PERFIL DE UNION FENOSA - London Stock Exchange · UNION FENOSA currently operates in 14 countries and is present across the whole energy cycle value chain: Generation:11,699 MW of

PERFIL DE

UNION FENOSA

Annual Report for 2007presented by the Board of Directors of

UNION FENOSA, S.A.,to the General Shareholders’ Meeting 22-23 April 2008

PROFILE OFUNION FENOSA

PROFILE OF

UNION FENOSA

PROFILE OF UNION FENOSA

UNION FENOSA is an integrated global energy company.

In 2007, a new chapter was written in the history of the company when it celebrated 25years since its incorporation following the merger of Unión Eléctrica and FENOSA. Thesetwo companies themselves have roots that go back to the early 20th century.

The Group has an excellent market positioning, with a solid base from which to embark onthe new and ambitious growth plan that is the BIGGER Plan 2007-2011.

007 2007 ANNUAL REPORT - UNION FENOSA

2011Estimate

16,0001982-2007 2007-2011

1982

4,309

2007

11,699

INSTALLED CAPACITY 1982-2007-2011 (MW)

2011Estimate

1,2001982-2007 2007-2011

1982

61.4

2007

986.4

NET RESULTS 1982-2007-1011 (Millons of €)

UNION FENOSA has a reduced body of shareholders representing 63.1% of its capital, who aredirectly represented on its Board of Directors. This solid shareholder structure provides a stablebasis for embarking on the Company's growth plan.

Strategic alliances with three of the biggest energy companies in the world (ENI, ENEL andTOTAL) and domestic partners such as CEPSA and INDRA have helped to boost businessopportunities during the company's new expansion phase.

A SOLID AND STABLE BODY OF SHAREHOLDERS

Banco Pastor and Fund. P. Barrié

2.622%

36.901%

45.305%

5.150%

5.022%Caixanova

CAM

ACS

Others

5.000%Caixa Galicia

MAIN UNION FENOSA SHAREHOLDERS AS AT 27 FEBRUARY 2008

UNION FENOSA currently operates in 14 countries and ispresent across the whole energy cycle value chain:

Generation: 11,699 MW of own installed capacity.Distribution: 9.1 million gas and electricity customers.Supply: 59,016 million kWh of electricity energysupplied and 38,044 million kWh of gas invoiced.


PROFILE OF

UNION FENOSA

Millions of Customers

Spain and Portugal 3.6Colombia 2.3Panama 0.4Guatemala 1.3Nicaragua 0.7Moldova 0.8


PROFILE OF

UNION FENOSA

Own Installed MW

Spain 8,865 MWMexico 1,550 MWColombia 952 MWPanama 26 MWKenya 58 MWDominican Rep. 198 MWCosta Rica 50 MW

PROFILE OF

UNION FENOSA

UNION FENOSA began its expansion cycle based on an integrated energy business structure,wide-ranging capacity to develop infrastructures and proven international experience.

The vertical integration of the energy businesses from upstream primary energy to downstreamsupply defines UNION FENOSA's current positioning and confirms that the company is preparedto tackle a new and ambitious growth cycle.

STRATEGIC COMPETITIVE POSITIONING

Meeting the targets of the previous Business Plan a year ahead of time allowed us to consolidatethe integrated electricity and gas business, reinforcing international activity and confirmingUNION FENOSA's position as an integrated energy operator.

These have been the foundations for the Company’s future growth. Its strategic alliances alsoallowed it to extend the renewables businesses and take advantage of new opportunities in aglobal energy environment.

Energy business

UNION FENOSA DOUBLES SIZE AND PROFITABILITY BETWEEN 2003 AND 2007

INTEGRATEDENERGY

BUSINESS

DEVELOPMENT OFENERGY

INFRASTRUCTURES

EXPERIENCE ANDGLOBAL

PROJECT

POSITIONING

Geographical and businessdiversification.

Vast experience in identifyingopportunities outside Spain.

Good position to take advantageof future opportunities.

Development model and systemsaimed at improving efficiency.

Customer-focusedcommercial management.

Technical teams with knowledge ofCCGT generation.

Experience in planning, constructionand operation of gas plants.Experience in the development andoperation of transport anddistribution networks.

Own gas and coal supply.

Competitive cost advantage ingas supply.

Technologically diversifiedgeneration.

Complementary natureof generation, distributionand supply activities.


The new plan was created in 2006. It is in place until2011 and represents the most important challenge ofUNION FENOSA in its nearly 100 years of history.

UNION FENOSA has begun a new expansion phasebased on its gas, renewable and internationalbusinesses and designed to double the Company’searnings per share.

The main target is to obtain an EBITDA of over 3,200million euros in 2011 and a net profit of 1,200 million,representing four euros per share.

BIGGER 2007-2011 STRATEGIC PLAN

BIGGER

EFFICIENCY

RETURNS

INVESTMENTS

GROWTH X 2

BUSINESSES

PROFILE OF

UNION FENOSA


BUSINESSES

UNION FENOSA's continues to be firmly committed to the management of its businesses acrossall points of the energy chain. In this way it aims to capture more value thanks to verticalintegration and the synergies between the businesses.

The new plan is aimed at guaranteeing stability in supplies of primary energies.This strategy was a complete success in the gas business. It will also be used in the coal andCO2 areas.

PRIMARY ENERGIES

PRIMARY ENERGIES

ELECTRICITY GENERATION

TRANSPORT AND DISTRIBUTION

ENGINEERING, OPERATION AND MAINTENANCEOF ENERGY INFRASTRUCTURES

GAS AND ELECTRICITY SUPPLY

INVESTMENTS

Over the period 2007-2011, UNION FENOSA will have an investment capacity of 9,000 millioneuros. This will be used to respond to the growth of businesses, develop new business and makeacquisitions.

UNION FENOSA plans to carry out a significant investment programme to achieve the targetsdefined in the plan, with identified projects representing a total of 5,200 million euros.

The company may also make additional acquisitions for a total of 3,600 million euros.

Investments will be undertaken according to a rigorous selection between the businessesoffering the greatest profitability.

GROWTH

UNION FENOSA’s growth is grounded in solid industrial assets.

Its generation capacity will increase by 60%.

The chief objective of the BIGGER Plan is for sustained and balanced growth through industrialassets.

Own installed generating capacity will increase from 10,289 MW to more than 16,500 MW.

The gas business will increase its supply capacity by 51% to 8 bcm. Renewable energies will begiven a major boost allowing the group to strengthen its generation mix, one of the mostefficient and balanced in the Spanish system.

UNION FENOSA will double its net profit and earnings per share over 2007-2011.

The significant growth in industrial assets and greater operating efficiency will enable it toachieve an EBITDA of over 3,200 million euros and a net profit of 1,200 million euros,representing four euros per share in 2011.

EFFICIENCY

The investments will be made with high profitability requirements and without recourse toshareholders.

UNION FENOSA will not have recourse to shareholders to comply with the BIGGER Planobjectives. It will use the cash flow from its businesses and outside finance.

Financial efficiency will be guided by basic parameters:

- A rigorous evaluation procedure for new investments.- Control of financial gearing ratio (55% forecast for 2011, maintaining the current levels)

and a debt/EBITDA ratio of 3.0/3.2.- Investment capacity of 9,000 million euros.- Support from strategic partners.- Increased margins through the integration of energy businesses.- Use of the management skills of the teams with a flexible organisation providing the

businesses with rapid response and autonomy.

RETURNS

UNION FENOSA plans to benefit all the stakeholders in economic, environmental and socialterms.

The BIGGER Plan is an important challenge for UNION FENOSA, a company that wants toshare its profit responsibly with all the economic stakeholders.

UNION FENOSA will double its earning per share from two euros in 2006 to four euros pershare at the end of the plan.


PROFILE OF

UNION FENOSA

TRAINING

The UNION FENOSA Corporate University (UCUF) and the Skills Development Plan are thekey tools for mobilising human skills and meeting the BIGGER targets.

One of the basic objectives of UCUF is to offer a proposal that is clearly differentiated fromthe competition, so that we can attract, select, train and commit all the valuableindividuals.

In 2008, more than 700 new professionals will join UNION FENOSA. They will receiveindividual development programmes in the technologies and processes required by thebusinesses. New advanced and specialisation courses will be given in gas, generation,renewables, supply, distribution and engineering, and management capacities will befostered through a new forum for dialogue and reflection on the future challenges of UNION FENOSA, the BIGGER Forum, given by IESE.

These and other activities are designed to ensure that we always have available individualscapable of developing our businesses. They will also help to achieve the objectives includedin the BIGGER Plan.


PROFILE OF

UNION FENOSA

25th

ANNIVERSARY

HISTORY OF UNION FENOSA: THE FIRST MERGER BETWEEN TWOMAJOR SPANISH COMPANIES

25 Years of Growth and Innovation

Twenty-five years ago UNION FENOSA was involved in the first major industrialconcentration in Spain. On 23 November 1982, the new Company was created from themerger between Unión Eléctrica Madrileña and Fuerzas Eléctricas del Noroeste.

A merger of this size was the logical response to the new industrial and corporate scenario.It was a move from a tradition of small electricity plants to a major electricity group. Themain challenge was to be the unification and standardisation of two corporate structureswith different ways of operating. This challenge was tackled by way of a complete businesstransformation from which the management tools, know-how and innovative attitudesemerged, which have become a feature of the Company's character.

Since then, the story of UNION FENOSA has been marked by growth and innovation. Themerger resulted in two and a half million customers, and third place in the national rankingof electricity companies. The company became a leader in the sector, which is one closelyconnected to the country’s development.

Steady Growth and Consolidation

The new company was created with an installed capacity of 4,560 MW. Over these 25 yearsit has multiplied its capacity to 11,700 MW, crossed borders into four continents, diversifiedits generation technologies and today has one of the most efficient mixes in the domesticsystem.

From the two and a half million “members” after its merger, mainly in the industrial sector,the number has risen to a current nine million customers throughout Spain and abroad.The workforce has also grown from just over 7,000 in 1982 to more than 12,000 today.

In economic terms, the strong growth over this period is obvious: both revenues and profitshave grown by a factor of 10.

Always Innovating

The innovative character accompanying UNION FENOSA over the last 25 year has alwayspushed it towards taking on new challenges.

In 1997, it anticipated the liberalisation and expansion of the gas business, one of thedistinguishing features of its new business model. Today it is present across the wholechain in this activity, with liquefaction, methane, regasification and combined cycle plants,allowing it to operate at competitive prices.

25th

ANNIVERSARY


UNION FENOSA’s firm commitment to the environment inspires the growth of itsinvestments in technological innovation and clean energies, favouring sustainabledevelopment and allowing an even greater diversification and generation mix. Since itscreation, UNION FENOSA’s environmental concern has been reflected in its planning.Evenat the start, programmes were developed to use biomass or plant material for charcoalfrom wood waste and experimental plants using solar energy. Currently the company aimsto have one of the two sustainable coal plants within the framework of the EU's new EnergyStrategy. It is participating in the CENIT technological research project promoted by theMinistry of Industry, Tourism and Trade and dedicated to the development of CO2 reduction,capture and storage technologies.

UNION FENOSA's 25th birthday is being celebrated at a time of strong growth in ourcompany. The launch of the BIGGER Plan for 2007-2011 is underpinned by financialstrength and an investment capacity of more than 9,000 million euros, without issuingshares.

Many people have over these 25 years contributed to forge the personality of the Companythat UNION FENOSA is today. At the simple event celebrating our Anniversary, which tookplace at our headquarters at the end of November, the Chairman, Mr. Pedro López Jiménezwanted to thank all of them for their dedication and commitment. Those taking partincluded numerous representatives of the UNION FENOSA Board of Directors, as well asmembers of related committees. Also present were the highest ranking members of theteam of directors of the Company, headed up by the First Vice-Chairman and ChiefExecutive, Mr. Honorato López Isla. Also at the dinner was the premier of the AutonomousRegion of Madrid, Ms. Esperanza Aguirre Gil de Biedma. As she said in her speech: “thereis no doubt that everyone here is someone, but not everyone who is anyone is here.”Also at the event were the Honorary Chairmen, Mr. José María Amusátegui de la Cierva andMr. Antonio Basagoiti García Tuñón. Two people who were key figures at the birth of UNION FENOSA, Ms. Carmela Arias and Díaz de Rábago, Countess of Fenosa, and Mr. JulioHernández Rubio (both Honorary Chairmen) were unable to attend. In addition, all of us atUNION FENOSA were deeply affected by the absence of two of the most important figures inthe past development of the company, Mr. Julián Trincado Settier and Mr. VictorianoReinoso y Reino.

The history of UNION FENOSA could also be told through the professional life of many of itsemployees. The Chairman himself, Mr. Pedro López Jiménez, was among the members ofthe Board of Directors of Unión Eléctrica at the time of the merger, and remained asChairman after it. The First Vice-Chairman and Chief Executive, Mr. Honorato López Isla,has been held numerous key positions in the Company since its creation.

The Company has changed over this quarter century, as has the world around it. It hasgrown, expanded its horizons and gained in strength. What was an electricity plant is nowan integrated, international and innovative energy group.


25th

ANNIVERSARY

LETTER FROMTHE CHAIRMANAND THE FIRST

VICE-CHAIRMAN ANDCHIEF EXECUTIVE


LETTER FROM

THE CHAIRMAN

AND THE FIRST

VICE-CHAIRMAN AND

CHIEF EXECUTIVE

PEDRO LÓPEZ JIMÉNEZChairman of UNION FENOSA

HONORATO LÓPEZ ISLAFirst Vice-Chairman and Chief Executive ofUNION FENOSA

Dear shareholders,

We are pleased to present you the Activity Report detailing theperformance of UNION FENOSA over 2007, its financial results and thecompliance with its planned targets.

Historic results on the 25th anniversary

Last year we celebrated the 25th anniversary of the company's creationas a result of the merger between Unión Eléctrica and FuerzasEléctricas del Noroeste. UNION FENOSA has undergone a profoundtransformation over these years. It has opened up to the world andtaken a great leap forward in the dimension and extension of itscapacity. It has demonstrated it has sufficient flexibility to be ready totake advantage of opportunities in the electricity sector, and also inother energy businesses, as well as telecommunications, consultingand information technologies.

In 2007, UNION FENOSA obtained a net profit of 986.4 million euros, anall-time record, and 55.2% more than in the previous year, giving anearnings per share of 3.24 euros.

These good results demonstrate a high level of sustainability andsolidity. They have been achieved against a demanding background oflow electricity prices, moderate growth in demand in Spain and thedepreciation of the dollar.

Recurring profit was 717 million euros, an increase of 12.9%. This doesnot include the extraordinary capital gains from the agreement tointegrate the businesses of consultancy and information technology andsome of the engineering services of Soluziona into Indra; or the sale of25% of Applus and 2% of Red Éléctrica de España.

The positive growth in all business areas, and the improved efficiencyachieved by reducing operating expenses, resulted in an EBITDA of2,062 million euros, 8.1% more than in 2006.The EBIT increased 12.2%to 1,466 million euros.

What is more, the results have been achieved alongside animprovement in UNION FENOSA’s financial structure. Theconsolidated net worth at the close of the year increased 13.3% whilethe gross debt was 5,795 million euros. The gearing ratio fell by 2.7percentage points to 47.5%, while the debt to EBITDA ratio fell by afactor of 3 to 2.8.

Positive stock market performance and increaseddividends

Based on these results, the Board of Directors of UNION FENOSA hasresolved to propose to the next General Shareholders’ Meeting the


LETTER FROM

THE CHAIRMAN

AND THE FIRST

VICE-CHAIRMAN AND

CHIEF EXECUTIVE

distribution of a dividend of 1.62 euros gross per share on 2007, anincrease of 55.8% on the amount paid the previous year.

This means paying 50% of the net attributable profit as dividend, asubstantial improvement on the amount in previous years. This is in linewith the shareholder remuneration policy announced in the BIGGERPlan, which projects a payout of 2,500 million euros during the period inwhich the plan is in operation.

In 2007, the UNION FENOSA market price increased by 23.2% on theclose of the previous year, easily outperforming the IBEX 35, whichincreased by 7.32% against a highly volatile background. Added to thedividend payment, this represented an increase in total shareholderreturn of 26%.

ACS increases its holding in UNION FENOSA andreinforces its strategic positioning in the energy sector

ACS has once more strengthened its investment in UNION FENOSA withthe purchase of an additional 4.83% of the share capital in January. Itsholding now stands at 45.3%. In this way, it has reaffirmed itscommitment to the energy sector, and demonstrated its explicit supportto the process of growth underway at present in our company, as wellas showing its confidence in UNION FENOSA’s future.

The ACS group is currently one of three leaders worldwide inconstruction and services. It has integrated UNION FENOSA to head upits energy activity area, and since 2007 it has consolidated the companyin its global accounts.

The global energy scenario: the year of climate changeand a move to a low-emission economy

The world of energy met at the end of 2007 in the 20th World EnergyCongress. There was an analysis of the main factors that are tocondition the future of the sector over the next few years, and a numberof conclusions were reached that will affect the direction that companybusinesses will take.

First of all, the impact energy activity has on the environment is alreadya broadly accepted fact. There is now a need to move on to immediateaction and to take concrete measures to mitigate the effects of ouractivities.

The world is undergoing a transition to a new phase of an economy lowin CO2 emissions. The processes will incorporate technologicalsolutions to reduce the negative effects on the environment, as well assome price mechanisms for emissions.


LETTER FROM

THE CHAIRMAN

AND THE FIRST

VICE-CHAIRMAN AND

CHIEF EXECUTIVE

Secondly, efficient action requires cooperation at an international leveland to an unprecedented degree. Developed countries cannot turn theirbacks on the changes taking place in emerging economies such asBrazil, Russia, India and China, which continue to increase theirconsumption, and will need more technological progress if they are tobalance their growth with the lowest rate of emissions possible.

Thirdly, the mix of technologies and raw materials should include bothsustainable coal, using new technologies for capturing and storing CO2,and nuclear energy. Both combine reduced emissions with secureenergy.

The last conclusion is that the decisions taken now will condition whathappens in the energy system over the next 30 years, given the longmaturing periods of investments and the associated research andtechnological needs.

These ideas have subsequently been reflected with increasing force inmany different fields. It may be said that 2007 was the year of climatechange, the general trend to suggest approaches for environmentalsustainability, and a consensus on the need to control and reduceemissions through innovative solutions. According to the NationalAcademy of Engineering of the United States, energy forms part of themain technological challenges faced by humanity this century.

The Bali conference on climate change has clearly shown thatenvironmental topics have an increasingly firm place on the politicalagenda. Recognition by countries of the need for a global response tothis question is an important step towards worldwide agreement. Thesearch for technological cooperation and financing mechanisms thatcan allow the goal of improving the environment to be taken up byemerging economies will be one of the fundamental subjects to which asolution will have to be found over the next few years.

In addition, the new generation of developments in nuclear energy hasbrought it to the forefront once more in recent years as one of thesources that can combine a secure supply and respect for theenvironment. Some of our neighbours are taking steps to boost thisform of energy, and even large emerging countries are implementingprogrammes of this type to ensure their future energy needs are met.Until now Spain has not joined this growing trend. However, this energyhas an important role in the energy mix in our country and it does notappear that there will be a hasty debate about existing power plants,the closure of which will not take place until the end of their useful life.

There is also sustainable coal, which has been included as one of thecore components of the European Union Energy Strategy and is beingpromoted by the Ministry for Industry, Trade and Tourism in Spain. Itappears to be one of the best options for contributing to an energymodel which will have to include renewable sources, but also be basedon traditional fuels – though with added environmental solutions.


LETTER FROM

THE CHAIRMAN

AND THE FIRST

VICE-CHAIRMAN AND

CHIEF EXECUTIVE

Reinforcing UNION FENOSA’s positioning as anintegrated energy operator

UNION FENOSA strengthened its position as an integrated energyoperator in 2007 through the completion of infrastructures planned inits first investment cycle.

Among the highlights of the year in this respect are the entry intocommercial operation of the Reganosa regasification plant in Ferrol,and the acquisition of Nuelgas, a company engaged in the regulatedunderground storage of gas. These facilities are in addition to theliquefaction plants in Damietta and Oman, and the Saguntoregasification plant, and complete our positioning across the whole coalvalue chain.

In addition, the installed generating capacity in combined cycle plantsincreased by 1,200 MW with the entry into commercial operation of thethree units in Sagunto (Valencia). The plant in Sabón (A Coruña), atpresent in the trial phase, is expected to begin operation in the first halfof 2008.

UNION FENOSA has implemented a strategy for integrating sustainablecoal in order to participate and capture value along all the points of thecoal energy chain, as we have done in the gas business. To ensuresupply to plants at stable and competitive prices we acquired 64% of theSouth African company Kangra Coal, which owns a coal mine in thecountry. From an environmental point of view, we have continued towork on the adaptation of coal-fired thermal plants to comply with therestrictions imposed by the European Union Directive on largeproduction plants in 2008. We also participate in a number of initiativesfor the capture and storage of CO2 under our "Sustainable Coal Plan".

In addition our policy has been directed towards generation usingrenewable energies in Spain since our alliance with ENEL, and alsothrough growth abroad.Among the most significant projects in 2007were the acquisition of the Central Hidráulica de Hidroprado plant inColombia, which has 52 MW of installed capacity; and in Mexico we aregoing to develop a wind-power project with a capacity of between 500MW and 1,000 MW in the La Rumorosa area (Bajo California) throughour 50% stake in the Mexican company Zemer Energía.

In our distribution activity, it is worth pointing to the increased incomethrough the update of the official tariff income structure, and also theexcellent results UNION FENOSA has achieved in terms of quality ofsupply. The interruption duration equivalent to the installed capacity(TIEPI) has improved by 25.7% and new records have been achieved inboth the national quality index and that for the region of Madrid, thanksabove all to investment in facilities and the incorporation ofimprovements in network management and new technologies inmaintenance and control systems.


LETTER FROM

THE CHAIRMAN

AND THE FIRST

VICE-CHAIRMAN AND

CHIEF EXECUTIVE

Economic uncertainty and instability in the financial markets

With regard to the economic background, the turbulence produced inthe financial markets over recent months has created liquidityproblems and an inevitable tightening of financing conditions, as well asgreater weighting of risks for new business projects and increasedvolatility on international stock markets.

Despite the continuing uncertainties at a global level and the fact thatmost forecasts point to a slowdown in economic activity, global growthstood at 4.9% in 2007 according to data from the IMF and was supportedby the positive performance of the main emerging economies, as wasthe case in previous years.

The Spanish economy maintained a 3.8% growth in 2007, only 0.1percent down on the figure for 2006, although clear signs of slowdownhave appeared. GDP growth in our country was, for yet another year,much higher than in other Euro zone countries, where the average was2.3%.

The BIGGER Plan and opportunities for investment inthe new economic situation

UNION FENOSA's strategic plan has defined a target of doubling the netprofit obtained in 2006 to over 1,200 million euros by 2011. This is anambitious but reasonable target, as it falls within global energy trendsand is compatible with the changes taking place in an economiccontext.The investment capacity for the period is around 9,000 million dollarswithout recourse to shareholders. It is based on the company’s soundfinancial situation, with a healthy balance and gearing ratio steady ataround 50%. The solid balance sheet and the good prospects for thefuture will provide the resources needed to achieve the goals that areforecast.

We have set ourselves the goal of taking advantage of any investmentopportunities that may arise in an expanding sector, both through theorganic growth of UNION FENOSA and through acquisitions that boostinternational expansion in the most significant areas. The neweconomic framework conditions are not going to change the principleson which these investments are based as, regardless of the economicsituation, the perspectives for the energy sector over the next few yearsat a global level are good. We also have the capacity to take advantageof a situation in which there is a natural selection of the mostcompetitive projects and which can give rise to some interestingacquisition opportunities.


LETTER FROM

THE CHAIRMAN

AND THE FIRST

VICE-CHAIRMAN AND

CHIEF EXECUTIVE

In this respect, we can use our position as an integrated energyoperator and our presence at various stages of the gas, coal andelectricity value chains. Our aim is to strengthen these factors thanksto our worldwide experience and in the development of infrastructures.Among the projects included in the BIGGER Plan are the construction ofa second liquefaction train in Egypt and the enlargement of theregasification plant in Sagunto.

UNION FENOSA has continued to develop its culture of strategicalliances, which are a main lever for company growth. We havestrengthened our collaborative relationship with ENEL to boost thegrowth of renewable energies in the Iberian Peninsula; and throughUNION FENOSA Gas (a company we share with ENI) we participate inthe development and operation of an energy project in the Gulf ofGuinea, in which we are working together with new energy partners of aglobal standing.

Progress during the first year of the 2007-2011 plan

The first year of the BIGGER Plan has seen the start of progress alongthe path of committed growth, with three basic aspects being defined.First, there is the definition in the Plan itself of the growth targets.Second, the search for investments has become systematised withrigorous processes for analysing the numerous potential projectsselected for study according to strategy and profitability criteria. Third,the organisation has shifted its approach towards compliance with thePlan, mobilising the technical capacities needed through the functionalconnection of the General Directorate for Development with specificunits in the business areas.

In terms of pure figures, UNION FENOSA invested 1,200 million eurosover 2007, fundamentally for the acquisition of strategic assets, mainlycoal in South Africa, and generation activities with renewable energysources on the Iberian Peninsula, Mexico and Colombia.

The company has already identified and committed 6,125 million eurosto projects that both continue with existing businesses and initiate newdevelopments. This figure represents 68% of the total included in theBIGGER Plan, and will push the EBITDA to 2,970 million euros, 93% ofthe 3,200 million euros target for the end of the period. In addition, wehave put in reserve an investment capacity of 2,900 million euros, whichcould be destined for new acquisitions.


LETTER FROM

THE CHAIRMAN

AND THE FIRST

VICE-CHAIRMAN AND

CHIEF EXECUTIVE

Our Policy on Corporate Social Responsibility

UNION FENOSA has continued to develop its policy on corporate socialresponsibility and renewed its place in the Dow Jones SustainabilityIndex (DJSI), where it has scored better than the sector average in theeconomic, environmental and social dimensions, and has also obtainedthe maximum score in the sector in the environmental dimension. TheCompany has also joined the most select European index, the DEjSISTOXX, and was awarded the “Sector Mover" title as the companyshowing the most improvement in sustainability performance.

In December 2007, the Board of Directors approved the Code of Conductfor the UNION FENOSA Group. It establishes the general guidelines foraction which should govern the day-to-day performance of employeesand their relationship with the various stakeholders, regardless of theirfunctions or geographical location.

Complete information on these policies and their results is available inthe Sustainability Report, which has been independently verified andreceived the maximum "A+" classification from the UN Global ReportingInitiative. At the same time, the activities of the company's governingbodies in 2007 are explained fully by the Annual Report on CorporateGovernance and the Audit and Compliance Activity Report.

The excellent results obtained at economic, social and environmentallevels have been possible thanks to the dedication and effort of themanagement team and all the people who work in the company; to thevaluable contribution made by the Board of Directors to companygovernance and the development of its projects; and to theshareholders, for the trust and support they offer to UNION FENOSA.We would like to express our sincere thanks to all of them.


LETTER FROM

THE CHAIRMAN

AND THE FIRST

VICE-CHAIRMAN AND

CHIEF EXECUTIVE

GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . 031

1. BOARD OF DIRECTORS AND MANAGEMENT . . . . . . . . . . . . 032

2. ADVANCES IN THE STRATEGIC PLAN 2007-2011 . . . . . . . . 040

3. UNION FENOSA ON THE STOCK MARKET . . . . . . . . . . . . . . . 046

4. REGULATORY FRAMEWORK . . . . . . . . . . . . . . . . . . . . . . . . . . 050

5. MANAGEMENT OF THE BUSINESSES . . . . . . . . . . . . . . . . . . 058

5.1 Peninsular Electricity Business . . . . . . . . . . . . . . . . . . . . . . . . . . 060

5.2 Gas Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 082

5.3 International Electricity Business . . . . . . . . . . . . . . . . . . . . . . . . 089

5.4 Engineering Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 098

5.5 Mining Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

5.6 Other Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

6. CORPORATE POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

6.1 Human Resources and Corporate University . . . . . . . . . . . . . . . 106

6.2 Environment, Quality and Innovation . . . . . . . . . . . . . . . . . . . . . . 117

6.3 Communication and Social Responsability . . . . . . . . . . . . . . . . . 127

7. FULL-YEAR RESULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

APPENDIX: STATISTICAL INFORMATION . . . . . . . 148

LEGAL DOCUMENTATION . . . . . . . . . . . . . . . . . . . 159


INDEX

GENERALINFORMATION

1

BOARD OF DIRECTORS AND MANAGEMENT


1


BOARD OF DIRECTORS AND COMMITTEES (Composition as at 27 February 2008)

BOARD OF EXECUTIVE AUDIT AND APPOINTMENTS AND

DIRECTORS COMMITTEE COMPLIANCE REMUNERATIONS COMMITTEE COMMITTEE

CHAIRMAN

Mr. Pedro López Jiménez Chairman Chairman

FIRST VICE-CHAIRMAN AND CHIEF EXECUTIVE

Mr. Honorato López IslaFirst

MemberVice-Chairman

VICE-CHAIRMEN

Mr. José María Arias Mosquera Vice-Chairman Member

Mr. José Luis Méndez López Vice-Chairman Member

DIRECTORS

Mr. José Antonio Olavarrieta Arcos Member Chairman

Mr. Ernesto Gerardo Mata López Member

Mr. Fernando Fernández-Tapias Román Member Member Member

Mr. Elías Velasco García Member Member

Mr. Alfonso Porras del Corral Member Member

Mr. José B. Terceiro Lomba Member Member

Mr. Luis Esteban Marcos Member Member Member

Mr. Manuel Delgado Solís Member Chairman

Mr. Ángel García Altozano Member Member

Mr. Santos Martínez-Conde y

Gutiérrez-Barquín Member Member

Mr. Juan Carlos Rodríguez Cebrián Member

Mr. Antonio García Ferrer Member Member

Mr. José María Loizaga Viguri Member Member

Mr. Julio Sacristán Fidalgo Member Member Member

Mr. José Luis del Valle Pérez Member Member

PR Pisa, S.A. (1) Member Member

Villanova, S.A. (2) Member

Mr. Julio Fernández Gayoso Member Member

NON-DIRECTOR SECRETARYMr. Ramón Novo Cabrera

(1) Represented by Mr. Demetrio Ullastres Llorente(2) Represented by Mr. Marcelino Fernández Verdes

Note: As at 30-01-2008, Board Member Caixa de Aforros de Vigo, Ourense ePontevedra, was replaced by Mr. Julio Fernández Gayoso.

MODIFICATIONS TO THE BOARD OF DIRECTORS AND ITS COMMITTEES

In its meeting on 17 January 2007, the Board of Directors appointed by co-option thecompany Villanova, S.A. as a director of the company, represented by Mr. Luis Ignacio PérezRodríguez, replacing Inversiones Razo, S. L.

On 28 February 2007, Board member PR Pisa, S. A. replaced the individual representativeon the Board of Directors, Mr. Guillermo de la Dehesa Romero, appointing as such, Mr.Demetrio Ullastres Llorente.

It was agreed at the Ordinary General Meeting held on 7 June 2007 to re-elect Mr. HonoratoLópez Isla for a period of six months as Executive Director, and the ratification andappointment for six years of Villanova, S. A., as the shareholder’s representative director ofthe ACS Group.

On this same date, the Board of Directors agreed the re-election of Mr. Honorato López Islaas Chief Executive and member of the Executive Committee.

On 23 July 2007, the Board of Directors of UNION FENOSA agreed to change themembership of the following Directors: Mr. Fernando Fernández-Tapias Román, whobecame a member of the Appointments and Remunerations Committee (prior to this hewas a member of the Audit and Compliance Committee), and of Mr. Alfonso Porras delCorral who became a member of the Audit and Compliance Committee (beforehand he wasa member of the Appointments and Remunerations Committee).

At the start of last December, the Board of UNION FENOSA was sorry to learn of thesudden death of one of its members. Mr. Luis Ignacio Pérez Rodríguez, who was the ChiefExecutive of Cobra, the industrial subsidiary of the ACS group, and who had joined theUNION FENOSA Board in January 2007 representing Villanova, S.A.

At the Board Meeting held on 19 December 2007, Villanova, S.A. appointed Mr. MarcelinoFernández Verdes, who is the current Chairman and Chief Executive of the constructioncompany Dragados S.A., part of the ACS Group, as the new individual to represent it on theBoard of UNION FENOSA, S.A.

