As filed with the Securities and Exchange Commission on November 13, 2007
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 20-F/A
(Amendment No. 1)
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR(g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Fiscal Year Ended: December 31, 2006 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Date of event requiring this shell company report For the transition period from to |
Commission file number: 1-14970
ENEL-Società per Azioni
(Exact name of registrant as specified in its charter)
ENEL S.p.A.
(Translation of registrant’s name into English)
Italy
(Jurisdiction of incorporation or organization)
Viale Regina Margherita 137, Rome, Italy
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |||
American Depositary Shares | New York Stock Exchange | |||
Ordinary shares with a par value of €1 each | New York Stock Exchange(*) |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
6,176,196,279
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.
Yes o No þ
Note — checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).
Yes o No þ
(*) | Not for trading, but only in connection with the registration of the American Depositary Shares. |
EXPLANATORY NOTE
This Amendment No.1 to our Annual Report on Form 20-F as filed on June 29, 2007 is being filed solely to remove the single word “(unaudited)” from the title of Note 25 of the Consolidated Financial Statements included therein, as appearing onpage F-102 thereof.
1
ITEM 18. | FINANCIAL STATEMENTS |
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm | F-1 | |||
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004 | F-2 | |||
Consolidated Balance Sheets as of December 31, 2006 and 2005 | F-3 | |||
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004 | F-5 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 | F-6 | |||
Notes to Consolidated Financial Statements | F-7 | |||
Report of Independent Registered Public Accounting Firm | F-108 |
2
ITEM 19. | EXHIBITS |
Index to Exhibits filed with this Amendment No. 1
12.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2 Certification of Principal Financial Officers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1 Certification of Chief Executive Officer and Chief Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
ENEL S.p.A.:
We have audited the accompanying consolidated balance sheets of ENEL S.p.A. and subsidiaries (“the Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of the subsidiary Wind Telecomunicazioni S.p.A. and its consolidated subsidiaries (“Wind”) for the year ended December 31, 2004, which statements reflect total consolidated revenues constituting 13% for the year ended December 31, 2004 of the related consolidated total (including revenues from discontinued operations). Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Wind, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits, and the report of other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with International Financial Reporting Standards adopted by the European Union.
International Financial Reporting Standards adopted by the European Union vary in certain significant respects from U.S. generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in Notes 23 and 24 to the consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of ENEL S.p.A.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 28, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
(signed) KPMG S.p.A.
Rome, Italy
June 28, 2007
F-1
ENEL S.P.A. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 | 2005 | 2004 | 2006 | |||||||||||||||||
Note | (millions of euro) | (millions | ||||||||||||||||||
of U.S | ||||||||||||||||||||
dollars) | ||||||||||||||||||||
Operating Revenues | ||||||||||||||||||||
Revenues from sales and services | 6.a | 37,497 | 32,370 | 29,147 | 49,485 | |||||||||||||||
Other revenues | 6.b | 1,016 | 1,417 | 1,880 | 1,341 | |||||||||||||||
38,513 | 33,787 | 31,027 | 50,826 | |||||||||||||||||
Income from equity exchange transaction | 7 | 263 | — | — | 347 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Raw materials and consumables | 8.a | 23,469 | 20,633 | 16,800 | 30,972 | |||||||||||||||
Services and rentals | 8.b | 3,477 | 3,057 | 3,106 | 4,589 | |||||||||||||||
Personnel | 8.c | 3,210 | 2,762 | 3,224 | 4,236 | |||||||||||||||
Depreciation, amortization and impairment losses | 8.d | 2,463 | 2,207 | 2,201 | 3,250 | |||||||||||||||
Other operating expenses | 8.e | 713 | 911 | 783 | 941 | |||||||||||||||
Capitalized expenses | 8.f | (989 | ) | (1,049 | ) | (973 | ) | (1,305 | ) | |||||||||||
32,343 | 28,521 | 25,141 | 42,683 | |||||||||||||||||
Net income/(charges) from commodity risk management | 9 | (614 | ) | 272 | (16 | ) | (810 | ) | ||||||||||||
Operating income | 5,819 | 5,538 | 5,870 | 7,679 | ||||||||||||||||
Financial income | 10 | 513 | 230 | 365 | 677 | |||||||||||||||
Financial expense | 10 | (1,160 | ) | (944 | ) | (1,192 | ) | (1,530 | ) | |||||||||||
Loss from investments accounted for using the equity method | 11 | (4 | ) | (30 | ) | (25 | ) | (5 | ) | |||||||||||
Income before taxes | 5,168 | 4,794 | 5,018 | 6,821 | ||||||||||||||||
Income taxes | 12 | 2,067 | 1,934 | 2,116 | 2,728 | |||||||||||||||
Income from continuing operations | 3,101 | 2,860 | 2,902 | 4,093 | ||||||||||||||||
Income (loss) from discontinued operations, net of tax | 13 | — | 1,272 | (155 | ) | — | ||||||||||||||
Income for the year (shareholders of Parent Company and minority interests) | 3,101 | 4,132 | 2,747 | 4,093 | ||||||||||||||||
Attributable to minority interests | 65 | 237 | 116 | 86 | ||||||||||||||||
Attributable to shareholders of Parent Company | 3,036 | 3,895 | 2,631 | 4,007 | ||||||||||||||||
Earnings per share (euro) | 0.50 | 0.67 | 0.45 | 0.66 | ||||||||||||||||
Diluted earnings per share (euro) | 0.50 | * | 0.67 | * | 0.45 | * | 0.66 | |||||||||||||
Earnings from continuing operations per share (euro) | 0.50 | 0.46 | 0.48 | 0.54 | ||||||||||||||||
Diluted earnings from continuing operations per share (euro) | 0.50 | * | 0.46 | * | 0.48 | * | 0.54 | |||||||||||||
Earnings from discontinued operations per share (euro) | 0.00 | 0.21 | (0.03 | ) | ||||||||||||||||
Diluted earnings from discontinued operations per share (euro) | 0.00 | 0.21 | * | (0.03 | )* |
(*) | Calculated on the basis of the average number of ordinary shares in the year (6,169,511,965 in 2006, 6,142,108,113 in 2005, 6,083,948,691 in 2004) adjusted for the diluting effect of outstanding stock options (65 million in 2006, 29 million in 2005, 102 million in 2004). Earnings and diluted earnings per share, calculated on the basis of options exercised to date, do not change with respect to the figures calculated as above. |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
ENEL S.P.A. AND SUBSIDIARIES
AS OF DECEMBER 31, 2006 AND 2005
2006 | 2005 | 2006 | ||||||||||||||
Note | (millions of euro) | (millions | ||||||||||||||
of U.S. | ||||||||||||||||
dollars) | ||||||||||||||||
ASSETS | ||||||||||||||||
Current assets | 14 | |||||||||||||||
Inventories | 14.a | 1,209 | 884 | 1,596 | ||||||||||||
Trade receivables, net | 14.b | 7,958 | 8,316 | 10,502 | ||||||||||||
Tax receivables | 14.c | 431 | 789 | 569 | ||||||||||||
Current financial assets | 14.d | 402 | 569 | 531 | ||||||||||||
Cash and cash equivalents | 14.e | 547 | 476 | 722 | ||||||||||||
Other current assets | 14.f | 2,453 | 1,712 | 3,236 | ||||||||||||
13,000 | 12,746 | 17,156 | ||||||||||||||
Non-current assets | 15 | |||||||||||||||
Property, plant and equipment, net | 15.a | 34,846 | 30,188 | 45,986 | ||||||||||||
Intangible assets, net | 15.b | 2,982 | 2,182 | 3,935 | ||||||||||||
Deferred tax assets | 15.c | 1,554 | 1,778 | 2,051 | ||||||||||||
Investments accounted for using the equity method | 15.d | 56 | 1,797 | 74 | ||||||||||||
Non-current financial assets | 15.e | 1,494 | 836 | 1,972 | ||||||||||||
Other non-current assets | 15.f | 568 | 975 | 750 | ||||||||||||
41,500 | 37,756 | 54,768 | ||||||||||||||
TOTAL ASSETS | 54,500 | 50,502 | 71,924 | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | 16 | |||||||||||||||
Short-term loans | 16.a | 1,086 | 1,361 | 1,433 | ||||||||||||
Current portion of long-term loans | 17.a | 323 | 935 | 426 | ||||||||||||
Trade payables | 16.b | 6,188 | 6,610 | 8,166 | ||||||||||||
Income tax payable | 189 | 28 | 249 | |||||||||||||
Current financial liabilities | 16.c | 941 | 294 | 1,242 | ||||||||||||
Other current liabilities | 16.d | 4,106 | 3,390 | 5,419 | ||||||||||||
12,833 | 12,618 | 16,935 | ||||||||||||||
Non-current liabilities | ||||||||||||||||
Long-term loans | 17.a | 12,194 | 10,967 | 16,092 | ||||||||||||
Post-employment and other employee benefits | 17.b | 2,633 | 2,662 | 3,475 | ||||||||||||
Provisions for risks and charges | 17.c | 4,151 | 1,267 | 5,478 | ||||||||||||
Deferred tax liabilities | 17.d | 2,504 | 2,464 | 3,305 | ||||||||||||
Non-current financial liabilities | 17.e | 116 | 262 | 153 | ||||||||||||
Other non-current liabilities | 17.f | 1,044 | 846 | 1,378 | ||||||||||||
22,642 | 18,468 | 29,881 | ||||||||||||||
TOTAL LIABILITIES | 35,475 | 31,086 | 46,816 | |||||||||||||
F-3
2006 | 2005 | 2006 | ||||||||||||||
Note | (millions of euro) | (millions | ||||||||||||||
of U.S. | ||||||||||||||||
dollars) | ||||||||||||||||
Equity attributable to the shareholders of the Parent Company | 18 | |||||||||||||||
Share capital | 6,176 | 6,157 | 8,150 | |||||||||||||
Other reserves | 4,386 | 4,249 | 5,788 | |||||||||||||
Reserve from measurement of financial instruments | 163 | 2 | 215 | |||||||||||||
Retained earnings | 5,934 | 5,923 | 7,831 | |||||||||||||
Net income for the year* | 1,801 | 2,726 | 2,378 | |||||||||||||
18,460 | 19,057 | 24,362 | ||||||||||||||
Equity attributable to minority interests | 565 | 359 | 746 | |||||||||||||
TOTAL SHAREHOLDERS’ EQUITY | 19,025 | 19,416 | 25,108 | |||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 54,500 | 50,502 | 71,924 |
(*) | Net of interim dividend equal to €1,235 million (€1,169 million for 2005) |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ENEL S.P.A. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
Share Capital and Reserves Attributable to the Shareholders of the Parent Company | ||||||||||||||||||||||||||||||||||||||||||||
Translation | ||||||||||||||||||||||||||||||||||||||||||||
of Financial | Equity | |||||||||||||||||||||||||||||||||||||||||||
Statements | Reserve from | Net | Attributable to | Equity | ||||||||||||||||||||||||||||||||||||||||
Share | in Currencies | Measurement | Income | the Shareholders | Attributable | |||||||||||||||||||||||||||||||||||||||
Share | Premium | Legal | Other | Retained | Other Than | of Financial | for the | of the Parent | to Minority | Shareholders’ | ||||||||||||||||||||||||||||||||||
Capital | Reserve | Reserve | Reserves | Earnings | Euro | Instruments | Year | Company | Interests | Equity | ||||||||||||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||||||||||||||
Millions of euro | ||||||||||||||||||||||||||||||||||||||||||||
January 1, 2004(1) | 6,063 | — | 1,453 | 2,255 | 7,342 | 18 | (200 | ) | 2,509 | 19,440 | 181 | 19,621 | ||||||||||||||||||||||||||||||||
Exercise of stock options | 41 | 208 | — | — | (8 | ) | — | — | — | 241 | — | 241 | ||||||||||||||||||||||||||||||||
Changes in scope of consolidation | — | — | — | — | (105 | ) | — | — | — | (105 | ) | 816 | 711 | |||||||||||||||||||||||||||||||
Allocation of income | — | — | — | — | 314 | — | — | (314 | ) | — | — | — | ||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | — | — | (2,195 | ) | (2,195 | ) | — | (2,195 | ) | ||||||||||||||||||||||||||||||
Interim dividends | — | — | — | — | — | — | — | (2,014 | ) | (2,014 | ) | — | (2,014 | ) | ||||||||||||||||||||||||||||||
Net income for the year recognized in equity | — | — | — | — | — | (16 | ) | (29 | ) | — | (45 | ) | — | (45 | ) | |||||||||||||||||||||||||||||
Net income for the year recognized in income statement | — | — | — | — | — | — | — | 2,631 | 2,631 | 116 | 2,747 | |||||||||||||||||||||||||||||||||
December 31, 2004 | 6,104 | 208 | 1,453 | 2,255 | 7,543 | 2 | (229 | ) | 617 | 17,953 | 1,113 | 19,066 | ||||||||||||||||||||||||||||||||
Exercise of stock options | 53 | 303 | — | — | (17 | ) | — | — | — | 339 | — | 339 | ||||||||||||||||||||||||||||||||
Other changes | — | — | — | (10 | ) | (6 | ) | — | — | — | (16 | ) | (7 | ) | (23 | ) | ||||||||||||||||||||||||||||
Change in scope of consolidation | — | — | — | — | — | — | — | — | — | (892 | ) | (892 | ) | |||||||||||||||||||||||||||||||
Dividends | — | — | — | — | (1,597 | ) | — | — | (617 | ) | (2,214 | ) | (89 | ) | (2,303 | ) | ||||||||||||||||||||||||||||
2005 interim dividend | — | — | — | — | — | — | — | (1,169 | ) | (1,169 | ) | — | (1,169 | ) | ||||||||||||||||||||||||||||||
Net income for the year recognized in equity | — | — | — | — | — | 38 | 231 | — | 269 | (3 | ) | 266 | ||||||||||||||||||||||||||||||||
Net income for the year recognized in income statement | — | — | — | — | — | 3,895 | 3,895 | 237 | 4,132 | |||||||||||||||||||||||||||||||||||
December 31, 2005 | 6,157 | 511 | 1,453 | 2,245 | 5,923 | 40 | 2 | 2,726 | 19,057 | 359 | 19,416 | |||||||||||||||||||||||||||||||||
Exercise of stock options | 19 | 96 | — | (7 | ) | — | — | — | — | 108 | — | 108 | ||||||||||||||||||||||||||||||||
Stock option charges | — | — | — | 7 | — | — | — | — | 7 | — | 7 | |||||||||||||||||||||||||||||||||
Change in scope of consolidation | — | — | — | — | — | — | — | — | — | 118 | 118 | |||||||||||||||||||||||||||||||||
Transfer of net income from the previous year | — | — | — | — | 2,726 | — | — | (2,726 | ) | — | — | — | ||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | (2,715 | ) | — | — | — | (2,715 | ) | (9 | ) | (2,724 | ) | |||||||||||||||||||||||||||||
2006 interim dividend | — | — | — | — | — | — | — | (1,235 | )(2) | (1,235 | ) | — | (1,235 | ) | ||||||||||||||||||||||||||||||
Net income for the year recognized in equity | — | — | — | — | — | 41 | 161 | — | 202 | 32 | 234 | |||||||||||||||||||||||||||||||||
Net income for the year recognized in income statement | — | — | — | — | — | — | — | 3,036 | 3,036 | 65 | 3,101 | |||||||||||||||||||||||||||||||||
December 31, 2006 | 6,176 | 607 | 1,453 | 2,245 | 5,934 | 81 | 163 | 1,801 | 18,460 | 565 | 19,025 | |||||||||||||||||||||||||||||||||
Millions of U.S. dollars | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2006 | 8,150 | 801 | 1,918 | 2,963 | 7,831 | 107 | 215 | 2,377 | 24,362 | 746 | 25,108 |
(1) | Reclassification from retained earnings to other reserves for an amount of €40 million | |
(2) | Authorized by the Board of Directors on September 6, 2006 with the ex dividend date set at November 20, 2006 and payment as from November 23, 2006. |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ENEL S.P.A. AND SUBSIDIARIES CONSOLIDATED
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 | 2005 | 2004 | 2006 | |||||||||||||||||
Note | (millions of euro) | (millions | ||||||||||||||||||
of U.S. | ||||||||||||||||||||
dollars) | ||||||||||||||||||||
Income for the year (shareholders of the Parent Company and minority interests) | 3,101 | 4,132 | 2,747 | 4,092 | ||||||||||||||||
Adjustments for: | ||||||||||||||||||||
Amortization and impairment losses of intangible assets | 15.b | 193 | 308 | 491 | 255 | |||||||||||||||
Depreciation and impairment losses of property, plant and equipment | 15.a | 2,160 | 2,561 | 2,994 | 2,851 | |||||||||||||||
Exchange rate gains and losses (including cash and cash equivalents) | (87 | ) | 22 | (1 | ) | (115 | ) | |||||||||||||
Provisions | 820 | 781 | 1,042 | 1,082 | ||||||||||||||||
Financial (income)/expense, net | 515 | 808 | 1,001 | 680 | ||||||||||||||||
Income taxes | 12 | 2,067 | 2,147 | 1,498 | 2,728 | |||||||||||||||
(Gains)/losses and other non-monetary items | (407 | ) | (1,295 | ) | 1,081 | (537 | ) | |||||||||||||
Cash flow from operating activities before changes in net current assets | 8,362 | 9,464 | 10,853 | 11,036 | ||||||||||||||||
Increase/(decrease) in provisions | (749 | ) | (814 | ) | (1,078 | ) | (988 | ) | ||||||||||||
(Increase)/decrease in inventories | (109 | ) | 125 | (39 | ) | (144 | ) | |||||||||||||
(Increase)/decrease in trade receivables | 449 | (1,919 | ) | (768 | ) | 593 | ||||||||||||||
(Increase)/decrease in other assets/liabilities | 776 | 250 | (1,546 | ) | 1,024 | |||||||||||||||
Increase/(decrease) in trade payables | (497 | ) | 1,265 | 819 | (656 | ) | ||||||||||||||
Interest income and other financial income received | 312 | 202 | 341 | 412 | ||||||||||||||||
Interest expense and other financial expense paid | (847 | ) | (1,065 | ) | (1,473 | ) | (1,118 | ) | ||||||||||||
Income taxes paid | (941 | ) | (1,815 | ) | (2,274 | ) | (1,242 | ) | ||||||||||||
Cash flows from operating activities(a) | 6,756 | 5,693 | 4,835 | 8,917 | ||||||||||||||||
— of which: discontinued operations | 730 | 731 | ||||||||||||||||||
Investments in property, plant and equipment | 15.a | (2,759 | ) | (3,037 | ) | (3,538 | ) | (3,641 | ) | |||||||||||
Investments in intangible assets | 15.b | (204 | ) | (220 | ) | (296 | ) | (269 | ) | |||||||||||
Investments in entities (or business units) less cash and cash equivalents acquired | (1,082 | ) | (524 | ) | (126 | ) | (1,428 | ) | ||||||||||||
Disposals of entities (or business units) less cash and cash equivalents sold | 1,518 | 4,652 | 1,941 | 2,003 | ||||||||||||||||
(Increase)/decrease in other investing activities | 153 | 221 | 66 | 202 | ||||||||||||||||
Cash flows from investing activities(b) | (2,374 | ) | 1,092 | (1,953 | ) | (3,133 | ) | |||||||||||||
— of which: discontinued operations | (439 | ) | (1,121 | ) | ||||||||||||||||
Financial debt (new borrowing) | 17.a | 1,524 | 1,759 | 3,986 | 2,011 | |||||||||||||||
Financial debt (repayments and other changes) | (1,995 | ) | (5,283 | ) | (2,947 | ) | (2,633 | ) | ||||||||||||
Dividends paid | 18 | (3,959 | ) | (3,472 | ) | (4,256 | ) | (5,225 | ) | |||||||||||
Increase in share capital and reserves due to the exercise of stock options | 18 | 108 | 339 | 241 | 143 | |||||||||||||||
Capital contributed by minority shareholders | — | 3 | 10 | |||||||||||||||||
Cash flows from financing activities(c) | (4,322 | ) | (6,654 | ) | (2,966 | ) | (5,704 | ) | ||||||||||||
— of which: discontinued operations | (11 | ) | 443 | |||||||||||||||||
Impact of exchange rate fluctuations on cash and cash equivalents(d) | 4 | 14 | (5 | ) | 5 | |||||||||||||||
Increase/(decrease) in cash and cash equivalents (a+b+c+d) | 64 | 145 | (2,167 | ) | 85 | |||||||||||||||
— of which: discontinued operations | 280 | 53 | ||||||||||||||||||
Cash and cash equivalents at beginning of the year | 508 | 363 | 452 | 670 | ||||||||||||||||
— of which: discontinued operations | 133 | 80 | ||||||||||||||||||
Cash and cash equivalents at the end of the year | 572 | (1) | 508 | 363 | 755 | |||||||||||||||
— of which: discontinued operations | — | 133 |
(1) | Of which short-term securities equal to €25 million at December 31, 2006. |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) | GENERAL |
Enel S.p.A. (the “Parent”) and its subsidiaries (the “Subsidiaries” or the “Subsidiary Companies”), (collectively the “Company” or “Enel”) are involved in the generation, distribution and sale of electricity, providing the majority of the electric service in Italy. Gas distribution and sale, fuel trading, engineering and contracting represent the other principal activities of Enel. International operations are mainly represented by the generation and distribution of electricity in Europe, North and Latin America.
Enel’s privatization was launched in 1999 when 31.7% of its capital stock, were placed on the market by the Italian Government through the Italian Ministry of Economy and Finance (the “MEF”). In 2003, further approximate 6.6% of Enel’s capital stock was sold in a private placement. In 2004, an additional 18.9% of Enel’s capital stock was sold through a public offering. In July 2005, further 9.4% of Enel’s share capital was sold through a public offering in Italy and a private placement to institutional investors. At December 31, 2006, 21.14% of the share capital of the Parent Company is owned by the MEF and 10.16% is owned by Cassa Depositi e Prestiti S.p.A., a government held entity. As of that date, no other entity or individual held 2% or more of the Company’s outstanding ordinary shares.
Following are the significant acquisitions and disposals during the three years period ended December 31, 2006 as further described in note 4:
a. In 2004, the Company purchased Ottogas Group, Sicilmetano Group and Italgestioni Group, all active in the distribution and sale of gas for a total of €104 million. These acquisitions were accounted as for a purchases, with resulting goodwill of €8 million.
b. On June 23, 2004, the Company completed the Initial Public Offering (IPO) of 50% of the share capital of Terna, its subsidiary constituting the Transmission Division. Under the terms of the IPO, 1,000,000 shares were sold to financial institutions and to the public at €1.70 per share. In 2005 the Company completed a further two disposals amounting to 43.85% of Terna’s capital for a total consideration of €1,315 million, with a resulting gain of €1,149 million.
c. On April 28, 2005 the Company acquired a 24.62% stake in Romanian electricity distribution companies Electrica Banat and Electrica Dobrogea for €51 million. The total value of the transaction, equal to €131 million, included the simultaneous subscription in a capital increase, bringing Enel’s share in the two companies to 51%.
d. On August 11, 2005 Enel completed the first step of the sale of its Telecommunication business (Wind Telecomunicazioni SpA) to Weather Investment (Weather). Specifically, the Company sold a 62.75% stake in Wind to a subsidiary of Weather for €2,986 million, fully paid in cash, with a resulting gain of €4 million. On the same date, Enel also subscribed to a capital increase in Weather, acquiring a 5.2% stake for €305 million and both companies entered into a mutual put and call option on 6.28% of the capital stock of Wind for €328 million to be paid in cash. On February 8, 2006, Weather exercised the call option on the 6.28% interest in Wind for a consideration of €328 million fully paid in cash. The Company also contributed to Weather its remaining 30.97% stake in Wind in exchange for a 20.9% ownership interest in Weather. On December 21, 2006 Enel sold its 26.1% in Weather, which it had obtained in the Wind-Weather exchange of shares, for a total consideration of €1,962 million. The agreement envisaged the sale of 10% of Weather to a wholly-owned Weather subsidiary and the remaining 16.1% to its parent company Weather Investments II S.à.r.l. (Weather II).
e. On April 28, 2006 Enel acquired, for €840 million, a 66% interest in Slovenské elektrárne, a company that generates electricity in Slovakia. This acquisition was accounted for as purchase, with resulting goodwill of €561 million.
f. On May 30, 2006 Union Fenosa exercised the call option on 30% of Enel Union Fenosa Renovables (EUFER). The Company and Union Fenosa now control 50% of EUFER share capital and they have the joint management of EUFER. Union Fenosa paid Enel a total consideration of €72 million.
F-7
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
g. On June 14, 2006 Enel exercised the call option on the minority interest of 40% in Maritza East III Power Holding. Following this transaction, the Company now holds a 73% stake in Enel Maritza East 3 (formerly Maritza East III Power Company), a Bulgarian generation company. Furthermore, the same day, Enel purchased for €4 million a 100% interest in Maritza O&M Holding Netherlands, a holding company that owns 73% of Enel Operations Bulgaria (formerly Maritza East 3 Operating Company), which is responsible for the maintenance of the Maritza East III power station; this acquisition was accounted as for a purchase, with a resulting goodwill of €2 million.
h. On June 21, 2006 Enel completed the acquisition of a 49.5% interest in Res Holdings, which holds a 100% stake in the Russian firm RusEnergoSbyt (energy trading and sales); the acquisition, for €84 million, was accounted for as purchase, with a resulting goodwill of €80 million. Enel now exercises joint control over the company together with the other shareholders; as a result, the company is consolidated on a proportionate basis.
i. On August 1, 2006, Enel purchased a 100% stake in Hydro Quebec Latin America (now Enel Panama), which exercises, together with the Company’s partner Globeleq (a private equity fund), de facto control over Fortuna, a Panamanian hydro generation company. This acquisition, with a total exchange value of €119 million, was accounted as for a purchase with a resulting goodwill of €62 million.
(2) | SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES |
Accounting policies and measurement criteria
Enel SpA, which operates in the energy utility sector, has its registered office in Rome, Italy. The consolidated financial statements of the Company for the year ended December 31, 2006 comprise the financial statements of the Company and its subsidiaries (“the Group”) and the Group’s holdings in associated companies and joint ventures.
Compliance with IFRS/IAS
The consolidated financial statements for the year ended December 31, 2006 have been prepared in compliance with international accounting standards (International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS), the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and the Standing Interpretations Committee (SIC) endorsed by the European Union (hereinafter, “IFRS-EU”).
Basis of presentation
The consolidated financial statements consist of the consolidated statements of income, the consolidated balance sheets, the consolidated statements of changes in shareholders’equity, the consolidated statements of cash flows and the related notes.
The assets and liabilities reported in the consolidated balance sheet are classified on a “current/non-current basis”, with separate reporting of assets and liabilities held for sale. Current assets, which include cash and cash equivalents, are assets that are intended to be realized, sold or consumed during the normal operating cycle of the company or in the twelve months following the balance-sheet date; current liabilities are liabilities that are expected to be settled during the normal operating cycle of the company or within the twelve months following the close of the financial year.
The consolidated income statement is classified on the basis of the nature of costs, while the indirect method is used for the cash flow statement.
The consolidated financial statements are presented in euro, the functional currency of the Parent Company Enel SpA. All figures are shown in millions of euro unless stated otherwise.
F-8
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The financial statements are prepared using the cost method, with the exception of items that are measured at fair value under IFRS-EU, as specified in the measurement policies for the individual items.
In addition, it may also be noted that changes made to the classification of certain transactions recognized in the income statement in 2006, which are essentially related to the management of commodity risk, resulted in related reclassifications of the comparative figures for 2005 and 2004.
The Company’s Consolidated Financial Statements are presented in euro. The translations of the euro amounts into U.S. Dollars (“USD”) at the rate of USD 1.3197 to 1 euro are included solely for the convenience of the reader, using the noon buying rate in New York City for cable transfers in euro, as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2006. The convenience translations should not be construed as representations that the euro amounts have been, could have been, or could in the future be, converted into USD at this or any other rate of exchange.
Use of estimates
Preparing the consolidated financial statements under IFRS-EU requires the use of estimates and assumptions that impact the carrying amount of assets and liabilities and the related information on the items involved as well as the disclosure required for contingent assets and liabilities at the balance sheet date. The estimates and the related assumptions are based on previous experience and other factors considered reasonable in the circumstances. They are formulated when the carrying amount of assets and liabilities is not easily determined from other sources. The actual results may therefore differ from these estimates. The estimates and assumptions are periodically revised and the effects of any changes are reflected in the income statement if they only involve that period. If the revision involves both the current and future periods, the change is recognized in the period in which the revision is made and in the related future periods.
A number of accounting policies are considered especially important for understanding the financial statements. To this end, the following section examines the main items affected by the use of estimates, as well as the main assumptions used by management in measuring these items in compliance with the IFRS-EU. The critical element of such estimates is the use of assumptions and professional judgments concerning issues that are by their very nature uncertain.
Changes in the conditions underlying the assumptions and judgments could have a substantial impact on future results.
Revenue recognition
Revenues from sales to retail and wholesale customers are recognized on an accruals basis. Revenues from sales of electricity and gas to retail customers are recognized at the time the electricity or gas is supplied on the basis of periodic meter readings and also include an estimate of the value of electricity and gas consumption between the date of the last meter reading and the year end. Revenues between the date of the meter reading and the end of the year are based on estimates of the daily consumption of individual customers calculated on the basis of their consumption record, adjusted to take account of weather conditions and other factors that may affect consumption.
Pensions and other post-employment benefits
Part of the Group’s employees participate in pension plans offering benefits based on their wage history and years of service.
Certain employees are also eligible for other post-employment benefit schemes. The expenses and liabilities of such plans are calculated on the basis of estimates carried out by consulting actuaries, who use a combination of statistical and actuarial elements in their calculations, including statistical data on past years and forecasts of future costs.
F-9
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other components of the estimation that are considered include mortality and withdrawal rates as well as assumptions concerning future developments in discount rates, the rate of wage increases and trends in the cost of medical care.
These estimates can differ significantly from actual developments owing to changes in economic and market conditions, increases or decreases in withdrawal rates and the lifespan of participants, as well as changes in the effective cost of medical care.
Such differences can have a substantial impact on the quantification of pension costs and other related expenses.
Recoverability of non-current assets
The carrying amount of non-current assets held and used (including goodwill and other intangibles) and assets held for sale is reviewed periodically and wherever circumstances or events suggest that more frequent review is necessary.
Where the value of a group of non-current assets is considered to be impaired, the carrying amount of the group of assets is written down to its recoverable value, as estimated on the basis of the use of the assets and their future disposal, in accordance with the company’s most recent plans.
The estimates of such recoverable values are considered reasonable. Nevertheless, possible changes in the estimation factors on which the calculation of such values is performed could generate different recoverable values. The analysis of each group of non-current assets is unique and requires management to use estimates and assumptions considered prudent and reasonable in the specific circumstances.
Recoverability of deferred tax assets
At December 31, 2006, the financial statements report deferred tax assets in respect of tax losses to be reversed in subsequent years in an amount whose recovery is considered by management to be highly probable.
The recoverability of such assets associated with losses carried forward is subject to the achievement of future profits sufficient to absorb such losses.
The assessment takes account of the estimate of future taxable income and is based on prudent tax planning strategies. However, where the Group should become aware that it would be unable to recover all or part of such tax assets in future years, the consequent adjustment of the assets would be taken to the income statement in the year in which this circumstance arises.
Litigation
The Enel Group is involved in various legal disputes regarding the generation, transport and distribution of electricity. In view of the nature of such litigation, it is not possible to predict the outcome of such disputes, which in some cases could be unfavorable.
Nevertheless, provisions have been recognized to cover all significant liabilities for cases in which management believes an adverse outcome is likely and a reasonable estimate of the amount of the loss can be made.
The Group is also involved in various disputes regarding urban planning and environmental issues (mainly regarding exposure to electromagnetic fields) associated with the construction and operation of a number of generation facilities and power lines.
F-10
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Provision for doubtful receivables
The provision for doubtful receivables reflects estimates of losses on the Group’s receivables. Provisions have been made against expected losses calculated on the basis of historical experience with receivables with similar credit risk profiles, current and historical arrears, eliminations and collections, as well as the careful monitoring of the quality of the receivables portfolio and current and forecast conditions in the economy and the relevant markets.
Although the provision recognized is considered appropriate, the use of different assumptions or changes in economic conditions could lead to changes in the provision and therefore impact net income.
The estimates and assumptions are reviewed periodically and the effects of any change are taken to the income statement if they relate to only that year.. Where changes involve the current and future years, the variation is recognized in the year in which the review is conducted and in the related future years.
Decommissioning and site restoration
In calculating liabilities in respect of decommissioning and site restoration costs, especially for the decommissioning of nuclear power plants and the storage of waste fuel and other radioactive materials, the estimation of future costs is a critical process in view of the fact that such costs will be incurred over a very long period of time, estimated at up to 100 years.
The obligation, based on financial and engineering assumptions, is calculated by discounting the expected future cash flows that the Company considers it will have to pay for the decommissioning operation.
The discount rate used to determine the present value of the liability is the pre-tax risk-free rate and is based on the economic parameters of the country in which the nuclear plant is located.
That liability, which requires management to make professional judgments in calculating its amount, is quantified on the basis of the technology existing at the measurement date and is reviewed each year, taking account of developments in decommissioning and site restoration technology, as well as the ongoing evolution of the legislative framework and the sensitivity of governments and the general public to the protection of health and the environment.
Subsequently, the obligation is increased to reflect the passage of time and any changes in estimates.
In addition to the items listed above, estimates were also used with regard to financial instruments, share-based payment plans and the fair value measurement of assets and liabilities acquired in business combinations. For these items, the estimates and assumptions are discussed in the notes on the accounting policies adopted.
Related parties
Related parties are mainly parties that have the same parent company with Enel SpA, companies that directly or indirectly through one or more intermediaries control, are controlled or are subject to the joint control of Enel SpA and in which the latter has a holding that enables it to exercise a significant influence. Related parties also include the managers with strategic responsibilities, and their close relatives, of Enel SpA and the companies over which it exercises direct, indirect or joint control and over which it exercises a significant influence. Managers with strategic responsibilities are those persons who have the power and direct or indirect responsibility for the planning, management and control of the activities of the company. They include company directors.
Subsidiaries
Subsidiaries comprise those entities for which the Group has the direct or indirect power to determine their financial and operating policies for the purposes of obtaining the benefits of their activities. In assessing the existence of a situation of control, account is also taken of potential voting rights that are effectively exercisable or
F-11
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
convertible. The figures of the subsidiaries are consolidated on a fullline-by-line basis as from the date control is acquired until such control ceases.
Special purpose entities
The Group consolidates a special purpose entity (SPE) when it exercises de facto control over such entity. Control is achieved if in substance the Group obtains the majority of the benefits produced by the SPE and supports the majority of the remaining risks or risks of ownership of the SPE, even if it does not own an equity interest in such entity.
Associated companies
Associated companies comprise those entities in which the Group has a significant influence. Potential voting rights that are effectively exercisable or convertible are also taken into consideration in determining the existence of significant influence. These companies are initially recognized at cost and are subsequently measured using the equity method, allocating the purchase costs of the assets, liabilities and identifiable contingent liabilities of the acquired company at their fair values in an analogous manner to the treatment of business combinations. The Group’s share of profit or loss is recognized in the consolidated financial statements from the date on which it acquires the significant influence over the entity until such influence ceases.
Should the Group’s share of the loss for the period exceed the carrying amount of the equity investment, the latter is impaired and any excess loss is recognized as a provision if the Group has a legal or constructive obligation to cover the associate’s loss.
Joint ventures
Interests in joint ventures — enterprises in which the Group exercises joint control with other entities — are consolidated using the proportionate method. The Group recognizes its share of the assets, liabilities, revenues and expenses on aline-by-line basis in proportion to the Group’s share in the entity from the date on which joint control is acquired until such control ceases. Potential voting rights that are effectively exercisable or convertible are taken into consideration in determining the existence of joint control.
