20-F 1 a06-9178_220f.htm ANNUAL AND TRANSITION REPORT OF FOREIGN PRIVATE ISSUERS

 

SECURITIES AND EXCHANGE COMMISSION
FORM 20-F

o                                  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x                               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2005
OR

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                   

OR

o                                  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-9932

ENDESA, S.A.

(Exact name of Registrant as specified in its charter)

Kingdom of Spain

(Jurisdiction of incorporation)

Ribera del Loira, 60
28042 Madrid, Spain

(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

Ordinary shares, nominal value 1.20 each*

 

New York Stock Exchange

American Depositary Shares, each representing the right to receive one ordinary share

 

New York Stock Exchange

 


*                     Listed on the New York Stock Exchange not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the New York Stock Exchange.


Securities registered or to be registered pursuant to Section 12(g) of the Act: None


Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None


The number of issued shares of each class of stock of Endesa, S.A. as of December 31, 2005 was:

Ordinary shares, nominal value 1.20 each: 1,058,752,117

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes x

 

No o

 

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 x

 

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 x

 

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” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x          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 x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

 

No x 

 

 




TABLE OF CONTENTS

 

Page

 

Certain Terms and Conventions

 

 

1

 

 

Presentation of Financial Information

 

 

1

 

 

Forward-Looking Statements

 

 

1

 

 

Item 1.

Identity of Directors, Senior Management and Advisers

 

 

2

 

 

Item 2.

Offer Statistics and Expected Timetable

 

 

2

 

 

Item 3.

Key Information

 

 

2

 

 

Item 4.

Information on the Company

 

 

12

 

 

Item 4A.

Unresolved Staff Comments

 

 

72

 

 

Item 5.

Operating and Financial Review and Prospects

 

 

72

 

 

Item 6.

Directors, Senior Management and Employees

 

 

101

 

 

Item 7.

Major Shareholders and Related Party Transactions

 

 

118

 

 

Item 8.

Financial Information

 

 

119

 

 

Item 9.

The Offer and Listing

 

 

122

 

 

Item 10.

Additional Information

 

 

130

 

 

Item 11.

Quantitative and Qualitative Disclosures about Market Risk

 

 

139

 

 

Item 12.

Description of Securities other than Equity Securities

 

 

157

 

 

Item 13.

Defaults, Dividend Arrearages and Delinquencies

 

 

157

 

 

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

 

 

157

 

 

Item 15.

Controls and Procedures

 

 

157

 

 

Item 16.

Reserved

 

 

157

 

 

Item 16A.

Audit Committee Financial Expert

 

 

157

 

 

Item 16B.

Code of Ethics

 

 

157

 

 

Item 16C.

Principal Accountant Fees and Services

 

 

158

 

 

Item 16D.

Exemptions From the Listing Standards for Audit Committees

 

 

159

 

 

Item 16E.

Purchases for Equity Securities by the Issuer and Affiliated Purchasers

 

 

159

 

 

Item 17.

Financial Statements

 

 

160

 

 

Item 18.

Financial Statements

 

 

160

 

 

Item 19.

Exhibits

 

 

160

 

 

 

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CERTAIN TERMS AND CONVENTIONS

As used in this annual report on Form 20-F, “Endesa”, the “Company” and first person, personal pronouns such as “we”, “us” or “our” refer to Endesa, S.A. and its consolidated subsidiaries which comprise the Endesa Group unless the context otherwise requires. When we use second person, personal pronouns in this report, such as “you” and “your”, we mean exclusively persons who have purchased our American depositary receipts or securities issued or guaranteed by Endesa or one of its consolidated subsidiaries as the context requires.

References to “TW” and “TWh” are to terawatts and terawatt hours, respectively; references to “GW” and “GWh” are to gigawatts and gigawatt hours, respectively; references to “MW” and “MWh” are to megawatts and megawatt hours, respectively; references to “kW” and “kWh” are to kilowatts and kilowatt hours, respectively; and references to “kV” are to kilovolts. References to “Nm3” are to normal cubic meters and references to “bcm” are to billions of cubic meters. Unless otherwise indicated, statistics provided in this annual report with respect to electricity generation facilities are expressed in MW, in the case of the installed capacity of such facilities, and in GWh, in the case of the aggregate annual electricity production of such facilities. One TW = 1,000 GW, one GW = 1,000 MW, and one MW = 1,000 kW. Statistics relating to aggregate annual electricity production are expressed in GWh and are based on a year of 8,760 hours. Statistics relating to our production do not include electricity consumed by our generators. 25.2 thermies are equivalent to a therm.

Energy losses of our Latin American subsidiaries are calculated on a 12-month rolling basis by (i) subtracting the number of GWh of energy sold from the aggregate GWh of energy purchased and self-generated within a given 12-month period and (ii) calculating the percentage that the resulting quantity bears to the aggregate number of GWh of energy purchased and self-generated within the same 12-month period.

PRESENTATION OF FINANCIAL INFORMATION

When we use “euro” or “” in this annual report, we mean the European Union euro, which is Spain’s legal currency. When we use “dollars”, “U.S.$” or “$” in this annual report, we mean United States dollars. The word “billion” refers to one thousand million.

IFRS differs in certain significant respects from Spanish GAAP. As a result, our financial information presented under IFRS is not directly comparable to our financial information presented under Spanish GAAP, and readers should avoid such a comparison.

FORWARD-LOOKING STATEMENTS

This annual report contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements that include the words “expect”, “project”, “anticipate”, “believe”, “should”, “seek”, “intend”, “probability”, “risk”, “target”, “goal”, “objective”, “estimate”, “future” and similar expressions or variations on such expressions. These statements appear in a number of places in this annual report and include statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our business, financial condition or results of operations.

These forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors that may be beyond our control. The accompanying information contained in this annual report, including, without limitation, the information under “Item 3. Key Information—Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” identifies important factors that could cause such differences.

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Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the dates thereof, including, without limitation, changes in our business strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

Enforceability of Civil Liabilities Under The U.S. Securities Laws

Endesa, S.A. is a company organized under Spanish law with limited liability. All of our directors and executive officers are non-residents of the United States. In addition, substantially all of our assets and the assets of our directors and executive officers are located outside of the United States. As a result, you may not be able to effect service of process within the United States upon us or our directors and executive officers or to enforce a judgment obtained against us or our directors and executive officers predicated solely upon the civil liability provisions of U.S. securities laws.

There is also doubt that a lawsuit based upon U.S. federal or state securities laws could be brought in an original action in Spain and that a judgment obtained in a U.S. court against us or our directors and executive officers based upon U.S. securities laws would be enforced in Spain.

PART I

ITEM 1.                             IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A.   DIRECTORS AND SENIOR MANAGEMENT

Not applicable.

B.   ADVISERS

Not applicable.

C.   AUDITORS

Not applicable.

ITEM 2.                             OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.                             KEY INFORMATION

A.   SELECTED FINANCIAL DATA

Selected Consolidated Financial Information

The following tables present selected consolidated financial data of Endesa, S.A. You should read these tables in conjunction with “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements beginning on page F-1.

The consolidated income statement data for each of the two years in the period ended December 31, 2005 and the consolidated balance sheet data at December 31, 2004 and 2005 set forth below have been derived from, and are qualified in their entirety by reference to, our audited consolidated financial statements and notes thereto appearing elsewhere in this annual report. Our audited consolidated financial statements for the years ended December 31, 2005 and 2004 have been prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. See Note 29 to our consolidated financial

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statements. The principles of consolidation are described in Note 2 to our consolidated financial statements.

The following table presents selected consolidated financial data of Endesa, S.A. in accordance with IFRS for the periods indicated:

 

 

Year Ended December 31,

 

 

 

       2004       

 

       2005       

 

 

 

(millions of euro, except share
and ADS data)

 

CONSOLIDATED INCOME STATEMENT DATA

 

 

 

 

 

 

 

 

 

Net sales

 

 

13,509

 

 

 

17,508

 

 

Operating income

 

 

2,846

 

 

 

4,244

 

 

Consolidated income before taxes and minority interest

 

 

2,013

 

 

 

4,547

 

 

Net income of the parent company

 

 

1,253

 

 

 

3,182

 

 

Dividends

 

 

782

 

 

 

2,541

 

 

Net income per ordinary share or ADS(1)

 

 

1.19

 

 

 

3.01

 

 

Dividends per ordinary share or ADS (euro)(2)

 

 

0.7386

 

 

 

2.400

 

 

Dividends per ordinary share or ADS($)(2)(3)

 

 

0.5456

 

 

 

2.026

 

 

Basic and diluted net income per ordinary share or ADS(1)

 

 

1.19

 

 

 

3.01

 

 

Weighted average number of ordinary shares outstanding
(in thousands)

 

 

1,058,752

 

 

 

1,058,752

 

 

 

 

 

At December 31,

 

 

 

2004

 

2005

 

 

 

(millions of euro)

 

CONSOLIDATED BALANCE SHEET DATA

 

 

 

 

 

Utility plant, net

 

28,910

 

32,313

 

Total assets

 

47,182

 

55,365

 

Long-term debt(4)

 

17,715

 

18,587

 

Equity of minority interests

 

5,405

 

4,737

 

Equity of the parent company

 

8,728

 

11,590

 


(1)          Per ordinary share and per ADS data has been computed based on the weighted average number of ordinary shares outstanding for the periods presented. Each ADS represents one ordinary share.

(2)          In respect of the years indicated.

(3)          Computed using the noon buying rate for U.S. dollars on December 31 of each of 2004 and 2005 for purposes of such years.

(4)          Long-term debt does not include current maturities. See Note 16 to our consolidated financial statements.

In our annual reports on Form 20-F for the years ended December 31, 2001, 2002, 2003 and 2004, in accordance with Item 18 of Form 20-F, we presented selected financial data in accordance with Spanish GAAP and U.S. GAAP, as well as a reconciliation of shareholders’ equity and net income under Spanish GAAP to shareholders’ equity and net income under U.S. GAAP in the notes to our consolidated financial statements. In such reconciliation, we were not required to modify the accounting under Spanish GAAP for certain inflation adjustments because such accounting was considered to be part of a comprehensive measure of accounting for certain effects of inflation at certain of our Latin American subsidiaries. As described in more detail in Note 29 to our consolidated financial statements in this annual report on Form 20-F, we have restated our previously presented U.S. GAAP selected financial data for 2001, 2002

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and 2003 to eliminate certain inflation adjustments that are not permissible under IFRS, but which were permissible under Spanish GAAP.

The following table presents selected consolidated financial data of Endesa, S.A. in accordance with U.S. GAAP for the periods indicated:

 

 

Year Ended December 31,

 

 

 

2001

 

2002

 

2003

 

2004

 

2005

 

 

 

(millions of euro, except share and ADS data)

 

CONSOLIDATED INCOME STATEMENT DATA(1)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

11,567

 

11,059

 

10,750

 

13,290

 

17,491

 

Operating income(2)

 

3,186

 

3,832

 

3,147

 

3,446

 

5,155

 

Net income

 

995

 

1,500

 

1,400

 

1,454

 

2,753

 

Net income per ordinary share or ADS(3)

 

0.94

 

1.42

 

1.32

 

1.37

 

2.60

 

Basic and diluted net income per ordinary share or ADS(3)

 

0.94

 

1.42

 

1.32

 

1.37

 

2.60

 

 

 

 

At December 31,

 

 

 

2001

 

2002

 

2003

 

2004

 

2005

 

 

 

(millions of euro)

 

CONSOLIDATED BALANCE SHEET DATA(1)

 

 

 

 

 

 

 

 

 

 

 

Utility plant, net

 

26,774

 

22,460

 

24,430

 

26,469

 

29,650

 

Total assets

 

48,590

 

43,685

 

44,853

 

47,352

 

54,742

 

Long-term debt

 

23,222

 

20,141

 

19,262

 

19,344

 

18,587

 

Minority interests

 

3,429

 

1,708

 

3,012

 

3,676

 

4,482

 

Stockholders’ equity

 

8,428

 

8,126

 

8,738

 

9,373

 

12,010

 


(1)          We have restated our previously presented U.S. GAAP selected financial data for 2001, 2002, 2003 and 2004 to eliminate certain inflation adjustments that are not permissible under IFRS, but which were permissible under Spanish GAAP. The restatement is made exclusively due to the fact that in prior years, as allowed pursuant to Item 17(c)(iv)(A) of Form 20-F, Endesa’s reconciliation from accounting principles generally accepted in Spain to U.S. GAAP excluded any adjustments attributable to the effect of differences resulting from the accounting for inflation, as it was considered to be part of a comprehensive measure of accounting for the effect of certain of our Latin American subsidiaries’ price-level changes in the local GAAP. Since such price-level adjustment under Item 17(c)(iv)(A) of Form 20-F is no longer applicable as a result of our adoption of EU-IFRSs (see Note 28 to our consolidated financial statements), all inflation adjustment for U.S. GAAP before January 1, 2004 has been removed from the presented U.S. GAAP amounts.

(2)          The main difference between Operating Income under IFRS and U.S. GAAP relates to the disposals of fully consolidated companies and companies accounted for using the equity method, which are considered within Operating Income under U.S. GAAP but not under IFRS.

(3)          Per ordinary share and per ADS data has been computed based on the weighted average number of ordinary shares outstanding for the periods presented. Each ADS represents one ordinary share.

Exchange Rates

The noon buying rate for the euro on May 15, 2006 was $1.2888 = 1.00.

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The following tables set forth, for the periods and dates indicated, certain information concerning the noon buying rate for euro expressed in U.S. dollars per euro.

