)           |   | 336          |   | 510          |   |
| **TOTAL**                                     |   | **369**      |   | **543**      |   |

 

Theaccrued expenses include the fourteenth monthly salary for employees for Euro33 thousand for the year 2003 and the expense of Euro 336 thousand of thehedging operation on the interest rates (IRS) of the financial debt obtainedvia Project financing.

 

Payables and Accrued expensesare broken down by maturity as follows:

 

40

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|                                              |   | **within  12 months** |       | **within  5 years** |       | **beyond  5 years** |       | **Total**   |       |
|---------------------------------------------------|--------|-----------------------|------------|---------------------|------------|---------------------|------------|-------------|------------|
| **Payables**                                      |   |                  |       |                |       |                |       |        |       |
|  • bank borrowings                      |   | 77,011                |       | 341,662             |       | 175,137             |       | 593,811     |       |
|  • due to other  financiers             |   | 2,994                 |       | 5,263               |       | 17,104              |       | 25,361      |       |
|  • due to suppliers                     |   | 21,395                |       | —              |       | —              |       | 21,395      |       |
|  • due to parent  companies             |   | 4,352                 |       | 5,478               |       | 17,803              |       | 27,632      |       |
|  • due to  associated companies         |   | 21,970                |       | 3,603               |       | 1,351               |       | 26,925      |       |
|  • due to tax  authorities              |   | 2,477                 |       | —              |       | —              |       | 2,477       |       |
|  • due to social  security institutions |   | 79                    |       | —              |       | —              |       | 79          |       |
|  • other payables                       |   | 327                   |       | —              |       | —              |       | 327         |       |
|                                              |   |                  |       |                |       |                |       |        |       |
| **Accrued expenses and  deferred income**         |   |                  |       |                |       |                |       |        |       |
|                                              |   |                  |       |                |       |                |       |        |       |
|  • accrued expenses                     |   | 369                   |       | —              |       | —              |       | 369         |       |
|  • deferred income                      |   | —                |       | —              |       | —              |       | —      |       |
|                                              |   |                  |       |                |       |                |       |        |       |
| **TOTAL**                                         |   | **130,973**           | ** ** | **356,007**         | ** ** | **211,396**         | ** ** | **698,375** | ** ** |

 

**4.13 Memorandum accounts  (Euro 3,137 thousand)**

 

Memorandum accounts are open on the raw materials deposited at theImpianti Sud of ERG Raffinerie Mediterranee S.r.l., for Euro 3,137 thousand(Euro 3,651 thousand at December 31st 2002).

 

Reference is made to previous descriptions regarding the ProjectFinancing restrictions, to which the financial flows produced by the companyare subject, and to the commitments accepted via the Interest Rate Swapoperation, which was activated in order to cover the interest rates on theProject Financing debt.

 

41

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**5 Income Statement Analysis**

 

**5.1 Production Value (Euro 427,512 thousand)**

 

**Revenues from sales and services**

 
|                                            |   | **2003**    |       | **2002**    |       | **2001**    |       |
|-------------------------------------------------|--------|-------------|------------|-------------|------------|-------------|------------|
| **Sales and services to customers:**            |   |        |       |        |       |        |       |
|  • Electricity                        |   | 405,069     |       | 409,329     |       | 366,760     |       |
|  • Other services and sales           |   | 3,037       |       | 2,437       |       | 1,975       |       |
|                                            |   | **408,106** |       | **411,765** | ** ** | **368,736** | ** ** |
| **Sales and services to parent companies**      |   |        |       |        |       |        |       |
|  • Heat                               |   | —      |       | 4,886       |       | 5,943       |       |
|  • Steam                              |   | —      |       | 1,066       |       | 1,364       |       |
|  • Fluxing product (oil)              |   | —      |       | 176         |       | 228         |       |
|  • Other services and sales           |   | —      |       | 909         |       | 937         |       |
|                                            |   | **—**  |       | **7,038**   | ** ** | **8,471**   | ** ** |
| **Sales and services to associated companies:** |   |        |       |        |       |        |       |
|  • Heat                               |   | 6,653       |       | 1,966       |       | —      |       |
|  • Steam                              |   | 1,345       |       | 302         |       | —      |       |
|  • Fluxing product (oil)              |   | 628         |       | —      |       | —      |       |
|  • Other services and sales           |   | 1,058       |       | 248         |       | —      |       |
|                                            |   | **9,685**   |       | **2,516**   | ** ** | **—**  | ** ** |
|                                            |   |        |       |        |       |        |       |
| **TOTAL**                                       |   | **417,791** | ** ** | **421,319** | ** ** | **377,207** | ** ** |

 

Sales revenues are mainly madeup of sales of electrical power at the incentive price of CIP/6, inclusive ofthe adjustment to the sales tariff for 2003, estimated to be Euro 12,235thousand.

Net production sold amountedto 4,000 thousand MWh (4,197 thousand MWh in 2002).

Sales and services includerevenues for the supply of steam, air, water and supplies of minor products.

The revenues from associatedcompanies relate to ERG Raffinerie Mediterranee.

