REPORT OF THE SUPERVISORY BOARD TO THE ......Report of the supervisory board to the shareholders’...

REPORT OF THE SUPERVISORYBOARD TO THE SHAREHOLDERS’ MEETING

ON THE SUPERVISORY ACTIVITYCARRIED OUT IN 2010

REPO

RT OF TH

E SU

PERV

ISORY BOARD

TO THE SH

AREHOLD

ERS’ MEETING ON THE SU

PERV

ISORY ACTIVITY CARR

IED OUT IN 2010

www.a2a.eu

pursuant to article 153, paragraph 1 of Legislative Decree no. 58of February 24, 1988 and article 1(i) of the Bylaws

Report of the supervisory board to the shareholders’ meeting on the

supervisory

A2A S.p.A.

Report of the supervisoryBoard to the shareholders’meeting on the supervisoryactivity carried out in 2010

pursuant to article 153, paragraph 1 ofLegislative Decree no. 58 of February 24, 1988and article 1(i) of the Bylaws


supervisory

Dear Shareholders,

The corporate governance structure of A2A S.p.A. (hereinafter also the “Company”) is based

on the dual management and control system, which is characterized by the presence of a

Supervisory Board and a Management Board. The roles, functions and responsibilities of the

two boards are clearly identified by the Bylaws and described in detail in the Report on

Corporate Governance and the Ownership Structure (for the year ended December 31, 2010).

Specifically, the control and direction activities of the Company are entrusted to the

Supervisory Board, while the Management Board is responsible for the management of the

business and it takes part in directing its activities.

In the second year of its term the Supervisory Board, in pursuit of the principles defined by the

corporate governance model, achieved full operational harmony with the management has

been the collaboration body in the perspective of mutual collaboration between the boards,

aimed at optimizing the effectiveness of the model adopted.

Pursuant to article 23 of the Bylaws, the activation, coordination and supervision of the work

carried out by the Supervisory Board are guaranteed, by the figure of the Chairman, who

supervises the proper functioning of the Board and contemporary performs a pro-active role

to ensure the existence of a link with the work carried out by Management Board. In addition,

the Chairman has immediate powers regarding the work performed by the Supervisory Board

on matters of strategy and control, formulating proposals to the board in connection with the

strategic operations approved by the Management Board.

In order to organize its work in the most effective way by observing the requirements of the

Bylaws and acting in compliance with the Corporate Conduct Code of Borsa Italiana. The

Supervisory Board created an internal organization structured in the form of Committees

which are set up to respond to the need to support the Board in examining specific matters and

carrying out preliminary investigations on issues over its responsibilities. These Committees

perform their work on the basis of specific regulations approved by the Supervisory Board.

Report of the supervisoryBoard to the shareholders’meeting on the supervisoryactivity carried out in 2010pursuant to article 153, paragraph 1 ofLegislative Decree no. 58 of February 24, 1988and article 1(i) of the Bylaws

3


supervisory

In particular, on the issue of supervision, the Supervisory Board has assigned the functions to

the Internal Control Committee that are envisaged by article 19 (Internal Control Committee

and Auditing) of Legislative Decree no. 39 of January 27, 2010, given that these functions may be

assigned to the Supervisory Board provided. Therefore, it has not been assigned the functions

as per article 2409-terdecies, paragraph 1f bis) of the Italian civil code.

The organizational model adopted by the Supervisory Board is completed by a structure called

the General Secretariat of the Supervisory Board, which assists the Board, the Chairman, the

Deputy Chairman and the Committees in performing their respective functions.

In full compliance with the Company’s By-Laws and the current legislation, the Supervisory

Board has adopted a Regulation which regulates its functioning and operations.

This report has been prepared - in order to satisfy the requirements of article 153 of Legislative

Decree no. 58 of February 24, 1998 (the Consolidated Finance Law or TUF) and pursuant to the

article 22, paragraph 1 (i) of the Bylaws - by the Supervisory Committee which reports to the

Shareholders’ Meeting which has to pursue the article 2364-bis of the Italian civil code on the

supervisory activities carried out during 2010, on any omissions and illegal acts. This activity has

also been performed through the support of the Committees set up within the board, and in

particular the Internal Control Committee, also taking into account the “Principles of Conduct”

recommended by the Italian accounting profession, Consiglio Nazionale dei Dottori

Commercialisti e degli Esperti Contabili.

A summary is presented below of the supervisory work performed together with a detailed

report prepared in accordance with the order of presentation envisaged by Consob

Communication no. 1025564 of April 6, 2001; this documentation is supplemented by the

additional information which the Supervisory Board intends to provide to the Shareholders’

Meeting regarding its strategic-nature activities.