It was also agreed at this same Board Meeting to accept the resignation submitted by Mr.Martínez-Conde y Gutiérrez-Barquín as a member of the Audit and Compliance Committee,whilst thanking him for his services to the Company since he joined in October 2005. He willbe replaced on this Committee by Board member Mr. Antonio García Ferrer, who in turnceases to be a member of the Appointments and Remunerations Committee, of which theBoard member Mr. Julio Sacristán Fidalgo will now become a member.

The Board of Directors meeting held on 30 January 2008 appointed Mr. Julio FernándezGayoso, as a Member of this Board, and member of the Executive Committee of theCompany by the co-option system, as a replacement for Caixa de Aforros de Vigo, Ourensee Pontevedra (Caixanova).


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A breakdown of the composition of the Board, including their member status is as follows:

CHIEF EXECUTIVES

(1) Represented by Mr. Demetrio Ullastres Llorente(2) The UNION FENOSA, S.A. Board Meeting of 17 January 2007 changed his appointment so that at the suggestion of the ACS Group, he

became a shareholder’s representative director whilst nevertheless retaining his executive status(3) Represented by Mr. Marcelino Fernández Verdes

Note: Composition as at 27 February 2008.

(1) The UNION FENOSA, S.A. Board Meeting of 17 January 2007 changed his appointment so that at the suggestion of the ACS Group, hebecame a shareholder’s representative director, whilst nevertheless retaining his executive status

Mr. Honorato López Isla First Vice-Chairman and Chief Executive

Mr. Ernesto Gerardo Mata López (1) Assistant to Chairman

Mr. Elías Velasco García Managing Director

CONSEJEROS INDEPENDIENTES

Mr. José Antonio Olavarrieta Arcos Vocal

Mr. Fernando Fernández-Tapias Román Vocal

Shareholder’s representative director for Post

Mr. Pedro López Jiménez ACS Group Chairman

Mr. José Luis Méndez López Caixa Galicia Vice-Chairman

Mr. José María Arias Mosquera Banco Pastor Vice-Chairman

Mr. Alfonso Porras del Corral Banco Pastor Member

Mr. José B. Terceiro Lomba Caixa Galicia Member

Mr. Luis Esteban Marcos Caja de Ahorros del Mediterráneo Member

Mr. Julio Fernández Gayoso Caixanova Member

Mr. Manuel Delgado Solís ACS Group Member

Mr. Ángel García Altozano ACS Group Member

Mr. Santos Martínez-Conde ACS Group Member y Gutiérrez-Barquín

Mr. Juan Carlos Rodríguez Cebrián Caixa Galicia Member

Mr. Antonio García Ferrer ACS Group Member

Mr. José María Loizaga Viguri ACS Group Member

Mr. Julio Sacristán Fidalgo ACS Group Member

Mr. José Luis del Valle Pérez ACS Group Member

PR Pisa, S.A. (1) ACS Group Member

Mr. Ernesto Gerardo Mata López (2) ACS Group Member

Villanova, S.A. (3) ACS Group Member

INDEPENDENT DIRECTORS

DIRECTORS REPRESENTING MAJOR SHAREHOLDERS


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Note: Composition as at 27 February 2008.

MANAGEMENT COMMITTEE

Mr. Honorato López Isla First Vice-Chairman and Managing Director

Mr. Elías Velasco García Member – Managing Director

Mr. Juan Luis López Cardenete General Manager Networks

Mr. Carlos Martínez de Albornoz Bonet Corporate General Manager

Mr. José Antonio de Tomás Alonso Business Development General Manager

Mr. José María Paz Goday Secretary General of Regulation

Mr. Jesús Verde López General Manager of Telecommunications and Systems

Mr. José Luis Zapata Pinar General Manager of Generation

Mr. Juan José González López Secretary-General of Control

Mr. José María Vázquez-Pena Pérez General Manager of Resources

Mr. Alejandro Sánchez Bustamante Legal Services Manager

Mr. José Manuel Velasco Guardado Communications Manager

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ADVANCES IN THE STRATEGIC PLAN 2007-2011

Progress in compliance with the 2007-2011 Plan

UNION FENOSA’s commitment to responsible and sustainable growth is the Strategic Planprepared for the period 2007-2011, known as the BIGGER Plan (Businesses,Investments, Growth x2, Efficiency and Returns). This plan is an ambitious development projectaimed at achieving earnings per share of 4 Euros in 2011, combining organic growth,acquisitions and fostering alliances with strategic partners.

This target implies obtaining a Net Profit of 1,200 million Euros in 2011 and Earnings beforeInterest, Taxes, Depreciation and Amortizations (EBITDA) of over 3,200 million Euros. It wasestimated that 5,400 million Euros were necessary for investment in continuity of the existingbusiness and for the development of already identified projects, to which a further 3,600 millionEuros could be added for further investments.

UNION FENOSA has been successful in making progress towards meeting the Strategic Planduring 2007, achieving 12.2% growth in Operating Results that reached 1,466 million Euros anda Net Profit of 986.4 million Euros.

Since its presentation, UNION FENOSA has carried out a series of actions that enables thetargets of the BIGGER Plan to be reasserted. The progress of the Plan in this first year, as wellas the forecast for 2008, constitute a solid platform to guarantee the growth of the businessbeyond the years included in this Plan. Furthermore, at the end of the 2007 financial year,UNION FENOSA had already closed 2,400 million Euros of basic proposals for investment, whichmeant that the investments identified and committed in business development have progressedsignificantly.

The planned investments translate into a significant increase in the installed capacityfavouring the balance between its own generation and customer demand. Installed powerwill pass from10,300 MW in 2006 to more than 16,000 MW in 2011. A total of 1,410 MW havealready entered into operation in 2007, this is 13.7% higher than at the close of 2006,adding the power from combined cycles and renewable energies.

The new Plan also has the support of the Company’s strategic partners. UNION FENOSAhas alliances with some of the leading world energy companies (ENI, ENEL andCEPSA/TOTAL), enabling it to explore new opportunities to expand the energy businessesand, in particular, gas and renewables activities.


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THE PROGRESS OFTHE BIGGER PLAN IN2007 CONSTITUTES ASOLID PLATFORM TO

GUARANTEE THATTHE TARGETS OF THE

PLAN AND GROWTHOF THE BUSINESSES

BEYOND 2011 AREACHIEVED

BIGGER Progress 2007-2011: Strategies

Integrated energybusiness:Gas and Coal

Growth inRenewable & Cycles

Iberia & Internacional

BIGGERImprove efficiency

Iberia & Internacionalin Networks

Solid financial position

Generation MixBalanced

Generation and Commercial

In the area of generation under the Ordinary Regime, the entry into operation of the threegroups in the Sagunto combined cycle power station during the year stands out, amounting to1,200 MW power, representing a 16.6% increase with respect to the Group’s installed capacityunder the Ordinary Regime in Spain at the end of 2006.

In order to complete the first investment cycle in domestic generation under the OrdinaryRegime for the year 2008, the start of operation of the 400 MW of the combined cycle plant inSabón in La Coruña remains pending. This increase in power and the various works that havebeen started for the adaptation of existing installations to the new regulations on largecombustion installations that came into force on 1 January 2008, as well as the ongoing workthat is being carried out on the plant in Meirama to use coal with a lower sulphur index, meansan overall investment of 333.3 million Euros.

Furthermore, UNION FENOSA continues to strengthen its generation mix with strongemphasis on renewable energy activity by EUFER and Generación Peninsular. The power thatUNION FENOSA has in operation in 2007, meeting accounting criteria for consolidation,reached 133 MW, 88.5% of which was from wind farms. Within this power there are newly builtfarms such as Malagón I and II with 86 MW and Valdepero with 30 MW, whereby EUFER holds a100% stake, and others acquired such as the Belmonte wind farm with 35 MW, in operation, orprojects such as the Huarte wind farm with 50 MW, in which EUFER holds a 50% stake.


AT THE 2007 YEAREND UNION FENOSAHAD INVESTED 1,034MILLION EUROSOF THE 5,400 MILLIONEUROS FORECAST INNOVEMBER 2006

(5.9)%

2007

1,466*

Domestic Generation

Domestic Distribution International

Gas

14.8%

22.5%

12.9%

12.2%

2006

1,307*x 2

2006

2.1

2007(*)

2.4

2011Estimate

4.0

CONTRIBUTION TO EBIT BY BUSINESS (M. €) (*) EVOLUTION OF PROFIT BY SHARE (€)

(*) Includes Others, Corporation and Adjustments (*) Recurring profit

Progress of this strategic plan is also outstanding in the international arena. The hydroelectricplant Hidroprado in Colombia has also been added to the UNION FENOSA shareholding, with 52MW of power. In Mexico, UNION FENOSA has won the bid to build a combined cycle power plantin Norte I, in the state of Durango. With 450 MW nominal power, its start-up is forecast forJanuary 2010; construction started in 2007 and accumulated investment at the end of thefinancial year amounted to 63.5 million Euros.

Also in Mexico, 50% of the company Zemer Energía was acquired that will be developing a windproject in the La Rumerosa area in Baja California with a capacity of between 500 MW and 1,000MW. Additionally, UNION FENOSA Renovables México that is 100% owned by UNION FENOSA, isdeveloping the project for the wind farm in Bii Hioxo in the State of Oxaca, with a total estimatedpower of 230 MW, the first stage of which is forecast to start up in 2010.

The Gas business continues to be a basic growth vector in the BIGGER Plan. The regasificationplant in Reganosa (Ferrol) has started up operations in this financial year, in which UNION FENOSA and UNION FENOSA GAS have a 21% joint stake, which also completes the firstinvestment cycle in the Gas business. Preliminary studies have started in 2007 for theconstruction of a second liquefaction train in Damietta (Egypt) and the extension of the Saguntoregasification plant with the installation of two LNG tanks similar to those already in existencethat would take the plant to a total capacity of 1,200,000 Nm3/h.

UNION FENOSA Gas has also bought 100% of the company Nuelgas, S.A. so as to have a stake inthe regulated activity of underground gas storage.

Investments in distribution of electricity, both in the national as well as in the international plan,are to pursue the continuous improvement in efficiency of the operational ratios. In order toachieve the targets proposed in the plan during 2007, fixed assets in overall domestic andinternational distribution have risen to 440 million Euros.

At a domestic level, the year closed with an improvement in the quality of supply withrespect to 2006 of 25.7%, with an ITEPI (Interruption Time Equivalent to Power Installed) of1.30 hours (78 minutes). This improvement in quality perceived by our customers has beenpossible thanks to the start up of new distribution infrastructures and to the work ofmaintenance and renewal of those already in existence.

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Others

7%

11%Mexico

10%Colombia

72%

IberianPeninsula

Others

7%

56%

30%

7%

Gas

Distribution

Generation

By businessBy Geographic area


INVESTMENTS FOR CONTINUITY AND BUSINESS DEVELOPMENT 2007-2011

THE FINANCIALSOUNDNESS OFUNION FENOSA

TRANSLATES INTOADDITIONAL

CAPACITY FORINVESTMENT IN

ACQUISITIONS OF2,900 MILLION EUROS

THAT WILL ENABLEADVANTAGE TO BE

TAKEN OF THE BESTOPPORTUNITIES

THAT CROP UP

In the area of mining and through LIMEISA, the end of 2007 saw the completion of theoperation to take control of the South African mine Kangra Coal. This operation forms partof UNION FENOSA’s strategy for “sustainable coal” and is integrated within the BIGGERPlan. In this regard, the Company plan is to take stakeholdings in mining companiesoutside of Spain, in order to ensure its own production of coal that, by dependingexclusively on costs, avoids exposure of this raw material to international prices.

The set of actions developed by the Company throughout 2007 in each of the businesses inboth the domestic and international arenas enables it to reaffirm the growth targets of theBIGGER Plan.

This Plan, based on the leadership and management ability of the UNION FENOSA Groupstaff, has placed special emphasis on training and the necessary resources to meet a newexpansion and growth process. The UNION FENOSA Corporate University is the keyelement for the transfer of knowledge and the preparation of professionals in new skills,taking shape as the central axis of the Group’s policy for social responsibility.


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UNION FENOSA ON THE STOCK MARKET

UNION FENOSA on the Stock Market

The fully subscribed and paid-up share capital of UNION FENOSA amounts to 914,037,978euros, split into 304,679,326 bearer shares with a face value of three euros each, recorded inuncertified form.

UNION FENOSA is admitted for official trading on the four Spanish Stock Markets, quoted on thecontinuous market and included in the Ibex 35, in which at the end of the financial year itoccupied 11th place by capitalisation.

During 2007, UNION FENOSA recorded close of trading minimum and maximum share prices of36.00 euros and 48.63 euros per share respectively. The maximum in intra-day sessions was49.00 euros on 6 December. At the end of the financial year the price per share reached 46.19euros, showing an increase of 8.69 euros, 23.2% over the previous financial year end. At 31December 2007, UNION FENOSA market capitalisation reached 14,073 million euros, with inter-annual growth of 2,648 million euros.

472.1 million UNION FENOSA shares were traded on the market in 2007, equal to 155% of theshare capital, with an effective value of 19,581.7 million euros. The shares had 100% liquidity,having been traded during all market sessions.

SHARE CAPITAL

On the date of the Board meeting when the accounts were prepared for presentation for theirapproval at the General Shareholders’ Meeting, the percentages of UNION FENOSA equityshareholding had undergone significant variations with respect to the end of the financial year2007, as well as with respect to those current on the date of holding the General Shareholders’Meeting for the 2006 financial year.

The most important movements that took place are led by the ACS Actividades de Construccióny Servicios Group, which on 8 January 2008 acquired 4.836% of the UNION FENOSA capital,following which its total equity increased to 45.305%. Subsequently, on 16 January 2008, theBanco Pastor informed the CNMV [Spanish Securities Exchange Commission] of the transfer of1.141% of the Company’s share capital, and therefore its direct equity in UNION FENOSA wasplaced at 1.861%. For its part, Caixa Galicia reported that in various operations carried outduring 2007, it had released a 5% share in UNION FENOSA shares, whilst retaining another 5per cent.


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MARKET CAPITALISATION (M. €) (*)

(*) As at 31 December of each financial year

2003

4,537

2004

5,896

2005

9,576

2006

11,425

2007

14,073

Further to these changes, the equity of the principal shareholders with representation on theBoard of Directors on the date of the Board meeting for preparation of the accounts was led bythe ACS Actividades de Construcción y Servicios Group (45.305%), the Caja de Ahorros delMediterráneo (5.150%), the Caixanova Group (5.022%), Caixa Galicia Group (5.000%) and theBanco Pastor together with the Fundación Pedro Barrié (2.622%).

DIVIDENDS

The total dividend charged to the 2007 results, including the amount that will be submitted tothe General Shareholders’ Meeting, amounts to 1.62 euros per share, of which amount 0.62euros per share has been paid on account on 2 January 2008.

This dividend is equal to a pay out of 50% on the consolidated profit attributable to UNION FENOSA (50% in 2006).

The total return for the shareholder in 2007, determined as the sum of the dividends paid inthe year, plus the difference recorded for the market prices between the start and end of thesame period, reaches a total of 9.73 euros, meaning a return of 26.0%. The PER (priceearnings ratio) calculated as the ratio between the average price and the consolidated profit, isa multiple of 12.8.

Banco Pastor & Fund. P. Barrié

2.622%

36.901%

45.305%

5.150%

5.022%Caixanova

CAM

ACS

Resto

5.000%Caixa Galicia

3,000 to 5,999

3.5%

1.7%

68.5%

More than1,000,000

6,000 to 8,999

10.4%1 to 2,999

2.7%

9,000 to 19,999

4.9%

20,000 to99,999

8.0%

100,000 to999,999

UNION FENOSA PRINCIPAL SHAREHOLDERS, AT 27 FEBRUARY 2008

SHAREHOLDING STRUCTURE (GENERAL SHAREHOLDERS’MEETING OF 7 JUNE 2007)

2003

0.55

2004

0.59

2005

0.76

2006

1.04

2007

1.62

2003

1.22

2004

1.24

2005

1.51

2006

2.09

2007

2.32

GROSS DIVIDEND PER SHARE (€) RECURRING EARNINGS PER SHARE (€)


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REGULATORY FRAMEWORK

New Energy Policy for Europe

On 10th January 2007, the European Commission presented an "Energy Package" as adevelopment of the Green Book "European Strategy for sustainable, competitive and safeenergy”, that was approved in March 2006 and which raised suggestions and options to formthe basis of the new European energy policy. A "Strategic Review of the Energy Sector” isestablished therein to make an energy policy possible based on the fight against climatechange, the promotion of growth and employment, and a reduction in the EU’s externaldependence.

In order to meet these objectives, the Commission proposed an Action Plan that would includea series of measures and reports grouped together in various fields, which was backed by theHeads of State, and by the Government in the European Council meeting of March 2007 whenspecific commitments were reached in this respect:

- To reduce greenhouse gas emissions by 20% in 2020, with respect to those of 1990.

- To reach 20% of renewable energies in the total consumption of energy in the EU by 2020.

- To achieve 20 per cent savings in the consumption of the EU's energy with respect to theprojected values for 2020.

The European Council also requested that the Commission put forward as soon as possible itsproposals to carry out said Action Plan and to advance in the achievement of a European EnergyPolicy, measures which the European Commission has presented during the remaining monthsof 2007.

- On the 19th September, a set of measures was presented (known as the "third package") toensure that the Internal Energy Market was implemented and which included fivelegislative proposals: two proposals for Directives to modify the existing ones on commonstandards for the internal electricity and gas markets, two proposals for Regulations tomodify current Regulations on access to the electricity and gas networks, and one proposalfor a Regulation by which an "Agency for the Cooperation of Energy Regulators" is created".


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- On the 22nd November, the European Strategic Energy Technology Plan "Towards aLow Carbon Future" (known as the SET Plan) was published, whereby the Commissionestablished a global programme to set a new guideline for research into energy and tothereby speed up the development and use of technologies with low carbon emissions,and to determine a new series of priorities - "European Industrial Initiatives" - to bepresented in 2008.

The European Commission announced its decisions within the context of the Directive onemissions trading during 2007 with respect to the National Allocation Plans on the systemfor emissions trading corresponding to the second period (2008-2012). Specifically withregard to the Spanish NAP notified to Brussels in November 2006, which the Commissionapproved on 26th February 2007, subjecting it to a series of conditions that were recognisedby national legislation through Royal Decree 1030 of 20th July 2007.

Likewise, the European Commission presented the Green Book on 29 June 2007"Adaptation to climate change in Europe - options for European Union action ", stating theareas of Community policy where it is necessary to act in order to reduce the threat posedby climate change for Europe and other parts of the world.

Regulatory Provisions in the Spanish Electricity Sector

In the Spanish regulatory field, it is worth mentioning the publication and entry into force of Act17 of 4 July 2007 modifying Act 54/1997 on the Electricity Sector, to adapt it to the provisions ofDirective 2003/54/EC on the common regulations for the internal electricity market.

The majority of the provisions in this Directive were already included in the aforementioned Act54/1997, and therefore the modifications introduced by Act 17/2007 refer only to the followingaspects:

- Elimination of the current tariff systems as of 1st January 2009 and the establishment,from that date, of a last resort tariff system for certain consumers defined in the Act.

- Separation of tariff supply that ceases to be a distributor activity as of 1st January2009. From that date, the supply of last resource will be made by distributors appointedby the Government.

- Introduction of a transport model, solely for the electricity sector, under the control ofthe Distribution Network Manager, REE, although the Ministry is able to authorisecertain 220 KV installations owned by the distributor, based on their characteristicsand functions.

- Introduction of new obligations of functional separation and independence between themanagement of regulated and non-regulated activities.

- Increased competencies of the Autonomous Regions in matters of distribution andintroduction of new supervision functions of the National Energy Commission.

- Creation of the joint Supplier Changes Office for gas and electricity.


In addition, during 2007 there was the regulatory implementation of two new energy contractingmethods. Firstly, bilateral contracts between distributor companies for the supply at aregulated tariff in Spanish territory are regulated. With this method of contracting the range ofopportunities for distributor companies to acquire energy for subsequent sale to consumers ata regulated tariff was completed, in such a way that they can combine daily and intra-dailyacquisitions on the market managed by OMEL, with future purchases, both in the OMIPorganised market and in auctions established under this new regulation.

Secondly, the regulation for the control of primary energy emissions was published in themonth of April, through energy call options auctions in which the Dominant Operators, Endesaand Iberdrola, are obliged to take part as bidders.

In relation with the generation activity, it is also worth pointing out the modification of thereward mechanism for the guarantee of power that was established through the MinisterialOrder for the revision of electricity tariffs. From 1st October 2007, this mechanism was replacedby a system of payments for capacity that rewards two types of service: an incentive forinvestment and payment for availability, pending definition, which will be structured in bilateralcontracts with the System Operator.

The publication of Royal Decree 661/2007 at the end of May 2007, regulating remuneration ofthe sale of energy from installations under the Special System, has meant a review of theprevious regulatory framework included in Royal Decree 436/2004, although it considers atransitional system for those installations that come into operation up to 1st January 2008,during which period these installations may continue under the previous regulation.

This new regulation introduces, amongst others, some lower and higher limits for theremuneration of renewable technologies that enter the market; it increases remuneration forcertain technologies that are in need of an incentive due to their limited development, such asbiomass, biogas or solar thermal electricity, and reference point maximum power limits are setfor each technology, above which the installations are not able to opt for the remunerationssystem under the aforementioned Royal Decree. The quarterly update of co-generations andwaste based on the variations of fuels and on the RPC and annual updates for the othertechnologies are also considered.


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The tariffs and premiums established in the Royal Decree shall be revised in 2010 in accordancewith the achievement of objectives set in the Renewable Energies Plan 2005-2010 and in theEnergy Savings and Efficiency Strategy, and in accordance with the new objectives that are to beincluded in the next Renewable Energies Plan for the period 2011-2020. Future tariff reviews willnot affect installations that are already in operation.

In the field of the Iberian Electricity Market (MIBEL), the governments of Spain and Portugalsigned a Regulatory Compatibility Plan in Lisbon on the 8th March 2007. The Council ofMinisters approved the modification to the Santiago de Compostela Agreement on 8thNovember 2007, which both countries had signed in 2004, to incorporate the agreementsreached within the framework of this Plan. These agreements mainly refer to the creation of theIberian Operator Market (OMI), the harmonisation of the measures for the promotion of liquidityand competition in the market, convergence on matters of tariffs and guarantee of power and tothe increase of coordination between the Regulatory Bodies of both countries.

Also, with respect to future trading through the OMIP, as of 2007 the distributors’ obligation topurchase increases from 5% to 10% of their energy sold to customers at the regulated tariff, inaccordance with the commitments undertaken at the Hispano-Lusa Summit held in Badajoz onthe 24th and 25th November 2006.

Order ITC 3315/2007 was published in November, implementing article 2 of Royal Decree Act3/2006, establishing the methodology for capping remunerations for generation due to theinternalisation of CO2 allowances in shaping prices on the electricity market.

Along the same lines, a Royal Decree Act was published on 8th December by whichremuneration for the activity of electricity production is removed from the higher income arisingfrom the internalisation of emissions allowances allocated in the NAP 2008-2012, which wasvalidated by the Congress of Deputies on 20th December, agreeing to its processing as a DraftAct.

2007 TARIFFS

Royal Decree 1634/2006 of 29 December setting the electricity tariffs for 2007, provided foran average increase in overall tariffs of 4.3% and a reduction in access tariffs of 10%, andfor the first time it recognised ex-ante a deficit in income in settlements of the regulatedactivities of ¤750 million in the first quarter of 2007, accepting that this deficit could be ashigh as 3,750 million Euros by the end of the year. This deficit ex-ante, as well as those thatmay come to light during the year, will be securitised on the financial markets.

In addition, from 1st July 2007 and on a quarterly basis, it is specifically provided for thegovernment to be able to make tariff changes by revising costs arising from the activitiesnecessary for the supply of electricity, the permanent costs of the system, and the costs ofdiversification and safeguarding of supply, including the refund to each company charged tothe electricity tariff revenue in the coming financial years of the amounts contributed tofinance the settlement deficit for 2006, including the financial costs that accrue.


As a result, Royal Decree 871/2007 of 29th June was published, setting the tariffs from 1July 2007, providing for an average increase of 1.8%, maintaining the access tariffs, andrecognising an ex-ante deficit of ¤750 million for the period 1July to 30 September 2007,and which, coupled with the ¤750 million corresponding to the first quarter, amounts to atotal of ¤1,500 million. This Royal Decree also set the 1st July 2008 as the date for theelimination of general high voltage tariffs.

Subsequently, order ITC/2794/2007 of 27th September was published, revising electricitytariffs from 1 October 2007, maintaining the overall and access tariffs, but modifying themechanism for guarantees of power.

2008 TARIFFS

Order ITC/3860/2007 was published on 29th December 2007 revising tariffs from 1st January2008 and providing for a general increase in overall and access tariffs of 3.3%, except overalltariffs of distributors of the 11th Transitional Provision (of Act 54/1997) that were increased by5.42% and access tariffs to domestic consumers that were reduced by 17%, leading to a seriesof tariff income which is growing in terms of homogenous demand of 2.88%.

An ex-ante income deficit was also recognised in remuneration from regulated activities for thefirst quarter of 2008, with a maximum amount of 1,200 million Euros that will be securitised onthe markets.

Secondly, this Order changes the way in which payments for distribution are made, tailoring bycompanies, amongst others, some of the parameters used in the same, and specifying someaspects of the new regulation for remuneration by capacity introduced by order ITC/2794/2007.


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Lastly, this Order includes a plan for replacement of metres for the supply of electricity up to 15kw of contracted power for an 11-year period up to 31st December 2018, in order to encouragethe implementation of meter telemanagement systems.

Regulatory provisions in the Spanish Gas Supply Industry

There were notable regulatory developments in the natural gas sector in Spain in 2007.

The most significant feature of the publication of various Orders from the Ministry ofIndustry, Tourism and Trade, relative to the gas supply business in December 2006 was thespecific regulation of this sector, setting tariffs for natural gas and gas manufactured bychannelling the rental of metres and connection rights as well as remuneration fromcertain regulated activities in the gas supply industry, re-gasification activities,underground storage of natural gas included in the basic network and tolls and feesassociated with third-party access to gas supply installations.

Act 12/2007 was published in July 2007 modifying Act 12/2007 of 7th October on thehydrocarbon industry, in order to adapt it to the provisions of the European Parliament andCouncil Directive 55/2003 of June 2003 on Community standards for the internal gasmarket.

The new Act transposes those items of Directive 55/2003 that remained to be incorporatedinto the Spanish regulations, and in addition, it is useful for making other modifications tothe basic regulations of the system. Amongst the most important items in this Act are theredefinition of activities of the various entities in the gas supply industry, the disappearanceof the tariff system, the creation of a last resource tariff, creation of the Supplier ChangesOffice and the adaptation of the industry's financial regime to the new situation in which thesuppliers are the only agents providing supply under free competition conditions.


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5.1 Peninsular Electricity Business

5.2 Gas Business

5.3 International Electricity Business

5.4 Engineering Business

5.5 Mining Business

5.6 Other Businesses

MANAGEMENT OF THE BUSINESSES

55.1. PENINSULAR ELECTRICITY BUSINESS

5.1.1 ELECTRICITY BUSINESS IN THE IBERIAN PENINSULA

The Iberian Peninsula, itself, creates an electricity market highly differentiated from the rest ofEurope, when adding supplies in Portugal, 10.8% of the installed capacity and 16.1% of thedemand, and Spain, 89.2% of the power and 83.9% of the demand. During 2007, integration ofthe electricity markets of the two countries was reinforced. Advances were made in thecoordination of the Operators and contracting in the OMIP1 futures market increased, by thecompulsory purchase on the part of the Distributor companies. In addition, joint clearing wasintroduced on the Daily Market, applying the mechanism of “Market Splitting” in situations ofcongestion in interconnection.

Mainland Electricity Market in Spain

In the Spanish mainland electricity system, the demand for electricity in Measured Consumption(M.C.), in other words, measured at the interconnection installations with the Transmission Grid,amounted to 260,818 million kWh, growing 2.8% with respect to 2006.

The peak hourly demand for power in the year reached its maximum value, 44,876 MW, at 8pmon 17 December, a value that surpassed the previous historical maximum by 1,498 MW, on 27January 2005 at 8pm, which was 43,378 MW. The summer peak, 39,038 MW, was far from thehistorical maximum reached the previous year.

Demand in M.C. Installed capacity Peak Power EnergyR.O.+R.E.2 (MW) MW GWh

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,959 44,876 260,818Portugal . . . . . . . . . . . . . . . . . . . . . . . . 10,402 9,110 50,050IBERIA . . . . . . . . . . . . . . . . . . . . . . . . . 96,361 53,986 310,868


DEMAND SITUATION IN THE PENINSULAR ELECTRICAL SYSTEM (GWh)

15.5%

2003

225,850

2004

235,999

2005

246,704

2006

253,744

2007

260,818

Source: REE

Source: REE and REN

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(1) Translator’s note: OMIP – Operador del Mercado Ibérico de Energía [Iberian Energy Market Operator](2) Translator’s note: Régimen Ordinario and Régimen Especial (Spanish legislative systems for the

production of electricity, hereinafter “Ordinary Regime” and “Special Regime”

Ordinary Regime Production

The production in the Ordinary Regime grew 1.3% over that of 2006, fundamentally due to theincrease in thermal production from coal and combined cycles that grew 8.9% and 7.3%,respectively.

From a hydrological point of view, 2007 has been very dry, annual precipitation registering aprobability of being surpassed (PSS) of 94%, in other words, statistically, 94 years out of 100would have a higher level of humidity than 2007. This fact has resulted in substantial use of coalthermal power plants and combined cycles of natural gas.

Against this background, hydroelectric production for the year was 26,339 million kWh, 4.0%above that produced in 2006, which represented a reduction of 22 points in the levels of energyreserves of the group of reservoirs in the domestic system, from 55% full with which they began2007, to 33% at the year end.

Production originating from nuclear power, 55,076 million kWh, fell by 8.4% as a result of theshutdowns and failures that affected a great part of the equipment. The fuel oil and gas powerplants were mainly used for safety and cover of the system, registering a reduction of 59.6% andamounting to 2,383 million kWh.

The coal units in the domestic group have produced 8.9% more than in 2006 as a result, amongothers, of the low hydroelectric and lower nuclear production.

For the second consecutive year the entry into operation of new combined cycles has beenespecially important, with the incorporation of 11 new groups that represent a total of 5,500 MWof installed capacity. As the year ends, this technology already accounts for 20,955 MW ofinstalled capacity, in 44 units.


PENINSULAR ENERGY BREAKDOWN (GWh)2007 2006 Var. 07/06 %

Hydroelectric Production . . . . . . . . . . . . . . . . . . . . 26,339 25,330 4.0Nuclear Production . . . . . . . . . . . . . . . . . . . . . . . . . 55,076 60,126 (8.4)Coal Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,855 66,006 8.9Fuel Oil and Gas Production . . . . . . . . . . . . . . . . . . 2,383 5,905 (59.6)Combined Cycle Production . . . . . . . . . . . . . . . . . . 68,137 63,505 7.3Total Ordinary Regime Production . . . . . . . . . . . . 223,790 220,872 1.3Consumption in Generation . . . . . . . . . . . . . . . . . . (8,621) (8,904) (3.2)Special Regime Production . . . . . . . . . . . . . . . . . . 55,781 50,316 10.9Total Net Production . . . . . . . . . . . . . . . . . . . . . . . . 270,950 262,284 3.3Reverse Pumping . . . . . . . . . . . . . . . . . . . . . . . . . . (4,378) (5,261) (16.8)International Exchange Account . . . . . . . . . . . . . . . (5,754) (3,279) 75.5Demand in MC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,818 253,744 2.8

Source: REE

The power from combined cycles already constitutes a third of the installed capacity in theOrdinary Regime and of the production achieved, which in 2007 was 68,137 million kWh, 7.3%more than in 2006.

Finally, the distinctly export nature of the physical balance of international interchanges, for thefourth consecutive year, must be highlighted; 5,754 million kWh, 75.5% more exported than in2006, a direct consequence of the differentials of price with Europe.

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Hydroelectric

19.4%

15.7%Wind

11.5%

Rest ofSpecial Regime

9.0%

Nuclear

13.2%

Coal

24.3%

CombinedCycle

6.9%Oil and Gas

STRUCTURE OF SPANISH MAINLAND ELECTRICITY SYSTEM CAPACITY (%)

Hydroelectric

9.4%

0.9%Oil and Gas

11.8%

Rest ofSpecial Regime

25.7%

Coal

19.7%

Nuclear

24.4%

CombinedCycle

8.1%Wind

STRUCTURE OF SPANISH MAINLAND ELECTRICITY PRODUCTION (%)


Source: REE Source: REE

Special Regime Production

The total installed capacity under the Special Regime at the end of 2007 is 23,380 MW. Of the newinstalled capacity, 2,327 MW correspond to new wind power which has now reached an installedcapacity of 13,467 MW and accounts for almost two thirds of the total in the Special Regime.