The following table reports the contribution of joint ventures to the main aggregates in the consolidated financial statements:
Enel Unión Fenosa | ||||||||||||
Fortuna | Renovables(1) | RusEnergoSbyt | ||||||||||
at Dec. 31, 2006 | ||||||||||||
(millions of euro) | ||||||||||||
Percentage consolidation | 49.9 | % | 50.0 | % | 49.5 | % | ||||||
Current assets | 26 | 52 | 17 | |||||||||
Non-current assets | 154 | 234 | — | |||||||||
Current liabilities | 14 | 44 | 10 | |||||||||
Non-current liabilities | 47 | 182 | — | |||||||||
Revenues | 18 | 53 | 202 | |||||||||
Costs | 15 | 31 | 196 |
(1) | Includes amounts for companies over which Enel Unión Fenosa Renovables exercises joint control. |
Consolidation procedure
The financial statements of subsidiaries used to prepare the consolidated financial statements were prepared at December 31, 2006 in accordance with the accounting policies adopted by the Parent Company.
F-12
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
All intragroup balances and transactions, including any unrealized profits or losses on transactions within the Group, are eliminated, net of the theoretical tax effect. Unrealized profits and losses with associates and joint ventures are eliminated for the part attributable to the Group.
In both cases, unrealized losses are eliminated except when relating to impairment.
Translation of foreign currency items
Each subsidiary prepares its financial statements in the functional currency of the economy in which it operates.
Transactions in currencies other than the functional currency are recognized in these financial statements at the exchange rate prevailing on the date of the transaction. Monetary assets and liabilities denominated in a foreign currency other than the functional currency are later adjusted using the balance sheet exchange rate. Any exchange rate differences are recognized in profit or loss.
Non-monetary assets and liabilities in foreign currency stated at historic cost are translated using the exchange rate prevailing on the date of initial recognition of the transaction. Non-monetary assets and liabilities in foreign currency carried at fair value are translated using the exchange rate prevailing on the date the related carrying amount is determined.
Translation of financial statements denominated in a foreign currency
For the purposes of the consolidated financial statements, all profits/losses, assets and liabilities are stated in euro, which is the functional currency of the Parent Company, Enel SpA.
In order to prepare the consolidated financial statements, the financial statements of consolidated companies in functional currencies other than the euro are translated into euro by applying the relevant period-end exchange rate to the assets and liabilities, including goodwill and consolidation adjustments, and the average exchange rate for the period.
Any resulting exchange rate gains or losses are recognized as a separate component of equity in a special reserve. The gains and losses are recognized in the income statement on the disposal of the subsidiary.
Business combinations
All business combinations are recognized using the purchase method, where the purchase cost is equal to the fair value at the date of the exchange of the assets acquired and the liabilities assumed, plus any costs directly attributable to the acquisition. This cost is allocated by recognizing the assets, liabilities and identifiable contingent liabilities of the acquired company at their fair values. Any positive difference between the purchase cost and the fair value of the share of the net assets acquired attributable to the Group is recognized as goodwill. Any negative difference is recognized in profit or loss. If the fair values of the assets, liabilities and contingent liabilities can only be calculated on a provisional basis, the business combination is recognized using such provisional values. Any adjustments resulting from the completion of the measurement process are recognized within twelve months of the date of acquisition.
On first-time adoption of the IFRS-EU, the Group elected to not apply IFRS 3 (Business combinations) retrospectively to acquisitions carried out before January 1, 2004. Accordingly, the goodwill associated with acquisitions carried out prior to the IFRS-EU transition date is still carried at the amount reported in the last consolidated financial statements prepared on the basis of previous accounting principles (December 31, 2003).
F-13
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, plant and equipment
Property, plant and equipment is recognized at historical cost, including directly attributable ancillary costs necessary for the asset to be ready for use. It is increased by the present value of the estimate of the costs of decommissioning and removing the asset where there is a legal or constructive obligation to do so. The corresponding liability is recognized under provisions for risks and charges. The accounting treatment of changes in the estimate of these costs, the passage of time and the discount rate is discussed under “Provisions for risks and charges”. Financial charges in respect of loans granted for the purchase of the assets are recognized in profit or loss as an expense in the period they accrue.
Certain items of property, plant and equipment that were revalued at January 1, 2004 (the transition date) or in previous periods are recognized at their revalued amount, which is considered as their deemed cost at the revaluation date.
Subsequent expenditure relating to an item of property, plant and equipment is recognized as an increase in the carrying amount of the asset when it is probable that future economic benefits deriving from the cost incurred to replace a component of such item will flow to the enterprise and the cost of the item can be reliably determined. All other expenditure is recognized as an expense in the period in which it is incurred. Where major components of property, plant and equipment have different useful lives, the components are recognized and depreciated separately.
The cost of replacing part or all of an asset is recognized as an increase in the value of the asset and is depreciated over its useful life; the net carrying amount of the replaced unit is eliminated through profit or loss, with the recognition of any capital gain/loss.
Property, plant and equipment is reported net of accumulated depreciation and any impairment losses determined as set out below. Depreciation is calculated on a straight-line basis over the item’s estimated useful life, which is reviewed annually, and any changes are reflected on a prospective basis. Depreciation begins when the asset is ready for use. The estimated useful life of the main items of property, plant and equipment is as follows:
Useful life | ||||
Civil buildings | 40 years | |||
Hydroelectric power plants(1) | 40 years | |||
Thermal power plants(1) | 40 years | |||
Nuclear power plants | 40 years | |||
Geothermal power plants | 20 years | |||
Alternative energy power plants | 20 years | |||
Transport lines | 40 years | |||
Transformation plant | 32-42 years | |||
Medium- and low-voltage distribution networks | 30-40 years | |||
Gas distribution networks and meters | 25-50 years | |||
Telecommunications systems and networks | 5.5-20 years | |||
Industrial and commercial equipment | 4 years |
(1) | Excluding assets to be relinquished at end of concession, which are depreciated over the duration of the concession if shorter than useful life. |
Land, both unbuilt and on which civil and industrial buildings stand, is not depreciated as it has an indefinite useful life.
The Group is the concession holder for the distribution and sale of electricity to the regulated market (non-eligible customers). The concession, granted by the Ministry for Economic Development, was issued free of charge
F-14
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and terminates on December 31, 2030. If the concession is not renewed upon expiry, the grantor is required to pay Enel an indemnity, at current values, for the assets owned by the Group that serve the concession. These assets, which comprise the electricity distribution networks, are recognized under “Property, plant and equipment” and are depreciated over their useful lives.
The Group’s plants include assets to be relinquished free of charge at the end of the concession. These mainly relate to major water diversion works and the public lands used for the operation of the thermal power plants. The concessions terminate in 2029, and in 2020 respectively (2010 for plants located in the Autonomous Provinces of Trento and Bolzano). If the concessions are not renewed, at those dates all intake and governing works, penstocks, outflow channels and other assets on public lands will be relinquished free of charge to the State in good operating condition. The Group believes that the existing ordinary maintenance programs ensure that the assets will be in good operating condition at the termination date.
Accordingly, depreciation on assets to be relinquished is calculated over the shorter of the term of the concession and the remaining useful lives of the assets.
The Group also operates in the gas distribution sector under concessions granted by local authorities for terms not exceeding twelve years. Local authorities can use service agreements to regulate the terms and conditions of the distribution service, as well as quality targets to be achieved. The concessions are granted based upon the financial conditions, quality and safety standards, investment plans, and technical and managerial expertise offered. The majority of the gas distribution concessions held by Enel expire on December 31, 2009. For the majority of the concessions, upon expiry the local authorities will hold new tenders to renew the concession. If the concession is not renewed, the new concession holder is required to pay to the Group an indemnity equal to the fair value of the assets that serve the concession. For certain concessions, on the expiry date the distribution networks will be relinquished free of charge to the local authorities in good operating condition. Such assets are carried under “Property, plant and equipment” and are depreciated over their useful life, where the concession agreement provides for an indemnity at the end of the concession period, or on the basis of the shorter of the term of the concession and the remaining useful life of the assets, where the assets are to be relinquished free of charge at the end of the concession.
Property, plant and equipment acquired under finance leases, whereby all risks and rewards incident to ownership are substantially transferred to the Group, are initially recognized as Group assets at the lower of fair value and the present value of the minimum lease payments due, including the payment required to exercise any purchase option. The corresponding liability due to the lessor is recognized under financial payables. The assets are depreciated on the basis of their useful lives. If it is not reasonably certain that the Group will acquire the assets at the end of the lease, they are depreciated over the shorter of the lease term and the useful life of the assets.
Leases where the lessor retains substantially all risks and rewards incident to ownership are classified as operating leases. Operating lease costs are taken to profit or loss on a systematic basis over the term of the lease.
Intangible assets
Intangible assets, all with a definite useful life, are measured at purchase or internal development cost, when it is probable that the use of such assets will generate future economic benefits and the related cost can be reliably determined.
The cost includes any directly attributable incidental expenses necessary to make the assets ready for use. The assets are shown net of accumulated amortization and any impairment losses, determined as set out below.
Amortization is calculated on a straight-line basis over the item’s estimated useful life, which is evaluated annually; any changes in amortization policies are reflected on a prospective basis.
Amortization commences when the asset is ready for use.
The estimated useful life of the significant intangible assets is reported in Note 15.b.
F-15
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill deriving from the acquisition of subsidiaries, associated companies or joint ventures is allocated to each of the cash-generating units identified. After initial recognition, goodwill is not amortized and is adjusted for any impairment losses, determined using the criteria described in the notes. Goodwill relating to equity investments in associates is included in their carrying amount.
Impairment losses
Property, plant and equipment and intangible assets with a definite life are reviewed at least once a year to determine whether there is evidence of impairment. If such evidence exists, the recoverable amount of any property, plant and equipment and intangible assets with a definite life is estimated.
The recoverable amount of goodwill and intangible assets with an indefinite useful life, if any, as well as that of intangible assets not yet available for use, is estimated annually.
The recoverable amount is the higher of an asset’s fair value less selling costs and its value in use.
Value in use is determined by discounting estimated future cash flows using a pre-tax discount rate that reflects the current market assessment of the time value of money and the specific risks of the asset. The recoverable amount of assets that do not generate independent cash flows is determined based on the cash-generating unit to which the asset belongs.
An impairment loss is recognized in the income statement if an asset’s carrying amount or that of the cash-generating unit to which it is allocated is higher than its recoverable amount.
Impairment losses of cash generating units are first charged against the carrying amount of any goodwill attributed to it and then against the value of other assets, in proportion to their carrying amount.
With the exception of those recognized for goodwill, impairment losses are reversed if the impairment has been reduced or is no longer present or there has been a change in the assumptions used to determine the recoverable amount.
Inventories
Inventories are measured at the lower of cost and net estimated realizable value. Average weighted cost is used, which includes related ancillary charges. Net estimated realizable value is the estimated normal selling price net of estimated selling costs.
The consumption of nuclear fuel is recognized on the basis of the energy generated by the nuclear power plants.
Financial instruments
Debt securities
Debt securities that the Company intends and is able to hold until maturity are recognized at the trade date and, upon initial recognition, are measured at fair value including transaction costs; subsequently, they are measured at amortized cost using the effective interest rate method, net of any impairment losses.
For securities measured at fair value through shareholders’ equity (available-for-sale securities), when a reduction in fair value has been recognized directly in equity and there is objective evidence that such securities have suffered an impairment loss, the cumulative loss recognized in equity is reversed to the income statement. For securities measured at amortized cost (loans and receivables or held-to-maturity investments), the amount of the loss is equal to the difference between the carrying amount and the present value of future cash flows discounted using the original effective interest rate.
F-16
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Debt securities held for trading and designated at fair value through profit or loss are initially recognized at fair value and subsequent variations are recognized in profit or loss.
Equity investments in other entities and other financial assets
Equity investments in entities other than subsidiaries, associates and joint ventures as well as other financial assets are recognized at fair value with any gains or losses recognized in equity (if classified as “available for sale”) or in profit or loss (if classified as “fair value through profit or loss”). On the sale of available-for-sale assets, any accumulated gains and losses are released to the income statement.
When the fair value cannot be determined reliably, equity investments in other entities are measured at cost adjusted by impairment losses with any gains or losses recognized in profit or loss. Such impairment losses are measured as the difference between the carrying amount and the present value of future cash flows discounted using the market interest rate for similar financial assets. The losses are not reversed.
Other assets classified under “loans and receivables” are initially recognized at fair value adjusted for transaction costs and are subsequently measured at amortized cost using the effective interest rate method, net of any impairment losses.
Cumulative impairment losses for assets measured at fair value through shareholders’ equity are equal to the difference between the purchase cost (net of any principal repayments and amortization) and the current fair value, reduced for any loss already recognized through profit or loss, and are reversed from equity to the income statement to the extent attributable to the year in which such loss is incurred.
Trade receivables
Trade receivables are recognized at amortized cost, net of any impairment losses. Impairment is determined on the basis of the present value of estimated future cash flows, discounted at the original effective interest rate.
Trade receivables falling due in line with generally accepted trade terms are not discounted.
Cash and cash equivalents
This category is used to record cash and cash equivalents that are available on demand or at very short term, and do not incur collection costs.
Cash and cash equivalents are reported net of bank overdrafts at period-end in the consolidated statement of cash flows.
Trade payables
Trade payables are recognized at amortized cost. Trade payables falling due in line with generally accepted trade terms are not discounted.
Financial liabilities
Financial liabilities other than derivatives are initially recognized at the settlement date at fair value, less directly attributable transaction costs. Financial liabilities are subsequently measured at amortized cost using the effective interest rate method.
Derivative financial instruments
Derivatives are recognized at the trade date at fair value and are designated as hedging instruments, if at all, when the relationship between the derivative and the hedged item is formally documented and the effectiveness of the hedge (assessed periodically) is high.
F-17
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The manner in which the result of measurement at fair value is recognized depends on the type of hedge accounting adopted, if any.
When the derivatives are used to hedge the risk of changes in the fair value of hedged assets or liabilities, any changes in the fair value of the hedging instrument are taken to income statement. The adjustments in the fair values of the hedged assets or liabilities are also taken to income statement to the extent of the risk being hedged.
When derivatives are used to hedge the risk of changes in the cash flows generated by the hedged items, changes in fair value are initially recognized in equity, in the amount qualifying as effective, and subsequently released to profit or loss in line with the gains and losses on the hedged item.
Hedge ineffectiveness and fair value changes on non-hedging derivatives are taken to income statement.
Changes in the fair value of derivatives that do not qualify for hedge accounting are recognized in the income statement.
Employee benefits
Liabilities related to employee benefits paid upon leaving or after ceasing employment in connection with defined benefit plans or other long-term benefits accrued during the employment period, which are recognized net of any plan assets, are determined separately for each plan, using actuarial assumptions to estimate the amount of the future benefits that employees have accrued at the balance sheet date. The liability is recognized on an accruals basis over the vesting period of the related rights. These appraisals are performed by independent actuaries.
The cumulative actuarial gains and losses exceeding 10% of the greater of the present value of the defined benefit obligation and the fair value of the plan assets are recognized in profit or loss over the expected average remaining working lives of the employees participating in the plan. Otherwise, they are not recognized.
Where there is a demonstrable commitment, with a formal plan without realistic possibility of withdrawal, to a termination before retirement eligibility has been reached, the benefits due to employees in respect of the termination are recognized as a cost and measured on the basis of the number of employees that are expected to accept the offer.
Share-based payments
The cost of services rendered by employees and remunerated through stock option plans is determined based on the fair value of the options granted to employees at the grant date.
The calculation method to determine the fair value considers all characteristics of the option (option term, price and exercise conditions, etc.), as well as the Enel share price at the grant date, the volatility of the stock and the yield curve at the grant date consistent with the expected life of the plan. The pricing model used is the Cox-Rubinstein.
This cost is recognized in the income statement over the vesting period considering the best estimate possible of the number of options that will become exercisable.
Provisions for risks and charges
Accruals to the provisions for risks and charges are recognized where there is a legal or constructive obligation as a result of a past event at period-end, the settlement of which is expected to result in an outflow of resources whose amount can be reliably estimated.
Where the impact is significant, the accruals are determined by discounting expected future cash flows using a pre-tax discount rate that reflects the current market assessment of the time value of money and, if applicable, the risks specific to the liability.
F-18
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
If the amount is discounted, the increase in the provision over time is recognized as a financial expense.
Where the liability relates to decommissioningand/or site restoration in respect of property, plant and equipment, the provision offsets the related asset. The expense is recognized in profit or loss through the depreciation of the item of property, plant and equipment to which it relates.
Where the liability regards the treatment and storage of nuclear waste and other radioactive materials, the provision is recognized against the related operating costs.
Changes in estimates are recognized in the income statement in the period in which the changes occur, with the exception of those in the costs of dismantling, removal and remediation resulting from changes in the timetable and costs necessary to extinguish the obligation or a change in the discount rate, which increase or decrease the value of the related assets and are taken to the income statement through depreciation. Where they increase the value of the assets, it is also determined whether the new carrying amount of the assets may not be fully recoverable. If this is the case, the assets are tested for impairment, estimating the unrecoverable amount and recognizing any loss in respect of the impairment.
Where the changes in estimates decrease the value of the assets, the reduction is recognized up to the carrying amount of the assets. Any excess is recognized immediately in the income statement.
Grants
Grants are recognized at fair value when it is reasonably certain that they will be received or that the conditions for receipt have been met.
Grants received for specific expenditure or specific assets the value of which is recognized as an item of property, plant and equipment or an intangible asset are recognized as other liabilities and credited to the income statement over the period in which the related costs are recognized.
Revenues
Revenues are recognized using the following criteria depending on the type of transaction:
• | revenues from the sale of goods are recognized when the significant risks and rewards of ownership are transferred to the buyer and their amount can be reliably determined and collected; | |
• | revenues from the sale and transport of electricity and gas refer to the quantities provided during the period, even if these have not yet been invoiced, and are determined using estimates as well as the fixed meter reading figures. Where applicable, this revenue is based on the rates and related restrictions established by law, the Authority for Electricity and Gas and the corresponding foreign authorities during the applicable period; | |
• | revenues from the rendering of services are recognized in line with the stage of completion of the services. Where it is not possible to reliably determine the value of the revenues, they are recognized in the amount of the costs that it is considered will be recovered; | |
• | connection fees related to the distribution of electricity are treated independently of any other service connected with the provision of electricity and therefore are recorded in a single amount upon completion of the connection service. |
With respect to revenues included in discontinued operations in 2004 and 2005:
• | revenues for the telecommunications sector from traffic, interconnections, and roaming are recorded according to the usage by customers and telephone operators calculated on an accrual basis. Such revenues include the amount relating to the access to and use of the Company’s network by customers and other domestic and international telephone operators. Revenues from the sale of rechargeable telephone cards are |
F-19
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recorded solely for the amount corresponding to prepaid traffic effectively used by customers during the year. The prepaid traffic not yet used as of balance sheet date is recognized as “deferred income”. Revenues from the sale of mobile and fixed telephones and related accessories are recorded at the time of the transfer of ownership. |
Financial income and expense
Financial income and expense is recognized on an accruals basis in line with interest accrued on the net carrying amount of the related financial assets and liabilities using the effective interest rate method.
Dividends
Dividends are recognized when the shareholder’s right to receive them is established.
Dividends and interim dividends payable to third parties are recognized as changes in equity at the date they are approved by the Shareholders’ Meeting and the Board of Directors, respectively.
Income taxes
Current income taxes for the period are determined using an estimate of taxable income and in conformity with the relevant tax regulations.
Deferred tax liabilities and assets are calculated on the temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and their corresponding values recognized for tax purposes on the basis of tax rates in effect on the date the temporary difference will reverse, which is determined on the basis of tax rates that are in force or substantively in force at the balance sheet date.
Deferred tax assets are recognized when recovery is probable, i.e. when an entity expects to have sufficient future taxable income to recover the asset.
The recoverability of deferred tax assets is reviewed at each period-end. Taxes in respect of components recognized directly in equity are taken directly to equity.
Discontinued operations and non-current assets held for sale
The assets or groups of assets and liabilities whose carrying amount will mainly be recovered through sale, rather than through ongoing use, are shown separately from the other balance sheet assets and liabilities. Assets classified as held-for-sale are measured at the lower of the carrying amount and estimated realizable value, net of selling costs. Any losses are expensed directly in the income statement. The corresponding values for the previous period are not reclassified.
Gains or losses on operating assets sold (relating to discontinued operations) are shown separately in the income statement, net of the tax effects. The corresponding values for the previous period are reclassified and reported separately in the income statement, net of tax effects, for comparative purposes.
Recently issued accounting standards
Standards not yet adopted
In 2006, the European Commission endorsed and published the following new accounting principles, amendments and interpretations to supplement the existing standards approved and published by the International Accounting Standards Board (IASB) and the International Financial Reporting Committee (IFRIC).
• | “IFRS 7 — Financial instruments: disclosure”: this standard supplements the standards for the recognition, measurement and presentation in the financial statements of financial assets and liabilities dealt with under |
F-20
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
IAS 32 “Financial instruments: disclosure and presentation” and under IAS 39 “Financial instruments: recognition and measurement” and supersedes IAS 30 “Disclosures in the financial statements of banks and similar financial institutions”. IFRS 7 requires additional disclosure of the significance of financial instruments for a company’s financial performance and position, as well as a description of management’s objectives, policies and processes for managing risks associated with financial instruments. This standard has already been adopted by the European Commission and takes effect starting as of the financial statements for periods beginning on or after January 1, 2007. Enel is assessing any impact this new standard may have in terms of disclosure in its consolidated financial statements. |
• | “IFRIC 8 — Scope of IFRS 2”: this interpretation clarifies whether IFRS 2 applies to arrangements where entities cannot specifically identify a portion or the entirety of the goods or services received. The issue addressed in this interpretation provides that, in the case in which the identifiable consideration received is less than the fair value of the equity instruments granted or liability incurred, the unidentifiable good/services received (or to be received) shall be valued, at the date of granting, at an amount equal to the difference between the fair value of the share-based payment and the fair value of the goods/services received (or to be received). The application of this interpretation, which has already been adopted by the European Commission, takes effect starting as of the financial statements for periods beginning on or after May 1, 2006. The Company is in the process of evaluating the impact of this standard on its consolidated financial statements. | |
• | “IFRIC 9 — Reassessment of embedded derivatives”: this interpretation establishes that the company shall assess whether embedded derivatives are to be recognized separately from the host contract at the time the company becomes party to the contract. Subsequent reassessment of the terms of the contract for separate recognition is prohibited, unless there is a change in the underlying contract that significantly modifies the related cash flows. Enel believes that the application of this interpretation, which has already been adopted by the European Commission and takes effect starting as of the financial statements for periods beginning on or after June 1, 2006, will not have a material impact on its consolidated financial statements. |
First-time adoption of applicable standards
• | Amendment of IAS 19 “Employee benefits”: the primary changes concern the option for the alternative treatment of actuarial gains and losses. Enel, which currently applies the corridor approach, has elected to not adopt the option introduced by this amendment. The amendment is effective as of January 1, 2006. | |
• | “IFRIC 4 — Determining whether an arrangement contains a lease”: the interpretation establishes the guidelines for identifying whether, in substance, a contract constitutes a lease as defined by IAS 17. The amendment is effective as of January 1, 2006. Specifically, in determining whether a contract is, or contains, a lease, the company must look to the substance of the arrangement and verify whether the contract: (a) explicitly or implicitly provides for the use of a specific asset or assets without which one of the parties to the contract would not be able to fulfill its contractual obligations; (b) transfers the right to use such assets. The application of this standard had no significant impact on Enel’s consolidated financial statements. | |
• | “IFRIC 5 — Rights to interests arising from decommissioning, restoration and environmental funds”, effective as of January 1, 2006. This interpretation establishes the criteria for recognizing and measuring contributions to funds established to decommission assets that have the following characteristics: (a) the fund assets are owned and managed by a legal entity that is distinct from the company; (b) the company contributing to the fund has a limited right of access to fund assets. The contributor separately recognizes its obligation to pay the decommissioning costs and its interest in the fund. The interest shall be measured at the lower of: (a) the amount of the decommission obligation recognized; and (b) the contributor’s share of the fair value of the net assets of the fund attributable to contributors. Changes in the carrying amount of this right to receive a reimbursement other than contributions to, and payments from, the fund shall be recognized in the income statement of the period in which the changes occur. In the case in which the |
F-21
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
interest in the fund is such as to allow the company to exercise control, considerable influence or joint control of the fund, the interest in the fund is recognized, respectively, as an interest in a subsidiary, associate or joint venture. The application of this standard had no effect on Enel’s consolidated financial statements. |
(3) | RISK MANAGEMENT |
Market risk
As part of its operations, Enel is exposed to different market risks, notably the risk of changes in interest rates, exchange rates and commodity prices.
To contain this exposure within the limits set at the start of the year as part of its risk management policies, Enel enters into derivative contracts using instruments available on the market.
Transactions that qualify for hedge accounting are designated as hedging transactions, while those that do not qualify for hedge accounting are classified as trading transactions.
The average term of length of the hedging transaction is approximately seven years.
The total ineffective amounts recognized in the income statement in 2006, 2005 and 2004 are equal to €1.1 million, €0.9 million and €1 million respectively.
The fair value is determined using the official prices for instruments traded on regulated markets, where available. The fair value of instruments not listed on regulated markets is determined using valuation methods appropriate for each type of financial instrument and market data as of the close of the financial year (such as interest rates, exchange rates, commodity prices, volatility), discounting expected future cash flows on the basis of the market yield curve at the balance sheet date and translating amounts in currencies other than the euro using year-end exchange rates provided by the European Central Bank. Where possible, contracts relating to commodities are measured using market prices related to the same instruments on both regulated and other markets. Contracts for differences are measured using a model based on the forward prices at the valuation date for the energy commodity analyzed, estimating developments in the electricity market in the reference period.
The financial assets and liabilities associated with derivative instruments are classified as:
• | cash flow hedges, mainly related to hedging the risk of changes in the cash flows associated with a number of long-term floating-rate loans and certain contracts entered into by Enel in order to stabilize revenues from the sale of electricity on the Italian Power Exchange (two-way contracts for differences); | |
• | trading derivatives, related to hedging interest and exchange rate risk and commodity risk but which do not qualify for recognition under IAS 39 as hedges of specific assets, liabilities, commitments or future transactions. |
The measurement techniques used for the open derivatives positions at the end of the year are the same as those adopted the previous year. Accordingly, the impact on profit or loss and shareholders’ equity of such measurement is essentially attributable to normal market developments.
The notional value of a derivative is the contractual amount on the basis of which differences are exchanged. This amount can be expressed as a value or a quantity (for example tons, converted into euro by multiplying the notional amount by the agreed price). Amounts denominated in currencies other than the euro are translated into euro at the exchange rate prevailing at the balance-sheet date.
The notional amounts of derivatives reported here do not represent amounts exchanged between the parties and therefore are not a measure of the Company’s credit risk exposure.
F-22
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest rate risk
Various types of derivatives are used to reduce the amount of debt exposed to interest rate fluctuations and to reduce borrowing costs. These include interest rate swaps, interest rate collars and swaptions, as detailed in the following table:
Notional Value | ||||||||
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Interest rate swaps | 5,132 | 4,866 | ||||||
Interest rate collars | 45 | 62 | ||||||
Swaptions | — | 69 | ||||||
Total | 5,177 | 4,997 |
Interest rate derivatives, specifically interest rate swaps, are used in order to reduce the amount of debt exposed to changes in interest rates and to reduce the volatility of borrowing costs. In an interest rate swap, Enel enters into an agreement with a counterparty to exchange at specified intervals floating-rate interest flows for fixed-rate interest flows (agreed between the parties), both of which are calculated on the basis of a notional principal amount.
Interest rate collars are used to reduce the impact of potential increases in interest rates on its floating-rate debt. Such contracts are normally used when the fixed interest rate that can be obtained in an interest rate swap is considered too high with respect to Enel’s expectations for future interest rate developments. In addition, interest rate collars are also considered appropriate in periods of uncertainty about future interest rate developments, in order to benefit from any decreases in interest rates. In such cases, Enel normally uses zero-cost collars, which do not require the payment of a premium.
A swaption gives the holder the right to enter into an interest rate swap with specified characteristics at an agreed future date. Enel normally acquires the right to pay a fixed rate or sells the right to receive a fixed rate in the case of the exercise of the option in order to obtain, where the option is exercised, a swap paying a fixed rate lower than the current market rate.
All these contracts are agreed with a notional amount and expiry date lower than or equal to that of the underlying financial liability or the expected future cash flows, so that any change in the fair valueand/or expected future cash flows is offset by a corresponding change in the fair valueand/or the expected future cash flows of the underlying position.
F-23
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accordingly, the fair value of the financial derivatives generally reflects the estimated amount that Enel would have to pay or receive in order to terminate the contracts at the balance-sheet date. The following table reports the notional amount and fair value of interest rate derivatives at December 31, 2006 and December 31, 2005.
Notional | Fair Value | Fair Value Assets | Fair Value Liabilities | |||||||||||||||||||||||||||||
Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||
Cash flow hedge derivatives: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 4,823 | 4,196 | (79 | ) | (261 | ) | 37 | 11 | (116 | ) | (272 | ) | ||||||||||||||||||||
Interest rate collars | 3 | 62 | — | — | — | — | — | — | ||||||||||||||||||||||||
Swaptions | — | 69 | — | — | — | — | — | — | ||||||||||||||||||||||||
Trading derivatives: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 309 | 670 | (26 | ) | (54 | ) | — | 1 | (26 | ) | (55 | ) | ||||||||||||||||||||
Interest rate collars | 42 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total interest rate swaps | 5,132 | 4,866 | (105 | ) | (315 | ) | 37 | 12 | (142 | ) | (327 | ) | ||||||||||||||||||||
Total interest rate collars | 45 | 62 | — | — | — | — | — | — | ||||||||||||||||||||||||
Total swaptions | — | 69 | — | — | — | — | — | — | ||||||||||||||||||||||||
TOTAL INTEREST RATE DERIVATIVES | 5,177 | 4,997 | (105 | ) | (315 | ) | 37 | 12 | (142 | ) | (327 | ) |
The following table reports the expected net financial income/(expense) in respect of these derivatives in the coming years, as well as the related amount resulting from a 10% increase or decrease in market interest rates. Actual changes in market interest rates may differ from the hypothetical changes.
Expected net financial income/(expense) in respect of interest rate derivatives in cash flow hedges.
2007 | 2008 | 2009 | 2010 | 2011 | Beyond | |||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||
Current rates decreased by 10% | (28 | ) | (49 | ) | (17 | ) | (16 | ) | (15 | ) | (66 | ) | ||||||||||||
Current rates at Dec. 31, 2006 | (18 | ) | (35 | ) | (5 | ) | (5 | ) | (5 | ) | (28 | ) | ||||||||||||
Current rates increased by 10% | (8 | ) | (20 | ) | 7 | 6 | 5 | 11 |
The market value of interest rate derivatives classified in the trading book at December 31, 2006 was a negative €26 million (compared with a negative €54 million at December 31, 2005).
The following table reports the expected net financial expense in respect of these derivatives in the coming years, as well as the expected changes in such expense resulting from a 10% increase or decrease in market interest rates. Actual changes in market interest rates may differ from the hypothetical changes.
Expected net financial income/(expense) in respect of interest rate derivatives in the trading book
2007 | 2008 | 2009 | 2010 | 2011 | Beyond | |||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||
Current rates decreased by 10% | (7 | ) | (6 | ) | (6 | ) | (3 | ) | (3 | ) | (10 | ) | ||||||||||||
Current rates at Dec. 31, 2006 | (6 | ) | (5 | ) | (5 | ) | (3 | ) | (2 | ) | (9 | ) | ||||||||||||
Current rates increased by 10% | (5 | ) | (4 | ) | (4 | ) | (2 | ) | (2 | ) | (7 | ) |
Exchange rate risk
In order to reduce the exchange rate risk on foreign currency assets, liabilities and expected future cash flows, Enel uses foreign exchange forward and option contracts in order to hedge cash flows in currencies other than the euro, however, no hedge accounting is applied in this respect. Payments in foreign currency are mainly denominated
F-24
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in dollars and Swiss francs. The buy and sell amounts in such contracts are notional values. Foreign exchange options, which are negotiated on unregulated markets, give Enel the right or the obligation to acquire or sell specified amounts of foreign currency at a specified exchange rate at the end of a given period of time, normally not exceeding one year. The maturity of forward contracts does not normally exceed twelve months.
At December 31, 2006 Enel had outstanding forward and option contracts totaling €1,574 million (€1,871 million at December 31, 2005).
Notional Value | ||||||||
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Forward contracts hedging commodities | 875 | 1,357 | ||||||
Forward contracts hedging commercial paper | 377 | 35 | ||||||
Forward contracts hedging future cash flows | 192 | 212 | ||||||
Other forward contracts | 50 | 194 | ||||||
Options | 80 | 73 | ||||||
Total | 1,574 | 1,871 |
More specifically, these include:
• | contracts with a notional value of €1,067 million used to hedge the exchange rate risk associated with purchases of fuel, imported electricity and expected cash flows in currencies other than the euro (€1,569 million at December 31, 2005); and | |
• | contracts with a notional value of €377 million used to hedge the exchange rate risk associated with redemptions of commercial paper issued in currencies other than the euro (€35 million at December 31, 2005). |
These contracts are also normally agreed with a notional amount and expiry date equal to that of the underlying financial liability or the expected future cash flows, so that any change in the fair valueand/or expected future cash flows of these contracts stemming from a potential appreciation or depreciation of the euro against other currencies is fully offset by a corresponding change in the fair valueand/or the expected future cash flows of the underlying position.
At the end of 2006 Enel also had €50 million in outstanding forward contracts (€194 million at December 31, 2005) and €80 million in options (€73 million at December 31, 2005) that were not directly associated with individual exposures subject to exchange rate risk. The following table reports the notional amount and fair value of exchange rate derivatives at December 31, 2006 and December 31, 2005.
Notional | Fair Value | Fair Value Assets | Fair Value Liabilities | |||||||||||||||||||||||||||||
Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||
Cash flow hedge derivatives: | ||||||||||||||||||||||||||||||||
- forwards | 26 | 21 | — | — | — | — | — | — | ||||||||||||||||||||||||
Trading derivatives: | ||||||||||||||||||||||||||||||||
- forwards | 1,468 | 1,777 | (22 | ) | (6 | ) | 2 | 9 | (24 | ) | (15 | ) | ||||||||||||||||||||
- options | 80 | 73 | — | — | — | — | — | — | ||||||||||||||||||||||||
Total forwards | 1,494 | 1,798 | (22 | ) | (6 | ) | 2 | 9 | (24 | ) | (15 | ) | ||||||||||||||||||||
Total options | 80 | 73 | — | — | — | — | — | — | ||||||||||||||||||||||||
TOTAL EXCHANGE RATE DERIVATIVES | 1,574 | 1,871 | (22 | ) | (6 | ) | 2 | 9 | (24 | ) | (15 | ) |
F-25
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The market value of exchange rate derivatives classified in the trading book at December 31, 2006 was a negative €22 million (compared with a negative €6 million at December 31, 2005).
The following table reports the expected net financial income/(expense) in respect of these derivatives in the coming years, as well as the expected amount of such expense resulting from a 10% appreciation or depreciation of the euro against other significant currencies. Actual changes in market exchange rates may differ from the hypothetical changes.
Expected net financial income/(expense) in respect of exchange rate derivatives in the trading book
2007 | 2008 | 2009 | 2010 | 2011 | Beyond | |||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||
10% depreciation of the euro | 110 | — | — | — | — | — | ||||||||||||||||||
Current exchange rates at December 31, 2006 | (23 | ) | — | — | — | — | — | |||||||||||||||||
10% appreciation of the euro | (130 | ) | — | — | — | — | — |
Commodity risk
Various types of derivatives are used to reduce the exposure to fluctuations in energy commodity prices, especially swaps and futures.
