ANNUAL REPORT AND ACCOUNTS to 31 December 2006 ANNUAL REPORT AND ACCOUNTS OF THE ASM GROUP AND ASM SPA to 31 December 2006 Report on Operations at 31 December 2006 THE CHAIRMAN’S MESSAGE Dear shareholders, 2006 was a good year for ASM. Growth on the equity market continued, and against this favourable backdrop, ASM put in a strong performance: on 10 October, the stock reached an all-time high of EUR 4.25 per share, and in 2006 alone grew by 62.1%, outperforming the Mibtel index by 43 percentage points and more than doubling its value since listing (+125%). The operating results for 2006 further consolidate growth initiated when the company was listed: all the main performance indicators registered an improvement, particularly net profit, which reached a record EUR 238 million. Over the year, ASM’s traditional sound financial structure was confirmed, and was reflected in the renewed A+ rating, the highest awarded to an Italian public utility, and in the issue in July of a 30-year bond – an exceptional maturity for the sector – which took the company into the select European group of 30-year borrowers. In 2006 ASM also registered some important results from an industrial viewpoint: a growing specialisation and rapid adaptation to the new demands of a market now heading towards full liberalisation have enabled the group to offer innovative, high-quality services, using processes that guarantee maximum efficiency and effectiveness. For example, Cito - the project to install digital meters that has been rolled out for the entire electricity grid – won ASM the CIO Innovation Award 2006, the prize for Italian companies that use new technologies to modernise their products and services, and thereby increase their efficiency and flexibility. In October, the company was also honoured with the prestigious WTERT 2006 Industry Award, the prize given by New York’s Columbia University to the world’s best WTE plant. The Brescia WTE plant stood out among 19 competitors from all over the world, including plants in Amsterdam, London, Vienna and New York, coming in the top ten both in terms of energy efficiency and emissions, which were by far the lowest of all the plants listed. The results achieved reflect ASM’s capacity to implement the strategy outlined in its business plans in the rapidly changing and highly competitive environment of the public utilities sector: this allowed the company to meet important financial targets and gain approval from the market, which took the value of the company on the stock market from almost EUR 2 billion at the end of 2005 to more than EUR 3 billion at the end of 2006. Confirming the strength of the strategies it has adopted and the results obtained, ASM recently received the Mediobanca prize for “Dynamic Report on Operations at 31 December 2006 medium-sized companies”, an important recognition that rated ASM as Italy’s most dynamic company and that with the greatest potential to become a large company. Last year’s results are the reward of our operational decisions and constant commitment to driving down costs: these include the operations to integrate the various companies of the group launched last year with a view to making better use of already existing internal synergies. The results also confirm and reflect the success of ASM’s strategic vision, and in particular, that the company’s external growth strategy is correct. The ongoing development of Endesa Italia and its consequent contributions to ASM’s net profit – EUR 116 million in the last year alone – are the fruits of the industrial partnership formed with Endesa in 2001 and the investments made in 2005 to increase ASM’s stake to 20%. It is against this backdrop that possible mergers with similar companies were considered during the year and negotiations were launched with AEM Milano. ASM’s aim is to play a leading role in the national energy market. For 2007, the company is again committed to meeting the challenging objectives set out in the new 2007-2011 business plan: expanding our district heating business in Brescia, Bergamo and Novara, boosting power generation capacity, increasing waste disposal and treatment capacity, and promoting higher tariffs in the water sector – all of which provide ASM with excellent growth prospects for the future. Furthermore, we have renewed our commitment to raising ASM’s profile on the main financial markets, through presentations of the company’s objectives, strategies and results: for 2007 alone, meetings are planned with major international investment funds in Milan, London, Paris, Frankfurt, New York and Boston. I would like to conclude by again drawing your attention to the outstanding results that ASM recorded in 2006. As always, we would like you to share in this achievement, and propose a dividend