 

 

Noon Buying Rate

 

Calendar Period

 

 

 

Period End

 

Average(1)

 

High

 

Low

 

Year ended December 31, 2001

 

 

0.8901

 

 

 

0.8909

 

 

0.9535

 

0.8370

 

Year ended December 31, 2002

 

 

1.0485

 

 

 

0.9495

 

 

1.0485

 

0.8594

 

Year ended December 31, 2003

 

 

1.2597

 

 

 

1.1411

 

 

1.2597

 

1.0361

 

Year ended December 31, 2004

 

 

1.3538

 

 

 

1.2478

 

 

1.3625

 

1.1801

 

Year ended December 31, 2005

 

 

1.1846

 

 

 

1.2400

 

 

1.3476

 

1.1667

 


(1)          The average of the noon buying rates on the last day of each month during the relevant period.

 

 

Noon Buying Rate

 

Calendar Period

 

 

 

Period End

 

High

 

Low

 

Month ended November 30, 2005

 

 

1.1790

 

 

1.2067

 

1.1667

 

Month ended December 31, 2005

 

 

1.1842

 

 

1.2041

 

1.1699

 

Month ended January 31, 2006

 

 

1.2158

 

 

1.2287

 

1.1980

 

Month ended February 28, 2006

 

 

1.1925

 

 

1.2100

 

1.1860

 

Month ended March 31, 2006

 

 

1.2139

 

 

1.2197

 

1.1886

 

Month ended April 30, 2006

 

 

1.2624

 

 

1.2624

 

1.2091

 

 

Unless otherwise indicated, where this annual report provides translations into euro of amounts denominated in or resulting from transactions effected in currencies other than the euro, the conversion has been effected at the relevant exchange as published by the Spanish Central Bank.

Our ordinary shares are quoted on the Spanish stock exchanges in euro. Currency fluctuations may affect the dollar equivalent of the euro price of our ordinary shares listed on the Spanish stock exchanges and, as a result, the market price of our American depositary shares (ADSs), which are listed on the New York Stock Exchange. Currency fluctuations may also affect the dollar amounts received by holders of American depositary receipts (ADRs) on conversion by the depositary of cash dividends (if any) paid in euro on the underlying ordinary shares.

Our consolidated results are affected by fluctuations between the euro and the currencies in which the revenues and expenses of our consolidated subsidiaries are denominated (principally the Chilean peso, the Colombian peso, the Argentine peso, the Brazilian real, the Peruvian nuevo sol and the U.S. dollar). See “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

B.   CAPITALIZATION AND INDEBTEDNESS

Not applicable.

C.   REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

D.   RISK FACTORS

Risks Related to Our Business and Industry

Our operations are subject to extensive government regulation, and our inability to comply with existing regulations or requirements or changes in applicable regulations or requirements may have an adverse effect on our business, financial condition and results of operations.

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Our operating subsidiaries are subject to extensive regulation of tariffs and other aspects of their operations in Spain and in each of the other countries in which they operate. While we are in substantial compliance with applicable laws and regulations, we remain subject to a varied and complex body of laws and regulations that both public officials and private parties may seek to enforce. The introduction of new laws or regulations, or changes in existing laws or regulations, could have a material adverse effect on our business, financial condition and results of operations.

In particular, under Spanish law, pursuant to Royal Decree-Law 5/2005, if the aggregate costs of the electricity system, as calculated by the Spanish authorities for a given year, exceed the aggregate amount of the electricity tariffs billed to end customers, certain companies, including Endesa, must finance this deficit by paying a sum, which is fixed by regulation, equal to the difference between (i) these overall costs and (ii) the aggregate amount of the tariffs billed to the end customers (such difference being a “tariff deficit”). In the case of Endesa, our parent company is required to finance 44.16% of the deficit in 2005 through income from regulated activities.

The tariff deficit exists because certain expenses included in the overall costs, above all the cost of power purchased on the wholesale market, are determined in a competitive market, whereas the government sets the electricity tariffs. Although we have the right to complete recovery of the amount financed, it is necessary for the government to establish a specific repayment procedure.

For the purpose of reducing the tariff deficit, on February 24, 2006, the government approved Royal Decree-Law 3/2006, which modifies the order matching process in the day-ahead and intra-day markets such that the energy acquired by electricity distribution companies is offset by the sales of electricity by electricity generation companies in the ordinary regime, when such companies are within the same industrial group. The price that will be used to settle these sales and purchases will eventually be set by the Spanish government as a function of prevailing market prices, but provisionally such price has been fixed at 42.35/MWh. The presence or absence of a tariff deficit for 2006 and the value of such deficit will depend on the fixing of this price. Moreover, the fixing of this price could have an adverse impact on our results of operations for the fiscal year 2006.

In addition, effective as of March 2, 2006, for purposes of the tariff deficit calculation, proceeds from sales of electricity by electricity generation companies in the ordinary regime will be reduced in an amount equal to the market value of the CO2 emission allowances that were allocated for free under the NAP. For purposes of the tariff deficit calculation between January 1, 2006 and March 2, 2006, there will be a reduction, for each industrial group, of the tariff deficit to which such group is entitled in an amount equal to the market value of emission allowances granted to such industrial group in this period.

Our operations are subject to extensive environmental regulation, and our inability to comply with existing environmental regulations or requirements or changes in applicable environmental regulations or requirements may have a material adverse effect on our business, financial condition and results of operations.

We and our operating subsidiaries are subject to environmental regulations, which, among other things, require us to perform environmental impact studies on future projects, to obtain regulatory licenses, permits and other approvals and to comply with the requirements of such licenses, permits and regulations. As with any regulated company, we cannot assure you:

·       that these environmental impact studies will be approved by governmental authorities;

·       that public opposition will not result in delays or modifications to any proposed project; or

·       that laws or regulations will not change or be interpreted in a manner that increases our costs of compliance or adversely affects our operations or plants or our plans for the companies in which we have an investment.

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In recent years statutory environmental requirements have been becoming stricter both in Spain and in the EU. Although we have been making the necessary investments to comply with this legislation, the future evolution and application thereof may have a material adverse effect on our business, financial condition and results of operations.

In particular, we must comply with the requirements contained in the National Allocation Plan, approved by Royal Decree 1866/2004, whereby our results of operations could be affected either by the price of the emission allowances or by a shortage of allowances in the market. We believe that in light of the final assignment of rights for our installations, we will continue to be a net purchaser of emission rights under the NAP in the short-to-medium-term.

A significant amount of the energy we produce in certain markets is subject to market forces that may affect the price and amount of energy we sell.

We are exposed to market price risk for the purchase of fuel (including fuel-oil, coal and natural gas) used to generate electricity and the sale of a portion of the electricity that we generate. We have entered into long-term revolving fuel supply contracts in order to provide for the secure supply of fuel for our generation activities in Spain. We have signed several natural gas supply contracts which include “take or pay” clauses. These contracts have been established by considering reasonable hypotheses of our future needs. Significant deviations of the contemplated hypotheses could lead to the obligation to execute purchases of fuel greater than our needs.

Because the prices under these contracts are not fixed, we actively manage the market price risk relating to our fuel requirements. There can be no assurance that such management will eliminate all market price risk relating to our fuel requirements.

Our business may be affected by hydrological conditions.

Our operations involve hydroelectric generation and, accordingly, we and our Latin American affiliates are dependent upon hydrological conditions prevailing from time to time in the broad geographic regions in which our hydroelectric generation facilities are located. If hydrological conditions result in droughts or other conditions that negatively affect our hydroelectric generation business, our results of operations could be materially adversely affected. At the same time, the electricity business is affected by atmospheric conditions such as the average temperatures that influence consumption.

Our financial condition and results of operations may be adversely affected if we do not effectively manage our exposure to interest rate and foreign currency exchange rate risk.

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and foreign currency exchange rate fluctuations. For this reason, we actively manage these risks to avoid the risks having a significant impact on our results. Our risk management strategies may not be successful, however, in limiting our exposure to changes in interest rates and foreign currency exchange rates, which could adversely affect our financial condition and results of operations.

Construction of new facilities may be adversely affected by factors commonly associated with such projects.

The construction of power generation, transmission and distribution facilities can be time-consuming and highly complex. In connection with the development of such facilities, we must generally obtain government permits and approvals, enter into land purchase or lease agreements, equipment procurement and construction contracts, operation and maintenance agreements, fuel supply and transportation agreements, off-take arrangements and obtain sufficient equity capital and debt financing. Factors that may affect our ability to construct new facilities include:

·       delays in obtaining regulatory approvals, including environmental permits;

·       shortages or changes in the price of equipment, materials or labor;

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·       opposition of political and other interest groups;

·       adverse changes in the relevant political and regulatory environments;

·       adverse weather conditions, which may delay the completion of power plants or substations, or natural disasters, accidents or other unforeseen events; and

·       the inability to obtain financing at rates that are satisfactory to us.

Any of these factors may cause delays in completion or commencement of operations of our construction projects and may increase the cost of contemplated projects. If we are unable to complete the projects contemplated, the costs incurred in connection with such projects may not be recoverable.

We could be subject to environmental and other liability in connection with our operations.

We face environmental risks inherent in our operations, including those relating to the management of waste, spills and emissions of our generation facilities, particularly nuclear power plants. Accordingly, we may be subject to claims for environmental and other damages in connection with our power generation, distribution and transmission facilities as well as our coal mining activities.

We are also subject to risks arising from the operation of nuclear facilities and the storage and handling of low-level radioactive materials. Spanish law and regulations limit the liability of nuclear plant operators for nuclear accidents. Such limits are consistent with the international treaties ratified by Spain. Spanish law provides that the operator of each nuclear facility is liable for no more than 150.3 million as a result of claims relating to a single nuclear accident. Our potential liability relating to our interests in nuclear facilities is fully covered by third-party liability insurance for liabilities up to 150.3 million. Our potential liability with respect to pollution or other damages to third parties or third party assets is similarly insured up to 150 million. If we were subject to liability for environmental and other damages in connection with our operations (other than our nuclear operations) for amounts in excess of our insurance coverage, it could have a material adverse effect on our business, financial condition and results of operations.

The liberalization of the electricity industry in the European Union has led to increased competition and lower prices.

The liberalization of the electricity industry in the European Union (including the countries in which we are present, such as Spain, Italy, France and Portugal) has led to increased competition as a result of consolidation and the entry of new market participants in European Union electricity markets, including the Spanish electricity market. The liberalization of the electricity industry in the European Union has also led to lower electricity prices in some market segments as a result of the entry of new competitors and cross-border energy suppliers and the establishment of European electricity exchanges, which in turn has led to increased liquidity in the electricity markets. This liberalization of the electricity market requires that diverse areas of our business develop in a more competitive environment. If we are not able to adapt to or manage adequately this competitive market, our business, financial condition or results of operations might be adversely affected.

Risks Related to Our Latin American Operations

Our Latin American subsidiaries are subject to a variety of risks, including economic downturns and political risks.

Our operations and investments in Latin America are exposed to various risks inherent in operating and investing in Latin America, including risks relating to the following:

·       changes in government regulations and administrative policies;

·       imposition of currency restrictions and other restraints on movements of funds;

8




·       changes in the business or political environment in which we operate;

·       economic downturns, political instability and civil disturbances affecting operations;

·       government expropriation of assets; and

·       exchange rate fluctuations.

In addition, revenues from operations of our Latin American subsidiaries, their market value and the dividends collected from these subsidiaries are exposed to risks in the countries in which they operate, which may materially and adversely affect demand, consumption and exchange rates.

We cannot predict what result any further deterioration in economic and political conditions in Latin America, or other legal or regulatory developments relating to the countries in which we operate in Latin America, could have on our business, financial condition or results of operations.

Operational Risks

Our activities could be subject to human or technological error.

In the course of our operations, direct or indirect losses could be caused by inadequate internal processes, technological flaws, human error or as a result of certain external events. The control and management of these risks, in particular those that affect the operations of our generation and distribution plants, are based on adequate development and training of personnel and on the existence of operational procedures, preventative maintenance plans and specific programs supported by quality control systems which minimize the possibility of the occurrence and impact of these risks. A failure of these risk management procedures could have an adverse impact on our business, financial condition and results of operations.

Other Risks

We are a party to litigation and other proceedings that may affect us.

We are subject to legal proceedings regarding our business, including tax and other disputes with regulatory authorities. See “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings”. We are also subject to tax audits and may be subject to additional claims in the future. Although we believe that we have recorded provisions that were reasonable in light of our legal contingencies as of December 31, 2005, we cannot assure you that we will prevail in any of the legal proceedings in which we are involved or may be involved in the future or that any adverse decision would not have a material adverse effect on our business, results of operations and financial condition.

We are subject to takeover bids.

On September 5, 2005, Gas Natural SDG, S.A., a Spanish natural gas company (“Gas Natural”), announced its intention to commence an exchange offer for all of the outstanding ordinary shares and ADSs of Endesa, S.A. After obtaining regulatory approvals from the Spanish Council of Ministers and the Comisión Nacional del Mercado de Valores (the “CNMV”), the Spanish securities regulator, as well as registration with the SEC, Gas Natural commenced its offer on March 6, 2006. On March 7, 2006, the Board of Directors of Endesa adopted a resolution recommending that Endesa’s shareholders reject the Gas Natural offer. Gas Natural’s offer consists of 7.34 in cash and 0.569 of a newly-issued ordinary share or ADS of Gas Natural in exchange for each ordinary share and ADS, as applicable, of Endesa, S.A. On April 4, 2006, Madrid Commercial Court No. 3 enjoined Gas Natural’s offer pending the outcome of a lawsuit by Endesa against Gas Natural and Iberdrola S.A., a Spanish company with which Gas Natural had entered into an agreement for the disposal of approximately 9 billion of our assets in the event Gas Natural’s bid is successful, alleging violations of European Commission competition law in connection with Gas Natural’s offer. Gas Natural has announced that it intends to appeal the Madrid court’s decision.