The exposure to the risk of changes in commodity prices is associated with the purchase of fuel for power plants and the purchase and sale of gas under indexed contracts as well as the purchase and sale of electricity at variable prices (indexed bilateral contracts and sales on Power Exchange).
The exposures on indexed contracts is quantified by breaking down the contracts that generate exposure into the underlying risk factors.
As regards electricity sold on the Italian Power Exchange, Enel uses two-way contracts for differences,under which differences are paid to the counterparty if the Single National Price (SNP) exceeds the strike price and to Enel in the opposite case. No fixed premium is envisaged for these contracts.
The residual exposure in respect of sales on the Power Exchange not hedged through two-way contracts for differences is quantified and managed on the basis of an estimation of generation costs in Italy. The residual positions thus determined are aggregated on the basis of uniform risk factors that can be hedged in the market.
Enel entered into one-way contracts for differences with the Single Buyer at the end of 2004. Under these contracts, if the Single National Price (SNP) exceeds the strike price, Enel pays the difference. The Single Buyer pays Enel a fixed premium equal to the amount set by the auction for the relevant product.
F-26
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reports the notional values and fair values of derivative contracts relating to commodities at December 31, 2006 and December 31, 2005.
Notional | Fair Value | Fair Value Asset | Fair Value Liability | |||||||||||||||||||||||||||||
Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |||||||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||
Cash flow hedge derivatives: | ||||||||||||||||||||||||||||||||
— Two-way contracts for differences | 1,034 | 1,372 | 48 | 57 | 48 | 57 | — | — | ||||||||||||||||||||||||
Trading derivatives: | ||||||||||||||||||||||||||||||||
— One-way contracts for differences | 3,219 | 6,266 | (123 | ) | 43 | — | 43 | (123 | ) | — | ||||||||||||||||||||||
— swaps on oil-based commodities | 581 | 613 | (7 | ) | (13 | ) | 9 | 11 | (16 | ) | (24 | ) | ||||||||||||||||||||
— futures on oil-based commodities | 252 | 291 | (2 | ) | 16 | 2 | 17 | (4 | ) | (1 | ) | |||||||||||||||||||||
— swaps on gas transmission fees | 16 | 18 | (8 | ) | (12 | ) | — | — | (8 | ) | (12 | ) | ||||||||||||||||||||
— other derivatives on energy | 57 | 107 | (6 | ) | (1 | ) | 1 | 397 | (7 | ) | (398 | ) | ||||||||||||||||||||
— embedded derivatives | 1,012 | — | (482 | ) | — | 58 | — | (540 | ) | — | ||||||||||||||||||||||
— options on other commodities | — | 9 | — | 2 | — | 2 | — | — | ||||||||||||||||||||||||
TOTAL COMMODITY DERIVATIVES | 6,171 | 8,676 | (580 | ) | 92 | 118 | 527 | (698 | ) | (435 | ) |
“Two-way contracts for differences” classified as cash flow hedges had a positive fair value at December 31, 2006 of €48 million (positive €57 million at December 31, 2005).
The following table shows the fair value these two-way contracts for differences would have in the event of a 10% increase or decrease in the prices of the energy commodities underlying the model for measuring energy prices on the Italian market. Actual changes in the price of commodities may differ from the hypothetical changes.Two-way contracts for differences refer to the physical positions in the underlying energy and, therefore, any negative (positive) change in the fair value of the derivative instrument corresponds to a positive (negative) change in the fair value of the underlying energy, so the impact on the income statement is equal to zero.
Fair value of two-way contracts for differences in cash flow hedges
2007 | ||||
(millions of euro) | ||||
10% decrease | 111 | |||
Scenario at Dec. 31, 2006 | 48 | |||
10% increase | (14 | ) |
Derivatives on energy commodities classified as trading derivatives had a net negative fair value of €17 million (a positive €11 million and a negative €28 million). At December 31, 2005 the total fair value was a negative €9 million.
The table below shows the fair value that these derivatives would have in the event of a 10% increase and a 10% decrease in the prices of the underlying risk factors. Actual changes in the price of commodities may differ from the hypothetical changes. Specifically, the column “Commodity” shows the change relating to derivatives whose fair value depends on the price of energy commodities, while the“10-year swap rate” column indicates the change relating to a gas derivative whose fair value is based on the10-year interest rate swap (IRS).
F-27
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair value of trading derivatives on energy commodities
Commodity | 10-year Swap Rate | Total for 2007 | ||||||||||
(millions of euro) | ||||||||||||
10% decrease | (19 | ) | (8 | ) | (27 | ) | ||||||
Scenario at Dec. 31, 2006 | (9 | ) | (8 | ) | (17 | ) | ||||||
10% increase | 1 | (8 | ) | (7 | ) |
“One-way contracts for differences” had a net negative fair value at December 31, 2006 of €123 million (positive €43 million at December 31, 2005).
The following table shows the fair value of such one-way contracts for differences, as well as the value that they would have as a result of a 10% increase and a 10% decrease in the prices of the energy commodities underlying the model for measuring energy prices on the Italian market. Actual changes in the price of commodities may differ from the hypothetical changes.
Fair value of one-way contracts for differences in trading book
2007 | ||||
(millions of euro) | ||||
10% decrease | (80 | ) | ||
Scenario at Dec. 31, 2006 | (123 | ) | ||
10% increase | (167 | ) |
Energy derivatives classified as trading derivatives had a net negative fair value at December 31, 2006 of €6 million (negative €1 million at December 31, 2005).
The following table shows the fair value at December 31, 2006, as well as the changes in such value as a result of a 10% increase and a 10% decrease in the price scenario. Actual changes in the price of commodities may differ from the hypothetical changes.
Specifically, for Italian energy derivatives, the changes are calculated (as with the approach for the contracts for differences described above) with reference to the energy commodity prices underlying the model for measuring energy prices on the Power Exchange.
For energy derivatives on foreign markets, for which forward rates are available, the changes are calculated based on the price of energy itself.
Fair value of energy trading derivatives
Italy | Foreign | Total for 2007 | ||||||||||
(millions of euro) | ||||||||||||
10% decrease | (7 | ) | (3 | ) | (10 | ) | ||||||
Scenario at Dec. 31, 2006 | (3 | ) | (3 | ) | (6 | ) | ||||||
10% increase | — | (4 | ) | (4 | ) |
Embedded derivatives relate to contracts for the purchase and sale of energy entered into by Slovenské elektrárne in Slovakia and are embedded in onerous, i.e. loss making host contracts. While the onerous contracts have been accounted as for through a provision, the embedded derivatives have been separated from the host contracts. The net fair value of the embedded derivatives at December 31, 2006 came to a negative €482 million, of which:
a) a positive €58 million relating to an embedded derivative whose fair value is based upon inflation in the United States, the price of aluminum on the London Metal Exchange and the Slovak koruna (SKK)/US dollar (USD) exchange rate;
F-28
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
b) a negative €304 million relating to an embedded derivative on the SKK/USD exchange rate;
c) a negative €236 million relating to a derivative on the price of gas.
Credit risk
Enel manages credit risk by operating solely with counterparties considered solvent by the market, i.e. those with high credit standing, and does not have any concentration of credit risk.
The credit risk in respect of the derivatives portfolio is considered negligible since transactions are conducted solely with leading Italian and international banks, diversifying the exposure among different institutions.
As part of activities related to purchasing fuels for thermal generation and the sale and distribution of electricity, the distribution of gas and the sale of gas to eligible customers, Enel grants trade credit to external counterparties. The counterparties selected are carefully monitored through the assessment of the related credit risk and the pledge of suitable guaranteesand/or security deposits to ensure adequate protection from default risk.
Enel considers the economic impact in future years of any default by counterparties in its derivatives positions open at the balance-sheet date to be immaterial given the high credit standing of such counterparties, the nature of the instruments (under which only differential flows are exchanged) and the risk diversification achieved by breaking down positions among the various counterparties.
Liquidity risk
Liquidity risk is managed by the Group Treasury unit at Enel SpA, which ensures coverage of cash needs (using lines of credit and issues of bonds and commercial paper) and management of any excess liquidity.
At December 31, 2006 Enel had committed lines of credit amounting to €5.6 billion, of which €0.6 billion had been drawn, and uncommitted lines of credit totaling €3.8 billion, of which €0.5 billion had been drawn.
In addition, Enel Finance International has an outstanding commercial paper program with a maximum amount of €4 billion, of which about €3.5 billion were available at December 31, 2006.
Concentrations of Risk
The Company’s business is largely determined by laws, regulations and policies established by the European Union and the Italian government. The regulatory framework for the Italian electricity market has changed significantly in recent years with the implementation of the Bersani Decree, designed to liberalize and create more competition in the Italian electricity market.
Tariff Structure
Prices paid by all Italian customers for electricity include a transmission component, a distribution component, a generation component covering the price of the electricity itself and system charges. Under the current electricity tariff regime, all customers pay regulated prices, set either directly by the Energy Authority or in accordance with Energy Authority guidelines and subject to its approval, for the transmission and distribution components and system charges. The transmission and distribution components, together referred to as “transport charges,” are subject to a price cap mechanism aimed at progressively reducing these charges on the basis of annual efficiency targets. For customers purchasing electricity on the regulated market, the Energy Authority also regulates the generation component, which is set on a quarterly basis, while customers purchasing electricity on the free market pay prices agreed through bilateral contracts or on the power exchange. The Energy Authority sets base tariff levels every four years.
In 2004, the Energy Authority set new base tariffs for the2004-2007 period, which have been in force since February 1, 2004. The tariff structure currently in place also includes certain mechanisms to take into account
F-29
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
structural factors affecting distributors’ costs. In 2004, the Energy Authority established a price equalizing mechanism intended to minimize the effects of a timing discrepancy in the setting of prices distributors pay to the Single Buyer for electricity to be distributed on the regulated market and the prices that distributors may charge to end users on the regulated market. The prices distributors pay to the Single Buyer for electricity to be distributed on the regulated market are set monthly by the Energy Authority based on the average unit costs incurred by the Single Buyer in connection with its purchases of electricity. However, the generation component included in the overall tariff that distributors may charge to end users on the regulated market is fixed by the Energy Authority on a quarterly basis. In order to minimize the effects of this discrepancy, the Energy Authority has established a price equalizing mechanism applicable since 2004. The equalizing mechanism is funded through a system charge in an amount set by the Energy Authority, applicable since 2005.
In 2004, the Energy Authority also put in place a system to compensate distributors that serve areas where costs are significantly higher than the national average due to uncontrollable factors such as population density and geography. The costs to be considered in setting this compensation are to be based on infrastructural elements such as the length of cables and installation type (aerial or underground). The compensation system does not apply to Enel Distribuzione S.p.A., a wholly owned subsidiary.
Increased Competition
For many years the Company has had virtually no competition in the generation, transmission and distribution of electricity market in Italy. The Company currently faces competition from independent power producers and municipal utilities in generation.
In addition, the disposal of its generating capacity has exposed the Company to increasing competition from other operators of electricity generating capacity, including Italian and international power companies. The Company also faces competition from suppliers and wholesalers for sales to customers that are intensive users of electricity and may freely purchase electricity from different producers.
From July 1, 2007, all customers, including residential customers, will be eligible to purchase electricity on the free market. Customers who choose not to participate on the free market will continue to be supplied under conditions set by the Energy Authority. The law also provides that even after all customers have become Eligible Customers, i.e. after July 1, 2007, the Single Buyer will continue to purchase electricity for resale to customers who choose not to leave the regulated market. Unbundling provisions of Directive 2003/54/CE concerning separation between distribution and supply activities are also likely in this context.
(4) | CHANGES IN THE SCOPE OF CONSOLIDATION |
The scope of consolidation for 2006 changed with respect to 2005 and 2004 as a result of the following main transactions:
I. | 2004 |
Acquisition:
a. the acquisition of controlling investments in Ottogas Rete and Ottogas Vendita (distribution and sale of natural gas to end-users) on September 15, 2004;
b. the acquisition of controlling investments in Italgestioni and Italgestioni Gas (distribution and sale of natural gas to end-users) on December 14, 2004.
F-30
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
II. | 2005 |
Acquisition:
a. the acquisition of controlling investments in Electrica Banat and Electrica Dobrogea (now Enel Electrica Banat ed Enel Electrica Dobrogea), companies that operate in electricity distribution and sales in Romania, on April 28, 2005. Accordingly, the income statement figures for 2005 reflect the consolidation of these companies for eight months only.
Disposal:
b. sale of 100% of Wind, 62.75% of which was sold on August 11, 2005, and 6.28% on February 8, 2006, with the remaining 30.97% being transferred to Weather Investments, again on February 8, 2006, in exchange for 20.9% of the latter;
c. sale of 43.85% of Terna, which took place in two transactions (13.86% on April 5, 2005 and 29.99% on September 15, 2005), and its deconsolidation on September 15, 2005.
III. 2006
Acquisition:
a. acquisition of a 66% interest in Slovenské elektrárne, a company that generates and sells electricity in Slovakia, on April 28, 2006;
b. acquisition, on June 14, 2006, of a 100% interest in Maritza O&M Holding Netherlands, a holding company that owns 73% of Enel Operations Bulgaria (formerly Maritza East 3 Operating Company), which is responsible for the maintenance of the Maritza East III power station;
c. acquisition, on June 21, 2006, of a 49.5% interest in Res Holdings, which holds a 100% stake in the Russian firm RusEnergoSbyt (energy trading and sales). Enel now exercises joint control over the company together with the other shareholders; as a result, the company is consolidated on a proportionate basis;
d. acquisition, on July 13, 2006 of 100% of Erelis, which operates in the development of wind plants in France;
e. acquisition, on August 1, 2006, of 100% of Hydro Quebec Latin America (now Enel Panama), which exercises, together with the Company’s partner Globeleq (a private equity fund), de facto control over Fortuna, a Panamanian hydro generation company. As a result, Fortuna is consolidated on a proportionate basis;
f. acquisition, on October 6, 2006, through the Brazilian subsidiary of Enel Latin America, Enel Brasil Partecipações, of 100% of 10 companies in the Rede Group that own 20 mini-hydro plants;
g. acquisition of the minority interest of 40% in Maritza East III Power Holding on June 14, 2006. Following this transaction, the Group now holds a 73% stake in Enel Maritza East 3 (formerly Maritza East III Power Company), a Bulgarian generation company.
Disposal:
h. sale of 30% of Enel Unión Fenosa Renovables on May 30, 2006. Following this sale, the interest in the company fell to 50%, with the Group exercising joint control over the company together with the other shareholders. As a result, the company is being consolidated on a proportionate basis effective as of that date.
F-31
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As regards the acquisition of Slovenské elektrárne on April 28, 2006, the allocation of the cost of the equity investment to the value of the assets and liabilities acquired was completed in 2006. The residual goodwill recognized can therefore be considered final. The following tables report the purchase price allocation of the company at the acquisition date.
Calculation of Slovenské elektrárne goodwill
(Millions of euro) | ||||
Net assets acquired before fair value adjustments | (1,196 | ) | ||
Fair value adjustments: | ||||
Property, plant and equipment | 1,943 | |||
Net deferred tax liabilities | (373 | ) | ||
Financial liabilities | 29 | |||
Sundry provisions | (22 | ) | ||
Other | 48 | |||
Total adjustments | 1,625 | |||
Net assets acquired after fair value adjustments | 429 | |||
Enel% holding (66)% | 283 | |||
Value of the transaction(1) | 844 | |||
of which payment on account made in 2005 | (168 | ) | ||
Goodwill | 561 |
(1) | Including incidental expenses of €4 million. |
Balance sheet of Slovenské elektrárne at the acquisition date
Book Values Before | Fair Values at | |||||||||||
April 28, | Fair Value | April 28, | ||||||||||
2006 | Adjustments | 2006 | ||||||||||
(millions of euro) | ||||||||||||
Property, plant and equipment | 1,928 | 1,943 | 3,871 | |||||||||
Intangible assets | 15 | 15 | ||||||||||
Inventories, trade and other receivables | 330 | (5 | ) | 325 | ||||||||
Cash and cash equivalents | 23 | 23 | ||||||||||
Other current and non-current assets | 911 | (397 | ) | 514 | ||||||||
Total assets | 3,207 | 1,541 | 4,748 | |||||||||
Shareholders’ equity | (789 | ) | 1,072 | 283 | ||||||||
Minority interests | (407 | ) | 553 | 146 | ||||||||
Total shareholders’ equity | (1,196 | ) | 1,625 | 429 | ||||||||
Trade and other payables | 258 | 258 | ||||||||||
Financial liabilities and Other current and non-current liabilities | 1,600 | (106 | ) | 1,494 | ||||||||
Sundry provisions | 2,545 | 22 | 2,567 | |||||||||
Total shareholders’ equity and liabilities | 3,207 | 1,541 | 4,748 |
The contribution of the Slovenské elektrárne to Group operating income for the year ended December 31, 2006 was €198 million.
F-32
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other acquisitions
With respect to the other 2006 acquisitions, the Company is in the process of evaluating the various components of net assets acquired and liabilities assumed and accordingly, the allocation of purchase price is preliminary and may be revised when such process is finalized. The final purchase price allocation is expected to be completed within one year from each acquisition date.
(Millions of euro) | ||||
Property, plant and equipment | 279 | |||
Intangible assets | 98 | |||
Trade receivables and inventories | 28 | |||
Cash and cash equivalents | 47 | |||
Other current and non-current assets | 16 | |||
Total assets | 468 | |||
Trade payables | (19 | ) | ||
Financial liabilities and Other current and non-current liabilities | (104 | ) | ||
Sundry and other provisions | (13 | ) | ||
Total liabilities | (136 | ) | ||
Net assets acquired | 332 | |||
Goodwill | 158 | |||
Negative goodwill | (30 | ) | ||
Value of the transaction(1) | 460 |
(1) | Including incidental expenses of €3 million. |
The negative goodwill of €30 million (which has been recognized in the consolidated income statement for the year ended December 31, 2006) is related to the acquisition of the minority interest of 40% of Maritza East III Power Holding for €26 million and to the acquisition of Simeo for €4 million.
(5) | SEGMENT INFORMATION |
The results presented in these notes reflect the new organizational structure implemented at the end of 2005 and operational since January 1, 2006, which, in addition to the Domestic Sales Division, the Domestic Generation and Energy Management Division, the Domestic Infrastructure and Networks Division, saw the creation of an International Division that includes all the Group’s resources devoted to generation and distribution activities in the electricity and gas sectors abroad.
For the purposes of providing comparable figures, the data for 2004 and 2005 have been reallocated to the Divisions on the basis of the new organizational arrangements. The figures for Transmission Networks and Telecommunications following the deconsolidation of Wind and Terna in the 2nd Half of 2005 are reported in the reference year as discontinued operations.
Following the transfer of the “large electricity users” unit (customers with annual consumption of more than 100 million kWh) from Enel Trade to Enel Energia, the 2004 and 2005 figures for the unit were reallocated from the Domestic Generation and Energy Management Division to the Domestic Sales Division for comparative purposes.
In addition, it may also be noted that changes made to the classification of certain transactions recognized in the income statement in 2006, which are essentially related to the management of commodity risk, resulted in related reclassifications of the comparative figures for 2005 and 2004.
F-33
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment information for 2006, 2005 and 2004
Results for 2006(1)
Continuing Operations | ||||||||||||||||||||||||||||||||||||
Domestic | ||||||||||||||||||||||||||||||||||||
Generat. and | Domestic | Services | Eliminations | |||||||||||||||||||||||||||||||||
Domestic | Energy | Infrastruc. | Parent | and Other | and | |||||||||||||||||||||||||||||||
Sales | Manag. | and Networks | Internat. | Company | Activities | Adjustments | Total | Total | ||||||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||||||
Revenues from third parties | 20,981 | 12,694 | 906 | 3,056 | 891 | 267 | (282 | ) | 38,513 | 38,513 | ||||||||||||||||||||||||||
Revenues from other segments | 127 | 2,967 | 4,801 | 12 | 287 | 894 | (9,088 | ) | — | — | ||||||||||||||||||||||||||
Total revenues | 21,108 | 15,661 | 5,707 | 3,068 | 1,178 | 1,161 | (9,370 | ) | 38,513 | 38,513 | ||||||||||||||||||||||||||
Net income/(charges) from commodity risk management | 4 | (705 | ) | — | 91 | (4 | ) | — | — | (614 | ) | (614 | ) | |||||||||||||||||||||||
Gross operating margin | 175 | 3,149 | 3,418 | 918 | 177 | 179 | 3 | 8,019 | 8,019 | |||||||||||||||||||||||||||
Income from equity exchange transaction | — | — | — | — | 263 | — | — | 263 | 263 | |||||||||||||||||||||||||||
Depreciation and amortization | 44 | 980 | 826 | 387 | 17 | 90 | — | 2,344 | 2,344 | |||||||||||||||||||||||||||
Impairment losses | 129 | (28 | ) | 3 | 12 | — | 3 | — | 119 | 119 | ||||||||||||||||||||||||||
Operating income | 2 | 2,197 | 2,589 | 519 | 423 | 86 | 3 | 5,819 | 5,819 | |||||||||||||||||||||||||||
Net financial income/(expense) and income/(expense) from equity investments accounted for using the equity method | — | — | — | — | — | — | — | (651 | ) | (651 | ) | |||||||||||||||||||||||||
Income taxes | — | — | — | — | — | — | — | 2,067 | 2,067 | |||||||||||||||||||||||||||
Net income (Group and minority interests) | — | — | — | — | — | — | — | 3,101 | 3,101 | |||||||||||||||||||||||||||
Operating assets | 6,948 | 16,752 | 16,875 | 10,008 | 1,013 | 1,771 | (3,352 | ) | 50,015 | 50,015 | ||||||||||||||||||||||||||
Operating liabilities | 6,272 | 4,019 | 4,042 | 4,037 | 1,275 | 1,128 | (2,884 | ) | 17,889 | 17,889 | ||||||||||||||||||||||||||
Capital expenditure | 56 | 897 | 1,459 | 467 | 13 | 71 | — | 2,963 | 2,963 |
(1) | Segment revenues include both revenues from third parties and revenue flows between the segments. A similar approach was taken for other income and costs for the year. |
F-34
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Results for 2005(1)
Continuing Operations | Discontinued Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Generat. | Domestic | Services | Eliminations | Eliminations | ||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | and Energy | Infrastruc. | Parent | and Other | and | Transm. | and | |||||||||||||||||||||||||||||||||||||||||||||
Sales | Manag. | and Networks | Internat. | Company | Activities | Adjustments | Total | Networks | TLC. | Adjustments | Total | Total | ||||||||||||||||||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenues from third parties | 19,155 | 10,648 | 837 | 1,856 | 886 | 440 | (35 | ) | 33,787 | 711 | 2,604 | (62 | ) | 3,253 | 37,040 | |||||||||||||||||||||||||||||||||||||
Revenues from other segments | 332 | 2,347 | 4,695 | 2 | 232 | 1,301 | (8,909 | ) | — | 29 | 144 | (173 | ) | — | — | |||||||||||||||||||||||||||||||||||||
Total revenues | 19,487 | 12,995 | 5,532 | 1,858 | 1,118 | 1,741 | (8,944 | ) | 33,787 | 740 | 2,748 | (235 | ) | 3,253 | 37,040 | |||||||||||||||||||||||||||||||||||||
Net income/(charges) from commodity risk management | (26 | ) | 326 | — | (14 | ) | (14 | ) | — | — | 272 | — | — | — | — | 272 | ||||||||||||||||||||||||||||||||||||
Gross operating margin | 152 | 3,407 | 3,398 | 485 | 67 | 315 | (79 | ) | 7,745 | 524 | 903 | (1 | ) | 1,426 | 9,171 | |||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 25 | 982 | 769 | 173 | 14 | 93 | — | 2,056 | 118 | 695 | — | 813 | 2,869 | |||||||||||||||||||||||||||||||||||||||
Impairment losses | 115 | 27 | 1 | 5 | — | 3 | — | 151 | — | 41 | — | 41 | 192 | |||||||||||||||||||||||||||||||||||||||
Operating income | 12 | 2,398 | 2,628 | 307 | 53 | 219 | (79 | ) | 5,538 | 406 | 167 | (1 | ) | 572 | 6,110 | |||||||||||||||||||||||||||||||||||||
Net financial income/(expense) and income/(expense) from equity investments accounted for using the equity method | — | — | — | — | — | — | — | (744 | ) | — | — | — | (240 | ) | (984 | ) | ||||||||||||||||||||||||||||||||||||
Income taxes | — | — | — | — | — | — | — | 1,934 | — | — | — | 213 | 2,147 | |||||||||||||||||||||||||||||||||||||||
Gains on disposal of assets | — | — | — | — | — | — | — | — | — | — | — | 1,153 | 1,153 | |||||||||||||||||||||||||||||||||||||||
Net income (Group and minority interests) | — | — | — | — | — | — | — | 2,860 | — | — | — | 1,272 | 4,132 | |||||||||||||||||||||||||||||||||||||||
Operating assets | 6,465 | 16,468 | 15,708 | 4,282 | 1,263 | 2,945 | (3,280 | ) | 43,851 | — | — | — | — | 43,851 | ||||||||||||||||||||||||||||||||||||||
Operating liabilities | 5,289 | 3,841 | 3,567 | 813 | 1,604 | 2,392 | (3,137 | ) | 14,369 | — | — | — | — | 14,369 | ||||||||||||||||||||||||||||||||||||||
Capital expenditure | 53 | 798 | 1,570 | 299 | 11 | 98 | — | 2,829 | 142 | 286 | — | 428 | 3,257 |
(1) | Segment revenues include both revenues from third parties and revenue flows between the segments. A similar approach was taken for other income and costs for the year. |
Results for 2004(1)
Continuing Operations | Discontinued Operations | |||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Generat. | Domestic | Services | Eliminations | Eliminations | ||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | and Energy | Infrastruc. and | Parent | and Other | and | Transm. | and | |||||||||||||||||||||||||||||||||||||||||||||
Sales | Manag. | Networks | Internat. | Company | Activities | Adjustments | Total | Networks | TLC. | Adjustments | Total | Total | ||||||||||||||||||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total revenues | 19,045 | 12,281 | 5,611 | 1,030 | 1,708 | 1,797 | (10,445 | ) | 31,027 | 1,017 | 4,727 | (235 | ) | 5,439 | 36,466 | |||||||||||||||||||||||||||||||||||||
Net income/(charges) from commodity risk management | (1 | ) | (8 | ) | — | — | (7 | ) | — | — | (16 | ) | — | — | — | — | (16 | ) | ||||||||||||||||||||||||||||||||||
Gross operating margin | 386 | 3,615 | 3,129 | 294 | 652 | 214 | (219 | ) | 8,071 | 649 | 1,421 | 14 | 2,084 | 10,155 | ||||||||||||||||||||||||||||||||||||||
Depreciation, amortization and impairment losses | 88 | 1,128 | 721 | 150 | 5 | 109 | — | 2,201 | 159 | 3,037 | 6 | 3,202 | 5,403 | |||||||||||||||||||||||||||||||||||||||
Operating income | 298 | 2,487 | 2,408 | 144 | 647 | 105 | (219 | ) | 5,870 | 490 | (1,616 | ) | 8 | (1,118 | ) | 4,752 | ||||||||||||||||||||||||||||||||||||
Net financial income/(expense) and income/(expense) from equity investments accounted for using the equity method | — | — | — | — | — | — | — | (852 | ) | — | — | — | (467 | ) | (1,319 | ) | ||||||||||||||||||||||||||||||||||||
Income taxes | — | — | — | — | — | — | — | 2,116 | — | — | — | (618 | ) | 1,498 | ||||||||||||||||||||||||||||||||||||||
Gains on disposal of assets | — | — | — | — | — | — | — | — | — | — | — | 812 | 812 | |||||||||||||||||||||||||||||||||||||||
Net income (Group and minority interests) | — | — | — | — | — | — | — | 2,902 | — | — | — | (155 | ) | 2,747 | ||||||||||||||||||||||||||||||||||||||
Operating assets | 5,104 | 16,051 | 14,908 | 3,628 | 1,147 | 3,508 | (3,553 | ) | 40,793 | 4,585 | 12,940 | — | 17,525 | 58,318 | ||||||||||||||||||||||||||||||||||||||
Operating liabilities | 4,546 | 3,259 | 3,466 | 503 | 1,955 | 3,982 | (5,014 | ) | 12,697 | 571 | 2,181 | — | 2,752 | 15,449 | ||||||||||||||||||||||||||||||||||||||
Capital expenditure | 67 | 678 | 1,596 | 230 | 10 | 109 | — | 2,690 | 277 | 867 | — | 1,144 | 3,834 |
(1) | Segment revenues include both revenues from third parties and revenue flows between the segments. A similar approach was taken for other income and costs for the year. |
F-35
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reconciles segment assets and liabilities and the consolidated figures.
At Dec. 31, 2006 | At Dec. 31, 2005 | At Dec. 31, 2004 | ||||||||||
(millions of euro) | ||||||||||||
Total assets | 54,500 | 50,502 | 65,378 | |||||||||
Financial assets and cash and cash equivalents | 2,107 | 3,203 | 746 | |||||||||
Tax assets | 2,378 | 3,448 | 6,314 | |||||||||
Segment assets | 50,015 | 43,851 | 58,318 | |||||||||
— of which: | ||||||||||||
Domestic Sales | 6,948 | 6,465 | 5,104 | |||||||||
Domestic Generation and Energy Management | 16,752 | 16,468 | 16,051 | |||||||||
Domestic Infrastructure and Networks | 16,875 | 15,708 | 14,908 | |||||||||
International | 10,008 | 4,282 | 3,628 | |||||||||
Parent Company | 1,013 | 1,263 | 1,147 | |||||||||
Services and Other Activities | 1,771 | 2,945 | 3,508 | |||||||||
Eliminations and adjustments | (3,352 | ) | (3,280 | ) | (3,553 | ) | ||||||
Telecommunications and Transmission Networks | — | — | 17,525 | |||||||||
Total liabilities | 35,475 | 31,086 | 46,312 | |||||||||
Financial liabilities and loans | 14,661 | 13,819 | 27,745 | |||||||||
Tax liabilities | 2,925 | 2,898 | 3,118 | |||||||||
Segment liabilities | 17,889 | 14,369 | 15,449 | |||||||||
— of which: | ||||||||||||
Domestic Sales | 6,272 | 5,289 | 4,546 | |||||||||
Domestic Generation and Energy Management | 4,019 | 3,841 | 3,259 | |||||||||
Domestic Infrastructure and Networks | 4,042 | 3,567 | 3,466 | |||||||||
International | 4,037 | 813 | 503 | |||||||||
Parent Company | 1,275 | 1,604 | 1,955 | |||||||||
Services and Other Activities | 1,128 | 2,392 | 3,982 | |||||||||
Eliminations and adjustments | (2,884 | ) | (3,137 | ) | (5,014 | ) | ||||||
Telecommunications and Transmission Networks | — | — | 2,752 |
F-36
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(6) | OPERATING REVENUES |
6.a Revenues from sales and services — €37,497 million
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Revenues from the sale and transport of electricity and contributions from Electricity Equalization Fund | 34,231 | 29,008 | 25,098 | |||||||||
Revenues from the sale and transport of natural gas to end-users | 1,695 | 1,556 | 1,374 | |||||||||
Revenues from fuel sales | 413 | 446 | 894 | |||||||||
Connection fees for the electricity and gas networks | 617 | 656 | 657 | |||||||||
Revenues for contract work in progress | 138 | 290 | 609 | |||||||||
Other sales and services | 403 | 414 | 515 | |||||||||
Total | 37,497 | 32,370 | 29,147 |
The table below gives a breakdown of revenues by geographical area:
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Italy | 32,389 | 30,563 | 27,369 | |||||||||
Europe | 4,525 | 1,656 | 1,549 | |||||||||
Americas | 180 | 117 | 160 | |||||||||
Middle East | 22 | 27 | 56 | |||||||||
Other | 381 | 7 | 13 | |||||||||
Total | 37,497 | 32,370 | 29,147 |
6.b Other revenues — €1,016 million
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Prior-year regulatory items | — | 338 | — | |||||||||
Reimbursement of stranded costs | 154 | 158 | 1,219 | |||||||||
Gains on sale of equity investments | 90 | 131 | 13 | |||||||||
Gains on sale of property, plant and equipment | 22 | 45 | — | |||||||||
Bonus for service continuity | 194 | 115 | 250 | |||||||||
Other | 556 | 630 | 398 | |||||||||
Total | 1,016 | 1,417 | 1,880 |
Prior-year regulatory items
For 2005 the amount include reimbursements for reserve services provided to the ISO (GRTN, now the Electricity Services Operator) for the period from 2002 through March 31, 2004.
Reimbursement of stranded costs
In August 2004, the Italian Ministry of Economy and Finance and the Ministry of Productive Activities issued a joint decree that determined the total amount of the stranded costs the Company is entitled to recover. On December 1, 2004, following the European Commission’s approval of the decree, the Company became entitled to recover approximately €513 million on account of stranded costs related to generation plants for the period2000-2003, as well as stranded costs related to the Nigerian LNG contract, which were determined to be
F-37
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
€555 million in respect of the2000-2003 period and approximately €910 million in respect of the2004-2009 period (of which, €151 million related to 2004). As a result, in 2004 the Company recorded as “other revenues” a total of €1,219 million in connection with stranded costs, and recorded €154 million and €158 million for stranded costs related to our Nigerian LNG contract in 2006 and 2005 respectively. The amounts related to stranded costs are received by Enel as contributions from the Electricity Equalization Fund.
Bonus for service continuity
The amount relates to the bonus payable to Enel Distribuzione and Deval by the Energy and Gas Authority for improvements in service continuity.
(7) | INCOME FROM EQUITY EXCHANGE TRANSACTION — €263 MILLION |
The item relates to the gain generated by the sale of Wind, in which 30.97% of the Company’s interest in Wind was exchanged for 20.9% of interest in Weather. The recognised amount represents difference between the fair value of the investment in Wind determined by an independent appraisal of €1,663 million and the carrying amount of such investment at transaction date of €1,400 million.
(8) | OPERATING EXPENSES |
8.a Raw materials and consumables — €23,469 million
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Electricity purchases | 17,082 | 14,321 | 10,380 | |||||||||
Fuel and gas | 5,637 | 5,514 | 5,393 | |||||||||
Materials | 750 | 798 | 1,027 | |||||||||
Total | 23,469 | 20,633 | 16,800 | |||||||||
— of which capitalized | (586 | ) | (665 | ) | (673 | ) |
8.b Services and rentals — €3,477 million
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Electricity and gas wheeling | 1,342 | 1,048 | 1,068 | |||||||||
Maintenance and repairs | 444 | 395 | 347 | |||||||||
Telephone and postal | 289 | 260 | 318 | |||||||||
Communication services | 62 | 62 | 91 | |||||||||
Information technology services | 123 | 121 | 63 | |||||||||
Commissions | 81 | 66 | 55 | |||||||||
Leases and rentals | 425 | 387 | 349 | |||||||||
Other | 711 | 718 | 815 | |||||||||
Total | 3,477 | 3,057 | 3,106 |
F-38
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8.c Personnel — €3,210 million
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Wages and salaries | 1,995 | 1,957 | 1,989 | |||||||||
Social security contributions | 568 | 529 | 537 | |||||||||
Termination benefits | 64 | 111 | 97 | |||||||||
Other costs | 583 | 165 | 601 | |||||||||
Total | 3,210 | 2,762 | 3,224 | |||||||||
— of which capitalized | (403 | ) | (384 | ) | (300 | ) |
Other costs for 2006 include a charge for the year for early retirement incentives (€487 million) and the charge recognized for 2006 related to defined-contribution plans, equal to €42 million (€49 million in 2005). Other costs for 2004 amounts to €601 million and include €425 million of charge for the year for early retirement incentives.
The table below shows the average number of employees by category, compared with the previous years, and the actual number of employees at December 31, 2006.