Peak wind power production, in other words, the maximum power put into the system, reached8,375 MW of instantaneous power on the 19 March at 17:40 hours, and the maximum dailyproduction reached 176 million kWh that same day. It emphasises, furthermore, the highvariability of this technology, greater than 6,300 MW in 24 hours and, consequently, thenecessity of reserving capacity in other technologies to deal with it.

The energy delivered by facilities in the Special Regime, 55,781 million kWh, increased by 10.9%with respect to the previous year, as a result of the significant growth in wind production, 16.2%higher than in 2006.

In terms of production, wind power reached 26,368 million kWh, a similar figure to that ofhydroelectric production in the Ordinary Regime.

Production Market

The Production Market maintained high prices in the month of January, but plummeted duringspring, coinciding with a strong increase in hydroelectric contribution and an ample margin ofcover, supported by the incorporation of new capacity to the system, and by the availability of fuel.Prices did not recover until the month of November, a situation of extreme drought accompanyingthe increase in fuel prices.

Price conditions in the Iberian Peninsula were not reflected in the rest of Continental Europe,where they remained at elevated values throughout the year. As a consequence, an export balanceof 5,754 million kWh was recorded in the year, a figure that constitutes a historical maximum.

On 1st July, the combined operation of the Daily Market within the scope of the Iberian ElectricityMarket (MIBEL) was initiated, integrating offers to buy and sell energy from Spain and Portugal inthe same settlement process, obtaining a unique peninsular price as a result. In the event ofcongestion in the interconnection between Spain and Portugal, the mechanism of market splittingis applied, that enables the markets to be disconnected and to assign different prices. From thebeginning of MIBEL, the Portuguese price has been permanently above the Spanish price, excepton Monday 17 December, when a higher price occurred in Spain for the first time, as a result ofthe peak demand situation.


34.7%

2003

41,405

2004

45,868

2005

50,409

2006

50,316

2007

55,781

Source: REE

PRODUCTION SITUATION IN THE SPECIAL PENINSULAR ELECTRICITY SYSTEM REGIME (GWh)

In addition, from the month of June onwards, auctions for the Contracting of Energy for theSupply of Last Resource (CESUR) of Iberian distributors were held quarterly. The volume ofenergy negotiated in these auctions reached 28 TWh for 2007 and 14 TWh for the first quarter of2008

Procurements

The essential element that has characterised the year 2007 has been the strongly bullishbehaviour of prices in the basic raw materials markets, with the singular exception of the priceof gas in the U.S. market, where the Henry Hub index has shown a progression with fluctuationsof scarcely any importance.

In the coal market, the constant increase in prices stands out, more pronounced in the secondhalf of the year, especially since the end of September when the 100 USD/t barrier was broken.

Brent has experienced a constant and strong increase throughout the whole year. The averagefor the year was 72.5 USD/BBL, 11.1% up on the historical average annual value for 2006 (65.2USD/BBL).

In the gas markets, movements of little significance have been observed in general, both inEurope and in the U.S.A. An element that has generated a certain distortion in the LNG marketsin 2007 has been the strong demand recorded in Asian countries, especially from Japan, China,India and Taiwan. The forecast for this market points to demand outstripping supply, which maycreate short term imbalances in the latter and in the gas market in general.


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5.1.2 UNION FENOSA GENERATION

The gross installed capacity of UNION FENOSA in Spain increased by 1,349 MW to reach 8,865 MWat the end of 2007. This increase is made up of 1,200 MW from the three Sagunto (Valencia) groups,the 18 MW increase in power of group 3 of C.H. Belesar and the 133 MW put into operation underthe Special Regime by taking into consideration 50% of EUFER’s business.

Net production of the generation group amounted to 34,025 million kWh, 10.7% above that of 2006.Of this growth, the increases produced in combined cycle power plants (+32.9%) and in the SpecialRegime (+14.3%) stand out.

Production Market

UNION FENOSA sales under the Ordinary Regime in the Production Market during 2007amounted to 33,063 million kWh, with prices above the industry average.

The final sale price was 49.97 €/MWh, 17.7% less than in 2006, being, however, 7.1% better thanthe value of the market group.

In respect of the Special Regime, 962 million kWh were sold, 14.3% above that in 2006, at a priceof 75.95 €/MWh, 13% below that obtained in 2006.

Energy Trading

In 2007, operations apart from the organised Production Market in Spain (OMEL and OS) wereabove 5 TWh.

A part of the volume traded corresponded to physical trading operations on the Europeanmarkets, basically on the French market, following criteria of optimisation of the generationportfolio in Spain.

In addition, both operations in the Futures Market (OMIP) and OTC bilateral contracting in theSpanish market increased significantly.

For the second consecutive year, the participation of UNION FENOSA in the interconnectionsoperation was limited by the legal prohibition on the import of electricity that is applied toDominant Operators.


UNION FENOSAREMAINS COMMITEDTO A MIXTURE OFDIVERSIFIEDGENERATION INWHICH THERE IS APLACE FOR ALLTECHNOLOGIES.CURRENTLY,PRACTICALLY ONETHIRD OF THEINSTALLED CAPACITYIS FREE OFGREENHOUSE GASEMISSIONS

IN SPITE OFUNFAVOURABLEMARKET CONDITIONS,UNION FENOSA ’SNEGOTIATINGCAPACITY HASENABLED IT TOOBTAINSIGNIFICANTLYBETTER ENERGY SALEPRICES THAN THEINDUSTRY AVERAGEAND VERYCOMPETITIVEPROCUREMENTS

Hydroelectric

20.8%4.7%Special Regime (*)

6.6%

Nuclear

23.1%

Coal

36.1%

CombinedCycle

8.7%Oil and Gas

INSTALLED CAPACITY BY TECHNOLOGY (%)

Hydroelectric

8.8%2.8%Special Regime (*)

13.1%

Nuclear

35.7%

Coal

38.9%

CombinedCycle

0.7%Oil and Gas

NET PRODUCTION BY TECHNOLOGY (%)

(*) Basis of figures: 50% consolidated EUFER and 100% Generación Peninsular, S.L.

Within the CESUR auctions framework (contracting of energy for the supply of last resource),UNION FENOSA sold in the two auctions with expiry in 2007 a total of 1.5 TWh, and another 1.5TWh for the first quarter of 2008 in the final auction held in 2007.

As for the management of Emission Allowances, UNION FENOSA acquired the pending purchasedeficit from the period 2005-2007 at a price lower than the average market price, and also acquiredAllowances for the period 2008-2012 under competitive conditions. Furthermore, purchasecontracts of Certified Emissions Reductions (CERs) coming from Clean Development Mechanisms(CDM) were negotiated, that will be delivered throughout the whole period 2008-2012.

Generation in the Ordinary Regime

Net production of UNION FENOSA generating equipment in Ordinary Regime amounted to33,063 million kWh in 2007, 10.6% more than was produced in 2006.

The year 2007 was, from a hydrological point of view, a very dry year for UNION FENOSA, with a95% probability of being surpassed. Hydroelectric production was 3,001 million kWh inmeasured consumption, 18.7% less than that of the previous year. The availability index was93.5%, similar to the result obtained in 2006.

The energy reserves in UNION FENOSA’s group of reservoirs at the end of the year were at 20%,23 points below the levels of the previous year.

Production of nuclear origin in 2007 was 4,461 million kWh, 4.2% less than that produced in2006. The combined availability index of the Almaraz and Trillo power plants was 92%, twopoints above 2007.


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IN TERMS OFPRODUCTION IN THE

ORDINARY REGIME,UNION FENOSA

RECORDS ITSHISTORICAL

MAXIMUM FOR THETHIRD CONSECUTIVE

YEAR, REACHING33,063 MILLION KWH

IN 2007

40.9%

Nuclear Classic ThermalHydroelectric Combined Cicle

2007

33,063

13,211

12,390

4,4613,001

2005

27,981

6,716

13,657

5,6611,947

2004

23,7051,039

14,211

5,702

2,7532003

23,460

13,783

5,459

4,218

2006

29,885

9,941

11,598

4,655

3,691

PRODUCTION IN MEASUREDCONSUMPTION IN ORDINARY REGIME (GWh)

Nuclear Classic ThermalHydroelectric Combined Cicle

57.6%

2007

8,449

3,200

2,822

589

1,838

2006

7,231

2,000

2,822

589

1,820

2005

6,986

1,600

2,822

739

1,825

2004

6,586

1,200

2,822

739

1,825

5,361

2,822

739

1,800

2003

INSTALLED CAPACITYIN ORDINARY REGIME (MW)

UNION FENOSA’S ENERGY RESERVES (% full)1997-2006 Inclusive

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Inclusive 2006 2007

Production from the coal thermal groups reached the figure of 12,150 million kWh in measuredconsumption, 12.4% above that of 2006. Collectively coal power plants have performed well andthe availability index, without including shutdowns for maintenance, was 95%. Usage levels, over6,200 equivalent hours of full load, are higher than those of 2006 and one of the highest in thistype of technology in the domestic group.

Fuel oil and gas power plants have had low usage indices, due to the entry of new combinedcycle groups. Their production was 240 million kWh in measured consumption, 69.4% less thanthe previous year.

With the publication of Royal Decree 430 of 12 March 2004, on Large Combustion Facilities, inwhich the new demanded limits were established for emissions into the atmosphere for allthermal power plants as of 2008, UNION FENOSA is implementing an investment plan that willenable compliance with that established in this Royal Decree to be guaranteed. The installationof desulphurisation plants, modification of the boiler burners for an additional reduction in theemissions of NOx and other measures for the reduction of particulate emission through theimprovement of the precipitators and filters, and injection of SO3 stand out amongst the mainadvances contemplated.

This investment plan is being applied to all coal power plants in the Group. In the La Roblathermal power plant, a desulphurisation plant is being constructed. Modification of the burnersand injection of combustion gasses for the reduction of NOx emissions have already beenimplemented and changing of the precipitator control has been completed.

Although outside the scope of the Royal Decree, in this same power plant, an unloading bay andinspection pit have been constructed that make up a marshalling yard infrastructure, with theaim of realising the transport of coal to the power plant by railroad.

In the thermal power plant in Narcea, the precipitator control has been changed to carry out thereduction of particulate emission in its groups 2 and 3, and the modification of the burners forthe reduction of NOx emissions in its group 3 as well as the construction of a desulphurisationplant for this same group.


THE BIGGER PLANENVISAGESINVESTMENTS TO THE VALUE OF 1,000 MILLION EUROS IN THEBUSINESS OFGENERATION IN THE ORDINARYREGIME. FINANCIALYEAR 2007 ENDSWITH ANINVESTMENT OF 300 MILLION EUROUNDERTAKEN

UNION FENOSAPARTICIPATES INPOWER GENERATIONPLANTS IN THEORDINARY ANDSPECIAL REGIMESWHOSE INSTALLEDCAPACITY TOTALS12,610 MW, WHICHRESULTS INATTRIBUTABLEPOWER OF 8,865 MWIN 2007

BREAKDOWN OF ENERGY GENERATIONInstalled Production in MC (GWh)

Capacity (MW) 2007 2006 Var. 07/06 %

Hydroelectric . . . . . . . . . . . . . . . . . . . . . . 1,838 3,001 3,691 (18.7)

Nuclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589 4,461 4,655 (4.2)

Lignite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563 3,797 3,119 21.7

Coal + Anthracite . . . . . . . . . . . . . . . . . . . 1,485 8,353 7,694 8.6

Combined Cycle . . . . . . . . . . . . . . . . . . . . 3,200 13,211 9,941 32.9

Fuel oil + Gas . . . . . . . . . . . . . . . . . . . . . . 774 240 785 (69.4)

Total Ordinary Regime . . . . . . . . . . . . . . 8,449 33,063 29,885 10.6

Special Regime (*) . . . . . . . . . . . . . . . . . . 416 962 842 14.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,865 34,025 30,727 10.7

(*) Basis of figures: 50% EUFER and 100% Generación Peninsular

In the Anllares thermal power plant, the precipitator control was changed and the injectionof SO3 has begun, both representing advances in obtaining a reduction in particulateemission.

In the Meirama thermal power plant, the refurbishment of the boiler is being carried out,the development of which at the moment is at the manufacturing of equipment and sitepreassembly phase. In addition, the precipitator control will be changed and the burnersmodified for the reduction of NOx emissions.

The second phase of the coal transfer yard in the port of La Coruña is already in operation.It consists of a great dome that enables the temporary coal store to be covered pending itsshipment to the power plant, reducing thereby the particulates emitted into theatmosphere.

Production in measured consumption with combined cycle technology reached the figure of13,211 million kWh, 32.9% more than in 2006. In addition, during the start-up trial period ofthe three combined cycles of the power Sagunto plant, 697 million kWh were discharged tothe grid, which has not been taken into consideration within the power generationbreakdown.

During 2007, construction was completed of UNION FENOSA Generación’s combined cyclepower plant at its location in Sagunto. The three groups entered commercial operation inthe months of July, September and October, with nominal power of 1,200 MW, which,together with the regasification plant, constitute the main nucleus around which theSagunto Power Pole is organised.

The combined cycle group of 400 MW of nominal power that has been constructed in thecurrent location of the Sabón (La Coruña) thermal power plant, displayed an overalladvance of 99% at 31 December 2007. It is currently undergoing the tests and start-upphase, and is forecast to enter commercial operation at the end of the first half of 2008.This group is supplied with gas from the regasification plant at Reganosa (Ferrol).

Procurements

The most notable aspect is the significant increase of the gas supply, with an increase of 31% inconsumption with respect to 2006.


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WITH THE ENTRYINTO OPERATION

OF THE NEWCOMBINED CYCLE

GROUPS, 1,200 MW IN SAGUNTO,

THE VOLUME OF GAS USED IN

PRODUCTION IN 2007 HAS

SHOWN A STRONG INCREASE

COMPARED WITHPREVIOUS YEARS

SUPPLY OF FUELThousands of tons

2007 2006 Var. 07/06 %

Domestic coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,975 5,064 18.0Imported coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,053 2,491 (17.6)Fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 276 (71.0)Natural gas (M. Nm3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,398 1,831 31.0

As regards management and strategies carried out in 200,7 the following advances should beemphasised:

• The contracting of domestic coal supplies at competitive fixed prices for the whole year.

• The purchases of imported coal - mix of contracts at fixed price plus others indexed - at afinal average price of15% below the market price in Europe.

• The advance in the purchase of low sulphur imported coal for its storage in order to allowthe maximum operation of the yard in 2008.

• The obtaining of competitive prices for natural gas for the whole year, which has allowed ahigh operation of the CCGT park in a framework of unfavourable prices on the electricityMarket.

• The subscription of a $/€ exchange insurance policy for payments in dollars derived fromthe purchases of imported coal in 2007 (of the order of 50% of the annual total), with aremarkably positive impact on the results of UNION FENOSA Generación.

• The start-up of Phase II of Medusa del Puerto in La Coruña, as well as of the railway to theLa Robla power plant which significantly reduces the transport cost of imported coal tothis power station.

The management of procurements carried out in 2007 has enabled, in a year of strong increasesin the raw materials markets, the cost of generation from fossil fuel stocks to be maintained atthe values predicted and even to reduce it in relation to the previous year by 1.8 percent.

Generation in the Special Regime

The companies within the Group that are involved in generation in the Special Regime are ENELUNION FENOSA Renovables (EUFER), that is managed 50% with ENEL, and PeninsularGeneration, that is 100% owned by UNION FENOSA .

The power attributable to EUFER and Peninsular Generation jointly, considering theirpercentage stake in each of the installations in operation at the end of 2007, amounts to 867MW, which represents an increase of 43.8% with respect to 2006. Of that total, 812 MW belong toEUFER, whereby 89 MW are operated on a lease basis, and 55 MW belong to PeninsularGeneration.

The power attributable to UNION FENOSA, meeting accounting criteria for consolidation,amounts to 416 MW with a growth of 46% with respect to the previous year. Wind generationrepresents 74.3% of the power.


UNION FENOSAPARTICIPATES IN THE SPECIALREGIME WITH AN INSTALLEDCAPACITY THATAMOUNTS TO 867 MW

GENERATION IN THE SPECIAL REGIME (*)OPERATIONAL CAPACITY (MW) NET PRODUCTION (GWh)2007 2006 Var. 07/06 % 2007 2006 Var. 07/06 %

Cogeneration . . . . . . . . . . . . . . . . . . . . . . 26 24 8.3 127 106 19.8

Wind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309 193 60.1 512 416 23.1

Urban Solid Waste . . . . . . . . . . . . . . . . . . 36 36 --- 213 208 2.4

Own hydroelectric . . . . . . . . . . . . . . . . . . 45 32 40.6 110 112 (1.8)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416 285 46.0 962 842 14.3

(*) Basis of consolidation: 50% EUFER subject to consolidation and 100% of Generación Peninsular. Excluding small leased hydroelectric plants

Production in measured consumption, including production corresponding to power meeting thecriteria for consolidation, grew by 120 million kWh, reaching 962 million kWh, without taking intoconsideration leased small hydroelectric power plants.

During the year 2007, the company EUFER has started up a total of 198 MW of wind power,distributed among the Autonomous Regions of Galicia, Castile-La Mancha and Castile and Leon.Galicia, with a total of 72 MW, has brought into operation the farms of Casa (30 MW), Couto deSan Sebastián (18 MW), Coto Codesas I (17 MW) and the extension of the Corzán farm (7 MW). InCastile-La Mancha, the farms of Malagón I and II (86 MW) together with the first line of theCaldereros farm (10 MW) have contributed 96 MW, and in Castile and Leon power has beenincreased by 30 MW as a result of the Valdepero farm.

Additionally, in the month of May the acquisition of the Belmonte wind farm was made, withpower of 35 MW and a 50.2% stake (100% consolidatable), located in Asturias.

Regarding hydroelectric facilities, 29.5 MW of power has entered into operation in 2007, thatcorresponds to the power plants at Cabanelas (10 MW), Brandariz (17.5 MW) and Tambre-Cabalar (2 MW), located in Galicia. The capacities are 100% owned by EUFER.

Regarding thermal energy, cogeneration and waste, as a result of the entry into force in the lastquarter of the year of the new Royal Decree 661/2007 that allows cogenerators to sell 100% oftheir production to the distributor, the operation of various plants has been adapted to the newrequirements, assuring at the same time the supplies to the host industries.

At the end of the year, 159 wind MW and 22 hydroelectric MW are in construction, all of them100% owned by EUFER.


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5.1.3 UNION FENOSA Distribution

Distribution Infrastructure

Strengthening its commitment in terms of coverage of the growth in demand, guaranteeand quality of supply, UNION FENOSA invested 311 million euros in 2007 in the area ofDistribution.

As a result of the investment made, 1,456 km net of new Medium and Low Voltage lineshave been put into service in the MV/LV grid, in other words, discounting the sections ofgrid that have been removed, and 77 km net of High Voltage cables. The Company’sdistribution and transmission grid in Spain amounts to 112,274 km at the end of 2007.

Within the group of substations and transformer centres, 1,272 facilities have been put intoservice throughout the year, the transformer capacity being increased by 5.1% with respectto the end of 2006.

Beyond the challenge that the attainment of the network sizing targets for 2007 represents, theconsolidation of the management levers associated with the expected investment should behighlighted, both in the previous plan and in the ongoing BIGGER Plan, that are characterisedby:

- Security, understood as key to the guarantee of supply and security of people and facilities.- Competitiveness, understood as operational efficiency, applied to the grid architecture, to

the provision of grid services and to the control of the energy flows that circulate around thegrids.

- Sustainability, understood in terms of acceptability and social impact, and fulfilment ofrequirements and environmental demands both from the perspective of new developmentsand the operation and maintenance of existing facilities.

In the area of Protection and Automation, whose initial equipment renovation plan can beconsidered finished, the normal work of installation of elements associated with line andsubstation protection as well as the automation of the same with the aim of improving securityand manoeuvrability of facilities is ongoing.


UNION FENOSAHAS MORE THAN112,000 KM OFELECTRICITYDISTRIBUTION AND TRANSMISSIONGRIDS IN SPAIN,MAINLY IN THECENTRE AND THE NORTHWESTREGIONS

INSTALLATIONS BY AUTONOMOUS REGIONS (31 December 2007)Reducing Transformers Length

Number Capacity MVA of Lines (km)

Madrid . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,809 4,340 19,080Galicia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,046 4,022 48,967Castile-La Mancha . . . . . . . . . . . . . . . . . . 6,456 1,947 20,023Castile and Leon . . . . . . . . . . . . . . . . . . . . 3,461 812 15,775Other Regions . . . . . . . . . . . . . . . . . . . . . . 7 1 33Total L.T. + M.T. . . . . . . . . . . . . . . . . . . . . . 33,779 11,122 103,878Madrid . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 9,675 1,551Galicia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 8,028 2,168Castile-La Mancha . . . . . . . . . . . . . . . . . . 184 4,150 3,099Castile and Leon . . . . . . . . . . . . . . . . . . . . 90 1,410 1,516Other Regions . . . . . . . . . . . . . . . . . . . . . . 6 91 62Total H.T. . . . . . . . . . . . . . . . . . . . . . . . . . . . 749 23,354 8,396TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,528 34,476 112,274

In addition, a new Integral Security project in all of the 220kV substations in the urban areas ofMadrid and Galicia has been carried out during 2007, equipping them with new infrastructuresrelating to security systems, remote surveillance and fire protection systems.

UNION FENOSA participates actively in the Spanish future grids platform, FUTURED, in which,among other activities, it coordinates the technical Measurement and Power Efficiency groupand the Regulation and Standardisation group, where it has defined the strategic agenda for themeasurement and power efficiency technologies and regulatory aspects to be developedassociated with the Vision of the Network of the Future document.

As a result of UNION FENOSA’s backing for growth in the areas where it provides its services,and within the investments made for the upgrading of the facilities and service given tocustomers, various agreements have been made during the financial year 2007 with theAutonomous Regions for the execution of Projects of Rural Electrification and projects of SupplyQuality Improvement in general.

In Madrid, the actual investment put into operation during the year 2007 amounted to 114.8million euros, of which 28.5 million correspond to very high voltage transmission facilities,lines and substations (>220 kV), 20.6 million invested in high voltage infrastructures (<200 kVbut >36 kV) and the remaining 65.6 million devoted to medium and low voltage facilities aswell as in commercial measuring equipment and other customer service infrastructure.Within these undertakings it is important to emphasise the investment of 9.8 million euros inthe improvement of electricity service quality and 2.5 million in advances associated with thecontrol of voltage, both executed in compliance with the Collaboration Agreement establishedwith the Government of the Autonomous Region of Madrid.

In the Autonomous Region of Galicia, the actual investment that has entered into operationin the year 2007 amounted to 97.9 million euros, of which 11.6 million correspond totransmission facilities, 17.6 million to high voltage infrastructures and 68.9 million tomedium and low voltage facilities as well as to measuring equipment and commercialinfrastructures associated with the provision of the service.

Included in the investments mentioned above, the Quality Plan provided for in the 2004tariffs decree in Galicia has been completed, which has made possible the implementationof a total of 34 new transformer centres and 59 km of lines. With respect to the Quality Planassociated with the 2005 tariffs decree, an investment of 2.3 million euros was made. LastDecember a new agreement corresponding to the 2006 tariffs decree was signed which willrequire an investment of 12.5 million euros to be made between years 2008-2009.


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UNION FENOSAHAS INVESTED

MORE THAN 311MILLION EUROS

IN 2007 INDISTRIBUTION

FACILITIES PUT INTO OPERATION IN

SPAIN ANDANTICIPATES

INVESTING 1,300MILLION EUROS

BETWEEN 2007-2011,IN ACORDANCE WITH

THE BIGGER PLAN

INVESTMENTS PUT INTO OPERATION (thousands of euros)High Voltage

Transmission Delivery Distribution TOTAL(>220 kV) (< 220 kV) (< 36 kV) (*)

Madrid . . . . . . . . . . . . . . . . . . . . . 28,523 20,622 65,612 114,757

Galicia . . . . . . . . . . . . . . . . . . . . . 11,643 17,556 68,750 97,949

Castile - La Mancha . . . . . . . . . . 9,632 34,154 29,229 73,015

Castile and Leon . . . . . . . . . . . . . 59 9,213 16,508 25,780

TOTAL 49,857 81,545 180,099 311,501

(*) Includes metering equipment and other infrastructures

In addition, on 2 July 2007 an agreement was signed with the Galician Regional Government for38.5 million euros, to be executed in the period 2007-2009, on quality improvement works inrural areas. In 2007, and under the auspices of this Agreement, 161 new transformer centres,95.5 km of medium voltage lines and 193.5 km of low voltage grids for an amount of 10.8 millioneuros have been put into operation.

In the Autonomous Region of Castile-La Mancha, the actual investment in facilities put intooperation amounted to 73.0 million euros, with 9.6 million having been allocated to thetransmission grid and 34.2 million to high voltage facilities. Medium and low voltageinfrastructures, with metering equipment and associated commercial funding, have received29.2 million euros. Investments associated with the Quality Plan for Tariffs 2005, executed in2006 and 2007 were provided for in this group of investments, and some from the investmentsassociated with the Quality Plan for Tariffs 2006, whose scope of execution includes years 2007and 2008.

In this Region, it is also necessary to highlight the agreement signed with the RegionalGovernment and the photovoltaic producers, leading to the equipping of the electricityinfrastructure in the region with the capacity necessary to absorb the energy that is generated inthese plants and which requires an estimated investment of 16.0 million euros to be made in2008.

In Castile and Leon, facilities and equipment that have required an investment of 25.8 millioneuros have been put into operation, with a heavy emphasis on medium and low voltageinfrastructures, with metering equipment and associated commercial infrastructure, which hasrequired an amount of 16.5 Million euros to be invested, the remaining 9.2 million being investedin high voltage facilities. Within these advances, the agreement with the Regional Governmentrelating to the Rural Electrical Infrastructure Improvement Plan (PIER) should be highlighted,for a total amount of 1.2 million euros, whose period of duration includes years 2006 and 2007.

In this Region, and in relation to the Quality Plan provided for in the 2005 tariffs decree, forapplication in years 2007 and 2008; works for an amount of 5.5 million euros have arisen and theperformance program for Improvement in the Supply Quality corresponding to 2006, forapplication in years 2008 and 2009, provides for works for the sum of almost 6 million euros.

Within the Service Quality improvement plans in the group of regions in which UNION FENOSAhas its distribution market, the Urban Centre Quality Improvement Plan continues to beimplemented, under which the installation of new transformer centres is being progressed, thusobtaining a reorganisation of the MV/LV grid of the various areas and a reduction in technicallosses. Within these advances, 63 transformer centres have been installed during the year andthere are another 46 in the process of execution or lodged with the various Public Authorities.

In the area of maintenance, UNION FENOSA has introduced a flyover of overhead lines in the MVgrid with the new LINZE system, more than 6,400 km of line having been reviewed. On the otherhand, analysis of underground lines, also of the MV grid, has been started for preventivemaintenance by means of partial discharges, 140 km of line having been reviewed.

In the area of Research and Development, integration of telecontrol in compact transformercentres has been achieved, which consists of the suppression of condenser cells by use of theintrinsic capacity of medium voltage cables. This solution, which is already in production, wasthe winning idea for the Innowatio Prize in a previous year. The Innowatio Prize was instituted byUNION FENOSA in 1999 and it is aimed at promoting and rewarding innovative ideas of itsemployees orientated towards the improvement of their work or of processes that are subject ofthe work of the Group Companies.


In Madrid, in the Vicálvaro district, advances have been made aimed at improving and extendingthe functionality of the telecontrol and advanced distribution grid management by means of thecapture, processing and sending of information associated with the state and security of the grid,industrial safety and energy control.

Within the large HV infrastructures put into service the following are highlighted:

• 220 kV Substation, Manuel Becerra (Madrid): The new substation relies on two 220/15/15 kVtransformers of 60 MVA power. The installed total capacity is 120 MVA, expandable to 180 MVA.The new substation involved the installation of secure technology equipment, both at 220 kVand 15 kV, to adapt to the reduced space available. The investment was made to improve thesupply quality and to guarantee the availability of electricity in two large districts of the city ofMadrid.

• 220 KV High Voltage Cable, Casa de Campo - Manuel Becerra - Prosperidad (Madrid): 4.2 km of new underground 220 kV line that runs along the Avenida de los Toreros. This newline is an extension to the existing one between Casa de Campo and Prosperidad that isneeded to supply the new 220 kV substation in Manuel Becerra.

• 132 KV Substation, El Castro: New substation located in the El Castro hills, in Vigo(Pontevedra), relies on two132/15kV 30 MVA transformers and is fitted with secure technologyequipment. This substation, the first underground one to be built in Galicia, increases theinstalled capacity in Vigo by 60 MVA, which will improve the supply quality both in the city andin its service area.

UNION FENOSA is frequently faced with difficulties when obtaining legal authorisations and theother permits necessary for the installation of new distribution facilities, which delays the start-up, postpones the improvement of the service quality and, in some cases, impedes the thoroughand proper coverage of new supplies. In order to avoid this, the company is intensifying itscollaboration with the various Public Authorities in order to improve the service to its customersand bring the corresponding projects and works to a satisfactory conclusion.

Service Quality and Productivity Indicators

UNION FENOSA continues as industry leader with regard to the Service Quality that it provides toits customers. In this respect, the TIEPI, Equivalent Outage Time of Installed Capacity, that wasalready one of the best in the industry in the previous year, continues with values below thatwhich could be considered the underlying or structural value of this indicator and in financial


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year 2007 it registered 1.3 hours. This value improves on that recorded in 2006 by 27 minutes andimproves on that recorded in 2005, which had set a historical record.

Supply quality is a company undertaking to which UNION FENOSA has devoted a significantamount of human, technical and financial resources, performing work and projects both of newconstruction and comprehensive updating of the facilities in substations with the aim ofendowing them with the most modern equipment and higher capacity.

All the investment deals, operational measures and maintenance carried out, together withsome climatic conditions that have not been extreme, except for certain cases, have made itpossible to obtain a better indicator of area quality (TIEPI) than those recorded to date.

TIEPI also reached record values in the Galicia and Madrid Regions, which signifies UNION FENOSA’s leadership in respect of the Supply Quality that the Company offers to itscustomers in these areas.

Therefore, it is necessary to emphasise how well the distribution facilities have performed,withstanding the wind and snow storms that mainly affected Castile La Mancha and Castile andLeon in the first quarter of 2007, as well as major storms and floods, without which these eventswould have had a huge impact on the good general index that has been obtained.

Regarding the productivity of the Distribution business in Spain, the value of energy provided peremployee has increased for yet another year. In the last five years, the increase in this indicatorhas been 9.2%, passing the 16.69 GWh/employee in 2003 to 18.23 GWh/employee in 2007, eventaking into account the higher manpower level in the tasks associated with the operation andmaintenance of the facilities.

Regulated market

UNION FENOSA distributes electricity in Spain in a market area of some 81,000 km2 and primarilyin four Autonomous Regions. In 2007, the number of supplies in the regulated market, includingboth those that receive the supply at the tariff and those that, being in UNION FENOSA distributionzones, have had the option to choose their provider, grew by 2.9% with respect to the previousyear, reaching 3,555,982 supplies.

Total energy provided through the distribution grids of UNION FENOSA rose to 35,150 million kWh,which translates to growth of 3.5% with respect to 2006 and shows the dynamic nature of demand


DEVELOPMENT OF TIEPI BY AREAS (hours) (*)

2007(*)

Total

1.30

Madrid Castiles Galicia

2003

1.67

0.69

2.08

2.74

0.57

1.32

2.32

(*) TIEPI: Equivalent Time of Outage of Installed Power

THE COMMITMENT OFTHE GROUP TOSUPPLY QUALITY HASTURNED IT INTO ONEOF THE LEADINGCOMPANIES IN THEINDUSTRY, HAVINGOBTAINED AHISTORICAL RECORDTIEPI OF JUST 78MINUTES, WITH VERYSIGNIFICANTIMPROVEMENTS INTHE VARIOUSMARKET SECTORS

in UNION FENOSA’s distribution area. The high growth in the Castile and Leon Region of 4.7percent stands out.

During 2007, low prices of electricity and the lowering of the access tariff prices have causedmedium and high voltage customers to flee to the Liberalised Market. This situation hascaused a growth in energy provided at Access Tariff (Grid Service) of 35.3% with respect tothe previous year, reaching 8,628 million kWh, whereas energy at Comprehensive Tariff hasregistered a reduction of 3.9% placing it at 26,522 million kWh.