 

**Changes in the inventories of products in progress,semi-finished products and finished products (Euro 181 thousand)**

 

The changes relate to the higher value of sulphur inventories (Euro 206thousand), partially offset by the reduction of the value of vanadiumconcentrate (Euro –25 thousand).

 

**Fixed asset increases for internal work**

 
|                              |   | **2003**  |       | **2002** |       | **2001** |       |
|-----------------------------------|--------|-----------|------------|----------|------------|----------|------------|
|                              |   |      |       |     |       |     |       |
| Material taken from the warehouse |   | 1,421     |       | 824      |       | 37       |       |
|                              |   |      |       |     |       |     |       |
| **TOTAL**                         |   | **1,421** | ** ** | **824**  | ** ** | **37**   | ** ** |

 

42

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This item refers to the valueof the spare parts taken from the warehouse and used to increase capitalisedinvestments.

 

**Other Income and revenues**

 
|                                                    |   | **2003**  |       | **2002**   |       | **2001**   |       |
|---------------------------------------------------------|--------|-----------|------------|------------|------------|------------|------------|
|  • Insurance reimbursements                   |   | 4,529     |       | 5          |       | 17,070     |       |
|  • Penalties and compensation  from suppliers |   | 38        |       | 21,091     |       | 233        |       |
|  • Ordinary surpluses                         |   | 2,570     |       | 988        |       | 1,268      |       |
|  • Sundry revenue and income                  |   | 981       |       | 328        |       | 300        |       |
| **TOTAL**                                               |   | **8,118** | ** ** | **22,413** | ** ** | **18,872** | ** ** |

 

The item includes Euro 4,529thousand for reimbursements regarding two incidents which occurred on May 1st2000 and on March 14th 2001, causing damage to the two technicalunits of the power plant. The inclusion of this amount amongst the ordinaryoperations is due to the recognisance of a loss in profit and of reimbursementsfor the higher production expenses recorded during those periods.

The ordinary surpluses forEuro 2,570 thousand are due to differences beetwen actual figures andestimation made in previous years on expenses for Euro 1,943 thousand and onrevenue for Euro 627 thousand.

The other revenues emerged asa result of the sale of spare and scrap parts for Euro 531 thousand, rentspayable for the part of the office building and connected services to theassociated company ISAB Energy Services for Euro 291 thousand, services to theassociated company ERG Raffinerie Mediterranee for Euro 116 thousand, ordinarycapital gains from the surrender of assets for Euro 39 thousand and sundryincome amounting to Euro 4 thousand.

 

**5.2Production expenses (Euro 295,302 thousand)**

 

**Raw, ancillary, and consumable materials and goods**

 
|                           |   | **2003**    |       | **2002**    |       | **2001**    |       |
|--------------------------------|--------|-------------|------------|-------------|------------|-------------|------------|
| Raw materials and goods        |   | 160,814     |       | 155,552     |       | 160,297     |       |
| Materials and spare parts      |   | 11,425      |       | 9,422       |       | 8,909       |       |
| Sundry materials and purchases |   | 66          |       | 99          |       | 61          |       |
| **TOTAL**                      |   | **172,305** | ** ** | **165,073** | ** ** | **169,267** | ** ** |

 

The purchases relate to thesupplies and provision of oxygen and nitrogen for Euro 48,263 thousand,electrical power for Euro 12,220 thousand, methane gas for Euro 4,718 thousandand raw materials supplied by the associated company ERG RaffinerieMediterranee for Euro 95,613 thousand.

The relations with other groupcompanies consisted of: the supply of diesel (Euro 11,926 thousand), feedstock(Euro 69,461 thousand), fuel oil (Euro 5,026 thousand) and LCO, Virgin naphtha,LPG and steam (Euro 9,199 thousand).

The other purchases are due tospare parts necessary for maintenance (Euro 5,810 thousand), to ancillary andconsumable materials (Euro 5,615 thousand), and to sundry goods, such as carfuel, stationary, printed matter, sets of forms, minor office equipment,etc.(Euro 66 thousand).

Included amongst the ancillarymaterials are purchases of lubricant oils for Euro 266 supplied by theassociated company ERG Petroli.

 

43

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**Service costs**

 
|                                            |   | **2003**   |       | **2002**   |       | **2001**   |       |
|-------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
| Commercial services and transportation          |   | 4,530      |       | 6,459      |       | 5,306      |       |
| Maintenance and operational assistance          |   | 13,031     |       | 11,970     |       | 18,096     |       |
| Technical, legal and other advice and  services |   | 3,474      |       | 4,208      |       | 7,878      |       |
| Insurance                                       |   | 12,602     |       | 9,730      |       | 3,527      |       |
| Services for staff                              |   | 152        |       | 192        |       | 216        |       |
| Services from parent companies                  |   | 1,005      |       | 4,767      |       | 3,975      |       |
| Services from associated companies              |   | 23,404     |       | 18,858     |       | 20,063     |       |
| Other services                                  |   | 2,214      |       | 1,939      |       | 289        |       |
| **TOTAL**                                       |   | **60,413** | ** ** | **58,123** | ** ** | **59,349** | ** ** |

 

Service costs on a whole roseby Euro 2,290 thousand compared to the previous year, and no longer include thesupply of steam which in this report is included amongst the purchase expenses.

