Hera S p A : Financial report as at 30 June 2023 [6040kb -

TABLE OF CONTENTS

DIRECTORS' REPORT

HERA GROUP CONSOLIDATED FINANCIAL STATEMENTS

1.01	TRENDS AND CONTEXTS	4
1.01.01	Macroeconomy and finance	4
1.01.02	Businesses and regulations	7
1.02	MAIN EVENTS OCCURRED	14
1.02.01	May 2023 flood events	14
1.02.02	Business and financial events	15
1.03	OVERVIEW OF OPERATING AND FINANCIAL TRENDS AND DEFINITION OF	17
	ALTERNATIVE PERFORMANCE MEASURES
1.03.01	Operating results and investments	21
1.03.02	Financial structure and adjusted net debt	26

1.04 SHARE PERFORMANCE AND INVESTOR RELATIONS

		29
1.05	ANALYSIS BY BUSINESS AREA	31
1.05.01	Gas	32
1.05.02	Electricity	36
1.05.03	Integrated water cycle	40
1.05.04	Waste management	44
1.05.05	Other services	49
2.01	FINANCIAL STATEMENT FORMATS	54
2.01.01	Income statement	54
2.01.02	Statement of comprehensive income	55
2.01.03	Statement of financial position	55
2.01.04	Cash flow statement	57
2.01.05	Statement of changes in net equity	58
2.02	EXPLANATORY NOTES	59
2.02.01	Introduction	59
2.02.02	Operational and financial performance	63
2.02.03	Taxation	72
2.02.04	Statement of financial position	76
2.02.05	Investment activities	85
2.02.06	Investments in shareholdings	91
2.02.07 Derivatives and analogous instruments	94
2.02.08	Provisions and potential liabilities	98
2.02.09	Operating working capital	101
2.02.10	Other information	111
2.03	FINANCIAL STATEMENT FORMATS AS PER CONSOB RESOLUTION 15519/2006	116
2.03.01	Income statement as per Consob resolution 15519/ 2006	117
2.03.02	Statement of financial position as per Consob resolution 15519/ 2006	118
2.03.03	Financial statement as per Consob resolution 15519/2006	120
2.03.04	Net financial debt according to the Consob notice DEM/6064293 of 2006	121
2.03.05	List of related parties	122
2.03.06	Explanatory notes to relations with related parties	123
2.04	LIST OF CONSOLIDATED COMPANIES	127
2.05	DECLARATION ON THE CONSOLIDATED FINANCIAL STATEMENT PURSUANT TO ART. 154-	129
	BIS OF LEGISLATIVE DECREE 58/98
2.06	REPORT BY THE INDEPENDENT AUDITOR	130

| Directors' report

| Hera Group Consolidated financial statements

1.01 TRENDS AND CONTEXTS

Global economic trends and projections

Hera makes ongoing efforts to interpret the signs coming from the contexts in which it operates, in an attempt to obtain an overall view of what lies ahead for the Group and its stakeholders. In order to anticipate future developments, and to operate based on an original business model, able to continuously innovate and maintain strong local roots while respecting the environment, the main updates in the macrotrends seen in the reference contexts are identified below. The most significant drivers of change and the Group's strategic approach are illustrated in the 2022 year-end financial report, which may be consulted for a more in-depth discussion.

1.01.01 Macroeconomy and finance

Focus on the Eurozone

Almost one year after the invasion of Ukraine, global economic activity in the fourth quarter of 2022 confirmed a gradual slowdown compared to the recovery that started in the previous year. Growth in gross domestic product (GDP) slowed down in the US and China, while stagnating in Japan and the UK, and dropping by 2.1% in Russia (compared to forecasts prior to the conflict, which estimated growth at almost 3%).

In the early months of 2023, the global economic context showed a subdued pace of growth in the US and the UK, while in China, the disappearance of pandemic-related restrictions led economic activity to rise.

The global production system still suffers from a high degree of uncertainty, mainly associated with inflation and the related response in terms of monetary policy shown by central banks, as well as the availability of raw materials, on which the ongoing conflict is having a particularly negative impact.

These uncertainties, accentuated by possible repercussions of recent disruptions in the banking system (United States and Switzerland), do not rule out the risk of less favourable trends and have already led international institutions to foresee a slowdown in global growth this year, albeit less pronounced than the forecasts made last autumn, projecting GDP growth at 2.6% in 2023 and 2.9% in 2024.

The Eurozone, which was the area most strongly affected by the war in Ukraine, mainly due to its proximity to the conflict zone and its dependence on gas supplies from Russia, saw stagnation in GDP during the last quarter of 2022.

The estimates available for 2023, made before the appearance of financial tension related to the bank disruptions mentioned above, indicate a slowdown in GDP coming to 1% (as against 3.5% one year earlier), to be followed by an acceleration in 2024-25, reaching 1.6% in each of the two years.