The structure of the energy provided to Access Tariff, by Voltage levels, reflects a significantchange in 2007, with a reduction of 7.1 percentage points in low voltage, changing from aposition of 28.2% in 2006 to one of 21.1 percent at the end of 2007.

Energy Purchases

The energy purchases made by UNION FENOSA for their customers at Comprehensive Tariffduring the year 2007 amounted to 28,730 million kWh, 4.5% less than that recorded in 2006. Thisreduction is in response to the qualification process and the movement to a Liberalised Marketby customers who were previously in the Regulated Market.

In 2007, the average price of energy acquired by UNION FENOSA Distribución was 60.65 €/MWh,which signified a 10.9% reduction with respect to that recorded in 2006. It is appropriate toemphasise that this price would have been 47.82 €/MWh if the effect of acquisitions in theSpecial Regime had been deducted.


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Madrid

33%

17%

Castile-La Mancha

9%Castile and Leon

41%

Galicia

STRUCTURE OF UNION FENOSA ’S SUPPLIESBY AUTONOMOUS REGION (%)

Madrid

28%

15%

Castile-La Mancha

6%Castile and Leon

51%

Galicia

STRUCTURE OF ENERGY SUPPLIEDBY AUTONOMOUS REGIONS (%)

2007

35,150

3,556

2006

33,968

3,456

2005

33,000

3,393

2004

31,567

3,322

2003

30,244

3,231

Energy supplied (GWh) Supplies (Monthly Average in thousands)

DEVELOPMENT OF DISTRIBUTION BUSINESS

MV HVLV

2003

22.1%

1.7%

76.2%

2004

19.4%

70.5%

10.1%2005

19.0%

62.4%

18.6%

2006

18.5%

53.3%

28.2%

2007

20.8%

58.1%

21.1%

STRUCTURE OF ENERGY SUPPLIEDIN VOLTAGE LEVELS (ACCESS TARIFF) (%)

(*) Energy supplied: Include Comprehensive Tariff and Access Tariff

5.1.4 UNION FENOSA Commercial

Business Indicators

In the Spanish electricity market in 2007, there was a fresh impetus in the process ofliberalisation initiated in 2003 that had undergone a slow-down as a result of the highenergy prices recorded in 2006. During the year 2007, the behaviour of Pool prices, lessthan those recorded during the previous year, has opened up the possibility of obtainingsupply margins in some customer sectors and it has enabled supply in the LiberalisedMarket to be intensified.

According to the latest official information provided, the Liberalised Market represents31.5% of the total energy provided in the Peninsular. The electricity provided to UNION FENOSA Comercial customers in 2007 was 10,149 million kWh, which represents agrowth of 67.6% with respect to that of 2006. This increase is a consequence of thecommercial strategy, already initiated in 2005, of the selective capture of customers in thesectors with greater sales margins. The UNION FENOSA Comercial’s share of participationin the Liberalised Electricity Market has been 15.9 percent.

With respect to gas, in 2007 2,021 million kWh have been supplied, which represents anincrease of 20.2% on 2006. This fact goes towards consolidating UNION FENOSAComercial’s positioning as a gas marketing agent.

UNION FENOSACOMERCIAL HAS GAINED MARKET SHARETHROUGHOUT THIS FINANCIALYEAR, IN WHICH IT HAS PROVIDED67.6% MOREELECTRICITY THAN IN 2006. WITHRESPECT TO GASSOLD, THE INCREASEWAS 20.2%

Company Public AuthoritiesMajor Accounts

DomesticSME

2007

18.9%

39.7%

19.4%

4.5%

17.5%

2006

5.7%

24.7%

22.8%

31.0%

15.8%

STRUCTURE OF THE ELECTRICITY PORTFOLIOBY CUSTOMER TYPE (%) (*)

North

5%

1%

25%Galicia

Portugal

4%Catalonia

36%

Madrid

14%

Castiles

5%Andalusia

10%Levante

ELECTRICITY PORTFOLIO BY GEOGRAPHICAL AREA (%)

43.6%

9.2%

CompanyMajor Accounts

DomesticSME

2007

12.3%

31.8%

3.1%

Public Authorities

2006

46.8%

5.3%9.9%

34.9%

3.1%

STRUCTURE OF THE GAS PORTFOLIOBY CUSTOMER TYPE (%)

North

9%

8%Galicia

20%Northeast

44%

Madrid

10%

Castiles

1%Andalusia

8%Levante

GAS PORTFOLIO BY GEOGRAPHICAL AREA (%)


(*) Includes Portugal

(1) Castile La Mancha + Castile and Leon

(1)

Commercial Activity

Within the sectors in which UNION FENOSA Comercial has grouped its customers, that ofpersonalised service, which includes Companies, Major Accounts and Public Authorities, hasbeen the engine for growth of sales during 2007. The electricity portfolio to 31 December, 2007in these sectors amounted to 9,523 million kWh, which represents an increase of 79.2% inrelation to the previous year. This growth has been especially relevant in Companies and MajorAccounts where the 2006 values have practically been doubled.

Regarding gas sales in these customer sectors it is necessary to review the consolidation of thepronounced growth path of previous years. For the first time in the history of the Company theportfolio has surpassed 1,000 million kWh. This increase has been concentrated in theCompanies and Public Authorities sector and, although the percentage of growth has beenexcellent in all the geographic areas, the Northwest and Castile stand out.

In the SME sector, the national grid of indirect sale channels has been consolidated, which nowcontributes 75% of the sales made. This model distances itself from traditional sales in thissector, giving UNION FENOSA Comercial a clear advantage for competing in future scenarios.The outcome from the different actions taken in customer loyalty matters is that the index ofSME customer retention has been in excess of 90%.

In a residential level, the positioning strategy in gas has been directed both at multi-familyhousing with centralised boilers as well as the individual domestic customer, to whom it hasbeen marketed through direct sale actions. It is necessary to emphasise that 18.5% ofresidential customers have additionally contracted value added services associated with thefacilities. These elements mean the domestic gas portfolio is of top quality and has a highdegree of customer loyalty.

The increasing commercial activity in the area of efficient energy and value added services hascontributed to the overall positioning of the Group in the liberalised gas and electricity markets.

Energy Efficiency

UNION FENOSA’s growing concern for the efficient use of energy makes this the Company’s firstactive commitment to corporate social responsibility.

UNION FENOSA created the Energy Efficiency Centre with the objective of contributing to gooduse of energy and, consequently, to the sustainable development of the planet, especially bymeans of the reduction in CO2 emissions. From this Centre, it advises individual consumers andcompanies on how to increase their energy efficiency, and it carries out certifications and studiesof buildings for companies and institutions. In fact, it works with the customer in the creation of anew energy culture.

Energy Efficiency is the key factor in the fight against climate change since it has beendemonstrated that it contributes remarkably to the reduction in emissions and generates largereconomic benefits than the other alternative actions that are also necessary to achievesustainable development.


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2007 HAS BEEN AFAVOURABLE YEAR

FOR THELIBERALISATION OF

THE SPANISHELECTRICITY MARKETAS A RESULT OF LOWPOOL PRICES WHICH

HAVE FAVOUREDMOVEMENT FROM

THE REGULATEDMARKET TO THE

LIBERALISEDMARKET

UNION FENOSA is a key agent in the domestic energy landscape in relation to the rational use ofenergy.

In 2007, at an institutional level, UNION FENOSA has maintained the contacts established inprevious years with the main autonomous and local agencies. Within the framework ofcollaboration with the Spanish Strategy of Energy Saving and Efficiency, the actions that havebeen developed with Regional Energy Agencies stand out, such as the customer days with INEGA,ICAEN, AGECAM, EREN and the Directorate General of Industry and Energy for the Madrid Region,and the publication of results and better practices with IDAE.

UNION FENOSA is the first Spanish utility to have two programmes assigned to SustainableEnergy for Europe, the campaign of the Directorate General for Energy and Transport of theEuropean Commission that promotes Sustainability and Energy Efficiency. It also collaborateswith the Energy Service Regulatory Authority (ERSE) of Portugal, where, for the secondconsecutive year, it is the company making the greatest contribution to plans for the broadcastingand promotion of Energy Efficiency.

UNION FENOSA Comercial continues to actively participate in courses and University days, suchas the one in Oviedo with which it has signed a collaboration agreement for the running ofcourses, presentations and forums on Energy Efficiency, the Polytechnic University of Valencia,where it has delivered a course on Energy Efficiency, and the Polytechnic University of Barcelona.In addition, actions have been promoted with business and consumer associations so that theyincorporate an energy efficiency content provided by UNION FENOSA Comercial.

Among the energy services for companies and Public Authorities, the Energy Services Cataloguehas been developed, which includes the services of Energy Pre-diagnosis, Energy Diagnosis andComprehensive Energy Analysis, as well as the incorporation to the Commercial Turnkey ServicesOffer of subsidies management, financing of studies and implementation of measures. In thisrespect, and as progress in the commitment to Efficiency, UNION FENOSA has launched theESCO Project that will enable it to position itself in the market as the leader in Energy Services.

Statistical studies have been made during the year of Energy Efficiency Indices in the Home and inSMEs that have shown savings potential in these sectors of 9.28% and 18.3% respectively.


The results for SMEs by activity sector and by Autonomous Region were:


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3rd Version2nd Version

fessional Sector

2.9 3.0

Industry

3.33.7

Food and Drink

3.94.1

Retail

3.03.4

Other sectors

3.03.4

ENERGY EFFICIENCY INDEX OF SMES BY SECTORS (%)

18.7%

18.2%

18.9%

18.0%

19.0%

19.9%

17.9%

18.2%

18.7%

19.5%

18.8%

17.4%

19.2%

18.0%

17.8%

18.3%

18.1%

Andalusia

Aragón

Asturias

Balearic I.

Canary I.

Cantabria

Castile & León

Castile-La Mancha

Catalonia

Estremadura

Galicia

La Rioja

Madrid

Murcia

Navarra

Basque C.

Valencia

ENERGY EFFICIENCY INDEX OF SMES BY AUTONOMOUS REGION (%)

ENERGY EFFICIENCY INDEX IN HOMES (%)

Total

6.2 6.3

3rd Version2nd Version

Maintenance

6.6

Control

6.6

Culture

6.3

Equipment

5.5

6.5 6.7 6.5

5.7

The publication of the results had a huge impact on both regional and national mass media.In addition, from a communication point of view, several campaigns have been run thatpromote the rational use of energy and efficiency as instruments to reduce the emission ofGHGs.

Within the Sustainable Energy for Europe programme. the Virtual Forest has beendeveloped and the plan to replace incandescent light bulbs by low energy bulbs showsUNION FENOSA’s commitment to sustainability.

A final action to highlight in the matter of communication was the preparation of the EnergyEfficiency Manual, in collaboration with the newspaper Cinco Días and the Escuela deOrganisación Industrial (EOI) [Industrial Organisation College).

Customer Service and UNION FENOSA Club

During 2007, some 434,029 calls from our customers were attended in the CustomerService Centre (CAC) with a quality factor of 92.7% and a hang-up rate of 2.7%, and thewebsite received 288,165 hits.

Within the innovating advances under the scope of customer service improvement, newtechnologies have been installed that improve the quality of the service by means of acontinuous monitoring of our customers’ requests and a project to redesign the UNION FENOSA Comercial website has been undertaken.

In addition, tools for communication with our customers have been installed such as SMSdelivery during the execution of processes or the sending of documents to mobiles or PDAs,and the option of being able to contact UNION FENOSA Comercial by means of a messageto the agent.

The fundamental mission of the Customer Service Technical Office is the evaluation andcontrol of the quality of the service provided, as well as to make proposals for improvementon the basis of the evaluation of suggestions and complaints, and to control the averageperiod of resolution and the average age of the complaints. Throughout year 2007, a total of19,342 complaints with an average period of resolution of 27.6 days were handled, whichmeans an improvement of 14.4% with respect to the previous year.

Our objective at the Customer Service Centre is to be competitive, providing a service with avalue that is hard to match, that is to say, efficient, excellent and the best. For that reason,the Customer Service Centre has obtained an ISO 9001:2000 certificate of quality, awardedby Bureau Veritas Quality Insurance (BVQi).

The UNION FENOSA Club, which has been in existence for almost 10 years, with 450,000members and invoicing of 197.4 million euros, has been consolidated as an excellent toolfor customer loyalty of domestic customers, because it contributes to achieving the targetsof UNION FENOSA Comercial:

• To reduce the loss of customers. The percentage of losses, both in gas and inelectricity, was reduced by half in the case of members.

• To create long-term bonds with customers. According to a CFI Group study, thepropensity to remain as a gas customer rises 10 points in the case of activemembers and the tendency to recommend this service also increases.

• To contribute profitability to the Group.• It is a self-financing program.• Helps with new customer capture, being one of the differential elements of our

service.• It facilitates cross sales to members with gas supply.


GAS SUPPLY ACTIVITY IN UNION FENOSA

In 2007, UNION FENOSA has reinforced the maturity of its gas project, initiated in 1997. UNION FENOSA Gas has achieved growth of commercial activity in Spain and, in particular, anoutstanding development in sales to the combined cycle sector. In addition, growth has beenrecorded in international commercial activity, where it has participated in a high number oftransactions.

Additionally, the industrial project has completed its first stage contemplated in the 2001-2007plan with the entry in operation of the regasification plant in Reganosa (Ferrol) in November of2007.

In the reference period, UNION FENOSA Gas has consolidated second position in sales to theSpanish Liberalised Market, being clearly confirmed as one of the most outstanding agents. Atthe end of the financial year, its market share approaches 14% of the total sales in the non-regulated market. In the international arena, an outstanding presence has been attained, with avolume of transactions that is 1.7 times that of the previous year.

During 2007, UNION FENOSA Gas has continued to develop its organisation, systems andprocedures with the purpose of adapting its structure to the growth demands of its businesses,for which its staff has increased by 8.0%.

GAS INFRASTRUCTURE

During the year, investments corresponding to gas infrastructures anticipated in the 2001-2007plan have been completed, the Reganosa (Ferrol) regasification plant having enteredcommercial operation.

The investment made up to the end of 2007 corresponding to the projects included in this planamounts to 2,126 million euros, the accumulated investment attributable to UNION FENOSA Gasbeing 1,001 million euros. Of them, 89 million euros correspond to 2007.


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IN 2007,THE FIRST CYCLE OF

INVESTMENTS IN GAS

INFRASTRUCTURES,WHICH HAD BEGUN

IN 2001, WASCOMPLETED AND

THE SECOND PHASE PROJECTS

WERE BEGUN

THE STRATEGICPLAN FORECASTSSTRONG GROWTH

IN SALES FOR UNION FENOSA GAS

AND AN EQUALLYSIGNIFICANTINCREASE OF

MARKET SHARE

5.2 GAS BUSINESS

GasProduction

SupplyContract Transport

Supply in the international market

Position of UNION FENOSA Gas

Supply

CCGTs ElectricityRegasification

2005 2006

Phase I: Damietta T1 Sagunto Reganosa Qalhat LNG

Phase II: Damietta T2 Sagunto Expansion Other Projects

Liquefaction

2007 2008-2011

In investment phaseEntry into operation

Operation

InvestmentInvestmentInvestment

OperationOperation

Operation

In addition to the aforementioned investments that belong to the first cycle of infrastructureprojects, the projects corresponding to the second phase of investments are in progress:

I. Construction of a second train in Damietta (Egypt),

II. First and second extension of the storage capacity and regasification of the LNG terminalat Sagunto.

On 24 September 2007, UNION FENOSA Gas acquired the Nueva Electricidad del Gas, S.A.(NUELGAS) company, owner of 100% of the concessions for the operation of the gaseoushydrocarbons of “El Ruedo" and "Las Barreras", located in the Guadalquivir basin (AutonomousRegion of Andalusia).

During the year, recognition has been obtained from the Public Authorities for the conversion ofthese operations into underground storage for CO2 and their inclusion in the “Planning of theelectricity and gas industries 2008-2016. Development of the transmission grids," as newunderground gas storage projects.

The operation of these deposits will continue until their resources are exhausted and latersuitable infrastructure will be developed to turn these into underground gas storage connectedto the basic transmission grid of the Spanish system.

The storage capacity of the acquired deposits is in the order of 0.30 bcm, with the possibility of afurther 1.50 bcm increase.

Liquefaction Plant in Damietta (Egypt)

UNION FENOSA Gas has an 80% stake in the shareholding of the company SEGAS, owner of thefirst train of the liquefaction plant in Damietta. This plant has a processing capacity of 7.56bcm/year, with energy efficiency of 90% that is equivalent to a capacity of 6.8 bcm/year ofmarketable natural gas. This plant has set global milestones in terms of construction time and unitcapacity of its liquefaction train.

In 2007, plant production reached 7.9 million m3 of liquefied natural gas (LNG), practically half ofthis production corresponding to the supply of UNION FENOSA Gas. Throughout the year 57 shipswere loaded, which means an average capacity per ship of approximately 137,000 m3 of LNG. Sincethe beginning of operations, the liquefaction plant production has been 24.1 million m3 of LNG,with a total of 178 ships loaded, of which 85 correspond to the supply of UNION FENOSA Gas.


IN THE CONTEXT OFTHE BIGGER PLANTHE CONSTRUCTIONOF A SECONDLIQUEFACTION TRAININ DAMIETTA ISFORECAST, INADDITION TOINCREASING THE LNGSTORAGE CAPACITY

UNION FENOSA ISTHE FIRST SPANISHINVESTOR IN THEMIDDLE EAST,THROUGH ITSPARTICIPATION INTHE DAMIETTA PLANT(EGYPT), THAT RELIESON THE BIGGESTLIQUEFACTION TRAININ OPERATION IN THEWORLD

The Damietta plant has obtained the ISO 14001 certification, which together with the renewal ofthe 9001 and 18001 certifications means that it has the maximum level of ISO certification.

In relation to the second liquefaction train project in Damietta, in July of 2007 the invitation totender for the basic engineering was awarded to KBR-Técnicas Reunidas - JGC (KJT) and to theFoster-Wheeler Italiana – Snamprogetti consortia, as well as for the engineering services of theproperty, their award being forecast for 2008.

Given its strategic geographic location in the Mediterranean Sea and near the Suez Canal, theplant is in a superb situation for exports to Europe, North America and Southeast Asia. In 2007,Spain was the main recipient of the LNG exported by the plant (47.5%), which contributespositively to diversifying the national market’s portfolio of supplies.

Qalhat LNG Liquefaction Plant (Oman)

UNION FENOSA Gas has a 7.36% stake in the shareholding of the company that has developedthe third train of the liquefaction plant of Qalhat LNG in the Sultanate of Oman, the governmentof that country being the majority shareholder of the same. UNION FENOSA Gas is the recipientof 50% of the production of this plant’s third train in accordance with the long-term contractsigned in 2002, by which supply in the order of 2.2 bcm/ year was agreed.

Both the construction period and the period of time between initiating the start-up and the firstproduction of LNG have set a world record in the development of this type of facility.

The Qalhat liquefaction plant complements and strengthens in a very significant way thebusiness structure of UNION FENOSA Gas.

Reganosa Regasification Plant (Ferrol)

The joint participation of UNION FENOSA and UNION FENOSA Gas in the companyRegasificadora del Noroeste, S.A. (Reganosa), owner of this plant, amounts to 21% of thecapital.

The nominal regasification capacity of the plant, included in the 2008-2011 Strategic Plansof the Gas and Electricity Systems and in the final discussion phase and pending definitiveappraisal, is 115.2 GWh/day, a value corresponding approximately to 3.6 bcm/year, and hasalready been contracted mostly by means of long-term (10 years) and short-term (24months) contracts.

In this same rough draft of the 2008-2011 Strategic Plan, an increase in vaporisationcapacity of the plant of up to 845,000 Nm3/h in 2013 is included, which would implydoubling its present capacity.

The plant completed the unloading of the first ship, Galicia Spirit of UNION FENOSA Gas, onthe 12 May, 2007, and on the 16 May gas was issued for the first time into the NationalBasic Grid. On the 7 November, 2007, Reganosa received the definitive commercial licencefrom the Ministry of Industry, which signifies total integration in the national gas supplysystem.

At the end of the 2007, the plant had processed a total of 9,112 million kWh of liquefiednatural gas and received 11 LNG ships.

With regard to the gas pipelines that were included in the Reganosa project and whichconnect the plant with the Spanish gas supply system and with the combined cycles thathave been built in Galicia, in March the authorisation to start up the North Gas Pipeline wasobtained, which constitutes the first section and connects the terminal with the basic


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natural gas network in Guitiriz, and in August the construction of the southern gas pipelinewas finalised, that goes from Abegondo to Sabón.

Sagunto (SAGGAS) Regasification Plant

The Sagunto plant plays a key role in the Spanish gas supply system due to its location vis-à-vis the LNG producing countries in North Africa and the Persian Gulf, and due to its locationwith regard to consumption, given that a substantial part of the national market isconcentrated in the Mediterranean arc, with significant forecast for growth in the comingyears.

The regasification capacity of the Sagunto plant included in the last Plan is 800,000 Nm3/h,which is equivalent to 7 bcm/year, almost all of which is contracted through short- and long-term regasification contracts.

In 2007, 97 ships were unloaded, and it has displayed a stable and satisfactory operation fromits start-up on 1 March 2006, becoming a fundamental part of the infrastructure to guaranteethe operation of the gas supply system and to enable national demand to be satisfied.

At the end of 2007, the plant had regasified a total of 59,037 million kWh (approximately 5.1bcm), which corresponds to 21.2% of the total LNG that is regasified in Spain. The average useof the plant has been 71.6%, the highest by a long way of the existing plants in Spain.

In the last Strategic Plan of the Electricity and Gas Systems published by the Ministry forIndustry, Tourism and Commerce, the extension of the plant in two successive phases isexpected, obtaining a capacity of up to 600,000 m3 of storage of LNG, with two 150,000 m3tanks in addition to the existing ones and the two vaporisers, reaching a regasification capacityof 1,200,000 Nm3/h, which means multiplying the present capacity by 1.5. The extension of theplant with a fifth tank and a seventh vaporiser is included in the draft Strategic Plan 2008-2011which would eventually leave the installation with a storage capacity of 750,000 m3 of LNG anda vaporisation capacity of 1,400,000 Nm3/h. It is expected that the fifth vaporiser will becomeoperational in September of 2008 and the third LNG tank in September of 2009.


IN 2007 A FIFTH OF THE GASREGASIFIED IN SPAIN HAS BEENPROCESSED IN THESAGUNTO PLANT

UNION FENOSA GASHAS PROVIDED

MORE THAN 12% OF THE TOTALNATURAL GASCONSUMED IN SPAIN IN 2007

THE MILES SAILED BYTHE GAS TANKERS OF

UNION FENOSA GASIN 2007,

TRANSPORTING LNGBETWEEN DAMIETTA

AND SPAIN, AREAPPROXIMATELYEQUIVALENT TO

TRAVELING 6 TIMESAROUND THE WORLD

PROCUREMENTS AND MARITIME TRANSPORT

Procurements

In 2007, the two main long-term procurements by UNION FENOSA Gas have been consolidated,from the liquefaction plant of Damietta (Egypt) and the Qalhat LNG plant (Oman). As a whole,the gas provided to the national gas supply system during 2007 was increased by 7.8%,amounting to 48,328 million kWh. This number represents 12.1% of all natural gas consumed inSpain and 13.5% of that consumed in the Liberalised Market.

During 2007, a total of 27 shipments were provided from the Damietta plant. With respect to thesecond year of the long-term contract with Qalhat LNG, the number of 25 shipments comingfrom Oman has been maintained.

In addition to own procurements, numerous purchase and sale trading transactions have beenmade on the spot market as well as other operations in the Spanish system for the purpose ofmeeting the commercial commitments of UNION FENOSA Gas and balancing the supply anddemand of gas.

The total volume of procurements of UNION FENOSA Gas in 2007 increased by 22.6% up to 6.5bcm. During the year, a total of 101 unloadings of LNG ships were handled, both in the Spanishsystem and internationally. This number signifies an increase of 50% with respect to theunloadings handled in 2006.

Maritime transport

There are two gas tankers in the UNION FENOSA Gas fleet, Galicia Spirit and the Cadiz Knutsen,on long-term charter from Time Charter. The ship Galicia Spirit has sailed more than 78,000miles during 2007, and the Cadiz Knutsen somewhat more than 70,000 miles. This would beequivalent to travelling more than 6 times round the world this year.

The usual route that these two ships have sailed during the year has been Damietta-Spain. Inparticular, a total of 72 unloading slots have been made divided between the Enagas plant (21),Sagunto plant (43), Reganosa plant (4) and the rest in international terminals (4). Additionally, in2007, UNION FENOSA Gas has managed 29 unloadings of ships from outside its fleet.

During the programmed shutdown for maintenance of the Damietta plant in 2007, the partialbeaching of the ship Cadiz Knutsen was planned simultaneously for the refurbishment of themachinery, hull and the rest of the equipment. During this beaching, all the elements of the shipwere verified to be in a good condition.


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GAS PROCUREMENTS BY ORIGIN (%)

Egypt OthersOman LNG

2005

17.5%

58.9%

23.6%

2006

17.2%

47.4%

35.4%

2007

35.4%

33.3%

31.3%

From the point of view of the logistic management of the Spanish system, 2007 has beencharacterised by a greater system complexity due to the increase of inflexibility in thesame, caused to a large extent by the lack of storage. UNION FENOSA GasComercializadora has incorporated gas into the system from 5 regasification plants(Sagunto, Mugardos, Barcelona, Cartagena and Huelva) and from the internationalconnection with Badajoz.

Within the system, the volume of interchanges in the secondary market has grownsignificantly during the year with the objective of resolving the logistic restrictions and ofdiminishing third party access costs to the network, reaching an approximated volume of60,000 million kWh.

COMMERCIAL ACTIVITY

The volume of supplies by UNION FENOSA Gas reached 74,564 million kWh in 2007, whichrepresents a 23.9% increase with respect to 2006. The commercial activity in Spain isundertaken in industrial, electricity and domestic-residential sectors, the latter managedby UNION FENOSA Comercial.

The year 2007 closed with two great achievements for UNION FENOSA GasComercializadora that could be summarised as the consolidation of its activity as thenumber two operator in the Spanish gas supply market and obtaining the ISO 9001certification for its natural gas supply process.

Total sales in 2007 of UNION FENOSA Gas in the Liberalised Market in Spain were 49,784million kWh (approximately 4.3 bcm), with growth of 11% on the amount recorded in 2006and a market share in the region of 14% of the national total of liberalised consumers.UNION FENOSA Gas consolidated its position during this year of 2007 as the number twosales agent amongst the operators in the Spanish market in the ranking based on volumessold.

In the industrial market, total sales amounted to 17,241 million kWh (approximately 1.5bcm), and represent a share in the region of 10%of the national market. It is appropriate tohighlight the commercial effort that has been reflected in the 40% increase in the numberof industrial customers with respect to 2006.

UNION FENOSA HASBEEN PRESENT INTHE GAS SUPPLYBUSINESS FOR 10YEARS, CURRENTLYTAKING PART IN EACHLINK IN THE CHAIN,FROM EXTRACTION ATSOURCE TO SUPPLYTO THE ENDCUSTOMER

UNION FENOSA GASHAS BEENCONSOLIDATED ASTHE NUMBER TWOOPERATOR IN THESPANISH GAS SUPPLYMARKET

GAS SUPPLIES BY MARKET (%)

Combined cycles

UF Commercial

Industrial

International supply

2005

13.3%3.2%

47.9%

35.6%

2006

25.5%

2.8%

39.0%

32.7%

2007

32.3%

2.7%

40.9%

23.1%


The entry into commercial operation of the three Sagunto combined cycle groups along withhigher production of the rest of the Group cycles, has contributed to an increase in sales in thissector, strategic and high-priority for the gas supply activity of UNION FENOSA Gas, of 30.0%reaching 30,522 million kWh (approximately 2.6 bcm) and with a market share higher than 20percent.

In the domestic-residential market that UNION FENOSA Comercial manages, gas sales in theLiberalised Market have risen to 2,021 million kWh (approximately 0.2 bcm), 20.2% more than inthe previous year.

GAS DIRECTO

The activity of Gas Directo is basically centred on the development, operation andmaintenance of distribution facilities aimed at taking gas to the end user, as well as theprovision of rate-regulated natural gas.

At the end of 2007, the number of customers, both domestic and industrial, of Gas Directo,a company owned by UNION FENOSA Gas (60%) and CEPSA (40%), was 3,972 to which 523million kWh of gas were supplied in the various municipalities of Madrid, Castile-LaMancha, Galicia and Andalusia, which marked annual increases of 26.5% and 43.2% in thenumber of customers and in the energy distributed, respectively.

In Galicia, on 27 April, 2007 a Collaboration Framework Agreement was signed between theDepartment of Innovation and Industry of the Regional Government of Galicia and GasDirecto for installation of the gas supply to new urban centres. As a result of thisFramework Agreement, on 30 April 2007 an application was made to the Ministry ofIndustry, Tourism and Commerce for the Specific Reimbursement for the essentialconnection facilities for laying a gas supply to the localities of Carballo and Pontedeume inLa Coruña.

In Madrid, in the locality of Meco, the distribution grids of Industrial Estate SAU-13 and thatof Housing Estate SAU-12, where the construction of 1,400 houses is planned, were put intoservice. In the "Parque de Valdebebas", within the city limits of Madrid, 43 km (91%) of theMedium Pressure distribution grid as well as 2 km (89%) of the High Pressure Supply Spurto the Ciudad de la Justicia have been constructed.

In Castile-La Mancha, the distribution grid in La Solana (Ciudad Real) to supply LNG to thefirst homes that have been delivered this year has been put into service. With this locality,there are now four towns in this Autonomous Region to which gas is being distributed:Sonseca in Toledo, and Malagón, Argamasilla de Alba and La Solana in Ciudad Real.


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THE INTERNATIONAL ELECTRICITY BUSINESS OF UNION FENOSA

The strategy of the UNION FENOSA Group in the international arena pursues theconsolidation of a wide business platform capable of taking advantage of the huge growthand profit potential that these markets can offer and serving as a bridge for thedevelopment of new businesses within the BIGGER Plan.

All the investments have a clear intention of permanence, in a climate of collaboration withlocal authorities and existing regulatory frameworks, and are orientated towards providingthe best electricity service to their customers and to increase the efficiency andcompetitiveness of their operations.

The electricity business of UNION FENOSA within the international arena is grouped intothree nodes: Mexico, Colombia and Central America and Others. The last node includes, onthe one hand, Panama, Guatamala, Nicaragua and the Republic of Moldova, countries inwhich the fundamental activity is electricity transmission and distribution and on the otherhand the Dominican Republic, Kenya and Costa Rica, where the main business is thegeneration of energy.

In the Generation business, installed capacity amounts to 2,834 MW, with the incorporationin the month of July of the Hidroprado hydroelectric power plant in Colombia, with grosscapacity of 52 MW and measured capacity of 51 million kWh during year 2007.

In the Distribution business, 22,345 million kWh have been supplied, 37.9% of the energysupplied by the Group to 5.5 million customers, who consititue 60.3% of the electricitycustomers of UNION FENOSA. UNION FENOSA’s market at an international level ischaracterised by strong dynamism, as shown by the growth in energy supplied, which rose6.8 percent.


THE DEDICATION TOPERMANENCE OFINVESTMENTSASSISTS THECOMPANY’SCOMMITMENT TO THECOUNTRIES IN WHICHIT IS PRESENT, BOTHECONOMICALLY ANDSOCIALLY

THE INTERNATIONALBUSINESS OF UNION FENOSA HAS AN INSTALLEDGENERATIONCAPACITY OF MORETHAN 2,800 MW, WITHWHICH IT PRODUCEDMORE THAN 15,000GWH IN 2007 ANDSERVES 5.5 MILLIONCUSTOMERS

5.3 INTERNATIONAL ELECTRICITY BUSINESS

UNION FENOSA ’S INTERNATIONAL BUSINESS (31/12/2007)NODES GENERATION DISTRIBUTION

Installed Production Delivered Customers

Capacity (MW) in MC (GWh) Energy(GWh)

Mexico . . . . . . . . . . . . . . . . . . . . . 1,550 10,009 --- ---

Colombia (1) . . . . . . . . . . . . . . . . 952 3,513 13,210 2,331,946

Central America and Others . . 332 1,.536 9,135 3,153,904

Total . . . . . . . . . . . . . . . . . . . . . . . 2,834 15,058 22,345 5,485,850

(1) Does not include the reserve capacity contract with Termovalle (140 MW)

Within the scope of the international businesses, the investment effort of the UNION FENOSAGroup in the financial year amounted to 249 million euros. These investments have primarilybeen directed at the improvement of medium and high voltage grids, and the construction andstart-up of new generation projects.