Average number | Headcount | |||||||||||||||
2006 | 2005 | 2004 | at Dec. 31, 2006 | |||||||||||||
Senior managers | 692 | 618 | 581 | 691 | ||||||||||||
Middle managers | 4,678 | 4,144 | 4,024 | 4,900 | ||||||||||||
Office staff | 29,918 | 29,231 | 29,515 | 30,540 | ||||||||||||
Workers | 21,300 | 19,369 | 17,728 | 22,417 | ||||||||||||
Total continuing operations | 56,588 | 53,362 | 51,398 | 58,548 | ||||||||||||
Discontinued operations | — | 6,722 | 10,820 | — | ||||||||||||
TOTAL | 56,588 | 60,084 | 62,218 | 58,548 |
8.d Depreciation, amortization and impairment losses — €2,463 million
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Depreciation | 2,154 | 1,918 | 1,990 | |||||||||
Amortization | 190 | 138 | 121 | |||||||||
Impairment losses | 119 | 151 | 90 | |||||||||
Total | 2,463 | 2,207 | 2,201 |
8.e Other operating expenses — €713 million
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Provisions for risks and charges | 98 | 212 | 203 | |||||||||
Purchase of green certificates | 73 | 119 | 104 | |||||||||
Charges for CO2 emissions | 84 | 228 | — | |||||||||
Taxes and duties | 159 | 144 | 158 | |||||||||
Other | 299 | 208 | 318 | |||||||||
Total | 713 | 911 | 783 |
F-39
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8.f Capitalized expenses — €(989) million
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Personnel | (403 | ) | (384 | ) | (300 | ) | ||||||
Materials | (586 | ) | (665 | ) | (673 | ) | ||||||
Total | (989 | ) | (1,049 | ) | (973 | ) |
(9) | NET INCOME / (CHARGES) FROM COMMODITY RISK MANAGEMENT — €(614) MILLION |
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Income | ||||||||||||
Unrealized on contracts for differences | — | 43 | — | |||||||||
Unrealized on other contracts | 16 | 9 | 15 | |||||||||
Total unrealized income | 16 | 52 | 15 | |||||||||
Realized on contracts for differences | — | 289 | — | |||||||||
Realized on other contracts | 76 | 98 | 89 | |||||||||
Total realized income | 76 | 387 | 89 | |||||||||
Total income | 92 | 439 | 104 | |||||||||
Charges | ||||||||||||
Unrealized on contracts for differences | (103 | ) | — | — | ||||||||
Unrealized on other contracts | (42 | ) | (13 | ) | (36 | ) | ||||||
Total unrealized charges | (145 | ) | (13 | ) | (36 | ) | ||||||
Realized on contracts for differences | (519 | ) | — | — | ||||||||
Realized on other contracts | (42 | ) | (154 | ) | (84 | ) | ||||||
Total realized charges | (561 | ) | (154 | ) | (84 | ) | ||||||
Total charges | (706 | ) | (167 | ) | (120 | ) | ||||||
NET INCOME/(CHARGES) FROM COMMODITY RISK MANAGEMENT | (614 | ) | 272 | (16 | ) |
F-40
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(10) | FINANCIAL INCOME (EXPENSE) — €(647) MILLION |
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Financial income: | ||||||||||||
— interest and other income from non-current financial assets | 8 | 29 | 49 | |||||||||
— foreign exchange gains | 165 | 23 | 165 | |||||||||
— income from derivative instruments | 85 | 68 | 29 | |||||||||
— other income | 233 | 99 | 118 | |||||||||
— income from investments | 22 | 11 | 4 | |||||||||
Total | 513 | 230 | 365 | |||||||||
Financial expense: | ||||||||||||
— interest and other charges on financial debt | (635 | ) | (686 | ) | (771 | ) | ||||||
— foreign exchange losses | (82 | ) | (52 | ) | (143 | ) | ||||||
— expense on derivative instruments | (169 | ) | (94 | ) | (135 | ) | ||||||
— accretion of post-employment and other employee benefits | (108 | ) | (112 | ) | (134 | ) | ||||||
— accretion of other provisions | (159 | ) | — | — | ||||||||
— loss on investments | (7 | ) | — | (9 | ) | |||||||
Total | (1,160 | ) | (944 | ) | (1,192 | ) | ||||||
TOTAL | (647 | ) | (714 | ) | (827 | ) | ||||||
(11) | LOSS FROM INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD — €(4) MILLION |
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Income from associates | 4 | 7 | 8 | |||||||||
Loss on associates | (8 | ) | (37 | ) | (33 | ) | ||||||
Total | (4 | ) | (30 | ) | (25 | ) |
(12) | INCOME TAXES — €2,067 MILLION |
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Current taxes | 1,657 | 1,398 | 1,328 | |||||||||
Income tax adjustments relating to prior years | (5 | ) | 14 | (14 | ) | |||||||
Deferred tax | 415 | 522 | 802 | |||||||||
Total | 2,067 | 1,934 | 2,116 |
Foreign taxes in the year totaled €99 million (€27 million and €22 million in 2005 and 2004 respectively).
The table below reconciles the theoretical tax rate with the effective rate.
F-41
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2006 | 2005 | 2004 | ||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||
Income before taxes | 5,168 | 4,794 | 5,018 | |||||||||||||||||||||
Theoretical tax due calculated as 33% of pre-tax income | 1,705 | 33.0 | % | 1,582 | 33.0 | % | 1,656 | 33.0 | % | |||||||||||||||
Permanent differences and minor items | 13 | 0.3 | % | (12 | ) | (0.3 | )% | 103 | 2.1 | % | ||||||||||||||
Difference on estimated income taxes from prior years | (5 | ) | (0.1 | )% | 14 | 0.3 | % | (14 | ) | (0.3 | )% | |||||||||||||
Regional tax at varying tax rates | 354 | 6.8 | % | 350 | 7.3 | % | 371 | 7.4 | % | |||||||||||||||
Total | 2,067 | 40.0 | % | 1,934 | 40.3 | % | 2,116 | 42.2 | % |
(13) | DISCONTINUED OPERATIONS — €0 MILLION |
Following the disposal of equity investments in Wind and Terna, which took place on August 11 and September 15, 2005, respectively, these entities were deconsolidated as from those dates and the financial performance achieved up to the disposal date is reported under discontinued operations. Similarly, the capital gain achieved in 2005 from the sale of 13.86% of Terna was recognized under discontinued operations. The components contributing to the total income (loss) from discontinued operations are shown in the following table.
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Operating income (loss) | — | 572 | (1,118 | ) | ||||||||
Net financial expense | — | (240 | ) | (467 | ) | |||||||
Income taxes | — | (213 | ) | 618 | ||||||||
Net income before capital gains | — | 119 | (967 | ) | ||||||||
Gains on disposal of assets | — | 1,153 | 812 | |||||||||
NET INCOME ON DISCONTINUED OPERATIONS, NET OF TAX | — | 1,272 | (155 | ) |
Assets
(14) | CURRENT ASSETS |
(14.a) Inventories — €1,209 million
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||
(millions of euro) | ||||||||
Raw materials, consumables and supplies: | ||||||||
— fuel | 853 | 585 | ||||||
— materials, equipment and other inventories | 207 | 115 | ||||||
Total | 1,060 | 700 | ||||||
Buildings available for sale | 148 | 166 | ||||||
Advances | 1 | 18 | ||||||
TOTAL | 1,209 | 884 |
F-42
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(14.b) Trade receivables — €7,958 million
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||
(millions of euro) | ||||||||
Customers: | ||||||||
— sale and transport of electricity | 6,809 | 6,850 | ||||||
— distribution and sale of natural gas | 712 | 611 | ||||||
— other activities | 387 | 506 | ||||||
Total | 7,908 | 7,967 | ||||||
Trade receivables due from associates | 7 | 290 | ||||||
Receivables for contract work in progress | 43 | 59 | ||||||
TOTAL | 7,958 | 8,316 |
Part of the trade receivables (€4,549 million and €4,543 million at December 31, 2006 and 2005 respectively) regard amounts determined as accrued at the end of the period and therefore have not yet been invoiced.
Trade receivables from customers are presented net of the related provision for doubtful receivables, which totaled €326 million and €347 million at December 31, 2006 and 2005 respectively.
The table below sets out the movements with respect to such provision for the three years period ended December 31, 2006.
(Millions of euro) | ||||
Balance at Jan 1, 2004 | 328 | |||
Accruals | 241 | |||
Utilization | (83 | ) | ||
Balance at Dec 31, 2004 | 486 | |||
Accruals | 188 | |||
Utilization | (29 | ) | ||
Changes in scope of consolidation | (305 | ) | ||
Other changes | 7 | |||
Balance at Dec. 31, 2005 | 347 | |||
Accruals | 110 | |||
Utilization | (129 | ) | ||
Other changes | (2 | ) | ||
Balance at Dec. 31, 2006 | 326 |
(14.c) Tax receivables — €431 million
Tax receivables at December 31, 2006 totaled €431 million and are essentially related to taxes and tax surcharges in the amount of €132 million and receivables for indirect taxation in the amount of €91 million.
They also include €121 million in respect of recognition of the right to obtain reimbursement of prior-year items recognized in 2006 from the tax authorities.
At December 31, 2005 tax receivable amounted to €789 million and related primarily to receivables in respect of direct taxes of €568 million.
F-43
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(14.d) Current financial assets — €402 million
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||
(millions of euro) | ||||||||
Receivables for factoring advances | 211 | 374 | ||||||
Derivative contracts | 120 | 115 | ||||||
Other securities | 25 | 28 | ||||||
Equity investments | — | 43 | ||||||
Other | 46 | 9 | ||||||
Total | 402 | 569 |
The following table reports the notional values and the fair value of derivative contracts, grouped by hedge type and designation:
Notional Value | Fair Value | |||||||||||||||
At Dec. 31, 2006 | At Dec. 31, 2005 | At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||||||||
(millions of euro) | ||||||||||||||||
Cash flow hedge derivatives: | ||||||||||||||||
— interest rates | — | 60 | — | — | ||||||||||||
— exchange rates | 25 | 1 | — | — | ||||||||||||
— commodities | 1,034 | 1,372 | 48 | 57 | ||||||||||||
Total | 1,059 | 1,433 | 48 | 57 | ||||||||||||
Trading derivatives: | ||||||||||||||||
— interest rates | 42 | 60 | — | 1 | ||||||||||||
— exchange rates | 208 | 703 | 2 | 9 | ||||||||||||
— commodities | 407 | 7,179 | 70 | 48 | ||||||||||||
Total | 657 | 7,942 | 72 | 58 | ||||||||||||
TOTAL | 1,716 | 9,375 | 120 | 115 |
Commodity derivates at December 31, 2006 are related to:
• | two-way contracts for differences with a notional value of €1,034 million and a fair value of €48 million. These amounts refer both to the two-way contracts for differences with the Single Buyer for 2007 and the virtual power plant (VPP) contracts that Enel entered into with the counterparties selected through the auction of December 28, 2006. These contracts are also two-way contracts for differences; | |
• | commodity derivatives on fuels and on electricity, with a notional value of €407 million and a fair value of €12 million; | |
• | embedded derivatives related to an energy sale contract in Slovakia, with a fair value of €58 million. |
At December 31, 2005 the commodity derivates are related to:
• | two-way contracts for differences, with a notional value of €1,372 million and a fair value of €57 million; | |
• | one-way contracts for differences, with a notional value of €6,266 million and a fair value of €43 million; | |
• | derivatives on fuels, energy and metals with a notional value of €913 million and a fair value of €5 million. |
F-44
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(14.e) Cash and cash equivalents — €547 million
Cash and cash equivalents, detailed in the table below, are not restricted by any encumbrances, apart from €28 million (€24 million in 2005) essentially attributable to deposits pledged to secure transactions carried out by Enel North America and Enel Panama.
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||
(millions of euro) | ||||||||
Bank and post office deposits | 541 | 472 | ||||||
Cash and cash equivalents | 6 | 4 | ||||||
Total | 547 | 476 |
(14.f) Other current assets — €2,453 million
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||
(millions of euro) | ||||||||
Receivables due from Electricity Equalization Fund | 1,355 | 816 | ||||||
Receivables due from employees | 14 | 14 | ||||||
Receivables due from others | 975 | 801 | ||||||
Accrued operating income and prepaid expenses | 109 | 81 | ||||||
Total | 2,453 | 1,712 |
F-45
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(15) | NON-CURRENT ASSETS |
(15.a) Property, plant and equipment — €34,846 million
Changes in property, plant and equipment for 2005 and 2006 are shown below:
Industrial | Assets Under | |||||||||||||||||||||||||||||||||||
and | Construction | |||||||||||||||||||||||||||||||||||
Plant and | Commercial | Other | Leased | Leasehold | and | |||||||||||||||||||||||||||||||
Land | Buildings | Machinery | Equipment | Assets | Assets | Improvements | Advances | Total | ||||||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||||||
Cost | 351 | 6,684 | 75,753 | 494 | 1,117 | — | 279 | 2,073 | 86,751 | |||||||||||||||||||||||||||
Accumulated depreciation | — | (3,041 | ) | (45,630 | ) | (393 | ) | (794 | ) | — | (191 | ) | — | (50,049 | ) | |||||||||||||||||||||
Balance at Dec. 31, 2004 | 351 | 3,643 | 30,123 | 101 | 323 | — | 88 | 2,073 | 36,702 | |||||||||||||||||||||||||||
Investments | 1 | 64 | 1,743 | 16 | 56 | — | 13 | 1,144 | 3,037 | |||||||||||||||||||||||||||
Assets entering service | 2 | 48 | 766 | 1 | 15 | — | 10 | (842 | ) | — | ||||||||||||||||||||||||||
Depreciation(1) | — | (210 | ) | (2,191 | ) | (24 | ) | (101 | ) | — | (35 | ) | — | (2,561 | ) | |||||||||||||||||||||
Change in scope of consolidation | (16 | ) | (325 | ) | (6,329 | ) | (10 | ) | (119 | ) | — | (59 | ) | (600 | ) | (7,458 | ) | |||||||||||||||||||
Exchange rate gains/ (losses) | 1 | — | 245 | — | — | — | — | 1 | 247 | |||||||||||||||||||||||||||
Ordinary disposals and other changes | 52 | 133 | (211 | ) | (4 | ) | (23 | ) | — | 10 | 264 | 221 | ||||||||||||||||||||||||
Total changes | 40 | (290 | ) | (5,977 | ) | (21 | ) | (172 | ) | — | (61 | ) | (33 | ) | (6,514 | ) | ||||||||||||||||||||
Cost | 391 | 6,435 | 64,698 | 358 | 664 | — | 65 | 2,040 | 74,651 | |||||||||||||||||||||||||||
Accumulated depreciation | — | (3,082 | ) | (40,552 | ) | (278 | ) | (513 | ) | — | (38 | ) | — | (44,463 | ) | |||||||||||||||||||||
Balance at Dec. 31, 2005 | 391 | 3,353 | 24,146 | 80 | 151 | — | 27 | 2,040 | 30,188 | |||||||||||||||||||||||||||
Investments | 1 | 56 | 1,415 | 17 | 71 | — | 11 | 1,188 | 2,759 | |||||||||||||||||||||||||||
Assets entering service | 1 | 58 | 612 | — | 31 | — | 17 | (719 | ) | — | ||||||||||||||||||||||||||
Depreciation | — | (247 | ) | (1,790 | ) | (16 | ) | (67 | ) | (21 | ) | (13 | ) | — | (2,154 | ) | ||||||||||||||||||||
Impairment losses | — | — | (6 | ) | — | — | — | — | — | (6 | ) | |||||||||||||||||||||||||
Change in scope of consolidation | 12 | 1,106 | 2,257 | 19 | 1 | 225 | — | 357 | 3,977 | |||||||||||||||||||||||||||
Exchange rate gains/ (losses) | — | 94 | 147 | 3 | — | 18 | — | 33 | 295 | |||||||||||||||||||||||||||
Ordinary disposals and other changes | (16 | ) | (14 | ) | (163 | ) | (3 | ) | (7 | ) | 3 | — | (13 | ) | (213 | ) | ||||||||||||||||||||
Total changes | (2 | ) | 1,053 | 2,472 | 20 | 29 | 225 | 15 | 846 | 4,658 | ||||||||||||||||||||||||||
Cost | 389 | 8,021 | 69,355 | 404 | 673 | 292 | 119 | 2,886 | 82,139 | |||||||||||||||||||||||||||
Accumulated depreciation | — | (3,615 | ) | (42,737 | ) | (304 | ) | (493 | ) | (67 | ) | (77 | ) | — | (47,293 | ) | ||||||||||||||||||||
Balance at Dec. 31, 2006 | 389 | 4,406 | 26,618 | 100 | 180 | 225 | 42 | 2,886 | 34,846 | |||||||||||||||||||||||||||
(1) | Includes €643 million in respect of Telecommunication and Transmission Networks Divisions until date of deconsolidation. |
“Plant and equipment” includes assets that at the end of related concession period have to be relinquished. The related net book value at December 31, 2006 amounted to €2,214 million, which mainly related to hydroelectric power plants.
“Leased assets” mainly relate to lease agreement for the V1 nuclear power plant at Jaslovske Bohunice and the hydroelectric plant at Gabcikovo, the signing of which was a necessary condition for the start of the privatization of the Slovakian electricity system. In particular, the lease contract for the V1 plant covers the entire remaining useful life of the asset and the period between the end of generation and the start of the decommissioning process, while that for the Gabcikovo plant has a30-year term as from April 2006.
F-46
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reports the minimum lease payments and the related present value.
Minimum Lease Payments | Present Value | |||||||
(millions of euro) | ||||||||
2007 | 14 | 11 | ||||||
2008-2012 | 31 | 14 | ||||||
After 2012 | 99 | 64 | ||||||
Total | 144 | 89 |
Changes in the scope of consolidation in 2006 relate to the following transactions:
• | the acquisition of Slovenské elektrárne (up €3,871 million); | |
• | the acquisition of Enel Panama (up €159 million); | |
• | the acquisition of the Brazilian companies of the Rede Group (up €79 million); | |
• | the acquisition of companies in the Gas area (up €41 million); | |
• | the partial deconsolidation of Enel Unión Fenosa Renovables (down €156 million); | |
• | the sale of Carbones Colombianos del Cerrejón (down €17 million). |
In 2005 change in scope of consolidation mainly relate to the deconsolidation of the Telecommunications and Transmission Networks Divisions.
Ordinary disposals and other changes in 2005 include the reclassification of materials to be used in the construction and maintenance of the distribution networks, which was classified until 2004 as inventory, as well as the transfer of land and buildings to Dalmazia Trieste following the spin-off of the Immobiliare Foro Bonaparte real estate firm.
F-47
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables report the net values at December 31, 2006 and December 31, 2005 for property, plant and equipment based on the use of the assets.
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Property, plant and equipment, gross: | ||||||||
Generating Plant(1): | ||||||||
Hydroelectric | 9,209 | 8,361 | ||||||
Thermal | 18,960 | 18,014 | ||||||
Nuclear | 2,759 | — | ||||||
Geothermal and renewable sources | 2,174 | 2,432 | ||||||
Distribution Electricity Network | 37,811 | 37,330 | ||||||
Distribution Gas Network | 2,662 | 2,655 | ||||||
Land and Buildings(2) | 3,733 | 2,277 | ||||||
Other | 1,945 | 1,542 | ||||||
Construction in progress | 2,886 | 2,040 | ||||||
Total | 82,139 | 74,651 | ||||||
Accumulated Depreciation: | ||||||||
Generating Plant(1): | ||||||||
Hydroelectric | 4,608 | 3,939 | ||||||
Thermal | 11,836 | 11,493 | ||||||
Nuclear | 928 | — | ||||||
Geothermal and renewable sources | 1,538 | 1,233 | ||||||
Distribution Electricity Network | 24,984 | 25,048 | ||||||
Distribution Gas Network | 1,077 | 1,029 | ||||||
Land and Buildings(2) | 1,147 | 731 | ||||||
Other | 1,175 | 990 | ||||||
Total | 47,293 | 44,463 | ||||||
Property, plant and equipment, net: | ||||||||
Generating Plant(1): | ||||||||
Hydroelectric | 4,601 | 4,422 | ||||||
Thermal | 7,124 | 6,521 | ||||||
Nuclear | 1,831 | — | ||||||
Geothermal and renewable sources | 636 | 1,199 | ||||||
Distribution Electricity Network | 12,827 | 12,282 | ||||||
Distribution Gas Network | 1,585 | 1,626 | ||||||
Land and Buildings(2) | 2,586 | 1,546 | ||||||
Other | 770 | 552 | ||||||
Construction in progress | 2,886 | 2,040 | ||||||
Total | 34,846 | 30,188 | ||||||
(1) | The values also include industrial land and buildings. | |
(2) | The values include non-industrial buildings (offices, warehouses, parking facilities, etc.), buildings for civil use and non-appurtenant land. |
F-48
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below summarizes capital expenditure for the year ended December 31, 2006 and 2005 by category.
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Power plants: | ||||||||
— thermal | 766 | 570 | ||||||
— hydro | 157 | 206 | ||||||
— geothermal | 79 | 84 | ||||||
— nuclear | 57 | — | ||||||
— alternative energy resources | 115 | 130 | ||||||
Total power plants | 1,174 | 990 | ||||||
Transport lines and transformer stations | — | 133 | ||||||
Electricity distribution networks | 1,324 | 1,381 | ||||||
Gas distribution networks | 88 | 70 | ||||||
Telecommunication networks | — | 251 | ||||||
Land, buildings and other assets and equipment | 173 | 212 | ||||||
TOTAL | 2,759 | 3,037 |
The expenditure on power plants primarily concerned works for the transformation of thermal plants and plant upgrading and repowering to enhance safety and environmental performance (upgrading of hydraulic plant, environmental impact work, etc.), as well as the effect of the consolidation of Slovenské elektrárne.
Investments in the electricity distribution network include expenditure on digital metering project.
In the absence of indications concerning events that might have reduced the value of the assets, no impairment test was conducted.
Enel has asset retirement obligations associated with a nuclear and geothermal power plant as well as a certain property owned by the State. Enel’s obligations relate to the return on expiration of the license or authorization of such assets to the State in same condition as originally conveyed.
Below is a reconciliation of the beginning and ending aggregate carrying amount of asset retirement obligations for the year ended December 31, 2006. The change in the scope of consolidation refers to the nuclear decommissioning provision and the provision for non-nuclear plant retirement and site restoration related to Slovenské elektrárne.
Millions of euro | ||||
Balance as of January 1, 2005 | 88 | |||
Disposal of investment | (53 | ) | ||
Accretion expense | 2 | |||
Balance as of January 1, 2006 | 37 | |||
Change in the scope of consolidation | 2,198 | |||
Accretion expense | 175 | |||
Balance as of December 31, 2006 | 2,410 |
Regarding Enel’s other geothermal plants, generally, the license or authorization is renewed, and no historical experience exists of discontinuing a license or authorization. The Company does not have sufficient information available to estimate a range of potential settlement dates in which asset retirement obligations relating to these plants will be incurred. The liability will be initially recognized in the period in which sufficient information to
F-49
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
estimate a range of potential settlement dates that is needed to employ a present value technique to estimate fair value becomes available.
(15.b) Intangible assets — €2,982 million
Changes in intangible assets for 2005 and 2006 are shown below:
Industrial | Concessions, | |||||||||||||||||||||||||||
Patents | Licenses, | Assets Under | ||||||||||||||||||||||||||
Development | and Intellectual | Trademarks and | Development | |||||||||||||||||||||||||
Costs | Property Rights | Similar Rights | Other | and Advances | Goodwill | Total | ||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||
Balance at Dec. 31, 2004 | 6 | 411 | 2,526 | 245 | 174 | 6,709 | 10,071 | |||||||||||||||||||||
Investments | — | 72 | 36 | 12 | 97 | 3 | 220 | |||||||||||||||||||||
Assets entering service | — | 59 | — | 9 | (68 | ) | — | — | ||||||||||||||||||||
Exchange rate differences | — | — | 1 | 9 | — | 23 | 33 | |||||||||||||||||||||
Changes in scope of consolidation | — | (245 | ) | (2,410 | ) | 26 | (70 | ) | (5,120 | ) | (7,819 | ) | ||||||||||||||||
Amortization(1) | — | (149 | ) | (96 | ) | (63 | ) | — | — | (308 | ) | |||||||||||||||||
Other changes | (6 | ) | (15 | ) | 20 | 27 | (1 | ) | (40 | ) | (15 | ) | ||||||||||||||||
Total changes | (6 | ) | (278 | ) | (2,449 | ) | 20 | (42 | ) | (5,134 | ) | (7,889 | ) | |||||||||||||||
Balance at Dec. 31, 2005 | — | 133 | 77 | 265 | 132 | 1,575 | 2,182 | |||||||||||||||||||||
Investments | 5 | 51 | 15 | 35 | 98 | — | 204 | |||||||||||||||||||||
Assets entering service | — | 69 | — | 10 | (79 | ) | — | — | ||||||||||||||||||||
Exchange rate differences | — | 1 | — | (11 | ) | 1 | 29 | 20 | ||||||||||||||||||||
Changes in scope of consolidation | — | 8 | 12 | 77 | 9 | 670 | 776 | |||||||||||||||||||||
Amortization | (2 | ) | (94 | ) | (15 | ) | (79 | ) | — | — | (190 | ) | ||||||||||||||||
Impairment losses | — | — | — | — | — | (3 | ) | (3 | ) | |||||||||||||||||||
Other changes | 32 | (3 | ) | (2 | ) | (21 | ) | (13 | ) | — | (7 | ) | ||||||||||||||||
Total changes | 35 | 32 | 10 | 11 | 16 | 696 | 800 | |||||||||||||||||||||
Cost | 42 | 482 | 128 | 759 | 148 | 2,271 | 3,830 | |||||||||||||||||||||
Accumulated amortization | 7 | 317 | 41 | 483 | — | — | 848 | |||||||||||||||||||||
Balance at Dec. 31, 2006 | 35 | 165 | 87 | 276 | 148 | 2,271 | 2,982 | |||||||||||||||||||||
(1) | Includes €170 million in respect of Telecommunications and Transmission Networks Divisions until date of deconsolidation. |
The individual items making up intangible assets are commented on below.
“Industrial patents and intellectual property rights” relate mainly to costs incurred in purchasing software and open-ended software licenses. The most important applications relate to invoicing and customer management, the development of Internet portals and the management of company systems. Amortization is calculated on a straight-line basis over the item’s residual useful life (on average between three and five years).
“Concessions, licenses, trademarks and similar rights” include customer base allocated in the acquisition of gas companies and foreign electricity distribution companies. Amortization is calculated on a straight-line basis over the term of the average period of the relationship with customers or of the concessions.
“Goodwill” amounted to €2,271 million, an increase of €696 million over the previous year.
F-50
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in | ||||||||||||||||||||
Scope of | Exchange Rate | Impairment | ||||||||||||||||||
At Dec. 31, 2005 | Consolidation | Differences | Losses | At Dec. 31, 2006 | ||||||||||||||||
(millions of euro) | ||||||||||||||||||||
Enel Viesgo Generación | 657 | — | — | — | 657 | |||||||||||||||
Enel Rete Gas | 4 | 4 | ||||||||||||||||||
Enel Energia (formerly Enel Gas) | 579 | — | — | — | 579 | |||||||||||||||
Enel Unión Fenosa Renovables | 131 | (49 | ) | — | — | 82 | ||||||||||||||
Enel North America | 85 | — | (9 | ) | (1 | ) | 75 | |||||||||||||
Enel Latin America | 73 | — | (7 | ) | — | 66 | ||||||||||||||
Electra de Viesgo Distribución | 24 | — | — | — | 24 | |||||||||||||||
Enel Maritza East 3 (formerly Maritza East III Power Company) | 15 | — | — | — | 15 | |||||||||||||||
Wisco | 7 | — | — | (2 | ) | 5 | ||||||||||||||
Slovenské elektrárne | — | 561 | 48 | — | 609 | |||||||||||||||
RusEnergoSbyt | — | 80 | (1 | ) | — | 79 | ||||||||||||||
Enel Panama | — | 62 | (2 | ) | — | 60 | ||||||||||||||
Erelis | — | 14 | — | — | 14 | |||||||||||||||
Enel Operations Bulgaria (formerly Maritza East 3 Operating Company) | — | 2 | — | — | 2 | |||||||||||||||
Total | 1,575 | 670 | 29 | (3 | ) | 2,271 |
The change in the scope of consolidation concerns the acquisition of 66% of Slovenské elektrárne (€561 million), and of 49.5% of Res Holdings that wholly ownes the Russian company RusEnergoSbyt (€80 million), 100% of Enel Panama (€62 million), 100% of Erelis (€14 million), and 73% of Enel Operations Bulgaria (formerly Maritza East 3 Operating Company, €2 million), net of the sale of a 30% stake in Enel Unión Fenosa Renovables (down €49 million).
The allocation of the cost of the investment in Slovenské elektrárne to the current value of the assets and liabilities acquired was completed at the end of 2006. Accordingly, the goodwill recognized can be considered final and subject to impairment tests, as described below. With respect to the other 2006 acquisitions, the Company is in the process of evaluating the various components of net assets acquired and liabilities assumed and accordingly, the allocation of purchase price is preliminary and may be prospectively revised when such process will be finalized. The final purchase price allocation is expected to be completed within one year from each acquisition date.
The recoverable value of the goodwill recognized was estimated using discounted cash flow and dividend discount models, which involve estimating future cash flows and applying an appropriate discount rate in order to determine an asset’s value in use. More specifically, the cash flows concern an explicit period selected in line with the average useful life of the assets or the duration of the concessions. In cases in which it was not possible to estimate cash flows reliably for the entire useful life of the assets, a residual amount was calculated as a perpetuity at a growth rate of zero or equal to inflation as deemed appropriate for the country involved. Except for Enel North America and Wisco, the value in use calculated as described above was found to be greater than the amount recognized on the balance sheet. The sensitivity analysis used in the analysis did not point to significant impacts on the results of the measurements themselves and consequently on the differences found.
F-51
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below reports the balance of goodwill according to the company to which the cash generating unit belongs, along with the discount rates applied and the time horizon over which the expected cash flows have been discounted.
At Dec. 31, 2006 | Discount Rate | Explicit Period of | ||||||||||||||||||||||
Amount | Tax Rate | Growth Rate(1) | WACC(2) | Ke(3) | Cash Flows | |||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||
Enel Viesgo Generación | 657 | 30 | % | no terminal value | 6.9 | % | 26 years | |||||||||||||||||
Electra de Viesgo Distribución | 24 | 30 | % | 1.0 | % | 6.0 | % | 11 years | ||||||||||||||||
Enel Rete Gas | 4 | 42 | % | 0 | % | 6.0 | % | 3 years | ||||||||||||||||
Enel Energia (formerly Enel Gas) | 579 | 38 | % | 0 | % | 7.1 | % | 5 years | ||||||||||||||||
Enel North America | 75 | 40.4 | % | 2.0 | % | 6.5 | % | 10 years | ||||||||||||||||
Enel Latin America | 66 | 28.2 | % | 2.0 | % | 9.9 | % | 10 years | ||||||||||||||||
Enel Unión Fenosa Renovables | 82 | 30 | % | no terminal value | 8.8 | % | 20 years | |||||||||||||||||
Enel Maritza East 3 (formerly | ||||||||||||||||||||||||
Maritza East III Power Company) | 15 | 10 | % | no terminal value | 11.4 | % | 18 years | |||||||||||||||||
Wisco | 5 | 40 | % | 0 | % | 8.0 | % | 11 years | ||||||||||||||||
Slovenské elektrárne | 609 | 19 | % | no terminal value | 8.5 | % | 34 years |
(1) | Perpetual growth rate of cash flows after explicit period. | |
(2) | WACC represents the weighted average cost of capital. | |
(3) | Ke is the opportunity cost for the shareholder for the investment in risk capital. |
F-52
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(15.c) Deferred tax assets — €1,554 million
Changes in “Deferred tax assets”, grouped by type of temporary difference and determined using current tax rates, are shown below.
Increase / | Increase / | |||||||||||||||||||||||||||||||||||
(Decrease) | (Decrease) | |||||||||||||||||||||||||||||||||||
Taken to | Change in | Taken to | Changes in | |||||||||||||||||||||||||||||||||
At Dec. 31, | Income | Other | Scope of | At Dec. 31, | Income | Other | Scope of | At Dec. 31, | ||||||||||||||||||||||||||||
2004 | Statement | Changes | Consolidation | 2005 | Statement | Changes | Consolidation | 2006 | ||||||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||||||
Nature of the temporary differences: | ||||||||||||||||||||||||||||||||||||
— impairment of property, plant and equipment and intangible assets | 83 | 5 | (1 | ) | (19 | ) | 68 | (9 | ) | (2 | ) | — | 57 | |||||||||||||||||||||||
— accruals to provisions for risks and charges and impairment losses with deferred deductibility | 995 | (251 | ) | 11 | (188 | ) | 567 | (192 | ) | — | 191 | 566 | ||||||||||||||||||||||||
— tax losses carried forward | 845 | (86 | ) | (2 | ) | (632 | ) | 125 | (60 | ) | — | — | 65 | |||||||||||||||||||||||
— measurement of financial assets | 164 | (11 | ) | 33 | (37 | ) | 149 | (61 | ) | (45 | ) | — | 43 | |||||||||||||||||||||||
— other items | 866 | 23 | 8 | (28 | ) | 869 | (46 | ) | — | — | 823 | |||||||||||||||||||||||||
Total | 2,953 | (320 | ) | 49 | (904 | ) | 1,778 | (368 | ) | (47 | ) | 191 | 1,554 |
The change in the scope of consolidation is related primarily to Slovenské elektrárne. No deferred tax assets were recorded in relation to prior tax losses of €764 million, mainly regarding two holding companies located in the Netherlands and Luxembourg (€649 million), because the tax laws in force in the countries in question do not treat the expected income (dividends) of the companies as taxable.
(15.d) Investments accounted for using the equity method — €56 million
Equity investments in associated companies accounted for using the equity method are as follows:
At Dec. 31, | Capital | Income | Other | At Dec. 31, | ||||||||||||||||||||||||||||
2005 | % Holding | Increases | Sales | Effect | Changes | 2006 | % Holding | |||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||
Wind Telecomunicazioni | 1,728 | 37.2 | % | — | (328 | ) | 263 | (1,663 | ) | — | — | |||||||||||||||||||||
Weather Investments | — | — | — | (1,962 | ) | (6 | ) | 1,968 | — | — | ||||||||||||||||||||||
Gesam | 14 | 40.0 | % | — | (18 | ) | 4 | — | — | — | ||||||||||||||||||||||
Idrosicilia | 9 | 40.0 | % | — | — | — | — | 9 | 40.0 | % | ||||||||||||||||||||||
Cesi | 7 | 25.9 | % | — | — | — | — | 7 | 25.9 | % | ||||||||||||||||||||||
Compagnia Porto di Civitavecchia | 9 | 25.0 | % | 2 | — | — | (4 | ) | 7 | 25.0 | % | |||||||||||||||||||||
Aes Distribuidores Salvadoreños | 7 | 20.0 | % | — | — | — | (2 | ) | 5 | 20.0 | % | |||||||||||||||||||||
Other | 23 | — | — | (2 | ) | 4 | 3 | 28 | — | |||||||||||||||||||||||
Total | 1,797 | 2 | (2,310 | ) | 265 | 302 | 56 |
F-53
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes for the year in the equity investments in Wind and Weather Investments are the result of the completion of the sale of Wind. Specifically, Enel transferred 6.28% of Wind’s share capital to a subsidiary of Weather after Weather exercised a call option envisaged in the May 2005 agreement between the parties. Enel also transferred its remaining 30.97% of Wind shares to Weather in exchange for 20.9% of the share capital of Weather. The exchange generated a gain of €263 million. Including the 5.2% of Weather acquired in August 2005 during the first phase of the transaction and classified at December 31, 2005 under non-current financial assets, Enel’s total holding in the company amounted to 26.1%. On December 21, 2006, Enel sold the holding for a total of €1,962 million, of which €1,000 million were paid on that date, with the remainder deferred on an interest-bearing basis for 18 months and classified under other non-current financial assets. The major income statement and balance sheet data for the principal equity investments in associates are reported in the following table.