4


supervisory

The Supervisory Board, also with the support of its internal Committees, acknowledges that:

• it obtained from the Management Board, whose meetings were attended by the Chairman

and the Deputy Chairman of the Supervisory Board in accordance with the Bylaws the

information on the activity on the most important economic, financial and capital

transactions carried out by the Company and its Subsidiaries, in accordance with the

planned schedule and in compliance with article 150, paragraph 1, of the TUF;

• it supervised, within its responsibilities, acquired knowledge about the compliance of the

Company with the law, the Bylaws and the memorandum of association, through regular

meetings with the General Managers of the Corporate and Market Area and the Technical

Operational Area and the main business functions, in order to understand the management

procedures which ensure compliance with laws and regulations at the individual

organizational units of competence;

• it supervised compliance with the principles of proper management and the adequacy of the

organizational structure and the directions given by the Parent Company to its Subsidiaries in

order to let them provide all the information necessary on a timely basis for the Company to

fulfill its communication obligations required by law. The requirements were undertaken

through direct observation, acquisition of information and regular meetings with the

General Managers of the Corporate and Market Area and the Technical Operational Area, the

Head of Internal Control, the Head of the Internal Audit Department, the Monitoring Body

pursuant to Legislative Decree no.231/01, the Manager responsible for the Preparation of

Corporate Accounting Documents and the Independent Auditors, PricewaterhouseCoopers

S.p.A.;

• it supervised the adequacy of the internal control and administrative-accounting systems,

as well as the reliability of the latter in correctly representing operations, by holding regular

meetings with the Head of Internal Control, the Head of Internal Audit Department, the

Manager responsible for the Preparation of Corporate Accounting Documents, the

Function Heads, the Control Bodies of the main Group companies and the Independent

Auditors, as well as by examining the documents prepared by them;

• it supervised the correct implementation of the corporate governance rules laid down in

Summary of supervisoryactivities

5


supervisory

the Corporate Governance Code for listed companies promoted by Borsa Italiana;

• through the Internal Control Committee, it supervised the financial reporting process, the

effectiveness of the internal audit and risk management systems, the legal audit of the

annual and consolidated financial statements and the independence of the legal auditors.

In addition, with regard to the specific responsibilities assigned to law and by the Bylaws

concerning the approval of the separate and consolidated financial statements, the

Supervisory Board notes that:

• on March 30, 2011 the Management Board reviewed and approved the draft separate and

consolidated financial statements for 2010, which were put at the disposal of the

Supervisory Board on the same date together with the related Report on Operations;

• it acknowledges the resolution of March 30, 2011 whereby the Management Board

approved the Report on Corporate Governance and the Ownership Structure for the year

ended December 31, 2010 and that it approved it in turn, for the part for which it is

responsible, on the same date;

• it verified, also with regard to the support of the Internal Control Committee, that the laws

and regulations concerning (i) the preparation and lay-out of the financial statement

formats, (ii) the formats of the financial statements themselves, as well as (iii) the further

accompanying documents, including the information relating to ownership structures

pursuant to article 123-bis of the TUF, have been observed;

• it verified, also with regard to the support of the Internal Control Committee, that the

Report on Operations for 2010 complies with the current laws and regulations and provides

an exhaustive and clear representation of the economic, capital and financial position of the

Company and the Group, as well as the performance of operations during the year, together

with a description of the main risks and uncertainties to which the Company and the Group

are exposed;

• on March 30, 2011 the Chairman of the Management Board, in the name and on behalf of the

Board itself, and the Manager responsible for the Preparation of Corporate Accounting

Document, made the representations required pursuant to article 154-bis, paragraph 5 of

Legislative Decree no. 58/98 (TUF);

• on April 5, 2011 the Independent Auditors issued their reports on the separate and

consolidated financial statements for the year ended December 31, 2010, which contain no

remarks;

• on April 7, 2011, the Independent Auditors issued their report pursuant to article 19,

paragraph 3 of Legislative Decree no. 39/10, from which no significant weaknesses emerged

in the system of internal control in relation to the financial reporting process;

• on April 20, 2011, the Independent Auditors issued a statement of independence pursuant

to article 17, paragraph 9 of Legislative Decree no. 39/10;

• with a resolution dated April 27, 2011 it approved the separate and consolidated financial

6


supervisory

statements of A2A for the year ended December 31, 2010, consisting of balance sheet,

income statement, statement of changes in equity, and cash flow statement and notes,

accompanied by the Report on Operations.

The Supervisory Board notes that in performing its supervisory activities no significant matters

emerged that require reporting to the Regulatory Authorities or mention in this Report.

7


supervisory

Transactions of a capital, economic or financial nature and strategicactivities

1. On February 4, 2010 the Supervisory Board, also in relation to the responsibilities assigned

to it by the Bylaws, reviewed and approved the 2010-2014 business plan prepared by the

Management Board; in November 2010, in order to prepare the new business plan and with

the intention of supporting the strategic planning process, the Supervisory Board provided

in a preliminary manner, the Management Board, with certain important recommendations

concerning the definition of the direction to be taken by the Group. These

recommendations regard the concentration on the Group’s areas of excellence as a key

element of business growth and identify the resort to renewable sources of energy in

particular in the hydroelectric production sector, energy recovery through the waste to

energy process and energy efficiency through cogeneration as being the reference points in

determining the Group’s strategic direction, within the ambit of a policy to contain financial

exposure.

In this context, together with the support of an advisor the Supervisory Board analyzed

changes in the electricity and gas markets, the Group’s industrial positioning and the main

financial trends in the sector.

In addition, the Supervisory Board agreed on the corporate simplification project currently

in progress, with respect to which rationalization and reorganization measures have been

identified and initiated which concentrate on the commercial areas, the environment

sector and the integrated water cycle. This course of corporate rationalization is consistent

with the objectives of efficiency and organizational simplification which have been a feature

of the Group’s evolution following the merger.

The work carried out by the Supervisory Board in connection with the business plans can

also be considered as a means by which it exercises its supervisory and control function, in

respect of the assessment of the risk factors which such plans may entail for the Group.