MEXICO

UNION FENOSA has three combined cycle power plants in operation in Mexico, withcombined installed capacity of 1,550 MW, and a fourth under construction of 450 MWnominal power.

The Hermosillo power plant has a capacity of 250 MW and is the oldest of the three that arein operation. It entered operation in October, 2001. In 2007, production from this powerplant amounted to 1,332 million kWh.

The Tuxpan plant in the state of Veracruz, located next to the city of the same name,entered into operation in May, 2003. This power plant is made up of two generator units,with nominal capacity of 500 MW in each group. The reduction of measured capacity withrespect to 2006 was 5.2%, amounting to 6,747 million kWh, as a result of the low sales inthe months of February and April by the Federal Commission of Electricity, and theincidence of Hurricane Dean in the area during the month of August.

The Naco Nogales plant entered into operation in October, 2003. It is located in the city ofAgua Prieta, to the north of the Sonant state, near to the border with the United States. Itsnominal installed capacity is 300 MW and during 2007 its production amounted to 1,930million kWh, 2.6% above the previous year.


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MEXICO

UNION FENOSA HAS 3COMBINED CYCLE

POWER PLANTS INOPERATION INMEXICO, THAT

TOGETHER PROVIDE1,550 MW, AND ONE

UNDERCONSTRUCTION, IN

THE STATE OFDURANGO, WITH

NOMINAL CAPACITYOF 450 MW

Central America & Others MexicoColombia

2003

10,419

5,883

1,655

2,881

2004

13,460

9,769

1,142

2,549

2005

12,616

8,373

1,266

2,977

2006

15,114

10,636

1,388

3,090

2007

15,058

10,009

1,536

3,513

PRODUCTION IN MEASURED CAPACITY (GWh)

Central America & OthersColombia

2003

15,922

7,266

8,656

2004

16,742

7,657

9,085

2005

18,205

8,047

10,158

2006

20,929

8,568

12,361

2007

22,345

9,135

13,210

ENERGY SUPPLIED (GWh)

Central America & OthersColombia

5,486

2003

4,615

2,761

1,812

2004

4,875

2,859

2,016

2005

5,035

2,979

2,056

2006

5,316

3,085

2,231

2007

3,154

2,332

DEVELOPMENT OF CUSTOMERS (thousands)

2003

21.2%

2004

20.5%

2005

19.8%

2006

18.0%

2007

17.0%

INTERNATIONAL DISTRIBUTION – ENERGY LOSSES (%) (1)

(1) Losses in the Distribution Grid (does not include transmission inEPSA-Colombia)

The combined use of these facilities has been 76.6%, 5.9% less than in 2006, the year in whichthe historical maximum was reached.

On 5 March this year, UNION FENOSA won the bid to build a 450 MW combined cycle powerplant in Norte I, in the State of Durango, and on 10 April the contract for the generation capacitycommitment and sale of associated electricity was signed with the Federal Commission ofElectricity (CFE), establishing the construction start date as 10 October 2007 and theprogrammed date of commercial operation as 2 January 2010.

UNION FENOSA Energías Renovables Mexico (UFERM), 100% owned by UNION FENOSA, isdeveloping the Bii Hioxo wind farm project in the State of Oaxaca, with a total installable capacityof 230 MW and that anticipates the start up of the first stage in 2010.

In May 2007, 50% of the Mexican company Zemer Energía was acquired. This company isdeveloping a wind project in the area of La Rumorosa (Baja California) with installed capacity ofbetween 500 MW and 1,000 MW.


UNION FENOSA ISDEVELOPING WINDPROJECTS IN THESTATES OF OAXACAAND BAJACALIFORNIA WITH ATOTAL INSTALLABLECAPACITY BETWEEN700 AND 1,200 MW

OPERATIONAL INDICATORS 2007Nominal Installed Production Availability

Capacity (MW) in MC (GWh) (%)

Hermosillo . . . . . . . . . . . . . . . . . . . . . . . . . 250 1,332 90.6

Naco Nogales . . . . . . . . . . . . . . . . . . . . . . 300 1,930 90.3

Tuxpan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 6,747 96.8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,550 10,009 94.6

COLOMBIA

UNION FENOSA is represented in Colombia in several companies. The company Energía delPacífico, S.A. (EPSA), based in the city of Cali, acts in the joint fields of generation,distribution and supply of energy, whereas the Costa-Caribe Group, with central offices inBarranquilla, is limited to the distribution and supply of energy.

After the purchase in July of the Hidroprado hydroelectric power plant, with an installed capacityof 52 MW, EPSA, has reached a total installed capacity of 952 MW, the majority of which iscomprised of hydroelectric power plants (926 MW). In 2007, production in measured capacitywas 3,513 million kWh, 13.7% more than in 2006 and with a combined availability of its plants of96.5%. In the distribution section, EPSA provided 1,900 million kWh to their 452,092 customerswith energy loss levels in the distribution grid of the order of 10%, in line with thosecorresponding to the best references in the sector and which, including the transmission grid,have fallen by 4.1 percent.

The credit rating agency Duph & Phelps ratified the AAA rating, the highest rating for long-termissues, for the issue of current EPSA bonds for the eighth consecutive year. It also gave a ratingof DP1+, the highest rating for short-term issues, for the issue of commercial paper which, withthe aim of optimising the financial structure of the Company, was carried out at year end tocover the reimbursements anticipated with the reduction in capital authorised in the previousGeneral Shareholders’ Meeting.

In addition, certification was obtained during the year of the ISO-9000 quality system for thetransmission, distribution and wholesale market processes and the certification for the energyproduction process was renewed. Similarly, work began on obtaining certification to the samestandard for the supply process, as well as on obtaining environmental certification according tostandard ISO-14000 for the energy production process.

The distributors included within the Costa-Caribe Group cover an area of 132,000 km2 to thenorth of the country and tend to 1.9 million customers. During 2007, 11,310 million kWh weresupplied, 8.4% more than in 2006, which shows the significant increase of electricity demandthat the country is experiencing. Still against this background of strong growth in energysupplied, the grid energy losses have been improved by 2.1 percentage points with respect to theprevious year having a value of 17.9 percent.


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COLOMBIA

UNION FENOSAGENERATES,

DISTRIBUTES ANDSUPPLIES

ELECTRICITY INCOLOMBIA THROUGH

EPSA AND GRUPOCOSTACARIBE.

ALMOST 50% OFUNION FENOSA ’S

CUSTOMERS OUTSIDESPAIN ARE IN THECOLOMBIAN NODE

GROUP

THE MERGER OF ELECTROCOSTA

AND ELECTRICARIBEAGREED IN

OCTOBER 2007 TOOKEFFECT IN 2008

In October 2007, the Board of Directors of the distributors approved the merger betweenthe companies Electrocosta and Electricaribe, which has become effective as of January2008.

Additionally, the support of the Colombian Government in the resolution of themanagement problems that the companies were experiencing in certain areas has resultedin the creation of Energía Social de la Costa, Energía Empresarial de la Costa, ElectrocostaMipymes and Electricaribe Mipymes. These companies take care of those depressed andrural districts where until now it was difficult to provide an electricity service, succeeding ininvolving their own customers in the management and supplying energy at a lower price.The Colombian Government is taking this management model as a reference whenspeaking of the normalisation processes of the marginal areas of the country.

This work of assisting in social integration and development of specific areas of the countryis also undertaken by maintaining a continuous improvement in the management indicatorsand increasing the contribution to UNION FENOSA Group’s results.

In the whole of Colombia, the increase in energy supplied was 6.9% and the index of energylosses has fallen 1.7 percentage points.

CENTRAL AMERICA AND OTHER

In the area of Central America and Other, UNION FENOSA manages an installed capacity of332 MW, which in 2007 has generated 1,536 million kWh. In this area, energy was suppliedto 3,153,904 customers, to whom 9,135 million kWh were delivered, 6.6% higher than in2006.

UNION FENOSA is going to complete a decade of presence in Panama. Since 1998, when itacquired 51% of the shareholding of the electricity distribution companies, DistribuidoraEléctrica de Metro-Oeste (Edemet) and Distribuidora Eléctrica de Chiriqui (Edechi) andbegan managing these, it has been improving all its operational indicators, turning it into amature business that is contributing to the economic development of the country and to theprofit and loss account of the UNION FENOSA Group.

In Panama, UNION FENOSA distributes energy to 418,991 customers in an area thatincludes approximately 46,000 km2 (70% of the market), in regions of higher economicdevelopment. 3,079 million kWh, 7.1% more than in 2006, were supplied.


CENTRALAMERICA ANDOTHER

IN THE AREA OFCENTRAL AMERICAAND OTHER, UNION FENOSAMANAGES ANINSTALLED CAPACITYOF 332 MW THATHAVE GENERATED1,536 GWH ANDSUPPLIES ENERGY TO3.2 MILLIONCUSTOMERS

IN PANAMA,CONSTRUCTION OFTHE 10 MWALGARROBOSHYDROELECTRICPOWER PLANT HASSTARTED,REGISTERED WITHTHE UN AS A CDMPROJECT

2003

20.4%

2004

20.8%

2005

20.3%

2006

18.4%

2007

16.7%

COLOMBIA – ENERGY LOSSES (%)

2003

4.15

2004

4.80

2005

5.70

2006

7.41

2007

7.97

COLOMBIA - PRODUCTIVITY (GWH/employee)

(1) Losses in the Distribution Grid (does not include transportin EPSA-Colombia)

UNION FENOSA BEGAN ITS

OPERATION IN GUATEMALA IN 1999 AND IN 2007 IT HAS 1.3

MILLION CUSTOMERS

During the year 2007, a tariff review took place, considerably reducing the Distribution AddedValue as a result of which the Panamanian Government did not consider it opportune to transferthe increase in the cost of energy procurements to the average sale prices to the end user.

Besides the Distribution business, UNION FENOSA manages 26 MW of hydroelectric and co-generation power. Additionally, in 2007 the contracting and start of construction was completed ofthe Los Algarrobos hydroelectric power plant, with 10 MW of installed capacity, and alsoinvitations to tender for the construction of other hydroelectric facilities were issued.

The electricity distribution activity of UNION FENOSA in Guatemala began in 1999 throughDistribuidora de Occidente (Deocsa) and Distribuidora de Oriente (Deorsa). In the year 2007, thetwo companies supplied 1,290,121 customers with 1,808 million kWh, 8.3% above the previousyear.

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MoldovaPanama Guatemala Nicaragua

2007

1,8082,058

3,079

2,190

2006

1,669

1,967

2,874

2,058

2005

1,537

1,824

2,804

1,882

2004

1,421

1,747

2,736

1,753

2003

1,319

1,674

2,592

1,681

CENTRAL AMERICA AND OTHER – ENERGY SUPPLIED (GWh)

MoldovaGuatemala NicaraguaPanama

2003 2004 2005

378357 392

569515

605

1,1641,1351,220

747754 762

2006

407

636

1,272

770

2007

419

660

1,290

785

CENTRAL AMERICA AND OTHER - CUSTOMERS (thousands)

2003

22.2%

2004

20.1%

2005

19.3%

2006

17.5%

2007

17.1%

CENTRAL AMERICA AND OTHER – ENERGY LOSSES (%)

2003

1.42

2004

1.62

2005

1.81

2006

2.02

2007

2.25

CENTRAL AMERICA AND OTHER - PRODUCTIVITY (GWh/employee)

2003

3.08

2004

3.72

2005

4.20

2006

4.44

2007

4.96

PANAMÁ - PRODUCTIVITY (GWh/employee)

2003

1.30

2004

1.43

2005

1.56

2006

1.70

2007

1,87

GUATEMALA - PRODUCTIVITY (GWh/employee)


Through the Rural Electrification Project (PER), part of an international tender, electricityhas been brought to more than 800,000 people (approximately 70% of the committed planfor distribution completed) and 18 substations and 14 transport lines have been put intooperation (60% of the transmission commitment completed). Given the social importance ofthis project, the Banco Centroamerica de Integración Económica [Central AmericanEconomic Integration Bank] is contributing funds to the trust created by the INDE (NationalInstitute of Electrification) for financing the works.

In 2007, the shareholders’ meetings of both distributors approved a capital reduction thatwill improve the profitability of UNION FENOSA in the country.

UNION FENOSA has operated in Nicaragua since the year 2000 through Distribuidora deElectricidad del Norte (Disnorte) and la Distribuidora de Electricidad del Sur (Dissur).These two distributors are the only ones operating in this country.

In 2007, 659,612 customers were served, 3.6% more than in the previous year, and theywere supplied 2,058 million kWh, an increase with respect to 2006 of 4.6 percent.

On 28 June, 2007 UNION FENOSA and the government of Nicaragua signed a Memorandumof Intent for the joint search for solutions to the structural power problems that the countryis experiencing, fundamentally associated with electricity generation. According to thisMemorandum, the possible solutions have to become reality in a Protocol of Understandingthat is pending definitive approval.

UNION FENOSA has operated in the Republic of Moldova since February of 2000 by meansof the control of three of the five existing distributors in the country, RE Chisinau, REDCentru and RED Sud. These distributors cover 70% of the population. In 2007, the Moldovandistributors served a total of 785,180 customers and have increased the energy supplied by6.4%, reaching 2,190 million kWh in 2007.

In the month of August 2007, the new tariff methodology approved by ANRE (the NationalAgency for the Regulation of Energy) took effect and the legal procedure for the merger ofthe three distributors began, which will yield significant improvements in the efficiency ofthe management of the companies. These three companies have merged into a singlecompany called RED Unión Fenosa.

2003

1.34

2004

1.51

2005

1.60

2006

1.79

2007

1.89

NICARAGUA - PRODUCTIVITY (GWh/employee)

2003

0.84

2004

0.94

2005

1.14

2006

1.36

2007

1.59

MOLDOVA - PRODUCTIVITY (GWh/employee)


In the Dominican Republic, UNION FENOSA has two fuel oil power plants that together have 198MW of installed capacity, the Palamara power plant (106 MW) which started commercialoperation in November 2000 and the La Vega power plant (92 MW) in February 2001.

Utilisation of the plants has been 53.4%, 16.0% higher than in the previous year. This increasehas been due both to the change of commercial policy in the second half of the year as a resultof the regularisation of payments to distributors and also to the good performance of the plants.The recorded availability was 92.5%, 2.1% higher than in the previous year. Production inmeasured capacity reached 888 million kWh, 15.9% more than the previous year.

During 2007, negotiations with the Dominican Electricity Corporation (CDE) have been ongoingwith the aim of modifying the prices formula of the current contracts for the sale of capacity andenergy (PPA). The intention is to remove the current over-indexing of payments from fuelconsumption, thereby avoiding the risks arising from fluctuations in fuel prices. In addition,payment of the frozen debt which has been held since 2004 has been agreed. In the publicdocument that was signed to finalise the negotiations, which took place on 10 July 2007, thedistributors paid out 15 million dollars, thereby settling 50% of the frozen debt and resolving toamortize the rest monthly over a period of 20 months.

Iberáfrica Power (IBP) is operating in Kenya, of which UNION FENOSA has 72% of the capital. Itbegan its operations on 27 August 1997 with a contract that guaranteed the sale of energy for aperiod of 7 years. In the year 2004, another contract was negotiated that began at the end of theprevious one and guaranteed the functioning of the operation for a further 15 years. This powerplant with fuel oil generators has an installed capacity of 58 MW.


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The output of the plant during 2007 was at 60% and production was 295 million kWh, less thanthe figure for 2006 which was 380 million kWh. This reduction is in accordance with the lowdemand and the smaller output due to the high hydroelectric output in the country that year.

Iberáfrica Power has reached a preliminary agreement for the entering into of another capacityand energy sales contract for the extension of the present plant. The increase in capacity will be50 MW and the duration 25 years; two capacity and energy sales contracts operating side by sidefor 10 years. The extension will enter into operation at the end of the year 2008.

UNION FENOSA operates the La Joya hydroelectric power plant in Costa Rica, which has aninstalled capacity of 50 MW. This power plant was authorised as a Clean DevelopmentMechanism (CDM) project by the United Nations on 9 March 2007. CDM Projects are provided forby the Kyoto Protocol to limit and reduce the emission of greenhouse gases.

In its first complete year of operation, it has had 96.7% availability, with production of 283 millionkWh and 64.7% utilisation.


SOCOIN is the Group company that carries out engineering activities in the power sector.Set up in 1989, it has extensive experience in the design, engineering, construction andoperation of all types of electrical generation, electricity transmission and distribution andnatural gas facilities. SOCOIN manages projects promoted by multilateral institutions andbodies and provides specialised power engineering services to public and privatecompanies worldwide. Its capability to manage large international projects, along with itsextensive experience in all production technologies, makes it one of the referencecompanies in the industry.

In 2007, it concluded a process of business reorganisation, initiated during 2006, by whichall the power engineering activities have been integrated into just one company through themerger by absorption of the organisation Ingeniería General, S.L.U. by SOCOIN Ingeniería yConstrucción Industrial, S.L.U.

SOCOIN is made up of a team of 477 professionals, most of them with 5-year universitydegrees, highly experienced in the management and execution of large power projects,which guarantees a high quality level in their activities.

In addition to its central offices in Spain, it maintains a permanent presence in Guatemala,Panama, Mexico, Puerto Rico, Egypt, Costa Rica and Venezuela.

In 2007, the intense activity in the international arena was particularly noteworthy. Variousprojects were started in countries in which it had not previously worked, such as Iran,Jordan and Equatorial Guinea. In this respect, SOCOIN is carrying out an active policy ofstrategic alliances with the aim of breaking into new markets.

Thermal generation

Amongst the activities carried out during the year are the commencement of commercialoperations at the Sagunto combined cycle power plant and the development of the Sabóncombined cycle power plant project, both owned by UNION FENOSA Generación, and in whichSOCOIN was responsible for the Balance of Plant (B.O.P) of the auxiliary services, basicengineering and engineering of the premises.

In conventional thermal generation, SOCOIN is developing the projects for the Group’s OrdinaryRegime thermal power plant desulphurisation facilities, including within their scope thebuilding engineering services, preparation of specifications and evaluation of bids.


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SOCOIN’S GREATESTASSET CONSISTS OF

ITS ALMOST 500PROFESSIONALS

THE MAJOR IMPETUSTO STRATEGIC

ALLIANCES IS ONE OFTHE GROWTH

DRIVERS OF SOCOIN’SACTIVITIES IN THE

INTERNATIONALARENA AND

FACILITATE ITSENTRY INTO NEW

MARKETS

5.4 ENGINEERING BUSINESS

Egypt

2%

8%Mexico

4%Panama

85%Spain

1%Guatemala

GEOGRAPHIC DISTRIBUTION OF THE WORKFORCE

5-yearDegree

77%

3-yearDegree

10%

Total

477

Adm./Others

13%Nº of employees

CLASSIFICATION OF EMPLOYEES

At an international level, SOCOIN was awarded the development project in 2007 for a simplecycle thermal power plant of 3 groups of 120 MW each in Mohammedia (Morocco), for theOffice National d'Electricité (ONE), in partnership with General Electric. In Venezuela, thedesign and construction project of the Termobarrancas simple cycle power plant for Repsolwas completed, in partnership with Inelectra.

Renewable Energy

Throughout 2007, strong activity has been maintained in this sector, especially in thehydroelectric, wind and solar fields.

SOCOIN is the leader in the hydroelectric sector in Spain. In the three last years it has built eightpower plants using this technology and has carried out studies and projects both in Spain and ina great number of countries, among which are Bolivia, Panama, Ecuador, Costa Rica, Honduras,Colombia, Morocco, Turkey and the Philippines.

During the year, activity has commenced on several hydroelectric projects, such as that of theFrieira ecologically friendly power plant (17.5 MW) in Spain, or that of the Sibulán power plant(43 MW), that is on the river that gives it its name, on the Island of Mindanao, in the Philippines.In addition, the studies awarded by the Office National d'Electricité de Marruecos (ONE) for theIfahsa pump power plant were begun.

As regards wind power, the construction of the Malagón I and II (86 MW) and Coto Codesas I (17MW) farms were completed. Both projects included civil works, electricity generation systems ofmedium and low voltage, electricity substation, engineering, works management, tests andstart-up of the electrical systems within the scope.

Regarding solar energy, the construction of the Aznalcóllar photovoltaic solar farm (1.89 MW) inSeville, owned by Fotosolar, S.A., has been carried out. The scope of the project includes theconstruction of the whole plant: civil works, fixed structures, solar panels, inverters and lowvoltage electricity generation system.


SOCOIN HASEXTENSIVEEXPERIENCE IN ALLFIELDS OF POWERENGINEERING AND ISTHE LEADERAMONGST THECOMPANIES WITHWHICH IT COMPETES

The award to SOCOIN of the Technical Support of the EUROSOLAR Program – an initiative ofthe European Commission whose objective is to reduce poverty levels in rural areas of somecountries of Central and South America to which there is no electricity supply - in the monthof July - has been especially significant. The Program will provide the recipient Regions witha renewable source of electricity, strictly for regional use, that will entail the installation ofstandard photovoltaic panels and wind turbine equipment for the production of energy. Theproject will also include telecommunications systems, illumination of regional facilities,computer equipment, cooling units for public health equipment, battery chargers and watertreatment plants.

Gas

In the gas sector, at a national level, building engineering tasks in the Sagunto and Reganosaregasification plants have continued to make progress. In addition, the construction works of theSur de Reganosa gas pipeline in Galicia are being undertaken.

Outside Spain, the technical services contract for the evaluation of the LNG liquefaction train inEquatorial Guinea must be highlighted.

Transport and Distribution of Electricity

UNION FENOSA Distribución continues to have a strong presence at a national level. During theyear, more than 90 overhead, underground and mixed electrical lines projects in 45, 66, 132, 200and 400 kV have been completed, as well as more than 120 substation projects with variousscopes.

In 2007, the technical support works for the development of three grid projects for the ESBNational Grid were completed - Operator of the Electricity Transmission System in Ireland. Theproject consisted of the search for substation locations and line layouts, as well as undertakingbasic engineering for the official processing of the projects.

In Ethiopia, the construction works of the Gilgel Gibe and Sebeta substations, as well as theextension of the already existing substation in Sebeta with two line positions continue to becarried out. This project is being performed in a joint venture with CYMI and the scope of theservices includes the design, supplies, tests, civil works, assembly and start-up of thesubstations, as well as the installation of a communication, monitoring, control and protectionsystem that integrates all the new substations in the same system as the already existing ones.All the facilities will have to be integrated in the load dispatch of the Ethiopian Electric PowerCorporation (EEPCO).

Also relevant at an international level are the 400 kV Aman East substation construction projectin Jordan, the development for Siemens of two 115 kV lines and three substations of 115 kV and13.8 kV in the State of Guanajuato, Mexico, owned by the Federal Commission of Electricity, andthe construction project in Panama of the 230 kV/SC high voltage line, Fortuna-Chiriquí Grande-Changuinola Frontera for Etesa, which is being undertaken as a joint venture with Cobra.

In addition, this year has seen SOCOIN named as the bid winner of the 220 kV high voltage cableimplementation project in Olkaria, Kenya.

Nuclear

The wide experience of SOCOIN in the nuclear area, together with its participation in Ghesa andGroup Businesses, enables it to count on first-rate technical knowledge for the development ofengineering projects in this area.


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Among the work that took place during 2007, the activities carried out within the project for thedismantling and closure of the José Cabrera nuclear power plant for ENRESA stand out, whichincluded the clearance and treatment of operational waste and the decontamination activities ofthe primary circuit and management of the spent fuel. In addition, the construction of the newtemporary irradiated fuel storage was completed in August.

The Nuclear Safety Council (CSN) has published a new guide on the execution of radioactive wastemanagement plans applied to spent fuel and to high level waste. SOCOIN, together with ENUSA, iscarrying out a research project on the application of the methodology contained in this guide,which is financed by UNESA, CSN and ENRESA.

SOCOIN supports the CSN in its participation in the second phase of the OECD project, “Fireincident records exchange” (OECD-Fire), the aim of which is to establish an internationalcooperation framework for the exchange of relevant information on the management of fire risksin nuclear power plants, and on a radiological safety project and the calculation of shields.

It is also collaborating in several projects with the Strategic R&D Committee on Nuclear Energy(CEIDEN). In 2007, preliminary work on radiated materials from the José Cabrera nuclear powerplant container for the international research project began, participation in which is beingnegotiated by the Nuclear Energy Agency (NEA-OCDE) and the International IASCC (IrradiationAssisted Stress Corrosion Cracking) Advisory Committee, led by the United States. In addition, ithas participated with the CEIDEN in the work groups on advanced reactors, internal dosimetry,fuel and materials.

At an international level, in the Kozloduy nuclear power plant (Bulgaria), two projects werecompleted, one on the engineering and supply of equipment for cleaning spent fuel pools, and theother on the design and supply of a new mobile installation for personnel access to a controlledzone. Work on the project for the design, engineering, licensing and supply of equipment andmaterials for the treatment of operational resins that began in 2006 also continued.

During 2007, work started on the participation in the experimental European Jules Horowitzreactor for materials testing, that the French Commissariat to L' Energie Atomique (CEA) is goingto build. The intervention of SOCOIN is framed within the Spanish participation, articulated bymeans of a national agreement, led by the Research Centre for Energy, Environment andTechnology (CIEMAT), that is also part of the corresponding international agreement.


THE PERFORMANCEOF NUCLEARENGINEERINGPROJECTS IN SOCOIN,GHESA AND GROUPCOMPANIES GIVESUNION FENOSAFIRST-RATETECHNICALKNOWLEDGE IN THISTECHNOLOGY

UNION FENOSA Redes Telecomunicación, S.L. (UFINET)

UNION FENOSA Redes de Telecomunicación (UFINET) is the telecommunications operator ofthe UNION FENOSA Group specialised in satellite infrastructure and communications with highquality integrated solutions.

LIMEISA

n 1980, work began on what would be the flagship of the Mining division of UNION FENOSA. TheMeirama lignite mine would supply the thermal power plant of the same name for over 27 years.Altogether, 93 million tons of lignite have been extracted, the last 3.9 during 2007, the permanentclosure of the mine is taking place in January 2008.

After the extraction work ceased due to exhausting the reserves, work on the permanent restorationof all the land affected by the mine working has begun, prior to the orderly closure of the mine.Within these tasks, the re-vegetation of the tip is expected, once a suitable morphology has beenobtained, to avoid the possible contamination of surface water, as well as the measures necessaryto obtain natural surroundings, in respect of drainage, natural water courses, tracks and a selectionof native vegetation species fully integrated into the adjacent ones, thereby obtaining effectiveintegration into the landscape of the area.

The estimated budget for executing the mine closure amounts to 60 million euros, of which 65%corresponds mainly to tasks of restoring the surroundings and stabilisation of the mine excavations,some of which have already been achieved, and the rest will be used in tending to the social aspectsof the closure.

At the moment more than 375 hectares are fully restored, much of that with a forestry managementoperation already in place. The total area of reforestation exceeds 200 hectares.

Acquisition of Kangra Coal (South Africa)

UNION FENOSA’s plan is centred on the acquisition of shareholdings in mining companies outsideSpain with the aim of assuring production coal from its own sources of at least 6 million tons/year,with the object of being self-sufficient in coal for its current and future power plants.

Within this context, and in keeping with the BIGGER Plan, UNION FENOSA has completed theoperation set out in the agreement that it signed in November of 2006 for the acquisition of 64% ofthe Kangra Coal company. This company is the owner of the Savmore coalmine, located in theregion of Mpumalanga, in South Africa. The remaining 36% stay in the hands of the two localpartners with whom the agreement was signed, Shanduka (Black Economic Empowerment), thathas 26%, and Kangra Group, that owns 10%.

The deposit has saleable production in the first two years estimated at 2.6 million tons, which isexpandable progressively to 3.2 million tons. The estimated coal and anthracite reserves amount to90 million tons. This purchase represents an investment of 1,152 million Rand, equivalent to 120million euros.

UNION FENOSA chairs the South African company and has five of the nine positions that form theBoard of Directors of Kangra Coal. This company in turn owns 2.3% of Richard Bay Coal Terminal(RBCT), a company that has the largest harbour facilities in the world for the export of coal.


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IN 2007, UNION FENOSA

TOOK ITS LEAVE OF THE MEIRAMA

MINE AFTER 27YEARS OF

OPERATION ANDALMOST 100 MILLION

TONS OF LIGNITEEXTRACTED

DURING THIS YEARTHE ACQUISITION

HAS BEENCOMPLETED OF 64%

OF KANGRA COAL,OWNER OF A COAL

MINE IN SOUTHAFRICA

5.5 MINING BUSINESS

5.6 OTHER BUSINESSES

UFINET maintains its international presence in Panama, Colombia, Guatemala andNicaragua, with strong growth in 2007 both in fibre optic cables and in the installation ofsatellite services over the whole continent.

Among the most significant activities carried out in the year, the successful conclusion ofputting the satellite hub installed in Panama into operation, the completion of all the accessroutes to population centres provided for within the Trunk Extension Plan in Galicia, thelaying of 618 new kilometres of fibre optic cable, the integration of the technology platform ofthe UNION FENOSA’s Customer Service Centre (CSC) and the installation of a centralisedvideo-conferencing system stand out.

Finally, as a part of the optimisation process, UFINET has acquired the telecommunicationsassets from UNION FENOSA that were still owned by the latter.

INDRA

At the beginning of 2007, the consultancy and data technology businesses of SOLUZIONAwere permanently integrated into INDRA, upon the agreement signed between the twocompanies in 2006 coming to fruition. In return, UNION FENOSA received shares in INDRA tothe value of 11% of its capital, increasing this participation to 15% last July to become thelargest shareholder of the technology group.

The operation, in which there was no exchange of cash, has generated capital gains to thesum of 150 million euros before tax.

INDRA is the leading Spanish multinational in data technologies, and is also to be foundamong the most important companies in Europe and Latin America in that sector. It hasaround 23,000 highly qualified professionals and a solid technology base. These factors, inaddition to its constant backing of innovation, the quality of its processes and results, and itsdemands on management standards, constitute the pillars of its success. INDRA has apresence in more than 30 countries and has references in more than 80, spread across fivecontinents. In the last results presented by the company, corresponding to the end of thefinancial year 2007, net operating profit amounted to 223.5 million euros and thecorresponding result increased 30% with respect to financial year 2006.

R

In the field of telecommunications, UNION FENOSA participates in R, the Galician fibre opticcommunications operator, with a 36.12% stake. R ended the financial year 2007 with a netprofit of 13.5 million euros, quadrupling the previous year’s figure.

R invested 105.3 million euros in 2007, fundamentally focused on the deployment of a fibreoptic network in 46 Galician towns and the installation of new mobile and interactive digitaltelevision. The accumulated investments in the development of these new infrastructures inGalicia amount to as much as 600 million euros.

At the end of 2007, 214,319 homes and companies chose R, a number that has multiplied byalmost three in the last five years. The R network continues growing in the Galician Region,its coverage at the moment stretching to 638,644 homes and business premises, with already1,200,000 people who can receive its services.


6

6.1 Human Resources and Corporate University

6.2 Environment, Quality and Innovation

6.3 Communication and Social Responsibility

CORPORATE POLICIES

HUMAN RESOURCES MANAGEMENT MODEL

The Management Model for Organisation and Human Resources is the support on which theStrategic Plan 2007–2011 is founded. Its application has enabled consolidation of the leadershipand management abilities of the people and teams of UNION FENOSA, and is the basis for thedevelopment and skills demanded to comply with the Company’s strategic targets.

At the end of the financial year 2007, there were 12,871 staff in the UNION FENOSA Group,which is 24.7% less than at the end of the 2006 financial year. This variation in staff isbasically due on the one hand, to exit from the 2007 scope of consolidation of the SOLUZIONAconsultancy businesses as a result of its incorporation into INDRA (-4,900 people), and on theother hand, to the acquisition of the mining activity of the Kangra Coal company (+679 people)and the inclusion in the scope of consolidation of the company R (+70 people).

In homogenous terms, discounting the effects of variation in the scope of consolidation, theworkforce diminished by 0.6%, a trend that has been coming on in recent years, reflecting theconsolidation of the policy of optimisation of available resources, seeking maximumprofitability and efficiency of the business. On the other hand, 61.5% of personnel in theGroup work abroad.

The workforce of the international energy business, in homogenous terms, confirms the trendof previous years, with a global reduction of 3.5% with respect to the 2006 year end that hasresulted from the review processes of organisational structures and improvements inoperational areas.