The industrial services forthe running and maintenance of the plants increased by Euro 5,462 thousand,administrative and general services increased by Euro 2,047 thousand andcommercial services fell by Euro 5,219 thousand. It should be noted that thefigure for the year 2002 includes the cost of steam for Euro 3,362 million diEuro.

 

The services supplied byparent companies consist mainly to relations with ERG S.p.A., for staffactivities (Euro 157 thousand), IT services (Euro 420 thousand), publicrelations (Euro 125 thousand) and the emoluments of directors directly employedby the parent company (Euro 219 thousand).

Furthermore, an amount of Euro83 thousand is included for the emoluments of directors directly employed byERG Petroli S.p.A., until the moment the said company controlled our company.

 

Services received from theassociated companies relate to the running and maintenance of the I.G.C.C.complex for Euro 22,172 thousand, completely rendered by ISAB Energy ServicesS.r.l., and to the fire-fighting/prevention services, healthcare assistance,marketing and personnel administration services rendered by ERG RaffinerieMediterranee S.r.l. (Euro 1.232 thousand).

 

**Leases and rentals**

 
|                    |   | **2003**  |       | **2002**  |       | **2001** |       |
|-------------------------|--------|-----------|------------|-----------|------------|----------|------------|
| Rents paid              |   | 304       |       | 247       |       | 205      |       |
| Long-term hires/leasing |   | 367       |       | 245       |       | 179      |       |
| Royalties               |   | 923       |       | 1,472     |       | 604      |       |
| **TOTAL**               |   | **1,594** | ** ** | **1,964** | ** ** | **989**  | ** ** |

 

The item “rents paid” consistsof rents paid to the associated company ERG Raffinerie Mediterranee for the storageof raw materials (Euro 211 thousand), to the leasing of service cars (Euro 44thousand), of office equipment (Euro 49 thousand), to the leasing of computersand instruments (Euro 192 thousand), and various rents (Euro 175 thousand).

The royalties paid relate tothe use of the industrial and gasification processes of Texaco Development-USA(Euro 870 thousand) and the “solvent reclaimer” of MPR Service Inc.-USA (Euro53 thousand).

 

44

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**Personnel expenses**

 
|                      |   | **2003**  |       | **2002**  |       | **2001**  |       |
|---------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
| Wages and salaries        |   | 887       |       | 952       |       | 906       |       |
| Social security expenses  |   | 285       |       | 281       |       | 242       |       |
| Staff leaving indemnities |   | 62        |       | 65        |       | 55        |       |
| Other expenses            |   | 16        |       | 19        |       | 1         |       |
| **TOTAL**                 |   | **1,250** | ** ** | **1,316** | ** ** | **1,204** | ** ** |

 

The company avails itself ofservices rendered by the company ISAB Energy Services for the running of theindustrial complex. Personnel expenses therefore refer only to white-collarstaff and not operational personnel.

 

The table shows the breakdownof company personnel by category (average number during the year):

 
|       |   | **2003** |   | **2002** |   | **2001** |   |
|------------|--------|----------|--------|----------|--------|----------|--------|
| Managers   |   | 3        |   | 4        |   | 4        |   |
| Executives |   | 4        |   | 4        |   | 5        |   |
| Employees  |   | 13       |   | 11       |   | 12       |   |
| **TOTAL**  |   | **20**   |   | **19**   |   | **21**   |   |

 

AtDecember 31st 2003 the total number of employees was 20 (19 at December 31st2002).

 

**Amortisation, depreciation and write-downs**

 
|                                    |   | **2003**   |       | **2002**   |       | **2001**   |       |
|-----------------------------------------|--------|------------|------------|------------|------------|------------|------------|
| Amortisation of intangible fixed assets |   | 8,741      |       | 8,795      |       | 9,011      |       |
| Depreciation of tangible fixed assets   |   | 37,834     |       | 36,981     |       | 36,247     |       |
| **TOTAL**                               |   | **46,575** | ** ** | **45,776** | ** ** | **45,258** | ** ** |

 

The value of the amortisation of intangible assets fell due to thecompletion of the three-year cycle of several software programmes. The increasein the depreciation of fixed assets is due to new assets becoming operationalduring the year.

Amortisation and depreciation was calculated with exclusive referenceto the economic and technical values and excess amortisation and depreciationwas therefore not applied.

 

**Changes in the inventories of raw, ancillary andconsumable materials and goods**

 
|                                 |   | **2003**  |       | **2002**   |   | **2001**   |   |
|--------------------------------------|--------|-----------|------------|------------|--------|------------|--------|
| Changes in raw materials             |   | (15       | )          | 285        |   | (61        | )      |
| Changes in materials and spare parts |   | 190       |       | (1,497     | )      | (1,359     | )      |
| Write-down of spare parts            |   | 850       |       | —     |   | —     |   |
| **TOTAL**                            |   | **1,024** | ** ** | **(1,212** | **)**  | **(1,420** | **)**  |

 

There was a slight increase inthe inventory of raw materials, of approximately Euro 15 thousand, due to theslightly higher quantities in stock of around 151 tonnes.