9




Pursuant to the Law of Civil Judgment, we were required to present an estimate of the damages or losses we may incur or that may be incurred by the companies affected by the suspension. We were required to post 1,000 million as a bond relating to these possible damages or losses. Separately, Endesa has appealed the Spanish Council of Ministers’ antitrust authorization of the Gas Natural offer and has asked the Spanish Supreme Court to enjoin Gas Natural’s offer. On May 10, 2006, Endesa was notified that the Spanish Supreme Court temporarily suspended the authorization until the Court considers Endesa’s claim and renders a decision. The suspension of the offer is provisional, and we cannot determine if or when the Gas Natural offer will be permanently enjoined. As a condition to the suspension, a 1,000 million bond must be posted relating to possible damages or losses that may be incurred by the companies affected by the suspension, but the Spanish Supreme Court has accepted the bond already posted by Endesa with the Madrid Commercial Court No. 3 in Madrid, provided that the bonding entities agree to extend the bond’s effects to the Spanish Supreme Court’s procedure. Neither the estimate nor the amount of assets posted will determine the existence or quantity of eventual damages or losses that could be derived from this process.

On February 21, 2006, E.ON AG, a German energy company (“E.ON”), announced a tender offer by its wholly-owned subsidiary, E.ON Zwölfte Verwaltungs GmbH, for all of the outstanding ordinary shares and ADSs of Endesa, S.A. E.ON’s offer consists of 27.50 in cash for each ordinary share and ADS of Endesa. On February 21, 2006, the Board of Directors of Endesa issued a preliminary response to E.On’s announced offer, stating that the price offered by E.On clearly improves that offered by Gas Natural but still fails to reflect Endesa’s real value. On April 25, 2006, the European Commission granted unconditional antitrust approval to E.ON. E.ON is currently awaiting Spanish regulatory approval. In accordance with official statements by the CNMV, E.ON’s offer, if and when commenced, must remain open until the injunction by Madrid Commercial Court No. 3 on Gas Natural’s offer is removed or Gas Natural’s offer is withdrawn or terminated. The provisional suspension by the Spanish Supreme Court of Gas Natural’s offer further limits the likelihood that the E.ON offer will commence or progress in the near term.

Under Spanish law, a public company that is the subject of an announced tender offer is subject to certain restrictions, including restrictions on its management’s ability to take certain actions that could impede the tender offer from succeeding, without shareholders’ approval. If these restrictions limit the ability of our management team to take certain actions to further the interests of the company, our business, financial condition and results of operations may be adversely affected.

As of the date of this annual report on Form 20-F, the outcome of the two takeover bids and litigation relating thereto cannot be predicted, and we cannot determine the effect that any of these bids, if successful, or disposition of assets in connection therewith, would have on our business, financial condition or results of operations. In particular, we cannot predict the conditions that may be imposed by regulatory authorities or courts in Spain or elsewhere on any particular bid or on our response thereto, nor can we predict how any such conditions would affect our business. See “Item 8—Legal Proceedings”.

In addition, the takeover bids, the litigation related thereto and other related developments have required that our management team spend a significant amount of time on issues unrelated to the execution of our strategy. If our management team is required to continue to spend significant amounts of time on the takeover bids and related litigation or other related developments, our business may be materially adversely affected.

Furthermore, as a result of these tender offers, we have accrued a series of expenditures relating to the cost of handling the various issues raised by the potential takeovers, in the interest of protecting the Company and its shareholders. The costs incurred from September 2005 through the date of this annual report on Form 20-F have reached €72 million, of which €52 million were accrued in fiscal year 2005. Depending on the evolution of this process, it is possible that these costs could increase.

10




We are a party to agreements with change in control provisions.

We and our affiliates are parties to certain bank loans and other financing arrangements which may be accelerated if Gas Natural or E.ON acquires control of Endesa. Approximately $232 million in bank loans would accelerate upon a change in control of Endesa, and a further 493 million in derivatives contracts would accelerate upon a change in control of Endesa if Endesa’s credit rating is reduced significantly. Moreover, approximately 1.02 billion in loans made by the European Investment Bank to Endesa would accelerate as a result of the Endesa asset divestitures that Gas Natural has agreed with Iberdrola, as disclosed in its Spanish Tender Offer Prospectus, and the divestitures required to comply with regulatory conditions, in the absence of consent by the bank. Acceleration of these financing arrangements could have a material adverse effect on our business, financial condition or results of operations.

Forward-looking statements contained in this annual report may not be realized.

We have made forward-looking statements in this annual report that are subject to risks and uncertainties. These forward-looking statements relate to among other things:

·       our strategic plan, including our anticipated capital expenditures and divestitures;

·       trends affecting our business, financial condition or results of operations, including market trends in the Spanish energy sector and the impact of regulations on the energy sector;

·       supervision and regulation of the Spanish, European and Latin American electricity sector;

·       our exposure to various types of market risks, such as interest rate risk and foreign exchange rate risk;

·       anticipated changes in foreign currency exchange rates;

·       our proposed dividend payout rate;

·       macroeconomic growth and inflation in Latin America and the region’s growth potential in terms of capacity and consumption of electricity; and

·       expansion opportunities and potential future acquisitions or dispositions in developed and emerging markets.

These statements reflect our current expectations. They are subject to a number of risks and uncertainties, including but not limited to:

·       inability to access the debt or equity capital markets;

·       our ability to find interested buyers who will pay acceptable prices for assets expected to be divested;

·       an increase in the market interest rates;

·       adverse changes in currency exchange rates;

·       adverse decisions by regulators in the European Union, Spain, Italy, Chile, Argentina or elsewhere;

·       general macroeconomic conditions in the markets where we generate and distribute electricity;

·       the effect of new pronouncements from the International Accounting Standards Board regarding International Financial Reporting Standards;

·       our ability to implement successfully our plan and objectives for our subsidiaries;

·       the impact of fluctuations in fuel and electricity prices;

·       our ability to maintain a stable supply of fuel;

11




·       our ability to manage the risks involved in the foregoing; and

·       other factors described in this annual report, including but not limited to “Item 4. Information on the Company—Regulation—New Regulatory Structure” and “Item 5. Operating and Financial Review and Prospects”.

In light of the many risks and uncertainties, you should understand that we cannot assure you that the forward-looking statements contained in this annual report will be realized. We disclaim any responsibility or obligation to update or revise any forward-looking statements in this annual report including, without limitation, any modifications to our strategic plan, our investment plans or due to supervening causes. You are cautioned not to put undue reliance on any forward-looking information.

ITEM 4.                             INFORMATION ON THE COMPANY

A.   HISTORY AND DEVELOPMENT OF THE COMPANY

We are a limited liability company (sociedad anónima) organized under the laws of the Kingdom of Spain. Our ordinary shares are publicly traded on the Madrid, Barcelona, Bilbao and Valencia stock exchanges and the Santiago Off Shore Stock Exchange in Chile, and our ADSs are listed on the New York Stock Exchange. We were formed under the laws of Spain on November 18, 1944 as “Empresa Nacional de Electricidad, S.A.” and changed our name to Endesa, S.A. by resolution of the shareholders’ meeting of June 25, 1997. Our principal executive office is located at Ribera del Loira, 60, 28042 Madrid, Spain, and our telephone number is (34 91) 213 1000. Our agent for service of process in the United States is Endesa North America, Inc., 410 Park Avenue, Suite 410, New York, NY 10022.

Public Tender Offers

On September 5, 2005, Gas Natural SDG, S.A., a Spanish natural gas company (“Gas Natural”), announced its intention to commence an exchange offer for all of the outstanding ordinary shares and ADSs of Endesa, S.A. After obtaining regulatory approvals from the Spanish Council of Ministers and the Comisión Nacional del Mercado de Valores (the “CNMV”), the Spanish securities regulator, as well as registration with the SEC, Gas Natural commenced its offer on March 6, 2006. On March 7, 2006, the Board of Directors of Endesa adopted a resolution recommending that Endesa’s shareholders reject the Gas Natural offer. Gas Natural’s offer consists of 7.34 in cash and 0.569 of a newly-issued ordinary share or ADS of Gas Natural in exchange for each ordinary share and ADS, as applicable, of Endesa, S.A. On April 4, 2006, Madrid Commercial Court No. 3 enjoined Gas Natural’s offer pending the outcome of a lawsuit by Endesa against Gas Natural and Iberdrola S.A., a Spanish company with which Gas Natural had entered into an agreement for the disposal of approximately 9 billion of our assets in the event Gas Natural’s bid is successful, alleging violations of European Commission competition law in connection with Gas Natural’s offer. Gas Natural has announced that it intends to appeal the Madrid court’s decision. Pursuant to the Law of Civil Judgment, we were required to present an estimate of the damages or losses we may incur or that may be incurred by the companies affected by the suspension. We were required to post €1,000 million as a bond relating to these possible damages or losses. Separately, Endesa has appealed the Spanish Council of Ministers’ antitrust authorization of the Gas Natural offer and has asked the Spanish Supreme Court to enjoin Gas Natural’s offer. On May 10, 2006, Endesa was notified that the Spanish Supreme Court temporarily suspended the authorization until the Court considers Endesa’s claim and renders a decision. The suspension of the offer is provisional, and we can not determine if or when the Gas Natural offer will be permanently enjoined. As a condition to the suspension, a €1,000 million bond must be posted relating to possible damages or losses that may be incurred by the companies affected by the suspension, but the Spanish Supreme Court has accepted the bond already posted by Endesa with the Madrid Commercial Court No. 3 in Madrid, provided that the bonding entities agree to extend the bond’s effects to the Spanish Supreme Court’s procedure. Neither the estimate nor the amount of assets posted will determine the existence or quantity of eventual damages or losses that could be derived from this process.

12




On February 21, 2006, E.ON AG, a German energy company (“E.ON”), announced a tender offer by its wholly-owned subsidiary, E.ON Zwölfte Verwaltungs GmbH, for all of the outstanding ordinary shares and ADSs of Endesa, S.A. E.ON’s offer consists of 27.50 in cash for each ordinary share and ADS of Endesa. On February 21, 2006, the Board of Directors of Endesa issued a preliminary response to E.On’s announced offer, stating that the price offered by E.On clearly improves that offered by Gas Natural but still fails to reflect Endesa’s real value. On April 25, 2006, the European Commission granted unconditional antitrust approval to E.ON. E.ON is currently awaiting Spanish regulatory approval. In accordance with official statements by the CNMV, E.ON’s offer, if and when commenced, must remain open until the injunction by Madrid Commercial Court No. 3 on Gas Natural’s offer is removed or Gas Natural’s offer is withdrawn or terminated. The provisional suspension by the Spanish Supreme Court of Gas Natural’s offer further limits the likelihood that the E.ON offer will commence or progress in the near term.

B.   BUSINESS OVERVIEW

Overview

We are the largest electricity company in Spain and Portugal in terms of installed capacity and market share in generation and distribution, with a significant presence in the Southern European electricity market, in particular in Italy, and one of the largest private-sector multinational electricity companies in Latin America. Our core business is energy, including the supply of natural gas.

Our electricity business is principally focused on Spain and Portugal, the Southern European region (including Italy and France) and Latin America.

At December 31, 2005, we had a total installed capacity of 45,908 MW, and in 2005, we generated 185,264 GWh and sold 203,335 GWh, supplying electricity to approximately 23.2 million customers in 15 countries. At that date, we had 27,204 employees, 53.2% of whom were located outside Spain and Portugal, and our total assets amounted to approximately 55 billion, 43.3% of which were located outside Spain and Portugal.

The breakdown of net sales by the three major lines of business, each based on a geographic area, for the periods indicated is as follows:

Market

 

 

 

2004

 

2005

 

 

 

(millions of euro)

 

Spain and Portugal

 

6,655

 

8,761

 

Italy

 

1,665

 

2,166

 

France

 

265

 

848

 

Rest of Europe

 

627

 

584

 

Europe (other than Spain and Portugal)

 

2,557

 

3,598

 

Chile

 

1,100

 

1,813

 

Argentina

 

512

 

606

 

Brazil

 

1,428

 

1,443

 

Colombia

 

761

 

815

 

Peru

 

496

 

472

 

Latin America

 

4,297

 

5,149

 

Total

 

13,509

 

17,508

 

 

Our Core Business

Electricity and gas

Our electricity business is conducted in Spain and Portugal, the rest of Europe and Latin America. Our gas business is conducted in Spain and Portugal.

13




Spain and Portugal

Electricity Generation and Distribution.   We are the leading electricity generator and distributor in Spain with an approximately 38.1% market share in generation in ordinary regime and 43.1% market share in distribution at December 31, 2005. We operate hydroelectric, nuclear, coal, fuel oil and gas generating facilities with a total installed capacity in Spain of 21,409 MW at December 31, 2005 and a total net generation of 91,505 GWh in 2005. In 2005, we sold 64,095 GWh to approximately 11.0 million regulated customers (i.e., those who have not chosen to contract with suppliers) in Catalonia, Andalusia, Aragon, the Balearic Islands, the Canary Islands, parts of Extremadura, Ceuta and Melilla. We are also one of the largest suppliers of electricity and gas to deregulated customers (i.e., those who have chosen to contract with suppliers) with an approximately 37.4% market share at December 31, 2005. In 2005, Endesa Energía sold 36,773 GWh to 998,154 points of consumption corresponding to deregulated customers.