The following matters are noted as far as transactions carried out by the Company and its

subsidiaries of a capital, economic or financial nature are concerned, in respect of which

Detailed report on supervisoryactivities

8


supervisory

the Supervisory Board has acquired information from the Management Board and the

two General Managers:

• on April 26, 2010, the Supervisory Board approved the plan to merge A2A Produzione

S.r.l. into A2A S.p.A.. The respective merger deed was signed on June 28, 2010 with

effective date July 1, 2010. This operation - as highlighted by the Supervisory Board -

forms part of the broader corporate rationalization process being carried out

following the birth of A2A S.p.A., which has enabled the number of subsidiaries to be

reduced from 52 to the present 34 and led to the resulting benefits in terms of lower

costs, the simplification of internal flows and a decrease in intragroup transactions;

• on May, 31, 2010, the sale was finalized of A2A’s investment in Alpiq Holding AG

consisting of 5.16% of the company’s share capital. The proceeds from this transaction

amounted to 306 million euros;

• on December 23, 2010, a merger deed was signed, with effect from January 1, 2011, for

the merger of A2A Servizi al Cliente S.r.l., Asmea S.r.l. and Bas Omniservizi S.r.l. into A2A

Energia S.p.A.. By means of this operation the Group’s selling companies were

transferred into A2A Energia S.p.A. together with A2A Servizi al Cliente S.r.l., which will

provide support activities;

• on December 23, 2010, the following were signed, effective January 1, 2011: (i) the

demerger deed by which ASMEA S.r.l. assigned to A2A Ciclo Idrico S.p.A. the business

relating to the ownership of the end customers of the water business of the Province

of Brescia and (ii) the deed by which the “Water Cycle” business of A2A S.p.A. was

contributed to A2A Ciclo Idrico S.p.A.. This operation was carried out with the purpose

of on the one hand completing the Group’s organizational model, with the parent

Company being allocated solely corporate and electricity production activities, and on

the other ensuring that there is a single entity presiding over the water business.

The most important operations, which are discussed in the Report on Operations for 2010,

comply with the law and the Bylaws and are not manifestly imprudent or reckless, in conflict

of interest, in conflict with the resolutions adopted by the Shareholders’ Meeting or for

example in compromising the integrity of the Company’s assets.

In addition, following extremely an detailed examination, the Supervisory Board approved

the amendments to the Company’s Bylaws proposed by the Management Board for

submission to the Shareholders’ Meeting, in order to satisfy the requirements of Legislative

Decree no. 27 of January 27, 2010 on “the exercising of certain rights of minorities in listed

companies” and, in particular, the new procedures for shareholders’ meetings. From the

same procedure, the Regulations for the Company’s Shareholders’ Meetings were

approved for submission for the approval of shareholders.

9

Atypical and unusual transactions

2. No atypical and/or unusual transactions with third parties, related parties or other Group

companies were found that were likely to give rise to doubts concerning the

correctness/completeness of the information in the financial statements, conflicts of

interest, the protection of the Company’s assets or the safeguarding of minority

shareholders.

Related party transactions

3. In the Report on Operations and the Notes to the Financial Statements concerning the draft

separate and consolidated statements for the year ended December 31, 2010, the Management

Board adequately reports and illustrates related party, intragroup transactions by also

describing their characteristics. Therefore, the legislation requires a specific procedure to be

connected with the related party transactions. In order to comply with current legislation,

during its meeting on November 1, 2010 the Management Board resolved to identify the Internal

Control Committee as the competent body for providing the preventive opinions on related

party transactions envisaged by articles 1.1a), 2.1c), and 3.1d) of Annex 2 of Consob Regulation no.

17221/2010. In addition, pursuant to article 4 of Consob Regulation no. 17221/2010, the

Management Board assessed the committee with the duty of expressing a preventive favorable

opinion to the Management Board for the approval of the related procedure.

In compliance with that role, the Internal Control Committee verified the structure and

contents of the procedure and, following a detailed examination of the faculties exercised

for the purposes of the procedure, the aspects regarding the identification of the subjective

boundary regarding what a related party should be considered to be and the existing

organizational structure and current working, issued a favorable opinion on the adoption of

the procedure on November 10, 2010; following said favorable opinion given by the Internal

Control Committee the procedure was then approved by the Management Board on

November 11, 2010 and by the Supervisory Board on November 17, 2010. It is further noted

that from the date on which it became effective, the procedure repeals and replaces the

provisions of the “Guidelines for Related Party Transactions” adopted by the Management

Board on May 14, 2008.

Indipendent auditors' reports

4. The Reports of the Independent Auditors PwC issued on April 5, 2011 on the separate and

consolidated financial statements for the year ended December 31, 2010 pursuant to


supervisory

10

articles 14 and 16 of Legislative Decree no. 39/10 contain no remarks. More specifically, the

reports certify that the financial statements referred to comply with the International

Financial Statements as adopted by the European Union as well as the regulations issued to

implement article 9 of Legislative Decree no. 38/06, that they have been drawn up clearly

and that they give a true and fair view of the consolidated financial position, results of

operations, changes in equity and cash flows of A2A S.p.A. and the Group as of and for the

year ended December 31, 2010.

The Independent Auditors have additionally certified the consistency of the Report on

Operations and the information required by paragraph 1c), d), f), l) and m) and paragraph

2b) of article 123-bis of Legislative Decree no. 58/98 presented in the Report on Corporate

Governance and the Ownership Structure with the financial statements, as required by law.