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Hum

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esou

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Cor

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61.5% OF THEPEOPLE IN THE

GROUP CARRY OUTTHEIR ACTIVITY

OUTSIDE OF SPAIN, ADEMONSTRATION OF

THE COMMITMENTAND INTERNATIONAL

VOCATION AND ITSIMPORTANT ROLE IN

THE ACHIEVEMENTOF THE STRATEGIC

TARGETS

THE 12,871PROFESSIONALS

EMPLOYED BY UNION FENOSA ARE

THE BASIS FOR ITSDEVELOPMENT AND A

FUNDAMENTALSUPPORT TO UPHOLD

THE BIGGER PLAN

6.1. HUMAN RESOURCES AND CORPORATE UNIVERSITY

DISTRIBUTION BY LINE OF ACTIVITYStaff

Domestic Energy Business . . . . . . . . . . . . 4,525Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149Generation/Mining . . . . . . . . . . . . . . . . . . . . 2,390Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 1,986International Energy Business . . . . . . . . . 6,877Generation . . . . . . . . . . . . . . . . . . . . . . . . . . 520Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 6,300Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Other Businesses . . . . . . . . . . . . . . . . . . . . 1,044Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 425Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,871

GEOGRAPHIC DISTRIBUTIONStaff

Africa 853America 5,650Europe 6,368Total 12,871

UNION FENOSA STAFF GROUP

AbroadSpain

2003

20,017

9,999

10,018

2004

19,463

10,218

9,245

2005

16,893

8,243

8,650

2006

17,099

8,284

8,815

2007

12,871

4,960

7,911

UNION FENOSAHAS A YOUNG ANDHIGHLY QUALIFIEDTEAM, IN WHICHALMOST HALF OFITS EMPLOYEESARE UNDER 40AND AROUND 45%HAVE UNIVERSITYDEGREES

The goal presented by the BIGGER Plan in matters of human resources is to have the bestprofessionals who are able to operate and develop the present and future businesses of theUNION FENOSA Group.

Within the domestic energy business, and aimed at achieving the Strategic Plan targets, anorganisational revitalisation plan has been started, the results of which are reflected in:

- 10% more with 5-year university degrees compared with 2006 year-end.

- 1 in 5 with 5-year university degrees changed activity.

- Commencement of the Cantera Project: a special plan for an intake of high-potential juniorpersonnel into the Company to participate in international generation and distributionprojects, and to ensure that critical positions are covered in the different businesses.

With a view to achieving the Strategic Plan, a reorganisation of the Business DevelopmentDepartment was carried out in 2007, establishing a management link between this Departmentand the specific units of the business areas to enable optimisation of the technical abilitiesnecessary to execute a study of the potential investments for the Group. This change has meantthe creation of a real organisational network within the company itself that is superimposed onthe general organisation.

In general terms, the reorganisation processes have meant:

- Strengthening the organisation for business development in the different areas of activitymentioned previously.

- Alignment of distribution activities to Directive 2003/54/EEC.

- Territorial expansion of business activity and generation with renewable energies.

New personnel, based on rejuvenation policies, qualification of human capital and covering criticalvacancies, are reflected in a 1.8% increase of personnel under 40 years of age - 42.9% of theworkforce, and an increase of 3.7% in staff with 5-year university degrees in the whole of theGroup, compared with the previous year-end.

There are growing numbers of women on the staff, reaching 23.8% in the Group as a whole, whichmeans an increase of 1.3% compared with the number of women that, in homogeneous terms,were part of the workforce in the previous year.

41-50

29.2%

31-40

27.1%

< 30

15.8%

51-60

25.1%

> 60

2.8%

UNION FENOSA GROUP WORKFORCE BY AGE (%)

3-year

Rest

55,2%

5-year

UniversityDegree

44.8%

13.6%

31.2%

UNION FENOSA GROUP WORKFORCE BY QUALIFICATION (%)


Collective Negotiation

2007 was characterised in Spain by the collective negotiation process, which resulted in signing theGroup’s 3rd Collective Agreement in January 2008, where those matters necessary for theoptimum management of human resources for the coming years are carried out. This is furtherextended as regards measures for balancing one’s private life, family and employment within theframework of our policy for equal opportunities.

In the international business, the signing of the EPSA Collective Agreement in Colombia issignificant, along with the start of negotiation processes for the CETSA collective agreements inColombia, Moldova and Nicaragua.

Equal Opportunities

In the course of recent years, the Workers Representation and Company Management haveagreed to foster initiatives to encourage equal opportunities and the recognition of the diversity ofthe people who work at UNION FENOSA, as a competitive advantage that produces benefits forthe company and its workers and which helps to achieve the challenges that the Company is facedwith. UNION FENOSA encourages and cooperates with the Ministry of Work and Social Affairs onthose initiatives that favour true equality of opportunities amongst workers, maintaining itsrecognition as a “Company Collaborating in equal opportunities amongst women and men”, underthe framework of the Optimum Programme.

The UNION FENOSA Model for Human Resources Management is based on competences andoccupations to guarantee equal opportunities in all fields of performance of human capitalmanagement.

In the negotiations held during 2007, and according to the subsequent agreement in January 2008with the signing of a new Collective Agreement for the Group, both parties expressed their firmconviction to reinforce the role of UNION FENOSA as a company committed to the principles ofequality and to the elimination of any kind of discrimination that makes these difficult to enforce,as stated in Constitutional Law 3/2007 of 23 March.

Likewise, in the task of organisation of work, there is the commitment by the workers’representatives and by Company management to pay special attention to those employees withthe greatest difficulties for adaptation as a consequence of the demands of the organisation, byseeking alternatives for their progress and professional fulfilment.

Risk Prevention and Health

Concern for the Health and Safety of its workers is one of the fundamental pillars on which UNION FENOSA puts its management policies into practice.

During the year 2007, the activity carried out within the framework of the “Prevention Workshop”has increased dramatically with more than 10,000 participants. One of the highlights amongst theactivities was the training in Basic Level Prevention, a three-year programme in which 800employees were trained in 2007.

The performance of the accident rate indexes shows a clear trend in the reduction of occupationalaccidents in the UNION FENOSA Group. The year 2007 ended with the Frequency Rate at 8.5%,meaning a 15.9% improvement in the year. The number of accidents recorded was 60 during 2007,with an improvement of 52.0%, and although the cessation of the odd activity had an impact onthis figure, as well as on the Accident Severity Rate, progress was equally positive by bringing therate down by 6.9%.


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THE PREVENTION OFRISKS PLAYS A

HIGHLY IMPORTANTROLE FOR

UNION FENOSA. THERATES OF

FREQUENCY ANDGRAVITY OFACCIDENTS

RECORDED IN 2007SHOW A CLEAR

IMPROVEMENT WITHRESPECT TO 2006

One of the new initiatives that stands out most amongst those that were started up during theyear is the Observations of Safe Behaviour program, whose principal objective is to achieve achange in attitude of the Company professions on matters of Prevention, through theinvolvement of employees in detecting unsafe practices, as well as their correspondingcorrection and the deployment of that correction in their working environment.

In order to improve coordination in emergency situations, relations have been fosteredthroughout the year with the public emergency services in the Autonomous Regions of Madrid,Castile-La Mancha, Castile and Leon and Galicia. One benefit of this collaboration has been theparticipation of 110 firemen from the largest towns in these Autonomous Regions in fire drillsand in giving courses specifically tailored to the risks attached to intervention when faced withdisasters in electricity installations.

UNION FENOSA (UCUF) CORPORATE UNIVERSITY

UNION FENOSA pays special attention to the training of its professionals and to the continuousimprovement of their management abilities. For the Company, training processes are the bestlever for professional and personal development and they enable it to have the most innovativeand productive people.

The UCUF, set up in 2000 with the motto “To teach and to learn from experience” is today aSpanish business university of an international scope that manages the whole talent valuechain, from selection to performance. It is a key element for the transfer of knowledge and thetraining of our professionals with the new skills necessary to tackle the challenges associatedwith our new expansion plans.

In Spain, it has the Punete Nuevo (Avila) campus, which has ISO 9001 Certification, and thetraining centres at Puente Princesa (Madrid) and Bens (La Coruña). In addition, it has trainingcentres in Moldova (Chisinau), Egypt (Damietta), Colombia (Cali, Barranquilla), and Mexico(Hermosillo), to which 25 training rooms in national and international work centres have to beadded, making a total of 61,000 m2 of academic and residential space in 8 countries.


"TO TEACH AND TOLEARN FROMEXPERIENCE" WASTHE MOTTO UNDERWHICH THE UFUCBEGAN IN THE YEAR2000 AND CONTINUESTO BE ONE OF THEPRINCIPALCORPORATE VALUES

ACCIDENT RATES2007 2006 Var. 07/06 %

Frequency Rate (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 10.1 (15.9)No. of Accidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 125 (52.0)Accident Severity Rate (%) . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.6 (6.9)

The UCUF Virtual Campus improves the transfer of knowledge and has an on-line learningplatform with 50 courses available in the different faculties, which complement classroomtraining.

Since 2002, UCUF forms part of the CLIP (Corporate Learning Improvement Process) SteeringCommittee, a certification granted by the EFMD (European Foundation for ManagementDevelopment). In 2007, UCUF and the Corporate Leadership Council Iberia organised a meetingthat was attended by those responsible for training policies and development in 20 of the leadingcompanies in Spain, with the objective of analysing and discussing the opportunities andchallenges of the corporate universities in Spain and worldwide.

UCUF has a network of alliances with both national and international academic institutions.Agreements with the universities of Alicante, Vigo, the Politécnica Universities of Madrid,Valencia and Castile-La Mancha, the Pontificia de Comillas, the Técnica in Moldova, theTecnológica in Panamá, the Universidad del Norte in Colombia and the Universidad de SanCarlos in Guatemala, and with the business schools IESE, ESADE, IE, EOI and the Club Españolde la Energía.

Attracting Talent

To face up to the challenges of the new expansion processes in the BIGGER Plan, 750 newprofessionals have joined the Group worldwide in 2007, 50% of whom are in the internationalarea. UCUF has the e-preselect on-line tool to manage the more than 25,000 curricula receivedby UNION FENOSA. It has intensified its active presence in Universities, Business Schools andprofessional training centres, as well as on employment websites and forums, and in the mediawith talent recruitment campaigns.

As regards new talent intake, one remarkable milestone stands out: the commencement of theCantera [Pool] Project, with the specific objective of having a pool of young engineers to takepart in international generation and distribution projects arising from the BIGGER Plan.Following the analysis of more than 660 curricula and a hundred or so interviews, 28 young“pool” engineers with high potential, international availability and fluent English joined thecompany.


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THE UCUF ISINTEGRATED INTO

THE PRINCIPALNETWORKS OF

WORLD KNOWLEDGE,AND IS OUTSTANDING

FOR ITS CHARACTERAND INTERNATIONAL

VOCATION AND HASBEEN DESERVING OF

SEVERALRECOGNITION

AWARDS AS AMONGSTTHE BEST CORPORATE

UNIVERSITIESWORLDWIDE

TO FACE UP TO THECHALLENGES OF THE

NEW EXPANSIONPROCESSES IN THEBIGGER PLAN, 750

NEW PROFESSIONALSHAVE JOINED THE

GROUP WORLDWIDEIN 2007, 50% OF

WHOM ARE IN THEINTERNATIONAL

AREA

The UCUF relies on a set of tools designed to facilitate quick and smooth integration of theprofessionals that join the businesses as a result of these selection processes, of which wehighlight the on-line course for Corporate Introduction and the New Intake Welcomecourse.

Training and Transfer of Knowledge

The UCUF activity is structured into four business faculties, Gas, Generation, Distributionand Engineering, plus two ‘across-the-board’ faculties that provide them with support - thefaculty of Corporate Processes and the Leadership School. The Skills Development Plan2007 included the development programmes identified by each business or facultyconsistent with the BIGGER Plan.

What differentiates UCUF from other corporate universities continues to be the substantialparticipation and commitment of executives and experts in the Group in the whole of thetalent management chain, which makes a significant contribution to the success of theCorporate University activity.

For the first time, UCUF taught the Management Development Programme 2007 in-house,which was tailor-made by the Instituto de Empresa. This programme trained 27 STARpeople to form a network of experts to do business, to be the champions of change and toprogress towards a more efficient and innovative organisation. This added up to 6,500 hoursof training and 15 managers acted as in-house teachers.


5-yearDegree

58%

3-yearDegree

27%

SecondarySchool and

ProfessionalTraining

15%

NEW INTAKE BY QUALIFICATION IN 2007 (%)

Gas

17%

39%International

15%Networks

14%

Generation

15%

Others

NEW INTAKE BY BUSINESS IN 2007 (%)

UCUF’SDIFFERENTIATINGFACTOR IS BASED ONITS EXPERIENCE ANDTHE PARTICIPATIONAND COMMITMENTOF THE EXECUTIVESAND EXPERTS IN THEGROUP IN THEWHOLE OF THETALENTMANAGEMENTCHAIN, FROMSELECTION TOPERFORMANCE

• Participants by country

DominicanRepublic

103

Panama2,225

Colombia11,352

Nicaragua3,372

Mexico2,646

Guatemala4,043

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Puente Nuevo Campus (Spain)Puente Nuevo Campus (Spain)


88% of staff trained60% of international training53 hours per person4.6% of the investment on personnel costs600 teachers and experts81% of training effectiveness22-million Euro investment

Kenya48

Egypt2,669

Moldova2,235

Spain17,166

AVERAGE TRAININGPER EMPLOYEEAMOUNTS TO 53HOURS PER YEARAND HAS INCREASEDBY MORE THAN 25%IN THE LAST FIVEYEARS

Innovation and Improvement2%

60%

9%

10%

Management

Infrastructures andMedia

Participants

19%

Teachers andExperts

INVESTMENT IN TRAINING (%)


Throughout 2007 various specific courses in the Business Sessions Cycle II were run forGroup managers, bringing executives and first-line managers up to date with informationabout the different UNION FENOSA businesses. 435 people took part in these sessions andthe information transferred was digitised to create the first online business course taught byour own professionals. Another of the courses was the Programme for Resource Managers,which, with 35 participants and 980 hours of training, extended their knowledge onEmployment Law and Social Security that is needed to take decisions in the management andadministration of Human Resources and in the units’ employment relations.

Courses tailored to specialisation were also run for each of the key business areas, such as inthe Generation area - the Generation Business Advanced Course II, which 31 peopleattended from the Spanish conventional and gas generation plants, and 7 professionals fromO&M Energy from Spain, the Dominican Republic and Kenya and the Training Programme forthe Combined Cycle Power Station in Sabon, with 191 participants coming from other powerstations and new intake staff.

In the Distribution business, the Medium and Low Voltage Network Workshops were run thattaught 12,800 hours of training to 548 participants and the Specialisation in the DistributionBusiness Course III in which 33 high potential professional staff participated together with 11new intake people. 50 teachers and experts from Distribution were involved and its totalduration was 200 hours.


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FOR THE COMPANY,TRAINING

PROCESSES ARE THE BEST PLATFORM

FOR PROFESSIONALAND PERSONAL

DEVELOPMENT ANDENABLES IT TO HAVE

MORE INNOVATIVEAND PRODUCTIVE

PEOPLE

Leadership School

Business Training Corporate Processes

Gas

1%

99%

Generation

5%

23%

72%

Networks

4%11%

85%

Engineering

4%

96%

Corporation

33%

67%

HOURS OF TRAINING BY BUSINESS: 676,393

Corporate Processes

18%

57%

Networks

2%Engineering

5%

LeadershipSchool

6%

Gas

12%

Generation

PARTICIPATION BY FACULTY IN 2007 (%)

Faculties Participants Hours of training

Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,933 63,793

Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,399 79,695Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,035 400,218

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,808 61,504International . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,227 338,714

SOLUZIONA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730 11,590Corporate Processes . . . . . . . . . . . . . . . . . . . . . . . 8,472 91,163Leadership School . . . . . . . . . . . . . . . . . . . . . . . . . 2,290 29,934

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,859 676,393

The Corporate Processes Faculty, with more than 90,000 hours of activity and 8,500participants, manages the ‘across-the-board’ knowledge necessary to achieve the businessobjectives. It is structured into 7 lecture rooms, where its core subjects are taught:economics, finance, communications, tax, law, resources, control, regulations, etc.

A strategic training activity of the CAMID Workshop is to create a culture in topics asimportant as Quality, Environment and R&D+I, with more than 1,500 participants in 2007,this gives an idea of the importance the Group gives to this matter. The Systems Workshop,which gave 6,200 hours of training, is the management tool of the change to theimplementation service of new systems such as the Management Improvement Plans.

200 people devote almost 10,000 hours annually to learning languages, which is essentialknowledge for our professionals given the internal international expansion of UNION FENOSA.

Lastly, it is worth mentioning the creation of the Welcome Workshop in 2007 which, with500 participants and more than 100,000 hours, reflects the importance that mobility and/orthe incorporation of professionals has in the achievement of the BIGGER Plan. The objectiveof this workshop is to facilitate the quick and smooth integration of professionals both froma cultural as well as a functional and social point of view into the Group.

The Leadership School upgrades the leadership ability of people and equipment and offerssuitable tools to the business for the development of the skills that our Strategic Planrequires as well as to facilitate change. The traditional activity of the Leadership School isbased on classroom modules and on-line guides, to which 2,290 participants have devoted30,000 hours in 2007 with the following new tools: Executive Development Programme,Coaching and evaluation of teams.


Objective Tool Principalindicators

Train newbusiness managers

• 27 participants• 6,500 hours/year• Evaluation: 8.7

Develop key executives in thenew organisation

• 15 executives• 180 hours/year• Evaluation: 9.1

Coaching

Align the people with corporateobjectives and values

• 4,000 participants• 15,000 hours/year• Evaluation: 8.2

Attendance modules and on-line guides

PDD 07

Evaluationof teams

Develop highperformance teams

• 30 participants, 6 teams• 500 hours/year.• Evaluation: 8.8

Evaluation and Development of People

In order to facilitate the identification of talent and decisions for intake and mobility as wellas to direct the development of Group professionals, in 2007 an on-line system, evalu@ wasimplemented that incorporates aptitude tests and skills evaluation for the various groups ofprofessionals at UNION FENOSA.

These tests provide, for the first time since the implementation of the human resourcesmanagement model, a uniform and reliable way of assessing the level of skills, qualities andpossible behaviour expected of the people, associated with the UNION FENOSA CorporateValues, as well as to make comparisons amongst them in all of the Group companies. In2007, 206 high-potential people in the businesses were evaluated and more than 900 peopleundergoing processes of external selections.

In the chapter on development of talent, the programme directed at STAR people stands out,the objective of which is to identify, develop and commit people with the ability and thenecessary potential to hold key positions in the businesses. Today there are 180 high-performance and high-potential professionals in this group, both in the domestic andinternational areas.

In order to facilitate the mobility decisions of these people and direct their development to thechallenges that the BIGGER Plan raises, personalised tracking is carried out on each of them,based on on-line evaluation and personal interviews.

The 2007 working environment survey on this group considered 10 motivational factors,whose assessment has undergone a cumulative increase of 15% since 2005, with theemphasis on their proximity to the company, the working environment and relationship withtheir superior.

MODEL FOR MANAGEMENT OF INTELLECTUAL RESOURCES

For the last 8 years, UNION FENOSA has been applying the criterion to its decisions thatappropriate management of the intangibles in each of its businesses, contributes to the creationof value and guarantees its ability to continue generating profits in the medium and long term.

The model is made up of three resources: Human, Structural and Relational. Each resource hasits intangible values and these, in turn, have their management indicators. Among the threeresources there are interrelated issues, an aspect that the model incorporates, and which isdirected at the achievement of results.

Among the new projects under way which have a bearing on the improvement of IntellectualResources, the following stand out:

• Human Resources: the Executive Development Programme (PDD), that was attended by 27STAR people, with the aim of forming a network of experts to do business, to be championsof change and strive towards a more efficient and innovative organisation

• Structural Resources: the SUMA project, the objective of which is the improvement ofthe environmental behaviour of suppliers of products and services to UNION FENOSA;the Ecological Footprint project, whose objectives are to calculate the domestic andinternational ecological footprint of the Group and to measure the repercussion andsustainability of the policies and programmes implemented, and lastly, the System ofEnvironmental Indicators (SIA), which enables the environmental informationgenerated in the Group’s installations to be recorded, stored and calculated

• Relational Resource: UNION FENOSA’s participation in forums related with energyefficiency, which more than 1,500 people took part in and the Energy Efficiency Indexcampaign through the Internet, with its “Virtual Forest".


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TODAY 180 HIGH-PERFORMANCEAND HIGH-POTENTIAL

PROFESSIONALSMAKE UP THE ‘STAR’

GROUP BOTH FROMTHE DOMESTIC AND

INTERNATIONALAREAS, PREPARED TO

ASSUME NEWCHALLENGES FOR

THE FULFILMENT OFTHE BIGGER PLAN

ENVIRONMENT AND SUSTAINABILITY

The principles of the Environmental Policy and of the Environmental Code of Conduct ofUNION FENOSA are the support base that forms part of the Group’s commitment to theprotection of the environment.

This commitment by UNION FENOSA to the environment and sustainability was recognised bythe inclusion of the Company in the exclusive 2007 European Dow Jones Sustainability STOXXand its renewal for the second year running in the Dow Jones Sustainability World Index.

These indexes are prepared by Dow Jones and the Sam Group to honour those companieswhich, occupying a top position within their respective activity sectors on the European or worldstage, stand out for their commitment to sustainable development.

In order to prepare these indexes, experts from the Sam Group analysed the performance ofcompanies by the scale of their economic, environmental and social policies. UNION FENOSA’sperformance in the environmental aspect is totally outstanding as it obtained the highest scorein its sector.

In addition, UNION FENOSA was awarded the title "SAM Sector Mover” for the company thatdemonstrated the greatest progress in terms of sustainability.

Being included in these sustainably indexes is an incentive for UNION FENOSA and a biggercommitment to continuous improvement in all aspects of our business management. Theintegration of these variables into the Company's policies and strategies, in turn, brings abetter guarantee for the sustainability of the business in the future.

Environmental management

Since UNION FENOSA started the Environmental Certification Plan 10 years ago, it hasmanaged to certify 9,337 MW in accordance with the UNE EN ISO 14001 Standards. Thus, in 2007the combined cycle power station at Aceca (Toledo), the power stations at Palarama and La Vega


UNION FENOSA’SCOMMITMENT TO THEENVIRONMENT HASBEEN RECOGNISEDBY ITS INCLUSION INTHE DOW JONESSUSTAINABILITYSTOXX, AS WELL ASHAVING ITSMEMBERSHIP TO THEDOW JONESSUSTAINABILITYWORLD INDEXRENEWED ANDHAVING BEENAWARDED THE TITLE"SAM SECTORMOVER"

UNION FENOSA HAS9,337 MW CERTIFIEDIN ACCORDANCEWITH THE UNE EN ISO14001 STANDARDS ONENVIRONMENTALMANAGEMENT

6.2. ENVIRONMENT, QUALITY AND INNOVATION

DOW JONES SUSTAINABILITY INDEX - ENVIRONMENTAL ASPECT SCORE

Average Sector Best SectorUNION FENOSA

80

2006 2007

5852

81 81 81

in the Dominican Republic and the hydroelectric plant at La Joya in Costa Rica, were added tothe list of certified installations.

On the other hand, the combined cycle power station at Palos de la Frontera was added tothose that had already joined the European system EMAS (EcoManagement AuditingScheme).

In the renewable energies fields, ENEL UNION FENOSA Renovables (EUFER) has obtainedenvironmental certification for five new wind farms, taking the total certification ofelectricity power in the wind farms in operation to 366 MW.

Lastly, also in 2007, the environmental management system was implemented in the gasliquefaction plant in Damietta, in Egypt, that will be certified in 2008, to join the certification ofprojects, works and maintenance in the transmission and distribution of electricity in Spain andPanama, those of UNION FENOSA Comercial and Servicios Generales de UNION FENOSA in theheadquarters in Avenida de San Luis and that of O&M Energy.

30 internal environmental audits have been carried out in this same period in UNION FENOSAinstallations, 18 of them in Spain and 12 in international installations: and 50 externalenvironmental audits, of which nine were for certifications of greenhouse gas emissions, 8 forEMAS audits, 15 for ISO 14001 national certification audits and 18 on international installations.

Environmental parameters

Efficient management of the UNION FENOSA Group’s power stations in Spain has made itpossible to keep its emissions below the legally established limits. Similarly, emissions of SO2

and particulates stood at 36.6% and 24.3% of the legal limit, respectively.

In recent years, UNION FENOSA has significantly reduced specific emissions at its thermalplants, basically due to the new combined cycles, combustion of high quality environmental coaland more efficient production in the plants. In 2007, specific emissions stood at 6.4 gm/kWh forSO2, 1.8 gm/kWh for NOx and 0.2 gm/kWh for particulates, meaning a reduction of 44.6%, 56.5%and 62.5% respectively in relation with those of 2002.

It is worth mentioning three products for reduction of emissions in thermal plants: the FaustoProject at the Meirama thermal plant, the Medusa Project in the port of La Coruña, which isminimising the emission of particulates into the atmosphere by the discharge and transport ofimported coal for the Meirama thermal power station, and the project for environmental


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ALL THE UNION FENOSATHERMAL COAL

POWER STATIONS INSPAIN ARE

AFFILIATED TO THEEMAS EUROPEAN

SYSTEM (ECOMANAGEMENT

AUDITING SCHEME)

THE MEDUSAPROJECT STARTED

OPERATIONS IN 2007FOR HANDLING

IMPORTED COAL IN ACLOSED CIRCUIT IN

THE PORT OF LACORUÑA, REDUCING

ENVIRONMENTALIMPACT BY 90%

ISO 14001 ENVIRONMENTALLY CERTIFIED POWEROF THE UNION FENOSA GROUP (MW)

InternationalSpain

2004

4,850

2005

1,618

5,892

2006

1,618

6,986

2007

1,844

7,493

SINCE 2002, SPECIFICNET EMISSIONS INTOTHE ATMOSPHERE OFSO2, NOx ANDPARTICULATES FROMTHE THERMALPOWER STATIONS INSPAIN HAVEREDUCED BY 44.6%,56.5% AND 62.5RESPECTIVELY

UNION FENOSA HASJOINED THEINTERNATIONALINITIATIVES "3CCOMBAT CLIMATECHANGE" AND THE"BUSINESSLEADERSHIPPLATFORM CARINGFOR CLIMATE",FOSTERED BY THEUNITED NATIONSGLOBAL COMPACT

improvement in coal thermal power stations, with investments in desulphurisation andimprovements in electro filters and in the burners. With these improvements it is hoped toreduce the emissions of SO2 by 80%, particulates by 50% and NOx by 10%.

Management of coal

At UNION FENOSA, we share the concerns about climate change and we believe in theeffectiveness of preventive action, and therefore a position has been taken and a commitmentmade in the light of global warming with targets for the reduction of greenhouse gas emissions- which are being met.

In order to reinforce this commitment, UNION FENOSA has joined the international initiatives"3C Combat Climate Change", which leading European companies are members of, and the“Business Leadership Platform Caring for Climate”, fostered by the United Nations GlobalCompact.

The principal objective of UNION FENOSA’s strategy for climate change is to reduce CO2

emissions from coal-fired power stations by 5% by the year 2010 with respect to those of 1990,and 27% with respect to those of 2004. In line with this objective, in 2007, emissions from coal-fired power stations were 13.5 million tonnes, with a reduction of 4.2% with respect to 2004.


SPECIFIC NET EMISSIONS OF ATMOSPHERIC POLLUTANTS (gm/kWh) (*)

2006200520042003

0.250.310.470.63

2.192.78

3.744.14

6.587.14

9.65

11.43

ParticulatesNOx

6.43

1.83

0.24

2007SO 2

THERMAL AND MIX UNION FENOSA ESPAÑA POWER STATION EMISSIONS (MtCO2/GWh)

1990

998

557

2002

998

626

2004

973

612

2007

706

535

2010

Mix total emissions in SpainSpanish thermal power station emissions

599

446

Results 2007

Target 2010

-3.9%

-29.3%

-20%

-40%

(*) Thermal mix in Spain

The second of the strategic targets is to reduce specific emissions of CO2 from thermalgeneration by 40% by the year 2010 and by 20% for those from the overall production mix, withrespect to 1990. In 2007, specific emissions from thermal generations were 706 g/kWh, which is29.3% less than in 1990.

UNION FENOSA was the first Spanish company to register a Clean DevelopmentMechanism Project with the United Nations Executive Commission for the mini-hydroelectric plant at Los Algarrobos, in Panama. Refurbishment and the extension of themini-hydroelectric plants in Macho de Monte and Dolega, both in Panama, were added tothis project and that of the hydroelectric plant in La Joya, Costa Rica. With thecommencement of these four projects, more than 300 million KWh of clean energy will besupplied, avoiding the emission the equivalent of some 100,000 tons of CO2 per year.

Sustainability and Biodiversity

UNION FENOSA has set the conservation of biodiversity and the sustainable use of naturalresources as principle targets within its strategy for sustainability and biodiversity.

For many years, the company has been making ecological studies in the surroundings of itsinstallations, the results of which have confirmed that there is no environmental impact onnatural conditions. Limnological studies have been made of aquatic ecosystems in thereservoirs, both in Spain as well as in Colombia and of the rivers of the thermal powerstations in Spain, giving the result that the ecological state of the water systems studiedare in good condition, both in terms of physical-chemical as well as hydro-morphologicaland biological. In addition, studies have been made of the ecological characterisation ofland and forest mass in the thermal power stations. The indicators of the ecological state ofthe land ecosystems of the installations do not demonstrate significant impact on forestmasses.

UNION FENOSA developed a corporate environmental management tool known as UMASthat quantifies over time the environmental impact of the activities and facilities. Thecriteria to make this valuation are based on the methodology of life cycle analysis (LCA). Onthe basis of this tool, the environmental impact of the UNION FENOSA facilities has beenreduced by 6.0% in the last 4 years, whilst the environmental impact of the generatedkilowatt hour has been reduced by 21.7%. The objective is to reduce the environmentalimpact by 63% by 2009 with respect to the year 2004.


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SINCE 1990, UNION FENOSA HAS REDUCED

CO2 SPECIFICEMISSIONS BY

15.1% FROM ITSGROUP OF

GENERATIONPLANTS, AND BY

29.3% OF SPECIFICEMISSIONS FROM ITS

THERMAL POWERSTATIONS IN SPAIN

UNION FENOSA STRATEGY TO MINIMISE GHG EMISSIONS

MINIMISATION

OF CO

EMISSIONS2

Renewable

Gas

Yield

R + D

Coalstocks

Savings &efficiency

Environmentaltraining

MDL + AC

Union Fenosa’s strategy to minimise GHG is based on 5 lines of internalactions, 2 external and 2 based on flexibility mechanisms.

SustainableCoal

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NA

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S

EX

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NA

LA

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S

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ME

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On matters of biodiversity, the following actions stand out: the Frieira cableway for taking thesalmonids and others beyond the reservoir, the ichthyological centres at Goo and Ulla, the fishladder in Güimil, the agreement for the protection of birds signed with the Sociedad Españolade Ornitología (SEO) [Spanish society for the protection of birds] and, in Colombia, thecommencement of the project for breeding in captivity of the native species of the AnchicayáRiver, for the purpose of preserving the aquatic fauna of the river and its tributaries. Also thePlans for Environmental Handling for the power stations in Alto Anchicayá and Salvajina(Colombia) have been drawn up and presented.

QUALITY

The guidelines approved by the 6th CAMID Committee continued to be following during the2007 financial year, which were endorsed and reinforced by the 7th Committee, along withother projects that must give continuity to the UNION FENOSA strategy for quality, thisbeing the priority for implementation and certification of quality systems under ISO 9001.Other projects have also started up using Quality tools and models such as Six Sigma andthe EFQM model, developing specific projects for inspection, guarantee and quality controland improvement of quality at end users.

During 2007, all the processes of the UNION FENOSA Distribución High Voltage NetworkDepartment have been certified under the ISO 9001:2000 standards. The scope of thiscertification includes all the processes in this network, from design through to start up andits maintenance, taking in telecontrol of lines and substations, as well as monitoring themanufacture and receipt of equipment.

In the Energy Management Department, the scope of the certification obtained in 2006 hasbeen extended, and in 2007 all the processes of the Department have been certified, exceptfor those falling under medium and low voltage.

The project to certify the Department for Medium and Low Voltage was included in 2007,thus obtaining a first certification for the Technical and Design Office units, which covers itswork on the standardisation and normalisation of the Company’s medium and low voltageinstallations in the network, as well as for the standardisation and monitoring of themanufacture and technical acceptance of materials, equipment and service providers.