of 15.5 euro cents per share, which represents an increase of 19% on last year. Chairman, Renzo Capra Report on Operations at 31 December 2006 Mission Our mission is to produce, develop and sell services in the energy, integrated water and environmental sectors. We strive to adapt constantly to customer requirements and market trends, while at the same time remaining highly competitive and continuing to offer excellent value to shareholders and stakeholders. ASM has always been highly aware of environmental issues. Our approach stems from close ties with our local region, which has always been an important part of the company’s history. We use the most advanced techniques available to minimise the environmental impact of our operations, and we are working on systems of company management that respect the environment and the community, as well as providing opportunities for staff development. Report on Operations at 31 December 2006 CONTENTS The ASM group in figures Page 4 ASM shares Page 5 The ASM group in 2006 Page 8 Profile of the ASM group Page 10 Structure of the ASM group Page 12 Strategy Page 13 Corporate governance Page 15 Corporate social responsibility Page 19 The ASM group Summary profit and loss account Page 23 Summary balance sheet Page 25 Results by business area Page 33 ASM SpA ASM in figures Page 63 Summary profit and loss account Page 64 Summary balance sheet Page 66 ASM and renewable sources Page 71 Transactions with related parties Page 72 Other information Human resources Page 82 Research, development, quality and environment Page 83 Accounting and administrative separation (AEEG resolution 310/01) Page 85 Significant events since 31 December 2006 Page 87 Outlook Page 88 Recommendations proposed by the Board of Directors of ASM SpA to the ordinary Page 88 shareholders' meeting ACCOUNTING STATEMENTS AND NOTES TO THE ACCOUNTS – ASM SPA Notes to the accounts Page 95 Report of the Board of Auditors Page 210 Report of the external auditors Page 213 ACCOUNTING STATEMENTS AND NOTES TO THE ACCOUNTS – ASM GROUP Notes to the accounts Page 215 Report of the Board of Auditors Page 313 Report of the external auditors Page 316 COMPANY CONTACTS AND FINANCIAL CALENDAR 2007 Page 318 Report on Operations at 31 December 2006 The ASM group in figures Key data (EUR thousand) 2006 2005 Revenues 2,051,844 100% 1,672,368 100% [1] EBITDA 381,153 18.6% 338,737 20.3% EBIT [2] 244,253 11.9% 208,391 12.5% Net profit 238,282 11.6% 212,361 12.7% [1] Revenues - operating costs - personnel costs [2] EBITDA - depreciation and amortisation/provisions/valuation of other assets at fair value Key financial data (EUR thousand) 2006 2005 Shareholders' equity 1,534,508 1,408,452 Net debt [3] 801,921 702,440 Net invested capital [4] 2,336,429 2,110,892 Cash-flow [5] 375,182 342,707 Investments 243,768 128,378 [3] Financial payables + securities and cash [4] Non-current assets + working capital + other medium-/long-term assets and liabilities – staff severance fund – provisions for risks and future liabilities [5] Profit + depreciation and amortisation/provisions/valuation of other assets at fair value Financial indicators 2006 2005 ROI [6] 10.5% 9.9% ROE [7] 15.5% 15.1% EBITDA/revenues 18.6% 20.3% ROS [8] 11.9% 12.5% Interest cover [9] 8.5 8.7 Net debt/rquity 52.3% 49.9% Net debt/EBITDA 2.10 2.07 [6] EBIT/net invested capital [7] Profit/equity [8] EBIT/revenues [9] EBITDA/financial charges Report on Operations at 31 December 2006 4 EBITDA by business area (EUR million) pow er generarion 16 8 electricity/gas sales 13 1 electricity/gas grids district heating 65 67 52 46 44 40 integrated w ater 26 26 16 18 services 8 12 environmental services 2006 2005 other services ASM shares Average stock market capitalisation in 2006: 2,446,231,823 Stock market data (EUR per share) Stock market data (EUR per share) IPO price (12 July 2002) 1.850 Average price 2002 1.703 Average price 2003 1.678 Average price 2004 2.119 Average price 2005 2.630 Average price 2006 3.159 Highest price in 2006 (10/10/06) 4.250 Lowest price in 2006 (13/01/06) 2.520 Report on Operations at 31 December 2006 5 Share data (EUR) 2006 2005 Number of shares (million) * 774.3 774.3 Earnings per share (EPS) 0.308 0.274 Cash-flow per share (CFPS) 0.485 0.443 Book value per share (BVPS) 1.982 1.819 Dividend per share 0.155 0.130 Total dividends (EUR thousand) 120,017 100,660 Pay-out ratio 50.37% 47.40% Price/earnings per share (P/E) 10.27x 9.59x Price/cash flow (P/CF) 6.52x 5.94x Price/book value (P/BV) 1.59x 1.45x EV/EBITDA 8.5x 8x Dividend yield 4.91% 4.94% Note: multiples per share were calculated on the basis of the average annual price * as of 31 December On 2 October 2006, ASM returned to the Midex, the market index for mid-cap companies whose composition is reviewed twice a year.