The change in ancillary andconsumable materials was a negative one due to the lower stock recorded asregards spare parts and consumable materials. Furthermore, there was awrite-down of spare parts for those components of the plant which, despite thecompletion of the maintenance cycles, have never recorded movements from theirinitial purchase, which

 

45

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occurred between 1998 and 1999on the basis of equipment lists supplied by the constructors of the IGCC plant.

 

**Other provisions (Euro 5.479 thousand)**

 

This item (which in 2002 was Euro 6,459 thousand and in 2001 Euro 1,931thousand) is composed of the competent share of the maintenance costs of thecyclical shutdown of the plants (Euro 5,446 thousand) and the expenses, whichwill be shown on the batches of vanadium concentrate in stock at the end of theyear (Euro 33 thousand).

 

**Otheroperating expenses**

 
|                               |   | **2003**  |       | **2002**  |       | **2001**  |       |
|------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
| Duties and taxes for the year      |   | 3,513     |       | 3,510     |       | 3,439     |       |
| Entertainment and public relations |   | 51        |       | 159       |       | 181       |       |
| Ordinary losses                    |   | 1,415     |       | 1,166     |       | 886       |       |
| Losses on disposal of assets       |   | 1,682     |       | 139       |       | —    |       |
| **TOTAL**                          |   | **6,661** | ** ** | **4,975** | ** ** | **4,506** | ** ** |

 

The duties and taxes refer to I.C.I. taxation paid to the council ofPriolo Gargallo (Euro 3,242 thousand), the tax on waste (Euro 135 thousand),the tax on emissions (Euro 75 thousand) and the additional taxation onelectricity (Euro 28 thousand).

The ordinary losses refer to differences between actual figures andestimation made in previous year on expenses and revenues, amounting to Euro523 thousand and Euro 893 thousand, respectively.

The losses on disposals of assets relate to the ordinary disposal ofplant assets from the productive process and electronic equipment (personalcomputer) sold due to obsolescence.

 

**5.3 Financialincome and expenses (Euro 39.636 thousand)**

 

Other financial income:

 
|                               |   | **2003**  |       | **2002**  |       | **2001**  |       |
|------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
| Bank interest                      |   | 1,901     |       | 2,300     |       | 2,525     |       |
| Interest from parent companies     |   | —    |       | 52        |       | 237       |       |
| Interest from associated companies |   | 177       |       | 26        |       | —    |       |
| Sundry financial income            |   | 390       |       | 188       |       | 312       |       |
| **TOTAL**                          |   | **2,468** | ** ** | **2,566** | ** ** | **3,074** | ** ** |

 

The bank interest arisesmainly from the current account assets held at the Citibank in Milan. Theinterest from associated companies represent the current share of the loanconceded to ISAB Energy Services (Euro 130 thousand) and the interest on traderelations with ERG Petroli.

The other financial incomerelates to interest for late payments by clients, for Euro 102 thousand, andexchange differences, for Euro 288 thousand.

 

46

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**Interest and other financial expenses**

 
|                                      |   | **2003**   |       | **2002**   |       | **2001**   |       |
|-------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
| Interest on bank borrowings               |   | 21,338     |       | 30,971     |       | 43,943     |       |
| Financial expenses on bank borrowings     |   | 4,598      |       | 5,780      |       | 5,989      |       |
| Interest due to swap differentials        |   | 13,428     |       | 9,461      |       | 2,230      |       |
| Interest on other loans                   |   | 2,540      |       | 2,804      |       | 3,455      |       |
| Interest to ISAB Energy Services          |   | 105        |       | 115        |       | 45         |       |
| Interest due to exchange rate differences |   | 14         |       | 60         |       | 178        |       |
| Sundry interest and financial expenses    |   | 81         |       | 607        |       | 59         |       |
| **TOTAL**                                 |   | **42,104** | ** ** | **49,797** | ** ** | **55,900** | ** ** |

 

The Project financing expensesfor the year were Euro 6,848 thousand lower than in the previous year, becauseof the combined effect of lower interest rate liabilities and a reducedexposure after the payment of the capital shares, compensated, in part, by thehigher negative differentials paid on the “Interest Rate Swap” operation tocover the interest rates on the debt.

The interest expense onsubordinated loans, as a consequence of the interest expense on the main debt,recorded a decrease amounting to Euro 264 thousand. The sum of Euro 2,540thousand includes interest expense for Euro 204 thousand to the parent companyERG Power & Gas and Euro 1,092 thousand to the associated company ERGPetroli.

Interest expense to ISABEnergy Services were accrued against late payment on relations of a commercialnature.