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||||||||||||||||||||||||||
Net | Net | |||||||||||||||||||||||||||||||
Assets | Liabilities | Revenues | Income/(Loss) | Assets | Liabilities | Revenues | Income/(Loss) | |||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||
Idrosicilia | 23 | 1 | — | 1 | 23 | 1 | — | 1 | ||||||||||||||||||||||||
Cesi | 128 | 101 | 80 | 1 | 159 | 129 | 125 | 1 | ||||||||||||||||||||||||
Compagnia Porto di Civitavecchia | 23 | 7 | — | (2 | ) | 2 | 4 | — | (3 | ) | ||||||||||||||||||||||
Aes Distribuidores Salvadoreños | 85 | 57 | 5 | — | 104 | 67 | 9 | 5 | ||||||||||||||||||||||||
Other companies | 166 | 114 | 52 | 6 | 119 | 103 | 14 | 4 |
(15.e) Non-current financial assets — €1,494 million
At Dec. 31, | At Dec. 31, | |||||||
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Equity investments in other companies | 367 | 594 | ||||||
Advance paid on the acquisition of Slovenské elektrárne | — | 168 | ||||||
Receivables due from associates and other equity investments | — | 34 | ||||||
Other securities designated at fair value through profit or loss | 114 | — | ||||||
Other receivables: | ||||||||
— financial receivables due from financing entities | 14 | 27 | ||||||
— derivative contracts | 37 | 11 | ||||||
— other items | 962 | 2 | ||||||
Total other receivables | 1,013 | 40 | ||||||
TOTAL | 1,494 | 836 |
As regards “Equity investments in other companies”, the fair value of publicly listed companies was determined with reference to the market value of their shares at the end of the period, whereas the fair value of unlisted companies was determined on the basis of what is considered to be a reliable valuation of their
F-54
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
significant balance sheet items. Other items in 2006 represent the outstanding balance for the disposal of Weather, payable within 18 months. Details with respect to equity investments in Other companies are as follows:
At Dec. 31, | At Dec. 31, | |||||||||||||||
2006 | % Holding | 2005 | % Holding | |||||||||||||
(millions of euro) | ||||||||||||||||
Weather Investments | — | — | 286 | 5.20 | % | |||||||||||
Terna | 262 | 5.12 | % | 213 | 5.12 | % | ||||||||||
Red Electrica de España | 44 | 1.00 | % | 35 | 1.00 | % | ||||||||||
LaGeo | 25 | 12.50 | % | 25 | 12.50 | % | ||||||||||
Echelon | 18 | 7.67 | % | 20 | 7.54 | % | ||||||||||
Tri Alpha Energy | 7 | 6.18 | % | 7 | 6.74 | % | ||||||||||
Other | 11 | 8 | ||||||||||||||
Total | 367 | 594 |
“Other securities designated at fair value through profit or loss” are financial investments in asset management funds.
The table below reports the carrying amount and the fair value of long-term financial receivables (€1,090 million in 2006 and €66 million in 2005), including the portion due within twelve months (€30 million in 2006 and €3 million in 2005 included under other short-term financial receivables).
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(millions of euro) | ||||||||||||||||
Long-term financial receivables | 1,120 | 1,120 | 66 | 66 | ||||||||||||
Total | 1,120 | 1,120 | 66 | 66 |
The following table shows the notional amounts and the fair value of derivative contracts classified under non-current financial assets:
Notional Value | Fair Value | |||||||||||||||
At Dec. 31, | At Dec. 31, | At Dec. 31, | At Dec. 31, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(millions of euro) | ||||||||||||||||
Cash flow hedge derivatives: | ||||||||||||||||
— interest rates | 2,586 | 327 | 37 | 11 | ||||||||||||
Total | 2,586 | 327 | 37 | 11 |
F-55
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(15.f) Other non-current assets — €568 million
At Dec. 31, | At Dec. 31, | |||||||
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Receivables from Electricity Equalization Fund | 209 | 847 | ||||||
Receivables from State Decommissioning Fund | 269 | — | ||||||
Other long-term receivables: | ||||||||
— tax paid on account on termination benefits | 5 | 19 | ||||||
— loans to employees | 45 | 44 | ||||||
— other receivables | 40 | 65 | ||||||
Total other long-term receivables | 90 | 128 | ||||||
TOTAL | 568 | 975 |
The “Receivables from the State Decommissioning Fund” in the amount of €269 million are entirely related to the consolidation of Slovenské elektrárne. The receivables relate to the contribution that the company, as a nuclear generation operator, paid to the Slovakian national nuclear decommissioning fund in the manner and in accordance with the timetable established under Slovakian law.1 The resources will be used by the Slovakian government to reimburse to the generating companies that paid into the Fund part of the future costs of decommissioning nuclear plants and managing the related waste, including post-operational costs in the period between the termination of generation activities and the start of decommissioning. If such costs are greater than the amounts paid into the Fund up to the decommissioning date, the rules governing the Fund establish that the difference can be recovered from end users through rate increases.
Liabilities
(16) | CURRENT LIABILITIES |
(16.a) Short-term loans — €1,086 million
At December 31, 2006 and 2005 short-term loans totaled €1,086 million and 1,361 million respectively as detailed below.
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||||||||||
Book Value | Fair Value | Book Value | Fair Value | |||||||||||||
Short-term amounts due to banks | 542 | 542 | 970 | 970 | ||||||||||||
Commercial paper | 531 | 531 | 275 | 275 | ||||||||||||
Other short-term financial payables | 13 | 13 | 116 | 116 | ||||||||||||
Short-term financial debt | 1,086 | 1,086 | 1,361 | 1,361 |
The payables represented by “Commercial paper” related to issues outstanding at year-end in the context of the €4,000 million program launched in November 2005 by Enel Finance International and guaranteed by Enel SpA.
At December 31, 2006, issues under the program totaled €531 million. The nominal value of the commercial paper is €535 million and is in the following currencies: euro (€202 million), pounds sterling (the equivalent of €48 million), US dollars (the equivalent of €251 million), and Swiss francs (the equivalent of €34 million). The exchange rate risk in respect of currencies other than the euro are fully hedged by currency swaps.
At December 31, 2005 payables represented by commercial paper related to issues at year-end in the context of the €1,500 million program launched in 2001 by Enel Investment Holding and guaranteed by Enel SpA, the
1 The fund and its assets are managed entirely by the Government.
F-56
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
maximum amount of which was raised to €2,500 million in May 2004. In November 2005, the ceiling amount was raised to €4,000 million and the issuer of the commercial paper was changed from Enel Investment Holding to Enel Finance International, with Enel SpA retaining its responsibility as guarantor. At December 31, 2005, issues under the program totaled €275 million. The notional value of the commercial paper is €276 million, and is denominated in euro (€240 million) and pounds sterling (the equivalent of €36 million). The exchange rate risk in respect of currencies other than euro are fully hedged by currency swaps .
(16.b) Trade payables — €6,188 million
This item includes payables for the supply of electricity, fuel, materials and equipment for tenders and sundry services.
(16.c) Current financial liabilities — €941 million
At Dec. 31, | At Dec. 31, | |||||||
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Deferred financial liabilities | 177 | 176 | ||||||
Derivative contracts | 753 | 103 | ||||||
Other items | 11 | 15 | ||||||
Total | 941 | 294 |
The following table shows the notional value and fair value of the derivative contracts:
Notional Value | Fair Value | |||||||||||||||
At Dec. 31, | At Dec. 31, | At Dec. 31, | At Dec. 31, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(millions of euro) | ||||||||||||||||
Cash flow hedge derivatives: | ||||||||||||||||
— interest rates | 2 | 191 | — | 10 | ||||||||||||
— exchange rates | 1 | 20 | — | — | ||||||||||||
Total | 3 | 211 | — | 10 | ||||||||||||
Trading derivatives: | ||||||||||||||||
— interest rates | 309 | 610 | 26 | 55 | ||||||||||||
— exchange rates | 1,340 | 1,147 | 24 | 15 | ||||||||||||
— commodities | 4,730 | 125 | 698 | 13 | ||||||||||||
— other | — | — | 5 | 10 | ||||||||||||
Total | 6,379 | 1,882 | 753 | 93 | ||||||||||||
TOTAL | 6,382 | 2,093 | 753 | 103 |
Trading derivatives on interest and exchange rates essentially include transactions entered into for hedging purposes, but which do not qualify for hedge accounting under the IFRS-EU.
Trading derivatives on commodities relate to:
• | fuel trading, with a notional value of €444 million and a fair value of €28 million; | |
• | one-way contracts for differences, with a notional value of €3,219 million and a fair value of €123 million; | |
• | trading derivatives on electricity, with a net notional value of about €55 million and a fair value of €7 million; | |
• | embedded derivatives related to energy sale and purchase contracts in Slovakia, with a notional value of €1,012 million and a fair value of €540 million. |
F-57
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(16.d) Other current liabilities — €4,106 million
At Dec. 31, | At Dec. 31, | |||||||
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Payables due to customers | 1,572 | 1,755 | ||||||
Payables due to the Electricity Equalization Fund | 948 | 406 | ||||||
Payables due to employees | 341 | 353 | ||||||
Taxes payable | 221 | 199 | ||||||
Social security contributions payable | 147 | 144 | ||||||
Other | 877 | 533 | ||||||
Total | 4,106 | 3,390 |
The item “Payables due to customers” include amounts for security deposits totaling €848 million, which refers to amounts received from customers under the terms of contracts for the delivery of electricity. Upon the finalization of contracts, the deposits (the use of which is not restricted) are recognized as current liabilities because the Company does not have an unconditional right to defer the repayment of the liabilities beyond twelve months.
(17) | NON-CURRENT LIABILITIES |
(17.a) Long-term loans (including current portion) — €12,517 million
The aggregate includes long-term payables in respect of bonds, bank loans and other loans in euro and other currencies, including the portion falling due within twelve months.
The following table shows long-term debt and repayment schedules at December 31, 2006, grouped by loan and interest rate type.
Portion | ||||||||||||||||||||||||||||||||||||||||||||
Falling Due | ||||||||||||||||||||||||||||||||||||||||||||
at More | ||||||||||||||||||||||||||||||||||||||||||||
Nominal | Than | Current | ||||||||||||||||||||||||||||||||||||||||||
Balance | Value | Balance | 12 months | Portion | Maturing in | |||||||||||||||||||||||||||||||||||||||
Maturing | 31.12.2006 | 31.12.2006 | 31.12.2005 | 2007 | 2008 | 2009 | 2010 | 2011 | Beyond | |||||||||||||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||||||||||||||
Bonds: | ||||||||||||||||||||||||||||||||||||||||||||
— listed, fixed rate | 2008-2033 | 5,680 | 5,721 | 5,621 | 5,674 | 6 | 1,004 | 7 | 107 | 946 | 3,610 | |||||||||||||||||||||||||||||||||
— listed, floating rate | 2009-2012 | 633 | 636 | 799 | 633 | — | 50 | 86 | 100 | — | 397 | |||||||||||||||||||||||||||||||||
— unlisted, fixed rate | 2007-2010 | 91 | 91 | 171 | 61 | 30 | 60 | 1 | — | — | — | |||||||||||||||||||||||||||||||||
— unlisted, floating rate | 2007-2032 | 2,030 | 2,030 | 1,939 | 2,007 | 23 | 22 | 331 | 79 | 56 | 1,519 | |||||||||||||||||||||||||||||||||
Total | 8,434 | 8,478 | 8,530 | 8,375 | 59 | 1,136 | 425 | 286 | 1,002 | 5,526 | ||||||||||||||||||||||||||||||||||
Bank loans: | ||||||||||||||||||||||||||||||||||||||||||||
— fixed rate | 2007-2015 | 130 | 130 | 166 | 91 | 39 | 19 | 20 | 9 | 9 | 34 | |||||||||||||||||||||||||||||||||
— floating rate | 2007-2026 | 3,780 | 3,802 | 3,015 | 3,586 | 194 | 235 | 282 | 254 | 816 | 1,999 | |||||||||||||||||||||||||||||||||
Total | 3,910 | 3,932 | 3,181 | 3,677 | 233 | 254 | 302 | 263 | 825 | 2,033 | ||||||||||||||||||||||||||||||||||
Non-bank loans: | ||||||||||||||||||||||||||||||||||||||||||||
— fixed rate | 2007-2026 | 132 | 135 | 138 | 104 | 28 | 21 | 7 | 6 | 7 | 63 | |||||||||||||||||||||||||||||||||
— floating rate | 2009-2020 | 41 | 41 | 53 | 38 | 3 | 3 | 2 | 2 | 2 | 29 | |||||||||||||||||||||||||||||||||
Total | 173 | 176 | 191 | 142 | 31 | 24 | 9 | 8 | 9 | 92 | ||||||||||||||||||||||||||||||||||
TOTAL | 12,517 | 12,586 | 11,902 | 12,194 | 323 | 1,414 | 736 | 557 | 1,836 | 7,651 |
The balance for bonds is stated net of €474 million relating to the unlisted floating-rate “Special series of bonds reserved for employees1994-2019”, which the Parent Company holds in portfolio.
F-58
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below reports long-term financial debt by currency and interest rate.
Current | Effective | |||||||||||||||||||
Balance | Nominal Value | Balance | Interest Rate | Interest Rate | ||||||||||||||||
At Dec. 31, 2006 | At Dec. 31, 2005 | At Dec. 31, 2006 | ||||||||||||||||||
(millions of euro) | ||||||||||||||||||||
Euro | 11,869 | 11,935 | 11,444 | 4.36 | % | 4.41 | % | |||||||||||||
US dollar | 222 | 225 | 185 | 8.09 | % | 8.11 | % | |||||||||||||
Pound sterling | 62 | 62 | 62 | 5.73 | % | 5.73 | % | |||||||||||||
Swiss franc | 13 | 13 | 22 | 6.49 | % | 6.49 | % | |||||||||||||
Japanese yen | 59 | 59 | 109 | 1.65 | % | 1.65 | % | |||||||||||||
Other currencies | 292 | 292 | 80 | 5.92 | % | 5.92 | % | |||||||||||||
Total non-euro currencies | 648 | 651 | 458 | |||||||||||||||||
TOTAL | 12,517 | 12,586 | 11,902 |
Change in the nominal value of long-term debt
Changes in | Exchange | |||||||||||||||||||||||||||
Nominal Value | Change in | Consolidated | New | Rate | Nominal Value | |||||||||||||||||||||||
At Dec. 31, 2005 | Repayments | Own Bonds | Companies | Financing | Differences | At Dec. 31, 2006 | ||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||
Bonds | 8,599 | (487 | ) | 53 | 246 | 97 | (30 | ) | 8,478 | |||||||||||||||||||
Bank loans | 3,195 | (1,173 | ) | — | 493 | 1,425 | (8 | ) | 3,932 | |||||||||||||||||||
Non-bank loans | 191 | (45 | ) | — | 45 | 2 | (17 | ) | 176 | |||||||||||||||||||
Total financial debt | 11,985 | (1,705 | ) | 53 | 784 | 1,524 | (55 | ) | 12,586 |
The main financing transactions for 2006 include the following:
• | the refinancing of Slovenské elektrárne debt with a new5-year revolving line of credit for a total of €600 million without an Enel SpA guarantee, €565 million of which was drawn at the end of 2006; | |
• | the renegotiation of the project financing in respect of Enel Maritza East 3 (formerly Maritza East III Power Company) in the amount of €450 million payable in 2023 and fully guaranteed by SACE, an Italian credit insurance agency, €220 million of which was drawn at December 31, 2006; | |
• | the renegotiation of the Acuerdo Marco II project financing for Enel Unión Fenosa Renovables in the amount of €283 million with a maturity of 15 years, €80 million of which was drawn at December 31, 2006; | |
• | the issue by Enel SpA of two additional tranches of a privately-placed bond issue for leading Italian insurance companies in the amount of €97 million maturing in 2024; | |
• | the signing by Enel Viesgo Generación of an EIB loan in the amount of €150 million for investment in the Escatrón plant, which is yet to be disbursed; | |
• | the signing by Enel Distribuzione of an EIB loan in the amount of €600 million for investments in the “Network Efficiency” project, which was disbursed in its entirety at December 31, 2006. |
In addition, in 2006 two bond issues were consolidated, one for €195 million issued by Slovenské elektrárne in 2004 maturing in 2011 and another with a residual value of €51 million issued by Fortuna maturing in 2013. Finally, Enel SpA’s5-year (renewable for a further two years) revolving line of credit in the amount of €5 billion agreed in November 2005 was available in its entirety at December 31, 2006.
F-59
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table compares the carrying amount and the fair value of long-term debt, including the portion falling due within twelve months, broken down by category.
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||||||||||
Book Value | Fair Value | Book Value | Fair Value | |||||||||||||
(millions of euro) | ||||||||||||||||
Bonds: | ||||||||||||||||
— fixed-rate | 5,771 | 5,938 | 5,792 | 6,235 | ||||||||||||
— floating-rate | 2,663 | 2,699 | 2,738 | 2,826 | ||||||||||||
Total | 8,434 | 8,637 | 8,530 | 9,061 | ||||||||||||
Bank loans: | ||||||||||||||||
— fixed-rate | 130 | 133 | 166 | 173 | ||||||||||||
— floating-rate | 3,780 | 3,785 | 3,015 | 3,012 | ||||||||||||
Total | 3,910 | 3,918 | 3,181 | 3,185 | ||||||||||||
Non-bank loans: | ||||||||||||||||
— fixed-rate | 132 | 135 | 138 | 138 | ||||||||||||
— floating-rate | 41 | 41 | 53 | 53 | ||||||||||||
Total | 173 | 176 | 191 | 191 | ||||||||||||
TOTAL | 12,517 | 12,731 | 11,902 | 12,437 |
The following tables show changes in the long-term loans for the period, distinguishing current from non-current portions.
Long-term loans (excluding current portion)
Book Value | Book Value | |||||||
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||
(millions of euro) | ||||||||
Bonds: | ||||||||
— fixed-rate | 5,735 | 5,495 | ||||||
— floating-rate | 2,640 | 2,548 | ||||||
Total | 8,375 | 8,043 | ||||||
Bank loans: | ||||||||
— fixed-rate | 91 | 127 | ||||||
— floating-rate | 3,586 | 2,655 | ||||||
Total | 3,677 | 2,782 | ||||||
Non-bank loans: | ||||||||
— fixed-rate | 104 | 96 | ||||||
— floating-rate | 38 | 46 | ||||||
Total | 142 | 142 | ||||||
TOTAL | 12,194 | 10,967 |
F-60
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Current portion of long-term loans
Book Value | Book Value | |||||||
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||
(millions of euro) | ||||||||
Bonds: | ||||||||
— fixed-rate | 36 | 297 | ||||||
— floating-rate | 23 | 190 | ||||||
Total | 59 | 487 | ||||||
Bank loans: | ||||||||
— fixed-rate | 39 | 39 | ||||||
— floating-rate | 194 | 360 | ||||||
Total | 233 | 399 | ||||||
Non-bank loans: | ||||||||
— fixed-rate | 28 | 42 | ||||||
— floating-rate | 3 | 7 | ||||||
Total | 31 | 49 | ||||||
TOTAL | 323 | 935 |
The Group’s main long-term financial debts are governed by covenants containing undertakings by the borrowers (Enel SpA and the other Group companies) and in some cases Enel SpA as guarantor that are commonly adopted in international business practice. The main covenants governing Enel’s debt regard the bond issues carried out within the framework of the Global Medium Term Notes program and loans granted by the European Investment Bank. To date none of the covenants have been triggered.
The commitments in respect of the bond issues in the Global Medium Term Notes program can be summarized as follows:
• | negative pledge clauses under which the issuer may not establish or maintain (except under statutory requirement) mortgages, liens or other encumbrances on all or part of its assets to secure any listed bond or bond for which listing is planned unless the same guarantee is extended equally or pro rata to the bonds in question; | |
• | pari passu clauses, under which the securities constitute a direct, unconditional and unsecured obligation of the issuer and are issued without preferential rights among them and have the same seniority as other present and future bonds of the issuer; | |
• | specification of default events, whose occurrence (for example, insolvency, failure to pay principle or interest, initiation of liquidation proceedings, etc.) constitutes a default; under “cross default” clauses, the occurrence of a default event in respect of any financial liability (above a threshold level) issued by the issuer or significant subsidiaries (defined as consolidated companies whose gross revenues or total assets are at least 10% of gross consolidated revenues or total consolidated assets) constitutes a default in respect of the liability in question, which becomes immediately repayable; | |
• | early redemption clauses in the event of new tax requirements, which permit early redemption at par of all outstanding bonds. |
The main covenants governing the loans granted by the European Investment Bank can be summarized as follows:
• | negative pledge clauses, under which the issuer undertakes not to establish or grant to third parties additional guarantees or privileges with respect to those already established in the individual contracts by the Company |
F-61
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or Enel Group companies, unless an equivalent guarantee is extended equally or pro rata to the loans in question; |
• | clauses that require the guarantor (whether Enel SpA or banks acceptable to the EIB) to maintain its rating above a specified grade; | |
• | in the case of guarantees provided by Enel SpA, the Group’s equity may not fall below a specified level; | |
• | material changes clauses, under which the occurrence of a specified event (mergers, spin-offs, disposal or transfer of business units, changes in company control structure, etc.) gives rise to the consequent adjustment of the contract, without which the loan shall become repayable immediately without payment of any commission; | |
• | requirements to report periodically to the EIB; | |
• | requirement for insurance coverage and maintenance of property, possession and use of the works, plant and machinery financed by the loan over the entire term of the agreement; | |
• | contract termination clauses, under which the occurrence of a specified event (serious inaccuracies in documentation presented in support of the contract, failure to repay at maturity, suspension of payments, insolvency, special administration, disposal of assets to creditors, dissolution, liquidation, total or partial disposal of assets, declaration of bankruptcy or composition with creditors or receivership, substantial decrease in equity, etc.) triggers immediate repayment. |
F-62
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reports the net financial position at December 31, 2006 and 2005.
At Dec. 31, | At Dec. 31, | |||||||
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Cash on hand | 6 | 4 | ||||||
Bank and post office deposits | 541 | 472 | ||||||
Securities(1) | 25 | 32 | ||||||
Total cash and cash equivalents | 572 | 508 | ||||||
Financial receivables due from associates | �� | 10 | 3 | |||||
Factoring receivables | 211 | 374 | ||||||
Short-term portion of long-term financial receivables | 30 | 3 | ||||||
Totalshort-term financial receivables | 251 | 380 | ||||||
Short-term bank debt | (542 | ) | (970 | ) | ||||
Commercial paper | (531 | ) | (275 | ) | ||||
Short-term portion of long-term bank debt | (233 | ) | (399 | ) | ||||
Bonds (short-term portion) | (59 | ) | (487 | ) | ||||
Other loans (short-term portion) | (31 | ) | (49 | ) | ||||
Other short-term financial payables | (13 | ) | (116 | ) | ||||
Total short-term financial debt | (1,409 | ) | (2,296 | ) | ||||
Net short-term financial position | (586 | ) | (1,408 | ) | ||||
Long-term financial receivables | 1,090 | 63 | ||||||
Debt to banks and financing entities | (3,677 | ) | (2,782 | ) | ||||
Bonds | (8,375 | ) | (8,043 | ) | ||||
Other loans | (142 | ) | (142 | ) | ||||
Total long-term financial debt | (12,194 | ) | (10,967 | ) | ||||
Net long-term financial position | (11,104 | ) | (10,904 | ) | ||||
TOTAL NET FINANCIAL POSITION | (11,690 | ) | (12,312 | ) |
(1) | On the consolidated Balance Sheet securities have been presented under Current Financial Assets. |
(17.b) Post-employment and other employee benefits — €2,633 million
The Group provides its employees with a variety of benefits, including termination benefits, additional months’ pay for having reached age limits or eligibility for old-age pension, loyalty bonuses for achievement of seniority milestones, supplementary pension and healthcare plans, domestic electricity discounts and similar benefits.
The item “Post-employment and other employee benefits” relates to accruals made to cover benefits due at the time the employment relationship is terminated and other long-term benefits to which employees have a statutory or contractual right as well as other post-employment benefits.
F-63
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reports the change during the year in actuarial liabilities and the fair value of plan assets, as well as a reconciliation of net actuarial liabilities with liabilities recognized in the balance sheet at December 31, 2006 and December 31, 2005.
Benefits Due on Termination of | ||||||||||||||||
Employment and | ||||||||||||||||
Other Long-Term | Post-Employment Benefits Under | |||||||||||||||
Benefits | Defined-Benefit Plans | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(millions of euro) | ||||||||||||||||
Changes in actuarial liabilities: | ||||||||||||||||
Actuarial liabilities at the beginning of the year | 1,783 | 1,977 | 1,199 | 1,237 | ||||||||||||
Service cost | 83 | 95 | (1) | 9 | 9 | (1) | ||||||||||
Interest cost | 74 | 68 | (1) | 48 | 49 | (1) | ||||||||||
Benefits paid | (162 | ) | (232 | ) | (58 | ) | (54 | ) | ||||||||
Other changes | (64 | ) | — | (6 | ) | — | ||||||||||
Changes in scope of consolidation | 37 | (113 | ) | 6 | (61 | ) | ||||||||||
Actuarial (gains)/losses | (31 | ) | (12 | ) | 3 | 19 | ||||||||||
Foreign exchange (gains)/losses | 3 | — | 1 | — | ||||||||||||
Actuarial liabilities at the end of the year | 1,723 | 1,783 | 1,202 | 1,199 | ||||||||||||
Changes in plan assets: | ||||||||||||||||
Fair value at the beginning of the year | 281 | 172 | 23 | 23 | ||||||||||||
Expected return on plan assets | 14 | 12 | — | 1 | ||||||||||||
Actuarial gains/(losses) | (2 | ) | (9 | ) | — | — | ||||||||||
Contributions paid by company | 26 | 15 | 1 | — | ||||||||||||
Other changes | — | 109 | — | — | ||||||||||||
Benefits paid | (24 | ) | (18 | ) | (1 | ) | (1 | ) | ||||||||
Fair value at the end of the year | 295 | 281 | 23 | 23 | ||||||||||||
Reconciliation with carrying amount: | ||||||||||||||||
Net actuarial liabilities at the end of the year | 1,428 | 1,502 | 1,179 | 1,176 | ||||||||||||
Unrecognized (gains)/losses | (29 | ) | (3 | ) | 3 | (19 | ) | |||||||||
Carrying amount of liabilities at the end of the year | 1,457 | 1,505 | 1,176 | 1,157 |
(1) | Includes Telecommunications and Transmission Networks Divisions until date of deconsolidation. |
The liabilities recognized are reported net of plan assets, whose fair value at period-end amounted to €318 million, including net unrecognized actuarial gains of €26 million. The expected return used in estimating the fair value of the plan assets is equal to 4.5% (4.2% in 2005).
The fair value of plan assets was determined to be the present value of the related obligations, as all plan assets are qualified insurance policies that exactly match the amount and timing of some of the benefits payable under the different plans.
The cost of employee benefits in 2006 came to €186 million (€257 million in 2005), of which €108 million in respect of accretion cost is recognized under interest cost (€117 million in 2005) and €78 million is recognized under personnel costs. The cost for termination benefits in 2006 amounted to €101 million, of which €37 million is in respect of accretion cost.
F-64
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The main actuarial assumptions used to calculate the liabilities in respect of employee benefits are set out in the following table:
2006 | 2005 | 2004 | ||||||||||
Discount rate | 4.25 | % | 4.00 | % | 4.25 | % | ||||||
Rate of increase in wages | 3.00 | % | 3.00 | % | 3.00 | % | ||||||
Rate of increase in healthcare costs | 3.00 | % | 3.00 | % | 3.00 | % |
(17.c) Provisions for risks and charges — €4,151 million
Provision | Changes in | Utilization | Taken to | Changes in | Utilization | |||||||||||||||||||||||||||||||||||
At Dec. 31, | Made During | Scope of | and other | At Dec. 31, | Income | Scope of | and Other | At Dec. 31, | ||||||||||||||||||||||||||||||||
2004 | the Year | Consolidation | Changes | 2005 | Accruals | Statement | Consolidation | Changes | 2006 | |||||||||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||||||||||
Provision for litigation, risks and other charges: | ||||||||||||||||||||||||||||||||||||||||
— nuclear decommissioning | 382 | 56 | (38 | ) | (59 | ) | — | 123 | — | 1,893 | 173 | 2,189 | ||||||||||||||||||||||||||||
— non-nuclear plant retirement and site restoration | 80 | — | (60 | ) | 7 | 27 | 16 | — | 169 | 11 | 223 | |||||||||||||||||||||||||||||
— litigation | 382 | 56 | (38 | ) | (59 | ) | 341 | 62 | (22 | ) | 7 | (40 | ) | 348 | ||||||||||||||||||||||||||
— CO2 emissions charges | — | 228 | — | — | 228 | 9 | (108 | ) | — | (120 | ) | 9 | ||||||||||||||||||||||||||||
— other | 647 | 171 | (74 | ) | (194 | ) | 550 | 215 | (61 | ) | 436 | (180 | ) | 960 | ||||||||||||||||||||||||||
Total | 1,109 | 455 | (172 | ) | (246 | ) | 1,146 | 425 | (191 | ) | 2,505 | (156 | ) | 3,729 | ||||||||||||||||||||||||||
Provision for early-retirement incentives | 295 | 69 | (8 | ) | (235 | ) | 121 | 400 | — | 21 | (120 | ) | 422 | |||||||||||||||||||||||||||
TOTAL | 1,404 | 524 | (180 | ) | (481 | ) | 1,267 | 825 | (191 | ) | 2,526 | (276 | ) | 4,151 |
Nuclear decommissioning provision
The “nuclear decommissioning” provision regards the V1 and V2 plants at Jasklovske Bohunice and EMO 1 and 2 plants at Mochovce. It comprises:
• | provision for disposal and storage of radioactive waste: at December 31, 2006 this amounted to €288 million in respect of the cost for the transport, treatment and storage of nuclear waste. The liability was estimated on the basis of the Company’s obligations under the applicable Slovakian legislation; | |
• | provision for storage and long-term disposal of spent nuclear fuel: at December 31, 2006 this amounted to €1,222 million in respect of the estimated cost for the transport and storage of spent nuclear fuel. The liability was estimated on the basis of engineering and financial assessments of the costs of building the storage facilities; | |
• | provision for decommissioning of nuclear power plants: at December 31, 2006 this amounted to €679 million in respect of the estimated cost of retiring the plants. The liability was estimated on the basis of engineering and financial assessments of the cost of retirement (also using comparative analyses) and the operating plans for decommissioning established by the relevant Slovakian authorities. |
The estimated timing of the outlays described above takes account of current knowledge of environmental regulations, the amount of time used to estimate the costs and the difficulties presented by the extremely long time span over which such costs could arise. The charges covered by the provisions are reported at their present value using discount rates of between 4.2% and 4.5%.
F-65
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Provision for non-nuclear plant retirement and site restoration
The “provision for non-nuclear retirement and site restoration” represents the present value of the estimated cost for the retirement and removal of non-nuclear plant where there is a legal or constructive obligation to do so. The increase in 2006 of €196 million is related to Slovenské elektrárne in the amount of €190 million (of which €169 million at the acquisition date) regarding the thermal plants at Novany and Vojany.
Litigation provision
The “litigation” provision covers liabilities that could arise in respect of pending litigation and other disputes. It includes an estimate of the potential liability relating to disputes that arose during the period, as well as revised estimates of the potential costs associated with disputes initiated in prior periods. The estimates are based on the opinions of internal and external legal counsel.
Other provisions
“Other” provisions refer to various risks and charges, mainly in connection with regulatory disputes and disputes with local authorities regarding various duties and fees.
Provision for early-retirement incentives
The “Provision for early-retirement incentives” includes the estimated charges relating to binding agreements for the voluntary termination of employment contracts in response to restructuring needs.
(17.d) Deferred tax liabilities — €2,504 million
The table reports changes in “Deferred tax liabilities” by type of temporary difference, determined on the basis of the current tax rates.
Increase | Increase | |||||||||||||||||||||||||||||||
(Decrease) | (Decrease) | |||||||||||||||||||||||||||||||
Taken to | Changes in | Taken to | ||||||||||||||||||||||||||||||
At Dec. 31, | Income | Other | Scope of | At Dec. 31, | Income | Other | At Dec. 31, | |||||||||||||||||||||||||
2004 | Statement | Changes | Consolidation | 2005 | Statement | Changes | 2006 | |||||||||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||||||||||
Nature of the temporary differences: | ||||||||||||||||||||||||||||||||
— differences on non-current and financial assets | 2,100 | 282 | 20 | (502 | ) | 1,900 | 127 | (14 | ) | 2,013 | ||||||||||||||||||||||
— income subject to deferred taxation | 98 | (41 | ) | — | — | 57 | (43 | ) | 6 | 20 | ||||||||||||||||||||||
— allocation of goodwill to assets | 61 | (3 | ) | 39 | — | 97 | (4 | ) | 7 | 100 | ||||||||||||||||||||||
— measurement of financial instruments | 12 | (19 | ) | 105 | (2 | ) | 96 | (41 | ) | (5 | ) | 50 | ||||||||||||||||||||
— other items | 241 | 64 | — | 9 | 314 | 8 | (1 | ) | 321 | |||||||||||||||||||||||
Total | 2,512 | 283 | 164 | (495 | ) | 2,464 | 47 | (7 | ) | 2,504 |
The caption includes the deferred tax liabilities on differences between depreciation charged for tax purposes, including accelerated depreciation, and depreciation based on the estimated useful lives of assets.
F-66
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(17.e) Non-current financial liabilities — €116 million
These consist of the fair value measurement of cash flow hedge derivatives. The following table shows the related notional amount and fair value.
Notional value | Fair value | |||||||||||||||
At Dec. 31, | At Dec. 31, | At Dec. 31, | At Dec. 31, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(millions of euro) | ||||||||||||||||
Cash flow hedge derivatives: | ||||||||||||||||
— interest rates | 2,238 | 3,749 | 116 | 262 | ||||||||||||
Total | 2,238 | 3,749 | 116 | 262 |
Derivatives outstanding at December 31, 2006 and 2005 were essentially composed of interest rate hedges on a number of long-term floating-rate loans. The negative fair value of such positions, primarily the result of a significant reduction in market interest rates in recent years, is largely offset by the reduction in financial expense relating to the hedged liabilities.
(17.f) Other non-current liabilities — €1,044 million
At Dec. 31, | At Dec. 31, | |||||||
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Deferred operating liabilities | 1,014 | 828 | ||||||
Other items | 30 | 18 | ||||||
Total | 1,044 | 846 |
Deferred operating liabilities represent deferred connection revenues and certain Electricity Equalization Fund contributions.
(18) | EQUITY ATTRIBUTABLE TO THE SHAREHOLDERS OF THE PARENT COMPANY |
Equity attributable to the shareholders of the Parent Company — €18,460 million
During 2006, 19,124,633 options that had been distributed under the stock option plans for 2002, 2003 and 2004 were exercised. The exercise of these options generated an increase of €108 million in equity through an increase in share capital of €19 million and in the share premium reserve of €89 million. In addition, as regards the exercised options, the share premium reserve increased by a further €7 million as a result of the reclassification from the specific stock option reserve.
Share capital — €6,176 million
Share capital at December 31, 2006 consisted of 6,176,196,279 ordinary shares with a par value of €1.00 each (6,157,071,646 shares at December 31, 2005).
Other reserves — €4,386 million
Share premium reserve — €607 million
The change in the year reflects the exercise of stock options by beneficiaries.
F-67
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Legal reserve — €1,453 million
Other reserves — €2,245 million
This includes €2,215 million in respect of the remaining portion of the value adjustments carried out when Enel was transformed from a public entity to a company limited by shares. This amount does not constitute taxable income when distributed.
Foreign currency translation reserve — €81 million
The increase in this aggregate for the period is attributable to the net appreciation of the functional currency against the foreign currencies used by subsidiaries.