Renewable Energies and Cogeneration.   The companies in which we participate produce 11.4% of the total special regime output in Spain. At December 31, 2005, we had ownership interests in facilities in service or under construction which had a total installed capacity of 2,301 MW in Spain, an additional 289 MW of capacity in Portugal, and an additional 36 MW in Colombia and Mexico.

Natural Gas Distribution.   We conduct our natural gas distribution business through Endesa Gas which, together with the natural gas distribution companies in which it holds controlling stakes, had 325,107 customers in Spain and 255,518 customers in Portugal at December 31, 2005, an increase of 8.4% from December 31, 2004. We are the third largest natural gas distributor in Spain, with an approximately 10.9% market share in the domestic regulated market and an approximately 12.1% market share in the liberalized market (including supplies to our gas-powered facilities) at December 31, 2005. We also seek to secure the supply of natural gas for our generation activities. In Spain, our goal is to be present in the businesses of import, re-gasification, transport, distribution and supply of natural gas.

Europe

We have entered into the electricity business in Southern Europe, taking advantage of opportunities arising from the deregulation process in Europe and the demand for the cross-border supply of electricity to deregulated customers throughout Europe. We operate plants in Italy with total installed capacity of 6,590 MW and have interests in an additional 2,807 MW in Snet (France) at December 31, 2005 and a total net generation in companies in which we participate of 33,749 GWh in 2005.

We currently hold a 80% stake in Endesa Italia. ASM Brescia holds the remaining 20%.

On September 13, 2004, we acquired from Charbonnages de France (CdF) a 35% interest in Snet, France’s second-largest electricity generator, which, in addition to the 30% interest we acquired in 2001, gave us a total ownership interest of 65%. The other stockholders are CdF and EdF. As a result, we now control the management of this company and have achieved a significant presence in the French electricity market, thereby fulfilling one of the objectives in our Strategic Plan. The total price of the transaction, including the 450 million we paid for the 30% stake acquired in 2001, was 571 million.

Snet has a controlling stake of 69.58% in the Polish co-generation plant Bialystok, and a 20% in Soprolif, the French company which owns a circulating fluid bed plant with installed capacity of 250 MW. Together with Alarco, Snet holds 50% of the Altek group (Turkey), which has 40MW of installed hydro capacity and at the end of 2005 opened a 80MW CCGT plant at Kirklareli.

In Northern Africa, we hold a 32% stake in a consortium with Office National de l’Electricité (ONE) in a 400 MW combined cycle gas turbine plant located in Tahaddart.

Latin America

We are involved in the generation, transmission, distribution and supply of electricity in five countries in Latin America. We participate in more than 20 electricity companies in the region, either directly or

14




through our controlling stake in the Latin American electricity group, Enersis, of which we acquired control in 1999, becoming one of the largest private electricity groups in Latin America in terms of consolidated assets and operating revenues. Endesa Chile manages our electricity generation business in Latin America and Chilectra manages our electricity distribution business in Latin America. Both Endesa Chile and Chilectra are controlled by Enersis. In 2005, we had a total installed capacity of 14,095 MW in the region, generated 57,890 GWh and distributed 55,246 GWh to 11.2 million customers. At December 31, 2005, assets in Latin America represented 31.0% of our total assets. In 2005, Latin American operations contributed 28.7% of our operating revenues and 32.4% of our operating income.

Strategy

Statements related to our strategy are forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties. See “Forward-Looking Statements”.

2005-2009 Investment Program

Pursuant to our 2005-2009 Strategic Plan, we invested 3,640 million in our businesses in 2005. For the period 2005-2009 we expect to invest a total of approximately 14,600 million in our businesses, broken down as follows:

 

2005-2009

 

 

 

(millions of euro)

 

Spain and Portugal

 

 

10,300

 

 

Generation

 

 

5,800

 

 

Distribution

 

 

4,300

 

 

Supply

 

 

200

 

 

Other countries in Europe

 

 

1,800

 

 

Development of new generating capacity

 

 

1,400

 

 

Maintenance investments

 

 

400

 

 

Latin America

 

 

2,500

 

 

Development of new generating capacity

 

 

500

 

 

Distribution and maintenance investments

 

 

2,000

 

 

Total

 

 

14,600

 

 

 

Investment in our businesses during 2005 was 3,640 million, broken down as follows:

 

2005

 

% of 2005-2009
Expected
Investment
Completed

 

 

 

(millions of euro)

 

 

 

Spain and Portugal

 

 

2,660

 

 

 

25.8

%

 

Other countries in Europe

 

 

308

 

 

 

17.1

%

 

Latin America

 

 

670

 

 

 

26.8

%

 

Other

 

 

2

 

 

 

 

 

Total

 

 

3,640

 

 

 

24.9

%

 

 

We expect to invest approximately 71% of the total investment outlined above in the Spanish and Portuguese electricity business. With this investment, we expect to increase our installed capacity substantially and to revamp our electricity distribution infrastructure so as to improve the security and quality of our supply.

Approximately 12% of the total investment outlined above is expected to be allocated to the business in other European countries and the remaining 17% is expected to be invested in the Latin American electricity business.

15




Our performance in 2005

During 2005 we made significant achievements:

·       33% growth in gross operating income;

·       154% growth in net income (60% growth if we exclude net income growth attributable to the sale of non-core assets);

·       Dividends of more than 2.5 billion declared and approved by shareholders in respect of 2005; and

·       A sound financial position. See Item 5, “Debt Reduction” for our net financial debt figure and a reconciliation of net financial debt to IFRS, as well as an explanation of our calculation of net financial debt, the manner in which management uses this measure and how the measure is useful to investors.

Operating performance

Our future growth is expected to be based on the development of our asset base, as set out in the 2005-2009 Strategic Plan.

Spain and Portugal

In Spain and Portugal, demand for electricity is increasing at a rate higher than the EU average, underpinning, in both business and economic terms, the forecast increase in installed generation capacity. This increase will mainly take the form of new combined cycle gas turbine (CCGT) plants, new generation plants and an increase in installed capacity for the extrapeninsular systems. The installed capacity of these three segments is expected to grow from 6,150 MW in 2004 to 12,400 MW in 2009, with an additional 24,000 GWh per year.

Rest of Europe

In Europe, Endesa Italia intends to increase and improve the technological structure of its generation mix, through an additional 1,755 MW and a greater weighting of CCGTs.

We also plan to install 425 MW of renewable energy capacity through 2009 and participate in regasification projects, resulting in increased access to gas at more competitive prices. The new regasification facilities and renewable capacity will enable us to maintain current unit margins.

Our presence in Italy and France is also generating business in the form of international energy trading which is set to increase in the coming years. We are also negotiating our entry into the Polish electricity market, which, if successful, is expected to offer an attractive growth platform.

Latin America

In 2005-2009 we expect a significant increase in activity in our Latin American business, both in terms of generation capacity, which is expected to rise to 65,300 GWh from 54,800 GWh, and distribution, which is expected to rise to 67,000 GWh from 52,000 GWh. This growth will be enhanced by improved asset efficiency. At the same time, new capacity is expected to be developed primarily in Chile and Peru, where our subsidiaries are scheduled to supply an additional 589 MW.

Electricity Business in Spain and Portugal

Generation

We operate coal, nuclear, hydroelectric and fuel oil and gas generation facilities in Spain with a total installed capacity of 21,409 MW at December 31, 2005, representing 38.7% of total installed capacity in

16




Spain (excluding installed capacity of cogeneration and renewable energies facilities with an installed capacity of less than 50 MW). Our net energy production in Spain in the year ended December 31, 2005 was 91,505 GWh, representing a market share of approximately 42.1%. In 2005, we produced an additional 2,120 GWh using renewable energies (e.g., wind, small-scale hydro power cogeneration and others). The following table sets forth our total installed capacity by type of generating facility at December 31, 2005.

 

 

2004 Installed
Capacity

 

2005 Installed
Capacity

 

Percentage of
Total Installed
Capacity

 

 

 

(in MW)

 

(in MW)

 

 

 

Coal

 

 

6,269

 

 

 

6,128

 

 

 

29

%

 

Nuclear

 

 

3,393

 

 

 

3,397

 

 

 

16

%

 

Hydroelectric

 

 

5,368

 

 

 

5,379

 

 

 

25

%

 

Fuel Oil/Gas

 

 

5,425

 

 

 

5,314

 

 

 

25

%

 

CCGT

 

 

1,191

 

 

 

1,191

 

 

 

5

%

 

Total installed capacity

 

 

21,646

 

 

 

21,409

 

 

 

100

%

 

 

In 2005 we invested an aggregate 799 million in the generation business under the ordinary regime, of which 375 million was applied to the construction of CCGTs.

The following table sets forth for each type of generating facility the percentage of our total electricity generated, average age of plant, average capacity utilization and average availability factor.

 

 

Percentage of
Total
Electricity
Generated in
2005

 

Average Age
of Plant
(years)

 

Average
Capacity
Utilization in
2005(1)

 

Average
Availability
Factor in
2005(2)

 

Coal

 

 

44.0

%

 

 

25

 

 

 

79.4

%

 

 

91.7

%

 

Nuclear

 

 

25.2

%

 

 

22

 

 

 

80.8

%

 

 

80.7

%

 

Hydroelectric

 

 

8.2

%

 

 

51

 

 

 

16.1

%

 

 

100.0

%

 

Fuel Oil/Gas

 

 

14.2

%

 

 

19

 

 

 

32.6

%

 

 

89.9

%

 

CCGT

 

 

8.4

%

 

 

4

 

 

 

75.9

%

 

 

89.5

%

 

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)          Average capacity utilization is defined as actual production as a percentage of theoretical maximum production.

(2)          Average availability factor is defined as the total number of hours per year that a power station is available for production as a percentage of the total number of hours in such year.

The balance in the types of generation facilities means our plants’ energy output is stable. We also believe our production centers are well-located, with ease of access to fuels and proximity to gas pipelines.

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The table below sets forth our gross production of electricity (excluding production by cogeneration and renewable energies facilities with a capacity of less than 50 MW) measured at the point of production by type of power station during the past two years. Our gross electricity production in 2005 totaled 95,811 GWh, and our energy production, net of our own consumption, was 91,505 GWh.

 

 

2004

 

2005

 

Percentage of
Total in
2005

 

Coal

 

42,820

 

42,600

 

 

44.5

%

 

Nuclear

 

26,635

 

24,007

 

 

25.1

%

 

Hydroelectric

 

10,502

 

7,576

 

 

7.9

%

 

Fuel Oil/Gas

 

12,014

 

13,708

 

 

14.3

%

 

CCGT

 

6,186

 

7,920

 

 

8.2

%

 

Total

 

98,157

 

95,811

 

 

100.0

%

 

 

Coal-Fired Power Stations

We operate coal-fired power stations in Spain with total installed capacity of 6,127.6 MW at December 31, 2005. The following table sets forth our coal-fired power stations at December 31, 2005, installed capacities, years of commencement of operation, average capacity utilization and average availability factor.

Coal-fired Power Station

 

 

 

Type of Coal

 

Installed
Capacity at
December 31,
2005

 

Year(s) of
Commencement
of Operation

 

Average
Capacity
Utilization in
2005(1)

 

Average
Availability
Factor in
2005(2)

 

 

 

 

 

(in MW)

 

 

 

 

 

 

 

As Pontes (Four Units)

 

Brown Lignite and Imported Sub-bituminous

 

 

1,468.5

 

 

1976/79-2005(4)

 

 

78.8

%

 

 

82.2

%

 

Compostilla (Five Units) 

 

Steam, Coal and Anthracite

 

 

1,199.6

 

 

1961-84

 

 

80.1

%

 

 

96.3

%

 

Teruel (Three Units)

 

Black Lignite and Imported Bituminous

 

 

1,101.4

 

 

1979-80

 

 

79.7

%

 

 

97.2

%

 

Anllares (One Unit)

 

Steam Coal and Anthracite

 

 

121.7

(3)

 

1982

 

 

81.8

%

 

 

96.9

%

 

Los Barrios (One Unit)

 

Imported Bituminous

 

 

567.5

 

 

1985

 

 

80.3

%

 

 

90.3

%

 

Alcudia (Four Units)

 

Imported Bituminous

 

 

510.0

 

 

1980-82

 

 

79.6

%

 

 

91.9

%

 

Litoral (Two Units)

 

Imported Bituminous

 

 

1,158.9

 

 

1984-97

 

 

83.2

%

 

 

94.0

%

 

Total

 

 

 

 

6,127.6

 

 

n.a.

 

 

79.4

%

 

 

91.7

%

 


(1)          Average capacity utilization is defined as actual production as a percentage of theoretical maximum production.

(2)          Average availability factor is defined as the total number of hours per year that a power station is available for production as a percentage of the total number of hours in such year.

(3)          Represents our 33.3% ownership interest in this facility. In addition, we operate the Elcogas plant (335 MW), one of the largest plants in the world to use coal gasification technology, on behalf of a third party.

(4)          In 2005, As Pontes converted Group 4 for its imported coal production.

Our coal-fired power stations were supplied with 22,187 KT of coal in 2005, of which 32.6% was provided by our coal operations. 69.4% of this production was supplied to Endesa Generación, 6.1% to our Elcogas holding company and 24.5% to Viesgo Generación. In order to meet our total needs for coal, we supplement our own coal production with purchases in Spain and foreign markets. We have consolidated

18




fuel purchase functions into a single management group, which operates through Carboex, our coal, liquid fuel and gas importer.

The following table sets forth the amounts of coal we extracted and the amounts purchased in Spain and foreign markets in each of the last three years.