On April 7, 2011, the Independent Auditors PwC issued a report pursuant to article 19,

paragraph 3 of Legislative Decree no. 39/10 reporting that no significant weaknesses

emerged in the system of internal control in relation to the financial reporting process.

Reports and complaints

5. With reference to the possibility for shareholders to lodge complaints with the controlling

body pursuant to article 2408 of the Italian civil code, the Supervisory Board acknowledges

that no matters were reported in this sense in 2010.

During 2010, together with the support of the General Secretariat of the Supervisory Board,

the Internal Control Committee drew up a reference's scheme for a procedure, which will be

subsequently issued by the Company, to collect and manage any reports of illegal acts sent to

the Supervisory Board by shareholders pursuant to article 2408 of the Italian civil code.

The procedure for managing reports as per article 2408 of the Italian civil code was

rendered operational by the Management Board on the impulse of the Supervisory Board

and may be found on the Company’s website www.a2a.eu.

6. During 2010 no reports were received by the Supervisory Board in relation to anomalies

and/or irregularities concerning the company’s operations.

Assignments to Independent Auditors

7/8. PricewaterhouseCoopers S.p.A. is the Audting Company which has been engaged by the

Parent Company and the other Group companies to carry out an audit of the annual and

consolidated financial statements, a review of the half-year report, periodical checks that the

accounting records have been properly maintained, an audit of the separate annual financial


supervisory

11

statements for the Electricity and Gas Authority (l’Autorità per l’Energia Elettrica ed il Gas -

AEEG) and an audit of the information sent to shareholders for the consolidation of

subsidiaries and joint ventures.

The Internal Control Committee has checked - including with reference to the

requirements of article 19 of Legislative Decree no. 39/10 - that the Auditing Company is in

compliance with the principles of independence.

The Auditing Company PwC has issued to the body as per article 19, paragraph 1, hence for

A2A to the Internal Control Committee, a statement of independence pursuant to article 17,

paragraph 9 of Legislative Decree no. 39/10, and has notified the non-audit services

provided to the entity of public interest, including those performed by entities belong to its

network.

The Report on Operations contains a summary of the fees for the legal audit of the financial

statements and for the various other auditing services provided within the Group during

2010.

Taking into account that statement and the engagements conferred by A2A S.p.A. and

Group companies on PwC and companies and entities belong to its network, the Internal

Control Committee does not believe that there are any critical matters concerning the

independence of PwC.

Opinions issued pursuant to law

9. No opinions were issued during 2010 pursuant to article 154-bis of Legislative Decree no.

58/98 TUF.

Meetings of Collegial Bodies

10. The Supervisory Board met twelve times during 2010 in the performance of its duties. The

Management Board of A2A met eight times during 2010 and the Chairman and Deputy

Chairman of the Supervisory Board attended those meetings.

The Internal Control Committee met sixteen times, the Compensation Committee met five

times and the Donations Committee met thirteen times: the Appointments Committee did

not meet in 2010 as there was continuation in the positions already conferred.

Principles of proper management

11. Within the sphere of its responsibilities the Supervisory Board has acquired knowledge of

and supervised that the principles of proper management have been observed.


supervisory

12

Specifically, this activity was carried out by attending the meetings of the Management

Board and analyzing the matters resolved by the management body, and also through the

support of the Internal Control Committee, by means of interviews, direct observation,

appropriate enquiries, periodically collecting information from the General Managers,

from the heads of the main business sectors, from the heads of business functions, from

the Head of Internal Control and from the Manager responsible for the Preparation of

Corporate Accounting Documents, as well as from the Independent Auditors, in the

framework of a mutual exchange of relevant information as per article 150, paragraph 3 of

the TUF.

These activities also involved detailed work on the methods and timing of the preparation of

the annual budget and the business plan, the means of interacting with the AEEG and the

organizational and functional aspects relating to the acquisition process and managing

tenders.

Through the general manager of the Corporate and Market Area the Management Board

issued a suitable report to the Supervisory Board on the general performance of operations

and on transactions of the greatest importance in terms of size or characteristics carried

out by the Company or its subsidiaries. It is hereby confirmed that in respect of the subject

supervision the principles of proper management have been applied.

Organizational Structure

12. The Supervisory Board has analyzed and monitored the set-up of the organizational

structure, with the support of the Internal Control Committee, which held periodic

meetings with the General Managers of the Corporate and Market Area and the Technical

Operational Area and reference management. . The aim of those meetings was to analyze

the adequacy of the organizational structure and system of proxies/ powers granted and to

ensure that there is a clear segregation/balance of responsibilities in business duties and

functions.

More specifically, consistent with the requirements of article 22, paragraph 1(r), which

assigns to the Supervisory Board the function of approving the guidelines of the structure

of the Group’s personnel, the Board, with the support of the Internal Control Committee,

carried out enquiries and detailed examinations on this matter. It met, besides the General

Manager of the Corporate and Market Area, also the Head of the Human Resources

Organization and Development Projects Department, and at the same time analyzed the

corporate rationalization process. As part of these analyses, which led to the approval of

the Guidelines for the Group’s personnel chart, the Supervisory Board provided certain

recommendations to the Management Board concerning measures to rationalize the


supervisory

13

personnel chart, consistent with the corporate simplification process, and to review the

best structure for the management body (sole director or board of directors) of certain

subsidiaries, however without leading to an increase in costs for the Group.

The Board, together with the support of the Internal Control Committee, also carried out

detailed reviews of an organizational nature on the Group’s management and coordination

model and on compliance with the principles of management autonomy.