Due to the sharp drop in the energy component, consumer inflation projections were also revised down from those released last December, coming to 5.3 per cent for this year, 2.9 per cent for 2024 and 2.1 per cent for 2025. According to surveys carried out by the European Commission, the expectations shown by households and companies concerning consumer price trends have returned to the figures prior to last year's sharp price increase, while the European Central Bank (ECB) confirmed its goal of bringing price stability back to around 2 per cent as soon as the geopolitical tensions ease.

The current situation and the national economic outlook

In the fourth quarter of 2022, the situation seen in Italian closely followed the trends seen in the Eurozone, with an interruption in its phase of expansion, mainly due to a drop in household spending and bottlenecks along the supply chains.

Economic activity picked up slightly in early 2023, benefiting from both falling energy costs and normalised supply conditions. Accelerating investment, rising exports and declining imports, already seen in the first months of this year, are expected to drive growth.

Industrial production rose in the first half of 2023, mainly due to an increase in the production of consumer goods. However, a remarkable gap remained between sectors with a high requirement for energy input and the rest of the manufacturing sector. Expansion in the industrial sector had a positive impact on labour supply, which, while still below pre-pandemic figures, reflected an increase in the number of permanent employees in the private sector as a whole, particularly in services.

Forecasts for growth in national GDP, however, have been revised downward, to 0.6% in 2023 and 1.2% in both 2024 and 2025.

Despite the context described above, the consumer confidence index continued to grow, driven by improved opinions of the economic situation, expectations for a reduction in unemployment and trends in prices. In this respect, inflation, after peaking at the end of last year (12.6%), also started a downward

Hera Group - Consolidated half-year report at 30 June 2023

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| Directors' report

| Hera Group Consolidated financial statements

Financial markets

trend nationwide, reflecting the drop in the energy component. Previous bottlenecks stemming from energy supply chains (passed on to the respective prices) are gradually easing, thanks to falling wholesale prices (which have now returned to figures equivalent to those prior to the invasion of Ukraine). Consumer inflation is estimated at 6.5% for the current year and is expected to drop to 2.6% in 2024 and 2% in 2025.

In the first half of the year, despite the crisis in the banking system, stock markets rebounded strongly from the low point seen at the end of October 2022, with some sectors leading this recovery. More specifically, the technology and communication services sectors, the hardest hit in 2022, showed significant growth. Furthermore, fears of a recession subsided, leading to a normalisation of investors' positions and lower stock price volatility. The major global stock markets indeed recorded significant increases, with rises ranging from around 3% to 29%. On the primary bond market, after a slowdown in the first part of the year, there were signs of recovery, and although volatility in rates was still quite high, market conditions remained particularly stable and supportive. Investor demand for solidly rated companies also increased, especially for those active in the utility sector and for securities with a short duration (2-5 years). During the second quarter, the market for bonds with longer durations, 8-10 years, reopened, confirming a scenario of recovery and pointing towards normalisation and stability.

Central banks and monetary policies

During the first half of the year, the ECB continued its restrictive monetary policy, which began during the previous year, with further increases in interest rates, bringing the reference level to 4%. The ECB revised its outlook for economic growth for the next two years downwards, while revising upwards its forecast for inflation to 5.1% for 2023. A substantial change in the outlook for inflation was ruled out at the last meeting, held in June. The prevailing view is that it is unlikely that the European central bank will be able to announce that interest rates will peak in the near future. For this reason, it stated that monetary policy will have to be decided on a meeting-by-meeting basis, remaining "data-dependent".

The British central bank (BoE) also raised the cost of money by 50 basis points at its 22 June meeting, going against expectations, which estimated a rise of only 25 basis points. Unlike the ECB's projections, the BoE's expectations for inflation involve a significant decline over the course of the year, mainly as a reflection of changes in energy prices. Overseas, the Fed, on the other hand, decided at its June meeting to suspend interest rate increases for the first time after ten consecutive hikes, leaving them unchanged at 5.00%-5.25%. Nevertheless, the prevailing market view points towards a further 25 basis point increase in July, on the basis of continued solid growth and a level of inflation that is struggling to settle back to 2%.

Interest rates

Compared to the same period of the previous year, the euro area interest rate curve showed an upward trend across all maturities. In particular, there was an average rise of about 380 basis points on short- term maturities (1-6 months) and about 180 basis points on medium/long-term maturities (2-15 years). In addition, an unusual phenomenon appeared with respect to the normal trend of the interest rate curve, with steepening on the short-term portion of the curve, showing a peak at 3.9%, and a flat trend on medium/long-term swap rates, settling at around 3.0%. In June, the 1-year forward scenario shows additional steepening on short-term rates, while the medium/long-term interest rate section remains flat at around 3% for the remainder of 2023.

Hera Group - Consolidated half-year report at 30 June 2023

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