 

 

2003

 

2004

 

2005

 

 

 

(in millions of tons)

 

Extracted

 

7.79

 

7.77

 

7.23

 

Purchased:

 

 

 

 

 

 

 

In Spain

 

4.83

 

4.92

 

4.48

 

Abroad

 

9.30

 

10.39

 

10.48

 

Total purchased

 

14.13

 

15.31

 

14.96

 

 

We have a significant interest in the mining of Spanish coal. Our interest amounted to approximately 37% of overall Spanish production in 2005. Many of the coal mines are located near our coal-fired power stations. The following table sets forth our coal production in 2003, 2004 and 2005 by type of coal.

 

 

Coal Production

 

Type of Coal

 

 

 

2003

 

2004

 

2005

 

Percentage
Change
2005/2004

 

 

 

(in millions of thermies of low heating value)

 

Brown Lignite

 

10,452

 

10,323

 

9,285

 

 

(10.1

)%

 

Black Lignite

 

2,871

 

2,882

 

2,948

 

 

2.3

%

 

Anthracite

 

1,320

 

1,138

 

1,030

 

 

(9.5

)%

 

Brown Coal

 

4,025

 

4,034

 

4,125

 

 

2.3

%

 

Total

 

18,668

 

18,377

 

17,388

 

 

(5.4

)%

 

 

Total coal production in our mines in 2005 was 7.2 million tons, equal to 17.4 billion thermies, representing a 7.0% decrease in terms of tonnage and a 5.4% decrease in terms of thermies compared with 2004. In 2004, adjustments of production were made in accordance with the 1999-2006 Coal Plan in connection with our strategy to achieve a more environmentally friendly fuel mix. In 2005 we successfully completed the transformation of the first group of As Pontes for the consumption of imported coal, with the objective of reducing carbon dioxide levels. We also took action in the coal centers with the objective of reducing SOx and NOx emissions in order to comply with the Environmental Directive of the GIC (large combustion installations) of the European Union.

In accordance with environmental regulations on emissions, we mix imported coal, which has a higher calorific and a lower sulfur content, with domestic coal at our As Pontes and Teruel facilities, which improves the competitiveness of those facilities.

We believe that our coal reserves in open cast mines will be sufficient to cover a substantial part of our coal requirements during the useful life of our conventional coal-fired plants. In addition, we have a combination of short-term self-renewing and long-term supply contracts with coal producers in Spain which we believe are sufficient to meet our needs for domestic coal in the long term.

The mines from which coal for our production was extracted included the large open-pit As Pontes de García Rodríguez (La Coruña) mine; two mines in the Andorra (Teruel), which are open pit (Gargallo and Gargallo Oeste); two mines in the Guadiato (Córdoba) coalfield, which are open pit (Cervantes and Ballesta Este); and an open-pit mine (Emma) in Puertollano (Ciudad Real).

Two of our underground mines, Oportuna and María, were closed in 2005.

19




Nuclear Power Stations

We have controlling interests in three nuclear power stations, Ascó I, Ascó II and Vandellós II, all located in northeastern Spain. In addition, we have a 50% interest in Nuclenor, S.A., which owns the Santa Maria de Garoña nuclear power station. We also have interests in three additional nuclear power stations, including the Central Nuclear Almaraz, A.I.E., consisting of Almaraz I and II, and Trillo. All such stations are operational.

The following table sets forth our nuclear power stations at December 31, 2005, our ownership interest and each station’s installed capacity, system type, year of commencement of operation and average availability factor.

Nuclear Power Station

 

 

 

Ownership
Interest

 

Installed
Capacity at
December 31,
2005(1)

 

System Type

 

Year of
Commencement
of Operation

 

Average
Availability
Factor 2005(2)

 

 

 

 

 

(in MW)

 

 

 

 

 

 

 

Ascó I

 

 

100

%

 

 

1,032.5

 

 

 

PWR

(3)

 

 

1983

 

 

 

88.6

%

 

Ascó II

 

 

85

%

 

 

873.0

 

 

 

PWR

 

 

 

1985

 

 

 

86.1

%

 

Vandellós II

 

 

72

%

 

 

782.7

 

 

 

PWR

 

 

 

1988

 

 

 

51.3

%

 

Almaraz I

 

 

36

%

 

 

353.4

 

 

 

PWR

 

 

 

1981

 

 

 

90.9

%

 

Almaraz II

 

 

36

%

 

 

355.7

 

 

 

PWR

 

 

 

1983

 

 

 

98.8

%

 


(1)          Adjusted for our ownership interest in jointly-owned nuclear power facilities.

(2)          Average availability factor is defined as the total number of hours per year that a power station is available for production as a percentage of the total number of hours in such year.

(3)          Pressurized water reactor.

Nuclear facilities use enriched uranium as fuel. Spanish law requires all enriched uranium supplies to be purchased from Empresa Nacional del Uranio (Enusa), which is owned by Spanish government agencies.

Enusa meets its requirements for uranium through long-term supply contracts with various suppliers outside Spain. Enusa is also party to contracts with various uranium enrichment facilities outside Spain. Our management believes that Enusa can meet the requirements for uranium of all nuclear generating facilities in Spain throughout their useful lives.

Empresa Nacional de Residuos Radioactivos (Enresa) administers a fund to finance certain activities in connection with a program to decommission nuclear power stations and dispose of nuclear waste (the “Plan General de Residuos Radioactivos”). Until now the sums required for treatment of nuclear waste and dismantling of nuclear power plants have been treated as a cost of diversification and safe storage. A percentage of the electric power rate will be allocated to the creation of a fund for that purpose. Pursuant to the Royal Decree-Law 5/2005, all the waste treatment and dismantling costs attributable to the operation of nuclear power plants from April 1, 2005 forward will cease to be treated as diversification and safe storage costs and will be financed by the owners during the plants’ operation, through a charge per nuclear kWh generated, which will be billed by Enresa. If a power plant ceases operations in advance for reasons not attributable to its owner, the resulting deficit in the provision will be treated as a diversification and safe storage cost. If the plant ceases operations for reasons attributable to its owner, the deficit will be covered by the owner during the three years subsequent to the shutdown. Enresa is solely responsible for the decommissioning of nuclear stations and the treatment and disposal of nuclear waste.

Nuclear waste from power stations in which we participate is temporarily stored at storage facilities at each station’s site. Given the number of years of operation of such nuclear power stations, the amount of

20




nuclear waste generated to date is small and we believe that the current storage facilities are sufficient to meet future storage needs. Each Spanish operator of a nuclear facility has an agreement with Enresa that defines its responsibilities with respect to stored nuclear waste. Once transported off-site, the responsibility for the nuclear waste lies with Enresa, until permanently stored, at which point the Spanish Government assumes full responsibility.

The operation of all nuclear power stations in Spain is regulated and supervised by the Nuclear Safety Council (Consejo de Seguridad Nuclear), a government agency that reports directly to the Spanish Parliament. The Nuclear Safety Council also has jurisdiction over the safety, construction and operation of nuclear power stations.

We are liable for damages caused by our nuclear power stations up to 150.3 million, in respect of which we have liability insurance to cover up to such amount. The Spanish government is liable for damages caused by our and others’ nuclear power stations in excess of 150.3 million up to 208 million (equivalent to 175 million Special Drawing Rights). The countries that are signatories to the Paris and Brussels Conventions are proportionately responsible for liabilities between 175 million and 300 million Special Drawing Rights at December 31, 2005. The Special Drawing Right is a basket currency established by the International Monetary Fund. Neither of these treaties nor Spanish law or regulations allocates responsibility for liabilities in excess of 300 million Special Drawing Rights. Moreover, the nuclear plants in which Endesa participates have insurance against damages to the facilities, including machinery breakdowns, with maximum coverages ranging from $700 million to $900 million.

Hydroelectric Power Stations

At December 31, 2005, we operated hydroelectric generating facilities in Spain with an installed capacity of 5,379.5 MW, which vary widely as to type and size. The hydroelectric generating facilities were built between 1933 and 1993 and are located primarily along rivers in the northwest, northeast and south of Spain. Our hydroelectric power plants are operated by concession from the Kingdom of Spain for a maximum term of 75 years.

The following table sets forth the installed capacity of our hydroelectric facilities.

 

 

Installed Capacity at
December 31, 2005

 

 

 

(in MW)

 

Northwest

 

 

744.3

 

 

Ebro-Pyrenees:

 

 

 

 

 

Pont de Suert

 

 

709.2

 

 

Zaragoza

 

 

586.0

 

 

Lleida

 

 

1,246.3

 

 

South:

 

 

 

 

 

Cordoba

 

 

391.1

 

 

Antequera

 

 

292.4

 

 

Pumping:

 

 

 

 

 

Moralets

 

 

221.4

 

 

Sallente and Montamara

 

 

534.0

 

 

Ip and Urdiceto

 

 

84.0

 

 

Tajo Encantada and Guillena

 

 

570.0

 

 

Extrapeninsular:

 

 

 

 

 

El Mulato

 

 

0.8

 

 

Total

 

 

5,379.5

 

 

 

21




Fuel Oil and Gas Power Stations

We operate fuel oil and gas power stations in Spain with total installed capacity of 6,504.5 MW, including the combined cycle gas turbine plants in San Roque 2, Besós 3 and Tarragona 1, at December 31, 2005, which are located in Andalusia and Catalonia, respectively. These power stations form part of our generation and production network in those areas. The following table sets forth the installed capacity of our fuel oil and gas power stations.

Service Area

 

 

 

Installed Capacity at
December 31, 2005

 

 

 

(in MW)

 

Foix

 

 

520.0

 

 

San Adrian 1 and 3

 

 

700.0

 

 

San Adrian 2

 

 

350.0

 

 

Cristobal Colon

 

 

308.0

 

 

Total Fuel Oil

 

 

1,878.0

 

 

Besós 3 (CCGT)

 

 

387.8

 

 

San Roque 2 (CCGT)

 

 

408.3

 

 

Tarragona 1 (CCGT)

 

 

395.0

 

 

Total CCGT

 

 

1,191.1

 

 

Total Mainland

 

 

3,069.1

 

 

Alcudia

 

 

75.0

 

 

Son Reus

 

 

612.8

 

 

Mahón

 

 

169.5

 

 

Ibiza

 

 

257.5

 

 

Formentera

 

 

14.0

 

 

Jinamar

 

 

415.6

 

 

Barranco de Tirajana

 

 

461.1

 

 

Candelaria

 

 

288.2

 

 

Granadilla

 

 

513.5

 

 

Arona

 

 

48.6

 

 

Punta Grande

 

 

174.5

 

 

Las Salinas

 

 

185.1

 

 

El Palmar

 

 

22.8

 

 

Llanos Blancos

 

 

11.0

 

 

Los Guinchos

 

 

80.2

 

 

Ceuta

 

 

45.9

 

 

Melilla

 

 

60.1

 

 

Total Extrapeninsular

 

 

3,435.4

 

 

Total Mainland and Extrapeninsular

 

 

6,504.5

 

 

 

At December 31, 2005, the average age of our fuel oil and gas power plants on the Spanish mainland was 29 years and 4 years, respectively, and the average age of our fuel oil and gas power plants outside the Spanish mainland (i.e., the Balearic Islands, the Canary Islands, Ceuta and Melilla) was 12 years.

We have a portfolio of gas supply contracts that provides us with flexibility in determining the amount of gas required. We have formalized a gas supply contract with Gas Natural exclusively for the generation of electricity in Spain. The duration of the contract is for 12 years, starting January 1, 2007, stipulating a maximum consumption volume of three bcm per year starting January 1, 2009. We also have a long-term supply contract with Sonatrach which secures the aggregate supply of 1 billion cubic meters of natural gas. This contract may be terminated at will.

22




Fuel Prices

The growing demand for fuel worldwide and restrictions placed on production, refinery and transmission capacity—factors already in play in 2004—were compounded in 2005 by a severe hurricane season in the Gulf of Mexico, ongoing technical problems plaguing refineries, the unfavorable impact of certain geopolitical conflicts, reduced surplus capacity among oil-producing countries and low fuel inventories, particularly gasoline.

Consequently, Brent oil prices, which started at 41/bbl in 2005, reached record highs in the third quarter of 2005, peaking at 67.70/bbl. Nevertheless, crude oil prices did fall, closing the year at 57/bbl, as a result of the gradual recovery of production in the hurricane-damaged areas of the Gulf of Mexico, the use of strategic reserves, increased inventories and lower demand forecasts for crude oil worldwide. The annual average price for 2005 was 55.1/bbl.

CO2 market: Compliance with ETS requirements

The European Union Emission Trading Scheme (ETS) came into force in 2005 to ensure that the objectives set forth in the Kyoto Protocol would be achieved.

In keeping with our commitment to the environment and fulfilling our obligations, we actively trade on Europe’s leading markets—NordPool, Powernext and ECX—and maintain publicly accessible accounts in the emission allowances registries for Denmark, France and Spain (RENADE) with a view to streamlining management of our position in emission rights.

The CO2 market fluctuated widely in 2005. A record-high price of 29/tCO2 (tons of CO2) was recorded in the month of July, although prices have leveled off at 21-23/tCO2 in recent months. Trading volumes were significant by the year end, following much less buoyant conditions at the beginning of the year.

We were granted 43 million tons in emission rights for 2005 under the National Allocation Plan for Emission Rights. The allocation, in itself insufficient, proved even less adequate when the need arose to increase the load factor (the need to obtain greater use of the thermal groups) for thermal facilities to counter the drought and meet soaring demand. As such, the emission rights used exceeded the original allocation. We covered our needs on all the markets in which we operate by engaging in bilateral trade with other national and international agents.