The Internal Control Committee held meetings with the following people in order to

supervise the adequacy of the organizational structure:

• the General Manager of the Corporate and Market Area and the Head of Legal Affairs,

to obtain information concerning outstanding litigation and the organizational and

functional aspects of the department;

• the General Manager of the Technical Operational Area and the Head of Quality

Environment and Safety to obtain information concerning the organizational and

functional aspects regarding quality and the system presiding over the health and

safety of workers and the prevention of environmental risks;

• the General Manager of the Corporate and Market Area and the Head of Investor

Relations for an examination of the investor communication process;

• the General Manager of the Corporate and Market Area and the Head of the

Procurement Department and of A2A Logistica to obtain information concerning the

organizational and functional aspects of the purchasing process and the management

of tenders;

• the General Manager of the Corporate and Market Area and the Head of the Planning,

Finance and Control Department to analyze the organizational, functional and

procedural aspects of the department; amongst other things an analysis was

performed of the methods and timing of the preparation of the annual budget and the

business plan, financial management and the management of the sources of debt and

the means of interacting with the AEEG;

• the General Manager of the Corporate and Market Area and the Heads of the Human

Resources Organization and Development Projects Department and General Services

Department to examine the Human Resources Plan for 2009/2011, remuneration

policies and the harmonization of the selection, training and development of

personnel employed by the A2A Group;

• the General Manager of the Corporate and Market Area and the Head of the

Information & Communication Technology Department for an examination of the

organization and management processes of the ICT systems.

In addition, the Internal Control Committee held meetings with the following people in


supervisory

14

order to acquire technical and operational details regarding the business sectors and the

main Group companies:

• the General Manager of the Technical Operational Area, the Independent Operator of

the Electricity Networks and the Independent Operator of A2A Reti Gas (Networks

sector);

• the General Manager of the Technical Operational Area and the Sole Director of

Partenope Ambiente (Environment sector);

• the General Manager of the Technical Operational Area and the Head of the Integrated

Water Cycle Business Unit (Networks sector);

• the General Manager of the Technical Operational Area and Head of A2A Calore e

Servizi S.r.l. (Heat and Services network);

• the General Manager of the Technical Operational Area and the Head of Production,

the Head of Thermoelectric Plants and the Head of Hydroelectric Plants (Energy

sector);

• the General Manager of the Corporate and Market Area and the Head of the Mergers,

Acquisitions & Divestments Department for an examination connected with the main

M&A transactions carried out following the merger, with particular reference to the

EPCG Group (Energy sector);

• the General Manager of the Corporate and Market Area and the Heads of the Business

Units of A2A Trading, the Head of Fuel and Managing Director of Plurigas, the Head of

Power Trading and Portfolio Management, the Head of Bidding and Dispatching and

the Head of the Back Office for an examination of trading and energy management

activities in the A2A Group (Energy sector).

It was settled that these meetings were also attended by the Head of Internal Control who

provided his contribution in connection with the work performed by the Committee,

supplementing the information regarding compliance with the principles of proper

management and details of the internal control system.

Internal Control System

13. The supervision of the internal control system was carried out by the Supervisory Board

together with the support of the Internal Control Committee, by means of meetings with

the main persons involved in monitoring and controlling the system, as well as with persons

having the responsibility for designing and implementing the system. The internal control

system is described in detail in the Report on Corporate Governance and the Ownership

Structure.

The Supervisory Board resolved to assign the supervisory functions, as per article 19 of


supervisory

15

Legislative Decree no. 39/10, to the Internal Control Committee; in particular those which

are related to the financial reporting process and the effectiveness of the internal control,

internal audit and risk management systems.

The “ex ante” analysis of the design and creation of the internal control system performed

by the Committee in 2010 was carried out through the support of the main persons involved

in the internal control system, in particular the Head of Internal Control, the Head of the

Internal Audit Unit, the Manager responsible for the Preparation of Corporate Accounting

Documents, the Surveillance Body as per Legislative Decree no. 231/01 and the control

bodies of Group companies.

13.1 Work performed by the persons in charge of internal control

Head of Internal Control

In line with the recommendations made in the Corporate Governance Code of Borsa Italiana, the

Company has identified a Head of Internal Control who has been delegated the task of verifying the

suitability of internal procedures, ensuring that risks are adequately contained and assisting the

Group in identifying and assessing its main exposures to risk.

The Head of Internal Control attended the meetings of the Internal Control Committee,

keeping it constantly informed about the activities performed and those scheduled, in line with

the annual audit plan and with his duty to provide disclosures. The Head of Internal Control uses

the support of the Internal Audit Unit.

In carrying out his audit procedures, which are formalized in the annual report presented to an

reviewed by the Internal Control Committee, the Head of Internal Control highlighted areas for

improvement related to the integration of the control systems with the Ecodeco Group,

profiles for access to the SAP ERP and controls in the supply chain area: matters for which

precise corrective measures have been identified with specific implementation responsibilities

which are monitored by the Head of Internal Control and the Internal Control Committee. In

addition, on the proposal of the Internal Control Committee, a dashboard to monitor the

results of the checks carried out by Internal Audit and the Surveillance Body has been set up,

with the aim of assessing the timeliness of Group companies in implementing the corrective

measures identified to overcome the weaknesses encountered and the adequacy and effective

functioning of the internal control system in individual companies and the respective business

sectors.