Reserve from measurement of financial instruments — €163 million
This item includes €16 million in losses not yet realized at the end of the period in respect of the measurement of cash flow hedging derivatives and recognized directly in equity, as well as €177 million in unrealized gains arising in respect of the fair value measurement of financial assets.
The table below shows the changes in gains and losses recognized directly in equity including minority interests and net of the related tax effects.
Gains/(Losses) | ||||||||||||||||
Recognized in | Released to | |||||||||||||||
At Dec. 31, | Equity for the | Income | At Dec. 31, | |||||||||||||
2005 | Period | Statement | 2006 | |||||||||||||
(millions of euro) | ||||||||||||||||
Reserve for fair value measurement of cash flow hedging, effective portion | (138 | ) | 71 | 52 | (15 | ) | ||||||||||
Reserve for fair value measurement of financial investments held for sale | 132 | 77 | (32 | ) | 177 | |||||||||||
Reserve for foreign exchange differences | 60 | 66 | 126 | |||||||||||||
Total gains/(losses) recognized in equity | 54 | 214 | 20 | 288 |
Net deferred tax liabilities calculated on the balance at December 31, 2006 were a negative €7 million (a positive €53 million at December 31, 2005). The net change of €60 million during the year included €39 million of net deferred tax liabilities in respect of gains and losses recognized directly in equity and €21 million of accrued taxes in respect of reserves released to the income statement.
The Company estimates that approximately €30 million of net derivatives gain recognized in equity as of December 31, 2006 will be reclassified into earnings within the next twelve months.
(19) | RELATED PARTIES |
As the main operator in the field of generation, transport and distribution of electricity in Italy, Enel provides services to a number of State-controlled companies. In the current regulatory framework, Enel concludes transactions with Terna — Rete Elettrica Nazionale, the Single Buyer, the Electricity Services Operator and the Market Operator (each of which is entirely controlled either directly or indirectly by the Ministry for the Economy and Finance).
Fees for the transport of electricity payable to Terna and certain charges paid to the Market Operator are determined by the Authority for Electricity and Gas.
Transactions relating to purchases and sales of electricity concluded with the Market Operator on the Power Exchange and with the Single Buyer are settled at market prices.
F-68
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Companies in the Domestic Sales Division acquire electricity from the Single Buyer and settle the contracts for difference related to CIP6 energy with the Electricity Services Operator, in addition to paying Terna fees for the use of the National Transmission Network (NTN). Companies that are part of the Domestic Generation and Energy Management Division, in addition to paying fees for the use of the NTN to Terna, acquire from and sell electricity to the Market Operator on the Power Exchange.
Enel also acquires fuel for generation and gas distribution and sale from ENI, a company controlled by the Ministry for the Economy and Finance.
All transactions with related parties are concluded on normal market terms and conditions.
The following table summarizes the relationships:
Balance sheet | ||||||||||||||||
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||||||||||
Receivables | Payables | Receivables | Payables | |||||||||||||
(millions of euro) | ||||||||||||||||
Single Buyer | 483 | 2,017 | 653 | 2,199 | ||||||||||||
Market Operator | 968 | 352 | 1,230 | 210 | ||||||||||||
Terna | 357 | 394 | 378 | 334 | ||||||||||||
Electricity Services Operator | 263 | 354 | 200 | 231 | ||||||||||||
ENI | 39 | 191 | 2 | 589 | ||||||||||||
Italian Post Office | — | 41 | 1 | 20 | ||||||||||||
Total | 2,110 | 3,349 | 2,464 | 3,583 |
Income Statement | ||||||||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||||||||
Costs | Revenues | Costs | Revenues | Costs | Revenues | |||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||
Single Buyer | 12,309 | 1,749 | 10,150 | 1,160 | 7,183 | 1,824 | ||||||||||||||||||
Market Operator | 1,579 | 6,274 | 1,159 | 6,308 | 483 | 3,079 | ||||||||||||||||||
Terna | 1,919 | 2,062 | 292 | 316 | — | — | ||||||||||||||||||
Electricity Services Operator | 27 | 539 | 1,294 | 2,455 | 1,917 | 2,715 | ||||||||||||||||||
ENI | 1,502 | 199 | 1,848 | 123 | 1,638 | — | ||||||||||||||||||
Italian Post Office | 145 | 15 | 99 | 15 | — | — | ||||||||||||||||||
Total | 17,481 | 10,838 | 14,842 | 10,377 | 11,221 | 7,618 |
The following table shows transactions with associated companies:
Balance sheet | ||||||||||||||||
At Dec. 31, 2006 | At Dec. 31, 2005 | |||||||||||||||
Receivables | Payables | Receivables | Payables | |||||||||||||
(millions of euro) | ||||||||||||||||
Cesi | 1 | 17 | 4 | 24 | ||||||||||||
Wind Telecomunicazioni | — | — | 291 | 193 | ||||||||||||
Other companies | 16 | 1 | — | — | ||||||||||||
Total | 17 | 18 | 295 | 217 |
F-69
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Statement | ||||||||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||||||||
Costs | Revenues | Costs | Revenues | Costs | Revenues | |||||||||||||||||||
(millions of euro) | ||||||||||||||||||||||||
Wind Telecomunicazioni | — | — | 138 | 26 | — | — | ||||||||||||||||||
Cesi | 15 | 1 | 24 | 4 | 22 | 4 | ||||||||||||||||||
Immobiliare Foro Bonaparte | — | — | 21 | — | 33 | — | ||||||||||||||||||
Leasys | — | — | 162 | 2 | 103 | 3 | ||||||||||||||||||
Idrolatina | — | — | 2 | — | — | — | ||||||||||||||||||
Other companies | 3 | 7 | — | — | 2 | — | ||||||||||||||||||
Total | 18 | 8 | 347 | 32 | 160 | 7 |
(20) | CONTRACTUAL COMMITMENTS AND GUARANTEES |
The commitments entered into by the Enel Group and the guarantees given to third parties are shown below:
At Dec. 31, 2006 | ||||
(millions of euro) | ||||
Guarantees given: | ||||
— sureties and other guarantees granted to third parties | 1,356 | |||
Commitments to suppliers for: | ||||
— electricity purchases | 4,592 | |||
— fuel purchases | 33,024 | |||
— various supplies | 6,177 | |||
— tenders | 1,827 | |||
— other | 258 | |||
Total | 45,878 | |||
TOTAL | 47,234 |
Guarantees granted to third parties amounted to €1,356 million and include €737 million in commitments relating to the sale of real estate assets in connection with the regulations that, for a period of six years and six months from July 2004, govern the termination of leases and the related payments. The value of such guarantees is reduced annually by a specified amount.
The expected cash flow of the lease contracts, including forecast inflation, is as follows:
• | 2007: €74 million; | |
• | 2008: €73 million; | |
• | 2009: €74 million; | |
• | 2010: €68 million; | |
• | 2011: €55 million. |
Commitments for electricity mainly relate to imports from France, Switzerland and Germany, and are all related to the period2007-2011.
Commitments for the purchase of fuels are determined with reference to the parameters and exchange rates applicable at the end of the period (given that fuel prices vary and are mainly set in foreign currencies). The total at
F-70
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2006, was €33,024 million, of which €13,930 million refers to the period2007-2011, €11,982 to the period2012-2016, €6,912 million to the period2017-2021, and the remaining €200 million beyond 2021.
(21) | CONTINGENT LIABILITIES AND ASSETS |
Litigation on rates
Enel is the target of a series of suits filed by a number of companies that consume large amounts of electricity and who have challenged, in full or in part, the legitimacy of the measures with which first the Interministerial Price Committee (CIP) and then the Authority for Electricity and Gas determined changes in electricity rates in the past. To date, the courts have generally rejected the complaints lodged and an examination of the rulings would indicate that the chance of unfavorable judgments is remote.
Environmental litigation
Litigation regarding environmental issues primarily concerns the installation and operation of power lines and equipment of Enel Distribuzione, which succeeded Enel SpA in the related relationships.
Enel Distribuzione has been involved in a number of civil and administrative suits relating to requests, often using urgent procedures, for the precautionary transfer or modification of operations on power lines by persons living near them on the basis of their alleged potential to cause harm, despite the fact that they have been installed in compliance with current regulations. In a number of proceedings claims for damages for harm caused by electromagnetic fields have been lodged. The outcome of litigation on these issues is normally favorable to Enel Distribuzione, with only sporadic adverse precautionary rulings. All of these have been appealed, so that at the present date there are no final adverse rulings, and no damages for physical harm have ever been granted.
There have also been a number of proceedings concerning electromagnetic fields generated by medium- and low-voltage transformer substations within buildings, in which the equipment has always been in compliance with induction limits set by current regulations.
The situation concerning litigation has evolved due to the clarification of the legislative framework following the entry into force of the framework law on electromagnetic emissions (Law 36 of February 22, 2001) and the related implementing regulations (Prime Minister’s Order of July 8, 2003). The new regulations seek to harmonize regulation of the field at the national level. The new rules also introduce a ten-year program as from the entry into force of Law 36/2001 for the environmental upgrading of the entire national network to comply with new exposure limits. They also envisage the possibility of recovering, in part or in full, costs incurred by the owners of power lines and substations through electricity rates, in accordance with criteria to be set by the Authority for Electricity and Gas, pursuant to Law 481/95, as they represent costs incurred in the public interest. At present, the Prime Minister has not issued the Order setting the criteria for the upgrading of power lines (Article 4(4) of Law 36/2001), nor have the criteria for measuring of the parameters and calculating tolerance limits been established, as provided for in the Order of July 8, 2003.
A number of urban planning and environmental disputes regarding the construction and operation of certain power plants and transmission and distribution lines are pending. Based on an analysis of individual cases, Enel believes the possibility of adverse rulings is remote. For a limited number of cases, an unfavorable outcome cannot be ruled out completely, however. The consequences of unfavorable judgments could, in addition to the possible payment of damages, also include the costs related to work required to modify electrical equipment and the temporary unavailability of the plant. At present such charges cannot be reliably quantified and are therefore not included in the “Provision for litigation, risks and other charges”.
F-71
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Porto Tolle thermal plant
Air pollution — Criminal proceedings against Enel directors and employees
— Damages for environmental harm
Concluding criminal proceedings which begun in 2005, the Court of Adria, in a ruling issued March 31, 2006, convicted former directors and employees of Enel for a number of incidents of air pollution caused by emissions from the Porto Tolle thermoelectric plant. The decision, provisionally enforceable, held the defendants and Enel (as a civilly liable party) jointly liable for the payment of damages for harm to multiple parties, both natural persons and local authorities. Damages for a number of mainly private parties were set at the amount of €367,000. The calculation of the amount of damages owed to certain public entities (the Regions of Veneto and Emilia Romagna, the Province of Rovigo and various municipalities) has been postponed to a later civil trial, although a “provisional award” of about €2.5 million was granted and has been provided for.
An appeal has been lodged against the ruling of the Court of Adria by the Company and its employees and former directors. If the ruling in the criminal case is affirmed, any civil lawsuits brought by interested parties seeking total compensation for losses suffered could expose the Company to the risk of further expenditures that cannot currently be quantified.
Out-of-court disputes and litigation connected with the blackout of September 28, 2003
With regard to the blackout that occurred on September 28, 2003, Enel Distribuzione received numerous letters (most drafted on the basis of standardized forms prepared by consumer associations) containing requests for automatic/lump-sum indemnities under the Electricity Service Charter and resolutions of the Authority for Electricity and Gas (€25.82 each), in addition to further damages to be quantified by customers with a view to possible legal action.
With regard to litigation, at December 31, 2006 more than 90,000 proceedings were pending against Enel Distribuzione, individually for small amounts (almost all before justices of the peace in Southern Italy). All involved requests for automatic/lump-sum indemnities on the basis of the resolutions of the Authority for Electricity and Gas and the Electricity Service Charter or damages for loss due to the interruption of electricity supplies. Enel Distribuzione has challenged these requests with the following arguments: first, neither the Authority resolutions nor the Electricity Service Charter (whose reference legislation has been repealed) provide for automatic/lump-sum indemnities in the case of an interruption of supply, as specified by the Authority in a press release. Second, in relation to both the manner and extent of the black-out, the electricity supply interruption of September 28, 2003 was an unexpected and unforeseeable event and, as such, is ascribable to exceptional events beyond the control of the Group companies, for which they cannot therefore be held liable in any way. At December 31, 2006 more than 39,000 rulings had been issued by justices of the peace, with a majority finding in favor of the plaintiffs. Charges in respect of such indemnities could be recovered at least in part under existing insurance policies. The appellate courts have nearly all found in favor of Enel Distribuzione, based upon both the lack of proof of the loss claimed and the recognition that the company was not involved in causing the event. The few adverse rulings against Enel Distribuzione (all in Calabria) have been appealed to the Court of Cassation (the supreme court of appeal). Although it is not possible to predict the outcome of these proceedings, the Company believes that they will not have a material adverse affect on its financial condition or results.
Extension of municipal property tax (ICI)
Article 1quinquiesof Decree Law 44 of March 31, 2005 (ratified with Law 88/2005) stated that Article 4 of Law 652 of April 13, 1939 (governing the land registry) shall be interpreted with regard to power plants alone in the sense that the buildings and permanent constructions consist of the land and those parts that are structurally attached to it, even temporarily, which may be joined by any means of connection with movable parts for the purpose of creating a single complex asset.
F-72
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a result of this provision (the interpretation of which was affirmed by a recent decision of the Court of Cassation) the calculation of the imputed rental income of buildings that form part of a generation plant must also take removable parts into account. Consequently, the Enel Group could be required to pay higher local ICI in the future.
The Court’s decision, however, established nothing with regard to the criteria to be used in calculating the value to be attributed to these components of imputed rent but rather referred the question to the Regional Tax Commission with territorial jurisdiction. The Regional Tax Commission of Emilia Romagna, in Ordinanceno. 16/13/06 (filed on July 13, 2006), sent the case to the Constitutional Court on the issue of the constitutionality of Article 1quinquiesof the Decree Law, finding it relevant and not clearly unfounded.
Therefore, with regard to pending litigation, the Enel Group shall continue to pursue its case to request a substantial reduction of the values originally assigned by the Land Registry Offices to the removable parts of the plant. Enel has, however, allocated €44 million to the “Provisions for risks and charges” to cover fully the potential charges that would result from an unfavorable outcome. At the same time, Enel does not feel that further provisions are necessary to take into account possible retroactive application of the rule on imputed rent proposals, which to date have not been the subject of comments by the Land Registry Offices and, in any event, primarily concern small plants.
INPS circular no. 63 of May 6, 2005
Concerning contribution obligations in respect of theCassa Integrazione Guadagni(CIG),Cassa Integrazione Guadagni Straordinaria(CIGS), Disoccupazione Involontaria(DS) andMobilità(unemployment benefit schemes)
On May 6, 2005, the Italian National Social Security Institute (INPS) issued a circular regarding obligatory contributions to theCassa Integrazione Guadagni (CIG),Cassa Integrazione Guadagni Straordinaria(CIGS),Disoccupazione Involontaria(DS) andMobilità(all unemployment benefit programs). In regulating the matter, the circular specified that contributions to be paid in respect of the above programs are also applicable toState-controlled companies and national public entities involved in industrial activities that are not wholly public-owned. These include Enel and companies incorporated by Enel pursuant to Legislative Decree 79 of March 16, 1999, both for the period following the issue of the circular and retroactively as from the date on which they ceased to be entirely owned by public entities (in the case of Enel, as from the date of the IPO, in November 1999).
More specifically, under the provisions of the circular Enel SpA would be required only to make contributions to CIG and CIGS, while companies incorporated by Enel under Legislative Decree79/1999 would also be required to contribute to the DS andMobilitàprograms.
The Enel Group believes that it is not liable for these contributions as it does not meet the conditions for applicability. In particular, as regards past periods, the Group contests the payment of contributions for programs whose benefits it would not have been eligible to use.
The circular has been challenged for precautionary reasons before the administrative courts, requesting its suspension. The Regional Administrative Court rejected the appeal for suspension, stating that the matter fell under the exclusive jurisdiction of the ordinary courts. Enel therefore filed an appeal with the Labor Court, indicating that no contribution obligation existed for CIG, CIGS andMobilità. The matter is still pending. Although it is not possible to predict the outcome of these proceedings, the Company believes that they will not have a material adverse affect on its financial condition or results.
Owing to the complexity of the issues and the need for further study, INPS initially extended the deadline for the payment of accrued contributions. INPS subsequently felt it advisable to request an opinion from the Council of State and extended the deadline for settlement of the obligation until the opinion was issued.
F-73
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In an opinion issued at the hearing of February 8, 2006, the second section of the Council of State ruled, specifically, that the circular may not have retroactive effect and that there are no grounds for levying penalties, therefore ordering that the circular be amended appropriately.
As regards the contribution for theDisoccupazione Involontariaprogram (involuntary unemployment), and therefore theMobilitàprogram (which applies only where the DS contribution is also due), the Ministry of Labor, upon completion of the inspection begun in December 2005 to ascertain whether the conditions exempting Enel and the companies incorporated by it under Legislative Decree79/1999 from the contributions continued to hold, issued a Decree on August 1, 2006 in which it confirmed that both Enel SpA and the companies incorporated under it that are still members of the Enel Group have been exempt from the DS (and thereforeMobilità) schemes since they began operations. The confirmation of the contribution exemption also affects theMobilitàcontribution, whose basis of calculation is the overall payroll subject to the contribution forDisoccupazione Involontaria.
However, despite the generally favorable situation for Enel and in conflict with the opinion issued by the Council of State (whose arguments were cited by the Rome Labor Court in its ruling no. 2384 of February 8, 2007 in Acea vs. INPS) and the findings of the decree issued by the Ministry of Labor, during 2006 and early 2007 Enel has received a number of tax assessments demanding payment of contributions for previous years for the CIG, CIGS,Mobilitàand DS programs. The assessments were suspended at the initiative of INPS or with an injunction of the Labor Court, to which Enel has appealed the assessments received. Accordingly, as the situation stands it is felt that the likelihood of incurring a liability in this regard is remote.
Inquiries by the Milan Public Prosecutor’s Office and the State Audit Court
In February 2003, the Milan Public Prosecutor’s Office initiated a criminal investigation (still ongoing) of former top managers of Enelpower and other individuals for alleged offences to the detriment of Enelpower and payments made by contractors to receive certain contracts. Implementing the resolutions of the boards of Enel, Enelpower and Enel Produzione, legal action was taken against the suppliers involved, which led to settlements with Siemens and Alstom.
On the basis of the information that emerged during the criminal proceedings, the State Audit Court sued the former Chief Executive Officer and a former executive of Enelpower, in addition to the former Chairman of Enel Produzione, citing them for possible administrative liability in relation to losses caused to the tax authorities. Enel, Enelpower and Enel Produzione deposited an instrument in support of the request of the Regional Public Prosecutor. In a ruling of February 22, 2006, the State Audit Court, finding that the former directors and managers cited in the suit were liable, awarded Enelpower damages of about €14 million. The ruling was appealed before the Central Jurisdictional Appeals Section of the Rome State Audit Court, where it is still pending.
In parallel with the above ruling, Enelpower and Enel Produzione initiated a revocatory action against the claimants in respect of the former Enel Produzione CEO and the former Enelpower CEO and manager, to obtain a court ruling challenging their authority to dispose certain assets of the Company.
(22) | STOCK OPTION PLANS AND REMUNERATION OF DIRECTORS AND SENIOR EXECUTIVES |
In 2002, following the authorization obtained at an Enel Shareholders’ meeting, the Parent launched a new “Stock Option Plan”, granting to certain of its executive 41,748,500 options. Among the beneficiaries of the 2002 stock-option plan, in their capacity as General Manager, were also those who held, at different times, the position of Enel’s Chief Executive Officer during that year.
Options under this plan vested if earnings before interest, taxes, depreciation and amortization (EBITDA), of Enel for the fiscal year 2002 exceeded the estimated EBITDA as indicated in the budget approved by the Board of Directors, and if the price of Enel shares on Telematico outperformed a specified reference index over the same
F-74
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
period. If either of these conditions were not met, all the options expire. In March 2003, the Company’s Board of Directors determined that the conditions for all the options to vest had been satisfied.
In 2003, following the authorization obtained in a Enel Shareholders’ meeting, the Parent launched a new “Stock Option Plan”, granting to certain of its executive 47,624,005 options. Among the beneficiaries of the 2003 stock-option plan, in their capacity as General Manager, were also those who held, at different times, the position of Enel’s Chief Executive Officer during that year.
This plan is based on conditions similar to the 2002 plan. In March 2004, the Company’s Board of Directors determined that the condition for all the options to vest had been satisfied.
In 2004, following the authorization obtained in a Enel Shareholders’ meeting, the Parent launched a new “Stock Option Plan”, granting to certain of its executive 38,527,550 options. Among the beneficiaries of the 2004 stock-option plan, in their capacity as General Manager, was also those who held the position of Enel’s Chief Executive Officer during that year.
This plan is based on conditions similar to the 2003 plan. In March 2005, the Company’s Board of Directors determined that the condition for all the options to vest had been satisfied.
In 2004, Enel’s Board of Directors awarded to all option holders, a cash bonus of euro 0.41 due upon exercise of stock options.
In 2005, Enel’s Board of Directors awarded to all option holders, a cash bonus of euro 0.62 due upon exercise of stock options.
F-75
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes developments in 2006 in Enel’s stock option plans, detailing the main assumptions used in calculating their fair value.
Developments in stock option plans
Number of Options | 2002 Plan | 2003 Plan | 2004 Plan | 2006 Plan | Total | |||||||||||||||
Options granted at December 31, 2004 | 41,748,500 | 47,624,005 | 38,527,550 | — | 127,900,055 | |||||||||||||||
Options exercised at December 31, 2004 | 24,104,556 | 16,342,119 | — | — | 40,446,675 | |||||||||||||||
Options lapsed at December 31, 2004 | 4,824,000 | 3,237,700 | 1,231,000 | — | 9,292,700 | |||||||||||||||
Options outstanding at December 31, 2004 | 12,819,944 | 28,044,186 | 37,296,550 | — | 78,160,680 | |||||||||||||||
Options exercised in 2005 | 10,697,094 | 14,158,373 | 12,392,982 | — | 37,248,449 | |||||||||||||||
Options lapsed in 2005 | 48,500 | 50,726 | 394,500 | — | 493,726 | |||||||||||||||
Options outstanding at December 31, 2005 | 2,074,350 | 13,835,087 | 24,509,068 | — | 40,418,505 | |||||||||||||||
New options granted in 2006 | — | — | — | 31,790,000 | 31,790,000 | |||||||||||||||
Options exercised in 2006 | 1,319,050 | 11,726,012 | 6,079,571 | — | 19,124,633 | |||||||||||||||
Options lapsed in 2006 | — | 60,290 | 334,300 | 286,000 | 680,590 | |||||||||||||||
Options outstanding at December 31, 2006 | 755,300 | 2,048,785 | 18,095,197 | 31,504,000 | 52,403,282 | |||||||||||||||
Fair value at grant date (euro) | 0.17 | 0.37 | 0.18 | 0.27 | ||||||||||||||||
Volatility | 28 | % | 28 | % | 17 | % | 14 | % | ||||||||||||
Vesting period | 2 years | 2 years | 3.5 years | 4 years | ||||||||||||||||
Option expiry | December 2007 | December 2008 | December 2009 | December 2012 | ||||||||||||||||
Average expected annual dividend | 0.28 | 0.28 | 0.36 | 0.44 | ||||||||||||||||
Risk-free interest rate | 2.82 | % | 2.82 | % | 2.72 | % | 4.00 | % |
The risk-free rate for periods within the contractual life of the option is based on the Euro yield curve at the time of the grant.
On May 26, 2006, the Enel Ordinary Shareholders’ Meeting approved the 2006 stock option plan, granting the Board of Directors the powers required to carry out the plan, to be exercised in accordance with criteria established by the Shareholders’ Meeting. On August 4, 2006, the Board of Directors of Enel SpA, exercising the authority given to it by the Shareholders’ Meeting, granted 31,790,000 options to 461 Enel Group executives. Achievement of the targets set in the 2006 plan will be verified between 2008 and 2009.
As established by the Board of Directors, executives were divided into different brackets, with each bracket receiving a different number of options. The right to subscribe the shares is subordinated to the executives concerned remaining employed within the Group, with a number of exceptions (for example, termination of employment because of retirement or permanent invalidity, exit from the Group of the company at which the executive is employed, and succession) specifically governed by the Regulations.
The options may be exercised subject to a number of specific suspensory conditions. These include exceeding Group EBITDA forecasts and the performance of Enel shares with respect to the benchmark index indicated in the Regulations for each plan.
F-76
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Remuneration of directors and senior executives
The current members of Enel’s board of directors were appointed on May 26, 2005 at the annual meeting of Enel’s shareholders. Enel’s shareholders also set the directors’ individual base compensation in an amount equal to €85,000 per year; while the board of directors set the additional compensation of the Chairman of the board of directors and the Chief Executive Officer, after having received the opinion of the board of statutory auditors in accordance with the Company’s by-laws. The following amounts include compensation matured to such persons.
Remuneration of directors
Last Name | Name | Position | 2006 | 2005 | ||||||||||||
Gnudi | Piero | Chairman | 735,764.00 | 700,755.14 | ||||||||||||
Conti | Fulvio | CEO and GM | 600,000.00 | 350,000.00 | ||||||||||||
Scaroni | Paolo | CEO and GM(1 | ) | — | 294,507.19 | |||||||||||
Ballio | Giulio | Director | 117,000.00 | 63,583.10 | ||||||||||||
Fantozzi | Augusto | Director | 116,427.00 | 62,833.10 | ||||||||||||
Luciano | Alessandro | Director | 117,000.00 | 62,833.10 | ||||||||||||
Miccio | Mauro | Director(1 | ) | — | 47,404.21 | |||||||||||
Morganti | Franco | Director(1 | ) | — | 46,630.90 | |||||||||||
Napolitano | Fernando | Director | 117,250.00 | 110,479.99 | ||||||||||||
Taranto | Francesco | Director | 122,500.00 | 117,029.40 | ||||||||||||
Tosi | Gianfranco | Director | 117,500.00 | 109,963.53 | ||||||||||||
Valsecchi | Francesco | Director | 117,000.00 | 62,883.10 | ||||||||||||
2,160,441.00 | 2,028,902.76 | |||||||||||||||
(1) | Former member of Enel’s board of directors. |
Other compensations of directors
2006 | 2005 | |||||||||||||||||||||||||||
Bonuses | Bonuses | |||||||||||||||||||||||||||
Non-Monetary | and Other | Other | Non-Monetary | and Other | Other | |||||||||||||||||||||||
Last Name | Name | Position | Benefits | Incentives | Compensation | Benefits | Incentives | Compensation | ||||||||||||||||||||
Gnudi | Piero | Chairman | 11,779.68 | — | — | 11,050.68 | 585,998.30 | 2,640,000.00 | ||||||||||||||||||||
Conti | Fulvio | CEO and GM | — | — | 701,678.52 | — | 350,000.00 | 982,959.61 | ||||||||||||||||||||
Scaroni | Paolo | CEO and GM | — | — | — | — | 3,187,024.91 | 5,997,675.71 | ||||||||||||||||||||
Ballio | Giulio | Director | — | — | — | — | — | — | ||||||||||||||||||||
Fantozzi | Augusto | Director | — | — | — | — | — | — | ||||||||||||||||||||
Luciano | Alessandro | Director | — | — | — | — | — | — | ||||||||||||||||||||
Miccio | Mauro | Director | — | — | — | — | — | — | ||||||||||||||||||||
Morganti | Franco | Director | — | — | — | — | — | 28,506.84 | ||||||||||||||||||||
Napolitano | Fernando | Director | — | — | — | — | — | — | ||||||||||||||||||||
Taranto | Francesco | Director | — | — | — | — | — | 18,273.97 | ||||||||||||||||||||
Tosi | Gianfranco | Director | — | — | — | — | — | — | ||||||||||||||||||||
Valsecchi | Francesco | Director | — | — | — | — | — | — | ||||||||||||||||||||
11,779.68 | — | 701,678.52 | 11,050.68 | 4,123,023.21 | 9,667,416.13 | |||||||||||||||||||||||
F-77
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Executive officers who are not also directors received compensation in 2006 of €7,428,332.98.
The aggregate compensation Enel and its subsidiaries paid to all of Enel’s directors, senior managers and statutory auditors identified in this annual report, excluding pension, retirement or similar benefits, for the year ended December 31, 2006, was approximately €10.5 million (€24.7 million in 2005). The aggregate amount paid or accrued for pension, retirement or similar benefits for the same directors, statutory auditors and executive officers for the year ended December 31, 2006, was approximately €2.5 million (€2.7 million in 2005).
In addition, Mr. Conti, in his capacity as Chief Financial Officer, was granted options as described in the table below:
Stock Option Plan | Options Exercisable | Strike Price | Option Exercised | Resulting Shares Sold | ||||||||||||||||||
of Which in 2006 | ||||||||||||||||||||||
2001 | 347,916 | 7.272 | 347,916 | — | 332,916 | |||||||||||||||||
2002 | 902,500 | 6.426 | 566,500 | — | 566,500 | |||||||||||||||||
2003 | 992,800 | 5.240 | 497,840 | — | 497,840 | |||||||||||||||||
2004 | 600,000 | 6.242 | — | — | — | |||||||||||||||||
2006 | 1,500,000 | 6.842 | — | — | — |
On March 27, 2007, the board of directors approved a proposal for a new stock option plan that provides for the assignment to the Chief Executive Officer, in his capacity as General Manager, of 1,500,000 options to subscribe to the same number of Enel’s newly issued ordinary shares. On May 25, 2007 the annual shareholders’ meeting approved this proposal and authorized the board of directors to implement this stock option plan.
23. | NET INCOME AND SHAREHOLDERS’ EQUITY IN ACCORDANCE WITH U.S. GAAP |
Differences Between IFRS-EU and United States Generally Accepted Accounting Principles
As discussed in Note 2, the accompanying consolidated financial statements as of December 31, 2006 and 2005 and for three-year period ended December 31, 2006 were prepared in compliance with International Financial Reporting Standards as adopted by the European Union. There are no differences between IFRS-EU and IFRS published by the International Accounting Standards Board (“IASB”) as these standards relate to the Company’s financial statements.
IFRS-EU differ in certain significant aspects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). The following table (“Reconciliation Table”) presents a summary of the
F-78
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
adjustments to consolidated net income and to consolidated shareholders’ equity that would have been required if U.S. GAAP had been applied instead of IFRS-EU.
Net Income | Equity | |||||||||||||||||||||||||||||||
For the Years Ended December 31, | As of December 31, | |||||||||||||||||||||||||||||||
Note | 2006 | 2005 | 2004 | 2006 | 2006 | 2005 | 2006 | |||||||||||||||||||||||||
(millions of euros) | (millions of | (millions of euros) | (millions of | |||||||||||||||||||||||||||||
U.S. dollars) | U.S. dollars) | |||||||||||||||||||||||||||||||
Financial statements: | ||||||||||||||||||||||||||||||||
Of the parent company | 3,036 | 3,895 | 2,631 | 4,007 | 18,460 | 19,057 | 24,362 | |||||||||||||||||||||||||
Of the minority interest | 23.1 | 65 | 237 | 116 | 86 | 565 | 359 | 746 | ||||||||||||||||||||||||
Total | 3,101 | 4,132 | 2,747 | 4,093 | 19,025 | 19,416 | 25,108 | |||||||||||||||||||||||||
Increases/(Decreases) due to: | ||||||||||||||||||||||||||||||||
Minority Interest | 23.1 | (61 | ) | (237 | ) | (116 | ) | (81 | ) | (968 | ) | (359 | ) | (1,277 | ) | |||||||||||||||||
Customers’ connection fees | 23.2 | (355 | ) | (419 | ) | (464 | ) | (469 | ) | (2,182 | ) | (1,827 | ) | (2,880 | ) | |||||||||||||||||
Revaluation of fixed assets, related depreciation and adjustment for gain/loss on disposal | 23.3 | (27 | ) | 183 | 1,057 | (36 | ) | 618 | 645 | 816 | ||||||||||||||||||||||
Capitalized interests and related depreciation | 23.4 | 33 | (12 | ) | (33 | ) | 44 | 1,269 | 1,236 | 1,675 | ||||||||||||||||||||||
Early retirement program | 23.5 | 294 | (121 | ) | 197 | 388 | 370 | 76 | 488 | |||||||||||||||||||||||
Employee benefit obligations | 23.6 | (36 | ) | 6 | 38 | (48 | ) | (8 | ) | 151 | (11 | ) | ||||||||||||||||||||
Goodwill impairment and subsequent disposal of an affiliate | 23.7 | 775 | 947 | (1,722 | ) | 1,023 | — | (775 | ) | — | ||||||||||||||||||||||
Business combinations, goodwill and other intangible assets | 23.8 | (100 | ) | (69 | ) | (86 | ) | (132 | ) | (3 | ) | 97 | (4 | ) | ||||||||||||||||||
Negative goodwill and related adjustments | 23.9 | (24 | ) | (24 | ) | — | (32 | ) | (48 | ) | (24 | ) | (63 | ) | ||||||||||||||||||
Deferred taxes on equity reserves | 23.10 | — | — | — | — | (571 | ) | (571 | ) | (754 | ) | |||||||||||||||||||||
Assets retirement obligations | 23.11 | 62 | 1 | (6 | ) | 82 | 72 | 10 | 95 | |||||||||||||||||||||||
Gain on sale of real estate business | 23.12 | 24 | 220 | (667 | ) | 31 | (423 | ) | (447 | ) | (558 | ) | ||||||||||||||||||||
Investment in equity securities — unlisted equity investments | 23.13 | — | (4 | ) | 4 | — | (4 | ) | 19 | (5 | ) | |||||||||||||||||||||
Transfer of financial asset | 23.14 | (2 | ) | — | — | (3 | ) | (2 | ) | — | (3 | ) | ||||||||||||||||||||
Onerous contracts | 23.15 | 32 | — | — | 42 | 32 | — | 42 | ||||||||||||||||||||||||
Other differences | 23.16 | (66 | ) | 43 | (70 | ) | (86 | ) | (112 | ) | (47 | ) | (148 | ) | ||||||||||||||||||
Tax effect of reconciling items | 74 | 62 | 146 | 98 | 151 | 29 | 199 | |||||||||||||||||||||||||
Minorities on reconciling items | 23.1 | (5 | ) | (10 | ) | 6 | (7 | ) | 4 | 9 | 5 | |||||||||||||||||||||
Amounts under U.S. GAAP corresponding to Parent Company | 3,719 | 4,698 | 1,031 | 4,907 | 17,220 | 17,638 | 22,725 | |||||||||||||||||||||||||
F-79
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The condensed Consolidated Balance Sheets as of December 31, 2006 and 2005 presented below have been adjusted to reflect the differences between IFRS-EU and U.S. GAAP.
CONSOLIDATED BALANCE SHEETS
As of December 31, | ||||||||||||
2006 | 2005 | 2006 | ||||||||||
(millions of euro) | (millions of | |||||||||||
U.S. dollars) | ||||||||||||
Assets | ||||||||||||
Current Assets | 12,704 | 12,654 | 16,764 | |||||||||
Property, plant and equipment, net | 33,684 | 30,320 | 44,454 | |||||||||
Other non-current assets | 9,716 | 7,622 | 12,822 | |||||||||
56,104 | 50,596 | 74,040 | ||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||
Current liabilities | 12,923 | 13,446 | 17,054 | |||||||||
Long-term debt | 12,056 | 10,967 | 15,911 | |||||||||
Other non-current liabilities | 13,561 | 8,195 | 17,896 | |||||||||
Total liabilities | 38,540 | 32,608 | 50,861 | |||||||||
Minority interest | 344 | 350 | 454 | |||||||||
Shareholders’ equity | 17,220 | 17,638 | 22,725 | |||||||||
56,104 | 50,596 | 74,040 | ||||||||||
The condensed Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004 presented below have been adjusted to reflect the differences between IFRS-EU and U.S. GAAP.