With a view to covering our needs in the coming years, we have participated in several international emission reduction schemes, also known as Clean Development Mechanisms, launched in 2005.

23




Cogeneration and Renewable Energies

We carry out our cogeneration and renewable energies business through our wholly-owned subsidiary, Endesa Cogeneración y Renovables, S.A. The main sources of energy produced by this division are wind power, cogeneration and small-scale hydroelectric power. At December 31, 2005, our cogeneration and renewable energies facilities had a total installed capacity of 2,301 MW, of which 1,844 MW relate to renewable energy facilities and 457 MW to cogeneration and waste treatment plants in Spain. In addition, we have stakes in cogeneration facilities in Portugal, Colombia and Mexico with a total capacity of 325 MW. The following table shows certain information relating to our cogeneration and renewable energies capacity at December 31, 2005.

Type of Energy

 

 

 

No. of Plants

 

Installed
Capacity and
Capacity under
Construction

 

Percent of
Total Installed
Capacity

 

Installed Capacity
and Capacity
under Construction
(% participation
of Endesa)

 

 

 

 

 

(MW)

 

 

 

 

 

Cogeneration

 

 

72

 

 

 

533

 

 

 

20

%

 

 

46

%

 

Wind

 

 

95

 

 

 

1,711

 

 

 

66

%

 

 

75

%

 

Small-scale Hydroelectric

 

 

37

 

 

 

236

 

 

 

9

%

 

 

81

%

 

Biomass

 

 

6

 

 

 

59

 

 

 

2

%

 

 

39

%

 

Urban Waste

 

 

4

 

 

 

75

 

 

 

3

%

 

 

25

%

 

Other

 

 

4

 

 

 

6

 

 

 

 

 

 

73

%

 

Total

 

 

218

 

 

 

2,620

 

 

 

100

%

 

 

 

 

 

 

In 2005, we had an estimated market share of approximately 11.8% in the renewable energies market in Spain.

In 2005, we brought the following renewable energy facilities into service: Valpardo 21.3 MW, a wind farm in Castilla y León, Saso Plano, a 39.2 MW wind farm in Aragón and Aitona, a 4.95 MW mini-hydroelectric plant in Catalonia.

In addition, in 2005 Endesa Cogeneración y Renovables, S.A. became the sole shareholder of the Portuguese company Finerge Gestao de Proyectos Energéticos, S.A. (Finerge), a company that operates wind farms and cogeneration facilities in Portugal, with a total installed capacity of 107 MW.

We expect to continue to grow our renewable energies business and as part of this effort, we currently plan to increase our renewable energies capacity by 2,400 MW in the period 2005-2009. For more information about our strategy, see “—Strategy”.

Distribution and Sales to Customers

In 2005, we supplied electricity to approximately 12.0 million customers throughout Spain resulting in sales of approximately 7.6 billion in distribution, transmission and supply. Approximately 15% of our customers are commercial and industrial clients and 85% are residential customers. In 2005, we sold 64,095 GWh to regulated retail customers and 36,773 GWh to deregulated customers, for total sales of 100,868 GWh, a 4.3% increase over 2004. In the wholesale market, we sold 80,575 GWh and acquired 89,840 GWh (including 2,152 GWh used to pump water from hydroelectric facilities) to supply our distribution and supply subsidiaries. The difference between the energy we generated and the energy we sold is due to:

·       sales to third parties in the wholesale market;

·       acquisitions of energy from cogenerators and self-producers;

24




·       purchases and sales in other countries; and

·       losses that occur in the transmission and distribution process.

Retail Distribution to Regulated Customers

We currently distribute electricity in the following regions in Spain: Catalonia, Andalusia, Aragon, the Balearic Islands, the Canary Islands, Ceuta, Melilla and Extremadura. We operate through Endesa Distribución Eléctrica and Endesa Operaciones y Servicios Comerciales, each of which is wholly-owned by our distribution holding company, Endesa Red. Endesa Distribución Eléctrica assumed the transmission, distribution and regulated supply activities formerly carried out by the five retail electricity distribution companies, while Endesa Operaciones y Servicios Comerciales provides support functions such as billing and collections, customer support, sales offices and other administrative functions to those companies and other companies in the Endesa Group.

In 2005, we distributed 101,258 GWh to approximately 11 million customers, representing a 2.3% increase in the number of customers over 2004, which was principally due to Spaniards and foreigners with second homes in areas like Canary Islands, Balearic Islands and Andalusia.

Supply to Deregulated Customers

As of January 1, 2003, the Spanish electricity sector became completely liberalized, as a result of which all consumers are able to choose their electricity supplier. See “—Regulation—Regulation of the Spanish Electricity Sector”.

We sell to deregulated customers through Endesa Energía. During 2005, Endesa Energía sold 36,773 GWh to 998,154 points of consumption in Spain, which is 445,162 points more than the prior year and represents a 37.4% share of the liberalized market. We seek to provide integrated and flexible energy solutions at affordable prices, and offer to supply electricity, steam, natural gas, compressed air and demineralized water.

As a result of the work we performed in previous years to strengthen our customer service channels, in 2005 we focused on the following aspects of customer service:

·       Customer perception of quality.   This indicator, which was carefully monitored in 2005, showed high levels of satisfaction in all channels and processes. In addition, we ran sales training and customer service quality incentivization campaigns at service points and sales offices.

·       Rationalization of the network of sales offices and service points.

·       Optimization of Customer Call Centers.   Throughout 2005, we extended the new services created in 2004, such as the Customer Call Center for corporate customers to all of the geographical areas we supply. We also installed further platform reinforcement services to handle calls when significant system incidents arise, and we created dedicated Customer Call Center teams focused on specific equipment and types of complaints.

·       Improvement of complaint management, by further developing the structure and tools implemented in 2004.

We have integrated our telephone customer service capabilities into four Centros de Atención Telefónica (CATS), which handled over 9 million calls in 2005. We have also implemented promotional programs aimed at the household and small- and medium-sized business sectors.

Our on-line initiatives include Endesa On Line (www.endesaonline.com), a web site dedicated to offer Endesa Energía’s value added services to satisfy the needs of deregulated customers, enabling them, among other things, to monitor their consumption of energy and to request services.

25




Throughout 2005, we continued to develop a range of products designed for customers in the deregulated market, leveraging our household customer base for sales of additional value added products such as life insurance policies and electrical appliances, including air conditioners and heating machines.

Supply of Natural Gas

We believe that there is a tendency towards convergence of the markets for the supply of electricity and natural gas in the Iberian Peninsula, and as part of our new strategy, we have become an integrated energy supplier, providing both electricity and natural gas to our customers. We believe that we were well-positioned for our entry into the natural gas supply market in 2001 as a result of our consumption of large quantities of natural gas in connection with our electricity generation business and our experience supplying electricity to our customers. In 2001, we began to supply natural gas through Endesa Energía to eligible customers to whom we also supply electricity. At December 31, 2005, we had 221,719 points of supply whose annual consumption requirements total approximately 18,558 GWh. Our market share for the unregulated supply of natural gas in Spain at December 31, 2005 was an estimated 10.9%, and an estimated 12.1% including the supply to our plants.

The Spanish Wholesale Market

The Spanish wholesale market comprises two types of market: the spot and intra-day markets, overseen by the Market Operator, and the operating market, managed by the System Operator, designed to provide the necessary reserves to meet demand and other ancillary services.

In 2005, approximately 237,388 GWh of power (90.3% of Spain’s entire electricity system) was traded on the wholesale market. The remainder came from renewables/CHP, traded directly by distributors.

In addition to the organized market, producers and customers can enter directly into supply contracts or financial contracts to lock in prices. Both forms of trading, still rather modest in terms of volume, soared in 2005: bilateral trading totaled 7,020 GWh and swap agreements finished the year at an estimated total of 36,000 GWh—equivalent to ten base load combined cycle plants valued at over 1.6 billion.

Financial over-the-counter derivatives trading increased significantly, primarily as a result of new participants emerging on the international scene, a sign of the increasing consolidation of this market, which complements trading on the Operador del Mercado Ibérico de Energía—Polo Español, S.A. (“OMEL”), the Spanish wholesale market operator. OMEL operates as a clearinghouse in this wholesale market, matching supply and demand for electricity, and carries out its functions as an agent for the participants in the wholesale market (i.e., generating companies, distributors and retailers).

Performance of electricity prices

The average spot price in 2005 was 55.98/MWh, which differs significantly from the 28.74/MWh calculated a year previously. The average monthly price fluctuated throughout the year between 44.18/MWh in January and 73.78/MWh in December. Since cost overruns of operating markets and the supply guarantee added 2.40/MWh and 4.48/MWh, respectively, to the average price, the final price was 62.86/MWh, 76% higher than in 2004.

This strong increase was due primarily to the following factors: the price of emission rights, which caused fossil-fuel plant costs to soar; low rainfall during the year; and high fuel prices in international markets, particularly the natural gas market.

The high fuel prices prompted several agents to reduce the load factors for combined cycles. Nevertheless, we obtained more competitive costs than our competitors through a successful trading policy that ensured our combined cycles a higher load factor.

26




Effective March 3, 2006, the matched positions in OMEL between generation companies and electricity distribution companies will be settled at a fixed price set by the government depending on electricity market prices. This price has been provisionally set at 42.35/MWh.

Purchases and sales in the wholesale market

We sold 80,575 GWh of power on the wholesale market in 2005, which accounts for 30.6% of total power fed to the mainland electricity system.

Of this figure, 3,567 GWh corresponded to bilateral trading agreements and 77,008 GWh was traded in the markets managed by OMEL and Red Eléctrica de España (REE). 79,168 GWh of power sold was produced by us and the remainder imported or surplus energy acquired from renewable/CHP plants.

Physical bilateral trading—the most popular form of trading in Europe—was practically nonexistent in Spain until the last two months of 2005, with Endesa as a key participant. The recent changes made to capacity payment regulations that eliminated the previous preference for spot market trading are increasing the role of bilateral trading.

Regarding purchases, we acquired 87,688 GWh of power on the wholesale market, 4% of which was secured through bilateral trading and the remainder purchased on organized markets.

Other purchases include 1,893 GWh for exports and 2,152 GWh of our own production for hydroelectric pumping plants.

Transmission and Distribution Network

At December 31, 2005, the total length of our transmission and distribution network was approximately 297,133 kilometers.

The table below provides summary information of the transmission and distribution lines of our electricity transmission network at the dates indicated.

 

 

At December 31,

 

Percentage
Change

 

 

 

2003

 

2004(1)

 

2005(2)

 

2005/2004

 

Aerial high-voltage lines (km)

 

20,704

 

20,539

 

20,870

 

 

1.6

%

 

Underground high-voltage lines (km)

 

555

 

635

 

674

 

 

6.1

%

 

Aerial medium-voltage lines (km)

 

78,048

 

77,981

 

78,445

 

 

0.6

%

 

Underground medium-voltage lines (km)

 

25,927

 

27,540

 

29,228

 

 

6.1

%

 

Transformer centers (MVA)

 

45,086

 

47,911

 

51,065

 

 

6.6

%

 

Substations (MVA)

 

56,977

 

63,865

 

71,754

 

 

12.3

%

 


(1)          The figures for 2004 may differ in some cases from those published in the related notes to financial statements due to inventory updates made subsequent to the publication of the financial statements.

(2)          The data for 2005 relating to the medium and high voltage network are provisional.

Royal Decree 1955/2000 dated December 1, 2000 established the conditions for engaging in transmission, distribution and trading activities. This decree regulates access to the electricity networks and renewed the system of electricity connections to new supplies, which had been in effect since 1982. Under the Electricity Sector Law, remuneration for transmission and distribution continues to be fixed by the government.

In November 2002, our Board of Directors approved the sale of our Spanish mainland electricity transmission assets, including any assets that were in service as of December 31, 2002, as well as certain construction projects in progress that were scheduled to commence operations in 2003 to REE for

27




1,052 million. Under the agreement, we will provide REE with operating and maintenance services, as well as other technical assistance and consultancy services, in relation to the transferred assets for four years. As part of the transaction, we will retain the right to use the fiber optic cable installed in the electricity lines we sold for a period of 99 years and will share with REE the right to install new fiber optic lines over the existing electricity lines. The transaction will not affect our ability to carry out electricity transmission activities pursuant to the prevailing regulatory framework in Spain. The transaction was closed in the first quarter of 2003. See “—Capital Expenditures and Divestitures—Divestitures”.

In 2005, the gross investment in our transmission and distribution network in Spain was 1,389 million, approximately 31% of which was dedicated to meeting new supply requirements due to the 5.5% increase in the amount of energy distributed and the connection of 230,200 new customers. The other approximately 69% was invested in improving the quality of service and procedures. As a result of these investments, in 2005 we increased the total length of our transmission and distribution network by more than 7,773 kilometers to 297,133 kilometers as at December 31, 2005. In 2005, we also constructed 40 new substations and more than 4,793 transforming centers (from medium- to low-voltage). Investments to improve quality of service and procedures included:

·       the replacement of lines with higher capacity lines;

·       the installation of more sophisticated circuits;

·       the installation of double power supply systems;

·       the enlargement and modernization of substations and transformer centers;

·       the automation of medium-voltage networks by installing telecontrol and other devices; and

·       the installation of new equipment and lines to reinforce facilities in certain areas.

We have continued work on the integration of systems and procedures which are key to improving operational efficiency. We have identified best practices in the provision of services, which are being introduced. We have also begun to consolidate the sales systems of former distributors. This will enable us to take advantage of the economies of scale provided by a larger customer base to develop advanced technology.