On this matter the Committee highlights, if such be the case, the corrective measures for which

to request timely implementation.


supervisory

16

Internal Audit Unit

In performing his duties the Head of Internal Control used the services of the Internal Audit

Organizational Unit, which during 2010 continued with the rationalization of its organizational

structure carried out by assigning roles and responsibilities by area of competence; on March

10, 2010, the new organization of the unit was defined and consequently presented to the

Internal Control Committee, which envisages three functions reporting directly to the Head:

• Environment, Heat and Services Operational Audit

• Corporate, Energy and Networks Operational Audit

• Law no. 231 compliance.

The Internal Audit Unit assists the Head of Internal Control and the other persons referred to

earlier in carrying out their tasks related to the internal control system and risk management,

with specific reference to the check of internal procedures and the preliminary activities of the

assessment of the internal control system and the Group’s business risks. The unit additionally

provided assistance to the Surveillance Bodies of the Parent Company and subsidiaries, set up

pursuant to Legislative Decree no. 231/01, carrying out specific examinations and tests aimed at

supporting these bodies in carrying out their verification of the working and effectiveness of

the organizational, management and control model adopted by the individual companies and

the fact that this model was being complied with.

The Internal Control Committee supervises the effectiveness of the internal control system

and the internal audit function by means of the Head of Internal Control’s system of periodic

reporting, the dashboard to monitor the results of the checks carried out by Internal Audit and

regular meetings with those figures.

Surveillance Body and Organizational, Management and Control Model pursuant to

Legislative Decree no. 231/01

The objective of the Organizational, Management and Control Model adopted pursuant to

Legislative Decree no. 231/01 as subsequently amended, approved in 2009, is to define the lines,

rules and principles of conduct which govern the Company’s activities and which must be

followed by all the recipients of the Model in order to prevent, within the ambit of the specific

“sensitive” activities performed in A2A, the offences envisaged by Legislative Decree no. 231/01

from being committed and to ensure the existence of propriety and transparency in conducting

business activities.

Monitoring of the effective implementation of the Model, pursuant to the above-mentioned

legislation, is entrusted to a Surveillance Body which oversees the functioning of and

compliance with the Model and ensures that it is constantly updated.


supervisory

17

In the person of its Chairman, the Parent Company’s Surveillance Body (which reports to the

Chairman of the Management Board and submits periodic reports on its work to the

Management Board, the Internal Control Committee and the Supervisory Board) presented

the activities performed during 2010 to the Internal Control Committee, also with the support

of the Head of Internal Control and the Internal Audit Unit.

These activities concentrated on the correct implementation of and proper compliance with

the Model, in particular by means of:

• determining the operational methods for monitoring compliance with the requirements of

the Model;

• continuing with the plan for auditing sensitive processes pursuant to Legislative Decree no.

231/01 for the period from 2010 to 2012 in the Parent Company and Group companies;

• putting into practice a plan to update the Models of the subsidiaries of A2A pursuant to

Legislative Decree no. 231/01.

As previously described, the Internal Control Committee checks the stage of completion of the

corrective measures which have been identified, by means of the dashboard to monitor the

results of the audits of sensitive processes pursuant to Legislative Decree no. 231/01.

13.2 Activities carried out by the Supervisory Board and by the Internal Control Committee

Activities on the internal control system were carried out, with the support of the Internal

Control Committee which proceeds according to a specific workplan, through meetings and

regular exchanges of information with the persons in charge of control activities, such as the

Head of Internal Control, the Risk Manager, the Head of the Internal Audit Unit, the Manager in

charge pursuant to Law no. 262/05 and the Surveillance Body, as well as through meetings with

management on specific subjects.

The Supervisory Board has acknowledged the decisions taken by the Management Board on

the question of the adequacy of the organizational, administrative and general accounting

structure of A2A and its subsidiaries having strategic importance, with specific reference to the

internal control system.

The Internal Control Committee has implemented a reporting system fed by information flows

incoming from the various parties which make up the internal control system and which are

centered on the General Secretariat of the Supervisory Board with an operational coordination

role and a role interfacing the parties concerned. In particular, the information flows linked to the

half-year reports of the manger in charge on the adequacy of the information and accounting

system, the half-year reports of the Head of Internal Control and the Surveillance Body and the

reports of the Boards of Statutory Auditors of Group companies are relevant.


supervisory

18

In respect of the support activities of the Committee provided to the Supervisory Board in

assessing the adequacy and effective functioning of the Guidelines on the internal control

system resolved by the Management Board, on March 18, 2010 the Committee met with the

Chairman of the Management Board, the General Manager of the Corporate and Market Area

and the General Manager of the Technical Operational Area to discuss and analyze general

matters regarding the governance of internal control, by putting forward certain organizational

solutions for improvement some of which have already been implemented.

During 2010 the Internal Control Committee supervised the work carried out by the Head of

Internal Control and the Internal Audit Unit, which envisaged (i) the completion of the work

included in the A2A Group’s 2009 Audit Plan, (ii) special audits, (iii) the preparation of the A2A

Group’s 2010 Audit Plan and the development of the related activities, and (iv) the performance

of support activities provided to the Surveillance Body relating to Legislative Decree no. 231/01.

With specific reference to the integration process at a Group level and the organizational

development plan currently in progress, the Committee is monitoring the evolution of the

procedural structure.

The Supervisory Board, in order the Internal Control Committee, monitored the evolution of

the investigation into gas meters initiated by the Milan Public Prosecutor and now transferred

to Brescia for any repercussions there may be on the Group as a result of the legal proceedings

in progress, within the terms of Legislative Decree no. 231/01.