 

**5.4 Extraordinary items (Euro 332 thousand)**

 
|                               |   | **2003** |   | **2002** |       | **2001** |       |
|------------------------------------|--------|----------|--------|----------|------------|----------|------------|
| **Extraordinary income**           |   |     |   |     |       |     |       |
| Gains on disposal of assets        |   |     |   |     |       | 34       |       |
|                               |   | —   |   | —   |       | 34       |       |
| **Extraordinary expenses**         |   |     |   |     |       |     |       |
| Taxes pertaining to previous years |   | 332      |   | 391      |       | —   |       |
| Losses on disposal of assets       |   | —   |   | —   |       | 195      |       |
|                               |   | **332**  |   | **391**  | ** ** | **195**  | ** ** |
|                               |   |     |   |     |       |     |       |
| **TOTAL**                          |   | **(332** | **)**  | **(391** | **)**      | **(161** | **)**      |

 

The item includes the tax chargesfor Euro 302 thousand incurred for the tax periods from 1997 to 2001, incompliance with art 8, law 289/2002 and for Euro 30 thousand following theassessment carried out by the revenue authorities in compliance with art. 2,law 350/2003 for the tax year 2002.

 

**5.5 Income tax**

 
|                       |   | **2003**   |       | **2002**  |       | **2001**  |       |
|----------------------------|--------|------------|------------|-----------|------------|-----------|------------|
| Current IRPEG taxation     |   | 2,447      |       | —    |       | —    |       |
| Current IRAP taxation      |   | 5,678      |       | 7,290     |       | 5,066     |       |
| Advance and deferred taxes |   | 3,568      |       | 72        |       | 86        |       |
| **TOTAL**                  |   | **11,694** | ** ** | **7,362** | ** ** | **5,152** | ** ** |

 

The provision for income taxesfor the year was calculated taking into account the estimated taxable incomedetermined in the light of current tax regulations .

 

47

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As far as IRPEG is concerned,it should be remembered that 2003 was the first year the company was subject toIRPEG, following the ten-year exemption which expired on October 5th2003 and the tax burden, as a result, reflects the charge for the reducedperiod subject to taxation.

The advance and deferred taxesrefer to the recovery of deferred IRPEG on losses carried forward for the years1998, 1999 and 2000 (Euro 5,451 thousand), IRAP paid in advance on thecapitalisation of financial expenses (Euro 163 thousand) and the effect oftiming differences pertaining to previous years (Euro 343 thousand), reduced bythe provision on deferred tax payables for IRPEG and IRAP for Euro 2,197thousand and Euro 192 thousand, respectively.

The deferred liabilities areclassified as decrease , of the deferred tax assets.

 

**Reconciliation between financial statements andtheoretical tax charges**

 

**IRPEG**

 
| **Profit before taxes**                                   |   | **92,242** |       |       | ** ** |
|-----------------------------------------------------------|--------|------------|------------|------------|------------|
| **Theoretical IRPEG taxation (34%)**                      |   |       |       | **31,362** | ** ** |
| **Taxable timing differences - subsequent years**         |   | **—** | ** ** |       |       |
| **Deductible timing differences - subsquent years**       |   | **(6,657** | **)**      |       |       |
| **Transfer of timing differences from previous years**    |   | **16,266** | ** ** |       |       |
| **Differences which will not arise in subsequent years:** |   |       | ** ** |       |       |
| Changes - increases                                       |   | 11,695     |       |       |       |
| Changes - decreases                                       |   | (96,767    | )          |       |       |
|                                                      |   |       |       |       |       |
| **IRPEG taxable income**                                  |   | **16,778** | ** ** |       |       |
| **Balance sheet IRPEG**                                   |   |       |       | **5,705**  | ** ** |

 

**IRAP**

 
| Difference between value and cost of production           |   | 132,209     |       |      |       |
|-----------------------------------------------------------|--------|-------------|------------|-----------|------------|
| Items not relevant for IRAP purposes                      |   | 1,250       |       |      |       |
|                                                      |   |        |       |      |       |
| **Theoretical taxable income**                            |   | **133,459** |       |      | ** ** |
| **Theoretical IRAP taxation (4,25%)**                     |   |        |       | **5,672** | ** ** |
| **Temporary difference deductible in future years**       |   | **(4,518**  | **)**      |      |       |
| **Reversal of temporary differences from previous years** |   | **11,828**  | ** ** |      |       |
| **Differences which will not arise in subsequent years:** |   |        | ** ** |      |       |
| Changes- increase                                         |   | 9,101       |       |      |       |
| Changes- increase                                         |   | (8,954      | )          |      |       |
|                                                      |   |        |       |      |       |
| **IRAP taxable income**                                   |   | **140,916** | ** ** |      |       |
| **Bilance sheet IRAP (4,25%)**                            |   |        |       | **5,989** | ** ** |

 