CONSOLIDATED STATEMENTS OF INCOME
2006 | 2005 | 2004 | 2006 | |||||||||||||
(millions of euro) | (millions of | |||||||||||||||
U.S. dollars) | ||||||||||||||||
Total operating revenues | 39,023 | 35,875 | 31,535 | 51,498 | ||||||||||||
Income from equity exchange transaction | 263 | — | — | 347 | ||||||||||||
Total operating expenses | 32,551 | 29,235 | 24,436 | 42,957 | ||||||||||||
Net income/(charges) from commodity risk management | (614 | ) | 272 | (16 | ) | (810 | ) | |||||||||
Operating income | 6,121 | 6,912 | 7,083 | 8,078 | ||||||||||||
Financial income (loss) | (362 | ) | (763 | ) | (703 | ) | (478 | ) | ||||||||
Gain (Loss) on equity method investments | 3 | (30 | ) | (36 | ) | 4 | ||||||||||
Income from continuing operations before income taxes and minority interest | 5,762 | 6,119 | 6,344 | 7,604 | ||||||||||||
Income tax expense | 1,985 | 1,991 | 2,288 | 2,620 | ||||||||||||
Income from continuing operations before minority interest | 3,777 | 4,128 | 4,056 | 4,984 | ||||||||||||
Minority interest (losses) | (58 | ) | (247 | ) | (98 | ) | (77 | ) | ||||||||
Income from continuing operations | 3,719 | 3,881 | 3,958 | 4,907 | ||||||||||||
Income from discontinued operations, net of tax | — | 817 | (2,927 | ) | — | |||||||||||
Net income | 3,719 | 4,698 | 1,031 | 4,907 | ||||||||||||
F-80
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The income from discontinued operation, net of tax, in 2005 and 2004 was as follow:
2005 | 2004 | |||||||
Income from operations of discontinued operations | (200 | ) | 94 | |||||
Gain from disposal of discontinued operations | 951 | (2,990 | ) | |||||
Income taxes | 66 | (31 | ) | |||||
Net income of discontinued operations, net of tax | 817 | (2,927 | ) |
The following table shows the statements of changes in shareholders’ equity for the years ended December 31, 2006, 2005, and 2004 adjusted to reflect the differences between IFRS-EU and U.S. GAAP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Notes | 2006 | 2005 | 2004 | 2006 | ||||||||||||||||
(millions of euros) | (millions of | |||||||||||||||||||
U.S. dollars) | ||||||||||||||||||||
U.S. GAAP shareholders’ equity at the beginning of the year | 17,638 | 15,697 | 18,651 | 23,277 | ||||||||||||||||
Movements during the year: | ||||||||||||||||||||
Net income for the year | 3,719 | 4,698 | 1,031 | 4,908 | ||||||||||||||||
Interim dividend | (1,235 | ) | (1,169 | ) | (2,014 | ) | (1,630 | ) | ||||||||||||
Dividend | (2,715 | ) | (2,214 | ) | (2,195 | ) | (3,583 | ) | ||||||||||||
Accumulated other comprehensive income (loss), net of tax | ||||||||||||||||||||
— Minimum pension liabilities | (33 | ) | 17 | 43 | (44 | ) | ||||||||||||||
— Application of SFAS 158 | (49 | ) | — | (65 | ) | |||||||||||||||
— Financial instruments | 145 | 241 | (45 | ) | 191 | |||||||||||||||
— Other | 49 | 29 | (15 | ) | 65 | |||||||||||||||
Exercise of stock options | 108 | 339 | 241 | 143 | ||||||||||||||||
Minority interest of Slovenské elektrárne | 23.1 | (407 | ) | (537 | ) | |||||||||||||||
U.S. GAAP shareholders’ equity at the end of the year | 17,220 | 17,638 | 15,697 | 22,725 | ||||||||||||||||
Tax effects on other comprehensive income are disclosed in Note 24(a).
DISCLOSURE OF COMPREHENSIVE INCOME, NET OF TAX
2006 | 2005 | 2004 | 2006 | |||||||||||||
(millions of euro) | (millions of | |||||||||||||||
U.S. dollars) | ||||||||||||||||
Net income in accordance with U.S. GAAP | 3,719 | 4,698 | 1,031 | 4,908 | ||||||||||||
Minimum pension liabilities | (33 | ) | 17 | 43 | (44 | ) | ||||||||||
Investments in equity securities | 30 | 141 | 5 | 39 | ||||||||||||
Derivatives | 115 | 100 | (50 | ) | 152 | |||||||||||
Other changes | 49 | 29 | (15 | ) | 65 | |||||||||||
Total comprehensive income, net of tax | 3,880 | 4,985 | 1,014 | 5,120 | ||||||||||||
F-81
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23.1. Minority Interest
Under U.S. GAAP, shareholder’s equity and net income comprise the equity portion attributed to equity holders of the Parent Company only. However, under IFRS-EU equity and net income include the equity and net income corresponding to the shareholders of both the controlling shareholder and the minority interests. Therefore, an adjustment to reconcile to U.S. GAAP is recorded in order to exclude the Minority Interests portion of shareholder’s equity and net income.
Under U.S. GAAP, when the Company consolidates the assets and liabilities of an acquired subsidiary that is not wholly owned, the fair value adjustments are limited to the amount attributable to the Company’s ownership percentage; therefore, under U.S. GAAP minority interests represent the minority’s share of the carrying amount of the subsidiary’s net assets; while, under IFRS, the minority’s proportion is measured at fair value at the date of the business combination.
Accordingly, under U.S. GAAP, if an acquired company has a deficit in historical shareholders’ equity, the minority interests’ share of the acquired company is presented as a direct reduction of the consolidated equity and the Company wholly recognizes the acquired enterprise’s results to the extent of such reductions.
Following the acquisition of Slovenské elektrárne, the Company recorded €407 million of negative minority interest under U.S.GAAP as a reduction of shareholders’equity and wholly recognized in Group net income €4 million minority net income realized by the acquired company under IFRS-EU and €24 million minority impact on the adjustments between IFRS-EU and U.S.GAAP.
23.2. Customers’ Connection Fees
Under IFRS-EU connection fees collected from new non eligible customers for connection to the electricity network which does not require an upgrade of the distribution network assets, are considered as a standalone transaction as there is no further obligations for the Company and all other service are paid for separately. Accordingly such fees are immediately recognized as revenues, meeting the revenue recognition criteria.
Under U.S. GAAP, such connection fees which is considered to be revenue earned from access and similar charges is recognized over the estimated life of the customer relationship, which is estimated at 20 years.
23.3. Revaluation of fixed assets, related depreciation and adjustment for gain/loss on disposal
The Company elected to use certain revaluations made to fixed assets at, or before, the date of transition to IFRS-EU as deemed costs at the date of the revaluation. Under U.S. GAAP, such revaluations are not permitted.
The Reconciliation Table includes adjustments to eliminate the revaluations and related accumulated depreciation, to reflect the effect of the recomputation of depreciation charge on a historical U.S. GAAP cost basis and to recognize gains or losses on asset disposals in accordance with U.S. GAAP book value.
23.4. Capitalized interest and related depreciation
Under U.S. GAAP, interest on qualifying assets is capitalized as part of the cost of constructing an asset in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 34, “Capitalization of Interest Cost”. Under IAS 23, interest capitalization is permitted, but not required. Under IFRS-EU, the Company has elected not to capitalize interest. The Reconciliation Table includes an adjustment to reflect the capitalization of interest on assets, to the extent those assets qualify for interest capitalization in accordance with SFAS No. 34, and the related effect on the depreciation.
F-82
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23.4.1 Property, plant and equipment Disclosures
The Company’s property, plant and equipment, net, under U.S. GAAP consists of the following:
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Property, plant and equipment, gross: | ||||||||
Generating Plant: | ||||||||
Hydroelectric | 7,218 | 6,661 | ||||||
Thermal | 18,325 | 17,304 | ||||||
Nuclear | 2,597 | |||||||
Geothermal and renewable sources | 1,853 | 2,317 | ||||||
Distribution Electricity Network | 34,267 | 33,710 | ||||||
Distribution Gas Network | 2,743 | 2,733 | ||||||
Land and Buildings | 3,215 | 1,792 | ||||||
Other | 1,835 | 1,478 | ||||||
Construction in progress | 2,761 | 2,038 | ||||||
Total | 74,814 | 68,033 | ||||||
Accumulated Depreciation: | ||||||||
Generating Plant: | ||||||||
Hydroelectric | 3,125 | 2,595 | ||||||
Thermal | 10,093 | 9,641 | ||||||
Nuclear | 928 | |||||||
Geothermal and renewable sources | 1,364 | 1,108 | ||||||
Distribution Electricity Network | 22,363 | 21,867 | ||||||
Distribution Gas Network | 1,077 | 1,029 | ||||||
Land and Buildings | 1,059 | 607 | ||||||
Other | 1,121 | 866 | ||||||
Total | 41,130 | 37,713 | ||||||
Property, plant and equipment, net: | ||||||||
Generating Plant: | ||||||||
Hydroelectric | 4,093 | 4,066 | ||||||
Thermal | 8,232 | 7,663 | ||||||
Nuclear | 1,669 | |||||||
Geothermal and renewable sources | 489 | 1,209 | ||||||
Distribution Electricity Network | 11,904 | 11,843 | ||||||
Distribution Gas Network | 1,666 | 1,704 | ||||||
Land and Buildings | 2,156 | 1,185 | ||||||
Other | 714 | 612 | ||||||
Construction in progress | 2,761 | 2,038 | ||||||
Total | 33,684 | 30,320 | ||||||
F-83
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23.5. Early Retirement Program
Under IFRS-EU an entity shall recognize termination benefits as a liability and an expense when a legal or constructive obligation exists, i.e. when the entity has a detailed formal plan, without realistic possibility of withdrawal, to terminate the employment of an employee or group of employees before the normal retirement date.
Under U.S. GAAP in accordance with SFAS 88, voluntary early retirement benefits are recognized when the employees formally accept the offer and the amount can be reasonably estimated.
The reconciliations include adjustments to eliminate the provision that did not meet U.S. GAAP criteria and recognition of such expense in the period in which such criteria were met.
23.6 Employee Benefit Obligations
Pursuant to an exemption provided by IFRS 1, the Company has elected to record unrecognized net actuarial gains and losses as of January 1, 2004 to retained earnings. Under U.S. GAAP this exemption is not applicable and generates a difference relating to the amortization of actuarial gains and losses recognized in income.
SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” for an employer with publicly traded equity securities, introduced, effective December 31, 2006 the requirement to recognize the funded status of a benefit plan and the related disclosure requirements.
This Statement requires recognition of the overfunded or underfunded status (measured as the difference between plan assets at fair value-with limited exceptions where applicable- and the benefit obligation) of a defined benefit postretirement plan (other than a multiemployer plan) as an asset/liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. Upon initial application of this statement and subsequently, an employer should continue to apply the provisions in SFAS no. 87, 88, and 106 in measuring plan assets and benefit obligations as of the date of its statement of financial position and in determining the amount of net periodic benefit costs.
Under IAS 19 and Enel’s “corridor approach” related option the actuarial gain and loss are recognized over expected remaining working lives of participants for the net gain/loss in excess of 10% of the greater of the defined obligation or the fair value of plan assets at the beginning of the year. Positive/negative past service cost are recognized over remaining service period if they have not already ended. Therefore under IFRS-EU no funded status is recognized as an asset or liability with changes recognized through other comprehensive income (“OCI”).
In adopting SFAS 158, as illustrated in the following table, unrecognized actuarial gains or losses and prior unrecognized service costs were recognized for €260 million, net of tax, as a component of accumulated other comprehensive income. This SFAS 158 adoption resulted in an increase in deferred tax assets of €23 million.
Dec. 31, | ||||||||||||||||
2006 Before | Dec. 31, | |||||||||||||||
Adjustment of | 2006 | |||||||||||||||
Minimum Liability | After Adjustment of | |||||||||||||||
and Adoption of | Adjustment of | Adoption of | Minimum Liability and | |||||||||||||
SFAS 158 | Minimum Liability | SFAS 158 | Adoption of SFAS 158 | |||||||||||||
(millions of euro) | ||||||||||||||||
Provisions for pensions | 2,570 | — | 71 | 2,641 | ||||||||||||
Accumulated other comprehensive income | (178 | ) | (33 | ) | (49 | ) | (260 | ) | ||||||||
The estimated amount of actuarial gains and losses recognized in accumulated other comprehensive income at December 31, 2006 which will be amortized through the income statement in 2007 is €18 million.
F-84
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23.6.1. Pension and Other Post-retirement Benefits disclosures
The following table illustrates the changes in the projected benefit obligation and in the fair value determined as market-related value of plan assets under U.S. GAAP.
Pensions Benefits | Other Post-retirement Benefits | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(millions of euro) | (millions of euro) | |||||||||||||||
Change in Projected Benefit Obligation: | ||||||||||||||||
Benefit Obligation at Jan 1 | 1,792 | 1,990 | 1,220 | 1,241 | ||||||||||||
Service cost | 83 | 78 | 9 | 6 | ||||||||||||
Interest cost | 75 | 78 | 49 | 48 | ||||||||||||
Actuarial (gain) loss | (30 | ) | (12 | ) | 3 | 39 | ||||||||||
Settlement | (49 | ) | (48 | ) | — | — | ||||||||||
PBO of business acquired (disposed) | 37 | (113 | ) | 6 | (61 | ) | ||||||||||
Benefits paid | (162 | ) | (181 | ) | (58 | ) | (53 | ) | ||||||||
Adjustment | (1 | ) | — | 2 | — | |||||||||||
Benefit Obligation at Dec 31 | 1,745 | 1,792 | 1,231 | 1,220 | ||||||||||||
Change in Plan Asset: | ||||||||||||||||
Fair value of plan assets at Jan 1 | 312 | 297 | 26 | 22 | ||||||||||||
Actuarial return on plan assets | (4 | ) | 14 | (1 | ) | 1 | ||||||||||
Company contribution | 21 | 156 | — | — | ||||||||||||
Benefit paid | (20 | ) | (111 | ) | — | (1 | ) | |||||||||
Settlement | — | (48 | ) | — | — | |||||||||||
Adjustments | (1 | ) | — | 2 | — | |||||||||||
Gains/(Losses) | — | 4 | — | 4 | ||||||||||||
Fair value of plan assets at Dec 31 | 308 | 312 | 27 | 26 | ||||||||||||
Reconciliation of Funded Status of the Plan: | ||||||||||||||||
Funded/(unfunded) status | (1,437 | ) | (1,480 | ) | (1,204 | ) | (1,194 | ) | ||||||||
Unrecognized net (gain)/loss | — | 400 | — | 42 | ||||||||||||
Unrecognized net transition obligation | — | (14 | ) | — | — | |||||||||||
Accrued benefit cost | (1,437 | ) | (1,094 | ) | (1,204 | ) | (1,152 | ) | ||||||||
Adjustment for minimum liability | — | (265 | ) | — | — | |||||||||||
Amount recognized in the consolidated balance sheet | (1,437 | ) | (1,359 | ) | (1,204 | ) | (1,152 | ) | ||||||||
Information for pension plans with an accumulated benefit obligation in excess of plan assets: | ||||||||||||||||
Projected benefit obligation | (1,401 | ) | (1,794 | ) | (60 | ) | (1,208 | ) | ||||||||
Accumulated benefit obligation | (1,380 | ) | (1,676 | ) | (46 | ) | (1,134 | ) | ||||||||
Fair value of plan assets | 32 | 312 | — | 26 |
F-85
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amount of the provisions recognized in the consolidated balance sheet in accordance with U.S. GAAP are split between current and non current portions as following:
2006 | 2005 | |||||||
(millions of euro) | ||||||||
Provisions for pensions | 2,641 | 2,246 | ||||||
Thereof current | 132 | 200 | ||||||
Thereof non-current | 2,509 | 2,046 |
Pensions Benefits | Other Post-Retirement Benefits | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(millions of euro) | (millions of euro) | |||||||||||||||
Accrued benefit cost | (1,437 | ) | (1,359 | ) | (1,204 | ) | (1,152 | ) | ||||||||
Accumulated other comprehensive income | — | 265 | — | — | ||||||||||||
Net amount recognized | (1,437 | ) | (1,094 | ) | (1,204 | ) | (1,152 | ) | ||||||||
Since under SFAS 158 the funded status is reported on the balance sheet, the obligation to recognize the minimum pension liability no longer applies. Other comprehensive income for minimum pension liability increased in 2005 by €26 million, then decreased in 2006 by €50 million.
Other Post- | ||||||||||||||||||||||||
Pensions Benefits | Retirement Benefits | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
(millions of euro) | (millions of euro) | |||||||||||||||||||||||
Components of Net Periodic Benefit Cost: | ||||||||||||||||||||||||
Service cost | 83 | 78 | 101 | 9 | 6 | 12 | ||||||||||||||||||
Interest cost | 75 | 78 | 104 | 49 | 48 | 56 | ||||||||||||||||||
Expected return on plan assets | (15 | ) | (13 | ) | (13 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||||
Amortization and of actuarial (gain) loss | (16 | ) | 13 | 17 | 3 | — | — | |||||||||||||||||
Net periodic benefit cost | 127 | 156 | 209 | 60 | 53 | 67 | ||||||||||||||||||
Settlement cost and other adjustments | (50 | ) | 39 | 71 | — | — | 2 | |||||||||||||||||
Total cost accrual | 77 | 195 | 280 | 60 | 53 | 69 | ||||||||||||||||||
Other Post- | ||||||||||||||||||||||||
Pensions Benefits | Retirement Benefits | |||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||||
Weighted-average assumptions used in determining net periodic cost for year: | ||||||||||||||||||||||||
Discount rate | 4.0 | % | 4.25 | % | 5.0 | % | 4.0 | % | 4.25 | % | 5.0 | % | ||||||||||||
Expected return on plan assets | 4.5 | % | 4.2 | % | 5.0 | % | 4.5 | % | 4.2 | % | 5.0 | % | ||||||||||||
Rate of compensation increase | 3.0 | % | 3.0 | % | 3.5 | % | 3.0 | % | 3.0 | % | 3.5 | % |
Additional Information
2006 | 2005 | |||||||
Assumed health care cost trend rates at December 31 | ||||||||
Health care cost trend rate assumed for next year | 2.00 | % | 3.00 | % | ||||
Rate to which the trend rate is assumed to decline (the ultimate trend rate) | 2.00 | % | 3.00 | % | ||||
Year that the rate reaches the ultimate trend rate | 2007 | 2006 |
F-86
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- | 1-Percentage- | |||||||
Point Increase | Point Decrease | |||||||
(millions of euro) | ||||||||
Effect on total cost | — | — | ||||||
Effect on accumulated post-retirement benefit obligation | 2 | (1 | ) |
The Company’s pension plan and post retirement plan assets, which solely relate to certain Spanish subsidiaries, are entirely covered by insurance contracts. Under the terms of the contracts, the annual yield is guaranteed by the insurance company and investment decisions are the responsibility of the insurance company.
Estimated Future Benefit Payments
The following undiscounted benefit payments, including benefits attributable to estimated future employee service, are expected to be paid:
Pension | Other Post- | |||||||
Benefits | Retirement Benefits | |||||||
(millions of euro) | ||||||||
2007 | 142 | 12 | ||||||
2008 | 152 | 12 | ||||||
2009 | 172 | 13 | ||||||
2010 | 194 | 13 | ||||||
2011 | 222 | 13 | ||||||
Years2012-2016 | 1,146 | 68 |
23.7 Goodwill impairment and subsequent disposal of an affiliate
SFAS 142 requires that goodwill is tested for impairment using a prescribed two-step process. The first step screens for potential impairment by comparing the fair value of the reporting units to their carrying values. If the fair value of a reporting unit is less than its carrying value, the second step must be completed. Step two requires a computation of the implied fair value of the reporting unit’s goodwill in comparison to the carrying amount of goodwill. Any excess of the carrying amount of goodwill over its implied fair value must be recorded as an impairment charge.
The Company estimates fair value for its reporting units using a present value technique, incorporating estimated discounted future cash flow assumptions that marketplace participants would use in their estimates of fair value. The June 30, 2004 impairment test of the telecommunications reporting unit, evaluated using the same basis as previous years, did not result in an impairment charge. However, due to a change in circumstances that the Company believed would more likely than not reduce the fair value of the reporting unit below its carrying amount, the Company reperformed the impairment test as of December 31, 2004, which resulted in an additional goodwill impairment charge of €1,722 million as compared to the charge recorded under IAS 36, which related to the Company’s interest in Wind.
The reconciliation table adjustments in 2005 and 2006 includes the increase in net income equal to €947 million and €775 million related to the disposal of 62.75% and 37.25% ownership interest in Wind in 2006 and 2005 respectively , which was recorded at a lower carrying amount under U.S. GAAP as a result of the above impairment charge.
F-87
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23.8 Business combinations, goodwill and other intangible assets
Pursuant to an exemption provided by IFRS 1, the Company elected not to restate business combinations completed prior to January 1, 2004.
Under U.S. GAAP, the Company follows Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141), which requires the purchase method of accounting to be used for all business combinations, initiated after June 30, 2001. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination.
Differences under IFRS-EU and US GAAP resulted to the extent of pre-existing differences between Italian GAAP and US GAAP arising primarily from the allocation of excess cost to assets acquired and liabilities assumed and from the goodwill amortization until January 1, 2004 not permitted under US GAAP, following the adoption of SFAS No. 142, effective January 1, 2002.
When the Company consolidates the assets and liabilities of an acquired subsidiary that is not wholly owned, the fair value adjustments are limited to the amount attributable to the Company’s ownership percentage; therefore, under U.S. GAAP minority interests represent the minority’s share of the carrying amount of the subsidiary’s net assets; while, under IFRS, the minority’s proportion is measured at fair value of such net assets at the date of the business combination.
If an acquired company has a deficit in historical shareholders’ equity, the minority interests’ share of the acquired company could be presented as a direct reduction of the consolidated equity, or as goodwill to the extent that the minority shareholders’ have not a binding obligation to compensate the cumulative losses. The Company presented the deficit of the shareholders’ equity attributable to minority interests’ as a direct reduction of its consolidated equity and wholly recognizes the acquired enterprise’s results to the extent of such direct reduction from consolidated equity.
The Company follows Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 prohibits the amortization of all goodwill and intangible assets with indefinite useful lives, and also requires that goodwill included in the carrying value of equity method investments no longer be amortized. Intangible assets, excluding goodwill, that have finite useful lives continue to be amortized over their useful lives.
23.8.1 Camuzzi Purchase Price Allocation
On May 23, 2002, the Company purchased 98.81% of the share capital of Camuzzi Gazometri SpA,for €1,045 million in cash.
Under U.S. GAAP, the Company accounted for such acquisition as a purchase and recorded a customer relationship intangible of €566 million, which is being amortized over 15 years deemed to be appropriate in view of estimated customer turnover, and a license valued at €66 million which is being amortized over 9 years over the duration of the license. If the license is not renewed, the customer relationship continues to exist even though the license is held by another party.
F-88
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the fair value of the assets acquired and liabilities assumed, on a U.S. GAAP basis, at the date of acquisition:
Millions of euro | ||||
Current assets | 479 | |||
Fixed assets, net | 866 | |||
Intangible assets | 632 | |||
Other non-current assets | 98 | |||
Total assets acquired | 2,075 | |||
Current liabilities | (658 | ) | ||
Long-term debt | (228 | ) | ||
Minority interest | (2 | ) | ||
Other non-current liabilities | (142 | ) | ||
Total liabilities assumed | (1,030 | ) | ||
Net assets acquired | 1,045 |
23.8.2 EUFER Acquistion
On June 16, 2003, Enel and Uniòn Fenosa signed an agreement for the acquisition by Enel of 80% of Uniòn Fenosa Energìas Especiales (EUFER), a company that groups the activities of the Spanish operator in the field of energy produced from renewable resources for €178 million, while Uniòn Fenosa held a call option on 30% of the shares exercisable in 2006 and 2007.
The following table summarizes the fair value of the assets acquired and liabilities assumed, on a U.S. GAAP basis, at the date of acquisition:
Millions of euro | ||||
Current assets | 46 | |||
Fixed assets, net | 168 | |||
Goodwill | 123 | |||
Other non-current assets | 39 | |||
Total assets acquired | 376 | |||
Current liabilities | (47 | ) | ||
Long-term debt | (135 | ) | ||
Minority interest | (14 | ) | ||
Other non-current liabilities | (2 | ) | ||
Total liabilities assumed | (198 | ) | ||
Net assets acquired | 178 |
For U.S. GAAP purposes the goodwill of €123 million recognized pursuant to the acquisition was assigned until to the exercise of the call option within the International sector and it was not amortized.
Following the exercise on May 30, 2006 of the call option, mentioned above, on 30% of the EUFER share by Uniòn Fenosa the Enel investment declines to 50% of EUFER share capital and the original amount of goodwill was derecognized for €46 million. Since this date EUFER is jointly controlled together with third-parties, proportionally consolidated under IFRS-EU and the remaining part of goodwill of €77 million is included in the carrying value of equity method investments under US GAAP.
F-89
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23.8.3 Wind Acquisition
On March 20, 2003, Enel reached an agreement for the acquisition of the 26.6% share in Wind’s capital stock held by the France Telecom Group (France Telecom), thus achieving the full ownership of Wind. The price paid was €1,389 million and the purchase agreement included the cancellation of the call option held by France Telecom giving France Telecom the right to increase its share in Wind to 44%. The agreement provided for payments of additional consideration to France Telecom in case Enel should sell Wind shares before December 31, 2004 receiving a cash price per share higher than that paid by Enel to France Telecom. The transfer of the shares and the payment of the price, in addition to the transfer of the €175 million subordinated loan, took place on July 1, 2003.
The following table summarizes the fair value of the assets acquired and liabilities assumed, on a U.S. GAAP basis, at the date of acquisition:
Millions of euro | ||||
Current assets | 395 | |||
Fixed assets, net | 922 | |||
Goodwill | 855 | |||
Intangible assets | 595 | |||
Other non-current assets | 1,284 | |||
Total assets acquired | 4,051 | |||
Current liabilities | (622 | ) | ||
Long-term debt | (1,855 | ) | ||
Minority interest | (7 | ) | ||
Other non-current liabilities | (178 | ) | ||
Total liabilities assumed | (2,662 | ) | ||
Net assets acquired | 1,389 |
Of the €595 million acquired intangible assets, €408 million was assigned to brands which are determined to have an indefinite useful life and therefore are not amortized, €103 million was assigned to customer relationships and amortized over 5 years, deemed to be appropriate based on estimated customer turnover, and €84 million was assigned to the GSM license and amortized over the residual duration of the license (which will expire in 2018). The resulting goodwill of €855 million was assigned to the Telecommunications Division. The minority interest represented third parties interests in a subsidiary of Wind.
Having been sold in 2005 and 2006, the reconciliation includes in this line the reversal effects of the deconsolidation of Wind.
23.8.4 Maritza Acquisition
On March 5, 2003, as part of the program aimed at expansion of its international operations, the Company acquired 60% of the share capital of the Dutch company Entergy Power Holding Maritza BV, which in turn controls 73% of the Bulgarian company Maritza East III Power Company AD. The latter will carry out the refurbishment and environmental upgrade of a lignite-fired generation plant located in Bulgaria.
F-90
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the fair value of the assets acquired and liabilities assumed, on a U.S. GAAP basis, at the date of acquisition:
Millions of euro | ||||
Current assets | 95 | |||
Fixed assets, net | 57 | |||
Goodwill | 28 | |||
Other non-current assets | 9 | |||
Total assets acquired | 189 | |||
Current liabilities | (53 | ) | ||
Long-term debt | — | |||
Minority interest | (61 | ) | ||
Other non-current liabilities | — | |||
Total liabilities assumed | (114 | ) | ||
Net assets acquired | 75 |
The resulting goodwill of €28 million is assigned within the International sector.
23.8.5 Viesgo Acquisition
On January 8, 2002, as part of the program aimed at expansion of its international operations, the Company acquired 100% of the share capital of Electra de Viesgo SL, the holding company of the Viesgo Group, the fourth largest electricity operator in Spain, for €1,920 million in cash.
The following table summarizes the fair value of the assets acquired and liabilities assumed, on a U.S. GAAP basis, at the date of acquisition:
Millions of euro | ||||
Current assets | 252 | |||
Fixed assets, net | 1,421 | |||
Goodwill | 757 | |||
Other non-current assets | 123 | |||
Total assets acquired | 2,553 | |||
Current liabilities | (457 | ) | ||
Long-term debt | (12 | ) | ||
Minority interest | (19 | ) | ||
Other non-current liabilities | (145 | ) | ||
Total liabilities assumed | (633 | ) | ||
Net assets acquired | 1,920 |
The resulting goodwill of €757 million was assigned within the International sector. Minority interest relates to certain Viesgo subsidiaries.
F-91
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23.8.6 Slovenské elektrárne acquisition
On April 28, 2006 the Company acquired the 66% of the share capital of Slovenské elektrárne for a total consideration of €844 million.
The following table summarizes the fair value of the assets acquired and liabilities assumed, under U.S. GAAP basis, at the date of acquisition:
Millions of euro | ||||
Current assets | 408 | |||
Fixed assets, net | 3,210 | |||
Goodwill | 561 | |||
Intangible assets | 15 | |||
Other non -current assets | 590 | |||
Total assets acquired | 4,784 | |||
Current liabilities | (947 | ) | ||
Long-term debt | (835 | ) | ||
Other non -current liabilities | (2,565 | ) | ||
Total liabilities assumed | (4,347 | ) | ||
Equity deficit of acquired enterprise | 407 | |||
Net assets acquired | 844 |
For U.S. GAAP purposes the goodwill is assigned within the International sector. The minority interests represent the minority’s share of the carrying amount of the Slovenské elektrárne’s net assets. The minority interests’ deficit of the acquired company is presented as a direct reduction of the consolidated equity. Subsequent to the acquisition date, the Company wholly recognizes Slovenské elektrárne’s results until the historical shareholders’ equity attributable to the minority to the extent of such reduction from the consolidated equity.
The following represents the unaudited pro-forma condensed results of operations for the years ended December 31, 2005 and 2006, assuming that the acquisition of Slovenské Elektrárne occurred on January 1, 2005. The pro-forma information is not necessarily indicative of the results of operations, which actually would have occurred had the acquisition been consummated on that dates, nor does it purport to represent the results of operations for future periods.
Year Ended December 31, | ||||||||
2005 | 2006 | |||||||
(millions of euro) | ||||||||
Operating Revenues | 40,882 | 39,513 | ||||||
Net income | 4,510 | 3,738 | ||||||
Earnings per share-basic (euro) | 0.73 | 0.61 | ||||||
Earnings per share-diluted (euro) | 0.73 | 0.61 |
F-92
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23.8.7 Goodwill disclosures
The carrying values of goodwill under U.S. GAAP for the segments are as follows:
Domestic | ||||||||||||||||||||||||
Generation | ||||||||||||||||||||||||
Telecommu- | and Energy | |||||||||||||||||||||||
nications | Management | Domestic Sales | International | Other | Total | |||||||||||||||||||
Balance as of January 1, 2005 | 2,820 | 1,071 | 8 | — | 7 | 3,906 | ||||||||||||||||||
Exchange differences | — | 23 | — | — | — | 23 | ||||||||||||||||||
Disposals(1) | (2,820 | ) | — | — | — | — | (2,820 | ) | ||||||||||||||||
Balance as of December 31, 2005 | — | 1,094 | 8 | — | 7 | 1,109 | ||||||||||||||||||
Reclassification due to change in reorganized segment | — | (1,094 | ) | — | 1,094 | — | — | |||||||||||||||||
Acquisitions | — | — | — | 577 | — | 577 | ||||||||||||||||||
Disposals(2) | — | — | — | (131 | ) | — | (131 | ) | ||||||||||||||||
Impairment | — | — | — | (1 | ) | (2 | ) | (3 | ) | |||||||||||||||
Exchange differences | — | — | — | 33 | — | 33 | ||||||||||||||||||
Balance as of December 31, 2006 | — | — | 8 | 1,572 | 5 | 1,585 | ||||||||||||||||||
(1) | Following the disposal of the 62.75% of stake in Wind, the remaining goodwill, equal to €1,050 million, has been classified at December 31, 2005 in the related investment. In 2006, following the disposal of the remaining 37.25% stake in Wind, the aforesaid goodwill has been disposed. | |
(2) | Following the disposal of the 30% of stake in EUFER, the remaining goodwill equal to €82 million has been classified in the related investment accounted for using the equity method. |
No goodwill has been allocated to any other segment.
23.8.8 Intangible Assets disclosures
The following table summarizes intangible assets from the above business combinations under U.S. GAAP.
Customer | Customer | |||||||||||
Relationships | Licences | Portfolio | ||||||||||
Balance as of January 1, 2004, net | 561 | 122 | 86 | |||||||||
2005 amortization expense | (51 | ) | (11 | ) | (8 | ) | ||||||
Disposals in 2005 | (60 | ) | (72 | ) | (78 | ) | ||||||
Balance as of December 31, 2005, net | 450 | 39 | — | |||||||||
2006 amortization expense | (38 | ) | (7 | ) | — | |||||||
Disposals in 2006 | (19 | ) | — | — | ||||||||
Balance as of December 31, 2006, net | 393 | 32 | — | |||||||||
Accumulated amortization as of December 31, 2006 was €174 million for customer relationships and €33 million for licenses. Accumulated amortization as of December 31, 2005 was €138 million for customer relationships, €26 million for licenses. Trademarks of €408 million, which were not subject to amortization, following the disposal of the 37.25% of stake in Wind have been derecognized.
The estimated amortization of intangible assets recorded under US GAAP in the period from 2007 to 2011 amounts to approximately €225 million.
F-93
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated amortization of intangible assets recorded under IFRS-EU in the period from 2007 to 2011 amounts to approximately €171 million, €132 million, €89 million, €14 million and €4 million, respectively.
The intangible assets acquired during 2006 relate primarily to industrial patents and intellectual property rights, amortized on average residual useful life between three and five years and concessions, licences, trademarks and similar rights amortized on a straight line basis over the term of the average period of the relationship with customers or the concessions.
23.9. Negative goodwill and related adjustments
Under IFRS-EU any excess cost of the acquisition over the acquirer’s interest in the fair value of the net identifiable assets acquired represents goodwill and should be recognized as an asset. When there is an apparent excess of the acquirer’s interest in the fair value of the net assets acquired over the cost of the acquisition, the acquirer is required to undertake a reassessment of the cost of the business combination and fair value of the acquired assets and assumed liabilities and contingent liabilities. If excess continues to exist following the reassessment, it is recognized immediately in profit.
Under U.S. GAAP, the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed is recognized as goodwill. If a negative goodwill exists it should generally be allocated as a pro rata reduction of the non-current assets. If any excess remains after reducing to zero the amounts that otherwise would have been assigned to non-current assets, that remaining excess is recognized as gain in the period in which the business combination is completed, unless the combination involves contingent consideration which would be recognized as an additional element of cost of the acquired entity. In this case, a potentially lesser amount is recognized as gain in the period.
In connection with the acquisition in 2005 of Romanian companies Electrica Banat and Electrica Dobrogea no U.S. GAAP/ IFRS-EU differences have been identified in the companies purchase accounting except for the negative goodwill recognition. Under IFRS-EU the Company recorded in earnings a negative goodwill of €24 million. Under U.S. GAAP this amount was allocated as reduction of tangible assets acquired.
With reference to the acquisition in 2006 of the remaining 40% of stake in Maritza East III Power Holding (the 60% of the share capital was acquired in 2003 ), under IFRS-EU the Company recorded in earnings a negative goodwill of €26 million. Taking into account the differences between IFRS-EU and U.S. GAAP arising until the date of acquisition of a further stake in Maritza East III Power Holding, under U.S. GAAP the adjusted amount (€21 million) was allocated as reduction of non current assets acquired.
The reconciliation table includes an adjustment to the negative goodwill elimination and the recomputation of tangible asset depreciation based on new U.S. GAAP historical cost.