Regasification

In anticipation of the liberalization of the Spanish natural gas market which took place on January 1, 2003, we acquired direct ownership interests in several regasification plants with the goal of guaranteeing access to gas supplies for our new combined cycle gas turbine plants and new and existing customers.

We are currently participating in the following three Liquid Natural Gas (LNG) Maritime Regasification Terminal projects:

We hold a 21% interest in Reganosa, which will be built in Mugardos (La Coruña) and which is expected to have a storage and regasification capacity of 300,000 cubic meters and distribution capacity of 412,500 Nm3 per hour, equivalent to 3.6 bcm per year of natural gas. This plant will include a 130 kilometer pipeline network and is expected to commence operations in 2007.

We hold a 20% interest in Planta Regasificadora de Sagunto, S.A., which we have built in Sagunto (Valencia) with a storage capacity of 300,000 cubic meters and a regasification capacity of 600,000 Nm3 per hour, equivalent to 5.25 bcm per year. We initiated the plant’s trial period in February 2006.

We hold a 45% interest in Compañía Transportista de Gas de Canarias. We are currently carrying out studies and initial activities for new projects in Arinaga (Gran Canaria) and Granadilla (Tenerife), which

28




we expect to commence operations in 2008 and 2009, respectively. Each of the Arinaga and Granadilla plants are expected to have a storage capacity of 150,000 cubic meters and a regasification capacity of 210,000 Nm3 per hour, equivalent to 1.8 bcm per year.

Distribution of Natural Gas

We distribute piped natural gas to residential, commercial and industrial customers in seven Spanish autonomous regions through Endesa Gas and several companies in which it holds stakes. In addition, Endesa Gas holds stakes in companies that distribute piped natural gas in Portugal. We are the third largest natural gas distributor in Spain, with a market share of approximately 6% at December 31, 2005. We are also present in the Portuguese natural gas distribution market through our interests in Setgas and Portgas. Our stake in these two companies is a result of our 49% share in NQF Gas, SGPS, S.A. (“NQF”), to which both companies belong. In January 2006 Endesa reached an agreement with Electricidade de Portugal (EDP) to sell its 49% share in NQF and, by extention, its stakes in Setgas and Portgas. The transaction is pending approval.

At December 31, 2005, Endesa Gas and the companies in which it holds stakes had more than 325,000 customers in Spain and approximately 255,000 customers in Portugal. In 2005, the volume of energy sold in Spain by Endesa Gas and the companies in which it holds stakes increased approximately 18% to 5,713 GWh and the volume of energy sold in Portugal increased 3% to 2,484 GWh. In accordance with our Strategic Plan 2005-2009, we intend to increase our market share in each of the Spanish and Portuguese markets for the distribution of natural gas. The following table shows certain information with respect to the companies in which Endesa Gas held stakes at December 31, 2005:

Company

 

 

 

Percent
Participation

 

No. of Customers at
December 31, 2005

 

Energy Supplied
in 2005

 

 

 

 

 

 

 

(GWh)

 

Gesa Gas

 

 

100.0

%

 

 

86,130

 

 

 

536.3

 

 

Distribuidora Regional de Gas

 

 

45.0

%

 

 

15,862

 

 

 

860.1

 

 

Meridional de Gas

 

 

100.0

%

 

 

14,809

 

 

 

907.2

 

 

D.C. Gas Extremadura

 

 

47.0

%

 

 

37,536

 

 

 

134.0

 

 

Gas Aragón

 

 

60.7

%

 

 

165,938

 

 

 

3,235.4

 

 

Gas Alicante

 

 

100.0

%

 

 

4,832

 

 

 

39.7

 

 

Portgas

 

 

12.4

%

 

 

148,229

 

 

 

1,905.5

 

 

Setgas

 

 

9.7

%

 

 

107,289

 

 

 

578.3

 

 

Total

 

 

 

 

 

 

580,625

 

 

 

8,196.5

 

 

 

Transport and Distribution Infrastructure

We participate in the gas transport sector through our wholly-owned subsidiary Endesa Gas Transportista. In 2005, we constructed 335 kilometers of network, with an investment of 20.8 million, reaching 2,874 kilometers of the distribution network in Spain, which represents an increase of 13% with respect to the previous year. We also worked on the construction of various gas pipelines in 2005, including most notably:

·       Pipelines brought into service in 2005: Jerez-El Puerto de Santa María gas pipeline (16 km), Platea-Fuenfreca gas pipeline (14.6 km) and El Burgo de Ebro gas pipeline (4.7 km); and

·       Pipelines undergoing design or construction in 2005: Zaragoza-Calatayud gas pipeline (70 km), Cella-Calamocha gas pipeline (56.7 km), Segovia-Avila gas pipeline (67.7 km), Medina-Arévalo gas pipeline (29.7 km), Salamanca-Peñaranda gas pipeline (52.9 km), Fraga-Mequinenza gas pipeline (10 km), Alagón-La Joyosa-Sobradiel gas pipeline (17 km), Gallur-Tauste-Ejea gas pipeline (39 km), Bahía de Cádiz gas pipeline (24 km) and Costa Noroeste de Cádiz gas pipeline (22 km).

29




Regarding our transmission infrastructure, we hold a 12% interest in the technical and economic viability study for the new gas pipeline that will connect Algeria and Spain, via Almeria, scheduled to enter into service in 2009.

Portugal

General

Our presence in the Portuguese electricity industry is primarily linked to generation activities resulting from our interests in Tejo Energia and cogeneration plants, and to selling electricity to end customers in the deregulated market.

Generation

In Portugal, we hold a 38.9% stake in Tejo Energia-Producão e Distribucião de Energia Eléctrica S.A., which owns a 600 MW coal-fired plant, accounting for 6.1% of generation capacity in Portugal at December 31, 2005. In 2005, the plant generated approximately 4,702 GWh of electricity. All of the electricity generated by the plant was sold under a long-term power purchase agreement with the national grid concessionaire.

We continue to develop our plans in Portugal to ensure a favorable position in the electricity market. We also lead Portugal’s cogeneration market through our 50% interest in Sociedade Termica Portuguesa, which has 71 MW of installed capacity in Portugal.

Furthermore, we became the sole shareholder of Finerge in 2005, which by year-end had a capacity of 107 MW. Projects are underway to achieve a capacity of 320 MW in 2007.

Sales to deregulated market customers

In 2005, we continued to consolidate our position in the Portuguese deregulated market, in which we made sales totaling 2,223 GWh, a 23.6% increase over 2004. As of November 30, 2005, we had secured a market share of 23.2%, and in that same month, we had 919 supply points.

Since 2002, we have operated in this market through a 50/50 joint venture with the Portuguese industrial group Sonae Group, called Sodesa S.A. Sodesa is currently the second largest retailer in the Portuguese deregulated market.

Electricity Business in Europe

General

Our strategy with respect to our electricity business in Europe responds to the business opportunities arising from the current liberalization and deregulation of the European electricity market. Directive 96/92/EC of the European Union sets forth as its goal the creation of a single electricity market.

We have focused principally on markets in the Southern European region and on specific opportunities outside of such region, in particular in Northern Africa.

At year end 2005, our installed capacity in Europe was 9,397 MW, of which 6,590 MW corresponded to Endesa Italia and 2,807 MW to the French company Snet. Total output was 33,749 GWh (23,362 GWh generated by Endesa Italia and 10,387 GWh by Snet). Sales totaled 47,221 GWh, of which 30,911 GWh corresponded to Endesa Italia and 16,310 GWh to Snet. Sales to deregulated customers in Italy and France were 13,064 GWh and 4,694 GWh, respectively.

30




Generation

Italy

On February 1, 2005, we sold 5.3% of our total investment in Endesa Italia to ASM Brescia for 159 million. This sale gave Endesa Italia an implicit value of 2,989 million, an increase of 36.4% over the initial purchase price by the consortium in September 2001, resulting in a net gain of 24 million. As a result of the foregoing transactions, Endesa Italia is currently owned 80% by us and 20% by ASM Brescia.

Endesa Italia, which merged into Endesa Holding Italia to form Endesa Italia S.p.A. in December 2003, is one of the three largest generators of electricity in Italy with an installed capacity of approximately 6,590 MW as of December 31, 2005, including 20 MW of installed capacity relating to its wind farms, 2,180 MW relating to its fuel oil and gas generating plants, 1,014 MW relating to its hydroelectric plants, 976 MW relating to its coal-fired plants and 2,400 MW relating to its CCGT plants. Net generation output stood at 23,362 GWh in 2005, an increase of 12% from 2004, due mainly to the conversion of the Ostiligia plant’s group 3 and the Tavazzano plant’s group 6 to a combined cycle generator which commenced operation in 2005, and the start-up of two turbo-gas groups at the Fiume Santo plant.

The conversion of the Ostiglia plant’s group 3 and the Tavazzano plant’s group 6 combined cycle plants is part of Endesa Italia’s thermal plant repowering program initiated in 2002. This program entails the conversion of these plants to more efficient and environmentally friendly technologies, while also significantly increasing their installed capacity.

The renewables business in Italy

Endesa Italia continues to produce electricity using renewable energies at its 20 MW Florinas wind farm located in the Sardinian region of the same name and uses animal flour for combustion in the coal groups of the Monfalcone plant.

On August 5, 2005 we were awarded two engineering procurement contracts (EPC) for the construction of wind farms in Trapani and Vizzini (total installed capacity of 56.1MW) belonging to IDAS, 100% owned by Endesa Italia. Total investment in the construction of the two plants will be approximately 59 million. Trapani and Vizzini are under construction and are expected to be completed in approximately six months. The plants are scheduled to begin operating in 2006.

Pursuant to the Framework Agreement between Gamesa and Endesa for 200 MW of operating wind farm capacity before 2007, the 14 MW Iardino Srl (Naples) wind farm is now in place and operative, and delivery to Endesa is expected to take place in the first half of 2006.

Endesa Italia reported sales of 30,911 GWh, an increase of 17.8% over 2004, as a result of higher output and a 41% rise in power purchases from third parties. A large part of this increase can be attributed to Endesa Europa capitalizing on its position in France, allowing Endesa Italia to increase its energy imports to 1,658 GWh in 2005 from 371 GWh in 2004.

France

In November 2000, we entered into an agreement with Charbonnages de France (CdF) to acquire a 30% interest in the French electricity generator, Societe Nationale d’Electricité et de Thermique (Snet). We acquired our 30% interest in Snet, following our receipt of clearance from the European Commission, in April 2001 for 450 million. On September 13, 2004, we acquired from CdF an additional 35% interest in Snet, giving us a total ownership interest of 65%. The other stockholders are CdF and EdF. As a result, we now control the management of Snet and have achieved a significant presence in the French electricity market, thereby fulfilling one of the objectives in our Strategic Plan. The total price of the transaction,

31




including the 450 million we paid for the 30% stake we acquired in 2001, was 571 million. We have consolidated Snet since September 2004.

CdF holds a 16.25% interest in Snet and Electricité de France holds an 18.75% interest. Snet has four coal plants with an aggregate installed capacity of 2,477 MW at December 31, 2005 and generated 8,689 GWh in 2005.

In 2005, assembly work began on the desulphurization and denitrification systems for two 600 MW groups—Provence 5 and Emile Huchet 6. These systems will allow both groups to comply with the EU Directive limiting the emissions produced at large combustion facilities. Investment in the project will total 156 million.

Snet reported sales of 16,310 GWh in 2005, of which 10,387 GWh corresponded to its own production and 5,923 GWh represented power purchases from third parties. The group sold 4,694 GWh of power to 159 customers on the deregulated French market.

On February 26, 2005 the National Allocation Plan for (NAP) for CO2 emissions was published in France. The plan assigned Snet 9,065 Mt/year for 2005-2007. We consider this allocation to be sufficient to cover Snet’s CO2 requirements.

In 2005, Snet acquired an additional 4.36% in a cogeneration plant, Bialystok, with 330 MWe of installed capacity in Poland. Bialystok generated 1,698 GWh at December 31, 2005. As a result of this transaction, Snet currently owns 69.58% of Bialystok.

In addition, Snet holds a 50% interest in Altek, a Turkish company, which operates a 40 MW hydroelectric plant and at the end of 2005 inaugurated a 80 MW CCGT plant at Kirklareli.

We also have a 20% interest in Soprolif, whose principal business is the construction and operation of a circulating fluidized-bed boiler at Gardanne (France), with capacity of 250 MW. Endesa Europa and Snet have a 25% and a 20% interest in Soprolif, respectively.

Supply

We seek to take advantage of the opportunities arising from the growing number of customers in Europe that can contract freely with suppliers.

In France, Snet supplied 4,694 GWh of electricity in 2005, and in Italy, Endesa Italia supplied 13,064 GWh to deregulated customers.

In February 2003, Endesa Energia entered into an agreement with Forces Electriques d’Andorra to supply electricity to Andorra until December 2008, which agreement extends a prior agreement from December 1998. Under the terms of the agreement, we will supply 50% of Andorra’s electricity needs.

On November 4, 2003, we and the Italian group ASM Brescia announced the formation of a jointly-owned company Ergon Energia. Ergon Energia will supply electricity, gas and power services to eligible customers in Italy. To support Ergon Energia’s operations, Endesa Italia will provide technological system and product support and ASM Brescia will contribute its knowledge of the Italian market. Ergon Energia will sell the electricity generated by Endesa Italia’s plants in Italy.