48

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**6 Cash Flow Statements**

**(Thousands of euro)**

 
|                                                      |   | **2003**     |       | **2002**    |       | **2001**    |       |
|-----------------------------------------------------------|--------|--------------|------------|-------------|------------|-------------|------------|
|                                                      |   |         |       |        |       |        |       |
| **CASH FLOWS FROM OPERATING ACTIVITIES (A)**              |   |         |       |        |       |        |       |
| Net profit  (loss) for the period                         |   | 80,548       |       | 106,959     |       | 56,959      |       |
| Amortization                                              |   | 46,575       |       | 45,776      |       | 45,258      |       |
| Losses / (gains) on asset disposals                       |   | 1,643        |       | 139         |       | 161         |       |
| Changes in  assets and liabilities:                       |   |         |       |        |       |        |       |
| Inventories                                               |   | 67           |       | (980        | )          | (1,625      | )          |
| Trading  account receivables                              |   | 32,994       |       | (23,639     | )          | 59,972      |       |
| Other short  term assets                                  |   | 16,320       |       | (5,932      | )          | (20,399     | )          |
| Trading  account payables                                 |   | 989          |       | (7,779      | )          | (11,991     | )          |
| Accruals and  provisions                                  |   | (1,624       | )          | 6,358       |       | 1,971       |       |
| Other short  term liabilities                             |   | (3,690       | )          | 3,203       |       | 2,381       |       |
| **Net cash provided (used in) operating activities**      |   | **173,822**  | ** ** | **124,107** | ** ** | **132,687** | ** ** |
|                                                      |   |         |       |        |       |        |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES (B)**              |   |         |       |        |       |        |       |
| Investments  in fixed assets                              |   | (473         | )          | (268        | )          | (483        | )          |
| Investments  in intangible assets                         |   | (12,905      | )          | (11,791     | )          | (15,758     | )          |
| Investment  in financial assets                           |   | —       |       | —      |       | —      |       |
| Disposals of  fixed assets                                |   | 98           |       | —      |       | 1,065       |       |
| Disposals of  financial assets                            |   | —       |       | —      |       | 285         |       |
| **Net cash used in investing activities**                 |   | **(13,280**  | **)**      | **(12,059** | **)**      | **(14,891** | **)**      |
|                                                      |   |         |       |        |       |        |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES (C)**              |   |         |       |        |       |        |       |
| Increase  (decrease) in mid-long term debt                |   | (71,955      | )          | (60,040     | )          | (98,458     | )          |
| Increase  (decrease) in short term debt                   |   | (53,667      | )          | 8,306       |       | 16,549      |       |
| Capital  contribution                                     |   | —       |       | —      |       | —      |       |
| Dividends                                                 |   | (18,260      | )          | (33,534     | )          | —      |       |
| **Net cash provided from (used in) financing activities** |   | **(143,882** | **)**      | **(85,267** | **)**      | **(81,909** | **)**      |
|                                                      |   |         |       |        |       |        |       |
| **INCREASE / (DECREASE) IN CASH (A+B+C)**                 |   | **16,660**   | ** ** | **26,781**  | ** ** | **35,887**  | ** ** |
|                                                      |   |         |       |        |       |        |       |
| CASH,  BEGINNING OF YEAR                                  |   | 85,101       |       | 58,321      |       | 22,434      |       |
| INCREASE IN  CASH (A+B+C)                                 |   | 16,660       |       | 26,781      |       | 35,887      |       |
| CASH, END OF  YEAR                                        |   | 101,761      |       | 85,101      |       | 58,321      |       |

 

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**7.Reconciliation to Generally Accepted Accounting Principles in the United States**

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

 

The Company’saccounting policies for financial reporting in accordance with Italian GAAPdiffer in certain respects from accounting principles generally accepted in theUnited States  (“US GAAP”).  Significant differences, which have aneffect on Net Income / (Loss) and Shareholders’ Equity, are described below:

 

***(a)Levelisation of incentive component*****-**The selling tariffs of electricity areestablished annually by the Italian Authority for Energy and include, for thefirst eight years of operations, an incentive premium referred to asCIP/6.  The CIP/6 premium is availableto the Company due to an Italian Law applicable to companies that generateelectricity through renewable sources. The incentive is currently being received by the Company as part of its annualbilling to GTRN; for purposes of Italian GAAP revenue recognition, the amountof the premium is billed annually and recognized in the Profit and LossStatement.

 

Under US GAAP, EITF 91-6, *RevenueRecognition of Long-Term Power Sales Contracts (“EITF 91-6”),*providesthe framework for revenue 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 GAAPpurposes, such incentive should be recognized in income over the life of thefifteen-year power sales contract. Therefore, a portion of the CIP/6 incentivebilled in each of the first eight years of the plant operation is beingdeferred to the following years.

 

The estimated amount to bedeferred at December 31, 2003 reflects the reforecast of the production for theyears from 2004 to 2015 and excludes the inflation effect on the incentiverate.

 

***(b) Capitalizationof refinancing costs* –** In 2000, theproject-financing contract was re-negotiated in order to extend its length;according to Italian GAAP, the cost of this re-negotiation was charged to the2000 statement of operations.

 

The accounting under US GAAP for this situationis highlighted in EITF 96-19, *Debtor’s Accounting for a Modification or Exchange ofDebt 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 EITF96-19, therefore, the exchange was not considered substantially

 

50

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different. Such costs have been capitalized and amortized over the life of theproject-financing contract.