In this respect it is noted that the Supervisory Board has been informed that on February 7, 2011,

notification was received that the preliminary enquiries at A2A Energia S.p.A. and A2A Reti Gas

S.p.A. have been completed, while notification to A2A S.p.A. of this matter is still in progress.

In addition, during 2010 the Supervisory Board was supported by the Donations Committee

with respect to the determination of the guidelines concerning cultural and charitable

initiatives and initiatives promoting the image of the Company and the A2A Group, drawing up

the “Guidelines pursuant to article 22, paragraph 1(n) of the Bylaws”, a document which was

subsequently approved by the Supervisory Board.

The Donations Committee additionally went into further details regarding the nature of the

amounts handed over to the AEM and ASM Foundations and the sums paid as donations and for

sponsorship. It carried out an examination, concerning the formation of the 2011 budget

dedicated to initiatives, in order to promote the Group’s image throughout the country and to

donations.

The supervisory work performed over the effective working of the internal control system,

predominately carried out with the support provided by the Head of Internal Control to the

Internal Control Committee, highlighted the areas for improvement where corrective


supervisory

19

measures were called for as indicated above in the section “Head of Internal Control”. In

respect of these areas, the Internal Control Committee reported that particular attention

should be given to monitoring the effective implementation of the measures for improvement.

Administrative and accounting system

14. The Supervisory Board, with the support of the Internal Control Committee, has assessed

and supervised the adequacy of the administration and accounting system and its reliability

in providing a correct representation of operations, by carrying out direct observations and

obtaining information from the heads of the competent business functions. More

specifically, the Manager responsible for the Preparation of Corporate Accounting

Documents (the Manager in Charge) - who has the task of setting up suitable administrative

and accounting procedures for creating the accounting disclosures communicated to the

market in compliance with the provisions of article 154-bis of the TUF, as well as supervising

that these procedures are actually being complied with - is the person to whom

responsibility for the administrative and accounting is assigned. The Manager in Charge has

kept the Internal Control Committee regularly updated on the state of progress of his work

program and the emerged findings.

The Internal Control Committee met regularly with the Manager in Charge and the

Independent Auditors, PwC, in order to assess the adequacy of the accounting principles

used. On this matter it is noted that the accounting principles of reference are the

International Financial Reporting Standards (IFRS) issued by the International Accounting

Standards Board (IASB) and the interpretations issued by the Standing Interpretations

Committee (SIC) and the International Financial Reporting Interpretations Committee

(IFRIC) for companies preparing their financial statements under international standards.

The Manager in charge reported to the Internal Control Committee on developments in the

work of analysis on the proper establishment of the administration and accounting system

and on the checks performed on the effectiveness of the administration and accounting

system, carried out by means of a work program which takes account of a specific boundary

of business processes, selected on the basis of parameters of accounting relevance.

Meetings were also held during the first few months of 2011 with reference to the

examination and approval of the separate and consolidated financial statements for the

year ended December 31, 2010. In particular, the Internal Control Committee dedicated

several meetings to an examination of the way in which the 2010 financial statements had

been prepared. The analysis detailed the main items with in the financial statements with

the Independent Auditors and the Manager in charge and in connection with the accounting

principles and their application, the assessment of significant risks and auditing procedures


supervisory

20

performed, disclosures and the results of the audit procedures.

The main issues examined by the Internal Control Committee with the support of the

Manager in charge were as follows:

• the application of IFRIC 12 Service Concession Arrangements to tangible and intangible

assets in the 2010 financial statements and the presentation of the comparative

figures for previous years;

• the line-by-line consolidation of the financial position of EPCG at December 31, 2010

and its results for the period then ended, as a result of the Group’s ability to govern the

financial and operating policies of that company;

• factoring operations concerning the sale of receivables without recourse;

• credit management and the provision for doubtful debts, with specific reference to

mass market customers, the monitoring of overdue balances and the introduction of

new tools for managing collection and overdue balances;

• an analysis of the structure of debt, the net financial position, the cost of debt and the

related derivatives hedging the volatility of interest rates;

• an examination of the derivative instruments currently in use, distinguishing between

industrial portfolio derivatives and trading portfolio derivatives, and of the criteria

used for allocating recognition of these for accounting purposes between profit or

loss and equity;

• an examination of fiscal issues;

• litigation and the main outstanding legal and fiscal disputes reported in the 2010

financial statements.

At separate meetings, before and after the preparation by the Management Board of the

draft financial statements, the Internal Control Committee analyzed the impairment

procedure and the related results with the General Manager of the Corporate and Market

Area, the Planning and Control Department and the Manager in charge in order to ensure

that this corresponds to the requirements of IAS 36.

With reference to the requirement of article 36 of the Market Regulations issued by Consob

regarding subsidiaries which have importance on a standalone basis and which have been

established and are governed by the law of countries not belonging to the EU, it is noted that

as far as the subsidiary EPCG is concerned, the Company has aligned itself with the

requirements concerning the adequacy of the administrative and accounting systems. In

addition, it has received specific representation from the management of the subsidiary, as

documented by following a specific meeting between the management of EPCG and the

Internal Control Committee.

The “Report of the Manager in charge to the Internal Control Committee” was analyzed in a


supervisory

21

specific meeting with the Internal Control Committee as part of the representation process

on the annual consolidated financial report and separate financial statements for the year

ended December 31, 2010.