Poland

In September 2005, the Ministry of Industry shortlisted Endesa, Belgium’s Electrabel and Italy’s Enel in the sale of Dolna Odra (Poland), owner of three plants with an installed capacity of 1,960 MW, within the framework of its privatization. On November 7, 2005, we were selected by the Ministry to negotiate the purchase of Dolna Odra on an exclusive basis for one month. The exclusivity period ended on December 5, 2005. On January 9, 2006, the European Commission notified Endesa Europa that it was authorized to conclude the transaction, which is now pending only an agreement with employees.

32




We are present in Poland through the controlling stake held by Snet in the 330 MW Bialystock plant, and our 10% holding in the Polish market (Gielda Energii).

The European Wholesale Market and Energy Trading

Deregulation of the European electricity sector has led to the development of wholesale markets where agents can buy energy from and sell energy to a number of producers, traders and suppliers directly or through brokers, both bilaterally and through exchanges. As a result, generation assets and supply activities in Europe are increasingly exposed to market risks. The European electricity sector has evolved towards several regional wholesale electricity markets, the most important of which is the Central European market, including Germany, France, Switzerland and Austria and, with a lower degree of integration, The Netherlands and Belgium.

Endesa has followed a proactive strategy to facilitate the development of wholesale markets in Europe. In 1999, we acquired a 10% interest in the Amsterdam Power Exchange (which has been renamed ENDEX), which established the first organized spot market in continental Europe, of which we now hold 2.5%. We were subsequently a founding member and owner of a 10% interest in Towarowa Gielda Energii, a company that operates a power exchange in Poland. In November 2001, we acquired a 5% interest in Powernext, which began operating an organized spot market in France at the end of 2001.

The objective of our trading activities in Europe is to support our generation and supply businesses by seeking to increase the return on our assets while hedging the market risk associated with generation and supply activities. During 2005, our trading activities involved purchases and sales of electricity, substantially all of which were physical transactions, both under medium-term (typically one year) contracts and in short-term transactions through over-the-counter markets (bilateral transactions) and the main European exchanges. Other important activities have involved sourcing energy for sales to deregulated customers in France, as well as hedging purchases and sales of natural gas to deregulated customers in Spain.

Activities in the European wholesale markets

We operate in the European wholesale markets to administer our generation and supply activities outside the Iberian area. Among other objectives, this strategy provides us with the necessary power supply to fulfill our contracts with European customers and balance our risk positions in those areas where we operate. We perform this activity through our subsidiary, Endesa Trading.

In 2005, activity in the European wholesale markets was shaped by CO2 emission rights and the rise in crude and natural gas prices. These factors led to generalized energy price increases, with supply contracts for 2006 rising almost 50%.

In addition, adverse weather conditions at the end of the year, natural gas supply difficulties—especially in the United Kingdom—and unexpected technical problems on the networks in France and Germany pushed spot prices to their highest levels since 2003. The knock on effect caused by these problems and the challenges in finding short term solutions affected contracts to be supplied in the future, i.e., monthly, quarterly and even annual products.

Also, volumes traded through bilateral contracts increased in organized markets such as Powernext, EEX or APX. The EEX reached 66 TWh in 2005, up 12% from 2004; the APX climbed to 16 TWh, up 19%; and the French market Powernext (in which we hold a 5% stake) recorded a figure of 19 TWh, up 34% from 2004.

Electricity futures rose significantly during 2005, and the base price for 2006, 34.5/MWh in Germany at the start of 2005, rose to 51.4 /MWh at the end of the year. Also, average spot prices in 2005 increased sharply in France and Germany. The average base price for both was 45/MWh up from 28/MWh in 2004.

33




In 2005, Endesa Trading handled total energy volumes of 49.46 TWh from operations with Italian customers (9.7 TWh), Endesa Energía (2.7 TWh) and Snet (1.97 TWh), direct supply contracts with large industrial customers and others, and import and export operations via the interconnections existing among Spain, France, Germany, Holland, Belgium, Denmark, Italy and Slovenia.

We highlight the energy obtained in virtual capacity auctions (VPP) held by Electricité de France, whose associated activities accounted for volumes of 1.03 TWh.

Cross-border Electricity Exchange

In 2005, international interconnection capacity was assigned by grid operators via a series of coordinated auctions. Power continued to be exported from France to the United Kingdom (2,000 MW at year end 2005), Italy, Switzerland and, to a lesser extent, Spain.

However, the balance of the exchange between France and Germany altered as the latter was no longer a net importer of energy from France, becoming primarily an exporter.

With regard to trading activities, we highlight our operations on the France-Italy interconnection, which on occasion accounted for up to half the energy auctioned (i.e., approximately 250 MW) and the entry of new countries, such as Denmark and Slovenia, in 2006. These countries may acquire virtual and interconnection capacity with Germany and Italy, respectively, for 2006 in auctions organized by local operator, or may participate in the existing interconnection between France and Germany.

In 2005, energy transmitted via trading activities from France to Italy amounted to 1.35 TWh. With regard to interconnections in France, power imports from Spain were 2.24 TWh, while exports were only 271 GWh.

Through these operations we were able to supply energy to Endesa Energía’s customers abroad and make wholesale sales to other grids. Endesa Trading purchased the remaining energy needed to supply Endesa Energía’s other European customers.

CO2 emissions market

In 2005 the first phase of the Emission Trading Directive (2005-2007) was implemented, with each country publishing its Allocation Plan for Emission Rights and the creation of National Emissions Registries.

In this context, several spot markets were created for emission rights, primarily on wholesale markets on which electricity was already traded (e.g., Powernext, Nordpool and EEX). Energy supplied via these markets is estimated at approximately 260 million tons.

During the year, Endesa Trading channeled purchases and sales of CO2 emission rights between Snet and Endesa Italia of approximately 2.98 million tons. The starting price for emissions rights fluctuated between 8 and 10/Mt, while by the end of 2005 the price was approximately 21/Mt.

Endesa in Morocco

On January 19, 2005, commercial activities started at the Tahaddart CCGT plant in Morocco.

This plant, with installed capacity of 400 MW and located in the town of the same name, is the result of an agreement made in 2001 to incorporate Energie Eléctrique de Tahaddart, S.A., the company in charge of the construction and use of the plant. The company is owned by the Moroccan group Office National d’Electricité (ONE) (48%), Endesa (32%) and Siemens (20%).

34




Tahaddart is the first combined cycle plant to be built in Morocco and represents 9% of the country’s total installed capacity and 13% of its thermal capacity. It supplies approximately 17% of the total energy consumed in Morocco.

Also, in January 2005 we sold our 18% stake in Lydec (a water, electricity and sanitation services company based in Casablanca) to the insurance group Al Watanya, for 26 million, generating a capital gain of 12 million.

In January 2006 an agreement was signed with ONE to construct an 800 MW combined cycle plant in Al Wahda. We will be the technical manager on this project, in which we hold a 20% stake.

Electricity Business in Latin America

Overview

We are involved in the generation, transmission, distribution and supply of electricity in five countries in Latin America, where we had an installed capacity of 14,095 MW and approximately 11.2 million customers at December 31, 2005. We are one of the largest private electricity operators in Latin America in terms of consolidated assets and operating revenues. We are present in Chile, Argentina, Colombia, Peru, and Brazil, and participate in the Siepac electricity interconnection system that will link the six Central American countries.

Our electricity business in Latin America is conducted principally through our subsidiary Enersis in which we currently hold a 60.62% interest, as well as through interests we have acquired directly in companies in the region. We acquired control of Enersis in April 1999. Enersis is an electricity utility company primarily engaged, through its principal subsidiaries and related companies, in the generation, transmission and distribution of electricity in Chile, Argentina, Brazil, Colombia and Peru. Through Endesa Chile, one of Enersis’ consolidated subsidiaries, Enersis is the largest private sector electricity generation company in Latin America in terms of installed capacity. Enersis also owns electricity distribution companies in Latin America directly or through Chilectra with over 11 million customers at December 31, 2005. Each of Enersis’ and Endesa Chile’s American depositary shares, evidencing American depositary receipts, are traded on the New York Stock Exchange, and each of Enersis and Endesa Chile is a reporting company in the United States that files annual reports on Form 20-F with, and furnishes periodic reports to, the SEC.

35




The following table sets forth, at December 31, 2005, our principal subsidiaries active in the Latin American electricity business.

Company

 

 

 

Direct
Economic
Interest of
Endesa

 

Economic
Interest
Through the
Enersis Group

 

Total
Economic
Ownership
Interest

 

Voting
Interest

 

Installed
Capacity

 

No. of clients

 

 

 

 

 

 

 

 

 

 

 

(MW)

 

(millions)

 

Argentina:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Central Costanera

 

 

 

 

 

23.37

%

 

 

23.37

%

 

64.27

%

 

2,303

 

 

 

n.a

 

 

Hidroeléctrica el Chocón

 

 

 

 

 

17.25

%

 

 

17.25

%

 

65.19

%

 

1,320

 

 

 

n.a

 

 

Dock Sud

 

 

39.99

%

 

 

 

 

 

39.99

%

 

69.99

%

 

870

 

 

 

n.a

 

 

Edesur

 

 

6.23

%

 

 

39.45

%

 

 

45.68

%

 

99.45

%

 

n.a

 

 

 

2.2

 

 

TESA*

 

 

28.48

%

 

 

32.50

%

 

 

60.98

%

 

100.00

%

 

n.a

 

 

 

n.a

 

 

CTM*

 

 

28.48

%

 

 

32.50

%

 

 

60.98

%

 

100.00

%

 

n.a

 

 

 

n.a

 

 

CEMSA

 

 

55.00

%

 

 

16.36

%

 

 

71.36

%

 

100.00

%

 

n.a

 

 

 

n.a

 

 

Brazil:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cachoeira

 

 

28.37

%

 

 

32.37

%

 

 

60.74

%

 

99.61

%

 

658

 

 

 

n.a

 

 

Fortaleza

 

 

28.48

%

 

 

32.50

%

 

 

60.98

%

 

100.00

%

 

318

 

 

 

n.a

 

 

Ampla

 

 

13.35

%

 

 

42.21

%

 

 

55.56

%

 

91.94

%

 

62

 

 

 

2.4

 

 

Cien*

 

 

28.48

%

 

 

32.50

%

 

 

60.98

%

 

100.00

%

 

n.a

 

 

 

n.a

 

 

Coelce

 

 

13.65

%

 

 

21.13

%

 

 

34.78

%

 

58.86

%

 

n.a

 

 

 

2.4

 

 

Colombia:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C.H. Betania

 

 

 

 

 

31.13

%

 

 

31.13

%

 

85.63

%

 

541

 

 

 

n.a

 

 

Emgesa

 

 

26.70

%

 

 

8.91

%

 

 

35.61

%

 

48.48

%

 

2,116

 

 

 

n.a

 

 

Codensa

 

 

29.61

%

 

 

14.34

%

 

 

43.95

%

 

48.48

%

 

n.a

 

 

 

2.1

 

 

Chile:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Endesa Chile

 

 

 

 

 

36.36

%

 

 

36.36

%

 

59.98

%

 

4,477

 

 

 

n.a

 

 

San Isidro**

 

 

 

 

 

36.36

%

 

 

36.36

%

 

100.00

%

 

n.a

 

 

 

n.a

 

 

Pangue**

 

 

5.01

%

 

 

34.54

%

 

 

39.55

%

 

99.99

%

 

n.a

 

 

 

n.a

 

 

Celta**

 

 

 

 

 

36.36

%

 

 

36.36

%

 

100.00

%

 

n.a

 

 

 

n.a

 

 

Pehuenche**

 

 

 

 

 

33.69

%

 

 

33.69

%

 

92.65

%

 

n.a

 

 

 

n.a

 

 

Chilectra

 

 

 

 

 

59.55

%

 

 

59.55

%

 

98.24

%

 

n.a

 

 

 

1.4

 

 

Peru:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Edegel

 

 

 

 

 

13.78

%

 

 

13.78

%

 

63.56

%

 

969

 

 

 

n.a

 

 

Etevensa

 

 

43.50

%

 

 

 

 

 

43.50

%

 

60.00

%

 

315

 

 

 

n.a

 

 

E. de Piura

 

 

48.00

%

 

 

 

 

 

48.00

%

 

60.00

%

 

143

 

 

 

n.a

 

 

Edelnor

 

 

18.00

%

 

 

20.24

%

 

 

38.24

%

 

60.00

%

 

2

 

 

 

0.9

 

 


*                    Transmission company.

**             Installed capacity included in Endesa Chile.

In 2005, we created a holding company, Endesa Brasil, S.A. The creation of Endesa Brasil has resulted in strategic and financial advantages. Strategic advantages include the improved visibility of our assets (which has had a positive effect on our share price), greater access to growth opportunities and increased bargaining power. The financial advantages of this operation include more stable cash flow, more diversified commercial risk and improved access to the financial markets.

In October 2005, we transferred all of our Brazilian holdings to Endesa Brasil.

36




Electricity Generation and Transmission

Generation

At December 31, 2005, we had an installed capacity of 14,095 MW in Latin America, most of which is held through our subsidiary Endesa Chile, of which we hold a 36.36% economic interest through Enersis. Approximately 61% of the installed capacity corresponds to hydroelectric power stations and approximately 39% to thermal power stations.

The following table shows the installed capacity of our consolidated subsidiaries in Latin America by country for the periods indicated.

Country*

 

 

 

2003

 

2004

 

2005

 

Percentage
change
2005/2004

 

 

 

 

 

(MW)

 

 

 

 

 

Chile

 

3,763

 

4,477

 

4,477

 

 

0.0

%

 

Argentina

 

4,492

 

4,492

 

4,493

 

 

0.0

%

 

Colombia

 

2,589

 

2,609

 

2,657

 

 

1.8

%

 

Peru