UNION FENOSA ISTHE FIRST SPANISHCOMPANY TO HAVEOBTAINEDAUTHORISATIONFROM THE UNITEDNATIONS FOR ACLEANDEVELOPMENTMECHANISM (CDM)AND IT CURRENTLYHAS FOUR PROJECTSOF THIS KIND INPANAMA AND COSTA RICA

The UNION FENOSA Comercial and UNION FENOSA Metra quality systems that were certified in2006 have also been monitored. The scope of both certifications has been extended this year inorder to cover the activities of the Customer Service Centre.

The certification process has involved a great deal of work for all the units of UNION FENOSADistribución in the standardisation and integration of working methods and raising awarenesson quality matters, focussing the unit processes on customer satisfaction and on theorganisation’s continuous improvement.

In the domestic Generation business, it is worth mentioning the definitive consolidation of theimplementation and certification of quality management systems, with the incorporation in 2007of the combined cycle power station in Aceca. In the international area, certification was issuedthis year for the power stations in Palamara and La Vega, in the Dominican Republic, as well asthe power station at La Joya, in Costa Rica.

On the other hand, in 2007, UNION FENOSA Generación has unified the internal audit process,integrating the audit programme (ISO 9001, ISO 14001, OHSAS 18000) and executing it under thecoordination of the Quality and Environmental Departments. They have carried out a total of 20integrated internal audits, both in the domestic as well as international departments.

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InternationalSpain

2004

57

5,055

2005

2,472

5,471

2006

2,670

6,660

2007

2,731

6,999

EVOLUTION OF QUALITY CERTIFIEDINSTALLED CAPACITY (MW)


Thanks to the certifications obtained during 2007, 80% of the installed capacity managed inSpain is now certified in accordance with ISO 9001:2000. This percentage increases to 83.2% ifthe international installations are also taken into account.

In UNION FENOSA Gas, since obtaining ISO9001:2000 certification for the liquefaction plant atDamietta (Egypt) in December 2006, certification was obtained for UNION FENOSA GasComercializadora in 2007. At the same time, its integration into the other UNION FENOSAbusinesses has improved through the use of common tools such as Cicerón.

In the international area, 2007 signified a definitive effort for the incorporation of theIberoamerican businesses to the common CAMID culture. The quality system wasimplemented in Deocsa and Deorsa in Guatemala, and in EPSA in Colombia, theimplementation of the quality system in all the Company processes was completed in 2007.

In short, it can be said that ten Six Sigma projects have been started in 2007 for the improvementof processes; in addition UCUF has developed a self-assessment in line with the EFQM model ofexcellence, resulting in a plan for improvement that will be implemented in 2008. In thegeneration area, the Inspection and Regulatory Control Manual has been implemented in powerstations and as far as the improvement in quality at end users is concerned, the scope of thequality management systems has been extended to incorporate the Customer Service Centres.

GLOBAL EVOLUTION OF R&D IN UNION FENOSA

The global effort in R&D has continued to increase during the year 2007, also improving thespecific ratios with reference to business turnover and the number of employees.

Total resources (costs and investment) for R&D and technological innovation rose to 18.4 millionEuros, representing an increase of 14.0% on resources employed in the same areas in 2006.


WITH THE QUALITYCERTIFICATION OFTHE COMBINEDCYCLE POWERSTATION IN PALOSAND THE TOLEDO PVPHOTOVOLTAICPOWER STATION ,88.6% OF THE POWERMANAGED IN SPAINBY UNION FENOSA ISCERTIFIED INACCORDANCE WITHISO 9001:2000STANDARDS

UNION FENOSAINCREASEDRESOURCESDEVOTED TO R&D+IBY 14% LAST YEAR,WHEREBY THECUMULATIVEINCREASE SINCE2003 IN ALL CURRENTAREAS IS 53%, ANDTHAT SPECIFICALLYDEVOTED TOGENERATION ANDDISTRIBUTION BY 77PERCENT

R&D AND TECHNOLOGICAL INNOVATION INDICATORS (*)2007 2006 Var. 07/06 %

Resources in R&D+i (Million €) . . . . . . . . . . . . . . . . . . . 18.4 16.1 14.0Resources in R&D+i / Employee (€/emp) . . . . . . . . . . . 1,541 1,446 6.6Resources in R&D+i / Income (%) . . . . . . . . . . . . . . . . . 0.314 0.274 14.6

(*) Data consistent with the 2007 scope

NUMBER OF ISO 9001 CERTIFICATIONS

International CertificationsNational Certifications

2003

1

6

2004

1

7

2005

4

12

2006

8

16

2007

10

21

In 2007, UNION FENOSA published its Corporate Policy for Research and Development, thepurpose of which is to establish a comprehensive R&D policy and to coordinate its activities inthe UNION FENOSA Group through a standardised process that enables basic actions and R&Dprojects to be appropriately focussed.

The UNION FENOSA R&D policy is focussed on detailed knowledge of technology advances inthe energy, engineering, consultancy, IT systems and communications fields, through intenseawareness and technological intelligence. In this respect, the following Technology Groups werecreated in 2007:

• Sustainable coal and CO2

• Energy Savings and Efficiency

• Renewables (Biomass and Solar)

• Optimisation in Generation

• Network Technologies (New Architectures and Materials, Support and Operation ofElectrical Systems, Inspection and Life-Cycle Management, Sustainability Energy Efficiency)

• Systems and Telecommunications

During the year 2007, the effort in R&D projects has intensified, following the lines andperformances outlined by the R&D Plan.

Falling under the activity of innovation relative to Generation, work has continued on thedevelopment of the projects included in the technological lines identified as high priority in theR&D Plan.

In relation with the line of support for the operation of installations and markets, projects for thedevelopment of models and tools for optimisation of management for the MOVE2 EnergyManagement Centre and OPTIGAS have been completed and the projects included within the fieldof Optimisation of Combustion and Thermal Power Stations Intelligent Blow Down are in progress.

With regard to the technological line of Inspection and Life Cycle management, and within thedevelopment of tools for complementary maintenance, it is worth mentioning the completion


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of the Monitoring of the State of Equipment (VIGIA) in Anllares, the supervision of the stateof the turbine group by vibration analysis (SISU-Vibraciones) in Meirama, research into theroot causes of ageing problems of materials, such as the appearance of magnetite wearand corrosion accelerated by flow (MARFAC project) in Narcea, as well as the developmentof new inspection techniques and tools for management of inspection data in combinedcycles (SITDI-TC project).

In the technological line of CO2 Treatment, work has continued on the reduction of CO2,through developments tied in with its capture and the use of biomass in combustion.

On the other hand, in the area of Renewables, the Toledo PV photovoltaic farm hascontinued to operate. During 2007, amongst other actions, a double-axis tracking systemhas been incorporated and a new prototype for inverting continuous current into alternatinghas been installed.

In the Distribution and Commercial areas, more than 70 projects were undertaken during2007, which involved an increase in the budget of around 20% with respect to the previousyear.

The high voltage network continues with the line of portable equipment to give a rapidresponse to incidents in the network. During 2007, a 30 MVA portable transformer waslaunched, dual tension both in the primary (132-66kV) and in the secondary (20-15 kV)

In the medium voltage network, a project for monitoring transformer centres was carriedout, in which sensors were fitted to enable, with the corresponding communication system,preventive detection of situations that may affect the operation of the network.

Energy Efficiency is one of the current pillars supporting the fight against climate change,and is a UNION FENOSA unique value. In this sense, the GAD project was launched in 2007for the active management of demand, a project that has received aid under the CENITprogramme, whose objective is to obtain a levelling of the load curve of electricity supply bythe domestic consumer. The project is about the design of both the technological,methodological and regulatory mechanisms to enable homes to participate in theelectricity market.

Throughout these last few years, Energy Efficiency has become the company’s mostimportant corporate social responsibility exercise here at UNION FENOSA.

One of the challenges of the Energy Efficiency Centre in the year 2007 was the ESCO(Energy Services Company) project that UNION FENOSA Comercial is committed to andconsists of providing major customers with energy services or improvement in EnergyEfficiency whereby payment is conditional on the energy savings that they obtain.

Projects have also been run in collaboration with various European companies such asSMENDEX (European Energy Efficiency Index for SMEs), an Energy Efficiency Index forEuropean SMEs.

In the Engineering area (SOCOIN), the continuity of dynamic Gas Network projects with thecollaboration of the ICAI warrant a mention, aimed at making progress in the study of thetime-based behaviour of gas supply networks, and the ARAS project, the objective of whichis the quantitative study of the impact of a serious accident on the environment, to thepublic, and on the availability of the power station.


Projects in the CENIT programme

UNION FENOSA is directly participating in three projects within the state CENIT (NationalStrategic Consortium for Technical Research) programme. The CENIT Programme is centred onmajor R&D projects with a period of four years for development and an individualimplementation budget of not less than 20 million Euros and which must be made up of majorcorporations that will be a driving force in the project together with SMEs and Public ResearchBodies.

Two of the CENIT projects were already approved in 2006: the CENIT CO2, belonging to thePriority Technology Line “CO2 Treatment” and the CENIT Hesperia belonging to the SignificantTechnology Line “Intelligent Safety”. These two projects are now in their second year ofdevelopment and are already bearing their first fruit.

The third project presented at the second invitation to submit CENIT projects, and approved in2007, was the CENIT GAD for Active Management of Demand.

MANAGEMENT SYSTEMS AND TELECOMMUNICATIONS

The Telecommunications and Systems (TyS) area of UNION FENOSA has a corporate directive tocover three basic targets. The first is centred on collaborating with the businesses in the searchfor optimal positioning and operational efficiency, on the basis of the redesign of the processesand the installation of Information Technology and Telecommunications solutions. The secondhas to do with providing quality information to managers to help in the decision-making processand the third objective means that the internal activities in this area must be performedefficiently, for which it is fundamental to be especially proactive in the innovation process.

The activity of the TyS area during 2007 as regards the first target of alignment with thebusinesses displays a series of milestones that is appropriate to highlight. In the Generationbusiness, efforts has been centred on the installation of the operation and maintenance tool(OCEN) in new power stations and it has continued to be given help in the area of EnergyMarkets with the installation of the first modules of the new integrated tool (OMER). With regardto the Distribution business, the optimisation activity has been centred on the processes ofservice provision and energy control. In the Commercial business, the contribution has beencentred on Management Control and Electronic Invoicing of Customers. In the Corporate area itis appropriate to emphasise the effort of consolidation and extension of functionality of theeconomic-financial solutions of procurements and human resources.

In the international area, the centralisation of the financial and procurement informationsystems should be highlighted, and the installation of the SCADA (operational data acquisitionsystems) in the Republics of Moldova and in Panama, as well as the first steps in implementinga payroll system with an ‘across the board’ market solution.

As regards the second target, during 2007 the framework of the Management and ControlOffices has been consolidated as a key tool for taking decisions by Senior Management and areamanagers. In the same way, a significant effort has been made to compile and to standardisethe Group Models and Structures in economic and budgetary matters and in operationalindicators.

Finally, the third target, orientated towards operational efficiency and innovation in the business,has been associated with a series of remarkable milestones, which are: the definition of a newmethod and tools to make the development of information systems more efficient, theseparation of distribution and conditions arising from the merger of SOLUZIONA with Indra, andthe standardisation of wireless networks and mobility solutions.


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UNION FENOSAACTIVELY

PARTICIPATES IN THER&D+I PROJECT

“CENIT CO2”,LEADING THE

MODULES ON CO2

CAPTURE, CO-COMBUSTION ANDEFFICIENCY, THAT

ARE KEPT TO R&D+ILINES, CONSISTENT

WITH ITS“SUSTAINABLE COAL"

STRATEGY

MANAGEMENT OF INFORMATION AND OF THE BRAND

In 2007, the communications policy was directed at contributing to meeting the Company’sstrategic targets, guided by the recently launched BIGGER Plan, the dissemination of whichamongst the financial community and the media constituted a most newsworthy item.

Media relations focussed their management on the dissemination of information about thecentral pillars that support the Company’s development: organic growth, acquisitions and thefostering of alliances. The press office paid special attention to the release of relevant factsregarding management and their financial impact, with the media as the main channel for thedissemination of messages. Along these lines, direct meetings were encouraged between theCompany’s top executives and journalists specialising in energy news, in order to provide themwith an overall and specific vision of development in the sector and the basic strategies of theCompany.

In UNION FENOSA’s view, information released from the Company must meet three criteria:usefulness, rigor and accessibility. In conformity with these criteria, special attention is paid topublic relations with communications media, orientated towards meeting the demands forinformation both in respect to the content of messages as well as the speed with whichresponses are provided. The digital platform managed by the communications room on UNION FENOSA’s website guarantees the speed of transmission, as well as access to graphicalinformation and contextual documentation that gives quality to media relations.

In line with the objective of combining proximity and accessibility, with the help of the newcommunication channels provided by digital technologies, the simplification and harnessing ofthe functionalities of the Intranet has also been progressed and the renovation project of theaforesaid Website www.unionfenosa.es has been set in motion.

In the area of brand management, the strategy led to the development of the Strengthening ofthe Positioning Plan, whose most notable initiative was the mass media publicity campaignlaunched in the month of November. With a strategy supported on two fronts (to capitalise theconcept of energy efficiency and to rehabilitate the role of energy), its main objective was to bringthe brand into the spotlight as a catalytic tool for communication in its various facets: financial,informative, commercial and social.


6.3. COMMUNICATION AND SOCIAL RESPONSIBILITY

Another of the notable milestones was the celebration of the 25th Anniversary of the mergerbetween Unión Eléctrica and Fenosa. This event represented a suitable opportunity toemphasise the youth and strength of a business project that is based on the maturity of themanagement team that has been toughened up by the difficulties that have taken place in theSpanish energy sector over the last two decades.

This celebration was the most important event of a financial year characterised by the presenceof the Chairman and the First Vice-Chairman and Chief Executive in the principal energy,economic and social forums of the country, with an eagerness to contribute to the creation of anew energy culture based on the responsible and balanced use of a product and service directlyrelated to the development of the business fabric and well-being of the people.

MANAGEMENT OF CORPORATE SOCIAL RESPONSIBILITY

UNION FENOSA introduced improvements in its management model of Corporate SocialResponsibility (RSC) throughout 2007 to strengthen its connections with the business strategyand, particularly, to align it with the BIGGER Plan. The model provides the Company policy in thematter of RSC, the relationship and process of dialogue with stakeholders, the managementsystem, as well as activities of information, certification and communication resulting from theformer processes.

The model works by means of a system of mechanisms that ensures the interrelation of theprocesses. The first of them reflects the three essential pillars of UNION FENOSA’s strategy inthe matter of RSC, the aforesaid integration with the business model, the support of this in theCorporate Values of the organisation and the essential transferring of the policy to commercialoperations, products and services. In connection with this, the Process of Dialogue with thestakeholders (investors, employees, customers) and social groups is established. The thirdcritical element of the model is the RSC Management System that is based on the various codesof conduct of the organisation and promotes the constitution of an RSC committee in whichrepresentatives of each and every one of the departments are integrated and that manages therelationship with each of the stakeholders.


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BUSINESS

STRATEGIC PLAN

OPERATIO

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INDICATORS

MANAGEMENT SUPPLIER

SOCI

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CHAIN

GROUPS

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AN

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PROJ

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MEASU

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TREPU

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INVE

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EMPLOYEESCUSTOMERS

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CODE OF CONDUCT ANDOTH

ERS

Finally, and from the results that each one of the initiatives generates, reporting activities aretriggered (sustainability reports, information for rating agencies and indices, etc.), thecertification of certain activities and communication processes, both internal and external.

The heterogeneity of the different types of stakeholders requires specific channels of dialogueto be provided for each one of them. In addition, to facilitate the process with each group thereis usually more than one channel.

In the case of Investors and Shareholders, the dialogue is established from the ShareholderServices Office, which provides for a dynamic communication and response to their commentsand request for information. In addition, open informative sessions are held (presentations ofquarterly and annual results), either periodic or one-off.

Another important stakeholders is that of investors and financial analysts. UNION FENOSAorganises sessions annually directed specifically at this group, in which a two-waycommunication channel is opened on the strategic aspects of the Company. Also, there is anInvestor Relations department from which information is provided as well as direct access tothose financial and strategic aspects that they need from day to day.

Dialogue with the employees is achieved within the framework of collective bargaining and thecommittee for social dialogue, in which the conditions that affect them are explained andnegotiated. Other dialogue channels are the Strategic Planning Seminars, the Quality Club, thesatisfaction surveys of the “Star” group or the "Hablemos" [Let’s talk] channel. This last one isa dual-purpose program that was developed, on the one hand, by means of the corporateIntranet, allowing all Company employees to ask questions directly to the First Vice-Chairmanand Chief Executive and on the other, by means of direct sessions of the top executive withspecific groups of not more than 25 people.

In turn, the Quality Club, set up in 1993, promotes a better quality working environment in thecompany, at both a professional and personal level.

The Club’s members are the prize winners and finalists of the C Prize. Created in 1990, it is anaward that comes from their own colleagues, with the aim of giving formal recognition to thepeople who throughout their career in the UNION FENOSA group distinguish themselves bytheir outstanding professionalism and impressive interpersonal skills, people who act inaccordance with a set of values that make the work and the quality of life of their environmentmore effective.

The dialogue channels with customers are established along two major routes. The first is theCustomer Service Centre (CSC), which can be accessed through its call centre or interactivesystems; the second route is that of dialogue held with the main consumer organisations, whoare informed about UNION FENOSA activities from the viewpoint of the product and service.


The relationship with Public Authorities is organised through membership of variousassociations and collaboration with national and international regulatory bodies. In the case ofregulation, UNION FENOSA has a general secretariat engaged exclusively in institutionalrelations that derive from the regulated nature of the transmission and distributionbusinesses, as well as dialogue with governmental authorities and institutions associated withcompetition in the sector, such as the National Energy Commission.

With suppliers, dialogue is accomplished by means of two fundamental channels: the SupplierOffice, which allows the relationship between the two parties to be optimised, and the agreedquality programs that strengthen collaboration between the two with the firm objective ofproviding improvements to UNIøN FENOSA customers.

Moreover the Company manages its purchases through the RePro system, a portal in whichcontacts are made and which represents an effective tool for guaranteeing the quality level ofsuppliers before being contracted.

The relationship with social groups flows through very diverse and open channels due to theheterogeneity of the Non-Profit Sector. Relationships with groups with obviously socialobjectives and also those of an environmental nature are included here. Dialogue ismaintained with multilateral associations, formal meetings are organised with specificrelevant associations on specific matters or aspects and also meetings with the main RSCwatchdogs. All these channels allow their expectations to be met and their opinions in relationto Company practices to be ascertained.

Code of Conduct

The Code of Conduct of UNION FENOSA explains the basic principles for the performance ofthe professionals in the Group: Integrity, Professionalism and Respect.

It was approved by the Board of Directors in the last quarter of 2007, as part of the RSCManagement System. In order to ensure compliance with the Code, to resolve incidents anddoubts about its interpretation and to adopt appropriate measures for its principles to bebetter upheld, the Code itself establishes a Monitoring Committee. The composition and rulesof operation of this Committee are determined by the Chairman of the Board of Directors, afterconsulting with the Chairmen of the Audit and Compliance Committee and the Appointmentsand Remunerations Committee. Among its tasks is that of periodically informing the Audit andCompliance Committee about compliance with the Code and the possible incidents that takeplace.

Membership of the Dow Jones Sustainability Index (DJSI)

In 2007, UNION FENOSA renewed its membership of the Dow Jones Sustainability Index (DJSI)and was added to the Dow Jones Sustainability Index EURO STOXX, thus gaining access to oneof the most outstanding and exclusive indexes, that recognises achievements in the matter ofsustainability.

Sustainability Report

UNION FENOSA published its Sustainability Report for the fifth consecutive year following theG3 guidelines of the Global Reporting Initiative of the United Nations, and obtained the highestrating granted by this institution, A+, upon the report being verified by independent auditors forthe first time.


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In September of 2007, the Sustainability Report corresponding to the 2006 financial year wasawarded the Golden Peacock Award in London, granted by the World Council for CorporateGovernance.

Social Action

The Social Action policy is sustained by the consideration that UNION FENOSA is a championof social transformation in those places where it is present, to which end it is based on itscorporate values. This policy promotes, above all, training and professional qualificationprojects, being an essential link for access to the labour market of underprivileged people.

An indicator of this policy is the "Día Solidario" [Solidarity Day] that brings together thevoluntary activities of the Group. More than 2,300 UNION FENOSA professionals already giveup a day of their pay each year for the realisation of a training project directed at youngpeople and underprivileged children in countries where the Group operates. The Companymatches the amount collected from the employees, as well as financing the managementexpenses of the initiative and making its resources available to the Managing Committeethat leads the project. In the financial year 2007, the collection amounted to 308,018 Euros.

During the year, “Solidarity Day” signed two agreements for collaborations in Panama tofinance the education of young people with very limited financial resources and very highacademic merit. If these young people are not given grants from Solidarity Day they wouldbe forced to work from a very young age and to drop their studies.

The objective of the project, known as “School grants for secondary education for 18outstanding students with low financial resources in the Pozos district”, presented by theSocial and Sports Club on 19 October, consists of financing the studies of secondaryeducation, first and second cycles for 18 students. It lasts for 6 years.

For its part, the project “Finish your studies” that will be run by the Committee for theEradication of Child Labour and the Protection of the Adolescent Worker, CETTIPAT, enablesthe education of 120 youths to be financed to study the Second Cycle of secondary educationfor a period of 3 years. Once completed, the 17 with the best grades will be selected to beawarded grants for their university studies for a further 5 years. Out of the 120, 20% of thembelong to the Ngabe Biglé indigenous ethnic group.


UNION FENOSA also supports and finances social action projects in Spain. Amongst the mostoutstanding are the following:

• Training project for electricians: In collaboration with the Red Cross, UNION FENOSApromotes the training of electricity technology through a programme run by the ValencianRegion for integrating immigrants into the workforce, which incorporates specific modules onenergy efficiency. The degree of participants’ integration into the workforce was greater than75% and this experience won Second Prize in the Generalitat Solidarity Prizes in 2007.

• Job and training workshops for maintenance of buildings workers, in collaboration with theCasal dels Infants del Raval, an institution whose objective is the defence and respect of basicrights, education, employment training and the integration of children and youths from the Ravaldistrict of the city of Barcelona. UNION FENOSA collaborates in a social intervention project tothe benefit of those youths at risk of social exclusion, promoting their training in electricitymaintenance and the associative and community fabric of the area. This year has seen thecompletion of the first course “Energy and Work”. 53% of the youths who completed this modulehave managed to be reintegrated and more than 26% have continued with their training.

• Training for NGOs in the UNION FENOSA Corporate University: For the third consecutiveyear, the UNION FENOSA Corporate University has run a training programme in managementskills for NGOs. This initiative is in line with its commitment and orientation to training. In2007, two courses were given, the first of them, “Communications Skills”, whose objective isto provide the basic and necessary keys to argue effectively and to give convincingpresentations to professional bodies; and the second, “Negotiation Techniques”, is aimed atunderstanding and putting into practice the principle skills to enable them to face up to anegotiation according to interests. In total, 27 people from 13 organisations attended.

Outside of Spain, in the countries in which UNION FENOSA is present, multiple Social Actionprojects tied to the business itself continue to be developed. Along these lines, the “Rural OrganicMarket” project in Colombia stands out, in the regional area of the Salvajine hydroelectric plant,which is in the Valle del Cauca. It is a programme directed at a population in which 76% of itsinhabitants live in conditions of extreme poverty, and is intended to generate local developmentbased on a culture of alternative agricultural production.

The benefits obtained from this pioneering experience are: self-sustaining market, reactivationof unproductive plots of land, improvement in quality of life, continuity of their way of life,avoidance of migratory movements. The increase in stable income from 2001 to date is 277%with 106 families directly benefitting.

This experiment was awarded a prize by CSR Europe in 2007 when it held its Marketplace inBrussels.


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Sponsorship and Patronage

The Group’s main investment in Sponsorship and Patronage is made through the Museo deArte Contemporáneo UNION FENOSA (MACUF), located in La Coruña. During the year 2007, itheld a total of 9 exhibitions, two of which “From Leipzig to Düsseldorf. Current GermanImagination” and “UNION FENOSA Artistic Creation Grants Abroad”, had already opened at theend of 2006.

Secondly, the collections “Bodies as Territory” by Isabel Muñoz and “Cosmic Bones”. Theshapes of time -3,200,000 to +2007” a scientific-artistic exhibition that made up thephotographic programming for the year. Alongside the previous ones, the exhibition“Hyperlinks. Exhibits from the UNION FENOSA collection at the Museo Patio Herreriano”brought together the assets that UNION FENOSA contributes to the Contemporary ArtCollection, showing us Spanish artistic development in the 20th century.

During the summer there were two group exhibitions, one photographic, “Bodies, steps andglances”, and “This is no joke”. The first brought the participants in the Picasso Workshoptogether, directed by Isabel Muñoz, and the second, formed by a group of six individualexhibitions dealt with the topic of humour or irony as strategy.

The year ended with paintings by the Colombian artist Ana Mercedes Hoyos, “The humanity ofcolour” and Ana Soler, winner of one of the UNION FENOSA 2005 grants with her “InvisibleScars”.

Also, “Bits of everything”, the exhibition showing a part of the MACUF assets in the variousInstituto Cervantes centres, continued its tour around Europe (Rome, Milan and Zagreb).).

In the conferences section, recognised personalities from the scientific world spoke with greatmeasured success in the “Energy and Sustainability” cycle, in which matters related to climatechange were addressed.

Under the educational workshops section, coordinated by the Department for Education andSocial Action, the activities directed at special needs groups call for a special mention.

In parallel to the activities carried out in the La Coruña head office, MACUF presented acultural revitalisation programme in the Xagoaza Monastery in Barco de Valdeorras. Amongstthe activities, the Sculpture Symposium directed by Álvaro de la Vega, Paulo Neves and PacoPestana was outstanding, as well as two exhibitions, a film season, didactic activities, music,dance and theatre. Within the same framework, a mycology series was organised as acontinuation of that held in 2006 in MACUF.

UNION FENOSA also contributes to the conservation and spreading of information aboutSpanish artistic heritage as a promoter and member of the Association for the ContemporaryArt Collection, created in 1987.

A highlight of 2007 was bringing a work by Celso Lagar to the assets of the collection housedin the Museo Patio Herreriano, in Valladolid.

7

FULL-YEAR RESULTS

CONSOLIDATED FULL-YEAR RESULTS

In 2007, UNION FENOSA’s group-wide business performed soundly in all areas. Attributableprofit of EUR 986.4 million and improved efficiency in subsidiaries provide a high degree ofsustainability to the full-year results. Gross profit from operations (EBITDA) amounted toEUR 2,062.1 million euros.

In order to perform a homogeneous comparison of 2007 full-year results with those of2006, capital gains from 2007 must be taken into account. Said gains resulted from the saleof 2% of the shareholding in REE and the sale of the shareholding in APPLUS+, from theintegration of SOLUZIONA Consultoría in INDRA and other less significant entries. Hence,recurring profit for 2007 — comparable to that of 2006 — amounted to 717 million euros, up12.9% on the preceding year.

Revenues

Revenues amounted to 6,010.6 million euros, similar to the preceding year. Change in theconsolidation scope from the integration of SOLUZIONA in INDRA, with an impact of 406.9million euros in reduced revenues, and the lower prices on the electricity market in Spainand the average devaluation of local currencies of international businesses in relation tothe euro were largely offset by the updating of the regulated distribution business and thesound performance of business in the Company’s International area.


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IN 2007, NET PROFITATTRIBUTABLE TO

THE PARENT ROSE BY55.2% WITH RESPECT

TO THAT OF 2006,SURPASSING 980

MILLION EUROS ANDAMOUNTING TO OVER

3.2 EUROS PERSHARE

IN 2007, RECURRINGATTRIBUTABLE

PROFIT ROSE BY12.9% COMPARED

WITH ATTRIBUTABLENET PROFIT FOR

2006,AMOUNTING TO 707

MILLION EUROS

CONSOLIDATED FULL-YEAR RESULTSMillions of € 2007 2006 Var. 07/06 (%)

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,010.6 6,056.7 (0.8)Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . 3,104.4 3,158.6 (1.7)EBITDA (gross profit from operations) . . . . . . . . . . 2,062.1 1,906.8 8.1EBIT (profit from operations) . . . . . . . . . . . . . . . . . . 1,466.0 1,306.8 12.2Profit before taxes on continuing operations . . . . . 1,463.8 975.4 50.1Profit attributable to Parent . . . . . . . . . . . . . . . . . . 986.4 635.4 55.2Recurring profit attributable to Parent . . . . . . . . . 717.0 635.4 12.9

REVENUESMillions of € 2007 2006 Var. 07/06 (%)

TOTAL (*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,010.6 6,056.7 (0.8)Generation in Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,244.4 2,193.5 2.3Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.3 678.5 8.4Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611.0 587.4 4.0International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,568.6 2,468.9 4.0

(*) Includes other + corporation + adjustments, and in 2006 Soluziona (407 million €)

Revenues are up by 2.3% in the generation business in Spain, which includes the activities ofgeneration and supply on the Liberalized Market as well as mining. This upturn is the result ofheightened production, energy sales on the Liberalised Market and the integration in theconsolidation scope of revenues from the Kangra Coal mine in South Africa, which offset thereduction in prices on the electricity market which took place over the year.

Distribution revenues for the year rose by 56.8 million euros, up 8.4% on 2006, chiefly due to theupdating of remuneration of the regulated distribution business.

In the gas business, revenues rose by 4.0%, owing to the higher sales volume, which offset thereduction in the average prices of this fuel.

Revenues from international activities grew by 4.0% despite the adverse effect of the exchangerates of local currencies against the euro.

Contribution margin

The consolidated contribution margin fell by 1.7% to 3,104.4 million euros, chiefly due to thechange in the consolidation scope brought on by the integration of SOLUZIONA in INDRA, whichamounted to 276.7 million euros at the end of December 2006.


REVENUES (millions of €)

(*) Includes other + corporation + adjustments

-0.8%

2007

6,011(*)

SOLUZIONA

Distribution Gas

International

Generation

Revenues2007/2006excluding

SOLUZIONA+6.4%

+4.0%

+8.4%

+4.0%

+2.3%

2006

6,057(*)

CONTRIBUTION MARGINMillions of € 2007 2006 Var. 07/06 (%)

TOTAL (*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,104.4 3,158.5 (1.7)Generation in Spain . . . . . . . . . . . . . . . . . . . . . . . . . . 1,033.9 954.3 8.3Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.3 678.4 8.4Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353.9 380.7 (7.0)International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 883.9 876.7 0.8


Gross profit from operations (EBITDA)

EBITDA rose to 2,062.1 million euros, which reflects an increase of 155.4 million euros (8.1%) on2006. Containment of net operating expenses, in line with that of preceding years, along with thechange in the consolidation scope brought on by the incorporation of SOLUZIONA in INDRA, ledto a reduction of 209.9 million euros in expenses, which contributed to the 15.3% improvementin the operating efficiency ratio compared with 2006.


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EBITDA AMOUNTEDTO 2,062.1 MILLION

EUROS, UP 8.1%OWING TO

CONTAINMENT OFNET OPERATING

EXPENSES IN ALLLINES OF BUSINESS

UNION FENOSACONTINUES TO

DEVELOP ITSSTRATEGY OF

PROMOTINGEFFICIENCY AS A

MEANS OFINCREASING THE

GROUP’SCOMPETITIVENESS.

THE EFFICIENCYRATIO IMPROVED BY

SIX PERCENTILEPOINTS IN 2007

OPERATING EFFICIENCYMillions of € 2007 2006 Var. 07/06 (%)

Net operating expenses . . . . . . . . . . . . . . . . . . . . . . . 1,042.2 1,251.8 (16.7)Staff costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487.8 643.1 (24.1)Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 629.0 689.7 (8.8)Capitalised operating expenses . . . . . . . . . . . . . . . . . 74.6 81.0 (8.0)Operating efficiency ratio. . . . . . . . . . . . . . . . . . . . . . 33.6 39.6 (15.3)

INTERNATIONAL CONTRIBUTION MARGINMillions of € 2007 2006 Var. 07/06 (%)

TOTAL (*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 883.9 876.7 0.8Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.3 145.6 (7.1)Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466.3 425.3 9.6Central America and other . . . . . . . . . . . . . . . . . . . . . 280.5 303.2 (7.5)

(*) Includes International structure

The generation business in Spain achieved a contribution margin of 1,033.9 million euros,up 8.3% on the preceding year as a result of higher revenues and the reduction inprocurements brought on by the decrease in the average unit cost of fossil fuels and in CO2-related costs.