 

***(c) Reversal of cyclical maintenance fund*** - The plant consists of twoseparate lines which need to be shut down every four years for cyclical maintenance.  According to Italian GAAP, the budgetedcosts for the cyclical maintenance are distributed over the scheduled cycleperiod through the accrual of a cyclical maintenance provision. Actual costsare charged 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 swapsand rate cap contracts, which are used to lock-in a targeted level of interestrates on the Company’s long-term debt. For Italian GAAP purposes, the changesin the fair value of the hedges are not recognized.  For US GAAP purposes, it is necessary to designate derivativefinancial instruments at the time of their inception in order to qualify forhedge accounting.  The Company hadcertain derivatives that had qualified for hedge accounting treatment; suchcontracts, initiated in previous years, expired during 2003. The fair values ofthese expired hedges are included in Shareholders’ Equity. All contractsinitiated in December 2003 do not qualify for hedge accounting, therefore theirfair value (total net amount of € 4.5 million) has been recognized in theprofit and loss account.

 

***(e) Settlement agreement*** - A claim was pending between Isaband the plant construction consortium for costs related to delayed start up ofthe plant and additional construction costs related to change 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 6,030 thousand inassignment of receivables of the consortium from Isab for royalties.

 

In accordance with ItalianLaw, the effectiveness of the settlement was retroactive to the signature dateand the settlement was treated as income in the year ended December 31, 2002.For US GAAP purposes, the settlement has been recognized in 2003 as it wascontingent on future events, in particular the consent of the banks. Under USGAAP, the liquidated damages, including indemnification of loss of profitrecoverable from the construction consortium are recorded as a reduction ofplant basis, while the assignment of the receivables will be recognzed in theyears it occurs.

 

***(f)Accounting for start-up costs –***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.

 

***(g)Recognition of insurance reimbursement*****-**TheCompany incurred certain reimbursable damages in 2001, for which insuranceclaims were filed. According to Italian GAAP, these claims are recognized whenreasonably estimable on the basis of supporting documentation.  For US GAAP purposes, these amounts are notrecognized until they are realizable. As at December 31, 2003 no differences inrecognition of receivables from insurance companies exist and, therefore, theUS GAAP differences related to previous years reverse.

 

***(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

 

51

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to temporary differences between the reporting basis for Italian GAAPand the reporting basis for US GAAP, no significant differences exist betweenthe method of accounting for deferred income taxes applied by Isab underItalian GAAP and US GAAP. The Italian statutory taxation is based on a nationaltax (IRPEG - 36% in 2002 and previous years, 34% in 2003) and on a Regional Taxon Productive Activities (IRAP – 4.25%); the temporary differences, which willreverse in 2004 and following, consider the effect of the Italian tax reformenacted in 2003 effective from January 1, 2004 which replaces IRPEG with IRES –33%; the effects of the change in tax rate is included in the 2003 profit andloss account. The taxable basis for the computation of IRAP is essentiallyoperating income, calculated on the basis of the legal Italian statements, pluslabor costs and interest expenses. In addition, the company was in a ten-year exemption fromIRPEG, which expires in October 2003; the 2003 income was therefore taxable atthe average IRPEG rate of 8.5%, which corresponds to the application of thefull tax rate (34%) on a pro-rata basis for one-quarter of 2003.

 

The following tablesummarizes the significant adjustments to the net loss and quotaholders’ equitywhich would be required if US GAAP had been applied instead of Italianaccounting principles.

 
|   |   |                                     |   | **NET EQUITY** |       | **NET INCOME** |       |
|--------|--------|------------------------------------------|--------|----------------|------------|----------------|------------|
|   |   |                                     |   | **2003**       |       | **2002**       |       | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
|   |   |                                     |   |           |       |           |       |   |   |   |   |   |   |   |   |
|   |   | **Amounts as per Italian GAAP**          |   | **206,371**    | ** ** | **144,083**    | ** ** | **70,657** | ** ** | **80,548** | ** ** | **106,959** | ** ** | **56,959** | ** ** |
|   |   |                                     |   |           |       |           |       |   |   |   |   |   |   |   |   |
| **a**  |   | Levelisation  of Incentive Component     |   | (186,340       | )          | (130,553       | )          | (76,060 | ) | (55,788 | ) | (54,493 | ) | (45,859 | ) |
| **b**  |   | Capitalization  refinancing costs        |   | 4,626          |       | 5,047          |       | 5,468 |   | (421 | ) | (421 | ) | (421 | ) |
| **c**  |   | Reversal  cyclical maintenance fund      |   | 7,352          |       | 9,716          |       | 3,304 |   | (2,364 | ) | 6,412 |   | 1,931 |   |
| **d**  |   | Derivatives                              |   | (4,596         | )          | (12,078        | )          | (14,097 | ) | 1,387 |   | 877 |   | (6,859 | ) |
| **e**  |   | Settlement  agreement                    |   | (19,409        | )          | (21,030        | )          | 0 |   | 1,621 |   | (21,030 | ) | 0 |   |
| **f**  |   | Accounting for  start up costs           |   | 5,339          |       | 710            |       | (3,436 | ) | 4,630 |   | 4,146 |   | 4,146 |   |
| **g**  |   | Recognition  of insurance reimbursements |   | 0              |       | (895           | )          | (3,977 | ) | 895 |   | 3,082 |   | (3,977 | ) |
| **h**  |   | Accounting  for income taxes             |   | 71,903         |       | 56,162         |       | 30,445 |   | 16,548 |   | 25,765 |   | 18,479 |   |
|   |   |                                     |   |           |       |           |       |   |   |   |   |   |   |   |   |
|   |   | **Amounts in accordance with US GAAP**   |   | **85,246**     | ** ** | **51,162**     | ** ** | **12,304** | ** ** | **47,056** | ** ** | **71,297** | ** ** | **24,399** | ** ** |