In performing his duties the Manager in charge, supported by the Compliance 262 and

Administrative Processes Organizational Unit, carried out the annual update of boundaries

of 262 interventions. The aim of this activity has been to ensure that the set of analyses of

the system of administrative and accounting controls and tests of the underlying processes

is adequate to guarantee that documents and communications of the Company divulged to

the market and the respective accounting information correspond to accounting records,

books and entries.

The Chairman of the Management Board, in the name of and on behalf of the

Management Board, and the Manager responsible for the Preparation of Corporate

Accounting Documents for A2A S.p.A. made a representation, pursuant to article 154-bis,

paragraphs 3 and 4 of Legislative Decree no. 58/98 TUF as to the adequacy, in relation to

the Group’s characteristics and the effective application of the administrative and

accounting procedures during 2010 underlying the preparation of the annual financial

statements and the consolidated financial statements. In addition, they represented that

the consolidated financial statements a) have been prepared in accordance with the

applicable international accounting standards approved by the European Union,

pursuant to regulation (EC) no. 1606/2002 of the European Parliament and of the Council

of July 19, 2002; b) correspond to the results of the accounting books and entries; c) are

suitable for providing a true and fair view of the financial position, the results and cash

flows of the issuer and the set of companies included in the consolidation.

In the light of the findings which have emerged, and the information provided by the

Manager in charge concerning the degree of adequacy of the financial reporting process, it

is believed the Company’s administrative and accounting system is capable of ensuring a

proper representation of operations.

Supervision of subsidiaries

15. Consistent with 2009, work continued into 2010 on obtaining information for the Chairmen

of the Boards of Statutory Auditors of the main and most important subsidiaries connected

with the supervisory activities performed by the control bodies. These meetings had been

envisaged by the Internal Control Committee in a specific plan which included:

• meetings with the Boards of Statutory Auditors of Plurigas, Asmea, A2A Reti Elettriche,

A2A Reti Gas, Ecodeco, A2A Calore e Servizi, Aprica, A2A Servizi al Cliente S.p.A.,


supervisory

22

Selene, Bas SII, Abruzzo Energia and Delmi, to be held through the General Secretariat

of the Supervisory Board;

• meetings with the Boards of Statutory Auditors of A2A Trading, A2A Energia,

Partenope

Ambiente and AMSA, to be held directly by the Internal Control Committee.

Meetings with the Independent Auditors

16. In performing its work to support the Supervisory Board, the Internal Control Committee

met PwC pursuant to article 150, paragraphs 3 and 5 of the TUF and in accordance with the

requirements of article 19 of Legislative Decree no. 39/10.

As a rule the Manager in charge attended these meetings. The aim of the meetings was to

detail the audit’s work in progress, with specific reference to the results of the procedures

performed and the accounting treatment of important transactions as a preliminary to the

examination and approval of the annual and consolidated financial statements, as described

in detail at point 14, as well as to check that the independence requirements pursuant to

article 19 of Legislative Decree no. 39/10 still hold.

Adherence to the Corporate Governance Code for listed companies

17. A2A S.p.A. adheres to the Corporate Governance Code approved in March 2006 by the

Committee for Corporate Governance promoted by Borsa Italiana S.p.A., by the means

described in detail in the Report on Corporate Governance and the Ownership Structure,

which was reviewed in detail by the Supervisory Board.

In respect of the independence requirements pursuant to the Corporate Governance Code,

the Supervisory Board has ascertained that its members meet the requirements laid down

in article 16 of A2A’s bylaws and in particular the independence requirements as per article

148 of the TUF and criterion 10.C.2 of the Corporate Governance Code. In addition, the

Supervisory Board has verified that the Management Board has correctly applied the

criteria and procedures for assessing the independence of its members pursuant to the

Corporate Governance Code, in line with the provisions of criterion 3.C.5 of the Code.

Assessment of the supervisory activity performed

18. Reference should be made to the preceding points for an assessment of the supervisory

activity performed. It is hereby confirmed that no omissions, illegal acts or irregularities

arose from the supervisory activity which require reporting to the shareholders.


supervisory

23

Proposals to be presented to the Shareholders Meeting

19. The Management Board has resolved to propose to the Shareholders’ Meeting the distribution

of an ordinary dividend of 0.060 euros per share to be paid in June 2011 and a non-recurring

additional dividend of 0.036 euros per share to be paid in November 2011.

The Supervisory Board has no objection concerning the proposal drawn up by the

Management Board for presentation to the Shareholders’ Meeting in relation to the

allocation of net income for the year ended December 31, 2010.

Brescia, April 27, 2011

On behalf of the Supervisory Board

The Chairman

Graziano Tarantini


supervisory

24

REPORT OF THE SUPERVISORYBOARD TO THE SHAREHOLDERS’ MEETING

ON THE SUPERVISORY ACTIVITYPERFORMED IN 2010

REPO

RT O

F TH

E SU

PERV

ISO

RY B

OA

RD T

O T

HE

SHA

REH

OLD

ERS’

MEE

TIN

G O

N T

HE

SUPE

RVIS

ORY

www.a2a.eu

pursuant to article 153, paragraph 1 of Legislative Decree no. 58of February 24, 1988 and article 1(i) of the Bylaws

REPORT OF THE SUPERVISORY BOARD TO THE ......Report of the supervisory board to the shareholders’...

Documents

Transcript of REPORT OF THE SUPERVISORY BOARD TO THE ......Report of the supervisory board to the shareholders’...