23.10. Deferred Taxes on equity reserves
Under IFRS-EU, the Company is not required to recognize deferred tax on equity reserves, including assets revaluations, if the Company is able to control when and whether the reserves created from the revalued assets are distributed. Therefore, considering that the company has determined that such reserves will not be distributed in the foreseeable future, no provision had to be made.
For U.S. GAAP purposes, as set forth in SFAS No. 109, “Accounting for Income Taxes”, these taxes are required to be recognized since certain criteria have been met. The reconciliation reflects the impact on deferred taxes related to the IFRS-EU — U.S. GAAP differences described above.
F-94
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23.11. Asset retirement obligations
Under IAS 37, the entity must recognize a liability as soon as the decommissioning obligation is created, which is normally when the facility is constructed and the damage to be restored is done. The amount recognized is discounted to its present value and added to the corresponding asset’s cost.
Under U.S. GAAP, Enel follows SFAS No. 143 Accounting for asset retirement obligations (SFAS 143), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that results from the acquisition, construction, development or normal use of assets. Under this standard, a liability is recognized for such an obligation at its fair value when incurred and a corresponding asset retirement cost is added to the carrying amount of the related asset.
Although under U.S. GAAP Asset Retirement Obligations recognition criteria are very similar to IFRS-EU, differences exist with respect to when the recognition criteria are met and how to account for changes in cost estimate or to determine the net present value of the obligations. Under IFRS-EU the discount rate used for measurement of the liability is adjusted at each reporting date whereas under U.S. GAAP the discount rate applied upon initial recognition of the liability is used for changes in estimates that decrease the asset retirement obligation.
23.12. Gain on sale of real estate business
On July 14, 2004, Enel sold 887 office buildings for €1.4 billion, consisting of €1,325 million in cash and €75 million in subordinated debt. Concurrent with the sale, Enel leased back certain properties for periods ranging from six to twenty years at an annual rental of approximately €84 million. In accordance with IFRS-EU, Enel recognized in full, on the date of sale, the net gain representing the difference between the sale proceeds and the net book value of the office buildings including those that were simultaneously leased back. Financing lease accounting was applied under IFRS-EU to those leases that met the criteria for financing lease accounting.
Under U.S. GAAP, considering the subordinated debt, the sale leaseback transaction was accounted for as a financing transaction, with the gain deferred accordingly.
In 2005, Enel extinguished the subordinated debt with the counterparty and consequently the sale-leaseback transaction qualified for sales recognition and the leaseback was classified as an operating lease and leases meeting capital lease criteria have been accounted for as capital leases. The gain in excess of the net present value of the minimum lease payments was recognized in 2005, and the remaining gain is deferred and recognized over the lease term.
The reconciliation includes the adjustment to the financial statements for the gain deferred over the life of the operating lease.
23.13. Investments in Equity Securities — unlisted equity investments
IFRS-EU requires investments in unlisted equity investments for which a fair value can be reasonably estimated to be recorded at fair value with changes in fair value recorded in reserves within shareholders’ equity.
U.S. GAAP requires unlisted equity securities to be recognized at cost with any impairment loss recognized in earnings.
23.14. Transfer of financial assets
Under IFRS-EU the recognition criteria for sale of investments in associates are accounted for under IAS 18, “Revenue recognition”. Under U.S. GAAP, such transactions are accounted for in accordance with SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. As such, the accounting criteria differ in that IFRS accounting treatment is based on the transfer of the risks and rewards whereas
F-95
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
U.S. GAAP specifies three conditions, all of which must be met, for the transferor to have surrendered control over transferred assets: the transferred assets have been isolated from the transferor; b) the transferee has the right to pledge or exchange the assets it acquired; and c) the transferor does not maintain effective control over the transferred asset.
If the condition mentioned above are met, the transfer is qualified as a sale to the extent that a consideration, other than beneficial interest in transferred assets, is received in exchange.
In December 2006 Enel sold its 26.1% in Weather: the agreement envisaged the sale of 10% of Weather to wholly-owned Weather subsidiary and the remaining 16.1% to its parent company Weather Investment II S.à.r.l.
The price agreed amounted to €1,962 billion; a part of this price, amounting to €1 billion was settled by a payment, while the remaining part, amounting to €962 million, will be settled within 18 months of the transfer; the portion to be settled is secured by a pledge of the 26.1% of Weather share capital in favor of Enel.
As the conditions mentioned above were not wholly met, the provision of SFAS No. 140 do not allow the derecognition of Weather investment for the purpose of U.S. GAAP.
Accordingly, the gain of €2 million recognized under IFRS-EU pursuant to the transfer has been reversed under US GAAP.
23.15. Onerous Contracts
Under IFRS-EU, the Company recognized the expected losses rising from non-cancellable onerous contracts. In such circumstances, under U.S. GAAP, it is generally not permitted to recognize the aforesaid expected losses arising from onerous contracts. Therefore, the reconciliation includes adjustments to eliminate provisions that did not meet the recognition criteria under U.S. GAAP.
However, with regard to the accounting for non-cancellable onerous contract acquired in a business combination, both U.S. GAAP and IFRS-EU require an acquiring company to include in the purchase price allocation a provision for losses that it expects to incur on onerous contract held by the acquired company. The subsequent measurement is at current market rates under IFRS, whereas under U.S. GAAP measurement is made at interest rate used at the time of initial recognition. The reconciliation also includes the effect of the different method adopted to reverse the aforesaid provision in the statement of income.
23.16. Other differences
The heading includes residual differences with a minor impact on the reconciliation.
23.17. Classification Differences
Jointly controlled entities
IFRS-EU allow the Company to account for investments in jointly controlled entities using either the equity method or proportionate consolidation; Enel, in such circumstances, adopted the proportionate consolidation.
U.S. GAAP require jointly controlled entities to be accounted for using the equity method; proportionate consolidation is not permitted. Accordingly, the condensed Consolidated Balance Sheet and condensed Consolidated Statement of Income prepared in accordance with U.S. GAAP reflect the aforesaid U.S. GAAP criteria.
Discontinued operations
Following the disposal of investments in Wind and Terna, which took place on August 11, 2005 and September 15, 2005 respectively, these entities were deconsolidated as from those dates and the financial performance achieved up to the disposal date is reported under IFRS-EU as discontinued operations.
F-96
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As the Company still maintains significant continuing cash flows with Terna, the performance of this entity included within discontinued operations under IFRS-EU in 2005 and 2004, has been reclassified as continuing operations for U.S. GAAP purposes.
Following the disposal of the remaining 37.25% stake in Wind which took place in February 8, 2006, the Company does not maintain continuing significant involvement in the operations of Wind and therefore for U.S. GAAP purposes it considers the performance of Wind as discontinued operation in 2005 and 2004.
Nuclear fuel
Under IFRS-EU the Company classified the nuclear fuel in Inventory, while under U.S. GAAP the aforesaid fuel constitutes a depreciable asset. Therefore, for the purposes of the U.S. GAAP classification, €121 million have been reclassified from Inventory to Property, plant and equipment as of December 31, 2006.
Asset retirement obligation: accretion expense
With regard to the asset retirement obligation, under IAS 37 the change in liability due to the passage of time is recognized in the consolidated statements of income as a financial expense; while, under U.S. GAAP, according to SFAS No. 143, par. 14, the aforesaid expense is classified as an operating expense.
Pension plans: Interest costs
The interest cost component recognized in the period is determined as the increase in the projected benefit obligation due to the passage of time. Under IAS 19 such interest cost is recognized as a financial expense; while, under U.S. GAAP, according to SFAS No. 87 requirements, the aforesaid interest cost should be reclassified to operating expenses.
23.18. Recently issued U.S. Accounting Pronouncements
Fair Value Measurements. In September 2006 FASB issued Statement No. 157 — Fair Value Measurements. This Statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”, provides additional guidance for measuring fair value of assets and liabilities (by introducing a fair value hierarchy based on inputs to valuation techniques) and expands disclosures about fair value measurements. This Statement does not expand the use of fair value measurements.
This Statement shall be effective for financial statements beginning after November 15, 2007. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for the year. This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except as for some specified financial instruments, to which retrospective application applies. The Company is in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements.
Uncertainty in Income Taxes. In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” — an interpretation of FASB Statement No. 109”. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The aforesaid Statement does not prescribe a recognition threshold or measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. To address diversity in practice that exists in the accounting for income taxes, FIN 48 clarifies the application of Statement 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements (the “more-likely-than-not” recognition threshold). Additionally, this Interpretation provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods and transition. FIN 48 also revises disclosure
F-97
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
requirements and introduces a prescriptive annual, tabular roll-forward of the unrecognized tax benefits. This Interpretation shall be effective for fiscal years beginning after December 15, 2006. Earlier adoption is permitted provided the enterprise has not yet issued financial statements for that year. The Company is in the process of evaluating the impact of FIN 48 on its consolidated financial statements.
(24) | ADDITIONAL U.S. GAAP DISCLOSURES |
(a) | Accounting for Income Taxes |
A detail of the provision for income taxes under U.S. GAAP for the years ended December 31, 2006, 2005 and 2004 is as follows:
2006 | 2005 | 2004 | 2006 | |||||||||||||
(millions of euro) | (millions of | |||||||||||||||
U.S. dollars) | ||||||||||||||||
Current | 1,657 | 1,398 | 1,525 | 2,187 | ||||||||||||
Deferred | 328 | 593 | 763 | 433 | ||||||||||||
Total | 1,985 | 1,991 | 2,288 | 2,620 |
All but an insignificant amount of income before tax and tax expenses is from Italian sources.
The difference between the theoretical and effective tax rate for the years ended December 31, 2006, 2005 and 2004 is due to the following factors:
2006 | 2005 | 2004 | ||||||||||
Theoretical tax rate* | 33.0 | % | 33.0 | % | 33.0 | % | ||||||
Permanent differences and minor items | (4.0 | )% | (3.3 | )% | (0.6 | )% | ||||||
Difference on estimated income taxes from prior years | (0.1 | )% | 0.3 | % | (0.3 | )% | ||||||
Regional taxes (IRAP) | 5.6 | % | 7.6 | % | 7.4 | % | ||||||
Income tax rate for the year | 34.5 | % | 37.6 | % | 39.5 | % | ||||||
* | Italian Corporate income tax rate of 33%. |
F-98
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of the deferred tax assets (liabilities) under U.S. GAAP as of December 31, 2006 and 2005 are as follows:
For the Years Ended December 31, | ||||||||||||
2006 | 2005 | 2006 | ||||||||||
(millions of euros) | (millions of | |||||||||||
U.S. dollars) | ||||||||||||
Deferred tax assets: | ||||||||||||
Other post retirement benefits accounting | 9 | — | 12 | |||||||||
Assets write-downs | 57 | — | 75 | |||||||||
Provision for litigation and contingent liabilities | 542 | 515 | 715 | |||||||||
Tax loss carryforwards | 317 | 343 | 418 | |||||||||
Customers’ connection fees | 813 | 681 | 1,073 | |||||||||
Measurement of financial assets | 44 | 146 | 58 | |||||||||
Deferred Income | 165 | 174 | 218 | |||||||||
Other | 700 | 821 | 924 | |||||||||
Total deferred tax assets | 2,647 | 2,680 | 3,493 | |||||||||
Valuation allowances | (252 | ) | (218 | ) | (333 | ) | ||||||
Total deferred tax assets, net | 2,395 | 2,462 | 3,160 | |||||||||
Deferred tax liabilities: | ||||||||||||
Other post retirement benefits accounting | — | (2 | ) | — | ||||||||
Assets write-downs | (228 | ) | (172 | ) | (301 | ) | ||||||
Revaluation of utility plant | (100 | ) | (95 | ) | (132 | ) | ||||||
Accelerated depreciation of utility plant | (1,740 | ) | (1,640 | ) | (2,296 | ) | ||||||
Capitalization of interest on utility plant | (463 | ) | (460 | ) | (611 | ) | ||||||
Equity reserves | (288 | ) | (282 | ) | (380 | ) | ||||||
Other | (376 | ) | (20 | ) | (496 | ) | ||||||
Total deferred tax liabilities | (3,195 | ) | (2,671 | ) | (4,216 | ) | ||||||
Net deferred tax liabilities | (800 | ) | (209 | ) | (1,056 | ) | ||||||
During the years ending December 31, 2005, and 2006 the valuation allowance decreased in 2005 by €377 million, and then increased in 2006 by €34 million.
The tax loss carry forwards as of December 31, 2006 expire as follows:
• | After 2011: €213 million; | |
• | No limits: €763 million. |
It is not practicable to determine the amount of deferred tax liabilities, if any, relating to the undistributed earnings of Company’s foreign operations.
F-99
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2006, 2005 and 2004, respectively, income tax has been allocated to each item in Other Comprehensive Income as follows:
2006 | 2005 | 2004 | ||||||||||
(millions of euro) | ||||||||||||
Minimum Pension Liabilities | 17 | (17 | ) | 20 | ||||||||
Application of SFAS 158 | 23 | — | — | |||||||||
Investments in equity securities | 7 | 2 | (2 | ) |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and tax loss carryforwards utilized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences and tax carryforwards, net of the existing valuation allowances at December 31, 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
(b) | Earnings per Share |
The computation of basic and diluted earnings per share for the years ended December 31, 2006, 2005 and 2004, in accordance with U.S. GAAP, are as follows:
2006 | 2005 | 2004 | 2006 | |||||||||||||
(millions of euro)* | (millions of | |||||||||||||||
U.S. dollars) * | ||||||||||||||||
Income available to common shareholders | 3,719 | 4,698 | 1,031 | 4,908 | ||||||||||||
Weighted average shares — basic (in millions) | 6,170 | 6,142 | 6,084 | 6,170 | ||||||||||||
Weighted average shares — diluted (in millions) | 6,235 | 6,171 | 6,186 | 6,235 | ||||||||||||
Earnings per share-basic | 0.60 | 0.76 | 0.17 | 0.79 | ||||||||||||
Earnings from continuing operations per share (basic and diluted) | 0.60 | 0.63 | 0.65 | 0.79 | ||||||||||||
Earnings from discontinued operations per share (basic and diluted) | — | 0.13 | (0.48 | ) | — |
(*) | Except per-share data which is in euro and U.S. dollars respectively. |
(c) | Effects of Regulation |
The Company is subject to the regulatory control of the Energy Authority with additional oversight provided by numerous laws, decrees and codes. The current regulatory tariff structure provides the Company with recovery of certain levels of cost through a price cap framework, and not necessarily its specific cost of providing service. Accordingly, SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation”, which relates to an entity whose rates are regulated on an actual cost basis, is not currently applicable to these Consolidated Financial Statements.
F-100
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(d) | Stock option compensation cost |
The following table presents additional information regarding stock option plans.
Number of | Average Grant | |||||||
Options | Price (euro) | |||||||
Outstanding at January 1, 2002 | 24,706,668 | 7.6 | ||||||
Granted | 41,748,500 | 6.4 | ||||||
Exercised | — | — | ||||||
Forfeited | — | — | ||||||
Outstanding at December 31, 2002 | 66,455,168 | 6.9 | ||||||
Outstanding at January 1, 2003 | 66,455,168 | 6.9 | ||||||
Granted | 47,624,005 | 5.2 | ||||||
Exercised | — | — | ||||||
Forfeited | — | — | ||||||
Outstanding at December 31, 2003 | 114,079,173 | 6.2 | ||||||
Outstanding at January 1, 2004 | 114,079,173 | 6.2 | ||||||
Granted | 38,527,550 | 6.2 | ||||||
Exercised | (40,446,675 | ) | 6.0 | |||||
Forfeited | (17,309,226 | ) | 6.8 | |||||
Outstanding at December 31, 2004 | 94,850,822 | 6.2 | ||||||
Outstanding at January 1, 2005 | 94,850,822 | 6.2 | ||||||
Granted | 28,757,000 | 7.3 | ||||||
Exercised | (53,549,782 | ) | 4.1 | |||||
Forfeited | (29,639,535 | ) | 7.2 | |||||
Outstanding at December 31, 2005 | 40,418,505 | 5.9 | ||||||
Outstanding at January 1, 2006 | 40,418,505 | 5.9 | ||||||
Granted | 31,790,000 | 6.8 | ||||||
Exercised | (19,124,633 | ) | 5.6 | |||||
Forfeited | (680,590 | ) | 6.4 | |||||
Outstanding at December 31, 2006 | 52,403,282 | 6.6 |
Under U.S. GAAP, Enel in previous years accounted for stock-based compensation plans in accordance with SFAS 123 “Accounted for Stock-Based Compensation” and applied the recognition and measurement provisions of APB 25, “Accounting for Stock Issued to Employees”. Accordingly, stock-based employee compensation cost was recognized based on the intrinsic value (the excess of the market price of the underlying common stock). In addition, the Company also presented the pro-forma disclosure required by SFAS No. 123 as amended by SFAS No. 148 “Accounting for Stock Base Compensation” — Transition and Disclosure.
Effective from January 1, 2006 ENEL adopted SFAS No. 123(R). The aforesaid statement requires compensation expense relating to share-based payments to be recognized in the net income using a fair value measurement method. Under the fair value method, the estimated fair value of awards is charged to income statement over the vesting period.
Enel applied the modified prospective transition method as prescribed in SFAS No. 123(R) and, therefore, prior period were not restated.
F-101
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On the basis of this method, this statement is to be applied to new awards granted after the time of adoption, as well as to the unvested portion of previously granted equity-based awards for which the requisite service had not been rendered as of January 1, 2006.
Share-based compensation expense in 2006 reduced the company’s result of operations as follows:
2006 | ||||
(millions of euro) | ||||
Income before income taxes | (22 | ) | ||
Net income | (15 | ) | ||
Basic earnings per share | 0.00 | |||
Diluted earning per share | 0.00 |
The following pro-forma net income and earnings per share information has been determined as if Enel had accounted for its share-based compensation awards issued using the fair value method in 2005 and 2004, as required by the provision of SFAS No. 123 for additional disclosure purposes.
2005 | 2004 | |||||||
Net income in accordance with U.S. GAAP, as reported | 4,698 | 1,031 | ||||||
Stock-based employee compensation expense, as reported | 165 | 139 | ||||||
Stock-based employee compensation expense under fair value | (179 | ) | (122 | ) | ||||
Pro forma net income | 4,684 | 1,048 |
The Company’s pro forma earnings per share for the years ended December 31, 2005 and 2004, had compensation costs, relating to the plan launched by the Parent, recorded in accordance with SFAS No. 123, as amended by SFAS No. 148, are presented below:
2005 | 2004 | |||||||||||||||
As Reported | Pro Forma | As Reported | Pro Forma | |||||||||||||
Basic and diluted earnings per share | 0.77 | 0.76 | 0.17 | 0.17 |
(25) | SUBSEQUENT EVENTS |
Agreements for the construction of wind plants in the United States and Canada
On January 5, 2007 Enel, acting through its subsidiary Enel North America, signed a series of agreements for the construction of two wind plants in the United States and Canada and for the supply of the electricity generated by the plants, which will have a maximum capacity of 250 MW and 27 MW respectively.
The Smoky Hills project, in Kansas (USA), will be built in two stages, with the first stage of 100.8 MW scheduled to come on line by the end of 2007. Once fully implemented, the facility will have maximum capacity of 250 MW.
NeWind, a wholly-owned subsidiary of Enel North America operating in Canada, signed a contract for the supply of electricity to Newfoundland and Labrador Hydro through the construction and operation of the 27 MW St. Lawrence wind project, which will generate about 100,000 MWh a year. It is scheduled to begin operations by the end of 2008.
Increase in stake in Fortuna
On February 2, 2007 Enel, acting through its Dutch subsidiary, Enel Investment Holding, acquired the entire share capital of the Panamanian-registered company Globeleq Holdings Fortuna from Globeleq, which operates in the electricity sector in emerging markets. As a result of this transaction, Enel, which is responsible for the operational management of the “Fortuna” hydroelectric plant, has increased its indirect holding in the Panamanian
F-102
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
hydroelectric generation company from 24.5% to 49%. Enel Investment Holding paid $161.3 million for the stake, equal to about €124.5 million at current exchange rates.
Acquisition of Endesa shares
On February 27, 2007 Enel, acting through its subsidiary Enel Energy Europe (EEE), purchased 105,800,000 shares of Endesa SA (Endesa), Spain’s leading electricity generator, equal to 9.99% of that company’s share capital, at a price of €39 per share for a total of €4,126.2 million. The Endesa shares, acquired through an off-market transaction with institutional investors, were financed with cash flow and existing lines of credit.
On March 1, 2007, EEE entered into a share swap agreement with UBS Limited in which the underlying is represented by a maximum of 74,112,648 shares of Endesa (7% of the share capital).
The agreement envisages cash settlement, with an option for EEE to request physical settlement in Endesa shares subject, among other requirements, to obtaining the necessary administrative authorizations to carry out the acquisition. To perform the share swap, EEE has already obtained financing for the same total of 74,112,648 Endesa shares at an average price of €39 per share.
On the same date, Enel, in addition to requesting from the relevant bodies of the Spanish Ministry for Industry, Tourism and Trade authorization to exercise the rights in respect of the entire shareholding owned in Endesa, also asked the Comisión Nacional de la Energia (the Spanish National Energy Commission — CNE):
• | to authorize the acquisition of Endesa shares amounting to more than 10% of that company’s share capital up to the threshold (currently set at 24.99% of the share capital) beyond which it is obligatory to launch a public tender offer; | |
• | to remove any restrictions on Enel’s exercise of its rights as a shareholder of Endesa with regard to the qualification of the latter as a “principal operator”. |
Subsequently, in three transactions carried out on March 1, 2 and 12, EEE entered into share swap agreements with Mediobanca in which the underlying is represented by a maximum of 84,488,949 shares of Endesa (7.99% of the share capital). Settlement procedures are the same as those for the other derivative contract with UBS.
On March 26, 2007 Enel signed an agreement with Acciona, one of the leading Spanish groups operating at the international level in the development and operation of infrastructure, services and energy from renewables, for the joint management of Endesa, which thanks to synergies and the exchange of experience will contribute to the future growth of the Spanish electricity company. The agreement is subject to the condition that E.On does not acquire more than 50% of Endesa.
On April 2, 2007 Enel and Acciona signed an agreement with E.On under which the latter agrees to withdraw its tender offer for Endesa, and Enel and Acciona agree to transfer to E.On a number of assets owned by Endesa and Enel, subject to acquiring effective control of Endesa through a tender offer, in line with the agreement of March 26, 2007.
The assets will be transferred to E.On once Acciona and Enel have control of Endesa, the transaction is approved by the corporate bodies of Endesa and it has received the necessary administrative authorizations.
On April 11, 2007, following the announcement of the failure of the E.On public tender for Endesa, Enel (acting through its subsidiary Enel Energy Europe) and Acciona presented Spain’s Comisión Nacional del Mercado de Valores (CNMV) a joint offer for 100% of Endesa shares.
The main terms of the offer are as follows:
• | the price offered to Endesa shareholders is €41.30 per share, entirely in cash, equal to the price of €41 per Endesa share announced by the offerors on March 26, 2007, increased by interest of3-month Euribor for the period from March 26, 2007 to May 31, 2007 (rounded up). The offer price will be reduced by the amount of |
F-103
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
any dividends (including any extraordinary dividends or similar payments) that should be distributed by Endesa between the date of the submission of the tender and the date of publication of the results of the tender (both dates are included for the purposes of any adjustment); |
• | the effectiveness of the tender is subject to the complete satisfaction of the following conditions, which may however be waived: |
• | the tender offer is accepted by shareholders representing a percentage of Endesa share capital that, together with the shares already held directly and indirectly by the offerors, exceeds 50%; | |
• | that before the end of the tender acceptance period: (a) the shareholders’ meeting of Endesa approves amendments to a number of articles of the bylaws that restrict shareholder voting rights and removes any other impediment to control of the company with regard to the membership of the board of directors; (b) all resolutions in this regard have been entered in the “Registro Mercantil” of Madrid; | |
• | the offerors notify the concentration resulting from the tender to the European Commission in accordance with the provisions of regulations governing the control of concentrations between undertakings (Regulation no. 139 of January 20, 2004) and to the antitrust authorities of any other country involved; | |
• | the tender is subject to receipt of a series of administrative authorizations. To this end, the offerors will make all necessary notifications to the Comisión Nacional de Energía and the Secretaría General de Energía of the Spanish Ministry for Industry, Tourism and Trade, as well as to the administrative and regulatory authorities of any other country involved; | |
• | in view of the fact that Endesa shares are listed on the New York Stock Exchange (in the form of American Depositary Shares) and are also listed on the offshore exchange (Registro de Valores Extranjeros) of Santiago in Chile, the offerors must perform all necessary formalities for the presentation or extension of the tender to these jurisdictions. |
On April 25, following the exclusion of the Viesgo Group companies from the category of principal operators in the Spanish electricity market, the restrictions on Enel’s rights as a shareholder of Endesa were removed.
On April 26, the CNE therefore authorized Enel to increase its holding in Endesa up to 24.99%.
On April 27, the Spanish government authorized the exercise of the shareholder rights in respect of the equity investment in Endesa.
On May 3, Enel and Acciona asked the CNE to authorize the acquisition of Endesa shares, which will be contributed to the tender offer. Enel and Acciona also asked the CNE to authorize the application of the provisions of the agreement between the two companies concerning the joint control of Endesa.
On May 17, 2007 Enel, through its subsidiary Enel Energy Europe (EEE), obtained by the Spanish Cabinet of Ministers the authorization to exercise the voting rights associated with shares acquired or underwritten representing up to a maximum of 24.99% of the share capital of Endesa. The Spanish Cabinet of Ministers also established that, in the event the limitation to the voting rights in Endesa’s bylaws is terminated, and EEE is able to exercise voting rights in excess of 10% of the share capital of Endesa, or in the event EEE otherwise appoints members of the Endesa’s Board of Directors, the authorization is conditioned upon compliance by EEE with some information duties towards the General Secretary of Energy with regard to the corporate strategy, agreements, resolutions and actions it may undertake that affect material interests in Spanish public safety.
On June 1, EEE executed the Share Swap Transaction Agreements entered into with UBS Limited and Mediobanca on a total of 158,601,597 shares in Endesa, S.A. which represents 14.98% of the capital stock, by means of physical delivery of the Endesa shares. As a result of the execution of this transaction (on June 6) EEE acquired 158,601,597 shares of Endesa (74,112,648 from the equity swap with UBS and the remaining 84,488,949
F-104
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
from the equity swap with Mediobanca), thus raising its stake in Endesa to a total of 264,401,597 shares and moving from 9.993% to 24.972% of the share capital.
Restructuration of Group’s debt
In order to meet the financial commitments of the above transaction, on April 9 the Board of Directors of Enel SpA also voted to obtain a syndicated line of credit totaling €35 billion. The facility, whose amount is sufficient to fully meet the obligations in respect of the acquisition of Endesa shares, is structured in three tranches with the following characteristics: tranche A of €10 billion maturing at 1 year, with an option to extend the maturity for a further 18 months; tranche B of €15 billion at 3 years; tranche C of €10 billion at 5 years. The interest rate will vary in relation to Enel’s rating. The line of credit may be repaid early in full or in part without penalty.
For the purposes of financing the transaction as well as restructuring the Group’s debt, the Board of Directors also approved:
• | the renewal of the program for the issue of medium-term notes, raising the amount from €10 to €25 billion; | |
• | the issue by Enel, as part of the above program, of one or more bonds in euro or foreign currency to be placed with institutional investors by December 31, 2007, in the total amount of €5 billion. |
On June 13, 2007 Enel has launched on the market a multi-tranche bond for €3.35 billion and 1.1 billion pounds (GBP), equal to approximately €5 billion, as part of its aforesaid Global Medium Term Notes programme.
The operation, which was led by a syndicate of banks made up by Goldman Sachs and Morgan Stanley as Global Coordinators and Banca IMI, BBVA, Banco Santander, Credit Suisse, Deutsche Bank, Dresdner Kleinwort, Royal Bank of Scotland, UBS and Unicredit as joint-bookrunners, has met requests for more than double the amount issued and is structured in the following 5 tranches:
• | 1.0 billion euro seven-year floating-rate note, priced at 99.757 equal to 0.20% over 3 months Euribor plus 0.24% yield over the 3 months Euribor; | |
• | 1.5 billion euro 5.25% ten-year fixed-rate note, priced at 99.582, equal to a spread of 0.34% on the swap rate with similar maturity, with a 5.305% yield; | |
• | 850 million euro 5.625% twenty-year fixed-rate note, priced at 99.834, equal to a spread of 0.55% over the swap rate with similar maturity, with a yield of 5.639%; | |
• | 550 million pound (GBP) 6.25% twelve-year fixed-rate note, priced at 99.671, equal to a spread of 0.83% over the Gilt with similar maturity, for a yield of 6.194%; | |
• | 550 million pound (GBP) 5.75% thirty-year fixed-rate note, priced at 98.286, equal to a spread of 0.94% over the Gilt with similar maturity, for a yield of 5.789%. |
Memorandum of Understanding with RosAtom
On March 14, 2007, Enel and the Federal Atomic Energy Agency of the Russian Federation (RosAtom) signed a Memorandum of Understanding for the development of the electricity system and nuclear generation in Russia and Central and Eastern Europe.
With the agreement, RosAtom and Enel have expressed their intention to develop a cooperative relationship involving joint investment projects and stakes in the assets related to:
• | the construction of new nuclear power plants; | |
• | the operation and upgrading of electricity transport networks; | |
• | the operation of existing nuclear power plants. |
F-105
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Acquisition of AMP Resources
On March 20, 2007, Enel, acting through its subsidiary Enel North America, acquired AMP Resources LLC (AMP) from AMP Capital Partners and another minority investor. The acquisition includes one operational geothermal project and four projects at an advanced development stage for a total capacity of about 150 MW that Enel North America will complete over the next four years.
The projects, located in Nevada, California and Utah, should generate sufficient renewable power to meet the annual electricity demand of about 100,000 US households once they are fully operational.
Partnership with Duferco
On March 21, 2007 Enel signed a partnership agreement with Duferco, one of Europe’s leading steel groups and the top manufacturer of steel and semifinished steel products in Wallonia (Belgium).
The partnership will start with the development of a project to build a combined-cycle gas plant with a net capacity of about 420 MW and a power plant that reuses gases produced in the steel manufacturing process with a capacity of about 65 MW at the Martinelle-Marchienne industrial site. In addition to covering the Duferco Group’s energy needs in Belgium, the power plants will provide new generation capacity for the entire market. To this end, the two partners also plan to establish an electricity sales operation, as well as to develop additional opportunities in other projects in the region.
Archimede Project with ENEA
On March 26, 2007 Enel signed a protocol of understanding with Italy’s National Agency for New Technologies, Energy and the Environment (ENEA) on the operational implementation of the Archimede Project. The initiative involves the construction of a solar plant at Enel’s power station at Priolo Gargallo (Siracusa). It will be the world’s first integration of a gas combined-cycle power station with a thermodynamic solar plant, which will boost the station’s capacity by about 5 MW. The investment will total more than €40 million, with the facility expected to enter service by the end of 2009.
Acquisition of Yukos assets in joint venture with Eni
On April 4, 2007 Enel, acting through the Enineftgaz Consortium (in which Enel has a stake of 40% and Eni 60%), won the tender for the acquisition from Yukos of a set of gas assets, with an offer of about $5.83 billion. The amount that Enel has undertaken to pay at the end of the tender is equal to $852 million.
The main assets are:
• | 100% of OAO Arcticgaz; | |
• | 100% of ZAO Urengoil; | |
• | 100% of OAO Neftegaztechnologia; | |
• | 20% of OAO Gazprom Neft (which will be entirely transferred to Eni). |
Arcticgaz, Urengoil and Neftegaztechnologia have hydrocarbon exploration and production licenses for the region of Yamal Nenets, the largest gas production area in the world. These companies have total reserves of gas and oil equal to about 5 billion barrels of oil equivalent.
The acquisition marks Enel’s entry into the important upstream segment of the natural gas market and lays the foundations for Enel to operate as a vertically integrated player in that sector.
F-106
ENEL S.P.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Acquisition of wind plants in Greece
On May 15, 2007 Enel has signed an agreement for the acquisition in Greece of wind plants either already in service or under development with a total capacity of 127 MW. In particular, the contract regards the acquisition of wind plants with a capacity of 84 MW already in service and 43 MW under construction. The plants are owned by the Greek group Copelouzos (50%), already an Enel partner in Enelco, which recently submitted the winning tender offer for the construction of a combined cycle gas plant of 430 MW at Livadia in central Greece, and by the International Constructional Group (50%).
The acquisition places Enel among the top three operators in the wind power production market, with plants distributed throughout Greece.
Acquisition of generation capacity in Russia
On June 6, 2007 Enel has acquired a 25.03% stake in JCS Fifth Generation Company of the Wholesale Electricity Market (“OGK-5”, four thermal power plants with a total capacity of about 8,700 MW) at an auction held in Moscow. On June 22, 2007 Enel has acquired a further 4.96% stake of the company. The total consideration for both acquisitions amounts to €1,330 million.
Established in 2004 as part of the industry reform, OGK-5 is one of six thermal wholesale generation companies in Russia, with assets strategically located in some of the most developed and fastest growing regions of the country, including 2,400 MW of gas fired capacity at Konakovskaya GRES in the Tver Region (Central Russia), 1,290 MW of gas fired capacity at Nevinnomysskaya GRES in the Stavropol Region (Southern Russia), 3,800 MW of coal fired capacity at Reftinskaya GRES in the Sverdlovsk Region (Urals) and 1,182 MW of gas fired capacity at Sredneuralskaya GRES in the Sverdlovsk Region (Urals).
Acquisition of distribution network in Romania
On June 11, 2007 Enel and Electrica SA, a company entirely owned by AVAS, signed the contract for the privatisation of the majority stake in the distribution company Electrica Muntenia Sud (EMS), which owns and operates the electricity distribution grid of Bucharest. Through this transaction, valued at 820 million euros, Enel will acquire directly from Electrica, against the amount of 395 million euros, 50% of the shares, after which it will acquire 67.5% (63.3% if the Property Fund will exercise its preemption rights over the shares related to the capital increase) of the company further to subscription of new titles via a capital increase in amount of 425 million euros, which will be used to finance the company’s investment plan (1 billion euros in the next 15 years).
F-107
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Wind Telecomunicazioni SpA
1 | We have audited the consolidated statements of income, of changes in shareholders’ equity and of cash flows of Wind Telecomunicazioni SpA (an Italian corporation) and its subsidiaries (the “Company”) as of December 31, 2004 for the year then ended (expressed in Euro). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. |
2 | We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. |
3 | The consolidated financial statements as of December 31, 2004 do not include comparative information and notes for 2003 that would be required to present the financial position, the result of operations and the cash flows in conformity with International Financial Reporting Standards as adopted by EU. As described in the notes, in fact, these consolidated financial statements are intended to comprise the comparative financial statements to the year ended December 31, 2005, which will be the first IFRS compliant consolidated financial statements. |
4 | In our opinion, except for the matter reported in the previous paragraph regarding the omission of comparative financial information for 2003, the consolidated financial statements referred to above present fairly, in all material respects the results of the operations and the cash flows of Wind Telecomunicazioni SpA and its subsidiaries for the year ended December 31, 2004, in conformity with the International Financial Reporting Standards issued by the International Accounting Standards Board as adopted by EU. |
5 | We draw your attention to the matters regarding deferred tax assets and intangible assets as described in the notes to the consolidated financial statements. |
6 | International Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in the notes to the consolidated financial statements under the caption US GAAP schedules and additional disclosures. |
Rome, 22 June 2006
PricewaterhouseCoopers SpA
Sergio Duca
Partner
F-108
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing onForm 20-F/A and that it has duly caused and authorized the undersigned to sign this amendment to its annual report on its behalf.
Date: November 13, 2007
ENEL S.P.A.
(Registrant)
/s/ Fulvio Conti
Name: Fulvio Conti
Title: Chief Executive Officer