 

Shareholders’ equityconsisted of the following:

 
|                                |   | **Capital  stock** |       | **Additional  paid in capital** |       | **Retained  earnings** |       | **Total**  |       |
|-------------------------------------|--------|--------------------|------------|---------------------------------|------------|------------------------|------------|------------|------------|
| **Balance as of December 31, 2000** |   | **5,165**          | ** ** | **24,302**                      | ** ** | **(35,180**            | **)**      | **(5,713** | **)**      |
| 2001 result                         |   | —             |       | —                          |       | 24,399                 |       | 24,399     |       |
| Fair value of hedging derivatives   |   | —             |       | —                          |       | (6,381                 | )          | (6,381     | )          |
| **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 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 December 31, 2003**       |   | **5,165**          | ** ** | **24,302**                      | ** ** | **55,779**             | ** ** | **85,246** | ** ** |

 

52

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The coverage of losses under Italian GAAP utilizing paid-in capital hasbeen reclassified under “Additional paid-in capital”, for the purpose of USGAAP.

 

**Furthermore, the reimbursement of paid incapital (Euro 8,533 thousand), classified in the Italian accounts as increaseof subordinated debt from Shareholders is classified in the above table asdividends.**

 

Italian law requires that 5%of a company’s net income be retained as a legal reserve, until such reserveequals 20% of the share capital. This reserve, amounting to Euro 1,033 thousandat December 31, 2003, is not available for distribution.

 

The Company has capitalizedcertain start-up and expansion costs under Italian GAAP. According to theItalian Law dividends can be distributed only if the equity reserves are higherthan the unamortized amount of such capitalized costs that, at December 31,2003, amounted to Euro 6,784  thousand.

 

 
| Roma, March  23rd 2004              |
|-------------------------------------|
|                                |
| On behalf of the Board of Directors |
| The Chairman                        |
| Domenico D’Arpizio             |

 

53

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**SIGNATURES**

** **

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis Amendment No. 1 on Form 10-K/A to its annual report on Form 10-K forthe year ended December 31, 2003 to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | Mission Energy Holding Company |
|--------|--------------------------------|
|   | (Registrant)                   |
|   |                           |   |
|   |                           |   |
|   | By:                            |   /s/ Kevin M. Smith |   |
|   |                           |   Kevin M. Smith    *Senior Vice President and Chief Financial Officer* |
|   |                           |   |
|   | Date:                          |   June 23, 2004 |   |
|        |                                |  |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **Signature**                                    |   | **Title**                             |   | **Date**      |
|--------------------------------------------------|--------|---------------------------------------|--------|---------------|
| **Principal  Executive Officer:**                |   |                                  |   |          |
|                                             |   |                                  |   |          |
|                                             |   |                                  |   |          |
| /s/ Theodore F. Craver, Jr.                      |   |                                  |   |          |
| Theodore F. Craver, Jr.                          |   | Chief Executive Officer and President |   | June 23, 2004 |
|                                             |   |                                  |   |          |
|                                             |   |                                  |   |          |
| **Controller  or Principal Accounting Officer:** |   |                                  |   |          |
|                                             |   |                                  |   |          |
|                                             |   |                                  |   |          |
| /s/ Mark C. Clarke                               |   |                                  |   |          |
| Mark C. Clarke                                   |   | Controller                            |   | June 23, 2004 |
|                                             |   |                                  |   |          |
|                                             |   |                                  |   |          |
| **Majority  of Board of Directors:**             |   |                                  |   |          |
|                                             |   |                                  |   |          |
|                                             |   |                                  |   |          |
| /s/ John E. Bryson                               |   |                                  |   |          |
| John E. Bryson                                   |   | Director, Chairman of the Board       |   | June 23, 2004 |
|                                             |   |                                  |   |          |
|                                             |   |                                  |   |          |
| /s/ Bryant C. Danner                             |   |                                  |   |          |
| Bryant C. Danner                                 |   | Director                              |   | June 23, 2004 |
|                                             |   |                                  |   |          |
|                                             |   |                                  |   |          |
| /s/ Theodore F. Craver, Jr.                      |   |                                  |   |          |
| Theodore F. Craver, Jr.                          |   | Director                              |   | June 23, 2004 |

 

54

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