In the gas business, the contribution margin contributed to the UNION FENOSA Group(50%) fell by 26.8 million euros compared with 2006. This decline is the result of a highlyunfavourable scenario in the first half of the year, which led to a reduction in the averageannual sale price and was partially offset by the streamlining of the portfolio of industrialcustomers and by international operations.

For the whole of the business in the International area, the contribution margin surpassedthat of 2006 by 0.8%, amounting to 883.9 million euros. The margin was dragged down by17.4 million euros due to the foreign exchange rate. Excluding this adverse factor, it wouldhave risen by 24.6 million euros, in a context of sharply increased procurements that, inrelative terms, grew 1.8 percentile points ahead of revenues.

EL EBIT SE HAINCREMENTADO EL12,2% ALCANZANDOLOS 1.466,0MILLONES DE EUROSA PESAR DE UNESCENARIO CONMENORES PRECIOSDEL MERCADOELÉCTRICO

Generation, retailing and mining

Profit from operations for the whole of generation, retailing and mining amounted to 511million euros, up 14.8% on the preceding year. Net operating expenses were curbed,resulting in an increase of 1.3%, in spite of the heightened activity, with new facilities incommercial operation and a greater amount of scheduled maintenance compared with thesame period for the preceding year.

Depreciation and amortisation rose by 4.9% on the preceding year, brought on by the start-up of the Sagunto combined-cycle plant, renewable-energy facilities, the integration of theKangra mine, and the full year of operation of the Aceca combined-cycle plant.

Distribution

In distribution, the improvement of 4.4 percentile points in operating efficiency allowed fora 22.7% improvement in profit from operations, which amounted to 305.1 million euros.

GasProfit from operations contributed to UNION FENOSA by the gas business in 2007amounted to 291.6 million euros, down by 6% on the preceding year. Net operatingexpenses fell by 21.2% and depreciation and amortisation rose by 0.2% due to the start-upof the Sagunto regasification plant, offset by the exchange rate used in depreciation at theDamietta plant.

Profit from operations (EBIT)

Profit from operations amounted to 1,466.0 million euros, up 12.2% on 2006.

PROFIT FROM OPERATIONS (EBIT)Millions of € 2007 2006 Var. 07/06 (%)

TOTAL (*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,466.0 1,306.8 12.2Generation in Spain . . . . . . . . . . . . . . . . . . . . . . . . . 511.0 445.2 14.8Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305.1 248.7 22.7Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291.6 310.2 (6.0)International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375.9 333.1 12.9

(*) Includes other + corporate + adjustments


International

Operating improvements carried out on an ongoing basis in the countries forming theInternational area made it possible to continue improving ratios of efficiency andproductivity. This helped to offset the relative effects of the high cost of energyprocurement. In this respect, the reduction of net operating expenses by 14.2 million euros(-3.9%), led to an improvement of 42.8 million euros in profit from operations, whichamounted to 375.9 million euros (up 12.9% on the preceding year).

In Mexico, despite the reductions in operating compared with the preceding year (-10.7%)and in depreciation and amortisation (-13.7%) resulting from the reduction in EOH, profitfrom operations fell by 0.9 million euros (-1.3%).

Profit from operations of the Colombia node amounted to 187.6 million euros, constitutingan upturn of 44.6 million euros (+31.2%). Although foreign exchange had a positive effect onthis node of 8 million euros, the increase brought on by the basic activities of the businessis estimated at nearly 30%.

In Central America and other, foreign-exchange fluctuation dragged down EBIT to 109.9million euros, amounting to a 2.2 million euros reduction compared with 2006 (-2.3%).Excluding this adverse factor, the businesses of the node would have recorded an increaseof nearly 6%.

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(6.0)%

2007

1,466*

Domestic generation

Domestic distribution International

Gas

14.8%

22.7%

12.9%

12.2%

1982

1,307*

CONTRIBUTION TO EBIT (Mill. €)

PERFORMANCE OFPROFIT FROM

OPERATIONS IN THEGAS BUSINESS IS

EASILY OFFSET BYDOUBLE-DIGIT

GROWTH IN THE EBITOF EACH OF THE

REMAINING AREASOF BUSINESS

The reduction in net finance costs is chiefly due to the favourable effect of foreign-exchangedifferences and the reduction in financial expenses.

This favourable effect was partially deteriorated by an upturn in benchmark rates, mainly on theLibor and Euribor indices, which brought on an upturn of 48 basis points in the average cost ofinterest. However, this upturn was mitigated through UNION FENOSA’s policy of interest-ratehedging, which reduces its exposure to change in financial markets.

Profit attributable to the shareholders of the Parent

Profit of the Parent amounted to 986.4 million euros, up 55.2% on the same period a yearearlier, with a tax rate of 29.7%.

Finance costs

Net finance costs as of 31 December 2007 rose to 384.3 million euros compared with 416.6million euros for the same period in the preceding year, amounting to a 7.8% reduction.


.

12 %

1,466.0

EBIT

384.3

Financecost

169.0

of associatesinv. + profit

Financial Non-currentassets

1,463.8

PBT

operationscontinuing

Tax

435.4

42.0

shareholdersMinority

986.4

Profitattributable

to shareholdersof Parent

55 %

213.2

PERFORMANCE FROM EBIT TO ATTRIBUTABLE NET PROFIT (Mill. €)

FINANCIAL EXPENSESMillions of € 2007 2006 Var. 07/06 (%)

Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373.1 366.5 1.8Other finance costs . . . . . . . . . . . . . . . . . . . . . . . . . 59.4 70.2 (15.3)Net foreign-exchange differences . . . . . . . . . . . . . (18.3) 6.9 ---Capitalised finance costs . . . . . . . . . . . . . . . . . . . . . (30.0) (27.0) 11.2Net finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 384.3 416.6 (7.8)Total gross financial debt . . . . . . . . . . . . . . . . . . . . 5,795.0 5,673.8 2.1Average cost of interest . . . . . . . . . . . . . . . . . . . . . 5.92 5.44 48 b.p.Total average cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.74 5.57 17 b.p.

IN 2007,A TOTAL OF

1,034 MILLIONEUROS WAS

INVESTED MAINLYIN THE GENERATION

BUSINESS INSPAIN AND IN

INITIATIVES TOIMPROVE

DISTRIBUTIONACTIVITIES

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Gas

38.1%

Others

International

Distribution

Generation

30.1%

1.2%

20.9%

9.7%

BREAKDOWN BY BUSINESS OF CONSOLIDATED INVESTMENT

BALANCE-SHEET ANALYSIS

Investment

In 2007, UNION FENOSA’s ongoing efforts in recent years have been rewarded both by new powerin operation and the extension of distribution networks and gas facilities in operation.

In 2007, consolidated investment of the UNION FENOSA Group amounted to 1,034 million euros.

With its investment of 394 million euros corresponding to the generation business in Spain, theGroup saw the completion of the Sagunto and Sabón combined-cycle plants, increasing generationcapacity brought into service under the ordinary regime by 16.8% and undertaking environmentaladaptations in coal-fired plants and investment in business continuity.

In renewable energies, the investment of EUFER and Generación Peninsular in the development ofwind-power and mini-hydro projects led to the start-up in 2007 of plants with 133 MW of capacityattributable to UNION FENOSA.

UNION FENOSA has always placed great importance on the distribution of electricity, despite thefact that it is a regulated activity whose remuneration is determined by the government and whoserates of return are lower than the cost of capital. In the last year, the distribution business wastargeted for nearly one-third of the Company’s investment, which was put towards the NetworkPlanning program, basically aimed at meeting heightened demand (energy and capacity) as wellas ensuring quality and continuity of supply.

Investment in the gas business is part of the early stages of investment of the BIGGER Plan, withthe expansion of the Sagunto regasification plant, as set forth in the document on Electricity andGas System Planning published by the Ministry of Industry, Tourism and Commerce. This involvesthe construction of an additional storage tank and a fifth vaporiser. In addition to this, initialstudies are under way in the development of the second train of the Damietta liquefaction plant.

The Reganosa plant started commercial operation on 7 November. The start-up concluded thedevelopment of gas infrastructures forecast for the first cycle of investment.

Investment in international distributors targeted a reduction in energy loss and an increase incapacity in order to meet each country’s increases in demand.



Divestment

The following are the most significant sales agreements made by the Group in 2007:

• In July 2007, UNION FENOSA agreed to sell to First Philippine Holdings Corp its 40%shareholding in First Philippine UNION FENOSA Inc, the portfolio company owned by both,for US$ 250 million (185 million euros). The sold company holds 22.9% of Manila ElectricCompany (Meralco), the leading electricity distributor in the Philippines. The deal wasfinalised on 25 January 2008.

• On 23 July 2007, UNION FENOSA, Agbar and Cajamadrid, agreed to buy shares with one ofthe Group’s fund-management companies, the Carlyle Group, through the transferral of thewhole of the share capital of Applus Servicios Tecnológicos, S.L. The price to be paid toUNION FENOSA by the buyer on the closing date of the transaction amounts to 240.6 millioneuros. The transaction was completed on 29 November 2007, after obtaining correspondingthe administrative and regulatory authorisation.

• On 6 November 2007, UNION FENOSA announced the sale of 2,705,400 shares representing2% of the capital of Red Eléctrica de España, S.A. The gross amount of the sale price was105 million euros, which represents an average placement price of 38.80 euros per share.

Financial debt

At 31 December 2007, gross financial debt amounted to 5,795 million euros, including thecontribution of UNION FENOSA to the financing of the tariff shortfalls of 2006 and 2007.

FINANCIAL DEBT2007 2006

Millones de €Amount % Amount %

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,795.0 100.0 5,673.8 100.0

Euros. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,644.2 62.9 3,626.6 63.9

Other currencies . . . . . . . . . . . . . . . . . . . 2,150.8 37,1 2,047.2 36,1

Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . 3,574.3 61.7 3,884.0 68.5

Floating rate . . . . . . . . . . . . . . . . . . . . . . . 2,220.7 38.3 1,789.8 31.5

Capital markets. . . . . . . . . . . . . . . . . . . . . 2,009.6 34.7 2,591.8 45.7

Banking market . . . . . . . . . . . . . . . . . . . . 3,785.4 65.3 3,081.9 54.3

Gearing ratio . . . . . . . . . . . . . . . . . . . . . . . 47.6% 50.2%

Available funds in credit accounts at 31 December 2007 amounted to 2,672.6 million euros, thuscontinuing with the policy of the UNION FENOSA Group of maintaining available funds to cover12 months of debt servicing.

The gearing ratio for 2007 is 47.6% compared with 50.2% for 2006. The ratio of gross debt toEBITDA fell to 2.8x.


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3x

Net financial debt/total market cap Gross debt/EBITDA

50%

2005

4.2x

2006

2.8x54%

48%

GEARING AND COVERAGE RATIOS (% and times) (*)

(*) Net debt / (net debt + net equity)

Fluctuation in the exchange rates of the currencies in which UNION FENOSA’s financing isdenominated led to the trimming of 178.7 million euros in debt. This was made possible by thedepreciation of the US dollar against the euro, which amounted to 176.3 million euros inreduction in debt, and the depreciation of the Colombian peso against the euro, which amountedto 2.4 million euros in reduction in debt.

The average cost of interest on debt at 31 December 2007 amounted to 5.92%, constituting anaverage increase of 48 basis points compared with the same period a year earlier.

DEBT OF UNION FENOSA GROUP AT 31 DECEMBER Millions of € 2007 2006 Var. 07/06 (%)

Debentures, bonds and promissory notes . . . . . . . 2,009.6 2,591.8 (22.5)

Loans in domestic currency . . . . . . . . . . . . . . . . . . . 1,951.7 1,370.6 42.4

Loans in foreign currency . . . . . . . . . . . . . . . . . . . . 1,833.7 1,711.4 7.1

Total gross financial debt . . . . . . . . . . . . . . . . . . . . 5,795.0 5,673.8 2.1

Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . 114.8 97.3 18.0

Total net financial debt . . . . . . . . . . . . . . . . . . . . . . 5,680.2 5,576.5 1.9

UNION FENOSACONTINUES TO

GAIN ECONOMICSTRENGTH AS

SEEN IN ITSGEARING RATIO:47.6% FOR 2007

Other considerations

In November 2007, the Spanish Association of Corporate Financiers and Treasurers(ASSET) chose UNION FENOSA for its third Financial Excellence in Finances award inMadrid. The Board of ASSET acknowledged UNION FENOSA’s ongoing commitment togrowth and the expansion plans that have put the company at the forefront of markets inMexico, Colombia and Central America.



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SUNION FENOSA GROUP. CONSOLIDATED INCOME STATEMENT (IFRS)

Millions of € 2007 2006 Var. 07/06 (%)

REVENUES 6,010.6 6,056.7 (0.8)

Procurement 2,906.2 2,898.2 0.3

CONTRIBUTION MARGIN 3,104.4 3,158.5 (1.7)

Net operating expenses 1,042.2 1,251.7 (16.7)

Staff costs 487.8 643.1 (24.1)Other expenses 629.0 689.7 (8.8)Capitalised operating expenses 74.6 81.0 (8.0)

EBITDA 2,062.1 1,906.8 8.1

Depreciation and amortisation 596.2 600.0 (0.6)

PROFIT FROM OPERATIONS (EBIT) 1,466.0 1,306.8 12.2

Net finance costs 384.3 416.6 (7.8)Income from financial assets 146.8 61.1 143.1Share of results in equity-accounted companies 22.2 10.6 109.3Income from non-current non-financialassets 213.2 13.5 1,483.4

PROFIT BEFORE TAXES FROMCONTINUING OPERATIONS

1,463.8 975.4 50.1

Tax on profits 435.4 316.7 37.5

YEAR’S PROFIT FROM CONTINUING OPERATIONS

1,028.4 658.7 56.1

Year’s profit from discontinued operations

0.0 (6.0) (100.0)

YEAR’S PROFIT 1,028.4 652.6 57.6

ATTRIBUTABLE TO SHAREHOLDERS OF THE PARENT

986.4 635.4 55.2

ATTRIBUTABLE TO MINORITY INTERESTS

42.0 17.3 143.3

RECURRING ATTRIBUTABLE PROFIT 717.0 635.4 12.9


UNION FENOSA GROUP. CONSOLIDATED BALANCE SHEET (IFRS)

Millions of € 2007 2006 Var. 07/06 (%)

ASSETS 17,877.2 16,762.7 6.6

Non-current/fixed assets 15,230.8 14,283.6 6.6

Tangible assets 11,500.3 10,932.6 5.2Intangible assets 578.1 501.0 15.4Consolidated goodwill 189.7 173.0 9.7Financial assets 2,083.5 1,732.0 20.3Deferred tax assets 793.5 857.3 (7.4)Other non-current assets 85.8 87.7 (2.2)

Current assets/working capital 2,277.5 2,383.8 (4.5)

Inventories 167.6 148.7 12.7Trade and other receivables 1,593.7 1,552.7 2.6Current financial assets 47.2 96.9 (51.3)Other current assets 354.2 488.2 (27.4)Cash and equivalents 114.8 97.3 18.0

Assets held for sale 368.9 95.3 287.1

EQUITY AND LIABILITIES 17,877.2 16,762.7 6.6

Shareholders of the Parent 5,103.8 4,444.8 14.8Minority interests 1,168.6 1,092.8 6.9

Total net equity 6,272.5 5,537.6 13.3

Non-current liabilities 7,389.9 6,773.2 9.1

Deferred income 748.9 599.8 24.9Long-term provisioning 1,168.9 1,112.0 5.1Gross financial debt 4,451.1 4,050.9 9.9Other long-term financial liabilities 0.3 0.6 (50.0)Deferred tax liabilities 659.3 523.4 26.0Other non-current liabilities 361.3 486.4 (25.7)

Current liabilities 4,214.8 4,446.8 (5.2)

Short-term provisioning 12.2 57.0 (78.6)Gross financial debt 1,343.9 1,622.8 (17.6)Other short-term financial liabilities 52.9 65.9 (19.7)Trade and other payables 1,770.4 1,918.6 (7.7)Other current liabilities 1,035.4 782.4 32.3

Liabilities held for sale 0.0 5.2 (100.0)

APPENDIX:STATISTICAL

INFORMATION

INDEX

RELEVANT DATA. Comparison of 2007 and 2006

Summarised economic data

Summarised operating data

HISTORICAL DATA. Five-year performance

Economic Data

Performance of Consolidated Income Statement

Performance of Consolidated Balance Sheet

Performance of debt

Performance of the share

Operating Data

Performance of Installed Capacity by Technology

Performance of Production in Power Plant Bars by Technology

Performance of Energy Supplied by Geographical Region

Performance of Customers in Distribution Market by Country

INFORMATION ON FACILITIES

Generation Facilities under Ordinary Regime in Spain

International Generation Facilities

Transmission and Distribution Facilities by Country


APPENDIX: STATISTICAL

INFORMATION

RELEVANT DATA: ECONOMIC DATA

Unit 2007 2006 Var. 07/06 (%)

INCOME STATEMENT Revenues (Mill.€) 6,010.6 6,056.7 (0.8)Contribution margin (Mill.€) 3,104.4 3,158.5 (1.7)EBITDA (Mill.€) 2,062.1 1,906.8 8.1Profit from operations (EBIT) (Mill.€) 1,466.0 1,306.8 12.2Profit before tax from continuing operations (Mill.€) 1,463.8 975.4 50.1Profit for the year (Mill.€) 1,028.4 652.6 57.6Profit attributable to minority interests (Mill.€) 42.0 17.3 143.3Profit attributable to Parent (Mill.€) 986.4 635.4 55.2Recurring profit attributable to the Parent (Mill.€) 717.0 635.4 12.9

BALANCE SHEETNet equity (Mill.€) 6,272.5 5,537.6 13.3Tangible fixed assets (Mill.€) 11,500.3 10,932.6 5.2Gross debt (Mill.€) 5,795.0 5,673.8 2.1Total assets (Mill.€) 17,877.2 16,762.7 6.6

STOCK EXCHANGE INDICATORSStock market capitalisation – year end (Mill.€) 14,073.1 11,425.5 23.3Attributed earnings per share (€) 3.2373 2.0853 55.2Gross dividend per share (€) 1.6200 1.0400 55.8

INDICADORES ECONÓMICOSEBIT/income (%) 24.39 21.58 13.0Net operating expenses/contribution margin (%) 33.57 39.63 (15.3)Average finance cost (%) 5.92 5.44 8.8Gearing ratio (Net debt/capitalisation)(1) (%) 47.52 50.18 (5.3)Gross debt/EBITDA (no. times) 2.81 2.98 (5.6)Return on equity (ROE)(2) (%) 16.40 11.78 39.2Recurring payout (%) 50.0 50.0 --

(1) Capitalisation: Net debt + net equity(2) Profit for the year/net equity


RELEVANT DATA: OPERATING DATA

Unit 2007 2006 Var. 07/06 (%)

DOMESTIC ENERGY BUSINESS Installed power (1) (MW) 8,865 7,516 17.9Electricity Production in Power Plant Bars

Ordinary regime (GWh) 33,063 29,885 10.6Hydro (GWh) 3,001 3,691 (18.7)Nuclear (GWh) 4,461 4,655 (4.2)Coal (GWh) 12,150 10,813 12.4Combined cycle (GWh) 13,211 9,941 32.9Fuel Oil+Gas (GWh) 240 785 (69.4)

Special regime (1) (GWh) 962 842 14.3TOTAL (GWh) 34,025 30,727 10.7

Energy suppliedRegulated market (T.Integral) (GWh) 26,522 27,590 (3.9)Deregulated market (GWh) 10,149 6,056 67.6Network Service (Access Tariff) (GWh) 8,628 6,378 35.3National electricity customers(2) (Units) 3,613,294 3,505,162 3.1

Gas billed(3)Regulated market (GWh) 262 183 43.2Deregulated market (GWh) 24,892 22,420 11.0National gas customers(2) (Units) 25,781 22,166 15.0

INTERNATIONAL ENERGY BUSINESSInstalled power (MW) 2,834 2,773 2.2Electricity Production in Power Plant Bars

Hydro (GWh) 3,866 3,332 16.0Fuel (GWh) 1,183 1,146 3.2Combined cycles (GWh) 10,009 10,636 (5.9)

TOTAL (GWh) 15,058 15,114 (0.4)

Supplied energy (4) (GWh) 22,345 20,928 6.8Electricity customers (Units) 5,485,850 5,162,335 6.3

Gas Billed (3) (GWh) 12,390 7,681 61.3

TOTAL UNION FENOSA GROUPInstalled power(1) (MW) 11,699 10,289 13.7Electricity Production in BC(1) (GWh) 49,083 45,841 7.1Supplied energy(5) (GWh) 59,016 54,574 8.1Gas Billed(3) (GWh) 37,544 30,284 24.0Customers (Units) 9,124,925 8,689,663 5.0Staff (Units) 12,871 17,099 (24.7)

(1) Consolidation Criteria. Includes 50% of EUFER consolidated and 100% of Generación Peninsular, S.L. Nominal Power in CCGT(2) Considered a Regulated and Liberalised Market (3) 50% of UNION FENOSA Gas incorporated(4) Energy supplied at Overall Tariff and Network Service (Access Tariff)(5) Includes Regulated Market (T.Integral) and Deregulated Market and Domestic Market and International Market

CONSOLIDATED INCOME STATEMENT

(Millions of €) 2003 2004 2005 2006 2007Revenues 5,560.1 4,465.0 5,984.9 6,056.7 6,010.6Contributions margin 2,182.2 2,308.7 2,754.4 3,158.5 3,104.4Gross profit from operations (EBITDA) 1,301.2 1,228.8 1,477.3 1,906.8 2,062.1Profit from operations (EBIT) 775.5 763.1 924.0 1,306.8 1,466.0Profit attributable to Parent 372.8 376.8 823.7 635.4 986.4Recurring attributable profit 372.8 376.8 460.5 635.4 717.0

CONSOLIDATED BALANCE SHEET

(Millions of €) 2003 2004 2005 2006 2007Total assets 14,571.3 15,269.4 17,617.0 16,762.7 17,877.2Tangible fixed assets 8,824.9 9,502.3 10,829.5 10,932.6 11,500.3Financial investments 2,222.6 1,623.0 1,920.5 1,732.0 2,083.5Current assests/working capital 2,005.0 1,922.7 2,565.9 2,383.8 2,277.5Net equity shareholders of Parent 3,061.5 2,962.3 3,923.8 4,444.8 5,103.8Net equity minority interests 1,015.3 355.8 1,143.0 1,092.8 1,168.6Gross financial debt 6,124.3 7,365.5 6,227.8 5,673.8 5,795.0

DEBT OF UNION FENOSA GROUP AT 31 DECEMBER (*)

(Millions of €) 2003 2004 2005 2006 2007Debentures, bonds and promissory notes 1,933.3 2,488.4 2,380.4 2,591.8 2,009.6Loans in domestic currency 2,099.0 2,617.8 1,312.0 1,370.6 1,951.7Loans in foreign currency 2,092.0 2,259.3 2,535.4 1,711.4 1,833.7Total gross financial debt 6,124.3 7,365.5 6,227.8 5,673.8 5,795.0Cash 107.2Short-term financial investments 110.5Cash and equivalents 199.7 151.1 97.3 114.8Total net financial debt 5,906.6 7,165.8 6,076.7 5,576.5 5,680.2

(*) Gross financial debt of 2004 includes outsourced pension liabilities that were cancelled in 2005

NOTE: Data for 2003 correspond to the application of the Spanish National Chart of Accounts (PlanGeneral Contable). Other data correspond to the application of International Financial ReportingStandards (IFRS).



INFORMATION


SHARE PERFORMANCE OF THE UNION FENOSA GROUP

2003 2004 2005 2006 2007Stock market dataNumber of shares (thousands) 304,679 304,679 304,679 304,679 304,679Market capitalisation (Mill.€) (year-end) 4,536.7 5,895.5 9,576.1 11,425.5 14,073.1

Share price (€)High for the year (*) 15.62 19.66 31.84 41.60 48.63Low for the year (*) 11.13 14.31 19.09 29.29 36.00Average for the year 13.53 17.58 24.80 33.91 41.44Year-end (1) 14.89 19.35 31.43 37.50 46.19

Per-share data (€)Net earnings (2) 1.22 1.24 2.70 2.09 3.24Dividend per share (3) 0.55 0.59 0.76 1.04 1.62

Interim dividend 0.25 0.27 0.32 0.40 0.62Final dividend 0.30 0.32 0.44 0.64 1.00

Total dividends (Mill. €)Total 167.8 181.2 231.6 316.9 493.6

Interim 76.8 82.9 97.5 121.9 188.9Final 91.0 98.3 134.1 195.0 304.7

Recurring pay-out (%) 45.02 48.10 50.28 49.87 50.04

Share price as multiple Profit (1)/(2) 12.17 15.65 11.63 17.98 14.27Dividend per share (1)/(3) 27.03 32.53 41.36 36.06 28.51

Volumes (shares) (thousands)Total traded 318,540 382,794 519,835 357,315 472,141Cash Daily average traded 1,269 1,519 2,031 1,401 1,866

Cash (Mill.€)Total cash value traded 4,351.5 6,562.7 13,478.5 12,088.7 19,581.7Daily average cash value traded 17.3 26.0 52.6 47.4 77.4

TurnoverYear-end share capital turnover (%) 104.5 125.6 170.6 117.3 155.0

(*) At trading day close

NOTE: Data for 2003 correspond to the application of the Spanish National Chart of Accounts (PlanGeneral Contable). Other data correspond to the application of International Financial ReportingStandards (IFRS).


PERFORMANCE OF INSTALLED CAPACITY BY TECHNOLOGY (MW)

2003 2004 2005 2006 2007Hydro 1,800 1,825 1,825 1,820 1,838Nuclear 739 739 739 589 589Thermal 2,822 2,822 2,822 2,822 2,822Combined cycle --- 1,200 1,600 2,000 3,200Total ordinary regime 5,361 6,586 6,986 7,231 8,449Total special regime (*) 326 212 243 285 416Total Spain 5,687 6,798 7,229 7,516 8,865Hydroelectric and cogeneration 917 917 917 967 1,028Thermal 256 256 256 256 256Combined cycle 1,550 1,550 1,550 1,550 1,550Total International 2,723 2,723 2,723 2,773 2,834Total installed capacity 8,410 9,521 9,952 10,289 11,699

PERFORMANCE OF PRODUCTION IN POWER PLANT BARS BY TECHNOLOGY (GWh)

2003 2004 2005 2006 2007Hydro 4,218 2,753 1,947 3,691 3,001Nuclear 5,459 5,702 5,661 4,655 4,461Thermal 13,783 14,211 13,657 11,598 12,390Combined cycle --- 1,039 6,716 9,941 13,211Total ordinary regime 23,460 23,705 27,981 29,885 33,063Total special regime (*) 974 742 794 842 962Total Spain 24,434 24,447 28,775 30,727 34,025Hydro 2,951 2,617 3,041 3,332 3,866Thermal 1,585 1,074 1,202 1,146 1,183Combined cycle 5,883 9,769 8,373 10,636 10,009Total International 10,419 13,460 12,616 15,114 15,058Total Production in power plant bars 34,853 37,907 41,391 45,841 49,083

(*) Special regime with consolidation criteria. Includes 50% of consolidated EUFER and 100% of Generación Peninsular, S.L.

(*) Special regime with consolidation criteria. Includes 50% of consolidated EUFER and 100% of Generación Peninsular, S.L.


INFORMATION


PERFORMANCE OF SUPPLIED ENERGY PER GEOGRAPHIC REGION (GWh)

2003 2004 2005 2006 2007Madrid 8,746 9,107 9,347 9,696 9,990Galicia 15,171 15,893 16,758 17,398 17,968Castile–La Mancha 4,599 4,730 5,025 4,889 5,112Castile and Leon 1,728 1,837 1,870 1,985 2,079Total Spain 30,244 31,567 33,000 33,968 35,150Colombia 8,656 9,085 10,158 12,361 13,210Central America and others 7,266 7,567 8,047 8,568 9,135Total International 15,922 16,652 18,205 20,929 22,345Total Electricity Supplied 46,166 48,219 51,205 54,897 57,495

PERFORMANCE OF CUSTOMERS IN DISTRIBUTION MARKET BY COUNTRY (thousands)

2003 2004 2005 2006 2007Spain(1) 3,239 3,341 3,450 3,505 3,613Colombia 1,812 2,016 2,056 2,077 2,332Panama 357 378 392 407 419Guatemala 1,135 1,164 1,220 1,272 1,290Nicaragua 515 570 605 636 660Moldova 754 747 762 770 785Total electricity customers 7,812 8,216 8,485 8,667 9,099

(1) Includes regulated and deregulated market

GENERATION FACILITIES OF UNION FENOSA UNDER ORDINARY REGIME IN SPAIN

Technology Province Total MW % Shareholding Capacity MWCapacity UNION FENOSA UNION FENOSA

HYDROELECTRICUGH Miño Hydroelec. 878 100% 878UGH Galicia Costa Hydroelec. 378 100% 378UGH Tajo Hydroelec. 367 100% 367UGH Bolarque H - Pumping 215 100% 215Total 1,838 1,838

NUCLEAR Almaraz I Nuclear Cáceres 982 11.2% 110Almaraz II Nuclear Cáceres 988 11.2% 111Trillo Nuclear Guadalajara 1,068 34.5% 368Total 3,038 589

COALMeirama Brown lignite A Coruña 563 100% 563Anllares Hard coal+anth. León 365 66,6% 244La Robla I-II Hard coal+anth. León 655 100% 655Narcea I-II-III Anthracite Asturias 586 100% 586Total 2,169 2,048

COMBINED CYCLECampo de Gibraltar I Natural Gas Cádiz 400 50% 200Campo de Gibraltar II Natural Gas Cádiz 400 50% 200Palos de la Frontera I Natural Gas Huelva 400 100% 400Palos de la Frontera II Natural Gas Huelva 400 100% 400Palos de la Frontera III Natural Gas Huelva 400 100% 400Aceca IV Natural Gas Toledo 400 100% 400Sagunto I Natural Gas Valencia 400 100% 400Sagunto II Natural Gas Valencia 400 100% 400Sagunto III Natural Gas Valencia 400 100% 400Total 3,600 3,200

FUEL OIL+GASAceca I-II Fuel Oil+Gas Toledo 628 50% 314Sabón I-II Fuel Oil A Coruña 460 100% 460Total 1,088 774

TOTAL UNION FENOSA SPAIN 11,743 8,449



INFORMATION


INTERNATIONAL GENERATION FACILITIES OF UNION FENOSA

Technology Country Capacity MWUNION FENOSA

HYDROELECTRICUC.H. La Yeguada Hydroelec. Panama 8C.H. Dolega Hydroelec. Panama 4C.H. Macho Monte Hydroelec. Panama 3C.H. Alto Anchicayá Hydroelec. Colombia 369C.H. Salvajina Hydroelec. Colombia 288C.H. Calima Hydroelec. Colombia 133C.H. Bajo Anchicayá Hydroelec. Colombia 75C.H. C.H. Río Cali Hydroelec. Colombia 2C.H. Nima Hydroelec. Colombia 7C.H. Hidroprado Hydroelec. Colombia 52C.H. La Joya Hydroelec. Costa Rica 50Total 991

CLASSIC THERMAL PLANTPalamara Fuel Oil Dominican Rep. 106La Vega Fuel Oil Dominican Rep. 92Iberáfrica Power Fuel Oil Kenya 58Total 256

COMBINED CYCLEHermosillo Natural Gas Mexico 250Naco Nogales Natural Gas Mexico 300Tuxpan Natural Gas Mexico 1,000Total 1,550

COGENERATIONCogeneration Panama 11Cogeneration EPSA Colombia 10Cogeneration CETSA Colombia 16Total 37

TOTAL UNION FENOSA INTERNATIONAL 2,834

DISTRIBUTION FACILITIES OF UNION FENOSA BY COUNTRY (2007)

Step-down transformers Length of

Number MVA Capacity lines (Km)

Spain 33,779 11,122 103,878Panama 36,709 3,396 16,887Guatemala 70,065 1,453 53,908Nicaragua 43,097 1,684 13,482Moldova 8,642 2,363 33,488Colombia 84,544 5,391 79,603TOTAL L.V. + M.V. 276,836 25,409 301,246

España 749 23,354 8,396Panamá 14 573 139Moldova 56 1,141 507Colombia 249 6,489 2,652TOTAL H.V. 1,068 31,557 11,694TOTAL 277,904 56,966 312,940



INFORMATION

LEGALDOCUMENTATION

UNION FENOSA, S.A.AND SUBSIDIARIESCOMPRISING THE

UNION FENOSA GROUP

Documents

PERFIL DE UNION FENOSA - London Stock Exchange · UNION FENOSA currently operates in 14 countries and is present across the whole energy cycle value chain: Generation:11,699 MW of